Richard Davis, the Chairman of Australian Vintage Limited (AVL), has backed the wine industry to recover from its current hard times and improve again.

Speaking at the company’s recent Annual General Meeting, Davis explained that the difficult climate is characterised by low margins, a decline in export value, a highly competitive market, and significant hyperinflationary costs.

“The industry has experienced a lot of media attention in recent months, with Wine Australia data highlighting significant export declines in traditional markets. Europe and North America recorded declines of 13 per cent and 14 per cent respectively, with exports to Asia declining five per cent over the prior year and 32 per cent in the last quarter,” he said.

Davis also highlighted the continuing oversupply issues from the high-yielding 2021 and 2022 vintages. However, the low yield of the 2023 vintage will ease some of these oversupply issues.

“It is important at this point that I remind shareholders that the wine industry is cyclical in nature, and we are currently experiencing a trough. Like any cycle, the industry is expected to improve again in future years. When you look at our share price, you can see it is being impacted by adverse industry conditions including high interest rates, global cost hyperinflation, China trade tariffs, excess capacity, grape surplus and irrational competitor pricing behaviour,” said Davis.

FY23 Results

The AGM also heard from CEO Craig Garvin, who said he was impressed with AVL’s performance in FY23, with the business hitting a total sales revenue of $258.6m, resulting in a net profit of $4m.

“When most are experiencing significant declines in revenue; this is an extraordinary result, especially as we have been able to take price across our key geographies,” he said.

“Given the trading environment, I am encouraged that we have maintained revenue in line with the prior year. We continue to grow market share, take price and improve our mix of higher margin business, driven by innovation and brand growth. Our pillar brand revenue was 78 per cent of our total revenue which is well up from 61 per cent in 2019,” he said.

In addition, AVL has made significant progress across many Environmental, Social and Governance (ESG) initiatives. Notably, the brand has submitted its assessment for B Corp global certification.

“B-Corp is the most comprehensive whole-of-business global standard. The B in B-Corp stands for ‘benefit’ with certification focused on how strong the business is with regards to governance, community, environment, employees and customers,” Garvin said.

Projections for FY24

AVL’s plans to deal with adverse economic conditions include reducing debt to minimise the impact of interest rate rises and reducing controllable costs by $9m to offset hyperinflationary costs. The company has already reduced its net debt to $48m through the sale and leaseback of its commercial vineyards, Coldridge and Grande Junction.

Garvin spoke positively of these measures.

“I am confident that our strategic plan is on track despite the adverse trading conditions. Our relentless pursuit to drive pillar brands, innovate, take price and expand geographically sets us up well for future growth,” he said.

Despite continuing difficulties in the wine export market, there are some opportunities in the space. In particular, the current situation regarding exports to China is a positive one.

“We are very pleased with the recent government approach to China, and China’s agreement to undertake an expedited review of wine import duties. Indirectly, across the industry, we believe that this important market will have a profound effect on the supply and demand balance of the Australian wine industry. Australian Vintage has maintained a ‘be ready’ position with our partners in China and are ready to supply once the market re-opens,” Davis said.

Garvin also highlighted the potential earnings from emerging markets.

“We are expecting our new and emerging markets to represent a higher mix of earnings over the next three years as we shift to a more geographically diverse business. The Middle East and India represent significant business opportunities for Australia with strategic partners appointed in both markets,” he said.

AVL will continue to focus on innovation and premiumisation in the coming year. In particular, the company is focusing on attracting Gen Z and Millennial consumers.

“Product innovation is now contributing 15 per cent to our margin that did not exist three years ago, and we expect this trend to continue given our strong innovation pipeline. Importantly our innovation and premiumisation is recruiting new consumers, especially Gen Z’s and Millennials, whilst retaining our existing consumer base,” Garvin said.

AVL has increased its market share in the no-and-low segment, launching the new Not Guilty brand and the McGuigan Mid range globally. In addition, the company has entered the spirits market, with Mr Stubbs continuing to grow.

“Our recently released premium gins are receiving outstanding awards and disrupting the market. Tempus Two Shiraz Gin received three double golds in a row at San Francisco, Singapore, and New York spirits competition as well as receiving the Masters Medal at the 2023 Gin Masters,” Garvin said.

In addition, AVL has appointed Evans and Partners undertake a strategic review of the business. The company has decided to undergo this review to achieve three key goals: assessing the current state of the industry, understanding the state of AVL within the context of the market dynamics, and identifying any opportunities for rationalisation and consolidation.

Garvin is confident that AVL is well-positioned coming into FY24.

“Despite a strong start to the year we expect our first half revenue to be flat, in a highly competitive market, where we expect to gain market share. We expect underlying earnings to improve into 2024 with improved margin, branded mix and cost outs. We have a continued focus on strengthening our balance sheet and reducing net bank debt. These outcomes are subject to a normal vintage, FX and other agricultural risk,” he said.

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