UK: SABMiller plc released its Annual Report for 2007

SABMiller plc released its Annual Report for 2007, in its press release, 27 June 2007.

“This has been another successful year for the group, with a strong volume performance and good earnings growth”, Meyer Kahn, Board of Director’s Chairman, said to the shareholders.

Our portfolio of developing and developed market operations generated 10% organic growth in lager volumes and 12% growth in earnings before interest, tax and amortisation (EBITA) on an organic, constant currency basis. Group EBITA now stands at US$3,591 million and the group EBITA margin increased to 17.4%, a rise of 20 basis points over the prior year. This translated into a 14% increase in profit before tax to US$2,804 million and a 10% increase in adjusted earnings per share to 120 US cents.

Total lager volumes stood at 216 million hectolitres, up 10% organically, and up 23% after taking into account the first full year of contributions from our South American businesses. Including soft drinks and other beverages, the group achieved total beverage volumes of 272 million hectolitres, up 10% on an organic basis and 23% above last year on a reported basis.

Net cash generated from operations, at over US$4,000 million, was 22% above the prior year, reflecting the overall strength of the trading performance and our strong cash characteristics. The group's gearing decreased at the year end to 45.8% from last year's 52.3%.

The board has proposed a final dividend of 36 US cents per share, making a total of 50 US cents per share for the year, an increase of 14% over the prior year. The dividend is covered 2.4 times by adjusted earnings per share.

Operational highlights

Europe delivered an excellent full-year performance, its sixth consecutive year of double-digit earnings growth, with EBITA of US$733 million, up 29% on a reported basis. Poland and Russia continued their run of strong growth while Romania increased its volumes by 23%. It was also pleasing to see a solid improvement in profitability from Italy.

In Latin America, our strategy is delivering volume, revenue and earnings growth ahead of our expectations, with EBITA of US$915 million. New brand launches and package renovations are beginning to lift the image of beer in consumers' minds and contributed to an acceleration of volume growth in the second half of the year. We also continue to benefit from the region's strong economic growth.

It's been a tough year for Miller, our North American business, with rising commodity costs and intense price competition continuing to diminish the value of the beer market. As a result, EBITA for the period of US$375 million was 17% lower than the previous year. Nevertheless, we are undeterred and the leadership team has a clear plan to return the business to growth.

Our portfolio of businesses in Africa has performed well and we now see much greater economic stability in these markets.

In Asia, our Chinese associate continues to power ahead, with the Snow brand established as the national leader. In India, volumes were up strongly, albeit from a small base. EBITA for the Africa and Asia region was US$467 million, up 11% despite currency weakness in some countries.

In South Africa, new marketing and pack innovations continued to drive growth in the premium lager category while soft drinks sales were strong, particularly in the final quarter. The result was a good earnings performance, with EBITA of US$1,102 million, a 14% increase on a constant currency basis. The loss of the licence to brew a major premium beer in South Africa in March 2007 had no impact on performance in the period under review.

Continuing growth

This has been a busy year, with the group actively shaping and expanding its international portfolio of businesses. Acquisitions and joint ventures in China, Vietnam, Australia and Angola have been further steps in creating an attractive, international spread of businesses with good exposure to fast growing, developing markets.

Along with our wide international footprint (now covering over 60 countries on six continents), we continue to benefit from our increasing scale. Since our UK listing in 1999, our lager volumes have grown from 48 million to 216 million hectolitres a year – an increase of 350%. Over the same period, group adjusted earnings have risen from US$394 million to US$1,796 million. As a result, total shareholder return since 1999 stands at 217% compared with 31% for the FTSE 100 as a whole (as measured at 31 March 2007).

This is a strong record and due in no small measure to the rigorous application of a clear, consistent strategy, designed to reap maximum rewards from the opportunities we face. On the following pages our Chief Executive, Graham Mackay, gives more details of the strategy itself and how its application has contributed to our growth in the past year.

But it's not just about growth, for we also take great pride in the quality of our product. Our high standards have again been recognised in a long list of brewing awards. We were particularly pleased that Miller was recognised as US Brewmaster of the Year at the World Beer Cup.

- Miller Lite – American-Style Light Lager
- Miller High Life – American-Style Lager
- Icehouse – America-Style Speciality Lager
- Henry Weinhard's Classic Dark – American-Style Dark Lager

Sustainable development

In seeking to do the best for the countries and communities in which we operate, we believe we contribute most by simply running successful businesses that create jobs and stimulate local economic activity. A recent study by the Bureau for Economic Research in South Africa supports this view by revealing that our South African business, as well as employing 8,600 people directly, supports 46,000 jobs among first-round suppliers and over five times that number in the wider economy. Every rand in sales revenue generated by the business adds R1.80 to South Africa's GDP.

As mentioned last year, our approach to corporate responsibility has been codified in ten environmental and social priorities. All our businesses are now embedding these priorities into their operations and striving to ensure that they meet the required standards.

One of these priorities is to promote the responsible consumption of alcohol, and we support programmes around the world that address the misuse of alcohol. That said, we disagree with broad regulatory proposals for reducing consumption in the general population. We question whether such proposals would succeed and believe they may have unintended consequences such as fostering illicit alcohol production, with significant health risks for consumers. They would also penalise the overwhelming majority of our consumers who enjoy our products responsibly.

In January 2007, SABMiller committed itself to the ten principles of the UN Global Compact that seeks progress in human and labour rights, environmental protection and tackling corruption. Our alignment with the UN in this way supports the implementation of our own sustainable development framework and ensures we align with worldwide best practice.
Our people

We were delighted to welcome John Davidson, who joined the group in August, as our new General Counsel and Group Company Secretary. Our thanks go to his predecessor, Andrew Tonkinson, for 14 years of excellent service to the board. In May 2007, we announced that Nancy De Lisi had stepped down from the board following her retirement from the Altria Group. We thank her, too, for her outstanding contribution to our deliberations and wish her a long and happy retirement. Altria's nominee as her successor is Dinyar Devitre, Senior Vice President and Chief Financial Officer, whom we welcomed to the board on 16 May.

We are fortunate in the high calibre of our directors and I would like to thank all my board colleagues for their wise counsel and strategic advice during the year. I also recognise that this year's strong performance reflects the dedication and hard work of all our executives, managers and staff around the world. My thanks go also to them as well as to our business partners and to you, our shareholders, for your continuing support.

As part of our responsibility to shareholders, we aim to observe the highest standards of corporate governance. To this end, we have further refined our reporting processes to align them more closely to the UK government's OFR requirements. The changes are reflected in this year's Annual Report.

Outlook

This has been another year of good growth for the group, with a particularly strong performance in the fourth quarter.

We have established a compelling portfolio of brands and businesses and, given the strong growth in many markets, we will be increasing our investments behind these assets in the coming year. While we face some challenges, including increasing commodity cost pressures and the need to rebuild our share of the premium segment in South Africa, we expect the group's underlying progress of recent years to continue.

Emerging markets

Perhaps the most important trend to have shaped the global brewing business over the last decade is that volume growth has primarily come from emerging markets. Since 2000, the compound annual growth rate (CAGR) has been 2.8% for the global beer market. The same period, however, has seen CAGRs of 5.1% in Asia, 3.9% in Africa and the Middle East, and a substantial 6.2% in Eastern Europe.

This trend is likely to continue. Between 2006 and 2011, the most significant overall volume growth is likely to come from Asia (115 million hectolitres), Central and South America (41 million hectolitres) and Eastern Europe (41 million hectolitres), rewarding brewers with strong footprints in emerging markets (chart 1).
Consumers trading up

Economic growth and rising disposable incomes are encouraging consumers in some markets to trade up into the beer category away from cheaper, traditional, local spirits and non commercially brewed beer. Brewers are nurturing this trend by offering more appealing and affordable products. In addition to those trading up into commercially produced beer, there is much trading up within the beer category as consumers choose premium brands more frequently (chart 2).

For example, in developed markets such as the USA, imported premium brands have achieved a CAGR of 6.0% over the last five years, and this contrasts with negative growth in US domestic brands. Similarly in many less developed markets in Eastern Europe and Russia, international brands are growing by up to 30 percentage points faster than local brands.

Against this backdrop, brewers who can offer full and varied brand portfolios, with brands differentiated by functional benefits (intrinsics) and emotional benefits (extrinsics) across a range of price segments, are more likely to retain or increase their market share.
More and broader industry consolidation

Given these trends in consumer behaviour, the brewing industry has been consolidating to secure brands and national positions. International brewers have also been investing for further growth, particularly in new and developing markets such as China, Latin America and Russia. The past five years have seen a steady flow of mergers and acquisitions, with the bigger brewers the busiest. Over this period, the top 20 brewers have been involved in more than 280 deals with a total transaction value of over US$80 billion. Activity has been particularly heated in emerging markets where most of the brewers have made investments.

All this has led to increasing globalisation, with the top 20 brewers now averaging 53% of sales from outside their traditional home markets, compared with just 33% in 2001. Looking ahead, further consolidation is expected as companies seek to broaden their global footprints in order to chase enhanced growth from emerging markets. There is clearly room for further moves as, despite recent activity, the beer industry remains relatively fragmented, with the five largest companies accounting for 38% of the market compared with 75% in carbonated soft drinks.

More challenging times in local markets

Looking ahead, we expect competition will get fiercer at a local level, as global businesses compete head to head. At the same time, the retail trade is becoming increasingly sophisticated across markets as grocery modernises in emerging markets like China and Russia, and continues to consolidate in many developed markets. The likely implications will be that access to distribution routes will become more ubiquitous, brand scale will become increasingly critical to driving availability, and customer management skills will become more important.

This trading environment will reward brewers who have the right brands, who are strong at local market execution and are able to leverage effectively their global scale and scope.

Operations review

Latin America

EBITA for the region was US$915 million. Organic constant currency growth of US$117 million represents growth of 27% on the prior year. The results in Latin America reflect robust market performances and successful business initiatives in each country underpinned by strong economic growth in the region. In South America, the strong momentum reported at the half year continued into the second half with pro forma lager volumes increasing by 12% for the year, while in Central America both beer and CSDs showed commendable performances, with growth of 8% and 6% respectively. The integration of operations in South America into the SABMiller group has been successfully completed during the year.

In Colombia, lager volumes for the year grew by 11% on a pro forma basis driven by solid economic growth, successful brand and packaging renovations, increased marketing investment and improved retail price discipline, which drove lower retail prices. Brand renovations during the second half of the year included the local premium brand Club Colombia and Pilsen in the mainstream segment, while in the premium segment our Peroni Nastro Azzurro brand was successfully launched. Trade marketing capabilities have been upgraded and include the appointment of brand developers to focus on quality of point of sale and enhancement of drinking occasions, while order taking has been supplemented with a telesales operation. Improvements have also been made in the distribution system, notably the introduction of a deposit system for returnable containers in October 2006, while national pricing was introduced from December 2006. Strong growth has necessitated investment in production capacity and a new 3.5 million hectolitre brewery in western Colombia is scheduled to come on stream in October 2007. Corporate restructuring proceeded during the year, including an offer to minority shareholders which resulted in an increase in SABMiller´s effective interest in Bavaria S.A. to 98.5%. The sale of Productura de Jugos S.A., our fruit juice and fruit pulp manufacturer, received the necessary regulatory approvals, and was completed in May 2007.

A good performance was reported by our Peru operations with pro forma lager volume growth of 16% for the year, which was assisted by strong GDP growth of 8%, as well as the impact of competitive pricing in the earlier part of the year. Our flagship mainstream brand, Cristal, was relaunched with a new and innovative packaging design and clear positioning as the beer of the Peruvians, resulting in annual growth of 27% and a significant improvement in market share. This, together with further investment in marketing, brand renovations and new brand launches in the second half of the year, particularly in the premium category, resulted in the company increasing its market share year on year to 92%. In the premium segment, our Peroni Nastro Azzurro brand was launched in February 2007 following the launch of our regional brand, Barena, in October 2006 and Cusqueña was relaunched in new packaging during March 2007. Pack mix has improved in favour of returnable packaging, influenced by the introduction of a deposit system in November 2006, while our route to market will benefit from the organisational change focusing on channel marketing based on consumption occasions. Corporate restructuring continued, including the purchase of further minority shareholdings, with SABMiller's effective interest in Backus & Johnston increasing to 93.3%.

In Ecuador, pro forma lager volume growth of over 12% was driven by the flagship mainstream brand Pilsener, capitalising on favourable economic conditions and buoyant consumer demand, underpinned by the brand's mid-year packaging upgrade. Market share gains in the fourth quarter confirmed the strength of this brand as the leading brand in Ecuador. Total beer market share increased by nearly one percentage point to 95.3% at the end of March 2007. The favourable volume performance together with a 7% price increase earlier in the year boosted profitability.

In Panama, we increased our share of the beer market by 2.5% on a year-on-year basis to reach 84%, with the market growing by an estimated 4%, fuelled by strong GDP growth. Our mainstream brands Atlas and Balboa have performed well, contributing to total pro forma volume growth of 7%, despite a significant price increase introduced in July 2006. The relaunch of SABMiller's international premium brand, Miller Genuine Draft, in October 2006 has strengthened our performance in the premium segment. In the non-beer segment, the unit performed well ahead of the prior year with sales volumes increasing by 11% on a pro forma basis, mainly driven by CSDs.

In Honduras, lager sales volumes grew by 3%, while CSDs reported growth of 9%. The volume growth of our Barena brand in the lager premium segment has improved the mix, and together with the full-year effect of price increases in February 2006, has enhanced profitability. Innovation continued with Port Royal Gold Grand Reserve launched in a 12oz aluminium bottle at a premium price. CSD volume growth was impacted by competitive pricing and discounting in the market, with a shift in mix to family packs tempering price gains.

The trading environment in El Salvador showed signs of improvement compared with the prior year. However the country continues to attract high levels of competition in both lager and CSDs. Our operations performed strongly, with lager volume growth of 14% assisted by good economic growth, and market share increased. Mix improved with our local premium brand, Golden Light, reporting growth of 36%. Soft drinks volumes grew by 5% with robust market share gains on the back of above inflation price increases in April 2006. The benefit of better pricing in CSDs was somewhat reduced by adverse pack mix.

Towards the end of the year, SABMiller entered the Puerto Rico market with the launch of Peroni Nastro Azzurro in March 2007. The sale of our Costa Rica Pepsi soft drink bottler was completed in April 2007.

In line with the strategic initiatives and plans for the region, a significant amount of restructuring and integration has been completed with one-time integration costs of US$64 million recorded during the year, mostly related to packaging upgrades and organisational restructuring. Capital investment levels will increase in the next year as we continue to implement our restructuring plans.

Europe

Europe again delivered excellent results, with total lager volume growth of 12% (organic 11%) and EBITA improving by 29%. Volumes were strong in Poland, Russia and Romania, while most other operations outperformed their underlying market growth. Volume performance was boosted by the favourable weather conditions which prevailed during the year, including an exceptionally mild winter, generally buoyant economies and the soccer World Cup. Direct marketing investment grew in line with revenue while productivity was up 6%, reflecting improved scale efficiencies. EBITA margin enhancement of 50 basis points was assisted by positive brand mix, with premium brands growing 15%.

Reported EBITA growth of 29% was enhanced by strong currencies, with organic constant currency growth of 19%. During the second half, margins tightened with a move to non-returnable packaging, particularly cans, where volumes were up 34%. Poor 2006 barley and hop harvests resulted in significantly increased malt and brewing costs in the final quarter, whilst skills shortages, and noticeable wage pressures, emerged across Central and Eastern Europe.

In Poland, our volumes were up 13% and market share increased by 1% to 39%. Industry growth was 10% owing to the combined effects of the World Cup, a warm summer and mild winter, a buoyant economy and growth in personal incomes. The operation achieved a small real price increase, a trend improvement from prior years, while industry prices declined in real terms. Tyskie and Zubr, Poland's two leading beer brands, grew volumes by 10% and 23% respectively, while our upper mainstream brand Lech grew 9%. In the premium segment, our flavoured beer, Redd's, grew 42% with a new variant, upgraded packaging, and a successful repositioning of the range towards female consumers contributing to growth in volumes. Sales and distribution initiatives have focused on increased product visibility, more chilled product availability and improving share of display within outlets. Marketing support has centred on enhanced consumer and outlet segmentation and shopper marketing techniques. Current expansion of brewing and packaging will increase annual capacity from 12.5 million hectolitres to 15 million hectolitres by July 2007, with the Tychy brewery having capacity of 8 million hectolitres.

In the Czech Republic, volumes grew by 1% which was in line with the industry, and domestic volume share was stable at 49%. Our strategy to build value share continued, with our premium brands up by 2% overall while our economy brands declined by 8% as we chose not to follow aggressive competitor price discounting in this segment. Pilsner Urquell grew by 4% and exceeded 1 million hectolitres for the first time. This performance was achieved by expanding our presence in the on-premise channel, as well as the launch of new packaging and a focus on shopper marketing in large format supermarkets. Volumes of our leading Czech brand Gambrinus (26% market share) declined in the on-premise channel following a price increase. However, off-premise growth was strong, supported by new primary and secondary packaging, the introduction of new multipacks, and brand sponsorship of the Czech national soccer team during the World Cup. Kozel grew by 10% in the domestic market, following the introduction of a new proprietary bottle, new labelling and a new variant. Across Central and Eastern Europe, Kozel is now marketed and sold in several of our countries and total volumes were up 17% to 2.5 million hectolitres. Exports to the key German market were well up with Pilsner Urquell growing by 31% and now established as the leading premium imported beer in the off-premise channel. Price increases marginally ahead of inflation were achieved, largely in the on-premise channel.

In Russia, volumes ended 24% up on prior year, well ahead of the market growth of 17%. Price increases of 5% were achieved against generally restrained industry pricing, and our national value share continued to increase. We significantly increased our investment in coolers and extended retail coverage by 25%. Miller Genuine Draft returned to robust growth, with volumes up 21% and a new half-litre bottle driving new consumption occasions. Zolotaya Bochka, the fastest growing local premium brand, was up 40% with the launch of a twist-off crown, and Pilsner Urquell and Redd's both grew strongly. Our marketing effort now includes non-traditional media, with the use of internet based marketing techniques. Profitability was improved by considerable operating leverage. The expansion of our Kaluga brewery to 6 million hectolitres continued on schedule and in March 2007 we announced a new 3 million hectolitre brewery to be constructed for US$170 million in Ulyanovsk, 1,000 km east of Moscow.

In Italy, the beer market grew by an estimated 3%, benefiting from some improvement in economic performance, increased consumption during the World Cup and a mild winter. Excluding imports, domestic industry production was up 1%, while Birra Peroni's total volume growth was 2%, with branded domestic volumes 5% higher than last year and private label declining by 28%, as we continued our managed reduction in our presence in this category. Nastro Azzurro was up 9% with premiumisation of the brand continuing through key prestige sponsorships and a marketing position focused on Italian style and design. The Peroni brand accelerated to 6% growth from the 2% posted last year, supported by a successful draught launch in the Northern provinces. Exports of Peroni Nastro Azzurro continued their strong momentum. The operation has recorded a solid improvement in profitability.

In Romania, industry volume growth is estimated at 20%, led by the continuing performance of mainstream PET. Our operation was capacity constrained during the first half of the year but nevertheless grew full year volumes by 23% and year-on-year market share rose by 60 basis points to 22%, driven by second-half volume growth of 42%. Our premium brand Ursus grew by 16%. Our mainstream Timisoreana Lux brand grew by 59% and was the strongest growing brand in the market, assisted by the newly launched two litre PET pack. Industry pricing remained subdued. Following from the strong growth of recent years, capacity is being expanded from 4.3 million hectolitres to 6.3 million hectolitres over the next 18 months.

In Hungary, our volumes grew by 7% and outperformed the market. This performance was achieved against a backdrop of significant fiscal austerity measures impacting consumers, a 20% excise increase, and competitor discounting.

In Slovakia, the major focus has been the integration of Topvar, which was completed successfully during the year. Organic growth of our brands was broadly in line with the market which was up by an estimated 2% as it begins to exhibit signs of recovery from the major excise rises of recent years.

In the Canaries, our international brands gained almost 3% while profits were boosted by the distribution of Red Bull and the introduction of Appletiser, alongside the existing Compal range of juices.

In its first full year of operation, Miller Brands UK has exceeded our expectations, with volumes and revenues ahead of plan. Peroni Nastro Azzurro, supported by innovative marketing and increased distribution, has grown 36%. The prior year decline in Miller Genuine Draft has been halted, and Pilsner Urquell has been successfully repositioned. In February 2007, the two key Polish brands Tyskie and Lech were added to the portfolio and are growing strongly.

North America

Miller Brewing Company experienced a difficult year, with significantly higher commodity costs, declining Miller Lite volume and price competition in the economy segment negatively impacting results. However, in line with its strategy, the company continued to migrate its brand portfolio to higher margin segments, deliver domestic revenue increases, and invest in its core brands and organisational capabilities in order to drive sustainable, long-term growth.

As the US beer industry continued to feel the impact of consumers trading into wine and spirits, volume performance of mainstream domestic beers was outpaced by import and craft brands. Total US industry domestic shipment volumes decreased by 0.4% during the financial year, while imports increased 13.1%.

In this trading environment, Miller's US domestic sales to retailers (STRs) were level with the prior year and down 3% on an organic basis, excluding the acquisition of the Sparks and Steel Reserve brands at mid year. Domestic shipments to wholesalers (STWs) were in line with STRs in the period. There was one less trading day in the year under review in comparison to the prior year.

Total shipment volumes, excluding contract brewing, declined by 1% as export sales to non-SABMiller markets declined due to challenging trading conditions. Contract brewing volumes were lower by 13%, largely as a result of the acquisition of Sparks and Steel Reserve which Miller had previously brewed under contract, and are down 4% on an organic basis.

Miller Lite sales declined by 1% as the brand cycled strong prior year comparisons and faced broader competition in the low calorie segment from import and craft entrants. Miller Genuine Draft continued its decline broadly in line with the overall decline in the full-calorie mainstream domestic segment.

While Miller High Life sales decreased in low single digits, a new advertising campaign in the third quarter helped drive positive trends in core markets by the end of the fourth quarter. Milwaukee's Best franchise sales declined in mid-single digits due to pricing dynamics within the economy segment. Miller High Life and Milwaukee's Best trends were both negatively impacted by reduced pricing gaps between the economy and mainstream segments, both at the wholesale and retail level.

Miller's worthmore platform continues to grow robustly, led by Peroni and Leinenkugel's, both of which brands significantly outperformed their respective import and craft segments. Sparks, which Miller acquired in August 2006, continues to perform strongly as the leader in the fast-growing caffeinated alcohol beverage segment.

Total revenue declined slightly by 1% versus the prior period, to US$4,887 million. Contract brewing revenues declined by 13%, but increased marginally after adjusting for the shift of Sparks and Steel Reserve from contract brewing to domestic brewing. Domestic net revenue per hl increased 1.7%, driven by price increases of nearly 2%. Improved brewery efficiencies and cost savings partially offset very significant commodity cost increases, thereby limiting the increase in cost of goods per hectolitre sold to mid-single digits.

Miller strengthened its sales capabilities with the addition of specialised sales staff for Sparks and import brands. Furthermore, in the fourth quarter, Miller announced plans to create new model markets in Texas and Florida/Georgia in which it will deploy sales, marketing, planning/strategy and finance capabilities locally to better capture business opportunities. Based on the learnings from these initial markets, Miller intends to roll out this initiative to additional markets in the next fiscal year.

EBITA for the period of US$375 million was 17% lower than the prior year, driven primarily by higher input costs of fuel, glass and, especially, aluminium. Overall EBITA margin decreased to 7.7% due mainly to the challenging input costs environment.

Going forward, Miller has set itself strategic objectives of which the primary objective is to grow Miller Lite in the mainstream light segment. Secondly it is to strengthen Miller's worthmore portfolio through expanding the distribution of Sparks, Leinenkugel's and Peroni and adding Miller Chill, a new light lager, and various South American brands. Miller also intends to maximise the sales and profitability of its legacy brands, whilst it is committed to delivering further operational efficiencies, which include projects to deliver savings of US$100 million by 2010, to reinvest into sales and marketing and improving margins.

Africa and Asia

Africa and Asia growth momentum continued for the year, with lager volume growth of 34% (organic growth of 26%) and reported EBITA growth of 11%, despite currency weakness in some of the African countries. Organic volume growth has been assisted by innovation, packaging upgrades and brand renovation. Whilst EBITA increased in Asia and in Africa, despite headwinds in Botswana, geographic EBITA mix in Africa combined with faster revenue growth in Asia resulted in a lower EBITA margin for the region, as had been anticipated.
Africa

Lager volumes for Africa, excluding Zimbabwe, grew 7% for the year while growth in total volumes, excluding Zimbabwe, was 11%. Continued economic growth in most countries, ongoing brand renovation and further improvements in distribution networks combined to deliver this result. Zimbabwe continues to experience difficult economic and political conditions with foreign currency shortages a key issue.

Mozambique enjoyed a third consecutive year of volume growth, with lager volumes advancing 11% on the back of improving economic fundamentals, a strong brand portfolio and new distribution centres in the North. Our key brands, 2M, Manica and Raiz, performed well. Recent flooding in the Zambezi river delta did little to hamper the ongoing volume growth. During the year a new brewhouse was commissioned in Maputo, with a further new brewhouse planned for Beira in the coming year.

Tanzania posted lager volume growth of 8% with recent packaging changes in key brands driving much of this growth. Castle Lager was reintroduced in a new long neck bottle, posting double digit growth, notwithstanding its price premium, and our local premium brand, Ndovu, was successfully relaunched as a pure malt lager. Profitability was constrained by the effects of currency weakness and higher input and energy costs.

Uganda's lager volumes again grew in double digits this year with volumes up 12%, and our core mainstream brands of Nile Special and Club enjoyed good growth during the year. Profitability improved despite increased fuel costs.

Following the effects of prior year devaluations and pressure on consumer disposable incomes, Botswana recorded another year of decline with lager volumes down 4%. Cost pressure was evident throughout the year as the operation is heavily reliant on imported goods and services with the consequent impact on profit margins. The final quarter, however, reflected growth in all beverage categories.

Elsewhere in Africa, Ghana benefited from a successful new brand launch, Stone Lager, which drove market share gains and improved profitability. Our innovative sorghum-based Eagle lager continues to play a meaningful role in the economy segment across the region and is now available in Uganda, Zambia and Zimbabwe and was launched in Tanzania in April.

CSD volumes in Angola grew by 33% to surpass 2.5 million hectolitres. Ongoing capacity upgrades are planned to meet ongoing growth. The Empressa N'Gola brewery in Southern Angola, which SABMiller has managed under contract for many years, was successfully privatised in December 2006, with SABMiller acquiring a 45% shareholding.

Castel delivered a strong performance, with lager volumes growing 10% while CSDs increased by 10%. Ethiopia and Angola provided above average growth with continued improvements in the more established markets in Cameroon, Gabon and Morocco.

Asia

China maintained the momentum reported at the half year with organic volume growth for the full year of 30%, well above industry growth rates, and all regions posted growth. Our national brand, Snow, showed a higher growth rate, with annual volumes approaching 30 million hectolitres. Snow is now the leading brand by volume in China, driven by the combined impact of national brand campaigns and the expansion of our production base.

The greenfield brewery in Guangdong province was commissioned in February 2006 and produced volumes of 550,000 hl in its first full year. During the year we acquired five breweries and in January 2007 we announced the acquisition of the 38% minority shareholding in the Blue Sword group of companies in Sichuan Province which was completed in April 2007.

Increases in energy costs impacted the business, and price increases were insufficient to offset the full effect of the cost increases and higher marketing spend. Profit margins were also impacted by start-up costs and initial losses at our greenfield breweries.

India also recorded excellent lager volume growth of 36% on a pro forma basis, above industry growth rates. Volumes were notably strong in Andra Pradesh as well as Punjab and Haryana, where industry reform provided a boost to volumes. Continuing capacity expansion is planned to meet demand in this fast growing market. The Foster's brewery and brand acquired during the year have been successfully integrated and production of the brand will be rolled out to other of our breweries in the coming year.

Our new joint ventures in Australia and Vietnam commenced trading during the second half of the year.

With strong volume growth expected across the division, increased capital expenditure in a number of countries will be necessary to meet capacity requirements.

South Africa

South Africa has experienced good economic growth over the last year, with gross domestic product growing at 5%, supported by strong consumer demand, notwithstanding firmer interest rates and inflationary pressures driven by higher food and fuel prices.

We recorded lager volume growth of 2.3%, and total soft drink volume growth of 7% supported by strong CSD volume growth of 6%. The double digit growth trend in other beverages continued, particularly in the water and energy drink categories. Performance was driven by buoyant fourth-quarter sales in both lager and soft drinks operations, with lager volumes up over 8% and soft drinks volumes up 33% over the prior year. Both operations benefited from the exceptionally hot and dry weather conditions experienced over the last quarter of the year. Soft drinks volumes were also boosted in the final quarter by replenishment of customer stocks following the carbon dioxide supply problems in the third quarter which severely limited CSD sales.

The premium and flavoured alcoholic beverage (FAB) categories continued to drive growth in lager volumes. Investment in marketing and pack innovation within these categories underpinned the 23% growth in premium lager volumes and the 9% increase in FABs for the year. The termination of the Amstel licence in early March 2007 did not impact sales volumes for the year. Strong performances were delivered by Castle Lite, Miller Genuine Draft and Peroni Nastro Azzurro brands. Mainstream beer volumes were marginally lower than the prior year despite renewed growth in Hansa and Castle Milk Stout.

This lager volume performance, supported by favourable premium mix benefits, delivered constant currency revenue growth of over 11% on the prior year. Raw material input costs increased as a result of higher commodity prices and the relatively weaker rand exchange rate, although favourable currency hedging positions, which were in place for much of the year, helped to mitigate these cost increases to below inflation in the year under review.

Distribution costs rose by some 20% in the current year principally resulting from the expansion of direct deliveries to customers, as we implemented our market penetration initiative. By the end of the year, the lager customer base had increased by 20% and the soft drink customer base by 8%.

Constant currency EBITA growth of 14% was achieved and the focus on fixed cost productivity, as well as minimising raw material input costs, assisted EBITA margin to improve by 50 basis points to 25.8%.

Our continuing innovation agenda led to a number of new product launches and pack renovations in the year. Both Castle Lite and Redd's packaging were enhanced, with a silver neck foil being added to the Castle Lite pack and all Redd's packs were redressed with contemporary pressure sensitive labels. The 375ml returnable bottle was replaced with a new 330ml returnable bottle. Our FAB portfolio was bolstered by the introduction of two new products. A new apple-flavoured premium brand, Sarita, was introduced and the Brutal Fruit product range was enhanced by a new lemon flavoured variant. Peroni Nastro Azzurro was launched in draught format in March 2007 following the success of this brand's single serve offering. Hansa Marzen Gold, a rich malt beer, was launched in early May 2007 and will build on our expanding portfolio of premium lagers. The 750ml returnable bottle for our mainstream brands will also be replaced by a new equivalent sized bottle over the next 18 months. This intensified market innovation leverages the installed manufacturing capacity as well as the investment in labeling capacity initiated last year.

Normalisation of the liquor trade, through formal government licensing of previously unlicensed outlets (or 'shebeens'), has proceeded slowly over the past year, notwithstanding the progress made in a number of provinces where enabling legislation to issue new liquor licences has been promulgated. Our taverner training programme, aimed at uplifting new taverners' business skills, has seen a further 5,000 taverners trained over the last year, bringing the total number trained to date to 12,400. This training programme is closely aligned with the market penetration initiative, to ensure improved commercial capabilities of new taverners.

The Department of Trade and Industry issued the final BEE (Broad Based Black Economic Empowerment) codes of good practice in early February 2007. Given that the BEE Act allows for the development of sector specific codes of good practice, the Liquor Industry Charter Steering Committee, in which we participate, will be meeting with the Department of Trade and Industry to discuss their respective expectations with the formulation of a sector code for the liquor industry.

As a result of a private arbitration award in favour of Heineken, and Heineken's subsequent decision to terminate the Amstel licence in March 2007, SA Beverages stopped manufacturing and distributing Amstel lager in South Africa. As announced in March 2007, the loss of Amstel has had no material impact on the earnings for the year under review. SA Beverages expects to mitigate the financial impact in the next financial year and going forward, through a number of initiatives including drawing upon SABMiller's global portfolio of brands and market experience, extending reach into direct distribution and broadening its premium offerings, but there will nevertheless still be a negative financial impact in the March 2008 financial year. In the financial year under review, on a pro forma basis, SA Beverages estimates that this would have amounted to some US$80 million at the EBITA level and expects the impact in the next financial year to be at a similar level.

Sales of Appletiser in South Africa continued to show strong growth both in South Africa and internationally, with volumes up 13%.

Distell's domestic sales volumes increased, with gains in the spirits and cider category, particularly in the premium sector, both contributing to improved sales mix. International volumes also grew, continuing the trends seen in prior years. Further improvements in operating efficiencies in production have also contributed to improved margins.
Hotels and Gaming

SABMiller is a 49% shareholder in the Tsogo Sun Group. The performance of Tsogo Sun continued to be assisted by a buoyant South African economy. The casino industry in general and Tsogo Sun Gaming in particular have shown real growth in revenue. The South African hotel industry has reported one of its best years on the back of a robust local economy and growth in international arrivals. Strong demand coupled with limited capacity growth to date, is underpinning significant real growth in average room rates.

The improved level of trading, assisted by good cost controls, resulted in a strong improvement in EBITA and margins.

Sustainable development review

Our ability to be successful and profitable is inextricably linked to the health and prosperity of the communities in which we operate.

Key achievements

- Introduction, group-wide, of a self-assessment management performance system across all 10 sustainable development priorities
- Reduction in carbon dioxide emissions ratio from 14.44 kg/hl to 12.74 kg/hl in 2006
- Energy use in our operations reduced from 163 mj/hl in 2006 to 146 mj/hl
- US$26 million, representing 0.9% of profit before tax, invested in corporate social investment programmes
- Water consumption ratio in brewery production reduced from 4.60 hectolitres to one hectolitre of beer in 2006 to 4.56 hl/hl, representing a notional cost saving of US$2 million
- Environmental management systems, based on the principles underlying ISO 14001 standard or similar, established for 84 sites
- KickStart, a programme encouraging entrepreneurship, launched in a third market, Colombia Signatory to the UN Global Compact in January 2007

We have continued to make progress this year on sustainability, particularly as a result of our focus on our 10 sustainable development priorities and the development of a group-wide method of collating performance data. Our 2007 Sustainable Development Report provides more detail on our social and environmental performance, but it is mainly our economic success which continues to make a real improvement in how people live in our communities.

A study by the Bureau for Economic Research, conducted for SAB Ltd, detailed the company's contribution to the South African economy, including the direct impact of our operations and the relevant economic multiplier effects. At the time of the study, SAB Ltd employed 8,600 workers directly, 73% of whom were from previously disadvantaged groups. The study found that our operations supported an estimated 46,000 jobs at first round suppliers and more than five times that number in the wider economy. In all, 362,000 full-time jobs (or 3% of total employment in South Africa) can be directly or indirectly traced back to the production and sale of SAB Ltd's products.

Our business success has resulted in a contribution of US$4,529 million in taxes and excise duties this year to local and national governments and authorities in the countries in which we operate. In addition, US$26 million has been invested in corporate social investment (CSI) programmes, over and above our funding of responsible drinking programmes. An important part of our CSI programmes is the effort to build wealth through encouraging entrepreneurs and supporting local businesses. Many of our operations run enterprise development programmes which create local employment and, in some cases, extend our supply chain. Overall, this wealth creation is important for the communities in which we operate, but it also enhances the market for sales of our products.

As well as our economic impact, we focus on the material opportunities and risks that arise from our environmental and social impacts. The growing consensus around climate change, the accessibility of sufficient quantities of safe and clean water, the social impacts of irresponsible drinking, poverty and HIV/Aids are all crucial considerations for how we run our business.

The SABMiller sustainable development framework

In 2006 we introduced our sustainable development framework based on the 10 sustainable development priorities most material to our business. Having a clear framework has provided a consistent approach for all operations under our day-to-day management control of SABMiller companies. At the same time it has given operations a degree of freedom to focus on the particular issues most relevant to them. Whilst all operations focus on responsible drinking as a top priority, other priorities such as HIV/Aids, water quality and availability, CSI and human rights will have different levels of relevance for different operations.

Given our experience in emerging markets, we are in a strong position to contribute to the debate regarding sustainable development issues. We work in partnership with governments, non-government organisations and other partners to share knowledge and best practice on these issues.
Measuring our performance

We have developed a self-assessment performance management tool (sustainability assessment matrix – SAM). We use a 'stairway' concept to identify the level at which each business sits between level 1 (minimum standard) and level 4 (best practice) for each priority.

All operations where our group companies have day-to-day management control must achieve level 1 on the stairways. Operations which fall short of level 1 must have mitigation plans in place to achieve this standard as soon as possible. Where operations have achieved level 4 already, they provide case studies and learnings for other parts of the business. In addition, to encourage operations to engage in level 4 projects, we have also committed to long-term scenario planning for the key priorities of water, carbon and HIV/Aids, to assess the business needs and current and potential future thinking on these issues.

For next year we will extend our programmes to encourage enterprise development to new markets, focus on meeting the challenges of water stress and expand our HIV/Aids programmes in our Latin American, African and Asian operations.

Our people

One of SABMiller's five values is that our people are our enduring advantage and our aim is therefore to be a global and local employer of choice. We have a strong culture of performance management and employees at every level are empowered and accountable for achieving clear goals. In this they are supported with world-class training and development. Being a learning and self-refreshing organisation is one of the priorities for the business.

In pursuit of this learning culture, we have developed a Global Action Learning programme involving the leadership team which consulted with over 300 organisations and stakeholders in a six-week programme. This programme is designed to hone the strategic and leadership skills of senior managers.

The SABMiller 'Ways', a set of tools, common terminologies and processes developed centrally but applied locally, are intended to deliver a consistent approach to manage and integrate core disciplines. They will provide a platform for exchange of knowledge which will result in rapid and ongoing improvement of performance.

Each company has employment policies which are appropriate to its business and markets and which attract, retain and motivate quality employees.

In the last year we employed an average of almost 67,000 people and total remuneration amounted to US$1,955 million.

Training

Continued investment in formal and on-the-job training and development has resulted in an average of 4.3 days training per employee across the operating companies. This figure dropped from 4.9 last year, mainly owing to the inclusion of data from our operations in Colombia, Peru and Panama for the first time.

Diversity

We believe in employing the best people, whatever their backgrounds, and we value and respect diversity. Many of our operations have an employee diversity policy covering ethnicity, gender, age and disability. Within these policies we recognise that diversity is applied differently in different countries because of cultural norms and legal frameworks.

Of total group management, 22% are women and 22% of the total workforce are women.

In South Africa, Asian, black and coloured representation in executive and management grades increased to an average of 48% (46% in 2006) and was 74.5% in the total workforce (73.5% in 2006).
Days lost through industrial action

As a result of industrial action, 138 days were lost, the majority of which were attributable to our operations in Peru.

Health and safety

We aim to ensure that working conditions are as safe as possible for our employees worldwide. Twenty five of our reporting operations have formal joint health and safety committees comprising management and worker representatives.

In total there were 1,091 industrial injuries in 2007 (1,360 in 2006 and 640 in 2005) and it is estimated that the business lost 21,426 days through work-related injuries. Most regrettably, during the year three employees lost their lives in work-related fatalities, two in Zimbabwe and one in Central America.

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