Can Clarke heal Treasury's self-inflicted wounds?

Michael Clarke probably represents Treasury Wines Estates’ final opportunity to remain independent and intact.

Clarke was today announced as the new chief executive of the embattled wine group, replacing Warwick Every-Burns, the former non-executive director with the cleaning products background who has been filling the position on a temporary basis since David Dearie was dumped by Treasury last September.

Clarke doesn’t have a wine industry background but does have an impressive fast-moving consumer goods resume, with senior roles at Coca-Cola and Kraft Foods, including the presidency of Kraft’s European business and a seat on the group’s global operating board. His most recent executive role was CEO of Premier Foods, one of the largest branded food groups in the UK.

His appointment was announced with the results of Treasury’s interim results, which showed, as foreshadowed last month, something of a collapse in Treasury’s earnings, with earnings before interest, tax and SGARA (the industry’s treatment of inventories) falling 38 per cent to $45.8 million.

While that’s at the top end of the revised guidance Treasury issued last month, it reflects the range of challenges and self-inflicted wounds the group is experiencing.

Dearie lost his job after Treasury was forced to create $155 million of provisions for the cost of restructuring its US distribution system, including the controversial destruction of aged inventory. Treasury compounded that damage by raising prices on some of its commercial wine portfolio and reducing discounting at Christmas (of all times)  – even as competitors were discounting aggressively. It also underestimated the impact of China’s crackdown on conspicuous consumption on what had been a fast-growing Asian business.

Not for the first time, the series of mistakes and misjudgements raised question marks over the competence of the group’s board and management and made it imperative that it find and appoint a well-credentialed chief executive before the continuing blunders and instability increased its vulnerability to a predator.

Clarke won’t be able to have much of an impact in what’s left of this financial year – Treasury revised down its full-year guidance for EBITS last month by $40 million to between $190 million and $210 million – and there are continuing pressures within its core Australian business, where retailers have been reducing stock levels.

Dearie did, however, leave Clarke with a potentially valuable legacy – nearly $500 million of premium non-current inventory which represents a latent pool of future profitability.

Clarke will also take over at a time when the US inventory issue is already being dealt with through the destruction of aged stock and lower shipments from Australia and with a more encouraging outlook for Treasury’s US wine business.

More importantly, as Every-Burns said today, global supply and demand in the industry is moving towards balance.

If that does occur it will be the first time in a decade and a half – roughly from the time Foster’s Group first truly entered the global wine industry with the acquisition of Beringer in the US – that there is a rough balance between supply and demand.

With demand for premium wines in the US picking up after it was hit hard by the financial crisis, with Treasury sitting on that big store of non-current inventory – 89 per cent of it luxury and “Masstige” wine -- and a slightly weaker Australian dollar there is potential upside for Clarke to exploit.

Whether he gets the opportunity do that is an open question. Before last year’s revelation of the US inventory issues and Dearie’s departure, Treasury shares had been trading around $5. They were trading just under $3.80 today after being as low as $3.50 this month.

Before it was demerged from Foster’s there was private equity interest in Treasury and it is inevitable that there would be prospective predators monitoring its performance and potential in a global market if the industry fundamentals continue to improve.

Treasury is particularly vulnerable because the market has lost faith in its ability to manage its North American business and has been urging the board to give up on that market.

So far the board has resisted but if Clarke can’t get some early runs on the board and win back some market confidence either Treasury will be taken over or the pressure for it to abandon its international ambitions and break itself up will become irresistible.