Gage Roads has published its results for the first half of its financial year, and says it is backing its Good Drinks strategy to build a firm foundation for future growth of earnings.
In addition the strategy is helping the business with its expansion into the east coast and overall, Managing Director, John Hoedemaker, said the business is on track to achieve the strategy’s longer-term targets.
For the half the Good Drinks brands were up 17 per cent to 4.2m litres, with revenue up 10 per cent to $19.3m and gross profit up 12 per cent to $13.3m. The only downside to the result was the issues with the national chains, but Hoedemaker explained he expects this to be a temporary issue for the business.
“Our strategy to diversify our channel mix has delivered strong growth across the independent channel and on-premise draught channel, resulting in total Good Drinks brands for the half-year being up 17 per cent to 4.2 million litres,” Hoedemaker said in the half-year report.
“However, sales of Good Drinks brands through the national chains were down 25 per cent of the half-year contributing to a shortfall to our total 20-25 per cent annual volume growth target for the Good Drinks brands.
“This shortfall was due to a combination of high opening inventory balances and timing of new product ranging with our largest national customer relating to the transition from a historic contractual relationship to one of a traditional supplier.”
He added: “We feel this is a temporary shortfall to strategy.
“Large inventory balances in the national chains channel at the beginning of the financial year resulted in lower replenishments of around 0.6m-litres in H!. The higher-than-usual inventory balances were a result of meeting volume commitments relating to a supply agreement which concluded 30 June 2019. Accordingly, this stock overhang is not expected to re-occur.
“The independent channel also held 0.2m-litres in additional inventory at the beginning of this financial year. Pleasingly, strong consumer demand at store level has reduced these inventory balances back to normal levels, indicating that the brand health of the brands in our portfolio continues to be strong.”
Looking at the overall business, Hoedemaker said: “We are pleased with the growth in the independent retail channel (up 47 per cent) and the on-premise channel (up 41 per cent) which highlights the strong brand health of our products. Diversification towards these channel continues to be a key driver of our strategy.”
For the rest of the financial year and beyond, Gage Roads looks to be in a strong position with East Coast expansion on the horizon as well as a taproom and microbrewery die to open in Redfern Sydney in the final quarter of the financial. Packaging line, warehouse and cold store expansion is also on the agenda, giving Hoedemaker confidence that once this financial year is over the business will remain on track.
“FY20 is a year of ‘changing gears’ for our business,” Hoedemaker said. “We are investing ahead of the curve in the right areas of the business to drive future growth.
“The transition from a contractual relationship to a traditional supplier with our largest national chain customer has been completed but in this period led to an isolated and temporary loss of sales that did have an impact on our short-terms H1 earnings. We expect H2 FY20 sales and earnings to be on track and aligned with our strategy, however they will now recover the H1 shortfall and will mean that our target of 25-30 per cent EBITDA is unlikely to be met for FY20.
“The investment in our packaging lines, growing our sales capabilities and broadening our brand portfolio as well as the execution of our venue strategy are all key strategic pillars designed to secure long-term success of our business.
“The Good Drinks strategy, to expand our sales and marketing efforts and to accelerate our brands’ growth on a national basis, is on track and sales at store level continue to grow strongly. Accordingly, we believe the strategy and targets we have set for ourselves are sounds and achievable and our expectations for FY21 and beyond remain unchanged.”