Global Breweries

1
Global Breweries
Advertisement Molson
2
Presented by

• Simon Wisniewski
• Kirsty Au
• Michelle Ho
• Adam Chamberlain

3
Overview of Presentation

• Industry Overview
• History Background
• Global Industry Overview
• U.S. Industry Overview
• Porters Forces and Key Success Factors
• Company Analysis and Recommendations

4
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.

5
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."

6
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.

7
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/holding
s/raley_timetable.shtml
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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/Pri
nterFriendly.cfm?ArticleIdA0000980
9
Brewing Process

1. Malted barley is weighted, cleaned and passed
   through a mill which crushes the grain.
2. The crushed malt, called grist, is mixed with hot
   water in a mash tank.
3. It is then boiled at a temperature which allows
   the malt to starch and convert to fermentable
   sugars called wort.
4. From the whirlpool, the wort is passed through a
   cooler where it is cooled and the pure yeast
   culture is added.
5. 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.
6. 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.
7. The finished beer exits the filter and enters the
   serving tank ready to be dispensed.

Source http//www.fosters.com.au/beer/brewing/bre
wing_process.asp
10
Global Industry Overview

• 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

11
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

12
Global Market Share2004
13
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, Becks, 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 Smiths, Fosters, Kronenbourg 1664, MGD,
  Becks, 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, Killians, Blue
  Moon, Keystone, Keystone Ice, Keystone Light,
  Extra Gold

14
Global Beer Consumption
15
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.

16
Canadian Industry Overview2003
Total Beer Sales (in HL)
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Canadian Industry Overview2003
Source http//www.brewers.ca/EN/statistics/asbpag
es.htm
18
Canadian Industry Overview2003
Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Beer (Legal) 93.6 92.88 93.02 92.62 90.58 90.93 90.6 90.69 88.82 89.57 88.45
Beer (Adult) 87.8 87.18 87.33 86.94 85 85.35 85.08 85.22 83.49 84.22 83.22
Spirits 5.64 5.48 5.39 5.36 5.35 5.58 5.83 6.04 6.16 6.72 6.86
Wine 10.25 10.07 10.22 10.44 10.81 10.99 11.44 11.96 12.54 13.11 13.5

• Adult is considered to 15 years old and over,
  Legal Drinking age is 19 years old across Canada
  except in Quebec, Manitoba, Alberta where its 18
  years old.

19
U.S. Industry Overview2004
Source http//www.myaccountoverview.com/scripts/M
arketOverview.aspx
20
U.S. Industry Overview2004
Source http//www.myaccountoverview.com/scripts/M
arketOverview.aspx
21
U.S. Industry Overview2004
Source http//www.myaccountoverview.com/scripts/M
arketOverview.aspx
22
U.S. Industry Overview2004
Source http//www.myaccountoverview.com/scripts/M
arketOverview.aspx
23
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
24
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.
25
U.S. Market Segments

• Import Beers
• Rivalry from imports has never been a big factor
  in the beer industry.
• Theyre 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/ownership
  s 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.

26
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

27
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/be
er.pdf
28
U.S. Industry Overview2004
29
U.S. Industry Overview2004
30
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/be
er.pdf
31
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/be
er.pdf
32
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/be
er.pdf
33
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 Millers leadership in this
  segment. In 2001 Bud Light became the top selling
  beer overall.

Source http//www.deed.state.mn.us/bizdev/PDFs/be
er.pdf
34
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
35
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.

36
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 .

37
U.S. Beer Distribution
Source http//www.myaccountoverview.com/scripts/M
arketOverview.aspx
38
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).

39
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

40
U.S. Regulations
Allowable Blood Alcohol Level
Source Adams Fact Book 2002
41
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.

42
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/
43
Porters Five Forces Model
Government
Threats of New Entrants (Low)
Bargaining Power Of Suppliers (Low)
Rivalry (High)
Bargaining Power Of Buyers (Medium)
Availability of Substitutes (Medium)
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Porters 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.

45
Porters 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.
• Buyers 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.

46
Porters 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

47
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

48
Anheuser Busch
Advertisement Budweiser (1)
49
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 - Americas Most Admired
  Companies

50
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.

51
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 Mikes Hard Lemonade
• Odouls non-alcoholic beverages

52
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

53
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 brewerys assets
• To reduce the cost of good sold

Advertisement Budweiser (2)
54
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

55
Successful Investment

• With continuous investment in China, A-Bs 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, Mexicos leading brewer, whose
  flagship band, Corona, is the No.1 import in U.S.

56
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

57
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

58
5 Year Stock Price History
59
1 Year Stock Price History
60
Comparison with SP 500
61
Stock Price Analysis
Valuation Ratios Valuation Ratios Valuation Ratios Valuation Ratios
Bud Industry SP 500
Beta -0.07 0.08 1
P/E Ratio (TTM) 17.32 18.03 22.08
62
Dividend Analysis
Dividends Dividends Dividends Dividends
Bud Industry SP 500
Dividend Yield 2.06 2.04 2.05
Dividend Yield - 5 Year Avg. 1.6 1.41 1.55
Dividend 5 Year Growth Rate 9.9 9.26 4.15
Payout Ratio 33.21 28.04 27.61
63
Beer Sales Analysis
Reported Beer Volume (millions of barrels) Reported Beer Volume (millions of barrels) Reported Beer Volume (millions of barrels) Reported Beer Volume (millions of barrels) Reported Beer Volume (millions of barrels) Reported Beer Volume (millions of barrels) Reported Beer Volume (millions of barrels)
  Fourth Quarter Fourth Quarter Fourth Quarter Full Year Ended December 31 Full Year Ended December 31 Full Year Ended December 31
    vs. 2003 vs. 2003     vs. 2003
  2004 Barrels 2004 Barrels
Domestic 22.9 Dn 0.3 Dn 1.5 103.0 Up 0.4 Up 0.4
International 4.7 Up 2.5 Up 120.5 13.8 Up 5.4 Up 64.8
Worldwide Brands 27.6 Up 2.2 Up 8.8 116.8 Up 5.8 Up 5.3
Intl Equity Partner Brands 4.6 Dn 0.01 Dn 0.2 19.3 Up 0.5 Up 2.7
Total Brands 32.2 Up 2.2 Up 7.4 136.1 Up 6.3 Up 4.9
64
2004 Financial Highlights
  ( in millions, except per share) ( in millions, except per share) ( in millions, except per share) ( in millions, except per share)
  Full Year Full Year 2004 vs. 2003 2004 vs. 2003
  2004 2003
Gross Sales 17,160 16,320 Up 840 Up 5.1
Net Sales 14,934 14,147 Up 787 Up 5.6
Income Before Income Taxes 2,999 2,824 Up 175 Up 6.2
Equity Income 404 345 Up 59 Up 17.2
Net Income 2,240 2,076 Up 164 Up 7.9
Diluted Earnings Per Share 2.77 2.48 Up .29 Up 11.7
65
Business Segments Performance
Domestic Beer Corporate Elims.
Domestic Beer Intl Beer Packaging Entertain. Other Corporate Elims. Consol.
2004
Gross Sales 13,371.60 1,015.10 2,276.80 989.3 75.4 -568 17,160.20
Net Sales
- Intersegment --- --- 880.10 --- 4 -884.1 ---
- External 11,350.8 809.9 1,396.7 989.3 71.4 316.1 14,934.2
Income Before
Income Taxes 3,279.4 130.9 163.9 172.7 (2.0) (745.5) 2,999.4
Equity Income --- 404.10 --- --- --- --- 404.10
Net Income 2,033.20 485.3 101.6 107.1 -1.2 -485.7 2,240.30

2003
Gross Sales 12,997.50 797 2,093.60 923.9 74.4 -566.2 16,320.20
Net Sales
- Intersegment --- --- 869.20 --- 4.3 -873.5 ---
- External 10,984.4 636.6 1,224.4 923.9 70.1 307.3 14,146.7
Income Before
Income Taxes 3,118.7 90.8 155.5 162.8 (12.0) (691.5) 2,824.3
Equity Income --- 344.90 --- --- --- --- 344.90
Net Income 1,933.60 401.2 96.4 100.9 -7.4 -448.8 2,075.90
66
Profit Analysis
Profitability Ratios () Profitability Ratios () Profitability Ratios () Profitability Ratios ()
Bud Industry SP 500
Gross Margin 39.85 39.31 46.45
EBITD Margin 28.75 25 21.78
Operating Margin 22.51 19.89 22.04
Net Profit Margin 12.3 10.98 14.11
67
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

68
Share Repurchase

• Average net purchase 2-3 of outstanding
  share

In Millions 2004 2003 2002 2001
of Shares purchase 27.1 39.4 40.7 28.2
Amount 1699.5 1958.9 2,027 1,163.80
Shares Outstanding 790.067 825.783 866 890.43
First 9 months in 2004
69
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

70
Financial Statements Analysis
71
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

72
Income Statement Analysis
Financial Strength Financial Strength Financial Strength Financial Strength
Bud Industry SP 500
LT Debt to Equity 3.1 2.32 0.52
Total Debt to Equity 3.1 2.34 0.76
73
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

Management Effectiveness Management Effectiveness Management Effectiveness Management Effectiveness
Bud Industry SP 500
Return On Assets (TTM) 11.84 10.68 7.41
Return On Investment (TTM) 13.58 12.58 11.23
Return On Equity (TTM) 82.26 62.72 19.59
74
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

75
Gordons 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

76
Technical Analysis
77
Key Investment Positives

• Dominant and growing beer brands
• High international growth potential

78
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

79
Key Investment Negatives

• High Leverage
• Decelerating growth in Domestic Market
• Non stop growth in Marketing and advertising cost

80
Recommendation

• BUY

Advertisement Budweiser (3)
81
(No Transcript)
82
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

83
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 LArche Holding S.A.
• 43.195 free float
• 6.8 Greenfee B.V.
• LArche Holding S.A.
• Swiss company
• Owned by Heineken family

84
Management

• Anthony Ruys
• Joined 1993
• Chairman of the Executive Board (2002)

• Jean Francois van Boxmeer
• Joined 1984
• 2001 member of the executive board

• Karl Buche
• 1993 Chairman of the executive board of BBAG
• 2004 member of the executive board

• Marc Bolland
• Joined 1987
• 2001 member of the executive board

• Rene Graafland
• Joined 1981
• 2002 member of the executive board

85
Markets

• Worlds 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 Heinekens 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)
86
Sales Revenue
Western Europe 6,210
Central and Eastern Europe 1,859
The Americas 1,510
Africa and Middle East 835
Asia/Pacific 467
87
Goal and Strategy

• Heinekens 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 worlds 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
88
The Heineken Business Model
Organic Growth

• 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

Business Development

• Acquisitions
• Partnerships
• Focus on developing markets and the premium
  segment

Our shareholders
89
Heinekens Top-10 Brands
Sales Volume hl millions
Brand

Country
Heineken
22.8
International
Amstel
11.1
International
5.3
Cruzcampo
Spain
3.2
Nigeria
Star
Poland
Zywiec
2.5
2.4
Cristal
Chile
2.4
Ochota
Russia
D.R. Congo, Rwanda
2.0
Primus
2.0
Moretti
Italy
Nigeria, Ghana
1.9
Gulder
Poland
Tatra
1.6
Poland
1.5
Specjal
Cristal owned by joint-venture
90
Overview - Distribution

• Seeks to achieve comprehensive coverage in each
  market by
• Forming alliances with independent distributors
• Distribute through its own beverage wholesalers

91
Recent Acquisitions Partnerships
Partnerships
FEMSA, USA
Lion Nathan, Australia
Diageo/Namibian Breweries, Southern Africa
Diageo Guinness Stout, Russia, 2005
Acquisitions
Kingway Brewery, China
Shikhan Brewery, Russia
Volga Brewery, Russia
Sobol Brewery, Russia
Fürstenbergische Brauerei, Germany
Hoepfner Brauerei, Germany
Würzburger Brauerei, Germany, 2005
Consolidated Breweries, Nigeria
92
Partnership and Acquisitions

• Europe acquired BBAG (Brau Union AG) in July
  2003
• Largest purchase in Heinekens 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 brands 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

93
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

94
Financial Review
95
Financial Review
/ hl million
Increase
2004
2003
Group beer sales volume
113
99
13.8
19.2
18.5
Heineken premium brand
4.1
1,329
1,327
Operating Profit BEIA
0.2
319
334
Net Profit BEIA
- 1.9
791
806
Organic growth in Operating Profit (BEIA)
5.0
Organic growth in Net Profit (BEIA) 8.1
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.
96
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
97
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 Unions 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

98
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

99
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

100
Five Year Stock Performance
BBAG acquisition Aug 2003 public offer for the
outstanding shares (???)
Unknown reason
101
One Year Stock Performance
102
Comparison with SP500
103
Stock Price Analysis
Valuation Ratios Valuation Ratios Valuation Ratios Valuation Ratios
  Heineken Industry SP 500
Beta 0.15 0.08 1
P/E Ratio (TTM) 24.02 18.03 22.08
Price to Sales (TTM) 1.29 2.28 3.05
104
Dividend Price Analysis
Dividends Dividends Dividends Dividends
  Heineken Industry SP 500
Dividend Yield 1.211 2.04 2.05
Dividend Yield - 5 Year Avg. 1.3 1.41 1.55
Dividend 5 Year Growth Rate 4.56 9.26 4.15
Payout Ratio (TTM) 36.5 28.04 27.61
105
Profit Analysis
Profitability Ratios () Profitability Ratios () Profitability Ratios () Profitability Ratios ()
  Heineken Industry SP 500
Gross Margin (TTM) 39.76 39.31 46.45
EBITD Margin (TTM) 20.2 25 21.78
Operating Margin (TTM) 12.47 19.89 22.04
Net Profit Margin (TTM) 6.22 10.98 14.11
106
Profit Analysis
107
Balance Sheet

• Financial fixed assets decreased by 31
• Stocks (inventory) decreased by 7
• Cash balance decreased by 53
• Shareholders 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

108
Management Effectiveness
Management Effectiveness Management Effectiveness Management Effectiveness Management Effectiveness
  Heineken Industry SP 500
Return On Assets (TTM) 5.73 10.68 7.41
Return On Investment (TTM) 7.94 12.58 11.23
Return On Equity (TTM) 16.52 62.72 19.59
109
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

110
Financial Strength
Financial Strength Financial Strength Financial Strength Financial Strength
  Heineken Industry SP 500
LT Debt to Equity (MRQ) 0.78 2.32 0.52
Total Debt to Equity (MRQ) 0.78 2.34 0.76
111
Dividend Growth Model
Stock Price 34.90
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
DPS1 DPS0 (1 g) 0.5335(10.05)
0.56
k g
g 0.06605
g 0.05
0.56 34.90
0.56 0.06605 0.05
Value of Stock 34.89
112
Technical Analysis
113
Recommendation

• Investment Positives
• Strong Growth
• Brand Loyalty
• Low Debt Ratio

• Investment Negatives
• High P/E Ratio
• Competitive Market
• OTC listing (European)
• Cash problems

114
Recommendation
HOLD
Advertisement Heineken (2)
115
(No Transcript)
116
Company Overview

• Sleeman family started brewing in Guelph in mid
  1800s
• 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 its heritage

117
Timeline of Sleemans

• 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

118
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

119
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

120
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

121
Premium Brands

• Cream Ale
• Honey Brown
• Silver Creek
• Clear
• Original Dark
• Premium light, Steam, Amber
• Fine Porter

122
Regional Brands

• Upper Canada - Ont
• Okanagan Springs BCAlta
• Shaftebury BCAlta
• Unibroue - Que
• Strohs Value Brand
• Sleeman Maritimes

123
Regional Breweries

• Different locations
• 2 in Guelph,Ont SleemansUpper Canada
• Chambly, Que
• Darthmouth, NS Sleemans Maritime
• Vernon, BC Okanagan Springs

124
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 Sleemans beer in the UK.
  Mostly around London.

125
Partner Brand/Strategic Alliances

• Grolsch
• Guinness
• Pilsner Urquell
• Samuel Adams
• Sapporo
• Scottish and Newcastle

126
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

127
Recent News

• Unibroue
• Sapporro Contract
• Continued growth in the US

128
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.

129
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

130
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

131
Financial

• Latest stats 3rd Quarter of 2004
• Annual report will be released tomorrow (March
  10)
• Compare with 2003 annual numbers

132
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

133
(No Transcript)
134
Analysis of Income Statement

• Net revenues up 16
• Gross Margin up 22
• SGA expense up 22
• Net Income up 27

135
(No Transcript)
136
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

137
5 year Summary (in thousand of dollars, except
for EPS)
138
5 year Summary(in thousands of dollars)
139
Ratios
140
Stock Options

• shares outstanding 2002- 15,967,192
• 2003 16,219,330

141
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

142
Stock Price 5 years
143
Stock Price last year
144
Sleeman vs. SP500

145
Moving Averages
146
Stock Valuation

• The company doesnt 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
147
Recommendation

• Moderate Buy

If can get through takeover of Unibroue in the
next year then, the company would be a BUY
148
Breweries