Anheuser-Busch Inbev SA (BUD) 2016 Q2 法說會逐字稿

Welcome to the Anheuser-Busch InBev second-quarter 2016 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.

(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 March 14, 2016.

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

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

Sir, you may begin.

Thank you, Jackie, and good morning, good afternoon, everyone, and welcome to our 2016 second-quarter results conference call.

I'm here with Graham Staley, as Felipe is not available today.

The purpose of today's call is to talk about those second-quarter results, but given the events of the past few days, I'll start by giving you a brief update on the status of the SABMiller transaction.

As I'm sure you can appreciate, it would not be appropriate for me to take any questions on this topic.

This week, we announced revised and final terms of our offer to SABMiller shareholders.

These new terms entitle each SABMiller shareholder to receive GBP45 per share, an increase of GBP1 over our offer in November.

Additionally, we respect the partial share alternative, which is available to all shareholders.

Each SABMiller shareholder that elects to receive that partial share alternative will receive a cash element of GBP4.6588.

The amount of restricted shares remains the same as our offer in November.

This offer is final and cannot be increased or otherwise changed.

We believe that the revised and final offer represents a compelling opportunity for all SABMiller shareholders and hope to receive the recommendation of the SABMiller Board for the cash consideration at the appropriate time.

SABMiller's two largest shareholders have undertaken to vote in favor of the transaction, as have the SABMiller Directors, with respect to their personal shareholders.

In recent weeks, we have made significant progress in obtaining the necessary regulatory clearance for the transaction, and this morning, we welcomed the conditional approval of China's Ministry of Commerce of the Company's proposed combination with SABMiller.

The Ministry of Commerce approval is a significant milestone for the transition.

Following previously announced clearances in the EU, South Africa, and United States, all of the pre-conditions to the proposed combination have now been satisfied and we have obtained approval in 23 jurisdictions to date.

We have worked in close collaboration with the SABMiller team since November.

We have made significant process with them on the regulatory process on bond financing and the disposals in the US, China, and Europe, as well as general integration planning.

It remains our objective to close the transaction in 2016.

With that, let's now turn to the highlights of our second quarter.

The second quarter saw another encouraging performance in the US, where consistent investment behind our brands is improving our market share trends, leading to the best share performance in almost three years.

Mexico also delivered strong growth, driven by a healthy economy and our own commercial initiatives.

The situation in Brazil remains very challenging.

We saw an improved second quarter in terms of both volumes and market share, although those improvement was not at the speed we had anticipated.

In China, while the industry remains under pressure, we saw good contribution from Budweiser after a difficult first quarter, coupled with further total market share gains.

Total revenue in the quarter grew by 4%, with revenue per hectoliter growing by 6.1% on a constant geographic basis, driven by our premiumization and revenue management initiatives.

Our global brands continued to deliver strong growth, with revenues up 8.4%.

Total volumes were down 1.7%, with our own beer volumes down 0.8%.

Volumes were significantly impacted by weak industry performances in Brazil and Argentina.

Our beer volumes in Brazil declined by 4.5% during the quarter, a good sequential improvement compared to the 10% decline in the first quarter.

EBITDA grew by 4.3%, with a margin increase in EBITDA margin to 37.1%.

The growth in EBITDA was driven by our top line and a good cost-of-sales performance, partially offset by the timing of our sales and marketing investments, which were weighted towards the first half of this year, in line with our guidance.

Normalized earnings per share were down $0.15 from the second quarter last year, at $1.06.

This was due to the higher net finance results and unfavorable currency translation, partly offset by the organic growth in EBITDA.

Our global brands continued to perform very well, delivering strong revenue growth, and driving the premiumization of our portfolio.

Revenues of our global brands grew by 8.4% in the quarter led by Corona, which saw revenue growth of 13%, driven by strong results in Mexico, the UK, and China.

Stella Artois revenues grew by over 9%, with good results from the US and Canada, while Budweiser revenues grew almost 6% on the back of strong performances in Brazil and the UK, and a return to solid growth in China after a difficult first quarter.

Let's now look deeper into each of the results of each of our top markets, starting with the US.

Industry volumes in the US were essentially flat in the second quarter, based on our estimates, and marginally up at the end of the first half.

Our own sales-to-retailers, STRs, were down 0.9%, leading to an estimated market share decline of approximately 35 bps.

This continues the improvement in our market share performance trend in recent quarters, a 30 basis point improvement compared to full-year 2015 and a 10 basis point improvement versus the first quarter.

Our sales-to-wholesalers, STWs, were up 0.5% in the quarter, ahead of STRs, as a result of adjustments to inventory levels in the normal course of business.

We continue to expect them to converge by the end of the year.

Total revenue was up 2.3% compared to the second quarter last year, with revenue per hectoliter up 1.8%, driven primarily by our revenue management initiatives, as well as positive brand mix.

EBITDA in the US grew by 4.8%, with margin expansion of almost a full percentage point to 40.9%.

This result was achieved through solid top-line growth, supported by a strong cost-of-sales performance, partially offset by the timing of sales and market investments.

Turning to the performance of our brands in the US.

The second quarter saw the full roll-out of Bud Light's new (inaudible) brand identity and refreshed packaging, as well as the continuation of our new Bud Light Party campaign.

Bud Light STRs declined by low single digits in the quarter, with an estimated total market share loss of approximately 40 bps, in line with the trend in the first quarter and last year.

While we still have a lot of work to do, our market trends are stable.

Consumers are responding positively to the theme of the new campaign, which brings lighthearted humor to significant current cultural topics.

Importantly, purchasing intent and key brand health attributes are up compared to the pre-Super Bowl launch.

Budweiser is experiencing its best performance in a decade.

STRs were down low single digits in the quarter, while market share was down only 15 bps based on our estimates.

We have adopted a consistent message and tone of voice built around the brand's quality and heritage credentials.

Budweiser aims to make the summer of 2016 the most patriotic summer ever with the launch of the America campaign and packaging.

The AB system is getting behind the brand and we aim to continue this improvement through the remainder of the year.

Michelob ULTRA remains the best-performing brand in the US, gaining more share than any other brand for the last five-consecutive quarters and with STRs up over 20% in the quarter.

Michelob ULTRA premium-plus position, low carbs and calories, and exceptional taste are powerful differentiators from the rest of the beer category.

We're investing big to support the continued acceleration of this brand.

In the remaining above-premium portfolio is Stella Artois, Goose Island, and our other craft partners led the way, with double-digit STR growth.

With this success, our high-end business unit consisting of craft and high-end imports, is gaining share within the US high-end segment.

Our near-beer portfolio is improving.

With the new campaign in innovation, declines in the Rita's Family have been significantly reduced.

Best Damn is also doing very well.

In addition to our great bands, we really stepped up our sales execution.

We're focusing our efforts where we can have the most success, including making our promotional dollars work even harder for us, especially around the major holidays.

Most importantly, we are more aligned and working well with our wholesalers who are delivering great results.

Our collaboration with the wholesaler panel on our three-year plan has also been especially helpful.

Moving on to Mexico.

Our Mexican business had another great quarter, with volumes up over 7%.

Revenue grew by 9.5%, with revenue per hectoliter up 2.1%.

EBITDA grew by 6.6% while EBITDA margin declined by 143 bps to 50.4% due to the timing of our sales and marketing investments.

It's now just over three years since we completed the combination with Grupo Modelo.

We're very pleased with the progress we have made and excited by the prospects for further growth and premiumization of our portfolio in the years ahead.

Our domestic brands in Mexico continue to perform well.

The Corona family grew volumes by mid single digits in the second quarter, supported by strong summer programs.

Victoria also performed well, with the continued success of its Mexican heritage campaign.

We continue to focus on the premiumization of the Modelo portfolio.

Our global and US brands continued to deliver strong growth.

These brands accounted for approximately 10% of our volumes in Mexico in the first half of the year, led by Bud Light.

Bud Light had another very strong quarter, resonating with LDA consumers, especially in the north, with volumes growing double digits.

We are also ramping up support for our global brands in Mexico and growth has accelerated for both Budweiser and Stella Artois.

Additionally, Michelob ULTRA more than doubled its volume year on year in Mexico.

Turning now to Brazil.

The trend of our beer volumes in Brazil in the second quarter showed improvement versus the first quarter, but not at the speed we anticipated.

Our total volumes declined by 4.7% in the second quarter, with beer volumes declining by 4.5%, much improved compared to the 10% decline in the first quarter, but not where we want it to be.

Soft drinks volumes were down 5.2%.

Our premium brands continue to perform well, with Budweiser, the leading premium brand in the country, growing volumes by double digits in both the second quarter and the year to date.

Although the Brazil beer market remains competitive, our market share trend improved versus the first quarter.

Brazil beer revenue per hectoliter increased by 6.9% in the quarter, reflecting our venue management initiatives, increase on distribution volumes and premium brand mix, partially offset by growth in our returnable glass bottle mix.

Growth of returnable-glass-bottles, or RGBs, is an important component of our affordability strategy, achieving an attractive consumer price point, while positively impacting profitability.

Brazil EBITDA declined by 2.8% in the quarter, while EBITDA margin contracted by 217 bps to 45.1%.

Given the results of the first six months, we are amending our net revenue guidance for Brazil.

Our previous guidance was for net revenue to grow by mid to high single digits in 2016; we now expect it to be flat with last year due to the weak consumer environment and increased mix of RGBs.

The consumer environment in Brazil remains challenging and uncertain.

As we have done many times before, we must therefore remain focused on what we can impact and influence, and this focus is reflected in our commercial platforms.

I'll talk more about the accelerated premium near-beer and shaping in-home consumption in a few minutes, but let me first cover the other two platforms.

Elevating our core brands remains a major priority in Brazil.

Our brands Skol, Brahma, and Antarctica remain healthy, with Skol enjoying especially strong consumer preference.

Regional festivals and events play a key role for brand activations.

To boost out-of-home consumption, we are increasing the number of coolers in the on-trade channel and driving further distribution of the 1 liter RGB.

Growth within the premium near-beer categories continues to be a significant opportunity.

Our complete portfolio approach enables us to continue leading this fast-growing segment.

Revenues and volumes of our premium brands, which include our global brands and our domestic specialty portfolio, grew double digits in the quarter, and we will continue to invest to drive this growth, building strong base for the long term.

In near-beer, volumes are also up double digits.

We're continuing to see growth from Skol Beats family and Brahman 0,0%.

The challenging economic situation is putting more pressure on consumers' disposable income.

Therefore, we are offering consumers affordable options to enjoy our products primarily through our RGBs.

RGBs continue to gain popularity for in-home consumption, with our volumes sold in supermarkets more than doubling in the first half of this year, and accelerating growth in the second quarter.

In summary, the second quarter was challenging in Brazil.

Nevertheless, we feel we have the brands, people, and right commercial strategy in place to manage through a challenging environment.

We have persevered through this condition before and we can and will do it again.

Moving now to China.

China beer industry volumes declined by 8% in the second quarter due to the continued economic headwinds, with most of the impact still being felt in the core and value segments.

Our volumes were down 2.3%, and as a result, we estimate we gained approximately 110 basis points of market share, reaching a level of 19.1% market share.

We continue to believe the core-plus premium and super-premium segments have the greatest long-term growth potential.

Our brands in these segment represent over one-half of our total China volumes, and they are well positioned, with strong brand health attributes.

Total revenues in China grew by 3.9,% with revenue per hectoliter growth of 6.3%, helped by positive brand mix.

This represents a solid improvement compared to the first quarter.

China EBITDA increased by 25.6%, with EBITDA margin expansion of well over 500 basis points to 32.1%.

Budweiser was a key contributor to China's financial results this quarter, growing by high single digits following a soft first quarter.

In Guangdong, where the industry remains under pressure, Budweiser returned to growth.

The best success this quarter was fueled by the Made for Music summer campaign.

I would now like to mention some highlights from other relevant markets.

Our business in Canada continues to perform well, although a weak industry in the quarter led to a low single-digit decline in our beer volumes.

We estimate the market share was stable.

Our own beer volumes in Europe were essentially flat in the quarter, with volumes in Western Europe up almost 5%, driven mainly by our performances in France, the UK, Spain, and Netherlands.

Net revenue in Europe was up 4.6%, driven mainly by the growth of our premium brands.

In the UK, volumes of our own products grew by high single digits, driven by the Budweiser EuroCup activations and continued growth of Corona.

Our beer volumes in Belgium were down mid single digits due to industry decline and some estimated market share loss.

While in Germany our own beer volumes grew by low single digits, driven by the good results from Beck's and Franziskaner.

Beer volumes in Russia were down mid single digits in the quarter, driven by a soft industry and some market share loss, partially offset by our premium brands' performances.

Latin America South beer volumes are down high single digits.

This was mainly driven by a weak consumer environment in Argentina.

In South Korea, beer volumes were flat in the quarter, although we estimate that we gained market share as a result of our very successful Cass freshness campaign.

Moving on now to below EBIT results.

Normalized earnings per share decreased to $1.06 from $1.21 per share in the second quarter last year.

As you can see from slide 23, normalized EPS, excluding the impact of unfavorable currency translation, the mark-to-market adjustment linked to the hedging of our share-based compensation programs, and the net cost of pre-funding of the SABMiller purchase price, decreased by $0.19 when compared to the same period last year.

This decrease is mainly due to net foreign exchange losses reported in other financial results in the second quarter, compared to the net foreign exchange gains in the second quarter of last year.

This was partially offset by increased EBIT.

Net finance costs in the quarter was $726 million compared to costs of $554 million in the second half last year.

This variance was driven primarily by the additional net interest expenses resulting from the bond issuances this year related to the pre-funding of the SABMiller combination.

Other financial results included favorable mark-to-market adjustment of $444 million linked to the hedging of our share-based payment programs, compared to a loss of $139 million in the second quarter of 2015.

Non-recurring net finance costs were almost $1.5 billion in the second quarter compared to only $60 million in the second quarter last year due to a number of factors.

Non-recurring net finance costs include a negative mark-to-market adjustment of almost $1.8 billion related to the portion of the foreign-exchange hedging of the purchase price of the proposed combination with SABMiller that does not qualify for hedge accounting under the IFRS rules.

At the end of June of this year, GBP46 billion of the purchase price of the proposed combination had been had hedged at an average dollar-sterling exchange rate of 1.5276.

The second-quarter result also includes a mark-to-market gain of $230 million resulting from the derivative instruments entered into to hedge the deferred share instrument issued in the transaction related to the combination with Grupo Modelo.

It also includes a mark-to-market gain of $168 million related to the derivative instruments entered to hedge part of the restricted shares to be issued in relation to the proposed combination with SABMiller.

Our normalized effective tax rate for the second quarter was 20.5%, up from 17.2% in the second quarter of 2015.

The normalized ETR was impacted by the pre-funding of the purchase price of the proposed combination with SABMiller for which no tax deduction has been reported.

Our guidance for the full-year 2016 remains in the 22% to 24% range.

As a reminder, this guidance excludes the impact of any future gains and losses related to the hedging of our share-based [themed] programs, as well as the impact of the proposed combination with SABMiller.

Our capital allocation objectives have not changed.

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

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

Deleveraging to around 2 times will be a priority following the completion of the combination with SABMiller.

M&A remains a core competency and we will always be ready to look at opportunities when and if they arise, subject to our strict financial discipline.

Surplus cash flow should be returned to shareholders.

Our goal is for dividends to be a growing flow, consistent with the non-cyclical nature of our business.

Dividend yield minus payout and free cash flow payout will remain references in determining the amount of our dividend payments.

With that, I'll hand it back to Jackie to begin the Q&A session.

But before we open the line for questions, let me please again remind you that it would not be appropriate for me to take any questions on the transaction itself.

Jackie, thank you.

(Operator Instructions)

Sanjeet Aujla, Credit Suisse.

Hey, Brito, can you shed a bit more light on the competitive dynamics in Brazil at the moment?

Also on the US?

Clearly, Bud Light you've had some big activations in Q2.

What's your initial assessments there?

What's working, what's not working, and do you plan to change anything?

Thanks.

Hi, Sanjeet.

The Brazil market has always been very competitive and today is no different.

Of course, we have an industry that's being pressured by what consumers are feeling given the economy, and we had to pass also prices, two prices, federal and state taxes, so that put more pressure.

The second quarter was better than the first quarter but not yet where it should be.

The pricing environment is I would say is the competitive pricing environment that we always had.

We have different dynamics when it comes to returnable bottles and the one-way package, and that's the big silver lining from this whole situation.

When you think about the macro consumer [under] pressure, the big silver lining that we invest in big time, because it helps in the short-term but it builds a brighter long-term, is the returnable glass bottles.

So if you heard me saying in the [off-trade], our returnable glass business has more than doubled in the first half of this year and continues to accelerate into the second half of the year.

That's very good because if you have been to Brazil lately, you would see up to a year ago, no glass returnable bottles in the off-trade, especially the big box stores.

Now they're back because consumers are looking for smart choices in terms of buying and when they buy the returnable glass bottles, they are buying the liquid of their preferred brand, not the package, not paying for the package.

That's something that is a proprietary bottle and that is something that builds a very good long-term.

That's a big silver lining that were trying to take advantage.

We're pressing the gas pedal and trying to get those returnable glass bottles back into the different channels, especially the off-trade.

On the other hand, the premium is growing.

Consumers are trading up, so that's great news and we have the brands.

We're leading the premium category.

We're growing double-digits and that's encouraging, so even in a weak economy, you do have consumers that are looking for that premium opportunity.

So that's Brazil.

In terms of the US, Bud Light, while we have still a lot of work to do on Bud Light, the share trend is stable but still negative.

Of course, what I can tell you, Sanjeet, is that consumers are responding positively to the theme of the Bud Light Party campaign and the roll-out, which is now completed, of the new Bud Light visual identity, which is much more contemporary and much more in tune with the LDA consumers.

So the purchase intent is up when you compare to before Super Bowl.

Super Bowl was launched the new VI, the new communication.

Brand health ratings on key attributes like helping make a good impression brings people together and I like the way this brand is going, the direction it's going, all up, and our system is very excited, which is very important for a brand like Bud Light the brand, that has 18% to 19% share in a very competitive market like the US.

So we're very encouraged by the Bud Light.

It hasn't yet reflected on a different share trend but we all know that brand health comes first and then share.

So we're not promising anything here, but we're very committed in investing behind the number one brand in the US, Bud Light.

Thank you.

Many thanks.

Caroline Levy, CLSA.

Thanks so much.

You did address Brazil somewhat already, Brito, but there's been some change in government, and I'm just wondering, from your perspective, which was a long one, on Brazil, if you could talk about the macros in a little bit more detail.

Then I'm wondering if you could also discuss on-premise trends in the US, which have been a big drag for the industry.

What are you seeing there?

In terms of Brazil, we've been doing business there, Caroline, for 27 years and net/net it has always been a great market for us.

So we continue to be bullish on Brazil, but we know that it's not a straight line up, but it's up.

But every five years or so, you have one or two years where things go sideways or backwards, but then that's when you have to take advantage and look for those silver linings.

So for example, the only way returnable glass bottles could ever go back to the off-trade in the big way it's going now is in a situation of crisis like today.

Because when times are good, consumers are not necessarily looking for that smart price point, and off-traders, they don't like to deal with returnables.

So that's a silver lining that we want to put the foot in the door, open the door, put the glass bottles in there, and that is a big play on margins.

So that's a big silver lining.

The fundamentals in Brazil remain the same: middle-class growing, the population young, lots of LDA coming to market ever year, and the regional differences we see at place in Brazil in per capita consumption is very pretty low.

Premium is growing, still from a very low base.

If you look at the reasons to believe, we have core brands that are very strong and that we still can do lots to grow those brands.

We have premiums, as I said before.

We have near beer, which is growing in Brazil very healthy.

We have the Beats family.

We have the 0,0%, Brahma 0,0%.

We have the in-home opportunity, again, where we're putting more and more returnable, again, because the off-trade has opened the door for returnables.

The out-of-home, beyond trade, 1-liter, we're putting a lot of emphasis on the 1 liter to attack the issue of affordability and also just operational excellence in general.

In tough times, we turned back to the things we can control and monitor and operational excellence has always been a hallmark of our Company.

So, again, we've been through tough times before, but it's a great time when some of our competitor sometimes take a pause, that we accelerate and do the things we need to do, because we've always been bullish and there are many reasons to believe on that, that I just mentioned.

That's Brazil.

But you're right, this year is going to be a tough one, and as the political macro situation gets cleared up, consumers, of course, will get more confident and go back to their normal behaviors.

If you look at the financial markets in Brazil, currency and stock markets and all that, they tend to signal that first and that's where they are at this point.

In terms of the US on-premise, it remains a channel that's a bit under pressure, but our performance has been -- we've been gaining share for the last 12 months in the on-premise.

We've been doing a lot to support our craft brands and high-end brands like Stella, because on-premise, for sure, for those brands is key to provide sampling, to provide premium experience, and to provide more penetration.

These brands still have a very low penetration compared to other brands, even high-end brands and that's a big opportunity for us in the on-trade, have a big role to play there.

So, that's the US on trade.

Our high-end business unit is very focused on providing those experiences in that on-trade location.

Thanks so much.

Thank you, Caroline.

Anthony Bucalo, HSBC.

Hello how are you?

Great, Tony.

Quick question on -- Brazil is the hot topic right now.

In terms of market share, it seems like InBev for years has hung back from going past 70% market share, and when you consider what's going on in Brazil, and the momentum you have with returnable bottles and with your super premium brands, do you think there will be a change in your attitude towards market share and do you think you might attempt to accumulate more than 70% market share considering the condition of some of your competitors?

Well, Tony, we've always worked with that range of 67% to 69% in terms of Nielsen metrics, What I can tell you is that because of the price increase that we implemented in the first quarters, and now coming back, we are below that range at this point, but not -- slightly below, so we intend to get back to range.

Just remember that three years ago, we were above 70%.

So there is no ceiling at 70%.

We've always said that 67% to 69% is where we feel things get optimized, but if you see an opportunity to go beyond the 70%, for sure we will take it.

Right now we're at slightly below the 67%, but the trend is positive to get back to that range.

So that's the range we've always used.

Right, but is gaining market share a top priority for you in Brazil or is it really just managing your mix through the macro crisis more than--?

In Brazil, the top priority is go top line and create value.

The market share, [right hand] management, all those things are parts of this bigger idea.

Of course, if we fall below 67%, we then re-jig the levers to get back to 67%, the range of 67% or 69%.

Then if we go to 69% and there is inflation pressure, then we pass that on to price and we go below again.

That has always been our mechanic in Brazil of trying to get the levers in harmony so as to create value.

The big thing in Brazil has always -- more than share when we think it's a great value, by having share under check in that range.

Great.

Thank you, Brito.

Thank you, Tony.

Trevor Stirling, Bernstein.

Two questions on my side, both relating to China.

The first one is, for me there's a bit of a disconnect between an economy that's growing, at least in official terms, around 6% and beer volumes down 8% and consistently weak for a couple of years now.

I was wondering if you can maybe give your perspectives on that disconnect?

And the same thing is, given that context with your own volumes down 2%, I was struck by 550 bps of margin expansions, incredible.

Is [that all done] under product mix or are there other things that are going on in China, as well?

Trevor, two very good points.

The economy in China, of course, decelerated, but we know it's still growing at 6%-plus, 6.6% in the second quarter, and grew 7% last year, so that's very strong.

But of course we all know that China, and the government, they say that, that they are trying to transform their economy from a manufacturing-led to more of a consumption-led, more service-led.

Then, of course, there's impact from channels, regions, and that is something that brewers are trying to figure out, what the new China will look like in terms of channels, regions, and consumer profile.

It is also true, to be fair, that the last two years, the summer in China has been very -- in the regions that are strong for beer, it has been very weak.

This year, it seems it's going to be a better summer.

But again, it's more structural, in the sense that we see some channels.

That's an opportunity for us, Trevor, to tell the truth, because when you look at the channels that are growing, for example, the restaurant channels in the high-end restaurants, for example, that is very good for our super-premium brands and we lead that category and we lead also the premium segment.

So the fact that our volume -- the fact that industry volume in China is negative, it's all on the core and value brands, or core and value segment brands, and that is where the negative is all.

If you look at the core-plus, premium, and super-premium, they are of course not growing at the same speed they were before, but they're still growing, and that's where we have most of our volume anyway.

But we still have 34% of our volumes in non- or below core-plus brands, so core and value.

That is why our volume is being impacted, not because of the core-plus brands of ours, premium or super-premium.

So that answers maybe both of your questions in that, yes, the economy is growing but there is a difference in how the economy is progressing.

That impacts consumer, channels, regions, and the traditional place for beer has had its stronghold is shifting a little bit and we're shifting with it, so our guys in China are very good at adapting very fast.

I will give you an example.

I'll give you an example.

This year, the beginning of the year in China was weak and normally this summer for Budweiser is not a very strong in terms of market activations.

That's not where we have most of the bulk of our activities.

We shifted this year.

Because of Chinese New Year is not as strong as we expected, we're putting more emphasis, the Budweiser way, during the summer and the results are coming very nicely.

That's what we need to do.

The super-premium company that we decided to start in China, with a different route to market and everything with Corona, Leffe, Hoegaarden, and Stella is also proving to be a very good decision that our guys made a two years ago there because as channels shift, we're in that channel shift with our super premium bands.

So we are capturing that.

But there is 34% of our volume that's still in core and value, going down fast, but that's what's dragging a little bit the volumes.

But if you look at the margins, that is where you see the mix improvement.

Very good.

Thank you, Brito.

And just the last sentence there.

If you think of our business in China for the past five years, we are always ahead of the curve in terms of sales and marketing investments.

Now, because of the scale, you see that sales and marketing are more in tune with everything else in the P&L, and that also is where margin starts to show up.

Great.

Thank you very much.

Thank you, Trevor.

Tristan van Strien, Deutsche Bank.

Good morning, afternoon, Brito.

First of all, congratulations on getting all the pre-approvals today, the pre-conditional approvals.

Two questions on the margins, please.

One in Mexico, you had a lot of sales and marketing investments.

Can you just remind us what they were in -- what those investments were for and do you expect that margin to reverse in H2?

And the second one, in Europe, you had a good premium mix and nice growth, but the margin declined so I'm trying to get a bit more understanding why you had a margin decline in that area?

Tristan, both of them have very similar explanations.

In Mexico, we had sales and marketing phasing that were more weighted toward the first half of the year.

That's in our press release and we had signaled to that, in terms of Company-wide, that would happen pretty much in all zones.

So that, of course, takes a toll on margin.

In Mexico, we also have the fact that Bud Light is growing so fast.

We have to bring Bud Light from the US into Mexico because we do not have enough capacity to produce Bud Light locally, and that of course also puts more strain on our logistics costs.

So that's something that will be relieved when we come up with a new brewery, the [Maya] brewery in the Yucatan Peninsula that should come towards the beginning of next year.

In Europe, you have some of the same thing.

Sales and marketing are more weighted towards the first half of the year, plus in Europe, because Corona is growing so fast, we also have some logistics that is impacting our logistics cost there.

But Europe is growing very well.

We're very happy that now, for the past two years, we've found a role for our European business in that it's all about the high-end and that's very good.

So I would say Mexico and Europe, sales and marketing weighted more towards the first half, and plus the import of Bud Light to Mexico, and Corona in Europe.

So those of the reasons.

Very clear.

Thank you.

Thank you.

Then again Europe is growing top line of 4.6% for the half year, so that's very, very good.

Mark Swartzberg, Stifel Nicolaus.

Good morning, Brito and everyone.

Brito, question on the US.

The category continues to be a little healthier than it was a few years ago.

And in addition to that, you're having some improvement in your own performance.

What do you think is going on with the category from a larger macroeconomic and beer-specific perspective?

And as you think about employment levels and other factors that contribute to the health of the category, how sustainable do you think this improved atmosphere is?

Well, Mark, it's hard to predict that, but we had in our guidance, we said that we expect better industry for the US this year, so that is in tune with our guidance.

Reasons for that are the economy -- of course, it could always be better, but it's been fine, unemployment is at its lowest level since the crisis in 2008, and inflation is down at 1% or so.

So there's growth in [real] earnings and that is important for the industry.

So, again, it's in light our guidance and, yes, it's a good thing to have because that helps the volume, of course.

What we see also is a continued trade up.

Consumers, if you look at retail sales, dollar retail sales, IRI, it's one of the healthier categories you have from all other categories.

It has been for many years since the crisis in 2008.

Great.

Thanks, Brito.

And in terms of our market share -- that was part of the question, as well -- we've been investing sales and marketing because it's the opportunity on the high-end, brands like Michelob ULTRA and Stella and craft portfolio.

We're also supporting Bud, Bud Light, so those of the things.

And you see that our trends in terms of market share, 35 bps loss is still a loss, but it's much better than the two years, any quarter.

You see that this half year in the US, we are growing top line, we're growing EBITDA, we're expanding margins in the US despite growing sales and marketing by 18% to 20%.

The beer revenue per hectoliter grew 1.8% in this quarter, so there's a lot of talk of discounting and all that in the marketplace.

We said last quarter that our discount dollars were the same, just being applied differently in ways that were new to the market, and I'm very happy to report that beer revenue per hectoliter is 1.8% up in the second quarter this year.

A quick follow-up on that, Brito.

As you said, better than some [years] out there and you cited the improvement in brand, Budweiser.

When you look at where you are for Bud Light in the larger portfolio, do you think that these tactical changes, if you will, with the emphasis on Budweiser, Bud Light, and Michelob ULTRA, are actually helping Bud Light specifically or are you just looking at it on a broader portfolio's perspective?

What's happening in our performance in the US big time is what our guys here led by Joao is doing together with the whole server system.

Joao came with a new mindset of winning together, of really working together with the panel, with the wholesalers, really listening to what their concerns are, to where the opportunities are.

As a Company, we decided two or three years ago to invest ahead of the curve in the US because we started to see some brands of ours that deserved more support.

So a lot has to do with the wholesaler alignment, the joint work that Joao and his team, Alex and Jorn, together with the wholesalers, look at the market, the opportunities, and the fact that we as a Company decided to invest, obviously, in our biggest market, the US market.

So it's all pointing in the right direction.

That's great.

Okay.

Thank you, Brito.

Pablo Zuanic, SIG.

Thank you.

Two questions.

Brito, can you comment on the relationship with Pepsi-Cola?

What I'm talking about here, how is the soft drinks business doing in South America, particularly Pepsi?

You have more flexibility in the contract now to terminate that relationship.

I want to understand, Pepsi has been struggling in South America and the region for a while.

Coke remains very strong.

I'd like to hear what's the state of that relationship?

And very, very briefly on China, you have only 19% market share, which of course, you are grateful it is in super and premium, and I didn't see that with numbers, but very below what you have in other markets.

Is there room there in the future [to look through] these transactions, like if you buy one of the Japanese companies, it would [stay the state of having things out].

I'm wondering, is there room, or in China, would you think that pretty much forget about M&A, [it's going to be a site for more M&A in China] and in tends to be more about just growing organically what you have?

Thanks.

Pablo, in terms of China, we're very happy with the business we have there.

We made -- AB, many years ago, made a decision to go high-end in China.

When we got together with them, 2008, we kept that very smart decision they made in China.

Today, we lead the premium segment in China, we lead the super-premium segment in China, and we're very well positioned in the core-plus segment.

That's where we put most of our investments and that's where the growth is coming from.

We're very happy with it because we see our business continuously gaining share, margin continuing to be accretive and to continue to go up, and it's very healthy and it's organic.

So very happy with the China business and very happy to be in the core-plus, premium, and super-premium segments.

It would make no sense for us to grow in the opposite direction, trying to add more core and value brands to our business.

In terms of Pepsi relationship, we've had a relationship with Pepsi for a long time.

We're very proud of our relationship we have with Pepsi, but it's true to say, in terms of the soft drinks business in Latin America, like the beer business, in LAN and LAS, it is suffering.

It's under pressure.

The same consumer that's been pressure for beer is being pressured for soft drinks.

In Brazil, real income is down, disposable income is down, inflation now is coming down but was up for the past few months.

In Argentina, the same thing.

In Argentina, the government is doing, in our view, all the right reforms and all the right moves, but the consumers, they are under pressure and their salary is going to be reviewed now in July.

That is when the negotiations for salary increase take place.

But before July, they were in an environment where inflation was almost close to 40% and their salary was still the salary from a year before.

So a very tough environment, and soft drinks tend to suffer as much as beer and sometimes even more than beer.

I don't know exactly the reasons, but that's the history in both countries, so again, not unlike beer, soft drink in both LAN and LAS, more specifically Brazil and Argentina.

Thanks.

Rob Ottenstein, Evercore ISI.

Great.

Thank you very much.

Brito, as we talk to a lot of your distributors in the US, as well as other industry observers and participants, there are two questions that we get a lot and I'd love to pass them by you.

A lot of people are mystified, I guess would be the right word, in terms of some of the pricing they've seen from Michelob ULTRA given how well the brand is doing and the premium image that the brand is supposed to have.

That's the first question on Michelob ULTRA.

The second one is, it appears, as you evolve the Bud Light image and come up with a brand identity, at least this year, there been a number of advertisements that have a social justice theme to them, if you will.

People want to know, I'd love to know, whether those sorts of social justice themes are just what you're doing this year or what you see as part of the new image for Bud Light going forward?

Thank you.

Robert, with Bud Light, I wouldn't say it's social justice, I would say it's more Bud Light going back to its roots, and being edgy and very in tune with contemporary cultural topics and relevant topics.

That's what it is.

That's how Bud Light was built.

Bud Light was built by not being afraid of tackling cultural, contemporary, relevant topics in a very Bud Light way of doing it.

We're back to that way of doing things.

That's totally -- if you go to and look at old communication from Bud Light in the last 20 years, you'll see that, that was always the theme there, to be really in tune with pop culture and relevant topics.

So no change there; we're just going back to what made the brand the biggest brand in the US.

In terms of Michelob ULTRA, there's no change.

This is a core-plus brand.

It's priced at 20%-plus compared to Bud and Bud Light so no change there.

What you saw was a promotion we did for a holiday period in which to get more ULTRA on lips, we joined that promotion with Bud and Bud Light just for three or four days, just to get penetration to move up.

Because what you see with Michelob ULTRA is that it's growing ahead a 20% volume-wise, but penetration is still very low.

Sometimes what you have to do in this beer consumer goods is you have to give people reason to buy it -- because it's always a risk to buy something you're not used to -- to have a reason to buy it and taste it, so they can have an opinion about it and maybe become consumers of that brand.

So let's not confuse a pricing policy that has been very consistent with some events that can be geared to drive penetration, experimentation, and be on lips type occasion or opportunity.

That's the difference I would drive there.

Fair concerns, but I would just drive the difference between what's the price policy and what's an event to get more penetration and more experimentation.

Perfect.

Thank you very much.

Very clear and helpful.

Okay.

You're welcome, Robert.

Brett Cooper, Consumer Edge Research.

Good morning.

On Mic ULTRA, I was just wondering, the strong growth that we're seeing here, how much of that cannibalizes Bud Light?

Is there any part of the chain where there's retailer, distributor, or the Company itself that is pushing on the hot brand at the expense of Bud Light?

Hi, Brett.

Cannibalization, we're not giving out those numbers, but the only thing I can say is that Michelob ULTRA sells at a higher price than Bud Light, and has a better margin, so even if there is some cannibalization, it's for a better result.

For example, if you look at our gross margin and I mentioned this in the past few calls, that for me is a great indicator of things ahead.

If you look at gross margin, it has progressed 1 percentage point every year since 2012.

It was a 66%, then 67%, 68%.

Last year, it was 68.7%.

This year, for the half-year, is at 61.2%.

So what that tells me is that the mix is progressing the right way, and even if there is some cannibalization, it's still creating value at the gross margin level, which is very good.

And we are reinvesting some of that gross margin back into the business and still having EBITDA growing this year.

So that's the virtual circle that you always want to have in a consumer goods company.

Great.

If I can follow up on a different topic of non-alcoholic beer, can you talk about the opportunities you see in some of your bigger markets?

Then if you were willing to talk about what you've seen with the non-alcoholic Budweiser in Canada?

I see that as a big opportunity.

We put out there 10-year commitment on our side of having 20% of our volume in 10 years checked, of course, every year, in non-alcohol and low alcohol beers.

This is a great opportunity, not only because there is a consumer trend there from some groups of consumers going to that direction, but also because our brands can extend in that domain.

If you look at some markets in Europe, for example, where the beer industry has declined, the segment that's growing the most, even in Brazil, that can also be said, is the low alcohol, no alcohol beer.

The profits are very interesting for those brands because the [ex size] is smaller because there is no alcohol or low alcohol.

So that's a very in tune with some trends out there.

Our brands can do it, our asset base can manufacture those beer brands, and it's something that can be very interesting in terms of enlarging the pie of consumers that connect and stay within our franchise.

So we're very committed to it.

Our target 20%, 10 years.

Today, our number 6%, so today we have 6% of our portfolio in non-alcohol, low alcohol beers, and we intend to get that to 20% in the next 10 years.

Bud Prohibition is being well received by consumers in Canada.

Of course, very early days, but our Canadian teams are being very creative.

It's amazing because it's a 0.0% product, you can go to parks and point of sales that beer would not go to.

It can go to a pizza place, it can go to a fast food place, it can go to many places because it is an adult soft drink at the end.

Perfect.

Thanks.

Thank you, Brett.

Edward Mundy, Jefferies.

Thanks for taking the question.

Two quick ones.

First of all, on Brazilian margins.

This year you've hedged on the dollar-exposed both parts of your Brazilian COGS at BRL3.21 to the dollar, which is pretty close to where spot is.

Are you able to comment on whether you've managed to capitalize on the recent strengthening of the Brazilian real in your hedging for next year 2017?

The second question is on Estrella Jalisco.

Are you able to comment on your ambition for this brand and what you might be doing differently relative to the Montejo launch?

On Estrella -- I will start with the second question.

Estrella Jalisco is a brand that started very well.

We rolled out Estrella Jalisco in the southwest region of the US.

Initial results have been very positive, especially in California, with a very strong rate of sales according to IRI, making it the second fastest trading 12-pack can and third fastest six-pack glass within Mexican imports in California, and now having a 1% share of total beer in California.

So, that's very encouraging.

Of course it's a brand that we just started, but those are the numbers that are out there, all public, so I'm just mentioning them.

Of course, you have some capacity constraints at the moment because, again, the Mexican supply capacity is being all taken by the growth we have in Mexico, by the growth Corona has worldwide in our system, and now by the growth we have with Mexican imports from us into the US markets.

That's why we're building a new brewery there in the Yucatan Peninsula.

We're very excited about Estrella Jalisco.

Let's see, early days, but some good signs, some good numbers to start with.

In terms of the Brazil-US hedge, I don't have the number in front of me, the BRL3.21or the BRL3.24 that is [staying] for 2016.

That's confirmed.

Last year was BRL2.31 for 2016 and we always hedge for 12 months.

That is our standard practice and the number for 2017 will be known toward the end of the year, not now.

Okay.

Thank you.

Thank you so much.

With that, I'd like to thank you all.

During the second quarter, we saw continued strong growth in Mexico, we saw encouraging trends in the US with particularly market share, and a good contribution from Budweiser in China, despite the very weak industry performance.

[Numbers] in Brazil were disappointing, but we will continue to work hard and remain focused on what we can impact and influence.

With regards the proposed combination with SABMiller, we have worked in close collaboration with the SABMiller team since November.

We have made significant progress with them on the regulatory process and bond financing and on the disposals in the US, China, and Europe, as well as general integration planning.

It remains our objective to close the transaction in 2016.

So I'd like to thank you all for joining the call and I would like to say enjoy the rest of the day.

All the best.

Thank you very much.

Thank you.

Thank you.

This does conclude today's teleconference and webcast.

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