ONE of the Australian wine industry's greatest success stories, Casella Wines, has plunged to its first loss in more than 20 years, putting it in breach of its debt covenants and forcing it to slash costs as a high Australian dollar cuts profit from its popular Yellow Tail label.
Strong Yellow Tail sales growth in the United States meant Casella could post profits even when most of its large rivals struggled during the last decade but the family business no longer makes money selling wine in the US due to the strong dollar.
Accounts lodged with the corporate regulator show Casella posted a $30 million loss in 2011-12 and had yet to secure a waiver from National Australia Bank, after breaching covenants.
Managing director John Casella told The Australian Financial Review the country's third-largest wine maker had secured a reprieve from NAB until January 30, giving the company time to identify further cost cuts and other ways to improve margins.
The group, based in Griffith, NSW, planned to release new premium wines, and a beer joint venture struck with Coca-Cola last year would improve cash generation, he said.
"It is very, very tough," Mr Casella said. "We are working out how we go forward. Provided we have the support of our financiers, we can make little or no money for a year or two. I'm hopeful the dollar is overvalued and we can return to some normality."
Asked what could happen if NAB withdrew its support at the end of the month, Mr Casella said: "I haven't even thought about it because it is not a scenario that is likely to occur.
"The covenants are early warning signs for the bank," he said. "It is the fundamental strength of the business that is important. I'm quite confident with everything."
The dramatic turnaround for Casella, which posted a $45.3 million profit in 2011, underscores the significant challenges facing Australian export businesses.
Mr Casella, one of founder Filippo's three sons involved in the business, said it was difficult for the government to intervene but it needed to look at the nation's taxation regime and industrial relations policies.
"We can't have a high Australian dollar and high wages and remain competitive with imports," he said.
Yellow Tail became the nation's largest exported wine within years of its release a decade ago. It sells 12 million cases a year. Three-quarters of the sales are in the US. It is still a big seller, with revenue slipping a modest 2.8 per cent to $335 million.
Mr Casella said US volumes eased 1 per cent last year compared to the double-digit falls by other players.
The problem for Casella is that it is no longer making money from those US sales. When the wine was first launched, the Australian dollar was trading at around US57¢.
Mr Casella said he would be comfortable with the dollar trading up to US85¢. It has traded above this mark since July 2010 and is currently above parity.
Mr Casella said he did not want to lift US prices for fear of losing market share. Australia's biggest wine group, Treasury Wine Estates, reversed a decision to cut US discounts in 2011 after many of its labels were dumped by retailers.
"We have a margin issue that we have to work out that minimises the impact for future sales, so when the exchange rate comes down we haven't lost our market share," he said.
"You need a lot of courage in the tough times. I don't think the dollar can stay where it is. We want to be strong for the long term and make sure we don't overreact to the short term."
Casella is reviewing marketing, distribution and other operating expenses. However, it has spent more than $5 million buying its first vineyard in the Barossa Valley. The transaction settled earlier this month.
It plans to use fruit from the 80 hectare vineyard to create new premium labels to sell to more profitable overseas markets such as China.
Casella's loss was impacted by a $29.8 million "loan write-down", which Mr Casella said related to inter-company loans and grower contracts. He said the winery might recoup the loans in future years.
He said that without the loan write- downs, the winery would have posted a loss but a much smaller one.
Its loss was amplified by the $68.5 million foreign currency gain a year earlier, significantly improving its 2011 result.
In 2010, the business generated a $12.3 million profit.
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