As expected, Treasury Wine Estates (TWE) more than doubled its after tax profit for the six months to December to $136.2 million as it rode stronger demand for its fine wines, especially in China and reaped the benefits of the Diageo wine purchase and the benefits of an aggressive cost cutting and restructuring program.
Net Sales Revenue for the half was up 20% on a reported currency basis to $1.294 billion and by 24% on a constant currency basis to $1.042 billion.
As a result, interim dividend was boosted 62.5%, or five cents a share to 13 cents share, a payout ratio of a still conservative 64%. And the company says that barring any unforeseen events, it is expecting a similar performance this half year to the six months to December.
Despite that news TWE shares fell 4.7% to $11.33.
Interestingly the company has hired a new chief financial officer who will be located in the Napa Valley in California, America’s and TWE’s major wine producing location.
And TWE said yesterday that CEO Michael Clarke will send up to six months of the year in the US where the huge Diageo wine buy is located and starting to boost returns.
The company said that Earnings Before Interest, Tax, SGARA (the accounting method used by wine makers and other food companies to account for their changes in value – like amortisation and depreciation) and material items (EBITS) of $226.8 million, up 58.8% on a reported currency basis.
Directors said the acquisition of the Diageo Wine business from January 1, 2016 “has already delivered positive upside to TWE, despite the significant investment in re-setting the brands as well as addressing unsustainable volume and customer contracts in F16.”
"As stated at the time of acquisition, the rationale for acquiring Diageo Wine was to secure increased access to Luxury and Masstige fruit which would in turn, deliver immediate portfolio mix benefits to TWE’s US business. The immediate portfolio mix benefit of the acquisition is evident in the America’s 1H17 result,” the company said.
CEO Clarke said in a statement with the results that the interim was "highlighted by further margin accretion, excellent cash conversion and outstanding EPS growth, despite the higher share base. All regions delivered double digit EBITS growth and importantly, growth was delivered sustainably”.
The stars were the company’s Asian and America’s divisions.
Asia reported a 75.6% surge in EBITS to $79 million, “reflecting continued investment in TWE’s business models, customer partnerships and brand portfolio, volume increased strongly and price increases across key brands delivered positive NSR per case growth.”
And the Americas reported a 75.4% jump in EBITS to $90.7 million. This directors said was due to the acquisition of Diageo Wine and “portfolio premiumisation.” (making existing wines more expensive by upgrading their image and prices).
"During the period, TWE front-ended a 30% increase in Advertising & Promotion (A&P) per case to re-set and refresh its US brand portfolio to position it for growth in both the US and in Asia in 2H17. Also included in 1H17 EBITS was a net, one- off $5m benefit, principally reflecting profit on asset sale,“ directors explained.
TWE’s Australia & New Zealand (ANZ) reported a 13.2% rise EBITS growth to $53.1 million for the six months, “driven by above-category volume growth in Australia (despite reallocating Luxury Australian wine to Asia), outstanding marketing and in-store activation, strengthened customer partnerships and a low cost culture.”
Europe reported a 34.3% rise in EBITS to $23.1 million, which was also “driven by strong customer partnerships, focused brand building investment on core Commercial brand tiers and the acquisition of Diageo Wine” TWE said.
TWE’ said its Supply Chain Optimisation initiative delivered Cost of Goods Sold (COGS) savings of $15 million in the half year, bringing the total cumulative savings to $56 mIllion.
This the company said, was "driven by realisation of cost reductions and benefits from production asset optimisation. This was partially offset by higher vintage costs from the 2014 and 2015 vintages in Australia and the 2015 vintage in the US.”
