FFW Directors and CEO Report 2017

The Directors of Foley Family Wines Limited (FFW) wish to announce the 2017 operating results and annual report for the 12 months ended 30 June 2017. Operating performance The 2017 year has been a difficult year due to the November earthquake and a full year of post Brexit exchange rates. FFW recorded an operating profit before revaluations and income tax ("operating earnings") of $4,979,000, compared with $4,339,000 for the previous financial year. Due to the requirement to account for insurance proceeds, approximately $2,000,000 is accounted for within the operating earnings. Last year, we advised that exchange rates had major implications for FFW. This is certainly reflected by the new level of the UK pound, where approximately $1,000,000 of operating earnings has been lost due to the strength of the New Zealand dollar versus the pound. Profit for the year net of tax, attributable to shareholders was $3,056,000, down from $4,956,000 the previous year. A significant reason for the decrease in revaluation gains, is due to the unrealised gain on harvested grapes being down by $2,524,000. This decrease is directly attributable to the tough conditions over summer and the late high rainfalls. Case sales and bulk wine Bottled case sales (000's) June 2017 June 2016 % change New Zealand 92 101 -9% Australia 68 104 -35% United States/Canada 147 131 12% United Kingdom/Europe 64 71 -10% Other/Rest of World 18 15 20% TOTAL 389 422 7.8% Net case realisation June 2017 June 2016 % change Ave. Price per case ($) 78 78 0% Ave. Selling, Promotion and Marketing cost per case ($) 9 8 13% Net case realisation ($) 69 70 -1.4% The USA market continues to be a critical focus for FFW. Over the last two years, shipments to the USA are up 29% from 2015, and this is after some major disruption due to one of our import partners having an ownership change in the first quarter of 2017. However, FFW believes this new partner will be positive due to scale and capabilities. While NZ was down 9% for the year, FFW had a much stronger second half of the financial year, with sales up 21% for the last quarter. FFW believes that following the changes which have been made to its sales strategy, this trend will continue, and this was evidenced in our July sales. Furthermore, FFW has continued to focus on the premium segment which is reflected in an 9% increase in revenue per case. Australia was extremely difficult due to high competition, with a high volume of supermarket and private label competition. The company decided not to drop prices to meet the competition, which had volume implications. However, like New Zealand, the focus on the premium segment saw a 11% lift in revenue per case. The United Kingdom and Europe was extremely challenging. The currency devaluation post Brexit led to a decrease of 18% in revenue per case, which is exactly in line with industry average. While FFW's strategy is to continue to focus on the premium sector in this market, FFW is unable to compete with the large bulk producers and therefore high quality wine led by Alastair Maling MW, Chief Group Winemaker/Head of Viticulture and his team, will be our point of difference. In 2016, we stated that FFW's strategy was to build our branded business. Bulk sales was a fall-back strategy to avoid discounting our brands. In this context, it was resolved to sell excess bulk wine from the large 2016 vintage. Bulk wine sales were 46,000 9L equivalents compared to 14,542 9L equivalents last year. FFW will maintain its strategy of only selling bulk to avoid the discounting of its brands. Average price per case is flat at $78 for the year. As outlined last year, these numbers need to be assessed in the context of the FFW business model. Specifically, FFW prices on an FOB basis and distributors pay the cost from the port, and importantly, they provide the sales resources and in-market logistics. Clearly, the United Kingdom significantly impacted the average price per case. However, FFW believes the positive changes in New Zealand and Australia over the last year, reinforce the strategy of focusing on the premium sector, and, in particular wines with an average case rate over $120 NZD. Earthquake As advised last year, the 7.8 Culverden earthquake caused significant damage to the Grove Mill winery with all tanks sustaining some level of damage (from minor repairs to complete write-offs). The timing of the earthquake created a race against time to ensure the winery was rebuilt in time for harvest, but it also created uncertainty in terms of grape intake. FFW wishes to express its gratitude to its staff, insurance advisors, contractors and underwriters who worked together to ensure that the winery was rebuilt in time. Also, FFW wishes to thank the Babich Family who offered to store wine at their facility as Grove Mill had to empty all its tanks to enable repairs to commence. In terms of financial implications, we acknowledge that the numbers appear complex. In simple terms, FFW received $4,674,000 in insurance proceeds (note 3). Non-recurring costs (inventory write off, extra costs of working etc) totalled $2,647,000 (note 4). FFW incurred $3,168,000 by way of costs on asset replacements. The difference between these reflects the insurance excess of $1,125,000 and costs not covered of $16,000. Balance sheet strength and cash flow Operating cash flow was $3,503,000 for the year, compared with $2,245,000 last year. Unlike last year, FFW decided not to bring the payment forward for growers due to the unbudgeted funding required for earthquake damage. The payment to growers was approximately $1,400,000 and this was paid in July. FFW paid down term debt by a further $1,000,000, thus reducing total term debt to $10,001,000. At year-end, total assets were $128,421,000 and equity was $91,144,000 (2016 $86,929,000). The final payment of $865,000 was received in August as full and final settlement for the earthquake claim. Capital expenditure FFW capital expenditure amounted to $4,886,000, which was significantly influenced by the earthquake expenditure of $3,168,000 (note that $1,844,000 was allocated from insurance proceeds as per the statement of cash flows. The difference equates approximately to our insurance excess). The remaining capital expenditure of $1,718,000 was well down on the prior year of $2,134,000. As stated last year, the directors are committed to keeping capital expenditure below the annual depreciation level other than in a year that requires capex for production expansion. FFW would have achieved this if the earthquake had not occurred. Vintage 2017 Vintage 2017 saw FFW harvest 5,527 tonnes of grapes from FFW-owned vineyards, leased vineyards and contract growers. The 2017 harvest is 20% lower than last year's record harvest of 6,954 tonnes, however it is up on the 2015 harvest of 5,300 tonnes. The 2017 vintage was a challenge due to a cool summer and late season rains. Steps needed to be taken to ensure fruit was harvested in the best possible condition, which due to the risk of Botrytis meant leaving some fruit on the vine. These decisions were made to ensure that our brands had the best possible wine quality. These decisions have already been vindicated by the initial feedback from wine reviewers. We expect our 2017 wines to perform very well in the upcoming wine shows. Wine shows FFW has had another great year in terms of accolades received in wine shows around the world. Over the course of the last 12 months, FFW has won the following medals: Platinum 2 Gold 15 Silver 53 Bronze 103 At the Decanter Wine Awards, Russian Jack 2016 Sauvignon Blanc was awarded the Platinum medal for Best in Show for "Best Value Sauvignon Blanc" and Te Kairanga Runholder 2015 Pinot Noir was awarded Platinum medal for "Best New Zealand Pinot Noir". In addition to the accolades outlined above, Grove Mill Sauvignon Blanc 2016 was awarded "Outstanding" by the Decanter tasting Panel with 96 points. Vavasour Sauvignon Blanc 2016 was once again chosen in Air New Zealand's "Fine Wines of New Zealand" list. The directors would like to extend their gratitude to staff for their commitment to the quality of FFW's wines and for their hard work. Lighthouse Gin Lighthouse Gin sales totalled 14,762 bottles for the year, however, in total the actual volume shipped was 32,264 up 95% on the prior year. Due to the terms of shipping, the additional 17,502 bottles will be recorded as sales in the 2018 financial year. Once again, FFW's focus continues to be new international distribution opportunities along with building the brand within New Zealand. Operating results outlook The directors fully acknowledge that 2017 was a difficult year and FFW did not meet its expectations. However, the directors firmly believe that FFW will become one of New Zealand's foremost wines groups in the premium segment. The quality of the wine produced will set us apart from competitors. Nothing has changed from the central theme outlined last year, which is to extract maximum value from our existing assets. Key priorities are: o Driving sales growth in line with our winery capacity. o Focusing on growing higher price point sales at the super premium and ultra-premium levels (trading up). o Cementing new distributor relationships that have been recently secured. o Seeking out new distribution arrangements in markets where our brands are not represented. o Continuing to focus on viticulture practices delivering the appropriate yields at the right cost for the price point. o Continuing to focus on process improvement and driving cost savings. Dividend The directors have resolved to maintain a final fully imputed dividend of 3 cents per share. This reflects the board's desire to maintain a dividend policy to shareholders and the confidence it has in the business. As outlined last year, FFW has a strong balance sheet and is focused on increasing the dividend yield to shareholders as the company grows. The policy of the board is to evaluate present and projected cash flows, sustainable operating earnings and, if prudent, declare a dividend subject to current and future capital and acquisition expenditure requirements. NZX listing and new acquisitions Notwithstanding the proposed changes with the NZX, FFW is committed to moving to the NZX within the next financial year. The intention is to confirm this at the Annual Shareholders' Meeting. Furthermore, as advised in June, with the strength of the FFW balance sheet, the company is actively seeking new opportunities. Fundamentally, the company needs to now start building scale to maximise the long term returns to shareholders. For and behalf of the Board of Directors Bill Foley Mark Turnbull CHAIRMAN CEO and DIRECTOR End CA:00306350 For:FFW Type:ANNREP Time:2017-08-29 17:01:58