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

Good morning, all. My name is Domenic Panaccio and as Chair of LARK Distilling Company, it is my pleasure to welcome you to the company's 2024 Annual General Meeting. I would like to start 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 that 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 open. I am joined today by my fellow directors, David Dearie and Stuart Gregor. Warren Randall is currently in transit, and we hope that he will be able to join the meeting shortly. Also in attendance is our Chief Executive Officer, Sash Sharma; our Chief Financial Officer, Ian Short; and Company Secretary, Melanie Leydin. In addition, we have Billy Chan from the company's external auditors, RSM, in attendance at this meeting. The notice of 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 by our CEO, Sash, 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'm now pleased to present my annual Chair address for 2024. While the past financial year presented macro challenges, including a difficult economic and market landscape, we are pleased that the company has made significant progress in several areas. Importantly, the organization is now rightsized with operational efficiencies contributing to operating cost and cash savings. We have seen exciting green shoots in the crucial direct export and GTR channels. More recently, in the domestic market, we transitioned to a new distribution partnership for the B2B channel with Spirits Platform, Australia's leading independent spirits distributor. Significant progress is being made on the LARK brand restage by both marketing and production to deliver against the growth potential of the brand, while work is currently underway for the sale of our Bothwell site and the modest modular development of Pontville as we transition this distillery into being the long-term home of LARK. These developments across the business set a strong foundation for LARK's future success. Importantly, Sash and the team have good operating momentum, which has continued into the first quarter of this financial year and are executing against the company's strategic priorities, namely focusing on building long-term brand value, delivering international sales momentum and maintaining our domestic leadership position and underpinning these priorities with cash and capital discipline. The strategic partnership with Sepplesfield Wines is an exciting and strategically important milestone for LARK, providing long-term surety on continuity of supply of the highest quality barrels, which are so critical to whiskey making. allowing us to build a long-term wood program and stock planning for commercial delivery with confidence. The successful equity raising of $25 million in the last quarter, supported by very strong demand from our retail shareholders under the share purchase plan provides LARK with the capital to allow us to drive growth and accelerate investment in brand marketing and international expansion. This is, of course, within a framework of disciplined capital management, ensuring our investments deliver long-term value. As we look ahead to this financial year, the Board and the executive team are excited about the LARK brand restage, which is progressing well and the ongoing development at Pontville. On 1st of October, we were pleased to welcome Stuart Gregor to the LARK Board at the time the company positions itself for its next phase of growth. Stuart's deep and long industry experience working with many of the world's most successful drinks businesses will be invaluable for LARK. I would like to take this opportunity to again thank Laura McVain, who stepped down from the Board on 1st of October for the support she has provided me as Chair and her contribution to the business, both as a nonexecutive and as an executive, reflecting high levels of commitment, dedication and commercial acumen, and we wish her all the best with her future endeavors. I would also like to thank all LARK employees for their dedication, passion and commitment to LARK and acknowledge and thank all of you as my fellow LARK shareholders. The Board and executive of LARK are very appreciative for the strong support received for our equity raising and at our recent AGM, and we look forward to continuing our journey of making LARK a leader in new World whiskey. I would like now to welcome our CEO, Sash Sharma, to address the meeting.

Thanks, Tom. Good morning, everyone. Thank you for joining us today for our FY '24 AGM. FY '24 was an important year for LARK. Today, I'll cover off some of the operational and financial highlights, including our strategic partnership with Sepplesfield and the related equity raising, along with our recent September quarter trading update. Moving to the next slide. Our ambition is to make LARK a leader in new World whiskey. You've heard this from me before, and it won't be the last time. This is an ambition the entire LARK team is energized by committed to and are progressing with making a reality. As we move to the next slide, which shows our FY '24. Net sales revenue was $14 million for FY '24, which was down $3.1 million against last year. This was due to cycling of older limited releases and a slowdown in the legacy Chinese indirect export channel, both of which were previously called out to the market as we reset the business for sustained revenue growth. Pleasingly, we again saw positive performance on the core LARK Signature range, up 11% on FY '23. Gross margins were 68%, down very slightly on FY '23 due to channel and product mix. Importantly, disciplined cost control has delivered savings in operating and overhead costs despite the ongoing inflationary environment in which we operate. Together, this resulted in an operating EBITDA loss of $2.8 million. Moving to our balance sheet. As at 30 June '24, pre our recent equity raise, we had $2.4 million of cash and $15 million undrawn committed bank facility in place at January 28. I'll cover shortly our position as at 30th September post the recent equity raise. Our high-quality whiskey bank increased slightly to 2.5 million liters during FY '24, underwriting future sales growth. Very exciting progress was made in Asia with distribution agreements concluded in Indonesia, Singapore, Malaysia and Philippines and shipments taking place in half 2. And pleasingly, our GTR business achieved sales of $1.1 million in FY '24. Moving to the next slide. The importance of casks can't be underestimated in the whiskey making process. As new Make Spirit is placed in a cask, the cask and spirit interact over time with the wood providing flavors, colors and aromas to the whiskey while also removing unwanted traits. We believe more than 60% of LARK's whiskey product character is influenced by this interaction. The strategic partnership with Sepplesfield will secure access to premium oak barrels for LARK, providing certainty over LARK's future maturation requirements. Sepplesfield was established in 1851, matures over 6,000 barrels of Port and sherry, including the longest unbroken lineage of single vintage [indiscernible] in the world, making it the largest repository of premium fortified wine and caskst in Australia. It's for this reason Sepplesfield is referred to as Australia's premium fortified house. The continuity of supply of the highest quality casks creates a competitive advantage for LARK and is one where there are notable precedents internationally, including with the #1 single malt in the world, McCallen. Off the back of the strategic partnership with Sepplesfield and related equity raise announced on 29th July, we successfully raised $25 million comprising a $15 million placement approved at the EGM on 30th of August, a $6.5 million institutional placement and a heavily oversubscribed by over 5x share purchase plan that raised $3.5 million. The proceeds from the equity raise provide LARK with the balance sheet flexibility to be used to invest in brands and facility. Brand and marketing investment will be targeted at restaging the brand to drive increased cut-through as a differentiated luxury whiskey brand, along with upweighted investments in key markets and channels. Capital investment will be allocated for further development of the Pontville site, which will see increased production and storage capacity, along with enhancements to the Lark Cellador offering in [check]r. And working capital will be used for general corporate costs, including future inventory lay down through to operating cash flow breakeven in FY '27. I'm excited by the strong capital position we find ourselves in post the conclusion of the equity raise. As I said at our FY '24 results, we've had a clear signal from our shareholders that they back our strategy, our teams and our ambition to become a leader in New World whiskey. We can now get on with executing and accelerating that vision. If we move to the next slide. We shared our strategic priorities with the market at our Investor Day in October '23 in [Hobart]. These priorities remain unchanged, and they remain core to our ongoing growth plans. We're pleased with the progress we've made against each of these strategic priorities, which I'll share with you now as we go to the next slide. Our first strategic priority is to create long-term brand value by establishing LARK as a globally recognized and differentiated luxury whiskey brand. LARK continues to make progress as it takes its place as a leader in New World Whiskey as evidenced by winning many prestigious awards, a testament to the quality of our whiskey and the hard work of our entire team from production through to sales and marketing. I'll also cover our portfolio restage and the appointment of our creative design agency shortly. Our second strategic priority is to create international sales momentum and cement our domestic leadership position by creating repeatable, diversified revenue streams across markets and channels. We made tangible and exciting progress with the execution of our Asian distribution agreements and sales took place to these markets in half 2 and into the first quarter of FY '25. We continue to see strong growth in GTR with sales of $1.1 million and domestically, our core range continued to perform. We appointed Spirits Platform, Australia's leading independent spirits distributor as an exclusive domestic partner from the 1st of August. Our third strategic priority is cash and capital discipline as we prioritize cash generation and ensure we're measured in our capital deployment decisions. Post the recent equity raise, our cash position was 2.5 -- sorry, $25.6 million at 30th of September. Given our strong cash position, we also took the opportunity to reduce our committed bank facility from $15 million to $5 million during October. We've now embedded cost and capital disciplines within our business, and we'll deploy new capital against targeted and value-accretive work streams. This includes a clear road map with respect to our stable of assets. Importantly, we believe that successful execution of these strategic priorities will create long-term and sustainable shareholder value. Moving to the next slide. The size and quality of our whiskey bank is a competitive advantage for LARK, supporting long-term growth plans by underwriting future sales. LARKs whiskey under maturation at year-end was 2.5 million liters at 43% ABV with a book value at cost of $57.7 million. As Ian covered off in our FY '24 results, the scale of our whiskey bank has allowed us to optimize production and more closely align to current sales with the size of the bank increasing only modestly over the last 12 months. When looking at the profile of the whiskey bank, it's important to consider various factors in our stock model, including ensuring continuity of supply of different whiskey profiles to support our planned growth. This profile of the whiskey bank means we have sufficient volume of mature whiskey in the short term to meet growth aspirations and have future availability of mature whiskey to support planned acceleration andexport growth. This also includes -- this also provides us with the flexibility to consider age statements as we move into the future. The ongoing work in relation to the brand stage -- brand restage forms a critical part of our stock modeling to align current and future inventory against portfolio to ensure continuity as well as optimal commercialization of the whiskey bank as we deliver against our strategic brand and sales priorities. Turning to the next slide, where I'll cover off the brand restage and our growth plans. If we move to the next slide, we first talked about our LARK brand restage at our Investor Day last October for delivery at the end of FY '25. Great brands don't materially change year-on-year. The foundations must be set right and done once, meaning this is one of the most significant steps in brand evolution we will take in the history of this company. Working with our creative partners, the highly credentialed team at LARK [Love Design], our restage has 6 key phases, which are set out on this slide. Positioning. We're building a globally differentiated luxury brand, proud of our past, but excited by the possibilities of the future. To date, we have been a domestic brand, and we need to appeal to a global audience. We're unpacking the key attributes and hooks that will resonate globally. Next, portfolio. This means creating an easy-to-navigate portfolio for consumers. With the absence of age statements, we must allow consumers to understand how to go up and down our spine of products as well as ensuring they are suitable for consumer occasions across markets. In addition, we will have a clear innovation pipeline, which is accretive to the master brand. Products. To complement our portfolio thinking, price points will be considered as part of our hierarchy. We will transition to 700 ml bottles initially to export markets. Our oat program supported by our [Seplesville] partnership will create a competitive advantage, allowing for a clear and repeatable portfolio of products. We'll also be able to assess our aging needs into the longer term. Turning to the next slide. This slide sets out our growth plan. It also remains unchanged. To recap, it's broken into 3 distinct phases. In the first phase, which we have already commenced executing against, and I'll cover in more detail on the next slide, represents the next 3 to 4 years. We're establishing our beachheads. In the second phase, it's all about building on and embedding foundations. And as we look to Phase 3, we'll accelerate sales and brand equity. Together, this growth plan will see LARK achieve its ambition of becoming a leader in New World whiskey. As we move to the next slide, this is our scorecard for Phase 1. For FY '24, we've added a column on the far right-hand side to capture and report against our KPIs. For our first strategic priority, build long-term brand value, the LARK brand restage has commenced and is on track for launch at the end of FY '25. For our second strategic priority, international sales momentum and domestic leadership position, we have taken positive steps and there is good momentum against all KPIs. We've got the distribution agreements in Southeast Asia with sales of $0.9 million in half 2 and with activation plans to drive depletions in FY '25. GTR delivered sales of $1.1 million in FY '24 and is proving positive as we move into FY '25. Domestically, we've now transitioned our B2B business to Spirits platform. For our third strategic priority of cash and capital discipline, our balance sheet is strong. We have $25.6 million cash at bank as at 30th September. We have a $5 million committed bank facility in January '28. We've made the decision to divest our [Bovill] distillery, and we remain committed to positive operating cash flows during the FY '27 period. If we turn to the next slide, and I'll quickly cover off our September quarter trading update. Next slide, please. Operationally, our first quarter sales of $3.4 million were up 7% versus PCP and broadly in line with our previous quarter. In the domestic B2B market, we made the transition to Spirit's platform as a domestic distribution partner on the 1st of August with a smooth change in trade and work is ongoing to deliver a growth plan given the step change in commercial coverage. Our D2C business had a strong quarter, up $0.3 million versus PCP, driven by Father's Day gifting period with personalized classic casks and hospitality venues doing well. Our GTR business continued its good performance with sales up 12% versus PCP. On the direct export side, we cycled $0.1 million of indirect export sales in the PCP and recorded a planned $0.2 million reorder shipment to Indonesia. We continue to work closely with our Asian distribution partners for launch events to build awareness, both with the trade and direct consumers as well as to build distribution. As we announced at the time of the equity raise, we will move to Pontville, making it the focus of our operations and our new home, one which is reflective of Australia's #1 luxury single malt whiskey and a future global whiskey icon. We've made good progress in planning for the modest modular transition from our Cambridge distillery to our Pontville site. The transition will see key equipment and processes transferred, providing continuity of new make house style for our award-winning whiskey. Our exciting brand restage is continuing well and will support our global expansion ambitions, positioning Tasmania as the epicenter of New World Whiskey with LARK as its differentiated leader. As I mentioned earlier, we expect this to go live by the conclusion of FY '25. I've already covered off our cash and undrawn debt facilities as at 30th September and the intention with respect to [Bothwell], which the sales campaign commenced last month. Finally, if I move to the next slide. Before I hand back to Tom, let me just touch on some items for FY '25 perspective. Trading conditions continue to be challenging. Consumers remain cautious set against the backdrop of persistent domestic inflation. We remain focused on executing against our strategic priorities. And pleasingly, we've maintained good operating momentum from the second half of FY '24 into the first [indiscernible]. Our first strategic priority around building long-term brand value is focused around the brand restage, which is progressing well. In the short term, we will increase our advertising and promotion reinvestment rates to support our Asian export business to build awareness for the brand of LARK. For our second strategic priority, international sales momentum and domestic leadership position, net sales are projected to grow despite the introduction of a distributor structure domestically. This is weighted to the second half and underpinned by export, GTR, D2C and Whiskey Club sales. For our third strategic priority, we will continue to exercise cash and capital discipline while utilizing the proceeds of the equity raise. This includes the decision to divest the [Bothwell] Distillery. That concludes my presentation today. I want to say a big thank you for all your continued support, and I'll now hand back to Don.

Thank you, Sash. I notice that Warren Randall has now joined the meeting. So welcome, Warren. And now we're going to move into the formal part of the meeting, and I'd like to hand over to our Company Secretary, who will go through the Q&A and voting procedure for today's meeting.

Brilliant. Thanks, Dom. For those of you attending the meeting in person, when you registered this morning, you are issued with an attendance card. All shareholders, proxy holders and authorized corporate representatives who are entitled to vote were issued with a yellow voting card. Shareholders who are not voting were issued a green card. White cards indicate a visitor and this is a reminder that whilst we welcome you at this meeting, it is a shareholders' meeting, and you may not comment or ask questions. If any present is entitled to vote and does not have a yellow voting card, please see one of the team members at the registration desk. If I call upon you, please raise your yellow voting or green nonvoting admission card prior to speaking to identify yourself as a shareholder. If you're acting as a proxy, please state clearly who you are appointed to represent when introducing yourself to the meeting. For our online shareholders, if you are a shareholder, proxy holder or authorized corporate representative who is attending this meeting virtually and wish to ask questions 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 the meeting virtually and you wish to speak and ask a question, an audio questions facility is available during this meeting, and please follow the instructions that are now displayed on your screen. In accordance with the Corporations Act, a poll will 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 proxy 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 poll voting instructions displayed on the screen. For shareholders attending in person, please complete and submit your yellow voting card to one of the team members here in the meeting room. Thanks, Dom.

Okay. All right. I 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 2024. These items are contained in the company's 2024 annual report, so I 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 and the independence of the auditor. So I'll just take a pause to see if there's any questions that need to be addressed by the auditor.

So nothing in the room, Dom, nothing online.

Okay. 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 2024. The remuneration report is set out in the directors' report in the company's 2024 annual report. The vote on this resolution is advisory only and does not bind the directors or the company. The following percentage of proxies have been received for Resolution 1 as displayed on the screen. I move that shareholders consider and if thought fit, pass this resolution. I now refer you to Resolution 2, which relates to the election of Stuart Gregor as Director of the company. Stuart's profile has been provided in the Notice of Meeting. I now invite Stuart to comment on his election.

Thanks, Dom. Just by way of introduction to those who don't know me, the shareholders in the room and online, I'm thrilled to be standing for election as a Nonexecutive Director of LARK. For those who don't know, my last September, I finished up working at the Four Pillars Distillery based in Healesville in Victoria, where I was Co-Founder of the business and the Lead Commercial Director and Co-CEO for the duration from 2013 to the end of 2023. Four Pillars sold the second and final tranche of its business to Global Drinks Giant Lion in July of last year, and I stayed an extra 2 months and left the business in September 2023. Whilst at Four Pillars, I also was lucky enough to chair the Australian Distillers Association for 8 years. That's a peak industry body for Australian distillers. And interestingly, I took the reins of that organization from none other than Bill Lark. And then further serendity, and I think it's something that aligns me even more to this particular business is that in May of last year, I was lucky enough to be installed in the Australian Distillers Hall of Fame alongside Lynn Lark as the fifth and sixth inductees to Australian distilling Hall of Fame. So my connections to this business and the family run deep. I would hope that I can add some value to the LARK team here with my experience in growing the Australian Spirit brand to become a global leader, both in reputation and commercial success. Over my decade at 4 pillars, I worked closely with distribution partners, some of whom are the same in important markets as LARK across about 30-odd international markets as well as the global travel retail sector as GTR as it's been referred to today. LARK has enormous potential as a global whiskey brand. I hope I can help Sash and the team realize its fullest extent. I think the distilling team led by Chris is clearly the finest in this country, and I think Sash might well be the best leader of the business in this sector. It's a very exciting time. I look forward to contributing on this Board, and I hope that I can share a [gram of great luck] whiskey with as many shareholders as possible over the next few years. So back to you, Mr. Chairman.

Thank you, Stuart. Okay. So the following percentages of proxies have been received to Resolution 2 as displayed on the screen. I move that the shareholders consider and, if thought fit, pass this ordinary resolution. I now refer you to Resolution 3, which relates to the reelection of Mr. David Dearie as Director of the company. David's profile has been provided in the Notice of Meeting. I now invite David to comment on his reelection.

Thanks, Domenic, and good morning, fellow shareholders. It's with enthusiasm for the future and respect for the past that I stand before you seeking reelection to perform my duties as a Non-Executive Director for LARK. My experience with LARK started in 2019, and it's been an honor to have served LARK as both the Chair and Non-Executive Director during this period. The company has been through many changes. We've had some challenging times and some extraordinary successes. I'm confident that the current leadership will deliver on our vision and our strategic plan. And although the global and domestic beverage alcohol is facing challenges, I'm excited by the long-term growth prospects for LARK, particularly for the growth in the luxury whiskey category where LARK is extremely well positioned and credential. With Sash, we have an exceptional leader complemented by his professional and talented executive team. Their vision, strategy, detailed planning and superb execution will ensure LARK and [indiscernible] have every opportunity to compete and to win in the marketplace, both domestically and in the export channels. The company has a balanced and experienced Board to support these plans. Dominic and I managed a smooth transition earlier this year as we switched Ned and Chair of seats. And the addition, as you just heard from Stuart, as Ned brings a wonderful brand building and route-to-market skills to support the company. I believe I continue to offer the company skills in exports, premiumization, beverage sector experience and relationship. And this combined with my recent company knowledge and the continuity I bring to the Board and the executive team. During the past 40 years, I performed several executive and Board roles in the whiskey and wine sector, living and working in 4 continents and in some 10 countries. I understand the sector. I have worldwide relationships and connections that I utilize to support the growth of LARK. And I'm super excited to offer my services for reelection as a Nonexecutive Director of LARK, and thank you for considering my reelection. Back to you, Dominic.

Thank you, David. The following percentage of proxies have been received for Resolution 3 as displayed on the 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 our Company Secretary, Melanie to conduct this resolution.

Thank you, Don. I now refer to Resolution 4, which seeks approval of the proposed issue of shares to Mr. Dominic [Panaccio] or his nominee. The following percentage of proxies have been received for Resolution 4 and this is displayed on the screen. I move that shareholders consider and if thought fit, pass the ordinary resolution. Dom I'll hand back to you.

Okay. Thank you, Melanie. I now refer to the final item of business, Resolution 5, a special resolution, which pertains to the amendments in the company's constitution. As this resolution is a special resolution, it requires 75% of votes cast to be in favor in order to be deemed as passed. The following percentage of proxies have been received for resolution 4 as displayed on the screen. I move that shareholders consider and if thought fit, pass this special resolution. We will now address shareholder questions from anyone participating online or in person today. Does any shareholder have any questions on any items of business or on the company's operations?

Thanks, Dom. So we might first go to questions in the room, and then we'll go to questions online. Any questions in the room? Proxy question coming through. We'll go to one online. And I think, Sash, you addressed this in your presentation as well. It's just with reference to the cash flow, $100,000 negative per week. How is the company going to get cash flow positive so shareholders can get some dividends?

Yes. I think -- I mean, we did cover that. We are in a stage of delivering against our 3 key strategic priorities, and it's about growth. A lot of that cash flow is going into reinvestment of the brand and advertising and promotional spend and also obviously expanding into new markets, building awareness of a category. So from my perspective, it is about delivering against that long-term ambition. I should probably say it's important that we call out, we will be reinvesting in the business. First and foremost, we believe we've got sufficient streams of opportunity that will accrete greater value as we grow the brand. So we have plenty to invest behind to grow against those key 3 strategic priorities.

Thanks, Sash. Look, there's no other questions online, and there's none through the audio facility. Just checking in the room again, any further questions. Dom, you may move to the next section.

Okay. So ladies and gentlemen, this concludes our Q&A session for the formal part of this meeting. We will now provide shareholders with an additional 30 seconds for poll voting to be completed. Thanks, Dom. And for those in the room, we'll have Michael collect the poll voting... [voting] As the additional time is up, I now declare the poll closed.

The company has not received notice of any other business. That concludes the formal business of today's meeting. This brings today's Annual General Meeting to an end, and I now declare the meeting closed. After the votes have been counted, the results of the poll will be released to the ASX later today. Thank you for your attendance, and we look forward to your continued support. Thank you. Thank you, John. And for those online, we will now close the webinar.