FOSTER’S HINGING ON DROUGHT AND CURRENCY TROUBLES
Today, Foster’s Group addressed shareholders at its annual meeting in Adelaide. In the meeting ceo Trevor O’Hoy and chairman Frank Swan addressed supply issues, price recovery, the California harvest and currency problems the company is currently facing.
WINE AND BEER TO STAY IN TACT. Frank Swan, chairman of Foster's Group denied all speculation that the company will eventually split its beer and wine operation.
“The board and management team clearly keep all of these options under review, but we have no intention at the present time of moving to separate the two businesses and nor do we believe that's in the best interests of the shareholders that we should do so.”
Swan is retiring from his role as Chairman after the meeting. He joined the board in 1996.
TIGHTER SUPPLY: THE GOOD, BAD AND THE UGLY. O’Hoy says that tighter grape supply in Australia, and to some extent, California, will help prices after a prolonged period of discounting. However, current droughts in Australia may cause Foster’s to have too short of a supply in the 2008 harvest.
The good news for Foster’s is that smaller 2007 and 2008 Australian harvests will likely eliminate the oversupply that has caused a major downshift in grape and wine prices in recent years.
“Recent price rises and a steady shift toward premium products will drive improved revenue per case sold,” said O’Hoy.
Another positive for Foster’s is trading up trends across the pond. The Americas are crazy over premium wine, including both California and imported.
“Growth in the Americas was driven by ongoing investment in sales capability and innovation in brands such as Beringer Third Century, Bohemian Highway and Yellowglen Pink and Yellow. Revenue continues to grow faster than volume in the North American market, with Foster’s portfolio very well placed to benefit,” said Frank Swan, chairman of Foster's Group Ltd.
However, there are some setbacks with both regions. In the Americas, the company expects “constant currency earnings and margins to be below the prior period, as a result of product mix and a higher cost 2006 Californian vintage.”
In Australia, the drought is causing a lot of concern. Following a small 2007 vintage, Australia is facing the potential for an even smaller 2008 harvest, depending on weather conditions in coming months, said O’Hoy. If the 2008 yields are too small, Foster’s could have a reverse supply problem on its hands.
“We are monitoring the vintage carefully and have undertaken a wide range of scenario planning exercises to ensure we are prepared.”
Australian regions that are not dependent on the Murray irrigation system have the potential of good yields, said O’Hoy, which is the “majority of Foster’s own vineyards.”
“In a typical year, our own vineyards and contract suppliers not dependent on Murray River water, would supply around half of our requirements.”
Foster’s will look at the possibility of sourcing wine from international markets to fill any supply gaps.
The California harvest, meanwhile, is almost complete. O’Hoy said the “intake was in line with our targets and our quality expectations for the vintage are very high...We expect total Californian yields in this vintage to be below last year and expect to see some further tightening in overall supply.”
STRONG AUSTRALIAN DOLLAR POSING PROBLEMS. The strong Australian dollar has continued to negatively impact earnings, said O’Hoy, particularly in wine.
In the September quarter, the average Australian – US dollar exchange rate was up around 6c cents compared to the average rate for the 2007 financial year, and the Australian dollar has continue to strengthen.
“Currency is likely to be a significant net negative impact on our 2008 earnings growth and return on investment in wine,” said O’Hoy.
GROWTH DRIVERS. Down to specific brands and emerging trends, O’Hoy says Foster’s is capitalizing on what consumers’ want.
“As our largest wine brand, Beringer is critical to our success in the important North American market. The successful launch of Beringer Third Century and growing success in export markets marked another successful year for this great Californian brand.”
“Bottled white wine – particularly crisp dry white - is in major growth and we are targeting this area through great brands like Rosemount, Fifth Leg and New Zealand’s first maker of Sauvignon Blanc, Matua Valley.”
“Finally, Pure Blonde, Lindeman’s Early Harvest, Yellowglen Jewel, Cougar and Black
Douglas Zero – are targeted squarely at a growing ‘lifestyle’ category [i.e. low-carb].”
SUPPLY STRUCTURE. In 2007, Foster’s worked to create a global supply system, which the company claims is “already seeing efficiency and procurement benefits.” Nonetheless, O’Hoy acknowledged the new business model had “just started to scratch the surface” and that the company will continue to “leverage our global supply capability to drive efficiencies through every aspect of our business.”
CLOSING REMARKS. In his closing remarks, O’Hoy said that “while currency will remain a drag on earnings growth and wine returns, I believe we can continue the strong constant currency performance we saw in the second half of the 2007 financial year.”
And as his last address as chairman, Swan said the following:
“The challenges we faced in 2007 were many – encompassing the completion of our significant integration program, a rising Australian dollar, and an extended period of Australian grape surplus. However, it’s often the tough times that bring out the best in a company and its employees.”
WINE AND BEER TO STAY IN TACT. Frank Swan, chairman of Foster's Group denied all speculation that the company will eventually split its beer and wine operation.
“The board and management team clearly keep all of these options under review, but we have no intention at the present time of moving to separate the two businesses and nor do we believe that's in the best interests of the shareholders that we should do so.”
Swan is retiring from his role as Chairman after the meeting. He joined the board in 1996.
TIGHTER SUPPLY: THE GOOD, BAD AND THE UGLY. O’Hoy says that tighter grape supply in Australia, and to some extent, California, will help prices after a prolonged period of discounting. However, current droughts in Australia may cause Foster’s to have too short of a supply in the 2008 harvest.
The good news for Foster’s is that smaller 2007 and 2008 Australian harvests will likely eliminate the oversupply that has caused a major downshift in grape and wine prices in recent years.
“Recent price rises and a steady shift toward premium products will drive improved revenue per case sold,” said O’Hoy.
Another positive for Foster’s is trading up trends across the pond. The Americas are crazy over premium wine, including both California and imported.
“Growth in the Americas was driven by ongoing investment in sales capability and innovation in brands such as Beringer Third Century, Bohemian Highway and Yellowglen Pink and Yellow. Revenue continues to grow faster than volume in the North American market, with Foster’s portfolio very well placed to benefit,” said Frank Swan, chairman of Foster's Group Ltd.
However, there are some setbacks with both regions. In the Americas, the company expects “constant currency earnings and margins to be below the prior period, as a result of product mix and a higher cost 2006 Californian vintage.”
In Australia, the drought is causing a lot of concern. Following a small 2007 vintage, Australia is facing the potential for an even smaller 2008 harvest, depending on weather conditions in coming months, said O’Hoy. If the 2008 yields are too small, Foster’s could have a reverse supply problem on its hands.
“We are monitoring the vintage carefully and have undertaken a wide range of scenario planning exercises to ensure we are prepared.”
Australian regions that are not dependent on the Murray irrigation system have the potential of good yields, said O’Hoy, which is the “majority of Foster’s own vineyards.”
“In a typical year, our own vineyards and contract suppliers not dependent on Murray River water, would supply around half of our requirements.”
Foster’s will look at the possibility of sourcing wine from international markets to fill any supply gaps.
The California harvest, meanwhile, is almost complete. O’Hoy said the “intake was in line with our targets and our quality expectations for the vintage are very high...We expect total Californian yields in this vintage to be below last year and expect to see some further tightening in overall supply.”
STRONG AUSTRALIAN DOLLAR POSING PROBLEMS. The strong Australian dollar has continued to negatively impact earnings, said O’Hoy, particularly in wine.
In the September quarter, the average Australian – US dollar exchange rate was up around 6c cents compared to the average rate for the 2007 financial year, and the Australian dollar has continue to strengthen.
“Currency is likely to be a significant net negative impact on our 2008 earnings growth and return on investment in wine,” said O’Hoy.
GROWTH DRIVERS. Down to specific brands and emerging trends, O’Hoy says Foster’s is capitalizing on what consumers’ want.
“As our largest wine brand, Beringer is critical to our success in the important North American market. The successful launch of Beringer Third Century and growing success in export markets marked another successful year for this great Californian brand.”
“Bottled white wine – particularly crisp dry white - is in major growth and we are targeting this area through great brands like Rosemount, Fifth Leg and New Zealand’s first maker of Sauvignon Blanc, Matua Valley.”
“Finally, Pure Blonde, Lindeman’s Early Harvest, Yellowglen Jewel, Cougar and Black
Douglas Zero – are targeted squarely at a growing ‘lifestyle’ category [i.e. low-carb].”
SUPPLY STRUCTURE. In 2007, Foster’s worked to create a global supply system, which the company claims is “already seeing efficiency and procurement benefits.” Nonetheless, O’Hoy acknowledged the new business model had “just started to scratch the surface” and that the company will continue to “leverage our global supply capability to drive efficiencies through every aspect of our business.”
CLOSING REMARKS. In his closing remarks, O’Hoy said that “while currency will remain a drag on earnings growth and wine returns, I believe we can continue the strong constant currency performance we saw in the second half of the 2007 financial year.”
And as his last address as chairman, Swan said the following:
“The challenges we faced in 2007 were many – encompassing the completion of our significant integration program, a rising Australian dollar, and an extended period of Australian grape surplus. However, it’s often the tough times that bring out the best in a company and its employees.”
posted at 1:35 PM
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