Foster's Blames Exchange Rate on Disappointing First Half

FILED DECEMBER 1, 2009

Dear Client:

Foster’s Group blamed “unfavorable exchange rate movements” on its disappointing first half results where the company lost $80 to $90 million in a trading update today. Chief Ian Johnston “reminded” investors of the poor exchange rate between the Aussie and US dollar and British pound. During a conference call, he said “...we do recognize that not all observers are current with their FX rates and we feel it’s helpful to remind of this FX consideration with our business... we note that there is a wide range of assumptions in current forecasts by the analysts.”

In a rather feisty article from the Sydney Morning Herald, Elizabeth Knight wrote “Foster's Group yesterday gave us a timely reminder of why the stock is so widely unloved... One would have to wonder why Terry Davis over at Coca-Cola Amatil would feel the imperative to move any time soon as Foster's appears to lurch from one problem to the next.” You’ll recall that there have been consistent rumors that Coca-Cola Amatil may acquire Foster’s beer unit.

Then later she wrote: “But given the number of overhauls in the Foster's wine business over the past five years, seeing it turn the corner any time soon would be quite an act of faith - particularly while it is being blasted with those foreign exchange headwinds.” We couldn’t tell if she was being sarcastic or not but it sure looks that way.

It seems that analysts and other industry observers felt that Foster’s put too much emphasis on the exchange rate. With a hint of sarcasm Elizabeth wrote: “It seemed somewhat strange that most of the analysts - who work for major investment banks - would not have adjusted their earnings to reflect the changed US dollar and British pound rate against the dollar. Foster's management insisted some hadn't.”

But the poor exchange rate wasn’t the only factor in Foster’s first half performance. It also had a tough 6 months in the US where the company performed beneath the market. Like Diageo earlier this week, Foster’s said the holiday season has so far been more disappointing than they expected. Meanwhile, the Australian grape situation continues to be bad – producers are growing too many grapes with nowhere to go. However chief Ian Johnston said the soft market in the US had a “lesser impact” than foreign exchange.

"The new management team in Americas is implementing the new strategy, however prevailing recessionary conditions remain challenging and are resulting in lower volume and net sales revenue. Foster’s performance and performance of the wine market generally, in the key states of California, Texas, Illinois and Florida are below expectations," the company said. And like other wine and spirits companies, Foster’s noted that the on-premise business is still weak in the US and that consumers are trading down. Recall that in the six months to June 30, Foster’s reported a 31% drop in US wine earnings.

Analysts were prodding Foster’s management for a deeper meaning in today’s announcement – mainly about inventory destocking and forecasts for the second half – but Ian and Angus were relatively tight lipped. The one thing they were emphatic about, however, was convincing the analysts not to rely solely on Nielsen and Gomberg Fredrikson data. “I would say that Nielsen – anyone that says that Nielsen is completely wrong, I think is just wrong. Nielsen is directionally very correct but there are nuances by market that we clearly call out to you collectively around the data sets,” said Angus. They claim that the wine market in the US is actually worse than the data represents.

Analysts agreed that Foster’s will have to improve its wine business before seriously considering selling it. Of course, once you have a strong business up and running, why would you want to sell?

ON HOLIDAY SALES IN THE US. “Certainly we did destock our distributors, not just last year but the year before, in the United States. We are certainly not looking at restocking our distributors. The issue that we’re seeing in the United States is around retail and consumer trade, and obviously our flow-through to that. So, you know, we believe the distributor issues that we – we’ve already addressed the distributor issues. This just really relates to, you know, the holiday period as it’s described, so late Halloween, Thanksgiving and the run-up to Christmas is such an important trading period in the United States. We have visibility to the fact that the market has not performed where we would expect, and our performance is in line with that,” said cfo Angus McKay.

“...Clearly the season hasn’t gone as well as everybody hoped, including us and we are certainly not loading the distributors by choice and we’re doing everything we can to drive it. One of the things you do have to think about when you look at the US is the market itself is only being measured by a fraction of the category. It doesn’t pick up the big box stores and the market doesn’t pick up what's happening on premise. So it's a little difficult to get a straight line read on what's happening in the total market,” said Ian.

Foster’s will report their first half result in mid-February.

GOLDMAN SACHS UPGRADES CONSTELLATION, STILL EXPECTS CHALLENGES

In a note to investors, Goldman Sachs upgraded Constellation to neutral from sale because “we believe US wine challenges are now appropriately discounted.” However, they still expect Constellation to “face challenges” in the US over the next several months due to “(1) tepid consumer demand, (2) escalating discounting, particularly bottles priced north of $5 a bottle where STZ skews, and (3) share declines for STZ within the segments it competes.

BEAULIEU VINEYARDS AGREES TO $15,000 FINE FOR ILLEGAL WASTE MANAGEMENT

Diageo Chateau and Estate Wines’ (DCEW) Beaulieu Vineyard has been sued by the Napa County’s district attorney’s office for allegedly allowing 8,700 gallons of waste water to enter state-owned waters since September 2008, reports the Napa Valley Register. Although the maximum penalty is $60,000, Beaulieu will pay $15,000. A judgment against Diageo, also filed this week, requires it to pay $2,500 in restitution to the district attorney’s office Hazardous Waste Fund, a $10,000 civil penalty and a total of $2,768.26 for reimbursement of investigative costs to the Department of Fish and Game and the county Department of Environmental Management. Beaulieu Vineyard says they accidently left a storm water valve open after rainfall in September 2008, and then immediately notified the appropriate agencies once they found out what had happened. “We have been working with those authorities to make sure we are improving all our waste water management,” said spokeswoman Maire Griffin. “At BV, we are really committed to making sure that we are environmentally responsible,”

W.J. DEUTSCH STRIKES J-V WITH SOUTH AMERICAN WINE GROUP

W.J. Deutsch & Sons say they have partnered with Corpora Group (Corpora), the pioneers of the Bio Bio region of Chile and the Patagonia region of Argentina, in a joint venture to launch a brand from Chile and Argentina. Deutsch and Corpora will create two brands equally owned by both companies and will be launched throughout the U.S. in the summer of 2010. The initial launch will consist of a Chilean Chardonnay and Pinot Noir from Bio Bio and an Argentine Malbec from Patagonia, all line priced at $12.99.

"Argentine wines are on fire right now," says chief Peter Deutsch. "They are currently the fastest growing wine category, up over 30% by volume and over 40% by value since this time last year. Chile is also showing impressive numbers - growing sales at over double the rate of domestic sales growth. Based on our research of US consumption habits, we believe these growth trends will continue. Following an extensive search we feel that Corpora Group, with their in-depth knowledge of these regions, state-of-the-art facilities, renowned winemaker and history of highly successful business ventures, is the ideal partner to work with in order to capitalize on the great opportunity that Chile and Argentina present."

WSD BRIEF:

BROADBENT SELECTIONS has appointed Gregg Perkins to the role of vp, director of sales effective January 1, 2010. Catherine Miles will be promoted to the position of vp, director of marketing. In addition, BSI will be combining the marketing and sales teams to ensure the.


Until Monday, Megan

“Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.”
George S. Patton

--------- Sell Day Calendar ----------
Today's Sell Day: 14
Sell days this month: 22
Sell days this month last year: 22
This month ends on a: Thur.
This month last year ended on a: Thur.
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

© 2009 Wine & Spirits Daily, all rights reserved. May quote with attribution.

Follow me on Twitter http://twitter.com/WineSpiritDaily

Go back to listing Go to next article Go to previous article

Comments

Top Secret News Hotline:

Got wine and spirits news for WSD?

Submit Anonymously
twitter facebook