Financial Review
"EBITA margin again improved across most businesses, reflecting a focus on productivity and volume growth."

Malcolm Wyman Chief financial officer
Group operating performance
Our widespread portfolio of established businesses (excluding Miller and Central America) showed impressive performance over the year, with volume growth and improved margins in South Africa, Europe and Africa & Asia. During the year, EBITA margins have continued to increase in most businesses, reaching 18.8% for the group's established businesses. The lower EBITA margins at Miller and Central America have diluted the total group's margin to 13.9% in comparison with the 17.6% of prior year. SABMiller believes that the reported profit measures – before exceptional items and amortisation of goodwill – provide additional and more meaningful information on trends to shareholders and allows for greater separability between segments.

Total group beverage volumes of 151.4 million hectolitres (hls) were 52% above last year's 99.4 million hls (organic growth 3.0%), and within this performance, Europe and Africa recorded organic growth of 8.4% and 6.7% respectively, and Beer South Africa recorded a second consecutive year of growth, with volumes up 0.8% to 24.4 million hls. Turnover, including share of associates, increased by 109% (organic growth 17.8%). In the determination and disclosure of reported sales volumes, the group aggregates the volumes of all consolidated subsidiaries and its equity accounted associates, other than associates where primary responsibility for day to day management rests with others (such as Castel and Distell). In these latter cases, the financial results of operations are equity accounted in terms of UK GAAP but volumes are excluded. Contract brewing volumes are excluded from total volumes; however turnover from contract brewing is included within group turnover.

Group operating profit before amortisation of goodwill and exceptional items increased 66% to US$1,270 million, with increases in most of our businesses.

EBITA margin again improved across most businesses, reflecting a focus on productivity and volume growth. Europe further increased EBITA margin before amortisation of goodwill by 120 points over the prior year, Beer South Africa raised its margin by 80 basis points to 26.6%, and margins continued to improve at ABI and Africa & Asia. Headline performance information of our results by region is set out in the segmental analysis of operations, and the disclosures accord with the manner in which the group is managed.

The group recorded net exceptional items of US$66 million, comprising Tumwater (USA) brewery closure and impairment costs of US$35 million, Miller and related integration costs of US$23 million, Central America reorganisation costs of US$12 million and a profit of US$4 million on the partial disposal of our holding in the Southern Sun Hotels and Gaming group. This compares to prior year net exceptional items of US$8 million.

Net interest costs increased to US$163 million, a 65.9% increase on prior year's US$98 million, due primarily to the borrowings acquired with Miller. Interest cover remains satisfactory at more than five times based on profit before interest, taxation and exceptional items. Profit before tax of US$770 million was 27% up on prior year, reflecting the strong operational performance.
The effective tax rate, before goodwill amortisation and exceptional items, is 33.6%. This, however, includes an exceptional US$9 million deferred tax credit in relation to tax losses in one of ABI's wholly owned subsidiaries which have been assessed in the year. Excluding this impact, the effective tax rate before goodwill amortisation is 34.4%, up from 31.2% in the prior year. The increase compared to the prior year is attributable to an increased proportion of the group's profits being earned in countries with higher effective tax rates.


Adjusted earnings increased by 66% to US$581 million (as shown in note 11 to the accounts)and the weighted average number of shares in issue was 1,076.1 million,
up from last year's 718.5 million, mainly as a result of the issue of 430 million shares to Altria in July 2002 as the consideration for the Miller acquisition. These shares consisted of a mixture of ordinary shares and unlisted low-voting participating shares. The group's adjusted earnings per share increased 11% to 54.0 US cents from the prior year's 48.7 US cents.


The board has proposed a final dividend of 18.5 US cents per share, making an unchanged total of 25.0 US cents per share for the year, representing a dividend cover of 2.2 times based on adjusted earnings (2002: 1.9). Details regarding payment dates and related matters are disclosed in the directors' report.

Accounting policies

No new standards have been issued for adoption during the year. During 2002 the Accounting Standards Board (ASB) delayed the mandatory implementation of a new accounting standard for Retirement Benefits (FRS 17) in order to allow UK and international standards boards an opportunity to agree how to converge their different approaches. The group continues to provide additional information as required by FRS 17 by way of note 34 to the accounts.

Historically, the group has had limited exposures associated with defined benefit pension schemes and post retirement benefits. With the acquisition of Miller, substantial defined benefit pension scheme and post retirement medical aid liabilities were assumed, which were fully provided under SSAP 24 in the acquisition balance sheet. The updated valuations as at the year end, required for FRS 17 disclosure purposes only, indicate a deficit on the Miller schemes in aggregate, in excess of amounts provided in the balance sheet, of some US$191 million, after taking account of the related deferred taxation. The group has no other significant exposures to pension and post retirement liabilities as measured in accordance with FRS 17.

Shareholder value

The value which a company returns to its owners is best measured by total shareholder return (TSR) – the combination of share price appreciation and dividends returned over the medium to long term. Recent measures of shareholder return are impacted by the significant decline in equity indices over the past four years. However, since SABMiller moved its primary listing to the London Stock Exchange in March 1999 the FTSE 100 has produced a TSR of negative 29% while the group has produced a TSR of negative 0.6% as at the time of our preliminary results announcement.

In focusing on shareholder value added, the group uses EVA™ as a key indicator of annual performance. As noted last year, SABMiller is continually investing in new brewing operations and most new investments impact negatively on EVA™ in the short term. The group's EVA™ calculation is summarised below. Key factors to be borne in mind are:
  • EVA™ is calculated using operating profit after tax, adjusted for exceptional and non-recurring items;
  • The capital charge is calculated on opening economic capital; adjusted for the Miller acquisition on a time-apportioned basis,any impairments of assets of continuing business units, and goodwill previously eliminated against reserves.
Economic profit statements



Profit on ordinary activities before interest and taxation 933  704   
Taxation on profit on ordinary activities (349) (208)  
Tax deduction on financing costs (56) (31)  
Adjustment for non-recurring items 309  65   
Net operating profit after tax 837  530   
Capital charge (773) (341)  
Economic Profit (EVA™)
Economic balance sheets    
Fixed assets 11,060  4,758   
Working capital (70) (78)  
SPV shareholding (Safari) (618) (618)  
Accumulated adjustment for non-recurring items 586  277   
Economic capital 10,958  4,339   
Non-interest bearing funding (306) (215)  
Provisions (743) (166)  
Net operating assets
The group's weighted average cost of capital (WACC) is applied against the resulting investment; and WACC, at 9.0% (2002: 11.0%), takes account of relevant individual country risk profiles and the group's overall debt profile. This reduction in WACC is the result of a lower average country risk premium following the Miller acquisition and a lower group risk profile from the increased geographic spread of business.

SABMiller returned EVA™ of US$64 million in the year under review
(2002: US$189 million). This reduction is mainly due to the additional capital charge for the Miller acquisition and the impact of holding the Central America assets for a full 12 months in the year, compared with four months in the prior year.
During the first half of the financial year, the SA rand demonstrated significant weakness against the US dollar, before strengthening in the second half, and the currency ended the financial year at R7.91 to the US dollar. As a result the weighted average rand/US dollar rate improved by 2.2% to R9.50,compared with R9.71 in the prior year and, together with the strengthening of currencies in central Europe against the US dollar, this has contributed to improved results, as reported in US dollars.

Translation differences on non-US dollar assets and liabilities are recognised in the statement of total recognised gains and losses. It is not the group's policy to hedge foreign currency earnings and their translation is made at weighted (by monthly turnover) average rates.

Financial structure

New borrowings are dominated by the US$2,000 million bank debt arising on the Miller acquisition. As at 31 March 2003, this debt had a term of less than one year
(to May 2003), and the analysis of debt at this date included in the notes to the accounts displays a significant reduction in the maturity profile of the group's debt. A bank facility has been arranged which was drawn down in May 2003. This facility has an initial 12 month term, with the option to extend for a further 12 months. We intend to refinance this facility with longer-term debt during the year ending 31 March 2004. The group's gearing, as measured by net debt relative to net assets, increased at the year end to 42.4% from last year's 40.8%, but the group still has substantial unutilised borrowing facilities.

Gross borrowing rose in the year under review from 1.7 to 2.2 times EBITDA, following the expansion activity undertaken during the year. This ratio is based on borrowings as at 31 March 2003, and is adversely affected by the inclusion of only nine months results for Miller. Net interest cover, based on profit before interest, taxation and exceptional items relative to net financing costs before exceptional items, was more than 5 times (2002: 7.2 times).

Balance sheet profile

Total assets increased by US$7,188 million to US$12,879 million as a result of the acquisition activity, with the Miller acquisition accounting for almost all of the increase. There was also a rise of US$33 million in equity minority interests to US$778 million.

Intangible assets increased by US$4,647 million during the year, due primarily to the inclusion of goodwill of US$4,4987 million relating to the Miller acquisition. Goodwill
in ABI is considered to have an indefinite life (consistent with prior years), while all other goodwill is amortised over 20 years. The attributable charge for the year under review rose to US$250 million from last year's US$46 million.

Net debt increased by 138% to US$2,962 million from the prior year's level of US$1,245 million following the Miller acquisition. The group again achieved its target of zero net working capital.

Cash flow and investment highlights

Net cash inflow from operating activities before working capital movement (EBITDA) rose to US$1,483 million, from last year's US$904 million. The ratio of EBITDA to group turnover declined in the year to 17.9% (2002: 24.3%), with the reduction attributable to lower margins in recently acquired businesses.

The group achieved free cash flow of US$755 million (2002: US$496 million), representing the operating cash flow generated by the group, after capital expenditure and the cost of financing and taxation, but before acquisitions.
Acquisition details are disclosed in note 29 to the accounts, and in addition to the Miller acquisition include a number of operations in Africa and Asia.
Malcolm Wyman
Chief financial officer