Treasury Wine Estates delivered a double surprise to the ASX last night – a revised retirement date for CEO Michael Clarke and a coronavirus warning.
Clarke has moved his retirement forward to July 1, after initially announcing in October that he would give a year’s notice.
TWE said the decision allowed Clarke’s successor, Tim Ford, to be CEO for the full financial year.
The company will provide repatriation support to Clarke for his return to the UK up to a maximum value of $50,000.
Ford’s total fixed annual remuneration will be AUD $1.5 million per annum, along with short and long-term incentive plans.
Regarding the coronavirus, TWE said: “While at this stage it is too early to assess financial impacts, should there be a sustained material impact on consumption, this would impact F20 earnings.
“TWE notes that Asia is a predominantly luxury wine sales region, and that it has the flexibility to allocate luxury wines to later fiscal periods and other geographies in order to deliver sustainable earnings growth.”
Clarke told analysts on January 29 that it was too early to predict if there would be business impacts from the coronavirus in China. But he said the company had a “watching brief” on the region.
He revealed that business had grown in Hong Kong following the recent protests, cautioning “it’s not always correct just to join the dots”.
The company said its primary focus during the coronavirus crisis was the safety and wellbeing of its people, “all of whom are well, in good spirits and currently working from home pending their planned return to the office later in February”.
It concluded: “Importantly, TWE remains excited by the significant long-term opportunity in the Asia region. Through its proven strategy, advantaged business model and strong commitment to its partners, brands and people, TWE is well placed to capitalise on long-term opportunities not only across the Asia region, but globally.”
US issues to blame for profit downgrade
TWE posted a 2% rise in half-year revenue to $1.536billion as net profit lifted 5.1% to $229.2million.
First half EBITS came in 6% higher than expected at $366.7 million with an EBITS margin of 23.95%.
Clarke said TWE’s revised full-year forecast reflects the company’s growth rate in F20 will be lower than previously guided.
“This is driven primarily by underperformance in our US results in the first half and is expected to continue through the second half,” he said.
Clarke explained this was due to unexpected changes in TWE’s Americas leadership, resulting in a loss of execution momentum through the first half that will carry into the second half.
He also noted that US wine market dynamics, where suppliers are trying to move surplus wine across the market at lower prices, had resulted in an accelerated growth of private label, which is up approximately 15% in a market that is flat to down.
He said this was a significant market shift in a very short period, especially after the recent US vintage in October and towards the end of the half.
“As a result of these market dynamics, TWE was unable to recover or offset higher US luxury COGS and higher Australian commercial COGS, with higher levels of discounting required to try to maintain share across all price points,” Clarke said.
“We also walked away from just under half a million cases of commercial volume in the US due to private label growth, aggressive market pricing and our higher COGS.”
Premiumisation continues to drive operating performance across all regions, with NSR from the luxury and masstige segments growing 7% in 1H20, and now representing 73% of Group NSR.
Clarke, commented: “While we are very pleased with our performance across the Asia, ANZ and EMEA regions, our first half performance in the Americas has been a setback and is disappointing given the high expectations we have for growth in this important market.
“The fact that we have continued to deliver sustainable, margin accretive growth despite this setback in one of our key markets is testament to the fundamental strength of our global business model, which sources multi-regionally, sells multi-regionally and is the most self-distributed wine business, globally.”
Americas reported a 17% decline in EBITS to $98.3m and an EBITS margin of 16.1% (down 3.6ppts).
Asia reported 19% EBITS growth to $175.5m and an EBITS margin of 43.1% (up 4.2ppts), driven by strong demand and continued outstanding execution across key markets. Key top-line metrics continued to exhibit strong growth, but volume was impacted temporarily due to a reset in distribution with one large customer.
Australia & New Zealand (ANZ) reported 10% EBITS growth to $85.9m and an EBITS margin of 26.4% (up 3.0ppts). Continued momentum in premiumisation and lower CODB was partly offset by market wide declines in Commercial volumes in addition to temporary changes to the buying patterns of key retailers across parts of the Luxury portfolio.
Europe, Middle East and Africa (EMEA) reported a 1% decline in EBITS to $32.0m and an EBITS margin of 16.8% (down 0.3ppts). Benefits from masstige-led premiumisation were offset by higher COGS on Australian sourced commercial wine.
TWE commercial wine division restructure plans
TWE announced on January 28 that Clarke was conducting a strategic review of the company’s commercial wine business before his impending retirement.
“We recognise that there are several longer-term trends within the commercial tier that are becoming more prevalent and are increasingly impacting both the markets we operate in and our business, and therefore, we will require a refined approach to moving forward,” Clarke said.
He said the trends include continued increases in commercial COGS [cost of goods sold] globally as well as strong growth in private label in the United States, Australia and the UK.
“And rather than just seeing these as long-term negatives, we believe these trends are actually an opportunity for us to accelerate our premiumisation strategy, both through the investment we are making in luxury production, but importantly, also through further changes to drive simplification focus as well as ensuring that we have the right capital and cost structure for the whole business across all price tiers,” Clarke explained.
The review is expected to be completed in the second half of FY20 and further details will be announced no later than the FY20 full-year results.
“We need a separate focus on luxury, and a separate focus on commercial,” Clarke said.
“We do know the answers. We’re going to move quickly on this”.
TWE demerger ruled out
Clarke ruled out a demerger of the commercial arm of the business, but said the company would be moving towards a “smaller, very profitable commercial business” to support its growing luxury business.
“We’ll be exploring a range of options, including refined supply chain structures and operating models, and this would include options such as internal divisionalisation, but not demerger,” he said.
“We have considerably improved the profitability of our commercial wine business over the last six years by right-sizing it and also removing costs and outsourcing supply to third-party suppliers.”
The next step was to address “how we manage this part of our business differently so that it continues to support, not drag our premiumisation strategy”.