Industry Analysis

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

Industry Overview - General

Mature product

Beer is the largest in the drinks sector Seasonality Steady increase in consumption Great consumer interest

Benefit of not being subject to volatile sales fluctuations

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 1990 2000 -51% -65%

Global market share of top 20 brewers is increasing

Industry remains fragmented

5 largest account for 30% of total volume Cigarette industry 5 largest, 60% share Depends on the home market

Biggest brewers are not the most global

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 No 1 market in total volume

China

Economic crises are good

Switch from higher-priced spirits to lower-priced beer

Beer Consumption
Share Country (2001) US 16.4 China 14.3 Germany 7.3 Brazil 5.8 UK 4.1 Japan 3.6 Mexico 3.5 Russian Federation 3.1 Poland 1.7 France 1.5 Czech Republic 1.2 Per Capita Consumption (in liters) 83.1 15.8 123.1 46.7 97.1 40 48.6 30 60.5 35.9 158.1

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% AB SABMiller Heineken Interbrew 6% 48% 6% 5% 4% 3% 3% 2% 3% Carlsberg Ambev Coors Modelo Scot & New Tsingtao Asahi Others

2%

Top US Brands
Rank Brand Brewer Market Share 1 Bud Light A-B 19.1 2 Budweiser A-B 16.3 3 Coors Light Coors 8.5 4 Miller Lite Miller Brewing 7.9 5 Natural Lite A-B 4.1 6 Busch A-B 3.9 7 Corona Extra Modelo 3.4 8 Busch Light Draft A-B 2.7 9 Miller High Life Miller Brewing 2.7 10 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 statelocal level) Beer Excise Tax

Brewers

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

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)

Threats of New Entrants

Barriers to entry in the National Market

Large capital requirements and distribution networks Industry regulations Product standardization and heavily advertised Fixed costs spread across large volume Product extension and brand proliferation eased

Economies of Scale

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

Buyers Bargaining Power

Low switching costs Price competition Advertising Promotional Schemes

Suppliers
Farmers Bottles/Can suppliers Union Labour

Average pay $18.27 an hour

Key Industry Success Factors

1. 2. 3. 4. 5. 6. 7.

Low Cost Structure Distribution Channels Competitive Pricing Strong Advertising & Marketing skills Strong Brand Recognition Quality Innovation

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, Docs Hard Lemonade, O'Doul's

2002 U.S. Market Share

(Not including exports)

Miller 19% AnheuserBusch 49%

Other 21%

Coors 11%

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: Price (03/11/03) 52 Week Spread: Market Cap: # of Shares: P/E Ratio: EPS: Book Value / Share: ROE: Indicated Dividends:

BUD-N $49.65 $53.84 - $45.30 $41,049 million 878.9 million 20.30 2.44 up 13.8% 3.61 down from 4.62 54.4% $0.88 from 0.75

Comparative Returns

Price History

Income Statement Analysis

Dollar in millions except per share Net Sales Net Income Earnings/Share Dividend Yield Annual Dividend Profitability Ratios Gross Margin Profit Margin 40.1% 14.3% 38.4% 13.2% 37.4% 12.4%

2002

2001

2000

$13,566.8 $12,911.0 $12,499.2 $1,933.8 $2.20 1.4 $0.75 $1,704.5 $1.89 1.5 $0.69 $1,551.6 $1.69 1.5 $0.63

Growth Analysis

Dividend Growth

5 yr = 8.5% 5 yr = 3.98% 1 yr = 16.4% 5 yr = 13.46%

Revenue Growth

EPS Growth

Growth Analysis
Annual Revenue

$14,000 $13,500 $13,000 $12,500 $12,000 $11,500 $11,000 2002 2001 2000 1999

Balance Sheet Analysis

2002 Quick Ratio Current Ratio Lt Debt / Equity Debt to Capitalization ratio Return on Assets ROE 0.46 0.8 2.16 68.4% 2001 0.45 0.9 1.47 59.6% 2000 N/A 0.9 1.30 56.5%

13.7% 54.4%

12.2% 41.6%

11.8% 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

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 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 worlds 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, Rickards Red, Pilsner, Carling, Carling Black label, Bavaria (import), & Tornade. Coors Light, Heineken, Miller Genuine Draft, Corna, Fosters Lager, Daves, Murphys Irish Stout, Caffrey, Milwaukees Best, Milwaukees Best Dry

Molson Partner brands

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

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

Molsons 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

49 48 47 46 45 44 43 42 Market Share in Canada

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

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2nd qt

Income Statement Analysis

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

Profitability Ratios Gross 23.11% 17.9% Margin

18.9%

5.45%

13.93%

Profit Margin

12.42% 8.44%

7.21%

(2.51%)

11.91%

Sales by Region

Volume by Region Fiscal 2003

Canada

Brazil

US

Canada

Brazil

US

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

Comparative Returns

Molson stock chart 12 months

Growth Analysis - Dividends past 5 year

0.6 0.5 0.4 0.3 0.2 0.1 0 2004 2003 2002 2001 2000

Year

200 4 Dividend .56 %

2003 .42

2002 .38 5.55

2001 .36 0

2000 .36 0

33.3 10.52

Balance Sheet Analysis

Year Current ratio

2003 0.5:1

2002 0.6:1

2001 0.7:1

2000 0.8:1

1999 0.8:1

Debt:equity ratio 54:46

Interest Coverage

59:41 59:41 52:48

4.9:1 3.8:1 0.1:1

52:48
2.2:1

5.4:1

Return on Equity Return on Assets

28.3% 18.0% 14.7% (4.1%) 16.3%

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 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

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 Molsons share are undervalue Good management controls and strategies Recommend - Buy

Heineken N. V.

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

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

Brands

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

Geographical Distribution
Europe Western Hemisphere Africa/Middel east 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 Sheet2001 2002

Total assets Current ratio 4,968 1.06:1 4,136 1.37:1 2,758 1.10:1

2000 6,289 1.27:1 2,396 1.15:1

1999 6,017 1.11:1 2,618 0.90:1

1998 2,445 6.70:1 2,299 0.06:1

Shareholders 2,543 equity D/E ratio Shares outstanding ROA ROE Market capitalization 1.52:1

391,979,67 391,979,6 313,583 313,583, 313,583 5 75 ,740 740 ,740 17.5% 31.3% 15.3 billion 14.7% 25.9% 18.2 billion 5.0% 25.9% 20.2 billion 6.1% 19.7% 15.2 billion 17.9% 18.6% 16.06 billion

Income 2002 Statement 2001

Sales Volume Operating profit Operating margin Net profit Profit margin 10,293 109 m 1,282 12.46% 795 7.72% 9,333 105.1m 1,123 12.03% 767 8.22%

2000 8,107 97,9m 921 11.36% 621 7.66%

1999 7,148 90.9 m 799 11.12% 516 7.22%

1998 6,273 N/A 445 7.09% 427 6.8%

EPS
Dividend per share

1.64
0.4

1.58
0.4

1.98
0.4

1.65
0.4

1.36
0.32

Cash Flow Statement

2002 Cash flow from Oper.
Free cash flow Cash flow from Inv. Cash flow from fin.

2001 1,165
994 -783 -39

2000 1,393
975 -1503 335

1999 1,205
764 -527 -13

1998 882
108 N/A N/A

1,184
932 -1,973 427

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

Gordons Growth Model

0.5 0.4 0.3 0.2 0.1 0 Year 1998 Year 1999 Year 2000 Year 2001 Year 2002

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

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