Dearie departs as cellar-dwelling days perk up

Ironically for David Dearie, the decision to oust him comes just as global wine fundamentals are looking more favourable than they have in well over a decade.

It took some time, but the Treasury Wine Estate board has exacted a heavy price for the $155 million of writedowns of excess US wine inventories that disfigured the group’s 2012-13 earnings, with chief executive David Dearie losing his job just as the outlook for Treasury was starting to look brighter.
Treasury announced the writedowns in July, citing excess inventories held by its US distribution partners, aged and deteriorating stock that needed to be destroyed, reduced shipments to shrink the pipeline of new product into the US, onerous grape contracts and the need for extra discounts and rebates. Overly optimistic forecasts of demand for new products were also a factor.

The impact of the decisions on the US inventory will hang over into the first half of this financial year, although the group is retaining its guidance of earnings before interest, tax and SGARA (the wine industry accounting treatment for inventories) of between $230 million and $250 million this year.

Today, Treasury Wines said Dearie, who became CEO nearly two and a half years ago ahead of its demerger from the Foster's beer business, would leave the company immediately to be replaced by Treasury non-executive director Warwick Every-Burns until a permanent CEO can be found. Every-Burns has been on the board since the demerger and was previously a senior executive at The Clorox Company, a cleaning products group.

Treasury chairman Paul Rayner said the board had conducted a review of the business after the writedowns and concluded that it needed a leader with a stronger "operational focus" to deliver its growth ambitions. He was reluctant to provide any details of the nature of the review or its precise findings.

The direct linkage between the review and Dearie’s departure suggests the board believes Dearie hadn’t paid sufficient attention to the detail of what was occurring within the US business. Rayner said today the board was aware that inventories in the US were relatively high, but it is self-evident that it was shocked by the extent and the financial impact of them.

Dearie will be gutted by the decision to force him out because, for the first time in probably a decade and a half, Treasury is moving into an environment where the fundamentals of the global wine sector are beginning to look more favourable for producers.

Having heavily restructured and repositioned Treasury since becoming CEO, Dearie was excited about the potential of the group to extract the kind of performance that it has always promised but rarely delivered.

For most of the period since Foster’s entered the industry and put together the collection of wine businesses that now forms Treasury the industry has been in heavy over-supply. Post-financial crisis a more consolidated industry has cut back on production, aided by poor seasons in Europe. About five per cent of the industry’s vines have been removed in recent years.

The US market, hit hard by the crisis — particularly at the premium end of the market — has been showing signs of life within an improving economy, although it is still working through the excess of commercial inventory that afflicted Treasury.

Dearie, having restructured and rationalised his domestic production base and cleared the decks in the US, has also built a big stock of non-current inventory – about $450 million – in the luxury and ‘masstige’ segments, which represent a future store of high margin profits as US demand at the higher price points continues to improve. The group’s prospects within Asia are particularly exciting.

Dearie had been planning a major investment in Treasury’s brands, particularly in Asia, as part of a new phase in the group’s development.

The other potential improvement in the settings within which Treasury operates is currency. The group is highly sensitive to currency relationships, particularly the US dollar and sterling, because of its predominantly Australian production base.

While the Australian dollar has bounced back of its recent lows it is still well below the post-crisis highs above parity with the US dollar and with each one cent movement relative to the US dollar equating to about $2.5 million of earnings before interest and tax and SGARA, the impact could be material.

Dearie was committed to the US and the ambition of Treasury to be a global wine producer, despite calls from some analysts for the group to exit a market that has been a difficult one ever since it acquired a US production base in 2001 with the acquisition of Beringer.

The Treasury board said the group remained committed to its agreed strategic priorities, which included a commitment to brand-building, increasing production of luxury and masstige wine, maintaining the scale and efficiency of the commercial wine portfolio and expanding global routes to market.

Rayner said the US business was an integral part of the group, but a new CEO would have the ability to review its future. He also said it would be a ‘’distinct advantage’’ if the new CEO had experience in the Americas, which is another pointer to the group’s desire to keep the current geography intact.

It appears that Dearie’s strategy won’t be unwound. The issues that led to his departure were more to do with detail and execution, and that unpleasant $155 million 'surprise' that emerged from seemingly nowhere in July, which blind-sided his board and sealed his fate.

For more on the Australian wine industry's need for powerful brand narratives in the face of increased global competition, see Ed Merrison's The battle of the bottles: Australia's wine offensive  (September 20).