Treasury eyes surge in profit growth, flags hitting target early

Treasury aims to meet earnings guidance two years early, without spinning off its commercial wines.

Treasury Wine Estate chief executive Michael Clarke.

Treasury Wine Estates chief executive Michael Clarke has unveiled an ambitious target to hit earnings margins as high as 30 per cent, making it the most profitable winemaker in the world. And believes he can get there without the need to demerge its lower margin commercial wines portfolio.

The pledge should cool off speculation Treasury Wine Estates (TWE) is seeking to rid itself of its long tail of cheap wine brands in order to focus on its more lucrative luxury portfolio, such as Penfolds and Wolf Blass. If met, it will trigger a significant acceleration of the company’s earnings.

Speaking to The Australian this afternoon after Treasury Wine Estates’ annual general meeting in Adelaide, Mr Clarke said the winemaker was already on the path to achieve high-teens pre-tax earnings growth by 2018 with the next step to push on to 20-plus margin accretion.

“Some people were confused when we said that next financial year we will hit the high-teens EBITS margin, some people thought that was a destination, and that to me is just a post on the road to our success.

“We are going to continue to grow our EBITS margins in the years to come, and what I’m saying is our margin will be somewhere between the high teens and 30 per cent,’’ Mr Clarke said.

During his address to shareholders at the AGM Mr Clarke said he was aiming to achieve the kind of group profit margin that the winemaker was currently enjoying in its strongest market, Asia.

“Treasury Wine Estates is on a journey to deliver a group margin that is towards our Asia region EBITS margin of 30 per cent plus. Where we land – between our current margin of 15 per cent and 30 per cent – will be through continued margin acceleration and how much commercial wine Treasury Wine Estates maintains in its portfolio,’’ he told investors.

Mr Clarke said the improving profitability would be driven by taking more costs out of the business, innovation, investing in its brands and also nudging consumers into its higher priced wines.

“If you look at our business we constantly are taking our low margin commercial (wines) and replacing it with higher margin luxury and ‘masstige’ wines, grow the business and drive mix change in our business and that will continue to drive our margin growth between high teens and 30 per cent.’’

In a note to clients CLSA analyst Richard Barwick said the drive to 30 per cent margins would “almost certainly will rely on the divestment/etc of some/all of the lower margin commercial business.”

However, Mr Clarke said this would not be the case, dismissing talk of a demerger.

“In Asia with luxury/masstige wines and some commercial wine we are at 34 per cent margins, so I don’t have to get rid of all my commercial to get there.

“I could get there tomorrow if I demerge the commercial business from the luxury/masstige business but we are not planning on doing that.’’

Addressing shareholders today in Adelaide at the company’s annual general meeting, the winemaker, whose brands include Penfolds, Wolf Blass, Blossom Hill and Lindeman’s, also promised to deliver “balance, sustainability and quality” to its earnings base.

Mr Clarke told investors that momentum from all its regions and a strong performance from its “priority brand portfolio”, which generated more than 85 per cent of sales revenue in fiscal 2016 and in excess of 90 per cent of pre-tax earnings, would set Treasury Wine Estates on course to meet earnings guidance two years early.

“Sales growth is translating into even higher earnings growth as we optimise our brand building investment and remain disciplined on managing costs,’’ Mr Clarke said.

“As a result, we expect to deliver a high-teens EBITS margin by fiscal 18, two years ahead of previous guidance.”

In fiscal 2016 Treasury Wine Estates posted a net profit after tax of $179.4 million, more than double the prior year, while EBITS at $342m was up 52 per cent.

“Fiscal 16 was a strong year for our company, but our journey of growth is really just beginning.

“Again, fiscal 17 and beyond is about growth. Our high-teens EBITS margin guidance by fiscal 18 is not a destination. In fact, Treasury Wine Estates is on a journey to deliver a group margin that is towards our Asia region EBITS margin of 30 per cent plus — where we land — between our current margin of 15 per cent and 30 per cent — will be through continued margin acceleration and how much commercial wine Treasury Wine Estates maintains in its portfolio.’’

Updating shareholders on the integration of the Diageo wine business, bought late last year for $754m, Mr Clarke said cash synergies flowing from the deal would hit $US35m, up from a previous target of $US25m by 2020.

Treasury Wine Estates was also set to deliver at least $100m in cost savings, up from previous guidance of $80 million by 2020.

Mr Clarke said a “second phase of growth” would come from greater consumer awareness and “trust” in its brands, leveraging the wines available from across its regions to direct the best and highest margin wines to consumers and extracting growth from its luxury wines as well as lower priced commercial wines.