Anheuser-Busch Q3 2008 Earnings Call Transcript

Nov. 6.08 | About: Anheuser-Busch Inbev (AHBIF)

Anheuser-Busch Companies, Inc. (NYSE:BUD)

Q3 2008 Earnings Call

November 6, 2008 11:00 am ET

Executives

Dave Sauerhoff - Vice President, Investor Relations

William J. Kimmins, Jr. - Treasurer

W. Randolph Baker - Chief Financial Officer, Vice President

Analysts

Kaumil Gajrawala - UBS

Mark Swartzberg - Stifel Nicolaus

Judy Hong - Goldman Sachs

Saichin Chau - Analyst

Operator

Good afternoon, ladies and gentlemen. We are ready to begin Anheuser-Busch Company’s third quarter investor teleconference. Mr. Sauerhoff, you may proceed with your opening remarks.

Dave Sauerhoff

Hello, everyone. I am Dave Sauerhoff, Vice President of investor relations at Anheuser-Busch. We issued our third quarter earnings release earlier today and it’s available on our corporate website. The release and this teleconference contain forward-looking statements and actual results might differ materially from these projections. Additional information on factors that could affect the company’s future operations, earnings, and prospects is included in the earnings release and the company’s most recent Form 10-K. The company disclaims any obligation to update or revise any of the guidance provided in this teleconference.

The earnings release posted on our website contains a disclosure and reconciliation of all the non-GAAP financial measures we will be using in this teleconference. Please note that our subsequent comments about the company’s financial results will be stated on a normalized basis excluding one-time items in 2007 and 2008. This includes a $166 million pretax corporate charge in the third quarter for outside professional services related to the InBev transaction and for costs associated with an enhanced retirement program. A complete reconciliation of these one-time items is presented on page nine of the earnings release.

Please also note that our comparison of U.S. beer wholesaler sales to retailers results for the third quarter and year-to-date are on a comparable selling-day adjusted basis unless otherwise indicated. So third quarter and year-to-date have one more selling day than the prior year.

For members of the media listening today, please direct your enquiries following the call to Brenda Williams in the Anheuser-Busch public relations department.

Participating with me on the call today are Bill Kimmins, AB's Treasurer, and today’s speaker, Vice President and Chief Financial Officer, W. Randolph Baker. Randy.

W. Randolph Baker

Thank you, Dave. Ladies and gentlemen, good morning and good afternoon to InBev European investors. I will start with brief comments on the status of our agreements with InBev, then cover our third quarter results.

As you are aware, on September 29th, InBev shareholders approved the acquisition of Anheuser-Busch by InBev with Anheuser-Busch InBev as the company name post closing. On October the 6th, Anheuser-Busch issued its proxy statement recommending approval of the merger agreement and established November the 12th as the date of our special shareholder meeting for shareholders of record as of October the 3rd. On October the 22nd, AB confirmed that agreement had been reached to settle all of the litigation filed by shareholders surrounding the planned InBev transaction, subject to foreign approval.

As InBev reiterated in its teleconference earlier today, Anheuser-Busch and InBev continue to expect that the transaction will close by the end of 2008.

I am pleased to report that AB had an excellent third quarter, with earnings per share up 10.5%, significantly ahead of the mid-single-digit guidance that we provided in our strategic plan teleconference on June 27th.

Our U.S. beer company had an outstanding summer selling season, with very strong sales and earnings performances. This series of initiatives that we took over the last year or two broadened our portfolio, enhanced our brand marketing, and transformed our selling system have clearly been successful. Innovative new products, especially Bud Light Lime and also Landshark Lager, Chelada, and most recently Bud American Ale, are making important contributions to both volume and revenue per barrel growth.

The U.S. beer pricing environment continues to be favorable and in September and October, we successfully implemented our 2009 pricing plan.

Our Blue Ocean cost reduction program is effectively mitigating cost pressures and we achieved better-than-expected gross margin expansion. And last month we announced a tentative agreement with the teamsters’ union on a new five-year labor contract with rank and file voting results expected November the 11th.

Briefly reviewing our third quarter financial results, consolidated net sales increased 6.5%. Net sales for our U.S. beer company drew 6.6% and international segment sales were up 19%.

Consolidated cost of sales increased 5% and cost of goods sold per barrel for the U.S. beer company increased 3%. Marketing, distribution, and administrative expenses were up 4%. Consolidated gross margins expanded by 80 basis points, while operating margins grew by 120 basis points.

Pretax income was up 16%. Equity income declined 13%. Consolidated net income increased 11% and earnings per share were $1.05, up 10.5%.

For the first nine months of the year, consolidated net sales increased 6%, pretax income increased 9%, net income grew 5%, and earnings per share were up 8.9%.

Our normalized effective tax rate was 37.7%, 220 basis points lower than the prior year, due to lower taxes on foreign earnings and tax benefits related to the exercise of employee incentive stock options.

Share repurchase spendings were $718 million for over 14 million shares. Our share repurchase program was suspended as of July 14th, due to the agreement with InBev.

Finally, the Anheuser-Busch Board of Directors approved a regular quarterly dividend of $0.37 per share payable on December the 9th to shareholders of record of November the 10th.

Wholesaler sales to retailers increased 3.6% in the third quarter. Year-to-date total STRs increased 1.3% with AB produced brands contributing 1%.

STR results in July were up mid-single-digits with a very strong performance over the July 4th holiday. STRs in August increased low-single-digits and STRs in September were up mid-single-digits due to strong Labor Day results and including some benefit from retail bills ahead of the price increase.

Looking at sales to retailers results by brand family for the third quarter, overall Bud family STRs increased 4%. Bud Light brand’s volume increased 8%, driven by the very successful introduction of Bud Light Lime and continued growth from Bud Light and Bud Light Chelada.

During 13 weeks ending September 28th, Bud Light Lime achieved a 1.5 volume share in supermarkets, according to IRI, and a 2.0 dollar share, with an average case price 45% higher than Bud Light.

Budweiser brand’s volume declined 3%, Michelob Ultra brand’s volume was up 6%, and overall Michelob family volume decreased only slightly. Busch and natural brands increased 4%. And the InBev European brands increased high single digits.

We rolled out Budweiser American Ale nationally in the latter half of September. While we are still in the early stages of the introduction, initial results and feedback from consumers and retailers have been very positive.

Anheuser-Busch's U.S. beer shipments to wholesalers increased 2.3% in the third quarter. For the first nine months of the year, shipments increased 1.1%, with AB produced brands up eight-tenths of 1%.

Wholesaler inventories at the end of the quarter were one day lower than the prior year.

Based on data from the Beer Institute, U.S. brewer [back-pay] withdrawals were up 1.2% for the third quarter and year-to-date. Total U.S. industry sales, including estimated import shipments also increased 1.2% in the third quarter and were up seven-tenths of 1% for the first nine months of the year.

Anheuser-Busch's U.S. market share year-to-date increased two-tenths of a share point on a shipment basis.

At the consumer level, according to IRI supermarket data, Anheuser-Busch gained nine-tenths of one share point in the third quarter.

Revenue per barrel increased 3.7% in the quarter. Front-line price increases contributed 250 basis points to revenue per barrel growth. Promotional price adjustments had no impact in the quarter and portfolio mix contributed 120 basis points to growth, driven by the strong performance of Bud Light Lime and other high margin products.

AB completed the main portion of our 2009 price increase plan, with over 95% of our actions occurring in September and October, with the remainder planned for the first quarter of 2009.

Our pricing actions to date covered over 85% of our volume, with increases targeted on a brand, package, and market basis. Competition has been taking their own similar pricing actions. Overall, we expect to achieve 4% of revenue per barrel increases for both 2008 and 2009.

Our international beer segment net income decreased 8% in the third quarter and was down 9% for the first nine months, with a very strong performance by our international operations offset by a decline in equity income.

International operations volume in the third quarter increased 6% and was up nearly 5% year-to-date.

Pretax income increased $12 million in the quarter and $48 million year-to-date, with most of our major markets reporting improved profitability. Volume results for our China operations increased mid-single-digits in the third quarter and year-to-date.

Bud family brands benefited from increased marketing and exposure during the Beijing Summer Olympic Games. Profits increased significantly in the quarter and year-to-date, as a result of volume performance, raw price increases, and positive mix from strong growth from our higher margin Budweiser and Harmon premium brands and the elimination of some low-margin Harmon packages.

In Canada, volume increased mid-teens in the third quarter and low double-digits year-to-date, as both Budweiser, the leading brand in Canada, and Bud Light continue to gain share.

Profits in Canada increased 23% in both the third quarter and year-to-date.

In the United Kingdom, volume declined low double-digits in both the quarter and year-to-date, reflecting continued industry on-premise declines and the impact from the excise tax increase.

Our financial results however improved significantly in both time periods due to the implementation of our restructuring plan.

Third quarter equity partner volume, which was reported on a one-month lag, reflecting June through August results, increased 4% on higher volume for both Modelo and Tsingtao. Year-to-date, volume increased 5%.

Equity income declined 13% in the third quarter and 16% year-to-date. Higher material and operating costs continued to negatively impact Modelo.

Year-to-date comparisons were normalized for a $16 million Modelo restructuring charge in 2007 and also include a $29 million benefit from the return of an advertising fund last year, and a $7 million retroactive tax charge for Tsingtao in 2008.

Pretax profits for AB's packaging segment increased 34% in the third quarter and are up 5% year-to-date. Improving can sales mix and higher pricing, along with hedge gains and our recycling operations, drove the improved performance.

Busch Entertainment’s pretax profits declined low-single-digits in the third quarter versus 2007, due to higher operating and marketing costs, partially offset by increased attendance and higher ticket pricing. Year-to-date, pretax profits were even with the prior year.

Our new Aquatico water park in Orlando continues to exceed our expectations but weakness in the economy negatively impacted performances at our parks during the summer.

In summary, Anheuser-Busch had a very strong third quarter and we are on track to deliver or exceed the results projected in our June 27th strategic plan teleconference. We have successfully implemented our 2009 pricing plan and are making good progress with our Blue Ocean cost reduction initiatives. We are exceeding our gross margin and operating margin expansion targets for 2008.

We’ll be holding our special shareholder meeting on November the 12th and as InBev stated in its teleconference earlier today, both companies expect the transaction to be completed by year-end.

That concludes my prepared remarks. I’ll now turn it back over to our Operator for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kaumil Gajrawala with UBS.

Kaumil Gajrawala - UBS

Randy, can you talk a little bit about what you have seen in volumes after the price increases, and if you are finding that consumers are a little more price elastic than in the past, given the economy? Thanks.

W. Randolph Baker

Kaumil, you broke up on the call, or at least the audio that we heard. I believe your question was what are we seeing in volume post price increase.

Kaumil Gajrawala - UBS

Yes, that’s right.

W. Randolph Baker

Our volume in October was down 1.8%. The first three weeks were soft. Last week was strong. This was generally in line with our expectations following a very strong September. Our September STRs were up essentially mid-single-digits and that reflected both the strong Labor Day and the volume build ahead of the price increase.

We’re not seeing any change in shall we say price elasticity or consumer reaction to the price increases. Our price increases are relatively moderate, moderate relative to what other beverage and food companies have taken this year, and the price increases have been well accepted by the retailers, consumers as well.

Operator

Our next question comes from Mark Swartzberg with Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Really just to clarify what you said at the end there about being on track to deliver or exceed the targets you laid out on June 27th -- so to be super clear, you are saying that in spite of the equity income disappointing in the quarter and presumably continuing to be below what you had talked about a few months ago, that is being more than offset or effectively offset by your view of what is happening here domestically?

W. Randolph Baker

That’s a fair statement. We’re really -- my remarks were focused down through the operating income line but we would still be on target with the lower-than-expected equity income. I’ll also, Mark, note that in the June 27th call, we had significant share repurchase spendings. That was suspended due to the agreement with InBev, so we do have differences in both the interest expense line and per share lines.

Operator

Your next question comes from Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs

Just a couple of questions, one is with respect to the InBev transaction, in the proxy statement it made it sound like you were going to file the China notification in October and I’m just wondering if that’s [been made].

And then secondly, as it relates to the broader alcoholic beverage trend in the U.S., are you seeing spirits slowing and beer getting that share of the growth, and whether you think there is more of a secular trend that now consumers are sort of shifting back to beer versus spirits?

W. Randolph Baker

Judy, with regard to the approvals remaining this morning, or earlier today in the call, Brito said that the three approvals that were remaining, regulatory approvals were the U.S., the U.K., and China. But we again, InBev and Anheuser-Busch expect the transaction to close by the end of the year.

With regard to liquor and wine, in supermarket data, in IRI supermarket data, in the third quarter beer actually growth exceeded both liquor and wine, which is the first time in a long time it’s done that. And wine has slowed in supermarket channels significantly.

In other industry data, we are seeing liquor slow a bit in shipments and overall yes, I think you are seeing beer relative to wine and spirits improve. For the year in terms of shipments, wine will probably exceed beer on a shipment basis but within the supermarket channels, beer is outperforming wine, underperforming liquor in supermarket channels but overall relatively strong.

Operator

(Operator Instructions) Our next question is coming from [Saichin Chau] with [inaudible].

Saichin Chau - Analyst

I just wanted to clarify the possibility -- there has been some talk that you may be receiving the DOJ approval later on this month and the deal could close by the end of the month. I see Carlos stated -- Carlos Brito -- stated that might be a possibility. Can you comment on that? That’s the first part.

The second part is it looks like you paid down about approximately $800 million in the quarter. It seems that this is a mutual combined effort by you guys as well as InBev to delever the current entity and the expected combined entity after the deal closes. If you could maybe comment on that as well.

W. Randolph Baker

On the first question on DOJ approval, again we, InBev and AB, expect DOJ approval and the deal to close by the end of the year. The next step in approvals, if you will, is our shareholder meeting next week and then it’s certainly a possibility that the DOJ approval could be achieved in November as you said or speculated. It’s a possibility but again, the statements by both AB and InBev are that we expect the transaction to close by the end of the year.

With regard to AB deleveraging, as you called it, this is because we suspended share repurchase as part of the InBev transaction, otherwise it’s very clearly business as usual but as you may know, normally Anheuser-Busch maintains a leverage position through share repurchasing and with the elimination of share repurchasing, you are seeing the net impact of a reduction in debt for AB.

Operator

Thank you. There are no further questions at this time. I will turn the conference back over to Mr. Baker for closing comments.

W. Randolph Baker

Thank you. One of the analysts who covers our stock suggested that I title this teleconference last call, closing time. And since we expect the InBev transaction to close by year-end, this should be our last teleconference with you, so I would like to take this opportunity to thank our Anheuser-Busch shareholders and analysts for your participation in our teleconferences over the years and your attendance at our Bud investor conferences and other investor programs. We do appreciate your longstanding interest in our company.

On a personal note, I truly enjoyed our interactions and your comments and questions that provided good input to Anheuser-Busch over the years. I would also like to congratulate InBev shareholders -- you are acquiring a great company with strong momentum heading into the merger. The new combined Anheuser-Busch InBev should have a very bright future as the global brewing leader for many years to come.

In conclusion, on behalf of Dave Sauerhoff and our entire investor relations team, thanks to all of you for your interest in Anheuser-Busch.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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