Foster's suffers headache from wine business

Foster's, the Australian beer and wine group, yesterday reported a drop in full-year profits after further slashing the value of its global wine business by about A$600m (US$513m).

The company declined to provide guidance for 2009 until it had completed a strategic review of its wine business. The unit has performed particularly poorly in the US, the group's most important market, where sales fell sharply.

In June, Trevor O'Hoy stepped down as chief executive after Foster's warned that full-year profits would be lower than expected and slashed A$1.2bn from the value of its global wine assets. The group said yesterday that the search for a new chief executive was going well, as it reported a net profit before significant items of A$713.2m for the year to June 30, down 0.4 per cent on the previous financial year.

Ian Johnston, acting chief executive, said global trading conditions for wine continue to be competitive. "We have not been immune from industry-wide pressures including an economic slow-down in key markets and higher grape prices."

Foster's said its Australasian beer business, which accounts for about 70 per cent of group earnings, saw net sales rise 5.8 per cent in spite of a decline in volume of 2.1 per cent.

But the company said that while its beer business in Australia continued to generate solid earnings growth, a high Australian dollar had cut wine earnings by A$70m.

"Put simply, financial returns from wine have not met our expectations," Mr Johnston said. The company was making good progress with the wine review but he would not comment on its findings until its completion at the end of the year.

"The scope of the review is comprehensive and will, among other things, consider the optimal structure and operations of Foster's wine business," he said.

The strategic review, which followed Mr O'Hoy's departure, was seen by analysts as a tacit recognition that the company had paid too much for Southcorp. Foster's paid A$3.7bn three years ago for the business, whose brands include Penfolds, Rosemount Estate and Lindemans, and turned into one of the world's largest listed beer and wine companies. Mr O'Hoy, who became chief executive more than four years ago, was at the helm when Foster's bought Southcorp.

Analysts yesterday complained at the lack of forward-looking guidance given the high level of uncertainty surrounding the business. They noted the company's strong cash flow, which after dividends increased 52.1 per cent to A$433.9m. The shares closed up 1.5 per cent at A$5.41 yesterday against a general 0.2 per cent decline in the wider Australian market.