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From plonk to premium: Treasury Wine’s luxury pivot paying dividends
That old quip, “life is too short to drink bad wine”, seems particularly apt for Treasury Wine Estates (ASX:TWE) in the wake of its half-year results to December 31, 2024.
While the bottom line numbers were quite fruity, with net sales revenue up 20 per cent to $1.54 billion and earnings before interest, tax and SGARA (EBITS) up 35 per cent to $391.4 million, it’s what drove this result that’s quite titillating.
For years, low-cost wine brands have driven the group’s earnings. But with the bottom end of the market flooded with cheaper wine, so much so that Treasury cannot find a buyer for the Wolf Blass and Lindeman’s brands at an acceptable price, it is devoting its attention on growing the luxury Penfolds business.
This strategic pivot towards luxury wine continues to bear fruit for shareholders, with the segment now representing 56 per cent of group revenue, up from 44 per cent in the previous corresponding period. This transformation has driven a significant improvement in the company’s EBITS margin, which increased by 2.8 percentage points to 25 per cent.
A major highlight of the half-year results was the successful re-establishment of Penfolds’ Australian portfolio in China following the removal of tariffs. The prestigious brand delivered outstanding performance with a 34 per cent increase in EBITS to $250 million, demonstrating strong customer demand and encouraging depletion rates comparable to pre-tariff levels.
The integration of DAOU Vineyards, acquired in December 2023, has exceeded initial expectations. The company has revised its synergy expectations upward to about $US35 million ($AU55 million), a significant increase from the previous guidance of about $US20 million ($AU32 million).
This strategic acquisition has strengthened Treasury’s position in the crucial US luxury wine market and is contributing positively to earnings.
Commenting on the results, chief executive officer Tim Ford told shareholders that the performance highlighted the benefit of a significant multi-year transformation to establish Treasury as a luxury-led business.
“Penfolds performance was once again a significant highlight, delivering an outstanding result. We are extremely pleased to have successfully re-established the Penfolds Australian country of origin portfolio in China, with positive consumer and customer sentiment and key performance signals very clear.
“The progress we have made integrating DAOU and Treasury Americas to create the leading supplier of luxury wine in the US market is also pleasing and we look forward to further capitalising on this opportunity in the year ahead.”
The company’s balance sheet remains robust, with net debt to EBITDA’s ratio steady at 2.0x, sitting at the upper end of management’s target range of 1.5-2.0x. Total available liquidity stands at $1.2 billion, providing ample flexibility for future strategic initiatives.
Looking ahead, Treasury has provided guidance for fiscal 2025 EBITS of about $780 million, at the lower end of its previously guided range of $780 to $810 million. This adjustment primarily reflects reduced expectations for Treasury’s premium brands, though the impact on overall earnings is partially offset by strong performance in the luxury segment.
What it means is that the transition to the top end of the wine market must happen sooner rather than later. While shareholders would have been raising a glass to the interim dividend of 20 cents a share (70 per cent franked), an 18 per cent increase on the previous corresponding period, it cannot hide the fact that the share price dipped about 10 per cent over the past year to close on Tuesday at $10.82. Finding a buyer for Wolf Blass and Lindeman’s at the right price would be a good starting point.
