The Artisanal Spirits Company plc (ART) Earnings Call Transcript

Good afternoon, and welcome to the Artisanal Spirits Company plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Andrew Dane. Good afternoon.

Good afternoon, and thanks all for joining us for the interim results presentation for the first half of 2026. I'm Andrew Dane, I'm the Chief Exec; William McCarter, CFO. And we're going to take you through some of the headlines from the first half of the year, current trading and outlook, structured into exec summary headlines. We'll talk through the details of what's happened in the first half of the year and then talk about what we expect to see going ahead. We'll start with who we are. And just a reminder that our ambition is to be the home of the world's most respected whisky brands. And we're going to spend a lot of time talking about our brands, Scotch & Whisky Society, Single Cask Nation, Artisan Casks in particular, and all of those brands are united by the creation of outstanding one-of-a-kind whiskies and experiences. In terms of the headlines for the period, really pleased to see branded sales growth of 7% in the first half of the year and that, that has now increased to 10% to the end of August at the top line, together with improved brand profitability through cost control. That has combined to drive cash flow improvement of GBP 1.5 million improvement in the first half of the year, entirely driven by that branded business. At a group level, revenue was down 5%, and that is entirely driven by the timing of trade cask sales, which we will talk about a lot today. But despite that deferral of profit and cash recognition on trade cask sales, we retain that really substantial high-quality asset backing of over 18,000 casks. And what's been really pleasing is what has driven that growth in the branded business are the strategic priorities we've been talking about over the last 18 months. The S&WS core proposition, investment in America and the launch of Artisan casks, we will talk about how each of those has contributed to the performance in the first half of the year. Billy, I hand over to you, and we can talk about what's been driving branded sales.

Thank you. So as we spend a bit of time talking about the brand, I just wanted to take a minute to talk about the kind of key financial headlines and particularly revenue to start with, particularly with regards to branded business. So as you can see on the screen, Andrew mentioned overall revenue down 5%, which is heavily impacted by the trade casks timing, which we'll talk a bit more to shortly. But what we are pleased about is we have seen a return to growth in the branded business. So we've achieved 7% growth across the branded business. And if we look at each of the regions and turn behind that, there are some really good green shoots that we're gaining momentum on as we entered half 2 as well, noting that the 7% branded position in half 1 by the end of August year-to-date, and that's up 10%. Within Europe, you can see with a 4% growth. Within that, there is a key driver of the new branded Artisan Casks. So a reminder, we launched Artisan Casks in July last year, and that delivered about GBP 400,000 in the half, whereas last year, it delivered a small GBP 50,000 amount. Within Europe, also, we've got U.K. venues and events, which has seen another period of growth. That was up 1% year-on-year. After that, we've got the 2 online areas of Europe, which is U.K. online and Europe online. So both unfortunately declined in the first half, so U.K. by about 5% and Europe by about 11%. However, if we look within that, we can see some real positive signs of improved trading there. Notably, in the U.K., we've seen membership grow plus 3%. And with regards to engagement, where a key tracker is the average bottles per member, that actually increased over 10%. So that's really positive. So there's an element of product mix playing a role in there, and we'll talk about all of this shortly. Within Americas, more importantly, we'll talk to a bit more detail also because that is a little confusing given the changes that we made to the RTM in last year and the accounting adjustment made in half 2. But at a headline level, that 44% reported revenue growth in Americas is 18% in SMWS America and 200% in Single Cask Nation. Now the latter Single Cask Nation is some underlying growth, but some of it is also due to the smoother profile of delivery this year, where last year, most of the delivery was back-ended to half 2, so a fairly small comp to compare to in half 1. In Asia, you can see it declined 11%. But again, as we dig down a little bit, that's against prior year declines in Asia of around 25% and 30%. We have stated before that Asia has been challenging. So we're pleased that that's reduced. And if we dig a little deeper into that also, China, the key market in Asia, is down only slightly at 3%, and then from another perspective, that's Australia performance, which is positively up 7% as well.

So now I spend a little bit of time just talking about what's driving that. One of the key focus areas has been growing SMWS membership and being clear about what the SMWS proposition brings that VIP access to the world's best whiskys, each of which have been individually tasted and selected by experts and using that to bring people into membership. And when we look at recruitment, engagement and retention, which are the 3 lenses that we think about from the society engagement perspective, recruitment has been very strong in the first half of the year. Global recruitment was almost a record just in second place after the first half of 2023. It's important to note that, that is really a very positive performance, particularly when you think that in 2023, we were spending something like GBP 3 million on marketing. But this year, it's less than GBP 2 million. So being able to recruit those members in challenging conditions reflects some really good performances. And I'm going to call out 2 markets that have been driving that. The U.K., where partnerships, in particular, the American Express partnership has performed very strongly. And secondly, in China, where a combination of product and video e-commerce has helped drive recruitment. You can see very strong recruitment numbers in China that have continued into H2. On the left-hand side, you can see a specific Sherry-influenced whisky product that was produced for the Chinese market as a recruitment product. We've also used a half-size bottle and partnership with a whisky influencer in China to drive recruitment. And then in the middle, a short video clip that has been used on e-commerce platforms in China, again, driving recruitment connected to whiskys with strong flavor profiles. This one is called a barrel of butter. And again, that allows people to connect really easily, and that has been a good driver of recruitment in that market. When we then think of total membership, total membership is now back to growth, much lower rates than we saw in the kind of post-COVID period, but it is back through to growth. So that's been really pleasing across big markets, U.S., U.K., China are all growing. And how we're engaging with those members. We tend to spend quite a lot of time talking about product and physical product development, and there's a lot of that still coming through that we're excited to update members on in the coming months around winter series products, new Sherry releases, new Sherry delivery, some new developments from the kind of gin and rum perspective. So there's lots of product development coming and our cracking Peat Plants III Creators Collection. But I thought here and just talk a little bit about digital NPD. And in August, we launched a new product called the whisky Wallet as a membership benefit that allows members basically to put aside some money every month, and we top that up with a 10% credit. When you log into your membership account now, you can see that credit available. That was launched to a few thousand kind of beta test group members in August and a few hundred have already signed up and will be rolled out to all U.K. members this month and hopefully being rolled out to EU members later this year. So that's a nice extra membership benefit. The second piece is from a personalization perspective. So we've always been very good as a society at giving people a personalized experience in person at a venue, at an event at the festival, being able to give that same quality of personalized experience to people online has proven harder, but we've made some really good progress here with the whisky team, working with the venue team, working with member services, working with the tech team and some exciting developments coming there over the coming weeks and months with first part launching this month, allowing people a personalized outturn personalized web experience and so that they are getting -- shown the whiskies that we think they would enjoy as well as being able to rate -- give their own ratings for whiskys that they have bought in the past, which is a feature that members have been asking for. So that bottle keep function coming soon. Next up is from a retention perspective, that's still holding strong, picking up gradually this year with a few more upsides to come. Two that I would call out are the reintroduction of auto renewal in the U.K., where we replaced the old legacy kind of direct debit model with a recurring card payment in April last year. So the benefits of that started to come through from Q1 this year will continue all the way through to Q1 next year as well as the loyalty program that we introduced in the U.S. at the tail end of 2025, which has shown benefits already with more to come in H2 there as well. And then we think what markets are driving growth, we've talked about the U.S., and I want to give a little bit more flavor over the next 2 minutes there. First is a reminder of the 2 big changes we've made in the U.S. First of all, in Q1 last year, we brought back in-house brought in-house the team and operations in the market. There was a one-off cost associated with that change, that having those team working directly for us, unleashing the potential has really worked and that we have seen 4 consecutive quarters of growth in the U.S., high single digits through to the end of Q2, and we're now at around about double-digit growth for Q3 to date. The second piece is that as announced in November last year, we have changed our route to market from a shipment basis to a depletions basis. And what that means is in the past, we recognized revenue when we loaded a shipping container in the U.K. and sent that off to the U.S. Instead now what we do is we recognize sales only when the member buys the bottle. What has happened in the meantime is as we've transitioned from one to the other, we essentially bought back or made a provision for the stock that had already been sold to our importer partner, but not yet to a member. So on the next page, what you can see is those 2 numbers shown separately. The top half of the table shows the reported revenue in our results. The bottom half shows what's really been happening in the market. And you can therefore see that in-market depletions have significantly outstripped what has been reported in our revenue over the last 18 months. And if you read that ahead, what we should expect in H2 is even if depletions stay flat, so in-market sales stay flat for the last 4 months of the year, we will recognize an extra GBP 2 million of revenue in H2 '26 versus H2 '25. So when you're looking at the results and looking at what to expect from the full year, there's GBP 2 million of arithmetic upside to come in the U.S. just because of the unwind of this accounting treatment H2. So that's a big growth that will just flow through naturally. Layered on top of that is the fact that in-market sales are growing. So there's more upside there and profitable growth there. So that's SMWS. We touched on Artisan Casks, which launched successfully last year and has been growing. We'll continue to invest in the building of that brand, as well as Single Cask Nation, where as Billy alluded to, there's a bit of timing gain in H1 versus H2 last year, but also there's real growth in the market. You can see the rebranding there, both the kind of top left, which is the retail offering as well as that kind of yellow nation style branding, which is for the e-commerce offering in the U.S. We've also launched into new markets, adding Australia at the tail end of last year back into Sweden this year. So continuing to grow that brand, which joined the group in 2024. Billy, you want to touch a little bit on profitability?

Thank you, Andrew. So as I said at the top, we've seen an improvement in branded revenue. And what we've seen is that branded revenue improvement at an EBITDA level, profitability level is actually a GBP 1.5 million improvement year-on-year. So there are 2 key elements to that. So there's a flow-through of that revenue improvement. So we've seen branded gross profit improved by about GBP 0.5 million year-on-year with the other GBP 1 million related to cost savings. And within those cost savings, you can basically categorize them as 2 further buckets. Firstly, last year, we talked about the U.S. As a reminder, we had to make a payment last year of about GBP 0.5 million to exit with our previous RTM partner. So that has not recurred. But one of the most pleasing is our continued cost base control and reduction. So we've reduced our marketing spend, reducing that marketing spend, but seeing some key improvement in statistics like recruitment, engagement and overall membership, which is positive. And we've also looked at our payroll headcount costs, and that again has reduced year-on-year, and there will be further savings in half 2 as a result of some changes that we made in Q4 of 2025. That's been flowing through to our cash flow improvement. So as a reminder, as a spirits business where Q4 is our biggest profit and cash generation period, it is normal to some level for a cash outflow to exist in half 1. But what we're really pleased about is that cash -- that cash outflow has reduced by GBP 1.5 million compared to prior year and to most years in recent time. Now the GBP 1.5 million branded business improvement is the net position explains it. But what I'd like to call it is we've managed to offset that trade cask impact that we talked about where we've seen revenue down GBP 1 million through reduction in the spirit and wood investment compared to prior years. The 2 together essentially netting out net position. Now we've mentioned trade cask sales a couple of times in here and trade cask sales remain something we will do. And the purpose of the slide is to show you the trend and the phasing of our Trade sales. We've done some in the past. And again, as we deliver our numbers for the full year, which we maintain confidence in, trade cask sales will remain. Now as you can see by this chart, the key thing is most of our transactions tend to happen in Q4. Now that looks like happening again this year, certainly. But if you look, over 50% of revenue between F '23 and F '25 is generated in Q4. So we're confident that we can deliver that again. One key thing we're seeing this year is certainly the profile of the stock that we're selling. And to highlight that a little bit, you can see on this graph that the margin and the volume that we've been doing compared to prior years is very different. So in prior years, we're talking tens of casks for millions of pounds of revenue. This year, due to the profile being younger than the old and rare we've sold before, this year, it's expected we'll sell thousands of cask at a lower margin. So we'll see a higher revenue but a similar profitability achievement. And as I close kind of this update on the more financial side of things, just a reminder that from an NBV perspective, the cask on our balance sheet is between GBP 27 million and GBP 28 million. We recently completed the 6-month revaluation with our bank by an independent valuer, and that value is about double NBV and came through at GBP 50 million. The key thing being that underpins the enterprise value of the business.

Thanks. And as we look ahead, this sort of underpins our attempt to build a credible path to a business generating GBP 30 million of revenue, double-digit profit margins, cash and PBT positive from the core branded businesses. So we'd grow that SMWS through brand awareness and recruitment, the personalization for engagement that I touched on as well as that new product development pipeline. From a Single Cask Nation perspective, growing distribution into new U.S. states where we're currently present in about half the states, new international markets, I talked about Australia and Sweden and more to come as well as product innovation under that brand. Artisan Cask launched successfully last year, so it's really about establishing and growing that new brand. From an ASC perspective, it's strengthening our retail reach, selling outside just the D2C model and testing and learning some ideas in that space in the coming weeks and months from an innovative perspective as well as delivering trade cask sales to deliver financial freedom for the group. Behind it all, a really whisky-first culture in our business with people empowered for success and we celebrate the success that they deliver. So that's from a kind of long-term strategy. And alongside that from a kind of capital allocation strategy, on the left-hand side, Billy has talked about managing marketing spend. So we're focusing that on the places that are delivering results like the U.S., like recruitment. From a Cask spirit perspective, managing that profile where we've just come out of a wave over the last 10 years where we've been heavily investing in new cask, now looking at rebalancing that portfolio and realizing some value out of some of the cask surplus to requirements. From a CapEx perspective, very minimal CapEx going into venues and [indiscernible] but also looking at ways we can get value back out of those. From a strategic uses perspective, the #1 priority is debt reduction for uses of cash. From a shareholder returns perspective, there is no expectation of paying any dividends or shareholder buybacks at this stage. Instead, we think the best path to shareholder returns is delivering more profit and more cash generation from the core business while being open-minded to M&A opportunities, which are complementary and incremental and could represent a strategic opportunity for the business. So that's what to expect long term. Short term, we are seeing continued growth momentum in the branded business. As I say, that 7% in H1 has become 10% year-to-date to the end of August. Membership is back above 40,000, driven with upside in the U.S., both in market and through an accounting perspective, meaning that we are seeing growth in sales, membership, recruitment, retention, cash, profitability, all the right things from the core business. And assuming that those continue and assuming our trade cask transactions complete as anticipated, we remain in line with expectations for the full year outcome dependent on those trade cask sales to deliver our current market expectations for 2026.

Thanks so much. I'll now pause and go across to questions. And we did have some in advance, and we've had a few questions over the period, which -- around a similar topic and it's around -- so given the high level of debt relative to the business, do we need to attract more investment or look at that? And Billy, do you want to take that question?

Yes. So when you look at our level of debt compared to perhaps our revenue and our P&L, it may seem relatively high. But it's important to remember, it was a few slides ago, the point I made where we have a bank value of the 18,000 cask that we hold of GBP 50 million. So the current level of debt is still below 70% LTV equivalent, which we're comfortable with. We -- to Andrew's point on capital allocation, we would like to see net debt reduce slightly, and that remains something we want to do. But at this level of time, the level is comfortable. We still have headroom in our facility. So again, we're comfortable with. And as we enter half 2 and more importantly, Q4, as we deliver the full year expectation in numbers, that will bring in significant cash generation alongside that profit generation, which will help us meet that net debt reduction expectation.