Treasury Wine Estates Limited

Thank you for standing by and welcome to the Treasury Wine Estates fiscal year 2024 half 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 start key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Tim Ford, Managing Director and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. Thanks for joining us for our half-year results briefing. With me here in Melbourne is Stuart Boxer and Pete Nielsen. Ben Dollard's in California, and Tom King is in Paris, in France, and I'm sure he'll explain why as we get through his part of the... conversation today. I'm pleased to announce the results today for the first half of fiscal 24. It's a period where our group performance was broadly in line with expectations and reflective of the continued strengthening of our luxury wine portfolio and the strong consumer demand that still exists around the world for luxury brands. There's no question, though, that it is a challenging operating environment with pretty competitive market dynamics, but I'm pleased with our underlying operating performance, in particular the dynamic way in which our teams are managing this environment and evolving our business, focused on continued execution of our strategy, which we remain very confident will support our long-term growth ambitions. From a numbers point of view, EBITS declined 6.5% to $289.8 million and EBITS margin declined 2.9 percentage points to 22.6%, which reflects our deliberate approach to the phasing of Penfold's Bin and Icon shipments across the year in order to retain flexibility in our global distribution and pricing models given the current review of tariffs on Australian wine into China. Despite holding back this portion of the bins and icon shipments, Penfolds continued its strong momentum, particularly in Asia and Australia, yet to still grow EBITs, whilst the Treasury of America's luxury portfolio returned to growth, which again is pleasing, driven by a modest increase in availability. Overall, our luxury net sales revenue grew 4% globally, supporting stability in our top line and offsetting the lower premium commercial revenue, which declined 2% and 6% respectively, and drove the EBITS declines in Treasury Americas and Treasury premium brands. Market trends in the period were broadly in line with our expectations. As I said, consumer demand for luxury wine remaining strong in our key markets, the ongoing resilience in the premium price points and the continued shift to consumer preference away from the commercial wine in the category. And we expect these trends to continue through the remainder of this fiscal year. Given the planned profile of the Penfold's bin and ICON shipments, we expect a stronger second half to deliver mid to high single digit organic EBITs growth for the full year, which excludes the additional expected EBITs from Dow of US $23 to $25 million in the second half. As we look forward over the half ahead, we are laser focused on three key priorities. The first being the expedited review of tariffs on Australian wine which remains ongoing with a determination anticipated in March and we are well prepared and well placed to re-establish our Australian country of origin portfolio in China should the review result in the removal of these tariffs. Importantly, our outlook for the second half that I've just explained does not include any benefit from a positive outcome in relation to the tariff review. Treasury Americas, following the acquisition of Dow, is also very focused on driving its clear strength we now have as the leading luxury wine portfolio in the United States. And with a return to normalised availability of luxury wine as we move forward into F25 and we transition away from the 2020 vintage, we're expected to support growth of our existing portfolio plus the acquisition of Dow. And third, priority work is underway to assess the future operating model for our global portfolio of premium brands, with a specific focus on how best to leverage their scale across our network globally, with a determination to be made this calendar year, 2024. I'll touch on these in more detail shortly. But from a financial performance, our headline, and Stuart will cover in more detail, our NSR per case increased 9%, driven by the continued and ongoing premiumisation of our portfolio mix. EBIT's margin declined 1.4 to 22.6, and we expect EBIT's margin to normalise, importantly, in the second half, in line with the weighting of Penfold's bin and ICON shipments. Net profit after tax declined 5.9% in line with the change in EBITs, while earnings per share fell 7.5%, reflecting in part the increase in the average shares outstanding as a result of the capital raised to fund the equity portion of the acquisition for Dow. Cash conversion was 75% and excluding the change in premium and luxury non-current inventory was 66%, which is below our annual target of 90% or higher. Leverage increased to 2.2 times, driven by 445 million of borrowings we used to fund the debt portion of the acquisition of Dow. Finally, the board has declared a 17% share interim dividend, which while representing a one cent reduction on the F23 interim dividend per share, it is a 6% increase to the value of the dividend paid, given the increase in the shares outstanding. To touch quickly on the divisions, Penfold's result, again, a standout. NSR and EBIT's growth delivered despite the deliberate shipment phasing of the Bin and Icon shipments into the second half. This continued strong momentum in Asia and Australia in particular drove the performance, and pleasingly, growth came from all portfolio tiers. Testament to the way the Penfold's team and the brand itself is connecting to a broad range of luxury consumers globally. We expect NSR per case and EBITS margin again to normalise in the second half in line with the half-on-half weighting of our shipment profile. In Treasury Americas, luxury portfolio return to growth is supported by a modest increase in wine availability ahead of a return to normalised levels from F25, which will see a double-digit increase in availability in the next fiscal year. This, in addition to Dow, will drive future divisional growth. However, overall division NSR did decline, led by our premium portfolio, which was down 14%, driven by the lower shipments of the 19 crimes modern tier innovations that were launched in the same period last fiscal year, while the classics tier stabilised and performed in line with the prior period. Just one thing to note on the US performance as well, we have not recognised any Dow earnings in the first half of fiscal 24. Higher COGS per case also contributed to the reduction in the divisional EBITs and EBITs margin, with COGS improvement expected in the second half as we transition to selling vintage 21 wines and through the 2020 California vintage. As for TPB, lower NSR and EBITs resulted from reduced shipments to Asia and double-digit declines in the commercial portfolio. Within the business there, the priority premium portfolio, including 19 crimes, squealing pig and pepper jack, continued to grow, up 8% in the period, and our performance in Australia and the UK was in line with our expectations. Shortly, Tom, Ben and Pete will give you a fair bit more detail on their divisions. So just turning to our three key focus areas that I wanted to outline that we are absolutely laser focused on as a management team. First, relating to the review of China tariffs on Australian wine imports, which remains ongoing, as I've said, and for which we expect a decision and therefore a path forward by the end of March. Should the tariffs be removed, We are both prepared and well placed to re-establish our country, Australian country of origin portfolio in China to supplement our other country of origin portfolios. We've outlined this before, but it's a reminder of what we will do should this change. Firstly, we will reallocate a portion of Penfold's bins and icons back into China to rebuild that market for the Australian portfolio while ensuring that we maintain strong momentum of growth and diversification across the global markets that we have very successfully grown over the past three years. We'll look to implement price increases on certain bin and icon tiers given we expect global demand to significantly exceed global supply while pursuing incremental sourcing to produce greater volumes, which is a strong focus of the supply team as we enter vintage 2024 here in Australia over the course of the next couple of months. We'll also be able to pretty quickly re-establish distribution of our entry-level Penfolds portfolio, the likes of One By Penfolds, Max's and Canunga Hill, where we do have incremental wine to sell pretty much immediately. From a team point of view, our plan is to expand our sales and marketing resources to support the increased level of product onshore, and we'll continue to grow this over time as the portfolio grows. And finally, just an important point, if this change does occur, we will continue our multi-country of origin strategy for Penfolds, which we believe can remain a significant element and opportunity of our growth agenda going forward. From a market perspective, we're confident that China does remain an attractive luxury wine market for our brands and a significant growth opportunity for Penfolds over the long term. Our confidence in this opportunity, however, goes well beyond the market itself and the dynamics that may exist in the market today and reflects the way that we have maintained our business and the Penfolds brand in China, particularly over the last three years, whilst the tariffs have been on Australian wine. The retention of a very strong organisational presence onshore has been critical, with our team of over 120 people today led by an experienced local leadership team who were a key part of the journey in China prior to 2020 and have retained strong connections with our customers, our consumers and relevant industry bodies as well. And our investment in the multi-country of origin portfolio has paid clear dividends, allowing us to retain not only wine on the shelf, but genuine brand presence in the market. We've also been very methodical and deliberate in reinvesting the onshore earnings from those sales back into AMP, allowing Penfolds to retain its unique appeal with the Chinese wine consumers. As you see on the slide, our recent brand health study we show here reflects the strength of Penfolds against the top 10 wine brands currently in the Chinese market across a number of key brand attributes and factors. Most notably, Penfolds ranks as the number two imported brand for awareness in China behind only Chateau Lafite, a remarkable achievement given the limited availability of the product in the market and a great confirmation that our investment has actually been successful over the last three years. Should the tariffs be removed, we don't think of this as re-establishing our business in China, but instead executing a clear plan to re-establish the Australian country of origin portfolio in that market. Our second big execution priority over the course of this second half and beyond links to the December acquisition of Dow, which now establishes Treasury Americas as the leading luxury wine business in the United States, with an iconic portfolio that includes Stag's Leap, Frank Family Vineyards, Boullieu Vineyard, Behringer, as well as obviously Dow. We remain very confident in the strategic and financial benefits that we expect this acquisition to deliver to TWE, which we lay down in October, but I'd like to reiterate. What it will allow us to do is accelerate our transformation in the United States into a luxury-focused wine business in what is still the world's largest luxury wine market with attractive fundamentals. It accelerates our global premiumisation focus, increasing the contribution for luxury brands across TWE to greater than 50% of our global revenue, with immediate accretion to earnings growth, NSR per case and margins. It will fill a key gap in our portfolio at the 20 to 40 US dollar price point, in addition to strengthening the existing portfolio at higher price points. Importantly, it provides scale in luxury wine to support what we've outlined today as our future standalone Treasury of America's luxury group and division, which I'll touch on in some more detail shortly, and will also deliver mid to high single digit EPS accretion in F25, the first full year of ownership, inclusive of the pro forma cost synergies of more than US$20 million per annum. It's important just to reiterate, now we own that business and we've had a couple of months in that business, that our objectives continue and remain as we outlined at the end of October. Dow's 2023 calendar year performance was significantly ahead of the market and in line with the expectations, driven by strong growth across all of the portfolio price tiers and in several key US markets. Pleasingly, the team are delivering sustained growth, particularly outside of California, where the significant distribution, expansion and growth opportunities lie, as reflected in the data on our presentation for the last 26 and 52 weeks. Looking forward, our expectations for Dow are unchanged. The EBITS contribution for the second half of this fiscal year, or either half we're in, is expected to be in the range of US$23 to $25 million. And over the medium term, we expect Dow to deliver average annual low double-digit NSR growth, led by the growth of the Discovery and Journey tiers, which will be ahead of the category, well ahead of the category, and accelerated growth in the ultra-luxury tiers with brands like Patrimony. Business integration plans are on track. The team stood up and they are working very diligently and hard to achieve what we've outlined. And we remain confident in the realisation of synergies of at least the $20 million US we outlined. We also look forward to welcoming you all to Dow Mountain and to the Paso Robles region, which I'm sure a number of you haven't actually visited before in June, to really experience the business, experience the brand, experience the region. And we can't wait to see you there. The third priority. is a more strategic priority. First two are execution. The strategic priority, given the addition of Dow, we now have the scale to support a future standalone Treasury America's luxury division with the metrics that we outline, which will sit alongside Penfolds and leave us with two outstanding luxury wine businesses, each with strong long-term growth prospects, attractive financial profiles, supported by the attractive category dynamics that exist in the luxury wine category. On a pro forma basis, Penfolds and the Treasury of America's luxury, as we outlined, would already represent over 75% of our group EBITs. To achieve that, our first priority, however, is to create a separate sales and marketing focus for the luxury and premium portfolios under Ben's leadership in the Americas, effective from July 1 this year, fiscal 25, the start of. We do know from experience with the separation of Penfolds and the Treasury premium brands business that this operating model will bring with it the benefits of separate focus to enhance our business plans, our customer relationships, the portfolio innovation, and ultimately, strengthen the financial performance. Longer term, we do see strong potential benefit in creating a global premium division, which would consist of Treasury Americas and Treasury premium brands as a second step. particularly given the similarities that exist in the category dynamics and the consumer trends within these premium price points across our key markets, and with the opportunity to centrally drive insights, innovation and brand building with brands that are sold across multiple markets. So the work is underway to assess this future operating model for our premium brands, of which an important element will be to include the benefits of scale that this business brings to Penfolds and TAM Luxury, which are our key growth drivers, particularly given the consolidation of our supply chains. This work will be completed before the end of this calendar year, and clearly, once we've achieved a determination of that work, we'll explain that to our investors as well as what our path forward is. So with that, I'll hand over to Stuart to cover the financial performance.

Thank you, Tim, and good morning, everyone. It's good to be here. I'm pleased to share with you the financial highlights of our fiscal 24 interim results. So starting with the key measures of performance, group net sales revenue declined 2.3% on a constant currency basis, reflecting the premium portfolio declines in Treasury Americas and the commercial portfolio declines within Treasury premium brands. Against these, as Tim has already shared, our global luxury NSR grew 4%, with Penfolds maintaining its strong positive momentum and with modestly increased availability of luxury wines within Treasury Americas. Net sales revenue per case increased 9.1%, reflecting continued portfolio mix shift to luxury and premium wine, which now contributes 86% of group NSR. Working down the P&L, cost of goods sold per case increased 13.4%, reflecting the premiumisation of the portfolio and the sell-through of higher cost vintages in all divisions. We expect this metric to improve in the second half, particularly for Treasury Americas, as we transition to the sell-through of the luxury vintage 2021 and transition off the short 2020 vintage. Cost of doing business margin decreased 1.7 percentage points to 19.9%, driven by lower overheads in Treasury premium brands following the business restructure in the fourth quarter of fiscal 23, together with a $3.6 million gain on sale benefit compared to the prior corresponding period, and the phasing of advertising and promotion expenditure in Treasury, Americas and Penfolds given the planned top line phasing. EBITS was $289.8 million, a decrease of 9.8% on a constant currency basis, and EBITS margin declined 1.4 percentage points to 22.6%, largely driven by the COGS impacts I just described. Return on capital decreased 0.1 percentage points to 11.1%, largely reflecting the EBITS outcome. This number excludes Dow. As Dow will be reflected in return on capital at the full year with the full asset base and effectively a half year of income, we do expect a mildly dilutive impact in the near term given the growth nature of the acquisition, but we are confident this will improve relatively quickly given the growth plans and cost synergies we expect to deliver from Dow. And I'll talk to Leverage a little bit later on. Material items, total material items of $37.5 million or $29 million after tax have been recognised in the half, of which the pre-tax cash flow was $7 million. That was an outflow. $35.1 million of the material item costs pre-tax were associated with the Dow acquisition. We also incurred some residual costs associated with the implementation of our new TPB operating model and supply chain restructure, which will be completed during the second half. Our overall outlook for net one-off costs associated with the TPB restructure remains at $90 million pre-tax, inclusive of expected gains on sale of assets, including commercial vineyards, which we expect to realise this half. Moving now to the balance sheet. Net assets increased $879 million this half on a reported basis, primarily due to the acquisition of Dow Vineyards. The recognition of Dow, which has impacted intangibles, property, plant and equipment, working capital and debt, as well as the recognition of the earn out as part of other liabilities, is provisional and subject to final purchase price accounting, which will be finalised ahead of the full year result. In addition to this, working capital increased, driven by a decline in payables due to the timing of grower payments and a higher receivables as a result of the timing of sales into Asia in particular, partly offset by lower inventories. So turning to some more detail on inventory. Against the prior corresponding period, total inventory volume is flat while value has increased 12%. Current inventory increased $45 million, impacted by the addition of Dow inventory to the luxury component and partly offset by reduced premium and commercial inventories. Non-current inventory increased $193 million versus the prior year. Overall, luxury inventory increased 24%, reflecting the strong 2023 California vintage in addition to the inclusion of the Dow inventory. partly offset by the reduced premium and commercial inventories. Now moving to cash flow and net debt. Operating cash flow before interest tax and material items was $274 million for the half year, with reported cash conversion of 75.2%. Excluding the change in non-current luxury and premium inventory, cash conversion was 66.1%. Cash conversion was again impacted by the timing of sales, particularly into Asia, with a greater proportion of export sales shipping in December, and also due to the timing of grower payments which contributed to reduced payables and a half. We expect F24 cash conversion to be approximately 80%, excluding changes in non-current luxury and premium inventory. This half year cash conversion outcome and the full year outlook follows a similar outcome in sales profile in F23. So what we are saying is that at this point we are not seeing an improvement in the sales profile across this year and there is potential for it to be slightly more back end weighted. We've previously explained that whilst this profile is not entirely unusual for our business, it has become exacerbated given the cost of funds. So our customers are wanting their orders later. This is not a profile we are happy with, and we are focused as a team on ways we can improve this sustainably, but it's not an instant fix. Beyond F24, we remain committed to our long-term target for full-year cash conversion, excluding the investment in non-current premium and luxury inventory of 90% or higher. Moving now to CapEx. Total capex for the period was $66 million, which included maintenance capex of 60 and growth capex of 6 million relating to the investment in low and no alcohol wine production technology here in Australia and the continued expansion of our winery operations in France. We continue to expect maintenance capex for F24 to be approximately $100 million and growth capex in the second half will include the purchase of a New Zealand vineyard for approximately $50 million, supporting the future sourcing of Marlborough Sauvignon Blanc, which continues to grow globally. Turning finally to capital management. Our investment grade capital structure was retained post the acquisition of Dow Vineyards with leverage of 2.2 times at the first half, lower than the 2.5 times F23 pro forma figure we shared on announcement due to favourable currency translation and the accounting recognition of the earn out liability. We maintain our expectation to de-lever over the course of F24 and beyond, returning to within our target 1.5 to 2.0 range by the end of F25. Our liquidity position remains strong with $1.2 billion of cash and committed undrawn debt facilities. As Tim said, we've today announced an interim dividend of 17 cents per share, representing a payout ratio of 76%. Slightly ahead of the upper end of our target range, based on our deliberate decision to wait penfold shipments to the second half, and not wanting shareholder returns to be impacted by this decision. We expect our full year payout ratio to be within our 55 to 70% target range. Franking is now at 70% following the acquisition of Dow, given the high proportion of expected future offshore earnings as outlined as part of the acquisition announcement in October. Elevating our focus on capital allocation and capital discipline will be a key priority moving forward with two particular areas of focus. As I've already stated, improving our revenue facing and operating cash flow profile. And secondly, driving return on capital growth right across TWE at a company, division, brand and asset level. So thank you. I will now hand over to Tom to cover Penfolds.