AB InBev

Welcome to Anheuser-Busch InBev's second quarter 2023 earnings conference call and webcast. Hosting the call today from AB InBev are Mr. Michelle Dukaris, Chief Executive Officer, and Mr. Fernando Tenenbaum, Chief Financial 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 and the Reports and Results Center page. Today's webcast will be available for on-demand playback later today. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you should require operator assistance, please press star 0. 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 AB InBev'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 AB InBev'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 the 17th of March, 2023. 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. Michel Dukaris. Sir, you may begin.

Thank you, Jessie, and welcome everyone to our second quarter 2023 earnings call. It is a great pleasure to be speaking with you all today. Today, Fernando and I will take you through our second quarter operating highlights and provide you with an update on the progress we have made in executing our strategic priorities. After that, we'll be happy to answer your questions. Let's start with our operating performance. Our global momentum continued this quarter, although was partially offset by the performance of our US business. We delivered revenue growth of 7.2%. Our net revenue per hectolitre increased 9% as a result of pricing actions, ongoing premiumization, and other revenue management initiatives. Total volumes declined by 1.4% as growth in the majority of our markets was offset by volume decline in the U.S. EBITDA increased by 5% and reached US$4.9 billion. Underlying EPS was US$0.72. While this quarter was not without challenges, the strength of our brand portfolio, global footprint, and our focus on disciplined resource allocation continues to enable us to invest for the long term while delivering profitable growth. We delivered broad-based growth this quarter, with double-digit top-line increases in four of our five operating regions. Revenue increased in more than 85% of our markets, with volume growth in over 50%. Our diverse geographic footprint positions us well to deliver superior long-term value creations. Now, I will take a few minutes to walk you through the operational highlights for the quarter from our key regions, starting with North America. In the U.S., the beer industry remained resilient, delivering revenue growth of 2.3% this quarter and with beer gaining share of value of total alcohol in the first half of 2023. Our revenues declined by 10.5%, and STR volumes by 14%, with performance impacted by the decline of the Bud Light brand. With respect to Bud Light brand performance, we have actively engaged with over 170,000 consumers since April, and there are a few clear insights. First, most consumers surveyed are favorable towards the Bud Light brand, and approximately 80% are favorable or neutral. The consumer will always be at the center of everything we do. All of us at ABI deeply care about and respect all our consumers. Second, regardless of favorability, our consumers across all sentiment groups have three points of feedback in common. One, they want to enjoy their beer without a debate. Two, they want Bud Light to focus on beer. Three, they want Bud Light to concentrate on the platforms that all consumers love, such as NFL, Folds of Honor, and music. We are taking the feedback and working hard to earn our consumers' business every day across the world. While our total beer industry share declined by 520 dips this quarter to 36.9%, It has been stable since the last week of April through the end of June. U.S. EBITDA declined by 28.2% this quarter, with approximately two-thirds driven by market share performance and one-third driven by productivity loss and the long-term strategic choices we made to increase sales and market investments in our brands and provide support to our wholesaler partners. As we move forward in the U.S., we are focused on what we do best, brewing great quality beer, actively engaging with our consumers, supporting our partners, and positively impacting the communities that we serve. Now, moving to our largest region, Middle Americas, which delivers margin expansion and another quarter of growth. In Mexico, we continue to outperform the industry. delivering double digit top and bottom line growth our above core portfolio grew revenue by meetings led by the strong performance of model special we continue to progress our digital dtc initiatives with our dtc platform tada now operating in over 60 major cities and fulfilling on average over 300 000 orders per month in short Mexico continues to execute effectively across all three pillars of our strategy to drive consistent performance. In Colombia, our business delivered high single-digit top and double-digit bottom line growth with our beer portfolio continue to gain share of total alcohol. Our mainstream portfolio drove our performance, delivering double-digit revenue growth led by a particularly strong performance from poker, which grew volumes by mid-teens. In South America, our business in Brazil delivered double-digit top and bottom line growth, with approximately 400 base points of margin expansion. Our beer volumes declined by 2.6% as we cycled a strong performance in 2Q 2022, which was supported by post-COVID recovery. Our premium and super premium brands led our performance, delivering a volume increase in the mid-30s. This marketplace continued to expand, reaching over 700,000 customers. a 29% increase versus 2Q 2022, and GMV growing by 64%. Brazil is another example of effective execution across all three pillars of our strategy. Now, let's talk about EMEA. In Europe, we grew top and bottom line by high single digits. volumes declined by mid-single digits, outperforming a soft industry in the majority of our key markets. We continue to drive premiumization across Europe. Our premium and super premium brands delivered double-digit revenue growth this quarter, led by Corona and Budweiser. In South Africa, we delivered double-digit top-line growth with our portfolio continuing to gain both share of beer and total alcohol. EBITDA was flattish as top line growth was offset primarily by anticipated commodity cost headwinds. Our performance was led by Carlin Black Label, the number one beer brand in the country, which grew volumes by high things. Our global brands grew volumes by more than 50%, driven by corona. And finally, APAC. In China, our business delivered double-digit top and bottom line growth, driven by continued premiumization and on-premise recovery across our key regions and channels. We outperformed the industry, delivering volume growth across all segments of our portfolio this quarter, led by mid-20s volume growth in both our premium and super premium portfolios. Now, I would like to share with you a few sustainability highlights. We continue to innovate and progress towards our 2025 sustainability goals. Here are a few examples of local initiatives with the potential to scale globally that are driving progress on our sustainability priorities. In climate action, we invested in a biomass processor in our Jupil brewery in Belgium. to produce thermal energy from mouth husks, which we expect to reduce our gas consumption by 15% and reduce our carbon emissions. In smart agriculture, we provided technical and financial training to over 900 smallholder barley farmers in Uganda to strengthen local supply chains. In water stewardship, We are installing new vacuum pump technology in brewers across several markets to reduce water usage in bottle fillers by approximately 50%. For circular packaging, our business in Brazil launched a nationwide returnable bottle campaign to help increase the use of returnable packaging by promoting affordability and sustainability. Now let's move on to our strategic pillars. Let's start with pillar one of our strategy, lead and grow the category. We continue to execute on our five levers to drive category expansion and deliver a strong quarter of profitable top line growth. We are leading and growing the category by offering superior corporate positions, developing new consumption occasions in expanding our premium and beyond beer portfolios. Our global brands continue to scale and drive premiumization across our markets. The combined revenues of Corona, Stella Artois, and Budweiser grew by 18.4% outside of brands' home markets, led by Corona, which was recently recognized by Kantar Brand Z as the number one fastest growing global brand by value, with 23.7% growth. Budweiser delivered a revenue increase of 16.9%, with broad-based growth in 25 markets. And Stellar 2A grew by 14.5%. Now let's turn to our second strategic pillar, digitize and monetize our ecosystem. This continues to accelerate usage and reach capturing $9.2 billion in gross merchandising value disquarted, a 30% increase year-over-year, and reaching 3.3 million monthly active users. Customer satisfaction continued to improve, with our weighted average net promoter score improving to plus 60, up 10 points since last year. In 15 of the training markets where business is live, our customers are also able to purchase third-party products through Biz Marketplace. Customer adoption is increasing, with 63% of Biz customers now also Biz Marketplace users. In the second quarter, Biz Marketplace generated approximately US$340 million in GMV. representing approximately 1.3 billion US dollars on annualized basis. Now let's talk about how we are strengthening our direct relationship with our consumers. Our digital D2C products, Zed Delivery, TADA, and Perfect Draft are now available in 20 markets and generated over 16.5 million orders and $115 million in revenue this quarter. We continue to leverage our digital DTC products to further develop new consumption locations. For example, in Brazil, ZDeliver enabled the launch of Corona Sunset Hours, an everyday activation encouraging consumers to disconnect from work and reconnect with friends in the early evening. With that, I would like to hand it over to Fernando to discuss the third pillar of our strategy, optimize our business. Fernando, over to you. Thank you, Michel.

Good morning. Good afternoon, everyone. We aim to maximize value by focusing on three areas, optimized resource allocation, robust risk management, and efficient capital structure. Respect to capital location, we're focused on maximizing long-term value creation by dynamically balancing our priorities. We continue to invest in organic growth to support our strategy to lead and grow the category and digitize and monetize our ecosystem. In the first half of 2023, Discipline overhead management and efficient allocation of resources enable us to invest approximately 5.6 billion US dollars combined in sales and marketing and CapEx. The excess cash generated by our business is then dynamically allocated to our three capital allocation priorities. The leveraging, selective M&A, and return of capital to shareholders. As you can see in the next slide, two point times net debt to EBITDA remains the point at which we maximize value, though approximately 90% of the benefits from the leveraging can be captured as we approach three times. As of June 30, our net debt to EBITDA ratio reached 3.7 times, down from 3.86 times year over year. with net debt reaching US$73.8 billion. As a reminder, we typically generate the vast majority of our cash flow in the second half of the year. Net debt was also impacted by the increased dividend paid in the first half of 2023, as well as the translational FX headwinds. Our debt maturity profile remains well distributed, with no bond maturity in 2023 and no relevant medium-term refinancing needs. If you look at our debt maturity profile, we have US$3 billion worth of bonds maturing through 2025. As of June 30, we had total liquidity of US$16.9 billion which consisted of 10.1 billion US dollars available under committed long-term credit facilities and 6.8 billion US dollars of cash equivalents. Our bond portfolio has an average pre-tax coupon of around 4% and a weighted average maturity of 14 years. In addition, our debt portfolio does not have any financial covenants and is comprised of a variety of currencies diversifying our FX risk. 96% of our bonds have a fixed rate insulated from interest rate volatility and inflation. And now, let me take you through the drivers of our underlying EPS this quarter. We delivered EPS of 72 cents per share versus 73 US cents per share last year, as we cycle a 4 cents per share net benefit from tax credits in Brazil year over year. Organic EBITDA growth, accounting for 12 cents per share, was offset primarily by translational effects. Lower income tax, increased EPS by 4 cents. With that, I would like to hand it back to Michel for some final comments before we start our Q&A session. Michel?

Thanks, Fernando. Before opening for Q&A, I would like to take a moment to recap my key takeaways for the quarter. While this quarter was not without challenges, We continue to make progress in executing across each of our three strategic pillars. Our business momentum continued this quarter with double-digit top-line growth in four of our five operating regions. Driven by the strength of our leading brand portfolio, we grew volumes in the majority of our markets and revenues in over 85%. We made important strategic choices in pricing and other revenue management initiatives, which drove continually strong net revenue per hectolitre growth of 9%. We progressed our digital transformation, generating US$9.2 billion in GMV through BIS, with 63% of BIS customers now also BIS marketplace buyers. delivering a GMV increase of 41% versus last year. EBITDA grew organically by 5% as discipline overhead management mostly offset that elevated cost environment. We are actively engaging with our consumers globally. and investing to drive long-term value creation, and our results this quarter are another proof point of the strength of our global footprint. With that, I would like to hand it back to Jess for the Q&A.

Thank you, Jess.

Thank you. The floor is now open for questions. In the interest of time, we will limit participants to one question and one follow-up. Again, if you have a question or comment, please press star one on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. We do ask that while you pose your question, you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from Trevor Sterling with Bernstein. Please proceed with your question.

Hi, Michelle and Fernando. Two questions from my side, please. The first one, Michelle, you're looking at your chart showing the market share trends over time in the U.S. It does look, maybe I'm being too optimistic here, that last week we started to see a little bit of an improvement in market share trends. Is that something you'd agree with? So is that being driven by Bud Light itself or the other brands? So basically Bud Light is still weak, but the other brands and the collateral damage, if you like, is starting to reduce. And the second question, probably one more for Fernando. Very good margin performance in Middle America, as I think you mentioned in the release. Mexico, 175 bps of margin expansion in the quarter. Maybe you could give a little bit of color on that, and is that sustainable for the rest of the year?

Hi, Trevor. Good morning. Thanks for the question. I'll take the first one here, and then Fernando can take the second. The main objective for us to share this data, which is public data, is to one, bring a little bit the idea that we see, which is a more stable share over the last couple of weeks. You see that from May to June to the early July readings, that is actually like an improvement on the Delta share as you come month to month, week to week. But it's more a stable scenario. And now, of course, brands and the team in the US working hard to build it back and to earn back consumers as our commercial activities are in place. And we continue to invest for the long term. brewing great quality beer supporting our wholesalers and the team there but the the reading is really stabilization with signals of improvement uh when you cut across different states and channels and Trevor uh hello Fernando here on your question on margins when we started this year

we said that we would have cost pressures to a lesser extent than last year, and it was not evenly distributed across the globe. As the year goes by, what we've been seeing is that, of course, you have some hedges in places, and a lot of your cost of goods sold is hedged, but there are always a portion of your cost of goods sold that cannot be hedged. And the latest evolution of commodities is definitely helping you on that. So you definitely are seeing the benefit in Latin America. You mentioned Mexico. It's right. You can also refer to Brazil. Brazil is also performing well from a margin standpoint. And then if you start to fast forward and looking the cost we are seeing now, the effects we are seeing now, and how that's going to unfold, Definitely, you should, then again, we are not fully hedged, and there are a lot of numbers that can change over time, but you should expect to start having some tailwinds, especially when you go into next year. It's too early to say, it's too early to be 100% sure, but definitely start having some regions that will have some tailwinds going forward.

Perfect. Thank you very much, Fernando, and thank you, Michel. Thank you.

Thank you. The next question is coming from Mitch Collette with Deutsche Bank. Please proceed with your question.

Hi, Michelle. Hi, Fernando. Given you did organic EBITDA growth of 9% in the first half, but 5% in the second half, which is pretty impressive given the challenges you faced, can you maybe run us through the puts and takes for the second half? specifically what you're assuming for the US and how we should think about the shape of Q3 and Q4. Thank you.

Hi, Mitch. I'll just try to clarify the question. I think that you said 9% first half and the 5% that you referred to is quarter two, right? Yes. Okay. I think that, again, the first half of the year was strong. Of course, this quarter, too, we had our own challenge here, but in puts and takes, you saw things working very well across four out of our five regions with very strong growth. And I think we mentioned before that the second half of the year, we would have differences in terms of quarter three and quarter four because of the World Cup last year. So we have at the back end of the year some of the benefits Fernando was mentioning in terms of the commodities already turning into more tailwinds than headwinds. So this is in the back end of the year. And we have a very strong phasing as last year we invested more sales and marketing aligned with FIFA in the back end of the year. And this year we have decided and we planned heavy up investments on the Q2, Q3. So we see now quarter three, quarter four coming. The balance is more commodity tailwinds in the quarter four, heavier investments in quarter two, quarter three in sales and marketing, while we maintained our outlook for the full year. I'm not sure, Fernando, you want to complement something?

I think that that's exactly right. A few weeks We remain confident in the business. As Michel pointed out very well, we had a very good performance on Q2 on four out of our five regions. And the performance going forward, we need to monitor the phasing, but to remain confident, we are making no changes to our outlook, and we continue to expect to have a strong year.

Thank you both.

Thank you.

Our next question is coming from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Great. Thank you very much. I want to circle back to the U.S. Two of the things that I think have concerned investors the most is what's going on on-premise, concerns that the on-premise may be worse than what we see in the scanner data. So if you could talk about that. and what you see on the on-premise with taps. And then, you know, the promo environment. Obviously, you know, we see in the press and on the news a lot of, you know, pretty deep discounts and couponing. You know, how is the promo environment now that we're in the middle of the summer season, and how does it compare to the past? Thank you.

Hey, Robert. Good morning. Thanks for the question. Two questions here, I think, that on and off. When you look at the numbers, pretty similar. There's nothing like big to highlight in difference between on-premise and off-premise so far. And I think one important indicator that you brought that we are always monitoring is taps. And that is not now. I think that since the comeback from COVID, That is a quite meaningful rotation in terms of taps. And we see bars, restaurants optimizing for high turnover. I think that that's the best way to explain what's happening. And you see brands that have higher sales and turnover getting more taps. And these large varieties that some points of sales carry that had very low productivity being delisted. We see this happening across some of our craft brands or brands that have low turnover. We measure this with our wholesalers and through independent. We have retained more than 98% of our taps throughout the year. And some of our brands are gaining a lot of taps. Some of brands are declining some taps. But all in all, on trade and off trade performance, very similar as you could see on our numbers. The second point I think that we addressed in the last call, the promotional activities, pricing, and discounts. So the environment in pricing, I think that healthy. If you think about the inflation last year, this year, the fact that we took two price increases last year, given the size of the inflation and costs, and that is a good carryover throughout this year. As per plan, we concentrated more of our commercial activities in the middle of this year, so this doesn't have anything to do with the Bud Light situation. It was planned and announced and shared with our wholesalers last year. We see the depth and the intensity of the promotional activities in line with historical levels. There is no anything beyond that. But of course, during the summer, you saw some activities and people bringing a lot of news around that, but not different than what the Super Bowl activities, promotions, coupons across the board. And, of course, we saw in the U.S. these two price increases last year trying to catch up with inflation. Inflation is slowing down a little bit this year, but it's still neither margins or the full price caught up with inflation yet. So we continue to monitor the environment and especially the consumer purchase power to have our plans for the end of this year, next year in place.

Thanks for the question. Thank you.

Thank you. The next question is coming from the line of Lawrence Wyatt with Barclays. Pleased to see with your question.

Hi. Thanks very much for the question. It's a couple from me. Firstly, in regard to the sales in the US potentially starting to stabilize, do you think the cost base in the US is in around the right place at the moment? And then secondly, on Brazil, you said you perhaps lost a little bit of share this quarter. I think at the four-year results, you stated how much share you gained over the past few years. Are you comfortable with the level of market share that you're taking in Brazil? And is there anything further that can be done there? Thank you very much.

So two questions there. I think that one data we shared, we got... some questions in the last interactions about the cost base in the US. It's like the bid to decline that we saw so far, rough numbers, two thirds related to the volume. One third is more operational leverage. And of course, there is many opportunities to improve productivity. As you get less dislocation in production, you can optimize your lines and those things are being planted. implemented as we are always working on optimizing costs so there is work to be done the team is working on that and we will be capturing productivity but while the the quarters as we move forward and in Brazil I think that we are having a very good performance and Volumes performed very well in the quarter. We saw a slowdown in the industry during the quarter two. Our premium portfolio continues to work very well. Our car plus brands are working well. And as premiumization trends continue to be in place, as we cycle the very strong comps that we had last year, I think that we will continue to see market share improvements, and especially in the premium segment where we are accelerating big time both volume and brand equity. So Corona performing well, Spaten performing very well, Original growing high double digits. So we are taking share on this very important segment in Brazil.

Great. Thank you very much. Thank you.

Thank you. Our next question is coming from Edward Mundy with Jefferies. Please proceed with your question.

Morning, Michelle. Morning, Fernando. First question is, I'd love to get your perspectives about how you think about the process of restoring lost brand equity. In particular, what are the lessons from previous brand turnarounds at ABI? And any examples, specific examples you can talk to around what you did, sort of how long it took to improve brand equity, and then how long it took to sort of get consumers back on site for some of these brands. And then the second question, just building on the point of premiumization, both yourselves and one of your competitors that reported earlier this week, still seeing really good premiumization within the beer category. Appreciate macros holding up okay. There's still some sort of revenge spending going on, but do you think this premiumization will persist as you look out over the short to medium term?

Hi Ed, thank you for the question. Let me start with the premiumization one. We have repeated this based on data and insights that we have. We see the premiumization in the beer category, both having like a very large headroom because we have a lot of opportunity to continue to premiumize, but also a trend that is very consistent. is consistent across the globe and it's consistent across different economic cycles and we even uh share with you before that in some recessionary scenarios when consumers are more under pressure you see a rather acceleration because people they concentrate their purchase power in categories where they can buy more with less, let's say. So it's more affordable to premiumize in beer than it is with some other categories. And we see very consistent results like China, South America, Middle America, North America continues to premiumize. And in Europe, our portfolio is more than half today in premium brands. So we see consistency here. We see our brands performing very well. We announced a very strong quarter for our main global brands, and they performed very well across the globe. When you think about the brand equity, I think that these stories, they are very similar, yet Each and every one is different. And as a company in the U.S., we are listening and actively engaging with our consumers. We learned a lot through these interactions so far. And as I shared in the webcast, people are still with good memories, favorable. The brands still have a very high equity. But people basically, they want to enjoy their beer without a debate. They want us to focus and concentrate in platforms that all consumers love, and this is what we're doing. We are investing behind the platforms that we have engaged throughout the years with our consumers. The response for both communication, advertisement, the events and platforms that we are activating is good, and you need time so you can get better reading and better results. We have three months so far since this situation, and we continue to learn, and we continue to move forward with the main activities that we know that work everywhere, including in our regions in the U.S. Different responses in different regions, but some very good responses across brands.

Thank you.

Thank you. Our next question is coming from Jeff Stent with BNB Paribas. Please proceed with your question.

Hi. Just one question from me, if I may. There seems to be some quite radical tax changes progressing through the Brazilian Congress. I was just wondering if you could perhaps comment on those in the context of your business and what they might mean if they go through as proposed. Thank you.

Hello, Jack. Fernando here. We support a tax reform that will reduce the complexity of the Brazilian tax system. A tax reform that can provide for legal certainty and, of course, does not increase the industry's tax burden. Because if you look, it's probably among the highest, if not the highest, aggregated tax burden in Latin America. The proposed changes which have been debated in the Congress for direct and indirect tax, they gained momentum this year. It was listed as top priority from the new government, and it was approved in the Congress in July, and now it's at the Senate to be approved or to see how they deal with that. The proposal will simplify a lot the tax system that we have, which is good. It's going to have a dual VAT, which is both a federal and a state one. And this simplifies in a meaningful way the current consumption tax system. And there is an excise tax. that apply to some services and good, and this kind of has not been defined, but it's going to be defined later on. So this is pretty much the indirect side. On the direct side, it still has to be discussed. And overall, I think we need to see they both combine it. But if there is any simplification, less uncertainty, I feel NetNet should be a positive for the industry and a positive for the country.

Thank you.

Thank you.

Our next question is coming from the line of Jared Dinges with JP Morgan. Please proceed with your question.

Hey, guys. Thanks for taking the question. If I can come back to Mexico, please. I think volumes came in a bit weaker than expected and a bit weaker than they have been for a while. I know there's some phasing that you guys called out, but Can you talk about what you're seeing in terms of underlying trends in that market? You know, do you still see industry growth there in the second half and as you look towards 2024? Thanks.

Hi, Jared. Michel here. Thanks for the question. So Mexico remains an incredibly exciting market with a lot of energy around the beer category that is both growing and premiumizing. And when you look to the quarter, I think that is always good to focus, but also step back. In this quarter, we have a couple of shifts. The most important one is Easter, right? So we had earlier Easter, so some of the volume phased into quarter one versus what was last year, a later Easter, and all the volume was inside the quarter two last year. So the comps here are important. The second component is like two sides of the same coin component, because as the effects appreciates in Mexico, the Mexican peso, we see the remittances from the US to Mexico continue to grow in a health way. And this is a very important component on the Mexican economy. But because the peso is appreciating, which is very good for us in EBITDA translation. Of course, in local pesos, the remittances are not as big as they were last year. So this definitely is bringing, in combination with the inflation, a short-term pressure on the consumer purchase power. And then we also saw, as in other regions, a little bit colder weather throughout the quarter too. uh bounced back at the end of the quarter so the end of june was slightly better but the beginning april may was a little bit colder than usually it is with this el nino la nina transition but uh nevertheless confident with the market long-term trends in the industry very healthy premiumization in place We are outperforming the industry, and the portfolio is very healthy, responding very well. Very strong demand for our brands in Mexico.

That's perfect. Thank you.

Thank you.

Our next question is coming from the line of Sanjit Ola with Credit Suisse. Please proceed with your question.

Hey, Michelle, Fernando, a couple from me, please. Firstly, Fernando, I think earlier you alluded to some potential tailwinds from the current commodity and ethics environment. I just wanted to get a sense in that context, what's your pricing philosophy as we look forward to some of those tailwinds? Would you look to maybe reinvest some of those tailwinds back into pricing to sort volumes? or would you look to continue the price in line with inflation? That's my first question.

Hi, Sanjit.

Michel here. We had a little bit of a break up on the line, but I think that I got your question. So as Fernando was saying before, we see at the back end of this year, commodities, coming back a little bit in price. And the visibility we have now with six, seven months under the belt is that this trend extends towards 2024. And we saw that different regions, we said this before, they got the impacts of this commodities differently, right? So Lactam, for example, is already getting out while some other regions like Europe and Africa still a little bit in the middle of the headwind in commodities. And in terms of pricing, I think that long term, as we always say, we expect the price to move with inflation. We discussed this before because of the high impact of commodities and high inflation. We've been playing a little bit of catch up over the last two years. margins are not back but as commodities start to go back we should see some margin rebuild and of course the investments that we are making in our brands and the long-term strategy will continue to be a priority while we expect prices to move long term with inflation margins to rebuild to pre-covered and if this tailwinds get confirmed for the second half of next year, we should see some of this materializing next year. Got it.

Thank you. And just a word on China. Now we've seen some reopening come through in the Q2 numbers. How do you assess the steady state of the Chinese consumer at the moment?

Well, that's interesting.

I've been a couple of times to Asia this year already and spent a good time with consumers. And we see like a steady recovery after the COVID. And remember that we discussed this last year a couple of times that we were disproportionately impacted by the lockdowns because there was a lot of the lockdowns in the eastern China, but also a lot of channel impact on our nightlife, Chinese restaurants. We saw traffic rebuilding, so good level of consumer come back to the channels. We see this impacting in a disproportionate way than our premium business and our presence in the more premium channels like nightlife and restaurants. Consumers everywhere else, they came back from the COVID experience slightly different. So they are more demanding for their brands. They want to see more value for the money that they are spending is a common topic in China now is, show me the value so you can get my money. It's kind of how you translate what people are saying. Premiumization trends in beer remain very healthy. Consumption is moving well in our category. I know that in some other categories, there is some slowdown, but beer continues to be moving well after the reopening. And summer now is an important season for the core business and the premium business. And so far we've been seeing a good rate of sales and distribution is growing as we expand the business. And our portfolio continues to perform very well in the premium and in the super premium business, which is very interesting. In long term, we know that the prospects of China is continued premiumization, and we are very well positioned with our portfolio to continue to benefit from that.

Great. Thank you very much.

Thank you.

Our next question is coming from the line of Richard Withegen with Kepler. Pleased to see with your question.

Good morning, Michel. Good morning, Fernando. I've got two questions, please. First of all, In the press release, you mentioned that you attracted more lower income groups in Latin America and in Africa through brands and pack innovations. So can you give some more details about this? And is this a response to a more difficult circumstance for consumers, for example, as a result of the inflation that we see? And then the second question, probably for Fernando, on the working capital, especially your receivables and your payables were a big drag. on free cash flow in the first half of 23. So can you talk a bit what is behind the adverse effect here and what your expectations are for the second half of the year?

Hey Richard, Michel here. I'll take the first question and then hand it over to Fernando. So we've been talking through the last two quarters and since our market capital day in 2021 about growing the category and implementing solutions that we know that work across the globe that we tested in the last few years and we are scaling up. So let me give you one example to quickly address that. So in Brazil, we are combining three things that are very important for us to increase participation and more occasions in the category. So a very strong core portfolio with the Brahma, Skoll, Antarctica brands, returnable packaging that we know that makes the product more affordable for consumers, and the convenience of that delivery with the home delivery of cold beer in 30 minutes so we can by combining the initiatives that we developed over the last few years increase participation get our products to penetrate more and have higher participation from low-income consumers while continue to have very good service level good margins and performance on our core brands. So this is a little bit of what we were talking in the press release in how we are increasing participation. Of course, in different places, we have different packs that address the same type of occasions, consumer base. But I think that this example from Brazil, where you combine returnable package, direct to consumer delivery, and strong core brands, is an example that brings to life how we are leading and growing the category. And then Fernando, on the working capital, with you.

Hi, Richard. Fernando here. On the working capital, a few topics. So you mentioned receivables. Receivables, the biggest chunk here is a derivative receivables position, which is actually reversed in non-cash. This is like $500, $550 million. Then we have another chunk, around 250, which is higher volume growth and channel mix, mostly in APAC and middle Americas. Then on the payable side, you need to look payables in conjunction with inventories. Because what ended up happening is during the pandemic, as everyone is very well aware, there were all these supply chain fluctuations. And then you ended up having more inventories than you actually needed, just to make sure that there was no issue on service level. Now, when you start bringing these inventories to a more healthy level, what happens is that you reduce inventories, but at the first moment, you reduce payables. And then once you start cycling that over, then you are going to have a lower inventory level, and then you are going to reduce some of these payables. So, no major concern here, and as we cycle over the pandemic, we should start normalizing that, and you should see cash coming from lower inventories and the respective benefit on payables.

Very clear. Thanks, both. Thank you.

Thank you. Our next question is coming from the line of Robert Voss with ABN AMRO. Please proceed with your question.

Yes, hi, good afternoon, good morning. Thanks for taking the question. When looking at, I think it's a question for Fernando, when looking at your current bond portfolio and taking into consideration the upcoming debt redemptions, which are quite minimal, and possibly also duration of some hedged interest rates, for how long do you think you will be able to maintain an average gross debt coupon of 4% And maybe a follow-up on the working capital question. Do you expect some kind of reversal in the second half? So the cash outflow was 4.6 billion in the first half. Will that in part reverse in the second half? Thank you.

Hello, Robert. Thanks for your question. On the bond portfolio, what is quite interesting is that it's a fixed rate bond portfolio. And now with interest rates rising, what we ended up doing is that as we generate cash and that was still the leveraging and taking the opportunity to buy back some debt outstanding, we're actually, you get more return of our cash when you buy the highest coupon debt. Since we don't have to borrow money in this new interest rate environment and are retiring, as we retire, that actually supports you for our 4% coupon. So we should be continuing to do that. And so no concerns on maintaining the 4% coupon here. On your second question, yes, as we explained it, the moment that you start normalizing your inventory levels and you start having the lower inventories but building back some of the payables, you could expect to have some of the reverse on that. We always remind that most of our cash flow is generated in the second half of the year, and the working capital component is very important to that.

Very clear. Thank you. Thank you.

Thank you. Our last question today will come from the line of Simon Hales with Citi. Please proceed with your question.

Thank you, Harsha. Hi, Fernando. So just a couple of things from me then. I just want to come back to the U.S. sort of please. One of your major competitors has been highlighting an acceleration in the number of U.S. retail and shelf resets it's seeing. Is that something you can confirm you're experiencing and perhaps how are you preparing for a further step up in shelf resets as we move into the fall. And then secondly, what if you could just talk a little bit about the support you've been providing to your U.S. wholesaler partners through Q2, and what support we should expect to continue to see those wholesalers in Q3 and beyond.

Hi, Simon. Thank you for the question.

I think I got the two questions here. In terms of shelf resets, different in each country and by retailer, but as an average in the U.S., you have two periods of the year, fall, spring. Usually, during the fall, you see 20% of the retailers, let's say, resetting, while the majority of the resets take place in the spring. We saw some activity now towards the fall, a little bit off cycle, but smaller activities. So a third or a fourth of the 20% of the retailers already doing some adjustments. And there is a huge planning on both sides, like retailers, And us and wholesalers, we work throughout the year to make sure that the shelves are optimized in the best possible way. With the retailers, of course, always making the last call on how they organize shelves and set for their consumer demand and needs. In terms of the wholesaler support, we have this long-term partnership with our wholesalers. Of course, objectives pretty much aligned here in maximizing our interests, combining our sales and operations as much as we can for optimization. And given the situation in the U.S., we thought that would be extremely important to extend support to our wholesalers LINKED TO THEIR VOLUME SALES, AND AS WE ANNOUNCE IT TO THEM, IT GOES UNTIL THE END OF THE YEAR. SO IT'S THE SAME SUPPORT FROM JUNE UNTIL DECEMBER. Very important as we bridge the situation here and we maintain our wholesalers competitive and focused on what they do best, which is high quality service level for their customers and making sure that they are bringing moments of joy to our consumers through our brands, platforms, and activations that we have.

Thank you for the question. Thank you.

Thank you. This was the final question. If your question has not been answered, please feel free to contact the investor relations team. I will now turn the floor back over to Mr. Michel Dukaris for closing remarks.

Thank you, Jeff.

Thank you, everyone, for your time today and ongoing partnership and support for our business. Hope you all stay safe and well. Thank you.

Thank you. This concludes today's earnings conference call and webcast. Please disconnect your lines and have a wonderful day.