E-Malt.com News article: UK & South Africa: SABMiller announces ITS IFRS results saying growth demonstrates strength of global footprint

SABMiller announced on November 10 its first IFRS results for the six months ended 30 September 2005. All comparatives have been appropriately restated.

Group lager beer volumes up 10.5% to 91 million hls, organic growth of 5.6%
• Group EBITA margin further improved to 16.0%
• Strong South Africa Beverages performance
• Miller performed satisfactorily in an intensely competitive environment
• Europe benefited from strong contributions in Poland and Czech
• Good contribution from Africa and Asia driven by China, Mozambique and Tanzania
• Major transaction involving Bavaria in South America completed on 12 October

Statement from Graham Mackay, Chief executive
“The group has delivered further increases in volumes and earnings in the first half, reaffirming our
strong growth profile within the global brewing industry.
“Despite the intensely competitive pricing environment in the US this summer, Miller has continued to
invest in its brands and its organisation to strengthen its base for sustainable future growth. South
Africa’s strong contribution has been supported by further operational improvements as well as robust
consumer growth in the local economy.
“The group has successfully secured a controlling interest in the leading Andean brewer Grupo
Empresarial Bavaria, which delivers a new platform for growth on the South American continent.”


Business review
A good performance was achieved against the comparable prior period’s high base, reflecting SABMiller’s access to growth in the global beer market. Our portfolio of developing and developed market operations generated organic growth of 5.6% in lager volumes. EBITA rose 12% (9% on an organic, constant currency basis), benefiting from both volume and value growth.

The group EBITA margin increased to 16%, 20 basis points higher than in the comparable prior period. During the period we announced a major investment in South America, which was completed on 12 October, obtaining a controlling interest in the leading Andean brewer, Grupo Empresarial Bavaria. In addition, we increased our interest in India through acquiring the balance of our joint venture; and our Chinese associate China Resources Snow Breweries Ltd (CR Snow) has continued to consolidate its presence in the world’s largest beer market. The South Africa Beverages division has recorded strong EBITA growth and the Africa and Asia business also delivered further good results. Europe contributed a particularly pleasing performance. In North America the results from Miller Brewing Company reflect higher input costs and an increasingly price competitive trading environment. Group beverage volumes totalled 110 million hectolitres (hls), a 10.4% increase on the comparable sixmonth period. Lager beer volumes were up 10.5% to 91 million hls, with organic growth of 5.6%.

Group revenue, including share of associates, increased by almost 7% on an organic, constant currency basis, and on a reported basis at US$7,901 million was 10% ahead of last year. Reported EBITA of US$1,264 million (up 12%), reflects strong operating performances with improved pricing and mix in most of our key markets. The reported results include currency benefits from the Polish zloty and Czech koruna, whilst the average rand rate was very similar to that in the same period of the prior year.

On an organic, constant currency basis, EBITA increased 9%. Adjusted earnings are up by 17%, to US$667 million. Adjusted earnings per share of 52.7 US cents have grown by 10% for the first six months on a reported basis, and are up 14% on a comparable basis, the calculation of which assumes the redemption of the group’s convertible bonds on 1 April 2004. An interim dividend of 13 US cents per share, an 8% increase, will be paid to shareholders. North America Over the period, the Miller business continued to invest in its brands and its organisational capabilities, despite rising input costs and an intensely competitive summer pricing environment which contributed to a 5% decline in EBITA.

While domestic sales to retailers (STRs) recorded a small decline compared to the prior year, Miller competed effectively against the other major domestic brewers in the face of aggressive price discounting. Results continued to benefit from the strength of its flagship brand, Miller Lite, which demonstrated improved brand equity, particularly in the on-premise channel, and delivered mid-single-digit overall sales growth on top of double-digit growth in the comparable period last year. Central America Group revenue for the period grew by 3% on a constant currency basis, reflecting improved pricing for beer across the business and for carbonated soft drinks (CSDs) in Honduras.

The decline in EBITA, against last year’s strong recovery for the same period reflects adverse economic conditions and in El Salvador, excise changes, together with lower aggregate CSD pricing.

CHIEF EXECUTIVE'S REVIEW
4 Europe Our Europe business performed well over the important summer period. Organic, constant currency EBITA increased by 16% and organic volumes were ahead by 4%, despite unseasonable rainfall and localised flooding in July and August. Strong growth in Poland, where volumes over the last twelve months have exceeded 11 million hls, was coupled with more moderate growth in the Czech Republic, where the Plzensky Prazdroj business grew volumes against a declining market. Russia volumes grew 6% and satisfactory progress is being made in Italy where Birra Peroni’s branded volumes grew by 2%. Africa and Asia Africa produced a further good set of results in the half year, reflecting excellent trading in Tanzania and Mozambique, partially offset by tougher conditions in Botswana where currency devaluation and rising inflation impacted consumer demand across the market. In China, our associate, CR Snow, generated organic volume growth of 16%, well ahead of the market, and our leading national brand, Snow, grew 51%. Together with the impact of acquisitions made in the previous financial year, CR Snow’s share of the Chinese market has risen to 13%. South Africa Beverages Beer and soft drink volumes continued their positive growth trends benefiting from increased marketing and sales activity, a mild winter and continued strong economic conditions.

Comparable beer volumes grew by almost 3%, with the premium segment recording strong growth. The organisation continues to develop its capability to build local premium and international brands in the market and over the period our premium portfolio achieved strong double-digit growth compared to the same period last year. South America In preparation for the integration of our South American business, a new regional management team is being established in Bogotá.

Whilst the Bavaria business will be included for five and a half months in the second half of this financial year, our initiatives - to develop differentiated brand portfolios, marketing and price management strategies, and reduce operating costs - are only expected to start taking effect from the following financial year. Outlook The group will continue to benefit from its exposure to attractive growth markets. In the second half of the financial year, increasing input costs from higher commodity prices, ongoing investment in marketing and in our business infrastructure, and tough currency comparatives are expected to have an effect on our results. Nevertheless, the general outlook remains positive and we expect to deliver growth in comparable adjusted earnings per share for the year.

Miller Brewing Company faced significant industry headwinds as pressure from an intensely competitive pricing environment was exacerbated by rising input costs and share gains by the spirits and wine industries in the total alcoholic beverage market. Despite these challenges, Miller’s focus on the fundamentals of brand-building, sales and distribution execution, cost and productivity improvement, and its organisational capability ensured that it remains on track to strengthen its base for future growth. Industry sales to retailers (STRs) for the first half of the financial year were largely unchanged as moderately negative domestic beer STRs were offset by strong growth in the import and craft beer segments.

Total US industry domestic shipments to wholesalers (STWs) for the same period decreased by an estimated 0.4%. Miller’s US domestic STRs decreased by 0.3% in the reporting period, decreasing by 1.5% in the second quarter. Domestic STWs rose by 1.1% in the first half, cycling a reduction in wholesaler inventories during the comparable period in the prior year. Total volumes including contract brewing for the six month period increased by 0.6% to 31.2 million hls. Export sales continued to be depressed by difficult trading conditions in key markets, and contract brewing volumes were down by 1%. While overall STRs were down due to price competition and continued softness of the Miller Genuine Draft brand, Miller competed effectively against the other major domestic brewers in the face of aggressive price discounting.

Results benefited from the strength of Miller’s flagship brand, Miller Lite, which showed significant brand equity in delivering a mid-single digit increase in STRs cycling last year’s double-digit growth in the comparable period. Miller Lite continues to show momentum despite unprecedented competitor discounting levels. Marketing investment and operational focus in the economy portfolio have resulted in sales increases in the Milwaukee’s Best franchise, and initial indications are that new advertising for Miller High Life will positively impact brand performance.

Miller Genuine Draft will be re-positioned and re-launched during the second half of the year. Group revenue grew by 1.8% to US$2,662 million during the first half versus the prior period, and within this US domestic revenue excluding contract brewing grew by 1.7%. This increase is the result of earlier price increases partly offset by extensive price promotions. Whilst the effect of brand mix was positive following the improvement in Miller Lite sales, geographic and package mix were negative. Contract brewing revenues reduced ahead of volume declines as a result of unfavourable mix impacts.
CHIEF EXECUTIVE'S REVIEW (continued) 6 Costs of goods sold increased by more than the US Consumer Price Index, driven by commodity and fuel price increases. Furthermore, increased investments were made in brand marketing, specialised sales staff, recruitment, information systems, health care and retirement funding.

Savings from other general costs and continued improved brewery efficiencies during the period only partially offset these increases. EBITA for the period of US$286 million was 5% lower than the prior year’s US$301 million, driven by the well-publicised US pricing environment and higher input costs of fuel, glass and aluminium. As a result, EBITA margin decreased to 10.7%. Miller continues to progress in all four areas of its three-year turnaround strategy.

The improved marketing capabilities and brand-building approach that has helped improve the Miller Lite brand equity measures have been applied to other key brands, most importantly Milwaukee’s Best and Miller High Life. Pilsner Urquell and Peroni Nastro Azzurro will also receive greater focus with the enhancement of the specialised sales force. As the turnaround period nears completion, improved alignment with distributors, increased rigour and discipline in local market planning, and the activation of enhanced marketing activities will drive further improvements in sales and distribution execution.

Miller will continue to invest substantial marketing resources against its core brands to build a sustainable portfolio of growing brands across all major segments. Finally, steady progress in building organisational capability will continue as performance management becomes further entrenched and new talent and personnel development initiatives are introduced into the organisation. Profitability in the second half of the year will continue to be impacted by the effects of the competitive pricing environment and higher raw material and energy costs together with further investments in brand and local marketing and sales force improvements.

During the period under review disposable incomes in both countries continued to be negatively impacted by fuel price increases and consequent increases in electricity and transport costs. Further progress has been made across both countries in improving execution through customer focused channel marketing and growing the worth-more lager segment. Lager volumes declined by 7% across the business, with growth in Honduras being more than offset by a decline in El Salvador, driven mainly by the discriminatory increases in excise taxes in January 2005.

The entry of a competitor into El Salvador also eroded volumes and share, but to a lesser extent than was anticipated. Improved revenue management through brand segmentation, enhanced brand equity and portfolio management have yielded benefits, and supported price increases across the business. Aggregate CSD volumes increased by 4% reflecting a relatively stable CSD market share in Honduras, and increased volumes in El Salvador. Selective price increases were taken in Honduras to improve the profitability of the CSD market, whilst in El Salvador we have introduced lower-priced offerings in selected market segments to compete on a price basis with competitors in these market segments.

Group revenue for the period grew by 3% on a constant currency basis, reflecting improved pricing for beer across the business and for CSDs in Honduras. The decline in EBITA (8% in constant currency terms) against last year’s strong recovery principally reflects the contraction of the El

We will continue our efforts to stimulate further growth in beer volumes and a gradual recovery of the CSD profit pool. Europe has delivered an excellent performance in the first half of the year, with share gains in most markets and organic EBITA growth of 16% in constant currency, boosted in US dollar terms by currency benefits from the Polish zloty and the Czech koruna.

Following organic volume growth of 6% in the first quarter, the peak months of July and August were characterised by unseasonable rainfall and localised flooding. This impacted second quarter volumes, which grew 3% organically, bringing organic growth in the first half to 4% overall. Worthmore brands were ahead by 6% regionally, while Poland’s total volumes surged 12%. EBITA margins were further boosted by productivity and improved sales mix, adding 150 basis points.

The strong volume growth in Kompania Piwowarska (KP) in Poland exceeded the industry growth of 5%, reflecting successful brand and channel initiatives, and our volumes over the last 12 months have exceeded 11 million hls. Together with the benefits from volume growth, enhanced productivity has resulted in healthy margin improvement. KP is again the market leader with share gains of 2% year on year, and commands an estimated 37% market share as at September.

Brands Tyskie, Zubr and Lech now represent the top three beer brands in Poland, with Tyskie having won the coveted 2005 BIIA (Burton upon Trent) Grand Champion Award for the second time. Zubr, Lech and Redds have all shown growth in excess of 25% over the last twelve months, with overall sales mix improving. Price competition is intense and industry prices have reduced by 3% in real terms with KP achieving selective price increases.

Channel initiatives continue to focus on increasing the off-premise availability of cold beer, developing KP’s leading key accounts’ presence despite greater discounting of competitor brands, and continuing to build share in the on-premise segment, which rose by over three percentage points to some 39% in the first half of the year.

To support this rapid growth, further capacity is being installed at the Poznan and Bialystok breweries. In Czech the domestic beer industry recorded a decline of 1%, reflecting higher summer rainfall than in the prior year, and against this market performance Plzensky Prazdroj grew by 1%. The Pilsner Urquell brand has grown 1% domestically, with domestic focus on key accounts and further on-premise availability. Improving mix resulting from growth in the worthmore and mainstream segments, together with real price gains, increased net revenue per hectolitre by 5%.

These positive developments, along with cost benefits from centralised procurement, have resulted in satisfactory profit growth. On 25 July 2005 the group announced that it had initiated a buy-out process to acquire the remaining 3.1% interest held by minority shareholders in the group’s Czech operating company, Plzensky Prazdroj a.s. This transaction has yet to complete.

Our Russian operations continued to perform favourably with volume growth of over 6%. The performance was particularly strong in the important Moscow area, following accelerated cooler placement in retail and on-premise trade outlets. We benefited from strong growth in the worthmore sector, led by Kozel which grew by 54% and is now Russia’s leading licensed brand. Multi-pack offerings were introduced for Miller Genuine Draft (MGD), Redds and Zolotaya Botchka, with Redds growth of almost 100%. According to AC Nielsen, SABMiller now markets three (MGD, Holsten and Kozel) of the top four licensed brands in Russia on both a volume and value basis. Additional local supply lines have reduced input costs and assisted margin growth.

CHIEF EXECUTIVE'S REVIEW (continued) 9 Birra Peroni’s branded volumes have grown by 2% in the Italian market, which is level year on year. Key brands Peroni and Nastro Azzurro have performed particularly well and both show volume growth of over 5%. Birra Peroni increased pricing on its economy private label brands in conjunction with its deliberate strategy to significantly reduce these volumes, which fell nearly 40% in the period.

The combination of mainstream and premium growth, combined with the economy segment decline, has produced a better sales mix with net revenue per hectolitre increasing by 8%, and production efficiencies have been improved. Export volumes continue their improving trend with the United Kingdom performing particularly well showing 25% growth on the back of the new packaging launch for the international brand Peroni Nastro Azzurro. In line with its premium-focused strategy, marketing investment has increased, particularly for the core domestic and international brands. Overhead productivity has benefited from the rationalisation of production which took place in the prior year.

Ursus Breweries in Romania has produced a good performance with 6% organic and 14% reported volume growth overall and 56% growth for the Timosoreana Lux brand assisted by its increased distribution footprint. Peroni Nastro Azzurro was launched in the worthmore segment while the Ciucas brand was successfully launched in PET packs nationally, creating a full brand portfolio alongside Ursus and Timosoreana Lux. Capacity expansion and upgrading continues and should be finalised by May 2006. Our Hungarian operations have shown 4% volume growth in a market that has declined 4% in the first six months. This has been achieved through renewed focus on Arany Aszok, our largest brand, which has grown 7%. International worthmore brands Pilsner Urquell and MGD have grown volume sharply, albeit from a low base. Significant price competition continues in the industry while lower input costs assisted by favourable pack mix have improved margins. In the Canary Islands the market declined by around 2% with weaker summer demand and lower tourism. We have maintained our value share of the market at 57%.

The restructuring plan announced in the prior year is on plan. Volumes at our Slovakian operations have declined by 1% in a market showing a decline of 4% while price competition remains fierce. The acquisition of Topvar a.s announced on the 9 May 2005 remains under review by the Slovakian Anti-Monopoly office. In the second half of the year, growth will be impacted by the cycling of the prior year’s earnings boost from Easter. Investments in sales, marketing and manufacturing will also continue in our major markets. Together with a challenging pricing environment and a more modest improvement in sales mix, this is expected to affect margins and profitability.

Africa
Our business in Africa delivered further growth in the first six months following three years of outstanding results, and reported lager volumes increased by almost 6%. This lager volume performance was underpinned by excellent trading in Tanzania, with growth of 7% led by the Kilimanjaro brand, and Mozambique with growth of 12% led by the 2M and Laurentina brands. In both Tanzania and Mozambique, favourable economic conditions and improved availability through distribution initiatives drove this success. In Uganda the launch of Eagle Extra, a sorghum based lager beer, resulted in high double-digit volume growth and market share gains, and in Zambia results were led by market share gains in the traditional beer sector, with volume growth of 20%. A 12.5% currency devaluation in Botswana, with resulting rising inflation and fuel prices, dampened consumer demand across the beer and soft drink product range, while beer volumes also declined in Zimbabwe. CSD volume growth moderated following an entry by a competitor in the economy segment in Angola and continuing tough economic conditions in Zimbabwe, partly offset by further growth in Zambia.

Group revenue in Africa was supported by inflation-led pricing growth. Volume and pricing growth and selected brand and package mix improvements more than offset fuel and distribution cost increases, and in conjunction with productivity gains, these resulted in good EBITA increases in the period. Higher organic, constant currency EBITA was achieved in most African countries, but the reported results were negatively impacted by currency devaluations in Botswana and other countries. The EBITA contribution from Castel reflected solid growth for the period. Lager volumes for Castel grew 7% compared to the first half of the prior year, with strong growth in Angola, Gabon and Ethiopia.

Within these volumes, our Castle Milk Stout brand produced under licence in Cameroon continues to grow in a competitive environment. Asia In China, organic lager volume growth of 16% outperformed the market, with the Snow brand growing by 51% and gaining further market share in the period. Total volumes grew 31% following the acquisitions in the previous financial year. All regions posted strong organic volume growth for the period including the North East where competitive pressures continue. This growth reflects the success of initiatives to strengthen and simplify the route to market, a significant increase in brand marketing investment and a focus on Snow as the lead brand within the portfolio

CHIEF EXECUTIVE'S REVIEW (continued) 11 In addition to volume growth, turnover has gained from continued modest and selective price increases in many regions. Mix has improved and includes the increased contribution made by the sales of the Snow brand. This, together with more stable input costs and further operational efficiencies, contributed to good double-digit organic growth in EBITA.

The acquisitions that we have made during the past year, including that in southern Jiangsu, are benefiting from greater efficiencies with resulting improvements in profitability. In India, we acquired the balance of our joint venture with Shaw Wallace Breweries in late May 2005, from which date the results have been consolidated. Trading compared with the same period in the prior year has shown improvement with volumes up 12% on a pro forma basis. Regulatory reform remains a key issue in liberalising the industry, which is poised for further growth in line with strong economic fundamentals.

Beer and soft drink volumes continued their positive growth trends during the six months to September, despite the absence of an Easter period in the current financial year. The growth was driven by the continued strength of the economy, a mild winter and targeted marketing and sales activity. A programme is continuing to establish and leverage benefits from the combination of our beverage businesses in South Africa. ABI now trades as the Soft Drink division of The South African Breweries Limited (SAB Limited). Beer volumes grew by almost 3% on a pro forma comparable basis, having adjusted for the transfer of management responsibility for exports to Angola to the Africa division during 2004.

Within this performance, the premium portfolio continues to show strong growth with Miller Genuine Draft, Castle Lite and Amstel achieving double digit growth versus the comparable six-month period in 2004. The organisation continues to increase its capability to build both local premium and international brands in the market.

The introduction of bulk packs in October for both Miller Genuine Draft and Brutal Fruit will continue to provide consumers with more choice, enhancing availability and value for money and an accessible premium offering. In line with our strategy to improve market penetration and with increased liquor licensing in two of the major areas of South Africa, the delivered customer base increased by 10% over the past six months. CSD volumes have benefited from the favourable economic environment, which has continued from the prior year into the first half of the current year, with ABI sales volume ending 10% above prior year.

Significant consumer promotional activity during the winter months, improved market execution and distribution reach, price restraint and favourable weather conditions throughout the trading period ensured that sales volume accelerated from a buoyant base. Although still a relatively small contribution to sales, non-carbonated beverage volume performed exceptionally well, contributing to the excellent volume growth.

The increased sales volumes, together with selective price increases in both beer and soft drinks and an improved mix with higher sales of premium products, resulted in an 11% increase in group revenue. Both beer and soft drink categories performed well, contributing to strong EBITA growth and improved margins. EBITA grew by 19% in constant currency, benefiting from increased revenue, lower commodity prices (including benefits from favourable effective exchange rates), and continued focus on cost productivity. In addition, EBITA improved as capacity was better utilised during the winter months. These factors combined to increase the EBITA margin by 140 basis points to 20.1%.

CHIEF EXECUTIVE'S REVIEW (continued) 13 SAB Limited’s reputation as one of South Africa’s leading companies, has been further confirmed in a series of recent awards. The business was voted “most admired company in South Africa” in a poll of CEOs and top business executives and the “best company to work for” in a survey carried out by Finance Week. In the Sunday Times/Markinor poll, SAB Limited was voted second most favourite brand in South Africa, the only corporate brand that is not also a product brand to be recognised in the top ten. SAB Limited’s product brand portfolio dominated the top ten brands in the same survey.

The process of provincial licensing of the liquor trade continues to progress slowly. Temporary liquor permits have been issued to previously unlicensed outlets, a significant proportion of which are investing to upgrade their outlets to meet formal licensing requirements and enhance the consumer experience. In line with our intention to actively support the normalisation of the retail liquor industry we have provided commercial training to almost 4,000 licensees during the last six months, at a cost of some US$2 million. In line with the BEE (Broad Based Black Economic Empowerment)

Act, the liquor industry has been developing a liquor charter. The completion of the charter is dependent on Government finalising the codes of good conduct. We are led to believe that these codes will be published later this year, following which the liquor charter will be completed. We continue to successfully progress our internal BEE agenda with spend on preferential procurement up by 37% on the comparable period last year and the first two franchise distribution centres also opening during the period. These centres have been created to enable direct delivery to an increasing customer base and positively improve enterprise development in the country.


11 November, 2005