Foreign Currency Headwinds For Anheuser-Busch Overshadow Return To Growth In The U.S.

Anheuser-Busch InBev (NYSE:BUD) reported weak third quarter results on October 25, posting a 10% decline in revenues, and a 49 cent fall in earnings per share, with both metrics falling short of consensus expectations. While a poor showing in the U.S. plagued its first half, a strong dollar was the primary driver for the miss. To make matters worse, the company halved its dividend, in a bid to bring its debt to a more manageable level post its acquisition of SABMiller. These factors resulted in the company’s stock plunging over 9%. For the full year, the company expects to deliver revenue per hectoliter growth ahead of inflation, due to premiumization and revenue management initiatives, while keeping costs below inflation. This should lead to revenue and EBITDA growth. This factor, together with the benefit of synergies should result in an earnings improvement.

We have a $117 price estimate for Anheuser-Busch InBev, which is significantly higher than the current market price. We are in the process of updating our model based on the performance in the quarter. The charts have been made using our new, interactive model. You can click here for our interactive dashboard on Anheuser-Busch’s Performance In Q3 And Estimating Its Fair Price to modify our driver assumptions to see what impact this will have on the company’s revenues, earnings, and price estimate.

Factors That May Impact Performance

1. Softness in the U.S. Market: BUD has been witnessing a soft market in the U.S., with industry volume declines exacerbated by market share declines. The company estimates that industry Sales-to-Retailers (STRs) in the United States declined by 0.5% in Q3, while BUD’s STRs were down 1.5%. In the quarter and in the first nine months of the year, the company’s market share fell 50 and 45 basis points, respectively. On the other hand, the company’s Above Premium brand portfolio had another strong quarter, gaining 90 bps of market share. This growth was led by Michelob Ultra, continuing its run as the top share gainer in the U.S. for the 14th consecutive quarter. Looking ahead, while we expect the overall North American revenues to decline in 2018, 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 was the global beer sponsor of the FIFA World Cup, held in Russia in June-July. Partnering with such a massive event, which boasts of an audience of over 3.2 billion, bodes well for the company. Its biggest commercial campaign called “Light Up the FIFA World Cup” was activated in more than 50 countries, which included not only those where the brand already has a significant presence such as China, Brazil, the U.K., and Russia, but also new markets like Colombia, Peru, Ecuador, Australia, and Africa. Budweiser grew by 6.4% globally and by 9.3% outside of the U.S. as it continued to reap the benefits of its biggest campaign ever as the global sponsor of the 2018 FIFA World Cup 2018. Moreover, greater brand awareness should help to drive sales in the future, with the brand expecting a bump of 45 basis points for the full year.

3. High-Growth Brands: BUD’s ‘The High End’ division, made up of its global specialty and craft brands, has been established in 22 markets, accounting for roughly 70% of the high-end opportunity worldwide, as at the end of FY 2017. In the quarter, the ‘High End’ company recorded double-digit 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 third quarter, BUD delivered $229 million of synergies and cost savings, bringing the total synergies captured year-to-date to  $588 million. 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: Revenue in the country grew by  7.4%, driven by volume growth of 1% (despite an overall negative industry trend) and revenue per hl growth of 6.4% in Q3. Budweiser and its super premium portfolio, led by Corona, continued to deliver strong growth. Moreover, the e-commerce business had another stellar quarter, with higher share online than offline. Moreover, the EBITDA margin also improved in the quarter by 415 bps to 33.1%, as a result of 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.

6. Easing Margin Pressure: BUD managed to improve its EBITDA margins by 116 basis points in Q3, due to a healthy top line (organic growth), cost efficiencies, and synergy capture, despite the increase in commodity costs. 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. Consequently, the margin pressure should further ease as the year progresses.

7. Dividend Cut: BUD cut its dividend in order to accelerate deleveraging towards its optimal capital structure of around a 2x net debt to EBITDA ratio. The brewer will use the entire $4 billion it saves as a result of the dividend cut to pay down its debt.

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