Earnings Call: Q2 2016

Jul 29, 2016

Welcome to the Anheuser Busch InBev Second Quarter 2016 Earnings Conference Call and Webcast. Hosting the call today from AB InBev is Mr. Carlos Brito, Chief Executive 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. 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 Frito. Sir, you may begin. Thank you, Jackie, and good morning, good afternoon, everyone, and welcome to our 2016 Q2 results conference call. I'm here with Graham Staley as Felipe is not available today. The purpose of today's call is to talk about our Q2 results. But given the events of the past few days, I'll start by giving you a brief update on the status of the SABMiller transaction. As I'm sure you can appreciate, it would not be appropriate for me to take any questions on this topic. This week, we announced revised and final terms of our offer to SABMiller shareholders. The new terms entitle each SAB Miller shareholder to receive £45 per share, an increase of £1 over offer in November. Additionally, with respect to the partial share alternative, which is available to all shareholders, each SABMiller shareholder that elects to receive the partial share alternative will receive a cash element of £4.658 The amount of restricted shares remains the same as our offer in November. This offer is final and cannot be increased or otherwise changed. We believe that the revised and final offer represents a compelling opportunity for all SABMiller shareholders and hope to receive the recommendation of the SABMiller Board for the cash consideration at the appropriate time. SABMiller's 2 largest shareholders have undertaken to vote in favor of the transaction as have the SABMiller directors with respect to their personal shareholders. In recent weeks, we have made significant progress in obtaining the necessary regulatory clearance to the transaction. And this morning, we welcome the conditional approval of China's Ministry of Commerce of the company's proposed combination with SABMiller. The Ministry of Commerce approval is a significant milestone for the transaction. Following previously announced clearances in the EU, South Africa and the United States, all of the preconditions to the proposed combination have now been satisfied, and we have obtained approval in 23 jurisdictions to date. We have worked in close collaboration with the SABMiller team since November. We have made significant progress with them on the regulatory process on bond financing and the disposals in the U. S, China and Europe as well as general integration planning. It remains our objective to close the transaction in 2016. With that, let's now turn to the highlights of our Q2. The Q2 saw another encouraging performance in the U. S. Where consistent investment behind our brands is improving our market share trends, leading to the best share performance in almost 2 years. Mexico also delivered strong growth driven by a healthy economy in our own commercial initiatives. Situation in Brazil remains very challenging. We saw an improved second quarter in terms of both volumes and market share, although this improvement was not at the speed we had anticipated. In China, while the industry remains under pressure, we saw good contribution from Budweiser after a difficult Q1, coupled with further total market share gains. Total revenue in the quarter grew by 4%, with revenue per hectoliter growing by 6.1% on a constant geographic basis, driven by our premiumization and revenue management initiatives. Our global brands continue to deliver strong growth with revenues up 8.4%. Total volumes were down 1.7% with our own beer volumes down 0.8%. Volumes were significantly impacted by weak industry performances in Brazil and Argentina. Our beer volumes in Brazil declined by 4.5% during the quarter, a good sequential improvement compared to the 10% decline in the Q1. EBITDA grew by 4.3% with the margin increase in EBITDA margin to 37.1%. The growth in EBITDA was driven by our top line and a good cost of sales performance, partially offset by the timing of our sales and market investments, which were weighted towards the first half this year, in line with our guidance. Normalized earnings per share were down $0.15 from the Q2 last year at $1.06 This is due to the higher net finance results and unfavorable currency translation, partly offset by the geographic by the organic growth in EBITDA. 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 8.4% in the quarter, led by corona, which saw revenue growth of 13%, driven by strong results in Mexico, the UK and China. Stella Torrevenues grew by over 9% with good results from the U. S. And Canada, while Budweiser revenues grew almost 6% on the back of strong performances in Brazil and the U. K. And a return to solid growth in China after a difficult Q1. Let's now look deeper into the results of each of our top markets, starting with the U. S. Industry volumes in the U. S. Were essentially flat in the second quarter based on our estimates and marginally up at the end of the first half. Our own sales to retailers STRs were down 0.9%, leading to an estimated market share decline of approximately 35 bps. This continues improvement in our market share performance trend in recent quarters, a 30 basis point improvement compared to full year 2015 and a 10 basis point improvement versus the Q1. Our sales to wholesalers FCWs were up 0.5% in the quarter, ahead of STRs, as a result of adjustments to inventory levels in the normal course of business. We continue to expect them to converge by the end of the year. Total revenue was up 2.3% compared to the Q2 last year, with revenue per hectoliter up 1.8%, driven primarily by our revenue management initiatives as well as positive brand mix. EBITDA in the U. S. Grew by 4.8% with margin expansion of almost a full percentage point to 40.9%. This result was achieved through solid top line growth, supported by a strong cost of sales performance, partially offset by the timing of sales and marketing investments. Turning to the performance of our brands in the U. S. The 2nd quarter saw the full rollout of Bud Light's new visual brand identity and refreshed packaging as well as the continuation of our new Bud Light party campaign. Bud Light STRs declined by low single digits in the quarter with an estimated total market share loss of approximately 40 bps, in line with the trend in the Q1 last year. While we still have a lot of work to do, our market share trend is stable. Consumers are responding positively to the theme of the new campaign, which brings lighthearted humor to significant cultural topics. Importantly, purchasing intent and key brand health attributes are up compared to the pre Super Bowl launch. Budweiser is experiencing its best performance in a decade. STRs were down low single digits in the quarter, while market share was down only 15 bps based on our estimates. We have adopted a consistent message and tone of voice built around the brand's quality and heritage credentials. And Budweiser aims to make the summer of 2016 the most patriotic summer ever with the launch of the America campaign and packaging. Baby System is getting behind the brand and we aim to continue this improvement through the remainder of the year. Michelob Ultra remains the best performing brand in the U. S, gaining more share than any other brand for the last 5 consecutive quarters and with SDRs up over 20% in the quarter. Michelob Ultra premium plus position, low carbs and calories and exceptional taste are powerful differentiators from the rest of the beer category. We're investing big to support the continued acceleration of this brand. In the remaining above premium portfolio, Stella Artois, Goose Island and our other craft partners led the way with double digit SDR growth. With this success, our high end business unit consisting of craft and high end imports is gaining share within the U. S. High end segment. Our near beer portfolio is improving. With the new campaign and innovation, the clients in the Retail's family have been significantly reduced. Bast Tam is also doing very well. In addition to our great brands, we really stepped up our sales execution. We're focusing our efforts where we can make the most where we can have the most success, including make our promotional dollars work even harder for us, especially around the major holidays. And most importantly, we're more aligned and working well with our wholesalers who are delivering great results. Our collaboration with the wholesaler panel on our 3 year plan has also been especially helpful. Moving now to Mexico. Our Mexican business had another great quarter with volumes up over 7%. Revenue grew by 9.5% with revenue per hectoliter up 2.1%. EBITDA grew by 6.6%, while EBITDA margin declined by 143 bps to 50.4% due to the timing of our sales and marketing investments. It's now just over 3 years since we completed the combination with Grupo Modelo. We're very pleased with the progress we've made and excited by the prospects for further growth and premiumization of our portfolios of our portfolio in the years ahead. Our domestic brands in Mexico continue to perform well. The Corona family grew volumes by mid single digits in the 2nd quarter, supported by strong summer programs. Victoria also performed well with the continued success of its Mexican heritage campaign. We continue to focus on the premiumization of the Modelo portfolio. Our global and U. S. Brands continue to deliver strong growth. This brand accounted for approximately 10% of our volumes in Mexico in the first half of the year led by Bud Light. Bud Light had another very strong quarter, resonating with LDA consumers, especially in the North, with volumes growing double digits. We're also ramping up support for our global brands in Mexico and growth has accelerated for both Budweiser and Stella Artois. Additionally, Michelob Ultra more than doubled its volume year on year in Mexico. Turning now to Brazil. The trend of our beer volumes in Brazil in the 2nd quarter showed improvement versus the Q1, but not at the speed we had anticipated. Our total volumes declined by 4.7% in the 2nd quarter, with beer volumes declining by 4.5%, much improved compared to the 10% decline in the Q1, but not where we want it to be. Soft drinks volumes were down 5.2%. Our premium brands continue to perform well with Budweiser, the leading premium brand in the country, growing volumes by double digits in both the second quarter and the year to date. Although the Brazil beer market remains very competitive, our market share trend improved versus the Q1. Brazil Beer revenue per hectoliter increased by 6.9% in the quarter, reflecting our revenue management initiatives, increased owned distribution volumes and premium brand mix, partially offset by growth in our returnable glass bottle mix. Growth of returnable glass bottles or RGBs is an important component of our affordability strategy, achieving an attractive consumer price point while positively impacting profitability. Brazil EBITDA declined by 2.8% in the quarter, while EBITDA margin contracted by 217 bps to 45.1%. Given the results of the 1st 6 months, we are amending our net revenue guidance for Brazil. Our previous guidance was for net revenue to grow by mid- to high single digits in 2016. We now expect it to be flat with last year due to the weak consumer environment and increased mix of RGBs. The consumer environment in Brazil remains challenging and uncertain. As we have done many times before, we must therefore remain focused on what we can impact and influence, and this focus is reflected in our commercial platforms. I'll talk more about accelerating premium near beer and shaping in home consumption in a few minutes, but let me first cover the other 2 platforms. Elevating our core brands remains a major priority in Brazil. Our brands Skol, Brahma and Antarctica remain healthy, with Skol enjoying especially strong consumer preference. Visuals festivals and events play a key role for brand activations. To boost out of home consumption, we're increasing the number of coolers in the on trade channel and driving further distribution of the 1 liter RGB. Growth within the premium year over year categories continues to be a significant opportunity. Our complete portfolio approach enables us to continue leading this fast growing segments. Revenues and volumes of our premium brands, which include our global brands and our domestic specialty portfolio, grew double digits in the quarter, and we'll continue to invest to drive this growth, building strong base for the long term. In year over year, volumes are also up double digits. We continue to see growth from the Skolbeats family and Brahma 0.0. The challenging economic situation is putting more pressure on consumers' disposable income. Therefore, we're offering consumers affordable options to enjoy our products, primarily through our RGBs. RGBs continue to gain popularity for in home consumption with our volumes sold in supermarkets more than doubling in the first half of this year and accelerating growth in the second quarter. In summary, the Q2 was challenging in Brazil. Nevertheless, we feel we have the brands, people and right commercial strategy in place to manage through a challenging environment. We have persevered through these conditions before, and we can and we'll do it again. Moving now to China. China B Industry volumes declined by 8% in the Q2 due to the continuing economic headwinds, with most of the impact still being felt in the core and value segments. Our volumes were down 2.3% and as a result, we estimate we gained approximately 110 basis points of market share, reaching a level of 19.1% market share. We continue to believe the core plus premium super premium segments have the greatest long term growth potential. Our brands in these segments represent over half of our total China volumes, and they're well positioned with strong brand health attributes. Total revenues in China grew by 3.9 percent with revenue per hectoliter growth of 6.3%, helped by positive brand mix. This represents a solid improvement compared to this Q1. China EBITDA increased by 25.6% with EBITDA margin expansion of well over 500 basis points to 32.1%. Budweiser was a key contributor to China's financial results this quarter, growing by high single digits following a soft first quarter. In Guangdong, where the industry remains under pressure, Budweiser returned to growth. The brand success this quarter was fueled by the Made for Music summer campaign. I would now like to mention some highlights from other relevant markets. Our business in Canada continues to perform well, although a weak industry in the quarter led to a low single digit decline in our beer volumes. We estimate our market share was stable. Our beer volumes in Europe were essentially flat in the quarter with volumes in Western Europe up almost 5%, driven mainly by our performances in France, the UK, Spain and Netherlands. Net revenue in Europe was up 4.6%, driven mainly by the growth of our premium brands. In the UK, volumes of our own products grew by high single digits, driven by the Budweiser Euro Cup activations and continued growth of corona. Our beer volumes in Belgium were down mid single digits due to industry decline and some estimated market share loss, while in Germany, our own beer volumes grew by low single digits, driven by the good results from DAX and Franziska. Dearborns in Russia, we're down mid single digits in the quarter, driven by soft industry and some market share loss, partially offset by our premium brands performances. Latin American South beer volumes were down high single digits. This was mainly driven by a weak consumer environment in Argentina. In South Korea, beer volumes are flat in the quarter, although we estimate we gained market share as a result of our very successful CABs Freshness campaign. Moving on now to below EBIT results. Normalized earnings per share decreased to $1.06 from $1.21 per share in the Q2 last year. As you can see from Slide 23, normalized EPS excluding the impact of unfavorable currency translation, the mark to market adjustment linked to the hedging of our share based compensation programs and the net cost of the prefunding of the SABMiller purchase price decreased by $0.19 when compared to the same period last year. This decrease is mainly due to net foreign exchange losses reported in other financial results in the 2nd quarter compared to the net foreign exchange gains in the Q2 last year. This was partially offset by increased EBIT. Net finance costs in the quarter were $726,000,000 compared to costs of 554 $1,000,000 in the second half last year. This variance was driven primarily by the additional net interest expenses net interest expenses resulting from the bond issuances this year related to the prefunding of the SABMiller combination. Other financial results include a favorable mark to market adjustment of $444,000,000 linked to the hedging of our share based payment programs compared to a loss of $139,000,000 in the second half second quarter of twenty fifteen. Non recurring net finance costs were almost $1,500,000,000 in the 2nd quarter compared to only 60 $1,000,000 in the Q2 last year due to a number of factors. Non recurring net finance costs included negative mark to market adjustment of 1 of almost $1,800,000,000 related to the portion of the foreign exchange hedging of the purchase price of the proposed combination with SMB Miller that does not qualify for hedge accounting under IFRS rules. At the end of June this year, £46,000,000,000 of the purchase price of the proposed combination had been hedged at an average dollar exchange rate of 1.5276. The 2nd quarter result also includes a mark to market gain of $230,000,000 resulting from the derivative instruments entered into to hedge the deferred share instrument issued in the transaction related to the combination with Grupo Movil. It also includes a mark to market gain of $168,000,000 related to the derivative instruments entered into the hedge into to hedge part of the restricted shares to be issued in relation to the proposed combination with SABMiller. Our normalized effective tax rate for the Q2 was 20.5%, up from 17.2% in the Q2 of 2015. The normalized ETR was impacted by the prefunding of the purchase price of the proposed combination with SABMiller, for which no tax deduction has been reported. Our guidance for the full year 2016 remains in the 22% to 24% range. As a reminder, this guidance excludes the impact of any future gains and losses related to the hedging of our share based payment programs as well as the impact of the proposed combination with SABMiller. Our capital allocation objectives have not changed. Our optimal capital 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 the organic growth opportunities in our business. The leveraging to around 2x will be a priority following the completion of the combination with SABMiller. M and A remains a core competency and will always be ready to look at opportunities when and if they arise subject to our strict financial discipline. Surplus cash flow should be returned to shareholders. Our goal is for dividends to be a growing flow consistent with the non cyclical nature of our business. Dividend yield, earnings payout and free cash flow payout will remain references in determining the amount of our dividend payments. And with that, I will hand it back to Jackie to begin the Q and A session. But before we open the line for questions, let me please again remind you that it would not be appropriate for me to take any questions on the transaction itself. Jackie, thank you. The floor is now open for questions. In the interest of time, we will limit participants to one question and one follow-up. Thank you. Our first question comes from the line of Sanjit Agla with Credit Suisse. Hey, Brito. Can you just shed a bit more light on the competitive dynamics in Brazil at the moment? And also on the U. S, clearly Bud Light, you've had some big activations in Q2. What's your initial assessments there? What's working? What's not working? And do you plan to change anything? Yes. Hi, Sanjeev. So I mean the Brazil market has always been very competitive, and today is no different. Of course, we have an industry that's being pressured by what consumers are feeling given the economy. And we had to pass also prices to prices, federal and state taxes, so that put more pressure. The Q2 was better than the Q1, but not yet where it should be. The pricing environment is, I would say, is the competitive pricing environment that we always have. You know that we have different dynamics when it comes to returnable bottle and the one way package. And that's a big silver lining from this whole situation. When you think about the macro consumer and the pressure, the big silver lining that we invest in big time because it helps in the short term, but it builds a brighter long term is the returnable glass bottles. So if you hear me saying if you heard me saying in the off trade, our returnable glass business has more than doubled in the first half of this year and continues to accelerate into the second half of the year. That's very good because if you have been to Brazil lately, you would see up to a year ago, no glass returnable bottles in the off trade, especially the big box stores. And now they're back because consumers are looking for smart choices in terms of buying. And when they buy the returnable glass bottles, they're buying the liquid of their preferred brand, not the package, not paying for the package. And that's something that's a proprietary bottle and that's something that builds a very good long term. So I think that's a big silver lining that we're trying to take advantage. We're putting the pressing the gas pedal and trying to get those returnable glass bottles back into the different channels, especially the drop trade. On the other hand, the premium is growing. I mean, consumers are trading up. So that's great news. I mean, and we have the brands. So we're leading the premium category. We're growing double digits, and that's encouraging. So even in a weak economy, you do have consumers that are looking for that premium opportunity. So that's Brazil. In terms of the U. S. Bud Light, I mean Bud Light, while we have still a lot of work to do on Bud Light, the share trend is stable, but still negative, of course. What I can tell you, Sanjay, is that consumers are responding positively to the theme of the Bud Light 40 campaign and the rollout, which is now completed, of the new Bud Light visual identity, which is much more contemporary and much more in tune with the LDA consumers. So the purchasing intent is up when you compare it to before Super Bowl. Super Bowl was launched, the new VI and the new communication. Brand health ratings on key attributes like helping make a good impression brings people together And I like the way this brand is going, direction it's going, all up. And our system is very excited, which is very important for a brand like Bud Light, a brand that has 18% to 19% share in a very competitive market like the U. S. So very encouraged by the Bud Light. It hasn't yet reflected on a different share trend, but we all know that our brand health comes first and then share. So we're not promising anything here, but we're very committed and investing behind the number one brand in West Bud Light. So thank you. Many thanks. Our next question comes from the line of Caroline Levy with CLSA. Thanks so much. You did address Brazil somewhat already, Brito, but there's been some change in government. And I'm just wondering from your perspective, which is a long one on Brazil, if you could talk about the macros in a little bit more detail. And then I'm wondering if you could also discuss on premise trends in the U. S, which have been a big drag for the industry. What are you seeing there? Yes. In terms of Brazil, I mean, we've been doing business there at Carline for 27 years. And net net has always been a great market for us. And so we continue to be bullish in Brazil, but we know that it's not a straight line up, but it's up. But every 5 years or so, you have 1 or 2 years where things go sideways or backwards. But then that's when you have to take advantage and look for those silver linings. So for example, the only way returnable glass bottles could ever go back to the off trade in the big way it's going out is in a situation of crisis like today. Because when times are good, consumers are not necessarily looking for that smart price point and off traders, they don't like to deal with returnables. So that's a silver lining that we want to put at the foot in the door, open the door, put the glass bottles in there and that's a big play on margins. So that's a big silver lining. So I mean, the fundamentals in Brazil remain the same, middle class growing, the population young, lots of LDAs coming to market every year. I mean, regional differences we still have placed in Brazil where per capita consumption is very low. Premiums grown still from very low base. And if you look at the reasons to believe, I mean, we have core brands that are very strong and that we still can do lots to grow those brands. We have premiums, as I said before. We have the near beer, which is growing in Brazil very healthy. We have the Beach family. We have the 0, Brahma 0, 0. We have in home opportunity, again, where we're putting more and more returnable, again, because the off trade has opened the door for returnables. The out of home, the on trade, the one liter, we're putting a lot of emphasis on the 1 liter to attack the issue of affordability and also just operational excellence in general. When tough times hit, we always turn back to the things we can control and monitor and operational excellence has always been a hallmark of our company. So again, we've been through tough times before. I think it's a great time when some of our competitors sometimes take a pause that we accelerate and do the things we need to do because we've always been bullish. And there are many reasons to believe on that, that I just mentioned. So that's Brazil. And but you're right, this year is going to be a tough one. And as the political macro situation gets cleared up, consumers, of course, will get more confident and go back to their normal behaviors. And if you look at the financial markets in Brazil, currency and stock markets and all that, they tend to signal that first and that's where they are at this point. In terms of the U. S. On premise, I mean, remains a channel that's been under pressure, but our performance has been we've been gaining share for the last 12 months in the on premise. We've been doing a lot to support our craft brands and high end brands like Stella because on premise for sure for these brands is key to provide sampling, to provide premium experience and to provide more penetration. These brands still have a very low penetration compared to other brands, even high end brands. And that's a big opportunity for us, and the On Trade have a big role to play there. So that's the U. S. On trade. And our high end business unit is very focused on providing those experiences in that on trade occasion. Thanks so much. Thank you, Caroline. Our next question comes from the line of Anthony Bucolo with HSBC. Hi, Brito. How are you? All right, Tom. Quick question on, I guess, Brazil is the hot topic right now. In terms of market share, it seems like Ambev for years has kind of hung back from going past 70 market share. And when you consider what's going on in Brazil and the momentum you have with returnable bottles and with your super premium brands. Do you think there will be a change in your attitude towards market share? And do you think you might attempt to accumulate more than 70 market share considering the condition of some of your competitors? Well, Tony, we've always worked with that range of 67 to 69 in terms of Nielsen metrics. What I can tell you is that because of the price increase we had to implement in the Q1 and now coming back, But we're still we are below that range at this point, but not slightly below. So we tend to get back to the range. Just remember that 3 years ago, we were above 70. So there's no ceiling at 70. We've always said that 67 to 69 is where we feel things get optimized. But if we see an opportunity to go beyond 70, for sure, we'll take it. Right now, we're slightly below the 67, but the trend is positive to get back to that range. So that's the range we've always used. Right. So is gaining market share a top priority for you in Brazil? Or is it really just kind of managing your mix through the macro crisis more than I think in Brazil, the top priority is grow top line and create value. And market share, revenue management, all these things are part of this bigger idea. And of course, I mean, if we fall below 67, we then rejig the leverage to get back to 67, the range of 67 to 69. Then if we go to 69 and there is inflation pressure, then we pass it on to price and we go below again. So I mean, that has always been our mechanic in Brazil of trying to get the levers in harmony so as to create value. The big thing in Brazil has always more than share or anything is to create value. By having share under check-in that range. Our next question comes from the line of Trevor Stirling with Bernstein. Hi, Brizo. Two questions from my side, Brizo, both relating to China. The first one is, for me, there's a bit of a disconnect between an economy that's growing at least in official terms around 6% and beer volumes down 8% and consistently weak for a couple of years now. And I wonder if you can give your perspectives on that disconnect. And the same is given that context with your own volumes down 2%, I was struck by 5 50 bps of margin expansions incredible. And is that all done to product mix? Or are there other things that are going on in China as well? Well, Trevor, 2 very good points. I mean, the economy in China, of course, decelerated, but we know it's still growing at 6.pluspercent, 6.6 percent in the second quarter, so and grew 7% last year. So that's very strong. But of course, we all know that China and the government is they say that, that they are trying to transform their economy from a manufacturing led to more of a consumption led, more service led. And that, of course, is impacting channels, regions. And that's something that brewers are trying to figure out what the new China will look like in terms of channels, regions and consumer profile. And it is also true, to be fair, that the last 2 years, the summer in China has been very in the regions that are strong for beer has been very kind of weak. This year, it seems it's going to be a better summer. But again, I think it's more structural in the sense that we see some channels. And that's an opportunity for us, Trevor, to tell the truth, because when you look at the channels that are growing, for example, the Western channels and the high end restaurants, for example, that's very good for our super premium brands and we lead that category and we lead also the premium segment. So the fact that our volume the fact that the industry volume in China is negative, it's all on the core and value brands or core and value segment brands. That's where the negative is all. I mean, if you look at the core plus premium and super premium, they are, of course, not growing at the same speed they were before, but they're still growing. And that's where we have most of our volume anyway. But we still have 30% to 40% of our volumes in non or below core plus brands, so core and value. So that's why our volume is being impacted, not because of the core plus brands of ours, premium or super premium. So that answers maybe both of your questions in that, yes, the economy is growing, but there is a difference in how the economy is progressing. And that impacts consumers, channels, regions. And the traditional place where beer has had its strongholds is shifting a little bit and we're shifting with it. So our guys in China are very good at adapting very fast. I'll give you an example. This year, the beginning of the year in China was kind of weak. And normally, the summer for Budweiser is not a very strong in terms of marketing activations. That's not where we have most of the bulk of our activities. We shifted this year because Chinese New Year is not as strong as we expected. We're putting more emphasis the Budweiser way during the summer and the results are coming very nicely. So I mean, that's what we need to do. The super premium company that we decided to start in China with a different route to market and everything with Corona, Laffer, Whole Garden and Stella is also proving to be a very good decision that our guys made 2 years ago there because of channel shift, we're in that channel shift with our super premium brands. So we're capturing that. But there is 34% of our volume that's still in core value going down fast, but that's what's dragging a little bit the volumes. But if you look at the margins, that's where you see the mix improvement. Thank you. Thank you, Bridget. And just the last sentence there. If you think of our business in China for the past 5 years, we're always ahead of the curve in terms of sales and market investments. Now because of the scale, you see the marketing are more in tune with everything else in the P and L and that also is where margins start to show up. Great. Thank you very much. Thank you, Trevor. Our next question comes from the line of Tristan Van Stryne with Deutsche Bank. Hi, good morning, afternoon, Brito. First of all, congratulations on getting all the pre approvals today, the additional approvals. Just two questions on the margins, please. 1 in Mexico, you had a lot of sales and marketing investments. Can you just remind us what they were in what those investments were for? And do you expect that margin to reverse in H2? And the second one in Europe, you had a good premium mix, a nice growth, but the margin declined. So I'm just trying to get a bit more understanding why that's why you had a margin decline in that area? Thank you very much. That's interesting. Both of them are very similar explanations. I mean, in Mexico, we had sales and marketing phasing as that were more weighted towards the first half of the year. That's in our press release. And we had signaled to that in terms of company wide that would happen pretty much in all zones. So that, of course, takes a toll on margin. And in Mexico, we also have the fact that Bud Light is growing so fast that we have to bring Bud Light from the U. S. Into Mexico because we don't have enough capacity to produce Bud Light locally. And that, of course, also puts more strain on our logistics costs. So that's something that will be released when we come up with a new brewery, the Meyer Brewery in the Yucatan Peninsula that should come towards the beginning of next year, okay? In Europe, you have some of the same thing. I mean, sales and marketing more weighted towards the first half of the year. Plus in Europe, because corona is growing so fast, you also have some logistics that is impacting the logistics cost there. So but Europe is going very well. We're very happy that now for the past 2 years, we found a role for our European business. In that, it's all about the high end, and that's very good. So I would say, Mexico and Europe sales and marketing weighted more towards the first half and plus the import of Bud Light in Mexico and Corona in Europe. So those are the reasons. Okay. Very clear. Thank you. And again, Europe is going top line of 4.6% for the half year. So that's very, very good. Our next question comes from the line of Mark Swartzberg with Stifel Nicolaus. Yes, thanks. Good morning, Brito and everyone. Brito, question on the U. S. The category continues to be a little healthier than it was a few years ago. And in addition to that, you're having some improvement in your own performance. What do you think is going on with the category from a larger macroeconomic and beer specific perspective? And as you think about employment levels and other factors that contribute to the health of the category, how sustainable do you think this improved atmosphere is? Well, Mark, it's kind of hard to predict that. But we had in our guidance, we had said that we expected better industry for the U. S. This year. So that is in tune with our guidance. And I think reasons for that are that economy, of course, it could always be better, but it's been fine. Unemployment is at its lowest level since the crisis since 2008. And so inflation is down, so at 1% or so. So there's growth in real earnings, and that is important for the industry. So again, it's in line with our guidance. And yes, it's a good thing to have because that helps the volume, of course. And what we see also is a continued trade up consumers. And then if you look at retail sales, dollar retail sales, IRI, it's one of the healthier categories you have from all other categories and has been for many years since the crisis in 2008. Great. Thanks, Brito. And in terms of our market share, I think that was part of your question as well. I mean, we've been investing sales and marketing because we see opportunities in the high end brands like Michelob Ultra and Stella and the craft portfolio. And we're also supporting Bud Bud Light. So I think those are the things. And then you see that our trends in terms of market share, yes, 35 bps loss is still a loss, but it's much better than the last 2 years, any quarter. And you see that this half year in the U. S, we're growing top line, we're growing EBITDA, we're expanding margins in the U. S. Despite growing sales and marketing by 18% to 20%. And the beer revenue per hectoliter grew 1.8% in this quarter. So there was a lot of talk of discounting and all that in the marketplace. And we said last quarter that our discount dollars were the same, just being applied differently in ways that were new to the market. And I'm very happy to report that beer revenue per hectoliter is 1.8% up in the Q2 of this year. And could I Sure. Go ahead. And could I Sure. Go ahead. A quick follow-up on that, Brito. Yes, as you said, better than some fears out there. And you cited the improvement in brand Budweiser. When you look at where you are for Bud Light and the larger portfolio, do you think that these tactical changes, if you will, with the emphasis on Budweiser Budlight and Michelob Ultra are actually helping Bud Light specifically? Or are you just looking at it on a broader portfolio's perspective? I think what's happening in our performance in the U. S. Big time is what our guys here led by Jerome is doing together with the wholesaler system. I mean Jerome came with a new mindset of winning together, of really working together with the panel, with the wholesalers, really listening to what their concerns are, to where the opportunities are. And as a company, we decided 2 or 3 years ago to invest ahead of the curve in the U. S. Because we started seeing some brands of ours that deserve more support. So I think a lot has to do with the wholesaler alignment, the joint work that Ron and his team, Alex and Johan, together with the wholesalers, looking at the market, the opportunities and the fact that we as a company decided to invest obviously in our biggest market, the U. S. Market. So it's all pointing in the right direction. That's great. Okay. Thank you, Brito. Thank you. Our next question comes from the line of Pablo Zlawnik with SIG. Thank you. Two questions. Brito, can you comment on the relationship with Pepsi Cola? I mean, what I'm talking about here, how is the soft drinks business doing in South America, particularly Pepsi? You have more flexibility in the contract now to terminate that relationship. I just want to understand, Pepsi has been struggling in South America and your region for a while. Coke remains very strong. Just like to hear what's the state of that relationship? And very, very briefly on China, you have only 19% market share, which of course, you're very focused on sugar and premium. And 'nineteen is still a good number, but very below what you have in other markets. Is there room there in the future to do strategic transactions like, if you buy 1, a Japanese company would say the state they have in Qingtao. So I'm just talking, is there room or in China, we should think that pretty much forget about M and A, it's going to be sizable M and A in China and it's going to be more about just growing organically what you have? Thanks. Paul, in terms of China, we're very happy with the business we have there. I mean, we made a I mean, AB, many years ago, made a decision to go high end in China. When we got together with them in 2008, we kept that very smart decision they made in China. Today, we lead the premium segment in China. We lead the super premium segment in China, and we're very well positioned in the core plus segment. That's where we put most of our investments, and that's where the growth is coming from. And we're very happy with it because we see our business continuously gaining share, margin continue to be accretive and to continue to go up and it's very healthy and it's organic. So very happy with the China business and very happy to be in the core plus premium and super premium segment. It would make no sense for us to go in the opposite direction trying to add more core and value brands to our business. And in terms of Pepsi relationship, we've had a relationship with Pepsi for a long time. We're very proud of our relationship with that level of Pepsi. And but it's true to say in terms of the soft drinks business in Latin America, like the beer business in Lend and Lhas, it is suffering. It's under pressure. The same consumer that's being pressured for beer is being pressured for soft drinks. In Brazil, income real income is down, disposable income is down, inflation now is coming down, but was up for the past few months. In Argentina, the same thing. In Argentina, I mean, the government is doing, in our view, all the right reforms and all the right moves. But consumers, they are under pressure. And their salary is going to be reviewed now in July. That's when the negotiations for salary increase take place. But before July, they were in an environment where inflation was almost close to 40%, and their salary was still the salary from a year before. So very tough environment and soft drinks tend to suffer as much as beer and sometimes even more than beer. I don't know exactly the reasons, but that's the history in both countries. So again, not unlike beer, Soft Drink is having a tough year in both La Enelas, more specifically Brazil and Argentina. Thanks. Thank you. Our next question comes from the line of Rob Ottenstein with Evercore ISI. Great. Thank you very much. Brito, as we talk to a lot of the your distributors in the U. S. As well as other industry observers and participants, there are 2 questions that we get a lot and I'd love to pass them by you. A lot of people are mystified, I guess, to be the right word, in terms of some of the pricing they've seen for Michelob Ultra, given how well the brand is doing and the premium image that the brand is supposed to have? So that's the first question on Michelob Ultra. And the second one is, it appears as you evolve the Bud Light image and come up with a brand identity, at least this year, there have been a number of advertisements that have a social justice theme to them, if you will. And people want to know, I would love to know whether those sorts of social justice themes are just what you're doing this year or what you see as part of the new image for Bud Light going forward? Thank you. Hi, Robert, on Bud Light, I wouldn't say it's social justice. I would say it's more Bud Light going back to its roots and being edgy and very in tune with contemporary cultural topics and relevant topics. I think that's what it is. And that's how Bud Light was built. Bud Light was built by not being afraid of tackling cultural contemporary relevant topics in a very Bud Light way of doing it. And we're back to that way of doing things. So that's totally if you go to and look at old communication from Bud Light in the last 20 years, you'll see that, that was always a theme there to be really in tune with pop culture and relevant topics. So no change there. We're just going back to what made the brand the biggest brand in the U. S. In terms of Michelob Ultra, there's no change. I mean, this is a core plus brand. It's priced at 20% -plus compared to Bud and Bud Light, so no change there. What you saw was a promotion we did for a holiday period in which to get more Ultra on lips, we joined that promotion with Bug and Bud Light just for 3 or 4 days just to get penetration to move up. Because what you see with Michelob Ultra is that it's growing ahead of 20% volume wise, but penetration is still very low. And sometimes what you have to do in this kind of beer consumer goods is that you have to give people a reason to buy it because it's always a risk to buy something you're not used to, to have a reason to buy it and taste it, so they can have an opinion about it and maybe become consumers of that brand. So let's not confuse pricing policy that has been very consistent with some events that can be there to drive penetration, experimentation and beer on lips type occasional opportunities. So that's the difference I would drive there. I mean, fair concerns, but I would just drive the difference between what's the price policy and what's an event to get more penetration and more experimentation. Okay? Terrific. Thank you very much. Very clear and helpful. Okay. Welcome, Robert. Our next question comes from the line of Brett Cooper with Consumer Edge Research. Good morning. On MiC Ultra, I was just wondering the strong growth that we're seeing here, how much of that cannibalizes Bud Light? And is there any part of the chain, whether it's retailer, distributor or the company itself, kind of pushing on the HOT brand at the expense of Bud Light? Yes. Hi, Brett. I mean cannibalization, I mean, we're not giving out those numbers. But the only thing I can say is that Michelob Ultra sells at a higher price than Bud Lights and has a better margin. So even if there is some cannibalization, it's for better results. For example, if you look at our gross margin, and I mentioned this in the past few calls, that for me is a great indicator of things ahead. If you look at our gross margin, it has progressed 1 percentage point every year since 2012. It was 56%, it went 57%, 58%, last year was 58.7%. Percent. This year, for the half year, is at 61.2 percent. So what that tells me is that the mix is progressing the right way. And even if there is some cannibalization, it's still creating value at the gross margin level, which is very good. And we're reinvesting some of that gross margin back in the business and still having EBITDA growing this year. So that's the kind of virtual circle that you always want to have in a consumer goods company. Great. If I can follow-up on a different topic of non alcoholic beer, can you talk about the opportunities you see in some of your bigger markets? And then if you were willing to talk about what you've seen with the non alcoholic Budweiser in Canada? Yes. I mean, I see that as a big 10 year commitment on our side of having 20% of our volume in 10 years checked, of course, every year in non alcohol and all alcohol beers. I think this is a great opportunity, not only because there is a consumer trend there from some groups of consumers going to that direction, but also because our brands can extend in that domain. And if you look at some markets in Europe, for example, where the beer industry is declining, the segment that's growing the most, even in Brazil, that can be also said, is the low alcohol, no alcohol beer. And the profits are very interesting for those brands because the excise is smaller and because there's no alcohol or lower alcohol. So that's very intuitive with some trends out there. Our brands can do it. Our asset base can manufacture those beer brands. And it's something that can be very interesting in terms of enlarging the pie of consumers that connect and stay within our franchise. So we're very committed to it. Our target of 20% in 10 years, today our number is 6%. So today we have 6% of our portfolio in non alcohol and low alcohol beers and we intend to get that to 20% in the next 10 years. Bug for admission is being well received by consumers in Canada. Of course, very early days, but our Canadian teams are being very creative. It's amazing because it's a 0 product, you can go to parts and point of sales that beer would not go to. You can go to a pizza place. You can go to a fast food place. You can go to many places because it's an adult soft drink at the end. Perfect. Thanks. Thank you, Brian. Ladies and gentlemen, we have time for one last question. Our final question comes from the line of Edward Mundy with Jefferies. Hi, thanks for taking the question. Two quick ones. First is on Brazilian margins. I think this year you've hedged on the dollar exposed parts of your Brazilian COGS at 3.21 at the dollar, which is pretty close to where spot is. Are you able to comment on whether you've managed to capitalize on the recent strengthening of the Brazilian real in your hedging for next year, 2017? And the second question is on Australia Jalisco. Are you able to comment on your ambitions for this brand and what you might be doing differently relative to the Montejo launch? Yes. And Estrella, I'll start with the second question. Estrella Jalisco is a brand that started very well. We rolled out Chola Jalisco in the Southwest region in the U. S. Initial results have been very positive, especially in California with a very strong rate of sales according to ROI, making it the 2nd fastest turning 12 pack can and 3rd fastest 6 pack glass within Mexican imports in California and now having a 1% share of total being in California. So that's very encouraging. Of course, I mean, it's a brand that has just started, but this is the numbers that are out there, all public. So I'm just mentioning them. And of course, we have some capacity constraints at the moment, because, again, the Mexican supply capacity is being all taken by the growth we have in Mexico, by the growth Corona has worldwide in our system and now by the growth we have with Mexican imports from us into the U. S. Market. So that's why we're building a new brewery there in the Yucatan Peninsula. So we're very excited about to see Jalisco. And let's see, I mean, early days, but some good signs, some good numbers to start with. In terms of the Brazil U. S. Hedge, I don't have the number in front of me, the 321 or the 324 that is same for 2016, that's confirmed. Last year was $231,000,000 for 2015. And we always hedge for 12 months. That's our standard practice. And the number for 2017 will be known towards the end of the year, not now. Okay. Thank you. Thank you so much. Well, with that, I would like to thank you all. During the Q2, we saw continued strong growth in Mexico. We saw encouraging trends in the U. S, particularly with market share and a good contribution from Budweiser in China, despite the very weak industry performance. Volumes in Brazil, however, were disappointing, but we'll continue to work hard and remain focused on what we can impact and influence. With regards to the proposed combination with SABMiller, we have worked in close collaboration with SABMiller team since November. We have made significant progress with them on the regulatory process and bond financing and on the disposals in the U. S, China and Europe, as well as general integration planning. It remains our objective to close the transaction in 2016. So I'd like to thank you all for joining the call, and I would like to say, enjoy the rest of the day. All the best. Thank you very much. Thank you. Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.