Chairman's Report

2018 was a year of considerable change for Adnams. After the very substantial investments in 2017, we had our first full year of trading at the transformed Swan Hotel and the first year of operation of our expanded brewery. We invested in our cutting-edge dealcoholisation plant, we planned and are developing our systems for the future, and we built new marketing capabilities. Our focus has been on quality, on creating first rate drinks and first rate customer experiences and on making Adnams the best and most efficient organisation that it can be.

At £78.9 million our turnover was 5.6% ahead of 2017 and our beer volumes grew by 2.2%. Operating profit before highlighted items, at £1.6 million, was behind the £2.2 million that we made in 2017. Our EBITDA (Earnings before Interest Tax, Depreciation and Amortisation, a commonly used proxy for cash generation before capital expenditure) remained robust at £5.2 million, slightly down from £5.4 million in 2017, before charging the non-cash highlighted items. This year, we have £1.8 million of highlighted items relating to guaranteed minimum pension commitments and property impairment costs. After charging these items there was an operating loss of £160,000. This compares to an operating profit of £1.4m in 2017.

The changes that we made in the year led to a number of one-off costs, notably the cost of outsourcing the filling of casks for a few months whilst we installed our dealcoholisation plant, and a new cask robot. However, as we anticipated at the time of our AGM, we moved from a first half position where operating profit was behind 2017 to being ahead of the prior year in the second half. Significant exceptional highlighted items have been charged at the full year.

The strategy of Adnams is to be a high quality branded drinks producer and provider of top quality customer experience in our property estate. The success of our low alcohol Ghost Ship, further highly respected awards for our spirits, and plaudits for the reopened Swan stand as evidence that our strategy is being delivered.

Beer

The beer market continues to evolve rapidly. For the first time for many years, volumes of beer sold in the UK on-trade increased, if only by a modest 0.1%. The relative growth of the off trade continued, with that segment of the market growing by 4.7%. Therefore, total market volumes increased by 2.6%. Within these totals there were some major variations with a strong increase in premium lager sales in both the on-trade and off-trade. In contrast, cask ale sales suffered a very poor year with volumes down by 9%. Cask ale remains the biggest category of beer for Adnams and it is disappointing to see this level of decline. Our new brewery investments were made to ensure that we have the flexibility and adaptability to produce all styles of beer.

One very positive trend for Adnams is the growing interest in 'low and no' alcohol beers, and Ghost Ship 0.5% is making a strong name for itself in this field. Adnams has invested in industry-leading technology to make its beer with results that are correspondingly good. Success has been such that we have already made a further investment to double our production capacity.

Regular readers of these accounts will know that we have frequently referred to the distortions caused by Small Breweries Relief (SBR), the UK's system for granting lower duty rates to smaller brewers. Concerns about the impacts of SBR, which have recently included it being cited by Fuller Smith & Turner as one of the reasons for selling their brewing business, have finally led the government to launch a review. Shareholders should understand that this is a very important matter for the health of mid-size breweries. If Adnams paid the same duty rates as its smaller competitors we would save around £7 million per annum.

Spirits

In 2013, Adnams celebrated winning the Gin Guild Cup for the best gin at the International Wine and Spirits Competition. In 2014, we had corresponding success winning the top vodka award, being the first UK producer to achieve this accolade. In 2018, we repeated our 2014 success with Adnams Longshore Vodka winning the best vodka award and on top of this Adnams was named the Vodka Producer of the Year. There can be no doubt as to the high quality of the spirits produced by Adnams. We have invested in top quality production and external awards have followed. In the gin market we are distinguished by being one of a small number of producers who distil from grain. The vast majority of gin producers distil their drinks using alcohol bought from bulk suppliers, we make our own alcohol and we believe that the quality shows.

Adnams was an early entrant into the craft spirits market in the UK, having opened our distillery over eight years ago. This helped us to grow sales rapidly and Copper House Gin in particular gained a strong reputation. That reputation continues to grow; however, the market has become substantially more challenging as the number of distillers has mushroomed, as has the range of gin flavours. We too have launched flavoured varieties of our Copper House Gin and saw good success in 2018 with our Adnams Pink Gin and later in the year with our Quince Gin. Our spirits volumes continued to grow in 2018; however, our 2.4% growth was much lower than we had been seeing in recent periods as the market has become very crowded.

Properties

The Adnams properties aim to provide top quality customer experience. Foremost amongst them is the Swan Hotel, Southwold, which represents the epitome of the Adnams experience. We aim to provide customers with memorable visits and a deeper understanding of the Adnams brand, integrating Adnams' premium drinks with experience of a great location. Service levels are crucial in pubs and hotels and we have sophisticated systems for capturing customer feedback.

Over the last few years, Adnams has developed a much stronger capability to run its own managed pubs and hotels and this has allowed us the ability to move properties between tenancy, leasehold or management as circumstances suggest. In 2018, we moved the Five Bells in Wrentham under our own management and since the year end we have done likewise with the Cross Keys in Aldeburgh. The growing managed estate also allows us to ensure that skills are shared and staff can cover more properties.

The managed estate allows us to communicate the Adnams brand under our own direction, though some pubs, particularly smaller ones, are better managed by others and many of our tenants and lessees are excellent advocates of Adnams.

Retail

The Adnams shops have an important role in raising the visibility and reputation of our brand and in providing a valuable channel of distribution for our products, particularly given the continuing market trend for customers to prefer beer and spirits packaged for consumption at home. Our shops work hand-in-hand with our online and mail order businesses to grow and widen our customer base. Our shops estate remained largely unchanged during the year.

Brand

The Adnams brand represents our promise to customers. We continue to invest strongly in brand development and evolve the communication channels we use. Digital content is becoming ever more important. However, different from many brands, Adnams has a real authenticity and human dimension to it and we will be blending our instinctive feel for our markets, our customers and their needs with increased use of data to ensure we develop and deliver products that meet their needs in compelling and motivating ways now and in future.

Systems

For the last eighteen months Adnams has been engaged in a major and very important change to its core systems governing the operation of its manufacturing and wholesale businesses. We had hoped to complete this project in the second half of last year; however, the scale of this implementation and the extent of the changes to our business processes have meant that the system will be going live just after the signing of these accounts. There will be some inevitable early disruption from such a fundamental change; however, adopting best practice systems is vital for the future growth and resilience of our business.

Dividend

We are recommending an unchanged final dividend of £1.50 per 'B' share and it is proposed that this be paid on Tuesday 4 June in line with the June payment date adopted last year.

Outlook

Those writing forward-looking statements at this time no doubt share an uneasiness as to how the future will look. At the time of writing we are due to circulate this report on the day before the UK is due to leave the EU. There is much talk of the leave date being delayed, though less clarity as to the deal that will accompany leaving, assuming that it happens. For businesses, this uncertainty makes planning very difficult; however, Adnams has the advantage that it is primarily a UK-based business and whilst we have plans to secure necessary imports and to continue the growth of our export business, our main concerns relate to consumer confidence and availability of suitably skilled staff including those in our wider supply chain and customer base. There is little that we can do about these matters, other than to try to ensure that we remain nimble and able to respond quickly to our markets as they change. This we will seek to do.

Our business is well-invested including state of the art systems. We have ensured that quality is at the heart of what we do and that we can communicate that message to our customers. We are well placed for the future, uncertain as it may be, and we will continue to keep our focus on our long-term success. I would like to thank you for your support.

Jonathan Adnams OBE

Chairman

The Directors have recommended a final dividend for the financial year ending 31 December 2018 of 150% per share on the 'A' and 'B' Ordinary Shares, unchanged on the previous year. This amounts to GBP1.50 per 'B' share and 37.5p per 'A' share. The dividend will be paid on 4 June 2019 to the shareholders on the register on 3 May 2019. In line with UK accounting standards, the 2018 final dividend has not been accounted for within the above financial statements.

The information contained in the above profit and loss account and balance sheet has been extracted from the audited accounts of Adnams PLC for the year ended 31 December 2018. The statement preceding the profit and loss account is unaudited.