Annual Report Analysis

Group 8:
Pierre Guine
Davide Lora
Eike Ketelsen
Amelie Koch
Ccile Pons
The following paper is a summary and analysis of the economic situation of Anheuser-Busch InBev.

1 Companys business
ABInBev, a merger of Anheuser-Busch and InBev, is a multinational and worlds largest beverage and
brewing company. The company owns more than 200 brands worldwide, including global brands like
Budweiser and Corona, international brands like Becks and Leffe, and so-called local Champions
like BudLight and Franziskaner. In 2014, their revenue was 47.1 billion USD, resulting in a global
market share of 25%. 16 of their brands generate more than 1 billion USD/year in revenue. They are
listed on the Euronext Brussels stock exchange as well as on the New York stock exchange. The
company is segmented in 6 regions.

2 Risk Factors
In the Annual Reports, the company names several Risk Factors, which can be classified as follows:
Economic risks: availability and price of raw materials, influence of key third parties
(suppliers, competitors) on price
Political and legal risks: taxation, political insurrections, intellectual property rights (e.g.
patents, trade secrets) and compliance
Social risks: new trends / innovations, changing consumers tastes, social acceptability of
beer and image and reputation
Financial risks: market risks (foreign currency risk, interest rate risk, commodity price risk,
equity risk, fair value risk and capital risk), credit risks and liquidity risks

3 - Sustainability, Strategy, Corporate Responsibility

The companys global goals are to increase sustainability, to be the Best Beer Company in a Better
World and to create value for the shareholders.
ABInBev tries to make its brands portfolio stronger by the growth of the premium segment
and international labels, but also by focusing on local brands: These leading brands, focused on local
markets, are the core of our business. Some local champions, adapted to each culture, can be
found in Mexico (Victoria, Modelo Especial), US (Bud Light), Brazil (Skol, Brahma), China (Harbin,
Sedrin) and South Korea (Cass).
On the other side, the company innovates through the creation of new products: in 2013,
new products represented 8% of sales volume. For instance, in 2012, they launched a new product
called Lime-A-Rita but also a new category of beverage -Rita- to expand their range of consumers.
In 2013, the launch of Straw-Ber-Rita was the biggest success on new products in the U.S. The R&D
budget increased by 19.2% between 2012 and 2014. It includes market research, but the majority
finances innovation in process optimization and product development.

2012 2013 2014

R&D Budget $182 m $185 m $217 m

Its mentality is to think out the box. In fact, today, the behaviour and the customers tastes
change so fast that ABInBev has to anticipate this evolution of the demand in order to achieve its
goal: being the best company bringing people together for a better world. Innovation is a really
important matter to create the new consumption of its customers instead of trying to follow the
trends. Thus, the company has millions of followers on social networks and works on digital
innovation to become the top consumer goods company in digital connections. In 2014, the
campaign Up For Whatever promoting Bud Light beer invited consumers to participate to a video
contest that has been a success with almost 2 million views.
 ABInBev has the goal to group people, so they also sponsor many music events, as the MADE
for Music campaign in 2013, and sports events, such as the FIFA World Cup in 2014. They want to
bring people together around their drinks, but keeping always in mind responsible drinking.

RESPONSIBILITY POLICY OF THE COMPANY

PEOPLE
- Responsible drinking awareness compaigns PLANET
(prevent alcohol abuses, driving while drunk, - Preserving environment
underage drinking)
(water & energy
- Founding members of TSR: Together for consumption, gas emissions)
Safer Roads in 2014
- In logistic operations too:
- Humanitarian projects (deliver drinking
water in devastated zones, building schools in alternative fuels, efficient
China) trucks...
- Hiring high potentials and developing talents - Set of ambitious goals for
- Safety in working environment ensured and PROFIT
the end of 2017
controlled (audit system)

4 Management/Board Letter and Corporate Governance

The term of the mandate came to an end in 2014 for 8 members of the board. Two mandates,
including the one of the chairman of the board, were renewed for one year. He has been in the
board since 2002. The audit committee meets 10 times a year in order to ensure the compliance of
the company. The other committees (finance, nomination, remuneration) meet four times per year.
The shareholder structure is very stable.

5 - Management Compensation/Remuneration
According to its remuneration policy for executives AB in Bev granted shares each year.
2012 2013 2014
Shares granted to the executives 442 579 222 630 228 200

The company offers stock options to its directors and executive ($3.2 million and $90 million
on average). Warrants (right to subscribed to newly issued shares) were replaced by stock options for
directors in 2014. The company also offers bonus shares to senior managers investing their bonuses
in shares (it represents an average amount for the last 2 years). The remuneration for the board of
directors is also presented below.

Remuneration of executives and board members 2012 2013 2014

Fixed remuneration CEO $1.64 m $1.64 m $1.64 m
Variable compensation CEO $3.20 m $4.36 m $1.34 m
Aggregate fixed remuneration for other executives board N/A $9.94 m $10.45 m
management members
Aggregate variable remuneration for other executives $12.02 m $15.15 m $6.53 m
board management members
Total fee for all directors as a group N/A $1.04 m $1.22 m
 The variable compensation increase is explained by the acquisitions in 2013 and 2014.
Management received shares and stock options as a reward for their performance, meaning they
benefit from the higher valuation of the consolidated group.

6 Key events
The key events of the years 2012 2014 were certainly the formation of a strategic alliance with ELJ
and CND to create the leading brewery company in the Caribbean, the acquisition of the Mexican
company Grupo Modelo in 2013 and the acquisition of the South Korean company Oriental Brewery
in 2014. In addition, in 2013 and 2014, several Chinese breweries were acquired. The purchase price
was approximately 439 million USD (2013) and 868 million USD (2014). All acquired businesses had
an immaterial impact on profit in 2013 and 2014.
The two big acquisitions of Grupo Modelo in 2013 and Oriental Brewery in 2014 had a rather
significant impact on the financial reports of ABInBev. The acquisition of Grupo Modelo was valued at
20.1 billion USD and a non-cash gain of 6.4 billion USD was booked. As of 4 June 2013, Grupo Modelo
contributed 3.34 billion USD to the revenue and 0.6 billion USD to the profit of ABInBev. If the
acquisition date had been 1 January 2013, it is estimated that revenue and profit would have been
5.74 billion USD and 1.1 billion USD, respectively. 19.6 billion USD of goodwill were allocated.
The value for the transaction of Oriental Brewery was 5.8 billion USD. Goodwill was
estimated to be 4.3 billion USD. As of 1 April 2014 Oriental Brewery contributed 1.14 USD to the
revenue and 0.21 USD to the profit of ABInBev. Again, if the acquisition date had been 1 January
2014, it is estimated that revenue and profit would have been 1.46 USD and 0.28 USD, respectively.
Both acquisitions can be seen in the Segment Assets (Figure x). In 2013, the assets in Mexico
increased dramatically, whereas in 2014, the assets in Asia-Pacific increased. The size of the
acquisition in Asia-Pacific was smaller than the one in Mexico, which can also be seen in the Segment
Assets.

7 Financial performance
Balance Sheet
Fixed assets constitute almost 90% of total assets as shown in Figure 1. Goodwill is considered as a
fixed assets, and represents around 55% of total fixed assets. In 2014, goodwill represents an amount
of $70.8 billion. The acquisition of Grupo Modulo in 2013 resulted in $19.6 billion of goodwill, which
presents a good investment, as the deal was valued $21 bn. The acquisition of Oriental Brewery in
2014 results in $4.3 billion of goodwill. The remaining 10% of assets is composed by the account
receivable which are around a third with respect to the account payable and by cash.
Apart from 2012, the Golden Rule of Balance Sheet does not apply, thus resulting is an
increased solvency risk. The account payable saw a 41.9% increase between 2011 and 2012, the
company succeeding in paying its suppliers later. Short term debt (ST Liabilities), equity and long
term debt (LT Liabilities) increase all years along with the company in a relatively stable way. LT debt
increases 18.2% compared to the 2011 level, but equity increases 32.4%, mainly due to retained
earnings.
A point of concern is the amount of goodwill, which is a fictive asset, and it can undergoes
huge depreciation. For example, in 2014, the French group GDF Suez presented a depreciation of
goodwill of $15 billion, because overpriced synergies.
 AbInBev - M$ Balance Sheets
160.000
140.000
120.000
100.000
80.000
60.000
40.000
20.000
0
31/12/11 31/12/12 31/12/13 31/12/14
Oth. Curr. Liab. Cash ST Fin. Assets
Acc. Receivable Oth. Curr. Assets Inventories
Fixed Assets ST Debt Acc. Payable

Figure 1: Balance sheets (data in M$)

Income Statements
Sales increase all years along with profits. In 2013 an Other income boosts the profit of a$6,4 billion
amount. This Other income is mostly constituted by a Fair Value Adjustment, a non-cash impact
revaluation of a past investment in Grupo Modelo. It is the goodwill resulting in the synergies created
by the merger. The sales rise 8.5% in 2013 and 9% in 2014. All other expenses and incomes remain
rather stable.

60.000
AbInBev - M$ Income Statements (function of expense)
50.000

40.000

30.000

20.000

10.000

0
31/12/12 31/12/13 31/12/14
Profit Loss Tax exp./benefit Financial income Other income S+A exp. COGS Sales

Figure 2: Income statement (data in M$)

Cash Flow Statements
Investments are constant at around $11 billion. Operating cash flow slightly increases over the years
(4.5 % increase in 2013, 1.4% increase in 2014). Equity payout doubled between 2012 and 2014. In
2014, the company paid $7.4 billion dividends. The result is a negative total cash flow in 2014. In
2013 the company increased its financing liabilities probably to finance such a rise in equity payout.
Every year, the operating cash flow covers the company investments, which ensure stable and
sustainable business.

AbInBev - M$ Cash Flow Statements

25.000
20.000
15.000
10.000
5.000
1.739 2.782
0 -1.517
-5.000
-10.000
-15.000
-20.000
-25.000
31/12/12 31/12/13 31/12/14

CF Operating CF Investing CF Financing Liab.

CF Financing Equity CF Discontinued operations Currency Translation

CF Total (= +/- Cash) Figure 3: Cash flow statements (data in M$)

Equity Reconciliation
Each year, some profit is saved as retained earnings to increase equity. The increase in retained
earnings represents respectively 40%, 57% and 37% over the 3 years. Other comprehensive incomes
(OCI & Restatements) are always negative. They represents $5 billion in 2014, which, along with $7.4
billion paid dividends, result in a drop in equity of $1 billion. However, it has seen an increase of
around $10 billion in 2013.

AbInBev - M$ Equity Reconciliation

20.000
15.000
10.000 9.855
5.000 4.409
0 -1.051
-5.000
-10.000
-15.000
31/12/12 31/12/13 31/12/14

Profit (Loss) OCI & Restatements CF Financing Equity +/- Equity

Figure 4: Equity reconciliation (data in M$)

Net Working Capital
AbInBev over the years increases the days payable outstanding, which were already above 300 days,
by 12% over 3 years. At the same time it keeps constant the days in account receivable and days in
inventory. The company thus receives the cash before paying its bills, a comfortable situation.

AbInBev - M$ NWC Management

400
340
350 315
303
300
250
200
150
100 54 56 57
37 39 45
50
-
31/12/12 31/12/13 31/12/14
Days in Acc. Receivable Days Payable Oustanding Days in Inventory

Figure 5: Net working capital management (data in in M$)

Liquidity
The current ratio is always below 100% (around 70%) apart from 2012. Current liabilities are always
higher than current assets. The net working capital decreases over the years becoming $-8.7 billion in
2014, from $222 million in 2012. . The liquidity risk is very high. Therefore, in case of non-predictable
events, the company will not be able to pay its functioning costs (e.g. salaries). However, one should
keep in mind that without the $7.4 billion paid dividends in 2014, the company would be able to
improve its net working capital. The management simply decided to focus on investors and
shareholders rather than on financial health. The cash ratio is over 30%, decreasing from 38% to 31%
between 2013 and 2014. The company still maintains a great amount of cash in order to deal with
current expenses.

120% AbInBev - M$ Liquidity 2.000

100% 222 0
80% -2.000
60% -4.000
40% -6.000
-7.321 -6.937
20% -8.000
-8.667
0% -10.000
31/12/11 31/12/12 31/12/13 31/12/14

Cash Ratio Quick Ratio, Acid Test

Current Ratio Net Working Capital

Figure 6: Liquidity (data in M$)

Profitability
Apart from the 2013 differences, due as mentioned above to the Fair Value Adjustment, the ROA,
ROS and ROE are stable, respectively an average of 8.0%, 23.75%, and 21%. The huge dividends in
2013 and 2014, $6.4 billion and $7.4 billion, explain the high ROE. The dividends policy has been a
way for the company to attract new investors while keeping existing ones.

AbInBev - M$ Profitability
45%
40% 38,2%
35% 32,8%
30%
23,5% 24,0%
25% 21,6% 20,6%
20%
15% 12,5%
10% 7,9% 8,0%
5%
0%
31/12/12 31/12/13 31/12/14

ROS ROA ROE

Figure 7: Profitability (data in M$)

Stability
As shown in figure 8, the company asset coverage from equity and LT liabilities is stable above 90%.
The equity ratio is really stable over the years, compensating the increases in fixed assets (mostly
goodwill) with retained earnings. Even with huge amounts of paid dividends, the company manages
to keep its equity ratio stable, which is a healthy practice regarding the category of its fixed assets.
However, one should keep in mind that the company cannot sell its assets to solve its debts, because
goodwill is pure fiction and hypotheses, therefore the coverage of the debt with assets is not as
stable as it may appear.

AbInBev - M$ Stability
120%
100,2%
100% 92,7% 94,4% 93,0%

80%

60%
41,0% 44,6% 45,0% 43,8%
36,5% 37,1% 39,0% 38,1%
40%

20%

0%
31/12/11 31/12/12 31/12/13 31/12/14
Equity Ratio Asset coverage I Asset coverage II

Figure 8: Stability
 8 Financial performance of segments
The company segmentation is related to geographical subdivision. The 6 segments are North
America, Mexico, Latin America North, Latin America South, Europe and Asia Pacific. 4 key indicators
are: sale volumes, revenues, profit and segment assets. North America and Latin America North
immediately stand out as the main markets. Latin America performs especially well with the highest
profit despite small assets and not the highest revenues. Profits for Europe and Asia Pacific are small,
given the concurrent firms and the fact that the market is somehow driven by small prices. The
conversion rate from revenues to profit is thus heavily inferior compared to North America and Latin
America North. Mexico is slowly developing and, despite no profit within the last 3 years, with the
recent acquisition of Grupo Modelo the situation is bound to change.
ABInBev, as the number one beer company in term of market shares, exhibits incredible
market shares: 46.4% in the US, 68.2% in Brazil, 78.1% in Argentina, 55.7% in Belgium, among others.
Their acquisition policy allows them to gain ground. For example, they went from 0% to 57.8% in
Mexico with Grupp Modelo, and from 0% to 60.4% in South Korea with the acquisition of Oriental
Brewery.
Segment assets (million $)
80000

70000
Volumes (Mhls) Revenues (M$) Profit (M$) Segment assets
500 50000 12000
(M$)
60000

50000 10000 150000

400 40000
40000 8000
300 30000 100000
30000 6000
200 20000
20000 4000 50000
10000
100 10000 2000
0 0 0 0 0
201220122013 2014 2012 2013 2014 2013 2012 2013 2014 2012 2013 2014
2014
North America Mexico Latin America North Latin America South Europe Asia Pacific

Figure 9: ABInBev Geographic Market segmentation

9 Market capitalization
The table below presents the market capitalization of ABInBev.
2012 2013 2014
Weighted average of shares outstanding (million shares) 1600 1617 1634
Year-end share price () 65.7 77.26 93.86
Market capitalization (million ) 105 209 124 097 150 867

Then the figure below shows the comparison between ABInBev quote and the S&P500, which
represents the 500 biggest company in the US, thus being a comprehensive picture of the evolution
of the market and the overall economic situation. The comparison goes from 2012 to 2014.
The company is over performing the S&P500, with the same global trend. It is possible to
infer a beta above 1, around 1.5, meaning when the market is going good, ABInBev stock registers
even better performance, but when the economic situation deteriorates, the stocks plunder even
more heavily.
 Figure 10: ABInBev stock price vs S&P500 (red line)

The market-to-book ratio represents the ratio between market capitalization and equity. The
ratio is superior to 3. A ratio superior to 1 can mean that either the stock is overvalued, or the market
trusts this company. In this case, it is worrisome, because the major part of the assets is goodwill, an
intangible asset, meaning that in case of downsizes the company cannot really sell its assets to
reimburse debt and shareholders.
2011 2012 2013 2014
Market capitalization (million USD) 98 315 138 716 171 142 183 167
Book value (equity in million USD) 41 044 45 453 55 308 54 257
Market-to-book ratio 2.40 3.05 3.09 3.38

10 - Auditor for the last 3 years

For the past 3 years, the auditor has been PWC (PricewaterhouseCoopers).

11 - Conclusions
ABInBev is the leading company in beer, one if not the most popular alcohol beverage. Its
active acquisition policy has led to dominant market shares in almost every part of the world. Its
progression on the market is driven by acquisitions. The business is very stable over the years, with
very high ROS, thus high margin and profitably. In addition, a high ROE, makes ABInBev a privileged
investment target. The last years high dividends show the company will to attract new investors.
Its corporate social responsibility respects the 3Ps law: People, Planet and Profit. It is an
indicator that the company bears in mind sustainability.
The main concern is the preponderance of goodwill in the fixed assets, which can be subject
to devaluation. Due to the $70 billion of goodwill, such an event would imply tremendous loss.
Therefore, even with stable, but still growing profit, monitoring the evolution of the company is
necessary, and the reimbursement of debt using goodwill in order to clean the accounts.
In 2015 ABInBev has announced its will to merge with the number 2 in the industry, and,
despite 2 failures this year, the company appears heavily consolidated and the future will
undoubtedly bring enthusiastic prospectives.