TWE’s new chief executive struggles to win over investors
It’s tough for a new chief executive to announce improved performance but still see their company’s share price slump to a five-year low on the same day.
That’s what happened to Tim Ford of Australia’s Treasury Wine Estates last week.
Mr Ford announced encouraging underlying trends in most of Treasury’s markets in the first three months of the company’s financial year.
Retail sales in the key Asian markets were up 14% and gained 17% in the UK. In Australia and New Zealand the “masstige” range (mass produced wines at prestige prices) priced at $A10 and above grew by 21%, well ahead of the market. Even in Treasury’s disaster area of North America the Focus 9 brand increased sales by a creditable 32%.
Investors, however, largely ignored the progress achieved by Mr Ford in his first three months at Treasury’s helm and focussed on the deepening threat of punitive new tariffs on Australian wines from China.
The shares slumped by 7% to $A7.96, having topped $A19 in 2019, on the fear that that the threat from China could not be overlooked in assessing the company’s prospects and thus its share price.
Australia is embroiled in a diplomatic row with China because Beijing objects to calls from Canberra for an international investigation into the origins of the Covid-19 coronavirus and whether the Chinese could have acted more quickly to contain it.
China has taken umbrage and is retaliating by threatening punitive tariffs on commodity imports from Australia, including wine. Barley shipments have already been slapped with an 80% impost.
Australia exports wine worth some $A1.2 billion (£675 million) a year, about 40% of which goes to China, its largest market.
Treasury, Australia’s largest producer and exporter, does not publish data on its trade with China but it has been concentrating on expanding that market since its first shipments of Penfolds in 1995. In the year to the end of July its Asia division made 45% of its profits so it is safe to assume that China accounts for the largest slice of its overseas business. Interruption to that trade would be a massive blow.
Since August Australian producers have been confronted by voluminous forms on which the Chinese demand detailed figures of their production costs, subsidies and selling prices. Beijing says this is part of a two-pronged investigation.
First it wanted to calculate whether wines were being dumped (sold below cost) in China; second to work out if producers were benefiting from unfair federal and state subsidies. If companies did not provide the data they faced having shipments being banned and returned.
Last Friday, November 6, was set as a deadline after which shippers were told they might have to wait up to six weeks for their wines to clear formalities. So far no decision has been announced on implementation.
But the pressure was ramped up last week by a demand from the China Alcoholic Drinks Association to Beijing that any punitive tariffs should be imposed retrospectively on Australian wine sold in containers up to 2 litres in size.
It is no secret that China is energetically seeking to expand its own wine production capabilities and sceptics suggest Beijing is not unhappy to use the “insult” about coronavirus to further that objective.
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Mr Ford said that Treasury had been war-gaming a wide range of tariff scenarios. “I won’t declare the actual percentages we’re working to,” he said, “but some of them are more dramatic than others. We’re in a position to react quite quickly.”
Observers speculated that options would be to add any extra impost to retail prices in China, to pass on the cost to Chinese importers or to cushion the impact by diverting sales to other markets. There are even suggestions that Treasury could step up its production in Europe to evade Chinese tariffs on its wines produced in Australia.
Treasury chairman Paul Rayner told the annual shareholders’ meeting that the company was committed to China for the long term but Mr Ford sought to deflect attention from the tariff problem by saying: “Whilst the process we’re going through at the moment is creating uncertainty….clearly we’re certainly focussed more on the medium and long term as to what the business will look like and ensuring that we have strong growth plans in the markets outside China.
“We are more than just China in this business and we want to make sure that all our other markets continue to grow…that’s a big part of the risk mitigation”, he said.
In its latest annual report in August, Treasury projected that China would be its fastest growing market up to the end of 2023, more than offsetting declines in more traditional markets such as the US, where it has had a torrid time, notably with the Beringer brand.
There it is seeking to sell off a number of peripheral and commodity lines to combat the wine glut and cope with severe price competition, but it faces a long haul. Groups of Treasury’s own shareholders are suing the company in both Australia and the US over what they believe was misleading information about the performance of the American arm in 2019.
An immediate change of tactics for Treasury shelving the plans to de-merge the Penfolds brand into a separate company. Before the China tariff threat some analysts reckoned it could be worth US$4.7 billion (£3.6 billion), more than $A5.75 billion (£3.17m) the stock market valued the whole of Treasury at the end of last week.
Work may continue to separate Penfolds internally in an attempt to add value, but Penfolds remains a cornerstone of Treasury’s portfolio for the time being at least while Mr Ford concentrates on more immediate problems.
Whatever the next few months hold, his actions will remain in the spotlight. Some analysts even predicted on the day of the trading statement that Treasury could be vulnerable to an opportunist takeover bid, so comparatively cheap were the shares.
By the weekend, however, calmer heads were holding sway and the shares rebounded by 10%.
The thinking was that becauseTreasury’s wines sell at the higher end of the price spectrum in China it is unlikely that much of what it sells there will be caught by anti-dumping measures.
Further, the tariff threat has been around for several months and its potential damage to Treasury had already been factored into the share price long before now. The optimists were suggesting with the shares still depressed, this is a good time to buy Treasury stock.
