Breaking the lease on one of the country’s largest vineyards has pushed Australian Vintage Ltd into the red, posting a statutory loss of nearly $2 million for 2016.
CEO Neil McGuigan said terminating the “onerous” lease on the 900ha Del Rios vineyard at Swan Hill in Victoria cost the business $9.2 million after tax, with the surprise Brexit vote also resulting in a $1.1 million after tax hit to the bottom line.
Net profit at Australian Vintage Ltd after tax and before one off items was $7.2 million compared to $7.1 million in 2015.
Chairman Richard Davis said the “onerous nature of most of our grape contracts” had been a challenge for the business for last decade. The company expects to save $9 million to $10 million a year after breaking the Del Rios vineyard lease, which was due to run until 2023, and other contracts expired.
Neil McGuigan appears to be taking the company on a similar path to Treasury Wine Estates as he focuses on transforming the business, which owns the McGuigans, Tempus Two, Nepenthe and Miranda brands, from a bulk wine producer to a quality branded bottled wine business. A fortnight ago, Treasury anounced doubled its profit last financial year after a series of massive write downs in recent years.
Revenue for Australian Vintage was up 5.1% to $242.68 million. Sales of the premium McGuigan, Tempus Two and Nepenthe brands were up 20% for the year. At the same time revenue from the bulk and processing business in Australia and overseas fell by $14 million. Bulk wine sales to UK/Europe dropped by $6.8 million.
The company said the year was shaping up to deliver a 16% growth in profit at $8.3 million, before the unrealised foreign currency adjustment due to Brexit.
Neil McGuigan said overall it was “quite a pleasing result” for the business. The company declared a 1.5 cent fully franked dividend declared.
“Over the last five years sales of AVL’s three key brands, McGuigan, Tempus Two and Nepenthe have almost doubled, as we continue to transition the business from a bulk wine producer to a quality branded bottled wine business,” he said.
The loss showed the company was “still in transition”.
“We told people needed to be patient with us,” said McGuigan. “This was always going to take time, but cash flow is good and going in right direction.”
Cash flow from operating activities, prior to termination payment on exit of vineyard lease, was $11.4 million compared to $2.1 million
McGuigan acknowledged that Treasury had done an outstanding job in its turnaround and believed AVL was on the same path.
“Congrats to them,” he said. “We don’t have the same power as their brands. Their history dates from 1884, ours from 1992.
“But it’s brand equity in the long term that is the profitable part of the business”.
Part of McGuigan’s drive for premiumisation of his eponymous brand was the release of The Philosophy, a $150 cabernet-shiraz blend using fruit from the Eden and Clare valleys.
Central to his strategy is creating wines that “over-deliver” on their price point and with the vineyards AVL planted in the ’90s reaching maturity now “the best wines are yet to come”.
After doubling sales in the three leading brands in five years, he’s hoping to repeat that growth in the next three to five years believing that, despite the Brexit hit, the UK has a long way to go.
“Brexit was a road bump, it’s not a crash,” said McGuigan. “Our commitment to the region remains and we think the brand has a long way to go in the UK.”
The company says a 17% shift in the GBP post-Brexit put pressure on our UK margins, adding that assuming no price adjustment, for the next 12 months a 1 pence movement in the GBP impacts net profit after tax by approximately $300,000.
AVL expects the UK market “will remain fragile” and doesn’t expect any change in conditions in the next 12 months.
The UK is AVL’s main overseas market, but over the last five years branded sales into Asia have grown by 89% and by 128% into Canada. Asia was up 22% for the year.
Australasia/North America packaged sales were up 8% on last year, with an increase in bottled sales of 17% offset by a 20% drop in cask sales.
Australia delivered the smallest gain at just 4%, followed by New Zealand at 15% and North America at 23%.
The contribution from the Australasia/North America packaged segment was down by $1 million due to a $1.9 million reduction in Australian cask sales.
Improving distribution is important, while McGuigan sees increasing the on premise presence as vital.
“Where we’re distributed we sell well,” he said. “But on premise is so important. It’s only modest in Australia and non-existent in UK.”
Further potential also exists in China, where the company has a distribution deal with the nation’s largest food processing, manufacturer and trader, COFCO.
“China’s a slow burn,” he said. “The challenge is getting a wine drinking culture into the mainstream, and that’s going to take a little longer than people think but it will come.”
But in the meantime McGuigan expects the US, where AVL is about to sign a distribution deal, to be a great market for, of all things, sauvignon blanc, and he believes Australia will have the advantage over its Kiwi rivals.
“New Zealand’s where chardonnay was in late ’80s, early ’90s. They’re at a different facet of their growth and evolution,” he said.
“There’s only finite amount of sauvignon blanc and world is just starting to get on it. It hasn’t fired in the US and it will.”
One challenge the entire industry faces, along with the Turnbull government, is the Wine Equalisation Tax (WET) rebate, which has distorted the industry, and seen the rise of “virtual” winemakers geared around the inducements provided by the rebate.
AVL says the cask market is currently being supported by an unsustainable low price, which in part is being supported through the use of the WET rebate.
Treasurer Scott Morrison announced changed in the 206 Budget, including reducing the rebate cap from $500,000 to $350,000 and only allowing producers with a financial interest in a winery can claim the rebate.
Labor claims the revenue grab by the government, while the financial interest aspect will hit grape growers who sell wine under their own label produced by a contracted winery.
Neil McGuigan says AVL, which crushes 10% of Australia’s grape harvest, support the boutique industry and the cap is up for debate.
“However, the definition of a producer is very important and must be clarified by a regulated industry body to avoid misappropriation of the WET rebate,” he said.
“The most important issue facing the Australian wine industry is the WET rebate on bulk wine, and this must be terminated immediately.
“The reason we are saying that is because the arguable rorting occurring in the wine industry is being reflected in unsustainable bulk wine prices that are appearing in the domestic and international market. This needs to be fixed now, for the good of the whole Australian wine industry.”