How Much Could Premiumization And Acquisition Synergies Affect BUD’s Q1 2019 Results?

Anheuser-Busch InBev (NYSE: BUD) is set to announce its Q1 2019 results on May 07, 2019, followed by a conference call with analysts. The company’s revenue has witnessed a lot of volatility in the previous four quarters, mainly due to benefits from continued premiumization being offset by declining market share of its flagship Budweiser and Bud Light brands. We expect revenue to decline by about 4%-5% (y-o-y) in Q1 2019, primarily driven by poor performance in Latin America South, led by Argentina, and soft beer sales in the US due to consumers preferring healthier options like wine. Earnings are expected to increase on a y-o-y basis, driven by premiumization and synergies from acquisition of SABMiller, partially offset by higher marketing costs and higher commodity prices.

We have summarized the key expectations from the announcement in our interactive dashboard – How is Anheuser-Busch InBev expected to fare in Q1 2019 and what is the full year outlook? In addition, here is more Consumer Staples data.

A Quick Look at BUD’s Revenue Sources

BUD reported $54.62 billion in Total Revenues in Fiscal 2018. This included 4 primary revenue streams:

• Latin America: Contributed about 40% of total revenues in FY 2018. This includes sales of BUD’s local and international beer brands in Colombia, Honduras, Mexico, Peru, Cuba, Brazil, Argentina, and many other countries spread across Latin America North, South and West.
• North America: Contributed 29% of revenues in 2018. This division includes BUD’s U.S. and Canada businesses. In addition, it also includes the Global Export and Holding Companies business, which includes the company’s headquarters and countries in which products are sold only on an export basis, where Anheuser doesn’t have any operations or production activities.
• EMEA (Europe, Middle-East and Africa): Contributed 15% of revenue in 2018. This includes sale of global and local beer brands in UK, Ireland, France, Italy, Spain, Russia, and export activities in Europe and Middle East.
• Asia-Pacific: Contributed 16% of revenues in 2018. This includes BUD’s business in Australia, China, India, Japan, New Zealand, South Korea, Vietnam, and other South and Southeast Asian countries.

Key Factors To Watch For In Q1 2019

A] Revenue Trend

Latin America

• The segment’s revenue has witnessed volatility, driven by strong volume growth in Latin America West, offset by revenue being largely pressured in the North and South, due to a shift in consumer mix and macro-economic challenges in Argentina and Peru.
• We expect the segment to continue its healthy growth throughout 2019, driven by rising share of Corona and Victoria, coupled with successful initiatives across the beer category, led by Pilsener and Club Premium and continued growth of the global brands.
• Additionally, launch of two new beer brands – Nossa and Magnifica – and increasing market share of Patagonia is expected to contribute in revenue growth.

North America

• Revenue from the region has been decreasing over the last 3 quarters due to lower volumes, led by soft beer demand and Bud Light and Budweiser losing 80 bps and 35 bps of total market share.
• We expect revenue from the segment to remain flat in 2019, driven by lower volume, which would be offset by growth in Michelob Ultra Pure Gold, Bud Light Orange, and the Budweiser Reserve series.

EMEA (Europe, Middle-East and Africa) Revenue

• Revenue was affected in 2018 due to the deconsolidation of Coca-Cola Beverages Africa (CCBA) and lower beer sales.
• Revenue is expected to increase going forward, due to rising share of Corona and introduction of a new brewery in Nigeria.

Asia-Pacific

• Revenue witnessed decline in the previous 3 quarters due to lower demand in Australia.
• Revenue from the segment is expected to increase going forward, led by increasing premiumization and strong overall performance of the company’s e-commerce business.

B] Profitability

• After increasing in Q2 2018, net income margin decreased over the following two quarters, driven by higher total expenses, led by an increase in effective tax rate and higher interest cost.
• Increase in effective tax rate in the second half of 2018 was driven by higher non-deductible mark-to-market losses and changes in tax legislation in some of the countries of operation.
• Finance cost increased over recent quarters due to higher interest expense, on the back of higher debt to finance the SABMiller acquisition, and mark-to-market losses on derivative instruments entered into to hedge the shares issued in relation to the Grupo Modelo and SAB combinations.
• Net income margin is expected to increase going forward due to increasing premiumization and synergies from recent combinations.

Full Year Outlook

• We expect revenue to increase by 1.9% to about $55.6 billion in 2019. Higher revenue would mainly be driven by the company’s focus on and initiatives to double the sales of its premium brands in the near future.
• Net income margin is expected to increase from 12.4% in 2018 to approximately 16% in 2019, driven by synergies from acquisition and lower interest expense due to BUD’s focus on deleveraging.
• New bond issuance of $15.5 billion in February 2019, to pay-off its existing higher interest debt, is expected to contribute to growth in the company’s bottom line.

Trefis has a price estimate of $90 per share for BUD’s stock. We believe that growth in the stock price would be driven by rising sales in emerging markets and synergies and productivity savings achieved due to acquisition, coupled with the company’s focus on lowering debt, which would, in turn, translate into better margins in the medium term.

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