Good day, and welcome to the MGP Ingredients Fourth Quarter and Full Year 2022 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mike Houston, Investor Relations. Please go ahead.

Thank you. I'm Mike Houston with Lambert & Company, MGP's Investor Relations firm. And joining me are members of their management team, including Dave Colo, President and Chief Executive Officer; and Brandon Gall, Vice President of Finance and Chief Financial Officer. We will begin the call with management's prepared remarks and then open the call to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of sales, operating income, gross margin and effective tax rate, as well as statements on the plans and objectives of the company's business and overall consumer and industry trends. The Company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in the company's most recent annual report filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during the call today. Additionally, this call will contain references to certain non-GAAP measures which we believe are useful in evaluating the Company’s performance. A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If anyone does not already have a copy of the press release issued by MGP today, you can access it at the company's website.

Thank you, Mike. And thanks to everyone for joining the call today. On this call, we will begin with an overview of our performance for the quarter and full year ended December 31, 2022; provide updates on key financial performance metrics; and discuss the progress we have made against our strategy. The strength and value of our business model and long-term growth strategy underpinned our performance during 2022. Strong execution from the team enabled MGP to meet increased customer demand for our products and deliver another year of record results across each of our segments. During the year, we continued to experience healthy demand for new distillate and aged whiskey in our Distilling Solutions segment, while also continuing to invest in marketing support and innovation to grow our American Whiskey and tequila brands. Additionally, our Ingredient Solutions segment recorded another record year from a sales and gross profit perspective. This consumer demand for plant-based, high protein and lower net carbohydrate foods continued. Consolidated sales for the year increased 25% to $782.4 million, while gross profit increased 27% to $253.3 million, representing 32.4% of sales. Operating income and adjusted operating income increased 18% and 23% respectively to $149 million. Adjusted EBITDA increased 20% to $169.3 million. The demand for American Whiskey continues to drive growth in our Distilling Solutions segment and resulted in brown goods sales increasing 65% and 42% on a quarterly and annual basis respectively. Our premium plus spirits brands grew 23% in the quarter, driving further gross margin expansion in our Branded Spirits segment. Our Ingredient Solutions segment delivered record results both on a fourth quarter and full year basis, with sales growth of 28% and gross profit growth of 42% for the year. Looking at each segment in greater detail, sales in our Distilling Solutions segment increased 22% for the year to $428.5 million. Gross profit for the year improved to $126.3 million for 29.5% of segment sales. Full year sales of premium beverage alcohol increased 28% versus the prior year, driven primarily by strong demand for both new distillate and aged whiskey. Brown goods sales growth continues to outpace longer term market trends and has been primarily driven by craft as well as multi-national customers. Our team has done an excellent job capturing market share and unfilled demand, and our strong sales results would not have been possible without our sales team's expertise and the relationships we have cultivated across a diverse customer base, which now stands at more than 750 brown goods customers. This expertise and strength of customer relationships have resulted in the vast majority of our new distillate whiskey being committed and the majority of our aged whiskey being committed for 2023. We're pleased with the improvement in demand visibility and consistency that we have achieved in brown goods. Full year sales for white goods decreased 2% versus the prior year. The decline was primarily due to lower sales volumes for our white goods premium beverage products. Sales of our industrial alcohol products decreased 25% for the year, also due to lower sales volumes. The impact of increased input costs, primarily corn and natural gas costs, along with excess supply available in the market remains a drag on white goods and industrial alcohol gross margins. As we have previously discussed on prior calls, these unfavorable dynamics resulted in negative gross margins for industrial alcohol and white goods and reduced gross profit by $21.2 million and gross margin by approximately 1600 basis points on a combined basis when compared to the prior year. As we look ahead to 2023, we anticipate these headwinds to continue, and comparing to 2022, we estimate 2023 industrial and white goods gross profit dollars on a combined basis are anticipated to decline another $4 million to $7 million. That said, we have taken steps to mitigate these headwinds over time. Over the past two years, we have shifted volume from industrial alcohol to white goods, which historically have better margins and better customer retention characteristics. As the market dynamics have continued to evolve due to the additional capacity for both industrial and white goods that have entered the market, in combination with higher corn and natural gas costs, we are implementing further reductions in volumes of our industrial alcohol and white goods premium beverage products to minimize the impact on our business as we enter 2023. These reductions will result in lower volumes, a decrease in full year revenue, and an unfavorable impact to gross margins for these respective product lines, which have been factored into the fiscal year 2023 guidance we will discuss later in the call. Moving to Branded Spirits, segment sales for the year increased 30% versus the prior year to $237.9 million. The full year increase was primarily driven by the inclusion of the Luxco brands acquired as part of the merger on April 1, 2021. For the last three quarters of the year, total branded spirits revenue was consistent with the prior year as we continued to focus on investing behind our premium plus brands, while allowing our mid and value priced brands to perform in line with the overall category declines in these price tiers. For this same timeframe, investments in premium plus brands have resulted in revenue increasing 17% and 23% in the fourth quarter, primarily driven by our American Whiskey and tequila brands’ performance. For the full year premium plus brands’ revenue increased from 30% of total branded spirits revenue in 2021 to 36% in 2022. Our team continues to innovate around these brands and we're proud of the progress we've made on that front with announced line extensions that include Remus Gatsby Reserve, Yellowstone Single Malt, Old Ezra Rye 7 Year, and El Mayor Cristalino. Importantly, these products are margin-accretive to the respective brand families and to our overall Branded Spirits gross margin profile. Gross profit for this segment increased to $95.5 million for the year, or 40.1% of segment sales, which is a 600 basis point improvement in gross margin percentage versus the prior year. This increase can primarily be attributed to continued focus on investing in our premium plus American whiskey and tequila brands. Turning to Ingredient Solutions, sales for the year increased 28% to a record $115.9 million, while gross profit increased to $31.5 million or 27.2% of segment sales. The increase was driven primarily by higher sales of specialty wheat starches and specialty wheat proteins, as strong consumer demand for foods containing higher levels of plant-based proteins and lower net carbohydrates continues. We have also begun initial shipments of Proterra seasoned crumbles utilized as a meat alternative to colleges and universities as we pilot the development of this product line in the food service channel. Construction of the textured protein extrusion facility that we previously announced remains on schedule with an expected start date during the fourth quarter of 2023. We believe the continued momentum we have realized across our specialty wheat and emerging plant-based products will enable long-term sustainable growth for the segment. Our experienced sales, innovation and R&D teams continue to work effectively and collaboratively throughout the year to meet our customers’ needs, as we accomplished these record results for the year. These achievements were supported by record production levels, a direct result of productivity improvements due to our continuous improvement initiative. Before I turn the call over to Brandon, I want to thank our team for their tremendous efforts and continued execution. Their ability to build on the momentum we have generated throughout the year and the continued alignment of our product offerings to meet consumer trends, enabled us to deliver strong results for the year. This concludes my initial remarks. Let me now turn things over to Brandon Gall for a review of the key metrics andnumbers.

Thanks, Dave. Before I begin an overview of the financials, I would like to remind everyone that we closed the merger of Luxco on April 1, 2021. And as a result, 2021 numbers only include three quarters of contribution from the acquisition, whereas 2022 benefited from the acquisition’s inclusion for the whole year. Additionally, during 2021, there were a number of non-recurring items that we have adjusted out to assist in analyzing and assessing our business. A list of these adjustments as well as a bridge to the corresponding GAAP reported metrics can be found in our earnings release disclosed this morning. For the fourth quarter 2022, consolidated sales increased 15% to $191 million as a result of increased sales in our Distilling Solutions and Ingredient Solutions business segments. Gross profit increased 20% to $63.2 million, representing 33.1% of sales due to improved segment gross profit performance by all three business segments. For the year, consolidated sales increased 25% to $782.4 million due to record results for all three business segments. Gross profit increased 27% to $253.3 million, driven by double-digit improvement across all three segments. Despite the headwinds we face in white goods and industrial alcohol, total company gross margin increased by 70 basis points, reaching 32.4% in 2022. Advertising and promotion expenses for the fourth quarter increased $4.7 million, or 75%, to $10.9 million as compared to the fourth quarter 2021. This increase reflects our continued effort to increase marketing spend on our premium plus price tier brands as part of our premiumization strategy. Our A&P spend this quarter was the highest of any quarter since the Luxco merger. For the full year Branded Spirits A&P spend increased to $27.3 million, which represented 11% of Branded Spirits sales with the vast majority being spent on our premium plus brands. Going forward, we will continue to invest in marketing for our Branded Spirits segment to promote our premium plus price tier brands. Corporate selling, general and administrative expenses for the fourth quarter increased $5.1 million to $22.6 million due primarily to higher expenses associated with incentive compensation and retirement. For the full year, corporate SG&A expenses increased $1.8 million to $74.6 million. Operating income for the fourth quarter decreased 34% to $29.7 million, due primarily to a $16.3 million favorable insurance recovery recorded in the fourth quarter of 2021. Adjusted operating income increased 3% to $29.7 million. For the full year, operating income and adjusted operating income increased 18% and 23% respectively to $149 million. Our corporate effective tax rate for the fourth quarter of 2022 was 19% compared with 26.8% from the year ago period. For the full year, the corporate effective tax rate was 22.3%, compared with 25% in 2021. The decrease for the quarter and full year corporate effective tax rates was primarily driven by an increase in state tax credits and further integration of the Luxco merger and the associated tax attributes. We anticipate our effective tax rate to be in the range of 24% to 25% in 2023. Net income for the fourth quarter decreased 29% to $22.5 million due to the $12.2 million tax affected favorable insurance recovery recorded in the 2021 fourth quarter. Adjusted net income for the quarter increased 16% to $22.5 million. Basic earnings per common share for the fourth quarter decreased from $1.44 per share to $1.02 per share due to the $0.56 per share favorable insurance recovery. On an adjusted basis, basic EPS increased from $0.88 per share to $1.02 per share. Factoring in the additional shares associated with convertible note offering by closing November 2021, fully diluted EPS decreased $1.01 per share in the quarter from $1.44 per share in the year ago period. Fully diluted adjusted EPS for the quarter increased to $1.01 per share compared to $0.88 per share in the year ago period. Net income and adjusted net income for the full year increased 20% and 23% respectively to $108.9 million. Basic EPS increased to $4.94 per share from $4.37 per share in 2021. On an adjusted basis, basic EPS increased to $4.94 per share compared to $4.26 per share in 2021. Factoring in the additional shares associated with the convertible note offering, fully diluted EPS increased to $4.92 per share compared to $4.37 per share. Fully diluted adjusted EPS for the year increased to $4.92 per share, compared to $4.26 per share in the year ago period. Adjusted EBITDA for the fourth quarter increased 2% to $35.1 million. Adjusted EBITDA for the full year was $169.3 million, an increase of 20% from the prior year. The increase was primarily driven by strong performance of all three business segments. Corn, wheat flour, and natural gas represent our three largest commodity expenses and each continued to experience elevated prices throughout the quarter. Relative to the prior year fourth quarter, our input costs for corn increased 41%; wheat flour increased 20%; and natural gas increased 37%. Despite these elevated input costs, a risk management process and our focus on products that are premium and more specialty in nature have enabled us to mitigate the impacts of inflation this year across the majority of product lines. Furthermore, we did not experience any significant supply chain disruptions in 2022. Cash flow from operations was $88.9 million in 2022, which was up slightly from $88.3 million in 2021, reflecting the consistent cash generating capability of our business. Inclusive in this is our investment in inventory of aging whiskey, which stood at $199 million at cost at year end, a net increase of $25 million at cost during the year. Matching whiskey put away to grow future Distilling Solutions and Branded Spirits segment sales is one of our priorities and long-term strategies. Strong cash flows for the quarter and year further emphasize the strength of our portfolio and the value of our long-term strategy and continue to support our company as we pursue M&A opportunities in expansionary projects. Our balance sheet remains strong and continues to support investment opportunities that support growth and return cash to shareholders. We remain well capitalized with debt totaling $230.3 million in a strong cash position of $47.9 million. Turning to capital expenditures, our previously announced expansionary projects remain on track from a timing and cost perspective. Our continued focus on strategically deploying capital to enhance our operational capabilities resulted in capital expenditures of $47.9 million for the year. We anticipate approximately $58 million in capital expenditures for 2023, which will be used for facility improvement and expansion such as our new Proterra facility in Atchison, Kansas, our distillation expansion at Lux Row Distillers in Bardstown, Kentucky, and the addition of whiskey barrel warehouses to support continued growth at our Lawrenceburg and Bardstown distilleries. We will also continue to invest in facility sustenance projects as well as environmental health and safety projects. The board authorized the quarterly dividend in the amount of $0.12 per share, which is payable on March 24, 2023, to stockholders of record as of March 10th. The Board continues to consider dividends as an important way to share the success of the company with shareholders. Our capital allocation strategy remains consistent with what we have communicated in recent quarters. We continue to believe that our focus on organic and acquisitive growth aligns well with our long-term strategy as well as the underlying consumer trends that our business is well positioned to leverage. We remain deliberate and disciplined as we continue to evaluate M&A opportunities, invest in put away of American whiskey, and conduct expansionary projects that accelerate growth and increase our capabilities and product offerings. And now let me turn things back over to Dave for concluding remarks.

Thanks, Brandon. We are very pleased with the strong results delivered this year despite increased costs and broader macroeconomic uncertainty. Demand for our products remains strong, and we believe our business continues to be well positioned. We remain confident in our strategy and believe recent Distilled Spirits Council of the United States data further emphasizes the value in our approach. In 2022, Spirits gained market share within the total U.S. beverage alcohol market for the 13th straight year and surpassed beer's U.S. market share on a revenue basis for the first time. The growth in both revenue and volume for U.S. spirits primarily reflects premiumization in the American whiskey and tequila categories, which is consistent with our strategy in our Branded Spirits segment. As we mentioned earlier in the call, brown goods sales increased 65% in the fourth quarter, and brown goods inventory increased $13.3 million at cost during the quarter. The ability to increase brown goods inventory while at the same time supporting significant revenue growth during the quarter is the result of expanding the principles of continuous improvement practices across other areas of the organization. Our American Whiskey Distillery in Lawrenceburg, Indiana, is one such example where during the year, brown goods volume production surpassed our previous annual record by more than 25% with no capital investment required. As we enter 2023, we will continue to focus efforts on optimizing product mix across all three of our business segments, and invest in areas that generate the greatest long-term value for our shareholders. We expect the consumer fundamentals that have supported historical growth in our business to remain intact, while we also expect inflationary pressures to persist in input cost primarily in corn and wheat throughout the year. We will continue to explore further actions that can be taken with respect to our white goods and industrial alcohol products to minimize the headwinds associated with these product lines. These factors, in combination with the strength of the underlying business, support the following financial outlook for the fiscal year ending December 31, 2023. Sales projected to be in the range of $815 million to $835 million. Adjusted EBITDA to be in the range of $178 million to $183 million, and adjusted basic earnings for common share in the range of $5.05 to $5.20 per share. With that backdrop, let me discuss expectations for the first quarter, which have already been factored into our full year 2023 guidance. We expect quarterly sales and gross profit results for the first quarter of this year to come in below the subsequent three quarters for the balance of 2023. This expectation can be attributed in part to the timing of customer commitments for brown goods, post-holiday seasonality in Branded Spirits, and signs of elevated distributor inventory levels relating to our premium plus brands. We continue to be pleased with the strength of our Branded Spirits depletion patterns, and we believe distributor inventory levels will begin to normalize in the second quarter. We continue to make progress on our sustainability initiatives. We have completed a holistic assessment of the company's ESG program to ensure we have an effective and optimized approach to our sustainability journey going forward. We have identified four ESG pillars: people, planet, product, and process, which align with our commitment to our employees, the communities in which we operate, our products, and our business processes. Our approach to ESG is based on a commitment to a culture of continuous improvement in which our shareholders, employees, and the communities where we operate all benefit from a business platform based on sustainable growth. Our inaugural sustainability report for calendar year 2022 will be published on our newly renovated company website in April of this year. As we begin the new year, we remain committed to leveraging the strong foundation we have established over the years with the objective to deliver sustainable long-term value for our shareholders. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

Thank you. Our first question comes from Vivien Azer with Cowen. Please go ahead.

Thank you. Good morning. I wanted to start on the brown goods sub-segment, please, in distillery products. Thank you for noting the customer count and the level of commitment. If you could just put that in context given the fact that brown goods came in much stronger, certainly than we were expecting throughout the year, what did that look like in the year-ago period in terms of the level of commitment? Thank you.

Hi, Vivien, this is Dave. Yes, we had a lot of success this past year in being able to increase the number of commitments we have with customers on both new distillate and aged. 2022 was probably our best year in gaining those commitments. Prior to 2022, we were successful in getting commitments on new distillate from customers, but historically we've had very limited success in commitments on aged whiskey. What's been driving that in our ability to increase commitments is just the tightness of supply and the overall market on both new distillate and aged whiskey. So obviously we've been able to take advantage of that as customers look to secure supply for their growing brands.

Understood. That's really helpful context. And just as a follow-up to that; could you please talk about your appetite to leverage the Branded Spirits supply chain to maybe satisfy incremental demand on the distillery product side? Thank you.

Yes. We basically look at our supply as having adequate supply to protect our Branded Spirits growth as well as adequate supply to service our bulk customer business. So we really don't anticipate any issues with supplying both Branded Spirits within our own portfolio as well as our bulk customer's business.

Understood. Thank you so much.

The next question comes from Marc Torrente with Wells Fargo. Please go ahead.

Hey, good morning. Thank you for taking my questions. Just starting high level, we'd love to hear your thoughts on the spirits industry outlook more near-term coming off several years of above average growth. We've heard some narrative of market normalization, even commentary on premiumization slowdown. So what are you seeing out there in the industry, and maybe if you could offer some refreshed perspective on your relative positioning?

Sure, thanks Marc. As you saw in our fourth quarter results, our premium plus brands grew 23% for the quarter. I think in Q2 they grew 12%, Q3 they were up like 16%. So we've continued to see strength in the premium plus portion of our portfolio. I think if you look at some of the data out there, American Whiskey continues to be projected to grow in the 5% to 7% compound annual growth rate. Now that takes into account all price tiers. Our expectation is that premium plus price tier brands will most likely grow above that rate, while obviously mid-value brands are going to grow below that rate. But that's been consistent for the last four to five years that American Whiskey has grown at a 5% to 7% compound annual growth rate. We're not seeing presently any indications that that's going to slow down in our Branded Spirits business or in our Distilling Solutions segment for that matter.

Okay, great. And then on the distilling side, specifically brown goods; has there been any easing on industry supply constraints with either capacity coming online or demand normalizing? And what's your outlook for the progress here?

Yes. I think the demand remains strong for both new distillate and aged. Obviously, there's been a lot of expansions announced in distilleries, whether they're owned by some of the multinationals or some of our competitors in the bulk spirit space. But at this point in time, Marc, we're not seeing any excess capacity on the market. A lot of that capacity is being added in anticipation of international growth for American Whiskeys. And again, we feel like we're well positioned from a supply point of view in our own business. We announced on this call, we had a 25% improvement in our total output in our Lawrenceburg, Indiana distillery. We previously announced both fermentation and distillation expansions at our Lux Row Distillers and in Bardstown. So we feel well positioned and we think there's going to be adequate demand going forward to support continued growth.

And then just one more on advertising expense. This has been stepping up as a percentage of sales specifically within Branded Spirits. Clearly the premium part of the portfolio is mixing higher. What are you seeing in terms of the effectiveness of this spend and where it is directed and how should we think about that level going into 2023?

Yes, I'll talk about the effectiveness and then Brandon can address how we're looking at it in 2023. But again, with the growth we're seeing in our premium plus brands for the last three quarters, particularly in Q4 where we had heavy A&P spend on advertising, we think the effectiveness of the spend has been very good. And those growth rates are obviously coming in our highest margin spirits brands. So we're pleased with the effectiveness of the spend, and we'll continue to invest behind these brands as we go into 2023. And I'll let Brandon address the spend levels.

Yes. And thanks Dave and Marc. As you know, the $27.3 million of the total A&P spend during 2022 was in Branded Spirits. So that's really what we mean when we talk about A&P. And so that represented approximately 11% of Branded Spirits net sales. And as we go into 2023, we expect to spend at that same level and even possibly slightly above. So that's how we're looking at it going into the New Year.

Okay. Thank you very much.

The next question comes from Ben Klieve with National Securities Corp. Please go ahead.

Hi, thanks for taking the questions and this is Ben Klieve from Lake Street Capital Markets actually now. First of all, congratulations on a very successful 2022. I'll echo the earlier comments congratulating you guys and thank you for the context on brown goods customer count and commitments. Two quick questions for you. First of all, Brandon, can you comment on the guidance for 2023; what is implied in that guidance from the expansion initiatives throughout both the Ingredient and Distillery segment?

Yes, thanks for the question, Ben. Yes, starting with the Ingredient Solutions, the gains that we expect to get in 2023 relative to 2022 are really going to be on an organic basis. The new Proterra expansion facility isn't going to be placed into service until Q4. And so we're not including anything involving that in our guide at this point. As Dave said, the expansion initiatives we're seeing in the Distilling Solutions and Branded Spirits are incorporated to a certain extent. But again, the distillation expansion for Branded Spirits won't be ready until the end of the year. And that's really as you know, Ben, that production is going to go into our Branded Spirits future sales portfolios. So as far as our expansion efforts are concerned, that's how we're thinking about it for 2023.

Got it. Okay. Very helpful. And then just maybe a little premature given that the pilot for Proterra really has just started, but do you have any color that you've received from your potential customers in this pilot program that you can share?

Yes. And the feedback from the colleges and universities that actually are purchasing the product has been fantastic. It's been very well received. They shared a story: we had one of the universities where some of the students complained to the university that they were serving real meat in their plant-based offerings in the cafeteria, and in fact it was Proterra. So the feedback overall has been very positive, and we continue to go out and try to sell in additional colleges and universities, but the functionality and the performance and the taste profile of the product has been very well received.

That's a great little anecdote. Very good. Well, best of luck as that product rolls out and yes, good luck here coming up in 2023. Thanks for taking my questions. We'll get back in line.

Thanks, Ben.

Thanks, Ben.

The next question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning.

Hi, Bill.

Hey Dave, I might have missed this comment, but you say that you're on the premium spirits that the new distillate in the aged is fully committed for 2023?

Yes. We said the vast majority of new distillate is committed and the majority of aged is committed.

Okay, that's what I thought. So that means you have really great visibility into that business and the profitability for all of this year. What's – I mean, and that's different from prior years, I mean, especially on the new it seems to be kind of, you'd wait for the orders to come. Is there just that much demand where you're trying to manage the distillery production schedule a little bit better? And so you have – you've, I mean, is there really any upside from there on the new side?

Yes, I mean, Bill, with the market dynamics the way they are, right, the last, call it 18 months, where demand's been in some cases higher than supply across the industry, not just for us, that's led customers to be much more willing to commit to forward purchases to make sure they have the inventory to protect their brand growth. So that's why we've had much more success entering 2023 with commitments, if you will, on new distillate, and the same thing can be said for aged. As you know, we've historically not been successful in getting any commitments on aged inventory. But this, as we were looking in 2022 to secure business for 2023 due to the same market dynamics, we were able to get commitments for the majority, not as much as on new distillate, but still a significant amount of aged commitments for 2023.

So I mean – go ahead.

No, go ahead, Bill.

Oh, I was just trying to understand, I mean, sticking on new, I think, you had also started some continuous improvement programs on the new or on the distillery maybe six, eight months ago. Do you think that's going to yield some capacity, the added capacity where you could add on top of what you are already committed?

Yes, I think, I don't know if you caught in my prepared remarks, but in 2022, we were able to increase the capacity of our Lawrenceburg, Indiana distillery by 25% versus its previous record production. So the teams are already making great strides, and to your point we have capacity to entertain spot sales if you will. But what we also try to do is make sure we've got a great balance between how much new distillate we're selling on an annual basis to ensure we can also lay down whiskey and age it to support future aged sales. So that's the balance we constantly monitor. And if opportunities present themselves to potentially sell more new distillate, we'll certainly evaluate that and take advantage of it if we feel it's the right decision.

Got it. And then on aged, I mean, you said fully committed, but obviously you have a lot more inventory than maybe what you have fully committed to. So when would you make the decision to, I guess, commit more of the age as customers come in and needing it? And, is there – I assume that's where there is some meaningful upside potential for this year?

Yes, kind of the same thing there, Bill, is we – the majority of aged is committed. We still have aged available for spot sales. But what we also try to do is make sure that we don't oversell our aged position in any one year so that we have adequate age to sell in future years. So, that's how we look at it. And we try to make sure – as we've discussed before, we could probably sell a lot more aged in any given year, but then you're jeopardizing growth in your out years. So, we try to ensure we balance that appropriately.

Sure. Last one for me, just the Luxco business being down kind of 1% in the quarter. Is that more just a tough comp? Was there a big difference between white goods and brown goods within that portfolio? Any more color around the quarterly performance for that would be great.

Yes, I mean, on Branded – you're asking about Branded Spirits, Bill?

Correct.

Yes. I think the dynamic in our Branded Spirits segment is, from a volume perspective, the majority of our case volume is still in the mid and value priced tiers, which are declining, both in our business and across the board in the industry. What we try to do in this business is have the gains in our premium plus brands, which are the much higher margin products, offset the decline in our mid and value tiers. That's pretty much what's played out this year. But the good news is by focusing on the premium plus brands, they are much more profitable and it expands the overall gross margin profile of our Branded Spirits business. To that point, we've been able to grow the gross profit by 600 basis points in 2022 versus 2021.

Got it. Thanks so much.

Thank you.

The next question comes from Sean McGowan with ROTH. Please go ahead.

Thank you, I appreciate it. A couple of questions on cost. So big improvement in the gross margin in the distillate business, is that something you think will sustain or will we see kind of a regression back to some lower levels going forward?

Sean, for clarity, are you talking about the cost side for new distillate or the revenue side?

I'm talking about gross margin.

Yes. We believe, given the current dynamics, that the pricing we're seeing and the demand we're seeing is sustainable in the near future. In fact, Dave has already spoken quite a bit about the commitments we're seeing for 2023. We're already looking forward as a team beyond 2023 and starting to get commitments in line for 2024 and beyond. What we can see over that timeframe, Sean, is a continued strengthening demand and pricing.

That's good news. On SG&A was there anything unusual in the quarter that drove that big dollar increase or do you think that this is kind of the new normal, this level of spending?

Yes, thanks for the question. SG&A for the quarter was up by about $5 million, $5.1 million versus last year. A lot of that is going to continue on. Part of the increase this year was due to incentive compensation and some retirement expenses that came through in the quarter. We feel like our SG&A as a percentage of sales is in line with our peers and the industries we compete in. So we believe we're in a good place.

Okay. Thank you very much.

The next question comes from Gerald Pascarelli with Wedbush Securities. Please go ahead.

Hi, good morning. Thanks very much for the question. As a follow-up to some of your previous commentary as it relates to your Branded Spirits portfolio, I believe you had the goal to grow that portfolio in total in line with the spirits category. So my question is, is that still the goal? And does that even really matter at this point given the outperformance that you've seen in your above premium offerings and kind of like the positive mix and the margin accretion you're able to generate off those select brands anyway? Any color you could provide there on your thoughts would be helpful. Thank you.

Yes, Gerald. The latter is definitely our priority, right? We want to continue to grow the premium plus brands in our portfolio because that's where the consumer demand is. Those brands are our highest gross margin brands. We don't really focus on top line net sales growth in Branded Spirits because of that; we're trying to grow the premium plus brands, increase the margin profile, and as a result, increase the overall profitability of Branded Spirits. I think over time, as the organic growth of the premium plus brands continues, it will become a larger portion of our overall portfolio and at some point will drive top line growth. But in the near term, our focus is expanding those brands, improving the gross margin profile and driving profitability.

Yes. And just to add to that, the fourth quarter is a great example of exactly what Dave just outlined. Top line for our Branded Spirits segment was basically consistent or flat for the prior year, but the premium plus price tiers of our portfolio were up 23%, which resulted in an 18% increase in gross profit dollars and a gross margin expansion of 630 basis points. The fourth quarter, I think, is a really good playbook for what we're trying to accomplish.

Perfect. Thanks very much. Last one for me is just on the M&A landscape. When you look at the industry, when you look at potential deals, has anything really changed, currently relative to maybe where we were six months ago? Just looking at your balance sheet, you have very low leverage, you have the capacity to add more debt, so any color you could provide just around what you are seeing in terms of potential deals or attractive categories would be helpful. Thank you.

Yes, the dynamics are pretty consistent with what they've been the last year. There is still very strong demand for premium brands, primarily in the American Whiskey and tequila categories, as well as others. Multiples remain very high, and our desire to do M&A remains high. So we're consistently looking at opportunities from an M&A perspective that can help us position for future growth. But overall, what we're seeing in the market hasn't really changed over the last six to twelve months.

The next question comes from Mitch Pinheiro with Sturdivant & Co. Please go ahead.

Yes, hey, good morning. Most of my questions have been asked. I do have a couple here. I don't know if you talked about input costs and how they factor into your 2023 guidance.

Yes. Thanks for the question, Mitch. As we shared on the call, in Q4 we saw elevated input costs; corn was up over 40%, wheat flour 20%, and natural gas 37%. As we look forward to 2023, we are still seeing elevated costs, even compared to what we saw in 2022. Looking across all of our inputs, we're into double-digit increases again. As we shared on these calls, we do enter any given year with the majority of our sales contracted and committed to going forward. So we're able, we are pricing this through. If you look at our product lines that are more premium in nature in 2022 as an example, we've had fairly good — about really good success in pricing through these increases. The continued item that we're keeping an eye on where it remains a little bit more challenging is industrial alcohol and white goods. But other than that, we feel like we're in a good position as we enter 2023.

Okay. And then on your A&P spend, where is it being spent? I mean, is it more A and less P or evenly split?

Yes, I mean, the majority of it is in advertising. We've really focused advertising dollars on the brands that we think have the most growth potential. The one example that we've talked about is our Yellowstone Bourbon brand. If you are a Yellowstone series fan, you probably noticed that we have commercials running when the series is running. The cost to run those commercials is very high, and that's part of what drove the increased spend in Q4 of the year. But we try to make sure that the A&P spend is working, to compare A&P dollars versus non-working, if you will, and that's proven to be pretty successful to date.

Okay. That's all I have. Thank you.

Thanks, Mitch.

Thanks, Mitch.

This concludes the question-and-answer session. I would like to turn the conference back over to Dave Colo for any closing remarks.

Okay. Thank you for your interest in our company and for joining us today for our fourth quarter and full year 2022 earnings call. We look forward to talking with you again after the first quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.