From Richard Davis
Chairman’s Report — 2017

In the year ended 30 June 2017, AVL recorded a net profit after tax of $4.3 million compared to a loss of $2.2 million in the prior period. Excluding the one-off payment in 2016 for the vineyard lease termination, this year’s result of $4.3 million compares to $7.0 million in the prior period. Cash flow from operating activities improved by $7.5 million to $14.0 million. The unfavorable GBP impacted our result significantly and based on the average exchange rate that was present in the 2016 financial year, this year’s cash flow would have been $4.7 million higher and our after tax profit would have been $3.3 million higher.

Over the last couple of years, we have been able to exit an onerous vineyard lease and onerous grape supply contract. This has enabled AVL to reduce the cost of grapes through the replacement of most of these grapes with grapes at market price. The Company calculated grape cost savings of between $8.0 million to $9.0 million per year when compared to the average grape prices paid in 2015. Whilst these grape savings have been achieved when compared to 2015 prices, the benefits have been slightly eroded due to increasing grape prices since 2015. Furthermore, the underutilisation of our large winery, where we processed 93,000 tonnes against a capacity of 120,000 tonnes, has added costs to our wine. We have recently signed a processing agreement which will remedy most of the future winery underutilisation issue.

AVL continues to grow its branded business with sales volumes of AVL’s three key brands, McGuigan, Tempus Two and Nepenthe continuing to grow against some market conditions that have seen wine volumes decline. The current strategy of increasing sales of our three key brands, growing our export business and controlling costs is the right strategy. This strategy has remained consistent over the last 5 years.

Whilst the UK continues to be our main overseas market, we have a strong focus on growing and strengthening our distribution channels in the key overseas markets of Asia and the United States. In the 6 month period to 30 June 2017, our sales into Asia have increased by 60% when compared to the same 6 month period in the previous financial year. Whilst some of this increase is due to timing of orders, it does reflect that our focus on Asia is starting to achieve positive results. Our distributor in the United States, Palm Bay, have launched Tempus Two to great acceptance with the launch of McGuigan “The Plan” to be executed in early 2018.

The UK market remains a tough market with the exchange rate making it hard to achieve a satisfactory return. AVL has taken some price increases but these increases have not covered the impact of the unfavourable exchange rate. For the next 12 months, we will continue to focus on improving sales mix and implementing further price increases.

Whilst the margins from the UK are currently not what we expect, we maintain our faith in this market and believe that in the medium to long term, margins will improve. It is also important to understand that this market provides AVL with significant volume of sales which in turn is critical to controlling our stock levels and ensuring that our large winery is utilised efficiently by processing as many tonnes as possible.

In May 2017, AVL made a strategic decision to issue 15% of its existing capital at a 7.1% premium to Vintage China Fund. The issue of the shares at 46.01 cents per share raised $16.5 million and most of these funds will be used for capital projects that will provide for greater efficiency at our production facilities. Also, as part of this share placement, Vintage China gained exclusive rights to distribute AVL products, excluding McGuigan brands, into mainland China.

Due to the continued growing confidence in the medium to long term outlook of the Company, the Board has agreed to pay a dividend. A fully franked dividend of 1.0 cents per share will be paid to all eligible shareholders on 10 November 2017 and the Company’s Dividend Reinvestment Plan will also be in operation.

Sales and EBIT

Revenue for the year decreased 7% or $16.2 million due to the unfavourable foreign currency which accounted for $17.5 million of this decrease.

Australasia / North America packaged sales, which covers Australia, New Zealand, Asia and North America were down 1% on last year with an increase in bottled sales of 1% and a decrease of 6% in our cask sales:

  • Australian sales decreased by 2% due to a 6% decline in cask sales. This decline is in line with the cask consumption trends in the Australian domestic market.
  • Sales to New Zealand were down due to new legislation on promotion depth and frequency. Since this new legislation was introduced, sales have recovered to levels seen in the previous year. In the last 6 months, sales to New Zealand have been in line with the previous year’s corresponding period.
  • Sales to Asia have grown by 19% with the last 6 months sales showing a 60% sales growth when compared to the same corresponding 6 month period in the prior period.
  • North America sales were down 2% due to increased margin expectation from the liquor boards in Canada. Sales through our United States based distributor, Palm Bay, are in line with expectation.

UK/Europe packaged and bulk sales were down by 14% on last year with packaged sales down 12% or $12.3 million and bulk and private label sales down 54% or $1.8 million. The unfavourable GBP negatively impacted packaged sales by $17.3 million when compared to the prior period.

Earnings before interest and tax (EBIT) is $11.3 million compared to $3.2 million in the prior period. Before one off items, EBIT is $11.3 million compared to $16.4 million:

  • Australasia / North America packaged segment EBIT is in line with last year;
  • The UK / Europe segment was significantly impacted by the unfavourable GBP. Actual sales volumes improved on last year in a market that saw wine sales decline. The contribution from this segment was down by $3.3 million due to the unfavourable GBP.
  • Australasia / North America Bulk segment contribution declined by $1.5 million due to losses on some bulk wine sales. These bulk sales were made to remove wine that was not required for future sales

Financial Position

Cash flow from operating activities improved by $7.5 million to $14.0 million due mainly to lower grape costs partially offset by the unfavourable movement in foreign currency which impacted cash flow by negative $4.7 million.

The gearing ratio (net debt to total equity) is at a comfortable 29% compared to 38% as at June 2016. The improved gearing is due to the recent share placement and improved cash flow.

Outlook

AVL continues to focus on growing its three key brands, McGuigan, Tempus Two and Nepenthe and whilst the last 12 months have been challenging, due mainly to the unfavourable GBP, we remain confident that our strategy is the correct one.

One of the most pleasing aspects of our business is the cash flow from operating activities which improved by $7.5 million over the prior period.

As foreshadowed in our May 2017 press release on the placement to Vintage China, the company will be undertaking several major capital projects to further improve efficiencies and quality of wine.

Our total capital spend for the next 12 months will be approximately $19.0 million and will focus on:

  • Major efficiency upgrades at the Buronga Hill Winery
  • Efficiency improvements at our Merbein packaging facility
  • Vineyard developments at existing owned vineyards

Our proposed capital spend will incorporate several sustainability initiatives including:

  • The completion of the 1,640Kw solar panel system at our Buronga Hill Winery
  • The installation of a 300Kw solar panel system at our Merbein Packaging facility
  • The development of a vineyard adjacent to our Buronga Hill Winery that will use the waste water from the winer

AVL has transformed over the last 10 years from a bulk wine company to a quality and well respected branded wine business. This global transformation will continue as we push into the Asian and US markets. Our persistence on improving efficiency will mean that AVL will spend $19.0 million on capital projects over the next 12 months.

Board Retirement

At the end of August 2017, one of our directors, Perry Gunner, retired from the Board. Perry has had a long association with AVL having been appointed a director of Simeon Wines Limited in 1993 and continuing his directorship through the successful merger between Simeon Wines Ltd and Brian McGuigan Wines Ltd in 2002 to form McGuigan Simeon Wines Ltd which changed its name to Australian Vintage Ltd in 2008.

During Perry’s time, as non-executive director, chairman of the Risk Committee and member of the Remuneration and Nomination Committee, his extensive business and wine industry knowledge has contributed greatly to the growth of the business from listing through to where we are now.

I would like to congratulate Perry for his dedication and leadership and wish him all the best for the future.

On behalf of the Board and shareholders I would like to thank Neil McGuigan, his management team and all the staff of Australian Vintage who continue to overcome the challenges with innovation, commitment and enthusiasm.

Finally, I would like to thank our shareholders, for your ongoing investment, support and belief in this Company.

The Company’s business has evolved into a respected branded wine business with a very clear focus on quality and growing branded sales.