Treasury year end results puts treasure in the chest

Treasure in the chest

Treasury Wine Estates Ltd (TWE) has announced its 2016 financial results, and very respectable they are. Net profit after tax (NPAT) was $179.4 million (last year $77.6 million). Shareholders will be pleased, as the year-end dividend of 12 cents, added to the half-year, brought the total dividend to 20 cents, up from 14 cents in 2015 (an increase of 43 per cent).

The accounts are slightly more complex this year, as TWE acquired Diageo’s wine assets on January 1 (at a cost of $803.8 million) and they have contributed. The Diageo figures:

  • Volume: 3.4 million nine-litre cases
  • Revenue: $200.7 million
  • Average case price: $59.26
  • EBITS: $33.2 million

The Diageo contribution is added to the regular TWE business, which was:

  • Volume: 30.2 million nine-litre cases
  • Revenue: $2031.9 million
  • Average case price: $67.31
  • EBITS: $308.8 million

After adding other income, revenue came to $2343.3 million, an increase of 18.9 per cent on 2015.

The overall global performance of TWE was impressive, and the future looks positive. Of greater intrigue is the regional performance. The home market is Australia and New Zealand (ANZ), which includes beer and cider distributed under licence in New Zealand. ANZ market figures:

  • Volume: 7.8 million cases, up 2 per cent from 7.6 million in 2015.
  • Sales value: $590.7 million, up a meagre 0.8 per cent from $586.3 million.
  • Average case price: $75.88, down 1.8 per cent from $77.28.
  • EBITS: $92.3 million, up 3.8 per cent from $88.9 million.

The increase in volume was marginal, as was the sales value. Surprising was the average case price, making a mockery of TWE’s constant bleating about premiumisation, which, as will be seen, works well in other markets but not domestically. Yet TWE says it is “gaining share in Australian Luxury category driven by outstanding consumer and brand-led marketing campaigns”. Surely if this were correct the average case price would have increased. The increase in EBITS provides some compensation.

Asia now incorporates the Middle East & Africa (MEA) business, which used to be included in the Europe figures. It’s not large, contributing $1.4 million in 2016. Asia figures:

  • Volume: 2.4 million cases, up 39.9 per cent from 1.7 million in 2015, including 100,000 cases from the Diageo portfolio.
  • Sales value: $293.2 million, up 40.6 per cent from $208.6 million.
  • Average case price: $123.48, up 0.5 per cent from $122.88.
  • EBITS: $102 million, up 39.9 per cent from $72.9 million.

TWE takes the small contribution of Diageo wine as a positive, and says the future holds promise, noting the “significant opportunity for US brand portfolio in F17 and beyond with US brand volume up strongly in F16; continued elevated brand investment to support US portfolio expected”.

The latest figures from Chinese customs show TWE could have a lot of hard work ahead, and it may not be as easy as the company’s confidence implies.

US wines held sixth position in Chinese imports for the January to March 2016 period, reporting volume of just over 5 million litres, with a value of US$24.73 million ($32.39 million), down 9.78 per cent. They had an average per litre price of US$4.87 ($6.38), with the average TWE price per litre for Asia being $13.72 litre. In the Wine Australia export report the Australian average per litre to China was $5.60 in the 12 months to end of June 2016. But according to Chinese figures it was US$7.88 ($10.32) in their reporting period.

Whatever the figures, it remains fact that TWE has a lot of work ahead. It’s also fact that it has a fine portfolio of American brands. It will be interesting to see what progress TWE can make.

Asia is the smallest contributor in value but comes second in the profits league. It will be fascinating to see what the coming year brings.

Sector Value Sector EBITS
Americas $991 million Americas $136.3 million
ANZ $590.7 million Asia $102 million
Europe $357.7 million ANZ $92.3 million
Asia $293.2 million Europe $47.7 million

Europe also includes Latin America, and is still proving a hard market for TWE:

Volume: 8.4 million cases, including 2 million cases from the Diageo portfolio. In total volume was up 26.4 per cent. Take out the Diageo contribution and the base figure (mainly Australian) was down (4.3 per cent).

Sales value: $357.7 million, up 25 per cent from $286.1 million.

Average case price: $42.46, down 1.1 per cent from $42.94.

EBITS: $47.7 million divided between base (pre-Diageo) of $36.4 million and Diageo’s contribution of $11.3 million. Worth noting is the base increase of 127.5 per cent on 2015, when it was $16 million.

TWE says under the heading, “Europe regional perspectives”:

Blossom Hill provides TWE with important scale and significance in higher margin Impulse channel.

Impact of Brexit on customer and consumer demand remains uncertain; cost and revenue mitigation plans for F17 and beyond in place.

Movements in foreign exchange rates as a result of Brexit likely to result in increased COGS for Australian and US imported wine in F17, notably Blossom Hill.

In the top 10 UK wine brands for the 52 weeks to July 2016, Blossom Hill ranked second, with sales of £207.9 million ($360.1 million), but that was down 14.5 per cent on the £243.3 million the previous year.

If Blossom Hill is doing as TWE says, offering significance in the higher margin impulse channel, how come it has the lowest average price of the top 10 at £4.93 for a 75cl bottle? Tesco currently has the range at various prices ranging from £5 to £7 a bottle.

The Americas:

  • Volume: 15 million cases, up 5.8 per cent from 14.2 million cases in 2015. This included 1.3 million cases from the Diageo portfolio.
  • Sales value: $991 million, up 27.7 per cent from $776.2 million.
  • Average case price: $66.10, up 20.7 per cent from $57.77.
  • EBITS: $136.3 million, up 63.8 per cent from $83.2 million.

In July TWE announced it had divested itself of a dozen non-priority commercial (NPC) brands but was reluctant to name them. They were:

  • Little Penguin
  • Stone Cellars
  • Cellar No 8
  • Colores del Sol
  • Black Opal
  • Century Cellars
  • Great American Wine Company
  • Chateau La Paws
  • Once Upon A Vine
  • Rosenblum
  • Snapdragon
  • Orogeny

Little Penguin is in volume terms the fifth biggest Australian brand in the US, with 3.2 per cent of the market. Black Opal is a range of South Eastern Australian wines. Colores Del Sol is an Argentinean malbec. Stone Cellars is a brand that has both Argentinean and Californian wines in its portfolio. Chateau La Paws is a range of Californian wines that features dogs on the label and in the tasting notes (very crass). Stone Cellars was a Beringer spin-off, and Century Cellars is a sub-brand of Beaulieu Vineyard. Cellar No 8 is a range of Californian wines.

The Great American Wine Company is part of Rosenblum, which is also disposed of. Rosenblum was acquired by Diageo in January 2008 for a reported price of US$105 million; TWE picked it up with the other Diageo wine assets in January this year and disposed of it within six months.

Once Upon A Vine is a brand in the Bronco Wine portfolio; perhaps it acquired it from TWE. Snapdragon was also a brand acquired from Diageo, and Sonoma based. Orogeny has some smart pinot noir and chardonnay from Green Valley. Collectively, these dozen brands represent about 1 million cases.

TWE has not finished offloading assets, as it holds for sale $39.7 million in the Australia and New Zealand sector and $59.1 million in the US, a total of $98.8 million before tax. Under reconciliations, the assets held for sale total $81 million and are broken down into:

  • Buildings freehold: $21.2 million
  • Buildings leasehold: $0.3 million
  • Plant and equipment: $33.1 million
  • Land: $26.5 million

Greater definition is to be found in Note 13:

“Americas segment: The Americas assets held for sale comprise assets acquired as part of the Diageo Chateau & Estates acquisition ($59.1 million) which are surplus to requirements and include Paicines and Acacia wineries as well as Rutherford House. The carrying value of total assets held for sale include land and buildings $41.0 million, plant and equipment $17.2 million and agricultural assets of $0.9 million.

“ANZ segment: The ANZ assets held for sale relate to Ryecroft winery, Matua Auckland winery as well as select vineyard assets which are surplus to requirements. The carrying value comprises land and buildings $14.4 million, plant and equipment $24.2 million and vineyards $1.1 million.”

The land holdings of the group are considerable, amounting to 13,425 hectares, divided into:

  • Australia: 8939ha
  • US: 4002ha
  • New Zealand: 339ha
  • Italy: 145ha

The area under vine shown above includes 3657 hectares under lease arrangements and seven hectares of olive groves in Tuscany.

From the Northern Hemisphere 2015 vintage and the Southern Hemisphere 2016 vintage the total yield was 100,737 tonnes of grapes (excluding grapes harvested from vines acquired from Diageo Chateau & Estates).

The group is making a determined effort to distance itself from commercial wine (in blunt terms, the cheap and nasty), but as can be seen with Blossom Hill, there is still money to be made in that sector providing costs are controlled. In that respect, TWE has done well, achieving savings of $1.36 a case on cost of goods sold (COGS), which amounted to $41 million across the company.

TWE has also continued the investment in luxury inventory introduced by former CEO David Dearie. It now totals $800 million, prompting Simon Evans to write an article for the Financial Review on August 18 headlined:

“Treasury Wine’s $800 million pot of gold in luxury wines as Asia booms.” Evans wrote:

“The company outlined a big rise in the amount of high-end wines it has sitting in storage ready for bottling and sale in years to come, which will underpin continued profit growth and an increase in profit margins.”

Evans quotes CEO Michael Clarke on the issue of interest in buying Accolade Wines: “Their business is very different to our business.” 

Not that different, with Blossom Hill in your portfolio, Mr Clarke. And Accolade does have some top-end wines. Admittedly, no Penfolds Grange, but enough goodies to work on.

TWE is also working on “continued focus on optimising payment terms with key suppliers”.

This means TWE sends an email to smaller suppliers telling them their 60-day payment terms set by TWE will be extended to 65. It’s a “take it or goodbye” sort of email.

The group is reducing its dependence on large retailers. It has two major customers whose revenues represent 15.4 per cent in America (down from 17.4 per cent in 2015) and 9 per cent in the ANZ segment. TKR would guess they are Woolworths in Australia and maybe Costco in the US.

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