Anheuser-Busch Inbev SA (BUD) 2014 Q4 法說會逐字稿

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  • Operator

  • Welcome to the Anheuser-Busch InBev full year 2014 earnings conference call and webcast.

  • Hosting the call today from AB InBev is Mr. Carlos Brito, Chief Executive Officer.

  • To access the slides accompanying today's call, please visit AB InBev's website now at www.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.

  • (Operator instructions.)

  • 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 the 25th of March, 2014.

  • AB InBev assumes no obligation to update or revise any forward-looking statement information provided during the conference call and shall not be liable for any action taken in reliance upon such information.

  • It is now my pleasure to turn the floor over to Mr. Carlos Brito.

  • Sir, you may begin.

  • Carlos Brito - CEO

  • Thank you, Maria.

  • And good morning, good afternoon, everyone, and welcome to our 2014 full year results conference call.

  • Let's start with the highlights.

  • 2014 was another year of solid financial performance, with strong commercial results in most of our top markets and forward expansion of our focus and global brands.

  • Revenue and revenue per hectoliter growth were both very strong, allowing us to deliver good growth in EBITDA as well as EBITDA margin expansion, despite the considerable step up in investment behind our brands.

  • Turning to the detail of the results, total volumes for the year grew by 0.6%, with beer volumes up 0.5% and non-beer volume growing by 1.3%.

  • Our focus brands grew by 2.2%, with our global brands, Budweiser, Corona, and Stella Artois, growing by 5.4%.

  • Total revenue for the year grew by almost 6%, a very strong performance driven by revenue per hectoliter growth of 5.7% on the basis of the same geographic mix.

  • EBITDA for the year grew by 6.6% with our EBITDA margin up 25 basis points, finishing the year at 39.4%, while normalized earnings per share for the year was up 10.6% to $5.43.

  • The Board is proposing a final dividend of EUR2.00 per share, subject to shareholder approval at the AGM in April, bringing the total for fiscal year 2014 to EUR3.00 per share.

  • This represents an increase compared to 2013 of 46% in euros and 26% in dollars.

  • The Board has also approved a $1 billion share buyback program, which Felipe will discuss in more detail later.

  • We believe we have the strongest portfolio of brands in the industry, with 16 brands each generating over $1 billion in retail sales per year, and more in the making through successful innovations such as the Ritas.

  • Last year our 20 focus brands accounted for approximately two-thirds of our total volume and revenue.

  • This includes our three global brands, which accounted for around 19% of our volume and 20% of our revenue.

  • Our global brands are very complementary and give us opportunities to connect with a brand range of consumers across multiple geographies and consumption occasions.

  • Collectively, our global brands grew by 5.4% in 2014, well ahead of the growth of our total portfolio.

  • Budweiser grew by 5.9%, driven by double digit growth in China, a strong result in Brazil bolstered by the World Cup, and good results in Canada and the UK.

  • Corona grew by 5.8%, led by a strong performance in Mexico and good results in our major export markets.

  • This result was achieved despite significant product shortfalls during the summer months in 2014.

  • Stella Artois grew by 2.5%, with good growth in Brazil, Canada, and the US.

  • Our innovations play an important role in addressing changing consumer trends and preferences, and last year accounted for approximately 8% of our total revenues and included, for example, new flavors for the Ritas family in the US, the introduction of Cubanisto in the UK and France, and Skol Beats Senses in Brazil.

  • 2014 also saw the benefit of two major packaging innovations in the US, the new 25-ounce can and the 16-ounce reclosable aluminum bottle.

  • Both packages have exceeded our expectations.

  • Turning now to the performance in our top four markets starting with the US, the trend of industry sales to retailers, STRs, improved in 2014, declining by 0.6% by our estimates compared to a decline of 1.8% in 2013.

  • We expect industry volumes to continue to improve in 2015, helped by a stronger economy.

  • Our own STRs were down by 1.7% in 2014 and down 1.4% in the fourth quarter, with our sales to wholesalers, STWs, down 1.5% in the full year.

  • Our STWs will face a challenging comparable in the first quarter of 2015 as we cycle the inventory built ahead of union negotiations in early 2014.

  • As a result, we expect our STWs to decline mid single digits in the first quarter of this year.

  • We estimate our total market share declined by approximately 50 basis points in 2014.

  • This decline in share was driven mainly by Budweiser and the segment mix shift to the high-end, where we under index.

  • However, we estimate that Bud Light gained share of premium lights, we gained share with our above premium brands, and our value brands held share, helped by the 25-ounce can.

  • Our share trends also improved in the on-trade in the second half of the year.

  • While we are not satisfied with our share performance last year, we do believe that the investments we made to support our brands are paying off in terms of building brand equity and creating future growth opportunities.

  • US beer revenue per hectoliter growth remained solid, growing by 1.7% in the full year, with positive brand mix being offset by negative package mix.

  • As you may recall, the negative package mix was due to the new 25-ounce can, which is dilutive for revenue per hectoliter but accretive for gross margin.

  • Revenue per hectoliter growth in the fourth quarter improved to 2.1% as we cycled the introduction of this new can.

  • US EBITDA declined by 1.4% in the year, with a margin contraction of 72 basis points, mainly as the result of increased investment behind the long term growth of our brands.

  • Turning now to the performances of our brands in the US, Bud Light is the most important brand in our US portfolio and our number one focus.

  • In 2014, we launched a new campaign, Up for Whatever, which was designed to reengage with millennials and drive the relevance of Bud Light to their lifestyles.

  • We've very pleased with the results in the first year, which led to Bud Light gaining share of premium lights and losing just 20 basis points of total market share.

  • The Ritas family also continues to perform well, gaining 10 basis points of share during the year on the back of new flavor introductions and the Fiesta Forever campaign.

  • Another flavor, the Lemon-Ade-Rita, is being added in early 2015.

  • We also have taken the insights gained from the Ritas to create a new member of the Bud Light family, Bud Light MixxTail, introduced this month.

  • MixxTail will be available in three flavors and is a share of throat play.

  • Budweiser share remains under pressure, but the brand ended the year on a strong note, boosted by the new aluminum bottle and our holiday campaign, which resonated at retail and carried a strong quality and heritage message.

  • Once again, the brand's Super Bowl campaign was a great success, with our lost dog commercial taking first place in the 2015 Ad Meter rankings and creating massive buzz on social media.

  • Budweiser also struck a confident and bold new tone regarding the brand's quality credentials in our Brewed the Hard Way campaign, also launched during this year's Super Bowl.

  • Feedback from consumers on both campaigns has been positive.

  • In 2015, we'll reinforce the quality and craftsmanship messages, supported by strong programs involving food pairings, music, and the holidays.

  • Michelob Ultra and our other high-end brands, led by Stella Artois, Shock Top, and Goose Island, gained 40 basis points of total market share in both the fourth quarter and the full year.

  • Michelob Ultra is now the ninth largest brand in the US according to IRI, clear proof that even 12 years after introduction new brands with a unique positioning and consumer appeal can continue to grow.

  • Montejo is our first entry in the important Mexican import category.

  • The rollout has gone well and the brand is being extended to another eight states in 2015, making 12 in total, with new packages also being added to drive trial and distribution.

  • We have also added many exciting craft brands to our portfolio over the past 15 months, such as Blue Point, 10 Barrel, and Elysian Brewing.

  • We welcome our new colleagues' play to InBev, and we look forward to learning from them and growing together.

  • In summary, we remain optimistic about the US market and consumer environment.

  • An improving economy should help the industry return to growth.

  • Moving now to Mexico, Mexican beer industry volumes grew by 2.6% in 2014, driven by a stronger economy, and we expect growth to continue in 2015.

  • Our own volumes grew by 1.6% last year due to strong contributions from our focus brands, particularly Corona, Bud Light, and Victoria.

  • We saw some estimated share loss in the year driven by regional mix.

  • Industry growth was weaker in the central region where we have a higher market share, while growth was much stronger in the north where we have a lower, but growing, market share.

  • Revenue per hectoliter grew by 3.7% in the year due to our revenue management initiatives and a positive contribution from brand mix, driven by strong performance from Bud Light and Stella Artois.

  • EBITDA grew by 21%, with margin expansion of over 600 basis points.

  • As I mentioned, our focus brands in Mexico performed very well in 2014, growing by 5.6% collectively, with the Corona World Cup campaign, the relaunch of Bud Light, and a new Victoria campaign all making major contributions to volume growth.

  • We have also recently introduced the Bud Light Ritas in Mexico, taking advantage of the insights gained in the US.

  • The results are very encouraging.

  • The modernization of our Modelorama franchise was also a major initiative in 2014.

  • We have completely refreshed the majority of our outlets to better emphasize Corona branding and dramatically improve the shopping experience.

  • Finally, on Mexico cost synergies, by the end of 2014 we had delivered $730 million of cost synergies following the combination with Grupo Modelo, and have over delivered against our target of $500 million of working capital savings.

  • Cost synergies generated in the second half of 2014 were much lower than in the first half, being negatively impacted by the incremental costs associated with the higher than expected demand for Corona globally.

  • This incremental demand has required us to source glass bottles from external suppliers at a much higher cost than normal, which negatively impacts the timing of the synergy capture.

  • Nevertheless, we remain committed and on track to deliver the full $1 billion of cost savings by the end of 2016, with the vast majority being delivered by the end of this year.

  • Moving now to Brazil, beer industry volumes grew by 4.3% in the full year, boosted by the FIFA World Cup.

  • Our own beer volumes grew by 4.7% during the year, with non-beer volumes growing by 1.4%.

  • We estimate that our beer market share for the year increased by approximately 30 basis points to 68.2%.

  • Beer revenue per hectoliter grew by 6.2% in the full year, with a strong result in the fourth quarter of 9.8%, driven by our revenue management initiatives and increased weight of owned distribution and premium brand and package mix.

  • Finally, we delivered EBITDA growth of 5.7% in the year.

  • EBITDA margin contracted by almost 250 basis points, with a strong top line result being offset by an increase in sales and marketing investments related to the World Cup as well as the long term growth of our brands.

  • Our premium brands performed particularly well in 2014, growing by nearly 20% overall led by Budweiser, which grew by over 40%.

  • During the World Cup, Budweiser gained nearly 500 basis points of market share in premium, and retained nearly all of this gain after the tournament ended.

  • Original, Bohemia, and Stella Artois also grew by double digits last year.

  • We estimate that premium now represents around 8% of the market in Brazil, but still well below the size of the premium category in other markets around the world.

  • Although the macroeconomic environment in Brazil is challenging, we believe the underlying fundamentals for our business remain sound.

  • There are a number of factors, both internal and external, which continue to give us confidence for the future.

  • The demographics in Brazil are very favorable, with growth in the legal drinking age population expected to continue for at least the next 10 years.

  • Disparities also remain between personal income and beer consumption in many Brazilian states, with about a third of the population living in states that under index versus the national average on both of these metrics.

  • This is particularly relevant in the north and the northeast regions, where we have been building our business and where we still see further opportunity for expansions.

  • From an internal perspective, we have a great portfolio of brands, plenty of growth opportunities in premium, and a world class sales and distribution operation.

  • We also have a very strong performance driven culture.

  • Our team in Brazil has faced challenges in the past and has always delivered.

  • We expect nothing different going forward.

  • In summary, 2015 will be a challenging year in Brazil, but we will continue to focus on elevating our core brands through innovations and a complete 360 approach to sales and marketing, while providing affordability through our winning packaging initiatives and revenue management strategies.

  • We also expect premium brands to continue to be a source of profitable growth.

  • Moving now to China, Chinese beer industry volumes were down just over 4% in 2014 based on our estimates, with the main drivers being poor weather in the second half coupled with a soft economy.

  • However, our own business, which is more focused on the core plus and premium segments, performed much better than the industry, with total volumes up 1.6% in the year, and our focus brand volumes, led by Budweiser and Harbin, up 7.8%.

  • We estimate that we gained approximately 90 basis points of market share on an organic basis, reaching a level of 15.9%.

  • After including our recent acquisitions, our share reached 16.8% for the year.

  • Revenue per hectoliter continues to be strong, growing by 9.9% in the year, driven mainly by brand mix.

  • China EBITDA grew by 29% to over $700 million, with margin expansion of over 250 basis points to 18.5%.

  • These results represent a clear validation of our strategy in China.

  • As I mentioned, our China focus brands of Budweiser, Harbin, and Sedrin grew by almost 8% last year, with plenty of growth opportunities still remaining.

  • These three brands account for over 73% of our China beer volumes in 2014.

  • Budweiser grew by double digits last year and continues to lead in premium.

  • Harbin, including Harbin Ice, is our largest brand in China, and also grew by double digits last year.

  • With that, I would like now to hand over to Felipe, who will take you through some further details in our 2014 results.

  • Felipe?

  • Felipe Dutra - CFO

  • Thank you, Brito, and good morning, good afternoon, everyone.

  • Slide 22 shows the contribution of each of our zones to the total EBITDA performance in 2014.

  • Our total company EBITDA grew by almost $1.2 billion organically versus last year, or by 6.6% with a margin improvement of 25 basis points.

  • This result was achieved despite the step up in investment behind our brands during the year, as Brito highlighted.

  • So, since Brito focused on the four top markets in some detail, let's just move into the highlights of other relevant markets, starting from Argentina, where we continue to face tough economic challenges, but our team remains focused on what they can impact and influence.

  • Our beer volumes were down 1.7% in the year, with some beer market share lost due to competitive pressure.

  • However, we had a very successful introduction of our new cocktail brand, MixxTail Mojito, which is part of our strategy for share of throat.

  • Belgium had a good year on the back of a successful World Cup.

  • Volumes and share were both stable.

  • Our beer volumes in Canada were down 0.7% in the year, but we estimate that we grew share, led by our focus brands of Budweiser, Bud Light, Corona, and Stella Artois.

  • Germany continues to remain very price competitive.

  • Our volumes were down 3.4% in the year, although our focus brands, Beck's and Franziskaner, held share.

  • Volumes in South Korea came under pressure due to a weak industry and some share loss, but we have strong brand plans in place for 2015.

  • And finally the UK, which had its best year for some time despite an industry volume decline.

  • Our volumes were up 1.5%, led by Budweiser in particular, and good share gains in the off-premise by our estimates.

  • Moving to the below EBIT performance, normalized earnings per share in the full year grew by 10.6% to $5.43.

  • The increase is primarily driven by profit growth in our underlying business and the profit contribution from the combination with Grupo Modelo.

  • There was also a significant decrease in net finance costs of over $650 million year-over-year.

  • The decrease in net finance costs included a reduction in net interest expense of $85 million, mainly due to a lower average coupon.

  • Moving to 2015, we expect the average coupon on net debt to be in the range of 3.5% to 4%.

  • Other financial results also included within net finance costs were a positive $294 million in the year compared to a negative of $251 million in 2013.

  • This includes $711 million of net gains linked to the hedging of our share-based payment programs compared to $456 million in 2013.

  • Other financial results in 2014 also included currency gains, partially offset by the payment of bank fees and taxes in the normal course of business.

  • The normalized effective tax rate for the year was 18.8%, an increase from 16.6% in 2013.

  • This increase is mainly due to the changes in country profit mix, including the impact of our combinations with Grupo Modelo and Oriental Brewery.

  • Our normalized effective tax rate is expected to be in the range of 22% to 24% in 2015, between 22% and 25% from 2016 to 2018, and in the range of 25% to 27% thereafter.

  • The increasing effective tax rate over time is driven by lower deductibility of goodwill amortization in Brazil, country profit mix, and the assumption of zero future gains or losses on the hedging of our share-based payment programs.

  • Slide 27 shows that we continue to drive incremental improvements in core working capital, reaching an average level of negative 11% of net revenues in 2014.

  • 2014 was another year of robust cash flow generation despite significant currency headwinds, with cash flow from operating activities increasing to just over $14.1 billion and free cash flow, as defined, reaching $12.2 billion.

  • In fact, we have generated over $69 billion of free cash flow since the combination with Anheuser-Busch in 2009.

  • Our year-end net debt increased by $3.3 billion to $42.1 billion, mainly due to the acquisition of OB in South Korea in April 2014.

  • As a result, our net debt to EBITDA ratio was essentially flat at 2.27 times at the end of 2014.

  • Our capital allocation objectives remain unchanged.

  • Our first priority will always be to invest behind our brands and to take full advantage of the organic growth opportunities in our business.

  • M&A remains a core competence, and we will always be ready to look at opportunities when and if they arrive, provided that the target, the deal structure, and the acquisition price make sense.

  • We recognize the value of growing dividends over time, consistent with the low volatility nature of a noncyclical business.

  • Our goal is to reach a dividend yield between 3% to 4%, in line with other consumer goods companies.

  • Our optimal capital structure remains a net debt to EBITDA ratio of around 2 times.

  • Around this level, the return of cash to shareholders is expected to consist of both dividends and share buybacks.

  • Regarding dividends, the Board is proposing, subject to shareholder approval, a final dividend of EUR2.00 per share which, combined with the interim dividend of EUR1.00 per share which was paid in November last year, will lead to a total dividend payment for the fiscal year 2014 of EUR3.00 per share.

  • This represents an increase over 2013 of 46% in euros and 26% in dollars.

  • The 2014 dividend payout would be 65% compared with 58% last year.

  • If approved, the dividend will be payable as from May 6th.

  • The Board has also approved a share buyback program for an amount of $1 billion which will be conducted during the course of this year.

  • Our current intention is to use the shares acquired to fulfill our various share delivery commitments under the stock ownership plan.

  • The program will be executed under the powers granted at the General Meeting of Shareholders on April 30th, 2014.

  • With that, I will hand it back to Maria to begin the Q&A section.

  • Thank you.

  • Operator

  • Thank you.

  • (Operator instructions.) Edward Mundy, Nomura.

  • Edward Mundy - Analyst

  • Good morning, good afternoon, everyone.

  • The first question is to what extent you -- well, what are you seeing so far that gives you confidence that US beer volumes for the industry will continue to improve in 2015?

  • Carlos Brito - CEO

  • Hi, Edward.

  • I mean, firstly, think what the industry did volume wise in 2013.

  • It contracted by 1.8%.

  • Last year in 2014, it contracted by 0.6%.

  • And if you look at the macro situation, the economy in the US getting better, lower oil prices, unemployment stable to going down to falling, and then when you put all this together, that's what gives us confidence that the industry should continue to get better.

  • It's also interesting to say that, despite weak volume in recent years, the beer industry is one of the few categories in IRI that consistently delivered positive sales dollar growth at retail.

  • So, that's interesting to see as well.

  • But again, from 1.8% in 2013 to 0.6%, and again we also saw a sequential monthly improvement in 2014.

  • That, I think, was one of the tables we have in our presentation in the webcast that shows exactly that very clear trend.

  • Edward Mundy - Analyst

  • Very clear.

  • And just as a follow up, when you think about the rollout of Oculto and MixxTail, compared to your learnings from Bud Light Lime-A-Rita, I mean, are these products being produced in more than one brewery, or how quickly do you think these brands will achieve national distribution?

  • And do you feel that the opportunity is as large as the Ritas?

  • Carlos Brito - CEO

  • Well, Ritas opened up for us a whole different world, I mean, of total alcohol.

  • We used to be very focused on beer.

  • And with total alcohol type segmentation, the kind of Ritas opportunity, MixxTail, Oculto, started to show up.

  • So, we're very excited.

  • It's early days.

  • I mean, the wholesalers are just loading on both products.

  • And we'll start, of course, in a few breweries.

  • And then, depending on how successful and how fast it ramps up, we'll go to other breweries.

  • But, it's very exciting to be able to -- with this new segmentation model, to see how our brands can have permission to play in different categories and different volume pockets and profitability pockets and go grab them.

  • Edward Mundy - Analyst

  • Okay.

  • Thank you.

  • Carlos Brito - CEO

  • Thank you.

  • Operator

  • Mark Swartzberg, Stifel Financial.

  • Mark Swartzberg - Analyst

  • Thanks.

  • Good morning, gentlemen.

  • I have really two related question.

  • One is just the CapEx levels for 2015 for the total company is higher than I would have guessed.

  • So, could you just speak to what the investment priorities are including Brazil, where you've expanded capacity quite significantly in recent years?

  • That's question one, I supposed two parts.

  • But then simply, in Brazil, you're talking about the tax environment improving.

  • It sounds like there's been some progress there.

  • So, could you elaborate on that as well?

  • Carlos Brito - CEO

  • Yes.

  • Sure, Mark.

  • First on CapEx, I mean, I think the CapEx guideline we gave for next year just proves how confident we are in the opportunities we see ahead, I mean not only in terms of capacity but also more and more in terms of the consumer and commercial CapEx and innovations.

  • So, again, looking at total alcohol, looking at the global brands, looking at markets that we can penetrate now in an asset light fashion by having production -- for example, Corona.

  • We started with Corona on a global basis.

  • That's a good example.

  • All of a sudden we see ourselves investing more in Mexico for capacity, because Corona is doing very well in markets outside of Mexico.

  • So, that kind of thing is showing that, even in some tough macro environments, we have the brands that people want, that consumers want and are willing to pay a premium for.

  • And that's why we're investing for the future.

  • That's the first question.

  • The Brazilian tax environment --.

  • Mark Swartzberg - Analyst

  • Could you speak to Brazil specifically?

  • Capacity has gone up a lot there, yet from Ambev's release, they're talking about spending levels in line with calendar 2014.

  • So, could you just speak to that too?

  • Carlos Brito - CEO

  • In Brazil, what's happening is that, because of the macro environment, we've been investing a lot in commercial CapEx to get to affordability.

  • So, I mean, the whole strategy of adding new packs for returnable bottles and that you have to buy the bottles.

  • You have to introduce the bottles.

  • You have to adapt the lines or buy new lines, plus the coolers.

  • We still don't have full coverage of coolers, and coolers is very important for us to get coverage in regions where we are underrepresented, like the north and the northeast.

  • So, I mean, we continue to increase our direct distribution, which also is linked to CapEx.

  • So, I mean, you put all those things together, I mean, you get there.

  • And what we see in Brazil is that despite the macro, if you look at demographics, the fundamentals for our business are intact.

  • If you look at macro, if you look at the middle class, if you look at disparities between regions, if you look at affordability and what we need to do, if you look at innovations, if you look at the high-end, all these things require investment up front, but with very good margins.

  • So, that's why we feel excited and we continue to guide for this kind of level of CapEx going forward.

  • Mark Swartzberg - Analyst

  • That's great.

  • Carlos Brito - CEO

  • In terms of taxes, your second question for Brazil, we welcome the new model, as it breaks the trend of real tax increases in the past and consequently double, sometimes, digit price increases above inflation.

  • So, we welcome this system.

  • It's simpler.

  • It's more predictable and allows fiscal revenue to continue to grow.

  • And it also keeps some very interesting features of the older system which had to do with the flow meters.

  • So, I think it achieves many things.

  • It's a win-win system.

  • So, it kicks in now on May 1st, and there's no significant price increase or impact in volumes as a consequence of this new revised IPI federal tax law.

  • Mark Swartzberg - Analyst

  • That's great.

  • That's great.

  • And we know Felipe is an expert on these flow meters, so that must have helped too.

  • Carlos Brito - CEO

  • Exactly.

  • He's the father of his flow meters, yes.

  • Mark Swartzberg - Analyst

  • That's great.

  • Thank you, Brito.

  • Carlos Brito - CEO

  • Thank you.

  • Operator

  • Caroline Levy, CLSA.

  • Caroline Levy - Analyst

  • Good morning; a couple of things.

  • Could you comment on the pricing environment in the United States?

  • And you always look for price mix.

  • Do you think you'll be getting more from mix or more from rate this year?

  • Carlos Brito - CEO

  • Hi, Caroline.

  • Brito here.

  • I mean, we don't give guidance exactly on the breakout of price.

  • But, if you look at 2014, US beer only revenue per hectoliter grew by 1.7% during the year and 2.1% in the fourth quarter.

  • And so, that's pretty good.

  • So, we're very excited about the opportunity to grow the high-end in the US because that has to do with mix.

  • We're also very excited about some package innovation that sometimes are dilutive for net revenues, but they are accretive to gross profit or gross margin.

  • So, I mean, there are many things.

  • Now we have the business unit in the US for high-end which was built based on some learnings we had in Brazil for soft drinks, for example.

  • And again, pricing is just one component of this whole net revenue.

  • I mean, you have brand mix.

  • You have package mix.

  • You have region mix.

  • So, all those thing play a role in the net number.

  • So, again, very comfortable with where we are.

  • Caroline Levy - Analyst

  • Thank you.

  • And then, if you're running -- which I know you do.

  • You run longer term models.

  • At what point do you think that your high-end brands, in North America specifically here, can offset potential declines continuing in a brand like Budweiser?

  • Carlos Brito - CEO

  • Well, first, I mean, our -- well, commitment, let's be very clear, has been from the very beginning share stabilization.

  • We're not there yet, but we want to get to share stabilization in a profitable and sustainable way.

  • And that's why we're investing in the drivers to get there, okay?

  • So, for example, if you look at Budweiser, when we started in the US some years ago, the yearly share loss for Budweiser would be around 0.8%.

  • Now it's 0.3%.

  • So, you can say, okay, we're not there yet, but there is some progress.

  • Bud Light is the number one brand in a very fragmented, very competitive market, and gaining share within the premium lights.

  • So, that's another.

  • Without Bud and Bud Light, it's very hard to get to share stabilization.

  • On top of that, you have the investments we're doing in the on-trade.

  • Then you have Ultra also gaining share every year.

  • Then you have the high-end where we see lots of opportunity.

  • We're totally underrepresented in that segment, very profitable, growing double digits.

  • And now with this business unit and the investments and the brands and the people, we believe we have what it takes to accelerate the growth and get to more of a fair share on that segment.

  • So, those are the reasons to believe.

  • And that's why we are investing in the things we're investing, because we believe those are the things that will get us to share neutrality in the right profitable, sustainable way.

  • Caroline Levy - Analyst

  • Thanks so much.

  • Carlos Brito - CEO

  • Thanks, Caroline.

  • Operator

  • Trevor Stirling, Bernstein.

  • Trevor Stirling - Analyst

  • Thank you.

  • Brito, two questions on my side.

  • The first one is you highlight the craft beer acquisitions in the US.

  • I know you think you've made a craft acquisition in Brazil as well.

  • Do you think that's something that's just got more broader application in other countries apart from the US?

  • Carlos Brito - CEO

  • Well, Trevor, right now what we want as a market leader in both US and Brazil is to have a portfolio that appeals to our consumers in any occasion.

  • We want, as much as possible, our consumers to be able to stay within our franchise in occasions in each space that they have during the day, during the year, in different seasons.

  • And we felt in Brazil and in the US that we had to step up our efforts in the craft, be it with our own crafts like Bohemia in Brazil, like Shock Top in the US, but also acquiring some regional crafts that we could see had potential to be expanded outside of that one city or one state or one capital.

  • And that's the case with Goose Island, 10 Barrel, Blue Point, and Elysian, for example, or Wals in Brazil.

  • So, we're going to learn from our new partners.

  • And they also like to join us because they have a dream to change the world to make their brands more known to consumers.

  • And within our system, they will have the capability to accomplish that.

  • So, it's a win-win for both partners and, at the end, win-win to consumers and wholesalers.

  • Trevor Stirling - Analyst

  • Thank you, Brito.

  • My follow up question regards the US branch strategy.

  • When you're given the opportunity to acquire a branch, how do you weigh up the economic upside from the acquisition of that branch versus the potential for antagonism elsewhere inside the distribution network?

  • Carlos Brito - CEO

  • Yes.

  • I mean, we don't have a plan, quote-unquote, to acquire branches.

  • I mean, what we have is a consolidation idea, because that's happening everywhere in all sectors.

  • So, we know consolidation is going to happen.

  • And every time it happens, we look and see if there is an opportunity for us to own or if it's better to pass it along to one of the great operators we have.

  • So, it's a case by case.

  • There's no plan, and it's a very opportunistic type approach.

  • And you know the US is very regulated, so in some places we can own.

  • In some others, we cannot.

  • But, again, there's no plan to own.

  • What we want, and that's a very important question, is that our whole system -- our wholesaler system remains strong as they are.

  • We've always said since day one when we arrived in the US in 2009 that our wholesaler system is one of the main assets we have as a system in the US market.

  • They're not exclusive, but 90% of what they sell is our brands.

  • And they always support our initiatives as we support them.

  • We don't agree on everything, like in any commercial relationship, but we agree on the main things.

  • So, we want them to continue to perform well.

  • We exchange best practices.

  • And that's the main idea.

  • Ownership of branches is something secondary on a case by case basis, but the main idea is to make our system stronger and stronger.

  • Trevor Stirling - Analyst

  • Thank very much, Brito.

  • Carlos Brito - CEO

  • Thank you, Trevor.

  • Operator

  • Rob Ottenstein, Evercore.

  • Robert Ottenstein - Analyst

  • Great.

  • Thank you very much.

  • Brito, in your management comments, you mention that you're evolving your dream for the first time in, I guess, many years to include bringing people together.

  • And I'm just wondering what was the motivation for that.

  • Are there new actions or behaviors that you're looking to enforce with that?

  • Carlos Brito - CEO

  • Yes, Robert.

  • I mean, thanks for the question.

  • I mean, that's very important.

  • As you know, dream-people-culture is the pillars on which we built our company, and we take it very seriously.

  • What we saw is that the dream we had before, which has done wonders for our company in terms of getting people motivated and work hard and achieve things, which was to build -- because you never get there, but to build the best beer company in a better world, was one that had a lot of significance and relevance for our internal people, but not sometimes so relevant for the external people, our consumers and customers.

  • So, we did a lot of research, because when we change things we really mean it, as you might have heard.

  • And we decided that we exist -- one of the reason why people come to us, why they use our products, is when people get together.

  • So, this whole idea that we want to build the best beer company by doing what, by bringing people together for what, for a better world is what made sense of us at the end.

  • We did a big inventory of our activities, and we're changing some of our commercial codes to make sure that every time we sponsor something that people feel better about themselves and their lives after.

  • So, if they go a music festival, we want to do it in a very responsible way so when they leave they have great memories and they want to do it again, and neighborhood where the festival took place will welcome us again next year.

  • So, that's the idea, to really make an impact, a positive impact, in the communities that we live and serve so we can have a long term business as opposed to anything else.

  • So, that's the idea.

  • Robert Ottenstein - Analyst

  • Terrific.

  • Thank you very much.

  • Operator

  • Nik Oliver, Bank of America.

  • Nik Oliver - Analyst

  • Hi.

  • Thanks for the question.

  • Just coming back to the guidance for Brazil, and does the net revenue guidance assume any sort of positive contribution from volumes?

  • And I'm guessing price and mix is a key driver.

  • But, to reach the upper end of that guidance, would we need to see a positive volume contribution from Brazil?

  • Carlos Brito - CEO

  • Yes.

  • Nick, our guidance, as it was last year, 2014, for this year, 2015, is again on top line for Brazil.

  • And that's because, given the volatility of the last few years, we'd rather give a guidance on top line because then we have more flexibility in terms of volume and pricing and mix during the year, given different situations that might arise.

  • So, it's much better to have a top line guidance for Brazil, we feel.

  • And you're right.

  • It will always be a combination between volume and price and mix.

  • And what we're trying to achieve is an optimal balance between those things, as I think we did in 2014 when our net revenue increased at the higher range of our guidance, increased by 11.2% and with a more balanced growth between volume, which grew 4.7%, ahead of the industry, gaining share, and net revenue at 6.2%, so below inflation of the country, so I think a healthier balance.

  • And that's why talk top line guidance for Brazil.

  • Nik Oliver - Analyst

  • Okay.

  • That's very clear.

  • Thank you.

  • Carlos Brito - CEO

  • You're welcome.

  • Operator

  • Andrea Pistacchi, Citi.

  • Andrea Pistacchi - Analyst

  • Yes, hi.

  • Good morning.

  • Thanks for taking the question.

  • So, firstly on -- the first question is about a year and a half ago you started talking about potential for asset light entries into new markets.

  • Can you update us on where you are with this and how your thoughts may have evolved on this in the past year, year and a half?

  • And then, the second question is on Mexico.

  • You said you lost some share due to slower growth in the central regions where you're dominant.

  • What's -- why do you think the market grew less in the central regions?

  • Is it sort of disparity in the economic growth, or any other reason?

  • And have you held or grown share in your sort of stronghold regions?

  • Carlos Brito - CEO

  • Well, the asset light, I mean, it's a great idea because now we have global brands, and it's much easier to enter a market with an -- asset light when you have global brands.

  • Look at Australia where we have no asset.

  • Look at France and Italy.

  • We have no assets, and today they have sizeable EBITDA and sizeable growth.

  • In the old days, we used to enter markets discounting brands, because we had brands that had to be created from zero and had no awareness.

  • Today is a very different ballgame, and we can achieve profitability at a much lower volume in much faster time.

  • I'm not going to give you the details.

  • We have plans for this year to go to different markets, but that's competitive sensitive.

  • But, you'll see through the year -- I mean as the year progresses, you'll see more than two countries that we'll penetrate using the asset light model.

  • In Mexico what happened is that the north grew ahead of the center, where we have a higher share in the center.

  • In the north, we have a lower share but growing share.

  • We did a lot with Bud Light and with Modeloramas in the north, and I think the competitor did the same.

  • And therefore there was more activity maybe in the north, and there was also some weather patterns between north and center.

  • But, the fact is that the north grew ahead of the center.

  • And that caused, by means of mix, a share loss for us, slightly share loss for us, despite heavy and positive volume growth.

  • Andrea Pistacchi - Analyst

  • Okay.

  • Thanks.

  • Carlos Brito - CEO

  • Thank you, Andrea.

  • Operator

  • Simon Hales, Barclays.

  • Simon Hales - Analyst

  • Thank you.

  • Good morning, Felipe.

  • Good morning, Brito.

  • A couple of questions if I can, please, firstly just going back to maybe one of your earlier comments.

  • And I was a little bit surprised on the guidance around distribution costs and also the sales and marketing costs, just the extent that you're expecting those costs to rise this year.

  • I appreciate what you said earlier, Brito, around perhaps greater investment in the affordability strategy in Brazil on the sales and marketing side.

  • But, could you flesh out a little bit what's driven those assumptions for both of those areas of the cost base?

  • Carlos Brito - CEO

  • Well, again, during the year 2014, it was a marked increase by 11% organically, and that was mainly in our main markets.

  • So, we saw opportunities to invest more in the US to get to that -- to build to that share stability behind Bud Light, high-end, Ritas, Montejo, on-trade; in Brazil, FIFO World Cup, clearly; in APAC, FIFO World Cup but also Bud Supreme and the whole preparation for the Chinese New Year.

  • And we guide for this year, 2015, that we expect sales and marketing investments to grow by mid single to high single digits as we continue to see opportunities to invest behind our brands and global platforms because, again, connecting to the question before, if I want to do an asset light model, I need to continue to invest behind our brands on a global basis and innovation so when I do enter new markets those brands are known.

  • So, we're very excited about the prospects, and that's why we guided for that.

  • Distribution expenses for the fiscal year 2014 grew on a per hectoliter basis by 8.5%.

  • That was mainly driven by freight rates in the US.

  • We saw a tight market in the US.

  • Other companies, I think, saw the same type market.

  • There is today a big shortfall of drivers for long haul in the US, and also increased owned distribution in Brazil because we continue to acquire wholesalers in Brazil, and increased expenses in Mexico because you remember that I said that Corona grew way ahead of our assumptions, which caused us to buy very expensive raw materials because we had to buy outside, so bottles for example, at a much higher price, and also because we had to hire spot freight as opposed to contract freight.

  • In terms of the guidance we give for 2015, it's an increase organically by mid single digits, driven by owned distribution in Brazil that will continue to grow; premium development in Brazil because we have to -- we don't produce premium in all breweries in Brazil like the Ritas in the beginning in the US; China expansion, we'll continue to expand in China; and Bud Light growth in Mexico because we still have to bring a lot of the Bud Light that's double -- almost doubling last year and the year before in Mexico from the US.

  • So, those are the four drivers in the main countries for 2015 for distribution expenses.

  • Simon Hales - Analyst

  • Thank you.

  • And can I just have one quick follow up around just the Mexican cost savings as we look into 2015?

  • Obviously you said the second half of 2014 was held back by the glass issues.

  • Are we through those now?

  • Should we start to expect the rate of cost synergy delivery to accelerate in the first half of 2015, or is it going to be more backend loaded again this year in terms of those benefits coming through?

  • Carlos Brito - CEO

  • Well, this year in 2014, you're right.

  • I mean, we had more in the first half, less in the second half.

  • A lot of that was because of the price of bottles because we sold more Corona than we thought we would.

  • But, we are totally committed to deliver the $1 billion that we said we would.

  • And for next year --.

  • Felipe Dutra - CFO

  • 2015 is more back loaded than front loaded.

  • Carlos Brito - CEO

  • Back loaded because of comps, right?

  • You're going to have easier comps as we streamline the cost overrun that we had in Mexico.

  • So, it's going to be more back loaded in 2015.

  • Simon Hales - Analyst

  • Perfect.

  • Thank you ever so much.

  • Carlos Brito - CEO

  • You're welcome.

  • Operator

  • Andrew Holland, Societe Generale.

  • Andrew Holland - Analyst

  • Yes, hi.

  • Could I just ask on Korea, whether there is any great seasonality in that business?

  • Just looking this sort of scope change there, it looks as though the margin on the Korean business that you bought is a bit lower than it was when you acquired it.

  • Can you tell me if that is in fact the case?

  • Carlos Brito - CEO

  • In Korea, we're not yet displaying all the quarters, so it's kind of hard to talk about it at this point.

  • But, there is seasonality for sure because there is summer.

  • There is also a kind of a Chinese New Year in Korea, much smaller, but there is.

  • So, that also changes year-on-year.

  • And what we can say in Korea is that, since we closed the business on April 1st through December 31st, our volume was up 0.5% in terms of total volumes, okay?

  • Also, the scope that you referred to is not just Korea but also Ginsber and Dafuhao that we acquired in China.

  • So, that's that scope line for APAC.

  • Andrew Holland - Analyst

  • Okay.

  • That helps explain it.

  • The other question I've got -- well, more of a point, really, is just to observe that a lot of your competitors give quite helpful guidance on FX in their sort of outlook statements, and that's something you don't do.

  • I just wondered whether you could give any quantification of the FX impact that you expect at current rates in 2015, preferably on translation and any transaction that you can help us with.

  • Felipe Dutra - CFO

  • Hi, Felipe here.

  • The transactional risk is part of the risk management and is part of our cost of goods sold outlook for last year.

  • So, that was taken into account on the translation side.

  • As you may know, we do not hedge.

  • And then, the way to mitigate that is to have the breakdown of our outstanding debt very much matching the cash flow generation.

  • So, the more -- the detailed or more sensitive information on the FX is always relying on Brazilian reais transactional exposure.

  • And its -- last year the average embedded FX rate was around 2.2%.

  • For 2015, it is expected to be at 2.3%, which implies a kind of 5% increase year-over-year.

  • It's very hard to forecast the 2016 at this point, but anyway we know that the spot level is above this 2.3%.

  • Andrew Holland - Analyst

  • Okay.

  • Thank you.

  • Felipe Dutra - CFO

  • You're welcome.

  • Operator

  • Tristan Van Strien, Deutsche Bank.

  • Tristan Van Strien - Analyst

  • Good day, gentlemen.

  • Thank you for taking the question.

  • Just, sorry, a technical question for you on distribution.

  • In the US in your own branches, you're going to be losing both Corona and Monster, I believe, in the spring.

  • I just want to know what the profitability impact of that will be on the one line and, on the other line, what your compensation gain will be in the exceptionals for next year.

  • Carlos Brito - CEO

  • Well, then on Corona/Monster, the asset we may be losing in our branches, but that is -- in terms of impact for the overall company owned wholesalers, or WODs, as we call it, is minimum.

  • And it will provide us an amazing opportunity to focus on our own brands, which we think will be very well received.

  • So, since it's there, we're going to look at the silver lining, which is the enhanced focus that will provide.

  • And yes, we'll get compensation for both Monster -- I mean for Corona for sure.

  • That's in the contract, but -- and Monster too.

  • Felipe Dutra - CFO

  • But not disclosed.

  • Carlos Brito - CEO

  • We're not disclosing.

  • Tristan Van Strien - Analyst

  • Okay.

  • Well, there's some estimates out there saying you'll get about $130 million.

  • Carlos Brito - CEO

  • Well, we can't confirm -- this is a private contract that cannot be disclosed.

  • Tristan Van Strien - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Brett Cooper, Consumer Edge Research.

  • Brett Cooper - Analyst

  • Morning, guys.

  • You're talking about playing on the fringes of beer and total alcohol.

  • Historically we've seen less sustainability of brands in those segments relative to core beer, if you will.

  • Can you talk about whether you believe you can change that paradigm, and then what the implications are from both marketing spend and production?

  • Carlos Brito - CEO

  • Well, Brett, I mean, again, since two years we've been looking at total alcohol in terms of consumer segmentation and consumption occasions and need states.

  • And we saw pockets of volume and profitability that we were not tapping or accessing with our brands.

  • Then we did some consumer research and saw that some of our beer brands were so strong in some countries that consumers gave us permission to play in the blur of some categories.

  • We'll never be a vodka, for example, a straight vodka, but cocktails and mixed drinks, yes, and we're experimenting.

  • The beauty of it is that, first, it's close to our business in terms of manufacturing, not exactly the same of course, but close enough.

  • It has very good margins, and it has an incremental volume.

  • And so, for us, it's great because it adds -- it's accretive in all respects.

  • It brings some complexity, but it's some good complexity.

  • There are good and bad complexities.

  • This is good complexity in that, as we scaled them up and we made them global brands or national brands, then the efficiencies -- again, you regain efficiencies, for example, like the Ritas.

  • The Ritas we started in one brewery shipping all over the US, very expensive logistics.

  • Now we produce it pretty much everyplace, in all breweries.

  • And now the costs are down, the profitability is up, gained 0.1% share even after two or three years, and it's a sizeable product today in our portfolio.

  • And with the learnings, we came with MixxTail.

  • And with the learnings, we went with MixxTail to many other countries.

  • But, again, it's a different kind of product.

  • You need more flavors.

  • You need to be more active.

  • You need to change it more frequently.

  • But, for us, it's a good learning because it comes at a higher margin and a higher incrementality in terms of volume.

  • So, it's welcome.

  • Brett Cooper - Analyst

  • Thanks.

  • Carlos Brito - CEO

  • You're welcome.

  • Operator

  • Anthony Bucalo, Santander.

  • Tony Bucalo - Analyst

  • Hello, everybody.

  • Brito, about -- I guess it was about three years ago when you launched the Rita line in the US, you became sort of a victim of your own success and were caught a little bit unprepared on the cost side for distribution.

  • And it looks like we've kind of had that same thing happen with Corona this year in Mexico where you again were sort of a victim of your own success and had to go out into the market and buy more packaging.

  • Internally, are you looking at your sort of planning process and saying what are the learnings from these two events, and how can we avoid sort of falling into that trap again, for lack of a better term, again being a victim of your own success in the future?

  • Carlos Brito - CEO

  • Well, I think it's a good point.

  • I mean, it's a better problem to have than the reverse, but you're right.

  • I mean, that's no excuse.

  • We should get better at it.

  • And I think we keep -- sometimes we got surprised.

  • Not all innovations work.

  • Some work the other way.

  • But, the two you mentioned worked very well, not innovations but, I mean, Corona being now in our system.

  • So, for us it's new news.

  • And Rita is being launched, and I think we're preparing better.

  • So, MixxTail, we think we're preparing better.

  • But, again, you're right.

  • It's very hard to predict especially when you go into new categories or when you have a total new product like Corona.

  • And you have to remember Corona is not a new product in the markets.

  • But, for the first time, it's being distributed by a company that owns it as opposed to a company that had a contract for two or three years.

  • So, that made a difference that we didn't anticipate.

  • So, I think that -- it's something that we didn't quite have in our assumptions.

  • But, you're right.

  • No excuse; we have to get better.

  • All I can say is that it's better to have this problem than the other problem.

  • Tony Bucalo - Analyst

  • Where was that Corona going, if you don't mind me asking?

  • Was it going -- I mean, obviously it's not going to the US.

  • Where is it going exactly?

  • Carlos Brito - CEO

  • Oh, it's growing everywhere.

  • I mean, it's growing in the --.

  • Tony Bucalo - Analyst

  • No.

  • Where was the actual product going, Brito?

  • I mean, was it going to Brazil?

  • Was it going to Europe?

  • Was it --?

  • Carlos Brito - CEO

  • Well, if I understood your question correctly, I mean, Chile and Australia are two big markets, and they continue to grow.

  • And then, we tried -- we got the product in Canada.

  • We got it in the UK.

  • We started in Brazil.

  • We got the product back in Argentina and the whole of Europe.

  • So, I mean, all of a sudden you had all these countries that now are within our system trying to get the brand to the right places.

  • And now it's in China as well.

  • So, I mean, all those places, when you add -- plus Mexico.

  • Let's not forget that Mexico had the World Cup, an amazing promotion, and sales in Mexico of Corona last year, and I don't have the number in the top of my mind, but grew like 6% or more.

  • And that was not the case before.

  • So, you add that to the transition, you had all this explosion compared to what we had in the assumption, and therefore buying bottles outside at the much higher cost, having to buy freight on a spot basis.

  • So, I mean, again, a bit messy, but a mess in the good sense because of our growth.

  • Tony Bucalo - Analyst

  • Okay.

  • So, it was broad based.

  • It wasn't one particular market that was sucking up all the bottles then.

  • Carlos Brito - CEO

  • No, broad based, broad based.

  • Tony Bucalo - Analyst

  • Okay.

  • Thanks.

  • Carlos Brito - CEO

  • All right.

  • Okay, Tony, thank you very much.

  • And well, I'd like to thank you all for joining.

  • In summary, 2014 was another year of solid financial performance with strong commercial results in most of our top markets and further expansion of our focus and global brands.

  • Revenue and revenue per hectoliter grew, allowing us to deliver good growth in EBITDA as well as EBITDA margin expansion, despite the considerable step up in investment behind our brands.

  • So, thank you very much for your time.

  • Have a great day, and speak to you again on May 6th when we meet next.

  • Thank you very much; all the best.

  • Operator

  • Thank you.

  • This does conclude today's teleconference and webcast.

  • Please disconnect your lines at this time, and have a wonderful day.