A-B Again Lowers Full Year-Forecast

Jul. 27–For the third time this year, Anheuser-Busch Cos. revised downward its 2005 earnings estimate on Wednesday, saying it expects full-year profit to be lower due to higher costs, more-aggressive promotional pricing and sluggish sales across the beer industry.

The St. Louis brewer — the nation’s largest — forecast earnings for 2005, excluding one-time items, to be in a range of $2.57 to $2.65 a share, a decline of 6 percent to 3 percent from last year. Only two months ago, A-B repeated an earlier growth forecast of 1 percent to 4 percent.

A-B issued the revised outlook as it reported weaker-than-expected profit in the second quarter. The news sent Anheuser-Busch shares to their lowest level in three years.

The lower guidance is due to Anheuser-Busch’s decision to defer price increases until next year and lower-than-expected shipment volume in a weak beer industry, A-B Chief Financial Officer W. Randolph Baker told analysts and investors on a conference call.

While the second-quarter results were “disappointing,” the brewer is turning around the earlier negative trends through its plan for aggressive promotional pricing, new products and packaging, increased media spending and on-premise marketing, Baker said.

Still, the sharp decline in A-B’s sales volume surprised Christopher Growe, a beverage analyst at A.G. Edwards & Sons Inc. in St. Louis.

A-B reported that its second-quarter shipments to wholesalers fell 3.7 percent from a year ago. The brewer attributed the decline to wholesalers cutting back on orders while they trimmed inventory, adding that wholesaler shipments to retailers declined only 0.2 percent during the second quarter.

Although A-B’s sales volumes were lower than expected, Growe doesn’t see a downside in the brewer’s earnings for 2005, since the company already has revised its target a number of times.

However, A-B’s weaker volume reflects bigger problems in the beer industry rather than just more competitiveness by Miller Brewing Co., a unit of London-based SABMiller PLC. Miller is the second-largest brewer in the United States.

“I think that indicates that something bigger is going on here,” Growe said, pointing to the increased popularity of spirits and wine.

To keep products priced competitively, Anheuser-Busch announced it won’t undertake beer price increases during the fall, a practice it has done regularly in recent years. The fall price increase typically had been followed by another round of increases early in the year that targeted markets unaffected by the increases in the autumn.

Instead, A-B said it would broadly increase prices only early in 2006.

However, given the beer industry’s troubles, Growe remains skeptical that higher beer prices will stick next year. “Right now, I don’t have a high confidence level in that occurring,” he said.

However, A-B’s decision to forgo a price hike this fall doesn’t mean the brewer intends to reduce prices further.

In recent months, Anheuser-Busch has reduced prices on many products as part of promotions aimed at reducing the price gap between its beers and those of Miller, a move that sparked talk of a “price war.” The brewer also has reduced prices for single servings typically sold at convenience stores to entice consumers pinched by higher gasoline prices.

For the four-week period ending July 3, Bud Light on average was priced above Miller Lite by about 27 cents a case in supermarkets, down from 48 cents at the end of last year’s second quarter, Baker said, citing data from retail sales-data research company Information Resources Inc.

However, Anheuser-Busch now appears satisfied with the current gap and it indicated that no further cuts were needed.

“We’ve succeeded in reducing the promotional price gaps, and we’re comfortable with where they are now,” Baker said.

Despite the lower second-quarter profit, Anheuser-Busch raised its quarterly dividend by 10 percent to 27 cents a share, saying that the move reflected its substantial cash flow and management’s confidence in its long-term prospects. Returning to double-digit earnings-per-share growth remains the company’s goal in the long term.

In trading Wednesday, shares of A-B ended down $1.78 to close at $44.12, its lowest closing price since ending at $44 on July 19, 2002.

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