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

Q2 2007 Earnings Call

July 25, 2007 4:00 pm ET

Executives

David C. Sauerhoff - Vice President, Investor Relations

W. Randolph Baker - Chief Financial Officer, Vice President

John F. Kelly - Vice President, Controller

Analysts

Mark Swartzberg - Stifel, Nicolaus & Co.

William P. Pecoriello - Morgan Stanley

Marc Greenberg - Deutsche Bank

John Faucher - J.P. Morgan

Bryan Spillane - Banc of America

Christine Farkas - Merrill Lynch

Christopher R. Growe - A.G. Edwards

Alec Patterson - RCM

Andy Fineman - Iridian Asset Management

Ann Gurkin - Davenport & Co. of Virginia

Robert van Brugge - Sanford Bernstein

Bonnie Herzog - Citigroup

Judy Hong - Goldman Sachs

Lauren Torres - HSBC

TRANSCRIPT SPONSOR
Wall Street Breakfast

Operator

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

David C. Sauerhoff

Good afternoon. I’m Dave Sauerhoff, Vice President of Investor Relations at Anheuser-Busch. We issued our second quarter earnings release earlier today and it is 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 effect 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.

Please note that our subsequent comments about the company’s financial results will be stated on a normalized basis excluding the sale in this quarter of our remaining equity stake in a Spanish theme park investment and a one-time positive deferred tax impact from the Texas income tax law change in the second quarter of last year.

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.

Also, please note that our comparisons of U.S. beer wholesaler sales to retailers require no selling day adjustments for the quarter and the first-half of this year.

For members of the media listening today, please direct your inquiries following the call to Kelli Powers in the Anheuser-Busch Public Relations Department.

Participating with me on the call today are John Kelly, our Controller, and today’s speaker, Vice President and Chief Financial Officer, W. Randolph Baker. Randy.

W. Randolph Baker

Thank you, Dave and good afternoon, everyone. Anheuser-Busch reported earnings per share growth of 7.4% in the second quarter, with profit increases from all of our business segments. The pricing environment for the first two major holidays of the key summer selling season was favorable and the outlook for Labor Day continues to be positive. Although AB sales to retailers volume was lower than anticipated in the second quarter, trends have improved thus far in the third quarter.

The cost outlook for our brewery operations continues to improve and our core brand cost of goods sold per barrel increases have been lower than last year’s increases. We continue to make good progress transitioning InBev distribution to our wholesaler system with approximately 65% of InBev volume now transitioned. The disruptions and most of the inventory shortages have been resolved and we are optimistic about the outlook for our import brands.

Also today, Anheuser-Busch's Board of Directors approved an 11.9% in the company’s quarterly dividend, from $0.295 to $0.33 per share, marking 31 consecutive years of dividend per share increases and reflecting the company’s positive outlook for cash flow and earnings growth.

Briefly reviewing our second quarter financial results, consolidated net sales increased 6.1% with U.S. beer net sales up 6.9%. Consolidated cost of sales increased 7.4%. Cost of goods sold per barrel for the U.S. beer company was up 4.4%, including the impact of the new InBev brands. The increase for our core brands was less than expected, reflecting good productivity in our brewery operations.

Marketing, distribution and administrative expenses were up 5.9%, reflecting the substantial increase in U.S. sales personnel and additional marketing for our new import brands and our trademark brands.

Equity income increased 14.2%. Consolidated net income grew 5.9% and earnings per share were $0.87, up 7.4%.

For the first six months of the year, consolidated net sales increased 4.5%, net income grew 4.9% and earnings per share was 6.2%.

Operating cash flow increased 17%, including a significantly higher Modelo dividend payment, a lower pension contribution, and higher networking capital.

Capital expenditures were $346 million, up 9% from the prior year. Free cash flow after capital expenditures grew 19%.

Return on capital employed improved by 170 basis points.

Share repurchase spendings were $1.1 billion and we have repurchased over 22 million shares.

Anheuser-Busch wholesaler sales to retailers in the second quarter and the first six months of the year increased one-tenth of one percent, with a 160 basis point contribution from the import brands in the second quarter and the same contribution year-to-date from the import brands and first quarter Rolling Rock results.

STR results in the second quarter were impacted by the most difficult prior yearly quarterly comparison when STRs were up 2% and by the key Fourth of July holiday falling mid-week this year.

Sales to retailers in April were down in the 3% range, primarily due to difficult prior year sales and weather comparisons. Sales results in May improved significantly, with STRs up low- to mid-single-digits. All of our major core brands had positive results, especially Bud Light, which grew mid-single-digits.

June sales to retailers were down slightly, due in part to the mid-week timing of July 4th and heavy rains and flooding in Texas and surrounding states.

Sales to retailers in July have improved and are up in the 2% range for the first three weeks.

Looking at sales to retailers results by brand family for the second quarter, Bud family volume declined low single digits; Bud Light continues to do well with STRs up 1% in comparison with a strong 6% performance in last year’s second quarter; Michelob family volume declined low- to mid-single-digits, improving sales trends from Michelob Ultra and a favorable reception to the new packaging and all-malt recipes for Michelob and Michelob Light helped counter the difficult comparison with the introduction of Ultra Amber last year; the Busch and natural brand families were down less than 1%.

STRs from our import Alliance brands were below expectations, primarily due to InBev transition disruptions and supply shortage issues. Considerable progress has been made resolving these issues and we remain optimistic for the outlook for these brands.

STRs for our Grolsch brands in the second quarter were up more than 50%. Test market results for Landshark and Budweiser and Bud Light Chillata have exceeded expectations and these brands are being rolled out into additional test markets.

We are also making progress in our expansion into specialty beverages beyond beer. Our distribution alliance with Hanson’s Energy Drinks is going very well, with excellent sales results for the vast majority of AB wholesalers who have the brands, especially those who have had the brands since the beginning of the year.

As previously announced, our distribution alliance with Hanson is being expanded to include the on-premise market and our own 180 energy drinks are also experiencing very rapid growth from a small base.

Last week we announced an exclusive distribution agreement with Icelandic Water Holdings for their super premium Icelandic Glacial Natural Spring water brand.

AB has also become the distributor in the Northeastern U.S. for the Vermont Spirits line of super premium vodka brands and for a high-end tequila brand from Margaritaville Spirits.

Anheuser-Busch's second quarter U.S. beer shipments to wholesalers increased 2.3%, with import brands contributing 190 basis points of growth. Shipments for the first six months of the year were up 1.5% as the import brands and first quarter Rolling Rock shipments contributed 170 basis points of growth.

Wholesaler inventories at the end of the second quarter were up slightly compared with the same period in the prior year.

Based on U.S. brewer data from the Beer Institute and import data from the Department of Commerce, industry sales are estimated to be up 1.8% in the second quarter and 1.6% for the first six months of the year.

Industry sales trends continue to be very good, despite the difficult comparison with the unusually strong first-half of last year when shipments increased 2.9%. Anheuser-Busch's U.S. market share for the first six months of the year decreased one-tenth of a share point on a shipment basis.

Revenue per barrel increased 3.1% in the second quarter and was up 2.7% year-to-date. Front line price increases contributed 190 basis points to revenue per barrel growth in the second quarter. Promotional price adjustments contributed 10 basis points and portfolio mix was favorable by 110 basis points due to the mix impact from the import brands.

Average promotional prices were higher than the prior year for both the Memorial Day and Fourth of July holidays and we are encouraged about the outlook for the promotional pricing environment for the Labor Day weekend and the remainder of the year.

Consistent with the timing pattern for our 2007 pricing actions, we anticipate implementing price increases on the majority of our volume early next year with a few increases planned for the fourth quarter of this year. As in the past, AB’s pricing actions will be tailored to specific markets, brands and packages.

Our international beer segment net income increased 14% in the second quarter and was up 19% in the first-half, led by Grupo Modelo. Equity income increased $24 million in the quarter, primarily due to improved Grupo Modelo earnings from higher domestic volume and earnings from Modelo’s Crown import joint venture in the U.S.

Equity income benefited by $12 million from the return of an advertising fund that was part of a prior import agreement.

Second quarter equity partner volume on AB’s reporting calendar reflecting March through May results for Modelo and Tsingtao increased 7%. Year-to-date volume increased 6%. Modelo recently reported their second quarter results. Domestic volume for April through June grew 2.9%, exports increased 6.5%, and operating income in constant pesos rose 26%.

International operations volume for the second quarter increased 1.6% and was up almost 5% year-to-date.

Profits increased 10% in the quarter, driven by favorable results in Canada and China, which offset the ongoing weakness in the United Kingdom. Profits were down 4% for the first six months of the year.

Volume for our Budweiser and Harbin operations in China increased low-single-digits in the second quarter and up mid-single-digits in the first-half of the year. Profits increased double-digits in both periods due to higher volume and better product mix, partially offset by higher marketing and selling expenses associated with the rollout of Budweiser and Harbin premium brands to new cities.

In Canada, volume increased mid-single-digits in the second quarter with continued growth for Budweiser, the leading brand in Canada, and very strong growth for Bud Light. Profits were up high-single-digits due to increased volume and favorable pricing. Year-to-date volume was up high-single-digits and profits grew low-double-digits.

In the United Kingdom, volume decreased high-teens in the second quarter and mid-teens for the first-half of the year, in part reflecting unfavorable volume comparisons from the World Cup last year and unusually wet weather in June. Financial results declined due to lower volume, price competition, and unfavorable revenue mix from the continued shift from on-premise to off-premise consumption.

Earlier this month, Anheuser-Busch announced the introduction of locally brewed Budweiser in India, produced at our new 500,000 hectoliter brewery jointly owned by AB and Crown Beers India.

Packaging segment second quarter pre-tax profits increased 22% versus last year due to favorable can sales volume and mix and improved operating performance across all of its businesses. Profits were up over 18% in the first six months of the year.

Busch Entertainment delivered solid second quarter results, as profits grew 5% on higher attendance and greater in-park spending. Profits also increased 5% for the first six months of the year.

I will now update our 2007 outlook for our key performance drivers. We expect revenue-per-barrel to increase in the 3% to 4% range, with the increase on our trademark brands being greater than in 2006.

Cost of goods sold per barrel for the full year is now expected to be up in the 3.5% to 4.5% range, with the increases on AB produced brands being less than last year.

Consolidated marketing, distribution, administrative expense is still expected to increase mid- to high-single-digits this year, reflecting the significant increase in field sales personnel and additional marketing to support our new import portfolio and our trademark brands.

Equity income should increase by more than 20% in 2007, driven by profits from Modelo’s U.S. joint venture.

We continue to expect profits for our international beer operations to increase low-single-digits.

Profits for the entertainment segment should be up mid-single-digits.

We now expect packaging segment profits to be up high-single-digits, given the better-than-expected profits year-to-date.

Our effective tax rate for 2007 should be around 40.5%.

Capital expenditures this year should be in the $900 million to $950 million range.

Our targeted spending for share repurchases this year is $2.5 billion.

We expect accelerated earnings per share growth in the second-half of the year, especially in the fourth quarter, given our wholesaler inventory reduction last year and we continue to expect full year earnings per share growth to exceed our long-term objective of 7% to 10% growth.

In summary, the pricing environment was favorable over the important Memorial Day/ July 4th holidays and the outlook continues to be favorable. U.S. industry shipment growth continues to significantly exceed our long-term model, despite a very difficult comparison with last year’s strong growth. AB sales to retailers were below expectations in the second quarter but have improved in the third quarter. The outlook for our cost of sales continues to improve, led by successful productivity initiatives and we expect a significant increase in our operating cash flow and cash returns to shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Mark Swartzberg with Stifel, Nicolaus.

Mark Swartzberg - Stifel, Nicolaus & Co.

Thanks, Operator. Good afternoon, Randy and everyone. Randy, on the pricing intentions you’ve laid out here, can you put a little more meat on those bones for us, including the amount of the magnitude you are anticipating in terms of increase next year?

W. Randolph Baker

It is a little early for us to give you pricing guidance for next year. We are in the process of formulating the plans. The comment that I had in my remarks is that we expect the pattern to be similar to last year, meaning we will do the vast majority of the increases in the first quarter of next year and we again expect to be covering the majority of our volume on a brand package and market basis but I don’t really have guidance for revenue-per-barrel for you for next year. We’ll start giving you preliminary guidance in the third quarter call.

Operator

Thank you. Our next question comes from Bill Pecoriello with Morgan Stanley. Please go ahead.

William P. Pecoriello - Morgan Stanley

Good afternoon, Randy. On the July 4th shift, you had mentioned how it had fallen on a Wednesday had hurt the Q2 sales. Can you quantify how much you think it shifted out of Q2 and benefited all the early July performance and any insights you can also give us on how the channel performance was playing out in the improved performance at convenience stores or on-premise, or any particular channels picked up? Thanks.

W. Randolph Baker

First of all, the July 4th falling on a Wednesday, the mid-week, has less of a favorable sales impact for the July 4th holiday than when it falls on other days of the week and this is true this year but also has been true in prior years when July 4th is on a Wednesday. What seems to happen is fewer people take the extended weekend vacations, given that the July 4th falling on a Wednesday.

So the sales impact was a bit less than it has been in the prior years. We estimate the impact was only a few tenths of a percent, around 0.3% impact on second quarter sales.

In terms of the channel mix in second quarter, now using our core brands, our AB produced brands where the STRs were down 1.5%, our off-premise was a bit better than that. The decline was less. Our strength was in supercenters. Supermarkets, grocery stores, were down 1%, which is a bit better than in your scanner data but still down 1%. Convenience stores were down this year versus last year, down just a little bit more than supermarkets, versus a very difficult comparison with us last year when C stores were up significantly in the second quarter.

And on-premise was down more than our average total. It was down in the 2%-plus range. We are continuing to see weakness in the casual dining segment, the casual dining traffic. But overall, those are the key picture for the channel for the quarter.

Operator

Thank you. Our next question is coming from Marc Greenberg with Deutsche Bank. Please go ahead.

Marc Greenberg - Deutsche Bank

Just a follow-up on the Modelo numbers, a little bit confused that they were not a little bit better here in the second quarter. You commented 26% net through June for Modelo. Should we infer that the Q3 benefit to the Bud numbers will be higher than the run-rate? Is there any change in AB’s outlook for the Crown contribution? I think you said $0.09 benefit in 2007. Any color you could provide with regard to that factor as well?

W. Randolph Baker

Marc, first of all on the Crown benefit, the $0.08 to $0.10 number that we gave you for Crown benefit came from the guidance that Modelo initially gave its investors for the impact on Modelo, which then translated to us was $0.08 to $0.10. They have confirmed that guidance and so that continues to be our expectations.

We report Modelo on a one-month lag and so basically a big part of the difference in what you are seeing in their performance in the second quarter and ours for their second quarter is the one-month lag. They had a good June. In their call, they commented that they had a particularly good June in exports and they also commented that they were seeing recent sales trends had improved and that they were optimistic for the second half of the year.

Operator

Thank you. Our next question is coming from John Faucher with J.P. Morgan. Please go ahead.

John Faucher - J.P. Morgan

Good afternoon, Randy. I just want to ask a question about the shipments ahead of STRs. You talk about the numbers being up, distributor inventories being up a little bit year over year in the second quarter and then you later referenced the fact you needed to take inventory out in the back-half of last year, so we’ll need to say the same thing so can you give us some insight in terms of why the shipments were so far ahead of STRs? Was it July 4th related? Is there anything going on there from a distributor/inventory standpoint?

W. Randolph Baker

John, the first of the distributor inventories are very slightly, just a few tenths above last year, so that is what is going on in inventories. It is not a big number.

We had STRs in June that were a bit below our expectations and as we have discussed in these calls before, basically you planned your production four weeks in advance and you cannot have swings at the end of the quarter on inventories based on whether STRs were coming in above or below plan.

You did have a little bit of an issue that you would ship for the July 4th holiday to your wholesalers in advance of their sales to retailers.

As far as the pattern for the remainder of the year, last year we had a significant increase in inventories in the third quarter basically because STRs were below expectations in the third quarter and then conversely in the fourth quarter, there was a major reduction in wholesaler inventories as we decreased shipments to bring inventories down. And then with the acceleration of STRs in December, we ended up with inventories way below our target and quite frankly, below the levels we need for operations.

So I think going into the remainder of the year, you should see our inventories in the third quarter lower than last year, again in part due to the year-over-year comparison issue. We would expect to have inventories at the end of the year higher than last year because again, they were too low, but a bit below where they were in 2005.

Operator

Thank you. Our next question is coming from Bryan Spillane of Banc of America. Please go ahead.

Bryan Spillane - Banc of America

Good afternoon. Just a couple of questions or points on InBev, if you could. First, in terms of the transition, do you have wholesalers or customers on allocation now? Second, how much did the transition costs impact your domestic brewing or domestic beer operating profit margins in the quarter?

W. Randolph Baker

Bryan, we have -- during the quarter, we did have significant, as you called it, allocation problems. We had shortages in both bottles and packaged beer and in draft. As you will recall in our first quarter teleconference, we talked about transition-related disruptions where there was a basically problems on ordering where the selling wholesaler didn’t place an order and then once our wholesaler placed the order, there were delays, et cetera.

In the second quarter on top of that we had basically bottle shortages in Europe and keg shortages. The bottle shortages have now been resolved and we are in pretty good shape currently in the field on our packaged inventory. We still have some shortages in draft, in our kegs. We should be catching up by the end of this month or end of next month, where we should get up to adequate inventories.

We did have additional costs in the second quarter, transportation, logistics type of costs to deal with these shortages, to accelerate freight and to get product to specific wholesalers. We also had a bit of a margin hit because of basically we were short of packages that had higher margins, so we took a bit of a margin hit due to supply shortages. As we move through the remainder of the year, these should resolve and again, we view these as transition issues that we’ll get behind us as we go through the year and into next year and we continue to be optimistic about the outlook for our import portfolio.

Operator

Thank you. Our next question is coming from Christine Farkas with Merrill Lynch. Please go ahead.

Christine Farkas - Merrill Lynch

Thank you very much. Good afternoon, Randy. Just a couple of clarifications. This would fall in the other category. With respect to reconciling your top line in domestic beer with your revenue per barrel and your actual shipment growth, there is about 150 basis points from this other income that would fall into non-beer. I guess I am wondering if you could comment on the Hanson or the non-alcohol run-rate that we would see in this category.

Secondly, the equity income boost, the $12 million from the advertising fund, that is considered ongoing I guess based on the fact that it is not pulled out. Was that something you paid into the in past and that is why it is considered a part of your underlying business? Thank you.

W. Randolph Baker

With regard to the reconciliation of the -- or basically what we report to you as revenue-per-barrel versus what you see in the segment report, the revenue-per-barrel for us is basically the revenue that we get from selling our beer to wholesalers, to distributors divided by the volume of beer. In the segment though, we have this year the biggest increase and the biggest factor for the increase is our energy drinks. The income that we get for our Hanson’s distribution alliance, the price that we get for selling them through our wholesaler system and our own 180, these are not in the volume base. So that is the majority of the increase versus last year.

The second-largest piece is the incremental beer revenue sold through our company wholesalers and there you pick up the mark-up, if you will, from our company wholesalers selling to retailers.

In terms of the total of the segment, the biggest factor is the one I just mentioned, the incremental beer flowing through the company wholesalers, as far as the largest component of what you might call other revenue. But in terms of the year-over-year increase, the biggest driver is the energy drinks.

And the third largest would be sales of Red Hook and Widmer.

And then the second -- John, do you want to take the advertising fund question for Modelo?

John F. Kelly

Sure. You did say it right. The return of the advertising fund to Modelo was money that Modelo contributed to that fund that was not spent as of the time the Crown joint venture came live, so that is the money that is being refunded to Modelo.

Operator

Thank you. Our next question is coming from Chris Growe of A.G. Edwards. Please go ahead.

Christopher R. Growe - A.G. Edwards

Good afternoon, Randy. I have just two questions for you. The first one is regarding the price realization for next year, should we presume that it is going to be predicated on cost or somehow aligned with your expectation for cost next year?

The second question I have is you have added all these sales reps now. It’s been obviously a large marketing cost associated with that. Is there any way to measure if there are any kind of benefit they had, whether it is in volume terms or number of accounts or that sort of thing? Thank you.

W. Randolph Baker

It is again too early to give guidance on both pricing and on costs for next year. We will start giving you preliminary guidance in the third quarter teleconference.

In general right now, just as a general statement, we would expect our -- we are looking at commodity cost pressures to be a little bit higher than this year, driven primarily by agricultural commodities and that of course, has been well-reported, is being driven by the corn plantings for ethanol. But in reality, this year’s crop hasn’t even been harvested and so it is a bit early to pin down what we expect those cost pressures to be.

Obviously we take our cost pressures into account when we develop our pricing plans but we also assess the marketplace situation and what we view as acceptable for the consumers and retailers as well.

But again, this is a bit early in the planning cycle to give guidance on either of those for next year.

In terms of the sales reps, the feet on the street, if you will, those, some 300 people are primarily for urban markets and calling on our customers in urban markets, both to support our new import brands, which are disproportionately in urban markets but also is a continuation of initiatives that we have had to improve our domestic beer, our trademark brands presence in the urban markets. But also we have additional reps to support chain selling, et cetera.

So it is a one-time step-up in our field sales force. We are seeing on an account-by-account basis some very definite improvement, improvements in placements, in relationships, et cetera. But this is a long-term process and we would not expect to see significant changes on a year-over-year basis in STR trends this quickly from that increase in the sales base.

Operator

Thank you. Our next question is coming from Alec Patterson of RCM. Please go ahead.

Alec Patterson - RCM

Randy, I just wanted to get a better sense on how you guys are thinking of the non-alcohol side, obviously point to energy drinks being seemingly a growth contributor here, as well as the Icelandic deal that you did and the equity stake you took into setting that up. Is the sales force expansion you have done taking into consideration further expansions into that non-alcoholic segment? Maybe if you could paint a picture of how you guys might be expanding that as a way of adding to your growth algorithm.

W. Randolph Baker

In the investor conference that we held in the second quarter, we talked about our objectives of growing in the specialty beverages that fit well with our distribution system and what we are looking to do is to capitalize on the strategic asset that is our distribution system, to add products to both grow and strengthen our system, and also to add profits for Anheuser-Busch as well.

We have relatively small marketing costs associated with those efforts but we do have some, but basically we are looking -- these are -- we are adding products selectively to our system that typically provide good margins for our wholesalers, broaden their base and in turn broaden Anheuser-Busch's base.

As you mentioned, the Hanson’s energy drink alliance is proving to be very, very successful, is providing good growth for Anheuser-Busch, good growth in profits for the wholesalers that have those, and our system is providing good growth for the Hanson’s company. So that has been a success all the way around.

The water venture is due. We are just getting into that although we have tested Icelandic water in a number of our wholesaler ships and that it tested successful, such that we formed the venture with Icelandic Glacial. And then we have been talking to you for some period of time about expanding our testing in the spirits business, and that’s the two announcements we had today. They are basically small and a continuation of our learning probe to understand the fit of spirits products in our distribution system and how we can effectively sell those products.

Operator

Thank you. Our next question is coming from Andy Fineman of Iridian Asset Management. Please go ahead.

Andy Fineman - Iridian Asset Management

Thank you. During the quarter, your net debt went down by $350 million. Your stock buy-back was $650 million and your dividends were $220 million, so if you add all that up, that is about $1.2 billion of cash that you generated during the quarter, which is pretty significant. I was just wondering if you could say where, what the big slugs of where that came from and whether that is typical and whether or not you might have taken on any off-balance sheet debt.

W. Randolph Baker

The first answer is no, we have no off-balance sheet debt. The cash flow was driven by first our operations but also a significantly higher Modelo dividend than last year and a lower pension contribution than last year. John, do you want to pick up on more specifics on the drivers of our free cash flow?

John F. Kelly

If you take the six-month cash flow statement we had in our release and you subtract from that the first quarter cash flow statement, that will give you a very good idea of what the cash came from the second quarter. I have done that for you and it is about $700 million of net income, $250 million of depreciation, $200 million of additional undistributed equity earnings because of the Modelo dividend we received in April. Other net of about $45 million, giving you operating cash flow in the quarter of about $1.2 billion, and then lower working capital about $120 million, giving you about a $1.4 billion of cash flow before CapEx that happened in the second quarter.

Operator

Thank you. Our next question is coming from Ann Gurkin of Davenport. Please go ahead.

Ann Gurkin - Davenport & Co. of Virginia

Good afternoon, Randy. I was wondering if you could tell us what your wholesalers are asking for right now, or distributors are asking for? Is it high-margin products, craft brews, more liquor brands -- can you give us an update there?

And then, could you just clarify the Vermont Spirits and the high-end tequila, is that getting distributed through your distributors in the Northeast or through your special, feet-on-the-street sales force?

W. Randolph Baker

First of all, the Vermont and the Tequila brand from Margaritaville, is through our wholesalers. The territory that they will be rolled out into is in the Northeast.

Our distributors have been asking for high-margin products to broaden their portfolios and accelerate their profit growth and that’s what we have been doing through all of the alliances and new products that we announced last year and this year.

We are going through a whole series of transitions. Our wholesalers are going through a whole series of transitions. We believe these are the right things to do, the right strategies. We’ve obviously had some transition difficulties and some of our wholesalers had as well but basically, we are broadening our portfolio for our distribution system and for AB while maintaining for AB and our distribution system our primary focus on our trademark brands.

Operator

Thank you. (Operator Instructions) Our next question is coming from Robert van Brugge of Sanford Bernstein. Please go ahead.

Robert van Brugge - Sanford Bernstein

Your STR volume and market share trends are still falling short of your long-term targets. What gives you confidence that these trends will turn around, particularly for your core domestic brands?

W. Randolph Baker

Robert, yes, our STR trends have been below our expectations in the second quarter and in the first-half of the year. On a shipment basis, our share is down one-tenth of a percent. We are probably down more than that on a STR basis.

A couple of comments on STRs and then I will talk about shipments for the rest of the year and then address your market share question.

We had more difficult comps in the first-half of the year. We will have easier comps in the second-half of the year. The third quarter is our easiest STR comp but in terms of shipments, the easy comp, if you will, is in the fourth quarter because last year we significantly reduced our inventories and reduced our shipments in the fourth quarter.

With regard to our market share outlook, in our long-term model that we presented to you in May, we looked to grow our volume at 1% to 1.5% and an expectation of the industry to grow at 0.5% to 1%. And last year and this year, the industry is growing substantially faster than that. Last year it was clearly driven by imports and craft beers. This year in the first-half, import growth is still significant but is not, has slowed some. Craft beers is still growing at a very rapid rate.

We have expanded our portfolio to better participate in those segments but basically if the growth in the industry -- well, first of all if the growth in the industry continues to exceed our model and actually exceeds our 1% to 1.5% volume target, we could achieve our volume target and still have a reduction in market share.

But more importantly, it is the composition of volume in the industry and if the volume growth, the extra volume growth is coming from imports and craft beers, it will be very difficult for us to achieve and overall market share gain just because the math of imports growing at 10%-plus. Again, we have increased our participation, which will start becoming more visible through our import alliances with InBev and with Grolsch.

But also recognize that not recorded in our market share but recorded in our profits, we participate in the growth of the import segment of the United States through our 50% ownership in Grupo Modelo.

Then, on the domestic side, it is clearly our objective to grow our share, to take a little bit of share in the domestic segment of the industry. Thus far this year on a shipment basis, the domestic industry is doing well. Domestic tax paid withdrawals for the first-half of the year are up eight-tenths of 1%. STRs are probably up less than that but over time we would expect to be able to slightly grow our share of the domestic segment.

Operator

Thank you. Our next question is coming from Bonnie Herzog of Citigroup. Please go ahead.

Bonnie Herzog - Citigroup

Thank you. Good afternoon, Randy. I actually had a question on your spending behind your core brands. You obviously mentioned the volume is continuing to decline, so I am curious from your perspective, do you feel that you are spending enough behind these brands? How do you monitor this, or what is your philosophy behind this?

W. Randolph Baker

Bonnie, we think we are spending enough behind the brands. We do have increases behind them but we will be actually doing some increases selectively in the second-half of the year to stimulate sales.

We have a lot of changes, Bonnie, in our media plans as we are shifting. We are doing more digital media. We are doing less of network. We are continuing our strong position in sports but there are a lot of changes that are going on in our media plans as we adjust to the viewing habits of our consumers. We have changes that continue to go on in our message, in our creative and that will continue to change as we try to reach our consumers in the most effective way.

We do have within our guidance quite a bit of flexibility with regard to marketing spending for the year and we also have very major efforts within the company to analyze and optimize both our media spending and the creative messages and marketing programs behind each of our brand families.

Operator

Thank you. Our next question is coming from Judy Hong of Goldman Sachs. Please go ahead.

Judy Hong - Goldman Sachs

Do you have the Light category growth for the quarter? Bud Light being up I think you said 1% in the quarter, was there anything unusual about that number other than just comparisons being tough a year ago?

W. Randolph Baker

Judy, that is primarily it. The comparisons were difficult for the prior year. Bud Light’s performance in the second quarter was not quite up to our expectations as well, but generally it was a difficult quarterly comparison.

Operator

Thank you. Our final question is coming from Lauren Torres with HSBC. Please go ahead.

Lauren Torres - HSBC

I was hoping you could be a bit more specific on performance, particularly at the Bud family of brands and Michelob. It seems like the declines in the second quarter were similar to what we saw in the first quarter. Outside of maybe just easier comparisons as we cycle through the year, are you seeing any improvement here? As far as efforts to improve these two families, what are you doing specifically, if you could?

W. Randolph Baker

Again, overall it was not a good quarter for our trademark brands, as we covered earlier. Our Bud Light, which we just talked about, was up. Our Budweiser continues to be down, as is Bud Select on a year-over-year basis. We are seeing some stabilization of Bud Select in supermarket scanner data in terms of its share has been stable at 1.3%, 1.3 points this year.

We have a number of marketing initiatives behind each of our brands and then as they work together as a brand family. As I commented on Michelob, we have seen an improved performance in Michelob Ultra. We are starting to see improved performance on Michelob and Michelob Light, with the new packaging and new all-malt recipes. But they have been declining. The rate of decline is slowing.

We have a focus on our core brands and our marketing plans for the remainder of the year and we would expect improved performance in the second-half of the year.

If that is the last question, again as always, we thank you for participating in our teleconference. Our third quarter teleconference will be held on October the 24th. We will also be webcasting an investor presentation on September the 6th. Thanks again for joining us today.

Operator

Thank you. That concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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Source: Anheuser-Busch Q2 2007 Earnings Call Transcript
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