Categories
Breweries Europe FMCG

AB InBev continues to deleverage and offers value

AB InBev ($BUD, $ABI.BR) issued a press release on their Q4 earnings on February 27th.

AB InBev 2019Q4 presentation.
AB InBev 2019Q4 presentation.

The company has maintained its dividend while continuing to deleverage.

Accounting for the proceeds expected to be received from the divestment of the Australian operations (while excluding the last 12 months EBITDA from the Australian operations), the net debt to EBITDA ratio would be 4.0x for the 12-month period ending 31 December 2019.

Q4 press release
Debt relative to EBITDA will decrease to 4.0x upon divestiture of Carlton & United Breweries to Asahi.

Since closing the SAB combination the debt has been reduced and maturities extended to eliminate near term refinancing risks.

AB InBev 2019Q4 presentation.

AB InBev is by far the largest brewery in the world after the merger of Belgian Interbrew and Brazilian AmBev in 2004 and acquisitions of Anheuscher-Busch in 2008 and SABMiller in 2016.

AB InBev continues to have the strongest margin in the industry. EBIT margins are greater than 30%, which is unrivaled in the industry.

Cash flow generation is also better than those of rivals Heineken ($HEIA.AS) and Carlsberg ($CARL-B.CO).

Likewise the return on capital and net tangible assets is unparalleled within the brewing industry.

The best-in-class margins and cash flow generation and return on assets is due their strong brands and their economies of scale.

Interbrands released their report on the 100 top ranked brands in the world on the 17th of October. AB InBev is featured on the list with two of their brands; Budweiser (#32) and the rapidly growing Corona (#79).

The AB InBev brands command a higher price per hectolitre than those of its competitors; Heineken and Carlsberg.

In terms of economies of scale, cost synergies of USD3.2B have been realized three years after the acquisition of SABMiller.

AB InBev 2019Q3 presentation.

AB InBev has a large presence in the Asian markets, which experienced negative organic volume growth in Q3 (-6.5%) and Q4 (-5.2%). The business in Asia is seeing a further decline due COVID19.

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

In the light of the temporary decline in on-premise channels it is interesting to not that the DTC business is now a billion dollar business growing by double digits.

AB InBev has better margins and cash flow generation than those of its competitors and it is deleveraging. Yet it trades at low multiples in absolute and historical terms and has reached the lows of December 2018. AB InBev is too good an investment to pass at current prices.

References

2020-02-27 Reuters – AB InBev sees 10% hit to first-quarter profit from coronavirus

2020-02-27 Bloomberg – AB InBev Cuts CEO Bonus as Brewer Sees Worst Quarter in a Decade

2020-02-06 Bloomberg Opinion – Beer Drinkers Want More Than a Typical Lager These Days

2019-10-25 Bloomberg Opinion – The King of Beers Is in a Bind

2019-10-25 Midgard Finance – AB InBev increases prices in South Korea and Brazil and sees volume decline

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

Categories
Breweries

Constellation Brands raises forecast and takes further Canopy impairment charges

Constellation Brands issued a press release on its third quarter earnings before the opening bell with the following highlights.

  • Generates reported basis EPS of $1.85 and comparable basis EPS of $2.14, including Canopy Growth equity losses of $0.25; excluding Canopy Growth equity losses, achieved comparable basis EPS of $2.39
  • Generates $2.1 billion of operating cash flow and $1.5 billion of free cash flow, an increase of 5% and 14%, respectively
  • Increases fiscal 2020 reported basis EPS outlook to $0.95 – $1.05; increases comparable basis EPS outlook to $9.45 – $9.55
  • Increases fiscal 2020 operating cash flow target to approximately $2.3 billion and free cash flow projection to $1.5 – $1.6 billion
  • Agrees to revise original Wine & Spirits agreement with Gallo in connection with Federal Trade Commission review; expected to close by the end of fiscal 2020
  • In a separate, but related, transaction, agrees to divest Nobilo Wine brand to Gallo for $130 million; expected to close in first half fiscal 2021
  • Signs agreement with Kings & Convicts Brewing to divest the Ballast Point brand and certain related facilities; expected to close by the end of fiscal 2020
  • Promotes Garth Hankinson to Constellation’s CFO replacing David Klein who will assume the Canopy Growth CEO role

Volume, net sales, operating income and margins for wines and spirits (W&S) was down YoY for the quarter.

 Vol (%)Sales (%)Income (%)
Beer6.8-14.20.0
W&S-13.5-9.7-12.4
Figures for the trailing twelve months (TTM) for shipment volume, net sales, operating income and operating margin.

The poor performance in terms of EPS was attributable to further impairment losses of $534 million related to Canopy Growth.

Goodwill

Given the headwinds caused by Canopy Growth it might be a while before Constellation Brands once more trades at its all time high of $234.22 from April 2018 despite some of the best operating margins in the industry.

Time series of enterprise value relative to EBITDA for selected breweries.
Operating margin time series for selected breweries.
Revenue time series for selected breweries.

Reuters – Constellation raises profit forecast after beer-driven quarter

Bloomberg – Constellation Brands Jumps After Boosting Profit Forecast

Categories
2019Q3 Breweries Europe

AB InBev increases prices in South Korea and Brazil and sees volume decline

AB InBev issued a press release on their quarterly results before the market opened.

The two most important headlines of the quarter were probably the listing of Budweiser APAC on the HKEx and implementation of price increases in South Korea and Brazil that drove volume declines.

Quarterly (YoY) organic volume growth (%).
CNBC Television – 30sep2019 – Budweiser APAC CEO speaks about the promise of the Asia market

Whereas revenue and revenue per hectolitre were up, volume was down and EBITDA margins contracted.

TTM revenue per segment
TTM volume per segment
TTM revenue per hectolitre

The proceeds from the listing of Budweiser APAC was used to reduce debt and AB InBev is on track to reduce the debt to 4 times normalized EBITDA before the end of the year; one year earlier than the prior guidance. Deleveraging to approximately 2 times EBITDA still remains the commitment.

Comparison of breweries

AB InBev continues to have the strongest operating margins in the industry because of their strong brands and their economies of scale. For example cost synergies of USD3.2B have been realised three years after the acquisition of SABMiller.

Interbrands 2019 report

Interbrands released their report on the 100 top ranked brands in the world on the 17th of October. AB InBev is featured on the list with two of their brands; Budweiser (#32) and the rapidly growing Corona (#79).

Media coverage

Reuters – AB InBev loses $13 billion in value as beer drinking slows in Brazil and South Korea

Bloomberg – Beer Giant AB InBev Loses $20 Billion in Market Value

CNN – Budweiser brewer hit by slumping sales in China

Financial Times – AB InBev scales back annual profit target after quarterly miss 

Bloomberg – The King of Beers Is in a Bind

WSJ – Budweiser Brewer Issues Profit Warning, Sending Shares Sharply Lower

2019-10-24 Bloomberg – Budweiser APAC Posts Sharp Profit Drop

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule