Strategy
The Group continues to follow a strategy of acquiring and developing beer operations in selected international markets. In sub-Saharan Africa, significant investments have been made in many countries, and this has had the added benefit of supporting the South African government's policy of assisting and promoting economic development in this region. In Central Europe, the Group has secured a major strategic position, and has also achieved significant advances in China, one of the world's fastest growing beer markets.

The Group's South African businesses are of a size and strength to have enabled SAB to support these successful entries into other developing markets. The Group is the largest brewer in Africa, producing two-thirds of all beer consumed on the continent, including over 15 million hectolitres of brand Castle. Worldwide last year, the Group produced 48 million hectolitres of lager beer, 14 million hectolitres of carbonated soft drinks and 8 million hectolitres of other beverages.

A key Group objective is the delivery of long-term shareholder value and there are three main drivers for this:

• additional volumes, margin expansion and cash flow generation in the South African businesses, where the Group remains fully committed to supporting further growth and development in the economy;
• optimising and expanding SAB plc's established positions in other developing markets, by growing organically and by acquisition to complement and support the existing operations; and
• seeking larger investments in both developing and established markets where value-adding capability can be demonstrated, for example, in economies of scale or brand portfolios.

Core investment activity
During the past year, the Group recorded further progress in strengthening and consolidating its position in the core beverage, hotel and gaming businesses. While pursuing organic development and expansion of these core businesses, SAB plc is in discussions to dispose of its non-core shareholding in Plate Glass and Shatterprufe Industries.

Recent highlights in the drive for growth in long-term shareholder value include:

• In Europe, the brewing interests in Lech Browary and Browary Tyskie in Poland are being integrated for greater efficiency and competitiveness, while the partially completed brewery in Kaluga Oblast near Moscow, acquired early last year, has been commissioned.
• The African operations saw a greenfield brewery open at Thika in Kenya in October 1998, and the recent acquisition of Lonrho Africa's sorghum breweries in Zambia and Malawi. Also, the SAB International ("SABI") lager operations acquired Northern Breweries, situated in Zambia's copperbelt region.
• SABI Asia's expansion continues and includes plans for a joint venture to operate a brewery in India. The acquisition of Foster's Brewery in Tianjin, China, has just been announced.
• Subsidiary ABI's acquisition and integration of the major franchise business and assets of the Coca-Cola bottler, Suncrush, has been a quantum leap in securing an aggregate 60 per cent share in the South African carbonated soft drinks market.
• Tsogo Sun, the Group's gaming associate, consolidated its position within the South African gaming industry by opening its third casino, north of Johannesburg.
• Southern Sun recently announced a joint venture acquisition of the four Cullinan hotels in key locations, including Cape Town.

Operating performance
This past year has been a challenging one for the Group with economic crises in a number of emerging markets. The South African consumer economy deteriorated sharply from mid-1998 and rand interest rates rose to historically high levels in real terms. Under these conditions, SAB again demonstrated considerable resilience in its overall performance.

Lager beer volumes of 48 million hectolitres grew organically by 6 per cent, compared with the world beer market increase in calendar 1998 of 1.5 per cent. Total beverage volumes reached 70 million hectolitres - 11 per cent ahead of the previous year. Group turnover, at US$6.2 billion including associates, rose by 5 per cent.

Group operating profit before exceptionals was US$786 million, reflecting a profit improvement of 3 per cent in US dollar terms, notwithstanding the 22 per cent depreciation in the value of the South African rand.

The core beverage and hotel business, in aggregate before exceptionals, exhibited a healthy operating margin at 17 per cent, almost a full point ahead of the prior year.

Exceptional items
The economic situation in Russia has been well documented and an impairment provision of US$71 million (78 per cent) was made against the Group's investment there. Management remains optimistic about the Russian beer market over the longer term and the brewery was completed, on time, in April 1999. Other exceptional items, totalling US$9 million pre-tax and minorities, include the adjustment to bring SABI's reporting date into line with the rest of the Group (US$21 million reduction in operating profit), closure and re-organisation costs (US$19 million) and SABI capitalisation costs (US$11 million). These are detailed in note 6 to the financial statements.

Outlook
In the first half of the current year, the Group anticipates continued difficult trading conditions as emerging market economies struggle to recover and, while it is too early to form a clear view, this period is likely to reflect relatively subdued trading conditions as well as start-up losses in Russia.

In South Africa, interest rates are well down from their 1998 peak, corporate taxes have been reduced by 5 percentage points and inflation is forecast to fall. All of this can be expected to lead to improved prospects for private consumption expenditure in the second half of the current financial year. As anticipated, the election returned the ANC to government, and this should maintain fiscal policy consistency which will be supportive of enhanced economic growth.

Initial signs of an improving outlook for the commodity cycle should have a beneficial and stabilising impact on the economies of many developing countries. Management's ongoing initiatives to drive sales, market share and productivity will provide additional impetus. Consequently, barring any economic instability, particularly relating to currency markets, the Board remains positive on the outlook for the full year.