SPIRITS & WINE

(Volumes are sales to third parties unless otherwise specified)

• Underlying trading profit up 4% (Europe +9%, North America +8%)

• Core 4 brand volumes up 5%, marketing spend up 6%

• Priority brand/market combination volumes up 6%

• Price increases +1½%

• Productivity up 7%

On maintained turnover, underlying trading profit, at constant exchange rates and on continuing business, increased by 4% to £207 million led by increases of 9% and 8% respectively for Europe and North America, the principal profit sources. Margins were maintained at around 18%. Trading profits were down 11% in Mexico and 7% in Asia Pacific. After an £8 million adverse currency impact and including the results for four months of Cantrell & Cochrane, actual trading profits were 3% lower at £231 million.

Underlying performance reflected the success of consistent operating strategies which focus marketing support on key brands and brand/market combinations (BMCs) backed by improved customer service and increasing operational efficiency.

The four core brands - Ballantines, Kahlua, Beefeater and Sauza - increased volumes by 5% in total. The category of priority BMCs we define as Grow Now, which have competitive advantage in the market place and are the current drivers of growth, increased sales volumes by 6%. Total sales of spirits and liqueurs grew marginally, but overall volumes were 2% lower due mainly to reduced sales of lower margin products including table and fortified wines and Presidencola.

Direct brand marketing spend (DBM) behind the core four brands increased by 6%. Underlying spend was £8 million lower at constant exchange reflecting the phasing of planned programmes and more efficient targeting. Second half spend will narrow this shortfall against last year.

Prices in the major regions have increased by 1%-2½%, and by 1½% overall excluding Mexico, with the rate of increase greater in Europe than in the Americas. Further cost savings have been made and manufacturing productivity, measured by cases per head, has increased by 7%.

Europe

Underlying trading profit in Europe increased by 9% to £75 million following a 10% per annum increase in each of the last two years. This growth has been led by further volume increases for Ballantines, the lead brand, and good performances generally in key BMCs.

The refocusing of marketing investment towards priority BMCs continues and total DBM for the year has been rephased to give greater support to summer campaigns in key markets. Therefore, although DBM at the half year was £4 million lower than last year, investment on the four core brands was up 4% and it is expected that total DBM for the full year will be higher than last year. Progress made by the European business is based on more sophisticated and analytically based systems. These systems are enhancing customer and category management and the targeting of marketing funds.

Ballantines increased volumes in most of its major European markets and by 5% in the region as a whole. Volumes in Spain were 11% ahead, in Germany 6% and in Italy 12%. There were declines of 6% in France and 20% in Greece. Duty free sales were also lower but external research ranks Allied Domecq as drinks industry leader in customer service in this sector, positioning the business well for success in travel retailing generally.

In Spain, the largest market, other key brands performed well with Beefeater volumes up 5%, Whisky DYC level and Centenario 3% ahead. Overall volumes in this market were 2% up. In the UK a number of main brands gained share during 1998. Tia Maria, backed by higher marketing investment, increased consumer off take although sales to the trade were slightly down in the period.

Cantrell & Cochrane increased profit by 9% to £24 million in the four months prior to disposal.

Americas

Profit for the Americas region as a whole were 2% up at £67 million. Underlying trading profits in North America increased by 8%. DBM spend at constant exchange was level year on year but increased by 11% on the four core brands.

Price increases have been marginal but increases have been achieved in the US for Sauza and Courvoisier VS. Further profit growth has been based on strong key brand performance in the US backed by increasing operational and marketing focus.

US depletions for Kahlua were 5% ahead and the total brand was further propelled by Ready to Drink varieties. Sauza, rated externally as the fastest growing spirits brand in the US, increased depletions by 21% and has been one of Impacts top 5 growth brands for 3 consecutive years. At the premium end of the market, Sauza depletions were 41% up. Beefeater depletions were 2% lower but market share increased, Canadian Club depletions were 6% lower and Courvoisier was down 9%. Makers Mark depletions were 11% higher. Overall US depletions were 4% ahead.

The comparison of shipments in the US with the corresponding period of last year was enhanced by weak shipments and depletions performance last year due primarily to retailer destocking. Shipments have been held in balance with depletions.

At the start of the year the US company reorganised its two spirits sales and marketing business units to achieve greater focus. Spirits brands have been consolidated into one organisation, Allied Domecq Spirits USA, based in Westport, Connecticut, with separate sales teams focusing on priority and non core brands respectively. The premium wines operation, Allied Domecq Wines USA, is based in California.

In Canada, Corby increased both depletions and market share although shipments were lower.

Latin American profits derive principally from Brazil and Argentina where, in difficult economic conditions, volumes fell by 4% and 23% respectively.

Mexico

Mexican profits were 11% down in local currency and 29% lower in sterling terms at £25 million. Within a 5% total first half volume increase Sauza was up 15%, Don Pedro registered a 4% gain but, despite market share gains, there was 6% decline for Presidente. Underlying margins were affected by sub inflation price increases and increasing competition from illegal bottlers.

Job numbers have been cut by 160. Second half conditions continue to be difficult and will be affected adversely by a change in the basis of duty collection introduced in April.

Rest of the World

Profits from other sources have reduced. In Asia profits were 7% lower at £13 million despite an increased contribution from our joint venture with Suntory.

A reduction in bulk sales of spirits impacted negatively the first half year on year profit comparison by £10 million. For the full year these profits will also be approximately £10 million lower than last year. Our strategy of achieving an appropriate balance between stocks and projected sales is now close to targeted levels and we anticipate that the profit contribution from bulk sales this year is more representative of what will be achieved in future years.

Outlook

Allied Domecq Spirits & Wine will continue to invest in building its key brands further extending the 11% growth for the core four brands achieved over the last two financial years. Reported trading profits for the year will be reduced as a consequence of the disposal of Cantrell & Cochrane, which contributed £27 million of profit in the second half of the 1998 year, and the first half reduction in bulk sales of spirits.

Continued underlying progress is expected based on further gains for core brands in the mainstream markets of Europe and North America and by further efficiency gains.

In Europe, the improved techniques for assessing and taking opportunities to develop cooperative customer relationships, to target influential on-premise outlets and to allocate marketing resources more effectively, are driving growth.

In North America these techniques are being adapted and implemented to reinforce the progress being made as a result of long term customer agreements and greater brand focus.

Profits from other sources including Mexico are likely to be lower this year but Asian markets are showing greater stability and in some cases renewed growth.

RETAILING

• Underlying trading profit -13%

• Managed pub profits per house 9% lower

• Food sales per pub + 11%, wet sales per pub +2%

• Mr Qs returns on investment continue to be 20%+

• Leased pubs profits per house up 5%

• US foodservice profits up 6%

• Dunkin Donuts same store sales growth +5%

• International foodservice impacted by £3 million of restructuring costs

Trading profit was 13% down at £110 million. Turnover was 1% lower. Margins on continuing businesses were lower at 19% (last year 21%).

Pubs
(Pub profit comparatives for 1998 are restated to include beer supply benefits and increased pension charges).

Managed pub profits were £10 million lower at £70 million. Leased pub profits were level with prior year at £25 million. The combined total pub profits were down 10% year on year.

The fall in managed pub profits, from an estate with 4% fewer pubs, resulted from reduced turnover and increased costs. Our pubs have a relatively high operational gearing and the combination of marginally lower sales with cost increases slightly above inflation has, therefore, significantly impacted profits in the first half.

Although sales were growing again at the end of the half year, this recovery followed four months of decline in managed pub turnover, a market trend first evident last summer.

Year on year sales trends within the managed pubs show a 2% increase in wet sales per pub and an 11% rise in food sales, a sector in which we have gained share. Amusement machine income per pub was level with the corresponding half year. Overall sales per pub were 3% ahead.

While underlying sales performance in uninvested pubs shows a decline of 4%, which is in line with that of major competitors, total sales and profit comparisons with competitors will be affected by our reduced share of industry capital expenditure.

Capital expenditure on managed pubs was 4% lower at £64 million. In branded pubs which now account for 48% of the total, opportunities for further conversions to Firkin and Big Steak Pub/Wacky Warehouse from the existing estate have been largely taken and the emphasis for the latter is therefore on greenfield site developments and acquisitions, rather than major conversions.

Within the existing estate, Mr Qs is our primary brand conversion focus and it is achieving returns well in excess of the cost of capital. Big Steak Pub/Wacky Warehouse is also competing satisfactorily. The impact of turnover decline has been most evident in the Firkin chain where a low average cost refurbishment programme has recently been introduced.

The relative weakness of wet sales, which account for 80% of total sales, has depressed gross profit. Margins have also been impacted by overall operating cost increases of 4% including increases in wages, rates, Sky TV and beer supply prices, the latter implemented in December after an 18 month gap. In addition retail beer price increases have been restricted to bring them more into line with competition. Operating costs per pub are low by industry standards and this has limited our ability to cut the cost base in the short term.

Vanguard leased pub business has continued to perform resiliently and profits were maintained at £25 million despite a 4% reduction in the number of houses.

Foodservice

US foodservice profits increased by 6% from £18 million to £19 million. Dunkin Donuts continued to display strong momentum with same store sales growth, at 5%, again ahead of the Quick Service Restaurant category. Togos same store sales improved further, rising by 4%, while Baskin-Robbins same store gallonage was level. Store numbers were again increased, Dunkin Donuts by 4% and Togos by 47 stores (+23%).

International foodservice results were affected by shortfalls primarily in Russia, China and the UK. Losses were £3 million higher at £7 million. Company operated outlets in Russia and the UK have been closed and £3 million of restructuring costs, to reduce the future cost base, have been charged to the first half. Staff numbers have been reduced by 270.

Off Licences

Profits of £3 million from the 50% share of the First Quench joint venture were £4 million lower than those achieved by the wholly owned Victoria Wine last year. The reduction in profit was attributable to a combination of lower sales, cost inflation and some initial disruption as the businesses were integrated. The opportunities both to enhance sales and reduce costs have been significantly increased by the merger although it is too early for the synergies to take effect.

Outlook

Market conditions and monthly sales trends for managed pubs have shown improvement since Christmas, but year on year comparisons are not expected to become markedly more favourable until the final quarter of the financial year. Promotional activities in the pubs are building customer numbers and spend, with food sales in particular being boosted by new products and improved menus. Changes to the Firkin format have met with early success and provide a detailed brand template which is being applied to a further 30 pubs. In Big Steak Pub strong food growth has been achieved while Mr Qs, the leading local brand, is growing sales.

Margins will continue to be impacted by cost increases, however, including a full six months impact of beer cost increases and the introduction of the minimum wage as well as by restrained retail selling prices. The benefits of improving sales trends are expected to show through in profits in the next financial year. Capital expenditure policies will continue to place greater emphasis on Mr Qs and on greenfield developments. Average refurbishment spends are being reduced and directed to early pay back projects.

The pub business has well accepted brands and has performed competitively in recent years. This years setback in profits is being addressed by vigorous management actions and early signs are positive. We have reviewed the lower 20% of the estate and have identified for action further disposals and transfers of pubs from managed to leased.

In foodservice, US profits in the second half are expected to benefit from continued store expansion and same store sales growth.

OTHER INTERESTS

Trading profits from the Panrico joint venture in Spain and the 25% interest in Britannia Soft Drinks were £6 million (last year £7 million).