E-Malt.com News article: Belgium: InBev delivers solid organic growth in the first half of 2005

InBev S.A. the world’s leading brewer by volume, announced on September 8 its results for the first half of 2005 (HY05):

-Organic beer volume growth of +5.5%; more than twice the industry average
-Challenging market conditions in Western Europe, more than offset by very good performances throughout the Americas and Russia/Ukraine
Organic revenue increased by +6.8% yoy (year on year)
-EBITDA margin expanded to 26.1% versus 23.0% in the first half of 2004 (HY04)
- Profit attributable to InBev equity holders of 397 million euro versus 205 million euro in HY04
-Successful conclusion of the Mandatory Tender Offer (MTO) for AmBev’s common shares raised InBev’s economic interest in the company from 50.27% to 55.52%
-Significant progress made to drive value creation: improving capital structure through share buy-back and purchase of AmBev preferred shares, and improved deployment of invested capital via sales of German soft drinks and Spanish beer minority stake

The financial and operating information was presented in euro pursuant to IFRS, and comparisons refer to the first half of 2004. It should be noted that in order to facilitate the understanding of InBev’s underlying performance, growth analyses are based on organic numbers, hence eliminating the impact of currency fluctuations, acquisitions or divestitures and transfers between Zones. However, as already widely announced to the market, given the transformational nature of the 2004 transaction involving AmBev, the latter’s financials and operating indicators are included in the calculation of organic growth for 2005.

Commenting on HY05 results, InBev’s CEO John Brock said: “We are enthusiastic about our results and the progress we have made implementing our strategy and operating initiatives. Trading conditions in Central & South America, Eastern Europe, and Asia Pacific remain positive, and we will continue to convert these market opportunities into further cash flow growth as efficiently as possible. While market conditions in Western Europe, North America and some countries in Central Europe continue to be tough, we have specific plans to improve our competitive position in each market. Overall, we remain well-positioned to achieve our 30% EBITDA margin target by 2007.”

Volume growth driven by developing markets
Total volume grew organically by +5.4% in HY05 versus HY04 (beer +5.5%; soft drinks +4.6%). Weak trading conditions in Western Europe (organic volume -3.7% yoy) as well as mixed volume performances in North America (organic volume -2.3%) and Asia Pacific (organic volume +1.4%) were fully offset by a strong performance in Central & South America (beer +12.9%) and in Russia/Ukraine (beer +14.7%); the latter drove organic beer volume growth in Central & Eastern Europe by +8.1%.

Despite difficult conditions in more developed beer markets, especially in the first quarter, InBev’s effective execution and presence in attractive and profitable developing beer markets continues to: (1) provide on-going profitable growth; (2) give the company significant diversification; and (3) pave the way for future growth. In Brazil, InBev recovered 200 basis points of market share, yoy, and realized beer volume growth of +13.3%. In Russia and Ukraine, market share growth of +0.7% and +2.0%, respectively, faced capacity constraints; however, the acquisition of Tinkoff in August, combined with additional capital expenditure, will provide capacity as well as a strong lever for organic growth in Russia and Ukraine.

In HY05, 74.1% of InBev’s total volumes were sold in Central & South America, Central & Eastern Europe and Asia Pacific, with the balance of 25.9% coming from developed beer markets. While InBev believes that developing markets offer significant volume opportunities, several actions are being taken, such as growing our branded volumes at the expense of lower-margin, private label volumes, to ensure sustainable, profitable volume growth in more developed markets.

InBev advanced the development of its three global flagship brands during the first half of 2005. Beck’s® grew by +11.6%, and Brahma® grew by +20%, primarily due to market share recovery in Brazil and growth in Venezuela. The global launch of Brahma® in March 2005 will further strengthen the volumes of premium brand portfolio, going forward. With this launch, InBev aspires to bring the authenticity of Brazil to consumers in more than 15 countries, worldwide, during 2005. Stella Artois® volume declined by -4.0%, primarily due to the U.K. performance where volumes were -9.6% lower. This was due to the resurgence of the standard lager segment at the expense of the premium lager segment in the On Trade, and to very aggressive pricing by our competitors in the Off Trade. The volume performance reflects pricing in line with brand equity, personality and positioning. The company is working hard on all aspects of the marketing mix to drive this brand forward, and brand health data point in the right direction.

Revenue – Consolidated revenue amounted to 5,220 million euro in HY05. Organically, InBev’s revenue increased by +6.8% yoy ( up 315 million euro) as a result of the following:

-Sales volume increases in Central & South America and Central & Eastern Europe
-A combination of revenue-management initiatives in several markets:
+21% volume growth of our specialty and global premium brands in Canada
-Volume growth of our 3 global premium brands in the U.S. (depletions +11.9%)
-Higher sales of premium brands in Brazil
-A price repositioning in Brazil in line with the company’s strategy to keep prices stable in real terms
-Good mix improvement in Germany, due to the growth of Beck’s (+12.0%) and Hasseröder (+6.0%) at the expense of private label volumes
-The growth of Beck’s in China

By contrast, some negative mix developments, both in packaging and in brand portfolio, have been noted in parts of our Central & Eastern European business, though the impact was less pronounced in Q2 than in Q1 of 2005. As a combination of these and other factors, revenue per Hl reached 50.1 euro in HY05 versus 49.0 euro in HY04. Importantly, this improvement in revenue per Hl has been achieved in parallel with a changing geographical mix, which has an estimated negative organic impact of 1.6 euro per Hl, as countries with a lower revenue per Hl grew significantly faster than countries with a higher revenue per Hl.

Costs of Sales (CoS) -The consolidated CoS was 2,308 million euro in HY05. CoS per Hl reached 22.2 euro in HY05 versus 23.0 euro in HY04. The decline is a combination of cost management initiatives, offsetting commodity price increases, and volume growth in developing beer markets, where CoS per hectoliter is lower. InBev continues to capture benefits of its plant optimization program. During the last twelve months, the company announced the closures of three plants, which will lower total costs, serving to increase productivity. Moreover, InBev also concluded its internal plant benchmarking process, which included AmBev’s plants. Management believes these and future productivity actions will help to achieve its expected synergy targets. As with revenues per Hl, countries with lower CoS per Hl grew faster in HY05 than those with higher CoS per Hl, the result of which is an estimated 0.8 euro-per-Hl improvement in InBev’s total CoS.

To summarize, including the impact of faster growth in countries with lower revenue and costs of sales per hectoliter, revenue management and increased cost efficiency have resulted in an organic increase of gross profit of +11.4%.

Operating Costs – Operating costs totalled 1,977 million euro in HY05, an organic increase of +3.5% compared to HY04, somewhat below average inflation in our markets.
The increase in selling expenses is mainly the result of increased direct distribution in Central & South America, while marketing expenses were contained, mainly as a result of a shift in the phasing of our North American spending plan. InBev estimates that this phasing shift accounted for approximately 14 million euro, which will be expensed in the second half of 2005. Administrative expenses increased organically by 51 million euro, yoy, largely reflecting an additional cost related to the new compensation system. However, bonus payments are subject to achievement of company, business unit and individual targets.

EBITDA – EBITDA totalled 1,363 million euro and grew +20.8% (up 223 million euro), organically.
-EBITDA was 170 million euro in North America (+47.6% / up 53 million euro), driven by lower CoS and a tight grip on fixed expenses, as well as improved revenue management
-Central & South America delivered 656 million euro (+49.1% / up 203 million euro), primarily through significantly better top-line performance in terms of volumes and pricing
- Western Europe EBITDA came in at 325 million euro (-7.1% / down 24 million euro), reflecting the lower sales volumes which could not be fully offset through savings initiatives
- Central & Eastern Europe generated 132 million euro (+9.6% / up 12 million euro) of EBITDA as a result of higher sales volumes and good cost management
-Asia Pacific reached 72 million euro EBITDA (-15.1% / down 11 million euro), as the impact of an improved sales mix could not fully offset higher commercial expenses
- The EBITDA of Global Export & Holding Companies of zero euro (-56.3% / down 10 million euro) was impacted by increased costs in holding companies which could not be offset by improved EBITDA in the Global Export business
The key metric of EBITDA margin expanded to 26.1% in HY05 from 23.0% in HY04, reflecting InBev’s volume growth, revenue- and cost-management initiatives.

Profit – Normalized profit attributable to equity holders of InBev reached 397 million euro (EPS before goodwill 0.67 euro) in HY05 versus 205 million euro (EPS before goodwill 0.65 euro) in HY04, primarily as a consequence of InBev’s increased operating profitability. However, there is limited comparability because of the transaction with AmBev, which was not adjusted on a pro-forma basis below the EBITDA line. Reported profit was also impacted by the following:
- Currency translation: Positive impact of 47 million euro at EBIT level
-Change due to acquisitions/divestitures: Positive impact of 81 million euro at EBIT level
- Net financing costs: Increased to 179 million euro in HY05 from 54 million euro in HY04 because of higher average interest rates and the company’s higher average financial debt. These trends are expected to continue over the remainder of the year, given the expected increase of the average net debt as a result of Capital Structure decisions. Currency exchange gains in Brazil and in parent companies were offset by the negative impact of fair value adjustments on debt hedges in Brazil.

-Share of result of associates: Zero euro in HY05 versus 21 million euro in HY04 coming from the 30% stake in FEMSA Cerveza, which was disposed of during the second half of 2004
-Income tax expense (normalized): Increased to 186 million euro in HY05 from 67 million euro in HY04. The effective tax rate reached 23.8% in HY05, within the range expected for this year - between 23% and 25%.
-Attributable to minority holders (normalized): Increased to 173 million euro in HY05 from 14 million euro in HY04, due to the higher results in Central & South America and the increased minority percentage in Canada.


09 September, 2005