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Truett Hurst Goes Public at Reduced Value

Company plans to use proceeds from offering to pay down debts

by Paul Franson
truett hurst
After opening at $6 each, shares of Truett Hurst Inc. settled around $5.80, ultimately raising $14.1 million.
Healdsburg, Calif.Truett Hurst Inc. wine company sold 2.7 million shares of its Class A common stock to the public at $6 per share June 20, then saw the stock price dip as low as $5.30 before settling around $5.80. The stock is traded on the Nasdaq Capital Market under the symbol “THST.”

The stock raised $14.1 million, far less than was anticipated when the company announced its plans to sell 2.9 million shares at a price of $11-$15 in late March ($32 to 45 million).

This marks the first initial public offering for a North Coast wine company in 13 years. Crimson Wine Group (parent of Pine Ridge, Archery Summit, Chamisal Vineyards and Seghesio Family Vineyards) was recently spun off as a public company, however.

Truett Hurst intends to use the net proceeds from the offering to pay down debts estimated at $2.5 million according to a report June 7 by small-cap underwriting and research firm Sidoti & Co. LLC, which co-managed the IPO, for working capital including buying wine and packaging material, capital expenditures, hiring additional personnel and for general corporate purposes.

The initial proposal called for executives and directors to sell stock, but they held back about 200,000 shares in the final offering. Those individuals still hold controlling interest with 40% of the stock by value and 60% of the voting power.

Truett Hurst’s total revenues during fiscal year 2012, ending June 30, were $12.7 million, a 135% increase from $5.4 million during fiscal year 2011.

Historically, wine companies have not done well in the stock market. All major wine companies, for example, are either private or part of companies that derive much of their revenues and profits from spirits, beer or other products. This is true partly because most investors seek regular incremental increases in revenues and profits, and wine companies are highly dependent on both annual and longer-term agricultural cycles.

Truett Hurst owns wine producer and marketing company HDD LLC, which was founded by Phillip Hurst (a veteran of another publicly owned wine company, Golden State Vintners, and co-founder of Novato-based Winery Exchange) and Paul Dolan III, who helped build Fetzer Vineyards into a large winery.

Truett Hurst partner Bill Hambrecht, an investment banker who helped Ravenswood Winery go public in 1999, was the architect of the IPO. The offering was led by W.R. Hambrecht + Co. using its Open-IPO process, which allows individual and institutional investors to bid on shares in an auction. CSCA Capital Advisors LLC, Feltl and Co. Inc. and Sidoti & Co. LLC, co-managed the offering.

A diverse product line
Truett Hurst produces and sells more than 30 brands, some in partnership with major retailers, and some independently. The company manages a custom-label business that builds brands for exclusive sale through retailers while retaining brand ownership.

Private label business accounts for 72% of Truett Hurst’s estimated sales for fiscal year 2013, according to the prospectus for the offering, with traditional three-tier sales comprising 10% and direct-to-consumer sales accounting for 18%.

Trader Joe’s, Total Wine and Safeway are its largest retail customers, together accounting for more than 50% of sales, according to the company’s presentation for potential investors.

Three of Truett Hurst’s brands account for more than 10% of sales each, including Dearly Beloved, Sauvignon Republic and Healdsburg Ranches. Together, they represent just less than 40% of sales, according to the presentation.

Dearly Beloved is sold through Trader Joe’s and is expected to be the company’s best-selling wine in 2013 and 2014.

VML is the company’s highest-end label, and it sells mainly through its wine club and tasting room.

Other brands include:
Direct to consumer: Truett Hurst

Traditional three-tier distribution: Healdsburg Ranches, Stonegate, Bradford Mountain

Private Label:
Dearly Beloved and Sauvignon Republic for Trader Joe’s; Curious Beasts, Paper Boy, Schucks and Fuchsia series for Safeway, Eden Ridge and Harbor Front for Total Wine

Twelve brands sell in excess of 10,000 cases, including private labels Hobson Estate/Kiarna, Curious Beasts, Paper Boy, Schucks, California Square, Fuchsia (rosé/white) and Harbor Front, while Stonegate Collection sells through distributors and Truett Hurst direct to consumers.

The company’s tasting rooms and wine clubs produced revenues of more than $2.35 million during the first nine months of fiscal year 2013 and more than $1,54 million during the first nine months of fiscal year 2012—an increase of 52%.

The company said its major distributors include Young’s Market Co. and Republic National Distributing Co.

Truett Hurst owns 50% of The Wine Spies, an Internet wine “flash” retailer.

The company also has developed some innovative products:

• Evocative wine wraps for Safeway, one of the country’s largest wine retailers.

• The world’s first paper bottle: Truett Hurst developed Paperboy with Safeway, and it’s expected to launch with a significant case order in fiscal year 2014. The paper bottle is 80% lighter than a glass bottle and has a 67% lower carbon footprint and better insulation properties. Truett Hurst owns the Paperboy brand; after 90 days, it can sell it through other retailers. It is in discussions to sell the product with several other U.S. retailers and distributors, including The Kroger Co. and Southern Wine & Spirits, according to a presentation for potential investors.
• Proprietary square bottle and brand. Truett Hurst says five of the top U.S. wine retailers are vying for the product, and it expects to produce and sell 40,000 cases (generating approximately $3.5 million in sales) during fiscal year 2014.
Truett Hurst buys much of its wine on the bulk wine market, keeping capital spending to a minimum. In addition, the founders and members of the management team collectively control 500 acres of vineyards in Sonoma and Mendocino counties, and the company buys grapes from them.

Its VML winery is located in the Russian River Valley, five miles southwest of Healdsburg, and is leased from Hambrecht Wine Group.

The VML winery can crush, ferment and oak barrel age approximately 500 tons (35,000 cases) of grapes annually, with capacity to increase to 2,000 tons with additional capital improvements, according to the prospectus for the offering.

Truett Hurst also outsources wine production to Sonoma County’s Owl Ridge Wines, Mendocino’s Rack & Riddle Custom Crush Wine Services and Paso Robles’ Robert Hall Winery. Wairau Vineyards in New Zealand produces Truett Hurst’s Sauvignon Republic Marlborough Sauvignon Blanc.

Virginia Lambrix is director of winemaking. She was formerly at De Loach Vineyards, La Follette and Hendry Ranch Winery.

Paul Dolan’s son Heath Dolan is director of vineyards. He has 16 years of experience in the wine industry, including managing cellar operations for Fetzer.

Truett Hurst Wines are sold at a tasting room in Dry Creek Valley six miles west of Healdsburg. Although the site has the infrastructure such as electricity and access to water to operate a winery at this facility, it has not installed processing equipment. The facility could be used for winemaking operations in the future.

A look into the future
Sidoti & Co., the co-manager and co-underwriter of Truett Hurst ’s IPO, issued a report June 7 about the company that warns Truett Hurst will not be able to buy enough wine and packaging materials to meet demand due to lower than anticipated results from the IPO, and lowered its earlier forecasts to about 313,000 cases (from 460,000) during fiscal year 2014 and 450,000 (from 712,000) for 2015.

The Wall Street specialist in small- and micro-cap stocks cut its net sales forecasts to $25.7 million (from $36.0 million) during fiscal year 2014 and $35.7 million (from $56.9 million) in 2015. That would decrease revenue growth to 57% (from 93%) in 2014 and 39% (from 58%) in 2015.

The most significant cuts are to the Paper Boy brand; Sidoti cut its case volume estimates to 50,000 in 2014 and 60,000 in 2015 (from a respective 105,000 and 175,000 cases).

Sidoti maintained that the company’s “asset-light” business model and sales of innovative products would fuel impressive revenue growth in 2014-15 and significant operating leverage.

It added that innovative products will spur virtually all of the growth; by its model, the California Square and Paper Boy brands will sell 90,000 cases combined during fiscal year 2014 and 160,000 in fiscal year 2015.

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