The world’s biggest brewer has indigestion

Global brewer AB InBev thumbed its nose at critics and economic misery-makers with the release of a sterling set of results that suggest that consumers around the world are in fine form, with most of them still drinking its beers. 

The company, which sells one in four beers globally, announced revenue of $26,5-billion for the six months to June 2019, with organic growth up 6%, driven by strong performances in many of its key markets including South Africa, Mexico, Brazil, Europe, Nigeria, Australia and Colombia. 

Earnings before interest, tax, depreciation and amortisation grew 8,8%, while margins expanded by 104 basis points to 40,9% thanks to better pricing combined with cost-saving initiatives.

The share rallied from EU86 to EU91,10 on the news.

While consumer tastes are changing and sales of beer are slowing globally, AB InBev (ABI) noted that the combined revenues of its three global brands, Budweiser, Stella Artois and Corona, grew by a hefty 8% globally. Sales of other brands grew more steadily at 1,7%, with own beer volumes growing 1,7% and non-beer volumes increasing 3,4%. 

It’s worth noting that the comparable period in 2018 was particularly strong, given AB InBev’s sponsorship of the 2018 FIFA World Cup, held in Russia. 

Cash flows from operating activities were healthy, up $1,4-billion to $4,9-billion in the first half of the year. This increase mainly results from lower changes in working capital in 2019 compared to 2018 and lower income taxes paid in 2019.

Normalised profit was $4,9-billion in the first six months of 2019, compared to $3,6-billion in the first six months of 2019. Earnings per share rose from $1,82 to $2,52 in the period. 

Net debt remains similar to year-end at $104,2-billion and is expected to reduce somewhat at year-end as the majority of the group's cash flow is generated during the second half of the year. “The strong earnings growth, as well as the news on the sale of its Australian business, should reduce anxieties about the leverage,” says Trevor Stirling, MD for European Beverages at research house Bernstein.

However, he is not negating the debt concerns. Management has also noted investor anxieties about the debt, which did not fall as quickly as expected once SAB Miller was fully integrated - despite AB InBev’s legendary ability to wring savings and efficiencies from its acquisitions. 

Net debt to Ebitda has reduced to 4.6x from 4.8x in the 2017 financial year and ABI targets this ratio to reach 4x by 2020, with a long-term target of 2x in place. 

“Like many other companies ABI gorged itself on cheap debt,” says Peter Armitage, CEO of Anchor Capital, which holds a small stake in the brewer on behalf of clients. “Acquisitions made sense at the time – after all this was and still is a defensive business that is growing. But when the debt started to look sticky and global growth eased, the market reacted - sensitivity to debt is high at the moment.”

He notes that almost all of ABI’s debt is in euros and dollars, while a big chunk of income is in emerging market currencies that are notorious for their volatility. Reducing this debt to a goal of 2x Ebitda will take significant restructuring, he says.

Measures include appointing Martin Barrington, the former chief executive of cigarette maker Altria Group, as chairman. According to the Financial Times this is intended to signal to shareholders that the board is determined to reverse a period of steep share price declines. 

In addition the board announced last October that it would cut its dividend in half which will save about $4-billion in cash a year. 

The step that really raised investor concerns was when ABI, which doesn’t often put a foot wrong publicly, aborted the proposed listing of its subsidiary, Budweiser Brewing Company Asia Pacific, on the Hong Kong stock exchange. This followed half-hearted interest from the market.

“ABI got its pricing wrong. It placed a higher valuation on the business than the market was willing to bear,” says Armitage.

 Management recovered quickly to announce the sale of its Australian business – Carlton & United Breweries, home to Carlton Draught, Victoria Bitter, Melbourne Bitter, Cascade, Crown Lager and the hugely popular Great Northern to Japans Asahi Group Holdings for a welcome $11,3-billion.   

“Selling the Australian business makes sense. It is a mature, or low growth market for ABI and is typical of what is happening in its other developed markets,” says Reuben Beelders, portfolio manager at Gryphon Asset Management. “Australians are migrating to wine or craft beer while the younger generation is moving to cider and spirit. It was a wise person who once said: don’t buy a company whose products are popular with the current generation.” 

It remains to be seen what, if any other assets may be on the chopping block. Ahead of the merge, ABI was forced to sell almost a third of the SABMiller empire, including its prized business in China, where volumes were starting to gain momentum, but profits were still elusive. It seems unlikely to sell any of its African or Latin American businesses which have long term growth opportunities.

In the meantime, the company is focused on cutting costs and building for growth.

“ABI is replicating a strategy similar to that employed by British American Tobacco (BAT) which, facing declining sales globally, focused on pricing and maintaining the momentum of its core brands, called drive brands,” says Beelders. “In this way BAT has continued to grow profits. Similarly, ABI has achieved good growth, outside its home markets, of its three core brands. This is contributing to profitability and growth.” 

While the current debt levels may be causing some indigestion, recent results suggest that ABI is an aggressive and assertive organisation with many levers to pull to drive growth. Overcoming the debt problem is a matter of time.