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

Our next presentation probably should have been scheduled up for a little later in the day, but I think it's strategically placed where it is for a good reason. We're going to hear from MD, Geoff Bainbridge, at Lark Distilling. Over to you, Geoff.

Thanks, [ Ian ]. Greetings from Tasmania or in fact, I'm from Melbourne at the moment. But as we cover all of Australia and New Zealand, we're in Tasmania. So quick introduction to Lark. So on our first slide, or I should say, next slide, yes. So Lark, we're a whiskey business, Tasmanian-based, 28 years old, and we're a $50 million market cap. We have physical assets. So we have distilleries. We have 2 distilleries, one in Bothwell and one in Hobart and one in Cambridge. Our Hobart one is more of a Cellar Door. Primary assets are our barrels and our brands, but mainly -- main point here on the left-hand side is that there was a very significant board change to our organization last year. We brought on David Dearie, who's our Independent Chair, ex CEO of Treasury Wine Estates, and I took over as CEO. Ex founder of Grill'd, Bounce Trampolines, also worked for 10 years in the spirits industry. So if you go to the next slide, and this is probably the key takeout for anyone thinking about whether they're investing in this company or not is what is our strategy. Our strategy is very clear. And the simplest way I could explain it to you is to say we want to make Lark the Penfolds of Australian whiskey. The characteristics that are similar to Penfolds is price points, innovation, heritage, premium, scalable, Asian appeal. And that, that Lark has, as I mentioned before, it's 28 years of history. It's founded by Bill Lark, and Bill Lark is still a great ambassador and endorser of our business. It sits in a category that is very unique, that is Tasmanian whiskey. It's a tightly held category, but it's highly admired due to its global success, particularly won Tasmanian Brand and won World's Best Whiskey twice in the last 10 years. If you look at the next slide and understand the commercials of the business. I think I just need next slide. So if you look at the commercials of the business, the framework to think about this business is what goes into a barrel and what comes out. So what goes into a barrel is about $2,000 worth of COGS. What comes out within 5 years is a 7.5 fold increase to about $15,000 per barrel. So unlike most investments where your asset is depreciating, this is an appreciating asset. The test here is whether we can sell it for what we have in our assumption there of $139 net sales value per liter. And I'll talk to you how we've been doing that, but it's -- we've consistently done that for the last 2 or 3 years. So that assumption is fairly validated. At a macro level, whiskey is a category that's growing at 9% per annum. The category the part that we play in, at $65 and above is, is premium, and it is achieving 9% per annum. Australia in the scheme of things is very small. So I think when you think about market share and impact of internationals, it's important to realize that this is an emerging brand and emerging industry and it's got a high growth. If you move to the next slide. What's going to drive the share price? Because invariably, that's the reason you're on this call. I've got 4 key things I want to share with you quickly. Number 1 is the F '21 maiden profit. And that's being driven by e-commerce and direct mainland sales. So if I just refer to that graph there, share price is up 46% since COVID-19. What's driving our share prices is sales and what's driving our sales is brands and then brand activation. So I'll give you a sense of what that looks like. But in terms of sales innovation, the 2 kind of key initiatives for us is a direct sales force. So we were previously an indirect sales force managed by a wholesaler or a distributor. We now manage that directly ourselves, and we're seeing the benefits of that. And then we've got a really vibrant e-commerce business. And to put the e-commerce in perspective, we're seeing sixfold growth rates in e-commerce. So in the first 2 months of this year, so July and August, we've achieved a greater than -- in sales, we've achieved sales greater than what we achieved in the full 12 months last year. So e-commerce sales, as everyone knows, is becoming a really important part of every business model that we look at, particularly during COVID. If I go to the next slide, the fundamental part of the business is brand and barrels. And if -- I'll talk about brand in a minute. But if I talk about barrels specifically, this is the appreciating asset. To give you a sense right now, we have 700,000 liters under maturation. So they're inside our bond stores. That if you -- 3 data points for reference is about $16 million it costs. So that's what sits on the balance sheet under the accounting standards. The most critical data point is it's $99 million worth of value. So that value is equivalent of $1.81 per share. So for us to bring that to market is -- the only requirement there is to put [Audio Gap] bottle and then to move it to a DC. All other COGS are already taken into account because they were already invested in 5 years ago when the barrels -- when the liquid went into the barrel. So from our perspective, it represents about $1.81 per share in whiskey inventories. So that gives you some comfort in this investment at the balance sheet. The balance sheet is defensible, and the balance sheet gives you some underlying value that reflects some security in terms of the investment. If you move to the next slide. So Lark as a brand and as a proposition, Lark is highly regarded. Bill Lark [indiscernible] being the founder of the Tasmanian whiskey business and the Tasmanian whiskey industry. He's had his fingerprints on many brands, but none more so than his own. It's highly regarded in terms of quality, it's highly regarded in terms of taste and it's award-winning and it has heritage. The biggest initiative that might be of interest to yourselves today is how we're expanding the portfolio. So we're looking very much as a portfolio of multiple price points. The one that I wanted to talk to you about today is the introductory price point. So I wanted to introduce Symphony No. 1. It's a blended malt whiskey as I mentioned, accessible price, accessible distribution, accessible volumes. By that, it may seem a little out of whack to say something is $129 or $139 decibel. But by comparison, normally, it's $180 million for a Lark product. Early indications are very strong for us. We sold 600 units of this product on a presale online. We've got it into 150 Dan Murphy stores. I won't talk -- we're in Vintage Cellars, BWS and recently presented to Liquorland, which went very well. Initial indication from one of our key majors, 6-week sales, we've seen sales doubling every week. We're now tracking around 120 to 130 units per week out of that major account. So it's a very positive outcome for us. If I go to the next slide, the other key driver for us next year is the gin. Forty Spotted Gin is the Tasmanian Gin brand. This is our cash cow. If whiskey is about maturation in barrels, gin is about cash cow. And clearly, it addresses another consumer demographic, the female. And I'll just touch on that hero product there that we've, through our research, identified a very significant market opportunity with a lower alcohol strength vis-à-vis what you see with Great Northern, also what you're seeing with various cocktails, lower strength so that you maintain control, responsible service of alcohol. So you're going to see a pretty significant push for us in gin in this summer. And if I move to the next slide. So to give you a sense of where the business is at and what has been working on. The first priority was understanding the whiskey landscape, which we've completed. The second priority over the last 12 months has been cleaning up the mess and resetting the foundations. That's now largely completed. There's nothing left to be done there. The third one is define an articulated proven strategy. And that certainly is what we presented at the November AGM last year, and it's what we're executing right now. So what that strategy looks like is to build Lark into a power brand with broad appeal and Asian relevance. So that's the Lark made of Tasmania. Reboot Forty Spotted Gin to own Tasmanian Gin, and that's underway. Innovate the product and tell meaningful stories and Lark Symphony No. 1 is a very good example of that. And build and stockpile inventory. So as I indicated, we currently have about $99 million of value of inventory on our balance sheet, against a market cap of about $55 million, $60 million. So we continue to build inventory. We add inventory at 4,300 liters per week. And in the last quarter, you would have seen just between our 2 filings, about a $12 million increase in value. And then the final thing is execute the plan while maximizing revenues. So what I would assure you there is that this year will be our maiden profit, and that -- and our expectation in sales is, again, a very significant increase. And I would suggest to you that our increase will be in the order of about double. So our business is well [Audio Gap] when you're thinking about it from an investment perspective, it's investing in this company 12 months ago would have been brave because it was a new management team with a new direction. Investing in this company today, I think this presentation gives you a good sense of where we are, what we're doing and what we're focused on. So thanks for your time today. [ Ian ]?

And thank you for your time. Very interesting subject, and I'm sure many of those attending today will be very interested to hear the developments and the progress you make. So great to hear.