Pure Blonde Fails To Stop Foster's Flop

The Age

Wednesday February 20, 2008

Nabila Ahmed

Foster's boss Trevor O'Hoy has refused to tell the market how long it will take to lift his troubled wine business, or how much longer he will remain at the helm of the company, after revealing profit growth had slowed in the first half.

Falling demand in the softening US market and the soaring Australian dollar combined to crimp earnings at Foster's in the six months to December 31. The company reported a 28% drop in net income after significant items, including gains from selling the company's Asian breweries a year earlier.

Profit before significant items rose 6% to $393.5 million, slightly above analysts' expectations of $380-$385 million. But the growth in earnings was less than the 11% the company reported a year earlier.

In Australia, Asia and Pacific, earnings rose 14.1% to $515.5 million as volumes slipped but as Foster's lifted prices for beer and premium wines. Beer, bolstered by a doubling in sales of Pure Blonde low carbohydrate beer, contributed almost 85% to the earnings for the region.

The result was dragged down by the performance in the Americas, where earnings fell by almost a third to $98.3 million. Foster's brands such as Beringer, Lindemans, Penfolds and Rosemount slowed sharply in November and December as consumers curbed spending.

Foster's expects conditions to remain tough in the face of "consumer economic anxiety", with full-year earnings from the region expected to fall. But the company is still targeting a 10% growth in underlying earnings per share for fiscal 2008.

Mr O'Hoy, who has been struggling to extract value from his $3.7 billion acquisition of Southcorp, admitted returns from the company's wine business were unacceptable.

"Clearly in wine returns and revenue growth, we have underperformed," he said.

But as shareholders continue to fret about the fact that Foster's share price has risen 6.85% since the acquisition in May 2005, compared to the market's 35.97% increase and rival Lion Nathan's 29.71% gain in the same period, Mr O'Hoy again promised to improve performance.

"I am absolutely passionate and energised and committed to the unique business model we have, not only in Australia but also in global premium wine," he said.

He said a period when the wine business, which is failing to meet the cost of capital by 400 basis points, would deliver acceptable returns was "within reach" but would not indicate a time frame in which it would be achieved.

Mr O'Hoy, who has been under enormous pressure in his role as some investors called for a split of the business into separate wine and beer operations and others wanted his head, was tight-lipped about his future.

"I say the rumours of my death are a little bit premature but I'm not going to give you guidance on that date at this stage," he said.

"There's two things I am not going to give guidance on: specific dates of either getting the wine returns where we want them, or my departure."

Foster's announced an interim dividend of 12? a share, payable on April 2. Foster's shares fell 9?, or 1.5%, to $5.77, extending this year's decline.

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