• Net profit after tax pre significant items up 11% to $363 million
• Net profit after tax up 90% to $554 million
• Earnings per share pre significant items up 10.4% to 18 cents per share
• Earnings per share pre significant items & SGARA increased 12.9% to 18.4 cents
• Net sales revenue up 3.5% to $2.4 billion
• Off-market share buy-back of up to $400 million
• Interim dividend up 10.3% to 10.75 cents per share
Half Year Highlights
• Earnings per share before significant items increased 10.4% to 18 cents. Earnings per share before significant items and SGARA increased 12.9% to 18.4 cents.
• Global wine volume increased 3.1% and revenue increased 4.9% (5.3% constant currency). Growth in Europe Middle East and Africa (EMEA) and the Americas was strong with momentum improving through the first half.
• In Australia, beer, cider and spirits (BCS) continue to perform well with revenue up 3.2% and net sales revenue per case up 4.1%.
• Southcorp integration activities are substantially complete. Increased complexity in wine packaging and Australian export logistics, however, will partially offset Southcorp synergy benefits for the remainder of fiscal 2007.
• The Australian multi-beverage route to market model continues to evolve but negatively impacted first half performance in Australian wine. Initiatives have been implemented in the first half to deliver the required improvements in sales capability and customer service.
• An increased capital management program will return up to $400 million of surplus capital to shareholders.
• The divestment of the Pallhuber business was completed during the period.
Continuing business EBIT increased 6.7% (6.9% constant currency) to $601.8 million.
• In the Australia, Asia and Pacific (AAP) region EBIT increased 2.5% to $442.2 million. In Australia EBIT prior to SGARA (EBITS) increased 5.7% with good growth in beer and cider, modest growth in spirits/RTDs, while wine earnings were below the prior period.
• In the Americas EBIT increased 16.6% (19.1% constant currency) to $143.1 million and EBITS increased 20.5% (23.0% constant currency). Earnings momentum improved through the half with innovation and new product development to accelerate in the second half.
• In EMEA, EBIT increased 9.9% (4.6% constant currency) to $38.7 million. Earnings benefited from successful promotional programs with major UK retailers, successful product innovation and continued strong growth in Continental Europe.
• An $11.4 million pre-tax SGARA charge was reported in the first half reflecting the impact of adverse Australian climatic conditions on the 2007 grape harvest.
Continuing Business Operating Cash Flow prior to interest and tax (OCFPIT) was $465.1 million.
• Continuing business OCPFIT/EBITDAS pre significant items declined 16.6 points to 68.1% reflecting the timing of Australian beer sales through December and wine shipments in November and December. These timing issues have reversed in January
• Net capital expenditure was $56.9 million, $11.5 million below the prior period.
• Directors have declared an interim dividend of 10.75 cents per ordinary share fully franked, an increase of 10.3% on the 2006 interim dividend.
On a continuing business basis, Foster’s earnings growth accelerated. Net profit before significant items increased 14.6% to $352 million and earnings per share before significant items and SGARA increased 12.9% to 18.4 cents per share. EBITS margins increased 1.2 points to 25.9%.
In the Americas and EMEA regions Foster’s is performing well with momentum improving through the first half and a strong product innovation pipeline in place. Within the AAP region, beer in Australia continues to perform well, however wine performance was disappointing. Foster’s is committed to multi-beverage in AAP and most aspects of the model remain on track. However, the model continues to evolve, with increasing focus on wine sales capabilities. Foster’s remains confident that multi-beverage will deliver the anticipated improvements in customer service and efficiencies.
Southcorp integration activity was substantially completed in the first half. Foster’s continues to expect to realise all anticipated Southcorp integration synergies and other wine supply efficiency benefits. However additional costs to overcome initial complexity in Australian wine export logistics and packaging and, delays and higher commissioning costs at Napa Bottling Centre (NBC) are expected to partially offset these anticipated production benefits over the next 6 to 9 months.
Revenue Growth
Continuing business net sales revenue increased 3.5% (constant currency 3.8%) to $2,367.8 million.
In Australian beer, revenue growth was solid; up 4.3% on the prior period, with Crown, Carlton, Pure Blonde and Corona leading the way.
The premium wine category globally continues to show attractive growth characteristics. In each of Foster’s major markets, premium Australian, Californian and Italian wines are key drivers of wine category growth.
Foster’s performance in the global premium wine category is improving with 10.5% volume growth in the Americas and EMEA offsetting volume declines of 10.5% in the AAP region. Foster’s global wine volume increased 3.1% with net sales revenue up 4.9% (5.3% constant currency). Beringer, Lindemans, Penfolds and Wolf Blass performed strongly while Rosemount volume declined 15.5% prior to the completion of the global relaunch. Excluding Rosemount, Foster’s global wine volume increased 4.7% and constant currency net sales revenue increased 8.0%.
Foster’s continues to invest behind its core brands with global advertising and promotional (A&P) spend remaining around 9% of net sales revenue.
Innovation and new product development remain key growth drivers. The launch of Lindemans Chilean and South African labels and Lindemans Winemakers’ Release in the UK drove 14% growth in the brand. Rosemount was re-launched in the UK in November and consumer and customer response has been encouraging. The new Rosemount package was released in Australia in November and previous vintage inventories have now largely been cleared. In the second half the Rosemount relaunch in Australia will be supported by increased A & P investment.
Australia, Asia and Pacific
In Australia, Foster’s is evolving its multi-beverage model to increase flexibility and sales capability, while continuing to capture service and efficiency benefits.
To improve sales execution and customer responsiveness, Foster’s implemented a dual National sales structure, effective January 2007. Wine performance trends in December and January are encouraging with net sales revenue ahead of the prior period for those two months.
Initiatives to increase Australian wine sales focus include the development of specialist wine and premium on-premise sales teams to complement the core multi-beverage sales force. In addition, increased investment in sales strategy, planning and customer management capability is also underway. The additional specialist sales teams are being implemented progressively and will be in place nationally by the end of February.
Foster’s continues to evolve its Australian multi beverage service platform with simplified customer transaction processes and streamlined ordering, invoicing, collection and payments. In Western Australia and South Australia Foster’s has established multi-beverage distribution centres and as the Australian logistics transformation project is competed over the next 12 months, “one delivery” capability will be become available to most customers nationally.
Increased investment in customer service combined with business simplification initiatives are delivering improvements in Australian key customer service performance metrics. BCS “In Full On Time” (IFOT) deliveries remain excellent and wine IFOT deliveries reached target levels in December. Wine out-of-stocks are substantially below the prior period with simplified procedures now in place to resolve these issues.
Foster’s continues to invest behind its core brand portfolio and insights capability in the AAP region with A & P spend remaining similar to the prior period. Portfolio simplification and brand prioritisation is underway across the Foster’s Australia portfolio, with product development priorities established and trade investment increased.
Americas
The Americas region continues to grow as a strong premium wine market for Foster’s. In particular, the US remains one of the fastest growing premium wine markets globally. The US market is growing across all premium price segments and across both Californian and imported wines. Latest industry estimates are that the 2006 Californian vintage was approximately 3.1 million tons, 17% below the 2005 vintage. Californian wine industry inventories remain balanced.
Market integration activity completed in fiscal 2006 has provided Foster’s with strong growth capabilities. Relationships with distributor partners are good and Foster’s is continuing to invest in sales capability such as proprietary store level depletions tracking, purchase level consumer insights and enhanced sales promotion analysis tools.
Foster’s is now delivering a sustainable, consumer and customer driven program of innovation. In the December quarter, Foster’s launched Beringer Third Century at the $US10-14 price point and, Bohemian Highway, a Californian lifestyle product positioned at the $US6-8 price point. Lindemans South African and Yellowglen Pink sparkling were also successfully launched in the first half as Foster’s continues to focus on delivering consumers the highest quality and best range of products in each price point.
EMEA
Foster’s has built a strong foundation for sustainable growth in the EMEA region.
The distribution reach of the combined Beringer Blass and Southcorp brand portfolio has increased across the region. In the UK, relationships with major retailers are strengthening and promotional programs are in place for the second half. Foster’s is also investing to develop the convenience and on-premise channels. In Continental Europe, Foster’s is partnering with the leading Nordic distributor Vin & Spirit, and is consolidating its distribution in Ireland through strong local distributor, Edward Dillon & Co.
Wolf Blass performance remains strong and continues to be supported by product innovation and A & P. Lindemans is showing substantial improvement with the launch of Lindemans Winemakers Release at an average price of approximately £4, re-invigorating the brand in the UK. While it remains early days for the relaunch of Rosemount, consumer and customer response in the UK has been strong, with AC Nielsen data indicating Rosemount volumes increased approximately 15% in December and January.
Targeted innovation is increasing our participation in new categories and consumer profit pools. Source country diversity is increasing with product innovation and sales focus delivering strong Beringer volume growth in the first half. In the second half, Foster’s will enter the Italian and Chilean categories with the launch in the UK of Gabbiano and Lindemans Chile.
Supply Efficiency
The global supply network provides the scale and cross-border capability to source raw materials in response to our goal of satisfying customer and consumer demand. The supply model is facilitating increased global co-operation, the adoption of best practice and is improving transparency and control.
Foster’s BCS supply function is performing well. Mix adjusted unit Cost of Goods Sold (COGS) increases are tracking at the lower end of our fiscal 2007 guidance range of between 3-5%.
Southcorp integration activity was substantially completed in the period and the anticipated benefits are being captured in procurement, vineyard operations, winery operations and Australian logistics, and are contributing favourably to wine COGS.
Additional costs are, however, being incurred to overcome initial integration complexity in Australian wine export logistics and at the Wolf Blass Packaging Centre (WBPC) and, as a result of delays in commissioning and initial operating inefficiencies at the Napa Bottling Centre (NBC). Recovery programs are in place and are delivering improvements in operational and financial performance. These additional costs are expected to be eliminated over the next 6 to 9 months and the anticipated supply synergy and efficiency benefits are expected to be realised during fiscal 2008.
Inefficiencies at both packaging facilities and in Australian wine export logistics resulted in costs being approximately $20 million higher than anticipated during the first half. In the second half Foster’s expects the cost impact of these inefficiencies to be approximately $10 million and in first half of fiscal 2008 Foster’s expects the cost impact to be less than $10 million.
Wine Packaging Consolidation
In the first half Foster’s consolidated its global wine packaging activities to 3 primary facilities – Lindemans Karadoc and the WBPC in Australia and, the NBC in California.
Foster’s completed an upgrade of the Karadoc bottling facility in fiscal 2006 and performance has been in line with expectations.
The commissioning of the NBC has allowed the consolidation of the majority of our Californian wine packaging to a single site. Packaging activities commenced at NBC approximately four months later than anticipated and production efficiency on one of the four bottling lines has been below expectations through commissioning and in initial operations. Foster’s expects NBC to be running at targeted efficiency levels within 6 to 9 months.
The WBPC is the largest wine packaging facility in Australia and Foster’s primary packaging facility for Australian export wine. The first stage of the WBPC was commissioned in fiscal 2006. The second stage of the WBPC was commissioned in July 2006 and included the integration of the majority of Southcorp’s Australian wine export products and, the re-location of packaging activities from Merbein and Smythesdale.
The consolidation of packaging activity at WBPC resulted in a significant increase in complexity in wine logistics and proliferation of bottle types, labels and short bottling runs. System and process re-engineering is improving performance at WBPC and Foster’s expects to reach targeted efficiency levels within the next 6 to 9 months.
Wine Export Logistics and Warehousing
In the first half Foster’s integrated the Southcorp and Beringer Blass wine export logistics functions. Initial integration complexity and, inefficiencies at the WBPC and Foster’s container packing facilities in Adelaide resulted in sub optimal container utilisation, additional transport, handling and warehousing costs and higher finished goods inventories.
Foster’s is refining its wine export systems and processes and remains confident all synergy benefits anticipated from the integration of export logistics will be realised within the next 6 to 9 months.
Grape and Wine Supply
Foster’s adjusts its committed grape and wine supply arrangements in order to balance risk and deliver appropriate returns while maintaining access to grapes and wine to make great wines.
In the 2006 Californian vintage, Foster’s continued to re-align its intake from the North Coast and Central Californian regions while maintaining an overall balanced inventory position.
In Australia, at this early stage of Vintage 2007, Foster’s expects adverse climatic conditions including frost and drought will reduce the total Australian wine grape harvest by up to 40%, which is in line with recent industry estimates. Foster’s currently expects a similar decline in grape production from its owned vineyards.
Foster’s has secured the vast majority of its 2007 Australian vintage requirements. In anticipation of a decline in Australian wine grape production in the 2007 vintage, Foster’s implemented risk mitigation plans with existing grape and wine suppliers and has proactively signed additional grape and wine supply agreements. However based on current estimates, Foster’s expects some regional and varietal shortages.
The 2007 Australian vintage is expected to move the Australian wine industry toward supply / demand balance earlier that previously expected. Foster’s expects a reduction in the Australian wine industry surplus inventory will create a more attractive environment for premium branded Australian wine producers, and provides the likelihood of stronger margins within the next few years. The timing of margin expansion opportunities will, however, depend on current levels of industry wine inventory, and growing conditions in the lead up to the 2008 vintage.
Grape and wine prices are expected to increase in the 2007 vintage and, while the precise impact remains unclear, it may result in some increases in COGS emerging in late fiscal 2008. In addition, lower anticipated grape production from Foster’s owned vineyards has resulted in an $11.4 million pre-tax SGARA charge being reported in the first half. Foster’s currently expects a pre-tax SGARA charge of between $20 and $30 million in fiscal 2007.
Foster’s commenced vintage on 9 January and to date has received almost half of its planned grape intake. Grape deliveries from contract growers and grapes harvested from owned vineyards have been broadly in line with Foster’s pre vintage estimates.
Focus and efficiency
Capital Management
Foster’s today announced an off-market buy-back program of up to $400 million.
Foster’s has cancelled the balance of its existing $200 million on-market buy-back announced in August 2006.
The off-market buy-back provides Foster’s with increased certainty in executing an expanded capital management program.
The increase in size of Foster’s capital management program reflects Foster’s ongoing confidence in its ability to generate operating cash flows and increased certainty as to the timing of previously announced asset sales.
Notwithstanding the $200 million increase in Foster’s announced capital management program, Foster’s expects to reduce net debt to below $3 billion by fiscal 2008, one year ahead of expectations at the time of the Southcorp acquisition. Foster’s remains committed to achieving metrics consistent with a BBB+/Baa1 credit rating by fiscal 2008.
Foster’s expects to continue to be able to pay fully franked dividends.
Cash Conversion
Foster’s OCFPIT as a percentage of EBITDAS (cash conversion) in the first half declined 16.6 percentage points to 68.1%. The decline in cash conversion primarily reflects the timing of Australian beer sales in December and wine export shipments in November and December. These timing issues largely reversed in January.
Discontinued Businesses
Foster’s has made progress in the divestment of its Wine Clubs & Services businesses.
In the first half the disposal of Pallhuber was completed and strong indications of interest have been received for the remaining Clubs & Services businesses. Disposition of these businesses is expected in fiscal 2007.
The Discontinued Businesses result of $227.0 million ($201.3 million after tax) includes a pre-tax trading result of $21.1 million ($11.1 million after tax) primarily relating to Wine Clubs & Services, a pre-tax loss of $24.8 million ($24.3 million post-tax) mainly relating to fair value adjustments prior to the divestment of US Wine Clubs businesses and a pre-tax profit of $230.7 million ($214.5 million post-tax) relating to the divestment of the Asian brewing businesses and the Foster’s trademark in India.
Southcorp integration and restructuring
Southcorp integration activity was substantially completed in the first half.
Cash disbursements relating to the Southcorp integration in the 6 months to December 2006 were $14.3 million.
In accordance with AASB3, Business Combinations, financial information for the 6 months ended 31 December 2005 has been restated to reflect the finalisation of the Southcorp acquisition accounts in May 2006.
Outlook
Trading conditions in all regions through January have been strong, and volume, constant currency revenue, and earnings growth rates for the 7 months to January are ahead of the first half.
For the remainder of fiscal 2007, Foster’s expects continued revenue growth from its Australian beer, spirits/RTDs and cider portfolio and expects some benefit from improved specialist wine and premium on-premise sales capabilities to emerge in the second half.
In the Americas, Foster’s expects the Californian wine industry to remain in a balanced inventory position and for value growth in the USA and Canadian premium wine categories to remain strong.
In the EMEA region, the UK market is expected to remain competitive. Foster’s expects good growth in volume and revenue, and improved EBIT margins are anticipated in the second half
Global wine EBITAS margins are expected to reach the mid 20s late in fiscal 2007.
Foster’s continues to expect realisation of $165 million of Southcorp synergies in fiscal 2008.
However, delivering Foster’s targeted return on capital from our global wine business in fiscal 2008 will require management focus in several key areas: elimination of current inefficiencies in wine packaging and Australian export logistics; and improvements in Australian wine performance from recent modifications to the Australian multi-beverage route to market model.
In addition, several other factors will influence Foster’s ability to achieve its wine returns targets. Key among these will be exchange rate movements and the possible impact in fiscal 2008 of the smaller and potentially more costly vintage 2007.
Foster’s continues to expect accelerating earnings per share growth (before significant items and SGARA) in fiscal 2007.
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