Underperformance in US hits Treasury Wine Estate’s profit expectations

Underperformance in the US is set to hit Treasury Wine’s (TWE) profit expectations, the company reported yesterday, as its first-half profits took a slight dip.

TWE chief executive Michael Clarke

The Australian wine giant has recorded a 17% fall in EBITS in the Americas region in the first half year to $98.3 million, with profit margins in the Americas dropping 3.6 percentage points to 16.1 % compared to the previous year.

This underperformance caused a 0.7% dip in the company’s half-year net sales, which is likely to impact its EBIT for the full fiscal year to around 5%-10%, it said, down from the expected 15%-20%, with F21 likely to see EBIt of 10-15%. Profit growth expectations for 2020-21 has also been cut to between 10 to 15%.

Net profits after tax (before material items and self-generating and regenerating assets) was recorded at 1.9%, it said, although losses on the back of Californian vintage losses in  2017, 2018 and 2019, pushed the net profits after tax by -4% to $220.3 million.

The US dip is the result of a perfect storm of increasing competition due to surplus wine, the 15% growth of US private label against a flat market, unexpected changes in its US team and the inability to recover or offset higher costs, forcing it to discount higher to maintain share.

“Our first-half performance in the Americas has been a setback and is disappointing given the high expectations we have for growth in this important market,” TWE chief executive officer Michael Clarke, adding the situation was unlikely to recover in the second half.

Clark, who is due to step down in September, said the team had ruled out “aggressive one off recovery activities” such as pricing and would focus on rebuilding momentum and reviewing its commercial wine business, hinting at potentially off-loading some of the lower-cost commercial wine businesses, removing costs and outsourcing supply to third party suppliers.

“We would rather stay on our journey of sustainably growing profit, but for F20 and F21, at slightly lower growth rates than previously expected and instead focus on resetting the US management team and rebuilding momentum in execution, strategically reviewing how we will manage our US and global Commercial wine business differently and go into the back half of F21 and then F22 stronger again,” he said.

He noted that there was a “pleasing” growth of luxury and masstige across Asia (up a total of 19% to $175.5m), Australia and New Zealand (up 10% overall to $85.9m), and European, the Middle East and Africa regions, which helped offset higher costs of Australian wine, which saw the latter latter fall by 1% to $32. He noted that the cost of the 2020 Australian vintage was likely to be affected by the recent drought, heat and fires in Australia.

“We remain focused on our journey of sustainably growing earnings, but for F20 and F21, at slower growth rates than previously expected as we look to re-build momentum in the US and implement key actions from our strategic review. The fundamentals of our global business are strong, and we remain firmly focused on continuing our journey of margin accretive growth into the future.”We remain focused on our journey of sustainably growing earnings, but for F20 and F21, at slower growth rates than previously expected as we look to re-build momentum in the US and implement key actions from our strategic review. The fundamentals of our global business are strong, and we remain firmly focused on continuing our journey of margin accretive growth into the future,” he said.

Criticism.

However In an interview with Australian publications The Age and The Sydney Morning Herald, Clarke defended the company’s running of the US business in the US against investor criticism at the “fiery” investor webcast following the results release, saying it had a long-standing presence in the US and its luxury and masstige wines were performing strongly.

“The luxury market is in growth in America and in America we are outgrowing our competition even while this issue of surplus wine is taking place,” he said, adding that there was significant potential for Penfolds in the US.