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AB InBev - sales volumes plunge, Q2 expected to be worse

Nicholas Hyett, Equity Analyst | 7 May 2020 | A A A
AB InBev - sales volumes plunge, Q2 expected to be worse

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First quarter revenues fell 5.8% to $11.0bn, driven by a 9.3% decline in volumes. Operating profits fell 19.7% to $2.8bn, while underlying earnings per share fell 30.1% to $0.51.

As previously announced, the group has reduced its final dividend of 2019 by 50% to $0.50 per share.

AB InBev expects the pandemic's effect on second quarter results to be materially worse than in the first quarter. Given the current uncertainty full year guidance has been withdrawn.

The shares rose 2.5% in early trading.

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Our View

The closure of pubs and restaurants around the world has cut off a major source of sales for brewers like AB InBev. This would be a problem at any time but it's especially worrying given the group's sizeable debt pile, courtesy of the 2016 SABMiller acquisition.

Efforts to bring debt under control have recently seen a minority stake in Budweiser APAC, part of the group's Asian operation, sold for $5.8bn. That follows the $11bn sale of the Australian business, due to complete later this this year. Management has now reduced net debt to 4x operating cash profits, but know it really needs to be half that.

In our opinion, the COVID-19 pandemic is going to make that a nigh impossible task in the short run. Frankly, we'll be impressed if the group can just stop the debt load growing any further. Once conditions return to normal AB InBev should be able to keep paying the debt down, but this looks like it might come at the cost of shareholder returns. The dividend has already been halved, and we suspect this may not be a temporary adjustment.

Still, if you can see past the debt shaped millstone hanging around the group's neck, there are bright spots.

Footholds in less-developed markets from Latin America to Sub-Saharan Africa mean there's scope for huge volume growth in the years ahead. That's despite AB Inbev already brewing one in four pints globally, and a growing middle class in those economies opens the door to price rises too.

In developed markets a trend towards more premium products presents the opportunity to boost both margins and revenues. That's played into the group's hands as strong brands like Michelob Ultra, Stella and Corona have reaped the rewards of the shift. However, recent currency and commodity headwinds have increased costs and hurt margins.

AB Inbev has an enviable portfolio of brands, and if it can control its debt it should be fine in the long term. Over time we think the group should be able to rebuild the dividend, but given the debt position we'd be surprised by a quick bounce back.

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First Quarter Results

While AB InBev saw volumes decline across all markets, Asia Pacific was by far the hardest hit. Volumes in the region fell 42.3% in the quarter, led by a 46.5% decline in China where the coronavirus outbreak affected sales from late January.

Revenue per hectolitre improved by 3.9%, driven by ongoing premiumisation. However, the group's flagship Global Brands still saw revenues fall by 11% as brands like Budweiser and Corona were particularly hard hit by the decline in China.

While operating costs improved slightly year-on-year that was not enough to offset the effect of lower revenues.

The group has drawn down its $9bn Revolving Credit Facility, and completed bond issuances worth EUR4.5bn and $6bn respectively. The group expects the $11bn disposal of Carlton & United Breweries to complete in the second quarter of 2020.

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