Australia’s largest wine producer, Treasury Wine Estates Ltd (ASX: TWE), released its FY21 interim results today. In early afternoon trade, the Treasury Wine share price has edged 1% higher to $10.
Pandemic, China impacts TWE performance
TWE’s revenue declined 5.9%, to $1.41 billion, as a result of the ongoing impact of the global pandemic’s disruptions to key sales channels for luxury wine, the impact of tariffs imposed by China, and reduced commercial volume in the United States.
The company’s cost of goods per case increased by 2.8%, largely driven by lower volume and higher costs offset somewhat by a favorable product mix.
Net Profit After Tax (NPAT) decreased 24% to $175.3 million, as the significant reduction in operations from China flows through to the profit and loss statement. NPAT will likely be lower in the second half as Treasury Wine experiences a full six months without contribution from China.
Return on Capital Employed – a measure of capital allocation, declined from 13.6% to 9.5% as a result of lower NPAT.
On a more positive note, TWE’s retail and e-commerce channels continue to grow across all geographies, reflecting increased in-home consumption of well-known and trusted brands during the pandemic.
The company announced an interim dividend of $0.15 per share. This was down 25% to $0.20 per share from the dividend paid in 1H20.
Management announced a new divisional operating model, aimed at maximizing focus across its key brand portfolios, rather than geographical regions.
From FY22, Treasury Wine will operate under three new internal divisions: Penfolds, Treasury Premium Brands and Treasury Americas.
Despite management shooting down speculation of a Penfold’s demerger, this organisational change could be the catalyst to finally realise the value with the vintage brand.
The company did not provide any full-year guidance.
My take
If you were Tim Ford, the recently promoted CEO of Treasury Wine, it would be difficult to think of a worse combination of external events to walk into for your first six months on the job. Losing your number one growth engine, China. A global pandemic. A $46.5 million write-down. Even the planned demerger of Penfolds seems a distant memory.
The positive news for investors (if there is any), is that no much else can go wrong. Future results in the near-term will likely be ugly, as the Chinese operations are removed.
However, if management can steer existing premium inventory to new markets, refocus operations in the United States and grow the e-commerce business, I see light at the end of the tunnel.