Treasury Wine Estates (TWE)

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13 February 2020

Results 

Half Year 2020

Half Year 2019

Change

Revenue ($m)

1,551.2

1,577.2

-1.6%

Americas EBITS ($m)

98.3

133.6

-26.4%

Asia EBITS ($m)

175.5

143.7

+22.1%

ANZ EBITS ($m)

85.9

75.6

+13.6%

EBITS ($m)

366.7

356.3

+2.9%

Net Profit ($m)

229.2

225.0

+1.9%

Interim Dividend ($)

0.20

0.18

+11.1%

Treasury Wine Estates (TWE) earnings sluggish due to US business  

What happened?

  • Treasury Wine Estates (TWE) - the owner of many well-known Australian wine brands – posted its pre-released half year results today. As expected, net profit for the six months to December 2019 rose by just 1.9% to $229.2m. Most of the headline results were flagged by the group in late January. 
  • TWE will pay eligible investors a slightly larger fully franked dividend of $0.20 per share on April 3. This was also previously flagged.
  • TWE owns dozens of wine brands, including Penfolds, Wolf Blass, 19 Crimes. Lindemans, Fifth Leg, Greg Norman Estates, Etude, Yellowglen and Wynns Coonawarra Estate. It sells its wines across Asia, Europe, the Americas and Australia & New Zealand (ANZ).

Why did it happen?

  • The result was predominantly held back by its American operations and to a lesser extent the Australian bushfires, heat and drought, which have kept costs elevated. 
  • Its American business posted a 26.4% slide in profit to $98.3m at Constant Currency (which doesn’t include foreign exchange fluctuations). US earnings accounted for 27% of group profits over the half (vs 35% a year earlier). The American business underperformed mainly because its wine market has been flooded with additional supply by competitors at lower prices. This has made it challenging for TWE to move product in sufficient volume to offset the higher level of discounting required (to maintain its market share).
  • Asia is by far its biggest market, accounting for close to half the group’s earnings. Growth continued across the region, ‘driven by strong demand and outstanding sales execution in key markets.’ It expects growth in consumption and interest in premium wines to continue.
  • While profits rose in ANZ, the Australian wine market volume remains flat. What has helped the group is the ‘premiumisation’ of its products (selling wine of higher quality in lower volumes but at higher prices). Across its portfolio, TWE delivered top-line growth on key focus brands including Penfolds, Wolf Blass, Squealing Pig, 19 Crimes and The Stag.
  • Following these results, CEO Michael Clarke announced his intention to step down in July, three months earlier than flagged by the company in October last year.

Where to now?

  • Looking forward, TWE expects underlying earnings (EBITS) to grow by approximately 5% - 10% in F20, ‘…with the current challenging conditions in the US wine market expected to persist through the remainder of the year.’ The company previously was hoping for 10-15% growth. This revised forecast does not include the potential impact of the coronavirus. 
  • It expects the drought, heat, extremely dry winter and windy conditions to have negatively impacted its 2020 Australian vintage. This will result in higher COGS (Cost of Goods Sold) over the second half.
  • TWE made additional comments relating to the coronavirus today (not included in the January 28 update). TWE said while it is still too early to accurately assess its financial influence, ‘…should there be a sustained material impact on consumption [in China], this would impact F20 earnings’. Due to a change in methodology for diagnosing cases by Chinese authorities today, there was a ten-fold lift in the number of reported cases of those infected with the illness over the past 24 hours.
  • TWE shares fell on the result, despite the pre-release of key numbers. Its shares slumped by 31% over just two days in late January following the significantly weaker guidance flagged by the group.

Tags:

TWE

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