Denmark: Royal Unibrew posted the best profit before tax of DKK 297 million

Royal Unibrew announced on March 3 that its net revenue increased by 11% to DKK 3,191 million (including organic growth of 4%). The company has recorded a profit before tax of DKK 297 million, the best performance ever by the Group (+9% over 2004). Consolidated profit after tax of DKK 224 million (+15% over 2004)

Financial ratios measured against the MACH II Plan:
Return on invested capital (ROIC): 11.2% (target: 10%)
Profit margin: 9.6%
EBIT margin: 9.8% (target: 10%)
Free cash flow before acquisitions: 7.9% (target: 7%)

Proposed increase of dividend by DKK 1.00 to DKK 10 per share (dividend rate 29%)

Realised share buy-back programme transferred almost DKK 100 million to shareholders

Expected profit before tax for 2006 of DKK 310-350 million

In 2005 the Royal Unibrew Group achieved a profit before tax of DKK 297.1 million, which is in line with the expectations for 2005 expressed in the H1 Report 2005 (cf Announcement RU24/2005 of 24 August 2005).

The results achieved in 2005 were affected by the acquisitions of the Lacplesa Alus A/S brewery in Latvia and the Polish breweries Brok and Strzelec realised in H1. On an overall estimate, EBIT (earnings before interest and tax) was affected negatively by a total of some DKK 25 million from these acquisitions in 2005.

Following the extremely bad summer weather in 2004, the summer of 2005 was average weatherwise. The strongly intensified price competition in Northern Europe in 2004 stabilised somewhat in Denmark and Norway in the first quarters of the year, whereas Germany still experienced considerable pressure on prices. In the last quarter of the year, pressure on prices increased again in Denmark. The German market continued to be affected by the unresolved issue concerning deposit on disposable containers, which meant that canned beer sales in 2005 remained at a low level.

As evidenced, the Group managed in 2005 to exceed the MACH II targets established as regards ROIC and free cash flow, whereas the EBIT margin was slightly below the targeted level. Adjusted for the effect of the acquisitions made in 2005, the EBIT margin will also be well above the MACH II Plan target.

Total group sales in 2005 aggregated 5.8 million hectolitres of beer, malt and soft drinks, which is a 21.3% increase over 2004. Some 11 percentage points of the increase were attributable to the businesses acquired in Latvia in 2004 and 2005, whereas the Polish activities acquired in 2005 caused an increase of some 6 percentage points. Accordingly, organic volume growth accounted for some 4 percentage points.


Beer and malt drinks sales aggregated 4.0 million hectolitres, which is a 16% increase over 2004, whereas soft drinks sales (including mineral water and fruit juices, etc) aggregating 1.8 million hectolitres increased by 35%. Net revenue amounting to DKK 3.2 billion in 2005 increased by some 11% over 2004. Some 5 percentage points of the increase are attributable to the acquired Latvian companies, whereas the acquisition of Brok‐Strzelec in Poland increased net revenue by some 2 percentage points (included for 8 months in the 2005 financial statements). Accordingly, organic growth in the Royal Unibrew Group in 2005 was 4%, primarily driven by revenue growth in Germany, Italy, Denmark and certain malt drinks markets.

Gross profit for the year amounting to DKK 1.6 billion increased by 7% over 2004. The gross margin was 50.4% and thus 1.8 percentage points lower than in 2004. Gross margin in 2005 was adversely affected by the acquisition of Lacplesa Alus A/S and the Brok‐Strzelec activities (an estimated negative effect of 0.6 percentage points) and by a shift in the product mix in the cross‐border trade between Denmark and Germany towards less expensive products. Furthermore, the gross margin in 2004 was positively affected by the net effect of the change of deposit prices introduced in Denmark in Q1 2004 (cf Announcement BG15/2004 of 27 April 2004). Both gross profit and gross margin were positively affected in 2005 by the process optimisation activities implemented in 2004.

Operating profit (EBIT) amounted to DKK 308 million in 2005, which is at the 2004 level. Other than the effect from gross profit for the year, operating profit was affected by an 8% increase in sales and distribution expenses over 2004 primarily due to increased sales and marketing expenses (+8%), increasing carriage expenses (+19%) as well as increasing payroll expenses (+16%). The Group’s administrative expenses increased by 8%, which was less than the increase in both net revenue and gross margin. Furthermore, the item “other operating income” decreased by some DKK 13 million due to certain contributions and distributions from collegiate organisations, etc terminating as of 2005.

Earnings before interest, tax, depreciation and amortisation (EBITDA) amounted to DKK 499.2 million compared to DKK 489.2 million in 2004. Special items related to the reversal in 2005 of impairment charges and provisions made in 2003 in connection with the closure of the Randers brewery.

Income before tax from investments in associates went up considerably compared to 2004 amounting to DKK 26 million compared to DKK 3 million in 2004. This increase is primarily due to improved Announcement – RU04/2006 – Page 7/24 performance by Hansa Borg Bryggerierne ASA and to the acquisition in H1 2005 of 48% of the shares of Brewary Lubelskie – Perla S.A.

The Group’s net interest expenses increased by some DKK 3 million due to the acquisitions realised in 2005. The profit before tax of the Royal Unibrew Group for 2005 amounted to DKK 297 million compared to DKK 271 million in 2004, equal to an increase of 9.4%. Consolidated profit (after tax) increased by DKK 29 million to DKK 224 million, equal to an increase of 15%.

In Denmark total beer sales are estimated to have continued the declining trend from recent years showing a decline of some 3% in 2005. During the year, Royal Unibrew’s branded beer sales in Denmark increased by some 1%, which meant that the Group won market shares in this segment also in 2005. The Royal products continued strengthening their position and market shares in 2005, and the Heineken brand developed satisfactorily. The Maribo produces showed decline primarily due to a retail chain contract that was not renewed.

In Q4 of the year, price competition on branded beer intensified again as campaign prices fell to new levels. The decline in the soft drinks market in Denmark is estimated at 2‐3% in 2005, whereas Royal Unibrew’s branded products achieved a minor increase in market share for the year as a whole, following market share losses in the two first quarters of the year. The increase is primarily attributable to Pepsi Cola and in H2 also to Faxe Kondi, both brands driven by light varieties, which have seen high double‐digit growth. In 2005 Royal Unibrew’s total soft drinks sales in Denmark amounted to 0.8 million hectolitres, which is a 1.2% decline.

It is estimated that illegal import and distribution of soft drinks in Denmark continue to result in considerable losses to the industry (and the Danish state). The increase in total beer consumption in Italy is estimated at some 1.7% in 2005, whereas the Group’s sales and revenue increased by 4% and 5%, respectively; the Group thus succeeded in increasing its market share over the year. The main product Ceres Strong Ale developed satisfactorily in terms of sales. Furthermore, the sales increase was driven by both Ceres Top boasting growth of some 20% and Ceres Old 9, which was launched during 2005.

Over the past year, the German market continued to be affected by the unresolved deposit issue, which meant difficult conditions for beverages in disposable containers. In spite of this, the Group’s sales increased by 7% during the year. Cross‐border trade between Denmark and Germany developed satisfactorily, however with a shift of sales towards products in lower price segments. In the UK the positive development in malt drinks sales, which is the key activity in this market, continued in 2005 as the Group’s market share is estimated at some 85% of the malt drinks market in the UK. The Tax Free market continued growing but was, like the cross‐border trade between Denmark and Germany, affected by a shift in sales towards less expensive product categories.

The increase in the total beer market in Lithuania in 2005 is estimated at 3‐4% driven primarily by lowprice brands and private labels. Price increases were introduced at the end of Q1 2005, and sales by Kalnapilio‐ Tauro Grupe declined by just below 1%. The Group’s market share declined slightly during the year representing some 23%.

Lithuania continued to perform satisfactorily and in accordance with plans. In Latvia sales of the Cido products, primarily fruit juices, mineral water as well as carbonated and noncarbonated soft drinks, developed satisfactorily and market positions were strengthened or defended both in Latvia and in the export markets in Lithuania and Estonia resulting in satisfactory earnings developments. Throughout the year, Lacplesa Alus A/S won market shares until technical problems in the autumn resulted in delivery problems, which have now been solved.

The integration between Cido and Lacplesa Alus was realised as planned. The level of activities increased considerably in Poland in 2005 due to the acquisition of the Brok and Strzelec breweries in late April 2005. The integration of these activities with the former Polish organisation of Royal Unibrew progressed as planned during 2005, but Poland recorded a loss for the year due to, among other things, the integration, adjustment and development of the Brok‐Strzelec activities acquired.

GENERAL
The primary activities of Royal Unibrew are to market, sell, distribute and produce quality beverages focusing on branded products primarily within beer, malt and soft drinks. The Group’s products are sold in some 65 markets with special focus on Northern Europe (the Nordic countries, the Baltic countries, Northern Germany and Poland), Italy, Canada and the international malt drinks markets (the Caribbean, Africa and the UK). Royal Unibrew comprises the Albani, Ceres, Faxe and Maribo breweries in Denmark, Kalnapilis and Vilniaus Tauras in Lithuania as well as the soft drinks producer SIA “Cido Partikas Grupa” in Latvia. The Latvian brewery Lacplesa Alus A/S has been included in Royal Unibrew as of 1 February 2005, whereas the Polish breweries Brok and Strzelec through the subsidiary Royal Unibrew Polska Sp. z.o.o. have been included as of 26 April 2005.

It is the vision of Royal Unibrew to develop the Group with increasing profitability as being among the leading providers of beverages in Northern Europe and to develop profitable export markets outside this region.

The acquisition of the Brok and Strzelec breweries, which is an element in MACH II, the Company’s strategic platform, secures Royal Unibrew four regional beer brands and two breweries in Poland as well as a 48% holding of shares of “Perla Browary Lubelskie S.A.”, which has a strong base in the Lublin area. In 2005 and 2006 (up until 20 January 2006), Royal Unibrew A/S acquired a total of 239,000 shares for treasury, including 190,000 shares under the share buy‐back programme launched in 2005. The Company now holds a total number of 298,645 treasury shares (equal to some 4.7% of the Company’s total share capital); 103,000 of these shares are expected to be used to cover the Company’s share option scheme.

For 2006, Royal Unibrew expects – without taking into consideration any future acquisitions – increasing sales primarily driven by growth in Denmark, Latvia, Italy, Germany and the malt drinks markets as well as the effect of the acquisition of the Brok‐Strzelec activities in Poland in April 2005. Overall, the net revenue of the Group is expected to increase by some 7% in 2006, with some 4 percentage points being attributable to the mentioned acquisition of the Brok‐Strzelec activities, whereas organic growth is expected to represent 3%. The improvement is supported by continued increased marketing efforts in the Group’s main markets.

It is anticipated that the businesses acquired in Poland and Latvia in 2005, which in 2005 affected the Group’s earnings and key figures and ratios negatively, will achieve considerably better results in 2006 and thus contribute towards increasing the Group’s profit margin and return on invested capital (ROIC). Furthermore, results in 2006 are expected to be positively affected by the business excellence projects implemented in 2005, which are expected to have a positive P/L effect of some DKK 20 million in 2006.

The further intensified competition in Denmark in the autumn of 2005 at both manufacturer and retailer level, resulting in pressure on prices may ‐ if it continues ‐ have a negative effect on Royal Unibrew’s gross margin for this market segment in the future year.

By the end of 2005, Royal Unibrew lost its rights in Denmark to sell and distribute a well‐established product in the mineral water segment. As a replacement, the ”Egekilde” premium brand was introduced in early 2006 spanning the entire still and sparkling mineral water segment. The product, which is controlled by Royal Unibrew throughout the value chain, is expected to strengthen the Group’s earnings in the long term, but in the coming year the change to the new brand will imply an earnings reduction of some DKK 10 million.

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