Treasury Wine drinks a bitter cup

It is difficult to escape the conclusion that Treasury Wine Estates and its shareholders are, not for the first time, a victim of its own poor execution.

Treasury today lowered its guidance for this financial year by $40 million from a $230 million to $250 million range (of earnings before interest, tax and the industry’s SGARA accounting treatment of inventories) that already reflected the anticipated costs of remedial action in the US to deal with the massive aged and excess inventory position that cost former chief executive David Dearie his job last year.

Interim EBITS are now expected to be between $42 million and $46 million compared to the $73.4 million generated last year.

Treasury had already factored a lower first half performance into its previous guidance, with the restructuring of its US business the major influence.

It is worth noting, however, that Treasury had already taken a provision of $155 million against the cost of that restructuring, which included the destruction of the aged inventory stuck within its US distribution system. That previous guidance included an expectation that lower shipments to the US as part of the reshaping of its inventory position would cost it up to $30 million of EBITS this year.

It had also remarked previously that there had been some softening of demand from China as the Chinese authorities cracked down on conspicuous consumption, although the extent of that deterioration in demand – at a time when Treasury has been ramping up the investment in its brands for that market – appears to have taken the group by surprise.

The other element identified as the cause of the downgrade was Treasury’s own decision to increase prices on some of its commercial portfolio and reduce promotional discounting over Christmas within a competitive marketplace, which caused “higher than expected” volume declines.

It would appear Treasury either bungled the execution of its US inventory restructuring or under-estimated the cost of the exercise last year, misjudged the condition of the Chinese market and made some poor tactical decisions in its home market over Christmas. Its performance doesn’t inspire confidence in its management.

Treasury, of course, doesn’t have a chief executive, or at least not a permanent one. Warwick Every-Burns, a non-executive director and former CEO of The Clorox Company, a cleaning products company, has been filling the role on a temporary basis since Dearie departed abruptly last September.

While Dearie lost his job because, it appears, the board had lost confidence in his grasp of the detail of the key US business, he was respected as someone who understood the industry and wine brands and who was positioning the business for the long term. He left Treasury with a major store of future profits by building a $446 million stock of premium non-current inventory.

The Treasury share price was shredded this morning, falling about 75 cents, or 16.5 per cent, to about $3.80 in response to its announcement. Last year the shares traded as high as $6.43.

Without a permanent CEO, with the confidence in its ability to manage its international portfolio undermined by its performance and with its share price destabilised Treasury is vulnerable.

That vulnerability is elevated by the latent profitability built into its non-current inventory, the Australian dollar trading at its lowest level for three-and-a-half years and the global wine industry supply-demand equation balanced for the first time in a decade and a half.

The depreciation of the Australia dollar has two dimensions to it. Given that a 1 cent movement in the Australian dollar versus the US dollar has a $2.5 million impact on EBITS and a 1p movement against the British pound a $3 million impact, Treasury ought to have a currency tailwind in the second half and beyond. The lower dollar, however, makes it less expensive for a foreign predator.

The downgrade, the weak share price and the market’s lack of confidence in the Treasury board and management makes it imperative that the group appoints a new CEO with impressive industry credentials as soon as possible if it isn’t to be targeted, and probably dismembered, by a predator looking to acquire the key Penfolds brand cheaply. A new CEO with the right CV could buy the group some breathing space.