Canada: Sleeman reports fourth quarter and fiscal 2005 results

Sleeman Breweries Ltd. Released on March 2 its financial results for the fourth quarter and fiscal year ended December 31, 2005.

Fourth Quarter Financial Highlights

• Net revenue was $49.6 million compared to $53.8 million for the same period last year.

• Earnings before interest, taxes, depreciation and amortization (EBITDA) were $5.7 million compared to $9.7 million for the same quarter last year.

• Net earnings were $0.5 million or $0.03 cents per share, compared to $3.9 million in the fourth quarter of 2004.

“The fourth quarter of 2005 was a very challenging period for Sleeman due to the intense price competition the Company faced in all of its key Canadian markets, especially Quebec,” said John Sleeman, Chairman and CEO. “Our volumes and market share held up quite well in this environment. However, our revenue per hectolitre and profitability were impacted as we offered limited time offer discounts to remain competitive with those offered by the large national brewers and the smaller regional brewers who benefit from provincial tax subsidies. I am pleased to say that our cost reduction efforts continue to generate savings as we reduced our average cost of goods sold by $1 per hectoliter in the quarter.”


Twelve Month Financial Review
• Net revenue was $206.7 million compared to $211.5 million in the prior year.
• EBITDA was $29.1 million compared to $35.9 million in the 2004 fiscal year.
• Net income for the year was $8.1 million, or $0.48 per share on a diluted basis, compared to $14.4 million, or $0.87 per share on a diluted basis in 2004.
• Normalized diluted earnings per share were $0.60 for 2005 compared to $0.90 in 2004.

Operational Highlights
• Continuing with the highly successful John Sleeman Presents line of specialty beers, the Company introduced John Sleeman Presents India Pale Ale nationally in the quarter.
• Consistent with Unibroue’s historical position as an innovative brewer of premium beers, Sleeman introduced two new Unibroue product offerings into the Quebec market in the quarter, Cerezo and San Antonio.
• In Western Canada, the Company introduced Okanagan Spring Winter Collections and Okanagan Spring Light to further solidify this brand’s position as Western Canada’s leading craft premium beer.
• The Company introduced the “heritage series” of Sleeman packages for the US market to support Sleeman’s position as Canada’s Premium Beer in the large and growing US import beer market. The “heritage series” consists of Sleeman Cream Ale, Original Dark Amber, Porter and India Pale Ale and are available in embossed amber bottles in open six pack carrier cases preferred by US craft beer drinkers.

Sleeman said in a press release: “Today, we are announcing a further reorganization across the organization aimed at reducing the Company’s costs by approximately $2.7 million annually; $1.7 million for the current fiscal year. The number of full time positions will be reduced by approximately 40 as a result of this initiative. A key element of this reorganization, will be the consolidation of the Ontario, Quebec and Maritimes provincial businesses under one Managing Director, Dan Fox. Sleeman will record a one-time charge of $2.0 million in the first quarter of 2006 in connection with this reorganization.

Mr. Sleeman continued, “The reorganization announced today further reflects the Company’s determination to reduce its cost structure. We will reduce our production, distribution and selling, general and administrative expenses to maintain our competitive position in response to continued pricing activity. We will also introduce innovative products and sales and marketing campaigns in the coming months to return the Company to its historical growth rates.”

Operating Results
Quarterly Comparison
The current fiscal quarter had 13 weeks while the prior year’s fiscal quarter had 14 weeks. This represented a 7% reduction in sales days in the current quarter and explained a significant portion of the decline in sales volumes when compared to the prior year’s fourth quarter.

NET REVENUE
Net revenue decreased to $49.6 million in the current quarter from $53.8 million in the prior year’s quarter. The $12 per hectolitre decline in the current quarter, was the result of lower net prices on its value brands in the Quebec, Ontario and Alberta markets and on its premium brands in Quebec and Ontario. Produced and sold volumes declined 1% to 309,000 hectolitres. Sapporo volumes increased 3% to 51,000 hectolitres. Core volumes decreased 2% while industry volumes were flat in the quarter.

In Eastern Canada, comparable net revenue decreased by 7%. The 3% increase in core volumes was more than offset by the impact of the shift to “floor priced” value beer in Ontario and the impact of lower net pricing in the Ontario and Quebec premium categories.

In Western Canada, comparable net revenue was down 8%. Core volumes declined by 10% as value brand sales continued to be affected by tax subsidy induced competitor pricing and provincial government bans of high alcohol large container packages in major urban centres. Net revenue per hectolitre increased due to the continuing mix shift in favour of premium brand sales.

COST OF GOODS SOLD
Comparable cost of goods sold decreased by 2% ($0.6 million) due primarily to a 1% decrease in produced and sold volumes and the continuing improvement in cost performance at the Company’s Guelph brewery. Comparable cost of goods sold in Eastern Canada decreased by $7 per hectolitre to $66 per hectolitre due to the aforementioned efficiencies in the Guelph facility. In Western Canada, comparable cost of goods sold increased by $16 per hectolitre due to the core volume decline and the resulting inefficiency of running the Vernon brewery at reduced production volumes.

OTHER OPERATING ITEMS
Selling, general and administrative (SG&A) expenses increased in the current quarter by $0.5 million due largely to the effects of higher premium category sales and marketing costs in British Columbia. SG&A expenses in Eastern Canada were consistent with the prior year’s fourth quarter level of $14.8 million. Segment management is strongly focused on reducing costs in the face of continuing price competition in both the premium and value categories.

In Western Canada, SG&A expenses increased by $0.5 million. Excluding the increase in premium category marketing costs in the quarter noted above, SG&A expenses in this segment were consistent with those in the prior year. This segment’s management also focused on controlling costs in this area in the face of declining value brand volumes and margins.

Depreciation and amortization expense increased by $0.2 million due primarily to depreciation charges on the production assets acquired in the preceding 12 months. Interest expense increased $0.5 million in the quarter. The Company recorded an additional interest expense of $0.7 million in the quarter for the impact of the increase in the spread on its Syndicated Loan Facilities B and C for the 2005 fiscal year. The spread on these facilities is subject to variation based on the Company’s ratio of funded debt to EBITDA for the period. Excluding the impact of this charge, interest expense decreased by $0.2 million compared to the prior year’s fourth quarter due to lower net borrowings in the current quarter.

The provision for income taxes decreased by $1.3 million principally as a result of the decrease in pretax earnings in the fourth quarter of 2005 compared to the fourth quarter of 2004. The reduction in the provision for income taxes due to the decrease in pretax earnings was partially offset by the increase in the effective tax rate in the current quarter to 47% compared to an effective tax rate of 32% in the fourth quarter of 2004. The Company’s effective tax rate for the quarter increased due to the impact of a change in Quebec’s substantively enacted tax rate and the impact of tax accounting differences on a reduced level of income before taxes.

Outlook
The Company expects that the intense price competition it has faced in key markets in the past two years will continue in 2006. The Company remains committed to returning to annual volume, revenue and profit growth in this competitive environment. Plans include improving the Company’s operations and cost structures at all of its locations to ensure that it can compete profitably regardless of competitor pricing activities across Canada. In 2006, the Company will again strive to reduce its average cost of goods sold per hectolitre and control its SG&A.

The Company expects to see the beneficial impacts on earnings of the March 2006 restructuring, various cost management programs and significant efficiency related capital expenditures including the installation of the sterile filtration system in Guelph for production of Sleeman Original Draught commencing in the second quarter of 2006.

Given this fact and the pricing environment mentioned above, management expects earnings in the first quarter of 2006 to be significantly lower than earnings reported in the first quarter of 2005. This assessment is based on management’s expectation that the first quarter of last year benefited from less severe industry price discounting than what is expected for the first quarter of 2006 and last year’s first quarter benefited from $0.9 million of insurance settlements which will
not recur in the first quarter of 2006.

The Company is also focused on continuing premium volume growth. It will introduce new and innovative products and continue to invest in its premium brands with distinctive sales and marketing programs in its key markets in Ontario, Quebec and Western Canada. In addition, Sleeman is a significant competitor in the value category of the Canadian beer market as a result of its high quality and well known stable of value brands. This category is growing and profitable in certain markets, therefore the Company will compete much more aggressively in those markets by introducing new products and sales and marketing programs to increase its value brand sales volumes and profits

The Company expects its depreciation and amortization and interest expenses for 2006 to be marginally higher than those amounts reported for the 2005 fiscal year. The Company anticipates its effective income tax rate for 2006 will be approximately 36%.

In Eastern Canada, the Company will focus on reducing costs as it expects a continuation of the highly competitive market conditions its premium and value brands have faced in the past 18 months. Continued price discounting also implies there will be limited opportunities for revenue growth from price increases. As such, revenue growth in Ontario will likely come from market share growth on the sale of new premium and value products like Sleeman Original Draught, “John Sleeman Presents”, Red Bull and Maclays. In Quebec, Sleeman is now the second largest seller of premium products. We will leverage this position with retailers and consumers to increase our premium brand sales. We will also drive premium brand sales with the full year sales of our recently introduced new Unibroue brands: Chambly Noire, Ephemere Raspberry, San Antonio and Cerezo. The Company expects the continued growth of its Sleeman and Unibroue products in the US market. The Company continues to believe innovation, speed to market and the quality of its products are key advantages and the resources of the Company will continue to be directed to realizing the benefits in these areas.

In Western Canada, we expect price discounting by competitors to continue, and as a result, we will reduce operating and SG&A costs while focusing on growing and supporting our premium brands. With strong regional brands in Shaftebury and Okanagan Spring, our premium portfolio provides a solid base for product innovation that will generate increased sales. 50% of sales occur on-premise in this segment, therefore we expect our premium on-premise business will benefit from the return of NHL hockey for all of 2006. Meanwhile, the Company expects ongoing challenges for its Western Canadian value beer portfolio as a result of the continued deep discounting in this category by small brewery competitors in provinces where there are no minimum beer prices and these competitors are supported by favourable provincial tax treatments.

The Company has capacity availability for the next 24-36 months, given the expansions and process improvements at its Guelph, Vernon and Chambly breweries in 2005. The Company anticipates reducing its capital expenditures in 2006 to approximately $9 million.

Sleeman Breweries Ltd. is the leading brewer and distributor of premium beer in Canada and the third largest brewing company nation-wide. The Company has supplemented its core Sleeman brands, which are available in every province, with a family of exceptional regional brands. These include Okanagan Spring and Shaftebury in British Columbia and Alberta, Upper Canada in Ontario, Unibroue and Seigneuriale in Quebec and Maritime Beer in Atlantic Canada. Sleeman entered the rapidly growing value price category in 1999 by acquiring the Stroh portfolio of brands in Canada. The company markets and/or distributes world-class imported products such as Guinness, Grolsch, Samuel Adams, Scottish & Newcastle (including Bulmers Strongbow English Cider), Sol, Sapporo and Pilsner Urquell, and provides contract production for Japan’s Sapporo Breweries’ products. The Company’s products are also available in selected international markets. Please visit our website at www.sleeman.com.

Sleeman Breweries Ltd. is the largest premium brewery in Canada, producing and marketing several unique brands of beer. The Company operates breweries in Guelph, Ontario; Chambly, Quebec; Dartmouth, Nova Scotia; Vernon, British Columbia and LaCrosse, Wisconsin. The Company’s reportable segments represent the aggregation of strategic business units that produce and sell beer in distinct geographic markets. They are managed separately because each business operates in different market environments in terms of regulatory regimes, customer preferences and sales and distribution channels.

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