Winemaker backs its US strategy, despite losses
Treasury Wine Estates chief executive David Dearie has defended the wine company's commitment to stay the course in the US market despite an oversupply of wine among distributors and warehouses bulging with unwanted aged stock triggering a surprise $160 million writeoff.
Shares in Treasury fell by more than 12 per cent when the world's biggest pure play winemaker and owner of brands such as Penfolds, Wolf Blass and Yellowglen, announced it would take a pre-tax earnings hit to help rid the key US market of aged and excess wine stock as well as cope with a restructure of its distribution system, which will lead it to carry extra wine and onerous grape contracts on its balance sheet.
Under sustained pressure from analysts on Monday to explain the latest ills in Treasury's biggest export market, Mr Dearie said a decision to pour $35 million worth of wine down the drain and hand over another $40 million in discounts to middlemen was a one-off and essential for the long-term success of the US business.
"I have made these hard but necessary decisions to set our business up for future success," he said. "As a brand-conscious and quality-focused business, we want to ensure our consumers are offered the best quality wine brands.
"The intent is to rebase the US inventory levels ... taking that excess inventory out of the system, and we don't see it as an ongoing process."
A more efficient distribution model into the US would also mean the company shipped less wine to the region in the 2014 financial year, which would slice pre-tax earnings by $30 million.
Treasury shares were sold down heavily and closed down 71¢ at $5.11.
Mr Dearie said this reduced shipment would equate to a reduction of between 1.5 million and 2 million cases exported to the US from the 15.7 million cases shipped last year.
But analysts were scathing of the oversupply and distribution shake-up that had come back to bite the company's balance sheet, pushing for Treasury to sell the US business it inherited from Foster's, which spent billions on buying American vineyards and wine brands in the late 1990s and early 2000s.
"Foster's had this business for 13 years and ... I can't remember [it] ever getting the US right," Merrill Lynch analyst David Errington said. "I know you have taken the axe to it but my question is: you have cleaned the business out now, why not just sell it? Why do you still need to be there?"
Mr Errington said vineyard prices were strong, with Treasury's 220,000 hectares of vines able to fetch as much as $500,000 a hectare, raising more than $1 billion for the company's coffers.
But Mr Dearie said Treasury had to be in the US market and would eventually receive the benefit of a new leadership team and a gradual shift by consumers up the price curve to drink more luxury wines, which were well covered by Treasury's US wine portfolio.