Treasury Wine Estates Limited

Thank you for standing by and welcome to the Treasury Wine Estates FY23 Full Year Results. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Tim Ford, Chief Executive Officer. Please go ahead.

Thank you and good morning. Thanks for joining the TWE 2023 full-year results briefing. Joining me today on the call as per normal are members of our leadership team, Matt Young, our CFO, Tom King, the Managing Director of Penfolds, Ben Dollard, President of Treasury Americas, and Pete Nielsen, the Managing Director of TPB. I'm pleased to announce today our results for fiscal 23, a year where we delivered margin accretive earnings growth, built on our already strong platforms for luxury wine growth with Penfolds globally and also with the United States portfolio, and made significant progress in the strengthening of our operating model for the future. EBITS increased 11% to $583.5 million in the year and we grew EBITS margin by 2.9 percentage points to 24.1%. We are particularly pleased to report the margin expansion in an environment of elevated cost inflation as we continue to make progress towards our long-term EBITS margin target of 25% and then beyond. Our performance was driven by continued growth in our luxury portfolios, where our momentum remains very strong, particularly for Penfolds. Also through the successful implementation of price increases across several key brands with strong equity, and also through incremental cost savings from our global supply chain optimisation programs. Pleasingly, premiumisation trends are continuing in our key markets, with ongoing strength of luxury wine and the overall resilience within the premium wine category. And while commercial price point volumes remain in decline globally, we are acting both proactively and decisively to ensure that we have our operating model, our cost and asset base in the right shape moving forward, with some excellent progress made in recent months, which I'll touch on in more detail shortly. With that said, we enter F24 well-positioned to deliver growth, led by our luxury brand portfolio, our culture-led premium brand portfolio, and the benefits of our asset and cost-based optimisation initiatives already delivered in FY23. Our confidence in our future trajectory is underpinned by our diversified global business model, our brands, our markets, our channels, and the multiple country of origin portfolios, which has proven to be a significant strength, enabling us to adapt and respond to the ever-changing consumer and economic environment over the past year in particular. Now touching on some of the other key performance and financial highlights. Portfolio sales premiumisation continued, reflecting luxury sales growth as well as the commercial portfolio declines, with 85% of our global revenue now generated from the premium and luxury portfolios, an increase of 2 percentage points on the prior year. Net sales revenue did decline 2% to $2.4 billion, with luxury sales growth and price increases across key portfolio brands partly offset by the commercial portfolio decline. This very strong sales mix, which reflects the ongoing premiumisation of the category as well as our business, saw revenue per case increase by 13%. And in addition to strong EBITS growth, we delivered growth in net profit after tax, which along with earnings per share, increased by 17%. Cash conversion was 61%, and excluding the change in premium and luxury non-current inventory was 76%, which is below our annual target of 90% or higher, reflecting the timing of our sales in Asia in the fourth quarter, as well as the earlier timing of supply payments and promotional spend on our brands in Treasury Americas and Penfolds. We expect our F24 delivery for cash conversion to be in line with the target. Leverage was at 1.9 times remaining within our 1.5 to 2 times through the cycle target, leaving us once again with a strong balance sheet and with options to use this strength to continue to drive growth and shareholder value. And finally, the Board declared a final dividend of 17 cents per share, bringing the full year dividend to 35 cents per share, which is a payout ratio of 67% for the full year, which once again is towards the upper end of our target range, and an increase of 13% on the prior year. Our three brand portfolio divisions, Penfolds, Treasury Americas and Treasury Premium Brands, each made progress towards their strategic objectives in the year. With the delivery of NSR per case growth and margin expansion by each division on a constant currency basis, a highlight. The Penfold's result was clearly a standout, with strong double-digit top-line growth reflecting the strength of this exceptional brand and the outstanding execution by the team who continue to build distribution and grow consumer demand globally. In Treasury Americas, we have continued to build our exceptional luxury portfolio platform, delivering price rises across a number of brands and growing distribution in a year of constrained wine availability. In our premium portfolio we saw another year of double digit revenue growth for Martua. And whilst revenues for 19 crimes declined in the year, overall this brand is performing above market trends when you look at retailer scan data, reinforcing the strength of the brand equity in 19 crimes. Overall EBIT margin for the division grew strongly reflecting this portfolio mix as well as improved cost management. And for Treasury premium brands, we maintained excellent momentum in a number of priority brands, which enabled double digit growth in gross profit for both the premium and luxury portfolios for TPB. Whilst the top line was impacted by the category-wide decline in commercial portfolio volumes, improved mix and the delivery of price increases helped support gross profit expansion. and the team has made outstanding progress in delivering the new TPB operating model and the supply chain restructure to support that. Shortly, Tom, Ben and Pete will each provide some more detail on the performance of the three divisions. Touching on sustainability, we're in F23, we continue to make progress towards what is an ambitious suite of commitments in a number of very important areas. For climate change and energy, the launch of Australia's largest winery solar installation in the Barossa Valley was a highlight, with a similar rollout to follow in California through fiscal 24, and we are on track to deliver on our target for 100% renewable electricity across our operations by the end of calendar year 2024. As a business with a significant agricultural footprint across key global winemaking regions, we have a responsibility to be a leader in water stewardship, and in F23 we delivered on our strategy called Treasuring Water, which was informed by the comprehensive review we completed the prior year. As part of this, we have committed to investing in smart water meter technology across all of our high and medium risk sites and vineyards and wineries by the end of F25, which will enable us to make smarter data led decisions around our use of the water, particularly in our vineyards and wineries. We continue to target Destination Zero Harm as the core of our health, safety and wellbeing agenda. And in F23, we achieved our target for a reduction in the serious incident frequency rate, supported by the launch of the organisation-wide Build Safe Together campaign, which included a particular focus on mental health to supplement the strength in physical health we already had. Female representation remains a key element of our inclusion, equity and diversity commitments, and we saw continued improvement in F23 with an increase in total female representation to 42.8% of our total employee population, up 0.9 points in the year, while representation of females across our senior leader cohort held broadly stable. And finally, on this topic, in terms of sustainable packaging, we did not achieve our goal for 100% of our packaging to be recyclable, reusable or compostable by the end of 2022 calendar year. But that doesn't mean we're not making great progress in the area. For example, at the Barossa Packaging Centre, approximately 90% of production is now recyclable, with the remaining elements reflecting challenges for the broader industry. And we are seeking to work collaboratively with our dry goods partners and peers to solve for these problematic materials by the end of 2025. We aspire to be a leader in sustainability, not just in the wine industry, but across the global beverage sector. And while we still have much to do, I'm very confident we're on the right track towards achieving our ambition. At our full year results update 12 months ago, we shared our expectations for the wine category performance leading into a tightening economic environment with our message at the time, reflecting our confidence that category fundamentals would remain strong across our key markets through this cycle, particularly for premium and luxury wine. Pleasingly, 12 months on, it is playing out as we expected, with premiumisation continuing to drive the category globally and with a number of key long-term consumption drivers enduring. Luxury wine consumption remains strong, with double-digit value growth recorded in a number of markets through the 2022 calendar year as measured by IWSR, including in Asia, Australia and the UK, whilst in the US we saw modest growth across the market, largely due to reduced availability from the 2020 vintage that was impacted, as we all know, by the wildfires in Napa. Great results there. All metric and indicators that we track constantly suggest this trend has continued through 2023 year to date. Consumption in mainland China did decline during the period, largely due to impacts from the pandemic, but we remain confident in the significant long-term opportunity for the category and ourselves in that market. The premium segment has remained resilient. as you can see on the chart, which shows value and volume trends as measured by scan data, which is the best measure of consumer demand. The Australia and UK premium category has seen value growth over the past year, with the US being in very slight decline, albeit the past 13-week data shows an improving trend to growth for the premium wine segment in the United States. We see these trends in both the premium and luxury wine segments in our key markets, remaining largely consistent in F24. For TWE, our strong luxury portfolio momentum continued in F23. It was another year of exceptional performance. Penfolds grew revenue by 15% or more in Asia, Australia and in EMEA, whilst also achieving double-digit growth in distribution across the global target account universe. Portfolio expansion was another highlight, with the multi-country of origin focus successfully expanding to include wine sourced from France and China across both the bin portfolio and the newly launched one by Penfold's tier. In Treasury Americas, despite constrained availability, we grew the breadth and quality of our distribution for the luxury portfolio and implemented double-digit price rises across key brands such as Stag's Leap and Boullier Vineyard. In addition, revenue through our cellar doors and wine clubs grew 10%, a pleasing return to growth for this highly profitable channel. And we return, as we return, I should say, to a normalised level of luxury portfolio availability from fiscal 25. We remain very confident in our US luxury portfolio as a strong platform of future growth in Treasury Americas and for the group. We also saw a number of our premium portfolio brands continue their strong performance in F23, reflecting our ongoing focus on investment and innovation. Two highlights were Squealing Pig and Matua brands, whose global revenue increased by 17% and 11%, respectively, in F23, with each of these brands growing across multiple markets. For Matua in particular, it was the third consecutive year of double-digit revenue growth driven by the United States. The 19 Crimes brand globally has strengthened over the course of F23. Firstly, in the US, 19 Crimes grew across scan channels for the year, delivering 1% growth, against a premium segment which I've already highlighted which declined slightly, with momentum certainly improving considerably in Q4, in line with our plans and activation. Outside of the US, 19Crimes continues to perform strongly in all other markets, with revenue up 8%, driven by growth in particular in EMEA and Asia. Our focus for this very important brand, 19Crimes, in the first half of fiscal 24 will be the global launch of our new brand platform, our new package, and a very innovative consumer campaign. We expect continued growth and improved performance for this tier to come through, in particular in the second half globally. As we have previously explained throughout this year, 19Crimes as a brand globally did perform below our internal expectations, however, it outperformed the market in the premium category globally. And in May, we announced our intention to implement a range of initiatives designed to strengthen the operating model for TBB. And before I step through those, it's worth recapping on what we've learned about this business since it became a standalone division in July 2021, two years ago. The priority brands, which include Wins, Pepperjack, Squealing Pig, 19 Crimes and St. Hubert's The Stag are proving to be a genuine growth engine, connecting strongly with consumers and providing a great platform to take advantage of the long-term category premiumisation trends. To put some context to this, Our priority premium portfolio has grown revenue at an annual compound growth rate of 25% over the past three years. The opportunity to grow this portfolio outside of the core Australian and UK retail markets, we believe, is significant. And we're making good gains, particularly in Southeast Asia, where we've gained real traction over the past two years, building both awareness and distribution of our brands. And with the essence of TPB centering on driving category-leading innovation, inventiveness is a core part of this business's DNA. And we've seen that through our product development in the better-for-you space with innovations like Pepper Jack Mid-Strength and the introduction of new packaging formats like Bagnums, reflecting the strength of focus of being consumer and insight-led within this business. These elements reinforce our confidence in the long-term trajectory for TPB. with top line growth and margin expansion to be led by the continued growth of the premium portfolio, which now is over half of division revenue. Commercial wine, however, in line with overall market trends, has seen consistent annual decline, driving the reduction in total division volume. We do expect the decline in commercial volume to continue And with that in mind, we've embarked on a series of initiatives to get ahead of any long-term adverse impacts aimed at right-sizing the cost and asset base and ensuring greater operational and strategic flexibility to support the continued growth of these premium and luxury portfolios I've talked about. These initiatives have included reducing the overhead costs to align with the future scale and size of the business, implementing changes to our commercial wine supply chain to what will now essentially be an outsourced and more capital light supply model, as well as divesting and rationalising our asset base. The transition of commercial wine production to outsourced third party providers, the closure of the Caradoc Winery and the divestment of commercial grade vineyards have all been key actions that have or are being progressed through fiscal 24. Upon completion of this program, we will have delivered a number of significant benefits, including variabilising the commercial wine cost base, mitigating the impacts of higher COGS as a result of reduced commercial portfolio volumes, thereby reducing TBB's exposure to this commercial wine segment, and increasing our strategic flexibility and optionality with respect to the remaining portfolio. As always, we continue to assess asset and brand optimisation initiatives that we believe will further strengthen TPB's operating model. We are confident this business is now structured appropriately to continue its growth focus on the portfolio premiumisation and margin growth strengths that this business does have. With that, I'll now hand over to Matt, who's going to run through the financial results.

Thanks, Tim. Morning, everyone. Pleased to share with you the highlights of our fiscal 23 financial results. Group net sales revenue declined 4.9% on a constant currency basis, reflecting commercial portfolio declines within TPB and premium portfolio declines in Treasury Americas. Against these, however, Penfolds delivered revenue growth of 13.8%, and we saw the benefit of incremental pricing across all divisions. Those price increases plus the portfolio mix shift to a more luxury premium wines delivered 9.6% increase in NSR per case, supporting our premiumisation strategy. COGS per case increased 2.8%, reflecting the premiumisation of the portfolio, but it includes the benefit of our 2020 Global Supply Chain Optimisation Program, which delivered $62 million on a run rate for the year. On a mix-adjusted basis, COGS per case were in line with the prior year, as expected. Cost of doing business margin increased one percentage point to 22%, driven by lower NSR, but also the continued focus of brand investment across the portfolio. EBITS was $583.5 million, an increase of 8.6% on a constant currency basis, and EBITS margin improved to 24.1%, with margin expansion delivered through stronger portfolio mix, price rises and strong cost management. ROSI increased 0.6 percentage points to 11.3%, which is progress on our plans to restore and grow ROSI. And finally, our leverage increased modestly to 1.9 times in line with our through the cycle target range with flexibility to support investment in growth and the delivery of shareholder returns. Our continued focus on revenue growth management has allowed us to deliver sustainable underlying growth of earnings and margin expansion in fiscal 23 and will be a continued focus in fiscal 24. We'll continue to invest strongly behind our brands, building on the current momentum we're experiencing in many markets to drive top line growth. When we presented in August last year, we talked about our plans to take targeted price rises in fiscal 23. And as you've heard from Tim and I already, those price rises were successful and supported our improved revenue per case and EBITS margin. On this slide, you'll see further detail of the price rises achieved on the brands we highlighted last year. These included increases on the Penfold's luxury Cabernet bins, such as $10 per bottle on bin 407. Increases on premium brands, including 6% increase for 19 crimes in the highly competitive UK market, and 10% increase on Matua in the US. And importantly, as we build on the luxury portfolio platform in the US, we've taken double-digit pricing during the current period on supply-constrained brands, products such as Stag's Leap Cabernet, which you see here, but also similar price rises on the Chardonnay, as well as Beaulieu Vineyard, among other brands. The strength of our revenue growth management disciplines will further support top-line growth and margin expansion in the future. Total material items of $109 million or $76 million after tax have been recognised in the year and generated net positive cash flows of $34.5 million. In addition to the previously announced programs of work, costs associated with the implementation of our new TPB operating model and supply chain restructure were recognised in the year. We expect this program will be complete in fiscal 24, with total one-off costs of approximately $90 million, cash costs of $30 million overall associated with that program. Moving to the balance sheet. Net assets increased $90 million versus the prior year on a reported basis. Key factors impacting the balance sheet in the half, outside of working capital, include the acquisition of Chateau Lanasan and the divestment of non-core supply assets in Australia and the US. And I'll turn to inventory in more detail. Total inventory value increased 8% versus the prior corresponding period. Current inventory increased $42 million, reflecting future demand expectations for our premium and luxury portfolios. Non-current inventory increased $112 million versus the prior year. Within this, we note that premium inventory has increased, and this reflects the moderation of sales performance in our premium portfolios, and this is being managed through the normal course operations, through future sales plans or as we balance out inventory through future vintages. In fiscal 24, we expect mix-adjusted COGS per case to be in line with fiscal 23. The impact of the lower yielding vintage 23 intake as well as reduced portfolio volumes is reflected in this expectation, as are the benefits of our recently announced supply chain restructure. We believe holding cost of goods flat in a period of ongoing higher inflation is a pleasing outcome, testament to the flexibility of our teams to respond to the changes in the supply chain. Turning to cash flow and net debt. Operating cash flow before interest, tax and material items was $443 million for the year, with reported cash conversion of 60.6%. Excluding the change in non-current luxury and premium inventory, cash conversion was 76%, which was below our target of 90% or above. Cash conversion was impacted by the timing of sales, particularly into Asia, with a greater proportion of export sales shipping in May and June, as opposed to March and April and May than we'd planned. Given the value of the sales and the standard credit terms with export customers, this impacted our cash conversion by approximately 10%. Also impacting cash conversion was the timing of global supplier payments and brand investment spend on Penfolds and Treasury Americas. In particular in these markets, our spend on future programs was slightly earlier than previous years as we got ready for the important launches like One by Penfolds and the new 19 Crimes platform. We expect F24 cash conversion to be in line with our stated targets of 90% or higher. Moving now to capex. Total capex for the year was $141 million, which included maintenance capex of $102 million and the acquisition of a previously leased vineyard in the US for $25 million. Our investment in solar technology in Australia and California was a highlight, and it will support the achievement of delivering 100% of energy from sustainable sources by 2024. We continue to expect maintenance capex for fiscal 24 to be approximately $100 million. And finally, to capital management. Overall, our disciplined approach to capital allocation and cashflow has ensured we've maintained an efficient and flexible investment grade capital structure. This remains a key source of business strength and importantly will be an enabler of continued investment in fiscal 24. Leverage was 1.9 times at the end of fiscal 23, within our target range of one and a half to two times, and we expect to deliver over the course of fiscal 24. Liquidity position remains strong, over $1.4 billion of cash and committed undrawn debt facilities, and proactive risk management will ensure that our cost of funds will only rise modestly in fiscal 24, despite an environment of increasing interest rates. And as Tim mentioned at the start, we've today announced a fully frank dividend of 17 cents per share, with our full year payout of 35 cents continuing to be at the top end of our policy range. Thank you. I'll now hand over to Tom.