Premiumization Results In Revenue Growth For Anheuser-Busch

by Trefis Team
Anheuser-Busch InBev
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Anheuser-Busch InBev (NYSE:BUD) had a mixed first quarter, wherein it beat consensus estimates on revenue but missed on earnings. The revenue growth was led by markets such as Colombia, Western Europe, and Australia, as well as strong performance of the premium brands. BUD also managed to improve its EBITDA margins by 70 basis points, due to the premiumization and synergy benefits. However, higher taxes and mark-to-market losses related to the hedging of its share-based payment programs resulted in a fall in EPS by 1 cent, as compared to the prior year quarter. The company expects the growth to accelerate in the remainder of the year, as the marketing and sales expenditure is concentrated in the first half of the financial year. Moreover, the tax rate is expected to be between 24% and 26% for the full year, versus 28.3% in the first quarter. Consequently, the margin pressure should ease as the year progresses.

We have a $122 price estimate for Anheuser-Busch InBev, which is higher than the current market price. The charts have been made using our new, interactive model. You can click here for our interactive dashboard to modify our driver assumptions to see what impact this will have on the company’s revenues, earnings, and price estimate.

Factors That May Have An Impact In The Upcoming Quarters

1. Softness in the U.S. Market: BUD has been witnessing a soft market in the U.S., made worse by the colder than normal weather in the quarter, with industry volume declines exacerbated by market share declines. The company estimates that industry Sales-to-Retailers (STRs) in the United States declined by 2.3% in Q1, while BUD’s STRs were down 3.3%. The company’s weak performance in the region was expected, as Molson Coors, which reported its first quarter earnings earlier this month, blamed “overall industry softness” in the U.S. beer industry for its sales decline. On the other hand, the company’s Above Premium brand portfolio had a strong quarter, gaining 80 bps of market share. This growth was led by Michelob Ultra, which reported double-digit volume growth, continuing its run as the top share gainer in the U.S. for the twelfth consecutive quarter. Looking ahead, while we expect the overall North American revenues to decline in 2017, its Above Premium segment should deliver strong growth.

2. FIFA World Cup Sponsorship: According to BrandZ, Budweiser is the most valuable beer brand in the world and the number-one global beer brand by volume. Budweiser is the global beer sponsor of the FIFA World Cup, which is going to be held in Russia this summer. Partnering with such a massive event, which boasts of an audience of over 3.2 billion, should bode well for the company. In this regard, AB InBev launched its biggest commercial campaign called “Light Up the FIFA World Cup.” This campaign is being activated in more than 50 countries, which includes not only those where the brand already has a significant presence such as China, Brazil, the U.K., and Russia. The new markets include Colombia, Peru, Ecuador, Australia, and Africa. However, the increased marketing spend, which is skewed towards the second quarter, should remain a drag on the margins.

3. High-Growth Brands: BUD’s ‘The High End’ division, made up of its global specialty and craft brands, had been established in 22 markets, accounting for roughly 70% of the high-end opportunity worldwide, as at the end of FY 2017. While the brands represented only 11.4% of BUD’s total revenue outside their home markets in 2017, they contributed to over 35% of the total net revenue growth. This presents BUD with a considerable opportunity to encourage consumers to trade-up to more high-end products, in both developed and in emerging markets.

4. Synergies from SABMiller Acquisition: Anheuser continues to reap benefits from the synergies from its acquisition. In the first quarter, BUD delivered $160 million of synergies, bringing the total synergies captured to-date to almost $2.3 billion. The synergy guidance remains at $3.2 billion which is expected to be delivered within the four-year period following the close of the combination. This should continue to benefit the company’s EBITDA margin in FY 2018.

5. Potential of China: Despite a tough comparison, revenue in the country grew by 4.4%, driven by volume growth of 1.6% and revenue per hl growth of 2.7%. The High End company recorded high double-digit volume growth, led by the strong performances of Corona, which became the number one imported beer, and Hoegaarden. Moreover, the e-commerce business had a stellar quarter, with high double-digit volume growth. The market share of the company continued its strong rise to over 20%, in an industry that underwent a modest recovery after a decline in 2017. The margins also improved, driven by premiumization and productivity gains. Looking ahead, the prospects of the company look positive in the country, as it occupies a place in the faster-growing premium and super-premium segments, as well as the online channels.

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