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Operations review

Europe

Europe again delivered excellent results, with total lager volume growth of 12% (organic 11%) and EBITA improving by 29%. Volumes were strong in Poland, Russia and Romania, while most other operations outperformed their underlying market growth. Volume performance was boosted by the favourable weather conditions which prevailed during the year, including an exceptionally mild winter, generally buoyant economies and the soccer World Cup. Direct marketing investment grew in line with revenue while productivity was up 6%, reflecting improved scale efficiencies. EBITA margin enhancement of 50 basis points was assisted by positive brand mix, with premium brands growing 15%.

Reported EBITA growth of 29% was enhanced by strong currencies, with organic constant currency growth of 19%. During the second half, margins tightened with a move to non-returnable packaging, particularly cans, where volumes were up 34%. Poor 2006 barley and hop harvests resulted in significantly increased malt and brewing costs in the final quarter, whilst skills shortages, and noticeable wage pressures, emerged across Central and Eastern Europe.

In Poland, our volumes were up 13% and market share increased by 1% to 39%. Industry growth was 10% owing to the combined effects of the World Cup, a warm summer and mild winter, a buoyant economy and growth in personal incomes. The operation achieved a small real price increase, a trend improvement from prior years, while industry prices declined in real terms. Tyskie and Zubr, Poland's two leading beer brands, grew volumes by 10% and 23% respectively, while our upper mainstream brand Lech grew 9%. In the premium segment, our flavoured beer, Redd's, grew 42% with a new variant, upgraded packaging, and a successful repositioning of the range towards female consumers contributing to growth in volumes. Sales and distribution initiatives have focused on increased product visibility, more chilled product availability and improving share of display within outlets. Marketing support has centred on enhanced consumer and outlet segmentation and shopper marketing techniques. Current expansion of brewing and packaging will increase annual capacity from 12.5 million hectolitres to 15 million hectolitres by July 2007, with the Tychy brewery having capacity of 8 million hectolitres.

In the Czech Republic, volumes grew by 1% which was in line with the industry, and domestic volume share was stable at 49%. Our strategy to build value share continued, with our premium brands up by 2% overall while our economy brands declined by 8% as we chose not to follow aggressive competitor price discounting in this segment. Pilsner Urquell grew by 4% and exceeded 1 million hectolitres for the first time. This performance was achieved by expanding our presence in the on-premise channel, as well as the launch of new packaging and a focus on shopper marketing in large format supermarkets. Volumes of our leading Czech brand Gambrinus (26% market share) declined in the on-premise channel following a price increase. However, off-premise growth was strong, supported by new primary and secondary packaging, the introduction of new multipacks, and brand sponsorship of the Czech national soccer team during the World Cup. Kozel grew by 10% in the domestic market, following the introduction of a new proprietary bottle, new labelling and a new variant. Across Central and Eastern Europe, Kozel is now marketed and sold in several of our countries and total volumes were up 17% to 2.5 million hectolitres. Exports to the key German market were well up with Pilsner Urquell growing by 31% and now established as the leading premium imported beer in the off-premise channel. Price increases marginally ahead of inflation were achieved, largely in the on-premise channel.

In Russia, volumes ended 24% up on prior year, well ahead of the market growth of 17%. Price increases of 5% were achieved against generally restrained industry pricing, and our national value share continued to increase. We significantly increased our investment in coolers and extended retail coverage by 25%. Miller Genuine Draft returned to robust growth, with volumes up 21% and a new half-litre bottle driving new consumption occasions. Zolotaya Bochka, the fastest growing local premium brand, was up 40% with the launch of a twist-off crown, and Pilsner Urquell and Redd's both grew strongly. Our marketing effort now includes non-traditional media, with the use of internet based marketing techniques. Profitability was improved by considerable operating leverage. The expansion of our Kaluga brewery to 6 million hectolitres continued on schedule and in March 2007 we announced a new 3 million hectolitre brewery to be constructed for US$170 million in Ulyanovsk, 1,000 km east of Moscow.

In Italy, the beer market grew by an estimated 3%, benefiting from some improvement in economic performance, increased consumption during the World Cup and a mild winter. Excluding imports, domestic industry production was up 1%, while Birra Peroni's total volume growth was 2%, with branded domestic volumes 5% higher than last year and private label declining by 28%, as we continued our managed reduction in our presence in this category. Nastro Azzurro was up 9% with premiumisation of the brand continuing through key prestige sponsorships and a marketing position focused on Italian style and design. The Peroni brand accelerated to 6% growth from the 2% posted last year, supported by a successful draught launch in the Northern provinces. Exports of Peroni Nastro Azzurro continued their strong momentum. The operation has recorded a solid improvement in profitability.

In Romania, industry volume growth is estimated at 20%, led by the continuing performance of mainstream PET. Our operation was capacity constrained during the first half of the year but nevertheless grew full year volumes by 23% and year-on-year market share rose by 60 basis points to 22%, driven by second-half volume growth of 42%. Our premium brand Ursus grew by 16%. Our mainstream Timisoreana Lux brand grew by 59% and was the strongest growing brand in the market, assisted by the newly launched two litre PET pack. Industry pricing remained subdued. Following from the strong growth of recent years, capacity is being expanded from 4.3 million hectolitres to 6.3 million hectolitres over the next 18 months.

In Hungary, our volumes grew by 7% and outperformed the market. This performance was achieved against a backdrop of significant fiscal austerity measures impacting consumers, a 20% excise increase, and competitor discounting.

In Slovakia, the major focus has been the integration of Topvar, which was completed successfully during the year. Organic growth of our brands was broadly in line with the market which was up by an estimated 2% as it begins to exhibit signs of recovery from the major excise rises of recent years.

In the Canaries, our international brands gained almost 3% while profits were boosted by the distribution of Red Bull and the introduction of Appletiser, alongside the existing Compal range of juices.

In its first full year of operation, Miller Brands UK has exceeded our expectations, with volumes and revenues ahead of plan. Peroni Nastro Azzurro, supported by innovative marketing and increased distribution, has grown 36%. The prior year decline in Miller Genuine Draft has been halted, and Pilsner Urquell has been successfully repositioned. In February 2007, the two key Polish brands Tyskie and Lech were added to the portfolio and are growing strongly.

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Financial summary Europe
2007
Europe
2006
%
Revenue (US$m) 4,078 3,258 25
EBITA* (US$m) 733 569 29
EBITA margin (%)* 18.0 17.5  
Sales volumes (hl 000):      
- Lager 40,113 35,664 12
- Lager organic 39,641 35,664 11

* In 2007 before net exceptional costs of US$24 million (2006: nil) being profit on disposal in Italy of US$14 million less restructuring costs of US$7 million primarily in Slovakia and an adjustment to goodwill on acquisition of US$31 million for Birra Peroni

 

Key focus areas

  • Continue to focus on superior execution to drive market share gains
  • Further develop premium brands and the ongoing renovation of core mainstream brands
  • Innovate across product, pack, and display to capture value
  • Work with retailers to market to our consumers effectively at the point of sale
  • Leverage our scale across procurement, manufacturing, brand management and the transfer of knowledge and best practice