UK: S&N posts profits growth despite French woes

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Scottish & Newcastle said it has weathered a "challenging environment" to post a good performance in its first six months of trading this year.

The UK-based brewer reported strong performances in Russia and the UK. However, the group's operations in France were far less positive, casting a shadow over results.

S&N said it saw organic growth in beer volumes of 5.5% and earnings per share growth of 9.9% on a comparable basis. Revenues grew 3.4% to £1,878m, leading to profits before tax of £163m, up 8.7% on the same period last year.

In the UK, the company gained market share which helped deliver operating profit growth of 11%. Meanwhile at its Eastern European joint venture, BBH, volumes grew 14% and operating profits were up 32%.

However, the weak French performance was a significant reason for a 10% fall in operating profits at S&N's Western European business.
Chief executive, Tony Froggatt said: "This has been a very satisfactory six month's performance, for a number of reasons. I am particularly pleased with the response of our brands across the group to the increased focus and funding designed to drive value growth in some difficult market environments."

In the UK, Froggatt said the company was gaining share within a soft UK market.

Its four key brands, Foster's, Kronenbourg 1664, John Smith's and Strongbow, continued to grow strongly with total volumes up 5.5% against a market decline of 3.9%.

But Froggatt said: "Our International business is facing challenging markets across Western Europe which resulted in a decline of operating profit year-on-year. Importantly though, our premium brands are outperforming their markets and are making a positive contribution to group margins.

"France is currently the market suffering most from reduced consumer confidence and weak economic conditions. Going forward we believe that one of the positive factors in this market will be changes to the current legislation in France in January 2006, which will allow retailers to compete on pricing and enable category brand leaders to regain their role as traffic builders. In the beer category Kronenbourg Red & White, as brand leader with a share of around 25% of the retail beer market, should be a major beneficiary of the new legislation."

Looking forward S&N said that the good performance in the first half of 2005 reinforced its expectation that it will meet its financial and commercial objectives for the full year.

In the UK, partly driven by the anticipated cost savings as well as positive top-line growth, S&N expects the operating profit growth seen in the first half of the year to continue for the remainder of 2005.

"We expect market volumes in the second half of the year to be broadly flat, while we continue to expect to outperform the market," a statement said.

It continued: "The overall situation in Western Europe will remain challenging, but comparatives with 2004 are more favourable for the second half of the year due to the poor weather in summer 2004. Trading in July has shown some improvement. The business remains confident that across the International division, premium brands will continue to grow contribution and that it will return to operating profit growth in the second half of 2005."

In Eastern Europe, S&N said there is continued optimism about the prospects for BBH's markets and brands.

"However given BBH's strong performance in the second half of 2004, a slowdown in volume growth is expected in the second half of 2005. Partly due to a seasonal bias in volumes in the second half, the operating profit margin is typically higher than in the first half. For the full year we are expecting margins to remain broadly at 2004 levels," it added.

The board has declared an interim dividend payment of 7.04p for the six months to 30 June 2005, an increase of 2.5%. The interim dividend will be payable on 17 October to shareholders on the register at 16 September 2005.

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