Treasury Wine Estates says Penfolds sales have been smashed by China’s tariffs

The bruising trade war with China has sunk sales of Penfolds, but its owner Treasury Wine Estates has seen strong demand for the luxury wine brand in other parts of Asia.

Treasury Wine Estates boss Tim Ford said the winemaker has shifted its focus from a mindset of ‘recovery and restructuring’ to one of ‘growth and innovation’. Picture: Aaron Francis

Treasury Wine Estates chief executive Tim Ford says the winemaker is well advanced on its herculean task of redirecting hundreds of millions of dollars worth of premium wine once sold into China to other markets just as they reopen from pandemic lockdowns.

The upbeat outlook for the nation’s largest winemaker and a solid performance from its operations over the December half spanning Australia and Asia to Europe and the Americas helped push shares in Treasury Wine 13.5 per cent higher and gave investors comfort that the loss of China trade hadn’t totally crippled the company.

Shares in Treasury Wine rallied to a high of $11.97 after it posted interim results showing a 7.5 per cent decline in its profit to $109.1m as sales fell 10.1 per cent to $1.267bn.

The stock later closed up $1.23, or 11.67 per cent, at $11.77.

While it is still a long way short of its high of just under $19 before the global pandemic hit in late 2019, and the Chinese government imposed its punishing tariffs in 2021, the share price has recovered almost 15 per cent in the last 12 months as Mr Ford and his team rebuild the business to adjust to the new realities of a closed China market.

The December half accounts still wore the bruises of the China trade war.

The former golden goose for Australia’s biggest wine company, its business has almost been completely destroyed by tariffs with earnings sourced from mainland China in the last six months of 2021 slumping to just $2.1m from $78.2m a year earlier.

China’s crippling tariffs on Australian wine sunk Penfolds earnings by 19 per cent but Treasury Wine was able to limit the pain by posting earnings growth in the Americas, a better performance by its premium wine portfolio and strong demand for Penfolds in other parts of Asia.

Mr Ford said the winemaker had now shifted its focus from a mindset of “recovery and restructuring” – which saw it last year trigger a restructure of its operations – to one of “growth and innovation” as it set its sights on revenue growth and improved earnings.

Key to that was redirecting wine once destined for China to other markets.

Analysts believe Treasury Wine has succeeded in shifting 50 per cent of that volume, while Mr Ford would only comment that the winemaker was ahead of schedule on this volume shift.

“The way we look at it is when we started this year, at the start of this journey of relocation – and building demand, particularly for the Penfolds wine that was destined for China – we outlined that was going to take us between two to three years,

“And after year one with that and the results today … we are well down the path and pretty pleased and probably slightly ahead of where we expected to be at the end of the year,” Mr Ford said.

Treasury Wine Estates, which owns brands such as Penfolds, Wolf Blass, Pepperjack and Squealing Pig, said that net sales revenue per case rose 16 per cent in the half as drinkers sifted to higher priced wines.

The company said its focus on portfolio premiumisation increased the contribution of the luxury and premium portfolios to 83 per cent of group net sales revenue, up from 75 per cent in the previous corresponding period.

The results for Treasury Wine Estates now reflect the restructure pushed through last year by Mr Ford with the company operating three key divisions of Penfolds, Treasury Americas and Treasury Premium Brands.

It declared an interim dividend of 15c per share, fully franked, flat with last year and payable on April 1.

Treasury said Penfolds reported a 19 per cent decline in earnings to $165.1m although reduced shipments to China were partly offset by strong growth across global markets and channels, with net sales and earnings outside of mainland China rising by 49.1 per cent and 32.1 per cent respectively on a constant currency basis.

Treasury Americas reported a 18.8 per cent increase in earnings to $85.2m. Its Treasury Premium Brands division reported a 19.3 per cent increase in earnings to $39m as net sales declined 5.6 per cent, with the impact of reduced commercial portfolio volumes in Europe, the Middle East and Africa as well as Australia and New Zealand moderated by the growth of premium portfolio brands, including 19 Crimes, Squealing Pig and Pepperjack.

Mr Ford expected trading conditions for the remainder of fiscal 2022 to be broadly consistent with those in the first half.