Anheuser-Busch InBev SA/NV's (BUD) CEO Carlos Alves de Brito on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Anheuser-Busch Inbev (BUD)

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

Q1 2014 Earnings Call

May 07, 2014 9:00 am ET

Executives

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

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

Analysts

Andrea Pistacchi - Citigroup Inc, Research Division

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Chris Pitcher - Redburn Partners LLP, Research Division

Melissa Earlam - UBS Investment Bank, Research Division

Nik Oliver - BofA Merrill Lynch, Research Division

Anthony J. Bucalo - Grupo Santander, Research Division

Brett Cooper - Consumer Edge Research, LLC

Sanjeet Aujla - Crédit Suisse AG, Research Division

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Kris Kippers - Petercam S.A., Research Division

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

Lauren Torres - HSBC, Research Division

Mitchell Collett - Goldman Sachs Group Inc., Research Division

Operator

Welcome to the Anheuser-Busch InBev First Quarter 2014 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 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.

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

Thank you, Maria, and good morning, good afternoon, everyone, and welcome to our 2014 first quarter results conference call. I have here with me today Felipe Dutra as well.

So let's start with the highlights. Our focus remains one of driving top line growth, and so we're very pleased with the results of this quarter. We delivered good volume performance in all of our top 4 markets, led by strong results from our Focus and Global Brands. This one performance, coupled with the robust revenue per hectoliter result, led to strong top line growth.

Our cost of sales decreased on a per hectoliter basis, which, together with the strong top line result, drove a double-digit growth in EBITDA, as well as EBITDA margin expansion.

Turning to the details of these results. Our own beer volumes in the quarter grew by 4.5%, with our Focus Brands growing by 6% and our 3 Global Brands growing by more than 8%. Total revenue per hectoliter -- total revenue for the quarter grew by almost 9%, driven by a strong revenue per hectoliter growth of 5.7% on the basis of the same geographic mix, solid performance in our top 4 markets as well.

We also increased investment behind our brands by more than 16% in the quarter to take advantage of growth opportunities in the market. EBITDA in the first quarter grew by 10.8%, with our EBITDA margin up 63 basis points to 36.6%. Earnings per share has declined from $1.16 per share to $0.87 per share due to an increase in other financial results within net finance costs. Felipe will provide more detail on this line item later.

Our Focus and Global Brands performed very well. Volumes of our Focus Brands grew by 6%, led by the Bud Light family and Michelob Ultra in the U.S.; Corona in Mexico; Skol, Antarctica and Brahma in Brazil; and Budweiser and Harbin in China. Within our Focus Brands, all 3 of our Global Brands delivered good volume growth in the first quarter, growing collectively by 8.3%. Global Budweiser is fueled by an excellent Chinese New Year campaign, grew by 7.8%; global Corona, driven by a very strong result in Mexico, grew by 10.5%; while Stella Artois grew by 5.2% due to good results in Argentina, Brazil and the U.S.

We have a very strong portfolio of brands, and we'll continue to invest behind them going forward. Our sales and marketing investments increased by 16.7% in the quarter, and we reiterate our previous guidance of a low- to mid-teens percentage increase in the full year.

Let's now look briefly at the results in our top markets, starting with the U.S. We estimate that the industry's sales-to-retailers, STRs, declined by 1.7% in the quarter, driven by a very challenging winter weather and the later timing of Easter this year. Our own STRs were down by 2.6%, leading to a share decline of approximately 40 basis points. This decline in the market share was due to the lacking of Budweiser Black Crown launch volumes, as well as a segment mix shift to the high-end, where we're under-indexed versus industry. We'll continue to focus on growing our share of the high-end, with a particular emphasis on the on-trade.

Sales-to-wholesalers, STWs, were up 2.1% in the quarter, driven by an increase in the wholesale inventories as part of our contingency planning ahead of labor negotiations for our 12 U.S. breweries. Negotiations came to a successful close on April 30 when we announced that a new 5-year agreement with the Teamsters had been reached. We expect STWs to decline in the second quarter compared to the same period last year as we make adjustments to inventory levels. We expect STWs and STRs to converge on a full year basis.

U.S. beer-only revenue per hectoliter grew by 1.9% in the quarter. This includes a brand mix contribution of approximately 50 basis points versus 150 basis points in the first quarter of last year as a result of the timing of our innovations in 2013. The successful introduction of our new 25-ounce can is driving a negative package mix impact on the revenue per hectoliter line, but it's accretive on a gross profit per hectoliter basis. Looking ahead, we expect a lower brand mix contribution and similar package mix impact for the next 2 quarters and more favorable comparables in the fourth quarter.

EBITDA in the U.S. grew by 1.8% in the quarter, with a margin contraction of approximately 90 bps, primarily due to the timing of our sales and marketing investments and admin expenses.

Turning to the performance of our brands in the U.S. The Bud Light family had a great quarter. We estimate that market share for the family was marginally ahead, with Bud Light gaining share in the premium light segment based on our estimates.

During the Super Bowl, at the beginning of February, we launched a new position in creative for Bud Light with the tagline "The Perfect Beer for Whatever Happens." The Super Bowl execution was our best ever, with our brands Bud Light and Budweiser generating nearly half of all social media traffic during the game across all categories. The digital media response to the rollout of the new Bud Light campaign has been very positive and paves the way for an exciting Bud Light summer program, which will be announced in the coming weeks.

Bud Light is also benefiting from the rollout of our new 16-ounce reclosable aluminum bottle and the 25-ounce can, both of which continue to gain share.

The Ritas family gained approximately 25 basis points of share in the first 3 months of the year, benefiting from the launch of our new 2 new flavors, Mang-O-Rita and Raz-Ber-Rita. As a family, the Ritas have reached almost a full percentage point of market share.

Turning now to Budweiser. We're very pleased with the progress we've made with Budweiser and are seeing consistently meaningful improvements in the brand's health. Our 2014 Super Bowl execution was our best ever. The Hero's Welcome and Puppy Love campaigns, coupled with our music programs and the reinforcement of the brand's credentials, are driving reappraisal with young adults.

Market share for the Budweiser brand was down approximately 25 bps in the quarter, a marked improvement over historical trends.

We'll be building on Budweiser's momentum and have a strong set of programs in place for the rest of the year. This includes the expansion of our Budweiser Made in America music platform from Philadelphia to the second location on the West Coast, Los Angeles. The L.A. event will feature leading Hispanic artists and will help Budweiser further connect with the large Hispanic population in California.

We'll also be leveraging the brand's global sponsorship of the FIFA World Cup and building on our established Major League Baseball and Red, White and Blue programs during the summer months. We still have work to do to stabilize Budweiser's market share, but we're heading in the right direction.

Michelob Ultra and our high-end brands continue to perform well, gaining 20 basis points of total market share in the quarter. We continue to invest behind our Focus Brands of Michelob Ultra, Shock Top and Stella Artois with Goose Island continuing its national rollout. The on-trade is a particular focus for us, with programs and investment in place to increase the relevance of our brands in food and nightlife occasions.

China continues to grow as a category, and at the beginning of April, we launched Johnny Appleseed, a new refreshingly sweet and intense hard apple cider. Johnny Appleseed joins Stella Artois Cidre in our cider portfolio. It's too early days, but we're off to a good start with the new brand.

Summing up our U.S. performance, we have made good progress with our Focus Brands against the backdrop of a harsh winter. Early indications are that the industry performed better in April, driven in part by the later timing of Easter.

Moving now to Mexico. Our Mexican business delivered a strong quarter in terms of volume, revenue and EBITDA. The Mexican economy is still soft but showing signs of recovery, helping to deliver marginal growth in the beer industry in the first quarter. Our overall volumes grew just under 1%, despite the later timing of Easter, which is the most important holiday in the Mexican calendar, driven by a strong Focus Brand performance and leading to a small gain in market share.

The Corona family result was particularly good, with volumes up 10% in the quarter. Bud Light also performed well, and we have now launched Stella Artois to kickstart our development of the superpremium segment in that market.

Revenue per hectoliter grew by 2.2% against a tough comparable, which included a March 2013 price increase. Mexico EBITDA grew by 27%, driven by the growth in revenue and the capture of cost synergies, partially offset by an increase in sales and marketing investments. EBITDA margin grew by over 800 basis points. As I mentioned, our Focus Brands performance in Mexico was strong, with volume growth of 5% in the quarter. This was helped by the launch of the largest ever consumer goods promotion in Mexico, with the goal of sending more than 1,000 Mexican consumers to the World Cup in Brazil. The campaign attracted a huge amount of attention and was a major contributor to the growth of Corona in the first quarter. Over 2 million special on-package promotional codes were redeemed and nearly all of the consumer trips have now been awarded.

The ongoing renovation and refurbishment of our Modelorama stores will also be an important driver of future volume growth, and we have an ambitious program in place. Cost synergies resulting from the combination with Modelo continue to be delivered ahead of our original schedule. We have now realized approximately $580 million of savings to date, with approximately $120 million being delivered in the first quarter this year. We remain committed to delivering $1 billion of cost synergies before the end of 2016, with the majority of the savings coming by the end of next year.

Turning to Brazil. Brazil had a great first quarter, with industry staging a strong recovery after a very challenging start last year. We estimate that industry beer volumes grew by 12%, with our own beer volumes up 10.9%, leading to a flat market share sequentially and a decline of 60 basis points compared to the first quarter of last year.

Our average market share for the quarter was 75.5% within our historic 76 -- sorry, 67.5% within our historical range of 67% to 69%. Beer revenue per hectoliter grew by approximately 9%, reflecting our revenue management initiatives, increased weight of own distribution and premium brand mix improvements.

EBITDA in Brazil grew by over 15% in the quarter, with a margin decline of 160 basis points. The contraction in margin was driven by a onetime credit relating to government incentives of approximately $55 million reported in the first quarter last year and the timing of our sales and marketing investments, driven by stronger volume performance and our World Cup activations.

The strong industry volume performance in the first quarter was driven by a number of factors. Brazil enjoyed record-high temperatures in January and February in contrast to the poor weather at the start of last year. The Carnival holiday, which traditionally marks the end of the summer vacation period, was also 3 weeks later this year, extending the summer selling season. Finally, lower levels of food inflation compared to the first quarter last year eased the pressure on consumer disposable income. Our own "summer without price increase" campaign, which focused on the affordability of beer at the consumer level, was also beneficial for both ourselves and the industry.

Just a few words on the cold beverage tax increase that was announced in Brazil. A week ago, the federal government announced adjustments to the reference price tables, which are used to calculate beer and soft drink excise taxes with effect from June 1 this year. While we're sensitive to the fact that the Brazilian government is under pressure to address their fiscal challenges, we believe that with no tax increase and a better industry volume growth, the government could achieve a similar level of tax revenues with a much better social impact. It remains our policy to pass along any tax increases, but we are not commenting on the timing of our price increase for competitive reasons.

Despite the volume impact that will result from the pass-through of the tax increase, we continue to expect that Brazil beer industry volumes will resume growth in 2014, helped by the FIFA World Cup.

Moving now to China. Our China business had another strong quarter on the back of a very successful Chinese New Year campaign. Our beer volumes grew by 9.4% in the quarter, driven by the industry growth and an estimated market share gain of approximately 70 bps to 15.6%. Our Focus Brands of Budweiser, Harbin and Sedrin grew by 13%. Revenue per hectoliter growth of 5.9% was mainly driven by improved premium brand mix led by Budweiser and Harbin Ice, as consumers continued to trade up to the core plus and premium segments.

China EBITDA increased by over 47%, with EBITDA margin growing by over 400 basis points to 20.4%. Budweiser delivered a great result in the first quarter. Budweiser leads in the premium -- superpremium segment, with an estimated share of over 50% and took center stage in our recent 2014 Chinese New Year campaign. To celebrate the Chinese Year of the Horse, we sent the Clydesdale horses to China, and they were a huge success. The campaign stretched into March, with the Clydesdales appearing at iconic venues such as the Great Wall of China. In summary, another great quarter in China.

Our attention now turns to the FIFA World Cup in Brazil, with the first game just 5 weeks away. The World Cup begins on June 12 and will comprise a total of 64 matches, which will be played in 12 cities across Brazil. Of the 32 teams that are playing the tournament, over half originate from countries where we have a major presence. We'll be acting World Cup -- activating World Cup campaigns globally, with a particular emphasis in these participating markets.

In many of our key markets, World Cup activations will have 2 distinct flavors. There will be the local sponsorship activities where the brand champion will vary by market, and a global brand campaign, which will be exclusively owned by Budweiser. Local brand sponsorship activations will tap into feelings of national pride and they will ignite fans to root for their teams.

By contrast, global Budweiser activations will promote the idea of bringing people together across borders, around the theme of Rise as One. Our campaigns will celebrate the world, not any particular country, and fans' passion for the beautiful game. The gold aluminum trophy bottle is designed to reinforce the premiumness of Budweiser globally and will be available in over 40 markets.

Global Budweiser also participated in a 6-part documentary series bringing Rise as One to life, featuring the likes of Ronaldo and Zidane. This series has been broadcast in 84 countries, reaching an estimated 600 million households. At the end of every game, Budweiser will also present the FIFA Man of the Match, with fans worldwide voting for their favorite player.

World Cup activations within Brazil will be significant, with both the Budweiser and Brahma brands bringing the tournament to life for fans. In Rio, the Budweiser Hotel will host guests from around the world and will be the centerpiece of Budweiser's international Rise as One campaign, capturing the greatest party on Earth and sharing it with football fans worldwide. Programming at the Budweiser Hotel will include performance by world-renowned music guests, appearance by FIFA World Cup legends, media announcements and a series of exclusive partner events. In addition to the Budweiser Hotel, we'll host more than 14,000 events in more than 150 cities, reaching a total of almost 2 million consumers. We'll also be running widespread trademarking initiatives throughout the 1 million points of sales in Brazil that will bring to life the concept of World Cup for all. This campaign is meant to bring the World Cup experience to all soccer fans around Brazil, not only those who will attend games in stadiums.

With that, I'd like now to hand over to Felipe, who will take us through some further detail in our first quarter results. Felipe?

Felipe Dutra

Thank you, Brito, and good morning, good afternoon, everyone. Starting now from Slide 20 that shows the EBITDA breakdown per zone. As Brito mentioned, our total company EBITDA performance was very solid, with organic growth of almost 11% and EBITDA margin expansion of over 60 basis points. The timing of sales and marketing investments in our 2 largest zones, North America and Latin America-North, drove margin contraction in the first quarter although we had strong margin expansion in Mexico, Latin America-South and APAC.

Brito has covered our top markets in some detail, and you'll find additional information about the other relevant markets in our press release, as well as the appendix to today's presentation.

These results naturally do not include the acquisition of Oriental Brewery in South Korea, which closed on April 1. OB is the leading brewer in South Korea, and we are excited to welcome the OB team back to the AB InBev family. OB was already enjoying good momentum prior to the sale in 2009, and the team has continued to build upon this platform, making Cass the #1 beer brand in the country, supported by a healthy consumer brand preference.

I would now like to quickly review our EPS and the below EBIT results before we move to the Q&A section. Normalized earnings per share in the first quarter declined to $0.87 per share from $1.16 in the first quarter of 2013. The decrease is mainly due to a difficult comparable in net finance costs, driven by the mark-to-market gain related to the hedging of our share-based programs and reported in the first quarter of last year. EPS also includes a positive contribution of $0.11 per share from organic EBIT growth.

Net finance costs in the first quarter were $866 million compared to just $255 million in the same period of last year. This increase of $611 million was mainly due to the negative noncash impact of the mark-to-market adjustments linked to the hedging of our share-based payment programs, which had a negative year-over-year swing of $454 million. This results from the reported gain of $402 million in the first quarter of last year and a reported loss of $52 million this year.

In addition, our first quarter net finance costs include negative currency results, including intercompany transactions and other hedging costs of approximately $200 million, of which about half are noncash.

Finally, our normalized effective tax rate for the quarter was 18.8%, up from 13.3% in the first quarter of 2013. This increase is mainly due to the nontaxable nature of the gain from the hedging of our share-based payment program in the first quarter of last year. At the same time, one should keep in mind the first quarter 2014 loss was nondeductible as well. The increase in effective tax rate is also due to the changes in country profit mix, including the mix impact resulting from the combination with Grupo Modelo. Our guidance for the full year 2014 in terms of effective tax rate remains in the range of 21% to 23%.

And with that, I will hand back to Maria to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will be coming from the line of Andrea Pistacchi of Citi.

Andrea Pistacchi - Citigroup Inc, Research Division

Have 2 questions, please. The first one, about the U.S., about the market shares, you're down 40 basis points in the quarter despite the significant step-up in marketing spend, the Bud Light bottle. So how optimistic are you that with the progressing of the year, that you can improve this performance? And then just please on Mexico, on the pricing environment there, you commented on 2.2% price mix in the market, which is well below what we've been used to in the past. Is this an issue about phasing of price increases? The old competitor there has been commenting on increased promotions in the market. If you could talk about that a little bit, please?

Carlos Alves de Brito

Okay, Andrea, Brito here. So in terms of U.S. market share, our commitment is really to stabilize the share equation. We're not there yet, but our strategy in terms of brands and revenue management is very straightforward. So we got here 5 years ago, it has always been about growing Bud Light, which we did this quarter in terms of family. It's all about stabilizing Budweiser, which continued to decline but at a much lower rate at 25 bps compared to 80 bps in some years ago. Growing the high-end, continue to bring innovation to the market like the Ritas that are now a full percentage point. This 40 bps that we saw this quarter in terms of revenue decline was -- has a lot to do with the lack of the Black Crown, Budweiser Black Crown launch. That's most of that 40 bps. But we're very encouraged by the fact that Bud Light's family gained ground in terms of total market, so slightly a share gain. Budweiser, again, much better trend compared to historical levels. We're gaining with Ultra in the high-end and so the direction is pretty much what we said, invest in the premium and premium plus high-end of the market. In terms of Mexico, to your question about the pricing, last year, our price increase in Mexico was in March 2013. This year, it was introduced -- it's already in the market in May. So because that fell in the second quarter compared to last year, that was the phasing of the price increase that's mainly responsible for this change. And the only promotional activity that we had, or the main one in Mexico, is the one that we've announced last quarter, which is the biggest ever in terms of CPG companies in Mexico, which is the one around the World Cup in which we are bringing more than 1,000 Mexican consumers to Brazil to experience the World Cup. So that's what we implemented in Mexico. And the price increase in March and May, that's also the one that answers your question.

Operator

Our next question comes from the line of Mark Swartzberg of Stifel, Nicolaus.

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

I guess, 2 questions on Bud Light as we think about how it's performing and its outlook here in the U.S. One is, what does your research say about the opportunity for further innovation with the liquid, so to speak, beyond, perhaps, the Ritas we're seeing, something more like a Platinum to come or something like that? And also on the research side of things, what is your research saying about "The Perfect Beer for Whatever Happens"? How well is that sticking, if you will, with consumers? So that's kind of question one, kind of research on those 2 counts. And then, this announcement of plans for the summer seems relatively late with Memorial Day coming up. Is that accurate or is this typical?

Carlos Alves de Brito

So Brito here. So in terms of Bud Light, we're very happy with the first quarter results. I mean, when we talk about liquid innovation, we have to see that this quarter, we had a lot of package innovation around Bud Light, so you should think about the 16-ounce reclosable aluminum bottle and the 25-ounce aluminum can. Those are 2 big innovations for Bud Light, not on liquid but on packaging. This also is a very important year for Bud Light in terms of innovation. In other years, we have been innovating on the premium plus side, with the Ritas, of course, that's within Bud Light family, but also other brands and more on the high-end. This year, we are more focused on Bud Light with the 2 packaging initiatives and continue to innovate with the Ritas. So that answers the first part of your first question. The second part is about "The Perfect Beer for Whatever Happens." We are seeing very good signs since Super Bowl that this campaign has lots of mileage and has lots of -- is echoing very well with our LDA to 27, which is our main focus. If you look at this campaign, it's really designed for the digital space. So if you only look at what's happening on the TV, you're losing 80% of the action because the whole action is in the digital. For example, during the Super Bowl game, the Super Bowl event, more than half of all social media traffic during the game was about both Bud Light and Budweiser. So I mean, campaign is clearly designed to this new LDA-27 cohort that spends a lot of time on social media. So yes, we're very happy with it. We see lots of mileage. And the summer will continue to drive -- or to draw on that same idea. That's the umbrella idea. In the summer, you'll see new executions connected to this idea. We're very happy that we're able to have this summer campaign out for Budweiser, for Bud Light. Summer has not been a part of the year in which Bud Light, in previous years, had good investments compared to the shoulder parts of the years because of all the sports events. This year, again, we took a different approach, and we're having more of a stable support behind Bud Light, including summer. So that's something new and maybe that's what called your attention. But of course, it has been in preparation since the beginning of the year. And your second question? That was it? Okay, great. All right. Thank you, Mark.

Operator

Our next question comes from the line of Chris Pitcher of Redburn Partners.

Chris Pitcher - Redburn Partners LLP, Research Division

A couple of questions. Following up again on the market share story, you've highlighted Bud's background as one of the difficult brands for comping. Obviously, you've got one of the bigger Ritas will be comping in the next quarter, its launch. Do you think the launch of Johnny Appleseed and the other Ritas will be enough to keep that innovation group of your portfolio incremental to market share? The second question was just a bit more color, whether you can give it, on the follow-up to the agreement with the Teamsters and what that means now in terms of costs, and I see that's built into your guidance.

Carlos Alves de Brito

I'll start with the second question. In terms of the agreement with the Teamsters, we're very happy with the agreement. I mean, we set out as a company, as a team to create a contract that was good for all involved, our people, our company and our customers, and -- while recognizing and addressing some of the business conditions and challenges. So we believe this contract accomplishes all of that and positions our company and our people, our employees for future success. So again, very happy with it. Of course, the detailed terms of this agreement are confidential so not much I can comment on that. And on your first question about market share, I mean, when you look at the innovation journey that we've been taking the last few years, I mean, we've had amazing innovations in the last 3 years. If you look at 2012, we had the #1 and 2 top innovations in the industry; 2013, #1 and #2; and for this first quarter, again, #1 and #2, so -- according to IRI. So we're very glad with our innovation pipeline. Of course, some become bigger innovations after 1 or 2 years, some become a bit smaller. But the fact is that they are all working in the sense of what we've planned. So Black Crown is an innovation or line extension for Budweiser that had a very specific role to play, and it played that role. I mean, we see it reflected on the mother brand and that's why Budweiser is doing so well in terms of brand health, not the only reason, but one of the reasons because it showed again and it called attention again of consumers about the artsmanship and the craftsmanship that go in brewing Budweiser and the ability of our brewmasters to come with different liquids and that's not going to be for sure the end of the story for Budweiser. So it played an important role. Of course, it's smaller than a Platinum, but again an important role in supporting the mother brand. So there's more to come for this year. Again, this year, we took a different approach in terms of only liquids. We're doing big package innovations, the 16-ounce aluminum bottle, 25-ounce can. It's very important for Bud Light so that's key. It's a year where Bud Light will have lots of support in terms of a new campaign that started very well, some package innovation that's very important for a premium brand like Bud Light and a summer that will be more intense than previous summers for the brand.

Operator

Our next question comes from the line of Melissa Earlam of UBS.

Melissa Earlam - UBS Investment Bank, Research Division

A couple of questions, please. First of all, a question on Modelo. Can you give a comment on whether you feel that sales and marketing spend in Mexico is at the appropriate level? And also, tied into that, how significant the Modelorama renovation is? And the second question was just on your CapEx guidance. For the full year, you were reiterating the $4 billion whereas AmBev is now commenting how its CapEx for the year will be down year-on-year. Can you just explain where the offset is regionally to Brazil?

Carlos Alves de Brito

I mean, sales and marketing in Mexico -- Mexican zone increased by 5.5% quarter-over-quarter, year-over-year. What you should not forget is in the -- this first phase of integration. There's a lot of nonworking money that gets transferred to working money and that's not visible in this 5.5%. So you have more than that being channeled into working money type activities that are clearly benefiting the brands. I mean, if you look at the Focus Brand performance in the first quarter in Mexico, we're all very pleased with it. So we think it's the right thing to do. It's the right amount, the right envelope. And this promotion, again, the World Cup promotion, has proven to be very good for the Corona family of brands, but also a great performance of Bud Light in Mexico, so that's very good news. Modelorama, it's another big driver, we think, for the future. It's a beer-centric-type outlet. We're just now reinvesting in terms of the consumer experience in those stores. I mean, it has been a very poor consumer experience, and we're remodeling the stores, bringing standards, bringing training to our people and really spending money and having the consumer experience, bringing that to a new level. And that's going to be a very important driver for our top line growth going forward. So very excited about that. And as you've seen in the slides in our website, the web presentation, you'll see that was a part about the Corona-centric-type remodeling of the storefront. And your second question was?

Felipe Dutra

On the CapEx side, in which AmBev will be reviewing downwards the CapEx for Brazil. But nevertheless, our outlook is for a total CapEx of around $4 billion. Brazil is 1/3 of that number and we are keeping our outlook of around $1 billion -- of $4 billion, sorry.

Operator

Our next question comes from Nik Oliver of Merrill Lynch.

Nik Oliver - BofA Merrill Lynch, Research Division

I have 2 on China, please, one short term and one longer term. Short term, just looking at the margin progression in 1Q being very strong, could you help us think about a run rate for the rest of the year? Is that sustainable on an organic basis before thinking about OB? And secondly, longer term, I think in the past, you've talked about the premium segment growing to maybe 10%, 15% of the Chinese market. Is that still your aspiration? And do you think ABI can hold share within that segment as it grows? And perhaps, what role do you see for the Corona brand within that segment?

Carlos Alves de Brito

So Brito here. Yes, we're very pleased with the margin expansion in China. Our strategy in China has been pretty much the same, very consistent for the past 5 years since we got there and put the 2 companies together in 2008 and '09. And that has been one of developing 2 national brands, Budweiser and Harbin, and more specifically, Harbin Ice, the core line extension -- the core plus line extension. And these 2 national brands are performing and growing very well. That, coupled with a Chinese industry or consumer that's trading up, and that's great to have the brands up top waiting for them to come to you and that's why you see our net revenues per hectoliter growing so in double digits the last few years and that's not rates. That's all -- or pretty much all of it, a big portion of it that you're seeing, from brand mix. And so we're very glad with that. The strategy has been consistent, it's working. Margin has been expanding. And I'm not going to give you guidance in terms of this year or the next few years, but we see potential for continuous margin expansion in China. And the second question was about the premium segment in China. Again, the premium segment in China is growing way ahead of the total industry. We've always said 15% because that's what we see on the markets. They're comparable, but we still have lots to do to get there. So that's going to be -- again, that's exciting because, I mean, we have all these results, all this growth the last 5 years and the premium segment is still underdeveloped compared to some other markets, so that's very good. And Budweiser has more than 50% of this premium segment and growing, so that's very encouraging. So again, strategy is working, we'll continue to support it. And now, on top of that, Nik, we'll have Corona that will also be arriving in our hands at some point in China. So that's also very exciting.

Operator

Our next question comes from the line of Anthony Bucalo of Santander.

Anthony J. Bucalo - Grupo Santander, Research Division

Quick question on Bud Light in Mexico. I know that it's early days there, but can you give us some color on how the brand is performing, where it's performing well, what channels, how it's priced regionally where it may be strong? Can you give us an update on that? And the second question is on soft drinks in Brazil. It looks like you're chipping away at some incremental market share with your soft drink portfolio. Is that outperformance coming from the Pepsi brands or is it from the AmBev brands or is it a combination of both?

Carlos Alves de Brito

I mean, in terms of Bud Light, I mean, we always knew that Budweiser -- always known that Budweiser -- Bud Light had a very big potential that was really underexplored in Mexico. And when we did consumer research, it was all there. I mean, some light segment is beginning to develop in Mexico, especially the northern part of the country. A lot of it because of the influence, we believe, from the U.S. but also the weather being much warmer. So light segment is developing. We're underdeveloped big time. So since we got there, we said not only the -- our focused Mexican brands but also Bud Light would deserve a lot of attention and support because growth was there to be taken. So very happy with Bud Light. I'm not going to give you a lot of numbers on that because that would give away a little bit or all of our strategy around the brand. But again, early days, but maybe in the next few quarters we'll talk more about Bud Light in Mexico. But again, very happy and getting ready for brand that will be much bigger than what we see today. In terms of soft drinks in Brazil, we're very glad that we gained share. I mean, soft drinks remain a very important pillar in our Latin America-North business. The net revenue grew 8.8% and volume expanded 2.1% and that increased our market share by 20 bps to 18.3%, so that's very good. And we also are implementing the returnable bottles on the Pepsi brand after having done that with Guaraná Antarctica. And we also have very exciting launches on the Pepsi line, including H2OH! So I mean, all in all, good business for us and one that continues to progress well, including market share gains.

Anthony J. Bucalo - Grupo Santander, Research Division

The Modelorama stores, will they be stocked with Bud Light, I imagine?

Carlos Alves de Brito

Yes, sure. It's a beer-centric store, yes, with our portfolios. Yes.

Operator

Our next question comes from the line of Brett Cooper of Consumer Edge Research.

Brett Cooper - Consumer Edge Research, LLC

Two questions. When looking at innovation, can you speak to, I guess, on a profit per hectoliter basis, the benefits from packaging versus a liquid, so a Bud Light aluminum bottle versus a Platinum?

Carlos Alves de Brito

Brett, yes, good question. Platinum, of course, was one that, because it was priced as a premium plus brand, it added both at the net revenue per hectoliter and at the gross profit per hectoliter, okay? The contrast with the 25-ounce can, okay, because of Bud Light, for example, in the total portfolio about the same because it's applied for all brands. The 25-ounce aluminum can is one that has a different effect, is one that has a dilutive effect at the net revenues per hectoliter line, but it's accretive at the gross line, at the gross profit per hectoliter. So I mean, liquid, I'm not saying that all liquids will behave like that or all packages will behave like that. Just 2 examples just to show how different pack innovations, depending on how they are positioned and depending on the gross profit they bring on a per hectoliter basis, can cause different effects, and that's why this time around because of the big pack, the 25-ounce can because it's been a huge success, the king in our mix, that's why we decided to split hairs a little bit and say, okay, this pack is one that's dilutive at the net revenue per hectoliter line, but it's accretive at the gross profit per hectoliter line and that's part of the explanation why the net revenue, total net revenue of 1.9% was below last year's net revenue per hectoliter for total U.S. business.

Brett Cooper - Consumer Edge Research, LLC

Great. And if I can follow up and push my luck, I mean, can you -- you said you wouldn't speak to whether you're going to put through a price increase or when you're going to put it through in Brazil, can you talk about whether your results to date are ahead of expectations in Brazil?

Carlos Alves de Brito

Well, if you look at our guidance, I mean, we haven't changed our guidance, even with the recent tax increase. I mean, we continue to say the same thing in terms of overall business in Brazil in terms of industry. So of course, the tax increase will change a little bit the equation between price and volumes, and we refer to that in our press release, but we continue to say that. And of course, the summer, of course, was very good. We had record temperatures in January and February, and we had a later Carnival time, which enlarges the summer vacation period in Brazil, so that was all in our favor. And now we're going to have the World Cup in Brazil, which happened last time 60 years ago, so it's an important event and we've been preparing for that event for 4 years. So again, very excited about the second quarter and what it can bring to us.

Operator

Our next question comes from the line of Sanjeet Aujla of Crédit Suisse.

Sanjeet Aujla - Crédit Suisse AG, Research Division

A couple of questions, please. Firstly, on Brazil, I'm slightly surprised you're not gaining share in that marketplace given the scale of investment going in. Can you just talk a little bit around that? And secondly, just on Asia-Pac, in the Oriental Brewery business, now you're consolidating that, can you just talk a little bit about the cost synergy potential in that marketplace?

Carlos Alves de Brito

So in terms of OB, the Oriental Breweries in Korea, very -- we're very happy to have that business back. It was a business that, when we sold in 2009, was pointing in the right direction. We were gaining market share. Cass was growing as a brand, and we're very happy to see that our colleagues in the last 5 years have taken that positive trend and make the best out of it and made Cass the #1 brand in the country and grew market share to a market share leadership position in that country. And now, we reacquired the brand and the business and we see that a lot of our colleagues are there, so it's great to have them back in the family. So Sanjeet, we're not giving at this point many details on OB other than the fact that the last 5 years have been a great run. And next quarter, we'll have more details because that will be in our numbers. In terms of market share in Brazil, your first question, market share was flat sequentially in the first quarter, and if you compare it to the first quarter of last year, so year-on-year basis, it lost 60 basis points but it's still within our range. So reaching 67.5% for the quarter, but still in our historical range of 67% to 69%. I mean, this has been the range in Brazil for many years and it fluctuates from one side of the range to the other side, depending on price increases and the lapping of those price increases and investments in the market and things like that. So I mean, it has always been within that range, so we're very glad to see that we have an amazing performance in terms of top line, net revenue per hectoliter, that we're able to recover part of the share that we lost last year, and we're still within our range with -- and now preparing for the World Cup that comes next quarter. It's also fair to say that the results in Brazil for the first quarter, the sales and marketing were up, and that's also in anticipation for the World Cup, which impact a little bit the margin and the EBITDA growth. But again, it's planting seeds for the quarter. We have high expectations onwards to the second quarter, so it's all within the plan.

Operator

Our next question comes from Edward Mundy of Nomura.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Just coming back to the revenue per hectoliter in the U.S., appreciate your comments around the negative pack mix and the launch of the 25-ounce can. I'm just trying to understand the weaker headline pricing evolution. Do you feel the industry is less able to absorb strong pricing that you've put through the last couple of years? Or is this an attempt to take your foot off the pedal to some extent to help stimulate volume demand? And my second question is really around your expectation to have a tax increase in Brazil, whether you've got any further comments there.

Carlos Alves de Brito

Well, Edward, in terms of our price in the U.S., let me start by saying that our pricing strategy remains the same since 2009 when we got here, okay? And so nothing has changed there. The difference you saw this quarter compared to last quarter, let's say, from 1.9% net revenue per hectoliter growth this quarter compared to the 4% you saw in the first quarter last year, can be explained in a very straightforward way. The 1 percentage point is because of brand mix, that this quarter contributed 50 bps versus 150 last quarter and that's because of the timing of our innovations last year and this year. So 1 percentage point right there of, let's say, the 2 percentage point difference. And the other percentage point has to do mostly with our mix impact from packaging mix impact, which has mostly to do with the 25-ounce can that, as I said, is a great pack in terms of being accretive to share and gross profit on a per hectoliter basis, but it does dilute the net revenue per hectoliter line. At the end of that, of course, what matters is the gross profit but because we always have a look at, of course, at the net revenue per hectoliter as well. That's why we explained this time that this pack has a dual effect in terms of being dilutive, net revenues per hectoliter, accretive in gross profit, different than from our innovations that were accretive on both lines, okay? So 1 percentage point explained by the mix contribution that has to do with the timing of our innovations last year and this year, and most of the other -- of the balance of the other point explained by the 25-ounce can, which became a huge pack in terms of innovation for us and is one that has a different effect compared to other innovations. In terms of the tax increase in Brazil, I mean, as I said, I mean, we understand that the federal government is trying to balance their numbers. They announced last week an adjustment to the reference price tables that are the base for the excise, federal excise tax for both beer and soft drinks, and this is to take effect on June 1. We remain convinced that the government can achieve the same results with a different mix, which not -- which would not include the tax increase but would count and rely on better industry volume growth that would create a similar level of tax revenues with a much better social impact in terms of investments and drive creation. So that's our strong belief. But of course, our policy is to pass along any tax increases to prices. But at this time, we're not commenting on the timing of our price increase related to this tax pass-through for competitive reasons, of course. But again, we remain -- our outlook remains one that ensures we will resume growth in Brazil, mainly because of the World Cup, even or despite of this tax increase.

Operator

Our next question comes from Kris Kippers of Petercam.

Kris Kippers - Petercam S.A., Research Division

Regarding your marketing, which was quite increasing a lot in Q1 with the plus 17%. Could you shed some light on the split between the 3 items that Brito mentioned in the Q1 conference call being growth, the World Cup innovation, that could give some more flavor towards the split of the Q2 when the World Cup is done. And then the second follow-up -- as a follow-up, regarding the Corona, are there any new markets where you're going to expand the brand after the announcement of Canada? And of course, can you give some comment on when you will launch it in Brazil?

Carlos Alves de Brito

I mean, in terms of the sales and marketing investments in the first quarter, they're totally within our guidance for the year of low- to mid-teens growth and also our guidance of that investment being more heavily skewed towards the first half of the year and that's because of, as you said, the World Cup, some scale operations and initiatives that we're taking and also because of innovations that we have in this first half of the year. So that's all consistent, very consistent with our previous guidance and we maintain that guidance. So no change, no new news there. In terms of Corona, as you said, Canada, we got the brand on March 1. Very excited about what that brand can do for that market. I mean, it changes our position big time in the high-end of that market. It's a full 2 percentage point share in the Canadian market, so very excited. We also transitioned the brand in some smaller countries like Italy, France, Spain, and the next big one, we'll do in a very phased approach, will be Brazil after the World Cup, so that's also already announced. So those are the countries and there's more to come. U.K. has also been confirmed for next year and we're in negotiation for other markets as we speak. So again, very excited about the Corona potential as a Global Brand. If you think about it, Kris, Corona today outside of the U.S. and outside of Mexico, so the rest of the world, it sells around 400 -- I mean, 4 million hectoliters compared to 20 million hectoliters that Budweiser sells outside of the U.S. Of course, Corona is a far more premium brand than Budweiser, but that gives you an idea of what we did with Budweiser when we got it in 2009, that we grew it every year since then, a brand that was declining on a global basis. And after it joined our system and never looked back, it went from a 1% growth in the first year to 3% to 5% to 6% to more than that this time around. And with Corona, we expect something similar in terms of growth. We're very excited about this brand and what it can do for our Global Brand portfolio.

Operator

Our next question comes from the line of Robert Ottenstein of ISI.

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

I was very impressed by the Focus Brand growth in the U.S., I think, with STRs being up 0.7%. Can you give us a little bit more color on that? Was the Bud Light core brand volumes up?

Carlos Alves de Brito

Yes, I mean, Bud Light, as a family, grew share slightly, so that's great news, much better than last year. And within the family, the Ritas continue to perform very well and the Bud Light brand grew within the light segment. So again, that's very good for Bud Light. The campaign, as I said before, the new campaign, "The Perfect Beer for Whatever Happens," also is off to a very good start with the Super Bowl. I mean, it's a campaign that was all designed for digital. And now with the summer, we'll continue to have mileage off of that campaign, off of that good start. So very exciting news for Bud Light.

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

Great. And then -- but did the volumes for Bud Light itself grow?

Carlos Alves de Brito

Well, we said in our press release, I think, low-single-digits decrease.

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

Okay, okay. And then looking at the Mexican market, over the amount of time that you've been there, in terms of the top line opportunities, what -- can you kind of summarize what you've learned? And also as you've looked at holes in the marketplace, where your brands are and the brand health of your brands, kind of what are the kind of the key takeaways of the last 6 months or so of really having a chance to examine that market more closely?

Carlos Alves de Brito

Yes, I think first time in the portfolio of brands in Mexico that connects the top line, of course, is one that's still not complete. So I mean, Bud Light, for example, needs to have a much bigger role within that portfolio. Corona Light, for example, also a much bigger role. We also need to be more active in the high-end, so we just introduced Stella Artois in Mexico. So that will give us that latitude that we're lacking today in our Mexican portfolio. We also see many opportunities in terms of revenue management, pack prices, modern trade execution, many things that will relate to top line. Modelorama also has a role to play. So I mean, many things to do in Mexico. The package mix is also one that's still not what it should be. So again, I think portfolio revenue initiatives and trade initiatives and the Modelorama, all this will be conducive to top line opportunity, let's put it this way.

Operator

Our next question comes from the line of Lauren Torres of HSBC.

Lauren Torres - HSBC, Research Division

My question goes back to Mexico, and Brito, I know you noted that the environment is still soft there, but you are seeing some signs of a recovery. I was just curious if you could talk a little bit more about the environment. It seems like other consumer products companies seem less enthusiastic about the second half recovery. So I was curious to hear what you're seeing in beer. And then second, still on Mexico, you mentioned that the price increase will go through in May. So with consumers still a bit under pressure here and seeing more pricing coming through, why do you think you can take this pricing with the consumer pushing back a bit?

Carlos Alves de Brito

Well, Lauren, in terms of beer, we're seeing a different scenario because, I mean, we're more bullish about this year and we told that in our outlook in terms of industry resuming growth in Mexico. And what we saw in the first quarter, yes, so volumes by 0.9%, with a slight share gain, but you have to remember that Easter was out this year in the first quarter. So even without Easter, which is the main holiday period in Mexico, we're still able to come with positive volumes, different than the performance from last year. The price is already in the market. It was introduced in the first days of May. So now for the second quarter, not only do we have the Easter holiday that's now going to help the second quarter, but we also have the World Cup with everything I said about the promotions and everything. And we believe, from what we see from analysts and economists, that the economy in Mexico also will be stronger this year. And given all the investments we're doing because -- Lauren, you have to remember, this is going to be the first year that we're going to be managing the business in Mexico full 12 months. Last year, we managed it for 6 months, and this year, we gathered, of course, some learnings last year and that was embedded in our plan for this year. So not only everything I said, but increased investments in -- overall in terms of sales and marketing. So again, very excited about what Mexico can bring to our overall company mix this year.

Operator

We only have time for one more question. Our question comes from Mitch Collett of Goldman Sachs.

Mitchell Collett - Goldman Sachs Group Inc., Research Division

On Mexico, I think if you take synergies out, x synergies, EBITDA was down about 7% organically. I just wondered if you could provide some color about that. And then secondly, your guidance for cost per hectoliter on a constant geographic basis, I think, it's still low-single-digit increase, it was flat in the quarter. I'd just be interested to know why it was going to increase for the remainder of the year.

Carlos Alves de Brito

Well, I think, Mitch, it's not a -- we don't think it's a good comparison to take just one quarter, especially in a country that is still going through an integration phase. So of course, the synergies are there, very important. But we also, as I just said in the previous questions, we're seeing lots of opportunities on the top line. Again, this quarter was heavily impacted by 2 things: first, the Easter that moved from last year being the first quarter to the second quarter this year; and the price increase that took place in March last year and is now taking place in May this year, by the way, already in the marketplace in Mexico. So those 2 things, of course, give pretty much an apples-to-oranges comparisons when you compare first quarter last year, first quarter this year. So we tend to look on a more yearly basis. And then you have to split what's synergy and what's, let's say, organic growth outside of synergies. But I think for one quarter, especially with these 2 huge impacts, which is the price increase and Easter, I think it's not a good basis for comparison.

Mitchell Collett - Goldman Sachs Group Inc., Research Division

Okay. So given your comment from the previous question, we should probably expect both synergies and underlying organic to contribute to EBITDA growth for Mexico for the full year?

Carlos Alves de Brito

Well, again, we're not giving any guidance, but you can expect that Mexico is all pointing in the right direction in terms of brands, share and synergy delivery. So the industry now in a better place this year, as we said in our outlook, that's our belief. So I think, again, very glad with our performance in Mexico. Don't take, please, the first quarter as a comparison, because of the price and Easter, I don't think it makes sense. Look at a broader period.

Mitchell Collett - Goldman Sachs Group Inc., Research Division

Okay. And then on the input cost side of things?

Carlos Alves de Brito

In terms of cost of sales, I mean, we continue to be within the guidance we gave, no change there. Yes, this first quarter was better than the guidance but we continue to stick to our guidance for the full year.

Okay, thank you very much. So I think that was the last question. So let me tell this, the IR team will follow up with some of the questions that didn't get the opportunity to be asked given the time constraints.

And in terms of my closing remarks, I'd like to thank you for your time. We're very excited about the second quarter, World Cup in Brazil. Most of our relevant countries participate in the World Cup. We've been preparing this for 4 years, now it's time to execute. So talk to you next quarter. Have a great day. Bye-bye.

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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