Canada: Sleeman releases first quarter 2006 financial results

Sleeman Breweries Ltd. released on May 11 its financial results for the first quarter ended April 1, 2006.

"I am pleased with the fact that our core volume growth strategies allowed us to deliver solid volume gains and grow our total revenues in the face of the expected difficult pricing conditions we experienced in the quarter," said John Sleeman, Chairman & CEO. "In addition, our focus on cost controls continued to bear fruit as we reduced our ongoing SG&A expenses and maintained our average cost of goods sold per hectolitre at the prior year's levels."

The Company successfully installed the sterile filtration equipment required to produce Sleeman Original Draught at its Guelph facility and now produces all of its eastern requirements there. This change in production source will generate significant freight savings for the Company in the future.

As previously announced, the Company implemented a second reorganization of its workforce during the quarter. This reorganization is expected to generate annual cost savings of $2.7 million.

In Ontario, the Company successfully executed its value brand growth strategy generating volume growth in excess of 30% in the quarter.

As of January 1, Sleeman Breweries Ltd. began selling and distributing the popular FEMSA brands Sol and Dos Equis across Canada.

The Company introduced Okanagan Spring India Pale Ale to premium beer drinkers in British Columbia in the quarter.

Mr. Sleeman continued, "We will continue to execute the volume growth and cost control strategies we achieved in the first quarter of 2006 as we realize the benefits of the two announced reorganizations and various capital projects completed recently. We believe that we are on the correct path to return Sleeman to its historical volume and earnings trends in the face of continuing competitive challenges."

Net revenue grew to $40.6 million in the first quarter of 2006 from $39.8 million in the prior year. This represented a 2% increase. Total produced and sold volumes were up by 9% over the first quarter of 2005 to 266,000 hectolitres. Sapporo volumes increased 7% and core volumes increased 10% nationally. The industry increase for the quarter was estimated to be approximately 3%.

Net revenue slipped by $12 per hectolitre. The shift in product mix to a higher proportion of value category volumes caused approximately one-half of the reduction in net revenue per hectolitre. The balance of the reduction was evenly split between foreign exchange rate changes and the lower net prices realized in the current quarter on its premium brand sales in the Quebec, Ontario and Alberta markets.

Cost of goods sold increased by 10% due primarily to the 9% increase in hectolitres produced and sold. Measured on a per hectolitre produced and sold basis, cost of goods sold were consistent with the prior year as the beneficial impacts of plant efficiency projects across the country and the favourable impact of exchange rate changes on US dollar denominated purchases offset the inflationary impacts of various commodity cost increases.

Excluding the impact of the non-recurring reorganization expenses recorded in the current quarter ($2 million) and the $0.9 million of insurance settlement receipts netted against SG&A expenses in the prior year's first quarter, SG&A expenses decreased by $0.5 million. The beneficial impact of the August 2005 reorganization, lower realized costs related to certain expenses accrued at the end of 2005 and cost control measures allowed the Company to achieve this result in the current quarter. Reported selling, general and administrative (SG&A) expenses increased in the quarter by $2.4 million to $15.8 ($59 per hectolitre).

Depreciation and amortization expenses increased marginally by $0.1 million as the Company reduced capital expenditures in the past year.

Interest expense in the first quarter remained consistent with the first quarter of 2005 as the impact of higher prevailing interest rates in the current quarter were offset by the impact of lower net borrowings.

The effective tax rate in the first quarter of 2006 was 36%, compared to an effective tax rate of 35% in the first quarter of 2005.

The Company had a bank indebtedness balance of $11.3 million compared to an indebtedness balance of $ 9.7 million as at December 31, 2005. This is a 364 day committed operating loan facility with a $20 million limit which expired on April 26, 2006. The facility was extended subsequent to the end of the quarter for another year to April 25, 2007 on substantially the same terms and conditions.

Accounts receivable decreased by $3.3 million from the level reported at the end of fiscal 2005 due primarily to the fact that the Company generated lower revenues due to seasonal fluctuations.

The Company's inventories increased by $1.7 million from December 31, 2005 levels as we built inventories in advance of the peak summer selling season, a trend that is consistent with prior years.

Prepaid expenses decreased by $1.3 million from the level reported at December 31, 2005. This decrease was attributable to a reduced can purchase prepayment balance partially offset by sales and marketing expenses prepaid in the current quarter.

Property, plant and equipment decreased by $0.7 million from the level reported at December 31, 2005 as depreciation charges exceeded capital expenditures in the quarter while intangible assets decreased by $0.4 million as amortization charges exceeded expenditures in the quarter.

Accounts payable increased by $1.2 million from the level at year end fiscal 2005 due to the timing of purchases and subsequent payments.

Long term debt levels decreased by $5.9 million as a result of debt repayments made during the first quarter of 2006. Subsequent to the end of the current quarter, the "Evergreen facility" (Facility B as described in the notes to the Company's 2005 audited financial statements) was renewed for a further one year period.

The company reduced its combined long term debt and bank indebtedness by $4.4 million compared to a decrease in total borrowings of $2.4 million in the first quarter last year. This improvement stemmed principally from favourable working capital changes in the current quarter.

Operating cash flow for the quarter increased by $2 million compared to the prior year as the current quarter's $4.8 million net improvement in working capital cash flow exceeded the impact of the decline in earnings in the period.

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 implementing various core volume growth strategies and 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 terms of core volume growth, the Company is focused on continuing its 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 and the Company will compete more aggressively in those markets by introducing new products and sales and marketing programs.

In 2006, the Company will again strive to reduce its average cost of goods sold per hectolitre from the level recorded in 2005 of $84/hl while focusing on controlling SG&A expenses. The Company expects to see the beneficial impact 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.

Sleeman Breweries Ltd. has sufficient production capacity to meet its expected production requirements for the next 24 months. The Canadian Brewer plans to reduce its capital expenditures in 2006 to $7.5 million. This amount is significantly lower than prior years' capital spending levels and will be used to improve efficiencies at its Guelph, Chambly and Vernon breweries.

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 has two reportable segments: Eastern Canadian operations and Western Canadian operations. Sleeman Breweries Ltd.’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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