Nov 9, 2011
Executives
Carlos Brito – Chief Executive Officer Felipe Dutra – Chief Financial Officer
Analysts
Andrea Pistacchi – Citi Jon Fell – Deutsche Bank Andrew Holland – Societe Generale Trevor Stirling – Sanford C. Bernstein Lauren Torres – HSBC Securities Nico Lambrechts – Bank of America Merrill Lynch Mark Swartzberg – Stifel Nicolaus Anthony Bucalo – Santander Chris Pitcher – Redburn James Edwards Jones – RBS Ian Shackleton – Nomura
Operator
Good morning and welcome to the Anheuser-Busch Inbev Q3 2011 Earnings Conference Call and Webcast. Hosting the call today from AB Inbev is Mr.
Carlos Brito, Chief Executive Officer. Today’s call is being recorded and will be available for telephone replay beginning at 6PM Central European Time.
Today’s webcast will also be available for on-demand playback. (Operator instructions.)
The monthly information provided during the conference call may contain statements of future expectations and other forward-looking statements. These expectations are based on the management’s current views and assumptions and involve known and unknown risks and uncertainties.
It is possible that the company’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial conditions 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.
Anheuser-Busch Inbev assumes no obligation to update any forward-looking information provided during the conference call. It is now my pleasure to turn the floor over to Mr.
Carlos Brito. Sir, you may begin.
Carlos Brito
Well thank you, Melissa. Good morning and good afternoon everyone, and thank you for joining our Q3 2011 conference call and webcast.
I’m joined here today by our CFO Felipe Dutra. Today, AB Inbev reported solid results in the three months ending September, 2011, delivering yet another quarter of EBIDTA margin expansion and earnings growth.
This means we have reported twelve consecutive quarters of year-over-year EBIDTA margin expansion since the combination with Anheuser-Busch at the end of 2008. Non-beer volumes in the quarter declined 0.6% and are flat year-to-date.
However, as confirmed in our outlook, we expect volumes to gain momentum in Q4 as we cycle more favorable comps in Brazil. Our focused brands grew by 1.1% in the quarter with particularly strong performance from Stella Artois in the US and the UK, Budweiser and Harbin in China, and Skol in Brazil; [Culmos] in Argentina and Bud in Russia.
Global Budweiser is also doing very well, growing by 6.9% in the quarter and by 2.5% year-to-date. We’re committed to growing the brand globally and last month we announced a renewal of the partnership with FIFA, extending our sponsorship to cover the 2018 and 2022 World Cup Tournaments.
The FIFA World Cup provides us with a great platform not only for Budweiser but also for our other leading brands in selected soccer markets around the world. In Q3, market share was ahead in Germany, Russia, Ukraine, and China; flat in Argentina, and marginally lower in Canada and the UK.
In the US, market share declined by 25 basis points concentrated in sub-premium brands, while focused brands continued to perform well. We continued to make consistent progress with our strategy of balancing market share and profitability in Brazil and Belgium.
Total revenue grew by 3.6% in Q3 and by 4% on a per hectoliter basis, helped by volume growth in Brazil, Argentina, and China, and supported by consistent execution of our brand building strategies across all of our markets. Revenue per hectoliter grew by 4.7% on a constant geographic basis and in the full year we expect to deliver revenue per hectoliter growth ahead of inflation on a comparable basis.
We increased our sales and marketing spend by 3.2% in the quarter and by 3.9% year-to-date. We now expect increases in sales and marketing expenses in 2011 to be at the lower end of our previous guidance of mid to high single digits having identified additional efficiencies in recent months as well as some volume-related savings in specific markets.
Finally, EBIDTA grew by 12.2% nominal terms and 5.5% organically, while EBIDTA margin expanded by 71 basis points year-over-year to 38.8%. As I normally do I would like to look in a little more detail at our progress in the United States, Brazil and China.
Next week, November 18, we’ll see the third anniversary of the closing of the combination of Inbev and Anheuser-Busch, and this is a great opportunity to share with you the progress so far. Firstly, we remain as confident as ever about the long-term opportunities in the US market – by far the largest beer profit pool in the world.
We have a great portfolio of brands and a clear strategy supported by a great team focused on flawless execution. Very soon after the combination we committed to $2.25 billion of total cost synergies and we remain confident that this target will be achieved by the end of this year.
Looking beyond 2011, we can see further savings opportunities in the US. Cost management and efficiency is one of our core competencies – it is in our DNA – and we’re always looking for and finding more opportunities to be efficient in all of our business.
The US is no different than any of our other business units in this respect, and that is why we’ll not be issuing a new savings target for the US. As far as we are concerned, cost efficiency is business as usual – not a project.
In terms of revenue synergies we have only just scratched the surface. Sharing of revenue management best practices has been gaining momentum in the last twelve months and the learnings will help to drive market execution going forward.
Finally, the financial results of the work we’ve done in the last three years have been outstanding. Back in 2008, the US business delivered an EBIDTA margin of below 30%.
By 2010, that is last year, margin had risen to over 40% and has continued to grow in the first nine months of this year, and all this has been achieved in difficult economic environments. It goes without saying that we’re very pleased with these results and I believe there’s more to come as we continue to build our brands, drive execution, improve our revenue management capabilities and realize further cost efficiencies.
What we’re not satisfied with is our market share performance and we’re committed to fixing this. Let’s look closely at our priorities in the US in 2011.
Our number one priority remains the faster growth of Bud Light. The key brand health indicators for the brand continue to improve and in the quarter we gained share of total market based on STRs.
The brand also gained share within the premium light segment according to [IRA]. Obviously, the NFL property plays an important part in our plan to win with Bud Light.
We’re following a fan-centric strategy, engaging consumers at all touch points with experiences that brings fans closer to the NFL. Although it’s too early to say, early signs show that the brand is starting to benefit from our new long-term sponsorship, providing rich content for branded packaging, in-stadium promotions, and full 3600 retail execution supported by traditional and digital media.
I would also like to take this opportunity to mention Bud Light Platinum, which we announced yesterday and which will hit the market in January. This exciting new product, which includes an innovative cobalt blue bottle, will connect with consumers on occasions where Bud Light is not playing today, delivering incremental volume and providing a positive halo effect across the Bud Light family.
The stabilization of Budweiser is our second major priority in the US market. Brand performance continues to improve and we cut the rate of total market share declines from 42 basis points in Q3 last year to 28 basis points this year.
We’ll continue to build upon the momentum in the summer and from the introduction of the bowtie can and the new secondary packaging, which are helping to drive reappraisal of the can and to improve brand health metrics. Finally, I’m very pleased with the progress we’re making with our high-end brands, with our STRs up 23% in the quarter and up 19% year-to-date.
We’ve also grown our share of the segment by 1.3 percentage points, getting over 330,000 new points of distribution in the process. All of our major high-end brands saw growth in the quarter, with Stella Artois showing 28%, Leffe growing 44% and [Tolstiak] growing 116%.
Turning now to Brazil, the industry in Brazil saw a recovery of volumes in Q3. Our non-beer volumes grew by 1.7% despite the difficult comp of 12.5% last year in 2010.
As I have said several times this year, 2011 will be a year of revenue management rather than volume growth but we remain confident about the growth prospects for the country and our industry in the medium- to long run. In particular, we’re looking forward to the benefits to the industry of an increased minimum range which according to the official formula should be 7.5% in real terms in January next year.
Our revenue performance remains strong, with beer revenue per hectoliter growing by 8.4% in the quarter, driven by our price increases and a higher mix of direct distribution volumes. Revenue per hectoliter grew 9.5% year-to-date as we officially lost market share as we took pricing in Q4 last year, increasing the price gap with competitors.
However, year-to-date we have gained 150 basis points of share achieving 69.6% in Q3, our second-highest ever Q3 market share. This has been achieved through the strong consumer preference, continued brand investment and disciplined sales execution.
In Brazil, we’re concentrating on a few key initiatives with a clear focus on brand building. Consumer preference for our focus brands – Skol, Brahman, and Antarctica – remains on average ten percentage points ahead of their combined market share driven by consistent brand-building investment.
In the quarter, Antarctica reached an all-time high consumer preference and its highest level of market share since 1998. The Antarctica Subzero line extension has been an important innovation, helping to drive this performance.
In fact, our innovation plan across the whole portfolio remains very strong with innovations accounting for approximately10% of our volume this quarter. The premium segment in Brazil is a big opportunity for us since it’s underdeveloped and represents less than 5% of the industry.
The Stella Artois is the fastest-growing brand in the premium segment, growing by over 200% in 2011, complementing our local brands, regional and bohemian. These brands are now joined by Budweiser, which was launched at the end of August.
The initial focus is on seeding the brand in Sao Paolo and Rio with a full launch campaign and national availability during Q4. Sales in the first two months have exceeded expectations and reorder levels are very healthy.
Finally, let me touch on regional growth in Brazil. We continue to gain share in the north and northeast.
Now that the new capacity has been added we’ll continue to eliminate incremental distribution expenses we have been incurring for the last 18 months. Finally, China.
China is an exciting and growing market for us with significant per capita growth opportunities and long-term margin and volume potential. Our beer volumes grew by 4.7% in the quarter with our focused brands – Budweiser, Harbin and Sedrin – which accounts for approximately 70% of our volume, growing by 13.6%, helping us to grow share in the quarter.
We’re successfully transitioning our local brand volumes into our focused brands, and as a consequence, we are improving our brand mix and net revenue per hectoliter, which grew by 11.7% in the quarter. The premium segment remains an important priority for us, and Budweiser is leading the way with growth well above the average for all three focus brands.
In support of this initiative we have also launched the Stella Artois in the market with initial focus on Shanghai, Beijing and Xiango. Finally, we continue to expand our China footprint, having closed two acquisitions and opened one greenfield operation so far this year.
I would now like to hand it over to Felipe to discuss the zone performances and below EBIDTA line items in more detail. Felipe?
Felipe Dutra
Thank you, Brito. Good morning, good afternoon , everyone.
Let me start with North America. Q3 results in the US was impacted by the timing of our 2011 price increase which was three weeks later than our price increase in 2010, leading to an easier-won comparable and a more challenging comparable for revenue per hectoliter.
In 2010 we increased prices on September 13, which led to a trade buy in during the first half of September last year, and consequently soft STRs in the second half of that month. In 2011 however, our price increase of 3% on average took place three weeks later on October 3, leading to a trade buy in towards the end of September this year.
We estimate that industry STRs declined by 0.4% in the quarter and by 1.2% in the nine months through the end of September. Our own STRs fell by 0.9% in the quarter with shipments to wholesalers [SD plus] declining by 3.4%.
The difference between STRs and STWs is due mainly to the timing of our price increases. As a result, STRs in the first part of October this year faced a more difficult comparable.
However, taking the year as a whole, absolute shipments and STRs should be closely aligned. We made good progress with our focused brands in the quarter with Miller Lite, Michelob Ultra and Stella Artois all gaining share, and as anticipated we saw share loss in the sub-premium segment as we continued to close our price gap with premium.
We also saw a share decline with Budweiser but at a slower rate than in the past. Beer-only revenue per hectoliter grew by 1.9% in the quarter, lower than the 3.6% achieved in the previous two quarters, exclusively driven by the later timing of our price increase year-over-year.
In other words, I want to emphasize that the revenue per hectoliter growth for Q3 2011 is a point off of the curve due to the timing of the price increase. In Canada, beer volumes grew 0.6% on the back of industry recovery.
We have maintained share relatively stable around 41% for the last 18 months. Balancing volume with profitability is a key priority in North America, and in Q3 we grew EBIDTA margin in the zone by 142 basis points to 44.5%.
In Latin America north, total volumes were up 3.4% and beer up 2%. Beer volumes in Brazil were up 1.7% and soft drinks earnings grew 6.4%, reaching our highest ever quarterly market share of 18.3%.
Zone EBIDTA grew 13.1% in the quarter and margin expanded by 129 basis points to 47.5% with revenue growth and lower M&A expenses more than offsetting higher input costs and distribution expenses. This is the ninth consecutive quarter of double-digit EBIDTA growth.
Latin America south saw total volumes growth of 2.3% in the quarter with beer volumes up 2.6%. Argentina grew beer volumes by 5.7% with Stella growing high single-digits.
EBIDTA in the zone grew over 25% in the quarter with margin expansion of 55 basis points. Western Europe, non-beer volumes declined 0.8% in the quarter.
Non-beer volumes in Belgium decreased 7.4% due to poor summer weather while Germany delivered non-beer volumes growth of 1.4% driven by share gains. Non-beer volumes in the UK grew by 0.8% in the quarter, benefitting from an easy comparable to the award cap.
Stella Artois Cidre, with is reported with the non-beer volumes continues to exceed our sales expectations. EBIDTA in the zone declined by 4.8% with margin expansion of 109 basis points.
Central and Eastern Europe volumes declined 9.6% in the quarter. Russian beer volumes declined 9.9% with difficult comparables due to an exceptionally hot summer in 2010 and buy in ahead of our excise tax-related price increase at the end of Q3 last year.
We gained market share in both volume and value terms in the quarter. [Insco] is now the second largest brand in Russia with a volume share of more than 6% and Bud price at a premium to (inaudible) with a volume share of almost 1% after its slouch in 2010.
Ukraine beer volumes fell 9.1% in the quarter driven by a weak industry but we gained share. EBIDTA in the zone declined by 33.7% as a result of lower volumes and higher input costs and distribution expenses.
Finally, Asia-Pacific: in China, our beer volumes grew by 4.7% with focused brands growing by almost 14%. Zone EBIDTA grew by 3.7% in the quarter driven by revenue growth, an improved brand mix and partially offset by higher cost of sales and operating expenses associated with our geographical expansion.
Turning now to below EBIDTA line items, our net interest expense continues to decline year-over-year as we reduce our net debt level and manage our average coupon downwards. We now expect the average coupon on the net debt for the full year 2011 to be at the lower end of the 6% to 6.5% range.
With regard to net debt evolution it is important to point out that approximately one-third of our debt is denominated in currencies other than US dollars, mainly the Euro and the Brazilian Real. Exchange rates will certainly have an impact on net debt evolution but we remain fully committed to deleveraging and we expect to reach a net debt to EBIDTA ratio of below 2.5x by the end of this year by the end of this year as we progress towards reaching our target of 2x during the course of 2012.
Other financial results show an adverse variance of $199 million compared to Q3 last year. This is mainly due to unrealized non-cash currency translation impacts on intercompany balances due to the weakening of the Brazilian Real.
Given the nature of these intercompany balances, the negative translation impact is reported in the P&L account and offset in non-recurring items by translation gains on foreign operations, which are reported in equity. Our normalized effective tax rate excluding this set of non-recurring items dropped to 19.2% versus 23.8% last year.
This decrease is due to a profit mix shift to countries with lower marginal tax rates, incremental income tax benefits in Brazil, and favorable outcomes on tax claims. While we continue to expect the rate to be in the range of 25% to 27% in the long run, this year the rate should be between 20% to 22%.
Finally, our normalized earnings per share for the quarter grew by almost 16% to $1.09 from $0.94 in the previous quarter. That concludes our comments and I’d like now to open up for the Q&A.
Thank you.
Operator
(Operator instructions.) Your first question comes from Andrea Pistacchi of Citi.
Andrea Pistacchi – Citi
Yes, hi, good morning. My question is on your COGS please.
If I looked at Brazil beer you had cold COGS inflation, this is from (inaudible)’s number of course, of around 4.1%. That was despite FX gains and given an easy comp you have on cans.
So clearly you’re seeing more input cost inflation in Brazil than elsewhere, so I was wondering whether this is an issue of timing of your hedges or what is, if you could explain on that a bit and in general on your COGS.
Felipe Dutra
This is related to the timing of the FX hedges. We had several items of impact in the year-to-date number in terms of imported cans, so on and so forth.
So for the full year at the consolidated level we are maintaining the guidance of cost of goods sold to grow at low single digits.
Andrea Pistacchi – Citi
Okay. If I could, so I just have a quick follow-up please.
On your additional marketing efficiencies that you’ve talked about, you’ve identified, if you can just be a little bit more specific on this, if these were mostly in the US and on what areas you’ve sort of identified these potential efficiencies.
Felipe Dutra
By marketing efficiencies we basically mean procurement savings related to non-working money, which is a part of what we do in the ordinary course of business – buying the same for less. And next to that we are also anticipating lower sales expanses in the specific geographies but that being linked to lower volumes.
Andrea Pistacchi – Citi
Okay, thank you.
Operator
Your next question comes from Jon Fell of Deutsche Bank.
Jon Fell – Deutsche Bank
Hi there. Just a few things on the price increase in the US.
Can you give us some idea of about how much volume that slightly later price increase actually impacted? So are we talking about a week’s worth of volume that got bought ahead or was it less than that?
And I know it’s early days, but can you tell us anything about the reaction so far from trade in customers to the price increase? Are they putting it through or do you have to deal some money back?
Carlos Brito
Hi Jon, it’s Brito here. As you said it’s early days.
We implemented our price increase this year on October 3, and last year we implemented on September 13. So there is an important lag and that’s why Felipe made the disclaimer that a lot of the numbers for Q3 for the US have to be taken with this caution given the different timing.
We continue to think that beer is very affordable in the US. Price of beer is like CPI for the last sixteen years and a lot of other companies are doing the same in terms of consumer goods.
So that’s where we’re headed and that’s pretty much what we do in October – increasing prices – so that’s what we did this year. But again, too early to talk in terms of impacts and things like that other than the timing that was very different from last year.
Jon Fell – Deutsche Bank
Sure. And is there anything you can say about the volume impact?
Like if the price increase had been the same time as last year, what do you think industry STRs would have been?
Carlos Brito
Well that, I cannot speculate on that. What I can say is there was a relevant volume shift given the difference in two to three weeks of the price increase, and that’s why you see our disclaimer in terms of easier comps on volumes, tougher comps on the revenue per quarter.
Jon Fell – Deutsche Bank
Okay, thanks.
Operator
Your next question comes from Andrew Holland of Societe Generale.
Andrew Holland – Societe Generale
Yeah, hi. Can I just stick with that and ask a related question, which is why you put your prices up three weeks later this year than last year?
Is that indicating to us that there is resistance from consumers to today’s price increases? And a second slightly unrelated question relates to your margin in North America which if I strip out the AB synergies was up about 20 basis points in Q3 despite weaker volumes, but was down 150 basis points on that basis in the first half.
So can you tell me what was helping the margin in Q3?
Carlos Brito
Andrew, in terms of the price increase it’s not really that this year we did it later. It’s more that last year we tried to push it earlier but then we learned that it is better to do it at the beginning of the month given the way that a lot of our customers work.
So this year we came back to the old practice of doing it in October at the beginning of the month. So again, it was more about last year being earlier than this year being late.
In terms of our margin expansion, I mean we’re very glad that we’ve been expanding margins. As we said in the intro, when we got here to the US, the US business had margins that were lower than 30% and last year we already got high in the 40% and this year we saw continued margin expansion for the nine months of the year.
Our recipe, for the ones that know our company for a long time like you do, is always top line growth with cost management. That’s the recipe that has afforded us the margin expansion in the last twenty years in the different markets where we operate, so that’s going to be the recipe for the US as well – top line with cost management.
Andrew Holland – Societe Generale
Sure. I’m just trying to get what was particular about Q3, because as I say, if you strip out the AB synergies your margin was down I think about 150 basis points in the first half, and it’s up 20 basis points on that basis in Q3.
So is this a phasing issue? Was there a cutback on A&P?
Carlos Brito
Yeah, the only exceptional item that comes to my mind is potentially the timing of the sales and marketing investments year-over-year, but we’re going to recheck the numbers as you are calculating and follow up with you after this call.
Andrew Holland – Societe Generale
Okay, thank you.
Operator
Your next question comes from Trevor Stirling of Stanford C. Bernstein.
Trevor Stirling – Sanford C. Bernstein
Two questions please, one and one follow-up. The first one: has Inbev taken its normal price increase in Q4 already and if so how much is that broadly speaking?
And the second question is if industry volumes in the United States continued to decline, at what stage would you have to consider closing a brewery or a network reconfiguration; and what level of constraints does your Teamsters contract impose on that?
Felipe Dutra
Well, let me take the price in Brazil. Our strategy has been to keep prices moving in line with inflation and we normally increase prices during Q4.
This year is not different totally from last year. We are increasing prices as we speak.
It is generally on a per-package, per-region basis. Some of that price increase has already been announced and implemented beginning of October, and some is being implemented as we speak.
So no unusual movement year-over-year for prices in Brazil.
Carlos Brito
And Trevor, related to your second question what we’re doing is we’re not closing any breweries. What we’re doing is we’re reconfiguring some of the capacity footprint.
For example, we just announced that we are taking one line out of Newark brewery and taking it to St. Louis, because given how the different regions have performed in the last few years that’s what makes sense.
So that’s what we’re doing. We’ve been very active trying to reshuffle and right-size different breweries, because there are breweries that are oversold like the ones in Texas and some others that are undersold given share developments and industry developments in different states.
Trevor Stirling – Sanford C. Bernstein
Great, thank you very much Brito and Felipe.
Operator
Your next question comes from Lauren Torres of HSBC Securities.
Lauren Torres – HSBC Securities
Good morning, everyone. If you don’t mind I just wanted to go back to the US pricing environment again.
I guess you’ve mentioned that you’re not happy obviously with market share losses but more importantly you need to get this pricing structure right. So I’m just curious as we think about your price points what you’ve done on the sub-premium side.
Where are you with respect to getting it where you need to go? And with that said, I assume once you get that properly aligned and if competition follows the market share gains will come back.
So can you just give us an update on how you’re flowing through that and how that’s impacting your results?
Carlos Brito
Sure, Lauren. Again our US pricing was done on October 3.
It was done pretty much along the lines of the last price increase last year in that we are increasing more the sub-premium than the premium and above segments, and the idea as I said is to continue to decrease that gap or narrow that gap between the sub-premium and the premium brands. So we continue to be committed to that and as we do that, we create a healthy problem for us in that we need to find that volume that’s been squeezed out of the sub-premium categories in more profitable categories.
But that’s the game we like about brand building and up-trading consumers, and doing things that are margin accretive. So that’s where we’re headed and that’s our decision.
Lauren Torres – HSBC Securities
And if I could also ask a follow-up on the Budweiser brand: as we’ve seen the market share stabilize there’s some modest improvements from the lack of growth here. Where are you two with respect to getting where you need to be?
I mean is this progress you’re making slower than you expected or you feel comfortable with how these improvements are coming through?
Carlos Brito
I think we’re on track. I mean last year we said that we were committed to stabilize the brand.
We had enough in sight to come to the conclusion that consumers saw a lot of differentiated factors in the brand that we were not supporting rightly so we changed the mix, the marketing mix of all the brand as presented, as executed. And you should look at what happened this summer with what we call the “red, white and blue” summer and the new packaging presentations.
I mean consumers responded really well. This shows us again that iconic brands like Budweiser, when you continue to bring support and new news consumers stick around and continue to be loyal to the brand.
So I think we’re on track and we’re committed to stabilizing the brand. That, together with the Bud Light acceleration, is our two biggest priorities for the US market.
Lauren Torres – HSBC Securities
Okay, thank you.
Operator
Your next question comes Nico Lambrechts of Bank of America Merrill Lynch.
Nico Lambrechts – Bank of America Merrill Lynch
Hi, Brito and Felipe. I’ve got three questions; the first is just on tax.
Is it fair to assume with Brazil likely to grow faster next year that your tax rate would again be lower than the 25% to 27% range? That’s the first question.
The second question: at this stage of the year you probably have very good visibility on your input costs for 2012. Some of the brewers have already guided that input costs would be up next year.
Can you give us any indication of what your input costs would look like for next year? And then lastly and probably the most important question for me is, now that you have reached your gearing target, or the 2.5 and [next set] two times, is it possible to give shareholders an indication of your preference of use of free cash flow in the absence of acquisitions?
We know that one is obviously dividends, it’s buying back your own shares or it’s buying back on those shares. What is your preference with respect to using these three methods of returning cash?
And then could you remind us of your criteria for M&A and at what stage in terms of gearing would you say “We need to accelerate the return of cash to shareholders?” I think that’s probably the most critical questions on investors’ minds at this moment.
Thank you very much.
Felipe Dutra
Okay. So Nico, let me start from the tax-related questions.
We continue to see effective tax rate in the medium- to long-term to be between 25% to 27%. This year given the change in country mix and which profits are generated, and also some positive outcomes in some of the tax disputes we expect to be able to deliver an effective tax rate between 20% to 22%.
So we are not yet in 2012. In terms of guidance overall, and that is impacting your second question as well, we intend to provide guidance as we announce full-year results for the coming year and it has been the policy, and we are going to stick to that.
So I hope you appreciate the fact that we are not in a position to provide guidance at this stage given that policy.
Nico Lambrechts – Bank of America Merrill Lynch
With respect to tax, I think it’s fairly clear that the Brazilian market should grow faster than the US market EBIDTA at this stage. Is it fair to assume-
Felipe Dutra
We’re seeing now 25% to 27% leading to the long-term range, and yes, the more the weight of Brazil in that equation perhaps toward the lower end of that range we can be. But I would take that range as the long-term reference as we have in our outlook.
So finally in terms of usage of cash. So we have been deleveraging faster than anticipated and as a result we have been reviewing dividend payouts especially as a way to return money back to shareholders.
So we see that as movements that will take place in parallel, meaning deleveraging while reviewing total shareholders return in terms of dividend and eventually buybacks. So we are not in a position to buy back shares at the moment as deleveraging remains a priority, but we declared the €0.80 dividend this year.
We are not in the range of dividend yields we expect to be as we compare to other consumer products peers but we are converging towards that direction, and that trend should continue. We announce dividends as we announce full-year results.
There has been no change in our dividend policy. We have a floor in terms of minimal payout which is 25% - we do not have a cap – but we think to look more on dividend yields rather than dividend payouts.
I think that is important to keep in mind as we will always be looking more in terms of dividend yields on average over time rather than the specific payout percentage wise. We said before and we want to emphasize that we believe in a consistent dividend flow, and dividends should be managed accordingly and not be a rollercoaster.
So that is what we think about dividend policy. Next to dividends, and moreover as we approach 2013 – so this year we are going to be below the 2.5x, for next year we will reach our, as already stated, 2x or below 2x net debt EBIDTA in terms of leveraging, preserving a strong credit rating.
So as we get into 2013 and as we get to 2x, basically as you said in the absence of an M&A transaction that would make sense there is a substantial cash to be returned to shareholders, and it’s fair to assume that dividends and buybacks… It has been the ways of returning cash to shareholders we normally use but I cannot speculate on InBev or ABI buyback preferences. Usually ABI has been focused more on ABI buybacks on InBev is more focused on InBev buybacks, and that’s basically it.
Nico Lambrechts – Bank of America Merrill Lynch
That’s very clear. I was just not 100% clear in terms of the dividend trends in the near term.
Did you say that the trend that we saw in the payout ratio, there could be a continuation in that trend in the shorter term? Did I understand that correctly?
Felipe Dutra
Well, as a result of the transformational nature of the AB transaction we reduced dividend payments significantly for the first years, and gradually we have been reviewing that number upwards so that this year, in regards to last year results, the declared dividend was €0.80 which implies a dividend yield below what we’ve seen in terms of other peers, so comparable peers – let’s put it that way. So the €0.80 implies below 3% and we always see comparable peers around 4%, not north of 4% or this kind of level.
So I cannot speculate if we are going to fully close that gap in the dividends to be declared in March next year but we are moving towards that direction.
Nico Lambrechts – Bank of America Merrill Lynch
Felipe, thanks very much. That’s very clear.
Operator
Your next question comes from Mark Swartzberg with Stifel Nicolaus.
Mark Swartzberg – Stifel Nicolaus
Good morning, Brito and Felipe. Brito, I was wondering if you can give us kind of an update on where you think we are in the history of the company, and the angle I’m coming from is Dream-People-Culture and particularly the subject of brand building, brand capabilities, innovation.
It seems like in the US we’re seeing a step up in focus on innovation. Of course this year as a company your sales and marketing rate of growth has picked up.
So can you just give us a sense of where you think you are in your capabilities generally as a company and then what kind of added emphasis you are indeed putting on that from a total company perspective and from a US perspective?
Carlos Brito
Okay, Mark. First again, as I just said, I mean the formula that we’ve grown and created value in our company has always been one of top line growth and cost management.
So that’s the first thing. The second thing, you’re right – after the 2008 transformational combination with Anheuser-Busch we looked at our company after we integrated the company and said “Well, now we have a much bigger company, much more powerful brands; a much better group of people, so now we can dare even further in terms of exploring and thinking about new news and things that other people might not be able to afford.”
So if you look at what happened in Brazil with our pipeline of innovation, that’s exactly what we’re doing in the US – filling the pipeline to have a consistent delivery of new news together with a very strong-based business for the next few years. It is fair to say that the pipeline in the US was more geared towards big innovations every three years-type thing, like Bud Light Lime.
We think those are great, we’ll continue those – Platinum is the next one in that same line – but we also need more new news and mid-term of every-year type innovation like we have in other markets of ours. That’s what consumers want and that’s how we know to do it.
So we have our pipeline in the US getting ready to deliver on those short-term and more long-term type innovations. So we’re very excited because again, with this new company of ours, we can sail different seas and come with different ideas, and dare more in terms of what we call the “explore” agenda as opposed to the more routine, doing better what we know-type day-to-day focus.
So I don’t know if that answered your questions but that’s the direction. And the Dream-People-Culture as I said remains the guiding principle for our company.
It’s all about this big dram, having the best people with a culture of ownership, and now with the new and large company daring to think even bigger in terms of new news to bring to the market.
Mark Swartzberg – Stifel Nicolaus
That’s great. And this may be a guidance question so you might wave it off, but with that added emphasis how should we be thinking about sales and marketing spend at least in North America vis a vis top line growth?
This year it’s growing faster – should we think of that as a new normal in terms of relationship there or is there some sort of recess happening here in ’11?
Carlos Brito
Yeah, that I’ll wave off because again, as Felipe says, we give normally the guidance, whatever guidance we give it’s normally together with the full-year results announcement which will be beginning of March next year. But we’re committed to the US, it’s our number one market.
We’re in this business for the long term. If you look at our company and the way it’s structured, our incentives are much more skewed to the long-term and that’s how we think about our business.
We think about the short-term for sure but even more about the long-term, and innovations play a key role in that long-term focus.
Mark Swartzberg – Stifel Nicolaus
That’s great. And if I could on CAPEX, Felipe, I may have missed this so apologies.
But the number in ’12, sales are up appreciably and understandably with China and Brazil, but can you talk a little bit about what you intend to do incrementally, plans for growth spend that drive that view of ’12?
Felipe Dutra
I mean more the absolute number, the $3.1 billion rather than percentage of sales. And in there we have incremental capacities, especially in China given the prospects of our business in there.
There are investments as this year in terms of innovation and so on and so forth, so there is incremental bottling capacity in Brazil and more investments in returnable bottles as well. We have more cost-related and innovation-related projects in the US as well, so that is more what to expect for CAPEX for next year.
Mark Swartzberg – Stifel Nicolaus
Got it, great. Thank you.
Operator
Your next question comes from Anthony Bucalo of Santander.
Anthony Bucalo – Santander
Good morning. The launch of Budweiser in Brazil, Brito, can you give us a little bit of color and a little bit of detail on how that launch is going and sort of what your medium- and long-term plans are for the brand, and how it’s affecting your profitability and how it fits in your portfolio; and sort of what your hopes and dreams are over the long term for that brand?
Carlos Brito
Good question, thanks for that, Anthony. Since we formed ABI we’ve always said that Budweiser as a global brand, as a flagship global brand would be the icing on the cake just because that we saw huge potential that was not being used or exploited.
So today, as I said in my opening speech, global Budweiser grew 6.9% volume-wise in Q3 and 2.5% in the nine months year-to-date this year, so a very strong growth. Today, 60% of the volume of Budweiser comes from the US, 40% from all the other countries, and we are on that track of getting this brand to be a huge global brand.
I mean we did almost a re-launch in the UK – it’s doing very well. We continue to grow that brand double-digit in China.
We launched it in Russia last year and it’s now selling at a premium to [Tuborg] which is the leader in that segment and has a 1% of share total market. We launched now in Brazil two months ago which is our second-biggest market at a price in between core plus and premium.
It’s the number one brand in Canada and it has been since many years, and in Brazil we’re very committed to grow that brand because again in Brazil there’s a huge opportunity in the Brazilian segment. It’s only 5% of the total industry – that’s very small compared to any other countries where we operate, and now with Stella Artois, the local premium brands of ours – Bohemia and [Verregional].
And now with Budweiser, and with the upcoming FIFA World Cup in 2014 we think everything is in place to get Budweiser to really grow and support our share in the high end, and also the expansion of the high end segment in Brazil. So we’re very excited, very committed, good results.
Budweiser has great positioning that travels through different markets, and that’s the good news about a global brand. You want to have the same positioning, same execution because that’s the beauty of a global brand scale.
Anthony Bucalo – Santander
Are you making money on the brand in Brazil at this time or do you think there’s an investment period here?
Carlos Brito
No, of course we’re investing because we’re receiving the brand now in Rio and Sao Paolo, the two main markets. We’re going to have a full national launch this quarter, Q4.
We couldn’t do it before in Brazil because of capacity issues, and it’s going to be a profitable brand for them and for Brazil because it’s going to be selling at a price that’s a premium price.
Anthony Bucalo – Santander
Thank you very much, Brito.
Operator
Your next question comes from Chris Pitcher with Redburn.
Chris Pitcher – Redburn
Good afternoon, gentlemen. Quick question on China in the quarter.
In China there was a big step up in admin costs in the quarter and obviously distribution expenses on a per unit basis continue to go up. I’m just trying to get a feel for where the investments are going into China beyond just building breweries and how much more of the good top line growth and gross profit growth you’re going to keep reinvesting through the balance of the year.
Carlos Brito
Okay. So in China, admin expenses grew by 50% or $20 million this quarter.
Most of that, so $15 million out of the $20 million was because of newly introduced social taxes for foreign companies in China and it’s counted as admin because it has to do with labor. $2 million out of that $20 million has to do with expansion, so hiring people for new territories where we’re expanding and setting up offices and everything that goes with it; and $3 million out of the $20 million is for bonus accrual given that we’re having a very good years in China.
In terms of distribution expenses we grew distribution expenses around 20%, that’s $9 million; $6 million of that $9 million has to do with the way our brand mix is growing. So we’re selling more Budweiser and Harbin in terms of the total mix, and because these brands are not produced everywhere in China they have to travel more.
So that’s $6 million out of the $9 million, and the other $3million is really connected to general volume growth and inflation in terms of oil prices and all that.
Chris Pitcher – Redburn
Some of your competition is netting that up against revenue but that will be an ongoing cost headwind for the next couple of quarters – is that right?
Carlos Brito
Well, if you look at our net revenues for China, it has grown by 11.7%, so our revenue per hectoliter growth in China has been very healthy. Yes, you’re right – our religion here is whenever there is a tax increase we try to pass it on to consumers in a sustainable fashion so that’s exactly what we’re trying to do there as well.
Chris Pitcher – Redburn
Thank you. And then just finally, can I ask a follow-up in terms of Western Europe?
I’ve been reading that you’ve been taking up your on-trade prices in the UK. Is next year a year for taking up pricing and potentially risking share losses?
I just want to get a feel for how the pricing is running in Western Europe.
Carlos Brito
Yeah, in the UK we announced price increases that are going to be introduced in January. That’s what you have to do in the UK – you have to announce it two, three months ahead of the price increase.
Price increases are going to take place on January 2nd. Again, the government in the UK has been taking lots of duty increases in the last few years given the beer duty escalator.
There’s also cost increases – as we know, notably from raw materials and energy. So we felt it was time to, I mean we do it every year but we felt it was time to increase a little bit the price increase proposed, and the headline is what we have in the press in terms of the price increase, around 7%.
Chris Pitcher – Redburn
That’s just for the on-trade, obviously, not for the off-trade?
Carlos Brito
On- or off-trade.
Chris Pitcher – Redburn
On- and off-trade, okay.
Carlos Brito
Yeah, of course that’s an average.
Chris Pitcher – Redburn
Pre- any deal backs or anything like that.
Carlos Brito
Exactly, that’s the gross one.
Chris Pitcher – Redburn
Okay, thank you very much.
Operator
Your next question comes from James Edwards Jones of RBS.
James Edwards Jones – RBS
Hello, Carlos and Felipe, just a quick one. I know there’s a lot of moving parts in this, but in the US what sort of top line growth do you need if you’re not going to see margins under pressure and potentially declining?
Carlos Brito
I mean again, this would be almost kind of a guidance – we’re not giving guidance at this point. But what we can say, James, is we’re looking for both.
We’re looking for margin expansion, top line growth together with the ever-in-our-DNA-type thing – cost management. So that has been the formula.
We’re very happy with the margin expansion we’ve had in the US. We’ve said we’re not very happy for sure with the share development in the last two years, especially with share being lost in the sub-premium segment.
We want to recover that in the premium and above segments. That takes a bit longer because of course you’re losing share in a segment where you have a very high share and gaining that share back in segments where you have a lower share, especially the high-end.
But that’s what we’re committed to do like we did in so many other markets – like we did in Russia, like we did in China. We like to sell brands that command premium.
We don’t like to sell brands that are sub-premium, value brands, price brands. And in the US when we got here, we saw that 30% of our volume was based on value and price brands that were selling at a 30% discount to our mainstream brands.
We said okay, we like the share position but we don’t like the share composition. So we said as a company we’re resolved to change that.
There’ll be some pain in the short-term but because we’re in this business for the long term we can endure this pain as long as we grow the business in the right way. And margin expansion I think is confirming that.
James Edwards Jones – RBS
Alright, I’m not looking for any guidance on this but it would really help in terms of understanding where revenue growth has to go before we start getting concerned about margin progression.
Felipe Dutra
What we have been doing basically is keeping prices moving in line or slightly above inflation while benefiting in terms of net revenues per hectoliter increase also in terms of better mix. So in previous quarters we’ve seen positive mix impact adding 40 to 80 basis points of incremental net revenue per hectoliter which is relevant for a market the size of the US and that is totally driven by a better brand mix of our portfolio.
Specifically in Q3, the 1.9% in our release that the brand impact was basically neutral; not as a result as a change in trends but especially because of the buying ahead of the price increase was more concentrated in the sub-premium brands given the magnitude of the expected price increase for this brand. I think the point here is, margins aside, and we continue to see efficiencies, opportunities in the US as Brito mentioned before, we are not going to announce three years after the combination a new synergy number as a result of the integration, but we do see cost efficiencies, opportunities in the US as a result of best practices sharing.
That is going to be incorporated into our numbers and that is going to help drive margin expansion and EBIDTA growth over and above what is being achieved in top line growth.
James Edwards Jones – RBS
Thank you.
Operator
Your final question comes from Ian Shackleton of Nomura.
Ian Shackleton – Nomura
Yeah, good morning, good afternoon gentlemen. My question is around Central and Eastern Europe which doesn’t often get many questions asked, and we’re always asking you what are you going to buy next – but my question is really why are you still involved in this region?
It doesn’t really look strategically very important. You’re number three in the Ukraine; you’re probably going to slip to number three in Russia after the FS/SEB deal and they’ve been always difficult marketplaces.
How core is that region for you?
Carlos Brito
Hi Ian, it’s Brito here. When we had to do our disposal program in 2008 we decided to look at the region and we decided what countries matter, and we decided to dispose of the other countries.
So the other countries have nice margins but very little scale, not a lot of brand overlap in the different brands that were in different languages, different route to markets, different regulatory framework – everything. So we sold all those countries that were smaller and we remained with Russia and Ukraine; Russia for the obvious regions, being top five in terms of size, Ukraine for the leadership and close ties with Russian market and the synergies we have by having those two markets together in the same zone.
So we are committed to the zone. On the other hand it is true that the zone only represents less than 2% of our total EBIDTA as a company but it’s an important volume market.
We have strong brands. Our Klinskoye brand is the number two brand in the country with a 6% share of total market.
Budweiser is doing very well in the Ukraine – we’ve gained share this quarter, we gained share with the right brands in the Ukraine with Chernigivske being the number one brand in the whole country, the market-leading brand. So I mean it’s a nice business to have and we’re very committed to the business.
So you’re right – there has been some bad news coming from that region in terms of tax increases in the last two years, in terms of more regulatory restrictions. We are talking to the governments via the industry association trying to bring some light to this discussion, but again we’re committed to the region.
It is also true there has been some new competitive news in the last month with FS and SEB getting together and we will continue to fight to be the number two player in Russia with the right portfolio of brands and with the right profitability. And it’s important to say that we gained share in Russia by volume and value in this Q3 driven mainly by Klinskoye, as I said the number two brand in the country, and Budweiser selling at a price premium to [Tuborg] and having one share of total market after one year of being launched.
So again, good news on the business front; not so good news in terms of regulatory but we are fighting via the industry association to talk to the government and to try and get on common grounds.
Ian Shackleton – Nomura
And just to follow up there, I mean do you actually think that those markets are going to go back into growth in the next couple of years?
Carlos Brito
Well, that would be very hard for me to speculate on at this point, because again, we’re still trying to talk to the government in terms of where the corporate affairs agenda will be led. So I wouldn’t make any forecasts at this point but again, we’re committed to both Russia and Ukraine, for sure.
Ian Shackleton – Nomura
Thanks very much indeed.
Carlos Brito
Thank you. Okay, so thank you very much for your questions, for your time; and have a great day and see you next quarter.
Operator
Thank you. This does conclude today’s teleconference.
Please disconnect your lines at this time and have a wonderful day.