United Kingdom: Brewing force, Scottish & Newcastle PLC, has reported on February 23, preliminary results for the year ending 31 December 2004. The company posted organic growth in beer volumes of 4.5%; operating profit +7% on a comparable basis. Scottish & Newcastle registered UK volumes of top four brands (Foster’s, John Smith’s, Kronenbourg 1664 and Strongbow) up 4.5%; robust International performance in difficult market conditions. Strong second half at BBH driven by investment in sales, marketing and distribution with annual volumes up 18%.

On a comparable basis, excluding the positive impact of acquisitions, the negative impact of the sale of Managed Retail and the impact of movements in foreign exchange rates, turnover grew by 1.7% to £4,992m and operating profit by 7.1% to £454m. Profit before tax for 2004 was £373m (€538m), an increase of 11.0% on a comparable basis. Earnings per share were 30.2p, an increase of 12.7% on a comparable basis.

On an unadjusted and pro forma basis profit before tax for the 12 months to 31 December 2003 was down to £471m and earnings per share were 39.0p. The fall in profit before tax and earnings per share from 2003 to 2004 is due primarily to the sale of Managed Retail for £2.5bn cash, which enabled the group to focus on international brewing.

Net debt at 31 December 2004 was £2.1bn compared to £2.0bn at 31 December 2003. During 2004 there was a free cash inflow of £220m before funding a £200m special contribution to the pension scheme. Gearing was modestly up: 75% at 31 December 2004 vs 69% at 31 December 2003. For 2004, EBITDA interest cover was 8.4x compared with 6.0x in the eight months to 31 December 2003 (excluding net interest on the pension liability). Operating profit interest cover was 6.1x compared to 4.5x.

Commenting on the results, Chairman, Sir Brian Stewart said: ‘This is a strong financial performance, with underlying operating profit up 7.1% and comparable earnings per share up 12.7%. The results demonstrate how the greater diversity of our business allows us to manage challenging conditions in local markets and still meet our financial objectives. This year we have also significantly increased investment in our brands, enhancing the prospects for volume and value growth in our markets. We continue to develop the Group’s interests by building on our existing businesses and through the expansion of a number of strategic partnerships. In the UK, the integration of Bulmer’s, the number one cider manufacturer, was a great success with sales growth and the planned integration benefits being generated. In Portugal, Luso, the mineral water business that we acquired along with the balance of Central de Cervejas, is also performing well. In Asia, our wider strategic opportunities have been enhanced by extending our partnership arrangement in India and by building on our long term China relationships through a direct equity investment.

Commenting on the results, Chief Executive, Tony Froggatt said: ‘S&N made very good progress in 2004. All our divisions produced improved operating profits, but equally importantly we enter 2005 a much more competitive business, with greater efficiency, higher investment in our brands and good momentum in our key markets. The results for 2004 also show good progress against our key measures. Organic growth in beer volume was +4.5%. Turnover growth of +1.7% was slightly behind volume growth due to the strong volume performance in our emerging markets and the reduction in reported turnover following the 32% cut in Finnish excise duty. Adjusting for the impact of this duty cut, comparable turnover growth for the group was 2.9%. Greater efficiency and a focus on our premium brands led to gross margin improvements in all divisions and, despite a 17% increase in brand investment, net margin grew by 45 basis points. These good operational results combined with a better asset utilisation and management of working capital produced strong free cash flow of £220m before a special pension contribution of £200m. Our UK business has performed particularly well and these results show a strong turnaround from 2003. Volume in our top four brands, Foster’s, Kronenbourg 1664, John Smith’s and Strongbow was up 4.5%, driving operating profit growth of 11%. There were also major improvements in operational efficiency, including synergies from the successful integration of Bulmer. Our International business also performed well despite weak economic conditions across Western Europe and a colder and wetter summer than in 2003. Our continued focus on premium brands combined with greater efficiency allowed us to grow operating profits by 1.1% in markets where volumes were generally depressed. Despite these tough conditions we have not sacrificed long term brand building and we increased advertising spend, giving us greater competitive strength in 2005. In Eastern Europe, BBH had a strong recovery in the second half and, for the year as a whole, beer volumes grew 18%. This strong volume performance was driven by significant ‘downstream’ investment in sales, distribution and advertising. Operating profit increased by 12%. Gross margins remained strong, and there was an excellent second half performance from the Baltika brand (up 13% for the year, 25% in the second half). S&N has a clear strategy – to improve efficiency through greater integration of our operations, to drive volume and value through brand investment and innovation, and to develop its positions in a number of fast growing markets. This strategy will enable us to achieve our twin financial goals of improving cash flow and building returns. S&N made considerable progress in 2004, and we look forward with increased confidence to growing the business and building returns in 2005 and beyond.’

Twelve analysts polled by Reuters forecast underlying pre-tax profits of between 361 million and 386 million pounds for 2004, compared to 471 million pounds for 2003. Profits were expected to fall after S&N sold its 1,406 pubs in November 2003 to focus solely on beer like its European brewing rivals.

"In Western Europe, and France in particular, beer markets are likely to benefit from easier summer comparatives although the underlying performance in 2005 will be relatively subdued as the outlook for consumer confidence remains weak."

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