MGP Ingredients, the quiet giant of the American whiskey world, just released its Q1 2024 earnings transcript. While analysts focused on the expected shift from aged to new distillate sales, and the potential impact of wholesaler destocking, a far more intriguing narrative lies buried within the numbers. MGP Ingredients is experiencing a silent margin revolution, one poised to propel the company to new heights.

The headline story is straightforward: MGP is pivoting to new distillate sales, locking in multi-year contracts and enjoying greater financial visibility. This is a strategic masterstroke, mitigating the risk associated with fluctuating aged whiskey demand and capitalizing on the insatiable thirst for American whiskey. But here's where it gets interesting: the pricing power MGP wields in this new distillate market is quietly transforming their entire margin structure.

While new distillate traditionally commands a lower margin than aged whiskey, MGP has managed to secure remarkably strong pricing on these contracts. Brandon Gall, CFO, highlighted this trend, stating that new distillate pricing was up on a customer-by-customer basis, despite an overall price/mix decline driven by the higher proportion of new distillate sales. This pricing power, coupled with the strategic shift away from the low-margin Atchison distillery, is generating a powerful ripple effect across the company's financials.

Here's the hypothesis: MGP's consolidated gross margins are on a trajectory to rival, and potentially surpass, their branded spirits peers. While Q1 2024 gross margins were impacted by temporary factors like the Lux Row distillery expansion and start-up costs at the Proterra facility, Gall confidently predicted a consolidated gross margin in the low to mid 40% range for 2024. This is a dramatic increase from the 36.4% achieved in 2023, and signals a fundamental shift in MGP's profitability.

To understand the magnitude of this change, let's look at the pro forma numbers. In 2023, excluding the Atchison distillery, MGP's consolidated gross margin would have been a staggering 42.5%. Even with the expected shift towards new distillate, MGP is projecting a sustained margin in the low to mid-40% range, a testament to the favorable pricing they've locked in.

Gross Margin Evolution (Pro Forma)

The following chart illustrates MGP's gross margin progression, highlighting the impact of the Atchison distillery closure.

This is significant for several reasons. First, it positions MGP to become a leader in profitability within the spirits industry. Branded spirits companies, with their higher-margin products, typically enjoy superior gross margins. MGP's evolving strategy, focusing on premium distillate and margin accretive branded spirits, is closing this gap. Second, it provides MGP with a significant financial advantage. Higher gross margins translate to increased cash flow, enabling greater investment in aging whiskey, strategic acquisitions, and growth initiatives.

But here's the kicker: MGP is not just riding the premiumization wave, they're shaping it. They're proactively rationalizing mid- and value-tier brands, opting for price increases or outright discontinuation in pursuit of greater profitability. This disciplined approach is a clear indication of MGP's commitment to becoming a premium, high-margin spirits powerhouse.

While the market fixates on temporary headwinds and the usual industry noise, MGP is quietly building a margin fortress. This silent revolution is poised to transform the company's financial profile and unlock significant value for its shareholders. As David Bratcher, CEO, eloquently stated, "We believe this is the optimal way to provide desired returns to our shareholders." The numbers tell the story: MGP Ingredients is no longer just a whiskey supplier, they're a margin maestro, orchestrating a quiet revolution that's set to make some serious noise.

"Fun Fact: MGP Ingredients' Lawrenceburg, Indiana distillery is one of the largest in the United States, producing over 100 million proof gallons of distilled spirits annually. This vast production capacity underscores MGP's role as a cornerstone of the American whiskey industry."