Anheuser Busch Cos. Inc. Q4 2007 Earnings Call Transcript

| About: Anheuser-Busch Inbev (AHBIF)

Anheuser Busch Cos. Inc. (NYSE:BUD)

Q4 2007 Earnings Call

January 31, 2008 4:00 pm ET


Dave Sauehoff – VP Investor Relations

W. Randolph Baker – VP, CFO


Lauren Torres – HSBC

Bill Pecoriello – Morgan Stanley

Mark Swartzberg – Stifel Nicolaus

Bryan Spillane – Banc of America

Ann Gurkin – Davenport

Kaumil Gajrawala – UBS

Judy Hong – Goldman Sachs

Carlos Laboy – Credit Suisse

Christine Farkas – Merrill Lynch


Good afternoon ladies and gentlemen, we are ready to begin Anheuser Busch Companies fourth quarter investor teleconference. Mr. Sauerhoff, you may proceed with your opening remarks.

Dave Sauehoff

Good afternoon. I’m Dave Sauerhoff, Vice President of Investor Relations and Anheuser Busch. We issued our fourth 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 10K.

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 onetime items in 2006 and 2007. A complete reconciliation of these onetime items is presented on page eight of the earnings release.

Also please note that our comparisons of US beer wholesaler sales to retailers results for the fourth quarter are on a comparable selling day adjusted basis unless otherwise indicated. The fourth quarter had one more selling day than the prior year. No selling day adjustment is made for full year STR results. For members of the media listening today, please direct your inquiries following the call to Brenda Williams in the Anheuser Busch public relations department. Participating with me on the call today are Bill Kimmins, Anheuser Busch’s treasurer, John Kelly, our controller and today’s speaker, Vice President and Chief Financial Officer, W. Randolph Baker. Randy.

W. Randolph Baker

Thank you Dave, good afternoon everyone. Anheuser Busch achieved double digit earnings per share growth in the fourth quarter and full year while implementing changes that better position the company for long term growth. AB significantly expanded its participation in the high end beer segment through import and craft alliances and participation in specialty beverages through our alliance with Hansen energy drinks. AB’s sales to retailers for both our core brands and new alliance brands showed significant improvement in the second half of the year as we worked through transition issues in the first half.

The pricing environment was favorable and the outlook continues to be very positive. We faced significant cost pressures but were able to mitigate the magnitude of these increases with more efficient operations and successful productivity improvement initiatives. The performance of AB’s other business segments were strong with international beer, packaging and entertainment segment profits all up double digits for the year. [Had] we delivered substantial increases in return on capital, operating and free cash flow and cash returned to shareholders.

Briefly reviewing our fourth quarter financial results, consolidated net sales increased 8%. US beer segment sales also grew 8% with revenue per barrel up 3.7%. Consolidated cost of sales increased 8%. Cost of goods sold per barrel for the US beer company was up 3.9% including the impact of the new imbed brands. The increase for our core brands was less than expected but better efficiencies and productivity improvement in our brewery operations. Marketing distribution and administrative expenses were up 2%. Pretax income growth was very strong up 51%, equity income decreased 12%, consolidated net income grew 12% and earnings per share were $0.29, up 16%. For the full year, consolidated net sales increased 6%, net income grew 7.5% and earnings per share were up 10%.

Operating cash flow before changes in working capital increased to $3 billion or up almost 18% including a significantly higher Modelo dividend payment and a lower pension contribution. Capital expenditures were $870 million, up $58 million from the prior year and $30 million below our 2007 guidance. Free cash flow after capital expenditures grew 9%. Return on capital improved 100 basis points. Share repurchase spendings were $2.7 billion as we repurchased almost 54 million shares or approximately 7% of shares outstanding and quarterly dividends per share were increased 11.9% in July.

As reported in our January the 7th volume release, Anheuser Busch US beer sales to retailers were up 1.3% in the fourth quarter and the full year with a 180 basis point contribution from import brands in the fourth quarter and a 160 point contribution for the full year from the import brands and first quarter Rolling Rock results. STRs were up in the 2% range in October and November through Thanksgiving with core brands up 0.5% as we reported in our New York investor meeting.

Results in the final week of November dropped off and December total STRs increased and core brand STRs declined in comparison with very strong results in December of the prior year. Looking at sales to retailers results by brand family, Bud family volume decline low single digits in the fourth quarter and the full year and Bud light grew low single digits in both periods.

Michelob family volume declined low single digits in the fourth quarter and the full year. Michelob Ultra performed well, up low single digits in the fourth quarter and the year. Our new Michelob Ultra fruit infused brands exceeded our expectations and contributed to volume and revenue per barrel growth. The Busch and Natural brand families were up over 1% in the quarter and up approximately 1% for the full year.

Our specialty brands grew 36% in the quarter and 40% in 2007, including successful test market results for Bud and Bud light [gelata] and Landshark Lager and the very strong performance of our new Bicardi Silver Mohito. AB rolled out Bud and Bud Light [gelata] brands nationally earlier this month and we plan to roll out Landshark next month. Full year STR trends for our import alliance brands were encouraging with STR [groch], STRs more than doubling in 2007 and STRs for our imbed brands showing sequential improvement in each quarter of the year.

Anheuser Busch’s fourth quarter US beer shipments to wholesalers increased 3.4% with import brands contributing 230 basis points of growth. Shipments for the full year were up 2% and import brands in first quarter Rolling Rock shipments contributed 170 basis points of growth. Wholesaler inventories at the end of the year were approximately the same as 2006 which was an unusually low level and somewhat below our 2007 yearend target.

Based on US brewer data from the beer institute and import data from the Department of Commerce, industry sales are estimated to be up four-tenths of one percent in the fourth quarter and up 1.4% for the full year. The 2.1% growth in 2006 and 1.4% growth in 2007, US industry sales have significantly exceeded our long term model expectation for two consecutive years. Anheuser Busch’s 2007 US market share increased three-tenths of a share point on a shipment basis. Revenue per barrel increased 3.7% in the fourth quarter and was up 3% for the full year.

For our core brands, revenue per barrel increased significantly more than in 2006, offsetting the increase in core brand cost of goods sold per barrel. In the quarter, frontline price increases contributed 210 basis points to revenue per barrel growth. Promotional price adjustments had a positive impact of ten basis points and portfolio mix was favorable by 150 basis points, reflecting mixed benefits from our imported brands. The outlook for the US beer pricing environment for 2008 continues to be favorable. Consistent with the timing of our 2007 pricing actions, we began the implementation of our 2008 price plan with increases in several states in the fourth quarter and have implemented pricing actions in a number of markets in January. The remainder of the plan’s price increases will be implemented in February. In total pricing actions are occurring on approximately two-thirds of our volume. Our major domestic competitors have taken similar pricing actions in the fourth quarter and thus far this year in the vast majority of these markets.

International beer segment net income decreased 5.4% in the fourth quarter but was up 15.9% for the full year on a normalized basis led by Grupo Modelo. Equity partner volume, which is reported on a one month lag basis reflecting September through November results increased two-tenths of one percent in the fourth quarter on increased Tsingtao volume offset by lower Modelo export volume.

This result is in comparison with a very strong 13% increase in equity partner volume in September through November of 2006. For the full year, equity partner volume was up 4.9% due to Tsingtao and Modelo volume growth. Equity income declined 12% in the fourth quarter as benefits from Modelo’s crown import joint venture were offset by Modelo’s lower export volume and increased production cost. For the full year, equity income normalized for a Modelo restructuring charge, increased 15.2%. Modelo and Tsingtao have not yet reported their October through December fourth quarter results. International operations volume for the fourth quarter increased almost 5% and was up nearly 6% for the full year. Profits increased substantially in the quarter and were up 22% for the full year. Volume results for our China operations increased mid single digits in the fourth quarter and the full year.

The Budweiser brand family was up over 11% while Harbin premium brands grew over 50% in 2007. AB continues to implement market expansion plans for Budweiser and Harbin premium brands, expanding into 40 additional cities in 2008. AB is the official Olympic beer sponsor for the 2008 Beijing Olympic games. The company has a full Olympic marketing campaign, including advertising, packaging, special events and trade promotions. Due to costs related to our market expansions and marketing efforts, financial results in China declined in the fourth quarter. For the full year, profits increased mid single digits.

Beginning this month, we implemented broad price increases in the Harbin territory, selected increases on Budweiser and are considering other price increases depending on market conditions. Finally, to supply the continuing growth in our China volume, we are constructing a new Greenfield 2.6 million hectoliter brewery in Foshan with completion scheduled by the end of this year. In Canada, volume increased low double digits in the fourth quarter and increased high single digits in 2007, as both Budweiser, the leading brand in Canada and Bud light continued to gain share. Profits in Canada increased low double digits in the fourth quarter and for the full year.

In the United Kingdom, volume declined low double digits in the fourth quarter and declined high single digits in 2007. Financial results improved in the quarter due to cost reductions but we still reported a loss due to the unfavorable revenue mix from the continued shift from on premise to off premise consumption and price competition. Pretax profits for AB’s packaging segment increased 16% in the fourth quarter and 21% for the full year due to improved margins in can manufacturing and aluminum recycling. Busch entertainment had another strong year with pretax profits up 13%, on increased attendance, favorable pricing and in park spending. For 2008 our clear top priority is to accelerate core domestic beer sales and profitability.

We are significantly increasing the media support for our core brands with new created messages and media plans to reach a wide ranging consumer audience. Last year we increased our field sales force by 40% and this year we have significantly realigned our field sales organization for stronger core brand support and execution on our expanded portfolio. We will discuss our 2008 marketing plans in more detail in our presentation at the CAGNY conference next month.

Reviewing our outlook for 2008, we expect revenue per barrel to increase in the two-and-one-half to 3% range with the increase excluding mixed benefits greater than in 2007. We expect costs of goods sold per barrel to increase in the three to three and one half percent range with increases on our core brands somewhat greater than last year. Productivity improvements and supply chain savings to mitigate commodity cost pressures are a very high priority at Anheuser Busch this year.

Consolidated marketing, distribution and administrative expense should be up low to mid single digits in 2008, off of the high 2007 base, which included a onetime step up from the major expansion of our sales force and marketing of our new import alliances. Equity income should increase mid single digits in 2008 versus normalized 2007. However, first quarter equity income is expected to decline in comparison with the very strong 30% equity income growth in the first quarter last year. We expect international beer operations profit growth to increase over 20%.

Our entertainment division should continue its strong profit growth momentum with profits expected to be up mid single digits. Packaging segment profits are likely to decline low double digits in comparison with very strong 2007 results. Our effective tax rate for 2008 is expected to be in line with our tax rate in 2007, approximately 40%. Capital spending should be around $975 million including carryover from 2007 projects. Our target for share repurchasing is approximately $2 billion subject as always to potential acquisition opportunities. Net interest expense should be up $45-55 million.

In summary, US beer industry has reported favorable volume growth in pricing for the past two years and the outlook for both volume and pricing continues to be favorable. AB has significantly expanded its portfolio to better participate in the fast growing, high end categories of the industry. Our top priority for 2008 is to accelerate core beer sales and profitability. Our international beer segment continues to be a major contributor to AB’s earnings growth and we are delivering significant increases in cash flow, return on capital and cash returned to shareholders. That concludes my prepared remarks, I’ll now turn it back over to our operator Elsa for the Q&A session.

Question-and-Answer Session


Thank you, the floor is now open for questions. If you have a question or a comment, please press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that you please pick up your handset while asking your question in order to assure the best possible sound quality. In the interest of time, we ask that you please limit yourself to one question in order to allow the maximum number of callers to ask their questions. Once again, that is star one to register your question. Our first question is coming from Lauren Torres with HSBC, please go ahead.

Lauren Torres – HSBC

Hi Randy, Randy I know you’re maybe somewhat limited in your comments here but I was hoping you could talk more about the lower Modelo export volume in the quarter and also your lowered equity income guidance for 2008. We’ve seen some slowdown here, I was just curious if you could give us color if we’re seeing a shift in consumer prices, if it’s a result of maybe some pricing actions, but any color on this topic would be helpful, thanks.

W. Randolph Baker

Lauren as you are aware and we stressed, first of all, what we are reporting is on a one month lag, so the volumes for September through November. In the volumes that we reported, that included September volumes which were already reported by Modelo in their third quarter results and that included the impact of very heavy rains in Mexico in September. The export comparisons on a year over year basis were impacted by the bottle shortage last year in the first half and the rebuilding of inventories in the second half, particularly in the fourth quarter.

All of that having been said, yes the export volume and the US volume as has been discussed by Constellation in their teleconferences, has been relatively weak. We are not party to the crown US joint venture. What Constellation and Modelo have both said is that the pattern of volume following the price increases that they took this year is similar to the pattern that they saw in prior years when they took price increases and Constellation in their most recent teleconference said they are starting to see good volume recovery in the markets in which the price increases took place early last year and therefore have essentially lapped the price increases.

Essentially that is what is going on. The equity income guidance of up mid single digits, again that is off of a 2007 base which is normalized for $16 million of onetime cost related to domestic distribution seasonal closings. So the reported equity income growth would be somewhat higher. We are lapping the crown startup so we won’t have the same dramatic impact as we did in 2007. The export volume is expected to recover certainly versus the levels that we saw in the second half of this year.


Thank you our next question is coming from Bill Pecoriello of Morgan Stanley, please go ahead.

Bill Pecoriello – Morgan Stanley

Hi Randy, how are you, if you could give us some color on the channel trends you saw in the quarter. We saw the soft drink guys talk about the C&G channel down a bit and how you’re on premise casual dining did in the quarter and then any update on what you’re seeing in January on organic STRs. Thanks.

W. Randolph Baker

Bill our convenience store business held up pretty well in the fourth quarter. Our core brand volume, so the AB produced volume excluding the imports, was up better than the trends earlier in the year but significantly below last year’s performance. But we did not see a deterioration in convenience store sales in the fourth quarter versus what we’d seen earlier in the year nor did we see a deterioration as we went through the quarter and in fact December was a bit stronger than November for our convenience store sales.

In discussions with convenience store managements, we are definitely observing that traffic is down, particularly the large C store states of Florida, Texas, California, which seem to be being hurt by the [codomy] labor market conditions, the housing market, et cetera. Offsetting that a little bit for us is that Bud chilata which was introduced in the fourth quarter and it was in those states is doing very well in C stores and the national rollout of those brands should help our C store performance this year.

The other thing is that the margin there, you probably in some markets may be seeing a little bit of trading down, nothing significant at this point in time. But given our strength and positioning in the premium and the Budweiser family and the sub premium and Busch Natural, we’re well positioned if there is trading down. Overall in the off premise channel, we were slightly better in the fourth quarter than we were prior to that. We did see a bit of a drop off in trends in the fourth quarter in the supermarket, grocery store channel.

We did see deterioration in on premise volume in the fourth quarter and the fourth quarter was worse than the first nine months again for our core brands. The restaurant and bar business both were down. We actually are starting to see some improvement versus the prior trends in casual dining but overall on premise was the weakness for us in the fourth quarter. Now when we add in our imports, the on premise is the strength for [stella]. January STRs are up slightly [floor] the or total for our AB produced brands, our core brands we are down about one and a half percent.

As a comment or a caution, that’s the three weeks ending the end of last week, those are very low volume weeks and whether or not they’re indicative for the full year clearly remains to be seen. This week is more significant as it is the week prior to Super Bowl. The outlook for this week is better than the first three weeks, although right now we have a snow storm going through the Midwest which won’t be positive for sales, but overall that is what it is, really relatively small weeks but we are up slightly in total and down in the 1% range in core.


Thank you our next question is coming from Mark Swartzberg with Stifel Nicolaus, please go ahead.

Mark Swartzberg – Stifel Nicolaus

Thanks, good afternoon Randy, trying to get a little more color on the executional challenges facing the core brands here and I guess partly I guess the portion of volume that’s going through exclusive wholesalers has gone down to about the 60% level versus high 60’s a couple of years ago. So, A, a little bit of an update on that, is that where we are today, do you see that number stabilizing as you look out into the coming year?

And then more broadly in an executional sense you commented on the field sales force and getting some better, some reconfiguration there but can you just comments, as you look at the exeuctional capacities of the company, you know what are some of the unturned rocks if you will that you see perhaps improved performance out there in the marketplace in the coming year?

W. Randolph Baker

Mark the percent of volume going through our purely exclusive wholesalers is 60%. And as you mentioned that’s down from 67% at the end of 2006. What has happened is that there have been a few wholesalers who have basically taken on who are unable to take on the products that we allied with because they were unable to get the franchises and then they took on other brands themselves. But we still have an extremely high percentage of AB volume is going through the wholesalers. Well the, our volume as a percent of the total volume that our entire system covers is extraordinarily high, so we still have a very strong focus by our wholesalers. In terms of execution, there are a lot of things that we are doing.

We have as we talked about more in our New York presentation mentioned today, we have reorganized our field sales management and have quite a few changes in our field sales operations to better support our efforts with wholesalers and our efforts with retailers. Last year we added a large number of employees, 30% plus increase in field sales personnel. Those are now, shall we say, into their jobs and we look for good contributions from our expanded field sales force. This year we will not be adding a significant number of additional field sales personnel. Mark, there are a whole series of things up and down the line that we are doing for execution than from a marketing side. We have a lot of changes in our media plans, a lot of changes in our creative that you’ll be seeing.

We have a 10% increase in media spending and a greater focus behind a smaller number of brands or real focused behind our key core brands. And you’ll see that throughout the year but most prominently a big increase in advertising during the summer of 2008 compared to 2007. So we are optimistic, I guess I would have to say cautiously optimistic, we’re optimistic on our core brand performance as we go through the year and especially and most importantly as we enter into the key summer selling season.


Thank you our next question is coming from Bryan Spillane of Banc of America, please go ahead. Bryan Spillane, your line is live, please proceed with your question.

Bryan Spillane – Banc of America

Good afternoon Randy, just a couple of questions about some of the assumptions you’re making in terms of the macro backdrop relative to your planning assumptions for 08, because if you look at 07 you know equity income at least ended the year sort of at a trend line that was below what would be your long term model, cost inflation running above what you’d expect long term and you know your domestic share trends running below average. When you look out into 2008 you know do your assumptions assume that the cost inflation environment changes much from where it ended the year in 08?

And then also in terms of the beer industry itself, are you expecting inventory trends to moderate back towards your long term growth rates or do you expect that kind of continues at this above average rate and then finally the same in equity income. Is there anything different there in terms of what your macro expectations are there?

W. Randolph Baker

Bryan, first for the industry trends, as you mentioned we’ve had very strong industry sales results for the last two years, for 2006, 2007. Our model continues to assume to forecast the half to 1%. But clearly we have stronger momentum than that going forward and we’ll see but basically our modeling is still based on the half to 1%. We have seen significant cost pressures as have really all brewers and essentially all food and beverage companies, last year and this year, driven heavily by agricultural costs pressures.

We’ve given you guidance for this year of costs of goods sold per barrel increased to be in the 3-3.5% range and have mentioned that we have a major push to mitigate those costs through productivity improvement, efficiency and operations et cetera. We ended up the year 2007 better than we had expected and we were able at the end of the year to bring in core brand revenue per barrel to increase to offset the increase in cost of goods sold per barrel for the core brands.

We’re not quite there yet for 2008 but that is certainly an objective to do what we can to be able to bring our costs down and our revenues up. Our revenue per barrel assumption guidance for you is 2.5-3%. Going forward beyond that, at some point it is logical that commodity costs will stifle, they certainly have throughout history. Obviously right now commodity costs are driven by a number of global factors, but in our models we do assume some softening of cost trends out beyond this year because they’re off of a very high base. The equity income as you mentioned certainly slowed at the second half of the year.

We have given you guidance for next year and the imports in the US have gone through stifles. Earlier this decade they were growing in the 1-2% range and then spiked up. We don’t see anything in our research that would indicate that there’s been a fundamental change in consumer perceptions of import brands and of course Corona as a key driving force for us in our equity income. But that all remains to be seen and remains to be seen the impact of the economy this year. But longer term, we think we will have good growth out of equity income and our international operations. And those again are a macro assumptions.

One other comment Bryan, for an industry and really for AB, we are relatively insensitive to economic conditions on the demand side and throughout history and all of our data, the demand for beer, beer as a category, has been very insensitive to changes in the economy. In fact in our long term models, changes in the economy really are not a factor in predicting growth. So that’s been the case throughout history, the only, it’s certainly in 2001 in the recession, it was not a factor. We didn’t really have a significant impact on beer sales and for that matter on trading down. We did back in 1991, but that was the year of the Federal excise tax doubling and we had a price increase on beer that was some three times normal.

We again in 2001 did not see trading down. That is something that we are watching because it is logical and you do see it in certain markets of some evidence of trading down, trading down from the high end to premium and from premium to sub premium. We’re not forecasting that that will occur but if it does occur AB is certainly well positioned in that environment.


Thank you our next question is coming from Ann Gurkin of Davenport, please go ahead.

Ann Gurkin – Davenport

Good afternoon Randy, I wanted to discuss again AB’s move to use more digital advertising and is it too early to get any kind of update on how that’s going? And then secondly I don’t know if you have any comments on the potential for further consolidation within either beer or spirits or both and would AB, would you like to comment whether AB would be a participant in further consolidation?

W. Randolph Baker

Ann we’ve got a whole series of changes in our media mix. In the past, last year and this year, we have significantly expanded our digital advertising and it’s on a wide range of fronts. A lot of special internet work, we run special ads that go on the internet. The series of do-dads that we’ve been running on television actually started on the internet and became so popular that we took them into broadcast media. We use the internet very heavily for brands like Rolling Rock and we continued to expand our participation in a whole wide variety of outlets on the internet.

We’re doing a number of things, we’re doing pings with cell phones, we’re doing things with a whole variety of digital space and that will continue to evolve as we see opportunities and we do a lot of testing. What we like about the digital space is it gives us opportunities to very directly communicate with and reach the contemporary adult.

In the consolidation of beer and clearly within the last year there were significant changes. The announcement of the intent of the joint venture between Miller and Coors and if that achieves regulatory approval would represent a consolidation within the US and then the most recent announcement on Scottish Newcastle with Heineken and Carlsberg. So there continues to be consolidation of beer on a global basis, there’s no doubt about that.

We have stated and continue to state we are interested in international beer acquisitions that would enhance our growth profile, our growth opportunities going forward and if we have the right opportunity we will certainly pursue it. With regards to spirits consolidation we observe consolidation occurring in that industry as well. We are not a participant in that. We are doing some very limited testing of spirits within our distribution system to better understand the fit and the synergies there but we are very early in that process.


Thank you our next question is coming from Kaumil Gajrawala of UBS, please go ahead.

Kaumil Gajrawala – UBS

Hi, sorry about that. Randy could you talk a little bit about recent spirits trends, it looks like they’ve been slowing down a bit and beer continues to do well or slightly above your forecast. So if you could maybe talk a little bit about the interaction between the categories and how you see that playing out over the next few years?

W. Randolph Baker

Well the trends for liquor, for spirits did slow in 2007 both on the data from the industry and also very much so in scanner data and the differential between beer and liquor has narrowed considerably. But still liquor and wine for that matter are growing faster than beer. But we do see the gap narrowing. As mentioned in the last two years with the acceleration of beer industry volume, we are seeing a renewed interest in beer. And a lot of that’s happening at the high end of the craft beer level especially perhaps in micros as people are experimenting, trying different brands, different flavors, but an overall strength in beer consumption in the US. And that may be having a bit of an impact on liquor but generally we’re encouraged with what we see in beer in the US and we do note as you’ve observed that there has been a narrowing of the gap between beer and liquor.

Also one other comment is that overall consumption of alcohol in the US continues to grow. And per capita consumption of alcohol continues to grow, so the overall alcoholic beverage market in the US is strong and favorable and beer in the last two years has certainly accelerated versus what we saw earlier in the decade.


Thank you, as a reminder if you wish to ask a question please press star one on your touchtone phone. Our next question is coming from Judy Hong of Goldman Sachs, please go ahead.

Judy Hong – Goldman Sachs

Hi Randy, I wanted to go back to your focus on growing your core brands, volume and profitability. I know you’ve talked a lot about the initiatives and media spending going up 10% this year et cetera, I’m just wondering how we can feel confident that you’re doing enough for spending is going u enough o really get your core brands volume to show stronger trend and at what point do you think that more dramatic action could be needed. Is it as we get closer to the key selling season, if you don’t start to see core brands gaining share then you could think about taking a more dramatic action.

And secondly I know you’ve given guidance for different components of P&L but in terms of thinking about earnings growth next year, I know last year you talked about EPS coming in at above the 7-10% long term target. Is this the year where you could see that number actually coming in somewhat below that in light of some of the headwinds you talked about?

W. Randolph Baker

Judy, clearly volume for core brands in last year, 2007 was below our expectations and we’ve been discussing that with you in our teleconference and investor presentations. We’ve discussed that we have both a very high priority on our core brand volume and profitability this year and have a number of changes in our marketing and field sales directed towards that. And as you mentioned we do have an increase in media behind our core brands. You’ll see that primarily in the summer Judy in terms of how the dollars are spread so the impact of the increases in media will be far more weighted into the summer and then in response to Bill’s question, clearly right now we only have three very small weeks of the year.

As far as when should we see improvement in our core brand performance? We would expect to gradually see improvements in core brand performance and certainly the key is the summer selling season. We are doing a lot of dramatic things. Obviously we will, as we always do, assess what’s working and perhaps do more of what’s working if some of our initiatives are not working as well, then we will retool and try additional or other things. But we believe we have a very good plan for this year and obviously yes it remains to be proven and we’ll see as we go through the year.

Our earnings growth model is 7-10%, it is a long term model that we have explained to you, we also do not give annual guidance but I can certainly confirm that the long term 7-10% is certainly the starting point that we have when we establish our internal targets as we develop our budgets et cetera. And again we’ve given you guidances up and down the line for 2008 with basically the exception of volume.


Thank you, our next question is coming from Carlos Laboy of Credit Suisse, please go ahead.

Carlos Laboy – Credit Suisse

Thanks, good afternoon Randy, at a time that Modelo’s going through a business model transition, they’re seeking different skill sets in Mexico, do you see opportunities to play more active or a strategic role with Modelo?

W. Randolph Baker

Carlos as you’re well aware, we have a 50% ownership in Grupo Modelo, we have a good working relationship with Grupo Modelo and participation on their Board, Carlos Hernandez is a key Board member on our Board and as appropriate, a best practices sharing and good working relationships at various levels of our company. The Modelo management runs Modelo and not Anheuser Busch and they again will come to us in certain areas and we in turn at times ask for insights that they have in certain areas. So it’s a good working relationship.

There are a series of things yes that they are doing and changing their business model which we think are the right moves, positive moves and they’re working through those but we continue to be very optimistic about Modelo, it’s an excellent management team and they have very strong position in Mexico and of course a strong position in the US and we think they will, working through things, will certainly recover back to more normal levels as we go forward.


Thank you our final question is coming from Christine Farkas of Merrill Lynch, please go ahead.

Christine Farkas – Merrill Lynch

Thank you very much, good afternoon Randy, a couple of clarifications if I could. Just first thing on your costs of goods per barrel, I just want to understand if this is ongoing underlying commodity inflation or if in fact there may be some contractual changes or step ups in certain contracts that might come due in 08 and secondly you talked about your up low double digit volume growth in Canada and down low double digit volume declines in the UK, can you comment on the underlying markets in those countries so we can assess your share gains or losses, thank you.

W. Randolph Baker

Costs of goods sold, the guidance is 3-3.5%. Within that the key driver are brewing materials and you’re quite aware of what’s going on in agricultural commodities and again almost all food and beverage companies are facing these pressures. The brewing materials are about 13% of our cost of goods sold per barrel. The big driver in it is barley which is way up, up double digits last year and this year 2008 and there we contract for barley with farmers and we need to be competitive with the alternative crops which are typically wheat and then wheat in turn needs to be competitive with corn and soybeans and so it’s all kind of driven together.

We’re seeing big increases in barley, really based upon that’s just what crop prices are. In barley is, we have barley and then you have conversion of barley into malt and there malt is just over 8% of our costs of sales, it’s the biggest part of brewing materials but about half of its barely and half of its conversion cost. In turn about half of our malting volume we do ourselves and you know the key driver in the malt increases is the commodity barley. Rice is also up significantly, that’s a world market situation. We use a little bit of corn and that’s way up and you’re well aware of that. The majority of our cost in agricultural materials are covered by contracts.

We do have some hedge positions but we do have a little bit of remaining exposure based on summer crop prices. But that is the key driver in our cost for this year 2008. Our packaging materials, our largest component, we have a little inflation but not significant inflation there. Energy, natural gas, fuel, oil, electricity, diesel fuel represent about 4% of our cost. And we’ve got continuing pressures there although energy costs in particular natural gas has been high for a number of years so the year over year impact is not huge.

And another factor is that because of the ongoing high energy cost we have a lot of projects in our breweries to reduce energy usage and energy cost and these are helpful in mitigating our cost pressures. So that’s what’s driving our costs of goods sold per barrel of the three to three and a half percent and again it’s primarily brewing materials and you’re seeing this throughout the industry and impacting others in food and beverage as well. In Canada, the industry was up just under 1%, nine-tenths of 1% for the year. We were up high single digits, so I mean we are significantly gaining share both for our Budweiser and Bud light.

And then Bud light a couple of years ago, we and Labatt, our partner, made a decision to increase marketing support and focus behind that brand and it’s growing very, very nicely off of a relatively low base and then Budweiser continues to do very well as the leading brand in Canada and off of a high base. The United Kingdom is unfortunately a different story. The industry was down 3.9% in 2007, primarily driven by on premise beyond trade off premise is essentially flat. Key drivers there included the smoking ban and just an ongoing pressure and the change from on premise to off premise consumption there. We lost a little bit of share in the UK.

In part we’ve discontinued some brands and some SKUs and a focus improving our cost position relative to our sales. But that’s a situation in the UK. Both an industry that’s going down and we are losing a little bit of share. In Canada it’s an industry that’s growing and we are gaining share. And if that’s the last question we do appreciate your participation as always in our teleconference. Our first quarter teleconference will be held on April 23 and we will be webcasting our presentation at CAGNY on February 21. And again thanks for joining us today.


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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!