2003 Annual Report 2003 Annual Repor

Transcription

1 / 2003 Annual Report

2 AmBev is the world s fifth largest brewer and, arguably, one of the best-managed and most profitable companies in the international beverage industry. The undisputed market leader in the Brazilian beer industry, with 67% market share, AmBev is also present in 11 other Latin American countries, with leading positions in four of them. Following the business combination with Interbrew, Canada s second largest brewery was merged into AmBev. With AmBev s footprint extending across the three Americas, we really are the American Beverage Company. 01/ Highlights 02/ Our operations in / Chairmen s letter 06/ Moving forward 10/ Operating review 18/ Corporate governance 20/ Corporate and social responsibility 22/ The team 23/ Financial section 72/ Investor information

3 Highlights /corporate and financial % Change US$ million R$ million R$ million Income statement Net sales 2,821 8,684 7, % Gross profit 1,507 4,640 3, % SG&A expenses 628 1,933 1, % EBIT 749 2,306 2, % Net income 459 1,412 1, % Balance sheet Cash and equivalents 877 2,534 3, % Total assets 5,133 14,830 12, % Total debt 2,070 5,980 4, % Shareholders equity 1,510 4,363 4, % Cash flow and profitability EBITDA 998 3,072 2, % EBITDA margin 35.4% 37.0% Capital expenditures % Return on equity (%) 32.4% 36.6% Per share ($/1,000 shares) Book value % EPS % Dividends (ON)* % Dividends (PN)* % Capitalization Market capitalization 9,135 26,392 19, % Net debt 1,193 3, % Minority interest % Shares outstanding** 37,913 38, % ADRs equivalent % * Includes payments of regular dividends and interest on capital. ** Excludes shares held in treasury. US dollar amounts have been translated at an average exchange rate of R$ 3.08 or year-end exchange rate of R$ Numbers may not add up due to rounding. AmBev /Ibovespa 180 Dec 00 Dec 01 Dec 02 Dec AmBev Ibovespa EBITDA /R$ m and EBITDA margin (%) , % Net sales /% total 70% Beer Brazil 1 15% CSD & Nanc Brazil 2 12% International 3 Operations 2% Other Brazil , % , % , % 01

4 Our operations in 2003 /AmBev at a glance Distribution network Facilities 52 Points of sale 1,700,000 Installed capacity (million hl/year) Employees Manufacturing 9,823 Sales and distribution 7,745 Headquarters/administrative 1, Brazil Overview Brazil is AmBev s home country and core business division. It is the world s fourth largest beer market and third largest soft drinks market, where AmBev holds 67% and 17% market share, respectively. Key brands Skol, Brahma, Antarctica, Bohemia and Guaraná Antarctica Key highlights in 2003 Undisputable leader in the beer market Strong second player in soft drinks Unparalleled distribution system reaching 1,000,000 points of sale 37% of volumes sold through direct distribution Benchmarking profitability, with 37% EBITDA margin International Overview During 2003, in addition to our operations in Brazil, AmBev was present in nine other countries across Latin America, including the Southern Cone (with a leading position through our strategic alliance with Quinsa), the Andean region and Central America. Key brands Quilmes, Brahma, Pepsi Key highlights in 2003 #1 brewer in Argentina, Bolivia, Paraguay and Uruguay 34% EBITDA margin in Quinsa operations Successful launch of operations in Guatemala Expansion into Ecuador and Peru Revitalized operations in Venezuela AmBev Annual Report 2003

5 1/Argentina Plants: 7 Installed capacity: 17.3 (million hl/year) POS reached: 311,000 4/Chile Plants: 1 Installed capacity: 0.8 (million hl/year) POS reached: 13,000 7/Paraguay Plants: 1 Installed capacity: 2.2 (million hl/year) POS reached: 48,000 10/Venezuela Plants: 1 Installed capacity: 2.2 (million hl/year) POS reached: 23,000 2/Bolivia Plants: 6 Installed capacity: 3.1 (million hl/year) POS reached: 52,000 5/Ecuador Plants: 1 Installed capacity: 0.9 (million hl/year) POS reached: 13,000 8/Peru Plants: 3 Installed capacity: 6.1 (million hl/year) POS reached: 141,000 3/Brazil Plants: 29 Installed capacity: (million hl/year) POS reached: 1,000,000 6/Guatemala Plants: 1 Installed capacity: 1.0 (million hl/year) POS reached: 30,000 9/Uruguay Plants: 2 Installed capacity: 1.7 (million hl/year) POS reached: 43,000 Volume contribution 56% Skol 1 27% Brahma 2 13% Antarctica 3 2% Outros 4 2% Bohemia 5 Volume contribution 71.6% Argentina 1 8.2% Bolivia 2 7.3% Paraguay 3 5.9% Venezuela 4 2.9% Uruguay 5 1.9% Chile 6 1.7% Peru 7 0.4% Guatemala 8 0.1% Ecuador was a challenging year for AmBev in Brazil. We faced a tougher competitive environment and high economic volatility. Nevertheless, we kept the AmBev machine robust and well oiled to capture the growth opportunities in the country. Carlos Alves de Brito Chief Executive Officer AmBev s expansion in 2003 is a genuine case of success. As the leading brewer in Latin America, we are definitely the best positioned company to benefit from the beverage market growth in the continent. Juan Manuel Vergara Galvis International Operations Executive Officer Sales /US$ 2,481m EBITDA & EBITDA margin /US$ 915m 37% Sales /US$ 340m EBITDA & EBITDA margin /US$ 83m 25% 02/03

6 Chairmen s letter /Dear shareholder Victorio Carlos De Marchi Co-Chairman of the Board of Directors Marcel Herrmann Telles Co-Chairman of the Board of Directors 2003 was a challenging but important year for AmBev. In spite of a difficult macroeconomic environment and increased competition in Brazil, we made significant strides in advancing our long-term strategy by strengthening our business in our home market and developing new sources for sustainable growth and profit generation abroad. This effort has been driven by our intense focus on four key drivers that have guided AmBev since its creation: A culture motivated by success, based on meritocracy and performance-driven remuneration, that encourages employee pride, ownership and excellence; A commitment to continuous improvement, top line growth and excellence in execution, especially in distribution; Unrelenting efforts to reduce cost and increase productivity; and Strict financial discipline. We continued to inculcate these drivers in our Brazilian business, and apply them as we expand our footprint across Latin America by completing a successful combination of alliances, greenfield projects and acquisitions. As the world s fourth-largest beer market, Brazil remains the most important contributor to AmBev s profit pool. In 2003, we faced a number of challenges from external factors in this core market that seriously impacted our consolidated results. However, we have taken steps to address these issues our efforts are beginning to pay off and we are now even better positioned for the future. Specifically, we faced a sluggish beer market, as the result of unstable macroeconomic conditions, that negatively impacted consumer consumption. Secondly, we faced a volatile real exchange rate, early in 2003, that forced us to adjust our hedging policy and depressed operating margins. The weakened demand for consumer goods caused the Brazilian beer market to contract by roughly 2%, putting further pressure on revenues. On top of this, we faced an increased amount of pricing and marketing pressure from competitors. Over this period, AmBev s market share decreased below our target range of 67% to 70%, negatively impacting revenues and demanding higher marketing expenditures. AmBev Annual Report 2003

7 1/ People & culture 2/ Top line growth 3/ Improving distribution efficiency execution 4/ Continually reducing costs & expenses 5/ Enhance profitability Financial discipline The combined effect of lower volumes and higher costs offset all of our operating improvements, and consequently AmBev delivered results in Brazil that were not in line with our own profitability expectations or our industry-leading track record. EBITDA from Brazilian operations, that grew by 38% in 2002, grew by only 6% in While AmBev strengthened its position at home to meet challenges, we also made significant strides in building our international presence to complement AmBev s core business and fully seize future growth opportunities. We embarked on a deliberate and consistent expansion to boost our position in select Latin American markets, reflecting our role as The American Beverage Company. Through a combination of alliances, greenfield developments and acquisitions, AmBev now spans the whole of South America, with the exception of Colombia and the Guyanas, and extends into northern Central America. These are all fastgrowing markets and our proven skill sets and clear drivers will support our efforts to build value in these markets. By the end of January 2003 we concluded our strategic alliance with Quinsa, consolidating our leading position in South America. Quinsa is the number one brewer in Argentina, Bolivia, Paraguay and Uruguay, and it also holds a 10% market share in Chile. These are all markets with significant potential. We have already captured significant synergies in 2003 from this alliance. The successful integration of AmBev s Southern Cone assets into Quinsa s operations boosted the results for the new combined entity, allowing Quinsa to deliver a 108% pro forma EBITDA growth. In the second half of the year, we started operations in Central America. Cerveceria Rio, our joint venture in Guatemala, launched the production and sales of our Brahva beer brand, achieving an impressive 30% market share in only four months. At the same time, we expanded our footprint in northwest South America. In October 2003 we entered the attractive Peruvian beverage market, acquiring the Pepsi franchise in Lima and the Northern Region, the two largest markets in the country. The soft drinks business will provide an effective distribution system for our beer operations that we expect to commence by We also acquired an 80% stake in Cerveceria Suramericana, the second-largest player in Ecuador. Our international business has since been further enhanced by our business combination with Interbrew, now called InBev, that we announced in March This combination gives us a stronghold in the Canadian beer market and an expanded platform to access other new and attractive international markets. We expect this groundbreaking transaction to unleash significant synergies at both AmBev and InBev, generated through the exchange of best practices between two worldclass beverage companies. Together, AmBev and InBev will form the world s largest beer sales platform for some of the world s leading brands, including our own Brahma. Also as part of this transaction, AmBev will incorporate Labatt Brewing Company Limited, the leading brewer in the profitable Canadian beer market, holding 43% market share. The merger of Labatt into AmBev also consolidates our presence across the three Americas, providing our Company significant cash flows in hard currency and an attractive way into the imports segment of the United States beer market, the most profitable in the world. Although 2003 had its challenges, we are a better Company because of our response to them. During the year, we strengthened our management skills and ability to execute, bolstered our domestic business and built a platform to seize new opportunities abroad we see enormous potential for long-term sustainable and profitable growth and value creation for all stakeholders. 04/05

8 Moving forward /strategy People AmBev s performance-driven culture runs deep throughout all levels of the organization, and represents a unique competitive advantage. Senior management s active involvement in the recruiting process helps ensure that we hire individuals who will thrive in AmBev s meritocratic environment. Our training programs prepare our people to meet and exceed all job requirements and optimize career development. We compensate our outstanding employees accordingly; bonuses are based on an aggressive variable compensation system dependent on AmBev s performance target achievements. Top performing employees participate in our Stock Ownership Plan, which helps ensure that performance for shareholders is an employee priority. The motivation, drive and leadership of our people are our greatest assets, allowing us to transform our ambitious goals into accomplishments. People and culture creating competitive advantage Our young talent relates to our consumer base AmBev s staff is renowned for its energy and motivation. Employees closely follow Company performance, and are encouraged to share any and all suggestions for improvement. We are a company of young, competitive, talented individuals the average age of our executive officers is 44 years, and 80% of our employees are 35 years old or younger. This makes for an enthusiastic, driven workforce, but more importantly, it means that our employees are able to easily relate to the needs and demands of our consumers, who are predominantly in a similar age demographic. World-class trainee program Founded in 1990, AmBev s trainee program is a valuable tool to attract young talent and prepare them for AmBev s challenges and opportunities. This program has trained more than 500 professionals, six of whom are currently Executive Officers in the Company. In 2003, almost 16,000 people applied; 37 were recruited, 18 of them internationally. Performance-driven compensation Our aggressive variable compensation system creates a strong commitment to AmBev s corporate goals and sense of ownership among our employees. Generous employee bonuses are paid only when corporate goals are met. Because we did not meet our corporate targets, there were no employee bonuses in 2003 (with the exception of certain factory workers who met industrial efficiency targets). Bonus evolution 2001 R$ 81.3m 2002 R$ 112.3m 2003 R$ 23.7m Investments in training 2002 R$ 10,022m 2003 R$ 10,917m Training programs deliver value We invest a great deal of time and effort training and preparing our people to make increasingly valuable contributions to the Company. Training courses at AmBev are offered through our AmBev University program, and range from one-day workshops to one-year extended courses in varied areas of studies, such as industrial, brewing, business management and sales. AmBev Annual Report 2003

9 Our commitment to top line growth has four drivers: Portfolio management We manage our portfolio sales mix to maximize profitability, working to increase the contribution from our high margin products and by developing the Brazilian premium beer market. Margin pool share We are also collaborating with retailers to capture a higher profit share from consumer beverage purchases, and since 2000 we have increased our margin pool share from 26.7% to 30.7%. Market share AmBev is committed to recovering Brazilian market share back to the 67 70% range by leveraging brand equity, reinforcing consumer preference, and increasing brand prominence while preserving profitability. Per capita consumption Working to grow the beer market is as important to us as market share preservation and growth. We have identified a series of opportunities that will allow us to significantly increase the Brazilian share of stomach. Focused on top line growth and revenue management No.1 AmBev operates in 13 countries and 3 continents AmBev has operations in 12 countries spanning Latin America*, representing sales of more than 95 million hectoliters per year**. The combination with Interbrew takes AmBev even further, giving access to North America. These markets represent an attractive mix of stable currency revenues as well as exciting growth markets. * Including Dominican Republic and Nicaragua, which were added in ** Considering the totality of Quinsa s volumes. Brazil beer net sales R$/hl Increase in net sales per hectoliter In 2003, AmBev met its commitment to keep consumer prices stable in real terms. This commitment, together with additional revenue management initiatives, improved net beer sales per hectoliter by 16% in Brazil. Net soft drinks and Nanc sales per hectoliter also performed strongly, improving by 13%. Enhanced trade programs In a nationwide effort to drive volume growth, AmBev negotiated a consumer price reduction in more than 180,000 points of sale throughout Brazil. As an alternative to providing retailer rebates to make up the consumer price differential, AmBev invested in advertising focused on generating footfall, and thus volumes, by inviting consumers to party in the official Festeja (The Beer Festival) points of sale. Significant growth potential on higher margin premium segment Premium sales in Brazil represented 6% of our beer portfolio in 2003, accounting for 3.4 million hectoliters. Products like Bohemia, Skol Beats and Original are the highlights in this segment. Although still a start up initiative, we are working to maximize the profitability of our sales mix by developing the Brazilian premium segment. 06/07

10 Moving forward /strategy Distribution efficiency and execution In Latin America, beer is mostly consumed on-premise, and there are millions of points of sale. For this reason, distribution is particularly important to our success and is a key focus at AmBev. We constantly look for ways to further streamline our operations and make our route to market more efficient. In 2003, we made significant progress in this area through two initiatives. We reduced middleman costs by implementing direct distribution of our products in key urban regions. We also began to consolidate our third-party distribution. Multi-brand operators eliminate conflicts of interest and give us more control over portfolio management. Improving our distribution, efficiency and execution 1.7m 1.7 million points of sale reached AmBev reaches 1.7 million points of sale each week. Wherever someone asks for a case of beer, we are there to supply it. The extensive reach of our distribution system is secured by an unparalleled understanding of market dynamics, excellent execution, and outstanding service to retail beer stores across the Americas. 83,000 new coolers in place In 2003, AmBev installed 83,000 new sub-zero coolers in Brazil. In a market where consumption is predominantly on-premise, the availability of perfectly icecold beer is a key component of successful sales execution. Consolidation of third-party distributors The number of multi-brand operators increased from 28% to 46% of total third party exclusive distributors in The consolidation of our distribution network to exclusive AmBev-brand operators significantly improves our ability to implement revenue management initiatives. Multi-brand thirdparty operators /% % % 37% of total volumes sold through direct distribution AmBev s direct distribution network sold 37% of AmBev s total volumes in Brazil in Our expanded salesforce is now present in each major Brazilian city, optimizing the Company s go to market capabilities, improving service to the retail channel and advancing AmBev s understanding of the marketplace. AmBev Annual Report 2003

11 Cost reduction Another key strategic driver at AmBev is our continuous effort to reduce costs and expenses. Every year we challenge ourselves to achieve reductions in real terms in our cost structure. AmBev s Supply Chain Department closely follows the evolution of inflation, commodity prices and currency exchange ratios, working out ways to mitigate possible negative impacts in our production costs. From improved agreements with suppliers to higher plant efficiency, there is a relentless pursuit of cost reduction. Additionally, several fixed expense reduction programs are in place, aiming to negate inflation-related fixed cost increases and fund incremental sales and marketing investments. We constantly investigate ways to decrease fixed expenses to sustain AmBev s benchmarking margins while we allocate the appropriate expenditures to assure the health of our brands. Continually reducing costs and expenses Increased plant efficiency To improve industrial process efficiencies, AmBev implemented the Manufacture Project, which developed standard procedures and execution guidelines in our production lines. The project focuses on four aspects: people, plant management, maintenance and quality, and was rolled out to all plants early in Consequently, we have been able to improve production line efficiency by 1,000 basis points to 86% in Manufacture Project structure Results Management Maintenance Quality Fixed costs reduced by R$ 3 million AmBev s Manufacture Project has not only significantly increased plant efficiency, but it has also considerably reduced fixed costs in our industrial operations. This progress is illustrated by the evolution of our maintenance costs (including services and parts), which decreased by 4% in real terms in % decrease in maintenance costs Environmental improvements contribute to productivity gains AmBev promotes eco-efficiency by developing technologies, processes and resources that minimize the environmental impact of our Company s operations, while maintaining our competitiveness. AmBev carefully manages production losses, reducing environmental impact as well as creating production chain productivity gains. Raw material losses % % % Saving enough water for an entire city AmBev s Environmental Management System is committed to environmental preservation and production cost reduction. Our water resources management program develops eco-efficient alternatives aimed at reusing and recycling water, therefore reducing water consumption and waste in the production lines. AmBev s water savings in 2003 would supply the population of Florianópolis (approximately 370,000 people) for an entire month. Water consumption per hl produced (hl/hl) People <None>/09 08/09

12 Operating review /Beer Brazil Brazil s sizeable beer market and AmBev s leadership in the country makes Beer Brazil the centerpiece of AmBev s profit pool. With volumes greater than 80 million hectoliters per year, one million points of sale, a large proportion of high-margin on-premise consumption, and the predominance of lowcost returnable packaging, the Brazilian beer market offers great value creation potential. AmBev s 67% Brazilian market share (the average for 2003, according to ACNielsen) positions us to benefit from growing beer consumption and upside of Brazil s economic development. However, in 2003, Beer Brazil results came under pressure and failed to meet our high expectations. We achieved EBITDA of R$ 2,670 million, an increase of 3% compared to 2002, notably below the last three years compounded average of 23%. The decline in 2003 performance was the consequence of several external factors, and in light of these we have taken steps to ensure that we are able to meet our expectations in the future. First, due to the real exchange rate volatility at the beginning of the year, we hedged our dollar-linked production costs, which represent roughly 50% of our total costs of goods sold. We were attempting to protect shareholders returns but the real appreciated during the rest of the year. As a result, AmBev was forced to carry extra hedging costs through to inventories, which amounted to R$ 99 million. Those costs offset the benefits of our successful 2003 fixed cost reduction initiatives and increased production efficiencies. In June 2003, we adjusted prices, sticking to our commitment of keeping longterm consumer prices stable in real terms. Our competitors delayed following this move for some months, causing a larger than usual price gap between our brands and theirs for a significant period of time. The combination of price difference and marketing investments from one of our competitors resulted in a 7.5 percentage point decline in our market share, reaching a low of 62.6% in November. In keeping with this scenario, the unstable macroeconomic environment in 2003 increased Brazilian unemployment and impacted disposable income, causing the beer market to decrease by 2.1%, (ACNielsen). Consequently, Beer Brazil volumes declined 4.7% and production costs per hectoliter increased by 17.6%, constraining bottom line growth. AmBev s response to these conditions has, however, strengthened the Company, and helped prepare us to deliver long-term sustainable growth in adverse conditions. Specifically, we have adopted a consistently proactive approach to the marketplace. We will not settle for the status quo, constantly challenging ourselves with stretched targets, and strengthening our leadership position wherever and whenever possible. Every employee in Brazil is challenged to rethink their attitude, entering into a highly We work hard to have our products always available for prompt delight. Promotion at the point of sale is key to fostering consumption. Brahma sponsors Barretão, the largest cow stampede in Latin America. The Bohemia brand is our jewel in the premium portfolio. AmBev Annual Report 2003

13 competitive mindset to recover the Company s market share, allowing AmBev to regain the 67% to 70% range. Our commitment to market share recovery is part of AmBev s core targets in It is essential that we outperform competitors at both the consumer and trade levels. Improving our brand positioning and excellence in execution at the point of sale is critical to AmBev s success in Also, as part of the efforts to rebuild AmBev s Brazilian market share, we are analyzing the successes and failures of Starting with the consumer front, during the second half of 2003 we made a number of improvements: Skol was running a responsible consumption campaign, Brahma had halted its advertising campaign due to the government s new advertising restrictions, and Antarctica s campaign was under review. To strengthen our brand positioning and marketing, the responsible consumption messages were shifted from a brand to a corporate perspective, and our marketing executives concentrated on redefining our brand positioning. New campaigns were launched during the fourth quarter of 2003, helping AmBev to reverse the market share loss. Moving into 2004, it is paramount that we maintain the right positioning for our three mainstream brands Skol, Brahma and Antarctica will reaffirm their rankings as one, two and three in both consumers preference and market share. On the trade front, AmBev s Brazilian distribution system is unparalleled, and the Company is moving on several fronts to leverage this valuable asset and to anticipate and overcome any initiative launched by the other market players. First, we have streamlined our third-party distributors, with the objective of establishing a single operator for our three mainstream brands in each sales district in Brazil. Despite maintaining separate sales forces for each portfolio of brands, some cost synergies related to economies of scale in warehousing and delivery have already been captured. In addition to the cost savings from this initiative, we have been driving significant revenue upsides and market share gains by implementing our portfolio management strategy in areas where we are already operating through a single operator. The number of multi-brand exclusive operators increased from 28% to 46% of total third-party distributors in Second, we continued the shift from third-party to direct distribution in the core areas of Brazil. By reaching the retail channel with our own sales structure we have been able to enjoy significant benefits. From a better understanding of the market to a more efficient cost structure, direct distribution brought important contributions to AmBev s results. In this roll out process, significant value was also captured through the benchmark of best practices between AmBev and our key third-party operators. The lessons from our distributors extensive experience in sales and delivery played a fundamental role in the success of our direct distribution system. In 2003 we were able to increase the participation of direct distribution by 765 basis points in our sales mix, increasing its share of volume to 43% in December 2003 from 35% in December Finally, we worked at full speed on rolling out our sub-zero cooler program, placing 83,000 new coolers in key points of sale across Brazil. As already mentioned, the beer market in Brazil is predominantly based upon on-premise consumption, and we prioritize the ability to prominently display our brands and provide products to our customers that are presented under ideal standards ice-cold. In 2003, we strengthened our business in our core operations in the wake of external challenges. AmBev is ready for the challenges of the Brazilian market in 2004 and we are confident that our Company will excel once again at serving our customers as well as our shareholders. Brazilians toasted 2004 with Brahma. Young adults party at Skol Beats, an electronic music festival that attracts 45,000 people annually. Our brand awareness is further enhanced by sponsoring massive events. 10/11

14 Operating review /Brazil soft drinks Although AmBev s primary focus is on beer, soft drinks are a key part of the Company s business and an important contribution to the Company s profit pool, mainly due to the significant synergies and profit opportunities that complement our core beer business. In 2003, soft drinks delivered R$ 246 million of EBITDA, an increase in real terms of 19% compared to The positive results of the last few years validate our decision in 2000 to create an independent soft drinks division. With this specialized team in place, the Company has been able to focus on maximizing the potential of the soft drinks brands, implementing an effective and profitable growth strategy. Underlying this strategy of focusing on the right few initiatives was the alignment of three key assets: AmBev s brand portfolio, our long-term partnership with PepsiCo and the Company s unparalleled distribution system. Our soft drinks business has mastered the category through an in-depth understanding of the sector s core performance levers, encompassing a multidimensional universe of consumers, packaging, flavors and sales channels. Its strategy has been crafted to complement AmBev s intense focus on beer sales. The achievements of 2003 demonstrate AmBev s ability to deliver on both of these fronts. First, our core portfolio posted a strong performance over the last year, with volumes up 5% in comparison to Our increased emphasis on higher margin products, namely Guaraná Antarctica, Pepsi Cola (including the successful brand extension Pepsi Twist) and Gatorade, supported strong brand positioning and superior point of sale execution. Guaraná Antarctica and Gatorade retained their leadership positions in their respective categories, while Pepsi Twist brought new momentum to Pepsi Cola, reaffirming the brand as a strong challenger in the cola segment, the largest sector in the market. The core portfolio accounted for 82% of soft drinks volumes in 2003, compared to 74% in In addition to volume growth, pricing also improved significantly. We were able to apply successful pricing techniques from our beer business to the soft drinks operations, with clear results. Specifically, in the case of carbonated soft drinks, a better understanding of price elasticity per package, sales channel and region allowed us to reduce the price gap between our products and those of the market leader. The improved price positioning impacted directly on our net revenues per hectoliter, which increased in 2003 by 13.3%. Our Brazilian original, with its natural and healthy appeal, is the second brand in the soft drinks market. Pepsi Twist effectively revitalized the Pepsi franchise in Brazil. Gatorade is the absolute leader in the profitable sports drinks market. AmBev Annual Report 2003

15 We also made progress on the cost side. AmBev benefited from a new PET bottle, developed by PepsiCo, and coordinated its launch in the Brazilian market. This new 2 liter size container required much less PET resin than the previous container, leading to a significant reduction in production costs. Additionally, AmBev s procurement department was able to make significant improvements in the way it sources PET and sugar through the development of advanced supply chain management platforms. These achievements partially offset the negative effects of the hedging policy that was put into place last year, and the net effect on the cost of goods sold for soft drinks in 2003 was an increase of 15%. Looking to 2004 and beyond, we are excited about the role that our soft drinks business will play as a complement to AmBev s core beer business. Soft drinks will play an increasingly important role in AmBev s strategy to drive long-term sustainable growth through increased per capita consumption, market share and operating margins. The Company is well-positioned to seize the opportunity offered by the third largest soft drinks market in the world. Pepsi X, the energy boosting cola. What better sponsor to the Brazilian national soccer team than the country s favorite soda? 12/13

16 Operating review /international International Operations AmBev significantly expanded its International Operations in Its contribution to AmBev s consolidated EBITDA increased to 8.4% compared to 1.5% in 2002, with the number of countries in which we operate increasing from four to ten in the same period 1. The main driver of our improved performance was the successful completion of our strategic alliance with Quinsa, consolidating AmBev s leading position in South America. Quinsa is the number one brewer in Argentina, Bolivia, Paraguay and Uruguay, with a secondary position in the Chilean market. After the transaction closed in January, Quinsa and AmBev conducted an extensive integration process, dedicated to merging the beer assets in Argentina, Paraguay and Uruguay. The successful combination of operations resulted in significant operational synergies, which allowed the newly enlarged Quinsa to deliver EBITDA growth, in pro forma terms, of 108% compared to In addition to the successful asset integration, the Argentine economic recovery also contributed to the marked improvement in results. Following the 2001/2002 economic crisis, consumer confidence rebounded in The beer market increased by roughly 7% last year, reaching 13 million hectoliters, and AmBev was well positioned to benefit from this. In Central America, 2003 also saw the start of beer production from our new greenfield operation in Guatemala. Cerveceria Rio, our joint-venture with Central America Bottling Corporation, CabCorp, commenced operations at the end of September. The strategy is to combine AmBev s expertise in driving beer sales with CabCorp s strong distribution platform. CabCorp is PepsiCo s primary bottler in Central America and holds the franchise for PepsiCo s soft drinks in Guatemala, El Salvador, Honduras and Nicaragua. This new business model for AmBev, a greenfield beer operation supported by a strong soft drinks distribution platform, has proved successful in its initial stages. After eight months of operations, Cerveceria Rio already had 22% of market share in Guatemala, and our Brahva beer brand could be found at more than 80% of the country s points of sale. Our plans for Cerveceria Rio include the roll out of beer sales to the other countries in which CabCorp operates. In 2004 Brahva has already been introduced to the Nicaraguan market, achieving roughly 8% market share in only three months. The strong results in Guatemala encouraged AmBev to pursue a similar operation in Peru, where AmBev had already announced its intention to enter the local beer market. In October 2003 we announced the acquisition of select production and distribution assets from Embotelladora Rivera, a transaction that granted AmBev the Pepsi franchise for the regions of Lima and Northern Peru. Those regions represent more than 80% of the Peruvian 1 Excluding Nicaragua and Canada, which were added in Brahma is AmBev s flagship brand for international expansion. Argentina s unquestionable leader. Patricia was successfully positioned as our premium brand in Uruguay. AmBev Annual Report 2003

17 beer market, and we expect the Pepsi distribution platform to facilitate the launch of our beer brands in the country. AmBev entered the Ecuadorian beer market in November 2003 through its 80% acquisition of Cerveceria Suramericana. With Suramericana s 6% market share in Ecuador, AmBev gained access to a state-of-the-art brewing facility in Guayaquil, Ecuador s largest city and primary beer market. With a capacity close to 900,000 hectoliters, this facility is able to serve up to 30% of the Ecuadorian beer market and allows AmBev to introduce new beer brands to the country without investing in additional production assets. Underlying the expansion in 2003 was a fundamental element that increased efficiency in all of the new operations in a short period of time. After many greenfield and acquisition initiatives, such as those in Argentina, Venezuela, Paraguay and Uruguay, AmBev was able to develop a service pack aimed at supporting startup operations. The pack utilizes technology that streamlines the integration process, allowing AmBev to assign administrative tasks from any of its operations to its Shared Services Center in Brazil. This eliminates the need for a full administrative structure in each new subsidiary, significantly reducing the human resource requirements and also avoiding any additional fixed cost structure. The consolidation of our current operations as well as further expansion will continue to be important sources of growth in the future. We have already had some success in this process in First, in February we announced the acquisition of 51% of Embotelladora Dominicana, PepsiCo s anchor bottler in the Caribbean. Second, in August we completed a strategic alliance with Interbrew, now renamed InBev. The alliance between AmBev and InBev establishes the world s largest beer platform. We expect to generate significant synergies from best practices exchange between two world-class brewers, which should be captured at both AmBev and InBev levels. As part of this operation AmBev will incorporate Labatt Brewing Company Limited, the leader in the profitable Canadian beer market, establishing a solid North American footprint. The Company will also gain access to the attractive beer imports segment in the US, as well as other new and exciting markets, where we believe there is an enormous potential for the commercialization of our Brahma brand. The outlook for AmBev outside of Brazil is more exciting than ever AmBev has made significant progress in growing its international business in We are now wellpositioned for growth in a number of key North and South American markets, where we will apply the drivers that made us a leader in Brazil in order to seize the opportunities that these markets present. AmBev s plants follow the same standards across the Americas. The Pepsi franchise played a key role in AmBev s expansion in Latin America. 14/15

18 Operating review /people and culture People Our commitment to recruiting, training and retaining the best people is a key element of one of our strategic drivers. We know that AmBev people represent our greatest competitive advantage. Recruiting and training AmBev s senior management is directly and actively involved in the recruiting process and, in the final rounds of the process, every candidate is interviewed by at least one of our top executives. Our trainee program, which was originally implemented at Brahma in 1990, is the foundation of our ability to inculcate our corporate culture in our employees. This program has trained more than 500 professionals, six of whom are currently Executive Officers in the Company. 50% of them today hold senior strategic positions, and 2003 s retention rate was close to 100%. To support AmBev s international expansion, our trainee program operates in Argentina, Venezuela, Uruguay, Paraguay, and was launched in Peru in This year, we screened almost 16,000 applications to hire 37 new trainees, 18 of them from the home markets of our International Operations. Reflecting the imperatives we place on training, in 1995, we created the AmBev University (originally called Brahma University), a Human Resources Department task force in charge of defining, implementing and coordinating the Company s training policy and guidelines. In 2003 R$ 10.9 million was invested in human resource development, offering our employees more than 40 different courses across several distinct disciplines. We ensure that each of our people receives the preparation that they need to fulfill the requirements of their position, while at the same time optimizing career development. These courses offer a broad variety of content and formats, ranging from one-day on-site seminars to a one-year MBA Program. Motivating and retaining To retain our outstanding employees, we compensate them accordingly. To accomplish this, they participate in a profit sharing program that is focused on attainment of AmBev s performance targets. This ensures that performance for shareholders is an employee priority. According to our variable pay system, every year that the Company accomplishes its internal profit target, up to 25% of the EVA generated is distributed to the employees who have contributed. Our meritocracy provides substantial motivation for our employees, as those who perform the best get the most, and those who don t accomplish their goals do not receive a bonus. In 2002, the Company outperformed its targets, and in return R$ 112 million were distributed to the 2,129 people who contributed to the success. In 2003, however, we failed to deliver the 15% real EBITDA growth to which we were Sales people leave the daily morning meetings energized and motivated. A casual and open environment is at the heart of our culture. AmBev Annual Report 2003

19 committed. Therefore, no bonus was paid this year, except to certain factory workers who met industrial efficiency targets. In addition to the compensation structure, top performing employees, who exemplify AmBev s culture and have a long-term track record of commitment to the Company, are granted access to a Stock Ownership Plan. This plan enables holders to acquire AmBev s preferred stock at a 10% discount to the market, and purchases vest over five years. This program has helped further align the interests of AmBev, its shareholders and its employees. In the same vein, we have developed sophisticated excellence programs to motivate our operational units and our distributors. Currently there are three programs in place: the PEF (for industrial units), PEV (for our distribution centers) and PEX (for our distributors). All of these programs are dedicated to maximizing efficiency, and the units compete against each other to achieve the highest score based on compliance with a number of procedures. The employees of the winning units of each program are awarded extra compensation, and if one unit achieves the top score more than three times, it is granted the Ambassador title. As well as motivating key people and partners, the excellence programs effectively support our cost reduction initiatives. Lastly, but perhaps most importantly, we remain totally committed to employee safety. AmBev is a huge organization, working in a very dynamic industry. Every day, more than 40,000 people perform tasks directly or indirectly related to AmBev s operations. From the sourcing of barley to the delivery of beer, there are a range of risks that we must pay close attention to managing. We have been working hard to identify and centralize knowledge regarding causes of accidents, creating a platform for the design and implementation of effective programs aimed at accident prevention. AmBev is constantly working to improve initiatives to ensure that people are aware, informed and, most importantly, in compliance with the official company safety policies and procedures. Culture Since its formation, AmBev has delivered strong results for its shareholders. We are proud of that track record, and we are very clear about the fundamental contribution that our culture makes to these accomplishments. No matter how hard we have worked or how creative we have been, we measure success by our ability to deliver results. We continually challenge and drive ourselves to set new targets and achieve greater goals. To deliver excellence, we must recruit the best people and train them to meet a variety of challenges. The motivation, drive and leadership of our people is our greatest asset, allowing us to transfer our goals into accomplishments. Our managers believe that hands on guidance is the most efficient and effective way to motivate a workforce. Instead of formal reports, they insist on experiencing our operations first-hand and lead by example. They are the first ones to work in the morning and the last to leave embracing a strict work ethic and driven by a passion to produce. We require a serious commitment from our people. Everyone must think and work as a business owner and take personal responsibility for delivering individual, unit and corporate goals, each of which complement one another. AmBev has an uncompromising variable compensation system and bonuses are only paid upon the achievement of all the goals established in this three-tiered structure. Our people are compensated as owners when ambitious goals are achieved. Not everyone will fit into AmBev s culture; it is intense and relentless in many respects. But this is our way forward and a unique performance advantage! A pleasant environment helps to compensate for AmBev s heavy workload. Careful planning is the first step to delivering our targets. 16/17

20 Corporate governance /improving practices Corporate governance is a critical matter related to public companies. Capital market investors must be assured that organizations where they hold stakes are managed to maximize firm value. AmBev cares about this. We believe that such transparency is achieved through the coordination of three basic principles: An efficient bilateral communication channel between the Company and the market Appropriate decisionmaking and control processes Senior management, Board members and counselors experience and competence Fiscal Council Executive Committee Shareholders GSM Board of Directors Audit Committee Executive Officers Communication We are heavily committed to presenting and discussing with the market a detailed analysis of our quarterly results. We are concerned that people understand the fundamentals of our business and how the main drivers lead to the results we present. To achieve this we conduct quarterly conference calls following the publication of our earnings releases; we also conduct roadshows and hundreds of meetings with analysts and investors every year. Company s by-law Advisory Committee Finance Committee Decision-making and control processes The definition of AmBev s longterm strategy, as well as the maintenance and improvement of current competitiveness, is the responsibility of the Board of Directors, supported by a number of committees and councils. Board of Directors The Board of Directors has nine members, seven of whom were elected for a three-year term in 1999 at a General Shareholder s Meeting and, in 2002, had their mandates extended until The remaining Board members, Diego Miguens and Magim Rodriguez, took their seats in April 2003 and February 2004 respectively. Board members use their sound knowledge of the business to ensure that AmBev reaches its long-term goals while preserving competitiveness. Also, the Board of Directors ensures that AmBev s corporate values are practiced and disseminated. Day-to-day management activities are performed by AmBev s executive officers, who are elected by the Board of Directors for a two-year term. The posts of Chairman of the Board of Directors and Chief Executive Officer are separate and are held by different people. Fiscal Council AmBev has a permanent Fiscal Council, which supervises the management s actions, analyzes and gives opinions on AmBev s financial statements, as well as performing other duties as determined by Brazilian Corporate Law. Currently, the members of the Fiscal Council hold meetings at least on a quarterly basis. Members of the Fiscal Council are appointed every year at the General Shareholders Meeting. None of them combines this position with a seat on the Board of Directors, the Executive Committee or a senior management position in the Company. Members: Antonio Luiz Benevides Xavier Everardo de Almeida Maciel José Fiorita Advisory Council The General Shareholders Meeting held on April 25, 2003 included a provision in the bylaws authorizing the Board of Directors to create an Advisory Council, formed by three independent members appointed by the Board of Directors every three years or in case of vacancy. The Advisory Council s role is: to issue opinions for the General Shareholders Meeting regarding: the conducting of business and the compliance of legal obligations by the Company s senior management, discussions on the senior management and on the Company s analysis report, and any proposal to be submitted by the Board of Directors to the General Shareholders Meetings; and to present recommendations concerning new businesses and general issues submitted for their consideration and advice. The mandate of current members of the Advisory Council expires in AmBev Annual Report 2003

21 Executive Committee The Executive Committee is the main link between the policies and decisions taken by the Board of Directors and AmBev s management team. The explicit responsibilities of the Executive Committee are: to present medium-term planning proposals to the Board of Directors, with their respective pluriannual projects; to propose annual performance targets for the Company, as well as the necessary budgets to reach the projected goals; and to monitor the Company s positioning by analysis of results and market developments. The Executive Committee is also responsible for the interests of AmBev s employees, and its members are involved in recruiting programs, variable compensation policies and in the dissemination of the Company s culture. The Executive Committee holds at least eight meetings per year, in which are discussed, among other matters: the evolution of the Company s results, the beverage market, integrated planning, goals, budget, people, investment planning, compensation policy, and pricing policy. The members of the Executive Committee are also members of the Board of Directors. They are appointed according to their strong experience in the beverage business. Members: Marcel Herrmann Telles Victório Carlos de Marchi Carlos Alberto da Veiga Sicupira Audit Committee The Audit Committee acts on behalf of the Board of Directors and is responsible for monitoring the integrity and accuracy of the Company s financial statements and the performance of internal and external auditors. Moreover, it oversees the Company s compliance with the legislation in relation to its operations, the management of its internal controls and the appointment of external auditors. Throughout the year, the Audit Committee holds quarterly meetings, in which are discussed, among other matters: the Company s financial statements, internal audit, fiscal risks and compliance with the Sarbanes- Oxley Act. The members of the Audit Committee are also members of the Board of Directors. They are selected according to their knowledge of finance and accounting, and also their experience in the beverage business. Members: Victório Carlos de Marchi Jorge Paulo Lemann José Heitor Attílio Gracioso Finance Committee The Finance Committee analyzes and monitors the Company s annual investment plan and ensures its execution. This Committee evaluates opportunities for mergers and acquisitions before presenting them to the Board of Directors. It is also part of the Finance Committee s responsibilities to evaluate the most appropriate capital structure for the Company, aiming at maximizing the Economic Value Added (EVA). Throughout the year, the Finance Committee holds at least three meetings, in which are discussed, among other matters: budget, financial risk analysis, treasury policy, and merger and acquisition opportunities. The members of the Finance Committee are also members of the Board of Directors. They are appointed according to their knowledge of finance and their experience in the beverage business. Members: Marcel Herrmann Telles Carlos Alberto da Veiga Sicupira Roberto Moses Thompson Motta Members of the Board of Directors and Executive Officers The most appropriate indication of the abilities of AmBev s Directors and Executive Officers is the Company s successful track record. Their experience and competence are directly translated into the Company s strong results. Also important to mention is AmBev s stock ownership plan. As top and key middle management become committed to a long-term investment in AmBev non voting shares, their interests are automatically aligned with AmBev shareholders. 18/19

22 CSR /corporate social responsibility Formed by companies whose evolution has been part of Brazilian history for more than a century, AmBev has learned the importance of a serious commitment towards the improvement of the quality of life in the communities where it operates. During 2003 we worked to a strategy built on corporate responsibility and ethical principles, which is focused on three key pillars: Responsible Consumption of Alcohol Responsibility Towards the Community Environmental Responsibility Responsible consumption of alcohol As one of the largest beverage companies in the world, responsible consumption of alcohol is one of the most important issues in our corporate responsibility policy. International experience and internal research conducted by the Company show that the utilization of supervising measures, by Government, associated with educational and awareness campaigns, are the best way to achieve satisfactory and effective results. Based on that research, we have been working on two main programs. The first of them is named AmBev and Responsible Consumption, and it is aimed at our clients, points of sale, and final consumers, including several actions to promote the responsible consumption of our beer brands. The two main issues tackled by this program are the incompatibility of drinking and driving and the prevention of alcohol consumption by people under 18 years old, the legal age for drinking in Brazil. The second program is targeted internally on our marketing department, the advertising and events agencies that we hire and our distributors. It involves the development of a Responsible Marketing Procedures Manual, which guides the preparation and execution of marketing events, assuring the compliance with procedures dedicated to responsible consumption and safety. Responsibility towards the community AmBev runs a number of continuous initiatives dedicated to improving the social and economic situation of the communities in which we operate. Some of these initiatives include: Recycling Library An engagement in partnership with the non-governmental organization Ecomarapendi, dedicated to the development of recycling activities. We have developed one of the largest information centers dedicated to this matter in Latin America. Furthermore, we have also established a supply system to artists who work with waste as their primary raw material, and created a special program, Solidarity Recycling, devoted to assisting cooperatives of waste collectors. Maués Project An initiative developed in the city of Maués, located in the Amazon region, which is the greatest source of the guaraná fruit used by AmBev. The purpose of this project is the economic, social and environmental development of the region, based on the improvement of guaraná cultivation techniques. In partnership with the local city hall, Embrapa (Brazil s leading agriculture research center) and IDAM (the Institute for the Development of the Amazon region), the project provides technical assistance to local farmers and supports research to improve cultivation productivity. Education Programs AmBev acknowledges the relevance of education as a fundamental component of sustainable development. We support different initiatives dedicated to improving access to schools and to reducing illiteracy. AmBev sponsors the work of SolidaryEducation, a nongovernmental organization, in four cities in the North and Northeast regions of Brazil, located in critical areas where illiteracy levels are higher than 21%. Another initiative fully supports the Walter Belian Technical School, located in Responsible consumption is fundamental for the sustainability of the beverage industry. Skol sponsored a broad campaign dedicated to the prevention of drinking and driving. AmBev Annual Report 2003

23 the city of São Paulo, in order to provide free education for the children of our employees. This is achieved through the Antonio and Helena Zerenner Foundation. Environmental responsibility One of AmBev s beliefs is to develop activities, products and services that involve a proactive attitude to environmental preservation and contribute to the expansion of environmental awareness. We have embraced the principles of sustainable development, convinced of the imperative to combine development with sustainability. In the last five years, R$ 200 million were invested in our environmental management policy. Besides reaching the goal of unifying and maximizing AmBev s environmental actions, this process also led to significant cost reductions through programs designed to minimize losses, reutilize waste, and save energy and water. In a pioneer action, we have implemented an Environmental Management System in all our plants, in accordance with ISO standards. Clean technologies We have made a clear commitment to promote sustainable development and the search for eco-efficiency, which means producing the minimum impact on the environment, often exceeding legal requirements. We use clean technologies including machinery that leads to less waste and no toxic substances, chemical by-products or heavy metals and constantly research new technologies, production processes and raw materials. In numbers, these efforts represent the economy of: 9 million m 3 per year in water consumption; 10,000 tons of glass per year, equivalent to approximately 42 million bottles; 600 tons of PET, equivalent to 14 million soft drink bottles; 1,800 tons of aluminum, equivalent to 12 million cans. Waste recycling Another success of our environmental policy is the recycling of industrial production waste. Currently, this index is at 95% and our goal is to reach 100%. In some plants it is already at 99%, thanks to the efficiency of the selective collection system, rigorous enforcement of the rules established in AmBev s Environmental Procedures Manual and specific programs, such as the destination of waste for the manufacturing of animal food, fertilizers and packaging. Malt husks, for instance, can be used, with great results, as part of the diet of dairy cattle. The volume discarded at AmBev s plants is enough to feed 720,000 head, which in turn are capable of producing up to 3 million liters of milk per day. The labels leftovers, originated from the cleaning of returnable bottles, are specially prepared to be recycled into cardboard and egg boxes. Full of nutrients, by-products of the water filtering process in compound plants are turned into fertilizer. This reutilization cycle produces valuable benefits to the environment, to communities and to the Company itself. AmBev contributes to the protection of the environment and benefits the economy by creating direct and indirect jobs as an intelligent alternative to simply dumping waste. AmBev supports the guaraná cultivation in the Amazon through the Maués Project, dedicated to the social development of the region. 20/21

24 The team /management 01 / 02 / 03 / 04 / 05 / 06 / 07 / 08 / 09 / 10/ 11 / 12 / 13 / Board of Directors Fiscal Council Executive Directors Marcel Herrmann Telles Co-Chairman Victorio Carlos De Marchi Co-Chairman Carlos Alberto da Veiga Sicupira Diego Fernando Miguens Bemberg Antonio Luiz Benevides Xavier Everardo de Almeida Maciel José Fiorita 01 / Carlos Alves de Brito Chief Executive Officer 02 / Bernando Pinto Paiva Logistics Executive Officer 03 / Cláudio Bráz Ferro Industrial Executive Officer 08 / Luis Felipe Pedreira Dutra Leite Chief Financial and Investor Relations Officer 09 / Luiz Fernando Edmond Sales and Management Executive Officer Jorge Paulo Lemann José Heitor Attílio Gracioso Magim Rodriguez Junior Roberto Herbster Gusmão Vicente Falconi Campos Roberto Moses Thompson Motta Alternate Fersen Lamas Lambranho Alternate 04 / Claudio Garcia Shared Services and Information Technology Executive Officer 05 / João M. Castro Neves Soft Drinks Executive Officer 06 / José Adilson Miguel Third-Party Distribution Executive Officer 07 / Juan Manuel Vergara Galvis International Operations Executive Officer 10 / Miguel Nuno da Mata Patrício Marketing Executive Officer 11 / Milton Seligman Corporate Relations Executive Officer 12 / Pedro de Abreu Mariani General Counsel 13 / Ricardo Wuerkert People and Management Executive Officer AmBev Annual Report 2003