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

Morning, all. Here to talk about the 6 months results through June. I am Andrew Dane, Chief Exec, joined here by Billy. And we're going to talk about The Artisanal Spirits Company's results. And just as a reminder, Artisanal Spirits Company creates and sells outstanding limited edition whiskeys and experiences around the world. We primarily do that through the Scotch Malt Whisky Society, which is a global direct-to-consumer, premium e-commerce business, selling limited edition whiskeys exclusively to a fee-paying membership of almost 40,000 now. We procure casks from the distillery. We're not a producer and we're maturing almost 17,000 casks today, turn those into amazing, unique, outstanding whiskeys, bottle them and sell them under our own brand but we're about more than just a great shop for whiskey. It's also about the experiences that go with that. One of the things that will come through today is just how important those experiences are with our venues in the U.K., one here in London, 2 in Edinburgh Glasgow, having had their best ever 6 months period. So when we talk about the results for the first 6 months, there's been both strategic and financial progress. And Billy will give details on the financial progress. But I wanted to set some context to the strategic work that's happened. We're all about captivating a global community of whiskey adventures and we do that by revealing the magic of our unique and outstanding whiskey. And our ambition is to create a highly profitable, high-quality premium global spirits business. We're making good progress on that but also in the short term on our ambition to double sales to GBP 30 million by next year. And we do that by delivering the world's best whiskey experiences. Now underpinning that, we've got 3 key strengths of the business. Our pioneering model. We are really well positioned still for a long-term global growth opportunity and a robust business primed to deliver. Now when we talk about strategic progress, we have 5 strategic pillars across our membership proposition, the experience, the liquid, our reach and our people. And we'll talk a little bit about some of the objectives that we've been working on this year. So for example, within reach, the launch of the new Taiwan subsidiary, which was a fantastic launch just a few weeks ago with 500 members recruited in 3 hours. Similar experience in Korea when we launched in April and it was 300 in 90 minutes. Alongside that, I'll show and tell, which I'll show later on, which is the new membership & a bottle product launch, which is going to help to drive recruitment. For liquid, for example, good progress on our cask sales program, which we're going to talk about in more detail later on. And then people, organizational development and Billy's promotion, promotion of Rebecca Hamilton, to our Chief Marketing & Experience Officer and recruitment of Chris Leggat, very experienced industry expert as our Business Development Director. So we're going to talk to a number of these objectives over the course of this morning but just wanted to show how these fit within our overall clear strategic pillar. So that's on the strategy side. And then before I hand over to Billy to talk through the details, we've also seen good financial progress. So we've seen growth in revenue, growth in membership and growth in cask value. From a revenue perspective, 7% growth in Q2 after a relatively flat start to the year, particularly in China but with momentum building and what we expect to see is a real acceleration of revenue growth in the second half of the year, particularly benefits of Taiwan and Korea launches earlier this year, ongoing growth momentum in those markets that performed well in the first half, better momentum and weaker comparatives in China, as well as progress on those cask sales. From a membership perspective, up 9% and that growth rate pretty steady between second half of last year and first half of this year, again, giving us confidence in the underlying quality of the proposition. And then finally, growth in cask spirit. And the one I would probably pull out here is the second one down, which is the bank valuation of the liquid stock, up GBP 10 million, that's GBP 10 million of value generated not in the books. And it means that based on this morning's market cap, about 80% of that market cap is underpinned by the bank's valuation of our cask spirit stock. So I'll hand over to Billy now to take you through some more of the detail on that.

Thank you, Andrew. Yes. So as Andrew has mentioned, it's been a good first half. We've had growth year-on-year of 3%. And -- but most notably, to Andrew's point, after a relatively flat Q1, we've seen some challenging headwinds in China and the macroeconomic conditions, we grew 7% in the second quarter, which is momentum we've taken into Q3. As Andrew said, for example, coming to Q4, our biggest -- our busiest trading period, that half -- we are -- definitely have to wait in terms of revenue and EBITDA this year. But that busiest trading period and the delivery a little later than planned of some of our strategic objectives, which Andrew will spend a bit more time on later, really does mean that we remain on track to deliver our full year EBITDA number. In terms of highlights, this is now the second time I've stood up here and said UK Venues continues to fly. It's had its strongest 6-month period on record. It's up 23% year-on-year. And again, Andrew will shortly go on about and what we're doing in terms of our venue and what we call our brand home, The Vaults in Leith, so that one is coming up. Other key callouts. Europe continues to grow not only -- so we're 21% up in revenue. And from a membership perspective, that's also above 20%. So you can see and we'll go and talk about lifetime value shortly but we're getting the members in and therefore, we're getting that revenue growth, which is fantastic. What we've included this year is some more information on our cask sales. So that is one of the strategic priorities and objectives for this business. We have done it previously and we will continue to do it. We have some fantastic opportunity in the balance of H2, which I've said will help deliver revenue growth and EBITDA growth and most importantly, positive EBITDA delivery for the full year, which I'll talk about a little bit more. And then in terms of others, I mean, we've had Japan consistently grow since IPO. We've had Australia consistently grow since IPO. So I think the key thing for us is that global revenue remains diversified, if not more so, by some of the introduction of our key strategic objectives over the next few years. So we're not overly exposed in one market. Taking that down to a P&L level. Our gross profit around GBP 6.2 million, relatively flat on last year. And again, that's impacted, one by balance of [indiscernible] but two, the predominant impact of that is those headwinds in China. At a group level, that group mix, China is one of our highest-margin markets. But that will come back in the second half because some of our strategic objectives in the second half being cask sales and that will significantly take us back to where we would expect it to be from a margin level. In terms of our cost base, certainly, our marketing is -- has been a bit higher in the first half but that will fall back in line in the second half as we come into our busiest trading period, we spend on marketing a little bit further. We'll do a lot of marketing, as you can imagine, on our new membership & a bottle but that will come into levels that we expect. So there's no color there. Payroll, 2 main factors for that increase. One, this time last year, we were building up Masterton Bond in terms of headcount. Those are -- have to -- has a weaker comparative as such. So year-on-year, that will look relatively similar. The other key point there is, obviously, we've been in a high inflation environment. And as a business, for example, our average pay increase across the board was 7% to 8% as an exceptional for this year. And then we'll see what it looks like next year. In terms of other overheads. The key theme in all this, I should say, is we have continued to invest in systems and people. So what that investment, obviously, on a low revenue balance, H1 means we're making an adjusted loss of [ GBP 1.8 million ]. That will correct itself in the second half as that balance comes in. But we are committed to ensuring we have the right experience within our business to deliver what we need to deliver and importantly, the right systems. So as you know and there's more to come on our new app and our website improvement, that will be delivered in the second half. That's on course and remains on course. And so I think the key point around here is, just that balance and our commitment, both to systems, which is having a big -- we'll have a big milestone by the end of the year in terms of an investment in people. And that is relatively peak -- that has peaked roughly where we are. So what you'll find is that revenue growth delivery, in H2 going forward, you will see that fall to the bottom line. So we remain with that same key message. And from a cash perspective, what that means, if we talk to cash for a second, you'll see we're flat from a net working capital perspective, resulting in operating cash flow, which is heavily impacted by that balance of that in revenue growth and EBITDA growth in the first half. As we deliver in H2 to meet the full year targets, that will come in and head towards positive. Also net cask spirit spend line, that's starting to peak. Our strategy was always to invest a lot of the funds we had. But at this point, it was more to manage our stock levels, keep our net debt where it is, where our future profit and cash generation will be used to make sure we balance that for each year going forward. So as a reminder, we have all the stock we need to beginning -- till 2028 and around 75% till the beginning of the decade. So from now on, that strategy is really about profit cash generation to make sure we maintain the level going forward, that significant cask spirit spend is peaking. And essentially, we're doing what we said we would do, which is good. In terms of balance sheet, we -- still very strong balance sheet, GBP 18.7 million net asset value. We'll talk a bit more about cask valuation. But as a reminder, the cask woods value on our balance sheet is the minimum value that exists. There's a bank valuation on top of that and obviously, our bottling value, we'll go into that a bit more. So still very healthy. Nothing more to add. We've invested in Masterton Bond. That is now tailing off. There was final elements of that in the first half but that is now completely self-sufficient. We do all the bottling. We do all the fulfillment. We have all the resources in place. So that's fantastic. The opportunity for us now is to make that more and more efficient as we become better at what we do, as a brand-new business doing our own supply chain but it's coming fantastically well, which is credit to the team there and a huge opportunity. And we're tied there. So I think we're -- back to Andrew. There you go.

Thanks very much. So as we talked about the kind of the 3 key pillars of strength across the business, well, I'm not going to talk through all these lines. But it is worth noting that one of those is around that loyal, valuable and growing global membership. We talk often about lifetime value. And while it has declined slightly in the period, in particular because of the slight drop in retention, it's worth noting 2 things, retention rate at 74% remains very strong and well above pre-IP and pre-COVID record levels of high 60s, 70%, as does the lifetime value. That's lifetime profit per member, which is up 35% since IPO. So this is not a directional metric. And we said this repeatedly, it's not directional metric thing. But that thing, that each member generates GBP 1,260 of lifetime profit. That's a significant number. And included within that, markets like China, where even on small membership numbers, you get a lot of value from them. And we'll talk about that in just a second. And one of the things that often come up is a question about how do we recruit, how do we engage with members. And what's really important to note is that the society is a truly hybrid model, that combination of in-person and digital. And that's true worldwide. Now exactly how that comes to life differs in each of the 4 biggest markets. And I'm going to talk a little bit about each of them, U.K., Europe, China and the U.S. So the most obvious example is in the U.K., we have these 4 wonderful member rooms, which are great for both driving engagement and spend, as Billy said, on track for something like GBP 4 million of revenue this year, about 20% of sales but also really important for recruitment with almost 2,000 members recruited in Venues in this 12-month period. So this is artist's impression of the work that is currently going on at our brand home, the Venue in Leith and that GBP 0.5 million refurbishment is live now. It doesn't quite look like that yet but this time next week, it will. The bar is being built and restocked at the moment. There's going to be a nice time lapse of that in due course. So that's on the physical side but also we talked about on the digital side, the launch of an app in the U.K. later this year. So that's that combination in the U.K. If we look at a market like the U.S., same message. I went to some wonderful partner bars in the U.S. earlier this year, a great one called Jack Rose in Washington and Brandy library in New York. They're a great way of engaging both with existing members but also recruiting new members. But again, alongside that, a few weeks ago, we relaunched the U.S. website with a much cleaner new member journey, making it much easier for recruitment but also in particular to drive people to buy a bottle with their membership because we know getting liquid on lips helps drive engagement and retention over the long term. In Europe, we've seen good return of the impact of festivals. We also have a network of 66 partner bars in Europe. And the number of events and tastings and so on we've been hosting there, that's helped drive up recruitment by 30% in Europe year-on-year. So that's why membership is growing 20-something percent, revenues growing 20-something percent, as we drive recruitment engagement there. And then finally, China, as an example, where, say, August was our joint highest ever month of recruitment. And about 3/4 of that coming from the return of the [ whiskey ale ] festival. It's the biggest whiskey festival in China, about 30,000 people attended, with a few thousand of them coming to our store. And that drove both recruitment of new members but also engagement with existing members there. And alongside that, we launched a digital program on TikTok, a kind of whiskey knowledge series of videos and 12 short videos, kind of taking people on a whiskey education journey but then introducing them, engaging them and recruiting them to the society. And in the month of August alone, I think it was about 20, 25 members joined through that channel, which perhaps doesn't sound like a lot but at GBP 3,000 of lifetime value each, that's over GBP 60,000 of value generated in 1 month from 1 digital campaign. So that shows the kind of truly hybrid nature of it. And then the U.K., talking about how we're driving recruitment, a change to how we bring to life the membership proposition with new membership & a bottle product. And we think that can drive a few things. One, the kind of wow experience for new members wanting to share it from a gifting perspective, too. We know that, that's quite a popular way for people to come into the society but getting a bottle in front of those people as soon as possible. But also opening up new markets and new reach for the society, something that people can understand and easily relate to if they get this great product on day 1. So that will be launched in just the coming months. So it will be on sale ahead of Christmas time and expected to drive significant volume in the balance of this year in the U.K. before being rolled out to other markets as fast as logistics will allow. So hopefully, that helps bring to life a little bit around the membership recruitment and engagement. On top of that, one of our objectives is to drive the value and volume of liquid consumption. We've looked at ways to extend our range and use the fact that the society turns 40 this year to release a 40-year-old whiskey. So this will be on sale in October, price point round about GBP 3,000 in the U.K., slightly higher in international markets. I've had the pleasure of tasting it. It's absolutely outstanding. And I am really looking forward to the buzz and -- from members and people around the world, so this has been really positive as we look at ways that we can play in that prestige price point above the existing range. So that's just brings to life a few of those strategic objectives, so you can see how they fit but also the really good progress that's being made. Second one is around long-term global growth opportunity. And it's important to note that the market remains very significant, over $8 billion of ultra-premium price point Scotch sold worldwide, with well over $6 billion of that in markets that we have a presence in today, most of which is in the top 8 markets. And that's significant and still growing strongly and it's still driven by premiumization trend. So the graph shows that 1/4 of all the scotch market is now in that premium price point and above, showing the continued momentum around premiumization. And we are well placed to take advantage of that significant market. Final piece is around robust business and we're really well placed to deliver that growth. Our margin, as Billy referred to, our access to casks and not only those casks giving us confidence in our supply for our own bottle sales but also in supporting value generation. And I just wanted to talk a little bit about our cask investment because it's something we do get asked about a lot. And we're investing in casks with 2 principal parts of value generation, short- to medium-term value generation, where we spent about GBP 3 million since IPO on round about 140 casks. And those are casks where we can -- they're ready to go and therefore, the turnaround is quite quick on those. So although these have only been bought in the last year, we've already had 10% of that cash returned at a significant -- yes, a significant return on that investment. And that drives both short-term and long-term value creation as these old, rare, prized gems, as part of that strategy. And then alongside that, about GBP 3.5 million invested post IPO in young and new mix spirit that drives long-term value. So you can see these are casks on average costing about GBP 1,000 each, typically under 3 years old and they are -- we are maturing those and ready for sale in 10, 15 years' time or longer. The bank valuation of all the stock, up by 26%. And on average, bank valuation stays between 10% and 20% appreciation per annum. What that means is, we now have GBP 14 million of extra value that's being generated through the stock that's not yet in our books. But if we were to just sell those casks and buy them back, that would be GBP 14 million of value as a minimum. For example, on the casks that we have sold, we're generating significantly higher value on those than the bank valuation would suggest. So there is a huge amount of value in that stock. And as I said, that means that the bank valuation of that represents 80% of our market cap. So some of that will come through as casks but the significant upside comes from the SMWS model, our ability to convert that liquid worth GBP 40 million, GBP 50 million in casks into GBP 0.5 billion worth of retail value. That's about GBP 300 million of gross profit from our existing stock, through existing channels over time, obviously. And so I want to talk a little bit more about cask sales as an area where we see a significant opportunity. As I said, it's been one of the strategic objectives for the year but also it's something that we've always done in particularly private cask sales to trusted industry partners, which is part of trading casks in the scotch market and that's always existed and it supports our own sourcing. But what's new for this year is the of launch of the private casks sales program and going after really 2 opportunities here. What's showing here is a high net worth individual private cask sales program and it's an opportunity to buy a cask's worth of bottles. So this is not an investment scheme where people are trying to turn a profit out of one. We're about people receiving and enjoying wonderful whiskey. So this is people who would like a whole cask worth of that. Personalized touch, white glove service and old beautiful whiskeys delivered in that -- with that personalized experience. And we've got good traction. You'll see those cask sales already coming through and momentum growing into the balance of this year and longer term. And alongside that, looking at similar ways that we can bring this kind of experience to a broader part of the SMWS membership. So it's not all about people who want to spend GBP 100,000 on a cask, it can be for that much broader cohort of members as well. So looking at both of those private cask sales opportunities. And then finally, around our people pillar, real significant operating experience with Billy joining the team and with the promotion of Rebecca. And additionally, as I said of Chris Leggat, formerly Chief Executive of Douglas Laing, one of the most premium independent bottling companies. So that's been really good. And underlying that, continued good results from staff surveys, building on our culture and sustainability of the business. So I'll just finish with a little bit of a look ahead on current trading and outlook. The headline is, we remain on track to deliver our consensus forecast for this year, to deliver on our ambition of doubling sales to GBP 30 million by next year and that clear path to profitability was including our inaugural positive EBITDA this year. So that's the headlines. In terms of specifics, [ post-period ] membership continues to grow. Now it's over 39,000 including the successful launch of that Taiwan subsidiary. And as we look ahead to the balance of the year, an acceleration of revenue growth, with the positive impact of Taiwan and Korea markets, improved momentum and weaker comparatives in China and further progress on the cask sales we've just talked about. Alongside that, continued strong performance in venues, supported by things like the refurbishment of the Vaults, launch of the new membership & a bottle product and that prestige 40-year-old, all giving us confidence and ability to deliver for the year. And then longer term, it's fair to say, there are ongoing wider macroeconomic conditions, which exists but increasingly, our globally diversified footprint, the growing membership supported by a wonderful proposition, the demographics of those members, which are certainly not immune but more insulated from those conditions and the premiumization trend ongoing, position us well to continue to deliver growth, both in the short and long term. Thanks very much. Thanks for your time. And yes, wishing you well for the rest of the day.