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DB looks at cranking up dividends

By David McEwen

Friday 21st February 2003

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In the brewery business these days, companies have to run a whole lot faster just to stay in the same place. Falling beer consumption, and the move to alternatives, means the beer market in this country is likely at best grow at the rate of GDP.

In that context DB Breweries is holding its own. In the year to September 30, DB increased sales 3% from $278 million to $287 million while earnings before interest and tax from continuing operations were flat at $30 million ($29.8 million the previous year).

In the company's latest annual report, DB managing director Brian Blake and outgoing chairman David Sadler elaborate on the amount of effort that went into achieving these pancake-like results. Through strong marketing of key brands, the company's volume and market share were maintained while price increases helped lift sales.

Brewing is a challenging business. Because it is not a high growth category, most new sales have to be stolen from competitors. The problem is that essentially one beer is not very different from another ­ but customers believe they are. Therefore, a huge amount of effort and expense goes into marketing, branding and advertising.

Last year Tui, Heineken and Monteith's "performed outstandingly well," the directors say, "achieving double digit growth."

Last year saw DB opening its new Waitemata Brewery, which took a decade and $120 million to complete. About half that amount went into building a new packaging hall and office building and road improvements.

The financials are typical of a well-established brewer: little growth, great cashflow and most of the debt paid off.

The balance sheet is very strong, with shareholders equity equal to 68% of total assets. Net operating cashflow is a healthy $28.9m and is substantially higher than the reported after-tax profit, indicating the high quality of earnings.

Prior year comparison is difficult because of the effect of asset sales including Corbans, Allied Liquor Merchants and NZ Liquor. But when all the exceptional items are excluded, DB's earnings have not gone anywhere for some time. The earnings per share in 2002 (44.7c) were lower than in 1998 (48.9c).

Nevertheless, under the guidance and majority ownership of Heineken, DB has become a highly stable and consistently profitable business. Its main appeal is as a payer of attractive dividends. The distribution policy is to pay around 67% of net profits but this is set to become even more attractive.

At the company's annual meeting this week, Mr Sadler told shareholders that after upgrading its Auckland brewery the company expected its capital expenditure needs to be "modest." "Hence your directors will review the stated dividend payout policy of around 67% of net surplus attributable to shareholders."

The medium-term outlook is secure but the only earnings growth is likely to come from the growing preference of consumers to drink smaller volumes of higher quality beers, which provide higher margins.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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