Earnings Call: Q3 2016

Oct 28, 2016

Welcome to the Anheuser Busch InBev Third Quarter 2016 Earnings Conference Call and Webcast. Hosting the call today from AV 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's website now at www.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. 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 March 14, 2016. 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. It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may begin. Thank you, Regina, and good morning, good afternoon, everyone, and welcome to our 2016 Q3 results conference call. Before we discuss results, I'd like to take a moment to focus on the very exciting milestone we reached just a couple of weeks ago when we closed the combination with SAB. The rationale is extremely compelling, creating the first truly global brewer and one of the world's leading consumer products companies. The combined company has a leadership position in most of the world's largest profit pools and a rich portfolio, including 7 of the top 10 most valuable beer brands globally. We now have an expanded geographic footprint with access to many more high growth markets as well as a diverse portfolio of brands to provide more choices to consumers around the world. It also allows us to leverage the talent, expertise and insights of the 2 companies to further enhance the consumer experience. We're already working closely with our new colleagues to ensure smooth integration and to deliver on our dream of bringing people together for a better world. We believe the 2 companies can achieve far more together than we could separately, and we look forward to building a company not just for the next decade, but for the next 100 years. Since the transaction closed after the end of Q3, the results released today do not include the SAB retained business. However, we have included volumes and revenues for the retained business for the 3 months through September in our press release. Turning now to our Q3 results. Most of our markets are on track and delivered solid results. However, these performances were negatively impacted by a very weak quarter in Brazil. Consolidated revenue in the quarter grew by 2.8 percent with net revenue per hectoliter growing by 3.7% on a constant geographic basis, driven by our premiumization and revenue management initiatives. We continue to deliver strong growth with revenues up 8.7%. Our total volumes were down 0.9%, with our own beer volumes down 0.2%. Our own beer volumes were down 8.1% due to soft results in Brazil and Argentina. EBITDA declined by 2% with a contraction in EBITDA margin of 178 basis points to 36.3%. This decline was driven by the weak performance in Brazil, where EBITDA was down 33%. The impact of Brazil on our quarterly operating results can be seen from the chart on Slide 4. Excluding Brazil, the business delivered solid results with volumes up 0.7%, revenue up 4.7% and EBITDA increasing by 6.6%. Normalized earnings per share were down $0.19 from the Q3 last year to $0.83 and Philippe will explain this in more detail later. Finally, the Board has approved an interim dividend of €1.60 per share for the fiscal year 2016, the same as last year and consistent with our commitment to deleveraging. Our global brands continue to perform very well, delivering strong revenue growth and driving the premiumization of our portfolio. Revenues of our global brands grew by 8.7% in the quarter, led by Corona, which saw revenue growth of 14.8%, driven by the acceleration of our new global container, This is Living. Stella Artois revenues also grew by over 12%, with the highlight of the quarter being the activation of the premium experiential platform, Le Savoie, in York, Montreal and Buenos Aires. And finally, Budweiser revenues grew by almost 5%, bringing innovation and leadership to the digital space. In Canada, for example, Budweiser became the 1st alcohol brand on Snapchat and has been successful through the Budweiser Red Light app, a key component of our national hockey activation. In addition to growing our global brands, we're also leveraging our global marketing assets to connect with consumers around the world. A great example of this is our partnership with Tomorrowland, the world's largest global electronic music festival held each July in Belgium. This summer, we activated the event in 28 countries using 11 of our major brands. We were present on-site where festival goers could visit our brewed district. Those who are not there could enjoy the experience through digital content, live streaming and trade executions. Our efforts resulted in over 100,000,000 earned impressions and 1,000,000,000 engagements with consumers. We look forward to scaling up these types of activations and further developing relationships with other great partners. Let's now look deeper into the results of each of our top markets, starting with the U. S. Indo CSTRs were down 2.6% in the 3rd quarter based on our estimates, driven by the timing of the July 4 holiday and a slowdown in the Craft segment. As you can see from the chart on Slide 7, this was a disappointing industry result after a good start to the year. We estimate U. S. Industry volumes declined by 0.8% year to date, and we expect the full year to show a similar trend. Our own STRs were down 3.8%, leading to an estimated market share decline of approximately 55 basis points. Our sales to wholesalers, STWs, were down 2.5% in the quarter, ahead of FTRs, as a result of adjustments to inventory levels in the normal course of business. We continue to expect FCWs and SDRs to converge by the end of the year. Total revenue was down by 0.3% compared to the Q2 last year, with revenue per hectoliter up 2.3%, driven primarily by positive brand mix as well as our revenue management initiatives. EBITDA in the U. S. Grew by 0.9 percent with margin expansion of 48 basis points to 40.6%. Turning now to the performances of our brands in the U. S. Bud Light volumes fell short of our expectations in the Q3, with FTRs down mid single digits, leading to an estimated market share decline of 65 basis points. Turning around the brand the size of Bud Light takes time and requires discipline. We remain committed to improving its performance and are investing to reverse the negative trends and start 2017 with good momentum. During the Q3, we began transitioning from the Bud Light Party campaign into our NFL and other football programs, supported by newly designed team cans. Following the signing of our new contract with the NFL, team cans are now more widely available than ever before for football and Budweiser fans. Moving now to Slide 9. Budweiser STRs declined by mid single digits in the quarter. This led to an estimated market share loss of approximately 20 bps, consistent with the trend of the last 18 months. The brand's message and total voice built around Budweiser's quality and heritage credentials continues to resonate with consumers. This summer, we launched our America campaign, supported by unique special packaging to drive home the connection between Budweiser and its proud heritage. The brand also promoted responsible drinking with Budweiser activations around the country on our Global Beer Responsible Day in September. Our portfolio of above premium brands continued to perform very well this quarter, gaining share and contributing to a positive net revenue per hectoliter result. Michelob Ultra remains the best performing brand in the U. S, gaining more share than any other brand in the country for the last 6 consecutive quarters, with STRs up high teens in the quarter and over 20% year to date. Stella Artois enjoyed its 22nd quarter of double digit one growth and continues to gain share of the high end import segment. Brand health is very strong, achieving all time highs in awareness and penetration. Volumes of Goose Island and our other craft partners also grew double digits despite the overall slowdown in the U. S. Craft industry. In the near beer category, Bass Gam grew in line with the segment, and the Rita's family saw a good performance from its new flavor variants, especially watermelon. Moving now to Mexico. Our Mexican business had another great quarter with bottoms up almost 10%. As you can see from the chart on Slide 11, our volume in Mexico has been steadily increasing since the combination with Grupo Modelo in mid-twenty 13. This is due to a healthy industry driven by a growing economy and our own successful commercial initiatives, which are creating new consumption occasions. Revenue grew by 12% with revenue per hectoliter up 2.2%. EBITDA grew by 5.8%, while EBITDA margin declined by 263 percent to 43.9% due to our commercial investments designed to grow our brands and distribution for the long term. Our success in Mexico has been driven by our focus brands, which are responding well to our investments. Corona introduced a new consumption occasion this quarter in Mexico, the so called niecles de foot, encouraging consumers to go out to points of sales on Wednesday night and support their football teams in the race for the Mexico Cup crown. Meanwhile, Victoria continues to leverage its Mexican heritage credentials, taking over the Fiesta Zapatres in September, one of the country's most iconic celebrations. And finally, Bud Light is focusing on increasing brand awareness throughout the country with targeted regional activations aimed at introducing more consumers to the brand. Bud Light's epic campaign has resonated well with LDAs, helping to drive volumes with double digits in the quarter. Turning now to Brazil. Our results in Brazil were very weak this quarter, negatively impacting total company performance. This was due to the challenging consumer environment, a tough volume comparable from the Q3 of 2015 and the impact of unfavorable foreign exchange hedges on cost of sales. We estimate that beer industry volumes declined by approximately 3% in the quarter, with our own volumes down 4.1%. Although the Brazil beer market remains very competitive, our market share trend continues to improve on a sequential basis. Revenue declined by 6.8% in the quarter, with BN net revenue per hectoliter decreasing by 1.2%. This was primarily driven by our decision to implement our price adjustments in the Q4 this year versus the Q3 last year. Additionally, as part of our revenue management strategy, we're using our complete portfolio packs, especially returnable glass bottles, so called RGBs and brands to provide attractive, more competitive consumer price points. Given the environment of soft industry volumes and a tough Q4 2015 net revenue pipe that are comparable, we no longer expect to achieve our goal of flat net revenue in Brazil for the full year. Brazil EBITDA declined by 33% in the quarter, while EBITDA margin fell to 37.8%. As you can see from the chart on Slide 14, more than 50% of the decline in Brazil EBITDA in the quarter was due to an expected increase in cost of sales per hectoliter, driven by the impact of unfavorable foreign exchange hedges. Our general policy is to hedge our transactional currency exposure 1 year in advance. Approximately 40% of our cost of sales in Brazil are denominated in U. S. Dollars. And therefore, the devaluation of the Brazilian real by over 50% in the second half of 2016 has resulted in unfavorable foreign exchange hedges in the second half of this year. Although the environment in Brazil remains challenging, there are some silver linings, things that we can focus on now, which will benefit our business over the long term. One of these opportunities is the returnable glass bottle, the RGBs. RGBs have always represented a large percentage of our volume in the traditional on trade channel. In recent years, we have seen good growth from our new 1 liter RGB in particular, with volumes up mid single digits year to date in the on trade. However, RGBs have historically represented a low percentage of our off trade volume. At a time when consumers are looking for more attractive price points and more affordable ways to enjoy our products, we have been very successful in growing RGBs in the off trade channel, especially in supermarkets. In fact, RGBs now account for 25% of our total volumes in supermarkets, led by the 300 ml bottle or, as we call, the mini. RGBs allowed us to achieve a lower consumer price point. While this negatively impacts our net revenue per hectoliter, they positively impact our cost of sales and are accretive for both EBITDA and EBITDA margin. 2016 has been one of the most difficult years for our business in Brazil in the last decade, and we're not satisfied with our results. However, we remain optimistic about the long term future and are encouraged by the favorable demographics, the narrowing of regional disparities in per capita income and consumer demand for innovative and premium products. Moving now to China. China D industry volumes were essentially flat this quarter and down approximately 4% year to date due to continuing economic headwinds. Our loan volumes, however, were up 1.6% in the quarter as a result of our focus on the faster growing core, pleasant and above segments. We estimate we gained approximately 30 bps of market share in the quarter, reaching a level of 19%. Total revenues grew by 6.3%, with revenue per hectoliter growth of 4.6%, driven by blend mix with strong performances from our premium and super premium brands, Budweiser and Corona. China EBITDA increased by 25.3 percent with EBITDA margin expansion of over 400 basis points to 27.5% as a result of our strong revenue performance and favorable commodity prices. We continue to believe the core plus premium and super premium segments have the greatest long term growth potential. Our brands in these segments represent over half of our total China volumes and are well positioned with strong brand health attributes. Budweiser had a solid quarter with volumes up high single digits on the back of the continued success of our music platforms. The brand continues to grow throughout the country, with especially strong performance in the South and East. Volumes of our super premium brands are also growing rapidly, largely due to the performance of our other 2 global brands, Stella Artois and Corona. Brands in this segment trade at a significant premium, contributing to good growth in both revenue per hectoliter and profitability. Moving now to some of our other relevant markets. Our business in Canada continues to perform well, although weakness in the industry led to a low single digit volume decline in our beer volumes. We estimate market share revenue performance for the quarter were essentially flat. Our own beer volumes in Europe declined, although volumes in Western Europe were up by 3%. Our total revenue grew by over 3%, mainly due to premiumization with good performances in France, Spain and Italy. In the UK, volumes of our own products grew by mid single digits despite a slight industry decline, driven by the growth of our global brands. Own beer volumes in Belgium were down mid single digits due to the industry decline, while in Germany, own beer volumes grew by low single digits, driven by good results from DAX and Francescana. Beer volumes in Russia were down mid teens in the quarter. Latin America and South beer volumes were up low single digits, recovering from a weak second quarter. This was driven mainly by the growth in Bolivia, Chile and Paraguay, compensating for continued weak consumer environment in Argentina. In South Korea, beer volumes were down low single digits in the quarter, although we estimate we gained market share. Summing up, 3rd quarter results were disappointing, driven by our performance in Brazil, as you can see from the chart on Page 19. We're working hard to finish the year with good momentum and are aiming for a fast start in 2017. As always, we're focused on what we can impact and influence in building our business for the long term. And we have positive trends in a number of areas. In the U. S, our revenue management initiatives and positive brand mix evolution have increased our revenue per hectoliter and profitability throughout the year. In Mexico, we have good momentum and continue to work to build the category. In Brazil, a challenging consumer environment has provided the opportunity, on the other hand, to grow the mix of RGBs, a very positive development for the long term. And in China, our focus on the core plus and above segments has allowed us to grow ahead of the industry and become the most profitable brewer in China. And finally, we have also successfully completed the combination with SAB, an integration of the 2 companies is well underway. With that, I'll hand over to Felipe, who will take you through some further detail in our Q3 results. Thank you, Brito, and good morning, good afternoon, everyone. Moving on to our below EBIT results, starting with our earnings per share performance. Normalized earnings per share decreased to $0.83 from $1.02 per share in the Q3 last year. This decrease is due mainly to higher net interest expenses resulting from the pre funding of the SEB purchase rights and lower foreign exchange translation gains, partially offset by the mark to market adjustments linked to our share based payment programs and lower income taxes. Net finance costs in the quarter were just over $1,200,000,000 compared to 8 $10,000,000 in the Q3 of last year. This variance was driven primarily by the additional net interest expenses resulting from the issuances earlier this year. Also, other financial results include the negative mark to market adjustment of $57,000,000 linked to the hedging of our share based payment programs compared to a loss of $585,000,000 in the Q3 of 2015, a positive swing of $528,000,000 Foreign exchange translation gains in the Q4 this year were also lower than the Q3 of 2015. Non recurring net finance costs were $678,000,000 in the 3rd quarter compared to $327,000,000 in the Q3 last year. Nonrecurring net finance costs include a negative mark to market adjustment to almost $100,000,000 related to the portion of the FX hedging of the purchase price of the combination with SAB that does not qualify for hedge accounting under the IFRS rules. We also recognized a negative mark to market adjustment of $22,000,000 resulting from the derivative instruments entered into to hedge the deferred share instrument issued in a transaction related to the combination with Grupo Model compared to a loss of $327,000,000 in the Q3 of 2015, a positive swing of $305,000,000 Our normalized effective tax rate for the 3rd quarter was 11 point 7%, down from 26.8% in the Q3 of 2015. The normalized effective tax rate was favorably impacted by the reporting of previously unrecognized deferred tax assets on carry loss forward losses and the reversal of deferred tax liabilities following a change in tax law in Argentina. The change in tax rate versus the Q3 of 2015 was also impacted by the swing between the two quarters in the mark to market adjustments process. Our guidance for the full year 'sixteen remains in the 22% to 24% range. Please note that this guidance excludes the impact of the combination with SAB, but now includes the impact of the funds being for the purchase price for which no tax deduction is expected to be reported at this point. The Board has approved an interim dividend of €1.60 per share, as you can see from Slide 24, and this is the same as last year and consistent with our commitment to deleveraging, as Peter mentioned. Expected dividend payment dates from each of our listings are shown on Page 15 of our press release. Our capital allocation objectives remain unchanged. Our optimal debt structure remains a net debt to EBITDA ratio of around 2x. Our first priority for the use of cash will always be to invest behind our brands and to take full advantage of our organic growth opportunity in our business. The leveraging to around 2x remain our commitment. M and A remains a core competence, and we will always be ready to look at opportunities when and if they arrive, subject to our strict financial discipline. Our goal is for dividends to be a growing flow over time, consistent with the non cyclical nature of our business. However, as I have said before, giving our emphasis on deleveraging, dividend growth is expected to be modest in the short term. Dividend yield, earnings payout and free cash flow payout will always remain as references in determining the amount of our dividend payments. And with that, I will hand back to Regina to begin our Q and A session. Thank you. The floor is now open for questions. In the interest of time, we will limit participants to 1 question and one follow-up. You. Our first question will come from the line of Edward Lundy with Jefferies. Please go ahead. Hi, everyone. Britta, you mentioned in your opening remarks that this has been one of the most difficult years in Brazil for a decade. Do you expect next year to be as difficult or more difficult or slightly better? I mean, hard to predict, would not pretend here to be economists. But what we see is that consumer confidence, the public figures, that consumer confidence is beginning to rebound. We see that inflation is coming down. We see that currency is in a better place. Financial markets tend to come first, And we see the political environment is more stable. But I think more importantly than that, Edward, because again, we're not economists, but more importantly than that is to say that our confidence and the fact that we've been always been bullish about Brazil remains intact. And the reason is simple. I mean, first, it's not a 1 or 2 bad years or some political stability that will change some of the basics that make this market such a great market, which are, for example, it's very attractive demographics. The regional disparities that are still show gaps that could be closed and that would result in capital in per capita consumption increases. And also the openness of consumers to go for premium products. You see that even in a tough environment like this, premium the premium segment continues to grow, and we have many brands to take advantage of that growth. And our commercial programs are very geared towards taking advantage of those fundamental drivers of the attractiveness of this market. And those are the basic five platforms, which is elevate the core because we have a very high share in that segment accelerate premium because, as I said, consumers are open the near beer opportunity, and we have examples in Brazil, 0, it's called Sensus, that are really very high margins and high growth. Shaping home with home consumption with the returnables, and that's very important, having more returnables in the off trade. And also, we continue to develop the out of home experience, the on trade experience with our global brands, draft and much more things we can do in terms of reinvigorating the category and premiumizing the consumer experience. So I mean, when we put all this together, we continue to be very bullish about the country. We've been there for 27 years. But you're right, I mean, this year has been one of the toughest we've seen in a long time. Thanks, Peter. Can I ask a follow-up? And I appreciate you've any other keys to SAB for a couple of weeks. But could you talk in more general terms how during the Modelo integration you managed to deliver such significant margin expansion without jeopardizing the top line? And as you think about SAP integration ahead of you, are you confident in being able to do a similar thing, I. E, delivering significant margin expansion and not jeopardizing the top line? I think that's a very good point. I mean, I think every integration we do, Edward, we come with a better toolkit or better ways of doing things. And I think in the Mobile integration, we learned a lot about exactly what you said. I mean, try to reach a better balance between the synergy delivery and the momentum of the business that we accelerated in Mexico. I think that's something that's very much top of mind for us. That's reflected in the targets for our people in the new zones, And that's something that we learned and that we intend to continue to carry on. Very good point. And is that what gives you confidence to say you expect a fast start to 2017? Well, we had, as you know, 11 months to prepare for day 1. We had the integration planning. Of course, on the commercial side, we didn't have access as we do now. So the integration planning was on everything else but the commercial side. But our guys are picking up speed very quickly on trying to understand the commercial drivers and try to implement again what we learned in our integrations and exchange the best facts that we planned during these 11 months. So we're ready for a fast start. Of course, every country has its different macro situations, but we'll learn how to deal with that. And I think more than that, Edward, we're very excited with the people, our new colleagues coming from the SAB side. Now there's no more ABI SAB. Now there's the new ABI, and they're all colleagues. And these are amazing people that build an amazing business. And now as part of a large organization with access to best practice on both sides of the business, I think the new company will have a lot and we'll do more together than we would do separate. Your next question will come from the line of Robert Ottenstein with Evercore ISI. Please go ahead. Great, great. Brito, if you could talk a little bit about a couple of things in the U. S. Market. Number 1, what you see going on with craft beer? It looks like an inflection point this year in terms of that slowing. Do you think that's the case? And who do you think and do you think that is going to represent a decline in overall U. S. Volumes with what people go into Craft now going to wine and spirits? Or do you see that as an opportunity for premium regular? And then second, in terms of Bud Light and the weakness of Bud Light, how much of that do you think is cannibalization from Ultra? Hi, Robert. So on your first question about craft, I mean, of course, craft has been growing for the past few years. We, as a market leader, like that a lot because it's a growth segment, and it's a very profitable segment. And now after some years of rekindling and really building a portfolio, we have we're very active in that segment. We're happy to say that we're gaining share within that segment, and our craft brands are doing very well. So if you look at our national brands, like Goose Island, for example, growing double digits, and that's very encouraging. If you look at our craft partners in the different regions, also growing double digits. So that's very encouraging. So in terms of craft, I think it's what it's called. But what we see in some customers is that there is some kind of thinking at this point about how much more of assortment can you carry. Customers began to realize some time ago that as you enlarge assortment, there's only so much shelf space that you can share and cold box that you can split. And there's also working capital implications out of stock that goes up, more people that you need to step the shelves. So I mean, I think there is like anything else, at some point, consumers also get a bit tired of so much choice, and they start going for fewer brands. But again, this is all speculation on our side. It's too early to call. But again, we like the segment. We think it's great that the segment is growing. It's elevating beer. It's a growing segment, profitable segment. We're playing that segment. So but again, Torrey's call. On Bud Light, it's our biggest brand. For sure, biggest brand in the country, more than 18% market share of total market, an amazing brand. Going through a tough quarter, for sure, this quarter was the worst in the year. But again, now we start what we do best, which is the whole thing about sports occasion, NFL activation. And this year, because of our new agreement with NFL, we're able to really activate the teams on our cans around the country, which we're not able to do before, and therefore, providing fans, no matter where they live, with their preferred cans and teams. And that is something that connects really well Budweiser, so very hopeful that, that will get Budweiser Budweiser to a better place as we did with Budweiser, right? Remember that Budweiser some years ago was losing 1 point or 0.8 share points a year. Nice losing 0.2. I'm not saying it's great, but it's stable. And the feedback we get from consumers is very strong. I mean, it found its voice. It found its way back in its heritage and history, and really has a very clear positioning. And that's exactly what we're trying to emulate on the Bud Light side. We'll have some new ideas. We have this new agency that's an amazing creative agency, and we think that there are some good things to come. You're right. I mean, on the other hand, we have Michelob Ultra, which is an amazing brand, the top gainer from all brands in the U. S. In terms of share gain for the last 6 quarters, if I'm not mistaken. And it's a big brand, and it's the positions are superior like beer. So that could be also having some things. We try, of course, to be to do it in a way that's accretive. But of course, there is some cannibalization there. But again, there is enough space for both, right? Ultra is at a high price point, Klade is 25% higher price point. So it doesn't necessarily cannibalize the same occasion of Bud Light, and we're trying to do it in a way that both can find a space to grow because we believe it's a complementary portfolio, not an overlapping portfolio. Okay. Just a follow-up for Felipe. We continue to scratch our head a little bit in terms of why your view is that the acquisition debt won't be tax deductible. I was just wondering if you could kind of help us understand that a little better. Robert, that is the approach we are taking. You may say that is a conservative approach. It all depends on what is the income level in different jurisdictions and where the debt will be allocated is part of a final structure that we are fine tuning. If we find opportunities in debt, we're going to keep you guys updated. But for now, the best assumption we have is to assume it's not going to be deductible. Your next question comes from the line of Trevor Stirling with Bernstein. Please go ahead. Hi, Frederic and Felipe. My first question is that the pressures from transactional FX in Brazil is something you've known about for at least 9 months. Why did you actually then choose this time to postpone the price increase? And was competitive dynamics part of that decision making process? Trevor, Brito here. So as you know, I mean, this year, as I've said just a minute ago, I mean, the market in Brazil has been very challenging. It has been a very tough year on consumers and on us, of course. It's a very competitive market, has always been. And the same way in the U. S, we decided to anticipate the price increase to bring it forward. In Brazil, we decided to delay it. And price is a very local back decision. Our guys locally will try to time it the best way possible. And sometimes, that means different phases. So in the U. S, the phasing was bringing it earlier. In Brazil, it was bringing it later. And that has to do with many things. But I mean, those are all competitive sensitive things, so rather not mentioned. But I would just say that phasing is not something in common. But to your question, what I can say is that the net revenue pack liter that was down by 1.2 percent. The primary driver of that difference going from a 6% plus to a minus 1.2% in Brazil beer was the delay in the price increase. Also contributed to that, the fact that we, as always, tried to balance revenue, share, volume and tried to cover, given situation of the consumers, some interesting price points and also try to push more for returnable glass bottles. So all that, of course, impacted the net revenue number. But the primary impact was the delay in the price increase that went from the Q3 last year to the Q4 last year. And given the kind of price increase we're talking about, this is a relevant difference. Okay. Thank you, Britta. And then my follow-up question is there are similar pressures from transactional FX in Mexico. Volumes are clearly very, very strong, but light is doing very well and yet only 2% revenue price mix growth in Mexico in the quarter. Yes. Because I mean, first, I mean, again, pricing decision is very local. There are also mix impacts there. But what's important to say is that, that number is in line with inflation of last year. It is true that inflation has come up this year in Mexico, and that will our pricing guidelines, as you know, has always been pretty much everywhere, not every year, but long term, is always to keep pricing in line with inflation. So this pricing this year is in line with the last year's inflation. Inflation come up came up. So we have to relook at this on the time, right? I'm sorry, I have a follow-up. When was the last time a price increase was taken in Mexico? We don't necessarily comment on that because we have different channels, different packs, different so many things, different regions. So it's a little bit of a patchwork in terms of date. Okay. Thank you, Richard. Thank you, Thiago. Your next question comes from the line of James Edwardes Jones with RBC. Please go ahead. Hi, Chris. Can I follow-up on Trevor's question first? Can you confirm that the Brazilian price increase has now gone through? And assuming it has, how much was it broadly? What's been the effect on volumes? And what should we be expecting for gross margin in Q4 in Brazil? Well, I mean, we're not going to comment on the Q4, but the only thing we can say is that the price increase was delayed from last year, Q3 price increase to a 4th quarter price increase this year. So we can say it's already in the market, but we're not going to comment more than that, James, at this point. So it went from basically September to October. Okay. And as a follow-up, your sales and marketing expenditures now increased by around 300 basis points over the last 3 years with little obvious benefit to revenue growth. What's your thinking here? Is it a reflection of the cost to compete rising? Or can we expect sales to marketing to fall shortly? Or is it just a phasing thing? At some stage, you expect that to deliver better revenue growth? You're asking about the total company? Yes. Okay. So in terms of total company, let me tell you a little bit how the thinking went and how we can connect the device. So in 2009, we got our first, let's say, global brand, Budweiser, okay? Stella was there before, but the footprint was not as large. Budweiser had a large footprint. In 2013, we got Corona. And in the meantime, we saw what happened with Craft. We acquired our first Craft in the U. S. In 2011, Goose Island. So all of a sudden, in 2013, we had 3 global brands that were complementary and a craft portfolio or a craft business that we believe could be developed elsewhere in the world. Then in 2014, we had the World Cup, which normally we invest more money in the World Cup. And then after that, we decided that it was time to start investing in the high end business in all the different regions around the world. So now that we have a global brand that we didn't have before and now that we have a view for what crack represent, we started investing. So the sales and marketing uptick that you saw in the last 3 years, 1st year was for the World Cup, which is pretty normal. But then 2015 2016 was to do things like, for example, to fund the high end business in the U. S, which is growing very nicely. Our craft is growing out of the craft. Our imports growing nicely like Stella. So that was part of that. In Mexico, to grow the category and American brands, so but like Mexico. For example, in London last, to grow the global brands and specialties, crafts, and that's a big part of the net revenue growth that we have in both zones. And Lena L'Arche is now the Global Brands, which was not the case some years ago. In Europe, if you look at Europe, Europe that was always a zone that had no top line growth in the last 3 years that we decided to invest the high end business in Europe. It became pretty much a high end zone with some exceptions, but pretty much most of the volume is tied now to the high end. And Europe now for the 3rd year in a row is growing top line at the tune of 3% to 4% with very good margins. In APAC, 3 years ago, we started with our super premium business on top of the Budweiser business, which is the premium business. So it started with Corona, L'Enfemore, Garden and Stella. So all this marketing money was invested 1st because of World Cup and second, to get our global brands across the geographies and to start the craft business in many different places. So but what I can tell you now is that in this year, we told the market that we would upload or bring the sales and marketing upfront to be front loaded in the year. And going forward, we're just looking at our overall business today. We can say that we feel good about the current base of sales and marketing, and growth will come like in the past based opportunities. And we'll continue to do what we always do is that we sweat the assets. So it's a bigger base, and there's more to sweat there. So that's a long answer, but just trying to connect the dots in terms of sales and marketing. Yes. That's a very helpful answer. Sorry, can I just go back to previous question, Jack? Did you say that the price increase in Brazil was deferred from September to October? Yes, I did. Thank you. Thank you. Welcome. Your next question comes from the line of Chris MacDonald with Redburn. Please go ahead. Hi, there. Chris Pitcher here from Redburn. A couple of questions. Firstly, on the Bud Light situation. You talked about it earlier, Brito, but in a period where craft slowed, market share performance actually deteriorated. Is it fair to say you see the bigger threat Bud Light than the Mexican brands and perhaps there's some loss volume there. And the follow-up to that is, what are you doing to sort of take the strength of Budweiser and Bud Light in Mexico and make that work in the United States? Because I noticed in your Mexican comments, and this is a follow on from James' question, that in the first half, you were saying that the higher sales and marketing was phasing. But in this quarter, you're actually saying now it looks like it's just incremental spend. So it feels like that, that is baked in higher spend. Thanks, Roger. No, no. No, no. What I said about the overall company is that this year, sales and marketing was front loaded, and we guided that at the beginning of the year. But in terms of if you look at the last 3, 4 years, then I told a little bit about the story about how the sales and marketing evolved, 1st because of the World Cup, then because of the global brands and the high end opportunity in many of our markets, right? So those are 2 different things. In terms of your question about light and craft, I don't see I mean, it's only 1 quarter, but it's also true that craft has been decelerating for more than 1 quarter, and that has not affected Bud Light to the point that of the share loss we had this quarter. So I would not connect those two things. I don't think they're necessarily connected. So again, Bud Light Now, we went to the football season, which is always very strong in terms of occasion and brand identification and positioning. And we have an amazing partnership with NFL, and we do lots together this year, even more than before. So I think this is let's go now for the Q4. I wouldn't take 1 quarter and try to drive any conclusion between Kraft and Bud Light. It was more specifically looking at the success you're having with Bud and Bud Light in Mexico and yet in the 90% Oh, sorry, that's right. The Mexican brands. Why aren't you joining the dots between Mexicans drinking American beer in Mexico and the Americas the U. S. Situation? Yes. No, no, you're right. I mean, we are the number one brewer in Mexico. And it's fair to say that because it's a fact that Bud Light is the number one beer with Hispanics in the U. S. And we're trying to bring more Mexican brands from Mexico into the U. S, especially the Southwest. So Estrella Jalisco, Montero are 2 brands that we brought. Estrella Jalisco, very promising brand. And a lot of the immigrants in many parts of the Southwest came from Jalisco. So that's a brand that talks deeply into their hearts, and we're trying to get the brands in their hands. And in terms of Bud Light, I mean, you're right. I mean, there is a lot of influences that come from the U. S. Southern States into the northern part of Mexico and vice versa. And you see Bud Light growing very strongly in Mexico. And we're always trying to the northern part of Mexico especially, and we're always trying to think of ways of connecting that back to the Southwest and South of the U. S. So that's something that's top of mind for sure for the Bud Light folks. Your next question will come from the line of Mark Swartzberg with Stifel Nicolaus. On Brazil, I don't know if you can give us a sense, but year to date EBITDA down 13%, 14% in local currency. Can you give us a sense what cash flow from operations have done in that particular region? No, no. We don't. No, we can't. Sorry. I mean, we only talk about cash flow anyway at twice a year, mid year and end of the year. So, wouldn't be a Okay, fair enough. And then Africa, it's nice to see the SAB numbers, the plus 10 revenue growth in the Q3. Can you give us a sense and yet volumes are declining about 3%. Can you give us a sense other than Nigeria of markets where you do see an opportunity for volume to start turning positive? And I know volumes are growing in Nigeria, but are there particular countries there where you see near term or medium term opportunity to return to positive volumes there? Well, Mark, it's too early for us to talk about SAB and insights into different countries because, again, as I said, integration planning has been going on for 11 months. But the commercial part, because of the integration rules, they were not available to us. So it's now it's been, what, 2, 3 weeks at the steering wheel, and now we're learning very fast about the commercial things. But one thing that I've always said about Africa is that Africa reminds me a lot about Brazil in the sense that for sure it's up in terms of where society is growing, middle class growing, GDP growing, therefore, a good place to have a business, especially our kind of business, but it's not a straight line. It's not a straight line, and there'll be foreign exchange crisis from time to time. There'll be political crisis from time to time, and consumer confidence will go up and down. But again, for us, it's just like Brazil. And we've been in Brazil for 27 years. And yes, Brazil this year is a bad year. But again, look at the past and see where it came from, and you see it's a line that's up, but not a straight line. Sometimes, maybe 5 years or so, there's 1 or 2 years where you go sideways or backwards as you're going this year in Brazil. But again, then when you go backwards, when you have a tough year, you try to look for the silver lines. And the silver lines in Brazil this year are 2. First, the RGBs that are growing very fast because consumers are asking for it and customers are open for it like never before to that tune. And second, we're getting a lot of sponsorships and properties that are important to drive our business in the category in Brazil back at much lower prices. So for example, the carnival properties in Rio and Salvador, 2 very important things for us in very high season BA sales period are back to us at better pricing, and that's because the market's down. So that's when you have that long term view, you take advantage because you can only do things like this if you have a long term view, returnables and properties with multiyear contracts. But Africa, I think it's a little bit like that. You have to have the view, as we do, that these things are up, but not every year. Fair enough. Great. Thank you, Brito. Thanks, Felipe. Thank you. You're welcome. Your next question comes from the line of Anthony Biccolo with HSBC. Please go ahead. Hello, Brito. When you acquired Anheuser Busch and Grupo Modelo both, you had a lot of brand equity in Latin American markets where you didn't have those where those brands really weren't distributed. Taking a look at, let's say, the Andean region or even Australia, do you find that you have the same levels of brand awareness for, say, Bud or Stella Artois or Corona that you had in Brazil when you bought those brands? And can you give us a sense of what your plans are in terms of getting those brands up to speed in the new markets that you've acquired? Well, in most of those markets, I mean, our brands have been present. In some like Australia in a big way, like Corona, which has a 6% to 7% market share there, right? In other markets, a smaller presence, but because we didn't have distribution, right, because we didn't have the scale of the critical mass. So in South Africa, our global brands have been there. In Colombia, they have been there. But sometimes, with other partners, sometimes, in the licensing arrangement, sometimes, with different partners. So now it's time to get all this and put in an amazing distribution system that SAP has in those countries and grow those brands in the right way. So we said from the beginning that we were giving synergies in terms of cost synergies, that we're putting a number to it like we always do. But then we saw lots of opportunities in terms of revenue, top line synergies that we're not quantifying, and Global Brands for sure is a part of that and also the working capital that we're not being quantified. So and we remain at the same opinion. So do you think you'll need to step up like you did a few years ago with more sales and marketing effort to sort of get those brands to where you'd like them, sort of put them on steroids in a sense? Well, in a way, the beautiful thing about the Global Brands is that they benefit from global investments. So when you do Tomorrowland, we're benefiting many brands of ours. When you do a World Cup, we're benefiting Budweiser in the existing countries and the new countries. When you do Corona Sunsets, the same. When you do World Surf League, for the target consumer Corona, the same. So I mean, I think a lot of what's already in the base that's been aired on a global basis or activated on a quasi global basis will now have a bigger footprint. But those a lot of those monies are already in our base because those are properties that we have in the system. And so it's going to be a standard implementation like we've done. We have what we call toolkits for the global brand implementation. And again, those brands are already in those markets. It's just that they're going to now get bigger. Got it. Thank you, Brito. Thanks, Johnny. Your next question will come from the line of Caroline Levy with CLSA. Please go ahead. Thank you. Good morning. Good morning. I'm just thinking about the margin changes, which are so severe versus anything we've seen in the past. You said you knew about the hedging situation. Would you not be inclined in future to sort of warn us that, that could be coming? No. I mean, we always told you, Caroline, that told you in the sense of everybody that we do hedge pretty much 12 months ahead. So that's we've always done that. So much so that let me call your attention to something now more specific. I mean, when you look at the EBITDA shortfall in Brazil, you see that half of it can be explained by the cost of sales. And in that cost of sales, there is a huge impact of our unfavorable, if you will, foreign exchange hedge because we hedged a year ahead. We hedged in 2015 midyear when the currency went up big time because of the uncertainties in the country, and we hedged at that level. So that will continue to impact us, but on the other hand, will become a tailwind in the second half of next year, okay? But again, that has been there out there in the public for forever that we hedge the year in advance, right? So since I spoke about Datetime Brazil, let me say even a bit more. I mean, if you connect the cost of sales with the sales and marketing that were uploaded or loaded upfront in terms of the year as we guided before And the incentives, fiscal incentives that have to do with top line that came down, that explains 80% of the EBITDA shortfall. And the net revenue per hectoliter explains 10% of the EBITDA shortfall this quarter in Brazil. So Constancis, yes, it was half of the EBITDA shortfall, so big impact. Okay. Then could you also talk about the margin shift in Mexico and the investment spending to grow the brands, which is clearly working, is that something that you because it's working, we should expect will continue and so not give any guidance in terms of sales and marketing. But what I just said, give any guidance in terms of sales and marketing. But what I just said, I think when James asked the question, we increased our base in the last 3 years given many opportunities we saw in global brands and craft and specialties. We feel good about the current base we have, and we'll continue to grow it whenever we see opportunities. But for sure, we'll continue to do what is in our DNA, which is swept that base that became bigger now. So and the same, Mexico is part of that. So in Mexico, we increased that because we saw opportunities in new occasions. We saw opportunities in global brands that we didn't have in Mexico up to 2013. American brands that started developing very fast once we got control over that market. So I mean, lots of things. But then you get to a base that you feel good about it and that's the question of swaying the assets and continue to look for opportunities to add to it if the case may. And then thank you. The last question, Britta, would just be I sense in your answer to the question on SAB and the way you're compensating people going forward that top line growth has taken a front row seat versus cost savings in the entire organization at this point. Am I reading that right? Well, if you look at the 27 years of our history here in the company, I mean, we've always grown the company with both, right, top line growth and the costs or efficiencies. Of course, when it came to the U. S, that story changed a bit because we got to a market where it was more of a developed market that was a big part of our business. So that changed. But we continue to grow top line in land loss. And again, sometimes there's a better year. We continue to grow top line big time in China, in APAC in general. And now we're growing top line in Europe at the tune of 4% in the last 3 years. So we grew top line this year slightly in the U. S. And Canada, not this quarter, but year to date. So I mean top line has always been in the back of our minds. But with the global brands, it is true that we begin to see even more opportunities, and our targets reflect that because they are weighted towards not only growing top line as a whole, but also growing top line of the high end in which global brands and specialties are the case. But cost is our DNA. I mean, we always work on cost. There's always opportunities, be it because of scale, be it because of technology development, be it because of just our learning curve, be it because of synergies when we do such a transaction, transformational transaction like this one. So again, very excited about the SAB people, our new colleagues and the markets. And again, we're building a company for the next 100 years. Thank you so much. Thanks, Carolyn. Your next question comes from the line of Alicia Fori with Liberum Capital. Please go ahead. Hi. Good afternoon, everyone. I was just looking at the CCBA decision, Coke's decision to buy you out of CCBA. I was wondering if you could remind us where in your combined network you will still be bottling for Coke after that business goes away. And in the markets where you are going to lose the Coke bottling rights, the CCBA African markets. Do you intend to replace that with, say, Pepsi volumes or other soft drinks that you have in your portfolio? Well, Alicia, very hard for me to comment on this. The only thing we can say is that the notice code sent to us is public, and we intend to work constructively with the Coca Cola Company to ensure an orderly and efficient process to minimize any disruption to our business. But at this point, that's all I can say. Okay. Perhaps I could have a follow-up on something else. I was wondering how much of the EBITDA decline in Brazil in the quarter was operating deleverage on the lower volumes. And I appreciate that those volumes may indeed come back. But if it takes a while, what opportunities do you think you have to rightsize the cost base in Brazil? Again, half if you're talking about the EBITDA decline, half of it was because of cost of goods sold, cost of sales, okay? And that's on Page 14 of the investor presentation we put out today on our website. And there you see that half of that 33% organic drop in EBITDA in Brazil, more than half, 16.7 percent, was based on the cost of sales increase. And that cost of sales has a lot to do with the unfavorable foreign exchange hedge that we have in place because of our hedging policy of always hedging, on average 12 months ahead. And we take the time 12 months ago, the currency was very devalued because of political instabilities in Brazil, and that is the currency we're living now in terms of our transactional costs. And that will take some quarters to unwind and will ease and will become, I would say, possibly a tailwind in the second half of next year. But that's half of that. And then you have, as I said, 80% to add this cost implication, the incentives that came down because revenue came down and the sales and marketing that was front loaded, that's 80% of why EBITDA came down. So there are a lot of temporary effects and events on this EBITDA downfall this quarter. We have reached our allotted time for Q and A for today's call. We will take our final question from the line of Andrea Pistacchi with Citi. Please go ahead. Yes. Hi. Thanks very much. Just one question from me on China, which has had a few subdued quarters even in the premium segment, quarter has been a bit better. So are you seeing any signs there that the environment for beer is starting to improve? Or what you think is the issue really there? I mean, the macro is not as strong as it was 2 years ago, for sure, but it's reasonably strong. So what really is holding back growth, do you think? I think, I mean, as we showed investors last year in China, there is a big difference between the segments in China, between when you look at core and value, core plus premium, super premium. And our business is heavily geared in terms of profitability and growth on the core plus premium, super premium. Those segments slowed down a bit, like the whole industry, but they continue to grow way ahead of the core value. And that's why we're so happy with our positioning in China and so happy with the decision of our guys in China of having started a super premium company, as we call it, in China 3 years ago, with brands like Corona, Stella, Lessor, Guggen, that are really, profitability wise, way above even Budweiser. China is a market from the markets where we operate where the difference between the core profitability and the premium super premium profitability is like 5 to 10x bigger. So it is a big thing, and that's why we're the number one profitability taker in China despite being the number 3 in volumes because we do operate in that top end of the market. But you're right. I mean, the industry in China has been negative. This quarter was flat, but it has been negative. Our volumes have always been ahead of the industry, so we're gaining share because of the segment shift that's favoring us. But to continue to be and then look at China, it's a market that for sure continues to be very relevant in the beer market or in any category in the world. And again, the economy has changed a little bit from blue colors to more white colors. The center of gravity of regions moved a little bit. The channels moved a little bit. And what we're seeing right now is a little bit of that adjustment that categories have to do in order to follow that center of gravity that moves because of the way the economy is being driven, a lot driven by the government policy there, right, from an export business to a more internal domestic consumer led economy. So thank you, Andrea, for that. And so that was the last question. So let me say that, again, thank you all for your time. In the Q3, most of our markets delivered solid volume, revenue and EBITDA growth, led by increased premiumization in the U. S, continued strong volume growth in Mexico and good financial results in China with big margin expansion. We're working hard to close the gaps in Brazil and prepare for a fast start for 2017. Regarding SAB, we're delighted to have completed the combination earlier this month, and we're excited to be working with our new colleagues to grow our business and achieve our dream of bringing people together for a better world. So thank you very much for your time. Thank you for joining the call, and enjoy the rest of your day. See you next quarter. Bye. Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.