Financial review
Results from operating activities
| In millions of EUR | 2007 | 2006 |
|---|---|---|
| Revenue | 12,564 | 11,829 |
| Other income | 30 | 379 |
| Raw materials, consumables and services | 8,162 | 7,376 |
| Personnel expenses | 2,165 | 2,241 |
| Amortisation, depreciation and impairments | 764 | 786 |
| Total expenses | 11,091 | 10,403 |
| Results from operating activities | 1,503 | 1,805 |
| Share of profit of associates | 25 | 27 |
| EBIT | 1,528 | 1,832 |
Revenue and expenses
Revenues increased by 6.2 per cent from €11.8 billion to €12.6 billion and by 7.3 per cent organically. Other revenues, which form part of revenues, increased slightly by 3 per cent from €241 million to €249 million and relates mainly to royalties, rental income and service to third parties.
Consolidated beer volume rose by 7.9 million hectolitres to 119.8 million hectolitres in 2007, representing an increase of 7.1 per cent. Organic growth in consolidated beer volume amounted to 6.5 per cent. Consolidated volumes of the Heineken brand in the premium segment of the market (including Heineken Premium Light) rose by 10 per cent or 2.2 million hectolitres to 24.7 million hectolitres in 2007.
The volume increase, improvements in sales mix and higher selling prices drove growth in revenue of €735 million to €12.6 billion in 2007. All regions contributed to this strong performance. Strong volume growth of 4.2 per cent and improving sales and price mix of 3.1 per cent drove organic growth of 7.3 per cent. The negative effect of movements in exchange rates on revenue amounted to €171 million or 1.4 per cent and was mainly related to the US Dollar, Chilean Peso, Singapore Dollar and Nigerian Naira.
Other income dropped to €30 million, mainly due to the gain in 2006 of €320 million, relating to the sale of land in Seville, Spain.
The Fit2Fight fixed-cost ratio improved further to 30.7 per cent from 33.1 per cent in 2006. In 2007 Heineken delivered additional gross cost savings of €191 million, achieving 68 per cent of the forecast three-year plan cumulative amount. Exceptional restructuring charges related to Fit2Fight amounted to €57 million before tax.
Costs of raw materials increased by 14.9 per cent, due to an increase in consolidated volume, higher commodity and energy prices and the shift towards innovative and more expensive packaging. The effect of higher commodity prices was limited to 8 per cent as a result of good timing of purchasing and the advantages of further centralisation of procurement.
Marketing and selling expenses increased by 9 per cent as a result of additional focus on long-term brand-building across most regions and represented 13 per cent of revenue.
Personnel expenses decreased by 3.4 per cent, including €30 million of exceptional restructuring charges related to our Fit2Fight initiative.
As such, total expenses increased more than revenue and rose by 6.6 per cent to €11,091 million. The effect of movements in exchange rates had a marginally positive impact on total operating expenses of 1.3 per cent or €137 million.
Results (beia)
| In millions of EUR | 2007 | 2006 |
|---|---|---|
| EBIT | 1,528 | 1,832 |
| Amortisation of brands | 11 | 10 |
| Exceptional items | 307 | (273) |
| EBIT (beia) | 1,846 | 1,569 |
| In millions of EUR | 2007 | 2006 |
|---|---|---|
| Net profit | 807 | 1,211 |
| Amortisation of brands | 11 | 10 |
| Exceptional items | 301 | (291) |
| Net profit (beia) | 1,119 | 930 |
EBIT (beia) and Net profit (beia)
| In millions of EUR | EBIT beia | Net profit beia |
|---|---|---|
| 2006 | 1,569 | 930 |
| Organic growth | 314 | 210 |
| Changes in consolidation | (1) | (4) |
| Effects of movements in exchange rates | (36) | (17) |
| 2007 | 1,846 | 1,119 |
EBIT and net profit
In 2007 EBIT amounted to €1,528 million compared with €1,832 million in 2006, heavily impacted by the EC fine of €219 million in 2007 compared with the exceptional gain on the sale of land in Seville in 2006. 2007 EBIT (beia) of €1,846 million compared favourably to the 2006 EBIT (beia) of €1,569 million, representing an organic growth of 20 per cent.
Head office EBIT increased by €54 million from a loss of €24 million to a profit of €30 million in 2007. This strong improvement was achieved thanks to a combination of positive trends. Volume growth of the Heineken brand generated an increase in royalties. In addition, the increase in volume in innovative pack types (BeerTender, DraughtKeg, Xtreme Draught) led to lower marketing support costs from Head Office, and the global increase in malting fees boosted results of Maltery Albert (which is part of Head Office). Finally, the cost reductions related to Fit2Fight also contributed positively to the improvement.
A total amount of €64 million is recognised on EBIT level, relating to impairments of goodwill, brands and property, plant and equipment.
€40 million relates to our joint venture, Brau Holding International in Germany, of which €36 million relates specifically to Karlsberg Brewery in which BHI holds a 45% stake, and the remaining 55% is held by Kulmbucher Brauerei A.G., and is treated as an exceptional item. Volume and long-term profitability of Karlsberg Brewery was severely affected by the introduction of a deposit on one-way pack types and the rise of input costs. By the end of 2007 management of Karlsberg was taken over by an experienced turn-around manager from the Heineken Group.
Other impairments relate to various other entities, across various regions and are individually small and therefore not treated as exceptional items.
EBIT as a proportion of revenue decreased to 12.2 per cent from 15.5 per cent, mainly due to aforementioned exceptional items.
The average tax burden increased significantly from 22 per cent in 2006 to 31.7 per cent in 2007. In 2006 the average tax rate was positively affected by the low rate of tax on the sale of real estate in Spain. In 2007 the average tax rate was negatively impacted by the European Commission fine, which is treated as non-deductible. Without these exceptional tax gains, the tax burden would have been 26.2 per cent compared with 27.2 per cent in 2006.
Basic earnings per share decreased from €2.47 to €1.65 as a result of lower net profit.
Cash flow
| In millions of EUR | 2007 | 2006 |
|---|---|---|
| Cash flow from operating activities | 1,730 | 1,849 |
| Cash flow used in operational investing activities | (985) | (727) |
| Free operating cash flow | 745 | 1,122 |
| Cash flow used for acquisitions and disposals | (278) | (72) |
| Cash flow from financing activities | (656) | (649) |
| Net cash flow | (189) | 401 |
Cash flow and investments
Cash flow from operating activities is below last year’s performance with €119 million, mainly driven by the EC fine influencing profit, an increase in working capital investments of €177 million and higher changes in provisions of €50 million due to the restructuring activities in Western Europe, partly compensated by €42 million less interest paid.
Purchase of property, plant and equipment was on a higher level compared with 2006, due to accelerated investments in capacity expansion mainly in Central and Eastern Europe and Africa and Middle East. Proceeds from the sale of property, plant and equipment amounted to €81 million versus €182 million last year, mainly due to the aforementioned sale of land and brewery site in Seville, Spain.
A net amount of €278 million in 2007 was invested in acquisitions and expansion of existing interests, compared with €72 million in 2006. Heineken acquired Královský Pivovar Krušovice a.s. in the Czech Republic and CJSC Brewing Company ‘Syabar’, in Bobruysk, Belarus for a total amount of €241 million.
Net cash flow decreased significantly to – €189 million compared to + €401 million in 2006. This decline was mainly attributable to a lower operating cash flow and an increase in cash flow used for acquisitions. Although the cash flow used in financing activities is stable compared with last year, lower repayments of net borrowings of €132 million are offset by higher dividend payments of €153 million.
Financing structure
| In millions of EUR | 2007 | % | 2006 | % |
|---|---|---|---|---|
| Total equity | 5,946 | 46 | 5,520 | 42 |
| Deferred tax liabilities | 478 | 4 | 471 | 4 |
| Employee benefits | 646 | 5 | 665 | 5 |
| Provisions | 327 | 3 | 364 | 3 |
| Loans and borrowings | 2,394 | 18 | 2,585 | 20 |
| Other liabilities | 3,177 | 24 | 3,392 | 26 |
| 12,968 | 100 | 12,997 | 100 |
Financing and liquidity
As at 31 December 2007, total equity increased by €426 million to €5,946 million, whilst equity attributable to equity holders of the Company increased by €395 million to €5,404 million. The total recognised income and expense attributable to equity holders of the Company of €736 million was offset by dividend distribution of €333 million and purchase of own shares of €15 million.
| In millions of EUR | 2007 | 2006 |
|---|---|---|
| EBIT | 1,528 | 1,832 |
| Depreciation and impairments P, P&E | 712 | 739 |
| Amortisation and impairments intangible assets | 52 | 47 |
| EBITDA | 2,292 | 2,618 |
| Exceptional items (adjusted for exceptional items in depreciation and amortisation) | 276 | (272) |
| EBITDA (beia) | 2,568 | 2,346 |
Financing ratios
Our net-interest bearing debt position remains stable compared to last year at €1,926 million, which is in line with our free operating cash flow and taking into account higher acquisitions and dividends. Net debt/EBITDA (beia) ratio is 0.75 and improved versus last year (0.82), driven by a higher EBITDA (beia).
Our cash conversion rate dropped from 105 per cent in 2006 to 58 per cent in 2007, which was mainly driven by the lower free operating cash flow and high Net profit (beia) before minority interest.
Profit appropriation
Heineken N.V.’s profit (attributable to shareholders of the Company) in 2007 amounted to €807 million. In accordance with Article 12, paragraph 7, of the Articles of Association, the Annual General Meeting of Shareholders will be invited to appropriate an amount of €343 million for distribution as dividend. This proposed appropriation corresponds to a dividend of €0.70 per share of €1.60 nominal value, on account of which an interim dividend of €0.24 was paid on 20 September 2007. The final dividend thus amounts to €0.46 per share. Netherlands withholding tax will be deducted from the final dividend at 15 per cent. It is proposed that the remaining €464 million be added to retained earnings.