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Global Breweries Fundamental Analysis and Recommendations

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1 Global Breweries Fundamental Analysis and Recommendations
Cyrus Cheung Ervinna Jeff November 17, 2004

2 Overview of Presentation
Industry Overview History & Background Product Industry Consumers Growth Area Key Success Factors Company Analysis and Recommendations: Anheuser-Busch : Cyrus Cheung Heineken : Erivnna Molson : Jeff

3 Industry Overview

4 History & Background Ancient History:
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. 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:

5 History & Background Renascence History:
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:

6 History & Background Modern History:
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 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:

7 History & Background Interesting Facts:
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:

8 Product Highly mature and standardized product Highly segmented market
Firms try to distinguish themselves by differentiation Quality, Innovation, and marketing Highly segmented market Traditional Beers: Sub-premium Premium Malt liquor segments Super premium* Light* Ice* Dry* Specialty Beers: Fastest growing segment (10-15% since 1990) They are perceived as higher quality by consumers They are the result of high price competition during the 1970s and 1980s. They are priced high and their purpose is to reclaim some of the revenue lost during the “price wars”.

9 Product - Brewing process:
Milling Mashing Boiling Cooling Fermenting Filtering Conditioning Pasteurizing Packaging Main Ingredients: Malt Hops Yeast Rice Water Malted barley is cracked in the Roll Mill turning into grist and then stored in the grist case. The grist drops into the mash lauter tun and mixes with hot water provided by the hot liquor tank producing a sugary liquid called wort. The wort travels to the brew kettle where it's heated to a rolling boil. Hops are added to provide bitterness, flavor, and aroma. The hopped wort passes through the heat exchanger cooling to the right temperature for fermentation. The now chilled, hopped wort meets up with the yeast in the fermenter to begin the fermentation process. Once completed, the liquid referred to as wort is now called beer. The beer enters a filter designed to help remove yeast and haze producing compounds. PASTEURISATION: This is a process of heating and rapid cooling which prolongs shelf-life and destroys any bacteria or other organisms in the beer. The finished beer exits the filter and enters the serving tank ready to be dispensed. Highly standardized and automated process.

10 Industry Global market share of top 20 brewers is increasing
1990 – 51% 2000 – 65% Industry remains fragmented 5 largest account for approx. 44% of total volume Compare this to the cigarette industry - 5 largest, 60% share Home market dependence

11 Industry Current trends in the industry
Consolidation led by major international brewers Interbrew and Heineken Volume growth in developing market China, Eastern Europe, Russia Big gets bigger

12 Industry

13 Industry Development of the Top 10 brewers and the World Market
(in millions of hl)

14 Industry Global Beer Consumption

15 Modern US Beer industry:
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: Brewers Wholesale Distributors Retailers

16 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)

17 Modern US Beer industry:
Share of Total Beverage Alcohol Retail Dollar Sales Share of Total Beverage Alcohol Consumption

18 US Market During the 3rd Quarter (Volume)

19 US Market

20 US Market

21 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)

22 Product Segments: Super Premium Premium Sub Premium
Imports, microbreweries, specialty ( low carbs) Premium National brand, light beer Sub Premium Malt Liquor, popular priced( cheap) 2003 US Market

23 Consumers & Trends

24 Consumers & Trends

25 Consumers & Trends

26 Consumers & Trends Health Conscious Consumers Changing Taste
Rise of the low Carb diets, light beers Changing Taste Looking for more sweet taste Fads in the market: Cider, Wine cooler, microbreweries… Latest : “Malternatives” ___%growth Non malt based alcoholic beverages (ie: coolers, hard lemonade, spirit based and others)

27 Consumers & Trends

28 Global Expansions Potential markets: Growing middle class
South America High Consumption Concentrated market ( Brazil (65%) , Argentina (80%), East Europe Switching from spirit Asia ( China) China has the largest Beer consumption by volume One of the world most competitive market

29 Key Success Factors Low Cost Structure ( efficient Scale)
Effective Marketing & Advertising Strategy Successful Brand loyalty Product Innovation Distribution Global player

30 Anheuser-Busch Companies Inc.

31 Presentation Overview:
Company Background Management Core Business Business Strategy Value Drivers Financial Statements Analysis Stock Price Performance Recent News Analyst Recommendation My Recommendation

32 Company Overview Company Overview
Established in 1864 St. Louis Based company Currently control by 5th generation of Busch Family 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 Anheuser-Busch Parent corporation to a number of subsidiaries Principle business: Production/Distribution of beer, Packaging and Entertainment Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)

33 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 Director; “Grupo Modello” Forese, James J. 68 Director; Americas Most Powerful People Knight, Charles F. 1987 Mr. Knight, 68, has been a director since He has been Chairman of the Board of Emerson Electric Co., a manufacturer of electrical and electronic equipment, since He also served as Chief Executive Officer of Emerson Electric from 1973 to October He is also a director of BP p.l.c., International Business Machines Corporation, Morgan Stanley, and SBC Communications Inc. Mr. Forese, 68, has been a director since April He has been Operating Partner and Chief Operating Officer of Thayer Capital Partners, a private equity investment firm, since July He was Chairman of the Board of IKON Office Solutions, Inc. ("IKON") from 2000 until his retirement in February He was President and Chief Executive Officer of IKON from 1998 to 2002, Executive Vice President and President of International Operations of IKON from 1997 to 1998, and Executive Vice President and Chief Operating Officer of IKON from 1996 to Prior to joining IKON, he spent 36 years with IBM Corporation ("IBM") in numerous executive positions, including two years as Chairman and Chief Executive Officer of IBM Credit Corporation, three years as Vice President--Finance of IBM, and six years as Vice President and Controller of IBM. He is also a director of American Management Systems, Inc., NUI Corporation, and Spherion Corporation. Source:

34 Compensation package: Top 5 Executives For Fiscal Year Ending 12/31/2003
Names Total Annual Compensation All Other 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 $1.25 M $13.66M $2.87 M All promoted from within. Average of 10 to 20 years with A-B. Long term outlook for company performance. Source:

35 Core Business Segment Production/Distribution of beer Packaging
Segmented in 3 main areas: Production/Distribution of beer 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) Packaging one of the largest U.S. manufacturers of aluminum beverage containers and the world's largest recycler of aluminum beverage containers. Entertainment Formed in 1979, consists of nine distinctive park Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)

36 Subsidiaries & Satellites
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

37 Income contribution of each segment For Fiscal Year Ending 12/31/2003
Sources: Anheuser Busch Companies 2003 Annual Report

38 Beer Products The company currently brews approximately 30 beers for sale in the United States World’s No.1 and No.2 brand: Budweiser & Bud Light Budweiser – about 3% of world market Bud light has 19.5% of U.S. market Other Brands: 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)

39 Business Strategy Missions Objectives / Strategies
Be the world's beer company Enrich and entertain a global audience Deliver superior returns to our shareholders Objectives / Strategies Increasing domestic beer segment volume and per barrel profitability Economies of Scale Increasing international beer segment profit growth. 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. Provide significant efficiencies, cost savings and quality assurance for domestic beer operations Sources: Anheuser Busch Companies 2003 Annual Report

40 Value Drivers Home market dominance (49.6% market share)
Twice as large as nearest competitors Economies of scale Extensive exclusive distribution 2/3rds of volume delivered by wholesalers who only carry Anheuser-Busch (A-B) Brand recognition and Innovation First to introduce low carb beers Marketing and manufacturing efficiency Leverage 49.6% market share into 75% of markets operating profit Sources: Anheuser Busch Companies 2003 Annual Report

41 Consolidated Balance Sheet

42 Balance Sheet Analysis
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%

43 Debt Analysis

44 Consolidated Statement of Income

45 Income Statement Analysis
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 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 Net Income $2,075.9 $1,933.8 $1,704.5 Earnings/Share (diluted) $2.48 $2.20 $1.89 Dividend Yield 1.92 1.4 1.5 1.86 2.02 Annual Dividend $0.83 $0.75 $0.69 Profitability Ratios Gross Margin 40.16% 40.1% 38.4% 39.84% 46.76% Profit Margin 12.25% 14.3% 13.2% 11.08% 13.99%

46 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 Totals 12,911,500 13,566,400 14,146,700 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

47 Consolidated Statement of Cash Flow

48 Cash Flow Analysis 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

49 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

50 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) 2.36 1.07 0.80 Interest Coverage (TTM) 8.02 8.81 19.33 12.81

51 Financial Analysis Summary
Valuation Ratios Profitability Ratios RATIO COMPARISON Valuation Ratios 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 Profitability Ratios (%) Company Industry Sector S&P 500 Gross Margin - 5 Yr. Avg. 38.71 38.81 45.54 46.18 EBITD - 5 Yr. Avg. 27.37 24.25 19.45 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.

52 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 $ Billions US Instit. Ownership $467.2 Million (58.3%) Current Price: 50.73 Change: -0.21 Open:   50.92 High:   51.09 Low:   50.70 Volume:   1,251,900 Percent Change:  -0.41% Yield:   1.90% P/E Ratio:   18.74 52 Week Range:   49.42 to 54.74 Sources:

53 Stock Price Performance: One Year Chart

54 Stock Price Performance Vs. Dow Jones Industrial Avg.: One Year Chart

55 Stock Price Performance Vs. Dow Jones Industrial Avg.: Five Year Chart

56 Valuation Model Gordon’s Growth Model Good for stable companies
Paying dividends that grow Stock Price = Ex (Div/Share) (k – g) 2001= = = 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: $ Actual: $50.73

57 Recent News Nov 12, 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 Nov 9, 2004 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:

58 Analyst Recommendations and Revisions
Consensus Recommendation Company Fiscal Year End Month Last Updated OUTPERFORM December 15-Nov-04 Analyst Recommendations and Revisions 1-5 Linear Scale Current 1 Month Ago 2 Months Ago 1 Year Ago (1)BUY 3 4 5 (2)OUTPERFORM 6 (3)HOLD 11 9 8 (4)UNDERPERFORM 1 (5)SELL No Opinion Mean Rating 2.47 2.29 2.17 Sources:

59 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

60 My recommendation Conclusion Buy

61 “Respect, Enjoyment, Passion for quality.”
Heineken N.V. “Respect, Enjoyment, Passion for quality.”

62 Company Overview History: Facts:
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

63 Company Overview The largest production in Europe
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 Sources: Brauwelt 2004/22 p Note: the figures only include beer produced in Europe The largest production in Europe

64 Company Overview The second largest imported beer in US market
Leading Imported Beer Brands ( Gallon Cases) BRAND SUPPLIER COUNTRY OF ORIGIN 2000 2001p % Change 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 11,024 12,026 9.1% Guinness Stout Guinness UDV Ireland 10,035 10,690 6.5% Foster's Lager Miller Brewing 8,956 10,196 13.9% Beck's Beck's North America Germany 7,938 8,135 2.5% Amstel Light 7,100 8,000 12.7% Bass Ale UK 7,338 7,690 4.8% Modelo Especial 5250 6,656 26.8% 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% The second largest imported beer in US market

65 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: billions

66 Company Overview Management: Executive Board: Supervisory 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)

67 Operation Product: 80% beer, 10% soft drinks, 3% spirits and wines.
International: Heineken (premium) Amstel (main stream) National and regional brands 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

68 Operation Segmentation by region: Europe: Americas:
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

69 Operation Segmentation by region: Africa/Middle East: Asia/Pacific:
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)

70 Operation Distribution: Partnership and Acquisitions:
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)

71 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)

72 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

73 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)

74 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)

75 Financial Analysis Financial Statements: Balance Sheet
Income Statement Cash Flow Statement

76 Financial Analysis Valuation Ratios RATIO COMPARISON Valuation Ratios
Company Industry Sector S&P 500 P/E Ratio (TTM) 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. 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 % Owned Institutions 0.66 55.92 54.14 63.55

77 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 Payout Ratio (TTM) 35.06 28.60 39.55 27.95

78 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 Sales - 5 Yr. Growth Rate 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

79 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) 2.36 1.07 0.80 Interest Coverage (TTM) NM 8.81 19.33 12.81

80 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 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

81 Financial Analysis Management Effectiveness
Company Industry Sector S&P 500 Return On Assets (TTM) 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

82 Financial Analysis Efficiency Efficiency Company Industry Sector
S&P 500 Revenue/Employee (TTM) 199,967 589,989 432,367 699,010 Net Income/Employee (TTM) 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 Asset Turnover (TTM) 0.91 0.98 1.08 0.95

83 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

84 Stock Price Analysis 5 years Performance

85 Stock Price Analysis 1 Year Performance

86 Valuation Gordon model: DPS/ (k-g) DPS= 0.42 g= 5% k= 0.5109
Value of stock = 38.53 Actual = 32.10

87 Analyst Recommendation
1-5 Linear Scale Current 1 Month Ago 2 Months Ago 1 Year Ago (1)BUY (2)OUTPERFORM (3)HOLD 2 (4)UNDERPERFORM (5)SELL 1 No Opinion Mean Rating 3.67

88 Conclusion Recommendation: HOLD
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


90 Molson

91 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

92 Molson: Senior Management
Daniel J. O'Neill ( Joined Molson in as CEO) President and Chief Executive Officer (2004: Salary $983, 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

93 Molson: Board of Directors

94 Molson: Operations

95 Molson: Operations North America Brazil

96 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:

97 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.

98 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

99 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%)

100 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

101 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.

102 Molson: Financial Income statement Cash Flow statement Balance Sheet
P/E Price to Sales Price to Book Dividend Per Share Book Value Per Share Revenue Per Share Cash Flow statement Operating Activities Investing Activities (73.1) Financing Activities (125.8) Net Greatest expenditure :Operating Activities Investing Activities, Molson has been investing in newer equipment Financing Activities, repayment of long term debt was greater than refinancing Balance Sheet Quick Ratio Current Ratio Debt to Equity Return on Equity (ROE) % Return on Assets (ROA) % Return on Invested Capital (ROIC) 10.7% Latest quarter

103 Molson : In the News November 8, 2004 Cost of $35 million
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

104 Molson : In the News Molson and Coors Announce Merger of Equals to Create “World's Fifth Largest Brewer“

105 Molson : In the News Transaction Summary:

106 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.

107 Molson: Stock Price A – Non-Voting 106.9M shares
Public 100% 106.9M shares Market Capitalization of approximately $4121 million

108 Molson : Stock Price B – Voting Public 45% 22.4M shares

109 Molson : Shareholder Return
Molson Shareholder Return Since April 2001

110 Molson : Recommendation
Analyst Recommendation: Our Recommendation: Hold : Wait for more info on Brazil Too early to tell the benefits of merger * Dividend capture opportunity

111 The End

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