DBRS Confirms Anheuser-Busch at A (high) and R-1 (low)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Anheuser-Busch Companies, Inc. (Anheuser-Busch, AB or the Company) at A (high) and R-1 (low).

AB’s earnings profile displayed signs of stabilizing as the Company delivered modest improvement in operating results so far this year, following a period of sharp decline in 2005. The U.S. beer market displayed a more rational pricing environment and greater resilience with respect to intense competition from spirits and wines than it did in 2005. International beer sales displayed strong growth, driven primarily by volume gains in China, Canada and Mexico. However, AB’s international sales remain relatively low (i.e., less than 10% of domestic beer sales). The overall operating margin this year was slightly lower than the comparable period in 2005 due to sharp increases in input and operating costs, but displayed signs of improvement toward the second half of 2006.

Although cash flow also stabilized following a significant decline in 2005, free cash flow remains below levels achieved in 2003 and 2004. AB reduced share repurchases sharply beginning in 2005 in order to use significant portions of free cash flow for debt reduction. The Company maintains a target for cash flow-to-debt in the mid to high 0.30 times range. As such, AB’s financial profile has remained relatively strong through the challenging competitive and cost environment of 2005-2006.

DBRS estimates domestic growth of 3% to 4% in the near term – relatively balanced between volume and pricing – as the Company continues with its strategy of reduced discounting and selective price increases within an intense competitive environment. While proportion of earnings from international operations remains relatively small, DBRS expects AB will increasingly rely on this segment for growth going forward.

DBRS expects that pressure on AB’s margins and earnings profile will ease further going forward as the rate of growth in input costs is expected to moderate. That being said, high costs and strong competition will not make full recovery of operating income (i.e., to pre-2005 levels) easy to achieve.

DBRS forecasts AB will achieve modest and steady growth in free cash flow in the near to medium term (based on rising operating income and stable capex), but also expects dividend and share repurchase levels to increase going forward. As such, DBRS does not expect significant changes in debt levels in the near to medium term, but does believe credit metrics could improve on the basis of higher cash flow generation.

Note:
These ratings are based on public information.