Belgium: InBev consolidated revenue increased by 8.1% in 1H 2006

InBev, the world’s leading brewer by volume, released September 06 its Unaudited Interim Report for the 6 month period ended 30 June 2006.

The consolidated revenue was 6.176 million euro, +8.1% higher (or +416 million euro) year-on-year (yoy). The implementation of revenue management initiatives across the business resulted in revenue growing above volume.

Latin America had higher revenue/Hl, due to price increases in line with inflation, together with more volumes being sold through direct distribution.

In Central & Eastern Europe, increased revenue/Hl was mainly the result of better pricing. Revenue per hl improved by +1.1 euro on an organic basis, more than offsetting an estimated negative “geography” impact of -0.4 euro/hl. This negative geography impact results when countries with lower revenue/hl grow faster than countries with higher revenue/hl.

Consolidated cost of sales (CoS) was 2.553 million euro, an organic increase of -3.6% (or -80 million euro). The CoS per hl improved by +0.51 euro organically (+2.3%), of which an estimated 0.11 euro/hl was the positive impact of the change in the geography mix previously explained.
Volume growth, higher revenue/hl, and cost control resulted in consolidated gross margin expansion of 184bp yoy.

Operating expenses were 2.226 million euro, representing an increase of -4.0% (or -79 million euro) when compared to the first half of 2005. Distribution expenses increased by -67 million euro (-11.0%), as direct distribution expenses in Latin America were higher, and logistics costs grew in Western Europe and Central & Eastern Europe. Sales and marketing expenses rose -59 million euro (-6.5%), reflecting the company’s commitment to invest to achieve healthy and sustainable top line growth. Administrative expenses decreased by +1 million euro (+0.1%), as strong expense control was achieved in nearly all areas of the business. Other operating income/expenses were +46 million euro (+128.8%) better than the first half of 2005. This improvement was mainly due to a release of provisions for non-income taxes, and fiscal incentives, both in Latin America.

Normalized EBITDA was 1.886 million euro, or an organic increase of +20.9% (up +284 million euro). North America EBITDA totaled 212 million euro (+7.0% / up +12 million euro), based upon very good cost management. Latin America EBITDA was 1.027 million euro (+27.5% / up +180 million euro) due mainly to good sales volumes and revenue growth, only partly offset by more spending on commercial and distribution expenses. Western Europe had an EBITDA of 347 million euro (+10.6% / up +33 million euro), as volumes grew and expenses were contained.
Central & Eastern Europe delivered 180m euro (+27.7% / up +36 million euro) of EBITDA, reflecting primarily a good top line result, which was only partially offset by increased distribution expense and higher marketing and sales spend. Asia Pacific generated a 80 million euro EBITDA (-5.3% / down -4 million euro), mainly as a result of much lower first quarter sales volumes growth in South Korea at relatively high margins, which could not be fully offset by top line growth in China, and a solid achievement in controlling expenses in all areas.

The EBITDA of Global Export & Holding Companies reached 39 million euro (+201.3% / up +26 million euro), impacted by higher royalty fees.

As a result of these factors, InBev’s EBITDA margin was 30.5% in the first half of 2006 compared to 26.1% in the corresponding period last year, representing an expansion of +442 basis points, of which +311 basis points was organic (i.e. excluding the impact of acquisitions & divestitures, as well as the positive impact of changes in currencies on translation of foreign operations).
The currency impact for the first half of 2006 amounted to +239 million euro.

Normalized profit attributable to equity holders of InBev was 602 million euro (normalized EPS 0.99 euro) in HY06. Reported profit for the period, was impacted by the following:
Net financing costs: 218 million euro, -39 million euro higher than HY05, of which -29 million euro was due to the negative currency translation impact. Excluding this currency effect, the -10 million euro increase in net financing costs is primarily explained by the combined effect of i) the adoption of hedge accounting for part of InBev’s bonds since December 2005, ii) better results on economic hedges for which hedge accounting is not applied and iii) lower foreign currency gains as compared to HY05.

The latter relates to open positions in the UK and Ukraine for which no hedging was performed since either hedge accounting cannot be applied (e.g. intercompany transactions) or the illiquidity of the local foreign exchange market prevents from hedging at a reasonable cost.
Income tax expense: 219 million euro (19.7% effective tax rate vs. 23.8% in HY05). The decrease in the effective tax rate is mainly explained by the higher profit contribution at a more favorable tax rate versus HY05 from AmBev. This is the result of the interest on equity benefit on one hand, and the effect of the goodwill tax deduction from the merger between InBev Holding Brasil and AmBev, as announced in July 2005, on the other hand.

Profit attributable to minority interests: 332 million euro, higher than HY05, mainly due to increased profitability in Latin America, partly offset by the increase of InBev’s share in AmBev.

Return on invested capital (ROIC) is calculated as profit from operations after tax, plus share of result of associates and dividend income from investments in equity securities, divided by the invested capital; prorated for acquisitions of subsidiaries done during the year. Invested capital consists of property, plant and equipment, goodwill and intangible assets, investments in associates and equity securities, working capital, provisions, employee benefits and deferred taxes. The normalized return on invested capital excludes the effect of the non-recurring items.
The increase in the (normalized) ROIC between 2005 and 2006 is explained by a strong operational performance in the first half of 2006 in relation to a significant smaller increase in invested capital. Last year’s ROIC figures were heavily impacted by the big increase in invested capital due to the purchase of significant minority interests, leading to additional goodwill of 1 739m euro, and by the appreciation of the Brazilian real.

The increase in interest expense by 30 million euro as compared to 2005 is fully explained by the negative currency translation effect of primarily the Brazilian real and Canadian dollar for which the average exchange rate decreased by respectively 19.6% and 13.2% as compared to last year.

The decrease in net foreign exchange gains from 32 million euro last year to 1m euro at 30 June 2006 and the increase in the gain from the net revaluation to fair value of derivatives by 20 million euro is the combined effect of i) the adoption of hedge accounting for part of InBev’s bonds since December 2005, ii) better results on economic hedges for which hedge accounting is not applied and iii) lower foreign currency gains as compared to the first six months of 2005. The latter relates to open positions in the UK and Ukraine for which no hedging was performed since either hedge accounting cannot be applied (e.g. intercompany transactions) or the illiquidity of the local foreign exchange market prevents from hedging at a reasonable cost.

The decrease in non deductible tax expenses from 154 million euro in 2005 to 121 million euro in 2006 is primarily explained by lower intercompany gains which were last year taxed while eliminated in the InBev consolidated financials. The increase in nontaxable financial and other income from 37 million euro last year to 68 million euro in 2006 is mainly the result of higher financial income that is not subject to income taxes.

The strong increase in tax savings from tax credits from 38 million euro in 2005 to 177 million euro in 2006 is mainly explained by the AmBev goodwill tax deduction from the merger between InBev Holding Brasil and AmBev as announced in July 2005 and higher interest on equity payment at AmBev level.

The higher withholding taxes are primarily related to higher 2006 profits for which withholding taxes are due upon distribution to the parent companies.

InBev’s cash flow from operating activities increased from 573 million euro in the first half of 2005 to 1 209m euro in the first half of 2006, or 111%, mainly explained by a strong increase in the cash generated from operations (613 million euro).

The evolution of the cash used in investment activities from 1.635 million euro in the first six months of 2005 to 1.280 million euro in the first six months of 2006 is mainly explained by the strong decrease in the purchase of minority interests when compared to previous period, partially compensated by the acquisition of the Fujian Sedrin Brewery 603 million euro, net of cash acquired. The cash inflow from InBev financing activities decreased from 505 million euro in the first six months of 2005 to 150 million euro in the first six months of 2006, impacted by lower proceeds from borrowings and 58 million euro cash outflow for the purchase of treasury shares.

InBev spent 432 million euro in the first six months of 2006 and 551 million euro in the first six months of 2005 on acquiring capital assets.

The decrease in net capex is mainly explained by the 67 million euro proceeds from the sale of the Rolling Rock® brands. For the first half year of 2006, out of the total capital expenditures, approximately 61% was used to improve InBev production facilities while 32% was used for logistics and commercial investments. Approximately 7% was used for improving administrative capabilities and purchase of hardware and software.

InBev spent 606 million euro in the first six months of 2006 on acquiring businesses (of which Sedrin for 603 million euro) compared to no acquisition expenditures during the same period last year. As regards purchases of minority interests, InBev spent 238 million euro during the first half of 2006 compared to 1.124 million euro in the same period of 2005. As already mentioned above, its principal purchases of minority interests relate to AmBev Brazil, Oriental Brewery in Korea and InBev Germany Holding GmbH.

InBev’s net financial debt increased to 5.344 million euro as of June 2006, from 4.867 million euro as of December 2005. Apart from operating results net of capital expenditures, the increase in net debt is primarily the result of the financing of the Fujian Sedrin acquisition (603 million euro); the InBev and AmBev share buyback programs (200 million euro); additional purchases of shares in Oriental Brewery (28 million euro) and InBev Germany Holding GmbH (68 million euro); dividend payments to shareholders of InBev (284 million euro); dividend payments to minority shareholders of AmBev (126 million euro), partly offset by the impact of changes in foreign exchange rates (105 million euro).

Consolidated equity attributable to equity holders of InBev as at 30 June 2006 was 11 651 million euro, compared with 11 471 million euro at the end of 2005. Foreign exchange translation adjustments impacted equity negatively with 97 million euro.

A number of acquisitions, divestitures and joint ventures affected InBev’s profit from operations and financial condition over the past two years. The main transactions are highlighted hereafter.

Transactions for the first six months 2006

Acquisition of Fujian Sedrin Brewery in China
On 23 January InBev announced that it reached agreement with various parties to acquire, in a series of transactions, 100% of the shares in Fujian Sedrin Brewery Co. Ltd. ("Sedrin"), the largest brewer in Fujian province, for a total cash consideration of 5.886 million RMB. The acquisition was completed on 8 June. The total RMB purchase price of 5.886 million was settled in US dollar for an equivalent EUR amount of 621 million.

Combined with InBev's existing operations in China, this transaction positions InBev as one of the largest brewers in China with 36 million hl volumes sold in 2005 and a leading presence in the affluent southeastern part of China.

Increase of shareholding in Quinsa
On 13 April, InBev announced that AmBev has entered into an agreement with Beverage Associates Corp. (“BAC”) to acquire all of BAC's remaining shares in Quilmes Industrial SA (“Quinsa”) for a total purchase price of approximately 1.2 billion US dollars, subject to certain adjustments, including dividends and interest. Upon the closing of the transaction on 8 August,
AmBev's equity interest in Quinsa increased from 56.72% to 91.18%. Since the transaction was closed after 30 June, its effect on the InBev financials has not yet been reflected in this half year report.

This agreement represents the final step of a transaction initiated in May 2002, whereby AmBev acquired an initial stake in Quinsa. The respective agreements provided that BAC had a put option in connection with its remaining shares in Quinsa, in exchange for AmBev’s shares. AmBev had a corresponding call right after 2009. Pursuant to this transaction, which supersedes these put and call options, the parties agreed that the purchase price will be paid in cash.
Since the creation of InBev in September 2004, InBev has included the results of Quinsa in its financial statements using the proportionate consolidation method.

Disposal of Rolling Rock
On 19 May InBev and Anheuser-Busch jointly announced the sale of the Rolling Rock® family of brands. The sales price was 82 million US dollars (67 million euro) for the US and worldwide rights to Rolling Rock® and Rock Green Light®.

Anheuser Busch began brewing Rolling Rock® and Rock Green Light® in August using the brands’ same time honored recipes, maintaining Rolling Rock’s craftsmanship and heritage that its fans expect and appreciate.

The decision to sell the Rolling Rock® brands was based on InBev’s strategic approach to the US market, which is to focus on the high-growth import brands in InBev’s portfolio. InBev’s sales and marketing efforts are aimed at maximizing the potential of its leading imported beers, including Stella Artois®, Bass Pale Ale®, Beck’s®, Brahma® and Labatt Blue®, and on our strength as the US leader in imported draught beer.

InBev plans to sell its brewery in Latrobe, Pennsylvania USA, which was dedicated to the brewing of Rolling Rock® beer. This decision is consistent with our US business strategy to focus on imported beers. At the date of this half year report, InBev is in discussions with potential buyers to determine the best available option for the Latrobe brewery and its employees.

Acquisition of minority interests
During the first six months of 2006, InBev purchased significant minority interests in several subsidiaries for a total cash consideration of 238 million euro. As the related subsidiaries were already fully consolidated, the purchases did not impact InBev’s profit, but reduced the minority interests and thus impacted the profit attributable to equity holders of InBev.

Transactions in 2005
During the year 2005 InBev purchased significant minority shareholdings in several subsidiaries for a total cash consideration of 1.580 million euro. As the related subsidiaries (with the exception of Quinsa) were already fully consolidated, the purchases did not impact InBev’s profit, but reduced the minority interests and thus impacted the profit attributable to equity holders of InBev.

In August 2005 InBev closed the acquisition of 100% of the Tinkoff brewery in St. Petersburg, Russia for a total cash consideration of 77 million euro. Costs directly attributable to the combination represent 1m euro. The Tinkoff goodwill of 68 million euro is justified by i) the immediate alleviation of existing short-term capacity constraints which InBev has faced in Russia, ii) the fact that Tinkoff complements InBev’s winning brand portfolio in Russia by adding the leading Russian brand in the fast growing and highly profitable super-premium segment and iii) further expected growth as a result of leveraging InBev’s existing nationwide sales and distribution network.

Impact of foreign currency
Foreign currency exchange rates may have a significant impact on our financial statements. In the first six months of 2006, 30.5% (2005 – 25.7%) of InBev revenue was realized in Brazilian reals, 10.6% (2005 – 10.7%) in Canadian dollar, 9.1% (2005 – 9.7%) in pound sterling, 6.5% (2005 – 5.8%) in Russian ruble, 3.7% (2005 – 4.2%) in South Korean won, 3.9% (2005 – 4.2%) in US dollar, and 4.1% (2005 – 3.4%) in Argentinean peso.

In the first half of 2006, the fluctuation of the foreign currency rates had a positive translation impact of 549 million euro on revenue, of 239 million euro on normalized EBITDA and of 204 million euro on normalized profit from operations in comparison to the same period in 2005.
InBev profit has been positively affected by the fluctuation of foreign currencies for 146 million euro and our EPS base (profit attributable to equity holders of InBev) by 84 million euro or 0.14 euro per share.

The impact of the fluctuation of the foreign currencies on its net debt is 105 million euro (decrease of net debt) and on its equity is 97 million euro (decrease of equity)

Non-recurring intems
Execution biggest to best strategy
The 2006 execution of InBev’s Biggest to Best strategy resulted in a net non-recurring charge to profit from operations of 67 million euro as at 30 June 2006. This charge relates primarily to organizational alignments in Western Europe, North America, China and at the global headquarters, and to the creation of European and American shared service centers for transactional services.

The changes aim to create clear responsibilities and to eliminate overlapping or duplicated processes and activities across functions and zones, taking into account the right match of employee profiles with the new organizational requirements. The outcome should be a stronger focus on InBev’s core activities, cost savings, which should in turn result in added value, quicker decision-making and improvements to efficiency, service and quality.

Research & Development
Similar to the first 6 months of 2005 InBev invested in the first half of 2006 6 million euro in research and development. Part of this was invested in the area of market research, but the majority is related to innovation in the areas of process optimization especially as it pertains to capacity, new product developments and packaging initiatives. Knowledge management and learning is also an integral part of research and development and a lot of value is placed on collaborations with universities and other industries to continuously enhance InBev knowledge.

Restructuring charges of 91 million euro relate primarily to the realignment of the structures and processes in Western Europe, North America, China and at the global headquarters, and to the creation of European and American shared service centers for transactional services. These changes aim to create clear responsibilities and to eliminate overlapping or duplicated processes and activities across functions and zones, taking into account the right match of employee profiles with the new organizational requirements. The outcome should be a stronger focus on InBev’s core activities, cost savings, which should in turn result in added value, quicker decision-making and improvements to efficiency, service and quality.

The sale of the Rolling Rock® family of brands in May 2006 resulted in a net business disposal gain of 24 million euro. This net gain comprises the proceeds from the brands sold (67 million euro) as well as related discontinuance (26 million euro) and impairment charges (17 million euro).

The 2005 non-recurring restructuring and impairment charges mainly comprise 41 million euro of closure costs for the Toronto brewery in Canada, including impairment of tangible assets of 10 million euro.

All the above amounts are before income taxes. The 2006 and 2005 non-recurring items as at 30 June decreased income taxes by respectively 23 million and 16 million euro.

Contingencies
InBev U.S.A. L.L.C., Labatt Brewing Company Limited, and numerous other U.S., Canadian and European beer and alcohol producers have been named in a putative class action lawsuit seeking damages and injunctive relief over alleged marketing of alcoholic beverages to underage consumers. Lawsuits have been filed in various states to date, predominantly by the same firm.
The lawsuits are all essentially similar in nature. InBev USA L.L.C. and Labatt Brewing Company Limited were named in several of the suits, however the parties agreed in April 2006 to voluntarily dismiss foreign defendants, including Labatt Brewing Company Limited. The dismissal requires certain document preservation by Labatt and allows refiling of the lawsuits in limited circumstances. The company will vigorously defend this litigation. It is not possible at this time to estimate the possible range of loss, if any, of these lawsuits.

Certain subsidiaries of AmBev have received tax assessments totaling 3 010m real, related to corporate Brazilian taxation of income generated outside Brazil. On 19 October 2005, AmBev was officially notified of an administrative Lower Court decision, recognizing that a substantial portion of the amount of the tax assessment mentioned above was incorrect. This Decision reduced the amount of such tax assessments to 2.451 million real (891 million euro). AmBev disputes the validity of these tax assessments and intends to vigorously defend its case. No provision has been recorded related to these tax assessments.

InBev NV is a company domiciled and publicly traded (Euronext: INB) in 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®, Leffe®, Hoegaarden®, Staropramen® and Bass®. InBev employs some 85,000 people, running operations in over 30 countries across the Americas, Europe and Asia Pacific.

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