FGL Stumbles

Once again Fosters Group has under-delivered, upsetting investors and raising questions about the capabilities of the management team running Australia’s biggest liquor group.

Foster’s yesterday revealed first-half earnings that missed analyst estimates after a new multi-product sales strategy in Australia backfired, sending the shares sharply lower in the biggest one day fall in two years.

FGL shares hit a day’s low of $6.61, a fall of 50c before recovering to around $6.79 on very heavy volume of well over 37 million shares.

With the company still subject to market whispers of possible takeover activity (it denied there had been any approaches yesterday, the third denial since August), punters are not convinced.

But the punters are betting this poor result will expose the company to corporate activity.

They also bought the stock because of the $400 million share buyback plan revealed with the poor quality result: a ploy designed to keep the shares as stable as possible while management tries to revamp the botched strategy.

Fosters said that net profit (excluding the sale of breweries in Vietnam and India) rose 11 per cent to $363 million in the December half, compared to analyst estimates of $400 million or thereabouts.

Dividend was lifted 10 per cent to 10.75c (on earnings per share which rose to 18.4c a share from 16.3c).

All that sounds sort of OK, not good, but OK. But in reading the accompanying comments for an explanation for the slippagea analysts discovered that the company’s Australian liquor sales went backwards in the half because of the new approach to marketing.

What makes it doubly galling is that rival brewer and wine group, Lion Nathan eased analyst concerns about its earnings by revealing 10 days ago that the first quarter (to the end of December) had been boosted by better than expected beer sales in particular.

With the drought and hot weather across much of the country you’d think there’s be nothing easier than selling VB or Rosemount Chardy.But Fosters had troubles.

CEO Trevor O’Hoy abandoned specialist wine, beer and spirits marketing teams in favor of a single network selling its full range to customers, such as national retail chains (Coles, Woolies, Metcash and the other buying groups) and local pubs and restaurants.

That caused profit growth in Australia to slow to 2.5 per cent in the half. Wine sales fell 11 per cent and beer sales by volume were lower in the half.

Sales of Ready to Drink and other alcoholic products in Australia were also down, and the total sales revenue in Australia and the Pacific rose 0.3 per cent, which is sort of like going backwards.

The news means that Fosters had troubles selling into the usually strong Christmas-new Year period as well.

And Fosters obviously forgot that a lot of the company’s wine sales can’t be done like beer: restaurants are smaller and need the personal touch, compared to the ‘deal’ driven approach to selling to the big retailers.

So the company is now spending money to boost sales, doing the opposite of what the new strategy was supposed to do: boost sales by making them more efficiently.

It’s not the first time Fosters has botched the marketing of its alcoholic products. Several years ago it tried to market wine like beer, going for volume instead of margin and in the process gave away millions of dollars to the big retail chains and undermined some of its best wine brands (Southcorp tried the same trick and failed).

And this is the company that spun off its pubs into ALH, handing Macquarie Bank millions of easy profits. Woolies swooped on ALH and the rest is history.

Fosters said net profit after significant items was $553.5 million after the company posted $190 million in one-off profits from assets sales, including its breweries in Vietnam. It may sell its struggling wine clubs business (Cellarmasters) this half. They made around $21 million before tax.

CEO O’Hoy expects to save $165 million a year from annual costs in the wine division as he completes the integration of Southcorp.

O’Hoy restructured the company’s global operations based on three geographic regions, rather than products, after selling breweries in Vietnam, China and India. In May, he sold the Foster’s brand in Europe to Scottish & Newcastle.

Foster’s had previously run separate domestic and international beer units and a global wine business. The wine division is the second-largest in the world behind Constellation Brands Inc., includes brands such as Penfolds and Rosemount, Lindemans.

Foster’s is expecting continued revenue growth from its Australian beer, spirits and cider portfolio in the current half, as well as good growth in volume and revenue in the UK market.

The company said it also expects strong value growth in the US and Canadian premium wine categories.

“Trading conditions in all regions through January have been strong, and volume, constant currency revenue, and earnings growth rates for the 7 months to January are ahead of the first half.”

It also has some logistics issues to be resolves, especially a dodgy bottling plant in the Napa Valley in the US and problems at the Wolf Blass packaging plant in the Barossa.

Another issue is the way the accounts seem more opaque: the company’s financial and operational heart is Carlton United Breweries (CUB) but try and find out how that went in the half. It’s impossible and yet its performance is vital to the whole company.

Clearly the new marketing set up is all we’ll get to read about, not operational efficiencies.

Something is wrong at FGL.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →