Australian Vintage Ltd (AVG) Earnings Call Transcript & Summary

Good morning all. Look, I think we should make a start on this. And if you wouldn't mind, if you could mute your phone, unless you're asking a question because we're getting a bit of feedback on the line. This morning, we have Craig Garvin, CEO of Australian Vintage Limited and myself, Mike Noack, the CFO. And the way we're going to run it is, basically, we're going to take you quickly through the slides that were put on the ASX yesterday. And then we'll open it up to your questions. Okay. Let's start. So if you've got the slides in front of you, I'll just refer to the page numbers there and just take you through the key points. So on Page 3, you'll see our key financial highlights. You guys can read it all, but our net profit was up by 127% to $13.3 million. And the other pleasing thing was that our cash flow from operating activities was up by $25.3 to $30.9 million, and at the same time, our debt reduced by $16.2 million to $51 million. And underlying all our performance is the fact that our 4 pillar brands, McGuigan, Tempus Two, Nepenthe and Barossa Valley Wine Company were up collectively by 20%. Moving on to Page 4, which is a summary of our results. A couple of points I want to make out of that is that COVID-19 had a mixed impact on our business and obviously, increased sales to the major retail chains. But it also has added costs to our production facility, where we've had to segregate shifts and had some challenges with the supply chain operations. The -- one of the really pleasing points from this result is that our new McGuigan Zero range, non-alcoholic product that we introduced during the year, has been an outstanding success and obviously demonstrates the importance of innovation to the portfolio long term. And the reason why it was an outstanding success is the fact that we have got the equipment that's [indiscernible] the best in the industry to take alcohol out of wine. The other thing that's helped us during the year is the production or benefits from our production efficiencies, which gave us an extra $3.3 million, and that's come from the -- a recent capital expenditure, recent, I mean the last full year and the improved 2020 vintage, which increased our throughput at our winery. The other thing I want to point out from this page is that we recently agreed terms on the introduction of the Tempus Two brand into a major U.K. retail. So therefore, we're increasing our footprint in the U.K. market. The largest retailer there is Tesco, and we haven't been selling a lot through them. Hopefully, that will change. Moving on to Page 5. Look, we've changed our segments the way we report to reflect the changes that Craig has put through our business. Basically the change was to transfer Americas from the Australian division to the U.K. division and then to take out the Asian division from the Australian segment and have that as a separate segment. Now we've done a bit of tweaking on that. Moving on to Page 6, and this is the Australia/New Zealand segment performance, which shows that our contribution from the segment was up 90% to $7.5 million. Again, the McGuigan brand has grown by 11%, due partly to the McGuigan Zero range. Tempus Two brand continues to grow with sales up 33% and Nepenthe and the Barossa Valley Wine company, BVWC, grew by 160% from a low base. The Barossa Valley Wine Company, which we started a few years ago, is getting now close to the size of our Nepenthe brand. So it's performing really well. The other thing that's helped us in this particular segment is that our cellar doors and clubs have also improved contribution. They were up by about $0.5 million for the half year. The other thing I want to point out from this slide is that New Zealand sales were up by 54%. So the McGuigan brand sold there through the [indiscernible] range. But we are expecting that New Zealand will slow down a bit in the second half of this calendar year. Moving on to Page 7. This just talks about our U.K., Europe segment. Again, our contribution was up by 76% to $10.2 million -- $10.7 million, and that's despite a negative $1 million impact due to the unfavorable movement in the British pound. What is even more pleasing in this particular segment is the fact that our McGuigan brand continues to grow, but also the higher prices within Black Label and Reserve ranges has increased even more. And then the slide shows them increase. There's a couple of things that went against us. We've got a few second-tier brands that were still over there, one of them [Shiraz,] that was down 50%, but that is not a priority brand going forward. The other thing you'll see there is Ireland, had a very good half year. Sales were up by 61% and EBIT increased by 108%. This -- we -- we're expecting that to continue to grow in the second half, but perhaps at the 64% mark that we achieved for the half year. Moving on to Page 8, the Asian segment. As we mentioned a while ago, our business into China is pretty small. It's less than a couple of percent. And you can see there now that we split it out that China sales are $200,000 for the 6 months to the end of December, provided that was about 1.9. But what we've been doing is we've been focusing on other Asia, which is your Malaysia and Singapore. And sales in that region have grown by 7%, and we will continue to focus on that. In terms of our vineyards, and as most of you would know, we own or lease a lot of our vineyards where we take the grapes from. In terms of intake, it probably represents about 60% to 70% of our total intake comes from leased and owned vineyards. The performance of this particular segment shows that we were up by $1.7 million. Having said that, we were expecting to have a better performance for the 6 months to December 2020, but what has happened as a result of MOFCOM investigation and the increase in tariffs, prices of red grapes have come off a bit. In general, there are about 15% to 20% below what the previous year where grape prices were. And that has an impact on reducing the income we get from those vineyards. But still up on last year, we expect our crop to be higher than last year. Moving on to Page 9. We have a segment called Australasia/North America Bulk and Processing. Again, this segment continues to improve. In prior years, we were selling loss-making bulk wine sales just to keep our stock under control. That has now been removed. And we have an Austflavor business that has performed really well. And that's come about because of our spirit sales. When we're doing products such as Zero, we spin out the alcohol, and we left the spirits, which is a by-product, and we sell that on the market. So that particular segment is turning along very nicely and improved by $1.2 million. In terms of our capital expenditure, as some of you guys will know, we've spent a lot of money in the last 4 years on the Buronga Hill premium winery and new packaging and from last year at the winery to improve efficiencies. At this stage, we're probably looking at a modest capital spend. It basically reflects our full year depreciation. So for this year, we're expecting total capital expenditure to be around about $9 million, which just probably reflects a normal one. But of course, if we see anything that improves efficiency, particularly our wineries, we will definitely investigate. In terms of our interest and financial position, I consider that our interest cost is down, and as previously mentioned, operating cash flow was really good this year. Over 6 months, net debt decreased and gearing is at a very comfortable level of 17%. Provided in Slide 10 and 11 -- provide you with a summary of our revenue and our actual profit result. I don't think I need to go through that. You can see that our profit's up by 127%.

So...

Go on, Craig.

So Mike, what I was going to do is just give an overall perspective of the business on top of your comments. What I would say is it's a business that I think is in much better balance across the board. And what do I mean by that? You can see by how we split out the reporting regions, how we're targeting the brands that we've got focused accountability and a much simpler business from a market and a consumer perspective. We understand by region how each brand is performing, what our outlook is, what our targets are. And in each region, we understand the consumer and the behaviors that come with it. So we don't do anything on brands now where we don't understand the consumer. And as per our mission, we put the consumer at the heart of everything we do. It's not just a slogan. It's real and it drives our long-term strategic planning. So brands are the essence of our growth. And as Mike's already talked about, we've invested well over the previous years in terms of our operational capability. And one of the strengths of this business and certainly for me when I came in 1.5 years ago, I was pleasantly surprised that the level of quality in terms of our operation but also our know-how, which means that as we grow our brands and we improve our margin and our mix, then our operational efficiency improves along with it. So we're not just going volume for the sake of volume. It's very targeted. And that drives our return on investment, when we're measuring our return on investment and managing costs. So whilst we've actually got cost improvements in our business, we've never spent more on brands. So it's the kind of combination that's necessary to meet the needs as we try to be more of a global business than an Australian-led business. And that shows the fact that China is pretty much 0, and we've taken a small hit there in our earnings, but we weren't hugely exposed, which is great. Our North American business, we're rebuilding. Despite that, the strength of our brands in Australia, the U.K. and our market partnerships are seeing us outperform our previous numbers in our business, which pleases me because those improvements are embedded in our long-term strategic goals and our plans. And we've got a much more balanced business, which sets us up well for the future. And you can see that the ROCE targeting 7% to 8% this year, up from numbers more like 3% to 4% as we are heavily investing in capital in the past in our processing facilities. That has set us well for the future. Acquisitions comes up often -- someone's phone's ringing -- anyway, so. Oh, dear. Guess they didn't like what I'm saying.

Whoever's doing that, can you turn off your phone?

Yes, that's really disappointing. So acquisitions comes up often. My answer to that is if it fits our consumer segments by region, if it doesn't compete our existing brands, and it adds value, we look at it. But right now, we're focused on our pillar brands and converting that for our outlook. Our outlook's very strong. And we're very, very excited still about Asia. Strategically, it often is great upside to our business. So overall, balanced targeted investments and brands growing, and that's our future, leveraging our excellent operations. And you can see that starting to come through in the numbers. So back to you, Mike.

Yes. No, very good summary, Craig. It leads well into our outlook, which is on Page 12. And as you can see, we've reconfirmed our $18 million to $20 million net profit after tax outlook, which reflects an improvement of around about 67% to 85% from the last year, and return on capital of between 7% and 7.5%, which is a real positive movement from this business. So I think the only other comment that we make in the outlook is probably a little bit new, refers to the capital management review, which we're undertaking the next few months, which could conclude that we need to share buyback or some sort of capital reduction. And that's because our cash flows are good, and our debt is going down, and we believe we will have positive earnings continuing about on our business if we do decide to go down this track. So I don't know if you want to add anything to that, Craig.

No. I think it plays to the balanced scorecard. We've got targeted investment. We're investing more in our brands than ever. We're investing in our people and our capability as we grow our business globally. And we're reducing debt and vastly improving our ROCE. So I think that all points to a very balanced scorecard and a predictable business for the future.

Yes. Craig, are you happy to open that?

Yes. Yes.

If you could just state your name and then ask a question, would be great.

Jason Palmer. A couple of questions from me. Congratulations first on a great result. I guess when I do a quick calculation across the business, looks like sort of $4.5 million of EBIT might have come from increased sales performance as opposed to production lead cost-outs or better conversion of fixed costs from a higher prior year intake. When you look at the business, Craig, how do you think about some of these pantries in tailwinds that might turn into headwinds next year?

Yes, good question. Certainly very topical for us. When I look at the markets we're in and the gains that we're making in distribution, whether it be Sainsbury's, Tesco, Coles, Woolworths, independents, et cetera, on more than satisfied, our growth is more than offsetting that for the future. There is no doubt that retail COVID gave some benefits. But we've been running our portfolio investment strategy for a little over a year, 1.5 years. And we see real upside with that. We think that the potential of those brands has a long way to go, and we're seeing that with distribution gains. On top of that, our innovation, eg. McGuigan Zero shows what's possible with growth, and we've got more innovation in the pipeline to come. So I think we're comfortable we'll more than offset that.

Okay. That's a big statement, Craig. Are you saying then that when you look at distribution gains as a relative to -- let's say, same-store sales versus distribution sales, you're saying that distribution sales gains actually offset same-store sales gains?

It's a combination of factors, but that's a key factor, yes.

Okay. Understood. The second thing that I noticed when I look at your numbers is what looks to be a material saving in sales and marketing of somewhere in the vicinity of $2 million at the EBIT line. Could you help us understand that savings and what you might be doing in the second half to accelerate that spend? I'm just cognizant that, that outlook statement appears to be very conservative, given you've done 120-odd percent, whatever the number was, NPAT growth for the first half. Even if I normalize the marketing and sales spend up to PCP, I get to about plus 95% NPAT growth for the year. So are you interested in both [indiscernible]?

Well, I'll take the first part of it. And then, Mike, you jump in. But we're investing in our brands moving forward, and the second half will see an up-weighted investment. So we're really investing for the future. And it's great to improve our results, but we think our estimate is about in line, and we have a responsibility to invest for the following years, which kind of links back to the previous question you asked me. Mike?

Yes, totally agree. So I suppose, Jason, what you're saying is that you guys have made $13 million. That means you're only going to make something similar over 6 months that you did in the prior year. Even though we're making more money in the first half. So Craig mentioned that we're going to be investing a lot more into our brand in the next 5 months. And the benefits of those will flow through in the future years, we hope, in terms of good investments, sound investments on our 4 key brands. In terms of your other question, Jason, on the sale [indiscernible] In 2019, we had some redundancy over there. And for this year, obviously, our travel costs are down a fair bit compared to the prior year. With our first cost pinned down and the way things have worked with reams and Zoom and all that, we suspect that a good part of those travel cost savings will continue in the next few years because we're not going to go back to normal.

I think we see a more efficient spend and where we can save money, we are, and we're putting it, no apologies, directly into our pillar brands.

Yes. Understood on that one. And 2 more if I could. Just in respect to this byproducts or McGuigan Zero that you called out as part of being the turnaround in the bulk division, how much of that $1.2 million that you kind of called out would be those spirit sales? And how should we be thinking about those by-product sales going forward? Because I imagine they've got a cost base of 0?

Yes. Look, out of that $1.2 million is -- probably about 20% to 30% is from the spirit sales for the half month -- for the half year.

Great. And those spirit sales are all the by-product?

Yes.

Yes. And that by product also gives us choices and options for the future as to what we may or may not do with it.