- CEO Michael Clarke went on the offensive after media reports that there was a buildup of the company’s cheaper wines in China.
- The AFR report sparked a sell off in TWE shares that wiped more than 11% off the value of the stock.
- Clarke held a 51-minute investor briefing within 90 minutes of the market opening and the company’s share price subsequently recovered 5%.
When Treasury Wine Estate’s CEO Michael Clarke stepped into the role in Macrch 2014, the company was a bit of a basket case. The share price had fallen 35% in 10 months, profits were on a downward spiral, the company’s credibility was taking a battering and a looming class action threatened to hit the bottom line even harder.
The South African-born former Kraft and Coca-Cola executive, a year on from a 18-month miracle turnaround of Premier Foods, was nonetheless seen as a neophyte moving into the complex wine sector.
TWE is one of the world’s biggest wine businesses, a behometh with Australian brands such as Penfolds, Wolf Blass, Yellowglen, Lindeman’s, Seppelt and Rosemount, as well as Beringer in the US, New Zealand’s Secret Stone and Squealing Pig and Italy’s Castello di Gabbiano.
Today, Clarke is seen on a par with Alan Joyce of Qantas when it comes to corporate turnarounds.
The Treasury share price was sitting at around the $3.50 mark when he took the reigns. And despite last Thursday’s hammering – we’ll get to that in a minute – it ended the week at $16.57, down from an all-time high of $19.07 just a fortnight ago.
And here’s a quick reminder of how far things have come under Clarke: just six months into his tenure, rival private equity firms KKR and TPG Capital were lobbing takeover bids worth around $3.4 billion at $5.20 share at the wine business.
Clarke and board terminated discussions and TWE’s shares fell nearly 15% to $4.19 in September 2014.
Plenty of analysts today have a price target above $20 on TWE.
Over the past few years, Clarke has been on an aggressive cost cutting drive, closing down some winemaking facilities, selling off other wineries, and also going on a spending spree, buying Diageo Wine’s US and UK operations for $US552 million ($AU760 million).
Meanwhile, Treasury settled the investor class action in August last year for $49 million without any admission of liability.
To start 2018, the company reported a 37% increase in after tax profit to $187.2 million for the year year to December on the back of strong sales in Asia.
The company increased dividends to 15 cents a share, 75% franked, up two cents on the same six months last year.
In Asia, earnings were up 48% to $117 million, 8% in the Americas to $100.4 million, 17% in Europe to $24 million, and 28% in Australia and New Zealand to $68.2 million.
The company was reportedly heading for record 2018 financial year.
But yesterday, the company which has been transforming itself from bulk wine producer to masstige brand business was sideswiped by a report in the AFR that it had up to 800,000 cases of cheaper wines such as Penfolds Rawson’s Retreat sitting unsold in Chinese warehouses.
The shares shares had closed at $18.02 last Wednesday, and within an hour’s trade on Thursday, fell brutally to $16.05.
And that’s when Clarke became the billion dollar man.
The company’s two page written response to The AFR was lodged with the ASX at 10.06am, with the company admitting that regulatory changes last month had delayed shipments into China clearing customs.
Just after 11.30am, Clarke fronted the investment community with CFO Matt Young in a 51-minute dial-in conference.
He began by saying he wouldn’t normally comment but “felt it was important given the noise in the media”, delivering a blunt and tough initial 10-minute defence of Treasury’s strategy.
He was “very happy with the operating model in China”, and stock levels were carefully monitored, including by a third party audit firm in ongoing reviews at every level.
In China the company doesn’t employ a traditional distribution model, instead working directly with retailers and tier 1 and tier 2 wholesalers who must share their data with Treasury so the company knows exactly who they’re selling to and can follow it up, right down to visiting stores to check stock levels.
“The most important fact everyone should write down,” Clarke said, adding “I’ll say it twice” was that: “Our depletions in China in the last quarter and over the last 12 months has more than doubled. All our core brands are growing.”
“Totally happy with the inventory levels in China, across the board.”
Central to his argument was that global changes to sales and distribution partnerships the company has developed over the past four years had led to some discontent.
Some “partners”, especially those who wanted to “cherry pick” rather than sell an entire portfolio, had been cut as a result.
“Sometimes we will upset partners and disappoint a partner… especially when we are performance managing that partner to ensure that that partner is part of our business model and is consistently delivering and wanting to grow the business – and the business being a portfolio of brands,” he said in a my-way-or-the-highway defence of Treasury’s approach.
“What we will not do is have a business partner who is upset when they are performance managed and becomes a squeaky wheel thinking they can put pressure on us to get us to get back into business with them when they have demonstrated that they are not the appropriate partner for us.
“And I think you’ve seen me do that over the last four years. And I’ve made it personal when I say me. Yes it’s Treasury Wine Estates but I am the person who has driven these changes in the company and taken the pain in the company, and personally, with my team and I, to actually address fixing things in our business and not put up with unsustainable practices by either ourselves or our business partners.”
Clarke’s message is that of you’re working with Treasury, then it’s about growing a portfolio of brands globally, not specialising in a particular label, such as Penfolds, in China.
He said they’re recently cut some partners in China and “could probably name” those who’d spoken to the AFR.
Clarke suggested a motive.
“They’re hoping to put pressure on Treasury Wine Estates to be able to give them something or give relief where we’re not prepared to give relief because we are absolutely focused on running a disciplined business globally, not just in China,” he said.
Clarke’s message was Spartan. It’s all about discipline and a willingness to “take the pain” in pursuit of longer term goals.
And the company won’t deviate, he said, because “we will be abused”.
“We’re not forcing anybody to be part of our business model,” he said.
Those who’s stuck with them are now “seeing profits well above where they were four years ago as a result of continuing to work with Treasury Wines in a disciplined way”.
Clarke also offered some insight into the argy-bargy that goes on, revealing some partners feed the company “good news” via analysts in a bid to curry favour.
But after several high profile businesses faced major issues in recent months that have been compounded by their seemingly tardy response to those problems, the Treasury CEO’s rapid response was a masterclass in crisis management.
Clarke’s spirited defence of his strategy and TWE appeared to have the desired effect, with Treasury’s share price recovering to close on Thursday at A$16.90, down 6%.
His day’s work put nearly $1 billion in value back into the company.
On Friday morning the share price climbed as high as $17.37 before closing the week down 1.955 for the day at $16.57.
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