Industry AnalysisBrewers

Presented by : Daniel De Santis

Amy Wu

Mike Chase

Pauline Savoy

Zhi Yuan Su(Max)

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

Seasonality

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

Industry Overview – Growth Prospects

Mature in North America and traditional European markets World’s 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

Beer Consumption

CountryShare(2001)

Per Capita Consumption

(in liters)US 16.4 83.1

China 14.3 15.8Germany 7.3 123.1

Brazil 5.8 46.7UK 4.1 97.1

Japan 3.6 40Mexico 3.5 48.6

Russian Federation 3.1 30Poland 1.7 60.5France 1.5 35.9

Czech Republic 1.2 158.1

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

Top Brewers

9%

9%

6%

6%

5%

4%3%

3%3%2%2%

48%

AB

SABMiller

Heineken

Interbrew

Carlsberg

Ambev

Coors

Modelo

Scot & New

Tsingtao

Asahi

Others

Top US Brands

Rank Brand Brewer Market Share1 Bud Light A-B 19.12 Budweiser A-B 16.33 Coors Light Coors 8.54 Miller Lite Miller Brewing 7.95 Natural Lite A-B 4.16 Busch A-B 3.97 Corona Extra Modelo 3.48 Busch Light Draft A-B 2.79 Miller High Life Miller Brewing 2.710 Miller Genuine Draft Miller Brewing 2.5

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

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

Porter’s Five Forces Model (Competitive Forces)

Threats of New Entrants(Moderate)

Bargaining Power Of Suppliers(Moderate)

Availability of Substitutes(Moderate)

Rivalry among Competitors

(Strong)

Bargaining PowerOf Buyers

(Very Strong)

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

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

Substitutes

Growth in premixed drinks Malt beverages Health conscience population

Non-alcoholic drinks (juice, mineral water,milk, etc.)

Beer remains the largest

drinks sector

Buyer’s Bargaining Power

Low switching costs Price competition Advertising Promotional Schemes

Suppliers

Farmers Bottles/Can suppliers Union Labour

Average pay $18.27 an hour

1. Low Cost Structure

2. Distribution Channels

3. Competitive Pricing

4. Strong Advertising & Marketing skills

5. Strong Brand Recognition

6. Quality

7. Innovation

Key Industry Success Factors

Anheuser-Busch Companies Inc.Just Mike

Chase

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, Doc’s Hard Lemonade, O'Doul's

2002 U.S. Market Share(Not including exports)

Miller19%

Coors11%

Other21%

Anheuser-Busch

49%

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.

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.com/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.

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

Comparative Returns

Price History

Income Statement AnalysisDollar 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%

Growth Analysis Dividend Growth

5 yr = 8.5% Revenue Growth

5 yr = 3.98% EPS Growth

1 yr = 16.4% 5 yr = 13.46%

Growth Analysis

$11,000

$11,500

$12,000

$12,500

$13,000

$13,500

$14,000

2002 2001 2000 1999

Annual Revenue

Balance Sheet Analysis2002 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%

Balance Sheet Analysis

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.

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.

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.

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.

Valuation Model Gordon’s 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 Indicated:

$57.33

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

CONTINUING TO DELIVER

Company Overview

• Founded 1786 – oldest brewer in North America

• One of the world’s largest brewers of quality beer

• Global brewer with $3.5 billion in gross annual sales

• Operations in Canada, Brazil and the United States

Brands

Molson Canada• Molson Canadian (light and ice), Molson

Export, Molson Dry, Rickard’s Red, Pilsner, Carling, Carling Black label, Bavaria (import), & Tornade.

Molson Partner brands• Coors Light, Heineken, Miller Genuine Draft,

Corna, Foster’s Lager, Dave’s, Murphy’s Irish Stout, Caffrey, Milwaukee’s Best, Milwaukee’s Best Dry

Brands

Molson USA• Molson’s 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

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

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

Molson’s Strategy

• Grow Operating Profits by 14.5% annually

• Grow Market Share annually• Grow Volume by 4% to 5% annually• Organizational Renewal• Improve Quality

2003 Market Share

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

42

43

44

45

46

47

48

49

Market Share in Canada

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2nd qt

Income Statement AnalysisYear

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%

Sales by Volume by Region Region

Fiscal 2003

Canada Brazil USCanada Brazil US

Molson Stock

Symbol: MOL.ARecent Price(23/10/03)34.3052 week range $28.00 - $38.75Market Cap(Mil) $4,356Share outstanding(Mil) 129.0P/E ratio: 16.70P/B ratio: 3.92EPS 2.05

Comparative Returns

Molson – stock chart 12 months

0

0.1

0.2

0.3

0.4

0.5

0.6

Growth Analysis - Dividends past 5 year

2004

2003

2002

2001

2000

Year 2004

2003 2002 2001 2000

Dividend .56 .42 .38 .36 .36

% Change

33.3 10.52 5.55 0 0

Balance Sheet Analysis

Year 2003

2002 2001 2000 1999

Current ratio

0.5:1 0.6:1 0.7:1 0.8:1 0.8:1

Debt:equity ratio

54:46 59:41 59:41 52:48 52:48

Interest Coverage

5.4:1 4.9:1 3.8:1 0.1:1 2.2:1

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%

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.

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 Molson’s 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

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)

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

Recommendation

• Strong earnings• Dividend Discount Model – Molson’s

share are undervalue• Good management controls and

strategies• Recommend - Buy

Heineken N. V.

Originated in Amsterdam, Netherlands

Heineken Holding (50.005% of Heineken NV)

Heineken Family (50.005% of Heineken Holding)

#1 in Europe and #2 worldwide

Company Overview

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

Cont’d

Brands International Heineken premium brands

-Heineken: premium segment

-Amstel: mid-priced mainstream segment

Local brands No low-priced segment

Geographical DistributionEurope

WesternHemisphere

Africa/Middeleast

Asia/Pacific

News Acquisition, acquisition, acquisition Amstel Beer is set to remain a sponsor

of the UEFA Champions League in the coming years

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) ……….

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

Balance Sheet2002 2001 2000 1999 1998

Total assets 4,968 4,136 6,289 6,017 2,445

Current ratio 1.06:1 1.37:1 1.27:1 1.11:1 6.70:1

Shareholder’s equity

2,543 2,758 2,396 2,618 2,299

D/E ratio 1.52:1 1.10:1 1.15:1 0.90:1 0.06:1

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

Income Statement2002 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

Cash Flow Statement2002 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

Key Positives Strong and steady growth Brand names Global coverage New marketing strategy

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

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

Gordon’s Growth Model

0

0. 1

0. 2

0. 3

0. 4

0. 5

Year1998

Year1999

Year2000

Year2001

Year2002

Cont’d 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

Five Year Stock Performance

One Year Stock Performance

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

Recommendation Modelwise

Hold Strategywise

Moderate buy/hold

Summary

Mature Stable Returns Steady Growth Gains from consolidation

Value to shareholders’ Growth in developing markets