sabmiller 2004 annual report

8/13/2019 SABMiller 2004 Annual Report

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SABMiller plc

AnnualReport 2004


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More top 50beer brands than

Occupying

a top threeposition

in more

than 30countries


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Brewing

operations

in over 40countries

150beerbrands owned


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SABMillerA story of growth From its South African origins,SABMiller has become one of the worlds largest brewing companies.

With operations in over 40 countries, it has more beer brands in the

worlds top 50 than any other brewer and it ranks among the top three

brewers in more than 30 countries. Every minute of every day, consumers

the world over drink an average of over 46,000 pints of SABMiller beer.

SABMiller is passionate about brewing. From local beers steeped

in tradition to brands that are recognised around the world, the companys

ambition is always to offer an outstanding product. Its quality is backed

by some of the most efficient brewing and distribution operations in the

industry not to mention its long and successful record of market

research, brand development and superb marketing in all corners of the

world. Its success also lies in the way it conducts its business with

respect for partners and employees and a desire to do the best for the

local community.

SABMillers history is one of exceptional growth and returns to

shareholders. With its global footprint, strong portfolio of brands and

spread of operations in both mature and developing markets, SABMiller

is well placed to continue its growth.


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SABMiller plc 1

Highlights2004 2003

US$m US$m# % change

Turnover^ 12,645 8,984 41

EBITA* 1,893 1,270 49Profit before tax 1,391 770 81Adjusted profit before tax* 1,705 1,107 54Adjusted earnings* 925 581 59Adjusted earnings per share*

US cents 77.6 54.0 44UK pence (up 31%) 45.8 34.9SA cents (up 7%) 547.6 513.3

Basic earnings per share (US cents) 54.1 27.5 97Dividends per share (US cents) 30.0 25.0 20Net cash inflow from operating activities 2,292 1,568 46# Includes Miller Brewing Company for nine months.^ 2003 turnover has been restated downward by US$128 million to reflect the adoption of FRS 5 Reporting

the substance of transactions, application note G revenue recognition.* EBITA and adjusted profit before tax comprise profit before interest and tax (US$1,579 million) and profit

before tax (US$1,391 million) respectively before goodwill amortisation (US$355 million), and beforeexceptional items (net credit US$41 million see note 5). The calculation of adjusted earnings is given

in note 11.

Total lager volumes increase 18.9% to 137.8 million hls,organic growth of 3.7%

Miller turnaround on track and showing momentum

Continuing excellent performances in Europe,EBITA* up 39%

Further good performance from Africa & Asia,EBITA* up 31%

Strong growth in Beer South Africa, EBITA up 54%

Balance sheet strength reflects cash generationand successful refinancing

15,000

12,000

9,000

6,000

3,000

01 02 03^ 04

TurnoverUS$ (million)

2,000

1,600

1,200

800

400

01 02 03 04

EBITA (pre-exceptional)US$ (million)

70

80

60

50

40

01 02 03 04

Adjusted EPS US cents

Restated for deferred tax change in accounting policy.


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2 SABMiller plc

Anothermilestone yearFrom our South African origins, weve risen to the top league of theinternational brewing industry by the planned and careful process we outlinedfive years ago. The result is a spread of operations, well balanced betweenfast-growing developing markets and cash-generating developed markets.

CHAIRMANS STATEMENT

Dear ShareholderI am delighted to report that the financialyear to 31 March 2004 has been anoutstanding one for your company.Turnover increased by some 41% whileadjusted earnings per share were up by44%. Pleasingly, for the first time, ouradjusted earnings per share showed anincrease in all our major currencies. Inview of this performance, the board hasrecommended an increase in the finaldividend to bring the total for the yearto 30 US cents, a 20% increase. Thedividend, which is covered 2.6 times byadjusted earnings, is at a level that webelieve should grow over time in line withthe trend of any increase in earnings.

Net cash flow generated in the year

totalled US$2,292 million from operatingactivities. The balance sheet remainsstrong with gearing at 43.3% this afterUS$576 million of capital expenditure,of which 33% was in new capacity and67% in maintenance expenditure. Duringthe year we launched a successfulUS$2,000 million debt offering.

It is particularly gratifying that all ourbusinesses did well. In the US, resultsfrom Miller Brewing Company acquiredin 2002 have answered many peoplesscepticism about our ability to restorethe business to financial health. Theturnaround programmes now in placeare already having an effect onperformance, though I should point out

that were still in the early stages andmuch remains to be done. Our CentralAmerican operation delivered higherearnings, thanks to the actions wevetaken to improve its brand portfolio andenhance its efficiency. There were strongresults from South Africa in both beerand soft drinks, helped by the rise ofthe rand against the dollar. The restof Africa produced an impressiveperformance and we again saw goodgrowth in Europe with Russia doingparticularly well.

Meanwhile, weve continued tostrengthen our position in new, emergingmarkets by acquiring further operationsin China and by forming a joint venturein India with Shaw Wallace breweries.

Also during the year, weve developedour European portfolio with theacquisition of Birra Peroni in Italy andgained entry to Morocco and Algeriathrough our joint venture with Castel.

Five years of progressIts now five years since SAB was listedon the London Stock Exchange. In1999, we had 39 breweries, operatedin 18 countries and sold 48 millionhectolitres of beer and 70 millionhectolitres of beverage overall. Contrastthat with todays figures: 81 breweries;operations in 43 countries on fourcontinents; annual beer sales of138 million hectolitres and total

beverage sales of 174 million hectolitres.Also over this period, the companysmarket capitalisation has grown from3.4 billion to 6.6 billion, and we haverisen from number 81 in the FTSE 100to number 34 as at market close on20 May, the day of our preliminaryresults announcement. Since our listing,our total shareholder return has beena gratifying 74% compared with negative17% for the FTSE 100 as a whole.

In 1999, we set out a three-partstrategy for growth improving ourvolumes, margins and cash flow in SouthAfrica; expanding our positions in otherdeveloping markets; and seeking major,value-adding investments in bothdeveloping and established markets.

Our London listing, as we said at thetime, would enhance the ability ofSAB to take advantage of increasingconsolidation in the international brewingindustry and to compete with otherinternational brewers for developmentopportunities throughout the world.

Milestones over the five yearsinclude our success in Poland; thepurchase of Pilsner Urquell in theCzech Republic in 1999; our moveinto India in 2000; being the firstinternational brewer to enter CentralAmerica in 2001; forming a pan-Africanalliance with Castel to invest in newAfrican markets in 2001; and, in 2002,acquiring Miller Brewing Company,


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SABMiller plc 3

the second largest brewer in the US.More recently, we achieved incrementalexpansion in China and Poland, weacquired Peroni in Italy and formeda new Indian joint venture. In addition,weve grown to become one of theworlds largest Coca-Cola bottlers.

From our South African origins,weve risen to the top league of theinternational brewing industry by theplanned and careful process we outlinedfive years ago. The result is a spread ofoperations, well balanced between fast-growing developing markets and cash-generating developed markets. In hischief executives review, Graham Mackay

explains how we now plan to carry thisstrategy into the future.

Corporate social responsibilityMany of our markets are challengingplaces to work and require greatsensitivity in dealing with partners, localcommunities and employees. Corporatesocial responsibility, or CSR, is thereforeingrained in everything we do. Ourcommitment starts at the top with aboard-level committee responsiblefor our CSR performance. Some1% of pre-tax profits go to help thecommunities in which we operate,through programmes coveringeducation, welfare and entrepreneurship.

As a brewer, we believe we have aspecial duty to promote the responsibleuse of alcohol. Consumed sensibly,alcoholic beverages can make a positivecontribution to peoples quality of life.We do, however, recognise thatirresponsible consumption can havenegative consequences. To this end,we continue to invest in alcoholeducation and research programmesand recently introduced a strict codeof practice to cover all our marketingand advertising.

Board and corporate governanceWe are fortunate to have a board of

the highest quality and integrity with agood balance of skills and experience.Nevertheless, at a time of growing publicscrutiny and developments such as theHiggs Review, we want to be sure wemeet the most exacting standards ofgovernance while recognising thesometimes different expectations ofshareholders in different jurisdictions.

To address the requirements of thenew Combined Code on directorsindependence, were strengthening thebalance of independent representationon the board and its committees. MikeLevett will not be seeking re-election atthe forthcoming annual general meetingand we have used this opportunity to

invite a new independent director,John Manzoni, to join the board andhe will take office from 1 August 2004.

Lord Renwick will hand over thechairmanship of the remunerationcommittee to Miles Morland, classified asan independent director and I will stepdown as a member of the committee.Louis Camilleri will step down from theboard to concentrate on his executiveduties in Altria Group, Inc.. Full details ofthe changes are outlined in the corporategovernance report.

Mike Levett has made an enormouscontribution in his 20 years with thecompany, first on the South African and

then on the UK board. He leaves withour gratitude and best wishes for thefuture. I would also like to thank LouisCamilleri for providing advice andsupport to the management and torecognise his crucial role in the Millertransaction. We welcome, most warmly,John Manzoni to the board.

We also said goodbye during theyear to former board members PeteLloyd and Mike Simms, both of whomretired from the company having madetremendous contributions to our SouthAfrican operations and, more recently, to

building our business around the world.In a year of outstanding results,

I must also thank the 39,500 employeesof our operating companies. They arethe ones who have made it all possibleand the board and I are grateful fortheir skills and hard work. In thankingthem, we also salute our businesspartners whose local knowledge andexpertise have made such a difference,especially in newer markets such asChina and India.

In summary, the last five years have

seen your company grow and developbeyond all recognition. Despite the manychallenges we face in an uncertain world,the strategy continues on course and welook to the future with confidence.

Meyer KahnChairman


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Well positionedto keep growingNow that were established in the top tier of international brewers, we aim toachieve sustainable growth in earnings by building on our existing operations,restoring Miller in the US, strengthening our positions in China and India andwidening the reach of our premium brands.

CHIEF EXECUTIVES REVIEW

4 SABMiller plc


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SABMiller plc 5

In a year of excellent results, our stronggrowth in reported earnings is due tothree main factors. Firstly, weve seen

sound operational performances fromeach of our businesses around theworld. Secondly, while theres still muchto be done, our turnaround programmeat Miller is starting to deliver results, withparticular momentum behind the MillerLite brand. Thirdly, weve benefitedfrom currency movements, mainly thestrengthening of the rand which hasenhanced the strong organic growthand operational improvements of ourSouth African businesses.

All these factors have contributed

to the years excellent figures. Totalbeverage volumes were up 15% at173.9 million hectolitres with lager salesrising 19% to 137.8 million hectolitres.Further details of our performanceare in the review of operations onpages 10 to 21.

Our strategy for growthThe chairman has described howwe have built SABMiller into a strong,international operator capable of furthergrowth in earnings both now and intothe future.

We see this growth occurring overthree time horizons.

In the near term, we look mainly toour strong, established operations inSouth Africa, the rest of Africa, Europeand, slightly further ahead, CentralAmerica. These are markets with manyyears of organic growth still aheadof them.

In the medium term, additionalgrowth will come from turning round therecent big acquisitions, Miller and Peroni,which we know have the potential to

produce strong, sustainable profits.For the longer term, we are buildingon our positions in the large, emergingmarkets of China and India, both of whichare capable of generating much greatervalue. Depending on economic growth,there may also be opportunities in Africa.

In the longer term we also expectto see a natural consumer drift towardshigher value, international brands. Ourglobal platform will give us the ability todistribute and develop our own portfolioof international premium beers, sosecuring a further source of earnings.

We believe this pattern of growthdifferentiates SABMiller from all itscompetitors. It also provides aframework for reporting our progressin the past year.

Established operations ingrowth marketsSouth Africa has had an exceptionally

successful year. Behind the growth wesee some recovery in the market shareof beer as against wine and spirits plusthe trickle-down effect of an improvingconsumer economy. We also see goodperformances from our two internationalpremium brands introduced last year Miller Genuine Draft and Pilsner Urquell and from efforts to make soft drinksmore affordable by offering smaller,returnable containers. In both beerand soft drinks, the past year has re-established the long-term upward trend

in sales and shown that South Africa iscapable of further organic growth.Our widerAfrica portfolio produced

its usual share of ups and downs but astrong result overall. We benefited fromthe earlier restructuring in Kenya andTanzania and saw strong progress fromAngola where the economy is recoveringafter the long civil war. The end of theyear brought new acquisitions in Algeriaand Morocco through our joint venturewith Castel, which itself performedvery well.

Our businesses in Europe produced

excellent results. In Poland, the growthwhich previously swelled the mainstreammarket is switching to the premium andeconomy sectors and our own portfoliois changing in response. Russia,meanwhile, has taken over as a

significant source of volume growthand were investing further in our Kalugabrewery to meet demand. Pleasingly, our

Czech business saw further increases inboth volumes and prices. Our volumegrowth in Hungary outstripped themarket and we are in the processof acquiring the Aurora brewery inRomania to strengthen our numbertwo position there.

Four of the countries in which weoperate joined the EU on 1 May 2004.The consequent restructuring may bedisruptive in the short term, but weshould see future benefits in therespective consumer economies.

In Central America, weveconcentrated on improving our brandportfolios along with sharper marketfocus and greater operational efficiency.Earnings have risen as a result.

Turnarounds at Miller and PeroniWhen we bought Millerin July 2002,it had suffered from a long period ofdecline and many commentators weresceptical that we would be able to fix thesecond largest brewer in the US. Werecognised it would take time, but drewconfidence from our record of successful

turnarounds in other parts of the world.Weve now completed the analysis andrestructuring phase and are in theprocess of implementing our three-yearplan. The first green shoots of recoveryare starting to show.

This years growth is due to three main factors.

First, weve seen sound operational performances

from each of our businesses. Secondly, ourturnaround programme at Miller is starting todeliver results. And thirdly, weve benefited fromthe strength of the rand.


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6 SABMiller plc

The plan has four areas of focus: brands,sales and distribution, costs andproductivity and organisational capability.Each is important and our eventualsuccess will depend on all theseelements working together.

Within the brands, a huge amount ofresearch was conducted into what theMiller brands stood for and what theycould be made to stand for. This led to arepositioning and advertising messagesinitially focused on the Miller name itselfand then on Miller Lite. The Atkins-inspired low-carbohydrate trend has

put a fair wind behind Miller Lite andwere using this, while it lasts, to buildmomentum. We are now turning ourattention to Miller Genuine Draft andthe rest of the portfolio.

Within distribution, our successdepends on good execution in themillions of transactions that have totake place every week. Again wevedone a lot of analysis, segmenting andprioritising the US market by channeland by geography and then aligningall marketing and sales activities

accordingly. Weve had great supportfrom our wholesalers who are nowworking with us in each of these areasto implement local market plans. Thisprocess will be rolled out countrywideover the next 18 months.

For better costs and productivity,weve reorganised Millers head office,re-aligned its management structuresand closed the Tumwater brewery toimprove capacity utilisation.

The last of our four areas of focus isorganisational capability where we aimto instil a new performance culture.

Again its going to take time, but theMiller team has made exceptional stridesin clarifying accountabilities, investingin new skills and putting in place the

elements of the culture we intendto create.

Weve tackled the problems at Miller

in the only way we know by analysingthe problem, asking the right questions,applying our knowledge of the beerbusiness and building capability.The result is a stronger, more focusedbusiness. Miller Lite is leading therecovery and in the coming months,

well be looking for positive signs in therest of the brand portfolio.

The Miller acquisition was followedin May 2003 by our purchase of Peroniin Italy. Integration of the business intoSABMiller is at much the same point thatMiller was a year ago, although Peroniskey brands were always in better shape.The analysis stage is almost complete,but implementation still lies ahead. Again

were confident of generating value,particularly as the Italian market growsand consolidates.

Large, emerging marketsWere currently one of the leadinginternational brewers in the worldslargest beer market, China. Our jointventure, China Resources Breweries, hasa 10% share of the Chinese beer marketand a record of being one of the mostprofitable. Having grown organicallyand through acquisitions, it now has 32breweries and a strong regional presence

in second tier regions and cities.The Chinese beer market is still at

an early stage of development. However,were confident that consolidation

will lead to better prices and that agrowing beer culture will further ouraim of building Snow into a strongnational brand.

While we purchased a 29% interestin Harbin Brewery earlier in the year, wehave recently announced our intention todispose of this interest at a substantialprofit. We are selling into an offer beingmade for the shares of Harbin at a pricethat we believe more than fully values thepotential of the company.

In India, weve consolidated ourposition through the Shaw Wallace joint

venture which we are in the process ofcompleting. Through the joint venturewe will have breweries in several statesacross India and a 33% market share,

Chief

executivesreview

Weve tackled the

problems at Miller in the

only way we know byanalysing the problem,asking the rightquestions, applying ourknowledge of the beerbusiness and buildingcapability. The resultis a stronger, more

focused business.

Top: Norman Adami, president and chiefexecutive, Miller Brewing Company andGraham Mackay, chief executive, SABMillerplc, tour Milwaukee Brewery, USA; Middle:Our leading Polish brand Tyskie sells morethan any other of our brands in Europe;Bottom: Castle Lager deliveries in Cape

Town, South Africa.


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SABMiller plc 7

which will make us the number twoplayer in the country. Its a good base,but we still have much to do in terms

of improving the product, developingour brands and introducing modernmanufacturing and marketing.India is a highly regulated marketwith ingrained ways of operating, buttheres no doubt it offers huge potentialfor growth.

Its also possible that a period ofpolitical stability and economic growthcould provide opportunities inAfricawhich are not visible today.

International premium brands

The final contributor to growth isexploiting the potential of ourinternational premium brands. Thepremium sector is growing faster thanthe total beer market and accounts fora disproportionate share of its profits.We therefore see good opportunities forbrands such as Miller Genuine Draft,Pilsner Urquell, Nastro Azzurro andCastle. Our approach is to refine anddevelop our local brand portfolios andenhance them with our internationalbrands where appropriate. Miller GenuineDraft, for example, is already doing well

in Russia and South Africa and is likelyto be suited to Chinese tastes.

The global marketplaceOver the last 12 months there has beenfurther restructuring in the global beerindustry. Only 15 years ago, the worldsfive largest brewers accounted for about

17% of world beer sales, however thatfigure has risen to 40% today and isforecast to top 50% in five years time.

We believe that the first phase of

consolidation, where larger establishedplayers buy underperforming localassets, is now over and that we are wellinto the second phase of consolidation,largely defined by mergers of relativeequals; a phase that arguably beganwith the Miller transaction.

Today we are established in theworlds top tier and believe that we havethe scale and the efficiencies we need tokeep growing organically. If other value-adding opportunities come along, we willof course consider their merits but wedont need another landscape-changing

merger or acquisition. Our focus, now,will be on raising the performance of ourexisting businesses.

Quite simply, our success willdepend on knowing how to run a beerbusiness better than our competitorsand extracting maximum value fromthe assets now in place. The groupsbeer businesses around the world arealready some of the most efficient andwe intend to turn our best local practicesinto common global practices.

ProspectsWe are well positioned by virtue ofour geographic reach and balance,the quality of our businesses and ourfinancial strength to continue to delivervalue to shareholders. The 2004 resultsreflect strong performances across thegroup and, for the coming year, webelieve were in a good position tocontinue to generate growth in earnings.

Graham MackayChief executive

The premium sector

is growing fasterthan the total beermarket and accountsfor a disproportionateshare of its profits.We therefore see goodopportunities for brandssuch as Miller Genuine

Draft, Pilsner Urquell,Nastro Azzurroand Castle.

Our success will depend on knowing how to

run a beer business better than our competitorsand extracting maximum value from the assetsnow in place.


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8 SABMiller plc

North America

SABMiller today

Total number of breweries: 8

Total brewing capacity (hls 000s): 59,829

Total volumes sold (hls 000s)

Lager: 47,258

Carbonated soft drinks (CSDs): 70

Average number of employees: 5,696

Miller Brewing Company (Miller), our NorthAmerican subsidiary operation, is the USAssecond largest brewer. Founded in 1855 and

based in Milwaukee, Wisconsin, Miller wasresponsible for innovations such as Miller Lite,which created the beer industrys low-caloriesegment and is now one of the 10 largest beerbrands in the world*, and Miller Genuine Draft,which was the first cold-filtered beer.

Miller has eight breweries in the USA,ranging from the niche breweries, whichproduce specialty beers such as theLeinenkugel brands in small quantities, toits largest brewery at Trenton, Ohio, whichproduces the equivalent of ten million bottlesor cans of beer per day. Overall, the companyhas over 5,600 employees, the majority ofwhom are based in the Milwaukee area.

Brands include:Miller Lite, Miller Genuine Draft, Miller High Life,Milwaukees Best, Pilsner Urquell, Fosters,SKYY Blue

* Canadean 2003

Europe




Lager: 30,925

Other beverages: 97


We are one of Europes largest brewers, withwholly or majority owned operations in theCanary Islands, Czech Republic, Hungary,

Italy, Poland, Romania, Russia, and Slovakia.In most of our markets we are either the largestor the second largest brewer by market share.

Our European brands include the CzechRepublics Pilsner Urquell, generally regarded asthe original golden beer, and the major Italianbeer, Nastro Azzurro, which are two of thegroups international premium brands.

Brands include:Pilsner Urquell, Nastro Azzurro, Miller GenuineDraft, Tyskie Gronie, Dreher, Lech, Dorada,Gambrinus, Arany szok, Debowe Mocne,Peroni, Kbnyai Sr, Velkopopovicky Kozel,Keller, Radegast, Raffo, Redds, S

v

arisv,

Smadny Mnich, T imisoreana, Tropical, Ursus,Wrhrer, Try Bogatyrya, Zolotaya Bochka

Central America



Total number of bottling plants: 6

Total bottling capacity (hls 000s): 12,183


Lager: 1,839

CSDs: 6,031

Other beverages

(water and juices): 2,643


Our presence in Central America is through asubsidiary, Bevco, which operates in the beerand soft drinks markets in El Salvador andHonduras. Through Bevco, we have 95% ofthe beer markets in both countries and, throughan exclusive agreement with The Coca-ColaCompany (TCCC), almost 65% of the softdrinks markets in El Salvador and in Honduras.

To support its core operating businesses,the company also owns packaging interestsand over 16,000 acres of sugar plantationsin Honduras.

Brands include:

Pilsener, Bahia, Golden Light, Suprema, RegiaExtra, Miller Genuine Draft, Port Royal, Imperial,Salva Vida, Coca-Cola, Sprite, Tropical

AC Nielsen 2003

North America8 breweries

1 country

Central America2 breweries

6 bottling plants

2 countries

Europe18 breweries

8 countries

Countries where SABMiller has production facilities


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Africa & Asia

Total number of breweries3: 46

Brewing capacity (hls 000s): 55,921

Bottling plants: 11

Bottling capacity (hls 000s): 10,075


Lager: 32,492

CSDs: 3,879

Other beverages

(water, wine and spirits,

traditional beer): 10,166


Our Africa & Asia region covers the Africancontinent (with the exception of South Africa),China and India. In Africa, we have brewing,beverage or financial interests in 29 countries,including operations in 17 countries throughour strategic alliance with the Castel Group.

In China, our joint venture, China ResourcesBreweries, Ltd, is one of Chinas leadingbrewers. We also have an interest in HarbinBrewing Group Ltd in north east China througha 29.4% stake in the business which we are inthe process of selling.

Our presence in India is through the Shaw

Wallace Breweries Ltd joint venture, whichwe are in the process of completing.

Brands include:Castle Lager, Castle Milk Stout, Hansa Pilsener,Kilimanjaro, Safari, Chairmans ESB, Club Pilsener,Nile Special, Eagle (clear sorghum), Mosi, Rhino,Ngola, Chibuku (sorghum), Golden Pilsener,St Louis, Club, 2M, Manica, Laurentina, KnockOut, Snow (also called Snowflake), Blue Sword

Other Beverage

InterestsTotal number of bottling plants: 10

Total bottling capacity (hls 000s): 17,471

Total volumes sold (hls 000s): 13,227


Consists of a 74% interest in AmalgamatedBeverage Industries Ltd (ABI), the leadingsoft-drink business in the SABMiller group,and the largest producer and trade marketerof The Coca-Cola Company brands in Southern

Africa; a 100% interest in Appletiser (Pty) Ltd,the international producer of non-alcoholicsparkling fruit juices; and a 30% equityaccounted interest in Distell Group Ltd, aleading South African distributor of winesand spirits.

In turn, ABI (which ranked among the top20 companies listed on the JohannesburgSecurities Exchange, South Africa in 2003)owns 32% of Coca-Cola Canners of Southern

Africa (Pty) Ltd.

Brands include:Coca-Cola, Coca-Cola Light, Vanilla Coke,

TAB, Sprite, Sprite Zero, Fanta, Lemon Twist,

Sparkling Grenadilla, Sparletta, Stones,Schweppes Just Juice, Appletiser, Grapetiser,Milo, Play, Bibo, Minute Maid, Bon Aqua,

Valpr, Nestea

South Africa Beer



Total lager volumes sold (hls 000s): 25,261


Our brewing operations in South Africa aremanaged through our wholly owned subsidiary,

The South African Breweries Ltd (SAB Ltd).Our South African beer business, which

was founded in Johannesburg in 1895 and

currently has over 97% of the South Africanmarket, was SABMillers original brewingcompany. Today SAB Ltd operates sevenbreweries in South Africa, including NewlandsBrewery, which is South Africas oldest, Alrode,the largest brewery in the Southern hemisphereand Ibhayi brewery, which is one of the worldsmost modern.

To support SAB Ltds production needs,SABMiller also has wholly owned interestsin maltsters through Southern AssociatedMaltsters (Pty) Ltd, and in hop farms throughSouth African Breweries Hop Farms (Pty) Ltd.

Brands include:

Castle Lager, Castle Lite, Castle Milk Stout,Hansa Pilsener, Carling Black Label, SterlingLight, Brutal Fruit, Redds, Miller Genuine Draft,

Amstel, Pilsner Urquell

South Africa Beer7 breweries

Other BeverageInterests10 bottling plants

Africa14 breweries

10 bottling plants

29 countries

(17 jointly with Castel)

Asia32 breweries

1 bottling plant

2 countries

Notes

1. Number of breweries, bottling plants, brewingand bottling capacities as at 7 June 2004

and are based on the definitions on page 25.Total volumes sold and average number ofemployees are for the year ended31 March 2004.

2. Employee figures exclude associates.3. Excludes 10 breweries in India, which is classified

as a fixed asset investment for accountingpurposes, and 29 sorghum breweries in Africa.


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Miller. Good call is the tag line for a MillerTrademark marketing campaign launchedin November 2003 that has re-invigoratedUS sales of Miller Lite.

The campaign follows a planningprocess that involved extensive consumerresearch. Delving deep into the US beerdrinkers psyche, Miller reached twosignificant conclusions: first, that tasteand satisfaction are still drivers of brandpreference; second, that consumersrecognise Miller Lite and Miller Genuine

Draft (MGD) as quality choices.The decision was made to promote

Millers quality across the board: to remind

Good call. Promoting the Miller brandconsumers that every bottle or cancarrying founder Frederick J Millerssignature still guarantees a confoundedlygood glass of beer; and to encouragethem to exercise their right to superiortaste, whether they choose Miller Lite(Great Taste and Less Filling) or MGD(Genuine Flavor, Cold-Filtered Smooth).

TV, billboard, print and radioadvertising has focused on the Millerbrand using it to market Miller Lite andMGD. A lot has also been done to build

Millers profile across the USA. The MillerTaste Challenge, a blind testing eventcarried out with over 130,000 consumers

to date, has proved particularly successful.Advertising can change attitudes towardsthe brand, but promotions like the TasteChallenge are the best way to shiftconsumer behaviour and sell more beer.

With recent advertising spotsannouncing Millers intention to run forPresident of Beers and Miller Lite andMGD promotions complementing eachother, the Miller trademark brands nowlook robust. Market feedback has beenexciting. Consumers are telling Miller

what it wants to hear: Miller is different,Miller has more taste.

Miller Lite billboard advertisementin downtown Milwaukee, USA.

Below: Stills from the Good call television advertising campaign, USA.


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SABMiller plc 11

Total Miller shipment volumes, comprisingdomestic US and international sales, fellby 0.8% for the full year versus proformafiscal 2003, as compared to a declineof 5.7% during the first half of the year.This improved full year performance

was driven by more robust sales in thesecond half when total shipment volumesgrew by 5.3%.

Millers US domestic shipments fellby just 0.4% for the year, again reflectingbetter second half volumes, whichincreased by 5.9%. Strong growth inMiller Lite sales in the second half wasthe prime contributor to this improvedperformance, offsetting declines inMiller Genuine Draft, certain economybrands and the flavoured malt beverage(FMB) brands.

Domestic US industry shipment volumesincreased by approximately 1% for thefiscal year despite the influence of thecontinuing Iraq conflict and higher fuelprices. Millers US domestic sales toretailers (STRs) fell by 1.5% versusproforma fiscal 2003, but in the secondsix months STRs grew by 2% compared

with the prior year.Total turnover declined by 0.8% ona proforma1 basis, impacted by declinesin contract brewing and internationalrevenues. US domestic turnover(excluding contract brewing) increasedby 0.3% on a proforma basis, reflectinggrowth in beer revenues largely offsetby a decline in FMBs. Industry pricingthroughout the year was solid, especiallyin the fourth quarter of the fiscal year.Miller Lite sales increases had a positiveimpact on brand mix. However, this waspartially offset by adverse geographic

and pack mix. Costs of goods soldincreased at approximately the prevailinginflation rate.

EBITA for the year, before exceptionalitems of US$14 million, was US$424 million,an increase of 5.0% over the proformaadjusted prior year1 of US$404 million.EBITA for the second half increased by18% to US$175 million reflecting thestronger performance described above.

In the past year, we have drivenproductivity across all functions of thebusiness realising savings in excess of

North

America

REVIEW OF OPERATIONS

2004 2003*Financial summary US$m US$m

Turnover^ 4,778 3,408EBITA** 424 250EBITA margin (%)** 8.9 7.3Sales volumes (hls 000s) Lager excluding

contract brewing 47,258 33,852 contract brewing 10,593 8,172

Carbonated soft drinks(CSDs) 70 55* 2003: nine months only.** Before exceptional items of US$14 million being restructuring

costs of US$13 million, Tumwater brewery closure cost reversalof US$4 million and asset impairment of US$5 million (2003:integration costs of US$17 million and Tumwater brewery closurecosts of US$35 million).

^ 2003 turnover has been restated downward by US$65 millionto reflect the adoption of FRS5 Reporting the substance oftransactions, application note G revenue recognition.

1 Proforma adjusted prior year turnover was US$4,815 million, consisting of US$3,408 million (as shownabove) plus US$1,407 million under the ownership of Altria during the period April June 2002. Proformaadjusted prior year EBITA was US$404 million, consisting of US$250 million (as shown above) plusUS$16 million of one time costs associated with the launch of FMBs, plus US$138 million under theownership of Altria during the period April June 2002.


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12 SABMiller plc

our original US$50 million target.This has been achieved by improvingthe operation of our breweries, betterprocurement, more effective marketingspend and a reduced overall headcount.The expected cost benefits from the

closure of the Tumwater breweryhave also been realised during the year.The current cost base of Miller reflectsthese changes and although incrementalimprovement is possible further large one-off savings are not expected. The costs ofpensions, healthcare and labour increasedabove the prevailing inflation rateoffsetting some of the benefits achievedthrough productivity improvement.

Capital expenditure was maintainedat previous years levels. Projectsincluded information systems upgrades,warehouse automation at the Albany and

Eden breweries, fridge pack packagingcapability as well as a number of quality-focused investments.

Our more disciplined approach tobrand marketing, focused on the attributesof our beers, began to deliver benefits inthe second half. Our new advertising andpromotions around the Miller name beganin November 2003 and were followed byspecific brand campaigns, first for MillerLite beginning in December 2003 andsubsequently for Miller Genuine Draft, inMarch 2004. New packaging linking Miller

Lite and Miller Genuine Draft has alsobeen launched to maximise the impactof the Miller name. The effect of theseactivities has been to cause consumersto reconsider Miller products and allowedus to engage with them about choice andtaste. Revitalised campaigns will follow forour economy and worthmore brands.

During the year, we segmented theUS market into 88 market areas andhave developed detailed local marketplans in each of our 33 high focusmarkets. These plans allow our salesefforts to be more appropriately directed,

better supporting our wholesalers. Wehave deployed additional sales peopleand marketing funds at a local level tofurther enhance this process. Plans will

be completed for the remaining

markets in the current year, and wewill continue to refine and improve theprocess. Furthermore, a marketing andsales integration project is under wayto drive further improvement.

Good progress had been madetowards improving the Miller organisationseffectiveness. The organisation wasrestructured in August and approximately200 new people have also beenrecruited, primarily in marketing andsales, while maintaining the overall netreduction in salaried staffing levels.Performance management processes

are now entrenched across Miller,and work continues on upgrading ourtalent through ongoing developmentand recruitment.

North

America

Top: Miller Lite packaging; Middle: Miller HighLife delivery in Milwaukee, USA; Bottom:Miller Genuine Draft bottling line, TrentonBrewery, Ohio, USA.


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Revitalising localbrands in Central

AmericaMarketing expertise developed on fourcontinents has helped SABMiller revitaliseits brand portfolios in El Salvador andHonduras. In El Salvador the market wasnascent, choice was virtually non-existent,

and while local brands were held in greataffection, none were equipped to competewith international brands.

The local team put knowledgegained through detailed segmentation

Progress was made throughout the yearin improving our brand portfolios, marketfocus and the operating efficiency ofthe business.

Beer volumes rose by 7% in thesecond half (up from 4% in the first half),resulting in an increase of 5% for the year.Our beer brand segmentation andportfolio management was improved aswe executed refocused advertising andnew product and sales initiatives. Ourleading brand franchises (Pilsener andSalva Vida) have been strengthened,

Central

America


2004 2003 %Financial summary US$m US$m change

Turnover 531 514 3EBITA* 76 56 36EBITA margin (%)* 14.2 10.8Sales volumes (hls 000s) Lager 1,839 1,747 5 Carbonated

soft drinks (CSDs) 6,031 6,257 (4) Other beverages 2,643 2,499 6* Before exceptional reorganisation costs of US$6 million

(2003: US$12 million).

alongside new premium offerings (Bahiaand Miller Genuine Draft) and enhancedlower-mainstream brands (Regia Extraand Imperial) designed to competemore effectively with low-priced spirits.Resulting recent volume trends areparticularly encouraging in El Salvador,whilst further trade marketing and saleseffectiveness initiatives are now under waythroughout the region.

CSD volumes fell by 1% in the second

half (compared to a 6% fall in the firsthalf), reflecting an improving trendtowards stabilisation following the regionalweakness and increased competitiveintensity in El Salvador, both of whichbegan in the latter half of 2002. Ourmarket share has stabilised in El Salvadorand increased slightly in Honduras wherevolumes grew modestly in the secondhalf. Strengthened brand positioning andmarketing execution for Coke and Spriteare well under way, supporting our sectorleadership in focusing on attribute rather

Leading Central American brands: Pilsener, Regia Extra and Bahia.

than price-based competition. Further

brand portfolio enhancement utilising theFanta and Tropical brands is also a focusfor fiscal 2005.

Turnover grew by 3%, as virtuallyunchanged total beverage sales volumeswere accompanied by both priceincreases (for beer in Honduras and CSDsthroughout) and the favourable mix impactof beers greater contribution to sales.This favourable impact was partly offsetby strong growth in bottled water salesin the second half that, while contributingattractive gross margins, have lower price

points. CSD prices rose by between 5%and 8% near the beginning of the fiscalyear, while Honduran beer pricingincreased by some 10% in March 2004.These increases have been accompaniedby the positive impact of both pricingstandardisation within channels andchannel mix improvement.

Pre-exceptional EBITA more thandoubled in the second half and grewby 36% for the full year as a result ofoperating cost reductions, improvedoperating leverage (on rising beer sales),favourable product mix trends, positive

pricing, and unit cost savings throughprocurement synergies. Following ourwide-ranging business restructuring,which resulted in a headcount reductionof1,600, we are now realising the synergiesbetween countries and from combiningbeer and CSD categories. EBITA marginrose in the second half compared to theprior year, driving the full year margin to14.2% against last years 10.8%.

studies, consumer focus groups andquantitative research to good use effectively repositioning three brands,and introducing a new one, in undera year.

Pilsener, a national institution after 98years on the market, was refreshed first.

A marketing campaign linked the brand tonational pride via the engaging Salvadorancharacter; a respectful redesign updatedthe famous Ace of Hearts motif. A similar

repositioning exercise followed for GoldenLight, and then Regia Extra, a brand indecline. Regia Extra packaging wasrenewed with a revised surface design,the flavour was enhanced and the brand

was relaunched in distinctive 750 ml and355 ml formats.

Market research revealed a gap inthe portfolio. Aspiring, fashion consciousconsumers wanted a more contemporarybrand to match their lifestyle. Bahia,packaged in stylish clear bottles andlaunched through a series of vibrantbeach parties, connected powerfullywith this need.

In El Salvador, the revitalisation

process has resulted in annual marketgrowth of 6%. A similar exercise inHonduras has seen the market growby 3% during 2003.

SABMiller plc 13


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Lager volumes grew 26% (8% on anorganic basis), influenced by the good

European summer of 2003 and a verystrong performance in Russia. Thedivision produced a third consecutiveyear of excellent profit growth with pre-exceptional EBITA up 39%. In constantcurrency terms, organic EBITA growthwas 22%. The rate of EBITA increaseagainst prior year was lower in thesecond half than in the first, reflectingthe increased seasonality in the divisionfollowing the Peroni acquisition.Improved sales mix within most markets,pricing ahead of local cost increases andimproved productivity resulted in organic,

constant currency EBITA marginenhancement. However, the reportedmargin was impacted by the lowercurrent margins of Peroni and Dojlidy.

The Polish beer market expanded byaround 6%, with disproportionate growthin the lower priced segments. KompaniaPiwowarskas total volumes increased byover 8%, while organic volumes weremarginally ahead of prior year. The Dojlidybusiness, which we acquired during theyear, grew 10% on a proforma basisagainst prior year. The rate of KompaniaPiwowarskas volume growth improvedduring the second half as distributorsresponded to an improved incentiveprogramme, and increased focus in the

on-premise channel started yielding

results. The Zubr and Debowe brandsshowed particularly strong growth, withZubr now at a 4% national share andthe flagship Tyskie brand exceeding5.6 million hectolitres. Improvedproduction standards and continuinggood cost productivity contributed tocontinued growth in EBITA.

In the Czech Republic a strongdomestic volume improvement of 4% ina market that grew by 2% reflects the hotsummer as well as share gains. Increasesin marketing spend helped boost growth

to 6% in the higher value on-premisechannel and this, together with increasedaverage prices of 4%, improved overallmargins. Our international premiumbrand Pilsner Urquell grew some 11%domestically and 7% globally. Favourableprocurement contracts and operatingefficiencies contributed to a substantialprofit improvement, which was furtherenhanced by the firm Czech currency.

In May 2003, SABMiller acquired60% of Birra Peroni SpA for 246 million(US$299 million, including acquisitioncosts). Industry volumes in Italy grew

strongly during the summer and the fullyears growth rate was approximately6%, with Peroni volumes in line with themarket. Both key brands, Peroni andNastro Azzurro, performed satisfactorily,with Peroni retaining its position as themarkets leading brand. The MillerGenuine Draft brand was introduced inNovember 2003 and is now producedin the Padova brewery. The integrationprocess within Peroni remains on planalthough the companys profitability forthe period was impacted by integrationcosts and significant marketing andpromotional investment behind ourbrands, together with the first beerexcise increase for 13 years.

In Russia, our business, which is clearly

focused in the premium segment, had avery strong year with volumes up 70%and continuing growth in segment share.Miller Genuine Draft grew by 90% andour Czech brand, Kozel, more thandoubled volume. We are continuing toexpand our market coverage and ourpresence in the on-premise channel,and this contributed to strong growth inEBITA and cash flow. A further expansionis being planned at the Kaluga plant.

Our business in Hungary enjoyed 6%volume growth against a market growth

of 4% and we retained our marketleadership in value share. The premiumDreher brand volume grew by 3%, andtogether with initiatives to improvemargin this led to strong profit growth.In Romania, the market expanded byapproximately 15% with our volumegrowth being in line. However, our shareof value increased and margins improved,while the broader market growth wasdriven by lower-priced volumes in PETpackages. In May 2004, SABMillerannounced its agreement to acquire81.1% of Aurora SA. This will consolidate

our position as number two in thecountry and will add a strong new salesplatform in the central region.

Our volume in Slovakia grew by 6%,while the market was held back by asignificant increase in excise. Thebusiness moved to direct distributionduring the year and this change shouldimprove market penetration andprofitability in the medium term. TheCanary Islands enjoyed renewed growth,influenced by the hot summer and anincrease in immigration, with our beervolumes increasing by 6%. We closedthe Pinalito water business at anexceptional cost of some US$6 million.

14 SABMiller plc

2004 2003 %

US$m US$m change

Turnover^ 2,420 1,583 53EBITA* 383 275 39EBITA margin (%)* 15.8 17.4Sales volume (hls 000s) Lager 30,925 24,472 26 Lager comparable 26,309 24,472 8 Other beverages 97 137 (29)* Before exceptional items being water plant closure costs of

US$6 million (2003: US$Nil).^ 2003 turnover has been restated downward by US$63 million

to reflect the adoption of FRS5 Reporting the substance oftransactions, application note G revenue recognition.

EuropeREVIEW OF OPERATIONS


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Deliveringexplosive salesin a tough market

In Russia, the fifth largest beer marketin the world, Miller Genuine Draft (MGD)has achieved phenomenal sales growthof over 90% in the past year.

How has Transmark, SABMillers whollyowned subsidiary in Russia, succeededin a market that boasts more than 510

brands? By investing time and resourcesto really understand the market; and byraising brand visibility through sponsoredevents, consumer testing and word-of-

mouth promotion rather than conventionalTV spots.

In-depth market research underpinnedthe whole awareness raising andpromotional campaign. It proved to thecompanys team in Russia that a keyconsumer segment socially active,upwardly mobile and urban-centred people could not be activated through traditionalcommunication channels. So instead, theteam concentrated on connecting withconsumers through local MGD brandedevents and personal contact.

Its an approach that worked from dayone, catapulting MGD sales beyondexpectations and building strongmomentum for the brand.

Rather more low key, but equallyimpressive, has been Transmarks successin building support in the Russian marketfor Pilsner Urquell, the Czech Republicsleading brand. Traditionally imported intothe country and given minimal marketsupport, the decision to start brewingPilsner Urquell at Kaluga, our breweryclose to Moscow, and to launch a forcefulmarketing drive targeting consumers,retailers and distributors alike, has pushedsales up and established the brand inRussias crowded premium lager segment.

Consumers enjoying MGDsponsored club nights in

Moscow, Russia.


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16 SABMiller plc

principally by steep declines in Zimbabwe.Lager brand growth was 2%, and

across the continent there have been a

number of successful brand rejuvenationprojects, particularly Safari in Tanzania,Laurentina in Mozambique and Nile andClub in Uganda.

Our African business delivereda strong pre-exceptional EBITAperformance reflecting volumedevelopments in key markets, improvedproductivity and operating performanceand currency strength principally inBotswana, Lesotho and Swaziland.In addition, the group recorded marketshare gains in Uganda and Ghana, the

former including the benefits of newproduct development. We continue tobenefit from last years East Africanconsolidation in Tanzania and Kenya,and Angola is proving to be an excitingmarket with strong growth in our CSDbusiness as the economy normalisesafter years of civil war. Botswanadelivered strong earnings growth despitethe marginal drop in volumes followingthe introduction of VAT.

Our alliance partner, Castel, enjoyedan excellent year with strong organicgrowth in its key markets of Cameroon,

Ivory Coast and Gabon, augmentedby a number of strategic acquisitionsand currency strength. We recentlyannounced our 40% participation in jointventures in Algeria and Morocco.

AfricaOur portfolio of businesses in Africacombined with our Castel alliancediversifies country risk across thecontinent and the benefits of this can beseen in the fiscal 2004 results. Overall,our African businesses continued thesolid performance reported at the halfyear, delivering strong results for thefull year. Lager volume growth wasrecorded in Uganda, Ghana, Tanzania,Zambia and Swaziland, but this wasmore than offset by a modest declinein Botswana and a significant reduction

in Zimbabwe where the depressedeconomy impacted sales. A similarpattern was evident in carbonated softdrinks, where exceptionally strongvolume gains in Angola were also offset

2004 2003 %US$m US$m change

Turnover 1,555 1,209 29

EBITA* 306 233 31EBITA margin (%)* 19.7 19.2Sales volumes (hls 000s)** Lager 32,492 31,332 4 Lager comparable 31,915 30,917 3 Carbonated

soft drinks (CSDs) 3,879 4,206 (8) Other beverages 10,166 9,920 2* Before exceptional items being US$6 million share of associates

profit on disposal of the CSD business and brands in Moroccoand US$1 million share of associates profit on disposal of abrand in Angola (2003: US$Nil).

** Castel volumes of 12,049 hls 000s (2003: 10,680 hls 000s)lager, 9,221 hls 000s (2003: 8,925 hls 000s) carbonated softdrinks, and 3,326 hls 000s (2003: 804 hls 000s) other beveragesare not included.

Building a winning

brand in GhanaMarket research, consumer testing andan inspired brand relaunch have helpedturn Castle Milk Stout into a best-sellingGhanaian brand, and transformed thefortunes of Accra Breweries Ltd (ABL).

Things were different in 1998 whenSABMiller acquired a majority share in

ABL. The company was struggling, withattempts to cut costs and boost efficiencymaking little impact on bottom lineprofitability. A driver for growth wasneeded urgently.

On first inspection, Castle Milk

Stout was an unlikely candidate. In amature West African stout market, longdominated by Guinness stout, Castle MilkStout, introduced in 1999, scored low ontaste and richness in market testing.

The ABL brand team realised thatthese perceived weaknesses werepotentially the brands greatest strengths.

A milder, smoother taste experienceappealed to consumers, testingparticularly well against lager brands.

In 2001 the brand was relaunchedthrough a radio and TV campaign targetedon the mainstream wind-down segment.Packaging and pricing strategy were

rethought too. Breaking with theconvention that says stout comes in330 ml bottles, a distinctive 625 ml bottlewas introduced. Consumers loved thelarger size, nicknaming it The Boss.

An equally bold move saw the teampitch Castle Milk Stout pricing structuresagainst mainstream lagers.

The reinvention of Castle Milk Stouthas changed a beer market traditionallydominated by lager into one in whichstout now accounts for 55% of total sales.The 625 ml bottle is responsible for 75%of Castle Milk Stout sales while the brandholds a price premium over mainstreamlagers and has achieved 1,648% growthsince 1999. ABLs total market share hasclimbed from 18% to 32% in two years,helping this once loss-making companyrecord a healthy profit for the 2004financial year.

Africa & Asia



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Clockwise from top: Market testing, Ghana;Castle Milk Stout bottling line;Castle Milk Stout distribution in Accra;Consumers enjoying a glass of Castle Milk Stout.


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AsiaOur Chinese associate, China ResourcesBreweries, Ltd (CRB), performed well,recovering from the SARS epidemic atthe beginning of the year to record 7.5%lager volume growth for the year, ofwhich 5% was organic. The Chinesebeer market is estimated to be the

biggest in the world by volume, withCRB enjoying the number two positionin the market. The development of anational brand remains a key focus areain the business, with the Snow brandachieving volumes of 7 million hectolitresduring the current year. The volumegrowth during the year contributed toan increase in EBITA.

In March 2004, CRB announcedthat it had entered into a conditionalagreement with the majority shareholderof Zhejiang Qianpi Group Company Ltd

(Qianjiang), the largest brewery inZhejiang Province, to co-operate toreorganise Qianjiang and establish a

joint venture company, whereby CRBwill have a 70% equity interest in thecompany and the shareholders ofQianjiang will have the remaining 30%interest. Further, in May 2004 CRBannounced that it had acquired a 90%interest in two breweries in AnhuiProvince. The two breweries in

Shucheng and Liuan produce theLongjin brand.

In June 2003 we announced theacquisition of a 29.6% stake in HarbinBrewery Group Ltd (Harbin), which wehave accounted for as a fixed assetinvestment for the period of theownership. We have recently announcedour intention to sell this interest into anoffer being made for the shares ofHarbin, at a substantial profit.

In India, we announced the formationof a 50:50 joint venture with the Shaw

Wallace group to achieve a strongnumber two position in this populouscountrys developing beer industry.

province and in north east China.In Tianjins crowded mainstream beer

market, Snow has historically achieveda single-digit market share, and this wascertainly the case at the end of 2002, withthe brand accounting for a market shareof 7.5%.

CRB brand teams took the decisionto develop Snow. Market researchreinforced their conviction that the brandwas a sleeping giant with the potential togrow market share in Tianjin. The key was

Africa & Asia

Building a nationalbrand in ChinaDuring 2003, China Resources Breweries,Ltd (CRB), in which SABMiller has a 49%share as a joint venture partner, hastransformed the fortunes of its Snowbrand (often called Snowflake) in theBeijing and the Tianjin regions.

Snow had previously been successfullymarketed by CRB in Chinas Sichuan

18 SABMiller plc


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rapid investment: in new technology toimprove quality; in new packaging andbottle and can formats, to extend choice;and in the distribution process toguarantee supply. At the same time, Snowwas actively promoted through a range oflifestyle marketing techniques, includingroad shows, consumer testing and otherpromotional events.

CRBs energy, and willingness to workat pace, produced impressive results.

It also put pressure on distributors to meetincreasing consumer demand. The figuresspeak for themselves. Managementestimates that during 2003 Snows marketshare in Tianjin rose from 7.5% to reach41% with volumes rising equally rapidly.Now Snow is ideally positioned for furtherdevelopment towards becoming a nationalbrand in a market that is already theworlds largest by volume and still growing.

The operational integration of ourbusinesses has been completed aheadof expectation and we have a solidfoundation to capture ongoing volumegrowth as the beer industry develops.Certain conditions are in the processof being completed, and until thetransaction becomes unconditional the

business will be accounted for as a fixedasset investment.

Far left: Consumers at a restaurantin Beijing enjoying Snow;Right: Snow bottling line,Jinzhou Brewery, China.

Left: Quality control at Jinzhou Brewery, China; Right: Consumer enjoying Snow, China.

SABMiller plc 19

The Chinese beer market is estimated to be thebiggest in the world by volume, with CRB enjoyingthe number two position in the market.


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20 SABMiller plc

South

Africa


Turnover 1,964 1,270 55EBITA 522 338 54EBITA margin (%) 26.6 26.6Sales volumes (hls 000s) Lager 25,261 24,428 3


Beer

Rethinking

brand promotionto breathe new lifeinto Hansa Pilsener

A decision to rethink the way Hansa Pilseneris marketed in South Africa has re-ignitedconsumer interest in a brand that ispositioned as refreshingly different.

A year or more ago things were verydifferent for Hansa. Annual sales volumeswere down compared with 2001, despite anational promotion during 2002. This lack ofsuccess prompted the Hansa brand team todo things differently.

They made the decision to move awayfrom conventional promotions, typicallybased around scratchcards concludingthat this approach was now commonplacethroughout the market and was unlikelyto have a positive impact on volume orbrand image. Instead, they adopted anew programme philosophy based onthe concept of ongoing, one-to-oneengagement with target consumers.

A new campaign, rolled out as aroad show across 19 urban centres,aimed to ensure that targeted Hansa

consumers were activated at least fourtimes over a concentrated time period,and that non-users were given theopportunity to try the brand inHansa-created environments.

The Night Among the Stars road showwas a dramatic break with the past, athrough-the-line brand experience that

utilised local radio advertising, flyercampaigns, word of mouth and point-of-sale promotions to target the key 18 to34-year-old consumer segment. The HansaNight Among the Stars event itself was adramatic experience a red carpet event atwhich invited consumers not only sampledHansa products, but were also entertainedby a virtual DJ, dazzled by a firework displayand treated to a free screening of arecent movie.

The Hansa road show successfullyraised the brands profile and helped the

team test consumer reaction and buildup a database of potential brandambassadors. Follow-up events helpsustain momentum and build word ofmouth support for the brand. Hansa isbeing talked about again. Consumers seeit as different and unique a brand thatis on the way up.

Consumers are seeing Hansa Pilsener asa brand that is on the way up.


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SABMiller plc 21

Beer volumes continued the positive trendsof the first half, ending the year 3.4%above prior year. The improved economic

climate in South Africa has underpinnedthis growth and has led to trading upamongst consumers both in the beersegment and in the broader liquor marketwhere beer has continued to take shareprimarily from natural wine, with our shareof the liquor market now 59.3%, up fromlast years 57.1%. This trend has beenenhanced by effective in-trade executionand the price and value of offerings ofproducts within our portfolio.

For the first time in many years themainstream market grew, and there has

been continued strong growth from thepremium and alcoholic fruit beveragesegments of the portfolio with year on yeargrowth of 30% and 50% respectively.

These segments continue to be the primefocus of our innovation programme withthe introduction of our international

premium brands, Miller Genuine Draft andPilsner Urquell, and a new variant of BrutalFruit, Sultry Strawberry. Our internationalpremium brands have achievedwidespread availability in their targetmarkets.

The higher volumes, improvementsin pricing and positive mix trends ledto turnover being up 15% in constantcurrency. EBITA margins have beenmaintained notwithstanding the launchcosts and higher ongoing marketing costsof the international premium brands

introduced in the year, the negative impactof the stronger rand on export margins andhigher raw material costs arising in partfrom the previous years hedging strategy.

As a result EBITA has also improved by15% in constant currency. This profitperformance has been further enhanced

by the strengthening of the rand leadingto a 54% increase in reported EBITA.

Disciplined cost managementenhanced productivity in all areas.Investments in the manufacturingexcellence programmes over the pastfew years have resulted in a significantimprovement in production raw materialusage, with efficiencies at an all time high.

The new liquor act, which wasapproved in November 2003, has yet tobe enacted. The material contents of theact remain unchanged from the time of

approval and the department of Tradeand Industry is currently developing theregulations applying to the act, which weexpect to be published later this year.

OBI

Hotels and Gaming

Amalgamated BeverageIndustries (ABI)Drivers of the 8% volume growth wereincreased promotional activity andimproved execution thereof, favourableweather patterns during the year and

higher consumer spending resultingfrom interest rate cuts and improvedconsumer confidence.

Carbonated soft drinks (CSDs) grewby 7% and contributed 95% of thevolume. The balance of volume wascontributed by alternative beverages(water and fruit juices) which grew byin excess of 30%.

EBITA increased by 61% (19% inconstant currency), driven by volumegrowth, a weighted price increase of 8%,overhead cost productivity and reduced


Turnover 1,171 788 49 ABI 912 594 54EBITA* 186 120 55 ABI 158 98 61EBITA margin (%)* 15.9 15.3 ABI 17.3 16.5Sales volumes (hls 000s) Soft drinks 13,227 12,489 6

ABI 12,999 12,063 8* Before exceptional US$13 million profit on disposal of

trademarks (2003: US$Nil).

2004# 2003^ %US$m US$m change

Turnover 226 212 6EBITA** 53 42 28EBITA margin (%)** 23.7 19.7

Revpar US$* 42.71 32.10 33# SABMiller 49% share of the new Tsogo Sun group formed on

31 March 2003.^ SABMiller 100% share of Hotels and 50% share of Gaming.* Revenue per available room.** Before exceptional profit of US$4 million on partial disposal of

subsidiary in 2003.

The new Tsogo Sun group, which wasformed on 31 March 2003 through therestructure of the SABMiller hotel andgaming interests, in conjunction with thegroups empowerment partners, TsogoInvestments, has had a successful firstyear, with strong trading performances inboth its hotel and gaming businesses.

In Hotels, the key domestic corporate

raw material costs, partly offset by salesmix including the impact of new productintroductions.

AppletiserEBITA was in line with prior year, as the

costs of additional marketing expensesin export markets were offset by benefitsfrom a stronger rand.

DistellDistells sales volumes in the domesticmarket reflect a favourable sales mix,and growth in the spirits category.International sales volumes showedstrong volume growth, and initiativeswere completed to reduce thecompanys overhead costs and toreduce the cost of materials.

market continues to perform welland occupancies in the domesticleisure segment have improved, whileinternational tourism has been hamperedby the strong rand and a global travelmarket that has experienced weak trends.

In Gaming, results are dominated bythe performance of the groups flagshipMontecasino operation in Gauteng.The Gauteng gaming market continuedto experience growth during the fiscal2004 year, and this has resulted inMontecasino achieving furtherimprovements in turnover.


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22 SABMiller plc

A focus onprofitable growth

FINANCIAL REVIEW

with the manner in which the group ismanaged. SABMiller believes that thereported profit measures beforeexceptional items and amortisation ofgoodwill provide additional and moremeaningful information on trends toshareholders and allow for greatercomparability between segments.

The groups aggregate pre-exceptional EBITA margin improved to15.0% from the prior years 14.1%, withmargin enhancement in most businesses

as volumes increased and productivitywas improved. Beer South Africa retainedits EBITA margin at 26.6%, havingabsorbed launch costs and higherongoing marketing costs of the newpremium brands introduced during theyear, and while Europe increased organicEBITA margin, the reported margin wasimpacted by the lower current margins ofPeroni and Dojlidy. Margins improved inNorth America as our turnaroundprogramme started to deliver results, andin Central America, reflecting managementaction to improve our brand portfolios and

2004 EBITAcontributionby segment*

North America 22%

Central America 4%

Europe 19%

Africa & Asia 16%

*Pre-exceptional items and before centraladministration costs.

Beer South Africa 27%

OBI 9%

Hotels and

Gaming 3%

Group operating performanceAll of our businesses performed well overthe year, and the overall portfolio deliveredexcellent results. Total lager beer volumesincreased 18.9% to 137.8 millionhectolitres (hls), and organic lagervolumes grew by 3.7%, with growth in allthe businesses. Millers performance isnoteworthy in that the decline in the earlypart of the year was replaced by growthin the second half, leading to year on yearorganic volume growth. Europe andCentral America recorded organic lagergrowth of 7.5% and 5.3% respectively

and Beer South Africa recorded a thirdconsecutive year of growth, with volumesup 3.4% to 25.3 million hls. Total groupbeverage volumes of 173.9 million hlswere 15% above last years 151.4 million

hls (organic growth 3.3%).Turnover,including share of associates, increasedby 41% (organic growth 20%, andorganic, constant currency growthwas 8%).

Earnings before interest, taxation,amortisation of goodwill and exceptionalitems (EBITA) increased 49% toUS$1,893 million, and organic, constantcurrency EBITA increased by 22%,with double digit increases in all of ourbusinesses. EBITA comprises profitbefore interest and tax (US$1,579 million)before goodwill amortisation

(US$355 million) and before exceptionalitems (net credit US$41 million).Information on our operating results byregion is set out in the segmental analysisof operations, and the disclosures accord


27/134

increase operating efficiencies. Marginsat OBI and Africa & Asia improved,continuing the trend of recent years.

The reported turnover for the yearended 31 March 2003 has been restatedfollowing the adoption of FRS 5 Reportingthe substance of transactions, applicationnote G revenue recognition. The changereduced each of turnover and netoperating costs by US$128 million for theyear ended 31 March 2003 in respect ofthe following segments US$65 million

in North America and US$63 million inEurope. The reclassifications related tofreight costs and distribution costs,respectively. Had the 2004 financialresults been prepared on the previousbasis, the impact would have been toincrease turnover by US$178 million(US$100 million in North America andUS$78 million in Europe). There was noimpact on EBITA in either year, howeverthe adjustment does increase the groupsreported EBITA margin by approximately20 basis points.

The group recorded netexceptional costs within operating profitof US$26 million, comprising Millerrestructuring costs of US$13 million; aU$5 million impairment charge in relationto FMB assets at Miller; US$6 million ofreorganisation costs in Central America;and US$6 million costs associated withthe closure of the water bottling plantin the Canary Islands, partially offsetby a reversal of US$4 million of theTumwater brewery closure costs at Miller.Exceptional profits of US$67 million wererecorded after operating profit and

comprised surplus on the pension fundof a disposed operation of US$47 million;profit on the disposal of trademarks inAppletiser of US$13 million, and thegroups share of the profit on disposal of

Castels CSD business and brands inMorocco of US$6 million anda brand in Angola of US$1 million. Thiscompares to prior year exceptional costswithin operating profit of US$70 million,comprised within Miller of Tumwaterbrewery closure and impairment costsof US$35 million and integration costsof US$23 million and Central Americareorganisation costs of US$12 million.A profit of US$4 million on partial disposalof the groups holdings in the Hotels

and Gaming group was recorded afteroperating profit.

Net interest costs increased toUS$188 million, a 15% increase on theprior years US$163 million. This increaseis due primarily to the increase inborrowings incurred regarding theacquisitions undertaken in the last twoyears, together with the effects of the higherinterest rates payable on the fixed debtissued during the year. Interest cover,based on pre-exceptional profit beforeinterest and tax, has improved to 8.2 times.The groups profit before tax increased81% to US$1,391 million, reflecting theconstituent changes referred to above.

The effective tax rate, before goodwillamortisation and exceptional items, is34.3%, broadly in line with the prior yearexcluding the 2003 exceptional deferredtax credit. While there is virtually nochange in the rate compared to the prioryear, the tax charge has increased asa result of higher profits earned, partlyoffset by impacts of various tax-savingmeasures introduced during the year.

CurrencyDuring the financial year, the SA randstrengthened against the US dollar, andthe rate demonstrated more stability thanin recent prior years, with the currency

ending the financial year at R6.39 to theUS dollar (2003: R7.91). The weightedaverage rand/dollar rate improved by34.6% to R7.06, compared with R9.50 inthe prior year and this has enhanced theresults of the South African businesses,as reported in US dollars. Currencies incentral Europe also strengthened againstthe US dollar and this has contributed tothe improvement in reported results.

Translation differences on non-dollarassets and liabilities are recognised in the

statement of total recognised gains andlosses. It is not the groups policy tohedge foreign currency earnings andtheir translation is made at weighted(by monthly turnover) average rates.

EarningsAdjusted earnings increased by 59% toUS$925 million and the weighted averagenumber of shares in issue for the yearwas 1,192.2 million, up from last years1,076.1 million, reflecting mainly thecarry-over impact from the prior yearsissue of 430 million shares to Altria asconsideration for the Miller acquisition.These shares consisted of a mixture ofordinary shares and unlisted low-votingparticipating shares. The groups adjustedearnings per share increased 44% to77.6 US cents from the prior years54 US cents. Adjusted earnings per sharealso increased when measured in thefollowing currencies: South Africa rand,sterling and euro. Basic earnings pershare increased 97% to 54.1 US centsfrom the prior years 27.5 US cents.

DividendsThe board has proposed a finaldividend of 22.5 US cents making a totalof 30 US cents per share for the year, anincrease of 20% on prior year. This would

SABMiller plc 23

25

30

20

15

10

5EBITA*margin bysegment%

2004

2003

North

America

Central

America

Africa

&Asia

Hotelsand

Gaming

BeerSouth

Africa

Europe

OBI

Group

*Pre-exceptional.

#2003 restated due to change in revenue recognition.

#

#

#

1,800

2,000

1,600

1,400

1,200

EBITA*componentsofperformanceUS$ (million)

*Pre-exceptional.

Mar03

Mar04

Underlying

Organic

Acquisitions/

Disposals(Net)

Currency

1,270

+22%

+19% +41%

+8% 1,893


28/134

represent a dividend cover of 2.6 timesbased on adjusted earnings (2003: 2.2).Details regarding declaration dates,eligibility and related matters are disclosedin the directors report.

Financial structureIn August 2003 the US$2,000 millionbank facility assumed with Miller wasrefinanced with the successful issue ofUS$1,100 million 5.5% ten-year bondsand US$600 million 4.25% five-year

bonds by Miller Brewing Company, witheffective interest rates of 5.21% and3.94% respectively, the balance beingrepaid by Miller from its surplus cashresources. Concurrently SABMiller plcalso issued US$300 million 6.625%30-year bonds with an effective interestrate of 6.41%. The effective interest ratesare arrived at after taking into accounthedges which were put in place prior tothe issuance of the bonds to protectagainst rising underlying Treasury interestrates. The average loan maturity inrespect of the US$ fixed-rate debtportfolio is some 5.25 years, and theanalysis of debt at 31 March 2004included in the notes to the accounts,includes the impact of this refinancing.As at 31 March 2004 68% of the groupsdebt was held as fixed-rate debt.

Gross borrowings have increased toUS$3,707 million from US$3,523 millionat 31 March 2003. Gross borrowingsrelative to net cash inflow from operatingactivities before working capitalmovement (EBITDA) reduced to 1.7 froma level in excess of 2.0 at the prior year

end. The average borrowing rate for thetotal debt portfolio as at 31 March 2004was 4.8% (2003: 4.3%), reflecting a

higher interest rate associated with thebonds described above. The groupsgearing, as measured by net debt relativeto net assets, decreased at the year endto 43.3% from last years 46.6% (restatedfor UITF 38), and the group hassubstantial unutilised borrowing facilities.

Balance sheet profileTotal assets increased toUS$13,799 million from the prior yearsUS$12,250 million (restated for UITF 38),

as a result of acquisition activity in Europeand in Africa & Asia.

Intangible assets increased byUS$62 million, due primarily to theinclusion of goodwill of US$283 millionarising on the Peroni acquisition in May2003, partially offset by the amortisationfor the year. Goodwill in ABI is consideredto have an indefinite life (as in prior years),while all other goodwill is amortised over20 years. The attributable amortisationcharge for the year under review roseto US$333 million from last yearsUS$250 million.

Net debt has increased toUS$3,025 million from $2,962 millionreflecting the net increase in borrowingsincurred regarding the acquisitions in theyear partly offset by cash inflow fromoperations. The group again achievedits target of negative net working capital.

Cash flow and investment highlightsNet cash inflow from operating activitiesbefore working capital movement(EBITDA) rose to US$2,185 million fromlast years US$1,483 million. The ratio of

EBITDA to group turnover increased inthe year to 19.2% (2003: 18.2% restated).

The group achieved free cash flow of

US$1,161 million (2003: US$755 million),representing net cash inflow fromoperating activities plus dividendsreceived from associates and otherinvestments, cash received from the saleof tangible fixed assets and investmentsless net interest paid, taxation paid andcash paid for expenditure on tangiblefixed assets.

Acquisition details are disclosed in thedirectors report.

Shareholder valueThe value which a company returnsto its owners is best measured bytotal shareholder return (TSR) thecombination of share price appreciationand dividends returned over the mediumto long term. Recent measures ofshareholder return are impacted by thesignificant decline in equity indices overthe past five years. Since SABMillermoved its primary listing to the LondonStock Exchange in March 1999 the grouphas produced a TSR of positive 74% asat the markets close on the date of ourpreliminary 2004 results announcementwhile the FTSE 100 has produced a TSRof negative 17%.

In focusing on shareholder valueadded, the group uses EVA as a keyindicator of annual performance. As notedpreviously, SABMiller is continuallyinvesting in new brewing operations andmost new investments impact negativelyon EVA in the short term. The groupsEVA calculation is summarised below.Key factors to be borne in mind are:EVA is calculated using operating profit

after tax, adjusted for exceptional andnon-recurring items; the capital charge iscalculated on opening economic capital

24 SABMiller plc

Financial

review1,600

1,800

2,000

1,200

1,000

1,400

800

600

400

200 Free cash flow vsEBITA US$ (million)

Free cash flow

EBITA(pre-exceptional)

00 01 02 03 04

75

90

60

45

30

15

01* 02 03 04

Adjustedearnings pershare anddividends pershare trendUS cents

Adjustedearningsper share

Dividends

per share

*Restated for deferred tax change in accounting policy.


29/134

adjusted for acquisitions, any impairmentsof assets of continuing business units,and goodwill previously eliminated againstreserves. The groups weighted average

cost of capital (WACC) is applied againstthe resulting investment; and WACC,at 8.75% (2003: 9%), takes account ofrelevant individual country risk profilesand the groups overall debt profile.This reduction in WACC is the result ofthe impact of lower market yields oncomparable corporate bonds and a lowergroup risk profile from the increasedgeographic spread of our businesses.

SABMiller returned EVA ofUS$241 million in the year under review(2003: US$64 million). This increase is

the result of the improved businessperformance outlined earlier, partiallyoffset by a higher capital charge thatreflects the Peroni and Dojlidy acquisitionsand the impact of holding the Miller assetsfor a full 12 months in the year, comparedwith nine months in the prior year.

Malcolm WymanChief financial officer

SABMiller plc 25

Calculation of EVA2004 2003

RestatedUS$m US$m

Economic profit statementsProfit on ordinary activitiesbefore interest and taxation 1,579 933Taxation on profit onordinary activities (579) (349)Tax deduction onfinancing costs (65) (56)Adjustment for non-recurringitems 308 309

Net operating profit after tax 1,243 837Capital charge (1,002) (773)

Economic profit (EVA) 241 64

Economic balance sheetsFixed assets 11,483 10,431Working capital (203) (70)Accumulated adjustment fornon-recurring items 894 586

Economic capital 12,174 10,947

Non-interest bearing funding (405) (306)Provisions (866) (743)

Net operating assets 10,903 9,898

Accounting policies and definitionsAs stated previously, the reported turnover for the year ended 31 March 2003 has

been restated following the adoption of FRS 5 Reporting the substance of transactions,application note G revenue recognition. There was no impact on EBITA in either 2003or 2004, however the adjustment does increase the groups reported EBITA margin byapproximately 20 basis points.

The group has also adopted UITF 38 Accounting for ESOP trusts, which has resultedin a reclassification of shares held in both employee share trusts and the Safari Ltdinvestment, from other fixed asset investments, reducing net assets by US$629 million at31 March 2003. This amount has been deducted in arriving at shareholders funds. Therevised UITF 17 Employee share schemes, has also been adopted. There were no materialchanges to reported profits for the year ended 31 March 2003.

During 2002 the Accounting Standards Board (ASB) delayed the mandatoryimplementation of a new accounting standard for Retirement Benefits (FRS 17) in order toallow UK and international standards boards an opportunity to agree how to converge theirdifferent approaches. The group continues to provide additional information as requiredby FRS 17 by way of a note to the accounts. The group has exposures associated withdefined benefit pension schemes and post-retirement benefits: the Miller defined benefitpension plans and post-retirement benefit plans, the ABI Pension Fund which is in surplus,and the South African post-retirement medical aid schemes which are almost fully providedfor under SSAP 24, being the most significant. The updated valuations as at the year end,required for FRS 17 disclosure purposes only, indicate a deficit on the schemes inaggregate, in excess of amounts provided in the balance sheet, of some US$140 million,after taking account of the related deferred taxation. This compares to the prior year deficitof US$194 million. The group has no other significant exposures to pension and post-retirement liabilities as measured in accordance with FRS 17.

In the determination and disclosure of reported sales volumes, the group aggregates thevolumes of all consolidated subsidiaries and its equity accounted associates, other thanassociates where primary responsibility for day-to-day management rests with others (suchas Castel and Distell). In these latter cases, the financial results of operations are equityaccounted in terms of UK GAAP but volumes are excluded. Contract brewing volumes areexcluded from total volumes; however, turnover from contract brewing is included withingroup turnover. The group has made some disclosures of its results on an organic, constantcurrency basis, to analyse the effects of acquisitions net of disposals and changes inexchange rates on the groups results. Organic results exclude the first 12 months resultsof acquisitions and the last 12 months results of disposals. Constant currency results havebeen determined by translating the local currency denominated results for the year ended31 March 2004 at the exchange rates for the comparable period in the prior year.

Adoption of International Financial Reporting StandardsAn International Accounting Standards Regulation was adopted by the Council of theEuropean Union (EU) in June 2002. This regulation requires all EU companies listed onan EU stock exchange to use endorsed International Financial Reporting Standards(IFRS), published by the International Accounting Standards Board (IASB), to report theirconsolidated results with effect from 1 January 2005. The IASB published 15 revisedstandards in December 2003 and in the quarter ended 31 March 2004 a further three

revised standards together with four new standards and is in the process of completing itsdevelopment of IFRSs to be adopted in 2005. A process of endorsement of IFRSs hasbeen established by the EU for completion in sufficient time to allow adoption bycompanies in 2005.

SABMiller has established a project team involving representatives of businesses andfunctions to plan for and achieve a smooth transition to IFRS. The project team is lookingat all implementation aspects, including changes to accounting policies, systems impactsand the wider business issues that may arise from such a major change. We expect thatthe group will be fully prepared for the transition in 2005 and for the first set of

sabmiller 2004 annual report

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