Treasury Wine Estates chief executive Mike Clarke says the company is poised to acquire up to two small wineries in France along with premium vineyards to supercharge a push into China with a portfolio of three French-made wines, one of which will be branded Penfolds.
Mr Clarke said the fragmented French wine category makes up 40 per cent of the total wine market in China, and the company wants to secure a chunk with some French-sourced labels to sit alongside the hugely successful Penfolds wines from Australia, which have been a major driver of impressive profit growth in China.
"This is a happy hunting ground for us," he said.
Treasury Wine Estates chief executive Michael Clarke is in negotiations with two or three parties in France to buy premium winery and vineyard assets to help fuel a concerted push into China. Jesse Marlow
Treasury, which also owns the Wolf Blass brand, accounts for about 5 per cent of wines imported by China. It is aiming to expand its distribution in China's cities by 50 per cent in the next three years, using the lure of luxury Penfolds allocations to retailers to gain more shelf space.
The value of Treasury's luxury wine inventory ready for release in future years is now at $1.18 billion, compared with $959 million a year ago, with Mr Clarke bullish about the "fabulous" quantities and quality available from the 2018 grape harvest. The 2019 grape harvest is underway and is shaping up as a robust vintage, too, he said.
Treasury intends on leveraging the Penfolds brand by making a French version.
The other two French offerings will be the existing Maison de Grand Esprit, which it started from scratch in mid-2017 as a "virtual" wine brand made by outsiders, and a French version of its Californian premium brand Beaulieu Vineyard.
It now intends owning assets in France for the first time. "We're in dialogue with two to three parties," he said, with the targeted wineries in premium regions with vineyards attached.
Natalie Tam, investment director with Aberdeen Standard Investments, said the company had been quite clever in its approach.
Penfolds owner Treasury Wines lifted its dividend by 20 per cent after delivering robust profit growth in Asia of 31 per cent. Carla Gottgens
"They've tried to do it in a capital light way so far," Ms Tam said. "It makes sense to go after that category. They don't want to be a one-trick pony with Penfolds."
Mr Clarke said Treasury had built a strong "self-distribution" model into China where it works directly with retail partners, which gives it a big advantage over rivals whose profits are eaten into by a range of third parties clipping the ticket on the way through to the end consumer.
"The challenge they face is they are trying to feed too many mouths," he said.
Treasury lifted its first-half dividend by 20 per cent to 18¢ after delivering robust profit growth of 31 per cent in Asia to $153.1 million for the first half of 2018-19.
Across its four main divisions, Treasury generated the fastest organic sales growth rate since the company split off from former parent, the brewing company Foster's Group, in 2011.
Treasury shares dipped initially on Thursday after initial worries over cash conversion rates but recovered to be largely flat at $16.70.
Treasury announced a 17.1 per cent rise in net profit after tax to $219.2 million and a 19.4 per cent rise in EBITs to $338.3 million, inside the forecast range of $335 million to $340 million, which had been previously reaffirmed in an announcement on January 10, and then again on January 21 when it stunned investors by revealing the abrupt departure of chief operating officer Robert Foye following a breach of the company's internal code of conduct policies.
'Disappointed' in Foye exit
It hasn't specified the nature of the breach. Mr Clarke said on Thursday it had been personally disappointing for him to have to give Mr Foye his marching orders because they had worked closely together over decades at other companies, including Coca-Cola.
"Yes. It was disappointing, and it was disappointing for Robert," Mr Clarke said. "He's a great operator. At the end of the day it was an easy decision. It wasn't left to debate as to what was going to happen".
He declined to specify what the nature of the breach was about. "I can't give any more colour."
The company raised some eyebrows on Thursday by putting a toe back in the water in beer. The fast-growing 19 Crimes wine brand in the United States will launch three different craft beers in March in Ohio initially, along with an Irish whisky.
Nineteen Crimes had been the fastest-growing wine brand in the US over the past three years. "It has really connected us with Millennial customers," he said. Big liquor retailers had been asking if it could be expanded into other beverages.
The Asian region was the standout for Treasury, although profit margins slipped marginally to 38.9 per cent from 39.3 per cent as it invested in a new warehouse. The Americas division, where Treasury is well advanced now in an overhaul of 40 per cent of its distribution systems, delivered a 12 per cent rise in EBITs to $112.1 million, although margins fell to 18.5 per cent from 19.9 per cent. Mr Clarke said profit margins would begin rising again in the US from 2019-20.
Australia and New Zealand lifted its profit margins to 23.2 per cent from 20.4 per cent a year ago, with EBITs rising by 13 per cent to $77.4 million in an overall wine market which is flat. Treasury is making headway by moving higher up the value chain in its "premiumisation" strategy, which is fattening margins.