Core markets ‘outperforming expectations’ for TWE

Treasury Wine Estates has released its interim 2018 financial result, with reported net profit after tax up 37% to AU$187.2 million, with core markets “outperforming expectations”.

Among the announcements in today’s report was the news that the incorporation of Diageo’s US-based Chateau & Estate Wine and UK-based Percy Fox businesses, acquired in 2016, was now complete and a move away from low margin wine and route-to-market improvements in the US were all well underway.

Chief Executive, Michael Clarke, commented: “I am very pleased to report another strong result in 1H18. Performance was delivered sustainably, with all regions contributing to EBITS growth and margin accretion. ‘Fixed’ regions, Asia, Europe and ANZ, are outperforming expectations, and we are now taking some exciting steps to really transform our route-to-market in the United States, and further strengthen the long-term outlook for the Americas region.”

The strongest growth was seen in Asia where earnings before interest tax (EBITS) grew 48% to $117m. The next best growth for EBITS was Australia and New Zealand, up 28% to $68.2m and in Europe growth was 17% to $24m.

Growth in the US was smaller, just 8% to $100.4m but this was partly affected by “an adverse one-off impact of $10m from reduced shipments as part of the transition process associated with these route-to- market changes that result in TWE selling direct to key retail partners in California and Washington; as well as an increased allocation of US sourced Luxury volume to Asia,” according to TWE.

The group explained how it was continuing to move away from its former reliance on ‘commercial’ wines, a segment that is declining in the US and UK, and while it was still important to the portfolio, “the completion of the Diageo Wine integration, along with the Company’s supply chain optimisation initiative and actions to increase access to ‘Masstige’ and ‘Luxury’ wine, are now facilitating the exit from lower margin Commercial volume, without materially impacting profit or profitability.”

TWE reported it had “proactively exited” around one million nine-litre cases from brands such as Blossom Hill and Beringer and expected to decrease volumes by a further 500,000 cases in 2H18.

The Australian wine giant also announced a raft of new measures to improve its position in the US, with changes spanning a number of key states and including changes in distribution.

Key changes will include implementing a direct sales and distribution model in California and Washington and for the on-trade and independent retailers it has appointed Classic Wines of California and Vehrs Distributing to represent it.

In Florida meanwhile TWE said it was implementing a hybrid distribution model, working with Breakthru Beverage Group to distribute to the on-trade, independent and small-chain retailers while working with larger and national retailers directly.

A number of full-service distribution partners have been appointed elsewhere, including Breakthru in Illinois, Colorado, South Carolina and Minnesota; Johnson Brothers in Indiana, Hawaii, Iowa, West Virginia, North Dakota and South Dakota; Vehrs in Oregon and Specialty Imports in Alaska.

TWE said: “Once fully embedded, these changes are expected to be margin enhancing for the Americas, underpinned by a more efficient and lower cost value chain, particularly in states where TWE will operate a direct or hybrid sales and distribution model. 
Transition is now underway, and TWE expects to have completed implementation by the end of F18, and fully embedded internal operating model changes, and operating rhythms with retail and distributor partners, by 2H19.”

Clarke added: “Similar to business model changes we implemented in China, Canada and New Zealand, as well as the change in global Penfolds release date – route-to-market transformation in the US demonstrates the relentless focus we have at TWE to continue improving our regional business models. These important changes will also strengthen our ability to deliver value from any future acquisitions in the region”.