TWE expects 21 per cent decline in earnings

09 July, 2020 by Deborah Jackson

Treasury Wine Estates (TWE) is expecting a decline of around 21 per cent in its full year earnings due to the impacts of the COVID-19 pandemic.

TWE has today provided a business update ahead of its F20 full year results announcement on 13 August. Outlining details of the business performance, TWE says it expects EBITS to be between $530m and $540m, with COVID-19 having delivered a blow to its trading performance across all geographies for the second half of the 2020 financial year.

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Earnings have declined against the previous year by around 21 per cent for the Group, with regional declines of around 14 per cent in Asia, 37 per cent in the Americas, 16 per cent in ANZ and 18 per cent in EMEA.

But CEO Tim Ford who commenced in the top job on 1 July, remains optimistic that TWE will, “return to both margin and profit growth” and says that the challenges that 2020 has presented will lay the platform for an even stronger business into the future”.

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 has been weighted to the masstige portfolio, with higher margin luxury wine sales below the F19 prior comparable period as consumers trade down (Aztec sales value data, QTR 21 June 2020).

Other key sales channels, including the on-premise, cellar doors and global travel retail were closed for a significant portion of 2H20, which impacted overall portfolio sales, volume, mix and EBITS.

Vintage 2020

The 2020 Australian vintage (V20) was impacted by extreme heat, in particular during key stages of the growing season, resulting in a smaller volume, higher cost vintage for TWE, with total intake around 30 per cent lower than the previous year.

This is expected to lead to a higher cost of goods in 2021, and this is expected to impact all of TWE’s sales regions but particularly ANZ and EMEA. It’s expected that the global cost of good sold (COGS) will increase by around three per cent per case in F21 versus the prior year, which is equivalent to a $50m increase in global COGS excluding the impact of volume and mix.

Work has commenced on restructuring TWE’s global supply chain cost base, which will support the achievement of lowering COGS per case over time.

Penfolds demerger

In April, TWE said it was considering a demerger of the Penfolds brands after a detailed review of the company’s portfolio.

Today’s announcement says that: “Work completed since that market announcement in April continues to validate the expectation that value will be created through a separate focus for both Penfolds and TWE’s other brands, globally” and it outlines that we could see a potential demerger by the end of calendar year 2021.

In relation to today’s business update, Ford 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 behaviour 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.”

In light of the continued uncertainty around the impacts of COVID-19, TWE will not be providing earnings guidance for 2021 at this point in time.

Note: Any financial figures outlined in today’s announcement are subject to audit, which will be completed ahead of TWE’s F20 results announcement on 13 August.