Beer industry

Beer Industry
«Beer is living proof that God loves
us and wants us to be happy» -
Benjamin Franklin

Jon Øyvind Bjørnstad
Christian Adeler Normann
Tuesday, 9 August 2011

Agenda
• History of Beer..............................................................3 • Emerging Markets......................................................36
• History of beer - last decade................................4 • Asia, Latin America and Eastern EU
• Global Macro Environ Analysis.............................5 • Developed Markets..................................................42
• Global Beer Environ Analysis.................................6 • EU, North America, Asia & Oceania
• How is beer made.......................................................8 • Social & Cultural Issue............................................46
• Overview of the global beer mk.........................9 • Self-Regulation.............................................................47
• Brieﬂy - EU Beverages....................................13 • Risks...................................................................................49
• Brieﬂy - Asian Markets...................................14 • Marketing & Advertising........................................51
• Beer the natural choice..........................................15 • Corporate Social Responsibility (CSR).........56
• Commodity prices & effects on beer • Conclusion.....................................................................57
prices/volumes........................................................16 • The BIG FOUR...........................................................58
• Production Margins..................................................18 • AB InBev.................................................................60
• Porter’s 5 Forces........................................................20 • SAB Miller..............................................................66
• Growth Opportunities...........................................21 • Heineken................................................................72
• M&A..................................................................................24 • Carlsberg................................................................80
• M&A - Our thoughts......................................27 • Ratios................................................................................87
• Investment Recommendation............................89

History of Beer
• Beer is one of the world’s oldest beverages, recorded back to the 6th millennium
• A very important drink in many cultures
• Family and microbreweries dominated around the world up untill the 20th century
• The hunt for taste versus the hunt for proﬁts
• The development of the beer industry in the
USA
• Today a global and ﬁercely competitive
business

3


History of beer – the last decade
• Consolidation trends going even further
• The top 10
and their
market share
• The top 4
today dominating
• Other trends
• Financial
crisis impact

4


Global Macro Environmental Analysis
• Emerging markets almost 50% of global growth (4.3% Q1)
• Advanced economies weak growth, 2.5% compared to 3% from
last year.

• Developing economies projected a strong growth, but will decline
from 7.5% (2010) to 6.5% (2011)

• IMF ﬁgures usually over-
optimistic, so we
estimate slightly weaker
global growths

5


Global Beer Environmental Analysis
• 2010 - Beer brewers sales increase of 2.6% (2009 - 9.2%).
- Overall beer sales remain ﬂat
- US beer sales down 1% (only growth seen in craft beers)
- US brewers 81% of US market share (imports gradually
increasing share)
- Consumer still remain taste conscious
- Beer industry performance correlated with economy
• Law and ethics:
- Stricter laws = drunk driving and smoking ban
- US Federal beer tax = 40% of retail cost of beer
- $18/gallon barrel (if produce <2million -->
discount $7 for ﬁrst 60,000barrels).

6


Global Beer Environmental Analysis

• Diversity & Global Trends:
- 2011 global population 7bn -->
in 2050 - 9.5bn (majority growth
in developing countries)
- Wealth shifting to East&South
countries (Globalization)
- Changes in preferences and attitudes toward beer
consumption

• Technology:
• Advances --> necessary to maintain competitive advantage
& efﬁciency

7


How is beer made?

8


Overview of the global beer market
• The beer industry:
– Consumer non-cyclical

• Outputs
– Beer, measured in barrels

• Major trends

– Consolidation
– Shifting in preferences in emerging markets
– Shifting in preferences in developed markets

• Compound annual growth rate of 3,5% globally – two very
different pictures
- Emerging markets showing strong growth with 6.8%
- Developed markets showing a negative growth of 3.4%

9


Global per capita consumption heavily skewed towards
developed countries
- Global per capita consumption at 28l a year
- North America 75 l
- Western Europe 66 l
- China 30 l
- Nigeria 10 l
Changes…
- Growth changed in light of crisis
- Who drives the growth?
- Distribution changes
- New segments
- Global beer?

10



• Where do we see growth?
– Emerging markets
– China the biggest consumer & producer
• Fastest growing international beer brand:
– Tuborg
– Premium segments rising
– Microbreweries – big business?

11



12


Brieﬂy – European Beverages

• Outperformed index – does that count?
– Outperformed the Morgan Stanley Capital International Europe Index (MSCI) by 16% -
but underperformed the market
– Sector is estimated to trade around 30% premium to the index
– Strong relative performance the last years
– Top-line prospects accelerating
– Earnings growth affected by grain prices
– Decrease in consumption from 374
– Sales in Europe:
• €110 bn
• 2.1 mn jobs
• 17% of production is exported
• 10% of consumption is imports

13


Brieﬂy – Asian Markets

• Strong growth
• Double-digit for all major Asian emerging markets
• Number one
consumer of beer
• Accounted for 37.7%
of global
consumption in 2010

14


Beer the natural choice?
• 95% of beer is water
• 3rd most popular drink (after water&tea)
• Easy to make, but standards are high
•One of the healthiest drinks
0 fats & cholesterol
- 94 calories (as in other drinks)
- Contains vitamins (barley when
malted --> vitamin B)
- Fibre, antioxidants and minerals -
silicon
- Low in sodium(salt) and high in
potassium
15


Commodity prices & effects on beer prices/volumes

YoY % change of main commodities affecting beer companies
130% 125%
- Forecast to raise next decade
108%
(40% by 2020 - global cereal
102%
stock in lowest)
87%
- Guilty:
-Unfavourable weather
65%
-Catastrophe in Japan
-Political uncertainty Africa &
46%
Near East
43%

27%
35% 34% -Strong increase oil prices
22%
-Uncertainty ﬁnancial mks
9% and global economy
0% CARMI CF&BI Barley Maize (corn) Wheat Aluminium Rice
* CARMI - Commod. Agri.Raw Material Index
* CF&BI - Commod. Food&Beverage Index 16


Commodity prices & effects on beer prices/volumes

• Corporate responses/strategies:
-Consumer price increases
- need of strong consumer loyalty to ensure sales
-Cost-cutting
- absorbing costs = cost-cutting
-Supply chain M&A and strategic alliances
- ﬁx price purchasing with commodity derivatives
- forward-buying --> to minimize value at risk

17


Risk & Conclusion
Production Margins
Costs Breakdown Large Brewery

2%
Packaging 4%1%
Tax 8%
Sales&Marketing
28%
Production
Malt 15%
Minor ingredients
Adjunts
Hops
17% 25%

18


Risk & Conclusion
Production Margins
COGS Margin
Gross Proﬁt Margin
Gross Proﬁt & COGS Margins as % of Revenues
100%
24%
44% 37%
75% 46%

Average 38%
50%
76%
56% 63%
25% 54%

AB InBev Carlsberg Heineken SABMiller
19


PORTER’s 5 Forces
Force Key Drivers Effect on Industry
Proﬁt

Intensity of Rivalry High concentration; high 0
innovation

Substitutes Growing substitute industry; low -
switching cost

Bargaining power of Small suppliers relative to +
Suppliers brewers

Bargaining power of Consolidation of industry; -
Buyers distribution connected to
retailers

Threat of Entry High capital requirements, +
economies of scale, closed
distribution channels, high
government regulation

Overall market 0
20


Growth Opportunities
• Expansion into emerging markets (China world’s next big consumer)
100 96.00 40%
Beer Consumption incremental growth (2010-2015F) in mhl
Forecast contribution to industry growth (2011-2015)
80 32%

60 24%

39.7%

40 16%

20.20
17.30
20 12.90 8%
12.20
9.40 8.60
8.3% 6.10 5.30 4.60
7.1% 5.3% 4.3% 3.9% 4.2% 2.5% 2.2% 1.9%
0 0%
China Brazil Russia Vietnam USA Mexico India Thailand Ukraine Nigeria

21 Plato - March 2011


• Saturation of traditional markets --> growth = strategic M&A
• reorganised industry and strengthened the big players
• Consumer preferring lighter and “healthier” beers --> new trend (40%
of all beer sold)

• Innovative product formats --> new trend = large packages
• Sales = ALL about strong branding & marketing
• Companies to be successful must focus on:
- variety (only 10% men loyal to a speciﬁc brand)
- relationships with distributors
- innovative marketing&advertising strategies to build brand
- control and reduce manufacturing costs
22


• Forces with strong inﬂuence over next 3-5 years:
• Globalization
- creates bigger market + additional competition

• Consumer Preferences
- bigger portfolio of products

• Regulations
- consumption heavily regulated

• Sustainability
- programs to reduce, reuse and recycle materials
(environmental friendly)

23


M&A
• Main aims =
- develop economies of scale Top 10 companies as a % of market share
- increase product portfolio --> 70% 63%
international interest 53%
37%
• High consolidation 35%

- “Big four” - 50% all global 18%
beer consumed
0%
• “Big four” - in size, Boston Beer is 1% 2000 2010

of InBev --> minimal effects if acquired

• “Too big to need ﬁnancing” to expand.
- Top companies proﬁt increases of 7-12%
- Buying companies “out of their main scope”
24


M&A
• 2002: SAB PLC combined with Miller Brewing --> SABMiller
- Miller #2 in US and #6 in world
- SAB #4 world and brands in Africa, China and East EU.
- $5.6bn deal ($2bn in assumed debt and $3.6bn in stock --> 64%
stake of Miller - Phillip Morris will keep 36%)
- SABMiller #2 Brewer (Miller needed it to remain competitive)
- Sharper focus on selling beer

- 2004: InBev created from merger Interbrew and AmBev
- Interbrew paid €9.2 for 57% stake in Ambev (stock&debt deal)
- Interbrew was #3 in world by volume and Ambev #5
- Deal was giving InBev approx. 25% of world beer sales

25


M&A
M&A

• 2008: Anheuser-Busch and InBev merger to create AB InBev
• $52bn deal
• Created Global Beer Leader and Top 5 consumer companies
• Access to new local markets (geo diversity) - leader in top 5
world markets - no geo overlap
• 40% revenues from the US

• Coors acquires Molson in 2004
• Heineken purchased FEMSA (Early 2010)

26


M&A - Our thoughts

• Craft beer outlook

• Predictions in the future
– China
– Emerging markets
– Developed markets

• M&As

27


Craft Beer Outlook

• Prohibition killed off diversity, but what now?
• Recent growth in craft beer segment
• The three-tiered future?
– Macro
– Regional
– Micro

28


Predictions
• China
– Slowdown in consolidation
• Top 3 brands market share of 52.5%
• Over 80 M&As in the last decade
• Fewer good acquisition targets
• Opening new plants
instead of acquiring
businesses

29


Predictions

• Emerging markets
– Same as China in other markets?
– “hotshots” slowing down M&A pace
– M&A booms in “younger” emerging markets like a lot
of the African countries

• Developed markets
– Market division settled, best targets acquired already
– Acquiring craft brewers
• Pros
• Cons

30


M&A Predictions

• Foster’s
– SABMiller’s June 21st bid on Foster’s Group Limited
– Bid valued Fosters at USD 10 billion
– Market reactions to the bid and rejection
– What happens now?
• Foster’s is an attractive target
• Could trade at values of
5.40-50 per share, pricing
it as high as USD 11 billion.

31


M&A Predictions

• Potential buyer: Asahi
– Leading brewer and soft-drink company
out of Tokyo, Japan
– 40% of Japanese beer market
– Stake in Foster’s Group already, acquired in 1990
– Cadbury Schweppes Australia acquired in 2009
– Moving into new markets
– Tsingtao stake acquired from ABInBev in 2009
– Is looking to expand in Asia and Oceania, an acquisition
of Foster’s would place them as a leading player in the
area.

32


M&A Predictions
• Megabrew – potential merger between ABInBev and SABMiller
– A merger would have positive and negative sides
• Pros: amazing growth, not much geographic overlap, one corporate HQ
• Cons: culture clash, US beer category, changes causing divesting, cultural risk
– Numbers don’t add up:
• High leverage deal meeting currency issues
• A huge amount of equity required
• Net-net it is harder to pull off than BUD because: 1) SAB offers lower synergies,
2) SAB’s emerging market cash flow makes it harder to lever, 3) SAB is on a
slightly higher multiple than BUD and 4) the execution risks are much higher.
• Discussions of a merger are not new, there were meetings in 2007, but InBev
were unwilling to pay a significant premium.
– Conclusion: We don’t see the benefits of a merger outweighing the
downsides.

33


M&A Predictions

• Molson Coors moving into India
– Joint Venture with Cobra India
– “beginning of a long-term commitment”
– Follows a 2009 deal between Molson Coors UK
and Cobra Beer covering sales outside south Asia.

34


M&A Predictions

• Opportunities in Africa

– Plenty of room for growth
– Heineken recently bought into the Ethiopian
market
– Nigeria and increased minimum wage
– SABMiller entering discount beer market

35


Emerging Markets

• Potential emerging markets
– Asia
– Latin-America
– Africa
– Eastern Europe
• Main trends:
– Rising disposable incomes
– Economic growth
– ”Westernizing”
• Areas and countries in detail:

36


Asia
ASIA
• Steady economic growth for some time
• China the main contributor
• More developed countries stalling or declining
• Two promising markets:
– China
– India

37


Latin-America
LATIN AMERICA

• In the long run we see tax beneﬁts in markets like
Panama, Peru and Colombia
• Markets are concentrated with high entry-barriers
• Especially premium segments look promising
• Two promising markets:
– Mexico
– Brazil

38


Africa
AFRICA

• Mostly lager is produced here
• Re-usage of bottles delivered in store
• A lot of people, but a lot of uncertainty
• Some promising countries:
– South Africa
– Nigeria
– Ethiopia

39


Ethiopia - Growth Opportunity

• Beer consumption rising, and it’s still extremely low at 4 l per
capita a year, and much lower than its neighbouring countries
• Economic progress in the country
• Double digit growth rates projected and experienced in the
recent years
• Heineken and BGI Ethiopia
• Risks
– famine

40


Eastern Europe
EASTERN EUROPE

• Growth is expected to continue
• Driven by Russia
• Some growth in developed markets as well
• Interesting markets:
– Czech Republic
– Russia

41


Developed MARKETS
DEVELOPED markets

• Trends:
– Declining consumption
– Increased health awareness
• Changes in:
– Tastes
– Alcoholic beverages
– Drinking patterns

42


Europe
EUROPE

• UK – big business, but a declining
consumption trend
• Netherlands – Heineken
domination
• France – wine… and beer?
• Germany – beer a major
part of the culture.
• Poland – a big consumer

43


North America
NORTH AMERICA
• USA
– Few players dominate
– Three-tier system
• Canada
– International inﬂuence
– Microbrewers

44


Asia & OCEANIA
ASIA & Oceania

• Japan
– New products with lower tax
• South Korea
– High entry barriers
– Microbreweries
• Australia
– High consumption per capita
– Dominated by Foster’s

45


Social and Cultural Issues
Social & Cultural Issues
• History of opposition
– Alcohol always had enemies
• Sin taxes
– Affecting the end-customer
– Seen as a regressive form of taxation
• Religion
– Islam the only one with a non-alcohol policy
– Some extremist churches
• Science and medicine
– Long term use linked to cancer, heart disease, diabetes and liver failure

46


Self-regulation
Self-Regulation

• A code of practice or
set of guiding principles
governing the content
of advertisements.
• A process for the
establishment, review,
and application of the
code or principles.
• Why do this?
• Is it working?

47


Self-Regulationexamples..
Self-regulation Examples

• Australia
– Minimal legislation and requirements, self-regulatory
code organized in 1998
• Netherlands
– Some legislation, and Code of Beverages
• UK
– International Code of advertising
• South Africa
– Self-regulatory code set up in 1989 by ARA

48


RISKS
Risks
• Beer excise duty:
• Highly taxable product --> increase in tax
= increase sale price
• price-sensitive consumption
• Russia 200% increase implemented in 2010 --> increase prices
--> russian mk share under pressure

• Legal/Regulatory restrictions & changes:
• Several mks have restrictions on sales, availability and
advertising regulation
• Pressure from authorities&stakeholders to reduce alcohol
consumption --> impacting consumer behavior

• Economic environment:
• Global recession with weak GDP growth projected for 2011
• Poor/raising unemployment --> weak consumer demand
49


RISKS
Risks
• Commodity price volatility
• Input costs skyrocketing --> sales prices increasing
• Change in consumer preferences:
• Strong portfolios to meet consumer needs
• Critical to anticipate quickly to market needs
• Management capability impairment
• “Unstable” emerging markets
• Customary risk
• Political, economic and regulatory uncertainty
• Competition
•“eat or be eaten”
50


MARKETING & ADVERTISING

• Compete on POSITIONING: target, image, communication
• Marketing-driven business --> adds not necessarily to increase demand,
but to increase brand awareness --> develop brand image!
Sales & Mk Expenses (in Billion $) 2009 - 2010 Beer Industry Advertising Expenditures ($ in millions)
1170 1175 1175
5 1200
4.9 1083
3.75 1090 1027
985 979
2009 980 910
2.5 4.7 2010
2.3 870 800
1.25
2.0 764
1.7 2.1 2.1
1.8 760
0
InBev Carlsberg Heineken SABMiller 650
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Company Annual Reports

• Successful brands --> balance of “push” and “pull” strategies
• “push” - relationships with distributor - place brand on the shelf
• “pull” - marketing directly to consumer
51



• “Fight for space” (shelf placement):
• “Visual equity” is more important than “memory equity”
• product must be in consumer’s face - literally!!
• Shelf placement: (picture)
“TOP AREAS”:
- +20% # people seeing you & probability
of been chosen

“GOLDEN ZONE”:
- # “Facings”/chances increased
--> chances being bought = +28%
--> chances low mk share brands = 67%

• Strategies to claim space:
• multiple packaging --> billboard effect
• maximising types of beers to sell 52



• Advertising & marketing code: (follow certain ethical standards)
• Portray beer in a socially responsible way
• Communicating solely to adult consumers of legal drinking age
• 70% audience --> to be over drinking age
• Should not undervalue other competing beers
• only be factual, no interpretations
• Advertised at college campuses or events only when permitted
• Applied also to “product placement” of beer
• not portray sexually explicit activity as result of
consuming beer
• no graphic nudity
53



• “Basic” steps for building successful beer brand:
1. Identify target group

2. Brand message: clear & appealing

3. Creating brand image

4. Consistent quality

5. Brand recognition--> get share shelf for their products

6. Consumer ownership --> distinctive atmosphere

7. Packaging: compelling, interesting and comfortable

54


• Social Media Marketing (SMM):
• Rise of social networks
--> changed way people interact with brands

• “one-one” interaction with customers - presence on the same
playing field
• specific campaigns & promotions
• closely monitor customers and instant feedback
• SMM -> all in the same battlefield --> the one with most
strategical power --> will survive the battle

55


Corporate Social Responsibility
Corporate Social Responsability

• Promote responsibility of the brand
• Sustainable priorities:
• Discourage irresponsible drinking
• Making more beer using less water
• Reducing energy and carbon footprint
• Packaging reuse and recycling
• Working towards zero-waste operations
• Encouraging enterprise development in value chains
• Beneﬁting communities
• Respecting human rights
• Transparency and ethics

56


“Conclusion”
Conclusion
• Seek growth in Emerging markets --> critical role in global beer
• Rise in purchasing power of middle class and investment in
food&drink supply chain infrastructure

• Developed markets:
• Reinvest themselves, attracting younger generations
• Strong branding & marketing with diverse portfolio
• Areas of concern for success in the industry:
• Unpredictable commodity prices
• Changing tastes
• Consolidation (M&A in emerging mks)
• Political, Legal, Regulatory issues, effectively managing needs of
governments
• Technological dimension
57


The BIG FOUR!
“Beer is a wholesome liquor....it abounds with nourishment.”
Dr. Benjamin Rush, American physician

58


Regional Breakdown Comparison

Asia Paciﬁc
13%
C&E EU Western EU Americas
North America 31% 29%
7%
Western EU 35%
8%
C&E EU Africa
Latin America 14% 21%
37% Asia Paciﬁc
5%

South Africa Asia
22% Latin America
31% 16%
Asia North&West EU
2%Africa 43%
12% Eastern EU
EU
North America 41%
14% 19%

59


• The leading global brewer
• Top-5 consumer products
• 114 000 employees worldwide
• Operations in 23 countries
• Strives to be the “best beer company in the world”
• 36.3 billion USD in revenue in 2010
• Number one or two position in 19 countries
• Committed to responsible drinking with programs operating in each
market
• Committed to achieving 99% recycle & reuse rate by 2012

61


Highlights
Highlights

• Q1 2011 results broadly in line with consensus
• Price-mix better than expected at 6.1%
• Results in North America – Slow but steady improvement
• Brazil was weak as expected – margins expanded on the back of strong
gross proﬁt and cost savings

62


Regional Breakdown

• North America
– Continued suffering from unemployment
– Top-line weakness offset by organic expansion and reduciton
in barley costs
• Latin America North
– New brewery in Brazil online in Q3 2011 Asia Pacific
– Volume growth in Brazil slowing down due to 13%
• Heavy rain & flooding C&E EU
• Deliberate volume/ share management 7% North America
• Modest slowdown in GDP growth 35%
• General inflation nearing minimum wage increases Western EU
8%
• Latin America South
– Volumes showing continued sequential improvement
Latin America
driven by beer 37%
– Revenue growth remained strong

63


Regional Breakdown

• Western Europe
– Organic trends remain weak
– Strong bottom-line margin expansion
– Minor growth expected for 2011
• Central & Eastern Europe
– Modest growth partly offsetting the decline last year
– Price-mix up 16.5%
– Projected growth of around 9% in 2011
• Asia
– Trends driven by BUD’s Chinese operation
– Almost 10% organic revenue growth
– Expected revenue growth (Bern) of around 10% along with margin expansion of about
110 bps

64


RiskRisks & Conclusion
& Conclusions

• Risks
– QE in the US leading to high inflation and dollar value falling
– Intensification of competition in the US and Brazilian markets
– Disposal process failing
– FX risks
– ZBB-cost reduction program failing to meet targets
– Global crisis in oil supply could put pressure on commodities
• Conclusion
– Underperformed peers and MSCI Europe for the first months of 2011
– Closed the gap in April
– Management has a great track record
– Currently at a 4% premium to peers, we expect 10%
– Rating: OUTPERFORM

65


SABMiller

• Basic Facts:
• Covers 75 countries on 6 continents South Africa
22% Latin America
31%
Asia

• Employs over 70,000 people 2%
Africa
12%

North America EU
• Well balanced portfolio (developed and 14% 19%

emerging mks)

• Over 200 different brands
• International premium brands: Pilsner
Urquell, Peroni, Miller and Grolsch

• 20% market share in China

67


SABMiller
Highlights

• 6% EBITA growth
• Strong FCF generation (reduction 200m in CapEx)
• +80% EBITA coming from high growth emerging markets
(plus MillerCoors synergies)

• Positive growth prospects in emerging markets (Asia & Africa)
• Strong momentum into F12 - improvement top-line growth as
Colombia recovers from last years tax hike, and C&E Euro beer
markets pick up

•Hedged 50% their input costs.
68


SABMiller
Regional Breakdown

• Latin America:
• 2% revenue growth, with ﬂat organic volume
( Colombia 50% of region - impacted by VAT increase)

• North America
• Flat organic revenue growth (declining volumes)
• Impact of economy uncertainty and unemployment
• Beneﬁting from MillerCoors strong synergies/cost
savings

• Central&Eastern Europe:
• Flat sales growth
• Challenging trading conditions

69


SABMiller
Regional Breakdown

• Africa:
• Strong top-line and improvement in capacity utilisation
• 24% volume growth
• Asia:
• Very strong top-line performance
• 14% org revenue growth (drivers China & India)
• Increased marketing support behind key brands
• South Africa:
• 8% revenue growth
• Market share stabilised (after loosing Amstel brand)

70


SABMiller
Risks
• The south-african governm. radically changes duty regime
• A global crisis in the supply of oil could further put pressure on
commodities in general and alu, energy & glass in particular.

• Signiﬁcant FX movements
• Intensiﬁcation of market battles with AmBev in
South American

• Further consumption slowdown in major
economies such as South Africa, Colombia,
Peru or Polan.

71


Heineken

• Owns over 125 breweries in more than 70 countries
• 3rd largest brewer in the world
• Employs approx. 54.000 people
• More than 170 international brands (including Cruzcampo, Tiger
Beer, Żywiec, Starobrno, Zagorka, Birra Moretti, Ochota,
Murphy’s, Star and of course Heineken Pilsener).

73


Heineken
Highlights

• Last 10 years it has gone from trading at a 130% premium to
peers in 2000 to a current 10% discount (over-exposure to low
growth W Europe and over reliance in the US market)

• Acquisition of FEMSA --> exposure to high-growth EM
(Mexico&Brazil, but well below SABMiller)

• Development of premium segment --> top-line
growth

• Improving margins (cost saving & synergies
from FEMSA deal)

74


Heineken
Regional Breakdown
• Western EU
• Challenging trading conditions
(leader in UK, Netherlands, co-leader but loosing
territory in Spain)
• Offset by cost savings
• Largest revenue & profit pool (42% & 31%) Western EU Americas
31% 29%

• C&E EU
• 20% & 14% in volume and profit C&E EU Africa
• Improvement primarily on the back of 14%
Asia Pacific
21%

economic recovery 5%

• Russia stabile after 27% drop in 2010 (market 6%
down)
• 33% market share in Romania&Poland (attractive mks)

75


Heineken
Regional Breakdown
• Americas
• 29% of groups profits
• FEMSA deal improves prospects (45% of Mexican
market)
• Opportunity to develop further the premium segment
in Mexico&Brazil

•Africa & Middle east:
• 21% of group profits
• Strong growth (notable Nigeria, Heineken #1 leader)
• Strong driver for profits and huge potential
consumption increase

• Asia Pacific: (operating mainly through JV’s) - 5% of profits
• Favorable GDP growth --> earnings growth
76


Heineken
Relevant Info.:

• FEMSA acquisition (2,5bn) changed growth proﬁle and TCM
programme (total cost management) gives triumph of hope.

• YTD in line with market and outperforming peers (2010 -
outperformed MSCI EU by 4% & underperf. peers by 6%)

• Px way below 90s levels (driven by high US growth)
• 230% premium to peers in 2000 to 10% discount today
• Paying expensive prices for acquisitions
• Solid export ﬁgures to the USA

77


Heineken
Near Future

• Expect moderate pressure on input costs
• Signiﬁcantly improved FCF generation
• approx. 3x in the last 2-3 years
• 5 year proﬁt expectations
• Strong deliverance mainly from FEMSA synergies and
ongoing savings from CM
• All regions to deliver strong growth
• Lower costs

78


Risks

• Timing and execution of cost saving programme slower than expected

• Breakdown in three-tier distribution system in the USA would expose
producers of beverage alcohol to greater margin pressure from retailers

• Significant FX movement such as a decline in the dollar

• Global crisis in supply of oil could put further upward pressure on
commodities in general and especially aluminum, glass & energy

• Price of oil weakening significantly could put Nigerian and Russian under
pressure and be significant drag on group profits

79


• Founded in 1847 in Denmark, outside Copenhagen
• World’s 4th largest brewery group
• Employing 41 000 people
• Characterized by great diversity in:
– Brands
– Markets
– Cultures
• Ambition of becoming the fastest growing global beer company
• Main regions of operation
– Eastern Europe
– Northern & Western Europe
– Asia

81


Highlights

• 2011 a rollercoaster in terms of quarters, we expect 2012 to be more
even

• 2010 performance a bit light

• Net proﬁt (pre-exceptionals) in-line with expectations

• Guidance: 2-4% market volume growth in Russia.
– Overall a high single-digit percentage growth in operating proﬁt in 2011

• Adjusting EPS estimates to account for weaker than expected recovery
from increased input costs in Eastern Europe

82


Guidance & Outlook

• Operating margin targets

– Northern & Western Europe at 15-17%
– Eastern Europe at 26-29%
– Asia at 15-20%
– Carlsberg Group at around 20%

83


Regional Breakdown
• Eastern Europe
– Organic volumes declined by 9%,
but revenue increased by 11% organically
– Negative price mix of 2% as a response to the excise hike
– Operating margins contracted 1280 bps in Q4, a total of
80bps contraction in 2010
– Net volume expected to grow 5% in 2010
– Expect signiﬁcant price increase to recover from the 1
extra RUB in excise and higher input costs
– Positive results from Ukraine Asia
16%
North&West EU
43%
Eastern EU
41%

84


Regional Breakdown

• Northern& Western Europe
– Weak top-line offset by strong margin expansion
– Volumes ﬂat during 2010
– Signiﬁcant improvement in UK
– Expect a 1% decrease in volume in 2011
• Asia
– Strong growth in volume 14% and revenue 17%
– Contraction in Q4 2010
– Margin expansion of 280bps in FY10 vs FY09
– Expected regional strength to continue with 10% organic
volume growth and 13% organic revenue growth

85


RisksRisk & Conclusion
& Conclusion
• Upside risks
– Geopolitical and macroeconomic factors causing FX appreciation
– Faster West European recovery
– Exceeding cost-cutting expectations in N&W Europe
– Inﬂation decreasing
– Recent surge in raw material prices quick return
• Downside risks
– Russian government putting pressure on alcohol consumption
– Geopolitical and macroeconomic factors causing FX depreciation
– Inﬂation increasing
– Prolonged recession in Western Europe
– Altering strategy for group, reducing value
– Slips in management’s ability to deliver
• Conclusion
– Share price rallied in 2010, but has halted as input cost headwinds were announced
– Believe that it should be traded at a discount to its peers

86


Risk & Conclusion
Ratios
ABInbev SABMiller Heineken Carlsberg

25
Breweries Average - 21x

20

15
23 25
10
16 15
5

0
P/E
Bloomberg
87


Risk & Conclusion
Ratios
ABInbev SABMiller Heineken Carlsberg
20

15

10 18

12 11
5 8 9
10
8
6 6
4 3
0 0
ROE ROA ROIC
Capital Ratios (%) 88


Investment& Conclusion
Risk Recommendation!

- Solid Ratios

- Regional breakdown
- Strong position in emerging
markets (Americas & Africa)
Western EU Americas
31% 29%

- Share price with room to grow
- Femsa acquisition synergies
- All areas to deliver strong growth C&E EU Africa
14% 21%
Asia Paciﬁc
5%
89


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