Treasury Wines shares plunged more than 25%, or more than $4 yesterday in the wake of the shock earnings downgrade released on Tuesday night.
The downgrade to 2019-20 earnings saw as a tense and heated conference call between the Michael Clarke, Treasury’s CEO (who departs in September) and major investors and analysts yesterday.
The shares ended down 26% at $12.35, which was the day’s low. More than 39.1 million shares were traded as investors bailed from the stock (but others bought in or topped up their holdings, it must be remembered).
A contentious part of Tuesday’s announcement was the news that it would conduct a strategic review of its operating model to boost returns from its commercial wine business.
In other words, the future of the so-called premiumisation strategy – which Treasury claimed was generating more money as its quality wines were pushed into higher price brackets – is now up in the air and looks like its a dead duck in its present form.
Treasury said it now expects reported EBITS (Earnings Before Interest, Tax and the agricultural accounting standard SGARA) growth of 5% to 10% in the June 30, 2019-20, financial year. This is down from earlier guidance of 15% to 20% growth.
The company said that the recent drought, heat, and bushfires in Australia had most likely created challenges for the cost of the upcoming Australian vintage, now being harvested. But it said its multi-regional sourcing model gave it flexibility.
But that wasn’t convincing and analysts say the earnings and revenue outlook for the current half (and the current vintage) is up in the air as the impact of the fires and the virus crisis become clearer.
The briefing yesterday saw a leading analyst who has covered Treasury Wine for more than two decades, blast the company and its managers over its commitment to the American market, saying Treasury was “throwing money” at the US while the ill-fated foray was only “destroying value”.
Merrill Lynch analyst David Errington launched his attack during the conference call to discuss Treasury’s first-half results and Tuesday night’s shock profit warning.
“Why are you persisting with this, why do you keep throwing money at it, why do you keep throwing the best resources that you’ve had…the smartest minds are in this market and all it’s doing is destroying value,” Mr. Errington said.
Treasury boss Michael Clarke, who is leaving the CEO role in the September quarter, said the cut to the company’s profit forecasts was primarily due to its “underperformance” in the US.
He said the US business was hit by a range of factors including deep discounting by rival wine companies, a need for greater promotional spending, unforeseen Treasury management changes, the US-China trade war and the rise of private label wine sales.
“Why would you persist with this (US) business that’s done nothing but offset this fantastic asset that you’ve got in Australia, this brilliant strategy that you’ve got leading into growth markets that sets you aside, where you’ve got competitive advantages,” he said.
“You’ve never had a competitive advantage in the US, I doubt you ever will,” he said.
