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Earnings Transcript for TSRYF - Q2 Fiscal Year 2022

Operator: Thank you all for standing by. And welcome to the Treasury Wine Estates FY ‘22 Half Year Results Briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to Mr. Tim Ford, Managing Director and CEO. Thank you. Please go ahead.
Tim Ford: Thank you. And good morning, everyone. Thanks for joining the Treasury Wine Estates 2022 Interim Results briefing. In the spirit of reconciliation, Treasury Wine Estates acknowledges the traditional custodians of country throughout Australia and make connections to land, sea and community. We pay our respects to their elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander peoples today. It's a pleasure to have in the call with me today, Matt Young, CFO; Tom King, the Managing Director of Penfolds; Ben Dollard, the President of Treasury Americas; and Peter Neilson, the Managing Director of Treasury Premium Brands, or TPB, as I'm lucky to refer to it today. I'm very pleased to be here today announcing our results for the first half of 2022, a period where we delivered strong performance across TWE, globally operating for the first time under the brand laid divisional portfolio model. While at the same time continuing to implement a number of important challenges across our business. The focused execution of the plans we've outlined previously and the priorities that we have laid out over the past 18 months are very much reflected in these results. And each of our global teams has been tremendous in driving this agenda forward. We firmly believe we've now moved from a significant and important period of restructuring and recovery to the exciting growth phase and execution phase for TWE. And as we explained today, this has already began. Starting with their first-half '22 financial highlights, 83% of our global sales revenue is now generated by the Luxury and Premium portfolios, an increase of 7% points, and our net sales revenue per case improved 16% in the half. This has been achieved through strong Luxury brand performances in Penfolds and Treasury Americas in addition to Premium portfolio growth in Treasury Premium Brands reflecting our continued focus. Net sales revenue in aggregate declined by 10%, reflecting the divestment of the U.S. Commercial portfolio, the decline in shipments to Mainland China, and also reduced commercial one portfolio of volumes in Australia and the UK, following the heartened pandemic roll out of demand of the prior year. EBITS declined 7% reported to $262.4 million. However, when you exclude the Australian country of origin sales to Mainland China, EBITS grew 28%, which points to the strength of our performance throughout -- across the business. EBITS margin also improved 0.8 percentage points to 20.7% reflecting progress towards our group EBITS margin target of 25% and beyond. Cash flow was once again very strong, with 115% cash conversion outcome aided by the lower 2021 Californian vintage intake, and some earlier phasing of shipments we put in place to reduce the supply chain risks in the market. And our capital structure remains in excellent shot with a leverage ratio of 1.8 times, which is only marginally up on the product corresponding period, notwithstanding the acquisition of Frank Family Vineyards, which was completed in December. As a result, the board has declared an interim dividend of $0.15 per share, which represents a payout ratio of 66% and is in line with our long-term and consistent dividend policy. The new divisional operating model has been a key enabler of the momentum and execution across the business with the benefits of separate focus and accountability already evident in the strong underlying earnings growth delivered by all three divisions in the half. For Penfolds, we continued to build strong momentum across priority markets and channels supported by global distribution gains, with outstanding growth being achieved with revenue in EBITS growing 49% and 32% respectively when you exclude Mainland China. Much pleasingly, we saw this growth across a number of Asian markets, the United State, and also in Europe. With Treasury Americas now a significantly [Indiscernible] Premium wine focused business, performance was led by gains in the above $11 Premium portfolio and in the Luxury portfolio. Excluding the impact from the U.S. Commercial brand divestment last March, Treasury Americas NSR and the EBITS grew 14% and 46% respectively, accompanied by strong margin growth, as you would expect. And in Treasury Premium Brands, there is good early progress towards the delivery of key divisional priorities, including portfolio premiumization, EBIT's growth and EBIT's margin expansion, led by the growth in a $10 to $30 portfolio across a number of global markets. Shortly, Tom, Ben and Peter will each provide more detail for the performance trends within their divisions, including the progress, they and their teams are making towards their respective priorities for FY ‘22. Consistent with our previous investor and market presentations, you will see our perspective of the channel impacts from the pandemic across the geographies in which we operate. Retail and e-commerce channels remain open and continue to operate above pre -pandemic levels, albeit there's been some moderation in demand through these channels compared to the prior corresponding period where demand was particularly elevated. Trends in on-premise and across our cellar door network have been mixed around the globe. In the U.S., we've seen continuation of the progressive reopening to commence light in fiscal '21, supporting the growth in the Treasury America's Luxury portfolio whilst here in Australia as an example, extended lockdowns in Sydney and Melbourne store on premise venue shut for a significant portion of the half and did impact our execution plans outside of the large rate Tyler's, particularly for Penfolds. In Asia, disruptions the key luxury sales channels continued, albeit with some signs of positive improvement, lighten the half. So we're expecting the first-half's trading conditions across our key global markets and channels to remain broadly consistent through the reminder of F22, and this has been our experience thus far through January and into February. But as borders continue to open and government restrictions continue to ease, there's a strong cash for optimism for those channels still [Indiscernible] in yellow and red as still constrained. With that, it's now over the team, and I'll hand over to Matt for the financial results.
Matt Young: Thanks, Tim. Good morning, everyone. I'm pleased to share with you the highlights of another strong financial results. Group net sales revenue declined 10% on a constant currency basis and 3.8% on an organic basis, which excludes the divested brands in Treasury Americas. Net sales revenue per case increased by 16% across the group, reflecting the 8 point increase in contribution of our Luxury and Premium portfolios to 83% of global revenue, following the divestment of the U.S. Source Commercial portfolio, but most importantly, from the strong growth in our Luxury brand portfolio in Treasury Americas and the Premium portfolio in Treasury Premium Brands. COGS per case increased 16% in line with the portfolio mix shift and reflecting slightly higher global supply chain and logistics costs. Cost of doing business improved 9.3% to $255.3 million, driven by reduced brand building investment in line with the reduced scale of business in Mainland China. Cost of doing business margin increased marginally, but is now stable at around 20%. EBITS was $262.4 million, a decrease of 3.6% on a constant currency basis and 1.2% on an organic basis and EBITS margin improved to 20.7%. Finally, ROCE improved 1% to 10.3%, reflecting an increase in EBITS for the last 12-month period and relatively consistent capital employed. Total material items costs of $45.6 million or $35 million after tax were recognized in the first half relating to previously announced programs of work and the acquisition of Frank Family Vineyards. The most significant costs in the half were in connection with the divestment of the U.S. brands and assets, as well as costs relating to the acquisition of Frank Family. We note that previously flagged cost of integration for Frank Family of approximately $8 million will be mostly recognized in H2. Moving to the balance sheet, net assets increased slightly versus the prior year on a constant currency basis with the key factors impacting the balance sheet, including the acquisition of Frank Family Vineyards and the divestment of non-core brands and assets in the U.S. Total inventory value has remained flat compared to first half '21, while volume declined 2%, reflecting the lower commercial inventory following the divestment of the U.S. Commercial portfolio, offset by higher Luxury inventory holdings. Overall, Luxury inventory increased 17% reflecting the high yielding 2021 vintage in Australia as well as the acquisition of Frank Family Vineyards. Current inventory increased $90 million driven by the improved near-term demand expectations for the Penfolds and Treasury Americas portfolios. And non-current inventory was $75 million lower than the prior year and includes the impact of the lower yielding most recent 2020 California vintage. As many would be aware, global supply chain disruptions have presented challenges for all organizations, but from an operational standpoint, our teams and partners delivered an outstanding result, proactively planning in navigating the challenges to deliver for our customers ahead of the key demand periods, with 98.6% of all planned shipments completed. Separately, we were not immune to the impacts of rising costs, and so some increases in cost of packing materials, shipping and labor. Given ongoing challenges, we expect these costs to remain elevated in the near term. As you would expect, we are executing plans to mitigate those costs and we are also implementing selected price increases across several portfolio brands, which will partly mitigate these impacts going into high H2 and beyond. Turning to the local market here in Australia, where the wine industry continues to manage through the impacts of the introduction of tariffs in Mainland, China. We continue to see that levels of wine exports to other markets remain strong, and we also see retail processing in the domestic market remaining steady. As the vintage heads -- sorry, as the industry heads into Vintage '22 off the back of higher industry inventory levels, market expectations of a reduced pricing on grapes and bulk wine. For Treasury Wines, we continue to deliberately and proactively manage our own inventory position, particularly Luxury Wine. As part of that, we are planning for a smaller intake from Vintage '22. This will likely moderate the level of benefit we achieve from any lower grape and bulk wine pricing in this vintage and will reduce overall winery throughput. However, we remain confident that our long-term initiatives and the ongoing market dynamics are still expected to deliver a reduction in COGS over time. Striking the right balance for Vintage '22 is an important decision, and we believe the approach we're taking achieved this balance. Firstly, by ensuring we held the right level of inventory to satisfy our future demand and manage vintage variation. Secondly, that we deliver long-term reductions to vintage costs. Finally, and most importantly in the near term, protecting our retail pricing and margin structures, particularly for our Luxury portfolio globally. We will continue to be disciplined and considered in this approach as we return to more balanced Luxury inventory positions. Turning to cash flow and debt, operating cash flow before interest, tax and material items was $386.5 million for the half year with reported cash conversion of 115.1%. Excluding the change in non-current Luxury and Premium inventory, cash conversion was 94.1%, which is in line with our state of target. Of the confirmed total net cash proceeds of $300 million relating to the divestments in Treasury Americas, approximately $235 million has been received as cash at the end of the half with the remainder expected to be received in calendar '22. Total CapEx for the first half was $59 million of which there was growth CapEx of $30 million, including the investments in Luxury wine making infrastructure in South Australia, which will be commissioned for the Vintage 2022. We now expect if '22 CapEx to be approximately $120 million, down from $150 million previously. Supply China and labor constraints have impacted the timing of several larger projects, particularly those on our technology roadmap, and will be deferred into implementation into FY ‘23. Turning finally to Capital Management. Leverage increased very marginally to 1.8 times at the end of the half. This position which includes the recent Frank Family acquisition leaves the balance sheet in a very strong position. We now expect leverage to remain below our stated target of two times through the cycle. First-half '22 financing highlights included the establishment of sustainability linked loans on $1.4 billion of existing committed debt facility commitments, and the establishment of a U.S. $240 million bridge facility to support the acquisition of Frank Family Vineyards. The retention of our strong investment grade capital structure, ensures that we retain the flexibility to continue investing in growth opportunities, in addition to exploring additional Capital Management opportunities going forward. Thank you. And I'll now hand over to Tom King in Shanghai.
Tom King: Thanks, Matt, and good morning everyone from Shanghai. I'm pleased to report a very strong first-half performance of Penfolds. A period where we continue to progress on our priority of recruiting new consumers and growing distribution and availability across key markets and channels despite the ongoing pandemic related disruptions, Volume and NSR have declined 15.8% and 16.3% respectively, driven by the decline in shipments to Mainland China, partly offset by strong growth in other key markets. Outside of Mainland China, NSR increased by approximately 50%, testament to the progress we are making in growing the Penfolds brand globally. NSR per case was in line with the prior period, highlighting the retention of our pricing structure across the globe. COGS per case increased 3.7% this period, reflecting the release of the high cost 2020 Australian vintage. Cost of doing business improved 19.2%, driven by reduced costs in Mainland China and contemporary phasing of overhead and promotional investments that will normalize in H2. This led to an EBITS decline of 17% to $165 million. A strong result, given that we're talking of shipments to Mainland, China in the comparative period and reflected by the growth in our EBITS outside of Mainland China, which grew 32%. As we called out in the disclosures, we expect our '22 EBIT to be weighted to the first half, while approximately 1.2%, reflecting the timing of the annual Penfolds release and key gift-giving occasions, in addition to the change to northern hemisphere release date. Turning to our F22 strategic priorities and an update on our execution towards it. A number of notable brand building initiatives were undertaken itself, focused on scaling our Luxury credentials and attracting new consumers to the Penfolds brand. In Australia, Penfolds announced its partnerships with the Victorian Racing Club at the new Victoria Derby Day partner. Victoria sponsorship agreement includes the naming rights to Australia's oldest classic race and it's a perfect platform to leverage Penfolds directors and the Luxury item and reflects our plan to grow the brand in the Australian market. The sponsorship was a huge success with influencer activity alone, generating over 25 million organic views across social media during the week. We also launched our new venture beyond domestic The global activation platform that talks the Penfolds pioneering spirit, and unwavering self-belief. Demonstrated here as the China International Import Expo in Shanghai, where we showcased our portfolio of Penfolds Wines, sourced from the most luxurious wine making regions around the world in a new and disruptive way. In November, Penfolds partnered with BlockBar, a leading NFC marketplace to launch a limited edition NFC tied to a rare Penfold rare Penfolds Magill Cellar 3 barrel of one. The NFT sold out in just 12 seconds for $130 thousand. With the newly launched BlockBar in service, we recently sold out a further 300 NFTs, process the $465 per bottle, presenting an exciting opportunities to consumers to give gift themselves in a new and innovative way. This is just a snapshot of some of the fabulous activities undertaken to recruit new consumers to the Penfolds brand. Our second priority is growing global distribution and availability. In the first half, we saw strong growth in distribution, volume and NSR delivered across priority market and channels. I witnessed the highlight with NSR growing 119% ex Mainland China, led by markets such as Malaysia, Singapore, Thailand, Hong Kong, and Taiwan. We also delivered strong growth in the Americas and EMEA with NSR growth of 39% and 14% respectively. Optimizing the portfolio for long term growth is our third strategic priority. A key highlight this half was the acquisition of additional French production assets in Bordeaux, which will ship for future French portfolio growth. In addition, we are continuing to explore the potential to produce a China sourced Penfolds portfolio in the future. We also announced our intention to transition to one focused global release date to the Penfolds collection, comprising our Australian, Californian and French wines. This change commencing in August 2022 will allow us to showcase our entire portfolio of wines to customers and consumers, demonstrating the enduring and limitless nature of the Penfolds [Indiscernible], and maximizing the benefit of the collection release globally. In summary, in the first half of FY ‘22, we've made excellent progress towards our strategic priorities and I feel increasingly confident and excited about the growth potential of the Penfolds brand across the global Luxury market. Thank you. I'll now hand over to Ben Dollard.
Ben Dollard: Thanks, Tom. Good morning, everyone. It's a pleasure to join you today from California. Treasury Americas is now a reshaped, premium - focused wine business, with expanding margins and a growth profile. Our results reflect the execution of our strategy over the past 18 months. Looking at key results from the first half of FY ‘22, organic NSR grew 13.6%, driven by strong growth in our Luxury brand portfolio, supported by guidance in both distribution and velocity, as well as the progressive reopening of on-premise and DTC channel. We've successfully transitioned nearly 40% of our U.S. business to RNDC, and our partnership is off to a solid start with momentum building in the second quarter and points of distribution growing 30% across Premium and Luxury portfolios in California. Reported volume and NSR declined due to the impact of the commercial brand divestment in March 2021. NSR per case increased significantly, reflecting our Premium and Luxury mix now contributing over 90% of our net sales revenue compared to 73% this time last year. COGS per case increased this period reflecting the improved mix and the impact of the relates of higher cost 2020 Australian and U.S. vintages. Cost of doing business improved 8.6%. And this is included insurance proceeds relating to lost profits from the ongoing closure of wildfire impacted cellar doors. This led to H1 fiscal ’22 EBITS of $85 million, an increase of 98% on a reported basis, or 46% on an organic basis. Looking ahead, we expect trading conditions in the second half to be broadly consistent with those in the first half of the year. In addition to our financial results, I'm pleased to report we have delivered significant progress against our key priorities this half. Outstanding brand innovation has driven expansion of our Premium brand portfolio. 19 Crimes Cali Rosé became the leading U.S. wine market innovation of 2021, the second consecutive year that 19 Crimes franchise delivered the most successful new product introduction following the hugely positive Cali Red launch in 2020. Following on this momentum, we are currently introducing 19 Crimes first California Chardonnay in collaboration with America's lifestyle icon, Martha Stewart. Initial trade, media and consumer reaction has been exceptionally positive. Another exciting Premium brand innovation was the release of Matua Lighter, building on the success of the Matua brand in the U.S. and tapping into the conscious consumption trend. Our Luxury brand portfolio also expanded significantly in the half with the addition of Frank Family Vineyards ' award winning portfolio, further enhancing our credentials as a leading player in the U.S. Luxury wine market and elevating us to the number two supplier of Chardonnay above U.S. $25. The integration of Frank Family is well underway two months in, and we're pleased and excited with regards to the opportunity. Our engagement with Rich and Lesley Frank and the broader team has been rewarding and we're excited for the opportunity to nurture one of Napa's preeminent brands through the next generation of growth. Moving to e-commerce. The rapid expansion of this channel continues and our strategic and consistent investment behind rates e-commerce has resulted in H1 sales beating the category significantly, making TWE the number four supplier in the U.S. online wine market. We will build on this momentum with proprietary consumer influx and strong trade partnerships. Our second priority, delivering asset portfolio and cost optimization also took a significant leap forward in the half. We have now substantially completed our program of divesting non-priority year portfolio brands and assets with total net cash proceeds of approximately $300 million now confirmed. In summary, our focus in deep understanding of category trends and consumer behavior continues. Premiumization remains the dominant theme in the market, and we will continue to evolve our brand portfolio to meet consumer needs. We've restructured our business to be a Premium focus, and our ambition is to lead this segment of the market in the U.S. We have achieved many milestones in the first half of fiscal '22, and I'm pleased with the progress we are making. I'm confident we have the brands, assets, and best theme in place to continue on this positive trajectory. I'll now hand over to Peter Neilson in Melbourne.
Peter Neilson: Thanks, Ben, and good morning, everyone. Treasury Premium Brands delivered a solid first half performance with our results showing positive early momentum towards our key financial priorities of premiumization, earnings growth, and margin expansion. Volume and NSR declined 11.7% and 6.3% respectively, driven by a 20% decline in commercial volumes. Most notably, through U.K. retail channels, as we cycled elevated pandemic related sales in the first half of fiscal '21, along with reduced commercial volumes in ANZ. This was partly offset by strong Premium portfolio performance in EMEA and Asia. NSR per case increased 6.1% reflecting portfolio premiumization, with the Premium and Luxury portfolios now contributing 58% of divisional NSR, up from 53% in first half '21. COGS per case increased driven by the improved mix, hard costs from the 2020 Australian vintage release, and increased supply chain costs. Cost of doing business improved, driven by more focused and strategic investments across our brand portfolio and the timing of some key promotional activity that will occur in the second half. As a result, EBITS increased 21% to $39 million with EBITS margin improving to 9.3%. Looking ahead, we expect trading conditions in the second half to be broadly consistent with those in the first half of the year, across key global markets and channels. Turning to some execution highlights, against their FY ‘22 priorities. Premium and Luxury portfolio expansion has been key to the period's result. We've delivered strong growth from our priority brand portfolio, led by 19 Crimes, SquealingPig and Pepperjack. And also made solid progress building the global presence of key brands. We continue to see exceptional growth in 19 Crimes across our priority global markets with strong sales growth continuing in EMEA and sales and distribution growth across Asia. Pepperjack continued its momentum in Australia and successfully gained distribution in new markets overseas, including Sweden, Singapore, Thailand, and Malaysia with other markets to follow pending customer registration. Wins also achieved significant overseas growth with strong depletions in Southeast Asia, significant distribution growth in Hong Kong, and some major listings in UK retail and the on-premise. We successfully launched Wolf Blast Zero in the half, premiumizing the fast-growing non-alcohol segment with an icon wine. Early performance indicators have been strong with positive customer feedback in wine reviews and leading rates of sale in distributed outlets. This is an area we will continue to invest in, further evolving our technology and offerings in this segment. Maintaining sales momentum across our portfolio this half was an outstanding achievement given the continued resilience of retail demand and the presence of logistical challenges. In Europe, in particular, our supply teams management of inventory levels was exceptional, lessening the impact of shipping challenges and enabling us to gain share as a result. Turning to our second priority, accelerating in priority growth markets, channels, and countries of origin. Our performance in EMEA and China is a cold out here with NSR up 35% and 38% respectively in the half. We also successfully expanded our multi-country of origin portfolio with new brand offerings for Rawson’s Retreat and Blossom Hill, sourced from Chile and Spain respectively, with both brands continuing to resonate strongly with consumers and key markets. In terms of our third priority, implementing a fit for purpose, cost and capital base, we've taken direct action to optimize our cost base under the new divisional structure. Including a more focused and prioritized approach to brand investment in addition to undertaking a strategic review to optimize the cost base of our products. A key execution highlight was our work to change the Blossom Hill country of origin to Spanish, a transformational move for this brand from a contribution perspective. In summary, I'm very pleased with TPB's first half performance. We've made significant progress on our strategic priorities and we see a tremendous amount of opportunity for future growth from the fabulous foundations of brands and assets we have to build from. I'll now hand back to Tim.
Tim Ford: Thank you Peter and the rest of team. In a fiscal '21 results last August, I certainly was hopefully clear in outlining our strategic priorities for the year ahead and we see them on the presentation there. As you've just heard from Tom, Ben and Peter, the three brand portfolio divisions have absolutely began to deliver on their respective, very clear path towards their objectives. After what has been a significant period of change across our business, we now are very focus on ensuring that each team is now given the time and resource to continue executing on these plans. Sticking the course and driving execution is a key mantra. Globally, groups are making excellent progress in leading the delivery of our four group wide priorities, driving value for TWE as a whole. Starting with the elevation of our culture and talent, our most important resource. We continue to invest in our most important assets, the people, with a number of development programs in trying to ensure that we remain future fit, including ongoing investment in the next generation of our leaders, building organizational-wide capability in key growth areas such as innovation, digital data, and analytics, and evolving our ways of working to start the new habits and skills necessitated by not only our new operating model, but the blended work models brought on by the pandemic. And we continue to make an impact through our inclusion, equity and diversity agenda driven by our people within our multiple employee resource groups who are [Indiscernible] in every geography around the world. Our investment in technology is gaining pace also. We've progressed as planned, have investment behind that global data and analytics capability and platform working towards our ambition of unlocking significant long-term opportunities through data across wine making [Indiscernible] culture as well as our customer and consumer engagements fees of our business. In other words, rock throughout TWE. The evolution of our e-commerce platforms continues to be a heart priority with what is a must-win channel the treasury want to start not only by enhancing the capability of our own business models, but also enhancing our partnering with our customers to better connect through their platforms to improve the consumer experience. Ensuring our brands and wines engage on the digital shelf, as well as the physical shelf or menu, is the paradigm shift in our business. Investment behind innovation and inorganic opportunity, supported by our strong balance sheet, and disciplined approach to our capital allocation, was a real highlight in the first half. While the Frank Family Vineyards transaction was the most notable investment, the acquisition as outlined by Tom, of incremental vineyard and wine making facilities in Bordeaux was another important step towards growing our French country of origin, sourcing to support Penfolds. As we look ahead, we'll continue to pursue opportunities to grow our portfolios, leveraging our strengths, and building new capabilities to drive incremental growth and maximize our shareholder returns. Three heads of the divisions have already talked about numerous examples of how we are leading the categories through innovation, and whilst impressive, the work on our future pipeline over the multiple year horizon ahead is even more exciting. Finally, and very importantly, we continue to take considerable steps towards embedding sustainability across TWE as we progress towards their sustainability ambition of cultivating a broader future. Through this half year, we have refined our strategy and broadened the suite of targets and commitments against which we will hold ourselves to account. Most importantly, we have developed a specific initiatives to implement to achieve these targets with very clear roadmaps now in place. We're also broadening our external networks to collaborate in this space joining RE100, a global initiative bringing together the world's most influential businesses committed to 100% renewable electricity. Another highlight we announced in December was the establishment of the sustainability linked lines of $1.4 billion of our existing debt, creating for the first time a direct link between our sustainability performance and our cost of capital. Going forward, we certainly plan to include updates on our sustainability performance in each of our half and full year result investor communications, and we look forward to sharing that with you over time. So to wrap up before Q&A, in the first half of fiscal ’22, we delivered strong underlying growth with group EBITS increasing by 28% outside of Mainland China underlining the positive momentum that we now have globally across TWE. The transition to a new divisional operating model has been a success, and I'm very, very pleased with how our team are focusing on executing their respective priorities and plans. As I said at the onset of this call, we have shifted their focus from a mindset and work focus of recovery in restructuring to one of growth and innovation, delivered through execution and we have now entered a very exciting phase of our journey with significant opportunities before us in the global markets in which we are proud. Thank you for listening and I'll now hand over to the Operator who will open up the line for questions.
Operator: Thank you so much. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Simotas at Jefferies. Please go ahead.
Michael Simotas: Good morning, guys. That's the first question from me is on the second half outlook commentary that you've given. I thought it was interesting that the first point in your outlook slide was that in the first half, you did 28% EBITS growth excluding China. You've given us some color on Penfolds and then generally you suggested trading conditions will be similar in the second half of the first half. Should we be looking at that 28% growth next Australian country of origin into China as reflective of what you might be able to do in the second half?
Matt Young: Michael, its Matt here. I think the -- obviously we've been fairly transparent and clear in how to think about the second half both on a divisional and a group basis and I think there's an element where you can sort of work through, I think, particularly when we consider second half. On second half, obviously, we're comparing two periods without China and the second thing I would probably [Indiscernible] is more so in reflect of Asia, ex-China. So you'll see that we've delivered some very strong growth there in Penfolds of a 119%, NSR growth in the half. Certainly feeling confident around those markets particularly as we build the availability and distribution and that we should be able to see continued growth fairly close with what we've seen in the first half into the second half in Asia.
Tim Ford: I think, Mike, if you think about -- look at Penfolds, and I'm sure it's a question marks have, after the first half of Penfolds operating in its own [Indiscernible]. What we've tried to do with the statements we've put out there today with the first half, second half, 1% to 2% difference between those for Penfolds, it's just highlight that at Penfolds business globally without China, which was much more first-half focused in terms of it selling pre -Chinese New Year, etc, The first-half-second-half difference, we don't expect to be as wide as what it was previously when we did have the China market. So we thought it was important to spell that out so that everyone can understand that is how we now see the mix between the half 1 and half 2 for Penfolds globally. So hopefully that's helpful.
Michael Simotas: Yes, now it does, because we're all getting used to the seasonality. So that helps. And then the second question for me is around the supply chain pressures and costs. How do you say that relative to what you saw in the first half? You think it's just more of the same, or we're past the worst? And interesting to see you talk about process increases. There a couple of other U.S. producers that are talking about price which probably gives some indication that it sticks. But I thought it was really interesting that you're talking about price in Australia, given the concerns that many in the market have had about potential price pressure in Australia, following the China tariff. So any comments on that will be helpful.
Tim Ford: Sure. I'll take the processing discussion and then hand over to Matt for some more of the supply chain post. But we've been deliberate with how we have looked at where we can take price increases around the globe and quite deliberate around it in terms of where our brand sit in process points to diverse competitive sits obviously where price increases can be taken where we're not going negatively impact the growth trajectory have. And it is different in different markets, in different channels, in different countries around the world. So we've spent a lot of time, in the last 2 to 3 months in particular, being quite deliberate around that. And it's not just price; it's also promotional, mechanics, and executions as well to make sure that we are where we can, recovering some of the cost increases that Matt will outline in a moment, but not broad brush percentage increases across the board because that doesn't help the consumer, that doesn't help our customers, and to be honest, it doesn't help the trajectory of our brand. So we've been quite deliberate on that front, so it's quite difficult to give a broad brush answer as I know some have in other commentary over the last week or so, because that's not the approach we've taken.
Matt Young: Michael on cost, we are essentially expecting a similar level into the second half. The impact on us, it's probably in the range of $5 million to $10 million across the business. We're expecting that to continue into the second half. It's important just to recognize, particularly in relation to cost of goods. 55% to 70% of the markup depending on the product, comes from the cost of the grapes and the juice, so we are less exposed than others in this space, but not immune. We've seen the costs rising in freight, particularly in container costs as well as packaging, whether particularly values at more energy intensive. For us, those disruptions appear likely to continue into the second half, which is -- which forms the basis for our expectation. But as Tim said, we've got more -- we're slightly less exposed. We've got mechanisms that we're looking at, as well as a fairly good discipline in our business of mitigating cost increases, which will continue to seek to deliver as well.
Tim Ford: I think this comes a lot in the first half results when it contains that in there. So we've managed to improve our margins whilst achieving that as well. It's not your question, but I'm going to use the opportunity because I've got to see the share to our supply chain and same around the globe, because to deliver the service levels and their ability to service customers with the performance that we outlined here today, where there has been disruptions is just test them into their planning. So we feel our ability to manage through these from a service and shipment point-of-view, which was a very small proportion of what our order book looks in the first half, that rolled into the second half, was an outstanding performance and I'll start answering your question, but it just prompted me to really share that because we're pretty proud of that.
Michael Simotas: Thanks, got it.
Tim Ford: Cheers.
Operator: Our next question comes from David Errington at Bank of America. Please go ahead.
David Errington: Good morning, Tim. Morning, Matt. I got one -- two questions, but they both intwine into one another. Matt, may I -- this is probably directed to you -- may I guide you to slide 10, please; your Inventory Analysis. Now when I look at that, when I do the basic math of your current inventory, which by definition is your next 12 months of sales compared to your last 12 months of sales. If you do the math there, there is a significant step-up in the availability or what you plan to sell of Luxury. And in terms of just doing the math, the current inventory of Luxury that you sold in the last 12 months was $248 million but you're planning to sell $421 million of cost of Luxury wine in the next 12 months, which is a huge step-up. And on the flip side, commercial at cost is going to drop from 297 to 201. So, am I right in expecting for the next 12 months? And I know I've got to tell you, Matt, your political diplomacy in answering Michael's question, was rod off the top shelf. You answered that absolutely beautifully, but you didn't say anything. But may I [Indiscernible] in the next 12 months on the numbers of what you're planning to sell based upon your inventory. You're looking to sell nearly $200 million at cost of Luxury wine in the next 12 months. That is a huge step-up. Am I reading that right Matt?
Matt Young: Yeah, David, you are right.
David Errington: And when you look at the margin, the margin accretion that we can expect in the next 12 months is significant given the drop-off in Commercial and the step-up in Luxury. That's a huge increase in the next 12 months that you're planning.
Matt Young: So, a couple of things to call out and I appreciate the commentary on my answers. The -- obviously, it is a 12-month theme, so we have not been -- we have not started away from the fact that as we head into fiscal '23 and beyond, increased building of the availability and distribution of Penfolds globally, the strength of their Premium and Luxury growth in other markets, TPB and TAM are expected to come to fruition. I think the results today suggest that we're on the right track. So to that extent, we feel confident that there is a long-term trajectory and you are right, that is a 12-month view of our expectations of inventory that will be sold over 12 months. I will say it's over 12 months, so fiscal '23 is important to remember there. I would just call out only the commercial pace, a lot of that commercial does represent either divested brands as well so that there's a bit of a structural element then.
David Errington: Just on the raw numbers, the numbers step up is huge. I mean, you're talking only 200 at cost of Luxury but you're going to sell in the second half of '21 and the first half of '22. That's a huge increase. I don't think of I've seen of such a big step-up. So you're obviously -- this is flowing into my second part of the question, which is, I'll finish on this but -- and probably this is to you, Tim. On this I'll probably goes into Slide 5. Obviously you've got huge bullish expectations that you're going to sell it. Which part of that slide you're likely to see opening up for you that you can achieve these really optimistic bullish outlook? Is it the whole sale Asia because -- Can you give us a bit of an overrun as to which part is holding it back at the moment and which part you are getting a sign that you could open up based upon re-openings?
Tim Ford: Thanks, David. Good morning to you too. I think the only thing I'll add to the inventory part is that the devil's in the detail around some of the cost of goods impacts in different vintages as well, but we can go through all of that in detail. But directionally, the point is important, which is it is based on our forward demand plan. So we are clearly optimistic in continuing the growth we've seen in the first half in multiple markets. I think in terms of reopening, the way our plan looks at the moment is half too, we're working on more of the same. It's actually a really simple way to look at it, brought from a channel point-of-view. Now that might change, but as we've seen in the last half, some channels end up performing better than what we expected, some are behind. You have different moves each month across different markets, but it doesn't change the overarching perspective is that Luxury channels and Luxury markets as borders open up, as tourism begins, as travel starts to open up, as more on-premise and as more consumers get out and about, as back into cities, back on the corporate credit cards. All of those things that point towards incremental Luxury -- Luxury growth across the globe. We expect us to continue to improve over the course of 2022, probably more into the next fiscal years than in this half, to be honest. But that's how we see all of these channels going forward. I mean, it's one of those areas of these channels where you think it has been an important wide to explain, what's happening in their business to this point. But I would like to think that in a full year results, we're working on a view that the channels are what the channels are. As I continue to work on that we'll see improvement from a mix point of view, in particular in our business as well. But to speak specific to your question around markets, I just continue to be constrained as we know. Henceforth, I think the performance in Asia is a standard that we're really pleased with and probably ahead of where our expectations would have been at the end of the six months given the constraints that still exist. So time will tell us. Channels open up as to what the difference is, but it's tough to actually really forecast that in data but the trajectory is strong.
Tom King: And Australia being held back, too, Tim. So, there's a lot of room for optimism here in the next 12 months, so I'm really looking forward to seeing you guys get some positive momentum behind you. Well done.
Tim Ford: Thank you. And I think the other point to make is how we think about it as well as -- we build up, we were focused 95% of the time, is on how we're building distribution across the different channels in the different markets around the world. And that's the lead indicator. Now, will consumers take our wine off the shelf compared to others? Well we have to have it on the shelf to start with. So we're really, really pleased with the distribution gains we've made in the focus channels around all markets around the world.
Operator: Thank you. Our next question comes from Richard Barwick at CLSA. Please go ahead.
Richard Barwick: Thanks, Tim. I just wanted to ask a question around China specifically. I know that in China customs announcement this morning, they've seized some Penfolds which was going in illegally into Shenzhen. Just want to know, do you guys have a view as to how much Penfolds is actually entering China illegally, so any sort of color you can give there. And then more widely, I think on China, if you could give us a little bit of update as to what you are actually doing there, particularly within Penfolds, I suppose under the new tariff regime, how much of a market is there? Is anything persistent and how you're thinking about that on a forward-looking basis?
Tim Ford: Not a problem. I'll tell the first one and then I'll let Tom talk about what we're doing in part in Penfolds in China going forward as well. Your information as always is very, very much on the money rigid side. We're certainly aware of an instance where a small volume in the order of about 80 cases of wine has been sitting at customs. We've probably -- as we go through this monitoring process over the last six months I'll talk about, we've seen a handful of instances of offers of our wines, which generally are combined with other wines as well. So there's packages of wine being offered to customers in China but you can count them on one hand and in terms of the volumes involved, they're always relatively small. So once we get that information clearly, we investigate it and we will find on the majority -- and in the last six months majority of cases specifically, that, it's not our customers we selling to, it's where it gets on sold to, etc as well. So we can try trace that back for it and we deal with it, and we deal with the customers that we deal with because of that. Because it's important that we actually do monitor that, we do manage that. Our relationship and our ongoing dialogue with customs in China. They are well aware of our commitment to doing that as well and we work pretty closely with them on that front. So it's a continued monitoring. Interestingly, it comes from the U.S., it comes from it comes from Europe, probably more so than it comes from other parts of Asia when we do find these instances and investigate them, and that's just their ongoing process where we've got to maintain vigilance. But key point is it's relatively small and relatively infrequent when it does actually come to our attention to answer the specific question because we've got to manage it. Touched on the half -- at the last half and I'll just reiterate it. We want to maintain our brand integrity and our processing integrity and all things integrity-wise when it comes to product in China and we're pretty vigilant on that. But, Tom, I'll hand over to you just to talk about, for Rich, the future view on how we -- what we're doing with Penfolds in China at the moment and then going forward, which, I think, is pretty exciting.
Tom King: Yes, sure, Tim. Thanks. And, thanks for the question, Richard. We've maintained a pretty significant presence on the ground here in China with key talent within the team maintains. At the consumer level, we still see positive demand for potentials across the board in channels where we still have inventory available. And with that inventories it might -- it's like through to the consumers have seen the process increase, continue to increase and pretty significantly, in some instances. Clearly, there's more elasticity across some areas of the portfolio than others and there is appetite from some of our customers who support the portfolio [Indiscernible] conclusive process. So we are working with our customers and we have a smooth level of Australian country of origin [Indiscernible] coming in to the market. It's still too early to make an assessment of how meaningful this will be ongoing. For the majority of our team time and effort with our comments at the moment is continuing to focus on the portfolio from California collection of Penfolds special bottling range, which includes our brandy and champagne and preparing in the chance of the release of our first French wines like [Indiscernible] 2022. We continue to invest behind the brand, but clearly our focus is on the elements, the portfolio that from Australia, building that awareness, building that demand so that we maintain a significant presence at the brand level with consumers in the market hit. Clearly that will evolve overtime as we build out the multi-country origin portfolio under the Penfolds collection. But as we've always said, that won't happen overnight. We can't set a cap on these things. So lots of positive belief in our strategy on the ground with our partners here, lots of engagement with consumers that continue to appreciate the once we are able to provide, and we continue to monitor the situation in terms of the Australian portfolio with the elasticity side of things.
Richard Barwick: So, I'm going to just follow on from that. Obviously with the French, it must be being released in the August release, I take it from what you've said.
Tom King: Yes.
Richard Barwick: What sort of volumes and again, my understanding is the French Penfolds is basically targeted to China more so. But we've been told all along that the Californian Penfolds is designed more for the American product. And so therefore, there was very small volumes only available for China. How -- can you give us a bit more color there in terms of materiality, and how soon or how quickly would you expect to be able to get more of the Californian Penfolds into China? Is this -- is this in FY '23 or have you think longer data than that?
Tom King: The real positive from the release in the California collection is that we're seeing huge demand for it globally, it's across the board. So we're having a tough time in terms of managing the allocation of that to where the demand is. Priority market's where we've been allocating that are absolutely the U.S. and where that is now supporting our ambition to build the Australian portfolio and we're seeing some really strong results at the back of that, and also in China. And given the situation we face at the moment with the Australia n portfolio. When it comes to the French, and this will be our first limited release in August that will be small in scale and scope for that first release. Importantly, and this is really important when we talk about whether it's Californian, French, or other countries of origin in the future, all of our wines will be absolutely made to a Penfolds kind of style and quality standards. That's the non-negotiable in all of this. Clearly over the coming months as we look to really small details of what those French wines are, we'll be more than happy to share more at that point in time.
Operator: Thank you. Our next question comes from Darshana Nair at Goldman Sachs. Please, go ahead.
Darshana Nair Syama: Hi Tim. First follow-up quick one on the Americas channel recovery. Can you provide us some color on how direct-to-consumer and on-premise channels are progressing? And if there's any early progress on leveraging FFC strength in these areas to the rest of the portfolio?
Tim Ford: I'm just going to hand that straight to Ben. Because he's the best place to answer.
Ben Dollard: Thank you. With regards to the some of the doors for the reopening, but we're -- we're seeing progressive openings, in terms of, how we're viewing consumers coming back and we're pleased with that progress and we expect that will continue through the second half. Now, we've activated some really compelling digital programs around that and engaging with our consumers as they come back. Again, really confident with regards to the programs we have in place and the playbook that we have in place to welcome consumers back. With regard to Frank Family, it is an iconic location in Napa Valley and a very loyal consumer following. And we expect that as we integrate Frank Family into the broader portfolio and into all of our [Indiscernible] in Napa that we can certainly leverage Frank Family's expertise and also ours and combine them together to make I think for a really compelling experience, so. And the same is true with regards to the Frank Family's on-premise distribution here in California. We see it as an opportunity for a brand like Penfolds, as Tom just said, to continue to penetrate the on-premise. And Frank Family has done an incredible job, and we look to ride with that with regards to the rest of our Luxury portfolio as well. So as we saw it in the first half, we expect that trend to continue in the second half.
Tim Ford: Ben, you might as well wanna give some color to what you've seen over the six months in terms of the I guess, demand through on-premise in the U.S. more broadly?
Ben Dollard: Yes, sure. Look, I think with regards to the on-premise, a similar story as what we've seen with DTC; progressive reopening, the premiumization trend is continuing in the on-premise brands with stories and certainly trusted brands like within our portfolio are certainly finding a place in the on-premise and that's what we're seeing with our Luxury portfolio brands like Stags ' Leap and Beringer and [Indiscernible]. So, again, as we continue to see progression in the on-premise, we are very well-positioned and we've also initiated through our Luxury selling team a very exciting approach to the on-premise side. Again, I think in the second half we expect what we saw in first half to continue.
Darshana Nair Syama: Thanks for the color. Secondly, on the CapEx programs, you did mention there was going to be a delay in some of the programs into the next year. Can you give us some color on what exactly you're seeing and which of these programs are being impacted?
Matt Young: Sure, it's Matt here. Fundamentally, it's mostly in the technology space. So we had some programs of work in the consumer and some of the supply chain. We prioritize the investment in our data and analytics program, program Helix. But some of their projects have been a little bit delay. They will still commence, but we won't be as progressed by the end of the year. No stopping, but more availability of labor has proven a challenge in that space. That's the major area where we -- where we've had some deferral.
Operator: Thank you. Our next question comes from Shaun Cousins at UBS. Please go ahead.
Shaun Cousins: Thanks. Good morning. Just two questions related to TPB, I guess the smallest business, but with the most sort of the upside here, EBITS margin target. Matt, could you help us with this? Just how are you thinking about Australia in terms of the impact of falling bulk wine and grape prices following the reduction in exports to China? You've noted that retail prices are held. Are you expecting that to continue such that margins expand for you? And also how does that potential boost to your gross margins tie in with broader changes in supply chain costs that you might be enduring as well, which you've called out also?
Matt Young: There's a couple of elements and I'll get paid to build if there's any sort of elements he's got on the high end head view as well. Longer term, we do see cost of goods improvement generally through the market dynamics, lower pricing for grapes and bulk wine, but also the delivery of our supply initiatives of $75 million globally. So they are things that we see as things within our control that can deliver that impact. Within Australia, we are seeing less, I guess, of the same supply chain impacts that we've seen globally. So, some of our supply chain impacts around shipping, energy costs, which are predominantly hitting overseas at the moment, are less impacted In ANZ. However, we are not going to be completely immune or make a call on that longer term. So fundamentally, from a margin perspective in Australia, they would be the, I guess the cost drivers, and maybe Peter, the -- mean the other element from a margin perspective is going to be at the top line and the mix that we sell.
Peter Neilson: And for us, the focus for us is around that $10 to $30 portfolio. And so we've been actually looking at revenue growth as a growth driver as opposed to price deflation. Our customers have also spent a number years now focused on driving process realization across the category. So I think there'd be a unwillingness to see that reverse in any way, shape, or form. We -- as Tim said earlier, we've looked at our brands around their ability to realize price, their brand health competitive set, the occasion that we're going after, and the consumer we're trying to talk to and repositioning brands accordingly. And today, that work has been around price realization, not price deflation.
Shaun Cousins: Great. Maybe just secondly, again, just more skewed TPB. Let's talk a little bit about the size of your exports to the United Kingdom, just in that you were always been quite vocal about the potential changes in taxation in the UK. Curious around what the impact could be? You've broken out your EMEA business, just use that as the UK half stats or two-thirds that, but then also doesn't skew more commercial than that other parts of your EMEA sort of business place. Thanks.
Tim Ford: I'll touch on the tech space and then I'm sure Peter's going to want to talk at length around our performance in the UK. It's going pretty well. The vocal nature of media we've seen around the tax reforms, which we -- clearly we've applied a part, is there's two components to it. One is, and the most important part is, the workability of the proposed tax reforms in the UK are going to be very challenging in their current form the way it was proposed by Her Majesty's Treasury. And we've been working very closely with them over the last period of time in terms of developing a more workable solution that we also think will allow the industry as well as us to mitigate, buy in large any of the flow on cost implications as well. So it's more around work ability and actually being able to operate and trade in that market with the tease of taxation that will be in proposed and I guess what was the favorite maybe a month ago, we're very confident, very happy with the way we've been engaged with the key bodies in the UK in particular, yet to come to a better solution from that point of view. So we're feeling much more confident then on that path. The implication financially, to be frank will be immaterial at the end of the day to -- to our business. But Peter, you might want to talk about some of the trends in the UK. UK is the dominant part of all EMEA numbers for TPB.
Peter Neilson: Yes. As we shared in April last year, the UK and Nordics represent a significant part of our EMEA business. But what we have done through great supply chain management is delivered an exceptional first half in the UK specifically where we've gained share across the board and being the leading growth supplier. But where we still see opportunities in UK, especially, is how we continue to build our Premium portfolio, that's other Australia country of origin as well as U.S. Luxury wine opportunities. We do see country of origin expansion as we build that out for -- the focus on Asia, we will still represent opportunities within Europe, for countries of origin that we don't currently play in to allow us to continue to grow in the UK, sorry. But what that will also do for us is give us the opportunity to enter new markets down the track with a relevant brand for consumers or relevant portfolio, before we enter those markets. So we still see plenty of avenues for growth in that market, including [Indiscernible] country of origin but outside that as well.
Tim Ford: I think with Europe as well and then TPB plus Penfolds. I think as we -- one of the bar products of the operating model is that the focus on that market and Europe but particularly the UK, given that as a topic of the question, yeah, we certainly see now is probably a more by growth opportunity than I'll certainly have seen in the last three to five years. There's no doubt about that in my mind. Consumers are premiumizing and there is demand for that wine. 19 Crimes is a Premium part of our portfolio. It's probably not well understood but UK is fast approaching the U.S. in terms of the volume side of 19 Crimes across the globe. Trajectory is significant, I mean, 19 Crimes globally for us is broadly 40% sold outside of the U.S. So whilst its performing brilliantly for us in that market, the UK's leading the charge, as are some of the markets here in Asia and ANZ as well. So our focus within TPB given at least such a substantial part of their earnings and from a growth perspective, this operating model, and again, the [Indiscernible] is allowing us to get more focus on delivery and executing opportunities there as well.
Operator: Our next question comes from Larry Gandler at Credit Suisse. Please go ahead.
Larry Gandler: Hi. Good morning, team. Two questions naturally. With Asia x China, net sales revenue growth 119% strong growth in distribution, can you give us a field for shipment, source depletion, there obviously you building out distribution. Whether the shipments depletion ratio won't be neutral in the second half, you might still be building distribution?
Matt Young: Its Matt here. Generally, the trend is following a line of shipments versus depletions, about half-on-half. There has been some strong depletions. We had a build in the second half last year as we were building that out. Market by market it is quite different, so it's hard to make a definitive percentage growth versus, but the most important thing as we look at inventory levels on a forward basis by our consistent period-on-period. So generally the shipment growth is driven by the depletion's growth, which is driven by the availability in distribution, which is driven by the brand building activities. So it is the right trend and the shipments are driven by that depletion trend as well.
Larry Gandler: So if I can just -- see if I can parse those words out, Matt. it might be that you are still building inventory in Asia x China, but anticipating greater sales. So, the inventory levels are right for your expected sales.
Matt Young: The inventory levels are right, but we differ in each market. I'll take a market like Taiwan or Korea where we are slower. We are a bit behind other markets like Thailand, Malaysia, Singapore in terms of that growth trajectory. But the inventories, they are ready for that future growth.
Larry Gandler: Okay, great. Just a -- while -- this is still the first question here, just in terms of China, you said five months of shipments in the PCP, where there any shipments to China in the June half last year?
Matt Young: Yes, there were some shipments that cleared and went through in the second half last year into China.
Larry Gandler: Okay. So are those material in nature? Do we need to consider that in our forecasting?
Matt Young: I certainly wouldn't be expecting them to be repeated, and I think there's certainly enough information to understand how big they were. They weren't particularly big and certainly not meaningful in an ongoing trajectory.
Larry Gandler: Of course. Okay, great. And the other question I had was around cost of goods and TPB. So you guys are indicating that hopefully for you guys grape cost might decline in the March '22 vintage. I'm just asking for some help around what savings there might be as we look into TPB's margins for F2023 and F2024. I think you called out that 55% of your costs are grape costs.
Matt Young: I think. I mean, just to reiterate, we are seeing those grape price declines. They vary by sourcing region within Australia, and the price points that the declines in grape prices are more likely at the commercial level. At the Luxury, we're seeing slight declines, but not way near. And that's predominantly in the reds as well. So that is going to benefit Vintage '22 overall cost. As we have called out today, just for absolute transparency, we will take in a slightly lower Vintage '22, which we may want to participate quite as fully as if we've taken in a full vintage. So that's important to recognize. And vintage will be sold in later periods in commercial. It will stop being sold in FY ‘23 and beyond. So it's a long-term trajectory. And Peter, Is there anything you wanted to add to how much that contributes?
Peter Neilson: More from a margin expansion perspective. As we said, our ambition to get to high teens hasn't changed, but it'll happen over multiple years. I think we've done a good job of growing margin in the first half. But as we think of margin expansion in the outer years, it'll come down to multiple factors. It will be portfolio premiumization, it will be mix, it will be cost management, product strategy with our supply team, plus we'll see reopening of more profitable channels for global travel retail, cellar doors, and on-premise, so there will be multiple factors that influence margin expansion with cost being one element of that.
Tim Ford: Thanks, Larry.
Operator: Our next question comes from Ross Curran at Macquarie Group. Please go ahead.
Ross Curran: Hi, Tim. Actually just sort of wondering, dig a little bit more into Asia by countries. The one Australia data that came out a few days ago just give us some pretty good detail on sort of country exports. But particularly, Singapore looks have done exceptionally well over the last 12 months. I'm assuming you're dropping some of that? You have to give us a bit more flavor by country throughout Asia to what you're saying?
Tim Ford: First I'll reiterate for the sake of being boring that very just be careful. [Indiscernible] want Australia data as their performance. And I just can't help myself but say that because it can confuse, Ross, but that being said, your point is spot on. Singapore -- we're certainly using Singapore as a hub, particularly through some of the shipping delay and supply chain challenges we've seen over the last six to nine months in particular, and then getting product out of Australia into Singapore, and then shipping further on to other countries, Malaysia, Thailand, Taiwan and Tom's talked through a number of them -- through the opportunities that we're chasing and the growth that we're seeing. Singapore has played a key role in that, but largely to deal with our supply chain channels. We think we're going to keep doing that because it's proven to be very effective in getting our product in a timely manner into the market. So the wine Australia data, which if I recall, was up a 100 odd percent plus over that period of time. A lot of it is driven by that from our perspective. Now, I'm not going to comment on how others are doing it. I think as you see across that data as well, there is strong growth across all of the markets. And I think pleasingly, you see Hong Kong returning back to somewhat of a normal trajectory in terms of inconsistent trajectory with other Asian markets, particularly for Luxury wine, which I think supports the point, though signed before in terms of our management of potential parallel Import risk that is a concern for a number of investors.
Ross Curran: All right. Thank you.
Operator: Our next question comes -- comes from Tom Kierath at Barrenjoey. Please go ahead.
Tom Kierath: Morning guys. Just a question on the Asia x China growth. I think last time you commented it was growing at 19% for the three months ended August, it's obviously it's all out of review. Can you just talk through what's changed in the past, it's four or five months in that market?
Matt Young: Not a lot in our overall planning. Important to call out there obviously, it's a very different period. We are shipping in ahead of key gift-giving periods. And that Q2 is always a much larger part of the shipping profile for our business. And nothing significantly has changed in our overall plans or in our expectations when we talk of the AGM. Predominantly what we were looking to do at the AGM was probably provide more clarity around the products depleting and pulling through because there was some feedback and some questions off the full-year results was how much of the shipment in, I guess, was stock build or pipeline build for the future. What we were trying to do was show that even in quieter times of consumption, we were seeing strong depletions. That was the reason for sharing that. And ongoing repurchase. So just to reiterate, no changes in our expectations of how that's performed over the half.
Tom Kierath: Okay, cool. And then you're also commenting us about the distribution -- number of distribution points are increasing in Asia. For how long do you think that increase is for? And when do you kind of get to a steady state where you're in -- all the outlooks or all the distributors that you want to be in?
Tim Ford: Tom, I'll hand that one to you. You're best placed to answer that.
Tom King: That's a great question. We still see significant runway ahead of us, not just in Asia but across the globe in terms of that distribution build. Previously, I don't think we've necessarily had the visibility of the scale of the opportunity, but during our form, we've actually set up a dedicated team to invest in proprietary data and insight that enables us now to identify at the outlet market across a number of -- at the outlet level, across a number of key markets, where we're going to be prioritizing our distribution efforts. And we're now starting to see some initial results of that in terms of working with our -- whether it's our third parties on the ground, or the dedicated Penfolds teams that we put in place to run our [Indiscernible] in various markets. Some of that is now starting to come through, obviously in the first half, and we are feeling increasingly confident that the risk further scouts go, I'm not going to give percentages of further headroom ahead of us, but we've got a really clear road map now across a number of different markets by channel buyout that, of how we're going to target, what portfolio we're going to put in place in each of those outlets, and then how we're going to activate against that to draw a brighter side. Distribution is one thing, but it’s that right to say than ongoing purchase, repurchase to the consumer level, which is where our marketing investment comes in over and above to build that awareness, build that demand. A lot of positive progress on this level. The work we're doing at a total company level around data and analytics. This is what it's going to be driving our insight and our approach to building distribution over the long term.
Tim Ford: [Indiscernible] It's a spot on answer. I think it's an important point I want to raise. To explain the methodology of how we're executing and delivering the guidance is because what we did when China was still the market that it was a couple of years ago for us as it was growing, was we had great information to drive that distribution growth; right channel, right tier of distributor, right market, right city, and Tom and the team are replicating that now through the other markets in Asia where having the right information has been challenging over a number of years. By gaining access to that, it allows us to be much more targeted. And it might sound a bit boring, but it's so crucial to driving that distribution and then understanding the velocity of that distribution for those outcomes. So we've been doing it for years in Australia or in America, etc, as well. And I guess bringing that to some of these other Asian markets is a really important fundamental next step of how we're just going to keep delivering and executing over time. Thanks, Tom.
Operator: Our next question comes from Phil Kimber at E&P. Please go ahead.
Phil Kimber: Hi, guys. I just also had a question on Premium brand, which was a great result. And just trying to understand how much that business can grow going forward because even with the great results, I think, and this is a pretty current way of looking at it, but it's about -- the first half is about 60% of first half '19 EBITS where the other two divisions are around 80%. So I know you touched on it before, but what are the key drivers in getting that to head back towards FY ‘19 levels? Is it the market opening up that's the biggest driver or is it going to be more about COGS coming down and other cost sizing? So I just wanted to be maybe explore a little bit more what the key drivers will be.
Peter Neilson: Thanks [Indiscernible]. There's a number of things we believe are still opportunities for us to grow that will play out over the next few years. What we have done in the first six months of operating under the new model is have the opportunity to really refine where we prioritize and focus and when -- we can't do everything at once, we just simply don't have the resources to do that. We've had to take a step back and actually lay that out over multiple years to focus on the right things at the right time for the foundations for future growth. A couple of things that we're doing at the moment, China still represents a huge opportunity for us and the first step was to actually get Rawson's reestablished in the market so we move that to South Africa n country of origin. We've introduced a Chilean country of origin for that brand, which is highly recognized in the market and sought after. As a foundation now, what we're doing is looking at the other brands we have in the roll where they can play in that market. We see plenty of opportunities both with priority brands that we've called out as well as creation of new brands into that market using different countries of origin. We're seeing great distribution gains in priority brands like Squealing -- sorry, Pepperjack, Wynns, 19 Crimes throughout the rest of Asia. Tim spoke about the growth of 19 Crimes into Europe. But even within Europe, the country of origin strategy will also allow us to play a bigger role in a market where we already have strong presence and great relationships. So there's no one single thing. COGS will absolutely be a part of it and how we work with supply collaboratively to manage that and optimize it for the portfolio, but multiple avenues of growth over many years. But we've now laid that out clearly as to where we want to focus and when.
Phil Kimber: Yeah, that's great. Can I just ask a second one? I suspect a lot of the industry players, people are getting nervous now about the big Vintage ’21, I mean we know how Vintage '22 is going to be like. But Vintage ’21 was a big vintage, the same time Australia lost its biggest trading export market. And there's concerns around excess supply and what that might do. You're saying that fairly confident that retailers wouldn't use that opportunity to take price. Maybe just explore that [Indiscernible]. If that's what -- if I heard you correctly?
Peter Neilson: Yeah, It certainly in Australia, I don't see it. We're seeing premiumization across the board in Australia and in Europe. So that trend is continuing and that's where consumers are wanting to shop. We're also seeing the growth of some of the emerging brand as Rose has been, in growth for a number of years now. But [Indiscernible], Pinot, which all operated at more Premium price point. So being -- continuing to be or have offerings that the consumer is looking for that means, I don't see that we'll see a shift down because I think despite the ability to potentially take higher percentage margins when you look at it from a cash perspective, trading a consumer down wouldn't be a wise thing to do. So, I think they'll continue to hold along with where they are with their processing across the market. As I said, we're seeing that premiumization trend everywhere.
Tim Ford: We feel a really important dynamic to understand with this upcoming vintage -- and there is going to be -- most companies will be similar to ourselves where going into Vintage '22, we need to balance our inventories with smaller intakes or carry some inventory over into Vintage '23. I think that's how most will manage it. But the growing varietals and the line of star varietals and the white wine varietals for example, I'm not seeing price reductions at all. If anything, in some instances, they're broadly flat but there might be some small increases, whereas the traditional red, the [Indiscernible] cabernet; those that are really impacted by what was the [Indiscernible] wine market for China, so it's the tale of different varietals as well, which implies through the challenge around, hey, you manage that from a price point of view that brands generally have the full portfolio of across it as well. So with low pricing being the norm on most portfolios, particularly under 15 bucks, that's just a dynamic that I think will also add that complexity too, another layer of detail, just to answer your question specifically.
Operator: Our next question comes from Bryan Raymond at JP Morgan. Please, go ahead.
Bryan Raymond: Good morning. Just one for me. Just on the marketing costs, I'm interested to see how you say that playing out in the next few years given Penfolds ' reallocation, [Indiscernible] obviously brand extensions happening and premiumization. Should we expect that to start rising? It was pretty flat in dollars and up a bit as a percentage of NSR. But just interested to say if that's a level you expect it to remain at, and it just gets reallocated? Or it's actually investment in that marketing line, what needs to happen to achieve your strategic goal?
Matt Young: It's Matt here, I'll start. Generally, we're expected to remain fairly consistent at a total global level. We think we invest fairly carefully within our brands. However, on a market-by-market and brand-by-brand basis, it will move around a little bit. Generally, if I type Penfolds, for example, there are some markets where we need to do brand building effort and in some markets we will invest ahead of the curve in those and at higher levels. However, in other markets, we've got the right level. If I take divisions like TPB and TAM, probably the right level of investment, but we need to think differently and more clearly around where we invest that. Whether that be in traditional or digital, and making sure that our brands have been invested at this point where consumers are seeing them. It is a multi-layered answer to that question. But overall, we feel that we invest a good in the right level, but we're continually reviewing where is the right place to put that.
Tim Ford: That's a really good question. I think it's an important shift that the age of the three divisions, in particular in taking, around where that investment goes. And I talked earlier about the digital shelf versus the physical shelf. Then you have sort of the brand building, brand awareness place on top of it as well. The mix within that, it's really important. That can be a very efficient and effective use of funds in terms of you can get a broad drop in the awareness and engagement through the digital shelf as well. More than some of the traditional marketing methods. So it's a -- we feel a lot of our investment model we've got right now is pretty strong and is right for the growth that we expect to see going forward.
Operator: Our next question comes from Sam Teeger at Citi. Please go ahead.
Sam Teeger: Hi there. I appreciate that you haven't taken a broad brush price increase strategy across the portfolio. But if you ride with it, can you please help us understand what proportion of your products will have the same price rises and where you've done so, just the magnitude of them?
Matt Young: I'll look up -- I can't -- as you can reasonably imagine, we're in lots of discussions around the world on different things. Where I can tell you where we would do it, it's where brands have strong equity where we -- particularly where we're challenged with supply. So they'll be in the Luxury space and in those strong brands in markets where -- and both Peter has talked about some of his markets and Ben as well, opportunities within his market as well are going to be where. We've obviously included some word in here where we expect them to partly mitigate cost increases. So hopefully that gives you a bit of a steer what it would do into the second half, but it's very difficult to give a specific.
Tim Ford: I'll give you one specific thing, which is New Zealand Sauvignon Blanc. It's been supply constrained the market, the demand is significantly outstripping supply around the globe. So we're certainly targeting our focus on that in key markets around the globe. So that's one area. The rest of it, we're going to -- it will take us half an hour to go through it, we're not going.
Sam Teeger: Fair enough. Can you discuss and quantify this first half earnings benefit, if any, from the transition to RNDC?
Peter Neilson: What I can share, so we had a -- I ran a bit of 300,000 cases where essentially that was a benefit, I guess in terms of shipments versus depletions, which is a one-off. I think for restructured the pay, you can work out what that has sort of delivered. So, relatively minor, but I would say on the underlying trading has built up pretty well in Q1 and we feel like we're really hitting air rhythms there in Q2, with the RNDC transition. So we're very positive on that new relationship, particularly as it pertains to California, given the growth that I think we've acquired there in distribution in California, so we're very positive about that for the long-term.
Operator: The next question comes from Craig Woolford at MST Marquee. Please go ahead.
Craig Woolford: Morning, Tim. Morning, Matt. I just wanted to -- I like the Slide 5 that gives that traffic light of the channels, Any chance we can just get a better feel for how far off normality they are? I know that's a little bit difficult to answer, but just trying to get a sense of revenue upside and probably more importantly the gross margin impact you'll have as some of those channels recover.
Matt Young: All right look, it's a bit -- it's Matt here. I'll start and maybe Tim can -- and the team can provide some clarity on the ground. Just to the size and structure, I can point you back to previous versions of this slide where we showed what the size of these channels were pre -pandemic. We aren't sharing that anymore, but it is a reference base you can use, because we're now -- it is not right for us to guide to what that recovery would look like, we're now really talking about where the shape of these. But generally, as you can imagine, going down the page, the margin improves as you go into on - prem, into direct to consumer and travel retail partially because of products, but also partially because of the structural chains there. I'll let Tim if there's more.
Tim Ford: Craig, I'd love nothing more to be able to give you detail, because I'd love to know myself. Somebody just monitoring, on a week by week, month by month basis. And it's not trying to dance around. Yes, it's really, really difficult to forecast that. And I think what we've seen over the last two years is, our forecast that we have in each of our channels and each of our markets around the globe, we've seen different conditions month-by-month, quarter-by-quarter etc. as well. But the balancing item of the different opening and reopening and pandemic conditions in the different markets has given us good strength across the globe, but very difficult to be specific, going forward, but thanks.
Tim Ford: Thanks, Craig and I appreciate your patience there as well. All right. Just to quickly wrap up. Firstly, thank you for joining us today. Certainly a pleasure to share the results. A quick summary from me. The first half of this year, we've delivered against our objectives and we're really pleased with that. Today, we've reiterated our long term guidance as well, and the belief that the team has, I'm sure, has come through and the confidence we have in our growth agenda going forward. And with H2, we plan to deliver and execute more of the same. So I look forward to talking to a number of you over the next couple of weeks as well and obviously, the team will get on and keep delivering, so thank you. Cheers.