Budget assumptions

To predict potential income for AWI, the Board considers a number of factors based on current, historical and forward predictions in consultation with industry, expert advisors and business intelligence sources. AWI seeks to be balanced and responsible in forward projections.

Bearing in mind this forecasting is for budgets commencing from July 2019, the modelling for the five levy rate options are based on the following assumptions;

EMI at 1700c – based on the current 2017/18 seasonal average, factoring in the highs and lows of the 2017/18 season and the potential for fluctuations over the next WoolPoll period (2019/20 – 2021/22).

Production at 352 million/ kg with forecast 2% increase per annum – based on current levels, with a productivity growth factor. Whilst high wool prices are seeing a return to the industry, sheep numbers take time to rebuild and may be impacted by factors such as drought.

Expenditure of $110 million per annum – AWI has been building its resources and expenditure over the past three years in line with increasing wool prices. The Board believes this level of investment is required to continue to drive demand, as well as to support industry growth, sustainability and productivity.

Forecast closing reserves at June 2019 of $105.3 million – based on forecast income and expenditure for 2018/19. Where we did not have high return projects, additional funds have been banked, building a “Discretionary Reserve”. This now enables us to look for new investment opportunities (such as automated shearing), as well as providing a buffer against any sudden or unexpected wool price downturn, ensuring vital projects can continue.

AWI recommends

Maintain the current 2% levy for R&D and Marketing

Wool is a conscious choice. You choose to be a farmer. You choose to grow wool instead of meat or crops. Similarly, designers choose to use wool over other fibres in their collections. Consumers also have a conscious choice whether to buy wool products.

Our industry is in a strong position. Many of you are taking advantage of current market conditions by investing in new infrastructure – new yards, fencing, sheds and even practice change – because we all know choosing to invest when times are good enables us to future proof and build resilience.

As you’re making these business decisions to invest for tomorrow, we’re doing the same. That’s why we’re recommending woolgrowers vote to maintain the 2% levy, because like you, we want to invest when times are good.

This is especially important given the historical volatile and cyclical nature of wool prices, so we must invest responsibly.

Over the past three years, we’ve increased resources across the business and we now have the right people and resources in the right places to deliver more for woolgrowers. We’ve also built up a responsible buffer in our reserves, which will help to protect the company against future price volatility. By maintaining the 2% levy rate, AWI will be able to operate at an optimum level to continue to deliver benefits to woolgrowers.

If the 2% levy is maintained, we can continue to deliver our core R&D and marketing programs to address your profitability and productivity priorities. We’re also able to look at investing in major projects to address those issues that are important to the industry (such as automated wool harvesting), rather than just the essentials.

While there are currently strong demand signals, we must keep marketing Australian wool. As any business knows, if we take the foot off the pedal or stop promoting ourselves, we’ll leave a gap in the market that will undoubtedly be filled by someone else. The global trend of provenance and traceability has shifted consumer priorities, and they’re now looking for natural, sustainable products, like wool. Unlike synthetic fibres, we have a unique and personal story we can tell about our fibre. And people are listening. By maintaining a 2% levy, we can keep investing in marketing and bring the world to your product, positioning wool and all its natural benefits as a premium luxury fibre.

To make sure we have a place in the apparel and textile market of the future, we must continue to push the boundaries of our fibre as we have been in recent years. We can only do this through continued investment in product and processing innovations, revolutionizing how wool is thought of and used – no longer that itchy, bulky school jumper of days gone by, but a luxurious, high performance, technical fibre that is the natural, sustainable and the obvious choice for the modern consumer.

It’s your choice to invest in your industry. The future profitability for you, sustainability for your industry and global demand for your product rests on this choice. It’s AWI’s responsibility to action this choice and we can do this best if you vote to maintain the 2% levy.;

While AWI could invest even more for growers at 3% or 2.5%, we believe 2% is the optimum level to balance our financial responsibility with our capacity to deliver benefits for growers.

It is not viable to maintain the level of investment in R&D and marketing at 1.5% in the long term, and AWI would not be able to continue to deliver R&D and marketing benefits for woolgrowers. We would have no capacity to invest in new investment opportunities and no buffer in our budget against any future wool price volatility, meaning existing programs may have to be discontinued.

At 0%, there would be no way to address key woolgrower priorities that support profitability, increased demand or industry sustainability. We would have no money to invest in R&D to continue to solve problems and help woolgrowers in the fight against flies, wild dogs or any future industry threats. We would not be able to market your wool and there would be no way of maintaining or increasing global demand for Australian wool.


Levy rate options

Increase levy: 3%

KEY INVESTMENT OPPORTUNITIES

With increased income from the levy, we would allocate more money to accelerating and expanding at a greater rate the R&D and marketing programs outlined in AWI’s Strategic Plan (summarised here), and we would have to build our capacity to find and resource new investment opportunities to leverage even more returns for growers.

With revenue based on a 3% levy, we would be able to look for new investment opportunities such as:

  • New automated wool harvesting strategy
  • Identifying new early stage processing opportunities to reduce reliance on a single market
  • Parasite and disease genome exploration and manipulation for treatments and vaccines for parasites other than the blowfly
  • Pasture breed development to identify new clover varieties resistant to red leaf clover syndrome
  • Fibre research into medical uses for wool
  • Wool testing for traceability or country of origin – such as isotopes and DNA testing of wool
  • Carbon footprint case studies
  • New centre for product and processing development, and innovations in machinery and technicians, to keep wool at the technical forefront
  • Bigger collaborations with bigger brands and partnerships with higher profile influencers (such as sports stars, actors and influencers) to be wool ambassadors.
IMPACT ON RESERVES

While expenditure will increase, it is also expected that AWI’s reserves will increase. It is expected the Discretionary Reserve would increase due to the time required to ensure the correct resources are in place and trained to deliver the additional investments. This increase will provide budget resilience, future-proofing the R&D and marketing programs to ensure we can continue to deliver for woolgrowers in the face of potential future wool price volatility.

RISK

Investing in new R&D and marketing opportunities would require a change to our investment risk profile to actively seek high-risk projects that have the potential to give higher returns, but also greater risk of failure. Our current investment balance is weighted towards low- and medium-risk programs, with only 10% of our R&D and marketing investment portfolio high-risk. The change in investment policy to higher risk will increase the possibility of negative returns on investment, though this could be mitigated through a more rigorous and staged approach to R&D and marketing projects. It will also take time to find new investment projects, along with the human resources to ensure that they are delivered, which may push expenditure into the next strategic period and delay in delivery of benefits.

While AWI could invest even more for growers at 3% or 2.5%, we believe 2% is the optimum level to balance our financial responsibility with our capacity to deliver benefits for growers.

Increase levy: 2.5%

KEY INVESTMENT OPPORTUNITIES

Similarly to the 3% levy rate option, AWI would look to accelerate and expand the delivery of our current R&D and marketing programs (summarised here), and would have some capacity to increase our investment risk profile to look at higher risk R&D and marketing projects, with potentially higher return.

With revenue based on a 2.5% levy, we would be able to look for new investment opportunities such as:

  • New automated wool harvesting strategy
  • Identifying new early stage processing opportunities to reduce reliance on a single market
  • Pasture breed development to identify new clover varieties resistant to red leaf clover syndrome
  • New centre for product and processing development, and innovations in machinery and technicians, to keep wool at the technical forefront.
  • Bigger collaborations with bigger brands and partnerships with higher profile influencers (such as sports stars, actors and influencers) to be wool ambassadors.
IMPACT ON RESERVES

As with the 3% levy option, a 2.5% levy will allow AWI to retain reserves at a healthy level to future-proof the industry against potential price volatility and enable industry to sustain its investment in R&D and marketing, as well as building required reserves to cover the company in the event woolgrowers vote to wind up operations.

RISK

A risk with increasing the investment risk profile will be in identifying good R&D and marketing investments without significantly increasing the risk to the returns on investments achieved.

While AWI could invest even more for growers at 3% or 2.5%, we believe 2% is the optimum level to balance our financial responsibility with our capacity to deliver benefits for growers.

Maintain current levy: 2%

KEY INVESTMENT OPPORTUNITIES

Over the previous three years, we have been working hard to build our resource capacity to deliver more through our current core R&D and marketing programs. By maintaining the 2% levy, we can continue on this trajectory to reach our optimal operational level and deliver greater returns for woolgrowers. We also plan to draw down on the Discretionary Reserve to invest in a new automated wool harvesting strategy.

We may also have some capacity to invest in other major areas, such as:

  • pasture breed development to identify new clover varieties resistant to red leaf clover syndrome
  • new centre for product and processing development to keep wool at the technical forefront
  • bigger collaborations with bigger brands and partnerships with higher profile influencers (such as sports stars, actors and influencers) to be wool ambassadors.
IMPACT ON RESERVES

Retaining the current 2% levy rate will allow us to maintain our Forward Contracts, Operating, Emergency Animal and Discretionary Reserves at a responsible level. While we would look to draw down on the Discretionary Reserve, the closing reserves at the end of the next three years will still be above the level that the Board considers responsible and necessary to enable AWI to invest in new, major R&D or marketing opportunities as they arise, as well as providing budget resilience in the face of potential wool price volatility to ensure investment in R&D and marketing programs can continue if levy income falls.

RISK

As 2% is the current levy rate, by maintaining this rate, the risk level is expected to be equivalent to what we are currently managing.

WHY AWI RECOMMENDS 2%

Decrease levy: 1.5%

KEY INVESTMENT THREATS

At a 1.5% levy rate, we can continue our current core investment program only if wool prices remain at current levels. Over the past three years, we have been building up our resources to deliver more R&D and marketing programs for the benefit of woolgrowers. This trajectory will not be able to continue with a 1.5% levy rate – we will not reach our optimal operational level and will have to limit our activities.

IMPACT ON RESERVES

After 3 years at a 1.5% levy rate at forecast expenditure, we’d be below our optimum Discretionary Reserve level, and at 6 years we’d be below our required wind-up reserves. We don’t believe this is responsible financial management as it doesn’t build resilience for the industry or make the most of the current EMI for the future.

RISK

As the majority of AWI’s income is dependent on the wool levy, a 1.5% levy rate would leave AWI highly exposed to wool price fluctuations and any volatility (caused either within the industry or by external threats) will be directly reflected in AWI’s balance sheet. AWI experienced this reality following the Global Financial Crisis, which affected global consumer confidence, and AWI saw a dramatic 23% fall in levy income.

The 1.5% levy rate option offers no buffer or protection in the face of future price volatility to ensure AWI’s investment in R&D and marketing programs can continue to deliver for woolgrowers. While the Discretionary Reserve can provide a buffer for a short time, a 1.5% levy over the next three years would not enable AWI to maintain an adequate buffer in the Discretionary Reserves, requiring a reduction in R&D and marketing expenditure to compensate.

It is not viable to maintain the level of investment in R&D and marketing at 1.5% in the long term, and AWI would not be able to continue to deliver R&D and marketing benefits for woolgrowers. We would have no capacity to invest in new investment opportunities and no buffer in our budget against any future wool price volatility, meaning existing programs may have to be discontinued.

Cease levy: 0%

KEY INVESTMENT THREATS

There would be no levy income, causing a wind-up of existing R&D and marketing programs and no new investments. Company assets would be sold with oversight by the Government.

The Woolmark brand licensee revenue would be the sole source of income and would be expected to decrease significantly over time without marketing support. Without this staff support, we wouldn’t be able to service the demand from retailers and brands, therefore the income from the Woolmark licensee business would be reduced.

As the investment interest income is based on AWI’s reserves, the draw down on reserves to wind-up the business would subsequently lead to a loss of interest income.

IMPACT ON RESERVES

AWI would spend over and above the Forward Contract and Operating Reserves in winding-up the R&D and marketing contracts and staff operations. Any remaining funds in the Discretionary and Emergency Reserves will revert to the Government to determine for the benefit of woolgrowers.

RISK

The risk to the Australian wool industry of no collective investment in R&D and marketing cannot be underestimated. With so many competing enterprises, producing wool must be worthwhile and the primary objective of investing in R&D is to make your woolgrowing operation more profitable.

More than 72% of woolgrowers have used a tool or program developed by AWI, which would not have been developed if there were no collective investment in R&D.

Marketing is critical to ensuring consumers, manufacturers and designers are aware of the quality fibre you’re producing, can manufacture it and can integrate it into their product lines. If the industry takes its foot off the pedal or stops promoting themselves, it’ll leave a gap in the market that will undoubtedly be filled by someone else.

At 0%, there would be no way to address key woolgrower priorities that support profitability, increased demand or industry sustainability. We would have no money to invest in R&D to continue to solve problems and help woolgrowers in the fight against flies, wild dogs or any future industry threats. We would not be able to market your wool and there would be no way of maintaining or increasing global demand for Australian wool.