Anheuser-Busch InBev SA/NV
Q3 2019 Earnings Call Transcript

Published: 25 Oct 2019

[Operator:]

Welcome to the Anheuser-Busch InBev Third Quarter 2019 Earnings Conference Call and Webcast. Hosting the call today from AB InBev are Mr. Carlos Brito, Chief Executive Officer; and Mr. Felipe Dutra, Chief Financial and Solutions Officer.To access the slides accompanying today’s call, please visit AB InBev’s website now at www.ab-inbev.com and click on the Investors tab and the Results Center page. Today’s webcast will be available for on-demand playback later today. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]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 the forward-looking statement.For a discussion of some of the risks factors and important factors that could affect AB InBev’s future results, see Risk Factors in the Company’s latest 20-F filed with the Securities and Exchange Commission on the 22nd of March 2019. 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. Carlos Brito. Sir, you may begin.

[Carlos Brito:]

Thank you, Maria, and good morning, good afternoon, everyone. Welcome to our third quarter and nine months 2019 earnings call. Today, I’ll be taking you through the results and highlights of the third quarter, including the third anniversary of the combination with SAB before handing over to Felipe, who will discuss our debt and risk management policies as well as our financials. We’ll then take your questions.So let’s start with the results of the quarter. There were several positive elements of this quarter that I would like to highlight, though, overall, the third quarter was challenging due to some material headwinds we faced, and we’re not satisfied with these results. We delivered very strong volume growth from several of our markets, led by Mexico, South Africa and Colombia. In Colombia, we had our best quarterly volume growth in the country since our combination with SAB in 2016.Additionally, many of our smart affordability initiatives contributed to growth across the world. Our smart affordability strategy is one of the pillars of the category expansion framework as it allows us to reach more consumers and more occasions by offering accessible price points, especially in emerging markets. The success we completed a major milestone this quarter

[Felipe Dutra:]

Thank you, Brito, and good morning, good afternoon, everyone. As Brito highlighted, the geographic diversification of our business has increased dramatically. 2015, the underlying currency mix of our EBITDA was highly concentrated, with nearly 60% denominated in U.S. dollars and Brazilian real.Today, we have a very different footprint, with nearly 60% of our EBITDA generated in currencies other than the U.S. dollars and the Brazilian real. The currency composition of our EBITDA creates inherent FX volatility. A way to mitigate the impact of this on our leverage is through the currency composition of our net debt.In a hypothetical world of perfectly matched FX portfolio, net debt-to-EBITDA should remain broadly unchanged despite currency fluctuations. However, Pascal limitations take a perfectly matched FX portfolio impossible. Give me our size, we focus on markets that can provide both market depth and long-term tenants. Another key consideration is cost. While adapting emerging markets is available, it is expensive due to high local interest rates.After taking into account these constraints, the most suitable debt financing markets for us are the U.S., Europe, the UK, Canada and Australia. I think for illustrate the limitations to funding in emerging market there. In the first column, you’ll see the composition of our 2018 EBITDA by currency, while the second column shows the currency composition of our 2018 debt portfolio on Page 19.If we attempt to follow a perfect matching approach, we would have needed to carry 15% of our debt in Brazilian real, which would have required us to raise over $15 billion of equivalent funding in Brazil. This quantum is unavailable to a single issuer in the Brazilian debt market. Even if it were available, the tenure would be extremely short, exposing us to almost constant refinancing risk, which would be irresponsible.Moreover, funding costs in Brazil are much more expensive than funding growth in dollars and euros, as shown in the last call. The same restrictions apply in our other large emerging markets, namely Mexico, Colombia and South Africa. Given these constraints, we instead rely on proxy currencies we have demonstrated long-term correlations to our primary EBITDA currencies, more specifically the euro.Our resulting debt profile is structured in a way that mitigates risk that might just factually possible. Approximately 91% of our gross debt holds a fixed rate. And on a net debt basis, when you add back our cash position, this amount is much higher. Our portfolio is comprised of a diverse mix of currencies. Both the weighted average maturity of roughly 14 years, and our gross debt coupon this year is a very manageable 3.75% to 4%.As a result of both our commitment to delever and our risk management practices, our debt maturity profile today is much more favorable than at the end of 2016. We have expanded the weighted average tenure by more than four years, reduced the total quantum by approximately $14 billion and reduced the amount due within the next five years by more than $22 billion.Importantly, the charts on Slide 21 do not reflect the net proceeds from the divestment of Australia for USD 11.3 billion, which will generate incremental bond redemptions, both closing and potentially an extension of the weighted average tenure. I hope this has provided a helpful overview of our financial position, risk management policy, net debt ex rationale and our commitment to deleveraging.Let me now discuss the financial results of the third quarter. Net finance costs in the third quarter were just under $700 million compared to almost $1.8 billion in the third quarter 2018. This increase was primarily due to mark-to-market gains linked to the hedging of our share-based payment programs of $549 million compared to a loss of $616million in the third quarter of last year.Additional savings in interest expenses and bank fees, transaction fees and other expenses were more than offset by an increase in accretion expenses, currency and other hedging results as well as lower hyperinflation monetary adjustments. Excluding the impact of gains and losses related to the hedging of our share-based payment programs, our normalized effective tax rate this quarter plus 26.8%, primarily increasing by [indiscernible] mix. We maintain our full year 2019 guidance of a normalized effective tax rate between 25% to 27%, excluding any gains and losses related to the hedging of our share-based payment programs.Our underlying EPS defined as our normalized EPS, excluding the impact of the mark-to-market related to our share-based payment programs and hyperinflation adjustment in Argentina decreased by $0.17 to $0.94. The decline was primarily driven by lower EBIT and an increase in income tax expenses.Our capital allocation objectives remain unchanged, as you can see on Slide 26. I would like to reinforce our deleveraging commitments and highlight that after the successful completion of the listing of Budweiser APAC and accounting for the proceeds expected to be received from the divestment of the Australian operations, while naturally excluding the last 12 months EBITDA from the Australian operations, our net debt-to-EBITDA ratio would be below 4 times by the end of 2019, one year earlier than our prior guidance.And with that, I will hand it back to Maria to begin the Q&A session. Thank you.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from the line of James Edwardes Jones of RBC.

[James Edwardes Jones:]

Yes. Hello team. If the challenges in Q3 were anticipated, as you say, why are you taking guidance down for the full year? That clearly implies some level of non-anticipation. And secondly, are you able to divide the revenue per hectoliter growth between price and mix and identify whether it’s price or mix that’s driven the guidance reduction for revenue per hectoliter for the full year?

[Carlos Brito:]

Hi James, good morning, Brito here. So in terms of the anticipated factors, you’re right. We guided and said the last quarter that the third quarter, we have three elements that we guided

[James Edwardes Jones:]

Great. Thank you for that.

[Carlos Brito:]

Thank you.

[Operator:]

Our next question comes from the line of Trevor Stirling of Bernstein.

[Trevor Stirling:]

Good morning, Brito, and Felipe. My question, following up on some of the pressures in Brazil, Brito. And so you’ve mentioned that the competitors have been slow to take price in Brazil. Have they followed price so we’re now back into a more normalized pricing situation in Brazil looking into the fourth quarter? And in the third quarter, margins of soft drinks were particularly weak, down 25 percentage points. Should we be looking for further margin contraction in soft drinks in Q4?

[Carlos Brito:]

No. I mean let’s start with soft drinks. Soft drinks in Brazil are doing very well. We’re growing ahead of the industry, gaining share. What happened is that we had a tough comp on the COGS side of soft drinks because last year – because of different actions that we’re taking that proved to be a tough comp in terms of COGS, especially on the soft drinks side in Brazil. So we’re going to have easier comps now in the fourth quarter on the soft drinks side.So I wouldn’t take that as any sign of our soft drinks doing poorly. Quite the opposite. Our soft drinks in Brazil are doing extremely well, growing share, having more of the diversified portfolio, growing more and more into no sugar products, growing more and more in health and wellness of juices and waters and everything. So I think it’s a great story there. If you look at this quarter in Brazil, non-beer or CSD grew volumes by 6.5% and in the year-to-date, 9.4%. So very healthy growth and with a better portfolio. So this is just a one-off on the COGS side. That’s the first question.Second question, Trevor, you’ve been following us. You know that, again, every time there’s a price increase in markets like Brazil, there’s two months, sometimes three months of lots of volatility in the market until the market finds its new equilibrium. This time was especially difficult because as we increased prices, our competitors decreased prices in a moment where the macros are still not the best.Consumers are still under pressure, and that caused us to have a third quarter that was not anticipated, but that’s a big impact on our numbers. And we’re saying that some of that and some combination between volume and price because we’re, of course, adjusting things like we always do after two months of reading the market, but that will continue to have some impact on the top line in the fourth quarter.But again, I don’t see that as any competitive situation that changed in Brazil. All I see is that some price increases are easier, sometimes are tougher. Not because of any macro competitive situation, but because sometimes you’re increasing, competitive for some different reasons, decreasing while there’s a launch of a new product like in Korea. At the same time, we increased prices with a lower price and – like we’ve seen in Brazil in 2003, if you remember. But then the market adjusts.Brazil has always been a very competitive market. Our portfolio in Brazil today is much better. Look, for example, at what’s happening in the Skol family. Skol family is declining. Now Skol Puro Malte has stabilized, right. Our premium brands in Brazil are growing double digits. We lead that segment. Brahma is growing very nicely. In the value segment, that’s 30%-plus of the total market, we came in which we had pretty much no action. Now it’s the smart affordability with Magnifica, Legitima and Nossa.We are having lower prices because of lower taxes and local crops, and we have margins that are comparable to Brahma and Skol and growing and bringing incremental profits and volume to our franchise because those are segments that we had no action. So again, I’m very confident about Brazil. But what we had in Brazil this year was that COGS or cost of sales in commodity, and it was very tough. Very, very tough. So we flagged that.But on the other hand, just to finish, if you look at Brazil nine months, Trevor, our net revenues growing by 9%. Our own beer is growing by 3.8%. Our non-beer is growing by 9.4%; total volume, 5.2%; and net revenue, 3.4%; and premium, double digits. So I think it’s an amazing year after years of Brazil not growing. This year, we’re growing. This third quarter took a dip because of the price increase and its volatility, but I wouldn’t read that that’s – I wouldn’t forget the nine months year-to-date.

[Trevor Stirling:]

Thanks. Thank you very much, Brito.

[Carlos Brito:]

You’re welcome.

[Operator:]

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

[Robert Ottenstein:]

Great, thank you very much. I was wondering if you could go into a little bit more depth on what’s going on in the U.S. I was a little surprised at the gap between the scanner data. We’re showing modestly up for your portfolio in the third quarter in IRI scanner data, and you guys are obviously down, I think, 3.5% on the STRs. So a big gap there. Just trying to understand that. And then also, just how you see the hard seltzer category evolving, how big do you think it can get. And maybe a little bit more granularity on your plans for that sector. Thank you.

[Carlos Brito:]

Thank you, Robert. So let’s start with the seltzer. Seltzer, I think, if you compare it to craft, is a great new news for the beer and FMB categories. In the U.S., craft bought new interest to the category in new consumers premium products growth segment. Seltzer is the same. It’s bringing new consumers. More than 50% of seltzer comes from outside of FMB, better margins than the average of the beer segment. Takes into – connects with some consumer trends of health and wellness and premiumization.We are underindexed. But we think the way to win, like we did in the craft segment, is with a portfolio gain. If you think of craft, which came from behind, we caught up quickly. We built a portfolio of brands the day we grow way ahead of the craft segment in the U.S. And if you add all our brands, we lead that segment in the U.S. So we think some of the same could happen in the seltzer category. It brings new news, new consumers, a growth segment, high profitability.We’re coming from behind. We have Bon & Viv. And then when we came with Natty Seltzer – Natty Light Seltzer, we doubled our share within the segment. And now we’re going to come, at the beginning of next year, with Bud Light Seltzer. So we believe what happened with craft could also happen – we have reasons to believe could happen with seltzer as well because of our wholesalers, because of our system, because of the strong brands we have that can transfer some of the exact equity to a new category.So again, it’s a new segment with profitable propositions and with growth, bringing consumers back to beer and FMB. So that’s a great development for beer and FMBs. In terms of the U.S., because of the way the U.S. share is composed where FMB is mostly in the way we report, I mean, when you think about the market share, if you consider market share, total beer and FMBs, we lost 85 bps in the quarter, 55 bps in the nine months. But if you take the FMBs, because it was such a different thing this summer, in beer only, we lost 35 bps this quarter and in the nine months, 15 bps in beer.The other thing about the difference between IRI and some scanner data is that the IRI has a more – has no coverage on on-premise and covers only a sample of the off-premise. That’s not new news, but that’s the way they sample the market. Also, they don’t have the same representation across all states. There are many stores in every state, however, that sometimes are not covered. BRI, the beer association, covers all channels and every ZIP code in the country. So one of the sample-type method, IRI. BRI is more of a census-type method. And sometimes there’s differences in that in terms of timing or even coverage or channels or regions. So not the first time we see that.

[Operator:]

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

[Simon Hales:]

Thank you. Good morning, Brito. Good morning, Felipe. Can I just follow-up, please, on your comments around seltzer, Brito? I mean do you think the barriers to entry into the seltzer category are higher than they were into the craft beer category sort of a decade ago? And also, with regards to the growth we’ve seen in seltzers, have you seen any impact at all on the Michelob Ultra brand? I appreciate the brand continues to grow double-digits. And are there any opportunities perhaps to think about rolling out the seltzer category into international markets beyond the U.S.?And then secondly, I wonder if I could just ask you around SG&A expenses as we head into the year-end. Obviously, clearly, a phasing of marketing spend into the second half of this year. Should we expect a similar step-up in run rate of SG&A in Q4 to what we saw in Q3?

[Carlos Brito:]

Okay. Simon, many questions here. So let’s go quickly. Seltzer, in my view, seltzers have a lower barrier to entry in a way because it’s about big brands. Craft is about a whole bunch of small brands everywhere, where you need to start with a group block by block. So I see seltzer as more – at least so far, has been a game of big brands, national brands. I think that’s much more of the game that people like us are very equipped to play. So that’s one thing. So scale matters.The other thing is no, we haven’t seen any impact on Michelob Ultra. Michelob Ultra continues to grow very healthy, grew share in all 50 markets. Michelob Ultra Pure Gold continues to be an amazing force in the Super Premium segment. The important – the interesting thing that we’ve seen also this quarter over the last few quarters, that Ultra has already become the number two share-gainer in Hispanic accounts as well. So this whole thing about the Hispanic consumer, the Mexican brands, Ultra playing a big role there with that segment as well. So no impact, amazing growth and still lots of opportunities.Ultra has significant room to grow, mainly due to the brand’s relative underdevelopment in some of our biggest states, such as California, where the brand has half the share of the total U.S. And we’re seeing now acceleration. And today, in California, it’s growing 2 times the national growth rate. So half the share growing at two times the rate. So again, amazing possibilities from Michelob Ultra. In international markets, we’re steady. Nothing to be announced at this point. We’re steady.And in terms of SG&A, in terms of the sales and marketing comps, we said that the third quarter would be the peak. So – but we also said that the second half, there’ll be tough comps, but the third quarter being the peak. I mean – sorry, I mean, you asked about the fourth quarter. So we said that the second half would be where the sales and marketing because the World Cup would be an unfavorable comp, tough comp. And we also said that the third quarter would be the peak. So fourth quarter should be slightly better.

[Simon Hales:]

Got it, thank you.

[Felipe Dutra:]

Let me add to that. Nevertheless, we also said in our outlook that total cost, being cost of sales per hectoliter and SG&A for the full year, should be below inflation, but that has grown for SG&A pressure for the fourth quarter within our outlook.

[Carlos Brito:]

That’s right. Good point. So we also guided for total cost of sales per hectoliter plus SG&A being below inflation for the year, and that’s – yes, that’s maintained.

[Simon Hales:]

So if I pull that together then, do you expect in Q4 EBITDA growth to be below what we saw in Q3 for the group?

[Carlos Brito:]

No, no. We’re not giving guidance for the fourth quarter here. What we said is that we amended our guidance to say moderate EBITDA growth for the year.

[Simon Hales:]

Okay, thanks.

[Carlos Brito:]

Thank you.

[Operator:]

Our next question comes from the line of Edward Mundy of Jefferies.

[Edward Mundy:]

Good morning, everyone. The first question, I was wondering whether you are able to quantify or provide a bit more color as to what moderate means relative to strong. And then the second sort of follow-up question is you pointed to some input cost becoming less of a headwind in Q4, certainly relative to Q3. I was wondering whether you’re able to provide an early look as to how the cost per hectoliter outlook looks for 2020 at this stage.

[Carlos Brito:]

Well, in terms of 2020, it’s too early to talk about 2020. So we’ll do that normally when we do full year results announcement next year. In terms of margin being strong, I don’t have much to add to it because we don’t give numbers. We give direction and strong and moderate or different directions. And so that’s why we decided to upgrade – not to upgrade, but to update and say that given the additional headwinds we faced in the third quarter of 2019, that is the headwinds that we’re not anticipated and there is South Korea and Brazil because of the price increase in volume deceleration, we anticipate that these additional headwinds will continue in the fourth quarter. And that’s why, overall, we decided to call for moderate yearly EBITDA growth as opposed to strong. But those are directional things. We’re not going to put a number to it.

[Edward Mundy:]

Sure. Thank you.

[Carlos Brito:]

Thanks, Edward.

[Operator:]

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

[Sanjeet Aujla:]

Yes. Hi, guys. Just coming back to Brazil and the competitive dynamics there, I think one of your competitors recently called out taking pricing on their economy portfolio. So I’m just curious as to which part of – or which price segments of the market you are seeing that increased discounting.

[Carlos Brito:]

The good thing, Sanjeet, about pricing is that you can go in the market and check for yourself, right, or you can take Nielsen or any other source. What we saw in the third quarter when we increased prices is that competitors decreased prices. Maybe they’ll do something different in the fourth quarter. It’s for them to decide. But what we saw is that the gap between our brands and their brands became wider. So that was – we’ve put our brands at a disadvantage. But what we’ve seen in Brazil is that it’s a very competitive market, competition does – different competitors will do – engage in price promotion from time to time.We’ve got a hand because of the [indiscernible] years. What we’ve seen is that in the long term, those things tend not to work too well because as you do more promotional, consumers get hooked on promotions so they only buy in promotions if you do too much of it. And it also doesn’t help the equity of the brand. So we prefer to be more consistent in how we treat our brands. And it takes one or two months our competitors are going the other way. When I get – that’s going to just follow because we’re there for the long term.We’re owners, and we’re not just managing the business for one quarter or two quarters. We manage the business for the long-term. AB InBev, for 30 years, have an amazing group of people, brands. We develop amazing brands. We’ll develop because we have patience, and we were able to resist temptation in one month or two quarters or one quarter and look at the long term and being consistent with the way we position our brands. So that’s how we run our business.

[Sanjeet Aujla:]

Just a quick follow-up on China, please. Are you seeing the pressures in the nightlife channel in Q3 continue into Q4? Or is that largely behind you?

[Carlos Brito:]

We see – we saw some early signs after the Chinese festivities on October 1, that could be – start to abate a little bit. I think some of the competitors in China saw the same thing about the nightlife being more restricted in September. And we have no reason to believe that this is a medium or long-term structural change. We’ve seen that nightlife back and forth before. It’s not the first time, and it has always come back. So the past is up to beat the future. But at this point, we have no reason to believe that there’s a medium or long-term structural change, and we are very strong in the nightlife. But of course, we’re also investing. We’ve invested in the last few years in other segments as well as some channels, Chinese restaurants and in-home consumption.

[Sanjeet Aujla:]

Thank you.

[Operator:]

Our next question comes from the line of Chris Pitcher of Redburn.

[Chris Pitcher:]

Thanks. Can we talk about South Africa? You saw an improved volume performance in the quarter, but with still pricing mix relatively low and now the fourth – fifth quarter of margin compression. How do we think about that market going forward? You talked about commodity pressures, currency pressures, but also a higher step-up in marketing investment. Should we start to expect margins to stabilize in South Africa yet? Or are you going to still push to get that volume through? Thanks.

[Carlos Brito:]

Well, in South Africa, in terms of margins, what you saw is that cost of sales was really something that was impacted by commodity transactional currency just like in Brazil and other emerging markets. And we also started to invest more in our global brands, and this is delivering beautifully, and also on trade programs. On the other hand, on the top line side, South Africa continued good volume growth. In Q3, we saw high single digits driven by double-digit volume growth of both tax for core brands and we continued momentum, growing double digits in the quarter for Brutal Fruit and Flying Fish. And it’s the highest-ever market share in the high-end business in South Africa.So if I would summarize for you Q3 south Africa, we had double-digit revenue; high single digit volume; net revenue, low single digits; share of total alcohol went up; premium, all-time high share; EBITDA, low single-digit decline, most of it because of cost of goods sold. So we’ve had two quarters now in South Africa with very good volume and share performance, and that’s good because momentum is back in our South Africa market. But the COGS and the more investment we’re doing for the future has also impacted EBITDA this quarter. But again, that’s one quarter.

[Chris Pitcher:]

And can I just have a quick follow-up on China in terms of Corona in the night channel? Is there any – perhaps any Budweiser softness, cannibalization from Corona? Or is it being very separately positioned?

[Carlos Brito:]

Well, it’s separate because Corona has double the price of Budweiser. So it’s a different kind of consumer, different kind of occasion, a different kind of liquid profile. So it complements very well Budweiser. And what we see is that Corona is growing strong double digits in China. Budweiser, if you look at the nine months in China, despite the last quarter with the nightlife and everything, Budweiser is flattish. What really declined in China was core value in terms of industry.So the high – the premium segment and Super Premium segment continues to grow. That’s where the margins are, the growth is, and that’s where most of our business is. And that’s why we’re so much more profitable than any other brewer in China.

[Chris Pitcher:]

Thank you.

[Carlos Brito:]

Thank you.

[Operator:]

Our next question comes from the line of Andrea Pistacchi of Deutsche Bank.

[Andrea Pistacchi:]

Yes. Hi, good morning. Yes. So a couple of questions, please. First, you’ve revised down slightly your revenue per hectoliter guidance from above inflation to slightly below. Was there – is there any sort of specific reason driving that change? Like the decision could be a bit more assertive on pricing or maybe the Budweiser in China growing a bit less because of the reasons you talked about? And then I wanted to ask just a clarification on the situation in Brazil, please, short term. You’ve said that the market is up low single digit. Your volumes in the quarter were down 3%. Heineken, the other day, said they declining slightly. Does – is the implication of this that short-term metropolis have been gaining share and maybe because they didn’t follow on the price increase?

[Carlos Brito:]

Yes. So let’s start from Brazil from the share question you had. I think when we talk share, we should look at longer periods because Nielsen has some phasing in how they look at the market. But then we had a price increase in Q3 that always disturbs a little bit of those metrics. But if you look at the nine months in Brazil, we gained share because the industry grew low single digits, and our beer grew 3.8%. So we gained share. But in this quarter, we lost share, mostly because of the price increase and all the volatility with the China market.In terms of the first question, the guidance for – and sort of the first question, the guidance for lower, but then inflation in revenue per hectoliter. We said that a lot of it was because of our smart affordability that grew in size, and the smart affordability has two components to it. First, it dilutes net revenue per hectoliter, but it also increments profit because it’s incremental volume. And in some countries, the margins are even at the core brand-type margins like in Brazil because of the tax incentives, local crops despite being lower priced. So those are two things that impact a little bit our guidance on net revenue per hectoliter. That would be above inflation. That’s going to be slightly below inflation.

[Andrea Pistacchi:]

Thank you.

[Carlos Brito:]

Thank you.

[Operator:]

Our next question comes from the line of Celine Pannuti of JPMorgan.

[Celine Pannuti:]

Yes, good morning and good afternoon. Maybe a follow-up question on the price/mix equation. So we’ve seen that growth has decelerated. I think if the math is right, even ex Brazil, ex South Korea, growth has decelerated. I just wanted to understand a bit the equation here. It seems that price/mix has decelerated across all regions. So you mentioned that your value equation is incremental to profit, yet the profit that we’ll be seeing, you lowered the profitability guidance. So I don’t know, how should I look at that? It seems there are a lot of moving parts. But in the end, neither the volume is accelerating from lower price/mix nor the profitability. Could you help us square that?

[Carlos Brito:]

Yes. If you’re asking about if it’s happening in all regions, the answer is a clear no. We said in our release that the smart affordability in some countries – and even in those countries, in some regions of those countries, those countries being Brazil, Argentina, Colombia, Ecuador, South Africa, right? So in those markets, because – some are because of macro. Most of them, Brazil, Argentina, Colombia, Ecuador and South Africa, consumers are under pressure. We saw – now that we have two kits with replicable models, we saw the need to expand some of those two kits in those markets like we’re doing in Brazil, where the net revenue is slightly lower per hectoliter because the price is lower. But because of taxes, be lower as well.And local crops being cheaper with a local recipe, then you have a margin that’s very good, at par with the core brands and incremental volume because those volumes, don’t forget, were being consumed from mostly illegal brands or very cheap brands that we don’t sell. As we bring these consumers to our portfolio of brands, those incremental volume, incremental profits. But it dilutes a little bit the net revenue per hectoliter. But at the end, what matters is the net of all this, which is the margin. So the margins are at par with our core brands.

[Celine Pannuti:]

Maybe if I just could follow up, given what you’re doing on the value side, do you think that this has led to a more promotional response from your competitors? And in general, how would you qualify the market from a promotional standpoint in the different regions where you are?

[Carlos Brito:]

No. No. No. I mean quite the opposite. Again, first, I mean, we’re doing the smart affordability in specific markets. And in those markets, the value segment was already there. Our participation was very low to nonexistent because we don’t like to sell beer for no margin. So when we found a way to match those price points in the value segment but with a way of dealing with the government first in terms of trying to get them to agree that, that was a smart thing to do to get consumers off brands that are dangerous, no quality and don’t pay taxes, to brands that are official, formal.So that, together with local crops, together with the local recipe, got us to do this. So – but that’s not everywhere. And that’s only in places where it makes sense because of the social demographic strata in those places. And so we think it’s something that makes sense because the margins are good. And we’re playing in a segment that we had hardly any presence. So for us, it’s all incremental. It’s not cannibalization, It’s incremental.

[Celine Pannuti:]

Thank you.

[Operator:]

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Fernando Ferreira of Bank of America Merrill Lynch.

[Fernando Ferreira:]

Good morning. Thanks for the question. Most of my questions have been answered. So I’ll ask one for Felipe. Felipe, can you give us an update on the digital transformation initiatives that you laid out in South Africa last year? And out of those five areas, curious to know which ones have advanced the most and which ones you still have more work to do. And also probably more interested on how your sales organization is changing with the B2B platforms, connected parts, box, et cetera. Then I had a follow-up on Corona as well. I mean given the success of the brand, are you perhaps flexing your views that all Corona has to be brewed in Mexico? Thank you.

[Felipe Dutra:]

Okay. Let me start from the digital part. In fact, we are looking to a business transformation that is actually enabled by technology, digital playing a key role on that. On the commercial side, we see our relationship with customers performing significantly from the old traditional model of sales reps visiting every park on average once a week, sometimes twice a week into a digital relationship. B2B is already a reality. It’s about 15% of our total revenues at this point, and we see this number tripling in the near future.And more important than that, lots of other initiatives that were piloted and now getting more into the phase of scaling up such as connected talk and other initiatives in terms of marketplace, so on and so forth, making this relationship more a kind of ecosystem, combining the best of the on and off-world and offering not only the unparalleled portfolio of brands, but now an unmatched service level. So we feel very excited about that. And we see a clear synergy between that and the way we will interact with our consumer, gaining or deploying tools that would allow us to scale up, personalize the marketing and increasing the so-called earned media.And so one connects to the second because, ultimately, we can drive traffic to box, leveraging our network relationship with consumer in one hand and on the other hand, bringing consumers ultimately to the B2C platform. So both very powerful. It does not stop there. On the supply chain, we see technology reaching an unparalleled level of integration, automatization, tools such as the Internet of Things and predictable models being built and making breweries far more efficient than they are today, another very exciting piece. All of that would require also the back office to be rethought, redesigned. Things such as cloud, data lakes and all of that are tools that are required to extract the most out of this model. But we are in a good direction with that. We are scaling up our route-to-market – new approach to route-to-market that we feel excited about.

[Carlos Brito:]

And Fernando, the other question on localization of Corona, right?

[Fernando Ferreira:]

Corona, yes.

[Carlos Brito:]

Yes. So I mean, Corona has been expanding – I mean has been more and more demanded by consumers around the world, growing very fast, double digits, as we said. Outside of Mexico, this quarter, growing 21%. So very strong. And we always look at ways to best serve this demand while preserving Corona’s, of course, brewing heritage and highest quality that consumers love. So the decision to brew Corona locally allows us to increase the availability in the market, first; better service our customers in terms of lead times, second; third, offer more of an assortment in terms of SKUs, okay; and fourth, also streamline our logistics and by doing that, decreasing our carbon footprint, which consumers of Corona care a lot.So every brewery that sets to start production of Corona around the world, we have a Mexican brew master go there and continue to supervise. So we have the same brewing process, the same raw materials and continue with the same brand heritage. And as you know, lots of our global brands, international brands are brewed locally like Budweiser in China, Stella Artois in Brazil, Bud Light in Mexico and so on. So it’s not unheard of, but the Corona growth is such a scale that we’re beginning to have issues with the supply chain and we thought it would serve better our consumers if we brew it locally.

[Fernando Ferreira:]

Thanks, Brito. And does that mean that you might change the price index of the brand as a result or not?

[Carlos Brito:]

No. No. No. It’s not about pricing. It’s not about cost. It’s really about getting consumers better service level, more availability, more SKUs, streamlined logistics with carbon footprint reduction, which Corona consumers care.

[Fernando Ferreira:]

Thank you.

[Carlos Brito:]

Thank you.

[Felipe Dutra:]

Thank you.

[Operator:]

And ladies and gentlemen, that was our final question. I will now turn the floor back over to Carlos Brito for any additional or closing remarks.

[Carlos Brito:]

Yes. Thank you, Maria. So in closing, the third quarter was challenging, and was challenging, and we’re not satisfied with these results. With that being said, we remain confident in our strategy and the fundamental strength of our business. Our growth algorithm has been evolving to achieve a more balanced top line growth that’s important and revenue per hectoliter. As we employ the category expansion framework across our markets, we’re reaching more consumers in more occasions by offering a diverse portfolio of brands that vary by style, need state and price points. By taking a long-term view and focusing on driving category growth, we’ve positioned ourselves to continue leading the global beer category into the future and growing – and leading future growth. Thank you very much for your time and enjoy the rest of your day. See you next quarter. Bye.

[Operator:]

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