Treasury Wine Estates Limited

Thank you for standing by and welcome to the Treasury Wine Estates TWE FY23 half year results conference call. All participants are in listen only mode. There'll be a presentation followed by a question and answer session. If you'd like to ask a question, you'll need to press the star key followed by the number one on your telephone keypad. I'd now like to hand the conference over to Mr Tim Ford, CEO. Please go ahead.

Thanks, operator. Good morning and thanks for joining us. the TWE 2023 interim results briefing. Joining me today is Matt, Tom, Ben and Pete, as we have done over a number of halves now. And we're all pleased to present our results today for the first half of fiscal 23, a period where we continued our progress towards the delivery of our long-term financial objectives. And in doing so, I believe we've added an important proof point of the strength and resilience of our global business, in particular our team's ability to navigate the changing economic environment and shifts in the consumer and market dynamics that we've seen. We delivered strong earnings growth and margin expansion in the half, with EBITS increasing 17% to $307.5 million and EBITS margin increasing 3.2 percentage points to 23.9%. We're particularly pleased to report the margin expansion in the environment of elevated cost inflation as we make great progress towards our long-term target of 25% and beyond. This performance was driven by three key factors, growth in our luxury portfolio, the successful implementation of price increases across several key brands, and cost savings from our global supply chain optimisation program of recent years. Pleasingly and very importantly, Penfold's, Treasury America's and Treasury Premium brands all delivered improved revenue per case, EBITS and EBITS margin in the half. Whilst the broader macroeconomic backdrop remains somewhat uncertain, global wine category trends have remained broadly consistent. The demand fundamentals of the category have stayed strong at the luxury end and our brands have continued to perform well. across all key markets, something that we expect to continue. Consumption and market trends for the entry-level price points for premium in the US, $8 to $11, and the commercial wine price points globally were softer in the important December quarter trading period relative to our expectations, which have contributed to volume declines in Treasury Americas and Treasury premium brands, respectively. So with that context in mind, We do expect these trading conditions to be consistent through the second half and we remain on track to deliver upon the expectations that we outlined in August for strong EBITS growth and EBITS margin expansion in fiscal 23. Now I'll just touch briefly on some other key performance and financial highlights. Our portfolio sales premiumisation continued with 85% of our global revenue now generated from premium and the luxury portfolios in the half, up two percentage points versus the prior year. Net sales revenue increased 1% to 1.3 billion, with luxury sales growth and price increases across key portfolio brands partly offset by commercial portfolio declines and the entry-level premium declines in the US I touched on earlier. This very strong sales mix, which reflects the ongoing premiumisation of the category and our business, as well as price accretion, saw our revenue per case increase by 13%. So in addition to the strong EBITS growth, we delivered growth in net profit after tax, which along with earnings per share, increased by 19%. Cash conversion of 68% is in line with our expectations at the end of the half and on track to be in line with our 90% or higher full year target, which we consistently meet. Leverage improved to 1.7 times comfortably within our 1.5 to 2 times through the cycle range, reflecting the continued strength of our balance sheet and leaving us well placed and with options to use this strength to continue to drive growth and shareholder value going forward. And finally, the board has declared a fully franked interim dividend of 18 cents per share, resulting in a payout ratio of 67% for the half, which is towards the upper end of our target range again, an increase of 16.7% on the prior comparable period. The brand portfolio divisions each made great progress towards their key strategic and financial objectives in the half. Penfolds remain focused on executing their strategy of attracting new consumers to the brand, growing distribution and availability in a very targeted manner across a number of global markets and channels, with excellent top-line growth delivered throughout Asia, Europe and Australia. EBITS grew 10% in the half and margin remaining exceptionally strong at 44%. For Treasury America's, top-line growth was led by luxury portfolio brands, including Frank Family Vineyards and Boullieu Vineyard, and in our premium portfolio, continued growth from Matua, as well as delivery of category-leading innovation within 19 crimes. They were the highlights. In the half, price increases on key brands were also implemented, laying a very strong foundation and significant progress towards our EBITS margin target for the TAM business of 25%. On the downside, we saw sales volume declines in two of our entry-level premium price point brands, 19 Crimes Australian Source Portfolio and the Sterling brand, which were impacted by softer consumption and market trends relative to our expectations in the December quarter. Outside of this decline, We are pleased with our execution and performance compared to the broader US category and our competition. And that's reflected in our delivery of 35% EBITS growth and growth in margin to over 23%, as I said. However, we also recognise and note favourable exchange rate did benefit that headline result. And on a constant currency basis, EBITS increased by 15%, which is the baseline measure that this leadership team measures itself against. And for Treasury premium brands, continued to make progress towards its long-term financial priorities, delivering 15% EBITS growth, EBITS margin improvement to now over 11%. The top line was impacted by category-wide declines across commercial portfolio volumes. However, through an improved mix, delivery of price increases, and again, improved cost of goods, we could deliver gross profit expansion. So shortly, Tom, Ben and Pete will flesh out the headlines I've given you for the respective divisions, but before they do, I'll hand over to Matt, who will run through the financial results in more detail.

Thanks, Tim. Good morning, everyone. I'm pleased to share with you the results of our half-year financial results. Group net sales revenue increased 1.4% and declined 1.1% on a constant currency basis. Within this revenue result, there are several factors to note, and the team will expand on shortly, but at a headline level, they're important to understand up front. Firstly, our luxury brands continue to perform strongly across Penfolds, Treasury Americas, TPB, and represent a strong proof point of the delivery of our strategy in the half. Within Treasury Americas, as was flagged previously, we're selling the lower yielding 2020 luxury vintage, which was smaller than prior years. In light of this, we've implemented price rises to reflect the shorter supply, which is offsetting the impact of lower volumes, as did the strong demand for our newly acquired brand, Frank Family Vineyards. The combination of this meant that luxury revenues for Treasury Americas grew in the first half at an overall level, but were constrained by supply. Most importantly, we're well set up for the future through the strength of our luxury distribution, price rises implemented in the period, and COGS improvements yet to come. Secondly, as Tim shared, we've seen consumption and market trends for entry-level premium wine in the US and UK and commercial wine globally soften in the important December quarter trading period relative to our expectations. This has meant that our revenue growth for Treasury Americas and TPB was lower than expectations. Actions are already planned to respond to these trends for the second half and beyond, which the team will touch on. And as a result of these, we saw a decline in volume and constant currency revenue overall, but the improved luxury mix and the benefits of increased pricing saw NSR per case increased 13% for the group, 11% on a constant currency basis. COGS per case increased 1% constant currency, reflecting the portfolio mix, which was more weighted to luxury, and the fact that those wines were largely sourced from the higher cost 2020 vintages. That being said, the benefits from our global supply chain optimisation program implemented in fiscal 20 were delivered in line with expectations, with total benefits of $28 million delivered in the half, on track to deliver our targeted fiscal 23 run rate of $65 million. EBITS was $307.5 million, a strong increase of 17% on a reported basis and 14.7% constant currency, and EBITS margin improved to 23.9%. Excellent progress towards our long-term target of 25% and beyond, delivered in an environment of elevated cost inflation. ROSI improved to 11.2%, reflecting strong earnings growth and relatively consistent capital employed. And finally, leverage improved to 1.7 times, in line with our expectations to deliver over the course of fiscal 23. Total material items in first half 23 reflected a gain of $19.7 million, or $15.4 million after tax, and relate to the previously announced programs of work and the acquisition of Chateau Lanasar. With the exception of the acquisition, these programs are now all complete, with total costs of the program below their initial estimates. Moving to the balance sheet. Net assets increased $160 million versus the prior year on a constant currency basis. Key factors impacting our balance sheet in the half, outside of working capital, include the acquisition of Chateau Lanassane and the divestment of non-core supply assets in Australia and the US. Turning to inventory in more detail. Total inventory value increased 9% on the prior corresponding period. Current inventory increased $100 million, reflecting future demand expectations for our premium and luxury portfolios. Non-current inventory increased $62 million versus the prior year. Within this, we note that premium inventory has increased, and it does reflect the moderation of sales performance for our premium portfolios in the half. This will be managed through the normal course of operations through future sales plans or as we rebalance inventory levels through future vintages. Turning to cash flow and net debt. Operating cash flow before interest, tax and material items was $258 million for the half, with reported cash conversion of 67.7%. Excluding the changes in non-current luxury and premium inventory, cash conversion was 62.9%. While cash conversion was lower than it has been over the last two half periods, it was in line with our expectations, reflecting a more normalised cycle of working capital than we've seen historically prior to the disruptions of the last two years. and it's a trend we would expect to see going forward in half-year results. We continue to expect full-year cash conversion to be in line with our stated target of 90% or higher for the full-year fiscal 23, excluding changes in non-current luxury and premium inventory. To give this some colour, cash conversion in the last couple of years was higher than normal, driven by a number of factors related to vintage sizes and the rebalancing of our business in response to the loss of China market including reductions to luxury inventory. As we've shared previously, we feel the better measure is to assess cash conversion excluding moves in non-current luxury and premium inventory, with our target being 90% or higher over the full year, which takes account of builds and depletions. And to provide more insight to that specific measure, we've included an additional slide, which shows the historical delivery of cash conversion for half years and full years, excluding changes in premium and luxury non-current inventory. You'll see the light pink bars, which represent the first half results for the last five years. In the last two years, we've seen higher than normal cash conversion, reflecting changes resulting from sales timing, specifically first half 21, With the impending loss of the China market, that led to earlier shipment profile. And in first half 22, we executed earlier sales in the half to reduce the impact of supply chain disruptions. But as you look prior to this, first half 18 to first half 20, it was not unusual for cash conversion to be lower, reflecting what is normally a skew of luxury sales to November and December. However, importantly, as you look to the dark red bars, which represent full year cash conversion, you'll see for all years, full-year cash conversion was delivered in line with our stated target of 90% or higher, regardless of the variability in the first half. And we retain the same ongoing confidence and plans, which will deliver cash conversion in line with that target for fiscal 23. Moving to capital expenditure. Total capex for the first half was $65 million. It included maintenance capex of $36 million and the acquisition of a previously leased vineyard in the US for $25 million. We continue to expect maintenance capex for fiscal 23 to be approximately $100 million. And finally, to capital management. Leverage improved 1.7 times at the end of H1, comfortably within our target one and a half to two times range, and in line with our expectations to deliver over the course of fiscal 23. Our liquidity position remains strong with over $1.5 billion of cash and committed undrawn debt facilities, our capital structure continues to reflect our ongoing disciplined and strategic approach to capital allocation. As we shared in August and reiterate today, we're exploring capital management, opportunities incremental to ordinary dividends, but we'll do so in the context of and against our priority to assess opportunities to invest in organic and inorganic growth or activity. Thank you. And with that, I'll hand over to Tom.