How is Australia Placed to Take Advantage of Global Trends?

Stuart McNab

Head o f G loba l Wine Produc t i onTreasury Wine Es ta tes

Australia’s advantages

• Australia’s quality credentials

• Clonal Material

• Regionality - our balanced approach

• Climate change - adaptation and regional flexibility

• Water availability

• Cost Competitiveness Cost of production Relative cost of land AUD$ impact on returns

• Global wine supply & demand

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

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 1590

• 1982 Seppelts Riesling, Eden Valley

TWE Master Blend Classification events

• Events in Melbourne, Toronto & London to “classify” some of the world’s leading Cabernet Sauvignon based blends

• 30 leading global wine critics

• Blind tasting of 18 world class cabernet blends

• Wolf Blass Black label 2008 excelled, coming equal second to Chateau Lynch Bages 2008

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

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

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 spread rapidly in Europe

France - 1865 France - 1890

Phylloxera distribution

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

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

Australia’s multi-regional brands

• Large volumes

• Consistent quality across vintages

• Quality, volume and cost maintained regardless of weather

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

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

Climate change adaptation

Pruned in May

Pruned in September

Source: Treasury Wine Estates

Source: Victor O. Sadras , Chris J. Soar, 2009, Shiraz vines maintain yield in response to a 2–4 ◦C increase in maximum∗temperature using an open-top heating system at key phenostages, South Australian Research and Development Institute

New premium regions emerging

Wrattonbully

Robe

Heathcote

Tasmania1994 – 280 Ha2013 – 11,400 Ha

Water availability

The dry river bed of the Murray River at Myall near Kerang, Victoria, 1914.During the Federation Drought the Murray stopped flowing for approx. 6

months.Source:  State Library of New South Wales. 

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

• 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

Is Australia cost competitive?

• Can Australia compete with other wine grape producing countries?

Langhorne Creek, SA

Cost of production – commercial wine

• Our growing costs are competitive

• Our exchange rate has a significant impact

USD Chile Australia Argentina USSouth Africa

2011 average USD rate 198 204 176 237 162

3-year low USD rate 142 126 171 237 112

Source: Rabobank, 2011

USD / Tonne

Into the US market

Cost components of bulk wine* landed in the US

Note: * Reflects grape component of bulk wine, excluding processing costsSource:Rabobank, Ciatti Company, industry sources, 2011

USD / Litre

Production costs – luxury wines

Source: Industry sources

Typical Cost

$ per Ha(AUD)

AUSTRALIA NEW ZEALAND UNITED STATES$0

$5,000

$10,000

$15,000

$20,000

Indicative luxury vineyard cost & returns

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

Indicative returns

ROCE at full production 168% 61% 14% 13%

Payback period based on EBITS (years) 6 4 10 13

AUD$ Exchange rate starting to soften

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

Global supply & demand

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

Summary

• Australia is well-placed to supply wine to meet global demand

• Established quality credentials

• Land and growing costs are competitive

• Water & new regions offer expansion and flexibility

• AUD$ has been high but is trending down