CR is a risk sure, as with anything using up cash. They do have...

CR is a risk sure, as with anything using up cash. They do have further $15m in debt facility on top of $6m cash on hand. I would think that the $15m will cover for the distillery build. Question will they raise or take on another $5-10m of debt for capital and operating etc if they cant drive sales quickly enough to get to positive CF. It will be in new COE's interest to not dilute from a CR based on his share price based incentives.

My very long winded explanation in why I don't think a CR is coming which requires a bit of reading between the lines of the recent announcements with some some common sense assumptions,

I am Expecting GP% to normalise back to 55-60% (was +68% in Dec Q, and not disclosed this Qtr ???). I have long argued for back to basics and grow the core lines (and expand core range) they seem to be executing this very well (150% growth in Symphony PCP Q3 is quite remarkable)... . I calculate that NSR is trending back to circa $215 per litre (as was achieved reported at time of Pontville acquisition, need to double check the timing on that but not relevant for this post, and is a far more sustainable number that $268. A $215 NSR I believe can be achieved with a sales mix (in litres) of 80% core range to wholesale, 15% of core range DTC and 5% of limited and special release DTC. This allows for a retailer margin of 75% - is this appropriate? My previous modelling was at 50% so this is a reasonable reduction in GP $ and % in my model to build in more conservatism.

Again, back solving so some assumptions based in here, litres sold appears to be increasing. last year was circa 67k. Taking Q3 YTD, this looks to be tracking to 77k litres sold this yr... 77k * $215 NST I have estimated = $16.5m of net sales - this would align with YTD of $13.1 + $3.4 (i.e. assume Q3 is achieved in Q4)...

Q4 sales should be better than Q3 as they push out expanded range to national accounts, and export partners... but I am looking to be conservative... This also generally aligns with net increase in whisky bank being reported and the know production capacity of circa 575k litres p.a.)...

This is all good and well, but when are they making money (FCF)... Well that really depends on the strategy re Pontville. If they add a further 1m litres of production capacity from the new distillery, what will they do with this, bank it all, this will drive up manufacturing costs? At current sales (as noted above estimating 77k litres p.a) they are adding about 500k litres to whisky bank p.a. with their current capacity... Will they close the other distilleries when new Pontville comes online (possible start of 2025)? This would generate some significant operating efficiencies if they moved to the one distillery... Will they temporarily close and look to upgrade the current distilleries. Will they sell new make that is excess to their their 5 year forward sales targets/ plans (doubt it). My guess is they will either delay Pontville construction by 12 months, or, close the other distilleries, at least temporarily, with a longer them focus for the older distilleries on rare releases as they have the heritage and history elements... A few big qns and directions to consider for managament.. They will be laying down a ton of whisky with any of the approaches no doubt.

The excess capacity is causing cash flow issues currently, let alone before new Pontville opens, this is quite obvious. Despite others commenting it is staffing costs (yes it is the key element recently), but into the future is the investment in whisky bank that will use up cash... YTD, $9m spent on manufacturing (this is new make) - this would be on circa 431k of new make YTD i.e. 75% of the 575k annual capacity. This equates to about $20.90 per litre)... If we look at the cash flow a different way, what was spent on replacing product sold versus what was spent on expanding the whisky bank... $20.90 * 77k litres, then $1.6m (annualised on replacing stock), and circa $10.5m annualised will be on whisky bank growth... This obviously doesn't change the actual cash flow, just an understanding of where it is going. On an underlying basis, if we pull out the whisky bank investment, and only looked at replacement, they are generating circa $3m of FCF if.. They are just using this, plus cash reserves to invest in the whisky bank..

Where does this lead me.... The real challenge - investment in the whisky bank now for future sales and this crushes CF, as we can see with LRK's cash flows, and cash dedicated to future sales... The key challenge for any distillery, particularly one looking to grow sales quickly. have to understand this to get the investment opportunity in LRK. And, this is where the strategy to growth core range is vital... It is all good and well laying down new make, but it is a waste of cash if it cant be sold in the future... So the next qn. How to efficiently monetise that investment in whisky bank.. And this is where the core range is so important...

The core range will have the shortest maturity cycle, i.e. less time from new make distillation to sales and returning that cash that has been invested in previous years... Sure, ROI might not be as good as the longer dated products with higher price points (I have not tested this)... but, turning $20.88 into two $150 bottles of Symphony in say 2-3 years, that is impressive to say the least. Obviously cooperage costs, storage, insurance, bottling, marketing etc to add to this...

So the value in the Lark story is in the core range and how fast they can grow core sales. Making an assumption that the core range can get to 95% of sales by end of year (DTC and Export and Domestic accounts), and growing at 25% p.a (half of current growth rate), That could push to circa 94k litres of sales next FY = $20.2m of net sales at $215 NSR on circa $24m -$25m) of cash outflows (ex Pontville construction)... Same growth rate yr after, net sales to 115k litres $24.85m of net sales, this is covering cash outflows including they investment in new make. I have excluded any expense or revenue inflation.. This is all ex Pontville new distillery and that would then refer back to the strategy re all of their distilleries... But for the purpose of this exercise, it is very plausible that they will be cash flow neutral (on their current distilleries and capacity), including the whisky bank investment, sometime in the next 12-24 months pending sales growth on core (they will be there in 12m if they can grow core a further 50% next year).

Re how to play the investment side, I feel that we are forming a reasonable base between $1.50 and $1.90 due to all that Feb and March selling. The cash flow inflection will be the big re-rate IMHO (i.e. cash flow positive), but, will the SP move before this in anticipation or, as it is announced (i.e. in the quarter it occurs)... I guess this will depend a bit on the commentary from the company, and, if there are a couple of successive quarters of improvement.

Recent Qtly CF statements, these are a bit lumpy due to timing of revenue and expenses, and receipt of grants etc... Ill normalise for grants..

Mar 2023: $-1.55m, some of this improvement due to expense recorded in prior qt, also explains why Dec looked so much worse, ex grants.
Dec 2022: -$2.15m (reported -$350k but incl $1.8m of qov grants)
Sep 2022: -$900k
Jun 2022: +$1.5m (note, very strong cash receipts this Q, 8.39m, vs net sales of $6.8m)
Mar 2022: -$3.7m (note, cash receipts look to have rolled into Jun 2022).
Dec 2021: -$3.8m
Sep 2021: -$1.96m

This is yet to show a general improvement in CF.


GLTAH. & DYOR...