InBev Reports a Tough Quarter

08/11/07 InBev, the world’s leading brewer, has announced its results for the third quarter 2007 (3Q07) and 9 months 2007 (9M07). Volume growth: beer volumes increased 3.6% organically in 3Q07 year-on-year (yoy), with volume growth in all Zones except Western Europe. Year to date, overall beer volumes were 4.8% higher.

Revenue grew by 4.8% in the third quarter, due to higher volumes and an increase in revenue per Hl of 1.3%, or +2.9% eliminating the impact of the change in geographic mix. During the first nine months of 2007, revenue was 7.0% higher, as the result of 1.8% higher revenue per Hl and increased volumes. Excluding the impact of the change in geographic mix, revenue per Hl would have increased +3.2%.

Cost of sales (CoS) in the 3Q07 were impacted by some commodity cost pressures, leading to an increase in CoS per Hl of 3.7%, year-on-year. Year to date, CoS per Hl was up by 2.6%. Despite the pressure on commodities, the company is confident that CoS per Hl will be below inflation for the full year. Operating expenses, and more specifically non-working expenses, continued to be strongly managed, resulting in a 1.1% reduction on an organic basis in 3Q07, and zero growth for the nine months 2007, yoy, despite higher commercial and distribution expenses.

Normalized EBITDA increased by 8.5%, leading to an EBITDA margin of 35.2% in 3Q07, an organic increase of 119 basis points. For 9M07, normalized EBITDA growth was 13.7%, resulting in an EBITDA margin of 33.4%, with organic margin expansion of 197 basis points.

For the third quarter, a combination of top line growth and a continuous focus on tightly managing costs and expenses has once more resulted in EBITDA growth and margin expansion. Tight cost management in North America helped drive margins higher in a challenging environment. Another quarter of margin expansion was achieved in both Latin America North and Latin America South, where both volume growth and higher revenue per Hl were realized. Western Europe had lower margins despite ongoing savings of nonworking fixed expenses, as volumes decreased and cost of sales were higher than last year.

The top line continued to grow across Central & Eastern Europe based on solid volume and revenue per Hl growth which drove EBITDA higher than in 3Q06. The decline in the reported EBITDA margin in CEE is once more entirely explained by changes in intercompany charges which are neutral at group level. Excluding this adjustment, EBITDA margins would have been unchanged versus a year ago. Asia Pacific EBITDA was unchanged organically compared to 3Q06, as higher volumes and revenue were offset by increased investments, leading to a lower margin in the quarter. On a consolidated level, organic EBITDA growth of 8.5% was achieved, on top of 19.0% delivered in the 3Q of last year. In contrast, the 4Q of last year was negatively impacted by significantly higher administrative and other operating expenses that are not expected to take place in the coming quarter, translating into a more favourable comparable for the 4Q07.

“Overall, our 3Q07 performance was below our expectations. In 3Q our cost management programs (ZBB and VPO) were key to offset the weaker top line results, mainly in the UK and China, and the commodity price pressure. This enabled us to increase our consolidated EBITDA margin organically by 119 basis points to 35.2% for the 3Q, and 197 basis points to 33.4% for the first nine months of 2007. We believe we have the commercial programs in place to deliver a stronger 4Q”, said Carlos Brito, InBev’s CEO.

“For 2008 we are not currently providing specific guidance on the impact of changes in commodity costs, beyond highlighting that the price developments during the last months, especially for barley and malt, will impact 2008 cost of sales in all business units. However, this impact is likely to be partly offset by favourable results from our risk management initiatives, together with ongoing efficiency programs being implemented throughout the company. Therefore we expect that the consolidated cost of sales per Hl will move in line with the average inflation for next year”, said Felipe Dutra, InBev’s CFO.