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Global Breweries Fundamental Analysis and Recommendations

Global Breweries Fundamental Analysis and Recommendations. Cyrus Cheung Ervinna Jeff. November 17, 2004. Overview of Presentation. Industry Overview History & Background Product Industry Consumers Growth Area Key Success Factors Company Analysis and Recommendations:

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Global Breweries Fundamental Analysis and Recommendations

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  1. Global BreweriesFundamental Analysis and Recommendations Cyrus Cheung Ervinna Jeff November 17, 2004

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

  3. Industry Overview

  4. History & Background • Ancient History: • There is evidence that beer was elaborated by the Babylonian, Assyrian, Egyptian (for medical purposes), Hebrew, Chinese, and Inca cultures. • 55 BC Roman legions introduce beer to Northern Europe. • 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. Source: http://www.beermachine.com/files/beer-science-history.htm

  5. History & Background • Renascence History: • 1553 Beck's Brewery founded & still brewing today. • 1587 the first beer brewed in New World at Sir Walter Raleigh's colony in Virginia. • 1612 the first commercial brewery opened in New Amsterdam (NYC, Manhattan). • 1786 Molson brewery is founded in what is today Canada. Source: http://www.beermachine.com/files/beer-science-history.htm

  6. History & Background • Modern History: • In the mid-19th Century (1850's) German immigrant brewers introduced cold maturation lagers to the US (Anheuser-Busch, Miller, Coors, Stroh, Schlitz, and Pabst roots begin here). • The modern era of brewing in the US began in the late 1800's with commercial refrigeration (1860), automatic bottling, pasteurization (1876), and railroad distribution. • 1880 there were approximately 2,300 breweries in the US. 1935only 160 breweries survive Prohibition (see below). • 1920 Prohibition (U.S) Starts for beer, even though some regions started as early as 1846, e.g. Maine. Prohibition focused more on whiskey and other distilled products. (Prohibition ends in April 7, 1933) Source: http://www.beermachine.com/files/beer-science-history.htm

  7. History & Background • Interesting Facts: • Historians speculate that prehistoric nomads may have made beer from grain & water before learning to make bread. • Most Expensive Beer in the World: “Tutankhamen” - US$52 • Country with the most individual brands: Belgium with 400 • Average American annually consumes 23.1 gallons of beer, more than milk or juice. • Cenosillicaphobia is the fear of ….. an empty glass. Source: http://www.beermachine.com/files/beer-trivia.htm

  8. Product • Highly mature and standardized product • Firms try to distinguish themselves by differentiation • Quality, Innovation, and marketing • Highly segmented market • Traditional Beers: • Sub-premium • Premium • Malt liquor segments • Super premium* • Light* • Ice* • Dry* • Specialty Beers: • Fastest growing segment (10-15% since 1990) • They are perceived as higher quality by consumers

  9. Product - Brewing process: • Milling • Mashing • Boiling • Cooling • Fermenting • Filtering • Conditioning • Pasteurizing • Packaging • Main Ingredients: • Malt • Hops • Yeast • Rice • Water • Highly standardized and automated process.

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

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

  12. Industry

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

  14. Industry Global Beer Consumption

  15. Modern US Beer industry: • Oldest company date back to the 17th century • Industry dynamics traced back to the repeal of prohibition in 1933. • Following the repeal of Prohibition, legislative changes required the industry to be divided into 3 distinct parts: • Brewers • Wholesale Distributors • Retailers

  16. Modern US Beer industry: Business model: • High transportation cost to be offset by high quality price premium as company seek to differentiate themselves and reach larger markets. • Maturing industry highly concentrated as the result of Mergers and acquisitions ( scale economies in operation and marketing)

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

  18. US Market During the 3rd Quarter (Volume)

  19. US Market

  20. US Market

  21. US Market • Taxation: • Highly regulated by each state • Beer Excise Tax (tax for each barrel of beer sold) • Federal ($0.58/gallon) • State (average: $0.25/gallon)

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

  23. Consumers & Trends

  24. Consumers & Trends

  25. Consumers & Trends

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

  27. Consumers & Trends

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

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

  30. Anheuser-Busch Companies Inc.

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

  32. Company Overview Company Overview Company Overview: • Established in 1864 • St. Louis Based company • Currently control by 5th generation of Busch Family • August A. Busch III – Chairman • August A. Busch IV – President of Anheuser Busch, Inc. (Domestic brewing) • Incorporated in 1979, is the holding company parent of Anheuser-Busch • Parent corporation to a number of subsidiaries • Principle business: Production/Distribution of beer, Packaging and Entertainment Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)

  33. Management Team Management Team Management Team : Source: http://yahoo.investor.reuters.com/Officers.aspx?ticker=BUD.N&target=executiveofficers%2flist

  34. Compensation package: Top 5 ExecutivesFor Fiscal Year Ending 12/31/2003 Source: http://yahoo.investor.reuters.com/OfficersComp.aspx?ticker=BUD.N&target=executiveofficers%2fbasiccompensation

  35. Core Business Segment • Segmented in 3 main areas: • Production/Distribution of beer • 2nd Largest Brewer in the world (130 M barrel/year) • New “King of Beer” is InBev (161M barrel/year), the result of the merger between Belgium’s Intervew and Brazilian beer in late August • Has 49.6% of U.S. market and about 10% of global market • operating 14 breweries, 12 (in U.S.) and two overseas (UK and China) • 2/3rds of volume delivered by wholesalers who only carry Anheuser-Busch (A-B) • Packaging • one of the largest U.S. manufacturers of aluminum beverage containers and the world's largest recycler of aluminum beverage containers. • Entertainment • Formed in 1979, consists of nine distinctive park Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)

  36. Subsidiaries & Satellites • A-B Packaging: Recycling, Printing/ Packaging, Aluminum Production • Busch Entertainment: Sea World, Busch Gardens • Busch Agricultural Resources Inc • Manufacturers Railway Company • 50% Share in Grupo Modelo: Corona (93-98) • 27% Share in Tsingtao: China’s largest brewer (13% of china market) • 29% Share in Harbin Beer Co: China regional brewer (prevented SABMiller’s takeover bid) • 20% Share in Cervecerias: Chile’s largest brewer *JUST SOLD* • Distribution partnerships: Labatt & Kirin (Japan) Sources: Anheuser Busch Companies 2003 Annual Report

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

  38. Beer Products • The company currently brews approximately 30 beers for sale in the United States • World’s No.1 and No.2 brand: Budweiser & Bud Light • Budweiser – about 3% of world market • Bud light has 19.5% of U.S. market • Other Brands: • Budweiser Family: Bud Dry, Bud Ice, Bud Ice Light • Michelob Family: Michelob, Michelob Ultra, etc • Busch Family: Busch, Busch Light, etc • Specialty Beers: World Select, etc • Nonalcohol Brews: O’Doul’s, etc • Natural Family: Natural Light, etc • Malt Liquors: Hurricane, etc • Specialty Malt Beverags: Bacardi Silver Limon, etc Sources: Anheuser Busch Companies: At a glance (Anheuser Busch Companies, 2003)

  39. Business Strategy • Missions • Be the world's beer company • Enrich and entertain a global audience • Deliver superior returns to our shareholders • Objectives / Strategies • Increasing domestic beer segment volume and per barrel profitability • Economies of Scale • Increasing international beer segment profit growth. • Made significant marketing investments to build brand recognition outside the United States and owns and operates breweries in China • Continued growth in profit and free cash flow in the packaging and entertainment segments. • Provide significant efficiencies, cost savings and quality assurance for domestic beer operations Sources: Anheuser Busch Companies 2003 Annual Report

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

  41. Consolidated Balance Sheet

  42. Balance Sheet Analysis • Invested $200 Million in Bonds & Loans with Tsingtao Brewery in China • Net Increase to Debt $682.2 Million with US Dollar Notes and Commercial Paper • 11% Decrease in Shareholders Equity

  43. Debt Analysis

  44. Consolidated Statement of Income

  45. Income Statement Analysis • 9% Increase in Revenues • 7% Increase in COGS • 18% Increase in Operating Income • 22% Increase in Net Income • Advertising and promotional activities are a key component of A-B’s Strategy • Advertising Costs were $806.7 Million • Promotional Costs were $511.8 Million

  46. REVENUE EARNINGS PER SHARE Quarters Quarters 2001 2001 2002 2002 2003 2003 2004 2004 MAR MAR 3,044,200 0.430 3,136,600 0.510 3,280,600 0.570 3,477,000 0.670 JUN JUN 3,452,000 0.580 3,626,100 0.660 3,770,200 0.750 4,010,000 0.830 SEP SEP 3,522,200 0.620 3,706,200 0.710 3,880,500 0.800 4,080,100 0.850 DEC DEC 2,893,100 0.260 3,097,500 0.320 3,215,400 0.360 Totals Totals 12,911,500 1.890 13,566,400 2.200 14,146,700 2.480 11,567,100 2.350 Note:  Units in Thousands of U.S. Dollars Note:  Units in U.S. Dollars Income Statement Analysis – cont.

  47. Consolidated Statement of Cash Flow

  48. Cash Flow Analysis • 1.82 Billion in Free Cash Flow • Acquired almost $2 Billion in Treasury Stock • Paid $652 Million in Debt • However, increased Debt by $1.4 Billion • Issued $685.4 Million in Dividends • Continue to acquire businesses and invest in packaging and related operations • Future Cash may be directed towards China • Focus on share repurchase

  49. Impact of Stock Options on Net Income Impact of Pension Plan • Reached 5 year agreement with Union • Pension Increases of 14% • $7.5 Million signing bonus • Pension plans cover substantially all regular employees • Employee Stock Ownership Plan (ESOP) deferred 45.4 million shares for purchase

  50. Financial Strength GROWTH RATES 1 Year 3 Years 5 Years Financial Strength Company Industry Sector S&P 500 Sales % Quick Ratio (MRQ) 4.28 0.54 4.21 0.66 0.68 4.70 1.31 Current Ratio (MRQ) EPS % 12.73 0.96 13.71 1.37 1.23 14.41 1.80 LT Debt to Equity (MRQ) Dividend % 10.67 2.99 9.63 2.34 0.85 8.98 0.63 Total Debt to Equity (MRQ) 2.99 2.36 1.07 0.80 Interest Coverage (TTM) 8.02 8.81 19.33 12.81 Financial Analysis Summary

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