Australian Vintage Ltd (AVG) Earnings Call Transcript & Summary

All right Good morning, everyone, who's joined, and thank you for joining to our half year results. The result is a solid result. We're quite pleased with the result, and it's very much in line with our strategic planning for our business. We continue to grow our pillar brands. We continue to invest in our pillar brands, and the underlying business is performing strongly with contribution before marketing plus 11% year-on-year, and plus 6% after a $1.8 million increase in marketing investment. The NPAT before onetime events of $14.2 million is plus 7% on last year's record result, which we're very pleased about. The onetime events that I'm referring to, from an NPAT perspective, were worth $4.2 million after tax, and they're very much into 3 key buckets. U.K. logistics, which in the first half, very much amounted to demurrage, wait times, ports, and the U.K. market had a serious issue post-Brexit with supply chain and enough lorry drivers, et cetera. International shipping was very much slowed down. All the ports around the world have been quite chaotic. And we're seeing that return to normal now in the second half. So they're very much onetime costs that were associated with that period. We also had COVID cellar door closures of the same period and a frost event from a SGARA perspective. All those 3 were not like-for-like in the same comparison a year ago. So removing those onetime events, very, very pleased with the base business performance and the growth. Pillar brands now represents 77% of total sales. And we've had a deliberate strategy to focus on core pillar brands and growth with higher margins as opposed to breakeven or low-margin bulk. So we won't be doing bulk for the sake of it, and we're reinventing our business towards a higher-margin branded business. Now you can see that with the shift from gross margin from 31% to 34%. This journey will continue into the future, and we're very confident that we're on track with that around our business. In the markets we operate in, which are heavily concentrated in retail, especially in Australia and the U.K., brand strength is key to long-term growth and sustainability, and we're well on track in that regard across all of our portfolio. Pleasingly, in the markets we're in, we're outperforming the market in those key geographies. And that's really, really important as we maintain the investment in our branded business. We chose not to cut marketing because we think it's the core essence of our strategic plan. And despite those one-off events, we stayed true to the marketing strategies and investment, which is great. We've also launched Tempus Two into the U.K., and we are market leaders in both the U.K. and Australia with our innovation of McGuigan Zero. So not only are we investing in our brands, we're expanding our footprint and distribution globally. Importantly, Canada and Southeast Asia are back in growth. We reset our Canada business 2 years ago, and we're well on track with our strategic plan for growth there and our brands are doing really well. We've also launched Tempus Two there. And Southeast Asia is our focus now, given the challenges that the market has with China. We continue to work hard in China, however, with key partners, key distribution options, and we are well established for the future if and when that market returns. Cash flow for the half was very much timing between the 2 halves versus a year ago. We did invest in inventory in the U.K., a deliberate strategy because sea freight has been very unpredictable. Lead times have doubled, and we thought it was prudent to increase our inventory there, which has had an effect on cash flow in the first half. Pleasingly, balance of year, we expect the full year to come back to $20 million positive, and we're well invested with sustainability. Our values remain unchanged and our guide to our business approach is really focused on putting the consumer at the heart of everything we do. But we are also a behaviors-led business and values are critical. So putting the consumer at the heart of everything we do is why it was so important that we didn't cut marketing, and we continue to invest. In the first half, our marketing investment was up about 30% on prior year. If you quickly turn to our strategic plan, our consumers and brands remain at the forefront, investing in our pillar brands, driving innovation. We have more innovation coming in the pipeline. We're certainly not resting on the laurels of the great success we've had with McGuigan Zero. But what McGuigan Zero has done is showing that something that would be seen as perhaps a niche product 2 years ago is now becoming a mainstream product. And there's a lot more innovation to come in the world of wine in that space. Our markets and customers are critical. Last year, we achieved #1 status in our Advantage Survey in Australia, and we're top 10 in the U.K. So we're improving how we deal with market, our professionalism, and the things that we offer for them and our consumers. So putting the consumer at the heart, doing much better business with our customers, we are significantly investing in our people. We have now world-class safety numbers. We are driving diversity and we're upweighting our investment in our leadership. And we think we've got a very, very good balance of people with experience in our industry, and some new ideas and thinking in our industry, especially around brand consumer. Sustainability is critical now and we are making great strides in our sustainability footprint. We have significant investment in solar. Renewables are coming online. We've done a full audit of our global footprint, and we've pointed our Chief Sustainability Officer, a lady by the name of Lucy Nash has commenced with the organization. So you're going to see and hear a lot more about our sustainability. This will flow into brand innovation over the next 2 years as well. Renewables, less waste and consumer products that have an incredibly big demand around sustainably-driven products for the future. Our return on assets is critical. As we've talked about, we're on track on our journey towards long-term sustainable return on assets up towards 8%, 9%, 10%, and we're well on track for that. So if you look at '22 and the scorecard metrics at the moment, where are we at with the consumer and brand perspective? The key numbers here are 77% of our total revenue is now coming from pillar brands. It was only a few years ago, that was 50%. So that's really, really important, and our marketing investment on prior year, plus 40% is a significant investment. On our markets and customers, you can see that we're outgrowing the market, which I'll come to in a slide as I talk to it in a second. But significantly in Australia and the U.K., the markets are well behind where our growth is in key brands. Canada is up 19% in value, and Asia, excluding China, was up 23% in value. Our staff engagement continues to climb and our lost time injury frequency rate is now down below 5 injuries per million hours worked. Only a few years ago, it was up towards 20. Sustainability, as I've talked about, our main processing plan at Buronga which has 90% of our [indiscernible] is a 100% on solar and wind. Sustainability journey is well advanced as I've talked about. Return on assets, contribution after marketing plus 6%, as I've talked about, the impact of those one-off events saw NPAT down 25%, and our ROCE sitting at around 6.5% to 7%, which is very pleasing. I'll get Mike now, our CFO, to talk to the historical financial performance, that it supports the step change in our business.

Yes. So this is on Slide 7. So as you can see on these graphs, there has been a step change in our business. This graph shows that our net profit after tax for the half year leading up to December, we're around about $10 million. Now we're into the 13s. That is a significant step change with some of the benefits coming from our investment in our efficiencies, et cetera, which has helped us dramatically. But more importantly, it's due to our mix of sales, our higher margin, introduction of Zero. So we do strongly feel that our business has changed from what it was before. This industry -- in this industry, it takes a long, long time to build up that sort of efficiencies in the winemaking, and we're at a stage where we're starting to see the benefits of it. So our business has changed quite dramatically. I think that's it for that page, Craig. I don't think there's anything else to add.

No. So what I'd really highlight on this page is the 77% of brands and the 72% in the prior year, you can see how it's driving through at the higher margin into the profit numbers. And you can see also the shaded areas there show you that on a normalized basis year-on-year, we're ahead of last year's record profits. So as Mike says, the underlying performance of our business is very strong. And it is absolutely on our strategic plan targets, which I'm very pleased about. In terms of those one-offs, we're already seeing in the U.K. now return to normal service levels. There was many months of severe out-of-stocks on shelf, et cetera. But we're seeing that normalize now. So those one-offs are not necessarily translating into the second half, especially from a service and a port point of view. We're seeing that back to service levels that we would have expected prior. If you look at our portfolio, again, just to quickly touch on those brands, McGuigan 'Just Because' is a great campaign and a great fit, whether it's Zero, whether it's premium, whether it's everyday consumption, but 'Just Because' campaign is working really well for us and getting fantastic cut-through with consumers. So whichever variant we invest in, it's giving a halo effect across the whole brand, which is very pleasing. Tempus Two is a unique positioned brand 'Beyond Tradition', it is about the occasion and the enjoyment. And we're finding that this is getting great cut-through. Our early numbers in the U.K. are exceeding our expectations on this brand, of which we're ranged in Sainsbury's and Tesco. So very, very excited about that, and we've launched in Canada very early days, but we see tremendous growth for this brand as a global brand moving forward. Traditionally, this was very much an Australia, New South Wales brand. So this is a gift for us. We love this brand. Nepenthe, super-premium, Adelaide Hills brand, 'Let It Flow', good times with friends. We are now expanding it across the Eastern Seaboard, a lot of upside and potential for this brand, very, very good margins and a unique positioning with a lot of credibility. And our Barossa Valley Wine Company brand, Aspirational Barossa. We have very big plans for this in Australia and Asia moving forward. It's a super premium brand. And again, tremendous upside for this in the future. So if you think about our business performance to date, very much driven out of McGuigan Wines and Tempus Two, very much driven out of Australia and the U.K. That shows you in the strat plan horizon tremendous upside coming from these other brands. We have a huge amount of growth left in this business, and we've only just begun. So I'm very excited about that for the future. Australia and New Zealand are outperforming the market, as I said before, coming to the next slide. All 4 pillar brands are in growth, plus 9%, driven by the increased consumer marketing investment. Our scan performance is 3x that of the wine category on those brands. So the wine category is growing at 3%, we're growing at 9%. If you go back 2 years ago, pre-COVID, we're at 22% growth, the market is at 10%. And as you can see, that's very much driven by those 2 pillar brands with a lot more upside to come from Nepenthe and Barossa Valley Wine Company. So it's really important that we've gained our customer partnering. Our distribution footprint has grown and now we're talking to the consumer on top of that, which is excellent. If I move on to the U.K., and again, we're outperforming market. If you look at this graph here, McGuigan is plus 6%, and Tempus is plus 87%. Obviously, Tempus is off a lower base because we've launched that brand over the last 10 months. But the early signs are very, very positive. And as I said, Canada is in turnaround, which is great news. If you look at the value growth in the U.K., again, it's predominantly a retail market so to scan. We're growing at 8%. The market is actually minus 3%. So that's where you saw some of that flatness in the overall branded volume. It was very much because the U.K. market itself was down, but we are winning in that market at plus 8%. Again, if you go back 2 years ago, we're up 27% and the markets are [ replicating ]. So the U.K. had a very, very strong period of COVID. But the key message from us is coming out of COVID, we are growing faster than the market, and we have reset our base business, which is fantastic news. Three things have driven that. McGuigan Zero has been a real success. The investment in our overall branding and distribution footprint, we have expanded with Tesco over that period, a customer who 2 years ago we were hardly trading with at all. So we've had a tremendous growth in footprint. And finally, we are talking to their consumer with our brands and we're launching new brands. So again, a lot of upside there. Asia, we're restaged out of China, as everyone has to Southeast Asia, albeit of a lower market, but we're continuing to grow our Southeast Asian business, and we expect that to accelerate in the next year. As I said before, we continue to work with our partners in China, COFCO, for example, and we are establishing our long-term footprint to be there and do great business. A serious growth aspiration for us will be the Barossa Valley Wine Company, super premium. We haven't played in that space before. So we think there's tremendous upside there. Sustainability journey, if I move to the next slide, is well underway. And we really break this into 3 areas: the planet, carbon footprint, et cetera, the people. So are we playing responsibly in our communities, supporting those communities where we employ the most people, and our corporate social responsibility, and our overall governance and performance towards global compliance with good corporate citizenship around sustainability. We think this is -- we are really well placed to do this for the future. You can see there an image of our solar farm at our Buronga winery, and 100% of that winery, our processing, is sourced from renewable energy now. So that gives us a lot of opportunities for great products in the future. And over the next 6 months, we will have a number of announcements around not only innovation but also our sustainability footprint step forward. So Mike, I might pass over to you for the underlying business performance summary.

Yes, not a problem. So as Craig mentioned, that our net profit after tax before the onetime events was up 7%. I won't go through the [ rest ]. Just on that revenue, the total revenue down to 7% to $138 million. But what you got to take into account, we had a product in the U.K. called Shy Pig, which was taking advantage of the tax situation in the U.K. that applied probably 3 years ago, but that tax advantage doesn't exist. So sales of our noncore Shy Pig brand went down by $5 million. The other thing, too, on the revenue side is that we had a couple of products in the U.K. called McGuigan Classic and McGuigan Estate. They were the first McGuigan brands that were introduced into the U.K. and they were lower margin and they're down with the [ WET book ] as we prioritize the higher-margin Black Label and reserve range of the McGuigan brand. So when you look at those 2, they total about $10 million in sales that we've dropped off because they're lower margin as we focus on the higher-margin stuff. And also, as Craig has mentioned a few times, our pillar brands have gone from 70% to 77%. The aim is to get that to the high 80s. The other thing I want to point out is that you see our gross margin has increased from 31% to 34%. Now the thing I want to point out there is that a lot of the onetime costs that we have highlighted in the business for the 6 months are actually incurred in the cost of goods sold figure. So on a like-for-like basis, if you took, let's say, demurrage out, that 34% is actually closer to 36%, which is a massive shift from 31% to 36%. Our cash flow from operating activities, as Craig mentioned, is negative 0.8%. But that's due to build-up of working capital, cash receipts and payables. Our stock in the U.K. is up by about $10 million as we try to avoid any delays, et cetera. But we're expecting the second half cash flow to be slightly better than the prior period -- comparable prior period to get to around about $20 million. So I think that's it. I think the kick we got out of this slide is that our gross margin while showing going from 31% to 34%. If you take out the onetime cost, it's actually gone to 36%.

Thanks, Mike. So that's really, really important that we understand that 31% to 36% because that's the core of our strategic plan is to drive a higher margin business as we move forward. And if you look at the U.K. alone, with normalized service returning, every extra liter that we do is coming in, obviously, at a much higher margin. And that's exactly what we wanted. And that's the point of putting the consumer at the heart of everything we do, but those consumers are pulling that product through at the higher margin. We also have a business in our ranks called Austflavor, where we make specialty products, whether it be juices, whether it be alcohol derivatives, et cetera. And we see a lot of upside for that business, too. If you add that business into our numbers, we're well into the 80s in terms of what I would call branded-specific business. So that's very positive for our future. And a lot of innovation can come from that business. We'll have more to say on that in the coming months as well. Mike, did you want to talk about...

Yes. We've changed our segment information slightly. In the past, we used to have a segment for bulk wine. And then we had theoretical prices going from the bulk wine and the margin going to our business that was selling branded products. To make it more consistent with how we run this business, we've changed our segments. So I suppose the biggest change you'll see for those guys that analyze our numbers is that SGARA is now part of ANZ and [indiscernible] U.K., Europe and Americas. But we have changed the segments and all the numbers are comparable to -- well, the comparable numbers have all been changed. But it's just a change in the process and how we view the business as this business has evolved to become a really truly branded business. SGARA. Craig, I'll take that one. So about half of the impact that you see on the P&L, which shows that we're down about $1.5 million on profit here, is due to some frost that we had in and around about November in one of our vineyards at Waikerie. About the other half or the other impact on the $1.5 million was the red grape prices because we're estimating that, that will come off. So we've made an assessment on the market price on red grapes, which means that our SGARA number goes down. But having said that, as red grape prices go down that obviously improved our margin in the future years because the red wine will come at a lower cost. That is why it's so important on our branded business because you can hold your margins. If we were in the bulk wine business, we'd be going with the market and making no money out of bulk wine. So what we're seeing, for example, in the irrigated regions is the Riverland is that the price has dropped for red grapes from about $700 to around $400 a tonne. And this is all because of the China tariff. All of a sudden, this industry has got a bit -- well, not a bit, a lot of oversupply of red grapes sitting in the tanks, and we're looking at a vintage that looks pretty reasonable this year, that will only add to it. But having said all that, we are in a really comfortable position with our stock levels in terms of our reds, and our whites, and our [ future sales ]. We're okay in that. Interest and financial position. We have talked about cash flow from operating activities a number of times. But this slide here, which is Slide 16, goes into more detail on why we went from a positive $31.7 million in the prior period to negative $0.8 million. And you can see that the inventory movement in the 6 months compared to the prior comparable period was up $11.1 million. Receivables was $6.4 million and payables was $5.1 million, they all total about $27 million the wrong way in terms of operating cash flow. Then you add on top of a $4 million or $5 million of cash that we incurred on demurrage, and you end up with a number that shows the $31.7 million movement. Our capital spend is expected to be around about $13 million this year. It's a little bit higher than what would be considered a normal year, but we are putting in -- or we're actually doubling the capacity of Austflavor as a result of the demand that we have for our Zero brands. So that's added another $3 million to our capital spend for this year. In terms of debt, we're expecting to be around about comfortable $70 million by 30th of June. That obviously takes into account that capital restructure that we did in July, where we returned $24 million to our shareholders. Over to you, Craig.

Yes. So the outlook is quite positive for our company. With the additional -- without the additional logistics cost, cellar doors, and SGARA, we would have delivered a base business with a record NPAT profit as we've gone through. I think importantly, we've made the correction from more of a bulk business to a branded business. Never has that been more important, as Mike points out, with what's happened with China and the lowering of prices around bulk and commodity. It's an incredibly low-margin business at the moment. And I'm pleased to say that we are repositioned with a normalized 36% margin branded business now, which is vital for our growth in the future. We continue to expect to see our pillar brands grow, as I talked about before. We're at early days on a lot of that brand activity, both Australia and U.K., but also Southeast Asia and North America. We have more innovation in the pipeline and our operating cash flow will return to positive in the second half. In fact, in the second half, it will be better than prior year second half to $20 million. The investment Mike talked about in capital is really important as we've invested in more spinning cone capacity. Not only are we producing it for our brands, but we're also using it for innovation, which we'll talk about more in the future. They have very quick paybacks for a small amount of incremental capital. Importantly, the technology for the spinning cone is actually made right here in Australia. So we've got some of the best in the world happening here, which is fantastic. We're expecting an outlook profit of between $17 million and $18 million. Given that we've incurred such big one-off hits as we've talked about at the first half, we're very pleased with that result. And again, that shows that we will have grown on last year on a normalized basis. So we make up some of that gap in the second half. And even though it's down on the prior year, on a normalized basis, it would have been well ahead of last year. So our second half is looking very strong. The sustainability study continues and we are investing, and we'll also see some new product innovation coming out of that space very, very soon. So I think what's really important in summary is we've moved from a bulk to a branded business. Our brands are all outperforming the market. We're very well placed with our organizational capability, both on a operational footprint and also on a people footprint. And there's a lot of upside in our pillar brands for the future. So quite exciting times for us as a company in terms of the strategic planning horizon. So with that, I might open it up for any questions.

Craig, it's Jason Palmer here from Taylor Collison. Could I ask some questions, please?

Sure, Jason.

Congratulations on the result, particularly the margin improvement you had in the business with all those one-offs that you've called out. Maybe we could start there, Craig. Could you maybe talk to distribution-type benefits that you've been able to get across those higher-margin products being McGuigan, Nepenthe and Tempus Two? And how much further do you think you still have to go with those labels? And then also, if you could also just touch on what you're seeing on depletions for those as well, please?

Yes. So if I -- I'll probably maybe refer to it by geography. So if I look at the U.K., for example, the McGuigan range, whilst quite a mature brand in the U.K., we see being able to continue growth within the brand, just Zero alone has a lot of upside left. We have new ranging across retailers coming. And I won't mention the names of the retailers because we have an NDA with a couple of them right now. But there's 2 retailers, for example, in the U.K., who McGuigan is hardly ranged with at all. Yet, we're very, very well placed with Sainsbury's, Tesco, et cetera. So in the U.K. and Ireland, you're really looking at about 5 major retailers. We think about 20% of those retailers were very underdone with distribution, and we're in negotiations right now. What Zero has done is also put us at a front seat at the table along with Heineken with joint business planning with those customers. So they're really keen on our insights and what we're seeing. And there's a whole lot more innovation coming, mid-strength, for example, in the wine category, the 7% range. We have a lot of exciting news coming in about that. Tempus Two, we've just launched there. So we're in very, very early stages. You see it's up 87% of a low base, but that gives you an idea of how much growth there is in that brand. And it's doing -- it's ahead of our expectations. We're also driving innovation in that space with Tempus in the U.K. For example, we are doing a Tempus product out of Provance, straight into Sainsbury's. We are doing an Argentinian Malbec under Tempus in the U.K. because it's an occasion-based brand and not a provenance-based brand, and that's really wowing the customers. So we're really happy about that. So that's just 2 brands before I get to Barossa Valley Wine Company in Asia where we haven't ranged it at all, and it's a super premium brand. So there's so much upside in that brand. We're in the very early stages of looking at India as a long-term strategic play. And in Australia, on the East Coast, for example, Nepenthe has so much growth. If you think about a company, a brand such as Shaw + Smith, where we come from the same, their distribution rates across Australia will be tenfold to ours. Yes, we are more awarded wine and a highly prestigious brand. So there is tremendous growth for that brand just in Australia alone. Canada, all those brands [indiscernible]. Southeast Asia, tip of the iceberg, and the U.K., a lot of distribution and growth left. Our innovation pipeline alone will give us good growth in all markets. So I'm very optimistic about that. Is there a lot of work to still be done? Is there a lot of negotiations still to be done? Yes, there is. But we think that we're in a solid place in terms of distribution footprint expansion, range expansion, innovation and talking to the consumer.

We've just introduced that Nepenthe Elevation, too, which has just received, what, 90-plus points, whatever it was.

So we've done a specific Nepenthe range for Coles, a great example, Mike, of a whole new footprint in distribution, which didn't exist 6 months ago. And it's the now one of the highest awarded sauv blancs in the country in terms of points. So that's where we're gaining credibility with the consumer. Great point.

So is it fair to assume then, Craig, that you'll need to continue to ramp up the marketing spend to sort of rise?

Yes, we would see that as our strategic plan horizon that there is an equivalent percentage that goes with that. So that you can't have these brand aspirations and not continue to kind of put your money where your mouth is, so to speak. But we're also a midsized company, so we'll keep the balance on that. So it's -- we want to be margin accretive after marketing.

Okay. I had a few more, if I could. In terms of the inflationary pressures you're seeing across the board, I mean, you've called out some one-offs in demurrage that you probably got around now with some of those short-game inflations. There might be some fixed price mechanisms in place on logistics that might protect you there. I'm not really sure what you've got there. Obviously, it's a tightening labor market. Some of your peers in other markets have shown a willingness to put through price rises. I appreciate it might be a bit more problematic in the U.K. given the complications with the changes to the import duties that could be coming in. Are you able to talk to ability to pass on inflationary pressures, please, within the business? What you're seeing from competitors in terms of price and in terms of maybe reducing promotional activities to sort of coincide with that inflationary pressure?