Foster’s Chairman: Letter to Shareholders
Foster’s “Considering All Options”
In a letter to shareholders yesterday, Foster’s chairman David Crawford said the company is working to fix its failing wine business rather than sell it, at least at the moment.
“The fundamentals of our business remain strong and the actions taken are measured and proportionate to the challenges that we face. Foster's retains a robust financial position and continues to generate outstanding cash flows,” he said.
“We own a great company. The beer division is delivering consistently strong financial returns and, while financial returns from our wine assets are not acceptable, we own leading international brands with excellent potential.”
Once again, Crawford partly blamed economic conditions and the strength of the Australian dollar for reducing earnings and returns. The company has also admitted in the past that it paid too much for Beringer ($2.6 billion) and Southcorp ($3.2 billion).
Crawford said the strategic review of the wine business will focus “on where we compete, how to capitalize on the growth characteristics of the wine category and the optimal structure and operation of our wine business into the future.”
However, Crawford said the company will “consider all options” in improving shareholder value.
“Our focus now is very clear - to consider all options to improve shareholder returns from wine and to exploit the growth potential of our leading portfolio of global brands.”
In our opinion, “all options” includes the possibility of a sell-off in the future. Analysts generally agree that it’s unlikely anyone would be willing to buy Foster’s wine business right now, although the usual suspects have been named as possibilities: Diageo, Pernod Ricard and Constellation Brands. Perhaps once the company is spruced up a bit, Foster’s wine will become more attractive to potential buyers. Or, just maybe, Foster’s is committed to remaining a multi-drinks company.
Anayst Andy Kovacs of Macquarie Group doesn’t believe Foster’s is in the position to sell, describing the company’s situation as “woeful” earlier this month.
“Furthermore, the weak operational performance highlights why this is a risky option, with acquirers, at least for the wine business, very difficult to identify,” he said in a research note.
Most analysts agree the likelihood of Foster’s selling its wine business is unlikely to happen before the end of the year, when the review of the wine business is complete and another ceo has been appointed.
OPTIONS FOR FOSTER’S. If Foster’s were to sell its wine business, an easier solution would be to break it up.
“We continue to believe a takeover is unlikely in the short term. The wine business is clearly in poor shape, and full of uncertainty. Furthermore it is very difficult to find acquirers of large wine assets...wine therefore acts as a poison pill for anyone interested in the beer business,” Andy said in another research note.
“Nevertheless, if broken up it would be an easier acquisition target...”
Analysts have also suggested that Foster’s separate its wine and beer business, namely because the beer business is more valuable to potential buyers (such SABMiller or Heineken) and it would allow management to focus more closely on the wine biz.
POSSIBLE REPLACEMENTS FOR O’HOY. Lots of speculation on who will replace Trevor O’Hoy as ceo is mounting among analysts. UBS has said an international brewing executive could be a good match.
“In our view there are a number of Beer executives who could be considered for the CEO role at FGL especially post the Heineken / Carlsberg takeover Scottish & Newcastle in January 2008 and the US merger of Molson Coors and SABMiller,” said analyst Lindy Newton.
In Lindy’s opinion, possible contenders include: Tony Froggatt (former ceo of Scottish & Newcastle), John Dunsmore (who succeeded Froggatt at Newcastle), Dan O’Neill (former Molson Coors Brewing Co. exec), Leo Kiely (ceo of MolsonCoors) and Tom Long (who heads Miller), according to UBS. We somehow doubt that Tom Long or Leo Kiely would take the position, especially since Tom was just named president and chief commercial officer of the new MillerCoors j-v and Leo was appointed ceo. It is an interesting notion nonetheless.
QUICK BACKGROUND. On June 10 Foster’s announced a revised earnings outlook for the 2008 financial year, which included a $700 million write-down and a transfer of $600 million in goodwill to the company’s beer operations. The company also said it would reduce the level of U.S. distributor inventories at year end by approximately 1.4 million cases compared to the prior period.
Perhaps most importantly, the Board accepted former ceo Trevor O’Hoy’s resignation. Ian Johnston, a non-executive director on the Foster's Board since September 2007, has agreed to assume the interim role of acting ceo while the company looks for a permanent successor for Trevor.
FORTUNE FACES SETBACKS IN SECOND QUARTER
Fortune’s faced some setbacks in the second quarter due to a combination of factors including the softening consumer environment and higher commodity costs, The tax increase in Australia on ready-to-drink spirits products took the industry by surprise and has “inversely impacted” Fortune’s business as well. Nonetheless, ceo Bruce Carbonari maintained that the U.S. spirits market remains resilient, although its growing at a more moderate pace, and outperformed beer in April and May.
"While our double-digit increase in brand-building investments and the Australia RTD tax increase adversely impacted operating income in our spirits business, we drove solid revenue and volume growth for several key premium spirits brands in the U.S. We also benefited from the anticipated rebuilding of U.S. spirits distributor inventories,” said Bruce in a statement.
THE U.S. FACTOR. He said the spirits industry performs well in most economic conditions. Overall, the U.S. market, which accounts for over half of Fortune’s spirits sales, remains healthy. Consumers continue to trade up though at a slower pace. The biggest change is that consumers are shifting from the on-premise to the off-premise, opting to drink at home to save money. Fortune has also seen some softness in areas hit the hardest by the housing correction, namely California and Florida. As a result, Fortune has realigned its business to fit the changing consumer shift from on-premise to off-premise.
A LOOK AT THE BRANDS. The company managed to drive revenue growth at a faster rate than volume growth in the second quarter. YTD depletions in the U.S. for Hornitos were up double digits and Gold and Blanco were up in the high single digit range. YTD depletions of Canadian Club “are solidly higher” following the “damn right” advertising campaign, reversing years of declining growth.
U.S. depletions for the Jim Beam brand were “off,” said cfo Craig Omtvedt, remarking that the brand has only just begun its new marketing campaign.
In all, Bruce said Fortune is performing in line with the market, with softness coming from the DeKuyper’s line “mostly because Apple Pucker was on fire for a number of years and it’s not as hot of a drink right now.”
REVENUE DEPLETIONS OUTPERFORM. Net sales were up high single digits in the U.S. as shipments rebounded from the larger than usual distributor inventory takedowns in the first quarter. The company also benefited from higher pricing. On a revenue basis, depletions grew significantly faster (3-4%) than depletion case volumes, particularly for premium brands in the U.S. Volume depletions were flat as the company focuses on building revenue and premiumizing their brands.
Like other spirits companies, Fortune said it is experiencing growth in emerging markets such as Russia, India, China and Brazil.
ACQUISITION QUESTION. In the question and answer portion of the conference call, Bruce said the company was most focused on internal growth. However, he said the company continues “to look for acquisitions that would help our portfolio or round out our portfolio both in gaps that we have or enhance some of the positions we currently have in certain categories as well as acquisitions that would help us in the emerging markets, those markets being what we believe will be the high growth markets.”
GOOD DISTRIBUTOR RELATIONS. Bruce also said relations with distributors are still very strong. He said there is always speculation over whether the company will make another acquisition, but “we’re well positioned in the U.S. with some of the best distributors, and I think it’s business as usual. We have great brands and those brands work especially well in the U.S.”
As we mentioned on Monday, Fortune completed the repurchase of Vin & Sprit’s 10% minority interest in Beam Global for $466 million. Fortune now owns a 100% of Beam.
Lastly, the company boosted dividends 5%, or 8 cents, to an annual rate of $1.76 per share from $1.68 per share. Share buybacks exceeded 4.3 million shares of its common stock since implementing on March 31 an authorization to repurchase up to 15 million shares.
REMY HEADED FOR A TOUGH YEAR
Remy Cointreau’s shares sunk today after the economic slowdown in the U.S. and weak dollar resulted in lower sales for the fiscal year. In addition, the company said it’s headed for a tough year.
“The 2008/09 financial year will be one of transition and enhancement of its distribution since the Group will leave the Maxxium network on 30 March 2009.”
“The slowdown noted in economic activity in the US and the unfavourable movement in the EUR/USD exchange rate will adversely affect the Group’s prospects for the year while other very significant geographical regions for the Group maintain their strong momentum
As a result, taking into account the temporary additional costs already announced for the setting up of the new distribution network, the Group does not anticipate organic growth in its current operating profit in 2008/09,” said the company in a statement.
The company initially withheld its year end results because of a dispute between Maxxium participants. Remy said they are “continuing their discussions and have noted the effective acquisition of V&S by the Pernod Ricard Group on 24 July 2008. These discussions focus notably on finding an agreement on the net asset value of Maxxium at 31 March 2008.”
Remy said the distribution activity in the US comprises mainly the distribution of the Scotch whisky brands, The Famous Grouse and The Macallan, and wines. It also reflects the transfer of Russian Standard to its own distribution network.
APPEALS COURT REOPENS WHOLE FOODS, WILD OATS CASE
A federal appeals court said a trial judge was wrong in dismissing the FTC’s challenge to the August 2007 merger of Whole Foods and Wild Oats, says the WSJ.
"The court should have taken whatever time it needed to consider the FTC's evidence fully," the ruling said.
It also said U.S. District Judge Paul Friedman "underestimated the FTC's likelihood of success on the merits" when he denied the agency's request.
The three judge panel’s (although one dissented) ruling revives legal proceedings over the $565 million transaction and may give the FTC a shot at forcing Whole Foods to sell some operations to meet competitive concerns raised by the merger.
Whole Foods said it was disappointed by the decision and could seek a review by the full appeals court. Meanwhile, it would carry on "business as usual."
Meanwhile, the FTC hopes the ruling will allow it to undertake a full review of competition issues raised by the merger.
"We are pleased by today's decision of the appeals court in the Whole Foods matter and are looking forward to future proceedings before the district court, leading to a full trial on the merits before the Commission," said Jeffrey Schmidt, head of the FTC's competition bureau.
NEW RESEARCH ON CONSUMER IN-STORE BEHAVIOR
A new study disproves the idea that 70% of consumer decisions are made at the shelf. According to a study from OgilvyAction, 39.4% is the actual number of consumers who decide what to buy at the store. About 10% change their minds while in the store and 20% decide against buying a product they previously planned to purchase. Nearly 30% of consumers buy something they didn’t intend on buying.
"The good news for marketers is that a product display and sampling can build brand equity," Jeff Froud, senior strategic planner for OgilvyAction, told AdAge.com. "No matter what rulebook you studied when you were studying marketing, price promotions don't build any brand equity and in some cases can be equity destroyers."
EXTREME SPIRITS RELAUNCHES WOKKA SAKI
Extreme Spirits are rebranding their eclectic ‘east meets west’ vodka, Wokka Saki. Starting August 1, the brand will be known as Wokka-Fusion Vodka. Simultaneously, the company is launching a quarter size version (20cl) bottle known as Mini Wokka. WOKKA is a micro distilled grain vodka with a subtle blend of Japanese sake infused with Asian fruit.
Wokka Saki was launched in South Beach Miami on April 2005, and is now exported internationally to 10 countries.
WSD BRIEFS:
BENNIGAN'S AND STEAK & ALE casual dining chains have filed for bankruptcy. Not Chapter 11, but Chapter 7 liquidation, proving it's tough out there in the casual dining industry. They are shutting more than 300 sites and letting go of thousands of employees, and they are unlikely to reopen. The told managers Monday to close the stores as they didn't have enough cash to make payroll that week. Filing does not include Ponderosa and Bonanza restaurants. Earlier this year, Bakers Square, Village Inn and Old Country Buffet filed for Chapter 11 bankruptcy protection, and many other dining chains are struggling, from Outback Steakhouse to Ruby Tuesday.
ABSOLUT ON THE WALK OF FAME. Absolut vodka will receive the first "Friend of the Walk of Fame" honorary star on Hollywood Boulevard. The brand is receiving recognition for being the inaugural donor to the restoration of L.A.’s historic “Walk of Fame.” The announcement is tied in with the launch of Absolut Los Angeles (made of blueberry, acai berry, acerola cherry and "fruity notes of pomegranate"), which debuted this month nationwide.
Until tomorrow, Megan
“Three o'clock is always too late or too early for anything you want to do.”
Jean-Paul Sartre
--------- Sell Day Calendar ----------
Today’s Sell Day: 21
Sell days this month: 23
Sell days this month last year: 22
This month ends on a: Thur
This month last year ended on a: Tues.
YTD sell days Over/Under: +0
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
In a letter to shareholders yesterday, Foster’s chairman David Crawford said the company is working to fix its failing wine business rather than sell it, at least at the moment.
“The fundamentals of our business remain strong and the actions taken are measured and proportionate to the challenges that we face. Foster's retains a robust financial position and continues to generate outstanding cash flows,” he said.
“We own a great company. The beer division is delivering consistently strong financial returns and, while financial returns from our wine assets are not acceptable, we own leading international brands with excellent potential.”
Once again, Crawford partly blamed economic conditions and the strength of the Australian dollar for reducing earnings and returns. The company has also admitted in the past that it paid too much for Beringer ($2.6 billion) and Southcorp ($3.2 billion).
Crawford said the strategic review of the wine business will focus “on where we compete, how to capitalize on the growth characteristics of the wine category and the optimal structure and operation of our wine business into the future.”
However, Crawford said the company will “consider all options” in improving shareholder value.
“Our focus now is very clear - to consider all options to improve shareholder returns from wine and to exploit the growth potential of our leading portfolio of global brands.”
In our opinion, “all options” includes the possibility of a sell-off in the future. Analysts generally agree that it’s unlikely anyone would be willing to buy Foster’s wine business right now, although the usual suspects have been named as possibilities: Diageo, Pernod Ricard and Constellation Brands. Perhaps once the company is spruced up a bit, Foster’s wine will become more attractive to potential buyers. Or, just maybe, Foster’s is committed to remaining a multi-drinks company.
Anayst Andy Kovacs of Macquarie Group doesn’t believe Foster’s is in the position to sell, describing the company’s situation as “woeful” earlier this month.
“Furthermore, the weak operational performance highlights why this is a risky option, with acquirers, at least for the wine business, very difficult to identify,” he said in a research note.
Most analysts agree the likelihood of Foster’s selling its wine business is unlikely to happen before the end of the year, when the review of the wine business is complete and another ceo has been appointed.
OPTIONS FOR FOSTER’S. If Foster’s were to sell its wine business, an easier solution would be to break it up.
“We continue to believe a takeover is unlikely in the short term. The wine business is clearly in poor shape, and full of uncertainty. Furthermore it is very difficult to find acquirers of large wine assets...wine therefore acts as a poison pill for anyone interested in the beer business,” Andy said in another research note.
“Nevertheless, if broken up it would be an easier acquisition target...”
Analysts have also suggested that Foster’s separate its wine and beer business, namely because the beer business is more valuable to potential buyers (such SABMiller or Heineken) and it would allow management to focus more closely on the wine biz.
POSSIBLE REPLACEMENTS FOR O’HOY. Lots of speculation on who will replace Trevor O’Hoy as ceo is mounting among analysts. UBS has said an international brewing executive could be a good match.
“In our view there are a number of Beer executives who could be considered for the CEO role at FGL especially post the Heineken / Carlsberg takeover Scottish & Newcastle in January 2008 and the US merger of Molson Coors and SABMiller,” said analyst Lindy Newton.
In Lindy’s opinion, possible contenders include: Tony Froggatt (former ceo of Scottish & Newcastle), John Dunsmore (who succeeded Froggatt at Newcastle), Dan O’Neill (former Molson Coors Brewing Co. exec), Leo Kiely (ceo of MolsonCoors) and Tom Long (who heads Miller), according to UBS. We somehow doubt that Tom Long or Leo Kiely would take the position, especially since Tom was just named president and chief commercial officer of the new MillerCoors j-v and Leo was appointed ceo. It is an interesting notion nonetheless.
QUICK BACKGROUND. On June 10 Foster’s announced a revised earnings outlook for the 2008 financial year, which included a $700 million write-down and a transfer of $600 million in goodwill to the company’s beer operations. The company also said it would reduce the level of U.S. distributor inventories at year end by approximately 1.4 million cases compared to the prior period.
Perhaps most importantly, the Board accepted former ceo Trevor O’Hoy’s resignation. Ian Johnston, a non-executive director on the Foster's Board since September 2007, has agreed to assume the interim role of acting ceo while the company looks for a permanent successor for Trevor.
FORTUNE FACES SETBACKS IN SECOND QUARTER
Fortune’s faced some setbacks in the second quarter due to a combination of factors including the softening consumer environment and higher commodity costs, The tax increase in Australia on ready-to-drink spirits products took the industry by surprise and has “inversely impacted” Fortune’s business as well. Nonetheless, ceo Bruce Carbonari maintained that the U.S. spirits market remains resilient, although its growing at a more moderate pace, and outperformed beer in April and May.
"While our double-digit increase in brand-building investments and the Australia RTD tax increase adversely impacted operating income in our spirits business, we drove solid revenue and volume growth for several key premium spirits brands in the U.S. We also benefited from the anticipated rebuilding of U.S. spirits distributor inventories,” said Bruce in a statement.
THE U.S. FACTOR. He said the spirits industry performs well in most economic conditions. Overall, the U.S. market, which accounts for over half of Fortune’s spirits sales, remains healthy. Consumers continue to trade up though at a slower pace. The biggest change is that consumers are shifting from the on-premise to the off-premise, opting to drink at home to save money. Fortune has also seen some softness in areas hit the hardest by the housing correction, namely California and Florida. As a result, Fortune has realigned its business to fit the changing consumer shift from on-premise to off-premise.
A LOOK AT THE BRANDS. The company managed to drive revenue growth at a faster rate than volume growth in the second quarter. YTD depletions in the U.S. for Hornitos were up double digits and Gold and Blanco were up in the high single digit range. YTD depletions of Canadian Club “are solidly higher” following the “damn right” advertising campaign, reversing years of declining growth.
U.S. depletions for the Jim Beam brand were “off,” said cfo Craig Omtvedt, remarking that the brand has only just begun its new marketing campaign.
In all, Bruce said Fortune is performing in line with the market, with softness coming from the DeKuyper’s line “mostly because Apple Pucker was on fire for a number of years and it’s not as hot of a drink right now.”
REVENUE DEPLETIONS OUTPERFORM. Net sales were up high single digits in the U.S. as shipments rebounded from the larger than usual distributor inventory takedowns in the first quarter. The company also benefited from higher pricing. On a revenue basis, depletions grew significantly faster (3-4%) than depletion case volumes, particularly for premium brands in the U.S. Volume depletions were flat as the company focuses on building revenue and premiumizing their brands.
Like other spirits companies, Fortune said it is experiencing growth in emerging markets such as Russia, India, China and Brazil.
ACQUISITION QUESTION. In the question and answer portion of the conference call, Bruce said the company was most focused on internal growth. However, he said the company continues “to look for acquisitions that would help our portfolio or round out our portfolio both in gaps that we have or enhance some of the positions we currently have in certain categories as well as acquisitions that would help us in the emerging markets, those markets being what we believe will be the high growth markets.”
GOOD DISTRIBUTOR RELATIONS. Bruce also said relations with distributors are still very strong. He said there is always speculation over whether the company will make another acquisition, but “we’re well positioned in the U.S. with some of the best distributors, and I think it’s business as usual. We have great brands and those brands work especially well in the U.S.”
As we mentioned on Monday, Fortune completed the repurchase of Vin & Sprit’s 10% minority interest in Beam Global for $466 million. Fortune now owns a 100% of Beam.
Lastly, the company boosted dividends 5%, or 8 cents, to an annual rate of $1.76 per share from $1.68 per share. Share buybacks exceeded 4.3 million shares of its common stock since implementing on March 31 an authorization to repurchase up to 15 million shares.
REMY HEADED FOR A TOUGH YEAR
Remy Cointreau’s shares sunk today after the economic slowdown in the U.S. and weak dollar resulted in lower sales for the fiscal year. In addition, the company said it’s headed for a tough year.
“The 2008/09 financial year will be one of transition and enhancement of its distribution since the Group will leave the Maxxium network on 30 March 2009.”
“The slowdown noted in economic activity in the US and the unfavourable movement in the EUR/USD exchange rate will adversely affect the Group’s prospects for the year while other very significant geographical regions for the Group maintain their strong momentum
As a result, taking into account the temporary additional costs already announced for the setting up of the new distribution network, the Group does not anticipate organic growth in its current operating profit in 2008/09,” said the company in a statement.
The company initially withheld its year end results because of a dispute between Maxxium participants. Remy said they are “continuing their discussions and have noted the effective acquisition of V&S by the Pernod Ricard Group on 24 July 2008. These discussions focus notably on finding an agreement on the net asset value of Maxxium at 31 March 2008.”
Remy said the distribution activity in the US comprises mainly the distribution of the Scotch whisky brands, The Famous Grouse and The Macallan, and wines. It also reflects the transfer of Russian Standard to its own distribution network.
APPEALS COURT REOPENS WHOLE FOODS, WILD OATS CASE
A federal appeals court said a trial judge was wrong in dismissing the FTC’s challenge to the August 2007 merger of Whole Foods and Wild Oats, says the WSJ.
"The court should have taken whatever time it needed to consider the FTC's evidence fully," the ruling said.
It also said U.S. District Judge Paul Friedman "underestimated the FTC's likelihood of success on the merits" when he denied the agency's request.
The three judge panel’s (although one dissented) ruling revives legal proceedings over the $565 million transaction and may give the FTC a shot at forcing Whole Foods to sell some operations to meet competitive concerns raised by the merger.
Whole Foods said it was disappointed by the decision and could seek a review by the full appeals court. Meanwhile, it would carry on "business as usual."
Meanwhile, the FTC hopes the ruling will allow it to undertake a full review of competition issues raised by the merger.
"We are pleased by today's decision of the appeals court in the Whole Foods matter and are looking forward to future proceedings before the district court, leading to a full trial on the merits before the Commission," said Jeffrey Schmidt, head of the FTC's competition bureau.
NEW RESEARCH ON CONSUMER IN-STORE BEHAVIOR
A new study disproves the idea that 70% of consumer decisions are made at the shelf. According to a study from OgilvyAction, 39.4% is the actual number of consumers who decide what to buy at the store. About 10% change their minds while in the store and 20% decide against buying a product they previously planned to purchase. Nearly 30% of consumers buy something they didn’t intend on buying.
"The good news for marketers is that a product display and sampling can build brand equity," Jeff Froud, senior strategic planner for OgilvyAction, told AdAge.com. "No matter what rulebook you studied when you were studying marketing, price promotions don't build any brand equity and in some cases can be equity destroyers."
EXTREME SPIRITS RELAUNCHES WOKKA SAKI
Extreme Spirits are rebranding their eclectic ‘east meets west’ vodka, Wokka Saki. Starting August 1, the brand will be known as Wokka-Fusion Vodka. Simultaneously, the company is launching a quarter size version (20cl) bottle known as Mini Wokka. WOKKA is a micro distilled grain vodka with a subtle blend of Japanese sake infused with Asian fruit.
Wokka Saki was launched in South Beach Miami on April 2005, and is now exported internationally to 10 countries.
WSD BRIEFS:
BENNIGAN'S AND STEAK & ALE casual dining chains have filed for bankruptcy. Not Chapter 11, but Chapter 7 liquidation, proving it's tough out there in the casual dining industry. They are shutting more than 300 sites and letting go of thousands of employees, and they are unlikely to reopen. The told managers Monday to close the stores as they didn't have enough cash to make payroll that week. Filing does not include Ponderosa and Bonanza restaurants. Earlier this year, Bakers Square, Village Inn and Old Country Buffet filed for Chapter 11 bankruptcy protection, and many other dining chains are struggling, from Outback Steakhouse to Ruby Tuesday.
ABSOLUT ON THE WALK OF FAME. Absolut vodka will receive the first "Friend of the Walk of Fame" honorary star on Hollywood Boulevard. The brand is receiving recognition for being the inaugural donor to the restoration of L.A.’s historic “Walk of Fame.” The announcement is tied in with the launch of Absolut Los Angeles (made of blueberry, acai berry, acerola cherry and "fruity notes of pomegranate"), which debuted this month nationwide.
Until tomorrow, Megan
“Three o'clock is always too late or too early for anything you want to do.”
Jean-Paul Sartre
--------- Sell Day Calendar ----------
Today’s Sell Day: 21
Sell days this month: 23
Sell days this month last year: 22
This month ends on a: Thur
This month last year ended on a: Tues.
YTD sell days Over/Under: +0
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
posted at 1:08 PM
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