I am happy to see such a low interest expense on the income...

I am happy to see such a low interest expense on the income statement and net debt being reduced quickly. Do you think there will be a need to use debt in the future?

@fatcactus

That’s certainly possible, but not likely in the near future from what I can tell. If we look for instance at the last round of capital investment, which was funded via the capital raise in 2017, it seems to me that the Company resorted to issuing fresh equity because 1) they weren’t generating enough FCF to fund their planned Capex organically, and 2) their [Net Debt]/EBITDA was already way too high for them to contemplate issuing more debt.

Right now, AVG is a lot more FCF-generative and also a lot less indebted relative to their earnings power; so, while major new capital investment does not appear to be on the cards, it is arguable that the Company could use some additional debt to fund it, if and when the need arises. As the topic of acquisitions has also been mentioned during recent earnings calls, and given the current low level of interest rates and credit spreads, AVG could also conceivably resort to debt funding if a sufficiently accretive opportunity arose in that space.

I agree with your analysis that the higher margin wines are increasing as a proportion of what we are selling and this will in short time increase revenues. However what concerns me is the cost of goods sold and SG&A expense being such a large proportion of the revenues. Is this the industry standard or can you see a way for the company to improve this beyond just seeling more of the higher margin goods? I note that TWE has gross profit margins in the 40% range compared to us in the 20s.

The main differences between AVG and TWE are that a) TWE are predominantly focussed on premium brands, and b) TWE have a much heavier presence in the Asian market, where their EBITS margins have been roughly twice as high as the average of ANZ/EMEA/Americas over recent years.

Even before the anti-dumping investigation in China, though, TWE’s Asia margins had been argued to be hard to sustain; so, when it comes to forming a view on margins going forward, it is probably sensible to isolate the impact of TWE's Asia business on their overall mix.

Looking at the most recent reporting period (1H2021), Gross Margins were actually 31.3% for AVG vis-a-vis 39.7% for TWE (including Asia), whereas EBITS Margins were 13.7% and 20.1% respectively. But, 41.0% of TWE’s EBITS (before Corporate costs) was Asia, where the EBITS Margin was 38.2% (despite everything going on with China); if one removed the Asia component from TWE’s EBITS, their EBITS Margin in 1H2021 (net of Corporate costs) would drop from 20.1% to 12.0%, which is actually slightly below AVG’s corresponding figure.

Hope this answers your questions, cheers.