AB InBev proves cost cuts can boost profit | Fin24

AB InBev proves cost cuts can boost profit

Jul 27 2017 20:45
Thomas Buckley, Bloomberg

London - Anheuser-Busch InBev [JSE:ANB] set a high bar for other consumer-product companies seeking to boost profitability through cost cuts as they try to keep activist investors at bay.

The world’s largest brewer said it’s generating cost savings from last year’s $104bn takeover of rival SABMiller [JSE:SAB] at a faster pace than expected, helping it post second-quarter profit growth on Thursday that trounced analyst estimates. AB InBev shares climbed as much as 5.7% in Brussels trading, the steepest intraday gain in almost two years.

AB InBev has led the consumer industry’s drive to cut costs and consolidate under the guidance of 3G Capital, the investment firm whose partners back the maker of Stella Artois and Budweiser.

The company’s approach to dealing with mainstream food and drink brands’ stagnant sales has prompted other packaged-goods companies to step up efficiency programmes of their own, as activists Dan Loeb and Nelson Peltz take aim at Nestlé and Procter & Gamble.

READ: Nestlé gives an inch on share buybacks but Loeb wants more

While Nestlé CEO Mark Schneider and others in the industry have decried the cost-cutting approach of another 3G-backed company, Kraft Heinz, AB InBev’s results showed that it can deliver.

Earnings rose 12% to $5.35bn on an adjusted basis before interest, taxes, depreciation and amortization, as overlaps from last year’s takeover of SABMiller were eliminated, the Budweiser owner said in a statement on Thursday. Analysts expected 7.9% growth. 

Cost cuts

AB InBev cut $335m of costs in the second quarter, part of an initiative that includes eliminating more than 5 500 jobs to capture $2.8bn in savings from the acquisition in the next three to four years.

“We’re not changing the $2.8bn guidance but we are moving fast in that regard; we like first to deliver and then see what is next,” chief financial officer Felipe Dutra said on a call with reporters. Earlier in the year, the company increased its savings target from $2bn.

Sales growth of 5% also beat estimates and was the highest among major consumer-goods companies such as Coca-Cola Co. and Danone in the second quarter. That provides a tough benchmark for companies such as Nestlé, which Loeb’s hedge-fund company, Third Point, is targeting.

AB InBev has championed budgeting initiatives such as justifying every expense from scratch at the beginning of a new financial period. Rival drinks company Diageo on Thursday raised its target for efficiencies. Unilever said this month that it was saving money on employee flights under a program that could see margins widen by more than 1 percentage point by year-end.

READ: AB InBev earnings beat estimates on SABMiller takeover savings

AB InBev said the second half looks promising on the back of strong sales in markets such as western Europe and China. Larger brands in its roster such as Corona, Stella Artois and Hoegaarden will drive growth in that period, the company said.

AB InBev is also seeking growth from new markets such as Africa, which it bolstered last year through its takeover of SABMiller. In the US, the Budweiser maker is devoting $2bn to boost top brands and improve distribution.

Bouncing back

The results come after AB InBev suffered setbacks in Brazil that hurt its performance last year, stripping management of bonuses and redoubling CEO Carlos Brito’s commitment to boosting returns.

“It’s been a painful period for the global beer leader but the worst is over,” Eamonn Ferry, an analyst at Exane BNP Paribas, wrote in a note to investors. “We can look forward to a strong second-half - AB InBev are back in business.”

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