Anheuser-Busch Companies Inc. Q1 2008 Earnings Call Transcript

| About: Anheuser-Busch Inbev (AHBIF)

Anheuser-Busch Companies Inc. (NYSE:BUD)

Q1 2008 Earnings Call

April 23, 2008 4:00 pm ET

Executives

Dave Sauehoff - VP of Investor Relations

W. Randolph Baker - VP and CFO

Analysts

Kaumil Gajrawala - UBS

Bill Pecoriello - Morgan Stanley

Marc Greenberg - Deutsche Bank

Bryan Spillane - Banc of America Securities

John Faucher - JPMorgan

Mark Swartzberg - Stifel Nicolaus

Judy Hong - Goldman Sachs

Christine Farkas - Merrill Lynch

Ann Gurkin - Davenport

Carlos Laboy - Credit Suisse

Jonathan Feeney - Wachovia securities

Lauren Torres - HSBC

Operator

We are ready to begin Anheuser-Busch Companies first quarter investor teleconference. Mr. Sauerhoff, you may proceed with your opening remarks.

Dave Sauehoff

Good afternoon. I am Dave Sauerhoff, Vice President of Investor Relations at Anheuser-Busch. We're placing today's call from Orlando, Florida where Anheuser-Busch's Annual Stockholders Meeting was held this morning at our Sea World Park. We issued our first quarter earnings release earlier today and it's available on our corporate website.

The release and this teleconference contain forward-looking statements and actual results might differ materially from these projections. Additional information on factors that could affect the company's future operations, earnings and prospects is included in the earnings release and the company's most recent Form 10-K. The company disclaims any obligation to update or revise any of the guidance provided in this teleconference. The earnings release posted on our website contains a disclosure and reconciliation of all the non-GAAP financial measures we will be using in this teleconference.

Also please note that our comparisons of U.S. beer wholesaler sales-to-retailers required no selling day adjustments for the quarter. For members of the media listening today, please direct your inquiries following the call to Brenda Williams in the Anheuser-Busch Public Relations Department.

Participating with me on the call today are Bill Kimmins, Anheuser-Busch's Treasurer; John Kelly, our Controller; and today's speaker, Vice President and Chief Financial Officer, W. Randolph Baker. Randy?

W. Randolph Baker

Thank you, Dave, and good afternoon, everyone. At our Annual Stockholders Meeting earlier today Anheuser-Busch reported a 6% increase in net sales, operating income and earnings per share. We successfully implemented our 2008 pricing plan and the outlook for the U.S. beer pricing environment continues to be favorable.

Mitigating commodity costs pressures through productivity improvement and costs reduction programs is a very high priority at AB. And in the first quarter, we were able to maintain gross profit margin in our U.S. beer operations. Our first quarter sales-to-retailer results were below expectations. As previously discussed, we are increasing sales and marketing support for our core beer brands and expect improved sales performance during the key summer selling season. Profits from our international beer operations were up significantly, but equity income declined due to higher costs and a very difficult prior year comparison.

Briefly reviewing our first quarter financial results, consolidating net sales increased 6.2% with U.S Beer segment sales up 4%. International segment net sales increased 20%. Consolidated cost to sales increased 6.2%. Cost of goods sold per barrel for the U.S. beer company increased 2.3%. Marketing, distribution, and administrative expenses were up 6.1%. Operating income growth was 6.2%. Equity income decreased 21%. Consolidated net income declined 1%. And earnings per share were $0.71, up 6%.

Operating cash flow before changes in working capital increased 18% and including a favorable working capital performance, operating cash flow nearly doubled to $611 million. Capital expenditures were $150 million, down slightly from the prior year. Share repurchase spending was $459 million, as we repurchased over 9 million shares. Wholesaler sales-to-retailers were down seven-tenth of 1% in the first quarter, with AB produced brands down 1.4%.

Although as reported CAGNY, we had positive sales-to-retailers results through mid February. Sales declined in late February and March, reflecting unfavorable weather and a difficult prior year comparison in March.

Sales-to-retailers trends have improved in April and AB produced brand FTRs are up 2% for the first three weeks.

Looking at sales-to-retailers results by brand family; Bud family volume declined low single digits in the first quarter. Michelob family volume declined mid single digits. The Busch and Natural brand families were up approximately 1% in the quarter. Our specialty brands grew 47%, with strong performances by the Bicardi Silver Mohito, Bud and Bud Light Chelada and LandShark Lager. Import brands were up low double digits on a comparable basis excluding January results for InBev brands.

As we have discussed our priority for 2008 is to accelerate core U.S. beer sales and profitability. We are increasing advertising support for Budweiser and Michelob families by 15%, with new created messages and media plans to reach a wide ranging consumer audience. The vast majority of the advertising increase will occur in the second and third quarters. We will be introducing Bud Light Lime at the end of April priced at a premium to Bud Light and backed by a $35 million marketing campaign.

Anheuser-Busch's U.S. beer shipments to wholesalers increased for four-tenths of 1% in the first quarter, with AB produced brands down to two-tenths of 1%.

Wholesaler inventories at the end of the quarter were approximately the same as in 2007. Based on data from the Beer Institute, U.S. brewer tax paid withdrawals were up 1% in the first quarter. Total U.S. industry sales including imports are estimated to be essentially flat, down one-tenth of 1% in the first quarter.

Anheuser-Busch's U.S. market share increased three-tenths of a share point on a shipment basis. Revenue per barrel increased 2.3% in the quarter. Front-line price increases contributed 230 basis points to revenue per barrel growth. Promotional price adjustments were even with last year and portfolio mix was also leveled with the prior year, as a 30 basis point contribution from imports was offset by increased sub premium brand volume.

Anheuser-Busch successfully implemented price increases and discount reductions on over 70% of our volume. As in the past AB's price actions were tailored to specific markets, brands and packages. The invested pricing environment continues to be favorable including the outlook for our promotional pricing during the important Memorial Day holiday.

Our International Beer segment net income decreased 12.5% in the quarter, with the strong performance by our international operations offset by a decline in equity income. Equity partner volume, which is reported on a one-month lag reflecting December through February results, increased 9.3% in the first quarter on higher volume for Modelo and Tsingtao. Equity income declined 21% in the first quarter, reflecting higher materials and operating costs for Grupo Modelo and a very difficult comparison with 30% growth in the first quarter of 2007, which benefited from the return of an advertising fund that was part of Modelo's former beer import contract. Modelo will report their first quarter results later this week and Tsingtao has not yet reported their first quarter results.

International operations volume for the first quarter increased over 3% and profit nearly doubled. Volume results for our China operations were up slightly and financial results were up significantly in the quarter. China suffered an unusually severe winter and our volume results were also impacted by the elimination of some unprofitable packages at Harbin.

Price increases and positive mix due to good volume growth by our higher margin Bud family and Harbin premium brands drove the improved profit performance. All major brewers in China have initiated price increases to help offset a very challenging input cost environment. Anheuser-Busch continues to implement market expansion plans for Budweiser and Harbin premium brands expanding into 40 additional cities in 2008.

AB is the official Olympic beer sponsor for the 2008 Beijing Olympic Games and the company has a full Olympic Marketing Campaign including advertising, packaging, special events and trade promotions.

Finally, to meet the continuing growth and demand for our beers in China, we recently announced a relocation and expansion of our Tangshan Brewery. The capacity of this brewery will be increased by 1 million hectoliters and is scheduled for completion at the end of 2009. Work is proceeding on our 2.6 million hectoliter Greenfield Brewery in Foshan which is expected to be completed later this year. In Canada, volume increased low double digits in the first quarter as both Budweiser, the leading brand in Canada and Bud Light continued to gain share. Profits in Canada increased 30%.

In the United Kingdom, volume declined mid single digits continuing a negative trend. Our financial results, however, improved significantly due to cost reductions from the implementation of our restructuring plan. Pre-tax profits for AB's packaging segment decreased 11% in comparison with a very strong performance in the first quarter last year. Busch Entertainment's pre-tax seasonal loss narrowed meaningfully versus the prior year due to significantly higher attendance as a result of the early Easter holiday and higher per capita revenue. Busch Entertainment also had a successful opening in March for the new Aquatica water park here in Orlando.

I will now review our outlook for the full-year 2008 for our key performance drivers. We continue to expect revenue per barrel to increase in the 2.5% to 3% range and cost of goods sold per barrel to increase in the 3% to 3.5% range.

Consolidated marketing, distribution and administrative expense should be up mid single digits in 2008, including incremental media investment for the launch of Bud Light Lime. We now expect international beer operations profits to increase over 25%. Equity income is now expected to decline in 2008 versus normalized 2007, reflecting higher costs incurred at Modelo and Tsingtao.

Recall that AB normalized for Modelo restructuring in 2007, also recognized that AB's equity income results will differ from Modelo's reported results due to our one-month accounting lag and differences in U.S. GAAP and Mexican gap. We continue to expect entertainment profits to be up mid single digit. Packaging segment profits are expected to decline low double digits in comparison with very strong 2007 results. We now expect net interest expense to be up $25 million to $35 million.

Our effective tax rate is now expected to be around 39.5% lower than prior guidance due to our lower expectations for equity income. Capital spending should be around $975 million. Our target for share repurchasing is approximately $2 billion subject as always to potential acquisition opportunities.

In summary, we successfully implemented our 2008 price increase plan and the outlook for the pricing environment this summer continues to be favorable. We are facing substantial commodity cost pressures, but in the first quarter, we were able to maintain our U.S. beer gross margins. Sales results in the first quarter were below our expectations. Sales trends have improved thus far in April and with the significant increase in the advertising support for our Budweiser and Michelob brand families, the introduction of Bud Light Lime, the outgoing strength of our sub premium brands and our expanded high end portfolio, we're cautiously optimistic concerning the outlook for our beer sales during the key summer selling season.

That concludes my prepared remarks. We'll now turn it back over to our operator, Lynne for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Kaumil Gajrawala of UBS.

Kaumil Gajrawala - UBS

Thanks everybody. Quick if we could first talk about the sales force restructuring. You segmented the country last year and it's been almost a year now that you had the 300% increase. Can you give us an update on how the restructuring is going? And is there anything that we can look at in terms of how execution is changing?

W. Randolph Baker

Kaumil, last year, as we stated, we increased field sales personnel by some 30%. We did this to support our new import portfolio to increase our support of urban markets and especially on-premise and increase sales, a chain sales support. We have seen good results in our urban markets in support of, with this increased attention. What we're getting in, as we go in, as we've added now our import portfolio is we are being able to pick up Bud family price cuts in on-premise accounts. At the same time, we are servicing the import accounts. We in 2007 had some 19,000 new placements, more than half of which were for our AB trademark brands. We had a restructuring at the end of the year with changes in management and new regions, with senior executives in each of the regions, with a new organization structure, with additional authority responsibility at the region level for implementation of the sales and marketing programs and additional responsibility. So far we are pleased with how the increase in sales force front, we are pleased with the reorganizations that occurred in our sales organization. We are not pleased with our first quarter sales results as we've commented, but we are optimistic as we move into the summer.

Operator

Thank you. Our next question is coming from Bill Pecoriello of Morgan Stanley.

Bill Pecoriello - Morgan Stanley

Good afternoon, Randy.

W. Randolph Baker

Hi, Bill.

Bill Pecoriello - Morgan Stanley

Maybe China, the underlying volume trends are obviously bouncing a lot and there is a lot of factors going on. You had the tough comp in March and you had the easy comp in early April. But if you are trying to maybe help us out and talking about the channel performance and what happened in March in some of the channels like restaurant and bar convenience stores where we know there is weakness out there. And then in April, was a rebound in certain channels that drove the improvement in China? Just trying to get a handle on some of the underlying trends there?

W. Randolph Baker

Yes. Sales trends as you put it have bounced around quite a bit. And again to repeat for AB produced brands in the first quarter, we were down 1.4% after being up 0.6% through mid February as we discussed at CAGNY. We had very unfavorable weather in March and a difficult comparison with March last year which had favorable weather. Where we saw in terms of channels in March the drop-off in trends versus the trends that we had for January, February were most pronounced in on-premise and in C stores.

We also had in March Easter, an early Easter. The impact of that was dampened by the bad weather, but in any case we had the benefit in the first quarter of early Easter versus it being in the second quarter of last year. In April, we had a nice rebound and the sales of FBRs that both AB produced in total were including imports were up in the 2% range. We have the opposite weather pattern versus last year. We have the opposite weather pattern versus March. We had favorable weather in April thus far versus unfavorable weather in March of last year and the unfavorable weather in April of last year, excuse me. And we had this week in response to your question last year, we had very bad STRs in the second and third week in April last year. You did have the Easter comparison that benefited last year and so on the relative basis this year.

In terms of channels, interestingly our rebound is in the same channels that were hurt in March. We had a pick-up in our performance in those C stores and in on-premise thus far in April. So the numbers are bouncing around quite a bit and you also had the impact of the change and timing of Easter between the quarters. And again the comment, I think I made this before, when Easter is early, we get less of a favorable impact from that and particularly if we had unfavorable weather. One other comment along the line while we are on the quarter, we will have at the end of the quarter Bill as you are aware a little bit of an impact from July 4, shifting to Friday this year versus it was Wednesday last year, an important selling day will shift over into July. Overall the shift of having July 4 on a Friday is a positive, but in terms of quarterly impact, it will be a negative, slight negative for the second quarter, a positive for the third quarter.

Operator

Thank you. Our next question is coming from Marc Greenberg of Deutsche Bank.

Marc Greenberg - Deutsche Bank

Good afternoon, Randy.

W. Randolph Baker

Hello, Marc.

Marc Greenberg - Deutsche Bank

My question relates to any insight that you could offer us ahead of the launch of Bud Light Lime on how seasonal the product you think this might be. If we look at the peak-to-trough volume share for Miller Chill, it really was significantly higher in the summer that it's trending right now. Conversely, Bud Light doesn't seem to move around that much. As those are kind of the two fairest comparisons for brand, how do you expect the overall volumes to trend in terms of seasonality? And if you could talk some about the system placement that you haven't placed around key holidays and promotion, how are you going to work Bud Light Lime into Bud and Bud Light?

W. Randolph Baker

Mark, Bud Light Lime should have more of a seasonal pattern than Bud Light, it's positioning as a lime flavor beverage, it's positioning is outdoor refreshment. And therefore, we'll obviously be a greater appealing the favorable weather in the summer versus the winter. We don't know since we really haven't, likes the brand, exactly what the pattern will be, but it's reasonable expectation that will be more of a seasonal pattern than Bud Light, and again because it is an outdoor refreshment type of positioning.

We do believe that Bud Light Lime will generate, well obviously it's going to generate trial from Bud Light drinkers, but the case profile, the packaging, the pricing are distinct versus Bud Light. And I think, it will bring in a different beer drinker to compliment Bud Light and expand that brand's portfolio or drinkers. Our placements for the launch are excellent. We are in a very good shape and very optimistic as we go into our launch next week and as we kick up for the advertising and sales support for the key summer selling season.

Operator

Thank you. Our next question is coming from Bryan Spillane of Banc of America Securities.

Bryan Spillane - Banc of America Securities

Good afternoon, Randy.

W. Randolph Baker

Hello, Bryan.

Bryan Spillane - Banc of America Securities

If you could talk a little bit more about the pricing environment, stepping back and looking at your results in the quarter more pricing went through in January and February and then volumes really seem to tail off back-end of February and March. And then looking at your mix, you've got the subpremium business doing well and you've got your high end business doing well and it looks like the middle is getting squeezed. So can you talk about how that squares with your confidence in the pricing environment? And then more specifically from Michelob family and Bud family, have you seen anything unusual about elasticity of demand this year than you had seen in other years?

W. Randolph Baker

Bryan, first of all, we increased prices, some of the discount reductions on over 70% of our volume. Those price increases had been well received by retailers, consumers. And again as you well know because of the commodity costs environment that most food and beverage companies are facing, retailers, consumers are typically same price increases of at least the CPI level or higher because of the cost environment. We've seen our competition take similar price increases across the country. We also are seeing the promotional environment to be favorable, the promotional prices that are in place for Memorial Day are higher than the promotional prices that were in place last year and the depth promotion is comparable. So promotional environment continues to be a favorable as well. So both the price increase environment and the promotional price environment continue to be favorable. We have not seen a what we would view as a change in elasticity for the price increase for any of the brands. But as it was answered, discussed in Bill's question we got a lot of weather impacts that are impacting a number of the markets and that seems to be more of a driving force than price elasticity.

We are seeing stronger increases in our sub-premium brands. And whether or not this is true trading down, we don't know. But we are definitely seeing in some markets stronger performances by our Busch and Natural brands. As they are the leading, the strong subpremium brands and we are continuing to gain share of the subpremium segment. In IRI supermarket data at least the subpremium sector continues to lose share, so you don't have, it was down about three-tenths per share point in the first quarter which is less of a share loss in subpremium have typically been doing, but still not an indication of widespread trading down.

But in some markets we are definitely seeing stronger performance out of our subpremium brands. It's not being driven by. We do very little marketing for the Busch and Natural brands. So, overall we are optimistic concerning the pricing environment as we go into the summer, both in terms of the price increases that are in place and the discount promotions that are in place and the outlook as we go through the year. In terms of our brand mix, we will see Bud Light Lime is premium priced to Bud Light, which should be a positive. The summer is when we have the increased advertising support for Budweiser and Michelob families and that occurs in the second and third quarter. And we are hopeful of improved mix as we go through the summer.

Operator

Thank you. Our next question is coming from John Faucher of JPMorgan.

John Faucher - JPMorgan

Yes, good afternoon, Randy.

W. Randolph Baker

Hello, John.

John Faucher - JPMorgan

I have quick question for you. So taking those comments about the trade down within your portfolio and looking at the impact on the overall category. We've been seen imports slow even before the economy really started slowing down in consumer spending. Any further thoughts in terms of what is driving some of the weakness in the imports, beyond maybe the consumer trade down and any thoughts on the craft segment in the same thought process? Are you seeing any trade down there? Is that slowing some of the growth that we have seen in craft?

W. Randolph Baker

Last year, imports slowed considerably, but the craft or micros were quite strong and I was continuing to see in scanner data that type of pattern of relative weakness in imports and relative strength and continuing to gain share in of crafts and micros. My guess is that that is partly basically what brands are hot and what just consumers trying different things. But it's undoubtedly more complex than that. But as if right now, John you're continuing to see trading up to the high end, perhaps at a bit less of a magnitude than we were seeing in the past couple of years. And then within the high end during the past year and a quarter, we've seen strengthen in crafts and micros relative to imports.

Operator

Thank you. Our next question is coming from Mark Swartzberg of Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Thanks and good afternoon, Randy.

W. Randolph Baker

Hello, Mark.

Mark Swartzberg - Stifel Nicolaus

On your comment of equity income, could you elaborate a bit more for us here how you're viewing this term normalized equity income and when you say down, how much down are you thinking?

W. Randolph Baker

Mark, last year we normalized for restructuring and restructuring costs in Modelo and John what was the amount of the restructuring? $60 million. So that's when we're saying normalize, it's basically recognizing that we normalize for restructuring costs at Modelo and therefore that's one of the factors where our equity income results will be different than Modelo's results. Again, specifically the guidance that I gave is, equity income is expected to decline in 2008 versus normalized 2007 and it reflects higher costs that have been incurred at both Modelo and Tsingtao. And then again, recognized in additional to the normalization, there're other difference in the results that we report versus the results Modelo reports both the one-month lag and also some important differences in U.S. GAAP versus Mexican GAAP. Both Modelo and Constellation have expressed both confidence in the sales outlook for the Corona brand in U.S. and comments about seeing improvement in sales trends as Corona has left the price increase on the year-over-year basis and we see the same results in IRI data. Modelo is going to report their first quarter results later this week and they typically provide comments on their outlook. We will wait to refine the guidance on equity income until Modelo and Tsingtao have provided updates. Magnitude is certainly a single digit type of decline, but we are not going to refine that future until Modelo and Tsingtao have updated their outlooks.

Operator

Thank you. Our next question is coming from Judy Hong of Goldman Sachs.

Judy Hong - Goldman Sachs

Hi, Randy.

W. Randolph Baker

Hello, Judy.

Judy Hong - Goldman Sachs

Just going back to your comment about the MD&A spending outlook for 2008, it sounds like you're upping that up a little bit from low to mid single digit to mid single digit. I'm just wondering if that's a reflection of this faster STR trend in the U.S. beer business? And if that's the number that we should think about potentially coming up if your volume tend does not improve anytime soon? And then secondly just looking at your guidance that you laid out this time around versus the last time, it sounds like your equity incomes coming down versus what you said previously, and again the MD&A coming up a little bit. So, are there any offset to those issues that basically you come out that even or are we basically looking at a little bit lower EPS guidance versus your prior guidance?

W. Randolph Baker

Judy, first on MD&A. The change in MD&A guidance from the prior low to mid single digits to mid single digits is simply Bud Light Lime. It's a $35 million for Bud Light Lime and that pushed us closer to mid and low to mid. So, that is the change there. We may or may not increase our marketing support as we go through the summer, but the change in guidance is simply reflective of the Bud Light Lime introduction.

The changes in guidance versus last time, again MD&A mid single digit versus low to mid single digits. International operations profit was increased from over 20% to now over 25%. We did change equity income guidance we expected to decline now. We lowered the interest expense, the prior guidance was $45 to $55 million, it's now $25 to $35 million. We have a slightly lower effective tax rate. The previous guidance was 40%, it's now 39.5%. And then finally although we don't provide guidance on it, our impact of the share repurchase there, the share count is positive.

Operator

Thank you. Our next question is coming from Christine Farkas of Merrill Lynch.

Christine Farkas - Merrill Lynch

(inaudible) which is still on up mid single digit range. I am wondering just as a clarification based on how early it is in the year, what is the --?

W. Randolph Baker

Christine, we couldn't hear the start of your question. Could you repeat it please? I am sorry.

Christine Farkas - Merrill Lynch

Apologies. Can you hear me now?

W. Randolph Baker

Yes, I can. I just didn't catch the very first part of the question. Could you start it over?

Christine Farkas - Merrill Lynch

Certainly, as a clarification your guidance for entertainment profit is still up mid single digit in '08. So I am just wondering if you have a little bit of, perhaps some anecdotal evidence as to what happens to theme park attendance in prior economic downturns? And then I'd like your perspective on any incremental changes in market trends in Canada and the UK. Your profit performance is clear, but underlying market trends would be helpful? Thank you.

W. Randolph Baker

Yes, and very good question. We are off to a good start at in our entertainment operations. Our Orlando parks here are having an excellent start. We had a very good Easter. We are continuing to have good attendance in our operations. But obviously the primary season is the summer when all of our parks are opened. In the past, there has been some sensitivity of theme park attendance to the economy. It is a more income sensitive business than beer which is one of the least income sensitive of the businesses.

But we do have an offset, Christine, particularly here in Florida, is that we are getting very strong attendance from international guest and that is in part benefiting from the weakness in the dollar which makes the visits to Florida, the visits to United States, the visits to our park as very affordable. We are optimistic concerning our outlook for our parks, but again we didn't want to change the guidance until we get into the summer and see how everything plays out.

In terms of international, in Canada the industry is up four-tenths of 1% in the first quarter. So we had a significant improvement in market share there. In the UK, we were down, the industry was down, the industry and I just have to -- the February was down 2.3% with continuing big drop, 11% drop in off-premise. As you know, in the UK the excise duty was increased significantly around 9% in March and brewers have increased price to offset the increase in excise duty and it remains to be seen as to the impact that that will have on industry sales, but it did cause a increase in price for UK beers.

Operator

Thank you. Our next question is coming from Ann Gurkin of Davenport.

Ann Gurkin - Davenport

Good afternoon.

W. Randolph Baker

Hello, Ann.

Ann Gurkin - Davenport

Just wondering if you can update on identified productivity against brewery productivity savings, I think the range was 300 million to 400 million over several years. Are you able to move forward any of those savings, are you increasing that range at this time? And then secondly, can you comment, are you experiencing any softness in volumes on a geographic basis?

W. Randolph Baker

Ann, the comments we've given concerning productivity and specifically the Blue Ocean is we originally said 300 million to 400 million over four years. We are now saying in access the 400 million over the four years. And that is primarily brewery productivity. We are adding G&A savings. We are adding G&A productivity. It won't be accounted for in this bucket, but we are also looking for improved profitability in our SKUs looking at ways to reduce costs, to improve profit margins on specific SKUs. In terms of geographic softness, in general, we are doing better west of the Mississippi, softer east of the Mississippi. In key markets, we are up in California. We are up in Texas. We are down in Florida. We are down in New York. But generally speaking for us, our pattern is stronger in the west and weaker in the east.

Operator

Thank you. (Operator Instructions). Our next question is coming from Carlos Laboy of Credit Suisse.

Carlos Laboy - Credit Suisse

Good afternoon, Randy.

W. Randolph Baker

Hello, Carlos.

Carlos Laboy - Credit Suisse

Randy, you mentioned that you are seeing big profitability increases in China, but you sounded more negative about Tsingtao equity income. What pressures are you seeing in your Tsingtao investments that maybe you are not seeing in your company-owned operations?

W. Randolph Baker

Carlos, as you know China brewers are facing significant commodity cost pressures in Tsingtao. There were higher costs in the first quarter, the December through February than we had in our plans. So that was simply the comment relating to Tsingtao which is prior cost and you are seeing that with other brewers. We added some -- we had excellent profit results for our China operations. Carlos a lot of this was driven by mix. Basically, we had very good growth for Bud family and as you know, that is at super-premium pricing for having even greater growth for the Harbin premium brands, which is at China premium prices, and they have relatively good margins.

We eliminated quite a number of unprofitable SKUs for Harbin popular beer. And so, within our mix, you've got a greater growth in the higher-margin brand families in China for our operations. And that in turn led to the nice profit growth we had in China.

Operator

Thank you. Our next question is coming from Jonathan Feeney of Wachovia Securities.

Jonathan Feeney - Wachovia securities

Good afternoon, Randy.

W. Randolph Baker

Hello, Jonathan.

Jonathan Feeney - Wachovia securities

I know you are on the mix issue. I know you do and have always been very tactical about managing pricing and promotions between the sub-premium, premium and the super-premium family.

But I just wonder in this environment where price mix is of the essence with all this cost pressure, I mean are there things you can do to may be meet that sub-premium drinker with that volume sort of popping up considered in the premium brands either by managing price up in sub-premium or promotions and premiums to sort of direct-to-drinker toward that more profitable product?

I mean is that something that you guys plan to do over the course of the year or how are you thinking about that?

W. Randolph Baker

Jonathan, yes. It is always our objective to grow our premium and above grand families. Our objective for our sub-premium brands has been for a number of years to gain share of that segment without growing the segment.

Our advertising, our marketing dollars are all behind the Bud Family and the Mich family. We have relatively little marketing, only a very, very small amount of marketing for sub-premium brands, Busch and Natural.

That having been said, the Busch and Natural beers are excellent beers. They have good appeal. And in this market place where there are some beer consumers that are being impacted by the economy and are looking for sub-premium brands, we have excellent sub-premium brands. And that gives us not as good of a margin as the Bud and Mich families, but still good margins. And we feel we are well positioned with our portfolio for really whatever of the categories show growth in each market.

But again, the big question behind the summer, along the lines of what you are saying, is our marketing support for Bud and Mich families, the Bud Light line at a higher price point, and that is our focus. But the extent to which consumers are choosing sub-premium brands, we have leading sub-premium brands and are getting good volume and margin performance from them.

Operator

Thank you. Our final question is coming from Lauren Torres of HSBC.

Lauren Torres - HSBC

Hi, Randy.

W. Randolph Baker

Hello, Lauren.

Lauren Torres - HSBC

Its appear your cost guidance is unchanged. But at this point looking at any ingredient or packaging costs, are they trending as expected or just more generally speaking are there any greater cost concerns for you this year?

W. Randolph Baker

Lauren, in general, well, we have significant cost concerns. The biggest pressures as you know are from agricultural commodities and also from energy. Most of our costs are controlled either by contract or hedging. But for those that were not covered, we have had unfavorable developments. The prices have gone up more than we have expected.

We have been able to offset that with better than expected productivity in our brewery operations. We are getting very, very good efficiencies throughout our brewery system. So we've been able to offset the unfavorable surprises, if you will, in the uncovered commodity cost with a favorable productivity improvement.

One another thing just as we're tracking cost of goods sold, as we saw in the first quarter where we hedged stronger performance for our Busch and Natural brands relative to Bud family, the package mix for sub-premiums is more cans versus glass as opposed to the Bud family. And so, you have a bit of a benefit within the packaging cost and therefore cost of goods sold.

But as the summer goes along and the brand mix changes, you can see that may go through differently and in our cost of goods sold per barrel. But in any case, we expect cost of goods sold per barrel, we still expect that to be up in the 3% to 3.5% range for the year. Our objective through productivity is to bring that in at the lower end of the range. But again, we are facing as all brewers a lot of commodity cost pressures.

With that, we thank all of you for participating in today's teleconference. We appreciate your questions, your interest in AB. The second quarter teleconference will be held on July 23rd. And again, thanks for joining us today.

Operator

Thank you. That concludes today's teleconference. You may disconnect your lines at this time and have wonderful day.

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