Anheuser-Busch InBev SA/NV Q2 FY2022 Earnings Call

Welcome to Anheuser-Busch InBev Second Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from AB InBev are Mr. Michel Doukeris Chief Executive Officer; and Mr. Fernando Tennenbaum, 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. 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 18th of March 2022. 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 Doukeris. Sir, you may begin.

Thank you, Jessie, and welcome, everyone, to our second quarter 2022 earnings call. It is a 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 the execution of our strategic pillars. We will then be happy to answer your questions. So let's start with our operating performance. Our momentum continued this quarter, and we are very pleased with the ongoing strength of our business. We delivered top line growth of 11.3%, with 3.4% volume and 7.5% revenue per hectoliter growth, driven by the expansion of the beer category, ongoing premiumization supported by increased investments in our brands and revenue management initiatives across our markets. Despite the dynamic operating environment, we continue to meet the moment, growing EBITDA by 7.2%. Normalized EPS was $0.75 and the underlying EPS was $0.73. Gross debt decreased by $5.5 billion in the first half of this year, and our net debt to normalized EBITDA decreased to 3.86x. Our performance this quarter was broad-based, and we delivered top line growth across all 5 of our regions with volume growth in over 60% of our markets. Our diverse geographic footprint and balanced EBITDA contribution provide a unique combination of growth and strong cash generation. Now I would like to share some highlights from our key markets. In the U.S., I would like to start by highlighting the resilience of the beer industry. Even in the current dynamic operating environment, we have seen gradual improvement throughout the quarter and an increase in value from pre-pandemic levels. While our volumes underperformed the industry, our business delivered another quarter of top line growth. We remain confident in our long-term strategy focused on rebalancing the portfolio. Our above core portfolio continues to outperform, led by Michelob ULTRA, which grew volumes by double digits. Within the spirits-based ready-to-drink segment, our portfolio once again outperformed the industry with both water and Nütrl vodka seltzer growing in strong double digits. In Mexico, we outperformed the industry, delivering double-digit top and bottom line growth. Our core brands delivered high single-digit volume growth and our above core portfolio once again grew by double digits, led by Modelo and Michelob ULTRA. Over 60% of our bus customers are now also marketplace buyers. In Colombia, we delivered double-digit top and high single-digit bottom line growth and continue to expand the beer category, again, reaching all-time hyper capital consumption. Our premium and super-premium portfolio reached a record high volume, delivering over 40% growth led by our global brands and local premium brands, including Colombia. Our business in Brazil delivered 26.8% top line growth and a strong 34.3% increase in EBITDA. Brazil is a great example of our evolution towards becoming a tech-first FMCG. Our advanced digital transformation allows us to capture both growth and operating efficiencies. Our beer volumes once again outperformed the industry, growing by 8.5%, led by our core brands, and over 20% volume growth of our premium and super premium brands. In a nutshell, our business in Brazil delivered across all 5 levers of our category expansion framework. In Europe, we delivered high single-digit top and double-digit bottom line growth, driven by on-premise reopening, ongoing premiumization, and implementation of revenue management initiatives. Our portfolio continues to premiumize, with growth this quarter led by our global and super premium brands. Our business in South Africa delivered high single-digit top and double-digit bottom line growth despite significant production constraints in April and May due to floods impacting our prospectum brewery. Underlying demand for our portfolio remained strong. Our leading core brands delivered continued revenue growth, and our premium and super premium deal beer portfolio outperformed this quarter, delivering a double-digit increase in revenues. In China, the implementation of COVID-19 restrictions led to a total industry decline of mid-single digits in the quarter according to our estimates. These restrictions disproportionately impacted our key regions and channels, leading to a revenue decline of 5.1%. Underlying consumer demand for our brands remained strong. As restrictions eased in June, both our premium and super premium portfolios returned to volume growth, increasing by double digits. I would like to now turn your attention to a few ESG highlights. In the second quarter, we made progress across our ESG priorities with select highlights including advancing circularity in our operations. We opened the first full-scale grain production facility in St. Louis, using our brewing process into high-quality, sustainable protein ingredients, building a resilient value chain. We brought together more than 250 supply chain partners with the launch of our global collaboration initiatives to drive climate action and decarbonization. Fostering entrepreneurship and innovation, we hosted the third annual demo day of our 100-plus accelerator program with our CPG partners, where 34 startups showcased pilots to progress our sustainability goals in areas such as water stewardship, climate action, smart agriculture, circular packaging, and upcycling. Now let's move on to our strategic pillars, starting with Pillar 1, lead and grow the category. Our brand and the creative work that brings them to light and connects them with our consumers is a true passion point for me. At this year's Cannes International Festival of Creativity, our marketing teams achieved their best performance ever, winning 50 awards, a record high for our company. These 50 awards were distributed across our key countries and 9 brands. We were especially honored to receive the Creative Marketer of the Year, and the Grand Prix for creative effectiveness for the Michelob ULTRA Contract for Change campaign. Big congratulations to our teams and partners for this extraordinary achievement and recognition of the progress in our creative marketing capabilities. Now let me take you through our category expansion levers. First, we continue to focus on making the beer category more inclusive for all consumers. This quarter, consumers' participation within our portfolio increased in the majority of our key markets, driven by brand, pack, and liquid innovations. Second, we are offering superior core propositions. Our mainstream portfolio delivered high single-digit revenue growth this quarter, led by strong performances of our core brands in Brazil, Mexico, and Colombia. Third, occasions development. Our global brand Stella Artois grew revenues by 7.7% outside of its home market, led by the focus on new occasions in key markets such as Brazil and Colombia. Fourth, we are advancing premiumization. This quarter, our above core portfolio grew revenue by approximately 12%, led by continued double-digit growth of Michelob ULTRA in the U.S. and Mexico and the expansion of Spartan in Brazil. Our global brands continue to drive premiumization across all markets. The combined revenues of Budweiser, Stella Artois and Corona grew by 9.7% outside of the brand's home market, led by Corona with 18.2% and Stella Artois with 7.7% growth. Budweiser grew by 6.1% despite the impact of COVID-19 restrictions in China, the brand's largest market. Finally, we continue to expand the category with our beyond beer offerings. Our global bind beer business contributed over USD 425 million of revenue in this quarter. In the U.S., our spirits-based ready-to-drink portfolio continued to grow ahead of the industry, led by Cutwater and Nütrl vodka seltzer. In South Africa, Brutal Fruit and Flying Fish delivered continued double-digit growth. Innovation this quarter supported the expansion across each of the 5 levers of our framework, contributing approximately 8% of our total revenue this year. Now let's turn to our second strategic pillar, digitize and monetize our ecosystem. As we invest to become a tech-first FMCG company, we continue to see a remarkable acceleration in usage and reach, capturing USD 7.4 billion in GMV this quarter, a 64% increase year-over-year. We have now 2.9 million monthly active users, generating over 1.9 million orders per week. In 12 of the 18 countries, our customers are also able to purchase third-party products through this marketplace. This marketplace offers a consolidated order and delivery management platform, solving pain points and empowering our customers to grow. We continue to increase the adoption and expansion of product availability as 40% of these customers in these markets are also buyers from this marketplace. To date, we have over 100 partners providing more than 500 brands through the platform, generating annualized revenues of USD 800 million. This winning partnership empowers our customers to grow via the benefits of digital inclusion and enables our partners to benefit from our world-class platform and highly engaged user base. Now let's talk about our direct-to-consumer business. This quarter, our DTC products generated USD 385 million in revenues. The number of online orders surpassed 16 million transactions this quarter, driven by the delivery in Brazil and the continued expansion of our on-demand platform in 10 additional markets in Latin America. With that, I would like to hand it over to Fernando to discuss the third pillar of our strategy, optimizing our business.

Thank you, Michel. Good morning. Good afternoon, everyone. We aim to maximize value by focusing on 3 areas: optimizing resource allocation; robust risk management; and efficient capital structure. With respect to capital allocation, we're going to maximize long-term value creation by dynamically balancing our priorities. We continue to invest in organic growth and support our strategy to lead and grow the category and digitize and monetize our ecosystem. The excess cash generated by our business is then dynamically allocated to our other capital allocation priorities, deleveraging, selective M&A, and return of capital to shareholders. In line with our capital allocation priorities, we continue to make progress on deleveraging. Our gross debt reduced by USD 5.5 billion in the first half of 2022, and our net debt-to-EBITDA ratio decreased to 3.86x. As you can see on the next slide, our debt maturity profile remains well-distributed with no near- and medium-term refinancing needs. We had USD 3.2 billion of bonds maturing through 2025 and more than sufficient cash on hand today to redeem all of these bonds. Our bond portfolio has an average pretax coupon of 4% and a weighted average maturity greater than 16 years. Moreover, our debt portfolio does not have any financial covenants and is comprised of a right of currencies diversifying our FX risk. Additionally, 94% of our bonds have a fixed rate, insulated from interest rate volatility and inflation. Now let me walk you through the drivers of our underlying EPS for the quarter. Underlying EPS was $0.73 per share, $0.02 lower than the second quarter last year. This was driven by an increase in net finance costs and higher income tax expenses. Net finance costs increased largely due to foreign exchange losses, which accounted for $0.04. These losses were a result of FX translation of cash held in foreign subsidiaries. I'll now hand it back to Michel for some final comments.

Thanks, Fernando. I would like to take a few minutes to recap our reflections and learnings and how we continue meeting the moment in 2022. The beer category continues to demonstrate strength. We are operating in a big, profitable, and growing category. Beer continues to gain share of throat globally, and we are well-positioned to capture this growth as we hold the #1 position in 7 of the top 10 global beer craft posts. Our business has momentum driven by the relentless execution of our strategy, the strength of our brands, and our accelerated digital transformation. Our business delivered sustained profitable growth. On top of that, this year presents unique opportunities to activate demand, such as continued on-premise reopening and the return of marquee events such as the World Cup in the second half of this year. In conclusion, we are confident in our business fundamentals and our team's ability to continue to meet the moment and create a future of more cheers. I would now like to hand it over to Jesse to begin the Q&A session.

Our first question is from Simon Hales with Citi.

Good morning, Michel. Good morning, Fernando. Two questions for me, please. I mean could you talk a little bit, Michel, about sort of what is the strong revenue per hectoliter increase you continue to see in Q2? And whether that robust pricing that continues to go through in your markets around the world is having any real underlying effect on consumer offtake trends. I wonder specifically in the U.S., whether some of the recent pickup we've seen in sort of the lower-priced beer brands like Busch is a reflection of some of the pricing and inflationary moves in the market. Just interested in your color there? And secondly, maybe one for Fernando around the tax credits in Brazil, which were clearly positive in the quarter. Is that a one-off really in Q2, Fernando? I mean, obviously, you had something last year as well. But should we expect any more tax credit to support the numbers into Q3 and beyond?

Simon, thank you for the question. I'll take the first one on revenue and then hand it over to Fernando. But when we think about revenue, we discussed at the beginning of this year, as we announced the year-end results that the majority of our price increase and revenue actions were in place. So we had this incoming revenue momentum and the price in place in the majority of the markets. As we look at that, we continue to very carefully analyze and assess the situation market by market, given the current environment and trying to balance the consumer demand and the value proposition of our brands. Up to date, based on what we saw in the first half of the year and our own volume performance, you don't see any deceleration in the trend. So beer continues to grow globally and gain share of growth in most of the relevant markets. So good performance, good incoming momentum. And as we go deeper market by market, I think that you had this question, there are always two tails of the stories in the U.S. and globally. You see premiumization as a big trend that's not slowing down. Of course, there are brands performing differently market to market. The Busch Light point that you asked here is not new. Busch Light has been on a strong growth run for several quarters already, expanding from the inner parts of the country to more regions and it continues to accelerate. But I don't think that has any relation to short-term pressure on consumers or trade down; it's much more about brand momentum behind Busch Light that's working very well. So I would say that on a consolidated view, and even specifically in the U.S., we don't see any signals of trading down or slow down. Historically, we know that beer is very resilient, that consumers trade out of some categories but not really beer because of its affordability. We often see more expensive beverages trading down to spring beer. So often, what we see is an acceleration of premium beer growth when you have inflationary scenarios and consumers under pressure. But to date, things are moving quite well. The biggest evidence of that is the growth of beer globally according to Aero monitor and IWSR and our own volume growth of 3.4%.

And Simon, on your second question, the tax credits in Brazil were more of a one-off this quarter. There are always some tax decisions out there, but it's not a recurring item that we should be expecting. The only highlight that I would say is that even though it has a benefit in the total EBITDA and EPS, it is excluded from our organic growth. So the organic growth number doesn't take into consideration any tax credit benefits.

Our next question is coming from the line of Tristan Van Strien with Redburn Partners.

Just a few questions for me. Just one quick follow-up on that last one from Simon. So just for the avoidance on the current Supreme Court decision on the tax credit, there's nothing coming in future years. Just to clarify that.

As far as we know today, no.

Okay. Great. Then just a few questions for me. One for Fernando, just on your working capital: quite a big outflow this first half from the largest I've ever seen. Can you just maybe take us through that and how we should think about it for the full year? I mean, are you going to get back to positive territory in a way you normally do? And then the second question, again, also go back on pricing. In the past, you said you want to get the CPI-type level of pricing. When I look at the U.S. in particular, is that something you're still aiming for, for this year? Or is it just really about covering your costs rather than recovering CPI? And then Michel, the third question on Colombia, it's really going well. I'm just trying to figure out what exactly has been that inflection point. I mean, why are you guys gaining the share from alcohol, which seems to have escaped Colombia for many years? What are you doing very differently that hasn't happened in the past?

Tristan, Fernando here. So let me take the first one and then I'll let Michel answer the other two questions. For us to better understand our 2022 working capital, we need to look at what happened in the opening balance in 2021. So if you look at CapEx, back in 2020, we made some proactive decisions to reduce CapEx during the peak of the COVID uncertainty in a meaningful way, and that led to a lower payables balance in our opening balance sheet for 2021. The income tax payables were also lower as the business was impacted in 2020, resulting in less income taxes to pay in 2021. Lastly, remember there was no bonus for the year. This bonus is actually paid in 2021. So again, lower payables balance. With this context, 2022 looks more like a normal year. And if you look, all those anticipated impacts are fully embedded into our plan. And with this in mind, we go back to this trend that seasonally, we generate lower cash flow in the first half of the year, and then you should see strong generation in the second half of the year. So no changes in our normal business operation. And Michel?

Yes. Thank you for the questions. I'll take the first one on pricing CPI. I think that generally, the idea does not change much. What really changed significantly this year and a little bit last year is that the CPI is much bigger than one would expect, and it even accelerated throughout the year, right? Because of that, we had our plans in place. We look globally. I would say that it's clear that beer prices are lagging inflation. While I just said before that we are carefully balancing consumer demand with the value proposition of our brands and input costs as we build our revenue management strategy. But globally, prices are likely below inflation. If you consider a company of our size and scale, of course, we have many levers to pull in how we offset the input costs. That's the reason why today, we are growing both top line with strong volumes and EBITDA. I think that we continue to monitor this carefully. We continue to balance well the consumer demand with our revenue management initiatives. On the second point, maybe just linking straight to Colombia that I think is a very interesting example as well. I mentioned Brazil in the webcast. In Colombia, we have this very good combination of activating the category levers. The five levers of expansion that we talk about includes innovation and strong per capita consumption growth in a very well-defined digital environment for us, where we can both activate demand with retailers and also start engaging consumers in a comprehensive digital activation that helps us position our brands and activate demand while continuing to develop the category. This is another good example of a market where everything is coming together and working very well for us as we continue to gain share of throat there.

And Tristan, just if I could add some color on Colombia as well because it is a market that we had double-digit top line growth, but we had single-digit EBITDA growth. The single-digit EBITDA growth was actually a function of the disposal of non-core assets. This quarter, we also sold land. If it wasn't for the sale of land, we would have also seen double-digit EBITDA growth in Colombia.

Our next question is coming from the line of James Edward Jones with RBC Capital Markets.

Just give us any indication on what's happening to your marketing spend as a percentage of sales. For example, this morning was interesting on its determination to continue investing in marketing to take share in the total beverage alcohol market. I guess I'm wondering what your reaction to that is.

James, thank you for the question. We have discussed this before as well in the annual release. We continue to invest behind our brands as we premiumize, create more alternatives to grow and expand the category, and there is no change in this plan. What has changed and is always a good opportunity to highlight is that we are becoming more efficient, so the campaigns have been working better. The more we digitalize, the more we connect with both points of sales and consumers digitally, we see growth in the investments that we are making. So we will continue to invest, and we are very pleased with the performance that we are having both in creative areas where we continue to do well, and in the other investments that continue to grow as we digitalize.

Our next question is coming from Edward Mundy with Jefferies.

Two questions from me, please. The first is on your guidance of 4% to 8% organic EBITDA year. You've delivered 7.5% in the first half and to deliver off is quite a wide range in the second half. I appreciate there's still scope for a lot of volatility, but the China exit rate looks quite encouraging in June. You mentioned the marquee events and the flooding in South Africa should be in the past. Is there anything that you're seeing so far would suggest that H2 will be materially worse than the first half? And then the second question is on Cutwater and Nütrl that are doing pretty well in the U.S. Does that give you confidence to push those two brands as spirit-based RTDs globally?

Ed, Fernando here. So on the 4% to 8%, we are reiterating the outlook. When we said that there is nothing you could read about the different performance in each quarter rather than full year 4% to 8%. I don't know if Michel wants to add any more to that.

Yes, I can add on that and take on the second question, Edward. Thanks for the question. I think that the opportunity here to answer that would be to remind ourselves and to clarify again why we provided an outlook as we were coming from last year to this year. At the moment that we announced our new strategy and the transition from an inorganic growth strategy to a more organic growth strategy, we discussed and shared with you the main things that we have to evolve and what would be required for us to really land this organic strategy. Three points that I stressed and discussed with you were investing to lead and grow the category, investing to advance and accelerate our digital transformation while dynamically allocating our resources to first grow the business organically and then deliver the other three priorities. We work amidst this pandemic and all this very dynamic operating environment, and we thought that it would be very important to provide clarity on the growth algorithm. That was the reason why we gave the 4% to 8%. All of that remains true today. We are accelerating organic growth, investing in the category and digital transformation, and we continue to support this growth. Therefore, the range of 4% to 8% works for us, not for a quarter only, but it's more a midterm algorithm and outlook that we are sharing. So providing the certainty of the financial discipline that we will do all the end. We will do all the investments that we need to do and deliver the EBITDA growth. Nütrl is a very interesting question. I'm sure that for a lot of people, it's a new brand, but Nütrl has been leading Vodka Soda in Canada, growing very fast in the last 3-4 years. We decided to launch at the end of last year in the U.S. and it has performed very well in 2 states. We are now rolling it out nationally with very accelerated growth and good news coming from Q2, and also from the 4th of July, where the brand did very well with high volumes and strong performance. The key focus now is on the U.S., where you have this dual strategy in the ready-to-drink Cutwater, which is a more complex huge variety of cocktails, and Nütrl is more on the vodka soda, which is the seltzer space. They take a lot of share from malt-based sales. The brand is performing very well. Once we get this well established in the U.S., there will be very good opportunities for both Cutwater and Nütrl to continue to expand globally.

And just to come back to the first question, I appreciate that the 4% to 8% is a very medium-term framework, and you need to have the flexibility to reinvest. But just to be clear, without guiding for the second half, you haven't seen anything that puts an inflection on the downside since the first half that we need to know about?

So year-to-date, no change. You see the volume in the second quarter; I think that is the best indication of the momentum, and we remain confident on the fundamentals and the strategy implementation and execution.

Our next question is coming from the line of Olivier Nicolai with Goldman Sachs.

Michel and Fernando, I got 2 questions, please. First of all, do you see or do you expect any impact on volumes from your price increase in some emerging markets, particularly in Africa and Latin America, considering that affordability for beer could be an issue and that food inflation is definitely going up quite a lot in those countries? That's the first question. And then the second question, you've made some good progress on deleveraging in H1. You usually generate much more cash in H2. Would it be fair to assume that you could end the year closer to 3.5x net debt to EBITDA? And from a cash flow perspective, would you be willing to reinstate the interim dividend as you've done in the past on top of the final dividend?

Olivier, thank you for the question. I'll take the first one and leave Fernando with the second and third questions. Our incoming volume trends remain very strong. This growth is across all regions. The most important point here is the underlying demand, because even in some of the regions today, we have some constraints in supply availability. We could be selling a little bit more. But we don't see to date any slowdown on that. Once again, historically, beer is very resilient. Data from the monitor, IWSR that we saw now at the end of quarter 1, April, continues to show the same trends: beer is growing globally and gaining share of growth. We will know more once we get through quarter three and quarter four. But to date, trends remain with good momentum.

And Olivier, on your second question, you are right. We continue to make progress on deleveraging. It is true that leverage seems to normally be stronger in the second half because the cash flow component is far stronger in that period. We are not providing any specific guidance on the number. However, as part of our strategy, we have been vocal about it, and we continue to focus on deleveraging, and we should be making further progress in the second half. Regarding your dividend question, I believe that the right way to approach this is based on our dynamic allocation of our capital. We continue to invest behind our business, and there are a lot of opportunities there. We will consider what creates more value with the excess cash, whether it's the leveraging, return of cash to shareholders, or selective M&A, and this decision will be taken at different moments. Once we get to October, we can have this discussion. What I can tell you is that right now, we can create value from leveraging rather than anything else, so that should be prioritized.

Our next question is coming from the line of Sanjeet Aujla with Credit Suisse.

Michel, Fernando, given your earlier comments that beer pricing is lagging CPI and it looking like another year of input cost headwinds into 2023. As you think about and budget over the next few quarters, is it reasonable to assume that your pricing will be considered to catch up to where CPI is now? Or should we expect you to price below CPI and place a little bit more emphasis on the volume momentum we have?

Sanjeet, this is Fernando here. Let me start with the cost and then Michel can talk about the top line. For 2022, the majority of our spending is covered, and this is embedded into our full year EBITDA growth outlook of 4% to 8%, which we reiterated today. Of course, revenue is growing ahead of EBITDA. For 2023, we are in the process of hedging our exposure, so it's too early to make any comments. But it's fair to say that commodity prices continue to be under pressure, though the recent movements have been positive. The commodity escalation is not evenly spread throughout the world. If you look at market price today, the highest year-on-year impact is in Europe, which happens to be where we have the lowest exposure as a business. Perhaps Michel can comment on the top line.

Yes. Sanjeet, thanks for the question. Good afternoon. I think that on the cost for sales aspect, as we look at the situation today, the impact, if the year were to finish today, for next year is smaller than what was the impact from last year to this year. However, we will need to get through quarter three, quarter four, again, to understand all the moving parts. In terms of pricing, Sanjeet, I believe that we are thinking along similar lines. There is no significant change in the way that we view our prices and inflation globally. The major change this year was that inflation moved much faster and even accelerated beyond what was the original expectations. We continue to monitor and assess this situation closely, and it is not abnormal that throughout the year, all our prices are not replacing us because in several markets, we have more than one price increase per year. We continue to execute our plans as we always do. The caveat I would highlight is this idea of needing to carefully assess the consumer environment country by country, brand by brand, and segment by segment. We keep in mind our number one priority, which is to grow the category. Therefore, growing for the long term is essential, not just for the short term. Penetration, transaction frequency is something we study constantly. So we don't disconnect the category from consumers. But at this point, we see inflation as a common issue across various categories, but prices are aligning in the right direction. It appears that beer is likely trailing inflation, but is responding well to consumers. We must continue to monitor the consumer environment, and we can only understand the full picture as we progress further into Q3 and Q4. However, directionally, we understand our strategy is working well.

Our next question is coming from Trevor Stirling with Bernstein.

Fernando, Michel. Two questions from my side, please. First one, 127 bps of margin compression in the quarter, Fernando. Could you estimate what's the impact of the marketplace? It's clearly very accretive for EBITDA growth, but what order of magnitude of dilution is coming from this marketplace?

Trevor, Fernando here. What I can say about this is that the marketplace is still in the early stages. We are rolling it out and growing our customer and partner base at a very accelerated rate. The revenues coming from this marketplace are entirely incremental and have a different margin profile but are very accretive from an ROI perspective given our existing asset base. Therefore, there is an impact on the margins, which means that the base business margin is better than the consolidated one. As the marketplace becomes more material, we will probably disclose it separately. Wrapping up, we have $800 million of annualized GMV, and if you use a similar business as a proxy, one can reverse engineer the impact on margins that we're having.

Great. And the second question: It's clearly very early days to be looking forward to 2023, and I'm sure you still have one of your hedging policies that has to be completed yet. But if you took today's spot rates and gas forward, are we looking at input cost inflation that's going to be worse than 2022 or better or more or less the same?

Michel just mentioned, if we were to look at today, that’s still a lot of quarters left but we are not fully hedged for next year. Upon looking at the spot prices today compared to last year, there will be some pressures, but they will be to a lesser extent than the ones we faced in 2022. The only case where we may experience an impact in excess is probably in Europe. On average, as a company, we would have less impact, but the region that has more impact than the one we had this year is Europe.

The next question is coming from Brett Cooper with Consumer Edge Research.

A question on improving returns. In April, Ambev spoke to focus on improving ROIC improvement in asset turnover and NOPAT margin. Can you offer your view on where you are today, the potential to deploy or export a similar effort and any details on that deployment in non-major markets like the U.S., Mexico, China, and Colombia?

Thanks for the question, Brett. I feel there is an opportunity for the Board; we always look to that. We talk about resource allocation continuously. We will continue to work on that. As long as we continue to deliver growth in EBITDA and enhance the efficiency in resource allocation, that is an ABI wide focus. It does not only pertain to a specific country or region, but rather it's how we optimize our business.

Our next question is coming from the line of Pinar Ergun with Morgan Stanley.

In the U.S., your performance has been a little lighter than the market trends. Is there anything ABI can do other than portfolio rebalancing towards the growth segments to improve its U.S. performance against the market?

Michel here. Thanks for the question. I just want to clarify that you’re speaking about ABI's performance relative to the U.S. market, right?

I'm talking about ABI's performance relative to the U.S. market. It appears that your performance has been a bit lighter, or you've been underperforming the market. Can you do anything, other than rebalancing your portfolio towards the growth segments, to improve your performance?

Got it. Thank you. I think that we talked about 3 main highlights in the U.S. this quarter. One was the results of the industry improving while our volumes underperformed in the industry. This is not a new component; we've had this story for a while. Of course, each quarter is different, and this one is highlighted. The industry was very low at the beginning, improved throughout. When the industry does not perform well, the core segments and mainstream brands tend to perform less than the overall industry. The portfolio rebalance is more of an outcome of everything that we are doing. It's not the only thing that we are doing. It is the result that we are trying to achieve. To give you examples and highlights: one of the areas we've been improving in the U.S. is category management. We've made several investments in category management and evolved from being beverage's #20 supplier to being a partner for the retailers in the U.S. according to the Advantage survey. This was based on all the improvements we've made. With our wholesalers, we enhanced our partnership significantly — we measure the NPS and engagement with our wholesalers every year, and we are currently at an all-time high. We have also improved our marketing capabilities and innovation, leading innovation in the last three years and being one of the most awarded companies for creative execution, including several prizes. Even with the difficulties in the three-tier system, we are advancing the digital transformation with more wholesalers from more states in the U.S. Combining this with locally optimized learning algorithms, we are getting much better data and improving the quality of our activations. As we do all of that and invest behind the right brands, the outcome is portfolio rebalancing. We are now 7 quarters in a row growing the top line in the U.S. This growth is happening alongside input inflation with a flat EBITDA, which shows improvement for our business in the U.S. There is more to do. I acknowledge that we underperformed in volumes, and this is the second biggest step we have to take. However, we are confident in the long-term strategy. Each quarter will differ, and each year will be different, but I am confident in the long term.

Our next question is coming from the line of Priya Ohri-Gupta with Barclays.

Fernando, I was wondering if we could just dig into the further deleveraging over the latter half of the year. How are you thinking about sort of where you could look to pay down some of that debt? And how are you considering opportunities to potentially utilize some of the lower dollar prices that your bonds are trading at to help accelerate deleveraging?

Priya, thanks for the question. Our cash flow is much more skewed towards the second half of the year. Moving into the second half, with this additional cash flow, we will look for further opportunities for liability management. You're right: If you look at the evolution of interest rates and everything happening around the world, you can see that the market-to-market of our debt portfolio moved from being 120% of fair value in the beginning of the year to close to 100%. Some are trading below 90% and closer to 80%, which presents another boost for our deleveraging efforts in the second half. Being able to buy segments of our debt at discounted prices also provides a great opportunity. It's also essential we leverage fixed-rate debt in an inflationary environment and in an environment of rising rates, so we need to ensure we maximize that.

Below par, right?

And then just one quick follow-up on how we should think about the timing of some of the cash coming in over the course of the second half as you sort of sweep in from your various markets globally?

Priya, that would be too much depth, too many specifics. We don't go into details month by month or day by day about how we generate cash. However, the notion that the second half of the year has significantly stronger cash flow is indeed true, as it has been for several years. This year, it's likely to be no different. Once we receive the cash, we’ll find the moderate way to deploy it to liability management.

Our final question is coming from the line of Rob Ottenstein with Evercore.

I want to kind of scope out a little bit bigger picture questions. So Michel, you're coming up on about a year now as CEO. Presumably, you came into the role with certain preconceptions. Love to hear if you can take a moment to reflect on any surprises, disappointments, or any need to pivot based on what you've learned over the last 12 months.

Robert, good morning. Thanks for the question, and thank you for reminding us that time goes by very fast. It's great to be talking to you here and have this opportunity. Let me start answering the question by saying that I have said before, this is really the opportunity of a lifetime. A lot of things are coming together, and I'm excited every day to come to work and think about all the possibilities while sharing with the team what we've been learning and executing. At the same time, we must agree that this has been an incredibly dynamic environment with many things happening simultaneously. I'm very glad with the way that our team is engaging and building each day towards the future we define as "More Cheers." Putting together the key points in response to your question: First, it is a great moment in the industry to be working with beer. Beer is inclusive, natural, local, and is a big profitable and growing category. Those are the key learnings and shared values. It's a great industry, growing and gaining share of throat globally. Second, we have a great foundation that we shared during my arrival on Investor Day: a solid company structure and global platform with unbelievable opportunities to unlock value. The more we push our strategy forward, advance our digital transformation, and work better with our scale of data, the more opportunities we uncover to grow the company, reimagine what a beer company can be, and monetize everything we built over the years. These core adjustments are central to our focus: leading and growing the category, digitizing our assets, and optimizing our business. It's a fantastic opportunity with a lot of positioning achievements, and we've accomplished many things within the year.

Thank you all for being here. Thanks for the partnership, and thank you for all the questions and support for the business. Have a great day, and I look forward to seeing you again soon.

Thank you, ladies and gentlemen. This does conclude today's conference call and webcast. We thank you for your participation, and you may disconnect your lines at this time.