Sleeman Breweries Ltd.
TSX : ALE

Sleeman Breweries Ltd.

August 10, 2005 08:01 ET

Sleeman Reports Second Quarter Results

GUELPH, ONTARIO--(CCNMatthews - Aug. 10, 2005) - Sleeman Breweries Ltd. (TSX:ALE) today released its financial results for the second quarter ended July 2, 2005.

Second Quarter Financial Highlights

- Net revenue was $57.9 million compared to $58.7 million for the same period last year.

- Earnings before interest, taxes, depreciation and amortization (EBITDA) were $7.7 million compared to $9.0 million for the same quarter last year. The decrease in quarterly EBITDA was due primarily to the $1 million increase in last year's second quarter results from the effects of the large brewers' distribution company strike in British Columbia.

- Total selling, general and administrative (SG&A) expenses increased $2.6 million to $21.8 million resulting from the inclusion of Unibroue which was acquired June 30, 2004 and the timing of marketing expenditures.

- Net earnings were $2.5 million, compared to $3.8 million in the second quarter of 2004.

- Normalized diluted earnings per share were $0.17 vs $0.23 in the prior year. Reported diluted earnings per share were $0.15.

"We had a challenging quarter due to the wet and cool spring across the country, the National Hockey League lockout and continued price discounting in our key markets. In addition, the second quarter of last year benefited from the distribution strike in British Columbia and the first summer sales of our very successful low carbohydrate beer - Sleeman Clear," said John Sleeman, Chairman and CEO. "To meet our stated objective to deliver strong, profitable growth in a competitive environment we will continue to focus on cost management and improved efficiencies. Combining this focus with increasing sales of our newest Sleeman offering, Sleeman Original Draught, improving weather and the end to the National Hockey League lockout, we are confident our results for the second half of the year will allow us to meet our financial objectives for the year."

First Six Month Financial Review

- Net revenue increased 1% to $98 million.

- EBITDA was $13.9 million compared to $15.5 million in the first six months of 2004.

- Net income was $4.1 million, or $0.24 per share on a diluted basis, compared to $6.1 million, or $0.37 per share in the same period in 2004.

Operational Highlights

- The Company followed the March launch of Sleeman Original Draught in Ontario with a multi-media advertising campaign which generated significant consumer interest and trial. Late in the quarter, the Company also introduced this highly refreshing beer to Western Canada.

- In response to the renewed consumer interest in its Upper Canada and Shaftebury brands, the Company introduced Upper Canada Red Ale and Upper Canada Pale Ale in Ontario and Shaftebury Wet Coast Wheat Ale and Shaftebury Easy Honey Ale in the West. The company also introduced a Sleeman Summer Selection pack in Quebec.

- Continuing with its efforts to reduce its logistics and warehousing costs, the Company successfully integrated all of its offsite Ontario warehousing facilities into one efficient facility located minutes from the Guelph brewery.

- The Company completed the installation of a new can line in its Vernon, British Columbia brewery and assorted production items in its Chambly, Quebec brewery. The installation of this equipment will generate significant efficiencies and cost savings in the future.

- Today we are announcing a reorganization across the country aimed at reducing our SG&A costs by approximately $2.7 million annually; $1 million for the current fiscal year. The number of salaried positions will be reduced, by approximately 40 as a result of this initiative. The Company will record a one-time charge of $2.1 million in the third quarter in connection with this reorganization.

Mr. Sleeman continued, "The reorganization along with our focus on improving productivity will help us reduce our costs to remain competitive in the rapidly changing beer industry. After several years of expansion, it is time to take a closer look at the way we operate and make the necessary changes to improve the business and our cost structure for the future. These initiatives will help us achieve our target of 10% annual normalized EPS growth in the current fiscal year and will leave us well positioned for the future."

Management's Discussion and Analysis of Results of Operations and Financial Position:

The following discussion and analysis should be read in conjunction with the financial statements for the second quarter of fiscal 2005 and 2004; with the MD&A in the fiscal 2004 annual report, including the section on risks and uncertainties; and with the notes to the financial statements for the second quarter of fiscal 2005 and in the fiscal 2004 annual report. (All amounts are in Canadian dollars unless otherwise stated.)

The following comments were prepared as of August 3, 2005. Additional information relating to the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.

Operating Results

Quarterly Comparison

The following chart sets out the per hectolitre results(1) for the quarter based on the number of hectolitres produced and sold by the Company:



---------------------------------------------------------------------
3 months ended 3 months ended
July 2, 2005 June 26, 2004
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Net revenue $172 $169
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Cost of goods sold 84 88
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Gross margin 88 81
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Selling, general and administrative 65 55
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EBITDA(2) 23 26
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Depreciation and amortization 6 5
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Earnings before interest and taxes 17 21
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Interest 5 4
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Earnings before taxes 11 17
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Income taxes 4 6
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Net earnings $7 $ 11
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NET REVENUE

The addition of Unibroue sales and strong Sapporo and partner brand sales in the current year's second quarter were more than offset by the impacts of poor spring weather nationally, continued industry price competition and the fact that there was a two-week distributors strike in British Columbia in the second quarter of 2004, resulting in a 1% decrease in net revenue to $57.9 million.

Sapporo volumes increased to 53,000 hectolitres, which was more than offset by core volume declines of 9% resulting in a 3% reduction in produced and sold volumes. The addition of the Unibroue brands added 17,000 hectolitres in the current quarter which is consistent with Unibroue's sales volumes in the second quarter of 2004. The addition of the Unibroue volume was more than offset by the effects of the following: (a) an estimated 15,000 hectolitres of core volume decrease from the above noted distributor's strike in British Columbia in that period (b) the loss of the private label production contract in Quebec at the end of the second quarter of 2004 led to a decrease in sales volumes of 10,400 hectolitres and (C) the remaining decline in core volumes was principally due to the effects of the poor spring weather in April and May across Canada and the NHL hockey lockout.

Net revenue rose by $3 per hectolitre as the favourable impact of Unibroue sales in the second quarter of 2005 was partially offset by the lower net prices realized in the quarter on its value brands in the Quebec, Ontario and Alberta markets and on its premium brands in Quebec.

In Eastern Canada, net revenue increased by 8%. The effects of the addition of the Unibroue volumes and the increase in Sapporo volumes more than offset the impact of decreases in core volumes in the Ontario premium and Quebec value categories and lower net pricing realized in the Ontario and Quebec value brand categories. Included in the prior year's second quarter core volume and net revenues was 10,400 hectolitres of contract packaging volumes as previously noted.

In Western Canada net revenue was down 17%, as a result of a decrease in core volumes. The principal reason for this core volume decrease was the fact that the Company generated an estimated non-recurring 15,000 hectolitres of sales in the prior year's second quarter as a result of the strike at the British Columbia distribution company owned by the national brewers. Net revenue would have decreased by an estimated 8% adjusting for the strike impact on last year's second quarter revenues. The segment also experienced lower core volume sales as a result of the continuing effects of the National Hockey League lockout on licensee sales and the unseasonably cool and rainy weather across Western Canada. Net revenue per hectolitre increased by $6 per hectolitre as the effects of increased pricing and take-home sales in British Columbia more than offset the impacts of lower pricing in the Alberta market on the Company's value brands.

COST OF GOODS SOLD

Cost of goods sold decreased by 7% ($2.1 million) on a 3% reduction in hectolitres produced and sold. Operational efficiencies were the key contributor to this improvement. Measured on a per hectolitre produced and sold basis, cost of goods sold decreased by 4%.

Cost of goods sold in Eastern Canada decreased by $8 per hectolitre to $80 per hectolitre. The decrease was due primarily to operating the Guelph facility more efficiently.

In Western Canada, cost of goods sold increased by $6 per hectolitre due to the sales mix shift to premium products.

OTHER OPERATING ITEMS

Selling, general and administrative (SG&A) expenses increased in the quarter by $2.6 million. The increase over the second quarter of 2004 was principally a result of the inclusion of Unibroue related SG&A and the timing of marketing expenditures in support of the Sleeman Original Draught brand launch. The Company also incurred non-recurring charges of $0.4 million to settle a pre-1996 acquisition legal matter and $0.1 million related to the reorganization announced today.

SG&A expenses in Eastern Canada increased to $68 per hectolitre from the prior year's second quarter level of $58 per hectolitre largely as a result of the effects of the Unibroue operations and the media spend to support the new brand launch.

In Western Canada, SG&A expenses per hectolitre decreased by $2 per hectolitre as the Company continued to maintain tight control over these costs.

Depreciation and amortization expense increased by $0.4 million due primarily to depreciation charges on the Unibroue assets acquired in June 2004 and other production assets acquired in the preceding 12 months.

Interest expense increased by $0.5 million due primarily to the increased borrowings required to finance the Unibroue purchase in 2004.

The provision for income taxes decreased by $0.9 million as a result of the decrease in pretax earnings in the second quarter of 2005 when compared to the second quarter of 2004. The effective tax rate in the second quarter of 2005 was 35%, compared to an effective tax rate of 36% in the second quarter of 2004.

Operating Results

Year to Date Comparison

The following chart sets out the per hectolitre results for the period based on the number of hectolitres produced and sold by the Company:



---------------------------------------------------------------------
6 months ended 6 months ended
July 2, 2005 June 26, 2004
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Net revenue $169 $168
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Cost of goods sold 84 88
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Gross margin 85 80
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Selling, general and administrative 61 53
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EBITDA 24 27
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Depreciation and amortization 7 5
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Earnings before interest and taxes 17 22
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Interest 6 5
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Earnings before taxes 11 17
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Income taxes 4 6
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Net earnings $7 $ 11
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Net revenue of $98.0 million for the year to date was up 1% over net revenue of $97.0 million earned in the first six months of fiscal 2004. The increase resulted from a 1% increase in produced and sold volumes. There was a mix shift to higher priced premium product sales in the period compared to the prior year as 52% of the Company's sales volumes were premium brand sales vs. 47% in the prior year. However, the favourable impact of this shift on the Company's net revenue per hectolitre was offset by the lower net pricing realized by the Company on its premium and value brand sales in the Ontario, Quebec and Alberta markets.

Cost of goods sold were $48.9 million for the period, down from $50.9 million in 2004. The decrease in cost of goods sold was due to operational efficiencies.

Selling, general and administrative (SG&A) expenses increased in 2005 by $4.5 million to $35.1 million (or $61 per hectolitre). This level of per hectolitre spending was consistent with the Company's target for the year, which was front end loaded with media to support brand launches and other sales and marketing activities for the peak selling season. These activities will reduce in the second half of the year.

The Company's depreciation and amortization expense increased by 27% in the current year due to the Unibroue acquisition in the third quarter of 2004 and due to the capital expenditures incurred over the past 12 months.

The Company's effective tax rate was 35%, which is slightly below the rate of 36% recorded in the first six months of the prior year.

Financial Position

The Company had a bank indebtedness balance of $12.4 million compared to a balance of $9.6 million as at January 1, 2005.

Accounts receivable increased by $6.4 million from the level reported at the end of fiscal 2004 due to higher revenues in the current quarter and the timing of payments from a large customer.

The Company's inventories increased by $7.9 million from January 1, 2005 levels as we built inventories in advance of the peak summer selling season, a trend that is consistent with prior years.

Prepaid expenses increased by $2.1 million from the level reported at January 1, 2005. This increase was attributable to the fact that the Company prepaid summer sales and marketing initiatives in the period.

Property, plant and equipment increased by $1.2 million from the level reported at January 1, 2005 as new capital expenditures incurred on a year-to-date basis marginally exceeded depreciation charges.

Accounts payable increased $11.3 million from the level at year end fiscal 2004 as production levels were higher in the second quarter of 2005 compared to the fourth quarter of 2004.

Long term debt levels decreased by $4.1 million as a result of debt repayments made during the first two quarters of 2005.

The increase of $0.9 million in share capital related to the exercise of employee stock options of the Company during the current period.

Cash Flow

Quarterly Comparison

The level of the Company's combined long term debt and bank indebtedness at the end of the current quarter increased by $1.0 million from the level at the end of the first quarter while there was a net decrease in total borrowings of $4.7 million in the second quarter last year. The reduction resulted from lower operating cash flow of $4.6 million, due to a combination of lower earnings and higher working capital and a $1 million reduction in stock option proceeds in the current quarter.

The Company's net working capital investment in the second quarter of 2005 of $3.4 million compared to a decrease of $0.2 million in last year's second quarter. This investment increase was due primarily to the Unibroue acquisition, Sapporo inventory increases in line with volume increases and the above noted accounts receivable increase at a large customer.

As a result of these activities, there was a net cash outflow for the period of $2.7 million compared to a net inflow of $2.1 million last year. The net cash decrease in the current period was funded with the Company's committed operating facility.

Year to Date Comparison

Operating cash flow increased by $2.2 million in the current six month period compared to the prior year. There was an increase in the Company's net working capital investment in the first six months of 2005 of $3.9 million compared to an increase of $7.4 million in the first six months of 2004. The $3.5 million increase in operating cash flow resulting from this reduced working capital investment was partially offset by the lower earnings in the current six month period.

Investing activities used $1.8 million less in this year's six month period due to lower capital expenditures.

Financing activities consumed $0.4 million more during the current period compared to the prior year. The Company received $1.3 million less proceeds from the exercise of stock options in the period. The impacts of this reduction in cash flow was partially offset by a $0.9 million decrease in long term debt repayments in the current six month period compared to the prior year.

As a result of the above noted changes in operating, investing and financing activities, there was a net cash outflow in the current six month period of $2.8 million compared to a net outflow of $6.4 million in last year's six month period. Both periods' net cash outflow were funded from the Company's committed operating facility.

Outlook

The Company is committed to meeting its stated goal of growing normalized diluted earnings per share by at least 10% in 2005 over its normalized diluted earnings per share(3) in 2004 of $0.90 as calculated in the Management Discussion & Analysis section of the Company's 2004 Annual Report. As management expects that the pricing environment in its major Canadian markets will continue to be intensely competitive for the foreseeable future, the Company has taken initiatives to improve operations and lower its costs to ensure that this goal is met. The reorganization we are implementing will not cause our Company to deviate from our focus of offering premium beer drinkers high quality and innovative products like the recently introduced Sleeman Original Draught and expanding our Unibroue portfolio across Canada and the United States.

Revenue growth will also come from increasing sales of Sapporo products in 2005 as we produce Sapporo "Silver Can" products for a full year.

The Company anticipates its effective income tax rate for 2005 will be approximately 35%.

In Eastern Canada, the Company expects a continuation of the highly competitive market conditions its premium and value brands have faced in the past twelve months. Price discounting by competitors will mean there will be limited opportunities for revenue growth from price increases. As such, revenue growth will likely come from market share growth on the sale of new products like the recently introduced Sleeman Original Draught and Upper Canada Pale Ale in Ontario. In Quebec, the scale we now have with the combined Sleeman Unibroue premium portfolio will allow us to have an increased presence and higher sales activity with several retailers in 2005. The Company continues to believe innovation, speed to market and the quality of its products are key advantages and the resources of the Company will continue to be directed to realizing the benefits in these areas.

In Western Canada, the Company's goal is to ensure its sales and marketing teams improve focus on the sale of premium products. The introduction of Sleeman Original Draught and innovative sales promotion programs will provide a significant lift to Sleeman brand sales in this segment for the remainder of 2005. Meanwhile, the Company expects ongoing challenges for its Alberta value beer portfolio as a result of the continued deep discounting in this category by small brewery competitors who continue to be supported with favourable tax treatment.

The Company has capacity availability for the next 24-36 months given the planned expansions of its Guelph, Vernon and Chambly breweries in 2005. The Company anticipates spending approximately $11.0 million in capital expenditures in 2005 to support further expansion in Guelph and Chambly, the installation of the new can line at the Vernon facility and to complete the waste water control system and carbon dioxide collection systems in Guelph.

Summary of Quarterly Information for the Last Eight Quarters

The following chart summarizes the quarterly results for the Company for the last eight fiscal quarters:



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Q2 2005 Q1 2005 Q4 2004 Q3 2004
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Net Revenue $57,862 $40,151 $55,635 $60,727
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S,G&A Expenses $21,763 $13,368 $19,873 $20,705
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EBITDA $7,689 $6,249 $9,708 $10,777
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Net Earnings $2,490 $1,610 $3,904 $4,463
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EPS (Basic) $0.15 $0.10 $0.24 $0.27
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EPS (Diluted) $0.15 $0.10 $0.23 $0.27
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Q2 2004 Q1 2004 Q4 2003 Q3 2003
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Net Revenue $58,712 $38,280 $48,740 $53,091
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S,G&A Expenses $19,134 $11,492 $13,364 $16,985
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EBITDA $9,033 $6,425 $11,952 $9,530
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Net Earnings $3,842 $2,217 $3,940 $4,359
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EPS (Basic) $0.24 $0.14 $0.25 $0.27
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EPS (Diluted) $0.23 $0.14 $0.24 $0.27
---------------------------------------------------------------------


Quarterly Conference Call Notification

Please note the Company's conference call with analysts and media will be webcast live at 10:00 am ET, August 10, 2005 at www.cdn-news.com and on the Sleeman investor website at www.sleeman.ca. Participants will require Windows Media Player™, which can be downloaded prior to accessing the call. The number to call to participate in the teleconference is 416-340-2216 or 866-898-9626. To ensure your participation, please call in about five minutes before the start of the call. For those unable to participate, a taped rebroadcast will be available until August 17, 2005. To access the rebroadcast, please dial 416-695-5800 or 800-408-3053. The reservation number is 3159574. All shareholders and other interested parties are invited to monitor this webcast, which is being offered on a listen-only basis.

Sleeman Breweries Ltd. is the leading brewer and distributor of premium beer in Canada and the third largest brewing company nation-wide. The Company has supplemented its core Sleeman brands, which are available in every province, with a family of exceptional regional brands. These include Okanagan Spring and Shaftebury in British Columbia and Alberta, Upper Canada in Ontario, Unibroue and Seigneuriale in Quebec and Maritime Beer in Atlantic Canada. Sleeman entered the rapidly growing value price category in 1999 by acquiring the Stroh portfolio of brands in Canada. The company markets and/or distributes world-class imported products such as Guinness, Grolsch, Samuel Adams, Scottish & Newcastle (including Bulmers Strongbow English Cider), Sapporo and Pilsner Urquell, and provides contract production for Japan's Sapporo Breweries' products. The Company's products are also available in selected international markets. Please visit our website at www.sleeman.ca.

Forward Looking Statements

All statements in this press release that do not directly and exclusively relate to historical facts constitute forward-looking statements. These statements represent Sleeman Breweries Ltd.'s intentions, plans, expectations, and beliefs, and are subject to risks, uncertainties, and other factors, of which many are beyond the control of the Company. These factors could cause actual results to differ materially from such forward-looking statements. Sleeman Breweries Ltd. disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise.



Consolidated Statements of Earnings-unaudited
for the three months ended July 2, 2005
(all amounts in '000s except per share and per hectolitre amounts)

3 months ended 3 months ended %
July 2, 2005 June 26, 2004 Change
---------------------------------------------------------------------
Net revenue $57,862 $58,712 -1%
---------------------------------------------------------------------
Cost of goods sold 28,410 30,545 -7%
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Gross margin 29,452 28,167 5%
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Selling, general and
administrative 21,763 19,134 14%
---------------------------------------------------------------------
Earnings before the undernoted 7,689 9,033 -15%
---------------------------------------------------------------------
Depreciation and amortization 2,058 1,650 25%
---------------------------------------------------------------------
Earnings before interest and
taxes 5,631 7,383 -24%
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Interest expense - net 1,798 1,322 36%
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Earnings before income taxes 3,833 6,061 -37%
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Income taxes 1,343 2,219 -39%
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Net earnings $2,490 $3,842 -35%
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Total Proforma HLs Reported 392,000 391,000 - %

EPS - Basic $0.15 $0.24 -38%
EPS - Diluted $0.15 $0.23 -35%
Weighted average common
shares during the period
-basic 16,564,228 16,184,617
-diluted 16,821,756 16,551,398


See accompanying notes to the consolidated financial statements.
These financial statements should be read in conjunction with the
audited annual financial statements.
Certain prior year amounts have been reclassified to conform to the
current year's presentation format.



Consolidated Statements of Earnings-unaudited
for the six months ended July 2, 2005
(all amounts in '000s except per share and per hectolitre amounts)

---------------------------------------------------------------------
6 months ended 6 months ended %
July 2, 2005 June 26, 2004 Change
---------------------------------------------------------------------
Net revenue $98,013 $96,992 1%
---------------------------------------------------------------------
Cost of goods sold 48,944 50,908 -4%
---------------------------------------------------------------------
Gross margin 49,069 46,084 6%
---------------------------------------------------------------------
Selling, general and
administrative 35,131 30,626 15%
---------------------------------------------------------------------
Earnings before the undernoted 13,938 15,458 -10%
---------------------------------------------------------------------
Depreciation and amortization 4,013 3,155 27%
---------------------------------------------------------------------
Earnings before interest and taxes 9,925 12,303 -19%
---------------------------------------------------------------------
Interest expense - net 3,613 2,762 31%
---------------------------------------------------------------------
Earnings before income taxes 6,312 9,541 -34%
---------------------------------------------------------------------
Income taxes 2,212 3,482 -36%
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Net earnings $4,100 $6,059 -32%
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Total Proforma HLs Reported 661,000 641,000 3%

EPS - Basic $0.25 $0.38 -34%
EPS - Diluted $0.24 $0.37 -35%
Weighted average common shares
during the period
-basic 16,526,102 16,109,406
-diluted 16,813,255 16,453,713


See accompanying notes to the consolidated financial statements.
These financial statements should be read in conjunction with the
audited annual financial statements.
Certain prior year amounts have been reclassified to conform to the
current year's presentation format.



Consolidated Balance Sheets-unaudited
as at July 2, 2005
(all amounts in 000s)

July 2, 2005 January 1, 2005 June 26, 2004
Assets (audited)

Current
Accounts receivable $50,809 $44,422 $42,911
Inventories 47,021 39,147 36,599
Prepaid expenses 8,707 6,589 7,304
------------------------------------------
106,537 90,158 86,814

Property, plant and equipment 101,919 100,748 78,748
Long-term note receivable - 1,083 2,301
Long-term investments 3,312 3,311 6,339
Intangible assets 104,111 104,852 85,439
------------------------------------------
$315,879 $300,152 $259,641
------------------------------------------
------------------------------------------
Liabilities

Current
Bank indebtedness $12,423 $9,634 $6,957
Accounts payable and accrued
liabilities 50,399 39,146 47,870
Current portion of long-term
debt 14,765 12,043 12,508
------------------------------------------
77,587 60,823 67,335

Long-term debt 96,775 103,616 67,772
Future income taxes 14,465 13,929 12,275
------------------------------------------
188,827 178,368 147,382
------------------------------------------
------------------------------------------

Shareholder's equity
Share capital 49,297 48,353 47,335
Contributed surplus 532 308 168
Retained earnings 77,223 73,123 64,756
------------------------------------------
127,052 121,784 112,259
------------------------------------------
$315,879 $300,152 $259,641
------------------------------------------
------------------------------------------



Consolidated Statements of Retained Earnings-unaudited
for the six months ended July 2, 2005
(all amounts in 000s)


6 months ended 6 months ended
July 2, 2005 June 26, 2004
---------------------------------------------------------------------

Retained earnings, beginning of period $73,123 $58,697

Net earnings for the period 4,100 6,059
---------------------------------------------------------------------
Retained earnings, end of period $77,223 $64,756
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---------------------------------------------------------------------


See accompanying notes to the consolidated financial statements.
These financial statements should be read in conjunction with the
audited annual financial statements.



Consolidated Statements of Cash Flows-unaudited
for the period ended July 2, 2005
(all amounts in '000s)


3 Months Ended 6 Months Ended
July 2, June 26, July 2, June 26,
2005 2004 2005 2004
Net inflow (outflow) of cash
related to the following
activities:

OPERATING
Net earnings $2,490 $3,842 $4,100 $6,059
Items not affecting cash
Depreciation and amortization 2,058 1,650 4,013 3,155
Future income taxes 335 432 536 748
Non-cash charges in income (67) (54) (135) (111)
Stock-based compensation expense 112 70 224 140
Loss (gain) on disposal of
equipment (17) - (17) -
------------------------------------------
4,911 5,940 8,721 9,991

Changes in non-cash operating
working capital items (3,363) 217 (3,907) (7,411)
------------------------------------------
1,548 6,157 4,814 2,580
------------------------------------------

INVESTING
Additions to property, plant
& equipment (2,686) (2,821) (3,915) (6,039)
Additions to intangible assets (444) (174) (530) (193)
Proceeds from disposal of equipment 18 - 18 -
------------------------------------------
(3,112) (2,995) (4,427) (6,232)
------------------------------------------

FINANCING
Net increase in bank operating
loans 2,698 (2,153) 2,788 6,402
Stock options exercised 509 1,571 944 2,260
Long-term debts - principal
repayments (1,643) (2,580) (4,119) (5,010)
------------------------------------------
1,564 (3,162) (387) 3,652
------------------------------------------

NET CASH FLOW AND CASH BALANCE,
END OF PERIOD $ - $ - $ - $ -
------------------------------------------
------------------------------------------

Supplemental disclosures of cash flows:
Interest paid $1,859 $1,382 $3,810 $2,942
Net income taxes paid $127 $473 ($56) $2,524


See accompanying notes to the consolidated financial statements.
These financial statements should be read in conjunction with the
audited annual financial statements.



Notes to the Consolidated Financial Statements - unaudited
(in thousands of dollars, except per share amounts)


1. DESCRIPTION OF BUSINESS

The Company develops, produces, imports, markets and distributes beer for sale to provincial liquor distribution organizations and entities engaged in the food and beverage industries within Canada.

The Company prepares its financial statements in accordance with accounting principles generally accepted in Canada.

The Company experiences seasonal variations in sales with revenue typically being highest in the second and third quarters and lowest in the first quarter of the fiscal year.

2. SIGNIFICANT ACCOUNTING POLICIES

The disclosures contained in these unaudited consolidated financial statements do not include all requirements of Canadian generally accepted accounting principles for annual financial statements. These unaudited consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended January 1, 2005.

These unaudited consolidated financial statements are based upon accounting principles consistent with those used and described in the annual consolidated financial statements.

Stock-Based Compensation

During the year 45,000 options were granted by the Company at an exercise price of $13.85. In 2004 the Company granted 195,000 options at an exercise price of $11.56.

During the current quarter, the compensation cost that has been charged against earnings for the stock options was $112 (2004 - $70). The fair value of each 2005 option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the period: dividend yield of 0%; expected volatility of 23%; risk-free interest rate of 3.5%; and an expected life of 4 years (2004 - dividend yield of 0%; expected volatility of 24%; risk-free interest rate of 3.5%; and an expected life of 4 years).

The Company did not recognize any compensation cost for the stock options issued prior to December 28, 2002. If the Company had determined compensation expense related to its stock option plan based on the fair value at the grant dates for awards granted in fiscal 2002, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:



---------------------------------------------------------------------
(Dollars in '000s, except
per share amounts) 3 Months Ended 6 Months Ended
--------------------------------------
July 2, June 26, July 2, June 26,
--------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Net earnings as reported $2,490 $3,842 $4,100 $6,059
---------------------------------------------------------------------
Net earnings - pro forma $2,490 3,839 4,099 6,053
---------------------------------------------------------------------

---------------------------------------------------------------------
Net earnings per share as
reported $0.15 $0.24 $0.25 $0.38
---------------------------------------------------------------------
Basic earnings per share
- pro forma $0.15 0.24 $0.25 0.38
---------------------------------------------------------------------

---------------------------------------------------------------------
Diluted earnings per share
as reported $0.15 $0.23 $0.24 $0.37
---------------------------------------------------------------------
Diluted earnings per share
- pro forma $0.15 0.23 $0.24 0.37
---------------------------------------------------------------------


The fair value of each 2002 option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the period: dividend yield of 0%; expected volatility of 27%; risk-free interest rate of 5%; and an expected life of 4 years.

Other Pronouncements

Effective January 2, 2005 the Company prospectively adopted the new provisions of the CICA Handbook Accounting Guideline AcG-15 "Variable Interest Entities". The Company does not expect this new standard to have a material impact on the reported results in the current year or in the future.

3. OUTSTANDING SHARES

As at July 2, 2005, the Company had outstanding 16,590,021 common shares and 914,954 options to acquire common shares under the Company's employee stock option plans.

4. SEGMENTED INFORMATION

Sleeman Breweries Ltd. is the largest premium brewery in Canada, producing and marketing several unique brands of beer. The Company operates breweries in Guelph, Ontario; Chambly, Quebec; Calgary, Alberta; Dartmouth, Nova Scotia; Vernon, British Columbia and LaCrosse, Wisconsin. The Company's reportable segments represent the aggregation of strategic business units that produce and sell beer in distinct geographic markets. They are managed separately because each business operates in different market environments in terms of regulatory regimes, customer preferences and sales and distribution channels.

The Company has two reportable segments: Eastern Canadian operations and Western Canadian operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for inter-segment sales and transfers at the transferring segment's cost plus a production margin. Segment performance is evaluated based on earnings before interest, income taxes, depreciation and amortization ("EBITDA").

The following table sets forth information about segment profit or loss and segment assets:



Eastern Western Eastern Western
Canada Canada Totals Canada Canada Totals
----------------------------------------------------
Quarter Ended 6 Months Ended
July 2, 2005 July 2, 2005

Revenues from
external
customers $ 39,417 $ 18,445 $ 57,862 $ 66,731 $ 31,282 $ 98,013
Inter-segment
revenues 4,959 2,025 6,984 6,278 3,029 9,307
EBITDA 4,060 3,629 7,689 7,851 6,087 13,938
Depreciation and
amortization 1,514 544 2,058 2,943 1,070 4,013
Segment assets 232,196 83,683 315,879 232,196 83,683 315,879
Expenditures for
capital assets 2,185 501 2,686 2,902 1,013 3,915
---------------------------------------------------------------------
Quarter Ended 6 Months Ended
June 26, 2004 June 26, 2004

Revenues from
external
customers $ 36,538 $ 22,174 $ 58,712 $ 61,900 $ 35,092 $ 96,992
Inter-segment
revenues 4,699 - 4,699 5,993 - 5,993
EBITDA 4,319 4,714 9,033 8,515 6,943 15,458
Depreciation and
amortization 1,161 489 1,650 2,257 898 3,155
Segment assets 177,074 82,567 259,641 177,074 82,567 259,641
Expenditures for
capital assets 1,540 1,281 2,821 4,299 1,740 6,039
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5. SUBSEQUENT EVENT

Subsequent to the end of the quarter, the Company announced a reorganization that will eliminate approximately 40 full time positions. The Company will record a pretax restructuring charge of approximately $2,100 in the third quarter of the current fiscal year.

6. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current period.

(1) Per hectolitre results are non-GAAP earnings measures, therefore, they do not have any standardized meaning prescribed by Canadian generally accepted accounting principles and may not be similar to measures presented by other companies. Management evaluates business trends on a per hectolitre basis as this is a measurement commonly used by breweries to benchmark revenue and costs.

(2) Normalized diluted earnings per share is calculated using normalized earnings. Normalized earnings is a non-GAAP earnings measure, therefore, it does not have any standardized meaning prescribed by Canadian generally accepted accounting principles and may not be similar to measures presented by other companies. Management uses this measurement for comparative purposes as it excludes the impact of non-recurring and unusual items. Management does not consider non-recurring and unusual items to be indicative of sustainable earnings. Normalized earnings is an additional measurement used by management and should not replace net earnings determined in accordance with GAAP as an indicator of the Company's performance.

(3) Normalized diluted earnings per share is calculated using normalized earnings. Normalized earnings is a non-GAAP earnings measure, therefore, it does not have any standardized meaning prescribed by Canadian generally accepted accounting principles and may not be similar to measures presented by other companies. Management uses this measurement for comparative purposes as it excludes the impact of non-recurring and unusual items. Management does not consider non-recurring and unusual items to be indicative of sustainable earnings. Normalized earnings is an additional measurement used by management and should not replace net earnings determined in accordance with GAAP as an indicator of the Company's performance.

Contact Information

  • Investor/Media Relations
    Sleeman Breweries Ltd.
    John Sleeman
    Chairman & CEO
    (519) 822-1834
    (519) 822-0221
    or
    Sleeman Breweries Ltd.
    Murray Mateyk
    CFO
    (519) 826-5437
    (519) 822-3164 (FAX)
    E-mail: sleemanir@sleeman.ca
    WWW: http://www.sleeman.ca