Financial Review
Results from operating activities
| In millions of EUR | 2008 | 2007 |
|---|---|---|
| Revenue | 14,319 | 11,245 |
| Other income | 32 | 28 |
| Raw materials, consumables and services | 9,548 | 7,320 |
| Personnel expenses | 2,415 | 1,951 |
| Amortisation, depreciation and impairments | 1,206 | 638 |
| Total expenses | 13,169 | 9,909 |
| Results from operating activities | 1,182 | 1,364 |
| Share of profit of associates | (102) | 54 |
| EBIT | 1,080 | 1,418 |
General overview
Despite the economic downturn Heineken realised an organic profit growth of 11 per cent. Heineken experienced an extraordinary year with the highest number and value of new acquisitions ever. However, the economic downturn impacted the valuation of certain assets and investments, affected foreign translation reserve, hedging reserve in equity and also impacted other net financing expenses significantly. At the beginning of 2008 Heineken changed accounting for Joint Ventures from proportional consolidation to equity accounting.
Revenue and expenses
Revenue increased by 27.3 per cent from €11.2 billion to €14.3 billion and 7.5 per cent organically. Consolidated beer volume rose 20.4 million hectolitre to 125.9 million hectolitre in 2008, which represented an increase of 19 per cent over the previous year. Organic growth in consolidated beer volume amounted to 3.5 per cent. Consolidated Heineken premium volume (including Heineken Premium Light) rose 4.7 per cent or 1.2 million hectolitre to 25.9 million hectolitres in 2008.
The volume increase, improvements in sales mix and higher selling prices caused revenue to rise organically by €839 million. Strong improvement of sales and price mix of 7 per cent drove organic growth in revenue to 7.4 per cent. The negative effect of movements in exchange rates on revenue amounted to €105 million or 0.9 per cent and was mainly related to the British Pound, US dollar and Russian Ruble.
Other income was relatively stable at €32 million and consisted mainly of gains on the sale of property, plant and equipment.
The Fit2Fight (F2F) fixed-cost ratio improved further to 29.5 per cent from 30.7 per cent in 2007. In 2008, Heineken delivered additional gross cost savings of €164 million, achieving €19 million more than the forecasted three-year plan cumulative amount of €450 million. In 2008, exceptional restructuring charges related to F2F amounted to €125 million before tax.
Costs of raw materials, consumables and services increased by 30 per cent, of which only 8.7 per cent organic, mainly relating to increases in consolidated volume, increases in commodity and energy prices and from the shift towards innovative and more expensive packaging. Marketing and selling expenses decreased to 11.7 per cent of revenue from 12.8 per cent in 2007, due to higher efficiencies in brand allocation and savings programmes across the regions. Personnel expenses increased by 23.8 per cent, mainly due to newly acquired companies and includes €166 million exceptional restructuring charges related to the integration of newly acquired companies and redundancy costs associated to the F2Fight programme. The effect of movements in exchange rates had a marginally negative impact on total operating expenses of 0.7 per cent or €71 million.
Results (beia)
| In millions of EUR | 2008 | 2007 |
|---|---|---|
| EBIT | 1,080 | 1,418 |
| Amortisation of brands and customer relationships | 63 | 11 |
| Exceptional items | 789 | 319 |
| EBIT (beia) | 1,932 | 1,748 |
| In millions of EUR | 2008 | 2007 |
|---|---|---|
| Net profit | 209 | 807 |
| Amortisation of brands and customer relationships | 47 | 11 |
| Exceptional items | 757 | 301 |
| Net profit (beia) | 1,013 | 1,119 |
EBIT (beia) and Net profit (beia)
| In millions of EUR | EBIT beia | Net profit beia |
|---|---|---|
| 2007 | 1,748 | 1,119 |
| Organic growth | 153 | 121 |
| Changes in consolidation | 71 | (198) |
| Effects of movements in exchange rates | (40) | (29) |
| 2008 | 1,932 | 1,013 |
EBIT and net profit
In 2008, EBIT amounted to €1,080 million compared to €1,418 million in 2007, heavily impacted by an increase in exceptional items of €470 million compared to 2007.
In 2008, €789 million was recognised at EBIT level relating to:
- Impairment of goodwill Russia
- €275 million
- Impairment investments in India
- €200 million
- Impairment Pub portfolios in the UK
- €51 million
- Restructuring costs
- €79 million
- Losses on disposals and write-offs related to restructurings
- €46 million
- Acquisition, integration and restructuring costs related to S&N acquisition
- €138 million
EBIT as a proportion of revenue decreased to 7.5 per cent in 2008 from 12.6 per cent in 2007, mainly due to above-mentioned exceptional items.
Net interest expenses increased from €91 million to €378 million mainly due to higher consolidated net debt resulting from the acquisition of S&N and other acquisitions. On an organic basis the net interest was slightly higher (€5 million) than in 2007. This was mainly attributable to higher interest rates in emerging markets as compared to 2007. Other net financing expenses increased substantially to €107 million. Of this, an amount of €65 million was attributable to negative fair value movements on a portfolio of interest rate swaps at S&N, which are treated as an exceptional item. Although interest rate risk is hedged economically, it is not possible to apply hedge accounting on this specific portfolio of Euro floating-to-fixed interest rate swaps with a notional amount of €1,290 million. The downward movement in interest rates during the fourth quarter led to a negative fair value movement. The related non-cash expenses in our income statement are expected to reverse over time. Furthermore, other net financing expenses include a net amount of €9 million associated with the revaluation of derivatives related to EUR/GBP hedging for the acquisition of S&N and the EUR/CHF hedging for the acquisition of Eichhof, which are also treated as exceptional items.
The average tax burden increased from 31.0 per cent in 2007 to 35.6 per cent in 2008. The increase was mainly due to the negative impact on the effective tax rate of the impairment on the goodwill of Russia, calculated on a significantly lower profit before income tax. This impairment does not result in a corresponding tax benefit (non-deductible) and increases the effective tax rate. This effect was partly compensated by an increase of the benefit of tax incentives. In 2007 the effective tax rate was negatively impacted by the European Commission fine, which was treated as non-deductible. Without exceptional items, the effective tax rate would have been 26.0 per cent in 2008 compared to 26.5 per cent in 2007.
Basic earnings per share decreased from €1.65 to €0.43 as a result of significantly lower net profit.
Cash flow
| In millions of EUR | 2008 | 2007 |
|---|---|---|
| Cash flow from operations before changes in working capital and provisions | 2,329 | 2,060 |
| Total change in working capital | (47) | (45) |
| Change in provisions and employee benefits | (114) | (71) |
| Cash flow from operations | 2,168 | 1,944 |
| Cash flow related to interest, dividend and income tax | (508) | (415) |
| Cash flow from operating activities | 1,660 | 1,529 |
| Cash flow used in operational investing activities | (1,110) | (866) |
| Free operating cash flow | 550 | 663 |
| Cash flow used for acquisitions and disposals | (3,634) | (259) |
| Cash flow from financing activities | 3,309 | (631) |
| Net cash flow | 225 | (227) |
Cash flow and investments
Free operating cash flow of €550 million was €113 million behind 2007’s performance. Although cash flow from operations before changes in working capital and provisions increased year-on-year by €269 million, this was more than offset due to:
- Higher change in provisions and employee benefits, mainly due to higher contributions paid compared to charged expenses to the income statement in newly acquired companies.
- Higher interest paid of €222 million because of the increase in net debt from the debt-financed acquisition of S&N and other acquisitions and lower taxes paid of €124 million.
- Increase of €244 million cash flow used in operational investing activities as a result of planned capacity increases in Congo, Tunisia, DRC, Russia and other countries in Central and Eastern Europe and purchased contract-based intangibles.
The cash conversion rate of 48 per cent is slightly behind 2007’s cash conversion rate of 53 per cent.
Financing structure
| In millions of EUR | 2008 | % | 2007 | % |
|---|---|---|---|---|
| Total equity | 4,752 | 23 | 5,711 | 48 |
| Deferred tax liabilities | 637 | 3 | 427 | 4 |
| Employee benefits | 688 | 3 | 586 | 5 |
| Provisions | 344 | 2 | 158 | 1 |
| Interest-bearing loans and borrowings | 9,644 | 47 | 2,320 | 19 |
| Other liabilities | 4,498 | 22 | 2,752 | 23 |
| 20,563 | 100 | 11,954 | 100 |
| In millions of EUR | 2008 | 2007 |
|---|---|---|
| EBIT | 1,080 | 1,418 |
| Depreciation and impairments of plant, property and & equipment | 825 | 609 |
| Amortisation and impairment of intangible assets (including goodwill) | 381 | 29 |
| EBITDA | 2,286 | 2,056 |
| Exceptional items (adjusted for exceptional items in depreciation and amortisation) |
434 | 328 |
| EBITDA (beia) | 2,720 | 2,384 |
Financing and liquidity
As at 31 December 2008, total equity decreased by €959 million to €4,752 million, whilst equity attributable to equity holders of the Company decreased by €933 million to €4,471 million. This decrease was mainly due to the effect of foreign currency translation differences and a negative movement in the hedging reserve. The increase in the impact of foreign currency translation differences for foreign operations in equity of €645 million was mainly due to the impact of depreciation of the British Pound on the net assets and goodwill measured in British Pounds of total €423 million. Remaining impact was related to devaluation of the Russian Ruble and Chilean Peso off-set by the appreciation of the US Dollar. Hedge accounting on interest rate swaps and hedging of US Dollar export cash flows mainly caused the negative impact on the hedging reserve.
Due to the economic downturn, employee benefit assets have decreased significantly. Future contributions to pension funds may increase if the existing situation remains.
Net debt as of 31 December 2008 amounted to €8,932 million. Because of the acquisition of S&N and several other acquisitions the leverage of the Group has increased significantly. S&N was acquired for a net consideration of €2,837 million and in addition, €3,836 million of existing net debt was acquired as well. Other cash flow from acquisitions and disposals added up to €797 million. The acquisition of S&N was financed with an Acquisition Facility provided by nine banks, split between a one-year tranche (outstanding as of 31 December 2008: €1,144 million) that is extendible with another one-year and a five-year tranche (outstanding as of 31 December 2008: €2,920 million).
Of total gross interest-bearing debt, approximately 84 per cent is denominated in Euro. This is includes the effect of cross-currency interest rate swaps on non-euro-denominated debt such as US private placements at both Heineken N.V. and S&N plc level. The fair value of these swaps does not form part of Net Debt.
Approximately 13 per cent of gross-bearing debt is denominated in British Pound. This consists both of interest-bearing debt at the level of several UK subsidiaries and Special Purpose Entities (SPEs) as well as approximately GBP 512 million of debt at Heineken N.V. level.
The remaining 3 per cent of gross interest debt is denominated in other currencies. This is mostly debt at subsidiary level. This currency breakdown excludes the effect of any derivatives, which are used to hedge inter-Company lending denominated in currencies other than Euro.
The first peak in our repayment profile can be identified in the first half of 2010. In February 2010 one of our €500 million Bonds, issued in 2003, will mature. Since the Company intends to extend the one-year tranche of the Acquisition Facility, it includes the repayment of this tranche as of the end of April 2010 in its repayment profile. The Company intends to repay the debts maturing in the first half of 2010 partly from its own cash flow generation and partly from proceeds from further refinancing activities. Heineken also established an EMTN programme in September 2008. This programme was approved by the Luxembourg Commission de Surveillance du Secteur Financier which is the Luxembourg competent authority for the purpose of Directive 2003/71/EC and facilitates flexible access to Debt Capital Markets going forward.
- *
- On February 9, 2009 the GBP3.85 billion S&N Acquisition Facility (available and drawn amount per 31 December 2008 EUR4,064 million) was restated to become a dual currency Facility, for GBP480 million and EUR3.1 billion. Without this conversion, the available amount expressed in Euros could fluctuate if and when the EUR/GBP exchange-rate would move beyond certain thresholds. Before the Facility was restated, the exchange-rate mechanism triggered a repayment on 15 January 2009 of EUR100 million on the one year tranche with an extension option to 2 years (expiring April 2010) and a repayment of EUR325 million on the five year tranche (expiring April 2013). These repayments were financed out of the EUR2 billion Revolving Credit Facility. After these and other, scheduled repayments, a total of EUR1.1 billion remains undrawn as per 15 February 2009
In addition to the reported net cash position, Heineken has significant headroom available on its €2 billion Revolving Credit Facility 2005 – 2012. This facility was drawn for €470 million as of 31 December 2008.
To mitigate the impact of these repayments on the headroom of the Group, Heineken obtained a credit commitment from ING for a fully committed two-year standby facility for €250 million beginning 2009.
Heineken opts for a well-balanced mix of fixed and variable interest rates in its financing operations, combined with the use of interest rate instruments. Currently Heineken’s interest rate position is approximately 85 per cent fixed for the year 2009.
Financing ratios
Heineken has an incurrence covenant in some of its financing facilities. Our incurrence covenant is calculated by dividing Net Debt (calculated in accordance with the consolidation method of the 2007 Annual Accounts) by EBITDA (beia) (also calculated in accordance with the consolidation method of the 2007 Annual Accounts and including the pro-forma full-year EBITDA of any acquisitions made in 2008). As at 31 December 2008 this ratio was 3.14. If the ratio would be beyond a level of 3.50, the incurrence covenant would prevent us from conducting further significant debt-financed acquisitions.
Profit appropriation
Heineken N.V.’s profit (attributable to shareholders of the Company) in 2008 amounted to €209 million. In accordance with Article 12, paragraphs 7 and 9, of the Articles of Association, the Annual General Meeting of Shareholders will be invited to appropriate an amount of €304 million for distribution as dividend. This proposed appropriation corresponds to a dividend of €0.62 per share of €1.60 nominal value, on account of which an interim dividend of €0.28 was paid on 3 September 2008. The final dividend thus amounts to €0.34 per share. Netherlands withholding tax will be deducted from the final dividend at 15 per cent. It is proposed that dividend exceeding profit, amounting to €95 million, will be paid from retained earnings.
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