Lion Nathan has to deliver on promise

Friday 1st March 2002

Last year, after reviewing Lion Nathan's 2000 annual report, I complimented the company for not being afraid to tell the world it intended to "earn some applause" this year.

This followed a dismal result, when it reported an $A3.7 million net profit compared with an $A100 million profit the previous year.

Its 2001 report shows it looking a lot more worthy of an ovation for its $A151.8 million net profit.

As with last year, when the result was hurt by a writedown on its China assets, Lion's profit has been distorted by abnormal elements, including asset writedowns, the disposal of its stake in Montana Wines and the sale of its soft drink assets.

Direct comparison with the previous year's result is also made difficult by a change of balance date that gave the 2000 financial year a duration of 13 months.

Perhaps for these reasons, the report rarely touches on the subject of net profits, preferring to compare ebita (earnings before interest, tax and amortisation). It also tends to ignore the group's result in favour of individual brewing businesses.

For example, its highlights pages at the front of the report shows revenue and profit figures for its beer operations only.

Of these, Australia has been a standout performer, delivering ebita growth of 11% against New Zealand's modest 2% increase and China's continuing but declining, losses.

A joint report to shareholders by chief executive Gordon Cairns and chairman Geoff Ricketts again focuses almost entirely on brewing, which produced almost all its revenue and profits last year.

Despite this apparent obsession with beer, Lion is actively diversifying away from this low-growth business.

As Mr Cairns and Mr Ricketts (or Gordon and Geoff, as they prefer to sign off their review) point out: "We are part of a larger beverage market, where wine is growing at the expense of beer, driven by an ageing population with growing affluence. We cannot ignore these trends. Wine for us is a growth overlay on to our beer business and the opportunity to establish a strong second leg."

It has already taken some steps in this direction, with a failed attempt last year to take over New Zealand wine company Montana.

The report turns this negative into a positive, saying it demonstrates the company is prepared to walk away when the price for an asset gets too high.

Since its September balance date, it has made significant investments in two Australian wine companies, Banksia and Petaluma, at prices it is happy with. Next year's report therefore is unlikely to be so beerocentric

Much of the report is devoted to pleasingly detailed descriptions of each of Lion Nathan's brewing divisions, Australia, New Zealand and China, complete with the obligatory illustrations from product commercials.

Fortunately, the company has avoided overdoing the self-promotion.

As a result, it has produced a very businesslike report that, while not ignoring the important marketing campaigns that drive its sales, doesn't look like one long advertising brochure.

One particularly strong aspect of the report is its willingness to disclose its business objectives and strategy for meeting them.

It talks of delivering double digit annual growth by leveraging three "gamebreakers" of new technology, customer satisfaction and "freedom" (which is interpreted as getting rid of bureaucracy in the company).

As Gordon and Geoff see it, the outlook is bright.

Lion Nathan's strategy is to deliver: "More of the same from our beer operations; measured steps into wine as our strong second leg; taking advantage of other opportunities in the broader beverage market; and delivering double digit earnings growth for our shareholders."

Once again, Lion Nathan has delivered a report that leaves shareholders with no doubts about its intentions.

Having had the nerve to publicly state its goals and strategy for achieving them, it now has to meet them. This is very welcome but the company runs the risk of attracting criticism if it fails, which is why many companies prefer to be vague.

On the other hand, investors can take comfort in the thought that Lion wouldn't make promises it didn't believe it could keep.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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