UK: Scottish & Newcastle announced encouraging start of the year

“After a robust set of results for 2006, Scottish & Newcastle has had an encouraging start to the year, with progress in all divisions, through our continuing strategy of developing a portfolio of brands across our markets worldwide”, Sir Brian Stewart, S&N’s Chairman, said in a statement at Annual General Meeting, according to company’s news room, April 26.

Brands and innovation continue to be strong drivers for growth, with successes in individual markets now being applied to other countries. We have continued to develop the Foster’s brand after acquiring the trademark last year, with a newly packaged relaunch for our international markets including Russia. In cider, we are introducing our Strongbow and Bulmers brands into a number of European markets.

This year is the first full year, post-merger, where Baltika is operating as a unified business across the Russian Federation – an integrated brand portfolio with an unrivalled operational footprint and the clear market leader producing Russia’s leading consumer brand.

As announced at our annual results in February, we are committed to delivering £50m in cost savings over three years across our wholly-owned European businesses. However, like all businesses, S&N is not immune to cost pressures associated with input price inflation.

UK

The beer market has had a slow start in the first quarter with an upturn during March due to favourable weather. Our three main beer brands – Foster’s, Kronenbourg 1664 and John Smith’s – continue to outperform the market, taking share. However, the smoking ban in England, which starts in July, remains a challenge.

In cider, our leading brand Strongbow has enjoyed a positive start to the year continuing its momentum achieved over the last three years since acquisition. Our premium cider portfolio, with Bulmers Original, Strongbow Sirrus and Jacques, is taking share of the “over-ice” segment. Bulmers Original is in around one third of on-trade outlets and commands listings in all of the multiple off-trade retailers.

KNDL, our distribution joint venture with Kuehne+Nagel, is developing a strong pipeline of new business, clearly demonstrating the success of our partnership strategy.

International

Our International division continues to grow branded beers in their respective markets, particularly Sagres in Portugal and Newcastle Brown Ale in the US.

French beer market volumes are encouraging on the back of good weather with our core brands performing ahead of the market. In the second year of the Loi Dutreil, we have successfully completed the latest round of pricing negotiations with the off-trade, ensuring continued strong performance of our brands. Despite overall strength in the on-trade, trading in the wholesale business is challenging and remains a focus going forward.
In India, our joint venture with United Breweries has the top two brands in the market with Kingfisher Mild and Strong and we continue to see double digit volume growth.

Our joint venture in China, Chongqing Breweries Co Ltd (CBC), reported its full year results earlier this month. Volumes grew by 29% in the 12 months to December 2006 to further establish its position as the No 1 brewer in Western China. Plans continue for Chongqing Beer Group, our partner and co-investor in CBC, to merge its brewery assets into CBC later this year. As previously stated, it is S&N’s intention to rebuild its stake in CBC to the original 19.5%.

Earlier this year we announced a new joint venture with Vinataba to build a greenfield brewery in the dynamic Vietnamese beer market. The management team is now in place.

Baltic Beverages Holding (BBH)

The results for the first quarter of 2007 will be announced on May 9. The full-year results for 2006 reported beer volume growth of 11%, and in Russia volume grew ahead of the market, resulting in 36.4% share. Operating profit grew by 39%.

Earlier this month Baltika announced it will double the planned capacity of its new brewery in Novosibirsk, Western Siberia in order to meet demand in a growing market. In addition, whilst being the smallest quarter, the Russian market has benefited from favourably mild weather in Q1 compared with the previous year. As a result, we believe the Russian market will exceed our previously guided range of expectations.

Outlook

Trading remains robust in our Western European markets which are highly cash generative; BBH, driven by the newly-merged Baltika, is delivering dynamic growth; and our developing markets in Asia continue to show real potential. Whilst financial expenses will be adversely affected by increasing interest rates and higher levels of investment in BBH, we remain confident that performance for the full year will meet expectations for the group as a whole.

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