Treasury Cuts Down Its Struggling Mass-Market Wines Portfolio in the US
Source: simplywall.st
Treasury Wine Estates, the Australia-based winemaker and one of the largest in the world, distributes wines across the globe. The lion’s share of revenues is generated in Australia and New Zealand, where it also distributes beer and cider, followed by a slightly smaller share from the Americas and considerably small contributions, although growing, from Asia, Europe, Middle East and Africa.
Rationale and impact
Prior to acquiring Diageo’s US and UK wine operations through a US$552 million deal last year in a drive to scale up operations and diversify its product line of high-end wines, Treasury had been struggling with its portfolio of mass-market wines as reflected in its falling revenues in the Americas – $726 million during FY’14 from $941 million in FY’10.
The acquisition has allowed it to get rid of the underperforming mass-market brands, which it has been trying to “manage-down” over the last two years. As a result, Treasury sold twelve brands from its non-core commercial brand portfolio, or mass-market wines, without losing much of the market share in terms of dollar-value in a key market such as the US.
Treasury indicated that the sales-growth in its Luxury and Masstige—wines with a price-point between Luxury and mass-market brands—portfolios in addition to savings from the company’s supply chain optimization initiative would be enough to neutralize the impact of the sale.
The company assured no effect on earnings while reaffirming FY’16 earnings – $330–$340 million – to be in line with market expectations – $325 million. Treasury also toned down the concerns related to the impact of Brexit, citing its effective hedging strategy and also the fact that the region’s contribution in overall sales is considerably small to have any significant impact.
Recent performance and outlook
Source: simplywall.st
EBIT grew by nearly 12% to $56.2 million in the Americas for the first-half of FY’16, ended December 2015. However, the star performer, among the geographic segments, was Asia – EBIT grew to $46.5 million compared to $19.1 million in the previous corresponding period, while the company-EBIT jumped by 37% to $146.7 million.
Based on consensus analysts’ estimates, Treasury is expected to deliver a 28% jump in revenues to $2.5 billion in FY’16, followed by an increase of 19.8% in FY’17. While the $475 million equity funding for the Diageo-deal did bring down the ROE for the past 12 months to an anemic 2.9%, the figure is expected to be over 8.5% in three years.