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Anheuser-Busch InBev Goes Flat on Brazilian Weakness

By Steve Symington - Updated Oct 30, 2016 at 7:08PM

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But the beer brewing juggernaut just fried a much larger fish that should leave investors' taste buds tingling this month.

IMAGE SOURCE: ANHEUSER-BUSCH INBEV.

It's been a busy year for Anheuser-Busch InBev (BUD 1.71%), especially leading up to the formal completion of the company's combination with fellow brewing giant SABMiller earlier this month.

But before we get there, we can't forget that AB InBev just released third-quarter 2016 results, and shares fell nearly 4% Friday as a result. Let's take a closer look, then, at what drove AB InBev's business in its latest quarter.

Anheuser-Busch InBev results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Year-Over-Year Growth

Revenue

$11.109 billion

$11.376 billion

(2.3%)

Normalized profit (attributable to shareholders of AB InBev)

$1.673 billion

$1.363 billion

(18.5%)

Normalized earnings per share (diluted)

$1.02

$0.83

(18.6%)

Data source: Anheuser-Busch InBev. 

What happened with Anheuser-Busch InBev this quarter?

  • Organic revenue growth was 2.8%.
  • Revenue per hectoliter increased 3.8% (3.7% on a constant geographic basis), driven by a combination of revenue management and premiumization initiatives.
  • Total volumes declined 0.9% year over year during the quarter, with AB InBev's own beer volumes down 0.2%. This decline was primarily driven by a 4.1% drop in Brazil volumes given the weak industry there, and offset partly by solid volume growth in Mexico.
  • Revenue from global brands increased 8.7% year over year, including:
    • 14.8% growth from Corona.
    • 4.8% growth from Budweiser.
    • 12.2% growth from Stella Artois.
  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 2% year over year, to $4.03 billion, again driven by weak results in Brazil.
  • EBITDA margin fell 178 basis points year over year, to 36.3%.
  • Net finance costs (excluding non-recurring costs) were $1.226 billion, up from $810 million in last year's third quarter, with the increase primarily attributed to net interest expenses resulting from bonds issued in the first quarter to pre-fund the SABMiller combination.
  • An interim dividend of 1.60 euros per share was approved for fiscal 2016.
  • The SABMiller merger was completed on Oct. 10. This move brings together two enormous businesses with largely complementary geographic footprints and product portfolios, the latter of which collectively includes seven of the top 10 most valuable beer brands in the world.

What management had to say

"We continue to be very bullish about the country," explained AB InBev CEO Carlos Brito, referring to Brazil, "but this year has been one of the toughest we've seen in a long time."

Brazil is indeed suffering amid what management describes as a "challenging consumer environment." But the company also notes that its brands saw sequential improvement in market share trends there, as compared with the second quarter, leaving a focus on building the business in Brazil with a long-term mindset. 

At the same time, AB InBev saw volumes slip 2.5% in its core United States market, while organic growth in the U.S. fell a more modest 0.3% year over year during the quarter. That includes a mid-single-digit decline in sales to retailers of Bud Light, the country's best-selling beer, which lost around 65 basis points of market share during the quarter, as American beer drinkers enjoy an ever-growing variety of craft brews on store shelves. Nonetheless, AB InBev insists it will continue to invest in Bud Light and looks forward to leveraging its partnership with the NFL to improve the brand's volume and share trends in the coming months. 

Looking forward

In light of lower industry volumes in Brazil and a difficult fourth-quarter comparable, AB InBev no longer expects to reach its goal of flat revenue in Brazil for all of 2016. As such, AB InBev now expects consolidated revenue per hectoliter overall to grow organically in line with inflation. This marks a reduction from AB InBev's previous consolidated guidance, which called for revenue per hectoliter to grow organically ahead of inflation on a constant geographic basis this year. 

The other more specific aspects of AB InBev's guidance remain largely intact. In the U.S., for example, AB InBev anticipates that industry volumes will remain in line with year-to-date trends, supported by a favorable brand mix. In Mexico, AB InBev continues to see a year of "solid growth" in industry volumes, helped by the country's favorable macroeconomic environment and the company's own commercial initiatives. And in China, AB InBev sees continued pressure this fiscal year on industry volumes, but it also continues to expect that its own premium and super-premium brands will drive relative outperformance in the Middle Kingdom.

In the end, it's evident that the beer industry is operating in an increasingly crowded fridge of late. And AB InBev's Brazilian woes won't wane anytime in the near future. But I also think investors should applaud the company for consciously approaching the troublesome market with a long-term view. And with the merger of AB InBev and SABMiller now complete, investors can look forward to the added scale and reach of owning a combined company with more than 30% market share of the worldwide beer market.

So if you're looking for a business that is perfectly positioned to weather some near-term uncertainty in select markets, I think you'll be hard pressed to find one that fits the bill better than AB InBev.

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