How the big boys are playing
Pernod Ricard full year results are positive with overall growth of 8 per cent the best since 2007/8. As with Diageo (see below) its emerging markets that are the main growth drivers. Sales across the wine portfolio grew 2 per cent but Jacobs Creek declined. Debt is the factor that slows down PR growth and it remains above nine billion Euros although CEO Pierre Pringuet has said in interview that bolt on acquisitions remains a possibility. The company is still in shock after the sudden death of Chairman Patrick Ricard. The Ricard family still retain a 14 per cent stake in the company and are moving swiftly to keep their hand on the controlling helm. It’s expected that Alexandre Ricard will take control of the company from 2015.
Diageo is not hampered with the debt burden of Pernod Ricard therefore freer to move in regard of acquisitions. Emerging markets amounted to almost 40 per cent of Diageo’s business, growing net sales 15 per cent and operating profit 23 per cent. Wine (Blossom Hill, Chalone, Piat d’Or, Rosenblum Cellars, Sterling Vineyards and more) is a small part of Diageo’s turnover but small equates to a lot when dealing with figures of this magnitude.
Around the world the company’s wine sales were down in volume and received the shortest comment of any drinks sector in the report: “Wine was 4 per cent of Diageo net sales. It remained a challenging category with volume declining in North America and Europe and with a shift to the lower end of the portfolio.” Diageo’s 34 per cent equity interest in Moët Hennessy contributed £205 million (2011: £179 million) to share of associates’ profits after interest and tax.
It’s a good indication how tough the American market has become for Australian wine when John Casella, the king of wine exports to the US, feels he needs to lift his game due to declining sales. Various publications have been reporting comments from Casella on the introduction of a higher priced range of Australian wines. It’s not clear if these will be under the Yellow Tail brand or Casella will try and recreate the successes of the furry critter in a more sophisticated way. All the comment TKR could entice was: “Not much to report at the moment, it’s really still a work in progress and plans are very early.”
The market that Casella is looking at in the US is one that is prepared to spend about US$10-12 a bottle, a step up from those who spend US$5-7 that Yellow Tail currently commands. The Yellow Tail brand is among the five top selling wine brands in US supermarkets, with estimated sales of about 7 million cases. If Casella can launch a new Australian brand in the US$10-12 bracket and generate sales of 1 million cases he will be doing well.
Australian Vintage (AV) has released its year-end. It’s not a bad result but the company is still burdened with heavy debt, even after knocking off $31.9 million, reducing it to $129.1 million. If any wine company is working for its bank it’s this one. Interest costs for the year were $12.85 million. This is one debt the Undertaker (chairman Ian Ferrier) can’t bury. The National Australia Bank has extended the debt facility until September 2014. Also adding to the costs was a more than $600,000 loss on foreign exchange, the price of doing extensive business with the UK. There was also a loss of $1.716 million on interest rate swaps.
• Sales: $227.8 million, up 2.1 per cent on the previous year
• Net profit: $7.1 million, up 8 per cent on the previous year
The result was well received lifting the shares 8 per cent on the day of announcement pushing them over 40 cents for the first time since October 2010.
The company is also bonded tightly with three customers that together account for $105.6 million of sales, eggs and baskets come to mind. Although not named the UK one is properly Tesco who tipped $71 million into AVs coffers last year, the profit on that would be interesting to observe. The other two are identified as being in the Australasia / North America diversion and worth $34.3 million possibly Coles and Woolworth’s. Domestic sales were down on last year but UK/Europe and North America were both up.
The Delegat’s Group has released its year-end results. Revenue from ordinary activities ending June 30, 2012, was NZ$215.1 million ($167 million), down 6 per cent on last year’s NZ$229.8 million.
Gross profit was down 3 per cent to NZ$120.6 million. Operating net profit after tax was up 7 per cent to NZ$25.6 million.
Global case sales were 1.85 million, with an average case price of NZ$116.30, only 40 cents less than last year. The Oyster Bay Brand accounts for 534,000 cases.
The company is doing extremely well in North America (the US and Canada), with sales up 18 per cent, but as with other drinks companies, the UK, Ireland and Europe are in decline (24 per cent). Australia is showing no change, which should be good news for Australian producers, but not as good as if it were showing a decline.
Though the 2012 vintage in New Zealand is down, Delegat’s is confident it will have enough stock to meet possible sales of 1.95 million cases in the 2013 financial year.
Treasury Wine Estates’ (TWE’s) year-end results were in the main well received. The market went with CEO David Dearie’s explanation of a tight 2013 but the expectation of a good 2014. He and the team appear to be staking a lot on what they term luxury product, which is reliant on the Penfolds brand. They also seem to anticipate lifting other parts of the portfolio to an internationally recognised higher ranking.
Dearie said lower stocks of luxury wine would hold back 2013 performance. What isn’t clear are the stocks of other wines, and will TWE manage to lift the profile, hence the retail price and ultimately the profit?
There is much work to be done with the whole group and the reality is it can’t be done within the next 12 months. Therefore it’s not unreasonable to think Dearie is hoping each quarter result will be showing enough positivity to keep the market satisfied until the next quarter, half-year, or full-year result.
Credit Suisse analyst Larry Gandler sees beyond the veneer of the latest results: “Gross profit was reported at $581 million vs. our forecast of $578 million and we were below market. We reflect upon gross profit because there are contradictions surrounding this stock about price increases while discounting, positive mix but lack of premium wine supply, volume growth but reported decline in volume. All that contradiction must be baked into gross profit. And, we were close to the mark in our forecast. However, overheads were much lower than modelled and we are not sure if such a low level of costs can be maintained – most probably not in North America and certainly not in Asia.”
Although the company is very gung-ho about its Asian success there appears a lot of opportunity in North America that it is missing out on. Trying to pinpoint where it is underperforming is not easy as TWE is reluctant to release information.
For TWE the North American region is the US and Canada: huge geography and huge in population. What the company doesn’t reveal is the split between Canadian and US sales, nor will it reveal the split between Australian imports into both countries and the sales of the American brands it owns.
What is known is that TWE sold 15.7 million cases of combined product at an average of $45.20 per case, 7 per cent down on the previous year. Total net revenue for the last financial year was $707.5 million (down 8.6 per cent) and EBITS was down 14.3 per cent. TWE is celebrating new life in Asia but the Americas are quietly slipping away.
John Grant has been appointed managing director, Beringer Brand Business Unit. He brings experience to the role and should be able to guide Beringer brands successfully. Without figures from TWE one can only surmise the poorest performers in the US and Canada are Australian brands. In 2010 TWE had five of the top performing Australian brands in the US but all were reporting declining sales and added together they didn’t equal the sales of Casella’s Yellow Tail.
TWE’s flag waving over Asia is justified but to equal its total loss of North American business the company would have to increase Asian sales by a multiple of seven. However, to keep this in perspective, it would only need to double EBITS from Asia to outshine the Americas.
Is it time for TWE to become neat, slender, tidy and hugely profitable rather than the sprawling, obese, morose and edgy company it now appears?
In June TKR broke the news: “Treasury Wine Estates (TWE) is to move its UK bottling requirements to Accolade Wines’ facility at Bristol in the west of England. As told to TKR, this is mutual back scratching, as Accolade Wines is said to be transferring its packaging requirements to TWE facilities in Australia.”
When asked if this was true, both companies brushed aside the question with metaphorical pursed lips and a silence that shouted volumes.
At the end of July both companies released statements confirming what TKR readers have known for a month.
According to Accolade it’s a “groundbreaking change”. There was a wry-chuckle-inducing comment from Accolade’s CEO Troy Christensen: “The agreements would strengthen the Australian wine industry by improving the efficiencies of both Accolade Wines and TWE.”
As much as he and David Dearie, CEO of TWE, think their representative companies are the Australian wine industry, they are not, but part of it. The arrangement will benefit Accolade and TWE only.
Black hilarity was also to be found in Christensen’s statement: “This agreement is important for the thousands of people in Australia and globally who rely on our business, including employees, customers, grape growers and other suppliers. It will allow us to put more effort into growing the sales of Australian wine in Asia and North America.”
The exception being the 175 to be made redundant in Accolade’s bottling plants. As for North America and Asia, Accolade and TWE will remain fierce competitors so there is no benefit for either.
As well as being logistically and mutually beneficial, the move will also put Accolade’s UK bottling plant on a stronger footing as production will be increased by 30 per cent. This should make the operation a strong stand-alone business, maybe setting it up for sale.
In summary, this is a very good financial move for both companies and a good use of each other’s under-used facilities. It’s a sound business decision. Dressing it up as being good for the whole industry is juvenile drivel. The harsh factor is the 175 redundancies at Accolade. This is on top of 85 jobs lost at Orlando when UK requirements for Jacob’s Creek were transferred to the UK.
It’s likely the Wolf Blass bottling plant in the Barossa and Constellation Park in the UK both still have bottling capacity available. Therefore, it’s also likely others could make use of either facility and more jobs could be lost.
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