Treasury Wine Estates Ltd (TSRYY) CEO Michael Clarke on Q2 2019 Results - Earnings Call Transcript

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About: Treasury Wine Estates Ltd. ADR (TSRYY)
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Earning Call Audio

Treasury Wine Estates Ltd (OTCPK:TSRYY) Q2 2019 Earnings Conference Call February 13, 2019 7:00 PM ET

Company Participants

Michael Clarke - CEO, MD & Director

Matthew Young - CFO

Tim Ford - COO

Conference Call Participants

Thomas Kierath - Morgan Stanley

Ben Gilbert - UBS Investment Bank

David Errington - Bank of America Merrill Lynch

Larry Gandler - Crédit Suisse

Morana Hunter - Macquarie Research

Shaun Cousins - JPMorgan Chase & Co.

Richard Barwick - CLSA Limited

Craig Woolford - Citigroup

Michael Simotas - Deutsche Bank

Andrew McLennan - Goldman Sachs Group

Operator

Thank you for standing by, and welcome to the Treasury Wine Estates FY '19 Interim Results Announcement. [Operator Instructions]. I would now like to hand the conference over to Mr. Michael Clarke, CEO. Please go ahead.

Michael Clarke

Thank you, Operator. Good morning, and thank you for joining Treasury Wine Estates' 2019 interim results call. Joining me on the call is Matt Young, our Chief Financial Officer; and Tim Ford, our Chief Operating Officer. Last year, fiscal '18, was a year that we labeled a foundation year as we undertook significant steps to enhance our brands, partnerships, people and particularly our business model in the United States, all whilst delivering a result which exceeded expectations. Today, I'm very proud to say that the foundation we have established continues to deliver sustainable momentum, and this is demonstrated by yet another strong set of financial results for the group. And like previous years, we've delivered on expectations while continuing to implement significant changes to the business and investing for future growth.

In the year-end -- in the half year ended 31st December 2018, Treasury Wine Estates has achieved top line growth through a combination of increased volume, price realization and continued premiumization. Net sales revenue increased 16% and NSR per case increased 15% over the prior period. On a constant currency basis, this is the strongest organic net sales revenue growth in our history. And pleasingly, we saw underlying top line momentum in all of our regions.

Group EBITS increased 19% to $338 million, with EBITS margin increasing to 22.4%. Statutory net profit after tax was $219 million, up 17% on a reported currency basis. And earnings per share, up 19%. The results presented today demonstrate not only the strength of our premiumization strategy and global balance but, in particular, highlights the strength of our competitively advantaged regional business models. I'd like to spend some time on this before we comment further on the result, specifically reinforcing the key attributes of our Asia and U.S. business models. I feel it is important to share this so that those who invest in our company can better understand why these business models allow us to better navigate challenges as well as provide us with a competitive advantage and deliver sustainable earnings growth.

Our underlying philosophy is to be as close as possible to the end customer in our key markets, allowing us to better drive the growth of our brands and also capitalize on our core competency of building collaborative relationships that deliver value growth for both our partners and ourselves. Turning first to China. As many of you will know, in China, we use a wholesale model where we are the distributor. Unlike our competitors, we do not rely on a third-party distributor to sell our brands and, therefore, we do not incur the approximately 50% distributor margin. Instead, we partner with retailers, wholesalers and state-owned enterprises, and we actively manage those relationships directly, making decisions on how and where our brands are sold, with specific portfolio and channel strategies.

Our model has a number of significant benefits, driving value for us, our customers and the consumer. Firstly, by self-distributing, we operate a more efficient value chain, which means we can deliver a lower price on-shelf and use the margin liberated from not paying a distributor margin to invest more actively behind our brands, building trustmark brands that will increasingly drive consumer pull-through over time. To help illustrate this, we know that our share of imported volume into China is the same as our sell-through volume share. I'll repeat that. We know that our share of volume imported into China is the same as our sell-through volume share. We also know that our imported value share is around double that of our sell-through value share. So for example, in a recent period, our imported value share was around 8%. However, our sell-through value share was closer to 4%. What this difference demonstrates is the efficiency of our model versus our competitors'. Our competitors incur distributor margins, negociants margins, additional duties that we do not incur, which ultimately result in higher retail prices for our competitors because they have more mouths to feed in their value chain.

Secondly, our wholesale model enables us to establish, own and maintain closer relationships with our customers just like we do in Australia, for example, to drive category value growth. We're able to do this because we have a deeper understanding of what's happening in the market, including visibility on customer performance and inventory levels. Being closer to the customer positions us to be able to react more readily than our competitors. Finally, our wholesale model means that we are better placed to execute a portfolio strategy comprising multiple brands, multiple price points and, more importantly, multiple countries of origin, but not doing this through one distributor partner. Rather, doing it through a selection of wholesale partners best placed to sell the right combination of brands and controlling the expansion of our customer base in existing and new cities.

We also see tremendous opportunity to expand our penetration into more cities and across more partners in China. We have an ambition to expand our presence and availability by more than 50% in the next three years, and we will achieve this through increased allocations of Luxury wine in future periods. In addition to expanding our geographical footprint, there is still significant opportunity to increase the penetration within existing cities and expand availability. We are the largest wine importer into China. But even after growing our share by over 30% in the last 12 months, we still currently only have a sub-5% market share. So we see tremendous opportunity to grow that share using our multiple country of origin portfolios. The French category, in particular, is one way we see huge opportunity for us to win share. It's the largest import category accounting for approximately 30% to 40% of the market and is highly, highly fragmented. And we are confident we can take share in this segment by putting more French wine through our competitively advantaged business model. I've said previously that France is strategically a very important sourcing region for us, and I'm pleased to share today that we are currently in discussions to acquire French production assets and supply arrangements so that we can build our French portfolio of Penfolds, Beaulieu Vineyards and Maison de Grand Esprit, and we can repeat the journey of Australian wine into China with our French portfolio of wines going forward. In summary, the fundamentals of the Asian wine market as a whole remain enormously attractive, and we are not seeing a slowdown in demand for our brands.

Importantly, though, we firmly believe that the strength of our unique business model, combined with our ability to manage luxury allocations globally, will allow us to navigate future challenges if they arise, and we will continue to succeed sustainably in China and other markets in the Asia region, focusing not only on our Australian portfolio but also building a greater share of the French category with our own French brand portfolio. Moving to the U.S. business model. As most of you are aware, we commenced a major route-to-market transformation in the United States in the final quarter of fiscal '18. This was a substantial change, and certainly the biggest change implemented in my time at Treasury Wine Estates. Again, driven by the strategic rationale to bring us as close as possible to the end customer, we changed 40% of our route-to-market, choosing to self-distribute 25% and transitioning 15% to new regional distributor partners. I'm very pleased with the progress made in our first nine months and know that there is still opportunity to improve our model and performance even further.

Our existing distributors have continued to perform well, and those markets in which we changed distributors are performing in line with or above expectations. We're achieving increased points of distribution from the transition to new distributor partners. In Florida and California, our new direct model is working well, and upside potential is clearly visible on our P&L with NSR per case and EBITS growing at an encouraging rate. There were also parts which we're continuing to improve and refine as we implement the model. For example, in California, during this half, we chose to establish our own merchandising team and move away from a third-party provider where we were not getting sufficient traction. This change is already working well, and is an investment that we believe will benefit the business longer term.

We will also continue to actively drive broad-market distribution across our transition markets, focusing on improving distribution and availability. As challenges like these are experienced, our team has shown great flexibility and capability to quickly address and change things where necessary. As we said on the fiscal '18 results call, we're carrying additional costs in this transition year in the United States. We have one team driving the business and another team driving the transition. We've also invested in direct sales, direct merchandising teams, and these transition costs and investments are carried above the line, not below the line, in our Americas EBITS. We'll start taking some of these costs out of the business in the second half as we continue -- and we continue to expect margin accretion from fiscal '20 onwards.

As I've said previously, we will continue to make the strategic and long-term investments to strengthen our regional business models to deliver long-term, sustainable growth. With that, I'll hand over to Matt who will take us through the financial results.

Matthew Young

Thanks, Mike, and good morning all. We're proud to report another excellent set of financial results delivered through a period of significant change and complex external dynamics. Before going into detail on the results, I want to highlight some of the factors that have had an impact on the H1 versus H2 profile of our P&L and cash flow. There are three main factors to note. Firstly, as Mike reiterated, a year ago we announced our route-to-market change in the U.S. seeing us move 40% of our business from one distributor to 25% self-distribution and 15% partnering with more focused regional distributors. Recognizing the significance of this change, we chose to allocate a greater proportion of our fiscal '18 Luxury wine to H1, resulting in around 55% to 60% allocated to H1 globally. In addition to satisfying customer demand out of key 50 consumption occasions, this reallocation enabled us to provide a level of reassurance to the market in respect of our F '18 expectations despite the significant transformation we were undertaking.

As we highlighted at our recent AGM, in fiscal '19, global luxury wine allocations will be split more evenly, or 50-50, between H1 and H2, something to consider when comparing H1 '19 to H1 '18. Secondly, in second half '18, we communicated a change in our strategy for Rawson's Retreat in China with the consolidation of our customer network for this brand, and we commenced a proactive rephasing of shipments. In the first half of F '19 in Asia, this change has resulted in improved mix, with more Luxury and less lower Masstige being sold as we cycle through this change. To amplify this, excluding the effect of the Rawson's network change and the exit of lower margin commercial wine in Southeast Asia, Asia volumes grew by more than 20%.

Finally, our shipment profile into China has been impacted by a few additional factors. As previously communicated, import clearance delays in fiscal '18 led to shipments being delayed until June 2018. And given our practice of actively managing customer inventory levels, this had a flow-on impact as, in turn, we back-ended our H1 '19 shipments into Q2. When comparing this to first half '18, this back-ended impact is accentuated by the fact that we were Q1-weighted last year as we pre-shipped product to our partners to ensure they have sufficient inventory ahead of the transition to our warehouse model.

One other point to note is that import tariffs on Australian wine into China reduced to zero from 1 January 2019, and some of our partners chose to delay shipment arrivals to January to benefit from the removal of this cost. These various shifts in our shipment profile have had impacts on some of the Asian performance metrics and the group's cash conversion, which I believe will now be clear. In addition, we would caution investors from taking external sources like the Wine Australia export data as a direct read through to Treasury Wine Estates. These data sources are misleading with respect to our performance as they don't consider the structural differences in our business model nor the variability in our export shipment profile.

And so with that context in mind, I move now to our financial result. And with a focus on the growth-oriented metrics we shared at our full year '18 result, being top line growth, profit growth and investment returns, net sales revenue grew 13% on a constant currency basis in first half '19. As mentioned earlier, this is the strongest top line growth rate in our history. This growth was delivered through increased volumes, increased availability of Luxury and Masstige wines as we continue to premiumize and through price realization with these latter two factors delivering growth in NSR per case of 11%. Pleasingly, top line growth occurred right across our business. Excluding the impact of the New Zealand route-to-market transition last year, all regions delivered volume, NSR and NSR per case growth.

The shape of our overall P&L continues to improve reflecting that top line growth, but also disciplined cost management with the company now delivering well over $1 for every $1 invested in cost of doing business. An important fact to highlight is the cost of doing business includes the incremental U.S. route-to-market transition cost as well as restructuring costs associated with our Simplify for Growth program, with all of these costs taken above the line within EBITS.

The Simplify for Growth program is progressing well with the establishment of our Global Business Services division, a particular milestone. Despite these upfront investments, our EBITS grew 18% and EBITS margin increased to 22.4% as we continue our journey toward 25% EBITS margin and beyond. On a reported basis, earnings benefited from a small currency upside, whereby weakening of the Australian dollar against our major currency peers, the U.S. dollar and pound, was partially offset by the operation of our hedging programs as well as the impact of shifts in our other currency peers. Underlying profit growth in all our regions delivered EPS growth of 18% and ROCE improved to 13.3%, continuing our delivery of strong returns for shareholders.

Our balance sheet continues to be strong and importantly, it remains flexible. Adjusting for foreign currency, net assets grew marginally with the increase in working capital reflecting our sustained investment in future growth, offset by higher borrowings. Delivery of ROCE accretion in the magnitude of 70 basis points in the half is a strong result given December is the historical high point in the annual asset cycle of our business and testament of our ability to continue achieving returns while we invest for the future.

Turning now to cash flow and CapEx. Cash conversion of 54% was below our 80% target, impacted by a number of factors. The first of these was the sharp deterioration in the Aussie dollar to U.S. dollar exchange rate very late in December 2018, which inflated working capital balances that had limited impact on our first half earnings. The impact of foreign currency reduced cash conversion by just under 10%.

The second factor impacting cash conversion by just over 20% relates to the heavier weighting of our global sales profile towards November and December than in previous years. This was driven by the changes I've described earlier, being the change in the U.S. route-to-market, the flow-on effect from Chinese customs clearance delays in F '18, the new Shanghai warehouse and the China customs duty changes. Whilst these factors are largely related to growth or structural investment we are making in our business, we regard them as temporary. And to that point, year-to-date cash conversion for the seven months to January was 85%, demonstrating both the timing nature of these impacts as well as the strong underlying cash generation of the business.

While we continue to maintain a cash conversion target of 80% over the course of the financial year as our objective, in periods of accelerated growth and especially when we are proactively investing in future growth, this metric may be impacted which, in our view, is a positive. When assessing financial strength of our business, we regard cash conversion as important but consider leverage or net debt to EBITDAS as an equally important and more relevant long-term measure. We encourage investors to continue to take a similar approach. And to assist that, we will commence providing updated cash conversion expectations each year so that investors are appropriately informed as to the impact that growth and investment will have on this metric.

And to that point, for fiscal '19, our expectation for cash conversion is in the range of 60% to 70%, reflecting the fact that the shifting global sales profile is likely to persist into F '19, combined with our expectations of a very strong second half growth relative to the F '18 second half driven by Luxury allocations and very importantly, our current expectations for high-quality and high-volume 2019 Australian Luxury vintage.

Moving to CapEx, which for the first half was $94 million, of which maintenance and replacement spend was $82 million. And we maintain our full year expectations for spend in the range of $130 million to $140 million. Growth CapEx for the full year is expected to target investment in Luxury vineyard assets and would include the incremental investment in French assets, subject to completion of any acquisition process.

Moving now to inventory which has increased by approximately $290 million to $2 billion as carried on our balance sheet at cost at the end of the first half. Pleasingly, this increase is driven by Luxury volumes demonstrating the continued premiumization in our inventory mix with foreign currency translation also contributing to the increase.

As I mentioned at our full year results last August, our investment in winemaking assets and capability is driving significant increase in yield 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. We are now leveraging this capability globally, with the 2018 Californian vintage benefiting in a similar manner to the Australian vintage before it as we continue to see opportunities to improve and refine these capabilities.

Our current inventory position has increased modestly reflecting the more balanced allocation of Luxury wines across fiscal half in F '19, offset by the ongoing benefits from our supply chain optimization where, as a result, we carry a relatively lower cost of production. The noncurrent inventory position includes the lower volume 2017 Luxury vintage from Australia that we will commence releasing from F '20. The position also includes the very strong 2018 Luxury vintages from Australia and now, California which, combined with our current expectations for a high-quality, high-volume 2019 Luxury vintage in Australia, are expected to support sustainable and continued earnings growth across F '21 to F '23.

And finally, turning to capital management. Capital discipline is fundamental to the way we do business at Treasury Wine Estates, and our credit metrics continue to reflect a strong investment-grade credit profile with lease adjusted net debt to EBITDAS of 2x and interest cover remaining healthy at 13.9x. In the half, we enhanced the mix, spread and tenor of our debt financing structure with the establishment of a new USD 350 million syndicated term loan and the refinancing of existing bilateral debt commitments. Our liquidity position remained strong, with cash of $183 million and undrawn committed debt facilities of over $770 million at the end of December.

Shareholder returns continue to increase in line with earnings growth, with a fully franked interim dividend of $0.18 per share declared today, an increase of 20%. And we're also announcing today the reactivation of our dividend reinvestment plan.

And so in summary, our financial results demonstrate the momentum in the business Mike described earlier and, importantly, our continued ability to deliver strong results in a disciplined and sustainable way while, at the same time, investing for future growth. With that, I'll hand the call over to Tim Ford to discuss regional performance.

Tim Ford

Thank you, Matt. Firstly, I'll talk through the Americas regional performance. The Americas, the net sales revenue increased 12% to $605 million, and EBITS grew 2% to $112 million, a very pleasing result given the substantial change we have undertaken in that business. Our new route-to-market model is embedded and is showing positive early signs as we establish ways of working with our new distributor and retail partners and focus on expanding the availability and distribution of our entire portfolio, complemented by the activation of targeted consumer pull-through programs.

In the key states of California and Florida, NSR per case and margins grew strongly as we made great progress with our retail chain partners while we are successfully building distribution points in the states where we are working with our new regional distribution partners. Important to note, shipments remained in line with depletions during the period of the first half of fiscal '19. The strong top line performance was driven by increased volumes and pleasingly, growth across the full Luxury and Masstige portfolio. Whilst the U.S. wine market continues to be flat overall, the Luxury and Masstige segments continue to see growth and remain our focus after we proactively exited lower margin Commercial volumes in previous years, well ahead of what our major competitors have done.

EBITS margin was impacted in the half by higher cost of doing business, which reflects the investment we have made in the sales and merchandising teams to operate our new direct model as well as the transitional costs, which we'll commence removing in the second half as this new model becomes more fully embedded. We do expect EBITS margin to return to growth from F '20 as we remove these costs and as well as we accelerate our momentum operating under this new model.

Elsewhere in the region, Canada and Latin America continue to perform well, supported by very strong customer and distributor partnerships in both of those regions. Turning to 19 Crimes and our exciting plans to drive further growth in this brand, which is in its sixth year of phenomenal growth in the U.S., with dollar sales increasing by over 70% in the past year. We have successfully expanded the 19 Crimes wine portfolio over the past two years and have grown distribution and velocity by introducing new characters via the launch of a Chardonnay, a red aged in rum barrels, a Pinot Noir as well as The Warden, which is our premium offer under the 19 Crimes brand. To build on this momentum, 19 Crimes will now test launch three beers: an IPA, a dry hop pilsner and a colonial style lager in the state of Ohio in March this year. We plan to scale this to selected other states on completion of a successful test in the Ohio market.

19 Crimes will also introduce an 1869 Irish whiskey. The whiskey will launch in July in key locations across North America and will leverage our current distributor partnerships and route-to-market. Turning to Asia which continues to deliver phenomenal growth for TWE. In the half, net sales revenue increased 31% to $394 million, EBITS increased 37% to $153 million as well as EBITS margin growing 1.5 points to 38.9%. Forward days of inventory cover were broadly in line with the prior year as we certainly maintained vigilance around ensuring healthy levels of stock throughout the region both through our partners and throughout the supply chain. Strong top line growth was driven by the increased availability of both Luxury and Masstige wine, complemented by outstanding sales execution by our teams across both North Asia and Southeast Asia. Higher NSR per case reflects a richer portfolio mix, price realization as well as our new product launches, including the successful launch of the Baijiu-infused Penfolds Lot. 518.

Our cost of doing business in the Asian region did increase slightly in this half due to our ongoing investment behind the brand portfolio as well as resourcing within our sales and marketing teams to support and fuel the future growth of this business.

As Mike outlined earlier, we see tremendous opportunity for sustained growth in our Asian business by continuing to leverage our unique operating model, working closely with our partners to drive expansion of our distribution penetration and by continuing to win share of the imported wine category, focused on driving growth across our Australian and French country-of-origin portfolios as well as further optimizing our competitively advantaged business model in China. We expect this strong momentum to continue in the second half, with growth rates slightly ahead of the first half in line with the balanced allocation of Luxury wine this financial year that both Mike and Matt spoke of.

Mike also talked previously about our focus on the French category and our plans to build on our French country of origin portfolio in addition to Maison de Grand Esprit and the Penfolds French champagne that we have already spoken publicly about. Building on our successful launch of the Beaulieu Vineyards brand from Napa into Asia, we will be launching a French wine from the BV trustmark this June. In future vintages, we will also draw on BV's French heritage, our access to exceptional fruit and our winemakers' expertise to produce further Luxury wines under this brand from Bordeaux.

I'll now turn to Europe. In Europe, TWE is continuing to build strong relationships with customers to achieve solid returns across what is predominantly a commercial portfolio. And the performance of the business is evidenced by the maintenance of this 15% EBITS margin for the first half. Pleasingly, NSR and EBITS both increased 5% on the prior period, driven by volume growth across all key regional markets. Along with Masstige-led mix improvement, our strengthened customer partnerships continue to allow us to effectively drive improved distribution of our priority brands and innovations.

And finally, to the ANZ business. Whilst net sales revenue was flat across the region, the ANZ business continues to perform exceptionally well, particularly in Australia, driving EBITS of $77 million, which is up 16% on the prior period and EBITS margin of 23.2%, which has increased by 3.2 points. There was strong top line growth in Australia with volumes increasing 3.8%, well ahead of the market, driven by distribution gains across key customers.

In respect to New Zealand, we are currently cycling the impacts from the distributor route-to-market change in the prior year but are also seeing positive signs in the half with strong depletions growth in the New Zealand market through our new model. All key brands are performing well with growth driven by the Masstige portfolio and the Masstige price points. TWE's launch of canned wines and the spritz-based products this half has also been a huge success that we're really, really pleased with. We are the market leader in canned wine now and have the Top 4 products in the market, even though our competitors have been in the market longer than us.

I'll now hand back over to Mike.

Michael Clarke

Thanks, Timothy. In summary, the results presented today demonstrate the strength of our premiumization strategy, our global balance and, in particular, our regional business models that provide us with an important competitive advantage. We've established a platform for sustainable success, and we believe that our competitively advantaged business model, combined with our increasing allocations of Luxury and Masstige wine, will allow us to continue to grow earnings each year. And we will continue to optimize our business models going forward, setting us up for further future success while continuing to grow earnings in a sustainable, disciplined manner.

As our momentum continues, we reiterate our guidance for approximately 25% reported EBITS growth in fiscal '19 and expect fiscal '20 EBITS growth in the range of approximately 15% to 20%, broadly in line with consensus, with clearly larger vintages being released in fiscal '21, '22, '23 and onwards through our competitively advantaged business models. We'll provide a further update on our expectations for fiscal '20 performance at the year-end results in August. And as always, we thank you for the support that you give our business.

With that, we'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Tom Kierath from Morgan Stanley.

Thomas Kierath

Just a question on the receivables, the $170 million increase. Can you just provide a bit of an update on which region, like a breakdown of, yes, where the increase was? Secondly, how much is past due? I know it increased at the FY '18. And then thirdly, whether there's any factoring happening on those interest costs up a bit?

Matthew Young

Thanks, Tom. Good questions. From a growth in the receivables, it's actually across the board. What I was talking about in my responses was that we're seeing the global sales profile increased more -- this year we saw it increasingly weighted to Q2. I did highlight particularly across Asia and Americas but it has been across the board. To your second point around past due, the level of past due debt is better than it was this time last year and better than June. And as we said at June, there were no issues at all. All our customers are in excellent, excellent positions. And I'm sorry, but I forgot the last part of the question...

Thomas Kierath

Yes. Just the interest cost rising. If there's any factoring and just -- yes, the driver of that.

Matthew Young

Factoring is still on the exact same basis as it's always been. There's been no impact of that in the numbers you're seeing today.

Thomas Kierath

Okay, great. And then just secondly, can you give us an update of shipments versus depletions in China? I note there, there's the chart which shows the expansion in distributions, so I presume that shipments are tracking a bit ahead of what the retailers are selling. Just some numbers there would be really helpful.

Michael Clarke

I think as we've always said, Tom, our shipments are in line with depletions which I am sure given that you cover lots of other wine companies, other companies don't say the same thing. But our shipments are in line with depletions, have been, always will be. And in high-growth markets, we maintain the same forward days cover on the growth for our sales, no change in that at all.

Operator

Your next question comes from Ben Gilbert from UBS.

Ben Gilbert

And just a question for me, just following on from Tom just around the working capital piece. Just in terms of the changes in the U.S. distribution model looking forward, whether that's going to continue to have or is going to have any impact on your working capital metrics as well, particularly -- you might be hiding more stock particularly recently California and Florida having that sort of more vertical offer within that market.

Michael Clarke

Okay. I think you'll find that, that will stabilize over time. Clearly, the two -- the couple of big things that affected us in the current period, one is the change in the route-to-market in America, 40% change in distributors. Clearly, at the fourth quarter of last year when we did that change, we allocated inventory to all our partners. And then you've got a flow-on effect in Q1 while that all settles down and then you start rebuilding this business and growing this business, not chasing volume but growing Luxury Masstige as we go forward. And so you'll find that, that should settle down as we go half year by half year. I'm expecting that to become more orderly pretty quickly.

Ben Gilbert

And just on the costs in U.S., I think it was $10 million that you had in the second half of last year. Should we expect all of that to reverse through the second half of '19?

Michael Clarke

So I think the costs are actually a bit more than that. Some of it is transition cost which I think you're referring to, but then also the direct investment in sales organization, direct sales team as well as the direct merchandising team. And yes, you will find that the transition costs, we will start taking those out in the back half of this year. And they should be completely out of the business by fiscal '20. Not going to get into specific numbers. What we would like to get to now is a process where investors look at how we're growing our business profitably on a year-by-year basis as opposed to getting into the detail on each of the line items.

Ben Gilbert

Great. And just final one for me, just on your comment around the French M&A. In terms of sort of materiality of that and obviously, you haven't announced anything today, but is this -- are we just to expect sort of more smaller vineyards and some distribution capabilities? Or actually sort of some quite significant more material opportunities you're looking at in that market?

Michael Clarke

Best way to think about how we're going to do that is probably similar to the way we run the business in Australia for our Luxury brands here. They will be an outlay from a CapEx point of view to get access to a winery. We will be able to put a lot more through that winery than the current owner put through that winery. And that will be done in a combination of access to vineyards that we would own, access to grower contracts, access to Luxury bulk wine deals. Think about how we've tested this model in the last 18 months with Maison de Grand Esprit, where we had no infrastructure, no people on the ground, no vineyards. We were able to launch a brand, Maison de Grand Esprit, sell it into China, 7 or 8 of those 10 propositions had 90-plus point scores. Being able to now control this more ourselves, having an infrastructure and a team on the ground with visiting winemakers from Beaulieu vineyards, with visiting winemakers from Penfolds in addition to permanent winemakers on the ground and supply chain infrastructure on the ground, we'll be able to now, if you will, supercharge what we've done so far on Maison de Grand Esprit. And we're about to do this with trustmarks that Chinese consumers, Asian consumers and global consumers are well aware of i.e., Penfolds portfolio and Beaulieu Vineyards portfolio.

Operator

Your next question comes from David Errington from Merrill Lynch.

David Errington

Mike, can I get you to refer to Slide 13, which is your inventory analysis, which I really try to follow it closely because it's the future of the earnings, ultimately, of TWE. And I'm trying to get my head around your comments at the bottom there. If you could elaborate, you're basically saying you had a cracking '16 vintage, which is supporting this year's earnings despite all these transition costs that you're wearing above the line. You're still delivering 25% growth despite you're doing some very heavy lifting in transitioning markets. So there's a lot of costs in there but you're still doing 25%. So that's supported largely by the '16 harvest. The '17, I think you're saying, is going to be a bit lower than what the '16 was. So that means that you're going to do 15% to 20%. Then you're dropping these comments there that you got a high-quality, high-volume '18, which we knew was a cracker, and you're saying now that '19 is also going to be a cracker. So not putting words into your mouth, but are you basically inferring, okay, 2020 you're wearing all these costs, you're doing all this transition, you're still going to do 15%, 20% in '20 but come '21, '22, I think your words were you're going to get reacceleration of that growth. Is that what you're saying there? Because those comments, those bullet points are highlighting to me that you're going to have a real step-up again in growth rates in '21 and '22. Is that effectively what you're alluding to?

Michael Clarke

The answer is yes. Let me amplify. So yes, I think what I'd like to -- I don't want people to walk away from this just thinking that we're an agricultural company. We're not. We happen to have a product which comes from an agricultural source. But as everyone knows, the discipline that we've tried to bring into this company is to bring FMCG practices, fast moving consumer goods practices, into the wine business and accelerate the profitability of the wine business. And I think there's a couple of points I'd make. The first thing is you're right with regard to the vintages. Vintage '16, a good vintage. Vintage '17, Australia, an okay vintage. Vintage '18, a fabulous, fabulous vintage from Australia. Fabulous vintage from California also, both with very high conversion rates. And vintage '19 is on track to potentially beat vintage '18. You're right with regard to those years, but I think it's important to land the point that we don't try and sell the vintage in that year. So we allocate the vintage to year 3, 4 and 5 after the vintage. So V16 is '19, '20, '21. V17, '20, '21, '22 and '23. And then V18, '21, '22, '23 and onwards, and the same thing for '19. So what we're doing is instead of trying to make a vintage and then quickly sell it all in the one year which, by the way, would give you a tremendous cash conversion, but you're liquidating future profit and future profit at a higher margin, very important, because our margin's growing all the time because of our advantaged business model. What we're doing by allocating this wine in a disciplined way to multiple years is we're able to deliver profit growth every single year.

Yes, your comment is correct that in fiscal '20, you've got a chunk of V17 coming through, which does have an adverse impact versus fiscal '19 or versus fiscal '21. But if you think about all the other things that we're doing, the self-help, the costs out, the efficiencies we're driving this business, Simplify for Growth, Global Business Services. But more importantly also, our competitive business models, which I still think a lot of investors don't truly understand how competitive our business models are, the Asia business model and then, going forward, the U.S. business model and the margins that we create or additionally -- and by the way, when we have those improved margins, that goes to also our retail partners, which drives their cash conversion. Cash conversion is essential for retail partners. And that's why retail partners want to work with us because it's not just a theoretical profit they can make on our product, we're helping them to pull through the product, they're getting a cash margin in addition to that. And the competitiveness of our business models, I would actually argue, is potentially even a bigger impact on the future profitability of this company as opposed to the vintages coming through. To your point, you're right with regard to your commentary on the vintages, but it's not just the vintages. It's the vintages, it's the self-help, it's the efficiency of how we run this company, it's adjacent businesses we're getting into, champagne, Baijiu, beer. Beer may not be big, necessarily, from a profit point of view but the spirits components from 19 Crimes is going to be big and profitable, so those adjacencies. But all of these are going through our competitively advantaged business model, which I still feel most people don't truly understand. But your answer is correct.

David Errington

And '21, '22, '23 are going to be unbelievable years by the sounds of it. The next bullish thing that I got out of today is that there's been a lot of criticism. I mean, you gave a special announcement to the market. You had to come out because there's a lot of people talking to mates who have got mates who have got mates in China basically saying that you are stuffing the channel in China through Rawson's and all the rest of it. What these Asian numbers today, you've got zero volume growth, yet your Luxury and Masstige grew by, I think Matt said, over 20% in China. And yet your net sales revenue per case is up 30%, which means you're actually taking lower quality wine out of the chain. Is that the right way looking at it? Because your net sales revenue up 30%, your volume growth didn't grow and yet your Luxury and Masstige was up 20%. Are they the right numbers? Did I read them correctly? Because that then seems to me that you're taking Rawson's out of the chain and you're taking noncommercial out of the chain. Is that what you're doing? And could you elaborate a little bit on that, please?

Michael Clarke

The answer is again, yes. I think we pretty much said this last year with regard to Rawson's that we got quite excited with Rawson's and the demand for Rawson's, but realized that we had too many partners that we were working with on Rawson's in China, and it started to become a tradable. And again, I'm going to come back to discipline. The most important word that I'd like investors to take away from us is the disciplined approach to how we're growing sustainably the profit of this company, not just in Asia but also around the world. But we addressed the issue very quickly last year that where we realized that Rawson's was becoming a tradable and so we scaled back on Rawson's, we scaled back on the number of partners, we've got a much better disciplined approach on how we are selling Rawson's in China. And by the way, the profit margin and price of Rawson's has gone up and so therefore, that's becoming more profitable to us. But yes, you're correct, the mix in the current period in the first half was 20% growth, approximately of Luxury Masstige in the Asia market, so it's not just China. And by the way, Asia is not just China, it's also Southeast Asia, it's the rest of North Asia and we're firing on all cylinders across all of those geographies, not just mainland China, and that is what's pleasing with regard to the growth of our business in China.

And as we put more through this competitively advantaged model in a disciplined way, i.e. because we're allocating the wine to future periods not just to the current year, and as it goes through the business model at ever-growing margins, because you've got a relatively fixed cost base, yes our overheads will increase as we grow our business in China as we get into more cities and we'll do that on a basis of allocating more Luxury wine to the market as our vintage releases get released in fiscal '20, '21, '22, '23. The upside potential and the return on the capital that we've -- or the working capital that we've tied up in inventory, the returns get better and better every year.

David Errington

Yes, and given that you've got such an advantage in China where your margins are so much stronger, with your model that you said, I mean, looks like you got a 60% advantage up to the more you sell up there and the more this goes, it's just feeding on itself, so yes.

Operator

Your next question comes from Larry Gandler from Crédit Suisse.

Larry Gandler

So Mike, I would probably ask a question something along the opposite vein of David. One of my observations in China, Mike, is that you're still seeing retail price compression even for now, some of the Luxury brands. Sam's Club and others ran 389, a loss leader. It's not you guys cutting on price. You guys are very disciplined, that is no doubt, especially on Rawson's Retreat. But this makes business difficult for your partners up there, your wholesale partners and your retail partners. So how do you manage through this? What can you do about it?

Michael Clarke

Well, I really appreciate -- by the way, I've got no problem with challenging questions. I think it's actually good because everyone learns through that process. I'm actually really pleased that you talked about the disciplined approach with how we are managing pricing in China and -- but I think to answer your question, you'd have to ask the competitors on how they're having a tough time. I mean, there's a lot of other people that are talking about slowdowns and they're facing up to challenges. And I think in all honesty, Larry, the challenge that they face is they are trying to feed too many mouths. If you go to that PowerPoint chart five, I think it is, on where we talk about our operating model versus others. And by the way, the reason for sharing it this time, we've always shared this in words, we've never hidden this, but I think it actually just helps people to better understand our business model versus others'. The competitors have too many people in their value chain and they're having to give margins to negociants, having to give margins to distributors. By the way, it also inflates the duties that they have to pay, and they're not in control of their business because they're going through third parties, those third parties -- and by the way, distributors represent 99.9% of our competitors in China, we're the 0.1% that is doing it ourselves.

And so therefore, those partners have a huge book of brands, not just company one, but company 2,000 on their list. And they've got all those brands and so therefore, the natural behavior, if you just think about human behavior, their sales force, that distributor team going into customers, they're not necessarily selling 2,000 brands, they're order taking. And when you go through order taking, what happens is the retailer cherrypicks, and the retailer cherrypicks on what they like or what's, honestly, going to drive their cash margin because they're in business to get volume through their stores, to turn that product to turn it back into cash. And I think that's something where we actually excel with our partners in China. We truly drive cash conversion. Now if you look at that model and you actually try and do a value chain comparison, which we're not going to give but some clever folk on this call are going to take that Slide 5 and they will work out what's the value chain for Treasury Wine look like, start with, let's say, $100 bottle of wine and what is the retail selling price if you go through our model, what's the price that you could sell it at on shelf. And then you go through someone else's $100 bottle of wine, going from Australia or from France, pick a geography, I don't care, you will actually find that they would have to sell their products at the point of sale at 2x our selling price, 2x.

Now, and this, I'm talk -- I've got the value chains but you guys can go and create this yourselves. Clearly, we're not selling our products at half price. We're selling our products at a similar price point to our competitor products for a relatively similar product. That just means we've got more to play with, more to use to excite our retail partners, more to pull through and also more to have on our bottom line. And that's why I think there's a sustainability of our model. And what makes our model sustainable, and I've said to you before, you and others, that anyone could copy our model in China. I think we're starting to get to the stage now where people are going to find it really hard to copy our model in China, and let me say why. You need critical mass of the Luxury Masstige portfolio to fund your own team on the ground, being your own distributor. And while others continue to be small or smaller than us, and again, we only have a five share of the market but we're the biggest importer of wine, Luxury Masstige wine into -- or biggest importer and definitely the biggest of Luxury Masstige wine into China. That critical mass is now becoming a disadvantage for others.

And I have discussed, without going into names, other players globally who could try and repeat this model. Some of them are so focused on the United States or focused on other things that they do in the United States. They're not going to allocate a big chunk of their business to the United -- to China, which I would do, by the way, because it's a huge platform that you could grow. This is one of the fastest-growing wine-consuming markets in the world, Asia. And others would have to get critical mass by doing a joint venture or an alliance. And I'd love them to do it because I think they'll be bickering with each other in a JV, so -- and that's my experience of JVs, by the way. So I think that's causing the difference, Larry. I know I've been quite long-winded but I'm trying to -- I think your question's a great question, but I think those are the challenges that others are facing, and it's going to cause them to potentially slow down while we accelerate. And we won't just accelerate with Australian, as David mentioned, the great vintages we've got coming through and we haven't allocated that to Asia yet. We will allocate that to Asia in future financial periods. Once we get going on doing the same thing now with the French portfolio, you're not going to be able to rein us back, and that's going to make it very hard for people to compete with our model in Asia. And I'm sure you're -- given that you come from the states or from North America, you'll start looking at analogies behind what we're trying to do with our Asia model in America to the extent that we can do that in selected states. That was long-winded.

Larry Gandler

That's good, that's fine, but it leads me to that French and American portfolio in China. On the one hand, Penfolds is a well-recognized brand in many parts of China, not everywhere but in many parts, but your French and American brands would be known by only a handful of people there. In the North America, traditional FMCG marketing, you're going to need to talk to the consumer and that costs money. You can't just rely on your distribution mechanism. So how do you do that? How do you get this brand known in China?

Michael Clarke

I'll help you. So Maison de Grand Esprit, I would agree with your point, that requires a lot of work to get people to understand what Maison de Grand Esprit is, what the proposition is about and we will continue to work on that. And we want to keep that as part of our portfolio of three brands, three Luxury, big brands that in some time in the future, let's just go out five years, there'll be three big brands that we will have in China from France. Maison de Grand Esprit will be the lower end of that tier of Luxury brands. Great quality, made to a quality standard, unbelievable margins. We've got margins on Maison de Grand Esprit which are above Penfolds margins. Second thing, Beaulieu Vineyards. Beaulieu Vineyards, we can't get enough of Beaulieu Vineyards to satisfy the North American market and also satisfy what the Asian market is demanding. This is a brand that is working really well in Asia for a number of different reasons. BV resonates with the Chinese consumer. They can pronounce it, they think it's potentially linked to some other Luxury brands that are in the marketplace, I'm not going to mention the other brand's name. But they think that it's a brand that exists already in Asia in other forms beyond wine.

So that is a brand that we're going to find relatively easy to build, to your point, with marketing dollars to build that connection. Think now of the efficiencies of our marketing spend between America and Asia that you're building the proposition, you're building the communication behind the brands and you can use that communication, translate it in two different geographies. Then you go with the Penfolds portfolio, this a brand that they know, it's a brand that they trust, it's a brand that they would like more of. My team would like more of it in Asia. We can't allocate more to them at the moment. We could but then, we're basically robbing year five to deliver the profit -- deliver more profit in the current year, which I'm not going to do. That's the discipline on how we will keep getting margin growth. So another way of getting access to more Penfolds wine Luxury portfolio is by growing our vintages in Australia but also by getting access from France. Remember, some of the wines that we have in Australia for Penfolds actually came originally from Bordeaux, so there's a strong linkage there. So that's going to give us access to be able to get more wine, to be able to sell into China and other parts of the world. Final point I'd say to you, cost of goods for French wine is lower than the cost of goods versus Californian wine. That's also very helpful. Going forward, as we take more share from French in China, it's freeing up more Luxury wine that's available in France that can be picked up, put into our brands and then sold into China, so it becomes quite a virtuous cycle. And so that's the journey that, I believe, we're going to be on for the next 5 years, 10 years.

Operator

Your next question comes from Morana Hunter from Macquarie Group.

Morana Hunter

Just a question on the U.S. You've called out improved P&L metrics in California and Florida where you're making route-to-market changes. Could you just provide some color or numbers around those improvement tricks and then how they differ where you're going direct versus where you've gone from large to regional distributor?

Michael Clarke

They look very good. I think we're not going to break it down, but I will help with the answer. In the same way as we don't break down Asia, for example, and talk about China versus Southeast Asia, et cetera, we're not going to do that for America, but let me help you, though. An average distributor in America generally will make around 18% to 20% margin. Clearly, where we go direct, we pick up that margin. You do have an offsetting cost in that you're investing in your own sales team and we're also investing in our own merchandising team, but I view that as an investment and a platform much like we've got our China business model platform that you can then actually grow a broader portfolio in those states over time. Treasury Wine Estates, it could be other stuff that we do too, that goes through that same platform which is, therefore, margin accretive to our business. So the best way to answer that, Morana, is to say that the distributor margin is about 18% that we pick up and then we reinvest some of that, but then the balance of it falls to the bottom line.

Operator

Your next question comes from Shaun Cousins from JPMorgan.

Shaun Cousins

Just a question on cash flow maybe for you, Matt. Can you just talk a bit about the reason for the moderation in your medium-term or long-term cash flow guidance from, I think it was over 80% or 80% -- 100% down to 80%, particularly curious around two areas in terms of the U.S. route-to-market, while that's accessed -- that provides access to the margin that Mike just highlighted, is it not higher working capital than your previous model? And then also, should we not expect that as you continue to change your mix towards Luxury Masstige across the group, that has exposure to the long-dated production cycle? So can you just talk a bit about those contributors to the reduction in your long term cash conversion target, please?

Matthew Young

Sure. Thanks, Shaun. I think at June, we did say we're targeting 80%. Let me just first focus on why 80% or that less than 100% is the right thing for us. If you compare us to another FMCG company, particularly those going through accelerated growth, the way that other companies may get there is investment in capital expenditure. So invest in capital expenditure, it will take a long time, but that's how they'll get their growth. If you think about us with long-dated inventory cycles, asset-light models and a premiumization strategy, the investment that we have to make is through working capital. They will be in Luxury inventory and it will be investing in our sales profiles and our business models around the world. So that's why we have a slightly lower amount. To that point, when we're in periods of significant accelerated hyper-growth, whichever term you want to use, and investing for future revenue growth, you are going to see points where the cash conversion as a short-term metric does get impacted.

I'm not sitting here punching the air at the numbers or at -- but by no means, that any of us is concerned. Mike touched on the point around discipline. There are easier ways for us to hit cash conversion targets. Rather than sell the inventory in a disciplined and make ourselves on a balanced way as we did which were Q2 weighted, we could have sold it in Q1 and hit our cash conversion target but we would've loaded our customers and that's not good for anyone. Alternatively, we could have delayed some of those sales into Q3 into January, but we would've missed gift-giving periods and missed key sales periods, again, wouldn't have built for long term. So again, we are going to focus on building our sales profile sustainably. We'll continue to invest in growing our long-term Luxury inventories because it locks in our long-term sales profile as well. So I just want to give that context and also just help people understand that the companies like us in long-term growth, we do have to invest, all companies have to invest to drive long-term, sustainable, accelerated growth. For us, it comes through working capital. For others, it's CapEx.

Michael Clarke

If I could build on, Matt. I can't resist, I want to jump in, so if I could just also share a point of view on this, and it goes beyond your question, Shaun. I think the disciplined point is the key thing that I would love investors to take from this call. I hope we have shown that we're not focused on trying to hit a one-year wonder or a one-half wonder or a one-quarter wonder. Yes, we focused on delivering the numbers on in a given year that we've committed to the market that we will deliver, but the bigger commitment is the continuous trajectory of growth. We've had 25% compound EBITS CAGR in the last five years, we're looking to continue to grow this company in the next five years, the next 10 years. That is the number one thing that we're focused on. I actually am not worried about whether we sell some wine in the current year at a certain margin and sell -- versus trying to sell it in the next year or a following year at an even higher margin. I'd prefer the latter as opposed to chasing the volume in the current period.

And so that discipline of making sure that we allocate the wine to different years and we get better margins on that wine every year, every single year, I think, is incredibly important. And the returns that we're giving to shareholders on that short-term tie-up of capital, working capital, the returns we're giving to shareholders, I think, is where we better than an example that Matt's used, for example, of FMCG companies, where some other FMCG companies could be, for example, hitting 100% cash conversion but they're probably delivering 2% growth. I would rather deliver this continuous growth to our shareholders with a working capital tie-up, which is part of growth. And don't forget, structural change, that's also impacted the current reporting period on working capital -- sorry, on cash conversion. I'd rather do what we're doing and be able to deliver this continued highly, highly accelerated growth rate for the last five years and also for the next five years. That, to me, is what we should rather focus on.

Matthew Young

And Shaun, if I can sort of build that and then link back to your original part of the question as well. We will continue to drive both cash conversion but importantly, as I've said before, when we're in this period, we need to focus equally and in our view, quite heavily on leverage. Think about our targets. We're targeting 80% cash conversion over the cycle as our objective and we stand by that. We still think that's reasonable but we will continue to give guidance when there's periods of accelerated growth in investment. But leverage, for us, that's what banks, that's what investors, that's what rating agencies focus on. It's long term and it's not as impacted by short-term fluctuations. And we target 2x across the cycle and up to 2.5x for strategic acquisitions or growth. Someone might argue that if we're at 2x, then we're in this period of significant growth, that's actually quite good. And when you compare that level to some of our peer companies or 2.5x to 4x growth -- leverage, again, we're -- our balance sheet's very flexible and in a very strong financial position. And that's what I just want people to understand. The position on cash conversion is not actually a reflection of our ability to generate cash flows as well. It's actually a demonstration that we can generate returns, generate cash flows and also invest for the future.

Shaun Cousins

Great. And maybe just one clarification -- or two clarifications. One, the U.S. route-to-market change, that is more working capital intensive than what your previous model is, is that the case?

Matthew Young

There's probably two parts to that. One is around when we did the route-to-market change, we did bring some inventory back. So there is a peak there that we said we would work through. And over the course of the year or so, that will work its way through. The second period -- the second part to that is actually the sales profile. We've talked about this before that one of the reasons for exiting and changing our route-to-market there was our previous partners that we worked with have very -- had sales patterns that resulted in big volumes going out at high discounts. We are working through that cycle and we have great ways of working with our new direct partners. And that has meant that we're getting into a new rhythm, a new 12-month rhythm. As a result, as we go through that, the sales profile there as well has been back ended towards the end of the quarter and that's what you're seeing there. But as I said earlier, we still see that as temporary. That will work its way through the cycle. And the reason is not just because someone in finance is going to work through the working capital, it's because our partners believe in the model and they're building into this new way of working. And so, the order profile and the shipping profile will become more normalized.

Michael Clarke

Final note, which I would -- just because we have to get the whole picture out. I think it's important to look at -- in the United States, what we've done in the last two years was we prioritized and I even colocated for quite a lot of time in the states so we could do this. We prioritized the change in the route-to-market, changing our distributors, going to this new model. We've now -- now that the team have done that and we're implementing it and we're now going to continue to grow off that new platform, there's an opportunity for us to revisit capitalizing our business in America and so, we'd go back into that mode of capitalizing our business and our infrastructure in the United States. That's an opportunity that was very hard to grow the business, maintain the business, change distributors and do that also -- and do the capitalizing simultaneously. We would kill the organization so we're going back into a phase of capitalizing just to give you a wholesome answer.

Shaun Cousins

Great. And just in terms of China, could you just indicate what share of your volumes go through the warehouse in the Shanghai free trade zone? And what goes through the distinct or the heritage sort of model?

Michael Clarke

Growing -- best way to answer it is growing quantities will go through the warehouse in Shanghai and growing quantities will go through more than one warehouse in China in the future. We're probably looking at three warehouses over time in China, North, Southeast or East and South.

Shaun Cousins

But it's a minority that goes through -- it's quite small that goes through Shanghai at the moment, is that not right?

Michael Clarke

Historically but yes, going forward, more will go through the warehouse. That's why we've put the warehouse in China.

Operator

Your next question comes from Richard Barwick from CLSA.

Richard Barwick

If you can just clarify, when you're talking about the French acquisition and you put -- catch that in the terms of the three brands, the Maison de Grand Esprit, BV and Penfolds, will that French acquisition basically be the sourcing mechanism for all three brands? Or is it targeted just for BV?

Michael Clarke

Go for it.

Tim Ford

Yes, I'll add to that. Thanks for the question. I guess the model we are looking to build in France is a lot similar with what we've built in our other geographies where we have supply chain footprints whereby we'll have a set of infrastructure that some of which we will own, some we will contract and some we will source on the bulk wine market, for example, and bring together those three brands under that same model. So there will be different wine styles, there will be different products, et cetera, and different sourcing requirements for each of those brands. But it will be led, managed under one set of resources, one team, one winemaking group, with separate winemaking expertise for each of those three brands. So exactly the same as how we would set that up in our other markets that we're in today.

Michael Clarke

I also think we will divulge more when we finish all the negotiations, but it may not be just one infrastructure, it may be two infrastructures, Richard. And it may be an accumulation of infrastructures over time, depending on what is needed. The key thing you should know, though, is whatever is going through that infrastructure today is small compared to the quantities that we know we can put through. But we will keep the brands separate, Maison, Beaulieu Vineyards and also Penfolds and we will also have separate winemakers. So there's separate winemaking teams that are making those wines. So they will be kept separate, they're made to their traditional style, Penfolds' style of making wine, Beaulieu Vineyards' style of making wine. As I say, the winemakers have already been there. They've seen, they've touched, they feel, they like, they want more, they would love to get bigger and we will get bigger in France over time, and it will be done in a way where we kind of know how we want the footprint to look currently in Australia and currently in America. And therefore, we can design the footprint we want in France the way we want the destination to look like as opposed to cobbling lots of different things together. I hope that helps, Richard.

Richard Barwick

Yes, it does. And this...

Michael Clarke

I'd also just add, we do not need any shareholder investment or anything like that to get these acquisitions done. We can do it in the ordinary course of business.

Richard Barwick

I was just going to say, so obviously, this -- the plans within France, is this a change in emphasis? Because up in -- well, certainly over the last 12 to 24 months when you're talking about a lot of the chat around your expanding production capabilities, it's been very U.S.-centric. So is this a signal that you're moving away from the prospects of a U.S. acquisition or does that still remain a possibility?

Michael Clarke

No, not at all. No. I think -- and I'd like to answer it in compounded parts. The first thing is clearly, Maison de Grand Esprit was a trial for us 18 months ago. We -- I needed to prove and my leadership team needed to prove to ourselves that we could make great French wine, made by the Penfolds winemaking team basically, Maison de Grand Esprit. And that we could do that with an infrastructure that didn't have to be 100% owned, and we've proven that to ourselves. Now in order to really have a serious platform that we can grow our French portfolio from, we don't want to use other people's infrastructure to do everything, i.e., vineyards and wineries. We want our infrastructure, we want a permanent team on the ground and the beauty is you can also have visiting winemakers, especially from Australia, going to France because it's contra season obviously, for two different vintages.

So that was the first thing. Proof of concept on Maison de Grand Esprit and now roll it out again with trustmarks that people know, consumers know, business partners know, people want. Second thing is there's still an opportunity, I think, to continue to grow our U.S. portfolio outside of the United States. Clearly, we do need to recognize that in selected geographies, there's some trade wars that are at play, and that does, obviously, affect the value chain. We are continuing to sell U.S. product in Asia. Consumers still want the U.S. product. What we're doing in the short term is we will eat the trade war additional duty or tax. We will take that as a cost to our business. And clearly, our P&L can handle that and you can see that in this first six months results. It has not had any adverse impact on our margin. So we'll eat that and keep consumers engaged with our brands. I can tell you that competitors are finding it very hard -- U.S. competitors are finding it very hard because they don't have the infrastructure that we've got and so therefore, they're probably scaling back or alternatively, passing on the cost and struggling from a financial point of view with their U.S. portfolio in selected geographies where there's a trade war. And then the third part is no, an acquisition in the United States is still definitely something that's on the cards. Taking our advantage to business model and either acquiring someone or merging with someone and putting that through our business model or getting the best of both business models would still make a huge amount of sense for our business. But again, Richard, as we've discussed before, we will only do it if it's at the right price and we can get the right returns for our shareholders. And you know I'm a very impatient person. My team's also grown to be very impatient, but when it comes to M&A, we're unbelievably patient.

Richard Barwick

Yes, understood. And just a final one for me, Mike. Inventory is another fantastic result in terms of the build for the noncurrent inventory. And it's pretty clear that the initiatives that you're able to bring to bear in the southern hemisphere vintage have played out within the northern hemisphere vintage now as well. Has that improvement or the step change in those conversion rates run its course? Or where can you take it from here?

Tim Ford

Yes. It certainly has run its course, to answer the question directly. Yes, we've seen across both hemispheres now that we're through not only investment but also focus in terms of this is what, across our total supply business, we're looking to drive. We see this as continual improvement and continual focus and for want of a better way to put it, we've now set ourselves a new standard that we'll continue to drive year-on-year. So we've got more work to do but very, very positive signs that we'll continue to drive improvement in that area, which is fundamentally very, very important for us to maximize the great asset base that we have in all of our sourcing agents.

Richard Barwick

But, Tim, would the improvements from here be as substantial as what we've just seen come through? Because they were absolutely significant.

Michael Clarke

Yes. I'll help Tim on that one, just to make sure we give the right answer. I think the answer is -- the way to look at this, Richard, is -- and I'm being absolutely genuine with this comment. If you look at what we've done in the last five years and the results we've delivered and we've done that in growing our business, the underlying growth in the top line of our business has been tremendous because it's been Luxury Masstige that's been driving that growth. Yes, we've been changing the mix and we've been walking away from commercial. And a lot of people who understand that see that, that has been the right strategy. I know a lot of people would like to actually see the actual detailed numbers, but we did share a year ago what that growth rate looked like for Luxury Masstige. The beauty now is that we're able to get our hands on even more A-grade, B-grade Californian and also Australian Luxury fruit and juice because of the higher conversion rates that allows us to then amplify those growth rates going forward with whatever kind of vintage that we get, whether it's an okay vintage, a good vintage or a great vintage.

I would see the same thing happening because we're using the same winemakers for the same brands in France as we go forward and so, you should see those same efficiencies continuing to accelerate. And therefore, I'm hoping what will happen is we will continue to be able to optimize the balance sheet dollar value of inventory because you're getting a better mix, a better grade on the balance sheet every year that goes by. The cost differential is not that huge, but the margin differential is quite significant. And so that's the journey from what we've been doing, which was fixing for the last five years, to now growing and then accelerating is what you should see happening in the business going forward, not just with Australian juice but also with American juice and also the French juice going forward.

Operator

Your next question comes from Craig Woolford from Citigroup.

Craig Woolford

My first question, just wanted to understand the movement in gross profit margin. There might be something that's sitting behind it, but the gross profit margin on a constant currency basis across the group was up 90 basis points. During the increase in the NSR per case, which was very impressive, what was increasing in cost of goods? Because I would have thought the mix effect of that would have led to a larger increase in the gross profit margin.

Michael Clarke

I'm going to start and, Matt, if I leave anything out or you want to correct anything, just correct me. I think if you compare that to the same half for last year, the first thing that I'd want to say is that's a tremendous improvement in the gross profit margin, especially when you take into account that we allocated 60% of our Luxury wine to the first half of last year, and we've allocated 50% in the first half of this year. So clearly, that would've helped the mix in last year's financials, and we've got less in the first half this year as a percentage of the allocation, the other 50% we allocated to the back half, and so that is actually -- would inflate this number even more. Second is you've got a good mix of Luxury that we're selling, and we continue to walk away from lower margin commercial. I know, Craig, you'd like me to share that breakdown so you can actually see exactly what's happening, but you'll see there's a greater percentage of Luxury Masstige in that mix, Luxury obviously is helping but also Masstige. If you look at a growth, for example, in Australia, that is a Masstige-driven growth, which is phenomenal what the Australian team is delivering. 3.8% volume growth, margin improvement. We've not increased the allocation of Penfolds to the Australian team just yet, that will come in future periods. That is a further upside that Australia could have, but that -- you're seeing that margin accretion because of the growth of our Masstige portfolio in Australia, in Europe, in America and also in Asia. But those are the things that are driving it. COGS, there have been -- we've had COGS hits where cost of goods have gone up, especially Australian lower cost -- sorry, commercial wine COGS have gone up, and you've got COGS increases also in America, especially in Luxury Masstige but clearly, we've got some offsetting things that we do where we manage costs down. But that's probably the holistic way to look at it without giving you detailed numbers.

Craig Woolford

Could there be anything else related to the shift in distribution, i.e. non-inventory cost of sales?

Michael Clarke

No, no. Not really. De minimis.

Craig Woolford

Okay. And in the guidance, the small footnote, I'm just intrigued by this one more than anything. You say the 15% to 20% EBIT growth assumes no material changes due to vintage. What are you actually referring to there, given the vintage effect is usually multiple years forward rather than the next year?

Michael Clarke

It's cost of goods of commercial.

Operator

Your next question comes from Michael Simotas from Deutsche Bank.

Michael Simotas

Just a couple of quick finance questions to start, if I can. The first one, and it was touched on earlier around the receivable sale facility. I just want to understand exactly what the comment means that no impact. I think when you finished the last reporting period with a balance of about $42 million in that facility, is that effectively been flat over this period? Is that what you're saying?

Matthew Young

Yes. Let me start with an opening comment. I will just remind, when we talked at June, we do have a receivables financing facility. They are with -- based on customers that have a better credit profile than Treasury Wine Estates, so they are an important -- they're a good part of our funding strategy because it results in the source of funds that is cheaper than we can borrow ourselves. So let me put that out there. To answer your second point, yes, we still maintain the receivables facility and it is about the same that we had at June. It is also about the same that we had at December last year.

Michael Simotas

Okay, all right. That's helpful. And then just another question on the accounts. Notes fixed other earnings disclosures, there's a restructuring and redundancy cost in there of $13.1 million, it's expressed as a positive number. Is that number actually an expense or is it a write-back?

Matthew Young

That is an expense, yes.

Michael Simotas

Okay. So a positive number is an expense and there's some negative numbers in that table that are also expenses, so it's a bit mixed.

Matthew Young

Understood.

Michael Simotas

All right. And then if I can just squeeze one in on Asia as well. Somewhat related to the earlier question around NSR per case versus margin. NSR per case drove significant growth in Asia, yet the margin doesn't seem to have followed that. You've mentioned cost of doing business. Can you just talk about the shape of the P&L in Asia? Is it all cost of doing business increase offsetting that NSR per case from a margin perspective? Or is there some gross margin impact there as well?

Matthew Young

No, I think what you're asking there is cost of doing business. So as we spoke about before, we have invested ahead of growth. So as we are building into new cities and we're building into increased distribution, we are increasing our sales and marketing capability. A lot of that investment is to grow into areas that we are not yet selling, so it is growth ahead -- sorry, the investment ahead of growth. The second area we're investing ahead of growth is in some of our new products and our new brands, Lot. 518 as an example. We have invested advertising and promotion spend in there ahead of the growth that we're expecting. So we've commenced sales but things like launch events and investment there has been ahead of the growth that we have coming in the second half.

Michael Simotas

Okay. So gross margin for that region should've actually increased, given the mix and then it's offset by CODB is what you're saying?

Matthew Young

At a dollar level, yes. And you'll continue to see the -- we have seen the margin expand given the same themes that we talked about.

Michael Clarke

And also, recognize if you look at the margin versus last year where there was a bigger allocation of Luxury in the first half, that would've inflated last year's margin, too, versus this year. So you'll see a full -- a better impact on a full year basis just building on the points.

Operator

Your next question comes from Andrew McLennan from Goldman Sachs.

Andrew McLennan

Just following on with the inventory story. You have been building up inventory, obviously, quite aggressively over the last couple of years. The big point of difference this time around is it's all come -- well, so far, it's come through in the first half. Typically, it's all second half skewed. That obviously follows the commentary around the northern hemisphere vintages. But I'm just wondering what else is driving that, and also if you could help us understand what to expect from inventory buildup in the second half as well because this is a very significant step change if it's going to be a build up in both periods, northern hemisphere and southern hemisphere vintages.

Matthew Young

It's Matt here. I think the reason in the first half buildup, couple of things, foreign currency is playing a role there. We've obviously got balances in the U.S. so that is an element. Yes, the success of the Californian vintage is playing a role there. The other aspect is the balancing of -- in F '19 as we release our Luxury. So there are a couple of factors there that are driving the December balance that you see. To the extent that you -- that we talk about the second half, I think the themes we've alluded to today around this, we should continue to expect to see high sales, so you'll see that work through, but you'll also start to see the bringing of the V19 vintage, and that will have its normal peak. But as you -- what I'd point to is at June last year, we did talk about it being a peak and being very good. But because of our lower cost of production, you don't always see that come through in a dollar sense. So I hope that helps at least, I guess, triangulate how we might see it. We're obviously not giving a forecast exactly what that number will be, but those will be the factors that drive it.

Andrew McLennan

Yes. So we shouldn't expect, by that rationale, a doubling of the inventory build that we typically see for 2019. That gives us part -- is that correct?

Matthew Young

No, I don't think you should see a doubling, no.

Andrew McLennan

Yes, yes, okay. So then in terms of the cash conversion numbers, I was just intrigued when you mentioned that there's still a packing facility in place. It may not incrementally impact it but when you look the receivables days, you're sitting at 114 days of COGS, which is well and truly an all-time peak and then that doesn't include the factoring. And I completely understand the financing benefits of factoring with the high-quality clients, there's no issue there, but it's just a very long-dated receivables. Can we expect that to continue if you're going to expand your international customer sales further from here?

Matthew Young

The first thing I'd probably clarify is when we look at sales outstanding, we compare it to revenue rather than COGS, given that, that's a like-for-like basis in terms of sales.

Michael Clarke

Given the margin uplift.

Matthew Young

You're right, given the margin. So I think that's the right metric to use. There's obviously a mix of customers that we have around the world. Some that receive their products shipped, so they have slightly longer credit terms, just to account for the fact that the product does take up to two months to get there. I think we've got excellent sales terms with our customers. We have excellent customers that pay on time, and we have no issues. And so I don't think what you're seeing there is an overly aggressive credit profile that we have. And as I mentioned earlier, our level of customers that are past due is getting better, and anything that would be past due is well and truly covered by insurance because we have insurance on all our customers that have long terms.

Michael Clarke

But it's low, so yes.

Matthew Young

Yes.

Operator

Thank you. Unfortunately, that is all the time we have for questions. I'll now hand back to Mr. Clarke for closing remarks.

Michael Clarke

Thank you very much. We really appreciate everyone dialing into the call. And again, thank you for your support in Treasury Wine Estates, and I'm sure we'll see some of you in one-on-one conversations. Thank you so much. Cheers.