Industry Analysis

1
Industry Analysis

• Brewers
• Presented by
• Daniel De Santis
• Amy Wu
• Mike Chase
• Pauline Savoy
• Zhi Yuan Su(Max)

2
Industry Overview - General

• Mature product
• Benefit of not being subject to volatile sales
  fluctuations
• Beer is the largest in the drinks sector
• Seasonality
• Steady increase in consumption
• Great consumer interest
• In US -2,800 brands, three times a decade ago
• Solid niche markets developing

3
Seasonality
4
Industry Overview - Companies

• Largest brewers in mature markets (business
  strategy of consolidation)
• Move to global consolidation
• Aggregate volume of the top 10 brewers has grown
  4x faster total industry since mid-1990s
• Global market share of top 20 brewers is
  increasing
• 1990 -51
• 2000 -65
• Industry remains fragmented
• 5 largest account for 30 of total volume
• Cigarette industry 5 largest, 60 share
• Biggest brewers are not the most global
• Depends on the home market

5
Industry Overview Growth Prospects

• Mature in North America and traditional European
  markets
• Worlds top 5 per capita consumption in Europe
• Growth in
• Eastern Europe and Russia
• Traditionally spirit drinking
• China
• No 1 market in total volume
• Economic crises are good
• Switch from higher-priced spirits to lower-priced
  beer

6
Beer Consumption
7
USA Growth

• Seven consecutive years of growth up to 2002
• 2002 growth of 1.4 percent
• All-time record of 203 million barrels shipped
• Demographic Trends
• Increase driven by growth in light beer, and
  gains in imports

8
Top Brewers
9
Top US Brands
10
Industry Regulations

• Extensive government regulations at
• Federal, State Local Level
• an astonishing 44 tax of its retail price in US
  (2001)
• taxes equal 31.7 of final sales of all products
  (GNP) in the U.S. (approx. 20 at the Federal
  level and 12 at the state-local level)
• Brewers
• Beer Excise Tax

11
Government Measures

• Decline in the USA in the early 1990s
• 100 increase in federal tax
• Individual consumption gradually declining since
  the early 1980s
• Public policy measures of moderation and personal
  responsibility
• Potential government interference
• Large scale employer, and contributes large
  amounts of tax revenue
• Environmental issues

12
Porters Five Forces Model (Competitive Forces)
Threats of New Entrants (Moderate)
Bargaining Power Of Suppliers (Moderate)
Rivalry among Competitors (Strong)
Bargaining Power Of Buyers (Very Strong)
Availability of Substitutes (Moderate)
13
Threats of New Entrants

• Barriers to entry in the National Market
• Large capital requirements and distribution
  networks
• Industry regulations
• Product standardization and heavily advertised
• Economies of Scale
• Fixed costs spread across large volume
• Product extension and brand proliferation eased

14
Rivalry among Competitors(USA)

• 3 Competitive Rivalry Segments
• National, Regional , and Microbrewers
• Dynamic Competitors
• 1800 domestic brewers importers
• growing popularity of microbreweries and brewpubs
• 5 times more breweries than in 1992
• 2,200 beer wholesalers, and 560,000 retail
  establishments
• Imports
• Sales tripling in the past 11 years
• However, 90 of all beer sold is Made in the USA

15
Substitutes

• Growth in premixed drinks
• Malt beverages
• Health conscience population
• Non-alcoholic drinks (juice, mineral water,milk,
  etc.)
• Beer remains the largest
• drinks sector

16
Buyers Bargaining Power

• Low switching costs
• Price competition
• Advertising
• Promotional Schemes

17
Suppliers

• Farmers
• Bottles/Can suppliers
• Union Labour
• Average pay 18.27 an hour

18

Key Industry Success Factors

1. Low Cost Structure
2. Distribution Channels
3. Competitive Pricing
4. Strong Advertising Marketing skills
5. Strong Brand Recognition
6. Quality
7. Innovation

19
Anheuser-Busch Companies Inc.

• Just Mike Chase

20
Company Overview

• Production/Distribution of beer, Packaging and
  Busch Entertainment
• Largest Brewer in the world and U.S.
• Has 51.6 of U.S. market and 11.6 of global
  market
• Bud light has 19.1 of U.S. market
• Budweiser 1 brand in the world
• Other Brands Bud Dry, Michelob, Michelob Ultra,
  Busch, Natural Pilsner, World Select, Bacardi
  Silver, Docs Hard Lemonade, O'Doul's

21
2002 U.S. Market Share(Not including
exports)
22
Operations

• A-B operates 12 breweries in U.S.
• Produced almost 110 million barrels in expanded
  capacity breweries
• Distribution through exclusive wholesalers, who
  gain from high margins and volume.
• Budweiser also produced in U.K. and Wuhan, China.

23
Subsidiaries and Consolidation

• Anheuser-Busch Packaging aluminum and bottle
  recycling, packaging printing.
• Busch Agricultural Resources Inc.
• Manufacturers Railway Company.
• Busch Entertainment Corp. http//www.4adventure.co
  m/home.aspx
• 50 interest Grupo Modelo Mexico.
• 20 interest Compania Cervesias Unidas (CCU)
  Chile.
• 7.2 interest Tsingtao brewer China.
• Partnership with Kirin, Japan.
• Partnership with Labatts.

24
Financials

• Symbol BUD-N
• Price (03/11/03) 49.65
• 52 Week Spread 53.84 - 45.30
• Market Cap 41,049 million
• of Shares 878.9 million
• P/E Ratio 20.30
• EPS 2.44 up 13.8
• Book Value / Share 3.61 down from 4.62
• ROE 54.4
• Indicated Dividends 0.88 from 0.75

25
Comparative Returns
26
Price History

27
Income Statement Analysis
Dollar in millions except per share 2002 2001 2000
Net Sales 13,566.8 12,911.0 12,499.2
Net Income 1,933.8 1,704.5 1,551.6
Earnings/Share 2.20 1.89 1.69
Dividend Yield 1.4 1.5 1.5
Annual Dividend 0.75 0.69 0.63
Profitability Ratios
Gross Margin 40.1 38.4 37.4
Profit Margin 14.3 13.2 12.4

28
Growth Analysis

• Dividend Growth
• 5 yr 8.5
• Revenue Growth
• 5 yr 3.98
• EPS Growth
• 1 yr 16.4
• 5 yr 13.46

29
Growth Analysis
30
Balance Sheet Analysis
2002 2001 2000
Quick Ratio 0.46 0.45 N/A
Current Ratio 0.8 0.9 0.9
Lt Debt / Equity 2.16 1.47 1.30
Debt to Capitalization ratio 68.4 59.6 56.5
Return on Assets 13.7 12.2 11.8
ROE 54.4 41.6 38.5
31
Balance Sheet Analysis

32
Cash Flow Analysis

• Generating 2.6 billion cash flow from
  operations.
• Free Cash flow of 1.93 billion.
• Up 44.2 from 2001.
• Reinvest in core businesses and packaging and
  entertainment.
• Continue to buy international businesses in high
  growth markets.
• Higher indicated dividends.
• Focus on share repurchase.

33
Management

• August A Busch President A-B Inc.
• Steve Burrows CEO of A-B International
• W Randolph Baker V.P., CFO A-B Inc.
• Keith N Kasen CEO Busch Entertainment
• Joe Sellinger CEO Packaging
• All promoted from within.
• Average of 10 to 20 years with A-B.
• Long term outlook for company performance.

34
Key Investment Positives

• Unbeatable domestic market share
• Extensive Exclusive Distribution
• Volume (Economies of Scale)
• Marketing
• Management
• Share repurchase strategy
• Strong network of growing and profitable Foreign
  Brewers
• Growing Volume, Revenue, FCF, EPS.

35
Key Investment Negatives

• High Debt ratios
• Growing debt servicing costs
• Slowing growth in domestic market
• Revenue and Profit growth from price increases
  and cost reductions.

36
Valuation Model

• Gordons Growth Model
• Good for stable companies
• Paying dividends that grow
• Stock Price Ex (Div/Share)
• (k g)
• g 8.525 over last 5 years
• k 0.1006
• Two valuations using expected dividends vs.
  indicated dividends
• Expected 53.03 Indicated57.33

37
Recommendation

• Slowing growth in the Domestic Market
• Reaching Price Break Point
• Dominant and growing beer brands
• Distribution competitive advantage
• Strong International growth potential
• Favourable treatment of stockholders
• Dividend model value 53.03 to 57.33
• Moderate Buy

38

• CONTINUING TO DELIVER

39
Company Overview

• Founded 1786 oldest brewer in North America
• One of the worlds largest brewers of quality
  beer
• Global brewer with 3.5 billion in gross annual
  sales
• Operations in Canada, Brazil and the United
  States

40
Brands

• Molson Canada
• Molson Canadian (light and ice), Molson Export,
  Molson Dry, Rickards Red, Pilsner, Carling,
  Carling Black label, Bavaria (import), Tornade.
• Molson Partner brands
• Coors Light, Heineken, Miller Genuine Draft,
  Corna, Fosters Lager, Daves, Murphys Irish
  Stout, Caffrey, Milwaukees Best, Milwaukees
  Best Dry

41
Brands

• Molson USA
• Molsons Beers imported directly from Canada
  Molson Canadian ( light), Molson, Ice, Molson
  Export, Molson Golden, Molson Excel
• Brazil
• Kaiser Pilsen, SaSanta Cerva, Kaiser Summer
  Draft, Xingu, Kaiser Bock, Heineken (under
  licence), Bavaria Pilsen, Bavaria Premium

42
Operations

• 100 Molson Canada brewers located throughout
  Canada
• 49.9 of Coors Canada
• 50.1 interest in Molson USA markets and
  distributes the Molson brands in the US
• 80 of Kaiser in Brazil

43
Consolidations

• Dec 2000 entered the South American Market by
  acquiring Bavaria a leading brand in Brazil
• Sold the Montreal Canadians (keeping 19.9 share
  in the hockey team)
• Purchased Kaiser 2002 2nd largest brewer in
  Brazil and merged Bavaria and Kaiser
• Heineken acquired 20 of the newly formed entity
• Molson does not plan any future Mergers or
  acquisition in the medium term.
• Export Strategy New VP

44
Molsons Strategy

• Grow Operating Profits by 14.5 annually
• Grow Market Share annually
• Grow Volume by 4 to 5 annually
• Organizational Renewal
• Improve Quality

45
2003 Market Share

• Brazil Market share increased from 3.1 to
  17.8 - purchase Kaiser 2nd largest brewer in
  Brazil.

46
Income Statement Analysis
Year 2003 2002 2001 2000 1999
Net Sales 2,515.2 2,102.3 1,857.1 1,753.7 1,426.8
Net Earnings 312.4 177.6 133.9 (44.0) 169.9
Earnings / Share 2.45 1.48 1.12 (0.37) 1.44

Profitability Ratios
Gross Margin 23.11 17.9 18.9 5.45 13.93
Profit Margin 12.42 8.44 7.21 (2.51) 11.91
47
Sales by Volume by Region
Region Fiscal 2003
48
Molson Stock

• Symbol MOL.A
• Recent Price(23/10/03) 34.30
• 52 week range 28.00 - 38.75
• Market Cap(Mil) 4,356
• Share outstanding(Mil) 129.0
• P/E ratio 16.70
• P/B ratio 3.92
• EPS 2.05

49
Comparative Returns
50
Molson stock chart 12 months
51
Year 2004 2003 2002 2001 2000
Dividend .56 .42 .38 .36 .36
Change 33.3 10.52 5.55 0 0
52
Balance Sheet Analysis
Year 2003 2002 2001 2000 1999
Current ratio 0.51 0.61 0.71 0.81 0.81
Debtequity ratio 5446 5941 5941 5248 5248
Interest Coverage 5.41 4.91 3.81 0.11 2.21
Return on Equity 28.3 18.0 14.7 (4.1) 16.3
Return on Assets 9.1 5.7 5.7 0.9 6.8
53
Cash Flow Analysis

• Positive operating cash flow increasing trend
  over the past 5 years
• Investment activity sale of 20 of its
  operations in Brazil contributed to its repayment
  of its long term debt.
• Investment activity In order to achieve its cost
  saving measures, through the modernization of
  equipment, capital investment and infrastructure
  upgrades.
• Financing activity repayment of long term debt,
  increase in cash dividends and share repurchase
  program.

54
Value Drivers

• A global brewer and now the fifteenth largest
  brewer in the world (achieving economy of scale)
• Experienced and proven management team
• Succession planning program top talent
  mentoring and leadership development
• Quality and brand recognition for Molsons and
  partners in Canada and holding the 2 beer brand
  in Brazil
• Exceeding its quality and efficiencies goals
• Dividend growth over the past 4 years and strong
  financial growth over the past 5 years

55
Challenges / Risks

• What if there is a substantial weakening in
  Brazilian economy (economic and political risk)
• Will there be further increase in the competitive
  environment in Canada (Ontario/West market share
  declining)
• How will the US dollar and the reais. (Exchange
  rate risk Brazil and US)

56
Valuation Model

• Value of Stock DPS/ (r-g)
• DPS(1) Expected Dividend during the year
• k Required rate of return for equity investors
• g Growth rate in dividend
• g 16.47 (past 3 year growth rate of dividend)
• DPS(1) DPS(0) (1 g) .56(1 16.47) .65
• k (DPS(0) / P(0)) g 0.56/34.3 .1647
  18.10
• Value of Stock .65/(.1810 - .1647) 39.81
  

57
Recommendation

• Strong earnings
• Dividend Discount Model Molsons share are
  undervalue
• Good management controls and strategies
• Recommend - Buy

58
Heineken N. V.
59
Company Overview

• Originated in Amsterdam, Netherlands
• Heineken Holding (50.005 of Heineken NV)
• Heineken Family (50.005 of Heineken Holding)
• 1 in Europe and 2 worldwide

60
Contd

• 80 beer, 10 soft drinks and 3 spirits and
  wines
• Operating in over 170 countries and employing
  48,237 people around the world
• Market shares Union 14, Europe 12, World 6
• Traded on U.S. OTC under symbol HINKY

61
Brands

• International Heineken premium brands
• -Heineken premium segment
• -Amstel mid-priced mainstream segment
• Local brands
• No low-priced segment

62
Geographical Distribution
63
News

• Acquisition, acquisition, acquisition
• Amstel Beer is set to remain a sponsor of the
  UEFA Champions League in the coming years

64
Acquisitions in 2002

• Russia Bravo international brewery
• Egypt Al Ahram beverages company (public offer)
• Germany Brauholding international (Joint
  venture)
• Costa Rica, Nicaragua, Panama, Kazakhstan
• Brazil targeted on Kaiser (created by Molson)
• .

65
Goals and Strategy

• Corporate level single business
• Consolidation and international joint ventures
• Remain one of the top global brewers
• Being more profitable per hectoliter than other
  international brewers
• Building the most valuable brand portfolio

66
Balance Sheet
2002 2001 2000 1999 1998
Total assets 4,968 4,136 6,289 6,017 2,445
Current ratio 1.061 1.371 1.271 1.111 6.701
Shareholders equity 2,543 2,758 2,396 2,618 2,299
D/E ratio 1.521 1.101 1.151 0.901 0.061
Shares outstanding 391,979,675 391,979,675 313,583,740 313,583,740 313,583,740
ROA 17.5 14.7 5.0 6.1 17.9
ROE 31.3 25.9 25.9 19.7 18.6
Market capitalization 15.3 billion 18.2 billion 20.2 billion 15.2 billion 16.06 billion
67
Income Statement
2002 2001 2000 1999 1998
Sales 10,293 9,333 8,107 7,148 6,273
Volume 109 m 105.1m 97,9m 90.9 m N/A
Operating profit 1,282 1,123 921 799 445
Operating margin 12.46 12.03 11.36 11.12 7.09
Net profit 795 767 621 516 427
Profit margin 7.72 8.22 7.66 7.22 6.8
EPS 1.64 1.58 1.98 1.65 1.36
Dividend per share 0.4 0.4 0.4 0.4 0.32
68
Cash Flow Statement
2002 2001 2000 1999 1998
Cash flow from Oper. 1,184 1,165 1,393 1,205 882
Free cash flow 932 994 975 764 108
Cash flow from Inv. -1,973 -783 -1503 -527 N/A
Cash flow from fin. 427 -39 335 -13 N/A
69
Key Positives

• Strong and steady growth
• Brand names
• Global coverage
• New marketing strategy

70
Key Negatives

• Rivalries
• Scale and control
• Weak in U. S. market
• OTC limitations

71
Outlook

• Dealing with uncertainty
• -economic slowdown
• Taking Heineken to the next level
• -new program targeting to raise operating
  efficiency and effectiveness
• -management works closer to the market
• Beacon project
• -retargeting on young consumers

72
Gordons Growth Model
73
Contd

• Value of Stock DPS/ (r-g)
• DPS(1) Expected Dividend during the year
• k Required rate of return for equity investors
• g Growth rate in dividend
• g 5 (past 5 year growth rate of dividend)
• DPS(1) DPS(0) (1 g) .4(1 5) .42
• k (DPS(0) / P(0)) g .4/36.65 .5
  51.09
• Value of Stock .42/(.5109 - .5) 38.53

74
Five Year Stock Performance
75
One Year Stock Performance
76
Stock Price Today

• Symbol HINKY
• Price 36.65 November 7, 2003
• 52-week high 40.5
• 52-week low 31.45
• EPS 1.64
• P/E ratio 22.35

77
Recommendation

• Modelwise
• Hold
• Strategywise
• Moderate buy/hold

78
Summary

• Mature
• Stable Returns
• Steady Growth
• Gains from consolidation
• Value to shareholders
• Growth in developing markets