Earnings Call: Q3 2012

Oct 31, 2012

Welcome to the Anheuser Busch InBev Third Quarter 2012 Earnings Conference Call and Webcast. Hosting the call today from AB InBev is Mr. Kazos Brito, Chief Executive Officer. To access the slides accompanying today's call, please visit AB InBev's website now at www. Ab inbev.com and click on the Investors tab. Today's webcast will be available for on demand playback later today. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. Some of the information provided during the conference call may contain statements of future expectations and other forward looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks and uncertainties. It is possible that the company's actual results and financial condition may differ, possibly materially from the anticipated results and financial condition indicated in these forward looking statements. For a discussion of some of the risks and important factors that could affect the firm's future results, see risk factors in the company's latest annual report on Form 20 F filed with the Securities and Exchange Commission on April 13, 2012. AB InBev assumes no obligation to update or revise any forward looking information provided during the conference call and shall not be liable for any action taken in reliance upon such information. It is now my pleasure to turn the floor over to Mr. Carlos Frito. Sir, you may begin. Thank you, Jackie, and good morning, good afternoon, everyone. Today, Limb have reported its 3rd quarter results. Total revenue for the quarter grew by 9.1%, driven by revenue per hectoliter growth of 10.2%. The main drivers were strong results in the U. S. With revenue per hectoliter growth of 5.7%, including 200 basis points of favorable brand mix and in Brazil with revenue per hectoliter growth of 18.3%, driven by the carryover of price increases from the Q4 last year, price increases in the Q3 this year, higher premium brand mix and additional direct distribution. Our focus brands globally volumes grew by 1.3% with our 3 global brands growing ahead of this rate at 5.8%. EBITDA grew by 10.6% and EBITDA margin grew by 54 basis points to 38.7%. Year to date EBITDA grew by 6.9%. Finally, our normalized earnings per share grew by 7.3% in the quarter to $1.17 and by 21.6% year to date to $3.43 In summary, a good quarter with solid top line and EBITDA growth. As I mentioned, the volumes of our global brands Budweiser, Stella, Twine Bax grew collectively by 5.8%. Global Budweiser continues to do well with volumes growing by 6.2% in both the quarter year to date driven by good performances in the U. K, China, Russia and Brazil. Similar to our volumes were up 5% with double digit growth in the U. S. And strong results in Brazil and Argentina. Vax volumes also grew by 5%, mainly due to a good performance in the brand's home market of Germany. Turning to the U. S. In more detail now. The industry has shown encouraging improvement in 2012 following 3 challenging years. This has been driven by good weather in the Q1 and innovations throughout the year. We estimate that industry selling day adjusted sales to retailers, STRs, declined by 0.4% in the quarter, but grew by 0.3% year to date. The trend of our own selling day adjusted STRs has also improved this year. Our STRs declined by 0.9% in the quarter, but are down by only 0.2% year to date with market share trends continued to improve. We estimate share was down 23 basis points in the quarter and 26 basis points year to date. The main contributors to the improving share trend were Bud Light Platinum and Bud Light Lime Marita, both of which helped the Bud Light family to gain approximately 3 quarters of a share point to reach an estimated total share of 21.5% in the quarter. We also saw share gains from Michelob Ultra as well as our high end brands led by Stellar Twin Choctaw. These gains are offset by share losses due to a decline in the value segment across the industry as well as losses in Budweiser. Shipments to wholesalers were up 1.5% in the quarter and ahead by 0.1% year to date. We expect STWs to grow in the Q4 with absolute STWs and STRs for the full year being closely aligned. As mentioned before, U. S. Revenue per hectoliter was strong in the quarter growing by 5.7%. This includes approximately 200 basis points of favorable brand mix driven by the growth in Michelob Ultra, Bud Light Platinum, Bud Light Lime, Lime Marita, Shark Tops, Stella Artois and our other high end brands as well as consumer trade off from our value brands. September saw the start of the football season and the 2nd year of Bud Light's sponsorship of the NFL. Our sponsorship activation will continue to focus on the fans and their passion for the game and we're looking forward to building on the successes of last year. Bud Light Platinum has been a big success this year and the 3rd quarter saw the rollout of 2 new bottle packs, a 22 ounce single and a 12 ounce 18 pack. We estimate that Platinum has achieved market share based on SCRs of over 0.9% since launch at the end of January. This share has been achieved without a can SKU in a market where cans account for more than 50% of the volume. We're also very enthusiastic about Bud Light Lime Lime Morita. The brand was rolled out in April and has quickly become one of the fastest growing brands in the industry, second only to Bud Light Platinum. Bud Light Lime Arista has achieved over 80% distribution by off trade with an estimated market share based on STRs of over 0.4% in the Q3. Early studies indicate that over 40% of La Marita's volume is being sourced from hard liquor and other beverages outside of the beer category. But despite the successes, we have our challenges. Budweiser did not meet our expectations in the quarter, partly due to a shift in retail execution focus from our teams to our innovations. However, we're pleased with the improvements we're seeing in the brand health scores among the important 21 to 27 year old core consumer group, the so called millennials. Music is one platform we're using to reconnect Budweiser with millennials. A 2 day Budweiser Made in America Music Festival headlined by Jay Z took place at the beginning of September and was the culmination of a summer of music parties in cities across America in which Budweiser invited its Facebook fans to experience talented local brands and artists and sample Budweiser of course. The festival was very successful with over 100,000 fans participating in the live concert and 1,300,000 online. The summer also saw the brew answers from our 12 U. S. Breweries coming together to create their own tribute to Budweiser Beers. This culminated in the selection of 3 beers for inclusion in a limited edition sampler pack, reminding consumers of Budweiser's iconic status and reputation for quality. Finally, during the Q3, we renewed Budweiser's sponsorship of Major League Baseball throughout the 2018 season. During the summer, fans have been enjoying our team specific packaging as well as the Walk Off A Hero program, a season long program which has so far raised $2,500,000 for the Foes of Honor Foundation. The renewal of our sponsorship will allow us to build on these programs in the years ahead. We remain committed to stabilizing Budweiser's market share in the U. S. And we will continue to work hard to do so. Michelob Ultra continues to grow from strength to strength in the premium plus category with volumes growing by 7.3% and share by 15 basis points. Similarly, our high end brands delivered strong growth once again with STRs growing by 19%. With these results, Stella Artois grew by 17% with total market share improving by 10 basis points. Before I wrap up on the U. S. Business, I wanted to say a few words about Truck Top, our fun and edgy domestic craft and one of the fastest growing brands in the industry. The brand has good momentum with volume growing nearly 70% year to date proving that strong craft brands are scalable. Sharktop will come with its new seasonal in the next quarter as depicted on slide 12. Turning now to Brazil. We estimate that the industry grew by 1.8% in the quarter with our own beer volumes up 0.2% impacted by the timing of our price increase this year. As a consequence, our beer market share declined by 110 basis points to 8.5% for the quarter. In addition to our earlier than normal price increases this year, we faced a difficult market share comparable with share in the Q3 2011 being the best of the year. We estimate the industry grew by 2.6% year to date with our own beer volumes up 2.3% year to date and market share down just 20 basis points. View revenue per hectoliter grew by 18.3% in the quarter as a result of the carryover price increases from last year, price increases in the Q3 of this year, positive premium brand mix led by our international premium brands and additional direct distribution volume. We historically adjust prices in Brazil in the Q4. However, this year in 2012, we decided to increase prices in the Q3 to include both our own price increase as well as the adjustment to excise taxes that were due to take place on October 1. This resulted in a positive impact on our beer revenue per hectoliter growth rate. On a sequential basis, beer revenue per hectoliter grew by 9.7% in the quarter. At the end of September, the federal government announced a partial postponement of the proposed excise increase and accordingly we have already announced price reductions for the balance of this year. Beer revenue per hectoliter growth was 9% in the 1st 9 months of this year and is expected to grow by high single digits for the full year. We continue to invest behind our focused brands Skol, Brahmin and Todica with the is designed to reinforce the brand's innovative and youthful image. Skol continues to lead the way in terms of connecting with consumers, particularly in the digital space. At the end of September, the brand had attracted almost 7,500,000 digital fans, second only to Guarana Antarctica in the whole of Brazil. We have also introduced a new 269 ml can for Skol 360. The profits from this new product will go towards conservation projects on the Rio de Janeiro shoreline chosen by consumers through the Skol website. Initiatives like this are very powerful tools for enhancing brand preference among today's consumers. We enjoyed good success with our 1 liter returnable glass bottle package since launch with a consumer proposition of better value for your money. The litter was designed to capture the attention of an emerging consumer group in Brazil numbers of Classes C, D and E, many of whom were less regular beer drinkers due to lower disposal income in the past. Now, 3 years later, we have been rolling out another proprietary returnable bottle, the 300 ml bottle. The 300 ml was initially launched in the South and Southeast of the country, but will eventually be available in all regions. The package already has over 50% distribution of the off trade key counts in our lounge markets. We're also innovating in route to market with the popular pit stop and non stop bar concepts being supplemented by the mobile micro events, in which the event goes to the consumer rather than the consumer going to the event. Microvents are gaining traction very quickly in Brazil. I'll wrap up the Brazil section with a few words on the premium segment, where volumes are growing well ahead of the market. We have a portfolio approach to premium and super premium with focus on 2 domestic premium brands and 2 international premium brands, offering consumers choice for trading up with different brand values, propositions and price points. Bohemia and Regional had deep roots in Brazilian culture and resonate with many generations of new and existing premium consumers. Budweiser on the other hand was launched only a year ago, but volumes are quickly approaching those of Bohemia both Bohemia and Original. Stella Artois and Super Premium is also growing quickly with volumes up nearly 50% so far this year. The timing is right for this extra focus on premium. The consumer is becoming more affluent and looking to trade up with nearly 30% of Brazilian consumers already drinking premium beers. International premium brands are leading the way with their weight in the premium segment growing from under 1% 5 years ago to nearly 24% at the end of last year in 2019. Moving now to China. Our beer volumes in China grew 2.2% in the quarter with volumes in our stronghold regions of the Northeast and Southeast being held back by adverse weather conditions. Year to date volumes are ahead by 4.3%. Our focused brands grew by 9.2% in the quarter well ahead of the rest of our portfolio with strong performance by Budweiser and Harbin. We estimate that we gained 20 basis points of total market share in the 1st 8 months through August of the year for which data is available. The Asia Pacific zone saw EBITDA growth of 15% with revenue per hectoliter growing 10.1% mainly driven by favorable brand mix. Budweiser brand volumes in China grew double digits in the quarter. We continue to build preference for the brand among our target consumers and have recently relaunched the Budweiser Music Kingdom or BMK platform. BMK is a leader in entertainment marketing, organizing national concerts and over 100 music fan activities, including karaoke contests in major cities. This year's campaign includes a concert a planned concert with Jennifer Lopez in Shanghai with Budweiser as the exclusive sponsor further strengthening the international image and credentials of the brand. The quarter also saw the end of the 2012 NBA season sponsored by Harbin, our largest brand in China. The NBA campaign reached consumers in over 200,000 points of sale across the country and was supported by nationwide TV and print campaigns as well as online videos. We also rolled out special packaging including team cans and multi packs. Finally in China, a few words on geographic expansion. We're continuing to expand distribution in China through both greenfields and acquisitions. We recently opened 2 new breweries in the Henan and Fujian provinces each with 2,500,000 hectares capacity and have 4 more new breweries coming online in the next 2 years. During the quarter, we also entered into agreements to acquire majority stakes in further 4 breweries for a total purchase price of approximately $400,000,000 These acquisitions are expected to bring approximately $9,000,000 equities of additional capacity and should close in the Q1 of next year. I'd now like to hand over to Filipe to cover the highlights and the other businesses business units and the below EBIT results. Thank you, Brito, and good morning, good afternoon, everyone. Let me start from Slide 23 with Canada, where our volumes were down by 0 point 8% in the quarter, primarily driven by full weather, but up by 0.7% year to date. Our market share was stable in the quarter with a good performance by Bud Light, which grew both volume and share. Total market share remains around the 41% level year to date. Moving to Latin America South on the next slide. Total volumes in the zone decreased 2.3% in the quarter with beer volumes flat and non beer volumes down 5.9%. Year to date, total volumes are ahead by 0.3% with beer volume growth of 0.7% and non beer volumes decline of 0.4%. TLACTOA has continued to deliver strong performance in Argentina, achieving market share growth in both the quarter year to date as per our estimates. We have also launched Qumis 9 as a premium line extension for the Qumis brand, joining Qumis 1890, which was launched in the Q2, and both brands are off to a good start. Las EBITDA grew 21.7% in the quarter with an EBITDA margin increase of 109 basis points to 43.7 percent with revenue growth offsetting high cost inflation. Moving on to Slide 25 now. In Western Europe, Ombia volumes declined 0.5%, while total volumes fell 0.6%. Including cider, all volumes would have increased 0.2%. In Belgium, on year volumes declined 1% and in Germany, on year volumes increased by 1.3%, while our focus brands grew 3.7% with strong performances and market share gains for both DAX and Hesser Road. In the UK, Ombia volumes in the quarter decreased by 6.3%, excluding CIDR and by 3.4 percent when Cider is included. While we estimate that market share year to date was below the previous year, the trend is turning and we saw improvement during the quarter with share gains in the off trade. Budweiser gained share in both the quarter year to date following the successful launch of Budraft. Western Europe EBITDA grew by 9.7% with an EBITDA margin improvement of 170 basis points to 33.6% due to revenue per hectoliter growth and solid cost management. Turning to Slide 26. In Russia, our BOE declined 17% as a result of weak industry and share losses driven by 1st, price increases ahead of competition and second, pressure in our value and core brands as a result of competitor promotional activity. Bud as a key focus brand, reached an estimated market share of 1.3 in the quarter, while priced at a premium to its main competitor in the segment. In Ukraine, our BFOAMs declined 8.3%, also driven by a weak industry and some share loss, but which was launched in April, has been well received and achieved an estimated 1% market share in the quarter. EBITDA grew by 41.3% with revenue per hectoliter growth of 12.9%, driven by brand mix improvements as well as good fixed cost management. On Slide 27, you will see that given the declining industry, challenging regulatory environment and self competitive conditions, our strategy in Russia has been to focus on premiumizing and improving the profitability of our brand portfolio. At the same time, we are significantly restructuring of our cost base, including cost of sales and distribution expenses besides G and A to ensure that we are appropriately structured for the new reality on the Russian beer market. Moving to below EBIT lines on Slide 28. Net finance costs decreased by $173,000,000 to 641,000,000 dollars mainly due to reduced net debt levels and lower coupon resulting from the debt refinancing and repayments, which occurred in 2011. Accretion expenses increased to $90,000,000 expected due to the approximately $30,000,000 charge relating to the IFRS accounting treatment for the put option linked to our investment in the Dominican Republic. Other financial results showed a loss of $85,000,000 in the quarter, driven by a number of items, including $51,000,000 of non cash unrealized FX translation losses on intercompany payables and loans balances for subsidiaries not reporting in U. S. Dollars as the reporting currency. IFRS requires that the currency translation loss to be reported in the profit and loss account with the impact being economically offset by currency translation gains on foreign operations, which are reported in equity. Other financial results are also impacted by the costs of currency and commodity hedges as well as normal bank fees and taxes. These costs were partially offset by gains from derivatives related to the hedging of our share based payment programs. Turning to income taxes. Our normalized effective tax rate improved from 19.2% to 17.3% in the quarter. This decrease mainly results from a shift in profit mix to countries with lower marginal tax rates, incremental tax benefits and the non taxable nature of gains from derivatives related to the hedging of our share based payment programs. You will also notice in our press release that we have amended our guidance for the normalized effective tax rate. We now expect the outcome to be in the range of 16% to 18% this year, 2012, and to remain between 20 2% 25% for the next 3 years and to be in the range of 25% to 27% after 2015. Turning to Slide 29. In summary, we delivered solid revenue performance with good bonus growth from our global and focused brands, leading to double digit EBITDA growth and EBITDA margin expansion in the quarter. With that, I would like to hand 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. You. Our first question is coming from Mark Swartzberg with Stifel Nicolaus. Brito on the U. S, really a 2 part question relating to innovation. Firstly, do you think that this year's P and L in terms of the spending that's required to achieve the improvements you're getting in terms of innovation? Do you think this P and L is representative of the kind of spendings necessary to get these better benefits you are getting now from innovation? And then the second question is, as you think about this exercise in managing gaps and the progress you've made as an organization becoming better at innovation, Where do you think your strengths now lie versus a few years ago? And what do you think some of the big to do items are? Hi, Mark. I think to your first point, I mean, I think you should look at the level of spend not only for 1 quarter, but for the year to date. I mean, if you look at the Q1, sales and marketing increased by 10%. 2nd quarter talking North America, okay? So 10%, 5.8% 2nd quarter, 12.8%. And we continue to say that as we said for the company, North America is along the same lines in the sense that sales and marketing will be between mid to high single digits for the year, okay? So don't take the Q3 as any indication. Take our guidance for the company as also being one valid year for North America. What happened this year is that we saw some opportunities that we thought would be this small when they became much bigger and we decided to invest behind them. And it proved to be a wise thing to do because they responded and that also impacted in our view the industry. So now very glad to see that the industry in the U. S. After 3 tough years is back to growth and with much better price and profitability. So that's and with a much better mix on our side. So that's all good news. In terms of your second point in terms of innovation, for sure, we're in a much different position this year. I think we have a better governance between what Zone does and Global does. I think we're also looking at alcohol beverages as opposed to beer only. I think that in our company the idea of focus has to be that first we look around and then we focus. If you just focus and focus and focus and don't look around that could be you could be missing some opportunities and we understand that. And Lima Rita is a big testament to that. I mean, when you look at the kind of price premium that Lima Rita commands about 60% to 70% when you compare similar packages to Bud Lights, huge premium, therefore, great margins and taking 40% of the volume from outside of the beer category mainly from hard liquor and bringing new consumers to the category, which is something that the category needs in the U. S. So I think a very good year for us. Innovation is working. I feel very confident. We feel very confident that our pipeline for the next 2, 3 years is in very good shape and there's lots of exciting things for next year. Thank you. Your next question comes from the line of Chris Pitcher with Redburn. Good question actually. In the U. S. Margin, I mean backing out Canada, it does look like your cost of goods inflation was pretty high in the quarter. I was wondering if there was anything specific within that relating to following on from the innovations perspective or whether that mid to high single digit is something that's perhaps a bit more sustainable? Well, hi, Chris. I mean, if you look again not only at the Q3, but if you look at all the quarters for the NA business, North America business, you'd see that in the Q1 we were 0.3 year on year organic, so pretty much flat in terms of cost of solds, cost of sales for Act Litter. Then it was worse by 5% and now by 6.6%. But we remain committed as for the company to mid single digits for the full year. And the thing is that commodities hit us more on the Q2 onwards. And also package mix and brand mix has been something that has also hit our cost of sales. But of course, they are all accretive. So it's great to revenue, great to margins. And if you remember from the 5.7% net revenue per hectoliter increase this quarter 200 basis points. I mean that has been the highest since we started reporting on the U. S. Business or the North American business that came from brand portfolio enhancements and trade on. So that's all pointing in the right direction. And if I could as a follow on to that, I mean, there's been obviously some press around trademarks you've been filing for Bud, Black Crown. And there's been talk about I think taking Goose Island nationally. Could you talk a bit more about those 2? Whether you think is Black Crown the solution to Budweiser? And to get a feel for when those might be coming to market and whether the implications of marketing spend ahead of that and so forth? Yes. I think when you look at Bud Light and how successful the line extensions on a brand like Bud Light has been, we believe that it's time now given some new insights that we acquired from our Bud Light consumer base and the other consumers we'd like to attract to the franchise, we see the need and the opportunity, better say, to really do some line extensions also on Budweiser to show the craftsmanship, the history, the roots of this brand. I mean, it's an amazing brand with lots of craftsmanship, lots of things to be told. And this initiative of getting the 12 brew masters in the U. S. From our 12 breweries to kind of come together and come with variants and old recipes and stuff from our archives that proved to be very interesting. Consumers are excited about it. We have a Semper pack in the market. And what's the only thing that's disappointing about Budweiser is that brand health is pointing upwards. And now for some quarters, especially with the young consumer, which is the kind of guys you need to continue to bring into the franchise. But market share has not yet responded. And we think this year in particular, it's because of all the focus we gave to the new innovations that we put in the marketplace that had a great yield in terms of volumes and industry impact. But of course, something had to give and that's something ended up being Budweiser a little bit. So but again make no mistake, we're committed. The brand is growing internationally at an amazing pace. I mean just remember that 4 years ago, the brand even on an international basis was challenged. And since 2,009 never looked back and went from 1% to 3% to 5% and now 6% or 7% growth, especially led by China, U. K, Russia, Brazil. So very exciting. We now get to stabilize Budweiser in the U. S. We're totally committed to it. We're putting big funds behind the brand. And now with new insights, we think those funds will be even better utilized. Thanks very much. Thank you, Chris. Your next question comes from the line of Andrea Pistacchi with Citi. Now focusing on the higher costs in the U. S, which to some extent in the past couple of quarters have limited your operational leverage there. You've touched on the marketing spend and we've just you just touched on the COGS. The other cost line, the distribution costs, they were up I think a bit less than in the previous two quarters as you're starting to optimize the production footprint of some of your innovation. Is there room for this trend to continue for your distribution costs to come down further in the U. S. Or to be up less going forward in the U. S? And then my second question please on Brazil. Now that the price increases have gone through and you have a sense of how the consumer is reacting to this. Next how you think the market will behave in Q4 and next year given the magnitude of the price increases? Good points. I mean, I think Andrea on logistics for North America, if you look again at Q1, it was an increase of 16.2%, 2nd quarter 12.9%, and pretty much be in the range that we set for the company, which is mid to high single digits or for logistics we said high single digits for better saying for the year. So yes, it will continue to go down as we expand production of new news or innovations to more breweries. So again, this innovations, Platinum and La Marita were much more successful than we thought. We can say it was a poor planning, but again good results that they were much better. But we had to ship product all over the country and that took its toll on our margin here. But that will start coming down as it is coming down, it will continue to come down. You can count on that. In terms of Brazil price, I mean, as you it was a bit we have a lot of noise in the Brazil price for this quarter, because first we decided to come with a price increase ahead of what we normally do a year earlier and that's because of the tax the excise tax increase event of October 1. So we decided to anticipate our normal price increase plus the pass on the pass through for the tax increase. Then we did that in September. Then of course with all the inventory shifts in between months that is normal. Then the government decided to do a partial postponement of the taxes. Then we responded positively saying we're going to give some of that price back and we gave full year guidance of high single digits for the Brazil for the full year revenue per hectoliter for the Brazil business beer business. So fiscal year 2012 very positive. We said, if you remember a year ago that we would strive for better balance between volume and pricing. Of course, we didn't know about the tax increases back then. But even with the tax increase, you'll see a much better balance between for the full year between volume and EBITDA and price. We're also very optimistic about 2013 and the long term. GDP is expected to pick up given everything the government is doing in terms of incentives, lowering interest rates. The minimum wage will have real increase of 2.7% that is above inflation for next year, not as strong as this year, but again a real increase of 2.7%. And there are many infrastructure projects that the government will start building for all the reasons we know plus the World Cup and the Olympics. So I mean that impacts our consumer in a very positive way. Unemployment continues to be very low in Brazil. So I think everything is pointing in the right direction. And this year, of course, because of the exercise and the price increase that we have to put on, the market didn't grow as much as it could have been in a more normal year. But consumer is brave, because even with all the price increase, the industry continues to be positive. So that gives us confidence going forward. Thank you. Thank you, Andrew. Your next question comes from the line of Lauren Torres with HSBC. On the U. S, as we're seeing the industry is firming up and consumer trends are a bit better, but you're still losing market share. So I was just curious if you could talk about your decision to sacrifice volume share for value share. What are your thoughts on further pricing in the U. S? And as we think about next year, are we expecting to see further market share losses as long as you get your pricing and margin improvement? Or there's the thought that maybe some of that market share will be regained? Well, Lauren, thanks for the question. I mean, when we got here 4 years ago, we saw an environment with 2 things. First, the prices of beer compared to other countries and compared to the kind of income that our consumer has in the U. S. Was very cheap coming from a price war in 2,005 and 2006. So we had we were lagging CPI big time. 2nd, we saw that we liked the market share composition. I mean, we liked the market share position of AD. We didn't like the market share composition, because there was too much of value brands being sold at 30% to Bud and Bud Light. So we didn't like that. We decided to have a revenue management strategy that was to recover the real price of beer and narrow the gap between the Bud Light and the value brand. So we've been implementing that now for 4 years. The gap of value brands to Bud Bud Light came from 30% to now 23%. That is causing of course that segment to shrink. But that's causing also consumers to trade up. And that's also causing our company and our marketeers and salespeople and commercial people to look up as opposed to look down. In the old days, there was a big temptation to rebalance the share equation with value brand activity. And now that door is pretty much closed. And we have to do the Bud Light Platinum. We have to do the Lamoritas, the Shark Tops, the Stella Artois to rebalance share. And that's a good new Lorne about this year. And that we reversed that 0.5, 0.6 share loss per year that we had in the last 2 years to a 0.2 6 year to date, but with much better pricing, but with much better mix. And that's the exciting thing. And because we see a good pipeline for next year and good commercial plans for next year, we continue to be committed to stabilize the market share here, but with better pricing, better profitability and with better mix, which we think builds a much better future than what we saw here 4 years ago. So that's the direction we're going and that's the thing we're committed to do. And I guess as a follow-up then on just the competitive environment with costs going up and you're taking this pricing. Are you seeing your competitors generally follow? I mean is it rational? And do you expect it to continue to be so if it's been year to date? Well, too early to talk about this price increase. It's just some weeks ago. And you know the market takes some 2, 3 months to really adjust to a new price reality. But if you look at the last 3 years, we have been able to increase our prices as per our strategy. Okay, great. Thank you. Your next question comes from the line of Mitch Collett with Goldman Sachs. Revenue per hectoliter impact quarter on quarter of the earlier price increase was about 9%. I think in the statement you say that the price increase was taken towards the back end of Q3. And I guess I thought the price increase was about 10%. So I'm just wondering how it can be a 9% impact for the quarter given that it happened late on. And then secondly, I just wondered what concessions have you had to make in order to have the excise increase come later and be smaller than was originally planned? Thanks. Well, no concessions really. What we told the government in a very healthy dialogue is that we will continue to do what we've been doing as a sector, not only our company, but as a sector and beer and soft drinks as we've done in the past few years. And that as long as the market continues to grow and taxes has something to do with is a factor in that. As long as the market continues to grow, we'll continue to invest, create jobs and invest in the overall business for our companies in the country. So CapEx and job creation and therefore tax collections. So that's what we told the government that we've been doing for the past 2, 3 years and that's what we continue to do. And that's why we asked them not to hit the industry too hard at one time with a huge tax increase because that would have to be passed on to prices and that would break this magic cycle in which consumers are better off. They buy more beer. We invest more. We create jobs. Tax collections go up, not necessarily with tax excise rate going up. So that was the and if you look back for 2 years, we've been successful with that. For 2 years, we had no excise increase, because taxes were going up and the government agreed that we were in a positive cycle investing, creating jobs, selling more. And they were collecting taxes more than the year before, which was what they wanted. So now of course a new government they came with new ideas, but we're able to convince them that postponement of some of the tax increase was a good idea, because it would allow us to continue in this positive cycle that is a win win win for everybody, for us, for governments, for consumers. Okay. And on the price increase and how it gets to be close 10% given it happened later on in the quarter? You're talking about Brazil? Yes. The quarter on quarter increase in revenue per hectoliter which was about 9% I think. That would suggest to me that you took the price increase relatively early in the quarter. If you did it right at the end, the revenue per hectoliter would only be a fraction of the price increase you've taken unless there's something else I'd missed? Well, again, revenue per hectoliter in Bio Brazil grew in the quarter by 18.3%, right? Yes. The 9% that you're referring to Is on a sequential basis. It's on a sequential basis. I'm talking year to date for the quarter 18.3% and that's because of four things. Year to date. Quarter over quarter. Yes, quarter over quarter and that's because of 4 things: the carryover from the Q4 last year 2011 the price increases that we did earlier this year in Q3, the positive premium brand favorable mix and the additional direct distribution. So that is what caused this 18.3%. But at the same time, we're giving guidance on that for the full year saying that it should be towards the high single digit for the full year in terms of net revenue per hectoliter. Which is consistent with the year to date. With the as Philippe is saying here, it's consistent with the year to date in that. Just so I can check, I've understood. I think, yes, you said quarter on quarter in beer Brazil revenue per hectoliter is up 9.7%. And if you've taken roughly a 10% price increase towards the end of the quarter, let's say, for the back third, you get about 3% from that. So the other 6%, 7% is that coming from mix? Or is there something I've missed? Well, the mix is playing in our favor, but there was also some sort of price increase in the Q3 of this year. And that is carrying over to the Q4 sorry, into the Q3 of this year together with the price increase that was implemented in early September ahead of the tax increase that was kicking in only in October. So there is 1 month of, let's say, new prices and no taxes that help us to drive that number as well. Okay. But I would suggest if you focus on the guidance for the full year, it's going to make the math much simpler. Okay. Thank you. You're welcome. Your next question comes from the line of Trevor Stirling with Sanford Bernstein. Gentlemen, the first one is, was price mix in the U. S. Accelerated quite a lot from Q2 to Q3? So I think if I'm right from 4.4 percent to 5.7%. And I wonder if you could just give a little bit of color on what actually drove that sequential improvement? And the second one, looking forward to 2013, there are a lot of moving parts in the price in Brazil. Backing out roughly, I guess you're implying Filipe that Q4 will have about a 9% net revenue per hectoliter increase. If you look forward to 2013 and then what the consumer is going to see in terms of taxation, should we be looking at that sort of going forward as your net price increase and then adding something on top for the taxation when it actually does hit later on in 2013? Hi, Trevor. Brito here. In terms of price mix, I mean, one thing that I as I mentioned before helped the 5.7 percent this quarter is a 200 basis points of favorable brand mix. And in the previous quarters, we're more like between 100 and 50 basis points. So that's a big pickup here and that's because of all the innovations and everything we said earlier in the call on our high end brand growth. The other thing that also helped explain the sequential increase from 4.4% to 5.7% is the fact that we're picking more direct distribution. And as you know from the Brazil case that has also an impact on the top line growth. So those two things plus the general price increase those would explain the difference. Great. Thank you. Thank you. And Brazil? Sorry. And Brazil what was the question again? Sorry. Brazil 2013, Britta, I mean, you're backing up from Felipe said, you're probably going to end up around 9% net revenue per hectoliter in quarter 4. Is that something we should expect to extend into 2013? So net revenue per hectoliter should be high single digits in 2013 plus something on top for taxation? Yes. Well, we do not have guidance at this stage on net presence per liters in Brazil next year. We will continue to balance this year pricing equation. And we did only refer to volumes expectation for year to pick up as a result of GDP growth and minimum wage increases above inflation. But at this stage, we would refrain from commenting on the pricing strategy as it has sensitivity consequences in the marketplace. Okay. Thank you very much, Felipe. You're welcome. Your next question comes from the line of James Edwardes Jones with RBC. Could you say and explain a little bit more about the distribution increase in distribution costs in the U. S. So far this year? And just thinking through the numbers, if you assume that Bud Light Lymeritra and Clasenum are somewhere around 3% of your sales in North America. Distribution costs are up around 3% of sales. And I get the point that you're doing more of your own distribution, but surely that should come along with an increased gross margin as well. So I'm just struggling to reconcile the moving parts. And secondly, can you say a bit more about the reasons behind Budweiser's decline in the U. S? What's you didn't mention I think what's happened to brand health in the press release today. I'd be very interested to know if there's been any developments to trajectory there and what sort of underlying rate of increase or decline we should be looking for going forward? Yes. Let me take the distribution expenses question first. Basically, this line extensions and innovations they have been more successful than we originally thought. And starting from a single plant production and getting to national distribution that put a lot of pressure and distribution costs over and above fuel prices and so on and so forth. So as we indicated at the beginning of the year, we were expecting these costs to go down as we expand production into other plants and optimizing the footprint as it has been the case on a as you take the organic growth quarter over quarter from the Q1 throughout the Q3. We're going to get to easier comps for the Q4 as we are lapsing the increase of last year. And for the full year, we have U. S. Very much in line with the whole company in which distribution costs per hectoliter is expected to grow at the high single digits, which again implies easier comps for the Q4 in the U. S, for example. I think for Budweiser, I mean, I mentioned in my speech that brand health for the young 21 to 27 7 consumer bracket continues to go up. I mean, the reappraisal of the brand continues to take place, but the brand continues to decline market share wise. Last year, we had a better result in terms of managing some of that decline. This year, the results were not as good as last year better than the past for sure, but not as good as last year. We attribute that to the fact that our commercial guys and our retailers put a lot of focus on our innovations, because they saw it was higher margin and turning and selling higher velocity. And Bud Light being of course the number one brand in the country didn't suffer that much, but Budweiser did suffer a little bit because a lot of the features and displays got turned to the innovations and Budweiser lost some of that. And there is a high correlation of course between features beer being featured and displayed and sales. I'm not saying this explains everything, but some of it is the decline that we've seen for years. We remain committed for many reasons. I mean, first is our number 2 brand is among the top 3 brands in the U. S. Has a very good margin, lots of roots and heritage, has a big international expansion taking place right now. And today, we understand much more about those three things you need to understand about a brand. I mean what's going well, so we can do more of it. Well, it's not going so well in terms of the market mix that we should fix or stop doing. And some of the things that we need to add to the brand mix like music that used to be part of the brand mix in the past that helped create the Budweiser iconic brand and that we lost that. Now it's coming back. And all those things are shaping up. And we all know that for brands, brand health comes before market share. So that's something we continue to keep an eye on, but not there where we would like it to be. So we're not happy with that and we'll not rest until we'll stabilize this brand, which is a multiyear commitment. So rest assured that's a key point for us. Bruce, I think given that sort of rate of volume decline, is it fair to assume that yes, I totally accept this Budweiser still makes a very good margin, but are those margins coming down significantly? Well, the margin for Equity, no. Total margins, not significantly, but they come down as volumes come down. Of course, some of that's being replaced by the high end brands of ours. And that's much higher margin than Budweiser, right? Got it. Thank you. Your next question comes from the line of Ian Shackleton with Nomura. You had several questions around higher costs of doing business in the U. S. And the message seems to be it will look a bit better in Q4. But what I was particularly interested was looking at the next few years and whether you do feel that we're moving into a period of more investment, which will a few years while that investment period is underway? No, no, no Ian. I don't think so. I mean, I think margin expansion is a whole market of our company, but it doesn't mean it's every year. And if you look at Brazil, other places, I mean, when you look at many years that is the trend. That's what took place, but not necessarily every year. Even in Brazil in 2010, if I'm not mistaken, margin was flat. And even in Argentina, I think last year margin was down slightly and now it's back to growth. So I mean some years you have star alignment that forces margins down a little bit like commodities or like innovations that you want to invest behind. And some of those innovations they are not there every year. For example, liquid innovation or brand innovation requires more money than a package innovation, okay? So depending on the mix of innovations that you have for that year, you need to invest more or less depending on the mix. But I think margin expansion remains something that we truly believe in and work hard to get to. But it's not every year, not every quarter. But rest assured that if we're investing more this year on marketing is because we see huge opportunities that will enable us to have that margin expansion in the future. And Persio just quick follow-up on Russia. Your minus 17 in the quarter on volumes, you talked about a weak industry. How much of that minus 17 is market? How much is lost share? Yes. It is both. I mean, we lost some share and industry has been negative territory. We in Russia, there are many sources for industry, so it's kind of hard to get to one number. We think it's somewhere between mid single digits to mid single digits. And the rest of the volume is pretty much our market share loss, especially in the value segment and some in the core segment, but growing. We're growing share in the premium and super premium segment with Budweiser mainly, but also Stella Artois and Hoolgarden. So that's the future. I mean, you have to imagine that with what happened in Russia in which 40% of the margin pool got disappeared with the tax increase and the way pricing was passed or not passed to the market and other restrictions. I mean, 40% in our more radical to the mix reappraisal, talking more premium super premium as opposed to value or even core minus and also rightsize our business. It's a new world in Russia and the world that we have to rightsize the portfolio and the fixed cost structure. Your next question comes from the line of Melissa Erling with UBS. Two questions please. You've guided that you expect U. S. Sales to wholesalers to be positive in Q4. Is this taking into account any possible negative impact from Hurricane Sandy that you've seen so far? Obviously, very early days to comment. But if you could just give some detail on the potential impact there. And the second question is just going back to the EBITDA margin in North America. Obviously, this has been down year on year in 3 of the last four quarters. Given everything that you're saying on the cost increases abating somewhat in Q4, could we assume that the EBITDA margin will be up year on year in Q4? Thanks. Well, first on the FCW's that's our guidance for next quarter. Of course, we still have very limited information on what the storm did to the system and to retailers even more importantly, because they're the ones selling beer at the end. But at this point, that's what we confirmed that STWs will grow in the Q4 and STWs and STRs will closely align by the end of the year for the full year. Your second question on margins, I answered that margin expansion will continue to be a focus for us. We believe that doing more with less and being more efficient is always something that you have room to find more. But that's not every year, not every quarter, not even in Brazil that we've been doing that for 20 years. So don't expect that for the U. S. Every quarter, every year, but that's the general direction. And if you look at what happened this year, a lot of the margin contraction in these last two quarters, 2nd and third, has been a lot due to distribution expenses being way higher than normal. And we explained that because of the innovations having to crisscross across the country with the innovations that were more successful. And also sales and marketing expenses, some of that is phasing, some of that is just because we saw some opportunities to open 2 huge avenues in our business, which we think is by Latin in terms of concept and lime arita again in terms of concept something that brings 40% of its volume from outside of beer. So we think those are 2 opportunities we couldn't pass. And as a company, whenever we see something good, we're not shy of putting money and resources behind. That's what we did. In Brazil, if you remember in 2010, as we were expanding the 1 liter bottle, we also did lots of investments more than normal, because we saw the opportunity to jump ahead of our competitors and that brought margins to flat that year. And after that was gone, we went back to the path of increasing EBITDA margins. So that's how the company works and how we think about the business. Yes. Melissa, if I may add to what Piro said, I would like to call your attention to the fact that in the Q4 2011, admin expenses was abnormally low as a Q4 2012 to be more challenging from all different angles being organic growth as well as margin expansion equation. So just General direction is margin expansion, doing it the right way, so it's sustainable. It doesn't mean it's going to be every quarter, every year. As you can see in other countries where we've been doing this for 20 years. Great. Thank you very much. You're welcome. Your final question comes from the line of Pablo Zlawnek with Liberum Capital. Look, Brito, if I may, three questions. 1, can you go back to the discussion about anchor distributors and alignment? The reason why I asked that is that we keep reading about distributors taking on other people's craft brands. You had some problems with execution of Advisor that maybe I would blame on the system not being so aligned. So talk about what's really going on and what levers do you really have at the end of the day? And if you can comment on metrics on how the system has consolidated over time using eightytwenty rule? That's the first question. And the second question, I'm very I'm trying to understand the mathematics or the accretion of direct distribution in the U. S. System. And the reason I ask that, the if I focus not on the organic increase in direct distribution, but on the reported increase, which is more than 60%, close to 80% of that increase is coming from what you call scope. And I assume a good chunk of that is the fact that you're buying distributors. On my math, that will imply your direct distribution in the U. S. Went up from 10% to 15%. But the big picture is that your gross margins went up 190 bps, Marketing is up only 60 bps, but distribution is up 300 bps. And I cannot believe that that's just La Amirita. It has to be the fact that you're buying direct distribution, but apparently it's not being accretive to margins. If you can comment on those two things, please. Thanks. Hi, Pablo. Felipe here. The scope adjustment in our reporting line here is due to the change in the way we charge for the freight and that is moving from cost of sales into the distribution expenses. Potential acquisition in terms of wholesalers, we do not treat as a scope the same way we do not treat as a scope in Brazil, but we use that as part of the explanation if the number ends up being relevant. To your first question The first question of anchor wholesalers? Yes. To the first question, I mean, Pablo, I mean, a year ago in November to be precise, we told our wholesalers in the convention what we expected going forward. And we introduced this idea of anchor wholesalers, the ones that would grow in the consolidation game going forward, by the way that we support as long as it's a natural consolidation. And we said that they had to have a couple of things. First, they had to have the track record to be able to expand. I mean, we need to see that they were able with the operations they have in hand today to do a good job. 2nd, would have to have people to send to these new operations. So people pipeline was something we would look at. 3rd, they would have to have the financial means not to be overly stretched in terms of leverage as they acquire new companies. And 4th and more importantly, they would have to be aligned with us. And that's what gets to your question. Alignment is all about it's a whole bunch of things, but also about share of mind, heart and gut in terms of our portfolio in our market programs. You have to remember that in our system today close to 95% of the volume being sold through the system is our brands, very different from our competitors. And we think that's a very important thing to provide alignment. And the idea of alignment is to get this number to remain at where it is or even go higher, which is a more challenging thing to do. But what we tell our wholesalers now is that we have a very competitive portfolio. Talk about craft, we have crafts. You talk about all the other segments. You talk about imports, we have imports. We don't have necessarily the biggest imports, but we have imports that are growing at a very fast pace and that they should have no reason to go outside. The ones that go outside, we cannot tell them not to, because they're free to do it. But that goes against what we call alignment. And that in a consolidation game will be a factor that will be looked at. Today, on the other hand, I tell you that we have no problems. Our wholesaler system is a very strong asset of our company in the U. S. And whenever we come with programs and ideas, they jump on, they embrace it, they execute it amazingly well and second to none in terms of distribution system in the U. S. And we're very fortunate to have the wholesalers we have. We're not saying we agree with them in everything. Sometimes in terms of wholesalers associations, we have different points of view, but we discussed this in a civilized fashion. And we have grown a lot in terms of trust in between us and the systems, especially when we put our products there that they embrace launch and they see the success. They love the Platnos, the Lime Maritas, they love the NFLs, the programs that go along with NFLs. So I think all this build trust for the next things that we're going to be bringing. So I think we're in a good path to the wholesalers and the consolidation will continue to occur. We'll continue to support it and alignment is a key dimension for the ones that want to grow. Thank you. That was our final question. And I'd like to turn the floor back over to Carlos Brito for any additional or closing remarks. Well, thank you very much. We have a solid quarter. I mean, the U. S. Industry is positive, price is positive, share trending to a much better place with the help of the top 2 innovations in the beer industry this year. In Brazil, industry positive, not as positive as we thought, given the price increases, but prices has to be taken because of excise taxes, but a better balance as we said between industry or our volumes and pricing and share. In China, we remain very confident. This quarter was heavily impacted by in our footprint by very extreme weather in China, typhoons and things of that sort. But our focus brands are growing nicely, double digits and our mix continues to trend the right way and share continues to grow. So very exciting news. And thank you very much for your time and see you next quarter. All the best. Have a nice day. Thank you. This does conclude today's teleconference and webcast.