AB InBev Earnings Preview: Macro Headwinds To Drag Down Organic Growth In Q3

Anheuser-Busch InBev (NYSE:BUD) has been in the news a lot in the last couple of months, as the world’s largest brewer is in hot pursuit of its largest competition, SABMiller, to create a beer behemoth, which could control close to one-third the net global beer volumes. Of course there will be anti-trust scrutiny, seeing how both the brewers hold strong positions in most markets, and there could be subsequent divestitures of divisions and brands. The Panel on Takeovers and Mergers in Britain has extended the deadline to November 4 for AB InBev and SABMiller to complete negotiations, and although the world awaits more news on that, we will focus our analysis on AB InBev’s Q3 results, which are scheduled to be announced on October 30.

We have a $120 price estimate for Anheuser-Busch InBev, which is above the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

As the global macroeconomic environment continues to remain tepid, we expect another quarter where organic growth will be offset by negative currency translations. Considering approximately 70% of AB InBev’s top-line comes from markets outside the U.S., the strengthening U.S. dollar against certain foreign currencies is dealing a blow to the brewer’s financials. Currency was an 11 percentage point headwind on the net sales in the last quarter.

But AB InBev’s core woes remain its slight underperformance in some of its most crucial markets. In the U.S., Brazil, and Mexico – three of the four largest markets for AB InBev – the brewer holds 50% or more volume share. It’s tough for the maker of Budweiser, Corona, and Stella Artois to hold on to such massive shares in these markets, and even tougher to achieve further growth. And with the general tepid global economic environment and volatility in markets such as Brazil, Russia, and China, the beer market is facing headwinds. Revenues declined 9% in the last quarter to $11.1 billion from $12.2 billion a year ago, including a 2.2% fall in volumes (organically).

U.S. Beer Market To Be Unkind To Domestic Beer Yet Again?

Approximately 30% of the net sales for AB InBev are contributed by the U.S., home of Anheuser, making beer in the domestic market a crucial operating division, even more so now when the dollar is continually appreciating against most foreign currencies. Not only is the beer market in the country mature, with industry selling-day sales to retailers (STRs) down in the last few years (with the exception of 2012), but Anheuser is also losing its strong grip in this market. According to Anheuser’s estimates, the industry-wide selling-day adjusted sales-to-retailers declined 0.6% in 2014, after a larger 1.8% decline in 2013 and, in the first quarter, the figure fell by only 0.5%, which could have meant that the market might be ready to return to some sort of growth. However, industry STRs were down again by 1% in the last quarter, with the brewer’s own STRs down 2.2%.

Beer could decline this quarter again for AB InBev in the U.S., on the back of continual declines for the domestic beer brands Bud Light and Budweiser. On the back of a strong presence in the domestic beer segment, which forms around 74% of the overall beer market, Anheuser has a solid 46% market share in the country’s beer market. But this share has consistently declined as customers are choosing either imported beer, craft beer, or are boycotting beer altogether. From developing their in-house craft beer brand Shock Top, which forms 1% of AB InBev’s U.S. volumes, to acquiring craft brands such as Elysian Brewing Company, Oregon’s 10 Barrel Brewing, Blue Point, and Goose Island, Anheuser has looked to penetrate the craft beer market. But these craft brands still form only around 2% of the company’s net U.S. volume, and therefore, solid growth in this segment is not enough to offset the larger declines in domestic beer.

Is this where SABMiller’s domestic beer brands could come in and try and revive that segment for AB InBev? Time shall tell. Besides, anti-trust authorities will be all over the possible merger of the two largest brewers, since SABMiller has a joint venture with Molson Coors in the U.S. called MillerCoors.

Growth In Brazil And China On Higher Revenue Per Hectoliter

Macro headwinds in both Brazil and China have dented AB InBev’s results so far this year, and this trend is expected to continue into the third quarter. While China is coming to terms with the new normal, with slower economic growth, plagued by a fall in the stock market and industry overcapacity, Brazil’s economy is in recession, struggling with high interest and inflation rates and negative customer sentiment. AB InBev’s organic volumes declined ~4% and grew only 1.7% in Brazil and China, respectively, through the first half of the year.

However, where growth lies for the brewer in these two markets presently, is in higher revenue per hectoliter, which increased 15% and 6.5% in Brazil and China, respectively, in the last quarter. Economic inequality in Brazil is one of the highest in the world. 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 an economy that is otherwise struggling. On the other hand, Budweiser is making the price mix better in China, growing by double-digit percentages in the country.

We expect another quarter where AB InBev’s organic growth will be marred by currency headwinds. However, the core performance will also be in focus, especially in the brewer’s top markets, where organic growth is also becoming hard to come by.

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