January 29, 2020 / 12:36 AM / a month ago

Australia's Treasury Wine shares skid 25% after profit downgrade

(Reuters) - A profit warning by Australia’s Treasury Wine Estates (TWE.AX) triggered a 25% tumble in the firm’s shares on Wednesday as it announced a review of its U.S. operations amid stiff competition, a wine glut and unforeseen management changes.

FILE PHOTO: Bottles of Penfolds Grange, made by Australian wine maker Penfolds and owned by Australia's Treasury Wine Estates, sit on a shelf for sale at a wine shop in central Sydney, Australia, August 4, 2014. REUTERS/David Gray

The owner of the Penfolds wine label slashed its earnings outlook for 2020 late on Tuesday, saying business would be affected by aggressive discounting and higher promotional spending in the United States, which it says has been flooded with cheaper wine.

The Americas region accounted for about 40% of Treasury’s annual revenue in financial year 2019.

In a statement, Treasury said it now expects its core earnings to grow about 5-10% for 2020, compared with an earlier range of 15% to 20%. The shares plummeted as low as A$12.48 on Wednesday, touching their lowest level since August 2017.

At least three brokerages - JP Morgan, Credit Suisse and UBS - downgraded their ratings for Treasury, citing continuing headwinds as the company’s guidance did not factor in the possibility of weaker demand due to risks from the outbreak of the new coronavirus in China.

China is one of Treasury’s biggest markets, with the company’s latest annual profit scaling a record in June due to robust demand for its premium wines there.

The company said its new guidance did not take into account any potential coronavirus impact, as it would be “premature” to do so.

“Despite the setback in the U.S. this half ... we remain confident ... to deliver growth in this business in the foreseeable future,” Tim Ford, Chief Operating Officer, and incoming Chief Executive Officer said during an analyst call. Treasury ruled out an exit from the U.S. market.

Treasury in December announced the appointment of Ben Dollard as president of its operations in the Americas, replacing Angus McPherson.

The change came after McPherson notified the company he was unable to relocate to the United States as planned due to unforeseen personal circumstances.

Deep discounting had been an issue for Treasury in 2014, when outgoing CEO Michael Clarke was brought in to rethink the company’s strategy and tasked with turning around fortunes after troubles in the U.S. wine market.

Clarke has since then led the company through a phase of rapid growth in China, and a major acquisition of the U.S. assets of the world’s largest spirits group Diageo Plc (DGE.L) in 2016.

“It is perhaps no surprise that the profit weakness was in the Americas business,” said Nigel Stevenson an analyst at GMT Research, which in August said Treasury may have inflated profits following its purchase of most of Diageo’s wine business.    The Hong Kong-based research house last year argued Treasury might have used acquisition accounting to boost profits by about A$300 million ($205 million), which the company rejected.     “Profitability in the Americas business may now be declining to more normal levels as the benefits of the acquisition wind down,” Stevenson told Reuters in emailed remarks.

Treasury also warned drought, heat and fires in Australia could drive up the cost of its 2020 Australian vintage wine, which is currently in harvest.

(This story has been refiled to clarify record profits as of June, not August, in 6th paragraph)

Reporting by Shriya Ramakrishnan in Bengaluru; Editing by Kenneth Maxwell and Lincoln Feast.

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