Lark Distilling Co Ltd

ASX:LRK

Earnings Call Transcript 2023-Q1

[Sam Wells;NWR Communications;Director]

Good morning, everyone, and thanks for joining us today for the September Quarter Q1 FY '23 Investor Webinar for Lark Distilling Co. I am Sam Wells from NWR Communications, and I'm pleased to have joining me today from the company, Laura McBain, Managing Director and Interim CEO; David Dearie, Chairman of the Board; as well as Alex Aleksic, Chief Financial Officer.

Following some key highlights from the team, we will have some time for Q&A at the end of the session. As a reminder, in order to ask a question, you can use the Q&A function at the bottom of your screen, and we'll do the best that we can do to get through all the questions today.

So Laura, David and Alex, I'll pass it over to you. Thank you.

[Laura McBain, executive]

Thank you, Sam, and great to have you all join us today and also wonderful to have David Dearie back in the country. Welcome, David. And of course, Alex Aleksic, our CFO joining the call.

And before I kick-off in some commentary about the results for the quarter, I'd like to hand over to you, David, to give some thoughts and reflections on where we are and where we are headed.

[David C. Dearie, executive]

Great. Yes. Thanks, Laura, and good morning, everyone. It's great to be back in Australia for first time in a while, first time in a couple of years. So it's good to be here.

But as you'll see, we have been searching for CEO candidate. And we have done a global search on looking for that CEO and we're looking for someone with the experience, the attitude, the desire, the knowledge, the reputation and relationship to really lead and grow Lark and create value in the company. And we're looking for someone who complements the existing executive team in terms of skills. So we conducted this global search. It's been a difficult brief of one-on-one, and it's taken a bit longer than we expected because we need the experience and expertise to drive our business and to create a value.

And that expertise is usually gained through the large international spirit companies, people like the AJIO, Brown-Forman, Bacardi, William Grant, Campari, Pene, et cetera. And these guys tend to pay their executives very well and have them tied into long-term golden handcuffs type arrangements. They also offer them long-term career paths. And we want to secure a CEO that had the desire and the drive to really turn Lark into the powerhouse of Australian whisky that all can be. We wanted someone who wants to live in Australia and someone who can take on the public company responsibilities.

So we need someone with that huge degree of belief and confidence in what we'll achieve with Lark and we're delighted that we found that individual and we will expect to have the contracts executed later this week. So we wanted to meet face-to-face with the candidate, which I did yesterday in Sydney, and we're pretty confident now that we'll have this out later this week, which is really super exciting. The timing of the start date is still to be determined. There is a notice period that the candidate may have to work, but we will get them on-board as soon as possible. And between the executive team, Laura and myself we will continue to develop and drive the strategy on the company and focus on executing the plans that are really going to drive our business as we go forward.

One thing I would add is the category of luxury and premium global spirits remains to be highly attractive and very resilient in the current economic environment. We need to be looking at how we can continue to get that growth in that exciting category. We're seeing great demand out of whiskey, tequila, other white spirits and brandy Cognac and Armagnac really driving growth. The brandy space globally is actually slightly down in volume, but really driving carbon value with a 100-plus per bottle category, really driving the sales out of this piece. We're looking at some information at IWSR. And Bain & Co estimated global market for fine wine and spirits increased 12% in 2021 to reach over $77 billion. So we know the category we're playing in is the right category. We know the reputation that we have as a company and the wonderful whiskey that we produce can compete in that space.

Now if we look at it, we're saying where does the growth coming from? Well, 21% of the growth came from molt and grain whiskey, 14% from blended whiskey and 47% from that brandy in Armagnac. We know we're in an exciting place. We've got to continue to invest behind building Lark, the brand. We know that we're on the right track. We've got the inventory laid down to support that growth and now we've got to be looking at exports and driving those exports. Top markets for exports in the spirit category continue to be places like China, the US Global Travel Retail, Japan, Taiwan, the UK, France continue to be a very important market. So our exports strategy will look to take it into the markets where we're seeing this dynamic growth.

But that's all for the future, very excited about where we're headed, and I will let Laura and Alex give a bit of an update on where we are year-to-date.

Just one thing I would add just -- the other thing that's important just to note is we'll continue to see enormous investment by the big global spirit companies in both laying down inventory and building new facilities and in tourism. So whiskey tourism is becoming a very big piece and equation in the category. So we're starting to -- we're really seeing that growth. People like the ad you recently put GBP 185 million into whiskey tourism. We're seeing Pernod with USD 110 million into a couple of their facilities. So we're seeing real investments in the infrastructure, and we're also seeing a lot of activity with these bigger companies are buying smaller brands to really drive the business as they forward. So the category continues to be resilient. We're well positioned to compete in that, but it is a tough competition.

[Laura McBain, executive]

Arguably, the best positioned whiskey brand in Australia to capitalize on the opportunities that sit out there in the luxury and global whiskey market. So just going back to the quarter, we've obviously seen some pleasing but modest growth compared to the same quarter last year. But Q-on-Q, we're up 13%, which is a fantastic demonstration of the opportunities that sit before Lark in this quarter that we're in now. Driving the growth for the quarter has really been our core range of products with Classic Cask and Symphony achieving 39% growth. This is a really important strategic initiative for Lark as these products that will lead the charge into new growth in new markets.

To further support this, we've been working on an expanded range of core collection with 3 new products slated for release in Q3 as part of a always-on core range initiative. These products will help drive consumer recruitment here in Australia and in export and also provide Lark [indiscernible] the opportunity to continue to experience a broader Lark range outside of those 2, Classic Cask and Symphony SKUs at any time. It's much more preferable for Australian retailers to have a collection of products to be able to brand in their stores and this is really a key for us in driving genuine sustainable brand growth in export markets.

Whilst the core range is obviously really important to us, our limited release program is continuing to support the initiatives and drive innovation and driving innovation that results in award-winning whiskeys. The limited release program is where we can flex our whiskey bank using our diverse range of whiskeys and finishing programs to drive the most profitable outcome for the group. As an example, Dark Lark concluded in the September quarter with 5,000 units sold. It has been our single biggest release to-date and testament to strength of the innovation within the Lark business.

Also supporting the growth for the quarter and into the future is the B2B sales performance, particularly to key retailers. We have had some great successful reviews with those retailers and expanded our core distribution, but we've also grown distribution in non-range of retailers with 16% growth in distribution points of presence since 30 June 2022. So that's more than double the same time last year. All of this is foundational to support this sustainable growth strategy, improving distribution as a key strategic priority and utilizing of course, our expanded sales team in support of this.

Turning to hospitality. The September quarter is traditionally a low point for Tasmanian hospitality businesses as it's impacted by tourism over those 3 months, but we were also impacted by staff shortages at Pontville, which resulted in 39 loss trading days. Nonetheless, hospitality did grow during this quarter compared to same time last year, and we're looking forward to the summer break.

E-commerce sales have deteriorated compared to same time last year, and this is really a reflection of the change in consumer behaviors post-COVID lockdowns and the lower gift pack sales. So for context, following the introduction of gift packs in September last year, so prior to the Father's Day period, Q1 FY '23 sales of whiskey gift packs was $600,000 lower than that same period. But if you take that out, overall group whiskey sales were up 28%. So it's still encouraging. It's just impacts were impacting and obviously the e-commerce part of the business has not been performing as strongly.

Then turning to Gin. The gin sales for the quarter have been impacted by slower-than-expected sell-through from our wholesale partners, which impacted replenishment. We are turning our attention to a much stronger marketing and branding campaign for Forty Spotted Gin and you'll start to see that rolling out through both dedicated website, committed and dedicated trade marketing activity as well as an enhanced and fully supported digital and social media strategy. We genuinely believe that Gin still has a very strong place to play in the Lark portfolio and we look forward to really pushing that, trading that over the next quarter, especially as we head into summer.

Export sales continue to perform as expected with strong growth from a small base by continuing to build our beachhead into these export markets. As already mentioned, redefining Lark's core range has also been a critical step in aiding future export potential. We are taking a measured approach to expansion to new geographies, as David just said and we are encouraged by the ongoing activity that's planned for this quarter with committed orders; most important is building a long-term successful, sustainable export channel with the right products, the right distributors and the right operating platforms is a key strategic priority for the business into the future.

All of these initiatives are of course, possible because of the new make spirit and our ability to extract value from the maturity profile of our whiskey under maturation. With 2.2 million leaders now taking their time to produce beautiful goodness, these are all produced by different distilleries, showcasing different profiles, and this gives us a huge amount of flexibility in our future innovation as well as a strong base of whiskey from which we've been able to develop this core range.

Just turning then to the balance sheet. Our cash position sits at $10 million, plus we have an unused bank facility of $15 million. During the quarter, we repaid $5 million of that facility that had originally been drawn down to repay Quality Life in December 2021. So from a prudential management perspective, we've paid this amount, but that means, obviously, our funding facility is increasing $10 million to $15 million at the end of the quarter.

The awards for Lark keep coming within an impressive 12 GOLD medals in the September quarter with Classic Cask and Symphony both taking home gold. Most recently, Lark won gold at Australian Distilled Spirits Awards for Symphony No. 1 and Para 50 II Rare Cask Release. And we're also very excited to announce that Bill Lark has been shortlisted for the Lifetime Achievement Award at the Global Spirits Business Awards, with winners to be announced tomorrow. So fingers crossed for Bill. Into this quarter, we just started our Christmas campaign with our award-winning Christmas Cask released last week. And coming up next month will be the TOKAY 100, which is a very, very unique, very special product. One of the rarest products in world, the TOKAY was finished until recently held Seppeltsfield museum blend Tokay, containing a highly precious parcel from 1922 vintage. TOKAY is a very limited release and will retail at $1,000.

So finally, just turning in to echo David's comments around tourism. Tourism is a really important part of the hospitality venues, and they're all in full swing. We're looking forward to a strong tourism quarter and obviously, strong hospitality result also. Bring on Christmas.

Thanks, everyone, for listening, and we'll now take questions. Thanks, Sam.

[Sam Wells;NWR Communications;Director]

Thanks, Laura. Thanks, David. I have got a couple of comments in mail. I'll take a few first from Nick McGarrigle of Barrenjoey. Do we continue to ramp-up whiskey production towards 1 million liters [indiscernible] in the new facilities?

[Laura McBain, executive]

Yes. So whiskey production, as David said, is super-important to deliver flexibility in the portfolio and also enable future growth. So yes, at the moment, our facilities can produce around about 650,000 liters annually. The Pontville facility plants are with Council, and we expect all things being equal, to be able to start that process next year. But in the meantime, yes, we'll continue to lay down whiskey to support that future growth trajectory.

[Sam Wells;NWR Communications;Director]

Great. And can you talk sell-through in that national key accounts channel. How penetrated is Lark across international care accounts where demographics suit Lark product.

[Laura McBain, executive]

Yes. It's really important that we put our product [indiscernible] sold in the places where people want to buy Lark. So obviously, retailers like Vintage Sellers and Dan Murphy's have a strategy in place for themselves in making sure that category has the right product mix in it. So we're focused on working with them on those key stores. But that being said, we have a really diverse base, and you can see that from some of our e-commerce results, people obviously send products to some of our biggest customers are in unlikely places if you would have put over a demographic map of Sydney or Melbourne. So there is opportunity and there's certainly products like Dark Lark have encouraged and brought forward a new set of customers to the Lark brand, but we're quite disciplined in our approach with the core range and where that will actually be positioned going forward.

[Sam Wells;NWR Communications;Director]

Right. Thank you and just one more. Why are Lark gift packs not as strong in the B2B?

[Laura McBain, executive]

Sorry, I missed last part, B2B yes. Gift packs don't tend to be super strong in the B2B channels. It obviously was a big item during COVID lockdowns, where I guess people weren't able to go and visit their fathers over Father's Day and so on. So gifting during that period was a really big component. That being said, this is the first year with B2B and with our retail partners that we've actually created a full Christmas campaign, so not just some product, it's actually a fully integrated trade marketing campaign. There will be places where you can go and go get calligraphy on the bottles done in certain stores. We worked with some of our key retail partners. There will be in-store demonstrations, tastings. And so we're utilizing those sorts of platforms to encourage consumers to the brand and also to encourage trial for gifting. So we're confident in our program with B2B going forward without the impacts being a core part of that.

[Sam Wells;NWR Communications;Director]

Thank you. Can you just elaborate around the export strategy. Focus on key geographies, what products are currently being sold and you start resourcing. And any other thoughts around price point at this time?

[Laura McBain, executive]

Yes. So today, the primary export sales have been to China in terms of the historic growth. This quarter, we'll see some small sales through to a new trading partner in Southeast Asia. Majority of the products that have been sold through to-date have been -- there's been some Classic Cask, but there's been a lot of the high-end products also moving through.

So for example, the Legacy or the Rare Cask Series, so those high-value products. And that's partly reflecting the fact that the brand itself has not really been in a position to offer that full core suite of core range to deliver against a category strategy into those key markets. David and I are working together on the export strategy going forward. And of course, we expect with the appointment of the new CEO and the experience that they'll bring to the table in export will be able to accelerate our export opportunities into the future.

[David C. Dearie, executive]

Yes. I think I'd just build on that. CEO candidate is incredibly experienced in Asian market, which is going to be important for us as we go forward. The other key markets will be in the Americas, Global Travel Retail and the USA, where my personal contacts are very strong in those markets. In the next few days, we've got the executive team and we're working through what is happening in the category and ensuring that we are very mindful of the category expansion, where the consumer is, what they're looking for, what kind of products, we're seeing a growth, if you take the [indiscernible] space, it's in those special packs and aged liquid, which is really driving that high-end growth. So we need to be mindful of that.

In the whiskey category, we're seeing age becoming increasingly important again at those luxury category points. So we're working through with our distiller on what can we do from an age statement point of view. So we're still perfecting that export strategy. We see it as a critically important element to the long-term success of Lark. But what we've got to make sure is what products have we got laid down today that is available for us to move into the export markets.

And as we look to the long-term in the next 5, 10, 15 years, what products should we be laying down today that will be available for us to service the growth in those export markets. So this is a long-term view on the exports. We've got to get some sales now because we have whiskey available, but we also then need to be looking at the longer term on where is the consumer, what sort of packaging, what sort of products and ensuring that we're laying down and crafting the whiskey that suits that consumer base as we go forward.

[Sam Wells;NWR Communications;Director]

And just one on hospitality. You mentioned some loss trading days at Pontville. How optimistic are you seeing a return to sort of normalized hospitality run rates?

[Laura McBain, executive]

Yes. Well, Pontville is fully operational. It's now trading 7 days a week. So that's really good. Pontville doesn't just offer, obviously, cellar door experience, also offers tours, which are pre-booked. We're also offering that now on our website. We can actually gift or purchase a tour of the Pontville facility. And the cellar door continues on the order front, which has performed extremely well. And The Still bar sort of tags in behind that and help customers often start with cellar door and during the day and end up at The Still, which is a great outcome. So we're really confident about the hospitality venues over the summer and not just being driven by tourists' performance but also locals as well that are now frequenting those venues.

[David C. Dearie, executive]

And I think just again, building on the hospitality, as I said in my opening comments, we're seeing this tourism of fine wine and spirits, becoming such an important element of brand building. If consumers are going looking for experience and I think there is a lot of explaining, we've got a wonderful range of experiences that we can offer for those tourists when they come down to Tasmania. And it would be great to see the doors opening again for tourists to come back into Australia and experience that plus the domestic travel, which will see more and more of Australians looking to come and experience these wonderful hospitality venues. So I think it becomes an increasingly important piece of the brand experience to like consumers interact with the brand, get to know the brand story and then go out and become ambassadors of the brand as they live their experience.

[Sam Wells;NWR Communications;Director]

And just on the Whisky Bank, how much emphasis has been placed on age statement releases in the future? And can you comment on any age ranges, volumes and price point.

[Laura McBain, executive]

We've obviously got Legacy, which the 20-year Legacy, and that's a really important part of the portfolio. In terms of aging statements, you can see from the 4C announcement, the majority of our whiskey is younger whiskey. But to David's point, we'll continue to build on that so that we can support an aging statement over the short and long-term, which is obviously really important as these things grows.

[David C. Dearie, executive]

It hasn't been a major focus for us to-date, but it is something we're mindful of. And as I said, we're looking at the category, where are the successes coming from in the category, what are the consumers looking for? Why they're looking for those and then we'll perfect our export strategy. And if we go down on aging statement strategy, we'll perfect that over the weeks and months to come.

[Sam Wells;NWR Communications;Director]

And just turning to competition. There's a large number of emerging Australian whiskey brands. Do you see them as a threat or a support more broadly to the reputation of Australian whiskey?

[Laura McBain, executive]

I think it's a case of rising tide lifts or boats to the point around, for example, the tourism aspect, giving a lot of people that are on the whiskey trail down here in Tasi. So you can't do that if it's only one brand. So that certainly supports that case. Lark is by far, looking at 2021 data, we're by far the largest brand from an Australian whiskey perspective in Australia. So we will optimize that and continue to build on that platform as we grow. As David said, the category is a $77 billion category. So I think there's more than enough room for everyone to play.

[David C. Dearie, executive]

Yes. I would just add to that and just say that the aim or our hope is to ensure that Tasmania continues with this premium plus luxury approach to crafting these outstanding whiskeys. And we will continue to watch competition and what they are doing. But our reputation, Tasmania's reputation at the moment is for crafting premium and luxury whiskey and the intent, the aim or hope is that everyone will continue along that path and the evidence suggests that it will.

[Laura McBain, executive]

And I should add one last thing is that we are Lark, we are the founders, we started it all. So we've got a natural winning point that stands out against our competitive set.

[Sam Wells;NWR Communications;Director]

We'll just take another question from Nick McGarrigle at Barrenjoey.

[Nicholas McGarrigle, analyst]

I just wanted to check on the modern manufacturing grant and just make sure that's still in train.

[Laura McBain, executive]

Yes, it is. No changes with the change of government.

[Nicholas McGarrigle, analyst]

And then with the new CEO, will that person be spending a material amount of time on relocating to Tasmania.

[David C. Dearie, executive]

He'll be spending a material time here rather than moving full time, certainly Australian-based and spending a lot of time here. But a lot of that role for the CEO is also being the face and the brand and out-driving the performance. And therefore, what we'll look to do is maximize the skills of the total executive team that we have in place and ensure that we're touching all elements of the business in the appropriate level and fashion. So whether that's a production or hospitality here in Tasmania, our sales around Australia and across the globe and the CEO will oversee, obviously, all of that to spending the appropriate level of time here in Tasmania and an appropriate level of time driving the business in the key markets across the globe.

[Nicholas McGarrigle, analyst]

Maybe just the last one, I can sneak-in as well. Just in terms of net sales value per liter over the quarter, did that come down on FY '22, just given some of the high-priced releases that you launched late in the last financial year.

[Laura McBain, executive]

I don't know whether you want to add into this, Alex. We're obviously moving away from speaking to net sales value, but it's fair to say that, obviously, the volume and growth for the quarter reflects the product mix and the gross margin mix that you would have seen.

[Nicholas McGarrigle, analyst]

Yes, I guess the net sales value per liter, and I appreciate you moving away from that. I suppose the market cap implies a net sales value per a liter of about $65, so it is sort of, I guess, it's an interesting data point just to compare against what the market cap is, particularly from a potential strategic perspective and also gives you optionality to maybe bring down the price point to expand faster into export markets, but maybe that's a segue into a question about David's experience with export markets. Do you think that you can have a scaled export market at $200 a liter or does it need to be a more mass market product?

[David C. Dearie, executive]

No, I think we've got to look at and see, from an export point of view, it's an interesting question. We benefit in Australia, obviously, from the hospitality sales and the direct-to-consumer sales. So we've already got it at the high-margin. Exports, you will need to take a distributor network in place, and you need to look at selling through retail, whether that retail is on-premise or off-premise retail. So there's more margin to be taken. There'll be less direct-to-consumer sales as a total mix internationally.

And therefore, as Laura indicated, we've got to look at the offering in the international markets and what do we place and enter those international markets. So what I'd say, Nick, is if you hold off that question until we've completed a review on the exports, but the likelihood is that the mix will be different in the international markets than it is domestically, both the mix of products that we sell and the mix of channels that we sell it through, therefore generating a different outcome.

My experience, however, on more on the wine side has been some of the export markets actually generate higher marked because the mix of product you sell in the international markets are different. But rather than you give an indication today, let us perfect our export strategy. And when we have it, then we'll come back to the investors and like where we're intending to go.

[Sam Wells;NWR Communications;Director]

Laura, just maybe one more question here just in terms of the outlook and maybe it's probably an opportune time to turn to some closing comments, but any further sort of comments on the outlook from you, David or Laura?

[Laura McBain, executive]

This quarter is very exciting for us. It's the campaign -- the Christmas campaign is, as I mentioned, not just about product. It's about full-fledged campaign across multiple touch-points and channels, put Lark in front of more consumers and to create interesting drive, gifting as well as, obviously, consumption over the summer period. The team has worked extremely hard to build that program. And in doing so, setting some foundations for the next quarter. In addition to that, we've got a number of new releases that will obviously come through in Q3 with not just the core range, but also some limited release programs. And Q4 is very exciting, too, with some further Rare Cask programs coming up.

So all-in-all, there's a lot of activity going on. And in back of all that, of course, we're building brand campaigns and building a campaign for export markets. So yes, busy times, but a really strong outlook for the opportunities for Lark as a brand into future, both here in Australia and filling our true destiny as the #1 whiskey brand in the country.

[David C. Dearie, executive]

Great. And my closing comments would be I continue to be excited by the resilience of the category across the globe and the amount of consumers, new consumers and existing consumers entering into the spirits categories. That continues to excite me. I'm excited by the talent of the new CEO to complement the talent of the existing executive team. And I think we've got a really strong team to help drive the business going forward.

I'm excited by the outstanding whiskeys and gin to be [ crafted ] and that we're laying down for the future to support our growth. And I'm excited by the legacy of Lark and the positioning that we have in Lark, the brand and the reputation that it's gaining across the domestic and to a lesser extent, international markets. So exciting times, tough trading environment, lots of competition, but exciting time for us as we look to the future and obviously driving performance and execution of the plan will help to grow the business and to generate the value that we're looking to create for our shareholders.

[Laura McBain, executive]

Thanks, Sam. Thank you, everyone. Great that you could join. And any further questions, please reach out to obviously ourselves or Sam.

[Sam Wells;NWR Communications;Director]

Thank you very much. That concludes this session. Have a great day. Goodbye.