AB InBev Q3 Results: Volume Growth & Effective Pricing Combine To Boost Top Line

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Anheuser-Busch InBev

It has been a great Q3 for Anheuser-Busch InBev (NYSE:BUD). The brewer reported better-than-expected volume growth for the quarter, raising its year-to-date performance. Organic volume sales rose 1.5% year-over-year, with AB InBev’s own beer volumes increasing 2.3% despite macroeconomic challenges in some of the crucial markets, such as Brazil and China. Though overall volumes are down 0.6% year-to-date organically, revenues are up 6% on a currency neutral basis (up 8% in the quarter) due to a solid rise in revenues per hectoliter, helped by effective pricing strategies and higher proportionate sales of premium and above premium brands. We shall discuss this, taking examples of the largest markets that AB InBev operates in.

We have a $120 price estimate for Anheuser-Busch InBev, which is roughly in line with the current market price.

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United States

The home market of Anheuser is where the company has underperformed the overall beer industry in the last few years, as domestic beer brands continue to lose popularity. 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 three quarters, the figure fell by only 0.5%, helped by the general improvement in the economic environment. However, the brewer’s own STRs were down 1.9%, as Bud Light and Budweiser continue to lose customers to the imported and craft beer categories.

Domestic beers form a significantly high portion of AB InBev’s overall U.S. volumes, while imported and craft beers form only a small portion. Craft beers, in fact, form only 2% of net volume sales. However, brands in these categories helped score an almost 3% growth in revenues from the U.S. in the third quarter. Above premium brands such as Michelob Ultra, Stella Artois (imported), and Goose Island (craft) gained approximately 30 basis points of total market share in both the quarter and through the first nine months. This bodes well for the brewer, which has struggled to extract growth from the U.S. Although the growth in imported and craft beer for AB InBev isn’t still enough to offset the much larger declines in domestic beer, one could say that the brewer is heading in the right direction, with the rate of decline reducing sequentially.

Brazil

Brazil is an emerging economy with a low beer penetration, which means there is growth potential. However, the country’s economy is in recession, struggling with high interest and inflation rates and negative customer sentiment. AB InBev’s organic volumes declined ~4% in Brazil through the first half of the year. But its own beer volume sales rose a strong 3.5% organically in Q3, as the brewer was lapping easy comparables from last year when there was a slight slowdown after the strong FIFA World Cup activation in Q2 2014, which raised the year-to-date results. Despite volumes remaining up and down all year, higher proportionate sales of the premium brands is what has helped AB InBev achieve an 8.4% year-over-year growth in sales, organically, in the first three quarters.

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 the economy that is otherwise struggling. And there is room for further growth. Brands such as Budweiser, Stella Artois, Original, and Skol Beats Senses all grew by double digit percentages in the quarter, growing the share of premium brands to 9% of the brewer’s overall Brazil volumes, which is still low, implying that there is further potential growth opportunities.

China

China is coming to terms with the new normal of slower than previously seen high economic growth levels, with the fall in the stock market, slower infrastructure, and real estate sectors. Total industry beer volumes declined by approximately 7.0% in Q3 and by 5.5% through September.

But what bodes well for AB InBev in China is that the brewer has outperformed the overall industry. Despite the slight fall in volume sales in Q3, the brewer’s beer volumes are up 0.5% through September in the country, thus gaining market share, which is now almost 20%. Driven by the higher sales of premium brands such as Budweiser, revenue per hectoliter grew by 7.9% in the quarter. AB InBev is gaining market share in China, and realizing solid top line growth on the back of higher sales of its premium and super premium portfolio.

The brewer’s core performance has remained strong in the first three quarters, especially in the third, with its three  global brands Budweiser, Corona, and Stella Artois growing volumes and revenues by double digit percentages this quarter. However, as has been the case all through the year, currency translations have dragged down the top line growth. Considering more than two-thirds the net revenues for AB InBev come from markets outside the U.S., the continually strengthening dollar against foreign currencies was a downer yet again in Q3. Currency has been an almost 25 percentage point headwind on sales from Latin America North, and over 11 percentage point headwind on the top line so far this year for the Belgian brewer. Negative currency translations have dented results for AB InBev so far this year and, with the Fed yet to raise interest rates, the dollar could continue strengthening. But the brewer’s core performance remains solid, which, in fact, became stronger in Q3.

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