Canada: Sleeman Breweries Ltd. net earnings increased 41% in 2Q 2006

Sleeman Breweries Ltd. released August 10 its financial results for the second quarter ended July 1, 2006.

Net revenue grew to $57.8 million in the second quarter of 2006 from $57.4 million in the prior year (all amounts in CA& unless otherwise stated). This represented a 1% increase. Total produced and sold volumes were up by 7% over the second quarter of 2005 to 361,000 hectolitres. Sapporo volumes increased 9% and core volumes increased 7% nationally. This volume increase outpaced the industry increase, for the quarter, estimated to be 2%.

Premium volumes declined by 2% in the quarter due mainly to the fact that the current quarter did not benefit from Easter holiday sales like last year's second quarter. Value brand volumes grew by 17% as the Company focused on growing value brand sales in the Ontario and Quebec markets. This growth was realized through effective sales and marketing support at existing spending levels.

Net revenue declined by $11 per hectolitre. The planned 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 a result of lower net prices realized on core volume sales in the Quebec, Ontario and Alberta markets.

In Eastern Canada, net revenue increased by 1%. An 11% increase in core volumes combined with the increase in Sapporo volumes generated increased net revenues which were partially offset by the increased proportion of value category sales and the impact of lower net pricing in Quebec on premium brand sales.

In Western Canada, net revenue remained consistent with the prior year's quarter despite a 1% decrease in core volumes. Premium brand volume increases were more than offset by value brand volume declines in the quarter.

"In setting the course for the future after a very challenging 2005, Sleeman implemented strategies to achieve strong core volume growth, contain costs of goods sold and significantly reduce SG&A expenses," said John Sleeman, Chairman & CEO. "I am proud to say our employees delivered on all of these fronts during the current quarter."

In August 2006, the Company introduced new Sleeman Light, a smooth easy-drinking beer created to provide a premium alternative for those who like to drink light beer. The Western segment launched Sleeman Summer Selections and OSB Summer Collections packs to give consumers opportunities to sample the Company's distinct premium beers. The Company upgraded the can line, at its Vernon facility, to meet the continuing growth in 473ml can sales in Western Canada.

Mr. Sleeman continued, "We are confident that the second quarter of 2006 marked the turning point for Sleeman as we execute the strategies to return the Company to sustainable profit growth. We will continue to focus on these strategies as we strive to deliver continuing improvements in our volume, operating and financial performance."

Regarding the strategic review that Sleeman is undertaking, the process continues, and the Company will make a public announcement at the appropriate time.

Consistent with the first quarter of the year, 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 input cost increases.

Cost of goods sold in Eastern Canada increased by $3 per hectolitre to $81 due to the effects of the increased production at the Chambly, Quebec and Dartmouth, Nova Scotia breweries, where costs are higher, compared to the second quarter of last year. The significant increase in sales volumes necessitated the increase in production at these breweries.

In Western Canada, cost of goods sold decreased by $5 per hectolitre due to continued improvements in Vernon plant efficiencies.

SG&A expenses decreased by $3.4 million in the current quarter ($51 per hectolitre) compared to the second quarter of 2005 ($65 per hectolitre). The current quarter SG&A expenses included $0.4 million of non-recurring strategic review costs while the second quarter of last year included $0.4 million of non-recurring legal settlement costs. Consistent with management's expectation, the beneficial impacts of the two restructurings announced in the past 12 months contributed nearly one-third to the expense amount reduction, with the remaining decrease coming from sales and marketing program reductions.

In Eastern Canada, SG&A expenses decreased by $2.9 million to $13.4 million as management focused on reducing sales, marketing and administrative costs.

Excluding $0.4 million of transaction expenses in 2006 and $0.4 million of legal settlement costs in 2005, Western Canadian SG&A expenses decreased marginally by $0.6 million to $4.5 million.

Depreciation and amortization expenses were consistent with the amount recorded in the prior year's second quarter.

Interest expense in the second quarter remained consistent with the second 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 of 35% in the second quarter of 2006 was consistent with rate recorded in the second quarter of 2005.

Year to Date Comparison

Net revenue of $98.4 million for the period was 1% higher than the $97.1 million recorded in the first six months of 2005. Produced and sold volumes totalled 627,000 hectolitres in the period, as compared to 580,000 in the prior year. Core volumes increased by 8% (39,000 hectolitres) while Sapporo volumes also increased by 8% (8,000 hectolitres).

In terms of core volumes, there was a mix shift to lower priced value product sales in 2006. As part of the Company's stated strategy, six month value brand sales volumes increased to 51% of the Company's core sales volumes from 48% in the prior year's six month period. This core volume value category shift combined with lower net pricing realized on the sale of value products in Ontario and Alberta and the sale of premium products in Quebec contributed to the reduced per hectolitre amounts year-over-year.

Cost of goods sold, on a per hectolitre basis was unchanged compared to the prior year, increased 9% to $52.1 million for the period, up from $48.0 million in 2005 due to the 8% increase in produced and sold volumes.

Selling, general and administrative (SG&A) expenses decreased in 2006 by $1.0 million to $34 million (or $55 per hectolitre). Included in this year's SG&A expenses are $2.0 million of restructuring costs and $0.4 million of strategic review costs. In the prior year, there were $0.4 million of one-time legal settlement costs included in SG&A. When non-recurring costs are removed, per hectolitre SG&A costs in the current period were $51 well below the $60 in the prior year.

The Company's depreciation and amortization expense increased marginally in the current period due to the effects of the net capital expenditures made by the Company in the past 12 months.

Interest costs increased by $0.1 million (4%) in 2006 due to the effects of higher prevailing market interest rates on the Company's variable rate debt in the period.

The Company's effective tax rate for both the 2006 and 2005 periods was 35%.

Financial Position

The Company had a bank indebtedness balance of $9.6 million at July 1, 2006 compared to an indebtedness balance of $ 9.7 million as at December 31, 2005.

Accounts receivable decreased by $1.0 million from the level reported at the end of fiscal 2005. The decrease in accounts receivable occurred despite the fact that the Company generated higher revenues during the second quarter of 2006 when compared to the last quarter of 2005. Strong efforts have been made by the Company to reduce the average age of its accounts receivable.

The Company's inventories increased by $1.4 million while its accounts payable increased by $1.2 million from December 31, 2005 levels due to seasonal fluctuations.

Prepaid expenses decreased by $1.7 million from the level reported at December 31, 2005. This decrease was attributable to the fact that there was no can purchase prepayment amount on July 1, 2006.

Property, plant and equipment decreased by $1.7 million from the level reported at December 31, 2005 due principally to the disposition of certain non-core assets in the current period while intangible assets decreased by $1.0 million as amortization charges exceeded expenditures in the period.

Total long term debt levels decreased by $8.7 million as a result of debt repayments made during the first six months of 2006.

Cash Flow

Quarterly Comparison

The company reduced its combined long term debt and bank indebtedness by $4.6 million in the current quarter compared to an increase in total borrowings of $1.1 million in the second quarter last year. This improvement is due to increased operating cash flows and reduced net capital expenditures in the current quarter.

Operating cash flow for the quarter increased by $2.9 million compared to the prior year due to a $1.5 million net improvement in working capital cash flow and increased net earnings in the current period.

Investing activities generated $1.3 million in the second quarter of 2006 compared to a net outflow of $1.8 million in the second quarter of 2005. This improvement resulted from reduced net investments in capital in the current period.

Non-cash financing activities used $1.5 million more in the second quarter of 2006 as compared to the second quarter of 2005 as the Company paid $1.2 million more in long-term debt principal payments in the current quarter.

Year to Date Comparison

The company reduced its combined long term debt and bank indebtedness by $8.6 million in the current period compared to a decrease in total borrowings of $1.3 million in the prior period. This is due primarily to favourable working capital changes in the current quarter.

Operating cash flow for the period increased by $4.9 million compared to the prior year as the current period's $6.3 million improvement in working capital cash flow exceeded the impact of the decline in earnings in the period.

Investing activities generated $0.4 million of cash flow in the period whereas these activities used $3.1 million of cash in the prior period. Lower net capital expenditures in the current period led to this improvement.

Non-cash financing activities used $3.9 million more in the first six months of 2006 as compared to the same period in 2005 as the Company's principal payments on its long term debt facilities were $4.7 million higher in the current period.

Outlook

The Company expects that the intense price competition it has faced in key markets in the past two years will continue for the balance of 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 generating premium volume growth. It will continue to introduce innovative products and invest in its premium brands with distinctive and cost effective 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 with its high quality and well known portfolio of value brands. The Company will continue to compete more aggressively in those markets where selling value beer is profitable.

In 2006, the Company is targeting to reduce cost of goods sold per hectolitre from the level recorded in 2005 of $84/hl and focusing on controlling SG&A expenses. The Company expects to achieve these cost objectives through the two restructuring programs announced in the past 12 months, implementing various cost management programs and making efficiency related capital expenditures. The most significant of these capital expenditures was the installation of the sterile filtration system in Guelph for production of Sleeman Original Draught for Eastern Canadian markets early in the second quarter of this year.

The Company expects its depreciation and amortization and interest expenses for 2006 to be marginally higher than those reported for the 2005 fiscal year.

The Company anticipates its effective income tax rate for 2006 will be approximately 35%.

In Eastern Canada, the Company is focused on growing its revenues by increasing its core volume sales in both the premium and value categories. The Company continues to develop innovative plans to distinguish its premium brands from its competitors in Ontario and Quebec while marketing its profitable value category brands more aggressively. The Company expects to generate double digit volume growth in both the Maritimes and US regions in 2006 on relatively small 2005 sales bases. The Company continues to believe innovation, speed to market and the quality of its products are key advantages, and the resources of the segment will be directed at realizing the benefits of these advantages. In addition, non-production SG&A expenses will be reduced from 2005 levels to ensure operating margins improve over those recorded in 2005 in the face of continuing price discounting in the major markets in which it competes.

In Western Canada, it is likely that price discounting by competitors will continue, notably in the value category. As a result, Sleeman will reduce production and SG&A costs while focusing on growing and supporting our premium brands. The Company has strong regional brands in Okanagan Spring and Shaftebury, which, when combined with the Sleeman brand, provide a solid base for product and sales and marketing innovations that will generate increased core volume sales. 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 sufficient production capacity to meet its expected production requirements for the next 24 months. The Company 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 breweries.

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