LA Private

A spot of wine rotation on the cards for Treasury

Shares in Treasury Wine Estates (ASX:TWE) fell by nearly 8% yesterday after it both upgraded and downgraded its outlook for its June 2022-23 outlook and revealed plans to restructure much of its operations here and in the US.

On the surface the upgrade/downgrade seems an oddity, but TWE provided enough information to support the contention that the most significant part of the announcement wasn’t the scant details on weak revenue and solid pre-tax earnings, but the planned restructuring, especially in its two main businesses – premium brands and so-called “commercial” wine.

The restructure got most of the attention and left investors with the feeling that there’s a top to bottom revamp coming with some of the company’s lesser-known wine brands being flogged off, if buyers can be found.

The changes were outlined, but not detailed in Thursday’s statement and there were no estimates of the costs involved; these, TWE said, would come with the release of the 2022-23 results in August.

The market doesn’t like this sort of uncertainty and reacted accordingly, sending the shares down an even dollar to $11.76.

TWE’s good news was that its earnings before interest, tax and SAGRA (a way of accounting for depreciation in rural products which self-generate and regenerate, such as grapes) and (unspecified) material items looks like rising by between 11% and 13% by the end of June to between $580 to $590 million.

Given what the company said on Thursday it was planning to change and restructure, material items will be a large figure and will lower statutory earnings for the year to June).

The bad news is that revenue will fall by around 2% to 3% in 2022-23 which will reflect declines in Treasury Americas and Treasury Premium Brands being partly offset by growth for its key Penfolds wines. Earnings will be up because of improved margins in some brands such as Penfolds.

However, TWE said entry-level premium wine in the United States is under pressure with category consumption “challenging” and has shown signs of further deterioration in recent months. Specifically, the company’s 19 Crimes brand portfolio has continued to perform below expectations.

According to the company, consumer demand for luxury wine remains strong in all markets globally, with luxury sales in the Penfolds, Treasury Americas, and Treasury Premium Brands divisions in line with expectations.

Penfolds continues to deliver strong momentum in building distribution and consumer demand across a number of key global markets, TWE said in the update.

But that good news won’t stop TWE from cutting costs by overhauling its premium brands business.

TWE revealed that it is planning to implement a range of changes aimed at delivering greater operational and strategic flexibility to enable continued growth of its Premium and Luxury portfolios.

This includes adjusting the Treasury Premium Brands (TPB) operating model and organisational structure “to align with the future scale of the business, in order to reduce fixed costs and increase focus on priority brands

In addition, the company says it will undertake a review of the Commercial wine supply chain, particularly in Australia, with a focus on improving operational flexibility and reducing total network cost to improve cost of goods sold.

It will also explore the divestiture and/or rationalisation of selected assets, either individually or in combination.

As Treasury Wines CEO Tim Ford explained, “We continually and proactively assess our business performance, our structure and our cost base to make sure we’re in the best position to continue to deliver on our premiumisation and growth strategy.

“With changing consumer preferences and a tightening economic environment in most major markets, we’re taking the opportunity to make changes in our business now, so we have increased flexibility in the future to continue to grow our Premium and Luxury portfolios.”