Anheuser-Busch InBev SA/NV Q2 FY2020 Earnings Call

Welcome to Anheuser-Busch InBev's Second Quarter 2020 Earnings Conference Call and Webcast. Today, we have Mr. Carlos Brito, Chief Executive Officer, and Mr. Fernando Tennenbaum, Chief Financial Officer, from AB InBev. To access the slides for 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. Some of the information provided during the conference call may contain statements about future expectations and other forward-looking statements. These expectations are based on management's current views and assumptions and involve risks and uncertainties that may be known or unknown. It is possible that AB InBev's actual results and financial condition may differ materially from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some risks and important factors that could affect AB InBev's future results, please refer to the risk factors in the company's latest annual report on Form 20-F filed with the Securities and Exchange Commission on March 23, 2020. AB InBev has no obligation to update or revise any forward-looking information provided during the conference call and shall not be liable for any reliance on such information. Now, I will turn the floor over to Mr. Carlos Brito. Please go ahead.

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 the 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 AB InBev, to bring people together for a better world, even if being together looks much different now. Today, I will 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 leveraged our facilities to produce and donate millions of units of hand sanitizer, face shields and packaged water. We also helped 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, and it 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 own beer volumes down 17.2% and non-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 hectoliter 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 14.1% and by 14.9% outside of their home markets, slightly outperforming the total business, but heavily impacted by their exposure to the on-premise channel. EBITDA declined by 34.1% with margin contraction of 825 basis points to 33.2%. More than two-thirds of the cost of sales per hectoliter increase 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 $0.46, while underlying EPS decreased to $0.40. Net debt to normalized EBITDA as of June 30 was 4.86x, 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. Deleveraging to around 2x 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 locations, while remaining cautious as we're now seeing renewed shutdowns of these channels in certain markets. In addition, South Africa implemented the 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 U.S., the continued implementation of our commercial strategy led to a healthy performance with an estimated stable market share for the quarter. Our above-core 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 of brands became available in 1,600 more OXXO 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 occasion consumption opportunities. We are focused on growing these occasions, while supporting the recovery of our on-premise customers with initiatives such as Tienda Cerca, 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 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 Malte 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're 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 of 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 continued 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 structural tailwinds 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 billion hectoliters. We have structured our geographic footprint to provide ample exposure to the larger 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 are 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 is a proven 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-to-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-to-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-to-consumer platforms to help our customers serve consumers in new ways. A great example is Tienda Cerca, our 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 livestream 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 U.K., 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 are 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-to-consumer marketing put us in an advantaged position to capture growth from these trends. 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 noncash 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 deem 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 recovery 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 for RCF and issuing approximately $11 billion of bonds. On June 1, 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 RCF 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-wholes 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 market 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 RCFs. 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 U.S. dollars and 30% in euros. 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, deleveraging to around a 2x 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 deleveraging commitments. 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.

Our first question comes from Trevor Stirling of Bernstein.

Two questions from my side, please. The first one, Brito, if you reflect on these results, what has been the biggest positive surprise that's come out of this, particularly compared to where we last talked in May? And the second follow-up question, in Brazil, great top line performance in Brazil, particularly on beer side, but you just clearly suffered on margins from operating deleverage and negative channel pack mix. If we had a normal quarter, whatever a normal quarter is, is there any reason why that margin wouldn't reverse?

Trevor, I think we were pleasantly surprised by two main factors. First, our team prepared exceptionally well for a strong recovery, maintaining operations with remarkable flexibility and creativity, while keeping our people safe as a top priority. This adaptability, especially as consumer behaviors shifted across different channels and products, was impressive. We have a principle in the company that we must follow where consumers lead because that’s where growth lies, and that was my biggest surprise. The second surprise was how quickly consumers adjusted to the new reality during lockdowns and stay-at-home orders. With a shift to in-home consumption, consumers found new ways to purchase our products and entertain themselves. We supported them by offering live streaming and enhancing our technology for both B2B and D2C sales, which has seen significant growth. For instance, our D2C platform in Brazil, Zé Delivery, had more orders in May and June for home delivery of beer than in the entirety of 2019. This demonstrates an extraordinary positive shift. Regarding Brazil’s top line and margins, it’s important to note that the margin structure was disrupted by various factors affecting channel and pack mixes. However, looking at Brazil in a typical quarter reveals some interesting insights. Volume recovery significantly impacts margins, as much of our margin pressure recently was due to volume losses; therefore, swift volume recovery could be beneficial. Additionally, the reopening of on-trade venues brings two margin-boosting factors: the return of returnable glass bottles that were absent during closures, and a higher demand for premium products in on-trade settings. The continuing focus on core and premium products, along with innovations like Brahma Duplo Malte, Beck's, and other premium offerings, keeps our portfolio appealing to consumers. As consumers return to the on-trade in a more normalized environment, this can further enhance margins. Moreover, ongoing innovation has become essential in Brazil since Jean, our CEO, joined from China two years ago. He emphasized the importance of innovation in our operations, which was not as prevalent before. Products like Brahma Duplo Malte and Skol Puro Malte exemplify this shift. He also highlighted that technology should play a larger role in our business, especially in consumer engagement, as evidenced by the growth of our delivery services. Lastly, agility in executing these strategies quickly is critical, influenced by the rapidity observed in China. All these factors will drive enhanced margins as the new normal settles in. Thank you.

Our next question comes from the line of Robert Ottenstein of Evercore ISI.

Great. I'd like if you could address sort of two related things. One, kind of the U.S. results that were very strong and tied to that, with Spiked Seltzer. So first, if you could talk about how you were able to keep market share flat, which is the best result really in memory in the U.S., given the incredible growth of White Claw and Truly. So that's quite an accomplishment. And then second, as you look at Spiked Seltzers, both in the U.S. and internationally, how much market share in Spiked Seltzers do you need in the U.S. to offset any general industry substitution? And related to that, what do you see the international potential to be for Spiked Seltzer? I know there's a lot there, but important questions.

Thank you, Robert. We are very pleased with our market share performance both for the quarter and the year. This success is a result of a commercial strategy that Michel implemented two years ago, which has clear drivers and is increasingly showing positive results. In Q2, our flat market share can be attributed to three main factors. First, our mainstream brands—Bud, Bud Light, Natural, and Busch—performed significantly better. Second, the core plus segment, particularly Michelob Ultra, continues to exceed expectations with a 23% growth compared to last year, making it the fastest-growing beer brand, excluding seltzers. It has also become a substantial brand in the market. Currently, Michelob Ultra ranks as the second highest in dollar sales within the beer category, only behind Bud Light. In terms of seltzer, we experienced a remarkable 600% growth this quarter, while the category itself grew by 300%. We have also doubled the share of our seltzer portfolio compared to last year. Our Bud Light Seltzer variety packs are selling as well as the leading brands in the category, and sales have increased from the first quarter to the second. We see great potential in the seltzer market, with our products being very profitable. We're already conducting pilot programs in various countries because consumer insights suggest there's a demand for low-carb, low-calorie, and diverse flavor options, particularly in more developed markets. Given our global presence and market reach, we believe there is a significant opportunity ahead. Thank you.

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

Brito, I'd just love to understand the dynamics in Brazil a little bit better. It seems like it was an impressive performance in May and June. Can you just talk a bit about the competitive landscape over that period? And is there any difference between sell-in and sell-out in Brazil over the period?

In Brazil, the competitive landscape has always been intense. Recently, we've seen the benefits of the strategic structure and investments made over the last five years paying off during COVID. Our ability to outperform the industry can be attributed to several factors. First, we manage 70% of our distribution directly, which allows for a smooth connection between us and our distribution operations. Second, our innovations have performed exceptionally well, such as Brahma Duplo Malte and Beck's. Brahma Duplo Malte, launched this year, gained significant visibility as the main sponsor of our live streaming events, raising brand awareness. Additionally, we've focused on enhancing service to smaller points of contact, which have attracted consumers shopping in their neighborhoods. Our investments in technology for both B2B and B2C have also significantly increased our reach. For instance, in the most recent quarter, our B2C platform Zé Delivery recorded 5.5 million orders, surpassing last year's entire total by a considerable margin. In May alone, we processed around 2 million orders compared to last year's total of 1.8 million. This trend continued into June, indicating strong consumer adoption of our contactless delivery service, which we've been developing for five years. Moreover, our B2B app saw high utilization, especially when traditional sales approaches were restricted. The rapid uptake of this technology reflects our effective investments in recent years, which have become crucial for customers and consumers alike. Coupled with our robust distribution system and consumer engagement through entertainment, we've managed to maintain a competitive edge in the market. Overall, we've adjusted effectively to the challenges in our environment and believe our performance outpaces the industry.

And is there any difference between sell-in and sell-out over the period in Brazil?

We observed that due to the on-premise restrictions being largely shut down, the off-trade became the primary channel for beer sales. Consequently, everything that arrived in the off-trade was sold. In the second quarter, our volumes saw a slight decline of 1.3%. However, we performed significantly better from April to June, surpassing industry expectations according to our estimates.

Our next question comes from the line of James Edward Jones of RBC.

You talked a lot in the statement about e-commerce in a sort of qualitative way. But could you maybe put some numbers around that, put it in some sort of context? And also, can I just check what Fernando said about the debt? Was it that you had enough cash available to redeem debt out to 2024?

Yes, certainly. Regarding e-commerce, I can provide three examples. In Europe, our proprietary e-commerce platforms, one in the U.K. and one in Continental Europe, doubled their volume during COVID and continue to grow. In China, our e-commerce volume, which has always been strong, increased significantly. Currently, we lead the beer sales segment with double the market share of the next brewer. In Brazil, our direct-to-consumer initiative is an integral part of e-commerce, delivering beer to consumers' homes in under an hour—usually around 40 minutes. We invested in this five years ago, and it has shown consistent growth. In May and June, we sold more than our total sales for the entire previous year in both months. This illustrates how the platforms we invested in are now highly relevant and giving us a significant advantage over our competitors. And regarding the second question—sorry?

James, on the liquidity, what I mentioned during my opening remarks is that given all the prudent measures that we took to address our liquidity, we now are in a position that we have enough cash on hand and not liquidity cash, actual cash on the balance sheet, for the maturities throughout 2024. Given that this level of liquidity is even higher than would be required, even in a volatile environment like we are seeing now, that's why we've been doing these bond redemptions and make-wholes to make sure we reduce a little bit of the cash balance and also reduce the short- and near-term liabilities.

Our next question comes from the line of Tristan Van Strien of Redburn Partners.

I'm very worried about South Africa on multiple levels. But you say you're working with the government. But when I look from the outside, when I speak to other guys in the alcohol industry in South Africa, it does not appear to be the case. And you have other groups like the taxi industry, much more powerful. So can you maybe give a bit more detail, a bit more comfort that you are on top of it, that your corporate affairs is capable to deal with the situation? And perhaps related to that as a follow-up, what does this also mean for your Zenzele program? Because when I look at it, half these taverners that Zenzele is supposed to be supporting or engaging won't exist at this rate by the time the ban is lifted.

Well, Tristan, there are a few points to address. Firstly, it's unfortunate that we are facing a second ban in South Africa. We are in communication with the government and have access to discussions with them. Our main concern is to ensure the safety of our employees and colleagues, and we are deeply involved in helping the community. We recognize the importance of our connection to the economy, which includes small farmers, taverns, retailers, and tax contributions that rely on our business. When a ban on alcohol is imposed, it leads to numerous negative consequences. We see an increase in smuggling and the involvement of criminal organizations, as was the case during previous lockdowns in Mexico and South Africa. We continue to engage with the government to demonstrate that we can be part of the solution and that some perceptions around alcohol's role in societal issues are misguided. Data from medical records do not support the idea that alcohol is a primary cause of these problems. Furthermore, while domestic violence is a concern in South Africa, we have observed that it tends to rise in other countries during alcohol bans, particularly when people are confined in stressful conditions. We will keep working with the South African government, though it's unclear when the ban will be lifted. Regarding the Zenzele program, we have already agreed on the payout and are actively supporting our customers to get back to business as they form a crucial part of our ecosystem. We are implementing measures in various regions, including credit support and product assortment, to help them recover because their success impacts the communities and the distribution of our products. We are committed to aiding their return to business as quickly as possible.

Our next question comes from the line of Simon Hales of Citi.

A couple of quick questions for you, Brito. Could you elaborate on the exit rate for the group in June? In your statement, you mentioned that the June numbers were somewhat influenced by replenishment observed in South Africa and Mexico. Can you provide insight into what the actual underlying exit rate was in June, excluding those effects? Were there any other markets where replenishment might have positively impacted the exit rate in June? Additionally, could you share your thoughts on the recent trading environment in the U.S.? It seems several competitors are experiencing issues with out-of-stocks on various brands and packs. From your perspective, have you been better prepared in terms of supply chain management? Can you confirm that and share what you are observing?

In terms of our stocks, it's difficult to comment on competitors since we only observe what’s happening in the marketplace. However, we've received positive feedback from our customers who indicate that our service level has improved compared to others during June as we approached the Fourth of July. This is encouraging, but we recognize that there is still much work to be done. Our supply chain is also facing challenges like everyone else. We believe we have an advantage because Michel and his team in the U.S. have strongly advocated for an end-to-end supply chain. This means our suppliers are linked to our breweries, wholsalers, and ultimately our customers, allowing us to quickly monitor inventory and consumer trends and respond accordingly throughout the supply chain. We are leveraging machine learning and big data since different regions in the U.S. exhibit varying patterns during this pandemic. Thanks to Michel's initiatives, we are starting to see some benefits, but we are still stretched. The significant stretch will likely occur between Labor Day and the period from Fourth of July to Labor Day during the summer. We may be better organized than previous periods, based on customer feedback, but we have prepared for these challenges. Regarding the exit rate, June was indeed stronger than both April and May. A significant portion of this improvement was attributed to increasing consumer demand as on-trade venues reopened in some countries that had previously been locked down, allowing consumers to purchase our products again. Additionally, there’s been stock replenishment in countries like Mexico, South Africa, and Peru which were previously closed down for two months. Therefore, the situation reflects a combination of increased consumer interest following previous supply constraints, alongside a stock replenishment effort in key markets.

Our next question comes from the line of Pinar Ergun of Morgan Stanley.

I have one on China. It appears that mainstream and local brands are doing better right now. Is this truly because of the channel shift? Or do you see some down-trading? And I guess what gives you comfort that this trend is temporary and premiumization should continue in the long term? And in your answer, it would be really helpful if you could also give us some color around the competition dynamics in the premium segments as well.

Thank you for your question. In China, the nightlife shutdown affected premium brands, while the core segment remained reliant on local store purchases, benefiting from increased in-home shopping. However, I believe this situation is temporary. Demand for premium products in China is still strong. From April to June, as points of consumption reopened, premium and super premium products have recovered more quickly than core products. During the lockdown, with only food stores available, consumers tended to purchase core and value brands. Now that nightlife and restaurants are largely reopened, we’re seeing a return to a more balanced market, which is fostering premiumization once again. We are confident that this trend will persist. Regarding the competitive landscape, China has always been highly competitive. We prioritize understanding our consumers and their evolving preferences over focusing exclusively on competitors. Our success in China, in terms of profitability rather than volume, stems from anticipating consumer trends based on insights rather than simply reacting to competitor actions. We are attentive to what our consumers and customers want, which has been our guiding principle in China.

Our next question comes from the line of Toby McCullagh of Societe Generale.

Just two questions, please. The first is just on deleverage. At the half year, you're at 4.9x, and you've reiterated the target of 2x. The dividend's already been cut, Australia has already been sold, and the IPO in Asia has happened. Is the current plan that you get to this target now organically? Or are there other options, which are sort of actively up for consideration? And then secondly, just on the U.S., two things. First, you flagged it in the mainstream business, good share performance within mainstream, but you flagged being a beneficiary of a flight to familiar brands and larger pack sizes. Was that just a knee-jerk reaction of consumers in sort of fear of shortages at the beginning of the period and changed shopping habits? Or is that something which has been sustained through the quarter and also into the exit rate? And then just secondly, within the U.S. still, on margins, you flagged there was a timing issue on variable comp reaccruals. Is that likely to be material in the second half?

So let's start with Fernando answering the deleverage question. Thanks, Toby. So our capital allocation priorities have not changed and the leverage into the optimal capital structure remains a priority. Of course, this year is unique, and our half 1 '20 performance was materially impacted by the outbreak of COVID-19. As a reminder, earlier this year, we made the decision to reduce the amount of the final 2019 dividend, given the uncertainty, volatility and continued impact of the COVID-19 pandemic. We believe this was prudent and in the best interest of the company. This decision is consistent with our financial discipline, deleveraging commitments and other actions taken to navigate this environment. We are always reviewing our asset base to identify noncore assets that can be divested as part of our normal business operations. At this stage, there are no major divestment plans to highlight. Our debt portfolio has a very manageable maturity profile on coupon. Our liquidity position, as I mentioned in my opening remarks, remains very comfortable despite the impact of COVID-19 on our business. Therefore, while we are prioritizing deleveraging, we are not forced to make any short-term decisions that won't be value-creative in the long run.

And the second question regarding the U.S. shows that three main factors contributed to our flat market share in the second quarter. First, the success of Bud Light Seltzer has helped the seltzer category grow significantly. Michelob Ultra remains the leading share gainer within the beer segment, aside from seltzers, and has grown 23% from a substantial foundation. Michelob Ultra is now the second highest-selling beer in the U.S. by revenue, following Bud Light. In the mainstream segment, performance has been strong where Bud and Bud Light are present. Bud and Bud Light, which are two of our major global brands, gained share in the beer market during COVID as consumers gravitated towards trusted brands and larger packaging. This trend has been consistent throughout COVID, with similar patterns in April, May, and June across the globe. This scenario presents a great opportunity for sampling. While it's early to tell, many consumers who may have been less familiar with Bud and Bud Light are now engaging with these products, which are well-received. It's encouraging to see consumers returning to familiar brands, but we will need to monitor developments once on-premise locations reopen and routines shift back to normal to gauge the impact on big brands. We are pleased with the share performance, and as for your inquiry about variable compensation accruals, these adjustments were made in line with our current performance, which has been notably affected by COVID. On an organic basis, we saw a year-over-year comparison to a robust second quarter with top line growth of 6.2% and EBITDA growth of 9.4%. Consequently, we would have accrued more variable compensation last year due to the stronger performance in the second quarter and first half compared to this year. At this stage, it's difficult to predict the second half of the year, but last year's first half showed significantly better results, leading to higher accruals.

That's very clear. Can I just follow-up on Bud Light Seltzer? Where is it sourcing from? I mean great growth, but where is it sourcing from?

Very good point. Forty percent of Bud Light Seltzer consumers come from outside the beer category. Yes, that’s correct, forty percent. The remaining sixty percent is sourced from within the seltzer category, with forty percent coming from outside seltzer categories and additional to the beer category. It’s also encouraging to note that Bud Light's variety pack sells at the same rate as the two leading brands' variety packs in the seltzer category. This indicates that the brand is very strong, not just due to its launch success, but also because of strong repeat purchases.

Our next question comes from the line of Richard Withagen of Kepler Cheuvreux.

I have two questions, please. First of all, going back to Brazil, I mean, it's a challenging market with the impact of COVID and difficult economic conditions. If we go back to 2015, '16, we saw volume losses during the recession. Are you expecting something similar in Brazil in the next few years? And how are you preparing for this? And the second question is on your costs. Your SG&A declined by 7% on an organic basis in the second quarter. And how do you see that develop, firstly in the short-term as markets recover? And secondly, longer term, do you think you can retain some of those savings?

You're talking about cost in Brazil?

No, the second question was on a group level.

In Brazil, we experienced one of the worst crises from 2015 to 2017, which involved tax increases, commodity fluctuations, and foreign exchange issues, all of which put pressure on consumers amidst high inflation. During that time, we made pricing decisions that, in retrospect, weren't effective, but we've learned from those mistakes. Currently, what's encouraging is the broader portfolio we now have, including successful innovations and technology that enables better connections with consumers through points of connection. We also have tools to address value segments, such as local craft beers, which we lacked previously, alongside affordable options like returnable glass bottles and specific 18-pack cans with lower excise taxes. Overall, we believe we are better equipped to navigate the current situation. Moreover, government support for consumers, amounting to BRL 600 monthly, is significant, although its duration is uncertain. We recognize the fluid nature of the situation, but we have more confidence in our ability to adapt, based on our array of affordable brands, innovations like Brahma Duplo Malte, advancements in B2B and B2C technology, and closer consumer engagement through enhanced data insights. These elements suggest we are in a stronger position to manage the challenges ahead, but uncertainties still exist. Therefore, we remain cautiously optimistic. For your second question, Fernando will address our cost outlook.

Richard, regarding costs, there are two aspects to consider. One is the cost of goods sold. When analyzing it on a per hectoliter basis, it's accurate to say that about two-thirds of the increase in cost of goods sold was due to volume deleverage, while a significant part of the remaining increase was caused by the package mix, influenced by the channel mix and shifts observed during the quarter. Concerning SG&A, much of the reduction you observed resulted from effectively managing discretionary expenses, particularly those that may not be effective in the current environment. Looking ahead, we can certainly leverage some of the insights gained, as effective resource utilization remains a key strength for us. We will continue to be agile and responsive, and we are committed to investing in our brands, which is crucial for us. Given the dynamic nature of the situation, we will not be providing guidance on expected levels for the second half of the year.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Edward Mundy of Jefferies.

I've got one question, one follow-up. The first is a basic one around the tax rate. The Q2 tax rate was about 19%, H1 tax rate is a little bit higher. I know you're not giving guidance, but I was wondering whether you'd provide a bit of a steer as to roughly where the tax might end up for the year. And then second, just to follow-up that last question around margins. Just as you think about philosophically hanging on to some of the savings that you're finding and reinvesting behind growth, is there any reason why you won't get back to the high watermark of 40% EBITDA margins in 2019?

Okay. So on the first one, on your question on ETR, the decrease on our normalized ETR, excluding the market-to-market gains or losses, linked to the hedging of our share-based payment programs in both H2 as well as second quarter, is primarily driven by country mix and positive impact of tax attributes with taxes applied on a lower base as a result of the COVID-19 pandemic. On the next one, I'll turn it over to Brito.

Yes. On the next one in terms of margin, I mean, there are many things there that impacted our margin this year. First, the volume deleverage. That was the first one. So volume deleverage, as said here, impacted two-thirds of our cost of sales this quarter. So that, of course, as volumes pick up, that volume deleverage will disappear, cost of sales will go back, and that was a huge impact on our margin. Second one is the channel mix. I mean the on-trade in some countries, important countries tends to be more profitable than the off-trade and the on-trade is shut down or operating at a minimum capacity. So the off-trade grew in importance, and that is an issue for margins because of the relative profitability. The channel mix also caused another mix issues, which is the package mix. So normally, in many important countries, the package mix in the off-trade has lower margins than the packaging mix in the on-trade. For example, returnable glass bottles are more connected to the on-trade, and they are gone when the on-trade is closed. Keg, the keg business normally is much better for margins, but they're gone when the on-trade is closed. In FX, I mean, we had FX in emerging markets going up big time, now they're coming down. But FX, of course, and commodities in general also put pressure on margins. So I would say that when COVID is over or this whole situation is a bit better, you could see that consumers will go back to more normal life. Channels will be more balanced as they were before, FX maybe will be to a more normal place and so commodities and all that. But the things we control or that we see consumers control is premiumization will remain. That's very important, right? Technology will continue to play a role because as we get more efficient in contacting customers and consumers, that has an impact on margin. The scale will come back as volume deleverage ceases to exist. And we're learning more how to invest behind our brands. I mean for example, using digital. The lives in Brazil has an amazing return on investment because you don't need to spend money creating all the venues and the stages and everything, those productions and you have people connecting and buy online because now we have direct-to-consumer delivery. Long term, the returnable glass bottle will continue, right? So again, I think in summary, premiumization, technology, scale, best-practice sharing and the global footprint, which is a huge asset. So those are things that could get margins back to where they once were.

That's great. And Brito, I mean, you sort of saw China go into the crisis first and then come out of the crisis first. Based on what you're seeing in China, does that give you confidence that the on-trade is going to make a full recovery around the wider sort of global picture?

We still have to consider that throughout the quarter, for instance, nightlife—where a significant portion of our margins come from—has seen a rise from 25% reopened to over 80% now. This is crucial for margins. Consumers are continuing to trade up, with super premium brands performing well. They didn't see rapid growth during COVID because nightlife was closed and in-home consumption was the only option. In-home, core and core plus brands generally fared better. E-commerce is expanding quickly, and premium brands have outperformed core brands in this space. Additionally, factors like channel diversity and brand mix in e-commerce are beneficial for margins in China. Importantly, our Super Premium business in China has significant growth potential and is still in its early stages. We've developed the premium segment in China, and now we are focusing on the Super Premium segment, where we are the clear leader. However, the growth rate for Super Premium was affected by the pandemic due to many channels being closed. As people return to normalcy, both Super Premium and premium brands are expected to grow faster than before, which is positive for margins. Thank you.

And that was our 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 Carlos Brito for closing remarks.

Well, thank you, Maria. In summary, we're excited about the future prospects of the beer category and we're confident in the fundamental strength of our company, rooted in our brands and footprint, our capabilities and most importantly, our people. We have a culture of ownership and a long-term mindset. Our people are rising to the challenge each day, demonstrating creativity, passion and strength to keep us move forward. I'd like to once again close by saying thank you. Thank you to everyone on the front lines for their commitment to keeping us safe, particularly health care workers. And thank you to our teams, especially those on the ground, ensuring business continuity. You inspire me every day, and I'm so proud to be your colleague. Thank you for joining the call today. We hope all of you stay safe and well, and we hope to celebrate a strong recovery over a beer soon. Thank you. Have a nice day.

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