TWE CEO Clarke said Asia will be the companys biggest profit contributor

TWE CEO Clarke said Asia will be the company's biggest profit contributor

The CEO of Treasury Wine Estates has said that in the next 18 months, Asia will become the biggest profit contributor to the company.

This time last year, CEO Michael Clarke was nearing the end of a company shake-up. In the last quarter of 2014, Clarke talked about taking "necessary steps" to "drive improved performance", which included increasing consumer marketing, reducing TWE’s cost base and "addressing structural challenges".

Fast forward 12 months, and TWE has turned in a strong set of fiscal-2015 results, with enviable growth in Asia. Operating profits in the region leapt 54.5% on the same period last year, to AUD73.1m (US$53.7m). The Asia region was hailed for delivering "outstanding growth", driven by a premiumisation strategy and broader distribution. Greater China (volumes up by 36%) and South-East Asia (+13%) led the way.

How did they do it? In a conference call following the results announcement, Clarke gave analysts some insight into the company's Asia operation.

He started by saying that when he joined the company, it was obvious that TWE was "trying to manage our North Asia business by remote control from Melbourne".

The company "didn't have talent on the ground" according to the CEO and he said it was important to "tackle [that] in the first half of fiscal-2015". Talent came in the form of former Coca-Cola exec Robert Foye, who Clarke installed in Shanghai.

He described the company's old way of working in Asia as "a distributor model", where TWE would sell through distributors who would take their mark up - which he suggested was around 50% - and sell on to different accounts.

Clarke said he decided to use these distributors for the on-trade channel and "tackle key accounts directly".

"We can do that with a relatively low-cost model in north Asia," he said. Clarke described his new method of working with retailers as "very disciplined" with no "shotgun approach".

"[We are] trying to build this retailer by retailer, going from large down to smaller and from region to region within China, for example," he said.

Clarke was keen to emphasise that depletions were ahead of shipments for all regions - including Asia. He said his team is "very focused" on levels of inventory at both the retail and the distribution level.

He said it would be "very easy to make our product available in a lot more retailers in China, as an example... likewise in Korea and Japan". He also admitted that his team "probably could sell more than what we've allocated" but he added that he didn't want a repeat of the company's inventory realignment experience in the US. "I don't want us to have to do a course-correction," he said.

The company is "trying to broaden the portfolio" on offer in Asia. "It's not just Penfolds... it's not just the Australian brands. It's also the American brands that we're selling in China and North Asia," he said.

"I feel very comfortable that this grown is sustainable," added Clarke. "Which is why we've called out that we believe in the next 18-month period, Asia will be the biggest profit contributor to our company."

As well as Asia, Clarke flagged Australia and the US as growth markets.