Treasury Wine Estates Limited

Thank you for standing by and welcome to the Treasury Wine Estates FY24 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 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.

Thank you and good morning, everybody. Thank you for joining the TWE 2024 Full Year Results Briefing. Joining me today is Stuart Boxer, our Chief Financial Strategy Officer, Tom King, the Managing Director of Penfolds, Ben Dollard from Napa Valley, our President of Treasury Americas, and for the first time, his debut, Angus Lilly, our recently appointed Managing Director of Treasury Premium Brands. I'm pleased to announce today our results for Fiscal 24, which was a year that saw significant change right across TWE and where we accelerated our organisational and portfolio focus towards becoming a global luxury brand-led leader in the global wine category. EBITs grew 12.8% to $658.1 million, driven by strong luxury growth in both Penfolds and Treasury Americas, which also included the contribution of Dow from the second half. Excluding that contribution, EBITs grew 6.4% in line with our guidance for the mid-to-high single-digit organic EBITs growth. The performance of our luxury portfolios was without doubt the key highlight in fiscal 24, with our luxury net sales revenue increasing approximately 30% across the group, or 14.5% on an organic basis. Testament to the great momentum we now have at the higher category price points in our key markets, where consumer demand for luxury wine remains strong. Reflecting this, both Penfolds and Treasury Americas delivered net sales revenue of over $1 billion for the first time, a significant milestone for both divisions. On a statutory basis, net profit after tax declined to $98.8 million, reflecting a post-tax material item loss of $318.1 million a year, driven primarily by the non-cash impairment of Goodwill and commercial brands within the Treasury premium brands business we announced last week. Adjusting for these material items, NPAC grew 8.3% for the year. Our key areas of strategic focus entering fiscal 25 are very, very clear. The first is continued execution of our plan to re-establish the Penfold's Australian country of origin portfolio in China, in addition to other global markets, which I am pleased to say is firmly on track, with strong demand from customers and initial depletions performance in line with our expectations. In Treasury Americas, Dow's delivery in the second half was in line with the expectations we set when we announced that acquisition last October, a pleasing result as that business continues its strong trajectory of growth. Our growth plans for Dow are unchanged, and with business integration now well into execution mode, we are on track to deliver the synergies of US $20 million plus by the end of F26. And we have completed the premium brands operating model review that we foreshadowed as part of the half-year results update we gave the market in February, with the planned creation of a global premium brands division, as well as the divestment of our commercial brand portfolio, both significant actions we have committed to undertaking, and I'll touch on this in more detail shortly. Finally, in fiscal 25, looking forward, we expect EBITs to be delivered in the range of $780 to $810 million, reflecting continued strong luxury portfolio growth in Penfolds and Treasury Americas, supported by stability across the remainder of our global portfolio. Now touching on the other elements of our financial performance, which Stuart will cover in more detail, but briefly, NSR grew 13.1% or 4.4% on an organic basis with the luxury portfolio growth being partly offset by lower premium and commercial shipments in treasury premium brands. NSR per case increased to $125 per case, up 14.2%, driven by the accelerated shift of our portfolio towards luxury wine, while EBIT's margin was in line with the prior year, with the benefits of improved portfolio mix offset by higher cost of goods on luxury wine, particularly in the Treasury Americas, but predominantly in the first half. Cash conversion was 82% for the year and excluding the change in non-current luxury and premium inventory was 95%. And the board has declared a final dividend of 19 cents per share, which is 70% franked, which represents a full year dividend of 36 cents per share for the full year, up one cent per share and an increase in value of 16% compared to the prior period. Turning now to the divisional performance, which Tom, Ben and Angus will all cover in more detail as well. For Panfolds, it was another outstanding year of execution, with momentum accelerating across the portfolio in Asia and solid top-line growth delivered once again here in Australia. EBIT's margin of 42% reflected sales through the fourth quarter following the removal of tariffs in China with increased shipments of entry-level tiers occurring at the same time as we commenced incremental investment in the China market. Tom and the team are very well placed to continue the well-established strategy of growing global distribution and availability, as well as consumer demand, across a number of key global markets, and with the removal of tariffs in China adding to what we see as a significant long-term growth opportunity. Penfolds is as well placed as it has ever been to deliver on its ambition to be a global luxury icon, as we outlined at our investor update in late June. Treasury America's top line growth was driven by a contribution of Dow in the second half, but as well as the 14% increase in revenue from our other luxury portfolio brands, supported by an increase in luxury wine availability for brands such as Stag's Leap and Frank Family Vineyards. Offsetting this was a decline in our premium brand portfolio, led by the 19 crimes Cali tier, which resulted in divisional organic revenue being delivered in line with the prior period. As I said earlier, high COGS from the 2020 Californian vintage did impact margin in the first half, but improved as we transition to the 2021 vintage in the second half. And finally, Treasury premium brands saw its revenue decline 6%, driven by lower commercial and premium shipments, with consumption trends remaining soft in the below $15 price point, and where our commercial portfolio also underperformed relative to the category. Pleasingly though, the priority premium portfolio within TBB grew in SR by 5%, driven by brands such as 19 Crimes, Squealing Pig and Pepperjack. Now touching on sustainability, we're in fiscal 24, we've made great progress against our suite of commitments, all working together to help build a resilient business, foster healthy inclusive communities and produce wine sustainably. We continue to decarbonise our business, decreasing our greenhouse gas emissions around 66% since fiscal 21. Renewable electricity now powers over 80% of our operations globally, and we are methodically improving efficiency, investing in new technology, and are on track to deliver on our target for 100% renewable electricity across our global operations by the end of this calendar year. We continue to invest in being a smarter business, with a focus on metering technology to provide real-time data and insights for the effective management of gas, electricity and particularly water, our most valuable commodity. In terms of water metering technology, we've installed these in over 90% of our operating sites defined as high-risk catchment areas, and we are well underway across our medium-risk sites as well. This initiative has been the priority focus of our Treasuring Water Strategy, which we launched in fiscal 23, to enable us to take a much more proactive role in water stewardship, given our large agricultural footprint. We continue to target Destination Zero Harm as the driving force of our health, safety and wellbeing agenda. In fiscal 24, we reduced our three-year rolling serious incident frequency rate by nearly 40%. This outstanding performance is due to the ongoing effort across all our teams on managing hazards that can cause serious harm and the continued success of our Build Safe Together campaign, which has a particular focus on mental health. Female representation remains a key element of our inclusion, equity and diversity commitments. And we saw continued improvement in the year with an increase in total female representation to 43.7% of our employee population, up one point, whilst representation of females across our senior leadership cohort improved by 2.8 points. And finally, we continue to work with our grower and our bulk wine supply partners, very important partners, to encourage their adoption of the relevant sustainability certifications that exist around the globe. Around 95% in America and 91% in Australia of our overall sourcing for the vintages we completed in fiscal 24 was sustainably certified. This means we are well positioned to give our customers and our consumers confidence our wine is being produced sustainably. Across this, we know we have more work to do, but we are proud of our progress and will continue to cultivate a brighter future for everyone who touches our business. Now back at our full year results in 2020, it feels like a lifetime ago, we laid out the blueprint for what was then our five-year plan, known internally as Tweet 2025, which was headlined by our ambition to be the world's most admired premium wine company. As we have come to the end of this period and our focus shifts to the next phase of our growth journey, which is centred on our luxury brand-led ambitions, it is worth taking a moment to reflect on the significant progress we have made to grow and evolve our business over this period. The transition to our brand portfolio-led operating model was a crucial step which we embarked upon to drive increased focus and accountability across our business. There is no doubt this change has unlocked growth and improved our operating performance right across Treasury wine estates during a period which included the imposition of tariffs on Australian wine in China, shifting consumer and market dynamics and a number of economic headwinds. Penfolds has evolved to become a truly global diversified business with a number of markets now driving top line growth and with a portfolio that has expanded beyond Australia to comprise wine sourced and produced from four countries of origin. Australia, the United States, France and China. Something that was previously unheard of in luxury wine. Treasury Americas has been transformed and now has a very clear strategic path as the leading luxury wine business in the United States, which is the world's largest luxury wine market, with the acquisitions of Frank Family Vineyards in 2022 and more recently Dow both significant additions to what was already a good portfolio of luxury brands. This business is now very well placed to become another outstanding luxury growth platform for Treasury Wine Estates alongside Penfolds. And TPB and Treasury Americas have delivered growth across a number of its priority premium brands during this period, providing a foundation for which to build upon as we make the shift now to a global premium brands division. Across our supply chain, we have implemented global industry-leading initiatives to drive efficiency, increase automation and reduce costs to deal with significant inflation over the period, supporting the delivery of consistent margins through a period where our commercial brand volumes have also declined. We've continued to invest, particularly in our luxury production capacity, Yes, our state-of-the-art winery in the Barossa Valley is one example, and we've established a luxury sourcing and production asset base in Bordeaux in France. So that brings us to where we are today. And we as a team are certainly learning from the past, but are firmly focused on now executing for the future. And as we look forward, our vision is firmly focused on being the world's most desirable luxury wine company. This vision reflects not only the fact that over 75% of our earnings now come from our luxury brand-led portfolios, and that the luxury price points represent a segment of the wine category that consumers are gravitating towards. It is also about embodying the hallmarks of a luxury company right through Treasury wine estates. Our focus on being luxury-led manifests in a number of clear priorities, including strengthening our leadership positions in Asia and the United States, scaling our portfolios in other must-win markets, expanding in emerging growth markets and continuing to invest in our multi-country of origin luxury sourcing model to enable future growth. And for our premium brand portfolios, we will strive to sustainably create value from within to support our organisation-wide luxury-led focus. And last month, our executive leadership team joined with our global team for the launch of our new game plan, which is presented here on this slide. A highlight of the launch for the first time was the defining of our organisational purpose, boldly cultivating. This purpose reflects a collective focus right across our business, centred on the vital role each individual will play in shaping TWE's future by boldly cultivating value through our brands, our wines, our people, through innovation, through sustainability and the experiences we deliver for our customers and most importantly our consumers. It is a purpose that is uniquely TWE and one that we will harness each and every day to drive our business forward. Supporting this purpose are our four strategic pillars, which will guide our decision-making and how we will succeed, focused on our consumers, our people, our collective mindset of playing to win, and our commitments of delivering today whilst building for tomorrow. And our DNA, which drives our culture and our standards, underpins everything we do at TWE and remains unchanged. I look forward to updating investors on our progress against this new game plan and strategy over the years ahead. Turning now to the future operating model for our premium brands, where we have concluded to one, create a global premium division by the 1st of July, 2025, through the combination of TBB and Treasury America's premium portfolios. And two, decided to divest our commercial brand portfolio, including Wolf Blast, Lindemans, Yellow Glen and Blossom Hill, as we announced last week. In relation to this global premium division, we believe this will be the optimal structure to create and drive value for our premium portfolio of brands, with benefits including a single globally focused business with a streamlined operating model, more effective prioritisation of opportunities across key markets, and improved investment and resource allocation. It will enhance our ability to execute more effectively key global premium brands such as Nineteen Crimes Mature and Squealing Pig, as well as our global innovation priorities. And importantly, it will unlock optionality to create future shareholder value. We believe these changes are the right ones to ensure that our global portfolio of premium brands continues to support our luxury brand-led strategy. Implementing key changes to enable the evolution to the Global Premium Division will be the key focus through F25 at the same time as improving the overall performance of that business, which we need to do. So with that, Stuart, I'll hand over to you to cover the financial performance in more detail.

Okay, thanks, Tim, and good morning, everyone. I'm pleased to share with you the financial highlights for fiscal 2024. Starting with our usual slide showing trend performance of key metrics, Group NSR increased 13.1% on a reported basis and 10.7% on a constant currency basis, reflecting strong luxury portfolio growth in Penfolds and Treasury Americas, which included the second half contribution from Dow, partly offset by lower sales in Treasury premium brands. NSR per case increased 11.8% on a constant currency basis, including Dow, and 8% excluding Dow, driven by the same factors, growth across our luxury wine portfolios, which accelerated following the acquisition of Dow and now represents approximately 50% of group NSR. Since F20, NSR per case has increased over 50%, reflecting a significant evolution of our brand portfolios over the period. Working down the P&L, COGS per case increased 12.7%, driven by portfolio mix and the sell-through of higher cost vintages in all divisions. As expected, we saw improvement in this metric in the second half, particularly for Treasury Americas, as the luxury portfolio transitioned from the wildfire impacted 2020 vintage to the 2021 vintage. The cost of doing business increased 7.2%, driven by the addition of Dow and the investment in brand building and overhead to support the re-establishment of Penfold's Australian country of origin portfolio in China, partly offset by the $23.6 million gain on sale of supply chain assets, of which approximately $20 million was recognised in the first half. EBITS was $658.1 million, an increase of 9.9% on a constant currency basis, and EBITS margin declined 0.2 percentage points to 24.0%, largely driven by the higher COGS in the first half within Treasury Americas and the lower F24 margin for Penfolds, as we foreshadowed. linked to the removal of tariffs in China, and specifically the step-up of entry-level Australian country of origin luxury tiers in that market and the high in-country overheads in Q4. Return on capital employed decreased 0.4 percentage points to 10.9%, reflecting the short-term impact from the acquisition of Dow, given the growth nature of the acquisition. Excluding the impact of Dow, return on capital employed increased to 12%. Please note that the capital employed I have quoted excludes the impact from the Treasury premium brand's impairment. Leverage ended the year at 2.0 times, up from 1.9 times in the PCP following the acquisition of Dow, which we are pretty pleased with. We expect some further deleveraging in F25 to return to within our 1.5 to 2 times range, consistent with our guidance. tax have been recognised this financial year with a net cash outflow of $71.7 million. The most significant component of this was the non-cash impairment of brands goodwill and a small amount of commercial inventory in treasury premium brands, which we announced on the 6th of August. Still on TPB, we also realised net income during the half of $14.2 million in relation to the operating model of supply chain restructuring that was announced last May. This specifically related to a gain on sale on surplus commercial vineyard and water. In relation to the operating model of supply chain restructuring that was announced last May. This specifically related to a gain on sale on surplus commercial vineyard and water assets. This program is now expected to be completed in F25, in line with the initial program cost of $90 million net, pending the sale of a final commercial vineyard and associated water assets in Australia. We also include $61 million of transaction and integration costs associated with the acquisition of Dow, with integration now well underway, which Ben will touch on shortly. Moving now to the balance sheet. Net assets increased $732 million on a reported currency basis, primarily due to the acquisition of Dow, which impacted intangibles, property, plant and equipment, working capital and debt, as well as the recognition of the earn-out as part of other liabilities. Beyond the impacts attributable to Dow, the other key balance sheet impacts were increased working capital, driven by underlying business growth, and increased luxury inventory following the Australian and California vintages, and the Treasury premium brands impairment. Turning to inventory in a little bit more detail. Against the prior corresponding period, total inventory volume reduced 3%, while value has increased 9%, driven by the growth of luxury inventory and the decline in premium and commercial inventory. Current inventory increased $30 million, driven by expected growth in luxury sales. Non-current inventory increased $164 million, driven by higher luxury inventory following the acquisition of Dow in addition to the 2023 Californian and 2024 Australian vintages, which saw a significant step up in our intake. Total luxury inventory increased 29%, approximately half of which relates to Dow and the other half relates to the increased intake for our other luxury brands, including Penfold, Stag's Leap and Frank Family Vineyards. Turning now to cash flow and net debt. Operating cash flow before interest tax and material items was $667 million for the year, with reported cash conversion of 82%. This cash conversion includes a significant investment in non-current luxury inventory in both V23 in the US and V24 in Australia, as I've already covered. Excluding the change in non-current luxury and premium inventory, cash conversion was 94.6%. This outcome was stronger than the 80% we guided to at our half-year results, driven by the recommencement of shipments to China in the June quarter, where a high proportion were cash sales. In F25, we expect a reduction in the proportion of cash term sales into China as we will be shipping to a more normal profile throughout the year, which in combination with underlying business growth, we expect to result in full-year cash conversion of approximately 80%. excluding the change in non-current luxury and premium inventory. Please note, this is a target for the full year, with cash conversion generally being weaker at the half year, given the typical seasonality of our business profile. Moving to CapEx. Total capex for the period was $190 million, which included maintenance capex of just over 100 million, growth capex of $75 million relating to the purchase of vineyard assets in New Zealand supporting future sourcing of Marlborough Sauvignon Blanc, investment in low and no alcohol wine production technology here in Australia, and the continued expansion of our luxury wine operations in France. The remainder of the capex were related to Dow. We expect maintenance capex for F25 to remain at approximately $100 million, with growth capex of up to $50 million planned, including the refurbishment of the Beaulieu Vineyard brand home in Napa, to upgrade the quality of the tasting room and consumer experience to reflect the luxury status of that brand. Finally, we will also continue to explore investment opportunities for luxury vineyards and production assets to support the growth ambitions for our existing portfolio of luxury brands. Turning finally to capital management. First of all, and importantly, we're very pleased that our investment grade capital structure has been retained following the acquisition of Dow. Our liquidity position remains strong with $1.2 billion of cash and committed undrawn debt facilities. In the second half, we completed a comprehensive exercise to extend and diversify our term funding structure, which included issuance of a US $300 million Asian term loan to refinance the Dow Acquisition Bridge facility. And finally, as Tim mentioned earlier, we have today announced a final dividend of $0.19 per share, giving rise to a full-year dividend of $0.36 per share, representing a $0.01 increase on the prior year and a 16% increase in value given the high number of shares posted to our acquisition. The payout ratio of 72% was slightly above our 55% to 70% target payout range, reflecting our continued focus on improving shareholder returns during what was a unique year following the acquisition of Dow, while balancing the strength of our balance sheet and capital structure. We expect to return the dividend payout back within the target range from F25. And as announced at the time of the Dow acquisition, franking for the dividend has been reduced to 70% given the higher proportion of offshore earnings. Thank you. I'll now hand over to Tom King.