Thank you for standing by, and welcome to the Treasury Wine Estates Business Update. All participants are in a listen-only mode. There will be a presentation, followed by a Q&A session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Tim Ford, Chief Executive Officer. Please go ahead.
Thanks, operator. Good morning, everyone. Thanks for joining us. Joining me on the call today is Ben Dollard, our President of Treasury Americas, based in California, and Stuart Boxer, who's today, our Chief Strategy and Corporate Development Officer, and tomorrow, our Chief Financial and Strategy Officer. So it's appropriate Stuart took the lead today. It's certainly my pleasure, you know, to announce to you all today that we've agreed to acquire the highly acclaimed luxury U.S. wine brand, DAOU Vineyards. DAOU will no doubt be an outstanding addition to the Treasury Americas portfolio, and more broadly, the TWE group portfolio. We strongly believe that the acquisition will deliver substantial strategic and financial benefits for TWE and its shareholders. DAOU is one of the largest and fastest growing brands at luxury price points in the United States.
To give you a sense of its positioning, it's one of the few brands globally we believe can rival Penfolds in terms of scale at these price points, and it's only in the U.S. As I stated up front, we're very optimistic around the strategic benefits. It's important that we deliver to our portfolio. This acquisition is 100% consistent with our stated strategy to continue the premiumization of our portfolio and expand our luxury footprint in the United States. From a group perspective, it also accelerates our premiumization focus. It increases the NSR contribution from luxury wine in our portfolio to more than 50%, while being accretive to key operating metrics, including earnings growth, NSR per case, and EBITS margin. It also will firmly establish Treasury Americas as a leading luxury wine business in the United States.
It will fill the gap in our portfolio between $20-$40, in addition to strengthening the portfolio at higher price points. As the largest segment by price point in the U.S., with a total size of $2.6 billion and growing at 7%-8%, this was a key focus for us. Finally, it will also provide the scale to support a future standalone Treasury Americas luxury division and team. We certainly believe that these strategic benefits, which I'll talk to in more detail shortly, are significant and will reinforce the foundations that we have already established for delivering sustainable growth over the long term.
But also from a financial perspective, this acquisition will be funded with a combination of debt and equity and is accretive pre-synergies and expected to deliver mid- to high-single-digit EPS accretion for shareholders in its first full year, inclusive of pro forma synergies. In terms of the transaction itself, we have agreed to acquire 100% of DAOU for an upfront consideration of $900 million. In addition to this upfront consideration, there is a contingent earn-out of up to $100 million, payable in the event that the direct-to-consumer channel and/or DAOU's ultra-luxury tiers delivered NSR growth over and above pre-agreed targets. I note that these targets have an embedded growth rate factored into them that must be achieved before any earn-out payments are triggered.
The upfront consideration is to be funded by AUD 825 million underwritten pro rata accelerated renounceable entitlement, or put more simply, PAITREO, a AUD 157 million Australian dollar placement of TWE shares to the existing shareholders, Daniel and Georges Daou, and a new U.S. acquisition debt facility of $350 million, which will also cover the transaction-related costs. Stuart will certainly cover this in more detail later in the call. This proposed funding structure results in a pro forma leverage of 2.5x FY 2023 EBITDAS, with strong cash flow supporting the deleveraging of the balance sheet back within our target range of 1.5x-2x range by the end of FY 2025.
Another important impact of the transaction is it will unlock cash tax benefits from the ability to deduct the amortization of goodwill for U.S. tax purposes. These benefits, which are cash in nature only and therefore not reflected in the EPS accretion metrics, average $12 million per annum over the 15-year period and carry an NPV of $100 million. From a multiple perspective, the upfront consideration implies 12.8x calendar year 2023 EBITDAS. Given the accretion that the addition of DAOU will deliver, we are also announcing today the upwards revision of our long-term EBITS margin targets for both Treasury Wine Estates as a group and Treasury Americas as a division, to the high 20% EBIT margin range, up from a previous target of 25% for both.
We expect the transaction to complete by the end of this calendar year, and clearly subject to some regulatory approval processes also. So in relation to DAOU, the business, I'm not gonna go through this in detail right now, as Ben will cover shortly, but a few brief facts that I'll leave you with at this point. The DAOU business is born and raised and based in Paso Robles, in California, founded in 2007 by Georges and Daniel Daou. Paso Robles, for those that haven't had the pleasure of going there, sits basically in the middle of Los Angeles and San Francisco, and is a fast-emerging wine region, home to the fastest-growing luxury Cabernets in the United States today. DAOU's brand portfolio is focused on five tiers, with luxury price points ranging from $20 up to U.S.
$500 per bottle, sold through a diversified channel mix right across the country. Importantly, DAOU has a common and strong distribution partner, with RNDC being their key partner, similar to Treasury Wine Estates. This will certainly minimize the transition risk upon completion. DAOU's financial metrics are simply compelling. At U.S. $195 NSR per case, EBITS margin of 30%, and a three-year NSR and EBITS CAGR of 45% and 61%, respectively. And very pleasingly, both George and Daniel will remain with the business ongoing as partners to TWE, and importantly, will also become shareholders of TWE. Coming back to the strategic rationale, I reiterate our excitement with the material benefits we see this transaction delivering to the TWE portfolio. A reminder, increasing our luxury exposure to 50% of NSR, creating a leading U.S.
luxury wine portfolio, and enhancing our presence in the strategic $20-$40 per bottle category. We also see real opportunity to leverage our global distribution network and the scale and presence of our business outside of the United States, created largely with Penfolds, to take DAOU to the world, along the way, building another truly international global brand. And finally, it does provide the scale, this acquisition, to enable a future standalone Treasury Americas luxury business, which we will cover shortly. So with that, I'll hand over to Ben, who can talk more about the DAOU business. Over to you, Ben.
Great. Thanks, Tim, and good morning. It's a pleasure to join you today from California. I'm thrilled to share with you an overview of DAOU Vineyards. The brand is a perfect complement to our existing luxury portfolio, and this acquisition underscores our ambition to lead the U.S. luxury wine market. Treasury Americas has a world-class luxury portfolio, of which DAOU will serve as the cornerstone. We now have a portfolio with iconic brands that cater to every luxury consumer, including Penfolds, Frank Family Vineyards, Beaulieu Vineyard, Stags' Leap Winery, Beringer Vineyards, and Etude Winery. The U.S. remains the largest market for luxury wine globally. Premiumization continues to be an overarching trend as consumers enjoy better quality and higher priced wines, driving growth rates in the above U.S. $20 price points.
Over the past three years, we have executed against our strategy to reshape our portfolio and build a culture that focuses on the consumer in order to capitalize on this very attractive market opportunity. Today, we expand our luxury portfolio with DAOU, a highly acclaimed and fast-growing wine business of significant scale. This slide highlights the strong operating and financial metrics that Tim touched on earlier. The foundation of the DAOU portfolio sits in the growing $20-$40 price point, an existing gap in the Treasury Americas portfolio. On the chart on the bottom right shows the market-leading performance of DAOU over the past three years, growing over 6x the rate of the luxury segment in the same time period. We admire DAOU's absolute quality at every touch point, from the vineyards through to consumer engagement.
DAOU's portfolio of exceptional, high quality, and highly rated luxury wines have been carefully made and loved widely by consumers. DAOU's understanding of the new luxury consumer is evidenced by the brand's consistent market-leading performance. DAOU's wineries, vineyards, and consumer experiences are esteemed with deep Paso Robles roots. The organization and culture that founders Daniel and Georges have created are world-class. We're excited that Daniel and Georges will continue to be very engaged in the future growth of DAOU as founders, and Daniel as chief winemaker. The DAOU portfolio offers something for every luxury consumer, with absolute quality across five tiers. The Discovery and Journey tiers have played a central role in building the brand. The Soul of a Lion is an innovative luxury wine and the crown jewel of the portfolio.
DAOU Reserve and Patrimony are introducing consumers to the best that Paso Robles has to offer, with Patrimony sitting comfortably alongside some of the world's most renowned ultra-luxury wines. The growth being delivered right across the portfolio exemplifies DAOU's reputation with consumers and the long-term potential of this brand. We see significant opportunity to expand DAOU's reach beyond the U.S. with our vision to take the brand global.... Founder and winemaker, Daniel Daou, has taken enormous pride in hand-crafting exceptional wines from the Paso Robles region, utilizing technology and innovation to produce award-winning wines. DAOU has received widespread critical acclaim, consistently achieving outstanding results. DAOU has a strong consumer obsession. Central to this is DAOU Mountain, an outstanding experience which welcomes over 90,000 guests annually, and was recently voted the number one tasting room in the U.S.
In addition, DAOU has benchmark-setting expertise with in-market activations, including luxury events and partnerships, and through the DAOU+ app, to drive direct engagement with consumers across the US. Paso Robles is an emerging, dynamic, and fantastic destination, which is home to amazing hospitality. It welcomes millions of visitors each year. DAOU has a significant presence in the region, particularly in the Adelaida sub-district, the region's premier luxury wine-producing area. Paso Robles has a favorable production and sourcing cost, and further diversifies Treasury Americas' sourcing footprint. Over the past three years, the growth of luxury wine from Paso Robles has been exceptional and well ahead of market. We strongly believe DAOU's team and culture will be an asset to Treasury. It's clear we share common values. We've enjoyed getting to know Georges, Daniel, and the management team.
We expect that we can learn from each other, and look forward to their continued involvement in realizing the next generation of growth for DAOU and Treasury. DAOU's impressive recent growth trajectory reflects growing distribution and demand across the entire portfolio. This is led by the Discovery and Journey tiers, supported by distribution growth, as the brand has expanded successfully outside of California. Looking ahead, we expect low double-digit revenue growth over the medium term, driven by continued category-beating growth in the Discovery and Journey tiers, accelerated growth in the ultra-premium tiers, which will be supported by recent sourcing investments and portfolio innovation. Thank you. I'll now hand back to Tim in Melbourne.
Thanks, Ben. I'm now going to step through each of the key highlights in detail of the strategic rationale, but I would also just emphasize up front, this is a unique opportunity. This acquisition presents a unique opportunity for TWE to add a high-quality, luxury business of scale to our existing portfolio, as well as the significant value creation we see coming from the acquisition of TWE and for our shareholders. The acquisition accelerates, without doubt, our luxury-led premiumization strategy, a strategy that we've outlined and been consistent on now for a number of years, and will be immediately accretive to key operating metrics. From a Treasury Americas perspective, to start there, the luxury contribution to NSR will increase from 38% to 53% of sales.
NSR per case goes up 21% to $181, and EBITS margin will increase 1.3 percentage points to 26.1%. Just as importantly, from a Treasury group perspective, the luxury contribution will increase from 43% of sales to 49% of sales. NSR per case increases 6%, and EBITS margin will also increase 0.7% across the whole company. More importantly, you can see from the page that the acquisition is very, very consistent with the journey we've been on, and accelerates the delivery of a number of the key portfolio targets we've outlined to the market and to investors, and those key quality operating metrics that we worked pretty hard to achieve.
This next slide demonstrates how the acquisition creates a leading and iconic luxury U.S. wine business, which will have tangible benefits and drive value on the back of that. We will drive distribution through all sales channels and have the multi-brand platform to create consumer-led luxury experiences like no other. Our combined sales team, the combination of Treasury Wine Estates and DAOU, I assure you, will be highly motivated about the opportunity to go to market with this portfolio of iconic brands and highly rated wines. And I also assure you, our distributor partners will be just as highly motivated. Here on the next slide, we set out the financial profile of the U.S. luxury business within Treasury Americas, post this transaction.
The combined Treasury Americas luxury business will have a highly attractive financial profile in its own right, contributing 1.7 million cases, AUD 643 million of revenue, and AUD 198 million of EBITS, all in AUD. Equally impressive is the NSR per case, at AUD 386 per nine, and a 36% EBIT margin, post the realization of run rate synergies. These metrics benchmark very, very favorably to any other luxury wine business, building another outstanding luxury pillar for TWE, alongside Penfolds in our global portfolio. As I said earlier, the acquisition will see us achieve our previously stated 25% EBITS margin targets for Treasury Americas. As such, today, we are revising that target to the higher 20% range.
This slide outlines the 20-40 dollar bottle segment, which is valued at $2.6 billion, or approximately two-thirds of the luxury wine market in the U.S. and is growing at around 7% and is still growing today. This is a segment of the market where we've been on record as being underrepresented and therefore, a focus of potential M&A. DAOU addresses this. The addition of the business will increase our NSR in this price point by 144%. Noting also, that DAOU is the standout performer, growing well ahead of the market in that price point. In the upper luxury price points, the reserve estate, Patrimony tiers, simply strengthen our Treasury Americas already strong portfolio when you combine it with Stags' Leap, Beaulieu Vineyard, Beringer, and Frank Family Vineyards.
The Daou brothers and their team, in particular, have done an incredible job building this business, and we're now really excited at the opportunity to further build and grow the business as part of TWE. Over recent years, particularly in the last three, we have made investments in our sales and marketing capabilities and our route to market model changes. Everyone's well aware of the shift we've made in the U.S., in particular, over the last three years. All of which creates an excellent platform to continue the growth of our existing luxury portfolio in combination with DAOU. The team's certainly ready to take that on. Today, as you see on the screen, DAOU's weighted distribution is below that of key luxury peers nationally, and also that of Treasury Americas distribution for our luxury portfolio in the top 10 U.S. markets.
We combined have the opportunity to leverage this deep distribution platform with the support of RNDC, which, as I said, distributes both TWE and DAOU wines today, which simplifies and de-risks the bringing together of these two businesses. DAOU's distribution is also currently weighted towards California, so further expanding outside of California through our existing platform will be a key priority for the team and a capability we have in-house today, and reflects a very, very similar playbook to what we were successfully implementing and are implementing with Frank Family Vineyards, which we acquired almost two years ago. So beyond the opportunity in the U.S., we also have conviction in our ability to establish DAOU and Patrimony as renowned international brands.
Our existing global distribution platform of scale, combined with the experience of building Penfolds into a global luxury icon, positions us very well to drive long-term growth for DAOU and Patrimony all around the world. We know that growth in the luxury wine segment is not unique to the U.S., and we have the essential building blocks to grow global awareness and establish them both as leading wine brands across the globe that nobody else can do. We will target key luxury consuming markets, including Asia, where through our existing platform, we already have a very strong understanding of what resonates with both the existing and the emerging luxury wine consumer. Clearly, the other significant opportunity which exists is through integration with material production and overhead cost synergies of more than $20 million per annum, expected to be realized by FY 2026.
The key sources of cost synergies have been identified through enhancing the utilization of our winemaking network, including our existing Paso Robles Winery, something we haven't talked about to investors much in the past, but is our second-largest winery globally, behind our Barossa Valley facility. We'll optimize sourcing through supplementing DAOU's supply with our own vineyard and grow a network of scale. We'll achieve savings across planning, procurement, logistics, and we'll optimize SG&A. Realization of synergies will commence in F 25, with full run rate realized by F 26. We expect one-off costs of approximately $27 million to achieve these. Having completed a very thorough diligence process, I would certainly describe these synergies as low risk to achieve.
We are very, very confident in our ability to realize these in accordance with the timeframe outlined, particularly given the network that we already have in the United States, as well as our track record of delivering these supply chain costs in particular. So in addition to a strong strategic rationale, we believe the acquisition will also deliver strong value accretion for TWE's and its shareholders, very importantly. The transaction has been carefully structured to ensure alignment of interest with the founders and financial returns for our business and for our shareholders. The upfront consideration includes a U.S. $100 million placement or AUD 157 million placement of TWE shares, which will be subject to escrow.
There is a contingent earn-out of up to $100 million, payable in three tranches to the extent that pre-agreed net sales revenue targets for our direct-to-consumer business and the ultra-luxury business are met in calendar year 2025, 2026, and 2027. These targets do have growth rates built into them such that if the earn-out was to be payable in full, the $100 million would represent a multiple of 3.5-4.5 times the incremental EBITDAS required to trigger such a payment. In our minds, payment of the earn-out in full implies a very, very good outcome for the business and for TWE shareholders. As I touched on upfront, there is also a material cash flow benefit of average $12 million per annum over the next 15 years, due to the ability to amortize goodwill for U.S. tax purposes.
Not a reason to do this transaction, but a good outcome. This has no impact on tax expense of the P&L, and therefore, this cash flow benefit is in addition to the expected EPS accretion. In terms of the transaction multiples, $900 million upfront considerations US, as I said, implies a headline multiple of 12.8x, which compares favorably to other recent transactions in the sector, including our most recent transaction with Frank Family Vineyards, which was 13.2x two years ago. The acquisition will be EPS accretive pre-synergies and mid- to high single-digit EPS accretive, with the cost synergies fully realized in our first full year of ownership. Lastly, really important slide to absorb. The scale of the DAOU acquisition is a truly transformational acquisition, not just for Treasury Americas, but for TWE.
As a consumer-obsessed business, our first step, the way we're going to run the business going forward post this acquisition, will be to establish two consumer-focused portfolio divisions, commercial units, the like within Treasury Americas: a luxury commercial unit and a premium brands commercial unit. Over time, and with scale, we'll also consider the possibility of creating a standalone Treasury Americas luxury division, as well as bringing our premium portfolios together around the world to focus on the brands' activation investments tailored to those premium consumers, which we know are different to the luxury consumer. So with that, over to Stuart.
Thank you, Tim, and good morning, everyone. It's good to be with you all. We will fund upfront consideration and transaction costs through a combination of new equity and new acquisition debt facility. Today, we've announced an AUD 825 million, fully underwritten, renounceable entitlement offer, with retail entitlements trading. We value the support that all our shareholders provide, both institutional and retail, and we believe this structure delivers the fairest outcome for all our shareholders. The 1 for 9.45 entitlement offer at AUD 10.80 per share, represents a 9.8% discount to the theoretical ex-rights price and a 10.7% discount to yesterday's closing price. Additionally, we've established a $350 million acquisition facility, which will fund the debt component and the transaction costs.
In determining the appropriate funding structure for this acquisition, maintaining the strength and flexibility of our investment-grade capital structure has been paramount. Reflecting this, pro forma leverage to 2.5 times based on F 2023, sits comfortably inside our publicly disclosed capital management framework, and supported by strong cash flow generation, we will expect to return into our target 1.5-2 times range by the end of F 2025, with deleveraging to commence from the second half of F 2024. Importantly for our shareholders, we also intend to maintain our existing dividend policy within the long-term payout range of 55%-70% of net profit after tax. As previously mentioned, the equity raising has been structured as a renounceable entitlement offer, which will comprise both an institutional entitlement offer and a retail entitlement offer.
Eligible retail shareholders will receive further details in a retail offer booklet next week. The institutional component of the equity raising has been launched this morning and will be complete by Thursday, 2 November, followed by a retail entitlement offer, which will open on Wednesday, the 8th of November, and close on Thursday, the 23rd of November. The pro forma balance sheet illustrates the impact of the acquisition and equity raising at 30 June 2023. Please note, this is illustrative only at this stage. Turning now to the outlook, which on a standalone basis, excluding DAOU, remains unchanged from the update we provided at our AGM earlier this month. For FY 2024, we remain well-positioned to deliver growth in line with our long-term ambition of high single-digit average earnings growth, in addition to continuing EBITS margin expansion.
EBITS will be weighted 55% to the second half of the fiscal year, reflecting the planned phasing of shipments as we retain operational flexibility while the expedited review of tariffs on Australian wine in China progresses. Importantly, I want to emphasize that our current outlook does not assume any incremental earnings from China, and nor does the timing or outcome of the review impact our full year shipment plan. Assuming a completion date of 31 December 2023, we expect DAOU to contribute EBITS of between $23 million and $25 million in our second half of FY 2024, and this reflects the historic weighting of DAOU sales to the second half of the calendar year.
Finally, as a result of the immediate margin accretion that DAOU will deliver, we have revised up both our long-term Treasury Wine Estates group and Treasury Americas margin targets to the high 20% range from 25% plus and 25% respectively. Thank you. I now hand back to Tim.
Great. Thanks, Stuart. Look, that's the overview we wanted to give of the business. I recognize that, particularly for Australian-based people on the call, that this is a new brand, so I'm sure you've got lots of questions. So let's get into it.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on speakerphone, please pick up the handset to ask your question. Your next question comes from Michael Simotas from Jefferies. Please go ahead.
Good, good morning, everyone. My first question is just around the process for the sale of this asset. Was it a competitive process? Just interested in the timing, why perhaps you wouldn't have waited for a little bit more certainty around China. And, may not be the best comparable, but Duckhorn's share price has effectively or more than halved, it trades on 10 times EBITDA. Are you confident that the price you're paying is reflective of the devaluation of U.S. wine assets?
Yeah. Good morning, Mike. Thanks for that. Look, I think from a perspective of... I'll actually start with the finish and we'll start with the China piece, so let's get it out of the way first. You know, I think our business has multiple growth opportunities. This is another one in the U.S. Now, what- in terms of waiting for China, I don't see why we would wait for China. We have a plan that is great in terms of growth. If China does come back at the end of this review process, then it's just going to open up another opportunity there within China. So yeah, we see this as building a couple of real strengths from that point of view.
But in terms of the more important topic, which is, you know, how we got to this point around DAOU. Yeah, it was not a competitive process. You know, DAOU is a business that we've been monitoring pretty much since we, you know, since we did the Frank Family Vineyards acquisition two years ago, as we sort of turned our attention to once we get the confidence and the financial capability, you know, to make another acquisition, potentially in the United States, what was gonna be our key target? And DAOU stood out, you know, on all metrics and all the things that we've explained to the market previously. So this is not a new target opportunity for us, but the timing, you know, became, we believe, earlier this year right for us to engage with Georges and Daniel.
It has been a multi-month process. I wouldn't say multi-year process, but a multi-month process whereby, you know, they had to make a decision on, you know, where they saw the best future for their family brand and their business that they created with their team. And I think Ben and I spent a lot of time with George and Daniel, and, you know, we believe together we have serious alignment in terms of our belief, in terms of the luxury consumer, what a luxury wine business can create. And then when you bring our portfolios together globally, that together you are gonna be stronger than separate. So that unlocked the dialogue, for a better way to put it, and then obviously we end up where we are today.
So that's the story in terms of how we got here. In terms of the price and the multiple we paid, you know, we think it's a fair multiple. You know, we think the value of the business, the growth profile of the business, which has been strong, will continue to be strong. You know, at 12.8x is favorable to our own multiple, is around the mark of what we would look to pay for a high-quality business. And this is a very, very high-quality business on every front. I assure you, there's nothing to fix, nothing to augment. Our task is to continue to let it grow the way it's been growing in combination with our team.
So when we look at that versus other opportunities, whether it be, you know, Duckhorn business or others, you know, I'm not going to really comment on other competitors, et cetera, but this has been a target for us for a while, and we're really, really pleased to build the trust of George and Daniel to get to this point.
Got all your bits. Thanks.
Thanks, Mike.
Thank you. Your next question comes from David Errington from Bank of America. Please go ahead.
Good morning, Tim. I don't know what it is with TWE CEOs in Australia that think you can succeed in the U.S. So, my question, Tim, is: I just can't understand why when you've never delivered in the United States, the business is still only doing $200 million of EBIT. Frank has yet to deliver and won't be until at least 2025 that you'll be able to deliver. You're buying a business that's under 7% return on capital. You need at least 15%, given the history of the U.S., to create value. You're pulling in tax credits on amortization to sort of like pseudo-justify it. I've never seen that before, anyway. I just don't get why you wouldn't buy back your own stock and leverage up Penfolds. Penfolds is the growth business of Treasury. It's what all our shareholders want increased exposure to.
I just don't get why you need to keep doubling down in the U.S. Why do you need this secondary growth market when you've got such an outstanding business in Penfolds? How do you justify paying something 7% less return on capital? You need at least 15% to justify it, given the track record in the U.S., given the risk. Explain it to me, please, Tim, because I just don't get it.
Thanks, David. Look, multifaceted, as always. So look, I think where I'll start with the best way is just look at the U.S. I'll start with the why, why not just focus on Penfolds? I think as you, as you see where we've outlined, what this U.S. luxury business now creating the largest market in the world, where consumers continue to consume more luxury wine. I mean, we've got a strong competence. And I think in the last three years, you know, I'm not going to go back over the last 20 years. I'm accountable for the last three. Yeah, I think our performance and the changes we've made over that period of time has set us up, you know, to be able to do an acquisition like this.
When you bring it with our luxury portfolio to drive the business, to have a very, very strong second business, you know, in the luxury space with Penfolds standing right next to it. Yeah, there's no reason why we can't do both. Penfolds is not gonna be starved of any investment. It's not gonna be starved of any. It gets what it needs. And I've said this multiple times: Penfolds clearly is a beautiful business, and we give it what it needs to continue to grow. We believe we can have a very strong second business next to Penfolds in the luxury wine space, so that's important. And we've been clear on that with what we're driving strategy-wise. And understand, we have a disagreement on a misalignment on strategy, and we disagree with that, and that's fine.
But that's why this delivers on all of that. This improves every operating metric we have in terms of the business. The quality of this business goes up exponentially with this acquisition. Yeah, no, no doubt about that. So that's, that's the reason why we continue down this path. We have a strong belief in the team in place to actually grow this business. Stuart, you can cover the, the return on capital.
Yeah, sure. So, thank you. In relation to the return on capital, yes, I understand your, your mathematics on day one. Certainly, we've outlined in this presentation the opportunity for growth for this business for us, both in terms of the top-line growth and also the material synergies that we see is available, which we, you know, gives us confidence about an the return on capital improving relatively quickly. I think that, so we, we're very confident about where that lands. The other comment that I'll make in relation to your, your tax credit comment, David, is that that relates to tax law in the U.S. that gives us real cash from the deductibility of that goodwill, which is U.S. tax law.
We're just outlining that because it is a real cash benefit that will come to the company over time.
Yeah. Thanks.
Thanks, David. And look, I'll just reiterate, I said it in my spiel earlier, yeah, we are not banking this acquisition on the tax credit line, right? This is a cherry on top that we're not using on any metrics or decision-making processes. It's something that flows through based on the uniqueness of the U.S. structure. So don't think we're trying to, yeah, add that in to make the metrics look better. We are not. Thanks, David.
Thank you. The next question comes from Lisa Deng from Goldman Sachs. Please go ahead.
Hi, just wanted to understand a little bit on the run rate of the DAOU business. If we look at the NSR per case in CY 2022, it actually was falling below $190. I think I've got $188. And also, with the historical run rate being, I'm just looking at the NSR now, actually, you know, closer to 30%, why are we forecasting? Well, sorry. First of all, why are we expecting the NSR per case to go back to almost $195 for CY 2022? What happened in CY 2023? What happened in CY 2022? Second is, if we've got, with the historical run rate of growth at 30%, why do we only expect low double-digit growth going forward? And then I've got a second follow-up as well, if I can.
Sure. So I'll take that one. The mix-driven NSR per case variance is really just mix driven, Lisa, so, and that does happen year-on-year, so that's not a big thing in our minds. Certainly, on the growth rate, I think, you know, the growth rate has been very strong historically. I think as the business gets bigger, just the law of big numbers means that the rate of growth will reduce in the future. So we've outlined the growth targets that we have going forward, which are still very solid and we think are very achievable.
Thank you. Your next question comes from Richard Barkwick from CLSA. Please go ahead.
Good morning, guys. Just following on from Lisa's question, you actually talk about just the Discovery and Journey tiers that'll be driving the revenue growth. I couldn't see what they were, like, what price points, and really, what I'm interested in is the implication for future EBITS margin.
Yeah, sure. Richard Barwick, good morning. It's a bit like the I was waiting for Tom Ford again one day. Yeah, I mean, just the Discovery and Journey tier are that sort of $20-$30 price points, and when you look at the distribution growth from a national level within the United States, yeah, with a Californian-centric model at the moment, we've seen certainly, the first step around our growth is around getting that on more shelves and taking the distribution forward, particularly on the East Coast. So for a period of time, you know, we certainly see that as being a key driver of the top-line growth. The luxury and D2C business, which is the higher, higher margin, as well as there's some growth ambitions, they're largely contained within the earn-out structure as well.
So which is over and above what we've outlined in terms of the financials with what we would term our base case. So we still see, yeah, all, all tiers growing, Richard, but certainly the way we've structured this arrangement with the, the earn-out structure in particular, we, we certainly see the, the first instance, our model can really drive the discovery entry-level tiers very strongly in the first year in particular.
In terms of margin, you know, we think that sort of broadly around the margin, where it is around that 30%+ margin, pre-synergies, yeah, we'll continue to drive it at that level for the first couple of years, and then as the luxury tiers kick in with the earn-out structure, which we do plan to pay, it'll be great for all of us if we pay it, then you'd expect the margin to increase there and then roll in the synergies, get you, you know, to that high mid-30s type number. Does that make sense? We're being a little brutal on the cutoff today of questions. So again, we only have half hour, so we have plenty of time to follow up in you know, subsequent calls over the next few days.
Thank you. Your next question comes from Ben Gilbert from Jarden. Please go ahead.
Morning, guys. Just following up on a couple of other questions around the timing. Just understanding bandwidth, you've actually got to do this in the business at the moment because you've got 19 Crimes, you're obviously still trying to get that going again, which feels like it's taking longer. You had some challenges around second half U.S. earnings. You got Frank's, which admittedly going for a while, but you're still ramping. Presumably, you're gonna have to source a whole bunch of juice to build up the global capability here. You got Penfolds, obviously trying to push into China. It just feels like you've got a lot on, trying to now bring in a big acquisition, which wasn't—doesn't sound like it was a competitive process.
How confident are you to actually be able to execute on all these things, particularly in the U.S., given, as sort of been talked to, and you know, another one on your watch has been a tumultuous 10-15 years around execution?
Yeah, I love the fact that 10-15 years, everyone. So thanks, Ben. It's again, I'll worry about the last three. And I think we've shown we can actually do significant things with the team there in the US, you know, at once, and still deliver the business, notwithstanding some of the things we've outlined in the past, of course. I'll let Ben answer this, but I'll just give a broader summary around the Penfolds—this distraction in the question around Penfolds versus Treasury Americas. All right, we will do both. Let's not... Don't be concerned that this will take away from anything to do with the trajectory of Penfolds. We divisionalize this company so that we have separate focus, separate teams, separate people. That is what they worry about.
Tell them that Penfolds team, "Do not worry about integration in the United States," I assure you, and I'm sure we'll all agree, they're doing a pretty good job with Penfolds. Yeah, we're ready if there's a change in China to clearly, you know, take that forward as well. But Ben, do you want to talk about from a U.S. perspective, your readiness? Because the reality is, you're driving it.
Yeah, sure. Hi, Ben. Look, I think for a start, the opportunity is very clearly aligned with our strategy for growth, and I think that's a really important consideration. It is not replacing our existing ambition. It's simply building on it. And so to that end, we're not walking away from any of our existing organic growth plans and opportunities. However, you know, as you think about the portfolio, you think about where the consumer is headed, and you think about the quality of the business that we're acquiring, you know, it really does, I think, allow us now to continue the journey we've been on, which is creating a world-class luxury footprint.
And, you know, just on the opportunity as it has come to us, you know, we're always looking at opportunities and they have to be the right ones. And as Tim mentioned before, the conversations we've had with Daniel and Georges and the team, this is absolutely the right fit for our portfolio, and it's an absolutely beautiful brand. And again, it's not gonna take away from the other priorities we have in the business, you know, including as we think about 19 Crimes and the focus on that, the growth of Matua, and executing against our Frank Family acquisition plan. So, you know, I'm very confident that we'll be able to continue to manage the portfolio and now welcome in a really hot and exciting brand.
I think the other thing, Ben, to add to that is there's some, there's some nuances here between Frank Family and DAOU as well. Yeah, and the largest one is, you know, Frank Family - DAOU, DAOU's a bigger business. Obviously, we paid a higher price. I get that. The management team within DAOU and the broader team within DAOU, some 250 people within that DAOU team, coming together with our team, we have significant resource, you know, when you bring these two businesses together, and high quality resource that, you know, with what we've seen in the discussions we've had so far, a very, very similar mindset and a capability, you know, to deliver and to do both the strategic as well as the operating on a daily basis. So, yeah, we shouldn't...
This isn't Treasury Americas taking over DAOU. This is a combination of the two businesses for those luxury portfolios. It's a really important point. DAOU is the cornerstone of this future luxury business in the U.S. Thanks, Ben.
Thank you. Your next question comes from Tom Kierath, from Barrenjoey. Please go ahead.
Yeah, morning, guys. Just to back up Arrow's point, I mean, the Americas business at the moment makes less money than it did in 2019. You've had a big FX tailwind, and you had AUD 40 million from Frank, so I'm just not sure where the, I guess, the compelling kind of reason to do this deal comes from. But anyway, that's not my question. My question is just on the actual earnings of DAOU. So I think in the presentation, you've said here, the three CAGRs are 61% CAGR, and it did AUD 63 million of EBIT. It will do that in 2023. Is my math right in thinking that the business did AUD 15 million of earnings in 2020? Can you maybe just talk through why it's gone up so much over such a short period?
Yeah. I think your math, without having myself to that, I'm sure it's right, Tom, 'cause you always are. So, I'll take that as truth. Yeah, I think, I mean, the biggest change from DAOU's point of view, where they started to really, really explode their distribution was when they started working with RNDC, you know, some three years ago. That was the start of real success for them in the United States. And as we've seen, and we've talked about a lot, having the right distribution partner who's building your brand, driving your brand, is a big, big part of the success. And DAOU made that change to RNDC, and that really has driven it.
I think separately, the expansion of the portfolio, which did start with purely the Discovery tier, when they came to market, a number of years ago. But as they've broadened that portfolio and innovated to meet the more consumer needs, they've got a much broader portfolio, higher margin at the top end, and their D2C business on the back of the brand gaining presence in the United States retail channel, in particular, and on-premise. But in California, yeah, has really significantly increased at that time. So, yeah, we're very confident as to why they've grown. We understand why they've grown. Hopefully, my answer, you know, outlines that.
It has been, you know, quite outstanding, and we certainly see there's a lot of runway to go, when you look at the numbers, the way we've looked at distribution, we've looked at the markets they're in, and how we align that with our portfolio. So your point's right, and thanks for the upfront commentary.
Thank you. Your next question comes from Bryan Raymond, from JP Morgan. Please go ahead.
Good morning. Just again, trying to understand the business you're acquiring here a bit better. I just noticed at the end of the presentation there, your channel mix and sourcing is a little bit surprising, with only 4% of grapes seem to be sourced from their own or leased vineyards, and most of it is obviously from third-party growers. And then quite a large off-prem exposure as well for a luxury business. I would've thought it maybe would've been skewed the other way. So can you just help us understand sort of how this business is structured, like the... and really what you're buying in terms of the asset quality of the business?
Are you buying a brand, or are you buying the quality of the winery itself and what they're growing and then the provenance? Thanks.
Yeah. Thanks, Bryan, for the good questions. I mean, realistically, we're buying the brand. You know, there's assets, quality assets behind it that have been invested in. From a vineyard perspective and a sourcing point of view, the owned vineyards are at the top end, so they're ultra-luxury and certainly supplying the Reserve tiers, the Estate tiers, and the Patrimony tiers. The model for the Discovery tiers, et cetera, is around grower networks, et cetera, which, from our point of view, yeah, we think is quite a strong model they have, particularly around Paso Robles, and it allows you to scale. And as we bring that into our winery network, we certainly have the capacity to bring that in pretty much by next vintage.
So that's, that's an important part of the synergy piece as well. So from a sourcing point of view, yeah, it's in good shape. From a channel mix, yeah, I think given the business, yeah, over time, has grown up, if you like, in retail with, you know, the DAOU brand and the Discovery tier, I'm not surprised by the level of the retail or the off-premise percentage that exists in the business. Certainly, the mix is shifting from off-premise to more towards on-premise, and the D2C business is partly becoming a bigger part of their earnings going forward as well. So it makes sense. I think your point is valid. Slightly different to when we explained Frank Family. You know, we started on-premise.
This does have a very strong on-premise business, but largely more Californian-focused than certainly on the East Coast. And again, we see that as that distribution opportunity. But yeah, your view of it's right, and it is slightly different to the Frank Family mix, that no doubt you would've understood when we went through that. So good questions, Brian.
Thank you. Your next question comes from Craig Woolford, from MST Marquee. Please go ahead.
Morning, Tim. My question, I'll try two parts, given we get cut off at the end. Firstly, do you have even just a guide as to roughly where revenue was in 2019? And the purpose of that is just trying to understand what the business looked like pre-COVID. And then you talk about that this brand could rival Penfolds as one of your more positive statements in the, the address. What did you really mean by that over time?
Yeah, I'll take, I'll take the second, and then the guys can, Stuart can jump in on the first. So when you look at the attributes of this brand and the way it connects with the consumers, the way they've executed the experience, the luxury experience, everything about it is high quality and luxury. We've done some fairly extensive, yeah, testing of this brand in markets around the world, and it does give us confidence as part of our due diligence process.
Now, I'm not sitting here to say we've just bought the next Penfolds, but the attributes of this brand, when you link it with how we can build luxury brands, you know, around the globe, and we've shown we've got that capability, particularly with Penfolds, we certainly are setting ourselves a task to build this brand internationally, in its own right, in its own way. But certainly as a luxury brand, we see, we see some really significant opportunities in international markets, particularly in Asia, over time. And also, the thing about the model, you know, going forward with the DAOU brand, we've aligned this with Georges and Daniel as well, is it doesn't always have to just be a Californian brand over time. Everyone knows our model is we build brands, and we build brands that consumers love.
Now, whether that's made in wine is made and sourced in California or France or Australia, you know, it's a model we'll certainly look to roll out with DAOU over the future years as well. So the essence is there, and the characteristics are there for DAOU to achieve something like that, well ahead of, I think, other brands we have in the portfolio today. Stuart?
Yeah, so in terms of your revenue, Chris, I'm going to make two comments. First, I don't have 2019. You could do the math on 2020, which I think will give you AUD 69 million as the number when you back solve with the CAGRs. I think the other thing, it comes back to Tim's point, which is, given the growth of this business over the last few years has really been driven by the change in distribution, particularly with RNDC, a 2019 comparator is really probably not that valuable anyway.
Thanks, Craig.
Thank you. Your next question comes from Phil Kimber, from E&P Capital. Please go ahead.
Hey, guys. Just a quick question on the sort of margin structure. I mean, the margins, you know, 29%, 27%, 30% over those last three years. You know, revenue's nearly doubled, and percentage margin hasn't really moved that much. So I'm just wondering why the incremental margin, you know, for a business like this, isn't significantly higher. Has there been a lot of costs put back in the business? Just wanted to understand that a bit better. Thanks.
That good pick up, Phil. One thing George and Daniel have driven with their management team is they invest ahead of growth, and they really do invest, and the quality of that investment pays off in future years. And that's a premise they run that business by and have run that business by. Now, it gets to the scale it's got, you know, across the U.S. in particular, that's where we can see improvement in that margin structure going forward. You should see the leverage through the P&L actually improve over time, but a very deliberate strategy to invest in the brand experience, in bringing the brand to market, as they've gone through this, what has been a fairly significant growth phase. So that is what's driving that.
Thank you. Your next question comes from Sam Teeger from Citi. Please go ahead.
Oh, hi, good morning. Can you talk to us a bit more about the timing of taking Patrimony to Asia? Just, you know, how much excess wine do you have right now? Can you do this while you're also increasing your U.S. distribution? And any color around how much you intend to increase sourcing in the short and medium term. And then just kind of a follow on from that, in the U.S., volume growth has been really, really strong the last few years. Should we assume depletions have been in line with the volume growth?
Thanks, Sam. In terms of, in terms of Patrimony, there's a difference between this acquisition and the one we've explained in the past, which is the business has created the wines in the last two, three vintages, and including this current vintage, which is looking like an absolute cracker in the U.S. They've created the wines to enable the growth going forward. Big difference to when we acquired Frank Family, where we had to wait, you know, till now or till end of this year, fiscal year, to be able to really grow that business significantly. So there is the wine there, the sourcing's there. The investment that's been made in the vineyards does unlock incremental growth.
I know the percentage of vineyards might look small on the chart, and that's a, it's a right pickup, but the volume of that Patrimony growth is gonna be supported by that. So we certainly have more wine to sell. In terms of the potential growth into Asia, as you can see in the disclosures, you know, the international business is very, very small. So once we start to understand that brand, once we own the business, bringing that brand into Asia, we'll be better positioned then to give a further view of what the timeframe of that ambition looks like, Sam. What was the outro last bit?
Uh, depletions.
Depletions.
So, look, this is a business that has been growing strongly. In a growing business, you tend to see, you know, shipments, you know, growing pretty quickly. We're really comfortable, though, with the balance there between shipments and depletions.
The inventory levels are fine?
Yep.
Okay. One more?
Thank you. Your next question comes from Jason Palmer, from Taylor Collisons. Please go ahead.
Yeah, thanks. So just carrying on from that, that supply question. I mean, the business has been growing really strongly. I think you said they've been creating, inventory ahead of the curve. Are you able to sort of talk to how, or whether that's actually caused any, any stock outs, relative to where you want to sort of stock the, the product? I just know the category-wide distribution's still under 70%.
Yeah. No, Jason, it's inventory levels are fine across the market. Future inventory, as you can imagine, doing an acquisition like this, we've been quite forensic in terms of linking what inventory exists to be able to make sure we can hit the growth targets that we've got and the numbers there. So yeah, it's in really good shape in terms of the access to that high-quality inventory that we need to do it. The good part about the Paso Robles region, we know it very well 'cause we've been there for, you know, 20 years. I said I wouldn't talk about 20 years, didn't I? So we've been there in the last three, we know that. And the region has incremental sourcing available. It's a fantastic quality region. It's lower cost of goods.
The cost of land, which drives the cost of grapes in California, as we all know, is significantly lower than Napa Valley as well. So for us, you know, to have a luxury brand that's famous for coming from Paso Robles, cost structure-wise and ability to expand sourcing, yeah, is a significant advantage. All right. That was a very quick Q&A. So as I said, just to ensure we got as many questions out, apologies for not necessarily enabling the multi-part questions that we normally do, but we'll have plenty of time to talk to everyone over the next few weeks. Thanks for dialing in. Please keep reaching out with the questions. Important to understand this acquisition, and, you know, we look forward to explaining it to you and bringing it to life. So have a good day. Cheers!