MGPI - NASDAQ

Good morning, and welcome to the MGP Ingredients First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Houston, Investor Relations at Lambert. Please go ahead.

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

Thank you, Mike, and thanks everyone for joining the call today. On this call we will begin with an overview of our performance for the quarter ended March 31, 2023, 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 year is off to another strong start and we remain encouraged by our continued momentum this quarter. During the first quarter, we achieved our second best quarterly gross profit and adjusted EBITDA performance in company history. The results this quarter were second only to the first quarter of 2022, which represented a record for the company. The continued strength and value of our business model and long-term growth strategy underpinned our success this quarter. Consolidated sales for the first quarter of 2023 increased 3% to $201 million, while gross profit decreased 3% to $69.8 million, representing 34.7% of consolidated sales. In our Distilling Solutions segment, we achieved record sales of brown goods, resulting in an increase of 10% from the prior year period. The increase was driven primarily by strong new distillate customer commitments, higher pricing across all brown goods and stronger-than-expected customer demand for spot purchases. In our branded spirits segment, revenue increased 2% for the quarter, while revenue for our Premium Plus price tier brands decreased 14% compared to the prior year quarter. As we mentioned during last quarter's earnings call, our branded spirits premium plus price tier revenue, primarily related to our Yellowstone brand was impacted during the quarter by higher-than-normal inventory levels at distributors. Excluding sales of our Yellowstone brand from current and prior year periods, premium plus brand revenues were up high single-digit percentages compared to the prior year. During the quarter, we completed a realignment of our national distribution capabilities with Republic National Distributing Company or RNDC. Associated with this realignment, we positioned inventory at additional RNDC distribution centers as part of the transition, which resulted in increased shipments, primarily related to our mid and value brands toward the end of the first quarter. Turning to our Ingredient Solutions segment. The team has maintained a high level of execution and continues to optimize the product mix to benefit from broader consumer trends, including the shift toward plant-based diets. These continued efforts are reflected by the segment sales growth of 10% and gross profit growth of more than $4 million during the quarter. Each of these figures represents another record for the segment. Looking at each segment in greater detail. Sales for our distilling solutions segment increased 2% to $113.2 million during the quarter. Gross profit decreased to $33 million or 29.2% of segment sales. The decline in gross profit can primarily be attributed to higher input costs for white goods, and industrial alcohol as well as our inability to pass through these costs, due to excess supply of these products in the market. As expected, planned volume reductions for aged brown goods within the quarter, also impacted gross profit although, this was primarily or partially offset by increased volume for new distillate and increased pricing across all brown goods. Sales of our premium beverage alcohol increased 2%, with continued strength in brown goods sales this quarter, supported by ongoing solid demand for our new distillate and aged whiskey. We remain confident that our significant share, scale advantage and our aging whiskey inventory position, will continue to support the demand within the American whiskey category. We're pleased with the improvement in demand visibility and consistency, that we achieved in brown goods as brown good sales growth continues to outpace longer-term market trends, and is primarily driven by craft as well as multinational customers. In an effort to moderate the impact of increased input costs, and excess supply available in the market, for industrial alcohol and white goods, as discussed on our previous call, we reduced the volumes produced and sold of our industrial alcohol and white goods products during the first quarter, to minimize the negative impact on our profitability. As a result, white goods sales for the quarter decreased by 21% and sales of our industrial alcohol products decreased 9%. As anticipated, industrial alcohol and white goods incurred negative gross margins for the quarter. On a combined basis, when compared to the prior year industrial alcohol and white goods gross profit decreased $2.8 million, which was in line with our expectations. As stated in our last quarter call, we anticipate these headwinds to persist throughout the year. We continue to believe 2023 industrial alcohol in white goods gross profit dollars, on a combined basis for the full year, will decline $4 million to $7 million compared to the prior year. We continue to explore further actions that can be taken with respect to our white goods and industrial alcohol products, to minimize the headwinds associated with these products. Turning to branded spirits. Segment sales for the first quarter increased 2% versus the prior year period to $56.9 million, driven by increased volume of our mid and value price tier brands, resulting from the recent realignment of our national distribution capabilities toward the end of the first quarter, as well as increased pricing. Gross profit decreased slightly to $24.6 million or 43.2% of segment sales. The decline in gross profit can primarily be attributed to decreased shipments of the Yellowstone brand, as described earlier in the call. This was partially offset by the benefit of cycling through lower cost inventory, at the start of the year. We anticipate the product mix of our overall branded spirits portfolio, to normalize as we cycle through these dynamics over the balance of the year. Sales for our premium plus portfolio decreased by 14% compared to the prior year. As previously mentioned, the decline reflects cycling over a record quarter of premium plus sales last year, as distributors purchased more than expected resulting in a tough year-over-year comparison. We remain encouraged by the ongoing strength in demand for premium plus, American whiskey and tequila brands, and we'll continue to invest in marketing support to achieve sustainable and profitable organic growth for our brands in these spirits categories. Turning to Ingredient Solutions. Sales for the quarter increased 10% to $30.9 million while gross profit increased to $12.2 million or 39.5% of segment sales. The increase in sales was primarily driven by higher sales of specialty wheat proteins, as well as commodity protein and commodity wheat starches, as rising consumer demand for plant-based proteins and food products with lower net carbohydrates continue to gain popularity. Gross profit this quarter also benefited from cycling through lower cost inventory at the start of the year, driving the segment's gross margin higher. The momentum we continue to realize across our specialty ingredients products, is driven by ongoing consumer demand for foods containing plant-based proteins and high fiber content. As we continue to align with these trends, construction of the textured protein extrusion facility that we previously announced, remains on schedule with an expected start date during the fourth quarter of 2023. Finally, I want to thank our team for their tremendous efforts and continued execution. Their ability to build on the momentum we generated in 2022, to meet consumer demand and align with long-term trends enabled us to deliver strong results in the first quarter. This concludes my initial remarks. Let me now turn things over to Brandon Gall, for a review of the key metrics and numbers. Brandon?

Thanks, Dave. For the first quarter of 2023, consolidated sales increased 3% to $201 million, as a result of increased sales in each of the reporting segments. Gross profit decreased 3% to $69.8 million representing 34.7% of sales. Advertising and promotion expenses for the first quarter increased $2.2 million, or 41% to $7.7 million as compared to the first quarter of 2022. Of this amount, $7.1 million was invested against our Premium Plus branded spirits, which represented 13% of total branded spirits segment sales in the quarter. The increase is consistent with our premiumization strategy and reflects our continued effort to increase marketing spend on our higher-margin premium plus price tier brands.. Corporate selling, general and administrative expenses for the quarter increased $4.3 million to $20.5 million as compared to the first quarter of 2022. The increase was primarily driven by planned personnel expenses, as well as other miscellaneous expenses for the quarter. Operating income for the first quarter decreased 17% to $41.6 million, primarily due to the previously mentioned decrease in consolidated gross profit as well as higher, but planned advertising and promotion and SG&A costs. Our corporate effective tax rate for the first quarter of 2023 was 23.7%, compared with 23% from the year ago period. The slight increase in ETR was due primarily to lower state tax credits taken in the current year period. Net income for the first quarter decreased 17% to $31 million. Basic earnings per common share decreased to $1.40 per share from $1.69 per share. Diluted EPS decreased to $1.39 per share from $1.69 per share. Adjusted EBITDA for the quarter was $47.1 million, a 15% decrease from the year ago period. The decrease was primarily driven by increased advertising and promotion and SG&A expenses, as well as gross profit declines year-over-year primarily in our distilling solutions segment. Turning to commodities. Corn, wheat flour, rye and natural gas represent our largest commodity expenses, and each continue to experience elevated prices throughout the first quarter. Relative to the prior year's first quarter, our input cost for corn increased 15%, wheat flour increased 8%, Rye increased 61%, and natural gas increased 16%. 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 impact of inflation over the past several quarters in most of our product lines. Additionally, we enter any given year with the majority of commodities purchased against contracted volumes. However, for various reasons, we do not contract 100% of our sales. Furthermore, we did not experience any significant supply chain disruptions in the first quarter of 2023. Cash flow from operations was $5 million in the first quarter, down from $22.2 million in the first quarter of 2022. The reduction in cash flow from operations was driven by an increase in accounts receivable due to the timing of customer sales, lower net income for the quarter and increases in inventory primarily our barrel distillate. Our balance sheet remains strong allowing us to continue to invest to grow. We remain well capitalized with debt totaling $229.6 million and a cash position of $31.7 million. Turning to capital allocation. Our approach which is focused on organic and acquisitive growth aligns well with our long-term strategy, as well as the underlying consumer trends our business is well positioned to leverage. We plan to continue to pursue M&A and conduct expansionary projects to accelerate growth and increase our capabilities and product offerings. In addition to M&A, laying down whiskey is another capital allocation priority for the company. Matching whiskey put away with growing future distilling solutions and branded, Spirits segment sales is critical to our long-term strategy. Our investment in inventory of aging whiskey increased $11.6 million at cost, as compared to the fourth quarter of 2022. Investing in CapEx to enhance our operational capabilities is another important capital allocation priority and resulted in capital expenditures of $9.8 million in the first quarter an increase of $4.8 million versus the prior year quarter. We continue to expect approximately $58 million in capital expenditures for the full year 2023, which we anticipate will be used for facility improvement and expansion, such as our new textured protein extrusion facility in Atchison, Kansas, our distillation expansion at Lux Row Distillers in Bardstown, Kentucky and the addition of whiskey barrel warehouses to support continued growth at our Lawrenceburg and Bardstown distilleries. These previously announced expansionary projects remain on track from a timing and cost perspective. Additionally, we plan to prioritize investments in facility subsidence projects as well as environmental health and safety projects. The Board of Directors authorized a quarterly dividend in the amount of $0.12 per share, which is payable on June 2 to stockholders of record as of May 19. Board continues to view dividends as an important way to share, the success of the company for stockholders. We remain deliberate and disciplined as we continue to evaluate M&A opportunities invest and put away of American whiskey and conduct expansionary projects that accelerate growth and increase our capabilities and product offerings. And now, let me turn things back over to Dave for concluding remarks.

Thanks, Brandon. We are pleased with the solid results delivered this quarter, despite increased costs and broader macroeconomic uncertainty. Demand for our products in each of our three segments remains strong and we believe our business continues to be well positioned. We expect to maintain a high level of operational execution and remain deliberate in our actions, as we navigate the market dynamics this year, which is why we are reconfirming our full year fiscal 2023 guidance. We expect revenue to be in the range of $815 million to $835 million. Adjusted EBITDA is expected to be in the range of $178 million to $183 million and adjusted basic earnings per common share is expected to be in the range of $5.05 to $5.20 per share, with basic weighted average shares outstanding expected to be approximately $22.2 million at year-end. At MGP, our commitment to sustainable development is underpinned by a core value, respect for people and nature. We take great pride in our craft and refuse to settle for anything less than exceptional, which is why we embarked on the difficult, but important work to establish an ESG strategy that would help hold ourselves accountable in all areas of our business and operations. As a result, we are proud to announce, that we released our inaugural sustainability report for calendar year 2022 earlier this April. This follows the comprehensive ESG materiality assessment we completed last year to better align our priorities with those of our stakeholders. This work ensures we are focusing our time and resources on the areas that matter most and help us to establish the four main pillars of our ESG strategy; people, planet, products and process. Our approach to ESG is based on a commitment to a culture of continuous improvement, in which our stockholders, employees and the communities where we operate, all benefit from a business platform based on sustainable growth. While we are early in our sustainability journey, we are proud of the progress we have made to date, and our progress on other ESG initiatives. This report is available for download under the Sustainability section of our website. We remain committed to leveraging the solid foundation we have established over the years, with the ongoing objective of delivering sustainable long-term value for our stockholders. 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. [Operator Instructions] The first question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning.

Good morning, Bill.

Just a little -- I know it's early in the year, but it seems like everything is going according to plan. So just kind of your thoughts of not changing full year guidance, was there something -- are you seeing it be in industrial go otherwise that are -- give you pause for the next few quarters, or are we just -- it's early in the year type outlook?

Yes, Bill, it's the latter. It's early in the year. And as you know, following us for a while now we -- one quarter does not a year make, but we do not see at this point any major red flags for the balance of the year. It's primarily just related to the timing within the year.

And with that I guess on the brown side, I mean, I know you have that scheduled out, but was there any for lack of better terms pull forward of sales in 1Q that will take away from 2Q, or was that largely in line with your plan?

Yes. I mean, it was largely in line with our plan. I think towards the end of the quarter, we had a little bit of stock purchases come in that we weren't anticipating, but overall very close to being in line with our expectations for the quarter.

Got it. And then one last for me. On the food ingredient side, industrial-grade side, we certainly hear you read about some softness or some I guess slowing demand for plant-based protein type products, be it Beyond Meat or Impossible or others. Are you seeing that in your customers? I know you don't have a whole lot of finished products, but I mean in terms of customer demand? And does that give you any pause on the new extrusion plant that's being built?

Yes. I mean, the majority of our ingredients are specialty wheat proteins and starches that are sold into the bakery channel, for baked goods, snacking snack foods and snacking channels if you will and pasta. So, quite a bit of a different customer set or base still versus like the Impossible Foods if you will. On the ProTerra side of things which is our texturized protein that's also a different product format than what some of the Beyond Meat or Impossible foods product lines and the consumers are targeting. Our ProTerra is more of a shelf-stable texturized protein that can be utilized in a number of finished products, whether it's meat alternatives or enhancing the protein in other food products. So, I would say that, we're probably seeing a little softness in that market versus what we had anticipated, but not near kind of what the trends you're seeing in the Beyond Meat and Impossible food-type product lines.

Got it. Thanks for clarification.

You bet.

The next question is from Vivian Azer with TD Cowen. Please go ahead.

Hi, thank you. Good morning. I was hoping to just start by following up on Bill's question or your response to it in terms of the spot market. coming in a little bit better than you expected. Can you comment at all around kind of how the pricing has evolved for your spot offerings? I recognize maybe some of that is competitively sensitive, but any incremental color there would be helpful.

Yes. I think pricing Vivien has remained very strong on both, new distillate and aged. Obviously, with our contracted volumes, we have very good pricing there. And on the spot market, we're seeing the pricing stay very firm.

Okay. That's great to hear. And then my follow-up question is on the commentary around inventories. Thank you very much for the incremental color on what it would have looked like or your top line would have looked like ex-Yellowstone. Can you comment at all on kind of more broadly like, what you're hearing from your wholesalers comfort around inventory levels, as we've gone through earnings season, it does seem -- and it's consistent with your script, there's a lot of caution around the US consumer. So I'm just kind of wondering, what wholesaler comfort level is with inventories today, what your comfort level is with your inventories today? Thank you.

Yes. I think in general, I'd say that the distributors may be hearing a little more inventory at this point than normal. However, kind of the other thing that I think, we're anticipating at the distributor level is with interest rates continuing to rise and at the level they are now. It wouldn't surprise us if some of the distributors maybe carried less inventory going forward, because their carrying costs are going to be significantly higher than they were even a year ago. But that's kind of a different issue than the demand side of the equation really to inventory, Vivien. But those are a couple of our observations in the market right now.

That's a really interesting consideration to call out. Is that factored into your full year guidance?

It is at this point, yes.

Perfect. Thank you.

The next question is from Marc Torrente of Wells Fargo. Please go ahead.

Hey good morning. Thank you for taking my questions. First, Brandon's, margins were quite strong even with the mix headwind which you communicated could happen given the comp, right? Ultra was down, 28%, super premium, down 3%. And then also record gross margins in Ingredient Solutions by far and well ahead of the sort of 30% bar. Maybe just a little more color on puts and takes on both of these. You called out cycling lower inventory costs. Anything else driving this? And then go-forward outlook from here?

Thanks for the question Marc. This is Brandon. So, yes, to your point, total company margins -- gross margins were 34.7% in the quarter, which is second best only to Q1 of last year. To your point, we did benefit from cycling through lower cost inventory from -- that we had on hand at the end of the year, particularly in Ingredient Solutions and branded spirits. Total company gross margin also benefited a part of this is a reduced output in sales of white goods and industrial alcohol. Going forward, we expect to see continued margin expansion year-over-year. So, as we look at Q2, Q3 and Q4, we expect to see in all our segments gross margins equal to or slightly above where we finished last year.

Okay. Great. And then the realignment with your distributor, what does that process look like? Is that fully complete? Did that have any impact to Q1 or Q2 on shipment timing or product availability of the channel?

Yes. We spoke to that a little bit, Mark in the script. We started that at the very end of the quarter Q1. So, it did impact the amount of mid and value brands, primarily that we shipped. The way it works is, we -- it's a realignment. It's not an expansion okay? So we -- when you realign from one distributor to another, you initially have to shift product into some of the new distributors that you're going with distribution centers, so you kind of get a onetime benefit from that. And that's what we experienced at the end of the first quarter, again primarily related to our mid and value brands. Keep in mind though, it is a -- it ends up being a net neutral because what ends up happening is that new distributor then basically buys the inventory in those states that they picked up from the prior distributor. So, you get a onetime bump, but then it ends up being a net neutral for us from a sales perspective as the year plays out, if that makes sense. That transition we're still in the process of completing it. But I'd say, the initial transition and the mechanics associated with that are pretty much played out or will be played out as we work through Q2 here.

Okay. Great. And then just lastly on the Branded side, maybe talk about some of the new launches and initiatives you have going on this year, the phasing of that growth? And how we should think about margin progression through the year both as mix improves and advertising support ramps?

Yeah. I mean, we've got a number of innovative items that will be launched this year. The Yellowstone Single Malt was launched earlier the year in the year and then we have some new expressions of existing brands that will be coming out as the year goes on as well as continued evolution if you will of our single barrel programs associated with certain brands. As Brandon mentioned, our gross margins for Branded Spirits in the first quarter were a bit elevated due to the kind of the one-time benefit of the lower inventory cost that we cycled over at the start of the quarter. But we do anticipate, for the full year, a bit of gross margin expansion for the Branded Spirits segment versus the prior year.

Thanks guys.

You bet.

The next question is from Sean McGowan of Roth MKM Partners. Please go ahead.

Thank you, guys. Good morning.

Good morning.

Question on inventory, would you expect inventory levels to stay somewhat elevated in relation to sales as the year progresses, or will that be worked down to kind of be more in line with the sales growth at the end of the year?

That's our expectation. Sean, we think that the year presses again particularly in line if you look at the carrying cost in the current interest rate environment we expect that inventory levels will pretty much -- shipments should equal to completions is the ideal way the industry runs and we anticipate that as the year plays out that's where the inventories will kind of normalize too.

Okay. And then, my follow-up is on the ingredients gross margin. Have we seen the full effect of that lower cost inventory, or could that linger beyond the first quarter?

Yeah. Thanks for the question, Sean. We have seen the full effect of that play out in Q1. As the year goes on we expect to see continued expansion in gross margins slightly above where we finished prior year which is in the mid upper-20s. So, we're not going to see that full effect in subsequent quarters but we do expect all else things being held equal to continue to show expansion.

All right. Thank you very much.

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

Hi. Good morning. Thanks very much for the question. First one is just a housekeeping question. So just on the distributor realignment to RNDC when we look at the P&L, should we expect any incremental termination fees or anything that might impact your operating expenses maybe than it would have had you not realigned, or is this fair to assume like status quo from here?

Yeah. I think it's fair to assume status quo Gerald. We do not anticipate any significant expenses related to the transition.

Got it. And then just on Branded Spirits a lot of my questions have been answered, but just understanding that you're going to continue to invest behind your brands over the course of this year. Any type of color you could provide on a cadence of your marketing spend, if there's any one quarter where you think you're going to spend more or less just for us to be mindful of. Thank you.

Yeah. Thanks for the question. We do expect the cadence to be slightly heavier as the year goes on, typically as we get into more of the -- closer to the holidays and fall typically tends to be more of American Whiskey, Bourbon demand months. We expect that our A&P spend in effort to raise awareness and trial and pull-through to be relatively greater in those quarters and months.

Perfect. Thanks very much guys.

The next question is from Ben Klieve of Lake Street. Please go ahead.

Hi. Thanks for taking my question. I wanted to ask kind of a high-level question Brandon you noted the flexibility that you have and the ability to invest in growth really kind of across the board. I'm hoping you can kind of provide a bit of an update on how your thought process has evolved over the last couple of quarters as all the macro dynamics that have been discussed here have evolved. Given the backdrop across all three of your segments, are there aspects of growth that you guys think are increasingly compelling or increasingly uninteresting as macro conditions have evolved here? And any color you can provide behind that would be helpful.

Yes, thanks for the question. Yes, so our main priorities in terms of investment as we stated our M&A, our inventory put away of aging whiskey and then obviously, also our CapEx plans. So M&A is still a really high priority for the company. We are very focused in the brand spirits segment relating to M&A, particularly in brands that are margin accretive that are in the right categories that are growing. And then, if opportunities come up internationally too, we see that as tremendous white space to grow our brand spirits portfolio and to possibly take it to other geographies outside the United States. As it relates to whiskey put away, it was more than $10 million in the quarter and -- which is a pretty amazing feat given the fact that it was also a record grounded sales quarter with it being up 10% over last year. So, this is really not necessarily to CapEx but just to our continuous improvement efforts and our ability to not only meet our customers' demands and our own branded spirits demands for whiskey but also to be able to put away for future growth as well. And then finally with CapEx, a lot of the same there. We still see great opportunities to invest across all three of our segments. Bill asked a question about ProTerra and our TruTex, facility which we expect to come online later on this year in the fourth quarter. We still see great upside there. Additionally, we are expanding distillation capacity at our Lux Row Distillers facility in Kentucky, and we're going to continue to invest in warehouses for aging whiskey product to support both, growth for our customers, for both whiskey our own brands and for aging whiskey.

Very helpful. Thanks Brandon. Congratulations on really solid start to the year and I’ll get back in line.

Thank you, Ben.

The next question is from Mitch Pinheiro of Sturdivant & Company. Please go ahead.

Yes. Hey. Good morning. Most of my questions have been asked. I guess following up on the barrel distillate question. Number one, was there -- you've had higher cost inventory. So it's up $10 million but a lot -- some of that would be sort of -- it's not sort of units but some of that's embedded in the higher cost.

Yes, you're correct, Mitch.

And what would that higher cost be? Was it -- is it 20% higher than…

Yes. So we shared that our main commodities were up year-over-year. As it relates to a barrel of distillate corn is a big component there, cons up 15% in the quarter. Rye is another big component of our match build for American whiskey that was up over 60%. But American whiskey on a bulk basis to our customers for new distillate and aged given its specialty ensure through higher price and a higher margin, we are able to pass through this cost as seen in probably some of our gross margin numbers historically as our brown goods grow rise. So relative to other product lines such as industrial alcohol and white goods, it's not the concern there.

Okay. Would you expect the barrel distillate at year-end to be higher or lower from current levels?

Yes. We're still investing for growth Mitch. And so just to be clear and I think a lot of us are aware of this but our put away is not only to sell it as bulk aid sales later on to our distilling solutions customers but also for our own brands. And we see good growth in both areas. And so we expect over time over the course of the year for the inventory level to continue being added to.

Okay. And then when it comes to the Ingredient Solutions side volume was down 12%. What is that just a tough comp from last year?

Yeah. That's right Mitch. Tough for comp, but we were able to get price and really return a really strong quarter which is evident in 10% sales growth and also 50% gross profit growth. Additionally, it's also a record for the segment for gross margin percent.

Is the pricing at all having any elasticity impact or because it's sort of a needed sort of ingredient in your customers' end product that it's just accepted.

Yeah. It's the latter. It's accepted. As we've shared our relationships with our customers are very important and very close and long lasting and as a result pretty sticky. One issue that we have seen has to do more with exchange rates around the world. The ingredient segment business is more of an international business relative to our other two and we have seen a little bit of issue with some of those customers just given the relative strength of the dollar in some instances. But all in all, given the third quarter and kind of how that segment is positioned we feel really good about the performance.

Okay. And then just final question on the premium beverage alcohol. So with the distributor sort of transition and the Yellowstone inventory, I'm talking branded spirits pardon me. Is the -- are we looking for from a volume perspective a flattish volume in Q2, or is it going to maintain sort of like a high single-digit level?

Yeah. No, we're expecting to continue from a sales perspective low single-digits level. As we discussed the portfolio of our Branded Spirits segment is pretty representative of total distilled spirits which in the Premium Plus recent trends have been growing. But with mid and value they've actually been declining as consumers drink less but better. So as a result we're pretty consistent in that the top line or even the volume isn't necessarily the right indicator for that segment as much as it is the premium plus sales and gross margin percent that we're getting and expanding in this segment.

Okay. So the Yellowstone has sort of leveled itself in terms of inventory you'll see sort of normal purchasing behavior after that?

Yeah. I think once we cycle through that more fully which I think we'd anticipate that will all play out through the end of Q2 here. We would then expect to see basically shipments match depletions on Yellowstone.

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

Thanks, Mitch.

Thanks, Mitch.

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

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