Key Global Brands Drive Modest Q1 Growth at Anheuser-Busch InBev

Anheuser-Busch InBev (NYSE: BUD  ) reported earnings on Wednesday, beating expectations on revenue but missing the mark on earnings per share. Let's quickly address the analyst estimates before digging into the first-quarter earnings of this beer behemoth.

Corona is rapidly becoming one of A-B InBev's most important beers.

Analyst summary
Though quarterly analyst estimates don't mean much for the long-term health of a company, they can explain short-term movements in a stock. Here's what analysts expected, and what A-B InBev delivered, for the first quarter of 2014.

Metric

Analyst

Actual

Revenue

$10.5 billion

$10.6 billion

EPS

$1.03

$0.87

Source: Yahoo! Finance, company release.

Mixed results: Volumes and revenue were both up year over year, but earnings per share were crushed as net finance costs soared more than 200% on hedging in the share-based payment program and currency fluctuations. The company's stock was up a negligible amount in Wednesday trading.

Now that the analysts are out of the way, let's check out the actual results.

Annual comparisons
Anheuser-Busch InBev separates its volumes into three categories: own beer, nonbeer, and third-party products. All three units posted higher volumes year over year. Combined total volume increased 4.4% to 105,993,000 hectoliters.

All but one of the company's six geographic zones posted first-quarter volume growth:

Source: Company filing.

Overall, this is a fairly mediocre performance. Though five of these zones grew, only Latin America North -- also known as Brazil -- really demonstrated anything beyond sustaining the previous year's results.

Investors who have been closely following the beer story in the U.S. might be surprised to see growth in the North American market. Sales to wholesalers picked up 2.1% in advance of labor negotiations at A-B InBev's 12 U.S. breweries. Sales to retailers, however, declined 1.7% because of inclement weather and Easter falling later in the calendar year. We should see some convergence of these two metrics in the company's second-quarter results, with an expected decline in sales to wholesalers. Also keep in mind that Canada posted a 4.1% decline in beer volumes, which will have an impact on these Q2 numbers.

Europe was the lone declining region, driven by a price increase in Germany, where beer volumes fell 6.4%. Volumes fell 3.1% in Belgium, chalked up to the company's promotional calendar. The United Kingdom business managed to eke out 0.6% growth on the strong performance of Budweiser.

Highlights
There are a few noteworthy points for investors:

  • The company's high-end U.S. brands -- Michelob Ultra, Stella Artois, Shock Top, and Goose Island -- gained an estimated 20 basis points of market share.
  • Though cost of sales increased overall, on a per-hectoliter basis they fell 2.2%, driven by lower commodity prices and production costs.
  • Its three global brands -- Budweiser, Corona, and Stella Artois -- collectively grew by 8.3%. Budweiser is successful everywhere but the U.S. right now.
  • Volumes grew 10.9% in Brazil and 9.4% in China.
  • Cost savings in Mexico related to the Grupo Modelo acquisition resulted in a 27% pop in EBITDA, despite organic volumes only growing 0.9%, itself partially related to the timing of a price increase.
  • In the U.S., Budweiser is having a very rough go of it, with an estimated market share decline of 25 basis points. This sounds bad, but is actually better than losses in prior years.

This is the basic A-B InBev story in a nutshell. Focus on growth in Brazil, China, and Mexico, while attempting to make up the ground lost by core brands such as Budweiser and Bud Light with higher-margin products in the U.S. market.

Going forward
In the short term, the biggest opportunity for Anheuser-Busch InBev will be the World Cup, which begins in Brazil on June 12. Frankly, the entire beer industry should benefit from this event, given that millions of people the world over will be drinking more than usual as they cheer on their country. It's a no-brainer in theory, and is just about execution now.

The company's longer-term opportunities are more compelling. First and foremost is the opportunity in China. Beer consumption continues to grow, as does the success of the premium beer market, of which A-B InBev has a 50% stake. China has yet to meet Corona, and it will be interesting to see if that brand can take off with Chinese consumers in the same inexplicable way it has everywhere else.

After China, investors will want to watch Mexico, as the company continues to grow its Bud Light and Corona Light brands. Again, long term, if the Mexican economy picks up -- perhaps driven by energy reform -- there should be a nice upside for A-B InBev as well. In the short term, management does not see beer suffering the way other consumer goods companies see their products, citing a later Easter holiday and a price increase that took effect in May.

Finally, there is the U.S. market. Bud Light remains the best-selling beer in America, but its market share is slipping. The Bud Light family, however, is growing on the strength of the Ritas drinks, as well as packaging innovation, including the 25-ounce can and resealable aluminum bottles. The U.S. is still the company's largest market for now, and management expects volumes to pick up this year. How reasonable that goal is remains to be seen, but given the headwinds facing macrobrewers in the country, sustaining volumes at this point may feel like a victory in itself.

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