significant strategic progress in our core markets and our international business

Our business model seeks growth in our core markets through strong brand/market combinations

recent developments will lay the foundations for accelerated international growth

GROUP CHIEF EXECUTIVE OFFICER’S REVIEW

C&C Chief Executive

It has been a busy year for the Group in which we have made significant strategic progress in consolidating and investing in our core markets, and accelerating the development of our international business.

In core markets, we weathered tough economic and trading headwinds to deliver another robust financial performance in line with guidance, again demonstrating the resilience of our business model. We continued to develop our model in these markets, as we have over the last few years, leveraging our strong brand/market combinations to move from a mono-brand to a multi-beverage model. This moves our business model from classic single-brand consumer models to broader customer-focused multiple-brand businesses. The post year-end acquisition of the Gleeson Group in Ireland and a recent equity investment in Wallaces Express in Scotland will both significantly improve our ability to execute this strategy and broaden our offering in these markets.

Internationally we continue to accelerate our growth ambitions and achieved a major milestone this year with the completion of the acquisition of Vermont Hard Cider Company in December 2012. Other achievements during the year include the re-launch of the Hornsby’s brand in the US and the further introduction of Tennent’s into new international markets. Recent developments should serve to enhance our business model whilst laying the foundations for accelerated international growth.

WINNING IN DEVELOPED MARKETS

Our business model seeks growth in our core markets through strong brand/market combinations, combining brand investment with a focus on local markets. We believe that we have the right strategy to grow the businesses in our core markets by focusing on four central themes:

  • Developing multi-beverage platforms in markets where we have strong brand positions; and having the flexibility to differentiate our brand proposition across the channels
  • Operating a decentralised business model with local management focused on our customer’s needs
  • Investment in both our strong authentic local brands through advertising and promotion; and our local customers through trade lending and support
  • Focusing on cost leadership in manufacturing and logistics

In a challenging economic environment in ROI and the UK, the Group’s results for the year continue to demonstrate the resilience of this model. On a constant currency basis, net revenues before exceptional items declined by 5.5% but Group operating profit, before exceptional items, increased by 0.4%.

ROI operating profit declined by 11.9% following a poor summer trading period but stabilised in the second half of the year as market conditions improved relatively.

Cider UK experienced a challenging year as poor summer weather and new entrants led to increased competition across the category. This resulted in an operating profit decline of 15.6% in the business as both Magners and the Gaymers branded portfolio underperformed the market.

The Tennent’s business continues to surpass expectations with operating profits growing by 34.7% supported by high quality market share growth across the Independent Free Trade (IFT) and increased trade lending.

CORE MARKET CONSOLIDATION

In our core markets we took significant steps to accelerate our move into multi-beverage.

The post year-end acquisition of the Gleeson Group in Ireland offers the prospect of returning the ROI business to growth for the first time in many years. The Gleeson Group is the largest distributor of packaged long alcohol drinks (LAD) to the licensed on-trade in Ireland. Its sales network services over 4,000 customers directly in the Irish market. It represents a number of beer, wine and spirits brands on an agency basis and manufactures Tipperary mineral water, Finches soft drinks and a range of own-label brands. We believe the acquisition will enhance our route to market in ROI and provide opportunities to grow our branded beer and wine portfolio in the Irish market, and provides Group-wide opportunities in soft-drinks and water.

In Scotland, after the year-end we made an equity investment in Wallaces Express, a Scottish independent wines and spirits wholesaler. The Wallaces Express business will move our brand offering into a multi-beverage model.

During the course of the year, we entered, for a modest investment, the on-trade wine segment with the acquisition of a number of brands from the Waverley portfolio. Well known brands such as Oliver & Greg’s and Moondara, exclusive to the on-trade channel, will continue to be developed across our core markets and help to broaden our own branded portfolio offering.

AUTHENTIC LOCAL BRANDS

Our philosophy is that local brands appeal to local consumers who are looking for authentic, quality brands with a strong heritage. Our marketing efforts and brand strategies, therefore, are tailored to reach consumers in each of our core markets.

The creation of the Shepton Mallet Cider Mill trading division in England post the year-end is a first step towards drawing out the latent potential in some of the brands acquired as part of the Gaymers portfolio, such as Addlestones, Blackthorn and Olde English. As part of this initiative, we committed over £1 million to an investment fund to support local agriculture through new orchard projects.

In Scotland the Caledonia Best brand launched its first TV advert and was unveiled as the official beer of Scottish Rugby in a three year deal. Provenance remains a key feature of both Caledonia Best and our leading Tennent’s Lager brands, and we announced that we would source all our barley from Scottish farmers.

Other brand initiatives included the development of Heverlee, a premium Belgian lager, which we launched in the Scottish on-trade market. We also seeded The Five Lamps Dublin Beer Company, an Irish craft beer brewer.

INTERNATIONAL DEVELOPMENT

The unique attributes of cider are central to our thesis that as a category it will continue to grow and internationalise. Cider as a natural, craft and traditional product will continue to benefit from the global trend of ‘savoury to sweet’, and be seen as a refreshing and gluten-free alternative to other long alcoholic drinks such as beer. We see evidence in many international markets to support our belief that cider will establish itself there as a long term sustainable category.

During the year we took a number of major strategic steps in positioning the International business to make the most of this opportunity. Centre stage in this regard was the acquisition in December 2012 of Vermont Hard Cider Company (VHCC) in the United States for a gross consideration of US$305 million (€230.9 million). In absolute terms the cider category in the United States is still small but it has seen strong volume growth over the last year and could in time become one of the largest markets outside of the UK and Ireland. This gives us confidence in the category’s development and underlines the significant opportunity that lies ahead.

VHCC is one of the leading premium craft cider producers in the United States. Over the last 13 years it has developed its principal brand Woodchuck as the leading cider brand in the US, and has established a national distribution platform. Since our acquisition we are delighted to find a strong cultural fit – shared commitment to values, heritage and brand attributes. We have retained the key senior management that have successfully grown the business and we are committed to investing over $30 million in order to double existing capacity. The combined salesforce in North America will also provide increased opportunities for the Magners brand, which remains in reasonable growth in the United States and Canadian markets. Magners volumes grew 10% in the United States in the year.

In other international markets we continued to invest in our infrastructure and grow the Magners brand. During the year we had good success in some European markets such as Spain and France, while seeding opportunities in new territories such as South America and Africa. Recent underperformance in the Australian market has been disappointing, but we believe we have rectified the core issue and recent shipment data are showing a return to market growth rates.

Hornsby’s was re-launched in the United States during the year and was repositioned as a more contemporary product in our growing portfolio. We innovated with some flavoured varieties but Hornsby’s ‘Crisp Apple’ remains the driving force for the brand.

Tennent’s had a very promising year, with over 32 kHL exported to international markets, notably Italy, Canada and Australia, as the brand’s Scottish provenance and heritage resonate with consumers. Over the year we have innovated with premium variants. We continue to see attractive opportunities and intend to invest behind the brand.

CASH AND BALANCE SHEET

Our balance sheet remains in robust health with a net debt to EBITDA ratio of less than 1x at the year-end. The Group ended the year with a net debt position of €123.4m, despite significant acquisition expenditure during the year. Historically the Group has generated significant cash returns, and while we do not expect this to change significantly, we recognise that there are current opportunities to invest in trade lending and some high quality capital expenditure projects.

PEOPLE

In the twelve months to May 2013 we have increased our headcount by over 750 employees mainly through our acquisition of VHCC and the acquisition of the Gleeson Group which was completed after the end of the year. I look forward to these talented new employees bringing their experience to the Group and participating in our performance reward culture.

The management team of the Group has continued to evolve during the year. Mr Joris Brams, our International MD, was appointed to the Board of C&C in recognition of his contribution to the International business.

The Group’s management and staff have worked hard to ensure the ongoing success of the business and the quality of our brands, and I would like to sincerely thank them for their efforts. Our remuneration philosophy focuses on stakeholder participation through equity participation, to align their interests with those of shareholders. This included introducing partnership and share matching plans for all employees alongside the existing Group-wide bonus incentive scheme. Since our financial performance did not meet internal targets Group-wide bonuses were not achieved this year.

CORPORATE RESPONSIBILITY

Key initiatives launched during the year included job creation through trade apprenticeships in Scotland; sustainable agriculture support through the creation of an investment fund of £1 million for apple farmers; and contributing to the new Portman Code on the responsible marketing of alcohol.

We continue to strengthen our links with local communities, suppliers and customers. Where possible we look to source raw materials from local partners, investing in their sustainable projects and helping our customers meet the challenges of duty and regulation. We encourage responsible drinking and our views on minimum pricing are well documented.

OUTLOOK

The significant activity over the last year and since year end will, we believe, lay a strong foundation for the Group. Our recent developments in core markets should help further consolidate our position and provide the financial stability to allow for continued investment in our growing international business. Our balance sheet remains conservatively geared, which provides scope for investing in further growth opportunities.
some C&C brands

Stephen Glancey

Group Chief Executive Officer

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