Treasury Wine has got its Mojo back, I’ll drink to that
We are all familiar with Treasury Wine products. Maybe some more than others in this locked-down world. I know my own alcohol consumption went into overdrive during the first lockdowns, but I confess that the recent Sydney lockdown has seen me embrace the example of Peter FitzSimons and avoid alcohol. Hopefully I am in the minority for Treasury’s sake.
Treasury is all about brands. It has three businesses now, with Penfolds as its premium product. It also has brands that we all know such as Wolf Blass, Lindeman’s, Seppelt, Pepperjack and many others. 19 Crimes is a new brand positioned for the US market.
Result versus expectations
The recent results have been unsurprising to some extent. That is a good thing, the market does not deal with surprises well. Treasury Wine has been at pains to keep the market fully informed on its recent journey and it has paid off. No one wants to open an expensive bottle of wine and find it's corked.
Treasury Wine (TWE) is a company in transition. A company that is part of the fabric of many lives.
In these ’unprecedented’ times one of the key themes has been the ability to ‘pivot’. Many companies have faced this with the pandemic, but for TWE it has been even more crucial to pivot as the relationship with China deteriorated as it was hit with devastating tariffs. It shows the strength of the brand and the new business model, which has repositioned its focus from mainland China and still delivered profit growth. Chinese earnings dropped by $77m. The Asian division saw a 15% hit to EBITS to $205m. That is a big hit, but it has done well elsewhere. It's all about the pivot. At least it still has earnings and there has been some redirection of product through Hong Kong which has helped.
It has met most analysts' expectations and results came in at the top end of guidance.
Some of the key points from the huge presentation:
- NPAT $309.6m up 3%. EPS up 2.9% to 42.9cps.
- Strong flexible balance sheet. FY Dividend 28c.
- Luxury and premium contribution up 6pts to 77%.
This chart tells the China story
Source: Company presentation
- Strong growth achieved for Penfolds Bins & Icons in key regional markets, including Singapore, Malaysia, Hong Kong and Thailand; Penfolds Bins & Icons NSR (ex-Mainland China) grew 38% in F21.
- TWE’s focus brand portfolio is continuing its strong momentum, growing 23% in F21 and outperforming the category led by 19 Crimes, Penfolds, Beringer Brothers, Matua and St Hubert’s and The Stag.
- Penfolds Bins & Icons delivered strong gains through F21, with Net Sales Revenue (NSR) up 15%, setting a solid platform for future growth.
Pivot and innovate
One of the surprises has been the ability of the company not only to pivot but to innovate. Leveraging its brand and launching 19 Crimes with Snoop Dogg as the face of this brand has been a masterstroke. Business in the Americas was up 23% in earnings before interest, tax and the SGARA accounting standard to $168.3m. Good doggy. Maybe crime does pay after all.
The most important thing for investors to know
Splitting the business into three has also been an important strategic move, and let’s face it, makes one of these brand silos easier to sell and perhaps more importantly, to be of interest to a buyer of the whole company. Lock, stock and two smoking barrels.
Money continues to slosh around the system and there are plenty of investment bankers looking for a career making deal to bring to fruition. The turnaround in TWE and its ability to withstand a massive hit to its growth channel (albeit at some cost in the short term) will not have gone unnoticed. In this market, with rates at record lows, every company is a target and TWE could be a tasty drop for a global brand manager. It must be an issue front and centre on new CEO Tim Ford’s mind. He has not long had his feet under the desk, and he would be loath to be pushed out by an aggressive bidder. Ford is showing his class with the transformation of TWE, and it would be good for him to see it through. He took the job in July 2020, and it has been a true baptism of fire.
The last few years have not been kind to TWE with short-seller attacks, accusations of ‘channel stuffing’ to inflate profits and of course, the Chinese tariffs. And the pandemic. The stock though has regained some of its mojo. That looks set to continue.
One of the great things with wine is it matures, and in theory, gets more valuable as it ages. At least the quality stuff does. Alcohol consumption has morphed from quantity to quality. TWE has quality. It also has brand and price point choices.
Another thing in its favour is the French wine harvest. It could be the lowest in at least 40 years. 1977 was the last great wine disaster in France. But 2021 could see production drop between 24-30%, according to some government reports. Destructive frosts and summer rain. Never a great combination. This could see French wine prices increase and TWE able to move its price point higher.
Keeping it premium
Ultimately for TWE it is all about premiumisation. Driving brands up the value chain and improving margins. This is happening and the dark and gloomy days after China hit the tariff button are behind it. It is learning to live in the new world. Opening up new markets, creating new value brands and innovating. If that doesn’t attract some interest, I am not sure what will.
The market seemed happy with the result despite some small slippage in the share price, against a weak backdrop, so not a true reflection.
I would expect to see mainly positive upgrades or at least the status quo remaining on these number.
Importantly Treasury Wine Estates has got its Mojo back, I’ll drink to that.
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Henry started in financial markets in London in the 80s as an option trader before coming to Sydney and spending 7 years at Macquarie Bank including a stint running equity derivatives and cash trading.
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