Earnings Call: Q3 2017

Oct 26, 2017

Welcome to the Anheuser Busch InBev Third Quarter 20 17 Earnings Conference Call and Webcast. Hosting the call today from AB InBev are Mr. Carlos Brito, Chief Executive Officer and Mr. Felipe Dutra, Chief Finance and Technology Officer. To access the slides accompanying today's call, please visit AV InBev's website now at www.av inbev.com and click on the Investors tab. Today's webcast will be available for on demand playback later today. Some of the information provided during the conference call may contain statements of future expectations and other forward looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks and uncertainties. It is possible that the company's actual results and financial condition may differ possibly materially from the anticipated results and financial condition indicated in these forward looking statements. For a discussion of some of the risks and important factors that could affect the firm's future results, see Risk Factors in the company's latest annual report on Form 20 F filed with the Securities and Exchange Commission on the 22nd March, 2017. AB InBev assumes no obligation to update or revise any forward looking information provided during the conference call and shall not be liable for any action taken in reliance upon such information. Please refer to the reference based press release dated the 6th January 2017 available on the company's website for important information about the company's updated 20152016 segment reporting. It is now my pleasure to turn the floor over to Mr. Carlos Prizo. Sir, you may begin. Thank you, Maria, and good morning, good afternoon, everyone. Welcome to our 2017 Q3 results conference call. Before we discuss results, I'd like to take a moment to highlight the 1 year anniversary of the combination with SAB, which we recently celebrated on October 11. Our people have amazed us over the past year. We came together, learned from one another and grew into a better, stronger company. We have brought out the best in each other. We have lived up to the challenge, taken ownership and navigated complex and massive change to achieve more than we could have imagined. We have a lot to be proud of. From our new category expansion model, to the scale up of our global brands into our new geographies, to the exchange of world class best practices to all our breweries and supply teams. And this is just the beginning. We have a long and exciting journey ahead of us. Today, we celebrate being a committed, hardworking, fun loving team who's passionate about bringing people together for a better world. So here's to 1 year and the next 100 to come. Turning now to our 3rd quarter results. Total revenue in the quarter grew by 3.6 percent with revenue per hectoliter growing by 5.4% on a constant geographic basis, driven by revenue management initiatives and continued premiumization efforts. The premiumization strategy was supported by our global brands, which grew revenue by 1.6%. Total volumes declined by 1.2% with our own beer volumes down 1.5% and non beer volumes down 0.9%. EBITDA grew by 13.8% with margin expansion of 353 bps to 38.9 percent, driven by an improved performance in Brazil as well as the continued delivery of synergies. Normalized earnings per share increased by $0.48 or 58 percent from $0.83 to $1.31 predominantly due to a higher profit. Finally, the Board has approved an interim dividend of €1.60 per share for the fiscal year 2017, the same as last year and consistent with our commitment to deleverage. Now turning to our Global Brands, which delivered revenue growth of 1.6% for the quarter and 7.3% for the 9 month period this year. Budweiser revenues were down by 2.2%, although they grew by 4.4% outside of the U. S, driven by growth in Brazil, South Korea, Colombia and Chile. This quarter, the highlight of our Bambaiza global music program was Tomorrowland, which is which I will discuss in further detail on the next slide. Stella Artois grew revenues by 0.9% with good volume led performances coming from Argentina, South Korea and Brazil, partially offset by declining shipments in the U. S. As a result of the temporary transportation disruptions caused by the major hurricanes. Corona continued its impressive track record of growth with revenues up by 9.6% and by over 11% outside of Mexico, driven by China, the U. K. And now a meaningful contribution from Colombia. We'll continue fueling the growth of our global brands through consistent communication and execution around the world, while further expanding in new markets. This July, we once again activated our global partnership with Tomorrowland, the world's largest global electronic music festival, which brings over 400,000 people together over the course of 2 weekends. The Budweiser music video created specifically for this event received over 10,000,000 views. We activated Tomorrowland campaigns across 18 countries, engaging almost 200,000,000 consumers through initiatives such as special packaging, digital content and activations in the on and off trade. We look forward to continuing to scale up with properties such as Tomorrowland to engage consumers in new ways throughout the world. Before we get into the performances of our markets, I'd like to highlight the many achievements of our beers this year. Brewing the highest quality beers is a passion of each and every one of us, who are driven by the opportunity to offer our consumers the best possible beers across many styles. Winning awards at renowned beer competition is recognition of that hard work and our dedication to brewing and quality. We're very proud of the 164 awards we have won at major beer competitions this year to date, of which 52 are gold medals, including Jupiler 0, which was introduced in Belgium earlier this year. Our most awarded breweries so far this year included 4 clients from Australia with an amazing 39 awards followed by our craft partners in Brazil, Walls and Colorado, who have won 24 18 awards respectively. Vertoyan Grand Prestige, a rich and flavorful strong ale is our most awarded single beer in 2017. We believe our impressive portfolio of high quality beers is key in enabling us to grow the global beer category. Let's now have a look at a closer look at the results of each of our regions. Our revenue in North America declined by 5.3% this quarter due to industry softness in both the U. S. And Canada, while revenue per hectoliter improved by 0.9%. Volumes declined by 6.1%. EBITDA declined by 1.4 percent with margin expansion of 164 bps to 41.8%. In the U. S, we estimate industry sales to retailers or STRs declined by 1.7% in the quarter and by 1.3% in the 1st 9 months. Our STIs were down 3.4% resulting in market share loss of approximately 80 bps for both the quarter and the year to date based on our estimates. Our revenue in the U. S. Declined by 5.6%. However, we saw revenue per hectoliter growth of 0.9%. Revenues based on sales to wholesalers or STWs, which were down 6.4%, largely attributed to shipment disruptions from major hurricanes in Texas and Florida. We expect SDRs and STWs to converge on a full year basis. During difficult times such as these, our first priority is the safety and support of our employees in affected areas and we have focused on giving back to our communities across the country. We have donated more than 2,800,000 cans of emergency drinking water in 2017 alone, with more than 2,000,000 of those cans going out recently to Texas, Puerto Rico, Florida, U. S. Virgin Islands and Northern California. Our premiumization strategy and tight cost management enabled the continued expansion of our gross profit margin, which grew by 94 bps to 62%, while EBITDA declined by 0.7% with margin expansion of 211 bps to 42.2%. The hurricanes in the quarter accounted for full 2 percentage point negative impact to EBITDA in the U. S. In the quarter. The highlight of our U. S. Portfolio continues to be Michelob Ultra, which has been the biggest share gain in the U. S. Industry for the past 10 quarters. This past quarter, the brand achieved its highest quarterly share gain in the last 5 years, reaching almost 10% of our total volume as its growth accelerates through increased penetration. As consumers in the U. S. Continue to trade up to bought premium brands, we believe we are well positioned with our craft portfolio, which is outperforming segment in our import brands led by Stella Artois. The premium light segment in the U. S. Remains under pressure with Bud Light losing 95 bps of market share in the quarter. However, we recently launched a new suite of creative content, some of which focuses on the quality credentials of the brand that resulted in an immediate increase in ad awareness. We remain committed to turn around Bud Light and continue to invest the time, talent and resources necessary to do so. Budweiser also remains under pressure along with the U. S. Premium segment, losing 45 bps of share this quarter. With that being said, we are excited about by our latest creative content, which resulted in Budweiser becoming the industry leading brand in ad awareness and consideration growth this quarter. The U. S. Market remains complex yet exciting, and we're confident that our diverse portfolio of brands allows us to address a wide variety of consumer preferences. Moving now to Latin American West. Revenue grew by almost 9%, with revenue per hectoliter increasing by 5.5% as a result of revenue management initiatives and favorable brand mix. Volumes were up 3.2% led by performances in Mexico, Ecuador and Peru. Our EBITDA increased by 13.1% with margin expansion of 173 bps to 47.4% with strong top line growth supported by synergy capture. Mexico had another great quarter with revenues growing by double digits and volumes up by mid single digits. EBITDA grew by 8.3 percent with margin contraction of 110 bps to 42.7 percent as top line growth was partially offset by the combined impact of currency devaluation on our cost of sales, a 30% increase in fuel costs in the beginning of the year and pressure on production on our production grid to meet growing demand, both domestically and internationally. The strong top line growth was accelerated by the success of our core plus and premium breads. We believe premiumization represents an opportunity to fuel the long term growth of the beer category in Mexico, especially through expansion into meal occasions. In Colombia, revenues were up by 6.7%. A slight decline in beer volumes of 1.4% was offset by the growth of Ponimoto, which led to non beer volume growth of 10.3%. Our EBITDA grew by 4.7% with 95 bps of margin contraction. The stop line growth and synergy capture were partially offset by the phasings by the phasing of sales and marketing investments as well as the release of certain provisions in the prior year. We're committed to growing the beer category in Colombia and believe one of the biggest opportunities to do so lies in the growth of new consumption occasions. Many of our brands initiatives are dedicated to this opportunity, especially targeting the weekday occasion and the meal occasion. Moving now to Latin American North. Our performance in Latin American North saw a sequential improvement this quarter from a challenging first half. Revenue was up by 8% and our revenue per hectoliter improved by almost 12%. Volumes in the region declined by 3.5%. EBITDA grew 16.7%, primarily driven by the performance in Brazil, with margin expansion of 298 bps to 39.8%. In Brazil specifically, we saw the beer industry decline by low single digits this quarter in a consumer environment that remains challenging. Our business grew revenue by 8.6 percent with revenue per hectoliter growth of 13.1%. Volumes by 4% with beer volumes declining 5.4% and on beer volumes up by 0.5%. This performance was largely attributable to the fact that in the prior year price increases were delayed until the 4th quarter creating a difficult volume comparable. Brazil EBITDA grew by 14.5% with margin expansion of over 200 bps to 39%, with strong EBITDA growth in our beer business, partially offset by an EBITDA decline in our non beer business, which was heavily impacted by commodity price escalation in the quarter. We believe that the revenue growth achieved this quarter signals a return to sustainable growth from a strengthened market position in our beer business. Cautiously optimistic about the Brazilian economy and are confident in our commercial plans and our ability to accelerate EBITDA growth and margin recovery for the balance of the year. Brazil continues to lead the way in premiumization and integration of the beer category as part of our commercial priorities. The recent packaging revamp of the entire Brahma brand family has led to a double digit increase in purchase intent with brand preference trending up. Brahma Extra, our core plus variant of the Brahma family, grew volumes by double digits this quarter. Our craft portfolio also grew by double digits as the craft segment continues to grow in Brazil. Let's now move to Latin American South, where we had a solid performance with revenues growing by well over 20%. Revenue per hectoliter grew 16.9%, driven by premiumization as well as revenue management initiatives. Volumes improved by 4.5% with continued growth in Argentina, driven by an enhanced commercial strategy as well as Paraguay, delivering its best ever quarterly performance. EBITDA grew by 17.3 percent with margin contraction of 193 bps to 46.9 percent as top line growth was partially offset by cost of sales increases as a result of continued adverse foreign exchange impacts. Turning now to EMEA, where our revenues grew by 4.5% this quarter with revenue per hectoliter increasing by 5.4%, largely driven by the continued growth of our premium brands in Western Europe, leading to share gains in most of our markets as well as our revenue management initiatives. Our volumes declined by 0.9% with owned beer volumes declining 0.5% as broad based growth across Africa was offset by beer volume declines of 2.5% in South Africa. EBITDA grew by 20.8% with margin expansion of 4.54 bps to 33.7%, as top line growth was enhanced by synergy capture in Africa. In South Africa this quarter, our beer revenues grew by 3.9% with revenue per hectoliter increasing by 6.6%. Our beer volumes declined by 2.5%, largely due to the phasing of inventory levels between the 2nd Q3 of the year due to the timing of our price increase. Our EBITDA grew by 30.7% in the 3rd quarter with margin expansion of 6.45 bps. In August, we launched Budweiser, rounding out our global brand portfolio in South Africa. We're excited about the progress we have made with Stella Artois and Corona, increasing brand awareness through experiential activations and trade execution in key urban centers. So far this year, their volumes have almost tripled. We're looking forward to scaling up the distribution and activations of all 3 global brands to grow the premium segment in the country. Moving now to the Asia Pacific region, where we delivered revenue growth of 4.6%, driven mostly by brand mix as volumes in the region were up marginally. This was led by the strength of our core plus and super premium brands in China as well as positive brand mix in Australia. EBITDA grew by 14.4% with margin expansion of almost 300 bps to 34%, with top line growth supported by synergy capture in our new markets. In China, revenues grew by 4.6% despite a slight decline in beer volumes of 0.2% as our growth in the country continues to come from the more profitable core plus and above segments. EBITDA grew by 12% this quarter with margin expansion of 193 bps to 29%. We have seen good growth this year from our core plus portfolio, which accelerated in the Q3. This was led by our Harbin family of brands and driven by increased LDA penetration. We're also pleased by our recent Harbin BiP innovation, a weak beer that's outperforming expectations and grew by almost 18 times so far this year. We remain confident in our ability to grow our business in a sustainable way for the long term with a portfolio focus on the core plus and above segments. With that, I would like to hand over to Filipe, who will take you through some further detail in our Q3 results. Filipe? Thank you, Brito, and good morning, good afternoon, everyone. Let's start with an update on our synergies. This quarter, we delivered $336,000,000 We are updating our total synergy guidance from $2,800,000,000 to $3,200,000,000 to be delivered within the same 4 year period following the close of the combination. This number is inclusive of the $1,050,000,000 of cost savings previously identified by SAB. The incremental $400,000,000 are expected to be derived predominantly from procurement and engineering savings as well as best practice sharing. We now expect the delivery of these recurring synergies to require estimated one off cash costs of approximately $1,000,000,000 an increase of $100,000,000 to be incurred in the 1st 3 years after closing, and of which $465,000,000 has been spent to date. As a reminder, these synergies do not include any top line or working capital Net finance costs in the quarter were over $1,100,000,000 compared to over $1,200,000,000 in the Q3 of 20 16. This decrease was driven primarily by a favorable $240,000,000 mark to market gain linked to the hedging of our share based payment programs compared to a loss of $57,000,000 in the Q3 last year, a swing of almost $300,000,000 partially offset by FX losses. Our normalized effective tax rate for the 3rd quarter was 16.7%, up from 11.7% in the 3rd quarter of 2016. Our guidance for full year 2017 remains in the range of 22% to 24%, which excludes the impact of any future gains and losses related to the hedging of our share based payment programs as we have said before. However, at this point, we expect to be at the lower end of this range. Normalized earnings per share increased 58% year over year from $0.83 to $1.31 This was largely driven by an $0.89 increase in normalized EBIT due to organic growth and benefiting from the earnings of the retained SAB business. There was also an $0.18 year over year positive change in the mark to market adjustments linked to the hedging of our share based payment program. In addition, last year's results were impacted by the pre funding costs related to the FAB transaction not yet matched by earnings. These favorable impacts were partially offset by dilution due to the increased number of shares as well as an increase in income tax expense. The Board has proposed an interim dividend of €1.60 And as you can see from slide 26, this is the same as the last 2 years and consistent with our commitment to deleveraging. Our capital allocation objectives are unchanged. Our optimum capital structure remains a net debt to EBITDA ratio of around 2 times. Our first priority for the use of cash will always be to invest behind our brands and to take full advantage of the organic growth opportunities in our business. De leveraging to around 2 times remains our commitment and we will prioritize debt repayment in order to meet this objective. M and A remains our core competency and we always be ready to look at opportunities when and if they arise, subject to our strict financial discipline and deleveraging commitment. Our goal is for dividends to be a growing flow over time, consistent with the non cyclical nature of our business. However, as we have said before, gaining our emphasis on deleveraging, dividend growth is expected to be modest in the short term. And with that, I will hand back to Maria to begin the Q and A section. Thank you. Thank you. The floor is now open for questions. In the interest of time, we will limit participants to one Our first question comes from the line of Oliver Nikolay of Morgan Stanley. Hi, good morning, Brito and Felipe. I've got one question and just one follow-up on Mexico. First of all, in your press release, you talk about a strong finish to the year. Is it going to be mostly driven by shipment phasing in countries like the U. S, South Africa and Australia, which were weak in Q3? Or do you expect also underlying improvement on top of that? And just regarding Mexico, top line has been extremely strong over the last for a while actually, but margins were actually down this quarter and it's been the case last year already. You mentioned some production grade issues due to high demand, which I guess is a big problem to have. But how long do you think it's going to take before we can see a margin recovery in Mexico and some operating leverage? Thank you. Yes, Olivier. So in terms of the Q4, as you saw in our U. S. Business, for example, there was a mismatch between STWs and STRs in that our STRs were down in the quarter by 3.4%, but our STW is down by 6.4%. And the reason for that was the hurricane we had in Texas and Florida that disrupted the shipments in those in that south part of the country and those being 2 big markets for us. So that's something that we expect has got to be reduced in the Q4 as SDWs and SGRs tend to converge on a full year basis. So that's one thing. In Brazil, we also said that we expect that revenue growth achieved in the 3rd quarter signals a return to sustainable growth. And together with the cost being more favorable, we also remain optimistic about the overall macro and are confident in our commercial plans. And we also said ability to accelerate EBITDA growth and margin recovery for the balance of the year. Also in South Africa, there was a price increase that we implemented. And because of the different phase between this year and last year and the time of the market to adjust. There was also some tough comps in volume. But again, that should be different story for the Q4. We also have some new news there in terms of packaging. South Africa with the big bottle 1 liter implementation, That should also be good news for volume. And in Australia, we also had a one off situation in that we took our brands back from Lion Nathan last quarter I mean last year and that provided a very tough comp for us this year, but will provide easier comps next quarter because of the very transition that that was a public thing that was we communicated last year. So yes, there are some things that will change for the Q4. I think that's what you mentioned. In terms of Mexico, you're right. I mean, it's a first class problem in a way, because top line has been very solid, growing. Our brand mix is also premiumizing. So this is all very good news. The issues that both domestically and internationally for exports, volumes have been ahead of our expectations when we planned for capacity some years ago. That's why we are putting more capacity, investing more capacity in Mexico because things are going well. So in the meantime, we have to take beer for further distances than we would normally do. Plus there was an energy cost increase on January 1st in which diesel went up by 30%. And that of course you have to travel even further that it's a double whammy right there. So those are the things that in Mexico. I think it's the first class problem to have. It is true that our margin in Mexico used to be higher than the 42 plus that we presented this year. But rest assured that we don't forget that those high watermarks, those are referenced for us to get back to. Our next question comes from the line of Matthew Webb of Macquarie. Yes. I wonder if I could just ask a question on the sale of CCBA. I was just wondering whether we should factor in any negative implications for your margins on your remaining beer businesses in Africa following the sale of CCBA based on them having shared some costs with that business? Well, Matthew, CCBA in South Africa was a total separate business. I mean, they had their own management, facilities, trucks, distribution, the procurement everything was separate. So and it was done this way once the CBA was formed. Before they had something in common, but because other partners came into the partnership like the Gucci family, the Coca Cola Company, they made a point at the time before we arrived to the picture of setting up a company that had its onboard management facilities, everything. So there's no impact in South Africa, which is the bulk of the business. So no dis synergies. And outside South Africa any impact at all or nothing material? Outside South Africa it is true to say that we share some things. But again, 2 things. First, the operations are much smaller than South Africa. And second, when we revised our synergies, Even before that when we had the 2.8 and now the 3.2 we took all that in consideration, but the effects of the synergies in those countries are very minimal. Okay. That's very clear. Thanks very much. Welcome. Our next question comes from the line of Edward Mundy of Jefferies. Hi, good morning everyone. It seems that best practice sharing from SAB is partly behind the increase in cost savings. But when it comes to showing of top line growth best practice from SAB, I think Britta, you mentioned in your opening remarks, in particular, the category expansion model. I was wondering whether you give some specific examples around how that's impacting your top line growth agenda? And how embedded is this so far? Very good point. I mean the best practice sharing has been very intense in both top line costs everything brewing package procurement. And that's why, Matt, Edward, this time this combination is the first one we use the terminology of intellectual synergies. We really learned a lot from each other. And category expansion model as you say is one was one of the highlights in that our new colleagues from SAB had been on that road, that track for many years since 2,009 to be precise. And they had accumulated a lot of learnings that we applied to our 3 year plan this year and as a consequence being applied to the 1 year plan next year. We first got the news to the total company and aligned the way of talking about category in March when we had our global meeting in South Africa by the way this year. And so became company language not only marked their sales became company language. And that's very key. That was very key in developing the 3 year plan and then the budget for next year that we're in the process of doing. So we're going to see more of that next year, because the plans are being crafted with that in mind. Of course, I mean, those things are about category development, are about positioning your brands in the right places in terms of consumer needs and occasions. Those are not things that will necessarily have a major impact in all markets year 1. But it's a framework that helps you think a lot about portfolio and resource allocation. And that's something that we had missed before. We were thinking a lot about brands in isolation. And therefore, the portfolio play was being missed sometimes in our discussions. And the category expansion model is a lot about where we are today. We're to our portfolio where the trends are going, consumers are going, 3, 5 years projection, where we should have a portfolio placed in 3, 5 years and what are the steps we need to take to get from here to there and the consequence in terms of resource location and targets and everything. So that's a very good framework to operate from. Thanks. And as a follow-up, are you able to share with us as to whether your market share has stabilized in Brazil post quarter end and whether competition have taken any price? Yes. Very, very good point. I mean, in increase prices and then the market takes 1, 2, 3 months to adjust. This year, we increased prices more towards the beginning of Q3. Last year was in Q4. So that's why you see a volume tough comp there in Brazil. But what we have to say is that now after 1, 2 months, the market has readjusted, let's say, has stabilized. And so that's good news. And but that of course made us lose some share in the Q3. But if you look at year to date, we're still ahead of the industry. So we're still in positive territory in terms of share. Okay. Thank you. Welcome. Our next question comes from the line of Robert Ottenstein of Evercore ISI. Great. Thank you very much. A number of I'd like you to talk a little bit about Bud Light and a couple of things here. Based on our kind of guesstimates, it looks like Bud Light STRs were probably down 7%, 8% or so in the quarter. I'm wondering if you can kind of verify that. How much of that do you think is due to cannibalization by Ultra? And give us a little bit of sense of the early read on the Dilly Dilly campaign and some of the what we're sensing is increased energy in the distribution system being excited about Andy Golar coming back? Thank you very much. I think, Robert, your point is very well taken. I think Andy is an amazing leader, inspirational marketeer and the system is very excited and supporting him big time. So on Bud Light, a couple of things that from a creative standpoint have been important in reinforcing the message about the friendship campaign. First time in August, what we decided to do on Bud Light is that for many years we haven't talked about quality for Bud Light and it came with what we call internally the essential ingredients campaign. And that took a got a lot of traction social media and everything. So I think we hit a sweet spot there and that consumers about light were curious about what we had to say about quality of the product, about the ingredients. So it was very well received in social media and whatnot. Then in terms of the friendship content, we also came in September with new spots. So the new phase of this platform are bringing more humor. And we had some very good executions that again got some high marks. We also as a third dimension, we continue to explore the Bud Light Music Bud Light Music influencer program with the dive bar tour. And that continues to be something that gets a lot of traction on social media, also including the friendship test that I'm sure you saw. And that was also a smart funny and also grabbed a lot of attention. And finally, in some specific regions like California and Texas where half of the share loss of Bud Light is and where Hispanic consumers have a big representation. We went with some very local 360 campaigns and that has proven to be interesting to build that kind of cohort. So we're now trying to from that learning to territories that have a similar population built. We also upped our media investment in the Q3 to increase support behind the new content. So if you look at our September share voice, is almost twice for Bud Light as it was in July. So that was also important. We think the quality of the campaign together with the pressure improved the ad awareness and brand consideration in the short term. And in the Q4, there's more to come in the friendship platform. So again, lots to come behind Bud Light. And I'm happy that you were able to also assess with wholesalers that there's more excitement in the system. And I think you're right. I mean, we feel the same way. And how much is Ultra cannibalizing Bud Light do you think? There is some cannibalization. But according to some internal numbers, what we see is that this cannibalization is less today than it was maybe a year ago, as we learn more about 1 and the other and try to merchandise them and position them in consumers' mind as the best way we can in terms of being complementary as opposed to being cannibalistic. There will always be some cannibalization, of course, but like being the biggest brand. And Ultra not being that small brand anymore, it's almost 10% of our volume. So you're now talking about 2 big brands in the marketplace and there'll be some cannibalization. The thing to remember, Robert, is that the Bud Light the Michelob Ultra margins are way better than Bud Light. So even if there is some cannibalization financially, gross profit, all that, that's accretive. Thank you very much. Welcome. Our next question comes from the line of Mark Swartzberg of Stifel Financial. Thank you and good morning, Brito. Hi, Felipe. Also a U. S. Question, I was impressed to see the level of profitability in the U. S. Gross margin expanding, EBITDA only down fractionally in spite of this more than 6 point shipment decline. So I'm wondering what your take is either Brito or Felipe on how enduring these drivers of gross margin expansion are. You mentioned mix and sometimes these high end brands can be here today and gone tomorrow, although Ultra is clearly a factor here. So gross margin expansion, how happy you are with the durability? And then SG and A too, I know you made some cuts in your high end component of your business. How contributory was that to the SG and A savings? Hi, Mark Brito here. I think what interesting points you're asking. Of course, what we're trying to do in the U. S. Because we have some brands that we want to invest more because they have legs. We're trying to really take as much money from non working dollars within SG and A and VILC, I mean, our cost of sales to really get that money back into things like packaging or messaging or experiential or support of new upcoming brands, so like our craft brands. So there is a big effort in finding those monies, so we can put it to better use. On the other hand, it is true as well that the hurricanes accounted for an estimated 2 percentage point reduction in our EBITDA this quarter, because not only we lost volume, not only we had to pay more for transportation, not only our STWs were down 6% when STRs were 3% down, so double the delta. But also we lost a lot of volume in Texas and Florida, especially Texas being the most profitable and biggest market we have. So that impacts everything from net revenue per hectoliter to brand mix to EBITDA growth. So that's why we decided to give this estimation of a 2 percentage point reduction in EBITDA just because of all this mess that happened in the south of the country and Texas specifically. It's very profitable and very big for us. But again, given the macro the margin difference, the other thing I would point your attention to is that we've been growing gross profit pretty much on a quarterly basis since 2,009. So when we got here we said premiumization and giving consumers reasons to trend up was high on our agenda and we've been very consistent with that. And once again this quarter we increased our gross profit margin getting to 62%. So that has been the trend since 2,009 pretty much every quarter. That's great. And as a follow-up, Brito, the aluminum prices and the larger input environment looks like it will be more challenging over the next year or so than it's been. How do you think about that vis a vis your ability to continue the gross margin expansion? Well, again commodities come and go. Don't forget we have a hedging policy. So what you see today on spot is not necessarily what we have in store for next year because we do hedge ahead of time. But you're right, aluminum came up. And we're not experts in aluminum in the sense of predicting where it's going. But we try to and that's not the reason why we do hedging. We do hedging more to guarantee a stable environment as we intend to react as we manage the business. But you're right, aluminum is up. But again, we have our hedging policy. So not necessarily what you see on spot, so we're going to have for next year. Fair enough. Thank you, Brito. Thank you, Mark. Our next question comes from the line of Tristan Van Stryne of Redburn Partners. Hi, good morning or good afternoon, guys. I just wanted to ask about wheat beer. Just a little bit color on that. You've now launched an extension on Harbin to at the Rugged in China, and it seems to be taking on China quite well. What's the opportunity there? Why is wheat beer working in China? Well, because in our view, 2 things. First, it fits well with spicy food. 2nd, because it's more coed. And you go to Korea, for example, there some months ago, it's amazing. You go out at night and you see tables with women going out together and they're all drinking whole garden. So it's we also have Franciscan. That's working very well in China, for example. And these brands are amazing. China, for example, you take Franciscan and Whole Garden, their margin is like 10 times what we have in terms of our core brands in China. So and so much so that we decided to introduce our Harbin by P. And Harbin by P as an innovation has been growing 18 times in terms of volume this year and purchase intent is very high. And again, it's a taste that we think together with the food pairing. Let's remember that 50% of the beer in China is consumed with food. And we think that wheat beer has goes well with spicy food. So that's our insight into this whole thing. But Whole Garden is doing amazingly well in the whole of Asia, for example. Obviously, your margins are bigger gross margin because of the price level. But also on an absolute cost level and in terms of production time, is it better than lager? Or is there some is it the same? I mean, this product, Rug Garden, for example, has a special production process that's more expensive. But again, given that it sells for a much higher price, I'm always looking at the net and saying, well, look at this, 10 times more than a core beer in China. So not 10 times, but it's very, very profitable in Korea. And you go to Japan, it's also growing. You go to Vietnam, it's also growing. Some of it's India. Some of it's something that does really well in that part of the world. Thank you. Welcome, Tristan. Our next question comes from the line of Sanjay Asjla of Credit Suisse. Hi, Brito. Can you just elaborate on some of your share of alcohol initiatives in Colombia and South Africa in particular year to date? And can you comment as to whether you think you're gaining share of alcohol in those markets? Yes, we are. And it's all about occasions and portfolio offering. For example, in Colombia, for example, we're trying to get more beer to be consumed during the week. So it's trying to get people not to drink just wine with food, but drink beer as they watch soccer. That is now also on weekdays. With poker, we're also trying to get Thursdays to be like a happy hour friends day type thing as we have in other countries. Stella Artois, for example, is trying to insert itself more and more into food and savoring in all those countries that you mentioned. And so I mean, we're trying to get to new occasions where beer under indexes. And we're also trying to understand even in pubs where we have the traditional beer scene, what we see in some countries is that after 10 or 11 p. M, the mix of alcohol beverages tend to change more in favor of hard liquor. And there are pilots in place on how to keep beer relevant even after 10 or 11 p. M. Once happy hour is over. So I mean, there are many things in trying to get beer to be more competitive, more appealing. In some occasions that has been traditionally dominated by either wine or hard liquor. Cider, for example, or flavored beer is also a big play. If you look at our fly and fish in South Africa, it plays a lot with the female drinker in terms of the wine, white wine occasion. So and also cider in some places, Australia, for example, competes a lot with white wine. So this is the idea to increase. And that's why the category expansion model that we learned from our new colleagues was so important because it opened our eyes, but with more substance on opportunities that could be out there that today we're not looking necessarily at. Got it. And can you just comment on the low end of your portfolio stay, in particular how you're faring against Aguadiente in Colombia and some of the cheap wine and spirits in South Africa? Yes, that's another good point. I mean, with SAB and your colleagues, we learn a lot about smart affordability. I mean, not that we had not done anything on affordability. We had the idea of the big bottles in our markets. But they came with the idea of not only big bottles, but also beer out of local ingredients like sorghum or cassava. The Eagle brand in Africa, for example, in which it's a bridge to bring consumers from illicit alcohol to branded alcohol in conjunction with government officials. In that they give us a tax break to get consumers to get to branded alcohol because in illicit alcohol there's no tax being collected, no quality control. When they come to our Eagle brand, government collects taxes and there's more assurance on the quality side with less issues in terms of people's health. So we have those initiatives in many countries. So yes, what we call a smart affordability is a mix of a lot of the things I just mentioned here. Many thanks. Thanks, Sanjay. Our next question comes from the line of Fernando Ferreira of Bank of America. Thank you. Brito, I had a question on Brazil. I mean, if we step back a little bit and look what has been the driver, right, of the volume leakage over the last couple of years, the 600 ml, right, returnable glass bottles consumed on premise has been the key driver of this volume decline. And you've done a great job with the 300 ml protect your off premise business. But can you share with us what's the plan to save this very important consumption occasion and the bars? What are you doing there to improve volumes? Yes. Very good point, Fernando, because in the old days, we used to have only 2 offerings in the on trade. That was or even at some point only 1. It was the 600 ml bottle. Then cans start coming in, but still was only 2 offerings. Then we came with the 1 liter bottle, which again provided more for less in some regions and that was very important. We're doing at the 600 ml bottle where our margin is much better than any other returnable glass bottle in Brazil is that we're dressing up it big time. If you look at the packaging today in Brazil compared to a year ago, we applied scuffing resin, so the bottles are not scuffed. We have new labels, front and neck that are much more premium. We have a foil, as a matter of fact, of the neck label. I mean, we're really trying to elevate that package because that package is an industry standard bottle. And therefore the bottle tends to be less clean or less appealing. So we're trying to make that bottle appealing. I was in Brazil 2 weeks ago. And the way we're elevating the core in Brazil, if you look at the Brahma family, the Skol family and compared just to 6 months ago, it's like 9 and day. So I think those things are going to be very important to not only elevate our core, but also to support the 600 mil bottle because that bottle is very important for profitability. Thanks, Brito. And if I may just follow-up on your guidance. SG and A so far has been is down 2%, right? But do you say that it will be flat broadly flat for the year? Is there any region where A and P might be lagging and there is a greater phasing in Q4? No. I mean, we said broadly flat, so it doesn't mean exactly 0.0. It's broadly flat. And I think we're keeping the guidance at this point. We see no reason to change it. And this is a global guidance. So I wouldn't go into any region, but this guidance is there. Okay, great. Thank you. Thank you. Our next question comes from the line of Andrew Holland of Societe Generale. Yes, hi. Can I also ask about Brazil? Just looking at the margin performance, obviously, a reasonable recovery there. It actually fell short, I think, of consensus forecast for where the LatAm North margin was going to be. Can you give us an idea of how much of the margin recovery is coming from any help from FX hedging and how much is other factors? I'm just mindful that the fall in Q3 last year, which was a big 31% fall in EBITDA, half of that was ascribed to FX hedging. I'm just wondering whether in this quarter you got any help from hedging? And continuing that thought, do you think you can get it back to the pre fall level, which by my reckoning was about 51%, 52% EBITDA margin? Do you think that is a possible recovery? Hi, Andrew. So in terms of the EBITDA margin recovery, what you have this quarter, Q3 and we put it in the release is that the EBITDA for the beer business increased big time as expected because of the pricing and the stabilization of cost of sales. On the other hand, the soft drinks business in Brazil, as you know, we call the non beer business is very relevant. It had still a huge impact commodity price escalation, so especially on the ingredients side. So that was a big negative in terms of EBITDA performance. And then when you put the 2 together, that's why the margin for the total business only grew 14.5%. But if you would look at the beer business that EBITDA margin grew way ahead of that. But soft drinks was very negative this quarter. So but again, what we said here is that we remain cautiously optimistic about the Brazilian economy and we're confident in our commercial plans and confident in our ability to accelerate EBITDA growth and margin recovery for the balance of the year. So as you said, the 50% for us is a high watermark, is a reference. We believe we can get there. We're not saying when. But that for sure is a lot of the conversations we have with our Brazilian team is what's the new mix that will get us there. Since things have changed as they do every year, different taxes, incentives, mix, costs, commodities, currency, but with all that a plan that we have internally to get back to 50%, something that we see as totally viable. So just on the specific point of FX hedging, was there any help from FX hedging on the beer margin that was up strongly? Hi, Andrew. Felipe here. On the year over year, yes, as we cycle the tough comps in terms of embedded effects and now we get to a level that is more in line with the current market. Our guidance for cost of goods sold as a whole remains valid for the second half of the year. We said before flattish to low single digit increase. This quarter, Q3, we've seen mid single digit increase and which implies a more favorable comp as we get into the Q4. Okay. That's helpful. And just a follow-up on CapEx. Can you give us an idea, you've kept your CapEx guidance for this year at I think SEK 3,700,000,000 dollars Looking further out, is that going to trend up or down over let's say the next 5 years? Yes. Andrew unfortunately we're not in a position to give guidance on CapEx for the next few years. But you're right we kept our guidance on the outlook session for this year at 3.7%. Okay. Thank you. Thank you. Our next question comes from the line of Pavel Slonnik of SIG. Okay. I guess, the last two questions given that everyone is not following the rule. Look, the first question is watching the World Series and being in L. A. Recently, quite amazing to see all the billboards and advertising of Estrella Jalisco. But then when I visit bodegas and stores or even Target stores, I don't see Jalisco on the shelves. So I'm just trying to understand, Molson Coors is trying to push Sol. You have Tecate and Dos Equis with the Heineken guys and of course Constellation. But all those brands go through the other network, right? The Anheuser Busch network would probably do better with the Mexican brand in the portfolio. And Montejo, nothing really happened with it. And Jalisco, you're making this bigger push from a marketing point of view, it seems, but we don't see it on the shelves. If you can explain that disconnect. And I'll break the rule and ask a second question then. Just in general, there are a lot of questions about the consumer, but there seems to be from my perspective a definite slowdown in premiumization. Craft has slowed, imports have slowed. In fact, out of Mexican beer they are down. So what explains that? Is the consumer going back to mass and to value brands? Thanks. Hi, Pablo. I think on our strategy to compete within the Mexican segment, we have a 3 pronged approach. 1st, we're trying to learn more and more about what's important in Mexico because we're the market leader in Mexico in terms of beers. So we're trying to learn that and bridge that back into the U. S. As much as possible. 2nd, we're trying to leverage Bud Light into Hispanics. In a previous question, I spoke about Bud Light in Texas and California having regional programming for Hispanic consumers and the learnings and the results being good results. So but like the number one beer with in the U. S. Among the Hispanic consumers. So we need to continue to support that. And the 3rd leg is the sale of Jalisco, which we call the authentic Mexican import. And this brand come from Jalisco where a lot of the people that came from Mexico that lives in the Southwest and some of our customers they came from. They have very good memories. They know the brand and they're very excited about introducing that to their customers or their clients. So we're still coming up with new packaging that is important in the U. S. Market, growth in like 12 packs. We're putting foil tops on our cans. And still Jalisco draft is already in some markets. We still have to get distribution up. But I think you're right. I mean the World Series will help us because by luck one of the 2 teams is ours in terms of sponsorship. But we're very excited. The wholesalers are very excited. The thing now is to grow SKU assortment or to grow points of distribution. And we intend to grow to by the end of 2017, we're going to expand beyond California and Texas to other 18 states. So you're right, that's still a gap we have. But we couldn't miss this opportunity with the World Series to get the brands the brand name out there, at least in the consideration set of some consumers, at least that they'd be curious about it. And in terms of slowdown, I wouldn't take a quarter on that. I mean, I think the import segment continues to grow strongly. Crafts slowed down even went to 0 or flat some time ago. Now it's back to growth single digit. Our craft portfolio, of course, is double digit growth, so going way ahead of the industry. But the craft is back to growth and imports are in the year to date are growing. So I think those are and when you look at our portfolio, Pablo, I don't have to worry too much about the segment because they still have so much to do with Stelo, for example, and other imports of ours. And all through the same thing and Stelo Jalisco that for me it's all upside. Right. Thank you. Thank you. Our next question comes from the line of Fernando Boer of Degroof Petercam. Yes, good afternoon. It's Fernand de Boer from Degroof Petercam. One question from my side. Could you tell something more about your performance in the global brands? You said you were pleased with that, but if I look at it, but it's slowing down outside the U. S. Stella, I can understand that they were hit by the hurricanes, but also corona is slowing down. So is this only temporary? And what do you expect going forward? Yes. On Global Brands, I mean, the story is that you have 2 stories. I mean, if you look at the quarter, it was very weak. The net revenue was even below our total company net revenue. But if you look at the year to date, net revenue of Global Brands are at 7.3% growth and total company at 4.1%. So this is 1 quarter. But what happened this quarter is that Budweiser had China was not very strong. So and Stella, we had issued the U. S. Shipments and that the shipments of Stella got also issues with the hurricane and the whole supply. But Corona had a good quarter. I could even say Corona could have had a better quarter if not for the tough comp in Australia because of the transition from the brands that came from Lion Nathan to us, COB in Australia. And that provided a quarter where there was too much shipments for them and a quarter there was no shipments. So now 3rd Q4 will be 2 different stories in terms of Australia and our import plans. So but corona even with this Australia hiccup and Australia is one of the top three countries for corona, it still performed well. Budweiser had issues in U. S. And China. U. S. Again hurricane didn't make it any easier. And Stella again U. S. Which is now a big market for Stella together with the U. K. So again, I wouldn't take this quarter as any yellow flag or anything. It's just that hurricanes here and there. But when you look at year to date, it's 7.3% versus 4.1% for total companies. So it's still going strong. So should we take the year to date performance also as a proxy for going forward as you are, let's say, internal ambitions? No, I mean, I wouldn't be prepared to give that guidance at this point. But what I can say is that if you look at the last many years, Global Brands have outperformed net revenue total net revenue always. So again, 1 quarter is just 1 quarter. Okay. Thank you very much. Thanks, Fermil. Our next question comes from the line of Melina Reyes of Bernstein. Hi, there. Just two questions from our side, Brito. So I want to quickly dive back in on Bud Light. I wonder if you could talk to us a little bit about what is the problem? Who are the consumers that are drinking less Bud Light? I know you spoke a little about millennials, but is there an issue failing to collect with younger consumers, etcetera? And then just a little bit on China. We saw in the first half, I think you had organic margin expansion of 500 basis points, which slowed down to about 190 basis points in the Q3. Can you talk a little bit about what are the margin drivers there? And then how we can think about margin progression in China moving forward? Well, again, I can the margin expansion in China has been very healthy, 193 bps this quarter as you said and year to date 22. I mean, 400 basis points year to date, right? So I call this very strong, because in China, we don't have any synergies or anything. This is really the core business performing better. What we had in China, which happened a couple of times in the last few years is that sometimes there is a regional mix because our business is not equally represented in all regions in China. And sometimes the region that's important for us or a couple of regions get hit by some weather or some economy in that region, and that affects us for a period of time, but then it comes back. So we're still in expansion phase in China when you think about it. Budweiser is present everywhere, but not at the same distribution level. So there's still lots to do in China. We're very focused on we're very our volumes too, they have concentrated along the coast, Southeast, Northeast. And when something happens along the coast, that, of course, takes a toll on Budweiser. But the brand is very healthy. The brand has an amazing brand health metrics, continues to grow, is already a big brand in some places for a premium brand and we continue to keep the premium credentials. So very happy with what our guys do there And that's why the margins continue to expand. So I think that's a very good story we have in China. It's not perfect every quarter, but it's a very good story overall. In terms of Bud Light, in terms of Bud Light to your first question, don't forget the Bud Light being the biggest brand in the U. S. Market, 19% share of total market. It does get in a fragmented market that's becoming ever more fragmented. It does get chipped from different sides for sure. And consumers today, they used to be consumers of Bud Light. They're still consumers of Bud Light, but the number of brands that they consume increased and therefore Bud Light has been replaced a couple of times by other brands. So but that's happening I think to all major brands and that consumers have a larger repertoire of brands that they would consider drinking. They used to be more focused on maybe 3 to 5 brands. Now they have 15 brands in mind. So that for Bud Light, of course, is an issue as with any the big brands in the U. S. On the other hand, some of the Bud Light issues are also caused by the growth of brands like Ultra. That's within our portfolio, but again that at a much better margin. So yes, we can do a better job in Bud Light. We're committed to get that job done and implement in the marketplace. But the pressure that comes from a more fragmented market even from internal brands of ours that are growing that share the same wholesaler and the same calendar will be there for sure. Thanks, Pune. You're welcome. Ladies and gentlemen, we have time for one more question. Our final question will come from the line of Andrea Pistacchi of Deutsche Bank. Yes. Hi, good morning. A question on Brazil, please, on the tax situation there. So 2017 has been very benign year from a duty point of view. Maybe it's a bit early, but do you are you in the position states gone through at this point? And then please on Africa, strong volume growth in Q3 in Africa ex South Africa. At the H1 call, I think you said that capacity would be coming on stream in H2. So has this happened? And where and are there any areas in Africa, any countries where you're still capacity constrained? 2 very good points. So in terms of Brazil, you asked about the state taxes. So the answer is that so far none of the 27 Brazilian states have announced tax increases. Of course, any tax increase at the state level, VAT, must be published until December 31. So we cannot be assured that nothing will happen. I think some states learned the hard way that if you continue to increase taxes at the state level, at some point, you don't increase tax revenues, because volumes are elastic. On the federal level, the new legislation that was implemented in 2015 had a tax increase scheduled for 2016, 2017 2018. So the change was already implemented. So we believe that the new model will be in place until the end of 2018. So it can always change, but we don't foresee that because it's a new model that was just implemented. In terms of your capacity question in Africa, we're increasing capacity in South Africa, including the launch of the 1 liter bottle for the Q4. So that's something we're very excited about. It's something that African consumers will have access. It worked really well in some other countries of ours, the bulk pack. And now consumers will have access in South Africa as well. And in Nigeria, we've been capped at capacity for now some quarters and we're beginning to have more capacity in a market that we're very excited about. It's a growth market. Our brands are doing very well. And the premiumization still play to be had. Nigeria is interesting because the premium markets are already established there. It's not insignificant. It's quite big because other players have been there for a while, but we have no presence. So for us, it's not a question of starting new segments, it's a question of getting our fair share in that segment with much better margins. So that's also a play together with more capacity for our local brands that do very well. So again Nigeria and South Africa 2 big focus for us in Africa. Thank you. Okay. So let me thank everybody for your time today. And in the call, let me tell you a couple of things. So our first priority, in terms of summary, a couple of things. So our performance in the Q3 of 2017 was solid. Revenues continue to increase and we're pleased to see an accelerated EBITDA growth rate. Another thing I'd like to comment is that we're very proud of the progress we have made on the SAB integration over the past year and continue to grow into a better, stronger company. And finally, we're working hard to deliver strong finish to the year and to further develop the global beer category. So again, thank you very much for your time. Thanks for joining the call. And I'll see you all next quarter. Have a great day. Bye bye. Thank you. Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.