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Treasury Wine Estates prepares for resolution of Chinese tariff woes

Treasury Wine Estates (ASX:TWE) appears confident that it can soon resolve its wine tariff issues in the once-thriving Chinese market. As a precautionary measure, the company is increasing its stock of its best-selling and most profitable brand in anticipation of a potential resolution in the coming months.

The penalty tariffs imposed by the Chinese government in March 2021, at rates of up to 200%, were unrelated to TWE’s pricing or cost structure. With recent reductions and eliminations of penalties on other Australian exports like barley and coal, TWE believes the wine tariffs will also be lifted soon.

This optimism was evident at TWE’s recent AGM, where management informed shareholders to anticipate greater earnings growth in the second half of the financial year compared to the current first six months. CEO Tim Ford explained that this strategy involves a measured approach to the phasing of Penfolds wine shipments, particularly for the Icon and Bin portfolio, throughout the year to maintain flexibility in their global distribution and pricing models.

In essence, TWE aims to retain as much of its high-margin premium Penfolds wine as possible, should the tariffs be eased, which seems likely to occur early next year.

Ford highlighted that TWE’s first-quarter trading results align with their overall expectations, and they foresee sustained strong demand for Luxury wine and resilient dynamics in the Premium wine category worldwide. He also emphasised the company’s long-term growth ambitions, anticipating an EBITS margin expansion of 25% or more, supported by a robust global brand portfolio, a diversified business model, and the benefits of key asset-based and cost optimisation initiatives implemented in FY23.

Later in the meeting TWE was hit with a protest vote over executive pay after the board allowed share-based incentives to CEO Ford on the basis that no-one could have foreseen the heavy profit drop from the 200% wine tariffs imposed by China.

It was the first time the company had been hit with a first strike in its 12 years of existence as the shareholder vote almost went against approving the company’s remuneration report at the meeting.

46% of the votes cast at the meeting were against the remuneration report being adopted – not quite a majority and actual rejection, but easily more than the 25% needed for a ‘first strike.’

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