Foster's Group, Australia's biggest alcoholic drinks company, posted its slowest growth in first-half net profit in several years on Tuesday, as U.S. wine sales slumped and the strong Aussie dollar crimped earnings.
Although the world's second largest wine company reported earnings slightly ahead of analyst forecasts, Chief Executive Trevor O'Hoy conceded Foster's had underperformed its targets on wine, and analysts warned of greater competition in its main beer market.
"It was mildly better than the poor expectations that were out there," said White Funds Management portfolio manager Angus Gluskie. "Beer is becoming more competitive at the moment because you've got both Coca-Cola Amatil moving into beer distribution and the major supermarkets starting their own home brands. But wine is the bigger challenge," Gluskie said.
Foster's, the world's second-largest wine company, said net profit before one-offs for the six months to Dec. 31 rose 6 percent to A$393.5 million (US$361 million) from A$371.4 million, helped by a strong performance in Australia and Europe.
That beat market forecasts of A$384.5 million before one-offs, according to a Reuters survey of eight analysts, but it was well below the double-digit pace of recent years and the 22 percent rise in the six months to June 2007.
Foster's said it expected earnings per share growth, before one-offs and currency effects, to rise about 10 percent in 2008, in line with market forecasts.
"I'm the first to admit we have to do better in wine. We are yet to achieve acceptable returns in this category," O'Hoy told a briefing. Foster's has struggled to integrate the wine business since its A$3.7 billion acquisition of Southcorp in 2005.
Foster's U.S. wine business, ranked only behind Constellation Brands, has been hit by the economic slowdown, a drift away from Australian wines, and a high Australian dollar that reduced earnings translated into local currency.
U.S. wine earnings before interest and tax dived 32.2 percent to A$98.3 million. In constant currency terms, earnings fell 11.9 percent.
Foster's U.S. sales of brands including Beringer, Lindemans, Penfolds and Rosemount slowed sharply in November and December and, although industry figures pointed to some recovery in January, the outlook was for full-year earnings to fall.
"We expect U.S. (wine) trading conditions to remain tough in the face of consumer economic anxiety," Foster's head of Americas Scott Weiss said.
In Australia, Foster's has been chasing higher-margin premium beer and wine sales, prompting small declines in volumes in the first half but improved pricing.
Foster's has a 50 percent share of Australia's beer market duopoly, but rival Lion Nathan with a 42 percent share has benefited from its focus on premium beers.
Foster's Australian beer volumes fell 1 percent and wine volume fell 9.7 percent. Revenues rose 5.3 percent for beer and fell 3.9 percent for wine.
Its mainstream beers, including its 113-year old Victoria Bitter (VB) brand, have come under pressure as consumers switch to craft or premium beers.
Australian beer, wine and spirits earnings before interest and tax increased 9.4 percent to A$433.4 million, including a one-off gain of A$17.8 million on the sale of properties.