Australian Vintage Ltd (AVG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Australian Vintage Limited FY '23 results. [Operator Instructions] I would now like to hand the conference over to Mr. Craig Garvin, CEO. Please go ahead.

Good afternoon, and welcome, everyone. Thank you for joining to our '23 full year results presentation, which myself and Adam Rigano are pleased to take you through, our CFO. Punching straight into it, if I summarize the highlights of the year, and we're pleased with the positioning of the business. Given the market conditions, we really feel that we're well set for our strategic plan, which we'll take you through. Firstly, our revenue was flat with the prior year, which given we play in quite a portion of the value segment, we're very, very pleased with that result, and our brands gained share in that environment and held up well. We not only did that, but we also took price, and we grew the mix further on our premium portfolio, which is really, really important for our strategic plan. Innovation and premium brands represent over 35% of our margin. So to have that as our core strategy now representing 1/3 of our business is very pleasing. We're the global leader in no-and-low with world-leading technology, and I've got to stress that no-and-low is a serious segment globally now, and it's only getting bigger. All of the customer research that we do, all of the conversations we had with our trade, this is the key area of innovation moving forward and value creation. Our business Austflavor is in double-digit growth over the prior period, and that's a business you're going to hear a lot more about it. So our ingredients value-add business, high margin, and we have, again, the technology to grow this business significantly without any extra capital. So we're very pleased about that. People always remain our #1 priority, with improvements in diversity, safety and engagement, and we believe that this drives discretionary effort, which sets us apart from a lot of our competition. Most of all, we have to take costs out. We're already well down that path. If you look at the year that's been, it's characterized by really solid strides in our strategic intent, but hit by very, very high costs as the whole globe has been in an inflationary environment. And that's really the simple story of our year. So I'm very pleased with that. To get into some -- a bit more of the detail, the industry has been characterized by low margins, heavy discounting and quite a lot of vintage for a number of reasons, not least of which were severe rains and floods through the year. We've actually fared better than the industry overall in that, but not immune equally so in terms of vintage. The first number there is really, really significant to understand, of $18 million absorbed into that result. So our #1 priority during the year has not only seen costs come out, especially things like sea freight, energy and logistics, but we also are embarking on a $9 million cost out program on top of that, call it insurance, if you like, as we come into F '24. Adam, would you like to continue on those numbers?

Yes. Thank you, Craig, and welcome all. What I'll first articulate is what underlying numbers means. So when we talk about our underlying numbers, we're talking about the business without anyone else. So it excludes asset sales and excludes any write-offs that we've done. So we're really pleased that we've been able to hit the guidance we put out to the market for both EBITDAS, EBITS and our NPATS. Hitting an EBITDAS of $26.1 million for the year, considering the year we've had with the hyperinflation that's come through. And as Craig mentioned, having the cost outs going forward, we feel very confident in what FY '24 will look like for us. Pleasingly, we overperformed in our net debt. We put guidance out at $52 million to $56 million, and we've come in at $48.1 million. It's a big focus for us and will continue to be a very big focus for us, as we go forward through a high inflationary environment. So we ended up with a net debt/EBITDAS of 1.8x, and that's on a post AASB 16 leases basis. On a pre-AASB 16 leases end up being 3.4x. And as we said, why we declared no dividend for this year. Balance sheet is strong. Gearing is at 17%, better than what it was last year. Leverage is down at 14%. And even though we sold 3 assets during the year, our NTA is still right up there and strong at $0.90 per share. Thank you, Craig.

Significantly reduced versus prior year.

It is, yes. It's right, $26 million down.

Yes. So it's $26 million better. We'd like to think we can improve on that even further. That is prudent management trying to make sure that in a high inflation environment, we keep debt as low as [ is prudent ]. So as we come out of that, we've got all the options we need as we have considerable headroom above that. If you look at our strategic plan and where we want to go to, I mean the numbers are an outcome, but the inputs sit here on the page. Consumers and brands. You know we have a big focus on that, and we'll talk a bit more about that. That is the lead of every bit of innovation we do or every customer conversation we have, is consumers. Markets and customers are important. We have to be able to show our products on shelf. We formed some really good partnerships, we believe, with major customers around the world. And those 2 things in combination are the hallmark of our future. People, as I said, gives us a discretionary effort. We've got a lot of focus on people. We're now a highly engaged workforce, and we have all the hallmarks of a world-class employer, which is a significant improvement over the last few years. ESG is not just a topic anymore that people talk about casually. It's not just a project. It's core to business. It's core to our business. And we've just submitted for B Corp certification, which would make us 1 of the first in Australia in this industry. And of course, our return on assets is vital as we move forward. And you'll see the hiccup we had given that onetime inflationary hit, but we think we're pretty well placed to come back from that moving forward. Our investment in brands, premiumization and innovation offset declines in the value segment, as I talked about earlier on. And you can see as a percent of our sales, there are dollar millions of sales that we are 78% of our total revenue come from those brands, premiumization and innovation, which is fantastic. It was only a couple of years ago that number was at 60%. So that's really, really important as we move forward because as we all know, if those brands are performing and our mix is high, then the margin starts to take care of itself and drop through if you have costs under control. You can also see, as we've done a call out here, the performance of those brands. So where we're premiumizing we're growing. McGuigan, which always plays in the value segment, whilst it says minus 6%, the category it plays in has been minus 10% to 15% between Australia and the U.K. So hence, why we've been able to grow share. Also pleasingly, our new markets are starting to really show some return. Ireland is a powerhouse for us now. And Asia, we're seeing -- that's outside of China, as you would assume, given that China isn't particularly trading with Australia at the moment. We've had significant growth, and we see a lot more upside over the next 2 years. We've reset the table in '23 to be able to go to market in Asia the way we want to. If China comes back and we can play on top of that, then we would expect to see a much bigger number. But as yet, it hasn't opened, we do expect it to. We didn't shy away from our marketing. We actually increased marketing even though we had all the inflationary challenges and headwinds, which also shows that we are committed to our strategic plan. We've launched the new Drinks Business, and that's settled down. We look to now take that on a global footing over the next 2 years and start to add some serious margin. The good thing about that drinks business was in its first year it washed its face despite all the start-up costs. So we're pretty pleased with that. We've learned a lot, and we also took price in that year. So overall, not only a good brand and innovation performance, but the establishment of new businesses, whether it happens to be our drinks business or whether it happens to be Austflavor, all key pillars in our strategic growth. This page is probably my proudest page in terms of what we've been able to do as a business, not just talk to it, it's actually converting. And if you look at where we are now as a business, premiumization of our brands represents 15% of revenue and 21% of margin, which is double the contribution in '20. Global leadership in No and low accounts for 10% of our revenue and 14% of our margins. So if you look at those 2 together, we've now got them adding up to about 30-odd percent of our business.

35%.

35, Adam, thank you. And most of that didn't exist 3 years ago. So a lot of companies talk about innovation, but you're wondering when it's ever going to translate. For us, it's translating and it's vital, especially as we play in that value segment, which is very challenging. So this is resetting the table for us in a practical, pragmatic way, not just on a PowerPoint slide. So we're really pleased with that. There's a lot more to come, and we haven't even got into the new geographies properly yet outside of Australia and the U.K. So very positive there. Adam, any comments you want to add to that?

No, it's -- I would add that even FY '23 has seen a hell of a lot of innovation in the space as well, whether it be the collaborations with Sarah Jessica Parker, Butchers Cellar, Sooshi Mango and they're all firing. So you take Sarah Jessica Parker with Sevenly, it's going to be a range in Sainsbury's. We are actually starting to take a lot of these collaborations, not just local but global, and that sets us up well for the future.

Yes. So mid-strengths, a really exciting emerging category. In the U.K. now, we're leading in that mid-strength establishment along with SJP or Sarah Jessica. We make her product. So again, we're able to collaborate with our trading partners and set the trends for the new categories moving forward. So very, very exciting, this part of our business. The external operating environment, as we've talked about, is an interesting one. It's always a moving feast. The year for Australia very much represented, as I said, a tough market with high inflation and lower yields across the vineyards.

Yes, that's right, Craig. And so if you look at whether it be the export market down 10%, as you mentioned right out of the gate, while in our traditional geographies, Europe and North America, 15% to 14%. Whether you look at the vintage itself, which is the lowest in decades. And that's on the back of very high prolific vintages in '21, '22, where there's still a lot of oversupply in the industry. This 1 year is [ not enough to ] offset those prolific years. You've got a situation where the overall market itself is challenging. I think 1 of the things that we continue to be proud of is we have our demand and supply in balance. And so some of the dynamics that's playing out across the industry, we're able to maneuver our way through very, very well because of that. And that's agile up and agile down, depending on what the markets otherwise say. However, the market dynamics did impact our crush throughput. And we only had added 1.3 million tonnes we released earlier this year, which is 20% down, which actually resulted in our underutilization $9 million mark. The yield on our own vineyards was up, right? So compared to the overall market, so we were down 9% versus an overall market that was down a lot more than that. However, with the market dynamics, the WDA average price for red grapes fell through the floor. And so that caused a bit of a market reset for us that impacted our SGARA number. Most of the numbers we talk about are pre SGARAs anyway. Nevertheless, there was a reset in that. However, this does provide opportunity. And the opportunities we continue to push forward is how do we utilize the market dynamics to continue to drive our premiumization strategy and margin.

Yes. So we're well placed in that regard and SGARA is a noncash item and something that's typical in the industry is one-offs ups and downs. Hence, why we talk pre-SGARA. I referred to our ESG strategy, which is alive and well. And we really break it into 3 areas, as per you would expect, given the heading environmental, social and governance. We're well advanced on all 3, and what does that mean really? Our climate action towards Net Zero, which we support. So by 2030, our Scope 1 and 2 emissions, which is the emissions we control, and a 52% reduction in the 3 GHG emissions per production unit. If you think about that in [ all the ] language, we're really talking about the goal of carbon neutral 2030 towards net 0 in 2040 across Scopes 1, 2 and 3. So we're already working with all of our suppliers to sign up to this, if you want to do business with AVG in the future. So this is very pragmatic. This is real, and we're very excited about and hence our submission towards B-Corp. We've also had our vineyards and winery sites certified with Sustainable Winegrowing Australia. So we're all officially certified, which is fantastic news. And again, it's the example of pragmatic action, not just something we're talking about. We've got sustainable packaging initiatives globally that we're working very, very closely with our suppliers and our customers. Because in the end, it has to be something that's worthwhile for consumers to purchase. Our B Corp impact assessment has been submitted, and we're going for global certification. Why is B Corp important? It's the global card-carrying membership, if you like, to prove that you are a certified corporation taking ESG seriously. Now whether that's mental health, whether that's carbon footprint, or whether it's governance and social environment, this is your measurement to be valid. So in the world that's had a little bit of impact from greenwashing and people and consumers get a little suspicious, this is the way you need to go to ensure that you have a global certification and language, which we're well developed on and hopefully, we'll be accredited very soon. So I'm very, very proud of that from an organization perspective. We've come a long way. As I've said, people are our highest priority, and we think the discretionary effort can set us apart, especially in tough times. So employee engagement is top quartile. We've won the gender equity award recently with Drinks Association, which is really at the heart of diversity. We've actually made a lot of ground on the gender pay gap. Safety has improved year-on-year, and we now are a company that's driven by lead indicators, not outcomes. We've put in a lot of benefits of flexibility post-COVID for our employees, and that's helping us to drive engagement, and the list goes on. But this is a really high priority for us. This is a snapshot into the kind of portfolio we're drinking, I apologize, that we're working on. And a few -- it was only a few years ago, you would have seen 4 brands up there, maybe 5. And now when you look at it, we've got pillar brands, and they're the brands that we own outright, and are ours in the market and Not Guilty is a very exciting new brand because it plays to the millennials and Gen Zs. We've also partnered, as you can see, collaborations at the top with a number of key brands around the world and organizations, who believe that we've got a better go-to-market strategy, even though they've had. So Sarah Jessica Parker, for example, we make for her because we make the best mid-strength in the world. That's as simple as that. And a whole lot of other partnerships. Then we've launched into the Drinks business. So we've broken the back of, are we just a wine business or are we in the drinks industry with wine pedigree? The latter, is where we are strategically. That gives us many options moving forward as consumer needs change, and we're finding that this is turning out to be very opportunistic and a lot more opportunities to come from this globally. So we're pleased with the portfolio. I would stress that we're also conscious of you can't do everything everywhere all the time. So this has a limit on it to our executional capability. Adam, I might hand over to you for the income statement.

Thanks, Craig. We've spoken about most of the items in here previously. Again, just to reiterate, underlying excludes all one-offs, whether it be asset sales or write-offs. So our underlying business, as we spoke about, has really been dominated by the hyperinflationary pressures. If you took them out, we'd be in line with where we were previously. And you can see quite clearly that even though we've had value market declines, we've been able to offset that through [ price ] whilst also starting to deliver cost outs through the business. And the marketing investment just helps us achieve that, and will continue to help us to achieve that going forward. So we've gone from a 30.7% down to a 10.6%. As I said, most of that is the $18 million worth of short-term hyperinflationary costs that we've received.

A couple of points to just build on that. One is you can see that through price and cost outs, we've already got the juggernaut underway as we move into '24. Those hyperinflationary pressures are also easing. So the 9.2 represents that we are getting on with cost outs above and beyond already, and that translates into '24.

Traditional slide that we show, just history over time. As you can see with most of the information up there, we've taken a dip in FY22. Hyperinflation again, is impacting that performance. If I drop to the return on capital employed, we're coming up at 2.6%. But if you take those hyperinflationary costs back out, we're still sitting in the mid-7s where we have been for the last 3 years. So -- but for, we are up there. And I know that but for is not an excuse. That's why we're taking this into our own hands and actually taking costs there.

So you can see that the revenue is -- stayed the same. And our mix of branded revenue and high-margin business has stayed the same. So that means we're well placed moving forward.

On a statutory basis, so this is an all-in as opposed to the underlying business. So this does include all the one-offs, including asset sales and write-offs. You can see quite clearly there that the movement in the underlying EBITDAS of more to $20.1 million, $18 million of that is the hyperinflation. We had 3 asset sales this year. So we had the 2 vineyard sale and leasebacks prior to December that we announced at that point in time. And we've also moved out of the Hunter Valley winery as well. So the combination of those, which sits in our other income, if you're looking at our statements, is $17.3 million. And that more than offsets the underutilization as a result of market dynamics of [ Australia ].

We just thought it was prudent to do an underutilization write-down given the lower yields and given the performance of the market in general. So again, noncash and it's just prudent management as we reset coming into '24 and those costs come off.

A very busy balance sheet. I think the takeaway is here is we strengthened it. So all the metrics, as I mentioned, right, the get go, whether it be gearing, leverage or NTA, we're all getting better in those metrics. I provided a bit more color for you all, so you can see the difference between the net debt EBITDAS pre and post leases to get a sense of that. At the end of the day, our balance sheet is very strong. Our NTA is at $0.90 a share. our gearing remains strong, but our focus is still on net debt, even though we've reduced it significantly from the same time last year.

Yes. And our goal moving forward with ROCE is still to have a 10% ROCE. So that hasn't shifted from the last 3 times we've presented.

Cash flow, probably no surprise. Hyperinflation has dominated operating cash flow as well. We had $15.4 million in operating cash flow last year, we're at negative $12.7 million. If you recall when we released our half year results, that number is at minus $18.5 million. So we've actually brought back in $6 million of positive operating cash flow in the half. But again, from a year perspective, it's a hyperinflationary [ place ].

Our second half demonstrated that the costs are coming down. We actually outperformed the first half, and you can see that there in the cash flow number. So that continues, and puts us in a confident mood coming into '24.

Thank you, Craig.

So if I look at the outlook and strategic plan, we remain profitable, we think, with a very sustainable business model that stands up against the industry and the headwinds. In fact, where some others have got some major distress, we've done a reset around those costs. If we can get costs under control, which we are, our strategic imperatives remain really strong. And more importantly, our innovation is working and working really well. We've got upside coming in the geography changes, rest of Asia, as I've talked about, but also the new businesses, if I look at Austflavor, Drinks and what we're doing. Even if they don't fire, our base business with cost outs is coming back to F '22 performance levels is the direction. Exciting for us also is that we've just signed or aligned with some strategic partners for the Middle East and India. On business we haven't talked about before, but it's right in line with strategy. Those ventures will also not risk our own capital and investment. We're partnering with people who will use their money to invest in those markets. But it's our intellectual capital and know-how, which is where we're really, really excited. These markets are huge. So you'll hear a lot more about that over the coming 12 to 18 months. So if you think about it, get our business right, get our innovation right in our base markets of Australia and the U.K., invest in new brands and innovation. Let's look at the new emerging geographies of Asia and North America. Now let's introduce some more highly flexible but highly profitable business arrangements in Middle East and India. So we're really looking forward to that. If China then comes back in on top, then that's further upside for it, especially if we've got a consistent effective cost operating base model to support all that. Directionally, we expect to be in line with '22 given -- and that's nothing more than we're getting those cost outs, and the rest stays the same. Bank reductions -- debt reductions, we just think it's prudent management, even though we have no headroom issues. We'll continue to focus on that. And hence, why we've had a pause on the dividend. Given that we've had those inflationary pressures, it's the responsible thing to do, and we think it's the best thing for shareholders at this time. The intention of the organization will still be to pay a dividend in the future when the timing and the numbers represent that to be the case. Strategic review has been launched, and this has had some discussion. We're doing that with Evans & Partners to explore options to unlock shareholder value through industry opportunities. We don't need an industry transaction to keep us afloat, as you've just heard. We don't have any issues in that regard. And this is also not about us being for sale. This is about us getting on the front foot as we've done with innovation, as we've done with markets, as we've done consistently. AVG is characterized by looking for new opportunities all the time. This is nothing more than that. And at the moment, there's an oversupply of stainless steel. There's an oversupply of grapes and there's a heavy discounting mentality. We think there's options for consolidation across the industry, and we're getting on the front foot to look at that on behalf of creating shareholder value, nothing more, nothing less. If I talked about the optimism I have for the business moving forward, then July has been a good example of where we're seeing that. So July, sales were 16% higher than prior year, very much led by our U.K. business, where our innovation and ranging is giving us great opportunities. We've also been on the front foot with tax law changes over there, which has set us up really well coming into '24 and improved our business relationship performance. Innovation is still going to be the hallmark of what we do, and that's helped us in that 16% start to July, but also our emerging markets are higher than prior year. So you overlay us getting cost outs and inflation coming off, we think we're well placed to line up with F '22 performance. Okay. With that, I might hand back to the moderator.