Earnings Call: Q1 2013

Apr 30, 2013

Today's AB InBev's First Quarter 2013 Earnings Call and Webcast will begin momentarily. As a reminder, there will be slides accompanying today's call. To access the slides, please visit AB InBev's website now at www.ab inbev.com and click on the Investors tab. If for some reason you are unable to view the slide advancement during the call, we suggest that you download the PDF of the presentation from the AV InBev Investor Relations website and follow along. Welcome to the Anheuser Busch InBev First Quarter 2013 Earnings Conference Call and Webcast. Hosting the call today from AV 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 this 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 20F filed with the Securities and Exchange Commission on March 25, 2013. AV InBev assumes no obligation to update or revise any forward looking information provided during the 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. Total revenue for the quarter grew by 1.5%, driven by strong revenue per hectoliter growth of 5.8%. U. S. Revenue per hectoliter grew by 4%, including 150 basis points of favorable brand mix. Brazil delivered revenue per hectoliter growth of 8.6% and China also saw a a strong growth of 11.6% mainly due to our premiumization strategy in China. Total volumes declined by 4.1% with beer volumes down 4%. Our 3 global brands grew by 4.7% led by a very strong performance by Global Budweiser, while our Focus Brands volumes declined 2.9%. EBITDA grew by 0.9% with EBITDA margin contracting by 22 basis points to 37.4%. Earnings per share grew by 12.6 percent to $1.16 The volumes of our global brands Budweiser, Stella Artois and Bax grew collectively by 4.7%. Global Budweiser led the way during the quarter with very strong volume growth of 8.4%, while Stella Klein Bex were both impacted by weak market conditions. The growth in Budweiser was driven by excellent growth in China as well as strong results from Russia and Brazil. In the U. S, share for the Budweiser brand family, including Budweiser Black Crown was flat. I would now like to move on to our top three markets and dig deeper into the results starting with Brazil. We estimate that Brazil beer industry volumes declined by approximately 7% in the quarter with our own beer volumes down 8.2%. Our market share in the Q1 declined by approximately 90 basis points to 68.1%, mostly explained by a tough comparable. Share was up 70 basis points in the Q1 last year as well as our 2012 price increases. Nevertheless, we did see 20 basis points of sequential improvement in share compared to the Q4 of last year. Brazil Beer revenue per hectoliter was strong in the quarter, growing by 8.6% due primarily to the carryover benefit of our 2012 price increases as well as increased own distribution and positive premium brand mix. Consumer preference for our brands remains strong. Volumes in Brazil in March in particular were more challenging than expected with an estimated high teen percentage decline in industry volumes during the month. Volume trends in April are much improved compared to March with estimated industry volumes for the month down by mid single digits. We believe the decline in industry volumes in the Q1 was due to the earlier timing of Carnival and poor weather both of which were flagged when we released our full year 2012 results at the end of February. However, we believe that consumption was also negatively impacted by high food inflation and a slowdown in the growth of disposable income. In this environment, the fact that we were required to increase prices in real terms to offset the tax increase in October 2012 was also not helpful. We expect these factors to continue to put pressure on volumes in the short term. We're therefore revising our outlook for volume growth in Brazil and now expect that beer industry volumes in the full year 2013 will be either flat or down low single digits compared to last year. Consumers continue to be under short term pressure and so we have adjusted our commercial plans to leverage many of the market programs and pack price strategies that have been used so successfully to drive increased demand and expand consumption occasions in the past. We have also increased our focus on productivity and cost efficiency opportunities to further support our EBITDA performance. We're maintaining our CapEx plans since these investments are key to supporting our commercial strategies. Additional capacity required for the rollout of the 300 ml returnable glass bottle and expansion of Budweiser are just two examples. It's our view that the fundamentals for the medium to long term in terms of industry growth in Brazil remains strong. In the short term, we continue to see potential for an improvement in the macroeconomic environment. The federal government continues to implement measures to stimulate the economy and has recently increased its focus behind counter inflationary measures. Brazil will also be hosting the 2 most important sports events in the world in the coming years the FIFA World Cup in 2014 and the Summer Olympics in 2016. Sports occasions represent approximately 25% of beer consumption and we're confident that these events especially the World Cup will not only help the economy in general, but also have a very positive effect on demand for beer. Beer consumption in some regions, especially the North and the Northeast is still below the national average, providing further growth opportunities, especially given the expansion of the middle class. Finally, the premium segment in Brazil represents a major growth opportunity for us. Today, premium volumes represent only percent of the total industry compared to global average of around 13%. Brazilians are becoming more and more interested in variety and choice and we have the portfolio and pipeline of innovations to satisfy this demand. This includes not only innovations in liquids and packaging, but also innovation around consumer occasions as beer consumption remains very concentrated still around weekends. We also see opportunities to expand returnables, especially in the off trade channel. And so we'll continue to expand concepts such as the 300 millimeters and pit stops to keep returnables front and center of consumers' mines. In summary, a very tough quarter for Brazil, but we understand the drivers. We have action plans in place and we remain optimistic about Brazil. Moving to the U. S. As expected volumes in the U. S. In the Q1 were impacted by a very tough weather comparable as well as macro factors including increased payroll taxes, delays in tax refunds and higher gasoline prices, all of which put significant pressure on consumer disposable income. As a consequence, we estimate that selling day adjusted industry sales to retailers, STRs, declined by 3% in the quarter, while our own selling day adjusted STRs declined by 4.1%. Shipments were down 5.2% with the difference between our STRs and STWs being explained by one less selling day in the Q1 this year. We believe that weather played a significant role in the weak industry performance with many parts of the country seeing negative temperatures variances of more than 10 degrees Celsius or almost 20 degrees Fahrenheit during the quarter. Despite the pressure on volumes, U. S. Revenue per hectoliter grew by 4% in the quarter, another strong performance. This includes approximately 150 basis points of favorable brand mix. The main drivers were our innovations launched in both 2012 and the Q1 2013 including Bud Light Platinum, Budweiser Black Crown, Lime Arita and Strawberryta as well as the growth of our high end brands especially Stella Artois and Choctaw. The strategy of positioning our innovations at higher price points continues to have a very positive effect on the revenue per hectoliter performance of the individual brand families. Our total market share declined by approximately 50 basis points. We estimate that our Focus Brands families grew share collectively in the Q1 with the decline in overall share being driven by the performance of our sub premium brands due to the pressure on disposable income and our strategy of narrowing the price gap between our premium and sub premium brands. We also faced a tough market share comparable this quarter following the launch of Platinum last year. EBITDA margin in the U. S. Was under pressure in the Q1 as a result of lower volumes as well as higher distribution expenses and sales and marketing investments. As we have mentioned previously, distribution costs will moderate during the year as we expand production of lime burrito and strawberry from 1 to 3 breweries starting in the 2nd quarter. Let's turn now to some of the individual brand family performances in the U. S. During the quarter. The market share of the Bud Light family was marginally down after strong share performance in the Q1 last year. Bud Light Platinum has held a stable share of around 0.8% since the middle of 2012 with a decline in the quarter due to the cycling of exceptionally strong Q1 2012 launch volumes. The platinum tough comp was partially offset by share gains from Strawberryta, which was only launched at the beginning of March and Lime Marita. These two brands achieved a combined market share of 0.6% during the quarter with IRI data indicating a combined share of 1.3% in the 1st 2 weeks of April. So far, there's little evidence of cannibalization of La Merita volumes with every indication that Strawberryta will be an even bigger brand than La Merita is. Budweiser family market share was essentially flat in the Q1 with the successful launch of Budweiser Black Crown, which came to the market at the end of January, offsetting share decline in Budweiser. As we mentioned during the full year results call, we will be launching a new bow tie shaped aluminum can in May that mirrors the Budweiser's iconic bow tie logo. This proprietary can will supplement and not replace the traditional Budweiser can and will only be available in the U. S. In Apex. The Bowtie can is a conversation starter. It's eye catching, easy to grip, contemporary and according to our research very appealing to young adults. I've also announced the lineup for the 2nd annual Made in America Music Festival, which will again be curated by Jay Z. This event will continue Budweiser's decades long association with great American music and will bring thousands of fans together to celebrate the country's most iconic brand and of course enjoy a cold Budweiser. Michelob Ultra and our high end brands led by Stella Artois, Shock Top and Goose Island all performed well in the quarter delivering share gains. In particular, we were pleased with the success of Shuck Top, Honey and Wheat, Apple Crisp, the latest line extension from Shuck Top and the national rollout of Goose Island, which continues to be well received by consumers who appreciate the deep craft credentials of the Goose Island brand portfolio. During the Q1, Goose Island volumes almost doubled versus last year. Finally, our innovation pipeline in the U. S. Remains strong. During 2012, we had the 2 most successful innovations in the beer category, both like platinum and lime arita. And we are already seeing great results from strawberry, which as I said is on track to be even larger than lime arita. In the next few weeks Stella Artois Sidre will arrive in the market alongside the iconic bow type Budweiser can. We'll also introduce a summer sample pack from the Shock Top brand family. And as the summer gets underway, we'll launch a new 25 ounce can across our entire brand portfolio. And there's more to come, so stay tuned. Moving now to China. Our beer volumes in China were very strong in the Q1 growing by 15.5%. We also estimate that we gained market share due to the strong performance of our focused brands, which were up 21.8%. Volume growth came from improved penetration of our national brands Budweiser and Harbin within our existing footprint as well as successful Chinese New Year campaigns. Revenue per hectoliter grew by 11.6% mainly as a result of our premiumization strategy and EBITDA for the zone grew by 58% to $113,000,000 Budweiser volumes continued to grow by double digits driven by our successor Chinese New Year campaigns in February. The Chinese New Year is the longest and most important holiday of the year in China and our execution was particularly strong this year. For Harbin, our biggest national brand in China, the NBA sponsorship was a key theme during the Chinese New Year period, with the brand achieving double digit volume growth during the quarter. In summary, a great quarter in China and we're looking forward to the rest of the year. Before I close, I'd like to share a quick update on the combination with Grupo Modelo. We're pleased that our regulatory approvals necessary for the closing for closing the transactions have now been obtained and we expect to close the combination in June 2013. After closing, we will hold the leading position in the world's 4th largest beer profit pool with the combined company holding the number one position in 4 of the top 5 beer profit pools globally. We remain very excited about the Mexican market and the potential of the Modelo brands internationally. Our integration plans are ready to be implemented as soon as the combination has been completed and we're looking forward to working with our new colleagues in Mexico to deliver the approximately $1,000,000,000 of cost synergies as previously committed. In addition to the cost synergies, we believe there are significant revenue synergies available through further expansion of corona sales worldwide excluding the U. S. And through the sharing of best practices. We can't wait to get started. With that, I'll hand over to Filipe to cover the other markets and the below EBIT line items. Filipe? Thank you, Brito. Let me start with Canada, where our BFOMs declined by 2.9% in the Q1. Market share was down slightly in the quarter, although there was a strong performance by the Bud Light family, with growth in both share and volume following the successful launch of Bud Light platform. We continue to build our innovation pipeline and roll out new products. As an example, we will be launching a special series of hop ales under Alexander Key flavor in the Q2. Moving to Latin America South, total volumes decreased by 10.2% in the quarter with beer volumes down 9% and non beer volumes down 12%. Our beer volumes in Argentina decreased 10.7% as a result of poor industry performance driven by weaker consumer confidence and cold weather. However, our market share saw solid growth with a good performance by the Cummins family. Zone EBITDA grew 9.4% with an EBITDA margin expansion of 65 basis points to 45.4%. Western Europe experienced an unusually cold and long winter season, which impacted industry volumes across the region. As a consequence, our OMBIA volumes declined 7%. In our home market, Belgium, volume declined 9.1% due entirely to a weak industry. We estimate that we maintain market share during the quarter. In Germany, home beer volumes declined 4.4% in a weak trading environment with high promotional activity in the off trade. In the UK, our owned products including cider declined by 4.6%. We estimate that our market share is close to flat with gains in the on trade being offset by continued pressure in the off trade channel. In Central and Eastern Europe, BF volumes declined 16.4% in the Q1. In Russia, BF volumes fell 17% on the back of an industry heavily impacted by the new sales restrictions, the media ban implemented last July and price increases following the most recent excise tax adjustments. Bud continues to perform well and grew by over 25% in the quarter. Although our overall market share remains under pressure as we continue to balance profitability and share. In Ukraine, Bf1 declined 15.5 percent with most of the decline driven by a weak industry. EBITDA in the zone was ahead in the quarter. EBITDA margin growth of 66 bps. Turning now to the below EBIT line items. Normalized earnings per share grew by 12.6 percent to $1.16 from $1.03 on a nominal basis. The increase is mainly due to other financial results of $295,000,000 reported within net finance costs. Moving to the next slide. Net finance costs were $255,000,000 in the quarter compared with $422,000,000 in the same period of last year. The year over year decrease of $467,000,000 is mainly related to the gains of $402,000,000 linked to the hedging of our share based payment programs. Non recurring net finance income was $223,000,000 resulting from market to market adjustments on hedges related to the Modelo transaction. Some group of Modelo shareholders have committed only a pound tender of their shares to acquire the equivalent of approximately 23,100,000 AB InBev shares to be delivered within 5 years via deferred share instrument for a consideration of approximately $1,500,000,000 By March 31 this year, 71% of this exposure had been hedged at an average price of approximately €67 per share, result in a market to market gain of $231,000,000 in the Q1 reported in non recurring net finance costs. Our effective tax rate improved from 17.1% to 12.4% in the quarter due to 1st, the non taxable nature of gains linked to the hedging of our equity related exposure second, a shift in profit mix to countries with lower marginal tax rates and finally incremental tax benefits. We previously expected our effective tax rate to be in the range of 20% to 22% in 2013. We now expect the full year 2013 rate to be between 19% 21%, given the Q1 results. There is no change to our guidance for future years. So in summary, the Q1 was a challenging quarter in terms of volume in most of our markets with the exception of China. Global Budweiser continues to perform very well. We delivered a strong revenue product leader performance, especially in the U. S, Brazil and China, driven by brand mix and our revenue management initiatives. Looking forward to the remainder of the year, we remain focused on what we can impact and influence as always. We have clear action plans in place to improve our volume performance, while maintaining our profitability and continuing to invest behind our brands. With that, I would like to hand it back to Jackie to start the Q and A section. 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. Your first question comes from the line of Mark Swartzberg with Stifel. Thanks. Good morning, gentlemen. Can you hear me okay? Yes. Hi, Mark. Good morning. Hi, Felipe. Two part question on Brazil. You talked about actions to improve volume performance across the globe. And in Brazil, can you speak to this comment about the government getting more focused on counterinflationary having a more counterinflationary objective and how that might affect your own pricing ambitions? And from a spending perspective, how you're thinking about supporting your brands given the difficulties with volume in Brazil? Okay. Hi, Mark. It's Brito here. What the government is trying to do in Brazil is trying to counter the food inflation that has been high in the last few months. They are trying to take taxes away from the food chains so as to get prices down. And if you look at the last few weeks at the wholesaler level, not yet at the retail level, in terms of food, you see that prices are beginning to come down. So that of course would help disposal income, which then again would help a beer consumption or consumption in general. Our consumer has been pressured in the short term as we said in the release by this food inflation and the consequences on disposable income. So government being committed to help that food inflation to ease should help the overall economy. And it seems that that implies a little bit of a less sequential ability to take price for everyone in the beer category. Is that a fair assessment? And how are you thinking about spending to support your brands? What kind of incremental spend do you think you need there? Well, what we're doing, I mean, we continue to support our brands because again, we're in this business for the long term and we're talking about 1 quarter. So that doesn't change. I mean, we continue to believe in the fundamentals. And to your question, what we're doing in terms of bridging this consumer gap or this consumer short term pressure is we're using things that have been very successful in the past like the pack price strategy that hit price points that are sweet spots for consumers. We're trying to help point of sales to activate their locations and to be solution providers for Box to bring traffic into their stores. We're also trying to accelerate the continuous introduction of new proprietary returnable bottles in the off trade channel to give consumers those price points without sacrificing our profitability. And in the on trade, continue as well with the 1 liter, which is more for less, but at a good margin. And the 300 ml, which has but at a good margin. And the 300 ml, which has a very good out of pocket prices point, but again, with a much better margin than the one way presentation. So I mean those are the things that we can control and those are the things that we're committed to continue to do in the marketplace. Okay. Thanks, Brito. Thank you, Mark. Your next question comes from the line of Trevor Stirling with Sanford Bernstein. Good morning, Brito. Good morning, Felipe. First question concerning the rate of decline and the slowdown in the rate of decline that you're expecting. How confident are you about that, Britta? Because it seems to me there's more pressure to come as well. We've got the impact of the April tax increases not really hit yet. There's the ongoing campaign against drink driving. And if interest rates have to go up as well to counter inflation that will lead to more pressure on disposable income? Well, again, what we said in our release is that some of the short term pressures on consumers will continue in the short term. On the other hand, again, as I said, the government is trying to do what they can to ease the food inflation, which is the thing that's the headline in every magazine newspaper in Brazil these days. And in terms of April taxes, we already included that April taxes in our October price increase. So that's already taken care of. And you know that the April tax increase is a much smaller one compared to the October one and the way the government structured their taxes going forward. So again, we can only control what we can control and that's what we're doing with the pack price, pack activation, returnable bottles, proprietary returnable bottles on and off trade without sacrificing profitability. So giving consumer interesting price points to help them bridge some of this pressure short term pressures, but with the good profitability in the prices that we have. Okay. Thank you, Brito. And then my follow-up question probably for Felipe. Felipe, in Beer Brazil, there was a significant increase in other operating income. I think it went up by about BRL 155 in the quarter. Could you just give us a bit of color on that? Is that a one off in the quarter? Is that something that's going to extend into the other quarters and indeed into 2014? Yes. Out of the about $92,000,000 in increase in the quarter, there is primarily driven by higher government grants in Brazil and that is related to VAT long term taxing and incentives. And in Brazil, in particular, there is an equivalent of BRL313,000,000, which is about $150,000,000 to higher level of government grants to the state VAT long term tax incentives. And inside the number, there is a one time credit that corresponds to approximately half of the increase versus Q1 2012. Thank you very much, Felipe. You're welcome. Your next question comes from the line of James Edward Jones with RBC. Thank you very much. I take your point about the one offs in terms of weather and the time you've carnival and so on, but that doesn't really explain your loss of share in the U. S. And Brazil. How concerned are you and should we be about this? Hi, James, Brito here. I think when you look at our share loss in Brazil, it was up against a very high Q1 last year. When you go back, I mean, we had a $69,000,000 share in the Q1 last year came down to $68,100,000 Let's remember our commitment is to stay within the range of 60 7% to 69%, while we balance profitability and share. So in the U. S, we're going up against the Platinum launch, which was a great quarter last year again, given the success of Platinum. If you remember, Platinum went all the way up to 1.9 share of total market in the U. S. So during those first couple of months of the launch, which was at the end of January last year. So I mean, we're up against share wise in both markets against very tough comps in both markets. Okay. Got it. Thank you. And the follow-up is, I suppose given your volume decline and the margin decline that's related to that, are you at all worried that you're pushing too hard, too far too fast on the premiumization strategy? In which market? Well, I guess across the whole group. I mean, it's a consistent strategy across the group, I guess. And for the group, your volume certainly compared to consensus is disappointing and we're not used to ABI's margins going down. No. I understand what you're saying. And you're right. I mean, our DNA is really to continue to increase margins, to continue to look for opportunities to operate in a more efficient way. We've always said, it's not every quarter, not every year, but that's the long term. And if you look at our history, that's what we have delivered. But in the quarter, when volumes go down by 4%, it's that's hard to have margin expansion. But again, that's 1 quarter. We're here for the long term and the fundamentals of our business have not changed. So the premium realization strategy, you're absolutely happy and confident with the way it's going? Yes. I mean if you look at the U. S. For example, out of the 4% price increase this quarter, 150 basis points came from better brand mix. And that's very encouraging, because I mean that's the way to increase the net revenue without affecting consumers. So that's the way we should go. In China, if you look at 11.6% that we grew our net revenue most of it we don't give the breakout for China, but most of it is due to our Budweiser and Harvey brand performing ahead of the rest of the portfolio. Thanks, Peter. Welcome. Your next question comes from the line of Chris Kippers with Petercam. Two questions please. The first one on Brazil, if you look at the consumer holding back as spending, could you share with us if there is a different trend within the portfolio? So meaning the mainstream brands and the higher end, do you see a different evolution over there? Thank you. Chris, at this point, again, it's only 1 quarter. And really March was the month that really took the quarter down from what we had told you in our last press release at the end of February. So it's one data point. So I would rather not comment on particular brands or packages or regions or channels because again we only have that one data point. But again April is doing better still negative but much better than the March in Brazil And that's encouraging. And again, we adjusted if there is one thing that our guys do very well is adjust and be nimble to market conditions when we saw what happened in March and what consumers are going through and the food inflation and the whole story. We believe those things are short term, but we said, okay, let's shift gears and change our priorities and give top priorities to things like pack price, plaque activation, returnable glass bottles introduction, especially the proprietary ones, because that's what consumers need at this point. They need street price points, so they can get the consumption to add and back, while going through this tough pressure in terms of foot inflation in general. Okay. And then just a follow-up on China. Again, this time, finally a strong quarter in volume terms, so quite nice. But also if you look at the price mix also after Q4 also here again a nice evolution. Could we state that there is some pricing coming into the market? Or is it mainly again a very nice mix effect of your portfolio, which is now heavily skewed towards the Focus brands? No. We increased prices. We did some price increase during the around Chinese New Year on our premium brands in China as we always as we've done in the last few years. But most of it as I said is through mix improvement. I mean Budweiss and Harbin are growing way ahead of the portfolio and that's and we see that this trend more likely has everything to continue, because I mean we still have tons of places to continue to expand these 2 brands. They're national brands nationally supported and consumers are excited about them and brand health continues to be very strong. Okay, perfect. Thank you. Thank you, Chris. Your next question comes from the line of Anthony Papakoto with Santander. Good morning, everyone. Quick question on Brazil again. Is there another time in recent memory where we had this sharp of a negative turn in volumes? I don't seem to think that within the last 10 years we've seen anything like this. Could you go back in time and come up with any time period where we had sort of a rapid erosion in volume trends? Tony, hi, Tony. This is Brito here. I mean, the only time you're right. I mean, Brazil, it's a great market. It has been a great market for us. You know the story of being with us for many years. But if you remember 2,003 for different reasons, I think that was the only time for 3 months or so a quarter or maybe 2 quarters that because of competitive action and the effects of price increases of different competitors in this county and all that that we saw in terms of our Brazil volumes declines. I don't remember exactly the magnitude, but that's what now 10 years. Right. But that's the only time I can remember. But again for different reasons. That was a competitor that launched the product in a very successful way. In a time when we had just put a price increase, they did the opposite. They put a price decrease. But again, as if you remember, we shift gears. We reorganized our price plans, again, being nimble. And then in 8 months or 10 months we're back to the market share position we had prior to their launch. So I think here's where you look at the same thing. I mean different reasons, worse than we had predicted for the quarter. We knew it was going to be a soft quarter, mainly because of March. Again, different reasons, but again, we're doing the same thing. We're being nimble, shifting gears, changing priorities, using toolkits that we have used in the past and that we have invested in the last few years to be able to have that optionality. And we're now accelerating that optionality, which includes, as you know, price packs and proprietary returnable glass introduction in the marketplace. So there's still lots to be done with 1 liter bottle with 300 ml bottle and those are packs that offer very nice price points sweet spot for consumers at very good margins better than the one way packages. So that's the way to go for us. Okay. Do you feel like you're in new territory here? Just because I guess, 3 was the NovaSkin period, right, if I remember correctly? Yes. We've never seen the industry really roll over like this in recent memory. Yes. But again, it was a combination of factors. I mean, you had as we said, you had the weather, you had the carnival, which you know it's an important factor, especially in the summer, right? Then we have the food inflation, which if you remember in 2,008 also put pressure in the Brazilian consumer. So here again putting pressure that's in the middle teens to inflation that's 6 plus. So that's almost more than double the inflation. Consumer disposable income is not growing as fast as it was in the Q1 of 2012. So it's half of the speed, so that impacts as well. And then on top of all that, you have the real price increase that we had to introduce in October last year because of the taxes, the excise taxes that were implemented by the government. So it was in a way a rare combination of factors I would say. But again, there's always a first time and that was the first time. But again, we shift gears. We put the plans in place. We're acting on things we can't control. And April was already a better month. All right. Thank you very much, Brito. Good morning. Your next question comes from the line of Melissa Ehrlein with UBS. Good morning. A couple of questions please. First of all, in terms of your new sales and marketing cost guidance for the year to be low to high sorry mid to high inflation rather than high inflation previously. Is that entirely due to a change of commercial focus in Brazil? And should we expect some of that to be a phasing shift into 2014? Hi, Melissa. This is Felipe. I think the short answer to that question is no. There is not a functioning change in in commercial strategy, but it's a function of volume related sales expenses that are going to go down as we are changing our outlook for volumes in Brazil. So as you can understand, there are fees related to sales in off premise channel and things like that. That is a direct function of volume, lower volume, lower sales expenses, as simple as that. We are not completely abandoning the high single digits. We are working with an interval mid single digits to high single digits year over year increase. Thank you. And just a follow-up question on Brazil and the market share momentum. Have you been gaining share specifically in the North Northeast region in the quarter? Well, at this point, I mean, we have been gaining, yes. But at this point, we're not seeing anything about this quarter. But yes, that's a region that since we started focusing and investing, you know that we've been building new breweries over there and putting new packs, proprietary packs. I mean, we've been gaining share in those regions. And if you look at a sequential basis, we gained 20 bps versus the 4th quarter last year. So yes, I'm just looking here at numbers for 20 12/13 Q1, yes, we gained share in the Northeast and the North region. Yes, you're right, as opposed to the 90 basis points that we lost year on year. But let's remember again Melissa, Q1 last year we were at 69 share for the quarter, so very tough comps. But you're right, Northeast and North will continue to gain share even in this Q1. Many thanks. Your next question comes from the line of Dirk Van Vlaenderen with Jefferies. Thanks very much. A question on Central and Eastern Europe. You start to lap some easier comps here. Are you expecting to see a sort of stabilization of volumes from these levels? That's the first part. And the second part is, do you see improved revenue per hectoliter trends in the sort of coming 9 months, especially given the strong performance of Budweiser and the mix pull through on that? Well, in terms of Russia, I mean, as you might remember, I think we mentioned last time and this time again, the industry there is really being transformed by the new regulatory environment. And we continue to try to cope with that plus we continue with the strategy that has been in place for years of trying to shift our portfolio to a better place, because we want that market to be more profitable, so we can continue to invest behind our brands. So that's why the Budweiser among others is such an important part of that strategy because it provides much better margins. That's not the only thing we're doing to increase our profits in the region. But it's just been a tough ride because in the midst of trying to do this, there is all these regulatory industry changes. And we haven't yet found the sweet spot between profitability and share, but we're committed to it because again Russia is one of the top markets for volume. We feel we have the brands and the people and the route to market in that market. And we wanted to be present there with a relevant presence and keep our number 2 position there. Okay. And on the revenue per hectoliter, you virtually grew double digit there in 2011 and 2012 bit of a slowdown in this quarter, which I thought was surprising given the strong performance from Budweiser. Is it just is it a phasing of timing of comps? Or should we be expecting sort of high single digit revenue per hectoliter growth for the year? Well, at this point, we're not giving any guidance in terms of revenue per hectoliter for the year for those markets. But we'll continue to try as I said to find that sweet spot between profitability, pricing and share, because again we're committed to keep our number 2 spot in that market. Great. Thanks. Thank you. Your next question comes from the line of Robert Ottenstein with IFI. Rito, a longer term question. You announced recently the building of a greenfield brewery in Vietnam next year. And I believe next year you have the right, but not the obligation to buy back Oriental Brewery, one of the leading beer companies in Korea. Can you give us any sense of what the long term Asia strategy is ex China and how we should be thinking about that? And any sense in terms of whether you want to get back into Korea? My understanding, if I remember right from the press release is that it was a fixed formula on the pricing on that. Hi, Robert. So in terms of Vietnam, I mean, it's we have acquired a license to build a brewery there. The facility will be located into in the Vietnam Singapore Industrial Park. We expect the brewery to be fully operational by the end of 2014. And the decision to build the brewery there, I mean, it's quite simple. I mean, at first, we see Asia as a growth market. Vietnam with its 90,000,000 people or population and the very favorable weather and demographics, it's something that's very inviting for beer and our brands like Budweiser do very well in that market. So it's something that we should have an eye on and we like to create options from time to time in markets that are interesting as this one. Terms of Korean business, we have the right as you know, but not the obligation to reacquire or be after 5 years after the divestiture. And the earlier stand for the call option to be used would be July next year 2014. So it's therefore too early to talk about it. But you're right, Dolby has a very strong position in that market, leads that market and Cass is a very strong brand. So but again, we'll talk about it when the right time comes. But Asia is I would say even more. I mean now with Corona after closing of course in June, we're going to look at many markets in a different way. I mean when you look at the potential for markets where Corona has a big share and especially share of profits that's very interesting. And Asia has some of those markets in there. So we're going to have a great portfolio of brands in terms of Corona, Budweiser, Stella, Bax to penetrate markets with necessarily having to have breweries there, so in an asset light type fashion. But penetrating the high end market where normally the growth in the money is with a portfolio that I think is very hard to beat by any other players. So that's something that will also change the way we look at white territories and greenfield opportunities in a more asset light type proposal in a more high end type entry. Great. Very interesting. And then back on the U. S, can you give us a sense of how far the sub premium volumes fell in the quarter? What the price gap is now between sub premium and premium? And whether you're rethinking the pricing strategy on sub premium? No. I mean the direction of sub premium in our price strategy remains the same. We wanted to continue to decrease that price gap. If you remember many years ago, 4, 5 years ago, it was around 30%, 28%, now it's around 22%, 23%. But of course, as you know lower income consumers are under pressure and that is putting some pressure on that segment which is shrinking or shrunk in this Q1. We continue to hold our fair share in that segment. But of course, we're trying to look up and very excited about the innovations that we've put in the market in the last 2 years that have higher price points. And that's why out of the 4% price increase net revenue per hectoliter increase we had this quarter, 1.5% came from brand mix enhancement. And that's the way to go, because it doesn't affect consumers therefore the industry, but it gets us to a better place in terms of net revenues. We like that. Yes. And how far down in terms of volume was the segment then? I don't have the information right in front of me, Rob. I can't come back to you with that later. Our guys will come back to you. Thank you very much. Okay. Thank you. Your next question comes from the line of Pablo Zlawnik with Liberum Capital. Good morning, everyone. I mean, if I may just go back to Brazil and ask the question in a different way. I guess, Brito, the technicals and the macro are differentiate in this quarter how much was really the technicals and what is more underlying trends? And can you talk about STWs and STRs in Brazil in the second half of last year? Because I was surprised you took very high pricing in the second half last year and volumes were still up. I mean what changed at the in terms of trade inventories in this quarter? Or what changed in the surprising? It seems that the price increases were really taken back in October. And just remind us the minimum wage increase this year, where are we this year? And at the end of the day, where is your price increase over the last 6, 9 months? Just to put some context here. It would seem that the price increase was close to 20% at the consumer level. So just remind us about that Brito. And I guess the bigger question here is there an elasticity issue, right? I mean how far can you really take prices? You're pretty much implying that pricing could be flat to negative in Brazil for the rest of the year. And if that's the right decision to take, that's fine. But just some background would help to understand better what's going on there in terms of what you can really manage. Thanks. Hi, Pablo. I think you have many questions there. But let me try to take pick 1 by 1. So I think you have a very good point. I mean, last time we increased prices was by the end of September last year in anticipation of the October tax increase and the April tax increase this year, okay? So if you look at the price to consumers in the Q4 last year and the Q1 this year, they were pretty much the same. So that's why in our opinion, the whole thing about food inflation, disposable income, weather, carnival that played a role because at the end of the day, the price to consumers of beer were pretty much flat to the Q4. And the Q4 had very good volumes was the 2nd best quarter of last year in terms of year on year volumes. So 2.9% growth in the 4th quarter and then 8% decrease this quarter. So that's why in our opinion a lot has to do with stuff outside of the beer category in terms of the economy for inflation pressure on consumers and all that. We also believe that some of those pressures are short term. And we also believe that we have in our toolbox things that we've been doing and we've done in the past to help consumers bridge this time of pressure on their disposable income. And those are pack price, price points, pack activation, the returnables more and more in the on and off trade, the litter presentation which is more for less but good margins, the $300,000,000 which is lower out of pocket but good margin all compared to the alternative which would be the one way presentation with lower margins. So and those are the things we can't control. We know how to do. We shift priorities. And that's what we have our army of people in Brazil and sales reps doing right now. In April, for a myriad of these reasons, was already a better month, still negative, but a better month. But we'll start to continue to build on those programs as we go through. What was your last question again, Sohre? Well, I guess the issue is more I mean, I think you've answered it in part, but I'm just trying to get to a point of price elasticity, right? Because the full inflation issue, the disposable income to my knowledge from the Q4 to the Q1 did not change much. But I'm just wondering whether the consumer is just I don't want to use the word tired, but are we getting to a point that the consumer is just beginning to reject these beer prices or not really at the end of the day they have increased the prices? No, no. Because again as you reminded us and you're right in the Q4 last year the prices were the same as in the Q1 And consumers bought 2.3% or 2.9%. 2.9% more than the year prior. So I don't think it's prices. Of course prices don't help given that we had real price increase in October in a situation where consumers have been pressured. But this is a short term effect. But the price is the same from the Q4. And what we're doing now since the pressure is on consumers, we're coming and doing more of the things we know can bridge this tough situation by giving consumer the price points they love with the kind of margins we love. So it's a win win situation for us and for them. And we have the investments in place. It's just a question of reprioritizing what our sales reps are doing in the marketplace. I understand. If I can do just two follow ups, Ritu. I mean, obviously, you Felipe and the whole management team have built, I would say, huge credibility with investors and analysts over the years. But you have been talking about North American EBITDA margin expansion for a few quarters already and it hasn't happened. I mean, in fact, we've seen decline for 4 quarters in a row. So I mean, sorry to put you in the spot, but I think you need to be a bit more clear and more specific about how and when we can begin to see EBITDA margin expansion in the U. S. And where that's really a target. Maybe it's maybe we should expect it. Well, I think in terms of margin expansion in the U. S, I mean, when we arrived to this business, as you know, it was 28. Now it's 40. So there was margin expansion for sure. As you know, from now on, the margin expansion will be not at the same rate, not every quarter, not every year. At the same point, Pablo, as you see, we've been trying to build innovations that will be important for our future. You have to remember that when we got to this business that was Bud Light Lime. But other than that, which was very successful, but other than that as I said before in other calls, the pipeline was a bit empty. We feel that pipeline and we're very excited about this. I think as important as margin pool enhancement is building for the future. And I think that's what we're doing, so we can have margin expansion as we go forward. So again, I've never promised margin expansion every quarter, every year. But if you look at our 24, 25 year history on average that's what you would've been delivering. So I think again the past is how I predict the future, but that's what we're continuing to build going forward by always having that pipeline, the best practice, the best people. Again, not every quarter, not every year, but we continue to see opportunities in the U. S. To expand those margins. And thank you very much for your questions. Your next question comes from the line of Lauren Torres with HSBC. Good morning. My question has to do with your outlook for U. S. Volumes for the year. Obviously, we've talked a lot about Brazil, but similar comments with bad weather and tougher comps affected you in the quarter and your sales retailers were down 4%. So I was just curious as we think about the full year, if some of this is isolated to what occurred in the Q1, should we expect that down 4% to just become down less over the course of the year or actually see industry return to growth again this year? Again, Lauren, we know that a lot of the pressures that we saw in the Q1 are deemed to be temporary. That temporary could be a couple of quarters. We don't know. But for sure they're pressuring consumers and that's what you see other analysts and economists saying. So but those are things we can't control. I think the things we can control, the innovations we put in place, the market programs And we feel that our pipeline some of it is already public, some of it's not public yet. But we have a very strong pipeline for this year and that will get the excitement back in the industry as we had last year. I mean last year we had the 2 most successful innovations coming from our company. And that together with the weather we know that was very important for the industry growth last year. So this year we had a tough weather comparable. But on what we can control with the innovations on our company, we'll continue to put a lot of resources in the marketplace and also execute even better than last year with our wholesaler system, which is a great asset of our company to influence the industry in a positive way. And if you look at our share performance in April according to IRI public data, it's already much better than in the Q1 because we don't have the Bud Light Platinum Lounge as a tough comp. So it's more of a normal type comp situation and our shares already almost flat. It's 0.1 negative for the 1st 2 weeks of April which is a much better position. But industry of course is something we can't control and it's very hard to predict at this point. And I know you don't like to discuss or give too much of a heads up on your pricing strategy, but you're still benefiting from the carryover last year and it seems like there is still room on the pricing side in the U. S. Is that a fair comment for later this year to see that? Well, yes, you're right. We don't like to comment on future price increases because again price is very local. It's something decided by our local guys and we'll see. But at this point you're right. We're benefiting from the annualization and carryover from last year's price increase plus the brand mix enhancement that we had in our portfolio. Okay. Thank you. Thank you. Your final question comes from the line of Caroline Levy with CLSA. Good morning, everybody. I have a couple of questions. Just starting with was there any inventory build either in Asia or anywhere else in the world such that your shipments may lag STRs in the second quarter? No. I mean, no. The answer is no. I mean, in Asia, for example, our price increase was during Chinese New Year, so that was halfway through the quarter. In Brazil, our price increase was in October last year, so again, nothing to do with this quarter. The same for the U. S. In Argentina, we haven't had a price increase because the price freeze since last quarter last year. So I mean, there's no reasons in the main markets for any load or anything and that's not our policy anyway. Okay. Thank you. And then the distribution costs you cited them being up particularly in the U. S. And at what point does the incremental platinum capacity offset the negative impact of the other issues in distribution? Well, we have 2 factors here in the Q1. First in the U. S. That is driven more by Storburita and La Merita as we are moving from 1 brewery into 3 brewery production that should ease as from the Q2. And on the other hand, in Brazil, as most of our distribution is direct distribution. Most of our volume is direct distribution. When there is a volume contraction, there is a lack of fixed cost dilution embedded into the system. Nevertheless, we are confirming our full year guidance for distribution expenses to be in the mid single digits. Thank you. And it's hard not to look at what's going on with the Modelo transaction. To notice I believe you're bringing your head of Brazil up to run Mexico. There's just some concern around is this management distracted by this transaction? And was there anything else you could have done in Brazil faster do you think to mitigate the volume impact? No. I mean, what's happened in Brazil has nothing to do with management changes. I mean, if there's one thing that we're very proud in our company is that we have a strong bench, especially in the sales function. And this guy, Alexander Medsos has been prepared for this role. He has done some excellent job in other parts of the country as a Regional Director and also outside of Brazil in Central America. He was the guy in charge of the Dominican Republic business and acquisition. And I mean has a great history of the company, great potential. He's one of our great names in our bench. So I mean that's not a cause for concern. And that's one of the things that we work hard in our company to always have people ready to replace others with seamless type situations where there's no disruption at all. So what we have in Brazil are things we explained here in terms of consumers for inflation, weather, carnival and things like that and not net of intangibles. And thank you very much for your questions. Well, guys, I'd like to close now our quarterly call. I mean, again, as we said, it would be a call. But again, the fundamentals of the business are unchanged. We continue to be very optimistic about our plans, our people, our capacity to execute and remain bullish about the markets we're in. We're very glad and happy about the Mobilo approvals requirement. In June, we're going to have this transaction close. And when you think about it, we're going to have a leading position in 4 out of the top five beer profit pools in the world, being them Brazil, Canada, U. S. And Mexico. So that's very exciting. We have lots to do. We have great people and great tools in the marketplace to be introduced. So again, thank you very much and see you next quarter. Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.