Comment - Jury Still Out On Treasury Wine Estates

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Treasury Wine Estates remains a work-in-progress amid tough conditions for Australian wine. 


Treasury Wine Estates reached net profits of AUD64.4m (US$67.2m) for the 12 months to the end of June, ensuring that it begins life as an independent company back in the black. However, its fiscal year included less than two months of trading independently from Foster's Group and the Rosemount and Wolf Blass winemaker showed signs of a hangover from its former existence.

Australia's wine industry, too, continues to grapple with overproduction, a difficult exchange rate and a cocktail of both weak economics and stronger competition in key markets, such as the UK and US.

For now, Treasury Wine Estates' (TWE) management has some breathing space. Having only split from Foster's Group on 9 May, TWE can attribute a certain degree of misfortune to a bygone era. Group CEO David Dearie tapped into this vein today (22 August): “As a focused, stand-alone wine company we have a unique opportunity to do things differently, to build on our numerous strengths, and improve the way we do business," he said. 

To emphasise the point, TWE announced a new global structure. Its brands will form an independent business unit, reflecting a greater focus on branded wine, alongside a regional business unit, a supply unit and a corporate unit. All four divisions will report direct to Dearie. Previously, a global brand manager reported to regional business heads, who in-turn reported to a group MD.

These changes help to mitigate figures that show TWE's volume sales fell by more than anticipated in the Americas and Europe, Middle East and Africa (EMEA) divisions. Volumes for the two divisions fell by 11% and 4% respectively for the year. 

That said, TWE continues to face significant challenges. On a pro-forma basis - a reporting technique designed to eradicate the impact of the Foster's demeger - TWE reported pre-tax profits down by 7%, to AUD171m. On the same basis, net sales fell by 7% to AUD1.76bn, albeit largely due to currency. 

Broadly speaking, TWE's plan hinges on pouring more resources into Asia, and China specifically, as well as targeting value sales growth and cost savings in established markets. "while maintaining scale and relevance". Asia accounted for just 3% of TWE's global volume sales of 33.2m nine-litre cases in the group's most recent year. Asia, though, punches above its weight on profits, having produced four times the EBITS supplied by the EMEA business in the year.  

Within TWE's regional strategy, the group is placing a particular emphasis on brands and feels that it can expand successful regional brands into new markets. Beringer is one such brand. Around 96% of its volumes are swallowed up in the Americas, yet it has shown promising growth on continental Europe, according to TWE.

Throughout all this, naturally, it remains possible that TWE will be bought out.

Foster's Group is entangled in a takeover tussle with SABMiller and TWE has been linked to suitors in private equity, as well as to China's Bright Food. Any potential suitors would likely be heartened by TWE's extra focus on branded wine, its most sellable asset. Offsetting that, however, there is uncertainty about wine market conditions in several important markets.

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