Australia’s Wine Industry The Future Outlook

Stuart McNab

Setting the Scene

- Global Supply Demand update

- AUD is on the move

- AUD impact on Australian wine

- Segmenting the Wine Market

Source: Zadar Estimates, Note * Consumption figures include c.333m 9L cases of wine used in the production of fortifieds & industrial applications, Source:International Organisation of Vine & Wine (OIV)

6

7

8

9

10

11

12

13

14

15

2,000

2,500

3,000

3,500

4,000

4,500

1979 1984 1989 1994 1999 2004 2009 2014E

Global Wine Supply and Demand (1979 - 2014)

Area Under Vine (mHa)

Wine Production (m 9L case)

Wine Consumption (m 9L case)

m 9L Cases mHa

AUD$... starting to get back to long term average

AUD$ Exchange rate starting to soften – a double impact

Note: * Based on the assumption of a typical $30 COGS Source: Bloomberg, Industry sources

$22.5Now

Segmenting the Global Wine Market Category Supply Characteristics Australia’s

Position

Commodity Low/below cost of production, due to a regional oversupply or currency fluctuation.

Weak

Commercial Quality commercial varietal winesTypically yields 15-30T/Ha

Strong

Premium Quality regional varietal wines Mild-cooler climate, 8-15T/ha

Strong

Luxury High quality varietal winesOptimal Clonal material/SiteMild to Cooler Climate 3-10T/Ha

Strong

Chardonnay Bulk Pricing

USD

Generic White Pricing

USD

Our Competitive Strengths• Australia’s quality credentials• Clonal material• Regionality - our balanced approach• Climate change – geographic flexibility• Water availability• Cost competitiveness

Cost of production Relative cost of land

Quality Credentials

• Australia’s commercial wines are very competitive

• Our luxury wines have a track record for matching it with the world’s best

Clare Valley, SA

2013 Decanter World Wine Awards• Australian wines scoop six International

Trophies at 2013 Decanter World Wine Awards

• Australian wines won more trophies than any other country

Decanter: 100 Wines To Try Before You Die

Four Australian wines:

• 1962 Penfolds Bin 60A

• 1998 Henschke Hill of Grace

• 1959 Lindeman's Bin, Hunter Valley

• 1982 Seppelts Riesling, Eden Valley

Wine Spectator Insider

AT UP TO 100 POINTS, AUSTRALIAN ALL-STARS KNOCK IT OUT of the park in this week’s Wine Spectator Insider.

Penfolds has seven releases here, led by the legendary Grange Shiraz and the Bin 707 Cabernet, and Torbreck in at six, with the latest RunRig Shiraz in the mix. Leeuwin excels with Chardonnay, and there’s an appearance for Two Hands as well.

– Vol. 9, No. 24 / June 12, 2013

Australia’s multi-regional brands

• Large volumes• Consistent quality across vintages• Quality, volume and cost maintained regardless of weather

Our clonal material has a strong pedigree

1820s•Busby and Macarthur introduce European planting material to Australia

1850s•Specimens of American vines imported into Europe

1860s•Phylloxera spreads throughout Europe

•Discovered in Australia in 1877

Today•Australia remains relatively phylloxera free

•Our clonal material has a strong pedigree

Phylloxera distribution

Source: Grape phylloxera, Exotic threat to Western Australia, Botha J, Hardie D, Power G, reviewed October 2006

Phylloxera spread rapidly in Europe

France - 1865 France - 1890

Phylloxera spread in Australia is contained

Phylloxera spread in Australia is limited

Australian heritage vineyards

1893Brands Laira vineyard -the oldest remaining single Shiraz block in Coonawarra

1885Penfolds Block 42 Cabernet Sauvignon vines are thought to be the oldest continuously producing Cabernet Sauvignon vines in the world

1843Langmeil Freedom Shiraz vineyard in Barossa Valley

Regionality

• Our balanced approach

Coonawarra, SA

Regional / Single vineyard brands

• True expressions of their region, tied to the history & regional “terroir”• Moderate volume, higher risk, more vintage variation

Premium brands with unique regional applications

• Reputation for high quality and consistency

• Larger volumes of higher quality wines

• Consistency of style & quality

• Not restricted to specific regions

• Some key wines within ranges are appellated to a region or even single vineyard

Climate Change

• A global phenomenon….. not unique to Australia

Barossa Valley, SA

The global picture

Source: Climate Change Impacts on Terroir, Jones (2008) Growing season average temperature 12-220C

World Viticulture Zones

1950 – 1999 Isotherms shift towards the poles ~80 – 240km

2000 – 2049 Isotherms shift towards the poles ~160 – 300 km

New premium regions emerging

Limestone Coast

Central-Southern Victoria

Tasmania1994 – 280 Ha2015 ≈ 1700 Ha

Water – strength or weakness?

• 2000’s “Millennium Drought” one of the worst in Australia since the 1900’s “Federation Drought”

• Water availability was 32% (S.A.)• Grape prices and water prices reacted• Despite drought, the 2008 Australian

wine crush was 1.8M Tonnes

• Why……Vineyard owners purchased temporary water

Water flows to the most profitable crop

Agribusiness Water Usage Gross Value $/ML

Horticulture/Wine 11% $6342

Cropping 31% $816

Grazing 58% $902

• Grape production in Australia delivers one of the highest $ returns for the water used, in the Murray Darling Basin

Source: ABS 2004

Other Countries have challenges…

Is Australia cost competitive?• Can Australia compete with other wine grape producing countries?

Langhorne Creek, SA

Source: Zadar Estimates, Rabobank, Ciatti Compnay, Industry sources, 2011

4.903.80

7.30

4.706.55

1.40

0.00

2.00

4.00

6.00

8.00

Chile Australia* US South Africa Argentina

Cost of bulk wine imported into China (2011)

* Australia wine includes CNY 1.4 in import tariffs. These import tariffs are no longer applicable due to the Free Trade Agreement between China and Australia

CNY/Litre

0.740.66 0.7 0.61

0.97

0

0.2

0.4

0.6

0.8

1

Chile Australia US South Africa Argentina

Cost of bulk wine imported into the US (2011)USD/Litre

Production costs – Luxury wines

Source: Industry sources

Typical Cost $ per Ha

(AUD)

$0

$5,000

$10,000

$15,000

$20,000

AUSTRALIA NEW ZEALAND UNITED STATES

Indicative luxury vineyard costs

Sources: 2011 Knight Frank Wealth Report, Nielsen Financial Services, industry sources

(AUD) Australia Australia US France

Icon Luxury Napa Bordeaux

Cost per planted hectare (A$) 75,000 59,000 296,000 642,000

Volumes

Hectares acquired per A$100m 1,333 1,695 338 156

Typical tonnes per hectare 3 6 6 1

2015 Update 75,000 60,000 500,000+ 750,000+

Summary• Australia is well-placed to supply wine to meet

increasing global demand

• Established quality credentials

• Land and growing costs are competitive

• Water & new regions offer expansion and flexibility

• AUD$ is trending down to more ‘normal’ levels

• Australia needs to target Commercial, Premium & Luxury Wines and not the surplus or “commodity” Wine