Results
Operating profit from subsidiaries increased by US$19 million to US$117 million for the year. Improved results from Australia and New Zealand and a steady performance in Hong Kong more than offset start-up losses in Asia. Share of profits from associates decreased by US$4 million, as another good performance by Maxim's could not make up for a decline in profit at Kwik Save.

The impact of exceptional items of US$30 million was significantly lower than 1996, as the costs of discontinuing the Wellsave supermarket operation in Japan and the Mannings drugstore chain in Taiwan were partly offset by a gain on the disposal of Nestlé Dairy Farm. As a result, profit before interest improved to US$154 million, an increase of 70%. The profit before interest attributable to continuing activities was US$209 million, an increase of 3% over 1996.

Currency movements reduced Group sales by 5%, due mainly to weaker Australian and New Zealand Dollars. The overall net profit was however enhanced by US$5 million, primarily reflecting the benefit of a weaker Japanese Yen, although there was no material currency effect on the net profit from continuing activities. Net interest expense of US$14 million was lower than 1996 as the Group's net debt level turned to a net cash position towards the end of the year. The effective tax rate for the year was 24% (1996: 50%) reflecting the reduced level of losses in Australia and the non-taxable nature of a number of exceptional items. If adjusted for tax losses and other non-taxable items in both years, the underlying tax rate would have been similar at 19%.

As a result, earnings per ordinary share increased significantly from US¢1.60 to US¢6.45 – excluding discontinued activities and exceptional items from both years, this would have increased by 8% to US¢8.59.

Accounting Policies
There have been no changes to the accounting policies adopted in the previous year.

Cash Flow
Cash flow from operating activities remained strongly positive at US$433 million, benefiting from further improvements in the control of working capital, particularly in Australia. After capital expenditure and asset disposals, primarily Nestlé Dairy Farm, of US$183 million, the net cash flow before financing activities amounted to US$250 million. Our Australasian operations accounted for capital expenditure of US$115 million and our Asian businesses accounted for US$62 million. The most significant areas of capital expenditure were US$124 million at stores and US$41 million on systems. Excluding the disposal of Simago, the capital expenditure for the current year is expected to be in excess of US$300 million, of which US$60 million will be on systems.

Dividends
The Board is recommending a final dividend of US¢4.35 per ordinary share, making a total annual dividend per ordinary share of US¢6.00, unchanged from last year. This compares with earnings per ordinary share, excluding discontinued activities and exceptional items, of US¢8.59 (1996: US¢7.94).

The dividends are payable in cash with a scrip alternative. The Directors believe scrip dividends provide both a cost effective method for Shareholders to increase their holdings and a cash benefit to the Group.

Property Valuation
Following a full independent valuation of the Group's properties in December 1996, the Directors have reviewed the current property values and believe that the carrying values are reasonably stated.

Treasury Activities
The Group manages its exposure to financial risk using a variety of techniques and instruments. The main objective is to provide a degree of certainty about costs. In those businesses with significant net debt, measures are taken to fix the rate of interest paid on a proportion of their borrowings. In respect of overseas acquisitions or expansion, borrowings may be taken in the local currency in order to partially hedge the investment and projected income. The Group broadly matches the currency mix of borrowings to the spread of its operational assets, so as to ensure that key ratios are not materially affected by exchange rate movements. As a result of this policy, the decline in Shareholders' funds due to currency movements in 1997 has been contained at US$56 million.

The investment of the Group's cash resources, held mainly in United States Dollars, is managed so as to minimise risk whilst seeking to enhance yield.

In the course of these activities, the Group enters into derivative financial instruments. However, the Group's treasury function is specifically prohibited from undertaking speculative transactions unrelated to underlying financial exposures.

Funding
At the year end, the Group, excluding associates, had undrawn committed facilities in excess of US$160 million. The average term to maturity of the committed facilities was 1.8 years. Bank balances amounted to US$608 million while overall the Group now has net cash of US$74 million compared with net borrowings of US$184 million last year. The Group's financial position remains strong and, accordingly, the Group is well placed to withstand the recent turmoil in the Asian economies.

Edouard Ettedgui
Group Finance Director
18th March 1998