Treasury Wine Estates Raises FY25 Incentive Targets to Meet Shareholder Demands

About Treasury Wine Estates Limited

Treasury Wine Estates Limited (ASX: TWE or Treasury Wines) is a global winemaking and distribution business selling wines in 70 countries under luxury and premium quality brands such as Penfolds, Beringer, Pepperjack, Seppelt, and Lindemans. TWE was formerly the wine division of Fosters Group before its demerger from Fosters in May 2011.

Upwardly revised Management incentive targets

In response to pressure from institutional shareholders the Board of Treasury Wines has increased Management’s incentive plan targets for FY25. Shareholders have challenged the Board’s initial Key Performance Indicators (KPIs) set out in the 2024 Remuneration Report as not being sufficiently demanding on Management.

Among the concerns raised was that Management would be rewarded for the ‘windfall gains’ that would ensue following the removal of Chinese tariffs on wine imports from Australia. Another concern expressed by institutional shareholders was that the earnings per share compound annual growth rate for FY25 at 10 percent was ‘unchallenging’.

Before receiving 100 percent of the proposed incentive remuneration entitlements Management must now deliver a 15 percent minimum increase in earnings per share and a minimum 14 percent return on capital employed in FY25. The previous thresholds were 10 percent and 13 percent respectively.

Interestingly, the Board admitted that the FY25 earnings per share target of 15 percent annual growth was below the internal target set for TWE’s Management team.

The increase in Management’s incentive plan targets following pressure from institutional shareholders highlights the effectiveness of the ASX ‘Two Strike’. Rule. This rule requires all Directors to face re-election if the Remuneration Report is voted down by 25 percent of shareholders in a consecutive 2-year period. Treasury Wines’ shareholders voted down the 2023 Remuneration Report. This means that if the Remuneration Report is not passed at the 2024 AGM set down for 17 October, then a ‘spill resolution’ must be put to the shareholders at the conclusion of the same AGM. If 50 percent or more of votes cast are in favour of a ‘spill’, then the entire Board must stand for re-election at a further special meeting of shareholders. This meeting must be convened within 90 days.

The prospect of a ‘second strike’ has resulted in the TWE Board engaging constructively with institutional shareholders and higher incentive target thresholds being set for Management in FY25. It is now more likely the upwardly revised performance thresholds will be supported by shareholders and the 2024 Remuneration Report adopted.

The Board have undertaken to engage with institutional shareholders during FY25 and solicit input as to how the Group’s Management incentive plan can be made more effective in future years.

Wine ‘premiumisation’ trend

While the re-opening of the Chinese market to Australian wine imports is positive for Treasury Wines, the rising middle class in Thailand, Vietnam, and Indonesia also represents a substantial opportunity for Australian wine. These economies are experiencing demand for premium and luxury products, including wine. This demand is driven by increasing disposable incomes from the rise of a burgeoning middle class that actively engages with Western luxury brands. This trend has been described as a modern-day ‘Silk Road’ and it appears to be a long-term and irreversible trend. In ancient times, the ‘Silk Road’ was a major trade route connecting the East and West that facilitated the exchange of goods. Today it is emerging as a centrepiece for luxury brand  commerce.

Treasury Wines is also experiencing growth in demand for its luxury wine products in the US following its acquisition of Paso Robles luxury wine business in October 2023 for US$900 million (A$1.4 billion). This acquisition accelerates Treasury Wines’ luxury-led premiumisation focus in the US and establishes it as a leading US luxury wine business. The acquisition is expected to deliver mid to high single digit earnings per share growth in FY25.

The growth in luxury brand wine products produced by Treasury Wines should underwrite shareholder value accretion over the medium term. Meanwhile the higher FY25 earnings per share performance incentive threshold to 15 percent growth should support shareholder returns in the short term.