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SouthAfricanBrewerie (SAB)

  Print      Mail a friend       Annual reports

Thursday 30 November, 2000


Interim Results - Part 1

South African Breweries PLC
30 November 2000

Part 1

Incorporated in England and Wales 
(Registration number 3528416) 


for the six months ended 30 September 2000 
South African Breweries plc, one of the world's major beer and beverage
companies, operating in 21 countries, announced on 30 November 2000 its
interim unaudited results for the half year ended 30 September 2000. 
                                  2000     1999        % change (note)     
                                  US$m     US$m     US$                £   
Turnover                         2,106    2,980                           
- continuing operations          2,106    2,100       -                8   
Trading profit                     334      372                             
- continuing operations            334      315       6               14  
Profit before tax                  310      319                             
- continuing operations            310      293       6               14  

Adjusted earnings per share                                               
US cents                          25.5     24.3       5               13  
SA cents (up 20%)                177.5    147.9                           
Dividend per share (US cents)      6.5      6.5                             
Note: Prior year numbers are before an exceptional item of US$9 million
relating to brewery closure costs in Hungary. There are no exceptional items
in the current period. Continuing operations exclude PGSI - disposed of on 30
November 1999. Percentages expressed in terms of £ sterling movements are
given above in order to aid comparability with other FTSE companies. 

Good overall performance, given mixed trading conditions 
* Total lager beer volumes up 25% to 32.7 million hls  
* SAB International volumes up strongly; Beer SA volumes remain under
* Continuing operations PBT up 6% to US$310 million (up 21% in rand) 
* Pilsner Urquell restructuring delivers profit improvement 
* Adjusted EPS up 5% (up 20% in rand)  
* Maintained interim dividend of US 6.5 cents (SA 50.8 cents; prior period SA
40 cents)
* Pilsner Urquell option over 24.5% exercised for US$165 million

Graham Mackay, Chief Executive, commented: 
'Overall the results are good, given mixed trading conditions. Whilst our
South African businesses continued to be affected by the structural shifts in
consumer expenditure, we achieved further gains in productivity. Our
international portfolio posted a gratifying volume increase of some 16% like
for like, and further margin expansion, justifying our strategy of ongoing
London                                Johannesburg 
South African Breweries               South African Breweries
- Telephone +44 20 7659 0100          - Telephone +27 11 407 1700 
Graham Mackay Chief Executive         Malcolm Wyman Corporate Finance Director
Nigel Cox Finance Director            Salome Brown Corporate Communications 
Anna Miller Head of Investor Relations 

Brunswick -                           Registered address: 25 Grosvenor Street,
Rupert Young +44 20 7404 5959         London W1X 9FE
This announcement and a copy of the analyst slide presentation are available
on the SAB website at 

Operating performance
We ended the six months with a 6% improvement in trading profit, 5% growth in
EPS and margin expansion in all divisions. This should be seen in the light
of the ongoing strength of the US dollar - our EPS in SA rand is up 20%. This
was against a difficult background in our South African market where,
although the economy is relatively stable, spending is mixed. There has been
a continuing increase in spending on mobile phones and gaming which, together
with higher fuel costs, has resulted in a marked fall in spending on
A recent feature has been increased sales of cheap wine, of which there is a
surplus in the South African market, which partly accounts for our beer
volume fall of 6% there. However, we achieved a further 60 basis points
improvement in Beer SA's margin and continue to focus on our ongoing
productivity programmes. 
In SAB International trading conditions were mixed. Our operations in China,
Poland and the Czech Republic performed well. Some of our African
subsidiaries were affected by sharply devaluing currencies. In particular,
Mozambique was affected by the aftermath of flooding, and Kenya and Zimbabwe
by worsening economic climates. However, across the entire international
portfolio we increased trading profit by 10% on a like for like basis and
total lager volumes, including Pilsner Urquell, reached 21.5 million hls.
Our Other Beverage Interests were also affected by the South African consumer
spending decline - ABI's volumes were down some 3%. However, the benefits of
the merger with Suncrush were evident in an improvement in the operating
margin. Subsequent to the period end, SAB plc acquired a further 8% in ABI
from Cadbury Schweppes plc. 
The Hotel and Gaming division had a good six months, despite being the last
casino operator in Johannesburg to open its permanent facility. Occupancies
in the hotels were up from 63.7% to 64.2%. We continue to evaluate our
strategic options for this division and expect to make a decision before the
financial year end. 
In South Africa, the outlook for the economy and consequently beer volumes is
subdued, arising from lower consumer confidence, continued high unemployment
in the formal sector, structural changes in consumer spending and higher
commuter transport costs. In October and November, Beer SA volumes maintained
the trend established in the first half.  
In Eastern Europe and China the summer is behind us, but the momentum built up
in these markets bodes well for the future. In our other African businesses we
are anticipating modestly better trading conditions for the second, more
important, half of the year with volumes expected to show some improvement. 
While US dollar currency movements are an important factor in our reported
earnings, the group's strategy is firmly on track to deliver improving
shareholder value. 

Beer South Africa 
                                   2000      1999          % change      
                                   US$m      US$m      US$          R    
Turnover                            670       765     - 12          -    
Trading profit                      147       163     - 10        + 3  
Operating margin (EBITA*)         21.9%     21.3%   
Sales volumes (hl 000's)         11,242    11,928      - 6               
* Earnings before interest, tax and goodwill amortisation 
Trading conditions during the first six months of the year have remained
difficult. However, despite a 6% drop in volumes sold, operating margins have
increased and, in local currency, trading profit was up 3%. 
Regardless of market conditions, we have maintained our focus on the key
strategic goals of profitable growth, good corporate citizenship and further
development of our people. 
We have continued to invest in our brand portfolio, with marketing spend
increasing in real terms. Further focus on our mainstream brands is evident -
including a four-year Castle sponsorship agreement with the SA national rugby
team and the relaunch of the Lion Lager brand, aimed at the 18 - 24 year old
market segment. Lion has always had a less bitter formula and is therefore
well positioned for the tastes of the younger drinker. Although early days,
the new offering has been well received by its target audience. 
Over the last two years the South African economy has been subdued and,
coupled with shifts in consumer spending and the adverse impact of higher
commuter transport costs, following steep increases in fuel prices, great
pressure has been placed on disposable income, specifically non durables. In
the short term, our liquor market share is under pressure arising from
significant down-trading by the consumer and a considerable wine surplus,
which is being released into the market at very low prices. 
Operating margins for the six months increased from 21.3% to 21.9%. Benefits
from successful hedging strategies on imported raw material components
(particularly barley) during the previous low commodity price cycle have
contributed to the first half's expansion in operating margin, and we
continue to drive our ongoing productivity improvement programmes. Packaging
innovation continues, most notably the recent launch of a new 660 ml pack for
Redd's, our leading flavoured alcoholic beverage, which has resulted in market
share gain in this category. Initiatives to continue improving performance and
productivity include the implementation of 'best operating practice', supply
chain integration, leveraging of information systems and shared service
The new Ibhayi brewery, near Port Elizabeth, was commissioned in August 2000
and is one of the most technologically advanced and efficient of its kind in
the world. The project was completed on time and at a cost of R630 million
(US$90 million), well within the projected budget. The enhanced operating
performance expected from this new high technology brewery will flow from
next year. In the short term this will be offset by pre-production costs
which will be written off in the current year. 
In order to ensure the company remains compliant with the requirements of the
new South African Competition Act, the company has progressed its compliance
programme. The key elements of this are the introduction of a compliance
manual, extensive training throughout the company and an internal audit of
business practices to determine compliance. No overall concerns have emerged.
In a recent development the Competition Commission has notified the company
of an investigation it intends to conduct into the liquor industry. The
notice indicates that the focus is on agreements among competitors in the
industry, but no further details are available at this stage.
SAB International 
                                           2000      1999      % change  
                                           US$m      US$m           US$       
Turnover                                    971       788          + 23      
Trading profit                              154       121          + 28      
Trading profit (excluding Czech)            135       121          + 12      
Operating margin (EBITA)                  16.8%     15.4%               

Sales volumes                                                      
Total (hl 000's)                         21,461    14,179          + 51      
Comparable (hl 000's)                    16,409    14,179          + 16      
SABI has reported strong growth in volumes, turnover and trading profit
mainly due to the impact of Pilsner Urquell, and ongoing growth in Poland and
China. This is our first full six months reporting period with complete
management control of the Pilsner Urquell group and performance to date has
been encouraging.  
In the Czech Republic, the operational merger of Pilsner Urquell, Radegast
and Kozel is well advanced with a more focused organisational structure in
place. The planned merger savings are being achieved and we are on track to
reduce costs as forecast. Brewery gate prices are up 3% in real terms, 8%
nominal, which is a reflection of a more stable pricing environment as
anticipated at the time of our acquisition. Our market share has been
maintained at around 43% in a beer market, which, as expected, declined by
approximately 2% over the reporting period.  
Outside the Czech Republic, a key priority has been the integration of the
Pilsner Urquell brand into our Poland and Slovakia distribution systems, and
this is proceeding well. Sales volumes in Germany and the USA are
encouraging, particularly as our USA re-positioning has only recently
In Poland we continue to perform exceptionally well. Sales volumes were up
40% for the six months against a market growth of 6% and our market share
is approaching 30%. Elsewhere in Europe, we continue to achieve growth through
our drive brands and brand portfolios, distribution and sales execution,
product quality and productivity improvement, combined with strong management
and a thorough understanding of our markets. In Russia we are continuing
modular expansion of the Kaluga Brewery from 1.5 million hls to 2.4 million
hls annual capacity at a cost of US$25 million which will provide the platform
for continuing sales growth. Profits and margins are up in both Hungary and
Slovakia, and volume growth is being achieved in Romania and Canary Islands.
The spread of our investments in Africa stood us in good stead as a number of
countries in which we operate experienced difficult trading conditions. The
ongoing crisis in Zimbabwe, currency devaluations in some countries, a
worsening economic climate in Kenya and the aftermath of the floods in
Mozambique all had an adverse impact. Whilst good gains in beer volumes were
achieved in both Zambia and Kenya (a solid 7% growth in a declining market),
the decline in Zimbabwe beer volumes resulted in the total region's volumes
falling by some 6%. Sorghum beer volumes were markedly up. In Angola, where
we have recently taken over management of a carbonated soft drinks plant,
volumes were strong. Taken as a whole, and excluding the exceptional
Zimbabwean situation, total beverage volumes in Africa held up reasonably
well under these circumstances, recording modestly improved organic growth. 
During the period we took advantage of opportunities to increase the group's
stake in two key African markets - Tanzania (from 51% to 65.8%) and Botswana
(from 40% to 46.8%) - for a total consideration of some US$42 million.
Additionally, at the end of November 2000 we exercised our option to increase
our Pilsner Urquell holding by 24.5% to 75.5% for US$165 million. 
China volumes (up 33%) and profitability continue to grow strongly. Our
strategy in China is on track where we are building our brand portfolios and
improving quality and distribution. Shenyang, which we have owned since 1994,
is performing well and is achieving a return on capital employed of over 16%
against a local WACC of 11%. Our aim is to continue to improve our current
market positions and to expand elsewhere in China where opportunities arise.
Our Indian investment was announced in March 2000 and although it is
currently quite small, we are delighted to be involved in this exciting and
growing market.  
(Slides on the recent China seminar held in London contain more detail on the
operations. These are available on our web site

Other Beverage Interests* 
                                    2000      1999         % change     
                                    US$m      US$m     US$         R    
Turnover                             355       421    - 16       - 4  
Trading profit                        31        35    - 10       + 3  
Operating margin (EBITA)            8.7%      8.3%                      
- ABI                               9.0%      8.9%                      
Comparable (hl 000's) **           4,679     4,846     - 3               
ABI volumes (hl 000's)             4,474     4,624     - 3               
* ABI, Appletiser, SFW and Distillers (prior year includes TBI) 
** Excludes TBI and other disposed operations 
Amalgamated Beverage Industries
Sales volumes were some 3% lower than in the prior year with the trading
environment continuing to be adversely affected by a shift in consumer
spending patterns and by substantial increases in commuter transport costs. 
Ongoing synergistic benefits from the Suncrush acquisition and containment of
costs, together with improved efficiencies, gave rise to a 3% increase in
rand trading profits.  
Subsequent to the period end, SAB acquired a further 8% in ABI from Cadbury
Schweppes plc for a cost of US$66 million (R496 million) paid in cash, in
rand. This increases our holding to 73%. 
Appletiser, Stellenbosch Farmers' Winery and Distillers Corporation 
Appletiser's trading conditions for the first half of the year remained
depressed with total sales volumes below the prior year. However, Valpre
Spring Water showed growth of 11.5%. 
SAB holds its investments in the wines and spirits sector via a 30% interest
in each of SFW and Distillers. Both companies continue to be impacted by
consumers' changing spending patterns and the highly competitive liquor
market. Shareholder approval has been granted for the merger of SFW and
Distillers in South Africa, although the Competition Commission continues to
probe industry complaints regarding the merger, as part of its wider
investigation of selected alcoholic beverage companies.  
Hotels and Gaming 
                                      2000       1999           % change      
                                      US$m       US$m       US$         R     
Turnover                               110        126      - 13         -     
Trading profit                          17         12                         
Trading profit (excluding profit          
on disposal of Sun International)       12         12         -      + 14
'Revpar'                           R192.60    R178.50                 + 8   

Southern Sun has returned an encouraging financial result for the first six
months with the hotel division delivering a favourable performance, while the
gaming division is feeling the temporary effects of Tsogo Sun being the last
casino operator to open its permanent facility ('Montecasino') in
metropolitan Johannesburg.

While there is not yet any notable improvement in the hotel supply and demand
cycle, occupancies were encouraging at 64.2% compared to 63.7% last year,
with Revpar up 8% in rand terms to R192.60. Efficiencies raised the operating
profit margin to 10.9% from 9.5% last year (before a profit of US$5 million
realised on disposal of the 20% interest in Sun International Inc for US$63
million in June 2000).

The hotel division successfully managed the September opening of Tsogo Sun's
Sandton Convention Centre (comprising 22,000 square metres of convention and
exhibition facilities) and will be opening four new hotels (two in
Johannesburg, one in Cape Town and one in Maputo, Mozambique) before the end
of this financial year.

The gaming industry continues to show real growth year on year in revenues,
fuelled by the opening of permanent facilities. Whilst Tsogo Sun suffered a
small loss of market share during the period, this is expected to be regained
following the opening of Montecasino in December 2000. The facility will
comprise a casino with 1,700 gaming machines and 70 tables, a 246 room 5 star
Inter-Continental hotel and 25,000 square metres of retail and entertainment
The important Durban licence was awarded to Tsogo Sun but is the subject of a
legal challenge. The implications of this challenge, and its effect on the
development of our Durban casino, have still to be determined. Tsogo Sun was
also awarded the smaller casino licence in East London. We are optimistic
that the legislation necessary for Southern Sun to enter the slot route
industry is nearing enactment. 

Financial information 


The board has declared a maintained interim dividend of 6.5 US cents. The
dividend will be payable on 29 December 2000 to shareholders on either
register on 15 December 2000. The ex-dividend trading date as stipulated by
the LSE, will be 11 December 2000 on both the London and Johannesburg Stock
Exchanges. As the group reports primarily in US dollars, dividends are also
declared in US dollars. They are payable in sterling to shareholders on the UK
section of the register and in South African rand to shareholders on the RSA
section of the register. The rates of exchange applicable two full business
days before the declaration date, being 24 November 2000, will be used for
conversion ($/£ = 1.40 and R/$ = 7.81), resulting in an equivalent interim
dividend of UK 4.6 pence per share for UK shareholders and SA 50.8 cents per
share for RSA shareholders.


Group gross borrowings at September 2000 were US$929 million, up from US$602
million at March 2000, following the Czech Republic acquisition deferred
payment of some US$230 million. Overall average borrowing cost approximated
11% during the period under review, whilst interest cover was 14 times.

Net cash inflows from operating activities, before working capital movements,
matched last year's level. Ongoing management focus on net working capital
resulted in further gains in this area. While maintenance capital expenditure
approximated depreciation and amortisation during the period, capacity
expansion was muted, particularly in South Africa due to the subdued trading
conditions. Acquisition expenditure included the top up of investments in
Tanzania and Botswana, as well as the Czech Republic payment. 


The group effective tax rate at 27%, (on PBT before goodwill amortisation) is
up on the prior year's 23% due to reduced allowances in South Africa and the
inclusion in SABI profits of a greater proportion of taxable income from
higher tax rate jurisdictions.


Share of operating profit of associates is not comparable with prior year
because of the disposal of the PGSI group and Sun International. 

Currency translation

Rand figures in the consolidated supplementary information have been
translated into US dollars as follows: 
                                               Weighted             Closing 
                                           average rate                rate   
Period ended    : 30 September 2000                6.96                7.24   
                : 30 September 1999                6.09                6.00   
                : 31 March 2000                    6.16                6.53   


This statement, which should be read in conjunction with the independent
review report of the auditors set out below, is made to enable shareholders
to distinguish the respective responsibilities of the directors and the
auditors in relation to the consolidated interim financial information, set
out on pages 8 to 24, which the directors confirm has been prepared on a
going concern basis and follows all applicable accounting standards. The
directors consider that the group has used appropriate accounting policies,
consistently applied and supported by reasonable and prudent judgements and

On behalf of the board

E A G Mackay                                        N G Cox 
Chief Executive                                     Finance Director 

29 November 2000



We have been instructed by the company to review the financial information
set out on pages 8 to 24 and we have read the other information contained
in the interim announcement for any apparent misstatements or material
inconsistencies with the financial information.

Directors' responsibilities

The interim announcement, including the financial information contained
therein, is the responsibility of, and has been approved by the directors.
The Listing Rules of the Financial Services Authority require that the
accounting policies and presentation applied to the interim figures should be
consistent with those applied in preparing the preceding annual accounts
except where any changes, and the reasons for them, are disclosed. 

Review work performed

We conducted our review in accordance with guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board. A review consists principally
of making enquiries of management and applying analytical procedures to the
financial information and underlying financial data, and based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities
and transactions. It is substantially less in scope than an audit performed
in accordance with Auditing Standards and therefore provides a lower level of
assurance than an audit. Accordingly we do not express an audit opinion on
the financial information.

Review conclusion 

On the basis of our review we are not aware of any material modifications
that should be made to the financial information as presented for the six
months ended 30 September 2000.  

Chartered Accountants

29 November 2000