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SMWS owner net debt jumps 44%
The Artisanal Spirits Company (ASC), which owns the Scotch Malt Whisky Society (SMWS), saw gross profit increase by 3% in the six months ending 30 June 2024 (H1), although its net debt increased to £27 million (US$35m).
The firm had previously revealed in its interim results that earnings before interest, taxes, depreciation, and amortisation (EBITDA) rose by around £1 million (US$1.3m) compared with H1 2023. Its final results confirmed these figures and revealed EBITDA for H1 2024 was -£1m (-US$1.3m).
Furthermore, its revenue reached £10.1 million (US$13.21m), down 1% on the previous year.
ASC also experienced recurring cost efficiencies of £750,000 (US$981,760) and a gross profit margin improvement of £250,000 (US$327,230).
Speaking to The Spirits Business, CEO Andrew Dane described the results as a “credible performance”. “We’ve delivered £1m of profit improvement, and flat revenue in the current conditions is, I think, a pretty good performance. [The profit improvement] has come from significant cost-management efficiencies, which support gross margin improvements.
“From the revenue perspective, we’ve had membership growth. We’ve got increasing diversification, both geographically, with the addition of Taiwan and Korea, as well as corporate diversification with the new cask sales growth from the tail end of last year, as well as the acquisition of Single Cask Nation at the start of this year. Overall this has given us profit momentum.”
Total SMWS membership grew by 4%, with a 31% uptick in Asia, following the firm’s establishment of a subsidiary in Taiwan in August 2023 and in South Korea in April 2023. Its membership now totals 40,300.
Debt and struggles in China
On the topic of its debt, Dane explained that stock investment was one reason for the rise, “as well as the timing of cash generation within the year. We’re quite seasonal. That net debt has peaked, so it is now on the way down. We’re probably still a couple of years from bottom-line profit after tax, but I think we can say net debt has now peaked, and we should be cash-generative from now.
“Over the past few years, we’ve been spending £5m a year on new spirit – that will drop to £1m, or £1m and a bit.”
As stated in its interim results, ASC confirmed difficulties with ‘industry and economic headwinds’ in China. “I would say market conditions in China are the most challenging of all the markets,” explained Dane. “Our results in China are down by 30%. Membership has actually grown, and we are seeing some positive signs in the £50 to £100 range. The other part of the strategy is to add just a small number of high-net-worth individuals at the top end, because across the whole consumer base, there is a decline in spending in China. We’re certainly not alone in that – you can see that in the data being published by all of the big spirits players, and also consumer data in China.
“What’s been good is being able to offset a big chunk of that in Asia with the new markets, as well as globally, with other initiatives like Single Cask Nation and cask sales opportunities in the US.”
Dane added that while SMWS membership growth in Asia was driven largely by Taiwan and South Korea, which increased by around 1,000 members, there was “double-digit growth” in China despite the challenges. “Year to date is up, but it’s a pretty small number – it’s still less than 2,000.”
Asset value and future plans
ASC stated that its cask spirits have been independently valued at more than £100m (US$131m), which is four times its net book value of cask spirit and net debt. It believes its inventory is sufficient to meet demand through the next 10 years, meaning net debt has peaked and the firm can transition from ‘material net cash investments in stock to a replenishment approach’.
Dane added: “We put out a note in July about independent valuation, saying that the casks are worth £100m. That demonstrates the success of the first part of the strategy, which is to buy the casks, mature them, and capture their value. We spent £25m on them – they’re now worth £100m. So that’s working – we just need to be patient for that to come through.
“The second part is we turn those casks into bottles and sell them to members. That’s what really drives long-term value – that £100m of casks could become £500m of bottles.”
For the second half of the year (H2), ASC intends to expand internationally, offer two new distillery releases, and refresh its range, with new releases for the SMWS including the ‘Creators’ Collection’ and the 2024 ‘Winter Series’.
While Dane was unable to reveal exactly where SMWS plans to expand, he named Vietnam and Nigeria as targets due to their positions in IWSR’s top 20 markets for ultra-premium spirits. “I would suspect we would be able to act quicker in Southeast Asia than we would in Nigeria – we have a wider network base and we can access the key players in those markets quicker – but they should both be targets.”
During H2 so far, the firm said it has consolidated its improved profitability from the previous six months and is on track to meet its predicted EBITDA.
To conclude the financial results, Dane released a statement: “We have delivered a creditable performance and made good progress on our journey towards profitability despite challenging trading conditions prevailing in some markets. We continue to focus on attracting and retaining higher quality members, whilst maintaining a well-controlled cost base.
“Our proven strategy of investing in whisky stock has built an impressive inventory to satisfy our requirements well into the next decade, as well as delivering a significant uplift in value creation, with the current cask value of just over £100m. Correspondingly, the group now only needs to acquire stock on a replenishment basis, thereby significantly improving the future cash profile of the business.
“Single Cask Nation has integrated well and is performing to expectation. Our revenue streams and the geographies in which we operate are becoming increasingly diverse, further limiting our exposure to any given market. This together with the actions we’re taking now are building this unique business for the longer term to the benefit of all shareholders.
“We enter H2 with a clear strategy, a focus on delivery of the key drivers of profitability in the year across cask sales and US shipments, and remain confident of meeting FY24 EBITDA expectations.”
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