Denmark: Royal Unibrew revealed its financial results for Q1 2006

Royal Unibrew A/S, one of the largest Danish beer companies, announced on April 27 that the company’s Supervisory Board of Royal Unibrew A/S has considered and adopted the Q1 Report at 31 March 2006. The company posted:

HIGHLIGHTS (FOR Q1 2006)
• Loss before tax amounting to DKK 52.4 million
• Consolidated loss amounting to DKK 37.7 million
• Considerable marketing expenses, due to among others the introduction of “Egekilde”
• Net revenue up by 3% to DKK 648 million
• Free cash flow amounting to a negative DKK 76.9 million compared to a negative DKK 75.9 million in
2005
• Unchanged expectations of consolidated profit for the full year of DKK 310‐350 million

FINANCIAL HIGHLIGHTS AND KEY RATIOS
The Q1 Report 2006 has been prepared under the measurement and recognition provisions of IFRS. Compared to the accounting policies applied in the Annual Report for 2005, the policy for valuation of inventories of serving equipment has been changed. The change affects consolidated profit/(loss) in Q1 2006 and 2005 by a negative DKK 0.8 million and a negative DKK 0.3 million, respectively. Financial highlights and key ratios for 2004, 2005 and 2006 have been restated to reflect the changed accounting policies, whereas financial highlights and key ratios for 2002‐2003 have been stated under the accounting policies applied in the Annual Report for 2004.

The primary activities of Royal Unibrew are to market, sell, distribute and produce quality beverages focusing on branded products primarily within beer, malt and soft drinks. The Group’s products are sold in some 65 markets with special focus on Northern Europe (the Nordic countries, the Baltic countries, Northern Germany and Poland), Italy, Canada and the international malt drinks markets (the Caribbean, Africa and the UK). Royal Unibrew comprises the Albani, Ceres, Faxe and Maribo breweries in Denmark, Kalnapilis and Vilniaus Tauras in Lithuania as well as the soft drinks producer SIA “Cido Partikas Grupa” in Latvia. The Latvian brewery Lacplesa Alus A/S has been included in Royal Unibrew as of 1 February 2005, whereas the Polish breweries Brok and Strzelec through the subsidiary Royal Unibrew Polska Sp. z.o.o. have been included as of 26 April 2005.

It is the vision of Royal Unibrew to develop the Group with increasing profitability as being among the leading providers of beverages in Northern Europe and to develop profitable export markets outside this region.

The acquisition of the Brok and Strzelec breweries, which is an element in MACH II, the Company’s new strategic platform, secures Royal Unibrew four regional beer brands and two breweries in Poland as well as a 48% holding of shares of “Perla Browary Lubelskie S.A.”, which has a strong base in the Lublin area. Following the share buy‐back programme realised in 2005 and 2006, the Company holds 298,645 treasury shares (equal to some 4.7% of the Company’s share capital). At the coming Annual General Meeting, the Supervisory Board will propose that 190,000 shares be used to reduce the Company’s share capital. The remaining shares held are expected to be used to cover the Company’s share option scheme.

RESULTS FOR Q1 2006
In Q1 2006, Royal Unibrew’s beer, malt and soft drinks sales amounted to 1.2 million hectolitres, which is an increase of 14% over the same period in 2005. In general, Q1 in Northern Europe was characterised of unfavourable weather, which affected both demand and distribution. The increasing sales are partly due to the Brok‐Strzelec breweries in Poland acquired in April 2005 (accounting for some 6 percentage points of the increase), partly to organic sales growth of some 8 percentage points, primarily derived from Latvia, Germany, Lithuania as well as the malt drinks markets in the Caribbean and Africa.

Total net revenue of the Group increased by some 3% in Q1 aggregating DKK 648 million. The consolidation with Brok‐Strzelec in Poland accounted for 2.7 percentage points of the increase, whereas organic growth accounted for 0.7 percentage point. The development in the average net selling price achieved per hectolitre was primarily affected by partly the relative sales increase in Eastern Europe and partly increased soft drinks sales. Furthermore, declining revenue from goods for resale in the Caribbean (not included in volumes) had a negative effect.

Gross margin for Q1 was 44.9% compared to 43.9% in the same period of last year. The gross margin increase was primarily caused by lower production costs due to the process optimisation activities implemented. The Group’s sales and distribution expenses increased in Q1 by 16% over 2005. Almost half of the total increase of DKK 39.1 million was due to increasing marketing expenses primarily relating to the introduction of the ”Egekilde” mineral water brand and continued efforts relating to the Group’s key brands: Royal, Ceres Strong Ale, Kalnapilis, Cido and Faxe (export markets). Furthermore, sales and distribution expenses were affected partly by the acquisition of Brok‐Strezelec and partly by the transfer of a number of sales people from Royal Unibrew’s stores in Denmark to direct employment with the Group.

Administrative expenses increased by 16% in Q1, partly due to the activities acquired in Poland and partly due to increased expenses in relation to the implementation of the MACH II strategy by way of general organisational strengthening and increased consulting fees.

Operating loss (EBIT) amounted to DKK 35.5 million compared to a loss of DKK 5.9 million in Q1 2005, which is primarily due to the above‐mentioned increasing sales and distribution expenses as well as the effect of the consolidation of Brok‐Strzelec. The development in ”income from investments” is primarily due to the profit development of Hansa Borg Bryggerierne ASA.

The development in net interest expenses was affected by partly non‐recurring income from securities achieved in 2005 and partly the Group’s increased indebtedness in accordance with the MACH II Strategic Plan and relating to the acquisitions and share buy‐backs made.

The loss before tax amounted to DKK 52.4 million compared to DKK 17.4 million in the corresponding period of last year, whereas the consolidated loss (after tax) amounted to DKK 37.7 million compared to a loss of DKK 12.2 million last year. The Q1 performance was, based on lower than expected net revenue, in accordance with plans.

It is estimated that total beer sales in Denmark declined by slightly below 3% in Q1 2006 compared to the same period of last year. The market for soft drinks sales in Denmark is estimated to have declined by 2% from the same period of 2005. Royal Unibrew kept its market share on beer and reached a considerable increase in its soft drinks share.

In Italy developments and the market were affected by duty increases in both 2005 and 2006. In 2005 the duty increase was effected at the beginning of Q2, which meant high revenue and sales in Q1 2005, whereas in 2006 the increase was effected at 1 January resulting in low volumes in Q1 2006. The total German market saw increasing sales, whereas revenue stagnated compared to Q1 2005. This development is due to a shift of cross‐border trade towards products in lower price segments. Malt drinks sales in the UK market developed satisfactorily.

It is estimated that Kalnapilio‐Tauro Grupe in Lithuania won market shares in Q1 2006 in an increasing local beer market with particularly low‐price segments showing growth. In Latvia both revenue and sales increased considerably driven by growth in both the Latvian market and export markets.

Poland saw very strongly increasing sales and revenue in Q1 as Brok‐Strzelec was not included in Q1 2005. Intensive efforts were directed at integration and restructuring of the Polish company, and the profit achieved for Q1 was below expectations.

Rest of the world

Net revenue in the region increased less than sales in Q1 2006 compared to 2005 primarily due to reduced revenue from products distributed for a third party that are not included in the Group’s statements of volumes. Generally, the underlying development in our malt drinks markets was satisfactory.

BALANCE SHEET AND CASH FLOW STATEMENT

The equity of Royal Unibrew amounted to DKK 1,101 million at 31 March 2006 equal to an equity ratio of 35.7%. Free cash flow for the period amounted to a negative DKK 77 million compared to a negative DKK 76 million in 2005. Net investments in property, plant and equipment amounted to DKK 36 million.

FUTURE CAPITAL STRUCTURE
With a view to optimising Royal Unibrew’s weighted average cost of capital (WACC) to increase shareholders’ return, it has been decided to adjust the Group’s capital structure by increasing its interestbearing debt to the effect that by the end of 2007 interest‐bearing debt represents approximately three times the Group’s EBITDA (cf Announcement No BG02/2005 of 24 February 2005). At the end of 2005, interest‐bearing debt was 2 X EBITDA. The further adjustment of capital structure is expected to be effected partly through realisation of the MACH II strategy and partly through repurchase of shares for treasury.

EXPECTATIONS TO THE 2006 FINANCIAL STATEMENTS
As mentioned above, the results achieved in Q1 were as expected, and no other events have occurred which could give rise to changing the expectations stated in the Annual Report for 2005; accordingly, the Group is still expected to show a profit before tax for 2006 of DKK 310‐350 million.

STATEMENTS ABOUT THE FUTURE
The statements about the future made in the Q1 Report 2006 reflect Management’s expectations in respect of future events and financial results, as well as of economic trends in key markets and developments in international money, foreign exchange and interest rate markets. Statements about the future will inherently involve uncertainty and may be affected by – in addition to global economic conditions ‐ marketdriven price reductions, market acceptance of new products, packaging and container types, unforeseen termination of working relationships and changes to regulatory aspects (taxes, environment, packaging). The actual results may therefore deviate from the expectations stated. Royal Unibrew is a party to a limited number of legal actions. These legal actions are not expected to have any material impact on the financial position of Royal Unibrew.

MANAGEMENT’S STATEMENT ON THE REPORT
The Executive and Supervisory Boards have today considered and adopted the Q1 Report of Royal Unibrew A/S at 31 March 2006. The Q1 Report was prepared under the measurement and recognition provisions of IFRS as well as in accordance with the general Danish financial reporting requirements governing listed companies. We consider the accounting policies applied appropriate. In our opinion, the Q1 Report gives a true and fair view of the financial position and of the results of operations and cash flows of the Group.

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