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Treasury Wines Estate (ASX: TWE) is looking to potentially allocate more supply for China ahead of an expected easing of wine tariffs as healthy growth in the company’s luxury Penfolds brands helped improve the group’s underlying earnings globally in FY23.
Treasury is hoping that a thaw in Australian and Chinese trade relations could lead to an early review of punishing tariffs imposed on Australian wines in 2020, leading the company to take a strategic decision to prepare for reallocating higher volumes to China in the second half of this financial year.
However, the company says it is already making headway in China where it has launched a locally sourced and produced Penfolds range branded as One by Penfolds.
The China-sourced wine adds to French and US-sourced products that Treasury says have been key to its global growth strategy.
Treasury Wines has been reaping the benefits of a spike in demand globally for its luxury wine brands which bolstered the group’s underlying performance in FY23.
Treasury Wines posted a net profit of $254.5 million for FY23, down 3.3 per cent from a year earlier.
However, despite a 2.2 per cent fall in net sales revenue to $2.4 billion, underlying EBITS (earnings before interest, tax, SGARA and material items)rose 11.4 per cent to $583.5 million thanks to higher margins.
The Penfolds division and Treasury Americas luxury wine division posted a 14 and 14.2 per cent increased in EBITS respectively.
Profits from the company’s cheaper premium wine division, which includes 19 Crimes, Wolf Blass, Lindemans, Squealing Pig and Pepperjack, were lower with EBITS down 5.4 per cent. This was due to falling commercial portfolio volumes in the division.
Treasury’s bottom line was impacted by a 9.9 per cent increase in corporate costs, driven by investment in cloud-based technology and higher employee expenses.
However, in a broadly upbeat assessment CEO Tim Ford says the group is well placed for the year ahead.
“We made significant progress in strengthening our operating models for the future,” Ford says.
“The Penfolds result was the standout, with strong top-line Luxury growth reflecting the unparalleled strength of this exceptional brand and outstanding execution by the team.
“Treasury Americas Luxury portfolio execution was a highlight, with price increases and growth in distribution achieved despite significant volume availability constraints, setting a strong platform for future growth.
“And Treasury Premium Brands made significant headway towards its new operating model, right-sizing the cost base for the future while enhancing both operational and strategic flexibility, and we will continue to assess additional optimisation initiatives.”
Ford says Treasury Wines is already preparing to allocate more supply to China should tariffs be eased.
“I look forward to that day,” Ford says.
“It’s prudent to give ourselves some flexibility more towards the second half of the year to manage our Penfolds allocation, particularly the Bins and above, in a strategic manner this year.
“It doesn’t change the depletions plan over the year. It’s more our shipment profile where we will look at shipping more in the second half versus the first half than we ordinarily would. (That's) just because the opportunity may exist to reallocate some of that volume to different markets should things change with the China tariff scenario.”
Ford says Treasury Wines enters FY24 with confidence that its ‘premiumisation strategy will continue to deliver our long-term growth ambitions through the cycle’.
“We are a much stronger business today and are well placed to succeed in the current macro-environment where consumer demand for Luxury wine is strong and Premium wine remains resilient,” he says.
Treasury Wines is paying a final dividend of 17c per share, for a full-year payout of 35c per share.
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