From Richard Davis & Craig Garvin
Chairman & CEO's Report — 2021

We are pleased to present the 2021 Annual Report for Australian Vintage Limited (AVL).

We are well established in our strategic journey of putting the consumer at the heart of everything we do. Australian Vintage has made real progress in core capability and is well placed to deliver growth over the coming years. We have a culture that embraces continuous improvement, and we are a values based organisation. Our people are our greatest assets. Our latest results demonstrate that we are delivering improved performance in a balanced and sustainable way.

Financial year ended June 2021 has again been a challenging year globally. The COVID-19 pandemic continues to disrupt the lives of so many with challenging working conditions and the way we all live. In the Australian wine industry, we have also seen the significant disruption to sales to mainland China and the dramatic slow down in high quality export as a result. Despite these challenges AVL was able to report a 79% improvement in profit. The significant improvement in AVL’s core branded business and leverage of our world class assets has seen a record profit of $19.6 million. This profit is the highest the Company has achieved over the last 10 years. Earnings per share improved by 79% to 7.0 cents per share and the Return on Capital Employed (ROCE) improved by 70% to 7.5%.

The record result was very pleasing with continued growth in our portfolio of key brands. We focussed very hard on our core markets and portfolio of brands and made our business as simple as possible during the Covid period to ensure improved performance and deliver best in class market execution. During the 12 month period, sales of our pillar brands of McGuigan, Tempus Two, Nepenthe and Barossa Valley Wine Company grew by 12% to $195.1 million.

As per our strategic plan to be a Consumer Led branded business, our mix of branded sales hit an all time high of 71% of total revenue. This growth and mix improvement, together with the efficiencies generated from our assets, investment in our people and the favourable 2020 and 2021 vintages have underpinned the 79% growth in profit. We are committed to our strategic plan, and it is showing positive signs
for our future.

During the year we increased our investment in our brands with marketing spend up 46% with most of the increased marketing spend occurring in the second half of FY21. What is also pleasing is that because of increased investment in our staff and our continued focus on our customers, the Company was awarded the number 1 wine supplier to the Australian retail industry by the Advantage Survey. This Survey
is a comprehensive balance scorecard rating of all suppliers across the marketplace as rated by the customer. This award is a significant achievement for AVL’s market reputation and credibility and demonstrates real progress for our company as perceived by our core customers.

Covid-19 has had a mixed impact on our business with some increased sales through the major retail chains but has added costs to our production facilities through segregation of shifts and some challenges with supply chain operations. Whilst it is difficult to calculate the impact of Covid-19 on the business, our key strategies should continue growth post Covid-19. Increased distribution, innovation and consumer engagement is key to this growth, and we have seen this in our Australian and UK business where we are working hard with our customer partners to drive our portfolio. Innovation is key to our strategic plan and the McGuigan Zero range has been an outstanding success and demonstrated what AVL can deliver in market long term. This, together with the benefits from production efficiencies has seen an improvement in our Gross Margin with Branded Portfolio sales now accounting for 71% of sales revenue up from 50% in 2019. This is sustainable for the long-term future and not Covid-19 dependent.

The financial position continues to improve with net borrowings as at 30 June 2021 down $24.5 million to $42.8 million. The Company’s operating cash flow was a record $45.0 million. In May 2021, the Company announced a capital restructure involving a return of capital and share consolidation. This was successfully completed in early July 2021 and resulted in all shareholders receiving 8.5 cents per share and a 10% reduction in shares held. The combined impact of the two corporate actions had the same effect as a share buyback of 1 share for every 10 for 85 cents.

For FY21, AVL declared a final dividend of 2.7 cents per share, in line with last year’s dividend, bringing the total return to shareholders of 11.2 cents per share. The dividend is partially franked to 60%.

The year saw the improvement in all key measures and was a standout performance despite all of the challenges faced in the market with Covid-19. The AVL team has continued to work with passion in support of our Strategic Plan and delivered not only excellent results but seen us position the company strongly for future growth and performance. Our staff engagement globally again improved significantly verses prior year.

Overview of FY21 Result (by Segment)

Australia and New Zealand

The Australian and New Zealand segment reported a contribution growth of 48% to $9.0 million. The Australian business outperformed the wine segment 3 to 1 over the last 12 months which is an outstanding result. Overall, our pillar brands have grown in all segments with McGuigan +3%, Tempus Two +15%, Nepenthe +8% and Barossa Valley Wine Company +19%.

The performance of the McGuigan Zero range has been a major success and demonstrated AVL’s capability as a leading consumer brand supplier globally.

The Direct-to-Consumer division, which includes our cellar doors, on-line platform and clubs, increased contribution by $1.3 million. This was as a result of the Company’s investment in technology and the refurbishment of the McGuigan and Tempus Two cellar doors. In the next 12 months the Company expects to undertake a major upgrade to the Adelaide Hills Nepenthe cellar door. This is all part of our branded consumer business strategic plan.

The New Zealand division result decreased by 16% to $0.6 million due to the significant logistic issues experienced in sending wine to New Zealand. This problem is ongoing and will provide challenges in the near future, however our New Zealand business is in growth and will play a key role to our portfolio expansion over the coming years.

The Australian business not only delivered outstanding profit growth but was also awarded the No1 Wine Supplier ranking in the prestigious Advantage Survey results. This award shows the significant improvement in AVL’s core capability across all aspects of our business and demonstrates our partnership trade-based approach driven by our people.

UK, Europe and Americas

In the UK, our business performance has been very strong, driven by our brand investment and continued distribution gains in major retail. The growth of sales has been impacted by the change in UK tax on wine product which resulted in a decline in our Shy Pig brand sales of $12.6 million when compared to prior period. Despite this decline the company’s overall sales line still grew on the back of higher margin brands as is our strategic intent.

The UK, Europe and Americas segment has performed exceptionally well with contribution up 55% to $17.2 million. This is despite a $0.4 million negative impact due to the unfavourable GBP when compared to the prior period. The McGuigan brand continues to grow with sales up 17% compared to the prior period. The McGuigan Zero brand has seen significant success with sales growing $5.0 million over the prior period. This brand now represents 5% of all McGuigan brand sales into this segment.

As a result of increased investment and distribution in the Tempus Two brand, sales of this brand have increased by 82% from a relatively low base. We have been focused on new customer distribution retail points and investment in brand building. Both are delivering the foundation for growth and in line with our strategic plan.

Americas remains a challenge with this division reporting a slight loss for the period but an improvement on last year. With changes to the leadership structure of the Americas division and the appointment of in market leadership, we are seeing significant improvement, and this is a key part of our long-term growth strategy.

Asia

AVL’s direct exposure to the China market is small with less than 1% of all sales going into mainland China prior to the increase in tariff. With the significant increase in China tariff, sales to mainland China have stopped. Sales to other regions within Asia have been pleasing with sales up 6%.

Whilst the Asian segment contribution decreased during the year, the impact was not material.

AVL remains committed to the China market with the support from our major China based distribution company, and we are currently examining several options to continue the sale of our pillar brands into China. We see Asia as a major growth platform for the future and a great market for our premium brands. AVL is already taking steps to increase sales of our portfolio in Southeast Asia whilst building
long term partnership for China growth over the coming years.

Australasia/North America Bulk and Processing

Whilst sales in the segment declined by $4.7 million, the contribution increased by $2.0 million due to the expiry of a loss-making bulk wine sales contract back in FY20 and the improved performance of our Austflavor business.

Vineyard

Vineyard contribution improved by $1.0 million due to the improved SGARA (Self Generating and Regenerating Assets). This improvement is due to the increased yield from our vineyards offset marginally by reduced red grape prices.

 

2021 Vintage

The 2021 Australian vintage has been estimated at 2.0 million tonnes which is 31% up on last year and 17% above the 10-year average. All regions experienced a substantial increase in tonnes with the biggest increase coming from premium regions such as the Barossa, which was up 112% on the prior year.

The record 2021 vintage together with the loss of sales to China, which was as high as 176 million litres (approximately 240,000 tonnes) in 2018, will put pressure on the Australian wine industry in terms of excess wine supply and reducing grape prices. As China was predominately a red wine market, the impact will be mainly on red wine and red grape prices.

AVG’s position, against a backdrop of an oversupply of red wine and reducing red grape prices, is sound with wine stock in balance and with flexibility going forward in terms of grape intake. The loss of the China market will not directly impact AVL’s performance in the medium term.

Financial Position

Reported operating cash flow was a record $45.0 million compared to $22.3 million in the prior year with the improved cash flow directly attributable to the performance of the Company and a slight reduction in working capital.

Net borrowings reduced to $42.8 million as of 30 June 2021 and our gearing is at a very comfortable 14%. With the recent capital restructure, which involved the return of $23.9 million to shareholders, we expect our debt to increase but still be within comfortable levels.

The existing bank facility has recently been extended to September 2024.

Strategy – “Putting the consumer at the heart of everything we do”

Putting the consumer at the heart of everything we do will see marketing and advertising expenditure continue to increase as we continue to focus on targeted brand marketing in our key markets. To support this, we will continue to invest in our Cellar Doors, Digital Technology and People Talent Development as we move toward world class consumer engagement. Over the last year we upgraded our McGuigan and Tempus Two Cellar Doors and this year will see a major redevelopment of our Nepenthe Cellar Door in the Adelaide Hills.

The operational capability of the business is a core strength and the wine we make is world class. As we drive branded growth across our key markets and create a consumer driven business, we will ensure our customer partnerships globally continue to develop as we leverage the capital investments made. The last 12 months has been challenging, however our business has performed very strongly which gives us confidence moving forward.

The changes we have put in place are starting to deliver solid results. Whilst Australia and the UK have been the primary focus for growth this financial year, North America, New Zealand and South East Asia will see improved business performance over the coming years and present significant growth opportunities for AVL. We believe that we have put in place the right structural changes and strategy to ensure continued improvement.

Sustainability

Sustainability is fundamental to AVL as we strive to be world class in our overall Carbon Footprint and strive for neutral impact. As a key step forward our major wine processing facility in Australia is powered by 100% renewable energy sources including an onsite solar farm.

In the coming year we will be focusing on a detailed sustainability study with the aim of setting realistic objectives to be carbon neutral in everything we do. Integral to this study is the development of a climate change policy which will establish targets which can be monitored against actual performance. We are currently undertaking a comprehensive audit of our Carbon Footprint from which we will implement actions to be world class.

The Company will continue to mitigate climate change risks through –

  • ongoing investment towards innovative water and power solutions to reduce AVL’s environmental footprint and save on costs
  • working closely with the Bureau of Meteorology to better understand short and long-term weather patterns and their impacts on AVL
  • working with key suppliers to ensure that they are managing climate change in a way that is commensurate with AVL’s policy and
    approach

The Company recognises that good management of our social, environmental and governance responsibility is integral to our future growth and prosperity. It is not only important to underpin the reputation and competitive appeal of our brands, but also to evolve our culture with contemporary values. The success of this Company is underpinned by being sustainable in everything we do.

Outlook

The record result for FY21 is very pleasing considering the many challenges that the pandemic has imposed on the Company. Our strategy will continue to focus on investing in core marketing investment and people capability to leverage our strong asset base. Our wine making know-how and consumer led innovation is world class.

Continuous improvement is at the core of our culture and FY21 has seen the Company improve its results significantly. Brand performance, Staff Engagement, Safety and Customer Satisfaction have all seen year on year improvement as part of our Balanced Scorecard approach. Our focus on being a responsible and balanced organisation is key to our strategic success.

The Company’s ROCE (Return on Capital Employed) has grown by 70% to 7.5% and in the medium term we expect to achieve high single digit ROCE.

The 2021 vintage has resulted in an increased throughput at our Buronga Hill Winery which together with the favourable 2020 vintage, will result in a reduction in our FY22 wine costs when compared to FY21.

Whilst Covid-19 appears to have had an overall positive impact on our business, a significant portion of the growth has come from long term sustainable strategies such as innovation, people capability, improved consumer trading technology and improved production efficiencies.

We have had a positive start to FY22 even after allowing for the closure of our two Hunter Valley cellar doors due to the NSW lockdown. We remain confident that we will continue to drive improved business performance in all key areas in the long term and are well set for growth.

Conclusion and Thanks

Our strategic agenda continues to reflect AVL’s transformation into a world class branded wine company. We are creating a business where sales are consumer driven and are investing in our people, brands, and customer partnerships globally to ensure we leverage the capital investments made over recent years. We are in a strong financial position to deliver sustainable long-term growth for our shareholders. Delivering  revenue growth and margin accretion remains a high priority.

Sustainability is fundamental to AVL as we strive to be world-class in water management, renewables, and our Carbon Footprint.

We would like to thank our team for their efforts during the year, for the care they have shown each other and for the way in which they have responded in the face of the various challenges.

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

Our excellent assets and focused portfolio approach sets the company up well for the future.