Sleeman Breweries Ltd.
TSX : ALE

Sleeman Breweries Ltd.

August 10, 2006 08:00 ET

Sleeman Reports Second Quarter Results

Net earnings increase 41%

GUELPH, ONTARIO--(CCNMatthews - Aug. 10, 2006) - Sleeman Breweries Ltd. (TSX:ALE) today released its financial results for the second quarter ended July 1, 2006.

Second Quarter Financial Highlights

- Normalized net earnings were $3.8 million and normalized earnings per share were $0.22, compared to normalized earnings of $0.17 per share in the prior year's second quarter. Normalized net earnings exclude the after -tax impact of the $0.4 million strategic review costs incurred in the current quarter. Net earnings in the quarter were $3.5 million, compared to $2.5 million in the second quarter of 2005. Reported earnings per share for the current quarter were $0.21.

- Net revenues grew by 1% as core volumes increased 7% driven by double digit gains in the Eastern Canadian markets. Nationally, premium brand volumes fell slightly due to the timing of the Easter holiday season this year, while value brand volumes grew in the high-teens.

- Cost of Goods Sold were consistent with the prior year as the beneficial impacts of plant efficiency projects and favourable exchange rates on US dollar purchases offset the inflationary impacts of various input cost increases. SG&A expenses, declined by $3.4 million year-over-year, as the Company continued to reduce these costs consistent with its plans for the year.

"In setting the course for the future after a very challenging 2005, Sleeman implemented strategies to achieve strong core volume growth, contain costs of goods sold and significantly reduce SG&A expenses," said John Sleeman, Chairman & CEO. "I am proud to say our employees delivered on all of these fronts during the current quarter."

First Six Month Financial Review

- Net revenue increased 1% to $98 million.

- EBITDA was $12 million compared to $14 million in the first six months of 2005. Normalized EBITDA was consistent in both periods at $14.4 million.

- Normalized earnings per share were $0.25 compared to $0.26 last year. Net earnings were $2.7 million or $0.16 per share on a diluted basis compared to $4.1 million or $0.26 per share in the same period in 2005.

Operational Highlights

- In August 2006, the Company introduced new Sleeman Light, a smooth easy-drinking beer created to provide a premium alternative for those who like to drink light beer.

- The Western segment launched Sleeman Summer Selections and OSB Summer Collections packs to give consumers opportunities to sample the Company's distinct premium beers.

- The Company upgraded the can line, at its Vernon facility, to meet the continuing growth in 473ml can sales in Western Canada.

Mr. Sleeman continued, "We are confident that the second quarter of 2006 marked the turning point for Sleeman as we execute the strategies to return the Company to sustainable profit growth. We will continue to focus on these strategies as we strive to deliver continuing improvements in our volume, operating and financial performance."

Regarding the strategic review that Sleeman is undertaking, the process continues, and the Company will make a public announcement at the appropriate time.

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 2006 and 2005; with the MD&A in the fiscal 2005 annual report, including the section on risks and uncertainties; and with the notes to the financial statements for the second quarter of fiscal 2006 and in the fiscal 2005 annual report. (All amounts are in Canadian dollars unless otherwise stated.)

The following comments were prepared as of August 9, 2006. 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 1, 2006 July 2, 2005
----------------------------------------------------------
Net revenue $160 $171
----------------------------------------------------------
Cost of goods sold 83 83
----------------------------------------------------------
Gross margin 77 88
----------------------------------------------------------
Selling, general and
administrative 51 65
----------------------------------------------------------
EBITDA(2) 26 23
----------------------------------------------------------
Depreciation and amortization 6 6
----------------------------------------------------------
Earnings before interest
and taxes 20 17
----------------------------------------------------------
Interest 5 5
----------------------------------------------------------
Earnings before taxes 15 11
----------------------------------------------------------
Income taxes 5 4
----------------------------------------------------------
Net earnings 10 7
----------------------------------------------------------


(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) EBITDA 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. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Management uses this measurement to evaluate the operating results of each of the Company's segments and the Company as a whole. Further, this measure is important to management since it is used by the Company's lenders to evaluate the ongoing cash generating capability of the Company and thus the amounts those lenders are willing to lend to the Company.

NET REVENUE

Net revenue grew to $57.8 million in the second quarter of 2006 from $57.4 million in the prior year. This represented a 1% increase. Total produced and sold volumes were up by 7% over the second quarter of 2005 to 361,000 hectolitres. Sapporo volumes increased 9% and core volumes increased 7% nationally. This volume increase outpaced the industry increase, for the quarter, estimated to be 2%.

Premium volumes declined by 2% in the quarter due mainly to the fact that the current quarter did not benefit from Easter holiday sales like last year's second quarter. Value brand volumes grew by 17% as the Company focused on growing value brand sales in the Ontario and Quebec markets. This growth was realized through effective sales and marketing support at existing spending levels.

Net revenue declined by $11 per hectolitre. The planned shift in product mix to a higher proportion of value category volumes caused approximately one-half of the reduction in net revenue per hectolitre. The balance of the reduction was a result of lower net prices realized on core volume sales in the Quebec, Ontario and Alberta markets.

In Eastern Canada, net revenue increased by 1%. An 11% increase in core volumes combined with the increase in Sapporo volumes generated increased net revenues which were partially offset by the increased proportion of value category sales and the impact of lower net pricing in Quebec on premium brand sales.

In Western Canada, net revenue remained consistent with the prior year's quarter despite a 1% decrease in core volumes. Premium brand volume increases were more than offset by value brand volume declines in the quarter.

COST OF GOODS SOLD

Consistent with the first quarter of the year, measured on a per hectolitre produced and sold basis, cost of goods sold were consistent with the prior year as the beneficial impacts of plant efficiency projects across the country and the favourable impact of exchange rate changes on US dollar denominated purchases offset the inflationary impacts of various input cost increases.

Cost of goods sold in Eastern Canada increased by $3 per hectolitre to $81 due to the effects of the increased production at the Chambly, Quebec and Dartmouth, Nova Scotia breweries, where costs are higher, compared to the second quarter of last year. The significant increase in sales volumes necessitated the increase in production at these breweries.

In Western Canada, cost of goods sold decreased by $5 per hectolitre due to continued improvements in Vernon plant efficiencies.

OTHER OPERATING ITEMS

SG&A expenses decreased by $3.4 million in the current quarter ($51 per hectolitre) compared to the second quarter of 2005 ($65 per hectolitre). The current quarter SG&A expenses included $0.4 million of non-recurring strategic review costs while the second quarter of last year included $0.4 million of non-recurring legal settlement costs. Consistent with management's expectation, the beneficial impacts of the two restructurings announced in the past 12 months contributed nearly one-third to the expense amount reduction, with the remaining decrease coming from sales and marketing program reductions.

In Eastern Canada, SG&A expenses decreased by $2.9 million to $13.4 million as management focused on reducing sales, marketing and administrative costs.

Excluding $0.4 million of transaction expenses in 2006 and $0.4 million of legal settlement costs in 2005, Western Canadian SG&A expenses decreased marginally by $0.6 million to $4.5 million.

Depreciation and amortization expenses were consistent with the amount recorded in the prior year's second quarter.

Interest expense in the second quarter remained consistent with the second quarter of 2005 as the impact of higher prevailing interest rates in the current quarter were offset by the impact of lower net borrowings.

The effective tax rate of 35% in the second quarter of 2006 was consistent with rate recorded in the second quarter of 2005.

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:



----------------------------------------------------------------
3 months ended 6 months ended
July 1, 2006 July 2, 2005
----------------------------------------------------------------
Net revenue $157 $168
----------------------------------------------------------------
Cost of goods sold 83 83
----------------------------------------------------------------
Gross margin 74 85
----------------------------------------------------------------
Selling, general and
administrative 55 61
----------------------------------------------------------------
EBITDA 19 24
----------------------------------------------------------------
Depreciation and amortization 7 7
----------------------------------------------------------------
Earnings before interest
and taxes 12 17
----------------------------------------------------------------
Interest 6 6
----------------------------------------------------------------
Earnings before taxes 6 11
----------------------------------------------------------------
Income taxes 2 4
----------------------------------------------------------------
Net earnings 4 7
----------------------------------------------------------------


Net revenue of $98.4 million for the period was 1% higher than the $97.1 million recorded in the first six months of 2005. Produced and sold volumes totalled 627,000 hectolitres in the period, as compared to 580,000 in the prior year. Core volumes increased by 8% (39,000 hectolitres) while Sapporo volumes also increased by 8% (8,000 hectolitres).

In terms of core volumes, there was a mix shift to lower priced value product sales in 2006. As part of the Company's stated strategy, six month value brand sales volumes increased to 51% of the Company's core sales volumes from 48% in the prior year's six month period. This core volume value category shift combined with lower net pricing realized on the sale of value products in Ontario and Alberta and the sale of premium products in Quebec contributed to the reduced per hectolitre amounts year-over-year.

Cost of goods sold, on a per hectolitre basis was unchanged compared to the prior year, increased 9% to $52.1 million for the period, up from $48.0 million in 2005 due to the 8% increase in produced and sold volumes.

Selling, general and administrative (SG&A) expenses decreased in 2006 by $1.0 million to $34 million (or $55 per hectolitre). Included in this year's SG&A expenses are $2.0 million of restructuring costs and $0.4 million of strategic review costs. In the prior year, there were $0.4 million of one-time legal settlement costs included in SG&A. When non-recurring costs are removed, per hectolitre SG&A costs in the current period were $51 well below the $60 in the prior year.

The Company's depreciation and amortization expense increased marginally in the current period due to the effects of the net capital expenditures made by the Company in the past 12 months.

Interest costs increased by $0.1 million (4%) in 2006 due to the effects of higher prevailing market interest rates on the Company's variable rate debt in the period.

The Company's effective tax rate for both the 2006 and 2005 periods was 35%.

Financial Position

The Company had a bank indebtedness balance of $9.6 million at July 1, 2006 compared to an indebtedness balance of $ 9.7 million as at December 31, 2005.

Accounts receivable decreased by $1.0 million from the level reported at the end of fiscal 2005. The decrease in accounts receivable occurred despite the fact that the Company generated higher revenues during the second quarter of 2006 when compared to the last quarter of 2005. Strong efforts have been made by the Company to reduce the average age of its accounts receivable.

The Company's inventories increased by $1.4 million while its accounts payable increased by $1.2 million from December 31, 2005 levels due to seasonal fluctuations.

Prepaid expenses decreased by $1.7 million from the level reported at December 31, 2005. This decrease was attributable to the fact that there was no can purchase prepayment amount on July 1, 2006.

Property, plant and equipment decreased by $1.7 million from the level reported at December 31, 2005 due principally to the disposition of certain non-core assets in the current period while intangible assets decreased by $1.0 million as amortization charges exceeded expenditures in the period.

Total long term debt levels decreased by $8.7 million as a result of debt repayments made during the first six months of 2006.

Cash Flow

Quarterly Comparison

The company reduced its combined long term debt and bank indebtedness by $4.6 million in the current quarter compared to an increase in total borrowings of $1.1 million in the second quarter last year. This improvement is due to increased operating cash flows and reduced net capital expenditures in the current quarter.

Operating cash flow for the quarter increased by $2.9 million compared to the prior year due to a $1.5 million net improvement in working capital cash flow and increased net earnings in the current period.

Investing activities generated $1.3 million in the second quarter of 2006 compared to a net outflow of $1.8 million in the second quarter of 2005. This improvement resulted from reduced net investments in capital in the current period.

Non-cash financing activities used $1.5 million more in the second quarter of 2006 as compared to the second quarter of 2005 as the Company paid $1.2 million more in long-term debt principal payments in the current quarter.

Year to Date Comparison

The company reduced its combined long term debt and bank indebtedness by $8.6 million in the current period compared to a decrease in total borrowings of $1.3 million in the prior period. This is due primarily to favourable working capital changes in the current quarter.

Operating cash flow for the period increased by $4.9 million compared to the prior year as the current period's $6.3 million improvement in working capital cash flow exceeded the impact of the decline in earnings in the period.

Investing activities generated $0.4 million of cash flow in the period whereas these activities used $3.1 million of cash in the prior period. Lower net capital expenditures in the current period led to this improvement.

Non-cash financing activities used $3.9 million more in the first six months of 2006 as compared to the same period in 2005 as the Company's principal payments on its long term debt facilities were $4.7 million higher in the current period.

Outlook

The Company expects that the intense price competition it has faced in key markets in the past two years will continue for the balance of 2006. The Company remains committed to returning to annual volume, revenue and profit growth in this competitive environment. Plans include implementing various core volume growth strategies and improving the Company's operations and cost structures at all of its locations to ensure that it can compete profitably regardless of competitor pricing activities across Canada.

In terms of core volume growth, the Company is focused on generating premium volume growth. It will continue to introduce innovative products and invest in its premium brands with distinctive and cost effective sales and marketing programs in its key markets in Ontario, Quebec and Western Canada. In addition, Sleeman is a significant competitor in the value category of the Canadian beer market with its high quality and well known portfolio of value brands. The Company will continue to compete more aggressively in those markets where selling value beer is profitable.

In 2006, the Company is targeting to reduce cost of goods sold per hectolitre from the level recorded in 2005 of $84/hl and focusing on controlling SG&A expenses. The Company expects to achieve these cost objectives through the two restructuring programs announced in the past 12 months, implementing various cost management programs and making efficiency related capital expenditures. The most significant of these capital expenditures was the installation of the sterile filtration system in Guelph for production of Sleeman Original Draught for Eastern Canadian markets early in the second quarter of this year.

The Company expects its depreciation and amortization and interest expenses for 2006 to be marginally higher than those reported for the 2005 fiscal year.

The Company anticipates its effective income tax rate for 2006 will be approximately 35%.

In Eastern Canada, the Company is focused on growing its revenues by increasing its core volume sales in both the premium and value categories. The Company continues to develop innovative plans to distinguish its premium brands from its competitors in Ontario and Quebec while marketing its profitable value category brands more aggressively. The Company expects to generate double digit volume growth in both the Maritimes and US regions in 2006 on relatively small 2005 sales bases. The Company continues to believe innovation, speed to market and the quality of its products are key advantages, and the resources of the segment will be directed at realizing the benefits of these advantages. In addition, non-production SG&A expenses will be reduced from 2005 levels to ensure operating margins improve over those recorded in 2005 in the face of continuing price discounting in the major markets in which it competes.

In Western Canada, it is likely that price discounting by competitors will continue, notably in the value category. As a result, we will reduce production and SG&A costs while focusing on growing and supporting our premium brands. The Company has strong regional brands in Okanagan Spring and Shaftebury, which, when combined with the Sleeman brand, provide a solid base for product and sales and marketing innovations that will generate increased core volume sales. The Company expects ongoing challenges for its Western Canadian value beer portfolio as a result of the continued deep discounting in this category by small brewery competitors in provinces where there are no minimum beer prices and these competitors are supported by favourable provincial tax treatments.

The Company has sufficient production capacity to meet its expected production requirements for the next 24 months. The Company plans to reduce its capital expenditures in 2006 to $7.5 million. This amount is significantly lower than prior years' capital spending levels and will be used to improve efficiencies at its breweries.

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:



-----------------------------------------------
Q2 2006 Q1 2006 Q4 2005 Q3 2005
-----------------------------------------------
Net Revenue $57,792 $40,560 $49,623 $59,038
-----------------------------------------------
S,G&A Expenses $18,358 $15,805 $20,351 $21,535
-----------------------------------------------
EBITDA $9,434 $ 2,608 $5,674 $9,480
-----------------------------------------------
Net Earnings
(Loss) $3,516 ($813) $539 $3,458
-----------------------------------------------
EPS (Basic) $0.21 ($0.05) $0.03 $0.21
-----------------------------------------------
EPS (Diluted) $0.21 ($0.05) $0.03 $0.20
-----------------------------------------------


-----------------------------------------------
Q2 2005 Q1 2005 Q4 2004 Q3 2004
-----------------------------------------------
Net Revenue $57,862 $39,747 $53,757 $60,727
-----------------------------------------------
S,G&A Expenses $21,763 $13,368 $19,873 $20,705
-----------------------------------------------
EBITDA $ 7,689 $6,249 $9,708 $10,777
-----------------------------------------------
Net Earnings
(Loss) $ 2,490 $1,610 $3,904 $4,463
-----------------------------------------------
EPS (Basic) $ 0.15 $0.10 $0.24 $0.27
-----------------------------------------------
EPS (Diluted) $ 0.15 $0.10 $0.23 $0.27
-----------------------------------------------


Quarterly Conference Call Notification

Please note the Company's conference call with analysts and media will be webcast live at 11:00 am ET, August 10, 2006 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 416-641-6105 or 866-226-1799. 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, 2006. To access the rebroadcast, please dial 416-695-5800 or 800-408-3053. The reservation number is 3194747. 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), Sol, 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 as of the date of this press release. These forward-looking statements include the statements concerning 2006 volume, revenue, cost and earnings expectations. These forward-looking statements are not guarantees. Although the Company believes that these forward-looking statements are based on information and assumptions which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from current expectations.
The statements concerning 2006 volume, revenue, cost and earnings expectations are based on the following material factors or assumptions: average net revenues the Company will earn on its products in 2006 will be similar to the net revenues it earned on its products in 2005 due to continued price discounting by major competitors, no significant changes in consumer preferences, continued increasing competition from current and new competitors, the continuation of Company's current relationship with its employees including successful labour negotiations of collective bargaining agreements, no significant changes to the regulatory environment in which the Company operates, continuing performance of third party service providers, the continuing ability of the Company to attract and retain key executives and no significant supply and quality control issues with vendors. The Company cautions that this list of factors is not exhaustive. These factors and other risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including in the Risks and Uncertainties section of the management's discussion and analysis included in the Company's 2005 Annual Report. Potential investors and other readers are urged to consider these factors carefully in evaluating these forward-looking statements and are cautioned not to place undue reliance on them.
The forward-looking statements included in this news release are made only as of the date of this news release and the Company does not undertake to publicly update these forward-looking statements or material factors or assumptions to reflect new information, future events or otherwise. The Company has included in this news release non-GAAP earnings measures. Normalized earnings per share, per hectolitre revenues and costs and EBITDA do not have standardized meanings prescribed by GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as alternatives to other financial measures determined in accordance with GAAP. The Company uses these earnings measures because it believes they provide useful information to both management and investors with respect to the operating and financial performance of the Company.



Interim Consolidated Statements of Earnings -unaudited
for the three months ended July 1, 2006
(all amounts in '000s except per share and per hectolitre amounts)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
3 months ended 3 months ended %
July 1, 2006 July 2, 2005 Change
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net revenue $57,792 57,371 1%
-----------------------------------------------------------------------
Cost of goods sold 30,000 27,919 7%
-----------------------------------------------------------------------
Gross margin 27,792 29,452 -6%
-----------------------------------------------------------------------
Selling, general and
administrative 18,358 21,763 -16%
-----------------------------------------------------------------------
Earnings before the undernoted 9,434 7,689 23%
-----------------------------------------------------------------------
Depreciation and amortization 2,097 2,058 2%
-----------------------------------------------------------------------
Earnings before interest
and taxes 7,337 5,631 30%
-----------------------------------------------------------------------
Interest expense -- net 1,893 1,798 5%
-----------------------------------------------------------------------
Earnings before income taxes 5,444 3,833 42%
-----------------------------------------------------------------------
Income taxes 1,928 1,343 44%
-----------------------------------------------------------------------
Net earnings $ 3,516 $2,490 41%
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Total Proforma HLs Reported 408,000 390,000 5%

EPS -- Basic $0.21 $0.15 40%
EPS - Diluted $0.21 $0.15 40%
Weighted average common
shares during the period
-basic 16,754,635 16,564,228
-diluted 16,978,593 16,821,756


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 Earnings -unaudited
for the six months ended July 1, 2006
(all amounts in '000s except per share amounts)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
6 months ended 6 months ended %
July 1, 2006 July 2, 2005 Change
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net revenue $98,352 $97,118 1%
-----------------------------------------------------------------------
Cost of goods sold 52,147 48,049 9%
-----------------------------------------------------------------------
Gross margin 46,205 49,069 -6%
-----------------------------------------------------------------------
Selling, general and
administrative 34,163 35,131 -3%
-----------------------------------------------------------------------
Earnings before the undernoted 12,042 13,938 -14%
-----------------------------------------------------------------------
Depreciation and amortization 4,125 4,013 3%
-----------------------------------------------------------------------
Earnings before interest
and taxes 7,917 9,925 -20%
-----------------------------------------------------------------------
Interest expense -- net 3,746 3,613 4%
-----------------------------------------------------------------------
Earnings before income taxes 4,171 6,312 -34%
-----------------------------------------------------------------------
Income taxes 1,468 2,212 -34%
-----------------------------------------------------------------------
Net earnings $2,703 $4,100 -34%
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Total Proforma HLs Reported 708,000 665,000 7%

EPS -- Basic $0.16 $0.25 -35%
EPS - Diluted $0.16 $0.24 -35%
Weighted average common shares
during the period
-basic 16,746,104 16,526,102
-diluted 16,948,866 16,813,255

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.


Interim Consolidated Balance Sheets-unaudited
As at July 1, 2006
(all amounts in 000s)

July 1, December 31, July 2,
2006 2005 2005
--------------------------------------
Assets

Current
Accounts receivable $45,931 $46,939 $50,809
Inventories 46,189 44,788 47,021
Prepaid expenses 4,547 6,271 8,707
--------------------------------------
96,667 97,998 106,537
Property, plant and
equipment 102,195 103,891 101,919
Long-term investments 3,313 3,313 3,312
Intangible assets 102,091 103,134 104,111
--------------------------------------
$304,266 $308,336 $315,879
--------------------------------------
--------------------------------------
Liabilities

Current
Bank indebtedness $9,577 $9,744 $12,423
Accounts payable and
accrued liabilities 46,374 45,349 50,399
Current portion of
long-term debt 12,283 16,794 14,765
--------------------------------------
68,234 71,887 77,587

Long-term debt 83,349 87,581 96,775
Future income taxes 17,106 16,373 14,465
--------------------------------------
168,689 175,841 188,827
--------------------------------------
--------------------------------------
Shareholders' equity
Share capital 50,780 50,520 49,297
Contributed surplus 874 755 532
Retained earnings 83,923 81,220 77,223
---------------------------------------
135,577 132,495 127,052
---------------------------------------
$304,266 $308,336 $315,879
---------------------------------------
---------------------------------------


Interim Consolidated Statements of Retained Earnings -unaudited
for the six months ended July 1, 2006
(all amounts in 000s)
6 months ended 6 months ended
July 1, 2006 July 2, 2005
---------------------------------
Retained earnings, beginning of period $ 81,220 $ 73,123
Net earnings for the period 2,703 4,100
---------------------------------
Retained earnings, end of period $83,923 $77,223
---------------------------------
---------------------------------


See accompanying notes to the consolidated financial statements.

These financial statements should be read in conjunction with the audited annual financial statements.



Interim Consolidated Statements of Cash Flows -unaudited
for the period ended July 1, 2006
(all amounts in '000s)
3 Months Ended 6 Months Ended
July 1 July 2 July 1 July 2
2006 2005 2006 2005
Net inflow (outflow) of cash
related to the following
activities:

OPERATING
Net earnings $3,516 $2,490 $2,703 $4,100
Items not affecting cash
Depreciation and amortization 2,097 2,058 4,125 4,013
Future income taxes 990 335 734 536
Non-cash charges in income (34) (67) (101) (135)
Stock-based compensation
expense 60 112 120 224
Gain on disposal of equipment (256) (17) (256) (17)
---------------------------------
6,373 4,911 7,325 8,721
Changes in non-cash operating
working capital items (3,259) (4,715) 1,003 (5,259)
---------------------------------
3,114 196 8,328 3,462
---------------------------------
INVESTING
Proceeds from note receivable 1,488 1,352 1,488 1,352
Additions to property, plant &
equipment (1,560) (2,686) (2,202) (3,915)
Additions to intangible assets (63) (444) (324) (530)
Proceeds from sale of
property, plant & equipment 1,396 18 1,396 18
---------------------------------
1,261 (1,760) 358 (3,075)
---------------------------------

FINANCING
Net increase (decrease) in
bank operating loans (1,755) 2,698 (170) 2,788
Stock options exercised 218 509 260 944
Long-term debts -- principal
repayments (2,838) (1,643) (8,776) (4,119)
---------------------------------
(4,375) 1,564 (8,686) (387)
---------------------------------

NET CASH FLOW FOR THE PERIOD - - - -
CASH BALANCE, BEGINNING OF
PERIOD - - - -
---------------------------------
CASH BALANCE, END OF PERIOD $ - $ - $ - $ -
---------------------------------
---------------------------------
Supplemental disclosures of
cash flows:
Interest paid $2,200 $1,859 $4,112 $3,810
Net income taxes paid
(refunded) ($1,103) $127 ($1,151) ($56)

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 Interim 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 meet 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 December 31, 2005.

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

Stock-Based Compensation

During the period, no options were granted by the Company. In the second quarter 2005, the Company granted 45,000 options at an exercise price of $13.85.

During the current quarter, the compensation cost that has been charged against earnings for the stock options was $60 (2005 - $112). 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).

3. LONG TERM DEBT

During the quarter, the Company's 364 day committed operating loan facility and its "Evergreen Facility" (Facilities A and B, respectively, as described in Note 10 to the Company's 2005 audited financial statements) were renewed for another year to April 25, 2007 on substantially the same terms and conditions.

During the quarter, the terms of the non-revolving term loan (item (iv) of Note 10 to the Company's 2005 audited financial statements) were amended such that the term of the loan was extended to July 1, 2012. Monthly principal repayments of $50 are payable on the first business day of each month from June 1, 2006 for the remaining term of the loan.

The current portion of long term debt included in these interim financial statements has been adjusted accordingly for the amendments to repayment terms of the loans noted above.

4. OUTSTANDING SHARES

As at July 1, 2006, the Company had outstanding 16,768,257 common shares and 704,522 options to acquire common shares under the Company's employee stock option plans.

5. 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; 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
Canada Canada Totals
---------------------------------
---------------------------------
Quarter Ended July 1, 2006
Revenues from external customers $ 39,312 $ 18,480 $ 57,792
Inter-segment revenues 1,608 118 1,726
EBITDA 4,594 4,840 9,434
Depreciation and amortization 1,526 571 2,097
Segment assets 224,044 80,222 304,266
Expenditures for capital assets 1,250 310 1,560
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Eastern Western
Canada Canada Totals
---------------------------------
---------------------------------
6 Months Ended July 2, 2006
Revenues from external customers $ 67,329 $ 31,023 $ 98,352
Inter-segment revenues 2,220 1,397 3,617
EBITDA 4,188 7,854 12,042
Depreciation and amortization 2,994 1,131 4,125
Segment assets 224,044 80,222 304,266
Expenditures for capital assets 1,885 316 2,201
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Eastern Western
Canada Canada Totals
---------------------------------
---------------------------------
Quarter Ended July 2, 2005
Revenues from external customers $ 38,926 $ 18,445 $ 57,371
Inter-segment revenues 4,959 2,025 6,984
EBITDA 4,060 3,629 7,689
Depreciation and amortization 1,514 544 2,058
Segment assets 232,196 83,683 315,879
Expenditures for capital assets 2,185 501 2,686
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Eastern Western
Canada Canada Totals
---------------------------------
---------------------------------
6 Months Ended July 2, 2005
Revenues from external customers $ 65,836 $ 31,282 $ 97,118
Inter-segment revenues 6,278 3,029 9,307
EBITDA 7,851 6,087 13,938
Depreciation and amortization 2,943 1,070 4,013
Segment assets 232,196 83,683 315,879
Expenditures for capital assets 2,902 1,013 3,915
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6. RESTRUCTURING COSTS

The Company announced a reorganization that would eliminate approximately 40 full time positions in the third quarter of 2005 and a further reorganization that would eliminate another 40 positions in the first quarter of 2006. These consisted of workforce reductions across both business segments and the consolidation of production facilities in Western Canada. The costs related to these reorganizations have been recorded in the selling, general and administration expense line in the Consolidated Statement of Earnings. The following tables show the changes in the restructuring provision for these initiatives by reportable segment:



August 10, 2005 Restructuring
Eastern Western
Canada Canada
--------- --------
--------- ---------
Workforce Workforce
Reduction Reduction

Original provision recorded August 10, 2005 $ 1,730 $ 395
Payments and revisions to accruals from
date of restructuring to April 1, 2006 (896) (235)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Provision at April 1, 2006 834 160
Payments in second quarter of 2006 (219) (63)
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Provision at July 1, 2006 $ 615 $ 97
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Western Canada
--------------------------
--------------------------
Redundant Total
Capital Subtotal Company
Original provision recorded August 10, 2005 $ 450 $ 845 $ 2,575
Payments and revisions to accruals from
date of restructuring to April 1, 2006 (450) (685) (1581)
------------------------------------------------------------------------
------------------------------------------------------------------------
Provision at April 1, 2006 - 160 994
Payments in second quarter of 2006 - (63) (282)
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------------------------------------------------------------------------
Provision at July 1, 2006 $ - $ 97 $ 712
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March 2, 2006 Restructuring

Eastern Canada Western Canada
------------------ ---------------
------------------ ---------------
Workforce Workforce Total
Reduction Reduction Company
Original Provision Recorded
in Current Year $ 1,810 $ 190 $ 2,000
Q1 Payments (137) (15) (152)
------------------------------------------------------------------------
------------------------------------------------------------------------
Provision at April 1, 2006 1,673 175 1,848

Q2 Payments (235) (79) (314)
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------------------------------------------------------------------------
Provision at July 1, 2006 $ 1,438 $ 96 $ 1,534
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7. COMPARATIVE FIGURES

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

Contact Information

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