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Edited Transcript of AVG.AX earnings conference call or presentation 29-Aug-19 1:30am GMT

Full Year 2019 Australian Vintage Ltd Earnings Call

PARKSIDE Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Australian Vintage Ltd earnings conference call or presentation Thursday, August 29, 2019 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael H. Noack

Australian Vintage Ltd - CFO & Company Secretary

* Neil A. McGuigan

Australian Vintage Ltd - CEO & Executive Director

* Rosie Davenport

Australian Vintage Ltd - Communications & PR Manager

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Conference Call Participants

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* Jamie Young

Castle Point Funds Management Ltd. - Co-Founder

* Jason Palmer

Taylor Collison Limited, Research Division - Equities Analyst

* Kurt Gelsomino

Morgans Financial Limited, Research Division - Associate Analyst

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Presentation

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [1]

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Good morning, and welcome to Australian Vintage's Full Year Results Conference Session. My name is Rosie Davenport, I look after the Communications and PR. I'm here to introduce the session, which will be led by our CEO, Neil McGuigan; and our CFO, Mike Noack.

Before I hand over to Neil, can I just ask if you haven't already downloaded today's presentation, please do so from our website, which is australianvintage.com.au. Following the presentation, there will be time for individual questions, with the session due to conclude around noon.

I'll now pass over to Neil McGuigan.

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [2]

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Welcome to the teleconference. Really appreciate your attendance today and your interest. Just as a very quick summary before I throw to Michael. We've had a pretty good result, as you've seen. Our profit's gone from $7.7 million last year to $8.1 million, which is quite pleasing. And that's after a SGARA hit of about $3.5 million compared to last year. It would have been a fantastic result if we'd had a decent reasonable -- a reasonable vintage. But we are in agriculture, and we do have to take these agricultural hits from time to time.

But fundamentally, if you look at the business, if you drill down to the business, we are in very good shape. We're growing our business both domestically and around the globe, and our branded sales are going particularly well. So we do have a plan. We're executing that plan, and we're very proud of where we are, and we're excited about where we're going in the future.

So that's a little bit of a summary. And so I'm quite happy about where we are. So I'd just like to throw now to Michael. And Mike Noack, our CFO, can take us through the slides.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [3]

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Thanks, Neil, and hello, everyone. What I'm going to do is, just take you through the slides that we put onto the [IDEX] site yesterday.

Start on Slide 3. And I'm not going to read the whole lot, I'm just going to highlight a few parts of each slide.

(technical difficulty)

Slide 3. Sorry, is there someone talking on the side?

(technical difficulty)

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [4]

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Excuse me. We're getting a bit of a crossed line here. Someone's talking on the line. Would they mind just -- just listening to Mike at the moment. Thank you. We'll take some questions when Mike is finished. Thank you. [I do think it's a clearer] thank you.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [5]

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Look, our EBIT went up by 30% to $21.7 million. And as Neil mentioned earlier, profit after tax was at $8.1 million. Our cash flow from operating activities reached $23.6 million, that even after we spent about $9.4 million on buying bulk wine. Our net debt is in a good position, it decreased to $72.4 million, even though allowing for about $16.2 million of capital spend. And the other thing that we announced yesterday is a $0.02 per share fully franked dividend, [sort of] like is about a 30% increase on last year, and it shows our confidence we have in our business going forward.

One of the biggest items that's impacted our results is our SGARA, and that's simply because our tonnes were down by about 8,000 from last year and 12,600 tonnes on what we expected. And look, and the reason why we expected the higher tonnage was that we replanted 5 sections of a couple of our vineyards. So we were expecting our tonnage to be up a lot compared to last year, but unfortunately the weather conditions have [forced volume less].

Moving on to Slide 4. And the next few slides will cover a bit about what's happening in the industry. The first part on Page 4 talks about Australian wine exports, which increased by 4.4% to $2.9 million (sic) [billion], and volume decreased by 6%. Now this volume decrease was driven by a decrease of 7% in shipments below an average value of $2.50. And the average value of exports grew by 10% to $3.58. And this increase in average value was partially due to the mix of wine sold overseas, so less cheaper wine, more expensive wine.

Okay, reasons for the decline in the volume of exports was due to the fact that we've had smaller vintages in the last few years, resulting in less supply for overseas sales. And to be honest, the industry seems to be pretty tight on supply, and this is reflected in the price of Australian bulk wine, which is still relatively high compared to where it was a few years ago.

International supply pressures have eased. [You know] countries such as France, Italy and Spain had big vintages in 2018. Those 3 countries were up effectively 4.9 million tonnes on the previous year, more than 2x what we crush every year.

Moving now to Slide 5. And this just delves slightly deeper into our export sales. Sales to China continue to lead our growth. Their sales were $1.1 billion, and they now represent about 38% of all export sales out of this wine industry. And the other key export markets, U.K. export sales decreased by 3%. And as you would have seen, we've actually increased our sales by 15%. U.S. export sales increased slightly, but I must say that the U.S. market is a very challenging market for Australian wine. New Zealand sales went up by 9%, and their own [year over year] sales were up 42%, showing a positive trend against what market's been doing.

Moving on to the next slide. Wine Australia released a estimated crush of 1.73 million tonnes, a decrease of 3% on last year. And whilst this is an estimate, the actual number will come out by probably just prior to next year's vintage, and these numbers will be provided by the Department of Agriculture.

Neil, do you want to say anything about the vintage?

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [6]

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Yes. Well, I think you were made aware at the AGM that we were hit with an early frost which affected us. So we were already on the back foot. And then, of course, the extreme heat that occurred in Australia during January, February also affected not just the wine industry, but other agricultural sectors as well. And it looked as though Sunraysia got the worst [tickle up] out of all of it [but we see it] Riverland was hit, but Sunraysia also got [tickled up]. [Clare] was severely hit along with Barossa. So it wasn't across all regions, and it was also a bit hit and miss where people are up to, where they're up to with their irrigation process as well. So it was a difficult year.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [7]

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Thanks, Neil. The other thing I want to point out on this slide is that the grape prices have increased across all regions, with an average increase for all the varieties by about 9%. Interesting to note that, for example, Shiraz in the Riverlands went up by 27% to $615 a tonne. That's an increase of about $130 a tonne on the previous year's vintage or about $0.17 per liter, which then equates to about $0.13 per bottle. But whilst some of you would be aware that we have about 60% to 70% of our grapes are our owned and leased vineyards, which is in theory not subject to market conditions, what we have to do under SGARA is put market price. So from a cash flow point of view, we are at an advantage in a climate where grape prices are going up. But because of SGARA, we have to put the market price against those grapes, which then ends up in stock and puts a higher price on the stock.

Moving on to Page 7, and we start talking about our own business here. In terms of branded sales, our 3 key brands, McGuigan, Tempus Two and Nepenthe increased by 10%, where these 3 products now represent about 60% of all our sales. The balance of 40% is made up of cask wine, Miranda, we do some [musk flavor] sales of concentrate and some bulk.

In the U.K. market, our McGuigan brand has grown by 13% and is now the third largest global brand in that market. Within that U.K./Europe market, the Black Label and the Reserve range, which are higher priced range, have grown by 31%. So what that shows is that we've improved our mix and now represents 40% of all our sales to the U.K.

We're also seeing a bit of growth in Tempus Two, which here in Australia 5 years ago was about 10% of our total sales, and it is now 18%. At the same time, while we're growing our Tempus Two brand -- the higher-priced Tempus Two brand, sales of our lower-margin products such as Miranda have declined during the year.

We make a (inaudible) our Barossa Valley Wine Company brand as well. Whilst it's off a low base, we've had a significant increase in the last 12 months on that brand. And that's [basically going to] become our fourth pillar of our key brands. So we're pushing that hard. And Neil will talk more about that particular brand later on.

Moving on to Slide 8. Now we are just talking about the Australasia/North America packaged segment of our business. And within that segment, our sales went up 8%. And even our cask sales improved by 1% during -- compared to a long-term trend of declining sales.

Now when you look at the Australian division within that segment, we experienced both an increase in sales and a shift in mix to higher-priced premium products. McGuigan went up 8% in this division and Tempus Two, Nepenthe went up 6%. 5 years ago, Tempus Two represent 10% of our sales, and now it's 18%. New Zealand was a bit of a star performer. That particular division went up by 42% due mainly to the outstanding performance of the McGuigan Private Bin range, which grew 45%.

Sales to Asia, Asia covers such countries -- countries such as Japan and Malaysia, and obviously, China, bulk sales have grown by 24%. McGuigan and Tempus Two have both performed well in that market. And this performance, or our performance, is against a 7% increase for the entire Australia wine industry for sales into Asia. So it was a good performance.

North America was probably a little bit disappointing. But you've got to keep in mind that over the last 2 years, sales to North America have grown by 19%. So we had a big sales period in the first -- a year ago and it flattened off a bit, but still over 2 years, it's been a pretty good result.

Palm Bay remained small or little volume growth into the U.S. That market is a challenging market for us and for every other Australian wine trying to be sold into the U.S.

Moving on to Slide 9, the U.K./Europe segment. This was our star performer during the year. U.K. sales were up 15%, and that was driven by McGuigan brand and another brand we've got in that market called Shy Pig. EBIT increased by 94%, helped by a bit of exchange rate benefits.

In Ireland, and you can see on the table below, and this is the first time we've split up the U.K./Europe segment. You can see that in Ireland, our EBIT margin is the best. It's actually the best in the whole company with about 24% EBIT against sales, and we continue to grow sales in that pretty profitable market, and we remain the second largest global brand in Ireland.

Moving on to Slide 10, where we talk about our other segments. You'll see there that our Cellar Door reported a fairly significant decline in contribution, and that was mainly due to decreased visitor numbers to the Hunter Valley. I know Neil and the people down in the Hunter are working hard and looking at various initiatives to improve this. In Australasia and North America with bulk and processing, we improved that by $1.8 million, and this is as a result of what we told you guys 12 months ago, because we were going to remove a significant portion of our loss-making bulk wine sales, which we've done.

Vineyard Segment declined by $6.9 million. I talked about that with SGARA as a result of the poor tonnes -- lower tonnes at -- we got from our owned and leased vineyard.

In terms of our financial position, obviously, interest costs reduced, margins were down a bit and also our borrowings were down. Operating cash flow was good, even allowing for $9.4 million of bulk wine that we purchased. And recently, we extended the bank facility to September 2020 -- sorry, 2022. And we'd expect that to further decline in the next 12 months.

Moving on to Slide 11. We've given you guys a bit of an idea of what we've been spending on here and how we're going with it. So we're going to be spending about $47.6 million in the 3 years to 2020. We've put some significant investment into a packaging line and the premium winery at Buronga. And we've also developed some of the vacant land we have at some of our vineyards. Now when you look at the new packaging line, which cost us $11 million, the return on that is a bit lower than expected at the moment, we've had a few teething problem. But we're pretty confident that over time, and with increased throughput, we will get our target of 12%. Our current return is around 6%, which is above our cost of funding. The cost of debt.

Now our premium winery, which is still being built, nearing completion, will be operational next year. And we expect to get significant savings from that. We were targeting around 15%. And the reason why we're getting those savings is because we're building that premium winery in a established winery, which has your [airport], which has your electricity, has all the infrastructure in place and shared management. We continue with our Vineyard development, which is mainly happening at our Barossa and Grand Junction vineyards. And we have developed about 106 -- or redeveloped 160 hectares at our [calkway] vineyard, which we did a couple of years ago, which then [while it] translated to increased tonnes, which we didn't quite get this year. And the next few pages just goes through our results summary. I'm not going to go through that.

In terms of our outlook, which is on Page 14. Business still continues to focus on our 3 key strategies. I know it sounds boring, we go through the same thing every year. But we believe they are the correct strategies. We still have a great focus on our 3 core brands. However, as I mentioned 3 minutes ago, we will have some focus on our Barossa Valley Wine Company, which we believe will become our fourth key brand in a couple of years' time.

Our cash flow from operating activities is strong. And with the decline in next year's or this year's capital spend, we're quite confident that our debt will decrease.

The U.K. has performed exceptionally well, that had seen a total volume decline of about 4% of Australian wine [sold over] to the U.K. And we will be investing more in advertising and marketing in the U.K. So our advertising and marketing cost in that market will increase in the next 12 months.

Moving on to Page 15. We have some significant challenges going forward. They include Brexit, the drought and the increase in cost of grapes and wine. We are not sure how Brexit will finish up and neither does anyone else, I believe. A hard Brexit will have an unfavorable impact on FX, that's what they're telling us. But we accounted for at least 60% of our net GBP for the next 12 months. However, whilst a hard Brexit [mile hat] might have an unfavorable impact on FX, it will give Australia the opportunity to gain a trade agreement with the U.K.

At the moment, all countries sending wine to the EU pay a tax called CCG or CCT, that means common customs tariff, it's just about $0.15 a bottle. And if the U.K. get out of Europe, Australia is going to negotiate a free trade agreement in this crisis. So we could see that we'll be in the same position as the other countries that are selling from Europe into the U.K.

The other challenge is drought. The allocations of water are pretty favorable at the moment, with New South Wales have round about 95% if you have high security water. In Victoria, it's a lot less. But we have been buying water recently, and we're looking okay for the 2020 vintage. But obviously the water costs have gone up.

The other challenges we have is insurance [cask] costs have gone up. You would have seen all the fires at Thomas Foods and all that. And as a result of that, the premium has gone up significantly, and a lot of that goes into our production costs. Electricity costs keep going up, even though we've ended up with a long-term agreement for some renewable energies.

And that's it guys. Neil, do you want to add anything to that?

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [8]

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Michael, you were outstanding. I don't have to talk at all. It's a great result. Listen, there are a couple of things. There are a couple of things I would like to go through, if I may, and I'm going to be boring as well. Because on Page 7, when Michael started to talk about branded sales, those people that know me pretty well would have heard this a thousand times, and I talk about the selling triangle, where we have popular premium at the base, where you need a very large base of sales to really ensure that -- your overhead recovery. And then you've got to start selling wines at a higher price, where you end up in the McGuigan brand, for example, at the top of the triangle with a product that we have, which is called Philosophy, with Nepenthe it's called Apex, with Barossa Valley Wine Company it's called Farms. And with Tempus Two, it's called Uno. So we -- you need those high-low fits. So you've got to have the selling triangle. And what we have to do is we have to continue up that premium price point. How do you do that?

Well, trying to get a price rise at our popular premium level is very difficult. So what you've got to do is you've got to change your mix. And that's why we have McGuigan Borders at Coles, for example, which sells over -- at over $10 a bottle, so above Black Label. Then we have McGuigan [the Plan], which is exclusive to our friends at Woolies. Then we have Tempus Two, of course, working very hard for us at the varietal level and also in other ranges as well. And Tempus Two is, as Michael spoke about, is on a bit of a roll, and we've got to continue with that momentum. And it's a real focus for us this year. And we get very good margin out of that product because it looks fantastic. It has a great image. And we've got to continue to drive it. And only recently at the drinks association, they gave Tempus Two an award that has been recognized by consumers as a sparkling brand gaining rapid popularity. Now that's fantastic because we are focusing on Tempus Two to be a sparkling-led brand, which Lisa actually started with many years ago. And our new packaging line is a packaging line that does sparkling as well. So it really is a focus for us to try to continue to push that along. And we're doing a lot of on-premise work with Tempus Two.

Michael spoke about BVWC, Barossa Valley Wine Company. Now we've had a bit of luck with BVWC because it's picked up 2 trophies recently internationally in the U.S. And one of them was for a current vintage product. And only today, another product called Gravel Track, which is the entry-level product, picked up a gold at the China Wine & Spirit Awards. So what that does for our friends at Coles, it gives them permission to go out and really drive that brand. So we've got to continue with the selling triangle. We've got to continue to changing our mix. And at the same time, we've got to make the triangle bigger and sell more popular premium because that will underpin our cost of production across the whole scenario.

We're also working on a number of new projects within [PD]. I don't want to go into those today because they're going to be released in the not-too-distant future, and I want that to be good news in the marketplace as well. Quite exciting stuff we're doing, especially with one of our brands.

Just taking on Michael's discussion about Brexit and what we're doing over there. I think you would remember when we spoke when Brexit hit, it was tough for us. And it caused us, and Michael you may tell me -- tell me if I'm wrong here, over that 14-month period from sort of the 23rd of June '16 to early July it was '18 -- '17, we hit -- it cost us about $7 million in profit and about $10 million in cash flow. So it hurt. And the exchange rate went from 51% to 62.5%, and a lot of people retreated. We did exactly the opposite. We put on salesmen, and we also did our first Above the Line campaign -- advertising campaign. And as you can tell from the results now, a little bit down the track, we've come out and we've come out of the block sparring. Now we are continuing on with that strategy because in the independents, we were something like 19 -- 19th brand in independents. We're now 13th brand, 13th biggest-selling brand. And we have actually pushed our brand for the first time on television. And we're doing a 52-week campaign on one of the channels -- introducing the movie channel. So that's something that we've committed to. We think it's the right thing for the brand. The brand has the distribution around the U.K. to really have a benefit. We're also looking at doing similar things in the U.K. as well. So we're continuing on the same 3 strategies. And Michael said, it is boring because we're growing the export business, increasing branded sale and focusing on our -- on cost control. So we have the plan. We are just continuing to execute it. And at the same time, we've still got to make fantastic wine, which gives us the opportunity to continue to talk to our customers and more importantly, our consumers.

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Questions and Answers

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [1]

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Okay. Thanks to Mike and Neil there. We've now got a little bit of time to take some of your questions. I'd be grateful if you could just please announce your name and where you're calling from before you introduce your questions. So please, fire away.

Any questions coming forth?

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Jamie Young, Castle Point Funds Management Ltd. - Co-Founder [2]

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Guys, can I get a mic?

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [3]

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Sorry. Can you just repeat where you are from? Welcome to the call.

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Jamie Young, Castle Point Funds Management Ltd. - Co-Founder [4]

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This is Jamie from Castle Point. Congratulations Neil, Mike. Good results, particularly the IWC win again, the Winemaker. Just a quick one. Obviously, your cash flow is still strong, but obviously it's been hurt by the grape purchases. But as you say, looking forward, that potentially should be even stronger than normalized vintage. Just can you give some more detail whether your focus was -- is purely to stockpile that down sort of level -- to a lower level you want to get to? Or whether you, given the discount to NTA you would start to look at maybe other capital [sort of] buybacks? Or what your sort of thoughts are given the stronger position you hope you're heading towards?

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [5]

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Well, I would say...

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [6]

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Well, I you -- why don't you go, Mike.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [7]

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No, you go, Neil.

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [8]

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I was going to say, I'm a simple tractor driver. You answer that question.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [9]

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Jamie, look, you're absolutely spot on, on what you're talking about. We don't want to get to a debt of 0 because that would not be good efficient use of our funds. We have a target of around about $60 million, which we'd like to get to. And we know that we can put to use funds that cost [us like] 4% to better use. So we're not going to go down to 0. We've got a target of around about $60 million, which I think is very comfortable for our business, as it stands at the moment. But if opportunities do come up and they are [above] the cost of borrowings, we will look at it. So we have a plan.

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [10]

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With the cash flow, as you pointed out, Jamie, the cash flow is terrific, and we're very proud of that. And of course, you've got to take into consideration that we actually bought $9 million worth of wine to -- this year to ensure that we had wine going forward for our sales. So if we would have had a normal vintage our cash flow would have just been sensational. So we are looking good. Positive cash flow, that the CapEx that we've spent. Yes, you might look at it and think, why did you spend so much CapEx? What is it -- what the CapEx spend has done for this business is not a catch-up. The catch-up is only the one down the bottom there, which is the normal depreciation CapEx we use, which is tractors and cars and crushers and stuff like that. What this -- what the CapEx spend has done for us, has given us the opportunity as I -- for a wonderful base for this business going forward. The technology we have in that new bottling line is absolutely world-class and state of the art, and that will give us fantastic wine for a period of time. So we've really done a great job for the long -term of this business. It wasn't a catch-up, it was to take us to another level.

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [11]

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Thanks for the question, Jamie. Anyone else with a question for Neil or Mike?

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Kurt Gelsomino, Morgans Financial Limited, Research Division - Associate Analyst [12]

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Kurt Gelsomino from Morgans. Congratulations on a great result. Could you provide a little bit of commentary around your performance, I guess, FY '20 to date maybe sales momentum, if that's continued over from FY '19?

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [13]

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Michael?

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [14]

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Jamie, we're only 1 month into the year. Sorry, was it Jamie or Kurt?

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Kurt Gelsomino, Morgans Financial Limited, Research Division - Associate Analyst [15]

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Kurt, Mike.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [16]

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Sorry, mate. We're only 1 month into the year, it's very early. We're comfortable where we're at right at the moment. But you can understand it's still a long way to go for this year.

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Kurt Gelsomino, Morgans Financial Limited, Research Division - Associate Analyst [17]

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Yes. Understand. And I guess, just some of the margin pressure you talked about with the high vintage. Do you still think you can get NPAT-esqe growth -- when you're excluding SGARA?

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [18]

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That's an interesting question because there's a lot of factors in there. And that's partly why we haven't given you guys a clear forecast because not only when you look at our, let's call it, gross margin, you've got the higher cost of the vintage. You've got Brexit with the exchange rate. You've got additional costs that we talked about, insurance, electricity, they all impact as far as the EBIT level side. We will give the market a better idea as we move into the year at the AGM, which is in November.

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Kurt Gelsomino, Morgans Financial Limited, Research Division - Associate Analyst [19]

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That's fair enough. I guess have you seen any slowdown like in, I guess, U.K. sales in that fourth quarter? And any impacts with Brexit slowing down at all, so...

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [20]

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We were cycling a very good summer in the U.K. In the U.K. last year, I think you'll remember that there was the soccer World Cup, there was the royal wedding, and there was the warmest summer on -- for the past 17 years. So we were cycling a very, very, very positive summer in the U.K. and the summer hasn't been as warm. So it's going to be hard to get over that same cycle. But our brand has still got very good momentum, very good momentum.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [21]

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It would be fair to say, too, that our sales are in line with our expectations.

(technical difficulty)

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [22]

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I think we've -- again, we've got a bit of interference there. Would you mind using your phone so that the call is clear, please.

Any more questions that anyone would like to pose, please, please fire away.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [23]

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It's Jason calling from Taylor Collison here. Just one question in respect to this year's vintage. Obviously, last year, you called out the frost impact and I guess some of the analysis that we've looked at suggests that this year's been as cold so far. Can you maybe comment on some of the key events you're looking towards for this year's vintage? Is it shaping up?

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [24]

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Right. Well, and it's -- I'm sitting here in Mildura, and it was bloody freezing this morning, I can tell you. The problem you have at this time of the year, when you have no rainy winter and we've had very little rain here, the soil has got no moisture in it, and therefore it can't retain any heat. As a result, the opportunity, the possibility of frost is much higher in a dry season, and we're going into a dry season. What have we done to try to mitigate that? It's normally chardonnay, the early varieties that get hit. So what Thomas Jung has done is, he has in the areas where we think we're exposed is we have actually pruned much later. In fact, we're only pruning the chardonnay now, and the later you prune it, normally the later you're going to have bud bursts. So he's trying to protect, he is trying to delay bud burst in those areas which are frost-prone.

Now if you have a major frost where -- then no matter what you do, you're going to get hammered. The other thing he's done in the lower areas, he's got piles of wood everywhere, so that if the alarm goes off, and we get below and we've got bud bursts, we go out and fire up the fire. And that will start turbulence, and that will hopefully protect some of the low areas.

But if it's a major frost, no matter what you do, you're not going to survive it. So we're aware of that, we're irrigating now. We've got -- we've looked at the fruitfulness in the buds and the fruitfulness looks good. So we've got the water already in the vineyards. We're trying to put as much water into the soil as we can, so the vines fire. When they do -- when the buds do come out, they do fire. So that we're looking okay at present. But it's agriculture and anything can happen. We hope this plan works.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [25]

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We've also purchased some [foringe] will key one of our [vineyards up]

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [26]

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Yes.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [27]

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Yes, that's all right. But I imagine, it's -- Melbourne Cup Day seems to be the critical date. If we get through that then it's unlikely we'd have frost afterwards.

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [28]

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Correct.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [29]

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Okay. Great. And just one more follow-up question. Obviously, you've been quite generous with the data that you provided on the -- on splitting out the segmentals in particular.

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [30]

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Yes.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [31]

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We've heard a lot about cost pressures going into next year or into '20. Could we maybe hear about some of the top line growth initiatives that the business is doing? And where do you think that some of those growing brands like Tempus Two and [that] still have some way to go?

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [32]

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Absolutely. Absolutely. Tempus Two is the -- one of -- is the fastest-growing brand in the top 50 brands in Australia. It is on a roll, and we're just about to turbocharge it with a [60 NPD] product. So -- and with the -- and this year is the first time we have done an above the line advertising campaign. So we are turbocharging that brand, and that is going to be a very important part of getting about our mix better and getting a better return. So we're up that like a rat up a rafter, and we are really working hard on it. But also don't forget, (inaudible).

We're still working hard on BVWC and Nepenthe, plus all the McGuigan ranges. So there's not just one brand or one range because under the portfolio are a plethora of products across the country. Plus also, you'll see something in the next 6 weeks, which is going to be very exciting.

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [33]

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Okay. Thank you for the question. We've probably got time for one more if anyone is keen to ask something. Any more questions?

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Unidentified Analyst, [34]

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Guys, it's (inaudible) from [Moelis].

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [35]

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Please fire away.

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Unidentified Analyst, [36]

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Just wanting to understand just on the Asia package sales. It looks like you're getting some really good growth there with sales up 25% to date. The EBIT growth just being a little bit behind that under 8-or-so percent. Just hoping you can help us understand that a little bit better?

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [37]

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Yes. What we've done is we've increased our costs there on the back of growing sales. So we've got more people on the ground. That is the main reason why the sales growth hasn't quite translated to the same sort of EBIT growth. So we're pruning up our division layer and adding cost in line with what we expect to sell in the next few years.

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Unidentified Analyst, [38]

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Mike, and then just one more for me. Are you able to give us any sense of the quantum of the gross margin impact from the lower vintages here for FY '20?

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [39]

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Look, there's a lot of factors that could impact the gross margin. Obviously, the vintage has impacted the, how we deal with our insurance costs because I can tell you, our insurance costs went up $1.8 million this year -- last year. So that's off a pretty low base. And electricity is about the same. So it's how we deal with all of those as a mix, that will impact our gross profit. So -- and the reason why we've delayed putting out a market guidance is that, for example, the insurance is being negotiated at the moment. The outcome of that will have a plus or minus impact on packaging cost, which goes to your P&L straight away. Whilst you say, well, the '19 is done. But the insurance costs are now moving, so they have just gone up crazily. And that's to do with polystyrene insulation and all that. But that -- if we can get our big cutback, that will save a lot of what the additional wine cost we're putting through (inaudible). Does that make sense?

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Rosie Davenport, Australian Vintage Ltd - Communications & PR Manager [40]

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Okay. Thank you very much for all your questions and also for your time. Our contact details are given at the bottom of the invitation and are even on the presentation that you've all accessed. So if there's any questions that you'd like to come forward with afterwards, please do get in touch with us, but otherwise, thanks again for your interest and time. We very much appreciate it.

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Neil A. McGuigan, Australian Vintage Ltd - CEO & Executive Director [41]

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Thanks, guys.

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Michael H. Noack, Australian Vintage Ltd - CFO & Company Secretary [42]

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Thanks, guys.