Earlier this year, Anheuser-Busch InBev (NYSE:BUD) said it expected revenue to grow faster than inflation in 2019 as "premiumization" pushed drinkers to its portfolio of higher-priced beers, and it forecast core profits would also experience strong growth.
Such confidence helped push the brewer's stock 39% higher in 2019, but that all came undone after Anheuser-Busch reported third-quarter results showing revenue was up 2.5%, but volume fell 0.5%. It offered guidance for just "moderate" growth in earnings before interest, taxes, depreciation, and amortization (EBITDA). Shares tumbled 10% on the lowered outlook.
Taming the debt monster
Anheuser-Busch has a problem. It's still saddled with exorbitant amounts of debt from its acquisition of SABMiller that it has been trying to tame with asset sales and spinoffs, the proceeds from which it will use to pay down the debt. It sold its Australian brewing business for almost $6 billion and raised over $11 billion by spinning off its Asia Pacific division, meaning debt levels ought to fall to about $87 billion by the end of the year.
Indeed, Anheuser-Busch now expects net debt to be below 4 times its EBITDA by the end of 2019, a full year ahead of its prior guidance. That's still very elevated, as it believes 2 times EBITDA is an optimal level, but it's clearly moving in the right direction and doing so quickly.
However, profit levels are no longer rising. EBITDA growth stalled out in the third quarter due to a "headwinds" hit in Europe and Asia, while the U.S. market continues to decelerate. EBITDA growth came in flat during the most recent period, and margins contracted 100 basis points to 40.2%, causing Anheuser-Busch to warn that the headwinds will carry over into the fourth quarter.
The brewer said in a statement, "Overall, we remain confident in our strategy and the fundamental strength of our business, though we now expect moderate Ebitda growth in FY19 given the additional headwinds faced in 3Q19 which we anticipate will continue into 4Q19."
Taking the wind out of its sails
The push for premiumization and the ability to raise prices at will to lift profits apparently has its limits, but because Anheuser-Busch still has a majority stake in the Asia Pacific business (only a minority interest was spun off), it can still benefit from the region's growth. Unfortunately, while Anheuser-Busch says the spinoff gives it the opportunity to use the new entity for mergers and acquisitions in the region, its Asian business was weak. The brewer reported a steep 24% drop in profits as revenue also fell on a 6% decline in volume.
Certainly there was some expectation for the global sales slowdown after Anheuser-Busch experienced its highest volume growth in five years in the second quarter, but the scale of the decline seems to have caught everyone by surprise.
It faced higher cost of sales per hectoliter due to significant commodity and currency fluctuations; tougher comparisons after last year's FIFA World Cup in Russia; and price hikes in South Korea and Brazil that drove down volumes, exacerbated further by soft demand due to difficult economic conditions. Having raised prices in South Korea, it was forced to retreat and roll them back as the country's economy slowed and the competition didn't follow suit.
A premium point of contention
The U.S. market is also problematic; it lost 85 basis points of share in the quarter, particularly because of the rise of hard seltzer. Despite having two hard seltzer brands on the market already, the company will be launching a third one under its Bud Light banner.
Anheuser-Busch maintains it's going to push forward with its premiumization efforts, but they will likely lead to just incremental increased profitability at the expense of revenue per hectoliter. After such revenue grew by 4.2% last quarter, it moderated to 3% growth this quarter.
Shares of the megabrewer have been growing at a torrid pace since it slashed its dividend a year ago, and the sharp pullback in their value is welcome for those investors looking to gain an entry point. But until Anheuser-Busch InBev can show that the global slowdown is no longer a threat, investors might want to consider holding off making a move.