Tonnellerie Francois Frères or TFF group (EPA:TFF) is the #1 manufacturer of wine and alcool barrels (and oak staves), it has a wide moat and trading at a discount to historical valuation
Bonjour M. Ermite. Je viens de découvrir votre analyse avec intéret - un des buts premiers de mes publications c'est justement d'initier ce genre de discussion. Le prix du chêne est une piste intéressante. Je sais que le prix du tonneau pour le Bourbon est en constante augmentation - 10% de 2023 a 2024. Avez-vous trouvé une source pour trouver le prix du chêne spécifiquement? Et puis il y a le chêne américain et le chêne francais. J'imagine que les 2 sont différents.
Bonjour, tout d'abord, je tiens à vous remercier pour vos mots concernant ma thèse. En tant qu'investisseur et écrivain, j'admire également ces débats où je peux apprendre d'autres investisseurs à propos d'entreprises très intéressantes. Je suis d'accord avec vous sur les projections futures possibles vers les pays de l'Est. L'Asie est un grand consommateur en raison des fêtes privées traditionnelles et de leurs alcools, en laissant de côté le vin. De plus, en Asie, il n'existe pas de concurrents prédominants comme c'est le cas en Europe ou en Amérique du Nord, et cela représente un grand avantage pour TFF, car par le biais d'acquisitions, elle peut entrer dans un marché encore à découvrir.
Concernant le prix du chêne français, il se vend approximativement sur le marché à 2.500€/m3, et le tonneau de chêne français, d'environ 500L, à environ 2.400€. Pour le chêne américain, il se vend approximativement à 2.000€ le m3. Le tonneau de chêne américain oscille entre 650€ pour 225L, soit environ 1.300€ pour 500L.
Je vous joins ci-dessous les sources de consultation :
par ailleurs la prochaine expansion post Bourbon est bien quelque chose que je me questionne. Je n'avais pas pensé à l'asie. Ca ne sera pas facile. Je me demande bien ce que les japonais utilisent pour faire viellir leur fameux whiskey par exemple. Il y a l'inde bien sur aussi pour le whiskey indien. Je ne pense pas qu'il y ait une tradition de viellissement pour l'alcool de riz mais je me trompe pt.
About the Bourbon graph inventory level going ballistic, what make you so sure it will keep raising? Couldn’t that be over supply that will depress prices?
You say, "In the last 10 years, TFF has traded at an average EV/EBITDA of 15x. Today it is trading at 9x EV/EBITDA, the lowest level in the last 10 years."
But the company is not the same today as it was in the past.
In the last couple of years its working capital requirements have ballooned, its capex has increased, its cash from operations has collapsed despite top line growth, and its free cash flow has turned negative.
Long term debt levels doubled from 2020 to 2021, and almost trebled from 2023 to 2024. This, together with a macro economic shift away from the ZIRP era, has caused financing costs to increase dramatically.
Rather than allocating retained earnings to reduce the debt, being a family trust owned business, distribution of balance sheet capital in the form of dividends always comes first! That is tantamount to borrowing to pay dividends. Insanity, but par for the course with old-money family owned businesses.
The moving average net earnings margin is down over 350 basis points having previously been constant in the mid-teens, and now stabilizing around 11%.
So why should this company, with deteriorating unit economics, trade at the same multiple as it did in the past?
Top line growth is often a red herring. If it comes at the expense of the unit economics of the business, sometimes it is unwelcome. You can't ascribe an earnings multiple based on expectations of top line growth alone.
I am not sure you understand the concept of investing for the future. Of course TFF is not the same company than 10 years ago. It build from scratch a 200 million business for a high growth bourbon business. They build 2 cooperage and 9 stave mills in the USA to address this market. They also need more working capital mostly in woods to build inventory for their stave mills. They stated that now they have the equivalent of 9 months of oak staves. Oak staves need to be aged. They took some debt to finance this. But EBIT (operating income) has doubled thanks to this expansion. Net Debt to EBITDA is at 2.45. This is healthy and this ratio has gone down since 2020. The worst year was 2020 when they invested heavily in the bourbon but the margin in that segment was below targer of 15%. Now Bourbon margin is 19% so its under control. The increase of price of wood was also a factor in the working capital increase.
I think you are TOTALLY wrong in thinking that this is a top line growth story. Operating income and net earnings has doubled since 2018. So I dont know where you are coming from. I actually admire a management that is willing to take calculating risk to enter a new market (like they did with Scotch) and now Bourbon and is winning hands on. It is taking some risks with debts but this is all under control IMO.
There is alsolutely no deteriorating unit economic. EBITDA margin in bourbon is on the rise at 19% and WINE is steady at 25%.
Cash flow is negative because they are investing in new factories new inventories in a business that is NOT LITE. It is not lite but it is MOATY.
As for the dividends - I agree they should have kept dividends to minimum. Not raising dividends until debt is being repaid.
Investment style is a personal choice. Some are obsess with cash flow and free cash flow without being too concerns about the business. I am more concern about the business and what will happen in the future. That is the reason I never invested in tobacco stock - which are free cash flow rich but a dying industry. although not dying as quick as I thought... Same thing with oil and gaz.
Anyway my main concern of family own business is to be content with the statu quo and pilling with cash ... I want ambitious multi-generation owner thinking far ahead in the future - Jerome Francois fits the bill. The family Ricard as well. M. Arnaud of course. The capacity of short term suffering for the long term good is very unique for family own or founder led. This is something that is missing with professional CEO looking to grow the business and most importantly earnings in 3 years so they can make loads of money in their stock options.
Have you noticed that there is no stock option with most family owned business.. TFF included. Music to my ear as a LT shareholder.
There is a fundamental issue with European businesses that are majority family owned.
Looking at the numbers it is exceptionally well run and stable, with durable earnings.
So the problem is not the business itself, but the mindset of the majority owners.
This is a business that has been in the same family for multiple generations and will almost certainly remain that way for generations to come. The public float is only 29% as the family own the other 71%.
European family owned businesses are treated like a cash cow. Ownership is usually held in a family trust, with trustees being concerned about one thing only. They want to be able to draw down enough income, on a regular basis, to be able to keep family members happy. These families have a life style to maintain, so these become lifestyle businesses.
Intelligent capital allocation decisions are turned on their head. Dividends always come first because that is what the family wants and as majority owners, what they want happens. If you own 71% of a company with a 715 million market cap, the dividend yield doesn't need to be very high to be able to keep family members happy. A 24% payout ratio results in a mere 1.8% yield which works for the family.
But what about external investors? If you are an income investor, is a 1.8% yield likely to work for you? You could earn far more being invested in risk free Treasuries. So if this doesn't work for income investors, what about growth investors? Well it doesn't work for them either. The family has no intention of selling its stake so it really doesn't care about the market cap or the share price. They will still own this business in 100 years regardless of today's share price. So they are not motivated to enhance the share price - again this is evident in their capital allocation decisions, always paying dividends and never repurchasing shares for example.
On this last point, I wonder why the business ever listed as a public company and why the family don't try to pay down the equity financing received in the past by repurchasing shares to take the company private (100% family owned). That would be best for both external shareholders and the family. In truth, they have probably never thought about it. They are probably not corporate finance people. They are likely a very prosperous upper class French family spending their time enjoying the finer things life has to offer rather than focusing on the business.
There are lots of businesses like this across Europe. They are great businesses with a very low risk profile, so for the uber rich looking for a safe place to preserve their wealth for generations to come which are inflation proof and not subject to cyclicality, then it isn't a bad choice (Anthony Deden would invest in this kind of set up for his high net worth clients). But for most investors looking to enhance their wealth rather than to preserve it, on an opportunity cost basis, these businesses are not a great choice simply because their interests are not aligned with the majority shareholders - there are better investments out there.
I invest for the long term. I never got a single cent of dividend from Amazon. I am only starting to get some dividends from my investment in Google in 2004 at IPO. Amazon and Google are my largest and one of my oldest investment. Amazon has reinvested all their cash to the business of e-commernce plus started a new business in AWS and now investing all their proceeds to AWS server farms. What is wrong with that. Why should family owned business like TFF invests most of their cash flow into new business like Scotch (2007-2014) and Bourbon (2017-now). What is wrong with that??? As a shareholder I am now a owner of a larger and larger piece of business (new and old) Google invested tens of billion on Waymo instead of givving me back some dividends. I am so glad they did it... Waymo will be changing the taxi business all over the world. I am a growth investor.
I am totally inline with Antony Deden views. I am a strong believer of investing with management with skin of the game. If they take risk this is calculated and is for long term impact. Like Bezos was... Steve Jobs.. Jerome Francois, Arnault, the hermes family,
Oct 3·edited Oct 3Liked by @Govro12 WinterGems Stocks
I think that we are saying the same thing in a different way. People like Bezos at Amazon and Buffett at Berkshire and so many others have grown because they reinvest all their earnings in growth. More particularly, as you say, they don't pay dividends. There is nothing wrong with that. I like to see that.
Paying a dividend is a partial liquidation of the business (a distribution of balance sheet assets).
All else being equal, if a company is able to generate X% on invested capital, and is able to reinvest all of its earnings in the business at the same rate of return, then its compounded growth will be X percent. But if it decides to have a payout ratio of 50% and only reinvests half of its earnings, then it will experience compounded growth of X/2 percent (half the growth rate).
Reinvestment includes reducing equity financing when shares trade below intrinsic value, because that is accretive to shareholder returns.
Dividends are a last resort if there are no viable reinvestment opportunities. But TFF seems to put dividends first when deciding which capital allocation levers to pull because it is a family lifestyle business. That is the part where a conflict of interest arises between internal and external investors.
Thanks for share your investment research!
I wrote about TFF too in my Substack profile, it could be interesting to share information.
About the industry, I would add the importance of the wood or oak price to determinate the revenues of every market company.
Good job, I will be waiting the second part!
Bonjour M. Ermite. Je viens de découvrir votre analyse avec intéret - un des buts premiers de mes publications c'est justement d'initier ce genre de discussion. Le prix du chêne est une piste intéressante. Je sais que le prix du tonneau pour le Bourbon est en constante augmentation - 10% de 2023 a 2024. Avez-vous trouvé une source pour trouver le prix du chêne spécifiquement? Et puis il y a le chêne américain et le chêne francais. J'imagine que les 2 sont différents.
Bonjour, tout d'abord, je tiens à vous remercier pour vos mots concernant ma thèse. En tant qu'investisseur et écrivain, j'admire également ces débats où je peux apprendre d'autres investisseurs à propos d'entreprises très intéressantes. Je suis d'accord avec vous sur les projections futures possibles vers les pays de l'Est. L'Asie est un grand consommateur en raison des fêtes privées traditionnelles et de leurs alcools, en laissant de côté le vin. De plus, en Asie, il n'existe pas de concurrents prédominants comme c'est le cas en Europe ou en Amérique du Nord, et cela représente un grand avantage pour TFF, car par le biais d'acquisitions, elle peut entrer dans un marché encore à découvrir.
Concernant le prix du chêne français, il se vend approximativement sur le marché à 2.500€/m3, et le tonneau de chêne français, d'environ 500L, à environ 2.400€. Pour le chêne américain, il se vend approximativement à 2.000€ le m3. Le tonneau de chêne américain oscille entre 650€ pour 225L, soit environ 1.300€ pour 500L.
Je vous joins ci-dessous les sources de consultation :
https://www.todobarricas.es/producto/barrica-de-roble-americano-225l-duero-tradicion/
https://www.copper-alembic.com/es/barril-de-roble-frances/
par ailleurs la prochaine expansion post Bourbon est bien quelque chose que je me questionne. Je n'avais pas pensé à l'asie. Ca ne sera pas facile. Je me demande bien ce que les japonais utilisent pour faire viellir leur fameux whiskey par exemple. Il y a l'inde bien sur aussi pour le whiskey indien. Je ne pense pas qu'il y ait une tradition de viellissement pour l'alcool de riz mais je me trompe pt.
Thanks for the write up!
About the Bourbon graph inventory level going ballistic, what make you so sure it will keep raising? Couldn’t that be over supply that will depress prices?
Thanks for the comment. I will address this question in PART2
Merci - très intéressant. Je n’avais jamais été au-delà des états financiers (et je n’ai jamais acheté TFF).
voila une belle occasion.
You say, "In the last 10 years, TFF has traded at an average EV/EBITDA of 15x. Today it is trading at 9x EV/EBITDA, the lowest level in the last 10 years."
But the company is not the same today as it was in the past.
In the last couple of years its working capital requirements have ballooned, its capex has increased, its cash from operations has collapsed despite top line growth, and its free cash flow has turned negative.
Long term debt levels doubled from 2020 to 2021, and almost trebled from 2023 to 2024. This, together with a macro economic shift away from the ZIRP era, has caused financing costs to increase dramatically.
Rather than allocating retained earnings to reduce the debt, being a family trust owned business, distribution of balance sheet capital in the form of dividends always comes first! That is tantamount to borrowing to pay dividends. Insanity, but par for the course with old-money family owned businesses.
The moving average net earnings margin is down over 350 basis points having previously been constant in the mid-teens, and now stabilizing around 11%.
So why should this company, with deteriorating unit economics, trade at the same multiple as it did in the past?
Top line growth is often a red herring. If it comes at the expense of the unit economics of the business, sometimes it is unwelcome. You can't ascribe an earnings multiple based on expectations of top line growth alone.
I am not sure you understand the concept of investing for the future. Of course TFF is not the same company than 10 years ago. It build from scratch a 200 million business for a high growth bourbon business. They build 2 cooperage and 9 stave mills in the USA to address this market. They also need more working capital mostly in woods to build inventory for their stave mills. They stated that now they have the equivalent of 9 months of oak staves. Oak staves need to be aged. They took some debt to finance this. But EBIT (operating income) has doubled thanks to this expansion. Net Debt to EBITDA is at 2.45. This is healthy and this ratio has gone down since 2020. The worst year was 2020 when they invested heavily in the bourbon but the margin in that segment was below targer of 15%. Now Bourbon margin is 19% so its under control. The increase of price of wood was also a factor in the working capital increase.
I think you are TOTALLY wrong in thinking that this is a top line growth story. Operating income and net earnings has doubled since 2018. So I dont know where you are coming from. I actually admire a management that is willing to take calculating risk to enter a new market (like they did with Scotch) and now Bourbon and is winning hands on. It is taking some risks with debts but this is all under control IMO.
There is alsolutely no deteriorating unit economic. EBITDA margin in bourbon is on the rise at 19% and WINE is steady at 25%.
Cash flow is negative because they are investing in new factories new inventories in a business that is NOT LITE. It is not lite but it is MOATY.
As for the dividends - I agree they should have kept dividends to minimum. Not raising dividends until debt is being repaid.
Investment style is a personal choice. Some are obsess with cash flow and free cash flow without being too concerns about the business. I am more concern about the business and what will happen in the future. That is the reason I never invested in tobacco stock - which are free cash flow rich but a dying industry. although not dying as quick as I thought... Same thing with oil and gaz.
Anyway my main concern of family own business is to be content with the statu quo and pilling with cash ... I want ambitious multi-generation owner thinking far ahead in the future - Jerome Francois fits the bill. The family Ricard as well. M. Arnaud of course. The capacity of short term suffering for the long term good is very unique for family own or founder led. This is something that is missing with professional CEO looking to grow the business and most importantly earnings in 3 years so they can make loads of money in their stock options.
Have you noticed that there is no stock option with most family owned business.. TFF included. Music to my ear as a LT shareholder.
There is a fundamental issue with European businesses that are majority family owned.
Looking at the numbers it is exceptionally well run and stable, with durable earnings.
So the problem is not the business itself, but the mindset of the majority owners.
This is a business that has been in the same family for multiple generations and will almost certainly remain that way for generations to come. The public float is only 29% as the family own the other 71%.
European family owned businesses are treated like a cash cow. Ownership is usually held in a family trust, with trustees being concerned about one thing only. They want to be able to draw down enough income, on a regular basis, to be able to keep family members happy. These families have a life style to maintain, so these become lifestyle businesses.
Intelligent capital allocation decisions are turned on their head. Dividends always come first because that is what the family wants and as majority owners, what they want happens. If you own 71% of a company with a 715 million market cap, the dividend yield doesn't need to be very high to be able to keep family members happy. A 24% payout ratio results in a mere 1.8% yield which works for the family.
But what about external investors? If you are an income investor, is a 1.8% yield likely to work for you? You could earn far more being invested in risk free Treasuries. So if this doesn't work for income investors, what about growth investors? Well it doesn't work for them either. The family has no intention of selling its stake so it really doesn't care about the market cap or the share price. They will still own this business in 100 years regardless of today's share price. So they are not motivated to enhance the share price - again this is evident in their capital allocation decisions, always paying dividends and never repurchasing shares for example.
On this last point, I wonder why the business ever listed as a public company and why the family don't try to pay down the equity financing received in the past by repurchasing shares to take the company private (100% family owned). That would be best for both external shareholders and the family. In truth, they have probably never thought about it. They are probably not corporate finance people. They are likely a very prosperous upper class French family spending their time enjoying the finer things life has to offer rather than focusing on the business.
There are lots of businesses like this across Europe. They are great businesses with a very low risk profile, so for the uber rich looking for a safe place to preserve their wealth for generations to come which are inflation proof and not subject to cyclicality, then it isn't a bad choice (Anthony Deden would invest in this kind of set up for his high net worth clients). But for most investors looking to enhance their wealth rather than to preserve it, on an opportunity cost basis, these businesses are not a great choice simply because their interests are not aligned with the majority shareholders - there are better investments out there.
I welcome your thoughts.
I welcome your thoughts.
I invest for the long term. I never got a single cent of dividend from Amazon. I am only starting to get some dividends from my investment in Google in 2004 at IPO. Amazon and Google are my largest and one of my oldest investment. Amazon has reinvested all their cash to the business of e-commernce plus started a new business in AWS and now investing all their proceeds to AWS server farms. What is wrong with that. Why should family owned business like TFF invests most of their cash flow into new business like Scotch (2007-2014) and Bourbon (2017-now). What is wrong with that??? As a shareholder I am now a owner of a larger and larger piece of business (new and old) Google invested tens of billion on Waymo instead of givving me back some dividends. I am so glad they did it... Waymo will be changing the taxi business all over the world. I am a growth investor.
I am totally inline with Antony Deden views. I am a strong believer of investing with management with skin of the game. If they take risk this is calculated and is for long term impact. Like Bezos was... Steve Jobs.. Jerome Francois, Arnault, the hermes family,
I think that we are saying the same thing in a different way. People like Bezos at Amazon and Buffett at Berkshire and so many others have grown because they reinvest all their earnings in growth. More particularly, as you say, they don't pay dividends. There is nothing wrong with that. I like to see that.
Paying a dividend is a partial liquidation of the business (a distribution of balance sheet assets).
All else being equal, if a company is able to generate X% on invested capital, and is able to reinvest all of its earnings in the business at the same rate of return, then its compounded growth will be X percent. But if it decides to have a payout ratio of 50% and only reinvests half of its earnings, then it will experience compounded growth of X/2 percent (half the growth rate).
Reinvestment includes reducing equity financing when shares trade below intrinsic value, because that is accretive to shareholder returns.
Dividends are a last resort if there are no viable reinvestment opportunities. But TFF seems to put dividends first when deciding which capital allocation levers to pull because it is a family lifestyle business. That is the part where a conflict of interest arises between internal and external investors.
Listen to this podcast: https://rockandturner.substack.com/p/podcast-unconventional-thinking
Capex exploded in the last two years and cash flow went negative. What did they spend so much money on and is that likely to continue?
Thanks for the comment. I will address this question in PART2