Top Shelf International Holdings Ltd (TSI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Top Shelf International Holdings Limited FY '22 Half Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Adem Karafili, Executive Chairman. Please go ahead.

Thank you very much, and I warmly welcome you all to the call and to our presentation. I think now it's just a little over a year since we joined the ASX as a public listed company. And since then, we've had our full year results, we've had our AGM and our half year for those investors that have been with us along the journey. I thank you for attending. So as mentioned, today is our Top Shelf International Holdings FY '22 First Half Results Presentation. In the room with me, I have Drew Fairchild, our CEO, who will do most of the talking throughout the presentation. We have Ben Kennare, CFO, who is available for questions as well if any questions are addressed to him; and Matthew Slade, our Investor Relations Head. So again, any questions, please follow the instructions in the forthcoming. So just as we're about to start, I will hand over to Drew, who will take you through our presentation. And as I said, we look forward to any responses at the end of the presentation. Over to you, Drew.

Thanks, Adem, and welcome to our shareholders. Delighted to present again the half year accounts. Certainly, as we stand back from these half year accounts, certainly, the key messages that we would like to convey to our shareholders is around the continuation, if you like, around the delivery of our strategy and calling out each of the key wins. And of course, one of the key highlights that we'll be delighted to talk a little bit more about is the recently announced deal with Coles. But certainly, we're hoping that you, from this call, will certainly understand what we've set out in terms of the execution of a particular strategy and how we're consistently striving to deliver on that and demonstrating that, that is the case. For those that are prospectively new to the call, what I'll do is just move through to Slide 3, which talks about Top Shelf and our ambition. So this slide is a slide that we always come back to. It's been in the deck, if you like, since we listed the company. And of course, it actually preexisted that in terms of what we're actually sort of setting out to achieve here. And so again, when we look at this slide, perhaps just some key callouts for people is that Top Shelf has clearly invested ahead of the curve in terms of building out our production capability and indeed laying down inventory. And of course, that's both from a whiskey perspective, but also in agave viewpoint, and also building -- investing in our -- in people in order to be able to execute our strategy. So we set out to achieve that really over a 5-year time frame now. And of course, to get to a point now as we get through the half year, we've actually got access to our whiskey increasingly at scale, really represents a clear line in the sand, if you like, of the company. So after a long period of time, we've arrived at that juncture. And of course, that's best manifest in terms of the ability to have a conversation with the likes of Coles and the fact that we can actually now range our whiskey, not only in Coles, but also in our independent network and indeed open up international fronts as well. So we're delighted that we've arrived at that juncture from a net perspective. Clearly, one of the standouts for us as we go through the results is the Grainshaker brand and performance. Obviously, the brand itself was only launched just over 12 months ago. Clearly, some challenges through the pandemic to be able to really see the -- what we're able to achieve on both the festival front, but also in the on-premise front through the back end of last calendar year, only really 2 months of that, November and December, is a great indicator of success in terms of the execution of our strategy around Grainshaker. And of course, we've been steadily demonstrating what we do think is the jewel in the crown in terms of the Top Shelf portfolio, our Australian Agave spirit. And people, of course, will be aware that we've welcomed Trent Fraser now working with us close for a year, building out both our brands and route-to-market strategy. We'll have more to say about clearly about brands when it's a more appropriate time, immediately prior to launch, et cetera. However, I'm delighted to say that we've really broken the back of that and then we couldn't be happier in terms of the way that the brand architecture has come together. Just on the right-hand side, this for us is the benchmarks that we've set out to achieve. Clearly, it's demonstrating the way point, if you like, particularly towards the gross margin target making sure that, again, people are prepared to pay for obviously the products and brands that we bring to market, and we demonstrate that increasing gross margin. Again, we're delighted to be able to do that in this deck. Perhaps the last key takeaway for those people that are on the phone is that Top Shelf is the largest whiskey company in terms of distillation and maturation, similarly on vodka and even in Agave, in terms of agronomy to bottle, to brand. It actually puts us in the top 5 in the world. So this is very much a premium spirits business at scale. Then if we can move through to the next slide. I think, of course, we thank all our shareholders for the support that they've given to us over a long period of time, essentially creating what is really only -- Australia's only multi-branded spirits company in many ways. To be able to back that [indiscernible] takes certain courage, not only from people that are executing it, but of course, shareholders to have the faith that it's the right horse to back, if you like. And of course, when we look at some of those external cues, we couldn't be happier in terms of the choices that we made around investment to arrive at a point where you're actually in the right place at the right time when it comes to the market opportunity. So just some examples of that. Clearly, through COVID and, indeed, more generally, the rate of growth in ready-to-drink products is enormous. When we look at the fact that spirits [ per se ] in the coming 12 months will actually have greater consumption than beer. When we think about premiumization and health consciousness and so on and so forth, all of those elements are driving, again, the growth of the spirits category. We've made the right bets at the right time. So we're delighted to say that we're certainly well placed to benefit from those structural tailwinds. And of course, we continue to manage this virtuous circle, if you like. And the next horizon for us is demonstrating to our stakeholders that we can and will deliver on the operating leverage. And obviously, that talks to profitability of the company moving forward. So we'll start to talk to that today, and we'll have a lot more to say about that in the presentations to come. Then, if we can move to the next slide. Slide 6, of course, is really the key slide that in many ways draws out the key talking points. And I'd like to walk through each of those points, and I'll reference some of the other elements in the deck just to ensure that the people understand -- understanding, if you like, of what we've drawn to people's attention through this slide. So on the left-hand side, as mentioned, what we are doing and have done as a business is we're bringing outstanding products to market. Increasingly, you see that recognized through external awards. And closing out the half, we're delighted to say that NED and Grainshaker closed the half with 21 medals. So this is really, in many ways, a third-party validation past what the team already knew. Having said that, though, what we do know as a team is that the quality of our product is only continuing to improve. And that's really reflected in the fact that it's really now that we're bringing whiskey to market that we've distilled, that we have matured and we've nurtured in order to be able to put that into both bottle and can. And of course, as people will be aware, that includes the elevation, if you like, of our brands, including The Wanted Series. And we're just about to actually bring to market a Master Distiller Series as well in terms of NED. So again, we'll see a continuation, if you like, in terms of external recognition of the quality of our products. As we move into the numbers, revenue, again, of course, off the backdrop of lockdowns and indeed not having a lot of whiskey for sale, but to deliver a 57% increase on the prior period in terms of revenue is a remarkable result. Clearly, when you look at the Q1 versus Q2 results, to double the Q1 result really talks about what is possible in terms of coming out of COVID lockdowns. And indeed, that was just a fantastic outcome. Now there's further detail in the pack on branded versus third party, which we'll also go through. But again, to be able to see the benefit in terms of branded revenue growth of Grainshaker really coming through to the fall was fantastic. Just as a data point there, in December, we've nurtured relationships in festivals and events space for some time. We were able to deliver close to $1 million in revenue in that space, and Grainshaker was the first [indiscernible] product that festivals in advance, including the [indiscernible] -- music for over 110,000 people. So to have our products in consumers' hands to make gross -- hit gross margin targets and contribution margin targets with people are having a good time is just an outstanding outcome and one that we wish to replicate it, of course, intrinsic to our business and business model. When we look at gross margin, what we've presented here and demonstrate is the continuation of improvement in gross margin from 21.6% effectively last half in FY '21 through to 25% through to 27%. Of course, this gross margin picks up gross margin across both our third-party canning and bottling business, but also our branded business. Of course, that implies that the branded gross margin was higher than 27%. And I'm pleased to report that, that is the case. And of course, third-party accounting and bottling is somewhat less than 27% to end up with that midpoint of 27% in terms of gross margin. So well on track in terms of growing our gross margin in our business in order to be able to hit that metric as per the 5-year plan. Hopefully, without complicating, if you like, the message around investment, this requires a little bit of understanding for our shareholders. But what we're doing is we're very much focused on delivering that operating result first as a waypoint to profitability; and secondly, obviously, to demonstrate to our shareholders that we are very much focused on driving profitability in this business. And so having arrived at this juncture through the half -- and again, obviously, with the first quarter result at negative 1 -- sorry, first half result, very much the operating loss, if you like, was orientated to the first quarter rather than the second quarter. So just in terms of explaining a little bit more about the operating result and indeed our business, the way that our business is structured, of course, is at the Coles is NED and Grainshaker. We obviously have sales teams that support the execution of sales strategies for those brands. And then we have essentially a centralized sales and marketing team that really sits below those sales teams across different channels. And those channels being independents, major retail, international and direct-to-consumer. Effectively below that sales and marketing team, our business is very much a fixed cost business. And so as we grow our revenue base -- and of course, in time as we welcome Agave, again, in terms of operating leverage, we do see the benefit of that operating leverage flowing through from our gross margin to our EBITDA. And so for us, focusing on that operating result again demonstrates that: one, we're very much focused on driving profitability; but two, it demonstrates that the model that we've put in place and the structure that we have in place will pay off as we grow our business in terms of whiskey sales, Grainshaker and, of course, prospectively bringing Agave to market. Just on the top right-hand side, sitting below the operating result, of course, people will be aware that when we complete recent capital raise we called out the fact that we were investing in brands and indeed investing in the distillery at the farm. From a P&L perspective, we, of course, have, as part of that investment across [indiscernible] our P&L. If it was an asset, you would capitalize it. But of course, in this instance, we've made a conscious decision to invest in the Australian Open, the V8 Supercars, a small sponsorship in the Marines in Queensland and the Australian Turf Club in Sydney. So essentially, there are 4 relationships and 4 sponsorships that were put ahead of the curve in terms of cost to build brand. And we're certainly seeing the benefit of making those choices. So we call those out as a business investment, but they're in the P&L. They can be turned on and they can be turned off, but we have made the decision to invest in those, and they sit below that operating result. When we consider those investments, we actually can sit them on a net basis. So we have revenue and gross margin and, of course, cost of sponsorship associated with those, but we look at them on a net basis in terms of the net investment in the P&L in those relationships. And it's only that -- it's nothing else in terms of looking at that investment in brand. Of course, when shareholders look at our cash flow statement, they're keen to understand where the cash is going. So again, what we've demonstrated here on the right-hand side is that in the half we invested $2.7 million of our cash flow into effectively the balance sheet. Of course, this is carried at cost. But what that allows us to draw out is that approximately $25 million in whiskey in terms of future earnings growth was actually distilled during the period. And of course, if we look at that gross margin on the left-hand side, the implied gross margin on $25 million is a significant number in its own right. And the balance is obviously Agave, which we'll look to bring to market in July of next year. So we continue to invest in future earnings, and you can see that then in terms of the growth that we have in our mature and spirits portfolio now up to $322 million. And of course, we'll have more to say about the price per liter for both whiskey and Agave through the full year. And on the bottom side of the -- this particular graphic really, again, talks to the choices we've made about investing in assets and indeed the funding that we've got to continue to realize our ambition. Then next slide. Next slide calls out a number of brand highlights. I don't propose to go through all of these. It's just further evidence of strength of brand. I think one of the delightful things -- and we'll talk about Coles in a moment -- but one of the delightful things about arriving at a juncture where we have our relationship through our independent network and, indeed, Coles is that consumers can finally find our brands. And of course, when you arrive at that juncture and you've got whiskey at scale, we're actually now in a position to actually talk about, for example, the NED brand. We've been at this for 5 or 6 years now. The brand has always had great strength, and we've had to hold ourselves back in terms of amplifying the brand store until you're in a position to create that virtuous circle, and we are now at that juncture. If I just look at the Grainshaker key callouts, again, I draw people's attention to what we've been able to achieve from a festival and event perspective. As I said, 110,000 people consuming our product, profitable at multiple levels through December. And of course, into January, we had 360,000 people with the tennis and sold 65,000 cans. So people know our brands, which is just a great callout. And you see that ultimately increasing and reflecting increased rates of sale. We just moved to the next page. From a production perspective, again, the Agave project is moving to the build phase. I'll talk a little bit about the brand side in a moment when we get that to that particular slide. I think, again, one of the key and key things that we were most delighted with through the back end of the calendar year was to have the spirits business, a global magazine, call out the fact that our Australian Agave project was one of the top 10 biggest Global Spirits storage for the year. It was just simply remarkable and to sit in great company with the likes of all the leading alcohol producers in the world was -- we think is a sign of things to come. So we were delighted with that. There's sort of single sentence in here that says brand development well advanced. I think that sort of understates where we're at. But again, we're pleased to say that we are now executing our trademark strategy internationally. And so that was, of course, a key underpinning of making sure that the brand work that we have done we could actually commercialize. And again, that's very much going to plan. So that's a great position to be. And to take delivery of our first deal for the farm, that's sort of sitting there the picture in the back of the deck that's sitting in storage in Townsville ready to go, is another milestone in itself. I think for people, in understanding our business, we made a decision to invest in our production facility, canning and bottling at Campbellfield field some time ago, and we're really seeing the benefit of that decision paying off. Of course, it is generally in terms of being generate cash to obviously assist in laying down and maturing our whiskey. But to see the fact that we're able to produce in December, for example, 113,000 cases off that site, still with the opportunity to run on weekends, and sell [ 69,000 ] to third parties is a remarkable achievement. Of course, over time, as we grow our brands, we look to internalize that production capacity. And so there's plenty of headline production capacity for us in addition to continuing to maintain those external relationships. I think really importantly, not only that, as we drive profitability in our production business, we start to get free carry, if you like, in terms of the fixed costs associated with producing our own products. And so we do certainly saw that through the back end of the year. I think the last point just to call out is we're now at a point, particularly given global supply challenges, but also just simply our internalized capability, that we can sit across the table with our customers and talk about exclusive formats, for example, 16-pack going into Coles or, indeed, introducing 2 new Grainshaker blends, if you like, that they think will hit the consumer pallet. So we're very much at that end in terms of being able to be that in many ways the nimble and agile and incredibly capable company. Moving through to the next slide, the whiskey maturation curve. So of course, this slide has been, I guess, the -- what sits behind this slide has been instrumental in terms of how the decisions that we've elected to make over time and clearly arriving at a point where we can engage, obviously, in ranging conversations and execute that with the likes of major retail. Clearly, through the first half, that was a low point in terms of matured whiskey again. To get to that market, it really talks to years of effort in terms of building a distillery and then distilling the product and then laying it down and then making sure that it's matured and hitting a quality profile. And of course, once you've arrived at that juncture, you can see the nature of that curve. You've got more product to sell, but you actually reach a point where you're spending less money investing in whiskey and investing in oak. And of course, starting to reap the benefits from a cash perspective as you harvest that. So you can look at that profile and really see what's ahead. So again, that's a key callout in terms of understanding our business. Next slide then. I won't spend any great length of time. This slide really represents our strategy. And if you go through any one of these particular line items, we're pleased to say that we've made demonstrable progress on all fronts. So if you like, this is management scorecard that -- certainly keeps us to account. And this is something that we work through each and every month to make sure that we're actually moving in the direction of delivering on the platform to realize our brand ambition. If we move to the next slide, Slide 11. Of course, we released this announcement earlier in the week. Again, we know that our investors are looking for key catalysts. What was that key catalyst in terms of understanding that you've got the distribution to sell out your whiskey curve, demonstrating that it wasn't just ourselves that really felt that the Grainshaker and NED brands were great brands. To have major retail obviously welcome the ranging decision nationally and to go immediately into 900-odd stores across NED and Grainshaker outside of ranging is simply a remarkable achievement. We need to make sure that we deliver on all the key customer metrics around [indiscernible] supply and so on and so forth. And of course, owning your own supply chain enables you to do just that. But if we do indeed deliver on those particular elements and obviously execute our campaigns to grow greater -- to grow further rates of sale, then the opportunities for us in this space continue to be quite significant. For example, into the online side, obviously, with Coles, the opportunity to welcome seasonal distilled spirits into their network, which is something, for example, that they've done on the craft beer side. There's no other alcohol company that Australia has that capability to do that. And so that for us is the next slide in terms of above and beyond this initial ranging. But this is a significant milestone for our business that perhaps might look simple, if you like, in terms of getting to this juncture, but I believe you mean it's about whiskey and maturation and grade, and it's about increasing price points and independence and it's about rebranding. The team have done an incredible job to align all of this up to hit the ground at the right time. And so I'm very pleased to call that out. You'll make on the -- sorry, I should say you'll note on the top of this slide, which is now Slide 12. Going back to the earlier deck where we talk about investments in the P&L. Of course, I called out these 4 sponsorships. And this is the only callout, if you like, in terms of those investments that do sit in the P&L. And so the principal one, of course, through the half was the tennis. A great success for us, notwithstanding COVID. And of course, having those sponsorships in play does indeed enable us to have ranging conversations with the likes of Coles and indeed to leverage our relationships into multiple fronts, including on-premise and festivals, et cetera. So to now get to a point where an Australian spirits company can kick out Jim Beam and to be the -- effectively, if you will, the exclusive partnering both whiskey and vodka, is an incredible achievement. It's been a long time coming. It also comes at a time when there's a change of ownership with the Supercars. There's very much a push to have on-course racing again across different locations right up there the sort of Eastern Seaboard and into New Zealand, et cetera. So to get to that juncture, we're incredibly proud. And what it allows us to do is we've scaled back our sponsorship in terms of the NED Whisky team. We've invested that sponsorship, if you like, into this relationship. And what we've done is we're able to create a very value-adding relationship with Grow Racing with NED now going on to 2 cars and not 1 car because that's aligned with their own ambitions around the Penn right brand as well. Pleased to also say that off the back of the Sound of Bates promotion, which was done last year, which was considered the best activation for the V8 Supercars for the whole year. That was an initial quantum of about 1,000 bottles. We're now working at collaborative set that expands that to 6,000 bottles. So again, these sponsorships, of course, they talk to an investment in growing brands, but they also provide opportunities to grow gross margin and revenue outside of these as well. So this for us is really around a set of investments in building out our brands. And of course, as we bring Agave to market, too, we'll be able to leverage these platforms as well for Agave. On to that Agave,[ per se ], obviously, part of the costs associated with bringing a Agave to market goes into the P&L and part of it goes into the balance sheet. And if you can look at the little schematic there in terms of the time frame -- sorry, the waypoints, so you can see here that we're actually moving beyond Phase 3 and well advanced on Phase 4. And so we're working back from July next year in terms of bringing our product to market. As mentioned, there's a picture there of our first fill that's arrived, the plants themselves, the build of the [indiscernible] with the local council for approval. We're well placed in terms of -- on multiple fronts around energy, around other elements that really underpin the build-out of what will be a world-class distribution and production facility. And we do indeed think that, not dissimilar to what the Australian wine industry did -- wine industry did back in the day, for us to bring a new world of Agave region into market, when tequila has just become the second largest spirit in the U.S., that they're struggling to find mature plants in order to be able to meet demand. And of course, we're sitting here with the fifth largest position in terms of agronomy to [indiscernible] brand puts us in a sensational position to capitalize on the consumers' thirst for Agave. And we see this sitting across multiple levels, super premium right down into obviously playing a role in terms of our festivals and events as well. So it's great progress on Agave. I'm just going to go to the P&L before I finish and open for questions. So on Slide 16 of the document, the P&L, earlier in the deck, when we were talking about the sort of key financials, which, again, for people's reference, was on Slide 6, we spoke about the operating results. So you can see there that, that operating result is the $1.5 million and below that is the business investment, which is the business investment in the P&L in those marquee relationships and the Agave component. So key for us is to demonstrate to our shareholders that as we grow the distribution, as we grow gross margin that, that operating result, of course, moves in the first instance to obviously positive. And then, of course, we demonstrate that that's cash flow generative. As you look at this business from an outside perspective, certainly some of our competitors, that's the key line that they would be looking at because the fixed costs that sit below that, whether they be listed costs or group costs, they are very much fixed. So we will demonstrate through operating leverage that improving that operating result over time. And of course, when we think about the Agave play, if you like, in terms of our portfolio, yes, of course, we'll invest money in growing that brand. Having said that, though, in terms of our sales structures, our marketing teams, et cetera, there's essentially that platform is built. So in many ways, it is a plug-and-play situation. So that will ultimately to flow through to our P&L. So I'm just going to pause there and perhaps we'll go back to Slide 6. And I might open for questions and perhaps either Matty or indeed the moderator, if there are any questions, please feel free to raise them. Otherwise, we'll open the call for questions.

[Operator Instructions] Your first phone question today comes from Allan Franklin with Canaccord.

Hopefully quick questions, if I may. Just sort of stepping through the major marquee sponsorships, Drew, just to sort of clarify, I heard that correctly, being recorded on a net basis. So in turn -- so there is a revenue number included above that line in terms of how you receive about those venues, but then the negative 2 is, I guess, the net cost post that point? Is that...

So there'll be -- so from a management versus statutory perspective, Allan, will demonstrate obviously how that reconciliation takes place because, of course, again, revenue from a statutory perspective is revenue. But of course, from our perspective, in demonstrating that operating result, that will be considered, if you like, on a net basis in terms of those sponsorships. So a practical example of that is we won't be showing a new and/or gross margin in one part of the business and then obviously cost in another part of the business. It's very much to the sales and marketing teams. We've made a conscious decision to invest in these opportunities. We manage these on a net basis in terms of our overall thinking in terms of cost. And of course, your opportunity -- or sorry, your obligation, if you like, is to deliver on the brand outcomes given the platforms that we've provided. So that's probably the best way to characterize.

I'll just add to that, Drew. It's an all-in cost as well. So if you think about sponsorship costs, so the sponsorship cost plus activation costs less contribution margin, which is revenue less cost of goods sold. So you get an effective -- an effective outcome for that -- for that sponsorship and the team are accountable for that. And of course, there are other ancillary benefits that we drive from there with the book further above the line, whether it's additional ranging, promotions, et cetera. Within our retail, and that's why having a national retailer like Coles Liquor Group would land first choice -- just add to the effectiveness of these sponsorships.

Yes, perfect. And just a follow-on, just in terms of any color you can provide on how to think about the seasonality of that line item and then also the seasonality of your sort of selling and marketing lines?

Yes. So on the V8 Supercars sponsorship, we're actually -- that part of that relationship is that we effectively get billed. And so we don't amortize an overall sponsorship line to the P&L. Effectively, the ability to like manage the cash reflects -- is reflected in the P&L, obviously, that follows the season. So that even obviously hasn't started yet. So that's been a feature of trying to align sponsorship dollars paid out, if you like, through P&L results through to cash. The tennis is of course-- is a little bit different to that in the sense that it's an event that's run over essentially 2 weeks. You've obviously got benefits on either side of that. In the first half, we have expensed the tenants 100% given that we've made those payments, obviously, prior to the tournament commencing. And of course, the sponsorships associated with the [indiscernible] are not material in many ways relative to the other 2. So the tenants next year, I expect that we'll be treating that the same, but the V8 will be very much amortized on a month-to-month basis. [indiscernible]

Yes, no, got you. And just sort of thinking -- sorry, just sort of sticking on that sort of sales and marketing thought process. Just with Coles, you sort of mentioned through-the-line marketing campaign. I mean just for layman like myself just what that actually means and how that actually works through...

Sorry I missed that.

Yes, sorry. So in -- with Coles, you sort of mentioning that you're doing through-the-line marketing investments aligning customer and consumer. Just hoping you can sort of flesh out is that, in layman terms, just to understand what additional marketing investment you're sort of looking to make through that and/or sort of just really trying to understand that how your term determining through the line, I guess.

So the interesting thing, of course, when we look at that operating result, and obviously, again, we've separately identified those marquee sponsorships in that business investment in the P&L. In that operating result as it currently stands, we actually have a significant investment in the development of our brands. And so for example, you look at the Coles particular slide and you can see that we've done from a packaging and format perspective. The Wanted Series, The Master Distiller Series, the build-out of the Grainshaker. So that external spend, again, you don't actually capitalize that to the balance sheet. But nonetheless, it is about brand. So what happens moving forward, of course, is having done that to a large extent on these 2 brands is always further opportunities, but we've certainly broken the back of that, and that was a key objective for us to be able to, again, execute that brand strategy at the same time we went into a major retailer. So for example, there is a QR code on the cans that will be going into Coles, and that will actually take you through to digital representation of the distillery. So we have got some sensational things that, if you like, to linking to that brand activation. But coming back to the point in the P&L, what we get is a shift between investment, if you like, in external agencies in terms of brand development through to the execution phase, which is really talking to digital and other campaigns to talk to, making sure we're hitting the right rates of sale, et cetera, in the likes of Coles.

So I'll just add to that, Drew, is that when we're thinking about being through the line, we've got obviously the above-line components and then what we talk about, which is all the external things that we're talking about, which is the sponsorship advertising, et cetera. We've got part of our V8 sponsorship deal with some significant outdoor value as well in billboards. So there'll be a lot of that you'll see. But then also the trade spend. So when we're talking about trade spend, the below-the-line spend, it's the money we invest with the retailer, which is in the form of promotions typically. And that's where we link -- we actually link our bottom line with a promotion that might be, for instance, the money can't buy rates around V8 Supercar, you sort of link the above the line with the below-the-line promotional and trade spend with the retailer.

I should say that it's a very simple commercial structure with Coles, which is very pleasing.

Yes. No, makes sense. And just the last one for the time being. Just on the CapEx point, I think you do sort of pull out some commentary there, which is great. But it reads that there's obviously an underlying spend in business CapEx item, which it looks like the first half was probably broadly -- broadly that stay in this? I'm just trying to understand how we should be thinking about CapEx then going forward. Obviously, for the Agave, those being fairly chunky items over the next few periods. But is it fair to probably annualize that sort of 1.7 or sort of make it, call it, 3-ish stay in business and then add on for Agave?

Yes, good question. Allan, again, the shape of that curve, if you like, is changing, of course, the production facility, it's capital spend on the production facility, Campbellfield, of course, is done. There's always some repairs and maintenance, et cetera, that are capitalized. When we think about again, leasehold improvements at the barrel houses, that's done. There's prospectively a small investment at the back end of this year, which gives us a 25% increase in capacity. And even when you look at that whiskey curve, you actually start to reach a point, for example, we're not purchasing any more of that. The vat that we've got on site allow us to deliver on our whiskey profile, if you like, in terms of volume. So when we look at barrels, I don't think we must be up to 4,000 barrels or 4,500 barrels. So we think when we fill those 2 sites and you can sort of see that maturation curve starting to flatten, there's a choice, obviously, to be made to going into the first site. And of course, that's very much based on ensuring that you're moving from just laying down whiskey to balancing it in terms of harvesting of whiskey and then going into a third site. So the capital profile and investment actually starts to stabilize, and you can see that through that whiskey maturation curve, and we certainly see that through the balance of this calendar year. So again, you get to a point through this quarter that you're looking at that whiskey maturation in your curve and you're finding a rhythm, if you like, between again, laying it down and harvesting. And just a sort of waypoint on that, for example, we've now -- the production team now look after the harvesting of whiskey at the barrel house, and that really talks to making sure that we're delivering on our sales and operational planning commitment to Coles. So it's becoming very much a manufacturing operation in some ways.

Yes, perfect.

I've got a couple of questions that have come through that have been central as well. I perhaps will just read them as we're -- Drew and I will going to answer to -- but from David Viral, thanks David from Croxon Capital. This is a supply chain question. Are you seeing any difficulty in accessing cans, glass or other suppliers? And then on labor, is it difficult to find staff? Are you seeing any meaningful wage growth or staff churn increase?

Great questions. One of the points that we do highlight in the slide is the fact that -- we're in a great position having made the choices that we did make on investment in terms of our supply chain. So through the back end of last year, the one challenge we did find was pallets and accessing pallets. And so Check were not able to provide us with pallets, and we source those pellets from a local timber manufacturer. And that's an opportunity, for example, to delight our customers, only since Pinnacle by keeping supply because we were able to do that, whereas others can't. So there's no doubt that we're very well placed in a sense that we're not exposed to international supply chains. We did have some challenges again through the back end of last year accessing from a maturation perspective, pleased to report that, that issue has been overcome. And so for us, we look at that and say there's opportunity not risk. From a people perspective, of course, we have the distiller operating, which is a venue in foundry. That's been challenged by COVID and access to staff from a hospitality perspective. That's really just about customer experience and not really intrinsic to the cash flows of the profitability of the business, but amplification on brands. That's been a challenge from a staff and hospitality viewpoint. It's good for us to understand that given that we supply it on-premise and being able to then work with on-premise around things like speed of service, et cetera. So for example, our Grainshaker product goes into on tap in venues, and that's tremendously well received because it's delivering a cocktail margin to the speed of services more or less immediate to like pouring beer. And then on people, I think that we've got an incredible team of people, both out of Campbellfield from a production perspective, in our maturation houses and indeed sitting in the sales and marketing team. And we've found that we find and continue to find it's quite not easy, per se, but people want to come and work for us because they back the ambition, and they want to be part of that success story. So that's a positive for us.

Okay. Thanks Drew. I'll read this Andrew [indiscernible] -- is private investor. Coles distribution, can we remind us of the total split of the Australian retail sales value between on-site and off-site spirit channels? I might just respond to that one straight off the bat. 70% of all RTD sales are in Coles and the independent channels combined. And obviously, on-premise, there will be very, very little. The other 30% would be in [ devourphy's or BWS ]. So in terms of our RTD components, we are very well placed to take advantage of that through the Coles relationship with independents. Vodka in itself is a 70% consumed on-premise, which has been key to our strategy around targeting key on-premise. We've put festivals in that as well. We've done an extraordinary job really of -- in our hometown. We were a bit landlocked. So it was very, very Melbourne-centric. So we obviously impacted by the extended lockdowns here, but obviously equally benefit from some of the rebound that has come that way. So we've basically got the high-volume venues in the South and working on some deals on the inner north, in which gives us a very, very strong position and leadership position from the on-premise side. On the whiskey side...

Yes. I think just more generally, in terms of -- again, as Adem mentioned, it's really only now post lockdown and having access to whiskey scale that we can provide a bit more clarity around our channel mix. There is a mention in the deck that our conversations in terms of international relationships are advancing. And so we're really delighted about that. So of course, we'll have more to say about that. But I think looking at our trading performance, particularly through the last 2 months of the calendar year, prospectively, where we end up is approximately 2/3 off-premise, 1/3 on-premise, including festivals, across obviously all products. And then we're very much working on building out our direct-to-consumer and international channel.

Which is fairly long. As I said, whiskey would be probably 30% on-premise, 70% off, and we'll follow into that. So there are the 2 questions we've received in written form. I might hand back to the moderator now for any further questions on the line.

Your next phone question comes from James Ferrier with Wilsons.

Guys. Congratulations on the Coles deal. That looks a good one with some exclusive product there, which I'm sure they're excited about. Could you give us a sense of the timing when you expect that sell-in to commence and obviously start hitting the sales line for Top Shelf?

Look, it's immediately really. So you'll see some revenue coming to this quarter. We're going to be in store by March 11 in some spaces. So we've been obviously working very closely with them. We've been working really on goodwill. We did make the announcement the other day. We were preparing for the orders without actually having the orders. So I guess that's why we had to wait for the actual release. But we're always very confident that we'd see this. And so if we knew when their -- [indiscernible] range view was for -- particularly, which are now Grainshaker actually came in on the ICD side outside of Range Review for the white spirit. So we're very, very pleased with that. And of course, the NED Whisky in the bottle is still yet to come. That would likely be further down the track in May and then Grainshaker bottle again, will go into the new financial year. So we'll continue to see what we'd call some pipe fill all the way through, but we certainly will start delivering this month or in very early March.

And actually, that's a good point you make there with the pipeline fill. Have you got a bit of an idea about what sort of sales value that pipeline fill would represent?

We're just working through it, James. We're getting store counts across all the -- all their banners, which is [indiscernible] -- and first choice and vintage cells. So we're just getting finalizing those store counts now. And then of course, the allocation of stock to each of those stores. So we're in a position to have all that finalized in the next week or the next few days, probably at the weekend of.

Okay. And just one last question on that topic before I move on to the next topic. Obviously, there's a substantial sales opportunity immediately, but also building over time. And that's going to be beneficial to gross profit dollars. But is the Coles arrangement in totality dilutive to gross profit percentage given the scale of that distribution?

So James, great question. The sales that we'll be doing through to Coles will be under bond. So that's adding itself is a key callout. So that allows us to maximize our working capital. And notwithstanding the fact that they're under bond, that will be accretive on a gross margin basis in a normalized sense. And of course, under bond will demonstrate that the gross margin will continue to grow in percentage for.

Yes. I think Drew sort of touched on it earlier, James, around the simplified trading terms Coles has in the past, and even my previous experience with supermarkets more than on the liquor side, certainly have things to an endeavor is a multi-tiered structure in which that sort of come at you in different ways. Coles is trying to simplify their business model by having one margin. Everyone can focus on that. They're very focused on having their stores focused on the consumer and their category buyers focusing on the consumer rather than taking additional money from suppliers as has been the case the proper margins. So they've done about facing, which is the way they go about business, which is one of the large reasons we've been focusing on with them because we think our interest equally aligned, which should make for a really, really great partnership.

Yes. Okay. No, that's very helpful. The second topic I wanted to ask about was operating leverage and perhaps referencing Slide 16 is going to be most helpful here. I like the way that you've listed the different expense items there at certain levels of the P&L. Looking at the top one there, the distribution, selling, marketing, operating, is it fair to think that they're going to grow with sales? And just wondering your view is whether they would grow faster or slow in sales in the next couple of years. Is there operating leverage on those items coming through years?

Yes. So it's a great question, James. And again, when you think about our business model back in terms of the ambition and what we've created today is investing in capacity, provides operating leverage. So we start to see that at multiple levels. So just to go to call that out in the P&L. Of course, now bringing to market our own distilled spirit, which previously back in the day, if you like, we effectively had contractors billed. So one, we get operating leverage to a lower cost on our distilled spirit. As we change our product mix and increasing vodka, for all intents and purposes, it is the same distilling team that run vodka versus whiskey. So you see operating leverage at that level. When you look at December from a production perspective, 113,000 cases, 69,000 sold to third parties. When we're selling at that late of cases, effectively in terms of amortization of fixed labor and indeed unit labor effectively getting free carry, if you like, in terms of no labor cost to produce your own branded product. So you start to see operating leverage at that level. Pleasingly, on the logistics side, we're actually moving part of our logistics operation into change to service Coles, and we're now exploring that opportunity for us more broadly with IBA and indeed clinical-- So that us, we don't want to be experts in managing logistics and so that allows us to sort of consolidate and reduce cost. So we're exploring that. Then, of course, as you get into the selling and marketing team, I mean fundamentally, our selling team. So for example, we've got state-based structures that sell into the independents. That structure and cost of change is getting more brands and indeed products so that we hold that cost. And then even on the broader selling and marketing team that we use the language that sort of sit below that at the C4 contribution, that team is largely fixed as well. So on multiple fronts, we get leverage. Of course, the other line there is really then around how much do we spend in marketing above and beyond, obviously, those cornerstone partnerships and relationships. And so that will obviously increase in dollar terms, will decrease as a percentage of revenue. So right through all of those lines, we expect to deliver operating leverage.

That's helpful, Drew. Just on your last point there, that marketing, putting aside the business investment and that the marketing spend, you would expect to decline as a percentage of revenue from this point forward? Or does it still have to grow a bit?

It will decline.

I mean -- good question, James. The shape of the P&L is obviously one of the highlights and the focus. And I think when we go to the original slide, which Drew had on the highlights and the things that we keep the team accountable to really obviously increasing revenue, increasing margin and ultimately getting the breakeven and then to profit and to be able to do those sorts of things. We need to adjust the shape of the P&L by holding and reducing where required while also going revenue at the top line. And we're demonstrating that, obviously, with distribution wins, Coles, other festivals-- we've talked about that range of opportunities and why we're doing that.

Just I think -- just to lay that too, James, again to call out, again, if you look at that operating result, essentially, it starts to look like a cash contribution margin. Because, again, when you look at our business, obviously, we've got some group costs and listing costs that sort of sit below that, and they're all fixed. So even the inclusion of Agave into our business, we've got tranche, obviously, already in the numbers, et cetera, but we don't actually add a [indiscernible] -- by bringing in a complete new brand opportunity in terms of our fixed cost base other than what we choose to invest in marketing.

We've got about 5 minutes left on the call.

Thanks for the questions.

Next phone question comes from James Bisinella with Shaw and Partners.

Congrats on the results. I have to jump at 12:30 as well. But just first one around the advanced discussions with a major partner for international. Can you give us an idea, firstly, on sort of maybe gross margins and potential size? And then also when you think something like that could land and be announced to the market?

Yes. Thanks, James. We're not in a position to talk to revenue and gross margin just yet. But again, we've obviously up raised the market going way back to when we listed the business, it certainly with Adem's background and skills that's growing into particularly the Asian markets was a key target for us. Of course, again, you invest ahead of the curve. And so we've built relationships there on multiple fronts, and we've appraised the market of different things that we've done in terms of Tmall and so on and so forth. The Hong Kong ranging, that's been going particularly well in terms of Grainshaker and the rate of sales. So that in itself presents us opportunity. And all of those ultimately come together in an ecosystem to allow us to talk to a significant distribution partner, prospectively, particularly into China. And so we're pleased that, that conversation and relationship continues to go from strength to strength. They now understand our capabilities at multiple levels. And of course, you don't close that relationship until sort of close that deal, your life until you've done it. And of course, it's still a case of crawl, walk, run that we're really pleased in terms of way that's all coming together. That's probably the best way to characterize it.

And I think you touched on that. Again, it is something that we have deliberately gone and invested on over time, knowing that it's some time before you see the revenue. So again, putting some cost before revenue, but now we'll look to see the benefit of that as we go forward.

And of course, Trent now is opening front into North America and beyond as well. So the international dimension is very much part of our growth strategy.

Your next question comes from David Meehan with Moelis Australia.

I'll just have one quick one. I just wanted to get a feel for roughly a rough proportion of your whiskey volume that you're currently selling as your limited addition range. So things such as Wanted Series and so the [indiscernible] -- and where do you see this ultimately increasing over time as a percentage of your sales? And would that help lift you average NSV per level?

It's a great question. Slide 9, obviously provides a backdrop to that. And of course, as we're now -- I had a tear in my eye, to be honest, and we have brought to market the other day, our first whiskey that we've distilled and mature, et cetera. And of course, controlling our own destiny now for 100% of our whiskey talks to the quality opportunity. We know where in the barrel house, for example, the best barrels can be sourced and so on and so forth. So again, we've demonstrated great success on the wanted series. We're actually just about to bring to market a series that sits above that. I mean just a couple of price points there. I think it was about $150 per liter on wanted. The market still a series of over $200. And of course, the quality of the whiskey is improving. So we'll grow from 10 to 15 to benchmark, if you like, 25% of our whiskey around that up we think in terms of quality. And then, of course, it's up to us to make sure that we find the channel for that whiskey to realize that price point. But that's where we're at in terms of practically what we've laid down and how we're seeing that pathway.

Congratulations on the results.

Thank you.

There are no further phone questions at this time. I'll now hand back the conference to Mr. Karafili.

Well, thank you very much. Just closing comments. I just want to thank everyone for taking the time for attending and listening and also I just got one last question. Are there any changes in cost to build in the facility [indiscernible].

I'll take that. So in terms of -- we might going, obviously, executing our plan in terms of the build-out of the facility at the farm. We have applied for a number of grants as people were these 3 sources. One is the Northern Australian development grant. One is the MMI transition grant ones on the clean energy/RET grant. So we've got active applications in all of them. I think it tied from doing the rounds with all the politicians, the Prime Minister last week, the Treasurer of the work before the nationals earlier. Now again, we'll find a little bit more about brand strategy over the course of the success of that, I should say, over the course of the success so that I could say to the course of next sort of 6 to 8 weeks. And that obviously goes into in part our capital strategy. Of course, we're also actively as people may know, we have built relationships with energy provider. So whether we choose to invest capital, we take enough operating costs, people are actually looking to leverage our energy into a broader opportunity in the Whitsunday. So that presents as well. And of course, just in terms of the headline numbers, we're obviously working through finalizing what those numbers are. You start the process with some contingency in mind and then you obviously get narrow that contingency down as you take delivery of assets and build out the execution of your strategy. So all of that's coming together. It's still the headline number, but of course, help to keep the grand strategy and obviously manage the actual procurement process provides further opportunity against that number. And of course, a good example of that is already taking the delivery of our first still. So we get further and further along the way.

Thanks,. We're right on time. So again, I'll just thank everyone, thank you all and for those who asked questions. And we obviously have multiple brokers on the line as well. So I'm sure if there's any follow-ups, you can work through them, and they can sort of get to us. So thank you all, and I'm sure we'll speak to you again shortly. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.