For 3d qtr in a row, AB beat Wall St expectations on profits. There were 3 main reasons: rev per bbl up 2.8%, more than anticipated, cost of goods sold increases moderated (in part because of AB’s productivity initiatives) and AB again shipped more than it depleted (because Sep sales came in much less than expected). With 1% shipments hike and rev per bbl up 3%, AB domestic beer income before taxes up $51 mil, 7%. That’s almost like “good old days” of early 2000s. But for 9 mos, domestic beer income before taxes still up just 3% to $2.366 bil. Recall that domestic beer unit income down 18% in 05. Meanwhile, AB equity income (mostly from Modelo) jumped $59 mil, 15% to $450 mil thru Sep 06. Over 1/4 of AB’s total net income comes from Modelo and about 1/3 of net inc growth.
AB’s Sep STRs “below expectations,” acknowledged cfo Randy Baker, citing “unfavorable” weather in much of East especially over Labor Day and tuff comps going against heavy couponing in Sep 05. But “we cannot explain all of the shortfall,” noted Randy. What’s more, Oct sales still “down slightly” tho better than Sep and “bouncing around.” AB down last 4 mos, following 9 mos of approx 2% growth thru Jun 06. Net-net: “Volume growth continues to be the biggest missing piece of the puzzle for AB,” as Morgan’s Stanley Bill Pecoriello wrote. Unlike old days, AB can’t quite suss out what will happen to its volume and so not giving guidance for 07 (it used to be specific, but in 06 AB just said it would be up). Costs coming under control, pricing going up, but growth not happenin’.
What’s gotta be big concern to AB: Bud family STRs dropped 2% in 3d qtr. Bud Light slowed to 2% growth over summer, but it’s still up 4% yr-to-date. Bud Select down mid-teens. Bud family flat yr-to-date. It’s highly unusual that cfo Randy would acknowledge effect of a new competitive brand. But AB does see “some impact from Heineken Premium Light,” with Bud Light taking biggest brunt because of its size. Randy also put “relative sizes” in perspective. HPL at 0.4 share in IRI data, compared to 1.4 for Bud Select and 0.3 for Michelob Ultra Amber. Mich family down low single digits. But Busch and Natty families each up low single digits in 3d qtr and low-to-mid single digits for 9 mos. In fact, mix shift knocked off 0.3% from rev per bbl gain in 3d qtr. Would have been over 3% on combo of 1.7% front-line price hikes and 1.4% in discount reductions.
AB expects full yr rev per bbl to be up 1.3-1.7% in 2006, much better than last yr’s down 0.5%. But that’s still considerably less than cost of goods sold per bbl, expected to be up near 3%. Next yr, AB expects rev “delivery” to be “somewhat greater than 06” and costs up “somewhat less than 06.” Mktg, distrib and admin costs up 2% for 9 mos, but will be up “low to mid-single digits” in 07. As important as equity income has become to AB, it’s likely to be even bigger factor in 07 as Modelo adds huge chunk to US profits.