417 gbrewer 051

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Published on April 24, 2008

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Slide1:  Advertisement: Molson Presented by::  Presented by: Simon Wisniewski Kirsty Au Michelle Ho Adam Chamberlain Overview of Presentation:  Overview of Presentation Industry Overview History & Background Global Industry Overview U.S. Industry Overview Porter’s Forces and Key Success Factors Company Analysis and Recommendations Ancient History:  Ancient History 4300 BC, Babylonian clay tablets detail recipes for beer. 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. Renascence History:  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. 1602 Dr. Alexander Nowell discovers that ale can be stored longer in cork sealed, glass bottles. 1612 the first commercial brewery opened in New Amsterdam (NYC, Manhattan). 1674 Harvard College has its own brew-house. 1680 William Penn (founder of Pennsylvania) operated a commercial brewery. 1786 Molson brewery is founded in what is today Canada. 1789 James Madison proposes that Congress levy a low 8-cent duty per barrel on malt liquors to encourage "the manufacture of beer in every State in the Union." Modern History:  Modern History Before the 1800's most beer was really "Ale." 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. 1870's Adolphus Busch pioneers the use of double-walled railcars, a network of icehouses to make Budweiser the first national brand. 1880 there are approximately 2,300 breweries in the US. 1890s Pabst is the first US brewer to sell over 1 million barrels in a year. Modern History:  Modern History 1914 commercial competition drives the number of operating breweries down to 1,400. 1920 Prohibition Starts for beer, even though some regions started as early as 1846, e.g. Maine. Prohibition focused more on whiskey and other distilled products. 1933 Prohibition ends for beer (April 7). 1935 only 160 breweries survive Prohibition. 1935 the beer can is introduced (American Can Co. & Kreuger Brewing). 1966 Budweiser is the first brand to sell 10 million barrels in a year. 1991 the US produces 20% of the world beer volume (world's largest). 1993 US retail beer sales exceed $45 Billion. Source: http://www.beerhistory.com/library/holdings/raley_timetable.shtml What is Beer:  What is Beer Beer is used as a generic term and includes both lager and ale. Lager is lighter in taste and is made with a type of yeast that drops to the bottom of the fermenting tank. More hops are used to brew ale and the yeast rises to the top of the tank. Less than 1% of the market is sold as stout or porter. More than 78% of all beer sold in Canada is in returnable and reusable bottles. 97 out of every 100 of those bottles come back for cleaning and refilling. A bottle can be reused 15 to 20 times, preventing enormous wastage. Aluminum beer cans (which account for 15% of all sales) are also crushed and recycled, as are the beer cartons. Draught beer is sold in reusable kegs that can last 15 to 20 years before they too are also crushed and recycled. Source: http://www.thecanadianencyclopedia.com/PrinterFriendly.cfm?ArticleId=A0000980 Brewing Process:  Brewing Process Malted barley is weighted, cleaned and passed through a mill which crushes the grain. The crushed malt, called grist, is mixed with hot water in a mash tank. It is then boiled at a temperature which allows the malt to starch and convert to fermentable sugars called wort. From the whirlpool, the wort is passed through a cooler where it is cooled and the pure yeast culture is added. During the fermentation the yeast converts the fermentable sugars in the wort into alcohol and carbon dioxide gas. Once completed, the liquid referred to as wort is now called beer. Following a prescribed maturation period, carbon dioxide gas is added and the beer is passed through a complex filtration system to remove surplus yeast and protein matarial. The beer is trasferred to holding tanks prior to packaging. The finished beer exits the filter and enters the serving tank ready to be dispensed. Source: http://www.fosters.com.au/beer/brewing/brewing_process.asp Slide10:  Beer is a Mature Product. Firms try to distinguish themselves by differentiation Quality, Innovation, and marketing It is the largest seller in the alcohol drinks sector. Consumer base: heavily male dominated. Although globalization is a general trend in many industries, the brewing industry has long been lagging behind and has remained very fragmented. 5 largest account for approx. 44% of total volume Compare this to the cigarette industry - 5 largest, 60% share Sales are seasonal and related to: Weather (summer months) Holidays: Christmas and the 4th of July in the US Global Industry Overview Current Global Trends:  Current Global Trends In the decade between 1988 and 1998 the 10 largest brewers hardly arose from 35.8% to 37.6%. Over the last five years this development has accelerated strongly, the 10 largest increased by nearly 20% and have now 57% of the global market. Consolidation led by major international brewers During recent years brewers like Heineken and Interbrew have started internationalizing their activities. Coors and Molson have merged within last couple of months. Volume growth in developing markets China: Second largest market (by sales) and growing. Largest market in total volume. Eastern Europe and Russia Global Market Share 2004:  Global Market Share 2004 Global Beers:  Global Beers Anheuser-Busch Budweiser, Bud Light, Bud Dry, Bud Ice, Michelob, Anheuser World Select, Bare Knuckle Stout, ZiegenLight, Busch, Natural Light , Various others SABMiller Miller Genuine Draft, Miller High Life, Milwaukee's Best, Nastro Azzurro, Pilsner Urquell, Carling Black Label, Tyskie Gronie, Castle Lager, Various others Interbrew (Inbev) Brahma, Beck’s, Stella Artois, Hoegaarden, Leffe, Bass, Staropramen, Various others Heineken Heineken, Amstel, Licenses others Carlsberg Carlsberg, Carlsberg Special Brew, Carlsberg Export, Tuborg, Okocim, Various others Ambev Skol, Brahma, Antarctica, Bohemia, Kronenbier, Caracu, Licenses others Scottish & Newcastle John Smith’s, Foster’s, Kronenbourg 1664, MGD, Beck’s, Baltika, Grimbergen, Brugs, Various Others Grupo Modelo Corona Extra, Corona Light, Modelo Especial, Victoria, Negra Modelo, Pacífico, Estrella, León, Montejo Molson Coors Molson Canadian, Molson Ultra, A Marca Bavaria, Pilsner, Molson Export, Carling, Molson Dry, Carling Black Label, Rickard's Red, Bohemian, Tornade, Kaiser, Various others Coors, Coors Light, Aspen Edge, Killian’s, Blue Moon, Keystone, Keystone Ice, Keystone Light, Extra Gold Kirin Kirin Light, Kirisn Ichiban, Various Others Sleeman Cream Ale, Honey Brown, Silver Creek, Clear, Original Dark, Premium Light, Steam, Amber, Various regional brands, Licenses others Many other producers and microbreweries Global Beer Consumption:  Global Beer Consumption Internationalization Matrix:  Internationalization Matrix “Degree of Internationalization” is evaluated by weighing the world market share with the respective ratio of foreign sales to total sales. “Potential of Internationalization” is described by weighing the free cash flow with the number of subsidiaries supported by the respective brewing group. The size of the circles corresponds to the respective group volume in hectoliters. Canadian Industry Overview 2003:  Canadian Industry Overview 2003 Total Beer Sales (in HL) Canadian Industry Overview 2003:  Canadian Industry Overview 2003 Source: http://www.brewers.ca/EN/statistics/asbpages.htm Canadian Industry Overview 2003:  Canadian Industry Overview 2003 Adult is considered to 15 years old and over, Legal Drinking age is 19 years old across Canada except in Quebec, Manitoba, Alberta where it’s 18 years old. U.S. Industry Overview 2004:  U.S. Industry Overview 2004 Source: http://www.myaccountoverview.com/scripts/MarketOverview.aspx U.S. Industry Overview 2004:  U.S. Industry Overview 2004 Source: http://www.myaccountoverview.com/scripts/MarketOverview.aspx U.S. Industry Overview 2004:  U.S. Industry Overview 2004 Source: http://www.myaccountoverview.com/scripts/MarketOverview.aspx U.S. Industry Overview 2004:  U.S. Industry Overview 2004 Source: http://www.myaccountoverview.com/scripts/MarketOverview.aspx U.S. Market Characteristics:  U.S. Market Characteristics 3 basic levels of brewing according to annual production: High-volume (shipments of over 15 million barrels) They account for around 80% of total production. All of them are owned by the 3 largest brewing companies in the US (Anheuser-Busch Inc., Miller Brewing Co., and Adolph Coors Co.). Regional (15,000 – 15 million barrels) They account for 15% of total production. Usually focused on local distribution. Many micro-breweries have grown into this category in the last 5 years. Largest regional breweries are Stroh Brewery Co., Pabst Brewing Co., Genessee Brewing Co. Small Breweries (less than 15,000 barrels) They account for 5% or less of total production. Microbreweries and brewpubs (also restaurant-breweries or “craft brewers”). Source: http://www.beer-brewing.com/US_beer_market.htm U.S. Market Segments:  U.S. Market Segments The market for beer in the U.S. consists of 3 segments: domestic beers, imports, and specialty beers Domestic Beers Sub-premium Premium Super premium Malt liquor segments Light* Ice* Dry* *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”. U.S. Market Segments:  U.S. Market Segments Import Beers Rivalry from imports has never been a big factor in the beer industry. They’re growing steadily (around 5-8% since 1990s). Reasons for growth: Expanding economy. Consumer interest in ‘higher-quality’ (higher-priced) beer. From 1995 through 1997 the growth of the Hispanic community in the US drove the import category . Most importantly, corporate partnerships/ownerships of foreign breweries that allow foreign brands to access the local distribution networks. Since 1995 the No. 1 import is Corona Extra from Cerveceria Modelo. U.S. Market Segments:  U.S. Market Segments Specialty Beers: Fastest growing segment (10-15% since 1990). They are perceived as higher quality by consumers. Subcategories include: large breweries regional breweries contract brewing companies microbreweries brewpubs U.S. Market Structure:  U.S. Market Structure Flat consumption trends: only some international markets and the micro-brewing segment show growing opportunities. Highly Concentrated: The industry includes more than 300 breweries but is dominated by three producers who command a nearly 80 percent market share: Anheuser-Busch (50%) Miller Brewing (18%) Adolph Coors (11%) The market leaders have expanded their respective market shares at the expense of other national brewers like Strohs Brewery. The industry as a whole has stable and relatively predictable Cash Flows. Source: http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf U.S. Industry Overview 2004:  U.S. Industry Overview 2004 U.S. Industry Overview 2004:  U.S. Industry Overview 2004 U.S. Market Structure:  U.S. Market Structure Market Leadership: Once a firm attains market leadership in a mature industry, it is difficult for it to be unseated and it offers a company many benefits over rivals including substantial production economies of scale advantages. Distribution: Expensive to ship: beer has low value relative to weight. Therefore, several breweries are needed for successful distribution. This sometimes explains why large breweries take over small ones. This highlights the importance of good distribution networks. The importance of branding and pricing: Price elasticity of demand. Premium Pricing for higher quality perceived beers. Source: http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf U.S. Market Structure:  U.S. Market Structure Virtually all new entrants to the beer industry are niche players that cater to specialized, often regional but sometime national, tastes. The recent explosion of micro brewers reflects this increased demand for niche beers. Characteristics of the microbrews market segment: High barriers to entry (i.e. legal, manufacturing and distribution costs). Small consumer market with less consumer price differentiation (i.e. low price elasticity) than for major brands. Due to the high costs of entry microbrews rely on regional brewers to produce their products under contract (e.g. Minnesota Brewing, Samuel Adams). Source: http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf U.S. Market Demographics:  U.S. Market Demographics Beer consumption is overwhelmingly male-dominated; men account for more than 80% of the volume consumed in the U.S. The largest group of male consumers are white and they favor domestic light beer. African American drinkers make up about 10% of the beer market overall, and they are the biggest consumers of malt liquors, followed by ice beer. Women beer drinkers are more attracted to specialty micro-brewed beers than they are to the big brands, due to their greater variety. Craft-beer is more appealing to white beer drinkers than to African Americans. Source: http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf U.S. Market Trends:  U.S. Market Trends Consolidation (e.g. mergers and acquisitions) due to: Flat consumption trends Regulatory burdens High Taxation The market is mature with flat consumption trends due to: Increased alcohol awareness Slow population growth Aging population (young male adults are the largest beer consumers) Changes in tastes Shift to “light beer” (started by Miller in 1972 – Miller Light). Light beer segment grew from 0% to 23% of US beer consumption since 1972. A-B has deterred Miller’s leadership in this segment. In 2001 Bud Light became the top selling beer overall. Source: http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf U.S. Industry Regulations:  U.S. Industry Regulations Regulations focus on: Distribution Labeling Advertising Credit Container characteristics Alcoholic content Tax rates Litter assessments Source: http://www.beer-brewing.com/US_beer_market.htm U.S. Beer Distribution:  U.S. Beer Distribution The brewing industry is organized into a so-called "three-tier" distribution system: 1) brewers and importers 2) wholesalers Exclusive (often partially owned by the brewery) Anheuser-Busch distributes about 75% of its beer through independent wholesalers; the remainder is marketed through exclusive wholesalers. Independent or multi-brand: Unlike wine and spirits wholesalers, which are generally multi-state operators, beer wholesalers tend to operate within the boundaries of a single state. 3) retailers Under this system, brewers and importers generally transport their beer to distribution warehouses, where they are temporarily stored and then reloaded onto distribution trucks and delivered via a routing system to individual retailers. U.S. Beer Distribution:  U.S. Beer Distribution In recent years, multi-brand beer wholesalers have been proliferating This is due, in great part, to the consolidation that has marked the industry for nearly two decades. The number of wholesalers has declined from more than 5,000 nationwide in 1970 to fewer than 2,500 today. Unlike wine and spirits wholesalers, which are generally multi-state operators, beer wholesalers tend to operate within the boundaries of a single state. Over the last decade, the off-premise retail segment for beer has changed dramatically While traditional liquor stores and mom-and-pop operations continue to account for a significant share of off-premise beer sales, national retail chains (supermarkets, drug stores, membership clubs, or convenience stores) are increasingly accounting for more beer sales . U.S. Beer Distribution:  U.S. Beer Distribution Source: http://www.myaccountoverview.com/scripts/MarketOverview.aspx U.S. Regulations:  U.S. Regulations Federal Regulations: Formerly issued by the Bureau of Alcohol, Tobacco, and Firearms (BATF), which was established by the Federal Alcohol Administration (FAA) Act. On November 25, 2002, the Homeland Security Act of 2002 split the agency into two different agencies. The Department of Justice. The Alcohol and Tobacco Tax and Trade Bureau (TTB) (kept within the United States Department of the Treasury). TTB responsibilities: Enforce the compliance of provisions for the formulation and labeling of alcoholic beverages, as required by the Internal Revenue Code and the FAA Act. Taxes, distribution and advertising. International trade regulations. Lab testing (approval of brewing formulas and equipment). U.S. Regulations:  U.S. Regulations State Regulations: After Prohibition, state governments were given considerable authority over the production, importation, distribution, sale, and consumption of beer within their borders. Regulations vary across states (i.e. Minnesota requires that the beer label show the alcohol content, while Michigan does not permit the label to show alcohol content). Other regulations include: Max – Min alcohol content Max – Min size of containers Credit sales Advertising Production, distribution and retailing Taxes U.S. Regulations:  U.S. Regulations Source Adams Fact Book 2002 Allowable Blood Alcohol Level U.S. Regulations:  U.S. Regulations Local Regulations: Many states permit local jurisdictions to regulate and separately tax beer sales, and even to prohibit the sale of beer within their jurisdiction. Georgia, Illinois, Louisiana, Maryland, New York, and Ohio have cities or counties that impose local beer taxes. Jurisdictions in which the sale of alcoholic beverages is prohibited are called “dry”. about 4.3% of the U.S. population live in dry counties. Beer Taxation:  Beer Taxation Canada ranks very high with respect to taxes on a case of beer. In Canada, commodity and sales taxes alone make up 52% of the average retail price of beer, ranking Canada the third highest. Taxes in the United States average 19% - 22nd out of 23 countries surveyed. An increase in alcohol taxes generally results in a larger increase in retail price, as wholesalers and retailers add markups to the products as they move through the distribution system. http://www.brewers.ca/EN/ Porter’s Five Forces Model:  Porter’s Five Forces Model Threats of New Entrants (Low) Bargaining Power Of Suppliers (Low) Availability of Substitutes (Medium) Rivalry (High) Bargaining Power Of Buyers (Medium) Government Porter’s Five Forces:  Porter’s Five Forces Threats of new entrants: High barriers to entry: Capital Intensive (especially in advertising) Distribution networks Regulations Economies of scale in marketing, production and distribution. Rivalry (price competition has been decreasing): Increasing competition from imported beers (however, national brewers own part of these breweries). 2,200 wholesalers and 560,000 retail establishments. Creative and enticing advertising by majors. Growing popularity of micro-breweries and other craft-beers. Alternative: expansion to super-premium beers and other segments with lower demand elasticity. Porter’s Five Forces:  Porter’s Five Forces Substitutes: Growth in: Premixed drinks Alternative malt beverage Alternative non-alcoholic drinks (from juices to mineral water) However, beer remains the largest drink sector. Buyer’s Bargaining Power: It changes from segment to segment, but in general: Low switching costs Brand loyalty Increasing health conscience However, for craft-beers, which are perceived as having higher quality, these characteristics may not always hold. Porter’s Five Forces:  Porter’s Five Forces Suppliers’ Bargaining Power: Most supplies come from competitive industries which are more fragmented than the beer industry. Farmers Labor (the case of unionized labor) The more consolidated supplier is that one supplying bottles/cans. Government Has the potential to change regulations/laws and taxation levels Key Success Factors:  Key Success Factors Low cost structure (Scale of economies and learning) Effective marketing & advertising strategy to expanded market share Successful brand loyalty and recognition Product innovation and production efficiency (packaging and automation) Distribution (wholesalers’ loyalty) International expansion to countries with increasing consumption trends Strategic price increases and premium pricing Slide48:  Advertisement: Budweiser (1) Company Overview:  Company Overview Established in 1864 World's largest brewer with 116.8 million of barrels sold Focus on 3 key divisions - beer, packaging and adventure park entertainment 49.6 % in U.S. market in 2004 Bud light has 19.1% of U.S. market Budweiser is the best selling beer in the world Rank No.1 in Beverage Industry in Fortune Magazine 2005 - “America’s Most Admired Companies’” Distribution Network:  Distribution Network Operating 14 breweries, 12 in the United States and two in China and U.K. Budweiser is locally brewed in 7 other countries outside the U.S. : Argentina, Canada, Ireland, Italy, Japan, South Korea and Spain. 2/3 of the the volume is delivered by wholesalers who carry only A-B beer. Products:  Products Approximately 30 beers for sale in the United States Budweiser & Bud Light Busch and Busch Light Michelob and Michelob Ultra Hurricane and Malt liquors Bacardi Silver & Mike’s Hard Lemonade O’doul’s & non-alcoholic beverages Recent International Investment:  Recent International Investment Purchase Harbin Brewery for $693M, 4th largest brewer in China Invest $33M in Convertible bond of TsingTao Brewery Partnership with Heineken in Italy Allow Heineken to brew, market and distribute “Budweiser” Make use of Heineken distribution network in Europe License agreement with Cerveceria Damm, 3rd largest brewer in Spain Marketing & Growth Strategy:  Marketing & Growth Strategy Extensive advertising and promotional activities Budweiser has been the “Official Beer” sponsor of Olympics since 1984 Maintain good relationship with wholesalers Enhance distribution channel Acquisition of wholesalers Forming equity partnerships with leading brewers in high growth markets Especially China Increase international presence Improve productivity and making optimum use of the brewery’s assets To reduce the cost of good sold Advertisement: Budweiser (2) Subsidiaries:  Subsidiaries Anheuser-Busch Packaging Busch Agricultural Resources Inc. Manufacturers Railway Company Busch Entertainment Corp 50% interest in Grupo Modelo, Mexico. 20% interest: Compania Cervesias Unidas, Chile 27% interest in TsingTao brewer, China. 100% in Harbin Brewer, China Reciprocal agreement with Kirin, Japan and Labatts Successful Investment:  Successful Investment With continuous investment in China, A-B’s China operations increased profits by 45% and volume by 17 % in 2003 Great jump up in International beer sales in 4th quarter, 2004 , right after the acquisition of Harbin Brewery in 3rd quarter. In Mexico, Budweiser and Bud Light volume increased 25% in 2003, resulting in profit growth for 3rd consecutive year. Grupo Modelo, Mexico’s leading brewer, whose flagship band, Corona, is the No.1 import in U.S. Key Executives:  Key Executives August A Busch III Chairman of the Board since 1979 Patrick T. Stokes President & CEO since 1981 W. Randolph  Baker CFO & Vice President since 1970 John E Jacob Director of Global Communications Most senior management have over 20 years of service in the company Stock Information:  Stock Information Trade in NYSE since April 18 1980 Symbol BUD Price (Mar 8 2005) $47.93 Outstanding Shares 790.068 M P/E 17.32 EPS 2.77 Dividend (Jan.12 05) 24 ½ cents 5 Year Stock Price History:  5 Year Stock Price History 1 Year Stock Price History:  1 Year Stock Price History Comparison with S&P 500:  Comparison with S&P 500 Stock Price Analysis:  Stock Price Analysis Dividend Analysis:  Dividend Analysis Beer Sales Analysis:  Beer Sales Analysis 2004 Financial Highlights:  2004 Financial Highlights Business Segments Performance:  Business Segments Performance Profit Analysis:  Profit Analysis Stock Option Plan:  Stock Option Plan Officers, certain employees and directors Price = market price on the date of option is granted Vest over 3 years generally Max. term of 10 years Share Repurchase:  Share Repurchase * First 9 months in 2004 Average net purchase 2-3 % of outstanding share Share Repurchase:  Share Repurchase Repurchase more shares than those issued under Stock Option Plan Enhance dividend growth Enhance Earning per Share Drop in Share Repurchase due to acquisition of Harbin Slide70:  Financial Statements Analysis Income Statement Analysis:  Income Statement Analysis 6.31% increase in Cost of Sales 3.7% increase in Marketing, Distribution and Administrative Expenses 5.05% increase in Operating Income 6.37% increase in Interest Expenses Great jump in Other Income Income Statement Analysis:  Income Statement Analysis Balance Sheet Analysis:  Balance Sheet Analysis 19.36% increase in Cash 17.5% increase in Inventories 13.63% increase in Debt 13.13% increase in Treasury Stock, at cost Cash Flow Analysis:  Cash Flow Analysis Generating $2.9403 billion cash flow from operations, a bit lower than 2003 Huge increase in working capital Acquisition increases due to Harbin Higher Dividend paid Share repurchase drops Issuance of shares increases under the stock option plan Gordon’s Growth Model:  Gordon’s Growth Model Good for stable companies Paying dividends that grow Stock Price = Ex (Div/Share) (k – g) g = 9.90 % in 5 years k = 0.1157, Div/Share = 0.93 Expected: $55.668 Actual: $ 47.930 Technical Analysis:  Technical Analysis Key Investment Positives:  Key Investment Positives Dominant and growing beer brands High international growth potential Key Investment Positives:  Key Investment Positives Broad network and foreign partnership Increasing Domestic Revenue per Barrel Growth in profit Increasing and favorable dividend payout Relatively low stock price at present Key Investment Negatives:  Key Investment Negatives High Leverage Decelerating growth in Domestic Market Non stop growth in Marketing and advertising cost Recommendation:  Recommendation BUY Advertisement: Budweiser (3) History:  History Originated in Amsterdam Netherlands 1864: Gerard Adriaan Heineken purchased “The Haystack” brewery 1873: Heineken Breweries is incorporated Gerard Heineken appointed President 1939: Heineken listed on stock market Euronext in Amsterdam Included in the AEX index 1980s: Global expansion Ownership - 1:  Ownership - 1 Heineken N.V. 50.005% held by Heineken Holding N.V. 49.995% free float Heineken Holding N.V. 50.005% held by L’Arche Holding S.A. 43.195% free float 6.8% Greenfee B.V. L’Arche Holding S.A. Swiss company Owned by Heineken family Management:  Management Anthony Ruys Joined 1993 Chairman of the Executive Board (2002) Marc Bolland Joined 1987 2001 member of the executive board Jean Francois van Boxmeer Joined 1984 2001 member of the executive board Rene Graafland Joined 1981 2002 member of the executive board Karl Buche 1993: Chairman of the executive board of BBAG 2004 member of the executive board Markets:  Markets World’s leading brewing group Operating in over 170 countries Own over 115 breweries in over 65 countries Ranks 2nd in the world beer market in profitability Principal area of activities: Europe – accounts for over ½ of Heineken’s sales Heineken is the leading beer brand with breweries in Netherlands, France, Spain, Italy, Greece, and Ireland Main export market outside Europe U.S. (particularly N.E. of U.S. – New York) Advertisement: Heineken (1) Sales Revenue:  Sales Revenue Goal and Strategy:  Goal and Strategy Heineken’s goal is to defend and strengthen its leading global market position and preserve its independence. Achieve a level of sales and profitability which makes it one of the world’s largest and financially best-performing brewing groups Maintain a strong portfolio of beer brands, with Heineken as the leading international premium beer Maintain strong local market positions Good sales mix Efficient cost structure * Low-Cost Strategy * The Heineken Business Model:  The Heineken Business Model Top-line growth Building winning brand portfolios, focus on their flagship Heineken: improve volume, mix, pricing Innovation Sales and marketing excellence Distribution power Cost reduction Continued cost focus in all business area Cash Generation Strict cash flow management Organic Growth Business Development Our shareholders Acquisitions Partnerships Focus on developing markets and the premium segment Heineken’s Top-10 Brands:  Heineken’s Top-10 Brands 3.2 Star 2.5 Zywiec 2.4 Cristal* 2.4 Ochota 5.3 Cruzcampo 2.0 Primus 2.0 Moretti 1.9 Gulder 11.1 Amstel 22.8 Heineken Sales Volume hl millions Brand Tatra Specjal International International Spain Country Poland Chile Russia D.R. Congo, Rwanda Italy Nigeria Poland Poland Nigeria, Ghana 1.6 1.5 *Cristal owned by joint-venture Overview - Distribution:  Overview - Distribution Seeks to achieve comprehensive coverage in each market by: Forming alliances with independent distributors Distribute through its own beverage wholesalers Recent Acquisitions & Partnerships:  Recent Acquisitions & Partnerships Partnership and Acquisitions:  Partnership and Acquisitions Europe: acquired BBAG (Brau Union AG) in July 2003 Largest purchase in Heineken’s history European brewer with leading market positions in Austria, Romania and Hungary Owns 22 breweries & sells around 13 million hl of beer Made Heineken a market leader in 8 Central European countries Enhance brand’s growth potential (esp in Austria, Romania, Hungary, and Czech Republic) February 2004, participating interest increased from 60.3% to 100% Russia: acquired Shikhan and Volga breweries (August 2004) and Sobol brewery (December 2004) Various wholesalers in Italy, Spain, and Poland 2005 Outlook:  2005 Outlook Invest in €100 million in innovation and high-impact, aggressive marketing programs to reinforce the Heineken brand equity in USA Improve volumes and sales mix to address the changing consumer dynamics in Western Europe Continue with business-wide focus on cost reduction Continue to actively pursue their strategy of selective, value-adding acquisitions in growth markets Heineken brand continue to drive sales mix improvment Worldwide, the premium segment of the beer market will continue to capture an increasing share of the market Innovations Consumer focused Financial Review:  Financial Review Financial Review:  Increase Group beer sales volume Heineken premium brand Net Profit BEIA Operating Profit BEIA 113 19.2 319 1,329 99 18.5 334 1,327 13.8% 4.1% - 1.9% 0.2% Organic growth in Operating Profit (BEIA) 5.0% Organic growth in Net Profit (BEIA) 8.1% 2004 2003 791 806 Financial Review Group volume: beer volume sold by consolidated companies and beer of Heineken brewed under license and sold by 3rd parties. BEIA: Before exceptional items and amortisation of goodwill Organic Profit: profit excluding the effects of currency movements, first-time consolidations, exceptional items and amortisation of goodwill. € / hl million Exchange Rate Movements:  Exchange Rate Movements Heineken hedges its exposure to the US dollar 2004: $1.13 USD = €1 Lower US dollar exchange rate reduced operating profit by €124 million Other currencies lowered operating profit by an additional €34 million Position US$ million 2004A Operating Profit Net Profit - 124 - 87 Review by Region:  Review by Region Western Europe (44.7 million hl to 43.5 million hl) Weak economy and adverse weather conditions Fierce retail competition constrained price increases Central and Eastern Europe (20.6million hl to 31.6 million hl) Launch of Heineken in Brau Union’s distribution network – revenue synergies Increase in volumes in Russia and Poland The Americas (12.5 million hl to 14.5 million hl) Operating result fell from € 369 to € 284 million (weakness of the dollar) Africa and Middle East (12.7 million hl to 13.5 million hl) Higher beer sales, cost reductions (closure of a brewery in Nigeria), efficiency improvement programs Asia Pacific (increased to 9.5 million hl) All markets in Asia Pacific increased except Singapore Heineken Premium Sales:  Heineken Premium Sales Heineken Premium 2004 Highlights Heineken brand growth 4% in challenging market Increasing market share in Europe and the USA Strong brand equity, superior to competition Current Stock Price:  Current Stock Price Traded on U.S. OTC Symbol: HINKY Current Price: $34.90 52-week HIGH: $34.95 52-week LOW: $29.30 Outstanding Shares: 489.98 million EPS (ttm): $1.42 P/E ratio (ttm): $24.47 Dividend: $13.96 Five Year Stock Performance:  Five Year Stock Performance BBAG acquisition Aug 2003 public offer for the outstanding shares (???) Unknown reason One Year Stock Performance:  One Year Stock Performance Comparison with S&P500:  Comparison with S&P500 Stock Price Analysis:  Stock Price Analysis Dividend Price Analysis:  Dividend Price Analysis Profit Analysis:  Profit Analysis Profit Analysis:  Profit Analysis Balance Sheet:  Balance Sheet Financial fixed assets decreased by 31% Stocks (inventory) decreased by 7% Cash balance decreased by 53% Shareholder’s equity increased 7% Minority ownership decreased 34% Provisions decreased 58% (including reduction of €100 million of deferred taxes) Employee Benefits: new for 2004 (reporting changes) Amounted to €680 Liabilities decreased Management Effectiveness:  Management Effectiveness Cash Flow Statement:  Cash Flow Statement Cash flow from operations increased by €12 million Lower net working capital (strict working capital control contributed to 93 million) Cash flow from investing activities negative figures in both years (investments) 2004: - € 1,671 million 2003: - € 2.080 million Negative Net cash flow of - €519 million Financial Strength:  Financial Strength Dividend Growth Model:  Dividend Growth Model DPS1 k - g Value of Stock = Price is calculated as the current intrinsic value of the stock DPS is the expected dividend paid out in one year k is the required rate of return on investments g is the assumed constant growth rate for dividend DPS1 P0 0.56 $34.90 0.56 0.06605 – 0.05 DPS1 = DPS0 (1 + g) =0.5335(1+0.05) = 0.56 k = + g = + g = 0.06605 g = 0.05 Value of Stock = = $34.89 Stock Price: $34.90 Technical Analysis:  Technical Analysis Recommendation:  Recommendation Investment Positives Strong Growth Brand Loyalty Low Debt Ratio Investment Negatives High P/E Ratio Competitive Market OTC listing (European) Cash problems Recommendation:  Recommendation HOLD Advertisement: Heineken (2) Company Overview:  Company Overview Sleeman family started brewing in Guelph in mid 1800’s John H. Sleeman was the original brewer and Malter for the company Five generations of family have been involved with the company, that has always taken pride in the product and it’s heritage Timeline of Sleeman’s:  Timeline of Sleeman’s 1836 – John H. Sleeman opened first brewery called the Stanford Spring Brewery 1933 – Company has been past from John to George to George A. Sleeman. George A gets caught smuggling beer into Detroit during prohibition, issued ultimatum 1984 – John W.Sleeman the great-great grandson of John H. received the historical family beer receipt book from his aunt. 1985 – he reincorporates the business 1988 – first beer bottle is filled since 1933 Overview Cont…:  Overview Cont… Today one of the fastest growing premium beers in North America Number 1 premium beer in Canada and the 3rd largest brewer. Their focus is premium beer but also produce value beer Overview Cont…:  Overview Cont… Company produces over 15 Million Cases of beer per year, increasing every year. Net income over $12 Million and increase each year Through 12 brand and numerous partnership agreements. 15% of total beer Sales in Canada with $7B Corporate Officers:  Corporate Officers John Sleeman – Chairman &CEO Radio Advertisement: John Sleeman Rick Knudson – President &COO Dan Rogozyski –Secretary & VP, Fin & Adm Dan Fox – Director Ont & Atlantic Canada Steve Pelkey – Director Western Canada John Bailey – Director Quebec John Driggers – Director US exports Premium Brands:  Premium Brands Cream Ale Honey Brown Silver Creek Clear Original Dark Premium light, Steam, Amber Fine Porter Regional Brands:  Regional Brands Upper Canada - Ont Okanagan Springs – BC&Alta Shaftebury – BC&Alta Unibroue - Que Stroh’s – Value Brand Sleeman Maritimes Regional Breweries:  Regional Breweries Different locations: 2 in Guelph,Ont: Sleeman’s&Upper Canada Chambly, Que Darthmouth, NS: Sleeman’s Maritime Vernon, BC: Okanagan Springs Distribution Network:  Distribution Network Through breweries located across the country and in the US. Beer is sold in all provinces in Canada. Shipped from breweries. Select states in the US mostly around brewery in Partnership agreement with Specialist Brand Development to sell Sleeman’s beer in the UK. Mostly around London. Partner Brand/Strategic Alliances:  Partner Brand/Strategic Alliances Grolsch Guinness Pilsner Urquell Samuel Adams Sapporo Scottish and Newcastle Growth Strategies:  Growth Strategies Focus on cost management Distinctive sales and marketing, with focus on building premium brands Expand production capacity in a cost effective manner Continue to advance in US market Evaluate acquisition and expansion opportunities from multiple standpoints Recent News:  Recent News Unibroue Sapporro Contract Continued growth in the US Unibroue:  Unibroue Sleeman Acquired in June/04 Largest Microbrewery in Quebec and among 20 largest in North America In 2003: 27.5% of sales were outside of Quebec. Sell beer in US, and European markets Also in Belgium, Switzerland, Australia and Germany. Unique brewing process, fermented 2 or 3 times to remove yeast. Corporate Culture:  Corporate Culture Values: committed to excellence in day-to-day operations and employees Great environment for employees Community Involvement: U of Guelph, Guelph Hospital, United Way, Ducks Unlimited Canada, Good standing within the community Benefits:  Benefits Rank #1 in the beverage industry for Corporate social responsibility by Globe and Mail Low turnover Internal promotions Leads to great work culture, which is need to foster great employees(#1 asset of company) Number of employees has steadily been increasing over the years. 2001-640 employees, 2002-700, 2003- 750 Financial:  Financial Latest stats 3rd Quarter of 2004 Annual report will be released tomorrow (March 10) Compare with 2003 annual numbers Analysis of Balance Sheet:  Analysis of Balance Sheet No cash at the end of the 3rd quarter Inventory increase, negative sign Intangible assets are over 1/3 of the assets Long-term obligations increased substantially and total liabilities Analysis of Income Statement:  Analysis of Income Statement Net revenues up 16% Gross Margin up 22% SG&A expense up 22% Net Income up 27% Analysis of Cash Flow:  Analysis of Cash Flow Cash from Operating Activities cut in half Change in non-cash from working capital Business acquisitions up from Unibroue acquisition Financing has gone up due to purchase Net cash is zero 5 year Summary (in thousand of dollars, except for EPS):  5 year Summary (in thousand of dollars, except for EPS) 5 year Summary (in thousands of dollars):  5 year Summary (in thousands of dollars) Ratios:  Ratios Stock Options:  Stock Options # shares outstanding 2002- 15,967,192 2003 –16,219,330 Stock Price:  Stock Price Symbol: ALE Stock Price: Market Cap: 244,785,885 Volume: Trading range(last 52 weeks): 15.65-11.15 P/E Ratio: 16.5 Shares outstanding: 16,482,898 Stock Price 5 years:  Stock Price 5 years Stock Price last year:  Stock Price last year Sleeman vs. S&P500:  Sleeman vs. S&P500 Moving Averages:  Moving Averages Stock Valuation:  Stock Valuation The company doesn’t pay dividends as they are directing all revenues to growing the company at this stage. This is a negative point relative to other breweries around the world. Unable to determine value of the company Positive side should see more capital growth from this company. Advertisement: Sleeman Recommendation:  Recommendation Moderate Buy If can get through takeover of Unibroue in the next year then, the company would be a BUY Slide148:  Breweries

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