Brito & Co. Speak to Analysts

FILED JUNE 3, 2010

Dear Client:

At A-B's capital markets open house for analysts at the St. Louis brewery yesterday (all day, starting at 6:45am and ending at 9pm with a few breaks, prompting one analyst to quip, "These people mean business.") Brito started with a recap of how challenging the deal was to close on A-B with "significant macroeconomic headwinds", debt markets "basically closed", "significant skepticism about AB InBev's ability to deliver on commitments," and a "heavy debt burden on AB Inbev." Did they deliver? Yes I do believe so, based on their slides.

COMMITMENTS AND RESULTS: They promised 1 billion in synergies from A-B, and they got $1.1 billion. They promised to release $500 million in working capital, they got $787 mil in working capital. They promised $7 billion in divestitures, they got $9.4 billion. They promised a billion in cap ex savings, they got $1.5 billion. Numbers don't lie.

SCALE. Brito showed an interesting slide showing the top ten brewers in 1990 versus 2009. What's amazing is that Interbrew was number 10, selling 11 million hectos versus A-B at number one, selling 108 mil hectos. Miller was number two selling 58 mil hectos. Fast forward to today, where A-B InBev sells 409 hectos at number one, and SABMiller is number two at 240 mil hectos.

PERFORMANCE. Brito also went through their human resources process. From December through March, they set targets and bonuses. From April through August, they conduct performance appraisals. From September through November, they conduct organization and people reviews.

TALENT. ABI has a Global Management Trainee Program which has the goal of "hiring people better than us." Initiated in Brazil in 1990, it is present in all 6 zones since 2005. They have produced 370 trainees over the last four years, with 84k applicants in 2009, 900 of which came from the US.

MARGIN. ABI has gone from a 26.1% EBIDTA margin in 2004 to a 35.5% margin in 2009. ABI's administrative expenses as a percentage of revenue has gone from 8.2% in 2005 to 6.3% in 2009.

SENIOR MANAGEMENT. Brito says that ABI "leads by personal example" and that they believe in "informality, candor, and simplicity." Their "open space" office concept is "critical in driving this principle." They also spend a lot of time on the road. "We are where things happen, in the field, in the market, with our people." Getting there may not be first class. "We have one travel policy, independent of hierarchical level....we are frugal and we set the example from the top."

GLOBAL FOOTPRINT. ABI is the number one or two brewer in the top five beer markets in the world. In the top ten beer markets, there are three where ABI is not a top three brewer: Australia, Japan, and Columbia. Hey Brito: Foster's is for sale.

MARKETING. ABI made a case that while cost cutting is important, they have an "evolving marketing skill-set" which was accelerated with the purchase of A-B. A person who was there described an "impressive" video showing the power of A-B's mobility.

In discussions with folks who were there, some take-aways:

-ABI believes that they still have pricing power in the US. The recession is the headwind in volumes, but that beer is more affordable today in real dollars than in the past, and it's more affordable here than in other countries. So maybe no price war.

-Regarding Brito's infamous statement that 50% of A-B's volumes could be shipped through company-owned distribution, he was merely referring to the legal maximum, not their target.

-As for Brito's "for now" comment, he meant that it simply was not on their list or radar.

-Folks we talked to got the impression from A-B brass that they are not after greatly expanding branches, as they clearly see the (expensive) legal, political, and commercial impediments.

-Brito acknowledged that while they were busy integrating A-B into AB InBev, they took their eye off the ball on communicating with distributors. They are now seeking to rectify this, and the first step was the meetings last week with Luiz and Dave.

-They believe Budweiser declines can be stabilized.....maybe not turned to positive, but at least stabilized. It will take time, and no timetable was given.

-Brand building and innovation will drive topline growth again. Analysts said the brewer took care to stress that, contrary to public opinion, AB InBev was remaking itself as a marketing powerhouse that builds brands long term.

COURT RULES ON KEY POINTS IN ILLINOIS CASE

In an order handed down yesterday in a US District Court in A-B's lawsuit to allow it to proceed on its purchase of City Beverage, the Court made three important decisions. You'll recall that two additional parties wished to make their voices known in the case: The Wine & Spirits Wholesaler's Association (WSDI), and the Associated Beer Distributors of Illinois (ABDI). The WSDI filed a motion to intervene in the case and to file a brief in opposition to A-B's request for a summary judgment as an amicus brief, while the ABDI simply wanted to file an amicus brief. A-B opposed all three.

The Court denied WSDI's motion to intervene, and yet it granted ABDI's motion to file its amicus brief. In addition, the Court accepted the filing of WSDI's brief in opposition to A-B's summary judgment as an amicus brief.

The crucial point in deciding whether ABDI could file an amicus brief is whether the Court finds that filing party is actually a friend of the Court or simply a friend of a party. The Court was satisfied that both the WSDI and the ABDI fall sufficiently into the former category to allow both to participate in this litigation as amicus curiae. Here's the money shot: "In regard to the WSDI specifically, the Court's research has revealed several cases in which proposed intervenors who cannot satisfy all of the Rule 24(a) factors and likewise fall short on permissive intervention under Rule 24(b) have been given the opportunity to make their views known to the Court (and to other parties) through the vehicle of an amicus brief."

Regarding A-B's opposition, the Court writes that "given the importance of the issues raised in this litigation and the expedited track on which the first specific issue - the Commerce Clause challenge - is proceeding to decision, the Court finds on balance that participation by the amici and additional briefing by Plaintiffs will be helpful to the Court."

In response to the Court's ruling, A-B told BBD that WSDI's "arguments were not considered strong enough to allow for intervention. Rather, the decision recognizes that the Attorney General adequately represents the interests of the state in defending the state law. This decision allows the case to keep moving, without delay."

So both sides can declare a partial victory. On balance, I think the ABDI in particular is pleased to be able to have their arguments heard in an amicus brief, so that Illinois distribuors' voices can be heard by the court. Stay tuned.....

LABOY: ABI AND DR PEPPER/SNAPPLE COULD BE A GOOD COMBINATION

With all the banter of a possible combination or strategic distribution alliance between A-B and PepsiCo, perhaps we are taking our eye off another possibility: That A-B could hook up with Dr Pepper Snapple Group. Writes Carlos Laboy of Credit Suisse in a research note: "There is a rare alignment of stars in the beverage industry which could be making this strategic opportunity possible." To wit: Coke and Pepsi have purchased most of its bottling networks, so DPS is kind of choked off on its own, and is master of its own destiny. Plus ABI is "quickly deleveraging" and is possibly able to do it's next big deal. Also, "US beer distributors have a serious long-term growth
problem with their beer portfolio that runs much deeper than the economy or weather. Some beer distributors are increasingly looking for ways of building sustainable non-alcoholic beverage distribution platforms that may help them offset a long-term brewing slowdown and becoming a powerful CSD and non-carbonated network is appealing." Interesting.

Carlos continues: "ABI has a need to infuse growth opportunities into an exclusive distributor network. It may not want these distributors to start to allocate incremental capital to other beverage ventures or brands not owned by ABI as the distributors may lose focus and the powerful control it now enjoys. We would argue that in taking over the DPS business, ABI may be able to offer its preferred distributors a new growth vehicle and a platform on which to keep growing. Elements of DPS could be used to incentivize its distributors to consolidate around a vision led by ABI at a time that distributor consolidation has stalled out." Beer distributors also "understand DSD execution and in our view have superior revenue management capability and knowledge of the retail point of sale than soft drink bottlers, which often run their soft drink operations for manufacturing efficiency and volume throughput ra! ther than with the objective of optimally capturing the value of the entire portfolio of brands that they represent. Beer distributors, on the other hand, look at the business from the point of sale up the chain, not from a manufacturing plant down the chain. Beer distributors do not own plants.

However, we must also consider that ABI "may need to preserve its financial flexibility during its ongoing arbitration process with Grupo Modelo, as the process could end with an opportunity for ABI to purchase the other half of Modelo that it does not yet own. Modelo would, in our view, be a higher priority for ABI than DPS."


BEER BRIEFS:

SAPPORO USA, the importer of Sapporo Beer, has chosen Moosylvania--a St. Louis based full service marketing and advertising agency, as its agency of record to develop a new brand position supported by advertising and promotional campaigns in the US. Sapporo intends to increase the brands market share beyond its core base.

WE ARE AGAIN even on sell days this June compared to last year. This year the month ends on a Wed versus last year, where June ended on a Friday.

Until tomorrow, Harry

"I, Joan Crawford, I believe in the dollar. Everything I earn, I spend."
-Joan Crawford

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--------- Sell Day Calendar ----------
Today's Sell Day: 3
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Sell days this month last year: 22
This month ends on a: Wed
This month last year ended on a: Friday
YTD sell days Over/Under: 0

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