ABC Breweries A/S April 18, 2014
Neutral (Initiation) Moody’s: Baa2 (Stable) S&P: Fitch: BBB (Stable) Investment Case
Risks
ABC Breweries A/S (ABC), the 4th largest brewer in the world, continues to be weighed down by an operational profile heavily skewed towards weak Western European markets, further exacerbated by a significant concentration in Russia (~35% EBIT; ~30% of Group cash flow) where, a combination of poor macros, negative consumer sentiment, weak pricing power and importantly, tough regulations (such as excise increases of 200% in 2010 followed by 11% in 2011, 20% in 2012 and 25% in 2013; timing restrictions; and a ban on the sale of beer in kiosks), have led to year-on-year volume declines across the industry for over the last three years (management continues to expect further declines in 2014). However, notwithstanding such challenging conditions, the Group maintains a strong position in these markets, with stable to increasing market value share and a solid portfolio of more than 500 brands, including premium brands such as ABC, Tuborg, Kronenbourg 1664 and Holsten. Margin expansion has been constrained by the negative geographic mix but increased portfolio optimisation, value management and significant cost cutting efforts have been supportive, with more efficiency programmes under implementation. Cash flow generation remains strong and liquidity is comfortable, though leverage profile improvements remain distant, given high capex requirements (one of the highest among peers) and ongoing investments to support network optimisation in Europe and expansion in Asia. Infact, management’s increasing willingness to offset developed market troubles by bringing in attractive Asian assets into its fold raises the risks of major M&A, also facilitated by recent changes to the Group’s charter allowing greater financial flexibility. A cautious outlook may therefore be warranted though it is acknowledged that the Group has a strong deleveraging track record (as witnessed in debt reduction following the Scottish and Newcastle deal in 2008) and is committed to investment grade credit quality.
Though unlikely in the near term, an improvement in the Group’s Russian operations will be a major upside, given that the country, despite ongoing geopolitical developments, does offer attractive long-term growth prospects. However, the credit could be adversely impacted in the scenario of further announcements by the government of tough regulations on the industry, possibly leading to major volume declines or shutdowns. Also, failure to generate substantial cost savings and synergies following prospective acquisitions of expensive brewing assets in Asia (and the consequent pick up in leverage) would be negative (execution/ integration risk).
Guidance Management expects Western European beer markets to decline slightly as consumers in many of these markets remain under pressure. The Russian market is also expected to witness low single digit volume decline, 2/3rd of which is expected to come from outlet closures (this is assuming no further new regulations are implemented). However, the Asian business is expected to continue to grow in line with FY’13. Reported COGS per hl is expected to be lower y-o-y (and flat in organic terms). The Group forecasts mid single digit EBIT growth (high single digit in organic terms) whereas capex is expected to be at the level of FY’13, with continued capacity investments in Asia.
Operating Profile Denmark-based ABC Breweries A/S (ABC) is the world's 4th largest brewer (119.7 million hl of volumes in FY’13), behind Anheuser- Busch InBev, SABMiller and Heineken, and benefits from a portfolio of more than 500 local and international brands, including key brands such as ABC, Baltika, Tuborg, Kronenbourg 1664 and Holsten. The Group’s operations are primarily concentrated in Europe (85% of sales), notably the Nordic region, the Baltic States and particularly in Russia where it claims ~39% share of the market. The Group also has a minor but increasing presence in Asia (revenue has close to doubled over the last 5 years), with a #1 position in Cambodia, Laos, Nepal and Western China. ABC’s FY’13 beer volumes declined 2% organically, resulting from (i) a challenging economic situation and negative consumer sentiment in the mature markets of Western Europe, where consumption has been generally flat or slightly declining, along with a marked shift to off-trade; and (ii) a negative regulatory environment in Russia, characterised by advertising restrictions, excise increases (200% in 2010, 11% in 2011, 20% in 2012, 25% in 2013), timing restrictions and a ban on the sale of beer in non-stationary pavilions and kiosks. Despite the volume declines, the Group maintained a price/mix of 2% (through a combination of portfolio optimisation and value management) and increased its value share across regions, generating a positive albeit minor organic net sales growth of 1% (reported sales were flat at DKK 66.6bn). Operating profit (before special items) increased by 5% organically, supported by cost benefits from centralisation of the supply chain and tight cost controls (reported operating profit was almost stable at DKK 9.8bn, with a small 10bps improvement in operating margin to 14.8%). Performance across Segments: Western Europe (41% of volumes): Beer volumes in Western Europe declined by 3% on an organic basis though net revenue was up 1%, supported by a strong price/mix of +3% (reported net revenue increased by 3% to DKK 38.8bn). Market share trends were positive in Sweden, Norway, Finland, Poland, Portugal, Italy, Bulgaria and Greece. Eastern Europe (35% of volumes): ABC’s beer volumes in Eastern Europe declined organically by 5% as the already-competitive Russian market was impacted more than expected by continued disruption from the closure of non-stationary outlets and an economic slowdown, leading to reduced consumer spending. Product mix was negative and organic net revenue in the region declined by 4% (reported revenue was down 9% to DKK 17.7bn, attributable to negative currency impact from the Russian and Ukrainian currencies). Asia (24% of volumes): The Asian operations continued to grow during the period, despite some markets being affected by slower growth and bad weather. Beer volumes grew organically by 6%, with international premium brands being an important driver (ABC and Tuborg were especially strong in India and China). Net revenue amounted to DKK 9.9bn, reflecting a strong organic growth of 14%, driven by a favourable price/mix of 8% (negative currency impact constrained reported revenue growth to 8%). Footprint in Asia: doubled over the past 5 years...
ABC Breweries A/S
Market leader in Western China: expanding towards the East...
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Financial Profile Following the acquisition of certain assets of Scottish & Newcastle in 2008, ABC deleveraged rapidly over the next 2 years, having reduced total debt to DKK 36.5bn in 2010 from a post-acquisition high of DKK 48.5bn (net leverage was down to 2.6x from 4.2x), particularly through a combination of DKK 1.3bn ($0.2bn) in realised synergies and a strong adherence to cash discipline, with moderate capex and tight working capital management. While annual CFO has averaged at ~DKK 10bn, further improvement in credit metrics has not been forthcoming in the last three years, primarily due to increased investments in the business to support network optimisation in Western Europe and capacity expansion in Asia (capex to sales ratio currently at 8.5% vs. 7.0% in 2012, 6.4% in 2011 and 5.2% in 2010). Total debt, as of December 31, 2013, was DKK 40.2bn, with a net leverage of 2.8x, both of which were relatively stable y-o-y. Liquidity, however, remains solid, underscored by cash balances of more than DKK 3.7bn as well as access to undrawn committed bank facilities to the tune of DKK 19bn (among these is a €800mn facility maturing in 2016 and a €1.7bn facility maturing in 2015, both without financial covenants), as against which the Group seems to have a comfortable maturity schedule, comprising DKK 9.5bn maturing in one year followed by slightly more than DKK 500mn in FY’15 and ~DKK 3.0bn in FY’16. The group's next bond repayment is scheduled in May 2014, when a €1.0bn bond comes due. While the amendment to the Charter increases financial flexibility and offers more headroom for the Group to pursue takeovers and capital increases, there are currently no plans for such a move. However, reflecting the proposed amendment to the Charter, ABC seeks to increase its dividend pay-out in phases to at least 25% of the Group's adjusted net profit (up from 17% in 2012). As a consequence of this, the Supervisory Board has decided to propose a 33% increase in dividend per share to DKK 8.00 for FY’13, which equals an adjusted payout ratio of 21% (as a result, total cash payout in FY’14 may amount to ~DKK 1.7bn). Debt Maturity Profile: comfortably placed... 25,000 19,724.0
In DKK mn
20,000 15,000 10,000
9,525.0 7,449.0
5,000
2,910.0 548.0
55.0
0 1 year
1-2 years
2-3 years
3-4 years
4-5 years
Beyond
Management Strategy ABC seeks to improve market shares and increase net revenue per hl by growing its strong local power brands as well as rolling-out its international premium brands in new markets, while maintaining a high level of support behind these brands. The Group will continue to focus on innovation (in terms of flavours, packaging, line extensions and marketing campaigns), portfolio optimization (pricing and assortment) and commercial execution. In Russia, which remains the Group’s best market in terms of margins, management seeks to utilize the strength of its brand portfolio, route-to-market, innovation capabilities and execution skills to further strengthen market position and improve profitability. Over recent years, ABC has continued to diversify outside of its core markets in Northern and Western Europe into developing countries. Recently, the Group announced an agreement to acquire 51% of Zatecky Pivovar in the Czech Republic and expects to widely roll-out its premium Czech beer, Zatec across key markets in Europe. Also, Asia continues to attract majority of the Group’s expansionary investments as management intends to be well positioned to capture growth in the region by investing in the business organically (brand development and capacity investments) as well as through focused M&A. The Group sees a significant opportunity in China which, despite being the world’s largest beer market in terms of volumes, has per capita consumption half that of Europe and North America, along with significant room for premiumisation (mainstream segment represents ~90% of the market). The Group has a national share of 5% and is heavily concentrated in the western part of the country (where it enjoys ~60% of the market), with M&A efforts focused on expanding towards the East and increasing shareholding in partly-owned businesses. For example, in November 2013, ABC completed the partial takeover of Chongqing Brewery Company, taking its ownership share to 60% (from 29.7%) for DKK 2.6bn (implying a forward EV/EBITDA multiple of c.19x) and expects to complete the DKK 1.4bn acquisition of Chongqing Beer Group Assets Management in 2014. The company comprises a total of eight breweries with a capacity of approximately 12 million hl in the eastern provinces of Jiangsu, Anhui and Zhejiang. In the preceding year, the Group increased ownership in the Chongqing Jianiang Brewery JV to 49.6%. The Group has recently amended its charter to allow for greater headroom in raising capital and pursuing growth opportunities by removing the condition that the ABC Foundation hold 25% of share capital in ABC A/S, though it shall still continue to hold 51% of voting rights. Given the challenged operational dynamics in core markets, the Group seeks to have a tight control on costs and has initiated long-term programmes in order to enhance operational efficiency and margins. The ABC Supply Company (CSC) was established in 2012 to integrate the production and logistics of the brewery network in Western Europe, thereby optimising warehouse and logistics structures, reducing distribution costs and improving on-shelf-availability (which is currently average, at about 90%). Furthering this objective, the Group began the roll-out of the supply chain integration and business standardization project (BSP1) in 2013, aimed at standardising work processes across markets through a common IT platform, thereby improving speed and asset utilization. The implementation of BSP1, scheduled for completion in 2015, is expected to grow margins in Western Europe by at least 50bps a year over the next 5 years. Sweden and Norway went live in 2013, with roll-out in UK expected in 2014. Management estimates costs of DKK 450mn-DKK 500mn to implement the BSP1 programme in 2014.
SWOT Analysis Strengths/ Opportunities ABC is the 2nd largest brewer in Europe and the 4th largest in the world, benefitting from a notable brand portfolio and strong market positions in the Nordic region, the Baltic States, Switzerland and Russia, in addition to an expanding footprint in Asia where, despite higher currency volatility in the near term, organic growth is anchored to favourable demographics, strong pricing mix, successful value management and premiumization of local and international brands. Although ABC’s margins are weaker relative to peers, reflecting a negative geographic mix, the implementation of BSP1 is expected to grow margins in Western Europe by at least 50bps a year over the next 5 years). Margins will also be supported by benign input cost inflation (malting barley prices down ~20% y-o-y). Liquidity remains solid, underscored by cash balances of more than DKK 3.7bn and undrawn committed bank facilities to the tune of DKK 19bn, as against which the Group has DKK 9.5bn maturing in one year. Management remains committed to investment grade credit quality and has a strong adherence to cash discipline. Weaknesses/ Threats The Group’s operational profile continues to be strained by challenging trading conditions in Western Europe, with rising indirect taxes, falling real wages, high unemployment and weak consumption, in addition to ongoing channel shift towards off-trade. Markets are highly fragmented and competitive, with retailers gaining more scale and leaving the brewers with limited to negligible pricing power. The Group has a fairly high concentration in Russia, which is a cause for concern as the Russian beer market has continued to decline over the last few years. Despite 11% of total Russian capacity having been taken out in the past 2 years, utilization is low and is expected to render a major improvement in pricing unlikely. Following the rapid deleveraging after the Scottish and Newcastle deal in 2008, further improvement in credit metrics has not been forthcoming, primarily due to increased investments in the business. ABC already has one of the highest capex spending among the major brewers and may increasingly be expected to pursue active M&A in Asia.
ABC Breweries A/S
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Financials DKK mn YE December 31 Net Revenue Beer Volumes (million hl) Revenue per hl Cost of Sales Gross Profit Gross Profit M argin Sales and Distribution Expenses Administrative Expenses Other Operating Activities, Net Share of Profit after Tax, Associates EBIT1 EBIT M argin Depreciation & Amortization Impairment Losses EBITDA 1 EBITDA M argin CFO CFO/Sales Capex: PPE and Intangibles Disposals: PPE and Intangibles Net Capex Net Capex/Sales FCF FCF M argin ROCE Cash and Equivalents Short-Term Debt Long-Term Debt Total Debt Total Debt/EBITDA Shareholder's Equity Total Capitalization Debt/Capitalization ST Debt/ Total Debt Net Debt Net Debt/EBITDA Operating Lease Expenses Operating Lease Liabilities Pension Obligations Adjusted Total Debt Adjusted Total Debt/ EBITDAR 1 Adjusted Net Debt/ EBITDAR Total Debt/FCF Debt/Equity EBITDA/Interest EBITDAR/(Interest+Rentals) Payout Ratio (Company) Dividends in Cash % FCF Cash Interest Expense (1) Before special items
ABC Breweries A/S
2008 59,944.0 126.8 472.7 (31,249.0) 28,695.0 47.9% (17,592.0) (3,934.0) 728.0 81.0 7,978.0 13.3% 3,628.0 4.0 11,610.0 19.4% 7,812.0 13.0% (5,292.0) 374.0 (4,918.0) 8.2% 2,894.0 4.8% 7.4% 2,857.0 5,291.0 43,230.0 48,521.0 4.2x 59,901.0 108,422.0 44.8% 10.9% 45,664.0 3.9x 677.0 2,651.0 1,793.0 52,965.0 4.3x 4.1x 16.8x 0.8x 4.4x 3.7x 20.0% 723.0 25.0% 2,635.0
2009 59,382.0 137.0 433.4 (30,197.0) 29,185.0 49.1% (15,989.0) (3,873.0) (45.0) 112.0 9,390.0 15.8% 3,769.0 10.0 13,169.0 22.2% 13,631.0 23.0% (2,767.0) 255.0 (2,512.0) 4.2% 11,119.0 18.7% 9.5% 2,734.0 3,322.0 36,075.0 39,397.0 3.0x 59,489.0 98,886.0 39.8% 8.4% 36,663.0 2.8x 463.0 1,961.0 2,153.0 43,511.0 3.2x 3.0x 3.5x 0.7x 5.6x 4.8x 15.0% 846.0 7.6% 2,372.0
2010 60,054.0 136.5 440.0 (28,982.0) 31,072.0 51.7% (17,158.0) (4,040.0) 227.0 148.0 10,249.0 17.1% 3,987.0 0.0 14,236.0 23.7% 11,020.0 18.4% (3,326.0) 181.0 (3,145.0) 5.2% 7,875.0 13.1% 9.7% 2,735.0 3,959.0 32,587.0 36,546.0 2.6x 69,629.0 106,175.0 34.4% 10.8% 33,811.0 2.4x 545.0 1,964.0 2,434.0 40,944.0 2.8x 2.6x 4.6x 0.5x 6.6x 5.5x 14.0% 1,243.0 15.8% 2,165.0
2011 63,561.0 139.8 454.7 (31,788.0) 31,773.0 50.0% (18,483.0) (3,903.0) 249.0 180.0 9,816.0 15.4% 3,780.0 4.0 13,600.0 21.4% 8,813.0 13.9% (4,329.0) 276.0 (4,053.0) 6.4% 4,760.0 7.5% 9.1% 3,145.0 1,875.0 34,364.0 36,239.0 2.7x 71,629.0 107,868.0 33.6% 5.2% 33,094.0 2.4x 565.0 1,899.0 3,263.0 41,401.0 2.9x 2.7x 7.6x 0.5x 7.0x 5.7x 16.0% 884.0 18.6% 1,935.0
2012 66,468.0 140.9 471.7 (33,831.0) 32,637.0 49.1% (18,912.0) (4,185.0) 145.0 108.0 9,793.0 14.7% 3,991.0 28.0 13,812.0 20.8% 9,871.0 14.9% (5,067.0) 440.0 (4,627.0) 7.0% 5,244.0 7.9% 8.6% 5,760.0 3,352.0 36,706.0 40,058.0 2.9x 73,650.0 113,708.0 35.2% 8.4% 34,298.0 2.5x 522.0 1,960.0 3,957.0 45,975.0 3.2x 2.8x 7.6x 0.5x 7.3x 5.9x 16.0% 1,121.0 21.4% 1,905.0
2013 66,552.0 138.7 479.8 (33,622.0) 32,930.0 49.5% (18,717.0) (4,502.0) 17.0 116.0 9,844.0 14.8% 3,983.0 6.0 13,833.0 20.8% 9,083.0 13.6% (5,788.0) 150.0 (5,638.0) 8.5% 3,445.0 5.2% 8.8% 3,714.0 9,525.0 30,686.0 40,211.0 2.9x 71,499.0 111,710.0 36.0% 23.7% 36,497.0 2.6x 515.0 1,824.0 3,093.0 45,128.0 3.1x 2.9x 11.7x 0.6x 8.0x 6.4x 22.0% 1,274.0 37.0% 1,726.0
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Segmental Analysis DKK mn YE December 31 Segm ent Western Europe Q1 Q2 Q3 Q4 Eastern Europe Q1 Q2 Q3 Q4 Asia Q1 Q2 Q3 Q4 Not Allocated Total
ABC Breweries A/S
2012 Net Revenue 37,727.0 7,524.0 10,667.0 10,361.0 9,175.0 19,502.0 2,951.0 6,266.0 5,805.0 4,480.0 9,114.0 2,261.0 2,379.0 2,389.0 2,085.0 125.0 66,468.0
EBIT 5,121.0 477.0 1,799.0 1,807.0 1,038.0 4,302.0 19.0 1,509.0 1,600.0 1,174.0 1,685.0 433.0 431.0 502.0 319.0 (1,315.0) 9,793.0
EBIT Margin Net Revenue 13.6% 38,796.0 6.3% 7,767.0 16.9% 10,764.0 17.4% 10,939.0 11.3% 9,326.0 22.1% 17,711.0 0.6% 2,902.0 24.1% 6,245.0 27.6% 4,598.0 26.2% 3,966.0 18.5% 9,874.0 19.2% 2,555.0 18.1% 2,608.0 21.0% 2,392.0 15.3% 2,319.0 NM 171.0 14.7% 66,552.0
2013 EBIT 5,269.0 426.0 1,737.0 2,014.0 1,092.0 4,127.0 83.0 1,608.0 1,297.0 1,139.0 1,921.0 493.0 493.0 493.0 442.0 (1,473.0) 9,844.0
EBIT Margin 13.6% 5.5% 16.1% 18.4% 11.7% 23.3% 2.9% 25.7% 28.2% 28.7% 19.5% 19.3% 18.9% 20.6% 19.1% NM 14.8%
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