Profit growth outlook cut in half for Treasury Wine Estates

Profit growth outlook cut in half for Treasury Wine Estates

Treasury Wine Estates (ASX: TWE) may have seen profits grow at home and in Asia recently, but challenging market conditions in the US have led to a hangover that will need time for recovery.

In the company's unaudited results released yesterday, Treasury noted net profit after tax (NPAT) for the first half was likely to be up 5 per cent at $229.2 million, falling short of expectations.

Unexpected TWE leadership changes and price undercutting in the US, combined with a higher cost of goods sold (COGS) in Australia and the US, mean the FY20 EBITS growth forecast has been dropped from 15-20 per cent down to 5-10 per cent.

Chief executive officer Michael Clarke (pictured) says suppliers in the US are "trying to move surplus wine across the market at lower prices, resulting in an accelerated growth of private label, which is up approximately 15% in a market that is flat to down".

"This is a significant market shift in a very short period, especially after the recent US vintage in October and towards the end of the half," Clarke says.

Americas EBITS was down 17 per cent year-on-year at 98.3 per cent, compared to growth of 19 per cent to $175.5 million in Asia and an increase of 10 per cent to $85.9 million in Australia and New Zealand.

The company was also forced to change its Americas leadership in the December quarter due to "unforeseen circumstances" that meant Angus McPherson - who has been with the group for almost a decade - was unable to work in the US. He will be replaced by Constellation Brands executive Ben Dollard.

Leadership troubles have led to a "loss of execution momentum" through the first half which is expected to carry into the second half.

These US market dynamics requiring discounting across all price points have also meant Treasury was unable to recover or offset a higher COGS for its US Luxury and Australian Commercial wines.

"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," says Clarke.

"We have looked at whether we can recover this first half shortfall in the second half, but given the continued market dynamics in the US, we believe that those aggressive one-off recovery activities, for example pricing, would not be repeatable in F21."

The cost of sourcing wine in Australia will also be a challenge this year in light of the recent drought, heat and fires that have affected vintages in various parts of the country. However, TWE is confident its multi-regional sourcing model, combined with past investments in Luxury inventory will provide a degree of flexibility.

"The results announced today demonstrate the continued momentum behind our premiumisation strategy across all markets, and the strength of our diversified, global business model," says Clarke.

"We are very pleased with our performance across Asia, ANZ and EMEA, all markets in which we are executing well and continuing to deliver improving financial returns for our shareholders.

"While current conditions in the US wine market are challenging, we are confident that we will re-gain momentum under the new Americas regional leadership team and return the region to growth once the market impacts subside."

Never miss a news update, subscribe here. Follow us on Facebook, LinkedIn, Instagram and Twitter.

Business News Australia

Help us deliver quality journalism to you.
As a free and independent news site providing daily updates
during a period of unprecedented challenges for businesses everywhere
we call on your support

Looking for a credit or charge card that’s built for your business? Try American Express
Partner Content
A good credit card should work for you, not against you, and let you and your business ...
American Express
Advertisement

Related Stories

Mandatory COVID isolation to end nationally mid-October

Mandatory COVID isolation to end nationally mid-October

National Cabinet has today determined that mandatory isolation peri...

Bottoms up: Sydney cold brew coffee liqueur brand Mr Black acquired by beverage giant Diageo

Bottoms up: Sydney cold brew coffee liqueur brand Mr Black acquired by beverage giant Diageo

Fast-growing coffee liqueur brand Mr Black is joining a portfo...

Sunset on the horizon in 2023 for developer Sunland

Sunset on the horizon in 2023 for developer Sunland

A developer behind some of the Gold Coast's most iconic buildin...

Goodwill impairment blows out Toys“R”Us ANZ losses

Goodwill impairment blows out Toys“R”Us ANZ losses

The Australian operator of toys and hobbies brand Toys"R"...