Anheuser-Busch Inbev SA/NV (BUD) Q2 2011 Earnings Conference Call August 11, 2011 9:00 AM ET
Welcome to the Anheuser-Busch InBev second quarter 2011 earnings conference call and webcast. Hosting the call today from Anheuser-Busch InBev is Mr. Carlos Brito, Chief Executive Officer.
To access the slides accompanying today’s call, please visit Anheuser-Busch 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-20F filled with Securities and Exchange Commission on April 12th, 2011.
Anheuser-Busch InBev assumes no obligation to update any forward-looking information provided during the conference call.
It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may begin.
Well, thank you, Jackie. Good morning, good afternoon, everyone and thank you for joining our second quarter 2011 conference call and webcast. As usual, I’m joined here today by our CFO, Felipe Dutra.
So let’s get started. Today, we have reported solid results in the three-months ending June 2011, delivering EBITDA margin expansion and earnings growth.
In fact, we have now reported 11 consecutive quarters of year-over-year normalized EBITDA margin expansion since the combination Anheuser-Busch at the end of 2008.
We also continued to deliver strong cash flow results with cash flow from operating activities in the six months to June 2011 reaching more than $4.5 billion, a growth of almost 10% on a reported basis.
Our own beer volumes drove momentum after a slow first quarter, growing by 0.6%. As confirmed in our outlook, we expect this momentum to continue in the second half, especially the first quarter.
Our Focus Brands grew at even faster rates of 2.3%, with particularly strong performances from Budweiser, Harbin and Sedrin in China.
The performance of global Budweiser, U.S. volumes, plus international volumes was particularly impressive with grow of 2.5% in the quarter. We also announced a brand partnership of the FA Cup [ph] for the next three years, a property we will be able to leverage to support our soccer platforms in multiple countries.
Total revenue grew by 3.7% and by 3.4% on a per hectoliter basis, helped by disciplined field sales execution and the revenue management best practices.
Revenue per hectoliter grew by 4.4% on a constant geographic basis. The focus on revenue management coupled with continuous investment behind our brands should allow us to deliver revenue per hectoliter growth ahead of inflation on constant a geographic basis for the full year?
In United States, we estimate our market share decline by 50 basis point, mainly attributable to the sub-premium segment, while achieving good progress in Focus Brand performance. We gained and maintained share in Argentina, Belgium, Canada, China and Germany and made consistent progress in line with our brand and pricing strategies in Brazil, Russia and the U.K.
We increased our investment behind sales and marketing by 3.9% in the quarter and by 4.3% in the half year. This compares to a growth of 7.6% in the first half of last year, which included incremental spend related to the FIFA World Cup.
Our guidelines for growth and sales and marketing spend for the full-year remains at mid-to-high single digits.
Finally, EBITDA grew by 11.7% in normal terms and 6% organically, while EBITDA margin expanded by 83 basis points year over year to 37.7%.
I would now like look in a little more detail at our progress in the United States, Brazil and China.
In the US, we are all aware that high levels of unemployment remains the most serious challenge for the economy.
Although this clearly impacts our consumers and our business, it is outside of our control. We must have full focus on what we can control. We have confidence in our US strategy and we are putting all our efforts into its execution.
US industry volumes in the quarter were impacted by poor weather and gas prices. However, the quarter ended on a positive note, with industry enjoying better volumes during the 4th of July holiday period, with IRI reporting industry beer volumes up 1.4% in the four weeks to July 10th and the combined food, drug, mass, convenience channels.
Our shipments in the quarter declined 1.7% while STRs, sales through retailers declined by 3.4%.
As I mentioned earlier, we estimate the market share decline in the U.S. by approximately 50 basis points in the quarter. We gained share with Bud Light, Michelob Ultra in our high end portfolio. But as anticipated, we saw share loss in the sub-premium segment, as we continued to close the price gap, that’s premium.
We also saw share loss with Budweiser, but the rate of decline is decelerating quite rapidly.
Our revenue management results continued to be strong. Beer-only revenue per hectoliter grew by 3.6% in the quarter, driven by our September 2010 price increase, as well as improved mix which we estimate provided a benefit of 52 basis points.
As you know, our number one priority in the US is to accelerate the growth of Bud Light. The key brand health indicators for Bud Light continued to improve and we gained share in the quarter.
Budweiser and Bud Light are encouraging. We believe we can do better. With this in mind, we are excited to be the official and exclusive beer sponsor for the NFL. Our multi-year partnership began on April 1st and we look forward to leveraging our investment to connect Bud Light more closely with NFL fans.
NFL is about the fan, about action and it is about fans getting together. And as such, is perfectly aligned with the Bud Light brand.
Our goal is to bring consumers closer to some of the ultimate NFL’s fan experiences. We will be celebrating back to football with the Bud Light National Happy Hours in September to kick up the season and we will be launching new TV campaign coupled with the strong visitor platform to drive consumers to retail.
Additionally, at retail, consumers can expect to find new packaging and innovations, including limited edition team specific cans and packs with innovative functional benefits.
The stabilization of Budweiser in the U.S is also another major priority for us. And therefore, I am pleased to report that the brand has just delivered its best half year volume performance in 11 years.
As you know, the brand has been losing share for some time, but according to IRI combined grocery and convenience store data, the brand cut its share decline to 0.3 percentage points in June 2011 from a decline of 0.8 percentage points in June 2010 on the rolling 12-month basis.
Even more encouraging is the fact that share has been flat on a rolling 12-month basis since January 2011.
This is very encouraging results for Budweiser, but we still have more to do. So what have we done so far with Budweiser?
Since the third quarter of last year, we have been working hard in partnership with our wholesalers on the coordinated series of initiatives, most reasonably a system-wide execution focus from Memorial Day through the 4th of July.
During this period, we announced limited edition patriot can, the (inaudible) program and the National Happy Hour on Flag Day on June 14th, initiatives, which stimulated consumer sampling, awareness and reconnection with the brand. We are going to build on this momentum and last week, we announced a new global visual, brand identity for Budweiser. The refreshed packaging involves a new (inaudible) designed Budweiser can, as well as changes to aluminum bottle in all secondary packaging.
This fresh contemporary look is designed to appeal to new Budweiser consumers and drive the appraisal, and at the same time, reinforce Budweiser’s heritage among our current consumers. New packaging passed it extremely well and we believe we have a winner in our hands.
Next, I would like to address the high-end growth. We are making with the high end and have grown in this segment by a 4 percentage points since December 2010.
Working hand in hand with our wholesale partners, the sales team has added over a quarter of million new points of distributions in six months. A great effort, but we can still do better and we will.
High end sales to retailers, STRs were up 18.7% in the quarter and 16.5% in the half year. All of our major brands in this segment saw growth in the half year, with Stella Artois growing 22% and Shock Top over 76%.
Goose Island, our recent acquisition, grew by double digits in the quarter. And as the integration process continues, we are gaining valuable insights into the high-end segment.
Turning now to Brazil, Brazil has seen a slowdown in consumer spending this year, driven in part government policies to curb the risk in inflation after a strong GDP growth in 2010.
However, we firmly believe that this slowdown is temporary and we remain confident about the growth prospects for the country and our industry in the medium to long run.
Our constants is based upon the continuing growth of the C&D consumer classes of 7.5% real, 14% nominal, increase in the minimal wage which should be implemented in January 2012 and the economic growth that will be triggered as the company prepares for the FIFA World Cup in 2014 and the Olympics in 2016.
Beer brands in Brazil declined 2.6% in the quarter driven by difficult comps. You will recall that volumes grew 13.7% in the second quarter last year helped by the FIFA World Cup. This was on top of 7% growth in the second quarter of 2009.
Low growth in real disposable income this year is also impacting volumes. Although volumes were soft, we delivered a strong revenue performance, with beer revenue per hectoliter growing by 8.1% in the quarter driven by our price increases and a higher mix of direct distribution volume. Revenue per hectoliter grew 10% for the half.
As we have seen in previous years, we initially lost market share after we took pricing in the fourth quarter last year, increasing the gap, the price gap to competitors.
However, as expected, we have started to recover this loss and share has been growing sequentially since February of this year.
In fact, share reached – market share reached 69.3% in the month of June and we achieved our total highest second quarter share in the last ten years. This has been achieved through strong consumer preference for our brands, continued brand investment and disciplined sales execution.
EBITDA for the Latin American zone continues to be strong and grew by 10.3%, bringing the half year growth to 10.9%. EBITDA margin expanded by 234 basis points in this quarter.
Our approach for Brazil remain on track. Consumer preference for Focus Brands, Cobra [ph] and Antarctica continues to grow and remains more than 10 percentage points ahead of their combined market share, driven by consistent brand building investment.
Secondly innovation, our pipeline remains very strong. The last two years have demonstrated our ability to use innovation to lead and shape the existing industry and create a better industry for the future.
We have also demonstrated that innovation does not have to confined to liquid and package. For example, within our existing route to market model, we have been practicing new propositions involving both on premise and off premise.
Our third focus area in Brazil is the premium segment. This is a big opportunity for us since it is underdeveloped and represents only 5% of the industry. We have the right franchise to shape this segment and deliver long-term volume and margin growth. Stella Artois is now the fastest growing brand in premium, growing by almost 200% in the first half of this year, complementing our local brands Original and Bohemia.
Also some consumers in Brazil will be able to enjoy Budweiser with the launch planned for later this month.
Finally, regional growth. The Northeast continues to offer an opportunity for growth and we’re gaining share primarily led by Skol. We are also rolling out our liquid and package innovations across the country based on the consumer opportunity.
As I have said before, 2011 Brazil will be year focused more on the revenue management than volume. But we remain confident about growth prospects for the industry in the medium and long run.
Finally, China. China is an exciting and growing market for us with significant long-term volume and margin potential.
There is strong consumer demand for beer, especially premium brands and per capita consumption is growing.
Our beer volumes grew by 11.7% in the second quarter, with our Focus Brands, Budweiser, Harbin and Sedrin which account for approximately 70% of our volume growing by 21.3%. All three of these brands grew by double digits in the quarter. We successfully transitioned our local value brand portfolio volume into our Focus Brands over time. And as a result, we maintained market share in the quarter with good revenue per hectoliter growth.
In summary, we are very pleased with the progress we’re making in implementation of our strategy in China and in particular in the premium segment.
I would now like to hand over to Felipe to discuss the zone performances and the below EBIT line items in more detail. Felipe?
Thank you, Brito and hello, everyone. Let me start with North America. As Brito mentioned, shipment volumes in the US in the quarter declined 1.7%, while sale to retailers, STRs decreased 3.4%.
As you know, there will always be variations between shipments and STRs from quarter to quarter, but take it a year as a whole, absolute shipments and the STRs should be closely aligned.
In Canada, beer volumes fell 1% on the back of our soft industry. We saw flat share in the quarter and the share has been stable at around 41% level for the last 15 months.
Balancing volume and profitability is the priority in North America. And in the second quarter, we grew the EBITDA margin in the zone by 66 basis points to 43.3%. Our performance, well ahead of our main competitors.
In doing so, we delivered $70 million of (inaudible) integration and synergies of $145 million in the half year and remain track to deliver at least our committed quarter billion dollars on a cumulative basis this year.
Latin America North, beer volumes were down 2% and soft drinks grew 1.9%. Brito has already commented on our volume performance in Brazil and that on prior year comps. So that did – that grew 10.3% in the quarter and margin expanded by 234 basis points to 46.2%, with revenue growth and lower admin expenses more than offsetting higher input costs and distribution expenses.
In Latin America South, saw our total volumes decline by 0.2% in the quarter with beer volumes up 2.9%.
Argentina grew volumes by 4.5%, and we gained market share with Stella Artois growing double digits. EBITDA in the zone grew over 20% in the quarter.
In Western Europe, own beer volumes declined 1.6% in the quarter, with all countries in the zone gaining or maintaining market share, with the exception of the UK, which faced difficult comparables due to the FIFA World Cup in 2010. Total volumes declined 4.3% driven by determination of legacy commercial product contracts, which delivered an immaterial EBITDA contribution.
Our beer volumes in Belgium grew 3.2%, driven by good weather and the rollout of a number of innovations. Germany enjoyed a very strong quarter with own beer volumes growing 9.9% driven by good Focus Brand performance, share gains, new product launches, line expansions, favorable weather and the relisting of our products by an important off-trade customer.
Our beer volumes in the UK declined by 16% in the quarter against our tough comparable of over 18% growth and that was doubling of Budweiser volumes driven by the work done.
The second quarter also saw the successful launch of Stella Artois which we believe is on track to become one of the UK’s most successful new product launches in any consumer product category.
EBITDA in the zone grew by 1.7%, with margin expansion of 278 basis points. Central and Eastern Europe volumes declined 3.1% in the quarter. Russian beer volumes declined 6% to soft drink industry as well as market share loss in the so-called low price segment, a segment we have chosen to deemphasize as we focus on the (inaudible) of our portfolio.
Looking at the first half of 2011 as whole, we lost 20 basis points of market share in volume terms while gaining 60 basis points of share in value terms growing from 15.7% to 16.3%.
Ukraine beer volumes grew 1.2% helped by new digital media on trade programs and Trinity lager line expense.
EBITDA in the zone declined by 19.8% due to higher commodity costs, higher transport tariffs and the right distribution leading to higher distribution expenses, but that should not be viewed as a proxy for the remaining of the year.
Last, but not least, Asia Pacific. Second quarter volumes rose 12.1%. In China, as Brito confirmed, our beer volumes grew by 11.7% with Focus Brands growing by over 20%.
Zone EBITDA increased over 50% in the quarter driven by revenue growth and improved brand mix, partially offset by higher cost of sales and distribution expenses. There were also favorable sales and market being comparisons due to incremental investments in 2010 related to the work done.
Before moving to below EBIT line items, I would just like to reconfirm our previous guidance of that in 2011 we expect the consolidated cost of sales per hectoliter to increase by low single digits on a constant geographic basis and for distribution expenses to increase by mid-single digits.
In the half year, we generated over $4.5 billion in cash from operating activities and the seasonality of our business should result in even stronger cash flow generation in the second half, positively impacting the timing of debt paid down and therefore, interest expenses.
We are also continuing to have to drive our commercial innovation pipeline and in building capacities to meet demand in growth markets such as Brazil and China.
We have previously guided full-year 2011 net CapEx of between $2.7 and $2.9 billion. However, we are revising this guidance to approximately $3.1 billion due primarily to foreign exchange fluctuations mainly depreciation of the Brazilian reais, euro and Chinese won against the U.S dollars.
Turning now to the below EBIT line items. Our net interest expense continues to decline year over year as we reduce our (inaudible) level and manage our average.
With regard to net debt evolution, it is important to point out that approximately 37% of our debt is denominated in (inaudible) other than U.S dollars, mainly the Brazilian reais and the euro.
The weakening of the U.S dollars in relation to these currencies in the half year negatively impacted the absolute level of our debt and therefore our interest expense, although the movements in action rates have a positive effect on reported EBITDA.
In summary, we remain fully committed to the leveraging and expect to reach net debt EBITDA ratio of below 2.5 times by the end of 2011 as we progress towards reaching out target of two times during the course of 2012.
I would also like to confirm our expectations for the average coupon and our net debt for the full year between 6% and 6.5%.
Other financial results show an adverse variance of $487 million compared to the second quarter last year, and this is due to the booking in 2010 of favorable market to market adjustments on derivative contracts.
Our normalized effective tax rate excluding the effect of non-recurring items dropped to 19.8% versus 25.4% in the same quarter last year. This decrease is due to approximate shift to countries with lower marginal tax rates, incremental income tax benefits in Brazil and favorable outcomes on tax claims.
While we continue to expect the rate to be in the range of 25% to 27% in the long run, we expect the result to be below 25% in the full year 2011.
Finally, our normalized earnings per share for the quarter grew by over 11% to over $1 from $0.90. That concludes our comments for today and we would like to open up the lines for the Q&A. Operator, Jackie, if you could please.