When InBev acquired Anheuser-Busch in November 2008 in a $52 billion all-cash deal, the transaction created the world’s largest brewery, Anheuser-Busch InBev (BUD). ABI has a regionally well-balanced portfolio, with emerging markets and developed markets each accounting for about 50% of sales.
InBev’s strong track record in cost savings and Anheuser-Busch’s excellent experience in brand building promise high cost synergies and bright long-term prospects. ABI has dominant positions in key markets (70% in Brazil, 50% in the US, 80% in Argentina, 55% in Belgium and 36% in Ukraine).
ABI's strong brand portfolio, a balanced regional spread, and realised high synergies helped the company deliver strong results in the past years. EBITDA margin improved 210 basis points (bps) to 38.2% in 2010.
2011 was off to a relatively weak start as volume trends in the US and Brazil were marginally below expectations in H1. But digging deep into details, you can make the conclusion that the volume weakness came mostly from much-higher-than anticipated price hikes. Beer prices rose 9.4% in Brazil and 3.7% in the US in H1. A result, EBITDA margin help up well.
ABI is the best positioned global brewer and is strongly cash-generative. The company had a dividend payout ratio of only 34% in 2010, compared to 79% before the Anheuser-Busch acquisition. With the net debt/EBITDA continuing declining (to 2.75x at the end of 1H11), dividend payouts could consistently rise the coming years.
In Q3, sales rose 9.6% yoy to $10.22 billion (est. $10.0 billion). EBITDA gained 12.3% to $3.97 billion (est. $3.88 billion) with margin up 120 basis points to 39.1% (est. 38.8%). Adjusted EPS climbed 16.5% to $1.09, beating consensus estimates of $1.01, aided also by a lower tax rate (19.2% vs. consensus of 25%).
Organic sales growth was 3.6%, missing analysts’ view of 4.5%, as volume came in weaker than expected. However, Brazil rebounded sharply, up 10.1% in terms of organic sales (volume +1.7% and prices +8.4%). North America reported a volume fall of 3.4%, driven by sales-to-wholesale, while sales-to-retail dropped only 0.9%, much better than anticipated -2.5% and than the category development. Europe was weak: organic sales declined 3.5% and EBITDA eased 4.8% in Western Europe, and were –2.9% and -33.8%, respectively, in Eastern Europe.
Outlook: Management expects continuing volume improvements in Brazil in Q4. FY11 tax rate of 20-22% is below analysts’ expectations of 23%. Marketing spending will be a bit less than previously guided (due to a weakening euro). The company pays a coupon on its debt at the lower end of previously guided range of 6.0-6.5%.
Overall, solid Q3 figures. More importantly, the company’s two core markets, Brazil and the US (accounting for about 75% of EBITDA), performed much better than expected. Figures from Brazil speak for itself. Regarding the US, although the volume decline of 3.5% is severe, it came mostly from the sales-to-wholesales channel, while sales in the retail channel was “resilient” and ABI gain shares. The combination of deep STW cuts and solid sales-to-retail means that we can expect inventory restocking in the wholesale channel in Q4, and thus volume improvements in the US.
In addition, a lower tax rate, lower marketing spending and lower financial expenses mean that consensus EPS estimates should be revised higher. A defensive play in stormy times, so this company really becomes your Bud.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.