Global hop marketA local alternative to mass beer suggested by independent brewers has been successful and is now altering the global market. Beer is becoming more diversified, so transnational companies have to accept the new game rules and to switch focus to young and fast growing markets. All these processes increased the demand for aroma and bitter hop as well as their acreage expansion on two continents. However now there appeared a downward trend of alcohol consumption in the world, so even special sorts can soon turn to be sufficient. In this connection the dynamic American hop market is already facing some problems. EU hop producers have become more cautious, they are not racing to exceed the demand and look forward with more confidence, judging by the contract terms.
Hop Market in RussiaGermany still dominates the Russian market, yet over the recent two years one has been able observe a continuous success of Czech hop suppliers. Their expansion and growing popularity of hops from the United States became the drivers of supplies growth in 2016 despite the preceding modest harvest crop in the EU, as well as the factor of relative stability in 2017. In this connection, in 2017, the ratio of the varieties continued to shift towards the aroma ones, and the supplies of Magnum hop and other alpha varieties were reduced. However, the import of bitter hop pellets is partially replaced by extracts, especially from the major beer manufacturers. Total volumes of alpha acid supplies, according to our estimation, decreased by approximately 5% and returned to the level of 2015. Barth Haas Group continues dominating the hop products market; HVG also increased its weight. At the same time, Morris Hanbury significantly reduced the supplies in 2017.
10+1 trends of Russian beer market 2015-2017Despite of the moderately negative prognoses for 2017, the beer market can be stabilized soon. Yet the years of the negative dynamics have resulted in marketing being limited just to “optimization” and the art of balancing between price and volumes. Bigger supermarkets share means stronger trade marketing. These processes are connected to the majority of the described trends. At the same time, the federal brands inflation leads to searching for new tastes, sales channels and contact formats that expand the product range and diversify the beer market, but do not imply a substantial volume increase. Let us enumerate and further discuss the ten trends of the beer market we can see in 2015-2017 as well as the major event of 2017.
Beer market of Ukraine 2017In the first half of 2017, the Ukrainian beer market goes on decreasing slowly. Yet, the companies manage to compensate their lost volumes by raising prices and improving the sales structures. This results in the mid price market segment reduction while the sales of premium brands are rising. These processes are connected to position strengthening of companies Carlsberg Group and Oasis and the market share reduction of Obolon. Most of the novelties by the market leaders belong to craft or hard lemon categories.
Beer market of Russia 2016: PET goes to draftThe beer market of Russia was warmed up by the hot summer, but the preparation for large volume PET prohibition has already impacted it negatively. The year was successful for Efes, MBC and regional producers; Carlsberg’s positions were virtually stable but AB InBev and Heineken lost a part of market share having focused on the sales profitability. The dynamics of big brands was determined by how much the companies were willing to keep the prices down or by their promotional activity. In this context the economy segment of the beer market and sales of inexpensive draft beer were increasing. The premium segment started shrinking due to license brands migrating to the mainstream segment.
TEXT-S&P summary: Anheuser-Busch InBev N.V./S.A.
Summary analysis -- Anheuser-Busch InBev N.V./S.A. ---------------- 22-Nov-2012
CREDIT RATING: A/Stable/A-1 Country: Belgium
Primary SIC: Distilled and
Mult. CUSIP6: 03524A
Credit Rating History:
Local currency Foreign currency
01-May-2012 A/A-1 A/A-1
19-Apr-2011 A-/A-2 A-/A-2
14-Jul-2008 BBB+/A-2 BBB+/A-2
The ratings on Belgium-based international brewer Anheuser-Busch InBev N.V./S.A. (ABI) reflect Standard & Poor's Ratings Services' view of its "excellent" business risk profile and "intermediate" financial risk profile.
We view ABI's leading market positions, high margins, and broad geographic diversity as supportive of its "excellent" business risk profile. ABI's adjusted EBITDA margin at the end of June 2012 was 42%; the group's closest competitors report adjusted EBITDA margins in the low-20s to mid-30s. In the nine months ended Sept. 30, 2012, 46% of reported EBITDA came from North America, 42% from Latin America, 10% from Europe, and 3% from Asia. Minus 1% was attributable to the global export and holding companies division.
We view as a business strength the high quality of earnings in the businesses owned by ABI at the parent level, as well as ABI's close association with the large and cash-generative subgroup headed by its subsidiary, Brazil-based AmBev - Companhia de Bebidas das Americas (AmBev; A/Stable/--, Brazil national scale brAAA/Stable/--). AmBev, ABI's most significant non-fully-owned subsidiary, covers Latin America (excluding Mexico), the Caribbean, and Canada.
At the end of June 2012, ABI reported adjusted debt of about $40 billion, which equates to an adjusted debt-to-EBITDA ratio of 2.4x. The ratings incorporate the impact of ABI's planned acquisition of the stake in Mexican brewer Grupo Modelo that it doesn't already own.
S&P base-case operating scenario
In our base-case scenario we project that over the next few years ABI will be able to grow its revenues at a mid-single-digit rate annually. In our view, this will be driven by strong demand and a growing taste for premium-brand products in developing regions such as Latin America and Asia, especially as the middle-income population in these regions increases. Demand in these regions should continue to offset weaker demand in developed markets, particularly in Europe where consumer confidence remains low.
We think that ABI will be able to expand its margins modestly over the next few years as a result of its pricing power, which is made possible by strong positioning in its key regions. In Brazil, for example, ABI leads the market with a 69% beer market share (via AmBev) and in the U.S. it leads with 48%. In addition, cost controls and economies of scale should support the group's margins.
S&P base-case cash flow and capital-structure scenario
Given our base-case operating assumptions, we project that ABI will generate funds from operations (FFO) of between $12 billion and $15 billion annually over the next few years. Assuming capital expenditure (capex) equal to 15%-20% of EBITDA and a dividend payment of about $3 billion in 2013, we project that in 2013 ABI will generate discretionary cash flows of about $6 billion. We have no indication of any share buybacks, therefore we have not incorporated such activity into our projections.
In our projections we have incorporated the acquisition of the portion of Grupo Modelo that ABI doesn't already own. We estimate that this transaction will add about 0.5x to the adjusted-debt-to-EBITDA ratio. Taking account of this acquisition, we project ABI is sufficiently cash generative to enable it to reduce adjusted leverage to close to 2x by the end of 2013 and below 2x during 2014. Our projection for 2013 is further supported by our understanding that the group remains committed to reaching a net-debt-to-EBITDA ratio of 2x. At the end of June 2012, adjusted debt to EBITDA was 2.4x and adjusted FFO to debt was 30%.
The 'A-1' short-term rating reflects our opinion that, over the short term, ABI should have ample internal liquidity, good cash flow characteristics, and significant access to the capital markets. We view ABI's liquidity as "adequate" under our criteria. This descriptor indicates a sources-to-uses ratio of at least 1.2x.
We forecast that liquidity sources for the next 12 months will include:
-- About $3.7 billion of cash and cash equivalents as of the end of June 2012;
-- FFO of about $12 billion; and
-- About $7.1 billion available under the group's $8 billion committed credit facilities with maturity in June 2016.
In our view, liquidity uses for the next 12 months include:
-- Short-term debt of about $7.6 billion at the end of June 2012;
-- Capex of about $3.4 billion; and
-- Dividends of about $3 billion.
We have not included the payment for Grupo Modelo as a use of cash as ABI has committed financing to fund this acquisition. Specifically, the group has added $14 billion of additional bank facilities: an $8 billion three-year facility and a $6 billion one-year facility with a one-year extension option.
Of further support to the group's "adequate" liquidity is:
-- Well-spread-out debt maturities. As of end-June 2012, about 39% of the group's total debt matures in more than five years. In addition, ABI benefits from a degree of currency diversification, with about one-third of the group's debt denominated in currencies other than the U.S. dollar.
-- Lack of financial covenants in the group's core debt facilities, including the facilities put in place to fund the Modelo acquisition.
-- Good access to euro and U.S. dollar capital markets. In July 2012, the group issued $7.5 billion of bonds comprising three-year, five-year, 10-year, and 30-year maturities and in September it issued EUR2,250 million of bonds comprised of five-year, seven-year, and 12-year maturities. These issuances have further enhanced the group's overall liquidity position, including its debt maturity profile.
The stable outlook reflects our opinion that ABI's strong discretionary cash flow generation will enable it to reduce its adjusted-debt-to-EBITDA ratio to close to 2x by the end of 2013. We anticipate that adjusted FFO to debt will remain above 30% over the medium term. We consider an FFO-to-debt ratio of close to 30%, and an adjusted debt-to-EBITDA ratio of close to 2.0x--equating to a gross debt-to-EBITDA ratio of between 2.0x-2.5x--to be commensurate with the current rating.
We could consider lowering the ratings if increased discretionary spending sees the group not returning to adjusted debt-to-EBITDA of close to 2x by the end of 2013, after the impact of the Modelo acquisition in 2013. Given the unconsolidated nature of the brewing industry, we view further M&A activity within the industry as likely. However, in view of ABI's stated commitment to the 2.0x net debt to EBITDA leverage target, we currently do not believe that ABI will change its financial policy in any way that would lead us to consider a downgrade.
We estimate that ABI is sufficiently cash generative to enable it to reduce adjusted debt to EBITDA to below 2x in 2014. An upgrade would likely be contingent on the group deleveraging to below 2.0x and also expressing commitment to maintaining this. As such, we view the possibility of an upgrade as unlikely at this stage.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
23 Nov. 2012