Treasury Wine Estates’ profits plunge

There was more disappointment and pain for the long-suffering shareholders of Australia’s biggest wine producer, Treasury Wine Estates, this week.

As suspected when it asked for its shares to be suspended in Sydney earlier this week, the company that owns brands such as Penfolds, Lindemans, Wynns and Rosemount has said that its profits in 2013-14 will be $A40m (£21.2m) lower than it had previously predicted.

Treasury says it now expects full-year profit to be between $A190m and $A210m, compared with its previous forecast that they would be a range between $A230m to $A250m. To be fair, Treasury had already said that profits in the first half of its year to the end of December would be lower than in 2012-13 because of weak shipments to the US, where distributors’ pipelines were overflowing, and extra marketing spend in Asia. But it had a disastrous December, which it blames largely on lifting prices on some of its brands and reducing promotional discounts on others in the Australian market.

It also said a slowdown in China, where government-imposed austerity measures have curbed demand for higher-priced wines, had worsened in the past few months. Treasury has also been having a tough time in America, where it is reducing its previously overflowing stocks by cutting shipments.

Treasury never seems far from crisis. Its woes stem back to the mid 1990s when under its Southcorp identity, it sought to meet a supply glut by cutting prices. It continued to suffer under the ownership of the Fosters beer group, where its suffered from underinvestment and poor management but hopes were raised in 2010 when it was demerged as a stand-alone company.
By last May its shares had doubled in price following a change of strategy to focus on premium brands and develop its market in China and East Asia. But since then it has had an awful seven months and the shares have halved in value.
First the company announced $A160m in write-downs related to its US business because of excess stock in lower-priced categories. It also suffered the disaster of having to destroy $A34m of bottled wine held in the warehouses of third-party distributors to ensure the oversupply problem didn’t worsen.

In September, the former chief executive David Dearie was fired in the wake of the embarrassing write-downs and stock control problems with Treasury chairman Paul Rayner installing one of his fellow directors, Warwick Every-Burns, as interim chief executive while a search for a new CEO took place.

With its Chinese strategy in particular under question because of the on-going official austerity and continuing problems in the US, where Treasury does not have strong brand clout, analysts are asking whether a new chief executive could come up with a Plan C.
Add to that the fact that Treasury is facing a class action from Australian shareholders over the stock write-downs in which they allege that Treasury misled the market and the job search becomes even more difficult for the headhunters. The company denies the allegations but shareholders will want some firm news about where the company is going and who will be in the driving seat by the time it formally announces its half-year results on February 20.

A longer-term tactic being mooted by analysts in Sydney is that Treasury could retrench in the US. They calculate that it could raise up to $A700m by finding buyers for its US brands which include Beringer. That would add to the upside for its own shares and allow it to focus on the Australian and Asian markets, where long-term growth potential seems the most fertile.