TREASURY Wine Estates will push ahead with a multi-million dollar asset sell-off focused on lower priority brands and vineyards in the US after taking a big sales hit in China because of Beijing's great tariff wall.
With Australian exports to its biggest market effectively halted in November, the big winemaker has also flagged cuts to winegrape purchases in Australia this vintage, particularly for its commercial and lower premium grade wine portfolio.
The company is expecting average yields across all winegrowing regions in Australia in autumn after a mild growing season and good summer fruit set.
TWE is looking at generating about $300 million from the sale of brands, winery sites and vineyards, and restructuring of its US operation to concentrate on higher value wine channels.
The US plan was flagged last year, with some assets already being offloaded, but no asset sales or brand changes are planned in Australia.
The proposed asset shakeup will coincide with TWE splitting its business into three divisions from July, based around its famous high end Penfolds brand name, its Treasury Americas business and Treasury Premium Brands.
The Australian-based global group, which has wine businesses spread across Australia, New Zealand, France and California, has posted a 43 per cent drop in statutory net profit to $120.9 million for the first half of 2020-21.
Treasury's half year results included a $45.6m impairment related to brand divestments already made in the US, plus spending on its South Australian luxury winery expansion and the related supply chain restructure.
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Although chief executive officer, Tim Ford, said retail and ecommerce channels continued to perform at elevated levels across all TWE's key markets, reflecting a COVID-19 shift to home-based consumer drinking trends and trusted brand demand, China and the impact of the pandemic on premium selling opportunities hit the business hard.
"Impacts from global pandemic disruptions to sales channels for higher margin luxury wine across key regional markets, in addition to reduced shipments in China resulting from the MOFCOM investigations into Australian wine were key drivers of lower earnings before interest and tax," he said.
The Chinese tariff barriers have added about 170pc to the cost of Australian wine's retail price in what was the industry's biggest market by far until this year.
In the US the company was progressing with key initiatives to "exit a significant portion of the commercial brand portfolio".
It would explore its divestment and exit options of other non-priority brands, operating assets and leases to cut costs across its vineyard, winemaking and packaging operations.
Mr Ford said the strategy would improve the balance of its US asset base and generate a net cash inflow of at least $300m as a result of the divestment and restructuring program.
The company has budgeted to write down about $100m in non-cash material items relating to leases and intangible assets in the next two financial years.
Responding to the China hit, Treasury has accelerated sales and investment activity in other priority Asian markets and cut its overhead costs in China.
However, the company warned it would be making "proactive adjustments" to its 2021 vintage intake in response to revised demand expectations from China.
Mr Ford said TWE was increasingly confident about opportunities to re-allocate its Penfolds Bins and Icon range from China to other global markets.
"The fundamentals for our diversified global business remain strong and I am confident they will continue to support our execution into the future," he said.
Although impact on TWE's intake of luxury grape varieties processed in Australia was expected to be minimal, reductions would focus on lower masstige lines.
In the US TWE's 2020 vintage ended below average because of drought during winter and extreme heat and fires during summer.
Warmer and drier than average conditions, followed by wet cool weather during the fruit set period, have also hurt NZ's Malborough vintage which is tipped to be average to below average.
The 2020 vintage in France was generally high quality with tonnages slightly up, too, and the most significant to date for the Penfolds brand in France.
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