Investor Update

Feb 14, 2013

Slides

Good day, ladies and gentlemen, and welcome to the AB InBev Investor Call. Anheuser Busch InBev and Constellation Brands announce revised agreement. The presentation is also available on the AB InBev website, www.abinbev.com. Hosting the call today are AB InBev Chief Executive Officer, Carlos Brito and AB InBev Chief Financial Officer, Felipe Dutra. Please remember to review the forward looking statements at the beginning of the presentation. At this time, all participants are in listen only mode and later we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to AB InBev's CEO, Carlos Brito. Please proceed. Well, thank you. Good morning, good afternoon, everyone, and thank you for joining Felipe, our CFO and me on today's call. On June 29, 2012, we announced our proposed combination with Grupo Modelo, which involved acquiring the 50% stake in Grupo Modelo, which we do not already own. At the same time, we announced that we had agreed to sell Grupo Modelo's 50% interest in Crown to Constellation Brands for $1,850,000,000 Our interest in Grupo Modelo has always been about the opportunity for growth in the Mexican domestic market and in making corona more global in all markets, excluding the U. S. That's why today, we're pleased to announce a revised agreement between AB InBev and Constellation Brands that includes a complete divestiture of the U. S. Business of Grupo Modelo, giving Crown imports independence of supply and rights in perpetuity to the Modelo brands distributed by Crown in the U. S. This revised agreement preserves the merits of the Modilla transaction and allows us to move expeditiously to the Modilla integration process, allowing us to capture significant cost synergies. Under the revised agreement, Crown would have all the responsibilities of a brewer and a state of the art facility to support its growth. Crown would also be granted a perpetual license for the Modelo brands distributed by Crown in the U. S. With exclusive rights to the brands and the freedom to develop brand extensions and innovations for the U. S. Market subject to trademark and quality protections consistent with the global brand manual. Under the previous agreement, AB and BAB had the right exercisable every 10 years, but not the obligation to terminate the importer agreement with Crown. That provision has been removed in the revised agreement. In addition to the perpetual license, the agreement includes the sale of the Piedras Negras Brewery to Constellation Brands a total price of $2,900,000,000 subject to post closing adjustment. The brewery began operations in 2010 and produces Corona, Corona Light and Modelo Speciale with the current capacity of 10,000,000 hectoliters. Constellation will put in place plans to increase the brewery's capacity to 15,000,000 hectoliter over the course of the next 2 years, which is more than enough to meet expected U. S. Demand at that time with the flexibility to further increase capacity to 30,000,000 hectoliters. The sale of Piras Negres will ensure independence of brewing and supply for Crown as well as providing it with complete control Modelo Brands distributed by Crown in the U. S. Market. To ensure the smooth transition to Constellation, AB InBev and Constellation Brands will enter into a 3 year transition service agreement. We believe the new agreement keeps intact the strategic rationale of our transaction with Grupo Modelo, while addressing all the concerns raised by the U. S. Department of Justice in its lawsuit. There will be no doubt about Constellation's ability and incentive to remain an independent competitor in the U. S. Market. Moving to Slide 3. The terms between AB InBev and Group Modulo remain unchanged. This means that following resolution of the U. S. DOJ litigation regarding the transaction, Grupo Modelo's operating subsidiary, Beeblo, will merge into its parent Grupo Modelo. At the same time, DIFA, the glass company, will merge into Grupo Modelo in exchange for 103,000,000 newly issued Groupe Mobileo shares. As a result of these mergers, AB and AB will own 50 0.3% of Group Mobile's voting, shares and economic interest. AB and BAB will then launch an all cash tender offer for all the outstanding group model shares it does not already own at a price of $9.15 a share for the total consideration of $20,100,000,000 AB InBev continues to have full financing in place for the mandatory tender offer. The transactions are subject to U. S. Clearance of AB InBev's acquisition of Grupo Mobile. Mexican and U. S. Regulatory approval will also be required for the new agreement with Constellation Brands and the sale of the Piedras Negras Brewery. On slide 4, you'll see an outline of the relationship between the various parties under the initially proposed transaction as well as the revised transaction. The sale of the Piedras Negras Brewery will ensure complete independence of brewing and supply for Crem and will provide it with control of the production in Mexico of Modelo's brands, which are distributed by Crown in the U. S. Market. Slide 5 contains a summary of the 3 year transition service agreement or TSA, which has been put in place to assist Constellation Brands in the transition of brewery operations. The services available under the TSA are at Constellation's election. Modelo will undertake to supply at Constellation's election any additional beer required by Crown, which cannot be produced at Piero's Niguez Brewery or which Constellation does not source from 3rd parties. This beer supply arrangement is valid for a period of 3 years with prices consistent with Modilla's current cost. Constellation has the option to extend this arrangement for up to an additional 2 1 year periods. Modillo will also supply relevant inputs for example bottles cans and malt consistent with the current group Modillo cost basis for up to 3 years. On-site management support formodillo is available for a period of up to 6 months, while other ongoing services such as finance, IT and admin services will be provided for up to 3 years under the TSA if required. Moving now to slide 6. Since the announcement of the combination with Groupe Mobile last year, we have been working diligently on our integration planning and reviewing our initial synergy forecasts. As a result of the more thorough analysis, we have been able to perform in reflecting the revised transaction structure, we believe that annual cost synergies phased in over 4 years will be approximately $1,000,000,000 up from the $600,000,000 estimate provided when the transaction was announced in June. The main drivers will be combined purchasing opportunities, sharing of best practices and efficiencies in overhead and system platform costs. In addition, the combined company expects to achieve significant revenue synergies through a further expansion of Corona sales worldwide excluding the U. S. By utilizing a global distribution network. One time working capital synergies of $500,000,000 delivered over 2 years remain unchanged from the estimate provided in June. I'd now like to hand over to Felipe, who will take you through the financials in more details starting on slide 7. Felipe? Thank you, Brito, and hello everyone. As a result of the revised agreement, we estimate that the Grupo Modelo business we will be acquiring would have revenues of $6,300,000,000 and EBITDA of $2,000,000,000 on a full 12 month 2013 illustrative basis. We estimate that combined AB in DAF and Grupo Modelo business would have revenues of 48 $1,000,000,000 and EBITDA of $18,400,000,000 on the same 2013 basis. Slide 8 summarizes the funds required for the transaction. The total consideration including the purchase of the 53 point 5% interest in DIFA will be $20,100,000,000 The net cash requirement to close the transaction is reduced to $12,900,000,000 as a result of the proceeds, which we received from the disposal of the 50% interest in crown of $1,850,000,000 the proceeds from the disposal of the Piedras Negras Brewery and perpetual brand licenses of $2,900,000,000 the equity reinvestment in AB InBev by 2 Modelo shareholders of 1 $500,000,000 the estimated cash balances in Modelo of $1,100,000,000 minus fees and transaction costs of $200,000,000 approximately. This net cash requirement will be met from our existing bank facilities. Now please turn to slide 9, which outlines our estimate of transaction multiple. Since the terms between AB InBev and Grupo Modelo are unchanged from those announced in June 2012, this multiple analysis has been prepared with the same 2012 EBITDA estimates and estimated Modelo cash balances used at the time of last year's announcement. You will recall that at that time our analysis estimated a transaction multiple of 12.9 times before the sale of the 50% interest in crown. The transaction enterprise value after the elimination of the 50% interest in crown, which Modelo does not own after the disposal of the 50% interest in crown, which Modelo does own and after the sale of Piedras Negres Brewery and Perpetro brand licenses is $25,600,000,000 The associated EBITDA including cost synergies is $2,800,000,000 which implies an enterprise value to EBITDA multiple of 9.3 times. We expect the transaction to be earnings accretive from year 1 and for the transaction's return on invested capital to exceed our cost of capital within 3 years of closing, driven by Modelo's strong organic growth outlook as well as the capture of synergies. The necessary financing to complete the transaction remains in place. And at the end of 2012, EBNBev had total liquidity between cash and long term committed facilities of over $35,000,000,000 I can also reconfirm that our target capital structure remains at 2 times net debt to EBITDA and that after the Modelo transaction, we expect to be below this level during the course of 2014. With that, I'd like to hand back to Birito to make a few comments before we go to the Q and A. Thank you, Roberto. Thank you, Felipe. In closing, I would like to remind you of the compelling strategic rationale for the combination with Grupo Movil. The combination is a natural next step in a long and successful partnership between 2 historic brewers. We know each other very well with Modelo reporting and distributing Budweiser and Bud Light in Mexico successfully for over 20 years. Mexico is a highly attractive beer market in which to invest based on solid macroeconomic fundamentals and favorable demographics. Combination also creates significant growth opportunities from combining our 2 brand portfolios and networks. Corona would join Budweiser as a global flagship brand with the strength of our product portfolios and distribution networks creating meaningful opportunities to grow our brands worldwide. Furthermore, we would unite Modelo's number one position in the world's 4th largest profit pool for beer with AB InBev's leading global position. And finally, we would create synergies from combined purchasing opportunities sharing our best practices and other efficiencies of $1,000,000,000 per annum phased over 4 years. During the last 7 months, we have had the chance to get to Nobodola business and the people much better. We're very pleased with what we see and we're excited about the growth we can achieve together. With that, I'd like now to turn back the call to the operator for Q and A. Thank you. And your line will be muted after your second question. Our first question will come from the line of Mark Swartzberg, Stifel Nicolaus. Good morning, gentlemen and congratulations. The supply agreement, I heard your comments, but I wanted to better understand them. This 3 year transition period where Constellation is buying the beer, the price consistent with Modelo's current cost, is that going to be in U. S. Dollars or pesos? And how does that current cost compare to what they've been buying beer at? Felipe? Hi. Well, this would apply for approximately 40% of the volume that is not currently produced by Piedras Negras and that's being consistent with the current basis and will be adjusted over time based on inflation. Therefore, the starting point is that they should be buying products at the current pace. And if the base is inflated over time, then the inflation will be applied on top. Okay. And this is a kind of 3 years contract. And that's you said that's in pesos or dollars? That is U. S. Dollars. U. S. Dollars. And then the 60% continues under the current arrangement? Well, the 60% they will be producing Impella Snickers directly. Right. Okay. So they're going to and how does that can you comment on how that kind of borne cost from a crown perspective, how that compares to the current contract? Well, we'll also be providing help in terms of sourcing of the key supply elements. And therefore, they should be incurring similar cost basis as they have today. Similar. Okay, great. And if I could real quick any thought on timing on how when the DOJ might come back on this? Well, it's very hard to speculate on timing, but we believe we're addressing all of their concerns, but we cannot speculate on timing at this stage. Your next question comes from the line of Chris Pitcher, Redburn. Good afternoon. Just following up on the funding for the transaction. You've obviously raised the debt in dollars. And at the time of the Modelo transaction, you mentioned that you were going to keep the debt in dollars because there were dollar cash flow coming out. And obviously, the cash dynamics of the acquisition has changed. Will you still be running with dollar debt? Or will you look to hedge some of that into pesos? And then on the remaining footprint ex Piedras Negras, I'm just wondering whether there's any additional CapEx requirements in the Modelo business above and beyond the original transaction parameters to compensate for the loss of the brewery? Thanks. Philippe will take the first one. I'll take the second one. Okay. Sorry, the first one was? Are you going to stick with just dollar debt or are you going to hedge dollar debt now in pesos? Okay. Okay. Okay. I was paying attention on the second question. The U. S. Dollar debt is going to be the primary source at this stage and we are going to evaluate over time whether or not to keep it in dollars or to reshuffle a bit across other currencies. But for now we are keeping dollars. And Chris on the second question on Modelo CapEx, I mean there'll be no need for us to on the Modelo side do any adjustment because you have to remember that Piedras Nega is totally dedicated to the U. S. Exports. So as we sell that capacity that doesn't affect really the domestic Mexican production or exports to the rest of the world. Thanks very much. Welcome. Your next question comes from the line of Anthony Broucalo, Santander. Good morning. Quick question related to Chris' question. When you start exporting Modelo out of Mexico into the sort of the broader international markets, Do you have the capacity to do that now in the system if you get a sort of big ramp up in Modelo volumes? And the second question is, did you at any point consider maybe shedding one of the sort of legacy Budd brands to lose a little bit of market share in exchange for being able to keep this brewery? Hi, Toni. First, I mean, in terms of export, we don't see any issues. I mean, it's business as usual for us in terms of Mexico domestic production and exports for the rest of the world. Again, Piedras Negras being sold that was solely dedicated to the U. S. Business. So that won't impact anything that Modilla had planned. Of course, they had planned for increased sales domestically and outside, but that was already in their CapEx planning. So that won't affect anything. And in terms of your second question, I'm not going to speculate on that. So today we're focused on the deal. That was the revised deal that as Felipe said we believe addresses all the points from the DOJ complaint and lawsuit. Great. Thanks so much. You're welcome. Next question comes from the line of Nick Oliver, Maryland. Hi, there. Thanks for the question. Just one follow-up to Chris' question on the financing. I'm not sure if you answered it. I think before you guided to a 2% cost of finance and highlighted the U. S. Dollar hedges as one of the reasons for that low cost. Should we still work off a 2% cost in our accretion modeling? And secondly on the synergies, clearly a higher number. Can you just confirm that's purely cost synergies and not factoring in any revenue synergies? And perhaps some help on the phasing as well? Thank you. Yes. Well, first of all, the cost of borrowing for this transaction is approximately 2% remains like that in U. S. Dollars. Synagis, we expect about 40% to 45% to be captured the cost of goods sold line and the balance meaning 55% to 60% on SG and A and those to be captured over the next 3 to 4 years. Okay. That's then. Very clear. Thank you. Thanks for your question. Your next question comes from the line of Trevor Stirling, Amford Bernstein. Hello, Felipe and Vitro, one quick question. There's about 4,000,000 hectares of Amrita's currently brewed for export in breweries other than Piedras Negras. As Piedras Negras ramps up, presumably that will leave a little bit of a hole in your capacity, But presumably that will be filled by growth in domestic volumes and export elsewhere? That's correct. Great. Thank you. You're welcome. Your next question will come from the line of Brett Cooper, Consumer question then. And your next question will come from the line of Ian Singleton. I'm sorry Ian Shackleton, Nomura. One moment. Yes. I'm on the line. Can you hear me? Yes. Yes. Two questions Felipe and Brito. When we talk about the synergies going to $1,000,000,000 is that taking account of any dis synergies that might arise as the 3 year transition services runs out? The first question. And the second question is really around Constellation. Are they able to sell Modelo products in any other market other than the U. S? Could they sell in Mexico or into other international markets? Well, the synergy number, Ian, is €1,000,000,000 net of any dis synergies. So, dis synergy number reflects this new revised deal with Constellation, okay? So it's net. 1,000,000,000 and that's only cost synergies. And the second question was that if they have ability to sell Grupo Modelo Brands outside of the U. S? Correct, yes. Yes. The answer is no. They can they have the perpetual license to the Grupo Modelo Brands that they currently sell in the U. S. Market along with line extensions and other innovations connected to those brands. But presumably they could brew another brand in Mexico not a current Modelo brand and export that to other markets, they could that with other brands? In principle, yes, but I think you should that's a question that they should deal with. Okay. Thank you very much. Welcome. Your next question will come from the line of Andrew Holland, SG. Yes. Hi. Just to could you just give us the revised depreciation and amortization charge that goes with the €2,000,000,000 EBITDA? So what is the EBIT? And secondly, you've magicked up $400,000,000 of additional synergies over the last 7 months of work. I'm sure we all wish we could do the same. Could you give us some concrete examples of where those extra cost savings are being found, please? Well, I think on the D and A question Andrew, Graham can follow-up with you after this call. On the extra synergies, I mean, quite simple. I mean the same thing happened with AV. I think when you announce the deal you have very limited information. You have only public information and benchmarks and all that. So in our experience having done this so many times and that's where the $600,000,000 was based. The $1,000,000,000 is based now on 6 to 7 months of working together with a selected group of people from both companies that were working in the integration planning. And as you do that and do the bottoms up analysis, you like we did with the AB in that deal, we came up with other opportunities that we couldn't see when we were looking at very consolidated figures at the beginning in June. So that's how we how you bridge the $600,000,000 to $1,000,000,000 Okay. So for example, you would have taken a view on how much Modelo might be paying for its cans, how much you might be able to save on that? And then you discover you can save more than that. Is that an example of that? Yes. I guess the best way Andrew to understand this is that again the same happened with the AB InBev transaction in 2008. Once you announce the transaction, you have the view of the public company type numbers and they tend to be very consolidated. And because you have experience and you're in the same business, you make assumptions and you get to the 600 number. After you work together with them under the guidelines of the integration planning process, you can do not a top down exercise, but this time a bottoms up exercise and be much more detailed and get to know the numbers much better. And then you come up with figures. And as with the MB AB transaction, this time around again, we were able to see stuff that we couldn't see before and the number went up from 600,000,000,000 to 1,000,000,000 dollars If you remember the ABKs it went up from $1,500,000,000 to $2,250,000,000 given the same process. Your next question will come from the line of Alice Longley, Buckingham Research. Hi, good morning. I gather you are going to be getting licensing fees from Constellation. Could you tell us what that rate is? And will they show up do they show up in SG and A or cost of goods sold? And also what happens to Modelo gross margins now that you're not shipping product to Constellation? Do the gross margins go up, down or whatever? Thanks. Felipe? Well, the first question regarding licensing As part of the purchase price of $2,900,000,000 they are not only paying for the assets, but paying for the expected net present value of the earnings those assets will be generated. Therefore, no future payment is expected other than potential price adjustment post closing. I think that was the first question. The second question on Modelo's margins, I don't have that number in front of me. So we will have to follow-up on a later stage. However, the amount of synergies to be captured should significantly drive margin expansion of the Modelo business over time. So that is where we are focused on. Thank you. Thank you. Your next question will come from the line of Chris Sippers, Petercam. Yes, good afternoon. Just a small question on the international part of Modelo now. Are you already working on the international licenses Modelo has with other players integration planning process guidelines, that's one thing that was not on the table. I mean, that has to do with commercial arrangements and that's off the table. So that will only happen once this transaction is cleared and closed. Okay. Thank you. Thank you. The next question will come from the line of Lauren Torres, HSBC. Good morning. Brito, I was hoping you could just shed a bit of light on coming to this decision of divesting the U. S. Business. It appeared that when the DOJ filed a lawsuit InBev's comment was that their claims were inconsistent with the law and that you'd refute those claims. So I'm just curious if there's any light you could shed on the fact that this was a business that you'd like to hold on to and that you may have refuted those claims rather than make the announcement today. Why did you push this fast or forward so fast, maybe rather than kind of repeating those claims? Well, Lauren, while we were confident for sure in our legal case and in the transaction we presented or proposed in June, we decided to restructure the transaction to address all of the concerns raised by the DOJ and its lawsuit of January 31. I can tell you we're very pleased to have reached this revised agreement that preserves the merits of the Modelo transaction which is about growth in Mexico and outside of the U. S. With the Corona global brand. So that rationale remains intact and while fully divesting the Modelo's U. S. Business in the U. S. So I think we decided to change it to address the DOJ concerns. These changes don't change at all. The core objectives of the Modelo transaction we announced in June, which is about exciting Mexican market and exciting global corona brand and its prospects for growth. I mean, if you look at what happened with Budweiser in the last 4 years on a global scale, that's what you see. Whenever you got a great brand to connect with a very established and wide footprint, things can happen and brands grow. And I think that's what we're excited about. So and we can't wait to get started. So that's the context for the revised transaction. Okay, great. Thank you. Thank you. This concludes the question and answer session for today's conference call. I would now like to turn the call back to Carlos Frito for any closing remarks. Well, thank you very much everybody for your time in a short notice. And we'll reconnect with you on February 27 for full year 2012 numbers announcements. Thank you very much. See you then. Bye. Have a nice day. And thank you again, ladies and gentlemen for your participation. This concludes today's conference call. You may now disconnect.