The Artisanal Spirits Company plc (ART) Earnings Call Transcript & Summary

Thank you very much all for coming along and joining us this morning. I'll start by introducing myself, again, for those of you I haven't met. I'm Andrew Dane, and I'm the Chief Exec, but also joined by my colleague, Billy McCarter here, who, as of 6 weeks ago, is our interim FD, having joined the business last year after a significant period of time at Diageo and others, and he's been a brilliant addition to the team. So you'll get to hear from Billy and also get to chat afterwards for those of you who haven't got to say hello. Yes. So tracking on. It's been another really good set of results. So I would characterize it as very positive and a strong year of delivery. So before we get into the actual -- those, I just thought I would just remind you of the basic principle of The Artisanal Spirits Company. We're about creating and selling outstanding limited edition whiskies around the world. And we primarily do that through the Scotch Malt Whisky Society. Scotch Malt Whisky Society turns 40 this year, and it's a global direct-to-consumer premium e-commerce business, selling those outstanding limited edition whiskies to a fee-paying membership around the world. We buy the casks from a wide range of distilleries. We're not a principal producer, but we own and mature those casks, about 16,500 casks now, to create our own flavors. We bottle those with our new facility that's opened and sell them under our own brand. And we sell those exclusively to our members, but we're about more than just the outstanding liquid. We're about the experience that goes with that. So whether that be the experience of drinking a bottle at home on your own or with friends joining us for an event or going to one of the venues across the U.K. or partner bars around the world, it's about the experience that goes with that. So that's who we are. And everything -- I won't go through this because many of you have seen it before, but everything we talk about today is delivered as part of our strategic framework, which is anchored around that purpose: captivating a global community of whisky adventurers by revealing the magic of our outstanding whisky. And everything we do aligns with that, and how I talk today, you will see how it fits within the strategic framework that we, as a business, keep anchoring back to. So without further ado, some of the results. So again, it was a strong year, with positive performance both from a financial and strategic perspective. So from a financial perspective, double-digit revenue and membership growth, expanding margins, helping to deliver growth in profit and our path to profitability and underpinned by that fantastic asset backing. So revenue growth of almost 20%, with increasing gross margin helping to deliver 23% gross profit growth, all of those being on or slightly ahead of expectations for this stage. And the net effect of that being an extra GBP 1 million worth of adjusted EBITDA, and that's the equivalent to around about 30% EBITDA margin on that incremental revenue. Alongside that, double-digit membership growth around the world, particular callouts in some markets such as Europe as we settled post Brexit and the U.S. and pleasingly continuing that high level of loyalty and retention, which supports that fantastic lifetime value that Billy will talk to shortly. And remembering on the third side that the business has this substantial appreciating asset backing. 16,500 casks that also gives us a great inflation hedge because we already own everything we plan to sell through to the end of 2028 and most of what we're going to sell over the next decade. So it gives us that great inflation hedge, too. Okay. So I'll now hand over to Billy to bring the revenue results to life a little bit more.

Yes. Thank you, Andrew. Hi, everyone. My first presentation for ASC, so welcome today. A little bit about me. So my background fits in well with ASC. So I've worked for Diageo -- [indiscernible] Diageo, worked at least 4 or 5 years in the whisky side of that business. I've also, outside Diageo, worked for some smaller businesses. So there's a good mix there that I've been to the scene. As Andrew said, been here a year and has gone fantastically well. So the results, what [indiscernible] you've seen. Andrew has called out a fantastic growing revenue. I think the key thing on here is you can see we are well diversified. We're globally diversified. We have ups in all areas. Particular momentum, I'd like to call out is U.K., specifically venues and events. They've really recovered well in COVID. They've also seen a relatively strong start to the year. So that's massively pleasing for us. China, fantastic year, up 28%. That is in what simply was a COVID lockdown in the last year. So it's a fantastic return in that sense. But I think the key thing here is we've delivered to plan. We've hit our consensus revenue expectation, and we are globally diversified, and we'll continue that way. So I'll get this working. What that, therefore, leads to is a strong P&L. So some key callouts here. We're delivering profit. We are meeting expectations delivering profits. So from that revenue growth, we've delivered a gross profit increase, so that's up 2.1 percentage points, which was fantastic, and that's feeding through to the bottom line. So in an adjusted EBITDA level, we [ hit on here ] GBP 1 million better off. So that is the gross profit delivery. Also as we start to mature, particularly in our payroll base, as our sales go and [indiscernible], our payroll no longer [indiscernible]. So we start to [ eat ] more of the EBITDA benefits from that. So really positive performance in that degree. The key thing is -- and we'll comment is we're also continuing to invest to meet the future. So we hit that GBP 30 million sales number going forward. I won't spend too long on this. It's a table full of numbers, and it's there. But I think the key thing for us here is this isn't necessarily a KPI that we set to necessarily say we were -- how would we say it? It's an idea of whether we're meeting our membership's needs. So on this slide, you can see year-end members up, average members up. Revenue per average member roughly flat and contribution per member. The key thing for us is if we can directionally hit these KPIs each year, then we have true belief that our members will help deliver the growth that we require or that we all want, including our members. So it's giving the members what they want and analyzing this to understand are we on the right track. And at this point in time, given the results, I believe we are. And then our balance sheet and our cash flow. I think the key point when it comes to balance sheet we all appreciate is that we have an appreciating asset. We have debt back against that appreciating asset. We have a strong net asset base of GBP 22 million. We have a strong partnership with RBS in terms of our revolving credit facility because of that cash holding now sitting at over GBP 23 million. So again, back to the investment, we truly believe we have the funds and investment to deliver the growth expected in the next few years to that GBP 30 million. Andrew?

Okay. Thanks so much. So that's from a financial delivery perspective, but we've also made good strategic progress against our objectives. And again, I'm not going to walk through this, but this anchors against the framework we talked about earlier: pioneering model, well placed to take advantage of long-term global growth opportunity, and we as a business are robust and primed to deliver. And that's the setting against which we'll talk about in the next 3 areas. So a reminder of that pioneering model and the progress that we are making. So we set out before, we have horizontal and vertical integration. So we are procuring that spirit directly from the distillers, and we are moving those costs down. Almost half of the casks we own now were purchased when they were less than 3 years old. That allows us to capture much more of its value. We're making good progress on our path to more ex-sherry cask, which drives up value on those products. Around about 1/3 of our products are going to be in that space with an extra 10% price premium. And that bringing in-house of the bottling, again, locking in a great element of our cost base. But it's really the fact that we can take the spirit all the way from the distiller right through to the member's door through our DTC model that allows us to capture the full value. I've talked to this before, but I will just point out 3 things again. From a margin perspective, on a like-for-like basis, we generate substantially more margin than some wonderful businesses. I mean Diageo, Pernod, Brown-Forman are fantastic businesses, but on a like-for-like margin perspective, we're generating substantially higher margin. But in contrast, the book value of our maturing stock represents a significant element of our market cap. That's the purchase price of that spirit, not its current value, which is substantially higher, but the purchase price that we paid for that liquid and depends almost 40% of our market cap. And then finally, from a premiumization perspective, talk in a moment about the trend towards premiumization, this shows just how well placed we are to take advantage of that. Diageo noted that about 1/4 of their business is in the super-premium space now, and that's the bit that's growing strong. It's over 30% growth in the results at the tail end of last year. 100% of what we sell is in that space. So well placed to take advantage of the premiumization trend. I won't go through these slides. They're there for you, but they just remind you of the quality, depth of that SMWS model around exclusive limited edition, award-winning products delivered to members as part of a wider experience that those members love, and that's both a physical experience with the member rooms and across the U.K., Edinburgh, Glasgow and London as well as events and the digital engagement that we have with our members across websites, content production and filtered magazine, et cetera. So the second topic is around that long-term global growth opportunity. Again, these are still based on the 2021 IWSR data as the latest, and first, we'll update these in due course. But for now, $7.6 billion is the size of the ultra-premium Scotch whisky market worldwide, and that's been growing at 10% CAGR, and it's grown even faster in recent periods. That's much faster than the growth rates for the lower price points, showing that premiumization trend. And importantly, of that $7.6 billion, the vast majority is in markets which we are already present in. So this is the element of markets where we already have a footprint in, with the lion's share being in a small number of markets, so we can deliver against that opportunity by focusing in a small number of markets. We don't have to spread ourselves super thin to be able to get to that. And that's a fast-growth market. Even in markets you might consider to be mature like the U.K., we've seen 250% growth in the U.K. in the last 10 years because while the U.K. overall Scotch sector may be considered mature, the premiumization trend, which is where we play, is driving people into our spaces. People trade up and buy better. And then the final element will be in a robust business primed to deliver. And part of that is being underpinned by the high-margin model. So bring it to life on a per bottle basis, our average selling price ex VAT last year was around about GBP 100, meaning we're generating about GBP 64 of gross profit per bottle sold. We have a number of initiatives to drive that up, both by increasing revenue and by reducing costs. I'll talk you through them in a second. But hopefully, we're going to get a video to work, fingers crossed. [Presentation]

So the bottling and cask storage is well underway. And the final stage of launch, which is the order fulfillment element, is in the process of transitioning across in the coming weeks and months to really drive margin there as well as getting greater operational control of this key area for the business. And we're already seeing some of the advantages of that, which has been great. So that takes us across our 3 key margin improvement initiatives. Masterton Bond now materially operationally delivered, and we'll start to see the margin improvement of that coming through. In the medium term, more of these ex-sherry casks, which drives up sales price and margin on those bottles. In simple terms, it means buying more ex-sherry casks. We work with the bodegas, maturing the whisky in those casks. It gives the whisky a flavor profile that members love, and they're willing to pay a further premium price for typically around about 10% price uplift for something that's been in an ex-sherry cask. And then finally, the long-term margin improvement that comes from moving from bottling product, which we bought when it was mature, to bottling product, which we bought as new make or young spirit that, we think, can add around about 5 percentage points on to margin over time. And that's without the effective inflation. That's purely about the appreciation of the asset, not the inflation of it. Billy, do you want to talk to this?

Yes. I mentioned debt level, our appreciating asset. And this is ultimately to bring to life what that allows us to do and how strong our financials are. So I mean I'll just quickly go down at retail value. You'll see that quoted. Essentially, every cask we own has a number of liters in it. Those number of liters make so many 70 cl bottles, and those bottles [ surplus set ] in price. If we stop today and decide to sell all of them, that's nearly GBP 500 million of revenue. That clearly is not a fix anywhere because we can't do that. But what we do have on our books is our net book value. So all our stock is GBP 28 million. I'm not sure if certain people are aware, but that value gets a broker value uplift in the RCF facility with the bank. So even that it's low, so about GBP 28 million, but at a value level, if we were to sell that as brokered casks, we get at least GBP 35 million. So it shows the strength of our balance sheet that that's there. And what that allows us to do is utilize this RCF facility. So as you have seen at the end of December last year, our RCF limit was increased to GBP 18.5 million to GBP 21.5 million to give us that further headroom and risk mitigation going forward, essentially. Just that strong asset-backed balance sheet allows us the opportunity to invest. And that's what we have in the last few years, and we'll continue to hit the numbers.

[ Thanks. Which ] is always delivered by the team. We have a wonderful team both at Board, management and across the wider business, who are highly engaged in delivering our success, and they continue to be very supportive of us as we continue to grow and develop, and we'll continue to make investments in that team as appropriate. So to close out, talk about current trading and outlook. So overall, revenue for the start of this year is broadly flat year-on-year. Now to be clear, that profile is in line with our expectations for growth. So we still maintain full confidence in our ability to deliver full year revenue growth for 2023. In Q1, we saw very strong growth in U.K., in particular, the venues that Billy talked about there. We had an all-time record month in December 2022 in our venues, and that's been followed by our best-ever January and our best-ever February in venue. So they've been performing really very well as well as continued growth in the EU, where we talked about great momentum there in 2022. Again, we've continued to see that. And interestingly, those 2 markets might be the ones that you'd most assume be impacted by cost of living and those other effects. Those are our callouts as the most positive markets we're seeing. China, we did see some particular impact of COVID. So in 2022, we saw the impact of restrictions and lockdowns, which eased at the tail end of last year. We then have the impact of the actual disease as it's spread throughout China at the tail end of last year and, particularly, the early few weeks of this year. We are definitely seeing that passing, and particularly into March, we're seeing that growth returning to the kind of levels that, again, gives us confidence in our ability to deliver full year. So really, that comment is around the early few weeks of the year. Continued membership growth, up 10% year-on-year. Change in leadership as well as the launch of Masterton Bond gives us a good warm feeling about the start of this year and continued confidence in our ability to deliver full year results. And what can you expect for the rest of the year: continued progress on this path. I love this graph, keep coming back and filling in the blocks. So another block in our path to delivering GBP 30 million of revenue next year. We've delivered everything we said we would do so far and are on track to hit that target. Benefits of Masterton Bond, continued investment in IT and technology spend as we grow, and we want to accelerate that growth even further. The other thing that I'll just pause and comment on here is around the American whiskey, where we said we would give an update on our approach there. And overall, the headline is we continue to believe there's a fantastic opportunity in the American whiskey space, but we want to make sure we take the time to get the right approach to that market. So if we look at our opportunity in North America more broadly across growth in the Scotch Malt Whisky Society in America, the opportunity for J.G. Thomson, as it does its first exports into the market as well as an opportunity, specifically in the American whiskey, to take. I think there's an opportunity to pause and just make sure we take the right approach to that overall fantastic opportunity for America. So that's the reflection of where we are just now. And it's why we continue to be excited about the opportunity, but we're not here at this stage saying, here it is, it's offering its life. Hope that makes sense. Thank you very much all for coming. As I say, really pleased with another strong year of delivery. And to see that revenue membership profitable growth, I'm really pleased and standing here with confidence in our ability to continue to deliver and hit our forecast ambition. So thank you very much all for your time and thanks again.