Q318 update and reset of KOM targets
In April 2018 MWE completed an initial review of trading to date and advised the market that the performance against three of its KOMs for FY18 would be likely to vary by more than 10%. The company said then that it expected its KOMs for gross harvest and New Zealand bottled wine sales revenue to be exceeded by more than 10% and its international wine sales revenue KOM to be underachieved by more than 10%. Management said it would update the market further with its Q3 business update.
MWE has now updated on Q318 trading and, as advised, has revised the three KOM targets:
Exhibit 1: Actual results and revised KOM
|
Q1
actual |
Q2
actual |
Q3
actual |
Q1-3
actual |
FY18 target
(old) |
FY18 target
(new) |
Gross harvest (tonnes) |
0 |
0 |
785 |
785 |
1,600 |
1,790 |
Bulk grape sales (tonnes) |
0 |
0 |
587 |
587 |
1,200 |
1,200 |
International wine sales revenue (NZ$000) |
467 |
288 |
297 |
1,052 |
2,000 |
1,300 |
NZ bottled wine sales (NZ$000) |
71 |
87 |
66 |
224 |
234 |
315 |
We review the Q3 trading result and KOM revisions by category:
Because of the seasonality of the crop, the wine harvest tonnage is usually all reported in the final quarter of the financial year ending June. What is unusual about the current year is that, due to favourable climatic and growing conditions, the harvest for the 2018 vintage started slightly earlier than usual, with some of the grapes harvested before the end of March, and therefore being reported within Q3. The remainder have been harvested during April. Although the Q3 amount does not itself tell us anything about the total amount expected to be harvested, favourable production factors have prompted a 12% upward revision of the KOM target to 1,790 tonnes.
Management cites three specific factors that have pushed production up:
■
Improvements to water irrigation with the completion of Donaldson Block Dam in early 2017.
■
MWE’s vines are becoming more productive as they mature.
■
Weather conditions for the 2018 vintage and harvest season were favourable.
On the basis of the revised target, the Q3 tonnage represents 44% of the total.
Delivery and sales to customers of bulk grapes are dependent on the timing of the grape harvest, discussed above. Similarly to the grape harvest, this is normally in Q4. As with the grape harvest, sales of bulk grapes this year began in Q3, although management says that the larger part of such sales is still expected to fall into Q4.
The KOM target of 1,200 tonnes has not been revised, which means that management does not expect the full-year result to vary by more than 10% from that figure. However, with the Q3 tonnage at 49% of the target, the Q4 tonnage would not need to be much higher for the KOM to be overachieved.
International wine sales revenue
MWE has focused on international markets outside China this year and, as we noted in March, has enjoyed some early success with exports to the US and Japan. MWE also expects to start exporting to the UK, Australia and Canada in the coming months. Management also expects a revised agreement for increased quantities of bulk wine to be shipped to its US importer for the 2018 vintage, but there are no details yet.
With Q3 revenue at a similar level to that of Q2, the total to date is just over 50% of the existing KOM target for the year. MWE is now reducing that target by NZ$700k, or 35%, to NZ$1,300k. The reduction can be attributed to two specific reasons:
1.
the wine market in China has not grown as much as MWE projected, with red wine still dominating the market; and
2.
MWE is focusing on other international markets which are proving slower to develop than expected. These markets include the US, Japan, UK, Canada and Australia. Early results are nonetheless promising, with exports to the US and Japan growing year-on-year. The first exports to Australia and Canada are likely to occur in the next few months, but the majority of such sales are likely to be later than June 2018.
The timing of these export sales is likely to result in an increase in inventory at end June 2018.
New Zealand bottled wine sales revenue
Bottled wine revenue has continued at broadly similar levels in all three quarters, totalling NZ$224k after nine months. Sales in the Auckland region have grown steadily, and the company has now started to expand its sales network beyond Auckland. Products launched this year have proved popular and a new Pinot Noir product launch should further boost sales in the New Zealand market.
The year to date revenue is 95% of the existing target for the year, and management is increasing that target by NZ$81k or 35%, to NZ$315k. The increase relates to two factors:
1.
Improved product variety and portfolio. MWE now offers a large range of highly rated white and red wines. The offer has been taken up by major New Zealand grocery and supermarket chains.
2.
The success of a greater focus on marketing and business development. MWE is working closely with retail outlets, prospective clients and marketing experts to improve its brand awareness and reputation.
The new KOM target implies that management expects to achieve Q4 revenue of NZ$91k, which is somewhat greater than the NZ$75k average of Q1-3.
