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Executives

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

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

Analysts

Melissa Earlam - UBS Investment Bank, Research Division

Andrea Pistacchi - Citigroup Inc, Research Division

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

Anthony J. Bucalo - Grupo Santander, Research Division

Sanjeet Aujla - Crédit Suisse AG, Research Division

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

Alice Beebe Longley - The Buckingham Research Group Incorporated

David Belaunde - Morgan Stanley, Research Division

Kris Kippers - Petercam, Research Division

Pablo E. Zuanic - Liberum Capital Limited, Research Division

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Chris Pitcher - Redburn Partners LLP, Research Division

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

Anheuser-Busch InBev SA/NV (BUD) Q2 2012 Earnings Call July 31, 2012 9:00 AM ET

Operator

Welcome to the Anheuser-Busch InBev Second Quarter 2012 Earnings Conference Call and Webcast. Hosting the call today from AB InBev is Mr. Carlos Brito, Chief Executive Officer. To access the slides accompanying today’s call, please visit AB InBev’s website 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] And the floor will be open for your questions following the presentation [Operator Instructions].

Some of the information provided during the conference call may contain statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. It is possible that the company’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

For a discussion of some of the risks and important factors that could affect the firm’s future results, see Risk Factors in the company’s latest Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 13, 2012. AB InBev assumes no obligation to update or revise any forward-looking information provided during the conference call and shall not be liable for any action taken in reliance upon such information.

It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may now begin.

Carlos Alves de Brito

Thank you, Jackie. Good morning, everybody. Today, AB InBev reported its second quarter results.

Total revenue for the second quarter grew by 4.7%, driven by revenue per hectoliter quarter growth of 6.4% on a constant geographic basis. Volumes in the quarter were soft, primarily driven by the U.S. as a result of the adjustments to shipping patterns which we flagged in the first quarter. These adjustments, which were designed to ensure a smoother and more cost-efficient phasing of deliveries to our wholesalers, led to a 2.1% decline in shipments to wholesalers or STWs. However, the underlying health of our U.S. business is good, with sales to retailers, STRs, closing the half year ahead by a positive 0.2%. Company-wide volumes of our focused brands grew by 1%, with our 3 global brands growing ahead of this rate at 2%.

EBITDA grew by 2.5%, and EBITDA margin declined by 80 basis points to 36.4%. EBITDA performance was impacted in the quarter by the anticipated decrease in shipments to wholesalers in the U.S. and increase in distribution expenses in the U.S. related to the very successful rollout of our innovations as well as higher overall transportation cost in both Brazil and the U.S. We also faced some difficult comparables in administrative expenses related to variable compensation accruals and the timing of certain expenses year-over-year. Year-to-date, EBITDA grew by 4.9% compared to the first 6 months of last year. Finally, our earnings per share grew by 22% in the quarter to $1.22 on a normalized basis. So a challenging quarter in terms of EBITDA, as we expected, but we're confident of a stronger second half.

Our global brands of Budweiser, Stella Artois and Beck's grew collectively by 2% in the quarter. Global Budweiser trends remain strong. Volume is growing by 5.2% in the quarter and 6.2% year-to-date. Budweiser brand health in the U.S. continues to improve, and we saw a strong performance, as in most of our key markets around the world. This includes a double-digit volume growth in China and Russia; solid execution behind the FA Cup sponsorship in the U.K., which helped the brand to gain share in the first half; and a good reception for the brand when it was launched in Ukraine in April. In Brazil, Budweiser continues to exceed expectations after its launch in August last year and has played an important role in our premium brand portfolio strategy.

Stella Artois global volumes came under pressure in the first quarter, declining by 3.5% due to weak weather-driven U.K. industry and competitive off-trade pressure as well as softer shipments in the U.S. due to the shipping pattern adjustments I mentioned earlier. However, the underlying performance in the U.S. continues to be strong, with STRs growing by 18% in the quarter. We also saw volume growth in Argentina, Brazil and Russia. We continue to see good growth from Stella Artois Cidre in the U.K., up 20% in the quarter. Beck's volumes declined in the quarter as a result of a weak German industry, although we grew share in that market.

Turning now to our top 3 markets and firstly, the U.S. We're encouraged by industry trends, with the first 6 months of the year seeing the best industry performance since 2008. As you know, the first quarter was helped by favorable weather and an improving economy, and the momentum continued into the second quarter with our innovations being a key driver. We estimate that industry's selling day adjusted STRs grew by 0.4% in the quarter and by 0.8% year-to-date, and the positive industry trend appears to have carried through into July based on ROI data for the 2 weeks ending July 15. Our own selling day adjusted STRs in the quarter were marginally down at minus 0.2% but ahead by plus 0.2% for the half year with market share trends continuing to improve. We estimate share was down 30 basis points in the quarter and 25 basis points in the half year.

The main drivers of this result were a strong commercial plan and the rollout of our innovations, in particular Bud Lite Platinum and Bud Light Lime Lime-a-Rita and supported by solid growth from Michelob Ultra, Stella Artois and Shock Top. Beer revenue per hectoliter grew by 4.4%, including approximately 150 basis points of brand mix driven by Bud Lite Platinum, Bud Light Lime Lime-a-Rita, the growth of Shock Top as well as consumer trade-up from value brands.

The success of our innovations continue to have a positive impact on the Bud Light family. STRs for the family grew by 3.5% in the quarter and 3.9% in the half year, adding 60 basis points of share growth to reach a total market share level of over 21%. This gives us good momentum as we look forward to the new NFL season and the second year of Bud Light's sponsorship of the league.

I will now say a few words on Bud Lite Platinum. We estimate the brand reached a 1.1% share of STRs in the 5 months since its launch and crossed the 1 million barrel mark in early July. Our analysis on cannibalization is also showing positive results. It is too early days, but the data suggests that less than 50% of Bud Lite Platinum's volume is being sourced from our own brands, with the brand selling at a premium of 10% to 15%. More importantly, our analysis shows that a significant proportion of the volume is coming from hard liquor and about 5% from outside the alcohol category completely. These are encouraging numbers, and we'll continue to track progress closely. It is important to remember that the success of Bud Lite Platinum has been achieved with only 2 SKUs, the 6-pack and the 12-pack and no cans. In the third quarter, we plan to extend the portfolio to include the 22-ounce bottle and an 18 pack of 12-ounce bottles.

Bud Light Lime Lime-a-Rita has followed fast on the heels of Bud Lite Platinum. This brand was originally intended to be a seasonal product, but consumer response to the taste was so strong that we decided to make it a year-round offering. It's the second most successful launch in the beer category this year behind Bud Lite Platinum and has already sold over 2 million cases. The product carries a price premium of around 20%.

Activation for Budweiser in the second quarter included limited edition Major League Baseball packaging and an enhanced Red, White and Blue program. We also have limited edition aluminum bottles in the market in support of the U.S. Olympic team. We had good wholesaler support for our programs, and brand health continues to improve. Budweiser STR performance was not as strong as we'd like -- as we would have liked. And there has been some cannibalization from our innovations, but we're committed to stabilizing the brand's market share and are working hard to do so.

Ultra. Ultra had another strong quarter with volumes up 7.3% and share growing by 13 basis points. The brand remains in good health, and our new line extensions, Ultra 19th Hole and Ultra Light Cider, are helping to build constellation [ph] and expand usage occasions.

Our high-end brands in the U.S. continue to outperform the industry, growing by 19% in the quarter. Stella Artois grew by 18%, with total market share improving by almost 10 basis points. We estimate that our share of the high-end category grew a further 150 basis points in the quarter year-over-year, positively impacting our revenue per hectoliter performance. Shock Top also continues to outperform, growing over 70% in the quarter and in the half year. With the line extensions helping to demonstrate that a strong craft brand, carefully managed, can be scalable.

Before leaving the U.S., I would like to mention our balanced portfolio approach. The objective of this initiative is to help retailers understand the importance of focusing on the drivers of incremental sales and not just the variety of brands available in their stores. Our analysis shows that 100% of retailers who have achieved a better balance between premium and craft beer space allocation have experienced improved volume trends in both categories. In summary, this program is delivering results and will continue to be developed with our wholesaler partners.

Turning now to Brazil. We estimate that the beer industry grew by approximately 3% in the second quarter, a similar rate to the first 3 months of the year. Our volumes grew just below this level at 2.8% as we eased back on some of our promotions. As a consequence, our market share declined by 20 basis points in the quarter but remains 30 basis points ahead for the first 6 months of the year compared to the previous years.

Revenue per hectoliter growth of 7.2% was a good improvement over the first quarter which, if you recall, was impacted by a difficult comp and also by a larger-than-normal impact from state VAT tax increases. Revenue per hectoliter for the half year was up by 4.4%, and we expect growth in the full year to be at least in line with inflation. We continue to invest in our 3 national brands of Skol, Brahma and Antarctica, which grew by 2% in the quarter and by 2.6% year-to-date. Consumer preference for this brand remain approximately -- remains approximately 10 percentage points above our combined market share. Expansion in the north and northeast of the country continues with double-digit volume growth in the first 6 months of the year. Per capita consumption in these regions continue to grow and remains below the national average.

Soft drink volumes were also strong in the quarter, growing by 6.9% and finishing the half year 7.2% ahead of the previous year. Share was flat in the quarter and up 30 basis points in the half year.

Innovations have played a key role in the growth of our Brazil beer business in the last 3 years and represented over 10% of our volume in the first half. Skol 360 and Antarctica Sub-Zero continued to perform well, and the presence of the 300 ml returnable glass bottle continues to expand. We're also exploring innovations in route to market. For example, the pit stop concept is reinforcing the returnable bottle in the supermarket off-trade channel. There's additional point of sales located just outside the supermarket, making it easier for the consumer to return their empty cases and bottles and buy new products.

Premium has become an important focus for us in Brazil. We're following a portfolio strategy for our premium and super premium brands, with 2 domestic and 2 global premium brands offering consumers different brand propositions at different price points with the opportunity for them to trade up. Budweiser plays a key role in this strategy and continues to perform well after its launch last year, with a 60% increase in distribution sequentially. Stella Artois is also growing quickly, with volumes up more than 60% in the second quarter.

Now moving on to China. We're very pleased with the results in China, where our beer volume grew by 7.6% in the second quarter, driven by our focus brands, Budweiser, Harbin and Sedrin, which grew by 14.7%. We estimate that we gained 40 basis points of market share in the first 5 months of the year for which data is available. In the second quarter, revenue per hectoliter grew 11.2%, driven by price increases and our premiumization strategy. Budweiser continues to build on its leadership position in premium with another quarter of double-digit volume growth, and we estimate the brand's share of premium segment is now over 40%.

Our growth in China is being helped by strong sponsorships. First, in April, Budweiser became the official sponsor of the Porsche Carrera Cup in Asia. This partnership with Porsche allows us to further strengthen Budweiser's premium brand positioning while benefiting from the growing popularity of motor sports. The sponsorship is being leveraged with Budweiser and Bud Genuine Draft in different communication channels, including TV, radio, print, social media and events, as well as packaging. We also have rolled out a special aluminum can and organized roadshows and events in over 50 cities to connect with consumers.

Secondly, in February, we announced the Harbin NBA sponsorship. Harbin is our biggest brand in China, and we believe the NBA is an ideal property given its contemporary image and audience. The NBA campaign reached consumers at over 200,000 points of sales across China and also included NBA packaging, national TV commercials and events with NBA celebrities.

We're also expanding this reach in China through both greenfields and acquisitions. In the second quarter, we opened 2 new breweries in the Henan and Fujian provinces, with production capacities of 2.5 million hectoliters each, and we have 4 more breweries expected to come online in the next 2 years.

I would now like to hand over to Felipe to cover the highlights in the other business units and the below EBIT results. Felipe?

Felipe Dutra

Thank you, Brito, and good morning, good afternoon, everyone. Brito has covered the U.S. in detail, but let me add a few words on Canada.

Canada continues to deliver solid top line results with volumes growing at 0.2% in the quarter and 1.6% in the half year after a partial recovery from the weak economy in 2011. Bud Light led the way, growing both volume and share, while Budweiser remains the market leader with good brand health trends. Total share was marginally down versus last year but remains around the 41% level.

Moving to Latin America South. Zone beer volumes were down 1.7% due to challenging economic environment in Argentina, Bolivia and Paraguay. Beer volumes in Argentina showed a decline of 2.4% due to a softening industry, although we gained market share thanks to solid performances from Quilmes and Stella Artois. We also launched Quilmes 1890, a premium line extension for the brand. Zone EBITDA grew by 8.2%, being impacted by softer volumes, higher input cost, inflationary pressures affecting distribution expenses and the timing of sales and marketing investments. However, we expect the zone to return to double-digit EBITDA growth in the full year.

Moving now to Western Europe, where we were able to grow revenues per hectoliter over 2% despite a tough pricing environment. In Belgium, the industry was very weak due to extremely poor weather compared to an exceptionally warm spring in 2011. We also suffered some market share loss due to the competitive activity in the off-trade, however, market share trends in June were much better. Industry volumes in Germany were also weak, but we gained share in the half year with Beck's and Hasseröder, driven by product and package innovations.

In the U.K., we faced a difficult industry as a result of unfavorable weather, with share also coming under pressure from competitive activities in the off-trade and package mix shift due to consumers moving from bottles to multipack cans at lower price points. The mix change impacted Stella Artois and Beck's in particular, which hold strong positions in premium bottle lager. On the other hand, Budweiser delivered a solid performance and gained market share in the half year.

In Central and Eastern Europe, Russia remains a challenging market. Industry was weak, and share also came under pressure driven by tax-related and other selective price increases at the start of the year as well as competitors' promotions activities in key account channels. Consistently with our strategy, we continued to gain share in premium, led by Bud, which grew by nearly 50% in the quarter and Stella Artois, which grew by 6%.

The industry was also soft in Ukraine. Our price increases with -- in response to high commodity cost were implemented ahead of competition, putting pressure on market share. Bud is currently being rolled out in Ukraine, as Brito mentioned earlier and has already reached 40 basis points of market share.

Given the difficult industry environment, the zone is focusing on improving the brand portfolio and driving overall profitability. In the half year, revenue per hectoliter grew by 15.1%, with EBITDA up by 19.5% with margin expansion.

I would now like to look briefly at the below EBIT results, where our net finance costs in the second quarter were $460 million, a decrease of $252 million versus the same period of last year, due mainly to reduced net debt levels and the lower coupon resulting from the debt refinancing and repayments which occurred in 2011. There was also an additional non-cash accretion expense of approximately $20 million in the quarter, which represents the IFRS accounting treatment for the put option associated with our investment in CND in Dominican Republic. Going forward, we expect a $30 million non-cash charge on a quarterly basis until the option is exercised.

Other financial results of $87 million include gains from derivatives related to the hedging of our share-based payment programs, partially offset by cost of currency hedges as well as the payment of bank fees and taxes in the normal course of business. Our effective tax rate improved from 17.3% to 12.6% in the second quarter. This increase results from the combined effect of a shift in profit mix to countries with lower marginal tax rates, incremental tax benefits, the non-taxable nature of gains on derivatives and the favorable outcome of certain tax claims amounting to $136 million.

Our previous guidance for the normalized effective tax rate in 2012 was a range of 19% to 21%. And we now expect the outcome to be in the range of 18% to 20% for the full year, while our long-run guidance remains in the range of 25% to 27%. Normalized profit attributable to equity holders of AB InBev grew 22% in nominal terms to almost just under $2 billion in the quarter. As a consequence, normalized earnings per share grew by 22% to $1.22 on a nominal basis. This growth was largely due to lower net finance cost and income taxes compared to the previous quarter despite a negative FX translation impact.

Before we close, I'd like to highlight that we are excited by the recently-announced combination with Modelo, the prospects in the Mexican market, the fourth largest beer profitable [ph] in the world, as well as the potential for the expansion of Corona brand globally. Any combination of this size provides unique learning and best practices sharing opportunities, and in due course, we look forward to working with our colleagues at Modelo to realize these benefits. The transaction is subject to regulatory approval and is expected to close during the first quarter of 2013. We were also able to secure financing on favorable terms.

On a related note, on July 10, we issued $7.5 billion of U.S. dollar bonds in a multi-tranche transaction. The weighted average pretax cost of the new funds is just over 2%, with a weighted average life of almost 10 years. The net proceeds of this transaction will be used for general corporate purposes and pre-funding of financing related to the combination with Modelo. This transaction allowed us to secure more permanent financing ahead of our expected drop-downs related to the Modelo combination, at a cost that is roughly equivalent to the $14 billion bank facilities that we secured for the transaction but with a much longer average maturity.

So in closing, the second quarter was a challenging one in terms of EBITDA growth due to the timing of our U.S. shipments, incremental distribution expenses, variable compensation accruals and the timing of certain admin expenses. However, we are confident about the momentum we have in our top 3 markets, U.S., Brazil and China, and look forward to a stronger second half compared to the first half EBITDA growth performance.

With that, I'd like to hand back to Jackie so we can start the Q&A section. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Melissa Earlam with UBS.

Melissa Earlam - UBS Investment Bank, Research Division

It's Melissa Earlam from UBS. Two questions, please, firstly for Brito. Regarding the U.S., what are your thoughts on the current price discount between your premium brands and your value brands relative to what your ambitions are in the midterm? And my follow-up is a question for Felipe just regarding the very favorable financing rates you got on your bond issue earlier this month. I was surprised that you reiterated your guidance for the full year for an interest rate of 5% to 5.5%. Can you comment on that and why we shouldn't expect slightly better than that given the very low bond issue rate?

Carlos Alves de Brito

Melissa, it's Brito here. As we said 4 years ago, I mean, we are in a journey, a multi-year journey, of diminishing that gap between the sub-premium and the premium brands, which came down from to 30% to 24% approximately. So that's a multi-year proposition, but we think it's the right thing to do given the portfolio that we have in our hands. So the goal is to get to 15% or 20% around those numbers. But that, of course, will take some years, but we are on our journey. And now, Felipe?

Felipe Dutra

Yes. Well, basically, as we look into the range of 5% to 5.5%, you're right of saying that the recent bond transactions should potentially cause us to go below that range. But at the same time, as we are building up firepower, looking forward, the closing of the Modelo transaction, we're going to incur a negative carry as well. So when we take all of that together, we feel that the range is still valid. And perhaps, we should be able to be at the lower end of the range, but the range is still valid.

Operator

Your next question comes from the line of Andrea Pistacchi with Citi.

Andrea Pistacchi - Citigroup Inc, Research Division

I have 2 questions, please, one is on Brazil. I think you slightly increased the guidance on price mix in Brazil. I think the previous year, you were guiding to pricing in line with inflation. Now you're saying at least in line with inflation. So I was wondering what this reflects. Was it that Q2 was better than you expected? Or does it reflect the timing of your implementation of price increases in the second half? And the other question is about the U.S. One of the drivers of the organic profit slowdown in North America seem to be higher COGS, I think about 5% on a per-hectoliter basis. So I wanted to know, please, what is driving that, whether it's input costs or maybe a reflection of your more premium sales mix.

Carlos Alves de Brito

Brito here. In terms of Brazil, I mean, you're right. I mean, first, we said in line now we're saying at least with inflation, and that's mainly because of some revenue management initiatives and also, very importantly, the premiumization that's ahead of our plan. So that's what's causing the change in language and the outlook. In terms of the U.S., the COGS is impacted by...

Felipe Dutra

Yes. There is a combining factor of overall commodities affecting our COGS, and particularly, in the U.S., the rollout of innovation pipeline is also causing COGS to go slightly up. Of course, products are being priced at 15% to 20% premium -- or 10% to 20% premium therefore leading to healthier margins, but the pressure on COGS is still there. We do not generally provide guidance on a per-market basis. I would refer back to our general outlook, where we expect COGS to grow at mid-single digits for the company as a whole, but U.S. is not an exception to that.

Operator

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

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

I have 2 questions for you, gentlemen. First one, I know it's a bit early to be thinking about 2011 input cost, but I wonder if you could give us a little bit of color on the impact or the lack of impact on the -- of the recent spike in grain costs. And in particular, concerning the hedging for the Argentinian harvest that comes up in January, February, did you manage to get your hedges in, ahead of that spike? And the second thing is I noticed about a $48 million headwind in the global export and holding company line on the EBITDA line. Is that something we should expect to continue through the rest of 2012? Or is that a one-off for Q2?

Felipe Dutra

Trevor, Felipe here. Our hedging strategy remains to get protection on a 12-months rolling basis. And as we have seen commodity price declines, it's fair to assume that future hedges are being rolled at more favorable prices year-over-year. On balance, we should also account for the fact that we do have some FX exposure, especially in Brazil, in terms of cost of goods sold, transactional exposure. And as we look forward into 2013, we see an easening for commodity, and a deterioration from the FX. We are not in a position to give a 2013 guidance for COGS at this stage, but generally, we are keeping the same hedging strategy as we have. So on the admin expenses, we face sometimes tougher comparables in connection to the timing of expenses and accrual for variable pay. That is being the case especially in Latin America North this quarter. And in headquarters as well, we have some other reported lines in there as packaging business and so on and so forth that may cause some fluctuations. So it's hard to go into quarterly guidance details for the headquarters, but we continue to manage fixed cost very tightly and as part of our core competencies.

Operator

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

Anthony J. Bucalo - Grupo Santander, Research Division

Just a quick question on Bud Lite Platinum, the production and distribution. Obviously, your distribution costs in the U.S. have gone up a lot. Where are you producing Bud Lite Platinum now? I think it's in 2 breweries. The brand keeps expanding market share. How quickly can you ramp up production in other breweries? And regionally, where is the brand strong? And how are you getting on with getting the brand to these markets with the rapid growth?

Carlos Alves de Brito

It's Brito here. I mean, you're right. I mean, we started with a much lower expectation in terms of what size this brand could get. We started in 3 breweries, and now, of course, we realize the brand is much bigger than we thought. It was very successful. So we're expanding production now to 6 out of the 12 breweries, and that will give a much better coverage from East to West Coast this -- in the next coming months.

Anthony J. Bucalo - Grupo Santander, Research Division

Okay. Will that be a -- will we see a material impact on your distribution line in the U.S. due to the ramping up on the new breweries?

Carlos Alves de Brito

Then I would go back to the outlook for the general distribution expenses that we said would be mid- to high-single digits for the overall company. And given where we are at the half year, it's fair to expect that this distribution cost will go down to meet our guideline in the -- or guidance for the second half, and the U.S. is no exception to that guidance.

Anthony J. Bucalo - Grupo Santander, Research Division

Okay. So that's already baked in there.

Felipe Dutra

Yes.

Carlos Alves de Brito

Yes. In the -- in terms of the consolidated company guidance, yes.

Operator

Your next question comes from the line of Sanjeet Aujla with Credit Suisse.

Sanjeet Aujla - Crédit Suisse AG, Research Division

A couple of questions for me. You alluded to the north and northeast growing double digit. By my own reckoning, that implies the rest of the country is around flat or quite low single digit. Is that a macro issue? Or is that a function of the recent price increases in the market do you think?

Carlos Alves de Brito

No, the north and the northeast from now, quite some years, have been growing ahead of the national average. That has to do with the fact that the government has put a lot of focus in terms of supporting with social programs the population over there. It's an underdeveloped region in Brazil, and that, of course, is having an effect on our business. We also invest in our brewery footprint that used to be underrepresented in that region. We used to have to carry, if you remember, the logistics costs we had in some previous years to support the growth of that region. Now we have new breweries in that region, so that's helping also the development. And we also have more focus, more investments in the region. So it's all 3 things, I mean better footprint, more investment and also, the region growing ahead of the overall economy.

Sanjeet Aujla - Crédit Suisse AG, Research Division

And what about the rest of the country, can you just allude on some of the trends there?

Carlos Alves de Brito

Well, we've seen some ease in terms of economy, but our business continues to be in a positive momentum. If you compare what we said in terms of the guidance for this year for the Brazilian beer business, that we tried to reach a better balance between pricing and volume. That's exactly what you see in the half year this year, and that volume is growing by 4-plus percent compared to 0.7% last year with very healthy pricing. So the economy, yes, is not growing at the same speed as the last 2 or 3 years, but our business is performing as per our guidance.

Sanjeet Aujla - Crédit Suisse AG, Research Division

And just a final one on Russia. Can you just clarify whether you are seeing an increased competitor promotional activity in that market Q2 and Q1? I think you allude to some comments today in the statement. I'm just wondering if you could clarify.

Carlos Alves de Brito

Well, our strategy in Russia, and that's not new, I mean has been for some years to focus on upgrading our mix and upgrading -- up-trading our consumers. So Budweiser is still in line with that strategy, and we saw Bud and Stella growing. We did lose some share mainly in the value brands and off-trade activities. The other fact is that for the last 3 years, and those are public figures, we have been leading price increases in Russia. And that, of course, is taking some toll on our market share, but we think it's the right thing to do for our business. That has to do with some revenue management initiatives and also, premiumization of our brand portfolio. So that's where we're headed.

Operator

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

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

Just a question really on Budweiser in Brazil. I think in Q1 you mentioned in the statement that you expect this to become the largest international premium brand in the country, and I just wondered if you had met that expectation at the half-year stage. And if you can maybe give a feel for market share within that segment, that would be great.

Carlos Alves de Brito

Yes. Budweiser, we're still cycling. I mean, we still don't have a 12-month cycle for that. So I'd rather wait another couple of months to get to a full year cycle and then talk about volumes. But it's going ahead of plan. It's very important to our premiumization strategy in Brazil, which is based on 4 brands, 2 local premium brands, Original and Bohemia and 2 global brands of ours, Stella and Bud. So very well accepted by consumers and growing ahead. I mean, we grew sequentially 60% of distribution, and Stella grew 60% its volume, so I mean very healthy growth in that high-end segment for our brands.

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

Okay. Great. And maybe just one quick follow-up. On China, how much of that 12% price mix in Q2, how much of it, if you could give a broad indication, was mix versus price? That would be really helpful.

Carlos Alves de Brito

Well, we're not giving out the split at this point, but it is an important component. I mean the premiumization, I mean if you look at the growth of Budweiser compared to the rest of the portfolio and given the very different price points, you can only imagine how important that is for our top line per hectoliter or revenue per hectoliter growth. But it's a combination of both, I mean price increases and premiumization of our portfolio.

Operator

Your next question comes from the line of Alice Longley with Buckingham Research.

Alice Beebe Longley - The Buckingham Research Group Incorporated

My question is about your EBITDA margins. Are you willing to say if EBITDA margins will be up in the second half or -- and/or up for the year? And then as part of my EBITDA margin question, on the longer-term basis, what's the -- I know that you are determined to have your margins grow longer term. And what's the model for that, that I should assume? Should I assume gross margins expand and the administrative ratio goes down, partly offset by hikes in the distribution and the marketing ratios? Is that the kind of model to use for the longer term?

Carlos Alves de Brito

Well, thanks for the questions. And then what Felipe said in his speech, the last paragraph, was that a tough quarter, but we're very confident about the momentum in our top 3 markets, U.S., Brazil and China, and look forward to a stronger second half compared to the first half in terms of EBITDA growth performance. So that's what we'd say at this point. In terms of your second question, yes. I mean if you look at the 20-year history or recent history of our company, EBITDA margin expansion has been one of our hallmarks. I'm not giving any guidance for this quarter or this year. I'm just saying in terms of general concept, we believe that this is an important measure of business performance, and we'll continue to be focused on trying to do it on a sustainable and right way going forward.

Operator

Your next question comes from the line of David Belaunde with Morgan Stanley.

David Belaunde - Morgan Stanley, Research Division

Just a couple of things. First, I wasn't sure where it pleases you [ph] sort of mentioning in your press release the fact that you are migrating more wholesalers to a managed freight program. Could you just confirm that that's also an important driver in your higher distribution cost but also of the very good price mix that you had in the -- in, I mean, realized net revenue per hectoliter growth that you had so far this year? And then the other thing is just on the COGS per hectoliter, obviously, you seem to be cycling some very high spot price increases from 12 months ago in a number of commodities even in the U.S. But obviously, as we go in the next 6 months or 9 months, you will be cycling much lower prices. Or I assume, given the way that your hedges work, that you're probably going to have a pretty mild commodity cost environment in -- I mean, in your hedges for 2013. Can you confirm that without necessarily giving a quantification, obviously?

Carlos Alves de Brito

Well -- Brito here. I mean the U.S. wholesaler freight program is one component, but it's a small one. I mean the big components on that is really brand mix. And yes, that's pretty much the biggest component, which, again, if you go back to our press release, it's -- we said that, that alone is responsible for 150 basis points in our 4.5% EBITDA per -- I mean net revenue per hectoliter growth. Okay, so...

David Belaunde - Morgan Stanley, Research Division

So the other 3% would be the smaller crate [ph] ?

Carlos Alves de Brito

It is a component. It's a smaller component compared to the brand mix that we're experiencing with the premium plus successes of Bud Lite Platinum, for example and Bud Light Lime Lime-a-Rita. And the second question, Felipe?

Felipe Dutra

It's more on the cost of goods sold and commodities going to 2013. Yes, we've seen commodity price declines, but on the other hand, we have also seen higher FX rate, especially in Brazil, impacting cost of goods sold in the other direction. So we are not right now providing guidance for 2013 but confirming the guidance for 2012, which has cost of goods sold expected to increase by mid-single digits.

David Belaunde - Morgan Stanley, Research Division

And then so can I just follow up on the -- in Brazil also. I know that the decline year-over-year in market share I know is relatively small for the second quarter, but I was wondering what the exit rate was. I mean, sort of what sort of level you finished the quarter? And the reason why I'm asking this is that I understand that you've been rolling out the 300 milliliter returnable bottle and doing a bigger effort with the returnable bottles in the off-premise. And I would imagine that, that would lead to market share gains but though they don't seem to have materialized in any meaningful way. So I'm just wondering where you are with that and what you expect...

Carlos Alves de Brito

Yes, I mean the 300 ml has been a very and will be a very important component of fighting in the -- with the one-way segment. If you remember, I mean we do have some competitors in Brazil. They are very aggressive in the one-way segment. And the way -- one of the ways to fight this, or to have competitive pricing, is through the 300 ml returnable bottle at much better margins than cans. So that's one thing. The second thing is that for the second quarter, our market share has been, on average, 68.8%. And for the half year, I mean we're 30 bps above half year of last year. So that's very healthy, I would say, given all the pricing. And the thing that made us lose a little bit, the 0.2% in the second quarter share wise, was that we eased some promotions. If you remember, last quarter, we said we had some promotion activity for Carnival that we eased a little bit, and that, of course, caused a little bit of market share for us marginally. But again, for the half year, we're still ahead of the previous year with a much better pricing.

Operator

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

Kris Kippers - Petercam, Research Division

I had a question on Europe. We saw volumes declining significantly in the quarter, of course due to the bad weather, but I was a bit surprised by the competitive activity. And to what extent does it imply that your portfolio is currently a bit more trading up, that you don't coincide with your peers on this promotional activity? Could you shed some light on that?

Carlos Alves de Brito

I mean, in Belgium, what we did is we increased prices ahead of our competitors, so that for us is always some pricing pressure. And there was competitive activity in the off-trade, right? And -- but if you look at June, for example, our market share has already recovered some, and it's more balanced. So in Belgium, it's always that balance between market share and pricing given that we're the market leaders. So no news there. The only thing that's new, as you said, Kris, is that the industry was very poor because of the tough comps with the very warm spring we had last year, as you will remember.

Operator

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

Pablo E. Zuanic - Liberum Capital Limited, Research Division

A few questions here. Look, first of all, just numerical on the margins, I understand you do not want to give guidance for EBITDA margins. But according to the consensus that you divulged for North America, consensus is looking for 70 bps of margins expansion for 2012 in North America, and here in the first half, we are down 40 bps. So I think -- I guess the obvious question is do you think the consensus is too high? And any color there would help. But number two and obviously, more important than those numbers, help me understand all the effort that goes through anchor distributors, efficiencies in the distribution network, the managed freight program, perhaps distribution consolidation, increase in the redistribution, all of that. Should we think of that as the driver of volume growth, share gains, helping profit margins? Because perhaps in a market like Brazil, you're looking at increasing per capita consumption or even perhaps, even back in the day, gaining share. But in a market like the U.S., in my opinion, to trade 100 bps of margins coming down for 0.5 point of share or less, I don't think that really works, right? It's a mature market, and you already have 50% share. And there's all these structural issues around the distribution side, third party distribution being mandatory and making it more difficult. So what I'm trying to understand, I mean I realize you do not want to give guidance for North America, but I think that, that's a key investment question, what's the upside for North America margins. Shed some light in terms of -- particularly on the distribution front, what are the initiatives that are being implemented there? And are those more geared to driving share per capita margins? That would help.

Carlos Alves de Brito

Okay. Brito here. I mean first, on margin on North America, we're not going to give any guidance. But just in general, as I said before, that hallmark of our company has been in the mid and long term to continue to expand margin, because we think it's a great measurement for business performance. And our history shows that we do have a track record of doing that. So that's what I'd -- how much I would say on that. In terms of distribution in the U.S., you're right. I mean we have many things in the last year or 2 years that we've been doing: first, a change in the leadership of our commercial department in the U.S., which has been proven to be a very good thing. I mean, we have a new team that's performing very well. We're more aligned with the wholesalers in terms of market programs, and that's helping the share performance, which is trading -- churning much better than last year. The wholesaler community is a very strong asset of our company, and we'll work very closely with them to tailor market programs that are meaningful, unique, differentiated and relevant to our consumers in the marketplace. So the anchor distributors is a key one, anchor wholesalers. It's linked to a couple of things, people having the track record, wholesalers having shown a track record, wholesalers having the financial means, having the people pipeline to expand and be aligned with our business. So we expect wholesalers to have really most stories [ph] or if not all of their shared mind and shared hearts behind our brands and behind our programs, and that's a very strong asset we have vis-a-vis some of our competitors. So we intend to keep that and continue to give incentives for wholesalers to really support our brands. And in order to have a brand portfolio that's complete, we've continued to work on different line extensions and supporting our brand portfolio. So our wholesalers have the ammunition they need to be effective in the marketplace. So that's the way we're headed.

Pablo E. Zuanic - Liberum Capital Limited, Research Division

But just to follow up. I'm sorry. With all these initiatives that you are talking about, should we think of -- I mean just a U.K. [ph] to sort of guide us, all these initiatives are really more, at the end of the today, to drive share and improve the mix, not so much to drive margins?

Carlos Alves de Brito

Yes. And the primary objective of this is to have a better execution in the marketplace, because what our system has shown is that whenever we have a good idea, like Bud Lite Lime, Bud Light Lime-a-Rita or Bud Lite Platinum, they really execute very, very well. So the primary idea is to continue to have that sales machine oiled and really efficient, so whenever we have not only good ideas but also the routine business that gets performed really well in the marketplace. So it's more to close market share gaps, I would say.

Pablo E. Zuanic - Liberum Capital Limited, Research Division

And one last one, if I may, about Brazil. I mean, obviously, in the first quarter, I think that price increase, only about 2% realized, was a bit of a scare. It's good that you fixed apparently in the second quarter now. But how should we think now about this excess tax that becomes effective in October? I understand that at the consumer level, it's going to be over a 5% price increase. Should we also assume that we may have a couple of surprises in the third and fourth quarter in terms of the company not being able to fully realize the immediate price increase to pass on the tax?

Carlos Alves de Brito

Well, a couple of things about tax and the way you think about it. First we're still in negotiations with the federal tax authorities and trying to continue to negotiate the price increase, because what we're trying to show the government, and this is not the first year, is that taxes will have an impact on industry, and that will have an impact on investments and job creation. And we'll have some very good years with a very high investment, capacity expansion, industry growth, and therefore, tax revenue is up with job creation, so a win-win for everybody. And if taxes go up, that -- of course, our second point is that we'll pass that on immediately to prices that could affect industry, could affect investments and could affect job creation. So we're saying it's better to have the mix we had in 2010 and '11 as opposed to some other mix that could be less of a win-win for everybody. So we're still in negotiation with them, but rest assured that any tax increase will be passed to consumer prices the next day.

Operator

Your next question comes from the line of Ian Shackleton with Nomura.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Just thinking about the force [ph] particularly in Western Europe. And obviously, it's quite a small -- and the Central and Eastern Europe. And obviously, they're quite small parts of your business. They're fairly fragmented marketplace, and it's obviously quite difficult to create value there. Do you increasingly feel those are businesses that probably it's better to realize the capital and invest elsewhere? Or are those still businesses that you're committed to holding for the longer term?

Carlos Alves de Brito

No, we're totally committed to those for the long term. I mean, Western Europe is the house of most of our global brands, premium brands, a lot of heritage; Belgium, a great, very profitable market; U.K., a very challenging market, as you know; Germany, a big market but also very fragmented. So yes, there's still much to do in Germany and not only with us but all players. And Central, Eastern Europe, Russia, I mean one of the top 5 markets volumewise in the world, tough regulatory conditions. We have to do a better job as a beer association, but we're committed to that market. But in a way, in Russia, to upgrade our portfolio, that's what we're trying to do, and that's where we're headed not only this year but for many years now. In Ukraine, of course, a secondary market for us in CE but also one that we lead, and that's very closely related to Russia. So again, in markets where we are investing our global brands, we believe that Budweiser, Stella, Beck's have tons to do in those markets, lots of economies of scale, sponsorships that are global, so lots of things to do in those markets to get it from subscale country markets to more of a bigger scale regional markets and in terms of our adding a common brand portfolio and premium brand portfolios. So we're committed to those markets for sure.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Maybe if I can just come back on your supplemental stuff [ph] on Brazil, the AmBev statement cast some question marks about the existing CapEx plans in Brazil after the FET increase. And I guess if we think forward on Brazil, should we think about the pattern being more like 2011, where you had less strong volumes, very strong revenue per hectoliter, rather than the way we started 2012?

Carlos Alves de Brito

Well, 2 things here, Ian, First, we said in 2012, we wanted to have a better balance between the price and volume, and if you look at the half year, that's what you see. And second, as I mentioned to Pablo just a moment ago, yes, I mean depending on how governments or federal government will decide on taxes, because we're still negotiating with them and depending on how that, given that we'll pass that to consumer prices, will affect industry, that will reflect, yes, potentially on our CapEx and job creation. So that's what AmBev said, I mean. And yes, we're totally aligned with that, and I just mentioned that to Pablo. Those things are all connected.

Operator

Your next question comes from the line of Chris Pitcher with Redburn.

Chris Pitcher - Redburn Partners LLP, Research Division

In terms of adjustments specifically, in Brazil, obviously, we had a sort of Latin America North, the bonus accruals that back up again following the weak quarter last time. I mean, looking at the quarterly numbers last year, it looks to me that you probably wouldn't see that step-up again, the fundamentals were more normal in the third quarter, at a slight negative. Can you confirm that we shouldn't expect that step-up in admin cost again? And then could you just give a bit more color on the working capital movements? You've attributed the significant step-up in working capital some to timing issues, some to seasonality and something which looks to be a rechanging in your payment terms on CapEx just to get a feel for whether we should expect to see that reverse meaningfully in the second half or whether working capital has become more of a draw on the business.

Felipe Dutra

Felipe here. So as you go back to the second quarter of last year, admin expenses were down double digits, about $50 million, which caused second quarter last year to be a tough comp year-over-year. From that number, about $48 million or so came from Latin America North, and we have comments in there that was basically saying, continue to fix cost savings across our business, which is our way of life, lower accruals for variable compensation and the timing of certain expenses. On a quarterly basis, you may have some volatility in terms of timing and allocation of certain expenses, but we remain committed to manage it properly on a full year basis. And in our case, as you know, the accruals for variable compensation is a function of our overall performance versus budget as well as target achievement, the entity and the individual target achievement and so on and so forth. So the second question is regarding working capital. Working capital has been an important source of cash flow generation, and we believe that is going to continue not only in 2012 but years to come. And on a full year basis, we had some timing issues regarding the first half. We also have a timing-related impact in connection to our CapEx as usually our -- we have much longer payment terms in capital investments as compared to the overall expenditures. And depending on the timing CapEx year-over-year took place, that has an impact in payables and overall working capital. So we should expect that to continue, an important source of cash flow generation for the full year. So no changes there and no surprises based on what we reported for the first half.

Chris Pitcher - Redburn Partners LLP, Research Division

If I could just follow up one final question on the cost of goods. So I appreciate this has been asked a lot on this call. I don't want to do it to death. But in terms of helping us model some of the impacts from movement, some quite different movement across different grain prices, maybe give us a feel for what the split of your cost of goods is between malt, barley, corn and then maybe the packaging goods just so we've got a framework to help model the potential impact into 2013.

Felipe Dutra

Yes. I'm sorry, Chris, but we never go into that level of granularity. So we stick to the expectation of cost of goods sold to grow mid-single digits this year. We see a more favorable commodities scenario for next year but a tougher FX impact for next year, but at this stage, we are not providing 2013 guidance. Sorry.

Operator

Your final question comes from the line of Mark Swartzberg with Stifel, Nicolaus.

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

Felipe, I guess 2 questions, one for Felipe and then on just the U.S. volumes being up in the second half. But Felipe, it's really a follow-on to Chris. Cash flow from ops was pretty similar to last year first half, and yet, the full year number last year was a lot larger than what you would take from simply multiplying the first half by 2. It sounds like what you're saying between the working capital comments, the EBITDA accelerating. Is it fair to think you'll have a rather significant free cash flow or cash flow from operations increase in the second half?

Felipe Dutra

Yes, that is correct.

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

Okay, great. And then on North America volume, up -- can you talk a little bit more about why up? In other words, are you planning to take distributor inventories up? Or are you saying you think your sales to retailers are going to get back to growth again in the second half?

Carlos Alves de Brito

No, Mark. What we're saying -- it's Brito here. What we're saying is that because STRs and STWs for the year tend to converge and STWs are -- is now behind STRs for the first half, that in the second half, the STRs, the STW should go -- should grow again, so it converges at the end of the year. So that's basically the rationale behind it.

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

So no intended increase in distributor inventories?

Carlos Alves de Brito

No, no, no. It's just the STRs are on positive trends. The STWs are behind STRs. So they need to grow in the second half to catch up, so we have a full 12-month pretty much balanced and converging both STWs and STRs.

Operator

That was our final question. I'd now like to turn the floor back over to Mr. Brito for any closing remarks.

Carlos Alves de Brito

Okay. Thanks, Jackie. Thank you, everybody, for participating. Again, a tough quarter, soft volumes, but we're very confident on the momentum we have in our top 3 markets, U.S., Brazil and China. And we look forward to a stronger second half compared to the first half in terms of EBITDA growth performance. So see you next quarter. Have a nice day. Thank you.

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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