Company Interview / TWE doubles down on luxury segment

Tim Ford CEO of Treasury Wine Estates, reveals that despite a 61% statutory net profit drop due to a non-cash impairment, the overall situation excluding this impairment shows an 8% rise. He confidently interprets this as proof that their strategies work, citing Penfolds and Treasury Americas reaching $1 billion in net sales revenue for the first time. Particularly, Treasury Americas performance is driven by its luxury wine portfolio, an area they have been heavily investing in following recent acquisitions.

Tim continues and lays out Treasury Wine Estates' current focuses. Nearly 80% of the company's earnings are derived from luxury wines priced above $30 Australian dollars, a significant shift in the global business. Contributing to increased margins and a more predictable earning pattern, part of this strategy involves divesting several large scale low margin commercial wine brands throughout fiscal 25. They are also integrating their Treasury premium brands division with their Americas division into one unit, unlocking potential for future value creation.

Looking at the future, Tim comments on their acquisition strategy and China's recovering market. He paints an encouraging picture of the Dow brand's performance in the US and is confident about focusing on their existing acquisitions. Moreover, he highlights the existing team and distribution structures in place within China despite the tariff period. With these structures, Tim sees the exciting potential to reestablish their portfolio products within this recovering market. He concludes that the company expects earnings between 780-810 million in fiscal 25, mostly driven by their luxury portfolios, Penfolds, and the Treasury Americas business.

Full unedited transcript:

0:00

And the statutory net profit down the 61% based on a non-cash impairment. We announced to the market, um, last week for our Treasury premium brands, business, goodwill and some brands, some commercial brands in that. So, um, that's been the biggest driver of that. You know, when you, uh, when you look at impact, uh, excluding that non-cash impairment, we're up about 8%

0:22

overall. How do you look at the result? How would you sum it up?

0:27

Well, I think it's, uh, proof of our strategy working is, uh, the way I sum it up to have, you know, both Penfolds and our Treasury Americas business delivering, you know, $1 billion in net sales revenue, top line for the first time is fantastic. And particularly Treasury Americas, uh, driven by its luxury wine portfolio, uh, which is clearly the strategy we've invested behind based on recent acquisitions and the focus of the business. So very, very pleased that, uh, the strategy we've been working on is now coming to life through our financial performance, and we've got some good momentum So the team, as you outlined, they're very much the focus now on that global premium model in the wake of your strategic review. So is that the focus now for the business? What happens to those cheaper brands if you like.

1:16

Yeah, definitely. Look at our business now is uh, you know, nearly 80% of our earnings comes from what we send luxury wine, which Australian dollars is $30 and above. So it's been a very big shift in our business globally over the last couple of years. And clearly higher margin, more certainty of earnings, more consistent growth you see in that category. And as part of that, um, you know, we still have a few commercial wine brands below $10 brands in our business today. And we've announced, um, you know, as part of this results that we'll also be divesting, um, a number of those large scale but low margin commercial wine brands over the course of fiscal 25, which will continue our drive towards increasing the margin and improving the mix of our business and the quality of our earnings. So divesting some of those brands, there's some speculation you may spin off, um, that the, uh, the cheaper brands if you like. If you're willing to comment on that.

2:08

I mean, the the we announced also today that we will bring together our Treasury premium brands division with, you know, the similar brand portfolio out of our Americas division in the in the one team, you know, by the end of this fiscal year. And that does enable us optionality to create value, you know, going forward, if that's the decision we make. But, you know, the first two decisions we've we've announced today, you know, is the divestment of that low end portfolio, which I think is important for us, and also the creation of this new global premium structure. It will unlock optionality in the future. But right now we have to improve the performance of that business as well as a supporting role, you know, to our luxury strategy.

2:47

Tim, how would you describe the success of your acquisition of Dow and its integration, how it's performing at the moment?

2:56

I look at, um, the brand continues to perform very, very well in the market in the United States. So that's, uh, it's always pleasing after particularly such a sizable acquisition that you know, is delivering to its plan that we outlined for for the first six months of ownership. So, you know, that's that's good news. And the momentum behind the brand, um, is there as well, which is great integration wise. You know, we're in execution mode now. So it's always nice to move from planning into execution for these, these activities as well. So you know, synergies are well and truly on track team structures in place. And it's about execution now in FY 25. So yeah, we're really pleased with with how that's come together. And the team in the US have just done a fabulous job combining both in the last 12 months.

3:40

Any other acquisitions on the table? You're keeping your options open

3:45

I think uh, right now we've got our uh we've got our focus on delivering on the, the business cases for the acquisitions we've made. So I think you know, that plus the opportunity clearly with Penfolds globally, you know, with the reopening of China, that's a that's a really focused plan for us to deliver what is fantastic growth over the next couple of years. So I don't see us acquiring new brands. We'll always be on the lookout. So in the near future, in particular in the the longer term, you know, clearly will would start looking at that again once we've delivered on the current ones. But that being said, you know, from a supply point of view, vineyards, you know, assets around the globe that support the growth of our luxury wine business, we're continually looking at that. But from a brand point of view, I think we've got a pretty good portfolio right now.

4:29

Tim, you mentioned China. Uh, obviously following the removal of those tariffs on Australian wine imports into China, what's your strategy? How are you rebuilding that business?

4:41

Yeah, look at, uh, about three months back into it now. And, um, you know, we we've kept our distribution model. We've kept our team in China throughout the, the tariff period of time, uh, by selling our French, our American, Penfolds and other brands, as well as the most recently a Chinese source, Penfolds as well. So we've maintained the relationships. So for us, it's certainly not starting from scratch. It's uh, it's reestablishing that portfolio and the, the, the products in market. The distribution is certainly, you know, going at great pace. And, you know, customers are starting to reorder after their initial orders, you know, from the tariff removal. So yeah, it's a pretty exciting time. I mean, number one brand, you know, from a brand awareness point of view, Penfolds is still the number one luxury wine brand in China, even though we really haven't been there for for much of the last three years in a meaningful way. So yeah, we've got the platform ready to go. All right. That's that brand recognition, which is obviously heartening for you. Tim, what's your guidance? What have you provided.

5:40

Yeah, we've got to to earnings in fiscal 25 of 780 million to 810 million, um, which, you know, on the back of 658 this year is a significant growth. Now, that includes a full year of the Dow earnings in the Treasury Americas. But yeah, that'll be that'll be driven by our luxury portfolios, Penfolds and within the Americas business supported by premium which which we believe will be broadly flat um year on year. So we've got a strong year ahead of us.

6:06

And what do you make of the economy. And I guess how the consumer is travelling at the moment I guess particularly, you know, with the issues at that lower end of the market as the average consumer deals with those cost of living issues.

6:21

Yeah. Look, it's challenging at the lower end of the market. There's a real bifurcation of the category, you know, within wine. And like there is the number of categories. And I guess fortunately we've shifted our business more towards the luxury price points significantly over the last couple of years. And that's remaining, you know, very strong, um, in terms of sales. So, you know, that's right around the world, it's actually quite consistent in all markets around the world. Whereas, you know, for years in Australia, for example, you know, below $15 is certainly challenged. Um, so the cost of living pressures are really hitting there. But in saying that every consumer around the world won't, consumer around the world is drinking less, but drinking better priced wines, you know, that's a that's a trend that's, um, certainly even a trend. It's just going to continue to happen, you know, as the as the health and wellness conscious consumer continues. So, you know, shifting up price points is crucial for for us.