The Treasury Wine Estates Ltd (ASX: TWE) share price will be on watch on Thursday after the release of a business update.
What did Treasury Wine announce?
This morning Treasury Wine provided the market with an update on its performance in FY 2020.
According to the release, the wine company expects its earnings before interest, tax and the agricultural accounting standard SGARA (EBITS) to be between $530 million and $540 million in FY 2020. This compares to its EBITS of $662.7 million in FY 2020.
Management advised that this reflects the impact of the COVID-19 pandemic, which has had a significant impact on its trading performance across all geographies throughout the second half.
Things would have been worse had it not been for cost management initiatives. These initiatives have seen reductions in costs of doing business, including no payment of any discretionary employee incentives which relate to FY 2020 performance outcomes.
The main drag on its performance has been its Americas business, which is expected to report a 37% decline in segment EBITS in FY 2020.
Elsewhere, Treasury Wine expects ANZ segment EBITS to decline 16%, EMEA segment EBITS to fall 18%, and Asia segment EBITS to fall 14%.
Current trading conditions.
Treasury Wine also provided investors with an update on current trading conditions. In China, the company advised that it continues to see positive signs in relation to both consumption and sales depletion recovery following the continued reopening of the country.
But while recent trends are positive, management remains cautious on the short to medium term outlook. It notes that gatherings and social occasions, which drive consumption of luxury wine, are yet to fully recover to previous levels.
In the Americas, and the United States in particular, the company revealed that the retail channel has seen strong value and volume growth across all price points since March. It notes that continued premiumisation is driving 20%+ value and volume growth in luxury and masstige portfolio price points versus the prior year.
Australian vintage update.
The company also revealed that its 2020 Australian vintage (V20) has been impacted by extreme heat during key stages of the growing season.
This has resulted in a smaller volume, higher cost vintage for the company, with total intake approximately 30% lower than the prior year.
Cost impacts from V20 are expected to lead to higher commercial and masstige costs in FY 2021. This is expected to impact all of its sales regions, but will be most notable in the ANZ and EMEA regions.
Strategic update.
Management advised that it has completed the implementation of its new operating model in the United States and expects it to deliver annualised cost savings of at least $35 million in FY 2021. It has also commenced the potential divestment of selected commercial wine brands, which are expected to deliver an acceleration in its premiumisation strategy in the Americas.
And finally, the company continues to look into the potential demerger of its Penfolds business. It advised that recent work supports the view that value will be created by the demerger.
Treasury Wine's new Chief Executive Officer, Tim Ford, commented on today's update.
He 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," he added.
