Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the presentation of Campari Group's acquisition of Wilderness Trail Distillery. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of Campari. Please go ahead, sir.
Thank you. Good afternoon to all, and thank you very much for joining us at such short notice. What we'll do is go through a short presentation and then take your questions. If you follow me to the first page of the presentation, actually number two, you'll see why we're really thrilled to have been able to sign this agreement. The acquisition of an initial 70% stake with a clear put and call to take it to full control in 2031 in Wilderness Trail Distillery. Wilderness Trail is really a unique distillery. All very high-end handcraft, fast-growing, super-premium bourbon and rye whiskeys.
You'll see in the following chart the price positioning, which makes it very, very interesting for us, clearly helping us to leverage even further one of the fastest- growing spirits categories in the core U.S. market. The distillery brings with it industry-leading capabilities in engineering, R&D, as well as best-in-class bourbon and rye crafting, driven both by art as well as science. It brings with it a state-of-the-art production infrastructure, which next year will be able to produce 100,000 barrels, and Paolo will take you through what that means in terms of finished cases production in a little while. Clearly, we also have warehousing capacity in place to scale. Putting all of this together, you realize that what we're doing strategically is ensuring that bourbon is primed to become our group's second major leg after the aperitifs.
The value of the acquisition ends up being an enterprise value of $600 million for 100% of the outstanding capital on a cash-free and debt-free basis. Clearly, it's a value-enhancing acquisition, both gross margin as well as cash earnings per share accretive. Moving on to the discussion. Actually, we're almost buying our neighbors because they're based in Danville, which is 20 minutes away from the Wild Turkey Distillery, and some of our warehouses are actually on the border between both distilleries. It's really putting two neighboring distilleries and operations together. Well, Wilderness Trail was launched in 2012. It's really a premium craft distillery with a very clear focus on making the highest quality bourbon and rye whiskeys.
In the range, there are currently two expertly handcrafted, super ultra-premium brands, the Wilderness Trail bourbon and Rye whiskey. The range now also includes two bottled-in-bond wheat, small grain, and rye small grain bourbon brands, one Rye whiskey brand, a silver label, six- years- old, and an eight- year- old bourbon for deeper and more mature flavor. Average selling prices are very, very interesting. They start at $55 and actually go beyond $75 for the six and eight-year-old bourbon expressions. Distribution currently is widespread across key states by independent wholesalers and distributors. I think one of the most important charts is actually chart number four, where you really see the value chain pyramid and how our different expressions are positioned. It's also interesting to see how our portfolio has evolved over the years.
We essentially started with the entry-level Wild Turkey, the bottom left of the pyramid, together with the American Honey flavored whiskey. Then over the years, we built Russell into a very exciting high-end super-premium brand. We added the Whiskey Barons, we added Longbranch, and also pushed up the higher-end expressions of the Wild Turkey brand, including the limited editions. Last but not least, a few months ago, we took our minority interest in Howler Head flavored whiskey, with the aim of obviously taking full control over the years. It's a very complete portfolio, and Wilderness Trail fits in very, very nicely in there. This is a solid, very solid base upon which to continue to grow and actually accelerate our growth in the key U.S. whiskey market.
The brand itself and the distillery combine, really a blend of innovation and tradition, and they are gonna help us to accelerate and significantly expand our innovation platform. The two cofounders, Shane Baker and Dr. Pat Heist, have more than 20 years of experience in the production of whiskey, and they're clearly recognized as pioneers in fermentation. I call them the fermentation gurus, as well as distilling activities, with an incredible technical and product development understanding to produce superior whiskey. The distillery has a proprietary infusion mashing process as well as a sweet mash technique, which enables also a very flexible output driven by multiple mash bills and yeast strains. Crafting bourbons and rye whiskeys with very distinctive flavors.
This is really a tool which is gonna be very, very important for us in order to continue to innovate on our existing portfolio and taking it to the next level. Clearly, it is based on the careful selection of locally sourced premium seed, grain corn, wheat, and rye varietals, and it has a pioneering use of a chemical-free steam in the boiler. What's also very distinctive is that the whiskeys enter into the barrel at the lowest proof, and that helps magnify the taste. The production infrastructure is scaled and very flexible, as well as the warehousing capacity, and this is gonna result in significantly expanding our own production capacity, as well as aging inventory to satisfy the future growth of our premium bourbons.
The distillery itself is the 14th largest bourbon distillery in the world, and it has plenty of capacity also to expand going forward. Currently, it has a bottling facility, and it has a current annual production capacity of 85,000 bbl, and this is the equivalent of 1.6 million 9-L cases of finished product, so quite a bit. This capacity will increase to 100,000 bbl, so the equivalent of 1.9 million cases next year, while the storage capacity will increase to 250,000 bbl in the same time horizon.
By 2028, the overall maximum capacity is expected to increase to 125,000 bbl, so in other words, the equivalent of 2.3 million cases, with storage capacity leading to 500,000 bbl or about 9 million cases in the same time horizon. You can see that clearly, you know, we're doubling down on bourbon and rye, and we expect this to help really develop the second major leg of this great company beyond the aperitifs. Why are we attracted to this? Clearly, American whiskey is very well- positioned to continue its positive trends. I mean, it grew by 7% in 2021 versus previous year. Most importantly, the super-premium price segment, so where Wilderness Trail is positioned, grew at a whopping 17%.
It's clearly a very large category. It's 13% of U.S. spirits value, again, that is 2021 data, and it is continuing to premiumize. Very, very interesting. You know, what makes it more interesting is our, let's say, ownership, and ability to play in the top 16, cocktails in the world in high-end mixology. It's clearly beyond the four dedicated, Campari-based cocktails. You have a lot of whiskey-based cocktails. The Old Fashioned is number two, Manhattan number eight, Whiskey Sour number 10, and obviously the Negroni, where also Campari plays a role, number 12. Bourbon was the single biggest contributor to U.S. spirits volume growth over the last five years.
What's also very important is that internationalization is only at the beginning of the generational life cycle, again, driven by heightened mixology and premium sipping. Clearly, there's quite a bit of leeway, growing internationally. If you look at the, you know, on the bottom left, you see the trends of the category, but what's also interesting is to look at the bottom right chart, and you see how Campari is, very well positioned in the premium plus range. This is it for a little while, and I'll pass it on to Paolo for a few comments, and then I'll conclude.
Okay. Thank you, Bob. If you follow me to page eight, we have a few numbers on the Wilderness Trail acquisition. For fiscal year 2021, the acquired company achieved overall net sales of $41.8 million, of which Wilderness Trail Distillery brand accounted for $7.2 million, and the balance was generated by bulk sales as well as storage fees and visitor center revenues. The EBITDA for 2021 accounted for $22.7 million. Now, if you look at the current year, the estimated net sales are $57 million, growing by 39% over last year. The EBITDA is expected to come in at $37 million, with an increase over prior year of 64%.
Clearly, you know, the disproportionate increase in EBITDA year-over-year versus the increase of net revenues is due to the improvement of mix, where the brand business moved from 18% to 23%. Clearly there is, you know, also a gross margin uplift driving the business as, you know, the gross margin on sales of the brand business is way higher than the bulk business. The gross margin for the acquired business on sales accounts for 70%, you know, the blend of the two, bulk plus brand, is 20 basis points accretive to the overall gross margin on sales.
The scarcity value of the bourbon liquid implies a very strong demand for the bourbon bulk, which they represent, you know, as an important source of business for the Wilderness Trail Distillery. Moving forward, you know, our ambition is to progressively change, you know, further change the sales mix and expand, you know, the brand business as opposed to support our new product development program at Campari. Clearly, you know, as Bob has just said, we can rely on installed distilling capacity for an equivalent amount of 1.6 million cases last year and 1.9 million cases in 2023. That is destined to become 2.3 million cases in 2028.
You know, ample room to develop the Wilderness Trail distillery brand, as well as our own portfolio. As of 3rd September 2022, the inventory book value accounted for $24 million, that is exclusively composed of the Wilderness Trail bourbon and rye, as the bulk production is sold as new make and hence no inventory is built on bulk. You know, on top of the $24 million for the inventory, we have $27 million of fixed tangible assets. Moving on to page nine, we have, you know, the analysis of the Campari Group pro forma net revenues for year 2021, as if the acquisition occurred 1st of January of 2021.
As you can see, you know, the first time consolidation of the Wilderness Trail brand would move the overall Campari Group bourbon portfolio at 11% of the overall group revenues. In so doing, it would become the second-largest category or leg after the aperitifs, you know, that account for 35% of group revenues. Clearly in size, the bourbon would be, you know, two times as big as each of the following three categories, tequila, rum, and Skyy, accounting for, you know, 5%-6% of overall group revenues.
If you move on to page 10, where we have structure and valuation, the perimeter of the acquired business entails the Wilderness Trail Distillery, including the full production facilities as well as the, you know, the local visitor center. Of course, within the perimeter we have the IP, the trademark, and the EUR 24 million inventory that I've mentioned. With regards to the enterprise value, we're talking of $600 million, or 100% of the outstanding capital on a cash-free, debt-free basis. The implied enterprise value to EBITDA multiple is 16x, based on a 2022 estimated EBITDA. The good news is that the goodwill generated by the acquisition, together with the trademark value, is tax-deductible in the U.S. over a period of 15 years.
From a cash perspective, it would generate $6.5 million of tax savings. It's a value-enhancing acquisition both from a gross margin perspective, say 20 basis points, as well as from an EPS perspective, you know, and also 1% EPS and about, you know, 3% on a cash EPS basis if you factor in the $6.5 million tax savings that I've just mentioned. With regards to the transaction structure, at the beginning, you know, at closing, we will be buying a 70% interest of the outstanding capital that is valued $420 million.
The remaining 30% of the outstanding capital is subject to call and put options that will be exercisable in 2031 at an enterprise value, which will be determined by applying the multiple above, you know, the 16x, to the highest between the 2030 EBITDA, so the year before the exercise of the call, or, you know, the highest between this and the average EBITDA for the period 2028 to 2030. The funding of the acquisition will be funded by a combination of existing cash, available cash, and bank term loans.
The net debt to EBITDA on a pro forma basis is expected to increase from 1.5x to 2.3x upon closing, so 0.8x . The deal is subject to customary closing conditions, and the transaction is expected to close by year-end. The first-time consolidation most likely will occur at the beginning of January next year in 2023. Until the transaction closes, each company will continue to operate independently. I think this is it on the numbers. I will hand back to Bob for conclusion.
Yeah. Quickly, conclusion before taking your questions. I mean, what are the key drivers of this fantastic deal. Clearly, it further expands our bourbon brand portfolio by adding a very fast-growing super ultra premium brand, Wilderness Trail, and that also accelerates our premiumization journey as well as enriches our rare portfolio. Importantly, it helps expand production capacity and accelerates production capacity growth. That will enable us to accommodate the growth of our bourbon portfolio, excluding obviously of the core Wild Turkey, which will continue to be exclusively distilled in our Lawrenceburg facility. We'll also provide liquid for the accelerated growth of our high- potential and highly profitable Whiskey Barons range, which unfortunately currently are capped due to capacity constraints.
Again, here it's very interesting proposition because we have 375 ml bottles retailing between $50-$60, so quite a bit of value to be untapped there. It will also help us unpack further value by continuing to differentiate our bourbon offerings by limited editions, which, as well currently, are capped by capacity constraints. We will accelerate and significantly expand our innovation platform, thanks to the very flexible output of the distillery. Last but not least, but very importantly, we're very happy to insource a team of fermentation and distillation experts which have pioneered the sweet mash whiskey and developed proprietary distilling processes and methodologies. That will benefit our overall bourbon portfolio. This is it in a nutshell, and we're happy to take your questions.
Thank you. This is the conference operator. We'll now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Andrea Pistacchi with Bank of America. Please go ahead.
Yes. Hi, Bob and Paolo. I have three questions please. Elaborating a bit on some of the things you said. The first question, please on if you could give a bit more color on how it will help you sort of improve or ease the potential capacity constraints that you have on the sort of current U.S. whiskey business. Sort of related to that, with the new capacity you have, what sort of growth do you think you can sustain in this new leg of the business? Going forward, what kind of growth should we expect in your view from the U.S. whiskey? Second question for Paolo, did you have an EBIT number you could give us potentially?
Also, the split, how what you're assuming in terms of financing costs, how it kind of splits between available cash and bank loans. If I may, the last one, again referring to one of the points you made about that you'll be gradually phasing out the bulk part of the business. Should we interpret this as that in sort of 2023, I mean, this will be just a gradual process. In 2023, we won't be seeing a sort of sudden decline in sales because you're dropping bulk.
Let me take the first two questions, Andrea.
Thanks.
How can this help us free capacity? Clearly, as I said earlier, I mean, the Wild Turkey brand will continue to be distilled in Lawrenceburg. But what this facility will enable us to do is to actually cater for our flavor whiskey brands, as well as for the non- Wild Turkey brands. It frees up capacity in Lawrenceburg, which we can then dedicate to Wild Turkey. Now, what kind of growth can we generate out of the whole portfolio? I think our aim would be to grow faster than the overall category. Then depending on the mix, obviously, we'd like to grow faster the super ultra premium part. You can calculate from there. It's gonna be in the high single digits or double- digits.
Yeah. With regards to the target business EBIT, you know, the D&A is 1.4, so you know, we're talking $35.8 million in 2022. With regards to the cost of funding, you know, we're currently considering to have a blend of new loans in the U.S. market and existing cash of 70%-30%. We're aiming at having 4.5% coupon on the incremental debt, you know, as a blended for 2023 onwards. You know, the CapEx, I've not mentioned the CapEx is about, on the distillery, is about $9 million a year. So you know, these are the numbers.
Yeah. The last point, please, on the phase out of the bulk, will it be? You said gradual, right? No sudden slip down in the sales?
No, it will be gradual. It will be gradual also because we have to bear in mind that, you know, we're ramping up distilling capacity. You know, for a certain period of time, we will be able to serve, you know, the bulk sales business. You know, as we said, you know, distilling capacity is moving from 1.6 million-2.3 million cases. You know, we have, you know, time to accommodate both. On one end, the rise in, you know, Wilderness Trail brand as well as our innovation pipeline. On the other hand, to keep on selling back to third parties.
Great. Thank you.
The next question is from Edward Mundy with Jefferies. Please go ahead.
Afternoon, guys. Congrats on the deal. Three from me, please. The first is on distribution in the U.S. You mentioned that you've got pretty good distribution across the U.S. through independent wholesalers, which is helping to grow the brand awareness. Could you talk to the opportunity to broaden distribution if you migrate the business over to Southern Glazer's? The second is on slide seven, you know, looking at the life cycle of bourbon. You know, clearly you got in there pretty early on bourbon with Wild Turkey, just as it was sort of kicking off. We covered this a little bit on the conference call last week that you're not seeing, you know, any clear signs of weakening consumer confidence.
What gives you confidence that up-trading within bourbon will continue if we do hit a bit of a rough spot from a consumer standpoint? The third question is on slide eight. I think you're sort of helping us to fill in some of the pieces of the puzzle on the P&L. You've got 57% of revenues, about 40% of gross margin, and then about 35%-36% of EBIT, which implies, you know, very little for A&P and SG&A. Could you just perhaps just go on, talk a little bit about the shape of the P&L? You know, why is the A&P and the broader SG&A just so low as a portion of sales, you know, related to a normal P&L?
Let me take the first two ones, Ed, hi. Well, first of all, I mean, here we have really the combination of two, let's say, best practices. The Wilderness Trail Distillery brings great liquids, and what we bring to the table is very strong distribution as well as strong marketing. We'll be able to move it into our network as well as, you know, put in the expertise from a marketing standpoint. I think there's opportunity to premiumize the packaging further. Clearly we're excited, and the sellers are all excited about, you know, what sort of transformation. Current distribution is good, but obviously, it's not at the level of a Southern Glazer's. Quite a way to go.
With regards to bourbon life cycle and premiumization, I mean, if you look back, even in, you know, in tough times in the past 10 years, bourbon has continued to premiumize. I mean, we launched a few weeks ago a 13-year-old Single Rickhouse of Russell's Reserve online, and they disappeared within two hours, and it were $200 bottles. At the end of the day, it is really approachable luxury, and you have bourbon fanatics who are very happy to, you know, cut down on other expenses, but actually continue building, you know, their collections and really driving high quality consumption.
Yeah. With regards to the weight of A&P and SG&A on revenues for the acquired business, you know, the reason why they are so low is the fact that on bar sales, you don't need to have SG&A, and you don't do A&P investments. On the other hand, prospectively, clearly, you know, as you know the branded business grows in size, we would invest more A&P. On the SG&A front, you know, we would not add incremental costs because for us, this is really a plug and play. You know, the distillery is not far from ours.
You know, we wouldn't need to add, you know, much. On the contrary, you know, I think there are, you know, some interesting opportunities, you know, at our own distillery to get, you know, the technology and the expertise from Pat and Shane. You know, they are really expert, and we believe, you know, we can generate, you know, some interesting savings if we were to use their processes that are, you know, quite advanced in distilling. That's, you know, the answer to the odd shape of the P&L.
Very good.
Bear in mind as the branded business grows, obviously that gross margin is much, much higher than the bulk gross margin. We'll add at those prices, $55, $75+ , absolutely no issues and problems accommodating additional A&P.
Yeah. The good news is that if you look at the, you know, branded business gross margin on revenues is in excess of 80%. Average for the company is 70%, but clearly bulk is lower in margin. You know, directionally, that would generate significant accretion in the acquired business.
Great. Thank you.
The next question is from Chris Pitcher with Redburn. Please go ahead.
Good afternoon. Thank you very much. A couple of questions from me. You mentioned CapEx was running at $9 million per annum, but looking at the expansion plans, should we expect that to go up? Then secondly, on working capital, as you shift from bulk to aging liquids, I'd expect that to become a drain on cash flow as well. Could you sort of confirm that? Finally, sorry, could you give us a rough age idea of the age of the brand? Sorry, one more, whether you were an existing customer of Wilderness for bulk whiskeys? Thanks.
Well, I'll take the last one, Chris. I mean, the age on the premium silver editions is between six and eight years. The others are obviously between three and six.
With regards to the CapEx, you know, on the contrary, we're not expecting to lift in any meaningful manner the CapEx spend in the coming years because, you know, the installed distilling capacity as well as the warehousing capacity is quite big. In bulk business, you know, basically the investments in warehousing capacity are covered by the warehousing fees and by the distilling charges. You know, this is basically covered. We're not expecting any drift in that CapEx line. I forgot the second. Your second question. Can you please-
Working capital.
Yeah. Working capital, you know, is now $24 million. Of course, you know, as the branded business, you know, grows, there will be, you know, an increase in working capital. You know, keeping working capital on revenues as a percentage of revenues flat for the acquired brand business.
Bear in mind that the flavored whiskey brands obviously have a younger age profile.
Were you buying bulk from Wild Turkey already? I.e., it's a liquid you know.
We do buy bulk, but we haven't been buying from them, so we'll be able to replace.
The next question is from Trevor Stirling with Bernstein. Please go ahead.
Hi, Bob and Paolo. Normally, I'd have lots of questions about the strategy, but you've laid it out in such great detail, just no need for that. Just a quick two. The EBITDA percentage, you know, around 65%, looks very, very high. Could that be reduced as you transfer over from U.S. GAAP to IFRS? The second thing, just given the shape of the deal, it sounds like this is much more about revenue synergies than cost synergies. I think you've mentioned some, Paolo, in terms of the transfer of know-how, but is there anything else we should be thinking about in terms of cost synergies?
No, with regards to the conversion from U.S. GAAP to IFRS, you know, we do not envisage a major reclass. As you know, often, you know, the biggest reclass occurs in net revenues and discounts, but, you know, in bulk business, there's, you know, no discounts, so, you know, it's an easy gain. It's an easy, you know, conversion. You know, clearly there is, you know, the area of purchase price allocation at the beginning. The, you know, the amount of goodwill and trademark that is subject to, you know, tax depreciation is basically at the moment estimated on the basis of the book value of inventory and the fixed tangible assets.
There might be, you know, minor changes, but nothing major, I believe. The rest is, I think, quite plain vanilla.
Super. Thank you very much.
You're welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Paola Carboni, Equita. Please go ahead.
Yes. Hi. Good afternoon, Bob and Paolo. I have two questions. The first one is about your CapEx plan for the future on the group as it is, let's say. We knew that you were needing an expansion of your production capacity at your distillery in Kentucky for Wild Turkey. I'm wondering to what extent this deal can allow us to expect less investment on that for the future. If you can remind us what your CapEx plan are for the next few years. The second point is just a follow-up on what you mentioned before, that you usually buy bulk, but you never bought from Wild Turkey Distillery.
I was wondering if we can take into account for the future that part of the current sales value the distillery has achieved in 2022 should become intercompany going forward. Thanks.
Yeah. With regards to the project of expanding the Wild Turkey distillery, this is unchanged because, you know, Wild Turkey, you know, brand, the core will still be sourced from the Wild Turkey distillery. This project is more aimed at supplying liquid for all new initiatives in the bourbon space, you know, from Polar Head to the high-end Whiskey Barons and so forth. It's, you know, with regards to the size of the investment, you know, we're basically preparing a disclosure that will be done at year-end.
We will, you know, recap all the, you know, major investments that, we're currently, you know, as we speak, planning, you know, including, you know, Novi Ligure, this one, the, you know, the takeover in Mexico, and waste management treatment in Jamaica. We will do a recap of everything in fact. With regards to the, you know, to the consolidation of this one, you know, yes. You know, before, you know, you have to see it this way, you know, before we were buying, bulk whiskey from third party, you know, to a minor extent, you know, in the future, you know, whenever possible, we will source that back from Wilderness Trail Distillery at arm's length conditions.
Basically, we will pay, you know, the liquid at the fair market price. Clearly, we would consolidate for 100% the P&L of target, which means that, you know, on one end by paying the arm's length price, we will recognize to our minority shareholders their profitability. But on the other end by consolidating the target, we would have a cost that is the internal cost of production of that distillate. It's not double counting cost and revenues between Wilderness Trail Distillery and Campari America. You know, revenues and costs will be eliminated. We would recognize the true-up cost of goods sold.
Should we expect Wilderness Trail Distillery bulk sales to be in the future, just towards you or there will still be some external sale in this respect?
No, as said, you know, in the short run, you know, the revenues from bulk sale will be, you know, maintained, will be, you know, kept alive in size because we're expanding the production, the distilling capacity from the equivalent of 1.6 million cases to the equivalent of 2.3 million cases. That, you know, would give us, you know, headroom to grow internally, you know, our branded business. Thereafter, you know, as the time goes by, and if we're lacking in our own business, of course, we will reduce the bulk revenues.
Clearly, you know, here the arbitrage there is potentially, you know, down the road a little bit of timing difference in recognizing revenues and profits. You know, the price of it is to get higher gross margin on revenues because, you know, in all cases, the brand of business, not just Wilderness Trail, but also our own innovation, does capture higher gross margin on revenues.
Okay, thank you very much.
Mr. Kunze-Concewitz, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.
Well, thank you very much for joining us, and we look forward to covering this story in the months and years to come. Thank you. Bye-bye.
Bye-bye.