Q1 meets expectations but Australian dollar strength beginning to hurt Foster’s

Posted by Daniel Palmer on 21st October 2009

Australia’s largest brewer has today informed shareholders that they are on track to meet guidance for the current year (ex-currency), but are beginning to encounter headwinds as a result of a surging Australian dollar.

“Adjusting for currency, Foster’s performance in the first quarter has been in line with expectations,” Chief Executive Officer Ian Johnston said at the AGM. “In Australia, beer is continuing to benefit from positive market conditions and earnings momentum remains strong.”

“In wine, performance in key international markets continues to reflect challenging financial conditions with consumers maintaining their preference for commercial wines and to eat out less. In Australia, the oversupply situation is impacting our commercial wine volume but this is being partially offset by solid performance in more premium price points and overall net sales revenue is only slightly behind the prior year.”Wine division

Foster’s, which reported growth in sales and profit in the 2009 Financial Year, has been held back in recent years by their underperforming wine assets with rumours still swirling that a demerger of their wine assets is on the cards despite the company distancing themselves from that prospect. Their Chairman and CEO did not discuss such a plan in their speeches to shareholders today.

“It’s just over twelve months since I took up the Chief Executive role, and the business environment over that time has not been easy. But we are building a stronger, more
focussed business with a refreshed management team, and a new organisational structure and culture,” Mr Johnston said. “We completed a comprehensive review of our wine business and operating structure during the 2009 financial year, and we have made significant progress in implementing the outcomes.”

“On viticulture assets, we have agreed the sale of 12 vineyards totalling around a quarter of our planned program and completed deletion, sales or marketing agreements for our tail wine brands identified as part of the review.”

It is widely thought that a demerger of the wine business would see the company become the centre of a bidding war for their beer assets.

Outlook

Mr Johnston said the business was confronted with a number of challenges that could hurt earnings in the coming year.

“The rising Australian dollar, up over the 90c level against the weakening US greenback, and over 55p against the pound, present challenges in terms of earnings and competitiveness in export markets – as does increasing competition from cleanskin and private label wines in the Australian market,” he advised. “From a global perspective, we are addressing head-on the image challenges facing Australian wine and, in particular, the image of core traditional varietals such as chardonnay.”

“We are working hard at building our reputation for outstanding quality and repositioning our portfolio for diversity and terroir.”

Th company has also begun a major marketing campaign for their highest selling brand, VB, and is set to launch new campaigns for Pure Blonde, Carlton Draught, Carlton Dry and Cascade in the near future.

“And there are more innovations to come, extending consumer favourites and breaking the mould with some new concepts,” Mr Johnston added. “Finally, our transformation agenda will continue at pace, continuing the cultural change amongst our people while we aggressively drive efficiency and productivity improvements – delivering the promised $100 million of annual cost savings.”