AUSTRALIA: Southcorp cheer but trading still tough

By | 18 February 2004

The Australian wine giant Southcorp has eased investor concerns, after a troublesome two years for the group, by unveiling half-year EBITA profit up 39% to A$72.3m after significant items.

The operating profit before tax was A$49.4m, a massive leap from the A$8.7m in the previous corresponding period, in a continuingly difficult period for the Australian wine industry.

Southcorp managing director and chief executive officer, John Ballard, said: "I'm pleased to say that whilst Southcorp still has a way to go, we have stabilised the business and substantially improved profitability this half year. We have delivered a range of cost savings and business improvements amounting to A$23.1m and made solid progress in the past six months, despite the tough trading conditions.

"It's a good outcome especially bearing in mind the continuing oversupply of wine in some markets and the appreciation of the Australian dollar, which increased 24% against the US dollar and 14% against the GBP during the period.
"Direct comparisons to the last half year are difficult because of the volume push and trade loading that occurred in 2002," Ballard said.

However, sales revenue for the period declined 17.4% to A$513.3m, primarily due to lower case volumes, which reduced revenue by A$71.2m, and the impact of the strong Australian dollar, which reduced revenue by A$68.4m. These issues were partly offset by pricing and mix improvements of A$31.5m.

"We're no longer chasing unprofitable volume. And that, together with Project
Veraison cost savings and efficiencies, has enabled Southcorp to improve margins in all regions at the local currency level," Ballard said. Sales revenue per case improved in Australasia by 10% and in the UK/Europe by 16%. In the Americas, case rates were down 2.6% for the period as a result of a swing to 1.5 litre bottles.

Ballard said that he was particularly pleased at the strong earnings growth of 41% in the Australasian market. "The Australasian performance reflects improvements in sales mix and in trading terms as well as the benefits from restructuring sales teams and support structures. Our business in Asia recovered quickly following from the SARS outbreak with excellent volume growth of more than 25% and strong EBITA growth on the previous period."

"The objective in Australasia now is to accelerate our marketing activity to support our key brands and to profitably grow our market share," he said.

The UK / Europe produced a return to profitability ahead of expectations. Ballard said: "The UK strategy is relatively straightforward. It's about having the right brand at the right price point, the right product for the right channel, the right match of sales skills to customer needs; and the right mix of promotional activity to build the brand and consumer satisfaction."

In the US, the result was heavily impacted by the strength of the Australian dollar. But the company said that margins in local US currency were maintained for the six months, in spite of competitive market conditions.

"Direct volume comparisons are distorted by a change in timing of shipments and the focus on reducing the level of distributor inventories, however there was positive depletions growth, albeit at a lower level to the past, Ballard said.

"While we are confident in our ability to maintain a strong competitive position, much will depend on the stability of the US market".

The company expects its cost-cutting programme, Project Veraison, to focus on maintaining cost controls and efficiencies in the second half.

However Ballard warned that trading conditions have remained tough across our main markets and are expected to remain competitive, especially the US.

"Notwithstanding the significant strengthening of the Australian dollar, against which we are virtually fully hedged for FY04, the Company is still on track in FY04 to achieve margin growth of between three and four percentage points. This outlook is in line with the guidance given at the 2003 results announcement," said Ballard.




Sectors: Wine

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