Treasury Wine Estates (TWE) shares touched a record high on Tuesday in the wake of an update to its cost cutting program, which really revealed the wine giant is enjoying solid trading conditions.
The record high ($6.75 in trading yesterday) came despite the volatility in global markets, which has caused the Australian sharemarket to fall more than 13% in the past six months.
Treasury shares, which closed at $6.63 yesterday, have moved beyond its last purple patch in May, 2013 when they touched a high of $6.47.
That was just before the US oversupply situation emerged to cost the company tens of millions of dollars in overstocks, write downs and other losses, the scalp of the former CEO, David Dearie and exposed it to predatory assault from private equity at $5.20 a share.
Now under David Clarke, 18 months into his gig as CEO, life is very different. The wine industry remains tough, unwanted brands unable to be sold, but costs have been cut (the company is now looking for another $30 million), wine marketing has been revamped, and sales are picking up.
In fact Mr Clarke said that sales momentum in the Asian business, in particular, was strong.
“The accelerated momentum in our business continues to be delivered across all regions, most notably Asia,” he said in the statement yesterday.
"TWE’s strategy of driving top line momentum, investing in our priority brands, enhancing both existing and new routes to market while reducing cost and complexity is continuing to deliver improved returns for our company and for our shareholders," he said.
“Today’s announcement demonstrates that we are successfully transitioning TWE from an order-taking, agricultural company to a more efficient, brand-led marketing organisation,” he added.
TWE 1Y – Treasury Wine flags improved performance, new cost cuts
Treasury’s Asian operations stood out in 2014-15, with profits rising 53% on profit margins running at 36.5% compared with 14.4% in the Australian business where big liquor chains run by Woolworths and Coles and large infrastructure investment keeps margins lower.
On October 15 TWE will conduct the global launch of the new 2011 vintage of its flagship wine Penfolds Grange in Shanghai, thereby underlining the importance of China to the company’s fortunes.
Treasury announced on Tuesday that the “Phase II” of a supply chain overhaul would strip out an extra $30 million in costs by 2020, on top of savings that had already been identified in March, which included the sale of the Asti winery in the United States.
The latest Phase II overhaul will result in asset write-downs of between $20 million to $30 million, and will see Treasury take one-off provisions of $14 million in its 2015-16 results.
Like Flight Centre, TWE is another company where shareholders have done well by not taking private equity money and running, but staying and trusting management to do the job and raise the share price.
