DGL - Delegats Wines

[Ferg]

Delegats was established in 1947 and own vineyards in NZ & Australia.  They harvest & purchase grapes to make wine that is sold locally & internationally.  Their biggest brands are Oyster Bay & Barossa Valley Estate, and their largest market is the USA.

The strategic goal of DGL is to build a leading global super premium wine company.  From what I understand, the categories in the wine industry are organised by retail price and they go from 'value' (aka cheap plonk) -> popular -> premium -> super premium -> ultra premium -> luxury -> super luxury and icon (which sounds like a misnomer to me).  So that puts 'super premium' into context.  Delegats have won numerous awards with their wines.

The main metric in the wine industry is 'cases' which refers to a box (or case) of 12 x 750ml bottles, which is 9 litres.  A breakdown of fiscal 2024 case sales into Delegats' main markets: USA/Canada 48%, Europe/UK/Ireland 33%, NZ/Oz/Asia/Pacific 19%.  So there is exposure to foreign exchange movements as an exporter.

EPS has a 15 year CAGR of 6.9% p.a. which is made up of 3.6% CAGR in sales per share, and 3.2% CAGR in NPAT as a % of sales.

Unfortunately IFRS makes a right meal of the reported NPAT for grape growers, so I use the historical cost values, and not IFRS adjusted values.  IFRS requires Delegats to revalue grape stocks to market value at year end which ignores the historical cost element of what it costs to grow and process them, and ignores the fact Delegats is not in the market of selling grapes - they sell wine.  The IFRS adjustments result in distortions to the reported profits but Delegats provide a useful reconciliation and full transparency on the IFRS junk.  Delegats refer to their underlying profit as 'operating profit'.  I have provided a summary of differences below.

Investor information can be found here: https://www.delegat.com/investor-information

Recent developments: there was a poor harvest in 2024 which resulted in a negative pre-tax $24m IFRS adjustment for grape valuations, plus the removal of building depreciation also negatively impacted reported NPAT by $13m.  Hence the reason reported NPAT at $31m in fiscal 2024 was down ~50% versus fiscal 2023.  Operating profit was $59.7m (2023 was $59.3m) and DGL have provided operating profit guidance of $55-$60m for FY25.

A history of their sales, NPAT as a % of sales, and EPS:

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Following is a reconciliation of reported NPAT with 'operating profit'.  IMO this shows the mess that IFRS does to some businesses:

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And in the words of Andrew Wiles, I think I'll stop here.

[Red Baron]

Nice vork Verg

This......

Unfortunately IFRS makes a right meal of the reported NPAT for grape growers, so I use the historical cost values, and not IFRS adjusted values.  IFRS requires Delegats to revalue grape stocks to market value at year end which ignores the historical cost element of what it costs to grow and process them, and ignores the fact Delegat]s is not in the market of selling grapes - they sell wine.

At vhat point in ze production process do 'grapes' turn into 'vine', under IFRS?   Eez it vhen they are crushed?

RB

[Ferg]

Nice vork Verg

This......

At vhat point in ze production process do 'grapes' turn into 'vine', under IFRS?   Eez it vhen they are crushed?

Thanks S-Dog.

Interesting question.

In short, the wine making process involves growing & harvesting (at which time they are grapes), then crushing/pressing, fermentation & clarification (during which time it is 'work in progress') and then aging (when it is WIP and/or bulk wine) and then bottling (when it becomes wine stock).  IFRS may have an opinion on each stage prior to bottling given there are known market prices for grapes and bulk wine.

Keep in mind wine makers capitalise all cost pertaining to a harvest (from growing to bottling) as work in progress so they know their actual costs to within a cent per litre.  Then along comes IFRS which says "yeah but if you sold the grapes and/or bulk wine on the open market then it is worth x", which is clearly nuts as evidenced by the swings in profit per the graph I posted.  Delegats is not in the business of selling grapes, nor I imagine selling bulk wine.

[Ferg]

A couple of extra graphs.

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And this graph is a thing of beauty .... no capital raises making demands of shareholders:

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[Mos]

Interesting times
- Declining wine consumption
- Industry oversupply globally and from NZ compounded by large 2025 vintage forecast
- New 10% tariff in market representing 52% of revenue

Tough operating environment for FY2025.

[BlackPeter]

Interesting times
- Declining wine consumption
- Industry oversupply globally and from NZ compounded by large 2025 vintage forecast
- New 10% tariff in market representing 52% of revenue

Tough operating environment for FY2025.

... and lets face it, the quality of their wine is deteriorating as well. I remembered the Oyster Bay as quite drinkable and bought last year some DGL shares to get the shareholder discount and bought subsequently a handful of boxes of their wine. Must say that I was pretty disappointed about the stuff they delivered, so I sold their shares again.

Super premium? - yeah right. While Tui is not good either, they come at least with good bill boards.

[Mos]

The Delegat Chardonnay is a good drop BP if you like full bodied Chardonnay - hard to find in retail though. You made a good move to exit I think given the industry challenges at this time.

[Ferg]

Re-posted from the other site answering a question if the new tariff regime could be beneficial to DGL.

DGL sell into the "super premium" category. In short the categories are based on price as follows: value -> premium -> super premium -> ultra premium -> luxury. The value and premium categories are in decline given they are (on average) popular with older demographic consumers who are (on average) relatively more price conscious than other consumers. Whereas the other categories are growing; in particular the super premium category is more popular with relatively younger demographics who (on average) want brands and quality over quantity.

I say *on average* given these are generalisations but are based on observed market trends and data.

My understanding is around 40% of wine consumed in the USA is imported. Around 80% of imports come from the EU who have a 20% tariff. So in short, DGL with it's 10% tariff is at an advantage. But I imagine who pays the tariff (before the consumer does) depends on whether the various companies are dealing with a USA importer directly, or if they have their own office in the USA and they are importing the wine on their own account.

Another thing to keep in mind is if the tariffs are recovered by higher sales prices, then we are entering a new world of a slightly lower NPAT percentage, albeit with the same NPAT $. Not a bad thing as such but it can be concerning/confusing if not taken into account.

For the sake of completeness......around half of DGL wine sales are into the USA.  And the super premium category accounts for around 15% of USA volumes consumed, but is between 25-30% of value spent.

[Ferg]

And no sooner do I post that then the USA puts the EU onto the same tariff rate as NZ.  So there goes a potential price advantage for DGL.

I have been running the numbers on the assumption DGL has a blend of intercompany recharges for a) stock transfers and b) management services and that DGL USA is the importer.  I'm assuming only stock transfers are subject to tariffs (not management recharges) and it is not the full sales value to final USA customers that attracts tariffs given DGL have a USA office and they make a margin on sales.  In which case I predict the after tax impact of tariffs is $11m less NPAT for DGL based on the FY24 results.  IF all that is correct, then DGL will need to lift USA prices by 7.6% to recover lost profits.

[Ricky Bobby]

Hey Ferg, if u send bulk into market and bottle in market then the tax will be only on liquid. Not glass and packaging. Unfortunately, they bottle everything in NZ...

[Ferg]

Hey Ferg, if u send bulk into market and bottle in market then the tax will be only on liquid. Not glass and packaging. Unfortunately, they bottle everything in NZ...

Agreed RB there may be ways and means around reducing the tariffs.  I'm sure they will be looking into this.  There are extra risks that come with such an approach but it is worth thinking about.  I assume they import wine on their account.  If so, they could look into the prices at which they effectively sell wine to themselves.  Unless Delegats USA is just a sales and marketing office and DGL use the services of a third party logistics provider...I don't know enough about the mechanics of their USA operation to say conclusively how they export to USA.  But different methods will having differing outcomes for DGL and possibly different values.  I'm believe they are not selling to a single importer in the USA....but again I don't 100% know.

[BlackPeter]

Hey Ferg, if u send bulk into market and bottle in market then the tax will be only on liquid. Not glass and packaging. Unfortunately, they bottle everything in NZ...

Not very sensible to invest longterm to fix a short term problem the long term investment would not fix anyway. Dumbs tariffs seem to change on a daily basis - and the US is by now the least reliable trading partner in the world.

Better DLG (and others) find different markets with trading partners one can trust. Asia would be a good example,  though Asia prefers typically red wine ... and not that many red grapes in DLG's portfolio.

[lorraina]

Hey Ferg, if u send bulk into market and bottle in market then the tax will be only on liquid. Not glass and packaging. Unfortunately, they bottle everything in NZ...

This is exactly what Indevin does for the UK market.

[Ferg]

Some good news and some not so good news.

2025 harvest is up 39% on last year's low harvest, and up 5% on the 2023 harvest.  The 2025 harvest "has delivered excellent quality in all regions":
https://www.nzx.com/announcements/450562

They also announced a slight profit downgrade for the current fiscal from the range $55-$60m to $47-$50m given the uncertainty over the US tariffs.
https://www.nzx.com/announcements/450561

This is the second downgrade and seems to have been baked into the SP already. The question remains...will there be a third downgrade?  Given there are 2 months to go in this fiscal year, I see the odds of a 3rd downgrade as low unless the wheels completely fall off for the USA sales.  I view that as unlikely given the number of distribution points for their products and the strength of the Oyster Bay brand.

[Ricky Bobby]

I'm in the industry and there is definitely more pain to come...