By Eli Greenblat
Treasury Wine Estates chief executive David Dearie has defended the company’s commitment to stay the course in the US market despite unwanted aged stock triggering a surprise $160 million write-off.
Under sustained pressure from analysts this morning 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 absolutely necessary for the long term success of the US business.
Reputation ... Treasury says it will destroy old stock to maintain quality.
‘‘I have made these hard but necessary decisions to set our business up for future success,’’ Mr Dearie 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...a one off rebasing of inventory levels in the US... taking that excess inventory out of the system and we don’t see it as an ongoing process.’’
Shares in Treasury have fallen 12.5 per cent to $5.11 after the company announced this morning it would take a $160 million before tax hit to its earnings to help rid the key US market of aged and excess wine stock as well as cope with a restructure of its distribution system into America which will lead it to carry extra wine and onerous grape contracts on its balance sheet.
A more efficient distribution model into the US, the winemaker’s most important market, would also see it ship less wine to the region in fiscal 2014, which would slice pre-tax earnings by $30 million.
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 off in 2012.
Analysts were scathing of the oversupply and distribution shake-up that has come back to bite the company’s balance sheet.
Many pushed for Treasury to sell the US business that it inherited from Foster’s, which spent billions on buying up American vineyards and wine brands in the late 1990s and early 2000s.
‘‘Foster’s had this business for 13 years and in my recollection I can’t remember ever getting the US right,’’ said Merrill Lynch analyst David Errington.
‘‘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 at the moment with Treasury’s 220,000 hectares of vines able to fetch as much as $500,000 per hectare, which could raise 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 was well covered by Treasury’s US wine portfolio.
‘‘The USA is the world’s largest consumer of wine and it’s growing,’’ said Mr Dearie.
‘‘And it’s growing at the more luxury price points, the mass prestige, luxury [end] that’s where the consumer is moving to.
‘‘[Wine consumption] in the US is forecast to grow from 300 million cases to 450 million cases over next 10 years and it’s a fantastic growth opportunity at the right price points and we must, if we are going to be in the most celebrated and successful wine company, we have to participate in the market place which is the largest and what we believe a growing opportunity.’’