A-B gets Wall St dressing-down for Q2 results

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Disappointing second quarter results from Anheuser-Busch were far from well received by investment analysts who believe the brewer is making mistakes and more importantly failing to heed their warnings. Olly Wehring reviews the response from a distinctly underwhelmed investment community.

"We told you so" was the response from many observers to Anheuser-Busch's disappointing second quarter results, announced last week. Despite denials from A-B that it has led the US brewing sector into a price war, the common consensus is that price cuts introduced by A-B, and subsequently by SABMiller, would make any positive figures for brewers in the US a tall order. A-B's Q2 figures seem to attest to that belief.

For the three months to 30 June, A-B's domestic volumes dipped by 3.7% year-on-year, reaching 26.3m barrels. In financial terms, gross sales for the quarter were flat at US$4.6m. Net income for the three-month period was down by almost 10%, however, at US$607m, and for the first six months of 2005 by 8.5% at US$1.12m.

Most significantly, however, diluted earnings per share for Q2 came in at US$0.78, a drop of 6% from US$0.83 in the corresponding quarter a year earlier. A-B's subsequent revision of its earnings estimates for the remainder of this year, from positive mid-single digit growth to a negative mid-single digit decline, saw the analysts queue up to revise their recommendations for the brewer.

"This is the fourth time management has lowered its '05 guidance and we are concerned it may not be the last," Citigroup Smith Barney said, while downgrading its coverage of the company. Its future looks "fairly bleak," the broker added.

The brewer was quick to suggest that its suffering was merely in line with the US beer industry as a whole. "Anheuser-Busch had a challenging first six months in its domestic beer business," Patrick Stokes, president and chief executive officer of the company, said as the figures were announced. "Both the company and the domestic beer industry experienced volume declines and higher cost pressures."

Stokes then suggested that the brewer had plans in place for the future. "Anheuser-Busch has implemented a number of initiatives to enhance beer volume and market share growth, including introduction of new products and packaging, increased investments in domestic marketing, stepped-up on-premise sales activities and tactical price promotions and we are encouraged by our sales improvement in June." The company said it was delaying the implementation of its traditional price increases from this autumn until early next year.

Both the quarterly figures and the postponement of increases suggest that the pricing issue is of great importance to A-B in the US. But the general thinking is that the price cuts have not been effective in regaining market share. "Anheuser-Busch reckon they've been increasing market share since they cut prices but we didn't think they had," one analyst told just-drinks. "As far as our forecasts show, they've been losing share. They may have gained some share over the holiday period. As far as it goes, they don't appear to be regaining the momentum in their market share - they're not achieving that, as far as I can see, with the discounting."

Looking at the decision to delay its price increases, Mark Swartzberg of Legg Mason believes that when A-B says that the US market needs a period of "calm" before any increases are introduced it "is essentially the same as A-B saying that discounts have not generated enough desired volume, leading it to the decision not to raise prices to any great extent before year-end." However, Swartzberg adds: "We also believe that Miller would embrace any increases, however modest, and have increasing comfort that A-B recognises that no absolute price growth would only compound the industry's problems building image and overall demand for malt beverages."

"The problem is that, in a market that is broadly flat, you've got to gain market share to get your volume growth and if your competitors are doing a reasonable job, then it's quite hard to do that, so they (A-B) are not able to gain share," one analyst told just-drinks. "Their price mix is a negative for them as they introduce new brands, which also raise costs through increased marketing spends. They've just got squeezed all round and if new products and price cuts don't do anything for their top line, then where can they go from here?"

Exacerbating the situation, the erosion of beer's overall drinks market share by wine and spirits in the US has continued. A Gallup poll late last month showed that 39% of US drinkers usually consume wine, with 36% drinking beer. In 1992, the figures were 27% and 47%, respectively. The number of 30- to 49-year-olds who consume beer in the US also fell from 48% in the early 1990s to 40% as more switched to wine or spirits.

As Banc of America Securities said: "While (A-B's) management is at least satisfied with having stopped the share erosion, there seems to be little progress made against winning back share of stomach from super premium beers or wine and spirits. This suggests to us that real sustainable improvement for Anheuser-Busch trends are not likely to be seen any time soon; this will likely continue to weigh on earnings and sentiment."

Another analyst at Bear Stearns suggested that the company "must take responsibility for the shabby state of the domestic beer category and focus its energies on regaining share of beverage alcohol and restoring a more sophisticated image to the domestic beer category. We are currently unconvinced that the company's strategies, tactics and creative media are moving them in that direction."
A-B's recent advertising campaigns on the US have left a bad taste in the mouth for some. In early July, the New York Times reported that the brewer was circulating marketing materials criticising SABMiller and Molson Coors as being "owned by foreigners," while boasting that A-B is expanding internationally to bring profits "back to the US." In its research note, Bear Stearns said: "Our concerns are growing about A-B's recent nationalistic messages and dismissal of both domestic competitors as inferior and "foreign." This has clearly not helped A-B."

Away from the domestic market, the company has fared little better. International volumes for the quarter did rise by 115.6%, or 2.6m barrels, to 4.9m barrels and for the first half of 2005 were up by 122.5%, or 5.1m barrels, to 9.3m barrels but these increases included additional volumes from Harbin Brewery which the company acquired and began consolidating in the third quarter 2004.

Take Harbin out of the equation and the brewer has very little to write home about. "Maybe they need to think about buying some growth, and then you've got to say where are you going to buy growth," one analyst told just-drinks. "They've tried to buy growth in China and actually it turns out that they don't know how to run the business as well as SAB does. If you want to have an emerging market strategy for generating better growth, then you need a diversified portfolio of emerging markets and they're starting too late on that. It's hard to know how they're going to pull themselves out of the mire."

Sectors: Beer & cider

Companies: SABMiller, Molson Coors

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