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A-B Reports Gains in Critical Summer Season

July 24, 2008

By Jeremiah McWilliams, St. Louis Post-Dispatch

Jul. 24–At the start of a conference call to discuss Anheuser-Busch Cos.’ recent results, W. Randolph Baker, the chief financial officer, needed to get one point on the record: Yes, the St. Louis brewer’s board recently agreed to a takeover by Belgian brewer InBev.

But “until the transaction closes,” Baker reminded analysts on the call, “A-B continues to operate as a public company on a business-as-usual basis.”

Anheuser-Busch’s days as an independent company are numbered. InBev’s $52 billion buyout is expected to close this year.

Takeover or no takeover, this is summer — and the country’s biggest brewer is trying to make a major splash in the crucial beer-selling season.

Anheuser-Busch showed momentum in its key U.S. market in its second quarter, posting higher sales and profit on the strength of increased beer sales and price hikes.

“Anheuser-Busch had a strong second quarter,” said Baker.

The two weeks ending July 5 were the best stretch in the company’s history. Beer sales to retailers — including InBev’s imported brands such as Stella Artois and Beck’s — jumped more than 7 percent. The upward trend continued into the current quarter: Anheuser-Busch gained a point of market share at the store level in the last four weeks.

“We are encouraged by the success of our marketing and selling initiatives, and are optimistic concerning the outlook for the remaining summer selling season,” Chief Executive August A. Busch IV said in a statement.

The brewer’s per-share earnings beat analysts’ average predictions. With the buyout looming, however, the results made few waves.

“Overall, it was in line — I don’t think there were any big surprises,” Edward Jones analyst Jack Russo said of A-B’s second quarter. “The industry’s doing pretty well.”

The company’s beer sales in the U.S. rose half a percentage point when measured in barrels but 4.5 percent when measured in dollars. That partly reflected price hikes and consumers drinking more-expensive brews.

For the quarter, the company — which also owns such attractions as the SeaWorld theme parks — got about 71 percent of its net sales from beer sales in the U.S.

Higher costs for energy and commodities such as grain and hops restrained Anheuser-Busch’s quarterly profit, which grew less than 2 percent.

PRICE RISES LOOM

In September and October, the company plans to raise prices on about 85 percent of its beer sold in the U.S. to keep ahead of sharply escalating costs for raw materials.

The price increases, now scheduled to take effect sooner than initially planned, are the main way Anheuser-Busch can maintain its profit margins, said research analyst Christopher Shanahan of consulting firm Frost & Sullivan.

Anheuser-Busch’s results “show that brewers are still struggling with input costs,” wrote Morningstar analyst Ann Gilpin.

With slightly less than 49 percent of the U.S. market, Anheuser-Busch has a strong influence on beer prices. Its plan to raise prices “will be favorable to all competitors in the U.S. beer market,” wrote Standard & Poor’s analyst Esther Kwon.

This summer appeared to be crucial for Anheuser-Busch even before InBev launched its takeover effort. The company is competing against a recently merged Miller and Coors and trying to build momentum in the U.S. with stepped-up marketing and new products such as Bud Light Lime.

BRANDS’ FORTUNES

However, the fortunes of Anheuser-Busch’s brands vary widely. In the second quarter plus the first week of July, the Bud brand family posted an increase of 1.5 percent in sales to retailers, a key gauge of demand.

But the increase masks a large divergence: Bud Light sales volume jumped 5 percent, while Budweiser slipped 4 percent.

Sales of Michelob Ultra grew 3 percent, but the overall Michelob family slid 5 percent.

Sales of Anheuser-Busch’s sub-premium brands — Busch and Natural beer — increased 3 percent.

The company’s international beer sales climbed 17 percent when measured in dollars because of stronger sales in China and Canada.

But international profit dropped nearly 7 percent because of higher costs at Mexican brewer Grupo Modelo, maker of Corona, and a retroactive tax charge at Chinese brewer Tsingtao. A-B holds equity stakes in both companies.

Anheuser-Busch’s worldwide beer sales, including those from equity investments, rose 1.4 percent to 43.1 million barrels.

Anheuser-Busch also raised the regular quarterly dividend on its common stock to 37 cents from 33 cents per share, marking its 32nd consecutive year of dividend increases.

INTEGRATION STARTING

The process of integrating Anheuser-Busch and InBev already is influencing Anheuser-Busch’s financial policies.

Anheuser-Busch suspended its share repurchasing program, Baker said. It also held its conference call on Wednesday morning, rather than in the afternoon, to accommodate analysts who cover InBev from European financial centers such as London and Brussels.

Many analysts and investors already may be looking toward the day when Anheuser-Busch will become a subsidiary of InBev. Due to a dearth of questions, the conference call ended early, after 34 minutes, instead of the usual hour.

At the end of the call — presumably one of A-B’s last as a standalone company — Baker took a moment, “on a personal note,” to thank investors and the analysts for their long-standing interest in Anheuser-Busch.

Then came the disembodied voice of the call moderator.

“This concludes today’s teleconference,” he said. “All parties may disconnect now.”

jmcwilliams@post-dispatch.com

314-340-8372

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