Treasury Wine Estates hits pause on Penfolds demerger plan

Treasury puts its exploration of a demerger of its key Penfolds label on ice while it deals with the fallout of COVID and a new trade hit.

Treasury Wine Estates CEO Tim Ford. Picture: Aaron Francis

Treasury Wine Estates chief executive Tim Ford has provided an upbeat assessment of the winemaker’s trading performance in the new year, including promising signs of recoveries in the US and Australia, despite the looming threat of its thriving business in China being crunched by a trade war.

Mr Ford also revealed that work on the possible demerger of its valuable Penfolds brand has been paused with the winemaker focusing on trading through the COVID-19 crisis, restructuring its US business and dealing with the investigation into anti-dumping by Chinese authorities. Earlier this year Mr Ford had led a review of its high-priced, luxury Penfolds wine brand to structurally separate the business from the rest of its bulging wine portfolio with that the first step in a possible demerger.

Addressing his first annual general meeting since being appointed the CEO of the wine company earlier this year, Mr Ford along with chairman Paul Rayner also updated investors about the latest twists and turns for its business in China with the government there embarking on an anti-dumping investigation into Australian wine that could see the industry hit with damaging tariffs.

Mr Ford said that despite travel restrictions, licensed venues being shut down and populations stuck at home in lockdowns because of COVID-19 the company was seeing an upturn in demand.

This was also evident in China, the first market hit by the coronavirus earlier. Even banquets, were up and running again, he said, and Treasury Wine’s brands such as Penfolds and Wolf Blass were making an appearance on the banquet table.

“Across Asia we have seen progressive and consistent recovery of demand month on month, with depletions for the total Treasury Wine Estates brand portfolio growing 14 per cent in the first quarter versus the prior year,’’ Mr Ford said.

Mr Ford said in the US the wine category is still seeing strong growth in retail channels with 12 per cent value growth in the first quarter.

“Importantly, a strong premiumisation story continues to play out, with above $11 price points growing 23 per cent during the same period and above $20 the fastest growing price segment. These premiumisation dynamics set a very positive backdrop for our Focus 9 brand portfolio that is performing very well, growing value … collectively by 32 per cent in the first quarter.

“As a result, our US business has delivered depletions growth across all channels for the quarter of 5 per cent across the total portfolio, and more importantly 31 per cent across our Focus 9 brand portfolio.”

Mr Ford said while this performance is particularly pleasing, there continues to be the ongoing restrictions in the on-premise channels in the United States, and in its California based cellar doors which have both historically been strong profit contributors to the business.

“The upcoming Thanksgiving and Christmas holidays, which are key selling periods in the US, will be very important to our first half performance in the Americas region.”

In Australia, trading conditions are consistent with those the winemaker called out at the full year results, with elevated retail performance driven by the above $10 price points. Treasury Wine’s performance continues to be weighted to the masstige and lower luxury portfolio, and its masstige portfolio is growing ahead of the market, up 21 per cent value in the first quarter, he said.

In Europe, the Middle East and Africa Treasury Wine continued to see strong performance through retail channels in the UK, where its portfolio grew 17 per cent value in the first quarter, along with Continental Europe and the Nordics. Performance declines continued in travel retail, Middle East & Africa and the on-premise due to channel closures.

Turning to China and the announcement in August of anti-dumping investigations into Australian wine exports, Mr Ford said the company remained focused on the long term value and prospects of its business in the region.

On Wednesday, Treasury Wine advised the market that the Chinese Alcoholic Drinks Association had applied to the Chinese Ministry of Commerce (MOFCOM) requesting that imports of Australian wine in containers of two litres or less into China be subject to retrospective tariffs.

“Firstly, these investigations do not change our long-term commitment to China and we will continue to focus on building our brands in this market, and further developing the deep relationships we have with our customers and strategic partners,’’ Mr Ford said.

“Secondly, we welcome the opportunity to participate in this investigation directly, and the team is currently responding to detailed information requests by MOFCOM - we respect the process and will continue to fully co-operate as these investigations continue.”