Australian Vintage Ltd (AVG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Australian Vintage Limited FY '24 Results. [Operator Instructions] I would now like to hand the conference over to Mr. James Williamson, Incoming Interim Chair.

Good afternoon, everyone, and welcome to the financial year 2024 Australian Vintage final results. I thought I'd start by introducing who I am and giving you some context. I'm Co-Founder of a private investment company called Wentworth Williamson Management. We're a value-driven investment house. And we do care about growth, but we also pay a lot of attention to balance sheets and free cash flow. And I think that's quite important to put that in context given what you will see in this presentation today. In recent times, we've watched the share price collapsed and we could have walked away or increased our skin in the game and play a more active role. So clearly, we adopted to do the latter. We made that decision for 3 main reasons. The first one, this business is trading at a fraction of its net assets. We believe this business can grow and we also believe this business can generate really good cash flow. I have to say, post a deeper engagement with the Australian Vintage people because I was sitting on the other side of the fence, mainly just talking to Adam, Adam is here with me as with some other senior management in the team. I didn't often get to speak to the deeper level, and I've been very pleasantly surprised on the upside. The company has first-class people and the company culture is very healthy. I would say that turnarounds are hard when you need to change the senior management and culture, and this is not the case with this business today. So it's unusual to start with the people first up in the presentation, but I think in this case, I'd like to introduce these people to you. Firstly, Adam. Adam, I used to see you every 6 months. I've got to know you a lot better the last several weeks. I think you're fantastic. You're really on top of your numbers, and I appreciate everything you've done. You're the wicket keeper of this business, but you're the Ian Healy of the business. You are always very vocal and turning everybody on. So thank you. Jeff Howlett, who is here today. Jeff, when I met you, I could immediately see that deep knowledge, that 20 years experience, many years with the French Pernod Ricard. Thank you very much for what you've done for this company and for being here. Julian is not here, he is in the U.K. Also 20 years experience, incredibly safe pair of hands. I have to say, if you've got an offshore business, different time zone, you really got to trust who is running that business. And we are extremely lucky to have Julian in our business. Tom. Sitting next to me here, Tom. You're going to hear from Tom too. Tom is Mr. Innovation, he is fabulous. I had the first meeting with Tom and I was like, wow, you are lucky. And so we will hear more about Tom. And Thomas, our Operations Director. I almost, when I was speaking to Tom, I was imagining one of those old ships and there's a big engine room and somebody is working furiously in the engine room full of grease in the background and is such a crucial role and said get more out of this ship, this is Thomas. So we're very lucky to have Thomas. 25-plus years experience in the one industry. So he knows this business backwards. So that's it for a start. I'm going to hand over to Adam. Thank you.

Thank you, James. And it's not often you talk to results presentation when you get such a glowing report for the management team right from the get-go. So on behalf of the team, thank you, James. And just for everybody's knowledge out there, James has joined us as Interim Chair and Interim CEO as of today. So looking forward to working with James more closely as we drive this business through and to the growth project goals that we now are going to achieve. So it's important with all the attention that has been on Australian Vintage over the last 6 weeks, in particular, that we remind people who we are. So Australian Vintage, we're a beverage company, in particular, alcohol beverage company, a world-class consumer-orientated business. We have 95% of our volumes in retailers across the globe with over 2/3 of those sales in export-related markets. So we are not reliant on the domestic market only. We have a lot of export focus through this retail focus and with retail focus is a consumer-led business. And one of our strengths, which we'll talk about a bit later, and Tom will talk to is innovation. It's the innovation and the consumer insights that we utilize, which is allowing us to lead the way in a space that you've seen is impacted by normal industry declines. So we are the leaders in no-and-low. We started the journey with our McGuigan Zero product way back when in FY '20 when we first launched it and we've utilized that strength time and time again. And Jeff will talk a little bit more about how that's worked for us in the last financial year in particular. We rely on relationships. We believe in the supply chain. We know we're not doing this alone. It's with our employees, it's our suppliers, it's our growers and our customers, jointly we're all succeeding in this together. And that is our point of difference and one that we want to keep emphasizing going forward, because as we grow, we want to bring our supply chain with us through the journey. We're really pleased to be able to take our ESG credentials and aspirations that we talked about at the end of last year and reinforce that with B-Corp certification. We are industry leading in this space. B-Corp is really important to us because it validates everything we believe in environment, social and governance, the ESG that, that is. It's a point of difference. And again, a point of difference that we can potentially leverage to grow our company going forward. We have modern production facilities. We're one of the few facilities in Australia, being the third largest, that has a commercial winery, a premium winery and an ingredients extraction facility, all on the same site. It is useful, it is crucial. And as we take ourselves forward, it gives us the right to be able to variabilize our cost base more so than some of our competitors would be able to. We can absorb. We've got capacity. We've spoken about that before. We've got capacity and we can absorb any planned growth that we choose with our plans going forward. And I won't talk any more about the experience of the stable senior management team because it looks a bit self-praising. So I'll leave that to James as he quite clearly articulated it right at the get-go. So that's who we are. We've got the capability, we've got the know-how and we're going to take this forward as we grow the business. So let's talk about the last year, the highlights. So there's a few key points to this. And you would have seen in the press release earlier this week that we gave a bit of an indication to this. We have improved our earnings despite the challenging environment. The wine industry continues to be challenged. The global macro environment seems to be challenged with interest rates and inflation. But despite all that, we have achieved a AUD 261 million revenue number, which is a 1% growth over last year. And we've grown our underlying earnings, both our EBITDAS at 12% and our EBITS of 25%. That is exceptional in an environment where most people have declined, we have grown. So credit to the team that's been able to do that. We have continued to expand our footprint across our emerging markets, the Asia and the Americas. In particular, Americas has grown by 28% over the prior year. These markets are useful and crucial as part of our growth plans, and you'll hear more about that from Tom in the future, but also a bit from Jeff as to where we've been. We continue to be the global leaders in the no-and-low wine category. It was only a year ago that we were talking to you about taking advantage of the ABV tax reform in the U.K., where we have and we continue to do so. And through that, and in Australia, we have grown this category by 20% in revenue over the prior year. This is an important category for us. It comes with higher margin. We will continue to drive higher margin opportunities through our business. We've had a refreshed Board. You've seen a lot of that over the last 6 weeks, in particular, and you would have seen more of that in the press release today. We have a whole new Board. And with that Board comes a different set of experience, whether it be global beverages, whether it be logistics, whether it be financial markets. We believe that having these experiences in lockstep with the management team will help us grow the company to where we believe we can take it. So welcome to the new Board through this, and James you in particular. We've secured liquidity. So we've got a lot of increase in standard bank facilities that have come through. We've undertaken and finalized the capital raise. And through that, we have got the ability to be able to wear any inflation pressures that come through, but actually utilize this to our own means to invest in the markets where we're going to grow this plan going forward. We've got a revised strategy, and James will talk a little bit about that later. So I won't touch it on now. But we are driving free cash flow. That is what we're after. And ultimately, ROCE over the next few years. And through that, we're going to also be maximizing our production facilities. We're going to utilize these. We've got capacity. I've spoken about that before. We've got planned growth. We are on the table with industry and partnership opportunities. We've said that time and time again. We believe there's a lot of those opportunities still to play out. And as I mentioned before, we do have a global best practice platform. It is industry-leading. We are B-Corp certified. We are doing things that others aren't able to at the moment. And we will drive that forward as part of that point of difference. So with that in mind, let's move to the actual financial figures. I've spoken about some of these. Net debt, a lot of people focus on net debt. We're sitting at AUD 56 million. So it's better than where we've put our guidance out previously, but part of that is because we received the capital funds coming through the capital raise. Our NTA is sitting at AUD 0.60 a share. We're trading at AUD 0.16 a share today. There's a lot of upside here. And we're looking forward to our new investment community that's coming through to help us drive our growth as we achieve these outcomes. Our gearing is solid. Our balance sheet is solid. We want to continue to solidify that further over the coming years. Jeff, can I hand over to you?

Yes. Thank you, Adam. Despite headline growth of just 1% over the last 5 years, our focus on our branded business continues to pay dividends where we're growing at 4% CAGR. Most pleasingly, we're seeing accelerated growth in our premium tiers from Tempus, Nepenthe and the Barossa Valley Wine Company being very dynamic in that time period. And even our global branded sales is still showing growth of 1% over that time period. Innovation has been a key driver of this growth in our branded business. It now represents 1/4 of our revenue and over 1/3 of our margin in that same time period. And it's really underpinned by major consumer insights. We are a consumer-driven business and we're using key global insights to drive our choices and our investment decisions around innovation in this space. Adam has touched on the fact that we are the leaders in the no-and-low wine category, which is a growing category within the wine space. It's grown 20% in the last year and represents a bit over 10% of our overall group sales now. So it's a material part of our business and we'll continue to drive that in the future, and Tom will come to that as we move forward.

I think just to add just a little bit of color, Tom here. When you think about the growth through innovation, a lot of companies talk about that. I think it's about, again, how we leverage our know-how. So you'll see on this page and throughout the deck some really interesting new concepts that are tapping either to new consumer occasions, new growth relays or even talking to our core, our heartland. There's lots of movements that are happening in the wine industry. There are still some very strong growth relays. So when you look at refresh and recruit, we're now in RTD. We're talking to young adults in a way that they've never been spoken to before from a wine company. We've got premiumization in McGuigan with McGuigan Gold that's been phenomenally successful across here in the U.K. Not Guilty was launched last year, a new no-and-low or 0 alcohol proposition is now #6 in the U.K. market, doing over GBP 2 million scanned. McGuigan Mid, leveraging the lower the ABV tax, but also the consumer demand for lighter wines. So we've got a very diverse portfolio both in our pillar brands and new propositions and we're really only getting started. So I'll give more in later in the deck.

So right on strategy. Well, first of all, let me tell you what's not going to change. In recent years, I've been very impressed the way this business has invested in its innovation, its brand mix, geographies. And I can tell you that that's not going to change at all. We're going to keep pushing and we're going to grow our top-line. That's our target. What is going to change is going to sweat our assets. There's cash sitting there and we're going to go reach for that cash. And there's a bit of a timing, there's a bit of sequencing to this, which Adam can talk to you later, but we can grow. We've got a healthy business and we're going to generate cash flow. And in this environment, if you can do that, you're doing exceptionally well and we can do it. In terms of industry consolidation, Adam spoke about it. Yes, there are opportunities out there and we're always open for talks. Adam?

No.

Over to me. So as CMO for the group, I was really tasked with how do I leverage the assets we have, the know-how and expand out both core business and new. The critical point to make I think to all investors is, from my assessment, Australian Vintage has a phenomenal growth with it relayed just in pillar brands alone. When you look at what McGuigan has achieved, it's one of the few propositions globally that has commanded a kind of multi-million case opportunity globally. So we're looking to consolidate that. There's still plenty of growth in our global market, the U.K. McGuigan Black Label is up 24% over the last 52 weeks at scan. That's a phenomenal outcome for a brand that is still a hallmark of many homes across the U.K. So we're not moving away from our pillars, in fact, we're leaning in. And as Jeff articulated that the company over many years has been consolidating those, has been looking at better structures and deals, leveraging more margin, growing more opportunities. So we're continuing to do that. Equally, Tempus, which has been in the portfolio for a while, is really appealing to these new consumer groups, these young adults that are looking for lighter, brighter opportunities. We have Tempus One, our spritzer portfolio partnering with Endeavour Group, with Coles, with our independent customers. We're getting some traction in market and it's going global. So everything we do, both leverages domestic and global opportunities. It's never just a single market proposition. So our pillar brands are critical to our growth. Our leadership in mid lighter wines, so lower ABV not only leverages tax benefits in markets like the U.K., but it's playing into consumer trends. People are looking for lighter alternatives. They want more length in their occasions. And so how can we bring that through our know-how and our assets. We are strategically placed to leverage this. If you look at the second pillar, a lot of CMOs are accused of just focusing on the shining new things. We've got to balance it. We've got to look at how we take our portfolio beyond wine into beverages, into occasions where wine would not traditionally be found. You'll see here our Lemsecco Spritz, a mixture of local lemons and Prosecco. A phenomenal sessionable beverage that historically the company probably couldn't explore. But now our frontiers are kind of in front of us. We have this breadth to be able to explore new things, new occasions. I'm very excited what these propositions can do. And you will have seen, we're looking at AI. We're leveraging Mid. We're looking at functional beverages. We're looking at other occasions. So you'll start to see a really strong innovation pipeline, all aligned with consumer trends and markets and also align with our customers. We've got to be servicing what our global retailers are telling us through their data sets is emerging. So we've got to position ourselves both as a partner to them and as a listener to our consumers so that we're ticking both boxes to get it to market. And I'm really comforted with what we've got coming through and excited to share that. The third pillar is accelerating international expansion. Again, most companies will say that this is what they're looking to do. But having been in the business for 18 months now, I have personally sat with every major one buyer in all of our markets, excluding China. So we are a hands-on leadership team. I know we have growth in Canada and we're seeing roads being made -- inroads being made there. We're expanding our footprint within that market. We've got a phenomenal partner and we've got an innovation pipeline to support. Subsequently, U.K. market has incredible headroom both in the mid and low categories, in new drinks and occasions. We under-index in some key customers that we're looking to leverage. So I'm really comfortable that even in our core international markets, we can grow, but then how do we expand this know-how into more traditional markets like the Asian markets in which we operate today and the new frontiers that we can access with our core portfolio. So hopefully, you get a sense that we have the breadth, we have the know-how, we have the capability and now it's just about how we execute it. With the support of the Board and the broader company, I'm really kind of very confident that we can achieve what we're planning to do.

Thank you very much for that, Tom. Tom has done a very good job of articulating where we're going to go from a top-line perspective. Unlike any strategy and a strategy where we're focused on free cash flow, we need to couple that with driving efficiencies out of our operating business at the same time. So you get the double hit. So we've got a single laser-like focused as what James indicated before around free cash flow. So we believe that we're targeting a free cash flow of plus AUD 20 million by FY '27. With that will come a ROCE of 8%. How do we get there? So Tom has spoken about the top-line growth. But in conjunction with that, we're looking at multiple parts of our operational footprint, we're looking at our sourcing strategy. And you've seen some of that with an early termination of one of our leases at Balranald that we've spoken about in the media previously. We're looking at others in the same way. We're looking at how do we utilize our operational facilities far more efficiently and effectively than where they are now to bring the overall cost down. We're looking at, as James alluded to, how do we sweat our assets, how do we sweat that inventory, how do we sweat that inventory to actually grow in new markets and new opportunities where we're not currently competing at the moment? How do we do this effectively such that we drive a free cash flow position next year. We drive a free cash flow positive position in year 2, and we'd get to that target that we've released to the market. Now you may be wondering, well, hang on, we're negative free cash flow today, how do we get to a free cash flow neutral position next year? There are a number of strategies we've put in place in FY '24 to be able to achieve that. And one of those is a cost-out strategy. So we leveraged AUD 9 million in cost-out in FY '24. That will translate on an annualized basis through to FY '25. We have terminated Balranald. However, in line with industry norms, our great cash payments indicate that 70% of those have to flow through in the following year. So from vintage 24, we've paid 30% of those grape costs. We've got 70% to go. But as we reduce that grape supply and utilize our facilities more fully, that will actually drive the cash flow out. And then on top of that, the inventory write-downs that we've taken in order to access those markets will sweat and sweat harder our cash flow as you come through. So we won't give it all away because there's a few teasers to come, but there are a number of strategies that we've implemented and a number to come that will release to the market in due course as we execute those. That will actually give you the confidence to be able to achieve these targeted financials.

Yes. Just for FY '25 to FY '26, just in very layman terms, you are simply going to be taking in less grapes in the next vantage. And so you've paid -- in the previous vintage, you have to pay for that previous strategy in FY '25, that's why more or less you're flat. And that's -- if we do our job well on our turnover, you'll actually have a release on your cash payments in the second year and start to spit out cash.

A much more simple way of talking about it, James.

All right, summary. So we are into great pains in the beginning to go through that. This is a very experienced management team with a track record. So hopefully, that's clear. You've had -- maybe you couldn't see a particular -- you have had a little bit of a taste for the strength of this business. It also has a refreshed Board and fresh thinking. Focus on revenue, gross margin growth, innovation, geography, brand mix, all extremely important, all are in the agenda and we will invest in our business. Reducing -- okay, large asset backing. I spoke about this as sweating our assets, which clearly we need to do, and reducing our fixed cost base. This cost base has been very fixed, long leases, long grape supply agreements. And so we are looking to change that to more of a variable structure and we're targeting that free cash flow growth. This business can generate that AUD 20 million of free cash flow, can generate a return on capital employed of about 8%. And so we are in the methodical steps to get there. Industry consolidation, it's clear it's going to continue, scale economies matter. The process has started. We've seen it elsewhere, it's going to continue, we'll be ready. But in the meantime, our business is strong and it's going to get stronger. So thank you very much for your time. It's Friday afternoon. Let's hear if you got some questions for us.

[Operator Instructions] Your first question comes from Andrew Johnston with MST Access.

So listen, congratulations on a result that you delivered your recent guidance, a very tough year from a business perspective. I don't think I've seen a Board get refreshed quite that quickly. So on the back of that, I'd just like to talk about the CEO role. Obviously, disturbing to see Peter leaving and for the reasons that he's had to, but hopefully, you can focus on that and get well. So with the CEO role, I assume you were well underway in looking for a replacement for that role. Do you need to appoint a Chair first? How are you going with that process? James, that's probably a question for you.

Look, it's true. My mentor, Jeff Levy, early on he always said to me the first and the most important thing of a Board is to appoint a well-credentialed and appropriate CEO. That's priority #1. So rest assured, it's priority #1. The process is well underway.

Okay, great. So if I can come back to the cost-out issue. So for -- to get from FY '24, and I think excluding the cap raise and the asset sale, it was about AUD 7 million negative. And you're talking about getting a turnaround in FY '25 to breakeven. So if I understand it correctly, you see most of that coming from inventory change in working capital. Is there any more cost to come out from -- on an overhead basis? And then thirdly, some of the other initiatives that you talked about, are they going to contribute to cash as well? I mean, particularly basically getting sale of your, I suppose, commercial product into other markets?

Andrew, Adam here. I'll take this question, if that's okay. So thank you for the question. Yes, I did touch on how we're going to get there. Absolutely, there were a number of costs that we incurred in FY '24 that aren't going to be repeated, whether they'd be redundancies, whether they'd be the strategic review costs that we've undertaken. So firstly, there were some costs in there that just aren't repeated. Secondly, yes, we undertook a cost-out program, which leveraged AUD 9 million in '24, but we're expecting that to annualize out to far more than that, the cash flow impacting and improving in FY '25. The third thing is the sourcing, which I touched on and James also more simply touched on. We are reducing our supply input. We have inventory available. We're going to sweat that inventory. So from a working capital perspective, that will translate and translate through. I guess, in regard to are we going to continue to look at cost-out? Absolutely, we are. I mean, there is still opportunity in our business and in our supply chain. So we're not done yet. We've hit a whole lot last year that we've spoken about, but there's a whole lot more to come. And there's a whole lot more manufacturing efficiency, which I alluded to as well, where we're going to look at opportunities to actually reduce the per unit cost in some of our products, which leverage margin. Then over and above that, we've got the opportunities with new markets that we spoke about as well. So there's obviously no one silver bullet with this. We are looking throughout the entire portfolio. And when you couple that with the top-line growth, that Tom alluded to before, with that with the operational footprint, we've got a really good opportunity to be able to take this to better than outcomes that we're talking about here, but it's targeted at the moment.