E-Malt.com News article: 2241

Dutch brewing force, Heineken Holding N.V., posted on February 25 its consolidated annual results for 2003. Company’s net turnover rose by EUR 773 million in 2003 to EUR 9,255 million, an increase of 9%. Organic turnover was up 5%, with a 3% increase accounted for by organic volume growth and the remainder reflecting the improved sales mix and higher selling prices. Newly consolidated acquisitions accounted for 8% turnover growth. The principal first-time consolidations are BBAG in Central Europe with effect from 1 October 2003, Al Ahram in Egypt with effect from 1 October 2002, CCU in Chile and Karlovacka in Croatia both with effect from 1 April 2003 and Karlsberg in Germany with effect from 1 January 2003 as well as a number of beverage wholesalers in Europe. The stronger euro reduced turnover by 4%, with the US dollar, the Nigerian naira, the Polish zloty, the Russian rouble and the Singapore dollar all lower against the European currency.

The world beer market grew by more than 1.7% in 2003, to around 1,464 million hl. Beer consumption in Western Europe was down 0.1%, while the Central and Eastern European markets added 4.3%. The North American beer market contracted a little, but the markets in South America grew by 0.2%. Beer consumption was higher in Africa and Asia, by 3.6% and 3.8% respectively, with growth of 5.3% in China accounting for most of the improvement in Asia.

Group volume rose by 14.2 million hl to 99.0 million hl in 2003, growing at 17% which was significantly faster than the world beer market. Organic sales growth accounted for 3 percentage points and new acquisitions such as BBAG for 14 percentage points. Rapid organic growth in sales volume was reported in Nigeria, Spain, Russia, Poland, the Far East and Italy, but this was offset by lower sales in France, Greece and the Netherlands, largely as a result of difficult market conditions. Due to the sale of our interest in Quilmes, the group’s total beer volume (group volume and sales by affiliated companies) remained stable at 109.0 million hl. Total sales for the year by the companies included in the consolidation as at 31 December 2003 amounted to 121.4 million hl.

Sales of Heineken beer in the countries where the Heineken brand is positioned in the premium segment increased 6.1% in 2003 to 18.5 million hl. The fastest growth was recorded in Italy, Poland, Spain, France and the Far East. Global sales of Heineken beer (including the Netherlands) rose 4.3% to 22.1 million hl.

Amstel volume rose from 10.8 million hl to 11.0 million hl, reflecting stronger sales in Africa and Spain and slightly higher Amstel Light sales in the US.

Although beer consumption is stable in Western Europe, a very profitable beer market, growing consumer preference for premium and speciality beers means that there are still opportunities here for Heineken to improve its performance. Heineken’s brands in both market segments are strong and earn high margins, so that growth in sales of these brands produces a more profitable sales mix and a better result. Heineken addresses all segments of the beer market, except the low-priced segment, and is actively pursuing further cost savings in Western Europe.

Higher sales of the Heineken brand and speciality beers enabled Heineken to improve the sales mix in all its markets in Western Europe in 2003. The effects of the weak economy, including rising demand for low-priced beers and lower on-trade volume, were largely compensated by the excellent summer. Total sales in Western Europe rose from 42.2 million hl in 2002 to 44.7 million hl in 2003, and the operating result (excluding extraordinary items and amortisation of goodwill) increased from EUR 553 million to EUR 667 million.

In the Netherlands, Heineken’s result gained from an improved sales mix, better selling prices and substantial cost savings. The reorganisation projects on which Heineken embarked in 2003 are progressing according to plan and will be completed in 2005. Staffing levels were reduced by over 400 during the year.

The improved result in France reflected a better sales mix, thanks to higher sales of Heineken and Desperados, and lower staff costs.

The result in Spain was significantly higher, due to increased sales of the key Heineken, Amstel and Cruzcampo brands. The reorganisation project which is currently in progress has reduced Heineken España’s cost levels.

The greatly improved result in Italy was the product of higher turnover and the improvement in the sales mix yielded by higher sales of Heineken and Birra Moretti. Heineken Italia launched its own portfolio of special beers during the year and strengthened its distribution.

The result in Greece was lower, consistent with the shrinking beer market, but the effect of the reduced sales volume was mitigated to some extent by the improved sales mix and strict cost control.

Many of the beer markets in Central and Eastern Europe are still developing and have good potential for volume growth. Prices are still relatively low in most of the beer markets in this region, the largest of which are Russia and Poland. Heineken aims to benefit from rising beer demand and predicts substantial growth in sales of branded beers, and particularly premium beers, in the coming years. The rising purchasing power, which is expected to flow from membership of the European Union will add momentum to this trend in some of the countries in the region. The operating result (excluding extraordinary items and amortisation of goodwill) in Central and Eastern Europe increased from EUR 78 million to EUR 93 million.

Heineken’s acquisition of brewing group BBAG makes it the largest brewer in Central Europe. Like Heineken, BBAG has strong local market positions, a close affinity with local cultures and expertise in managing brand portfolios. The integration of these newly acquired activities into Heineken’s existing operations will generate significant cost synergy, greater growth potential and more efficient and effective brand portfolio management. The new combine will operate under the name Brau Union. BBAG has been included in the consolidation since 1 October 2003.
The Zywiec Group in Poland again reported a greatly improved result, the product of a 9% increase in sales volume and cost savings. Sales of the Heineken brand doubled and the Zywiec Group further increased its market share.
In Russia, Heineken improved its result despite the weak rouble, with sales up 17%. The introduction of locally brewed Heineken beer in early 2003 generated substantially higher sales.

Heineken is seeking to establish a strong position in the premium beer segment in the mature and profitable beer markets of the United States and Canada with the Heineken and Amstel Light brands imported from Europe. In the growing beer markets of Central and South America, Heineken is working to expand its position and advance the Heineken brand. Sales in the Americas increased from 8.4 million hl to 12.5 million hl. The operating result (excluding extraordinary items and amortisation of goodwill) fell from EUR 416 million to EUR 369 million, largely due to the dollar’s weakness against the euro.

In the United States, the poor weather in the key North East region, the uncertain economic climate, the war in Iraq and the smoking ban in bars and restaurants in some states restrained growth in imported beer sales. Heineken and Amstel Light sales on the US market benefited from the introduction of new packaging and expansion of the distribution network. With independent distributors reducing their inventory levels, sales of the Heineken brand remained at their 2002 level, but Amstel Light sales rose slightly.

Beer sales in Chile and Argentina, where CCU took over production and sale of the Heineken brand, were higher. Heineken acquired a 50% holding last year in IRSA, the majority shareholder in CCU, the largest brewer in Chile which also owns breweries in Argentina.

The Asia-Pacific region comprises a mixture of mature and developing beer markets, of which China is the most important. In the mature markets, Heineken is seeking to improve its sales mix, primarily by boosting sales of the Heineken brand, and reduce its costs. In the developing beer markets, it is focusing on extending its positions and growing sales of the Heineken brand. Sales in the region rose from 8.0 million hl to 8.4 million hl, despite the effects of the Sars epidemic, and the operating result in euros (excluding extraordinary items and amortisation of goodwill) increased from EUR 47 million to EUR 48 million, despite the lower exchange rates of the local currencies against the euro.

In China, the world’s biggest beer market, Heineken and its partner, Fraser & Neave, merged their existing brewing and importing activities to form Heineken Asia Pacific Breweries China. To help the brand grow more rapidly, they also agreed to start local production of Heineken beer in April 2004. Heineken APB China further reinforced its market position in early 2004 by acquiring an interest in Guangdong Brewery Holdings.

The brewery in Thailand was extended last year to meet the growing demand for Heineken beer.

Substantial growth in sales of both Heineken and Tiger beer was achieved in Vietnam. A second brewery opened last year near Hanoi in the north, to complement the brewery near Ho Chi Minh City in the south. The new brewery has a capacity of 300,000 hl, which can be expanded to 1 million hl.

The operating result (excluding extraordinary items and amortisation of goodwill) in the Africa and Middle East region amounted to EUR 150 million in 2003 compared with EUR 188 million in 2002. Sales increased from 10.6 million hl to 12.7 million hl.

Heineken has owned breweries and enjoyed substantial market shares in several African countries for over 50 years. In 2003, Heineken decided to restrict its focus in Africa primarily to a limited number of countries with attractive beer markets.

Sales rose rapidly in Nigeria in 2003. Nigerian Breweries’ state-of-the-art brewery in Enugu, with a capacity of 3.4 million hl, was opened during the year and an extensive modernisation programme was carried out at the group’s other breweries to meet the burgeoning demand. Although sales volume was up 23%, the result fell short of the 2002 figure because of the weaker naira against the euro, lower prices reflecting the better balance of supply and demand, higher pension charges, non-recurring write-downs and higher depreciation charges due to the opening of the new brewery.

An agreement was signed with Diageo for joint marketing in Namibia and South Africa

Heineken is active in the Middle East via a number of breweries and imports of Heineken and Amstel beer. New licensing agreements were signed in Morocco and Tunisia in 2003. Al Ahram in Egypt posted significant growth, with sales of the non-alcoholic malt drink Fayrouz up almost 50%. Preparations are in progress for an international launch.

Because Heineken hedges its exposure to the US dollar, movements in that currency against the euro have a delayed effect on the group’s results. Thanks to this policy, the effects of the dollar’s current weakness have largely been deferred until 2004 and 2005. The euro’s strength against the dollar reduced the operating result by EUR 42 million and against other currencies by EUR 46 million in 2003. The average exchange rate of the dollar in 2003 was EUR 0.96.

Heineken estimates that the adverse impact of exchange rates, including the dollar’s, will be substantially greater in 2004 than in 2003. Net dollar revenues in 2004 are estimated at $800 million, of which $709 million has been hedged at an average of $1.12 to the euro. On that basis, the adverse effect of the weaker dollar on Heineken’s 2004 operating result will amount to EUR 129 million and its effect on the net result of Heineken Holding will amount to EUR 42 million relative to 2003, assuming a spot rate of $1.28 to the euro for the unhedged portion of the dollar cash flow. The effect of other exchange rates on the result will depend on how they develop in 2004.

Net dollar revenues in 2005 are also estimated at $800 million, of which $102 million has been hedged at an average of $1.27 to the euro. On that basis, the adverse effect of the weaker dollar on Heineken’s 2005 operating result will amount to EUR 79 million and its effect on the net result of Heineken Holding will amount to EUR 26 million relative to 2004, again assuming a spot rate of $1.28 to the euro for the unhedged portion of the dollar cash flow.

As from 2003, goodwill has to be capitalised and amortised over a maximum of 20 years, instead of charged directly to equity as in the past. Total goodwill of EUR 1,124 million was capitalised in 2003 and EUR 31 million was amortised.

As from 2003, excise duties and certain selling expenses are deducted from net turnover in compliance with new regulations in the Netherlands for the determination of net turnover. The relevant figures for 2002 have been adjusted for comparison purposes. The effect of this change is to reduce the reported turnover for 2002 by EUR 1,811 million to EUR 8,482 million. This change has no effect on the reported operating result or net profit. Another difference resulting from these revised reporting regulations is that, as from 2003, the final dividend is shown in shareholders’ equity instead of under current liabilities. The comparative figures have been restated accordingly.

The acquisition of BBAG is one reason why Heineken has decided to revise the reporting of its regional results. From now on, reporting on Europe will be split between Western Europe on the one hand and Central and Eastern Europe on the other. Revenues from and results of export business are attributed to the region in which the product is sold to the consumer. Most of the assets employed in exporting are located in Western Europe.

Heineken will apply International Financial Reporting Standard (IFRS) 19 in respect of pensions as from 2004. We expect our pension costs in 2004 under the new system to be in line with the costs under the current system.
The group will apply the IFRS in full in 2005. This change will relate mainly to the valuation of tangible fixed assets at historical cost and the valuation of all financial instruments in the balance sheet at fair value. The depreciation charge on tangible fixed assets is expected to be around EUR 40 million lower.

Organic growth in operating result (excluding first-time consolidations, amortisation of goodwill, exchange effects and extraordinary items) amounted to 7%, but the total operating result was down 5%, from EUR 1,282 million to EUR 1,222 million.

The operating result excluding amortisation of goodwill (EUR 31 million) and extraordinary reorganisation costs (EUR 74 million) was 3.5% higher, up from EUR 1,282 million to EUR 1,327 million. As a percentage of net turnover, the operating result excluding amortisation of goodwill and extraordinary costs in the Netherlands fell from 15.1% to 14.3% in 2003, due to first-time consolidations and adverse exchange effects.

The operating result before interest, tax, depreciation and amortisation of intangible fixed assets (EBITDA) increased by EUR 55 million, from EUR 1,811 million to EUR 1,866 million. EBITA in 2003 was EUR 1,253 million, compared with EUR 1,282 million in 2002. The result of non-consolidated minority interests rose EUR 53 million to EUR 101 million, mainly due to a net extraordinary gain of EUR 71 million on the sale of our 15% interest in Argentinian brewery group Quilmes.

Marketing and selling costs as a percentage of net turnover decreased slightly, from 12.4% to 12.2%, but raw materials and packaging costs were up 5%. Staff costs were lower in the mature markets, but higher in the developing markets, giving a net 2% increase on a like-for-like basis. Depreciation charges were 16% higher, mainly due to first-time consolidations and depreciation of the new brewery in Nigeria.

Net interest expense rose EUR 31 million to EUR 140 million, mainly reflecting additional interest expense on loans raised to finance acquisitions as well as on the liabilities of these acquisitions included in the consolidation for the first time and lower interest income on the reduced cash balances.

The average tax burden fell from 31.0% in 2002 to 29.5%, due primarily to non-recurring tax assets in several countries, including Greece.

Net profit (excluding extraordinary items and amortisation of goodwill) of Heineken Holding increased 1.4% from EUR 398 million to EUR 403 million. The organic growth in net profit (excluding first-time consolidations, amortisation of goodwill, exchange effects and extraordinary items) amounted to 7%.

Net profit was EUR 1 million (0.4%) higher at EUR 399 million. Net earnings per share increased from EUR 2.03 to EUR 2.04.

The net book profit of EUR 71 million on the sale of the 15% interest in Quilmes in the first half of 2003 is shown as an extraordinary item. In the second half of the year, a provision of EUR 74 million before tax was formed for reorganisations in the Netherlands.

Cash flow from operations in 2003 amounted to EUR 2,083 million, compared with EUR 1,628 million in 2002. The EUR 55 million increase in EBITDA to EUR 1,866 million would have been higher without the addition of EUR 95 million to provisions (mainly provisions for reorganisation in the Netherlands), none of which was spent in 2003. Much of the increase in cash flow was due to significantly improved working capital management. By the end of 2003, working capital had been reduced by EUR 92 million.

Net investments of EUR 611 million were made in tangible fixed assets in 2003, compared with EUR 696 million in 2002 when the new brewery in Nigeria accounted for most of the high level of investment. Heineken expects to invest around EUR 750 million in tangible fixed assets in 2004. A total of EUR 1,339 million was paid for consolidated participating interests, most notably BBAG (60%) in Central Europe, CCU (31%) in Chile via the IRSA joint venture, Karlsberg (22.5%) in Germany via the BrauHolding International joint venture and Karlovacka (94%) in Croatia, together with various beverage wholesalers in Europe.

Heineken N.V. advanced a subordinated loan of EUR 160 million to the Heineken pension fund in 2003 to enable the fund to comply with the Pensions and Insurance Supervisory Board’s tighter funding-ratio requirements.

Shareholders’ equity increased by EUR 265 million, the combined effect of net profit of EUR 399 million, revaluations of EUR 20 million, exchange movements of EUR 76 million and a dividend distribution of EUR 78 million. In accordance with new regulations which took effect on 1 January 2003, dividends approved after the balance sheet date are no longer shown as a liability on the balance sheet date.

Interest-bearing debt increased from EUR 2,169 million as at 31 December 2002 to EUR 3,761 million as at 31 December 2003, while the net debt positions on those dates were EUR 1,390 million and EUR 2,341 million respectively. The increase in interest-bearing debt is largely attributable to the two bond loans, totalling EUR 1,100 million, issued by Heineken N.V. on 4 November 2003. One loan was for EUR 600 million, with a coupon of 5.00% and maturing in November 2013, and the other was for EUR 500 million, with a coupon of 4.375% and maturing in February 2010. A credit facility of EUR 1,200 million was also agreed with a syndicate of banks at an interest rate of 0.225 points over Euribor. This credit facility, which will expire in December 2008, was undrawn as at 31 December 2003.

Earnings per share from ordinary activities before extraordinary items and amortisation of goodwill (cash earnings per share) increased by 1.4% from EUR 2.03 in 2002 to EUR 2.06 in 2003. Net earnings from ordinary activities rose from EUR 2.03 to EUR 2.04 per share.

The General Meeting of Shareholders on 29 April 2004 will be asked to approve the distribution of an unchanged cash dividend of EUR 0.40 per share of EUR 2.00 nominal value, which will be subject to 25% Dutch withholding tax. As an interim dividend of EUR 0.16 was paid on 22 September 2003, the remaining final dividend will be EUR 0.24 per share. If the meeting approves the proposed dividend, Heineken Holding shares will be quoted ex-dividend on 3 May 2004. The final dividend will be payable on 7 May 2004.

Heineken Holding has maintained a consistent dividend policy over many years and carries out a review every three years to ascertain whether there is scope for increasing the dividend by increasing the number of shares in issue by 25%. A proposal to split the Heineken Holding A- and B-shares by issuing five new A- or B-shares of EUR 1.60 nominal value for every four existing A- or B-shares of EUR 2.00 nominal value will consequently be presented to the General Meeting of Shareholders. The new shares will carry full entitlement to dividend as from 1 January 2004.

The structural volume growth in the premium segment of the world beer market will continue, enabling Heineken to further improve its sales mix. There is scope for expanding the sales and raising the selling prices in several markets, and Heineken shall keep cutting the costs wherever possible. Barring unforeseen circumstances, Heineken therefore expects to achieve further organic profit growth [2] in 2004. The recent acquisitions will also make a positive contribution to the result, before amortisation of goodwill. At the current exchange rates for the dollar and other currencies against the euro relative to the basis on which hedging contracts have been entered into, Heineken’s net profit will again be severely affected by currency movements. These effects will outweigh the predicted organic profit growth and the contributions to earnings in 2004 by the new acquisitions. Even if the exchange rates stay the same, the weaker dollar will still have a marked impact on the results in 2005. Heineken’s long-term profit forecast is positive, given the strength of its brand portfolio, the distribution structure and the opportunities for efficiency gains.



25 February, 2004