Treasury Wine share price tumbles on Penfolds China update

Here's an updated outlook for the Penfolds business now that China is back on the menu.

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The Treasury Wine Estates Ltd (ASX: TWE) share price is under pressure on Thursday morning.

At the time of writing, the wine giant's shares are down 2% to $12.17.

Why is the Treasury Wine share price falling?

Investors have been selling the company's shares this morning in response to the release of an update on its outlook for the Penfolds business.

According to the release, Penfolds earnings before interest, tax, self-generating and re-generating assets (EBITS) is expected to be in the range of $418 million to $421 million in FY 2024. This is being driven by strong top-line growth across all portfolio tiers and price points, with the weighting of Bin & Icon portfolio shipments to the second-half completed as planned.

Penfolds EBITS margin in FY 2024 is expected to be approximately 42%. This reflects the reestablishment of entry-level Australian COO Luxury tiers and higher onshore overhead costs in China through the fourth quarter following the removal of tariffs.

Management continues to expect mid-high single digit group EBITS growth in FY 2024, excluding the EBITS contribution from the recently acquired DAOU business.

FY 2025, FY 2026, and FY 2027 Penfolds outlook

In response to the removal of tariffs in China, Treasury Wine has provided investors with an idea of what to expect from its key Penfolds business in the coming years.

In FY 2025, it expects the Penfolds business to deliver low double-digit EBITS growth. This reflects top-line growth driven by price increases and a modest increase in shipments for the Bin & Icon portfolio. This will be partly offset by a step-up in brand building investment and overheads in China of approximately $20 million ahead of increased Bin & Icon portfolio availability from FY 2026. The Penfolds EBITS margin is expected to improve to within the range of 43% to 45% for the year.

Moving on, in both FY 2026 and FY 2027, the Penfolds business will be targeting annual EBITS growth of approximately 15% across both years. This is expected to be driven by a significant increase in availability for the Bin & Icon portfolio from the record 2024 Australian vintage intake.

Penfolds will also be targeting an EBITS margin in line with its long-term target of 45%.

Broker reaction

Goldman Sachs was pleased with the update and notes that these targets are above its own estimates. However, it does concede that there are a few doubts about achieving these numbers. It said:

Whilst we view this guidance as positive and agree that China as a market continues to have attractive TAM for luxury Win/Spirits consumption, our key questions on the call will be largely focused on execution, including the structure of its on-the-ground sales team, go-to-market/distribution, channel profitability/trade marketing support, advertising focus, parallel market control and allocation between the different Penfolds regions.

The Treasury Wine share price remains up 14% in 2024.

Motley Fool contributor James Mickleboro has positions in Treasury Wine Estates. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended Treasury Wine Estates. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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