Australia: Foster’s released its 2006 Annual Report

Australia’s biggest brewer Foster’s released September 14 its 2006 Annual Report. Foster’s Chairman Frank Swan said: “It has been a year of great change and consolidation at Foster’s. Bringing together three major businesses – Carlton & United Beverages, Beringer Blass Wine Estates and the former Southcorp Limited – has been a huge undertaking. The Foster’s management team managed this process successfully and fundamentally changed the structure of the Company.”

The directors’ report presented their report on the consolidated entity comprising Foster’s Group Limited and the entities it controlled at the end of, or during, the year ended 30 June 2006. The principal activities of the Group during the period were the production and marketing of alcoholic beverages.

The consolidated net profit of the Group after income tax expense and outside equity interests was $1.166 million, a 26.8 per cent increase on the previous corresponding period result of $919.9 million. The current period result included material items which totalled a net gain after tax of $556.5 million. The prior period result included a net material loss after tax of $50.9 million. Earnings Before Interest, Tax and material items (EBIT) increased 35.6 per cent to $1.119 million, compared with $825.6 million in the previous corresponding period.

The EBIT contribution from each operating division was as follows:
1. Carlton & United Beverages EBIT increased by 17.0 per cent to $669.7 million, compared with $572.6 million in the previous corresponding period.

2. International Beer contributed $38.5 million, a decrease of 11.7 per cent over the previous corresponding period of $43.6 million.

3. Wine Trade EBIT was $430.7 million compared with $236.9 million in the previous corresponding period, an increase of 81.8 per cent. The prior period result includes a six-week contribution from Southcorp, following the acquisition of this business in May 2005.

4. Wine Clubs & Services EBIT was $39.1 million, a decrease of 10.7 per cent over the previous corresponding period of $43.8 million.

Corporate division costs before tax were $58.7 million, a decrease of 17.7 per cent over the previous corresponding period of $71.3 million.

Net interest expense increased by $147.2 million to $243.3 million, mainly due to higher debt levels relating to the Southcorp acquisition. Income tax expense, relating to continuing operations only, increased by $29.9 million to $233.5 million, mainly due to tax benefits associated with the material items.

Discontinued operations after tax in the current period was $1.8 million attributable to sales of developed hotel sites, compared with $467.8 million after tax in 2005 attributable to Lensworth.

The current period results included a net material gain before tax of $525.5 million ($556.5 million after tax) comprising:


1. a net gain from the International Beer business restructuring of $713.1 million ($704.9 million after tax), comprising the net gain on sale of the Foster’s brand in Europe of $705.3 million ($697.5 million after tax), and the net gain on sale of Foster’s China of $7.8 million ($7.4 million after tax);
2. Southcorp integration restructuring costs of $101.9 million ($67.7 million after tax); and
3. intangible asset recoverable amount write-downs relating to Wine Clubs & Services entities of $85.7 million ($80.7 million after tax).

The previous period results included a net material loss before tax of $83.6 million ($50.9 million after tax) comprising:

1. Southcorp integration restructuring costs of $80.1 million ($55.5 million after tax);
2. a provision against the carrying value of the investment in Foster’s US partnership of $23.7 million (nil tax expense applicable);
3. asset write-downs, provisions and other costs of $28.8 million ($25.1 million after tax) following the implementation of Wine Clubs & Services business improvement initiatives;
4. a recoverable amount write-down to Australian beer assets of $14.7 million ($10.3 million after tax) arising from a review of the remaining useful life of assets affected by the 2003 operational review, largely associated with the closure of the Kent Brewery in Sydney; partly offset by;
5. profit on sale of the 10 per cent investment in Australian Leisure & Hospitality Limited of $55.4 million (nil tax expense applicable); and
6. profit on disposal of corporate artworks of $8.3 million (nil tax expense applicable).

Following the acquisition of Southcorp Limited in May 2005, the focus during the 2006 year has been on integrating Southcorp into the Foster’s businesses, synergy realisation and re-engineering the global supply chain to be flexible, responsive and low cost.

The Group has continued to narrow its focus on premium alcoholic beverages, disposing of non-core assets comprising Asian breweries and surplus vineyard and winery assets. Strong operating cash flows and the proceeds from asset sales have been used to reduce net debt balances.

In May 2006 the Group sold the Foster’s brand in Europe to brewing and distribution partner Scottish & Newcastle. The sale aligned with the business objective to maximize the value of the global Foster’s brand. The Group retains ownership of the Foster’s brand in significant markets around the world, which account for approximately two-thirds of global beer volumes. The consideration of $736.5 million significantly exceeded the value of the annuity stream that the Group would otherwise receive from the brand in Europe.

As part of the transition to Australian equivalents to International Financial Reporting Standards (AIFRS), the opening balance of contributed equity has increased by $4.9 million due to the new accounting treatment for share-based payments attributable to the Employee Share Grant Plan.

The 2004/2005 final dividend of $215.3 million (10.75 cents per ordinary share) was paid on 3 October 2005. Dividend reinvestment plan participation resulted in 9,471,176 ordinary shares being issued at $5.64 per share, increasing share capital by $53.4 million.

The 2005/2006 interim dividend of $196.4 million (9.75 cents per ordinary share) was paid on 3 April 2006. Dividend reinvestment plan participation resulted in 4,812,022 ordinary shares being issued at $5.26 per share, increasing share capital by $25.3 million.

In September and October 2005, three former executives of the Company exercised options held over an aggregate 1,490,000 unissued ordinary shares, at an exercise price of between $2.12 and $2.48 per share, resulting in the aggregate proceeds to the Company of $3.4 million. As a consequence of these transactions, there are no further options outstanding.

Under the terms of the Employee Share Grant Plan, a total of 1,062,241 fully paid ordinary shares were issued during the period. These shares were issued at $5.59, calculated at the weighted average market price at the time of issue to eligible employees.

The Directors have declared a final fully franked dividend of 11.75 cents per ordinary share, an increase of 9.3 per cent over the previous year. The total fully franked dividend for the year will amount to 21.50 cents per share, an increase of 7.5 per cent over the total fully franked dividend for 2004/2005.

In August 2006, Foster’s moved to a new organisational structure based on three regional businesses – Australia, Asia and Pacific (AAP); Americas; and Europe, Middle East and Africa (EMEA). Each regional business is responsible for managing Foster’s regional customer and consumer relationships, reports directly to the Chief Executive Officer and is backed by the resources of a global supply chain team and a global marketing team. Specialist support functions of Strategy, Human Resources, Finance and Legal will operate services across the Group.

Other likely developments in the operations of the Group and the Group’s business strategies and prospects in subsequent financial years and the expected results of these operations are generally covered elsewhere in the Annual Report.

On 4 August 2006 the Group announced the sale of its business in Vietnam to Asia Pacific Breweries for US$105 million and its business and the Foster’s brand in India to SABMiller plc for US$120 million, marking the Group’s exit from brewing in the Asia region. These transactions are expected to be completed in September 2006.

On 29 August 2006 the Group announced its intention to divest the Wine Clubs & Services business and has appointed external advisers to commence the sales process. In addition, the Group announced an on-market share buy-back program of up to $200 million.

In the group’s financial review, Foster’s said reported revenue increased 24.5 per cent to $4.946 million, and on a Pro Forma basis (as if the Southcorp acquisition had been completed on 30 June 2004) revenue increased 1.9 per cent. Growth in Australian beer, spirits, ready-to-drink (RTD) and cider remains solid. However, revenue growth in global wine was limited by a primary focus on integration activities and synergy realisation, and minimal new product innovation throughout the year.

The worldwide success of the Foster’s brand continues – with global volume growth of 9.5 per cent in 2006, in a global beer market growing 2.7 per cent. However, the value created for Foster’s shareholders by the growth of this great brand has been limited.

Foster’s has implemented a number of initiatives to improve the financial returns of its International Beer business including the sale of the Foster’s trademark in regions where the financial metrics supporting a sale were compelling, the sale of the Asian brewing businesses and the rationalisation of global sponsorships and overheads. Together these transactions have generated gross proceeds of more than A$1 billion with less than A$5 million of net earnings forgone.

A pre-tax significant profit of $713 million relating to these transactions was reported in fiscal 2006, with a further pre-tax profit relating to the transactions announced on 4 August 2006 of approximately $230 million expected to be reported in fiscal 2007.

Beyond 2006, priorities for the Foster’s brand include returning the brand to growth in the US market, the development of further strong regional partnerships in Asia, and exploring opportunities to take the Foster’s brand further into new markets including Central and South America.

On 29 August Foster’s announced an on-market share buy-back program of up to $200 million. Strong operating cash flows complemented by proceeds from asset sales have contributed to reduce net debt balances to below $3.5 billion at 30 June 2006. Combined with expected strong operating cash flows and proceeds from further asset sales including the recently announced sale of our brewing operations in India and Vietnam, this have created the opportunity to return funds to shareholders through an on-market share buy-back program.

Reflecting strong cash realisation, Foster’s split credit rating was removed in April with Standard & Poor’s upgrading Foster’s credit rating to BBB flat. Notwithstanding the $200 million share buy-back, Foster’s expects continued strong cash flows to reduce net debt below $3 billion in fiscal 2008 – one year ahead of expectations at the time of the Southcorp acquisition. Foster’s remains committed to achieving metrics consistent with a BBB+/Baa1 credit rating by Fiscal 2008.

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