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

All right. Good afternoon, everybody, and welcome to Lark's FY '22 Results Presentation. I'm Sam Wells from NWR Communications. I'm pleased to have joining me today from Lark is Laura McBain, Managing Director and Interim CEO; as well as Alex Aleksic. Before I pass it over to Laura and Alex for comments, we will have some time for Q&A towards the end of the call. [Operator Instructions] So Laura and Alex, the floor is yours. Thank you.

Thanks very much, Sam, and good afternoon, everyone, and welcome to the Lark Distilling FY '22 Results Presentation. It's great to have you all here today, and I know it's a busy day for many of you, so thank you for joining. Also in the room with us today is Michael Andrews, who is our Financial Controller and master of our PowerPoint presentation today. So if you can bring the presentation up on the screen, Michael. So just starting, FY '22 delivered a record net sales for Lark with revenue of $20.3 million, obviously up 57% compared to last year. And that's on the back of the net sales per liter of $269, which was at the end of the top range of that forecast, an increase of 25% year-on-year. During the year, we also started export sales, and those export sales had us believe it was the right stage for us to grow into China. And we are obviously continuing to explore opportunities for Lark in Southeast Asia and the U.S. Normalized EBITDA of $1.4 million, up 31% year-on-year, a great signal for the ongoing success of the Lark business. Opening the future opportunities for our business is the 2.1 million liters of high-quality and diverse whisky under maturation. It's wonderful to achieve that target through the year. And as we can see, it's been a very strong result for FY '22, but we remain focused on delivering long-term strategies, building domestic as well as export opportunities. I'm going to hand over now to Alex Aleksic, our CFO, to take us through some of the financials for the year.

Thank you, Laura. There's a problem, sorry. Perfect. Thanks, everyone. As Laura highlighted, I guess we had a great year, a record year with regards to net sales, growing the business year-on-year by 57%, $20.3 million from $12.9 million for the prior year. Our margin for the year closed out at 66.5%, slightly lower than last year at 67%. From our perspective, we had a fairly strong H2 compared to the headwinds and challenges that we had in the first half, where we closed out at 61.5%. Predominantly, that margin influence was an outcome of better trading conditions where we were able to trade our hospitality channels here in Tasmania. We had a collection of high-value, limited-release liquids released in that second half, which all contributed to an overall H2 margin of just under 71%, which rounded us out for the year at 66.5%. So a great achievement there by our business. From an operating cost perspective, we can see that we spent $13.3 million versus $7.8 million in the prior year. As we spoke to you in H1 and the theme sort of continues in H2, we've made some additional investments in the brand, and we've strengthened the bench trade in regards to the management team and additional resources in sales channels to get those particular outcomes. From an EBITDA perspective, non-normalized. You can see, we delivered $801,000 versus $1.5 million in the prior year. However, when we normalize for one-offs, one-offs being in the FY '22 relating to cost relating to the acquisition of Pontville, if you normalize that $599,000, we delivered a normalized EBITDA of $1.4 million, which from the normalized prior year of FY '21 is a 31% increase. So from our perspective, that's a great result. I'll get to next slide. From a cash positive perspective, again, we feel that we've had a fairly good result. You can see that we closed the year out with $16.1 million. And in addition to that, we've still got -- out of the $15 million facility that we negotiated with the NAB early on in the year, we've got $10 million of undrawn funds. We successfully completed the acquisition of Pontville during the year, where we raised in excess of $56 million, and we also settled within the Q3 quarter circa $37.3 million. Net cash outflows for the period year-on-year, we've spent approximately $1.3 million more compared to the same time last year. However, when you take into consideration the normalization of the one-offs and nonrecurring cash flow boost and JobKeeper impacts from the prior year, our year-on-year cash flow from operations is actually up by about $290,000. And that $290,000 relates to continued investments in the team, increasing production in regards to doing the whisky brand. So they are essentially the core highlights from a cash flow perspective.

Awesome, Alex. Thank you. So just moving on, Pontville as our expansion was a really important part of our FY '22 year. The acquisition of that distillery via Shene Estate is a strategic acquisition. It has been a real turning point for the brand. The facility itself or the site itself contains significant heritage-listed buildings, including stables built in 1851. And the barn, which you can see on the screen, is just the home of our new cellar door at Pontville. This site really enables us to create a true luxury tourism destination, bringing new customers into the brand, and bringing existing customers an opportunity to really embrace the experience what Lark is all about. The new site also will be home to our new distillery, where we will be able to produce around 1 million liters of new make spirit annually, which will obviously exponentially grow the whisky bank and is critical to the future success of Lark. You'll recall that we were the beneficiaries of a $4.5 million manufacturing grant from the federal government during the year, and we are on track for completion of paperwork in relation to that. Plans for the start are obviously sympathetic to the historical significance of the buildings already present there. And we are also in the final stages of preparing documentation for submission through the authorities. As I mentioned, all of this is around building this whisky bank, and the whisky bank is critical to the future success of Lark. And if you just flip to the next slide, achieving 2.1 million liters is a great milestone in this journey for us. Most importantly is that, that whisky bank is a diverse range of tasks and it includes the 496,000 liters acquired with the Shene Estate, as well as the liquids that are being produced at the Cambridge and Bothwell sites over the years. The diversity of our cask program is critical to the development of great whiskies into the future, and our master distiller/head distiller, Chris Thomson, who many of you have met, has been focused on ensuring that diversity and quality gives the maximum amount of opportunity for Lark into the future. And as you can see, in the last 18 months, this diversity has allowed us to continue the upgradation pipeline with a diverse limited-release range from Dark Lark to Lark x Glenfarclas. The volume of diversity of these liquids has meant that sales volume and net sales value can be optimized to achieve the maximum potential. We demonstrated the success of this during the year with a 25% year-on-year increase in our net sales value. And obviously, those are great examples how maximizing and optimizing the use of whisky that we have in maturation is important to our current and future activities. On to the next slide, we can see optimization of that whiskies. We're also on track to achieve our ambition to be a global icon in single-malt whisky and being renowned as being the most innovative distiller. During the year, we executed a number of initiatives to reinforce and build our global iconic status. So firstly, we focused on strengthening our market position, leading with our distribution of core products being Classic Cask and Cask Strength. We've started to increase our advertising promotion investment into these products to drive scale and grow the heartland of the brand across all of our channels. So what we mean by that is we're making sure that our Classic Cask is in as many places as possible, so that new and existing customers can always access Classic Cask wherever they may be. Secondly, our limited-release program delivered some outstanding results through the year. Dark Lark in particular sold out ahead of forecast, as did the Lark x Glenfarclas. A key focus of Dark Lark was to drive [indiscernible] the new consumers and the targeting of marketing spend and the disruptive packaging resulted in 57% of the purchases of that product through our e-commerce channel were to new customers. So a great result. And it really demonstrates that focus and discipline around a strong program for limited-release execution really makes a difference to the way Lark will behave now and into the future. In terms of the optimization of consumer and online marketing, we will continue to invest in e-commerce and digital. We've built a new website, getting ready to launch that soon, and developed sophisticated capabilities in the back end of that site to be a lot more targeted and data-led in a way we produce new products and reach our existing consumers. And finally, credentials that we continue to build around the quality of product have been recognized domestically and internationally. We were awarded the top honor at the World Whisky Masters, with a Masters Medal for Chinotto Cask II Cask Strength release. That's a highly regarded award and we took that up. But also we were the most awarded gold medals for any brand in that program. So that included Classic Cask, Para 1992, Symphony No1, Dark Lark, Evolve Whisky Bar series, Para 100 II Rare Cask, and the Classic Cask 2020. So fair to say, it was quite a whole for Lark. Other awards through the year include Best Blended Malt at the World Whisky Awards. Whisky Distillery of The Year at the Australian Whisky Awards. And Whisky of the Year Award to Christmas Cask. So certainly, testament to our approach, to our innovative thinking and our forward thinking in the way we achieve some of those results through the year.

Sorry, Laura, just to interrupt quickly, would you mind just unmuting Alex's line and unmute yours, Laura, just to make the audio a little clearer.

[Technical Difficulty]

Just unmute, Alex, please. Yes, you should be good to go ahead.

[Technical Difficulty]

We might move back to Laura's line. Apologies for everybody on the line.

Yes, we're just getting a whole lot of feedback.

Yes. We'll just keep Alex's line on mute and please proceed on the screen.

Okay. I'll keep going. Sorry about that, folks. Obviously, we're still really renowned not just for our innovation and all awards that we got, but we have been the -- this has been a very special year for us being 30-year celebrations of Lark. I'll switch to next slide. We've had a number of different activities which we've highlighted previously. The celebration at Pontville with 200-plus local and estate retailers, partners and media. And that's built a really deep brand connection, resulting in new listings of Lark, and obviously increased orders with existing retailers. During that 30-year celebration, we launched the Lark Rare Cask by Glenfarclas, limited-release program, $1,000 a bottle, and that celebrated the relationship that Bill Lark has with the Scottish distilling industry. That product sold out ahead of forecast and it's fair to say it's a beautiful whisky that we are very proud of, but also testament to that rare proposition that Lark continues to build. We had a wonderful collaboration with the Whisky Club, one of Australia's largest online whisky membership groups and that included 2 anniversary releases to them, which drive products trial and recruiting new customers to the brand. Overall, the 30-year anniversary has seen us attract significant amounts of PR, media, reaching over 2.9 million impressions, new audiences and reinforcing our brand potentials. So moving to export channels. It is absolutely critical that this export expansion for Lark, which is critical to the long-term growth, is done in a sustainable way, and we lead with a luxury global positioning. We have started this with a heads of agreement for distribution to China and GMT and seeing some bright indications of this opportunity and the popularity of those [indiscernible] with Rare Casks and Legacy, in particular, to high net wealth individuals as a foundation. We've also identified an opportunity to build awareness of the brand with high net wealth Australian investors that can push the product and the brand experience into destination export customers. Whilst this is at its early stages, we believe there is a strong opportunity for our luxury products to reach those markets through those channels and create a high-level effect for the remaining portfolio. Most importantly, we are focused on ensuring the first launches into export markets, but when we do so, we remain competitively positioned and that we scale sensibly to ensure that once we go into those markets that our products are always available in key retailers and destinations and supported by our targeted and proactive marketing program. All of these activities being underpinned by our investment during the year into critical personnel and expansion in particular of our sales team domestically to ensure better representation in Australian retailers and on-coast venues. Obviously, with the acquisition of Lark, we've expanded our manufacturing team to support making of the new whisky. And in that facility, we've also expanded our hospitality team for the opening of The Still in December '21 and the Pontville cellar door in March this year. Both of those venues have been an extraordinary success for us and has demonstrated the value of having Lark owned facilities to deliver our real whisky, true Lark whisky experience. The hospitality venues that [indiscernible] and that [indiscernible] leads to most sales, but most importantly, long-term loyal customers. So looking at FY '23, it's going to be another big year for Lark. We're obviously very focused on -- myself, David Dearie, and the rest of the Board are very focused on the employment of the new CEO. We have engineered a diverse and strong set of candidates, and we're hopeful to make that appointment in the near future. But as I've said in the past and continue to say, I'm committed to continuing in my role, in the interim role, and growing being part of this amazing Tasmanian brand story. For FY '23, there are a number of other activities that myself and my team are focused on and I'll just touch on those in a bit more detail. So firstly, you know, as I've said, we had a wonderful limited-release program that's seen us achieve a number of awards over the years. And there's been a lot of ways to come out of that in terms of what works well, product mix, scale of investment, and size of the release. Those learnings are being adopted into our limited-release program from this year, as well as using the data insights from our e-commerce channel to better target and create a really focused limited-release program in FY '23. We're already expanding our classic collections to ensure that we can meet the demand of luxury high-end products. And you'll see, in the near future, this expansion not only of our Classic Cask, but also the incorporation of 3 other products that will be always part of our core ranging. And that will be made available to retailers and on-premises venues across Australia, and it's also a critical and strategic next step to underpin our opportunities into export markets by having a suite of products that new customers and new retailers can explore. As I've said before, the export strategy is key, but we need to make sure we get it right. We received significant interest from distributors across Southeast Asia, China, and the U.S., and that is absolutely fantastic and testament to the brand's strength. We're focused on getting those entry strategies right, so that the brand is supported probably and wholesomely as we expand to export and working alongside those distributors to create those great go-to-market plans. There is obvious distribution opportunities still here in Australia and our steady and strong sales team up there representing Lark on the road and building relationships with retailers and venues will be a key part of our revenue growth in FY '23. Our positioning as Australia's preeminent luxury whisky continues to be a focus and we will continue to report creative the targeted marketing programs to facilitate brand awareness and increase sales. And while we don't talk a lot about Forty Spotted Gin, but I think this is the first time I perhaps have mentioned that there is an opportunity for Forty Spotted in the domestic market and also internationally. To capture that opportunity, we've created a dedicated team within Lark focused on Forty Spotted, and we look forward to developing those opportunities and the obvious growth that will come out of that expansion process. So fair to say, there's a lot going on. We're super excited. At Lark, there are many issues underway and there's just great participation and focus of the team on building a brand that is so well recognized in Australia and globally. We really are at the forefront of Australian luxury whisky, and we're focused on maintaining that by building the brand, pushing up across the domestic market, and then growing sustainably into export markets, using that whisky bank that we've created and will continue to build upon. FY '22 has been a volatile year for the drinks category, but we have demonstrated, through our innovation, through our agility, that Lark and the Lark team are very capable of moving through complexity and delivering our results. So congratulations to everyone at the Lark team. You've done an amazing job. And thank you, to you, all our shareholders, for your continuing support. Sam, I'll hand back to you.

Yes. Thanks very much, Laura, and thanks, Alex. First question coming in just on The Still. Can you just give an update around any estimated costs and any additional color on time line, please?

Yes. So we've been working with, obviously, Council and Heritage Tasmania to ensure that they are comfortable and satisfied that this site has met their major requirements. We're 95% through that, awaiting the last few bits of paperwork to come through. Once that is submitted, it'll obviously be in the hands of those authorities as they process that application. But in doing so, obviously, we'll be careful to make the site sustainable and obviously keeping in line with the cost structure that we originally identified. So once we even up on the design phase, we will come back with more concrete and finalized budget number for the actual build itself. But yes, so we're comfortable with where we are at the moment.

Next question just on limited releases. Can you please talk to the success during the year, particularly the anniversary products including views into '23?

Yes. So I think the big standouts have been, as I've already mentioned, Dark Lark has been an amazing success in our limited release, selling through well ahead of our forecast expectations. Glenfarclas, the Lark x Glenfarclas product has been really strong also, as well as the [indiscernible] at the beginning of the year. We launched Legacy in March, April this year, and that was part of the bigger releases we've done of Legacy, and we've seen some strong results. So all of them have targeted different consumers and different frameworks that we've been, as I said before, targeting that different consumer base is really important as we build the portfolio and taking those learnings into FY '23. So this year, we'll be doing more -- higher-range products will be obviously smaller in sales, so we create lots of demand; and products like Dark Lark range, which is targeted at that $250 plus point, will be to a broader range of consumers. It's obviously a bigger product. Christmas Cask is obviously kind of that are one of that big releases and obviously been very successful in the past. We also have a couple of very limited and special drops into the future, and most recently, we've released the Wolf Release V, which has seen some great results already. So we're really pleased with that limited release program, but it's fair to say it probably won't be as big as it's been in Q2 last year, but that's sort of now is growing up. And what we've learned is that being disciplined with [indiscernible] overall, investing in the marketing campaigns across a targeted product, it's going to make a lot more steps for us into the future and success.