UK: Scottish & Newcastle’s market leadership and balanced portfolio drived robust growth in 2007

The S&N business drew strength from its diversified portfolio and geographic spread in 2007, according to S&N press release, February 19. The business enjoys balance across western and developing markets, its portfolios of mainstream, premium and speciality beer brands, and its beer and nonbeer offerings.

Highlights - Continuing Operations

* Revenue up +7.9% at £4,150m
* Operating profit up +5.7% at £560m: profit before tax level at £444m
* EPS up +0.6% at 34.9p
* Unrivalled portfolio delivers value growth across western markets
* Excellent performance from our cider brands: revenue +21.2%
* Outstanding results for BBH: volume +22.7%, operating profit +42.6%
* Continued strong growth in India: volume +14.4%
* Free cash flow of £332m


Review of Operations

Margins and cost savings

UK

UK margins fell to 11.4% in 2007 from 12.4% in 2006, with operating profit down £18m to £213m. Of this reduction, £9m relates to higher input costs, £10m is the net impact from the introduction of the smoking ban and £19m mainly relates to lower than- expected volumes over the key summer trading period and the negative operating leverage that entails. These were mitigated by cost savings of £20m – being the last £10m from our historic £60m programme and £10m from our initiative announced in February 2007 - and are in line with our expectations.

France

Brasseries Kronenbourg (“BK”) is the market leader in France, with a 33.6% share11. Total French beer market volumes declined -2.9%, with a promising start to the year reversed by severe weather over the key summer trading period. The larger offtrade was down -3.0% while the on-trade fell -2.7%12. In addition to underlying market conditions, BK was adversely impacted by a strike at the Obernai brewery at the end of the first half of the year and increased levels of promotional activity by the competition. For the full year, BK’s total branded volumes fell -4.7% although NSV/hl increased +4.4%.

However, our core brands of Kronenbourg Red & White, Kronenbourg 1664 and Grimbergen marginally outperformed the total French beer market. In particular, we enjoyed success with such innovations as Kronenbourg Extra-Fine (a low-calorie extension), Kronenbourg 1664 Instant Pression and Grimbergen Cuvée Blanche. As announced on 20th November 2007, we have reached an agreement in principle with Centrale Européenne de Distribution (“C10”, the largest independent French wholesaler) to sell a large proportion of our wholly-owned French on-trade distribution businesses for c.£85m. In accordance with IAS, the business has been classified as discontinued, with the trading loss for the year of £(13)m (FY 2006: £(5)m) reported outside operating profit and the post-tax earnings excluded from normalised earnings. The transaction has resulted in a loss on disposal of £376m, the majority of which is goodwill on acquisition, and is expected to close in Q1 2008.

Portugal

Central de Cervejas (“SCC”) is Portugal’s number two brewer, with an estimated share of 44.8% in the on-trade and 42.6% in the off-trade13. Our total domestic beer volumes were ahead +2.5% in a market down -3.7%14, with NSV/hl up +6.0%; SCC again grew volume and value share in both the on and offtrade. Our core beer brand, Sagres, grew volumes by +3.6% and NSV/hl by +5.8%, boosted by such extensions as Limalight and Bohemia D’Ouro. Our water business delivered volume growth of +2.3% and increased NSV/hl by +12.7%, with Formas Luso the outstanding success in the very profitable functional water segment.

Belgium

Alken-Maes is the number two brewer in Belgium, with the Maes, Grimbergen, Mort- Subite and Cristal brands. The business held share in a market down -4.2%15 but grew NSV/hl by +4.2%. Our overall results confirm that a strategy focused on value rather than volume will deliver profitable long-term growth in the Belgian market. We signed an agreement with K&N at the end of the year, to outsource secondary distribution with effect from 1st January 2008. This follows on from our very successful KNDL joint venture in the UK, and is indicative of management’s approach towards active asset management.

Finland

Hartwall is one of the leading multi-beverages companies and its core brands include Lapin Kulta and Karjala in beer, Hartwall Jaffa juice drinks, ED energy drinks, Hartwall Novelle water and Upcider.

In beer, Hartwall is the number two player, with an n estimated market share of 30%16. In a virtually flat market, Hartwall’s branded beer volumes were down -15.3%. This decline was largely driven by the value-focused decision not to participate in lossmaking campaigns in the larger off-trade, and helped boost NSV/hl by +4.9%. In 2007, Hartwall delivered its highest ever profit, despite its share loss in beer. This was an excellent result, reinforcing the success of its multi-beverage strategy to drive value from higher growth/margin categories.

Greece

Mythos Breweries is the number two brewer in Greece, and grew market share to an estimated 10.5% from 9.7%17. Domestic branded beer volumes rose +8.3%.

USA

In the US, our leading import beer brand, Newcastle Brown Ale, had another strong year and delivered volume growth of +10.0% and NSV/hl +1.3%. The Smooth Operators programme, to encourage on-trade sampling, has proved very successful in terms of continuing to familiarise consumers with the brand.

Venture Markets

Sales in our other export markets were up by +7% with particularly strong performances from military sales (+50%), Germany (+21%), Spain (+15%) and the Nordic countries (+22%).

Margins and cost savings

CWE/US margins fell to 15.2% in 2007 from 16.0% in 2006, with operating profit down £10m to £185m. Of this reduction, £10m relates to higher input costs, £3m to the strike at Obernai at the end of the first half and £9m mainly to lower volumes over the key summer trading period and the negative operating leverage that entails. These were mitigated by £11m of savings from our historic programme.

BBH

BBH is a 50:50 joint venture between S&N and Carlsberg Breweries A/S. BBH is the market leader in Russia, the Baltic countries and Kazakhstan and is the number three player in Ukraine.

- Excellent BBH volume growth +22.7%
- Very strong performance from the Baltika brand, volumes +35.6%
- Successful turnaround in Ukraine: +230bp share gain
- Outstanding result in Kazakhstan: volumes +46%, share +510bp
- Again, net sales continued to grow impressively ahead of volumes at +43.1%.

During the year, there were significant cash inflows from BBH into the S&N group. BBH repaid a loan of EUR 45m that it had previously received from S&N and provided a loan to S&N of EUR 100m. In addition, S&N received a dividend from BBH of EUR 75m. BBH has announced today a dividend to be paid in 2008 in respect of 2007 of EUR 182.5m (2006A: EUR 150m): the S&N share of this dividend is EUR 91.25m.

Russia

Momentum continued in the Russian beer market, with volume growth of +15.7% in FY 200718. The market benefited from the development of the category with rising disposable income driving per capita consumption, and the continued positive shift from strong alcohol to beer following the wine and spirits disruption in the second half of 2006. As well as strong underlying growth, the market was also boosted by unseasonably mild weather in the first quarter. Baltika Breweries remains the clear leader in the Russian market, with a 37.6% share (+1.2% versus 2006)19. Its domestic beer volume growth of +19.3% (on volumes of 41.8mhl) outperformed the market yet again, driven by innovation and brand development. In particular, the development of Baltika Cooler and the introduction of a 1l can format and re-styled bottle for Baltika 7 were significant contributors to the domestic volume growth of +35.6% of the Baltika brand, taking its market share to 12.7% (+1.8%)20.

The success of the national Baltika portfolio was reinforced by the strong performance of such regional brands as Don and Uralsky Master. In addition, total licensed brands continued to outperform, with exceptional volume growth for Foster’s (+63%) and Kronenbourg (+132%). The Baltika share buyback announced in August 2007 was successfully completed in January 2008, with the company purchasing 9,828,550 ordinary and 1,213,545 preference A-type shares. As previously communicated BBH, as Baltika’s majority shareholder, participated in the buyback to ensure it retained its level of shareholding at 90.54%.

Other markets

In the Baltic countries, our multi-beverage model delivered volume growth of +8% and continues to drive strong value. With a share of 45.2%21, we remained clear market leader.

In Ukraine, the beer market increased +19.4% in volume terms22. Our turnaround plan delivered volume growth of +39%, increasing our market share +2.3% to 20.6%23. Following its successful re-launch in the mainstream segment in May, Slavutich improved its brand position to 4th from 8th (by volume), while BBH retained its leadership of the premium segment. In Kazakhstan, BBH delivered outstanding volume growth of +45.5%, with strong performance in both the mainstream and premium segments from the Irbis and TG brands. As a result, BBH increased its market share by +5.1% to 44.1%24.

Margins and cost savings

The BBH margin of 22.0% was down -10bp versus 2006. The positive impact of the final incremental integration benefits in Russia and operational leverage/mix were offset by higher raw materials and distribution costs.

India

Underlying market growth remained strong in 2007, with volumes up +16%25. United Breweries Ltd (“UBL”), our joint venture in India, achieved volume growth of +14.4% with NSV/hl ahead +4.1%. With a share of 46%26, UBL is the clear market leader with dominant positions in both the strong and mild segments, and the flagship Kingfisher brand enjoys strong awareness. In particular, Kingfisher Strong delivered outstanding volume growth of +26.4%, supported by strong results for both Sandpiper (+17.1%) and Zingaro (+17.7%). With planned capital expenditure of £150m over the next three years (which will double capacity), UBL is uniquely positioned to capture the future growth potential of the Indian beer market.

China

Chongqing Brewery Company Ltd, our Chinese joint venture, is a publicly listed company and does not announce its full year results until the end of March. For the nine months to September 2007, sales were ahead +8.0% with net profit growth of +21.3%.

Vietnam

In Vietnam, we have a 50:50 joint venture with the Vietnamese National Tobacco Corporation (“Vinataba”). Construction of the greenfield brewery is underway, and is on track to start production in H2 2008. We have already launched Kronenbourg 1664 in Hanoi and Ho Chi Minh City, and early indications are promising. Margins and cost savings Margins in Asia rose to 8.8% in 2007 from 7.4% in 2006 with operating profit up £3m to £10m, driven by superior operating leverage from higher volumes.

Financial Review

Discontinued operations

On 20th November 2007, S&N announced that it planned to sell a large proportion of its wholly-owned French on-trade wholesaling business. At 31 December 2007, negotiations on the sale of the business were in progress and the business has been classified as a disposal group held for resale. In the twelve months to 31 December 2007, the business incurred an operating loss of £13m (FY 2006: loss of £5m) and exceptional re-organisation costs of £4m (FY 2006: costs of £7m). The loss on re-measurement to fair value was £376m.

Exceptional items

There was a loss on net exceptional items of £430m, of which £379m related to discontinued operations. Re-organisation initiatives in the UK and CWE/US totalled £93m and there was a net £11m gain on the disposal of property and businesses. Defence costs relating to the consortium bid for S&N were £9m. There was financial income of £17m arising from movements in the fair value of financial instruments which are held for hedging purposes, but which do not qualify for hedge accounting under IAS 39. There were gains of £2m on disposals within joint ventures/associates and the net tax relief on exceptionals was £21m. Interest

Net interest costs (excluding exceptionals and the net interest on the pension liability) were £124m compared to £93m in 2006. The increase was driven by the impact of the exchange rate on the group’s euro borrowings, rising interest rates and higher debt levels within joint ventures/associates. The net interest income on the pension liability was £8m compared to £10m in 2006. This decrease was primarily caused by an increase in the interest cost on benefit obligations.

In 2007, EBITDA interest cover (continuing operations, excluding exceptionals and the net interest on the pension liability) was 6.0 x compared to 7.7 x in the previous year. On a similar basis, operating profit interest cover was 4.5x (2006: 5.8x). Cash flow and net debt Free cash flow (cash flow from operating activities and investing activities, before dividends but excluding, in 2006, both the purchase of the Foster’s brand and the purchase of the final tranche of Mythos) was £332m compared to £333m in the previous year.

Cash flow from operating activities was £430m and £85m was spent on reorganisation and onerous contracts, to give a net cash flow from operations of £345m.

Net interest paid was £93m. There was a net inflow on tax of £8m, as the group benefited from tax refunds. Dividends received from joint ventures/associates were £53m, including £52m from BBH (up from £39m in 2006). Capital expenditure was £174m, split £66m in the UK, £95m in CWE/US and £13m in head office. Depreciation and amortisation was £101m and fixed asset disposals generated proceeds of £68m. There was a net cash inflow on investments of £125m, largely from trade loans realised from customers a nd loans from joint ventures.

There was a cash outflow on dividends of £206m (£136m on the 2006 final and £70m on the 2007 interim), giving a net cash inflow of £126m. Net debt increased to £2,020m from £1,912m. The net cash inflow of £126m was offset b y a £255m negative movement on exchange rates (mainly the strengthening of the euro) and by £11m of new finance leases, but net debt was positively affected by changes in the fair value of interest rate swaps of £17m and £15m from equity share transactions . Gearing (net debt/total equity) at the year-end was 63% compared to 57% at December 2006.

Pensions

The net pension liability improved to £56m at December 2007 from £280m at December 2006, as a result of actuarial gains arising mainly from higher corporate bond rates and strong investment returns.