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
2019Q3 S&P500

Kraft Heinz increases prices but experiences negative organic growth of -1.1%

Kraft Heinz issued a press release on its third quarter results before the market opened. Organic growth was -1.6% in the US and -1.1% for the whole business.

Revenue and income by geographic and product segment

Revenue growth was impacted negatively by negative organic growth, currency headwinds and divestitures.

The natural cheese business being sold contributed approximately $560 million CAD (approximately $427 million USD at current FX rates) to Kraft Heinz’s net sales in 2017.

Press release from November 2018 announcing sale of Canadian natural cheese business to Parmalat.

The Kraft Heinz Company announced today the closing of the previously announced sale of its Canadian natural cheese business to Parmalat for a purchase price of $1.62 billion CAD (approximately $1.24 billion USD at current FX rates). The agreement includes Cracker Barrel, P’tit Québec, and aMOOza! brands in the Canadian market.

Press release from July 2nd announcing closing of the sale.

Gross margins and operating margins reached lows of 32.0% and 19.5% respectively, whereas SG&A excluding impairment losses was down from $803M to $762M.

The US experienced negative organic growth of -1.6% despite price growth of 1.5% and revenue in the US for the quarter was $4,361M.

EBITDA was down in all geographic segments, but EBITDA and EBITDA margins seem to have stabilised. Except in the Rest of the World segment, where increasing supply chain costs are causing damage to the EBITDA margin.

The product segment condiments and sauces as well as infant and nutrition both saw some of the biggest declines in the quarter.

CEO Miguel Patricio had the following comment regarding the segments.

While overall performance is improving, our numbers are still negative versus the prior year, and our performance remains uneven across categories and across geographies. This includes ongoing share and distribution losses within our natural cheese, cold cuts and coffee business in the United States, lower-than-anticipated promotional lifts in Canada, ongoing infant nutrition declines in both EMEA and China as well as increasing supply chain costs in our Rest of the World segment.

Kraft Heinz CEO Miguel Patricio on the 2019 third quarter earnings call.

Growth

Organic growth was -1.1% and -1.6% in the US despite growth in price of 1.5% in the US.

Debt and interest expenses

S&P in August affirmed the credit rating but revised the outlook from stable to negative. This followed the downgrade in June. S&P commented on adjusted leverage.

The negative outlook reflects the potential for a downgrade to speculative grade by mid-2021 if we believe Kraft Heinz cannot reduce adjusted leverage to below 4x. This could result if operating performance weakens further and we come to believe the strategic plan to be announced by the new CEO in early 2020 will be unsuccessful, including a failure to stabilize and reverse EBITDA declines, or an inability or unwillingness to reduce or eliminate the dividend or conduct meaningful deleveraging asset sales.

S&P press release from August

The adjusted leverage is still above 4x, but there are small signs of improvement following the deleveraging asset sale of the Canadian natural cheese business for approximately USD1.24B.

Interest expenses were up, which further stresses the need to deleverage.

Impairment charges and the balance sheet

Unlike the previous three quarters and the disastrous fourth quarter of 2018 there were no significant impairment charges and long term debt was reduced to $28,112M following the deleveraging asset sale in Canada.

Why is the share price up in the pre-market?

That the share price is up in the pre-market is probably a combination of valuation, the return of the CFO, the absence of impairment charges. Especially the valuation was attractive following the share price collapse.

And despite all of the bad news that landed in February it still remains a fact, that Kraft Heinz has some of the lowest costs and best margins in the industry.

And unlike the share price neither the sales nor the operating income have imploded. The business is intact despite the headwinds and the mountain of debt.

Media coverage

Reuters – Kraft Heinz investors cheer profit beat, plans to boost marketing

Bloomberg – Kraft Heinz Shares Rise as Delayed Comeback Materializes at Last

CNBC – Kraft Heinz stock jumps on earnings beat

Financial Times – Kraft Heinz still struggling with changing consumer tastes as sales dip

Previous media coverage

2019-10-23 Reuters – Kraft Heinz sees potential in baby food, will keep Plasmon

2019-09-17 CNBC – 3G Capital sells over 25 million shares of Kraft Heinz

2019-09-12 Reuters – Where’s the fake beef? Not at Kraft Heinz, investors worry

2019-08-26 Reuters – Kraft Heinz brings back former CFO after accounting missteps

2019-08-23 Bloomberg – Kraft Heinz Would Be Third-Largest Junk Issuer If Ratings Cut
2019-08-08 CNBC – Nightly Business Report
2019-06-25 CNBC – Warren Buffett denies tension with Kraft Heinz partner
2019-05-06 CNBC – Warren Buffett on Kraft Heinz restating earnings
2019-04-22 CNBC – Kraft Heinz names Miguel Patricio as new CEO
2019-02-25 CNBC – Warren Buffett on what he plans to do with his Kraft Heinz shares and 3G Capital
2019-02-22 CNBC – Morningstar’s Erin Lash dissects Kraft Heinz’s earnings miss
2019-02-22 CNBC – What went wrong with Kraft Heinz?
2018-05-07 CNBC – Warren Buffett: Changing Consumer Habits Hit Coke And Kraft Heinz
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
Categories
2019Q3 FMCG S&P500

P&G raises 2020 guidance amidst shining beauty and trimmed grooming

Procter & Gamble [$PG] issued a press release on its first quarter results prior to the market opening. The company raised its full year guidance. The share price jumped by 2.6% from $119.08 to a 52 week high of $122.18.

Financials

All segments except grooming displayed positive organic sales growth. The main contributors to top and bottom line growth is the beauty segment along with the fabric & home care segment.

Valuation

P&G has in 12 months gone up by more than 50% through expansion of multiples. As a consequence it is anything but cheap at current levels irrespective of having one of the best operating margins and currently displaying one of the best growth rates in the industry.

Media coverage

Reuters – P&G raises full-year forecast after beauty, healthcare brands drive profit beat

Bloomberg – P&G Gains After Posting Strong Sales Growth, Raising Outlook