Unlike the mostly benign reaction to the weaker Chinese economic data yesterday, wine producer Treasury Wine Estates (TWE) again reminded us that the market doesn’t like big, hard to explain problems emerging in a major company, especially when it is close to a reporting period and in a major market for the company.
TWE shares ended the day down a whopping 12.2%, or 71c, at $5.11 after it stunned the market with news of a $US160 million profit hit from problems with old and excess wine stocks in the US market.
1Y TWE – Shares plunge after writedown
Now, normally for a wine company, stocks of old wine would not be a problem, more a nice headache as they mature and become hopefully higher priced and more exclusive with time.
But clearly that didn’t happen in the US where the old and excess wine is cheap to mid-priced plonk that no one wanted and the company and its distributors couldn’t sell.
As a result, while the company said yesterday that while it expected its 2013 pre-tax earnings to be in line with market consensus of $216 million, tax profits will be cut by a round $160 million by a series of cash and non-cash items. Ouch!
TWE said it was working with its US distributors to address the problems of too much aged and deteriorating wine on its books in the US. To get rid of it will cost a motza.
Destruction of old and aged stock could cost up to $35 million, another $40 million provision will be raised for extra discounts and rebates to accelerate the sale of excess vintage wines and a $85 million provision made for TWE’s own excess bulk and finished wine and onerous grape contracts, while reduced shipments to the US could impact earnings by up to $30 million next year.
The US market is the world’s largest for wine consumption, but it clearly isn’t the easiest one for companies such as TWE to crack, especially since the 2008 recession and GFC.
Nor has the high value of the Australian dollar for much of the past three years helped companies like TWE maintain a profitable foothold in even a market as large and diverse at the US.
In short it got stuck with too much red and white wine at price points above what the market wanted. TWE decided to hang onto the wine and sell it as the economy recovered, but it hasn’t been able to do that at a rate fast enough to reduce stocks to more acceptable limits.
TWE is the wine rump of the old Foster’s booze giant. It controls leading brands such as Penfolds, Wolf Blass, Rosemount and Beringer (which is a big US label).
The upshot of all of these changes is that while TWE clears the excess stocks and revamps its US wine distribution businesses, it will ship around $30 million less wine to the US market in 2013-14 and be forced to carry up to $85 million worth of excess bulk and bottled wine, as well as some contracts to buy wine that can’t be changed.
Treasury chief executive David Dearie said: “We have been operating at the higher end of our desired distributor inventory levels in the US and while Treasury has been focusing on reducing days’ inventory organically, advances in logistics and warehousing, combined with a renewed focus on efficiency has resulted in US distributors significantly reducing their targeted inventory levels”.
Mr Dearie said Treasury made the decision to destroy old and out-of-date product in the US distribution network in order to maintain brand reputation.
“Excess inventory affecting Treasury’s US supply chain has arisen as a result of three elements: over ambitious forecasting of new commercial product launches, improved distributor logistics, and old and out-of-date stock which both Treasury and our distribution partners would prefer to destroy," he said.
Much of the wine in question will be buried in bottles underground in the US.
Normally too much wine can lead to headache for consumers – not producers or distributors.
Clearly this is one of those rare examples where the biggest hangover is the producer’s. In this case, TWE.
