r e p o r tannual 2 0 0 0 - quinsa · second pepsico franchise in argentina, ... beverages-related...

ANNUALr e p o r t2 0 0 0

Quinsa

Quilmes Industrial S.A.

84, Grand Rue L-1660 Luxembourg

Grand Duchy of Luxembourg

2000ANNUAL

report

The past year has seen the Company steadily

strengthen its position as a leading beverage producer

in Latin America.

With the consolidation of BAESA, the acquisition of a

second PepsiCo franchise in Argentina, and the sale of

its bottling operation in Paraguay, the Company now

has a solid and focused presence in the Argentine and

Uruguayan soft drinks markets. The water business is

also expanding healthily on the back of our association

with Perrier Vittel, as acquisitions and the

introduction of new brands and technology have

already made Quinsa the second largest player in the

Argentine and Uruguayan markets.

2

StatementCHAIRMAN’S

JACQUES LOUIS DE MONTALEMBERT

Chairman of the Board

The Company’s core business has also seen major

developments, as evidenced by the recent acquisition

of two beer companies in Bolivia. Quinsa now holds a

commanding presence in that market and we are

extremely excited with the potential for earnings

growth this will provide for 2001.

These achievements are no mean feat considering the

u n f a vourable trading conditions that pre vailed in

most of these markets during 2000. Pe r s i s t e n t

recessions and an extremely aggre s s i ve competitive

e n v i ronment have underlined the import ance of

maintaining an adequate balance between mark e t

s h a re and pro f i t a b i l i t y. We believe t he Company has

successfully ove rcome this challenge, as reflected by its

defence of above - a verage margins. In that sense, our

success reflects the efforts of an extremely motiva t e d

and focused management team and the dedication of

all Qu i n s a’s people.

3

We are optimistic about the region’s prospects and are

confident that as the different economies resume their

growth, the efforts of these past years will bear the

results we have been working for: that Quinsa become

a major force in the beverages industry.

Consistently adding value to our shareholders remains

our ultimate objective. In that direction, we approved

the implementation of a share buy-back programme

last year and also approved the restructuring of the

Company’s capital in order to give holders of preferred

shares full voting rights, and allow Argentine pension

funds to invest in our stock.

We appreciate the support of our shareholders and are

committed to enhancing their investment in the

Company.

4

review

chiefEXECUTIVE’S

Dear Shareholder,

The year 2000 will probably be a difficult year to

forget for Quinsa’s shareholders, management and

employees. Far from recovering from its long drawn

recession, Argentina went through one of its most

difficult years in the last decade. In terms of the

beverage industry, the effects of this continued decline

in economic activity were compounded by fierce and

at times irrational competition.

Despite this environment, the Company managed to

maintain its total beer volumes almost unchanged and,

t h rough the acquisition of BAESA, was able to incre a s e

soft drink volumes nearly threefold and to virt u a l l y

AGUSTÍN GARCÍA MANSILLA

Chief Executive Officer

double its water volumes. Total re venues increased 21%

to US$ 955 million. Operating profit declined 18% to

US$ 132 million, as the lower profitability from an

Argentine beer business that has been subject to heavy

discounting by the competition, was not ye t

compensated by the new businesses acquired. Net pro f i t

after tax declined 6% to US$ 73 million.

The year 2000 has also been by far the most active in

terms of mergers, acquisitions and divestitures. In

effect, we have completed a number of transactions as

a result of our growth strategy, that have strengthened

our position as a leading beverage company in Latin

America. In that sense, our strategic initiatives have

included:

Beverages-related diversification

During December 1999 we had announced the

acquisition of 51% of the capital stock of BAESA, the

largest PepsiCo bottler in Argentina. The acquisition of

the remaining shares was a prerequisite for the full

integration of our beer and soft drinks businesses, a

necessary step to accelerate the cost savings and

synergies needed to turn around BAESA. As the result

of lengthy negotiations, Quinsa acquired a further 47%

of BAESA’s capital stock during the year. The final

acquisition cost was US$ 230 million, implying a

valuation of under US$ 2.5 per unit case sold, which is

very attractive when compared to other bottlers in the

region. This has allowed us to accelerate the

5

implementation of commercial, industrial and

administrative synergies. Among other things, we have

been able to merge CMQ with BAESA, a process we

completed in March 2001. This merger will

undoubtedly result in the simplification of

administrative procedures, and will also enhance the

combined operation’s tax efficiency. On a normalised

basis, that is once the synergies and cost savings have

been implemented, we expect total annual savings to

reach about US$ 31 million.

Towards the end of the year, we also completed the

acquisition of EDISA, the second-largest PepsiCo

bottler in Argentina, with a franchise that covers

approximately 20% of the country’s population. The

transaction was completed at a firm value of US$ 36.5

million, a valuation of US$ 1.6 per unit case sold.

EDISA will provide additional synergies to the BAESA

operation, par ticularly in terms of the consolidation of

our soft drinks industrial infrastructure. This

acquisition includes an excellent facility in Tucuman

that could allow us to service a large par t of the

country once the remaining PepsiCo franchises are

available.

The mirror of these two acquisitions was the sale of

our Paraguayan soft drinks business to Coca-Cola.

After long and complex negotiations we were able to

sell our 58% equity stake in this company during

October last year for US$ 64 million. This implies a

valuation of US$ 4.5 per case sold, undoubtedly an

excellent price compared to other transactions, and

particularly to the price paid for the PepsiCo

franchises in Argentina. This transaction allows

Quinsa to focus on the development of other

businesses with PepsiCo, including not only the

acquisition of the remaining soft drinks franchises in

Argentina but also the addition of other product lines

such as Tropicana, which will be introduced during

the year 2001.

6

Geographical expansion

Growth through geographical expansion has always

been one of our strategic thrust s. The major

diff iculty in implementing this strategy for almost

e ve ry brewer in South America has been the scarc i t y

of targets and the lack of controlling share h o l d e r s

willing to sell.

During the year 1996 we made our entry into Bolivia

t h rough the acquisition of two breweries in

Cochabamba and Santa Cruz . This allowed us to

c a p t u re a third of the Bolivian market with the Du c a l

and Taquiña brands.

In September 2000 we announced the acquisition of

a 61% stake in Cervecería Boliviana Nacional La Pa z ,

and one month later we acquired a controlling stake

in C ervecería Boliviana Nacional Santa Cruz . T h i s

re p resented a total investment of US$ 110 million,

plus US$ 15 million in outst anding debt. Both

companies combined sold 1.2 million hectolit re s

during the fiscal year ended Ma rch 31, 2000. T h e s e

acquisitions have given us cont rol of what is by far

the most import ant brand in Bolivia, Paceña, and

reach a t ot al market share of about 98%.

These t wo transactions are of paramount import a n c e

for Quinsa, since they will allow us to implement a

number of synergies with our previous businesses

t h rough the rationalisation of industrial capacity, a

m o re rational pricing policy for our broad brand

p o rtfolio and the reduction of administrative

expenses. The present value of these synergies exc e e d s

US$ 50 million, almost half the price paid for the

equity of both companies.

With almost US$ 90 million in re venues, our

Bolivian operation is now comparable to our

Paraguayan beer business. Despite the peculiarities of

the Bolivian topography, which re q u i res us to

maint ain several breweries to serve the mark e t

e f f i c i e n t l y, we expect to achieve profitability leve l s

similar to those obt ained by our beer business in

7

The year 2000 has also witnessed major operational

d e velopments. Among the most significant of these I

would like to mention the follow i n g :

Industrial Benchmarking Programme

Quinsa introduced a Productivity Analysis concept

based on six factors: volume, seasonality, production

planning, capacity utilisation, flexibility and hourly

output. Through a benchmarking process, we are now

comparing all of our facilities with Heineken’s. As a

result of this exercise, we have successfully

implemented action plans which resulted in annual

savings for the whole system of close to US$ 8 million.

Administrative Streamlining

We have continued to implement a very focused

programme aimed at reducing administrative expenses

in all of our operations. The main target of this

programme has been Argentina, where we will benefit

from the merger of our beer and soft drinks

companies. An indication of our success to date is the

fact that administrative expenses have barely increased

despite the large acquisitions we have made.

8

Pa r a g u a y, within the next couple of years. Bolivia will

c e rtainly be one of the major contributors to

Qu i n s a’s operating cash flow growth in the years to

c o m e .

During 2000 we also concentrated the production of

malt at our most efficient plant in Tres Arroyo s

(Argentina), by disposing of our old malstery in

Uruguay for a total consideration of about US$ 14

million. Our Tres Arroyos plant, with a capacity of

90,000 tonnes, will supply almost 70% of Qu i n s a’s

needs, while the remainder will be acquired fro m

t h i rd parties with production facilities closer to our

b rewe r i e s .

9

Product Portfolio

Our beer operation in Argentina was more active than

ever in terms of product development and packaging

innovations. We strengthened our leadership in the

one-way segment of the market with the introduction

of one-litre bottles for Heineken and for the

reformulated Iguana brand. Among other innovations,

we launched the first PET bottle in Argentina and also

developed diverse multipacks. We have reinforced our

role as market leaders, not only in terms of volume,

but also in terms of pricing and product innovation.

We believe these actions were very relevant for the

Argentine beer market to counter the effects of a long

recession.

Our bottled water business in Argentina has added the

Glaciar brand to its portfolio, which it acquired

through BAESA. It also launched the Nestle Pureza

Vital brand in October 2000. Total volume sold with

three brands (Glaciar, Nestle Pureza Vital and Eco de

los Andes) was 1.2 million hectolitres, giving us a

21.4% share in this market.

Integration of Soft Drinks

In t he soft drinks business, one of our major

o b j e c t i ves is t o be the lowest cost pro d u c e r. It is with

this in mind that we have concentrated our efforts in

cost reduct ion programmes and the integration

p rocess with our beer business. Both processes are

running ext remely well, and have been decisive in

the turning of the business’ operat ing results t o

almost bre a k - e ven for t he year 2000. Headcount has

been reduced by more than 30% and the cost of

p u rchases has been greatly reduced despite incre a s e s

in the price of aluminium and PE T. The int egration

of BAESA’s distribut ion network with our beer

business is also running according to plan, to the

extent that both syst ems will be fully integrat ed by

the end of 2001. While we will be maintaining an

independent sales force for supermarkets and dire c t

sales, t he integration of merchandising, ware h o u s i n g

and delive ry will result in substantial cost savings.

The successful conclusion of this effort tow a rds the

end of the year 2001 will result in a signif icant

10

i m p rovement of the business’ operational cashflow

during the next ye a r s .

Other Market Developments

Our business in Chile continues to improve on the

basis of a 14% volume growth, which

has resulted in a market share of

almost 10%. This excellent

performance was the result of the

continued success of locally brewed

Heineken, and allowed the Chilean operation to

achieve a positive operational cashflow for the first

time ever.

Our Paraguayan beer operation continued to perform

extremely well. During 2000 the company completed

the expansion of the Ypané brewery and closed down

the old Asunción plant. The performance of the

Quilmes brand was determinant in achieving an 81%

market share.

1 1

Other Corporate Initiatives

Management has pursued various initiatives aimed at

enhancing the value of the Company for its

shareholders, two of which I would like to address in

some detail:

One of senior management’s major concerns has been

the price of Qu i n s a’s stock and the f irm’s low va l u a t i o n

re l a t i ve to its regional peers. This has been the result, to a

c e rtain extent, of the nature of the Company’s capital

s t ru c t u re. The Board of Di rectors has there f o re approve d

two initiatives proposed by management during the ye a r

2000. The first of these concerns the implementation of

a share buy-back programme, for a maximum amount of

5 million shares, or approximately 4.6% of total capital

outstanding. As of Fe b ru a ry 27, 2001 the total amount

of shares acquired under this programme was 574,000.

We remain committed, there f o re, to support the price of

our stock as far as possible under current SEC and

Lu xembourg regulations.

The second initiative is related to the nature of our

capital stock. We are current ly in t he process of

c o n ve rting our pre f e r red non-voting shares into

o rd i n a ry voting shares (Class B shares). With this, we

hope to appeal to a wider investor base, including the

Argentine pension funds. These are t he most

signif icant local investors in equities, and are

c u r rently barred from investing in our stock owing to

its non-vot ing nature. As part of the same process we

will be splitt ing current ord i n a ry shares on a 10:1

ratio, with each of these new Class A shares carry i n g

a claim to dividends and assets equal to 10% of t he

claim they had prior to the re s t ructuring. Fi n a l l y, we

a re allowing for the conversion f rom Class A share s

into Class B shares, under certain limitat ions. We

thus hope to provide current holders of ord i n a ry

s h a res with access to the more liquid market, since

Class B shares will be traded in the New Yo rk St o c k

Exchange.

12

Outlook

A lot has been achieved during the past ye a r, and ye t

we are still faced with an enormous amount of work

to be done during 2001. The successful consolidation

of our Bolivian acquisitions and the merger of our

soft drinks and beer operat ions in Argentina and

Uruguay will demand an enormous effort fro m

e ve ryone in the Company. I am confident they will

both be completed on schedule and with the re s u l t s

we are expect ing.

We are t he leaders in markets with high grow t h

potential, have developed a lean and dynamic

s t ru c t u re and have maintained a solid balance sheet

while invest ing heavily in our brands and

p roduction f acilities. We are pleased with the many

tangible improvement s we have been able to make

t h roughout t he Company during the past ye a r. On

behalf of all of our management team and the Board

of Di rectors we would like to t hank our

s h a reholders for t heir continued support. I would

also ve ry specially like t o t hank our personnel, who

h a ve worked ve ry hard throughout t he year and

h a ve shown a noticeable capacity for reaction under

changing circumstances.

We remain committed to add value to our

shareholders, and have no doubts we are on the right

track in that respect.

Thank you for your support.

13

Quinsa is a Lu xembourg-based holding company,

which controls 85 percent of Quilmes In t e r n a t i o n a l

( Bermuda) Ltd., ("QIB"). The remaining 15 perc e n t

s h a re is owned, since 1984, by He i n e k e n

International Beheer B.V. ("Heineken"). He i n e k e n

Technical Se rvices B.V. renders technical assistance to

the operating companies. Quinsa, through QIB,

c o n t rols beverage and malting businesses in five Latin

American count ries. Its beer brands are market leaders

in Argentina, Bolivia, Paraguay and Uruguay and

h a ve a strong presence in Chile. The Company also

owns a controlling interest in the two largest Pe p s i C o

bottlers in Argentina, Buenos Aires Em b o t e l l a d o r a

S.A. ("BAESA") and Embotelladora del Interior S.A.

("EDISA"). Qu i n s a’s common and pre f e r red share s

a re listed on the Lu xembourg Stock Exc h a n g e

( Reuters codes: QU I N . LU and QU I N p. LU). Qu i n s a’s

American De p o s i t o ry Sh a res, re p resent ing the

C o m p a n y’s pre f e r red shares, are listed on the New

Yo rk Stock Exchange (NYSE:LQU ) .

14

QUINSAabout

15

2000 1999 1998 1997 1996 1995

Consolidated Operating Results

Gross Sales 991.9 819.9 854.8 890.9 831.9 797.6

Operating Profit 132.3 160.4 165.6 173.4 148.5 166.5

Net Profit 72.8 77.5 94.5 72.0 60.4 60.3

Net Income per share* 0.673 0.727 0.887 0.676 0.572 0.588

Consolidated financial condition

Total Assets 1,510.7 1,386.4 1,075.2 1,038.7 942.7 825.5

Shareholders’ equity 647.8 589.2 539.0 468.2 416.9 338.5

Capital Expenditures** 68.1 104.1 81.1 123.9 64.3 76.3

Dividends

Dividends declared (net) *** 31.9 31.4 27.3 23.6 20.5 20.5

Dividends per share (net)* 0.295 0.295 0.256 0.221 0.193 0.193

Price per share (12/31)

-Voting share (Lux) 7.000 9.125 9.000 10.750 8.000 10.400

-Share (NYSE) 9.000 11.9375 9.313 13.688 9.125

* Net income per share and dividend per share have been computed on the weighted average aggregate number

of shares and voting shares outstanding for the period restated to give effect to the 1996 stock split and the issue

of 1,581,339 preferred shares which were exchanged for BAESA shares acquired from Bayerische Hypo-Vereinsbank.

** Includes bottles and crates

*** To be proposed at the AGM of June 2001.

FINANCIAL HIGHLIGHTS

Year ended December 31,

(IN US$ million, except per share amounts)

17

Argentina

Bolivia

Chile

Paraguay

Uruguay

QUINSA

Quilmes’ leadership of the Argentine market is

reflected in its 69 percent market share. The drivers

for this commanding position continue to be the

strength of its brands, its large brand portfolio, and its

access to the largest distribution network for beverages

in the country.

Market developments – 2000

T h ree years of economic recession finally took their toll

on beer consumption, as market volumes for the ye a r

declined 2.3 percent to 12.4 million hectolitres. Wi t h i n

this context average prices decreased compared to 1999,

18

ARGENTINAas some competitors continued their aggre s s i ve price

discounting and the economic environment led

consumers to down-trade to less expensive brands.

Quilmes maintained its focus on defending long-term

p rofitability and brand equity, avoiding actions where a

loss of value could not be compensated with potential

volume increases. This policy is reflected in the

C o m p a n y’s share of value, which is consistently higher

than its market share .

Company developments

During the year 2000 Quilmes was highly pro a c t i ve in

terms of product and packaging development. T h e

Company be lieves innovation is a key tool for maintaining

its leadership in the market. In line with this, new

p resentations we re introduced in the market such as non-

returnable one-litre bottles, a PET bottle under the

Quilmes brand, the first such bottle in the Argentine

m a rket, and new multipacks. These actions, intro d u c e d

during the fourth quarter of the ye a r, supported an

i n c rease in market share which has continued into 2001.

In terms of industrial ef ficiency, the year 2000 saw the

Company increase its focus on Continuous Im p rove m e n t

both in the breweries and in the malting plant.

Im p o rtant pro g resses we re made in the pro d u c t i v i t y

t rend and operating performance, leading to

i m p rovements in our production costs. The main

efficiencies achieved we re the result of Target and Ac t i o n

Plans based on internal and external Be n c h m a rk i n g

(BCS), the consolidation of our Team Ba s e d

Organisation and TPM Programs, and the

re-engineering of administrative and logistic processes.

Quinsa obtained approval for the merger of its beer and

soft drinks businesses, and this will result in an

acceleration of a number of synergies, particularly in the

a d m i n i s t r a t i ve and commercial are a s .

20

21

OPERATING HIGHLIGHTS

(Figures in US$ million, where applicable)

2000 1999

Sales volume (beer, thousands

of hls.) 8,427 9,033

Revenues (net of taxes) 463.8 525.3

Operating profit 110.3 134.9

EBITDA 159.0 183.6

Headcount 1,964 2,127

Market developments - 2000

Ma rket volumes increased close to 8 percent despite the

u n f a vourable environment, albeit at the expense of ave r a g e

price declines. Consumers, affected by the long-drawn

economic recession, tended to trade down to less

e x p e n s i ve brands. BAESA’s market share in the Gre a t e r

Buenos Aires region was approximately 27 perc e n t .

BAESA

22

23

Company developments

Quinsa completed the acquisition of a 98.6 percent

stake in the company, which was a prerequisite for the

full integration of its beer and soft drinks operations.

In that sense, the beer and soft drink distribution

networks will be fully integrated by the end of 2001.

Combining warehousing, delivery and merchandising

for both businesses will result in a significant

improvement of operating cash flow.

In December 2000, Quinsa acquired Em b o t e l l a d o r a s

de l Interior S.A., and thus consolidated 84 percent of

PepsiCo volume sales in Argentina. This acquisition will

a l l ow the Company to tap further synergies, part i c u l a r l y

related to the rationalisation of its industrial network .



2000 1999 (*)

Sales volume (soft drinks,

thousands of hls.) 4,680 588


Operating profit (2.2) 3.7

EBITDA 9.9 5.2

Headcount 1,591 2,352

(*) 1999 includes December only.

25

Market developments - 2000

Consumer demand did not improve during the year,

as the country’s economic difficulties persisted and

market volumes declined. This was particularly true of

the on-premise segment, which accounts for more

than 50 percent of market volumes.

In December 2000 the government reduced the

specific tax on beers by 29 percent, in an effort to fuel

consumer spending.

Company developments – 2000

The most re l e vant development during the year was the

acquisition of Cervecería Boliviana Nacional, which has

g i ven Quinsa a consolidated market share of

a p p roximately 98 percent. This acquisition will result in

m a rked improvements for the Bolivian business, as it will

a l l ow for a higher degree of price rationality and

industrial efficiency, lower transportation costs and lowe r

a d m i n i s t r a t i ve expenses as a percentage of sales. As the

synergies and cost reductions come into place during the

year 2001, profitability will improve signif icantly.

BOLIVIA



2000 1999

Sales volume

(beer, thousands of hls.) 799 553


Operating income 0.2 0.5

EBITDA 9.1 7.8

Headcount 1,578 476

(*) Figures for 2000 include four months of operations for Cervecería

Boliviana Nacional La Paz and one month for Cervecería Boliviana

Nacional Santa Cruz.

26



2000 1999

Sales volume



Operating profit (4.1) (5.9)

EBITDA 0.3 (1.2)

Headcount 321 311

27


The Chilean market recovered from the recession of

1999, with beer volumes increasing particularly during

the second half of the year. Thus, total market

volumes for the year increased approximately 3

percent. Quinsa’s performance was significantly better

than this, leading to an average market share for the

year of approximately 10 percent.

Company developments –2000

The successful launching of locally brewed Heineken

beer towards the end of 1999 provided the Company

with a solid platform from which to develop volume

growth and improved performance. During 2000 its

Becker, Baltica and Heineken brands all performed

above expectations, leading to total volume increases

of approximately 14 percent. This trend has continued

into 2001, which leads us to be optimistic about

margin improvements in the future.

The past year also marked a milestone in the history of

Quinsa’s Chilean business: EBITDA was positive for

the first time since we entered the market.

CHILE

Company developments –2000

The Company completed the expansion of its Ypané

plant during the year, doubling its previous capacity.

It also closed down its older facility in downtown

Asunción and set up a distribution centre to handle

direct sales and distribution in the city. The Ypané

expansion has allowed for significant cost savings, as

witnessed by the businesses improved margins.

Furthermore, it included our first local canning line,

which has further improved profitability. The

Quilmes brand, which was previously imported from

Argentina, is now being produced locally.


The Paraguayan beer market saw total volumes

increase slightly more than 1 percent, despite

economic difficulties that affected consumer demand.

Quinsa continued to do extremely well, ending the

year with a 5 percent increase in volumes sold. Market

share increased to 81 percent, fuelled by solid

performances of the Quilmes and Baviera brands.

30

PARAGUAY

31



2000 1999

Sales volume

(beer, thousands of hls.) 1,603 1,520


Operating profit 31.4 25.3

EBITDA 40.9 35.9

Headcount 461 574

Company developments – 2000

The Company is in the process of merging its

Uruguayan beer and soft drinks operations, the latter

resulting from the BAESA acquisition in December

1999. This process will involve moving the bottling

lines to our brewery, and it should be completed

during the year 2001. Operating results, which were

affected by the poor performance of the soft drinks

market in general, should improve considerably as a

result of this process.


The Uruguayan economy experienced difficulties that

were similar to other countries in the region,

particularly Argentina. Market volumes for beer

declined approximately 7 percent, although Quinsa’s

volume sales performed better than that as market

share increased one percentage point to 54 percent.

32

URUGUAY

33



2000 1999

Sales v olume



Beer 26.1 27.6

Soft drinks and water 21.4 4.0

Other (net) 16.4 17.1

Operating profit (0.8) 2.5

Beer 2.6 4.2

Other (net) (3.4) (1.7)

EBITDA 3.3 5.1

Headcount 479 354

StatementsF I N A N C I A L

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