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Issue of new shares 0 0 0 0 0 0 0 0 0 0
Revaluation adjustment (13) (?) 139 134 (151) 0 0 0 0 0
Goodwill written off (127) (72) (839) (131) (612) (253) (91) (95) (299) (108)
Short term debt (NLG) 433 586 774 476 474 218 150 257 0 0
Long-term debt (NLG) 503 424 792 909 1,151 933 783 526 526 526
Retirement-related liability (NLG) 164 167 162 157 103 103 103 103 103 103
Heineken's operating expenses (not including depreciation) as a percentage of revenues have fluctuated between 83.5 percent and 86.6 percent during 1994 to 1998, with the lowest figure recorded in 1998. Only the years 1996 to 1998 are comparable because of the acquisitions of Fischer Group, Saint-Arnould, and Birra Moretti in 1996. We can see clear trends in a few of the cost categories. Marketing and merchandising expenses combined have been the largest portion of the operating costs (33.8 percent-34.3 percent of revenues), and have been relatively constant. This fits with the company's strategy of global marketing and branding. Raw material costs have decreased. The company partially attributes the decline to cost-saving programs and the appreciation of the dollar against other currencies, including the euro. Other costs including packaging and personnel have remained constant, slightly decreasing from 1996. The dip from 1996 could best be explained by the full integration of the newly acquired operations. Without any other sources of information, we forecast operating expenses to remain constant as a percentage of revenues (compared to 1998) during the next several years.
Most of the depreciable assets purchased by Heineken are related to the company's breweries, including buildings and large machinery. In the years 1994 to 1998, depreciation was between 11 percent and 14 percent of net plant, property, and equipment. We assume that depreciation remains constant as a percentage of net property, plant, and equipment, given the slow growth and industrial nature of the business.
The annual report provides the amortization schedule for Heineken's existing debt. We create new debt or marketable securities in our forecast to balance the sources and uses of cash. For simplicity, we estimate interest expense based on the level of debt at the beginning of that year, rather than on the average level of debt. We forecast the interest rate on existing debt as 8.5 percent, the same as the effective rate in 1998. The rate on new debt and retirement-related liability is the opportunity cost of borrowing, 4.3 percent. We use the interest rate on short-term treasury bills in the Netherlands to estimate the interest rate on excess marketable securities.
We estimate Heineken's marginal tax rate as 35 percent, the statutory tax rate in the Netherlands. Heineken's EBITA effective tax rate has historically been close to the marginal tax rate, between 33 percent and 36 percent, with the exception of the heavy acquisition years. So we use 1998's effective tax rate of 33.8 percent to forecast effective cash taxes.
Operating working capital is comprised of operating cash, accounts receivable, inventories, and other current assets (such as prepaid expenses) less accounts payable, and other current liabilities (such as taxes payable). It does not include short-term sources of funds such as short-term debt or dividends payable. Between 1994 and 1998, net working capital was about 3 percent of revenues, with the exception of 1996 and 1997 (which were acquisition years). The only significant change in any single line item seems to be other current liabilities. We believe this will revert to a normal level of about 11.8 percent of revenues, generating a forecasted level of working capital of 3.3 percent of revenues.
In general, consider the following when forecasting working capital:
? Does the company's acquisition (or other growth) strategy affect its need for working capital?
? How much working cash does this company generally need to operate (we assume 2 percent of revenue in this case; for most industrial companies it is between 1 percent and 2 percent of revenue)?
? Does the company plan to reduce working capital in the near future? If there is a clear trend in working capital, will this trend continue or stabilize?
Year-end working capital can be volatile simply because it is measured on the last day of the year. Average measures are probably more stable, yet generally not available. So do not give too much weight to minor year-to-year fluctuations. Focus instead on major trends.
Net Property, Plant, and Equipment
Property, plant, and equipment are more difficult to forecast than other line items because revenues, costs, and working capital are generally equally affected by inflation. PPE are not. The bottom-up approach of forecasting individual expenditures (new and replacement) may be the most accurate approach, but can usually only be done from within the company.