“We had a strong second quarter….” Gavin Hattersley CEO of Molson Coors
With replenishments resuming BUD points to rapidly improving trends
Anheuser-Busch InBev reported Q2 EPS of $.46, beating consensus expectations of $.31. Overall revenue -17.7% was better than expected and EBITDA by region was better than expected everywhere except EMEA. Total volumes declined 17.1% in Q2. North American volumes declined 5.5%, Asia Pacific volumes declined 6.3%, and South America declined 6.8%. Middle America declined 36.6% significantly impacted by beer the production stoppage in Mexico and EMEA declined 29.8% due to the significant restrictions for on-premise consumption. Most importantly trends improved significantly through the quarter with April volumes declining 32.4%, May declining by 21.4%, and June volumes increasing by 0.7%. The trend in June was in part driven by the replenishment in orders and production resuming in Mexico.
Beer volume in Mexico grew in the high teens% in June after re-opening beer operations. In China the company had the highest ever monthly volumes in June. In the US, beer sales benefited from strength in off-premise, Michelob Ultra, and hard seltzer. Michelob Ultra grew 23%, making it the fastest share gainer in beer ex. hard seltzer. It’s currently the #2 beer in the US. Bud’s hard seltzer grew 600% in Q2, twice the growth rate of the category. The Bud Light hard seltzer variety cases had the same rate of sales as White Claw and Truly from Q1 to Q2. Management said 40% of their hard seltzer is sourced from outside the beer category while 60% is sourced from other seltzer brands. US market share being flat in the quarter does not fit with the narrative of brands that are losing massively against hard seltzers.
Without the narrative of share loss, ABI’s leverage is probably the biggest overhang on the stock. Trailing net debt/EBITDA was 4.9x at the end of Q2 and 2x is still the goal. There are still two more quarters with lower EBITDA, but we can project when that will improve with better confidence now. The company paid down $4.7B of bonds after quarter end and has enough liquidity to cover debt maturities through 2024. The leverage is high, but it is manageable and as the debt is paid down it will accrete to equity owners. BUD is on our Long Bias list.
Molson Coors to short bias list
Molson Coors reported Q2 EPS of $1.55 vs. consensus of $1.52 driven by lower marketing spend. Sales decreased 14.3% in constant currencies. North America decreased 7.9% in constant currencies with shipments down 6.5%. Europe, which is much more dependent upon the on-premise channel (50-55%), decreased 42.4%. In Europe brand volumes declined 21.4%. Pricing increased 0.3% while volumes declined 11.6%.
Gross margins contracted 270bps driven by sales deleverage, mix and higher costs. Marketing and G&A costs declined 30.8% in constant currencies primarily due to a drop in marketing. Going forward management expects marketing spend to be up to support Blue Moon LightSKy, Vizzy, and Coors Seltzer as well as sports programming resuming. Total EBITDA increased 2.2% with North America up 13.8% and Europe down 66.9%.
The company pointed to shortages of aluminum cans and the re-closing of some on-premise establishments as headwinds. We have not heard from other large brewers that are growing that are receiving less cans than they were previously allocated. We are also concerned by the pull back in marketing, the sin e qua non for a beer brand. We are not making the point from an earnings quality perspective, but from a future market share perspective. We are adding Molson Coors to our short bias list. At less than 12x consensus EPS estimates and less than 9x EBITDA shares are discounting our concerns. Revenue and margins will also be less bad in Q3, so we will wait for a better trade set-up.
Bar closures tick up from recent restrictions (BUD)
The percentage of local bars closed increased from 30% at the end of June to 38% in mid-July after several states ordered more restrictions or closures for bars. The following chart from Womply (a CRM provider) shows the recent uptick in closures. Some bars have added limited food menus to skirt the restrictions and state governments have then added further modifications to their rules.
