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Edited Transcript of DGL.NZ earnings conference call or presentation 23-Feb-20 10:00pm GMT

Half Year 2020 Delegat Group Ltd Earnings Call

Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Delegat Group Ltd earnings conference call or presentation Sunday, February 23, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Anthony Freeman

Delegat Group Limited - MD & Executive Director

* Murray Annabell

Delegat Group Limited - CFO

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Conference Call Participants

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* Christopher Byrne

Craigs Investment Partners Limited, Research Division - Senior Research Analyst

* Guy Edward Harding Hooper

Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities

* Jack Crowley

Jarden Limited, Research Division - VP of Equity Research

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Presentation

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Murray Annabell, Delegat Group Limited - CFO [1]

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Good morning, everyone. Welcome to the Delegat Group 2020 Interim 6-Month Year Results Announcement. Consistent with how we've held this before, as you know, you've got an operator in the conference call today. We'd like to hold the meeting today firstly by having John Freeman, our Managing Director, make some introductory comments. John will hand over to myself to go under the period under review before I hand back to John to conclude, commenting on the outlook. Once we finish the more formal part of the presentation, we will look to open the meeting up to question and answers. We have got some people here in the room with us here today, so we will likely ask those in the room to go first. And then once they've satisfied their questions, we'll ask the operator to come back on the line and give you all instructions on how to request your questions.

If I could just ask, it's really helpful to the operator if -- when you finished your questions, if you could say, "Thank you, that's all for me," then that allows them to know to move to the next person on the queue.

So it's just gone past 11. We'd like to think that we will sort of hold this for about 45 minutes and wrap it up sort of on the quarter to 12. If there are any calls being required afterwards, you as -- are welcome to come to us separately on that.

So I'll hand over to John now. Thanks.

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John Anthony Freeman, Delegat Group Limited - MD & Executive Director [2]

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All right. Thank you, Murray. Good morning, everybody, and thank you for your interest in the company and for joining us again. The first half has been a good first half. Murray will take us through the detailed performance, and you'll have -- had a chance perhaps to see the presentation that goes along with this, but he'll walk us through it if you don't have that at hand.

And I'll just make a few preliminary comments. We have had very good performance out of Europe again this year. We've had some good growth there as well as North America. The Australia, New Zealand marketplace has a few more challenges that we can talk to. There's -- again, they're trading very, very well. They continue to do so for the most part, but they are down a little bit on last year, and some of that relates to the trading conditions with one of the big key accounts in Australia. So we have a desire to make sure we manage our brand appropriately, and some pressure from retailers is something that we get on a regular basis in the business. And you're probably well aware that as a company, Delegat can be a little bit more challenging for retailers to get discounts out of some retailer companies. So we expect that to persist for a little while, but we are working through that. Nothing in there concerns us from the fundamentals of the marketplace. And then I suspect there would be some interest in a few of the happenings around the world that can have an impact on company performances.

First I will touch on is Brexit. We've been watching Brexit very closely before the official date all came up. And as they moved through a new official date that came up, we kept watching and preparing accordingly. Our biggest concern was not so much around consumption patterns or immediate effect on taxation or duties, we were more concerned about disruption and border clearance processes. But we've had no issues in that regard, and we'll keep watching to see how kind of the next couple of years of transition into a post-Brexit environment could affect us. But there is nothing immediate that we're concerned about there.

Another big topic on everybody's mind is in the Australian bushfires. They've obviously been a terrible tragedy. And its traumatic themes, we've always watched playing out. The impact on the wine industry in general has been mixed. Some areas have been hit quite hard, and others have been completely untouched. We've had no direct impact in the Barossa Valley, where we have our Barossa Valley Estate and vineyards and winery. We are working with the Australian Wine Research Institute to keep an eye on whether or not any of the vineyards have had any impact from the smoke and heat. We're not anticipating any concerns, but we will watch for that. The Barossa is to the west of most of the regions that have been affected. So the prevailing winds have actually carried more smoke out into the Tasman and then across our key wine-growing region within Australia.

The other effect of bushfires can be market disruption within Australia. Just given that we are trading a little bit differently with one of our key customers, just now, it's a little bit hard to read whether or not that's having any impact on the market itself. But the general sentiment is that it's not had a big impact on consumption or wine sales within Australia.

The other topic, of course, everybody has been discussing lately is the coronavirus, COVID-19. And for us, the risk on the sales side is very minimal. We have a very small team operating in Shanghai, and our business there is primarily e-commerce-based through Alibaba and Tmall. So we've had nothing material in terms of impact there. The -- in terms of supply chain, the major item we source out of China is glass, and we have been making plans accordingly should there be a disruption. But we haven't had anything to date that's caused us a concern. And if that was to happen, we're more concerned about it being a slight delay than it being a major disruption. So 3 items that can have an impact, but we don't see any of them as materially interfering with business operations at this point.

And then with regards to the growing season, we are just getting underway with harvest. We've been harvesting a little bit of Chardonnay in the Hawke's Bay for our sparkling wines, and we are anticipating yields in New Zealand to be largely in line with our forecast. You never really know until you're through the harvest, but that's been looking fairly good. A few varieties up and a few varieties down, but on the whole, in balance.

In the Barossa Valley, most producers are expecting to find that their yields are down. We're quite proud of how we've been managing our vineyards, and we're held up within the Barossa as definitely being innovative and using some really class-leading vineyard management practices. So our yields, for the most part, I believe, are looking better than the industry. I was just across there last week, having a look. And we will be down on total expected yields, but we'll have adequate inventories for what we need for Barossa Valley, I think. So again, minimal with any disruption to us.

I think that's probably the main thing to start on for now, Murray. So why don't we take it to the performance run-through that you take us through, and then we'll pick it up from there with the questions.

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Murray Annabell, Delegat Group Limited - CFO [3]

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Perfect. Thanks, John. So as John said, trading performance for the first 6 months has been another great result. You should hopefully have had access to the presentation that was uploaded onto the NZX this morning. I don't tend to go through each slide, but rather highlight some key items.

So I guess the first one is, as indicated in our annual report, we gave guidance that case sales for the year would grow by about 8% on an annual basis. We don't give guidance in terms of the 6 months, so that obviously comes back to each of the analysts' reports around what that looks like. But I'm delighted to say that today, we've continued to report records. So we've had a record 6-month period of selling 1.733 million cases. That then has influenced us reporting operating profit of $34.4 million, which beats our previous record by some 10%. And really pleasing, where a lot of people now are starting to look away from the income statement but more to the cash flow statement as a barometer of the health of the organization is we've reported a record cash flow from operations of $35.5 million. So that cash from operation, as we've said, underpins our commitment to driving sustainable, profitable growth. That is well and truly now covering our capital expenditure and financing for the group. And we have, in this period, as you've seen, reported a lower debt position than we were 6 months -- sorry, 12 months ago. So it's behind us, that significant capital expenditure program that we've had, which we had signaled we were putting that now in the rear vision.

So if we go to Page 4 of the presentation, you'll now be comfortable with how we present our sales for the purposes of this. We present it by the 3 key regions. And as highlighted there, you could see that North America continues to be our #1 market at 722,000 cases, up 13% on the comparative period. So again, success in the U.S. continues to be our primary focus and underpins the success for the group. But clipping on its heels now is U.K., Ireland and Europe, which has achieved over 600,000 cases in the trading period to date.

Just a couple of comments on U.K. and Ireland. You can see that is up 28%. You will recall that at the June '19 briefing, we had signaled that the region has grown by 30%, which was underpinned by our new distribution listings. So I just want to remind people that this 6-month period is a full period of trading with that new listings as opposed to the previous 6 months. So we have had good increased rate of sale with key customers, we had a strong Christmas trading period, particularly with Sauvignon Blanc. So that's fantastic, but it's unlikely that we would see annual growth year-on-year being around that 28%. It's likely to be in the region more of close to sub-10% to 12% rather than that number there. And that just reflects that trading is performing well, but we don't just expect to see a similar new listing come along the second 6 months.

As John said, no significant adverse impact by Brexit, but we did manage inventories in the market, particularly to deal with the possible supply chain disruptions. So there really was no unplanned buy-up or anything from any of our customers. So the trading performance is a solid, genuine sales pattern and not influenced by anything where people were trying to beat the impact of anything of Brexit.

And then John talked about Australia being down and sort of focused again on the fact that we are mindful of how -- of customers looking to increase their margin demands. And effectively, we may not have gone so deep or frequent in some promotions, which may have influenced particularly the sales pattern.

Lastly, on that page, you see our currency. Relatively speaking, currency has been better than the year before. But we still note that with the exception of the U.S., all of the currencies still are unfavorable against 15-year averages, especially the Australian dollar. But it's really pleasing to see certainly the latest step in the U.S. dollar, particularly as that is obviously our growth market going forward.

To Page 5, our revenue, up $13-odd million or 9% year-on-year. We continue to break that down. Volume is 10%, as we've just talked, in terms of case sales. So value is slightly unfavorable, and that really is just a mixture of country, primarily, in this case, country mix, with the U.K.'s performance being strong relative to the -- for the 6-month period ending, also our sales increased being in Sauvignon Blanc. So currency, up 1%. At a New Zealand-dollar level, revenue is about $0.30 case lower year-on-year, but currency has probably been around about $1 positive per case.

Page 7. We distill the operating performance, the 10% growth, by our key operating drivers. So if you just look at that, as you would expect that on a 157,000 extra cases, we should be delivering a margin impact. Just pause on that to, again, say, we've signaled that of the best of the lower-yielding 2019 vintage, we expected costs to be adverse given that we're spreading some of those costs over a lower base. So we had said that we will need to navigate through that. So again, positive outcome from this is that we've been able to navigate through, deliver a strong performance in line with sales growth despite what that adverse impact on cost of goods would be.

For the currency, about a $900,000 improvement year-on-year from small financing through better debt levels and achieving some more favorable financing rates. And the last one on there is the other item, you can see there. That's a reflection really that we've had some really good progress around filling some key roles, that we had some basic fees in the year before. So that's the primary driver for what that is. So we had obviously factored that into our guidance. But in terms of the year-on-year, that's the primary reason for the change.

So a 10% increase on operating profit. When we go to -- as you know, having to include the fair value items for the reported profit, our reported profit is $4.5 million lower than the operating profit of $34 million, so just a click under $30 million. But it's stronger than where we were a year ago. So again, I don't plan to go over it. There's a lot of detail on that you're quite comfortable with. There's 2 key drivers for that. But this one -- for this year, it's been primarily impacted by the derivative instruments, which is really around the interest rate swaps. So this 6-month period, we actually saw a gain on those derivatives compared to a lot in the previous 6 months. And so we've given you a waterfall for Page 9 for the reported profit so that you can see that, that interest is very much to do with the derivative basket rather than anything else.

Page 10, our balance sheet. Again, just reminding everyone that this 6-month period was the introduction of the accounting standard change for introducing leases on balance sheet. We had given some quite detailed guidance on our 30th of June annual report around what that would mean. For us, we have sizable lease vineyard obligations, to a lesser extent, office warehouse and some motor vehicle leases. Again, I'm not going to go into too much detail on it. The financial statements that's attached do provide everyone the opening balance restatements going back to June '18 so that you can see what that means. But I assume then everyone will need to sort of factor that into your models going forward.

Probably the key comment there is in the 6-month period, the impact to the change of the operating leases has a very minute impact on the P&L. And even at the annual, we have said it's probably right around -- figure of around $0.5 million is the impact of moving to the new IFRS standard. So in the scheme of things, as opposed to other company announcements where it's more significant, what that change in standards meant for Delegat, we have managed -- it's not as significant going forward.

Debts there at $267.8 million. We've given you, again, a waterfall on Page 11. I think it's consistent -- or it's fair to say consistently that we tend to find our first 6 months trading has our debt at peak, as we're financing the vintage that we're in. And then on the rundown to June, subject to what our capital programs look like, we tend to have a lower debt than we do with the 6-month announcement. So this year, our debt is down a couple of million from June. But significantly, it's down $23.7 million against where we were at December of '18. So that's sizable. And again, we are very confident that we will continue to have good operating cash flows for the remaining 6 months and be in a position to be having, again, favorable balance sheet presentation of that. So over $60 million of facility drawdowns available to us means that we are operating well within our covenants.

So I think in conclusion, we've talked about this before, the 6-month performance really gives you a snapshot of where we are. There's no real compelling comments coming out other than saying sales is where we thought it would be or also vice versa. So it's been a good start to the year. Oyster Bay remains very strong and positive in terms of its brand health. We've navigated through the impact of the lower 2019 yield, and what that would have is an adverse impact on margins. And we continue to focus on our currency management, picking up the bits where we can to ensure that we're protecting certainly the next few months. We're well positioned on that.

So I'll now hand back to John to discuss the outlook.

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John Anthony Freeman, Delegat Group Limited - MD & Executive Director [4]

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Thank you, Murray. So as you can see on Page 13, what we're expecting to achieve this year is in line with, quite frankly, what we've said along the way. So those of you who had attended the Annual General Meeting or the notice of the forecast coming from that, we are on target to achieve global case sales of 3.24 million cases, and that will be an 8% growth from last year. So it's not quite the growth we've seen year-to-date. We're expecting to be smoothing out a little bit in the second half of the year, but we'll still achieve that number.

And then based on the prevailing exchange rates, which can be hard to predict, but where we are forecasting is to come in, in line with market consensus of $52.4 million. And that's the operating profit result that we're referring to when we say that.

So fairly straightforward, hopefully, not too much of a surprise from us. We strive to be as predictable as we can be. And Murray, I'll pass back to you, so we'll take questions from here, I think.

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Questions and Answers

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Murray Annabell, Delegat Group Limited - CFO [1]

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Okay. Yes. Okay. All right, operator -- sorry, we've got one person here in the meeting room. So why don't we open questions up to you, Chris, and you've got the honor of that. And we can take those and then pass back to the operator after that.

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Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [2]

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Yes, it's Chris Byrne here from Craigs Investment Partners. Just in terms of our key customer in Australia, having, I guess, a discussion over discounts to be added. How do you expect that to play out over the next 12 to 24 months? And I think you've obviously had experience in this in the U.K. What are you looking -- what does it look like in Aussie? It's down 12% on the half. What does that look like over the next 12, 24 months?

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John Anthony Freeman, Delegat Group Limited - MD & Executive Director [3]

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I think probably the -- I mean, you never know exactly how they'll always all play out. But the relationships we have with the key accounts are very solid, so there's no issue with the breakdown in communication or trading in that regard. It is our strong understanding with the trade laws in Australia that we can't set price. So we're certainly not trying to do that, but we will manage our own price to our trading partners. And so if a retailer wants to heavily discount or survey to get foot traffic and then turn to us to say, "Give us a better price so our margins are in good shape," we're very familiar with that approach. We have 1 brand delivering and a key sustainable source of earnings for Delegat, and so we defend that very strongly. And so we see no issue with that, that's quite normal. We have a mindset that we try not to let any customer be more than 10% of our global sales, thinking of retailers and the key accounts or the retail tier in that respect. And that's so that if we have to have a situation where we are negotiating a little bit more with one, that we can do it with confidence.

So we're not concerned about it. The predictability for key retailers in Australia is pretty low right now. There's a lot of ownership change going on, and that's right across the board. So it's not unique to one necessarily. And so that can have an impact in terms of making it hard to predict how that will play out. But we need to put that aside, and we focus on the trading relationship with these retailers individually.

So I think we won't see it recover by the end of the year within Australia, would be my anticipation. But I think it's stabilized at this point. It needs to be like a long-term result is what we're looking for.

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Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [4]

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All right. And just on your guidance. I know you don't like to go into more detail on this particularly. But I guess just cognizant of the fact you've had a very strong first half and then when you look at what it implies for the second half now, I think it sort of implies a 10% decline in operating net profit, ticking up in the second half. I mean, what assumptions go into that? And what should we -- how should we be thinking about that after a very good first half? Is that a bit of the revenue line or cost line or what?

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Murray Annabell, Delegat Group Limited - CFO [5]

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So that's a good question. We always encourage people to look at history. And so we are first half-weighted, so there's no change there. That cost of goods, again, as you've been through it, you will always have some vintage change there. So it's likely that the reason you're seeing a little bit of that, which is what we had already predicted, right, in terms of our guidance, was that our cost of goods would be as we're selling through the remainder of the 2019, that will come through. And then John has emphasized more recently that we're continuing to invest in brands and consumer advertising, and that's probably more second 6 months-weighted as well.

So from our perspective, we know that. We will always choose to, at this stage, kind of just go softly stock here a little bit on that and give an opportunity probably nearer post-harvest to give some correction if the earning is required or not.

Operator, can you now take the people on the line first and help them know how to obviously ask the questions? That'd be great. Thank you.

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Operator [6]

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(Operator Instructions) And our first question today comes from Guy Hooper with Forsyth Barr.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [7]

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Guy here. Look, first question from me, just around U.S. growth. So pretty strong growth from that market, reasonably encouraging, particularly against the backdrop of, I suppose, weak growth from other players and commentary of oversupply in the market. Are you benefiting from, I suppose, pricing over other category growth? And how do you see your brand reception in the market at the moment?

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John Anthony Freeman, Delegat Group Limited - MD & Executive Director [8]

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Okay. Thanks, Guy. There's a few couple of questions nestled in there. I'll try to work through them. If I miss anything, just let me know.

Okay. So the U.S., there is some commentary coming out these days around overall consumption levels in wine decreasing a little bit. Some of that is competition with other beverages such as gin or hard seltzer. But what we're seeing when we look more closely at the statistics, as to your point, is that within wine, the more premium segments are growing and certainly growing more rapidly than under USD 12 wine. So what you've got up behind any number, of course, is a mix. We almost exclusively operate well north of $12 unless the retailer is doing a particularly sharp promotion. So for us, that's been a benefit rather than a detriment. There is a little bit of pessimism in some sectors of the market, which makes people a bit reticent to move as quickly, but that hasn't affected us too much.

And then more to the point, imports are growing. And within the varieties, Sauvignon Blanc remains one of the faster-growing varietals. So that has helped us, and the Oyster Bay brand continues to be very strong. We've just been awarded for the 10th time the Hot Brand award by Impact Magazine. And that's a sign that the brand continues to grow, and it continues to be on the radar for the trade. And working with our distributor partners, we have very, very strong relationships there and nothing has interrupted that. If anything, they're quite pleased to see that there is a sector of their business that can still generate good growth and, of course, more premium price points for them.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [9]

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Yes. Perhaps -- also, secondly for me, you've touched on it a wee bit already, but just around case sales growth going forward by market. So can you provide a bit of color, I guess, as to what kind of magnitude of growth you're expecting in each market, not just for the second half but then to sort of '21 as well?

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John Anthony Freeman, Delegat Group Limited - MD & Executive Director [10]

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We don't give a breakdown by market. We report by the 3 global reasons that you can see in this report here, and then we provide an overall growth figure, which we did at the AGM. So that was provided. Then we go out 3 years, but we don't give a breakdown by market overall. We do still see North America as a driver of growth. So I can say that's continuing. The European market, particularly the U.K., has grown more quickly than I think even we were expecting. So I don't think we'll see those same kind of percentages necessarily. But on the long term, I would still see the U.S. as being the biggest opportunity probably over the next 5 years.

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Operator [11]

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(Operator Instructions) Our next question comes from Jack Crowley with Jarden.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [12]

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May I -- just one quick one from me. I guess, just wanting to dive down a little bit more into kind of full year guidance and, in particular, case sale guidance. And I guess what I'm looking at there is the way that after kind of 10% growth on the first half year-on-year, it's implied to go down to about kind of 5.8% or so on the second half. And kind of understand the distribution for this side of things in the U.K., but it just kind of comes -- there is a number in the second half that might be a little bit softer than what we think of as the kind of longer-running trends for Delegat just in terms of case sale growth. So just kind of wondering, is that kind of supply constraints following a lower 2019 harvest that you think is the difference there? Or is that kind of the Australia kind of retail market challenges? Or is there anything in particular you think that kind of means that you might be able to achieve slightly less growth in the second half of this fiscal year? Then you're looking to deliver across kind of '21, '22 type thing based on your longer-run case sell guidance that you've provided historically?

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Murray Annabell, Delegat Group Limited - CFO [13]

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Yes. Look, Jack, I don't think we see it quite as pessimistically, if that's what you're saying. As I've said before, first half is always weighted more to the first half, right? So our guidance of 8% growth year-on-year from '19 was obviously influenced by the lower 2019 vintage. It's not to a point that we are on a -- as tight as literally the '20 vintage willing to come through. But the comments, I think, we've given around the U.S. continuing to be strong as well as the fact that the U.K. is more probably 2/3 of sales were in the first 6 months, probably is just for you or what looks like, signaling it's going to be a tougher 6 months. The second 6 months sales is up on the previous 6 months. So it's probably just a reflection of the Christmas or the summer periods of the respective markets that we sell in more than anything else.

And certainly, '21, '22, at this stage, it's probably too early to signal anything. The harvest will allow us a good opportunity to review that. But we'd just refer you back to the guidance that we gave at the annual report around that 3-year window, and it still shows healthy growth year-on-year. So nothing to signal anything other than that, as such.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [14]

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Got it. Maybe just a second kind of follow-up, if I could then. Thinking about the second half on a year-on-year basis, noting that it's a seasonally softer period, what do you think type of growth might have been achievable if we see a softer 2019 harvest and you get the benefit of kind of slightly more inventory?

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Murray Annabell, Delegat Group Limited - CFO [15]

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We have a look at what the '21 to the '20 and the '22 to the '21 signals. That would not assume anything other than in line with our target yield assumption. So on a bigger base, obviously, growing 10% -- 8% to 10% becomes harder each year. John has indicated quite likely that we've got relatively mature markets, Australia, New Zealand, to some extent, the U.K., plus the effect of additional listings. So really, the growth engine is really North America, U.S. and Canada. And I guess we're taking some deliberate -- we're not going out on a limb to sort of say that growth will exceed our expectations. We are very well known for growing in a sustainable manner to preserve our top line pricing as well as to bring our customers and distributors along that growth curve with us.

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Operator [16]

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(Operator Instructions) And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

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Murray Annabell, Delegat Group Limited - CFO [17]

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Well, that's that. I think, as John said, steady as she goes. Just sometimes, we're accused of being boring. So apologies again for that, that we -- that there aren't any surprises. So look forward to getting together again in late August to update on the full year results. And as always, if you want to reach out to us separately, please avail yourself of it.

And we'll call the call to a halt. Thanks very much.

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John Anthony Freeman, Delegat Group Limited - MD & Executive Director [18]

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Thank you, everybody.

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Operator [19]

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Thank you. That does conclude today's conference. We do thank you for your participation, and have a wonderful day.