Treasury Wine Estates has given an update on the Penfolds demerger and announced that its 2020 financial year earnings will be down 21% due to the impact of COVID-19.
There were regional declines of approximately 14% in Asia, 37% in the Americas, 16% in ANZ and 18% in EMEA.
The winemaker flagged that the potential Penfolds demerger would be completed by the end of calendar year 2021.
TWE is also preparing to sell selected commercial wine brands and assets in the US.
The update comes ahead of the company’s FY20 full-year results announcement on August 13, 2020.
For FY20, TWE expects EBITS to be between $530million and $540million, with the COVID-19 pandemic having a significant impact on TWE’s trading performance across all geographies through the second half of FY20.
The winemaker noted that cost management throughout this period has seen reductions in costs of doing business, including no payment of any discretionary employee incentives which relate to FY20 performance outcomes.
Signs of recovery in China
In China, TWE said it continues to see positive signs of both consumption and sales depletion recovery with continued reopening across the country.
TWE’s depletions in April and May were up 1% when compared to the same period a year ago, after experiencing declines in depletions of more than 50% in February and March versus the same period prior year.
TWE has also been performing strongly in e-commerce, with consumers increasingly shifting their buying behaviour to this channel.
While these recent trends are positive, TWE said it remains cautious on the short to medium term outlook, with gatherings and social occasions, which drive consumption of luxury wine, yet to fully recover to previous levels.
Retail channel strong in US
In the Americas, and the US specifically, the retail channel has seen strong value and volume growth across all price points since March (15%+ on a value and volume basis versus the prior year), with continued premiumisation driving 20%+ value and volume growth in luxury and masstige portfolio price points versus the prior year.
TWE’s priority brand portfolio, which includes Stags Leap, 19 Crimes, Matua, Beringer Brothers and Beaulieu Vineyard, grew collectively by more than 35% in retail channels across the same period.
Outside of retail, key channels including on-premise, cellar doors and global travel retail were closed for a significant proportion of the second half of FY20, some of which have re-opened progressively, albeit with restrictions in place.
TWE’s sales through these channels are weighted toward higher margin, luxury wine and generally have lower cost of doing business than retail channels.
In the Americas, these channels represent approximately 12% of volume and 25% of revenue on a pre-COVID-19 basis.
More broadly in the US, TWE continued to experience challenging wine market conditions, including the market oversupply that has driven continued acceleration in private label growth, which was up more than 50% in the $8-15 price points over the past six months.
Off-premise sales elevated in Australia
Strong retail channel performance continues to remain at elevated levels compared to the prior year.
TWE’s performance and growth during this period across retail channels has been weighted to the masstige portfolio, with higher margin luxury wine sales below the F19 prior comparable period as consumers trade down.
Similar to the US, other key sales channels including on-premise, cellar doors and global travel retail were closed for a significant portion of the second half of FY20, which impacted overall portfolio sales volume, mix and EBITS.
Australian vintage update
TWE said the 2020 Australian vintage was impacted by extreme heat, in particular during key stages of the growing season, resulting in a smaller volume, higher cost vintage for the winemaker, with total intake approximately 30% lower than the prior year.
Cost impacts are expected to lead to higher commercial and masstige COGS in FY21. This is expected to impact all of TWE’s sales regions, but will be most notable in ANZ and EMEA.
TWE expects global COGS per case to increase by approximately 3% in F21 versus the prior year, which is equivalent to a $50m increase in global COGS excluding the impact of volume and mix.
It advised that work has commenced on restructuring TWE’s global supply chain cost base, which will support the achievement of lowering COGS per case over time.
TWE strategy update & Penfolds demerger
TWE said the continuation of the challenging conditions at lower price points in the US wine market re-confirmed its plans to reduce the size and scale of its commercial wine business in the region.
TWE has completed the implementation of operating model and organisation structure changes in the US business which will deliver annualized cost savings of at least $35million in FY21.
TWE has also commenced the potential divestiture of selected commercial wine brands and assets in the US, as well as a restructure of its supply chain.
In regard to the potential Penfolds demerger, TWE said work completed since the market announcement in April continued to validate the expectation that value will be created through a separate focus for both Penfolds and TWE’s other brands, globally.
TWE’s Chief Executive Officer Tim Ford (above) said: “The second half of fiscal 2020 has been a unique period for the industry and all of the communities in which we operate. I am proud of the way that our people, customers and suppliers have managed through the disruptive impacts of the COVID-19 pandemic giving me continued confidence in our team, brands and operating models and their combined strength.
“While it is right to remain cautious on the near-term outlook, given uncertainty remains around the timing and pace of recovery in our key markets, we remain optimistic around our return to both margin and profit growth.
“We will continue to remain agile and opportunistic, diverting resource and focus appropriately to markets and sales channels as consumer and shopper behavior adjusts, and government mandated restrictions change.
“Both myself and the leadership team, which I have immense confidence in, strongly believe that TWE is very well positioned to manage through and beyond the currently impacted trading environment in markets around the globe, and believe that the challenges we have faced will lay the platform for an even stronger business into the future.”
