Anheuser-Busch InBev SA/NV Q2 FY2023 Earnings Call

Welcome to Anheuser-Busch InBev's earnings conference call for the second quarter of 2023. Joining us today are Mr. Michel Doukeris, Chief Executive Officer, and Mr. Fernando Tennenbaum, Chief Financial Officer. To view the slides for today's presentation, please go to AB InBev's website at www.ab-inbev.com, select the Investors tab, and access the Reports and Results Center page. The webcast will also be available for on-demand playback later today. Currently, all participants are in listen-only mode, and we will open the floor for your questions after the presentation. Please note that the information shared during this call may include forward-looking statements based on management's current views and involve risks and uncertainties. Actual results may differ significantly from those anticipated. For details on risks that could impact our future results, please refer to the Risk Factors section in our latest annual report filed on March 17, 2023. AB InBev does not intend to update or revise any forward-looking information shared during the call and is not responsible for any actions taken based on that information. I will now hand it over to Mr. Michel Doukeris. You may begin.

Thank you, Jesse, and welcome, everyone, to our second quarter 2023 earnings call. It is a great pleasure to be speaking with you all today. Today, Fernando and I will take you through our second quarter operating highlights and provide you with an update on the progress we have made in executing our strategic priorities. After that, we'll be happy to answer your questions. Let's start with our operating performance. Our global momentum continued this quarter, although it was partially offset by the performance of our U.S. business. We delivered revenue growth of 7.2%. Our net revenue per hectoliter increased 9% as a result of pricing actions, ongoing premiumization, and other revenue management initiatives. Total volumes declined by 1.4% as growth in the majority of our markets was offset by volume decline in the U.S. EBITDA increased by 5% and reached US$4.9 billion. Underlying EPS was US$0.72. While this quarter was not without challenge, the strength of our brand portfolio, global footprint, and our focus on disciplined resource allocation continues to enable us to invest for the long term while delivering profitable growth. We delivered broad-based growth this quarter with double-digit top line increases in four of our five operating regions. Revenue increased in more than 85% of our markets, with volume growth in over 50%. Our diverse geographic footprint positions us well to deliver superior long-term value creation. Now I will take a few minutes to walk you through the operational highlights for the quarter from our key regions, starting with North America. In the U.S., the beer industry remained resilient, delivering revenue growth of 2.3% this quarter and with beer gaining share of value of total alcohol in the first half of 2023. Our revenues declined by 10.5% and STR volumes by 14%, with performance impacted by the decline of the Bud Light brand. Regarding Bud Light brand performance, we have actively engaged with over 17,000 consumers since April, and there are a few clear insights. First, most consumers surveyed are favorable towards the Bud Light brand, and approximately 80% are favorable or neutral. The consumer will always be at the center of everything we do. All of us at ABI deeply care about and respect all our consumers. Second, regardless of favorability, our consumers across all sentiment groups have three points of feedback in common. One, they want to enjoy their beer without a debate. Two, they want Bud Light to focus on beer. Three, they want Bud Light to concentrate on the platforms that all consumers love, such as NFL, Folds of Honor, and Music. We are taking the feedback and working hard toward our consumers' needs every day across the world. While our total beer industry share declined by 520 bps this quarter to 36.9%, it has been stable since the last week of April through the end of June. U.S. EBITDA declined by 28.2% this quarter, with approximately two-thirds driven by market share performance and one-third driven by productivity loss and the long-term strategic choices we made to increase sales and market investments in our brands and provide support to our wholesaler partners. As we move forward in the U.S., we are focused on what we do best: brewing great quality beer, actively engaging with our consumers, supporting our partners, and positively impacting the communities that we serve. Now moving to our largest region, Middle Americas, which delivered margin expansion and another quarter of growth. In Mexico, we continue to outperform the industry, delivering double-digit top and bottom line growth. Our above-core portfolio grew revenue by mid-teens, led by the strong performance of Modelo Especial. We continue to progress our digital DTC initiatives, with our DTC platform, TaDa, now operating in over 60 major cities and fulfilling on average over 300,000 orders per month. In short, Mexico continues to execute effectively across all three pillars of our strategy to drive consistent performance. In Colombia, our business delivered high single-digit top and double-digit bottom line growth, with our beer portfolio continuing to gain share of total alcohol. Our mainstream portfolio drove our performance, delivering double-digit revenue growth led by a particularly strong performance from Poker, which grew volumes by mid-teens. In South America, our business in Brazil delivered double-digit top and bottom line growth with approximately 400 basis points of margin expansion. Our beer volumes declined by 2.6% as we cycled a strong performance in Q2 2022, which was supported by post-COVID recovery. Our premium and super-premium brands led our performance, delivering a volume increase in the mid-teens. The BEES marketplace continued to expand, reaching over 700,000 customers, a 29% increase versus Q2 2022, with GMV growing by 64%. Brazil is another example of effective execution across all three pillars of our strategy. Now let's talk about EMEA. In Europe, we grew top and bottom line by high single digits. Volumes declined by mid-single digits, outperforming a soft industry in the majority of our key markets. We continue to drive premiumization across Europe. Our premium and super-premium brands delivered double-digit revenue growth this quarter, led by Corona and Budweiser. In South Africa, we delivered double-digit top line growth with our portfolio continuing to gain both share of beer and total alcohol. EBITDA was flattish as top line growth was offset primarily by anticipated commodity cost headwinds. Our performance was led by Carling Black Label, the number one beer brand in the country, which grew volumes by high teens. Our global brands grew volumes by more than 50%, driven by Corona. And finally, in APAC. In China, our business delivered double-digit top and bottom line growth, driven by continued premiumization and on-premise recovery across our key regions and channels. We outperformed the industry, delivering volume growth across all segments of our portfolio this quarter, led by mid-20s volume growth in both our premium and super-premium portfolios. Now I would like to share with you a few sustainability highlights. We continue to innovate and progress toward our 2025 sustainability goals. Here are a few examples of local initiatives with the potential to scale globally that are driving progress on our sustainability priorities. In Climate Action, we invested in a biomass processor in our Jupille brewery in Belgium to produce thermal energy from malt husks, which we expect to reduce our gas consumption by 15% and reduce our carbon emissions. In smart agriculture, we provide technical and financial training to over 900 smallholder barley farmers in Uganda to strengthen local supply chains. In Water Stewardship, we are installing new vacuum pump technology in breweries across several markets to reduce water usage in bottle fillers by approximately 50%. For Circular Packaging, our business in Brazil launched a nationwide returnable bottle campaign to help increase the use of returnable packaging by promoting affordability and sustainability. Now let’s move on to our strategic pillars. Let’s start with pillar one of our strategy lead and grow the category. We continue to execute on our five levers to drive category expansion and delivered a strong quarter of profitable top line growth. We are leading and growing the category by offering superior core propositions, developing new consumption occasions, and expanding our premium and Beyond Beer portfolios. Our global brands continue to scale and drive premiumization across our markets. The combined revenues of Corona, Stella Artois, and Budweiser grew by 18.4% outside of brands’ home markets, led by Corona, which was recently recognized by Kantar BrandZ as the number one fastest growing global brand by value with 23.7% growth. Budweiser delivered a revenue increase of 16.9% with broad-based growth in 25 markets, and Stella Artois grew by 14.5%. Now let’s turn to our second strategic pillar, digitize and monetize our ecosystem. This continues to accelerate usage and reach, capturing US$9.2 billion in gross merchandising value this quarter, a 30% increase year-over-year, and reaching 3.3 million monthly active users. Customer satisfaction continues to improve with our weighted average Net Promoter Score improving to plus 60, up 10 points since last year. In 15 of the 20 markets where BEES is live, our customers are also able to purchase third-party products through the BEES marketplace. Customer adoption is increasing with 63% of BEES customers now also BEES marketplace users. In the second quarter, the BEES marketplace generated approximately US$340 million in GMV representing approximately US$1.3 billion on an annualized basis. Now let’s talk about how we are strengthening our direct relationship with our consumers. Our digital DTC products Zé Delivery, TaDa, and PerfectDraft are now available in 20 markets and generated over 16.5 million orders and US$115 million in revenue this quarter. We continue to leverage our digital DTC products to further develop new consumption occasions. For example, in Brazil, Zé Delivery enabled the launch of Corona Sunset Hours, an everyday activation, encouraging consumers to disconnect from work and reconnect with friends in the early evening. With that, I would like to hand it over to Fernando to discuss the third pillar of our strategy, optimize our business.

Thank you, Michel. Good morning, good afternoon, everyone. We aim to maximize value by focusing on three areas: optimizing resource allocation, robust risk management, and efficient capital structure. With respect to capital allocation, we are focused on maximizing long-term value creation by dynamically balancing our priorities. We continue to invest in organic growth to support our strategy to lead and grow the category and digitize and monetize our ecosystem. In the first half of 2023, disciplined overhead management and efficient allocation of resources enabled us to invest approximately US$5.6 billion combined in sales and marketing and CapEx. The excess cash generated by our business is then dynamically allocated to our three capital allocation priorities: deleveraging, selective M&A, and return of capital to shareholders. As you can see in the next slide, 2.2 times net debt-to-EBITDA remains the point at which we maximize value, though approximately 90% of the benefits from deleveraging can be captured as we approach three times. As of June 30, our net debt-to-EBITDA ratio reached 3.7 times, down from 3.86 times year-over-year, with net debt reaching US$73.8 billion. As a reminder, we typically generate the vast majority of our cash flow in the second half of the year. Net debt was also impacted by the increased dividend paid in the first half of 2023, as well as the translational effects hedged. Our debt maturity profile remains well distributed, with no bond maturities in 2023 and no relevant medium-term refinancing needs. If you look at our debt maturity profile, we have US$3 billion worth of bonds maturing through 2025. As of June 30, we had total liquidity of US$16.9 billion, which consisted of US$10.1 billion available under committed long-term credit facilities and US$6.8 billion of cash equivalents. Our bond portfolio has an average pre-tax coupon of around 4% and a weighted average maturity of 14 years. In addition, our debt portfolio does not have any financial covenants, and it is comprised of a variety of currencies, diversifying our FX risk. 96% of our bonds have a fixed rate insulated from interest rate volatility and inflation. Now let me take you through the drivers of our underlying EPS this quarter. We delivered EPS of US$0.72 per share versus US$0.73 per share last year as we cycled a US$0.04 per share net benefit from tax credits in Brazil year-over-year. Organic EBITDA growth accounting for US$0.12 per share was offset primarily by translational effects. Lower income tax increased EPS by US$0.04. With that, I would like to hand it back to Michel for some final comments before we start our Q&A session.

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

Thank you. The floor is now open for questions. To make the most of our time, please limit yourselves to one question and one follow-up. Our first question comes from Trevor Stirling with Bernstein. Please go ahead with your question.

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

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

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

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

Thank you.

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

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

Hi, Mitch. I'll just try to clarify the question. I think that you said 9% first half, and the 5% that you referred to is quarter two, right?

Yes.

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

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

Thank you, guys.

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

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

Hi, Robert. Good morning. Thanks for the question. Two questions here. I think that, overall, when you look at the numbers, pretty similar; there's nothing particularly significant to highlight in difference between on-premise and off-premise so far. One important indicator that you brought that we are always monitoring is TAPs. Since they come back from COVID, there has been quite a meaningful rotation in terms of TAPs. We see bars and restaurants optimizing for high turnover. I think that's the best way to explain what's happening. You see brands that have higher sales and turnover getting more TAPs, while those that have low productivity being delisted. We measure this with our wholesalers and through independent channels. We have retained more than 98% of our TAPs throughout the year. Some of our brands are gaining significant TAPs, while others are declining. But all in all, on-trade and off-trade performance is very similar, as you could see in our numbers. As for the second point, I think that we addressed in the last call the promotional activities, pricing, and discounts. The environment in pricing is healthy. We took two price increases last year given the size of inflation and costs, and there is good carryover throughout this year. As planned, we concentrated more of our commercial activities in the middle of this year. There is nothing beyond that; the depth and intensity of the promotional activities are in line with historical levels. Of course, during the summer, you've seen some activities, and people have been bringing a lot of news around that, but there is nothing different than past promotional events.

Thank you.

Thank you. The next question is coming from the line of Laurence Whyatt with Barclays. Please proceed with your question.

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

So two questions there. I think that one data we shared, we got some questions in the last interactions about the cost base in the U.S. It's like the EBITDA decline that we saw so far, rough numbers, two-thirds related to volume, one-third is more operational leverage. Of course, there are many opportunities to improve productivity as you get less dislocation in production; you can optimize your lines and those things are being planned and implemented. So there is work to be done. The team is working on that, and we will capture productivity over the quarters as we move forward. Regarding Brazil, I think that we are having a very good performance. Volumes performed very well in the quarter. We saw a slowdown in the industry during Q2. Our premium portfolio continues to work very well. Our core-plus brands are working well. As premiumization trends continue to be in place as we cycle the very strong comps that we had last year, I think that we will continue to see market share improvements, especially in the premium segment where we are accelerating both volume and brand equity. Brands like Corona and Spaten are performing well, and our original product is also growing at high double digits. We are taking share in this very important segment in Brazil.

Great. Thank you very much.

Thank you.

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

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

Hi, Ed. Thank you for the question. Let me start with the premiumization one. We have reiterated this based on data and insights that we have. We see the premiumization in the beer category having a very large headroom, with a lot of opportunity to continue to premiumize, and the trend is consistent across the globe and across different economic cycles. We even shared before that in recessionary scenarios when consumers are more under pressure, you may see an acceleration because people focus their purchase power on categories where they can buy more for less. It’s more affordable to opt for premium beer than other categories. Premiumization trends in beer remain very healthy. Consumption is moving well in our category. I know that in some other categories there is a slowdown, but beer continues to perform well after the reopening and summer, which is an important season for the core business and the premium business. So far, we’ve been seeing good sales rates, and our distribution is growing as we expand the business. Our portfolio continues to perform very well in premium and super-premium categories, which is interesting. Regarding brand equity, this story is very similar yet each case is different. As a company in the U.S., we are listening and actively engaging with our consumers. We've learned a lot through these interactions. As I shared in the webcast, consumers still have a favorable view of our brands, and we have high equity, but they want us to focus on platforms they love. We are investing behind these key platforms that have engaged consumers throughout the years. It takes time to see improved results; we have had three months since this situation unfolded. We're continuing to learn and move forward with key activities that we know work.

Okay, thank you.

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

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

Hello, Jeff. Fernando here. We support the tax reform that will reduce the complexity of the Brazilian tax system—a tax reform that can provide legal certainty. It should not increase the industry's tax burden because, as you look, we have among the highest—if not the highest—aggregated tax burden in Latin America. The proposed changes, which have been debated in Congress for direct and indirect tax, are gaining momentum this year. It was listed as a top priority by the new government, and it was approved in Congress in July. It is currently in the Senate for further discussion. The proposal will significantly simplify the current consumption tax system, which is good. It’s going to have a dual VAT, both a federal and a state one, and this should simplify the current tax burden for many companies. On the direct side, further discussions are pending. Overall, if there is simplification and less uncertainty, it should be a positive for the industry and the country.

Thank you.

Thank you. Our next question is coming from the line of Jared Dinges with JPMorgan. Please proceed with your question.

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

Hi, Jared. Michel here. Thanks for the question. Mexico remains an incredibly exciting market with a lot of energy around the beer category that is both growing and premiumizing. In the quarter, I think it’s always good to focus, but also step back; we have a couple of shifts. The most important one is Easter. We had an earlier Easter this year compared to last year, which created some volume phasing into Q1 from what was last year; a later Easter. The comps here are important. The second component is like two sides of the same coin. As the peso appreciates in Mexico, we see the remittances from the U.S. to Mexico continue to grow in a healthy way. This is a very important component of the Mexican economy, but because the peso is appreciating, which is very good for us in EBITDA translation, in local pesos, remittances are not as big as they were last year. So this combination, along with inflation, creates a short-term pressure on consumer purchasing power. We also saw a little bit colder weather during Q2; it bounced back at the end of the quarter, so the end of June was slightly better. Nevertheless, we are confident in the market; long-term trends in the industry are very healthy, with premiumization in place. We are outperforming the industry, and the portfolio is very healthy, responding very well with strong demand for our brands in Mexico.

That’s perfect. Thank you.

Thank you. Our next question is coming from the line of Sanjeet Aujla with Credit Suisse. Please proceed with your question.

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

Hi, Sanjeet. Michel here. We had a little bit of a breakup on the line, but I think I got your question. As Fernando was saying before, we see commodity prices returning a bit in the second half of the year, and the visibility we have now with six to seven months underway shows this trend toward 2024. Different regions have been impacted differently, for example, lockdowns are already getting out while some regions like Europe and Africa are still a bit in the middle of headwinds concerning commodities. In terms of pricing, I believe that long-term, as we always say, we expect prices to move with inflation. We've discussed this before because of the high impact of commodities and high inflation playing a little bit of catch-up over the last two years. Margins are not back yet, but as commodities begin to stabilize, we should see some margin rebuilding. The investments we are making in our brands and our long-term strategy remain a priority, as we expect prices to move long-term with inflation; margins should rebuild to pre-COVID levels. If these tailwinds get confirmed for the second half of next year, we should see some results materializing.

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

Well, that’s interesting. I’ve been to Asia a couple of times this year already and spent a good time with consumers. We see a steady recovery after COVID. Remember we discussed this last year that we were disproportionately impacted by lockdowns due to restrictions in Eastern China, and this affected our nightlife and restaurant channels. We saw traffic rebuilding, with good levels of consumers coming back to these channels; this disproportionately impacts our premium business presence in more premium venues such as nightlife and restaurants. Consumers, as everywhere, want to see more value for their money spent. It’s a common sentiment in China now: show me the value, so I am willing to spend. Premiumization trends in beer remain very healthy. Consumption is moving well in our category, and while there may be a slowdown in other categories, beer continues to perform well post-reopening, especially during the summer season. We have been seeing good sales rates, and our distribution in the premium category is growing. Long-term, we know that the prospects of China continue toward premiumization, and we are well positioned with our portfolio to continue benefitting from this.

Great. Thank you very much.

Thank you. Our next question is coming from the line of Richard Withagen with Kepler. Please proceed with your question.

Yes, good morning, Michel. Good morning, Fernando. I've got two questions, please. First of all, in the press release, you mentioned that you attracted more lower-income groups in Latin America and in Africa through brands and back innovations. So can you give some more details about this? And is this a response to more difficult circumstances for consumers, for example, as a result of inflation? And then the second question is probably for Fernando on working capital—especially your receivables and your payables were a big drag on free cash flow in the first half of 2023. Can you talk a bit about what is behind the adverse effect here and what your expectations are for the second half of the year?

Hey, Richard, Michel here. I’ll take the first question and then hand over to Fernando. We’ve talked through the last few quarters and since our market capital day in 2021, about growing the category and implementing solutions that we know work globally and that we have tested over the last few years. One example from Brazil combines three important components for us to increase participation in the category. We have a strong core portfolio with brands such as Antarctica, combined with returnable packaging that makes products more affordable for consumers, and the convenience of Zé Delivery ensures cold beer is delivered within 30 minutes. This combination has allowed us to increase penetration and participation from low-income consumers while maintaining good service levels, strong margins, and performance in our core brands. I think this example from Brazil illustrates how we are leading and growing the category. Now, Fernando, over to you regarding working capital.

Hi, Richard. Fernando here. Regarding working capital and your mention of receivables: the largest portion of this reflects derivative receivables position, which is actually non-cash. This accounts for around US$500 million to US$550 million. We also experienced another segment around US$250 million due to higher volume growth and a channel mix—mostly in APAC and Middle Americas. As for payables, you need to consider them alongside inventories. During the pandemic, as you are well aware, supply chain fluctuations left us with more inventories than needed to ensure service levels. As we adjust these inventories to healthier levels, you will see reduced payables from this. This adjustment will normalize as we cycle through the pandemic, leading to lower inventories and the respective impact on payables. So no major concern here.

Very clear. Thanks, both.

Thank you.

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

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

Hello, Robert. Thanks for your question. On the bond portfolio, it’s interesting that it’s primarily fixed-rate bonds. In this rising interest rate environment, as we generate cash, we have the capacity to buy back some of our outstanding debt. We’re actually able to get more return for our cash when we buy back high coupon debt. Since we do not need to borrow in this environment, we are retiring debt, which should support our 4% average coupon. Currently, I have no concerns about maintaining this average coupon. Regarding your second question, yes, as in previous discussions, when you start normalizing your inventory levels and bring down inventories, you will also build up payables—expecting some reversal in this area to reflect positively in cash flows in the second half of the year.

Very clear. Thank you.

Thank you.

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

Thank you. Hi, Michel. Hi, Fernando. Just a couple of things from me then. I want to come back to the U.S. One of your major competitors has been highlighting an acceleration in the number of U.S. retailer shelf resets. Is this something you can confirm you are experiencing? And perhaps how are you preparing for a further step up in shelf resets as we move into the fall? Secondly, I wonder if you could just talk a bit about the support you've been providing to your U.S. wholesaler partners throughout Q2 and what support we should expect to see continue with wholesalers in Q3 and beyond.

Hi, Simon. Thank you for the question. I think I got both questions here. Regarding shelf resets, while the dynamics differ depending on each retailer and region, on average in the U.S., you have two periods during the year, typically in spring and fall. Usually, during the fall, you see about 20% of retailers resetting; we did see some off-cycle activity toward the fall, but on a smaller scale. About a third to a fourth of that 20% has already performed some adjustments. There is significant planning on both sides—retailers and us as well as wholesalers. We work throughout the year to ensure that shelves are optimized for consumer demand. In terms of wholesaler support, we have established long-term partnerships with our wholesalers, and our objectives are aligned in maximizing our interests while optimizing sales and operations. Given the situation in the U.S., it was essential to extend support to our wholesalers linked to their volume sales, and we announced that this support would continue until the end of the year. It’s important as we bridge this situation to maintain our wholesalers' competitiveness and focus on delivering high-quality service levels for their customers while bringing joy to consumers through our brands.

Thank you.

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