While shareholders in Treasury Wine Estates (TWE), our born again wine giant, got a bullish update at yesterday’s annual meeting in Adelaide with news of faster than expected gains on cost cuts and product rationalisation, it was the company’s exposure to the US economy that saw the shares surge more than 8% off the back of the shock US election result.
Shares in the owner of the Penfolds, Lindeman’s and Wolf Blass brands were up 8.8%, at $10.88, amid the broad market rally.
Chief executive Michael Clarke told the company’s annual general meeting in Adelaide that Treasury Wine would deliver better than expected savings by fiscal 2020, stronger cash benefits from its acquisition of Diageo Wine, and boost its earnings margin in the high teens by the end of 2017-18
"Our group EBITS margin is now 15.3% and our ROCE is 9.6%. The momentum delivered in fiscal 16 saw us not only deliver strong results, but also underpinned a number of upgrades which we communicated in August.
“We will now deliver at least $100 million of COGS (Cost of Goods) savings – up from previously communicated $80 million – by fiscal 20. We now expect to recognise run-rate, cash synergies from the Diageo Wine acquisition of US$35 million – up from previously communicated US$25 million – by fiscal 20,” he told the meeting in a sort address.
“In addition to our organic growth, I believe we have the team, the brands, the regional business models, and the balance sheet to drive incremental growth and margin accretion by securing increased access to Luxury and Masstige fruit,” he said.
“(S)ales growth is translating into even higher earnings growth as we optimise our brand building investment and remain disciplined on managing costs. As a result, we expect to deliver a high-teens EBITS margin by fiscal 18, (i.e. next year); two years ahead of previous guidance.
"Again fiscal 17 and beyond is about growth. Our high-teens EBITS margin guidance by fiscal 18 (next year) is not a destination,” Mr Clarke told the meeting.
"In fact, TWE is on a journey to deliver a group margin that is towards our Asia region EBITS margin of 30% plus – where we land – between our current margin of 15% and 30% – will be through continued margin accretion and how much Commercial wine TWE maintains in its portfolio.”
TWE reported a net profit after tax $179.4 million for 2016, more than double the year before.
Treasury Wine has been shifting its business to the premium end of the market from the mass market.(hence the use of the word masstige, which is the converstion of mass market wines into premium wines through the purchase of better fruit and wining making skills).
It is also finding a growing market in Asia with the appetite for Penfolds and Wolf Blass wines especially growing strongly in China.
Treasury’s board and management yesterday clearly rebuffed attempts to get the company to spin off its lower range wines to concentrate on its premium offerings.
