Chris Knorr, Investor Relations Director: Good afternoon, ladies and gentlemen. Thank you for joining us at relatively short notice. We need to advise that this presentation contains forward-looking statements which may be subjected to significant uncertainties outside Foster's' control. No representation is made as to the accuracy or reliability of these forecasts or the assumptions on which they are based, and actual future events may vary from these forecasts and you are cautioned not to place undue reliance on any forward-looking statement.
With me this afternoon are Trevor O'Hoy, our CEO; Pete Scott, our CFO; Rick Scully, Managing Director of Foster's Brewing International; and Stephen Matthews, Foster's Group Finance Director and Treasurer.
This afternoon's call is being recorded and the replay will be available on our website, fostersgroup.com two hours after the call. I would now like to hand over to Trevor O'Hoy.
Trevor O'Hoy, Chief Executive Officer: Thanks, Chris. Good afternoon, ladies and gentlemen. Also my thanks for joining us at very short notice. I'm going to make some brief comments introducing the key features of the transaction we announced this afternoon, walk you through the presentation and then very happy to open up to Q&A.
To begin with, the combination of the Southcorp acquisition and operational improvements within Foster's has significantly advanced our Australia multi-beverage strategy and our global premium wine strategy. Up until today, we have made limited progress in terms of our third strategy of leveraging value from the global Foster's beer brand. I'm very pleased to say and announce today that this transaction now commences that process. We will continue to look for ways to get fair value for this great brand as we take it around the world.
The deal today I believe is financially compelling. It also opens for the first time in over a decade the opportunity for our group to introduce a full range of our Australian premium beers into the very important European market. The deal also enables us to significantly reduce the cost structure of out global beer business, and today we have announced the end of our Formula One sponsorship which was primarily targeted at the European market, and we now also have the ability to reduce the amount of support structure around the global brand.
I think in terms of where this process all began, I just want to go into a bit of history before we move on to the slide presentation. In 1995, when our company was in a very different financial condition, the deal was struck with S&N where the Foster's brand was licensed to Scottish & Newcastle in Europe in perpetuity and at a rate which meant most of the economic upside accrued to S&N.
S&N have done some wonderful things with the brand, and given that the majority of the economic benefit of the brand already accrued to S&N, it seemed to us that S&N were the natural owner of the trademark in Europe.
The sale of the trademark to S&N was the best way for us to deliver value to our shareholders and also for the further development of the brand in that region. Quite clearly the brand is in very, very good hands. On that basis, we're very, very happy with the transaction and like all good transactions it is a win-win. We are particularly pleased as we have a long-term partnership with Scottish & Newcastle.
Importantly for Foster's Group, we continue to own the brand in the fastest growing parts of the world beer market and markets that are twice the size of the European market. And, as I've said before, we have the right now to promote some of our other great Australian beer brands within the European region.
Our focus in global premium beer is in intellectual property excellence.
For some time we've been examining options to maximise the returns we receive from the great Foster's Brand. Initially our focus was to examine cost reduction opportunities and in particular the return we are receiving from our investment in global sponsorships. As we went down this path and reviewed our global sponsorships and our licensing arrangements a number of very competitive options were presented in relation to the brand in a number of regions.
Today we've announced that we have sold the Foster's trademark in Western Europe, Russia and Turkey to our current brewing and distribution partner Scottish and Newcastle for A$750 million.
Importantly Foster's will always be "Australian for beer" and continue to represent the Australian way of life in more than 150 countries around the world. Its position will be maintained. Our agreement with Scottish and Newcastle ensures that the brand's Australian origin, premium positioning, distinct packaging, logos, taste and production standards will be consistently applied all around the world.
Here the interests of the now joint owners of the Foster's Brand S&N in Europe and Foster's Group in all other regions are in complete alignment. A newly formed Foster's Council comprising three representatives each from Foster's and S&N will manage the covenants and development of the Foster's Brand internationally.
The council shall meet in London at least quarterly or more often if required and will be a forum for exchange of ideas about the development of the Foster's Brand worldwide, including the need for consistency in each other's territories, new product development, innovations and any cross border issues. Any material changes or adjustments outside of the evolutionary changes that happen with any great brand must be agreed unanimously between all members.
The success of the Foster's Brand in Europe is irrefutable. The Scots have done a wonderful job. Our investment in sponsorship, our commitment to product excellence, our access to outstanding in-market execution via Scottish & Newcastle has seen the brand become the seventh highest selling international lager brand across Europe and the only non-European beer brand in the top 15.
Notwithstanding the extraordinary success of the brand in Europe, Foster's Group has not and under the historic licensing arrangements with S&N never would be a major beneficiary of the economic upside.
Foster's effectively transferred the majority of the economic benefits of the brand in Europe to S&N in 1995 by granting S&N a license to brew and distribute Foster's in perpetuity at below market royalty rates and with very few performance hurdles. This license was granted when Foster's was in financial difficulties and coincided with Foster's Group sale of Courage Breweries to S&N. At the time Foster's financial condition required the Courage sale and license agreement with S&N but its legacy is that the Foster's Group receives a relatively fixed annuity income stream from the brand in Europe.
The sale of trademark to S&N allows us to monetise this relatively fixed income at a substantial premium.
Today we've not only captured value in excess of the annuity style income we would have received but we also will gain the freedom to take other Australian beer brands into Europe.
Turning to the next slide, Foster's remains absolutely committed to the Foster's Brand and we continue to own the brand in the markets with the highest growth potential which account for roughly two thirds of the global beer market.
Globally Asia is the highest growth market for beer and in particular premium beer. We are continuing to pursue growth strategies to accelerate the growth of the brand in this region.
In North America the Foster's Brand is under developed with significant opportunities to expand our footprint. We continue to work very closely with our partners, SAB Miller in the US and Molson in Canada to improve the performance of the brand in this region.
In the high growth Middle East region, our joint venture with African & Eastern is an excellent distribution platform and is delivering very strong growth.
We also continue to expand the brand's reach through Australian controlled export markets into developing central and South American markets.
Turning to the next slide, the sale of the Foster's Trademark in Europe represents an excellent financial outcome for the Foster's shareholders as the value we have received in exchange for foregoing the low growth annuity style income significantly exceeds the value of the assets to Foster's. Net proceeds after tax are expected to be approximately A$650 million and a one off gain after tax of a similar amount is expected to be reported in fiscal 2006.
Today we have also announced a number of initiatives to reduce Foster's Group cost base by approximately $26 million. These initiatives include the end of the Foster's Global Formula One sponsorship and further overhead reductions.
The net impact of the divestment and cost reductions is to reduce pro forma fiscal 2006 EBITA by approximately $10.8 million. Further financial details of these initiatives are included on the following slide.
The net sales proceeds will be used to pay down debt and as a result Foster's now expects to reduce net debt to below $3 billion by fiscal 2008, one year ahead of previous guidance. Reflecting this reduction in debt, Standard & Poors have indicated their intention to upgrade Foster's credit rating one notch to BBB flat with a stable outlook. This now is in line with a Moody's rating of Baa2 which has also been confirmed.
Together the transaction, costs reduction initiatives and lower interest expense are expected to be 2.7% accretive to 2006 pro forma earnings per share. The pro forma EPS accretion assumes the transaction and cost reductions occurred on 1 July 2005.
As the transaction is not expected to be completed until late in the fiscal 2006 year, it is not expected to have any material impact on fiscal 2006 earnings, so our previous guidance growth of between 12 to 14% normalised earning per share remains. The benefits that we are talking about will progressively flow through and be realised in fiscal 2007. With that I am very happy to take your questions.
QUESTIONS AND ANSWERS
QUESTION: Hi, I just have a couple of questions, please. Firstly could you just comment on the implications for the Foster's Brand value on your balance sheet, post the sale?
MR SCOTT: There is no book value for this brand on the balance sheet now. Nor will there be.
QUESTION: Should there be any change of ownership in Foster's in Australia, are there any sort of clauses within the sale contract to S&N that would be triggered?
MR O'HOY: No, well they're the owner of the mark in the European region, there are rights for the other two thirds of the world.
QUESTION: A couple of questions. With regards to the statement about reducing net debt to below $3 billion by the end of '08, I'm not sure how to read that. It creates a bit of debate. The previous statement was to below $3 billion by '09. If you adjust that, by the $650 million or so, you'd get to $2.35 billion by '09, but under this new guidance, you might end up with something like $2.5 or 2.6 billion of net debt in '09 but still achieve your '08 hurdle. I would interpret that as slippage against the original target, so can we just clarify this statement - does it indicate slippage against the original target?
MR SCOTT: I'll confirm that, no slippage. We've given some guidance to suggest that before this deal, we would have expected our net debt position at June 2006 to be roughly the same as it was when we opened the year, around the $4.2 to $4.3 billion mark. This transaction will reduce that amount by the net proceeds, so will be well under $4 billion as we go into the next fiscal year. Our operating cash flow expectations for '07 and '08 have not changed at all.
QUESTION: Okay, so, great. The next question I have is earlier in the opening remarks you mentioned that the company reviewed all regions in terms of the international business. With regards to India, Vietnam and China, would you say that today there exists a strategic requirement for manufacturing in those countries, or can you market the Foster's Brand perhaps with a partner?
MR O'HOY: I won't talk specifics because that's pure speculation. I'll talk philosophy. As we focus on the two thirds of the beer market where we retain the mark, which is growing at something like two and a half times the region we've just sold, I think it is fair to say we will be looking at developing the brand probably by seeding with exports and looking to move quickly to license the brand with best in class distributors by region. There is no one best in class brewer across all the regions. So we'll be looking region by region for the best in class distributor and unlike the agreement we've just sold, any new agreement will be at market royalty rates.
It will have performance hurdles in it so will be performance based. It will have a finite term, not in perpetuity. And it will have brand spend requirement levels that are fitting for such a great brand. So they are the sort of things we will be looking for and I guess that probably says we are not necessarily looking for being a producer and owning breweries, it's more an intellectual property strategy, which is very much the way I see our wine business growing. In wine we also want to leverage the great brands we have but in an asset light way.
QUESTION: Just one question, I've got your FY '05 result, and I think Foster's Brewing International in '05 had net sales revenue of $264 million and EBITA of $44 million. Are we right in assuming now that Foster's Brewing International will generate revenue of about $228 million and EBITA of around $34 million?
MR O'HOY: I think you would reduce the revenue by the royalty, so about $37 million, and the $44 million, will probably be mid $30m. But note we will receive approximately $650 million of cash.
QUESTION: The next question Trevor, I would have thought that the majority of FBI's $44 million EBITA was actually coming from the Scottish and Newcastle royalty. That means that FBI outside of the royalty is doing mid $30 million EBITA. Can you provide a run down as to where that EBITA has been generated?
MR SCULLY: FBI includes the multi beverage business in New Zealand which is in profit and improving, and a very good, efficient, profitable Pacific brewing and stilling operations.
QUESTION: And the North American?
MR SCULLY: In the US, we have two revenue streams, a joint venture with Miller on wholesale gross profit, and a royalty stream on the license for the brand in the United States. We also have a small but profitable export business and a very good business in the Middle East where there's not a lot of people playing, and we're the dominant player selling not only beer but wine and spirits as well.
QUESTION: Given that this is such an accretive deal for shareholders, why wouldn't you go and sell the other businesses at this sort of multiple? Can you do that?
MR O'HOY: As I said in my introduction, leveraging the value of the Foster's beer brand is one of our three strategies. I see today's transaction as the first step. I think we will assess each market on its own merits looking at growth prospects and who we partner with. We might want to partner with the best in class distributor in a region, but that doesn't mean that they might want to partner with us.
We will do it region by region, and the solutions may be different. What I can say definitely is that we will not be writing any license agreements with below market royalty arrangements or that are in perpetuity.
QUESTION: Were the $17.1 million in brand support and the $9 million in overhead reductions evergreen costs with the royalty stream? Were they locked in or could you have got out of those costs without actually selling the brand?
MR O'HOY: Eventually we could reduce the sponsorships, but they have been long term deals. We are coming up for renewal in the next 12 months and we had to make a decision whether the costs were integral to the value that was being created within the European region. I suspect they were because the Formula One is very focussed on Europe.
We could have made the decision to just terminate the sponsorship but this may have had an impact on the value of the brand in Europe. It was better to negotiate this deal now, while the Formula One is still going.
The overhead structure is very similar in that it was set up for a global business. Now that we are implementing our strategy to be looking for more regional best in class distributors, and we will no longer have Europe to service, even though it was being very well run by the Scots it still required a lot of servicing in terms of brand etc, we certainly will not need the overheads we currently have.
QUESTION: A question on other brands that you've mentioned taking to Europe - Carlton Draught or Cascade. Can you just talk about how you see that unfolding in terms of joint ventures, the timing and whether S&N would have to be involved?
MR O'HOY: I think it is unlikely that it would involve S&N as they have an Australian positioning with Foster's. I think it would be difficult for them to push another Australian brand, but we would obviously talk to them because we're long-term partners. It's something that hasn't been decided, but we feel that we've been building a lot of equity in the Australian market with VB, which actually is Australia's favourite beer and that is how we started with Foster's.
Contrary to our desire to stop it leaking from Australia, VB has been getting around in various markets, so it's already starting to build a bit of momentum. So that's clearly one we will look at, given its position in the Australian market, and also particularly its taste profile which seems to suit where drinkers are heading.
So that's one, but the decision has not been made, but clearly that will be in the mix. Two others that I think have potential momentum is Carlton Draught especially given the way it's growing here in Australia. And clearly Crown Lager as Australia's premium beer I think would be very suitable for overseas markets.
I think it's probably within those three, but as I say, we have not made any decisions, and we won't rush either. Clearly in our discussions with partners in regions outside of Europe there may be some upside in discussing the use of these other brands. I don't know who we'll be talking to, but they could well be existing players in the European markets. So there'd be a stand up opportunity there in the region we're looking at, and also the European market.
So nothing's been decided, no discussions yet, but we will look at these regions for far better deals than the one that was struck in 1995.
QUESTION: Just on SAB Miller, given this transaction, it's unusual, they probably didn't want to participate or change the structure of their deal, or whether S&N looked at taking out that contract or that licence as well, is that because the business has not been performing at the same level as the European business?
MR O'HOY: I think the nature of the license we inherited, and the fact that - my guess is that 75%, or probably 85% of Foster's volume overseas is in the European region, S&N were frankly the natural buyer. Any deal you have, you've got to have the win/win, and I believe both Foster's and S&N's shareholders do very well out of this deal. I think SAB Miller didn't have as much skin in the game.
QUESTION: One final thing, the name of the company and obviously Foster's Wine Estates, do we look forward for a change, maybe to VB Wine Estates?
MR O'HOY: Absolutely not, we are still Foster's, and we own the rights to Foster's in two thirds of the world which are the fastest growing regions. We are absolutely committed to the brand.
QUESTION: Can you just clarify what you mean by a 30 point reduction in gearing? What are the points?
MR SCOTT: Percentage points of gearing. We were at 117% gearing which is a net debt to book equity relationship at the half year. We expected that to come down by about 10 percentage points between 107 to 110% at the end of the fiscal year, before this transaction. We think we'll take 30 percentage points off that gearing ratio through this transaction.
QUESTION: So in the high 70s?
MR SCOTT: In the 70s, that's right.
QUESTION: In the press release you talked about a forecast gearing of 50% to 60% by FY08. I understood the restated gearing target under IFRS was 65% to 75%.
MR SCOTT: That's right.
QUESTION: So do you still intend to leave it to that point, or just stop once you get into the mid point of that range? How does this impact your ambitions about regaining a BBB+ credit rating?
MR SCOTT: Well as a result of this transaction, we moved up one notch to BBB flat and we continue to hold to previous comments that we think that BBB+ is the right place for Foster's from a credit standpoint. I think once there, we would be reasonably comfortable with the capital structure.
QUESTION: So do you still intend to leave it to an actual range of 50% to 60% or just stop once you get to the 65% to 75%?
MR SCOTT: Well we'd stop at a point that got us to the BBB+ rating. And frankly gearing is not the main driver for BBB+. From an S&P standpoint, the key metric is FFO to debt, which is very difficult for those of you outside the company to measure, since it's comprised of a number of metrics that are not necessarily published. We tend to think about either gearing ratios or interest cover ratios and expect to get the interest cover ratios to the seven to eight times range, and the gearing ratio to roughly the 50% range. All we're saying is that's going to happen a year or so earlier than it might have before this transaction.
QUESTION: Good afternoon, could I just clarify one part of the cost saving target. You mentioned $17.1 million from F1 and other brand support, and you mentioned that the F1 sponsorship was coming up for renewal. As part of this deal, did those costs transfer as well to Scottish and Newcastle? Will they take on the duration of that contract? Or will you run that for the period up until renegotiation?
MR O'HOY: There are separate contracts for the global sponsorship and the Australian sponsorship. They're separate, but we have the right to extend or terminate both of them on the 31st of December this year and we have given notice that we will terminate both.
QUESTION: That accounts for the majority of that $17.1 million, those costs aren't transferring to S&N as part of the deal.
MR O'HOY: No they don't transfer, they won't exist anymore.
QUESTION: Two questions if I may. One is there any requirement for you to support the brand in the non-European territories as part of the agreement with S&N? And secondly, I'm just having a look in the presentation you gave in relation to the Southcorp acquisition on the 17th of January 2005, which indicates that you expect gearing to be 50% by year three. I presume the difference between that target and now is purely IFRS, or has there been any slippage in expectations of debt repayment?
MR SCOTT: No, it's all IFRS. If you recall when the IFRS restatement came out, we adjusted the 50% number to roughly 65%. And that's the only difference between the January comments and today's comment.
MR O'HOY: In the two thirds of the world that we own, the agreement with S&N does not stipulate any level of required spend. However we will spend what we think is appropriate. The agreement with S&N requires both parties to stick within the brand architecture and the positioning, and we have absolutely no issue with that.
QUESTION: So does that mean you are looking at having to give support in Europe for any particular period of time? Or are you totally out of Europe from the 1st of January?
MR O'HOY: We're out of there when the cheque is handed over.
QUESTION: But you're still going to be paying for a sponsorship of Formula One in Europe until the 31st ?
MR O'HOY: We will of course honour our contractual obligations for the Formula One sponsorship until the contract ends in December 2006. But there's no requirement for us to spend money in the European region.
QUESTION: And outside of Europe, will you be spending money on the brand? Will the total $17 million saving in sponsorship be realised or will it be something less than that because of you having to do some sort of marketing spend instead of Formula One?
MR O'HOY: No I don't think so, we see the way forward is with best in class distributors with license agreements that reflect market royalties and as part of that we will also ensure two things. Firstly performance based hurdles, and secondly a required level of brand spend of around the 8% to 10% mark. So we will decentralise the spend into the regions.
QUESTION: Could you just give us some insight into why S&N paid so much? It is a great price for you guys.
MR O'HOY: I think you'd have to ask S&N that. I have said that I believe they are the natural owner, and I believe this is a great deal for both as even though it was a low royalty rate, S&N now get the ability to capture all the income stream for the work they're doing, and we get to focus in on the higher growth areas without any encumbrances. I think it's a win/win, but I can't answer how people value different assets and income streams. You would have to ask them that question. All I can say is we're very happy.
Again I would like to thank you for joining us at very short notice and late in the day and commit to communicating with you as more unfolds.
Thanks again and we'll be in touch.
Foster's Group signs deal with Scottish & Newcastle - Investor Teleconference (PDF, 187 Kb)
