E-Malt.com News article: Belgium: InBev Third quarter 2005 results-continued growth

InBev the world’s leading brewer by volume, announced on November 19 its results for the third quarter of 2005(3Q05) and nine months year-to-date (9M05):

Organic beer volume growth of +6.8% in 3Q05 and +6.0% 9M05 year-on-year (yoy); consistent with its long term target to grow volumes more than twice the industry average

Volumes of InBev’s Global Flagship brands grew much faster than group volume, up by +12.0% in 3Q05 and +11.8% 9M05 yoy

Organic revenue increased by +8.4% 3Q05 and +7.3% 9M05 yoy, also in line with its target to grow revenue/mix by 1%

EBITDA margin expanded to 30.2% 3Q05 and 27.7% 9M05, versus 28.6% in the third quarter of 2004 (3Q04) and 25.1% for the nine months year-to-date 2004 (9M04) .Normalized profit attributable to InBev equity holders of 325 million euro

Significant progress made to drive value creation: a more balanced operational performance across the different Zones; improved capital structure through share buy-back of 3.5 million InBev shares; focused deployment of invested capital via buy-out of minorities in KK (China), sale of German soft drinks and Spanish beer businesses; capacity constraint in Russia alleviated by Tinkoff acquisition

As part of InBev’s efforts to improve disclosure and transparency, in addition to the third quarter and year to date segment information, this press release also provides pro forma segment information for 2004 that includes AmBev results under IFRS for twelve months.

Commenting on 3Q05 results, InBev’s CEO John Brock said: “These third quarter results and the progress we have made executing our strategy and operating initiatives are encouraging. Twelve months after creating this new company, we have been successful in rolling out the new culture, together with a new compensation system for senior management. Overall, we remain well-positioned to achieve our full year 30% EBITDA margin target by 2007.”

Total volume grew organically by +6.0% in 3Q05 versus 3Q04 (beer +6.8%; soft drinks +0.7%).

Despite very challenging trading conditions in both Canada and the USA in 3Q05, InBev’s organic volume growth in North America was +2.2%. In Brazil, we realized beer volume growth of +3.4%, against the difficult comparable basis of last year. Our beer market share reached 68.1% in comparison to 66.6% in 3Q04. Total volume growth of Quinsa (+10.8%), combined with higher volumes in Brazil and other HILA operations lead to total volume growth in Latin America of +4.7% (beer + 4.5%; soft drinks +5.2%).

Our Western European business performed better, leading to organic volume growth in this Zone of +0.4%. Our beer volumes in Germany increased organically by +4.3%, while we faced softer market conditions in Belgium and the Netherlands. Organic volume growth was also recorded in the UK, primarily due to the improved performance of Stella Artois, where volumes were up by +7.6%. Stella Artois’ U.K. volume growth reflects pricing in line with brand equity, personality and positioning. We are committed to work hard on all aspects of the marketing mix to drive this brand forward.



Strong volume growth in Russia, Ukraine, Romania and Bulgaria, combined with limited volume reduction in Hungary, Croatia and Czech Republic led to an organic volume growth of +12.3% in Central and Eastern Europe. Strong volume growth in China (+16.7%) more than offset the decline of -1.7% in South Korea, in line with the market, resulting in +10.8% organic volume growth in Asia Pacific.

InBev’s effective execution and presence in attractive and high growth markets continues to: (1) provide sustainable results; (2) give the company significant diversification; and (3) pave the way for future growth. In 3Q05, 74.4% of InBev’s total volumes were sold in developing beer markets, with the balance of 25.6% 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 third quarter of 2005. Beck’s® grew by +10.2% in 3Q05 and +11.0% for the nine months year to date (ytd). Brahma® grew by +14.6% in 3Q05 and +18.1% ytd, primarily due to market share recovery in Brazil and successful launches in Russia and Ukraine. Stella Artois® volume grew by +8.4% in 3Q05 and +0.4% ytd, supported by improved performance in the U.K.

Revenue – Consolidated revenue was 3,193 million euro in 3Q05. Organically, InBev’s revenue increased by +8.4% (up 223 million euro), primarily as a result of the following:

A combination of revenue management initiatives in several markets:

-Firmer pricing in Latin America, particularly in Brazil, in line with the company’s strategy to keep prices stable in real terms

-Improved revenue/Hl in our Central & Eastern European business, driven by Russia, Ukraine, Bulgaria and Romania

-Volume growth of our 3 global flagship brands in the U.S. (depletions +21.2%)

-Good mix improvement in Germany, due to the growth of Beck’s® (+28.8%) and Hasseröder® (+3.9%) at the expense of private label volumes

As a combination of these and other factors, revenue per Hl reached 53.3 euro in 3Q05 versus 48.8 euro in 3Q04. Importantly, this improvement in revenue per Hl has been achieved in spite of a negative change in geographic mix.

Costs of Sales (CoS) – The consolidated CoS was 1,359 million euro in 3Q05, an organic increase of 4.8% (up by 57 million euro). However, on a per Hl basis, CoS improved organically by 1.2%. Despite the impact of faster growth in countries with lower revenue and costs of sales per hectoliter, solid top-line growth helped to deliver an organic increase of gross profit of +11.3%.

This performance is the result of several initiatives, including our Plant Optimization program, which focuses on improving energy, water and extract consumption, among others. Management believes that these and future productivity actions, such as the elevation of the procurement function to an Executive Board of Management position, are consistent with InBev’s targets to drive efficiency through strong financial and cost discipline.

To summarize, despite the impact of faster growth in countries with lower revenue and costs of sales per Hl, solid top-line growth and a focus on productivity helped to deliver an organic increase of gross profit of +11.3%.

Operating Costs – Operating costs totalled 1,096 million euro in 3Q05, an organic increase of +9.5% compared to 3Q04.

The increase in distribution expenses is the result of increased direct distribution in Latin America, as well as higher average shipping distances in Central & Eastern Europe. Marketing expenses increased in the third quarter in North America, as some spending shifted into the second half of 2005, as communicated during the HY05 results announcement. Administrative expenses increased by 34 million euro. This reflects higher costs due to severance expenses, several corporate projects and accruals for share-based compensation and bonus as well as some cost reclassification in Central and Eastern Europe. Other operating income/expense improved by 13 million euro, driven primarily by a 21 million euro improvement in Latin America, due to gains in taxes and on an asset disposal, partly offset by a write-off of 9 million euro in Western Europe related to old deals and exposures.

EBITDA – Normalized EBITDA totalled 966 million euro and grew +11.7% (up 89 million euro), organically.

EBITDA was 162 million euro in North America (+14.3% / up 19 million euro), driven by organic revenue growth, lower CoS and continued control of fixed costs

Latin America delivered 375 million euro (+20.7% / up 51 million euro) EBITDA, through significantly better top-line performance in terms of pricing, and higher other operating income

Western Europe EBITDA came in at 242 million euro (+4.4% / up 9 million euro), reflecting stable sales volumes and good revenue growth, which more than offset an increase in other operating expenses

Central & Eastern Europe generated 119 million euro (+18.9% / up 19 million euro) of EBITDA due to an outstanding volume and revenue performance more than offsetting higher operating costs

Asia Pacific reached 67 million euro EBITDA (+17.0% / up 9 million euro), primarily due to a very good top-line performance

The EBITDA of Global Export & Holding Companies was -1 million euro (-101.6% / down 18 million euro), due primarily to increased costs in holding companies

The key metric of EBITDA margin expanded to 30.2% in 3Q05 from 28.6% in 3Q04, reflecting InBev’s solid volume and revenue growth.

Profit – Normalized profit attributable to equity holders of InBev was 325 million euro (normalized EPS 0.53 euro) in 3Q05. Reported profit was also impacted by the following:

Currency translation: Positive impact of 73 million euro at EBIT level.

Change due to acquisitions/divestitures: Positive impact of 66 million euro at EBIT level, due to the acquisitions of Spaten and Zhejiang Shiliang.

Net financing costs: 120 million euro in 3Q05. This is the result of higher interest charges, lower foreign exchange gains and a negative impact from the fair valuation of derivatives. The higher interest charges are the result of the company’s higher average financial debt due to acquisitions and capital structure decisions.

Share of result of associates: -1 million euro in 3Q05

Income tax expense: 143 million euro in 3Q05 and an effective tax rate of 23%

Non-recurring net financing costs: 32 million euro in 3Q05, net capital gain arising from the partial sale of InBev's minority stake in the Spanish brewer Damm

Attributable to minority holders: 145 million euro in 3Q05, due to the results in Latin America and the increased minority percentage in Canada.

OUTLOOK
Despite continued challenging trading conditions in some markets, given InBev’s diversification and the actions to enhance our position in the marketplace, operational performance in the third quarter was in line with our plan to deliver solid volume and EBITDA performance for the year 2005. InBev continues to be well-positioned to achieve its full year target EBITDA margin of 30% by 2007.

Subsequent events
InBev announced its proposed plan to reduce the number of positions at its Global Headquarters in Leuven, Belgium. The implementation of the proposed plan would lead to a collective dismissal of a maximum of 60 people, on a current total of about 400 positions. However, InBev anticipates that a minimum of 15 dismissals could be avoided by transferring employees to new positions within the newly proposed organization structure.

InBev announced that its Bulgarian subsidiary ceased brewing operations in the Pleven brewery, one of its three Bulgarian breweries, on October 21, 2005, and transferred

InBev announced that the brewery in Zwickau, Germany will be bought out by management with effect from January 2006.

InBev is a publicly traded company based in Leuven, Belgium. The company's origins date back to 1366, and today it is the leading global brewer by volume. InBev’s strategy is to strengthen its local platforms by building significant positions in the world's major beer markets through organic growth, world-class efficiency, targeted acquisitions, and by putting consumers first. InBev has a portfolio of more than 200 brands, including Stella Artois®, Brahma®, Beck’s®, Skol® - the third-largest selling beer brand in the world - Leffe®, Hoegaarden®, Staropramen® and Bass®. InBev employs some 77,000 people, running operations in over 30 countries across the Americas, Europe and Asia Pacific. In 2004, InBev realized revenue of 8.57 billion euro (including four months of AmBev).


11 November, 2005