AB InBev Earnings Preview: Strong Revenue Per Hectoliter Growth To Boost Sales

Anheuser-Busch InBev (NYSE:BUD) is scheduled to announce its Q1 results on May 6. The global leader in beer sales is expected to deliver solid revenue growth this quarter on higher average revenue per unit volume. Organic growth in revenues stood at 5.9% last year, even as volume sales rose only 0.6%. ^[1] This was mainly because the brewer remained committed to its premium brand profiling and put more emphasis on sales of premium beer brands, 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.

On the back of strong revenue growth and higher cost savings, AB InBev’s normalized earnings per share rose 10.6% to $5.43 in 2014. The financial results for this quarter are expected to be negatively impacted by a stronger dollar, as compared to certain local currencies, and higher cost of sales. However, solid performances and growth in average revenue per hectoliter in key markets such as the U.S., Mexico, Brazil, and China are expected to more than offset the rise in operational costs.

We have a $122 price estimate for Anheuser-Busch InBev, which is above the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

Expected Growth In The U.S. On Higher Craft And Imported Beer Sales

Beer is a relatively mature market in the U.S. 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 2014, with improving economic conditions in the U.S., due to lower energy prices and historically-low unemployment rates, higher customer purchasing power allowed a slight 0.5% year-over-year growth in beer volumes. ^[2] The conducive market conditions also helped improve the industry-wide average revenue per hectoliter, bolstering the beer market’s net value to $101.5 billion, up 1.5% over 2013 levels.

The U.S. is the largest market for AB InBev, accounting for 24% of net volumes and 30% of net revenues last year. 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. AB InBev ended the year with a 1.4% decline in volume sales in the U.S. This quarter, the brewer could achieve growth in the country through a lower percentage decline/slight growth in beer volume sales, and higher revenue per hectoliter, boosted by larger proportionate sales of imported and craft beers.

Imported and craft beer volumes grew by 6.9% and 17.6%, respectively, in the country last year, outpacing the 0.5% growth in the overall market. In particular, the Mexican imported beer segment, which forms around 8-9% of the U.S. beer market according to Anheuser, grew 11% in 2014, and continues to thrive on an increasing Hispanic population in the country and higher customer demand. AB InBev is expected to gain from the high demand for imported beer this quarter and 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, and the initial roll-out of Montejo has been successful. On the other hand, incremental sales from the craft breweries acquired by Anheuser, such as Oregon’s 10 Barrel Brewing, Elysian Brewing Company, Blue Point, and Goose Island, are expected to fuel growth in the top line in Q1.

The imported and craft beer segments together form only 26% of the beer market, which is still dominated by the domestic beer segment. However, these segments are growing at a relatively faster rate, and operate at higher price points. This is why AB InBev is eyeing growth in these segments, which promise higher average revenue per hectoliter.

China Volumes Could Slow Down But Sales Growth To Remain Solid

Hurt by rough weather conditions and relatively slower economic activity in the latter part of the year, the industry-wide beer volumes in China declined by 1.8% in 2014. ^[3] 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 three of the four largest markets for AB InBev, namely the U.S., Brazil, and Mexico, the brewer has massive volume shares of 46.4%, 68.2, and 57.8% respectively. It is generally tougher for companies with massive market shares (near 50% or more) to further grow share, especially in relatively mature markets such as the U.S. beer market, which is not so dynamic.

However, in China — the largest beer market in the world in terms of volumes, and the third largest for AB InBev — the brewer holds a smaller 15.9% volume share. This means that there is still a large growth opportunity for the world’s largest brewer in China, where beer penetration is still low, as compared to Europe and the U.S. This quarter as well, although AB InBev’s volumes might not grow by much in China, which faces slowing economic activity, higher revenue per hectoliter is expected to boost the brewer’s sales. China formed 87% of net volumes last year for AB InBev’s Asia-Pacific division, which forms approximately 12% of the company’s valuation by our estimates. Despite a small 1.6% growth in volumes, AB InBev’s China revenues rose 11.6% over a year ago period in 2014, and as the premium segment is growing twice as fast as the overall beer market, and given the brewer’s premium positioning, sales growth could remain strong this quarter as well.

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