Clarke orders review as grog glut gives Treasury Wine Estates a hangover

Struggles in the US, including aggressive discounting and the rise of private label, weighed on the company’s earnings.

Michael Clarke, chief executive of Treasury Wine Estates. Picture: Bloomberg

Outgoing Treasury Wine Estates chief executive Michael Clarke is undertaking a strategic review of the Penfolds makers’ operations — flagging a possible restructure — after struggles in the US, including aggressive discounting and the rise of private label, weighed on the company’s earnings.

Treasury Wine’s share price plummeted 26 per cent to $12.35 on Wednesday after Mr Clarke said the company expected to deliver earnings growth of 5 per cent, instead of a previously forecast 15-20 per cent range and warned it could take at least two years for growth to return to normal.

Mr Clarke, who will retire in September this year, said the company was undertaking a strategic review, which would include looking at the internal structure but he ruled out any prospect of demerging poorly performing Treasury Wine businesses.

As well as Penfolds, Treasury has a large portfolio of wines including Wolf Blass, Beringer and Lindeman’s.

“There are many areas of our business that are performing to expectation and enabling us to continue to deliver growth despite the short-term challenges in the US,” Mr Clarke said.

“However, we recognise that beneath these short-term challenges are several longer term trends within the commercial tier, which are becoming more prevalent and are increasingly impacting the markets we operate in and our business, and therefore we will require a refined approach to moving forward.

“We are currently undertaking a strategic review of our internal operating model, focused on how we best manage our commercial wine business differently moving forward. As part of this we will be exploring a range of options including refined supply chain structures and operating models and this would include options such as internal divisionalisaton but not demerger.”

The softer-than-expected result comes after Mr Clarke sold shares in the company in an on-market trade last May, netting him $6.88m.

$12.35 Treasury Wine Estates fell 26% q

He said the troubles in North America — which reported a 17 per cent drop in earnings before interest and taxes to $98.3m — included changes in Treasury Wine’s US leadership team, which stalled execution momentum, and a glut of wine that competitors were pouring into private label brands.

“Suppliers are trying to move surplus wine across the market at lower prices, resulting in an accelerated growth of private label, which is up approximately 15 per cent in a market that is flat to down,” Mr Clarke said.

“As a result of these market dynamics, we were unable to recover or offset higher US luxury COGS (cost of goods) and higher Australian commercial COGS, with higher levels of discounting required to try to maintain share across all price points.” The US wine glut forced Treasury Wine to “walk away” from about 500,000 cases of commercial volume in the US. But rather than dispose of that volume — like the company did several years ago –— they didn’t source those 500,000 cases to begin with.

Mr Clarke said wine producers in the US had three choices: sit on inventory; transfer it to private label, which he said all major players were doing; or not source the volume. He said Treasury chose the latter to protect the value of its brands.

“Rather than just seeing these as long-term negatives we believe these trends are actually an opportunity for us to accelerate our premiumisation strategy, both through the investment we are making in luxury production … but importantly also through further changes to drive simplification focus as well as ensuring we have the right capital and costs structure for the whole business across all price tiers.”

Subject to an audit, Treasury Wine delivered net profit for the six months to December 31 of $229.2m — 5.1 per cent higher than the previous corresponding period but lower than the forecast rise of 10-20 per cent.

JPMorgan analyst Shaun Cousins downgraded the company to neutral, saying Treasury Wine was facing headwinds in its two most important divisions, which it couldn’t offset with “self help alone”, citing the US challenges as well as Asia.

“Asia, with its strong volume growth that has helped tighten supply globally and has driven a positive country margin mix shift, is facing external demand risks due to coronavirus, a factor not yet part of the new financial year 2020 and 2021 EBITS (earnings before interest and taxes) growth guidance,” Mr Cousins wrote in a note to investors. “We would revisit Treasury Wine at a lower share price and when coronavirus risk is better known.”

Treasury Wine intends to pay a dividend of 20c a share, fully franked, up 11 per cent.