From Richard Davis & Craig Garvin
Chairman & CEO's Report — 2020

Dear Shareholder

Welcome to the 2020 Annual Report for Australian Vintage Limited (AVL).

Financial year ended June 2020 has been a challenging year globally. The COVID-19 global pandemic has changed the lives of many of us with changed working conditions and the way we all live our lives. In Australia, the drought and bushfires have significantly impacted many communities. Our priority has been the welfare and safety of our staff, customers and suppliers.

Since the onset of COVID-19, the Company has been able to safely operate all aspects of the business. AVL has maintained the production of all our world class products and ensured that our business continuity plans were appropriate for the current circumstances. COVID-19 has had a mixed impact on our business with above industry increased sales through the major retail chains and reduced sales in our cellar door and on premise businesses. Through the outstanding efforts of all our staff we continued to operate and improve our business.

At the time of writing this report, AVL was advised that the Chinese Ministry of Commerce has started two investigations into Australian wine exports into China. Whilst AVL’s business into China is less than 2% of our total sales, it is concerning to the Australian wine industry. AVL remains committed to the China market, and in the long term, plans to grow sales with the support from our China based distribution partners. AVL intends to fully cooperate with the investigation.

Despite the challenges faced during the year, AVL was able to report a 35% improvement in profit. In the year ended 30 June 2020, Net Profit after tax improved to $11.0 million. Ignoring the impact of the new Accounting Standard on leases (AASB 16), the FY20 Net Profit after tax increased 41% on last year at $11.4 million. This was achieved after taking into account the higher cost from the 2019 vintage ($2.3 million), higher water costs and fire ($2.9 million), cellar door closures during the year ($0.7 million) and restructure costs ($0.8 million). This result demonstrates the business improvement achieved in difficult conditions and gives confidence in terms of future performance.

Earnings per share improved by 35% to 3.8 cents per share and the Return on Capital Employed (ROCE) improved by 18% to 5.1% (pre AASB 16 impact).

We are well advanced in our plans to become a consumer led portfolio business. As such it is pleasing that we were able to grow our brands 8% over the prior year. Three of our four pillar brands grew double digit in a very challenging global market. During the second half of the year, AVL customer growth was ahead of its competition again reflecting its consumer focus and brand activation.

The performance of our operations has been particularly pleasing. Despite the industry suffering declines in grape production across the total Australian wine sector, AVL has been able to improve its yield. This, together with our excellent assets, sets the Company up well when combined with our focussed portfolio approach.

Our Asian and North American markets have been underperforming and not consumer focussed. A complete review of the leadership group and strategy has been done and the necessary changes made. The board and management team have worked together closely on the strategic plan and are confident of our ability to deliver future growth based on the FY20 results.

The financial position continues to improve with net borrowings as at 30 June 2020 down $5.1 million to $67.3 million. With a planned 25% reduction in FY21 capital spend, net debt is expected to continue to decrease. The Company’s operating cash flow was positive $22.3 million.

For FY20, AVL declared a final dividend of 2.7 cents per share, up 35% on last year’s dividend. This dividend is partially franked to 63%.

 

Overview of FY20 Result (by Segment)

Australasia/North America reported a 30% EBIT decline to $5.5 million. Whilst the Australian division contribution increased by 18%, Asia and North America division reported a decline in contribution.

  • Our Australian business performed above expectation and showed improved profit performance over last year. Pleasingly all pillar brands grew and reinforced our strategic intent of a “portfolio of brands”. Sales of the McGuigan brand grew by 3% and Tempus Two grew by 42%. Despite on-premise sales declining due to COVID-19, the Australian business delivered a profit result 18% up on prior year. The combination of consumer focus with retail partners, innovation and strong cost control all contributed to the positive result in very challenging circumstances.
  • New Zealand EBIT was down $0.2 million due to COVID-19 closure which is a positive result given the shutdown. Recent months have shown significant growth over prior year with our brand focus strategy.
  • As a result of COVID-19, Asia sales were significantly down 40%, resulting in a decline in EBIT of $1.9 million. The Company does not expect significant sales to mainland China over the coming six to twelve months as the new management at our major distributor continue to focus on reducing working capital. In the long term we believe that our strategies will result in significant sales growth.
  • The Company has addressed its marketplace strategy in North America and expects improvements in sales following a disappointing decline of 18%. Canada and United States remain challenging markets for Australian wines with total Australian volume sales to Canada down 18%. North America EBIT contribution was down $1.0 million.

UK/Europe reported a 6% EBIT growth to $11.9 million. The UK performance was exceptional with sales volumes up against an industry trend that is showing total Australian wine sales volumes to the UK declining by 2%. In the UK, sales of the McGuigan brand increased by 13% through an improved mix of sales, volume increases and targeted marketing. Sales of our higher priced McGuigan Black Label and Reserve ranges increased by 23%. The Tempus Two brand has also performed well in the UK, with sales up 34% from a low base. The Company will continue to invest in the UK market with increased marketing spend planned for FY21 and a strong Tempus Two campaign seeing the introduction of new ranging in major retail.

Cellar Door reported a 75% EBIT decline to $0.2 million. With Cellar doors closed for part of the year, sales declined by 16% to $7.9 million, but is to be expected during COVID-19. During lockdown we have started to execute our cellar door refresh program which should see future upside.

Australasia/North America Bulk and Processing EBIT improved by $1.1 million due mainly to increased contract processing of grapes.

Vineyard Segment (including SGARA) EBIT improved by $3.0 million ($3.5 million before the impact of AASB 16) due to the improved 2020 vintage. Against last year total yield was up 25% or 10,200 tonnes and is an outstanding result. This demonstrates our core competency of vineyard management.

 

Cash Flow and Financial Position

Reported operating cash flow was $22.3 million compared to $23.6 million in the prior year. Ignoring the impact of AASB 16, FY20 operating cash flow was $16.4 million with the reduced cash flow due mainly to the purchase of $8 million of bulk wine in FY20.

Net borrowings reducing to $67.3 million at 30 June 2020. With a 25% reduction in FY21 planned capital spend and the reduced need to buy bulk wine in FY21, net debt is expected to continue to decrease in the next year. Our gearing is at a comfortable 22% and our existing bank facility expires September 2022.

 

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

Over the last 3 years the Company has invested heavily in various capital projects, including $11.0 million on a new packaging line and various long-term investments in winemaking, including a $9.0 million premium winery at our Buronga winery facility. These investments have contributed to the improved efficiency in our production facilities and set up a solid base from which to grow.

The strategic intent of our business will see significant investment and focus on our key pillar brands, McGuigan, Tempus Two, Nepenthe and Barossa Valley Wine Company.

Putting the consumer at the heart of everything we do will see marketing and advertising expenditure increase by 20% in FY21 as we deploy a more targeted approach to brand marketing in our various key markets. To support this, we will be investing in our Cellar Doors, Digital Technology and People Talent Development as we move toward world class consumer engagement. Over the last 6 months we took the opportunity to upgrade our McGuigan Cellar Door 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 are developed to ensure we leverage the capital investments made. The last 6 months have 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, Asia and North America 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.

 

Outlook

The future looks promising based on the recent growth of our key brands. We will continue to improve our mix of business by market, focus on our portfolio of brands and increase consumer investment to maintain the recent sales growth momentum. We have some challenges in Asia and North America, but believe that our strategies are now in place to achieve long term growth in these markets.

With China representing less than 2% of our total forecast FY21 sales, we do not see the recently announced investigation into anti- dumping materially impacting our FY21 earnings. We remain committed to the China market as part of our long term strategy and do not see this as a risk to earnings.

Sustainability is fundamental to AVL as we strive to be world class in water management, renewables and our Carbon Footprint. As a key step forward our major wine processing facility in Australia is powered by 100% renewable energy sources including an on-site solar farm.

AVL has now adopted a much more in depth data rich culture. Measurement of staff engagement, consumer brand awareness, customer partnership health and a balanced scorecard approach are all examples of management’s focus on driving world class performance and sustainability.

Continuous improvement is at the core of our culture and FY20 has seen our 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 cash flow remains strong and based on a normal 2021 Vintage, we expect cash flow to improve by $8.0 million to $12.0 million in FY21 due to a forecast decline in FY21 capital spend and bulk wine purchases.

The improved 2020 vintage has resulted in an increased throughput at our Buronga Hill Winery which together with improved packaging efficiency at our Merbein facility, will result in a $3.0 million reduction in our FY21 costs when compared to FY20.

Assuming no material change to the current foreign exchange rates and including the impact of AASB 16, we are targeting a 48% improvement in AVL’s ROCE (return on capital employed) to 6.6%.

Our improved sales momentum and contribution mix continues with a very positive start to FY21.

As part of our ongoing confidence in the medium to long term outlook of Australian Vintage, the board has agreed to pay a partially franked (63%) dividend of 2.7c per share. This dividend reflects a payout ratio of 70% and is in line with last year’s payout ratio. This dividend will be paid to all shareholders on 6 November 2020 and the Record Date to establish shareholder dividend entitlements is 16 October 2020. The Company’s Dividend Reinvestment Plan (DRP) will be suspended for the dividend payable on 6 November 2020.

 

Corporate Responsibility

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. Our strategies and activities include –

  • The planned development of a climate change policy which will regularly monitor performance against set objectives;
  • 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 Management 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; and
  • Monitoring water availability, use and conservation through improved practices in our vineyards and wineries and investment in innovation and technology.

 

Conclusion and Thanks

Our FY21 priorities continue 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.

We believe AVL is well positioned to get through the challenges associated with the health and economic impacts of COVID-19. As a company, we want to ensure that COVID-19 safe behaviours are applied across our team and the environment that we operate in and make them a normal part of how we live for now.

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.