CHIEF FINANCIAL OFFICER'S REVIEW

chairmans statement


RESULTS FOR THE YEAR
C&C is pleased to report net revenue of €480.8 million, operating profit from continuing operations of €111.2 million and adjusted diluted EPS for continuing operations of 27.6 cent.

On a constant currency basis, this translates to a net revenue decline of 4.8% (reported basis: decline of 5.7%) but an operating profit increase of 9.0% (reported basis: up 10.2%) equating to an operating margin of 23.1%, an increase of 2.9 percentage points on the prior year (3.3 percentage points on a reported basis).

The achievement reflects both the Group’s commitment to continued cost management and its strategy of capitalising on brand strength by the pursuit of value.


Table 1 – Key financial indicators 2012 2011
Financial Summary
Net revenue €m 480.8 509.9
EBITDA (i) €m 131.4 126.3
Adjusted Diluted EPS Cent 27.6 25.4
 
Free cash flow (ii) €m 102.6 106.8
Free cash flow conversion ratio 78.1% 84.6%
Net cash/(debt) (iii) €m 68.3 (6.3)
 
Dividend per share Cent 8.17 6.6
Dividend cover 29.6% 26.0%
Financing
Net interest paid €m 3.9 7.1
Interest Cover 34.6 17.8
Net debt/EBITDA - 0.07
Net debt as percentage of market capitalisation n/a 0.5%
Share price performance
Share price at 29/28 February €3.665 €3.535
52 week high €3.69 €3.60
52 week low €2.70 €2.75
 
Market capitalisation at year end €m 1,243 1,192
(i) EBITDA: Earnings before exceptional items, interest, tax, depreciation and amortisation and inclusive of discontinued operations.
(ii) 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.
(iii) FY2011 Net Debt is net of prepaid issue costs of €0.3 million and excludes the fair value of swap instruments amounting to a liability of €2.0 million. The equivalent balances for FY2012 were nil.


The performance of each of the Group’s reporting segments is discussed in detail in the Operations Review on pages 10 to 17, in summary the key drivers of this financial performance were:-

  • A good earnings performance from ROI:
    despite continued price deflation as a result of growing home consumption and increased promotional activity in the off-trade; the Group achieved stable earnings with increased operating profit contribution from beer compensating for reduced cider earnings,
  • Stabilisation of Magners performance in GB:
    despite increased competition, Magners experienced volume growth for the first time in five years, increasing 2.8%. On constant currency basis, net revenue grew 0.7% reflecting increased volumes and price stabilisation, as offset by the negative impact of channel mix. Operating margins improved 1.1ppts to 23.4%,
  • Encouraging volume and operating profit growth in the Group’s export business
    with Magners export volumes up 28% and operating profit increasing from €4.1 million to €6.6 million, of which the newly acquired Hornsby’s brand contributed €0.9 million,
  • Strong Tennent’s performance:
    the pursuit of value and improved pricing for Tennent’s in the off-trade channel had a negative impact on volume and net revenue but resulted in significant operating profit and margin growth for the Tennent’s brand, on a constant currency basis up 22.5% and 4.5ppts respectively,
  • Continued commitment to brand investment:
    marketing investment remains at 10% of net revenue with increased investment in developing markets partially offsetting reduced investment in mature markets as the Group competes on price in a tough environment.
  • EPS growth ahead of operating profit growth
    reflecting reduced finance costs following debt repayment,
  • Currency:
    applying this year’s effective rates to last year’s operating profit improves FY 2011 reported profits by a net €1.1 million as a result of a strengthening in the sterling effective transaction rate which was partially offset by a weakening in the effective translation rate.

ACCOUNTING POLICIES

As required by European Union (EU) law, the Group’s 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 67 to 77.

FINANCE COSTS, INCOME TAX AND SHAREHOLDER RETURNS

Net finance costs reduced to €5.1million (2011: €9.4 million) reflecting a reduction in average drawn debt levels and the associated reduction in issue cost amortisation charges, the benefit of which was partially offset by an increase in effective interest rates. The average interest rate paid was 3.4% (2011: 2.5%) reflecting the increased weighting of debt subject to an ‘out of money’ fixed rate swap contract. On a time weighted basis average drawn debt reduced from €305 million during FY 2011 to €92 million in FY 2012. Net finance costs are also inclusive of an unwind of discount on provisions charge of €1.0 million (2011: €1.0 million).

The income tax charge in the year relating to continuing activities and excluding exceptional items amounted to €13.8 million giving an effective tax rate of 13%, an increase on the prior year primarily due to the expiration of manufacturing relief in ROI. The low effective tax rate reflects the residency of the Group’s brand owning companies, with the majority of the Group’s taxable profits continuing to arise in ROI.

Total dividends paid to ordinary shareholders in the current financial year amounted to €22.7 million of which €18.5 million was paid in cash while €4.2 million or 18% (2011: 40%) was settled by the issue of new shares. Subject to shareholder approval, the proposed final dividend of 4.5 cent per share will be paid on 13 July 2012 to ordinary shareholders registered at the close of business on 25 May 2012. The Group’s full year dividend will therefore amount to 8.17 cent per share, a 23.8% increase on the previous year. The proposed full year dividend per share will represent a payout of 29.6% (2011: 26.0%) of the full year reported adjusted diluted earnings per share. A scrip dividend alternative will be available.

EXCEPTIONAL ITEMS

The Group posted to operating profits a net income of €3.1 million before tax in relation to a number of items which due to their nature and materiality were classified as exceptional items for reporting purposes; a presentation which in the opinion of the Board provides a more helpful analysis of the underlying performance of the Group.

The items which were classified as exceptional include:-

  • Retirement benefit obligations:
    as discussed later the Group’s pension reform programme concluded with the receipt from the Pensions Board of a Section 50 Direction to remove guaranteed pensions in payment increases. This resulted in the recognition of a past service gain net of expenses of €14.7 million, calculated as the difference in the value of liabilities assuming an average discretionary increase rate of 2.25% per annum as opposed to the previously guaranteed 3% per annum on pensions in payment.

    The Group also earned a curtailment gain of €0.1 million arising as a result of the Group’s disposal of its Northern Ireland wholesale business and the reclassification of these employees from active to deferred members.

  • Restructuring costs:
    comprising severance and other initiatives arising from ongoing cost management initiatives resulted in an exceptional charge before taxation of €4.6 million (2011: €4.9 million).

  • IT Systems implementation & integration costs of €4.0 million:
    primarily relating to the migration of the Gaymers Cider business onto a new IT system enabling the business to fully integrate with the Group’s Magners business in England and Wales.

  • Loss on revaluation of property, plant & machinery:
    in line with the Group’s policy to recognise its freehold properties and plant & machinery at fair value on the Balance Sheet, the Group engaged external consultants to complete a valuation as at 29 February 2012. This exercise resulted in a net revaluation loss of €2.0 million being accounted for in the Income Statement, and a further net loss of €1.7 million accounted for in other comprehensive income on the basis that it created a revaluation surplus in respect of the Group’s Scottish buildings and reduced a revaluation surplus previously recognised in respect of other assets.

  • Loss from discontinued operations:
    a loss of €1.1 million was realised, of which €0.1 million profit arose on the disposal of the Group’s Northern Ireland wholesaling business (Quinns of Cookstown) to Britvic Northern Ireland Limited on 30 June 2011 for a gross consideration of €4.8 million (£4.3 million) and the balance in relation to a working capital settlement to reflect ‘normalised’ working capital’ as set out in the Sale and Purchase Agreement following the prior year disposal of the Group’s Spirits & Liqueurs business.

    The Group also recognised a loss of €0.7 million on recycling a foreign currency reserve balance to the Income Statement following the disposal of its Northern Ireland wholesaling business.

  • Inventory recovery:
    juice stocks which were previously impaired were recovered and used by the Group’s cider business during the current financial year resulting in a write back of juice stocks to operating profit at their recoverable value of €0.7 million. As the original impairment charge was accounted for as an exceptional cost the write-back has also been accounted for in this manner.

BALANCE SHEET STRENGTH, DEBT MANAGEMENT AND CASHFLOW GENERATION

A key strength of the Group, and one which leaves the Group ideally placed to invest in its brands, business and customer base, and, to access growth potential in what is a challenging economic and financial climate, is the strength of its balance sheet.

Total assets reported by the Group were €960.8 million at 29 February 2012. The Group’s portfolio of market leading brands and related goodwill is valued at €483.3 million. Brand values and goodwill are assessed for impairment on a regular basis with the Directors concluding that no material adjustments to the assumptions underlying the impairment testing models applied would result in any foreseeable risk of an impairment arising.

In addition, the Group generated Free Cash Flow of €102.6 million in the period, reflecting an EBI TDA to Free Cash Flow conversion ratio of 78.1% which is comfortably within the Group’s target range of 70%-80%, enabling it to achieve a year end net cash position of €68.3 million. As discussed below, the Group also had undrawn committed facilities available of €375 million at the year end date.

Debt management
The Group substantially reduced its drawn debt, during the current financial year, repaying its maturing sterling debt facility and reducing the drawings under its primary euro debt facility to €60 million. This facility was subsequently voluntarily repaid and cancelled on 30 March 2012, in advance of the May 2012 maturity date. All debt repayments were financed from surplus cash resources.

In February 2012, the Group entered into a committed €250 million multi-currency five year syndicated revolving loan facility with seven banks, repayable on 28 February 2017. The facility agreement provides for a further €100 million in the form of an uncommitted accordion facility and permits the Group to avail of additional indebtedness, excluding working capital and guarantee facilities, to a maximum value of €150 million. Consequently, the Group is permitted, under the terms of the agreement, to have debt capacity of €500 million.

Table 2 – Cash flow summary 2012 2011
€m €m
 
Operating profit (i) 111.1 105.0
Amortisation/depreciation 20.3 21.3
EBITDA (ii) 131.4 126.3
 
Working capital 8.0 31.5
Net capital expenditure (17.7) (21.1)
Net finance costs (3.9) (7.1)
Tax paid (4.4) (8.4)
Exceptional items paid (8.7) (13.5)
Other * (2.1) (0.9)
 
Free cash flow(iii) 102.6 106.8
Free cash flow conversion ratio 78.1% 84.6%
 
Proceeds on disposal of operations 4.7 294.9
Proceeds from exercise of share options and issue of new shares under Joint Share Ownership Plan 1.6 4.8
Consideration / costs of acquisitions (16.6) (31.7)
Dividends paid in cash (18.5) (12.1)
 
Reduction in net debt 73.8 362.7
 
Net debt at beginning of year (6.3) (364.9)
Translation adjustment 1.1 (2.6)
Non cash movement (0.3) (1.5)
 
Net cash/(debt)(iv) at end of year 68.3 (6.3)

* other relates to the share options add back, pensions charged to operating profit before exceptional items less contributions paid and profit on disposal of plant & equipment

(i) before exceptional costs and inclusive of discontinued activities

(ii) EBITDA: Earnings before exceptional items, interest, tax, depreciation and amortisation and inclusive of discontinued operations

(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) FY 2011 Net Debt is net of prepaid issue costs of €0.3 million and excludes the fair value of swap instruments amounting to a liability of €2.0 million. The equivalent balances for FY2012 were nil.


Cash generation
Management reviews the Group’s cash generating performance by measuring the conversion of EBITDA to Free Cash Flow as we consider that this metric best highlights the underlying cash generating performance of the ongoing business.

The Group ended the year with a strong EBITDA to Free Cash Flow conversion ratio of 78.1% (2011: 84.6%) principally reflecting:-

  • a reduction in financing costs driven by reduced levels of drawn debt,
  • reduced corporation tax payments following a prior year overpayment,
  • on-going focus on working capital management,
  • low capital investment: the current year capital investment included the costs of transferring a bottling line from the Group’s cider manufacturing facility in Clonmel to Glasgow providing the brewery with bottling capacity.

The prior year’s free cash flow conversion rate benefited from a oneoff positive working capital benefit arising from the timing of cashflows transferring to the Group from AB Inbev under the transitional services arrangement.

The high level of cash generation coupled with the availability of finance under the terms of the debt facility provides the Group with significant financial flexibility to enhance earnings growth through accretive acquisitions and/or return cash to shareholders.

A summary cash flow statement is set out in Table 2.

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 Group’s ROI defined benefit pension schemes experienced funding difficulties in recent years owing to poor investment performance, low interest rates and continued improvements in life expectancy, resulting in the Group concluding that the scale of financial risks associated with funding the schemes in a deflationary and austere environment were unsustainable. Consequently, the Group worked with the Pension Scheme Trustees to implement pension reform in order to manage the Group’s funding risk. The process concluded with the Pensions Board issuing a Section 50 directive to remove the mandatory pension increase rule, which guaranteed 3% per annum increase to certain pensions in payment, and replace it with guaranteed pension increases of 2% per annum for each of the 3 years 2012, 2013 and 2014 and thereafter future pension increases to be awarded on a discretionary basis.

A Funding Proposal was also approved by the Pensions Board which sees the Group commit to contributions of 14% of Pensionable Salaries (FY2011: 38.1% of Pensionable Salaries) to fund future pension accrual of benefits, a deficit contribution of €3.4m and an additional supplementary deficit contribution of €1.9m for which C&C reserves the right to reduce or terminate if on consultation with the Trustees and on advice from the Scheme Actuary that it is no longer required due to a correction in market conditions. The level of future funding commitment is in line with current funding levels. The Directors believe that the agreed plan will enable the schemes to meet the Minimum Funding Standard by 31 December 2016.

At 29 February 2012, the retirement benefit obligations on the IAS 19 basis amounted to €15.1 million gross and €13.2 million net of deferred tax (2011: €15.3 million gross and €13.3 million net of deferred tax). The movement in the deficit is as follows:-

€m
Deficit at 1 March 2011 15.3
Employer contributions paid (5.9)
Actuarial loss 19.0
Past service gain/curtailment gain (14.9)
Charge to the Income Statement 1.6
Net deficit at 29 February 2012 15.1


Although, the retirement benefit deficit computed in accordance with IAS 19 did not change materially from the prior year, the deficit was impacted by a number of factors, namely:-

  • actuarial loss: €19.0m recognised as a result of a reduction in the discount rate applied to liabilities (ROI schemes): reduced from 5.3% - 5.5% at 28 February 2011 to 4.7% - 4.9% at 29 February 2012),
  • Past service gain: €14.8m arising on elimination of the guaranteed pensions in payment increases and reflecting the difference between liabilities valued using a pension increase assumption of 3% per annum versus 2.25% per annum (assumed to be the average discretionary pension increase rate)
  • Employer contributions: €5.9 million

All other significant assumptions applied in the measurement of the Group’s pension obligations at 29 February 2012 are consistent with those as applied at 28 February 2011.

FINANCIAL RISK MANAGEMENT

The most significant financial market risks that the Group is exposed to include foreign currency exchange rate risk, commodity price fluctuations, interest rate risk and creditworthiness risk in relation to its counterparties.

The board of Directors set the treasury policies and objectives of the Group, the implementation of which is monitored by the Audit Committee. There has been no significant change during the financial year to the Board’s approach to the management of these risks, details of both the policies and control procedures adopted to manage these financial risks are set out in detail in note 23 to the financial statements.

Debt and interest rate risk management
It is Group policy to ensure that a structure of medium/long term debt funding is in place to provide it with the financial capacity to promote the future development of the business and to achieve its strategic objectives. The Group manages its borrowing ability by entering into committed loan facility agreements and as discussed earlier successfully completed negotiations on a committed five year debt facility with seven banks, including Bank of Ireland, Bank of Scotland, Barclays Bank, Danske Bank, HSBC, Rabobank, and Ulster Bank providing the Group with committed debt capacity of up to €250 million.

The Group seeks to manage its interest rate risk by hedging an appropriate portion of future interest rate risk through the use of interest rate swap agreements converting variable rate debt to fixed rates. The Group had drawn debt of €60 million at the year end which was subsequently repaid on 30 March 2012 and had no outstanding interest rate swap agreements.

The Group’s cash deposits are all invested on a short term basis with banks who are members of the Group’s banking syndicate.

Currency risk management
The Group publishes its consolidated financial statements in euro but transacts 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 sterling borrowings as net investment hedges and enters into forward rate hedge agreements to hedge an appropriate portion of the transaction exposure borne by its subsidiary undertakings for a period of up to two years ahead. Currency transaction exposures primarily arise on the sterling and US Dollar denominated sales of its euro subsidiaries.

The principal foreign currency forward contracts in place at 29 February 2012 are:

Sterling USD
Foreign Currency Amount (m) 35.0 1.0
Average forward rate (Euro:FX) 0.86 1.32


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 29 February 2012 as calculated by reference to current market value amounted to a net liability of €0.8 million (2011: €1.7 million net liability) and this has been included on the balance sheet under “derivative financial assets and liabilities”.

The effective rate for the translation of results from foreign currency operations was €1:£0.87 (year ended 28 February 2011: €1:£0.85) and the effective rate for the translation of foreign currency revenue/net revenue transactions resulting in an effective rate of €1:£0.85 (year ended 28 February 2011: €1:£0.88) at operating profit level.

Comparisons for revenue, net revenue and operating profit for each of the Group’s operating segments are shown at constant exchange rates for transactions by subsidiary undertakings in currencies other than their functional currency and for translation in relation to the Group’s sterling denominated subsidiaries by restating the prior year at FY 2012 effective rates. Applying the realised FY 2012 foreign currency rates to the reported FY 2011 revenue, net revenue and operating profit rebases the comparatives as shown in Table 3.

Table 3 – Constant Currency Comparatives
Year ended
28 February 2011(i)
€m
FX
Transaction
€m
FX
Translation
€m
Year ended
28 February 2011
Constant currency
comparative
€m
Revenue
Cider – ROI 136.4 - - 136.4
Cider– GB 281.6 - (3.1) 278.5
Cider – NI 15.7 - (0.2) 15.5
Cider – Export 24.5 (0.5) - 24.0
Tennent’s 227.2 - (3.3) 223.9
Third party brands 84.6 - (1.1) 83.5
Total 770.0 (0.5) (7.7) 761.8
 
Net revenue
Cider – ROI 100.0 - - 100.0
Cider – GB 192.2 - (1.7) 190.5
Cider – NI 12.6 - (0.2) 12.4
Cider – Export 24.5 (0.5) - 24.0
Tennent’s 103.5 - (1.5) 102.0
Third party brands 77.1 - (1.0) 76.1
Total 509.9 (0.5) (4.4) 505.0
 
Operating profit
Cider – ROI 43.7 (0.5) - 43.2
Cider – GB 25.6 2.3 (0.1) 27.8
Cider – NI 3.1 (0.1) - 3.0
Cider – Export 4.1 (0.1) - 4.0
Tennent’s 18.5 - (0.3) 18.2
Third party brands 5.9 - (0.1) 5.8
Total 100.9 1.6 (0.5) 102.0
 
(i) Continuing operations i.e. excluding Revenue, Net revenue and Operating profit of the Group’s discontinued NI Wholesaling business


Commodity price and other risk management
The Group is exposed to commodity price fluctuations, and manages this risk, where economically viable, by entering into fixed price supply contracts with suppliers. The Group does not directly enter into commodity hedge contracts. The cost of production is also sensitive to variability in the price of energy, primarily gas and electricity. It is Group policy to fix the cost of a certain level of its energy requirement through fixed price contractual arrangements directly with its energy suppliers.

The Group seeks to mitigate risks in relation to the continuity of supply of key raw materials and ingredients by developing trade relationships with key suppliers. The Group has over 60 long term apple supply contracts with farmers in the west of England and has an agreement with malt farmers in Scotland for the supply of malt.

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.

UNGEARED BALANCE SHEET
SUPPORTED BY NEW €250
MILLION FINANCING FACILITY


Kenny Neison
Group Chief Financial Officer


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