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Beer Prices Help Foster's Lift Its Profit MARKETPLACE By Bloomberg

Posted on: Wednesday, 15 February 2006, 12:00 CST

By Robert Fenner

Higher beer prices helped Foster's Group log an 11 percent rise in first-half earnings on Tuesday, but its shares fell on concern that the company was not getting enough cost savings from its wine business.

Earnings before one-time items rose to 333.3 million Australian dollars, or $246.3 million, in the six months through Dec. 31. Including one-time items like the sale last year of its property unit, first-half net income fell 62 percent to 291.1 million dollars. Foster's chief executive, Trevor O'Hoy, kept his full-year cost-savings target at 50 million dollars. O'Hoy reached 46 percent of his annual target in the first half by cutting jobs and offices after buying Southcorp for 3.2 billion dollars in 2005 to create a global wine business second only to Constellation Brands. As a grape glut in Australia eroded profit from wine, Foster's was able to sustain earnings growth by raising beer prices.

"The problem is that they should be getting more wine synergies early and we really thought those savings were a bit light," said Michael Birch at Wallace Funds Management. "Everything else was fine with good cash flow and beer profit, it's just the wine that was a bit weaker."

Annual savings from buying Southcorp are forecast to rise to 145 million dollars in 2008.

Foster's shares fell 12 cents to close at 5.48 dollars. The company's 5.8 billion dollars in wine acquisitions since 2000 have weighed on its shares, which have posted only one annual gain since 2001.

Foster's domestic beer unit, which sells Victoria Bitter and Crown Lager, increased earnings before interest and tax 18 percent to 371.6 million dollars after raising prices, selling more profitable beers and seeing higher demand for premixed cocktails.

"We had strong pricing and had volume growth in beer for the first time in a decade," O'Hoy said. "On top of that we are taking costs out of the business."

Wine earnings were lifted by the Southcorp acquisition and higher sales in North America and Asia. But sales in Australia, New Zealand and Britain fell, with sales of the Rosemount brand slumping 20 percent.

"While its early days, full-year earnings for wine are on track," O'Hoy said. "Expect momentum to build in the second half."

Source: International Herald Tribune

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