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SABMiller plc Annual Report 2007

Chief Executive’s review

Graham Mackay, Chief Executive

Success requires a broad, global spread of businesses, a full portfolio of brands, outstanding operational capability and talented people. As a result of consistently sticking to its strategic priorities, SABMiller has all these requisites in place.

Owning the growth

This year has seen another strong performance with results continuing the trend of several very strong years. Adjusted earnings per share grew by 19%, bringing the compound annual growth rate over the last six years to some 20% per annum. At 143.1 US cents, our adjusted earnings per share have very nearly trebled since 2002.

Review of operations

While each of our markets has its own unique drivers of profit growth, there are common themes that have characterised our success this year. Our focus on building leading, local, mainstream and premium brands and managing full brand portfolios in each market has been successful in driving up revenues and profits and expanding our organic market share. What we’ve demonstrated is that stronger brands can deliver better value to our consumers and sustain firmer pricing. As a consequence, revenues have grown strongly across the business and have more than offset higher input costs.

We have also improved our brand mix, selling more higher-value brands in packs that generate higher margins. Given the trend towards premium beers, we continue to work hard to enhance our offering in this segment. We’re also starting to see a meaningful contribution from brand innovations.

Consumer demand remained strong during the year, particularly in our developing markets. As a result, we’ve continued to make significant investments – some US$2.0 billion in total – in additional production capacity, the provision of fridges and the introduction of new bottles to ensure we’re positioned to take advantage of the growth in our markets. We’ve also invested heavily in product and packaging innovations.

Europe continued its very successful run with marketing and brand investments producing gains in market share in our six largest markets and pushing organic lager volumes up by 8%. Almost a third of volumes came from local product and pack innovations undertaken in the last three years. The region has also seen robust price growth with EBITA rising 30% as we capitalise on the strength of our brands.

After several brand launches and renovations in the prior year, Latin America delivered lager volume growth of 5%. Strong revenue and cost management as well as favourable currency impacts, drove solid profit growth with EBITA up 17%. We expect further growth as we continue to make the beer category more appealing through clearer segmentation of the market, improved brand portfolios and more effective and efficient selling and distribution.

In North America, Miller Brewing Company has returned to growth after the previous years’ setbacks. EBITA was up by 27%, driven by a 4% increase in sales to retailers along with higher pricing, brand mix improvements, cost savings and a non-recurring gain. Miller’s worthmore portfolio overall grew by nearly 50% with the newly launched Miller Chill selling some 500,000 barrels during the year. The underlying momentum of the business will help considerably as we prepare for the proposed joint venture with Coors. We hope to close the transaction in mid-2008.

Robust economic conditions in Africa contributed to a 6% growth in organic lager volumes from the group’s operations on the continent (excluding Zimbabwe). Beer sales in our key markets of Tanzania and Mozambique continue to expand rapidly, despite tough comparisons with the previous year. Growth in Botswana has also been excellent, following the renovation of the St Louis brand and the launch of returnable glass bottles. Our partners in Africa, Castel, have also delivered a laudable performance in their markets.

In Asia, the group’s associate in China, CR Snow, has extended its lead, acquiring a further four breweries in the year and growing volumes by 15% on an organic basis to bring its market share to 18%. Recent industry-wide price increases will help to cover rising input costs in the short term and, more importantly, bode well for future profitability. In India, despite over burdening regulation, we achieved organic volume growth of 19%. Our import-led business in Australia continues to grow strongly, albeit from a small base.

Our priority, increasingly, is to identify the most valuable segments of the markets we already serve and to make sure we capture a higher value share of these than our competitors. We call this process ‘owning the growth’.

In South Africa, where SAB Ltd began the year with the loss of a major premium brand to a competitor, overall volumes remained level while mainstream volumes grew satisfactorily by mid-single digits. The decline in premium volumes was partially mitigated by the successful launch of Hansa Marzen Gold and growth in excess of 100% for Peroni Nastro Azzurro. Soft drinks grew 4% despite tough comparatives in the final quarter. EBITA declined by 7%, reflecting a weaker currency, rising costs in distribution and brewing raw materials and investment in our marketing and sales activities.

Exploiting our strengths in a challenging marketplace

As the Chairman has indicated, economies in general and the brewing sector in particular face tough new challenges. Against the background of a global economic slowdown and rising food price inflation, the current growth in commodity prices means sharp increases in the cost of our brewing and packaging raw materials. At the same time, the brewing industry continues to consolidate, intensifying the competition within each market. The retail environment is also getting tougher as stores and supermarkets claim more of the market from bars and restaurants where brewers’ margins are higher.

Meanwhile, as the global beer market review explains, consumers are seeking more choice and variety in their repertoire of drinks – a further trend to be factored into our strategy.

Succeeding in this challenging environment requires a broad, global spread of businesses, a full portfolio of brands, outstanding operational capability and talented people. As a result of sticking to the group’s strategic priorities, I believe SABMiller is unique among the global brewing companies in having all these requisites in place.

Our business portfolio, for example, gives us wide geographic coverage and advantageous exposure to emerging markets with above-average economic growth. Other brewers have followed our lead into emerging markets and, as a result, competition is increasing between the global operators. However, we have well established positions and a long track record of success in these types of markets.

As time moves on, the opportunities to expand into new territories through mergers and acquisitions are becoming fewer. This means that while growth through territorial expansion remains important, our priority, increasingly, is to identify the most valuable segments of the markets we already serve and to make sure we capture a higher value share of these than our competitors. We call this process ‘owning the growth’.

Owning the growth has to begin with a thorough analysis of consumer trends and marketplace dynamics. Before we can identify the opportunities, we need to understand the evolving tastes and preferences of different groups of consumers. Trends such as premiumisation, fragmentation and the increasing importance of female consumers will influence the way we approach any given market. Then we have to offer the right brands to the right target audiences in order to capture the growth where we think it exists.

Here we benefit from a second of our strengths – the ability to develop strong, relevant brand portfolios for each local market. Unlike some of our competitors, we’ve never concentrated on just one or two monolithic brands. Instead, we’ve developed a spectrum of strong brands from economy to premium, local to international and traditional to experimental. This is now turning out to be an advantage as we now have a locker-full of brands with which to address almost any segment of any market where we see an opportunity. The aim is to develop and deploy these brands for maximum competitive advantage in each local market.

A third strength of our business is its operational capability. Our strategy here is to keep improving our day-to-day execution by consistently and relentlessly raising the performance of each local business. In our manufacturing, our routes-to-market, our sales processes and every other aspect of our operations, we believe that long-term success comes down in the end to superior local execution, recognising that each of our local markets has is own unique features.

Shorter term, with input costs remaining high, it is critical to be able to secure the raw materials we need at the lowest costs. This key priority is discussed further in Strategic priority three.

Finally, we’re looking to grow by leveraging our global scale. While allowing each business a high degree of autonomy and accountability, we’re setting up structures and networks to foster collaboration, to ensure standard ways of doing things where this is helpful and to capture the best ideas and practices and disperse them quickly through the group. The objective is to create a collaborative, learning organisation in which the whole becomes greater than the sum of the parts and is better able to seize the opportunities for growth.

We recognise that our people are critical to our success. We have a strong culture of accountability and empowerment with clearly defined performance goals and we support our employees with world-class training and development. Further details are included within Sustainable development.

Addressing risks

Like any organisation, we face a variety of risks. Recognising that risk is a fact of business, presenting opportunity as well as threat, we aim to manage it in a way that generates the best return for our shareholders. The well developed risk-management process helps us to identify and monitor the principal risks to the business and deal with them appropriately. The principal risks we face are set out within Our strategic priorities while financial risks are discussed in note 22.

In summary

With the market positions we now occupy and the strategies we’ve consistently deployed, we believe that we’re well placed to capture the growth opportunities in each market, to reinforce our competitive advantages and to keep generating value for our shareholders.

Graham Mackay

Chief Executive


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