AB InBev Earnings Review: Strong Sales Growth In Core Markets

Anheuser-Busch InBev (NYSE:BUD) reported strong organic growth in revenues and average price per volume, on February 26, delivering solid progress in 2014. Organic growth in revenues stood at 5.9% last year, even as volume sales rose only 0.6%. ^[1] This was mainly as the brewer remained committed to its premium brand profiling, and lay more emphasis on sales of premium beer brands, thereby growing revenue per hectoliter by 5.7%. AB InBev has focused on M&A activities to grow its business, especially by acquiring strong local businesses in emerging markets that have an already established loyal customer base. The combination with Grupo Modelo and Oriental Brewery yielded positive results in Mexico and South Korea respectively in the last year, and AB InBev was also able to deliver $730 million in cost synergies related to the Grupo Modelo acquisition, and remains on track to achieve $1 billion in cost savings by the end of 2016. ^[2]

But besides the new acquisitions that were incremental to AB InBev’s business in the last year, the brewer was able to deliver solid performances in its core markets comprising U.S., Brazil, and China.

We have a $116 price estimate for Anheuser-Busch InBev, which is below the current market price. However, we are currently in the process of incorporating the recent annual results into our forecasts and revising our price estimate.

See Our Complete Analysis For Anheuser-Busch InBev

Decline In U.S. Volumes Slows Down

The U.S. is the largest market for AB InBev, accounting for 30% of the net revenues last year. Beer consumption has declined in the country in the last few years as millennial customers are more health conscious and look to curb alcohol consumption. In addition, beer penetration is already relatively high at around 80 liters per person in the country, which although less than the 90+ liter per capita beer consumption in most European countries, beats the intake per capita figures of most emerging economies, which are expected to be the major contributors to global beer volume growth in the coming years. The already high beer penetration in the U.S. limits future growth opportunity. However, an improving macroeconomic environment, with historically-low unemployment rates and plunging oil prices, fueled customer purchasing power, which in turn benefited beer sales in the latter part of 2014. Although AB InBev’s U.S. volume sales remained essentially flat in Q4, this was a rather positive outcome after consecutive quarters of declining volumes in the country. The conducive market conditions helped the brewer improve revenue per hectoliter in the U.S., which boosted net sales.

Ab InBev ended the year with a 1.4% decline in volume sales in the U.S., but going forward, volumes could grow on improving economic conditions and new product launches. More jobs and increasing incomes could prompt customers to switch to higher priced beers, and consequently boost sales of AB InBev’s premium brands such as Bud Light and Budweiser. Higher proportionate sales for these brands could further lift the average revenue per unit volume, fueling growth in net sales. In addition, AB InBev could gain from the high demand for imported beer going forward, as distribution of the Mexican brand Montejo spreads to eight additional states in 2015. The beer brand started selling in September last year in California, Arizona, Texas, and New Mexico, where 70% of America’s Latino population resides. According to Anheuser, around 8-9% of the U.S. beer market is formed by the Mexican import segment, and the initial rollout of Montejo has been successful. Demand for Mexican beer is already high in the U.S., and with an increasing Hispanic population in the country, the Montejo and other Mexican Grupo Modelo brands that AB InBev looks to launch in the U.S. in the coming years could achieve meaningful volume sales.

Brazil Delivers Solid Growth Despite Slowing Economy

Despite slowing economic activity in Brazil, AB InBev managed to derive a strong 10.6% revenue growth in the country last year. This was mainly on the back of a strong FIFA World Cup activation and higher penetration of premium beer brands. Case in point is the Q4 revenue growth of 10.4% even when volumes grew only 0.6%.

Brazil is one of the most unequal countries in the world. Despite having a small proportion of high net worth individuals (HNWI), Brazil’s combined HNWI wealth of around $4 trillion is the third largest for any country. ^[3] High interest and inflation rates, and tight credit availability don’t tend to adversely impact the more affluent individuals, and this could be one of the reasons why AB InBev’s premium beers have grown at a rapid pace in the economy that is otherwise struggling. And there is room for further growth. The brewer’s premium brands grew 20% in Brazil last year, with Budweiser registering an impressive 40% growth. But premium brands still form only 8% of the industry-wide volumes in the country, compared to 75% of the net volumes in the U.S. This presents further potential growth opportunities in the premium segment in the Brazilian beer market. Furthermore, growth in the legal drinking age population is expected to continue for at least the next ten years, meaning that AB InBev’s target customer base should continue to grow.

AB InBev’s Market Share Improves In China

The beer market in China is the largest in the world in terms of volumes, but hurt by rough weather conditions and relatively slower economic activity in the latter part of the year, the industry-wide volumes declined by 4% in 2014. However, AB InBev’s volume growth remained positive at 1.6%, reflecting strong growth in the brewer’s focus brands in the country. The brewer’s core focus group in China comprising Budweiser, Harbin, and Sedrin grew by 7.8% last year, and accounted for approximately 73% of the company’s portfolio in the country.

While the 1.6% volume growth figure represents organic growth, volume growth including M&A activities was approximately 9% in 2014. In April 2013, Anheuser acquired four breweries in China, with net beer capacity of roughly 9 million hectoliters, for $439 million, and also acquired Siping Ginsber last year. Anheuser might look to acquire more regional brands to boost its portfolio and penetrate deeper into China. The company improved its market share in the country by 90 basis points to 15.9%, and if we include the recent mergers and acquisitions, the share becomes around 16.8%.

AB InBev’s underlying strategy seems clear — to grow its business organically by focusing on premium beers, especially in emerging markets where disposable incomes are growing, and also acquiring locally established breweries that could leverage AB InBev’s strong distribution channels and marketing muscle to grow even further.

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1. AB InBev 20-f [↩]
2. AB InBev earnings transcript [↩]
3. Sales of luxury cars boom in Brazil, June 2014, ft.com [↩]