Australian Vintage Ltd (AVG) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the Australian Vintage Limited Half Year '24 Financial Results. [Operator Instructions] I would now like to hand the conference over to Mr. Craig Garvin, Chief Executive Officer. Sir, please go ahead.

Good afternoon, everyone, and welcome. Thank you for joining us for our '24 half year results. I'm joined today by Adam Rigano, our CFO.

Love to be here with you, Craig. Thank you.

Yes, very good. And as I said, I'm Craig Garvin, CEO. As -- and I'll kick straight into it. So the next page. Right. So the half year results as it stands, just a bit of context. We've improved earnings despite an extremely challenging environment, which I'm sure everyone in the -- who follows the industry is aware of at the moment, and it's going through one of those cycles. We've managed to keep revenue in line with prior year, but improve our underlying earnings from really 3 areas: Our branded growth continues, so our mix of business is improving, which you'll see later on. Our innovation is effective. They're Not Guilty brand that you see, there is an example of those having tremendous success in the U.K. And our cost-out measures, which are just vital in this inflationary environment that the world is in especially over the last 12 to 18-months, and there will be a continuation of that for a while. So really, really important we get that combination of those 3 working together, especially over our second half and into '25. We've improved performance across our key markets. So what does that mean? In the U.K. and Australia, we've improved our share performance and also innovation is working, but we're much better established for the '25 season in Asia than we were before, and I'll come to that. Global leadership in no-and low continues, with our world-leading technology. And we've actually entered mid-strength in the U.K. market, and we're live on shelf and we're the #1 seller already, which is great news in Sainsbury's. So it's an example where our innovation is real, it's alive, and it's hitting the consumer. Operating and free cash flow have improved over the prior year. Absolutely critical we demonstrated that after getting hit with so much inflation in the prior results. I'm really pleased to announce that we've achieved B Corp certification, and a lot of companies talk about ESG and its important environmental, social and governance. Well, B Corp is the measure of are you actually a ESG credible company? And we're really proud that we've been -- one of the few in Australia actually from a listed perspective, who's achieved this certification. We see that translating through into our branded products in the coming 12 to 18-months. And we think that will help us continue under that innovation heading of credible consumer connection to our brands of the future. We also know that from research that consumers care about this enormously. And if you're not in this space, the younger generations in particular won't be that interested in new products. So a lot more to come on that. We still have a high confidence in the strat plan, and we're not throwing off it because of inflationary and short-term issues. If you look at the last few years, whether it be COVID, Ukraine, inflation, there's been some significant jolts to the market. And on top of that, you're looking at a surplus of wine, and it's really, really important, we stay focused on brands, innovation and our cost-out measures, which we've done. Finally, in summary, the market review that we announced is well progressed, and I'll come to that. There are significant opportunities in a distressed industry, as I alluded to before. So an update to follow there. And I'll go to the next page. And I'll hand over to Adam to take this one.

Yes. Thank you, Craig. So what we've got in front of you now is our standard metric slide. And we're really proud to be able to put up here, as Craig said, that we've maintained flat revenue in a challenging market. But if we look at our underlying earnings measures, we've grown, whether it be underlying EBITDAS, EBITS or NPATS. EBITDAS and EBITS are up over $3 million over the prior year, and we'll come to that a bit later on and talk about how we got there. NPATS, from an underlying perspective, it's almost double what it was on the prior year. So it's demonstrating all the work that we've been putting is translating through to our bottom line. Net debt of $67 million is in line with our expectations and where we are at this point in time. We've got a heavy focus on reducing that further, which we'll talk about going forward. Thank you, Craig.

Yes. The other margin there going up 2 percentage points on PCP is really, really important, and that's driven again by our mix of branded business, which is up, but also that we're putting higher margin products through innovation, and it translates into that gross margin number that you see up there. Net debt, as Adam alluded to, typically, you spent a much higher proportion in the first half on grower payments. That's typical. We will see that number come down considerably in the second half as we announced at our last AGM.

Absolutely.

Just to recap on the strat plan and the buckets that make it up as you can see there. We're very focused on consumers and brands. How does that fit into the markets and customers that we play in because you've got to get that combination absolutely right. Our people are our core strength of our business, and we still remain in that top quartile employer status. And as I talked about, B Corp certification really brings home the ESG credentials. Cost out, debt management, et cetera, return on assets, fundamental, and we think that we're actually making all the right moves there in a tough industry. If you look at our strategic investment in brands and innovations that I've talked about over the last 5 years, it's actually quite a good story in that period as opposed to looking at a 6-month only period where you've had high inflation, et cetera. So if you look at our pillar brands in that period, 65% of our revenue back in first half of '20 was in brands, okay? If you look at that same number now, it's 79% or just on 80% of our revenue. So that's 15 -- those 15 points represents a huge movement in terms of driving that GM number in markets where inflation is high, and it is challenging to pass inflation through to price. So that's really, really something we're quite proud of. The dollar sales, we want to accelerate in the coming couple of years. But it's been very important that we've got our base business and mix right moving forward. The premiumization strategy over the last 5 years is really making sure that we drive our brands and then we're not a toll manufacturer. And you can see that in the 5-year CAGR numbers down the right there. I'll call out McGuigan's as plus 1%, but that's very aligned to our strat plan, which was defend McGuigan's because it was a large part of the company's only winning brand back 5 years ago. So to have that flat is actually quite a good result and to see all the other brands growing at double digit around it over that period is right on strategy. So we're very pleased with that. McGuigan also plays in the value segment, which has had the most pressure over the last 2 years of decline in that $10 kind of category. Winning in key geographies over the prior year. So now we're coming much more into the recent history. Australia performed 3 percentage points better than the market. The U.K. was flat, but we were very, very pleased with that result because it contributed a much higher margin in our U.K. business. Innovation is really working there. So we didn't chase volume at any cost, we really chased margin and earnings improvements. So to finish flat was actually a great result. In our emerging markets of Ireland, Canada, really good performances, but a lot more growth will come out of those bottom 3, especially Asia. And like most of the businesses, we're optimistic about China coming to life in our second half. The indicators are good. And the rest of Asia presents a very, very good earnings upside for us, I think, from '25 onwards. So in summary, the portfolio growth is on strat plan, and a lot of noise comes around shipping costs and labor and all the other things that we do, but we haven't taken our eye off those brands, which I think is really, really important. Global leaders in no-and-low. And I think that's reinforced by the fact that we're first to market with mid-strength in the U.K. and market-leading, which we're quite proud of. McGuigan's is the #1 brand in U.K. and Ireland grocery. Let's not forget that, and it's based on Kantar information. So again, when I come back to that point about McGuigan's performance, it's a mega brand in the U.K. supermarkets and retail as it is here in Australia. We are getting strong support from retailers and innovation, and we were rated #1 in the Advantage survey in the U.K. for innovation. Again, really important. You've got to have a combination of your core brands, and you've got to have a combination of continued innovation, if you're going to drive margin. As you can tell, we've got a very strong margin and earnings focus by the things I'm talking about. And those of you that have met with me and sat with me, when you've got an inflationary environment that has to be the core of what you're working on. And the Asia market reset, I think, is really, really important. We've selected and put in place a new set of distribution partners outside of China. That is turning out to be a very, very good move. And I think you'll see future earnings benefit from that. Okay. Improving underlying performance, what does that really mean? Adam, would you like to take us through this slide.

Thanks, Craig. So this is our history over the last 5 years. You've done a great job articulating the move from pillar brand strength or pillar brand percentage of revenue all the way through. And you can see this in the chart as it comes through year-on-year, we've had improvements in -- I guess you've been out, loud and proud about no forgiveness around driving that margin, and I think that's actually helped with our resilience in this hyperinflationary well that we've spoken about. I think if we hadn't done that, we could have been in talking a very different story than what we are today. So 79% of our pillar brands are coming from -- or revenues coming from our pillar brands, and with some of the easing of the hyperinflation and with the earnings improvements we've put in place through management action, you can actually see the turnaround. So what we really see coming out of the 5 graphs here is that the first half '23 was our low point. And so as we continue to grow from here, as we indicated to the market that we would do, we're expecting more to come for the full year results and beyond.

Yes. Great. You'll also notice that we don't have a SGARA write-down in these first half numbers.

That's correct.

And that's because for the first time in a long time, we don't have projected yield issues in a vineyard, same time last year, you had a vineyard underwater, for example. We don't have those concerns this year. So that's why you're not seeing a SGARA announcement for the half. Okay. Reported income statement. I mean, this obviously is really, really important getting into the nitty gritty of what's happened. So Adam?

Yes, I think there's a couple of takeaways from our reported earnings that you've seen before. Last year's results were dominated by the sale and leaseback of Coldridge and Grande Junction, which we did for specific purposes to reduce our debt. So undertaking that transaction was the right thing to do, brought $58 million into the half at the time, which you see translate into the net debt figures. But it also brought quite a large profit in as well. The underlying relative, which you'll see in a couple of slides time, against that basis is about $13 million underlying EBITDAS. Against that, we've grown. And I think that's the important point here, and we'll talk a little bit about what's driven the underlying result in the following slides. I think the other piece to call out here is that we have spent some transformational costs. So this hasn't come out -- this growth hasn't come for free. We spent transformational costs on additional cost-out initiatives that are yet to translate and on our strategic review. And unfortunately, we've had some people leave the business that we've spoken about before, and that comes as cost as well.

Yes, and we'll get into that detail a little bit. The other point I'd note here that we had an FX hit in the last day of the year, and you can see it there to the turn of about $700,000, which took off the results.

FX is a gift that keeps on giving unfortunately. Yes, you're right, Craig. We had a very strong U.S. dollar, which a lot of our shipping comes in U.S. dollars, and we don't hedge on that one. And I think you all would have seen, for all those that you follow the commodity markets would have seen a adverse or unusual strengthening of the Australian dollar out to December 31, which gave us a great revaluation of our balance sheet just when we needed it at the time.

Yes. So the key outtake of this page is that there's been a $4.2 million underlying result improvement, year-on-year.

That's right.

This page is also really important because although we talk about cost out in our business, inflationary environment hasn't stopped. It hasn't gone away. As we know in all industries when we talk about reserve banks, when we talk about interest rates and we talk about everything else, inflation is still part of our society. So perhaps, Adam, just to build the bridge here.

Yes. Thanks, Craig. When we launched the cost-out program, we were very conscious that inflationary pressures would continue. And so when we launched that cost-out program and the efficiency program, our aspiration was to always achieve $9 million on an annualized basis net of inflation. And what you can see translating through to our results is some of that coming through. So it's not just the efficiencies and cost outs, but it's also all the work we've put into price, innovation and mix, which combined come out at about $12 million of growth. And the good thing about that is it's offset an additional $6 million worth of inflation. So if we haven't done that, then the inflation would have otherwise taken over. So keep doing what we're doing to actually overtake the inflation is it the right way to go.

Yes. Now a lot of those cost-outs came online in October. So they're not full year, and we would expect to improve in our second half based on full year numbers. So pleasingly for me is that net position between efficiencies and cost outs and improved price and mix was about the number we were looking for to offset the anticipated $5 million to $6 million of inflation. And that's how it played out in the half. You then add the adverse FX and you can see the net position down the end there. But the bottom line is you've got a 17.2% number pre-FX, and that's largely where we expected it to be when we spoke at the AGM. If you think about that cost-out program and what is in place, the first thing I'd say is it's ongoing. And it's -- this is the bigger rounds that we did, but they largely were people cost out. So we've shedded in the corporate area, not in our manufacturing operational vineyard area. So that's quite important. We have seen some sea freight improvements, and we've been negotiating and working hard on efficiencies in this area. It's not just price, it's handling. So size of your boxes, size of your containers and a whole lot of things that we've been working on in the background there. We also do dry goods negotiation, domestic logistics negotiations, bottle negotiations. So we've been a fairly busy team on this front, as you would expect, we should be. And largely, as I said, we took people out through corporate cost reduction. That's all wrapped up in part of that $1.9 million, $2 million of underlying -- of cost expense outside of the underlying numbers. The operational footprint, we continue to consolidate further into our Buronga Hill Winery, we closed the Hunter Valley Winery. It was requiring a lot more capital for the future, and it made a really good choice of decision to consolidate into our world leading Buronga Hill Winery. So that's done. And we've also engaged a number of cost-out expert consultants who have helped us really get acceleration and traction on this with more savings to come moving forward.

And I think the message around that one, Craig, as well is we're not stopping at the $9 million. We're looking for every to go above and beyond the $9 million. And so getting the outside help to identify that and execute that is critical.

And we know that issues are going to come up. Right now, we've got Red Sea staring us down with shipping cost issues. So there's going to be continued things like that, that we've got to try to look to offset whilst our brands and margins grow. This page is really significant, I think, in terms of does the rubber hit the road from a cash flow perspective? And the $18 million down to $11 million that you can see there in the red banding, working capital is critical for us.

It is.

And this has really been important to show this improvement, which is not insignificant. We talked before about the grower payments where we have 70% of that falling into the first half. Hence, why your debt stays where it is. Historically, that's very much in line. And we would expect to have full cost out sitting in the second half, lower CapEx in H2 and that debt in a much more manageable position, which we'll come to.

Yes.

On that...

Here's one you prepared earlier, Craig. So yes, we are expecting net debt to reduce. And you can see that we've put some guidance out around our net debt. We're looking for our net debt to be in the range of $43 million to $50 million by the full year. And we're aspiring, as we've indicated before, to get that as close to the pre-capital buyback that we did at the back end of '21. So for us, getting this net debt down as much as possible is a key focus, right? And you do that through price, cost out, efficiencies. So that's why...

And then also, we've had a program over the last couple of years. If anything, that's not core asset then that would be sold. So that continues, but it's not the major factor. The major factor here is efficiency cost out and higher margins at the end of the day. We're comfortable with that debt level. We have plenty of headroom. So there is no issues on covenants or anything else in this story. We just feel it's very, very important in an inflationary environment to continue to drive debt down as far as we can. And that won't stop until inflation eases off a little bit. Rolling metrics impacted by inflationary costs in the second half of '23. As we know and we've talked to. I think that's the key message about this. We're very focused, still on our strat plan. Our brands and innovation is working, but we're reducing debt and taking cost out. And you can see that starting to come through.

And our banks are also supportive of us. So we've extended our facilities out to November '26, with no otherwise no impact on margin at all. And so thank you to our banking partners around that as they continue to support us as we've supported them.

And prudently in that period, we've also reduced the scale of our headroom borrowing.

Yes, that's correct.

Which again just gives the banks a lot more confidence in what we're doing. So debt in terms of headroom, in terms of covenants, in terms of banks is in a very good place for our business and with a very strong balance sheet as well. So if you look at the outlook, we remain profitable with a sustainable business model, but it's standing up against a very tough industry, otherwise known as significant headwinds, as you can see there. That's no secret. If you look at the market, where some assets have been on the market for sale. Other companies have mothballed and earnings performance has been challenging across the sector. We're pleased to be able to bring this result and show the improvement and deliver on what we said we would in the last update. So we're going to continue to invest in that strategic plan, as I talked about. Brands and Innovation is fundamental and our customers expect it. Rest of Asia and China is definitely future upside. How much of that hits in second half of this year? Not quite sure, but I'm very positive about it for '25. So from August next year, cost-out program will continue. We're looking for even more than what we've had before. And we continue to have a highly engaged workforce. That's the true strategic advantage of any business is your culture right, and are your people engaged, and that's what we are continuing to be focused on. And we're very proud of our people as well. We are working hard on some emerging businesses. Middle East and India, we have some partners identified. We have business cases we're putting together. We would expect that to also be beginning in '25, but very strong into the '26 season. So we can't just rest on our traditional U.K. Australian businesses. We've also got to find new geographies. So if you think about '25, Asia really starts to deliver. Our great Austflavor business starts to deliver a lot more in that space. And then we see Middle East and India coming on into '26. So you can see we're also lining up future strategic geographies that we may not have played in before with the great brands and innovation that we can bring to the market. And again, that's really sweat our assets, as you would understand. We're certainly not entering any of those new markets with bulk wine, we would only enter those markets with high-margin brands. So again, it's consistent with what we need to do strategically. The full year EBITDAS will be directionally aligned to '22 as per the way we talked about it at our AGM. The Red Sea, drone attacks, et cetera, we do see earnings risk of $2 million to $3 million, which we are trying to offset, but they're real, those risks. And I think everyone is aware of what's happening there. And our bank debt, as Adam says, we think it will be between that $43 million and $50 million in a comfortable number, and well inside any headroom that we have. So that, again, gets us down to one of the lowest levels of debts in the company's history, and that's how we like to present it. Okay. That's a run through, if you like, of the first half business results. We also announced over 6 months ago that we'd be doing a strategic review of the market, given all the challenges that are in the market and the sector. And so therefore, what was the state of play and how are we positioned when you compare our strategic plan to that market? That's the first point. What were the industry findings? We did a lot of benchmarking and identified initiatives. And I'd like to just give a progress update on those initiatives. We've worked with Evans & Partners on this. They're our strategic partner. And it's been a really, really interesting exercise. And I have to say a fast-moving sector from where -- when we started this to where we are today, a lot has happened in the sector with a lot of other announcements, sales and so it goes. All right. So we presented -- we alluded to this at our AGM. External shocks have created a very challenging operating environment for the Australian wine industry. Anyone in the sector understands and knows that. So whether it be trade tariffs with China, whether it be supply chain dislocation, with shipping inflation, floods. Supply glut is a really important one. When you've got too much wine in the industry, something has to give. And you're seeing some of that in the news that we've got in the industry now where the balance isn't quite right. We run our business in balance. It's very, very important, not easy to do. And when I say in balance, it's as simple as the forecast sales out matches the harvest from the prior year. It's the simplest way to talk about it. Yes, there's vintages and yes, there is a -- but that's the simplest way to think about it. And what are the consumption trends moving forward because you need to get your mix of grapes right. So for example, a few years ago, Pinot Grigio and [ Rose ] weren't selling half of what they sell today because consumers want light varieties, equally Heavy Shiraz's aren't as popular as they used to be. So it's a shifting market from a consumer perspective as well. And that's before I get to the Gen Zs and the millennials who want something completely new, again, hence, the kind of brand innovation that we're bringing. Okay. So a tough market, surplus, et cetera, and extreme inflation. All right. What does that mean? Well, how do we take active steps to think about this in our strategy? And is it working? Export market diversification is core, I talked about new markets when we just spoke then. Product innovation. I won't go through that again. Branded growth, cost efficiencies, asset base monetization. So in other words, anything that's a lazy asset, translate it into cash and reduce debt. And there you see focus on debt reduction. So on the right, a core to our strat plan. On the left is market conditions. So any responsible company has got to be working down the right-hand side, and that's what we're doing, no matter what happens, okay? So that's, if you like, where do we stand today versus those market issues? And do those things on the right hold up no matter what? Yes, they do. They're fundamental, good or bad in markets. So we're actually confident in terms of as these issues on the left ease, we're very well placed strategically to grow and create shareholder value and return. So a strategic review findings. It's challenged, which we've said a number of times. Surplus processing infrastructure, too much capacity, large fixed cost base and yet low utilization is what the industry is characterized. It's very much characterized by a past history as opposed to a future outlook, okay? So there needs to be some change there. Capital markets, as we know, can be quite brutal in driving that change, and we've seen some of that with recent announcements. So what happens in that kind of market when you've got too much capacity, surplus of wine and low utilization? You get the surplus that I talked about, but you get focus on market share, volume, in other words, and it's not sustainable, and you get a decline in the value segment. So what happens is your industry can become quite a discounted industry versus what its true value should be [indiscernible]. Okay. So there's a real opportunity out of those 2 headings, if you like, to create, we think, a much more sustainable environment. And when you have challenges and issues, there comes opportunities if you can do it in the right way. And that's how we like to look at it as our company. What's really fundamental to success? Scale and cost structure. Efficient scale drives out surplus cost, if you like, it makes you a much better operator, and that's obvious. So fixed costs work much better for you, things become variably costed and your margins go up as you get the right scale.

Manufacturing efficiency vastly.