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SABMiller plc Annual Report 2007

Chief Financial Officer’s review

Malcolm Wyman, Chief Financial Officer

Our revenue growth reflects the group’s success in expanding its volumes while also achieving significant price and mix gains.

Key performance indicators (KPIs)

SABMiller has a clear strategic focus, with four strategic priorities, as noted in the Chief Executive’s review. Management use a range of KPIs to monitor progress against these priorities. Some of the most important measures used are:

Certain KPIs are discussed in further detail below within the review of the current year’s financial performance. Other non-financial KPIs have been dealt with in the Chief Executive’s review and in the operations review.

Selected disclosures of results on an organic, constant currency basis are made to illustrate underlying performance. These exclude the effects of acquisitions net of disposals, and changes in exchange rates. Organic results exclude the first 12 months’ results in the case of acquisitions and investments, and the last 12 months’ results from disposals. Constant currency results have been determined by translating the local currency denominated results for the year ended 31 March 2008 at the exchange rates for the comparable period in the prior year.


increase in group revenue on an organic constant currency basis


The adjacent chart shows the group’s organic growth in lager volumes for each of the last four years. The group’s growth in each year is significantly ahead of the growth rate of the global beer industry.

This year’s results demonstrate the operating strength of our group and our recent volume increases in part reflect our strong presence in higher growth markets. Total beverage volumes, including soft drink volumes, grew by 6% on an organic basis and 6% on a reported basis to 288 million hl. Within this total, lager volumes at 239 million hl were up by 7% on an organic basis and 11% on a reported basis. Particularly strong growth in lager volumes was recorded in Europe and Africa & Asia.

Lager organic volume growth by percent for the years 2005-2008


Our revenue growth reflects the group’s success in expanding its volumes while also achieving significant price and mix gains illustrating the strength of our brands, front-line pricing and good revenue management. The adjacent chart illustrates the organic growth in group revenue for each of the last four years with each year’s performance shown in constant currency.

Group revenue (including our share of associates of US$2,418 million) was US$23,828 million. This represents an increase of 9.6% on an organic, constant currency basis and is ahead of the growth in volumes. Real price/mix gains of 3.3% were achieved, principally in North America, Europe and Latin America, with stronger gains in the second half of the year.

Currency movements during the year increased reported revenue by 5.5%, as the majority of the currencies in which the group trade strengthened against the US dollar with the exception of the South African rand. Transactions completed in the financial year in the Netherlands and Poland (offset by soft drinks business disposals in Latin America and China) had the effect of increasing reported revenue by 0.8%.

Since the Miller transaction in July 2002, the group has grown revenue strongly, both on an organic basis and by acquisition. The compound annual organic growth rate in volumes has been 5.6%. The group has leveraged volume growth through price and mix benefits to generate compound annual group revenue growth of 9.3% over that period.

Group revenue growth by percent for the years 2005-2008

Input costs

Input cost pressures have been significant in the past year. Most notably there have been substantial increases in the market prices of malt, barley and hops. The price of malt and barley has more than doubled in the last two years, while the price of hops has increased by seven to ten times over the same period, with a significant spike in the last 12 months in particular. The impact of this on profitability has been tempered through supply contracts for future requirements and an active hedging programme, combined with programmes to support development of local barley farming in both Africa and India, underpinning our supply in these areas. As a consequence the impact of input cost increases has been more muted, with total raw material costs increasing 9% per hl in constant currency. Our total cost of goods sold per hl, which includes other variable costs, is up about 6% on the same basis reflecting the lower cost pressures experienced on other inputs.

Double digit organic constant currency growth in EBITA was achieved by Europe, North America and Africa & Asia.


EBITA is defined as operating profit before exceptional items and amortisation of intangible assets (excluding software). It includes the group’s share of associates’ operating profit on a similar basis. We choose to report EBITA in our results in order to accord with the manner in which the group is managed. SABMiller believes that the reported EBITA profit measures give shareholders additional information on trends and make it easier to compare different segments. Segmental performance is reported after the specific apportionment of attributable head office service costs.

The chart below shows the organic increase in EBITA for each of the last four years with each year’s performance shown in constant currency. EBITA grew 9% on an organic, constant currency basis. Reported EBITA, which includes the impact of currency movements and acquisitions, grew by 15% to US$4,141 million. Growth in EBITA reflects the benefits of volume and revenue increases as well as productivity. The group has a record of improving its productivity over time, notwithstanding increases in capital investment and in sales and marketing expenses which can impact productivity in any individual year.

Double digit organic constant currency growth in EBITA was achieved by Europe, North America and Africa & Asia, which enabled the group to absorb the EBITA decline in South Africa and still achieve a good overall performance for the year. Latin America is now the largest beverage segment, contributing 25% of group EBITA and this represents the significant progress made by the group in developing a balanced portfolio of businesses.

EBITA growth by percent for the years 2005-2008

EBITA margin

The group has a strong record in protecting and developing profitability to raise the performance of local businesses, as seen in group EBITA margin trends in the chart above. In this year of significantly rising input costs, revenue growth and production efficiencies enabled the group to recover the increases in costs experienced and the group has maintained its EBITA margin at 17.4%. This is a noteworthy achievement. In addition to the input price pressures experienced the group suffered the adverse impact on volume and mix of the loss to a competitor of the licence to produce a premium brand which had previously accounted for 9% of volumes in South Africa.


EBITA growth on organic constant currency basis

The group’s reported EBITA margin on an organic constant currency basis is 10 basis points lower, as currency movements that have favoured the weighting of higher margin businesses in the group total are excluded from this measure.

The group has continued investment in future growth, particularly capacity expansion, and also in brand support and sales capability. There has also been a focus on productivity and cost management. Overall this investment has led to some incremental cost in EBITA margin.

EBITA margin performance by percent for the years 2007 and 2008

Exceptional items

Items that are material either by size or incidence are classified as exceptional items. Further details on the treatment of these items can be found in note 4 to the financial statements.

Net exceptional charges of US$112 million before tax were reported during the year (2007: US$93 million). Of these, US$78 million relate to final restructuring costs incurred in Latin America (2007: US$69 million), partially offset by a net profit of US$17 million on the disposal of soft drinks businesses in Costa Rica and Colombia. Miller has also recorded costs of US$51 million in relation to retention accruals pending the completion of the proposed MillerCoors joint venture and certain integration costs. In 2007, Europe reported a net exceptional cost of US$24 million. This comprised a profit on the disposal of land in Naples of US$14 million less integration costs of US$7 million principally incurred in Slovakia, and an adjustment to goodwill at Birra Peroni. As required under IFRS, to the extent that a business is able to utilise, after an acquisition, previously unrecognised deferred tax assets, an adjustment to goodwill is required with a compensating adjustment to tax. During 2007 we recorded such an adjustment for US$31 million in respect of Birra Peroni and this had been included within exceptional items.

Finance costs and tax

Net finance costs increased to US$456 million, a 7% increase on the prior year’s US$428 million. Finance costs in the current year include a net benefit from the mark-to-market adjustments of various derivatives amounting to US$35 million (2007: nil) which are of a capital nature and for which the group has been unable to obtain hedge accounting. This benefit has been excluded from the determination of adjusted earnings per share. Adjusted net finance costs, which exclude this benefit, were US$491 million, up 15%, reflecting an increase in net debt following the significant capital expenditure programme currently being undertaken by the group and the recent Grolsch acquisition. Interest cover, based on pre-exceptional profit before interest and tax and excluding the impact of the mark to market movements noted above, has increased to 7.9 times from 7.8 times in the prior year.

The effective tax rate of 32.5% (2007: 34.5%) before amortisation of intangible assets (other than software) and exceptional items and the adjustment to interest noted above, is below that of the prior year, principally reflecting a more favourable geographic mix of profits across the group, local statutory rate reductions and ongoing initiatives to manage our effective tax rate.


The South African rand has declined against the US dollar during the year and ended the financial year at R8.15 to the US dollar, while the weighted average rand/dollar rate weakened by 1% to R7.13 compared with R7.06 in the prior year. The Colombian peso (COP) strengthened by almost 17% against the US dollar compared to the prior year end, and ended the year at COP1,822 to the US dollar, while the weighted average COP/dollar rate improved by 15% to COP1,997 from COP2,340.

Profit and earnings

Adjusted profit before tax of US$3,639 million increased by 15% over the prior year, reflecting performance improvements across the businesses and translation of results into US dollars. On a statutory basis, profit before tax of US$3,264 million was up 16%, including the impact of exceptional items and the mark to market movements in finance costs as noted above.

The group presents adjusted basic earnings per share to exclude the impact of amortisation of intangible assets (excluding software) and other non-recurring items, which include post-tax exceptional items, in order to present a more meaningful comparison for the years shown in the consolidated financial statements. Adjusted earnings increased by 20% to US$2,147 million and the weighted average number of basic shares in issue for the year was 1,500 million, up from last year’s 1,496 million.

Adjusted earnings per share increased by 19%, the fifth year in the last six years with double digit growth. The group’s adjusted earnings per share also showed double-digit increases when measured in South African rand and sterling. A reconciliation of basic earnings per share to adjusted earnings per share is shown in note 8 to the financial statements and, on a statutory basis, basic earnings per share were up 22%.


increase in dividends for the year


The board has proposed a final dividend of 42 US cents to make a total of 58 US cents per share for the year – an increase of 16% on the prior year. This represents a dividend cover of 2.5 times based on adjusted earnings per share, as described above (2007: 2.4 times). The group’s guideline is to achieve dividend cover of between 2.0 and 2.5 times adjusted earnings. The relationship between the growth in dividends and adjusted earnings per share is demonstrated in the chart shown opposite. Details of payment dates and related matters are disclosed in the directors’ report.

Adjusted EPS and Dividend per share in US cents for the years 2005-2008

Acquisitions and disposals

In December 2007, SABMiller plc and Molson Coors Brewing Company announced that they had signed a definitive transaction agreement to combine the US and Puerto Rico operations of their respective subsidiaries, Miller and Coors, in a joint venture to create a stronger, brand-led US brewer in the increasingly competitive US marketplace. We hope to close the transaction, which is subject to US anti-trust clearance, in mid-2008.

In January 2008 the group completed the acquisition of 99.96% of Browar Belgia Sp. z o.o, the fourth largest brewer in Poland.

In February 2008 the group completed the acquisition of Royal Grolsch N.V. in the Netherlands and by 31 March 2008 had acquired a 99.65% shareholding. In addition, our joint venture with Coca-Cola Amatil Limited, Pacific Beverages Pty Limited acquired Bluetongue Brewery Pty Limited (Bluetongue), the Australian premium brewer.

In May 2008, SABMiller announced it had agreed to acquire a 99.84% interest in the Ukrainian brewer CJSC Sarmat. The transaction is subject to approval by the Ukrainian competition authorities and other customary pre-closing conditions.

During the year the group completed the disposals of its soft drinks business in Costa Rica and its juice business in Colombia. The group has also purchased further minority shareholdings in our operating company in Panama.

Our associate in China, CR Snow, has continued to consolidate its position as the country’s largest brewer with the purchase of further breweries. CR Snow completed the disposal of a non-core water business.

Cash flow and investment highlights

The group has a good record of generating cash, as shown in the adjacent chart. Increases in cash generation reflect growth in profitability before interest and tax payments and investment activities.


cash generation measured by EBITDA: revenue

Net cash inflow from operating activities before working capital movements (EBITDA) rose 12% to US$4,518 million from last year’s US$4,031 million. The group’s cash flow generation was again strong as demonstrated by the ratio of EBITDA to revenue (both metrics excluding results of associates) at 21% (2007: 22%). The group maintained its net liability position in working capital but there has been a cash outflow from rising working capital of US$242 million across the group mainly as a result of outflows in Latin America and Europe with higher receivables from the Easter period the most significant factor. As a result cash generated from operations increased by only 6% over the prior year to reach US$4,276 million.

US $2,034m

invested in capital expenditure

The group has continued to invest in the business, and capital expenditure for the year has grown to some US$1,978 million (2007: US$1,191 million) including additional production capacity, new containers and distribution to enable the business to take advantage of the growth in its markets. Capital expenditure as reflected in US dollars has also been increased by the strengthening of certain currencies in key markets against the US dollar. Capital expenditure including the capitalisation of intangible software costs is US$2,034 million (2007: US$1,244 million).

Tax paid has risen by 21% to US$969 million from US$801 million, in excess of profit before tax growth due to timing considerations.

Net cash from operations in US$m for the years 2005-2008

Financial structure and liquidity

The group finances its operations through cash generated by the business and a mixture of short and medium-term bank credit facilities, bank loans, corporate bonds and commercial paper. In this way, the group avoids over-reliance on any particular liquidity source. The group seeks to mitigate the effect of structural currency exposures by borrowing, where cost effective, in the same currency as the functional currency of its main units. The group borrows principally in US dollars, South African rands, euros, Polish zlotys and Colombian pesos at both fixed and floating rates of interest.

Funding structure

Overdraft (485) (187)
Borrowings (9,160) (7,029)
Derivatives (75) (127)
Finance leases (13) (15)
Gross debt (9,733) (7,358)
Cash and cash equivalents 673 481
Net debt (9,060) (6,877)

Maturity of borrowings:
Within one year (2,062) (1,711)
Between one to two years (380) (414)
Between two and five years (3,932) (1,847)
Over five years (3,359) (3,386)

The group also enters into derivative transactions to manage the currency, commodities and interest rate risk arising from its operations and financing activities. It is group policy that no trading in financial instruments is undertaken.

The group’s policy is to borrow (directly or synthetically) in floating rates, reflecting the fact that floating rates are generally lower than fixed rates in the medium term. However, in order to mitigate against the impact of an upward change in interest rates, the extent to which group debt may be in floating rates is restricted to the lower of (a) 75% of consolidated net debt and (b) that amount of net borrowings in floating rates that would, with a 1% increase in interest rates, increase finance costs by an amount equal to (but not more than) 1.2% of EBITDA. This policy is not applied for borrowings arising from recent acquisition activity and inflation linked debt.

Exposure to movements in interest rates in group borrowings is managed through interest rate swaps and forward rate agreements. As at 31 March 2008, 30% of the borrowings were at fixed rates, taking into account interest rate swaps and forward rate agreements (2007: 34%). A 1% move in interest rates would result in a change to finance costs equivalent to a 0.65% (2007: 0.65%) impact on EBITDA (excluding exceptional items).

Gross debt at 31 March 2008, comprising borrowings together with the fair value of derivative assets or liabilities held to manage interest rate and foreign currency risk of borrowings, has increased to US$9,733 million from US$7,358 million at 31 March 2007. Net debt comprising gross debt net of cash and cash equivalents has increased to US$9,060 million from US$6,877 million at 31 March 2007 reflecting payment for the acquisition of Royal Grolsch N.V. (US$1,190 million) and the assumption of its borrowings (US$162 million) and the group’s increased capital expenditure programme and the translation impact resulting from a weaker dollar against most of our trading currencies. An analysis of net debt is provided in note 27b. The group’s gearing (presented as a ratio of debt/equity) has increased to 49.7% from 45.8% at 31 March 2007.

In July 2007, the group’s South African holding company for its South African operations raised R1,600 million (approximately US$230 million) in 5-year notes. The notes, issued under a Domestic Medium Term Note programme, are guaranteed by SABMiller plc and are listed on BESA, the South African Bond Exchange. The net proceeds have been used to repay part of the existing loan facilities of The South African Breweries Ltd.

The average loan maturity in respect of the fixed rate debt portfolio is 3.9 years (2007: 4.7 years). The weighted average interest rate for the total gross debt portfolio at 31 March 2008 was 7.3% (2007: 7.6%) reflecting the currency profile of the debt and movements in rates in the year.

The group uses cash in hand, cash from operations and short-term borrowings to manage its liquidity. As at 31 March 2008, the group had cash and cash equivalent investments of US$673 million (2007: US$481 million).

Our strong financial structure gives us adequate resources to facilitate ongoing business along with medium-term flexibility to invest in appropriate growth opportunities and manage the balance sheet. As a result of the Grolsch acquisition, the group has reduced committed undrawn borrowing facilities from US$3,426 million at 31 March 2007 to US$1,222 million at 31 March 2008. Subsequent to the year end, in order to provide supplementary headroom, the group entered into an additional US$1,000 million committed facility maturing June 2009, and the refinancing of the US$600 million Miller bonds, maturing August 2008, has been secured with additional three year committed bank facilities.

Our strong financial structure gives us adequate resources to facilitate ongoing business along with medium-term flexibility to invest in appropriate growth opportunities and manage the balance sheet.

Balance sheet profile

As outlined above, the group has continued to enter new markets to strengthen its positions through additional acquisitions and investments. These transactions have altered the balance sheet profile of the group and details are given in note 28 to the financial statements.

Total assets increased to US$35,813 million from the prior year’s US$28,736 million. There was also an increase of US$104 million in equity interests attributable to minorities.

Goodwill increased by US$2,350 million, reflecting acquisitions, primarily in relation to Royal Grolsch N.V. and as a result of foreign exchange movements on goodwill denominated in currencies other than the US dollar (US$1,406 million).

Intangible assets increased by US$482 million primarily reflecting foreign exchange movements on assets denominated in currencies other than the US dollar. A preliminary purchase price allocation for Royal Grolsch was undertaken in March 2008 following its acquisition in February 2008 and this did not include the recognition of all potential intangible assets. This exercise will be completed in the next financial year and will probably involve the recognition of new intangible assets.

Shareholder value

The value that a company returns to its owners is best measured by total shareholder return (TSR) – a combination of share price appreciation and dividends returned over the medium to long term. Recent measures of shareholder return have been affected by the volatility of equity indices. Nevertheless, since SABMiller moved its primary listing to the London Stock Exchange in March 1999, the FTSE 100 has produced a TSR of 23% to March 2008 (to 31 March 2007: 31%), while the group has delivered a TSR of 220% in sterling terms over the same period (to 31 March 2007: 217%).

Accounting policies and definitions

The principal accounting policies used by the group are shown as note 1 to the financial statements. Note 1 also includes recent accounting developments, none of which is expected to have a material impact on the group.

In addition, note 1 details the areas where a high degree of judgement has been applied in the selection of a policy, an assumption or estimates used. These relate to the assumptions used in impairment tests of carrying values for goodwill and intangible assets; estimates of useful economic lives and residual values for intangible assets, property, plant and equipment; assumptions required for the calculation of post-retirement benefit obligations; and judgements in relation to provision for taxes where the tax treatment cannot be fully determined until a formal resolution has been reached with the relevant tax authority.

The group’s operating results on a segmental basis are set out in the segmental analysis of operations, and the disclosures are in accordance with the basis on which the businesses are managed and according to the differing risk and reward profiles.

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 IFRS but volumes are excluded. Although contract brewing volumes are excluded from total volumes, turnover from contract brewing is included within group turnover.

Translation differences on non-dollar assets and liabilities are recognised in the statement of recognised income and expense. It is not the group’s policy to hedge foreign currency earnings and their translation is made at weighted (by monthly revenue) average rates.

Malcolm Wyman

Chief Financial Officer

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