TWE Continues Its Rebound from Messy Chinese Break-Up

Australia’s biggest wine group Treasury Wine Estates is well on the road to recovery from China’s trade policy last year that saw tariffs slapped on the company’s wine exports to that country in a move that effectively shut the market to Australian winemakers.

In a presentation to investors and the industry and released to the ASX, Treasury (TWE) on Thursday issued a bullish earnings update and a new five-year growth plan.

The company said in its presentation that 2021 earnings before interest, tax, depreciation, amortisation and industry accounting standard SGARA would be in the range of $495 million to $515 million, above market forecasts and meaning a smaller profit fall than originally feared from the impact of the China ban.

If this range is hit then it means TWE earnings will be up 33% in the June half from the depressed June half of 2020.

It will mean the company’s 2020-21 earnings will only fall between 3.3% and 7% which will be a much better result that the 30% plus estimates at the time of the ban last November (the tariffs were confirmed in March of this year)

The new earnings guidance is well above market forecasts from analysts and saw the shares edge up by nearly 2.7% to 10.22.

That’s still well under the most recent peak of $11.87 in mid-February.

Over the long term, Treasury also noted it was targeting high single-digit average earnings growth along with a group-wide margin of 25%.

The company continues to make efforts to diversify away from China in response to near 200% imposts, placing most of its focus on growing the US division (where it signed a new distribution deal recently) and also expanding its offering into other Asian markets such as Thailand, Singapore and South Korea.

TWE is in the process of splitting into three operationally distinct divisions, covering its high-end Penfolds range, its Americas businesses, and its premium brands.

It announced on Thursday earnings margin targets for those divisions, aiming for 40% to 45% for Penfolds, 25% in the Americas, and the “high teens” for its premium brands many of which will sold into the competitive Australian market.

A big part of these margin targets is a cost cutting campaign now underway.

The China ban has forced the company to shake itself up (it started under former CEO Michael Clarke after the company stumbled in the US market with too much unsold stock and big losses.

There’s the renewed focus on expanding its range and sales of premium and luxury wines. The company is undergoing a global supply-chain optimisation program expected to deliver annualised benefits of at least $75 million by 2022-23, up from the $50 million announced previously.

And China – an afterthought, TWE said in Thursday’s presentation that it is now “ex-China,” indicating that there are no longer any ambitions for what was the company’s fastest growing market.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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