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Treasury Wine Estates to conduct strategic review

Outgoing Treasury boss Michael Clarke is undertaking a strategic review after US troubles weighed on the Penfolds maker’s earnings.

Treasury boss Michael Clarke Picture: Bloomberg
Treasury boss Michael Clarke Picture: Bloomberg

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

TWE’s share price plummeted more than 19.2 per cent to $13.43 in early trade 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.

Mr Clarke, who will retire later this year, said the company was undertaking a strategic review, which would include internal divisionalisation but he ruled out any prospect of demerging poor performing TWE businesses.

“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 troubles in North America included changes in TWE’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 TWE 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 TWE 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, TWE 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.

JP Morgan analyst Shaun Cousins downgraded the company to neutral, saying TWE 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 FY20 and FY21 EBITS (earnings before interest and taxes) growth guidance,” Mr Cousins wrote in a note to investors.

“We would revisit TWE at a lower share price and when coronavirus risk is better known.”

TWE intends to pay a dividend of 20c a share, fully franked, which is an 11 per cent increase on the previous corresponding period.

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Original URL: https://www.theaustralian.com.au/business/companies/treasury-wine-estates-to-conduct-strategic-review/news-story/eaf2901aeb1b696ccc4e430dcebc08e2