The Long and Short
Anheuser-Busch keeps its eye on debt reduction
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
ABIBB posted solid fiscal first quarter results, underscored by double-digit revenue growth and solid EBITDA performance. All regions performed well except China, where strict zero-COVID policy kept lockdowns and restrictions in place in its two largest cities of Shanghai and Beijing. The EBITDA growth helps reduce leverage, while management continues to prioritize debt reduction, having repaid over $3.0 billion of debt in the quarter. That combination should help bring leverage closer to 3.0x, the threshold to be upgraded to single-A. ABIBB debt spreads have lagged peers given its bloated balance sheet since the close of the SAB Miller acquisition. Declining leverage should tighten credit spreads, as the company takes advantage of repaying higher coupon debt at attractive prices given the rate move.
Exhibit 1. ABIBB Debt Profile
Source: ABIBB Earnings Presentation; APS
Debt Reduction Has Reduced Short-Term Financing Pressure
After paying down roughly $10 billion of debt in 2021, ABIBB continued to focus on debt reduction in 2022, with an additional $3.1 billion debt paydown in 1Q22. Management has explicitly stated that deleveraging is the most accretive opportunity near-term, as they look to optimize their capital structure. ABIBB executed the debt reduction via the make-whole call option on both its 3.65% 2/1/26 and 4.915% 1/29/46 bonds. This puts the weighted average coupon of ABIBB’s debt at roughly 4% with the weighted average maturity being close to 16 years. The company now only has $200 million of debt maturing this year and none maturing in 2023. This provides flexibility in targeting additional high coupon debt in its debt reduction efforts, versus just paying down short-term debt. Furthermore, 93% of the debt portfolio is fixed rate debt, which bodes well in a rising rate environment and its debt portfolio contains no restrictive financial covenants.
Long-term Net Leverage Target Still 2.0x
Estimates are that ABIBB ended the quarter with net leverage of 3.7x, which is down from 3.96x at year end. Last quarter was the first time that leverage had declined below 4.0x since the acquisition of SAB Miller in 2016, which pushed net leverage to the 5.5x area. While ABIBB ended 2019 with net leverage of 4.01x, the pandemic negatively impacted EBITDA in 2020, and despite debt reduction, ABIBB saw leverage increase to 4.78x at year-end 2020. Looking at Exhibit 2., ABIBB believes its 2.0x net leverage target is where they maximize value creation as it allows for them to reinvest in the business while providing them with flexibility to pursue selective M&A and return capital to shareholders. However, they did note that at 3.0x net leverage, they can capture roughly 90% of the value creation benefit. ABIBB could reach 3.0x net leverage some time in 2023, which means that ratings could move to the low single-A area at both Moody’s and S&P when that happens.
Exhibit 2. Deleveraging Provides Value Creation
Source: ABIBB Company Presentation; APS
Sales Growth Outpaces EBITDA Growth as Inflation Takes a Sip
ABIBB witnessed an 11.1% increase in revenues in the quarter as total volume was up 2.8%. Management noted that they delivered volume growth in more than two-thirds of their markets, even in the face of the current “dynamic” operating environment. EBITDA growth was also strong at 7.4%, but not able to keep up with top line growth as price increases in both 4Q21 and 1Q22 have lagged the pace of inflation. Furthermore, SG&A was higher than expected due to continued supply chain restraints. Management noted that commodity prices are moving much faster than anticipated, particularly in the beer category. ABIBB anticipates that revenue growth will continue to outpace EBITDA growth for the full year due to a combination of volume and price increases. The current full year outlook puts EBITDA growth in the 4%-8% range, which is in line with management’s medium-term outlook for the operating line item.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.