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Treasury Wine Estates kneecapped by China tariff hit

Penfolds owner Treasury Wine Estates says it is positioning itself for a renewed push at growing the business again after heavy tariffs imposed by the Chinese government crushed its previously lucrative China business.


Chief executive Tim Ford said an overall 7.5 per cent drop in net profit after tax for the December half to $109.1 million was a solid result with the mainland China market effectively closed, the pandemic hitting hospitality venues and the company having gone through a large restructure internally.


Treasury Wines was the biggest Australian exporter of wine to China but was stung with a tariff.


Earnings from the mainland China business tumbled to just $2 million in the six months ended December 31, compared with $78.2 million a year earlier. Australian wine exporters sold about $1.3 billion worth of wine a year to China before the tariffs were imposed in November 2020.


Treasury Wines was the biggest Australian exporter of wine to China but was stung with a tariff of 175.6 per cent for five years. Two-thirds of Australian wine producers have simply given up selling to China.


Mr Ford said Treasury Wines is now shifting from a “mindset of recovery and restructure to one of growth and innovation”.


It now reports financial results from its flagship Penfolds brand as a stand-alone division. Penfolds reported a 19 per cent drop in earnings before interest, tax and the SGARA agricultural accounting standard (EBITS) to $165.1 million. Penfolds margins slipped by 1.4 percentage points to 43.1 per cent.


Treasury has been steadily building up its export business to other Asian countries including Vietnam, Thailand, Malaysia and Japan, but it wasn’t enough to offset the China tariff hit.

Mr Ford said outside of mainland China, Penfolds revenues increased by 49.1 per cent. Mr Ford wants to chase new customers for the Penfolds brand and expand global distribution and availability further.


The Treasury Americas business lifted EBITS by 19 per cent to $85.2 million, with margins rising by 4.2 percentage points to 18.3 per cent.


Treasury Wines has been steadily exiting from lower-priced commercial wine operations in the United States and its strategy is to shift further into the premium end of the market. The company on November 18 announced it had acquired luxury chardonnay maker Frank Family Vineyards in the Napa Valley in California for $US315 million ($434 million).


Treasury Wine shares were trading at $12.50 on January 5 but had drifted down to below $11 over the past few weeks. The stock was at $13.20 at the end of August.


Overall, Treasury Wines revenues for the six months ended December 31 slipped by 8.8 per cent to $1.3 billion. The company kept its interim dividend steady at 15¢ per share.


Frank Family Vineyards was established in 1992 by Rich Frank and sells wines in price brackets from $US38 to $US225 per bottle across grape varieties including chardonnay, cabernet sauvignon, pinot noir and sparkling wine. It is the No.2 player in the luxury chardonnay market in the United States. Frank Family Vineyards is a high-margin business delivering 37.9 per cent earnings margins.


One of Treasury Wines’ fastest-growing brands in the US is 19 Crimes, which sells at a substantially lower price than the Frank Family Vineyards portfolio.


The 19 Crimes brand, fronted by a big marketing and advertising push featuring American rapper Snoop Dogg, has grown into a 5-million-case-a-year business around the world, but generates most of its sales in the US.


Simon Evans writes on business specialising in retail, manufacturing, beverages, mining and M&A. He is based in Adelaide. Connect with Simon on Twitter. Email Simon at simon.evans@afr.com


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David James Connolly







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