Treasury Wine Estates (ASX:TWE) reveals soured FY20 profit

Treasury Wine Estates (ASX:TWE) reveals soured FY20 profit

The Treasury Wine Estates (ASX: TWE) share price could come under pressure this morning after revealing that FY20 profit is down on FY19.

What is Treasury Wine Estates?

Treasury Wine Estates is a world-leader in winemaking and brand marketing with some 13,000 hectares of vineyards available and around 3,400 employees across 70 countries. Some of more popular brands include Lindeman’s, Penfolds, Pepperjack, Rosemount, Yellowglen and Wolf Blass.

TWE’s FY20 update

New CEO Tim Ford starts work today. His arrival comes with a tough trading update.

In FY20, Treasury Wine Estates expects EBITS (click here to learn what EBIT means) to be between $530 million to $540 million. This reflects the impact of the global COVID-19 pandemic which has had a “significant impact” on TWE’s trading across the world.

FY20 EBITS has declined against the prior year by approximately 21%. Regional performances varied. Asian EBITS was down 14%, Americas EBITS was down 37%, ANZ EBITS dropped 16% and EMEA (Europe, Middle East and Africa) EBITS fell 18%.

The company has been working on reducing costs in the business during this period, including no payment of any discretionary employee incentives which relate to FY20 performance.

Clouds are lifting?

In China, TWE is seeing positive signs about both consumption and a sales recovery across the country. There has been pleasing growth in e-commerce. But the company is cautious for the shorter term.

In the Americas, and the US specifically, the retail channel has seen strong value and volume growth, up 15%, across all price points since March. Luxury and ‘masstige’ has seen value and volume growth of more than 20%. However, there is still a market oversupply in the US.

Australian retail sales had remained solid, but consumers aren’t going for luxury wine as much as they “trade down”. Wine retail locations were closed for a fair bit of the second half of FY20, so this impacted sales volume, the mix and EBITS.

TWE balance sheet

The net debt to EBITDAS ratio is expected to be 2.2x at 30 June 2020. The company had cash on hand of $448 million and undrawn debt of $920 million, meaning it has good liquidity. Cash conversion for FY20 is expected to be higher than 80%.

It seems Treasury Wine Estates is still going to be a dividend – it’s targeting a payout ratio of between 55% to 70% of net profit after tax.

Summary

The company has had a tough year, but it still seems to have made a decent profit. It’s working on a US business restructure in FY21 that will save it at least $35 million a year. It’s also considering divesting some wine brands and assets in the US.

Management are optimistic about a return to margin and profit growth.

The TWE share price is down 4% this morning. It may turn out to be a decent entry point considering the long term growth plans of the business, but there are lot of moving cogs with this business so I’m not sure it would be an investment I’d go for my own portfolio. I think Bubs (ASX: BUB) could turn into a better global growth business.

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Disclosure: At the time of writing, Jaz doesn’t own shares in any of the businesses mentioned. 


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