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..

first, shipment phasing for the second quarter in China ahead of our summer activations; second, higher cost of sales per hectoliter from significant commodity and transactional currency headwinds; and third, the year-over-year phasing of our sales and marketing investments driven by the 2018 FIFA World Cup.

In addition to these headwinds that were expected, price increases implemented in South Korea and Brazil drove volume declines, which were exacerbated by softer consumer demand in light of difficult macroeconomic conditions. Let me now take you through the key figures from the quarter.

In the quarter, our revenues grew by 2.7% with revenue per hectoliter growth of 3%. Total volumes declined by 0.5%. Own beer volumes declined by 0.9%, though were partially offset by strong non-beer volume growth of 4%. Our EBITDA was flat versus last year, while our margin contracted by just 1 percentage point to 40.2%.

Our underlying EPS decreased by $0.17 to $0.94 in the quarter. Additionally, the Board has approved an interim dividend of EUR 0.80 per share for fiscal year 2019. Now I’d like to take you through some of the quarterly highlights from our major markets.

Further details can be found in our third quarter 2019 results press release published earlier today. In the U.S., we delivered slight revenue growth despite volume declines. Positive brand mix, coupled with ongoing cost efficiencies, drove EBITDA growth of just under 1%. Our market share in the U.S.

declined by 85 bps in the quarter driven by the significant growth of the hard seltzer category, where we’re currently under-indexed as we cycle a tough comparable. Excluding favorite malt beverages, which include hard seltzer, we saw a market share decline of 35 bps.

We believe hard seltzer is positive for the beer category, and I’ll talk about it in more details in just a minute. In Mexico, we delivered another strong performance. Volumes grew by high-single digits, while revenue grew by double-digits, with revenue frankly growth of low-single digits in line with inflation.

Our growth was broad-based across all regions and segments. Our premium portfolio continued to grow ahead of our total business, led by Modelo and Michelob Ultra. We’re excited about the growth prospects of our business in Mexico, particularly in the premium segment.

In Colombia, we delivered our best quarterly volume growth performances the combination with SAB in 2016, with both beer and non-beer volumes up by mid-single digits. We’ll continue to focus on growing our share of total alcohol in Colombia, with our portfolio gaining another 10 bps of share in the quarter.

Our growth was led by our global brands, which grew by more than 50%, along with another strong performance from our Aguila brand. We’re leveraging our category expansion framework to reach more consumers in more occasions by expanding our 1-liter packaging format to offer more affordable options in the market.

Brazil, Brazil had a more challenging quarter as the impact of a price increase was amplified by simultaneously competitor discounting in a difficult macroeconomic environment, resulting in beer volume declines of 3%, which were partially offset by non-beer volume growth of 6.5%.

Our bottom line performance was impacted by higher cost of sales, resulting from the timing of commodity and transactional currency hedges, as expected. Our premium portfolio continued to grow by double-digits with strong contributions from both our global brands and local brand portfolio.

Furthermore, our regional affordable brands grew with cost drawn by local farmers, Nossa, Magnifica and Legitima, continue to perform well, increasing our presence in the value segment in relevant states with comparable margins to our core portfolio.

South Africa, South Africa delivered another strong performance this quarter even with the challenging macroeconomic environment, with double-digit revenue growth and continued share gains of total alcohol.

Our premium portfolio delivered very strong growth, and we posted our highest-ever market share result in the segment led by Corona, which grew triple digits. Brutal Fruit and Flying Fish grew by strong double-digits.

China, in China, a softer volume performance was a consequence of shipment phasing into the second quarter this year ahead of summer activations as flagged last quarter, combined with softness in the night-life channel, where our portfolio over-indexes.

We delivered a strong revenue per hectoliter results with growth of 6% as we lead the premium and super premium segments in the country, which continue to grow faster than the overall industry.

Europe, in Europe, we continue to grow volumes with market share gains across the majority of our markets, though our bottom line was impacted primarily by the phasing of sales and marketing investments following the 2018 FIFA World Cup. We continue to expand our portfolio into new price tiers, particularly into the core-plus segment.

This quarter, we launched Budweiser in the Netherlands, following a successful launch in France earlier this year. As I mentioned, the U.S. has seen a significant growth from the hard seltzer segment.

This is positive for the malt beverage category, attracting consumers from other alcohol segments and generating enormous interest as it addresses consumer trends, including premiumization and health and wellness. We estimate that more than half of hard seltzer segment growth is incremental to the malt beverage category.

We believe that as the category evolves, consumers will demand more choices, and a portfolio approach is key to success. We’re expanding and enhancing our hard seltzer portfolio rapidly.

Starting with our premium brand, Bon & Viv, and with the recent successful launch of Natty Light Seltzer, which is positioned at a more accessible price point within hard seltzer. Natty Light Seltzer is off to a strong start, and our share segment has nearly doubled since its launch.

We’re also excited to announce the upcoming launch of Bud Light Seltzer, which we believe will leverage the equity of an established brand in a new category. Bud Light Seltzer will complement our portfolio with an EBITDA of 5% and only 100 calories.

We believe we are well positioned for success in this growth segment with our current portfolio and exciting innovations we have in the pipeline.

Moving now to our global brands, our global brand portfolio continued to grow faster than our total business, though growth decelerated this quarter due to flattish performance from Budweiser and Stella Artois. Budweiser revenue outside of the U.S.

declined slightly as very strong performance from a variety of markets, including India, Colombia and Western Europe, were offset by declines in China, Budweiser’s largest market. This decline was driven by softness in the Chinese nightlife channel as Budweiser is well established as the leading brand of the nightlife occasion.

Stella Artois revenue also declined slightly this quarter outside of its home market of Belgium. We saw very good growth from markets such as Argentina, Brazil and Chile. However, this was largely offset by the U.S. as a result of shipment phasing ahead of the brand’s summer campaign.

Corona, our most premium global brand, continued to deliver very strong results with 21.1% revenue growth outside of Mexico. Growth was led by channel, where the brand continues to grow by strong double-digits, with solid results from South Africa and Western Europe as well.

Given the tremendous growth and increasing demand for Corona around the world, we regularly review the best ways to meet that demand by preserving Corona’s brewing heritage in the high quality our consumers love. As a result, we have recently started brewing Corona locally in certain markets where it’s growing rapidly.

Every brewery sets produce Corona will maintain the brand heritage by following the exact same brewing process used in Mexico for more than 90 years. Brewing Corona locally allows us to increase the availability in the market, better serve our consumers and reduce our carbon footprint by a more streamlined logistics.

We remain committed to bringing the unique and refreshing face of Corona to consumers around the world. While premiumization is a critical driver of future growth, the category expansion framework highlights the opportunity of offering consumers a portfolio of brands across the price spectrum.

Our smart affordability strategy is another key pillar of this framework as it allows us to reach new consumers and introduce beer to new occasions by offering options at more accessible price points.

This is especially relevant in emerging markets where consumers disposable income is typically lower, and therefore, affordability often limits consumers from entering the beer category.

Therefore, we have been expanding our portfolio to offer more accessible price points with initiatives such as new packaging formats and new beers brewed with local crops. These offerings drive incremental profit but generally have a dilutive effect on net revenue per hectoliter.

They are contributing meaningfully to growth in any of our markets, including Brazil, Argentina, Colombia, Ecuador and South Africa. We’re excited about the potential of our smart affordability strategy as a driver of category expansion. We continue to make progress on our Better World agenda this quarter.

First, we reinforce our commitment to the United Nations Sustainable Development goals. Our colleagues engage with key stakeholders, and we show how we leverage the power and reach of our global brands to engage consumers and inspire action for a better world.

We also launched the second round of our 100-plus accelerator for the success of the inaugural group of companies. Through this program, we collaborate with entrepreneurs to create solutions for some of the most pressing environmental challenges of our time.

Our first group of 21 companies across 10 countries created solutions that generated unprecedented social and environmental impact across our value chain, while reducing our cost base.

An important landmark for our company this quarter was the successful completion of a minority stake listing of our Asia Pacific business, Budweiser APAC, on the Hong Kong Stock Exchange for USD 7.75 billion, making it the largest initial public offering in the APAC region this year.

Budweiser APAC represents a local campaign in the consumer goods space. It’s one of the fastest-growing and most profitable brewers in Asia, with best-in-class talent and an unmatched portfolio of brands. Additionally, we believe it provides an attractive platform for potential M&A in the region.

The net proceeds from the listing have been used to repay debt. We’re already issued notice of redemption but a full amount of this proceeds. We’re proud of the completion of this listing and look forward to new opportunities presented by Budweiser APAC.

We recently celebrated another major milestone, the three-year anniversary of the transformational combination with SAB. This quarter, we completed our deliveries of $3.2 billion of cost synergies from the transaction. The synergies were delivered more than one year ahead of schedule and we captured $750 million more than originally planned.

However, this combination is about so much more than cost synergies. We’re creating the world’s leading brewer with more than a quarter of the global beer industry and the leading FMCG company by EBITDA.

Our unparalleled portfolio brands now includes more than 500 global multi-country and local brands, enabling us to reach more consumers and more occasions. Importantly, we now own eight of the top most valuable – of the top 10 most valuable beer brands in the world, according to BrandZ.

We have leveraged this portfolio to bring our brands to new markets, especially our global brands. In fact, since the combination, we have sold more than 2.5 million hectoliters of our global brands across the legacy SAB markets.

Our geographic footprint is much more diversified today as a result of the combination, with 10 countries contributing to 80% of our EBITDA, up from five countries in 2015. Our combined geographic footprint provides us with diversification, reducing our exposure to volatility in any given market.

This new footprint also increases our exposure to emerging markets with positions – which positions us for accelerated future growth. Emerging markets now make up roughly 70% of our volumes. I believe is the most exciting part of this combination are the intellectual synergies captured, which has made us a smarter and more strategic company.

A great example is how we have combined two strategic frameworks from SAB, the market maturity model and the category expansion framework, with a third framework from AB InBev called Growth Champions, to ensure we evolve our portfolio commercial strategy across our markets at the right time and in the most effective way.

We’re very pleased with the evolution of our new combined company over the last three years and believe we’re now much broader position to lead the long-term growth of the global beer category. In order to complete this transformation combination, we increased our leverage.

Since the combination, we have taken significant steps to proactively manage our debt portfolio and reinforce our commitment to deleveraging through our optimal capital structure of approximately two times net debt-to-EBITDA. I’ll now hand it over to Felipe, who will elaborate on our risk management framework in the context of our debt portfolio.

Felipe?.

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..

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..

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?.

shipment phasing in China into the second quarter; commodities and transactional currency that would be tough for the first three quarters of the year, especially in the third quarter, that would make the second half more challenging; and year-over-year phasing in terms of sales and marketing given the World Cup. So these were all anticipated.

In addition to that, therefore, things that were not anticipated, is that the price increase that we implemented in the third quarter in South Korea and Brazil had impacts on our volumes.

And that’s mostly because of the tough macro, consumers under pressure, and also exacerbated by some competitive discounting that happened at the same time in both countries. And then we said in our release that we expect some of that – still some of that volatility to go into the fourth quarter.

In Brazil, for example, because this is not the first time we did price a increase in Brazil, but every time we do a price increase in Brazil, we have a period of two months normally where the market is still trying to find its equilibrium, where different players do different things. And that’s what exactly happened in the third quarter.

And this year, we did a price increase in Brazil a bit earlier than what we normally do. So the third quarter got more of that – blunt that volatility whenever we do a price increase. And in Korea, we had some of the same happening and that increase prices. Some of our competitors decreased price at the same time.

Our brands are very strong, but the gap got widened. And it’s public now. We decided to roll back our price increases now in October. It’s already public. So because of that, we said that some of those unanticipated, Brazil and South Korea, were an impact because the price increases also impact the fourth quarter.

So that’s the full story of what was anticipated and unanticipated. And in terms of price/mix, we’re not giving any split at this point. Our growth algorithm has been evolving to achieve a more balanced top line. We’ve been talking about this between volume and revenue per hectoliter.

And as we employ the category expansion framework across our markets, we’re reaching more consumers in more occasions with a diverse portfolio of brands, different price points. So that’s one thing that will cause us – because think about this. There’s premium growth, net revenue – think about China.

In China, most of our net revenue per hectoliter growth has always been throughout the years based on mix evolution going through the trade-up more than rate or price increase. As our global brands continue to be more and more sizable in markets, we have that effect of the – of that mix effect on the net revenue per hectoliter.

On the other hand, as we do more smart affordability, especially in emerging markets, then the impacts are twofold. First, we’ve diluted a little bit the net revenue per hectoliter, everything else being equal.

But we have incremental profits as a consequence of smart affordability because you’re bringing new consumers into the category into our brands. And on the other hand, there’s incremental profits because there’s the new consumers.

And in some countries like Brazil, because of some tax – lower taxes on products that use local crops, which is what we call smart affordability, we tend to have margins that are even at par with our core brands.

So it’s a very interesting initiative because, as you know, we’ve always been very cautious about being very active in the value segment because the margins are always very low.

But with the toolkit that we learned from our new colleagues from SAB, with the whole thing about local crops and getting consumers from illegal or call it non-branded, unsafe and getting governments to help us do that, it’s in the best interest of the governments from a public health-type thing and also from tax collections.

But they give us a lower tax so we can get to lower price points. We use local crops with local recipes. And that will, at the end, get us to have less of net revenue because price is lower but better margins and incremental margins. So those are some of the dynamics that are going on, on the net revenue and its different components..

Great. Thank you for that..

Thank you..

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

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?.

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..

Thanks. Thank you very much, Brito..

You’re welcome..

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

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..

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..

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

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?.

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..

Got it, thank you..

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..

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..

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?.

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..

Okay, thanks..

Thank you..

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

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..

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..

Sure. Thank you..

Thanks, Edward..

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

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..

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..

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?.

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..

Thank you..

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

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..

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..

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?.

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..

Thank you..

Thank you..

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

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?.

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..

Thank you..

Thank you..

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

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?.

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..

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?.

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..

Thank you..

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..

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..

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..

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

Corona, yes..

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..

Thanks, Brito.

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

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..

Thank you..

Thank you..

Thank you..

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..

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..

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