Lion FY13 Result

13 February 2014: Lion today announced its trading update for the full year ended 30 September 2013 in conjunction with Kirin Holdings’ full year announcement.

Across the entire Lion group, revenue increased 4.7 percent to $5,093 million as Lion experienced a one-time benefit from the addition of Little World Beverages and distribution contracts for new international premium brands to its Australian beer portfolio.

Lion CEO Stuart Irvine said: “While we have benefited from the addition of new brands to our beer portfolio in Australia the underlying conditions in the beer market remain tough, with like-for-like volumes in decline. There are however some positive signs that conditions may be on the cusp of improving, with the beer market returning to growth in the last quarter.

“Australians are increasingly choosing quality over quantity in alcohol beverages, which is benefiting our long-term strategy of marketing and innovation investment to encourage consumers to trade up to higher equity brands.

“We also continue to invest in our assets and since the conclusion of F13 opened our new Little Creatures Brewery in Geelong following a $60 million investment, which will improve distribution across the Eastern seaboard.”

Lion’s Dairy & Drinks business experienced significant margin pressure as subdued consumer confidence and a deflationary retail environment depressed volumes and milk input costs increased sharply in the last quarter.

“Our Dairy & Drinks business is undergoing transformational change in an operating environment that is evolving rapidly. As the dairy industry consolidates we are firmly focused on executing our plans to stabilise and optimise our business over the medium term.

“We are committed to delivering lowest cost manufacturing to support growth across our portfolio. Since 2010 we have invested approximately $550 million to drive efficiency in our Dairy & Drinks business, including the rationalization and consolidation of volume in our milk and cheese manufacturing sites and investment in state-of-the-art operations in specialty cheese and yoghurt to fuel growth in higher value categories.

“We are also innovating and taking a strategic category approach to lift profitability in high-value segments such as dairy beverages, yoghurt and specialty cheese. Lion is the market leader in specialty cheese and in dairy beverages, with Dare now the number one iced coffee in Australia and the number four non-alcoholic beverage behind Coke, Red Bull and V.”

With the one-time addition of new beer brands to its portfolio and a continued focus on efficiency programs across the business Lion’s operating earnings ((EBIT pre-significant items)) before interest and tax increased 11.7 percent to $698 million.

“As we continue to transform our local dairy operations we are positioning ourselves to tap growing demand for branded dairy products domestically and internationally, particularly in Asia.

“Our recent investment in Warrnambool Cheese & Butter (WCB) further strengthens the close relationship we have enjoyed with WCB in our domestic cheese business over many years. Internationally we are pursuing an evolution not a revolution – our assets are domestically focused and our emphasis will be on higher margin products, rather than a fundamental change in business model to compete in commodity markets.”

Beer, Spirits & Wine

Australia

Toward the end of F12 Lion added the Little World Beverages brands to its portfolio in a deal that valued the company at $381.6 million. Lion also added distribution contracts for new international premium brands such as Corona Extra, Stella Artois, Guinness and Kilkenny in the latter half of F12 and during F13. As a consequence, Lion experienced a one-time benefit, growing volumes 10 percent. However, underlying conditions in the beer market remained tough, with volumes on a like-for-like basis ((Volume movement without the benefit of new brands added to the portfolio in F12/13.)) declining 1.3 percent.

Within this challenging environment the mid-strength segment grew volumes 1.9 percent off a large base, with XXXX GOLD outperforming the segment at 3.2 percent growth. Contemporary mid-strength brands also thrived, with Hahn Super Dry 3.5 posting growth over 24 percent ((Aztec: volume growth MAT Sept 13 vs. YAGO 24.4 percent for HSD 3.5 )). In the last quarter the total beer market showed signs of recovery, moving back into growth.

Lion’s premium wine business performed solidly in challenging market conditions, with particularly strong performances from Villa Maria and St Hallett; the latter showing strong growth in both domestic and international markets.

New Zealand

Lion’s Beer, Spirits & Wine division in New Zealand saw total volumes decline 2.8 percent in a highly competitive market, however held revenues steady through a sustainable balance of volume, pricing and mix. While the total beer market moved into growth and cider continued to grow steadily off a small base, the total wine, spirits and RTD markets continued to decline.

The positive momentum in the beer market and an early onset summer helped Lion end the year with positive volume and value growth in beer, with particularly strong performances from Corona Extra, Speight’s Summit and Beck’s4. Lion’s innovative ‘Made to Match’ marketing campaign also contributed to the beer rebound by improving consumer appreciation of beer, how to match it with food and by debunking common beer myths.

While the total spirits market remains challenging, Lion saw positive growth in the final quarter, encouraged by strong performances from Smirnoff and Johnnie Walker and the addition of Wild Turkey to the portfolio from April. While aggressive competitor activity continued in wine, Lion saw standout performances from Lindauer, Wither Hills and Huntaway4.

Dairy & Drinks

In Lion’s Dairy & Drinks business subdued consumer confidence and a deflationary retail environment saw volumes decline 4.3 percent and created significant margin pressure, particularly in price-driven categories such as everyday cheese and juice.

During the last quarter of F13, and since, margin pressure has intensified as milk prices increased – up to 27 percent in some states on last year’s average price – and Lion’s ability to pass costs through remained highly constrained. In response, Lion accelerated its long-term efficiency and effectiveness program, aligning its business structure behind refreshed category and channel strategies and significantly reducing overheads and complexity.

Lion also remained focused on growth in higher value categories, such as dairy beverages and specialty cheese, and invested in targeted innovations to grow the profit pool available to all in the supply chain. In dairy beverages Dare posted double digit volume and value growth and is now ranked number one in the category and growing in all states ((Aztec to 29 September 2013)) , while Masters ‘Kakao’ flavoured milk has performed well since launch. In yoghurt Yoplait continued to grow share and new launches Dairy Farmers Thick and Creamy and Forme gained good traction in the market.

Asset revaluations

Despite substantial efficiency gains to date, Lion’s Dairy & Drinks business faces considerable headwinds in F14. Based on the impact of the increased milk price, now well above historical levels, the loss of the Coles retailer-own-brand contract from June 2014 (representing a sixth of annual milk volumes currently procured by Lion) and a sustained competitive and deflationary retail environment, Lion will record an impairment charge of $338.8 million against goodwill, milk plants, equipment and brands.

Due to the long term decline in total alcohol volumes in New Zealand Lion will also record an impairment charge of A$143.4million against goodwill and brands in its Beer, Spirits & Wine New Zealand business.

These impairments have been recorded in Lion’s accounts at a local level based on Australian accounting standards.

About Lion

Lion is a leading beverage and food company with a portfolio that includes many of Australia and New Zealand’s favourite brands.

Lion employs close to 7,000 people across Australia and New Zealand predominantly, as well as in Hong Kong, Malaysia, Singapore and the US, and takes great pride in its local manufacturing footprint, which spans over 40 sites across the Tasman – including large breweries, craft breweries, wineries, dairy farms, milk, cheese, yoghurt and juice sites as well as hospitality venues and over 40 Liquor King retail outlets in New Zealand.

Lion is one of the region’s largest purchasers of agricultural goods and an integral component of the retail, hospitality and tourism industries, with a total direct plus indirect contribution to the Australian and New Zealand economies estimated at more than $5 billion annually.

Lion builds marketplace success from the foundations of great people and great brands, with a portfolio of household-name brands such as Tooheys, Dairy Farmers, Steinlager, Tasmanian Heritage, XXXX, PURA, Hahn, Berri, Speight’s, King Island Dairy, James Boag & Son, Dare, Yoplait, Wither Hills, St Hallett and COON.

Lion’s products accompany life’s sociable moments, whether it’s a family meal or good times at the pub with mates. Dairy, juice, soy and the responsible enjoyment of alcohol beverages are all part of a healthy lifestyle for many people, and when enjoyed in moderation, Lion’s combined portfolio of food and drink brands can benefit wellbeing, and help people to live well.

www.lionco.com