OPERATIONS REVIEW

Operations Review

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The financial year to 28 February 2011 includes the first full year trading contribution from the acquired Tennent’s and Gaymers businesses. On a constant currency basis for the continuing business, the Group reported an increase of 60.3% in Revenue, 46.1% in Net revenue, and growth of 41.2% and 30.1% in EBIT and adjusted diluted EPS respectively. Despite the increased weighting of the lower margin acquired businesses, operating margins were broadly unchanged at 19% implying a material increase in operating margins of the original cider business of Bulmers and Magners.

ncluding the €4.5 million operating profit contribution from the discontinued Spirits & Liqueurs division, the Group is reporting operating profit of €105 million for the full year, which is in line with stated guidance and represents an increase of 17% over the previous financial year.

Conversion of EBITDA into free cash flow remains strong at 84.6%, delivering free cash flow of €107 million. Added to the proceeds received from the disposal of the Spirits & Liqueurs business, this generated a €359 million reduction in net debt from €365 million at 28 February 2010 to €6 million at 28 February 2011.

Original Cider Business

Economic conditions in ROI and GB remain unpredictable and challenging. From a consumer perspective the environment is negative. However, from a sector-specific viewpoint the position of C&C is perhaps more balanced than the macro economic or consumer challenges in ROI and GB otherwise suggest. Two out of our three principal territories (GB and Export) continue to offer opportunity for growth in both cider volume and value.

ROI: The performance of the Bulmers business unit over the last twelve months was robust against a challenging backdrop. The objective of holding earnings in a deflationary environment was achieved with segmental profits inclusive of beer level year on year. The Bulmers brand performed, according to Nielsen, in line with a declining on trade Long Alcoholic Drinks (LAD) market but lagged the LAD growth in the off trade channel. Bulmers volumes were down 2.4% in the year with pricing and mix impact taking the net revenue decline to 7.1% in total. Earnings were protected by a 2.6 percentage point improvement in operating margins as the impact of cost reductions in Ireland flowed through.

GB: The cider category in GB is in good health, fuelled by innovation within the category and a dynamic off trade channel. The long term growth trend continued with volume and value growth of 3% and 5% respectively for the 12 months to 19 February 2011. Market data sources (CGA and Nielsen) recorded Magners volume as rising by 5% in the year, whereas our own shipments were up 3.6% but lagged behind in value with a net revenue decline of 3.5%. The volume to value differential reflects a volume share gain for Magners in the off trade but a share loss in the on trade; the decision to absorb the duty price increase in June 2010; and increased off trade promotional activity in the second half of the financial year.

Export: Market data (Euro monitor) suggest that cider as a worldwide category is enjoying growth of around 8%, implying double-digit growth excluding the UK. Magners volume sold outside of the UK grew by 34% in the year. North America and Australia continue to demonstrate very robust growth with other cider markets such as France and Finland showing signs of promise. With revenue per litre in line with those of the Bulmers brand in Ireland, Export is already providing some protection for the deflationary challenges in Ireland. Current volatility in foreign currency markets does, however, give some grounds for caution around growth in Export profit contribution in the short term.

Total worldwide Magners volumes, which includes GB, Export and Northern Ireland, grew by 4% this year while net revenues declined by 1.3% on a constant currency basis.

Acquired Businesses

The acquired businesses of Tennent’s and Gaymers combined to contribute €34.1 million of operating profit before allocation of Group overheads in the first full financial year of C&C ownership. This equates to more than double the full year earnings contribution from the disposed Spirits & Liqueurs business. The three transactions delivered net cash to C&C of €32.0 million and this corporate activity has strengthened both the earnings base and capital structure of C&C. The contribution should continue to improve as the remaining synergies are delivered during the 2011/12 financial year.

The Tennent’s business contributed €27.5 million of the €34.1 million with an improvement in the Tennent’s brand operating profit contribution margin from 17.4% at the half year to 20.3%. This margin improvement was achieved having absorbed a step change increase in marketing levels for the Tennent’s brand to over 11% of its net revenue. The brand is gaining share in the Scottish on trade whilst dropping some low value off trade activity.

Despite the improvement, the brand still indexes below the category averages in retail pricing, suggesting that there is scope for further operating margin gain over the next few years. The relevance of the Tennent’s business to the performance of Magners in the Scottish on trade is showing signs of emerging in the most recent CGA market stats. Magners Moving Annual Total (MAT) volume grew 13% within a Scottish on trade cider category that grew by 2%. Magners share of on trade cider in Scotland increased by 2.1 percentage points to 21.6% in the year.

Before allocation of group overheads, the Gaymers business contributed €6.6 million of EBIT in FY2010/11.

This represents an operating profit contribution margin of 7.5% and an improvement on the comparable 5.8% reported at the half year. The position of the Gaymers business and brands within the C&C portfolio remains unchanged. Their primary role is to support and protect the continued development of the Magners brand.

Exceptional costs in the year were €13.3 million. Of this, €8.4 million was attributed to the integration of the acquired businesses.

In addition, €6.6 million was invested in the new GB systems platform, enabling a successful and smooth exit from the transitional service agreements with AB InBev and Constellation Group.


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The Tennent’s business accounted for €27.5m of the €34.1m with the Tennent’s brand again improving operating profit contribution margins from 17.4% at the half year to 20.3%.