No matter whom Fosters selects to replace former chief executive Trevor O’Hoy, who walked the plank yesterday, the problem remains: the company is adrift, the board is as culpable as the CEO was and the problems in wine are still there for investors to see.
Even after the big write downs of $600 million to $700 million before tax in the carrying value of its global wine assets, the company still has one major problem: its exposure to the strong Australian dollar.
Fosters big problem is that the Aussie dollar’s strength has neutered whatever efficiencies it has managed to wring out of the Australian wine business and in its US operations. The company uses a thing called ‘constant dollars’ to try produce a set of ‘normalised’ accounts that remove the impact of the currency changes.
While understandable, that also reflects its avoidance of bad news and dislike of revealing the obvious: the currency movements in the past 15 months have hurt, at a time when the lingering effects of oversupply situations in wine in the US and Australia have cut returns and margins.
It has been startling obvious for two years that the company paid too much for Southcorp at around $3.2 billion: the board and former management denied that situation existed until it was too late.
Now denial seems to be out and facing up to the problems seem to be the only strategy.
The market has mixed thoughts about the move and the departure of the CEO: Foster’s shares dropped as much as 3.5%, or 19c, to $5.20 in early trade before rebounding strongly to rise more than 4% to a high of $5.64 for the day. They closed up 6c at $5.45.
Fosters was often mentioned in 2005 and 2006-07 as being on the ‘radar’ of big international grog groups such as Diageo, InBev and SABMiller, as well as private equity groups.
It seems there were plenty of tirekickers but no one got interested to the point where a ‘hug’ via a premium priced offer was made.
Some brokers reckoned it was the problematic wine division that forced those interested to retreat.
There’s nothing wrong with the beer business except that it’s mature and been leached for millions of dollars in spare cash to plug the holes and underwrite the revamp of the wine business.
Now constant currency earnings per share growth is expected to be between 5% and 7% in the year to June 30, down from previous guidance for a rise of about 10% increase.
The company said profit before tax, significant items and self-generating and re-generating assets (SGARA) for fiscal 2008 will be between $700 million and $715 million. That will be lower than the 2007 result.
That is expected to produce earnings per share of between 36.2c and 36.9c.
Foster’s said disappointing results from wine in the US and slower revenue growth in Australia had dragged on its second-half business performance.
"Trading conditions have been tough and the continued strength of the Australian dollar has hit us hard," chairman David Crawford said.
"The reality is we did not execute the Southcorp integration as well as we expected and operating conditions are now more challenging."
"We must also recognise and acknowledge that we paid too much to acquire wine assets," he added.
The group expects to report a non-cash impairment charge of $600 million to $700 million – equivalent to $511 million to $590 million after tax – to the carrying value of its global wine assets.
Of the total impairment charge, $430 million to $480 million, or $341 million to $370 million net, is attributable to the American cash generating unit, following a fall in Californian sourced wine sales.
In the Australian wine business, an impairment charge of between $170 million and $220 million will be recognised because of the rising Australian dollar, and a reduction in forecast international sales of Australian wine.
Foster’s will write down a further $49 million net on its surplus Australian wine inventories.Cheap wine for a while longer, it seems.
