Treasury Wine Estates CEO Michael Clarke

Olly Wehring:

This is the tenth set of results - half- and full-year - that we've delivered in my time here at Treasury. I'm very pleased with the performance of each of our regions, particularly with Asia, which continues to go from strength to strength. Our mainland China business is considerably up on the prior year.

Australia had fantastic results, as did Europe, while the US had very good results. I just use those differentiators because this is the first year after we changed our route-to-market in the US. In most normal circumstances, that would result in a negative year for a company. I'm really pleased, however, that revenue, volumes and profits were all up in the country.

Companies like Constellation Brands continue to have a problem with their wine business [in the US]. With that as our backdrop and the fact that we changed our route-to-market, I think it was a great result for us in the country.

The key thing that's driven our US business is not just our luxury portfolio - which is very strong - but we've had a real trajectory change in the growth of our 'masstige' portfolio, which means wines between $10 and $25 a bottle.

Clearly, we're not chasing volumes in commercial wine - wines less than $10. Our commercial wines are more profitable than ever, given we're not chasing volumes.

Our luxury/'masstige' portfolio grew 27% in revenue dollars, which is outstanding. The net sales revenue from this portfolio is now 70% of our business - five years ago, it was 40%.

On the bottom line, we are outgrowing all of our competitors by quite a distance. So, on the whole, we're feeling quite good.

We've always been transparent about the fact that our business model gives us an advantage. Five years ago, we moved away from distributors - we handle our own distribution in Asia. We've invested heavily in growing our sales organisation across the region. In fact, in the fourth quarter of the year, we started the process of doubling our sales force in China, stealing people from beer, wine and spirits competitors and bringing them into our organisation to help us continue to accelerate our growth.

One of the other big things we changed is that our French wine does not go through negociants, who take a 20% mark-up of margin. When the product lands in China, most competitors go through a distributor, who take a 50% mark-up. We don't do that, either.

That we're doing this ourselves saves us a huge chunk of the value chain that gets shared with other people. We take those funds and use them to give ourselves a more competitive price in the market for an equivalent product, across luxury, 'masstige' and commercial.

We also give our wholesalers and retailers a bit of margin. More importantly, we're investing more money behind our portfolio of brands to connect with consumers. We also invest more money to drive pull-through programmes, where the retailer is able to get the sale done quicker,which leads them to get the cash conversion and margin quicker.

Fast forward to today, and these are more challenging times - there are trade wars going on at the moment. I think business partners in China - and in Asia - are being more discerning on whose product they're choosing. If you and I were running a store in China, we'd go for a brand that has a better connection with consumers. We'd also choose a supplier that can help take our inventory and convert it into cash quicker. That's what Treasury is doing with its portfolio.

To me, it's common sense. That's why these guys are choosing us in these tougher times.

It's definitely growing. If we look at imports into China in our last financial year, we can see that French wine is in decline and Australian wine has been flat. When you look at our numbers, we've been powering ahead. We haven't disclosed what our new market share is but I would bet it's gone up. We've taken share from other French, Australian and American companies. We've also announced an acquisition in Bordeaux.

This is a footprint now to repeat the journey that we've already been on with Australian wine into Asia. Our ambition now is to be the number one importer of French wine into Asia. We're already the number one importer of wine with a small share into Asia - we're now going after number one for French wine, in value terms - I'm not going to chase volume.

Asia is now our biggest profits contributor. Six years ago, we were losing money in Asia - in our results today, we've declared just under A$300m of the A$663m came from Asia. It's become a very big part of our business. What I'm pleased about in America, though, is we have gone through the pain of changing distributors, changing route-to-market and fixing our business. I think we've done all the right things.

So, I'm pleased we have delivered revenue, volume and profit growth in America in a year when Constellation, Chateau St Michel and others are reporting negatives. We're able to do that in a market where others are finding it tougher. Don't forget, Constellation has already announced that it's trying to sell its wine business. Over time, we could be an acquirer of other people's wine businesses, but it will be when they have been weakened and therefore at a lower price.

For us in the US, it's about heads down, keep delivering what we're doing, improve the strength of our business. Historically, the US has not been a happy geography for us. Since we've fixed it, it's going to become a happier geography for us. It will become a significant profits contributor. Last year, it was A$218m versus Asia's A$294m.

Now that we've fixed the US, we can start to get the country delivering and take share from our competitors there.

If we were to rank what drove the revenue growth in the business, first was premiumisation - a better mix of more luxury and masstige sales - followed by volume. The third was price. This was predominantly in masstige and then on some of our luxury portfolio. But the biggest driver was the mix change in our business.

Price played a very small part.

A good example is, we've not taken price increases on Penfolds. Our retail partners are able to take price and obviously they've improved their margins. What we're deliberately doing is leaving an opportunity for our retail partners to not have to discount our brands and to get margin accretion through them taking price.

There has been some price, but it's really premiumisation that's driven it.

In Bordeaux, we've bought Cambon de la Pelouse. It's a winery plus vineyards and linked to that we're going to have grower contracts and bulk wine deals that we'll put in place with growers in the surrounding area. We'll be able to get access to more fruit and more wine than what we make in our own vineyards.

This is our first acquisition, it will not be our last.

We're looking now to find a way to accelerate our French-sourced country-of-origin business, which will be three brands - Penfolds, Beaulieu Vineyards and Maison de Grand Esprit. With Maison de Grand Esprit, we've been using other people's infrastructure in France. Now, some of our vines in Australia came from Bordeaux, so through this acquisition, we'll be effectively taking Penfolds and Beaulieu Vineyards back home to France.

In Australia, given our long-range plans, we can see that we are going to need to step up more capacity for luxury and masstige wines, not just for the Australian market but also for Asia, Europe and the US. Therefore, we've announced a significant capital investment in increasing capacity at our wine facility in Barossa. This has been the biggest capital expenditure that I've put to the board in my six years with the company, other than acquiring Diageo's wine assets [in 2016].

There's a fair amount of experimentation going on within our company from an innovation point of view. We've got the Blossom Hill Gin Fizz, Squealing Pig gin in Australia, Penfolds with baijiu in China, then we've got wine in cans and wine on tap.

We're testing customers and consumers' receptivity to these things. If it works, we'll accelerate it. If it doesn't, we'll learn and I'm also prepared to stop if it doesn't make sense.

We looked at 19 Crimes beer in the US - we're still testing it in one state, in Ohio. It's going well, retailers and consumers seem to like it. We also looked at trying to do a 19 Crimes whiskey in the US but we decided to stop it because we thought it might distract us.

So, there are different things we're testing in different geographies. If it works, then we'll quickly re-apply and take it global.