Delegat Group Limited (DGL.NZ) Earnings Call Transcript

Good afternoon, everyone. Thank you for dialing in to this annual meeting today. 2020 has indeed been a year of disruptions and changes, and no one could have foreseen the widespread impact the coronavirus pandemic would have on how we conduct everyday life. This is particularly evident today with us holding this meeting virtually. I've been told that 80% of all 2020 annual meetings have been held in this same way. On behalf of the Board, I am pleased to welcome you here today to the 15th Annual Meeting of Delegat Group Limited since listing in April 2006. My name is Jim Delegat, and I have the privilege of chairing your Board of Directors. I can confirm that we do have a quorum present. And given the time is now 2:00 p.m., I declare the meeting open for business. This meeting is an audio-only meeting and so very much like holding a conference call. You will be able to hear us, view the presentation on your device be that a computer, laptop, tablet or smartphone, but there is no live video of the presenters. Through the technology platform, our moderator will be managing what you can see on your screens in front of you. You will have the ability to ask questions, which I will explain how to do later. And for those that have not posted their voting by proxy already, you will be able to cast your votes on the resolutions through the website platform. I can also confirm that the meeting is being recorded. Let me first introduce you virtually to my fellow Board members. Today, we have on the call John Freeman, Managing Director; Rose Delegat; Robert Wilton, Dr. Alan Jackson, Chair of Audit and Risk Committee; Phillipa Muir, Chair of the Remuneration Committee; and Graeme Lord. Also in attendance is Murray Annabell, the group's Chief Financial Officer, who will act as our minutes secretary. I also would like to welcome our retiring auditors, Ernst & Young, and incoming auditors Delut -- Deloitte to the meeting, along with our legal counsel, David Jones from Heimsath Alexander. To open, I'm not aware of any apologies anyone want -- of apologies anyone would like to advise the meeting on? If there are, please type in the apology in the question box at the bottom of your screen marked Ask a Question. If there are any apologies, these will be recorded in the minutes. Proxies. I will advise the meeting that directors and others are holding proxies and postal votes of 88,012,895 shares, representing 87% of the share capital of the company. Notice of meeting has been sent to all shareholders, together with the annual report. And I propose that together with the agenda, they be taken as read. Minutes of the 14th annual meeting held on the 3rd of December 2019 have been approved by the directors. And Murray Annabell is holding a copy should a shareholder wish to receive one to view. In terms of the agenda, the procedure today will be: firstly, I will address the annual report incorporating our directors' report, financial statements and unqualified audit report covering the year to 30 June 2020. I will then provide a brief overview of our key investment projects before handing the meeting to the Managing Director, who will cover the 2020 performance in more detail and the group's future sales growth plans. Following Mr. Freeman's remarks, I will ask if there is any discussion on the annual report and Executive Chairman's and Managing Director's presentation before moving on to the formal business of the resolutions. I now move to my Executive Chairman's address. As Executive Chairman, my focus is on the strategic direction and then monitoring performance to ensure successful delivery of Board-approved business plans. I invest a significant amount of my time on capital investment and growth initiatives. On behalf of the Board of Directors of Delegat Group Limited, I am pleased to report another year of record performance. Delegat achieved record global sales of 3,277,000 cases in the year 2020, up 9% on the prior year. I'm delighted to confirm that Delegat is now the #1 New Zealand wine exporter to the world, yet another milestone achieved on our journey to becoming one of the world's leading Super Premier wine companies. Record operating net profit after-tax of $60.8 million was generated, up 20% on the previous year, continuing the group's strong track record of profitable growth. This is a result everyone can be enormously proud of. Record cash flows from operations of $84.3 million were achieved, 42% higher than last year. This achievement surpasses our previous record of $63.4 million achieved in the 2017 year. Accordingly, your Board considered it appropriate to declare a fully imputed dividend of $0.17 per share, which is in line with last year. The Board is cognizant of both dividends to reward shareholders and the need for reinvestment for long-term growth. Delegat is investing for growth to support its strategic goal to build a leading global Super Premium wine company. During the year under review, the company generated cash flows from operations of $84 million -- $84.3 million as mentioned, which more than funded the $28.7 million invested in growth assets including development of the group's wineries, land acquisition and vineyard development in New Zealand and the Barossa Valley. Delegat will invest an additional $52.2 million in the FY 2020 (sic) [ FY 2021 ] year to provide earnings growth in the years ahead. This capital investment supports the group's plan to grow sales by more than 563,000 cases to 3,840,000 cases by FY '23 and will provide further growth beyond that period. The group planted 142 hectares of new vineyards in FY '20 and is developing another 133 hectares in the current year. The group has a further 745 hectares of viticultural land, which will be planted progressively from fiscal year 2022 onwards. The group now has 4,271 net hectares of vineyards and viticultural land, 3,931 hectares in New Zealand and 340 hectares in Australia. Of this area, 81% is owned or managed by the company, and 19% is from our grower partners. The group has a strong balance sheet with shareholders' equity of $404.6 million, net bank debt of $239.5 million, and undrawn syndicated bank debt facility of $90.4 million as at the 30th of June 2020. The group's retained earnings and syndicated bank debt facilities provide appropriate funding for our capital investment program and growth plans. As can be seen from today's meeting agenda, we have 2 new directors seeking election, having been appointed by casual vacancies during the year. At this time, I wish to advise that Robert Wilton is not seeking reelection and will be retiring from the Board at the conclusion of this meeting. Bob, as many of you know, began his involvement with Rose and myself for over 35 years and obviously has made a significant contribution in bringing Delegat from a modest family business to the company that we have here today. Bob was the inaugural Chairman of Delegat Group limited since listing in 2006 and has been active in all Board affairs. Bob, on behalf of my fellow directors, I place on record our thanks and appreciation, and we wish you well in your retirement. Also recall from the last annual meeting that I announced that a search was being undertaken to replace Shelley Cave, who had indicated for personal reasons that she was unable to continue as a director and would resign once we had found a suitable replacement. I can confirm that we did find a very good director, being Phillipa Muir. And in August 2020, an announcement was made that Shelley Cave had resigned from the Board. I would at the same time thank Shelley for her contribution to the Board of Delegat Group since she was appointed in 2016. Shelley was Chair of the Remuneration Committee and very effective in maintaining governance oversight. Again, I would also like to place on record my and my fellow directors' thanks and appreciation for Shelley's contribution over her time with us, and we wish her very well for the future. Later in the meeting, we will -- it will be your opportunity to confirm by vote the appointment of Graeme Lord and Phillipa Muir to the Board. Their bios have been circulated with the notice of the meeting. We continue to review our own performance and the composition of the Board with respect to experience, and believe there's an appropriate structure and skill base to lead the company forward, while at the same time recognizing market and regulatory changes. The record results achieved in the year under review are testament to the group's robust business model. Against the backdrop of uncertainty caused by the disruption of COVID-19, the strength of our category-leading Super Premium brands, in-market sales team, distribution networks and strong consumer design have provided the necessary resilience in these challenging times. Particularly pleasing was the achievement of a 9% global case sales growth this year and the group achieving a compound annual growth of 17.7% over the last 2 decades. I continue to be excited about your company's performance and strategy, all of which supports substantial future sales and earnings growth. The Board would like to take this opportunity to acknowledge our Delegat Great Wine People around the world. Our global team have once again shown great resolve and set new performance records. It is inspiring to work with such a talented team who are committed to winning together. John Freeman, the group's Managing Director, will now provide a more fulsome report on the 2020 year and the group's future sales growth plans.

Thank you, Mr. Chairman. Good afternoon, ladies and gentlemen. It is a privilege to be on the call with you today, and it will be my pleasure to share and discuss the performance and growth plans of the company. FY 2020 was another year of record performance and continuing to build the foundations for long-term growth. As noted by the Executive Chairman, in 2020 the group achieved record global case sales of 3,277,000 cases, record operating net profit after-tax of $60.4 million, and record net cash flows from operations of $84.3 million. I'd like to take a moment to speak to the COVID-19 global pandemic, as I imagine many of you are interested to know how this has impacted on the group. The group performed very well through the global disruptions caused by the emergence of the COVID-19 pandemic in early 2020. The resilience and commitment demonstrated by the group's global team during this challenging period has been nothing short of inspirational. The group is classified as an essential business by the New Zealand and Australian governments, allowing viticulture and winemaking teams to complete harvest operations and winemaking processes for the 2020 vintage, albeit with additional safety precautions and procedures in place. Across the group, our ongoing investments in workplace productivity technology enabled our teams to quickly adapt and maintain all critical functions throughout government-imposed lockdowns. And the group's investment in developing its own in-market sales teams in New Zealand, Australia, the United Kingdom, the United States, Canada and China has been an important contributor to sustained performance in a disruptive marketplace. Whilst field sales activities were limited in many global markets by social distancing requirements and new trading conditions, our in-market sales teams sustained regular and frequent communication with key customers and distributor partners to support ongoing sales initiatives and priorities. Reduced sales in the hospitality channel for March onwards were offset by increased sales in retail and particularly in e-commerce channels as consumers adjusted their shopping habits in response to lockdown restrictions. The group observes that during times of uncertainty, consumers increasingly choose to purchase brands they know and trust. As a leading Super Premium wine brand, Oyster Bay holds a high position -- holds a position of high awareness and affinity among premium wine consumers. Our record global case sales continue to be well diversified by market, with 44% in North America; 30% in the United Kingdom, Ireland and Europe region; and 22% in the Australia, New Zealand and Asia Pacific region. In North America, the group again delivered strong growth, increasing sales volumes by 8% to a record 1,438,000 cases. The United States remains one of the world's most attractive wine markets, demonstrating sustained category growth and strong demand for imported lines. This makes it a major growth market opportunity for the group. The Oyster Bay brand continues its strong growth, gaining distribution and rate of sale across the country. Oyster Bay Sauvignon Blanc is now a top 5 white wine, over USD 10 by value. The group has in recent years invested in its brands and distribution channels. The group is well positioned to continue building momentum through its strong relationships with its distributor partners. With premiumization continuing to drive value growth for the wine category, Canadian wine consumers are demanding higher quality wines for which they are willing to pay a premium price. Oyster Bay has delivered consistent strong performance while maintaining category-leading ranking positions in Canada. The United Kingdom, Ireland and Europe region again performed extremely well, growing sales by 23% to 1,101,000 cases. The United Kingdom is a highly competitive market. Oyster Bay has outperformed the wine category and contributed significantly to consumer demand for New Zealand wines. Through increased distribution and higher rate of sale, Oyster Bay has further strengthened its position as a leading super premium wine brand. Oyster Bay Sauvignon Blanc, Chardonnay and Merlot continued to be the top-selling wines above GBP 8 in their individual varietal categories irrespective of origin. Barossa Valley Estate Grenache Shiraz Mourvedre delivered strong sales growth during the year, supporting further growth in brand awareness and affinity. In Ireland, Oyster Bay maintained its Super Premium category leadership position. Highlights included significant growth for Oyster Bay Sauvignon Blanc, Chardonnay and Pinot Noir during the year. Oyster Chardonnay, Merlot and Pinot Noir remain the top-selling New Zealand wines in their respective varietal categories above EUR 9. In established New Zealand and Australia markets, Oyster Bay continued to perform strongly as a category-leading Super Premium wine brand. The Australia, New Zealand and Asia Pacific region achieved sales of 738,000 cases, slightly lower than in the previous year as the group focused on optimizing long-term value growth in preference to short-term volume growth. In Australia, Oyster Bay Sauvignon Blanc continues to lead the category as the top-selling Sauvignon Blanc and bottled white wine by value. And Oyster Bay Chardonnay remains the top-selling premium Chardonnay and a top 3 white wine above AUD 15. During the year, the group again experienced very strong growth in China. Whilst China is currently a relatively small emerging market for the group, it continues to represent an important long-term growth opportunity. The group's goal is to establish Oyster Bay and Barossa Valley Estate as leading brands in the Super Premium wine category globally. Based on wine consumption patterns, the group classifies markets as established, growth or emerging. Understanding the level of maturity of our markets is essential for setting business strategy. Marketing activities are then tailored to the specific needs of each market and phases of brand development. Marketing programs are designed to grow consumer awareness and affinity, supporting distribution and rate of sale growth for our brands. The group works closely with its retail partners to develop highly effective in-store activations that support rate of sale and nurture long-term brand affinity. In the consumer environment, the group uses a mix of media channels, both online and off-line, to attract and engage the premium wine consumer. In recognition of its market performance and reputation, Oyster Bay continues to be recognized as a Blue Chip Brand by New York's Impact Magazine, a status reserved only for brands of substantial size and sustained growth over many years. Oyster Bay was also recognized by Impact Magazine as a Hot Brand for the 10th consecutive year, and has been recognized multiple times over recent years by Drinks International as one of the world's most admired wine brands. Looking into 2020 vintage, the 2020 harvest delivered exceptional-quality fruit across all 3 of our wine regions. The group's harvest of 38,129 tonnes was up 7% on the 2019 vintage. The group continues to have appropriate inventories and supply to achieve future sales growth plans. We're extremely proud of our Delegat Great Wine People who make up our global team. Our people are the key to realizing the group's goals, and we have thorough processes for recruiting talented and capable people. This year, we have invested in a new Human Resources Information System. As this new system is fully implemented, it will provide our managers and teams with greater visibility and control overall of our people-related processes, from recruitment through to performance management and learning and development planning. We strongly believe in a learning culture, one where both formal and informal learning play important roles in helping us to be more skilled, resilient and productive. This enables us to create an aspirational environment for success where our people can achieve or exceed their own career aspirations. This year, we have also continued to progress diversity and inclusion planning, which is a positive contributor to the wellness of our people and to the group's long term-performance. We feel that we benefit greatly from the different backgrounds and perspectives that our people bring to their work. The global economic outlook is uncertain, but the 2020 year has demonstrated that the group is well positioned to navigate and succeed in uncertain economic times. The group continues to see opportunities globally to further expand distribution and grow rate of sale per point of distribution, supporting the achievement of sustainable sales and earnings growth in the years ahead. Delegat plans to grow sales by 17% to 3,840,000 cases over the next 3 years. The primary drivers of planned growth are Oyster Bay sales in North America and Barossa Valley Estate sales globally. With respect to the current year to June 2021, the group is on track to achieve our plans to grow sales by 2% to 3,346,000 cases. The group continues to forecast the FY 2021 operating profit result to be in the range of $60 million to $65 million. In conclusion, as mentioned by the Executive Chairman, your company is well positioned to grow sales and achieve sustainable earnings growth in the years ahead. This continued success hinges on our great staff here in New Zealand and around the world. I wish to personally commend each of our Great Wine People for their resilience and their achievements in 2020 and for their continuing efforts to aim high, pursue mastery and win together. Lastly, I'd like to thank you, our shareholders, for your commitment as we have worked hard to build your company and for your ongoing support in the future. Thank you.

Thank you, John, for your presentation. At this stage at the meeting, we would ask if there are any questions in respect of the annual report, my Executive Chairman's presentation or the Managing Director's presentation. [Operator Instructions] Well, thank you very much. We have a number of questions, a few questions. I should ask John Freeman to please answer the question #7?

Okay. Thank you, Mr. Chairman. So the question that's been asked is, "Can you please comment on the risks and opportunities from China's restrictions on Australian wines, and also the climate change-driven reduction in production from California wineries?" This is coming from [ Grant Diegel ] with the New Zealand Shareholders Association. Thank you, Grant. I'll comment briefly on China and Australia, and then our Chairman will speak to California. So we have -- it has been prevalent in the media that China and Australia have been having some trade discussions and a little bit of dispute. That has been expected to have an impact on the wine industry. I won't comment too much on the media because you can see the articles that are there. For us, China is quite a small operation, so it hasn't impacted us directly, nor do I see it as a specific opportunity for New Zealand wines. The view in the Australian wine industry is that this is likely to be temporary. We'll have to wait and see, but they do expect to be able to resume trading. And the confidence in the Chinese consumers' appetite for Australian wines remains very high. They have seen great growth there over the last 5 years. So we continue to see it as an opportunity, but we don't see it changing materially because of the current trading environment.

And John, the second part of the question is related to the reduction in production of Californian wines as a result of climate change. So we would assume that refers to the fact that they have a reduced production of wine. And would that open an opportunity up for Delegat? Is that right? And I think we would share the view that California is well stocked with wine. They have significant vineyard plantings. And whilst we don't have any empirical data, we would suggest that they are well positioned to maintain adequate supply to the market. Would you agree with that?

I would agree. I think the impact to our opportunity will not be significant in the short term.

No, no. And we do find that there is growth in Californian wines, but of course there's significant growth in imported wine as well. So they don't have the market to themselves.

Regardless of production quantities, we have seen that imported wines have been growing rapidly generally in the United States. There's been a brief interruption or reduction in growth rate for European imports, but New Zealand imports have been very, very strong.

Very good. Thank you for that. We'll now move to question #8, which is, "Congratulations on a very successful profitable year. My question is simple. What is the reason the Board did not increase the dividend by $0.01 per share as I would have expected?" This is from [ Warren Sanderson. ] Well, I don't know how [ Warren ] got to the idea of just being $0.01, but we did get to the view that we would hold our dividend as per last year, as we felt that the surplus earnings would be well employed in investing for growth. And that was the thinking behind that decision. And given the ongoing demand and the opportunities for growth, we think that's very much in the benefit of shareholders' interest. Thank you very much, Warren, for your question.

All right. Hi, everyone. We have a question here. I don't have the shareholder's name, but from Mr. or Ms. Brown. "Are there plans to relocate headquarters in Auckland?" The answer to that is that we have signed a lease agreement for new facilities within Auckland. We would expect to be relocating sometime in calendar 2021.

Thank you. John, would you like to go on to question #11?

Sure. Question 11 says, "Delegat is one of the 3 Companies of the Year." Nominees is what that means in the Deloitte Top 200 awards. "How did Delegat fare in the final selection?" And the very simple answer is we do not know. The selection will be announced next week at a lunch event being held by the organizers. But we're very, very pleased to have been nominated again. That's the second year in a row for us, so it's a great honor.

And we have a good one on question 12 for you, John.

Okay. Question 12 says, "Compound annual growth rate for the next 3 years in case sales volumes comes to less than 6% compared to 9% for this year. Can you provide any color around this?" I think probably the best answer to that is that we always have a 10-year plan in mind. There can be years where we'll have more rapid growth and years where the growth might be a little bit lower percent. But we're interested in long-term sustainable growth, so we think very carefully about the category opportunities in each of our markets. And then we set our growth plans based on the share and the ranking position we feel we can achieve. And what's important for us always is to hold sustainable earnings at the forefront, which means optimizing the retail price position as well as growing distribution and our rate of sale for each point of distribution. So percentages can go down over the year, and you have more volume each year you need to deliver. But we like to be, on one hand, conservative. But more to the point, we like to be precise. And so this reflects the detailed planning that sits underneath.

Thank you, John. And we have question 13 here. "There has been a marked falloff in revenue per case over the last 10 years, about $20 per case. What is the cause of this? And what has been done to arrest this trend?"

Okay. So revenue per case is a function of country and market mix. And it will also be driven by how the accounting standards work and how we recognize promotional expenses. So we have not had any material degradation in our case price realization in our markets. So we are in healthy shape in that regard, and we don't see it as a decline. There's a change in the accounting standard. And in any given year, currency or country mix can create small variations, but we tend to see those variations in the order of single dollars per case, not anything of magnitude.

So John, it's really driven about international or IFRS.

Yes.

It's the change in the reporting.