Mgp Ingredients Inc Q4 FY2024 Earnings Call

Good day, and welcome to the MGP Ingredients fourth quarter of 2024 financial results conference call. All participants will be in a listen-only mode for the duration of the call. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. And to withdraw a question, please press star then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Amit Sharma, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to MGP's fourth quarter earnings conference call. I'm Amit Sharma, vice president of investor relations, and joining me is Brendan Gall, interim president and chief executive officer, and chief financial officer. And Mark Davidson, VP corporate controller and head of treasury. We will begin the call with management's prepared remarks before opening the call to analyst questions. Before we begin, this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward statements made today due to a number of factors, including the risk factors described in the company's annual report filed with the SEC. The company assumes no obligation to update any forward-looking statements made during the call except as required by law. Additionally, this call will contain references to certain non-GAAP measures that we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures is included in today's earnings release issued this morning before the market open. If anyone does not already have a copy of the earnings release, you can access it on our website, mgpingredients.com. With that, I would like to turn the call over to Brendan Gall. Brandon?

Thank you, Amit. Good morning, everyone. Before diving into our results and outlook for 2025, I want to take a moment to recognize our incredible team across the organization. As they continue to act with speed, agility, and dedication in a difficult and volatile operating environment, their actions ensured that our fourth quarter results were in line with our expectations and our full year 2024 results were within our updated guidance. We've made meaningful strides across two of our three operating segments. However, this progress was more than offset by the faster than expected and larger than expected decline in our brown goods business primarily due to elevated industry-wide barrel whiskey inventories. As we look ahead, we are committed to maintaining our position as one of the leading suppliers of high-quality differentiated premium American whiskey. Elevated inventories in a high, albeit slowing, industry whiskey production will remain a headwind for our Brown Goods business. We are taking decisive actions designed to navigate the current industry landscape and put us in a stronger competitive position. On the other hand, we are pleased with the trajectories of our branded spirits and ingredient solutions businesses. These two businesses, on a combined basis, accounted for a significant portion of our overall performance, and we believe we are well positioned to deliver attractive growth and make them an even bigger driver of our consolidated financial performance in 2025 and beyond. As for the fourth quarter of 2024, results were in line with expectations. Consolidated sales for the fourth quarter decreased 16% compared to the prior year period. Factoring in the Atchison Distillery closure, consolidated sales decreased by 7% as the expected declines in the distilling solutions and branded spirits sales more than offset a return to growth in the ingredient solutions segment. Adjusted EBITDA decreased by 9% to $53.1 million as lower SG&A expenses partially offset reduced gross profits. Basic earnings per common share declined to a loss of $1.91 per share due to a one-time noncash adjustment to goodwill. Adjusted basic earnings per share decreased 4% to $1.57 per share. Before Mark and I discuss the results and our 2025 guidance in detail, let me take the next few minutes to highlight the current operating environment in each of our three business segments. This business continues to perform well. It remains a cornerstone of our long-term strategy to establish MGP as a premier branded spirits company. Across the global alcoholic beverage segment, North America is one of the most attractive markets, and American whiskey and tequila are the most attractive categories. We are well represented across both these sectors, strongly positioning us for the long term. As we look ahead, many of our premium plus brands continue to gain traction in the marketplace. This is highlighted by the continued momentum of Penelope and Elmayor, two of our largest premium plus brands, whose sales were up strong double digits in 2024. The strong sales trend for Revel 100 is another example of the upside potential of our Premium Plus portfolio. Revel 100's strong sales performance is benefiting from our realignment of the Rebel brand with the lifestyles of its targeted consumer cohort and more impactful marketing, highlighted by our sponsorship of Kyle Butch's number eight car under Richard Childress Racing for the NASCAR season. We see potential to employ a similar playbook with other brands in our portfolio. At the same time, our extensive portfolio brands across the price positions us well to opportunistically meet consumers where they are, particularly in the current environment. We are pleased with the double-digit average annual growth of our Premium Plus portfolio over the last two years. Notwithstanding some near-term volatility, we believe that it remains well positioned to grow ahead of the category over the long term. Turning to our Ingredient Solutions segment, sequentially improving sales and gross margin performance in the fourth quarter reinforced our confidence in this business's attractive long-term growth and gross margin upside potential. Food with better functional nutrition, such as high protein and high fiber, continues to meaningfully outgrow overall food industry spending. Our specialty starches under the FibroScan brand and specialty protein products under the Arise brand are designed to meet these needs. Our innovation pipeline remains strong, with opportunities to expand into higher growth markets, including plant-based foods and healthy snack categories. We continue to receive strong interest from both existing and new customers, and we are committed to working closely with them to develop ingredient solutions that align with emerging consumer trends. We're positioning this business to take full advantage of these tailwinds by sharpening our commercial and operational execution. The recent promotion of Mike Butchaw to the Ingredion Solutions segment president role should enable even closer cross-functional collaboration within the team. In addition, the completion of the beef starch fuel plant should provide cost relief related to the disposal of the waste starch stream in the second half of 2025. We believe these initiatives will help unlock additional growth potential for this business and further solidify our position as a leading specialty wheat ingredient supplier. Now let me provide an update on our distilling solutions business. As we called out on our third quarter earnings call, soft whiskey consumption and elevated industry-wide barrel whiskey inventories are having a larger and quicker than expected impact on our Brown Goods results, and this pattern is continuing. Annual whiskey production in the US has increased by nearly a million barrels since 2020, to nearly 4.6 million barrels, as the number of new and existing distillers has added or expanded distilling capacities to fulfill stronger demand from not just multinational and craft whiskey brands but also private investment funds. However, with consumption normalizing from post-COVID levels, most of these demand projections turned out to be too optimistic, leaving brands with too much aging inventory relative to their current sales. This issue was initially more pronounced among our smaller craft brand customers, but we are now seeing similar issues from many of our other customers as well. As a result, to better align their inventories with current demand, they are cutting back their orders for both new fill and aged whiskey. These developments are putting even more pressure on distilling solutions sales and gross profit in 2025 than we previously anticipated, and we believe this dynamic will persist into 2026. The good news is that our customers remain committed to the American whiskey category, and the brown goods industry appears to be responding to this excess inventory. Industry data published by the TTB shows that after double-digit increases over the last three years, total US whiskey production through October is down 1% in 2024, including a 4% decline in the last six months compared to the same periods in 2023. At the same time, TTB industry usage trends are improving as total whiskey barrel dumps are down 1% in the last six months relative to a 4% decline year to date through October and a 10% decline in 2023. We are encouraged by this nascent improvement in the industry supply-demand dynamics, even though total whiskey remains elevated relative to historical levels. That said, we're not simply waiting for market conditions to improve. We're taking decisive proactive actions designed to derisk our Brown Goods outlook and emerge in a stronger competitive position from this period. As we mentioned on our last earnings call, we're optimizing our distillery cost structure to mitigate the impact of lower production volumes. Now as we plan additional production cuts in 2025 and 2026, we have identified additional cost savings opportunities and are leaning more on our key suppliers and partners to further lower our overall cost structure. At the same time, we are strengthening our key customer relationships. We have a strong reputation and a long track record of providing high-quality aged and new distillate to many of the largest American whiskey brands. Our ability to produce unique and complex mash bills at scale is unmatched in the industry, and we are leveraging these strengths to plan more strategic partnerships with our top customers. Let me reiterate that we remain committed to our Brown Goods business. We're confident that our actions will help us navigate this challenging period over time and position us to capture the full value of our aging whiskey inventory. Putting it all together, our 2025 guidance signals that these ongoing challenges in the distilling solutions business will continue to overshadow meaningful strides in our branded spirits and ingredient solutions businesses. Specifically, for 2025, we expect net sales in the $520 million to $540 million range, adjusted EBITDA in the $105 million to $115 million range, and adjusted basic earnings per share in the $2.45 to $2.75 range, with average shares outstanding of approximately 21.3 million shares, and a full year tax rate of approximately 25%. Due to the factors in our proactive actions I mentioned earlier, the full-year guidance now assumes approximately a 50% decline in Distilling Solutions segment sales and a 65% decline in segment gross profit relative to our previous estimate of 35% and 50% declines respectively. Full-year branded spirits segment sales are expected to be relatively flat with gross margin in the high 40s in line with 2024. As we cut back on some of our single barrel programs as consumers and retailers become a bit more selective, and as we sharpen our price points on some brands. We expect Ingredion Solutions to return to positive sales growth in 2025 along with improving gross margins. We've accelerated our productivity initiatives to reduce costs across the business in this challenging environment, including a double-digit percentage reduction in our corporate headcount implemented earlier this month. We believe these initiatives will help offset the reinstated incentive compensation accrual this year and will remain a tailwind for the company beyond 2025. We're committed to investing behind our brands. At the same time, we're reducing and realigning our advertising and promotion spend to our most attractive growth opportunities. As a result, Branded Spirits A&P spend as a percent of Branded sales will be approximately 12% in 2025. That said, with most of our A&P spending behind our premium plus portfolio, branded spirits A&P as a percent of our Premium Plus sales will remain high at approximately 25%, well ahead of industry spending levels. As we look at the quarterly cadence, the first quarter tends to be our smallest gross profit and EBITDA quarter due to the seasonality of our business. We expect this dynamic to be even more pronounced in 2025 due to weather-related disruptions in the timing of onboarding new customers in our ingredient solutions business. We remain committed to generating strong cash flows. As part of this commitment, 2025 CapEx is estimated to be approximately $36 million, down from approximately $73 million in 2024. A net whiskey put away is expected to be in the $15 million to $20 million range, down from approximately $33 million and $51 million in 2024 and 2023, respectively. Our 2025 Whiskey Putaway is primarily for our own brands. Given the evolving situation regarding the implementation and timing of tariffs, their potential financial impacts are not included in our current outlook. The vast majority of any impact would be from our tequila brands that are imported from Mexico, as well as other imported products. We have contingency plans in place to focus on what we can control to help mitigate the potential impact of any tariffs. With that, let me hand it over to Mark for the review of our fourth quarter results.

Thank you, Brendan. For the fourth quarter of 2024, consolidated sales decreased 16% to $180.8 million compared to the year-ago period. Excluding the impact of the Atchison distillery, consolidated sales decreased by 7%. Within the Distilling Solutions segment, reported sales declined by 25%. Excluding the impact of the Atchison Distillery, segment sales declined by 6% as a 10% decline in Brown Goods Sales was partially offset by a 15% increase in warehouse service sales. Branded Spirits segment sales decreased by 12% due to the continued double-digit decline in our value-priced brands, as well as a 12% decline in our premium plus sales as we lapped strong growth in the year-ago period. Ingredient solution sales increased by 4% as expected, specialty protein sales posted their first quarterly growth of the year as new business wins offset the stronger U.S. dollar's impact on our international sales. While we are proud of the progress we've made in generating specialty protein demand in North America, we expect order patterns to be relatively choppy in the early quarters of 2025 as we work to onboard new specialty protein customers. Our specialty starch sales increased 8%, leading to a record year in 2024 as FibroScan continues to benefit from long-term, consumer-driven tailwinds. Consolidated gross profit decreased 13%. Excluding the impact of the Atchison Distillery, consolidated gross profit declined by 15% to $74.5 million due to lower gross profit across all three operating segments. Gross margin declined by 400 basis points to 41.2%. Fourth quarter SG&A benefited from the lower incentive compensation expense. While advertising and promotion expenses declined 15%, largely due to the timing of certain A&P campaigns within the year. Full year 2024 A&P spending increased by 6% compared to full year 2023. Fourth quarter adjusted EBITDA decreased 9% to $53.1 million as lower gross profits more than offset reduced SG&A and advertising and promotion costs. During the fourth quarter, we recorded a $73.8 million non-cash adjustment to the carrying value of goodwill in the branded spirits segment, primarily due to certain unfavorable macroeconomic factors such as a high discount rate and lower peer valuation multiples since the 2021 Luxco acquisition. This non-cash charge is excluded from our adjusted metrics as outlined in our earnings release. The impairment is not a reflection of the performance of the Luxco or Penelope acquisitions, as each has performed well since their respective close dates. Net income for the fourth quarter decreased to a loss of $42 million due to the previously mentioned one-time non-cash adjustment. Net income for the full year decreased 6% to $34.4 million. Basic earnings per common share decreased to a loss of $1.91, while adjusted basic EPS decreased 4% to $1.57. We continue to prioritize strong cash generation by managing our working capital and reducing our barrel inventory put away. Net whiskey put away declined from $51.1 million in 2023 to $32.9 million in 2024, helping to drive a 22% increase in full-year cash flow from operations to $102.3 million, a record year for the company. Capital expenditures were $29.7 million during the fourth quarter and $73.2 million for the full year. 2024 capital expenditures likely represented a high watermark for our capital spending, as we expect it to decline to $36 million in 2025. Our balance sheet remains healthy and we remain well capitalized, with debt totaling $323.5 million as of the end of 2024, leaving us with approximately $520 million in availability under our debt facilities. We ended the year with a cash position of $25.3 million and our net debt leverage ratio remained largely stable at approximately 1.5 times at the end of 2024. With that, let me hand it over to Brendan.

Despite our lower year-over-year financial projections and the uncertainty we face as an industry at this point in the cycle, we remain confident we continue to be profitable and believe our balance sheet, cash flow generation, and access to capital gives us a strong foundation. We remain a leader in the contract distillation of American whiskey, and we are committed to this business and our customers. We are also a leading supplier of specialty wheat ingredients. In both cases, we believe we will emerge stronger and more competitive in the years to come. What gives us even more confidence is the progress we are making towards our mission of becoming a premier branded spirits company. Over the last four years, our branded spirits initiative has evolved from an aspirational idea to what we believe will be our largest segment by sales and gross profit in 2025. Our diverse portfolio of brands spans categories and price points, giving us the ability to meet consumers where they are. Our portfolio of premium plus price brands has performed well, growing to 46% of total segment sales and expanding gross margin by 1500 basis points since 2021. Our national sales and marketing platform combined with the scale of our portfolio allows us to be a critical partner with our customers. We believe this is yet another example of where our commitment and leadership position us well to emerge stronger and more competitive in the years ahead. But what really gives me the most confidence is our people. Every day, I'm humbled and honored to work side by side with my colleagues at MGP. Our team is passionate, innovative, agile, and resilient. There's no other group of individuals more committed and capable than those on our team. In conclusion, we remain well positioned in all three of the industries in which we compete, and our unique capabilities and product offerings give us the right to win. The current environment in the spirits industry is challenging. However, we believe our strategy and most importantly, our people will steer us into greater success. That concludes our prepared remarks. Operator, we are ready to begin the question and answer portion of the call.

We will now begin the question and answer session. And to withdraw a question, you may press star then two. Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning, Brandon. Can you talk a little bit more about your strategy for aged going forward? And when I say that, it's not just for the spot market. It seems like you've kind of shut down the spot market, which makes sense. But even for customers where you're making aged that they're going to buy down the road. I mean, last quarter or the end of last year, you were kind of left high and dry by some customers that had committed to that inventory and then walked away from it. Are you putting anything in place? Are you calling the customer base of who you're going to do that for? I mean, trying to understand how you're derisking that business a little bit more.

Yeah. Thanks, Bill, for the question. You're exactly right on a lot of those points. You know, last year in 2024, we said at the beginning of the year that aged sales were going to be down year over year. New distillate sales were off last year mid-single digits. So, you know, on the aged front, it did play out largely how we anticipated. We expect this year to be down even more, just due to where we are at this point in the cycle for that business. However, that being said, we are not giving up on the aged business. Although we are at the point in the cycle where maybe it's in relatively less demand, we do not believe this will always be the case. We are still the only contract distiller partner to offer customers both new distillate and aged at the breadth and scale that we do. This is important to our existing customers as it helps them fill gaps and brings new customers to their timelines. As our focus increases internationally, aged will play an even more critical role in our success. So we believe our long track record, Bill, our reputation for quality, and our commitment to our Brown Goods business and customers will allow us to monetize the value of our aged whiskey inventory over time. Just to the point we're at in the cycle, it's not playing as prominent a role as it has in the past. The second part of your question is a really good one, which is what's transpired with our customers since the previous third quarter call? So since last quarter, customers that just recently confirmed their contracts reached out to us to cancel their 2025 orders, while others began calling us for reduced pricing. At the same time, spot pricing for both new distillate and aged continued its decline below the reduced levels that we'd anticipated back in October. So in response, we've taken two critical action steps. Number one, we made the strategic decision to begin outreach to our other contracted customers in an attempt to proactively connect with them. While these conversations are still taking place, we assume this proactive partnership approach will result in additional reductions in sales and gross profit. Simultaneously, we've also set in motion cost savings initiatives to offset some of these impacts. However, even with these measures, we expect Distilling Solutions sales and gross profit to be down now 50% and 65% respectively this year. To sum it up, Bill, we are really leaning into our relationships with our critical customers. Rather than waiting for our phone to ring to see what customers are going to say, we're using the value of the relationships and the long-standing interactions we've had with them to proactively contact them and ask them what their real needs are, and where they align with market prices today. Because it’s very critical for us as we remain committed to this business to expand that partnership and to work with them through these tough times.

Got it. So just to translate it, from November, there's not much change to what your outlook was for aged in 2025, but the real difference is now you have a firmer after going to at least a third of the customers and not half with new pricing and new volume. You've come up with kind of a new estimate of what new business will be in 2025. Is that right way to think about it?

Yeah. That is right. Our outlook on aged for 2025 volume is largely what it was back in October, which was pretty small, especially related to prior years. You know, if anything's changed, we're probably going to get a little sharper on price there where we can. But, yeah, the aged outlook hasn't changed. We feel really good about our inventory position. We feel very confident that we're going to be able to monetize that over time.

Okay. And then second, just on the branded portfolio, it's often difficult for us to understand the true growth, excluding what you're planning to call. Is there any way to, as you rationalize that portfolio, understand kind of what the drag will be in 2025 for brands you're exiting or deemphasizing versus just the core growth?

Yeah. So in the premium plus segment, we're expecting flattish sales for the year. The overall branded spirits market is still trying to find its footing and stabilization. We feel that flattish growth, especially at some of those price points, is prudent. Although, obviously, we're going to aim for higher, we're trying to be realistic with our numbers for 2025. The reason for that is twofold. Number one, we've taken out of the 2025 number a lot of single barrel offerings to retailers. These are high-margin, high-priced, really good products that were very popular when they first came out a few years ago. They're popular because they were scarce and premium, and original to what that retailer could offer. What happened is a lot of other suppliers have gotten smart to it, so the scarcity has gone away, and the high price nature is a little less consumable from a consumer standpoint. Demand has gone down on those. We are taking that down in our 2025 for the premium plus portfolio. We are also incorporating more price support at certain price tiers to strategically position certain products versus their competitive set or to help move some higher-priced slower-moving inventory. So that's premium plus. The mid and value segment is collectively going to be down mid- to high single digits, which sequentially is a really good improvement from 2024. The reason for that is we are now no longer going to be lapping the repositioning of Rebel 80, which is a mid-price American whiskey that we discontinued in 2024. That's now going to be out of the comparison periods and we expect the mid- and value portfolio to perform relatively better sequentially.

Great. Thanks, Brandon.

And our next question will come from Robert Moskow with TD. Please go ahead.

This is Seamus Cassidy on for Rob Moskow and thanks for the question. So, Brandon, you cited the TTB data and looking at that data, it seems like there's something like over a decade of current consumption sitting in barrels. You said that you and other industry participants are cutting production to address the supply-demand imbalance. But my question is looking at maybe 2026 and beyond, how confident are you that Distilling Solutions will return to growth? Or said differently, how long do you think it will take for these production cuts to start addressing the supply-demand imbalance that you're seeing in the market right now?

Yeah. Great question. We see this tough environment persisting. It really depends on the industry how much longer beyond that it's going to last. However, we do expect over time that industry players will behave more rationally. Like we shared, we're starting to see some signs of improvement in that regard, which is encouraging. What we do know, Seamus, is that we are doing our part. We are reducing our production and controlling our controllables, such as reducing costs, running with greater efficiency, and staying close to our key customers. Like I said with Bill, we still believe that our aged products will remain valuable. While we remain committed to this business, it's worth noting that it's going to be a much smaller part of our overall business in the coming quarters and years than it's been in the past.

Got it. That's helpful. And then maybe one more from me. There's an S-3 out this morning with Chairman Don Lux listing his shares for sale. Given his significant ownership stake, is there any appetite by the company to maybe step in and repurchase some of these shares, especially in the context of the increased share repurchase activity in Q4?

Yeah. Great question. The S-3 that went out this morning is more of a housekeeping item. When we did the Luxco acquisition, it was part of the agreement that we would handle those matters on behalf of Don and his family. I believe this is the second one that we've done. We had wanted to do it in the back half of last year but there was some information that the board was aware of that prevented us from doing it, which is why we filed it today.

Understood. Thank you.

And our next question will come from Marc Torrente with Wells Fargo. Please go ahead.

Hey, good morning and thank you for the questions. I guess first on the guidance, particularly entering a year you would provide an idea of your visibility ahead. Do you guys typically cite the amount of distilling planned already contracted for the year? So maybe, I guess, entering this year, a new environment – help us get some comfort around the outlook. Could you maybe provide some context around the buildup of the guide particularly for distilling, and also any cadence considerations perhaps by segment for the year?

Yeah. Thanks, Marc. A large percentage, in fact, the vast majority of our projections for this year are contracted. Given the fact that we're anticipating even less on spot and age, even more of our expected sales are under commitment through new contracts. I've already shared what transpired, and what we're doing in response. So, we increased the year-over-year decline in that business to 50% sales and 65% gross profit. The gross profit impact is approximately $21 million incrementally to what we had shared a few months ago. That's netting out a lot of the great cost savings initiatives the teams identified and are putting in place. From a confidence standpoint, we feel we're doing all the right things. We are getting out in front of it. We are anticipating, rather than hoping, that our contracts hold, and we are now building into our guide for the first time that the contracts are going to be possibly renegotiated closer to what our customers need and closer to the market price for those products.

Okay. Thank you for that color. And then how are you thinking through cash flow project progression for the year? Earnings are under pressure. You've rebased CapEx. Even with some carryover projects, and then there's potential for the canal PR payout. So just any additional color on how you're thinking about cash needs for the year in management throughout?

Yeah. Last year, as Mark shared, cash flow from operations was a record for our company, over $100 million for the year. Despite the pressure on earnings and the lower EBITDA outlook, we still expect this to be a very strong free cash flow year for the business. The reason for that is, just as you said, we are reducing our CapEx significantly. We believe last year was a high watermark for the business, and this year, we think it's going to be approximately $36 million somewhere in that range. But still, we are not walking away from very positive ROI projects that will strategically position us in the future. That's going to be one huge source of cash that wasn't there in the past. Additionally, our put away is going to be reduced on a net basis this year. So we're forecasting probably $15 million to $20 million in net put away. Last year, it was roughly $32 to $33 million. Just through those actions alone, we're able to free up a lot of cash and use it at our disposal, whether to pay down debt or do other things opportunistically. Our net leverage ratio at the end of the year was approximately 1.5. With the lower earnings, we expect that to be pushed upward possibly, but we don't see it going above two times before the end of the year. One other thing to note is the Pinal T earn-out is not slated to be paid out until Q1 of 2026.

Okay. Great. Very helpful.

And our next question will come from Sean McGowan with Roth. Please go ahead.

Thank you. Two questions. One, how confident are you on the carrying value of the distillers that you have on your books given those changes in inventory and what's going on in the industry?

We're confident, Sean. Our carrying value remains far below where market prices are. And, you know, you can imagine this that our size and scale mean our costs can be relatively low within the industry. There's no cause for concern at this point in time.

Okay. My other question was, you talked about the vast majority of the tariff exposure being on tequila. But can you talk a little bit about the tariffs resuming at the end of next month and what portion of your output is bound for Europe, and what kind of exposure does that represent?

Today, it represents very little exposure, is the answer. But we don't view that as the case longer term. The tariffs are set to resume later on this year at around 50%. Those conversations are fluid, and we have more than one industry trade association that is really working on behalf of the industry to try to prevent those tariffs from coming back on. As far as our guidance for 2025 goes, Sean, not a big number is incorporated into that for international sales.

Okay. Thank you.

Thank you, Sean.

And our next question will come from Ben Kleevee with Lake Street Capital Markets. Please go ahead.

Thanks for taking my questions. First question on the ingredient business. Wondering if you can elaborate a bit on the magnitude of the one-time costs in that segment in 2024, and expected continued expenses on a one-time basis in the first half of 2025 as you transition that segment post-Atchison?

Thanks. This is Mark. For the full year 2024, our ingredient gross profit was down $20.8 million versus the prior year. Six point five million of that had to do with the B-start credit, which is excluded from our pro forma adjusted metrics for the segment. Aside from the B-start credit, we had around $8 million in other operational costs and headwinds, including incremental costs to dispose of the B-start slurry byproduct, which is something that we are mitigating with our biofuel facility in the second half of 2025. Lastly, approximately $2.5 million of cost was associated with operating the Proterra facility that did not exist in 2023. These are the one-time costs. The remainder of the decrease in gross profit was related to sales decreases, particularly in specialty protein.

So just to build on that, yes, the specialty protein business is the area that took a hit last year due to the strong FX headwinds from a strong U.S. dollar. A lot of our Arise 500 business goes to Japan. After losing a significant portion of that business last year, our teams did a great job of finding domestic customers. We saw that come on in Q4, which is significant as it's the first quarter of growth of the year for that product line. Although it's going to be choppy as these new customers are onboarded in 2025, we do expect more demand for that product. Secondly, Mark mentioned Proterra. We're very excited about this new capability. Just as a reminder, it commenced in Q2 and we're making progress. It’s still going to be a slight drag on the ingredient solutions business P&L in 2025 but much less than it was last year. We have two new accounts expected to come online in the second half, which are very large accounts for that business. Additionally, we expect three new ingredient inclusions to be released and ready for sale in Q3 and Q4. This has been a very challenging year operationally, separating this segment from the distillery came with a lot of complexity, resulting in these one-time costs. I'm very proud of the team for their response and excited to have Mike Butchaw as the new president of Ingredion Solutions. His collaborative work across functions is going to be incredibly beneficial for that business over time.

Got it. That all makes sense. A lot of moving pieces and a lot of progress there of late. I guess one follow-up question on the segment is around the international business that you referred to, Brandon. Is your expectation that those international customers are lost? Have they gone to another ingredient within their recipes or are they expected to come back as their inventory levels come down or as forex pressures mitigate?

Great question. As a reminder, our Arise product line in specialty protein, just like our Fibers and product line in specialty starch, are proprietary to us. So yes, the Japanese business went away quite a bit in 2024 and also in 2025. However, their substitutes for what we do are hard to come by. As the U.S. dollar has weakened a little bit over the last number of months relative to the Japanese yen, we are seeing interest come back. It was definitely a hit, which is why we're seeing them showing more interest again even at higher or elevated levels of exchange rates.

Very good. I appreciate you guys taking my questions. Thanks a lot. I'll get back in queue.

Thank you, Ben.

Again, our next question will come from Mitch Panhiro with Stifel. Please go ahead.

Yeah. Hi. Good morning. So looking at your put away for 2025, you're going to have some put away, but I'm curious. I guess that's all for your branded spirits business? There'd be no need to put away for your wholesale customers, is that right?

Yeah. That's our thinking right now. It's primarily going to be for our own brands. As we watch the industry dynamics, similar to last year, we expect this year's net put away to be down year over year and most of it is going to go to our branded goods.

Okay. And then is there a fungibility of the mash bills? From a product that was earmarked for wholesale customers, can any of it be reused for your higher margin branded spirits offerings?

Absolutely. And we do that all the time. In fact, it goes both ways. If there's a branded spirits barrel that the innovation team decided to go in a different direction on, then those get freed up, likewise for distilling solutions customers. It's a very symbiotic relationship between the two segments as it relates to inventory.

Okay. And then as the distilling solutions business recovers, which customer segment is going to drive that improvement at the beginning?

The way we look at it and the way we're trying to dial it in is focusing on certain customers, but also where we're differentiated. Where we're differentiated is in the higher rye mash bills that we provide. Additionally, a lot of these customers are ones we have supplied for a long time, so we are synonymous with their taste profiles. The easy and quick answer is that the larger national multinationals who've been around a long time are likely going to drive that growth when it returns. Those same customers have a lot of inventory that we're working with them to recalibrate. But, there are also craft and regional brands that are doing well, and we feel they have a good shot at becoming household brands over time. The smaller brands are under more pressure for various reasons than perhaps some of their larger peers. This is where we can help them innovate, blend, and create new products to stay fresh in the minds of consumers with their age. We can also provide affordable new distillates over time to help them grow.

And just one final question. Is this down cycle in the industry accelerating your business transformation to being almost a pure play branded spirits business? Is that the right way to look at this?

I think that's mostly correct, Mitch. This isn't how we thought we'd arrive here. If I'm being perfectly honest, this has been a lot sharper and impactful of a downturn than we anticipated. But it is a reminder of why our strategy has been what it has over the last five to 10 years. We switched from building our own brand to acquiring when we realized that while the brown goods business is a great market, it's very volatile. We also realized that building a brand and spirits business organically takes a long time and costs a significant amount of money. This led us to our strategic acquisitions of Luxco in 2021 and Penelope in 2023. The aspiration of being a branded spirits business is a reality for us as we're expecting it to be our largest segment by sales and gross profit in 2025. This segment will also be our most stable business and will enable us to grow significantly into the future. We're proud of the progress we've made and how we're positioned going forward.

Okay. Thank you.

Thank you for your interest in our company.

This concludes our question and answer session. I'd like to turn the conference back over to Brendan Gall for any closing remarks.

Thank you for your interest in our company and for joining us today for our fourth quarter earnings call. We look forward to meeting with many of you over the next few weeks.

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