beverages

Costs Outweigh Gains For Anheuser, InBev

Costs outweighed increased volumes and pricing in this year's third quarter for both Anheuser-Busch (A-B) and its soon-to-be-parent company InBev.

In the third quarter, A-B saw volume for its brands rise 2.3% in the U.S. and 3.2% worldwide (including equity partner brands), to a total 46.5 million barrels. Volumes for the first nine months were up 1.1% in the U.S. and 2.3% in total, to 128 million barrels.

A-B increased prices across most of its U.S. beer volume during September and October, and expects to see full-year 2008 revenue-per-barrel growth of 4%.

The company's total worldwide net sales grew 6.5% to $4.9 billion in the third quarter, including a 6.6% U.S. beer net sales gain driven by 2.3% higher shipments volume and 3.7% growth in revenue per barrel driven by price increases. For the nine months, companywide net sales grew 5.7% to $13.7 billion. That included a 5% U.S. gain, also driven by increased volume and higher prices/revenue-per-barrel.

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A-B had "an outstanding summer selling season, with record sales in the third quarter," said President/CEO August A. Busch IV. "Driven by the national introduction of Bud Light Lime, U.S. beer shipments to wholesalers increased 2.3%, while sales to retailers were up 3.6% on a selling day adjusted basis."

Bud Light, super-premium Michelob Ultra and new products, including Chelada and Landshark, also contributed to growth, Busch reported. According to IRI supermarket data, A-B gained 0.9 share points at the consumer level during the third quarter.

However, net income declined 5.7% (to $666 million) in the third quarter, and declined 1.8% (to $1.87 billion) for the first nine months, as commodity cost pressures offset volume and pricing gains.

"The costs of producing beer are high," notes Christopher Shanahan, research analyst, chemicals, materials and food at Frost & Sullivan, a marketing research firm. "Beer companies are still seeing the impact of high hops prices. The costs of aluminum are way up because prices have been driven up by many investors moving from stocks into metals."

However, Shanahan's assessment is that A-B performed "relatively better" than InBev during the third quarter.

At InBev, Q3 volumes as measured in hectoliters rose 1.9% worldwide, including 0.5% growth in North America. Year-to-date volumes rose 0.8% overall, including 1.3% growth in North America. Year-to-date, total worldwide beer volume was flat (-0.1%).

Q3 worldwide revenue rose 7.7% to €3.95 billion (approximately $5.15 billion). Profit attributable to InBev equity holders declined 13.9 to €447 million ($583 million), while profit attributable to minority interests rose 3.6% to €202 million ($263 million).

Year-to-date total revenue rose 5.7%, to €10.85 billion ($14 billion).

Q3 EBITDA on a normalized basis (before recurring items) rose 6.5% worldwide to €1.39 million ($1.8 million), but was down 2.3% in North America to €173 million ($226 million). On an organic basis (eliminating the effects of currency and scope changes), EBITDA margin declined by 40 basis points. Year-to-date, normalized EBITDA rose 4.3% to €2.76 billion ($3.6 billion).

Normalized earnings per share grew 7.1%, to €0.91 in Q3. Year-to-date, earnings per share declined, from €2.12 to €2.07, while normalized EPS rose from €2.10 to €2.27.

InBev's cost of sales rose 9.6% YTD, which it attributed primarily to brand-building investments, including marketing.

A-B's shareholders are scheduled to vote on the company's merger with InBev on Wednesday. Although many mergers and acquisitions have recently crashed on the rocks of the credit crunch, this one seems secure, says Shanahan.

"It's a good deal for Anheuser stockholders, because InBev will be paying above the current stock value," he says. "InBev has the reserves, and of course sees significant strategic value in this acquisition."

In its Q3 financials report, InBev stated that its focus for the merged company will be integrating the businesses, de-leveraging the combined company and delivering the expected synergies.

Cash-flow generation will be a top priority, the report added.

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