Earnings Call: Q2 2012

Jul 31, 2012

Welcome to the Anheuser Busch InBev Second Quarter 2012 Earnings Conference Call and Webcast. Hosting the call today from AB InBev is Mr. Carlos Brito, Chief Executive Officer. To access the slides accompanying today's call, please visit AB InBev's website 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, the 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. We shall not be liable for It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may begin. Thank you, Jackie. Good morning, everybody. Today, the InBev reported its 2nd quarter results. Total revenue for the Q2 grew by 4.7%, driven by revenue per hectoliter growth of 6.4% on a constant geographic basis. Volumes in the quarter were soft, primarily driven by the U. S. As a result of the adjustments to shipping patterns, which we flagged in the Q1. These adjustments, which were designed to ensure smoother and more cost efficient phasing of deliveries to our wholesalers led to a 2.1% decline in shipments to wholesalers or STWs. However, the underlying health of our U. S. Business is good with sales to retailers, SCRs, closing the half year ahead by a positive 0.2%. Company wide volumes of our focused brands grew by 1% with our 3 global brands growing ahead of this rate at 2%. EBITDA grew by 2.5% and EBITDA margin declined by 80 basis points to 36.4%. EBITDA performance was impacted in the quarter by the anticipated decrease in shipments to wholesalers in the U. S. And increase in distribution expenses in the U. S. Related to the very successful rollout of our innovations as well as higher overall transportation costs in both Brazil and the U. S. We also faced some difficult comparables in administrative expenses related to variable compensation accruals and the timing of certain expenses year over year. Year to date EBITDA grew by 4.9% compared to the 1st 6 months of last year. Finally, our earnings per share grew by 22% in the quarter to $1.22 on a normalized basis. So a challenging quarter in terms of EBITDA as we expected, but we're confident of a stronger second half. Our global brands of Budweiser, Stella, ToynBx grew collectively by 2% in the quarter. Global Budweiser trends remain strong. Volumes growing by 5.2% in the quarter and 6.2% year to date. Budweiser brand health in the U. S. Continues to improve and we saw strong performances in most of our key markets around the world. This includes double digit volume growth in China and Russia, solid execution behind the FA Cup sponsorship in the U. K, which helped the brand to gain share in the first half and a good reception for the brand when it was launched in Ukraine in April. In Brazil, Budweiser continues to exceed expectations after its launch in August last year and is playing an important role in our premium brand portfolio strategy. Star to our global volumes came under pressure in the Q1, declining by 3.5% due to weak weather driven U. K. Industry and competitive off trade pressure as well as softer shipments in the U. S. Due to the shipping pattern adjustments I mentioned earlier. However, the underlying performance in the U. S. Continues to be strong with STRs growing by 18% in the quarter. We also saw volume growth in Argentina, Brazil and Russia. We continue to see good growth from STELLAR to A SIBRE in the U. K, up 20% in the quarter. Bax volumes declined in the quarter as a result of a weak German industry, although we grew share in that market. Turning now to our top three markets and firstly the U. S. We're encouraged by industry trends with the 1st 6 months of the year seeing the best industry performance since 2,008. As you know, the Q1 was helped by favorable weather and an improving economy and the momentum continued into the 2nd quarter with our innovations being a key driver. We estimate that industry selling day adjusted STRs grew by 0.4% in the quarter and by 0.8% year to date. And the positive industry trend appears to have carried through into July based on RI data for the 2 weeks ending July 15. Our own selling day adjusted SCRs in the quarter were marginally down at minus 0.2%, but ahead by plus 0.2% for the half year with market share trends continuing to improve. We estimate share was down 30 basis points in the quarter and 25 basis points in the half year. The main drivers of this result were a strong commercial plan and the rollout of our innovations in particular Bud Light Platinum and Bud Light Lime Lime Marita and supported by solid growth from Michelob Ultra, Stella Artois and Shawkat. Beer revenue per hectoliter grew by 4.4% including approximately 150 basis points of brand mix driven by Bud Light Platinum, Bud Light Lime, Lime Arita, the growth of Shock Top as well as consumer trade up from value brands. The success of our innovations continue to have a positive impact on the Bud Light family. STRs for the family grew by 3.5% in the quarter and 3.9% in the half year, adding 60 basis points of share growth to reach a total market share level of over 21%. This gives us good momentum as we look forward to the new NFL season and the 2nd year of Bud Light's sponsorship of the league. I mean, I'll say a few words on Bud Light Platinum. We estimate the brand reached a 1.1% share of STRs in the 5 months since its launch and crossed the 1,000,000 barrel mark in early July. Our analysis on cannibalization is also showing positive results. It is too early days, but the data suggests that less than 50% of Bud Light Platinum's volume is being sourced from our own brands with the brands selling at a premium of 10% to 15%. More importantly, our analysis shows that a significant proportion of the volume is coming from hard liquor and about 5% from outside the alcohol category completely. These are encouraging numbers and we'll continue to track progress closely. It is important to remember that the success of Bud Light Platinum has been achieved with only 2 SKUs, the 6 pack and the 12 pack and no cans. In the Q3, we plan to extend the portfolio to include a 22 ounce bottle and an 18 pack of 12 ounce bottles. Bud Light Lime Marita has fallen fast on the heels of Bud Light Platinum. This brand was originally intended to be a seasonal product. But consumer response to the taste was so strong that we decided to make it a year round offering. It's the 2nd most successful launch in the beer category this year behind Bud Light Platinum and has already sold over 2,000,000 cases. The product carries a price premium of around 20%. Activation for Budweiser in the 2nd quarter included limited edition Major League Baseball Packaging and enhanced red, white and blue program. We also have limited edition aluminum bottles in the market in support of the U. S. Olympic team. We had good wholesaler support for our programs and brand health continues to improve. Budweiser STR performance was not as strong as we would have liked and there has been some cannibalization from our innovations. But we're committed to stabilizing the brand's market share and are working hard to do so. Ultra. Ultra had another strong quarter with volumes up 7.3% and share growing by 13 basis points. The brand remains in good health and our new line extensions Ultra 19th Hole and Ultra Light Cider are helping to build consideration and expand usage occasions. Our high end brands in the U. S. Continued to outperform the industry, growing by 19% in the quarter. Stella Artois grew by 18% with total market share improving by almost 10 basis points. We estimate that our share of the high end category grew a further 150 basis points in the quarter year over year positively impacting our revenue per hectoliter performance. Sharp top also continues to outperform, growing over 70% in the quarter and the half year with the line extensions helping to demonstrate that a strong craft brand carefully managed can be scalable. Before leaving the U. S, I'd like to mention our balanced portfolio approach. The objective of this initiative is to help retailers understand the importance of focusing on the drivers of incremental sales and not just the variety of brands available in their stores. Our analysis shows that 100 percent of retailers who have achieved a better balance between premium and craft beer space allocation have experienced improved volume trends in both categories. In summary, this program is delivering results and will continue to be developed with our wholesaler partners. Turning now to Brazil. We estimate that the beer industry grew by approximately 3% in the second quarter, a similar rate to the 1st 3 months of the year. Our volumes grew just below this level at 2.8% as we eased back on some of our promotions. As a consequence, our market share declined by 20 basis points in the quarter, but remained steady basis points ahead for the 1st 6 months of the year compared to the previous years. Revenue per hectoliter growth of 7.2% was a good improvement over the Q1, which if you recall was impacted by difficult comp and also by a larger normal impact from state VAT tax increases. Revenue per hectoliter for the half year was up by 4.4% and we expect growth in the full year to be at least in line with inflation. We continue to invest in our 3 national brands of Skol, Brahma and Antarctica, which grew by 2% in the quarter and by 2.6% year to date. Consumer preference for this brand remains approximately 10 percentage points above their combined market share. Expansion in the North and Northeast of the country continues with double digit volume growth in the 1st 6 months of the year. Per capita consumption in these regions continued to grow and remains below the national average. Soft drink volumes were also strong in the quarter growing by 6.9% and finishing the half year 7.2% ahead of the previous year. Share was flat in the quarter and up 30 basis points in the half year. Innovations have played a key role in the growth of our Brazil beer business in the last 3 years and represented over 10% of our volume in the first half. Skol 360 and Antarctica Sub 0 continued to perform well and the presence of the 300 ml returnable glass bottle continues to expand. We're also exploring innovations in route to market. For example, the pit stop concept is reinforcing the returnable bottle in the supermarket off trade channel. This additional point of sale is located just outside the supermarket, making it easier for the consumer to return their empty cases and bottles and buy new products. Premium has become an important focus for us in Brazil. We're following a portfolio strategy for our premium and super premium brands with 2 domestic and 2 global premium brands offering consumers different brand propositions at different price points with the opportunity for them to trade up. Budweiser plays a key role in this strategy and continues to perform well after its launch last year with a 60% increase in distribution sequentially. Stella Artois is also growing quickly with volumes up more than 60% in the Q2. Now moving on to China. We're very pleased with the results in China, where our beer volume grew by 7.6% in the 2nd quarter, driven by our focused brands Budweiser, Harbin and Sedrin, which grew by 14.7%. We estimate that we gained 40 basis points of market share in the first 5 months of the year for which data is available. In the Q2, revenue per hectoliter grew 11.2%, driven by price increases in our premiumization strategy. Budweiser continues to build on its leadership position in premium with another quarter of double digit volume growth and we estimate the brand's share of premium segment is now over 40%. Our growth in China is being helped by strong sponsorships. 1st, in April, Budweiser became the official sponsor of the Porsche Carrera Cup in Asia. This partnership with Porsche allows us to further strengthen Budweiser's premium brand positioning, while benefiting from the growing popularity of motorsports. The sponsorship is being leveraged with Budweiser and BudGentle and Draft in different communication channels including TV, radio, print, social media and events as well as packaging. We also have rolled out the special aluminum can and organized roadshows and events in over 50 cities to connect with consumers. Secondly, in February, we announced the Harbin NBA Sponsorship. Harbin is our biggest brand in China and we believe the NBA is an ideal property given its contemporary image and audience. The NBA campaign reached consumers at over 200,000 points of sales across China and also included NBA packaging, national TV commercials and events with NBA celebrities. We're also expanding distribution in China through both greenfields and acquisitions. In the Q2, we opened 2 new breweries in the Henan and Fujian provinces with production capacities of 2,500,000 hectares each and we have 4 more new breweries expected to come online in the next 2 years. I'd now like to hand over to Felipe to cover the highlights in the other business units and the below EBIT results. Felipe? Thank you, Brito, and good morning, good afternoon, everyone. Brito has covered the U. S. In detail, but let me add a few words on Canada. Canada continues to deliver solid top line results with volumes growing 0.2% in the quarter and 1.6% in the half year after a partial recovery from the weak economy in 2011. Bud Light led the way growing both volume and share, while Budweiser remains the market leader with good brand health trends. Total share was marginally down versus last year, but remains around 41% level. Moving to Latin America South, Zone beer volumes were down 1.7% due to challenging economic environment in Argentina, Bolivia and Paraguay. Beer volumes in Argentina showed a decline of 2.4% due to a soft industry, although we gained market share, thanks to solid performances from QMEs and Stella Artois. We also launched QMEs 1890, a premium line extension for the brand. Zone EBITDA grew by 8.2% being impacted by softer volumes, higher input costs, inflationary pressures affecting distribution expenses and the timing of sales and marketing investments. However, we expect Exxon to return to double jitted EBITDA growth in the full year. Moving now to Western Europe, where we were able to grow revenues per hectoliter over 2% despite a tough price environment. In Belgium, the industry was very weak due to extremely poor weather compared to an exceptionally warm spring in 2011. We also suffered some market share loss due to the competitive activity in the off trade. However, market share trends in June were much better. Industry volumes in Germany were also weak, but we gained share in the half year with Bags and Hassleroader driven by product and packaging innovations. In the UK, we faced a difficult industry as a result of unfavorable weather, with share also coming under pressure from competitive activities in the off trade and package mix shift due to consumers moving from bottles to multipack cans at lower price points. The mix change impacted Stella Artois and BECCS in particular, which holds strong positions in premium bottle lager. On the other hand, Budweiser delivered a solid performance and gained market share in the half year. In Central and Eastern Europe, Russia remains a challenging market. Industry was weak and share also came under pressure driven by tax related and other selective price increases at the start of the year as well as competitors' promotions activities in key account channels. Consistently with our strategy, we continue to gain share in premium led by Bud, which grew by nearly 50% in the quarter and Stella Trois, which grew by 6%. The industry was also soft in Ukraine. Our price increases with in response to high commodity costs were implemented ahead of competition putting pressure on market share, but is currently being rolled out in Ukraine as Brito mentioned earlier and has already reached 40 basis points of market share. Given the difficult industry environment, DAZN is focusing on improving the brand portfolio and driving overall profitability. In the half year, revenue per hectoliter grew by 15.1% with EBITDA up by 19.5 percent with margin expansion. I would now like to look briefly at the low EBIT results, where our net finance cards in the 2nd quarter were $460,000,000 a decrease of $252,000,000 versus the same period of last year, due mainly to reduced net debt levels and the lower coupon resulting from the debt refinancing and repayments, which occurred in 2011. There was also an additional non cash accretion expense of approximately $20,000,000 in the quarter, which represents the IFRS accounting treatment for the put option associated with our investment in C and D in Dominican Republic. Going forward, we expect a $30,000,000 non cash charge on a quarterly basis until the option is exercised. While the financial results of $87,000,000 include gains from derivatives related to the hedging of our share based payment programs, partially offset by cost of currency hedges as well as the payment of bank fees and taxes in the normal cost of business. Our effective tax rate improved from 17.3% to 12.6% in the 2nd quarter. This decrease results from the combined effect of a shift in profit mix to countries with lower marginal tax rates, incremental tax benefits, the non taxable nature of gains on derivatives and the favorable outcome of certain tax claims amounting to $136,000,000 Our previous guidance for the normalized effective tax rate in 2012 was a range of 19% to 21%, and we now expect the outcome to be in the range of 18% to 20% for the full year, while our long run guidance remains in the range of 25% to 27%. Normalized profit attributable to equity holders of AB InBev grew 22% in nominal terms to almost just under $2,000,000,000 in the quarter. As a consequence, normalized earnings per share grew by 22% to $1.22 on a nominal basis. This growth was largely due to lower net finance costs and income taxes compared to the previous quarter despite a negative FX translation impact. Before we close, I'd like to highlight that we are excited by the recently announced combination with Modelo, the prospects in the Mexican market, the 4th largest beer profitable in the world, as well as the potential for the expansion of Corona brand globally. Any combination of this size provides unique learning and best practices sharing opportunities. And in due course, we look forward to working with our colleagues at Modelo to realize these benefits. The transaction is subject to regulatory approval and is expected to close during the Q1 of 2013. We were also able to secure financing on favorable terms. On a related note, on July 10, we issued $7,500,000,000 of U. S. Dollar bonds in a multi tranche transaction. The weighted average pre tax cost of the new funds is just over 2% with a weighted average life of almost 10 years. The net proceeds of this transaction will be used for general corporate purposes and prefunding financing related to the combination with Modelo. This transaction allowed us to secure more permanent financing ahead of our expected drop downs related to the Modelo combination at a cost that is roughly equivalent to the 14 $1,000,000,000 bank facilities that we secured for the transaction, but with a much longer average maturity. So in closing, the Q2 was a challenging one in terms of EBITDA growth due to the timing of our U. S. Shipments, incremental distribution expenses, variable compensation accruals and the timing of certain admin expenses. However, we are confident about the momentum we have in our top three markets, U. S, Brazil and China and look forward to a stronger second half compared to the first half EBITDA growth performance. With that, I would like to hand back to Jackie so we can 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. Our first question comes from the line of Melissa Ehrlein with UBS. Good morning. It's Melissa Ehrlein from UBS. Two questions please. Firstly for Brito, regarding the U. S, what are your thoughts on the current price discount between your premium brands and your value brands relative to what your ambitions are in the midterm? And my follow-up is a question for Felipe. Just regarding the very favorable financing rates you got on your bond issue earlier this month, I was surprised that you reiterated your guidance for the full year for an interest rate of 5% to 5.5%. Can you comment on that and why we shouldn't expect slightly better than that given the very low bond issue rate? Thanks. Hi, Melissa. Brito here. As we said 4 years ago, I mean, we are in a journey, a multiyear journey of diminishing that gap between the sub premium and the premium brands, which came now from 30% to 24% approximately. So that's a multi year proposition, but we think it's the right thing to do given the portfolio that we have in our hands. So the goal is to get to 15% or 20% around those numbers, but that of course will take some years. But we are on our journey. And now, Felipe? Yes. Hi, Melissa. Well, basically, as we look into the range of 5% to 5.5%, you're right of saying that the recent bond transactions should potentially cause us to go below that range. But at the same time, as we are building up firepower looking forward, the closing of the Modelo we feel that the range is still valid and perhaps we should be able to be at the lower end of the range, but the range is still valid. Great. Thank you very much. You're welcome. Your next question comes from the line of Andrea Pistacchi with Citi. Yes, hi. I had 2 questions please. One is on Brazil. I think you slightly increased the guidance on price mix in Brazil. I think previously you were guiding to pricing in line with inflation and now you're saying at least in line with inflation. So I was wondering what this reflects. Was it that Q2 was better than you expected? Or does it reflect timing of your implementation of price increases in the second half? And the other question is about the U. S. One of the drivers of the organic profit slowdown in North America seem to be higher COGS. I think about 5% on a per hectoliter basis. So I wanted to know please what is driving that whether it's input costs or maybe a reflection of your more premium sales mix? Hi, Andrea, Brito here. In terms of Brazil, I mean, you're right. I mean, firstly said, in line now we're seeing at least with inflation. And that's mainly because of some revenue management initiatives and also very importantly the premiumization that's ahead of our plan. So that's what's causing the change in language and the outlook. In terms of the U. S, the COGS is impacted by Yes. There is a combined impact of overall commodities affecting our COGS. And particularly in the U. S, the rollout of innovation pipeline is also causing COGS to go slightly up. Of course, products are being priced at 15% to 20% premium or 10% to 20% premium, therefore, leading to healthier margins, but the pressure on COGS is still there. We do not generally provide guidance on a per market basis. I would refer back to our general outlook where we expect COGS to grow at mid single digits for the company as a whole, but U. S. Is not an exception to that. Thank you. You're welcome. Your next question comes from the line of Trevor Serling with Sanford Bernstein. Hello. I have two questions please gentlemen. First one, I know it's a bit early to be thinking about 2011 input costs. But I wonder if you could give us a little bit of color on the impact or the lack of impact on the of the recent spike in grain costs And in particular concerning the hedging for the Argentinian harvest that comes up in January February, did you manage to get your hedges in ahead of that spike? And the second thing is, I noticed there's about a €48,000,000 headwind in the global export and holding company line on the EBITDA line. Is that something we should expect to continue through the rest of 2012? Or is that a one off for Q2? Hi, Trevor. Felipe here. Our hedging strategy remains to get protection on a 12 months rolling basis. And as we have seen commodity price declines, it's fair to assume that future hedges are being rolled at more favorable prices year over year. On balance, we should also account for the fact that we do have some FX exposure especially in Brazil in terms of cost of goods sold, transactional exposure. And as we look forward into 2013, we see an easening from commodity and deterioration from the FX. We are not in a position to give a 2013 guidance for COGS. COGS at this stage, but generally we are keeping the same hedging strategy as we had. So on the admin expenses, we face sometimes tougher comparables in connection to the timing of expenses and accrual for variable pay. That has been the case, especially in Latin America North this quarter and in headquarters as well. We have some other reported lines in there as packaging business and so on and so forth that may cause some fluctuations. So it's hard to go into quarterly guidance details for the headquarters, but we continue to manage fixed costs very tightly and as part of our core competencies. Thank you very much, Felipe. You're welcome. Your next question comes from the line of Anthony Boakalo with Santander. Hello, everybody. Just a quick question on Bud Light Platinum, the production and distribution. Obviously, your distribution costs in the U. S. Have gone up a lot. Where are you producing Bud Light Platinum now? I think it's in 2 breweries. If the brand keeps expanding market share, how quickly can you ramp up production in other breweries? And regionally, where is the brand strong? And how are you getting on with getting the brand to these markets with the rapid growth? Hi, Tony, it's Brito here. I mean, you're right. I mean, we started with a much lower expectation in terms of what the size this brand could get. We started in 3 breweries. And now of course we realize the brand is much bigger than we thought. It was very successful. So we're expanding production out to 6 out of the 12 breweries and that will give a much better coverage from East to West Coast this in the next coming months. Okay. So will that be will we see a material impact on your distribution line in the U. S. Due to the ramping up in the new breweries? Then I'll go back to the outlook for the general distribution expenses that we said will be mid to high single digits for the overall company. And given where we are at the half year, it's fair to expect that this submission cost will go down to meet our guideline in our guidance for the second half and the U. S. Is no exception to that guidance. Okay. So that's already baked in then? Yes. Yes. In terms of consolidated company guidance, yes. Great. Thanks so much. Thank you. You're welcome, Tony. Your next question comes from the line of Sanjit Azla with Credit Suisse. Hi, guys. A couple of questions from me. You alluded to the North and Northeast growing double digit. By my reckoning then that implies the rest of the country is around flat or quite low single digit. Is that a macro issue? Or is it a function of the recent price increases in the market do you think? No. The North and the Northeast from now quite some years have been growing ahead of the national average. That has to do with the fact that the government has put a lot of focus in terms of supporting with social programs the population over there. It's an underdeveloped region in Brazil and that of course is having an effect on our business. We also invest in our brewery footprint that used to be underrepresented in that region. We used to have to carry you remember the logistics costs we had in some previous years to support the growth of that region. Now we have new brewers in that region, so that's helping also the development. And we also have more focus, more investments in the region. So it's all three things. I mean, better footprint, more investments and also the region going ahead of the overall economy. And what about the rest of the country? Can you just allude on some of the trends there? Well, we've seen some ease in terms of economy, but our business continues to be in a positive momentum. If you compare what we said in terms of guidance for this year guidance for this year for the Brazilian beer business that we would try to reach a better balance between pricing and volume. That's exactly what you see in the half year this year. And that volume growing by 4 plus percent compared to 0.7% last year with very healthy pricing. So the economy, yes, is not growing at the same speed as the last 2, 3 years, but our business has performed yes per our guidance. And just final one on Q2 and Q1? I think you alluded to some comments there in the Q2 and Q1? I think you alluded to some comments there in the statement. I just Rune Peak could clarify. Well, our strategy in Russia, that's not new. I mean, has been for some years to focus on upgrading our mix and upgrading our consumers. So Budweiser is still in line with that strategy and we saw Bud and Stella growing. We did lose some share mainly in the value brands and off trade activities. The other fact is that for the last 3 years and those are public figures we have been leading price increases in Russia. And that of course is taking some toll on our market share, but we think it's the right thing to do for our business. That has to do with some revenue management initiatives and also premiumization of our brand portfolio. So that's where we're headed. Okay. Thanks. Your next question comes from the line of Dirk Van Vlenderen with Jefferies. Hi, everyone. Thanks for taking the question. Just a question really on Budweiser in Brazil. I think in Q1, you mentioned in the statement that you expect it to become the largest international premium brand in the country. And I just wondered if you had met that expectation at the half year stage. And if you could maybe give a feel for market share within that segment that would be great. Thanks. Yes. Budweiser we're still cycling. I mean we still don't have a 12 month cycle for that. So rather wait another couple of months to get to a full year cycle and then talk about volumes. But it's going ahead of plan. It's very important to our premiumization strategy in Brazil, which is based on 4 brands, 2 local premium brands, Original and Bohemia and 2 global brands of ours Stella and Bud. So very well accepted by consumers and growing ahead. I mean we grew sequentially 60 percent our distribution and Stella grew 60% its volume. So I mean, very healthy growth in that high end segment for our brands. Okay, great. Thanks. And maybe just as one quick follow-up on China. How much of that 12% pricemix in Q2? How much of it if you could give a broad indication was mix versus price? That would be really helpful. Well, we're not giving out the split at this point, but it is an important component. I mean the premiumization. I mean if you look at the growth of Budweiser compared to the rest of the portfolio And given the very different price points, you can only imagine how important that is for our top line per hectoliter or revenue per hectoliter growth. But it's a combination of growth. I mean price increases and premiumization of our portfolio. Thanks very much. Thank you. Your next question comes from the line of Alice Longley with Buckingham Research. Hi, good morning. My question is about your EBITDA margins. Are you willing to say if EBITDA margins will be up in the second half or and or up for the year? And then as part of my EBITDA margin question, on a longer term basis, what's the I know that you are determined to have your margins grow longer term. And what's the model for that that I should assume? Should I assume gross margins expand and the administrative ratio goes down partly offset by hikes in the distribution and the marketing ratios. Is that the kind of model to use for the longer term? Thank you. Well, thanks for the question. And then what Philippe said in his speech, the last paragraph is that a tough quarter, but we're very confident about the momentum in our top three we So that's what we stand at this point. In terms of your second question, yes, I mean, if you look at the 20 year history or recent history of our company, EBITDA margin expansion has been one of our hallmarks. I'm not giving any guidance for this quarter or this year. I'm just saying in terms of general concept, we believe that this is an important measure of business performance and we'll continue to be focused on trying to do it in a sustainable and right way going forward. Thank you. Your next question comes from the line of David Ballant with Morgan Stanley. Yes, hello. A couple of things. First, I was actually very pleased that you started mentioning in your press release the fact that you're migrating more wholesalers to the managed freight program. Can you just confirm that that's also an important driver in your higher distribution costs, but also of the very good price mix that you had in the I mean realized net revenues per hectoliter growth that you had so far this year? And then the other thing is just on the COGS per hectoliter. Obviously, you seem to be cycling some very high spot price increases from 12 months ago in a number of commodities even in the U. S. But obviously, as we go in the next 6 months or 9 months, you will be cycling much lower prices. So I assume given the way that your hedges work that you're probably going to have a pretty mild commodity cost environment in your hedges for 2013, if you could confirm that without necessarily giving a quantification obviously? Thanks. Well, hi, Dave. Brito here. I mean, the U. S. Wholesaler freight program is one component, but it's a smaller one. And then the big components on that is really brand mix. And yes, that's pretty much the biggest component. And on the growth. Which again if you go back to our press release, it's we said that that alone is responsible for 150 basis points in our 4.5% EBITDA net revenue per hectoliter growth. Okay? So the other 3% It is a component. It's a smaller component compared to the brand mix upgrade that we're experiencing with the Premium Plus successes of Bud Light Platinum for example and Bud Light Lime L'Amourita. Okay. And the second question Felipe? It's more on the cost of goods sold and commodities going to 2013. Yes, we've seen commodity price declines. But on the other hand, we have also seen higher FX rate, especially in Brazil impacting cost of goods sold in the other direction. So we are not right now providing guidance for 2013, but confirming the guidance for 2012, which as cost of goods sold expected to increase by mid single digits. And then, sorry, can I just follow-up on the in Brazil also, I noted the decline year over year in market share, I know it's relatively small for the Q2? But I was wondering what the exit rate was. I mean, sort of what sort of level you finished the quarter. And the reason why I'm asking this is that, I understand that you've been rolling out the 300 milliliter returnable bottle and doing a bigger effort with the returnable bottles in the off premise. And I would imagine that that would lead to market share gains, but they don't seem to have materialized in any meaningful way. So I'm just wondering where you are with that and what you you think? I mean, the 3rd and the ML has been a very and will be a very important component of fighting in the with the One Way segment. If you remember, I mean, we do have some competitors in Brazil that are very aggressive in the One Way segment. And the way one of the ways to fight this or to have competitive pricing is through the 300 ml returnable bottle at much better margins than cans. So that's one thing. Second thing is that for the Q2 our market share has been on average 68.8%. And for the half year, I mean, we're 30 bps above half year of last year. So that's very healthy, I would say given all the pricing. And the thing that made us lose a little bit the 0.2 in the second quarter share wise was that we eased some promotions. You remember last quarter we said we had some promotional activity for Carnival that we eased a little bit and that of course caused a little bit of market share loss marginally. But again for the half year we're still ahead of previous year with a much better price. Thanks. Thank you, David. Your next question comes from the line of Chris Kippers with Petercam. Yes. Good morning. Thank you for taking my call. I had a question on Europe. We saw volumes declining significantly into the quarter of course due to bad weather. But I was a bit surprised by the competitive activity and to what extent does it imply that your portfolio is currently a bit more trading up that you don't coincide with your peers on this promotional activity? Could you shed some light on that? Thank you. I mean in Belgium what we did is we increased prices ahead of our competitors. So that caused as always some pricing pressure. And there was competitive activity in the off trade you're right. And but if you look at June for example, our market share has already recovered some and it's more balanced. So in Belgium, it's always that balance between market share and pricing given that we're the market leaders. So no news there. The only thing that's new as you said Chris is that the industry was very poor because of the tough comps with the very warm spring we had last year as you remember. Yes. Indeed. Okay. Thank you. Thank you. Your next question comes from the line of Pablo Zlawnik with Liberum Capital. Hello, everyone. Hello. Two questions here. Look, first of all, just numerical on the margins. I understand you do not want to give guidance for EBITDA margins. But according to a consensus that you divulge for North America consensus, we're looking for 70 bps of margin expansion for 2012 in North America. And here in the first half, we are down 40 bps. So I think I guess the obvious question is, do you think the consensus is too high? And any color there would help. But number 2 and obviously more important than those numbers, help me understand all the effort that goes through anchor distributors, efficiencies in the distribution network, the managed freight program, perhaps distribution consolidation, increasing the distribution, all of that. Should we think of that as a driver of volume growth, share gains, helping profit margins? Because perhaps in a market like Brazil, you're looking at increasing per capita consumption or even perhaps even back in the day gaining share. But in a market like the U. S, in my opinion, to trade 100 bps of margin expansion of margins coming down for 0.5 point of share or less, I don't think that really works, right? It's a mature market and you already have 50% share and there's all these structural issues around the distribution side, 3rd party distribution being mandatory and make it more difficult. So what I'm trying to understand and I realize you do not want to give guidance for North America, but I think that that's a key investment question. What's the upside for North American margins? Shed some light in terms of particularly on the distribution front, what are the initiatives that are being implemented there? And are those more geared to driving share per capita margins? That would help. Thanks, Britt. Okay. Pablo, hi, Brito here. Mean, first on margin on North America, we're not going to give any guidance. We're just saying general, as I said before, that hallmark of our company has been in the mid and long term to continue to expand margins because we think it's a great measurement for business performance. And our history shows that we do have a track record of doing that. So that's what I how much I would say on that. In terms of distribution in the U. S, you're right. I mean, we have many things in the last year or 2 years that we've been doing. 1st, to change the leadership of our commercial department in the U. S, which has been proven to be a very good thing. I mean, we have a new team that's performing very well. We're more aligned with the wholesalers in terms of market programs and that's helping the share performance, which is trading much better than last year. The wholesaler community is a very strong asset of our company and we work very closely with them to tailor market programs that are meaningful, unique, differentiated and relevant to our consumers in the marketplace. So, the idea of anchor distributors is a key one anchor wholesalers. It's linked to a couple of things. People having the track record, wholesalers having shown the track record, wholesalers having the financial means, having the people pipeline to expand and be aligned with our business. So we expect wholesalers to have really most or if not all of their share of mind and share of hearts behind our brands and behind our programs. And that's a very strong asset we have visavis some of our competitors. So we intend to keep that and continue to give incentives for wholesalers to really support our brands. And in order to have a brand portfolio that's complete, we continue to work on different line extensions and supporting our brand portfolio, so our wholesalers have the ammunition they need to be effective in the marketplace. So that's the way we're headed. But just to follow-up, I'm sorry, but all these initiatives that you're talking about, should we think of I mean, just the UK does all guide us. All these initiatives are really more at the end of the day to drive share and improve the mix not so much to drive margins? Yes. And the primary objective of all this is to have a better execution in the marketplace because what our system has shown is that whenever we have a good idea like Bud Light Lime, Bud Light Lime Orita or Bud Light Platinum, they really execute very, very well. So the primary idea is to continue to have that sales machine oiled and really efficient. So whenever we have not only good ideas, but also the routine business that gets performed really well in the marketplace. So it's more to close market share gaps I would say. And one last one if I may about Brazil. I mean obviously in the Q1, I think that price increase only about 2% realized was a bit of a scare good that you that's been fixed apparently in the Q2 now. But how should we think now about these excise tax that becomes effective in October? I understand that at the consumer level there's going to be about a 5% price increase. Should we also assume that we may have capital surprises in the 3rd Q4 terms of the company not being able to fully realize the needed price increase to pass on the tax? Well, a price increase, because to continue to negotiate the price increase because what we're trying to show the government and this is not the 1st year is that Texas will have an impact on industry and that will have an impact on investments and job creation. And we've had some very good years with very high investment, capacity expansion, industry growth and therefore tax revenue is up with job creation. So a win win for everybody. And if taxes go up that of course our second point is that we'll pass that on immediately to prices that could affect industry, could affect investments and could affect job creation. So we're saying it's better to have the mix we had in 2010, 2011 as opposed to some other mix that could be less of a win win for everybody. So we're seeing negotiation with them, but rest assured that any tax increase will be passed to consumer prices the next day. All right. Thank you. Your next question comes from the line of Ian Shackleton with Nomura. Yes. Good afternoon, gentlemen. Just thinking about the performance in Western Europe, and obviously it's quite a small and Central and Eastern Europe. And obviously they're quite small parts of your business. They're fairly fragmented marketplace and it's obviously quite difficult to create value there. Do you increasingly feel those businesses that probably to realize the capital invest elsewhere? Or are those still businesses that you're committed to holding for the longer term? Hi. And now we're totally committed to hold for long term. I mean, Western Europe is the house of most of our global brands, premium brands, a lot of heritage. Belgium, great very profitable market. U. K, a very challenging market as you know. Germany a big market, but also very fragmented. So yes, still lots to do in Germany and not only with us, but all players. And Centrus in Europe, Russia, I mean, one of the top 5 markets, 1 and wise in the world, tough regulatory conditions. We have to do a better job as a beer association, but we're committed to that market. But in a way in Russia to upgrade our portfolio that's what we're trying to do. And that's where we're headed not only this year, but for many years now. In Ukraine, of course, a secondary market for us in CE, but also one that we lead and that's very closely related to Russia. So again, in markets where we are investing our global rents, we believe that Budweiser, Stella Bax have tons to do in those markets. Lots of economies of scale sponsorships that are global. So lots of things to do in those markets to get it from subscale country markets to more of a bigger scale regional markets in terms of adding a common brand portfolio and premium brand portfolios. So we're committed to those markets for sure. And if I could just come back on the supplementary parts on Brazil. The ANVV statement casts some question marks about the existing CapEx plans in Brazil after the FET increase. And I guess as we think forward on Brazil, should we think about the patent being more like 2011 where you had less strong volumes, but very strong revenue per hectoliter rather than the way we started 2012? Well, two things here, Ian. First, we said in 2012, we wanted to have a better balance between price and volume. And if you look at the half year, that's what you see. And second, as I mentioned to Pablo just a moment ago, yes, I mean depending on how governments or federal government will decide on Texas because we're still negotiating with them and depending on how that's given that we'll pass that to consumer prices will affect industry that will reflect yes potentially on our CapEx and drug creation. So that's what Ambr said. I mean and yes, we're totally aligned with that and I just mentioned that to Pavel. Those things are all connected. Okay. Thanks very much. You're welcome, Ian. Your next question comes from the line of Chris Pitcher with Redburn. Good afternoon. Thanks very much. In terms of just some specifics. In Brazil, obviously, we had a so Latin America North, the bonus accruals set back up again following the weak quarter last time. I mean, looking at the quarterly numbers last year, it looks to me that you probably wouldn't bonus accruals were more normal in the Q3. I know it's slight negative. Can you confirm whether we shouldn't expect that step up in admin costs again? And then could you just give a bit more color on the working capital movements? You've attributed the significant step up in working capital, some to timing issues, some to seasonality and something which looks to be a re changing in your payment terms on CapEx. Just to get a feel for whether we should expect to see that reverse meaningfully in the second half or whether working capital has become more of a draw on the business? Thanks. Hi, Chris. Filipe here. So as you go back to the Q2 of last year, admin expenses were down double digits about $50,000,000 which caused Q2 last year to be a tough comp year over year. From that number about $48,000,000 or so came from Latin America North. And we had comments in there that was basically saying continue to fix the cost savings across our business, which is our way of life, lower accruals for variable compensation and the timing and allocation of certain expenses, but we remain committed to manage it properly on a full year basis. And in our case, as you know, the accruals for variable compensation is a function of overall performance versus budget as well as target achievement, the entity and the individual target achievement and so on and so forth. So the second question is regarding working capital. Working capital has been an important source of cash flow generation and we believe that is going to continue not only in 2012, but years to come. And on a full year basis, we had some timing issues regarding the first half. We also have a timing related impact in connection to our CapEx as usually our we have much longer payment terms in capital investments as compared to the overall expenditures. And depending on the timing, CapEx year over year took place that has an impact in payables and overall working capital. So we should expect that to continue important source of cash flow generation for the full year. So no changes and no surprises based on what we reported for the first half. And if I could just follow-up one final question on the cost of goods. So I appreciate this has been asked a lot on this call. I don't want to do it to death. But in terms of helping us model some of the impacts from movements, some quite different movement across different grain prices, maybe give us a feel for what the split of your cost of goods is between malt, barley, corn and then maybe the packaging goods just so we've got a framework to help model the potential impact into 20 13? Yes. I'm sorry, Chris, but we never go into that level of granularity. So we stick to the expectation of cost of goods sold to grow mid single digits this year. We see a more favorable commodity scenario for next year, but a tougher FX impact for next year. But at this stage, we're not providing 2013 guidance. Sorry. Okay. Understood. Last chance. My last attempt to get that, Alex. So I think I'll leave that now. Thank you. You're welcome. Your final question comes from the line of Mark Swartzberg with Stifel Nicolaus. Thanks. Good morning, guys. Good morning. Good morning. Felipe, I guess two questions. One for Felipe and then on just the U. S. Volumes being up in the second half. But Felipe, it's really a follow on to Chris. Cash flow from ops was pretty similar to last year first half and yet the full year number last year was a lot larger than what you would take from simply multiplying the first half by 2. It sounds like what you're saying between the working capital comments, the EBITDA accelerating, is it fair to think you'll have a rather significant free cash flow or cash flow from operations increase in the second half? Yes. That is correct. Okay. Great. And then on North America volume, up can you talk a little bit more about why up? In other words, are you planning to take distributor inventories up? Or are you saying you think your sales to retailers are going to get back to growth again in the second half? No, Marc. What we're saying this is Brito here. What we're saying is that because STRs and STWs for the year tend to converge and STWs are is now behind STRs for the first half. But in the second half, the STRs the STWs should go should grow again. So it converges at the end of the year. So that's basically the rationale behind it. So no intended increase in distributor inventories? No, no, no, no. It's just the STRs are on positive trends. The STWs are behind STRs. So they need to grow in the second half to catch up. So we have full 12 months pretty much balanced and converging both STWs and STRs. Great. Thank you, guys. Thank you very much. That was our final question. I'd now like to turn the floor back over to Mr. Brito for any closing remarks. Okay. Thanks, Jackie. Thank you everybody for participating. Again, tough quarter, soft volumes, but we're very confident in the momentum we have in our top three markets, U. S, Brazil and China and we look forward to a stronger second half compared to the first half in terms of EBITDA growth performance. So see you next quarter. Have a nice day. Thank you. Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time and have a wonderful day.