Transcript Global breweries - Beedie School of Business

Global Breweries
Fundamental Analysis and Recommendations
Cyrus Cheung
Ervinna
Jeff
November 17, 2004
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Overview of Presentation
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Industry Overview
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History & Background
Product
Industry
Consumers
Growth Area
Key Success Factors
Company Analysis and Recommendations:
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Anheuser-Busch : Cyrus Cheung
Heineken : Erivnna
Molson : Jeff
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Industry Overview
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History & Background
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Ancient History:
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There is evidence that beer was elaborated by the Babylonian,
Assyrian, Egyptian (for medical purposes), Hebrew, Chinese, and
Inca cultures.
55 BC Roman legions introduce beer to Northern Europe.
500-1000 AD the first half of the Middle Ages, brewing begins to
be practiced in Europe, shifting from family tradition to centralized
production in monasteries and convents (hospitality for traveling
pilgrims).
1200 AD beer making is firmly established as a commercial
enterprise in Germany, Austria, and England.
1420 German brewers develop the lager method of brewing.
1489 Germany's first brewing guild, Brauerei Beck, was
established.
Source: http://www.beermachine.com/files/beer-science-history.htm
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History & Background
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Renascence History:
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1553 Beck's Brewery founded & still brewing today.
1587 the first beer brewed in New World at Sir Walter Raleigh's
colony in Virginia.
1612 the first commercial brewery opened in New Amsterdam
(NYC, Manhattan).
1786 Molson brewery is founded in what is today Canada.
Source: http://www.beermachine.com/files/beer-science-history.htm
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History & Background
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Modern History:
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In the mid-19th Century (1850's) German immigrant brewers
introduced cold maturation lagers to the US (Anheuser-Busch,
Miller, Coors, Stroh, Schlitz, and Pabst roots begin here).
The modern era of brewing in the US began in the late 1800's
with commercial refrigeration (1860), automatic bottling,
pasteurization (1876), and railroad distribution.
1880 there were approximately 2,300 breweries in the US. 1935
only 160 breweries survive Prohibition (see below).
1920 Prohibition (U.S) Starts for beer, even though some regions
started as early as 1846, e.g. Maine. Prohibition focused more on
whiskey and other distilled products. (Prohibition ends in April 7,
1933)
Source: http://www.beermachine.com/files/beer-science-history.htm
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History & Background
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Interesting Facts:
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Historians speculate that prehistoric nomads may have made
beer from grain & water before learning to make bread.
Most Expensive Beer in the World: “Tutankhamen” - US$52
Country with the most individual brands: Belgium with 400
Average American annually consumes 23.1 gallons of beer, more
than milk or juice.
Cenosillicaphobia is the fear of ….. an empty glass.
Source: http://www.beermachine.com/files/beer-trivia.htm
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Product
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Highly mature and standardized product
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Firms try to distinguish themselves by differentiation
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Quality, Innovation, and marketing
Highly segmented market
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Traditional Beers:
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Sub-premium
Premium
Malt liquor segments
Super premium*
Light*
Ice*
Dry*
Specialty Beers:
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Fastest growing segment (10-15% since 1990)
They are perceived as higher quality by consumers
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Product - Brewing process:
1.
2.
3.
4.
5.
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7.
8.
9.
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Milling
Mashing
Boiling
Cooling
Fermenting
Filtering
Conditioning
Pasteurizing
Packaging
Main
Ingredients:
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Malt
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Hops
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Yeast
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Rice
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Water
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Highly standardized and automated process.
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Industry
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Global market share of top 20 brewers is increasing
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Industry remains fragmented
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1990 – 51%
2000 – 65%
5 largest account for approx. 44% of total volume
Compare this to the cigarette industry - 5 largest, 60%
share
Home market dependence
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Industry
Current trends in the industry
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Consolidation led by major international brewers
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Volume growth in developing market
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Interbrew and Heineken
China, Eastern Europe, Russia
Big gets bigger
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Industry
Global Market Share 2004 (in volume)
InBev
13%
AnheuserBusch
10%
SABMiller
9%
others
56%
Carlsberg
5%
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Heineken
7%
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Industry
Development of the Top 10 brewers and the World Market
(in millions of hl)
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Industry
Global Beer Consumption
Share
Country
(2001)
US
16.4
China
14.3
Germany
7.3
Brazil
5.8
UK
4.1
Japan
3.6
Mexico
3.5
Russian Federation 3.1
Poland
1.7
France
1.5
Czech Republic
1.2
Per Capita
Consumption
(in liters)
83.1
15.8
123.1
46.7
97.1
40
48.6
30
60.5
35.9
158.1
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Modern US Beer industry:
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Oldest company date back to the 17th century
Industry dynamics traced back to the repeal of
prohibition in 1933.
Following the repeal of Prohibition, legislative changes
required the industry to be divided into 3 distinct parts:
1. Brewers
2. Wholesale Distributors
3. Retailers
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Modern US Beer industry:
Business model:
 High transportation cost to be offset by high
quality price premium as company seek to
differentiate themselves and reach larger
markets.
 Maturing industry highly concentrated as the
result of Mergers and acquisitions ( scale
economies in operation and marketing)
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Modern US Beer industry:
Share of Total Beverage Alcohol
Retail Dollar Sales
Share of Total Beverage Alcohol
Consumption
Spirits
5%
Wine
8%
Spirits
31%
Beer
54%
Wine
15%
Beer
87%
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US Market
During the 3rd Quarter (Volume)
% Change
Shipments
Market Share (%)
49.8
Anheuser-Busch +0.9
Miller
+4.0
Coors
-2.9
Pabst
-4.6
Imports
+4.0
Others
-0.7
Total
+1.1
18.3
10.4
4.0
11.4
6.1
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Chg
-0.1 Pts
+0.5
-0.4
-0.2
+0.3
-0.1 Pts
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Market Share by Brewer
60
Anheuser-Busch
50
40
30
SABMiller (excludes Foster’s, Pilsner Urquell & Presidente)
20
Pabst (includes Stroh, etc.)
10
200 4
200 3
200 2
200 1
200 0
199 9
199 8
19 97
19 96
19 95
19 94
19 93
19 92
19 91
19 90
19 89
19 88
1 987
1 986
1 985
Imports
1 984
0
Micros & Regionals
Coors (including Molson)
1 983
M a rk et S hare (Inc lu ding E x p orts ) %
US Market
Source: A-B Internal
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US Market
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US Market
Taxation:
•Highly regulated by
each state
•Beer Excise Tax (tax
for each barrel of beer
sold)
•Federal
($0.58/gallon)
•State
(average:
$0.25/gallon)
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Product Segments:
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Super Premium
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Sub
Premium
25.5%
Premium
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Imports, microbreweries,
specialty ( low carbs)
National brand, light beer
Super
Premium
18.2%
Sub Premium
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Malt Liquor, popular priced(
cheap)
Premium
56.3%
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2003 US Market
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Consumers & Trends
The Growth of Beer Consumption Slowed in 2003
U.S. All Beverages: Total Beverage Consumption (Gallon Basis)
0.7%
Soft Drinks
0.3%
Coffee
0.7%
Milk
-0.6%
Beer
10.5%
Bottled Water
0.5%
Tea
1.6%
Juices
Total Beverages Trend: +1.6%
-0.8%
Powdered Drinks
4.8%
Wine
3.6%
Distilled Spirits
-9.1%
Cider
CHANGE IN CONSUMPT ION 2003 v. 2002
Source: Adams Beverage Group 2004, Ranked on Volume (Gallons)
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Consumers & Trends
Beer Consumer Demographic Profile
Beer Consumers skew towards Male, Younger, Low to Moderate Educated,
Blue Collar, and Moderate Income Households.
One P e rs o n
F ull T im e
T wo P e rso ns
P a rt T im e
R e t ire d
T hree P e rso ns
N o t in La bo r F o rc e
F o ur P e rso ns
Total US
Beer Consumer
F ive P e rso ns
B lue C o lla r
S ix P e rs o ns +
Whit e C o lla r
G re y C o lla r
M ale s
N o t E m plo ye d
F e m ale s
Whit e s
2 1 - 2 4 yea rs
B la c k s
2 5 - 3 4 yea rs
H is pa nic
3 5 - 4 4 yea rs
O t he r
4 5 - 5 4 yea rs
S ingle
5 5 - 6 4 yea rs
M a rrie d
6 5 ye ars +
O t he r
G rade S c ho o l
Unde r $ 15 ,0 0 0
S om e H igh S c ho o l
$ 15 ,0 0 0 - $ 2 4 ,9 9 9
High S c ho o l Gra d.
$ 2 5 ,0 0 0 - $ 3 4 ,9 9 9
S o me C o lle ge
$ 3 5 ,0 0 0 - $ 4 9 ,9 9 9
C o lle ge Gra d.
$ 5 0 ,0 0 0 - $ 6 4 ,9 9 9
$ 6 5 ,0 0 0 +
0
20
40
60
80
100
0
20
40
60
80
100
Source: Anheuser-Busch, Inc. Eagle Eye, Beer Poll
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Consumers & Trends
The Number of Core Beer Consumers Is Expected to
Continue Growing, Generating Greater Category Sales
After Bottoming Out in the Late 1990’s, a Core Beer Consumer
Demographic Will Grow by 16% over the Next 6 Years
Age 21 - 27
Population (Millions)
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28
27
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Growth Rate:
+16%
25
24
23
'90 '9 1 '9 2 '9 3 '9 4 '9 5 '9 6 '97 '98 '99 '00 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6 '07 '08 '09 '10
Source: U.S. Census
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Consumers & Trends
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Health Conscious Consumers
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Changing Taste
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Rise of the low Carb diets, light beers
Looking for more sweet taste
Fads in the market:
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Cider, Wine cooler, microbreweries…
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Latest : “Malternatives” ___%growth
Non malt based alcoholic beverages (ie: coolers, hard
lemonade, spirit based and others)
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Consumers & Trends
(000 2.25 Gallon Cases)
Brand
Supplier
2000
2001
2002
Smirnoff Ice
Diageo
310
19,880
22,450
Mike's Hard Lemonade
Mike's Hard Beverage
6,800
11,000
11,500
Skyy Blue
SAB Miller/Skyy Spirits
--
--
7,000
Bacardi Silver
Anheuser-Busch/Bacardi
--
--
6,000
Zima
Coors Brewing
8,400
6,900
5,240
Tequiza
Anheuser-Busch
3,600
2,750
2,600
Doc Otis
Anheuser Busch
2,500
2,550
2,400
Hooper's Hooch
US Beverage
2,300
2,200
1,500
Two Dogs
Next Generation Mktg.
1,060
1,100
950
Rick's Spiked Lemonade
US Beverage
1,000
900
900
Vibe
Coors Brewing
--
--
690
Jed's Hard Lemonade
Matt Brewing
500
520
450
Source: Adams Handbook Advance 2003
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Global Expansions
Potential markets:
Growing middle class
 South America
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East Europe
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High Consumption
Concentrated market ( Brazil (65%) , Argentina (80%),
Switching from spirit
Asia ( China)
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China has the largest Beer consumption by volume
One of the world most competitive market
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Key Success Factors
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Low Cost Structure ( efficient Scale)
Effective Marketing & Advertising Strategy
Successful Brand loyalty
Product Innovation
Distribution
Global player
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Anheuser-Busch Companies Inc.
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Presentation Overview:
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Company Background
Management
Core Business
Business Strategy
Value Drivers
Financial Statements Analysis
Stock Price Performance
Recent News
Analyst Recommendation
My Recommendation
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Company
CompanyOverview
Overview
Company Overview:
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Established in 1864
St. Louis Based company
Currently control by 5th generation of Busch Family
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August A. Busch III – Chairman
August A. Busch IV – President of Anheuser Busch, Inc. (Domestic brewing)
Incorporated in 1979, is the holding company parent of AnheuserBusch
Parent corporation to a number of subsidiaries
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Principle business: Production/Distribution of beer, Packaging and Entertainment
Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)
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Management Team
Management Team :
Names
Age
Officer Since
Title
Busch III, August A.
66
1974
Chairman of the Board
Stokes, Patrick T
61
1981
President, Chief Executive Officer,
Director
Baker, W. Randolph
57
1982
Chief Financial Office, Vice President
Jacob, John E
69
1994
Executive Vice President – Global
Communication, Director
Kasen, Keith M.
60
2003
President and Chairman of the Board of
Busch Entertainment Corp.
Busch IV, August A.
39
2000
Vice President and Group Executive;
President of Anheuser-Busch, Inc.
Gonzales, Carlos F.
37
1994
Director; “Grupo Modello”
Forese, James J.
68
2003
Director; Americas Most Powerful People
Knight, Charles F.
68
1987
Director; Americas Most Powerful People
Source: http://yahoo.investor.reuters.com/Officers.aspx?ticker=BUD.N&target=executiveofficers%2flist
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Compensation package: Top 5 Executives
For Fiscal Year Ending 12/31/2003
Names
Total Annual
All Other
Compensation
Fiscal Year
Total
Options
Total
Exercised
Stokes,
Patrick T
$4.91 M
$0.15 M
$5.06 M
$46.21 M
$6.56 M
Busch III,
August A.
$2.14 M
$0.11 M
$2.24 M
$46.10 M
$6.41M
Busch IV,
August A.
$1.81 M
$0.07M
$1.88 M
$8.34 M
$1.32 M
Baker, W.
Randolph
$1.24 M
$0.06M
$1.30 M
$28.34 M
$2.26 M
Lambright,
Stephen K.
$1.18 M
$0.07M
$1.25 M
$13.66M
$2.87 M
Source: http://yahoo.investor.reuters.com/OfficersComp.aspx?ticker=BUD.N&target=executiveofficers%2fbasiccompensation
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Core Business Segment
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Segmented in 3 main areas:
 Production/Distribution of beer
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Packaging
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2nd Largest Brewer in the world (130 M barrel/year)
 New “King of Beer” is InBev (161M barrel/year), the result of the merger
between Belgium’s Intervew and Brazilian beer in late August
Has 49.6% of U.S. market and about 10% of global market
operating 14 breweries, 12 (in U.S.) and two overseas (UK and China)
2/3rds of volume delivered by wholesalers who only carry Anheuser-Busch (A-B)
one of the largest U.S. manufacturers of aluminum beverage containers and the
world's largest recycler of aluminum beverage containers.
Entertainment
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Formed in 1979, consists of nine distinctive park
Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)
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Subsidiaries & Satellites
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A-B Packaging: Recycling, Printing/ Packaging, Aluminum
Production
Busch Entertainment: Sea World, Busch Gardens
Busch Agricultural Resources Inc
Manufacturers Railway Company
50% Share in Grupo Modelo: Corona (93-98)
27% Share in Tsingtao: China’s largest brewer (13% of china
market)
29% Share in Harbin Beer Co: China regional brewer
(prevented SABMiller’s takeover bid)
20% Share in Cervecerias: Chile’s largest brewer *JUST SOLD*
Distribution partnerships: Labatt & Kirin (Japan)
Sources: Anheuser Busch Companies 2003 Annual Report
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Income contribution of each segment
For Fiscal Year Ending 12/31/2003
2%
4%
5%
Domestic Beer
International
Beer
Packaging
Entertainment
89%
Sources: Anheuser Busch Companies 2003 Annual Report
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Beer Products
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The company currently brews approximately 30 beers for sale in the
United States
World’s No.1 and No.2 brand: Budweiser & Bud Light
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Budweiser – about 3% of world market
Bud light has 19.5% of U.S. market
Other Brands:
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Budweiser Family: Bud Dry, Bud Ice, Bud Ice Light
Michelob Family: Michelob, Michelob Ultra, etc
Busch Family: Busch, Busch Light, etc
Specialty Beers: World Select, etc
Nonalcohol Brews: O’Doul’s, etc
Natural Family: Natural Light, etc
Malt Liquors: Hurricane, etc
Specialty Malt Beverags: Bacardi Silver Limon, etc
Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)
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Business Strategy
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Missions
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Be the world's beer company
Enrich and entertain a global audience
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Deliver superior returns to our shareholders
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Objectives / Strategies
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Increasing domestic beer segment volume and per barrel profitability
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Increasing international beer segment profit growth.
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Economies of Scale
Made significant marketing investments to build brand recognition outside the
United States and owns and operates breweries in China
Continued growth in profit and free cash flow in the packaging and
entertainment segments.
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Provide significant efficiencies, cost savings and quality assurance for
domestic beer operations
Sources: Anheuser Busch Companies 2003 Annual Report
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Value Drivers
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Home market dominance (49.6% market share)
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Twice as large as nearest competitors
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Economies of scale
Extensive exclusive distribution
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Brand recognition and Innovation
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2/3rds of volume delivered by wholesalers who only carry
Anheuser-Busch (A-B)
First to introduce low carb beers
Marketing and manufacturing efficiency
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Leverage 49.6% market share into 75% of markets operating
profit
Sources: Anheuser Busch Companies 2003 Annual Report
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Consolidated Balance Sheet
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Balance Sheet Analysis
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Invested $200 Million in Bonds & Loans with Tsingtao Brewery
in China
Net Increase to Debt $682.2 Million with US Dollar Notes and
Commercial Paper
11% Decrease in Shareholders Equity
2003
2002
2001
Industry
S&P 500
Quick Ratio
0.54
0.46
0.45
0.66
1.31
Current Ratio
0.96
0.8
0.9
1.37
1.80
Lt Debt / Equity
2.99
2.16
1.47
2.34
0.63
Return on
Assets
12.05%
13.7%
12.2%
10.83%
7.38%
ROE
72.0%
54.4%
41.6%
64.01%
20.05%
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Debt Analysis
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Consolidated Statement of Income
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Income Statement Analysis
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9% Increase in Revenues
7% Increase in COGS
18% Increase in Operating Income
22% Increase in Net Income
Advertising and promotional activities are a key component of A-B’s Strategy
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Advertising Costs were $806.7 Million
Promotional Costs were $511.8 Million
Dollar in millions except
per share
2003
2002
2001
Industry
S&P 500
Net Sales
$14,146.7
$13,566.8
$12,911.0
N/A
N/A
Net Income
$2,075.9
$1,933.8
$1,704.5
N/A
N/A
Earnings/Share (diluted)
$2.48
$2.20
$1.89
N/A
N/A
Dividend Yield
1.92
1.4
1.5
1.86
2.02
Annual Dividend
$0.83
$0.75
$0.69
N/A
N/A
Gross Margin
40.16%
40.1%
38.4%
39.84%
46.76%
Profit Margin
12.25%
14.3%
13.2%
11.08%
13.99%
Profitability Ratios
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Income Statement Analysis – cont.
REVENUE
Quarters
2001
2002
2003
2004
MAR
3,044,200
3,136,600
3,280,600
3,477,000
JUN
3,452,000
3,626,100
3,770,200
4,010,000
SEP
3,522,200
3,706,200
3,880,500
4,080,100
DEC
2,893,100
3,097,500
3,215,400
12,911,500
13,566,400
14,146,700
Totals
11,567,100
Note: Units in Thousands of U.S. Dollars
EARNINGS PER SHARE
Quarters
2001
2002
2003
2004
MAR
0.430
0.510
0.570
0.670
JUN
0.580
0.660
0.750
0.830
SEP
0.620
0.710
0.800
0.850
DEC
0.260
0.320
0.360
Totals
1.890
2.200
2.480
2.350
Note: Units in U.S. Dollars
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Consolidated Statement of Cash Flow
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Cash Flow Analysis
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1.82 Billion in Free Cash Flow
Acquired almost $2 Billion in Treasury Stock
Paid $652 Million in Debt
However, increased Debt by $1.4 Billion
Issued $685.4 Million in Dividends
Continue to acquire businesses and invest in packaging
and related operations
Future Cash may be directed towards China
Focus on share repurchase
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Impact of Stock Options on Net Income
Impact of Pension Plan
Reached 5 year agreement with Union
 Pension Increases of 14%
 $7.5 Million signing bonus
 Pension plans cover substantially all
regular employees
 Employee Stock Ownership Plan
(ESOP) deferred 45.4 million shares for
purchase

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Financial Analysis Summary
GROWTH RATES
1 Year
3 Years
5 Years
Sales %
4.28
4.21
4.70
EPS %
12.73
13.71
14.41
Dividend %
10.67
9.63
8.98
Financial Strength
Financial Strength
Company
Industry
Sector
S&P 500
Quick Ratio (MRQ)
0.54
0.66
0.68
1.31
Current Ratio (MRQ)
0.96
1.37
1.23
1.80
LT Debt to Equity (MRQ)
2.99
2.34
0.85
0.63
Total Debt to Equity (MRQ)
2.99
2.36
1.07
0.80
Interest Coverage (TTM)
8.02
8.81
19.33
12.81
Global Breweries
50
Financial Analysis Summary
Valuation Ratios
Profitability Ratios
Profitability Ratios (%)
Company
Industry
RATIO COMPARISON
Sector
S&P 500
Valuation Ratios
Gross Margin - 5 Yr. Avg.
EBITD - 5 Yr. Avg.
38.71
27.37
38.81
24.25
45.54
19.45
46.18
Company
Industry
Sector
S&P 500
P/E Ratio (TTM)
18.86
19.19
20.28
22.25
P/E High - Last 5 Yrs.
28.79
28.27
42.58
45.90
P/E Low - Last 5 Yrs.
20.97
18.63
18.24
16.40
Price to Sales (TTM)
2.82
2.48
2.45
3.26
Price to Book (MRQ)
14.59
11.51
7.45
4.16
Price to Tangible Book (MRQ)
25.25
22.91
16.14
7.56
Price to Cash Flow (TTM)
15.17
14.91
15.50
16.03
Price to Free Cash Flow (TTM)
35.14
32.17
35.75
26.26
20.38
Operating Margin - 5 Yr. Avg.
21.00
18.73
16.16
18.07
Pre-Tax Margin - 5 Yr. Avg.
18.41
16.40
15.07
17.10
Net Profit Margin - 5 Yr. Avg.
11.21
10.07
9.86
11.31
Effective Tax Rate - 5 Yr. Avg.
39.11
38.41
35.09
34.
Global Breweries
51
Stock Price Summary
As of 11/16/04 4:00 PM

Traded on NYSE




Symbol: BUD.N
790,067,968 units outstanding
Market Capitalization of $40.246 Billions US
Instit. Ownership $467.2 Million (58.3%)
Current
Price:
50.73
Change:
Open:
50.92
High:
51.09
Low:
50.70
Volume:
1,251,900
Yield:
1.90%
P/E
Ratio:
18.74
52 Week Range:
49.42 to 54.74
-0.21
Percent
Change:
-0.41%
Sources: Globeinvestor.com
Global Breweries
52
Stock Price Performance: One Year Chart
Sources: http://yahoo.investor.reuters.com
Global Breweries
53
Stock Price Performance Vs.
Dow Jones Industrial Avg.: One Year Chart
Sources: http://yahoo.investor.reuters.com
Global Breweries
54
Stock Price Performance Vs.
Dow Jones Industrial Avg.: Five Year Chart
Sources: http://yahoo.investor.reuters.com
Global Breweries
55
Valuation Model








Gordon’s Growth Model
 Good for stable companies
 Paying dividends that grow
Stock Price = Ex (Div/Share)
(k – g)
2001= 614.1 2002= 649.5 2003= 685.4
Ex (Div/Share) = 0.82
g = 6% over last 3 years
k = 0.075
Two valuations using expected dividends vs. indicated
dividends
Expected: $54.67
Actual: $50.73
Global Breweries
56
Recent News

Nov 12, 2004


Nov 9, 2004


The company sold its 20 percent stake in Chile's biggest brewer CCU for
$299 million in an auction on the Santiago Stock Exchange
The compnay expects 2004 profit to grow at a previously forecast rate of
10 percent to 11 percent, which would result in earnings per share of
$2.73 to $2.75, excluding a 1.5 cent gain from a commodity hedge.
Jun 3, 2004

Anheuser-Busch Companies Proceeds with Tender Offer for China's
Harbin Brewery; SABMiller Withdraws Bid
Sources: http://yahoo.investor.reuters.com
Global Breweries
57
Analyst Recommendations and Revisions
Consensus
Recommendation
Company Fiscal Year
End Month
Last
Updated
OUTPERFORM
December
15-Nov-04
Analyst Recommendations and Revisions
Current
1 Month
Ago
(1)BUY
3
4
5
5
(2)OUTPERFORM
3
4
5
6
(3)HOLD
11
9
8
6
(4)UNDERPERFORM
0
0
0
1
(5)SELL
0
0
0
0
No Opinion
0
0
0
0
2.47
2.29
2.17
2.17
1-5 Linear Scale
Mean Rating
2 Months
Ago
1 Year
Ago
Sources: http://yahoo.investor.reuters.com
Global Breweries
58
My recommendation

Analysis:









Sound Management
Favourable treatment of stockholders
Dominant Domestic Market Share
Distribution competitive advantage
Strong International growth potential
Dividend model value $54.67
Intense International competition
Slowing growth in the Domestic Market
Questionable International Investment
Global Breweries
59
My recommendation

Conclusion
Buy
Global Breweries
60
Heineken N.V.
“Respect, Enjoyment, Passion for quality.”
Global Breweries
61
Company Overview

History:





Originated in Amsterdam, Netherlands (Head Office)
1873: Heineken Breweries (HBM) is incorporated (Gerard Heineken is
appointed President)
1980s: Start global expansion
International brewing groups (over 170 countries with 61,000
employees.)
Facts:



The fourth largest market share in the world
The largest production in Europe
The second largest imported beer in US market
Global Breweries
62
Company Overview
Output of the largest breweries in Europe (million hl)
Brewery
2003
Heineken
73
Interbrew/Ambev
66
Carlsberg
56
S&N
49
SABMiller
33
Radeberger Gruppe
18
Coors
12
Anadolou Group
11
Mahou S.A.
10
Bitburger
9
Total
337
Total all breweries
500
The largest production in
Europe
Sources:
Brauwelt 2004/22 p. 645
Note:
the figures only include beer produced in Europe
Global Breweries
63
Company Overview
Leading Imported Beer Brands (000 2.25-Gallon Cases)
%
C
h
a
n
g
e
BRAND
SUPPLIER
COUNTRY
OF
ORIGI
N
Corona Extra
Barton/Gambrinus
Mexico
74,000
85,061
14.9%
Heineken
Heineken USA
Netherlands
54,000
58,000
7.4%
Labatt Blue
Labatt USA
Canada
14,106
15,269
8.2%
Tecate
Labatt USA
Mexico
11,024
12,026
9.1%
Guinness Stout
Guinness UDV
Ireland
10,035
10,690
6.5%
Foster's Lager
Miller Brewing
Canada
8,956
10,196
13.9%
Beck's
Beck's North America
Germany
7,938
8,135
2.5%
Amstel Light
Heineken USA
Netherlands
7,100
8,000
12.7%
Bass Ale
Guinness UDV
UK
7,338
7,690
4.8%
Modelo Especial
Barton/Gambrinus
Mexico
5250
6,656
26.8%
2000
2001p
TOTAL LEADING BRANDS
199,747
221,723
11.0%
OTHERS
77,603
79,427
2.3%
TOTAL IMPORTED BEER
277,350
301,150
8.6%
Global Breweries
The second largest
imported beer in
US market
64
Company Overview

Investment Snapshot:

Major Shareholder:

Heineken Holding NV (50.005% of Heineken NV)
Heineken Family (50.005% of Heineken Holding NV)




Traded in US OTC under symbol HINKY or HINKY.PK
Number of shares outstanding: 489,974,594
Average daily trade: 1.8 millions
Market capitalization: 15.73 billions
Global Breweries
65
Company Overview

Management:

Executive Board:





A. Ruys, Chairman (since 2000). Joined in 1993.
M.J. Bolland, Executive Board (since 2001). Joined in 1986.
J.F.M. van Boxmeer, Executive Board (since 2001). Joined in 1984.
D.R.H. Graafland, Executive Board (since 2002). Joined in 1981.
Supervisory Board:







J.M. de Jong, Chairman (since 2002)
M. Das, Supervisory Board and Chairman of Management Board (since 1994)
H. de Ruiter, Supervisory Board (since 1993)
M.R. de Carvalho, Supervisory Board (since 1996)
A.H.J. Risseeuw, Supervisory Board (since 2000)
J.M. Hessels, Supervisory Board (since 2001)
C.J.A. van Lede, Supervisory Board (since 2002)
Global Breweries
66
Operation

Product:


80% beer, 10% soft drinks, 3% spirits and wines.
International:



National and regional brands



Heineken (premium)
Amstel (main stream)
Tiger (China), Primus (Africa), Guinness (Africa), Kaiser (Brazil),
Murphy’s Irish (Europe), etc.
Limited in low-price segment
International and local include lagers, specialty beers, light
beers, and alcohol free beers
Global Breweries
67
Operation

Segmentation by region:

Europe:



Western: market leader in Netherlands, Spain, Italy, and Greece
Central and Eastern: 31% increase in sales due to the acquisition in 2003 of
BBAG
Americas:





United States: modest growth (Amstel Light)
Canada: 9% increase in sales as imported beer
South America: interest in CCU (Chile and Argentina), 20% interest in Kaiser
(Brazil)
Central America: alliance with FIFCO and 25% interest in Cervecaria (Costa
Rica)
Caribbean: has 5 breweries in the region
Global Breweries
68
Operation

Segmentation by region:

Africa/Middle East:





Amstel beer is brewed in some countries
Produce and market soft drinks
Heineken and Diageo together acquired a 28% stake in Namibia
Breweries
Consolidation with Al Ahram Beverages Company (Egypt)
Asia/Pacific:


Joint venture with Fraser & Neave (Singapore)
43.9% indirect interest in HAPBC (China market)
Global Breweries
69
Operation

Distribution:



Alliances with independent distributors
Has its own beverage wholesalers
Partnership and Acquisitions:


Gain market share in innovation, production, distribution and
marketing
2002/2003: Bravo International (Russia), Kaiser (Brazil), Al
Ahram (Egypt), Florida Bebidas (Costa Rica), Karlsberg
(Germany), CCU (Chile), NBL (Namibia)
Global Breweries
70
Operation

Partnership and Acquisitions:

Recent:







Combine operations with APB in China
Introduce “BeerTender” (drought beer system used at home) with
Krups
Joint venture with Lion Nathan (Australia)
Joint venture with Diageo and Namibia Breweries (South Africa)
Combine operations with FEMSA in US market
Acquire Sobol Beer, Shikhan and Volga Breweries (Rusia)
Acquire Furstenbergische Brauerei KG and Brewery Hoepfner
(Germany)
Global Breweries
71
Objectives

Company’s goal:




Remain one of the top global brewers
Being more profitable per hectolitre than other international
brewers
Building the most valuable brand portfolio, with Heineken as the
international flagship brand
Remain independent
Global Breweries
72
Business Strategy



Maintain strong local market position, a good sales mix and
an efficient cost structure by combining the sale and
distribution of the international Heineken premium brand with
that of strong local brands
Fulfill its corporate social responsibility
Segment Leadership:


Acquire and combine strong brands into a new, larger company
In the market that is already in the hands of other brewers,
promote the premium sector and specialty beers (e.g. US market)
Global Breweries
73
Key Success Factor




Strong brand name (internationally well-known)
Consolidation with strong local brands (gain market share and
distribution channel)
Low cost structure (through joint venture)
Innovation and new marketing strategy (new packaging)
Global Breweries
74
Financial Analysis

Financial Statements:



Balance Sheet
Income Statement
Cash Flow Statement
Global Breweries
75
Financial Analysis

Valuation Ratios
RATIO COMPARISON
Valuation Ratios
P/E Ratio (TTM)
Company
Industry
Sector
S&P 500
24.69
19.19
20.28
22.25
P/E High - Last 5 Yrs.
NA
28.27
42.58
45.90
P/E Low - Last 5 Yrs.
NA
18.63
18.24
16.40
Beta
0.11
0.04
0.22
1.00
Price to Sales (TTM)
1.28
2.48
2.45
3.26
Price to Book (MRQ)
3.78
11.51
7.45
4.16
Price to Tangible Book (MRQ)
8.21
22.91
16.14
7.56
Price to Cash Flow (TTM)
14.19
14.91
15.50
16.03
Price to Free Cash Flow (TTM)
15.75
32.17
35.75
26.26
0.66
55.92
54.14
63.55
% Owned Institutions
Global Breweries
76
Financial Analysis

Dividend (in US Dollar)
Dividends
Company
Industry
Sector
S&P 500
Dividend Yield
0.91
1.86
2.44
2.02
Dividend Yield - 5 Year Avg.
1.30
1.36
2.34
1.52
Dividend 5 Year Growth Rate
9.50
8.59
7.03
7.37
35.06
28.60
39.55
Payout Ratio (TTM)
Global Breweries
27.95
77
Financial Analysis

Growth Rates
Growth Rates(%)
Company
Industry
Sector
S&P 500
Sales (MRQ) vs Qtr. 1 Yr. Ago
11.26
6.32
8.27
16.43
Sales (TTM) vs TTM 1 Yr. Ago
12.05
7.45
10.90
15.01
8.09
6.90
5.26
9.50
EPS (MRQ) vs Qtr. 1 Yr. Ago
-26.72
20.76
9.35
17.42
EPS (TTM) vs TTM 1 Yr. Ago
-22.32
14.26
13.86
25.92
EPS - 5 Yr. Growth Rate
-2.16
14.16
12.20
12.64
Capital Spending - 5 Yr. Growth Rate
10.34
5.50
-1.09
4.38
Sales - 5 Yr. Growth Rate
Global Breweries
78
Financial Analysis

Financial Strength
Financial Strength
Company
Industry
Sector
S&P 500
Quick Ratio (MRQ)
0.72
0.66
0.68
1.31
Current Ratio (MRQ)
0.98
1.37
1.23
1.80
LT Debt to Equity (MRQ)
0.84
2.34
0.85
0.63
Total Debt to Equity (MRQ)
0.84
2.36
1.07
0.80
NM
8.81
19.33
12.81
Interest Coverage (TTM)
Global Breweries
79
Financial Analysis

Profitability Ratios
Profitability Ratios (%)
Company
Industry
Sector
S&P 500
Gross Margin (TTM)
40.89
39.84
45.25
46.76
Gross Margin - 5 Yr. Avg.
75.71
38.81
45.54
46.18
EBITD Margin (TTM)
20.41
25.51
19.59
21.56
EBITD - 5 Yr. Avg.
18.12
24.25
19.45
20.38
Operating Margin (TTM)
12.59
20.11
16.82
21.68
Operating Margin - 5 Yr. Avg.
12.70
18.73
16.16
18.07
Pre-Tax Margin (TTM)
11.31
17.86
16.08
18.06
Pre-Tax Margin - 5 Yr. Avg.
12.42
16.40
15.07
17.10
Net Profit Margin (TTM)
8.02
11.08
11.30
13.99
Net Profit Margin - 5 Yr. Avg.
8.75
10.07
9.86
11.31
Effective Tax Rate (TTM)
29.04
37.50
30.33
29.99
Effective Tax Rate - 5 Yr. Avg.
29.64
38.41
35.09
34.23
Global Breweries
80
Financial Analysis

Management Effectiveness
Management Effectiveness (%)
Return On Assets (TTM)
Company
Industry
Sector
S&P 500
7.33
10.83
11.23
7.38
Return On Assets - 5 Yr. Avg.
10.58
9.96
10.38
6.63
Return On Investment (TTM)
10.57
12.75
15.96
11.19
Return On Investment - 5 Yr. Avg.
15.20
11.88
15.33
10.70
Return On Equity (TTM)
15.95
64.01
34.27
20.05
Return On Equity - 5 Yr. Avg.
24.51
39.78
32.88
19.00
Global Breweries
81
Financial Analysis

Efficiency
Efficiency
Revenue/Employee (TTM)
Company
Industry
Sector
S&P 500
199,967
589,989
432,367
699,010
16,041
66,920
47,197
96,653
Receivable Turnover (TTM)
5.74
14.29
12.28
10.15
Inventory Turnover (TTM)
6.30
11.37
6.55
12.28
Asset Turnover (TTM)
0.91
0.98
1.08
0.95
Net Income/Employee (TTM)
Global Breweries
82
Stock Price Analysis






Symbol: HINKY
Price: 32.10 (Today)
52–week High: 47.36
52–week Low: 23.64
EPS: 1.303
P/E Ratio: 24.64
Global Breweries
83
Stock Price Analysis

5 years Performance
Global Breweries
84
Stock Price Analysis

1 Year Performance
Global Breweries
85
Valuation







Gordon model:
DPS/ (k-g)
DPS= 0.42
g= 5%
k= 0.5109
Value of stock = 38.53
Actual = 32.10
Global Breweries
86
Analyst Recommendation
Current
1 Month
Ago
2 Months
Ago
1 Year
Ago
(1)BUY
0
0
0
0
(2)OUTPERFORM
0
0
0
0
(3)HOLD
2
2
2
2
(4)UNDERPERFORM
0
0
0
0
(5)SELL
1
1
1
1
No Opinion
0
0
0
0
3.67
3.67
3.67
3.67
1-5 Linear Scale
Mean Rating
Global Breweries
87
Conclusion








Tight competition in global market (InBev and A-B)
US economy slowdown
Flat growth in total beer volume
Operating profit is decreased
Long-term debt is increased
Employment cost is increased
No new strategy to expand in Asia (the current fastest growth
market)
Recommendation: HOLD
Global Breweries
88
Global Breweries
89
Molson
Global Breweries
90
Molson: Company Overview






Founded in 1786 by John Molson who establish his first brewery in Montreal.
Incorporated in 1930
Became a public corporation in 1945: Molson's Brewery Limited
Canada's oldest consumer brand names
North America's oldest beer brand
Today:







Canada’s largest brewer
headquartered in Montreal
3,800 employees
Five breweries across Canada: Vancouver, Edmonton, Toronto, Montreal and St. John’s
Operations in Canada, Brazil, and the United States
Global gross sales of $3.5 billion
Traded on TSX : MOL.A-T & MOL.B-T
Global Breweries
91
Molson: Senior Management

Daniel J. O'Neill ( Joined Molson in 1999 as CEO)
President and Chief Executive Officer
(2004: Salary $983,333 bonus $ 1,008,167)

Brian Burden ( Joined Molson in 2003)
Executive Vice President and Chief Financial Officer
(2004: Salary $408,333 bonus $154,202)

Kevin T. Boyce ( Joined Molson in 2004)
President and Chief Operating Officer, North America

Robert Coallier( Joined Molson in 2000)
President and Chief Executive Officer, Cervejarias Kaiser & Executive VP, Molson Inc.
(2004: salary $ 459,375)

Raynald H. Doin ( Joined Molson in 1997)
Senior Vice-President Strategy and Integration, Human Resources
(2004: Salary $311,583 bonus $128,807)

Marie Giguère ( Joined Molson in 1999)
Senior Vice President, Chief Legal Officer and Secretary

Peter L. Amirault ( Joined Molson in 2002)
Senior Vice-President Business Development and Innovation

Les Hine ( Joined Molson in 2003)
Chief Marketing Officer
Global Breweries
92
Molson: Board of Directors
Composition of the Board
For fiscal 2005 the Board is composed of 9 Directors*:
5 unrelated independent Directors:
1. Dr. Francesco
Bellini,O.C.
2. John E. Cleghorn
3. Daniel W. Colson
4. David P. O’Brien
5. H. Sanford Riley
1 related Director:
6. Daniel J. O'Neill
President and Chief Executive Officer ( member of management)
3 Un-independent Directors:
7. Eric H. Molson ( Chairman)
8. Stephen T. Molson
(two shareholders of a corporation that owns 44.68% of the Molson's voting shares)
9. Luc Beauregard - CEO of National Public Relations servicing Molson
*in 2004 the Board Sharked by one-third
Global Breweries
93
Molson: Operations
Global Breweries
94
Molson: Operations
North America
Brazil
Global Breweries
95
Molson: Vision & Objectives
“Molson’s vision is to regain a position as one of the top performing
brewers in the world as measured by long-term shareholder value. To
realize this vision,Molson must deliver annual EBIT,volume andmarket
share targets in Canada,Brazil and the United States.”
the longer term objectives:
Global Breweries
96
Molson: Vision & Objectives 1) Growing Operating Profits:
by growing revenue and saving costs
Revenue Growth

EBIT (i) remained virtually
unchanged compared to
fiscal 2003 and did not reach
the stated EBIT growth target
of 14.5% as a result of lower
than expected volumes in
Canada and Brazil. Going
forward, the EBIT target is
double-digit growth.
Cost Saving
In Canada:
September 2003: announced
The target of $125 million in
cost savings for fiscal 2004
to 2006
At the end of fiscal 2004, $45
million of the objective was in
place
In Brazil:
cost savings program
exceeded expectations
in the first year targeting
R$200 million in cost savings
for the fiscal 2003 to 2005
period.
Two years into this program,
R$152 million in savings had
been implemented.
Global Breweries
97
Molson: Vision & Objectives 2) Grow Market Share
By building brand equity and innovating:
Canada
Total market share in Canada
decreased by 0.6% from 44.4% to 43.8%
Customers’ preference for core owned brands
(increase in share by 0.9%) lead to a
rebalancing in Molson’s brand portfolio in
favour of owned brands
Strengthen the CANADIAN brand in the
premium segment
Redesigned packaging : including new label
for bottles, New look for cans, Refreshed
outer case
Brazil
Market share decreased from 14.6% to 12.4%
The flagship brand, KAISER PILSEN, was reformulated and launched a
new advertising campaign
US
Market erosion of GOLDEN and MOLSON ICE
Molson used print, radio and outdoor advertising to win the young adult consumer
Use of Molson Twin Labels
Global Breweries
98
Molson: Vision & Objectives 3) Grow Volume
by developing markets and strengthening sales
Volume by Geographic Regions:
Molson volume over fiscal 2004 :
•Grew slightly in Canada
(by 0.7% while industry up 2%)
•Virtually flat in the United States
•Decreased substantially in Brazil.
(by 17.5% while industry drop by only 3.4%)
Global Breweries
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Molson: Vision & Objectives 4) Organizational Renewal
by leveraging and developing talent:
New structure of an integrated but decentralized sales force
connected to local markets.
Brazil: hiring of more than 1,200 experienced sales people in six
regional sales centres
Leadership Development and Succession Planning
Production Leadership Program
New program for development of talent in strategic marketing
function
Optimal Work Environment philosophy
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Molson: Vision & Objectives 5) Improve
Quality

Molson made great strides in fiscal 2004 toward the
achievement of best-in-class brewer status in all
performance measures.

Molson is evaluating investments in brewing
capabilities, improved maintenance practices,
additional line upgrades, reduced utilities
consumption, and, as always, improved quality and
a safer workplace.
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Molson: Financial

Income statement
P/E
Price to Sales
Price to Book
Dividend Per Share
Book Value Per Share
Revenue Per Share

17.99
1.22
3.50
0.56
9.57
27.34
Balance Sheet
Quick Ratio
0.25
Current Ratio
0.42
Debt to Equity
0.65
Return on Equity (ROE)
25.1%
Return on Assets (ROA)
6.03%
Return on Invested Capital (ROIC) 10.7%

Cash Flow statement
Operating Activities
Investing Activities
Financing Activities
Net
216.4
(73.1)
(125.8)
21.2
Greatest expenditure :Operating Activities
Investing Activities, Molson has been investing
in newer equipment
Financing Activities, repayment of long term debt
was greater than refinancing
Latest quarter
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Molson : In the News

November 8, 2004
Molson to Build New $35 Million Brewery in New Brunswick
Cost of $35 million
Located in Moncton, New Brunswick
Completed by January 2007
Capacity of 6 million 12 packs annually
Implementation of distribution system
$3.5 million forgivable loan
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Molson : In the News
Molson and Coors Announce Merger of Equals to Create “World's
Fifth Largest Brewer“
Merger of equals unlocks three phases of value creation:
• Phase 1 – Estimated US$175M in potential synergies leading to nearterm value creation for shareholders:
– Cost savings primarily through procurement and network optimizat ion
– Expected to be accretive to earnings in year 1 for shareholders
– 50% of synergy capture within 18 months
Volume (M hl)
215
InterbrewAmBev
A-B
152
SABMiller
• Phase 2 – Funding generated by synergies to allow for additional
support in key markets on critical brands to grow revenue
• Phase 3 – Operating and financial scale to become a consolidator:
– ‘Top 5’ by volume with 60M hl
– Strong cash flow and balance sheet to support future plans
116
Heineken
109
60
Molson Coors
Carlsberg (1)
Scottish &
Newcastle
54
50
Grupo Modelo
• Creates top-5 brewer with the operational scale to succeed in the global
brewing industry
–
Strong market positions in some of the world’s largest beer markets
–
Broader geographic base provides diversified sources of revenue, profit and cash
126 years of consumer industry experience
–
Proven integration skills
• Natural strategic and cultural fit
–
Complementary product lines and operational geography
–
Existing strong working relationships
–
Common values, operating philosophies and heritages
39
Coors
36
Asahi
• Experienced management team to ensure smooth integration and
capitalize on growth opportunities
–
42
Tsingtao
33
FEMSA
25
Kirin
23
21
Molson
Foster’s
17
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Molson : In the News
Transaction Summary:
Company Name
 Molson Coors Brewing Company
Transaction Overview
 Combination of Molson and Coors through a merger-of-equals
transaction
Consideration
 Stock-for-stock exchange (tax-free to holders of Molson in Canada and
to holders of Coors in US)
Exchange Ratio
 .360 Coors voting/non-voting shares per Molson voting/non-voting share
Shareholder Support
 Both families agree to vote in favor of transaction
Expected Closing
 Fall 2004
Required Approvals
 Recommended unanimously by Molson and Coors Board of Directors
 Subject to approval by 2/3 of each class of Molson shareholders and by
a majority of each class of Coors shareholders
 Subject to regulatory approvals
Stock Listings
 Listing of Molson Coors A and B shares on NYSE; listing of
exchangeable A and B shares on TSX
Dividend Policy
 Company to adopt current Molson dividend policy currently US$0.44 per
Molson share, or US$1.21 per Molson Coors share
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Molson : In the News
Nov 5th:
Molson and Coors Announce Agreement to Pay Special Dividend to Molson
Shareholders Molson to Build New $35 Million Brewery in New Brunswick
As part of Molson and Coors merger Pentland ( owned by will forego special
dividend As a result, dividend will be $3.26 rather than $3.00
Both Molson Class A non-voting and Class B common shareholders, excluding
Pentland, will receive C$ 3.26 per share, or a total of approximately C$ 381
million (US$ 316 million), payable as part of the plan of arrangement to Molson
shareholders of record as of the last trading day immediately prior to the date of
closing of the merger transaction.
Assuming these approvals, and approval by the Quebec Superior Court, the
companies expect to close the transaction later this year or early next year.
Molson Inc. Coors shareholders of record at the close of business on Monday,
November 22, 2004, will be entitled to notice of the special meeting and to vote
on the proposal. The date of the special meeting has not been set.
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Molson: Stock Price
A – Non-Voting
Molson MOL.A-T
Last:
C$ 34.050
Public
100%
Public
100%
106.9M shares
Last Trade:Nov 17, 2004 16:20 EST
Net Change:
C$ 0.450
Open
High
Low
Volume
52-Week High
33.500
34.350
33.500
1,042,800
36.800
52-Week Low 28.500
% Change:
1.34%
Bid
Ask
EPS
P/E
Indicated
Annual Div.
Yield
34.050
34.100
0.28
121.60
0.60
1.79
Market Capitalization of approximately $4121 million
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Molson : Stock Price
B – Voting
Molson MOL.B-T
Last Trade:Nov 17, 2004 12:46 EST
Last: C$ 34.230 Net Change: C$ 0.530 % Change: 1.57%
Molson
Family
55%
Public
Public
45%
45%
Open
High
Low
Volume
52-Week High
34.230
34.230
34.230
500
36.780
52-Week Low 28.950
Bid
Ask
EPS
P/E
Indicated
Annual Div.
Yield
33.800
34.490
0.28
122.20
0.60
1.78
22.4M shares
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Molson : Shareholder Return
Molson Shareholder Return Since April 2001
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Molson : Recommendation
Analyst Recommendation:
Current Recommendation
7 Days 30 Days 60 Days
Company Symbol
# of Ago Mean Ago Mean Ago Mean
Consensus Mean Industry
Brokers
Molson MOL.A-T Hold
3.5
2.7
13
3.5
3.4
3.2
Our Recommendation:
Hold :
Wait for more info on Brazil
Too early to tell the benefits of merger
* Dividend capture opportunity
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