Can Anheuser-Busch Halt The Slowdown In The U.S. Market In The Fourth Quarter?

Anheuser-Busch InBev (NYSE:BUD) is slated to report its fourth quarter earnings on March 1, wherein a rise in revenues and earnings per share is expected, driven by its acquisition of SABMiller last financial year. In the last quarter, BUD finally delivered a beat on its earnings, reversing a trend that had been continuing for the previous five quarters. The company is on track with its integration of SABMiller, and in this regard, has divested some of its assets as part of the merger deal. Despite the divestitures, the combined company occupies the top spot in the beer industry, with a 45.8% share of the market, holding a portfolio that includes seven of the 10 most valuable beer brands in the world. Below we’ll highlight certain trends taking place, which may have an impact on the company’s earnings.

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Diversifying The Portfolio

• BUD announced the acquisition of organic energy drink maker Hiball, which closed in the third quarter of FY 2017.
• While this is a small deal (Hiball has 20 employees and had sales of $40 million in the past 12 months), it is newsworthy as it implies a move towards non-beer categories. The company may also want to jump on the organic/natural drinks bandwagon.
• Anheuser has the distribution network to make Hiball increase its scale immensely.
• The company already sells carbonated soft drinks in the Latin American market, where it is a bottler for PepsiCo.
• BUD also struck a deal with Starbucks last financial year to make, bottle, and distribute the ready-to-drink Teavana tea line.
• The company is also trying to make in-roads in the craft beer industry, with partnerships with almost a dozen craft breweries.
• The company’s craft portfolio is growing ahead of the industry, at double-digit rates, driven by organic growth, as well as expanded distribution.

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 financial year, the company had raised its savings target from $2 billion to $2.8 billion. During the third quarter earnings update, the company again 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 U.S.

• Revenue in North America fell 5.3% and volumes declined by 6.1% in Q3, due to industry softness in both the U.S. and Canada.
• In the U.S., while the industry sales-to-retailers (STRs) were down by 1.7%, the company’s STRs slumped 3.4%, resulting in a 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 U.S. was the performance of Michelob Ultra, which has been the biggest share gainer in the U.S. 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 Bud Light volumes, though the rate has slowed down. Furthermore, 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.

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• Does A New Survey Spell Good News For Anheuser-Busch?
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