FINANCE REVIEW

STRONG PLATFORM FOR FUTURE DEVELOPMENT
C&C is pleased to report a strong financial and operating performance for the financial year ended 28 February 2011 delivering earnings growth in line with our stated guidance. The Group is reporting a 60.3% increase in revenue to €789.7 million on a constant currency basis (60.9% on a reported basis), a net revenue increase of 46.1% to €529.6 million (46.0% on a reported basis), operating profit, before exceptional items, of €100.5 million and basic earnings per share of 93.4 cent for the financial year ended 28 February 2011.

accounting policies

As required by European Union (EU) law, the Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), applicable Irish law and the Listing Rules of the Irish and London Stock Exchanges. Details of the basis of preparation and the significant accounting policies are outlined on pages 63 to 71.

Results For The Year

The financial year to 28 February 2011 incorporates the first full year trading contribution from the acquired Tennent’s and Gaymers businesses. Operating profit for continuing operations before exceptional items of €100.5 million reflects a constant currency increase of 41.2% on the prior year. This performance translates to an operating margin of 19.0% which, despite the increased weighting of the lower margin acquired businesses, represents a reduction of only 0.6 percentage points in constant currency terms on the operating margin earned in the previous financial year implying a material increase in the operating margin of the original cider business i.e. Bulmers and Magners brands. These results are discussed in more detail and analysed by business sector in the Operations Review on pages 10 to 20.

Management reviews the Group’s cash generating performance by measuring the conversion of EBITDA to Free Cash Flow as this metric highlights the underlying cash generating performance of the ongoing business. Free Cash Flow is a non-GAAP measure that comprises cash flow from operating activities net of capital investment cash outflows which forms part of the cash impact of investing activities.

The Group ended the year with a strong EBITDA to Free Cash Flow conversion ratio of 84.6% (2010: 103.4%) reflecting:-

a one-off positive working capital benefit arising from the timing of cashflows transferred to the Group from AB InBev under the transitional services agreement,
the Group’s on-going focus on working capital management, and
the well invested nature of the Group’s production facilities.

The net debt position benefited from both this and the net cash inflow from investing activities (excluding capital investment) of €263.2 million which reduced the Group’s net debt position from €364.9 million to €6.3 million. The cash inflow from investing activities includes the net proceeds received on disposal of the Group’s Spirits and Liqueurs division and is net of the deferred consideration and other costs paid in relation to the prior year acquisitions.

Exceptional Items

The Group incurred the following costs which due to their nature and materiality were accounted for as exceptional items:-

(a) Integration of acquired businesses: the €8.4 million of costs associated with the integration of the acquired Tennent’s and Gaymers businesses recognised in the income statement primarily relate to external consultant fees and remuneration costs of employees directly involved in the integration process and in the implementation of a new IT systems platform in the acquired Tennent’s business, which in accordance with IAS 16 Property, Plant and Equipment, and in the opinion of management, were not appropriate for capitalisation within Property, plant and equipment in the balance sheet.
(b) Restructuring costs: comprising severance and other initiatives arising from cost cutting initiatives implemented during the financial year and the integration of the acquired businesses, resulted in the recognition of an exceptional charge before taxation of €4.9 million.
(c) Retirement benefit obligation income: a defined benefit pension scheme curtailment gain of €2.0 million was recognised during the current financial year and arose as a result of: the Group’s disposal of its Spirits & Liqueurs business to William Grant & Sons Holdings Limited and the subsequent reclassification of those employees from active to deferred members; restructuring initiatives in Northern Ireland following the integration of the acquired business; and a cost reduction programme in the Group’s cider manufacturing facility in Clonmel, Co Tipperary.
(d) Inventory recovery: juice stocks which were previously impaired were recovered and used by the Group’s acquired Gaymers cider business during the current financial year resulting in a write back of juice stocks to operating profit at their recoverable value of €0.2 million. As the original impairment charge was accounted for as an exceptional cost the write-back has also been accounted for in this manner.

FINANCE COSTS, INCOME TAX AND SHAREHOLDER RETURNS

The average interest rate on the Group’s debt was 2.5% (2010: 2.0%) reflecting the ongoing low level of variable interest rates, the average annual one month euribor rate was 0.64% marginally lower than the equivalent rate of 0.66% for the 12 month period ended 28 February 2010. The marginal increase in average interest rate is reflective of the increased weighting of debt subject to fixed as opposed to variable rates, a consequence of the disposal of the Group’s Spirits & Liqueurs business and the subsequent repayment of debt. The average interest rate attributable to interest rate swap contracts increased from 3.6% for the financial year ended 28 February 2010 to 4.0% for the current financial year.

The income tax charge in the year relating to continuing activities and excluding exceptional items amounted to €11.1 million giving an effective tax rate of 12.2%, an increase on the prior year due to the acquisition of the Tennent’s and Gaymers businesses and the associated increased proportion of Group profits subject to the higher UK Corporation tax rate. However, the bulk of the Group’s taxable profits continue to arise in the Republic of Ireland, which accounts for the low effective tax rate.

Subject to shareholder approval, the proposed final dividend of 3.3 cent per share will be paid on 13 July 2011 to ordinary shareholders registered at the close of business on 27 May 2011. The Group’s full year dividend will therefore amount to 6.6 cent per share, a 10% increase on the previous year. The proposed full year dividend per share will represent a payout of 26% (2010: 26%) of the full year reported adjusted diluted earnings per share. A scrip dividend alternative will be available. Total dividends paid to ordinary shareholders in the current financial year amounted to €20.2 million of which €12.1 million was paid in cash while €8.1 million or 40% (2010: 22.6%) was settled by the issue of new shares.

Cash Generation

The Group generated Free Cash Flow of €106.8 million representing 84.6% of EBITDA compared with 103.4% for the year ended 28 February 2010. The reduction in Free Cash Flow from the exceptionally high EBITDA conversion rate for the year ended 28 February 2010 is driven by a number of factors including:-

increased capital expenditure due to the installation of a new IT system (JD Edwards) in the acquired Tennent’s business. The well invested nature of the Group’s manufacturing and brewing facilities means that ongoing capital investment will continue at low levels for the foreseeable future;
increased taxation payments reflecting higher UK tax liabilities as a result of the full year ownership of the Tennent’s and Gaymers businesses, and the year on year impact of an exceptional tax refund received during the financial year ended 28 February 2010 in relation to the receipt of R&D tax credits relating to the financial years ended 28 February 2005 to 29 February 2008;
reduced cash inflow from working capital management as the prior year working capital benefited from the timing of the acquisitions as outlined below.

The Group continued to maintain its focus on cash and working capital management during the financial year and had anticipated that it would be debt neutral at the year end, but higher than originally anticipated cash outflows in relation to integration and restructuring costs resulted in the Group retaining a net debt position, albeit at the low level of €6.3 million / 0.07 times EBITDA (calculated in accordance with the Committed Revolving Loan Facility Agreements), at the year end.

The free cash inflow in the financial year ended 28 February 2010 principally reflected low capital investment, a reduction in financing costs driven by a fall in variable interest rates and a positive working capital contribution primarily from the timing of the acquisition of the Tennent’s and Gaymers cider businesses which yielded a working capital inflow of €30.0 million in Tennent’s, partly offset by a working capital outflow in the Gaymers cider business of €4.2 million, as no trade receivables were transferred on acquisition.

A summary cash flow statement is set out in Table 1.

Key Liquidity Indicators

The Group continues to have a very strong balance sheet, fully invested production facilities and good cash generation capabilities. The receipt of a gross cash consideration of €300.0 million following the disposal of its Spirits & Liqueurs business enabled the Group to significantly reduce its net debt position by the year end and leaves the Group well placed to support continued business investment and take advantage of any acquisition or development opportunities which may arise. The Group’s primary euro facility reduced to €185.0 million, of which €100 million is drawn, during the financial year and is due for renewal in May 2012.

Table 1 – Cash flow summary

  2011
€m
2010
€m
     
Inflows    
Operating profit (i) 105.0 89.5
Amortisation/depreciation 21.3 16.8
EBITDA (ii) 126.3 106.3
     
Outflows    
Working capital 31.5 38.0
Net capital expenditure (21.1) (5.4)
Net finance costs (7.1) (7.0)
Tax paid (8.4) (4.7)
Exceptional items paid (13.5) (13.0)
Other (0.9) (4.3)
     
Free cash flow(iii) 106.8 109.9
     
Proceeds on disposal of subsidiaries 294.9 2.1
Proceeds from exercise of share options and issue of new shares under Joint Share Ownership Plan 4.8 1.5
Deferred consideration / costs of acquisitions (31.7) (237.7)
Dividends paid in cash (12.1) (14.7)
     
Reduction/ (increase) in net debt 362.7 (138.9)
     
Net debt at beginning of year (364.9) (226.2)
Translation adjustment (2.6) 0.6
Non cash movement (1.5) (0.4)
     
Net debt (iv) at end of year (6.3) (364.9)

Table 2 – Key liquidity indicators

    2011 2010
       
Financial Summary      
EBITDA (ii) €m 126.3 106.3
Net interest paid €m 7.1 7.0
Net debt €m 6.3 364.9
       
Adjusted Diluted EPS Cent 25.4 22.7
Dividend per share Cent 6.6 6.0
Dividend cover   26% 26%
       
Price performance      
Share price at 28 February   €3.54 €2.71
52 week high   €3.60 €3.20
52 week low   €2.75 €0.90
       
Market capitalisation at year end (excluding treasury shares) €m 1,149.1 861.9
       
Financing      
EBITDA/net interest   17.8 17.9
Net debt/EBITDA   0.07 2.8
Net debt as percentage of market capitalisation   0.5% 42.3%

(i) before exceptional costs and inclusive of discontinued activities
(ii) EBITDA: Earnings before exceptional items, interest, tax, depreciation and amortisation
(iii) Free Cash Flow is a non-GAAP measure that comprises cash flow from operating activities net of capital investment cash outflows which form part of investing activities.
Free Cash Flow highlights the underlying cash generating performance of the ongoing business.
(iv) Net Debt is net of prepaid issue costs of €0.3 million (2010: €1.8 million) and excludes the fair value of swap instruments amounting to a liability of €2 million (2010: €4.9 million)

The Group is subject to two financial covenants under the terms of its debt agreements, interest cover and Net Debt:EBITDA. Interest cover, being a measure of the ability of a company to meet interest payments on outstanding debt, remains very strong at 17.8 times, being in excess of fives times the 3.5 times minimum cover provided in the Group’s banking covenants. Net debt/EBITDA ratio, being a measure of the ability of a company to pay off its incurred debt, reduced to 0.07 times (maximum level specified in the aforementioned banking covenants is 3.5 times) following debt reduction and reflects the Group’s extremely low levels of net debt. An analysis of cash, debt and derivative financial instruments including maturity profiles is set out in notes 20, 21 and 24.

This significantly reduced net debt to market capitalisation ratio is primarily driven by the repayment of debt and to a lesser extent the increase in the market capitalisation of the Group.

Retirement Benefit Obligations

In compliance with IFRS, the net assets and actuarial liabilities of the various defined benefit pension schemes operated by the Group companies, computed in accordance with IAS 19 Employee Benefits, are included on the face of the Group balance sheet as retirement benefit obligations.

The last actuarial valuation of 1 January 2009 highlighted the Republic of Ireland schemes’ failure to meet the Minimum Funding Standard and, although the Pensions Board deferred the deadline for the submission of funding recovery plans and applications for benefit reductions until further clarification is received from the Government in relation to their plans for pension reform, the Group is continuing to work with the Pension Scheme Trustees to implement pension reform with the objective of managing the Group’s funding risk, making the schemes sustainable and placing the schemes in a position to satisfy the funding standard.

At 28 February 2011, the retirement benefit obligations on the IAS 19 basis amounted to €15.3 million gross and €13.3 million net of deferred tax (2010: €21.2 million gross and €18.4 million net of deferred tax). The movement in the deficit is as follows:-

  €m
   
Deficit at 1 March 2010 21.2
Translation adjustment 0.1
Employer contributions paid (6.6)
Actuarial gains (0.2)
Charge to the Income Statement 0.8
Deficit at 28 February 2011 15.3

The reduction in the value of the Group’s retirement benefit obligation is largely as a result of the recognition of the annual employer contribution. The charge to the income statement benefits from the recognition of a curtailment gain of €2.0 million which primarily arose as a result of the restructuring of the Group’s operations and the disposal of its Spirits & Liqueurs business which led to the reclassification of these employees from active to deferred members.

All other significant assumptions applied in the measurement of the Group’s pension obligations at 28 February 2011 are consistent with those as applied at 28 February 2010.

FINANCIAL RISK MANAGEMENT

The primary financial market risks that the Group is exposed to include interest rate and foreign currency exchange rate movement risks. The board of Directors set the treasury policies and objectives of the Group, the implementation of which is monitored by the Audit Committee. Details of both the policies and control procedures adopted to manage these financial risks are set out in detail in note 24 to the financial statements. The Group is also exposed to commodity price fluctuations, and manages this risk, where economically viable, by entering into fixed price short term supply contracts with suppliers. The Group does not directly enter into commodity hedge contracts.

In addition, the Group enters into insurance arrangements to cover certain insurable risks where external insurance is considered by management to be an economic means of mitigating these risks.

Debt and interest rate management
The Group’s debt is primarily denominated in euro, subject to floating interest rates, and repayable by way of a bullet repayment on maturity. A sterling denominated loan facility was negotiated in November 2009, subject to variable interest rates and is repayable by instalment, the last of which is due on 30 June 2011. This facility will be repaid from existing cash resources. It is the intention of the Group to review its debt structure and to contract a new facility in advance of the maturing of its euro debt facility which is due to expire in May 2012. The Group finished the year in a very strong financial position. Reporting a net debt of €6.3 million the Group is substantially debt free. The sale of the Spirits & Liqueurs business for €300.0 million plus working capital adjustments was the main driver in the reduction of net debt and effectively de-risks the refinancing of the Group’s primary euro debt facility.

In line with its treasury policy, the Group hedges an appropriate portion of its interest rate risk and, as set out in note 24, at 28 February 2011 the Group has €50.0 million of its variable rate debt converted to fixed rates through the use of interest rate swap agreements at the following interest rates (excluding margin):

  Amount
fixed
€m
Fixed
interest
rate
     
Expiring on 31 August 2012 50.0 4.57%

Cash deposits are all invested on a short term basis with banks who are members of our banking syndicate.

Currency risk management
The Group publishes its consolidated financial statements in euro but conducts business in other currencies. By entering into foreign currency transactions and by the consolidation of the results of its non-euro reporting foreign operations the Group is exposed to both transaction and translation foreign currency rate risk. The Group hedges a portion of its exposure to the sterling value of its foreign operations by designating its sterling borrowings as a net investment hedge. Currency transaction exposures primarily arise on the sterling denominated sales of its euro subsidiary undertakings and the Group’s policy is to hedge an appropriate portion of this exposure for a period of up to 2 years ahead.

The effective rate for the translation of results from foreign currency operations was €1:£0.85 (year ended 28 February 2010: €1:£0.89) and the effective rate for the translation of the net operating profit impact or foreign currency transactions was €1:£0.88 (year ended 28 February 2010: €1:£0.82)

The principal foreign currency forward contracts in place at 28 February 2011 are:

  2012
   
Sterling amount (m) 20.0
Average forward rate (Euro:Stg) 0.84

Where hedge accounting is applied, hedges are documented and tested for effectiveness on an ongoing basis. All interest rate swaps and currency hedges are based on forecasted exposures and meet the requirements of IAS 39 Financial Instruments: Recognition and Measurement to qualify as cash flow hedges. The fair value of all outstanding hedges at 28 February 2011 as calculated by reference to current market value amounted to a net liability of €1.7 million (2010: €6.8 million net liability) and this has been included on the balance sheet under “derivative financial assets and liabilities”.


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