From Richard Davis
Chairman’s Report — 2019

Dear Shareholder

Welcome to the 2019 Annual Report for Australian Vintage Limited (AVL).

Ignoring the poor 2019 vintage, fiscal 2019 (FY19) was a year of strong performance as we continue our transition from a bulk wine company to a well respected branded wine company. Underpinning this transition was our continued investment in our business through increased capital spend, our brands and our people.

In the year ended 30 June 2019, the Net Profit after tax and before SGARA (Self Generating and Regenerating Assets) improved 48% to $11.9 million due mainly to a significant uplift in the contribution from our UK/Europe segment. Unfortunately, this significant improvement in our underlying business did not filter through to our bottom line due to the poor 2019 vintage which resulted in our SGARA being down $4.9 million against last year and $6.9 million against expectation. If the vintage was in line with expectation our Net Profit result would have been $12.9 million rather than $8.1 million.

Our financial position continues to improve with net borrowings as at 30 June 2019 at $72.4 million, the lowest it has been since this company was formed back in 2002. With a reduced capital spend planned for FY20 we expect net debt to continue to decrease and as a result, the Board has declared a fully franked dividend of 2 cents per share, the highest payout ratio since this Company was formed. The Company’s operating cash flow was positive $23.6 million against $26.7 million last year.

The continued focus on our 3 core brands, McGuigan, Tempus Two and Nepenthe has resulted in their continued growth, with sales of these 3 brands increasing by 10% during the year.

Our decision to continue to focus on the UK market, post the Brexit vote in 2016, has been vindicated with UK/Europe sales up 15% and contribution up 94% to $10.9 million. A focus on sales mix has resulted in the increase in sales of the higher quality and higher priced McGuigan Black Label and Reserve ranges, which now represent 40% of all sales compared to 30% in FY17.

Whilst the UK continues to be our main overseas market, we continue to have a strong focus on growing and strengthening our distribution channels in the other key overseas markets. In the 12 month period to 30 June 2019, our sales to Asia increased by 24% and sales to New Zealand increased by 45%. Sales to North America decreased by 11% on the back of significant growth in previous periods.

 

Overview of FY19 Result (by Segment)

Australasia/North America reported a 7% EBIT growth to $7.9 million. There was strong growth in Australia with sales up 6% due to a shift in the mix to higher priced, premium products. Sales of the McGuigan brand continued its growth with sales up 8% and the higher priced Tempus Two and Nepenthe brand sales improving by 6%. Five years ago, Tempus Two sales represented 10% of total Company bottled sales in Australia and are now 18%. Sales to New Zealand have improved 42% due to the outstanding performance of the McGuigan Private Bin range which grew 45%. Sales to Asia have grown by 24% with McGuigan up 23% and Tempus Two up 25%. This performance is against a 7% increase for the entire Australian wine industry for sales to Asia. North America sales are down 11% on the back of significant growth in previous periods. Over the last 2 years, sales to North America have grown by 19%

UK/Europe reported a significant 94% EBIT growth to $10.9 million due mainly to the improvement in sales mix, focus on growing independents and the ongoing sales growth of the relatively new generic Shy Pig brand. Favourable foreign currency during the year provided an extra $2.8 million to the EBIT.

Cellar Door reported a 39% EBIT decline to $1.0 million mainly due to decreased visitor numbers in the Hunter Valley where our two key cellar doors are located.

Australasia/North America Bulk and Processing EBIT improved by $1.8 million due to the removal of a significant portion of loss-making bulk wine sales.

Vineyard Segment (including SGARA) EBIT declined by $6.9 million due mainly to the poor 2019 vintage. Against expectation our yield from our owned and leased vineyards fell by 12,600 tonnes and against last year it was 7,900 tonnes down. The frost and the significant heat contributed to the poor 2019 yield.

 

Capital Expenditure

Over the last 2 years the Company has invested $35.6 million in various capital projects including $11 million on a new packaging line and various long-term investments in winemaking, plus a premium winery at our Buronga winery facility. The return on investment on the new packaging line is currently lower than expected but above cost of funding. Over time and with increased throughput the expected target of 12 % will be met.

The premium winery, at a total cost of $10.0 million, will be operational next year and all our premium grapes will be processed at Buronga in 2020. We remain confident that the target return of 15% will be achieved on this investment.

For FY20, our total capital expenditure is expected to be $12.0 million with $4.0 million to be spent on the completion of the premium winery and the balance on further vineyard development and normal capital replacement programs.

 

Cash Flow and Financial Position

The cash flow from operating activities was $23.6 million, $3.1 million below the previous period. The decline in operating cash flow was due to the poor 2019 vintage, which required the Company to purchase $9.7 million of bulk wine. This purchase of wine was essential to meet our future sales forecasts. The Company’s net debt position declined by $4.8 million to $72.4 million and the gearing ratio is at a comfortable 24% (26% as at 30 June 2018). During June 2019, we extended the existing banking facility to September 2022.

 

Outlook

The Company continues to focus on its three key strategies –

  • Grow export business
  • Increase branded sales
  • Focus on cost control

These strategies, together with a focus on growing our three key brands, McGuigan, Tempus Two and Nepenthe, have significantly contributed to our growth in our core business. This is reflected by the 48% growth in Net profit (after tax and before SGARA).

The cash flow from operating activities remains strong and with a decline in FY20 capital spend we expect our debt to decrease significantly in the near future.

Our major brands continue to perform well with sales of the McGuigan brand increasing by 11% and our higher priced brand, Tempus Two, increasing by 9%. We will continue to improve our mix of sales and focus on premiumisation of our brands.

The UK has performed exceptionally well in an environment that has seen total volume of Australian wine sales to the UK decline by 4%. The Company will be investing more on advertising and marketing in the UK to keep this momentum going.

Our recent growth in Asia has been above industry average and the Company continues to work hard with our key distributors.

In 2019 the Company invested $16.2 million on capital projects covering winery and packaging equipment. This brings the total capital spend over the last two years to $35.6 million. In the next 12 months our total capital is expected to decrease to $12.0 million which, under normal vintage conditions, will mean that our net debt should decrease significantly.

Australian Vintage has transformed over the last 12 years from a bulk wine company to a quality and well respected branded wine business. This global transformation will continue with the premiumisation of our sales mix.

The poor 2019 vintage has meant that the processing cost of our wine has increased due to the lower than expected utilisation of our Buronga winery. This will impact our margins in FY20. A normal 2020 vintage will more than offset the higher cost of the 2019 wine through a significant improvement in SGARA.

The Company, together with the entire wine industry will have several short term challenges, including Brexit, the drought and the increasing cost of grapes and wine processing. This is in an environment where retail prices of wine have remained relatively flat.

As part of our ongoing confidence in the medium to long term outlook of Australian Vintage, the board has agreed to pay a fully franked dividend of 2.0c per share. This dividend reflects a payout ratio of 70% and is based on an improved operating cash flow and reduced FY20 capital spend. This dividend will be paid to all shareholders on 8 November 2019 and the Record Date to establish shareholder dividend entitlements is 18 October 2019. The Company’s Dividend Reinvestment Plan (DRP) will be suspended for the dividend payable on 8 November 2019.

 

Sustainability

The success of this Company is underpinned by being sustainable in everything we do and therefore, we have an ongoing commitment to operate sustainably, safely and responsibly. Our strategies and activities include –

  • Adhering to product quality and safety standards and certifications to produce exceptional quality wine
  • Good corporate governance and transparency. AVL complies with the ASX Corporate Governance Principles and Recommendations which set out recommended corporate governance practices for ASX listed entities
  • Effective risk management through the establishment of the Risk Committee which reviews the Risk Management Policy at least annually. This Policy provides guidance on the management risk in AVL and enforces our commitment to the management of risk to reduce uncertainty in the Company’s financial performance.
  • Minimising any adverse impacts of AVL’s operations and products on the environment through compliance with environmental regulations, reducing and/or optimising resource use, waste reduction and monitoring environmental risk.
  • Monitoring water availability, use and conservation through improved practices in our vineyards and wineries and investment in innovation and technology.

 

Conclusion and Thanks

AVL enters FY20 in a strong financial position and with strong customer partnerships across various regions we are confident that our strategies are appropriate to deliver sustainable long term growth for our shareholders. Delivering revenue growth and margin accretion remains a high priority.

In July 2019 we announced to the market that Neil McGuigan will be resigning as CEO after spending 15 years with AVG with 9 of those years as CEO.

During Neil’s time at AVG, he has been awarded the International Winemaker of the Year four times at the International Wine and Spirits Competition, London. This is an amazing achievement and is testament to Neil’s desire to make the ‘wine the hero’ in every bottle of wine that we make.

Neil has a great passion for the wine industry and has done a tremendous job as CEO of this company. During his time as CEO he has transformed this company into a well-respected quality branded wine company with a clear focus on developing world leading quality wine. We thank him for all his efforts in the role of CEO.

In view of Neil’s knowledge and expertise in the wine Industry, the Board of AVG have reached an agreement with Neil McGuigan to remain with AVL as a consultant in the role as Technical Advisor.

At the same time as AVL announced Neil’s retirement, the board announced that Craig Garvin has been appointed as CEO elect to 20 November 2019. Thereafter, Craig will be appointed as CEO. Craig was previously the CEO of leading dairy manufacturer, Parmalat, where he held that position for 9 years until February 2019. Prior to Parmalat, Craig held a range of senior executive positions at Star City Casino, Campbell Arnott’s and Lion Nathan.

Craig is an experienced CEO with a demonstrated history of building sustainable above average business performance. He has a track record of building high calibre teams and strategic thinking.

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.