From Richard Davis
Chairman’s Report — 2015

I am pleased to report that Australian Vintage increased branded sales and reduced debt for the year ended 30 June 2015. However, as foreshadowed in our May 2015 Vintage and Trading Update release, net profit after tax was down 11% to $9.4 million. The lower net profit was due to the lower than expected SGARA profit.

In the year ended 30 June 2015, the Company’s net profit after tax declined to $9.4 million, representing an 11% decrease in comparison to the 2014 result. Revenue was up 7.5% to $230.9 million.

The business continues to focus on reducing its cost base while running its core assets hard, and at the same time improving the reputation and value of its brands and wines.

During the year the Company finalized the sale of the underutilized Yaldara winery for $15.5 million. This sale represents another important step toward giving effect to the Company’s strategy to be the lowest cost premium wine maker.

The performance of our brands continues to impress with ongoing growth in our three key brands, McGuigan, Tempus Two and Nepenthe. Total sales of these three brands have increased by 43% over the last 3 years. Over the same period we have reduced our reliance on bulk wine sales and processing to the extent that our branded sales now represent 72% of total sales compared to 62% in 2012. By comparison, ten years ago our branded sales represented only 35% of total sales. This is a significant and positive shift in our business.

The Company’s business has evolved into a respected branded wine business with a very clear focus on quality and growing branded sales.

The 2015 vintage crush was 113,771 tonnes compared to 124,215 tonnes in 2014. When compared to the previous year, the volume of third party contract processing tonnes was down by 24,916 tonnes, due to the expiry of a long term contract
processing agreement. This was partially offset by the increased volumes (14,472 tonnes) processed from leased vineyards and third party growers. Overall the average cost of wine made from grapes sourced from the 2015 vintage is significantly less than the wine made from the 2014 vintage.

Sales and Margins
During the year we increased our presence in the UK / Europe segment by expanding our customer base to include all major supermarkets and major banner groups in the independent channel. The benefits of this expanded base are shown in the 12% increase in UK / Europe sales. Partially offsetting the increased branded sales was reduced sales and contribution from the Australasia / North America Bulk and Processing Segment. This decline was due to the expiry of a long term processing agreement.

Our emphasis of growing branded business and growing export has resulted in increased sales and contribution in the Australian, UK, New Zealand and North American markets.

The high cost of the 2014 vintage has negatively impacted the Company’s 2014/15 margin by $6.2 million. The high 2014 vintage cost will also negatively impact our results for the first half of 2015/16.

The lower Australian dollar has provided a benefit of $5.2 million compared to the previous year. However, this benefit did not flow through to improved margin due to the higher cost of the 2014 vintage and margin pressure from UK supermarkets.

During the year the Company had a number of one off items that impacted net profit. The profit on the sale of Yaldara was partially offset by the write off of customer incentives and legal costs associated with a vineyard dispute.

Financial Position
Cash flow from operating activities improved by $5.7 million due mainly to increased branded sales. The gearing ratio (net debt to total equity) is at a comfortable 36% with a secure banking facility in place until October 2017.

After the 2016 vintage the Company has a number of significant onerous and above market priced grape supply contracts that expire. The intention is to replace these contracts as they expire with grape supply contracts reflecting market price. Whilst the accounting benefit of this change will take some time, the cash benefit will flow through immediately. Based on contracts that expire from 2016 to 2018 and using average weighted 2015 grape prices, the expected cash flow benefit after the 2018 vintage is $6.9 million per annum.

Global Markets
The International Organisation of Vine and Wine (OIV) recently estimated that global production fell 7% in 2014 to 27.0 billion litres.

Whilst there will continue to be periods when global wine production will exceed consumption, the Company believes that the long term trend is likely to be a more balanced global production and consumption.

Australian wine exports for the year ended June 2015 increased by 4% to 724 million litres. As a result of an Australian dollar that has weakened significantly, the average value of exports increased by only 0.3%.

The recently signed trade agreements between Australia and Japan and South Korea should assist in future wine sales to these countries.

Outlook
The Company continues to focus on the core strategies of improving quality, growing branded sales (in both existing and evolving export markets) and in maintaining a low cost position.

We continue to face short term challenges due to the high cost from the 2014 vintage and ongoing margin pressure from customers. The recent reduction in the Australian dollar has had a positive impact and will assist in margin improvement.

The business continues to increase its footprint in the UK market via sales to new channels and customers. Sales of branded products into the US and Asian markets is a focus for 2016.

The strategy of increasing branded sales and improving operational efficiencies is critical to our continued success therefore investment in these areas will be increased. As a result of this increased investment, the Board has decided to take a
conservative approach toward 2016 cash requirements and no final dividend for 2015 will be paid. As in previous years, the board will continue to assess the payment of future dividends on a year by year basis.

Market conditions are continually monitored and further profit guidance will be provided at the Annual General Meeting in November 2015.

On behalf of the Board and shareholders I would like to thank Neil McGuigan, his management team and all of the staff of Australian Vintage who continue to meet the challenges with commitment, innovation and effort.

Finally I would like to thank all of our shareholders for your ongoing support.

Board Changes
In June this year the then Chairman, Mr Ian Ferrier and Non-Executive Director, Mr Brian McGuigan retired from the Board. Two new and very capable Non-Executive Directors were appointed, namely Ms Naseema Sparks and Mr John Davies.

Both Brian McGuigan and Ian Ferrier have had a long association with the Company having been appointed Directors of Brian McGuigan Wines Ltd in 1991 and continuing their directorship through the successful merger between Simeon Wines Ltd and Brian McGuigan Wines Ltd in 2002 to form McGuigan Simeon Wines Ltd (which changed its name to Australian Vintage Ltd in 2008).

On behalf of the Company, my fellow directors and shareholders, I acknowledge the material contributions made by both Ian and Brian and thank them sincerely for their respective contributions to the Board and to the Company.

I wish to thank Ian Ferrier for his outstanding commitment and contribution and for his influential leadership. He has provided considerable leadership as Chairman and his focus and disciplined approach has been greatly appreciated.

Similarly Brian McGuigan’s contribution to this Company has been significant. Brian requires special acknowledgement as the founding Managing Director of Brian McGuigan Wines (now Australian Vintage Limited) and then for his continuing contribution over the last 9 years as a Non-Executive Director. I wish to thank Brian for his passion, commitment and leadership.

The Company’s business has evolved into a respected branded wine business with a very clear focus on quality and growing branded sales.