Treasury Wine Estates – Potential Penfolds Demerger – 5 August 2020

TWE [Treasury Wine Estates] stated that Penfolds represents about 10% of its total volume but 50% of its income. Could you break down the 10% and 50% across products and geographies, including the US, Europe, China and Australia?

Would you say Penfolds’ portfolio is primarily concentrated on high-end luxury wine, or is there a mix of commercial products as well?

TWE’s revenue grew about 16.6% between FY18 and FY19, and net profit was 15.4% which Penfolds contributed significantly to. What was the revenue growth if you had to isolate the Penfolds and TWE?

Penfolds’ gross margins are about 50%. Why are the gross margins so much higher than the rest of TWE’s portfolio, and how does this translate to EBITDA or net profit margins?

TWE’s management recently alluded to a deviation in Penfolds’ growth strategy vs its other brands, which I would presume is to do with A&P [advertising and promotional] spend. What is your understanding of the alluded-to growth strategy deviation, and what is causing the need for a demerger? Similar to Penfolds, TWE also appears to be on a premiumisation growth focus, and trying to shift from its mass-market standing.

How is the reinvestment capital allocation happening between Penfolds and TWE’s other brands? You said Penfolds generates a large amount of wealth but isn’t really reinvesting in its own A&P or other categories inside TWE. Do you think Penfolds is losing out by not being able to reinvest its own capital?

Could you outline the relationship between TWE and Penfolds? How reliant are they on each other with vineyards, production, sales and distribution? What is the nature of the interrelationship for the two entities?

TWE was selling Penfolds as a package in China, and distributors are coerced to pick up the rest of the TWE portfolio in addition to Penfolds. How would you assess the short- and long-term impacts from the distribution and bundling strategy? Do you think Penfolds or TWE could be negatively impacted?

If Penfolds is demerged, where does TWE’s core portfolio, excluding Penfolds, stand in the China market, in market share or consumer demand? Do you think it might collapse based on current trends?

Do you think TWE is at risk of overextending the Penfolds brand by introducing French- and US-sourced products, given that Penfolds is relatively known for its Australian heritage in the China market?

What other dis-synergies might be realised due to the Penfolds demerger, barring what you said about bargaining power and distribution? Who might have more to lose from these dis-synergies? I would presume TWE to be the likely loser in this situation.

You indicated that the demerger could unlock share value for the TWE shareholders. What do you mean in terms of unlocking share value? Are you referring to better capital investments and growth strategies?

TWE has repeatedly mentioned how it wants to spin off Penfolds and list it on the ASX. I believe that Penfolds has already generated significant private-equity interest and traction. Do you think Penfolds can sustain the whims of the public market, or would it be better-suited in a luxuries-related portfolio of a private equity firm?

Penfolds has been successful in its premiumisation strategy in China and the entire Australian heritage region is quite attractive for Chinese consumers. What levers would allow Penfolds to upgrade its mix, become a luxury brand and increase sales in China?

Do you think an 18-month gestation period is achievable for the demerger? You also said the demerger is highly possible under current management because of the new CEO’s style, but the demerger was announced when Michael Clarke left. What obstacles previously slowed down the demerger process? What could extend the time period for the demerger to take place?

Do you think the demerger is more likely to occur under the new management and new CEO?