You Say Kumala

The core brand results have been positive, but should Vincor and Western Wines call the whole thing off, wonders Robyn Lewis

Exactly a year ago to the month these very pages brought you the news that Canadian company Vincor International had bought British-based Western Wines for some £84 million. Twelve months on and, as Vincor’s far from fabulous Quarter 1, fiscal year 2006 results are released – causing much hand-wringing by the analysts – we thought it was about time somebody asked if the acquisition has lived up to the original promise?

Certainly, the results do rather indicate a result to the contrary. Operating income for the Q1 2006 was down 3% on last year to CAN$16.3m, net income was $8.3m, compared with $10.2m Q1 2005 and, though net sales did post a 46% increase, approximately 85% of that growth was attributable to the Western Wine acquisition. Discounting Western Wines, sales rose by approximately 7%.

These lower than anticipated results had analysts across the board downgrading the company’s rating, many saying that Vincor had been rather wide of the mark in terms of market expectations. The primary factors cited for concern were Australia and the UK. In the former the red wine glut and retail consolidation were blamed for increasing margin pressures on the company, and in the latter, again, it was margin-squeezing from the retailers, but also higher than expected marketing spend requirements and a dip in own-label that were accorded the blame. Vincor, however, was keen to defend its position. “While the Q1 results were below our expectations the long-term fundamentals of our business remain very strong, with all our key New World wine markets showing substantial growth and our core brands performing well in their main markets,” said Donald Triggs, the company’s president and CEO.

Indeed, the core brand results are positive – Kim Crawford +69%, Kumala +36%, Jackson Triggs +17%, Inniskillin +11% in sales – and the company is upbeat about future performance in several of its key markets. “The market environment in the United States has improved in recent months, resulting in a decline in price discounting and overall we believe our Canadian, US, New Zealand and export businesses will each deliver solid results this year,” Triggs argued.

The launch of Kumala into the US market this month may also have a marked effect on results, following what Triggs calls “a positive early response from the wine trade”. However, the brand will be competing in a tough market in which South Africa has yet to truly blaze a trail and it will need to sustain growth above and beyond its initial launch in order to have any serious impact on Vincor’s future financial results or to ease ongoing margin pressure.

Insider Opinion

 “In a sense, nothing has changed with the company. However, in terms of the portfolio, the potential of the company has increased significantly given the strength of the Vincor premium portfolio in Australia, NZ, the USA and Canada. In addition, we have been able to use the Vincor distribution strength in the US and Canada to launch Kumala in the former and ramp up its growth in the latter.

With the Group portfolio, the emphasis so far has been on developing a clear way forward in continental Europe and, within the UK, accelerating the progress of the m u l t i – a w a r d – winning Canadian Icewine Inniskillin.

For this note we have moved the UK independent and on-trade agency to Liberty (who also handle the Kim Crawford and Osoyoos Larose brands) and launched a PR campaign targeting the luxury press.

There is also much development work going on behind the scenes on the rest of the range.

In the US, Kumala actually launches this month with a range of single varietals (Sauvignon Blanc and Chardonnay as well as Cabernet Sauvignon, Merlot and Shiraz) with an RRP of US$8.99.

I’s been a very exciting year for us and over the next 12 months we should really see the benefits of all the development work that we’ve been undertaking with our new associates around the world.”

Mike Paul, managing director, Western Wines.

Vincor results at a glance

Vincor quarter one, fiscal year 2006 results

Net Income: CAN$8.3m

Operating income: $16.3m

Net sales: $165.8m

Regional sales

Canada: + 9% volume, +14% revenue

US: -16% volume, -22% revenue

Australia: +7% volume, +22% revenue UK: n/a, n/a

Key brand results

Kim Crawford: +69%

Jackson-Triggs: +17%

Kumala: +36%

Inniskillin: +7%

Earnings per share

Basic: $0.25

Diluted: $0.25

All compared with first quarter fiscal 2005 Vincor results at a glance

KEY VINCOR FACTS

• Vincor was first established in 1874, with the formation of The Niagara Falls Wine Company

• Vincor International now ranks as one of the world’s top-10 wine companies by revenue

• The company was first floated on the stock exchange in 1996

• Key brands include Jackson- Triggs, Kim Crawford, Inniskillin and Kumala

• Based in Ontario, Canada, the company’s head office is: Vincor International Inc. 441 Courtneypark Drive East, Mississauga, Ontario L5T 2V3, 1-800-265-9463

• The board of directors is headed up by Mark L F Hilson, chair, and Donald L Triggs, president and chief executive officer

 • Vincor acquired British wine company Western Wines in 2004 for £84m