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Anheuser-Busch InBev SA/NV (NYSE:BUD)

Q1 2013 Earnings Call

April 30, 2013 9:00 am ET

Executives

Carlos Alves de Brito - Chief Executive Officer and Member of Executive Board of Management

Felipe Dutra - Chief Financial Officer and Member of Executive Board of Management

Analysts

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

James Edwardes Jones - RBC Capital Markets, LLC, Research Division

Kris Kippers - Petercam S.A., Research Division

Anthony J. Bucalo - Grupo Santander, Research Division

Melissa Earlam - UBS Investment Bank, Research Division

Dirk Van Vlaanderen - Jefferies & Company, Inc., Research Division

Robert E. Ottenstein - ISI Group Inc., Research Division

Pablo E. Zuanic - Liberum Capital Limited, Research Division

Lauren Torres - HSBC, Research Division

Caroline S. Levy - CLSA Asia-Pacific Markets, Research Division

Operator

Welcome to the Anheuser-Busch InBev First Quarter 2013 Earnings Conference Call and Webcast. Hosting the call today from AB InBev is Mr. Carlos de 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 this 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 25, 2013. 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 de Brito. Sir, you may begin.

Carlos Alves de Brito

Well, thank you, Jackie, and good morning, good afternoon, everyone. Total revenue for the quarter grew by 1.5%, driven by strong revenue per hectoliter growth of 5.8%. U.S. revenue per hectoliter grew by 4%, including 150 basis points of favorable brand mix. Brazil delivered revenue per hectoliter growth of 8.6%, and China also saw a strong growth of 11.6%, mainly due to our premiumization strategy in China.

Total volumes declined by 4.1%, with beer volumes down 4%. Our 3 global brands grew by 4.7%, led by very strong performance by global Budweiser, while our Focus Brands volumes declined 2.9%. EBITDA grew by 0.9%, with EBITDA margin contracting by 22 basis points to 37.4%. Earnings per share grew by 12.6% to $1.16.

The volumes of our global brands Budweiser, Stella Artois and Beck's grew collectively by 4.7%. Global Budweiser led the way during the quarter, with very strong volume growth of 8.4%, while Stella Artois and Beck's were both impacted by weak market conditions. The growth in Budweiser is driven by excellent growth in China, as well as strong results from Russia and Brazil. In the U.S., share for the Budweiser brand family, including Budweiser Black Crown, was flat.

I'd now like to move on to our top 3 markets and dig deeper into the results, starting with Brazil. We estimate that Brazil beer industry volumes declined by approximately 7% in the quarter, with our own beer volumes down 8.2%. Our market share in the first quarter declined by approximately 90, 9-0, basis points to 68.1%, most explained by a tough comparable. Share was up 70 basis points in the first quarter last year, as well as our 2012 price increases. Nevertheless, we did see 20 basis points of sequential improvement in share compared to the fourth quarter of last year. Brazil beer revenue per hectoliter was strong in the quarter, growing by 8.6% due primarily to the carryover benefit of our 2012 price increases, as well as increased own distribution and positive premium brand mix. Consumer preference for our brands remains strong.

Volumes in Brazil in March, in particular, were more challenging than expected, with an estimated high-teen percentage decline in industry volumes during the month. Volume trends in April are much improved compared to March, with estimated industry volumes for the month down by mid-single digits. We believe the decline in industry volumes in the first quarter was due to the earlier timing of Carnival and poorer weather, both of which were flagged when we released our full year 2012 results at the end of February. However, we believe that consumption was also negatively impacted by high food inflation and a slowdown in the growth of disposable income.

In this environment, the fact that we were required to increase prices in real terms to offset the tax increase in October 2012 was also not helpful. We expect these factors to continue to put pressure on volumes in the short term. We're, therefore, revising our outlook for volume growth in Brazil and now expect that beer industry volumes in the full year 2013 will be either flat or down low single digits compared to last year. Consumers continue to be under short-term pressure, and so we have adjusted our commercial plans to leverage many of the market programs and pack price strategies that have been used so successfully to drive increased demand and expand consumption occasions in the past. We have also increased our focus on productivity and cost efficiency opportunities to further support our EBITDA performance.

We are maintaining our CapEx plans since these investments are key to supporting our commercial strategies. Additional capacity required for the rollout of the 300 ml returnable glass bottle and the expansion of Budweiser are just 2 examples.

It's our view that the fundamentals for the medium to long term in terms of industry growth in Brazil remain strong. In the short term, we continue to see potential for an improvement in the macroeconomic environment. The federal government continues to implement measures to stimulate the economy and has recently increased its focus behind counter-inflationary measures. Brazil will also be hosting the 2 most important sports events in the world in the coming years, the FIFA World Cup in 2014 and the Summer Olympics in 2016. Sports occasions represent approximately 25% of beer consumption, and we're confident that these events, especially the World Cup, will not only help the economy in general but also have a very positive effect on demand for beer. Beer consumptions in some regions, especially the North and the Northeast, is still below the national average, providing further growth opportunities, especially given the expansion of the middle class.

Finally, the premium segment in Brazil represents a major growth opportunity for us. Today, premium volumes represent only 5% of the total industry compared to global average of around 13%. Brazil is now becoming more and more interested in variety and choice, and we have the portfolio and pipeline of innovations to satisfy this demand. This includes not only innovations in liquids and packaging but also innovation around consumer occasions, as beer consumption remains very concentrated still around the weekends. We also see opportunities to expand returnables, especially in the off-trade channel. And so we'll continue to expand concepts such as the 300 ml and pit stops to keep returnables front and center of consumers' minds. In summary, a very tough quarter for Brazil, but we understand the drivers, we have action plans in place, and we remain optimistic about Brazil.

Moving to the U.S. As expected, volumes in the U.S. for the first quarter were impacted by a very tough weather comparable, as well as macro factors, including increased payroll taxes, delays in tax refunds and higher gasoline prices, all of which put significant pressure on consumer disposable income. As a consequence, we estimate that selling-day adjusted industry sales-to-retailers, STRs, declined by 3% in the quarter, while our own selling-day adjusted STRs declined by 4.1%. Shipments were down 5.2%, with the difference between our STRs and STWs being explained by one less selling day in the first quarter this year. We believe that weather played a significant role in the weak industry performance, with many parts of the country seeing negative temperature variances of more than 10 degrees Celsius or almost 20 degrees Fahrenheit during the quarter. Despite the pressure on volumes, U.S. revenue per hectoliter grew by 4% in the quarter, another strong performance. This includes approximately 150 basis points of favorable brand mix. The main drivers were our innovations launched in both 2012 and the first quarter of 2013, including Bud Light Platinum, Budweiser Black Crown, Lime-A-Rita and Straw-Ber-Rita, as well as the growth of our high-end brands, especially Stella Artois and Shock Top. The strategy of positioning our innovations at higher price points continues to have a very positive effect on the revenue per hectoliter performance of the individual brand families.

Our total market share declined by approximately 50 basis points. We estimate that our Focus Brands families grew share collectively in the first quarter, with the decline in overall share being driven by the performance of our sub-premium brands due to the pressure on disposable income and our strategy of narrowing the price gap between our premium and sub-premium brands. We also faced a tough market share comparable this quarter following the launch of Platinum last year.

EBITDA margin in the U.S. was under pressure in the first quarter as a result of lower volumes, as well as high distribution expenses in sales and marketing investments. As I have mentioned previously, distribution costs will moderate during the year as we expand production of Lime-A-Rita and Straw-Ber-Rita from 1 to 3 breweries starting in the second quarter.

Let's turn now to some of the individual brand family performances in the U.S. during the quarter. The market share of the Bud Light family was marginally down after strong share performance in the first quarter last year. Bud Light Platinum has held a stable share of around 0.8% since the middle of 2012, with the decline in the quarter due to the cycling of a successfully strong first quarter 2012 launch volumes. The Platinum tough comp was partially offset by share gains from Straw-Ber-Rita, which was only launched at the beginning of March, and Lime-A-Rita. These 2 brands achieved a combined market share of 0.6% during the quarter, with IRI data indicating a combined share of 1.3% in the first 2 weeks of April. So far, there's little evidence of cannibalization of Lime-A-Rita volumes, with every indication that Straw-Ber-Rita will be an even bigger brand than Lime-A-Rita is.

Budweiser family market share was essentially flat in the first quarter with the successful launch of Budweiser Black Crown, which came to the market at the end of January, offsetting a share decline in Budweiser. As I mentioned during the full year results call, we will be launching a new bow tie-shaped aluminum can in May that mirrors the Budweiser's iconic bow tie logo. This proprietary can will supplement and not replace the traditional Budweiser can and will only be available in the U.S. in 8-packs. The bow tie can is a conversation starter. It's eye-catching, easy to grip, contemporary and, according to our research, very appealing to young adults.

I have also announced the lineup for the second annual Made in America music festival, which will again be curated by Jay-Z. This event will continue Budweiser's decades-long association with great American music and will bring thousands of fans together to celebrate the country's most iconic brand and, of course, enjoy a cold Budweiser.

Michelob Ultra and our high-end brands, led by Stella Artois, Shock Top and Goose Island, all performed well in the quarter, delivering share gains. In particular, we're pleased with the success of Shock Top Honeywheat Apple Crisp (sic) [Honeycrisp Apple Wheat], the latest line extension from Shock Top, and the national rollout of Goose Island, which continues to be well received by consumers who appreciate the deep craft credentials of the Goose Island brand portfolio. During the first quarter, Goose Island volumes almost doubled versus last year.

Finally, our innovation pipeline in the U.S. remains strong. During 2012, we had the 2 most successful innovations in the beer category, Bud Light Platinum and Lime-A-Rita. And we're already seeing great results from Straw-Ber-Rita, which, as I said, is on track to be even larger than Lime-A-Rita. In the next few weeks, Stella Artois Cidre will arrive in the market, alongside the iconic bow tie Budweiser can. We'll also introduce a summer sampler pack from the Shock Top brand family. And as the summer gets under way, we'll launch a new 25-ounce can across our entire brand portfolio. And there's more to come, so stay tuned.

Moving now to China. Our beer volumes in China were very strong in the first quarter, growing by 15.5%. We also estimate that we gained market share due to the strong performance of our Focus Brands, which were up 21.8%. Volume growth came from improved penetration of our national brands, Budweiser and Harbin, within our existing footprint, as well as successful Chinese New Year campaigns. Revenue per hectoliter grew by 11.6% mainly as a result of our premiumization strategy, and EBITDA for the zone grew by 58%, to $113 million. Budweiser volumes continue to grow by double digits, driven by our successful Chinese New Year campaigns in February. The Chinese New Year is the longest and most important holiday of the year in China, and our execution was particularly strong this year. For Harbin, our biggest national brand in China, the NBA sponsorship was the key theme during the Chinese New Year period, with the brand achieving double-digit volume growth during the quarter. In summary, a great quarter in China, and we're looking forward to the rest of the year.

Before I close, I'd like to share a quick update on the culmination with Grupo Modelo. We're pleased that all regulatory approvals necessary for closing the transactions have now been obtained, and we expect to close the culmination in June 2013. After closing, we will hold the leading position in the world's fourth largest beer profit pool, with the combined company holding the #1 position in 4 of the top 5 beer profit pools globally.

We remain very excited about the Mexican market and the potential of the Modelo brands internationally. Our integration plans are ready to be implemented as soon as the culmination has been completed, and we're looking forward to working with our new colleagues in Mexico to deliver the approximately $1 billion of cost synergies, as previously committed. In addition to the cost synergies, we believe there are significant revenue synergies available through further expansion of Corona sales worldwide, excluding the U.S., and through the sharing of best practices. We can't wait to get started.

With that, I'll hand it over to Felipe to cover the other markets and the below-EBIT line items. Felipe?

Felipe Dutra

Thank you, Brito. Let me start with Canada, where our beer volumes declined by 2.9% in the first quarter. Market share was down slightly in the quarter, although there was a strong performance by the Bud Light family, with growth in both share and volume following the successful launch of Bud Light Platinum. We continue to build our innovation pipeline and roll out new products. As an example, we'll be launching a special series of hop ales under Alexander Keith's label in the second quarter.

Moving to Latin America South, total volumes decreased by 10.2% in the quarter, with beer volumes down 9% and non-beer volumes down 12%. Our beer volumes in Argentina decreased 10.7% as a result of poor industry performance, driven by weaker consumer confidence and cold weather. However, our market share started to grow with a good performance by the Quilmes family.

Zone EBITDA grew 9.4%, with an EBITDA margin expansion of 65 basis points to 45.4%. Western Europe experienced an unusually cold and long winter season, which impacted the industry volumes across the region. As a consequence, our own beer volumes declined 7%.

In our home market, Belgium, volume declined 9.1% due entirely to a weak industry. We estimate that we maintained market share during the quarter.

In Germany, own beer volumes declined 4.4% in a weak trading environment, with high promotional activity in the off-trade. In the U.K., our own products, including cider, declined by 4.6%. We estimate that our market share is close to flat, with gains in the on-trade being offset by continued pressure in the off-trade channel.

In Central and Eastern Europe, beer volumes declined 16.4% in the first quarter. In Russia, beer volumes fell 17% on the back of an industry heavily impacted by the new sales restrictions, the media ban implemented last July and price increases following the most recent excise tax adjustments. Bud continues to perform well and grew by over 25% in the quarter, although our overall market share remains under pressure as it continued to balance profitability and share.

In Ukraine, beer volumes declined 15.5%, with most of the decline driven by a weak industry. EBITDA in the zone was ahead in the quarter, EBITDA margin growth of 66 bps.

Turning now to the below-EBIT line items. Normalized earnings per share grew by 12.6% to $1.16 from $1.03 on a nominal basis. The increase is mainly due to other financial results of $295 million reported with the net finance costs.

Moving to the next slide, net finance costs were $255 million in the quarter compared with $422 million in the same period of last year. The year-over-year decrease of $167 million is mainly related to the gains of $402 million linked to the hedging of our share-based payment programs. Nonrecurring net finance income was $223 million, resulting from mark-to-market adjustments on hedges related to the Modelo transaction. Some Grupo Modelo shareholders have committed only upon tender of their shares to acquire the equivalent of approximately 23.1 million AB Inbev shares to be delivered within 5 years via a deferred share instrument for a consideration of approximately $1.5 billion. By March 31 this year, 71% of this exposure had been hedged at an average price of approximately EUR 67 per share, resulting in a mark-to-market gain of $231 million in the first quarter reported in nonrecurring net finance costs.

Our effective tax rate improved from 17.1% to 12.4% in the quarter due to, first, the nontaxable nature of gains linked to the hedging of our equity-related exposure; second, a shift in profit mix to countries with lower marginal tax rates; and finally, incremental tax benefits. We've previously expected our effective tax rate to be in the range of 20% to 22% in 2013. We now expect the full year 2013 rate to be between 19% and 21%, given the first quarter results. There is no change to our guidance for future years.

So in summary, the first quarter was a challenging quarter in terms of volume in most of our markets, with the exception of China. Global Budweiser continues to perform very well. We delivered a strong revenue per hectoliter performance, especially in the U.S., Brazil and China, driven by brand mix and our revenue management initiatives. Looking forward to the remainder of the year, we remain focused on what we can impact and influence, as always. We have clear action plans in place to improve our volume performance while maintaining our profitability and continuing to invest behind our brands.

With that, I would like to hand it back to Jackie to start the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mark Swartzberg with Stifel.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Two-part question on Brazil. You talked about actions to improve volume performance across the globe. And in Brazil, can you speak to this comment about the government getting more focused on counterinflationary -- having a more counterinflationary objective and how that might affect your own pricing ambition and from a spending perspective, how you're thinking about supporting your brands given the difficulties with volume in Brazil?

Carlos Alves de Brito

Okay. Mark, it's Brito here. What the government is trying to do in Brazil is trying to counter the food inflation that has been high in the last few months. They are trying to take taxes away from the food chains so as to get prices down. And if you look at the last few weeks at the wholesale level, not yet at the retail level, in terms of food, you see that prices are beginning to come down. So that, of course, would help disposable income, which then, again, would help beer consumption or consumption in general. Consumer has been pressured in the short term, as I said in the release, by this food inflation and the consequences on disposable income. So government, being committed to help that food inflation to ease, should help the overall economy.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

And it seems that, that implies a little bit of a less sequential ability to take price for everyone in the beer category. Is that a fair assessment on how you're thinking about spending to support your brands? What kind of incremental spend do you think you need there?

Carlos Alves de Brito

Well, what we're doing -- I mean, we continue to support our brands because, again, we're in this business of long term and we're talking about one quarter, so that doesn't change. I mean, we continue to believe in the fundamentals. And to your question, what we're doing in terms of bridging this consumer gap or this consumer short-term pressure is we're using things that have been very successful in the past like the pack price strategy that hit price points that are sweet spots for consumers. We're trying to help point of sales to activate their locations and to be solution providers for packs to bring traffic into their stores. We're also trying to accelerate the continuous introduction of new proprietary returnable bottles in the off-trade channel to give consumers those price points without sacrificing our profitability. And in the on-trade, continue as well with the 1 liter, which is more for less but at a good margin, and the 300 ml, which has a very good out-of-pocket price point but, again, with a much better margin than the one-way presentation. And these are the things that we can control, and those are the things that we're committed to continue to do in the marketplace.

Operator

Your next question comes from the line of Trevor Stirling with Sanford C. Bernstein.

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

First question, concerning the rate of decline and the slowdown on the rate of decline that you're expecting, how confident are you about that, Brito, because it seems to me there's more pressure to come as well? We've got the impact of the April tax increases not really hit yet. There's the ongoing campaign against drink driving. And if the interest rates have to go up as well to counter inflation, that will lead to more pressure on disposable income.

Carlos Alves de Brito

Well, again, what we said in our release is that some of the short-term pressures on consumers will continue in the short term. On the other hand, again, as I said, consumer -- the government is trying to do what they can to ease the food inflation, which is the thing that's the headline in every magazine and newspaper in Brazil these days. And in terms of April taxes, we already included that April taxes in our October price increase, so that's already taken care of. And you know that the April tax increase is a much smaller one when compared to the October one in the way the government structured their taxes going forward. So again, we can only control what we can control, and that's what we're doing with the pack price, pack activation, returnable bottles, proprietary returnable bottles on- and off-trade without sacrificing profitability. So giving consumer interesting price points to help them bridge some of this pressure -- short-term pressures, but with the good profitability in the prices that we have.

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Okay. My follow-up question probably is for Felipe. Felipe, in beer Brazil, there was a significant increase in other operating income. I think it went up by about BRL 155 in the quarter. Could you just give us a bit of color on that? Is that a one-off in the quarter? Is that something that's going to extend into the other quarters and, indeed, into 2014?

Felipe Dutra

Yes. About $92 million in increase in the quarter, that is primarily driven by higher government grants in Brazil, and that is related to VAT long-term tax incentives. And in Brazil, in particular, there is equivalent of BRL 313 million, which is about $150 million to higher level of government grants to the state VAT long-term tax incentives. And inside that number, there is a onetime credit that corresponds to approximately half of the increase versus first quarter 2012.

Operator

Your next question comes from the line of James Edwardes Jones with RBC.

James Edwardes Jones - RBC Capital Markets, LLC, Research Division

I take your point about the one-offs in terms of weather and the timing of Carnival and so on, but that doesn't really explain your loss of share in the U.S. and Brazil. How concerned are you and should we be about this?

Carlos Alves de Brito

James, Brito here. I think when we look at our share loss in Brazil, it was up against a very high first quarter last year. When you go back, I mean, we had a 69% share in the first quarter last year. It came down to 68.1%. Let's remember our commitment is to stay within the range of 67% to 69% while we balance profitability and share. So in the U.S., we're going up against the Platinum launch, which was a great quarter last year again, given the success of Platinum. If you remember, Platinum went all the way up to 1.9% share of total market in the U.S. during these first couple of months of the launch, which was at the end of January last year. So I mean, we're up against, share-wise, in both markets, against very tough comps in both markets.

James Edwardes Jones - RBC Capital Markets, LLC, Research Division

Okay. Got it. And the follow-up is just given your volume decline and the margin decline that's related to that, are you at all worried that you're pushing too hard, too far, too fast on the premiumization strategy?

Carlos Alves de Brito

In which market?

James Edwardes Jones - RBC Capital Markets, LLC, Research Division

Well, I guess across the whole group. I mean, it's a consistent strategy across the group, I guess. And for the group, your volume, certainly compared to consensus, disappointing, and we're not used to ABI's margins going down.

Carlos Alves de Brito

No. I understand what you say, and you're right. I mean, our DNA is really to continue to increase margins, continue to look for opportunities to operate in a more efficient way. And we've always said, it's not every quarter, not every year, but that's the long term. And if you look at our history, that's what we have delivered. But in the quarter, when volumes go down by 4%, that's hard to have margin expansion. But again, that's one quarter. We're here for the long term, and the fundamentals of our business have not changed.

James Edwardes Jones - RBC Capital Markets, LLC, Research Division

So the premiumization strategy, you're absolutely happy and confident with where it's going?

Carlos Alves de Brito

Yes. I mean, if you look at the U.S., for example, out of the 4% price increase this quarter, 150 basis points came from better brand mix. And that's very encouraging because, I mean, that's the way to increase the net revenue without affecting consumers, so that's the way we should go. In China, if you look at 11.6% that we grew our net revenue, most of it -- we don't give the breakout for China, but most of it is due to our Budweiser and Harbin brand performing ahead of the rest of the portfolio.

Operator

Your next question comes from the line of Kris Kippers with Petercam.

Kris Kippers - Petercam S.A., Research Division

Two questions for you. The first one, on Brazil, if you look at the consumer holding back his spending, could you share with us if there was a different trend within the portfolio, so meaning the mainstream brands and the higher-end, do you see a different evolution over there?

Carlos Alves de Brito

Well, Kris, at this point, again, it's only one quarter, and really, March was the month that really took the quarter down from what we had told you in our last press release at the end of February. So it's 1 data point. So I would rather not comment on particular brands or packages or regions or channels because, again, we only have that 1 data point. But again, April is doing better, still negative but much better than the March in Brazil, and that's encouraging. And again, we adjusted -- if there is one thing that our guys do very well is adjust and be nimble to market conditions. When we saw what happened in March and what consumers were going through and the food inflation and the whole story, we believe those things are short term, but we said, okay, let's shift gears and change our priorities and give top priorities to things like pack price, pack activation, returnable glass bottles introduction, especially the proprietaries ones, because that's what consumers need at this point. They need sweet price points, so they can get the consumption turning back while going through this tough pressure in terms of food inflation in general.

Kris Kippers - Petercam S.A., Research Division

Okay. And then just a follow-up on China. Again, this time, finally a strong quarter in volume terms, so quite nice. But also, if you look at the price mix, also after Q4, also here again, a nice evolution. Could we state that there is some pricing coming into market, or is it mainly, again, a very nice mix effect of your portfolio, which is now heavily skewed towards the Focus Brands?

Carlos Alves de Brito

We increased prices -- we did some price increase during the -- around Chinese New Year on our premium brands in China, as we always -- as we've done in the last few years. But most of it, as I said, is through mix improvement. I mean, Budweiser and Harbin are growing way ahead of the portfolio. And that's -- and we see that this trend will likely -- has everything to continue because, I mean, we still have tons of places to continue to expand these 2 brands. They are national brands, nationally supported. And consumers are excited about them, and brand health continues to be very strong.

Operator

Your next question comes from the line of Anthony Bucalo with Santander.

Anthony J. Bucalo - Grupo Santander, Research Division

Quick question on Brazil again. Is there another time in recent memory where we had this sharp of a negative turn in volumes? I don't seem to think that within the last 10 years we've seen anything like this. Could you go back in time and come up with any time period where we had this sort of rapid erosion in volume trends?

Carlos Alves de Brito

Tony, this is Brito here. I mean, the only time -- you're right. I mean, Brazil, it's a great market, has been a great market for us. You know the story . You've been with us for many years. But if you remember 2003, for different reasons, I think that was the only time for 3 months or so or quarter or maybe 2 quarters that because of competitive action and the effects of price increases of different competitors and discounting and all that, that we saw in terms of our Brazil volumes declines. I don't remember exactly the magnitude, but that's, what, now 10 years. But that's the only time I can remember but, again, for different reasons. That was a competitor that launched a product in a very successful way. In a time when we had just put a price increase, they did the opposite. They put a price decrease. But again, if you remember, we shift gears. We reorganized our price plans, again, being nimble. And in 8 months or 10 months, we're back to the market share position we had prior to their launch. So I think here, you're looking at the same thing, I mean, different reasons. It's worse than we had predicted for the quarter. We knew it was going to be a soft quarter mainly because of March. Again, different reasons, but again, we're doing same thing. We're being nimble, shifting gears, changing priorities, using tool kits that we have used in the past and that we have invested in the last few years to be able to have that optionality. And we're now accelerating our optionality, which includes, as you know, price packs and proprietary returnable glass introduction in the marketplace. So there's still lots to be done with the 1-liter bottle, with the 300ml bottle. And those are packs that offer very nice price points, sweet spot for consumers at very good margins. That is under one-way packages. So that's the way to go for us.

Anthony J. Bucalo - Grupo Santander, Research Division

Okay. Do you feel like your new territory here just because -- I guess '03 was the Nova Skin [ph] period, right, if I remember correctly.

Carlos Alves de Brito

Yes.

Anthony J. Bucalo - Grupo Santander, Research Division

We've never seen the industry really roll over like this in recent memory.

Carlos Alves de Brito

Yes. But again, it was a combination of factors. I mean, you had -- as we said, you had the weather. You had the Carnival, which you know is an important factor, especially in the summer, right? Then we have the food inflation, which, if you remember in 2008, also put pressure in the Brazilian consumer. So here again, putting pressure, that's in the middle teens to an inflation that's 6-plus, so that's almost more than double the inflation. Consumer disposable income is not growing as fast as it was in the first quarter of 2012, so it's half of the speed, so that impacts as well. And then on top of all that, you have the real price increase that we had to introduce in October last year because of the taxes, the excise taxes that were implemented by the government. So there was, in a way, a rare combination of factors, I would say. But again, there's always a first time, and that was the first time. But again, we shift gears. We put the plans in place. We act on things we can control, and April was already a better month.

Operator

Your next question comes from the line of Melissa Earlam with UBS.

Melissa Earlam - UBS Investment Bank, Research Division

A couple of questions, please. First of all, in terms of your new sales and marketing cost guidance for the year to be low to high -- sorry, mid to high inflation rather than high inflation previously, is that entirely due to a change of commercial focus in Brazil? And should we expect some of that to be a phasing shift into 2014?

Felipe Dutra

Melissa, this is Felipe. I think the short answer to that question is no. That is not a function in change in commercial strategy but is a function of volume-related sales experiences that are going to go down as we are changing our outlook for volumes in Brazil. So as you can understand, there are fees related to sales in off-premise channel and things like that, that is a direct function of volume, lower volume, lower sales expenses, as simple as that. We are not completely abandoning the high single digits. We are working with an interval mid-single digits to high single digits year-over-year increase.

Melissa Earlam - UBS Investment Bank, Research Division

And just a follow-up question on Brazil and the market share momentum. Have you been gaining share specifically in the North, Northeast region in the quarter?

Carlos Alves de Brito

Well, at this point, I mean, we have been gaining, yes. But at this point, we're not seeing anything about this quarter. But yes, that's a region that since we started focusing and investing, you know that we've been building new breweries over there and putting new proprietary packs. I mean, we've been gaining share in those regions. And if you look on a sequential basis, again, 20 bps versus the fourth quarter last year. So yes, I'm just looking here at numbers for 2012 and '13 first quarter. Yes, we gained share in the Northeast, in the North region. Yes, you're right. As opposed to the 90 basis points that we lost year-on-year. But let's remember, again, Melissa, first quarter last year, we were at 69% share for the quarter, so very tough comps. But you're right. Northeast and North, we continue to gain share even in this first quarter.

Operator

Your next question comes from the line of Dirk Van Vlaanderen with Jefferies.

Dirk Van Vlaanderen - Jefferies & Company, Inc., Research Division

A question on Central and Eastern Europe. You're starting to lap some easier comps here. Are you expecting to see sort of a stabilization of volumes from these levels? That's the first part. And the second part is, do you see improved revenue per hectoliter trends in the sort of coming 9 months, especially given the strong performance of Budweiser and the mix pull-through on that?

Carlos Alves de Brito

Well, in terms of Russia, I mean, as you might remember, I think we mentioned last time and this time again, the industry there is really being transformed by the new regulatory environment. And we continue to try to cope with that, plus we continue with the strategy that has been in place for years of trying to shift our portfolio to a better place because we want that market to be more profitable, so we can continue to invest behind our brands. So that's why the Budweiser, among others, is such an important part of that strategy, because it provides much better margins. That's not the only thing we're doing to increase our profits in the region. But it has been a tough ride because in the midst of trying to do this, there is all these regulatory industry changes, and we haven't yet found the sweet spot between profitability and share. But we're committed to it because, again, Russia is one of the top markets for volume. We feel we have the brands and the people and the route to market in that market, and we wanted to be present there with a relevant presence and keep our #2 position there.

Dirk Van Vlaanderen - Jefferies & Company, Inc., Research Division

Okay. On the revenue per hectoliter, you've actually grew double digit there in 2011 and '12. A bit of a slow down in this quarter, which I thought was surprising given the strong performance from Budweiser. Is it a -- just a phasing or a timing of comps, or should we be expecting some high-single-digit revenue per hectoliter growth for the year?

Carlos Alves de Brito

Well, at this point, we're not giving any guidance in terms of revenue per hectoliter for the year for those markets. But we'll continue to try, as I said, to find that sweet spot between profitability, pricing and share because, again, we're committed to keep our #2 spot in that market.

Operator

Your next question comes from the line of Robert Ottenstein with ISI.

Robert E. Ottenstein - ISI Group Inc., Research Division

Brito, a longer-term question. You announced recently the building of a greenfield brewery in Vietnam next year. And I believe next year, you have the right but not the obligation to buy back Oriental Brewery, one of the leading beer companies in Korea. Can you give us any sense of what the long-term Asia strategy is, x China, and how we should be thinking about that? And any sense in terms of whether you want to get back into Korea? My understanding, if I remember right from the press release, is that it was a fixed formula on the pricing on that.

Carlos Alves de Brito

Robert, so in terms of Vietnam, I mean, we have acquired a license to build a brewery there. The facility will be located in the Vietnam Singapore Industrial Park. We expect the brewery to be fully operational by the end of 2014. And the decision to build the brewery there, I mean, it's quite simple. I mean, first, we see Asia as a growth market. Vietnam, with its 90 million people or population and a very favorable weather and demographics, it's something that's very inviting for beer. And brands like Budweiser do very well in that market. So it's something that we should have an eye on, and we like to create options from time to time in markets that are interesting as this one. In terms of Korean business, we have the right, as you know, but not the obligation to reacquire. It will be after 5 years after the divestiture. And the earliest time for the call option to be used would be July next year, 2014. So it's, therefore, too early to talk about it. But you're right, OB has a very strong position in that market, leads that market, and Cass is a very strong brand. But again, we'll talk about it when the right time comes. But Asia is, I would say, even more. I mean, now with Corona, after closing, of course, in June, we're going to look at many markets in a different way. I mean, when you look at the potential for markets where Corona has a big share, I mean, special share of profits, that's very interesting. And Asia has some of those markets in there. So we're going to have a great portfolio of brands in terms of Corona. Budweiser, Stella, Beck's to penetrate markets, with necessarily having to have breweries there, so in an asset-light-type fashion but penetrating the high-end market, where, normally, the growth and the money is, with a portfolio that I think is very hard to beat by any other players. So that's something that will also change the way we look at white territories and greenfield opportunities in a more asset-light-type proposal in a more high-end-type entry.

Robert E. Ottenstein - ISI Group Inc., Research Division

Great, very interesting. And then back on the U.S., can you give us a sense of how far the sub-premium volumes fell in the quarter, what the price gap is now between sub-premium and premium and whether you're rethinking the pricing strategy on sub-premium?

Carlos Alves de Brito

No. I mean, the direction of sub-premium in our price strategy remains the same. We wanted to continue to decrease that price gap. If you remember many years ago, 4, 5 years ago, it was around 30%, 28%. Now it's around 22%, 23%. But of course, as you know, lower-income consumers are under pressure, and that is putting some pressure on that segment, which is shrinking or shrunk in this first quarter. We continue to hold our fair share in that segment, but of course, we're trying to look up and very excited about the innovations that we put in the market in the last 2 years that have higher price points. And that's why out of the 4% price increase, net revenue per hectoliter increase we had this quarter, 1.5% came from brand-mix enhancement. And that's the way to go because it doesn't affect consumers, therefore, the industry, but it gets us to a better place in terms of net revenues. We like that.

Robert E. Ottenstein - ISI Group Inc., Research Division

Yes, and how far down in terms of volume was the segment then?

Carlos Alves de Brito

I don't have the information right in front of me, Rob. I can come back to you with that later. Our guys will come back you.

Operator

Your next question comes from the line of Pablo Zuanic with Liberum Capital.

Pablo E. Zuanic - Liberum Capital Limited, Research Division

I mean, if I just go back to Brazil and ask the question in a different way, I guess, Brito, the technicals and the macro are understandable, but how much of all this your companyss own fault? Let me put it this way. I mean, I guess our job as analysts is trying to differentiate in this quarter how much was really the technicals and what is more underlying trends. And can you talk about STWs and STRs in Brazil in the second half of last year? Because I was surprised you took very high pricing in the second half last year, and volumes were still up. I mean, what changed in terms of trade inventories in this quarter, and what changed in terms of pricing? It seems that the price increases were really taken back in October. And just remind us, the minimum wage increase this year, where are we this year? And at the end of the day, where is your price increase over the last 6, 9 months? You have to put some context here. It would seem that price increases was close 20% at the consumer level. So just remind us about that, Brito. And I guess the bigger question here, is there elasticity issue, right? I mean, how far can you really take price? Because you're pretty much implying that pricing will be flat to negative in Brazil for the rest of the year. I mean, that's the right decision to take. That's fine. But just some background would help to understand better what's going on in there in terms of what you can really manage.

Carlos Alves de Brito

Pablo, I think you have many questions there, but let me try to take one by one. So I think you have a very good point. I mean, the last time we increased prices was by the end of September last year in anticipation of the October tax increase and the April tax increase this year, okay? So if you look at the price to consumers in the fourth quarter last year and the first quarter this year, they were pretty much the same. So that's why in our opinion, the whole thing about food inflation, disposable income, weather, Carnival, all that played a role because at the end of the day, the price to consumers of beer were pretty much flat to the fourth quarter. And the fourth quarter had very good volumes, was the second best quarter of last year in terms of year-on-year volumes, so 2.9% growth in the fourth quarter and then 8% decrease this quarter. So that's why in our opinion, a lot has to do with stuff outside of the beer category in terms of the economy, food inflation, pressure on consumers and all that. We also believe that some of those pressures are short term. And we also believe that we have, in our tool box, things that we've been doing and we have done in the past to help consumers bridge this time of pressure in their disposable income. And those are pack price; price points; pack activation; the returnables more and more in the on- and off-trade; the liter presentation, which is more for less but good margins; the 300 ml, which is lower out-of-pocket but good margin; all compare to the alternative, which would be the one-way presentation with lower margins. And those are the things we can't control. We know what to do. We shift priorities, and that's what we have our army of people in Brazil, in sales reps doing right now. And April, for a myriad of these reasons, was already a better month, still negative but a better month. But we'll start to continue to build on those programs as we go through. What was your last question again, sorry?

Pablo E. Zuanic - Liberum Capital Limited, Research Division

Well, I guess Asia is more -- I mean, you answered it in part, but I'm just trying to get to a point of price elasticity, right, because the food inflation issue, the disposable income, to my knowledge, from the fourth quarter to the first quarter did not change much. But I'm just wondering where the consumer is just -- I don't want to use the word tired, but are we getting to a point that the consumer is just beginning to reject these beer prices or not really [indiscernible]?

Carlos Alves de Brito

No, no. Because, again, as you reminded us, and you're right, in the fourth quarter last year, the prices were the same as in the first quarter. And consumers bought 2.3% or...

Felipe Dutra

2.9%.

Carlos Alves de Brito

2.9% more than the year prior, so I don't think it's prices. Of course, prices don't help, given that we had real price increases in October, in a situation where consumers are being pressured, but this is a short-term effect. But the prices are the same from the fourth quarter. And what we're doing now since the pressure is on consumers, we're coming and doing more of the things we know can bridge this tough situation by giving consumer the price points they love with the kind of margins we love. So it's a win-win situation for us and for them. And we have the investments in place. It's just a question of re-prioritizing what our sales reps are doing in the marketplace.

Pablo E. Zuanic - Liberum Capital Limited, Research Division

I understand. If I can do just 2 follow-ups, Brito, I mean, obviously, you, Felipe, and the whole management team have built a, I would say, huge credibility with investors and analysts over the years. But you have been talking about North American EBITDA margin expansion for a few quarters already. It hasn't happened. I mean, in fact, we've seen declines for 4 quarters in a row, so I mean, sorry to put you on the spot, but you need to be a little more clear and more specific about how and when we can begin to see EBITDA margin expansion in the U.S. and whether that's really a target. Maybe we shouldn't expect it. [indiscernible]

Carlos Alves de Brito

Well, I think in terms of margin expansion in the U.S., I mean, when we arrived to this business, as you know, it was 28%, now it's 40%, so there was margin expansion, for sure. As you know, from now on, the margin expansion will be not at the same rate, not every quarter, not every year, at the same point, Pablo, is, you see, we've been trying to build innovations that will be important for our future. You have to remember that when we got to this business, there was Bud Light line, but other than that -- which was very successful. But other than that, as I said before in other calls, the pipeline was a bit empty. We filled that pipeline, and we're very excited about this. I think as important as margin pool enhancement is building for the future. And I think that's what we're doing, so we can have margin expansion as we go forward. So again, I've never promised margin expansion every quarter, every year, but if you look at our 24-, 25-year history, on average, that's what we've been delivering. So I think, again, the past does not predict the future, but that's what we continue to build going forward. By always having that pipeline, the best practice, the best people, again, not every quarter, not every year, but we continue to see opportunities in the U.S. to expand those margins. And thank you very much for your questions.

Operator

Your next question comes from the line of Lauren Torres with HSBC.

Lauren Torres - HSBC, Research Division

My question has to do with your outlook for U.S. volumes for the year. Obviously, we've talked a lot about Brazil, but similar comments with bad weather and tougher comps affected you in the quarter, and your sales retailers were down 4%. So I was just curious, as we think about the full year, is some of this isolated to what occurred in the first quarter? Should we expect that down forward to just become down less over the course of the year or actually see industry return to growth again this year?

Carlos Alves de Brito

Again, Lauren, we know that a lot of the pressures that we saw in the first quarter are deemed to be temporary. That temporary could be a couple of quarters. We don't know. But for sure, they're pressuring consumers, and that's what you see other analysts and economists saying. But those are the things we can't control. I think the things we can control, the innovations we put in place, the market programs, and we feel that our pipeline, some of it is already public. Some of it is not public yet. But we have a very strong pipeline for this year, and that will get the excitement back in the industry, as we had last year. I mean, last year, we had the 2 most successful innovations coming from our company. And that, together with the weather, we know that was very important for the industry growth last year. So this year, we had a tough weather comparable, but on what we can control, the innovations in our company, we'll continue to put a lot of resources in the marketplace and also execute even better than last year with our wholesaler system, which is a great asset of our company, to influence the industry in a positive way. And if you look at our share performance in April, according to IRI public data, it's already much better than the first quarter because we don't have the Bud Light Platinum launch as a tough comp, so it's more of a normal-type comp situation. And our share's already almost flat. It's 0.1 negative for the first 2 weeks of April, which is a much better position. But industry, of course, is something we can't control, and it's very hard to predict at this point.

Lauren Torres - HSBC, Research Division

And I know you don't like to discuss or give too much of heads-up on your pricing strategy, but you're still benefiting from the carryover last year. And it seems like there is still room on the pricing side in the U.S. Is that a fair comment for later this year to see that?

Carlos Alves de Brito

Well, yes, sure, right. We don't like to comment on future price increases because, again, price is very local. It's something decided by our local guys, and we'll see. But at this point, you're right. We're benefiting from the annualization and carryover from last year's price increase plus the brand mix enhancement that we had in our portfolio.

Operator

Your final question comes from the line of Caroline Levy with CLSA.

Caroline S. Levy - CLSA Asia-Pacific Markets, Research Division

I have a couple of questions, just starting with, was there any inventory build either in Asia or anywhere else in the world such that your shipments may lag STRs in the second quarter?

Carlos Alves de Brito

No. I mean, no. The answer is no. I mean, in Asia, for example, our price increase was during Chinese New Year, so that was halfway through the quarter. In Brazil, our price increase was in October last year, so, again, nothing to do with this quarter. The same for the U.S. In Argentina, we haven't had a price increase because of the price freeze since last quarter of last year. So I mean, there's no reasons in the main markets for any load or anything, and that's not our policy anyway so...

Caroline S. Levy - CLSA Asia-Pacific Markets, Research Division

Okay. And then the distribution costs, you cited them being up, particularly in the U.S. And at what point does the incremental Platinum capacity offset the negative impact of the other issues in distribution?

Felipe Dutra

We have 2 factors here in the first quarter. First, in the U.S., that is driven more by Straw-Ber-Rita and Lime-A-Rita as we are moving from 1-brewery into 3-brewery production. That should ease as from the second quarter. And on the other hand, in Brazil, as most of our distribution is direct distribution -- most of our volume is direct distribution, when there is a volume contraction, there is a lack of fixed cost dilution embedded into the system. Nevertheless, we are confirming our full year guidance for distribution expenses to be in the mid-single digits.

Caroline S. Levy - CLSA Asia-Pacific Markets, Research Division

And it's hard not to look at what's going on with the Modelo transaction to notice, I believe, you're bringing your head of Brazil up to run Mexico. There's just some concern around is this management distracted by this transaction. And was there anything else you could have done in Brazil faster, do you think, to mitigate the volume impact?

Carlos Alves de Brito

No. I mean, what's happened in Brazil has nothing to do with management changes. I mean, if there's one of the things that we're very proud in our company is that we have a strong bench, especially in the sales function. And this guy, Alexander Médicis, has been prepared for this role. He has done some excellent job in other parts of the country as a Regional Director and also outside of Brazil, in Central America. He was the guy in charge of the Dominican Republic business and acquisition and, I mean, has a great history of the company, great potential. He's one of our great names in our bench. So I mean, that's not a cause for concern, and that's one of the things we work hard in our company, to always have people ready to replace others with seamless-type situations, where there's no disruption at all. So what we have in Brazil are -- things are explained here in terms of consumers, food inflation, weather, Carnival and things like that and not management changes. And thank you very much for your questions.

Well, guys, I would like to close now our quarterly call. I mean, again, as we said, it would be a soft call, but again, the fundamentals of the business aren't changed. We continue to be very optimistic about our plans, our people, our capacity to execute and remain bullish about the markets we're in. We're very glad and happy about the Modelo approvals, requirement. In June, we're going to have this transaction closed. And when you think about it, we're going to have a leading position in 4 out of the top 5 beer profit pools in the world, being then Brazil, Canada, U.S. and Mexico. So that's very exciting. We have lots to do. We have great people and great tools in the marketplace to be introduced. So again, thank you very much, and see you next quarter.

Operator

Thank you. This does conclude today's teleconference and webcast. Please disconnect your lines at this time, and have a wonderful day.

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