Annual Report 2015

Operating Results

Clearly this year has, in financial terms, proved relatively disappointing. Our reported outcome, however, should not obscure the Group’s robust business characteristics with leading positions in our core geographies of Ireland and Scotland supplemented by brands with strong consumer resonance. This model and the strength of our core brands delivered highly creditable results in those territories. Internationally our brands continued to develop and offer attractive long term growth.

It is worth commenting on the two areas of our business which posed the greatest challenge during the year in review. Our Chief Executive will provide greater detail on the challenges and opportunities we face within his Report.

In our C&C Brands segment, significant pressures in the off-trade channel from large supermarket retailers were compounded by increased competitive activity particularly through the increase in flavoured cider variants. We have now restructured our business in England and Wales to better address these challenges and to defend both our brand position and profitability.

In the United States, the cider category has continued to grow and other large beverage companies are committing heavy investment in new brand entrants. We remain confident in the longer term opportunity for our unique cider business which, with the opening of our new cidery in Vermont, has maintained its heritage position in the market and expect to see a more stable competitive landscape in a category that will continue to grow considerably over the next twelve months.

Our brand and commercial strategy remains unchanged and, while timescales may have altered, our strategic intent and ambitions remain undiminished.

Development

This year has seen the continuing integration of our acquisitions of Gleeson in Ireland and Wallaces Express in Scotland into the Group. In terms of distribution and service these have strengthened our business model and opportunities but the integration challenges are substantial and the teams are to be complimented on their efforts in this regard. Integration and rationalisation of businesses, for the longer term benefit, comes at a cost in both people and effort. It is sometimes easy from a financial perspective to underestimate these efforts but as a Board we are all too aware of the considerable contribution of management and employees in achieving a smooth transition.

There was considerable speculation and comment regarding the Group’s preliminary approach to the Spirit Pub Company. The preliminary nature of this approach and the manner in which it was initially reported presented some challenges for the Group in articulating the strategic rationale and benefits of a combination with Spirit. It is perhaps sufficient to say that the Group remained (and remains) fully committed to its existing strategy, capitalising on our strengths, particularly in terms of brands and distribution and focusing on driving returns for shareholders. Within that strategy, we are committed to looking at all options to build and sustain long term shareholder value.

People

The challenges for all our businesses have been significant whether in the restructuring and integration of acquired businesses or in developing to meet new competition in the market place. The ultimate test, as always, is in the quality of people we retain, develop and recruit to meet these and future challenges. I believe we have made continuing progress in this regard.

Remuneration & bonuses

Our long term incentive schemes have now come up for renewal and the detailed proposals are included in the Remuneration Report, for which we will be seeking shareholder approval at this year’s AGM. We remain fully committed to the alignment of shareholder and executive management through long term equity incentive arrangements. Indeed we are enthusiastic about wider equity participation by all employees throughout the Group.

There has been considerable effort by the Remuneration Committee in preparing these proposals to balance the Company needs with the justifiable observations of our shareholders. We have also updated our remuneration policy to reflect the provisions of the new share plans and, consistent with best-practice, will again be submitting this revised policy to an advisory vote of shareholders at the AGM.

Financial incentives have been used prudently in the past to reward effort. Indeed when we look at our historic bonus levels, one might observe that relative to our peers, pay outs have been modest. This year a limited number of bonuses are being paid in operational areas of the business, given some of their outstanding achievements. In commercial and sales areas we generally have not obtained our objectives and consequently bonuses have not been achieved. Our bonus system is quantitatively driven and even where the failure to achieve objectives is a function of market conditions, there is no award. Clearly at the Group level we did not realise our expectations and no bonuses are paid.

Dividends & Financing Policy

Reflecting both the strength of the Group’s balance sheet and free cash flow characteristics, we completed a €30 million share repurchase programme in FY2015. We are also proposing to pay a final dividend of 7 cent per share, subject to shareholder approval. If approved, this will bring the Group’s full dividend to 11.5 cent, a 15% increase on last year, and is consistent with our commitment to provide certainty of value in the form of a progressive dividend stream. A scrip dividend alternative will also be available.

...this will bring the Group’s full dividend to 11.5 cent, a 15% increase on last year, and is consistent with our commitment to provide certainty of value in the form of a progressive dividend stream.

At the AGM, we will also be seeking authority for the Company to purchase its own shares. This authority will be exercised if the Board considers it would be in the best interests of shareholders generally.

Governance & Corporate Responsibility

The Board and senior management team are committed to maintaining the highest standards of governance and ethical behaviour throughout the business. A statement of our main Governance principles and practice is provided on pages 52 to 62 and reflect the requirements of the 2014 UK Corporate Governance Code and the Irish Corporate Governance Annex.

We take corporate responsibility seriously and our Corporate Responsibility Statement on pages 36 to 44 sets out our work this year in this area. Recognising the importance of shareholder engagement, I have also recently completed a series of meetings, focused solely on corporate governance, with a number of the Group’s largest institutional shareholders.

Continued refreshment and development of the Board is an ongoing process. At the conclusion of this year’s AGM, John Hogan will step down as Chairman of the Audit Committee and be succeeded by Emer Finnan. John will remain as a Director until the end of 2015 to ensure a smooth transition. I would like to thank John for his significant contribution in that role over many years.

Paul Walker, who has been the Group’s Company Secretary since 2011, made the decision to retire during the year. I would like to thank Paul for the contribution he has made to the evolution of the Group during a time in which it was transformed both geographically and organisationally and wish him well in his retirement. David Johnston has joined us as Company Secretary from Paddy Power plc.

Conclusion

Looking forward, we have characterised FY2016 as a period of stabilisation and investment. Our balance sheet strength and cash generation capability provide a broad range of capital allocation opportunities including investment behind our iconic Bulmers, Magners and Tennent’s brands. It also provides scope to deliver increased returns for shareholders and continued investment in our business to build durable value.

Sir Brian Stewart

Chairman