Welcome to the Anheuser-Busch InBev second quarter 2017 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 ab-inbev.com and click on the investors tab. Today's webcast will be available for on-demand playback later today. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star 0.
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 of 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 January 6, 2017, available on the company's website for important information about the company's updated 2015 and 2016 segment reporting. It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may begin.
Thank you, Maria. Good morning, good afternoon, everyone, welcome to our 2017 second quarter results conference call. The second quarter saw great performance in many of our markets, especially in South Africa, Western Europe, China, and Argentina. Our three global brands, Budweiser, Stella Artois, and Corona, continue to perform very well, with combined revenues growing by almost 9%. Additionally, our integration with SAB continues as planned, with good synergy capture coming from all of our new markets. Let's now take a look at the second quarter results in more detail. Total revenue in the quarter grew by 5%, with revenue per capita growing by 3.6% on a constant geographic basis, driven by revenue management initiatives and continued premiumization efforts. Total volumes were up 1%, with our own beer volumes up 2.1% and non-beer volumes down 5.7%. EBITDA grew by 11.8% with margin expansion of 238 basis points.
This quarter's performance was driven by the strong top-line result and the realization of synergies offsetting an anticipated weak performance in Brazil, where EBITDA was down 15.4%. This was due to the impact of a significant cost of sales per capita increase as expected. Excluding Brazil, our business delivered even better results, with revenue up 6.2% and EBITDA growing by 16.5%. Normalized earnings per share decreased by $0.11 to $0.95 in the quarter. Normalized earnings per share increased from $1.57 in the first half of 2016 to $1.69 in the first half of 2017. Turning to our global brands, which delivered another strong result this quarter with revenues up by almost 9%. Budweiser continued to perform very well, supported by a strong performance in China, as well as good growth in Brazil and the U.K.
We also executed our Global Tomorrowland campaign in nine countries, leveraging our global scale. Stella Artois grew revenues by 6.6% with good volume-led performance coming from Argentina, South Korea, Canada, and Australia. We also launched our full-scale hosting campaign in North America with experiential and trade platform. Corona continued its impressive track record of growth, with revenues up by over 16% and by more than 25% outside of Mexico, driven by China, U.K., Australia, and Colombia. We also launched a Better World Campaign partnership with Parley, setting the goal of protecting 100 islands from ocean plastic pollution by 2020. We believe in the ability of our three global brands to continue their strong growth by leveraging their global commercial assets with consistent communication and execution around the world while increasing their scale through further distribution, especially in our new markets.
Let's now have a closer look at the results of each of our regions. Our revenue in North America was flat in the second quarter as a 1% improvement in revenue per capita was offset by a volume decline of 1%. EBITDA grew by 3.2% with margin expansion of 129 basis points to 41.6%. In the U.S., we estimate industry sales to retailers or STRs declined by 0.7% in the second quarter and by 1.1% in the first half, in line with last year's trends. Our own STRs were down 3%, resulting in market share loss of approximately 105 basis points in the quarter and 85 basis points in the first half, based on our estimates, as we cycled a strong comparable versus the second quarter of 2016. Our revenue in the U.S. declined by 0.2%, with revenue per hectolitre growth of 0.9% negatively impacted by brand shipment mix.
In the first half of 2017, our revenue per hectolitre increased by 1.5%. Despite the soft top-line result, EBITDA improved by 3.9%, with margin expansion of 168 basis points to 42.2% as a result of disciplined cost management. We also saw improvement in our gross margin, which was up by 45 basis points to 62.2%, leading to more than seven consecutive years of margin expansion. While this was a challenging quarter for the U.S., we saw continued growth from the above premium segment. Michelob ULTRA maintains its impressive growth trajectory with nine straight quarters as the number 1 share gainer in the U.S. This quarter also marked the highest quarterly share gain in the past five years, affirming our belief that further acceleration is possible through increased awareness and penetration. Stella Artois also continued to gain share in the U.S. as the fastest-growing European imported beer, according to IRI.
Our regional craft portfolio continued to grow ahead of the slowing craft segment, led by our local and regional craft brands. Our U.S. premium lagers remain under pressure, driven primarily by Bud Light and Budweiser. Bud Light lost approximately 90 basis points of share, while last year's declined by mid-single digits. While we are surely not satisfied with this result, we did see bright spots for Bud Light, such as our music influencer program, Dive Bar Tour, which led the category's digital conversation in June. We have developed local programs for key Hispanic markets, and initial performance is showing positive results. In the second half of the year, we look forward to new creative content as we bring the Friends platform to life for drinkers of America's most popular light lager. Budweiser's share declined by approximately 40 basis points, with STRs down by mid-single digits.
This quarter, we saw the return of the successful Budweiser America campaign, giving back to those who protect the ability to pursue the American dream. The content continues to drive improvement in brand equity measures. We will evolve the campaign this year, rolling out unique state packaging in the locations of our 12 breweries, further reinforcing Budweiser's status as an American icon. In summary, we are not pleased with our U.S. market share performance. We will continue to work to balance the share and profitability equation while fine-tuning our regional pack by strategy and leveraging our strong wholesaler system. Moving now to Latin America West. Latin America West revenue grew by 8.5%, with revenue per hectolitre increasing by 5.2%. Volumes were up 3.1%, with good performances in Mexico, Peru, and Ecuador.
Our EBITDA increased by 16.4%, with margin expansion of 319 basis points to 47.2%, with strong top-line growth supported by synergies captured. Mexico recorded a solid performance this quarter, with revenue growing by low double digits and volumes up mid-single digits, helped in part by the timing of Easter. Our EBITDA increased by 4.6%, with margin contraction of 242 basis points to 43.2%. Top-line growth was partially offset by the combined impacts of currency devaluation on our cost of sales, as well as an energy price increase at the beginning of the year. Our big brands in Mexico all performed well this quarter, resulting in the strong top-line result. Bud Light outperformed through its successful sports and music activations, with volumes up double digits and expansion continuing beyond the north region of the country.
Corona's brand health continues to improve. The brand aims to grow the beer category in Mexico through leveraging new consumption occasions. Victoria continues to increase its relevance with Mexico's LDA consumers through consistent messaging centered around the brand's Mexican heritage while stepping up its digital activity to generate positive attention in an authentic and efficient way. We remain excited about the Mexican business and believe we have the brands and plans in place to advance further category expansion. In Colombia, we saw sequential improvements from a tough first quarter, with revenues up by 3.1% and volumes declining by 1.4%. Our EBITDA grew by almost 20%, with margin expanding by more than 700 basis points as a result of synergy capture, cost discipline, and the growth of our premium brand portfolio. Premiumization in Colombia is one of the ways we believe we can achieve category expansion.
By establishing a high-end distribution network and rolling out our global brands, we're now in a better position to make the most of this opportunity. On the other end of the spectrum, through smart affordability initiatives, we believe we can increase per capita consumption in Colombia, which is relatively low at 48 liters per capita. By offering consumers economical options, such as returnable glass bottles and large format packaging, we can bring more people into the beer category and position ourselves for long-term sustainable growth. Moving now to Latin America North. Our business in Latin America North was under pressure this quarter. Revenue is down by 1.8%, and our revenue per hectolitre improved by 2.2%, with revenue management initiatives partially offset by packaging mix due to the growth of returnable glass bottles. Volumes in the region declined by 3.8%.
EBITDA declined 9.5%, primarily driven by the performance of Brazil, with margin contraction of 334 basis points to 39.3%. In Brazil specifically, the political and macroeconomic environments remain challenging. Our beer business outperformed the industry for the second consecutive quarter in terms of volumes, with our volumes declining by 1.3% versus an industry that declined 2.7%. Our non-beer volumes were down by 14.1% as the soft drink industry continues to be pressured by the economy, leading to total volume decline of 4.6%. Our total revenues declined by 3.8%. Brazil EBITDA remained weak this quarter, declining by 15.4% with margin contraction of over 500 basis points to 39.2%. The Brazilian economy is recovering at a slow pace, still representing challenging for the beer industry in the short term. We acknowledge the difficult reality, but we believe in our strategy, and we remain cautiously optimistic for the year.
We'll now begin cycling more favorable net revenue per hectolitre comparables. For example, in the third quarter of 2016, our beer revenue per hectolitre was BRL 242, while in the second quarter of this year, it was almost BRL 261. If nothing else changes, this would result in a 7.6% increase year-over-year next quarter. Additionally, cost of sales per hectolitre will bridge to between a flattish and low single-digit increase. Therefore, we expect to resume EBITDA growth in Brazil in the second half of 2017. With that in mind, we'll continue to put efforts in our plan, focusing on our commercial platforms in Brazil and pursuing cost savings and efficiency gains to positively impact our profitability. In terms of our commercial platforms, we continue to see growth in the premium space, especially in our global brand portfolio, which grew by double digits this quarter.
Our Budweiser campaign featuring Brazilian basketball legend Oscar Schmidt received the Golden Lion in the Cannes Festival in France, supporting further growth through strong brand equity. We're also committed to elevating our core portfolio brands, making them more aspirational through initiatives such as our new visual brand identity for Brahma, our classic lager. Moving now to Latin America South. We had another great performance this quarter in Latin America South. Revenues grew by 35.4% as a result of pricing in line with inflation, as well as growth of our premium brands, especially our global brands. Volumes improved by 12.2%, and beer volumes in Argentina, the largest market in this region, were up by more than 20%.
EBITDA grew by 30.5% with margin contraction of 154 basis points to 41.1% as top line growth was partially offset by the cost of sales increase as a result of adverse foreign exchange impacts as expected. Turning now to EMEA. In EMEA, our revenues grew by 10% this quarter, with revenue per hectolitre increasing by 5.7%, largely driven by the continued growth of our premium brands in Europe, as well as our revenue management initiatives. Our volumes grew by 4.1% with broad-based growth across Africa. EBITDA grew by 17.1% with margin expansion of 192 basis points to 29.4%. Our business in South Africa had a very strong quarter. Our beer revenues grew by 13.4% with revenue per hectolitre increasing by 2.4%, benefiting from the annualization of the July 2016 price increase and a good performance of our premium brands, especially Castle Lite.
Our beer volumes grew by 10.8%, helped in part by the timing of Easter. Beer's strong top-line growth, combined with synergy delivery, drove total EBITDA in South Africa up by almost 30%. Our strong performance this quarter was enhanced by growth in the near beer segment, with an especially strong performance of Flying Fish, which grew volumes by more than 100%. This segment has the potential to further expand the beer category by recruiting female LDA consumers and by targeting occasions outside those typical of beer. Moving now to the Asia Pacific region. Asia Pacific delivered revenue growth of 5.9%, driven mostly by brand mix, as volumes in the region were roughly flat. This was led by the strength of Budweiser in China and our enhanced portfolio in Australia.
EBITDA grew by 22.1%, with margin expansion of more than 500 basis points to 36.9%, partially due to synergy capture in our new markets. In China, revenues grew by 7.2% in the second quarter, while volumes were up 1%. The top-line growth was driven by continued premiumization initiatives led by Budweiser, as well as our super premium brands and innovations. EBITDA in China grew 20.9% this quarter, with margin expansion of more than 400 basis points to 35.7%. We continue to believe that the growth potential in China lies in the core plus and above segments in which we over index. Budweiser continues to lead the premium segment and is aiming to own the fast-growing in-home consumption occasion. We have also seen impressive results from our high-end portfolio, especially Corona and Hoegaarden, which we believe to have much more potential given their low brand awareness.
With that, I would like to hand over to Felipe, who will take you through some further detail on our second quarter results. Felipe?
Thank you, Brito. Let's start with the synergy capture. We have continued to deliver synergies resulting from the combination with SAB. This quarter, we delivered $333 million coming from all of our new markets. We continue to expect the delivery of $2.8 billion worth of recurring cost saving synergies on a constant currency basis as of August 2016 to be realized in the next three to four years. As we have previously said, this will require estimated one-off cash costs of approximately $900 million to be incurred in the first three years after closing, of which $382 million has been spent to date. Of course, does not include any top line or working capital synergies. Net finance costs in the quarter were over $1.6 billion compared to more than $700 million in the second quarter of 2016.
This increase was primarily driven by an unfavorable $265 million mark-to-market loss linked to the hedging of our share-based payment programs, compared to a gain of $444 million in the first quarter last year, a swing of over $700 million. Our normalized effective tax rate for the first quarter was 21.3%, up from 20.5% in the second quarter 2016. We have amended our guidance for the full year 2017 from the range of 24%-26% down to the range of 22%-24%, which excludes the impact of any future gain or losses related to the hedging of our share-based payment programs. Normalized earnings per share decreased to $0.95 from $1.06 in the second quarter of last year.
A $0.68 increase in normalized EBIT due to the organic growth was more than offset by a $0.43 year-over-year change in the mark-to-market adjustments linked to the hedging of our share-based payment program and $0.37 change due to an increase in net finance cost. In addition, the CS results were impacted by the pre-funding costs related to the SAB transaction, not yet matched by earnings. These favorable impacts were partially offset by dilution due to the increased number of shares. Our capital allocation objectives have not changed. Our optimal capital structure remains at a net debt-to-EBITDA rate of around two times. At the end of the first half of this year, our net debt-to-EBITDA ratio was 5.3 times.
It is worth mentioning that our operational cash flow has historically been much stronger in the second half of the year as a result of the seasonality of our business. In addition, the second half cash flow should be enhanced by the proceeds resulting from the sale of our stake in CCBA, which we expect to close before the end of this year. We are tracking in line with our internal deleveraging targets. 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. Deleveraging to around two times remains our commitment, and we will prioritize debt repayment in order to meet this objective.
M&A remains a core competency. We will 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. As we have said before, given our emphasis on deleveraging, dividend growth is expected to be modest in the short term. With that, I will hand back to Maria to begin the Q&A section. Thank you.
The floor is now open for questions. In the interest of time, we will limit participants to one question. Again, if you have a question or comment, please press *1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the # key. We do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Our first question comes from the line of Simon Hales of Barclays.
Thank you. Good afternoon, good morning, everybody. Hi, Brito. Hi, Felipe. Two questions, please, if I can. I wonder if perhaps firstly on the synergy capture in the period, you could talk about maybe what drove the step up in the rate of synergy capture in Q2 versus what we were seeing perhaps in Q1 and Q4. Whether or not there's any more information you can share with us in regard to future phasing of those synergies. Is there any reason we shouldn't extrapolate that Q2 rate of capture into Q3, for instance? Then secondly, maybe for Brito, I wonder if you could just talk a little bit more about maybe the subsector performance in U.S. beer through Q2 and the first half.
Particularly maybe what you've been doing in craft at one end and maybe in the value segment at the other, which I think often gets lost.
Well, thanks for the question, Simon. On the synergy side, I think it is not uncommon in the transactions that we do and combinations that you see that there is a learning curve as you go through the process. Synergies tend to accelerate sometimes in the first quarters because you do put more things in place. At the end of June, we have already delivered 50% of our EUR 2.8 billion commitment. I think we're very happy with the integration. We think things are on track. Our new colleagues have really embraced our culture. They're now part of one company, one culture, one dream. That's very encouraging. We're very happy, and better than that, we're seeing synergies coming from all new markets. It's not something that's concentrated here or there, it's something that's across the board.
I think that's a testament for good planning that our joint teams did between signing and closing. In terms of U.S. beer, you have a good point. We talk a lot about the premium brands, Bud and Bud Light, but sometimes we don't see what's happening above the premium side, which is developing very nicely. Our craft brands growing ahead of the craft segment. Brands like Stella being the number one brand growth in terms of European imports, and Michelob ULTRA being the fastest share gainer in the U.S. now for seven quarters. Having the highest market share position in terms of overall market in many years. That's very encouraging.
On the value segment, what people tend to miss as well sometimes is that the value segment is still a very important segment within the overall beer mix in terms of total market and also very important for us. It's 25% of our business. It's a segment in which profitability came up quite a ways because of the decrease we did in the last eight years in the discount in which they were sold at in terms of price points. The price points are less of a discount to the 100% index of the market. These brands have a better margin because of that, and you don't invest much in terms of marketing support. When you put those two together, the profitability is quite interesting, and it's a segment in which we have a big presence. You're right, those two segments are important.
Our focus continues to be on the premium and above segments, but the value segment is part of our business, and it has quite a very good profitability.
Understood. Thank you, Brito.
Thanks, Simon.
Our next question comes from the line of Pablo Zuanic of SIG.
Good morning, everyone. Look, just two very quick questions. I was looking at your acquisition of Hiball in the energy drink segment, and I was wondering why such a large company like Anheuser-Busch would bother with such a small little brand when you have Red Bull and other brands out there. The question really is, if the idea is to give more volume and scale to your distributors in the U.S., are you going to start looking at more individual brands outside of beer? And why not look at bigger brands? Bai was just sold. Vita Coco is out there. Why bother with Hiball? And the second question, if you can just give us a reminder about this incentive plan for the top management team of $350 million if the company reaches $100 billion in revenues by 2020. How strict is that? Is that a policy by 2020?
If you deliver by 2021, that reward would not be there? If you can explain that. Thank you.
Yeah. Okay. Pablo, in terms of the Hiball is an opportunity we saw in terms of our DGO type approach to markets in terms of disruptive initiatives. We saw somebody who is still small, but we believe has a high potential. It's a company that's taking a different approach on energy drinks in the sense of being natural and organic, which is something that consumers are looking for. It has momentum. It's been in the market now since 2005. We believe that our wholesaler system has proven, with Monster, their capacity to develop products outside of the alcohol segment. We believe that it's not only a good play for us in terms of trying to look for a disruptive angle on a category that's a growth category, high margins, and with a wholesaler system that is very knowledgeable about this kind of product.
It's just a disruptive play on a category that's established and still growing very fast with very good margins. It's a complementary product. Again, we're in this business for the long term, so the fact that we're buying something small but with big potential, it doesn't scare us because we're owners, we're here for the long term, and if it's going to take five, 10 years to take scale, for us, that's fine. In terms of incentives, some of our incentives have partial achievement. Most of them do not, but this one do. There is a partial achievement for this one for the years 2021 and 2022. You're right. There is a range of payouts on this incentive depending if it's 100% in 2020 or partial 2021 and 2022.
Understood. Thank you.
Thank you.
Our next question comes from the line of Trevor Stirling of Bernstein.
Hi, Brito and Felipe. Two questions from my side, please. The first one, Felipe, the lowered tax rate for 2017, does that also mean that possibly there's an opportunity to lower tax rates going further and we could see guidance fall in the out years as well? The second question may be for you, Brito. Brazilian margins have clearly been under a lot of pressure. Currency hedges start to turn positive as we enter Q3 and Q4 and we would expect to see margin expansion coming through, and you highlighted the opportunity on price mix. If I look at peak margins in Brazil in 2013, 2014, at that stage it was based on a Real at BRL 2 to the dollar and the level of incentives was much higher.
Is it realistic to be able to get back to those peak margins or should we be looking slightly lower in terms of where we think we can get back to?
Well, let me tackle the second one. Felipe will tackle the first one. In terms of the Brazilian market, Trevor, as I said in our comments just some minutes ago, we had already anticipated that in previous quarters, the second half of this year will see easier comps on the cost of sales side because of the currency that we mentioned in the past. Also we'll face easy comps in terms of net revenue per hectolitre. We just put two numbers here that are public just to make the point.
If there's nothing done in the third quarter of this year in terms of pricing, just by taking the pricing that we had already in the second quarter of this year on average in local currency versus the price we had last year in the third quarter, that would be, if nothing changes, a 7.6% increase in net revenue per hectolitre. You know that our price policy in Brazil normally is to increase prices in the second half of the year, normally in the third quarter. Last year, by exception, we did in the fourth quarter. This year, I can tell you, and it's already in the market, that we're going to do our price increase in the third quarter this year in Brazil. That's why we said that the EBITDA will resume growth in the second half because of the two components, top line and cost.
In terms of margins, the only thing I can tell you is this. The margins we used to have of 15+ in the Brazil business, these margins are, for us, in our culture, high water marks. We won't forget them. This continues to be a reference for our people operating in Brazil. That I can tell you. Felipe?
Hi, Trevor. On the effective tax rate, yes, we are updating the guidance at this point. It is valid for 2017. It's just too early to talk about 2018 at this point.
Okay. Thank you very much, Felipe and Trevor.
Welcome.
Thanks, Trevor.
Our next question comes from the line of Tristan van Strien of Redburn.
Good morning, gentlemen. Two questions, if I may. Just the first one, in the U.S., you had a very good margin expansion of 168 basis points and over 100 seems to be from savings in SG&A. Can you maybe break that down, what bucket that sits in? Is it in admin or marketing and what drove that? And then secondly, in South Africa, you've relaunched Lion Lager in what appears to be about a 20% discount to mainstream. As you currently own 100% of the mainstream segment, how are you ensuring that Lion does not cannibalize from Castle and Hansa in that market? And how should we think of the Lion margins relative to mainstream in South Africa? Thank you.
Yeah, that's a very good point. I'm going to start with the Lion brand. In South Africa, there are some cheap spirits that we have to deal with in terms of category, Lion is exactly supposed to do that. It was designed to do that. What we're trying to do, of course, is trying to get Lion in the plots where it should be, where the prevalence of those cheap liquors are more the case. Package-wise, we're also trying to signal that that's the value brand as opposed to try to avoid cannibalization as much as possible. We're doing that in a very controlled fashion. The objective is not, of course, to cannibalize our own brands, but to really expand, via affordability, the category play. It's being done, I can guarantee you, in a very controlled fashion. It's not something that's across the board.
Our guys, for all the reasons you said, are being very careful in where to implement this brand. Okay? No rush in implementing it. In terms of U.S. margin, we're very happy with the financial performance we had last year, financial performance we had this year so far. We're not happy with the share, that's a different story. The financial performance has been driven solely by having our net revenue per hectolitre growing. If you look at the first half of this year, our net revenue per hectolitre grew by 1.5%, which is pretty much in line with what we want to do with price in general, which is to have it in line with inflation when you look at a broader period. In terms of SG&A, we'll continue to operate SG&A as efficiently as we can.
You can be assured that we're looking at non-working dollars type opportunity. When you look at the U.S. base of SG&A, it's big enough to afford us to be able to look for that. The other important thing to notice is that our gross margin now for seven or eight years, once again grew. If you look at the quarter, it grew 45 bps to 62.2%, which for me, tells me that the whole premiumization and the whole focus that we have on the premium and the bought premium is continuously paying off because we've had years and years of gross margin expansion, and last year and this year, EBITDA expansion as well.
Thank you, Brito. Just to follow up on that gross margin. Historically, that does not seem to drop down that benefit the last seven years because all the expenditure you've had in marketing. Can we just then say that actually, that amount of marketing you spent to support your brands, we don't expect that to increase as a result? You basically let some of it drop down the bottom line at the moment.
What you can expect is that because we increased the base of SG&A in the last three years, because of this focus on the high-end, that now we have a base that's big enough to afford us to start optimizing. When you have a big base, optimization is always a big opportunity. That's what we're doing.
Got it.
Thank you.
Thank you.
Our next question comes from Robert Ottenstein of Evercore ISI.
Great. Thank you very much. I was wondering, Brito, if you could, I know it's early days, but obviously, the global brands are doing well in a lot of the SAB territories. Can you talk about what you've learned so far about how well Bud, Stella, Corona resonate in those different territories? Maybe a little bit about your strategy with those brands and any surprises that you've seen in the marketplace, good or bad, in terms of how those have worked commercially.
Robert, thanks for the question, global brands is one of those things that's a no-brainer. So far, all markets in which we have implemented those brands, they've done well. They have appeal that's a universal appeal. Each of them has its own position, so they complement each other. They're not sitting on top of each other, and their values are pretty much universal values. They appeal to a wide range of consumers, and we've seen these brands performing really well in our new territories. The other thing for you to think about, Robert, is that when you go to Africa, for example, even in Africa, when you go to, for example, I'll give two examples. South Africa and Nigeria. Premium segments are present in those markets. It's just that the SABMiller colleagues of ours didn't have brands to compete in those segments.
If you look at Heineken and Diageo, they had healthy businesses in the premium segment in those two markets, for example. Now we're coming with our brands in a market that already exists, just trying to get our fair share and enlarge that side of the market. When our global brands go into these new markets, it's not that they are there to initiate the category. They are there finally to compete in a category that others have already introduced in the market. Now we have brands that we believe, given the portfolio play that we have, that can do better than some of these other brands because some of these companies are one branded, and we have a portfolio of brands for different occasions. That's the bet we have. We have now to deliver, but the initial signs are very positive.
As a follow-up to that, it appears that your strategy in China is evolving a little bit. Can you talk a little bit about that and how you're kind of looking to continue to have a commanding lead and spread that lead at the very high-end using the global brands?
Well, in China, Robert, we are the leaders in everything that's premium and super premium. Because of that, we need to continue to elevate the bar, to raise the bar. Let me give you a couple of examples. Budweiser, leading brand in the premium segment. At some point, our guys in China said three, four years ago, "Well, at some point there'll be a super premium segment, and we need to lead that as well." We separated the route to market. We did everything that we had to do in order to create the infrastructure. We got the brands, and now you look at Stella, Corona, and Hoegaarden, mainly Corona and Hoegaarden in China. They're growing at triple digits and with very high margins. You look at e-commerce.
We lead e-commerce in China, which is in China for beer, at least it's a very high-end type occasion. You look at Budweiser. We tried to get Budweiser to be less dependent on two regions. We're broadening, expanding Budweiser to other regions. That has been the case for many years, and also through different channels. Chinese consumers are evolving, and the nightlife is getting more segmented. That's where Budweiser has a very strong hold. We are, together with the super premium company in China, going through Western bars and different white tablecloth restaurants, Chinese restaurants, and trying to get more of a balanced base for our premium and super premium brands in China, as opposed to depending on one channel or two regions.
That's what we're trying to do to continue to be the leader and reference in the Chinese market for premium, super premium beer brands.
Great. Thank you very much.
Thank you.
Our next question comes from one of Edward Mundy of Jefferies.
Hello, Edward.
Brito. Hi, can you hear me?
Yeah.
Morning, afternoon, everyone. Just on page three in your management comments, you made the point that the second half of the year looks promising. Is that from a revenue perspective or from a cost perspective? What excites you most about the second half? Is it top line or margins?
We said second half looks promising in terms of Brazil because of top line and cost. We also said that in Mexico, we had a second quarter that was a little bit of a one-off, but the first half of the year is more what you should expect of the Mexican performance. We feel good about our business, Edward, because when you look at Brazil, I just mentioned, when you look at LAS, Latin American South is accelerating. Mexico had a one-off this quarter, second quarter in terms of financials. It should be better going forward. COPAC, when you look at Colombia, if you look at the third quarter, all public numbers, third quarter last year, you see that Colombia came from the El Niño type 15-month spread that was very good for volumes.
We're lapping that. If you look at the third quarter last year, when the El Niño effect finished, there was some negative volumes in Colombia that we're now going to be lapping in the third quarter. Europe has a third year in which top line is growing. China continues to grow share. Now we have, after three years, industry China back to positive territory, slightly positive territory year to date. Australia, two quarters now growing out of industry. In Africa, we're going to have some capacity that is going to come online in the second half of this year, because in some places we have capacity constraints, and we have momentum. When I look at this, I think we are optimistic about the second half, I could say.
Great. Thank you. Just as a follow-up, I appreciate you're not changing your cost synergy targets at this stage, but I think, Felipe, you alluded to, in your presentation, working capital synergies. Are you able to talk a little bit more around those at this stage?
The way we describe core working capital, defined as receivables, inventories, and payables that are really connected to the business and excluding things such as payroll and commodities, mark-to-market adjustments. ABI reached around 15% in the negative territory by the end of last year. SAB is coming from low single digits in the negative territory. The gap is there. Our 15% is average. We have zones that are doing much better than that, zones that are below that average, and we are always raising the bar. When we compare the two footprints, there is no reason why the former SAB footprint could not get to current ABI levels on average. That is the journey that we started as we started integration. Working capital should continue to be a very strong component of the overall cash flow generation. We are working on it.
Things are progressing well. We just didn't put a public number out there, not for working capital, not for revenue synergies, just the cost-related ones.
Great. Thank you.
You're welcome.
Our next question comes from Mitchell Collett of Goldman Sachs.
Hi there. Just returning to your comment about promising. I guess your formal guidance is that revenue growth should accelerate. The comps were much tougher for the first half. Is there any reason we shouldn't expect your second half performance in terms of top-line growth to accelerate from the 2Q or 1H performance?
Mitch, can you talk a bit louder or closer to the mic? It's kind of hard to understand. If you could repeat the question, please.
Yes. Sorry. Is that better?
Yeah, much better.
Sorry. I just wanted to come back to your comment about the second half looking promising, and obviously you've seen a sequential acceleration in 2Q versus 1Q. The comps are much easier in the second half. Is there any reason we shouldn't expect 3Q and 4Q to continue to accelerate from the 2Q performance? Secondly, I think you said that cost of sales should be flat or up low single digits in Brazil, given the FX benefit. I guess the hedges, I would have thought, would have meant cost of sales would be down year-on-year, but I appreciate not all of your cost of sales are hedged. Is that partly why it would be flat or small up, or is that potentially the impact of an increased exposure to returnable glass bottles? Thank you.
Well, Mitch, on Brazil and cost of sales, there are many other impacts. As premium brands grow, for example, cost of sales go up because those premium brands are normally more expensive packaging. They have better margins, of course. They are normally one-way bottles or more with no returnable bottles. They're pretty much all one-way bottles and cans. There are other things that take into account. That's why we said flattish to slightly up, which is much better than we had in the first half. What I said about the second half is pretty much what's in the release, is that for Brazil, we guided for better revenue per hectolitre, because of the comps and better cost of sales. For LAS, I'm saying LAS is also accelerated, from first to second quarter, so that is in a good place.
For Mexico, in terms of financials, we said that the second quarter, because of some phasings and one-offs, is not necessarily the best representation for margins and EBITDA growth for Mexico. The first half would be better. For COPAC, I said that there would be a third quarter, but if you look at the numbers and the weather that was exceptional well two years later, you'll see that July, August, September third quarter, there should be some easier comps on volumes in Colombia, which is a top five market for us. In Europe, there's good momentum. In Africa, there's good momentum with some capacity coming online, which is already public. In China, industry is back to slightly positive, and we have also momentum. In Australia, for two quarters now, we've been growing out of industry.
I'm just saying that other than the U.S., in terms of share in the U.S., the other main markets seem to have some good things going for them. Never perfect, but on net, some good things going for them.
Okay. Thank you.
Thank you, Mitch.
Our next question comes from the line of Mark Swartzberg of Stifel Nicolaus.
Yeah, thanks. Good morning, gentlemen. One for you, Brito, one for you, Felipe. In the U.S., Brito, there seems to be some silver linings here with all the challenges that are obviously facing your largest brands, and you've touched on them, but I'm curious if you could elaborate. When you think about the craft space specifically, whether it's you or others in the brewing space, private equity, whether you think there's an opportunity for a quickening in the pace of M&A in craft. Felipe, as we think about currency hedging, you're dealing with a much larger basket of currencies than you were prior to the SAB transaction. I'm sure we could go at length in what's different in the way you're approaching currency.
Is there something you can tell us in brief that would help us get comfortable that you're actually able to minimize volatility even more than you have historically and minimize the top, so to speak? You can't obviously eliminate what happened in Brazil, but something to give us some sense about how you're managing that risk on a go-forward basis.
Mark, in terms of craft, our craft portfolio is growing ahead of the craft industry. Very happy with that. When we look for craft or potential craft partners, we look much more at the founder, the personality, the culture, the fit, because what we've seen is that with our partners today or to date, we've been able to create a very strong sense of team. They work together. We have what we call the craft panel, they exchange ideas, best practices, development of new styles. They're very connected to the business and very committed to growing the business the right way. We pick our partners because of the fit, because of their vision, the capacity to dream big, the cultural fit as well, and their love for their business and willingness to stay with us to continue to develop brands.
that's our main criteria, and we're very happy with the craft partners we have today.
Do you believe the 11, assuming Wicked Weed closes or perhaps it's closed, do you think the 11 is about right, or do you see that the 11 validating, so to speak, the approach where you have given craft brewers serving a particular region?
I wouldn't speculate at this point, but all I can say is that our guys did an amazing job of finding these founders, connecting with them, and creating this camaraderie and this partnership and this panel and this exchange of ideas and best facts that's really been magic for us.
Great. Thank you.
Mark, on the hedging piece, there has been no material change to our hedging approach. What essentially happened, given the enlarged footprint, is that now we benefit from a larger risk diversification, as our approach to hedging has always been the one of understanding the basket of risks we are running, not only from the FX but also the commodity standpoint and often relying on the cross-correlation of different exposures and assets that we may have. The biggest bucket is always the one on the outstanding debt breakdown. We have been very clear in the sense that one-third of our outstanding debt is euro-denominated. Recently, given the euro appreciation versus dollars, that is putting a weight on the overall net debt.
On the other hand, given the correlation between euro and other emerging market currencies, we also benefit from the translation of local results, local EBITDA into U.S. dollars. In summary, that has been the approach. The approach has not changed. It's just a better risk diversification at this point.
Fair enough. Great. Thank you, gentlemen.
You're welcome.
Our next question comes from the line of Komal Dhillon of JP Morgan.
Hi. Morning, Brito and Felipe. Just two questions from me, please. First one on the U.S. We've got volume share loss of 105 bps in the quarter, I know you've had a tougher comp in Q2, can you outline the plans to stem this loss, how should we be thinking about the volume share situation going forward? The second one, really, we had news this week that the head of Carlton & United Breweries in Australia saying you are interested in the privatization of the breweries in Vietnam. Any more comments on that, please?
Well, Vietnam is a market that we're very committed to. We like the profile of the market. It's a growth market. It's a scale market, we cannot comment on market rumors. It's a market that we have our global brands there, that we're very excited about growing that market. China is a great inspiration for us on how to grow those brands in Vietnam. That's all I could say about Vietnam. In terms of your first question, in terms of share, what we're doing, Komal, is really trying to first understand a little bit of comp, also trying to continue to get to a better position in terms of supporting Bud Light. That's important. Bud Light, there'll be some new campaign executions hitting the market pretty soon.
We also have the Dive Bar Tour that dominated the whole social scene and chatter in the month of June, pretty much also very strong in May. The same with Budweiser, with the America campaign. Folds of Honor. These two brands are doing well in social media. They have campaigns that have mileage, especially Budweiser. Bud Light's a new campaign with friends, the friends platform. We continue to put a lot of focus on the execution in the marketplace. Those things have not translated yet in better market share sales, we'll continue to be very focused on those. In terms of above premium, again, you've heard me talking about Michelob ULTRA. Nine consecutive quarters of being the biggest share gainer. We'll continue to put a lot of effort and money behind it. It has its best quarterly share gain in the past five years.
Craft doing well, ahead of the segment. Value stabilizing, important for us, given that the margin, given the lower investment, has also an interesting financial component to it. I think that's what we'll continue to do. Bud Light is the focus because the rest of the portfolio is doing well.
Okay, thank you.
Thanks, Komal.
Our next question comes from one of Eddy Hargreaves of Investec.
Yes. Hi, Brito and Felipe. I think you said, Brito, just now that China had returned to growth. I assume you mean in volume terms with that comment. Clearly, it's all about profit there. Your margins were up 500 bps at the EBITDA level in the half year. Could you say how much of that is mix and how much is cost savings? You mentioned both factors in that paragraph. I assume it's mainly mix. That's question one. A second one is that you're committed to ensuring that 20% of your beer volume globally will be no and low alcohol product by the end of 2025. Could you say what level you're at at the moment, in looking at how demanding that 20% target is? Thank you.
Yeah. Hi, Eddy. I'll start with the second question. We're very committed to the non-alcohol and low-alcohol beers because we think not only are there consumer trends out there, but it's also very profitable. We put a target to ourselves of getting to 20% of our mix in terms of volume. Today we are at seven, or seven-plus to be precise. What happened is that with the SABMiller new markets, we evolved a lot in terms of learnings. If you go to markets like Australia, Colombia, Ecuador, our China market, we're already above and beyond that 20% in terms of especially the low-alcohol beers. Below 3.5%. The reason is to believe for other markets of ours and the amount of best practice we have now, especially in the low-alcohol beer, increased big time compared to a year ago.
Now we're trying to get those best practice from Australia, Colombia, Ecuador, and China to travel faster because there is an opportunity there, especially in the low-alcohol beer. That's on the NAB lab, as we call it. Your first question-
Yeah
was on APAC, on China. On China, as you will remember for sure, brand mix has always been a very important component of our profitability growth in China. Why? Because Budweiser is growing together with the high-end segments way ahead of the average of our portfolio. Just to give you a number, let me get to the numbers here. In terms of the Chinese beer market, let me see if I can find the page here. I don't have the page here, but what I wanted to say is that in terms of the core plus premium and super premium segment, we're way above. I found the page. For example, the industry in China has 57% of its volume, 57.5% of its volume in the half year this year in the core and value segment. We only have 36%. 36.9%.
I mean, our business is much more skewed towards core plus premium and super premium. The momentum is there, and we continue to grow disproportionately on those segments where the money is and the growth is. A lot of this margin enhancement in China is caused by this mix shift, there's also because China now has a big base. Lots of initiatives on efficiencies as we always do. As the base grows bigger, those initiatives are more relevant. Most of it comes from premiumization of our mix.
Sure. Sorry, was that number 57% or 67% there?
Yeah, 57%.
Core and value
Yeah, 57% for the half year this year is what the industry has in terms of-
Yes
Its volume on the segment core and value. Ours is 36.9, so 37. 57 for the market in core and value, we have 37.
Yeah. Understood. The figure for the Chinese beer market volume overall in the period?
Volume overall for the half year increased by 0.2% in our estimates. After three years-
Thank you
of being negative this half year-to-date, plus 0.2% growth for the total industry in China. Of course, the segments in which we over-index are growing way ahead of that, but that's the total industry.
Understood. Thank you.
Thank you.
Ladies and gentlemen, we have time for one more question. Our final question today comes from the line of Fernando Ferreira of BAML.
Thank you. Brito, two questions, please. When you look at your sales today globally, what percentage of those sales are premium and the super premium brands, and where do you see that going in the next five or seven years? Do you have any target, like non and low alcohol? Second question on Brazil, I understand the effect on your revenue per hectoliter driven by the RGBs and the easy comparisons as you mentioned, but can you talk about the pricing environment ahead now that competition appears to be a bit more rational and also you have recovered a lot of your market share that you had lost last year? Thank you.
Well, Fernando, I'll start with the second question. The environment in Brazil has always been very competitive. Pricing is very local. As you said, our guys in Brazil signaled to us that they will implement the price in the third quarter of this year as compared to the fourth quarter last year. That's all I can say about price in Brazil, which is a very competitive market. In terms of our global brands, I think the only figure we have out there is that our global brands, in terms of our total portfolio, is ahead of 20%, north of 20%. That doesn't include all premium brands of ours, but just the global brands. More than that, of course, in terms of revenue and margins, but in terms of volume, it's 20-plus % our global brands. We have some targets of our own, but they're not public.
Okay, great. Thanks, Brito.
Okay. Well, if there are no further questions, I would like to thank you, Maria. Thank you, everybody. In summary, our performance at the half year mark of 2017 is promising. While we are not satisfied with our market share performance in the U.S., nor our financials in Brazil, we have delivered strong top-line results in almost every other market and are pleased to see the company's growth accelerating. Our integration continues to progress very well with excellent synergy captured to date. We remain excited about the long-term prospects of our global business and the opportunity to expand and develop the beer category. Thanks for joining the call today, and enjoy the rest of your day. Thanks so much. Bye-bye.
Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.