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Edited Transcript of TWE.AX earnings conference call or presentation 15-Aug-19 12:30am GMT

Full Year 2019 Treasury Wine Estates Ltd Earnings Call

Victoria Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Treasury Wine Estates Ltd earnings conference call or presentation Thursday, August 15, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angus G. J. McPherson

Treasury Wine Estates Limited - President of Americas & Global Sales

* Matthew John Young

Treasury Wine Estates Limited - CFO

* Michael A. Clarke

Treasury Wine Estates Limited - CEO, MD & Director

* Tim Ford

Treasury Wine Estates Limited - COO

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Conference Call Participants

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* Andrew J. McLennan

Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst

* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Craig John Woolford

Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team

* David Errington

BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia

* Euan Grant Mcleish

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Jason Palmer

Taylor Collison Limited, Research Division - Equities Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Morana McGarrigle

Macquarie Research - Analyst

* Richard Barwick

CLSA Limited, Research Division - Research Analyst

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Treasury Wine Estates FY '19 Annual Results Announcement. (Operator Instructions)

I would now like to hand the conference over to Mr. Michael Clarke, CEO. Please go ahead.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [2]

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Thank you, operator. Good morning, and thank you for joining Treasury Wine Estates 2019 Results Call. Joining me on the call today is Matt Young, our Chief Financial Officer; Tim Ford, our Chief Operating Officer; and Angus McPherson, our Managing Director for Australian, New Zealand, Europe and SEAMEA.

The results we're announcing today reflect the continued growth momentum in our business, which has been delivered through our premiumization strategy, the sustainable disciplined investments we've been making in our business over recent years and importantly, the commitment and exceptional execution of our global team. In the full year ended 30th of June, 2019, our teams have delivered on expectations while continuing to invest and make significant changes in our business to ensure sustainable future growth.

Strong top line momentum has continued through a combination of increased volume, price realization and continued premiumization across all regions.

Net sales revenue increased 17% and net sales revenue per case increased 14% over the prior year. On a constant currency basis, this is the strongest organic net sales revenue growth in our history. Continuing the strong performance we announced at our half year results update. Demonstrating the success of our premiumization strategy, net sales revenue delivered from Luxury and Masstige brands grew 27% and now represents 69% of our total NSR, up from 43% when we started this journey 5 years ago. Group EBITS increased 25% to $663 million, in line with our guidance, delivering a 5-year EBITS CAGR of 30%. And EBITS margin increased 1.6 percentage points to 23.4%, continuing the progress on our journey to group EBITS margin of 25% and beyond. This strong profit growth has been achieved while maintaining our practice of taking the financial impact of fixing our business above the line, not below the line in material items. Statutory net profit after tax was $419 million, up 16% on a reported currency basis. And earnings per share is up 18%. From a business and strategy execution perspective, we are pleased with the performance of all our regions. Tim and Angus will provide further insights into the fiscal '19 performance across these regions. But let me highlight some of the progress that we've made during the year within America and Asia.

In United States, we have completed our first full financial year operating under the new route-to-market model and performance to date continues to validate the decision to make this investment. We've delivered growth in this market, despite the period of significant operational change and within a U.S. wine market that is challenging. Most notably, in the Commercial tier, where retailers are increasingly focusing on private label and where we are witnessing some competitors unsustainably discounting their brands to chase volume ahead of potential structural changes to their own businesses.

These factors have required additional investment within our business in fiscal '19. However, we're still pleased to have delivered growth against this backdrop, something which has proven challenging for other players in the U.S. market. Our performance in the Americas has been delivered by working collaboratively with both our distributor and retailer partners. As demonstrated also by improved results for our partners with Luxury and Masstige depletions growing at 9% and improved performance with retailers with IRI showing improved performance across the past 52 weeks, particularly in key price categories and across our focused brands.

Importantly, we still see significant opportunity to drive improved -- improvement and fully capture the new opportunity for our business in United States, realizing this potential will take patience and discipline but we're confident it will be delivered through continued premiumization, stepping up our execution across the broad market, particularly in California and through further rationalization of our cost base. We will continue to focus on Masstige and Luxury tiers where the category is growing strongly. And we are continuing to improve our performance. Turning to Asia. Where the business continues to grow from strength to strength across all major markets. Focusing on China, we have again delivered outstanding growth by leveraging our competitively advantaged business model and focusing on expanding our breadth and penetration of availability of Luxury product across the country. As we've highlighted previously, our business model is centered on self-distribution through our own local team, a team that we continue to invest in heavily, who directly own and manage relationships with our wholesale and retail partners rather than selling through distributors.

While we've all observed there are challenges being experienced throughout parts of broader economy in fiscal '19, our advantaged model in China positions us apart from other players, allowing us to continue executing a focused portfolio selling strategy, which is supported by additional investment and pull-through programs that drive consumer engagement and deliver cash margin to our customers. Within and beyond the wine category, we believe that companies like Treasury Wine Estates, who have actively invested in their model to drive direct engagement with retailers, our best place to succeed in China over the longer term.

We will look to further enhance this model over time and the next priority for us will be to expand the use of our Shanghai warehouse. With the intention that, over time, we will sell the majority of our portfolio to partners via the warehouse model, thereby reducing our reliance on direct exports or container model as we know it. We will move to this model over time with the pace of change to be a function of the broader macroeconomic and geopolitical environment. However, we know that this new model will deliver substantive benefits for our customers through much shorter order lead times, smother shipment profiles and reduced working capital tie-up, all of which will support our customer growth ambition.

For Treasury Wine Estates, this shift to this new model is about sustainability. This model will deliver sustainability through enhancing our competitive advantage business model as well as reduced working capital demands and improved cash conversion for our business. But importantly, we consider increasing our presence and being a part of the fabric of China as critical to demonstrating our commitment to and realizing the long-term potential of our Asian business. As shared at the interim results, a key to our growth in China will be achieved through expanding our breadth and penetration of distribution throughout the country and by increased availability of our Luxury wine, wine that we already have on our balance sheet through recent investments in outstanding Australian vintages and which we will grow further over time as we invest ahead of expanding our French country-of-origin portfolio.

While we are already the #1 importer of wine into the China market and Asia, but with only a 5% share, growing share further remains a priority for us. In fiscal '19, we have made good progress in our expansion plan with a significant increase in our sales staff in China in quarter 4 to support the expansion of our business along with our partners. In addition to this, we have made significant commitment to invest further to drive Luxury growth.

Today, we're announcing the acquisition of French production and vineyard assets in Bordeaux region, which will allow us to expand our French country of origin portfolio centered on Penfolds, Beaulieu Vineyard and Maison de Grand Esprit brands. This investment will allow us to step change our sourcing strategy for fruit in France. We're also announcing an expansion of our Luxury winemaking assets in Australia with a significant investment in our Bilyara winery site in Barossa. Both of these investments are important steps towards the execution of our growth in China, Asia and globally.

Finally, I want to emphasize 2 points that I have made previously. Firstly, we're delivering the strong results while at the same time continuing to invest in improving or fixing parts of our business, setting TWE up to deliver growth well into the future. Sustainability is at the heart of everything that we do. And neither myself nor my team have any interest in pursuing short-term fixes to deliver short-term outcomes or delivering short-term success or metrics at the expense of the business over the longer term. And secondly, our performance to date reflects the commitment and exceptional execution of our global team here at Treasury Wine Estates. We're not reliant on any one individual or one leader or one region in Treasury Wine Estates. Our results reflect that today. We have a team that is diverse, high caliber and focused on realizing the potential for this business and I want to thank the team at Treasury Wine Estates and I hope that they are proud of what they have delivered in fiscal '19. With that, I'd like to hand over to Matt, who will take us through the financial results in more detail.

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Matthew John Young, Treasury Wine Estates Limited - CFO [3]

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Thanks, Mike, and good morning, everyone. I'm very pleased to report another strong set of financial results, reflecting excellent execution and what was again a year of significant change at Treasury Wine Estates. What I believe investors will be most pleased about is the quality of the result and a continued improvement in the shape of our P&L, balance sheet and cash flow, with that improvement justifying our commitment to our strategy and the investment we've made to both optimize and grow the business. Turning to our key measures of performance. Net sales revenue grew 12% on a constant currency basis, driven by volume growth, continued premiumization towards Luxury and Masstige wines and price realization, with NSR per case growing 10%. Pleasingly, this top line growth continued right across their business with all regions delivering volume, NSR and NSR per case growth. COGS and COGS per case increases were primarily due to the same premiumization shift. However, we did see increases attributable to higher cost of Austrian Commercial wine as well as U.S. source Luxury wines from higher cost vintages. Cost of doing business margin improved 1.9 percentage points to 19.8%, driven by revenue growth, but importantly, also through continued optimization and simplification of our business and operating models.

This improvement has offset incremental investment in our people and brands in Asia as well as incremental ongoing costs to manage our new U.S. route-to-market. EBITS increased 25% in line with our guidance to $663 million, resulting in a 5-year EBITS CAGR of 30%. EBITS margin increased to 23.4%, moving us further along our journey towards the margin of 25% and beyond. Earnings per share increased 18% to $0.58 per share and ROCE increased 2.3 percentage points to 14.9%, another year of significant incremental returns for our shareholders and a reflection on our disciplined and sustainable approach to managing the capital base.

Moving to the balance sheet, which continues to be strong, efficient and flexible. Adjusting for FX, net assets increased by $136 million, driven by an increase in working capital, reflecting our accelerated growth in the year and premium inventory investment as well as a reduction in net borrowings.

Working capital balances demonstrated year-on-year efficiency with key areas such as inventory and data days showing improvement, the quality of our data position continues to be high with no extended credit terms, no data is written off in the year and no increase in the risk profile of our customer base or collections. Days sales outstanding has improved year-on-year by around 10%. Turning now to inventory, which has increased by $129 million to $2.1 billion at cost on our balance sheet at the end of the financial year. This increase has been driven by Luxury volume, the result of a strong 2018 vintage in California and a strong 2019 Luxury vintage in Australia.

Our investment in winemaking assets and capability continues to drive strong yields and grade conversion, ensuring that we're extracting the highest quality fruit from our asset base, and in turn, increasing the future availability of our Luxury wine portfolio. The 2009 (sic) [2019] vintage in Australia was a very strong and high-quality Luxury vintage, which was up approximately 10% for Treasury Wine Estates on 2018 vintage. This impressive outcome was the result of significant investments we have made in recent years to strengthen our multiregional sourcing strategy.

Turning now to cash flow. Operating cash flow before interest and tax increased 36% to $581 million and cash conversion was 76%. Cash flow performance above our guidance shared at the interim results was delivered through cycling of route-to-market changes and improved sales order profile management in the U.S. as well as more efficient inventory management in Australia, where our flexible sourcing model enables us to source bulk wine closer to the date of manufacture and sale. Fiscal '19 cash conversion also reflects a reduction in the use of our data financing program.

In comparison to our long-term target of 80%, cash conversion was impacted primarily by our growth in Asia and our investment to accelerate growth through larger vintages. As we've shared previously, TWE is unlike many other consumer goods companies. To grow at accelerated rates, our growth is to a large extent driven by investment in inventory, specifically Luxury inventory, which ties up working capital given the typical 3- to 5-year age of release of the wine. Once sold, this Luxury inventory delivers stronger profitability and shareholder returns but over a longer period.

To that end, this investment is better classified as a form of capital expenditure. For comparability and to improve investor insight into our cash flow generation, we can share that the increase in Luxury and Masstige noncurrent inventory in the period was $128 million and as the chart on this slide shows, cash conversion excluding investment in noncurrent inventory was extremely strong at 92%. We expect full year operating cash flow in fiscal '20 to grow in line with EBITS growth and therefore underlying fiscal '20 cash conversion to be approximately in line with fiscal '19 as we continue to work to improve our sales facing profile. And I would like to be very clear that this is specifically full year guidance only.

Finally, we have maintained our investment-grade credit profile with net debt reducing and leverage improving to 1.7x in the year. Our liquidity position remains strong with cash and undrawn committed debt facilities in excess of $1.2 billion at the end of June. Moving to CapEx. Total CapEx for the year was $160 million, of which maintenance and replacement spend was a $132 million, in line with our guidance. Growth CapEx of $28 million represented vineyard acquisitions as well as investment in IT systems and Simplify for Growth initiatives.

Looking ahead to fiscal '20. We estimate maintenance from replacement spend to be in the range $100 million to $110 million. This level of capital expenditure is consistent with fiscal '19 with the decrease from the FY '19 guidance number, reflecting the purchase of oak barrels. Going forward, barrels will no longer be captured in CapEx as we are transitioning to a direct leasing model instead of a purchase and then separate sale and leaseback approach.

Growth CapEx in F '20 is expected to be up to $135 million, reflecting ongoing investment in our IT infrastructure and Simplify for Growth program and also the 2 important investments to drive future premiumization and growth in our Luxury business. The first of these is the acquisition of the French production and vineyard infrastructure in the Bordeaux region. This acquisition was completed in July and whilst modest in size, represents a key step in our plans to build a meaningful French country-of-origin portfolio led by the Penfolds, Beaulieu Vineyard and Maison de Grand Esprit brands through the creation of a flexible sourcing model like the one we operate in Australia.

The second investment, also announced today, relates to the expansion of our Luxury winemaking infrastructure in South Australia. This project is a significant investment that will support the continued growth of our Australian Luxury portfolio, will increase winemaking capacity by 1/3, drive production efficiency and increase wine storage facilities by approximately 15%. Total capital investment is expected to be between $150 million to $180 million and will be incurred over the course of F '20 and F '21. In addition to this, there will be some associated one-off charges that will be recognized in F '20, expected to total approximately $35 million, of which half are noncash and are excluded in our guidance for F '20.

At this stage, we expect the site to be fully operational in time for 2021 vintage. Both this new Australian Luxury infrastructure and the new French infrastructure investments will be funded through a combination of cash and existing committed debt facilities. As you can see, we remain committed to investing in our business to drive sustainable long-term growth. Whether through growing access to Luxury/Masstige inventory or through investment in vineyard's winemaking assets and capability, these are all investments that we are making to support continuation of our premiumization strategy through each of our regions in the years ahead.

As we execute this strategy, we constantly benchmark our performance to our global alcohol beverage and FMCG peers. And today, we're sharing with you our relative performance on 2 measures that we believe should give a feel for the strong returns that we are delivering from our investments. The first is our 5-year EBITS performance. With our EBITS CAGR of 30%, well ahead of the peer group and exhibiting the profitability growth we have achieved for our shareholders over this period. We are very proud of these returns, which are in no small part a result of the commitment and passion of our team members and also the investments and structural change we have made in our business over the past 5 years.

The second chart benchmarks the ratio of our average level of capital investment over the past 5 years to earnings growth versus the peer group over the same period. For TWE, we also show an additional arguably penalized scenario, which includes our investment in CapEx and long-term inventory, which has been and will continue to be a key driver of our growth. For the peer group, capital investment only reflects normal CapEx. Under both the normal and penalized scenarios, we can again show that Treasury Wine Estates are delivering strong returns through our deliberate and careful investment strategy. Not only does this validate our investment model, but it should also provide an insight into the potential for delivering future growth for the investments we are currently making, including those we have announced today.

Finally, as you all know, the new lease accounting standard will be applicable for Treasury Wine Estates commencing F '20 and we are sharing with investors today a summary of the changes driven by this new standard and its impact on our key financial metrics. The impact of bringing leases on to our balance sheet will be an increase in total assets and total liabilities, a shift in our P&L structure and no impact to our net overall cash flow. Metrics such as EBIT margin, cash conversion, ROCE, and EPS will be impacted as highlighted on the slide. An important point to highlight is that TWE will apply the new standard on a fully retrospective basis, and we've provided the adjustments applicable for F '17 to F '19 in the appendix to our results disclosures.

And I would guide investors that given we've applied the standard on a fully retrospective basis, the impact to earnings in F '19 is a useful guide to the future impact on earnings, subject to future changes in our lease portfolio.

In summary, I'm proud to report another set of high-quality financial results in F '19 and I'll now hand over to Tim and Angus to discuss the performance of the regions.

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Tim Ford, Treasury Wine Estates Limited - COO [4]

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Thank you, Matt. Good morning, everybody. Firstly, I'll start with the Americas where we have delivered top line growth and increased earnings despite the significant route-to-market changes, which were fully implemented in fiscal '19. Net sales revenue increased 9% and EBITS were up 2% to $219 million. Margin did decline 1.4% to 19.3% but was up 0.8 percentage points versus the first half, which was a result of the higher cost of doing business in the form of our investment in new sales and merchandising teams as well as transitional costs to support the successful implementation of this new route-to-market model.

For the second year in a row, our shipments were below our depletions, pointing to the fact that we maintained balanced and healthy inventory levels across the distributor network for our entire portfolio. In relation to our new route-to-market, we're very pleased with the progress we have made in its first full financial year and remain confident with the decision we have made to implement these changes. It is absolutely the right thing to do and we believe in it.

Our distributor partners, both new as well as existing, are working well and we are achieving positive momentum working with our new retail partners also. We continue to work closely with all of these partners to embed new ways of working with a specific focus on driving improved distribution and availability of our portfolio, importantly complemented by targeted investment in programs and activation that drives increased consumer pull-through, specifically on priority brands.

It's really important to remind everyone, the changes we have undertaken are substantial. And that while the model is now implemented, we also recognize there remains work for us to do to optimize our performance and deliver on our aspirations. This is particularly true in the broad market where change in distributors has had an impact on our product availability and distribution. And we are now prioritizing effort with our partners to return this channel to growth in fiscal '20. As we have started previously, we will remove the transitional costs over time and it's something we have started doing in the second half of fiscal '19.

And we'll continue to do so through this year along with pursuing numerous other cost-efficiency initiatives, noting that there will be some upfront cost involved in getting these savings, which we manage within the ordinary course of running the business. Combined with our efforts to improve business execution under the new model, further cost optimization will support continuation of the margin accretion we have delivered in the second half of fiscal '19. What we know from our experience is that optimization of our business models in the regions does not happen overnight.

It's an ongoing journey as demonstrated by the path we have been down in Asia and Australia and we'll continue on this journey because we know it is the right thing to do to provide our business with a competitive advantage in the U.S. over the longer term. Moving down to the performance of our U.S. brand portfolio, where mix and premiumization continues to be the key driver of our performance, as evidenced by our Luxury and Masstige depletions in fiscal '19, which grew 9%.

While scan data is by no means a comprehensive track on our overall performance in the United States, we are continuing to see improvement that we expected to come through as we cycle the lag effects of the proactive exit of Commercial wine and the transition to our new route-to-market model in fiscal '18. This positive momentum is particularly evident across our Masstige portfolio, led by the continued strong growth of 19 Crimes with volume and value going above 30% in F '19. And the Matua brand from New Zealand, which has also continued its strong performance with above 30% growth in both volume and value in the U.S. Strong growth in the $15 to $20 segment continue with Beringer Brothers and The Stag, both millennial-focused propositions that are performing particularly well and which we see a very bright growth future for.

Beringer Brothers was the top performing MPV in the market in 2018. With our Luxury portfolio, we are seeing great signs of positivity with a performance of Stags' Leap, Beringer, BV as well as Penfolds. The scores we are being awarded by critics show the outstanding quality of our wines across our Luxury brand portfolio and the opportunity for Treasury Wine Estates to continue drive in share gains at the upper end of the market we still believe is significant.

In addition -- sorry, excuse me. As Mike mentioned earlier, aggressive discounting by competitors and the increased proliferation of private label offerings are presenting some challenges that we have had to navigate at the Commercial end of the U.S. market. In addition, the trade war has led to increased availability in the market for U.S. country-of-origin wine, at this Commercial and in particular that was previously slated for export and has resulted in increased supply. This is industry-wide, not just unique to Treasury Wine Estates.

For us, our strategy of growing our Luxury and Masstige portfolios, the segments of the U.S. wine, which are growing very, very strongly, remains precisely the right approach and plan. We remain patient and very much focused on the execution of our strategy based on setting up our U.S. business for success over the long term and not the short term.

Moving to Asia, where we continue to deliver very strong growth across both North and South East Asia, supported by increased availability of Luxury and Masstige wine. Strong consumer demand across our entire portfolio and outstanding execution by our teams right throughout the region.

In fiscal '19, net sales revenue increased 36% to $749 million and revenue per case grew 27% with price realization across parts of our Luxury and Masstige portfolio also being delivered. Shipments growth was weighted to the second half as we move to a balanced sales profile for Rawson’s Retreat and specifically on a -- and reduce our Commercial wine shipments in SEAMEA.

EBITS grew an outstanding 49% and EBITS margin increased to just over 39%. We continue to see very strong demand for Penfolds but on the back of this, we remain highly focused on selling our portfolio in Asia, comprising country of origin propositions from Australia, France and pending the improvement in trade relations, the U.S. As we do in each of our other regions, we consider selling our diverse portfolio of brands as vital to ensure in the long-term health of our business. And pleasingly, focused brands such as Wolf Blass, 19 Crimes and Matua also delivered great growth in the year across the Asian business.

Consumers enjoy wine across a range of varietals, price points and countries of origin. And this is no different in Asia, where our portfolio of brands is absolutely positioned to satisfy demand, albeit will continue to focus at the premium end of the market. As we highlighted the half year results, repeating for our French portfolio, the journey of growth that we have delivered with our Australian portfolio does remain the priority for us as we look to continue growing share throughout the region into the future and over the long term.

As our business in Asia continues to go from strength to strength, we remain focused on enhancing our unique operating model. Firstly, we are stepping up our level of investment in the region to ensure we are well placed to continue executing sustainably against our growth ambitions. In China, we are significantly increasing our sales force and investment that will bolster our organizational capability and support our plans to expand our breadth and depth of distribution coverage throughout that country. In addition to this, as Mike touched on, increasing the use of our Shanghai warehouse and reducing reliance on the container model is a priority for us to deliver better speed to market and a better ability to fulfill smaller customer orders; two things that we expect will improve our sales phasing profile, and in turn, our cash flow.

We know moving to the warehouse model is the right thing for us long term. However, the pace with which we do this will be influenced by the macroeconomic and geopolitical environment in the region over the course of the year. Across Asia, our business model has left us better placed than many of our competitors to successfully navigate some of the challenges being experienced throughout parts of the broader economy. In this environment, retailers and wholesalers are choosing to work with partners like us who can drive consumer engagement and pull through of their brands that delivers to them cash margin. These are the brands that will win in China. But especially so during challenging times. Our model is working because we directly manage our connection in the market. We are investing in both people on the ground and the brands that we sell in that marketplace, all of which are contributors to the results we are presenting today, results that we are very, very proud of.

Finally, inventory management remains a key area of focus for us in Asia as it is in America. And we continue our discipline of closely monitoring stock levels across both our wholesale and their retail partners. Forward days inventory cover are broadly in line with where they were in the prior year and we maintained vigilance around ensuring healthy levels of inventory throughout the region, both through our partners and throughout the entire supply chain. I'll now hand to Angus, who will talk through the performance through the ANZ and European businesses.

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Angus G. J. McPherson, Treasury Wine Estates Limited - President of Americas & Global Sales [5]

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Thanks, Tim. Turning first to Australia and New Zealand, where we delivered yet another strong year of performance. Net sales revenue and revenue per case grew 0.6% and 0.5%, [retrospectively,] both of which were impacted by the cycling of the distributor route-to-change market in New Zealand in the prior year.

In Australia, strong top line growth momentum continued with NSR up 3%. Favorable cost of business drove EBITS, which increased 17% to $156.5 million and EBITS margin increased 3.7 percentage points to 26% with ANZ now our second region behind Asia to achieve margin ahead of our group EBITS margin target of 25%. In many respects, ANZ is our gold standard region with strong collaborative relationships with our retail partners, combined with growing portfolio of Luxury and Masstige brands that we are actively investing behind is combining to deliver excellent results.

We have seen positive growth momentum in a number of our brands: 5 brands in particular are showing strong growth, including Squealing Pig, 19 Crimes, Seppelt, The Stag and T'Gallant, all propositions that are continuing to drive the growth across Luxury and Masstige categories. TWE is outperforming the market in the $10 to $15 segments and all price segments above $20. 19 Crimes continues to enjoy spectacular growth, up 135% in volume this year as we continue to drive distribution in Australia. Squealing Pig is continuing to deliver double-digit earnings growth and it's the #1 rosé in Australia. Our wine-in-can portfolio continues to dominate with TWE retaining the top 4 cans and leading the category with over 50% value share.

In addition, our wine-on-tap offering is proving to be a big hit, supporting our improving presence in the on-premise channel. We maintain a 25% market share target in Australia and our priority is to achieve this in a sustainable and repeatable way and not at the expense of margin by chasing low-margin, Commercial wine volume but rather by focusing on a continued mix shift towards growing our presence in Masstige and Luxury.

Finally, turning to Europe, where we have achieved top line growth across a number of mature markets and successfully manage our investment levels and cost base to maintain an EBITS margin of approximately 15%. NSR increased by 4%, led by Masstige-led premiumization and gaining -- gains in Continental Europe and the Nordics. Higher Australian Commercial COGS, however, had an unfavorable impact, with EBITS declining 3% on a constant currency basis to $51.4 million. A number of brands are driving positive momentum across the Masstige portfolio. In the U.K., 19 Crimes and Wolf Blass Yellow Label are benefiting from distribution gains. In the Netherlands, Lindeman's continues to go from strength to strength as a leading wine brand in the market. And in the Nordics, we've seen good growth in our gentlemen's collections and bag-in-box propositions. We carry this momentum into F '20, where we will again focus on delivering value growth from our focused brands, while maintaining the streamline cost base. I'll now hand back to Mike for closing comments and Q&A.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [6]

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Thanks, Angus. In summary, we are very pleased to once again deliver to our shareholders a strong financial performance in fiscal '19. These results demonstrate both the strength of our premiumization strategy and the investments we have made in our business over the past 5 years, which have established an important competitive advantage for Treasury Wine Estates, setting us up for the next phase of sustainable growth. I am confident, we are very well placed in terms of our global management team, our brand portfolio, our customer partnerships and our business models to continue delivering margin accretive growth. We reiterate our guidance for approximately 15% to 20% reported EBITS growth in fiscal '20, noting that this excludes the impact of the new leases standard and one-off charges associated with our expansion in Luxury winemaking infrastructure in Australia. I'd like to thank you for joining the call today, and more importantly, I want to thank you to everyone who continues to support our business.

And with that, we're going to open the line for questions. Thanks, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Craig Woolford with Citigroup.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [2]

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Just wanted to understand the gross profit margin performance for the business. So it was a very strong result on NSR per case and profitability. In the second half, by my calculations, the gross margin was down about 178 basis points. And there is still good NSR per case growth. So I'm just interested in the contradiction between the pricing versus the gross margin result there, particularly during second half?

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Matthew John Young, Treasury Wine Estates Limited - CFO [3]

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Craig, its Matt here. Look, I think we -- I would focus on the full year as a whole. Certainly, the mix on a year-over-year basis, October, November, December another sales periods can lead to a misleading -- if you looking on a half-by-half basis. We're still quite pleased with the growth at the top line. And for our top line being revenue, revenue per case, and that's growing in all our regions. We have made some comments around the COGS impacts in each of our regions, but we think that's reflected in the full year position, and we think that gives a good guidance for the future as well.

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Operator [4]

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Your next question comes from Richard Barwick from CLSA.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [5]

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You've obviously provided some commentary sort of referencing the Chinese release to Asian in-market inventory levels and certainly the bit on the depletions would suggest it's in balance. And to be fair, that does fit with our thinking given the survey we did with wine distributors in June. But this issue of channel stuffing in China doesn't seem to go away. I don't think I've had a conversation probably in the last 12 months where this hasn't been raised. So my question is, are you prepared to comment more directly on the in-market inventory levels in terms of trying to give us some numbers to work with? Or perhaps, explain why you're so confident that there is not excess supply of TWE product actually sitting with distributors or retailers in China?

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Matthew John Young, Treasury Wine Estates Limited - CFO [6]

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Thanks, Richard. It's Matt here again, I might take that one. This does come up regularly, we hear you. So firstly, on behalf of us all, I want to reiterate the key points that we shared today. And that we share each and every time. They're not just statements we make. They are internal policies that we use to run our business. We maintain shipments in line with depletions and for us, shipments have been in line with or below depletions in each of the last 5 years. So we have been net destocking the system over that time.

For our high-growth markets, we maintain 4 days inventory cover flat. And that means that we are able to meet demand, not get ahead of it. And as we always have said and have demonstrated, we maintain strong engagement and inventory management practice in all our markets and that includes all the procedures to manage inventory levels.

And so look, Richard, we do find the constant rumors, to be honest with you, really frustrating. They are rumors without bases and the market is never presented with facts. And yet, somehow the onus is on us to continue to step in and constantly prove them wrong. It's especially frustrated when we are -- frustrating when we are required to and hold ourselves to such a high standard of quality in all our market disclosures but others are not required to.

So the one thing I would ask everyone to do when they are thinking about these rumors is, do they make sense? And I think applying some common sense here and clear facts about business that you know will help with this. So let me think through 3 -- talk you through 3 things that we think should help: Firstly, nearly 50% of our employee base are shareholders and this is growing. If we were genuinely engaging in unsustainable practices, I'm sure people in our team would realize this and they would not be investing behind our business so strongly. Secondly, as we demonstrated consistently, we allocated wines over a 3- to 5-year period. This means we are actively holding stock back, not the other way around. And finally, and I think this is the simplest and most important, we have been demonstrating that we are constantly moving away from distributor models over the past 5 years. And we are now working closer and closer with retailers and large wholesalers. These are large and sophisticated businesses who I can absolutely assure you have 0 interest in being looted, absolutely none. And they simply don't allow it and they wouldn't allow it to happen every year for 5 years. So I hope that helps answer your question. I -- and I hope it helps you understand the frustration that we feel on your behalf for these constant rumors that we are constantly asked to explain but have never presented with facts.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [7]

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Richard, I'm just going to build on that. I'm not going to repeat what Matt has said, but as most of you know, I joined the company just under 6 years ago following on from previous management doing unsustainable things. And in addition to the point that -- points that Matt has made, I can assure you that when you've come in to an organization and you've cleaned up somebody else's mess, you don't want to create that kind of mess again. It is the last thing that this team wants to do. And you have to -- have gone through cleaning up someone else's mess first to then realize just how hard it is to cycle that mess and therefore, you will never go down the path of creating these unsustainable things. So anyway, that's the only comment I'm going to make.

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Operator [8]

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Your next question comes from Shaun Cousins with JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Maybe just a question regarding the earlier release of Penfolds and bringing that from October to August. Could you just talk a bit about what impact that had in terms of shipments, revenue and cash flow, if any, in fiscal '19? And what's the reason to bring it forward? Is it just to collect more cash in the first half '20? Or will this help you sell more Penfolds then what you would if you were selling a -- if you're releasing in October as you usually do, please?

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [10]

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Okay. First of all, it is had 0 impact on fiscal '19 in anyway shape or form. So 0 impact on fiscal '19. It has 0 impact -- also I'm going to go further than your question, 0 impact on fiscal '21, i.e., we allocate wine as you know and as we have shared consistently over the last 5 years. We allocate wine to our Luxury wine 3, 4, 5 years out and we keep to those allocations.

That -- what that does, Shaun, is it ensures that we are, one, achieving the right margin for that product; two, it forces us to look at growing the rest of our portfolio at the same time, which as you guys know from previous conversations that you've had with me, I'm adamant we're going to grow the portfolio in this company. And you've heard both Tim and also Angus talk about the portfolio growth, not only in Luxury, but also in Masstige. And this sustainable growth that we're delivering there. What it means for fiscal '20, which is part of your question, is that we've -- we're sticking with what we allocated to fiscal '20 and therefore, we will deliver those sales in the current financial year.

The second part of your question is why did we make this change? As you know clearly, Penfolds is becoming a bigger part of our business in Treasury Wine Estates globally. We're not only sourcing Penfolds from Australia, we are sourcing Penfolds from Napa and also from Bordeaux going forward. And what we've done here is we've just created space in the current financial year for us to do 175th anniversary of Treasury Wine Estates, make sure that we can do the right programs in an unhurried way behind our brand across the 4 quarters and also make sure that we've got that space now to be able to do a northern hemisphere release in the future and a southern hemisphere release of Penfolds in the future.

Now we're not releasing a northern hemisphere Penfolds in the current year but we will do in future years to come. And so all we're doing is planning this space to be able to manage this brand on a global platform for future years. And that's the only reason for the change. Why the date? Very simple, we switched promotional times or release times of wins and Penfolds and clearly, our retailers have been unbelievably happy with the way that we've just switched 2 of our brands from a release point of view.

So therefore, it's not gone and screwed up their planning with other suppliers. They love the fact that they've got a longer period in which to sell Penfolds as opposed to a shorter period given the October release. So it's actually helped our business partners more than helping us, which I think over time will show that it's actually been financially beneficial for our partners and also financially beneficial for us. Just looking at Angus and Tim, do you guys want to refer to what's happened with release and how that's reacted in -- with -- what the performance has been?

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Angus G. J. McPherson, Treasury Wine Estates Limited - President of Americas & Global Sales [11]

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Yes. Thanks, Mike. Obviously, we just had the release last week of Penfolds on the 8th of the 8th. And the read from a couple of our major retail partners is the increase in performance this year versus last year is significant. And the other pleasing part is sales -- retail sale prices are also holding up. So not only have we seen improved performance this year versus last year on the equipment time period. So October launch versus August lunch this year but also pricing as well is really strong.

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Matthew John Young, Treasury Wine Estates Limited - CFO [12]

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And they've taken priced ahead of us. We didn't take price.

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Tim Ford, Treasury Wine Estates Limited - COO [13]

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The other thing around where Mike touched on space, and that is the key word, not just our 175th celebration with Penfolds this year, which is a significant event for us. But if we think about as we continually learn how to grow our business in China, and this -- we always talk about our Chinese New Year being the key selling period or key festive period. Mid-autumn festival is also our significant selling and activation period for us, of which we are now activating against this new release in China, now even into September and October. So that's another further development that allows us just to spread and create the space of where we sell the allocation across the year as opposed to changing the allocation.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [14]

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So we're sticking with our disciplined allocation 3 to 4, 5 years out. We haven't changed it. No impact on fiscal '19, '20 or '21.

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Operator [15]

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Your next question comes from David Errington with Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [16]

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Mike, one thing I've been watching TWE over a number of years and what I've been really pleased with is -- is the development that you've got in your team, and the team -- and clearly, that's on show today with the depth that you're building.

But the one person I'd like to really ask a question to, which I think he's doing a phenomenal performance, is Angus, and particularly that Australian business. I mean I don't think I've ever seen Australia go above 20%, let alone 25% margin. And my question is, he's been able to do it without Penfolds. I mean in [Cool Daddy] did Squealing Pig, 19 Crimes, Seppelt, Stags and T'Gallant.

Angus, how you been able to do such a great result without Penfolds? And going into -- you are obviously clearly responsible for the growth of the production, which all these other guys can sell around the world, what is this $180 million investment going to do? I mean that's a big investment that you're going to do for your wine assets. What are you actually going to do with that $180 million at the Bilyara production facility that's going to foster even further growth beyond '21, '22?

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [17]

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David, it's Mike. I want Angus to respond to this. He is a rock star. But I also want to say to everybody that when you come to our Investor Day on the 24th of September in the Barossa, you will actually see -- sorry, in Adelaide, you will actually see even more rock stars that are in this organization. But let me hand over to the rock star.

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Angus G. J. McPherson, Treasury Wine Estates Limited - President of Americas & Global Sales [18]

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Thanks, Mike. No pressure. Thanks, David. I think, David, you've been hearing us talk about, in Australia for a couple of years, the importance of category and insights that we use. And so really looking at how we can grow the category in the key price points and that's been an evolution for 5 years. And those insights that we've got around consumer insights, shopper behaviors and where category growth is going to come into the future has led to us to being able to grow those brands that you mentioned, things like 19 Crimes, T'Gallant, Squealing Pig, Seppelt, et cetera.

So it's really been insight-based and TWE thrives around this to have that strategic advantage when we're dealing with our customers. And I think across the board, we have good strategic relationships. We're able to use those insights to our business. Of course, I have a gentleman called Peter Neilson who heads up the ANZ business who is -- he's very, very good at what he does.

So as I said, it's really been insight-led, that's allowed us, and you heard me say earlier, above $10, we're growing at every price point apart from one and growing ahead of the market, which is really pleasingly.

When you talk about the investment at Bilyara, the simple point is we're going to build the single best, most luxury state-of-the-art premium winemaking facility in Australia and potentially one of the best in the world. And that investment, as Matt mentioned earlier, increases our capacity by over 1/3 as we've been trying to grow -- we've got growing demand for all of our Luxury portfolio.

And that investment at Bilyara, it's going to be a standalone luxury facility at Bilyara. And it's going to allow us to continue to make the demand for future growth of our Luxury brands. Truly exciting development, one of the biggest ones we've made in Australia in a long, long period of time, and it sets us up for future growth.

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Operator [19]

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Your next question comes from Larry Gandler with Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [20]

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Question for Tim probably. With regards to China, Tim, I think most independent observers are seeing the economy really weaken, consumer weaken there. How's that causing you guys to adjust your business? I know you probably have some good momentum, but it still must require some changes. So what changes are you making to engage that weaker consumer? And maybe even business person?

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Tim Ford, Treasury Wine Estates Limited - COO [21]

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Yes, sure. Thanks, Larry, thanks for the question. I think that the strategy we're taking and you are correct, the environment which we monitor very closely in China is shifting. The key for us is doubling down and driving harder, the key parts of our strategy that have been successful for us in the last couple of years and deliver the results today. First one being that the investment in our brands, the investments we've made not just with Penfolds but with other brands is really, really important.

And from a partner point of view, will that be a wholesaler or a retailer, our brands, given their advantage model in China, does deliver their net cash margin. So when they see their investment being better placed within our brands when combined with our investment behind driving consumer pull-through on those brands, that's a combination that we believe is unique to us in that market, hence why we continue to drive those 2 agendas. So that's point one.

I think the second aspect, and we talk about this quite often is once we've had considerable success to date in growing that business, we still have a small share. And there's still numerous cities where we believe our -- we are underrepresented in terms of the depth of distribution within those cities. But also our other cities and provinces where we have invested overly in terms of time and resource. And that's the next phase for us, which is the investment in our sales force, our on the ground sales force, understanding each province, each city where the sales team will be based and bringing those insights back so we can tailor our solutions, particularly our consumer activation, in those different cities and provinces, which do have, in some cases, unique needs.

So we're very specific and drive that at a much more granular level of detail as our connection in each of those grows. So I firmly believe that that's what underpins our confidence in terms of that going forward. But we're not -- we're subject to the same economic position as other competitors, but we believe we're certainly better placed based on that.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [22]

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If I can build on Tim's comment without repeating anything he's said. I think the key thing is our focus on Luxury/Masstige and the fact that we are stepping up our marketing investment behind our Luxury/Masstige portfolio every single year. And that helps drives the connections with the consumers. And also, it helps our business partners deliver cash margin and cash conversion.

And so if you would be running a business in a market where there are some challenges and you're having to choose which brands you're going to back in order to keep your business sustainable, you will choose, one, the brand that the consumers are choosing; and two, the supplier that is actually helping you realize cash margin and cash conversion.

The second thing is, as we mentioned earlier, we have stepped up the recruiting of our sales organization in the fourth quarter, and that is because we know we can steal people from competitors in beer, wine and spirits, where those people are maybe not as happy with the performance of their businesses and therefore are coming to us and therefore we're strengthening our team as a result of that in the first quarter. That will help our future results, investment in first quarter and help us in the future.

Last thing, as you've seen what's happened with the percentage share of French wine that is consumed, it's always been the biggest country-of-origin wine consumption. You've seen the decline just recently. We're going to step up our business there to be able to take that excess wine, Luxury wine that is available in France, and we will bring it into Asia and over time, we will become the #1 importer of French wine into Asia.

We're the #1 importer of wine into Asia and into China. We'll become the #1 importer of French wine into Asia.

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Operator [23]

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Your next question comes from Morana McGarrigle with Macquarie Bank.

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Morana McGarrigle, Macquarie Research - Analyst [24]

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Just a question on the U.S. You said that you expect margin accretion from FY '20. Could you just talk a little bit about the EBIT margin outside from accessing that distributed margin now that the changes have been embedded?

And I guess with that, can you reassure a 50% rate capture? And then maybe more broadly, just some color on performance where you've gone direct, and it says an opportunity to perhaps make some changes to distribution in the remaining states. And my apologies, I realized I probably asked 3 questions.

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Matthew John Young, Treasury Wine Estates Limited - CFO [25]

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Thank you, Morana. So I'll let Tim take that. I think we're not going to comment on specific margin uplifts, but I'll comment on where I see us in the, I guess, the journey that we're on within the U.S. from the change and probably start by stating what I did say earlier. But it's an important point is, we are very, very confident and comfortable that we have made the right decisions and changes over the last 12 months or 15 months in the United States. I think the increased margin opportunity will certainly come from few areas for us, continue driving and better and outstanding is where we're going to get to execution in the U.S. around our Luxury and Masstige portfolio.

I'm very confident that we have a great portfolio that we'll continue to grow, and we have the wine coming through to be able to deliver against that. So certainly, margin accretion will come by the further premiumization of our portfolio on mix within the U.S. And we've seen that start with all the data that I'm sure you guys have seen over the last 12 months as well.

The second component is around cost management. We have started to get some of the cost out that we invested ahead of the curve to deliver the route-to-market changes in the U.S. We'll continue to do that over this next 6-month period in particular. But we're also developing other cost management exercise -- so other cost management programs within the U.S. business to further drive that agenda and that culture within our business.

So I'm working on the assumption that we'll do both of those and hence both will improve margin accretion going forward. To the other part of your question, which was a separate question but around where some of the areas of improvement will focus for us. It's clearly around the broad market distribution.

When you make a change as significance as what we did and it's delivered against our expectations. However, the broad market is one we do have a higher risk of losing distribution and availability of our products, particularly with the strength of our previous partners and that has been true.

So within the broad markets, specifically in California but also within Florida, where we do have a more direct model, that is our focus where we need to improve our execution with our partners. We need to improve our focus in terms of the outlets we're going to and regain some of the distribution that we lost. We're making progress.

Traditionally, we're starting from now to do this. We've certainly made some progress over Q4, but we're not where we wanted to be, and we'll continue to work hard to actually drive that. And again, Luxury and Masstige portfolio is going to be the focus area for us within that broad market as well and the specific channels within that.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [26]

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I'm going to add one extra build, and that extra build is that you can see some of our competitors who do report their results in America have gone through some tough times and that's a combination of how they're looking at exiting their business, the wine business. And that they have other businesses that they're prioritizing or alternatively, they have exported their wine outside of America in the past, and they're struggling to export that wine outside of America. And therefore, that's meant that as result of them looking at structurally changing their company or their business and divesting or alternatively finding a home for wine that they cannot sell in Asia. And remember, we don't have that problem.

They have obviously discounted their wine in America. And I think after that has settled down, either they have restructured their company or they have gotten rid of brands or they -- the trade war stops. You'll find that the market in America will go back to a bit more normal. We have been able to perform well through this period in America. But from a margin enhancement point of view, when that all settles down, people have got the right homes for their businesses and their brands, then you'll find that things will settle down and will do better as a result.

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Operator [27]

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Your next question comes from Ben Gilbert with UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [28]

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Question from me just during M&A. I think Mike, you said certainly in the past you had an appetite to sort of go out there and look at the other brands and I appreciate you picked up vineyards and the assets in France. But just in terms of how you're seeing that pipeline opportunities out there that's sort of potentially add-on brands and particularly in the U.S. where, I think, it would sort of continue to materially derisk, albeit obviously we're a fair way through it now, that new distribution strategy. Is there much out there? Is there much of that -- particularly that sort of Masstige premium end of a decent brand portfolio you can tap into the Treasury network?

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [29]

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Yes, Ben, there's definitely plenty out there. It's making sure that you get it at the right price. I'll cover France first. This is the first acquisition that we've done in France. It will not be the last. And as we have mentioned before that we are working on others, other acquisitions in France. So this will be something that we will accelerate over time. I think it's important to also state, which Tim referred to earlier, we don't have to necessarily buy a lot more infrastructure. We can repeat what we do in Australia where we use other people's vineyards, lease vineyards, grower contracts et cetera. We can do the exact same thing in France and then accelerate our business, obviously getting full utilization of infrastructure that we buy, but replicate the business model of Australia in -- for our Australian business in France for exports to other markets. So that's the first part.

In the United States, clearly, I think our performance in the United States has been very good in our first full year after the change in route-to-market. When you change distributors in United States generally, and you go back and look at history with the other suppliers, when you change distributors in the United States, your business tends to go backwards, i.e., top line and profit. We have grown top line, and we have grown bottom line in America in our first year of change.

One of the key things we've done is obviously, we've also gone direct in selected states, and we've taken that as an opportunity. A lot of our competitors have not done that, i.e., they do not go direct. They continue to work through distributor partners and in many instances, they're therefore part of a much broader portfolio of supplier brands that the retailer then cherry-picks from as opposed to having that direct relationship.

What will happen over time is I think some of the U.S. assets, with our improving performance in United States, and with the poor performance in United States, their valuations will come down. And I think patience is a key thing for us, especially in that geography.

There's definitely opportunities to expand to be more of a larger size in the United States. But I think the key thing for us to do is make sure we do that at the right price, right valuation. And when someone is really wanting to get out of the business, that will be the time for us to buy that business. There's no further comment I can make.

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Operator [30]

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Your next question comes from Andrew McLennan from Goldman Sachs.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [31]

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My questions relates to the cash conversion, and in particular, the role that inventories played. Inventories reduced pretty materially as a percentage of cost of goods sold, to the tune of around $170 million, by the looks of it. I'm just wondering if you could talk around how you've been able to drive that down, whether it's related to vintage 19; and given your comments earlier around the lack of an impact from the Penfolds release, I'd just comment that we've certainly heard that some of your big partners have had inventory of that earlier vintage Penfolds turning up in May and June. I'm just wondering if you could comment on that and just talk about the drivers of that inventory impact, please.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [32]

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Absolute nonsense, Andrew. There is no one who's got anything from the release that just took place in August. And this is the sort of garbage that continues to get recycled when we've actually made a category statement -- and by the way, when we make these statements, these comments are actually part of an audit review. So I'd like to make sure that everybody in this call clearly understands that when we say things in addition to what's in our PowerPoint presentation and the ASX, it is all audit reviewed. So I think it's important to actually make that -- I find it astonishing that Goldman Sachs would even repeat garbage like that. But anyway, let me go to the cash conversion piece, which we'll get Matt to repeat.

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Matthew John Young, Treasury Wine Estates Limited - CFO [33]

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So -- and Andrew, on the cash conversion, not necessarily easy to lineup inventory balances, which are future related versus historical COGS. That is a difficult thing to compare to and discuss, but I will talk -- we did make a comment in our cash conversion commentary that we had done a little better in our inventory management in fiscal '19.

People will largely be aware that the vintage 19 Australia is down as a whole. It was up for us in the Luxury space, but as a whole, it was down. We also have a flexible intake model, which allows us, not on the Luxury but to actually take other wine in closer to the date of the eventual bottling and sale. So it's our model that has allowed us to do that not take as much wine at 30 June and becomes a more balanced and I guess efficient working capital model to support that future growth.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [34]

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I'll actually just build and say that I want to remind everybody that we told everyone at the half year that our cash conversion was not bad. We had short-term timing things that we were going through like the change in our business model in America, the cycling of what was going on in China with regard to the delayed shipments in the previous Q4.

And FX and inventory et cetera, we walked you all through that. A lot of people probably didn't believe, and this goes back to my point. We will not do things in the short term just to prop up a number or prop up a metric. We are very disciplined in how we run this company. We are principled in how we run the company. And what we say, we mean; and what we say gets audited and it's audit reviewed. And so we do not tell mysteries on these calls or on our ASX announcement or in the PowerPoint, at which we'll have to say one more time because I find it astonishing some analysts and brokers from gold-plated organizations seem to want to recycle the garbage that gets repeated.

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Operator [35]

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Your next question comes from Euan Mcleish with Bernstein.

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Euan Grant Mcleish, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [36]

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Can you give us some color around Luxury wine allocation, please? I'm interested in the proportions of Luxury wine that you allocated to different regions in FY '19? And how that's been changing over the last couple of years?

I'm really trying to understand, how far down the line towards skewing to Asia you've gone? And how much further scope there is to move in that direction over a couple of -- next couple of years?

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [37]

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Okay. I'll try and keep it pretty tight on this call, but if you think about our business 6 years ago, when a good vintage was made generally, it will all be sold fairly quickly over next couple of years. One of the things that we put in place about 5 years ago was that we will deliberately allocate vintages especially for Luxury wine over 3-, 4-, 5-year period. And I'd say 3, 4, 5 because obviously you've got certain propositions within Penfolds that gets released after a 3-year hold, and you get some that get released after 5-year hold. And we've pretty much stuck to that from a disciplined point of view. It's part of a 5-year plan that gets reviewed by the Board. And so if you were to try and change any of that allocation, we would have to be transparent to the Board that we reallocated wine from 1 year to another.

And I can tell you categorically that we do not do that. We tend to allocate it to a year and then we stick to that allocation for the year. What we do within the year from an allocation point of view to your question about Asia, we will then take that allocation of the wine for a particular year, and we will allocate it to selected markets, Asia, Europe, Australia, America et cetera. And we also go to detail of how we allocate that to particular customers or business partners that we work with.

So that's the granularity that we've got in our 5-year planning horizon. So the kind of detail that most people would see in the business plans for 1-year horizon, we have for 3- to 5-year horizon, by customer, by geography et cetera, and by year. So we have that sort of granularity.

What's going to happen now over time is, as we've got better vintages that are coming through -- because that's the other thing we've done, we work really hard with our winemakers, our viniculturist to ensure that we keep skewing our wine production from our own vineyards, leased vineyard and grower contracts to get more Luxury fruit, A-, B-rated fruit across every geography we operate in.

And so as we've done that, we've been able to get some better vintages that have come through. And so clearly, we started this 5 years ago. But clearly, we don't have all of that in year 1, 2. It sort of started to come through in 3, 4, 5, 6 et cetera, as we go forward. So what that's done? It helped us in the shorter term, it's in the last 5 years, to allocate more of that Luxury wine to a market in Asia where there's more opportunity for us to grow at a fast pace, capture share and become the #1 importer of wine into Asia.

And as we go forward now, with these bigger vintages that are on our balance sheet and also the fact that we're going to source more Luxury from America, Penfolds, Baijiu Vineyard for global consumption and also Bordeaux going forward and the rest of France going forward as we keep going. We will start having more wine coming into our business. We will allocate that Luxury wine not only to Asia, we will allocate that to Europe, Australia and America. And we believe in the principle of apparent scarcity.

We don't say that. We actually do this. And so by allocating the wine and making sure that you don't have one geography or one customer that gets too much of the good thing and you're allocating it to other customers in to other regions, you keep driving this apparent scarcity where everyone can't get enough of your Luxury portfolio.

It helps drive demand, consumer demand and retainer demand. It also helps with margin accretion. That in a -- as quick a nutshell as I could say on this call how we run the allocations in a very principled basis over a 5-year period.

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Operator [38]

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Your next question comes from Jason Palmer from Taylor Collison.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [39]

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My question just in relation to the strong debtors conversion in the second half. I think in the first half, you might've called out the phasing sales [a piece in] Q2 and Q4 skewed into Asia. Maybe if you could just comment on that really strong debtors conversion? And what you've sort of done around the invoicing at the warehouse, in terms of trying to improve that?

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Matthew John Young, Treasury Wine Estates Limited - CFO [40]

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Sure, Jason. Matt here. The comments we made at the half did continue through for the second half. It was still relatively Q4 weighted in Asia. But we did see some improvement working with our customers to help them manage through their working capital balances, driving depletions. But I would say, the greater shift in the debtor's profile and sales order profile occurred in the U.S., where the team did more work there to pull forward particularly Luxury sales and manage that sales order profile more evenly over the half. Those will be the main drivers of the sales order profile.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [41]

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I think they'll build as we bed down business models and changes in business models, the business gets more and more efficient over time and therefore you'll find that not just receivables but all the metrics improved over time.

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Operator [42]

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Thank you. That's all the time we have for questions today. I will hand back to Mr. Clarke for closing remarks.

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Michael A. Clarke, Treasury Wine Estates Limited - CEO, MD & Director [43]

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Thank you, operator. I didn't realize that was the last question. But thank you very much, and I'd like to thank everyone for joining the call today, and look forward to talking to you individually on the web chat. Thank you very much. Ciao.