SABMiller Synergies Help Anheuser-Busch Deliver A Beat On Earnings

The timing could not have been better for the SABMiller deal, as Anheuser-Busch InBev (NYSE:BUD) comes to terms with declining sales in the US. SABMiller’s sales are mostly concentrated in the developing markets, particularly in Africa, where beer volumes are still on the rise. The sales also improved due to the acquisition, as well as continued premiumization efforts. Margin expansion, as a result of the ongoing delivery of synergies and improved performance in Brazil, helped to increase the earnings per share, a metric it has finally delivered a beat on, after missing for the five previous quarters.  We have a $126 price estimate for Anheuser’s stock, which is 6% above the current market price.

Synergies From The Merger

• The company continues to deliver synergies from the combination with SABMiller.
• In the first, second, and third quarter, BUD delivered synergies of $252 million, $335 million, and $336 million, with a large portion of the synergies coming from best practice sharing.
• Earlier in the year, the company raised its savings target from $2 billion to $2.8 billion; however, given the significant savings already captured, we had stated that the end total will exceed $2.8 billion. This time around, the company has indeed revised its target upwards, to $3.2 billion.
• This involves one-off cash costs of ~$1 billion, $100 million higher than anticipated earlier, to be incurred in the first three years of the deal closing, of which $465 million has been spent to date.

Slowdown In The US

• Revenue in North America fell 5.3% and volumes declined by 6.1% due to industry softness in both the US and Canada.
• In the US, while the industry sales-to-retailers (STRs) were down by 1.7%, the company’s STR’s slumped 3.4%, resulting in market share loss of ~80 basis points.
• Sales-to-wholesalers (STWs) fell by 6.4%, owing to the shipment disruptions arising from the major hurricanes in Texas and Florida.
• The company’s two major brands in the country – Bud Light and Budweiser – remained under pressure in the quarter, with both losing market share of 95 basis points and 45 basis points, respectively.
• The one positive in the quarter in the US seems to be the performance of Michelob Ultra, which has been the biggest share gainer in the US industry for the past 10 quarters. In Q3, the brand attained its highest quarterly share gain in the past five years, reaching almost 10% of the company’s total volume, as its growth accelerated through increased penetration.
• There has also been some cannibalization by Ultra on the Bud Light volumes, though the rate has slowed down. However, given the better margins for Michelob Ultra, it may actually be accretive to the gross margins.
• In the future, as the consumers trade upwards to the Above Premium brands, the company’s craft portfolio will hold it in good stead, as well as brands such as Michelob Ultra and Stella Artois.

See Our Complete Analysis For Anheuser-Busch InBev

Have more questions on Anheuser-Busch InBev? See the links below.

• Here’s How AB InBev Trimmed Business To Make Room For SABMiller
• Does A New Survey Spell Good News For Anheuser-Busch?
• Lure Of The Non-Alcoholic Beverage Market For Liquor Companies

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