Netherlands: Royal Grolsch N.V. net profit under pressure from supermarket war

Royal Grolsch N.V. posted on September 7 a net profit of €7.4 million for the first half of 2005 (2004: €8,2 million). Operating from a single location had a positive impact on the result in the first half of 2005, while higher trading discounts due to market conditions in the Dutch retail segment had a negative effect.

All financial data were drawn up in accordance with the International Financial Reporting Standards (IFRS), including provisional standards.

The first half of 2005 showed lower volumes in the Netherlands and the UK and higher trading discounts in the retail segment, partially offset by good growth in other international core markets as well as acquisitions. This led to a 3.1% diminution in net turnover (€147.2 million versus €152.0 million in 2004).

Operating expenses excluding depreciation and amortisation were €6.2 million lower than in the first half of 2004 (down by 4.8%). In addition to a volume-driven reduction, lower prices for raw materials and packaging materials, resulting partly from better procurement terms, and the higher efficiency of the new brewery, brought direct costs to a lower level on a structural basis. The switch in the pension basis from final pay to average pay had a one-off positive effect of some €1.5 million. Intensified marketing efforts and acquisitions had the effect of increasing operating expenses.

The operating result before depreciation and amortisation (EBITDA) was €26.2 million, €0.9 million higher than in the first half of 2004 (€25.3 million). Depreciation and amortisation rose by €2.6 million to €14.5 million, largely due to the phased commissioning of the new brewery, leading to an operating result (EBIT) of €11.6 million (2004: €13.4 million).

The tax burden was two percentage points lower, at 32.3%, as a result of rate changes. The net profit of €7.4 million in the first half of 2005 was at the same level as in the first half of 2004 (€8.2 million), allowing for the effects of the changes in the pension system (net positive effect of €1.0 million in 2005) and higher depreciation/amortisation and financing costs (net negative effect of €2.0 million in 2005). Earnings per share turned out at €0.44 (2004: €0.49). The €3.4 million reduction in the cash flow from trading activities to €8.7 million is entirely attributable to the increase in working capital driven by the movements in pension and packaging deposit liabilities.

According to the company, so far, 2005 has been dominated by increased pressure on consumer prices in the Netherlands, and on Grolsch’s net price levels, as a result of the supermarket price war. In the first six months of the year, Grolsch narrowly maintained its share of a shrinking Dutch market, partly through continuing growth in the on-trade segment. A new advertising campaign was launched in February, with the slogan ‘Beer the Grolsch way’. The new beer Grolsch Premium Blond was introduced in early June, with its own campaign. In the UK, Grolsch took a restrained line on joining the extreme price competition in the first half of 2005, resulting in negative volume growth. However, growth of 12% was achieved in the other core markets (the US, Canada, France, Australia and New Zealand) in the first half of 2005, in line with the sharpened focus strategy.

The opening of the new brewery and the closure of the old brewery in Groenlo in 2004 was followed by the closure of the second old brewery in Enschede-North in the first half of 2005. This completed the transfer to the new location.

Outlook for 2005

• Netherlands
Volumes in the Dutch beer market are expected to be lower in 2005 as a whole though Grolsch expects to be able to maintain its share of this market. Higher trading discounts will also have a negative impact on the full-year turnover and profit.

• International
Grolsch is confident that, by the end of the year, the negative volume trend in the UK to the end of June will reverse, leading to a growth situation. Growth is expected to continue in the other core markets, so that Grolsch’s international activities will show clear overall growth. Movements in the US dollar exchange rate are expected to have a negative pre-tax effect of an estimated €1.5 million on the full-year results for 2005.

• New brewery
Partly because of the phased commissioning of the new brewery during 2004 and the first half of 2005, depreciation and financing costs in 2005 will be clearly higher than in 2004. These effects are expected to amount to €4.8 million and €0.9 million respectively, on a pre-tax year-on-year basis. Recent developments show prospects of a higher-than-anticipated contribution from the sale of the old brewery in Enschede-North.

• Forecast
Grolsch expects to advance its position for the aggregate of its core markets in 2005. In the Netherlands, pressure on net price levels will also be felt in the second half of the year. Extra marketing efforts are also under way to support the launches of Grolsch Premium Blond and the PerfectDraft system giving draught beer convenience at home. Total net profit, including the anticipated net proceeds from the sale of the old Enschede brewery, is expected to be lower than last year (2004: €20.6 million). Uncertain market conditions and the fact that the amount of the net proceeds from the old brewery has yet to be finalised, mean that it is not possible to give a more exact indication for the full year at present.

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