Bloomberg News

Yellow Tail Maker Looks to Bottle Abroad Amid Debt Terms Breach

January 14, 2013

Casella Wines Pty., maker of the third-best selling U.S. wine brand Yellow Tail, is looking at bottling so-called bulk wine overseas to cut costs after breaching terms on debt.

“Bulk we could certainly do, and that’s part of what we’re looking at,” Managing Director John Casella said in a phone interview.

Closely held Casella, which accounts for one in five wine bottles leaving Australia, intends to conclude talks in about two weeks with National Australia Bank Ltd., after recording its first annual loss in at least 20 years, the managing director said. The loss pushed earnings below a threshold the bank monitors to assess its ability to pay interest, he said.

“Bottling overseas would carry risks,” Casella said. Local operations would become cheaper again should the Australian currency decline, he said. “The danger is you do it and you’re in no man’s land--you’re over there when you should be here.”

Australian wine companies including Accolade Wines Ltd., owned by Champ Private Equity, and the largest listed group Treasury Wine Estates Ltd. (TWE) have moved to bottle some of their product in end-markets to earn more profit margin on exports that have been hit by the strength of the local dollar, the strongest-performing major currency against the U.S. dollar in the three years ended Dec. 31.

Bulk Chardonnay

Exports of chardonnay in so-called bulk containers climbed 37 percent to 117 million liters in 2012, government-backed industry body Wine Australia said yesterday. Total export volume rose 3 percent, while the value of overseas sales fell 2 percent to A$1.85 billion ($1.95 billion) as lower-priced bulk wine outpaced more expensive bottled exports.

Casella, founded in 1969 by Sicilian immigrants and based in Griffith, New South Wales state, fell into a loss after hedge contracts written when the dollar was weaker expired over the past year, Casella said.

“We had a really strong hedge book that ran out. I think we did quite well to get this far,” he said. “We really didn’t expect this exchange rate to stay so high for so long.”

Foreign currency hedges with National Australia worth $150 million at the end of June 2011 had fallen to $45 million a year later, according to the company’s annual report. That’s now close to zero, apart from “odds and ends,” Casella said.

Covenant Breach

The company hadn’t been granted a formal waiver for its covenant breach and its borrowings are secured against its assets, according to Casella’s annual report.

“The fundamentals are still the same as what they were,” he said. “The only issue is exchange and margin pressure as a result of those issues.”

Annual sales fell 2.8 percent from a year earlier to A$335 million, according to the report filed in December. Net income dropped from a A$45 million profit to a A$30 million loss, the results show.

Casella has announced plans for a more expensive wine to sell at around $10 a bottle and entered a potential beer joint venture with Coca-Cola Amatil Ltd. (CCL) via a convertible loan from the soft-drink bottler as it seeks to minimize the exposure of its low-priced wine to the strength of Australia’s currency.

The loss was driven by a A$30 million writedown of loans, according to the report.

Net debt was A$118 million as of June 30, based on the value of the company’s borrowings minus its cash, according to the report. Borrowing costs came to A$6.1 million, against operating cash flows of A$59 million, the data show.

Casella had A$125 million in bank bills at the end of June as well as an overdraft drawn to A$7.1 million, the data show.

“We’ve been squeezed by the exchange rate,” John Casella said. “I don’t see there’s any Australian company that hasn’t been squeezed by that.”

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net


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