Treasury Wine Estates profits to fall on Chinese standstill

Treasury Wine Estates profits to fall on Chinese standstill

The Asian market was a shining light for Treasury Wine Estates (ASX: TWE) until recently, but the Covid-19 outbreak has led the company to cut its earnings forecast downward for the second time in 30 days.

In late January the group slashed its profit forecast for FY20 by 15 percentage points, driven by challenges in the US where a leadership change had disrupted business and the market was drowning in oversupply with heavy price discounting.

That revision was in parallel to an otherwise strong Asian business that notched steady growth of 19 per cent in the first half to reach $175.5 million, or more than three-quarters of total profits.

However, since then the paralysation of many sectors of the Chinese economy has taken its toll, including on wine consumption.

"Whilst the full operating and financial impacts of the outbreak are yet to be fully determined, TWE now has sufficient information in its possession that would indicate consumption across discretionary categories in China has been significantly impacted through February, and that this impact on consumption is expected to be sustained to at least through March," the Melbourne-based business said in an update today.

"As a result, TWE no longer believes that it will achieve the previously provided guidance for F20 reported EBITS growth of between 5 per cent and 10 per cent."

Treasury clarified its staff in China have not yet returned to the office due to infection containment controls, and continue to work from home.

"The same situation is being experienced by TWE's partnership network, including wholesalers, retailers and logistics providers," the group said.

The positive news is that depletions performance - reflecting the movement of stock - was strong and in line with plans in the lead-up to Chinese New Year reflecting strong marketing and pull-through programs across its brand portfolio.

But after the celebrations, consumption across discretionary categories has been "significantly adversely impacted".

"TWE will however remain vigilant in ensuring its shipments into the market are appropriately calibrated to the rate of depletions once consumption normalises," the company said.

"The COVID-19 outbreak may impact performance in markets outside of China, however at this stage this is not expected to have a material impact.

"Asia is a predominantly Luxury wine sales region, and TWE has the flexibility to allocate Luxury wines to later fiscal periods or other geographies in order to deliver sustainable earnings growth. Should the impacts of COVID-19 be resolved in F20, it does not expect its F21 plans to be impacted."

TWE shares were down 3.96 per cent at $11.17 at 4:30pm AEDT, representing their lowest market close in more than three years. 

Earlier this month the company also announced its CEO Michael Clarke would retire effective 1 July, to be replaced by Tim Ford.

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