LARK Distilling Co. Ltd. (LRK.AX) Earnings Call Transcript & Summary

Good morning. My name is Domenic Panaccio and as Chair of LARK Distilling Company Limited, it is my pleasure to welcome you to the company's 2025 Annual General Meeting. I would like to start first by acknowledging and paying respect to the traditional custodians of the land, wherever those participating at this meeting are located. Today's meeting is being held in a hybrid format, allowing shareholders and their representatives to participate in person or virtually. The company Secretary has advised we have complied with the relevant requirements for convening this meeting and that a quorum is present. As the time is now 10:00 a.m., I formally declare the meeting opened. I am joined today by my fellow directors, David Dearie, Warren Randall and Stuart Gregor. Also in attendance is our Chief Executive Officer, Satya Sharma; our Chief Financial Officer, Iain Short; and Company Secretary, Michael Sapountzis. Also a special welcome to Bill Lark, who has joined us here for this meeting. In addition, we have Billy Chan from the company's external auditors, RSM, in attendance as well. The notice of the meeting has been given in accordance with the company's constitution and is also available on our website, the share registry's online voting site and on the ASX. Unless there are any objections, I will take the notice of meeting and explanatory statement as read. The format of today's meeting will be a brief address from myself, a presentation from our CEO, Satya, followed by consideration of the formal business on today's agenda. On conclusion of the formal business, there will be a Q&A session, giving all shareholders the opportunity to ask questions in relation to the resolutions presented at today's meeting. I am now pleased to present my annual Chair address. The financial year 2025 was a pivotal year for LARK, one of transformation, focus and foundation building. In a challenging market, we applied disciplined execution and strategic investment to strengthen operations and position the business for sustainable growth. This year marked a return to revenue growth. We achieved 12% growth in net sales to $15.6 million and delivered $10 million in gross profit, a 6% improvement on the previous year. Among our major achievements was our strategic partnership with Seppeltsfield Wines, giving us certainty over barrel supply for future maturation and opening new [indiscernible] premium whiskey innovation. The successful equity raising also provided the flexibility to invest confidently in our brands, infrastructure and international expansion. I'm pleased to report meaningful progress across all our strategic priorities. Our whiskeys continue to be recognized, winning the highest accolades in some of the world's famous global awards such as San Francisco World Spirits Competition, World Whiskey Awards, Global Spirits Masters and the International Wines and Spirits Competition. The completion of the LARK brand restage has been a significant milestone, which we believe will be transformational for the company. Early indicators suggest it will allow us to unlock substantial growth potential in both existing and new markets. progress with international sales momentum, accelerating distribution in Asia and delivering robust performance in global travel retail. At home, we've solidified our domestic leadership, our seamless transition to spirits platform and innovative growth to direct-to-consumer channels, which play [indiscernible] consumer engagement. The development of our Pontville site as LARK's long-term brand home is largely complete. The site now integrates production on one location, expands distilling capacity and removes bottlenecks to scaling growth through our new blending facilities. It is a clear sign of our commitment to quality, innovation and efficiency. Operationally, we've never been stronger. We continue to exercise disciplined capital management to build long-term value to shareholders. While share price performance has been disappointing, we believe our enhanced operations, growth strategy and improved performance, LARK is well positioned for the future. On behalf of the Board, I would like to thank our CEO, Sash Sharma, for his outstanding leadership and dedication. He has guided LARK through a period of transformation, a return to growth and set the foundations for success. We are also delighted to welcome Stuart Gregor as incoming CEO in January 2026. Stuart has deep industry experience, including co-founding Four Pillars Gin and building it from a small craft distillery into an internationally celebrated brand that was later sold to Drinks Giant Lion in 2023. Together with his understanding of LARK as a Nonexecutive Director, Stuart is exceptionally well positioned to lead the company through its next phase of growth. I would also like to thank all LARK employees for their commitment and passion as we continue our journey to make LARK a leader in new World whiskey. Finally, thank you to our shareholders for your continued confidence and support and for taking the time to join us today. With the foundations firmly in place, we look ahead to 2026 and beyond with momentum, confidence and belief in LARK's potential. I would now like to welcome to you our CEO, Sash, to address the meeting.

Thanks, Tom. Let me say upfront that FY '25 was a very significant and successful -- sorry, if you go to the next slide. successful year for LARK, both operationally and from a growth perspective. Importantly, we made significant progress against all of our strategic objectives and priorities. And as Dom mentioned, the foundations are now in place for the next stage of growth. From a financial perspective, net sales was $15.6 million, which was up 12% on the year before. And importantly, whiskey sales were up 16%. We also achieved at that point in time, 4 consecutive quarters of PCP growth with the release of our Q1 results that made it 5 consecutive quarters. In addition to that, we achieved gross profit of $10 million with margins of 64%, which was down slightly but was driven by channel mix in general. Our net operating cash flows were $2.9 million, an improvement of $1.3 million. Disciplined cost control again delivered savings in operating and overhead costs to the tune of $0.4 million. Offsetting this was an acceleration -- planned acceleration in marketing investment, which was $2.4 million versus PCP. This step-up investment included our exciting brand restate, which is on display today and has been taken through in our annual results. Post our successful capital raise, which Dom alluded to, we ended up the year with $23.1 million in cash and cash equivalents. Importantly, we have sufficient capital to drive our growth strategy. We can go to the next slide, please. The strategic priorities that we laid out in October '23 remained true, and we continue to make significant progress, as I alluded to earlier, building long-term brand value, driving international sales momentum and domestic market leadership and exercising cash and capital discipline. We go to the next slide. Underwriting all of this, we know it's extremely important that we have a high-quality whiskey bank. What's changed in the year was our significant progress in making sure that we can commercialize this whiskey bank and take products that can be scaled into the world. We have utilization for the acquired inventory that was part of this acquisition here at Pontville. We've got a brand restage and the launch of Kurio, which allows us to scale into perpetuity effectively as we use a blended malt. And finally, the Whiskey Bank stood at $57.2 million in costs or acquired value. And again, is a stock profile that we are very confident of taking to the world. So the next slide, please. A lot of the work that's taken place over the last year or so has been related to the brand restage, an incredible effort by the team who have come together in all facets of the business to take us to a position where we can now scale LARK into a leader in New World whiskey. Next slide, please. Thank you. The opportunity that this has created is a brand that can be scaled. It is now in 700 mills. It's a luxury New World whiskey. It allows navigation and discovery and again, provides cut-through and value engineering in order for us to go out and accrete margins. Next slide, please. As we went through the ideation and therefore, conclusion of the brand restate, we looked at 3 key products, 3 key facets: people, product and place. The people that help make the amazing whiskey that we've got here in Tasmania, the product which uses our innovative techniques and the access that we've got to our [indiscernible], to our water, our air, our super climate and importantly, the place, the Mystical Island of Tasmania, which we believe can be used and utilized to provide a point of differentiation as we take our whiskeys to the world. Next slide, please. When we look at the whiskeys that we have created, they are truly new world. What that means is that we've utilized innovation to set ourselves apart from our peers around the world, whether that's scotch or Japanese and truly provide us an opportunity to talk about Tasmanian whiskey and how proud we are of the product that we can create that puts us at the same level as, if not better, than our peers around the world. Now the packaging is here on display. You will see that it is a proprietary bottling. It allows, as I said, navigation. It allows us to have a structure that can be automated, again, providing more efficiencies as we go out and scale. When you look at the facets that are within our packaging and our bottle, particularly, they are ownable. They're truly reflective of storytelling and something that has been tested against the consumer set, both here in Australia, against our current products and in China, where we believe there is a big opportunity. All of that has provided us the opportunity to go out and create a product which has tested incredibly well and we believe has a, let's call it, an impartial response from our consumer set. We then move into the box, which is on the next slide. You'll see that this has been built to stand out. It's vibrant. It's reflective of new World whiskey. There is an illustrated [LARK], which again incorporates native flora in its detailing and the inner door talks about whiskey from another world, telling our story for every consumer that picks up our box. Next slide. This is meant to reflect the mood board and the mood board there is to show the progression we've made from what we've got today to where we are going tomorrow. We believe that this sits within our target audience, which is every whiskey consumer, but we need to be able to show how we are differentiated, and this is meant to visually represent that. A lineup here, which you will see continues to include Classic cask here in Australia, our most important market that seamlessly shows where the new range as well as the current range, something we're very proud of, the product that started the whiskey category here Bills in the room, so 1992, the Classic cask continues to play an important role as we transition into a new product set. Now the restage. Importantly, we've gone down the path of creating the product, building something that we think is truly scalable. We are now in the process of going into commercial viability and talking about all of those things with our customers, our distributors and taking to the next step, which is seeing this activated and brought into life as we execute with our distributors, with our tools and assets that we've created over the last year or so. We've got positive responses from all of our domestic customers. We've also got incredible feedback from our GTR customers. And importantly, as we've taken the product internationally and spoken to distributor partners, the response has been overwhelming positive around what this can do and how it can stand up against a whiskey subset, which is broader around the world. Next page. As we move into the Q1 updates, that momentum that we spoke about at the end of FY '25 continues. We are in our fifth consecutive quarter of PCP growth. I won't take -- go through each of the numbers, but it's important to call out all of our channels are performing extremely well. Our B2B change that we made in August of FY '25 with Spirits platform continues to deliver returns, adjusted for, obviously, the distributor margin, which sits inside the value chain that has been more than offset by our savings in overheads. So again, a very, very positive relationship to date. We've talked about our brand restage that continues to give us positive feedback from the market and something we're really confident about launching into various markets, including Australia. And our cash and capital discipline continues as we've called out to the market. If we go to our full year perspectives, we've talked about what we need to do this year. We, as a team, are very, very clear about the -- I suppose, the goals we need to keep. We need to get into our international markets and open up new distribution. We need to go out and continue the momentum we've shown in Q1 into the future quarters. And importantly, we will work towards our cash flow break -- operating cash flow breakeven during the FY '27 period. Importantly, the leadership transition between Stu and I has been seamless. As I've called out to many of our investors, this is not a new CEO. It's someone who has been very, very close to the business for the last year and has been intimately involved in, I suppose, the brand restage and where we're going with this over the next little while. So I'm really excited about where we're going to go under Stu's leadership, a proven leader with extremely strong credentials, as Dom has called out. And as we go into the next steps, I think we've got a lot of tailwinds in a difficult trading environment where we've got something special to take to the world. So that's it for me, Dom, as I pass back to you. But before I do that, probably worthwhile thanking all of our shareholders, our staff and everyone that's been part of the story. I spoke to Bill this morning to sort of say there's an analogy that I use, which is from the all black to leave a jersey in a better way than you found it. And I passed that jersey very proudly to Stu and no doubt we'll see incredible things happen with LARK into the future. Dom, over to you.

Thanks, Sash. We're going to now move to the formal part of the meeting. And firstly, I want to outline the Q&A and voting procedure for today's meeting. So for those of you attending this meeting in person, all shareholders, proxy holders and authorized corporate representatives who are entitled to vote were issued with a voting card. If anyone present is entitled to vote and does not have a voting card, please see one of the team members at the registration desk. They will assist you. If you would like to ask a question, please raise your hand to speak to identify yourself as a shareholder. If you are acting as a proxy, please state clearly who you are appointed to represent when introducing yourself to the meeting. If you are a shareholder, proxy holder or authorized corporate representative who is attending this meeting virtually and wish to ask a question via text, please take note of the instructions displayed on the screen. If you are a shareholder, proxy holder or authorized corporate representative who is attending this meeting virtually and you wish to speak and ask a question, please follow the instructions displayed on the screen. Visitors are reminded that while we welcome you at this meeting, it is a shareholder meeting, and you may not make comments or ask questions. In accordance with the Corporations Act, a poll would be conducted on each resolution to be considered at today's meeting. As advised in the Notice of Meeting, where proxies have been properly nominated to be at the Chair's discretion, those votes will be cast in favor of each resolution. With regards to the poll procedure, we will open voting shortly so that your votes can be cast during the formal business section of the meeting. For shareholders attending online, when the poll is declared open, a poll window will appear. Please follow the voting instructions displayed on screen. For shareholders attending in person, please complete and submit your voting card to one of the team members here at the meeting. I will now declare the poll open. I refer you to the first item of business as set out in the Notice of Meeting, which is to receive and consider the financial report of the company, together with the directors' report and the auditor's report for the financial year ended 30th of June 2025. These items are contained in the company's 2025 annual report, so I will ask that they be taken as read. The annual report is available on the ASX and on our website. No written questions to the company or the company's auditors were received by the cutoff date, 5 business days before this meeting. Questions may be directed through myself to the auditor in relation to the conduct of the audit, the audit report, the company's accounting policies or the independence of the auditor. As this matter does not require a vote, we will now move to the first resolution. I now refer you to Resolution 1, which is to consider the adoption of the remuneration report forming part of the directors' report for the financial year ended 30th of June 2025. The remuneration report is set out in the directors' report in the company's 2025 annual report. The vote for this resolution is advisory only and does not bind the directors or the company. The following proxies have been received for Resolution 1 as displayed on screen. I move that shareholders consider and if thought fit, pass this ordinary resolution. I now refer you to Resolution 2, which relates to the reelection of Mr. Warren Randall as a Director of the company. Warren's profile has been provided in the Notice of Meeting. The following proxies have been received for Resolution 2 as displayed on screen. I move that shareholders consider and if thought fit, pass this ordinary resolution. As this next resolution is a matter concerning myself, I now hand the meeting over to my fellow Director, Stuart to conduct this resolution.

Thank you, Dom. I now refer you to Resolution 3, which relates to the reelection of Domenic Panaccio as a Director of the company. Dom's profile has been provided in the Notice of Meeting and the following proxies have been received for Resolution 3 as displayed on screen. I now move that shareholders consider and if thought fit, pass this ordinary resolution. And with that, I'll now pass the chair back to you, Dom.

Thank you, Stuart. I now refer to the final item of business, Resolution 4, which is to consider the approval of the issue of equity securities under the company's equity incentive plan. The following proxies have been received for resolution 4 as displayed on screen. I move that shareholders consider and if thought fit, pass this ordinary resolution.

We will now address shareholder questions from anyone participating online or in person today. Does any shareholder have any questions or any other items of business on the company's operations?

I just have one on the whiskey storage. What proportion of that is the LARK [indiscernible].

So we've got 2.4 million liters under maturation. As has been previously sort of reported, we undertook an acquisition of Pontville, which forms the largest next proportion of that, which was around, let's call it, 500,000 liters, right? So between 2.5 to 500,000, that's of that proportion. With respect to the rest, so i.e., 2 million-odd liters, there isn't a recipe. That's the job of the master distiller, which is Chris. The recipe itself is a combination of age, cask types and how we bring that together. As we know, Classic Cask is an unaged, non-aged statement. So works for flavor profiles and skills that we bring to bring that together. We have always been -- we've been transparent on all of our packaging around source distillery. So as you pick up each of these new releases, you will see the distillery source. So transparency is provided to all consumers in terms of its source distillery. So a large proportion is a short answer and the acquired amount is approximately 500,000 to 600,000 that has been purchased.

Quite [indiscernible] about future sales. But when I look at the company's revenue here, it's gone from $16.7 million to $17.1 million, which is really quite static, If nothing. There's no great change there. And we're currently running at a $3 million a year deficit, which was $4 million last year, which is about $60,000 a week. Now something has got to change. This has been going on for, in fact 3 years, this has been going on. Where are we going in [indiscernible].

So when you have a look at our strategic plan, right, when Sash joined the business with Iain, our CFO, we put together a strategic plan, and we've pretty much been keeping to that original plan. When we think about cash flow, the business is forecast to become cash flow -- operating cash flow breakeven and positive during the financial year '26, '27. And that was in our original plan. So if you think about the sales growth. Yes, we've had 5 consecutive quarters of positive sales growth and so sales momentum. We would expect that to continue. Our operating costs are being controlled and managed. And as that growth comes through, the cash flow will turn positive. So we're buoyant like as a Board and as a management team in terms of the future of LARK. With the brand restage, the feedback we've been getting in terms of the quality of the product, the packaging and also the fact that there is a big market that we -- that is the world that is open to us. So over the last 12 months, we've started to increase and expand internationally, and that momentum will continue as will our expansion into Australia. I don't know if there's anything you want to add.

I think the important thing to take into account as well, we outlined and I just looked it up. It's on Page 8 of our results that we went out in the annual report -- sorry, the annual results. On Page 8, you'll see that where we've taken the business is from an operating cash flow deficit of $8 million to taking it to where it is today, which is a path to FY '27 in terms of operating cash flow positive. The important thing to also work through that is where is that money being spent. The vast majority of that has been going into the opportunity to unlock the markets which we didn't have the opportunity to unlock, i.e., a $700 million format, i.e., a product which now can be automated down a production line. What it also allows us to do is invest in something that has an opportunity to take market share in a whiskey category around the world outside of Australia. So we've continued to grow in Australia. We have come off, I suppose, the COVID highs, which was, I suppose, the biggest proportion of where whiskey sales took place in terms of I suppose, a non status quo, I suppose, position. The market is regulated. We have outperformed the market, which is in decline. And for 5 consecutive quarters, we've shown that growth. How do we get to cash flow positive? The answer to that is top line growth. And now we have the tools, the assets and the products to take to the world. So yes, we are operating cash flow negative, but the trajectory of where we've gone has been positive despite the discretionary advertising and promotional spend in my view.

You mentioned you've got 2.4 million liters of whiskey [indiscernible].

Correct.

What is the [indiscernible]? Are you going to keep increasing that?

Sorry, I missed what's that?

What is the [indiscernible] you're going to increase that?

So again, sorry Yes. So we've got 2.4 million as we've outlined. As we've gone out to the market and explained in the short term, our cash deployment will go into building the brand and building sales momentum. We've gone out and stipulated that our production will replicate our sales because we have $2.4 million in approximately 2.4 million in whiskey under maturation. What you see outside is something that has a capacity of 500,000 liters to date. That's what that opportunity is today. We make approximately 100,000. So we've got a 5x opportunity within our current capacity and a modular production up to 800,000 without much CapEx. So I think in terms of what the long-term plan is, it's to grow top line, build brand equity and continue to produce at least that much in order to then underwrite future sales.

So you've got no -- you're just going to increase production as you increase [indiscernible].

Correct. And we've got more than that in our whiskey bank as we currently hold our sales and our projections say that we do have an opportunity over the short to medium term to follow that methodology without compromising any lost sales.

Approximately how many litres do you sell?