Growth at Mighty Craft despite ATO obstacle

ASX-listed accelerator Mighty Craft has seen growth despite ongoing costs and an obstacle from the Australian Tax Office in its Q1 results.

The accelerator made $20.7 million in receipts from customers for the first quarter – an increase of 81 per cent on the same period last year, the business said.

However, it has not been immune to difficult trading conditions and inflation. It spent $14.2 million on product manufacturing, $6.3 million on employee salaries added to administration and marketing costs, ensuring that the business’ operating cash outflow was $2.7 million, it told the ASX.

Price increases have also been executed from August 2022 for key wholesale customers to partially cover the cost of inflation, and it expects to introduce further price rises from February 2023.

Mighty Craft, which owns part or all of breweries including Slipstream Brewing Co., Ballistic Beer Co., Foghorn Brewery, and Jetty Road Brewery as well as the company behind the Better Beer brand, saw an uptick in production volumes for numerous categories.

This included a 182 per cent growth in beer and cider to 2.2 million litres. Better Beer has reportedly continued on its growth trajectory and remains on track to deliver its 10 million litre target for FY23 after having launched just one year ago, with 6 million litres already sold.

The results also showed that venue performance reflected a strong rebound as hospitality conditions returned to normal following COVID with revenues up 75 per cent for their venues and a return to profitability

Mighty Craft noted that October 2022 will be a record sales month with $9 million in revenue expected.

“The results were well received – it’s been a very tough couple of quarters across the sector and to finish the quarter strongly and deliver results like that was really pleasing and probably a slightly better result than what the market was expecting,” Mighty Craft managing director Mark Haysman told Brews News.

“[With] the look forward into October where we’re going to have a record month also gave people confidence that we’re going to pick up momentum in a positive sense rather than that fall off.”

Combatting the cash outflows is also a key strategy moving forward, he said.

“Obviously as we get more scale through our business, and Q2, Q3 tend to be the biggest quarters of the year, we will start to operate in revenue levels well above that breakeven point, which is positive.

“We’ve set out a platform for growth and now we just need to continue to drive revenue through it and get above that breakeven point in the next few months. So we will start to see that positivity on both the earnings and the cash flow component.”

One issue facing Mighty Craft which it detailed in its full year report was the lack of perceived value in the brand by the market. Haysman acknowledged this but said that its performance was beginning to speak for itself.

“Up until this time last week, you know, the whole market cap was basically equal to the whiskey bank that we’re going to have down by the end of the year.

“So it was taking no account as to the value that we’re building in the individual businesses and brands. But in time, as we deliver on our commitments and show growth, but also profitable growth, that will get looked at again.

“That will sort itself out over time and we’re just going to focus on delivering the results.”

The accelerator has previously launched plans to offload non-core assets including its two Mighty venues, and said it will also consider smaller branded assets. One further divestment is expected before the end of the year.

ATO and Mighty Craft excise

An important issue that was raised within the Mighty Craft results was that of excise rebates for partially-owned breweries.

In its Q1 results today, Mighty Craft noted that it did not intend to challenge the Australian Tax Office on the eligibility for Foghorn Brewery to claim the excise rebate – which was extended last year to the $350,000 threshold.

“Given the costs involved the Company does not consider that this is in the best interests of shareholders,” Mighty Craft stated.

Managing director Mark Haysman explained the situation and said that under ATO rules, owning 51 per cent or more of the business makes it part of the wider entity for excise purposes.

“We own 75 per cent of the [Foghorn] core business and one of the key things with craft businesses is the opportunity to claim the excise permission up to $350,000 per annum.

“The way the ATO looks at it is that the business needs to be economically independent [to access the rebate] amongst a bunch of other measures. And so we’ve been working through that in relation to Foghorn in particular, and that didn’t go our way.”

The ruling raises interesting issues for businesses which are partly or majority owned by a much bigger producer, which would not be considered for the rebate due to its size.

“Foghorn is not seen as economically independent from the other businesses within Mighty Craft, which we actually don’t agree with, but I don’t think we would win that fight.

“They took a look at the equity holding we had in that business and said, well, it’s over 5 per cent, so we can’t claim that extension for their business. We can only claim that for one in the group.”

Haysman said it wasn’t an ideal situation given that founders such as Foghorn’s Shawn Sherlock still operate their businesses rather than Mighty Craft taking the reins.

“Obviously for a business like Foghorn with Shawn, we feel that Shawn runs the business and we’re there to support him as an investor and doing his sales and distribution, he should have been able to claim that, but it is what it is.

“[However], that makes it difficult in relation to us taking a bigger stake in a smaller business where it puts our partners in that position, it’s a disadvantage to them and it’s something we need to work through in the next little while.”

Update 1st November 2022: At the request of Brews News, the ATO has provided guidance on the criteria for the excise rebate:

A licensed alcohol manufacturer (regardless of business size) will be eligible to claim a remission up to a maximum of $350,000 per year where they meet the following criteria:

  1. they are analcohol manufacturerthat has aliability to payexcise dutyon an alcoholic beverage that they have manufactured and entered for home consumption during the financial year, and
  2. they arelegally and economically independentof any other alcohol manufacturer that has received a remission or refund in respect of goods entered during the financial year, and
  3. they havefermented or distilled at least 70% of the alcohol contentof the beverage on which they had an excise duty liability, and
  4. if the remission is in respect of a liability to pay excise duty on a distilled beverage, that they satisfy the’still ownership test’where required.

In determining if an alcohol manufacturer is ‘legally and economically independent’ it is necessary to consider whether, through the legal and/or economic connections between manufacturers, they each have capacity to make business decisions independently.Situations where an alcohol manufacturer will not be legally and economically independent include where an alcohol manufacturer is a subsidiary of another, another alcohol manufacturer subsidises its operations, or where two individuals or companies control or have majority shareholding in multiple licensed alcohol manufacturers.

Full details of the Remission Scheme and the eligibility criteria can be found in Chapter 7 of theExcise Guidelines for the Alcohol Industry

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