Q4 2023 MGP Ingredients Inc Earnings Call

Participants

Mike Houston; Investor Relations; MGP Ingredients, Inc.

David S. Bratcher; President and CEO; MGP Ingredients, Inc.

Brandon M. Gall; VP of Finance & CFO; MGP Ingredients, Inc.

Bill Chappell; Analyst; Truist Securities

Marc Torrente; Analyst; Wells Fargo

Gerald Pascarelli; Analyst; Wedbush Securities

Ben Klieve; Analyst; Lake Street Capital Markets

Rob Moskow; Analyst; TD cowen

Mitch Pinheiro; Analyst; Sturdivant

Sean McGowan; Analyst; ROTH MKM

Presentation

Operator

Good morning, and welcome to the MGP Ingredients Fourth Quarter and Year End 2023 financial results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Houston, Investor Relations. Please go ahead.

Mike Houston

Thank you. I'm Mike Houston with Lambert global MGP's Investor Relations firm. And joining me today are members of their management team, including David Brasher, Chief Executive Officer and President. I'm 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, adjusted EBITDA, adjusted basic earnings per share, gross profit 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. Additionally, this call will contain reference 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 eight 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 www.MGPIngredients.com.
At this time, I would like to turn the call over to MGP's Chief Executive Officer and President, David Brasher. David?

David S. Bratcher

Thank you, Mike. And thanks, everyone, for joining the call today. I am honored and grateful to serve in the role of COO and President and truly excited to build on the MGP legacy on this call, we will begin with our overview of our performance for the quarter and full year ended December 31st, 2023. We will provide updates on key financial performance metrics and discuss the progress we have made against our strategy. At the end of the call, we will open the line for Q&A.
Our strong financial results for the quarter and year were a direct result of the continued strength of each of our business segments and the dedication of our team who are focused on implementing our business strategy. Consolidated sales for the year increased 7% to $836.5 million, while gross profit increased 20% to $304.7 million, representing 36.4% of sales.
Adjusted EBITDA increased 20% to $202.5 million. During the year, we continued to experience healthy demand for new distillate and aged whiskey in our distilling Solutions segment, which resulted in brown goods sales increasing 39% for the quarter and 26% for the year. These increases were driven by both price and volume. Our brand goods sales growth outpaced US market trends for American whiskey in 2023, driven by both our craft and multinational customers.
Our strong sales are a direct result of our exceptional American whiskey offerings and the relationships we have cultivated across our diverse customer base, which now stands at more than 840 brand, good customers over the last two years, we have deliberately grown our new distillate whiskey commitments compared to aged whiskey sales to bring longer term financial stability and visibility to our distilled solutions segment of our business in 2023.
New distillate sales exceeded aged whiskey sales for the first time since 2020, and we anticipate this will continue into 2024 and beyond as we accommodate our maturing and growing customer base and de-risk our commercial sales efforts. As a reminder, new distillate sales, while at a lower price point than age, still have a very attractive gross profit margin, our commonly contracted years in advance, providing greater visibility and provide greater cash flow to be reinvested into our business.
As a result of this effort, more than 90% of our new digital whiskey sales volume is committed in 2024 compared to 50% of our aged whiskey sales volume committed, I believe customer willingness to contract longer term on new distant whiskey is a positive sign for the American whiskey category sales. We expect total aged whiskey revenues in 2024 to be less than 2023 due to our strategy of developing longer term stability with new discipline and because of our success in working with longer-term craft customers who started their brands with aged whiskey and are now moving into the new distillate market.
While we do have the vast majority of our anticipated total brown goods volume committed for 2024, we expect the last three quarters of 2024 will result in stronger profits as compared to Q1 due to the variation and timing of customer demand, particularly of aged whiskey and timing of our barge, some Kentucky distillery expansion project coming online.
Looking beyond 2024, we are continuing to work closely with our customers to lock in existing capacity to contract renewals and gain additional commitments for our newly created capacity.
Turning to white goods and in industrial alcohol, last July, we announced the planned closure of the white goods and industrial alcohol distillery in Atchison Kansas. We're pleased to share that the closure has been completed on schedule. Brandon will speak in more detail about the financial impact of the closure, why it was not a decision that we took lightly given the long history of the distillery in Atchison, we firmly believe these actions will enable us to further align our product categories and their supporting operations toward achieving our long-term strategic objectives.
Our strategy to reduce the volumes of our industrial alcohol and white goods product produced and sold continued during Q4. As a result, white goods sales for the year decreased by 21% and the sales of our industrial alcohol products decreased 19% year over year as expected, on a combined basis, these product lines continue to have negative gross margin for the year.
Moving to branded spirits, our premium-plus spirits brands grew 50% in the quarter and 24% for the full year, which in turn drove further gross margin expansion across the portfolio. Our focus on investing behind our higher margin brands throughout the year resulted in an increase in full year gross profit to $112.8 million or 44.4% of segment sales. We plan to continue to focus on margin expansion through our strategy of increasing our points of distribution and shelf presence with our current portfolio of margin-accretive brands as well as through continued evaluation of branded spirits acquisition opportunities that we anticipate will further enhance our gross profit as a percentage of sales for the branded spirits segment.
Speaking of branded spirits acquisitions, we're proud of the progress we've made integrating Penelope bird into our sales and marketing platform. We are also pleased to announce that we achieved our goal of having to now be in 37 states by the end of the year. This illustrates a key component to our branded spirits strategy as we remain focused on growing points of distribution by leveraging the expansion of our margin accretive brands portfolio. M&a is a high priority, and we hope to be able to execute more margin accretive branded spirits acquisitions in 2024.
Turning to Ingredient Solutions, we experienced another strong year. Our Ingredient Solutions segment delivered record results, both on a fourth quarter and full year basis with sales growth of 14% and gross profit growth of 49% for the year, the record sales and gross profit results are were driven primarily by higher sales of specialty wheat proteins and specialty wheat starches as strong demand for our plant-based high-protein and lower net carbohydrate Foods continued.
Before I turn the call over to Brandon, I want to thank our team for their tremendous effort 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 and enabled us to deliver strong results for the year.
This concludes my initial remarks. Let me turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?

Brandon M. Gall

Thanks, David. From for the fourth quarter 2023, consolidated sales increased 13% to $214.9 million as a result of increased sales in each of our three business segments.
Gross profit increased 35% to $85.1 million, representing 39.6% of sales due to improved segment gross profit performance, again by all three business segments. For the year, consolidated sales increased 7% to $836.5 million. Gross profit increased 20% to $304.7 million, driven by a double-digit percentage improvement across all three segments despite the headwinds we faced in white goods and industrial alcohol, which were largely addressed by the recent closure of the Atchison distillery.
Total Company gross margin increased 400 basis points to 36.4% in 2023 sales in our distilling Solutions segment increased 8% in the fourth quarter to $108.9 million, reflecting a 22% increase in sales of premium beverage alcohol gross profit increased to $40 million or 36.7% of segment sales compared to $31.7 million or 31.3% of segment sales in the fourth quarter in 2022.
For the full year 2023, distilling solutions segment sales increased 5% to $450.9 million, reflecting a 14% increase in sales of premium beverage alcohol due to continued strong new distillate and aged American whiskey sales. Gross profit increased to $145 million or 32.2% of segment sales compared to $126.3 million or 29.5% of segment sales in 2022 sales for the branded spirits segment in the fourth quarter increased 19% to $72.6 million. Sales of our premium-plus price tier brands grew 50%, driven by both the Penelope acquisition and our organic premium-plus spirits portfolio.
Gross profit for the quarter increased to $33.1 million or 45.6% of segment sales compared to $24.7 million or 40.6% of segment sales in the fourth quarter of 2022. For the full year, branded spirits sales increased 7% to $253.9 million, reflecting continued strength in our portfolio of brands. Sales of our premium plus priced tier brands grew 24%. Gross profit for the year increased to $112.8 million or 44.4% of segment sales compared to $95.5 billion or 40.1% of segment sales in 2022.
Turning to Ingredient Solutions. In the fourth quarter, sales for this segment increased 15% to $33.4 billion. Gross profit for the quarter increased to $12 million or 36% of segment sales compared to $6.9 million or 23.8% of segment sales in the fourth quarter of 2022. For the full year Ingredient Solutions segment sales increased 14% to $131.7 million, driven primarily by higher sales of specialty wheat proteins and specialty wheat starches.
Gross profit for the year increased to $47 million or 35.7% of segment sales compared to $31.5 million or 27.2% of segment sales in 2022. We expect 2024 to be another strong year for Ingredient Solutions, although we expect to see some margin dilution for this segment as we absorb the previous starch stream credit from the assets in distillery and finalize our plans to convert this stream into a profit center in 2025 with the construction and implementation of the many fuel plan more on this in a moment.
Advertising and promotion expenses for the fourth quarter increased $1.5 million or 14% to $12.3 million as compared to the fourth quarter of 2022. This increase reflects our continued effort to prioritize marketing spend on our premium-plus price tier brands as part of our premiumization strategy. As such, branded spirits, A&P as a percent of branded spirits sales was 15.5% in the quarter for the full year.
Advertising and promotion expenses increased $8.5 million or 29% to $38.2 million as compared to the full year 2022 in 2024. We will continue to invest in marketing for our brand spirits segment, promote our premium plus price tier and higher margin brands that we feel have the best opportunity to grow international brands.
Corporate selling, general and administrative expenses for the fourth quarter increased $3.2 million to $25.8 million as compared to the fourth quarter 2022. For the full year, corporate SG&A expenses increased $16.8 million as compared to 2022 to $91.4 million, driven primarily by higher personnel expenses, incentive compensation, inclusive of certain incremental share-based compensation costs incurred relating to our CEO transition and business acquisition expenses related to the Penelope acquisition.
during the fourth quarter, the impairment of assets and other one-time expenses relating to the closure of the Asyst and Distillery totaled $1.1 million. The change in fair value of the contingent consideration relating to the Penelope acquisition for the quarter totaled $2.9 million. This change in fair value deferred from the prior quarter due to, among other items, updates to the discount and volatility rates assumed for the full year, the impairment of assets and other one-time expenses relating to the closure of the Atchison facility totaled $19.4 million. The change in fair value of the contingent consideration relating to the Penelope acquisition totaled $7.1 million.
We'll continue to evaluate this contingent consideration liability in subsequent quarters and adjust as necessary on a quarterly basis throughout the term of the earn-out period, which ends in December 2025. Additionally, we believe the vast majority of one-time charges related to the Edson distillery closure was reflected in our 2023 financial results. However, additional one-time expenses may occur, including those related to the equipment sales in subsequent quarters.
Operating income for the fourth quarter increased 45% to $43.1 million. Adjusted operating income increased 70% to $50.4 million. For the full year, operating income decreased slightly to $148.6 million, while adjusted operating income increased 21% to $180.3 million. Our corporate effective tax rate for the fourth quarter was 24% compared to 19% from the year ago period. The corporate ETR for the full year was 24.4% compared to 22.3% in 2022.
The increase for the quarter and full year corporate effective tax rates was primarily driven by an increase in valuation allowances and lower tax credits we anticipate our effective tax rate to be in the range of 24.5% to 25.5% for 2024. Net income for the fourth quarter increased 38% to $31 million. Adjusted net income for the quarter increased 63% to $36.6 million. Basic earnings per common share for the fourth quarter increased to $1.39 per share from $1.2 per share.
Adjusted basic EPS increased to $1.64 per share from $1.2 per share. Factoring in the additional shares associated with the convertible notes issued in November 2021. Fully diluted EPS increased to $1.39 per share from $1.1 per share. Adjusted diluted EPS increased to $1.64 per share from $1.1 per share. Net income for the full year decreased 2% to $107.1 million.
Adjusted net income increased 20% to $131.1 million. Basic EPS decreased to $4.82 per share from $4.94 per share. Adjusted basic EPS increased to $5.90 per share from $4.94 per share. On a fully diluted basis, EPS decreased to $4.80 per share from $4.92 per share. Adjusted diluted EPS increased to $5.88 per share from $4.92 per share in the year ago period. Adjusted EBITDA for the quarter increased 60% to $56.2 million. Adjusted EBITDA for the full year was $202.5 million, an increase of 20% from the prior year. The increase was primarily driven again by the strong performances of all three business segments.
Moving to commodities, corn, wheat, flour and rice natural gas represent our largest commodity expenses. Each continue to experience elevated prices throughout the year compared to the prior year fourth quarter, our input cost for corn increased 6%, wheat flour increased 15%, Rice increased 25% and natural gas increased 36%. Despite these elevated input costs, our 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 in the majority of our product lines.
Cash flow from operations was $83.8 million in 2023 and a record $35.2 million in the fourth quarter, reflecting the consistent cash-generating capability of our business. Inclusive in this is our investment in inventory of aging whiskey, which stood at $250.2 million at cost at year end, a net increase of $51.1 million at cost during the year, matching whiskey put away with growing future distilling solutions and branded spirits demand 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, even as we pursue M&A opportunities and expansionary projects that support the long-term growth of our company.
Our balance sheet remains strong and continues to be available to support investment opportunities that we believe will drive growth and return cash to shareholders. We remain well capitalized with debt totaling $287.2 million and a cash position of $18.4 million as of December 31st, 2023.
Turning to capital expenditures. Our previously announced expansion projects remain on track from a timing and cost perspective. Our continued focus on strategically deploying capital to enhance our operational capabilities resulted in CapEx of $61.1 million in 2023. The vast majority of this investment in the year was for growth projects such as the Proterra facility in Atchison, Kansas, which is coming online in the first quarter of 2024, Lux road distillation expansion and parts that Kentucky, which is expected to come online in the second quarter of 2024
and numerous warehouse investments needed to support our customers and our aging whiskey. We anticipate approximately $85.8 million in CapEx for 2024, which will be used for facility improvement and expansion, such as additional warehouses to support our recent capacity increases. Dryer investments to support our Luxe ROE expansion, the acquisition of our previously leased bottling facility in St. Louis, Missouri and I-many fuel plant that's in Kansas to better monetize the wheat starch stream in our Ingredient Solutions segment.
Our warehouse investment represents approximately half of our anticipated $85.8 million of CapEx for 2024. In recent months, we've experienced some unanticipated land new setbacks in our pursuit of building new warehouses in Kentucky. We continue to work to find a solution, and we will provide additional details regarding our warehouse investment in future earnings calls. In addition to these growth investments, we also continue to invest in facilities, sustenance projects as well as environmental health and safety projects.
Now an updated look at the financial impact of the Aspen stores' performance on a preliminary pro forma and unaudited basis for the year ending December 31st, 2023, excluding the financial impacts of the assets and Distillery results were as follows. Consolidated sales and Sealing Solutions sales are reduced by $108.5 million. Consolidated gross profit is increased by $4.7 million and consolidated gross margin has increased by 610 basis points.
Last quarter, we shared that we were confident that we'd identified a path to dispose of the waste starch stream via third party at no cost to the Company in fiscal 2024. This is consistent with the detail provided in the updated pro forma financials down in our earnings release more recently, we've learned that additional operating costs potentially totaling $4 million to $6 million will need to be incurred in 2024 to ready the waste starch for commercial sale these costs involve further drying of the waste, Arch and expenses associated with depreciation, insurance, energy and utilities to name a few.
We anticipate a portion of this cost will be recouped via sales of revenue received from our third party partner as a result of the increased commercial viability of the starch. However, trials are still underway and we cannot guarantee at this point that we will be successful in recouping the incremental costs through offsetting revenue. As such, we are factoring in the incremental cost for 2024 guidance, but not the offsetting revenue. We continue to pursue other more economically beneficial options of disposing of the waste starts, such as investing in the mini fuel plan.
As previously described, we believe these actions will enable us to further align our product categories and their supporting operations toward achieving our long-term strategic objectives as we continue to assess current and more accretive options, dispose of the wheat starch stream and their impact on our financial results. We will provide additional details in future earnings calls.
Despite these incremental costs, we continue to believe the closure of the Axsun distillery will be accretive to consolidated gross margin percentage beginning in 2024. It's important to note that in some circumstances, white goods, industrial alcohol fuel and at certain times, certainly coproducts are produced at our Lawrenceburg, Indiana distillery. Please refer to the pro forma schedules included in this morning's earnings release for more information in accordance with accounting guidance, we expect to present the Atchison facility operations as discontinued operations later in the year due to the impact that the Edson facility closure has on its Drilling Solutions segment product offerings as well as the impact that ongoing changes in the Nielsen price tiers has on our branded spirits segment pricing tiers.
We are in the process of reviewing our presentation of our product category line items across our business segments. The Board authorized a quarterly dividend in the amount of $0.12 per share, which is payable on March 29th, 2024, to stockholders of record as of March 15th. The Board continues to be dividends as an important way to share the success of the Company with our stockholders.
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, we believe our business is well-positioned to leverage. We remain deliberate and disciplined as we continue to evaluate M&A opportunities, investment, put away at American whiskey and conduct expansionary projects that are designed to accelerate growth and increase our capabilities and product offerings as we enter 2024.
We will continue to focus efforts on optimizing product mix across all three of our business segments and invest in areas that we expect to 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 in 2024. While we continue to monitor the potential impact of inventory levels of distributors overall, American whiskey supply and consumption patterns and inflation on consumers. Despite these industry headwinds, we feel uniquely positioned to grow as a company in this dynamic operating environment.
These factors in combination with the strength of our underlying business support the following financial outlook for the fiscal year ending December 31st, 2024, sales are projected to be in the range of $742 million, $756 million following the closure of the Atchison distillery adjusted EBITDA to be in the range of $213 million to $217 million, reflecting a mid to high single digit growth rate for adjusted EBITDA on top of a record 2023 results, please note, this range excludes the add back of share-based compensation expense, including the add back of share-based compensation expense.
Adjusted EBITDA EBITDA is expected to be in the range of $218 million to $222 million. This range contemplates approximately $5.4 million in share-based compensation expense for 2024. Please refer to this morning's earnings release for previous year, share-based compensation expense, we intend to begin adding back share-based compensation expense when reporting adjusted EBITDA in the first quarter of 2024.
And lastly, adjusted basic earnings per common share are projected to be in the range of $6.12 to $6.23 per share, with basic weighted average shares outstanding expected to be approximately $22.3 million at year end.
With that backdrop, let me discuss expectations for the first quarter, which have already been factored into the full year of 2024 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 2024. This expansion can be attributed in part to lower relative sales of allocated and single barrel premium plus brand spirits offerings in Q1, timing of customer commitments for brown goods opening of the Luxtera distillation expansion in Q2 and time needed to commercialize a new Proterra facility now set some recent international challenges in Ingredient Solutions.
And now let me turn things back over to David for concluding remarks.

David S. Bratcher

Thanks, Brandon. We are very pleased with the strong results delivered in 2023. Healthy demand for our products continue, and we believe our business remains well positioned. We are also happy to report that we completed the construction of our extrusion manufacturing facility with in our Ingredient Solutions segment by the end of 2023 as planned. This facility will allow us to support our Pro Terra brand and offer us additional capabilities that we did not have prior to completion.
I would like to thank and congratulate our engineering and operations team for delivering this project on time and on budget.
As we move into 2024, our sales team is focused on taking advantage of this added capacity and capability.
In closing, I would like to add that despite some reported softening within the branded spirits industry when compared to the COVID super cycles, we are very optimistic about the long-term health of this industry. In 2023, spirits growth continued within the total US beverage alcohol market relative to other alcohol categories. And while US premiumization trends slowed broadly in 2023.
We are encouraged by the continued growth in the American whiskey category as well as growth in other segments such as tequila. Additionally, recent industry reports indicated inventory destocking at a wholesale level will remain an issue for the branded spirits industry in 2024, working closely with our distributors throughout 2023, we feel we have made significant progress in managing wholesaler inventory for our portfolio and remain focused on driving points of distribution and velocity across our brands with emphasis on our higher margin offerings our strategy is to build a portfolio of branded spirits through increasing our points of distribution, accelerating our sales velocity with Endo's points of distribution through effective marketing, expanding our product offerings through innovation and closing on meaningful margin accretive M&A transactions.
We believe the interconnectedness of our distilled solutions and branded spirits segments support continued growth and plan to use both segments to transform our company into a dedicated brand spirits company. As we begin the new year, we remain committed to leveraging the strong foundation we have established over the years with the objective of delivering sustainable long-term value for our shareholders.
In closing, let me add, I am extremely honored to have been offered the opportunity to serve as CEO, President and Board Member of MGP starting January first, I take the obligations that I have to our shareholders, employees and other stakeholders very seriously. The team and I are committed to the continued long-term growth of our business. That concludes our prepared remarks. Operator, we are ready to begin with the question and answer portion of the call.

Question and Answer Session

Operator

We will now begin the question and answer session to ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question. Please press star then two. At this time we will pause momentarily to assemble our roster. First question comes from Bill Chappell with Truist Securities. Please go ahead.

Bill Chappell

Thanks.Good morning.Wendell, didn't wanted to go back on the kind of the new distillery sales. And I think one of the things you said was So total sales would be down in 24 versus 23. So maybe you can give some more color.
I think you kind of explained what was and some customer changes and stuff like that. But I'm trying to understand that.
And then also, you had mentioned that you're monitoring the the overall American whiskey supply levels, and that might be a headwind. So kind of maybe help us understand that is are you talking about at retail? Or are you talking about supply of other players coming for new still?

Brandon M. Gall

Yes, Bill, I'll start on that. Yes, and thanks for giving us the opportunity to clarify. So we do not expect new distillate sales to decline year over year. In fact, we expect brown goods sales in total to continue to continue to grow in line with or better than the broader category of American whiskey in 2024. Over what we were trying to get across in our prepared remarks is that the proportion of new disciplines, sales versus eight sales has been growing, and that has been deliberate, as David mentioned on the call.
And the reason for that is as our customers on the traditionally bought age as they continue to mature and grow their now better able to finance new distillate. So we're leaning into that because there's a lot of attributes of new distillate customers that we find attractive and such as that have greater visibility, they provide greater cash flow characteristics on a slightly different versus brings as far as moderating the overall supply to the industry.
That's not our plan, and we're continuing to grow with our portfolio and with our customers. And as such, the mix may change more towards near versus age, but we continue to grow at the same pace or better than the American whiskey category as we've done in recent years?

David S. Bratcher

Yes. I mean, I'll add to that, too. Just in clarification, the the new digital focus is really critical for our business. It gives us longer term arrangements, financial stability and visibility for multi-years on average, a better business for us in terms of understanding the impact financially over on the overall business, it also somewhat of a normal cycle as the category continues to grow and some of our previous craft customers become bigger, they're naturally going to switch over to new this month's supply that's just normal.
There is no, we have no plans to moderate our supply to. As a matter of fact, we've taken just the opposite approach, as you heard in our call script that we're expanding one of our major distilleries in Kentucky, basically doubling this capacity, and we expect it to come online midyear so we're very optimistic about branded sales and plan to expand and continue to grow with the segment.

Bill Chappell

Vladimir, that helps. And then if I'm looking at the just the age demand I understand that you're naturally going to leaping into the new bus. Are you hearing from your customers that you have 800 customers, you any worries that there's going to be a slowdown in brown goods demand three, four years out from now? Or is it kind of the overall interest pretty much the same as it has in the past few years?

David S. Bratcher

You know, I think what we could say on that is that if we look at our age vertical and we referenced about 50% of it being obligated actually pretty high number on Asia because most of these tend to be craft customers are new entrants into the category. So actually, we feel pretty good about the amount that we have contracted and how that relates to any potential unknown is that does have this the craft distilleries or craft brand companies are subject to the same inventory, retail, wholesale level type of inventory situations as anybody.
And so with higher interest rates and everything else, they're being a little more cautious.
But their investment on we really in the past, we saw by just so they could corner their piece of the business. Now you're starting to see them switch to more just-in-time type of demand. They want to transact. No, they can fill the product and get it right through the shelf, given the high interest rates that they operate in.

Bill Chappell

And last question, just on the aged, I mean, sorry, on the branded portfolio, your comments about there's still some destocking at distributors and stuff like that. Does that mean I mean, yes, I thought most of the impact you kind of saw in the first half last year, do you expect a quarter where we could be flat to down for that overall business, excluding Penelope, or is most of the heavy destocking done

David S. Bratcher

was the comment in general about the industry. Overall, there is still bullish on inventory destocking for the industry overall, as it relates specifically to our business, we've worked really hard in the past year to manage that actively manage that with our wholesalers. We believe we have it in a controllable area of data on hand. At the end of the day, the wholesalers do control the inventory they place the order and they decide what the number is. I think our exposure on it is for us is smaller than, let's say, our peer set because I think we've done a really good job of managing it in 2023

Bill Chappell

Great. Thanks so much.

Operator

Next question is from Marc Torrente with Wells Fargo. Please go ahead.

Marc Torrente

Hey, good morning. Thanks for the question on just building on Bill's question with new distillate outpacing age going forward or that's the expectation we know new distal, it carries a strong margin, but age is likely even greater. So maybe anything to read into implications here. And then on the new distillate contract to renewables.
And you mentioned before that the strong pricing there has been giving you cover to be more strategic on the age side. So maybe any more color on pricing trends there and how long does this, I guess, contract cycle continue?

David S. Bratcher

Yes, though we are market exactly right. We have been successful on the new discipline side in getting on more and more price as contracts renew. On the ATE side, though, as David said, it's still a very important and valuable part of our business. But we are using this opportunity as our customers are demanding to lean more into the new display side of things because as we mentioned we feel like it sets us up better for longer term from that perspective.

Brandon M. Gall

Yes, I would add to that, too, and I think we call it out in our script I see this shift to this new. This is a good sign for the industry. Overall. If people are willing to contract multiple years out, I think that's a signal of their commitment. So the category, yes, new business margins for us are a little softer than a. So that's a given and Brandon has talked about that in the past, but the benefit that we gain from a new discipline is that financial stability, that long term visibility and it still has very, very attractive margin portfolios. I look at it as a possible. Well, I look at it as a possible way. It's our effort to de-risk the exposure on age by increasing, as we said in our script, that the new distillate catagory, it brings that stability that we need.

Marc Torrente

Okay, great. And then just a little more color on guidance calls for a topline growth of about 2% to 4% on a pro forma basis. And EBITDA growth around 6%. I guess maybe if you could provide some underlying color on segment buildup and phasing through the year. There's clearly strong growth in your core categories in Q4, but the guide would imply a fair amount of deceleration. Was there any pull forward there?

Brandon M. Gall

Yes. No pull forward on the AO to your point about what we're seeing on a pro forma basis as growth in the 2% to 4%, which, as you recall, is in line with kind of our long-term aspirations and algorithm by segment. If we were to take it apart on, we expect sales in the Sealing Solutions to grow in the mid-single digits. And as I said, as brown goods continue to grow with or better than the category brands, we expect to be flattish to low single digits, which is probably a little counter to what maybe a lot of expectations would have been because while we do while we do have incorporated into our guide strong sales of premium plus again at or better than.
But the overall category for this price tiers there is going to be a larger offset to mid and value in 2024. And there's two reasons for this mark on the first one being mid and value has been on a steady decline as we all know, as consumers drink less but better with the second one is we've actually identified you have to look for very large volume, mid and value brands in our portfolio.
And we've made the decision to either take more price or are rationalized in some cases, the brands altogether, because as a result, it will be more accretive, both from a gross profit dollars and gross margin percent, although it will, it will create an added headwind to revenue for the segment in the year.
And then finally, targeted solutions on sales growth for the year, we expect that to be in the mid-single digits as well. So that's where we get to our revenue guide. And I know there is a lot of a little bit more confusion around that with the actions story closure on, which is why I'm happy to share a little bit more detail than we have in past years.

David S. Bratcher

Yes, I want to emphasize what Brendan said about the mid and value. We have a substantial portfolio in that area and one of the for quite some time, to be honest, you our focus of the company has been always on being margin accretive. But having spent many, many years with the company before NGP, it really was a drive that we were pushing on to focus on premium plus categories into do that you have to build that basis of premium plus and then strategically relooked at mid and value.
And Brandon said it exactly right we have some great products in that that are margin-dilutive. And when you're doing that and we're growing our overall business and trying to generate cash flow, we have to pick and choose which ones we're going to focus on to drive the business.
And what do you do most of the time? The first thing you do is impacted on price and that is no different than what we experienced. And that is why you've seen in our guidance number that it's probably impacted. It is impacted more than the other price points.

Brandon M. Gall

Last piece on that, Mark glum On EBITDA, we talked about it from a top-line perspective. But yes, as David said, our midpoint on EBITDA growth of 6%, which again is in line with our long-term aspirations of mid to high single digit EBITDA growth on an adjusted basis.
On what we also shared in our prepared remarks was that the Ingredient Solutions segment is going to incur $46 million in incremental operating costs to ready the starch stream for sale on that is a change from what we what we knew in Q three and so if you were to add that back or take that away, because that is only in our mind a temporary costs that were going to have to incur until we get a longer-term solution in place, that growth is closer to 8.5% on an adjusted basis for EBITDA or so.

Marc Torrente

I'm happy to provide that additional color to you thanks, guys.

Operator

Next question is from Gerald Pascarelli with Wedbush Securities. Please go ahead.

Gerald Pascarelli

Great. Thanks very much for the questions. Just going back to the guidance, I don't want to belabor the point here. But Tom, you have historically started out conservatively, you have consistent beat and raises. And I guess, like I say that in the backdrop that there is increasing concerns around inventory building, et cetera.
So can you maybe just talk about is the degree of conservatism that may be embedded in your guidance just to start the initial year maybe and maybe how that compares to years past, I think that'd be helpful. Thank you.

David S. Bratcher

Yes, sure. I'll start and then let Brendan chime in at the end. As we look at our guidance. We want to make sure we're providing accurate as accurate numbers as we know at any given time.

Brandon M. Gall

Right. So in preference and preparing for those numbers, Brian and I and our team spent a whole Hydratight long hours going through various scenarios.

David S. Bratcher

Looking at the impact on the starch stream that Brendan just talked about, looking at shifts in inventory levels, looking at shifts in price points looking at consumer demand and trust me when I could actually credit and I spent a lot of hours personally going back through our scenario of what we provided we feel is a realistic number for us for the year. That's why we provided that guidance. If we can always grow our business and do better, we're going to grow our business and do better. But what we provided is what we really feel strongly that we should be able to deliver.

Brandon M. Gall

Yes, in data that we showed the exact percentages of new distillate and aged commitments for the year on year to help kind of address this question, while we're still very confident in American whiskey category, at 50% of our age, we sought to go time sales for. And so as the year goes on, we get more confident in that number. You know, we'll factor that in on it.
But on top of that drilling, as I already mentioned, we are still guiding to you mid to high single digit adjusted EBITDA growth after coming off multiple years of more than 20% growth. So on while we have historically, you know, in retrospect and conservative, as David said, we feel like this is the right approach to this year as we keep trying to grow from a bigger and bigger base.

David S. Bratcher

Yes. And then one last thing you closing off on that question. I mean, it's a given across your very now all of our peers talk about there is a reset going on in the industry. We compare to the COVID super cycle and those were great years for the industry. But if you start looking at what the industry is doing after 20 plus years of solid growth. And yes, it might have slowed a little bit in 22 versus 23.
It's still a very, very healthy industry. And it's my belief that it will. And while we are normalizing, it may be hard as you start to get as an overall industry as you start to compare year on year, but I'm confident that it will reset to what we saw pre-COVID, but that's the industry in general. I think there's opportunity for us because of our size and our opportunities, as we mentioned in pods and velocity compared to our peer set that we're excited for, and we also factored that optimism into into our guidance.

Gerald Pascarelli

Perfect. Thanks for the color. And just one more for me is kind of a housekeeping item, but some color on your accounts receivable days. It looks like they and continued to increase and be fresh among among all-time highs. And so can you can you provide any color on your on your accounts receivable or if there's anything to glean from that? Thank you.

David S. Bratcher

Yes, on discarded points. Our accounts receivable days stood at between 61 and 62 days at the end of the year, which was up about nine days from Q4 of last year.
On year. We believe that putting combination, Gerald with our other cash conversion metrics, one of those being on CPO., which also increased on per tonnes from beginning of the year to help offset some of that impact on yield in this higher rate environment. And we share this one-on-one and on prior calls, our customers are looking to extend terms where they can and especially our smaller craft ones that do have terms are now not a lot of them do.
A lot of them are prepaid on, but they do tie to it take their commitments as late as they can if they don't need it right away and then they're paying more slowly. So it is up to your point on. But if you look at our history of bad debt and inability to collect, it's actually pretty good. So we generally speaking, feel pretty good about it.

Gerald Pascarelli

Right. Thanks, guys. Appreciate it.

Operator

Ben Klieve with Lake Street Capital Markets. Please go ahead.

Ben Klieve

Thanks for taking my questions. A couple of quick ones from me. First of all, on the guidance for 2024 on the relationship with Penelope, can you comment on the contributions that you have baked into the guidance relative to the metrics that are laid out in your earn out with them. Are you guiding to kind of a meeting that earn-out on the earn-out schedule throughout the year? Or are you guiding below or above?

Brandon M. Gall

Yes, we're very pleased with the performance of Penelope. And relative to our underwriting assumptions, it continues to perform in line or better than those expectations. And so as we look at the guide for this year to incorporate those expectations that the brand continues to perform as we had hoped for better.

Ben Klieve

Okay, great. Thanks, Brandon. And then one more for me. Brian, in your prepared remarks, you noted that while within the ingredients segment, some challenges internationally. I'm wondering if you can comment on that qualitatively or quantitatively at all to kind of help us understand how significant this is

David S. Bratcher

Yes, Tom, it's near term on something that we're looking at. But mid to long term, our full confidence in Mike push on that team to find a solution. But what I was highlighting in my prepared remarks, were really two things. Firstly, we've begun to see increases in imports of commodities, commodity starches from Canada, Australia and the EU, which is for now resulting in some pricing pressure for our own clean label commodity wheat starches, which represented about 12% of segment sales in 2023. So that's one of that's one of the headwinds.
The second international headwind, as we're also seeing some export headwinds of our specialty protein products in Japan are due mostly to unfavorable currency exchange rates. So what we're doing to counter these challenges is really focusing on our domestic commercial efforts to maximize our specialty wheat starch and protein sales here in the US.
So we are seeing some early signs of success here, and we're confident we're on it's going to work out over the course of the year, but it will take a little bit of time and allied to that we continue to focus on what we do well and our ingredient business, and that is our premium type of products with the specialty products. Those are the things that we focus on commodity starches up, obviously a piece of our business, but it's really more of a subset of what we do will nearly what we want to sell as our specialty type of products.
The model we run for ingredients is very similar to the model we run for brand experience. We want to focus on those upsides, upper higher end margin type of brands and commodity surcharge or clean label commodity starches are exactly that. They're a commodity driven. This works by supply and demand. And yes, this year as we look at imports and stuff came in and it created pricing pressure.

Ben Klieve

Scott, I don't know if that makes sense on. Very good. I appreciate you both answered my questions. I'll jump back in queue. So that, excuse me.

Operator

Rob Moskow, TD colon. Please go ahead.

Rob Moskow

Hi, this is Sheamus capacity on for Rob Moskow and thanks for the question. I just wanted to drill a little bit deeper on brown goods volumes on. So you mentioned that they were off for the full year, but for the first three quarters, you called out negative brand volumes, which, as you mentioned, was driven by sort of being more selective around the selling of H. barrels given better contract visibility on the new side.
So there wasn't pull forward, but maybe higher than expected spot sales in 4Q on that, maybe the sales beat you just offer any commentary on sort of your outlook for that in 2024 and how we should think about embedding that in distilling solutions, you have mid-single digit growth as you called out. Thank you.

Brandon M. Gall

Yes, and thanks for the question, Seamus and yes, so the 2023 Q4 volumes were a big part of that of our sales in Q4, especially the growth and our volume did play a role throughout the course of the earlier quarters, although less so than price. So that was the point we were making in and a lot of the quarters.
As we look to 24, though, we do expect volume to play a larger role in a lot of that is because we're moving more towards new distillate and that type of model on. So we expect to see out of good pricing, absolutely discipline. Nh level continue into this year, 2024. That is we do expect volumes to be the main driver of this of the sales growth. We see in this year.

David S. Bratcher

Yes, I'd add to that. The other piece of that is the other facility coming online in March, the expansion on capacity. And as we looked at our guidance and the numbers we provided the Q2 three and four focused because of that additional capacity that we have available.
The other thing I would add in general is our new distillate business, especially as we go into 2024 is really a model of the branded service category. The people we're selling to or the people they're putting in brands and putting it on shelves and traditionally and the industry Q1 on average tends to be a slower quarter than the other quarters.
As we look at everything that we've talked about there if you were to subtract our capacity expansions, the stuff in the buy side, it might look a little more normalized or we start to factor in everything going on with a lot of the craft customers, the age that Brendan mentioned than we look at the back half of this with our margin expansion, you know, our numbers we anticipate should be better as Brendan indicated in Q4.

Rob Moskow

That's helpful. Thank you. And then just one more for me on given that you're moving more towards sort of this new distillate model. I mean, you called out that inflation costs for a lot of your core commodities remain elevated. Can you just offer us a little bit more detail on how that sort of what flows through given that a lot more of these volumes will be contracted on and sort of how you could connect with your with your customers on that. Thank you for that.

David S. Bratcher

And that's another advantage of having a longer term agreements in place because they are the pricing is input based and so on. In addition to adding on a typical inflation factor on year over year, what we also incorporate into our contracts for new distillate and is pricing based off of our raw material inputs, whether it's corn, whether it's rely more on natural gas the barrel, et cetera. So there are those are mechanisms within our contract to help insulate us in our margins as we go forward and that type of environment, yes, especially true on the new discipline begins, as Brendan alluded, it's all the contracts.
When we go out multi-years, they're all based on that people on I'll reflect whatever that current grain commodity may be including the price of barrel as we look at our age in our pilot way, obviously that that that those are impacting our future inventory costs and stuff. But in the big picture of things on aged in the commodities, very like to add that it's not super significant on the overall margin capabilities because at this point of age, as you guys have literally we can reflect that in the pricing as well in the future.

Operator

The next question is from Mitch Pinheiro with Sturdivant. Please go ahead.

Mitch Pinheiro

Yes, good morning. Just a couple of follow-up questions. One is on if the customers are kind of leaning into the new distillate, what does that where how should we interpret that related to their own inventory levels of age, do they have ample aged? And I mean, at this point?

David S. Bratcher

Well, I would say that, yes, I mean, I we think that they're managing their age and balance our strategy. Ngp strategy for a long time has always been taking a new customer that wants to be an entrant into the branded spirits category in American whiskey and bridge. And then to new discipline. This is really a primary strategy that's an evolution over time. And so as those customers build those age, they will naturally go to new discipline and they're going to win be in a better financial shape to carry the own inventory costs and as well.
So but it doesn't preclude that those same customers get additional sales in their products and the more aged to be able to make that transition to new discipline, which is what happens on a lot of the customers on the ag market. It's also a reflection of why it's easier to contract on the new discipline side because you're going to be doing it with larger customers that have larger brands. And on the age side, they're able to come in because of our cutaway plan and pick and choose what they need when they need it.

Mitch Pinheiro

Okay. And then on wind, so when you look at new barreled distillate increasing. It gets us up 26% year over year on some of that, obviously Penelope and Dom. But I would imagine that as that barrel distillate grows, that growth is really earmarked for for your own brands, flux row, Remus, Penelope, et cetera. Is that correct?

Brandon M. Gall

Yes, it's both. So to date, it's been more out weighted toward for distilling solutions and other own brands. But as we go forward, Mitch, that is going to evolve and on any part of the benefit of selling more new distillate with our capacity is the cash flow impact. And so as we move forward this year is a good example that net put away at costs will be less than the $51 million we experienced last year. We're going to continue to invest in our put away to line up with future demand for for both of our segments. But that is one of the benefits we'll see this year.

Mitch Pinheiro

Okay. And then just final question, you talk about wholesaler inventory destocking. What are you seeing? Have you seen any studies your own surveys on of consumer pantry destocking that seems to me to be a significant I've Yes, no, no specific surveys to speak of on that.
A lot of a lot of that niche, as we know, is probably pretty anecdotal and but what we have seen is a resilient growth in American whiskey despite the broader industry being flattish in 2023. And we expect that we expect that to continue yes, I would agree a key.

David S. Bratcher

Again, I haven't seen any data on a pantry destocking, to be honest with you. I think that's a that's a speculation. What we can, what we can understand is retail emphasis on that. And they've had the same pressure that you've seen at the wholesale level in their sharing to even higher costs and wholesalers. And when you're dealing with big retailers, they're watching their dollars as well. So I do see that as an industry that is something that still we're going to continue to see in 2024. But as you look at our own business, and that's what I said earlier is that we know compared to our peers, the opportunity to increase our points of distributions is reflective in our guidance.

Mitch Pinheiro

Okay. Very helpful. Thank you.
Thank you very much.

Operator

The next question is from Sean McGowan from ROTH MKM. Please go ahead.

Sean McGowan

Thank you. A couple of questions. So in terms of margin, you've talked about some some potential shifts to lower margin segments, et cetera. But at the same time, that's stripping out obviously in the fourth quarter, margins were at extremely high levels. So can you give us some overall color on what how you expect gross margins to trend in 2024?

Brandon M. Gall

Yes. Thanks. Thanks for the question, Sean, but we are glad we got to this. I'll probably get to it earlier, actually. But yes, so the closure of the assets and Distillery we anticipate is going to be very accretive for our overall consolidated gross margin structure. So in the performance that we provided this morning for last year, as an example, consolidated margins were would be 42.5% in 2023.
And going forward this year, we expect margins to be a right right in there in the low to mid 40% on a consolidated basis by by segment on the Sealing Solutions. On a pro forma basis, it's a little bit north of 45%. We expect it to be in that low to mid 40s on.
Yes, it's about expansion. It's not going to be as strong as you might expect, just, but that's partly due to the brown goods sales mix that we've described within branded spirits. We do we do anticipate more expansion this year. So we finished the area in the mid 40s and we expect to be in the mid to upper 40s potentially in 2020 for ingredients that is going to be a little bit more challenged near term. And there's really two main reasons for that. Number one is the additional $4 million to $6 million in cost of drying that starch slurry.
And that's going to temporarily weigh on the segment this year until we get a longer term solution in place to figure that out. But also we're ramping up our new ProTec per Terra facility on commercially, and we're not going to have it sold out in 2024. There's going to be more overhead to absorb as part of that. So for those two reasons, we actually expected Grid Solutions margins to be in the mid 20s for the year. So our monthly, Mitch or I'm sorry, Josh, on that it answers your question.

Sean McGowan

Yes, very helpful. And one other clarification and then a quick housekeeping thing on when you talked about the first quarter being lower than the subsequent three quarters. I think that's typically the case.

David S. Bratcher

But I you trying to imply that the first quarter could actually be below last year on a pro forma basis yes, that is what we're implying. And there's four main reasons for that. And that spans all four segments, some of them we've touched on one of the bigger ones. In fact, the biggest driver in our in our look forward is in branded for our branded spirits segment, excuse me. And that's really the result of the timing and seasonality of our allocated and Single Barrel pick on items within our premium plus brands. That usually is it is more weighted towards the back half of the last three quarters.
But this year it's going to be even more so and in those items, as you can imagine, a lot of gross profit attached to them. So even on a year-over-year basis, we're going to do less in Q1 of this year than we did last year in Q1. And really the reason for that is the the ideal time to get those products out in the market in Q3 and Q4.
And in the last year, what are the best products out? We experienced some delays operationally. And so some of them you have accidentally trickling out into Q1 of this year. So we're going to be lapping that Brandon's commitments with the second one, while we feel really good about having the vast majority of those committed, it's not going to be equal across the year, as David alluded to. And so that's more weighted towards Q2 through Q4.
We also mentioned the Luxtera expansion, which is going to take off in Q2 of this year. That's our whiskey American whiskey, the story in Kentucky and some of the new disciplines sales we'll get out of that facility will not when I have a chance in Q1 take place, but what's the remainder of the year? And then again for ingredients on you mentioned the commercialization of Proterra that's going to ramp up as the year goes on. And then as we as we handle these international headwinds, we're seeing, as we already discussed, we expect those to be offset, but not all at once in the first quarter but as the year plays out as well.

Sean McGowan

Okay. Thank you. And then a quick housekeeping. What would you expect the effective tax rate to be for the year

Brandon M. Gall

yet about between 24.5% and 25.5% this year. And in another node, our A. and P. advertising promotion offer branded spirits, lower or click through here, Sean outlook was about a 15, 15.5% in Q4. We expect that to be around the same in 2024. And the reason for that is, again on flattish to low-single-digit sales for brand spirits for the reasons I already described, but really ramping up our advertising and promotion investment into Penelope and as the year goes on this year.

Sean McGowan

Okay, thank you very much.

Operator

This concludes our question and answer session. I would like to turn the conference back over to David Brasher for any closing remarks.

David S. Bratcher

Thank you for your interest in our company and for joining us today for our fourth quarter and full year 2023 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.