Interim Results

10th Nov 2005 07:02

SABMiller PLC10 November 2005 SABMILLER PLC INTERIM ANNOUNCEMENT Ref: 20/2005 Further growth demonstrates strength of our global footprint London and Johannesburg, 10 November 2005. SABMiller plc today announces itsfirst IFRS results for the six months ended 30 September 2005. All comparativeshave been appropriately restated. Highlights are: Half year Half year Full year 2005 2004 March 2005 US$m US$m % change US$m Group revenue (including share of associates' revenue) 7,901 7,178 10 14,543 Revenue 7,051 6,443 9 12,901 EBITA (1) 1,264 1,130 12 2,389 Profit before tax (including net exceptional credits in the 1,126 1,324 (15) 2,552prior year) Adjusted profit before tax (2) 1,192 1,039 15 2,221 Adjusted earnings (3) 667 572 17 1,224 Adjusted earnings per share (3) - US cents 52.7 47.9 10 101.0 - UK pence 28.9 26.4 10 54.7 - SA cents 340.5 311.1 9 628.2 - on a comparable basis (3) (4) (US cents) 52.7 46.3 14 98.4 Basic earnings per share (US cents) 51.3 71.8 (29) 125.5 Interim dividend per share (US cents) 13.0 12.0 8 Cash generated from operations 1,289 1,262 2 2,792 • Group lager beer volumes up 10.5% to 91 million hls, organic growth of 5.6% • Group EBITA margin further improved to 16.0% • Strong South Africa Beverages performance • Miller performed satisfactorily in an intensely competitive environment • Europe benefited from strong contributions in Poland and Czech • Good contribution from Africa and Asia driven by China, Mozambique and Tanzania • Major transaction involving Bavaria in South America completed on 12 October Organic, constant 2005 Reported currency EBITA growth growth US$m % %North America 286 (5) (5)Central America 32 (12) (8)Europe 379 27 16Africa and Asia 209 17 14South Africa: Beverages 375 19 19South Africa: Hotels and Gaming 38 29 29Corporate (55) - -Group 1,264 12 9 Statement from Graham Mackay, Chief executive "The group has delivered further increases in volumes and earnings in the firsthalf, reaffirming our strong growth profile within the global brewing industry. "Despite the intensely competitive pricing environment in the US this summer,Miller has continued to invest in its brands and its organisation to strengthenits base for sustainable future growth. South Africa's strong contribution hasbeen supported by further operational improvements as well as robust consumergrowth in the local economy. "The group has successfully secured a controlling interest in the leading Andeanbrewer Grupo Empresarial Bavaria, which delivers a new platform for growth onthe South American continent." (1) EBITA comprises operating profit (US$1,103 million) before amortisation ofbrands (US$1 million) and exceptional items (US$Nil million) and includes shareof post-tax results of associates (US$100 million) together with exceptionalitems, amortisation of brands, interest, tax, and minority interests (US$60million). (2) Adjusted profit before tax comprises EBITA less net interest payable (US$77million) less share of associates' interest (US$8 million) adjusted for theearly redemption penalty in respect of the private placement notes (US$13million). (3) The calculation of adjusted earnings and earnings per share is given in note5. (4) 2004 figure adjusted for conversion of convertible bonds. Further detailsare given in note 5. Enquiries: SABMiller plc Tel: +44 20 7659 0100 Sue Clark Director of Corporate Affairs Tel: +44 20 7659 0184 Gary Leibowitz Vice President, Investor Relations Mob: +44 7717 428540 Nigel Fairbrass Head of Media Relations Mob: +44 7799 894265 Philip Gawith The Maitland Consultancy Ltd Tel: +44 20 7379 5151 A live webcast of the management presentation to analysts will begin at 9.30am(GMT) on 10 November 2005. This announcement, a copy of the slide presentationand video interviews with management are available on the SABMiller plc websiteat www.sabmiller.com . Video interviews with management can also be found atwww.cantos.com. High resolution images are available for the media to view anddownload free of charge from www.vismedia.co.uk Copies of the SABMiller B-rollare available for accredited journalists and news producers. Contact LucyCharlesworth or Nick Spears at Medialink on Tel: +44 20 7554 2700 Registered office: SABMiller House, Church Street West, Woking, Surrey GU21 6HS Telephone: +44 1483 264000Telefax: +44 1483 264103 CHIEF EXECUTIVE'S REVIEW (continued) 3 Business review A good performance was achieved against the comparable prior period's high base,reflecting SABMiller's access to growth in the global beer market. Ourportfolio of developing and developed market operations generated organic growthof 5.6% in lager volumes. EBITA rose 12% (9% on an organic, constant currencybasis), benefiting from both volume and value growth. The group EBITA marginincreased to 16%, 20 basis points higher than in the comparable prior period. During the period we announced a major investment in South America, which wascompleted on 12 October, obtaining a controlling interest in the leading Andeanbrewer, Grupo Empresarial Bavaria. In addition, we increased our interest inIndia through acquiring the balance of our joint venture; and our Chineseassociate China Resources Snow Breweries Ltd (CR Snow) has continued toconsolidate its presence in the world's largest beer market. The South Africa Beverages division has recorded strong EBITA growth and theAfrica and Asia business also delivered further good results. Europecontributed a particularly pleasing performance. In North America the resultsfrom Miller Brewing Company reflect higher input costs and an increasingly pricecompetitive trading environment. Group beverage volumes totalled 110 million hectolitres (hls), a 10.4% increaseon the comparable six-month period. Lager beer volumes were up 10.5% to 91million hls, with organic growth of 5.6%. Group revenue, including share ofassociates, increased by almost 7% on an organic, constant currency basis, andon a reported basis at US$7,901 million was 10% ahead of last year. Reported EBITA of US$1,264 million (up 12%), reflects strong operatingperformances with improved pricing and mix in most of our key markets. Thereported results include currency benefits from the Polish zloty and Czechkoruna, whilst the average rand rate was very similar to that in the same periodof the prior year. On an organic, constant currency basis, EBITA increased 9%.Adjusted earnings are up by 17%, to US$667 million. Adjusted earnings per shareof 52.7 US cents have grown by 10% for the first six months on a reported basis,and are up 14% on a comparable basis, the calculation of which assumes theredemption of the group's convertible bonds on 1 April 2004. An interim dividend of 13 US cents per share, an 8% increase, will be paid toshareholders. North America Over the period, the Miller business continued to invest in its brands and itsorganisational capabilities, despite rising input costs and an intenselycompetitive summer pricing environment which contributed to a 5% decline inEBITA. While domestic sales to retailers (STRs) recorded a small declinecompared to the prior year, Miller competed effectively against the other majordomestic brewers in the face of aggressive price discounting. Results continuedto benefit from the strength of its flagship brand, Miller Lite, whichdemonstrated improved brand equity, particularly in the on-premise channel, anddelivered mid-single-digit overall sales growth on top of double-digit growth inthe comparable period last year. Central America Group revenue for the period grew by 3% on a constant currency basis, reflectingimproved pricing for beer across the business and for carbonated soft drinks(CSDs) in Honduras. The decline in EBITA, against last year's strong recoveryfor the same period reflects adverse economic conditions and in El Salvador,excise changes, together with lower aggregate CSD pricing. CHIEF EXECUTIVE'S REVIEW (continued) 4 Europe Our Europe business performed well over the important summer period. Organic,constant currency EBITA increased by 16% and organic volumes were ahead by 4%,despite unseasonable rainfall and localised flooding in July and August. Stronggrowth in Poland, where volumes over the last twelve months have exceeded 11million hls, was coupled with more moderate growth in the Czech Republic, wherethe Plzensky Prazdroj business grew volumes against a declining market. Russiavolumes grew 6% and satisfactory progress is being made in Italy where BirraPeroni's branded volumes grew by 2%. Africa and Asia Africa produced a further good set of results in the half year, reflectingexcellent trading in Tanzania and Mozambique, partially offset by tougherconditions in Botswana where currency devaluation and rising inflation impactedconsumer demand across the market. In China, our associate, CR Snow, generated organic volume growth of 16%, wellahead of the market, and our leading national brand, Snow, grew 51%. Togetherwith the impact of acquisitions made in the previous financial year, CR Snow'sshare of the Chinese market has risen to 13%. South Africa Beverages Beer and soft drink volumes continued their positive growth trends benefitingfrom increased marketing and sales activity, a mild winter and continued strongeconomic conditions. Comparable beer volumes grew by almost 3%, with the premium segment recordingstrong growth. The organisation continues to develop its capability to buildlocal premium and international brands in the market and over the period ourpremium portfolio achieved strong double-digit growth compared to the sameperiod last year. South America In preparation for the integration of our South American business, a newregional management team is being established in Bogota. Whilst the Bavariabusiness will be included for five and a half months in the second half of thisfinancial year, our initiatives - to develop differentiated brand portfolios,marketing and price management strategies, and reduce operating costs - are onlyexpected to start taking effect from the following financial year. Outlook The group will continue to benefit from its exposure to attractive growthmarkets. In the second half of the financial year, increasing input costs fromhigher commodity prices, ongoing investment in marketing and in our businessinfrastructure, and tough currency comparatives are expected to have an effecton our results. Nevertheless, the general outlook remains positive and weexpect to deliver growth in comparable adjusted earnings per share for the year. CHIEF EXECUTIVE'S REVIEW (continued) 5 Operational reviews North America 2005 2004 % changeFinancial summary US$m US$m Group revenue 2,662 2,615 2EBITA # 286 301 (5)EBITA margin (%)# 10.7 11.5 Sales volumes (hl 000s)Lager - excluding contract brewing 25,655 25,427 1Lager - contract brewing 5,506 5,562 (1)Carbonated soft drinks (CSDs) 42 46 (9) Lager - domestic sales to retailers (STRs) 23,976 24,041 - # Before exceptional profit on the sale of Tumwater brewery of US$4 million in2004 Miller Brewing Company faced significant industry headwinds as pressure from anintensely competitive pricing environment was exacerbated by rising input costsand share gains by the spirits and wine industries in the total alcoholicbeverage market. Despite these challenges, Miller's focus on the fundamentalsof brand-building, sales and distribution execution, cost and productivityimprovement, and its organisational capability ensured that it remains on trackto strengthen its base for future growth. Industry sales to retailers (STRs) for the first half of the financial year werelargely unchanged as moderately negative domestic beer STRs were offset bystrong growth in the import and craft beer segments. Total US industry domesticshipments to wholesalers (STWs) for the same period decreased by an estimated0.4%. Miller's US domestic STRs decreased by 0.3% in the reporting period, decreasingby 1.5% in the second quarter. Domestic STWs rose by 1.1% in the first half,cycling a reduction in wholesaler inventories during the comparable period inthe prior year. Total volumes including contract brewing for the six monthperiod increased by 0.6% to 31.2 million hls. Export sales continued to bedepressed by difficult trading conditions in key markets, and contract brewingvolumes were down by 1%. While overall STRs were down due to price competition and continued softness ofthe Miller Genuine Draft brand, Miller competed effectively against the othermajor domestic brewers in the face of aggressive price discounting. Resultsbenefited from the strength of Miller's flagship brand, Miller Lite, whichshowed significant brand equity in delivering a mid-single digit increase inSTRs cycling last year's double-digit growth in the comparable period. MillerLite continues to show momentum despite unprecedented competitor discountinglevels. Marketing investment and operational focus in the economy portfolio haveresulted in sales increases in the Milwaukee's Best franchise, and initialindications are that new advertising for Miller High Life will positively impactbrand performance. Miller Genuine Draft will be re-positioned and re-launchedduring the second half of the year. Group revenue grew by 1.8% to US$2,662 million during the first half versus theprior period, and within this US domestic revenue excluding contract brewinggrew by 1.7%. This increase is the result of earlier price increases partlyoffset by extensive price promotions. Whilst the effect of brand mix waspositive following the improvement in Miller Lite sales, geographic and packagemix were negative. Contract brewing revenues reduced ahead of volume declines asa result of unfavourable mix impacts. CHIEF EXECUTIVE'S REVIEW (continued) 6 Costs of goods sold increased by more than the US Consumer Price Index, drivenby commodity and fuel price increases. Furthermore, increased investments weremade in brand marketing, specialised sales staff, recruitment, informationsystems, health care and retirement funding. Savings from other general costsand continued improved brewery efficiencies during the period only partiallyoffset these increases. EBITA for the period of US$286 million was 5% lower than the prior year's US$301million, driven by the well-publicised US pricing environment and higher inputcosts of fuel, glass and aluminium. As a result, EBITA margin decreased to10.7%. Miller continues to progress in all four areas of its three-year turnaroundstrategy. The improved marketing capabilities and brand-building approach thathas helped improve the Miller Lite brand equity measures have been applied toother key brands, most importantly Milwaukee's Best and Miller High Life.Pilsner Urquell and Peroni Nastro Azzurro will also receive greater focus withthe enhancement of the specialised sales force. As the turnaround period nearscompletion, improved alignment with distributors, increased rigour anddiscipline in local market planning, and the activation of enhanced marketingactivities will drive further improvements in sales and distribution execution.Miller will continue to invest substantial marketing resources against its corebrands to build a sustainable portfolio of growing brands across all majorsegments. Finally, steady progress in building organisational capability willcontinue as performance management becomes further entrenched and new talent andpersonnel development initiatives are introduced into the organisation. Profitability in the second half of the year will continue to be impacted by theeffects of the competitive pricing environment and higher raw material andenergy costs together with further investments in brand and local marketing andsales force improvements. CHIEF EXECUTIVE'S REVIEW (continued) 7 Central America 2005 2004 % changeFinancial summary US$m US$m Group revenue 262 260 1EBITA 32 36 (12)EBITA margin (%) 12.2 13.9 Sales volumes (hl 000s)Lager 826 891 (7)Carbonated soft drinks (CSDs) 2,991 2,886 4Other beverages 1,451 1,410 3 During the period under review disposable incomes in both countries continued tobe negatively impacted by fuel price increases and consequent increases inelectricity and transport costs. Further progress has been made across bothcountries in improving execution through customer focused channel marketing andgrowing the worth-more lager segment. Lager volumes declined by 7% across the business, with growth in Honduras beingmore than offset by a decline in El Salvador, driven mainly by thediscriminatory increases in excise taxes in January 2005. The entry of acompetitor into El Salvador also eroded volumes and share, but to a lesserextent than was anticipated. Improved revenue management through brandsegmentation, enhanced brand equity and portfolio management have yieldedbenefits, and supported price increases across the business. Aggregate CSD volumes increased by 4% reflecting a relatively stable CSD marketshare in Honduras, and increased volumes in El Salvador. Selective priceincreases were taken in Honduras to improve the profitability of the CSD market,whilst in El Salvador we have introduced lower-priced offerings in selectedmarket segments to compete on a price basis with competitors in these marketsegments. Group revenue for the period grew by 3% on a constant currency basis, reflectingimproved pricing for beer across the business and for CSDs in Honduras. Thedecline in EBITA (8% in constant currency terms) against last year's strongrecovery principally reflects the contraction of the El Salvador beer marketfollowing the excise tax changes and the impact of lower aggregate CSD pricing. We will continue our efforts to stimulate further growth in beer volumes and agradual recovery of the CSD profit pool. CHIEF EXECUTIVE'S REVIEW (continued) 8 Europe 2005 2004 % changeFinancial summary US$m US$m Group revenue 1,894 1,617 17EBITA # 379 299 27EBITA margin (%)# 20.0 18.5 Sales volumes (hl 000s)Lager 20,813 19,797 5Lager organic 20,667 19,797 4 # Before exceptional Naples brewery closure costs of US$23 million in 2004. Europe has delivered an excellent performance in the first half of the year,with share gains in most markets and organic EBITA growth of 16% in constantcurrency, boosted in US dollar terms by currency benefits from the Polish zlotyand the Czech koruna. Following organic volume growth of 6% in the firstquarter, the peak months of July and August were characterised by unseasonablerainfall and localised flooding. This impacted second quarter volumes, whichgrew 3% organically, bringing organic growth in the first half to 4% overall.Worthmore brands were ahead by 6% regionally, while Poland's total volumessurged 12%. EBITA margins were further boosted by productivity and improvedsales mix, adding 150 basis points. The strong volume growth in Kompania Piwowarska (KP) in Poland exceeded theindustry growth of 5%, reflecting successful brand and channel initiatives, andour volumes over the last 12 months have exceeded 11 million hls. Together withthe benefits from volume growth, enhanced productivity has resulted in healthymargin improvement. KP is again the market leader with share gains of 2% year onyear, and commands an estimated 37% market share as at September. BrandsTyskie, Zubr and Lech now represent the top three beer brands in Poland, withTyskie having won the coveted 2005 BIIA (Burton upon Trent) Grand Champion Awardfor the second time. Zubr, Lech and Redds have all shown growth in excess of25% over the last twelve months, with overall sales mix improving. Pricecompetition is intense and industry prices have reduced by 3% in real terms withKP achieving selective price increases. Channel initiatives continue to focus onincreasing the off-premise availability of cold beer, developing KP's leadingkey accounts' presence despite greater discounting of competitor brands, andcontinuing to build share in the on-premise segment, which rose by over threepercentage points to some 39% in the first half of the year. To support thisrapid growth, further capacity is being installed at the Poznan and Bialystokbreweries. In Czech the domestic beer industry recorded a decline of 1%, reflecting highersummer rainfall than in the prior year, and against this market performancePlzensky Prazdroj grew by 1%. The Pilsner Urquell brand has grown 1%domestically, with domestic focus on key accounts and further on-premiseavailability. Improving mix resulting from growth in the worthmore andmainstream segments, together with real price gains, increased net revenue perhectolitre by 5%. These positive developments, along with cost benefits fromcentralised procurement, have resulted in satisfactory profit growth. On 25July 2005 the group announced that it had initiated a buy-out process to acquirethe remaining 3.1% interest held by minority shareholders in the group's Czechoperating company, Plzensky Prazdroj a.s. This transaction has yet to complete. Our Russian operations continued to perform favourably with volume growth ofover 6%. The performance was particularly strong in the important Moscow area,following accelerated cooler placement in retail and on-premise trade outlets.We benefited from strong growth in the worthmore sector, led by Kozel which grewby 54% and is now Russia's leading licensed brand. Multi-pack offerings wereintroduced for Miller Genuine Draft (MGD), Redds and Zolotaya Botchka, withRedds growth of almost 100%. According to AC Nielsen, SABMiller now marketsthree (MGD, Holsten and Kozel) of the top four licensed brands in Russia on botha volume and value basis. Additional local supply lines have reduced input costsand assisted margin growth. CHIEF EXECUTIVE'S REVIEW (continued) 9 Birra Peroni's branded volumes have grown by 2% in the Italian market, which islevel year on year. Key brands Peroni and Nastro Azzurro have performedparticularly well and both show volume growth of over 5%. Birra Peroni increasedpricing on its economy private label brands in conjunction with its deliberatestrategy to significantly reduce these volumes, which fell nearly 40% in theperiod. The combination of mainstream and premium growth, combined with theeconomy segment decline, has produced a better sales mix with net revenue perhectolitre increasing by 8%, and production efficiencies have been improved.Export volumes continue their improving trend with the United Kingdom performingparticularly well showing 25% growth on the back of the new packaging launch forthe international brand Peroni Nastro Azzurro. In line with its premium-focusedstrategy, marketing investment has increased, particularly for the core domesticand international brands. Overhead productivity has benefited from therationalisation of production which took place in the prior year. Ursus Breweries in Romania has produced a good performance with 6% organic and14% reported volume growth overall and 56% growth for the Timosoreana Lux brandassisted by its increased distribution footprint. Peroni Nastro Azzurro waslaunched in the worthmore segment while the Ciucas brand was successfullylaunched in PET packs nationally, creating a full brand portfolio alongsideUrsus and Timosoreana Lux. Capacity expansion and upgrading continues and shouldbe finalised by May 2006. Our Hungarian operations have shown 4% volume growth in a market that hasdeclined 4% in the first six months. This has been achieved through renewedfocus on Arany Aszok, our largest brand, which has grown 7%. Internationalworthmore brands Pilsner Urquell and MGD have grown volume sharply, albeit froma low base. Significant price competition continues in the industry while lowerinput costs assisted by favourable pack mix have improved margins. In the Canary Islands the market declined by around 2% with weaker summer demandand lower tourism. We have maintained our value share of the market at 57%. Therestructuring plan announced in the prior year is on plan. Volumes at our Slovakian operations have declined by 1% in a market showing adecline of 4% while price competition remains fierce. The acquisition of Topvara.s announced on the 9 May 2005 remains under review by the SlovakianAnti-Monopoly office. In the second half of the year, growth will be impacted by the cycling of theprior year's earnings boost from Easter. Investments in sales, marketing andmanufacturing will also continue in our major markets. Together with achallenging pricing environment and a more modest improvement in sales mix, thisis expected to affect margins and profitability. CHIEF EXECUTIVE'S REVIEW (continued) 10 Africa and Asia 2005 2004 % changeFinancial summary US$m US$m Group revenue (including share of associates' revenue) 1,065 870 22EBITA # 209 179 17EBITA margin (%) # 19.7 20.6 Sales volumes (hl 000s)*Lager 31,156 23,851 31Lager organic **?c=8734 27,268 23,851 14Carbonated soft drinks (CSDs) 1,939 2,000 (3)Other beverages 7,142 6,113 17 # Excludes exceptional profit of US$96 million on the disposal of the group'sinterest in Harbin Brewery Group Limited (Harbin) in 2004 * Castel volumes of 6,826 (2004: 6,397) hls 000s lager beer, 4,382 (2004: 4,215)hls 000s carbonated soft drinks and 1,740 (2004: 1,337) hls 000s other beveragesare not included. **?c=8734 During 2004, the management responsibility for sales to Angola wastransferred from South Africa: Beverages to the Africa and Asia division. On apro forma comparable basis, the organic growth in lager volume in Africa andAsia would have been 13% compared to the same period in the prior year. Africa Our business in Africa delivered further growth in the first six monthsfollowing three years of outstanding results, and reported lager volumesincreased by almost 6%. This lager volume performance was underpinned byexcellent trading in Tanzania, with growth of 7% led by the Kilimanjaro brand,and Mozambique with growth of 12% led by the 2M and Laurentina brands. In bothTanzania and Mozambique, favourable economic conditions and improvedavailability through distribution initiatives drove this success. In Uganda thelaunch of Eagle Extra, a sorghum based lager beer, resulted in high double-digitvolume growth and market share gains, and in Zambia results were led by marketshare gains in the traditional beer sector, with volume growth of 20%. A 12.5%currency devaluation in Botswana, with resulting rising inflation and fuelprices, dampened consumer demand across the beer and soft drink product range,while beer volumes also declined in Zimbabwe. CSD volume growth moderated following an entry by a competitor in the economysegment in Angola and continuing tough economic conditions in Zimbabwe, partlyoffset by further growth in Zambia. Group revenue in Africa was supported by inflation-led pricing growth. Volumeand pricing growth and selected brand and package mix improvements more thanoffset fuel and distribution cost increases, and in conjunction withproductivity gains, these resulted in good EBITA increases in the period.Higher organic, constant currency EBITA was achieved in most African countries,but the reported results were negatively impacted by currency devaluations inBotswana and other countries. The EBITA contribution from Castel reflected solidgrowth for the period. Lager volumes for Castel grew 7% compared to the first half of the prior year,with strong growth in Angola, Gabon and Ethiopia. Within these volumes, ourCastle Milk Stout brand produced under licence in Cameroon continues to grow ina competitive environment. Asia In China, organic lager volume growth of 16% outperformed the market, with theSnow brand growing by 51% and gaining further market share in the period. Totalvolumes grew 31% following the acquisitions in the previous financial year. Allregions posted strong organic volume growth for the period including the NorthEast where competitive pressures continue. This growth reflects the success ofinitiatives to strengthen and simplify the route to market, a significantincrease in brand marketing investment and a focus on Snow as the lead brandwithin the portfolio CHIEF EXECUTIVE'S REVIEW (continued) 11 In addition to volume growth, turnover has gained from continued modest andselective price increases in many regions. Mix has improved and includes theincreased contribution made by the sales of the Snow brand. This, together withmore stable input costs and further operational efficiencies, contributed togood double-digit organic growth in EBITA. The acquisitions that we have madeduring the past year, including that in southern Jiangsu, are benefiting fromgreater efficiencies with resulting improvements in profitability. In India, we acquired the balance of our joint venture with Shaw WallaceBreweries in late May 2005, from which date the results have been consolidated.Trading compared with the same period in the prior year has shown improvementwith volumes up 12% on a pro forma basis. Regulatory reform remains a key issuein liberalising the industry, which is poised for further growth in line withstrong economic fundamentals. CHIEF EXECUTIVE'S REVIEW (continued) 12 South Africa: Beverages 2005 2004 % changeFinancial summary US$m US$m Group revenue (including share of associates' revenue) 1,864 1,684 11EBITA 375 315 19EBITA margin (%) 20.1 18.7 Sales volumes (hl 000s)Lager 12,153 11,992 1Carbonated soft drinks (CSDs) 5,922 5,384 10Other beverages 492 394 25 Beer and soft drink volumes continued their positive growth trends during thesix months to September, despite the absence of an Easter period in the currentfinancial year. The growth was driven by the continued strength of the economy,a mild winter and targeted marketing and sales activity. A programme is continuing to establish and leverage benefits from thecombination of our beverage businesses in South Africa. ABI now trades as theSoft Drink division of The South African Breweries Limited (SAB Limited). Beer volumes grew by almost 3% on a pro forma comparable basis, having adjustedfor the transfer of management responsibility for exports to Angola to theAfrica division during 2004. Within this performance, the premium portfoliocontinues to show strong growth with Miller Genuine Draft, Castle Lite andAmstel achieving double digit growth versus the comparable six-month period in2004. The organisation continues to increase its capability to build both localpremium and international brands in the market. The introduction of bulk packsin October for both Miller Genuine Draft and Brutal Fruit will continue toprovide consumers with more choice, enhancing availability and value for moneyand an accessible premium offering. In line with our strategy to improve market penetration and with increasedliquor licensing in two of the major areas of South Africa, the deliveredcustomer base increased by 10% over the past six months. CSD volumes have benefited from the favourable economic environment, which hascontinued from the prior year into the first half of the current year, with ABIsales volume ending 10% above prior year. Significant consumer promotionalactivity during the winter months, improved market execution and distributionreach, price restraint and favourable weather conditions throughout the tradingperiod ensured that sales volume accelerated from a buoyant base. Althoughstill a relatively small contribution to sales, non-carbonated beverage volumeperformed exceptionally well, contributing to the excellent volume growth. The increased sales volumes, together with selective price increases in bothbeer and soft drinks and an improved mix with higher sales of premium products,resulted in an 11% increase in group revenue. Both beer and soft drinkcategories performed well, contributing to strong EBITA growth and improvedmargins. EBITA grew by 19% in constant currency, benefiting from increasedrevenue, lower commodity prices (including benefits from favourable effectiveexchange rates), and continued focus on cost productivity. In addition, EBITAimproved as capacity was better utilised during the winter months. Thesefactors combined to increase the EBITA margin by 140 basis points to 20.1%. CHIEF EXECUTIVE'S REVIEW (continued) 13 SAB Limited's reputation as one of South Africa's leading companies, has beenfurther confirmed in a series of recent awards. The business was voted "mostadmired company in South Africa" in a poll of CEOs and top business executivesand the "best company to work for" in a survey carried out by Finance Week. Inthe Sunday Times/Markinor poll, SAB Limited was voted second most favouritebrand in South Africa, the only corporate brand that is not also a product brandto be recognised in the top ten. SAB Limited's product brand portfoliodominated the top ten brands in the same survey. The process of provincial licensing of the liquor trade continues to progressslowly. Temporary liquor permits have been issued to previously unlicensedoutlets, a significant proportion of which are investing to upgrade theiroutlets to meet formal licensing requirements and enhance the consumerexperience. In line with our intention to actively support the normalisation ofthe retail liquor industry we have provided commercial training to almost 4,000licensees during the last six months, at a cost of some US$2 million. In line with the BEE (Broad Based Black Economic Empowerment) Act, the liquorindustry has been developing a liquor charter. The completion of the charter isdependent on Government finalising the codes of good conduct. We are led tobelieve that these codes will be published later this year, following which theliquor charter will be completed. We continue to successfully progress ourinternal BEE agenda with spend on preferential procurement up by 37% on thecomparable period last year and the first two franchise distribution centresalso opening during the period. These centres have been created to enabledirect delivery to an increasing customer base and positively improve enterprisedevelopment in the country. Appletiser Total volumes rose 7% following on from significant growth in the prior period.The business continues to benefit from marketing initiatives including the newbottle styles introduced in July 2004 and the good economic conditions. Distell Volumes have increased by 1.8%, with South African volumes up 1%, consistentwith muted growth experience in the South African wine and spirit industry. Thebusiness recognised strong improvements in performance due to enhancements inrevenue, mix, and logistics. South Africa: Hotels and Gaming 2005 2004 % changeFinancial summary US$m US$m Group revenue (including share of associates' revenue) 154 132 17EBITA # 38 29 29EBITA margin (%) # 25.0 22.1 Revpar (US$) * 52.58 46.07 14 # Excludes share of associates' exceptional profit of US$11 million on thedisposal of property, plant and equipment in 2004. * Revenue per available room. The Tsogo Sun group reported a strong first half year performance with our shareof EBITA for the period being US$38 million, an increase of 29% over thecomparable period. The beneficial effects of low interest rates, low inflationand growth in household spending have all contributed to the good resultsachieved by both Gaming and Hotels divisions. In particular, the gaming industryhas remained buoyant during the past half year, and within this Tsogo Sun'smajor casinos maintained or grew their share and achieved operationalefficiencies. Good occupancy levels have been achieved in the group's hotels,with most of the growth occurring in the higher-priced sectors of the market,leading to the increased Revpar. These factors combined to produce animprovement in the group EBITA margin to 25%, 290 basis points higher thanreported for the comparable period. CHIEF EXECUTIVE'S REVIEW (continued) 14 Financial review New accounting standards and restatements The group previously prepared its financial statements under United KingdomGenerally Accepted Accounting Principles (UK GAAP). From 1 April 2005, SABMillerplc is required to adopt the International Financial Reporting Standards (IFRS)endorsed by the European Union (EU) and has made available comparative financialinformation for the year ended 31 March 2005 prepared on a basis consistent withthe IFRS accounting policies as set out in note 9 to this interim financialreport (www.sabmiller.com/SABMiller/Financial+centre/ - Restatement of FinancialInformation under International Financial Reporting Standards). The group'saccounting policies in note 9 detail certain permitted exemptions from the fullrequirements of IFRS which the group has elected to take in adopting IFRS forthe first time. IAS 34 Interim Financial Reporting has not been applied in preparing this reportdue to the continual changes to timing and content of the IFRSs and due tocertain elements which the group expects to use having not been endorsed by theEU at the date of this report, principally in relation to the proposedamendments to IAS 19 Employee Benefits. This report has been prepared based onaccounting standards the group expects to apply for the 31 March 2006 annualreport and not on the accounting standards in place at the time of issuing thisreport. In accordance with the exemption available in IFRS 1, the group has applied IAS32 Financial Instruments: Disclosure and Presentation and IAS 39 FinancialInstruments: Recognition and Measurement with effect from 1 April 2005. Thishas resulted in increases in total assets of US$6 million and total liabilitiesof US$1 million, giving an increase in net assets of US$5 million, as at 1 April2005. The impact includes adjustments to the carrying value of borrowings wherethere was a fair value hedge and an increase in borrowings reflecting thereclassification of interest accruals, previously shown as creditors under UKGAAP. Further details of the impact of the adoption of these standards are givenin note 8. Segmental analysis The group's operating results are set out in the segmental analysis ofoperations, and the disclosures accord with the manner in which the group ismanaged. SABMiller believes that the reported profit measures - beforeexceptional items and brand amortisation, and including associates on a grossoperating profit basis (i.e. before interest, tax and minority interests) -provide additional information on trends to shareholders and allow for greatercomparability between segments. Segmental performance is reported after thespecific apportionment of attributable head office service costs. This announcement includes segmental results and commentaries for South Africa:Beverages. This follows the acquisition in December 2004 of all of the shares inABI which the group did not own, and the commencement of a programme of work toestablish and leverage the benefits from the combination of our beveragebusinesses in South Africa. South Africa: Beverages combines two previouslyseparate business segments: Beer South Africa and Other Beverage Interests. Presentation of volumes In the determination and disclosure of reported sales volumes, the groupaggregates 100% of the volumes of all consolidated subsidiaries and its equityaccounted associates, other than associates where the group exercisessignificant influence but primary responsibility for day to day management restswith others (such as Castel and Distell). In these latter cases, the financialresults of operations are equity accounted in terms of IFRS but volumes areexcluded. Contract brewing volumes are excluded from total volumes; howeverrevenue from contract brewing is included within group revenue. Reportedvolumes exclude intra-group sales volumes. CHIEF EXECUTIVE'S REVIEW (continued) 15 Organic, constant currency comparisons The group has made some additional disclosures of its results on an organic,constant currency basis, to analyse the effects of acquisitions net of disposalsand changes in exchange rates on the group's results. Organic results excludethe first twelve months' results of acquisitions and the last twelve months'results of disposals. Constant currency results have been determined bytranslating the local currency denominated results for the six months ended 30September 2005 at the exchange rates for the comparable period in the prioryear. Acquisitions On 27 May 2005 the group announced that its Indian subsidiary, MBL Investmentshad acquired the Shaw Wallace Group's interest in the brewing operations of itsIndian investment, taking the group's interest to 99%. On 19 July 2005 the group announced a major investment through a transactioninvolving the Santo Domingo Group, which completed on 12 October 2005, in whichSABMiller obtained a 71.77% controlling interest in Bavaria S.A., a companylisted on the Colombian Stock Exchange. As consideration, SABMiller plc issued225 million ordinary shares, amounting to some 15.04% of the enlarged ordinaryshare capital of SABMiller. Following the share issue, the group has made orwill make cash offers to acquire the remaining 28.23% of Bavaria and certainother minority interests held in the Bavaria group. Profit before tax Profit before tax of US$1,126 million was down 15% on prior period. Howeverexcluding the impact of exceptional items in the prior year and the earlyredemption penalty on the private placement notes in the current year (seebelow) and including the share of results of associates before tax and minorityinterests, adjusted profit before tax increased 15% reflecting performanceimprovements in the majority of our business segments, excluding those in theAmericas. Additional acquisitions have not had a significant impact on profitbefore tax for the period. Exceptional items Items that are material either by size or incidence are classified asexceptional items. Further details on the treatment of these items can be foundin notes 3 and 9(r). There were no exceptional items during the six months ended 30 September 2005. In the prior period, an exceptional profit of US$316 million was included withinoperating profit. This comprised a US$239 million profit on the disposal of thegroup's 21% investment in Edgars Consolidated Stores Ltd (Edcon), a US$96million profit on the disposal of the group's 29.4% stake in Harbin BreweryGroup Limited (Harbin) and a US$4 million profit on the disposal of the Tumwaterbrewery at Miller, partly offset by US$23 million of brewery closure costs inItaly. In addition there was an exceptional profit within the share of post-taxresults of associates of US$11 million, relating to the share of associate'sprofit on the disposal of property, plant and equipment in South Africa: Hotelsand Gaming. Interest Net interest costs are broadly in line with the prior year, despite the earlyredemption penalty referred to below. Taxation The effective tax rate, before exceptional items and including share ofassociates' operating profit before exceptional items and share of associates'tax, is 35.3%, broadly in line with the prior period. CHIEF EXECUTIVE'S REVIEW (continued) 16 Treasury Gross debt, comprising borrowings of the group together with the fair value ofderivative assets or liabilities held to manage interest rate and foreigncurrency risk of borrowings, have increased to US$3,570 million from US$3,354million at 1 April 2005 (restated). Net debt comprises gross debt net of cashand cash equivalents. Net debt has increased to US$2,428 million from US$2,210million at 1 April 2005 (restated) reflecting the increase in cash generatedfrom operating activities offset by additional borrowings to fund the purchaseof the Indian business. The group's gearing (presented as a ratio of debt/equity) has increased to 27.2% from 25.2% (restated) at 1 April 2005. The group previously had US dollar and sterling private placement notes in issuewith final maturity in 2008. As part of the refinancing for the Bavariatransaction, notice was given to repay all of these notes in accordance withtheir terms, with repayment on 22 September 2005. The amounts on repaymenttotalled US$179 million and £25 million (US$37 million) and were met out ofexisting resources. These amounts included an early redemption penalty of US$13million, included in interest payable but which has been treated as an adjustingitem for adjusted earnings purposes. The average loan maturity in respect of the US$ fixed rate debt portfolio is 5.9years. The average borrowing rate for the total debt portfolio at 30 September2005 was 5.6% (2004: 5.1%). On 9 September 2005 the group entered into a US$3,500 million 364 day revolvingcredit facility for general corporate purposes (including financing the Bavariaminority acquisitions). This facility can be extended at the group's electionfor a term of a further year. Goodwill Goodwill increased by US$234 million compared to 31 March 2005, due primarily tothe goodwill arising on the Indian acquisition, partially offset by the effectof foreign exchange movements. Cash flow Net cash generated from operations before working capital movement (EBITDA) roseto US$1,418 million from last half year's US$1,278 million. Management believesthat an appropriate ratio for showing the conversion of revenue into cash isEBITDA to revenue. This ratio increased in the period to 20.1% (2004: 19.9%). Dividend The board has declared an interim dividend of 13 US cents per share. Thedividend will be payable on 19 December 2005 to all shareholders registered onthe London and Johannesburg Registers on 2 December 2005. The ex-dividendtrading dates will be 30 November 2005 on the London Stock Exchange (LSE) and 28November 2005 on the JSE Limited, South Africa. As the group reports in USdollars, dividends are declared in US dollars. They are payable in South Africanrand to shareholders on the South African register, in US dollars toshareholders on the UK register with a registered address in the United States(unless mandated otherwise), and in sterling to all remaining shareholders onthe UK section of the register. The rates of exchange will be calculated on 17 November 2005 and announcementswill be made on the LSE's Regulatory News Service and on the JSE Stock ExchangeNews Service to shareholders, indicating the exchange rates to be applied. To comply with the requirements of STRATE in South Africa, from the close ofbusiness on 25 November 2005 until the close of business on 2 December 2005, notransfers between the UK and South African registers will be permitted and noshares may be dematerialised or rematerialised. DIRECTORS' RESPONSIBILITY FOR FINANCIAL REPORTING 17 This statement, which should be read in conjunction with the independent reviewreport of the auditors set out below, is made to enable shareholders todistinguish the respective responsibilities of the directors and the auditors inrelation to the consolidated interim financial information, set out on pages 18to 40, which the directors confirm has been prepared on a going concern basisand follows all applicable accounting standards. The directors consider that thegroup has used appropriate accounting policies, consistently applied andsupported by reasonable and appropriate judgements and estimates. A copy of the interim report of the group is placed on the company's website.The directors are responsible for the maintenance and integrity of informationon the company's website. Information published on the internet is accessiblein many countries with different legal requirements. Legislation in the UnitedKingdom governing the preparation and dissemination of the financial statementsmay differ from legislation in other jurisdictions. On behalf of the board E A G Mackay M I WymanChief executive Chief financial officer 9 November 2005 INDEPENDENT REVIEW REPORT TO SABMILLER plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 September 2005 which comprises the consolidated interimbalance sheet as at 30 September 2005, the related consolidated interimstatements of income, cash flows and recognised income and expense for the sixmonths then ended and the related notes. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. Thepreviously published IFRS transition information as referred to in note 1 doesnot form part of this review. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the group willbe prepared in accordance with accounting standards adopted for use in theEuropean Union. This interim report has been prepared in accordance with thebasis set out in note 1. The accounting policies are consistent with those that the directors intend touse in the next annual financial statements. As explained in note 1, there is,however, a possibility that the directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with accounting standards adopted for use in the European Union.The IFRS standards and IFRIC interpretations that will be applicable and adoptedfor use in the European Union are not known with certainty at the time ofpreparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit and therefore provides a lower level of assurance. Accordingly we do notexpress an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2005. PricewaterhouseCoopers LLPChartered Accountants London, 9 November 2005 SABMiller plcCONSOLIDATED INCOME STATEMENTSfor the six months ended 30 September 18 Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited Notes US$m US$m US$m Group revenue (including share of associates' 2 7,901 7,178 14,543revenue)Share of associates' revenue (850) (735) (1,642)Revenue 2 7,051 6,443 12,901 Net operating expenses (5,948) (5,123) (10,354) Operating profit 2 1,103 1,320 2,547Operating profit before exceptional items 1,103 1,004 2,132Exceptional items 3 - 316 415 Net finance costs (77) (78) (143)Interest payable and similar charges (117) (121) (239)Interest receivable 40 43 96 Share of post-tax results of associates 100 82 148 Profit before taxation 1,126 1,324 2,552Taxation 4 (377) (365) (823) Profit for the financial period 749 959 1,729 Profit attributable to minority interests 99 101 208Profit attributable to equity shareholders 650 858 1,521 749 959 1,729 Basic earnings per share (US cents) 5 51.3 71.8 125.5Diluted earnings per share (US cents) 5 50.9 68.5 121.0 SABMiller plcCONSOLIDATED BALANCE SHEETSat 30 September 19 30/9/05 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m AssetsNon-current assetsGoodwill 7,415 6,551 7,181Other intangible assets 150 113 122Property, plant and equipment 4,102 3,743 4,056Investments in associates 1,156 1,045 1,125Financial assets- Available for sale investments 59 170 187- Derivative financial instruments 14 - -Trade and other receivables 58 53 54Deferred tax assets 164 110 153 13,118 11,785 12,878 Current assetsInventories 608 601 627Trade and other receivables 1,145 1,000 1,008Financial assets- Derivative financial instruments 8 - -Cash and cash equivalents 1,142 1,279 1,143 2,903 2,880 2,778 Total assets 16,021 14,665 15,656 LiabilitiesCurrent liabilitiesFinancial liabilities- Derivative financial instruments (7) - -- Borrowings (1,154) (507) (815)Trade and other payables (1,936) (1,821) (1,941)Current tax liabilities (332) (257) (381)Provisions (64) (86) (62) (3,493) (2,671) (3,199) Non-current liabilitiesFinancial liabilities- Derivative financial instruments (2) - -- Borrowings (2,428) (3,169) (2,525)Trade and other payables (48) (63) (53)Deferred tax liabilities (188) (224) (188)Provisions (931) (795) (927) (3,597) (4,251) (3,693) Total liabilities (7,090) (6,922) (6,892) Net assets 8,931 7,743 8,764 EquityTotal shareholders' equity 8,261 6,910 8,086Minority interests 670 833 678Total equity 8,931 7,743 8,764 SABMiller plcCONSOLIDATED CASH FLOW STATEMENTSfor the six months ended 30 September 20 Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited Notes US$m US$m US$m Cash flows from operating activitiesCash generated from operations 6 1,289 1,262 2,792Interest received 41 45 94Interest paid (123) (114) (228)Interest element of finance lease rental payments - (1) (2)Tax paid (394) (272) (625) Net cash from operating activities 813 920 2,031 Cash flows (to)/from investing activitiesPurchase of property, plant and equipment (404) (334) (756)Proceeds from sale of property, plant and equipment 21 12 30Purchase of intangible assets (15) (4) (12)Purchase of investments (18) (5) (19)Proceeds from sale of investments - 463 475Acquisition of subsidiaries (net of cash acquired) (180) (24) (23)Purchase of shares from minorities (6) - (793)Purchase of shares in associates - (8) (13)Net funding to associates - (59) (68)Dividends received from associates 38 21 47Dividends received from other investments 1 10 10 Net cash (to)/from investing activities (563) 72 (1,122) Cash flows (to)/from financing activitiesProceeds from issue of shares 18 19 38Proceeds from issue of shares to minorities - 1 1Net purchase of own shares for share trusts (8) (5) (21)Issue of loans 265 527 540Repayment of loans (356) (566) (632)Capital element of finance lease payments (9) (13) (25)Equity dividends paid to equity holders of the (328) (269) (412)parentDividends paid to minority interests (63) (76) (172) Net cash to financing activities (481) (382) (683) Net cash (to)/from operating, investing and (231) 610 226financing activities Effects of exchange rate changes 2 (14) (56) Net (decrease)/increase in cash and cash equivalents (229) 596 170 Cash and cash equivalents at 1 April 630 460 460 Cash and cash equivalents at period end 401 1,056 630 SABMiller plcCONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSEfor the six months ended 30 September 21 Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m Currency translation differences on foreign currency (227) 45 220net investments, net of taxActuarial losses on defined benefit plans - - (127)Net investment hedges 10 - - Net (losses)/gains recognised directly in equity (217) 45 93Profit for the financial period 749 959 1,729 Total recognised income for the period 532 1,004 1,822- attributable to equity shareholders 453 898 1,601- attributable to minority interests 79 106 221 SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT 22 1. Basis of preparation SABMiller plc and its subsidiaries and associates (together referred to as thegroup) previously prepared its consolidated financial statements under UKGenerally Accepted Accounting Principles (GAAP). From 1 April 2005 onwards, thegroup is required to prepare its consolidated financial statements in accordancewith International Financial Reporting Standards (IFRS) as endorsed by theEuropean Union (EU). The unaudited financial information in this interim announcement is prepared onthe basis of the IFRS accounting policies that the directors intend to use inthe next annual report, as set out in note 9. This basis is subject toamendment by the International Accounting Standards Board (IASB) and isdependent on further endorsement by the European Commission (EC). Accordinglythe information presented and the format of presentation may be subject tochange as new guidance is issued or as practice develops. The group has decided to adopt the amendments of IAS 19 Employee Benefits issuedin December 2004 in advance of their earlier effective date of January 2006, asendorsement of these amendments by the EU is expected later this year. As aresult, the group has recognised actuarial gains and losses arising on itspost-retirement benefit schemes in the consolidated statements of recognisedincome and expense. Comparative numbers included in this interim report represent amounts adjustedfor the impact of IFRS with the exception of IAS 32 Financial Instruments:Disclosure and Presentation and IAS 39 Financial Instruments: Recognition andMeasurement which have been applied with effect from 1 April 2005. The UK GAAP to IFRS reconciliations for both the year ended 31 March 2005 andsix month interim period ended 30 September 2004 detailing the unaudited IFRSadjustments were published on 5 July 2005 and are available in the 'Restatementof Financial Information under International Financial Reporting Standards'publication available on the SABMiller plc website www.sabmiller.com/SABMiller/Financial+centre/. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of certain critical accounting estimates.It also requires management to exercise judgment in the process of applying thegroup's accounting policies. The areas involving a higher degree of judgment orcomplexity or areas where assumptions and estimates are significant to theconsolidated financial statements are disclosed in these statements. Actualresults could differ from those estimates. The unaudited interim report was approved by the Board of Directors on 9November 2005. The financial information included in this report does not constitute statutoryaccounts for the purpose of Section 240 of the Companies Act 1985 (as amended).A copy of the statutory accounts for the year ended 31 March 2005 under UK GAAPhas been delivered to the Registrar of Companies on which an unqualified reporthas been made by the auditors under Section 235 of the Companies Act 1985 (asamended). SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 23 2. Segmental analysis Six months Six months Year endedRevenue ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m North America 2,662 2,615 4,892 Central America 262 260 521 Europe 1,894 1,617 2,909 Africa and Asia 1,065 870 1,937Less: associates' share (520) (427) (934) 545 443 1,003 South Africa: Beverages 1,864 1,684 3,995 Less: associates' share (176) (176) (419) 1,688 1,508 3,576 South Africa: Hotels and Gaming 154 132 289Less: associates' share (154) (132) (289) - - - South Africa: Total 1,688 1,508 3,576 Group revenue (including share of associates') 7,901 7,178 14,543Less: associates' share (850) (735) (1,642)Revenue 7,051 6,443 12,901 SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 24 2. Segmental analysis (continued) Six months Six months Year endedOperating profit ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m North America 286 305 598Operating profit before exceptional items 286 301 487Exceptional items - 4 111 Central America 32 36 90 Europe 379 276 431 Operating profit before exceptional items 379 299 482Exceptional items - (23) (51) Africa and Asia 108 195 352Operating profit before exceptional items 108 99 249Exceptional items - 96 103 South Africa: Beverages and Total 353 298 906 Corporate (55) 210 170Operating loss before exceptional items (55) (29) (82)Exceptional items - 239 252 Group 1,103 1,320 2,547Operating profit before exceptional items 1,103 1,004 2,132Exceptional items - 316 415 SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 25 2. Segmental analysis (continued) Six months Six months Year endedEBITA * ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m North America 286 301 487 Central America 32 36 90 Europe 379 299 482 Africa and Asia 209 179 383Less: share of associate's operating profit (100) (80) (134) 109 99 249 South Africa: Beverages 375 315 956Less: share of associate's operating profit (22) (17) (50) 353 298 906 South Africa: Hotels and Gaming 38 29 73Less: share of associate's operating profit (38) (29) (73) - - - South Africa: Total 353 298 906 Corporate (55) (29) (82) EBITA 1,264 1,130 2,389Less: share of associate's operating profit (160) (126) (257)Group - excluding exceptional items 1,104 1,004 2,132 Reconciliation of operating profit to EBITA Operating profit 1,103 1,320 2,547 Add: Brand amortisation 1 - - Add: Share of associates' operating profit (excluding 160 126 257exceptional items)Less: Exceptional items (excluding share of associates'exceptional items)- North America - (4) (111)- Europe - 23 51- Africa and Asia - (96) (103)- Corporate - (239) (252)EBITA 1,264 1,130 2,389 * EBITA comprises operating profit (US$1,103 million) before amortisation of brands (US$1 million) andexceptional items (US$Nil million) and includes post-tax results of associates (US$100 million) togetherwith exceptional items, amortisation of brands, interest, tax and minority interests (US$60 million). SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 26 2. Segmental analysis (continued) Six months Six months Year endedEBITDA ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m North America 359 366 634 Central America 52 57 129 Europe 469 377 649 Africa and Asia 137 116 293 South Africa: Beverages and Total 440 384 1,101 Corporate (39) (26) (69) 1,418 1,274 2,737 Exceptional itemsNorth America - 4 4Europe - - (5) EBITDA 1,418 1,278 2,736 EBITDA is the net cash inflow from operating activities before working capital movements. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 27 3. Exceptional items The following items were treated as exceptional items by the group: Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m Subsidiaries' exceptional items included in operatingprofit:North America - 4 111 Profit on disposal of Tumwater brewery - 4 4Miller integration and restructuring costs - - 2Brewery closure costs in Tumwater - - 1Gain in relation to changes to post-retirement plans - - 104 Europe - (23) (51) Brewery closure costs in Italy - (23) (35)Restructuring costs in the Canary Islands - - (16) Africa and AsiaProfit on disposal of investment - 96 103 CorporateProfit on disposal of investment - 239 252 Exceptional items included in operating profit - 316 415 Taxation charge - (31) (74)Minority interests' share of the above items - - 8 Share of associates' exceptional itemsSouth Africa: Hotels and GamingShare of associate's profit on disposal of property, plant - 11 11and equipmentRestructuring costs - - (4) Taxation credit - - 1 Exceptional items (including share of associates' - 327 422exceptional items) There were no exceptional items during the six months ended 30 September 2005. In the prior period, an exceptional profit of US$316 million was included withinoperating profit. This comprised a US$239 million profit on the disposal of thegroup's 21% investment in Edgars Consolidated Stores Ltd (Edcon), a US$96million profit on the disposal of the group's 29.4% stake in Harbin BreweryGroup Limited (Harbin) and a US$4 million profit on the disposal of the Tumwaterbrewery at Miller, partly offset by US$23 million brewery closure costs inItaly. In addition there was an exceptional profit within the share of post taxresults of associates of US$11 million, relating to the share of associate'sprofit on the disposal of property, plant and equipment in South Africa: Hotelsand Gaming. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 28 4. Taxation Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m Current taxation charge 379 339 807- Charge for the period 357 301 638- Adjustments in respect of prior years (7) (1) 43- Withholding and other taxes 29 39 126Deferred taxation (credit)/charge (2) 26 16- Charge for the year (2) 25 55- Adjustment in respect of prior years 2 1 (39)- Rate change (2) - - 377 365 823 Effective tax rate, before exceptional items (%)* 35.3 35.1 37.1 The effective tax rate is calculated including share of associates' operatingprofit before exceptional items and share of associates' tax before exceptionalitems. This calculation is on a basis consistent with that used in prior yearsand is also consistent with other group operating metrics. \* The effective tax rate for the year ended 31 March 2005 before the SouthAfrican secondary tax on companies (STC) charge on non-recurring dividends,following a restructuring of the group's holdings in South Africa, of US$38million was 35.4%. 5. Earnings per share Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US cents US cents US cents Basic earnings per share 51.3 71.8 125.5Headline earnings per share 52.7 47.9 95.3Adjusted basic earnings per share 52.7 47.9 101.0Adjusted comparable earnings per share * 52.7 46.3 98.4Diluted earnings per share 50.9 68.5 121.0Adjusted diluted earnings per share 52.2 46.0 97.7 * Comparative figures adjusted for conversion of convertible bonds. The amountsare calculated as if the bonds had converted on 1 April 2004. The calculation of basic earnings per share has been based on the profit for thefinancial period as shown in the table below, and on a weighted average numberof shares in issue of 1,265,874,123 (2004: 1,193,753,551). At 30 September 2005 there were 11,399,683 share purchase options outstandingunder the SABMiller plc Executive Share Purchase Scheme (South Africa),9,230,114 share purchase options outstanding under the SABMiller plc ExecutiveShare Option Scheme (Approved Scheme and (No 2) Scheme combined), 1,426,911conditional awards under the SABMiller plc Performance Share Awards Scheme whichhave not yet vested and 3,709,136 share purchase options outstanding under theSABMiller plc International Employee Share Scheme. The calculation of dilutedearnings per share is based on a weighted average number of shares in issue of1,277,058,054 after adjusting for 11,203,931 weighted potentially dilutiveordinary shares arising from the share options (2004: and the guaranteedconvertible bond), and the profit for the financial period as shown below. Theaverage share price of SABMiller plc since the beginning of the financial year,used in determining the number of potentially dilutive ordinary shares, isUS$16.52, compared with an average strike price on the outstanding options ofUS$9.65. The group has also presented an adjusted basic earnings per share figure toexclude the impact of brand amortisation and other non-recurring items in orderto present a more meaningful comparison for the periods shown in theconsolidated interim report. Adjusted earnings per share has been based onadjusted headline earnings for each financial period and on the same number ofweighted average shares in issue as the basic earnings per share calculation.Headline earnings per share has been calculated in accordance with the Instituteof Investment Management and Research (IIMR)'s Statement of Investment PracticeNo. 1 entitled 'The Definition of Headline Earnings'. The adjustments made toarrive at headline earnings and adjusted earnings are detailed below. The calculation of prior period adjusted earnings on a comparable basis adjustsfor the conversion of the US$600 million convertible bonds, as if the bonds hadbeen converted on 1 April 2004. The profit for the financial period afteradjusting for the interest on the convertible bonds was US$585 million for thesix months ended 30 September 2004 and US$1,243 million for the year ended 31March 2005, and the weighted average number of shares was 1,262,945,732 for thesix months ended 30 September 2004 and 1,263,672,981 for the year ended 31 March2005. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 29 5. Earnings per share (continued) Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m Profit for the financial period attributable to equity 650 858 1,521holders of the parentLoss on derivatives on capital items* 10 - -Early redemption penalty in respect of private placement 13 - -notes (Corporate)Brewery closure costs in Tumwater (North America) - - (1)Gain in relation to changes to post-retirement plans - - (104)(North America)Impairment of property, plant and equipment - - 9Share of associate's profit on disposal of property, plant - (11) (11)and equipment (South Africa: Hotels and Gaming)Profit on sale of investments (Africa and Asia, Corporate) - (335) (355)Profit on disposal of Tumwater (North America) - (4) (4)Brewery closure costs in Italy (Europe) - 23 21Brand amortisation 1 - -(Profit)/loss on sale of property, plant and equipment and (2) 9 16investmentsTax effects of the above items (7) 31 71Minority interests' share of the above items 2 1 (9)Headline earnings (basic) 667 572 1,154Integration/reorganisation costs - - 32South African STC on non-recurring dividend - - 38Adjusted earnings 667 572 1,224 * This does not include all derivative movements but includes those in relation to capital items forwhich hedge accounting cannot be applied. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 30 6. Reconciliation of operating profit to net cash generated from operations Six months Six months Year ended ended 30/9/05 ended 30/9/04 31/3/05 Unaudited Unaudited Unaudited US$m US$m US$m Operating profit 1,103 1,320 2,547Depreciation:- Property, plant and equipment 204 197 396- Containers 45 40 82 Container breakages, shrinkage and write-offs 11 13 51 (Profit)/loss on sale of property, plant and equipment (2) 9 16 Impairment of property, plant and equipment - - 8 Amortisation of intangible assets 22 15 33 Net loss from fair value hedges 20 - -Dividends received from other investments (1) (10) (10)Charge with respect to share options 10 5 18Gain in relation to changes to post-retirement plans (North - - (104)America)Profit on sale of investments (Africa and Asia, Corporate) - (335) (355)Restructuring provision in the Canary Islands (Europe) - - 16Restructuring provision (North America) - - (2)Brewery closure costs in Tumwater (North America) - - (1)Brewery closure costs in Italy (Europe) - 23 30Deferred income (1) (1) (3)Other non-cash movements 7 2 14 Net cash generated from operations before workingcapital movements (EBITDA) 1,418 1,278 2,736 Net (decrease)/increase in working capital (129) (16) 56Net cash generated from operations 1,289 1,262 2,792 In the six months ended 30 September 2004, operating cash flows included cashinflows relating to exceptional items of US$4 million (year ended 31 March 2005:US$4 million) in respect of proceeds on the Tumwater disposal, and a cashoutflow of US$Nil million (year ended 31 March 2005: US$5 million) in respect ofbrewery closure costs in Italy. 7. Post-balance sheet events On 19 July 2005 the group announced a major investment through a transactioninvolving the Santo Domingo Group which completed on 12 October 2005, in whichSABMiller obtained a 71.77% controlling interest in Bavaria S.A., a companylisted on the Colombian Stock Exchange. As consideration, SABMiller issued 225million ordinary shares, amounting to some 15.04% of the enlarged ordinary sharecapital of SABMiller. Following the share issue, the group has made or will makecash offers to acquire the remaining 28.23% of Bavaria and certain otherminority interests held in the Bavaria group. 8. Adoption of IAS 32 and IAS 39 In accordance with the exemption available in IFRS 1, the group has adopted IAS32 and IAS 39 with effect from 1 April 2005. As a result, the group is requiredto recognise transitional adjustments for financial instruments, includingdesignated hedging relationships, in accordance with the measurementrequirements of IAS 39 at 1 April 2005. The effects of applying these standardsare as follows: Fair value hedges Fair value hedges comprise derivative financial instruments designated in ahedging relationship to manage the group's interest rate risk to which the fairvalue of certain assets and liabilities are exposed. Changes in the fair valueof the derivative offset the relevant changes in the fair value of theunderlying hedged item attributable to the hedged risk in the income statementin the period incurred. At 1 April 2005, the group recognised additional non-current derivative assetsof US$3 million, additional non-current derivative liabilities of US$5 millionand a decrease in non-current borrowings of US$2 million in respect of financialinstruments used to hedge the group's interest rate risk. These adjustments hadno impact on deferred tax. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 31 8. Adoption of IAS 32 and IAS 39 (continued) Cash flow hedges Cash flow hedges comprise derivative financial instruments designated in ahedging relationship to manage currency risk to which the cash flows of certainliabilities are exposed. The effective portion of changes in the fair value ofthe derivative that is designated and qualifies for hedge accounting isrecognised in equity. Amounts accumulated in equity are recycled to the incomestatement in the period in which the hedged item affects profit or loss. At 1 April 2005, the group recognised additional non-current derivative assetsof US$14 million and a decrease in non-current trade and other receivables ofUS$14 million in respect of financial instruments used to hedge the group'sforeign currency debt exposure. These adjustments had no impact on deferred tax. Embedded derivatives At 1 April 2005, the group recognised additional current derivative assets ofUS$5 million and an increase in equity of US$5 million in respect of embeddedderivatives relating to the group's malt and barley contracts (US$4 million),and foreign exchange contracts (US$1 million). These adjustments had no impacton deferred tax. Balance sheet classification At 1 April 2005, the reclassification of interest accruals and prepaymentsresulted in a US$2 million decrease in current trade and other receivables, aUS$29 million decrease in current trade and other payables, a US$1 milliondecrease in current borrowings and a US$28 million increase in non-currentborrowings. The net impact on the group's gross borrowings at 1 April 2005 wasan increase of US$27 million. Restatement of consolidated balance sheet to include IAS 32 and 39 - as at 1April 2005 1 April 2005 Restated IFRS 31 March IAS 32/39 after 2005 transition adoption IFRS adjustment of IAS 32/39 Unaudited Unaudited Unaudited US$m US$m US$m AssetsNon-current assetsDerivative financial instruments - 17 17Trade and other receivables 54 (14) 40 54 3 57Current assetsTrade and other receivables 1,008 (2) 1,006Derivative financial instruments - 5 5 1,008 3 1,011LiabilitiesCurrent liabilitiesBorrowings (815) 1 (814)Trade and other payables (1,941) 29 (1,912) (2,756) 30 (2,726)Non-current liabilitiesDerivative financial instruments - (5) (5)Borrowings (2,525) (26) (2,551) (2,525) (31) (2,556) Impact on net assets 5 EquityEquity attributable to equity holders 8,086 5 8,091 8,086 5 8,091Impact on equity 5 SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 32 9. Accounting policies under IFRS The significant accounting policies adopted in the preparation of the group'sfinancial statements are set out below, together with the decisions made by thegroup as part of its transition to IFRS. These policies have been consistentlyapplied to all the periods presented, unless otherwise stated. a) Basis of preparation The consolidated financial statements will be prepared on a basis consistentwith IFRS as required by a European Union Regulation issued in June 2002, theInternational Financial Reporting Interpretations Committee (IFRIC)interpretations and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. This basis is subject to amendment by theInternational Accounting Standards Board (IASB) and is dependent on furtherendorsement by the European Commission (EC). Accordingly the informationpresented and the format of presentation may be subject to change as newguidance is issued or as practice develops. The financial statements are prepared under the historical cost convention,except for the revaluation to fair value of certain financial instruments asdescribed in the accounting policies below. IFRS 1 First-time adoption of IFRS permits certain exemptions from the fullrequirements of IFRS to companies adopting IFRS for the first time. The grouphas elected to take the following permitted exemptions: i) Business combinations (including acquisitions) before the date oftransition have not been restated. The net book value of goodwill as at thetransition date has been restated as deemed cost of goodwill under IFRS. ii) Non-current assets held at historical cost have not been revalued;therefore depreciation and impairment tests will continue to be based onhistorical cost. iii) IAS 32 and IAS 39 have been applied with effect from 1 April 2005,therefore hedge documentation and effectiveness is measured from that date. iv) Cumulative currency translation differences on foreign net investmentsrecognised separately in equity have been reset to US$Nil at the date oftransition. v) The cost of share options granted prior to 7 November 2002 has not beenrecognised in the income statement. vi) The accumulated actuarial gains and losses with regard to employeedefined benefit post-retirement plans have been recognised in full in theopening IFRS balance sheet as at 1 April 2004. vii) Convertible bonds have not been split into component values if the bondhas been repaid by the transition date for financial instruments, which was 1April 2005. The accounts have been prepared on a going concern basis. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of certain critical accounting estimates.It also requires management to exercise judgment in the process of applying thegroup's accounting policies. Actual results could differ from those estimates. b) Segmental reporting A reportable segment is a distinguishable business or geographical component ofthe group that provides products or services that are different from those ofother segments. Segments results, assets and liabilities include items directlyattributable to a segment as well as those that can be allocated on a reasonablebasis. The group's primary segmental analyses are in accordance with the basis on whichthe businesses are managed and according to the differing risk and rewardprofiles. The group presents its geographic analysis as its primarysegmentation. The group intends to present its product analysis as its secondary segmentation.This will be analysed between secondary segments of Beer, Soft drinks and Other. c) Basis of consolidation SABMiller plc (the company) is a public limited company incorporated in GreatBritain and registered in England and Wales. The consolidated financialstatements include the financial information of the subsidiary and associatedentities owned by the company. (i) Subsidiaries Subsidiaries are entities controlled by the company, where control is the powerdirectly or indirectly to govern the financial and operating policies of theentity so as to obtain benefit from its activities, regardless of whether thispower is actually exercised. Where the company's interest in subsidiaries isless than 100%, the share attributable to outside shareholders is reflected inminority interests. Subsidiaries are included in the financial statements fromthe date control commences until the date control ceases. Intra-group balances, and any unrealised gains and losses or income and expensesarising from intra-group transactions, are eliminated in preparing theconsolidated financial statements. Unrealised losses are eliminated unless thetransaction provides evidence of an impairment of the asset transferred. Some of the company's subsidiaries have a local statutory accounting referencedate of 31 December. These are consolidated using management preparedinformation on a basis coterminous with the company's accounting reference date. (ii) Associates Associates are entities in which the group has a long-term interest and overwhich the group has directly or indirectly significant influence, wheresignificant influence is the ability to influence the financial and operatingpolicies of the entity. The associate, Distell Group Ltd, has a statutory accounting reference date of30 June. In respect of each year ending 31 March, this company is included basedon financial statements drawn up to the previous 31 December, but taking intoaccount any changes in the subsequent period from 1 January to 31 March thatwould materially affect the results. All other associates are included on acoterminous basis. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 33 9. Accounting policies under IFRS (continued) d) Foreign exchange (i) Foreign exchange translation Items included in the financial statements of each of the group's entities aremeasured using the currency of the primary economic environment in which theentity operates (the functional currency). The consolidated financial statementsare presented in US dollars which is the group's functional and presentationalcurrency. (ii) Transactions and balances The financial statements for each group company have been prepared on the basisthat transactions in foreign currencies are recorded in their functionalcurrency at the rate of exchange ruling at the date of the transaction. Monetaryitems denominated in foreign currencies are retranslated at the rate of exchangeruling at the balance sheet date with the resultant translation differencesbeing included in operating profit in the income statement other than thosearising on financial liabilities which are recorded within net finance costs andthose which are deferred in equity as qualifying cash flow hedges and qualifyingnet investment hedges. Translation differences on non-monetary assets such asequity investments classified as available for sale assets are included inequity. (iii) Overseas subsidiaries and associates One-off items in the income and cash flow statements of overseas subsidiariesand associates expressed in currencies other than the US dollar are translatedto US dollars at the rates of exchange prevailing on the day of the transaction.All other items are translated at weighted average rates of exchange for therelevant reporting period. Assets and liabilities of these undertakings aretranslated at closing rates of exchange at each balance sheet date. Alltranslation exchange differences arising on the retranslation of opening netassets together with differences between income statements translated at averageand closing rates are recognised as a separate component of equity. For thesepurposes net assets include loans between group companies that form part of thenet investment, for which settlement is neither planned nor likely to occur inthe foreseeable future and is either denominated in the functional currency ofthe parent or the foreign entity. When a foreign operation is disposed of, anyrelated exchange differences in equity are recycled through the income statementas part of the gain or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. e) Business combinations (i) Subsidiaries The purchase method is used to account for the acquisition of subsidiaries. Theseparable net assets (including intangibles), are incorporated into thefinancial statements on the basis of the fair value to the group from theeffective date of control, and the results of subsidiary undertakings acquiredduring the financial year are included in the group's results from that date. Control is presumed to exist when the group owns, directly or indirectly throughsubsidiaries, more than half of the voting power of an entity unless, inexceptional circumstances, it can be clearly demonstrated that such ownershipdoes not constitute control. Control also exists where the group has the abilityto direct or dominate decision-making in an entity, regardless of whether thispower is actually exercised. On the acquisition of a company or business, fair values reflecting conditionsat the date of acquisition are attributed to the identifiable assets (includingintangibles), liabilities and contingent liabilities acquired. Fair values ofthese assets and liabilities are determined by reference to market values, whereavailable, or by reference to the current price at which similar assets could beacquired or similar obligations entered into, or by discounting expected futurecash flows to present value, using either market rates or the risk-free ratesand risk-adjusted expected future cash flows. The cost of an acquisition is measured as the fair value of the assets given,equity instruments issued and liabilities incurred or assumed at the date of theacquisition plus costs directly attributable to the acquisition. It alsoincludes the group's estimate of any deferred consideration payable. Where thebusiness combination agreement provides for an adjustment to the cost that iscontingent on future events, contingent consideration is included in the cost ofan acquisition if the adjustment is probable (that is, more likely than not) andcan be measured reliably. The difference between the costs of acquisition andthe share of the net assets acquired is capitalised as goodwill. Where the group purchases additional shares in subsidiaries such purchases arereflected as separate acquisition processes and no revised fair valuation isrequired. The difference between the costs of acquisition and the share of thenet assets acquired is capitalised as goodwill. On the subsequent disposal or termination of a previously acquired business, theresults of the business are included in the group's results up to the effectivedate of disposal. The profit or loss on disposal or termination is calculatedafter charging or crediting the amount of any related goodwill to the extentthat it has not previously been taken to the income statement. (ii) Associates The group's share of the recognised income and expenses of associates areaccounted for using the equity method from the date significant influencecommences to the date it ceases based on present ownership interests. The datesignificant influence commences is not necessarily the same as the closing dateor any other date named in the contract. The group recognises its share of associates' results as a one line entry beforetax in the income statement, after taking account of the share of interest, taxand minority interests. When the group's interest in an associate has been reduced to nil because thegroup's share of losses exceeds its interest in the associate, the group onlyprovides for additional losses to the extent that it has incurred legal orconstructive obligations to fund such losses, or make payments on behalf of theassociate. Where the disposal of an investment in an associate is consideredhighly probable (that is, significantly more likely than probable), theinvestment ceases to be equity accounted and, instead, is classified as held forsale and stated at the lower of carrying amount and fair value less costs todispose. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 34 9. Accounting policies under IFRS (continued) e) Business combinations (continued) (iii) Goodwill Goodwill arising on consolidation represents the excess of the costs ofacquisition over the group's interest in the fair value of the identifiableassets (including intangibles), liabilities and contingent liabilities of theacquired entity at the date of acquisition. Where the fair value of the group'sshare of separable net assets acquired exceeds the fair value of theconsideration, the difference is recorded as negative goodwill. Negativegoodwill arising on an acquisition is recognised immediately in the incomestatement. Goodwill is stated at cost less impairment losses and is reviewed for impairmenton an annual basis. Any impairment identified is recognised immediately in theincome statement and is not reversed. The carrying amount of goodwill in respect of associates is included in thecarrying value of the investment in the associate. Where a business combination occurs in several stages, the goodwill associatedwith each stage is calculated using fair value information at the date of eachadditional share purchase. f) Intangible assets Intangible assets are stated at cost less accumulated amortisation on astraight-line basis (if applicable) and impairment losses. Cost is usuallydetermined as the amount paid by the group, unless the asset has been acquiredas part of a business combination. Amortisation is included within net operatingexpenses in the income statement. Internally generated intangibles are notrecognised except for applied development costs referred to under research anddevelopment below. Intangible assets with indefinite lives are not amortised but are subject toannual reviews for impairment. Intangible assets with finite lives are amortised over their estimated usefuleconomic lives, and only tested for impairment where there is a triggeringevent. The directors' assessment of the useful life of intangible assets isbased on the nature of the asset acquired, the durability of the products towhich the asset attaches and the expected future impact of competition on thebusiness. Intangible assets acquired as part of a business combination are recognisedseparately when they are identifiable, it is probable that economic benefitswill flow to the group and the fair value can be measured reliably. (i) Trademarks recognised as part of a business combination Trademarks are recognised as an intangible asset where the trademark has a longterm value. Acquired trademarks are only recognised where title is clear or thetrademark could be sold separately from the rest of the business and theearnings attributable to it are separately identifiable. The group typicallyarrives at the cost of such trademarks on a relief from royalty basis. Where the acquired trademark is seen as having a finite useful economic life, itis subject to amortisation, which in respect of trademarks currently held is10-15 years, being the period for which the group has exclusive rights to thosetrademarks. Where the acquired trademark is seen as having an indefinite usefuleconomic life, the carrying value is subject to an annual impairment review. (ii) Contract brewing and other licences recognised as part of a businesscombination Contractual arrangements for contract brewing and competitor licensingarrangements are recognised as an intangible asset at a fair value representingthe remaining contractual period with an assumption about the expectation thatsuch a contract will be renewed, together with a valuation of this extension.Contractual arrangements and relationships with customers and distributors alsofall to be valued on a similar basis. Where the acquired licence or contract is seen as having a finite usefuleconomic life, it is subject to amortisation, which is the period for which thegroup has exclusive rights to these assets or income streams. (iii) Customer lists and relationships recognised as part of a businesscombination The fair value of businesses acquired may include customer lists andrelationships. These are recognised as intangible assets and are calculated bydiscounting the future revenue stream attributable to these lists orrelationships. Where the acquired asset is seen as having a finite useful economic life, it issubject to amortisation over the period for which the group has the benefit ofthese assets. (iv) Software Where computer software is not an integral part of a related item of property,plant and equipment, the software is capitalised as an intangible asset. Acquired computer software licences are capitalised on the basis of the costsincurred to acquire and bring them to use. Direct costs associated with theproduction of identifiable and unique internally generated software productscontrolled by the group that will probably generate economic benefits exceedingcosts beyond one year are capitalised. Direct costs include software developmentemployment costs (including those of contractors used) and an appropriateportion of overheads. Capitalised computer software, licence and developmentcosts are amortised over their useful economic lives of between 3 and 5 years. Internally generated costs associated with developing or maintaining computersoftware programmes are expensed as incurred. (v) Research and development Research and general development expenditure is written off in the period inwhich it is incurred. Certain applied development costs are only capitalised as internally generatedintangible assets where there is a clearly defined project, separatelyidentifiable expenditure, an outcome assessed with reasonable certainty (interms of feasibility and commerciality), future costs exceed expected revenueand the group has the resources to complete the task. Such assets are amortisedon a straight line basis over their useful lives. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 35 9. Accounting policies under IFRS (continued) g) Property, plant and equipment Property, plant and equipment are stated at cost net of accumulated depreciationand any impairment losses. Cost includes expenditure that is directly attributable to the acquisition ofthe assets. Subsequent costs are included in the asset's carrying value orrecognised as a separate asset as appropriate, only when it is probable thatfuture economic benefits associated with the specific asset will flow to thegroup and the cost can be measured reliably. Repairs and maintenance costs arecharged to the income statement during the financial period in which they areincurred. (i) Land and buildings Land and buildings have been included at their cost as permitted by IFRS 1. Costrepresents the carrying value of land and buildings as at the transition date toIFRS, being 1 April 2004. (ii) Assets in the course of construction Assets in the course of construction are carried at cost less any impairmentloss. Cost includes professional fees and for qualifying assets certainborrowing costs as determined below. Depreciation of these assets, on the samebasis as other property assets commences when the assets are ready for theirintended use. (iii) Assets held under finance leases Assets held under finance leases which result in the group bearing substantiallyall the risks and rewards incidental to ownership are capitalised as property,plant and equipment. Finance lease assets are initially recognised at an amountequal to the lower of their fair value and the present value of the minimumlease payments at inception of the lease, then depreciated over their usefullives. The capital element of future obligations under the leases is included asa liability in the balance sheet classified, as appropriate, as a current ornon-current liability. The interest element of the lease obligations is chargedto the income statement over the period of the lease term to reflect a constantrate of interest on the remaining balance of the obligation for each financialperiod. (iv) Containers Containers in circulation are recorded within plant, property and equipment atcost net of accumulated depreciation less any impairment loss. Depreciation of returnable bottles and containers is recorded to write thecontainers off over the course of their economic life. This is typicallyundertaken in a two stage process; • The excess over deposit value is written down over a period of 1 - 3years. • Provisions are made against the deposit values for breakages and lossin trade together with a design obsolescence provision held to write off thedeposit value over the expected bottle design period - which is a period of nomore than 10 years from the inception of a bottle design. This period isshortened where appropriate by reference to market dynamics and the ability ofthe entity to use bottles for different brands. (v) Depreciation No depreciation is provided on freehold land or assets in the course ofconstruction. In respect of all other plant, property and equipment,depreciation is provided on a straight-line basis at rates calculated to writeoff the cost or valuation, less the estimated residual value of each asset overits expected useful life as follows: Freehold buildings 20 - 50 yearsLeasehold land and buildings Shorter of the lease term or 50 yearsPlant, vehicles and systems 2 -30 yearsContainers, including returnable containers 1 -10 yearsAssets held under finance leases Lower of the lease term of life of the asset The group regularly reviews all of its depreciation rates and residual values totake account of any changes in circumstances. When setting useful economiclives, the principal factors the group takes into account are the expected rateof technological developments, expected market requirements for the equipmentand the intensity at which the assets are expected to be used. The profit or loss on the disposal of an asset is the difference between thedisposal proceeds and the net book amount, including any revaluation, of theasset. Any amount in the revaluation reserve relating to such an asset istransferred across reserves to retained earnings and is not included in theincome statement for the financial year. (vi) Capitalisation of borrowing costs Direct financing costs incurred, before tax, on major capital projects duringthe period of development or construction that necessarily take a substantialperiod of time to be developed for their intended use are capitalised up to thetime of completion of the project. h) Advance payments made to customers (principally hotels, restaurants,bars and clubs) Advance payments made to customers are conditional on the achievement ofcontracted sales targets or marketing commitments. The group records suchpayments as prepayments initially at fair value and amortised in the incomestatement over the relevant period to which the customer commitment is made(typically 3-5 years). These prepayments are recorded net of any impairmentlosses. Where there is a volume target the amortised cost of the advance is included insales discounts and where there are specific marketing activities/commitmentsthe cost is included in marketing. The amounts capitalised are reassessedannually for achievement of targets and are written down if there are impairmentconcerns. Assets held at customer premises are included within plant, property andequipment and are depreciated in line with group policies on similar assets. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 36 9. Accounting policies under IFRS (continued) i) Inventories Inventories are stated at the lower of cost incurred in bringing each product toits present location and condition, and net realisable value, as follows: • Raw materials, consumables and goods for resale: Purchase cost net ofdiscounts and rebates on a first-in first-out basis (FIFO). • Finished goods and work in progress: Raw material cost plus directcosts and a proportion of manufacturing overhead expenses on a FIFO basis. Net realisable value is based on estimated selling price less further costsexpected to be incurred to completion and disposal. j) Financial assets and financial liabilities Financial assets and financial liabilities are initially recorded at fair value(plus any directly attributable transactions costs where applicable). For thosefinancial instruments that are not subsequently held at fair value, the groupassesses whether there is any objective evidence of impairment at each balancesheet date. Financial assets are recognised when the group has rights or other access toeconomic benefits. Such assets consist of cash, equity instruments, acontractual right to receive cash or another financial asset, or a contractualright to exchange financial instruments with another entity on potentiallyfavourable terms. Financial assets are derecognised when the right to receivecash flows from the asset have expired or have been transferred and the grouphas transferred substantially all risks and rewards of ownership. Financial liabilities are recognised when there is an obligation to transferbenefits and that obligation is a contractual liability to deliver cash oranother financial asset or to exchange financial instruments with another entityon potentially unfavourable terms. Financial liabilities are derecognised whenthey are extinguished, that is discharged, cancelled or expired. If a legally enforceable right exists to set off recognised amounts of financialassets and liabilities, which are in determinable monetary amounts, the relevantfinancial assets and liabilities are offset. Interest costs are charged against income in the year in which they accrue.Premiums or discounts arising from the difference between the net proceeds offinancial instruments purchased or issued and the amounts receivable orrepayable at maturity are included in the effective interest calculation andtaken to net interest payable over the life of the instrument. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They arise whenthe group provides money, goods or services directly to a debtor with nointention of trading the receivable. They are included in current assets, exceptfor maturities of greater than 12 months after the balance sheet date which areclassified as non-current assets. Loans and receivables are included in tradeand other receivables in the balance sheet. Investments in this category areinitially recognised at fair value including originating fees and transactioncosts, and subsequently measured at amortised cost using the effective interestmethod less provision for impairment. (ii) Available-for-sale investments Available-for-sale investments are non-derivative financial assets that areeither designated in this category or not classified as financial assets at fairvalue through the income statement, or loans and receivables. Investments inthis category are included in non-current assets unless management intends todispose of the investment within 12 months of the balance sheet date. They areinitially recognised at fair value plus transaction costs and subsequentlyre-measured at fair value. Gains and losses arising from changes in fair valueincluding any related foreign exchange movements are recognised in equity. Ondisposal or impairment of available-for-sale investments, any gains or losses inequity are recycled through the income statement. Purchases and sales of investments are recognised on the date on which the groupcommits to purchase or sell the asset. Investments are derecognised when therights to receive cash flows from the investments have expired or have beentransferred and the group has transferred substantially all risks and rewards ofownership. (iii) Trade receivables Trade receivables are initially recognised at fair value and subsequentlymeasured at amortised cost less provision for impairment. A provision for impairment of trade receivables is established when there isobjective evidence that the group will not be able to collect all amounts dueaccording to the terms of the receivables. The amount of the provision is thedifference between the asset's carrying value and the present value of theestimated future cash flows discounted at the original effective interest rate.This provision is recognised in the income statement. (iv) Cash and cash equivalents Cash and cash equivalents include cash in hand, bank deposits repayable ondemand, other short-term highly liquid investments with original maturities ofthree months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities and areincluded within cash and cash equivalents on the face of the cash flow statementas they form an integral part of the group's cash management. (v) Derivative financial assets and financial liabilities Derivative financial assets and financial liabilities are financial instrumentswhose value changes in response to an underlying variable, require little or noinitial investment and are settled in the future. These include derivatives embedded in host contracts. Such embedded derivativesneed not be accounted for separately if the host contract is already fairvalued; if it is not considered as a derivative if it was freestanding; or if itcan be demonstrated that it is closely related to the host contract. There arecertain currency exemptions which the group has applied to these rules whichlimit the need to account for certain potential embedded foreign exchangederivatives. These are: if a contract is denominated in the functional currencyof either party; where that currency is commonly used in international trade ofthe good traded; or if it is commonly used for local transactions in an economicenvironment. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 37 9. Accounting policies under IFRS (continued) j) Financial assets and financial liabilities (continued) (v) Derivative financial assets and financial liabilities (continued) Derivative financial assets and liabilities are analysed between current andnon-current assets and liabilities on the face of the balance sheet, dependingon when they are expected to mature. For derivatives that have not been designated to a hedging relationship, allfair value movements are recognised immediately in the income statement. Seenote (v) for the group's accounting policy on hedge accounting. (vi) Trade payables Trade payables are initially recognised at fair value and subsequently measuredat amortised cost. Trade payables are analysed between current and non-current liabilities on theface of the balance sheet, depending on when the obligation to settle will berealised. (vii) Borrowings Borrowings are recognised initially at fair value, net of transactions costs andare subsequently stated at amortised cost and include accrued interest andprepaid interest. Borrowings are classified as current liabilities unless thegroup has an unconditional right to defer settlement of the liability for atleast 12 months from the balance sheet date. k) Impairment This policy covers all assets except inventories (see note i), financial assets(see note j), non-current assets classified as held for sale (see note l), anddeferred tax assets (see note s). Impairment reviews are performed by comparing the carrying value of thenon-current asset to its recoverable amount, being the higher of the fair valueless costs to sell and value in use. The fair value less costs to sell isconsidered to be the amount that could be obtained on disposal of the asset. Thevalue in use of the asset is determined by discounting, at a market basedpre-tax discount rate, the expected future cash flows resulting from itscontinued use, including those arising from its final disposal. When thecarrying values of non-current assets are written down by any impairment amount,the loss is recognised in the income statement in the period in which it isincurred. Where the asset does not generate cash flows that are independent from the cashflows of other assets the group estimates the recoverable amount of the cashgenerating unit (CGU) to which the assets belongs. For the purpose of conductingimpairment reviews, CGU's are considered to be groups of assets and liabilitiesthat are separately identifiable cash flows. They also include those assets andliabilities directly involved in producing the income and a suitable proportionof those used to produce more than one income stream. When an impairment is recognised, the impairment loss is held firstly againstany specifically impaired assets of the CGU, then taken against goodwillbalances and if there is a remaining loss it is set against the remainingintangible and tangible assets on a pro-rata basis. Should circumstances or events change and give rise to a reversal of a previousimpairment loss, the reversal is recognised in the income statement in theperiod in which it occurs and the carrying value of the asset is increased. Theincrease in the carrying value of the asset is restricted to the amount that itwould have been had the original impairment not occurred. Impairment losses inrespect of goodwill are irreversible. Intangible non-current assets with an indefinite life and goodwill are testedannually for impairment. Assets subject to amortisation are reviewed forimpairment if circumstances or events change to indicate that the carrying valuemay not be fully recoverable. l) Non-current assets held for resale Non-current assets and all assets and liabilities classified as held for resaleare measured at the lower of carrying value and fair value less costs to sell. Such assets are classified as held for resale if their carrying amount will berecovered through a sale transaction rather than through continued use. Thiscondition is regarded as met only when a sale is highly probable, the asset ordisposal group is available for immediate sale in its present condition and whenmanagement is committed to the sale which is expected to qualify for recognitionas a completed sale within one year from date of classification. m) Provisions Provisions are recognised when there is a present obligation, whether legal orconstructive, as a result of a past event for which it is probable that atransfer of economic benefits will be required to settle the obligation and areliable estimate can be made of the amount of the obligation. Such provisionsare calculated on a discounted basis where the effect is material to theoriginal undiscounted provision. The carrying amount of the provision increasesin each period to reflect the passage of time and the unwinding of the discountand the movement is recognised in the income statement within interest costs. Restructuring provisions comprise lease termination penalties and employeetermination payments. Provisions are not recognised for future operating losseshowever provisions are recognised for onerous contracts where a contract isexpected to be loss making (and not merely less profitable than expected). n) Share capital Ordinary shares are classified as equity. The convertible participating sharesand the non-voting convertible shares are also classified as equity. Incrementalcosts directly attributable to the issue of new shares or options are shown inequity as a deduction, net of tax, from the proceeds. Incremental costs directlyattributable to the issue of new shares or options, or for the acquisition of abusiness, are included in the share premium account. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 38 9. Accounting policies under IFRS (continued) o) Investments in own shares and those shares held by employee benefittrusts Shares held by employee share ownership plans and employee benefit trusts aretreated as a deduction from equity until the shares are cancelled, reissued, ordisposed of. The SABMiller plc shares held by Safari Ltd, a special purposevehicle, are classified similarly. Net purchases of such shares are classified in the cash flow statement as a netpurchase of own shares for share trusts within net cash from financingactivities. Where such shares are subsequently sold or reissued any consideration received,net of any directly attributable incremental costs and related tax effects, isincluded in equity attributable to the company's equity shareholders. p) Revenue recognition (i) Sale of goods and services Revenue represents the net invoice value of goods and services provided to thirdparties and is recognised when the risks and rewards of ownership aresubstantially transferred. The group presents revenue gross of excise duties because unlike value addedtax, excise is not directly related to the value of sales. It is not generallyrecognised as a separate item on invoices, increases in excise are not alwaysdirectly passed on to customers, and the group cannot reclaim the excise wherecustomers do not pay for product received. The group therefore considers exciseas a cost to the group and reflects it as a production cost. Consequently anyexcise that is recovered in the sale price is included in revenue. Revenue excludes value added tax. It is stated net of price discounts,promotional discounts and after an appropriate amount has been provided to coverthe sales value of credit notes yet to be issued that relate to the current andprior periods. The same recognition criteria also apply to the sale of by-products and waste(such as spent grain, malt dust and yeast) with the exception that these areincluded within other income. (ii) Interest income Interest income is recognised using the effective interest method. When a receivable is impaired the group reduces the carrying amount to itsrecoverable amount by discounting the estimated future cash flows at theoriginal effective interest rate, and continuing to unwind the discount asinterest income. (iii) Royalty income Royalty income is recognised on an accruals basis in accordance with therelevant agreements and is included in other income. (iv) Dividend income Dividend income is recognised when the right to receive payment is established. q) Operating leases Rentals paid and incentives received on operating leases are charged or creditedto the income statement on a straight-line basis over the lease term. r) Exceptional items Where certain expense or revenue items recorded in a period are material bytheir size or incidence, the group reflects such items as exceptional itemswithin a separate line on the income statement except for those exceptionalitems that relate to associates, interest and tax. (Associates, interest and taxexceptional items are only referred to in the notes to the consolidatedfinancial statements). Exceptional items are also summarised by class in the segmental analyses,excluding those that relate to interest and tax. Where certain income statement items incurred are of a capital nature or areconsidered material and non-recurring, the group proposes to continue to presentalternative earnings per share calculations both on a headline (under the IIMRdefinition) and on an adjusted basis. s) Taxation The tax expense for the period comprises current and deferred tax. Tax isrecognised in the income statement except to the extent that it relates to itemsrecognised directly in equity, in which case it is recognised in equity. Current tax expense is based on the results for the period as adjusted for itemsthat are not taxable or not deductible. The group's liability for currenttaxation is calculated using tax rates and laws that have been enacted orsubstantively enacted by the balance sheet date. Deferred tax is provided in full using the liability method, in respect of alltemporary differences arising between the tax bases of assets and liabilitiesand their carrying values in the consolidated financial statements, except wherethe temporary difference arises from goodwill or from the initial recognition(other than a business combination) of other assets and liabilities in atransaction that affects neither accounting nor taxable profit. Deferred tax liabilities are recognised where the carrying value of an asset isgreater than its tax base, or where the carrying value of a liability is lessthan its tax base. Deferred tax is recognised in full on temporary differencesarising from investment in subsidiaries and associates, except where the timingof the reversal of the temporary difference is controlled by the group and it isprobable that the temporary difference will not reverse in the foreseeablefuture. This includes taxation in respect of the retained earnings of overseassubsidiaries only to the extent that, at the balance sheet date, dividends havebeen accrued as receivable or a binding agreement to distribute past earnings infuture periods has been entered into by the subsidiary. Deferred income tax isalso recognised in respect of the unremitted retained earnings of overseasassociates as the group is not able to determine when such earnings will beremitted and when such additional tax such as withholding taxes might bepayable. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 39 9. Accounting policies under IFRS (continued) s) Taxation (continued) A net deferred tax asset is regarded as recoverable and therefore recognisedonly when, on the basis of all available evidence, it is probable that futuretaxable profit will be available against which the temporary differences(including carried forward tax losses) can be utilised. Deferred tax is measured at the tax rates expected to apply in the periods inwhich the timing differences are expected to reverse based on tax rates and lawsthat have been enacted or substantively enacted at balance sheet date. Deferredtax is measured on a non-discounted basis. t) Dividend distributions Dividend distributions to equity holders of the parent are recognised as aliability in the group's financial statements in the period in which thedividends are approved by the company's shareholders. Interim dividends arerecognised when approved by the board. Dividends declared after the balancesheet date are not recognised, as there is no present obligation at the balancesheet date. u) Employee benefits (i) Wages and salaries Wages and salaries for current employees are recognised in the income statementas the employees' services are rendered. (ii) Vacation and long term service awards costs The group recognises a liability and an expense for accrued vacation pay whensuch benefits are earned and not when these benefits are paid. The group also recognises a liability and an expense for long term serviceawards where cash is paid to the employee at certain milestone dates in a careerwith the group. Such accruals are appropriately discounted to reflect the futurepayment dates at discount rates determined by reference to local high qualitycorporate bonds. (iii) Profit-sharing and bonus plans The group recognises a liability and an expense for bonuses and profit-sharing,based on a formula that takes into consideration the profit attributable to thecompany's shareholders after certain adjustments. The group recognises a provision where contractually obliged or where there is apast practice that has created a constructive obligation. At a mid year point anaccrual is maintained for the appropriate proportion of the expected bonuseswhich would become payable at the year end. (iv) Share-based compensation The group operates a variety of equity-settled, share-based compensation plans.These comprise share option plans (with and without non-market performanceconditions attached) and a performance share award scheme (with marketconditions attached). An expense is recognised to spread the fair value of eachaward granted after 7 November 2002 over the vesting period on a straight-linebasis, after allowing for an estimate of the share awards that will eventuallyvest. This expense is offset by a corresponding adjustment made to equity overthe remaining vesting period. The estimate of the level of vesting is reviewedat least annually, with any impact on the cumulative charge being recognisedimmediately. The charge is based on the fair value of the award as at the dateof grant, as calculated by various binomial model calculations. The charge is not reversed if the options are not exercised because the marketvalue of the shares is lower than the option price at the date of grant. The proceeds received net of any directly attributable transaction costs arecredited to share capital (nominal value) and share premium when the options areexercised. (v) Pension obligations The group has both defined benefit and defined contribution plans. The liability recognised in the balance sheet in respect of defined benefitpension plans is the present value of the defined benefit obligation at thebalance sheet date less the fair value of plan assets, together with adjustmentsfor any actuarial gains or losses and unrecognised past service costs. Thedefined benefit obligation is calculated annually by independent actuaries usingthe projected unit credit method. The present value of the defined benefitobligation is determined by discounting the estimated future cash outflows usinginterest rates of high-quality corporate bonds that are denominated in thecurrency in which the benefits will be paid, and that have terms to maturityapproximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes inactuarial assumptions are recognised in full as they arise outside of incomestatement and are presented in the statement of recognised income and expense,with the exception of gains or losses arising from changes in the benefitsregarding past services, which are recognised in the income statement. Past-service costs are recognised immediately in the income statement, unlessthe changes to the pension plan are conditional on the employees remaining inservice for a specified period of time. In this case, the past-service costs areamortised on a straight-line basis over the vesting period. The contributions to defined contribution plans are recognised as an expense asthe costs become payable. The contributions are recognised as employee benefitexpense when they are due. Prepaid contributions are recognised as an asset tothe extent that a cash refund or a reduction in the future payments isavailable. SABMiller plcNOTES TO THE INTERIM FINANCIAL REPORT (continued) 40 9. Accounting policies under IFRS (continued) u) Employee benefits (continued) (vi) Other post-employment obligations Some group companies provide post-retirement healthcare benefits to qualifyingemployees. The expected costs of these benefits are assessed in accordance withthe advice of qualified actuaries and contributions are made to the relevantfunds over the expected service lives of the employees entitled to those funds.Actuarial gains and losses arising from experience adjustments, and changes inactuarial assumptions, are charged or credited to the income statement over theexpected average remaining working lives of the related employees. Theseobligations are valued annually by independent qualified actuaries. (vii) Termination benefits Termination benefits are payable when employment is terminated before the normalretirement date, or whenever an employee accepts voluntary redundancy inexchange for these benefits. The group recognises termination benefits when itis demonstrably committed to terminating the employment of current employeesaccording to a detailed formal plan without possibility of withdrawal, orproviding termination benefits as a result of an offer made to encouragevoluntary redundancy. Benefits falling due more than 12 months after balancesheet date are discounted to present value in a similar manner to all long termemployee benefits. v) Hedge accounting The derivative instruments used by the group, which are used solely for hedgingpurposes (i.e. to offset foreign exchange and interest rate risks), compriseinterest rate swaps and forward foreign exchange contracts. Such derivativeinstruments are used to alter the risk profile of an existing underlyingexposure of the group in line with the group's risk management policies. Thegroup also has derivatives embedded in other contracts primarily cross borderforeign currency supply contracts for raw materials. Derivatives are initially recorded at fair value on the date a derivativecontract is entered into and are subsequently re-measured at their fair value.The method of recognising the resulting gain or loss depends on whether thederivative is designated as a hedging instrument, and if so, the nature of thehedging relationship. In order to qualify for hedge accounting, the group is required to document therelationship between the hedged item and the hedging instrument. The group isalso required to document and demonstrate that the relationship between thehedged item and the hedging instrument will be highly effective. Thiseffectiveness test is re-performed at each period end to ensure that the hedgehas remained and will continue to remain highly effective. The group designates certain derivatives as either: hedges of the fair ofrecognised assets or liabilities or a firm commitment (fair value hedge); hedgesof highly probable forecast transactions or commitment (cash flow hedge); orhedges of net investments in foreign operations. (i) Fair value hedges Fair value hedges comprise derivative financial instruments designated in ahedging relationship to manage the group's interest rate risk to which the fairvalue of certain assets and liabilities are exposed. Changes in the fair valueof the derivative offset the relevant changes in the fair value of theunderlying hedged item attributable to the hedged risk in the income statementin the period incurred. Gains or losses on fair value hedges that are regarded as highly effective arerecorded in the income statement together with the gain or loss on the hedgeditem attributable to the hedged risk. (ii) Cash flow hedges Cash flow hedges comprise derivative financial instruments designated in ahedging relationship to manage currency risk to which the cash flows of certainliabilities are exposed. The effective portion of changes in the fair value ofthe derivative that is designated and qualifies for hedge accounting isrecognised in equity. The ineffective portion is recognised immediately in theincome statement. Amounts accumulated in equity are recycled to the incomestatement in the period in which the hedged item affects profit or loss.However, where a forecasted transaction results in a non-financial asset orliability, the accumulated fair value movements previously deferred in equityare included in the initial cost of the asset or liability. (iii) Hedges of net investments in foreign operations Hedges of net investments in foreign operations comprise either foreign currencyborrowings or derivatives (typically forward exchange contracts) designated in ahedging relationship. Gains or losses on hedging instruments that are regarded as highly effective arerecognised in equity. These largely offset foreign currency gains or lossesarising on the translation of net investments that are recorded in equity, inthe foreign currency translation reserve. The ineffective portion of gains orlosses on hedging instruments is recognised immediately in the income statement.Amounts accumulated in equity are only recycled to the income statement upondisposal of the net investment. Where a derivative ceases to meet the criteria of being a hedging instrument orthe underlying exposure which it is hedging is sold, matures or is extinguished,hedge accounting is discontinued. A similar treatment is applied where thehedge is of a future transaction and that transaction is no longer likely tooccur. Certain derivative instruments, whilst providing effective economic hedges underthe group's policies, are not designated as hedges. Changes in the fair valueof any derivative instruments that do not qualify or have not been designated ashedges are recognised immediately in the income statement. The group does nothold or issue derivative financial instruments for speculative purposes. w) Deposits by customers Bottles and containers in circulation are recorded within property, plant andequipment and a corresponding liability is recorded in respect of the obligationto repay the customers' deposits. Deposits paid by customers for brandedreturnable containers are reflected in the balance sheet within currentliabilities. Any estimated liabilities that may arise in respect of depositsfor unbranded containers and bottles is shown in provisions. SABMiller plcFORWARD LOOKING STATEMENTS 41 This announcement does not constitute an offer to sell or issue or thesolicitation of an offer to buy or acquire ordinary shares in the capital ofSABMiller plc (the "company") or an inducement to enter into investment activityin any jurisdiction. This announcement includes "forward-looking statements". These statements maycontain the words "anticipate", "believe", "intend", "estimate", "expect" andwords of similar meaning. All statements other than statements of historicalfacts included in this announcement, including, without limitation, thoseregarding the company's financial position, business strategy, plans andobjectives of management for future operations (including development plans andobjectives relating to the company's products and services) are forward-lookingstatements. Such forward-looking statements involve known and unknown risks,uncertainties and other important factors that could cause the actual results,performance or achievements of the company to be materially different fromfuture results, performance or achievements expressed or implied by suchforward-looking statements. Such forward-looking statements are based onnumerous assumptions regarding the company's present and future businessstrategies and the environment in which the company will operate in the future.These forward-looking statements speak only as at the date of this announcement. The company expressly disclaims any obligation or undertaking to disseminateany updates or revisions to any forward-looking statements herein to reflect anychange in the company's expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based. SABMiller plcADMINISTRATION 42 SABMiller plc (Registration No. 3528416) Company Secretary A O C Tonkinson Registered Office SABMiller House, Church Street West Woking Surrey, England GU21 6HS Telefax +44 1483 264103 Telephone +44 1483 264000 Head Office One Stanhope Gate London, England W1K 1AF Telefax +44 20 7659 0111 Telephone +44 20 7659 0100 Internet address http://www.sabmiller.com Investor Relations [email protected] Telephone +44 20 7659 0100 Independent Auditors PricewaterhouseCoopers LLP 1 Embankment Place London, England WC2N 6RH Telefax +44 20 7822 4652 Telephone +44 20 7583 5000 Registrar (United Kingdom) Capita Registrars The Registry 34 Beckenham Road Beckenham Kent, England BR3 4TU Telefax +44 20 8658 3430 Telephone +44 20 8639 2157 (outside UK) Telephone 0870 162 3100 (from UK) Registrar (South Africa) Computershare Investor Services 2004 (Pty) Limited 70 Marshall Street, Johannesburg PO Box 61051 Marshalltown 2107 South Africa Telefax +27 11 370 5487 Telephone +27 11 370 5000 United States ADR Depositary The Bank of New York ADR Department 101 Barclay Street New York, NY 10286 United States of America Telefax +1 212 815 3050 Telephone +1 212 815 2051 Internet :http:// www.bankofny.com Toll free +1 888 269 2377 (USA & Canada only) This information is provided by RNS The company news service from the London Stock Exchange

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