Penfolds owner Treasury Wine Estates takes $92m hit in US distributor exit deal

Penfolds owner Treasury Wine Estates will repurchase stock from a key US distributor as it settles a dispute that stemmed from Republic National Distributing Company closing operations in the lucrative California market.

RNDC’s decision to exit California last September created headaches for Treasury Wine — also behind the 19 Crimes, Wolf Blass, Lindeman’s, Squealing Pig, Blossom Hill and Wynns labels — and forced the company to find a new distribution partner in the market.

On Tuesday, Treasury Wine told the market it had reached a settlement agreement to repurchase Treasury Americas and Treasury Collective portfolio inventory held by RNDC in California for its original sale value “net of a confidential settlement”, which compensates it for the closure of RNDC’s business in the state.

The net cash outflow for the agreement in the six months to June is expected to be $US65 million ($91.8m), Treasury Wine said.

Shares in the company jumped 6.7 per cent to $5.52 just before 10am on Tuesday. The stock slumped to a more than 10-year low in early December after Treasury Wine told investors it would write down the value of its US business by nearly $700m.

Treasury Wine now expects half-year earnings to be about $236m, just above the upper range of the $225m to $235m guidance provided in December.

The company will continue to partner with RNDC to distribute its portfolio across a number of other US markets and said it was supportive of the distributor’s recent initiatives to strengthen its business model and capital structure, including the planned divestment of several markets to Reyes Beverage Group and the establishment of new financing arrangements.

Providing a trading update, Treasury Wine said depletions — wines sales from distributors to retailers and consumers — for the Americas division distributed by RNDC grew 2.7 per cent in the half-year.

It also said the settlement does not alter earlier plans to cut shipments of 700,000 cases of wine across the US and China — equivalent to $340m in net sales revenue — over a two-year period, starting from the second quarter.

“Although RNDC’s decision to exit the Californian market had a significant impact on our performance in (the half-year), we are pleased to have reached this resolution with RNDC, who remain a committed and high-performing partner for TWE across a number of other US markets,” Treasury Wine chief executive Sam Fischer said.

RBC Capital Markets analyst Michael Toner said Treasury Wine’s updated earnings guidance of $236m reflected stronger trading since mid-December.

It comes as Australia’s wine industry faces a 260 million litre surplus and consumption is tipped to slow further over the next five years amid shifting consumer drinking preferences.

Wine consumption per capita has been in decline since 1990 as health-conscious and younger consumers are opting for ready-to-drink spirits or giving up alcohol altogether.