Treasury Wine Estates plans cutbacks of $100m as weakness persists in China and the US

A downturn in China and the US is unlikely to improve in the near term for Treasury Wine Estates (ASX: TWE) as the company behind the Penfolds brand looks to slash $100 million from its cost base amid weakness in luxury wine sales in its key global markets.

After abandoning plans in October to deliver earnings forecast for FY26, Treasury Wine Estate today forecast pre-tax earnings of between $225 million and $235 million in the current half-year. This compares with EBIT of $391.4 million in the first half of FY24.

However, Treasury Wine expects pre-tax profit in the second half of FY26 to higher than the first half.

The review of operations, and the planned cutback in expenses which may also impact dividend payments to shareholders, follows the appointment of new CEO Sam Fischer at the end of October.

Fischer says that among the measures to shore up the business will be a reduction in customer inventory holdings in the US and China, as stock depletions in these markets begin to moderate.

The company is also planning to significantly restrict shipments that are contributing to “parallel import activity” in China, largely to protect the strength of the Penfolds brand.

Parallel imports in China have become a significant problem for the company’s Penfolds brand where the wine is distributed through unofficial channels, bypassing official distributors and sold at cheaper rates.

“We are currently experiencing category weakness in the US and China, two of our key growth markets, which will impact our business performance in the near-term,” says Fischer.

“Maintaining the strength of our brands and the health of their respective sales channels is of critical importance to our management team and our board as we navigate through the current environment.”

Fischer maintains the view that Treasury Wine Estates is a “high-quality business with strong foundations in place for sustainable, profitable growth”.

“Our powerful portfolio of brands, leading market positions in attractive growth markets, unparalleled supply chain and highly engaged, capable team are all considerable strengths that position us strongly to deliver sustainable, profitable growth over the long-term,” he says.

“I’m energised by the opportunity to accelerate a transformation agenda to reshape TWE for its next era, leveraging these strong foundations.

“We have commenced work to identify opportunities to simplify the way we operate, to strengthen our execution focus right across the business and to realise significant cost benefits.”

Treasury Wine’s brands, which include Penfolds, 19 Crimes, Wolf Blass, Lindeman's, Wynns, Beringer and DAOU Vineyards, are sold in about 100 countries, with the portfolio dominated by the luxury and premium price segments.

The group has vineyard and production assets in the Barossa Valley and Coonawarra in Australia, Napa Valley and Paso Robles in the US, Marlborough in New Zealand, Bordeaux in France, Tuscany in Italy and Ningxia in China.

Treasury Wine says the benefits of the $100 million cost-saving program will start to be felt in FY27 with full benefits expected to be realised across a two to three-year period.

The company says Penfolds is experiencing growth in stock depletions in key markets, led by Bin 389 and Bin 407, which are “performing well”.

However, the ultra-luxury products in the range are performing below expectations, despite still recording growth globally. Depletions refer to the volume of stock being sold by distributors with the recent performance reflecting weakness in the global fine wine markets.

“In China, depletions grew 21 per cent in the three-months to October, including through the mid-autumn festival period,” says the company.

“Depletions growth is expected to continue in China, albeit at a lower rate than the original F26 operating plan, which was set prior to the recent changes that have impacted the frequency of large-style banqueting.”

In the Americas, Treasury Wine says the luxury wine market continues to moderate, down 2.4 per cent in the latest 26 weeks compared to the 3.5 per cent growth reported in the company’s June update.

This has been impacted by weakness in California due to changes in its distribution network in the west coast state. Outside of California, depletions have increased by 2.3 per cent in the Americas in the year to date.

But the hit from California has seen the Americas division's depletions fall nationally by 4.6 per cent in the year to date.

Treasury Wine expects leverage to remain above the 1.5 to 2.0x target range for the next two years as the company rebalances customer inventory.

Leverage in the current half is forecast to come in at a higher rate than this – at 2.5x.

Despite the challenges, Treasury Wine says it has “strong liquidity and several levers available” to pull back leverage to its target range.

Unfortunately for shareholders, this includes a review of the company’s dividend payout ratio, in addition to potential non-core asset sales and a review of capital investments.