USA: Anheuser-Busch reports financial results for third quarter and first nine months of 2005

Anheuser-Busch Cos. Inc. reported on October 26 that consolidated net sales increased 0.2 % in the third quarter of 2005, while diluted earnings per share (excluding a one-time litigation settlement) decreased 8.2 percent. For the nine months of 2005, net sales increased 0.9 percent and earnings per share (excluding one-time items in both 2005 and 2004) declined 6.9 percent.

“We are disappointed in our sales and earnings results, but we are encouraged by improvement in our market share performance at the consumer level,” said Patrick Stokes, president and chief executive officer of the company. “Both the company and the domestic beer industry have experienced volume declines and significant cost pressures. Anheuser-Busch has undertaken a number of initiatives in 2005 to enhance beer volume and market share growth, and in the third quarter the company’s market share increased in supermarkets, according to IRI data. Although we are confident the company will restore its sales and earnings growth momentum in the future, we now expect 2005 earnings per share excluding one-time items to be 10 to 11 percent below 2004 results.”

As previously stated, the domestic beer company is planning a price increase for early 2006. Discount reductions will likely comprise a larger portion of revenue enhancement initiatives in 2006 compared with recent years. As always, revenue enhancement initiatives will be tailored to specific markets, brands and packages.

During the third quarter of 2005, domestic beer sales-to-wholesalers decreased 1.4 percent compared with the third quarter 2004, while wholesaler sales-to-retailers declined 1.0 percent. Sales in late August and early September were negatively impacted by Hurricane Katrina, with sharp declines in the hurricane-affected areas. Sales trends quickly recovered in Mississippi, Alabama and Louisiana with the exception of the New Orleans market. Third quarter sales-to-retailers comparisons with 2004 were also adversely impacted by differences in timing of price increases. Third quarter 2004 sales-to-retailers include the sales build-up in advance of the company’s fourth quarter 2004 price increase. No comparable build-up occurred in the third quarter 2005 due to the company’s decision to defer price increases throughout most of the country until early 2006. Sales-to-retailers for the period including the third quarter plus the first two weeks in October were down 0.4 percent, which eliminates the distortion from the normal inventory build and depletion surrounding the price increase in 2004. During the nine months of 2005, domestic beer sales-to-wholesalers declined 2.6 percent, and wholesaler sales-to-retailers decreased 0.6 percent (on a comparable selling day adjusted basis). Wholesaler inventories were reduced significantly in the first nine months of 2005, from approximately two-and-one-half days higher than the prior year at the end of 2004 to approximately one day lower than the prior year at the end of the third quarter.

The company’s estimated domestic market share (excluding exports) for the nine months of 2005 was 49 percent, compared with 2004 market share of 50 percent. Domestic market share is based on estimated U.S. beer industry shipment volume using information provided by the Beer Institute and the U.S. Department of Commerce. Anheuser-Busch’s market share performance based on shipments was impacted by the company’s wholesaler inventory reduction.

International volume, consisting of Anheuser-Busch brands produced overseas by company-owned breweries and under license and contract brewing agreements, plus exports from the company’s U.S. breweries to markets around the world, increased 26 percent for the third quarter and 70 percent for the nine months of 2005. These increases were primarily due to increased volume in Canada, the United Kingdom and Mexico for both the third quarter and nine months of 2005, the impact of the Harbin Brewery acquisition in the third quarter 2004, and higher Budweiser sales volume in China for the third quarter 2005. International volume, excluding the Harbin acquisition, increased 7.5 percent in the third quarter and was up 3.4 percent through the nine months.

Worldwide Anheuser-Busch brands volume, comprised of domestic volume and international volume, increased 2.8 percent and 4.8 percent, respectively, for the third quarter and nine months of 2005 to 33.4 million and 93.4 million barrels vs. 2004.

Total brands volume, which combines worldwide Anheuser-Busch brand volume with international equity partner volume (representing the company’s share of its foreign equity partners’ volume on a one-month lag basis) was 42 million barrels in the third quarter 2005, up 4.3 million barrels, or 11.5 percent over third quarter 2004. Total brands volume was up 8.9 percent, to 113.1 million barrels for the nine months of 2005.

International equity partner brands volume grew 66 percent and 34 percent, respectively, for the third quarter and nine months of 2005 due to Modelo volume growth and the addition of Tsingtao equity volume beginning in May 2005, partially offset by the loss of volume from the sale of the company’s equity investment in Compañía Cervecerías Unidas S.A. (CCU) in the fourth quarter 2004.

Net sales increased 0.2 percent vs. the third quarter 2004, driven primarily by an 11 percent increase in international beer segment net sales due to higher sales in Canada, the United Kingdom and China and a 13 percent revenue increase from entertainment operations.

Domestic beer segment sales declined 2.7 percent on lower beer sales volume and lower revenue per barrel. Domestic revenue per barrel 3/ decreased 1.2 percent in the third quarter 2005 vs. the third quarter 2004.

Domestic beer pretax income decreased 21 percent due to lower beer sales volume, lower revenue per barrel and higher costs, primarily resulting from commodity cost pressures from aluminum, glass and energy, plus higher costs for new packaging.

During the third quarter 2005, the company and its outside insurance companies settled claims associated with lawsuits involving the company and a former independent beer wholesaler. As a result of the settlement the company paid $120 million and incurred a pretax charge of $105 million, or $.12 per share, which is reported as a separate line item on a pretax basis in the company’s income statement. For business segment reporting purposes the settlement is classified as a corporate item.

Income before income taxes, excluding the litigation settlement, decreased 21 percent 1/ vs. the third quarter 2004, reflecting lower profits in domestic beer, international beer and packaging operations, partially offset by improved results from the company’s entertainment business.

International beer segment net income increased 27 percent, led by continued strong performance by Grupo Modelo. Equity income increased $43 million in the third quarter 2005 vs. 2004, reflecting the benefit of Grupo Modelo volume growth, a lower Mexican income tax rate and the inclusion of Tsingtao equity earnings since May 2005. International beer pretax income decreased $14 million primarily due to lower profits in China, including Harbin.

Packaging segment pretax profits were down $9 million primarily due to higher energy and material costs for glass and can manufacturing operations.

Entertainment segment pretax results improved $31 million due to increased attendance and admissions pricing and higher in-park spending, partially offset by increased park operating expenses. Results in 2004 were adversely impacted by four hurricanes in Florida.

Anheuser-Busch Companies net income and diluted earnings per share decreased 10.8 percent and 8.2 percent, respectively, for the third quarter1/, excluding the impact of the litigation settlement. Reported net income decreased 24 percent compared with third quarter 2004, while reported diluted earnings per share declined 22 percent, to $.66. Excluding the impact of the litigation settlement, the effective tax rate was 38.1 percent1/. The reported effective income tax rate increased 350 basis points, to 42.3 percent in the third quarter 2005 primarily due to a limited tax benefit from the litigation settlement, partially offset by lower foreign taxes and ongoing benefits received under the American Jobs Creation Act.

Net sales increased 0.9 percent vs. the nine months of 2004, due primarily to a 21 percent increase in international beer net sales, an 8 percent increase in commodity-based packaging operations sales and 9 percent higher entertainment segment sales.

Domestic beer segment net sales decreased 2.6 percent primarily due to lower beer sales volume partially offset by higher revenue per barrel. Domestic revenue per barrel grew 0.2 percent in the nine months of 2005 vs. the nine months of 2004.

Income before income taxes decreased 23 percent vs. the nine months of 2004, primarily reflecting lower profits in domestic beer, international beer and packaging operations, and the litigation settlement, partially offset by improved results from entertainment operations.

In addition to the $105 million ($.12 per share) litigation settlement in the third quarter, income before income taxes for the nine months of 2005 includes a $15.4 million pretax gain ($.024 per share) from the sale of the company’s 13 percent equity interest in the Port Aventura theme park in Spain. Also, income before income taxes for the nine months of 2004 includes a one-time pretax gain of $19.5 million ($.015 per share) from the sale of commodity hedges. The theme park and hedge sale gains are included in other income for consolidated reporting and classified as corporate items for business segment reporting purposes. Excluding these one-time items, income before income taxes decreased 19 percent 1/ vs. the nine months of 2004.

International beer segment net income increased 22 percent year-to-date. Equity income increased $91 million in the nine months of 2005 vs. 2004, primarily reflecting the benefit of Grupo Modelo volume growth and a lower Mexican income tax rate plus the impact of reporting Tsingtao equity income, partially offset by the reduction in equity income due to the sale of the company’s equity investment in CCU in the fourth quarter 2004. International beer pretax income was down $20 million for the nine months primarily due to lower profits in China and the United Kingdom, partially offset by improved results in Canada.

Packaging segment pretax profits were down $18 million during the nine months of 2005 due to higher energy and materials costs for can and glass manufacturing operations.

Entertainment segment pretax results improved $31 million year-to-date due to increased attendance, admissions pricing and in-park spending, partially offset by higher park operating expenses.

Net income decreased 14 percent compared with the nine months of 2004. Reported diluted earnings per share were $2.09, a decrease of 11.1 percent, compared to the nine months of 2004. Excluding one-time items, net income and diluted earnings per share decreased by 10.4 percent and 6.9 percent, respectively. 1/ Earnings per share for the nine months of 2005 benefited from the company’s repurchase of nearly 13 million shares during the period.

The effective income tax rate for the nine months of 2005 was 38.3 percent. Excluding the impact of the one-time items discussed above and the previously disclosed second quarter 2005 income tax benefits related to the sale of CCU and State of Ohio tax legislation, the effective tax rate was 38.1 percent.

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