Anheuser First-Half Performance Validates Strategy, Execs Report

by Karlene Lukovitz, Jul 24, 2008, 5:00 AM

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Nine days after the announcement of the historic buyout of Anheuser-Busch by Belgium-based InBev, A-B management stressed the efficacy of its current strategy as it reported substantial performance gains for the second quarter and first half.

Net sales grew 4.6% for the quarter (to $4.7 billion) and 5.3% year-to-date (to $8.8 billion), while diluted earnings per share increased 9.2% and 7.1% for the respective periods.

A-B's initiatives over the past two years, including new products such as Bud Light Lime, "are gaining traction with consumers," said VP/CFO W. Randolph Baker, during the company's Q2 earnings conference call.

Baker stressed that A-B's plans and business will proceed as usual during the transition period. During a Q&A, he said that InBev is "very pleased" with A-B's strategic plan to accelerate earnings growth, "specifically our Blue Ocean plan."

The Blue Ocean cost-cutting plan, announced in June, includes encouraging early retirement among 13,000 employees. The plan originally called for savings of more than $750 million through 2009 and $1 billion through 2010. After the acquisition announcement, a joint A-B/InBev statement projected that the savings will be at least $1.5 billion annually by 2011. (InBev's cost-cutting reputation prompted Teamsters to respond to the A-B acquisition announcement with a release "questioning the reliability" of InBev's stated commitment not to close any U.S. breweries or cause any significant job losses among production workers.)

Baker's comments echoed those of A-B president/CEO August A. Busch IV in the company's earnings press release. "The company's new strategic plan expands and accelerates our cost reduction and operation efficiency initiatives generated by our Blue Ocean project, as well as our planned price increases," Busch stated. "These initiatives, combined with our increased marketing and selling efforts, are all contributing to our very strong outlook for profit growth."

Asked about the integration of A-B as an InBev division, Baker said the process is "going relatively well," adding that it is obviously very early in the process. He confirmed that the companies expect the transaction to close by year-end.

In regard to the effect of InBev's acquisition on A-B's reported interest in possibly acquiring SABMiller (which is poised to give A-B greater competition through its joint venture with Coors Brewing Co.), Baker said he still believes that SABMiller "represents an opportunity" for A-B, although this would depend on "specific market conditions."

More highlights of A-B's financials report:

• U.S. beer sales increased 4.5% in Q2, driven by a 0.5% volume gain, and 4% for the first half, driven by volume gain and higher revenue per barrel.

• U.S. beer shipments and wholesaler sales to retailers increased in Q2, driven by the Bud Light Lime launch and improved performance for other core brands.

• A-B's estimated share of the U.S. beer market for the first half declined slightly, to 48.8% versus 48.9% in first-half 2007.

• Year-to-date, A-B's U.S. beer volume rose 0.4% to 27.6 million barrels; international volume rose 4% to 6.2 million barrels; and equity partner brand volume grew 5.2% to 9.3 million barrels, driven by the Mexican-based Modelo and China-based Tsingtao brands. In total, A-B volume was up 1.9% to 43.1 million barrels for the first half.

• U.S. sales to retailers declined 0.1% in the first half, in part because the timing of the 2008 Fourth of July holiday adversely impacted comparison with Q2 2007 results.

• However, Baker reported that A-B not only had "especially strong" retail sales performance for this Fourth of July weekend, but that the two weeks ending July 5th were the strongest in the company's history. Bud Light Lime performed "extremely well," he added.

• Noting that the U.S. beer pricing environment "remained favorable" through the Memorial Day and Fourth holidays, and citing rising materials and energy costs, A-B confirmed plans to implement price increases on most of its U.S. beer volume in September and October.

• Baker said increases would range from 3% to 5%, to average about 4%. "Consumers won't leave the beer category" as a result of such price increases, he said, noting that these are moderate in comparison with the hikes being implemented on many F&B products.

• A-B's U.S. sales have been particularly strong this year in supercenters, and "good" in supermarkets and other channels, according to Baker. While A-B's convenience store sales showed gains, growth has slowed substantially in this channel as a result of lower C-store traffic caused by fuel prices, he said. Restaurant and other off-premises sales picked up substantially between the first and second quarters, Baker added.

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