Earnings Transcript for TSRYY - Q4 Fiscal Year 2021
Company Representatives:
Tim Ford - Chief Executive Officer Matt Young - Chief Financial Officer Tom King - Managing Director of Penfolds Ben Dollard - President, Treasury Americas Pete Neilson - Managing Director of the Treasury Premium Brands or TPB
Operator:
Good day and thank you for standing by. Welcome to the Treasury Wine Estates FY ‘21 Full Year Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. Please be advised that this conference is being recorded today, Thursday, 19 August, 2021. I would now like to hand the conference over to your speaker, Tim Ford, Chief Executive Officer of TWE. Thank you. Please go ahead.
Tim Ford:
Good morning, everybody, and thank you for joining the Treasury Wine Estates 2021 full year results briefing. In the spirit of reconciliation, Treasury Wine Estates acknowledges the traditional custodians of country throughout Australia, and their 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 Island of people today. So I'm very pleased to have joining me on the call today the following members of the leadership team
Matt Young:
Thanks, Tim. Good morning, everyone. Fiscal ‘21 was a year to be proud of at TWE for many reasons, but our financial delivery was certainly one of them. Despite the challenges that presented us in the first half of this year, our teams are able to demonstrate incredible agility to develop strong response plans, but more importantly, they were able to execute those plans successfully, demonstrating the underlying strength of the business models, brands and talent here at Treasury Wine’s. As a result, I'm pleased to present to you our fiscal ‘21 financial results, which are in line with or ahead of our commitments, and provide a strong base to continue the execution of our TWE 2025 strategy. We returned to top line growth in fiscal ‘21 with group net sales revenue increasing 1.3% on a constant currency basis and 4.4% on an organic basis. NSR per case rose in every region and was up 2.4% across the group, with momentum being led by our Premium portfolio, which was the driver of mix improvement in the Americas, EMEA and ANZ. As a result, our luxury and premium portfolios contributed 77% of our global NSR, up 6 percentage points in fiscal ‘21. COGS per case increased 10.6% on a constant currency basis, reflecting the favorable portfolio mix shift, along with the previously signaled higher COGS on the Australian source Commercial Wine. A number of one-off impacts also impacted COGS in fiscal ’21, including the impact of inventory damage by the Californian wildfires, which was covered by insurance, and one-off costs incurred in response to the changes in China and as a result of Brexit. Cost of doing business margin improved 1.8 percentage points to 20%, reflecting the organizational changes implemented in the Americas in the last quarter of fiscal ‘20 and more recently in China as we realigned our overall cost base to the reduction in sales volume in that market. EBITS was $510.3 million representing growth of 3% on a constant currency basis, while on an organic basis EBITS grew 3.5%. EBITS margin increased 0.6 percentage points to 19.9% and finally ROCE improved 0.6 percentage points to 10.8% with lower capital employed reflecting improved cash flow, which facilitated repayment of borrowings. Total material items costs of $88.5 million or $66.1 million after tax were recognized in fiscal 2021, and all relate to the previously announced programs of work. The most significant costs relate to the divestment of U.S. brands and assets with the cost of $62.3 million relating primarily to the write down of intangible brand values and inventories that were associated with the U.S. Commercial portfolio divestment. These write downs were offset by a gain on sale of a Napa-based vineyard that was sold in the first half. To-date we have confirmed net cash proceeds of approximately $150 million as a result of the divestments and remain on track to deliver total inflows of approximately $300 million by conclusion of the program. We also recognized $18.4 million of cost in relation to the ongoing overhead and supply chain restructuring program, and an additional $7.8 million in respect to the luxury capacity expansion in South Australia. Moving now to the balance sheet, which remains a major source of strength for Treasury and one that has enabled us to seamlessly manage through the necessary changes to our business in fiscal ‘21. Net assets declined slightly versus the prior year; however, adjusting for the impact of currency, net assets increased by $113.4 million with the repayment of borrowings from strengthened operating cash flow as a key driver. Other key factors influencing the balance sheet in the year included the U.S. Commercial portfolio divestment and ongoing plans to divest further wineries, vineyard and brands in the Americas. Turning to inventory in more detail, which is declined by $180 million to $1.9 billion valued at cost at the end of fiscal ‘21. Currency was a significant driver of the decline as was the divestment of the U.S. Commercial portfolio brands. With the impact of this transaction reflected in the lower current inventory position and now seen as our less commercial inventory overall. Non-current inventory was in line with the prior year, with a high yielding 2021 Australian vintage and the carry forward of inventory that have been allocated for sale in China, offset by the lower yielding 2020 California vintage. Luxury inventory declined 2% in value terms, while volume was flat and remains a key component of our future growth ambitions. Current inventory has declined, also reflecting the expected short term decrease in sales volumes as a result of Luxury channel disruptions and the impact of reduced sales into China. At our Investor Day in May, I provided insights of the risks to the Australian market as a result of the effective closure of China, and as a follow-on the potential impact to our business. Three months on, the macro observations we shared then continues to hold. Firstly, demand trends continue to be positive in the domestic market, consumption through retail channels has being strong as evidenced by scan data, which shows growth of just under 6% in value terms in fiscal ‘21. Complementing this is the accelerated growth of Australian Wine exports with export value outside of Mainland China up 12% in the 12 months to June. On the supply side, the high yielding 2021 Australian vintage helped restore the inventory position following the low yield in 2020 vintage. This was also true for Treasury Wines, where we elected to increase our holdings of Luxury wine to address the 2020 vintage, but also support long term growth ambitions. The current market position is reflected by retail pricing trends, which remains stable across all price points; however, we will continue to monitor this, including trends in private label. So in summary, we remain in a strong position coming out of fiscal ’21 and we'll continue to monitor closely both the domestic and global trends. We do recognize however that ongoing management of vintage intakes will likely be required across the next one to two Luxury vintages. We've taken some proactive steps of our own to bring forward some long planned vineyard redevelopment programs into fiscal ’22. Programs that were planned in future years, but doing them now helps to manage the short term intake, while ensuring that the vineyard are set up to support growth in the future. At the same time, we're reviewing our upcoming grower contract renewals, with our expectation being that our intake from growers may need to be reduced over the medium term. While we recognize this will continue to be a period of uncertainty for the industry, we remain well placed to manage through this period, both from an inventory and cost base perspective. Turning to cash flow and net debt. Operating cash flow before interest, tax and material items was up 4% in the year, with reported cash conversion of 100.8%; the primary drivers of this with a lower 2020 vintage intake in California and adjusted 2021 Australian vintage intake and the regional shift in sales mix in Asia. Excluding the change in non-current Luxury and Premium inventory, cash conversion was 97% consistent with our target of 90% or higher. Moving now to CapEx. Total CapEx for fiscal ‘21 was $121 million of which growth CapEx was $66 million, including the investments in Luxury wine making infrastructure in South Australia and in technology. Whilst total CapEx was slightly below our fiscal ‘21 expectations, this was primarily due to supply chain limitations. We expect fiscal ’22 CapEx to be up to a $150 million, including maintenance and replacement expenditure and continued investment to support growth. We've been disciplined in our management of cash flow, but remain committed to delivering self-funded growth CapEx to support our strategy. And turning finally to Capital Management, where I'm delighted to say that we've retained our strong investment grade capital structure despite a number of significant disruptions through the course of fiscal 2021. Leverage reduced to 1.6x in the year, reflecting the $376 million decline in net debt, and is now well back within our target of up to 2x through the cycle, which is where we expect it to remain moving forward. Importantly, our capital structure retained its flexibility, both in the short and long term, which leaves us in a great position to consider a range of opportunities as we continue to prioritize investing in future growth and incremental opportunities. Our liquidity position of over $1.2 billion is supported by significant undrawn committed debt facilities across a well-diversified maturity profile, and this strong liquidity position supports the maintenance of our long term dividend policy, and today we declared a final, fully frank dividend of $0.13 per share, representing a payout of 65%. Thank you, and I'll now hand over to Tom in Shanghai to speak to you about the Asia region.
Tom King:
Thanks Matt and good morning everyone from Shanghai. Across Asia, key channels for Premium wine sales remain in a mixed state, with China fully opened for business and other key markets subject to continued disruptions, with ongoing restrictions throughout the region continuing to cause significant disruptions, most notably across the travel retail channel. Against this backdrop and the introduction of tariffs in Mainland China, the TWE portfolio has held up well, with ongoing strong appetite for our brands assisting F21 performance. For the Asia region, net sales revenue declined 8%, driven by reduced shipments to Mainland China from late November onwards when the provisional measures were announced. This decline was partly offset by a 20% increase in net sales revenue throughout the rest of Asia, driven by meeting previously unmet demand and the strengthening of demand for our brand portfolio in key markets including Malaysia, Thailand, Singapore and Hong Kong. COGS per case increased 50.1% as a result of improved portfolio mix and one-off costs, including additional freight costs and clearance delays through Chinese ports. Cost of doing business improved 11%, driven by the realignment of brand investments and overheads in China to our future state China business models. Regional EBITS were $205 million and EBIT margin was 36%. Our plans to grow demand and build distribution and availability for Penfolds Bins & Icons across key regional markets is progressing well, with people and brand building investment accelerating in the second half. As a result of these investments and our focus on driving distribution gains, in particular in the retail and ecommerce channels, NSR for the Penfolds Bins & Icons range grew 38% in markets outside Mainland China. We also executed a number of route-to-market changes in H2 across the region, enabling us to get closer to our end consumers and setting our business up for further growth. In Mainland China we continue to invest behind our multi country of origin portfolio growth strategy, which is evolving with second half highlights, including the launch of the Penfolds California collection and the release of Rawson’s Retreat sourced from South Africa, both offerings generating strong trade appetite. We've also continued to invest behind the Penfolds brand in China, where consumer demand remained strong. Moving forward, we expect to sell through some of the Penfolds Bins & Icons range in Mainland China, at higher tariff inclusive retail prices. While we’re yet to form a definitive view on what this will look like in volume terms, we do expect that EBITS contribution from China net of investment will be minimal in F22. While the impacts from the pandemic are continuing, we do expect to see strong growth across the region supported by greater availability and acceleration of our sales and marketing efforts. I feel very confident and excited about the growth potential of the Penfolds brand across not only Asia, but the global Luxury market, and I look forward to updating you on our progress moving forward on behalf of the Penfolds division. Thank you, and I'll now hand over to Ben Dollard.
Ben Dollard:
Thank you, Tom, and good morning everyone from Napa, California. It's a pleasure to join you today. Fiscal ‘21 was a milestone year with significant progress delivered against our key priority. Americas F21 performance saw net sales revenue increase 2%, driven by strong growth in the Premium portfolio across retail and the e-commerce. This was partly offset by the divestment of a significant portion of the U.S. Commercial brand portfolio in March. Excluding these divested brands, organic NSR increased 11%, which reflects the strong consumer demand for or our focused TWE 10 [ph] brand portfolio. Lower overheads driven by the new organization structure implemented in June 2020 reduced our cost of doing business and in combination with strong topline momentum resulted in a 54% increase in regional EBITS to $168 million and our EBITS margin increased 5.7 points to 17%. On an organic basis EBITS increased by over 66%. These are pleasing results despite the ongoing impacts of on-premise and cellar door closures during the period. We successfully navigated COVID induced channel shifts, delivered best-in-class innovation and significantly transformed the business the one that is Premium focused and positioned for long term sustainable growth. Our transformation is on-going, however I'm pleased with the progress we made throughout the year. U.S. market dynamic shifted in the second half, with retail and ecommerce channels remaining strong, but moderating as we saw reopening of the on-premise venues across the U.S. While the on-premise and cellar door are now largely reopened, trading activity remains below pre-pandemic levels. This dynamic is due to constraints from staff availability, reduced number of on-premise locations and ongoing travel restrictions. COVID restrictions permitting, we expect to see continued up-life in these channels in the first half as we lead into the key holiday period and we are well positioned to accelerate our performance once fully operational. We will continue to monitor closely, local and national mandates surrounding COVID and potential impacts for the trading environment. U.S. Consumer trends continued to Premiumize with the about $11 price points growing in U.S. retail by 12% for fiscal 2021 and the above $20 price points growing 20% in the same period. Our focus portfolio of Premium brands continues to outperform the market, growing 23% in value for the year, led by 19 Crimes, Penfolds, Beringer Brothers, Matua and St Huberts The Stag. Underpinning the performance of these brands has seen tremendous retail execution along with outstanding innovation success. 19 Crimes, Cali Red strongly resonated with consumers and finished the fiscal year as the number one growth skew in the category. 19 Crimes Cali Rose launched in March and was also very successful, finishing as the number 10 growth skew for H2. Building on our innovation success with [Inaudible], our second iconic celebrity to join Snoop as we expand the 19 Crimes franchise. Our new product will launch in spring our 2022 with standout our packaging and world class augmented reality, providing a terrific complement to Cali Red and Cali Rosé. We will continue to innovate with new 19 Crimes partnerships, variety [ph] and assortment, all while constructing the world of wine. The Penfolds California collection launch was a success, with outstanding response from critics, retail customers and consumers. Our depletion momentum was facilitated by our newly creative dedicated Luxury selling team, The Volt Collective [ph]. We’re seeing strong volatility in reorder rates since the launch, along with healthy on-premise mix. Pleasingly, we've seen increased distribution and interest on the Penfolds Australian portfolio, as we have launched the California collection. Another exciting innovation is the recent release of Matua Lighter launched for the US Summer and tapping into the conscious consumption trend, while early days, trade response has been positive. Our restructuring activities to deliver a future state US Premium Wine business are on track to be completed by the end of the calendar year. The divestment of a significant portion of our commercial profile in March was an important milestone. Our portfolio is now focused on the Premium and Luxury segment. We are continuing to explore further brands and asset rationalization in addition to our supply chain optimization that is currently in progress. This will be one of our top priorities in fiscal 22. Another key highlight of the announcement of our partnership with Republic National Distributing Company. This relationship stands approximately one-third of our business, importantly in our key markets of California and Texas. Our transition plans are progressing well, and we are optimistic with regards to the outlook across the RNDC network. In summary, fiscal ‘21 was a year of material progress and momentum. Our business continues to be all about focus, meeting the needs of the consumers, retail customers and distributors. I’ll now hand over to Peter Neilson in Melbourne.
Peter Neilson:
Thanks Ben and good morning everyone. The ANZ business delivered a solid F21 performance driven by our key Luxury and Premium brands in the retail and ecommerce channels. While there has been intermittent reopening of on-premise venues in Australia, key sales channels for higher margin Luxury wine, including travel, retail and cellar doors remains subdued, and this has continued to impact our performance. For the ANZ region, NSR was 2% above the prior comparative period, driven by growth in our Luxury and Premium portfolios, partly offset by reduced contribution from the commercial portfolio. COGS per case increased 14% due to the mix shift, along with higher COGS on Australian sourced wine and some incremental cost associated with finished goods that have been intended to sale in China. Cost of doing business reduced 9%, driven by lower overheads and reduced A&P during the pandemic impacted period. This led to regional EBITS of $143 million, up 3% on F20. Pleasingly, the premiumization trends remain strong with retail category growth driven by the above $10 price points. The Premium segment, $10 to $30 growing 11% and about $30 growing 26% in value terms over the year. Despite seeing some soft retail data in the second half as we cycle the peak pantry loading period in F20, our priority brands continue to deliver strong growth, led by Pepperjack, St Huberts The Stag, Wynns, 19 Crimes and SquealingPig. Notably, Penfolds Bins & Icons also delivered strong gains with NSR up 15%, driven by increased availability and for some of these increased price. While Premium price segment drove category growth, the commercial segment continued to decline, and there is no doubt that we expect this segment to remain challenging. This is a result of both consumers shifting away from the sub $10 category, and retailers, the leading brands in favor of their own private label strategies. We are proactively managing the commercial portfolio and the role it plays in our business. This includes working in conjunction with our retail partners to agree the role of our brands, with our financial ambitions of EBITS and margin growth family guiding our decisions. The step change in our innovation agenda during the year delivered some impressive results. Highlights included the expansion of Pepperjack, into Chardonnay, Malbec and Grenache and Tempranillo with TWE becoming a leader in the fast faring Malbec and Grenache variety. The launch of our SquealingPig gen sector was another tremendous success on the innovation front, building on the already strong momentum behind the SquealingPig brand. In the background, we've been very busy on the innovation front, and I look forward to sharing what we are bringing to life in the first half of F22. While the positive momentum behind our focus brands is pleasing, the impact of COVID and higher COGS have hurt our financial performance in the past two years. There is clearly work to do to return the business to a high teens margin, but there is significant opportunity here and a clear roadmap map to our destination. We are working closely with supply to reduce COGS and we use our strong innovation focus and multi-country of origin strategies to drive incremental growth. Sourcing Argentinean Malbec this year is an example of a multi country of origin strategy and action, and part of the driver of the growth of both Pepperjack and 19 Crimes this period. The on COGS on the cost management front, we were very focused on F21 on how and where we were investing, making very conscious decisions on the cost lines we have control over. This will be an ongoing discipline moving forward as we optimize our cost and capital base. In summary, I'm very pleased with the F21 ANZ performance. There is work to do, but I'm confident in the significant opportunity before, as part of the broader Treasury Premium Brands division. Turning now to performance in the EMEA, with strong execution and continued restrictions on people movement, drove retail sales upside across the regions, notably in the UK and the Nordics. Unfortunately, this strong top line performance didn't translate to bottom line, with reduced contribution from the Nordics in Continental Europe due to the impact of travel restrictions and rationalization in a key retailer. The Middle East and Africa performance was also subdued due to the lack of tourism. For the EMEA region, net sales revenue increased 15%, driven by growth in the Premium and Luxury portfolios through retail channels with contribution of the Luxury and Premium portfolios, increasing 7 percentage points to 42% of the EMEA regional NSR. COGS per case, increased 7% driven by the improved portfolio mix and higher cost of Australian and U.S. sourced wine. Cost of doing business increased 10% with accelerated brand building investments for key portfolio brands and one-off Brexit related costs, the key drivers. This led to a regional EBITS increase of 1% to $47 million and EBITS margin of 11%. Our priority brand portfolio enjoyed strong growth in retail channels. 19 Crimes continued its stellar performance with distribution gains, a strong NPD pipeline and engaging marketing campaigns, driving 152% increase in dollar sales in the UK, where it is now a top 15 brand, and also strong growth across other key markets in the region. Lindeman's remain the number one brand in Sweden and the Netherlands, with the brand sustainability focus driving increase relevance with consumers. Blossom Hill’s strong brand equity saw its sales back in growth with increased demand in UK grocery and impulse channels during COVID. On the Luxury front, Wynns and Beaulieu vineyard were successfully launched on [inaudible], our global distribution channel for our icon wine and a step towards our ambition of building the awareness of our Luxury portfolio outside of Australia. In summary, a strong top line performance in the region, with our brands resonating strongly with consumer. Similar to the ANZ region, there are some challenges to overcome on the coach front, but there is also significant opportunity in a large and premiumizing market. Thank you. I'll now hand back to Tim.
Tim Ford:
Thanks, Pete, to Tom, Ben and Matt. So F22, which we are now into, we are certainly moving into the next phase of executing the TWE 2025 game plan, which is focused on our ambition of becoming the world's most admired Premium wine company. With our new divisional operating model now in place, our F22 priorities will be led by our brand portfolio divisions and the execution of their respective strategic and growth priorities. Tom and the Penfolds team are focused on growing global demand for the brand by attracting new consumers and also expanding distribution and availability in the priority channels and markets, whilst optimizing the portfolio for long term growth with the execution of our multi-country of origin strategy within the portfolio. With Treasury Americas now to fundamentally change business, Ben and his team will be delivering more of the same in fiscal twenty two. More of the same that is driving relentless focus on premiumization across the business, delivering portfolio expansion through bold consumer led innovation and completing the brand and asset optimization program. For Pete and the TPB team, the focus is on expanding the fantastic portfolio of Premium brands across priority growth markets globally, and the channels within those markets. Building out the multi country of origin consumer offerings you spoke of and also establishing very importantly a sustainable, fit for purpose cost and capital base that will support the margin ambitions we have outlined for that division. Importantly, supporting the divisional growth objectives are four TWE group wide priorities being led by our corporate and central functions to be implemented throughout the business. The first of these is to continue to elevate our culture and our talent with a real focus and investment on nurturing and developing the next generation of latest within our business, which we began strongly in FY’21. Our teams and our people are without doubt our greatest strategic asset and strength and are at the heart of our game plan, guided by the TWE DNA. Embedding sustainability throughout our business is the second global priority. Following the launch of our next phase sustainability agenda at our Investor Day in May, we are now working at pace to implement initiatives and measures right across TWE, focused on the delivery of key imperatives in the areas of health, safety and wellness, water stewardship, greenhouse emissions and sustainable packaging to name a few. Cultivating a broader future is what we will do. Thirdly, investing in technology, tools and platforms to generate data and insights will set TWE up to build capability and become digitally enabled right throughout our business; from the front end example to drive enhanced consumer engagement through to the back end example, to increase the efficiency of our vineyard and winery operations. This year we are step changing our level of investment in technology as we look to build the TWE business of the future. And finally, we will pursue global innovation and inorganic growth opportunities that can either fill premium portfolio gaps across our brand portfolio divisions, can leverage our existing strengths or build new capabilities for the future. We are now in a fantastic position to consider a range of investment opportunities that will drive incremental growth in our business and maximize shareholder returns, because we have the support of the capital structure that is in as good a shape as it's ever been. So in closing, fiscal ’21 was a year of significant change, but more importantly achievement for TWE, one where we delivered organic top line and EBITS growth despite major disruptions and challenges. In F22 our focus will be on continuing the strong momentum of our premium portfolios across all markets, in addition to executing our plans to drive growth of the Penfolds luxury portfolio across key global channels and markets. We are positive on the outlook in F22 across all the key markets outside of Mainland China. Our belief in focusing on what we can control is critical, and in F22 we are very clear on what our priorities are, and once again, doing what we say we're going to do. This is a truly exciting point in time in the history of our business, as we progress deliberately and at pace towards our ambitions and goals led by our new brand portfolio divisional model. So thank you for joining us today, and I'll now hand over to the operator, who will open up the line for questions.
Operator:
Thank you. [Operator Instructions] Your first question comes from the line of Michael Simotas from Jefferies. Please ask to question.
Michael Simotas :
Good morning, everyone. The first one from me is just on the very strong performance in the Asia business ex-China. Just hoping you can give us a little bit more color around that. How much of that was reallocation of wine away from China? How much was just sort of strong underlying growth in some of those markets anyway? And you know was there a temporary boost to any of those markets because China shut down or do you say that performance is sustainable?
Tim Ford:
Good morning, Michael. Thanks for the question. I'll answer it broadly and then I'll hand over to Tom in Shanghai. He can take you through a bit more detail. I think as we outlined our plans around the global response if you like to, the tariffs in the China market, we did say our priorities were two-fold in the second half of the fiscal year just gone. The first one was, we had a strong belief and has now come to life, that there was unmet demand due to supply constrained wines over that period of time, so that was step one. You know everyone else wants to call it reallocation, we like to call it satisfying demand and we'll continue to do so. The second part of it was then really rearranging our focus on resources, investments, you know to build distribution, make sure we had the right partners to build distribution in a number of these different markets as well. So without giving you a percentage split, which I'm surely they’ll expect that I would do between what is those two, you know clearly there was the – for one of the better way to put it, the one off building of demand, satisfying of demand, but more importantly I think the work and Tom can go into more detail of what we've done in terms of really driving the agenda in some of these markets is what we're most excited about to set us up over the future years. So Tom, do you want to build on that?
Tom King:
Yeah, thanks Tim, thanks Michael. I think it's important that we don't forget, we did have very strong canceled businesses, businesses we were growing before the impact to China. And also we started this planning pretty much a year ago this week when the initial investigation was announced. So there's been a lot of work that's gone into identifying where we're going to be investing, where we see the opportunities, and already in H2 and particularly in Q4 we're seeing some of our upside come to fruition. In terms of the markets within Asia and outside of China, Hong Kong, Singapore, Malaysia into China, Thailand and Taiwan, we've really been focusing as Tim said, on identifying where we can recruit new consumers, driving the distribution and availability to support the availability for those consumers, and ensuring we've got the right portfolio in place to meet the demands of consumers from different needs, states and different occasions in different channels. We've been following a pretty similar approach to that that we've followed in China and that's driven a lot of our success in recent years. Firstly, ensuring a really clear portfolio plan like I said that delivers on consumer occasions in these states. A lot of this has been driven by the insights we've had from our luxury wine consumer study that we invested in last year. And then working with the right partners really, to ensure that we've got the right partners on the ground with us, who relies on our strategy and our ambition and with the right capability, and then supporting them with actually our own people on the ground. So bringing in new capabilities that are seen across a number of different disciplines, whether that’s you know key accounts sales managers to support with retail and e-commerce, businesses where we are focused more on driving the entry, entry level of the luxury portfolio and working with customers to add category value by growing the premium and luxury segments. In addition, luxury sales managers who are focused on broadening our availability across fine wine, but also luxury retail and into high net worth individuals as well. And above all of this, you know ensuring that we've got the right representation incentive brand ambassadors to educate trade and consumers. I'm really pleased to see actually that whilst there was an immediate opportunity to reallocate some of the products that was previously unable to be allocated due to excess demand, it's really a combination of the results of these investments and that reallocation that started to come through in H2 and give us confidence going forward, not just on those Asia markets I’ve highlighted, but also across the U.S., U.K. and Australia. I’ll bring you a little bit more, you know I'll give you an example of Thailand where working with a great partner on the ground there we’ve learned a very strong plan with investments and it’s led to in multiple new listings in distribution with key retailers whether that’s to hear the message into convenience channels or luxury wines into premium retail, as well as expanding our broad and our wholesale network. Similarly in Malaysia, you know a strong business plan with our distributors and the end customers, helping us grow distribution into retail channels. Singapore has been a highlight from an e-commerce perspective. You know really strong growth, particularly for Penfolds and that's been driven by you know a focus on ensuring we've got the right internal capability; we're working with the right platforms and partners to leverage the data to inform our investments behind the portfolio. And then you know the final piece is slightly different, is where we have – and I mentioned this in my script, that we've mentioned rich market changes in the last of Japan and Vietnam in the second half, to ensure we're setting ourselves up with the right partners who are looking to invest and support our growth ambition, and in there China where we made a pretty big transition from one regional distributor to work directly with multiple and local distributors, to get closer to customers, closer to consumers and ultimately closer to the market. These are our priorities going forward. This is how we're going to be running the Penfolds division going forward under the new model, and it is a much sharper focus in everything that we do that's already starting to – we’re already starting to see it come to life. Also in Australia, in Europe where in Australia we set up a dedicated on-premise sales team and a dedicated independent retail sales team and in Europe we've now got dedicated retail account managers and we're starting to see some really positive conversations come to life at a customer level, so. I appreciate that was a bit of a long winded answer, but I really wanted to bring it to life, so yes there was some short term reallocations as we like to call it, but our focus now is absolutely on recruiting consumers, driving that distribution and ensuring we've got the right portfolio to meet those consumer demands.
Tim Ford:
Thanks Tom and one…
Michael Simotas :
That’s good color, thank you.
Tim Ford:
I think Michael, one other thing I'll just add to this and this is probably the most exciting part of the work that Tom and the team have done, is when you sort of think back to the slide that we had in the deck before around where some of the key luxury selling channels sit, you know within Asia at the moment in particular you know and we have seen some deterioration of those over that half. The foundations that have been built by the team in some of these other key markets and cities within these key markets, it really does give us the confidence that we're setting ourselves up to succeed as things reopen as well. So yeah, they’ve done a terrific job, so thanks Michael.
Michael Simotas :
Can I just ask a question on COGS as well? Just on the outlook commentary you talk about elevated COGS and that's not surprising given the spillover of 2020 in Australia as well as the U.S. Vintage. How should we think about COGS in FY ‘22 versus FY ‘21? So should we take those comments to mean they are elevated relative what you think a normal level is or will there be another step up in F22 versus F21?
Tim Ford:
And I think how you should interpret that is remain elevated. So we see COGS at the moment as elevated off the back of historical vintage challenges. You have Vintage 20 for commercial. The wording is intended to be ‘Remain Elevated.’ Now the only thing I would add is here, we are clearly focused on addressing that, and as we called out in Investor Day, we've done the bulk of the work to do that, and/or we have reasonable expectations that there are natural trends that will lower that over time through Vintage ‘21 in Australia and early insights in terms of long term pricing trends. So from our perspective, we haven't set in our hands that we are looking to address that, but the benefit of those is likely to come through fiscal ‘23 and beyond. So for fiscal ’22 it's a remained top comment, but our focus is on the longer term where we have more positivity.
Michael Simotas :
Okay, that's it. So just to make it simple and be clear, the drag sounds like it'll be similar in ‘22 relative to ’21, so no worse.
Tim Ford:
That's a reasonable conclusion, yeah.
Michael Simotas :
Thank you.
Tim Ford:
Thanks Michael.
Operator:
Your next question comes from the line of David Errington from Bank of America. Please ask your question.
David Errington:
Good morning Tim, Matt and team. Tim look, I don't want to see negatives here, because I'm very optimistic and I’m positive and I think you're doing a great job and I think the team is in great shape. So please, these are just two questions that I think that – I don't understand and I think the TWE, if you can get this right, there's a lot more upside. Your COGS, following on from Michael's question there, to go through you had a 10% increase in COGS this year per case. The previous year you had a 3% increase in COGS and the previous year before that you had 8.1% increase in COGS per case. Now, given all your supply chain optimization, given all your investments that you've been making, given that you are the largest producer in Australia, I just don't understand why you still have a COGS issue. There always a COGS issue with Treasury Wine. It’s been going on since you know, years ago. Why can't you get on top of this COGS issue, given that you are the buyer of choice, you are the largest, you should have the base systems. You've got a lead investment and you spend nearly $150 million bucks a year, that's more than anyone else. Why do you still have a COGS issue, I don’t understand it?
Tim Ford:
Thanks David, and I guess I'll top-line my view on it, and then Matt can go through a little bit more of the detail, because it is a significant challenge for us and we don't hide from that. The first thing I'll say is, you know as you say with our size, scale and capability, we should be absolutely leading the charge when it comes to cost of goods and we think know that we are best placed to deal with some of the issues that have occurred over previous vintages. So from a cost of goods across the board, we think where we sit as a comparator, then it is in line with what we would hope to be when you talk about it from an industry point of view. However, the increases are unacceptable for us as we've seen over the last period of time, and I think as you look through for example, the Treasury Premium brands business, the implications that has for that business means, not only do we have to understand the supply chain restructuring and go through those processes which we have and will start to flow-through from fiscal ‘23. But we have to take also a very critical look at how we're actually starting from the front end of the business; how we're actually looking at right from an end-to-end part of our business, are we developing our products, our innovation and our plans that actually deliver us a margin structure, that allows us to actually have some flexibility where it does come to some variations that may occur vintage-on-vintage. So it's a broader issue for us than just the supply chain optimization. It's when we feel like now, particularly with this divisional structure and model, where our measurement will be on those portfolio, not only on a cost of goods point of view, but also the asset base that supports it, that we now have a better place to focus on that in a different way to where we have been before. That's what gives us the belief in terms of we will address this issue, but Matt, do you want to add to that?
Matt Young:
Yeah, sure. Thanks, Tim. I'll start just David on the scale of the numbers you've mentioned. I think it's important to back at mix. So I'll use this year as a 10% increase, but we have seen a up in the premiumization of our products. So I will – I'll just – in terms of the scale of challenge you described, mix does play a role in our COGS, the case which I'm sure you understand, not getting away from the fact that the challenges we've seen. The other context thing to understand is we do feel like we have the best systems, processes, network and you know particularly in Australia we have the scale with which to manage our costs and we are proactive in this space. The key drivers that you're hearing about in terms of – but however, what I would say is the greatest contribution to cost of goods is grapes and bulk wine, and when we do have lower yielding vintages, they do tend to be higher costs, whether it be through the network or the price of grapes, those are challenges that are industry-wide and are set by the market. So for us, that is something that you know we look to manage through the flexibility of our supply, and as we say, we are in good shape, but there are elements of that, that we just have to navigate. Now, as I say, as we look to Vintage ’21, we see some positivity. It was a larger vintage and it has fueled our network and we see good opportunity for cost of goods improvement for Vintage ’21 in Australia. But that driver of the grape increases across America, of lower yielding vintages in Australia is the one, and of course the age of release takes that across a couple of years. So I still feel very confident that we are best placed and tackling particularly those costs that we can control and we are proactively doing that. We are using our network to the best effect. And as I said before, we see the longer term outlook as more positive, off the back of more normal sized vintages and the work that we've undertaken.
David Errington:
Okay, okay. Well my second question, Tim, and this is probably to you and to Ben. When I look at a snapshot of your divisions, I look at like slide 18. Asia in ‘21; the EBIT is highlighted in ‘18. When I look at ANZ, the EBIT in ‘21 is higher than ‘18. When I look at EMEA, EMEA is not – it adds a bit of case. When I look at the U.S., its EBIT is still below what it was in ‘18, despite having invested $1 billion in with the Diageo acquisition. Now you guys really talk up U.S. big time. You're really saying that this is it, and you give a lot good reasons, whether it's portfolio expansion, it's always been the same. But when you look at that slide 18 or slide 19 and you look at the actual EBIT performance, FY ‘21 is still a long, long, long way away from where FY was in ‘17 in EBIT, and yet that's after $1 billion investment in Diageo. So can you – I know it’s going on a bit and probably you need to – but can you tell us in a couple of points, why we should be bullish on the Americas business from a terms of future EBIT performance, because when you look at that slide 19, you're still tracking a long way away from where you were in ‘17, and that's after a $1 billion buck investment in Diageo.
Tim Ford:
Yeah sure. Look, I think a couple of points I'll start with is, you know our Americas business and I think I've been pretty consistent with this over the last, you know particularly the last two halves and I will pass to Ben to comment as well once I’ve given my responses. But there's a consistency with how we're executing in the market in the U.S. that we've seen over the last 12 months, which is I think sticking the course in terms of very clear strategy and plan, and I think that's number one. We actually are sticking the course and it's working. Our portfolio is more and more playing to where the consumer is going. It is more and more playing to the price points to where the consumers are increasing their consumption of wine in that market. So we have the shape of the portfolio closer to where we want it to be from an ongoing growth point of view. We're not having a balance half of the business is performing well with a half of the business, it's a drag on the business, which is where we've been over that period of time. The second point, I'd say is that you know I think the proof points of what we've delivered over the course of this year, which have been delivered with the backdrop of circa a quarter, where 25% of our channels within that market still significantly impacted by the pandemic in the U.S. When you actually build that back into historical financials and where we actually sat before the pandemic, you know that certainly gives me confidence as well, that's still to come. And we're in place to execute that and we've got the right resourcing in place, we've got the right partners in place. I think the third one I’d add is that, you know the U.S. business and this is hard to measure, but I guess this is how I feel about it and what gives me confidence. Yes, I’ve delivered and executed a plan, and I think Ben will probably add and I'm sure he will that it's one step down the path of a trajectory. But at the same time, I've managed to deliver a significant change in that business whilst delivering really, really good outcomes. And Ben and the team, as we do most of that business, spend most of their time focusing on the how we go about things? Are we running this two speed business that I talk about quite often, which is delivered today and make sure we've got the right set of initiatives, strategies and plans for tomorrow. And if you think about it, they've adjusted the route to market to a platform which will be a growth platform for us going forward, restructured the organization some four to eight months ago now, but delivered on that, whilst delivering the business results, as well as some of the portfolio and asset changes we've made. It gives you confidence and it gives you belief, you know that they can actually continue to run the business that way and the decisions we're making are building blocks to continue to grow over time. So I guess that's my sense and response to it, but Ben what would you like to add to that?
Ben Dollard:
Yeah, thanks, and good morning David. Look, thanks for the question, and I think Tim highlighted a number of key steps that we're thinking. And I could just build on it with a couple in terms of how we're thinking about focus and the benefits of that, and I think the areas around portfolio and tracking where the consumer is going. I think we're really well dialed in in that space and we will continue to exert a significant amount of effort, not only around the TWE 10 [ph] portfolio, but also how we think about innovation. I'd say importantly, you know the restructuring activities to deliver our future state premium wine business are on track, but they are not completed. So that's a process that we're continuing to exert a significant amount of effort around, be it you know how we can fit up our vineyards, our winery assets, our brands, but continuing to challenge costs, and that gives me confidence that we're certainly on the right path. And the other area that is not as easy to put some specific metrics to, but around the same. You know over the last 18 months we've built a best-in-class team; we've got continuity around our leadership team, which I think gives us a great platform from which to tackle the business now. And so to that end I feel that all of the blocks are in place for us to continue this momentum we've got, plus the relationships we have with our distributors and the retailers as well as, as we continue to improve day-in and day-out. So I think you know based on what’s been said and as I see it, I think it should give us confidence.
David Errington:
Thank you. Thank you very much.
Tim Ford:
Actually, so there’s one other thought that just came to mind as Ben was answering that. I mean, I see why you've asked the question David, because even with the negative time, but the – yeah, the previous years is something we focus on a lot when we're actually seeing how we're tracking against our plans, because it's easy to move on from the pre-pandemic period and start measuring yourself against the prior years, and for our instance, it’s the prior years with pandemic and China were the two major issues. So I think it's important that how we run the business and how we measure ourselves is not necessarily just on year-on-year, but how we're going to compare when we look back with those periods of time before the pandemic and what our metrics are around that. It's a really key measure us internally, so thanks for raising it.
Operator:
Your next question comes from the line of Ross Curran from Macquarie Group. Please ask question.
Ross Curran:
Hi team! Ross Curran from Macquarie. Just wondering if we could perhaps talk about the new divisional structure. So this is slide 31, and how we should think about margins by the new divisions going forward. Where they are trading at the moment, that sort of 44% EBIT margin for Penfolds, is that the right level we should see going forward. And then secondly on that, if maybe you could just dig into a bit of a Penfolds performance, but particularly in Asia, whether we have actually found a level there, nearly $500 million of sales. Is that the right base for us to use?
Tim Ford:
Yeah, I'll touch on the margin structure and then Matt can jump in after me as well. I think hopefully we're quite clear with our Investor Day, you know margin structure ambitions that we certainly see. Penfolds continuing to be in the range of 40% to 45% over the journey as we go forward and then clearly over the course of this fiscal year as Tom's outlined, you know there is some investments that we're making to build that distribution and build that capability in the markets. So our expectation is we'd still be within that range that we’d deliver. I think it also gives a proof point and hopefully everyone's picked this up over the last six months. We're not seeing pricing reductions around the markets for the Penfolds portfolio. We are doing a good job with our customers, doing a good job as well of maintaining the margin structure and profitability of that portfolio as we look to build that demand over the different markets around the globe, so that's Penfolds. The U.S., we remain committed to our ambition of 25% EBITS margin and not going to stop until we get there as our first step, and then how do we continue to grow that from there? So that's been pretty consistent now for a period of time and we're very, very strong, that’s still our ambition. On TPB, clearly TPB or Treasury Premium Brands, you know when you look at the results, when they are already cut around Treasury Premium Brands, that’s you know a significant margin challenging gap to our ambition, which is around the teen's ambition and the high teens ambition that we outlined at the Investor Day. So that's still where we're going to get to. We believe we have the roadmap to get them to start to see that over the next 12 months. It's not going to be in the first 12 months clearly. However, over the long term of our plans, we have a real strong roadmap of multi levers that we need to pull to achieve that. I think it's a great example of why we have a strong belief in the operating model that we've moved to. The understanding that Treasury Premium Brands, P&L, financial structure portfolio and how we can actually change that business is really, really important clearly for Treasury Wine Estates as we then build three very, very strong divisions, because we have the portfolio, the demand is there, the consumer engagement with these brands is there, you know we now focus on how we not only grow them, but improve the margin structure and growing the top line is still the best way to improve that margin structure. So that's broadly our ambition and how we'll continue to focus the business and talk about those three divisions. But Matt, do you want to build on any of that?
Matt Young:
Yes, I think just for the Penfolds in Asia, unfortunately not quite as simple as take that as the base. There's probably three factors as you think about that going forward. First of all, those numbers do include the first half of China, so there's obviously an element there that would not be repeated going forward. Tom talked you through the distribution and brand building plans that we're doing. We're seeing some success of that in Q4 and that will be a path forward for fiscal ’22. And then third element, it's a key factor. Remember it is a big driver of the performance in Asia of Penfolds that comes through luxury channels and through the movement of people. So again, those are elements that you'd need to consider around what that would look like going forward.
Ross Curran:
Thank you. That's it for me.
Tim Ford:
Thanks Ross.
Operator:
Your next question comes from the line of Richard Barwick from CLSA. Please ask your question.
Richard Barwick:
Thanks and good morning, guys. Just to follow on a little bit on Ross’s question, the Treasury Premium Brands, I guess the area of weakness, it stands out. Its Asia with 46% step down in revenue. How much of that relates to Rawson’s that would have been sold into China?
Matt Young:
Vast, vast majority of it. Asia in general, but certainly Rawson’s and other brands that we had going into China. As you can probably imagine, with the announcement in August it was certainly a conversation with partners there and taking brands with some uncertainty. And whilst we were successful in selling Penfolds in the lead up to November, that was a tougher challenge which we talked about at the first half for Rawson’s and other brands in Asia.
Richard Barwick:
Thank you. And then if you look at Penfolds and the Americas, I was a bit surprised. That has gone backwards given the launch of the California collection. I mean, is that a reflection going back to I think Tim’s answer earlier to David’s question as to around the channels that are shut. So if we think about Penfolds in the U.S., it is because of the Cellar Door and the On Premise?
Tim Ford:
Yeah, but beneath that is a strong performance of the California collection, albeit really its light in the year, so there’s – you know essentially you’ve got one quarters of performance there. But you're right, channels such as cruise, travel and on-premise closures during the year did have an impact in the Americas, but still pretty comfortable with how that's performing in the U.S.
Richard Barwick:
Right, so if we do think about Penfolds in the U.S., it's skewed to those channels that are still under pressure.
Tim Ford:
And independent luxury retail – on-premise, independent luxury retail and travel retail.
Richard Barwick:
Yeah, okay. And just the last one for me, and I talked about minimal EBITs from China in FY ‘22. Can you just clarify or confirm that by minimal you’re still meaning positive?
Tim Ford:
Close to zero or small positive.
Richard Barwick:
Okay, alright. Thank you, guys.
A - Tim Ford:
Thanks Richard.
Operator:
Your next question comes from the line of Shaun Cousins from UBS. Your line is open Shaun. Please go ahead.
Shaun Cousins:
Hi! Thanks so much. Good morning. Just a question regarding I guess 19 Crimes. Can you just – given you've called out its over 1 million cases in EMEA, can just quantify the size of the brand overall? And should we envisage some of the brand extensions that have been successful in the United States. Should we expect that to be occurring in other markets? It just seems to be a brand where you've been able to take it broadly and it's obviously been rather successful as well. So I’m just curious around the scope of it now and maybe the plan forward for that brand please?
Tim Ford:
Yeah. Sure Shaun, nice to here from you and your definition of rather seems a little harsh, but it's been very successful. The – Well, we've got a second global brand on our hands. Well yeah, Penfolds is clearly a global brand, but clearly 19 Crimes has now become that and it's broadly within a few cases, about a 5 million case business for us globally now. And the point you made, I think it’s a really, really important one to understand how we think about 19 Crimes. So clearly the United States has been the starting point for the growth of 19 Crimes where the core range or 19 Crimes Core as we call it, yeah it’s continued to have fantastic result for a number of years, the addition of innovation around the partnerships with Snoop Dogg and Cali Red and Cali Rosé and as Ben said, more to come is a roadmap where we continue to innovate, we continue to engage differently to other wine brands with consumers and clearly it's working. Clearly it’s a non-traditional one way of connecting with consumers, and we certainly feel like we've learned a hell of a lot as we've built this in the United States. You then got to the next big market for us and saw, which is the U.K. Again, similar playbook and you should expect you know over time we'll continue to then take what we've done in the U.S. as an example and roll that through the U.K. and it becomes part of the expansion plan of 19 Crimes; same in Australia, same in Asia. There's a number of markets in Asia, so those sort of four is the sequence and as we continue to build the market, slightly leading with America, into the U.K. into Australia, into Asia, we'll then transpose the successes we've had, because it is about how we actually activate that brand and connect with those consumers. So thinking about it as a global brand, thinking about it as a brand that requires and will continue to have investment behind innovation, but also you know how we do it through partnerships and digitally enabled channels is really what is key to that and bringing new consumers into the wine category. So yeah, it's a pretty, pretty exciting future for the 19 Crimes franchise as we call it internally, but hopefully I’ve explain how we think about the model. You know we're not going to try and do everything in all markets all at once. You need to build that over time and clearly the U.K. and Europe becomes the next port of call as we develop it.
Shaun Cousins:
And if we think about that 5 million cases, is that roughly 3 million in the United States, in the Americas, and then the other two, 1 million in EMEA and then the other 1 million down in Australia, is that the way to think about that?
Tim Ford:
Close. Roughly right in terms of U.S. and U.K., Australia and then Asia you know. So Australia, Asia is probably – Australia is not a million, its below that and then Asia picks up the rest.
Shaun Cousins:
Great, and just a question for Matt, just on cash conversion. You highlighted the regional sales mix changes had an impact. Is that as you've gone to more distributors or different distributors you're effectively getting paid earlier and so should we anticipate that we've seen a step up in cash conversion and as a result of the change in the route to market or can you just amplify a little bit more about that regional sales mix change and the impact on cash conversion please.
Matt Young:
There's a slight structural shift in – shifting away from China that was sort of on slightly longer credit terms to other partners in the rest of Asia which is on slightly shorter, which largely links to the time of shipping. So that as a result, and as a result of slightly earlier shipping times this year is the main part. So I wouldn't say it should major change models around cash flow, but there’s a slight structural shift in that sort of shift away from China.
Shaun Cousins:
Okay, fantastic. Thanks Matt, thanks Tim.
Operator:
Your next question comes from the line of Phil Kimber from Evans & Partners. Please ask your question.
Phil Kimber:
Hi guys. First question, I'm taking a different tack on cost of goods sold. I noticed for the first time in a long time, your Cigar [ph] number is actually positive. I assume that’s a bit if a leading indicator for the outlook for COGS on our sort of not almost one year EBITS, two, three, four EBIT. Is that correct, and does that give you confidence that is actually a decent COGS tailwind coming sort of from FY23 and beyond. Just wanted to explore that a bit further, thanks.
Tim Ford:
I've got to say Phil, it’s a glorious moment when I get to talk about Cigar on an investor call. Nobody ever asked me this question. So look I would say Cigar includes current and the impact of prior vintages, but in fiscal 2021, the current vintage impact of Australia as a Cigar is a profit, which does indicate a lowering of cost of goods for Vintage 21 in Australia. It's not a necessary impact of a trend, because it will impact by future vintages, etc. However, certainly for Vintage 21 in Australia, that is a positive sign, yes.
Phil Kimber:
And that's really 23, 24 that, I mean commercial comes though UM, but I mean that’s also got a challenging terminology now, but I can't recall it. So Masstige and Luxury is coming through on a sort of two, and three, and fourth year.
Tim Ford:
Yes, so commercial this year. Call it premium next year, the year after and Luxury thereafter.
Phil Kimber:
Yes. And then my second question was just around the selling price that weight on this sort of a sense can see a very off premise market, driven particularly in the U.S. and those numbers are turning south because of base effects now. So I just wanted to get a sense of, as the on-premise side of the business starts to improve, I mean, I just wanted to double check that. The switching channel from on-premise to off premise did actually net-net was a drag on your earnings. So therefore as they gradually unwind, hopefully, it will be a tailwind on earnings. I just wanted to make sure there wasn't a risk that with the of-premise on a year-over-year basis starting to come off just because of the base effects, that it was – you know there’s a risk around it being a little bit of a whole in case the on-premise doesn't sort of peak out quite as fast.
Tim Ford:
Yeah. I think your premise of your question is spot, because we do see, we do see as on premise opens up the mix of our sales and portfolio will continue to improve and then hence the margin structure of our mix will also improve. So we certainly do see that as a positive going forward, as these channels open up, and we've seen it to a degree in the U.S. So the U.S. is a good example of the dynamics and Ben can probably talk a bit about the U.S. it’s probably the best example we have when I'll finished. So point number one, yes, we certainly see the trajectory as the vaccination rolls out and things reopen with those more Luxury channels, and that's a positive for us from a growth point of view. The second comment in there, and it's something we've been monitoring pretty closely internally as you say, you look at the Nelson's [ph] or IRIs of whichever data that you want to look at, and year-on-year, the retail channels are down versus the trends of what it was last year. Where there was that initial real spark in the retail channels. So, that's factual broadly across the board, certainly pockets of Premium price points, that's not right, but broadly across the board. When you go back one more year and you look at what is the market now versus what it was pre-COVID, it’s still elevated. So that's a really important point to have, and when we look at our numbers and how we’re performing, rather than looking at and talking about lapping COVID and all the stuff that ever likes to talk about. At the moment it is, are we being a competitive set in that market today? Yes or no? And are we actually ahead of where we were on a pre-COVID basis in fiscal ‘19 from of a better way to put it. So the dynamics in retail are still pretty good when you go back and have a look at it from that perspective. So there's sort of two points to that, that yes, there's that softness in retail you referred to, but as a mix going forward, we certainly see the one plus one, hopefully equaling more than two, what it did in F19 is the way we think about it. But Ben, do you want to add anything, some color on that from the U.S. point of view, because you're living and breathing it?
Ben Dollard:
Yes, I’ve got two points. As I mentioned earlier, dynamics are shifting in the U.S. markets and certainly we saw it in the second half around retail, often its retail and I’d say there’s two key areas. One is the emergence of the rapid expansion of e-commerce, and the engagement and commitment by our retail partners and the consumers desire to shop online. That's been a – and it will continue to be an enormous area of focus for us, and one that we're starting to see the fruits of our labor. And then the other is the cellar doors and how we've been thinking about cellar doors and the closures. What we saw this time last year and as we reopen and reinvite consumers back in. Obviously that's a positive from our margin standpoint for our Luxury portfolio, and that's a definite shift that we're going to see in the back half, assuming the landscape continues to evolve as it is today.
Tim Ford:
So hopefully that gives you a fulsome answer feeling. It’s always good to hear from Ben, because you know he’s got that positivity in his voice about loss locked, when you start to vaccination programs rolling out for us here in Australia. So it's good, I talk to him every morning to keep myself up. Thanks Phil.
Phil Kimber:
Okay, thanks guys.
Operator:
Your next question comes from the line of Ben Gilbert from Jarden Australia. Your line is open Ben, please ask your question.
Ben Gilbert:
Morning, Tim and team. One short term question and one longer term question. First one, I know the language around your medium term targets and cost outs etc. are all pretty similar. It’s got the same since the strategy is right. But you've obviously sort of left that caveat in there around COVID impact or ability to hit that sort of high up single digit earnings growth for this year at least. Do you still think given the reopening and Tim to your point, just then that the U.S. is opening up on-premise and it’s going pretty well. That's conceivable for this year or was there any reason to lay that caveat in or it’s just general uncertainty?
Matt Young:
Its Matt here. The general uncertainly is important and it's important that people understand the slide we've given in the deck about where we're at in terms of the various channels is the other important point. The way to sort of interpret is that from an outlook perspective, we are not expecting major changes to the landscape as a general statement, other than slow reopening around on-premise. We're not expecting a lot in the way of increased travel, which I think is a reasonable assumption and so therefore it's a relatively stable base. It's more just so that people can understand, particularly that slide, the dynamics of what it does to revenue in making assessments as they look forward.
Ben Gilbert:
And Matt, did you get any benefit in the second half from China profit, from Penfolds product you shipped in pro-December? Because obviously it looks like the sell through, the sales of Penfolds is still pretty strong in the Chinese market. Everything is standing with product, particularly to sell that at a much higher price. Did you have any profit in the second half?
Matt Young:
Nothing meaningful that you should think about in terms of on-going. There was a small parcel that made its way from – through the process. But no, there's clearly still product to market and Tom can sort of talk to that, but nothing to consider from an ongoing perspective. The focus now is what does that look like forward and I know there’s some – maybe Tom, if you want to give an insight longer term of how we think about Australian base Pinfolds for China.
Tom King:
Yes, I can jump in there. I think the real positive for us is, and both of the brand is still in high demand at the consumer level, even though we've seen the process continue to elevate and certain parts of the portfolio really now had a pretty significant elevation to what they were a year ago. We're planning to bring in the new Australian collection during H1 this year. That’ll obviously be at tariff impacted prices. So a bit too early to say whether, the elasticity of the Penfolds brand can stretch to that extent and what the actual demand will be at an elevated process. But positivity is the brand remains strong at the consumer level. We are losing some distribution as retailers and wholesalers do struggle to maintain supply and stock. And many of our partners are continuing to manage their own cash flow and businesses to keep and set up the growth as we launch the multi country of origin portfolio in F22 and beyond.
Ben Gilbert:
That's helpful. And maybe be second one for me, just on the strategic side. I noticed you put some talking around capacity for funding. One, did you guys have a decent crack at trying to sell. I was surprised, I thought you guys would have had more synergies with some of the benefit you got from the INDC [ph] deal. And secondly, saying much out there at the moment, from an M&A standpoint, particularity in the U.S. I think is always probably the biggest opportunity?
Tim Ford:
Yes. I'm not going to comment on whether we did or didn't look at certain things. But I think I'll probably catch it by saying that our acquisition targets that we do look at, we'll look at, should look at, where those opportunities do arise will have to play to our Premium price point of our portfolio. So if there's a center of gravity below that Premium price point, then you can take from that, that by and large unless there's a huge strategic reason outside of that, you know and not going to be a priority for us in terms of the investment of our capital going forward. So they need to be additive, any acquisition would need to be additive to our portfolio, who need to be complementary to what we have today. I don't think we need necessarily more of exactly the same. What we need is to actually build out the portfolio that builds on the strengths we've got. U.S. is certainly a market. I mean we’ve all seen there's a fair bit of activity in that market at the moment. Well I think it will continue to be the case over the next year or two in particular. So yeah, I mean there's opportunities that will come up. I have no doubt about that, but hopefully that gives you the color and shape of what our priorities are when we're looking at those.
Ben Gilbert:
Yes, sounds great. Thanks guys.
Tim Ford:
Cheers!
Operator:
Your next question comes from the line of Peter Marks from Barrenjoey Capital. Please ask your question.
Peter Marks:
Good morning, Tim and Matt. Just wondering if you can give us a bit more color on how much of that non-Asia growth was building availability versus sell through. I guess what I'm trying to understand is what selling and selling out, because I mean I would have thought maybe I’m not thinking about it the right way, but isn’t that – wouldn’t that be the best indication for demand?
Tim Ford:
Yes, I'm still quite comfortable. We try to manage – from an inventory perspective, we try to manage forward days inventory cover in line with the prior year, and I'd say we're still in that space. So certainly as we’ve sold and satisfied that demand, that was – I guess latent in the market, certainly the selling needs to satisfy that demand. As you've probably seen in multiple years for Asia, shipments are ahead of depletions, largely off the back of growing demand for the brands. And that's certainly the case with what we've done. There's no pipe fill, so that I would say in terms of a bump to need to worry about. I do think it is a genuine – we’ll say an underlying performance within those markets.
Peter Marks:
That's really helpful. And then just my second one, I just wanted to clarify some of the one off costs that might have been above the line. So it looks to me like there is an $8 milling benefit from the wild fire insurance claims, but then there might have be been like an equivalent headwind in China due to some one-off costs, so they could essentially net out. But then, can you give us any color on the one-off costs in ANZ related to that product initially destined for China? And then how big were the Brexit costs in EMEA?
Tim Ford:
Sure, I'll take that. I'll start with the insurance and for those that want to sort of digest, particularly balance sheet P&L. Note four to our financial statements in the annual report is a good one to look at, because there are some large movements there. You're about right, in a net P&L sense it's about $8 million impact, what that represents is the effect of the closure of our Sterling Tasting Room, as well as lost profit from the product that was damaged. So it is a, I guess an underlying base that's right to keep in the above the line. From an ongoing – from other one off costs , a range of different things in terms of reworking products in China, in Australia that was destined for China, as well as Brexit costs. We haven't broken those out separately within the accounts. We've sort of just given them as color around the COGS impact. From that perspective, yes, they are one-off and they won't continue next year, but I think most of those sit within COGS and the guidance we've given around elevated COGS for fiscal 2022 is the right way to think about that line.
Peter Marks:
Yes. And then have you quantified the Brexit impact?
Tim Ford:
No, we haven’t, not in that market.
Operator:
Your next question comes from the line of Bradley Beckett from Credit Suisse. Please ask your question.
Larry Gandler:
Hi, guys. It's Larry from Credit Suisse. Thanks for taking the call. Couple of questions, I just wanted a clarification going way back to Mike Simotas’s question. Matt, you agreed with Michael saying that remains elevated, it means the drag will be similar in FY’22 as FY’21. And that was a contradiction to the earlier part of the answer you gave, which basically said elevated was kind of similar. That's a big distinction. I just want to clarify, is FY’22 going to be a similar drag or a similar absolute level of COGS.
Matt Young:
A similar absolute COGS per case on a mix adjusted basis, volume mix adjusted basis.
Larry Gandler:
Got you. So if FY ‘21 was impacting with the drag, FY ‘22 will not have such a drag because we're talking about similar COGS.
Matt Young:
That’s right. We are not having incremental drag. It will remain at those elevated levels that it was in fiscal ‘21, again on a volume mix adjusted basis with longer term took for that to decline as a result of the programs and roll through of lower cost vintages.
Larry Gandler:
Okay, that's in point clarification. Now on the matter of the low cost vintages, I know Matua might seem somewhat of a smaller proposition, although very important growth brand, particularly in the U.S. As you guys know, the great supply situation there is almost to a point of desperation, no new planting in Marlborough pretty much can be undertaking and we're in short supply. I think grade costs are heading up towards 50%. So given that, I know you guys have done an amazing job in sourcing grade for FY ‘22, but longer term what’s the plan there for Marlborough, Sauvignon Blanc Matua for you guys? And how did that affect your overall grade costs?
Tim Ford:
Yes thanks, Larry. Longer term, so I'm not going to necessarily reveal our plans that we're looking at a moment because it’s – there’s a few options that we are in the middle of the assessing for the longer term. As you say FY ‘22, FY ‘23 our teams have done a fabulous job to gain the access to the supply for Sauvignon Blanc, not just for Matua for the U.S., but Squealing Pig here in Australia and some of the other markets are around the globe as well. And it is a growth engine for us, and it will require us to gain more access to more fruit over the coming years and we do think there is certain ways we can do that. We do have certain plans to implement across that, none of which have come to life for say ‘24 and beyond at this point. But it's important for us and it's a higher priority for us, because we see this category continuing to grow, continuing to be a growth engine for us and Ben touched on the launch of Matua Lighter earlier and you sort of join the dots on consumer trends around health and wellness. He's joined the dots on Sauvignon Blanc as a variety line of style, a lighter in alcohol or even zero alcohol proposition for New Zealand Sauvignon Blanc. You can certainly see having great demand in the future as well. So it is one of those where our short to medium term is covered, but we've got some work to do on the long term. So your points and that actually you’ve written on them, which I read with interest, you know I think you're right. It's a challenge for us to deal with, but we feel like we’ve got some levers still to pull, so. And then clearly, as the constraints occur, prices are just adjusting the market as well and you've seen that with the U.S. as well in particular across some of the other big Sauvignon Blanc brands as well, which we continue to use that as a potential for us going forward to protect the margin structure of the portfolios as well, given the rising costs of the fruit over the last vintage or two.
Larry Gandler:
Okay. Just this question for Matt. Just as, is the Sauvignon Blanc cost a great increase enough to move the dial for your overall COGS outlook?
Matt Young:
Not at that level. The only thing I’d add, and I think that's the comment around Australia is probably more relevant. The only thing I'd also add to Tim’s is clearly part of the challenge of COGS for this year for New Zealand, when I say this year, this year's vintage and is also the size of the vintage, the vintage being impacted late in the process. So there is a – it was a lower yielding vintage overall. A more normal sized vintage going forward would correct some of that cost base.
Larry Gandler:
Okay, thanks a lot. Thanks guys.
Tim Ford :
Okay. I think, we – unfortunately we've run out a time. So we did have a smaller presentation time today and hopefully longer on Q&A to provide more expansive responses. I know a couple haven't had a chance to ask the question, but we'll certainly follow those up with the one-on-one sessions that we're having over the next couple of weeks. So to wrap up, thank you for joining us today. Thank you for your support of TWE and your analysis of TWE, and hopefully you share our belief in what has been a great year for our business in terms of the circumstances in particular and set ourselves up for a strong period ahead for our business and our team. So cheers! Enjoy the rest of your day.