Anheuser-Busch InBev SA/NV

Welcome to the Anheuser-Busch InBev's second quarter 2020 earnings conference call and webcast. Hosting the call today from AB InBev are Mr. Carlos Breedom, 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 the pound key. If you should require operator assistance, please press star zero. 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 23rd of March, 2020. AB InBev assumes no obligation to update or revise any forward-looking information provided during the conference call. I shall not be liable for any action taken in reliance upon such information. It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may begin.

Thank you, Maria, and good morning, good afternoon, everyone. Welcome to our second quarter and half year 2020 earnings call. I hope you and your families are safe and well. First and foremost, I'd like to extend our deepest sympathies to everyone who has been affected by COVID-19. I want to express our sincere gratitude to those on the front lines for their commitment to keeping us safe, particularly health care workers. I'd like also to personally thank all of our colleagues for their dedication and efforts to ensure business continuity and a strong recovery. The COVID-19 pandemic has altered life as we know it. However, it has not changed our purpose at ABM Bath to bring people together for a better world, even if it being together looks much different now. Today, I'll start by discussing initiatives we have implemented to ensure the health and safety of our people and support the communities in which we operate. Next, I will review the results of the second quarter and discuss the ways in which we're positioned for a strong recovery. I will then hand it over to Fernando to talk about our financials. We'll then be happy to answer your questions. The health and safety of our people has been and always will be our top priority. As more of our colleagues return to the workplace in markets where restrictions are being lifted, we have implemented rigorous safety measures such as strict sanitation practices, workplace capacity, and social distancing guidelines, health tracking, and personal protective equipment. Our products are almost entirely sourced, brewed, and enjoyed locally. making us deeply connected to the communities in which we operate. We're working closely with local governments and other stakeholders to leverage our scale, capabilities, and resources to support the fight against the pandemic and to do our part in the economic recovery. For example, we leverage our facilities to produce and donate millions of units of hand sanitizer, face shields, and packaged water. We also help build public health care facilities in Mexico, Colombia, Brazil, and Peru. Our customers have also been severely impacted by the pandemic, particularly our on-premise partners. We're working closely with them through a variety of programs to support business continuity and a strong recovery. The success of these endeavors is thanks to the rapid mobilization and creativity of our teams. has been encouraging and humbling to see that these programs are making a difference, especially through recognitions received such as the United Nations Solidarity Award for our initiatives in Brazil. Let me now spend some time discussing our second quarter results. Our performance in the second quarter was materially impacted by the COVID-19 pandemic as expected. Our volumes declined by 17.1%, with on-beer volumes down 17.2% and on-beer volumes down 15.5%. As the quarter progressed, we saw considerable improvement month over month. In April, our volumes declined by 32.4%. In May, the trend improved with a decline of 21.4%, and in June, we delivered volume growth of 0.7%. We came out of the quarter with reinforced confidence in the resilience of our business in the global beer category. Revenue declined by 17.7%, mainly driven by the decline in volume. Revenue per capita declined by 0.6%, as successful revenue management initiatives were more than offset by the change in channel and packaging mix resulting from the COVID-19 restrictions. Our global brands declined by 14.5% and by 14.1% outside of their home markets, slightly outperforming the total business, but heavily impacted by their exposure to the on-premise channel. Events have declined by 34.1% with margin contraction of 825 BIPs to 33.2%. More than two-thirds of the cost of sales per hectare increased that contributed to margin contraction, was driven by the operational deleverage resulting from lower volumes, especially in the beginning of the quarter. As always, efficiently utilizing our resources is part of our DNA and a critical driver of our industry-leading profitability. We implemented several measures to reduce or eliminate discretionary spending, which helped offset the impact of the top-line decline and operational deleverage. Our normalized EPS decreased to 46 cents while underlying EPS decreased to 40 cents. Net debt to normalized EBITDA as of June 30th was 4.86 times, impacted by the COVID-19 pandemic and our results, and the seasonality of our cash flows, which are typically weighted toward the second half of the year. The leveraging to around two times remains our commitment, and we will prioritize debt repayment in order to meet this objective. The trajectory of our performance improved as the second quarter progressed. This was the result of being able to resume operations in markets such as Mexico, South Africa, and Peru, the ongoing resilience of the off-premise channel, and the continued reopening of the on-premise channel around the world. We're excited about the return of on-premise consumption occasions, while remaining cautious as we're now seeing renewed shutdowns of these channels in certain markets. In addition, South Africa implemented a second ban on the sale of alcohol beverages in mid-July, which will impact our results in the third quarter. Let me now take you through the key takeaways for some of our main markets in the second quarter. In the US, the continued implementation of our commercial strategy led to a healthy performance with an estimated stable market share for the quarter. Our above-court portfolio continued to outperform the industry, supported by the continued success of Bud Light Seltzer and Michelob Ultra. We also saw an improved performance in the mainstream segment, largely due to the uplift of beer sales in the off-premise channel, which benefits established brands and larger packs. In Mexico, our beer operations faced a shutdown in April and May. The restrictions were lifted at the beginning of June and we recovered rapidly, delivering beer volume growth of high teens in the month and outperforming the industry in the quarter. In addition, our portfolio brands became available in 1,600 more Oxford stores in July. We remain excited about the long-term growth potential and incrementality of this opportunity. In Colombia, our performance was significantly impacted by the closure of the on-premise channel and stay-at-home restrictions. However, our team managed to offset some of this impact by quickly pivoting resources to new in-home consumption occasions. We're focused on growing these occasions while supporting the recovery of our on-premise customers with initiatives such as Tienda Circa, an online delivery platform, and our recently launched proprietary digital B2B platform called Bees. In Brazil, our beer business delivered a healthy performance in the context of a volatile environment with only a slight volume decline that outperformed the industry, according to our estimates. We saw an improving trend throughout the quarter, driven by the success of our enhanced brand portfolio with innovations like Brahma Duplo Malche and our ability to connect with our customers and consumers in new ways by leveraging technology. In South Africa, our business was significantly impacted by the complete ban on the sale of alcohol beverages, which lasted until the end of May. We were able to fully resume our operations in June, and we saw a strong recovery in the month with volume growth of high single digits. However, a second ban on the sale of alcohol beverages was implemented in mid-July. Our priority is and continues to be the safety and well-being of our people and our communities. We remain focused. on working with the government on measures that will meaningfully combat the public health crisis while supporting the country's much-needed economic recovery. Our business in China continues its recovery throughout the quarter. While we faced a 17% decline in volumes in April, we achieved mid-single-digit growth in May and June, with our June performance representing our highest-ever monthly volumes in the country. We saw improving trends in the reopening rates across channels, as well as accelerated growth in e-commerce, where we have grown our market share to more than twice that of the next brewer. In Europe, our performance was heavily impacted by on-premise restrictions. However, we saw a gradual reopening of the channel throughout the quarter, resulting in an improving volume trend. We continue to gain market share across almost all of our markets, supported by the strength of our premium brands. While the past few months have been challenging, they have also reinforced our confidence in the strength of the beer category and our business. This is evidenced by the rapid improvement of our performance in many markets throughout the second quarter, supported by strong consumer demand in both developed and emerging markets. In emerging markets, favorable demographic and economic trends provide a structural tailwind to drive long-term category growth. For example, the legal drinking age population in Africa is expected to grow by 30% in the next 10 years. The table on the left side of slide 11 shows the difference in per capita consumption in mature versus emerging markets. This represents a significant potential volume opportunity in emerging markets of approximately 2.3%. 2.3 billion hecklers. We have structured our geographic footprint to provide ample exposure to the emerging markets that are expected to drive future growth. In addition, we maintain a strong presence in developed markets that generate robust cash flow with continued growth opportunities from premiumization and innovation. We believe premiumization will remain an important source of top and bottom line growth in both developed and emerging markets. Beer as a category is still in its early stages of premiumization, even in developed markets, when compared to other alcohol categories. We're all well-positioned to capture this growth opportunity as the number one player in the premium segment in many of our key markets. We have also been investing ahead of the curve in the premium segment through The High End Company, a dedicated business unit with a specialized focus and structure to grow our portfolio of global, local, and specialty premium brands. The high-end company's approval model, having gained more than 12 percentage points of market share in the premium segment over the last three years in the markets where it operates. We're confident that we have the right brand portfolio and structure to continue capitalizing on the growing premiumization trend across our footprint. In order to fully benefit from these growth opportunities in the beer category, we have been investing capabilities to better connect with our customers and consumers. Growing trends such as digital sales, e-commerce, and online marketing are more relevant than ever before and have rapidly accelerated in recent months. We have spent the past several years building our proprietary B2B sales platform called Bees. Bees combines our unparalleled global logistics system with our internal digital capabilities to provide our customers with a truly end-to-end experience. We have put an important emphasis on this platform over the last several months, helping our teams stay in regular contact with our customers, even when in-person interactions are not possible, and by providing a valuable source of data on emerging consumer and customer trends. We believe that our B2B initiatives have the power to transform our business and drive growth. For that reason, we recently restructured our senior leadership team to create a fully dedicated chief B2B officer to lead and develop our global strategy. E-commerce has been a growing channel for the beer category for several years, and the recent situation has rapidly accelerated consumer adoption of this trend. We're seeing strong growth in both our direct consumer platforms and through our partnerships with major global online retailers. Consistent investments in owned and third-party e-commerce, including more than 20 direct consumer ventures globally, are positioning us to lead online sales. In the first half of the year, we increased our market share of online sales. In addition, in response to the current crisis, we rapidly developed new proprietary direct consumer platforms to help our customers serve consumers in new ways. A great example is Tienda Cerca, a free online delivery service that's now in use by approximately 400,000 neighborhood shops in eight markets in Latin America. Our teams have also found innovative ways to connect with the consumers while they stay home. In Brazil, we launched a live stream concert series called Lives, which activates several of the top brands and innovations in our portfolio. The platform has tremendous reach across the country with more than 675 million views in the quarter. To put this in perspective, this is approximately 57% more views generated than the 2018 FIFA World Cup final in Brazil. In addition, we continue to leverage our sponsorship assets in new and creative ways. In the UK, Budweiser celebrated the return of the English Premier League by offering fans the opportunity to cheer for their favorite teams on billboards, giving them a safe way to demonstrate their support. In summary, we believe we are well positioned for a strong recovery, even though we remain cautious in the current environment, given the volatility and uncertainty presented by the COVID-19 pandemic. We're proud leaders of the Global Beer category, which continues to show tremendous resilience. We have a diverse geographic footprint with a strong presence in emerging markets that are expected to drive long-term growth. Premiumization offers an exciting opportunity to grow our top and bottom line in both emerging and mature markets, and we have a winning structure to capitalize on this through the high-end company. Furthermore, our significant progress in investment in capabilities such as B2B sales, e-commerce, and direct consumer marketing put us in an advantage position to capture growth from this trend. Most importantly, we have a strong team of talented people with an ownership mindset to leverage these assets as we look forward to a strong recovery. Now I'd like to hand it over to Fernando. Fernando, please.

Thank you, Brito. Good morning, good afternoon, everyone. I hope you are all safe and well. During the second quarter, we reported a $2.5 billion non-cash goodwill impairment charge. The COVID-19 pandemic resulted in a sharp contraction of sales in many countries in which we operate. We therefore concluded that a triggering event occurred, which required us to perform an impairment test. The impairment test considered three scenarios for recovery of sales for the tested cash generating units, a base case, which we deemed to be the most likely case, a best case, and a worst case. Based on the results of the impairment test, we concluded that no impairment was warranted under the base case and the best case scenarios. Nevertheless, under the worst case scenario, run with higher discount rates to factor the heightened business risk, we concluded that the estimated recovered amounts of the South Africa and rest of Africa cash generating units were below their carrying value. Accordingly, we determined that it was prudent, in view of the uncertainties, to record an impairment charge of $2.5 billion, applying a 30% probability of occurrence of the worst-case scenario. This was partially offset by a $1.9 billion gain on the disposal of the Australia operations. Now I would like to discuss the initiatives we have undertaken to maintain strong liquidity while proactively managing our debt profile. In March this year, the COVID-19 pandemic began to have a global impact, resulting in severe market volatility and uncertainty. As a result, We quickly took significant and prudent actions to further strengthen our liquidity position, including drawing down our full $9 billion revolving credit facility, or RCF, and issuing approximately $11 billion of bonds. On June 1st, we successfully completed the sale of our Australian business for approximately $10.8 billion. Following the completion of this transaction, we repaid our RCF in full. At the end of the second quarter, our total liquidity position amounted to more than $35 billion, consisting of the $9 billion undrawn RTF and more than $25 billion of cash. This cash balance would be sufficient to cover our debt maturities through 2024. This liquidity amount was higher than we required to manage our business, even in times of elevated volatility. Therefore, Earlier this month, we completed tender offers for approximately $3 billion of bonds and announced make-holes on $1.7 billion of bonds, all of which were maturing between 2021 and 2023. We will continue to proactively manage our upcoming liabilities as we monitor the evolving marketing environment. Our updated bond maturity profile is shown on slide 20. Our maturities are well distributed across the next several years, with each annual maturity tower well below our current liquid position. In addition, the redemption transactions undertaken this month have considerably reduced our obligations for the next three years. As a reminder, we do not have any financial covenants on our entire debt portfolio, including our RTFs. Our bond portfolio remains largely insulated from interest rate volatility, as approximately 95% holds a fixed rate. Furthermore, the portfolio is comprised of a diverse mix of currencies, with 64% denominated in US dollars and 30% in euro. Our weighted average maturity is roughly 15 years, and we have a weighted average coupon rate of approximately 4%. I will now take you through our capital allocation priorities. The first priority for the use of cash is to invest behind our brands and to take full advantage of the organic growth opportunities in our business. Second, the leveraging to around a two times net debt to EBITDA ratio remains our commitment and we will prioritize debt repayment in order to meet this objective. Third, with respect to M&A, we will always be ready to look at opportunities when and if they arise, subject to our strict financial discipline and the leveraging commitment. Our fourth priority is returning excess cash to shareholders in the form of dividends and or share buybacks. With this being said, we must continue to exercise prudent measures during times of uncertainty and volatility, including efficient management of discretionary expenditures especially those which may not prove effective in the current environment. And with that, I'll hand back to Maria to begin the Q&A session.