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Chief executive's review

"We now have a continuum of businesses from emerging to mature; enabling us to benefit from value and volume growth."

Over the past 12 months we have concentrated steadily on building our operations and marketing skills while working to extract better performance from all our assets.

In a third year of remarkable growth, total beverage volumes increased by 8% to 187 million hectolitres. Lager sales – also up 8% – stood at 148 million hectolitres. Earnings before interest, taxation, amortisation of goodwill and exceptional items (EBITA) grew by 27% (18% in organic, constant currency terms) to US$2,409 million while our EBITA margin rose from 15.0% to 16.6%. So not only are we selling more, we’re also making more money from our sales as margins improve.

So what have been some of the reasons for the year’s successes?

One is the global spread of our operations. We now have a continuum of businesses from emerging to mature; enabling us to benefit from both value and volume growth. In many cases, there’s also an upward trend towards higher value brands as consumers enter the market at the bottom end and others progress towards the premium end.

A second reason is our strong market positions and the benefits that come from having market leadership in nearly every case.

Thirdly, we continue to benefit from our skills in turning around previously under-performing businesses. We’ve done it several times over in Europe and the team at Miller are now producing good results from their turnaround programme.

Finally, we’ve again reaped the rewards of our relentless focus on operating performance.

Three stages of growth
Last year I described our three-phase strategy for growing our earnings. To recap, we see gains to be made in the near-term from our strong, established operations in growth markets – South Africa, the rest of Africa, Europe and Central America. We then see, somewhat later, growth from the recent big acquisitions, Miller in the US and Peroni in Italy. Longer term, we look to the developing markets of China and India and the growing contribution of our international premium brands.

This year, each of our businesses contributed more or less in accordance with its place in the strategy. The exception is Miller where the turnaround programme has produced results ahead of their expectations. With two years gone, the benefits expected towards the end of the programme are already coming through.

Although, for the coming year, we anticipate that Miller’s growth rate will be more modest than the original plan.

Near-term growth
As the chairman has mentioned, our businesses in South Africa have benefited from the country’s strong economic growth and the consequent robust consumer upturn that seems set to continue for some time. One result is the upward trend I referred to earlier as more South Africans find they can afford commercially-brewed lager for the first time while others trade up to mainstream brands or from mainstream to premium brands.

The business has capitalised on the trend in a number of ways: by introducing new premium brands such as Miller Genuine Draft and Pilsner Urquell at the top of the market; by adding new flavours to its range of fruit alcoholic drinks; and by offering higher-value brands in new packaging. As a result, our premium brands grew by 50% during the year.

With sales volumes up 8%, the soft drinks business, ABI, was one of the best performing Coca-Cola bottlers in the world last year. Following the buy-out of the minority ABI shareholders in December 2004, we’ve now combined our beer and soft drinks businesses in one division and are starting to look for joint efficiencies.

The rest of Africa produced another year of strong earnings growth. Our two largest operations, Tanzania and Botswana, have contributed the bulk of our profits in Africa for some time and both again did well – exceptionally so in the case of Tanzania. Among our smaller businesses, Mozambique excelled and Angola continued its strong growth in soft drinks.

Prospects in Africa are generally hopeful with increasing economic stability. As incomes rise, we’re seeing the same trading up among beer drinkers that is evident in South Africa. The challenge is to make sure our products are readily available, particularly in rural areas. We’re also working hard to improve productivity, recognising that there’s some way to go to match the standards we’ve achieved in South Africa.

Europe produced another tremendous performance with particularly good results in Russia, Poland and Romania. In Europe generally, we’re emerging from a period of acquisition, turnaround and consolidation. The priority now is to capitalise on the positions we’ve gained and to keep building our brands. We’re looking to increase volumes ahead of the market and so gain market share. One feature of these markets is that many mainstream consumers are trading either up or down to premium or economy brands. In response, we’re rejuvenating our mainstream brands while also developing our higher-value brands, both local and international. It’s also crucial to keep innovating and the year has seen a number of new products and formats.

Central America had a good year financially with profits up as costs were reduced, despite operating in an extremely competitive market. El Salvador has been particularly tough and the team there has re-engineered the business for what is bound to be a challenging year ahead.

Medium-term growth
In North America, we acquired Miller in 2002 and after an intense period of analysis and planning, the Miller executive team announced its three-year recovery programme in May 2003. Two years into the programme, we’re pleased to report that Miller’s US sales volumes have started to lift for the first time in six years. While the most eyecatching success has been the resurgence of Miller Lite, the trends in our other brands are beginning to improve.

As mentioned last year, the turnaround plan has four components – building brands and shaping the portfolio; getting sales and distribution right; cutting costs and raising productivity; and mobilising and invigorating the organisation and its people.

There’s been good progress in each aspect. Miller has staked out strong positions for most of its important brands, some linked to the qualities of the product. It has split the US into distinct market areas and is working to local marketing plans with the enthusiastic support of its distributors. Among its cost-saving measures, it has rationalised the corporate centre and sharpened its approach to procurement. To help establish a performance culture, it has restructured the organisation with new performance management processes, clearer goals and better training and development of its people.

Miller is now the recognised challenger to the long-established market leader, Anheuser-Busch. It uses the phrase ‘able challenger’ to describe the required competence and capability in shaking up the market, challenging the status quo and presenting itself as a strong alternative. This positioning will be important as the US market becomes more competitive.

Although Italy is not an easy market at present, we’re starting to see some progress with Peroni. A new managing director was appointed in February 2005 to accelerate the pace of change as the turnaround programme moves from planning to implementation.

Long-term growth
Through our Chinese associate, CR Snow (previously CRB), we’ve been operating in China for 11 years. During that time, the business has grown both organically and by acquisition to become one of the largest beer businesses in the world’s largest market. Volumes have continued to increase and after stagnating for many years, Chinese beer prices are starting to lift as outdated breweries are taken out of service and cost pressures in commodities such as glass and grain are passed on in price increases. As we build brand equities, we see opportunities for premium brands commanding premium prices.

India also offers good long-term prospects. Following the transaction in May 2005, the business is now wholly-owned and is India’s second largest brewer and expanding ahead of the industry with double-digit volume growth in the past year. Although beer consumption is low, the country’s economic growth and the trend from spirits to beer promise well for the future. The main impediment is a complex regulatory system that limits economies of scale and may take some time to be liberalised.

The final element in our long-term growth strategy consists of our international premium brands. Among the year’s successes, Miller Genuine Draft did well in South Africa and grew by 43% in Russia. The newly packaged Peroni Nastro Azzurro was launched in the USA, the UK and Romania, while Pilsner Urquell continued to grow worldwide and Castle increased its sales in Zambia and Tanzania.

Developments in the global marketplace
I argued last year that the global beer industry had largely completed its first phase of consolidation – the acquisition of local businesses by larger players – and was now entering a second phase consisting of mergers of relative equals. The Miller transaction was the first of this new wave and has now been followed by the Interbrew and Ambev deal and the merger between Coors and Molson. Global consolidation continues to gather pace.

In our view, we have the scale we need to execute our strategy without being constrained by our size. We therefore don’t need another landscape-changing deal on the scale of Miller. Any acquisitions we do decide to make will be determined solely by their ability to add value.

The imperative from here on is to keep building brands that consumers love and to market them superbly. It’s also to make each operation work better – that relentless focus on performance I mentioned earlier – while making the whole greater than the sum of its parts, so generating ever-greater value from our worldwide portfolio.

There is underlying momentum in most of our major markets, and we expect further steady organic volume growth for the group, supported by significant ongoing marketplace investments.

Following a number of years of exceptional rates of profit growth delivered by the group, earnings per share for the coming year are expected to continue to grow at a more moderate rate from this higher base.

Signature of Graham Mackay

Graham Mackay
Chief executive

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Graham Mackay