The Distillery: TWE's bitter drop

Scribes see Treasury Wine Estates' US problems as entrenched, with one saying the demerger from Foster's Group was no cure-all.

Treasury Wine Estates chief executive David Dearie still sits atop a company that has risen 48 per cent since its spin-off from Foster’s Group in 2011. But its status as a market darling has been thoroughly debased by news of ongoing problems in the US – the same problems that plagued its former owner for a decade.

Are demergers as good as all that? Is the company’s US business beyond saving? Australia’s business commentators investigate.

The Australian’s John Durie explains how Dearie has been left in a bad spot by this latest episode.

“The board discussed the writedown at a meeting in the morning, leaving Dearie to carry the can without being able to expand on the issues because the company is the middle of a pre-earnings blackout. Dearie has just concluded talks with US distributors, including Southern Wine and Spirits, which told him it was changing its distribution to a hub and spoke model and this would mean excess inventory could not be accommodated. The distributor told Dearie it was getting rid of its stock and he should do the same.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd kicks off the discussion about demergers and the well-worn theory that separately run businesses make better financial returns.

“But sometimes a split cannot do anything for entrenched problems that are in the blind spot of management and the board. That looks to be the story with Treasury Wine Estates, which is facing its fifth or sixth restructuring charge in the United States over the past decade. Hard questions will have to be asked of the board of TWE, which is led by Paul Rayner. How much did directors know about the well-publicised inventory problems in the US? Were they aware that wine was being offloaded to wholesalers and not going anywhere?”

So what of the US? The Australian Financial Review’s Mike Smith takes us through why the land of the free is the place to flog wine at the moment.

“Dearie has made it clear a sale is not on his agenda. The company is forecasting the US market to grow from 300 million cases a year to 450 million cases over the next decade. ‘There is a fantastic opportunity at the right price point. We have to participate in the largest marketplace,’ he said. TWE will need to demonstrate it has got the excess inventory issues in the US under control as it defends any decision to hold onto the business. It is confident the measures announced on Monday are a one-off which will rebase the US inventory levels and set the business up for future success. The market is not yet convinced…It is easy to point the finger for the problems in the Americas at previous management. Sandra LeDrew, managing director Americas, has only been in the job for a bit over a year. Dearie, who has been chief executive since May 2011, admits mistakes have been including over-ambitious forecasting for new commercial product launches. He also cites improved distributor logistics for the glut.”

Are there perhaps others reasons why Treasury is missing out on the fruits of America? Business Spectator’s Stephen Bartholomeusz offers another explanation.

“Treasury has traditionally, despite its ambition of being a premium producer, had a portfolio skewed towards lower price points in the US – the commercial wine category where volumes have been flat and competition is purely around price. Its US business was also quite reliant on the white zinfandel variety which isn’t as popular as it once was. The growth in the US market appears to be in the premium wine segments, where there are price and volume gains occurring. Getting rid of the excess inventory it and its distributors hold will not just help remove oversupply but should enable Treasury to reposition its offering towards the higher-growth segments.”

So why not flog the business altogether, as Fairfax Media’s Elizabeth Knight notes following suggestions from analysts during a conference call?

“Dearie discounted any suggestion Treasury Wine would pull out of the US, which he described as a large and high-growth market. The reduced shipments to the US will bleed into earnings in 2014 and potentially 2015. What was once a sharemarket darling lost its gloss in Monday’s trading – the share price fell more than 12 per cent by the close of trade as investors’ thirst for more detail was avoided by management, which invoked the defence that it was in black-out restriction territory. Dearie said part of the new inventory strategy was about protecting wine brands. But this news will pose a threat to the company that will require repair.”

The other big news from yesterday was China’s June quarter GDP numbers. The Herald Sun’s Terry McCrann has something rather obvious to say about that sentence.

“Earth to gullible commentators. Look at today’s date. That quarter ended barely two weeks ago. How credible do you think those numbers are?”

The credibility of China’s official economic statistics have long been the subject of strong suspicion, if not outright ridicule.

But it’s all we’ve got to go on. And Bartholomeusz points out in a separate piece that the statistics are being interpreted in a logic vacuum.

“One of the oddities in the discussion about China’s economic growth rate is the way in which its slowing is interpreted despite the fact that the explicit and stated objective of its new leadership is a slowing and re-orientation of growth.”

Meanwhile, Fairfax’s Tim Colebatch writes on how China will be the greatest influence on the Australian economy is this decade, just as it was in the last. However, the nature of that influence will be different due to the much talked about ‘transition’.

And finally, Fairfax’s Adele Ferguson is awaiting the release of a report from the Organisation for Economic Co-operation and Development in profit shifting by the world’s largest corporations.

Google will be holding its breath just a little.

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