Foster's first half profit down as wine ops continue to struggle
Foster's Group Ltd's first half profit suffered due to another poor performance from its wine business, but the global beverages firm expects to see operational improvements over the next 18 months.
Foster's on Tuesday reported a 13.5 per cent fall in first half net profit to $355.7 million from the previous corresponding period.
The Carlton & United Breweries (CUB) beer-making operations increased earnings but volumes and market share fell, while a strong exchange rate and a sluggish United States economy hurt Foster's wine business.
But Foster's chief executive officer Ian Johnston said an operational restructure was already showing benefits across both the beer and wine businesses.
"I'm confident that over the coming 12 to 18 months, we will see the changes across our business translate into sustained performance improvement," he said.
Mr Johnston reiterated his comment of August last year that it would take one or two years to turn around the wine business.
Foster's shares closed down 12 cents or 2.16 per cent to $5.44 on Tuesday.
IG Markets market analyst Ben Potter said there was "little fizz" in the result, which missed the average consensus profit estimate of $381 million.
Mr Johnston said the rising Australian dollar had cut earnings from wine by around $83 million. Total wine earnings fell 53.1 per cent to $99.2 million.
A poor economy in the US also hurt wine earnings as consumers worried about jobs and falling house prices cut discretionary spending.
Wine earnings in the Americas plunged 62 per cent to $43.8 million as cuts in business entertainment accounts saw demand for wine in restaurants decline, consumers bought cheaper brands and competition drove down prices.
Wine earnings in Europe, the Middle East and Africa were down 76.2 per cent to $12 million. The Nordic countries and continental Europe performed strongly.
However, the United Kingdom and Ireland markets had been affected similarly to the US but made worse by the severe oversupply of wine.
"The grocery channel in the UK is hooked on a format demanding heavily discounted prices," Mr Johnston said.
Wine earnings fell 1.1 per cent to $37 million in Australia and New Zealand. Australia performed strongly although there was a serious oversupply of wine.
"This is made worse by the excess sauvignon blanc flowing in from New Zealand plus the diversion of wine formerly destined for export, but now finding no overseas outlet given the strong Australian dollar," Mr Johnston said.
"This has resulted in widespread discounting."
In Asia, wine earnings were down 25.6 per cent to $6.4 million, with the global financial crisis pulling back demand in Japan but China showing signs of improvement.
Foster's said it was looking to realign its wine distribution in the US, trim the number of brands in the Australian market, develop the more profitable Nordic and continental European markets, and grow its Asia business.
Meanwhile, earnings from CUB products in the first half rose 6.6 per cent to $486.4 million although volumes in Australia fell 1.1 per cent compared to industry volume growth of one per cent.
Australian beer volumes were impacted by lower promotion programsin the December quarter and disruption caused by the bedding down a new CUB sales structure, following the structural separation of Foster's beer and wine operations.
Mr Johnston said CUB had lost market share to "small players" that were "doing interesting things" with new products as consumers continued to be drawn to craft, low-carbohydrate and premium beers.
It would probably take longer than six months for CUB to regain market share, but it would not do that by discounting products.
"It does come down to store-by-store, account-by-account, brand-by-brand building. There's no quick fix there," Mr Johnston said.
Foster's total operating revenue for the six months ended December 31 was $2.4 billion, down 4.7 per cent.
The company declared an interim dividend of 12 cents per share, steady with the prior first half year.