Brazil, the third-largest beer market in the world, is officially getting introduced to Budweiser in 2012 with the slogan "Great Times Are Waiting." For an Ambev (ABV) shareholder, that just may hold true.
In 2008, during the height of the credit crisis and straddled with debt, Belgian competitor InBev bought Anheuser-Busch by for $52 billion. Having previously acquired Ambev, a leading Brazilian beer company, Anheuser-Busch InBev (BUD) has now assembled a global portfolio of leading brewers and an expanding soft drink portfolio.
With the benefits of parent company InBev's portfolio brands, yet its own corporate culture, isolated financial results, and distinct ticker, Ambev has grown to become the largest beer company in Latin America. It has a presence in 14 countries, including Canada where it operates through its Labatt subsidiary. While its countries of operations are diverse and its product line-up ever expanding (it owns the exclusive Pepsi (PEP) bottling rights through 2017), the heart of an investment in Ambev is the Brazilian beer market.
Ambev's Brazilian beer sales, with a small contribution from the soft drinks operations, make up 70% of the company's total volumes and revenues; thus, Ambev is considered a pure play on the Brazilian beer market. While investing in parent company Anheuser-Busch InBev offers a more geographically diversified investment approach, Brazil is currently in the sweet spot of its expanding beverage industry. Three primary factors are behind this growth: growth in per-capita beer consumption driven by income growth, an underpenetrated "premium" beer market, and the impact of bolus sporting events including World Cup 2014 and the 2016 Olympics.
Since 1995, Brazilian consumption trends have steadily increased in marked contrast to the volatility in rest of the economy (GDP) and the Bovespa stock exchange. Behind this trend in consumption growth is a dramatic halving of unemployment since 2004, according to the Brazilian ministry of Finance. This has directly correlated with an equally astounding increase in the growth of a Brazilian middle class. Estimates from Fundacao Getulio Vargas show the middle class growing from 63 million to 102 million from 2005-1,0 and project an additional 36 million by 2014. To tie all of this together to beer, a Brazilian government study (SENAD) has shown that the frequency of drinking rises as income rises and Ambev's results confirm this.
With 70% of the Brazilian beer market share and with beer accounting for 60% of all the alcohol consumed in Brazil, Ambev is ready with a broad portfolio of offerings. Its local brands include Skol, Brahma, Antartica, Bohemia, and Original. Now, InBev's international portfolio is bringing in Stella Artois and Budweiser, which will enter the market as premium beers. As company management likes to note, these beers are not just premium priced, they also carry a premium margin and a premium earnings before interest, taxes, depreciation and amortization (EBITDA) contribution.
This premium segment is a vital component of an investment in Ambev. Currently representing 5% of beer sales, success in this segment is required to keep propelling the company stock. Compared to other world markets, Brazil's 5% premium beer sales is a small sliver. In France, for example, 51% of beers sold are premium. The early signs of market demand in this segment are positive, with Stella Artois volumes growing at a rate of more than 200% in 2011. Only introduced in the states of Rio de Janeiro and Sao Paulo in the fourth quarter of 2011, preliminary signs are encouraging for the country wide introduction of Budweiser in 2012.
The logistics of new product introductions and the distribution network required is a unique competitive advantage to Ambev and an additional critical component of an investment in the stock. With less stringent alcohol sales licensing requirements, Brazil has developed over a million points of sales for beer. Everything from a remote beach stand to a bar within the maze of traffic in Sao Paulo requires timely delivery. Known as the most efficient company in the beverage industry (G&A accounts for less than 5% of net sales), Ambev has collapsed its outside distributer relationships from 1,100 to its current 200.
The simplification and expanded reach of its distribution network is a key example of Ambev's culture of ownership. Employees generally are promoted from within the company and early on are indoctrinated in a mindset of looking for efficiencies and opportunities to propel the business and their careers.
Top of the list of current opportunities is a focus on increased production capacity and local marketing efforts in the North and Northeast of Brazil. Ambev has more than doubled capital expenditures in the last two years with most of the investment occurring in these regions where the rate of change of wage growth and unemployment are driving a fast consumption growth opportunity. As an added benefit, Ambev receives fiscal benefits from these investments to help offset escalating alcohol Value Added Taxes and helps explain the company's steady decline in their corporate effective tax rate.
After capital investment and a strong commitment to innovation (my personal favorite is the Brahma "Copaco" removable lid can), Ambev still has free cash flow to deliver to shareholders in the form of a current 2.9% dividend yield.
With projected EBITDA growth of over 10% in the next three years, Ambev's profitable, solid growth and defensible business model are worth a look. Importantly, the background environment for investing in Brazil stands in stark contrast to the U.S.'s 2011 debt downgrade. In fact, Moody's, Fitch, and Standard & Poor's have all raised their foreign and local currency credit ratings for Brazil and Ambev holds one of the highest credit ratings in Brazil (A-).
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