After a traumatic year, Treasury Wine Estates, Australia’s biggest producer, has reported surprisingly resilient results and an upbeat prediction for the next year.
In a year that saw it confronted by the global on-trade shutdowns as the coronavirus pandemic caused huge upheavals, Treasury preserved its full-year profit despite losing its key China market thanks to Beijing’s unilateral imposition of swingeing tariffs on Australian wines.
Effectively that killed Treasury’s largest export market, which was reflected in a $A77.3m (£40.5m) slump in earnings from mainland China and a 15% drop in overall earnings from Asia as a whole to $A205.4m (£108m).
Despite that, the owner of brands such as Penfolds, Wolf Blass and Lindemans made a net profit for the year to June 30 of $A250m (£131m), a 1.8% increase on the previous performance, which itself was heavily depressed by the effects of coronavirus.
That prompted sufficient confidence for the company to reward loyal shareholders with a 62% increase in the annual dividend.
Sales for the year were just 3% lower at $A2.56 billion while earnings before interest and tax were just 0.4 % lower than a year ago at $A510m.
Despite the tariff body blow from Beijing at the start of this year, Treasury’s shares are up by almost a quarter to just over $A9 since early January: they have recovered by almost 50% since Beijing signalled its intention last summer to punish Australia’s winemakers for receiving alleged unfair subsidies.
The shares fell marginally in the wake of the results, not because investors were disappointed but more due to the fact that the company signalled that its cost base would remain high despite rigorous efforts to pare it.
Earnings in the year were largely maintained on the back of strong growth in the mid-range portfolio that includes brands such as Pepperjack, Squealing Pig, Beringer Brothers and Matua, particularly in the Americas, European and Middle East and Antipodean markets.
Consumers in countries such as Thailand and Singapore also turned to more expensive wines, helping the company boost sales from its luxury and premium portfolio, offsetting reduced sales at restaurants, pubs and clubs due to lockdowns.
It was also favourably noted that despite loss of the China market, Treasury had determinedly resisted the temptation to reduce the price (and margins) on its premium Penfolds range.
It has also restructured its organisation to operate more effectively as three divisions, Penfolds, Treasury Premium Brands and Treasury Americas.
Having rapidly reorganised its business to concentrate on developing Asian markets outside China and selling off millstone commodity brands in the US, Treasury’s management were rightly upbeat.
“Despite a backdrop of significant external disruption, we have delivered on the priorities we set for ourselves at the start of the year, and therefore we remain very well placed to deliver on the long-term growth ambitions,” chief executive Tim Ford said.
“We’re very much looking forward to controlling what we can control and being in the driver’s seat of our future,” he said.
When international travel to and from Australia resumes, one person Ford might choose to thank personally at the earliest opportunity is American rapper Snoop Dogg, who has become the face of the fast-growing 19 Crimes brand.
The strength of the 19 Crimes helped Treasury’s US business perform strongly, raising its earnings by 23% to $A168.3m despite the sale of the commodity lines that had long hampered Treasury’s US business.
Ford said 19 Crimes was fast becoming Treasury’s second global brand next to Penfolds and the group is widely is expected to soon announce a new prominent female celebrity ambassador for the mid-market brand.
Looking to the current financial year, Ford said Treasury would continue its focus on markets outside China and warned that costs would probably remain high.
The chief executive also underlined the need for widespread vaccination as a priority to help the return to normality. Treasury is strongly encouraging (but not forcing) its staff to get vaccinated, donating to charity for each employee who gets jabbed.
However, the company, like many others, is stopping short of mandating the vaccine, with Ford confident the business can get its staff inoculated without such measures.
Investment analyst Belinda Moore agreed with Ford that the result was strong given the company’s challenging year.
“Despite a full-year impact of limited China sales, in fiscal 2022 Treasury should benefit from its new operating model and the continued reopening of countries/markets post-Covid,” she said.
But while Ford is looking forward to better times, he should still take an occasional glance back over his shoulder.
At the depth of the share price slump last autumn as China launched its tariff attack, there was widespread speculation that Treasury could be vulnerable to an opportunist takeover bid from an investment fund.
Although Treasury has made huge strides to improve its business model and strengthen its performance in a very short time, its shares remain 35% below their 2018 peak. That still leaves scope for a bidder to pounce.