Earnings Call: Q2 2015

Jul 30, 2015

Welcome to the Anheuser Busch InBev Second Quarter 2015 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 dotab 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, the risk factors in the company's latest annual report on Form 20 F filed with the Securities and Exchange Commission on March 24, 2015. 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. Well, thank you, Jackie, and good morning, good afternoon, everyone, and welcome to our 2015 Q2 results conference call. I will start with the highlights. The Q2 was challenging with tough comps from the FIFA World Cup last year and weak economic conditions in a number of our markets. Unfavorable weather, especially in the U. S. And China added to the pressure. Nevertheless, our strong portfolio of brands and our geographic diversification enable us to withstand these headwinds and deliver solid revenue growth. We entered the second half with momentum behind our brands and commercial initiatives and have strong plans in place to accelerate revenue growth. Total revenues grew by 4.1% in the quarter with strong revenue per hectoliter growth of 7.1% on a constant geographic basis, helping to offset the decline in total volumes of 2.2%. Volumes of our focus brands were down 2%, but our 3 global brands grew by 6.4%. EBITDA grew by 4.6 percent with EBITDA margin expanding by 17 bps to 37.6%. Normalized earnings per share decreased to $1.21 from $1.60 due to unfavorable currency translation, one off items and higher net finance costs, all of which Felipe will explain in more detail later. Each of our 3 global brands performed well in the quarter with combined volumes up more than 6%. Corona volumes grew by 7.8%, driven by great performances in Brazil, Canada, U. K. And our global export markets. Corona is being rolled out globally with a consistent position and execution. We're very excited about the growth potential for this unique Super Premium brand. Global Budweiser grew by 6% this quarter on top of 6 0.7% growth during the World Cup last year, led by China and a very encouraging performance in the U. S, which I'll talk some more later. Finally, Stella Artois grew by 4.9% with good results in the U. S, Argentina, Canada and the U. K. Centered around the Chalice program and the brand's association with the world's greatest events. Global brand volumes are up 5.6% in the first half of the year. More importantly, revenues are up 10.7% in the same period, so great result. All three brands have good momentum and will continue to fuel the fire. Turning now to the results in the U. S. The U. S. Economy continues to improve, but weather was a major negative factor for the industry in the quarter with May being the wettest month in well over 100 years. June weather was also poor. We estimate that industry sales to retailers, STRs, were down approximately 1% in the quarter. However, we continue to see improving trends in the industry for the full year 2015 despite the weak performance in May June. Our own SDRs were down 2.2 percent with an estimated share loss of approximately 55 bps, nearly half of which is explained by disappointing results by the retailers. Our bought premium brands continue to gain share and we saw a much improved share performance from Budweiser during the quarter. Our premium light and sub premium brands lost share in the quarter, although after the 1st 6 months Bud Light's share within the Premium Light segment is stable and we have gained share in the sub premium segment. Our sales to wholesalers were down 1.1% in the quarter with total revenues essentially flat. Revenue per hectoliter grew by 1.2% in the quarter consistent with the Q1 trend, although the contribution from brand mix was below our expectations due to the performance of Deritas. EBITDA for the U. S. Was down 6.9% in the quarter with more than half of this decline due to a one time benefit of $57,000,000 recorded in cost of sales, which Felipe will explain later. Turning to the performance of our brands in the U. S. Now. Bud Light had a challenging quarter as the brand faced a difficult comparable with the Q2 last year benefiting from the first ever Whatever USA activation, the launch of the aluminum bottle and the 25 ounce can plus the World Cup last year. Nevertheless, we know we can and must do better with Bud Light. Brand health indicators are improving significantly year over year and our programs are resonating with young adults. The 2nd edition of Whatever You Say held in late May on Santa Catalina Island in California, for example, was a big success and is a major reason for the improvement in brand health. Looking forward, we have strong programs in place for the second half of this year. The aluminum model is performing very well and will be increasing investment behind this package going forward. We also have a very strong integrated NFL program lined up for the upcoming season. Turning to Budweiser. Budweiser delivered one of its best volume of market share results in recent years. We estimate market share was down around 15 bps in both the quarter and a half year, a major improvement from the declines of 80 bps we saw at the time of the combination back in 2,008. And according to IRI, the brand grew volume in the quarter with share almost flat in recent weeks. This result is being driven by strong campaigns, which focus on the brand's quality and heritage credentials, messages that are resonating well with consumers of all ages. The Brew the Hardaway campaign in particular has struck a chord with many beer drinkers and we have been very disciplined in continuing that message through the Budden Burger summer campaign and our Made in America program. The increased investment behind the brand is making a difference and we'll continue to put dollars behind initiatives that are working like this one. It's also important to note that wholesaler and retailer support for our Budweiser programs has been strong with very good execution in the marketplace. That's a critical component of the brand's success. We still have a long way to go to stabilize Budweiser market share in the U. S, but we intend to keep this momentum going and have strong programs in place for the rest of the year, which build on the quality and heritage messages. Our portfolio of above premium brands continue to perform very well with market share growing by approximately 35 bps in the quarter. These brands have also played an important role in driving our overall performance in the on premise, while we estimate we have gained share in each of the last 5 months. Growth in the broad premium is being led by Niccolo Ultra, with STRs growing double digits in the quarter. Michelob Ultra is on fire and benefiting from the increased investments we're putting behind the brand this year. It's the fastest growing brand in the U. S. Overall in terms of absolute volume, with the growth being driven by the brand's unique position as an active lifestyle brand and with an amazing taste. Stella Klein Goose Island are also performing very well with SDRs increasing double digits and Goose Island IPA growing triple digits year to date. In fact, volumes in all of our new craft partnerships, Blue Point, 10 Barrel and Elision are showing good growth and making important contribution to ours and our wholesalers portfolios. Overall, the above premium portfolio is performing well, although we have work to do on the recurrence, which are falling short of our expectations. Moving now to Mexico. We're very pleased with the results in our Mexican business, which delivered another solid results in terms of volume, revenue and EBITDA growth. Volumes grew by 4.1% despite both an earlier Easter holiday this year, which pulled volume into the Q1 as well as the impact of the World Cup last year. Revenues were up by 7.9%, supported by strong revenue per hectoliter growth of 3.5%, driven by our revenue management initiatives and favorable brand mix from the growth of Bud Light. The strong top line result and the delivery of $430,000,000 of cost synergies, which brings the total to $770,000,000 led to growth in EBITDA of over 14% and margin expansion of more than 300 bps to 53.9%. Volumes of our Focus brands, which represent almost 90% of our Mexican volumes, grew by 6.1% in the quarter. This growth was led by Bud Light, which is up double digits in both the quarter and the half year and a great performance by Victoria. The Corona brand also performed well despite cycling a tough World Cup comparable. Turning to Brazil. Beer industry volumes came under pressure in Brazil due to very difficult World Cup comps and a weak macroeconomic environment. Our beer volumes declined by 8.6% in the quarter, although we estimate that 5.5 percentage points of this decline, over 60% of the decline can be explained by the tough comparable from the World Cup. We estimate our market share reached the level of 67.6%, down versus the Q2 last year when we delivered good share gains, thanks to our World Cup activations. Our beer revenue per hectoliter result was very solid with growth of 15%, reflecting our revenue measurement initiatives, increased on distribution volumes and premium brand mix. We also faced an easy cup versus last year with beer revenue pack leader growing by only 3.8% due to promotion activity at the time of the World Cup. The 2 year compounded growth rate is around 9.2% though. We continue to gain share in soft drinks and reached an all time high level of almost 20% during the quarter, driven by strong performances from Pepsi and Guarana, Antarctica. This balanced top line result and an easy comp for sales and marketing related to the World Cup helped to grow EBITDA in Brazil by 9.3% with margin expansion of over 200 bps to 46.5%. The macroeconomic environment in Brazil remains challenging. And in this context, our commercial focus is to maintain a healthy balance between volume and revenue per hectoliter growth, building on our affordability and back price strategies, supported by very strong disciplined field execution. At the same time, we'll continue to elevate our core brands Skol, Brahmin and Antarctica in the minds of our consumers, building on the strong consumer preference that these brands have built over many years. We're still seeing significant increase in demand for premium brands in Brazil. So we're also accelerating investments behind the growth of our premium brands. These include not only our 3 global brands, Budweiser, Corona and Stella Artois, but also our domestic specialty brands and some of the brands in our recently acquired craft portfolio. Finally, we're seeing near beer occasions to gain share throughout. We're already enjoying good success with Skol Beat Senses and Brahma 0.0 and have a strong pipeline of innovations to come. Year to date, the revenues in Brazil are up 7.4% and we are retaining our guidance for mid- to high single digit growth for the full year. Moving now to China. In China, poor weather across the country and economic headwinds led to a decline in industry volumes in the quarter. We estimate industry volumes were down by over 6% in the quarter and over 4% year to date with most of the impact being felt in the value and core segments. Our OMBF volumes were essentially flat in the quarter and up 1.7% year to date. We estimate that our market share grew by 100 basis points to 18% in the quarter, led by our premium brands. Budweiser in particular remains the engine of growth with bottoms up double digits in both the quarter and half year. China EBITDA increased by 12.1 percent with EBITDA margin up 139 bps to 26%. Despite the headwinds in the economy, we continue to invest behind our 3 focused brands Budweiser, Harbin and Southern, which represents 72% of our volume in China and which grew by 3% in the quarter. Budweiser delivered a great result in the quarter and continues to strengthen its leading position in the premium segment. During the quarter, we stepped up support for our Brew the Hard Way since 18/76 campaign, quality campaign, which included over 12,000 Brew the Hard Way market activations. In summary, our strong portfolio of brands and geographic diversification enabled us to deal with tough comps and difficult trading conditions in a number of our markets in the second quarter. We started the second half of the year with good momentum and will continue to invest behind our brands. We have strong plans in place to accelerate revenue growth in the second half of this year. With that, I'd like to hand over to Felipe, who will take you through some further detail in our Thank you, Brito, and good morning, good afternoon, everyone. Slide 15 shows the EBITDA breakdown by zone for both the second quarter and the half year. Total company EBITDA grew by $207,000,000 or 4.6 percent in the quarter. However, as Brito mentioned earlier, the 2nd quarter results last year included a one time benefit of $57,000,000 relating to the reversal of medical expense accruals in the U. S. This one off last year has the effect of reducing underlying EBITDA growth for the total company in the Q2 this year by 1.3 percentage points. Sales and marketing investments increased 1.3% in the first half on top of a 13% increase in the same period of last year, driven by the World Cup. We are continuing to invest behind our brands and we are maintaining our guidance for full year growth in sales and marketing of mid to high single digits, implying double digit growth in the second half in support of the total revenues acceleration. I would now like to quickly review our EPS and the below weighted results before we move to the Q and A. Normalized earnings per share decreased to $1.21 from $1.60 in the Q2 last year. This increase was due to an improvement in EBIT of $0.14 per share being more than offset by unfavorable currency translation, particularly the Brazilian real, the Mexican peso and the euro, negative scope changes and higher net finance costs. The main item included in the scope changes relates to a one time accounting adjustment of $223,000,000 which was reported in the Q2 last year following an actuarial reassessment of future liabilities under our post retirement healthcare benefit plans in the U. S. This adjustment was included in the results of North America last year as a positive scope change in non operating income and therefore excluded from WorkMFG growth. Accordingly, 2nd quarter results this year include a negative scope change of the same amount. Net finance costs in the quarter were $554,000,000 compared to $382,000,000 in the same period last year. This increase of $172,000,000 was due to the negative impact of mark to market adjustments linked to the hedging of our share based payment programs, which led to a negative year over year swing of $483,000,000 This results from a reported loss of $439,000,000 in the Q2 this year compared to a reported gain of 3.24 $1,000,000 last year. This negative swing in the mark to market adjustment was partially offset by positive currency results and other hedging costs of approximately $209,000,000 and lower net interest expense of $90,000,000 Our normalized effective tax rate for the 2nd quarter was 17.2%, down from 18.1% in the Q2 of 2014. This increase is mainly due to the favorable impact of country mix, partially offset by the negative impact from the mark to market adjustments related to the hedging of our share based payment program. As a result of the year to date performance, we are amending our normalized effective tax rate guidance for the full year 2015 from a range of 22% to 24% to a range of 20% to 22%. As a reminder, this guidance continues to exclude the impact of any future gains and losses related to the hedging of our share based payment programs. Slide 19 shows cash flow generation for the first half of the year. Cash flow from operating activities was $4,700,000,000 in the first half, flat with last year despite considerable foreign exchange headwinds. Free cash flow, which we define as cash flow from operating activities before interest but after net CapEx decreased from $4,300,000,000 to $4,000,000,000 in the first half. At the end of June 2015, our net debt to EBITDA rate was 2.48 times on a reported basis compared to 2.27 times at the end of December 2014. The increase in the ratio during this period is due to the normal seasonality of our cash flows and the impact of currency translation on our reported EBITDA, not fully offset by the currency impact in our outstanding net debt. Our capital allocation objectives remain unchanged. Our first priority will always be to invest behind our brands and to take full advantage of the organic growth opportunities in our business. M and A remains a core competency and we will always be ready to look at opportunities when and if they arise provided that the target deal structure and price makes sense. We do not feel any pressure to do deals and there is no pre deferred timetable. We recognize the growth of growing dividend over time consistent with the low volatility of a non cyclical business. Our goal is to reach a dividend yield between 3% to 4% in line with other consumer goods companies. Our optimal capital structure remains a net debt to EBITDA ratio of around 2x. At this level, the return of cash to shareholders is expected to be consistent of both dividends and share buybacks. And with that, I will hand back to Jackie to Thank you. Our first question is coming from Mark Swartzberg with Stifel Financial. Thanks, Jackie. Good morning, Brito and Felipe. I really have two questions. One is pertaining to Brazil and one's pertaining to cash returns. In the instance of Brazil, obviously, you've been dealing in an inflationary environment for some time now and your experience dates to periods when today's inflation compares would be considered low compared to some of the things you've seen. And you're adapting well, but I wonder as you think about kind of the multiyear strategy for that market, if you could share a little bit more than we've heard so far about what the multiyear strategy there is, given that we are in this no growth increasingly inflationary environment? And then on cash return, I appreciate the reiteration of the targets here. What I'm still scratching my head on is the choice not to have some additional share repurchase as a target appreciating that a target is not the same as a commitment. But you completed the $1,000,000,000 I know that was for incentive purposes to reward people. But I'm still not quite following why we haven't heard more about your share repurchase intentions from here. Hi, Mark. Brito here. Thanks for the question. In terms of Brazil, our team in Brazil at the beginning of this year decided once again because we've been through tough macroeconomic situations before and the team has experience with that that we would not be part of the crisis. So by that I mean that we would focus on our programs, try to execute competition in the marketplace, outthink in terms of strategy and how to adapt programs given the macro in terms of doing what we can control. So we've been in Brazil now operating for 26 years. And we know that in the market like Brazil or some others in Latin America, every 5 years or so you'll have a period like this one in that things kind of go sideways or even backwards. But then again, the net is very positive, has always been. And we say that because it's not going to be a year or 2 of turbulence that will change the fundamentals in Brazil that are very clear. I mean, when you look at demographics, when you look at beer culture in Brazil, when you look at the core brands that we have, they're very strong and that we can continue to grow. When you look at the premium that finally in the last 2 years have kind of woken up and now it's starting to grow. When you look at the premium, when you talk to consumers 20% of the total preference that consumers manifest all linked to premium brands. And today, we're gaining share in the premium segment, but premium is only 8.5% of our mix. So you see lots of room to grow with better top line and macro. When you think about near beer it's another big opportunity. I mean, you look at SCOVID sensors, you look at Brahma 0, so non alcohol and near beer in terms of tapping volume from mixed drinks, Skol Beach Sense is doing very well. So near beer, again, it's highly incremental, very profitable. It's something we haven't done before and we feel we have the brands to do it and have the knowledge because of all the things we've done in other markets. So and you look at the in home occasion, I mean, the whole thing about returnables, that's where the experience of our guys and the scale and the strength of the brands play an amazing role. For example, in the off trade, affordability is a big component of our strategy. But in the off trade, for example, up until last year, when you took the whole of off trade returnables, which offers a very good price for consumers, because of the packaging that come and go, was only 2% of the mix. Today, in just a year, it's now 15% of the mix of the off trade and it's growing, continues to grow. So I mean that's an amazing opportunity that we have that our brands and scale can afford us to do and that talks to the in home occasion. When you talk about out of home, we have initiatives like Skol draft, which is extending the draft that has been only for Brahma now to Skol in a different proposition in the Skol Cube, which is getting that consumer experience of cold beer to a whole different level again in the on trade. So I think those are the things reasons to believe that even in a tough economic environment, we can have affordability. Our core brands premium will continue to grow because a lot of people are not as affected in this tough economic times. Near beer, again, highly incremental and in home with returnable strategies. So again, a team in summary, a team that's experienced in terms of tough economic times, a decision made early on to not whine about things and the focus on the things we can influence and execute and execute better than competition and the things I just told you. So in terms of reasons to believe and fundamentals that are not going to change because of 1 year of turbulence in the macro environment. So those are the things that make us feel good about Brazil in the mid and long run as we've always felt. And yes. That's great. That's great. Very helpful. Yes. Yes. Hi, Marc. Felipe here to address your second question on cash returns. Our capital allocation priorities remain unchanged. When we announced the $1,000,000,000 buyback program, we made it clear that to be driven by our share delivery commitments more than capital structure allocation. And as the first $1,000,000,000 was completed, the shares acquired fulfill our immediate commitment under the stock ownership plan. There will be future commitments then and the Board will be constantly evaluating capital structure and take into account the fiscal delivery commitments, which will drive decisions going forward. But at this point, we didn't feel necessary to launch a new program. So is it reasonable to think that come the October release or early November release when you have a Board meeting that that's a more reasonable time to get an update on the amount of dividend and repo from that point forward incremental to what's already been put out there? We'll see. We manage it very closely. We monitor it very, very closely. And as the Board concludes that makes sense to do anything, a decision will be made. But I cannot speculate on where or not the decision will be made at that point. Fair enough. Okay. Thank you, gentlemen. You're welcome. Thank you. Our next question comes from the line of Edward Mundy with Nomura. Hello, everyone. From recollection about 40% of your COGS in Brazil, I think are hard currency denominated. I was wondering whether you could provide some color on the various levers both on the commercial side and cost side you can pull in Brazil to offset the negative transactional risk on this hard currency denominated input costs into 2016 given the recent devaluation of the Brazilian real? Well, I guess, we have as you said part of our cost of sales is dollar denominated 40%. We've had a long standing policy of hedging the transactional piece of the business not the translation. So for this year, why do you do hedge not to second guess the market, but to give us time to react in case of a devaluation or commodity movement or volatility and that's the whole idea. So we continue to do that. And what we try to do is we try to look at beer inflation and we try to be realistic when we balance the way we go to market in terms of share volume and price to reflect in the marketplace the kind of pressures we have on the cost side. That has been again, we've been in Brazil for 26 years. It's not the first time that we have currency impacts or commodity impacts. And that's why we have the Hatch program in place to give us time to re shift gears, adjust plans and go to market in a way that makes sense and that we pass not overnight, but in a period of time that to consumers in a rational way, but also give us time to give more support to returnable bottle growth, for example, so we don't need to burden consumers too much because we have a much better margin on the returnable. So that's the mix of things that we trigger every time we have this thing. The other things we do is that we constantly review our cost efficiencies. Every time we have this kind of pressure of volatility, we go back to our value engineering files to our footprint analysis of where we have breweries and all that. And so that's another driver. And the other thing, Ed, to have in mind is that some of the costs that you're seeing in our cost of sales going up is the result of our premium mix going up, because the premium mix mostly sold on one way packs with very good margins. But when you look at the costs only as opposed to the total business, you see the cost going up, Because if you sell Budweiser, Corona and sell it mostly in one way packs, but with very good margins, you see the top line will go up, costs will go up, but the net in terms of macro will be very good. But having said all that, we expect cost of sales by the way to increase organically for the full year by low single digits. In other words, we're keeping our outlook based of course on constant geographic mix. Great. Thank you. And just as a follow-up, I was wondering, I mean, your outlook statement implies you expect the Chinese beer market, Chinese industry volumes to go back into growth in the second half. I was wondering whether you could provide some color that gives you optimism around that. And as a second part to that question, the number one in liter China resource snow reported some very strong revenue per hectoliter in the last quarter plus 9%. Are you seeing a more rational industry in China at the moment? I mean, our numbers for China continues to be very exciting. When you think about the half year in which industry declined by our estimates by 4.5%, our volume increased by 1.7%, so a 6 percentage point difference between what the market is doing and what our volumes are doing. And more importantly, our revenue per hectoliter increased by 6.5% at the same time. So I mean, very good balance there. And we feel good about the balance of the year for two reasons. First, because the summer has not yet arrived in China And that's a reality. You look at the numbers they are public and you see the temperatures and precipitation and all that. It's not the typical summer that we normally have. So that's one thing. We believe that that's going to get better now in the Q3. And second, because in a market like this, when you look at the industry decline, what's really declining more than anything else is the core and value segments. And because we have an amazing leadership position in the premium segment, we'll just put more fuel in the fire in China and there are many programs to do that. And on top of that, the super premium segment that's new to our business in China. So our business used to be a lot about premium in China with Budweiser mainly. Now we have Corona, we have Stella and those brands are growing at a price point above Budweiser, which again provides amazing growth opportunities and amazing profit opportunities. And by the way, in that or in a month from now, we're going to have our China trip in the 1st week of September with our some of our investors. And it will be an amazing opportunity for us to showcase what and the way we build our business and the momentum our business has in China not only in the premium segment, but now in the super premium segment as well. So thanks for your question. Great. Thank you. Our next question comes from the line of Olivier Nicolai with Morgan Stanley. Hi, good afternoon. Just two questions please. First of all, on the U. S, revenue per hectoliter growth in the U. S. Is definitely below historical trends. Do you expect the negative mix from the retail to last for the rest of the year? And secondly, on in Mexico volume growth accelerated in Q2. Is it fair to assume that you're gaining share? Well, I'll start with Mexico. In Mexico, our volumes grew by 4.1 percent and Puerto Rico particularly are growing 6.1%. We don't have share numbers Olivier, because we only get share numbers at the end of the year. So we have some estimates that we do internally. We drive from other competitors as they announced numbers, but we don't make it public. So it's a yearly share communication that we do to the markets given that we don't have other sources. So but we're very happy with the development in Mexico in terms of volume, the way the portfolio is evolving, the way our pricing is evolving and also with Bud Light that's going in a very, very healthy way. Your first question on the U. S, can you repeat it please? Well, basically you have this negative mix effect from the fact that the retails are declining and that's bringing creating some negative mix on your revenue by territory there. Could we expect this to continue and do you basically expect still around 1%, 1.5% of revenue per hectoliter growth in the U. S. Compared to Okay. Okay. Got it. Well, we're not giving guidance on that specific metric. But one thing you can infer from what we said this quarter is that brand mix will play a key role. So this quarter, a lot of the 1.2% was influenced down by the underperformance of the Repas. So had it performed better that number would be higher. So there was a big impact there in terms of what we get net revenue per hectoliter and our brand mix. Thank you very much, Wouter. You're welcome. Our next question comes from the line of Robert Ottenstein with Evercore ISI. Great. Thank you. Two questions. First, can you give us any more sense of some of the timing potentially timing issues that are affecting your COGS line and your distribution costs such that you'll be able to maintain guidance for the year despite what was reported this quarter? So that's the first question. And then the second question, you've now had a chance to see a little bit more first hand the kind of potential that Corona has globally. Perhaps you could maybe revisit with us your assumptions on the potential of that brand long term outside of Mexico? Thank you. Hi, Robert. It's Felipe here taking the cost of sales and also distribution expenses first. If you recollect last year, cost of sales per terita growth was essentially a 2.2% decline in the 1st quarter, essentially flat in the 2nd quarter, then 5.6% growth in the 3rd, 6.7% growth in the 4th quarter. So net net, we are getting to easier comps as we recycle the 3rd and 4th quarter. The first half of the year was negatively impacted by the 57 $1,000,000 booked in the cost of goods sold. Moreover, we also said Corona or Modelo synergies were back loaded in the year and a lot of the synergies at this point are kicking in the cost of goods sold line rather than admin expenses. There is a component of freight rates that also impacts positively cost of goods sold, but also distribution expenses. On the distribution expenses, you basically saw the same trend last year, an increase of 1.7% in the Q1, 7.6% in the second, 11.9% in the third, 12.7 in the 4th, which means again as we entered to the second half of the year, we are getting easier comps and we feel comfortable in keeping the current guidance for both cost of sales and distribution expenses. Is there anything else going on Felipe besides easier comps? No. Well, there is a synergies, Modelo synergies as I said that are more back loaded. There is the thing on the fuel prices that is positively impacting not only cost of sales, freight overall, but also distribution expenses. And there is the $57,000,000 that was a kind of headwind in the first half will not be there on the second half. Thank you. Robert, when you talk about Brito here, when you talk about Colona, I mean, this is an amazing positive news on our side. I mean, global corona, as you saw in the release, it's up by 7.8 percent this quarter. But if you look at global export markets, it's up by 9.1% in the 2nd quarter. So and more importantly than that, revenue is growing even ahead of that, because as we got the Brent back in many markets, we repriced it up to really reflect the fact that we want to position it as the most super premium brands in all markets where we operate and that's what the brand deserves. So very early to say what the potential is, but it's has been only surprises to us. Even in market where we have a high share, it's adding to our share. And in China, it's showing us a new different world of super premium brands. It's giving us access to channels in China. For example, you see a month from now in China that we have very little access to like the Western bars that's growing rapidly in China. And just redefining what the price of super premium brand is or should be in any markets, redefining what a high price beer is. So, great to our overall business. Thank you very much. Welcome. Our next question comes from the line of Chris Pitcher with Redburn. Good afternoon. Great time. Felipe. My two questions. The first one, I'm trying to go to different market, but in Korea, looks to have had a very tough Q2, indeed a tough year. Are you still suffering from the production problems around CAS last year and the brand perception there? Margins do look to be a lot weaker in Korea than certainly I was looking for. Now that you've got the business back from private equity, does it need more money than perhaps you originally thought? And then my follow-up question is on U. S. Inventory levels. You talk about shipments and depletions matching each other for the full year. Is that still short 1,000,000 hectoliters to sort of to go through the shipment line in the second half just to check I've got my numbers broadly right there? Thanks. Yes. Hi, Chris. In terms of Korea, I mean, it's in a way it's a new market for us. We have been absent in that market for 5 years. Now we're back for 1 year. So and you're right. I mean, total volumes declined by high single digits in the second quarter. I would say half of that is industry decline mid single digits and half of that is market share loss in a very competitive environment. So I can also say that we're still transitioning the business. It came from a private equity type environment where some of the ways of work are very different. So we're going back to basics and going back to our culture we're building our plans for the future. So that has lagged a little bit because of some of the things that have to change. On the other hand, we have a very motivated team. I mean, they now are back to a brewer. We're in this business for forever, not for 5 years or 6 years. I think the other guys, private equity did an amazing job. But of course, their scenario in terms of years to hold the business is different than ours. So we haven't really adjust as we transition the business. The new thing in Korea from 5 years ago when we sold the business is that CAS is now the number one brand in the country. The asset suffered a little bit with production issues last year, but share is stable now, but down from last year for sure. And there is another big difference from last year or 5 years ago is that imported brands are just booming and that's great news for us. We're still underrepresented because again it was not so much high in the agenda of the last administration imported brands. But now with our global brands, have a big opportunity there to make an impact and with our leadership position. So again, we're very happy to have that business back, very motivated team, but we're transitioning the business and we had some issues as you mentioned last year that we're cycling through. And just I mean while we're on Korea, in terms of when you acquired the business and you talked about the potential to take synergies out, do you think some of the quality assurance issues perhaps mean that there are dis synergies now in Korea that actually you need to put more money in the perhaps when you bought it in? Or is it tracking according to the plan? No, no, no. I mean we never really just filed a Korean reacquisition based on synergies. I mean the multiple we bought was an amazing multiple, so it made sense by itself. And so I mean, we're very happy. We know the business has changed a bit. Let's transition a couple of things because the other administration did some great things. But how they did it, some of the culture aspects were transitioning back, going back to basics, investing in people again, rebuilding some of the teams, going back to some of the basics in market execution and looking a lot at import trends, import segments and trying to get CASK back again number 1 brand in the country back to the momentum it had last year that got affected a little bit by some production issues. You're right. Okay. Thanks. And just on U. S. Shipment levels? U. S. Shipment levels. Okay. Hi, Chris. The first half is here STRs were down 1.9%, while STWs were down 3.5%. Like in previous years, we believe STRs and STWs should converge, which suggests that STWs meaning shipments to wholesalers in the second half should perform better than the SDRs. And is there anything you can comment around? I know you weren't directly mentioning it, but the whole SEC investigation that's going on around your major competitor in the Spirit side. Have you been approached by the SEC around the whole stock level issue in the United States? We have no information on SEC, the Agile investigation apart from what we read in the papers. We have not been approached. No, we have not been approached. Then again, more than that, we believe our sales practice reporting is compliant with any applicable regulations. So that's what we have to say at this point. Thanks. Very clear. Our next question comes from the line of Sanjit Azla with Credit Suisse. Hi. Thanks for the question. Most of mine have been asked, but can you just give us a bit of color on how many more shares do you need to acquire to fulfill future commitments from the stock ownership plan? I don't have the number in front of me. But over time, it's fair for you to assume that what we report as share forward swap agreements outstanding, which is part of our hedging should at some point be converted into shares being acquired as a way to fully fulfill the share delivery commitments, but that is over time. So that number is likely to be around 55,000,000 shares for the period in total. Got it. The biggest chunk of this is the Modelo the shares to be delivered to former Modelo shareholders, which was a 5 year commitment since the closing of the transaction in 2013. It's coming in 2018. Of course, also the Board reserves the right of issuing new shares because economically that would have been neutral. Got it. Thank you. Our next question comes from the line of Trevor Stirling with Bernstein. Hi, Felipe and Brito. One question from my side. U. S. Gross margins were down 300 basis points in the quarter and roughly it seems about 160 of that was the nonrecurring of the medical expense. But at least about 140 basis points of underlying gross margin pressure. What's the what areas are you going to look at, Brito, to sort of try and address that? First, you should look, as we said 1st, you should look as we said before in terms of brand mix. I mean, we expected the brand mix that started increasing in terms of the retailers for example came back. So we lost representation of REITs within the portfolio and that was a very good gross profit enhancer. And in terms of operational leverage, we're also investing more in terms of marketing because we see some good opportunities in terms of ultra, our high end brands, some of the craft brands we acquired. So all these things are going well and we're putting more fuels on fire. So I mean we're trying to rebalance our portfolio in the U. S. And that bottom line remains priorities, but the high end needs to step up and grow faster, Also investing in the Maxim segment. So all these things are part of this remaking of our portfolio given the new market and consumers. And this is all good news because I mean there's remaking of the portfolio as we said in 2008 when we got here. We like to share position not to share composition and we thought we have too much reliance on value brands or sub premium brands and we wouldn't tell people to look up and get things like the Rita's and the Stella to go faster and the Ultra to go faster and all these things that are more accretive and in terms of future more promising. Thank you, appreciate it. Thank you. Our next question comes from the line of Mitch Collett with Goldman Sachs. Hi there. I wanted to ask about innovation in the U. S. You've obviously had some innovations over the last 2 or 3 years that have been very successful initially, but then have tended to be less successful in the second or third year. I wondered how you were thinking about innovation going forward. Is it worth the investment to push these innovations out for what is a relatively temporary gain? Yes. Hi, Mitra. I think innovation is part of it. The other part is really focus on the things that are working. So we don't need innovation only to grow the business, but that's part of the growth equation. When you think about like platinum or Repus, they went up then down a bit, but they have a very good residual. Platinum have a 0.5% share coming from nothing, Wieta is 0.9% using SDRs. Bud Light Line Glass bottle was relaunched in terms of a new bottle this April and has been very successful versus some negative trends. So it has had the best trend since 2009. On the other hand, but like the Black Crown has failed. So and again, when you innovate, you have things that are success and failure and that's important for the learning. You only learn if you it's like learning to ride a bike and you have to fail to learn. On the other hand, we also have some package innovation that have been very successful, 25 ounce can, aluminum bottle, enclosed aluminum bottle, all these packs have been very successful. We also have different flavor variants for the ritas and here we need to do a better job. We came with lemonade arrita for example that's doing well but not as well as some of the others. We also have mixed tail in the F and B category in Occulto. So I mean F and B is something that when you think about it Mitch is that we had a 0 share in that category 3 years ago, but they were the number one player. And the retailers this year are not performing well, disappointing. But that doesn't mean that the equity behind it is gone like the opposite. It means that this segment attract a lot of new players and we need to up our game to compete and to continue to grow and keep the leadership position in the F and B. But it's very profitable at the F and B and highly accretive to the beer business with most of the volume coming from outside of beer. So expanding the pie. So we're very committed to it. Okay. So you're happy that the level of investment you're making is generating an adequate return even though sometimes they tail off a bit after a year or 2? Yes. Well, innovations like this. But again, if the residual of a brand is 0.5% share, 0.9% share and profitable, I think those are good returns residuals. And yes, we'll have some tailors, but I think it's part of the equation. Another part of the equation is continue to invest behind the big brands that make up most of our business like Buzz Light Ultra, Stella, Goose Island more and more. So these are important brands for the makeup. And this year, we're very bullish about the second half of the year in terms of total company total company, because if you look at our guidance in terms of sales and marketing investments, we kept the guidance for the year mid to high single digits. But in the first half, because of some calendarization in FIFA World Cup last year, we only grew our sales and marketing by 1.3% on top of a 13% growth last year. So if you do the math, you get to a double digit sales and marketing growth spend or investment spend in the second half of the year. And that will be great to support what we said in the press release about the revenue accelerating in the second half. And I'm talking about the global company not the U. S. Necessarily, the U. S. Being part of it. Okay. And if I can ask one unrelated follow-up. In Brazil, your market share is, I think you said, 67.6%. That's at the bottom end of your historic range. Normally, it's somewhere between 67% and 70%. Would we be right, therefore, to assume that you're likely to perhaps push a bit more on volume or market share in the second half to restore that back towards the upper end of the range? Well, Mitch, our range has been 67% to 69%. It's down this year quarter over quarter, because if you remember last year with all the FIFA World Cup sponsorship and activation, we had an amazing market share during that period. So it's a very tough comp. The 67.6 percent was the kind of price we're having this year, I think again in a year like this you have to balance very carefully how you get your volume share and price going or revenue initiatives going. And I think our guys in Brazil have been able to navigate that really well. You look at their results despite the comps of the World Cup and the macro, I think it's a very good balance. So continue to try to strive for that right balance. Okay, great. Thank you. Our next question comes from the line of Ian Wood with Bank of America Merrill Lynch. Yeah. Hi. It's actually Andrew Scott. Thanks for taking the question. Going back to China again. If I do the math on Q2, your core three brands are growing by 3.5%. Your volume overall was flattish slightly down. So that tail, I think you said about 30% of it is the tail, is obviously down with the market broadly. You mentioned your sales 6 point percent. So what two questions really. What do you see for the second half in that tail of the brands you have in China? And what is the longer term plan not to preempt what you may say in September? Thanks. Well, I mean, our strategy in China has been the same for the past 5, 6 years and that especially after the Sedrin acquisition in 2,006 and after the Budweiser combination in 2,008. We wanted to develop our brands in the premium and super premium segment. Of course, we have a lot of brands still 30% of the business in core and value less than 30% and less and less every quarter. And the market is growing is not growing this year, it's negative, as I said, 4.5% for the first half year first half of this year. But our volume grew by 1.7%. So a 6 percentage point difference between what the market is doing overall on average and what our portfolio is doing because skewed more towards premium, super premium. So our strategy will remain the same to try to increase the importance of these premium brands or our focus brands, which they sit at 72%, try to increase continue to increase that because they are more profitable and because the dynamics of the industry is more favorable to them even in tough times. And that's our game plan and has been for many years. The other good thing to know in China is that different from some years ago, today more than 90% of our business is in our hands. So the whole thing about joint ventures is going down fast and because they're mostly based on premium on core and value. And when you talk about profitability, it's around 96% to 98%, around 100% control of ourselves. So you put a portfolio that's right position. You put the momentum we have. The fact that we have 90 plus percent now in our hands, I think that builds for a great future. And that's why on top of that, if you put corona, stellar, I think that is even more exciting because up until some months ago, Budweiser was the top in terms of pricing. Now you put Stellan Corona on top of that and you again raise that ceiling and you start building that super premium segment that in which there was a pent up demand there that now is being out there because now we have products to offer. So and because of our route to market, it's a premium route to market, it's great to put those brands on top of that premium route to market, which we have established there throughout the years. So very excited about China as we've been in the past few years. We remain excited. Can I just follow-up on that? It's great to put those brands on top of that pre route market, which we have established there throughout the years. So very excited about China as we've been in the past few years. We remain excited. Can I just follow-up on that? Because you mentioned SG and A acceleration in the second half. If I think about that regionally, I'm guessing a lot of that is China. But I just wondered what other regions we're going to see a big push on SG and A? A? Say it again though, it's really bad connection. Can you talk a bit louder please? Yes. I'm sorry. The question was around sorry, hopefully that's better. The question was around the second half, the comments you made about picking up on SG and A Investment, double digit increase in the second half and whether most of that or the majority of that is going to China. Just give me an idea of where that investment is going regionally. Thank you. No, no, no, no. What I said again is this because we're keeping the guidance on sales and marketing for a mini and high single digits for the year. And in the first half was only 1.3% on top of a very high base last year for the World Cup, but that's a fact. The math tells us that there'll be double digit year on year growth in sales and marketing for 3rd Q4. So that's great for acceleration, which we said. But we said that on a company wide basis. We didn't split by region or anything. But because there are so many initiatives that are very promising and working, we want to put more fuel on that fire. So we have an acceleration of revenue going towards year end. Okay. Got it. Thank you. Thanks, Jiggen. Our next question comes from the line of Tristan Van Strien with Deutsche Bank. Good morning, guys. Tristan here. Two questions, a bit more on China, if you don't mind. The first one, just can you give a bit of color on your provincial market share gains, if you had any, particularly Northeast versus the Greater Guangdong area? And then second, I saw that you or you intend to increase your shareholding in the Pearl River breweries to 30%. But my understanding that you guys were always restricted from doing that according to the 2,008, MOSCOM decisions. I was wondering what has changed that allows you to do that? Thank you. Paul, Filipe will take the second one. I'll go back to the first one. Well, the second one, it basically depends on the Mofcom approval for us to get there. And we are going to work together with the Zhejiang Brewery and the province in order to enhance our already very strong strategic partnership into that business, which is a partnership that's been there for 30 years. But the increase is subject to Mavcon approval. Okay. Yes. And Tristan on your first question about China regional market shares or we don't give those out. I mean we but we're very happy with our share performance in China, again, to 18%, 100 bps improvement. And that talks again to the strength of the portfolio and the momentum of the brands. Okay. Just to follow-up on that. I see your EBITDA margins obviously is increasing on a very good clip. Is that happening at the same pace on your EBIT margins as well? Or is your D and A expense because you're investing quite a bit is that increasing faster? Well, that I'll have to get back to you. Graeme will get back to you because I don't have it here in front of me. I know that our EBITDA margin went to 26%, which is a very good development, 26%, yes. Okay. Thank you. Thank you. Ladies and gentlemen, we have time for one final question. Our final question comes from the line of Andrea Pistacchi with Citi. Yeah. Hi. Thanks very much. It's actually on Vietnam and your greenfield initiative. So you because you recently opened the brewery in Vietnam, if you could just say a few words on that. And in terms of ramping up the brewery, if you expect this to be a pretty fast process of getting to the 500,000 hectoliters you have there? And should we expect more greenfield brewery initiatives like Vietnam in other markets? Or will your expansion to new markets be mainly asset light? And again on this asset light aspect, you said it would be a focus for you a few quarters ago. Are you I imagine you're looking at situations. Have you gone into new markets yet with salespeople on the ground where you weren't present before? Yes, sure. I mean, in Vietnam, we're very happy with the way our business is going. As you know, we used to have we've had imports in Vietnam, especially Budweiser for many years. It's a very promising market, demographics, the scale of the market, beer culture. So we decided to have more of a presence. We built we just opened a 500,000 hectoliter's brewery. Phase 1 can expand to another 1000000 hectoliters up to 1,000,000. The products we have there is really our global brands and some of our international brands. So we have Budweiser, Corona, Stella, focused on Budweiser. And we also have Laffer Hoot, Garden and Vax. So it's a very promising market and we're very excited about it. And I was there last year. We have a great team in place that really wants to make Vietnam a second China for us in the region. So that's great. And a lot of the best products that we developed in China in terms of brand building are being copied in Vietnam and that provides a faster growth we believe. So we've experienced a very fast growth of our brands in Vietnam. And is this sorry is so should this lead to maybe other greenfield projects in other countries maybe in the region? Yes. Sorry, that was your follow-up question. Yes. It depends on the market. I mean, in China, we have greenfields. If you take the last 3 years plus what's been in construction, we've had 11 Greenfields. And in India, because we're at capacity at some point brownfield maybe, but we'll have to expand capacity. But then in other markets, we're adding people to the field in an asset light model. For example, Australia, for example, Japan, just to give 2 examples. And you start seeing some results, because you have people, ideas, young people, we're sending trainees to those markets, so millennials, so that's great. Thanks. That was our final question. I would now like to turn the floor back over to Carlos Brito for any additional or closing remarks. So thank you, Jackie. So in summary, the 2nd quarter was challenging, but despite tough comparables, some economic headwinds in the number of online kits, we're able to deliver revenue growth of over 4%. We started the second half with momentum behind our brands and commercial initiatives and expect to accelerate revenue growth for the remaining of the year, remembering that double digit sales and marketing growth given our guidance for the second half. So we look forward to speaking to you again on October 30, when we report Q3 results. And thank you for your time today. Have a nice day. Bye. Thank you. Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.