Russia & Ukraine: BBH has demonstrated outstanding progress in the nine months to September 2006

Scottish & Newcastle announced on November 8th the results for the nine months to September 2006 from its 50% owned joint venture Baltic Beverages Holding AB (BBH).

INTEGRATION BENEFITS ACCELERATE
Beer volume growth of 9%
Net Sales (EUR) up 20%
Margin growth of 320bp to 24.0%
Continued improvement in market share trend in Russia – share gain in Q3
Integration benefits in Russia delivering ahead of plan

The company stated in its press release:

“SUMMARY OF FINANCIAL PERFORMANCE

BBH has demonstrated outstanding progress in the nine months to September 2006 with net sales and operating profit growth of 20% to €1645M and 39% to €395M respectively. Operating margin increased 320bp to 24.0%. We have seen strong top line performance across the summer months giving rise to operational leverage and we have seen an acceleration of the benefits from operational integration in Russia. In addition, there was also a one-off benefit to the Russian beer market in the quarter arising from changes in legislation for the wine and spirits categories.

PRICING & MARGIN GROWTH

Pricing has improved across all markets. Price per litre has grown by 7.1% in local currency benefiting from a volume shift into premium and licensed brands.

Reported margin is strong at 24.0% (320bps growth). The improvement is largely driven by accelerated merger synergies (c180bps). In addition, we benefited from the exceptional market growth in the quarter resulting from changes in legislation for wine and spirits (c100bps).

RUSSIA

The Market

The Russian beer market showed exceptional growth of 14% in the third quarter of the year. BBH volumes grew just ahead of the market at 15%, resulting in a small share gain. BBH’s cumulative market share in Russia is now at 36.3%, broadly in line with same period last year.
The beverages market experienced temporary disruption during the quarter – new legislation was implemented designed to control sales of wine and spirits. The changes resulted in short term supply shortages in these categories. Beer and locally produced spirits benefited during this period. We estimate this will drive an approximate 3% annual uplift to the Russian beer market.

Integration

The legal merger of BBH’s four Russian businesses moved closer during the quarter with the decisions made at the Pikra, Vena and Yarpivo extraordinary general meetings to approve the merger. In addition, Russia’s Federal Antimonopoly Service formally approved the merger in September. BBH remains confident of completing formal proceedings by the end of 2006.
Expected synergy benefits from the integration, previously estimated at $60m-$80m by 2008, have accelerated ahead of previous guidance - we expect to deliver around $80m by the end of 2006.

OTHER MARKETS

Ukraine

In the nine months to September, BBH Ukraine volumes grew by 7.8% against market growth of 14.2%. This resulted in a market share of 17.9%. In Ukraine the new management team is focussed on implementing a turnaround and step-up plan to improve the performance of the business.

The Baltics

Continued growth across the summer months further enhanced BBH’s combined market share position in the Baltics up 1.0%pt to 44.5% - volume growth was partly driven by exceptional weather in the region. Value share increased ahead of volume supported by the continued premiumisation of our brand portfolio.

Kazakhstan

BBH in Kazakhstan continues its exceptional performance with volume growth of 37.7% in a beer market up 19.4%. BBH has further consolidated its leadership in the market with 29.2% share, an improvement of 4.4% pts compared to the same period last year.
In 2006 we doubled capacity in Kazakhstan in order to meet the demands of a growing market.

Outlook

Driven by the exceptional market conditions, we believe the Russian beer market will grow by 8-9% this year before reverting to 3-5% in the medium term. We expect to continue to achieve price increases just below the level of local food and beverage price inflation. BBH remains confident of completing formal proceedings on the merger in Russia by the end of 2006. For the full year we expect margins to be around 23% reflecting a one off benefit of circa 100bps from the exceptional market conditions in the third quarter.

We plan to increase capital expenditure to around €300M for the full year in order to meet further volume growth across our markets.”

Baltic Beverages Holding AB (BBH) is a 50:50 owned joint venture between Scottish & Newcastle plc and Carlsberg A/S. BBH operates 18 breweries in six countries in Eastern Europe, including Russia where it is the market leader with a 36% market share.

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