Chairman`s & MD`s Address to Shareholders
Document date:
Thu 01 Nov 2001
Published:
Thu 01 Nov 2001 00:00:00
Document No:
248026
Document part:
C
Market Flag:
N
Classification:
FRUCOR BEVERAGES GROUP LIMITED 2001-11-01 ASX-SIGNAL-G
HOMEX - Sydney
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MANAGING DIRECTORS ADDRESS
FRUCOR LOGO
It is my pleasure to present a geographic overview of Frucor's
strategic priorities and a brief update on year to date trading. I'll
then conclude with the outlook for the company going forward.
But before I do that, I'd like to introduce my management team who
are here today and ask that they each stand up individually to make
themselves known;
* Carl Bergstrom is the CEO of the New Zealand business
* John Rymarz is the newly appointed CEO of the Australian operation
* Ray Nicholls is the General Manager of the UK business
* Malcolm Tubby is Frucor's Chief Financial Officer
* Andrew Fraser is the International Marketing Manager for "V" and
* Teva Loos is Frucor's General Manager of Human Resources
They form part of the strong team at Frucor who are responsible for
developing the business strategies and delivering the results.
As I mentioned in the Annual Report, Frucor's on a mission:
To be a world-class innovator, manufacturer and marketer of quality,
branded cold beverages, and to achieve excellence in the fulfillment
of customer, shareholder and employee requirements and expectations.
Whilst the recent recognition by Forbes Global of Frucor as one of
the world's top 20 small company's was a great achievement, we believe
our mission is far from complete. The culture of this company is one
of restless endeavour in the thirst to become the best "small"
beverage company in the world.
Nor will recent market-place events distract us from continuing to
pursue the company's longterm growth strategies which I'd like to
share with you now.
Given the keen interest in the company's performance in the UK and
Australia, I'll talk to these markets first. However, before I do,
it's worth emphasising that the NZ business continues to both
generate the majority of the company's profits and perform strongly.
UK STRATEGY AND UPDATE
UK BULLSEYE
In the UK, our objective is clear. To achieve a profitable number two
position in the large, yet relatively underdeveloped UK energy drink
market by focussing on the daytime consumption opportunity.
Its fair to say its been a challenging goal for Frucor and in
particular, General Manager, Ray Nicholls and his team. The market is
very competitive with around 25 or so other energy drink brands
launched in the UK over the last two years. Last summer,the
distribution build took longer than anticipated and this, combined
with significant launch marketing investment, impacted on the
year-end result.
During 2001, our strategy was to substantially increase "V"s
distribution coverage and the UK team did a good job in driving this.
Weighted distribution increased to nearly 50% pre-Summer which
justified further marketing investment over the UK Summer.
UK REVENUE, V FEATURE
In terms of recent trading, our continued investment has had the
desired effect. "V" is now the clear number two in the UK market with
Nielsen reporting an improvement in market share from the June
quarter. In fact, "V"is the only significant brand to have grown its
share in the past three months in the UK, a considerable achievement
in light of the 40 or so other competing brands in the market.
Management believe that "V"s market share is between 8-10%.
The market, however, as reported by Nielsen, declined for the first
time ever by 4% over the last quarter. This is a significant
contraction on the annual growth rate of 27% reported in the
company's 2001 Annual Report.
The net result of these two factors on revenues is that, whilst
average weekly sales grew 51% between fourth quarter 2001 and the
first quarter this year, they are below our expectation which was
built on the assumption of higher market growth.
A key factor in the drop off in market growth has been the unexpected
fall in media investment in the category. This has fallen from 13.5
million pounds last year to 6.2 million pounds in 2001, a reduction
of 55%. Surprisingly, the market leader reduced its media spend by
more than half over Summer which has served to reduce the profile of
the energy drink category in the context of the broader cold beverage
market.
Our focus for the balance of the year is on broadening "V"s
distribution and broadening the range in selective accounts with the
introduction of "V" bottles and multipacks. This broadened range
serves to differentiate "V" from the competition and across the
market. The addition of the bottle has been incremental to sales
of "V" cans.
While there is still much work to be done, the recent gains in "V"s
market share gives us confidence that the proposition for the brand
is credible in the minds of our customers and a growing number of
UK consumers.
In terms of market potential, consumption per capita of energy drinks
in the UK remains relatively low at 0.6 litres per head, when
compared with both NZ and Australia. This suggests that there
continues to be a substantial underlying growth opportunity in this
market.
A rekindling of market growth is dependent on category investment by
the major players, but even if historical growth levels were to be
regained, it has become clear that Frucor's plans in the UK would be
better achieved in conjunction with a strategic partner who could
complement our capabilities. This would facilitate the creation of a
longterm platform for the brand and enable sustained investment at an
appropriate level.
Indeed, as we continue to explore other major international
opportunities for the business, beyond Australasia, the Board
believes that one, or a series of such strategic partnerships, will
be the best way forward.
AUSTRALIA STRATEGY/UPDATE
AUSTRALIA BULLSEYE 1
We turn now to Australia, where continued expansion presents the most
logical growth step for the company, and is Frucor's primary
investment focus.
Australia has a relatively large economy with a GDP per capita
approximately 20% higher than that of NZ's, and a warmer climate with
around 80% of its population centred on the key urban centres.
It is a huge, A$61 billion cold beverage market with per capita
consumption levels, for the most part, far greater than that of New
Zealand.
AUSTRALIA VS NZ PER CAPS
This graph shows that Australians consume around 197 litres of cold
non-alcoholic beverages annually compared with only 150 litres in NZ.
That's a 31% higher consumption rate proving that Aussies do indeed
drink more then Kiwi's!
The bottled water market alone for example, is approximately 10 times
the volume of its NZ equivalent. The only exception is the energy
drink market which, at 1.2 litres per head of population, lags behind
NZ at 3.0 litres. This illustrates the untapped potential that this
category offers.
While the scale of the Australian market is attractive, the
competitive cold beverage arena is fierce, dominated by two large
multinational companies, following a period of significant
rationalisation.
We're very mindful of this, so our goal has always been to take a
considered approach to the Australian market and to establish a
Frucor selling system, as a longterm platform for growth.
The acquisition of the Spring Valley sales and distribution system
earlier this year was a key step forward for Frucor. Prior to this,
we had used Spring Valley to distribute "V" in Australia but never
viewed this as a long-term solution given our broader cold beverage
agenda.
AUSTRALIAN BULLSEYE 2
Its an evolutionary stage of the company's development in Australia.
Our growth strategy is to drive "V" into new outlets and channels,
launch innovative new products, build our customer base and continue
to attract and retain good people.
The future expansion of the Australian operation will be led by CE0
John Rymarz, an Australian with extensive cold beverage management
experience.
It's been just over two years, since we launched "V" in Australia on
a national basis. In that time, we've gained invaluable insights into
the Australian market and its consumers. The formation of our own
organisation, has driven Trans-Tasman processes around new product
development, manufacturing, finance and marketing in an effort to
drive efficiencies through the business.
Australia is our most attractive market and one which we will manage
for growth. This will entail significant marketing investment and we
will pick our opportunities carefully to ensure sustained growth for
the long-term and a good level of payback.
In terms of recent results, "V" market share has grown steadily to
just under 50%. However, Frucor's lack of media investment over the
April to August period, depressed market growth rates as demonstrated
by this graph.
GROWTH RATE CHART
This shows a sudden slow-down in energy drink market growth over the
latest quarter, ended 2/9/01. A C Nielsen reports a decline in market
growth from 34% in the May quarter to just 9% for the August quarter.
However, once we resumed "V" advertising in August, Frucor sales and
market indicators started to accelerate as demonstrated by this next
graph.
BL2W MILLWARD BROWN/MARKET GROWTH
This shows an uplift over the last two months in recent consumer
purchase behaviour which correlates with the resumption of "V" TV
advertising. Specifically, around 38% of 18-24 year olds, "V"s core
drinkers, claim to have bought the brand in the last 2 weeks in
October compared with only around 18% in August.
This is an encouraging sign and underscores the responsibility that
Frucor has, as the category leader, in stimulating market demand
through its marketing investment.
I'd like to now share with you two new "V" TV commmercials which air
in Australasia this summer.
"V" TVCS X 2
I hope you enjoyed those ads, "V" consumers certainly do. In fact the
"cow tennis" ad achieved the second highest pre- screening
"enjoyability" index score in the world out of 10,000 other Millward
Brown researched, finished TVC's. So we're particularly confident
that it'll be a highly effective investment for the "V" brand.
AUSTRALIA RESULTS
I'm also pleased to report that total "V" sales in Australia during
October were up around 12% on a year ago on the back of increased "V"
investment. Sales of both Mizone and H2GO were fully incremental to
the business in October.
The Mizone launch campaign has only just commenced in Australia and
so while were pleased with progress, it's too early to provide a
fuller update on the brand's performance in this market.
The Australian business continues to expand its direct customer base
achieving 11,000 outlets in September. we are targeting to increase
this by a further 25% outlets by year end.
On top of this, we'd like to announce that we're in the final stages
of concluding a distribution arrangement with Bundaberg Brewed
Drinks, Australia's leading brewed ginger beer.
The Bundaberg brand complements our Australian portfolio of premium,
differentiated brands and is forecast to generate an additional NZ$5
million in operating revenues this financial year, at reasonable
margins.
This, together with the recent gains in our customer base and
vigorous "V" investment will assist in lifting the sales run-rate in
Australia. We also believe that growth in the energy drink category
will rebound to around 20%.
NEW ZEALAND STRATEGY/UPDATE
NZ BULLSEYE
And finally turning to New Zealand where the imperative is to grow
and defend this stable, highly profitable business by capitalising on
our portfolio of high profile brands, innovative culture, new product
development expertise and operational competencies.
Needless to say, our international growth program is highly dependent
on the sustained success of the New Zealand business and the
supportive resourcing it provides.
The New Zealand business, led by CE0, Carl Bergstrom, is the
epicenter of the company's innovation, research and development
efforts. It has a highly skilled, experienced management team with an
excellent understanding of the cold beverage market, its consumers,
customers and the key growth categories. It is at the forefront of
international beverage development as demonstrated by the continuing
success of "V", its consumer preferred juice brands, and innovative
new products like Mizone.
MIZONE PACK SHOTS
The recent launch of Mizone, two years in development, was an
Australasian first and has recently been rolled out to Australia.
Mizone is a lightly flavored sportswater with vitamins to assist in
rehydration. It tapped into an insight that men in particular,
struggle to drink bottled water because it's too bland. Quite simply,
Mizone makes water taste great, and consumer's agree with the brand
achieving 25% market share in the convenience channel over the first
quarter of this year.
I'd like to now show you some new Mizone TV commercials, which are on
air in Australasia this Summer.
MIZONE:30 AND LIME: 15
There certainly is something in the water because Mizone, together
with the 1999 acquisition of the H2GO brand has strengthened Frucor's
position in the fast growing New Zealand bottled water market.
The New Zealand business has strong market positions in all the
significant cold beverage categories, number one in fruit juice
drinks and energy drinks, second in water, and softdrinks with a fast
improving position in sportsdrinks. It is well placed to defend and
grow its position in the near term.
NZ THEME PICTURE, FRUCOR LOGO
In terms of current trading, the New Zealand business is currently
achieving pleasing revenue growth with positive gains across all
three core categories. "Juice/drinks" are trending up, "new age
beverages" jumped 20% due to new "G-FORCE" products and "V" sales
growth, while "other beverages" which includes "Pepsi" is achieving
modest growth. Agency lines, which also form part of "other
beverages", are well behind year ago due to supply problems.
Significantly, Frucor water sales in NZ are around double that of
year ago. The company is now a strong number two player in a market
which is currently growing at around 35%.
The NZ business has in hand a number of cost saving initiatives which
will positively contribute to earnings this financial year.
So overall, total Frucor operating revenues for the first quarter
were slightly ahead of last year, however October sales were well up,
around 18% on last year.
FRUCOR LOGO
In conclusion, I'd like to make four main points;
* Firstly that the outlook for the company remains promising with
stronger revenue and earnings growth anticipated over the balance of
the year. All 3 geographies are anticpated to deliver improved
results in 2002
* In the UK, market conditions are soft but we are working to
leverage "V"s number two position and recent growth by expanding our
distribution and range. We expect to report a smaller loss this year
on the back of the gains we've made and we will actively seek a
strategic alliance in this market for the reasons outlined
previously.
* In Australia, our performance has rallied behind renewed investment,
product news and an expanded customer base. Per capita consumption of
energy drinks remain low, so this, together with our aggressive sales
and marketing program gives us confidence in the future growth
prospects in this market. Last year, profits in Australia doubled to
NZ$10.8 million despite the one-off costs associated with the
acquisition of the Spring Valley sales infrastructure. This year
we're forecasting further strong earnings growth.
And finally, to New Zealand, where last year the company achieved an
EBITDA result of NZ$30.6 million, an increase of 17% on the 2000
reported result. It's easy to dismiss NZ as a mature business with
limited upside, the reality for Frucor is that, since 1999, it has
grown EBITDA from a base of NZ$18.8 million, an increase of 62% over
two years. Given that the NZ business is already showing positive
gains across all categories, we're confident of a further growth in
contribution to Frucor's bottom line for the full year.
At this stage, I'd like to end my address by re-iterating the
Chairman's comments that it's very much business as usual at Frucor.
This is no time to take our eye off the ball as we ramp up to the
busy Australasian Summer period and drive home our gains in the UK.
We remain committed to our goals - to innovate, internationalise and
be world class in everything we do, values and behaviours which have
been internationally recognised and make Frucor stand out on the
world stage.
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