ANALYST’S NOTE

TWE reported a strong FY18 result, with group operating earnings (EBITS) up +16.5%, driven by ANZ (up +22.5%) and Asia (up +36.7%).

U.S. underperformance was driven by the exit from lower margin Commercial volumes and reduced shipment to the U.S. due to change in U.S. route-to-market strategy. TWE expects FY19 EBITS growth of 25% on the back of higher availability of high-end wine.

Management also reiterated their aspiration of achieving 25% EBITS margin (versus current 21.8%). We maintain our Neutral recommendation given the stock is trading on a PE-multiple of 30x, which suggests little downside is being attributable to execution risk.

• Australia & NZ (NSR up +1.3%; EBITS up +22.5%). Volumes were up +1.3%, with growth outpacing the Australian wine category according to management (believed to be growing at 0-1%). Net sales revenue (NSR) per case was -0.5% below the previous corresponding period (pcp), however adjusting for the route-to-market transition underlying NSR per case was up +4%.
• Asia (NSR up +38.9%; EBITS up +36.7%). Solid volumes growth, up +23%, with North Asia up +41% while South East Asia, Middle East & Africa was down -6%. The strong volume growth was led by Australian (+27%) and French (+296%) brand portfolios. The Company noted that the fundamentals of Asia wine market remain attractive with growth in imported wine category coming at the expense of domestic peers.
• Americas (NSR down -9.4%; EBITS up +2.1%). Segment volumes were down 11.6% on pcp, driven by the exit from lower margin Commercial volumes and reduced shipment to the U.S. due to change in US route-to-market. Operating earnings (EBITS) rose +2.1% on the back of underlying premiumisation offset by a $25m impact from the route-to-market transition in 4Q18.
• Europe (NSR down -9.4%; EBITS up +3.1%). Segment volumes were down 10.4%, reflecting exit from lower margin Blossom Hill Commercial volumes as well as the exit from under-bond wholesale market in the UK. Growth in operating earnings (EBITS) of +20.7% was driven by favourable costs of goods sold (COGS) and overheads largely stable year on year.

• Group cash conversion was disappointing. TWE net operating cash flow fell -10% on pcp. TWE’s headline cash conversion fell to 68%, however management called out a number of one-offs which meant underlying cash conversion was approximately 83%. Whilst we agree a number of these are one-offs, we will be closely monitoring this in the coming periods.
• U.S. still represents execution risk. Management noted that the impact from the change in distribution strategy detracted from EBITS by approximately $25m. However, this impact isn’t likely to automatically reverse in FY19 and is more likely to flow through over a long-term timeframe as new distribution partnerships start to take shape.