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Edited Transcript of ABI.BR earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 Anheuser Busch Inbev NV Earnings Call

LEUVEN (LOUVAIN) May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Anheuser Busch Inbev NV earnings conference call or presentation Tuesday, May 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Alves de Brito

Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board

* Felipe Dutra

Anheuser-Busch InBev SA/NV - CTO, Chief Financial & Solutions Officer and Member of Executive Management Board

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Conference Call Participants

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* Andrea Pistacchi

Deutsche Bank AG, Research Division - Research Analyst

* Carlos Alberto Laboy

HSBC, Research Division - MD, Global Head of Beverages Research, and Senior Analyst, Global Beverages

* Chris Pitcher

Redburn (Europe) Limited, Research Division - Partner of Beverages Research

* Edward John Hargreaves

Investec Bank plc, Research Division - Analyst

* Fernando Ferreira

BofA Merrill Lynch, Research Division - Director

* Jean-Olivier Nicolai

Morgan Stanley, Research Division - Executive Director

* Robert Edward Ottenstein

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages Research

* Simon Lynsay Hales

Citigroup Inc, Research Division - MD

* Trevor J. Stirling

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Welcome to the Anheuser-Busch InBev First 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. (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 these forward-looking statements.

For a discussion of some of the risks and important factors that could affect AB InBev's future results, see risk factors in the company's latest 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.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [2]

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Thank you, Maria, and good morning, good afternoon, everyone. Welcome to our first quarter 2019 earnings call. Today, I'll be taking you through the highlights of the first quarter, especially those of our 2 largest markets, the U.S. and Brazil. I'll then discuss exploration of a potential listing of a minority stake of our Asia Pacific business before handing over to Felipe who will discuss our financials. We'll then be happy to take your questions.

Let's start with the highlights. 2019 is off to a strong start as we accelerate our momentum from the fourth quarter last year into a solid first quarter performance. We delivered healthy broad-based top and bottom line growth with particularly good results from Brazil, Colombia, Europe, Nigeria and the U.S. These results were delivered despite the unfavorable time of a late Easter holiday, which is an important consumption occasion in markets such as the U.S., Mexico, Colombia, South Africa and Australia. The benefits of this holiday will fall in the second quarter of this year. And as such, we expect this effect to normalize on a half year basis.

Additionally, some of our new markets, especially Argentina and South Africa, continue to suffer from difficult macroeconomic conditions that subdue consumers' confidence and spending patterns. We also faced some commodity and currency headwinds, as expected, mainly due to higher aluminum and barley prices.

With that being said, we have a lot to be proud of this quarter. We're very pleased with our results from Brazil both in beer and non-beer. We have outperformed the market with double-digit volume growth. We also grew volume across all segments of our beer portfolio. This strong performance was supported by the later timing of Carnival, resulting in a favorable comparable. In the U.S., our top line performance continues to improve as a result of our evolved commercial strategy with an emphasis on premiumization and innovation.

This quarter, we had our best market share trend performance in the past 25 quarters with an estimated market share decrease of just 10 bps. Premiumization remains the key focus for our global business, assuming top and bottom line growth with strong results from our High End Company and global brand portfolio. The High End Company grew revenue by almost 20%, while our global brands, Budweiser, Stella Artois and Corona, grew revenue by 14% outside of their respective home markets. As we have stated previously, sustainability is our business, and it's good business. We're proud to progress toward our 2025 Sustainability Goals, reducing carbon emissions across our value chain by 4.5% over the past year.

Let me now take you through some of the numbers from the quarter. In the first quarter, our revenues grew by 5.9% with revenue per hectoliter growth of 4.6%. Total volumes grew by 1.3%. Own beer volumes grew by 1% with especially strong contributions from markets such as Brazil, Nigeria, Europe, Peru and Colombia, partially offset by South Africa, Argentina and the later timing of the Easter holiday in many of our markets. Non-beer volumes increased by 4.9%, predominantly driven by Brazil.

Solid top line performance coupled with operating leverage, favorable brand mix and continued cost discipline resulted in EBITDA growth of 8.2% and margin expansion of nearly 90 bps. Our underlying EPS decreased by $0.06 to $0.79 as our strong performance was more than offset by the negative impact of unfavorable currency translation effects. Our global brands continue to lead our growth, with global revenue up by 8.5% and by 14% outside of the brands' home markets where they typically command a premium price point. Budweiser's role in our premium portfolio is to offer consumers a tradeoff from core beer. It had great results in the first quarter, with revenue growing by more than 15% outside of the U.S. This success was driven by especially strong performances in China, Brazil, the U.K. and Colombia.

Stella Artois also delivered a solid performance, with revenue growing by nearly 8% in the quarter. The growth was from a broad group of markets as the brand experienced double-digit revenue growth in more than 30 countries, including Brazil, South Korea and Mexico.

Corona, our most premium global brand, sustained its strong momentum from last year with revenue up 15.7% outside of its home country of Mexico. This growth was led by Brazil, Colombia, the U.K., China and Canada.

I'd also like to update you on our 2025 Sustainability Goals. We announced these goals in the first quarter of 2018 and have come a long way in the past year. In only 12 months, we've made strong progress against these commitments. We reduced our carbon footprint by 4.5% across our value chain, reached an average water usage of under 3 hectoliters per hectoliter of beer we brew and contracted approximately 50% of our purchased electricity from renewable sources.

Moreover, we continue to put strong progress and partnerships in place. We launched the 100+ Accelerator, piloting 21 companies across the world to help solve our biggest sustainability challenges and have already received multiple industry awards and recognitions. We're also leveraging technology to accelerate our progress. We have successfully tested electric vehicles to be added to our fleets in Mexico, Colombia and the U.S. We recognize there's a long way to go to reach these ambitious goals, but we're very excited about the progress we have made to date in close alignment with the United Nations' Sustainable Development Goals, SDGs.

Now I'd like to highlight the performance of some of our major markets. Further details can be found in our first quarter 2019 results press release published earlier today. Additionally, I'll provide more detail in the performance at the U.S. and Brazil in the quarter shortly, given the improved commercial results as well as their relevance to our total company's performance.

In Mexico, revenue and EBITDA increased as a result of growth in a revenue per hectoliter and enhanced by meaningful contribution from our premium portfolio led by Michelob Ultra and Stella Artois. Our volumes were lower versus last year, truly driven by the later timing of Easter, an effect which we expect to normalize on a half year basis. Despite this phasing fact, we estimate we outperformed the industry in the 3 -- in the first 3 months of the year.

We're also very excited to have signed a contract with OXXO, the largest retailer in Mexico, to offer a superior portfolio of beers in over 17,000 stores across the country. The rollout is underway. It will cover OXXO's entire Mexican footprint by the end of 2022. This important commercial alliance enables us to reach more consumers in more occasions and further grows the beer category in Mexico.

In Colombia, we grew volumes by low single digits despite the negative impact from Easter timing. Revenue per hectoliter increased by high single digits (inaudible) by positive brand mix as our global brand portfolio grew over 60%. Solid top line growth, together with continued synergy capture, resulted in double-digit EBITDA growth.

South Africa had another challenging quarter with the later Easter result in a tough comparable and further exacerbated by a persistently challenging macroeconomic environment. This environment is impacting consumer demand and driving the continued segment mix shift out of the core, which is more elastic and where we over-indexed. While we're still under-indexed in the growing premium segment, we gained more than 6 percentage points of market share in the segment versus the first quarter of last year.

In China, we continue to drive premiumization, which resulted in healthy brand mix and a solid financial performance. Although their overall volume performance was affected by the earlier timing of the Chinese New Year, Budweiser continued to grow across China by mid-single digits. And our Super Premium portfolio led by Corona, Franziskaner and Hoegaarden once again delivered double-digit growth. We continue to improve our U.S. performance through an evolved commercial strategy focused on leveraging our full portfolio, especially through premiumization and innovation.

Our market share trend performance is heading in the right direction as we invest behind the sustained momentum of our above core portfolio and the stabilization of our core-embedded brands. We have improved our share trend from losing 70 bps in full year '17 to 45 bps in the first half of last year and 35 bps in the second half of last year. During the first quarter of this year, we continue to improve the trend, getting to minus 10 bps. Nine of our brands were among the top 15 market share gainers in the country in the first quarter according to IRI, reinforcing our commitment to our portfolio strategy. This was led by Michelob Ultra as the top share gain in the U.S. once again, now holding that position for more than 4 consecutive years.

We're fully committed to strengthening the beer category in the U.S. in leading future growth. In order to do so, it's vital that we're listening closely to our consumers and we use the insights that we gain to power our portfolio of brands. It's clear that consumers are demanding more transparency in the food and beverage they purchase. Thus, the beer industry needs to provide such transparency to evolve with consumer preferences.

As the category leader, we're spearheading this effort by clearly labeling ingredients on the packaging of the #1 selling beer in the United States, Bud Light. This is a long-term play for the benefit of not just the brand but the entire beer category. Bud Light will continue providing consumers with the transparency they demand, and you can expect to see this approach with our other brands down the line.

Furthermore, taking a regional approach is a key component of our U.S. strategy. The beer market in the U.S. is large and diverse, and the consumer environment differs quite a bit from one region to the next. Therefore, the closer we get to the consumer, the more we can leverage the effectiveness of our wholesaler network to better meet consumer needs.

Big and powerful brands are still very relevant in the lives of our consumers as long as they remain close and speak to them. Examples of successful executions at a local level include the Bud Light-Philadelphia NFL campaign, Philly Philly; the Bud Light-Cleveland Browns Victoria -- Victory Fridges; and the Michelob Ultra-New York City Marathon. We'll continue to invest behind local community-relevant campaigns, which go beyond traditional media by leveraging social conversations and delivering best-in-class brand experiences.

Innovation is another major driver of our improved performance in the U.S. We have revamped our approach to innovation by bringing consumers to the forefront and placing an emphasis on rapid test-and-learn pilots. This enables us for that ahead of national -- so that ahead of national rollouts, testing in a fast and small way. Once the concept is validated, we can then scale it up quickly and efficiently.

With our new and more nimble approach, we can speed up time to market to less than 100 days. Last year alone, we launched several new products such as Bud Light Orange, Budweiser Freedom Reserve and Michelob Ultra Pure Gold organic. These new products contributed to half of the innovations volume for the entire U.S. beer category in 2018.

In the first quarter of this year, we continue to lead the category. We have ventured into new segments, such as with Michelob Ultra Pure Gold as the first beer brand at scale to obtain organic certification from the USDA; and into new occasions, such as with Stella Artois Spritzer, which offers a refreshing alternative to wine. Furthermore, we're leveraging our global footprint, such as through the U.S. launch of Patagonia, a premier local brand from our portfolio in Argentina. We're then finding opportunity for this brand to meet consumer needs in the U.S. enacted with speed, getting the brand on the shelves in selected markets only 60 days after identifying the opportunity.

In line with our culture, we're never completely satisfied with our results, and we acknowledge there's still work to be done in the U.S. However, we're seeing many encouraging signs that our evolved commercial strategy is delivering results. We firmly believe that we have the right people, portfolio, plans and strategy in place to shape and lead future growth of the U.S. beer category.

Now I'd like to discuss our business in Brazil in a bit more detail. Brazil was a leader amongst all of our markets this quarter in both volume and revenue growth, reaching double-digit growth in both beer and non-beer, outperforming their respective categories. We're very pleased with the strong start of the year in which we grew volume across all segments of the industry. The favorable result was supported by the later timing of Carnival as well as the lower industry weight of the various segment, even though we have not yet seen an increase in consumer disposable income. We continue to gain share in the growing premium segment with our global brand portfolio growing by more than 50% and Corona more than doubling its volume since the first quarter of 2018.

Our local premium brands also contributed meaningfully to our results with volumes up by doubles -- double digits. We firmly believe that premiumization is achieved through a portfolio of brands and a constant that our standard portfolio is best positioned to continue winning in this segment.

We're very pleased with the growth of our core portfolio, which benefited from recent innovations in line extensions, including Skol Puro Malte, which offers consumers a pure malt choice in the core segment. The category extension framework has given us the tools to better differentiate our core brands, firmly positions Skol as an easy-drinking lager and Brahma as a classic lager. This is driving improved performance of the entire core portfolio.

Furthermore, we saw the ongoing decline of the value segment in Brazil as consumers are trading up. However, the value segment remains very relevant in certain regions of the country. And for this reason, we have launched affordable brands brewed with ingredients grown by local farmers to profitably compete in the segment. We currently have 2 regional brands brewed with local cassava: Nossa in the State of Pernambuco; and Magnífica in the State of Maranhão, both of which have achieved very positive results to date. We continue to explore additional opportunities to expand our affordability initiatives throughout relevant states while achieving margins comparable to those commanded by our core brands.

In summary, we're confident in our commercial strategy, superior portfolio of brands and most importantly our committed and talented people. The transformation investments undertaken in our business even during the times of extreme volatility and a challenging macroeconomic environment have put us in a stronger position to win in the Brazilian beer market going forward.

Moving on. As we announced in our press release this morning, we're actively exploring a potential initial public offering, or IPO, of a minority interest in our Asia Pacific business on the Hong Kong Stock Exchange. Proceeding with the listing will depend on a number of factors, including but not limited to valuation and prevailing market conditions. Demands of this initiative are based upon the creation of an APAC champion in the consumer goods space. Furthermore, our superior portfolio of brands and leadership position in the beer industry provide an attractive platform for potential M&A in the region.

We appreciate that a minority stake listing would accelerate our deleveraging path. Nonetheless, our commitment to reach a net debt-to-EBITDA ratio below 4x by the end of 2020 is not dependent on the completion of such a transaction.

I'd now like to hand it over to Felipe who will take you through our first quarter 2019 financials. Felipe?

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Felipe Dutra, Anheuser-Busch InBev SA/NV - CTO, Chief Financial & Solutions Officer and Member of Executive Management Board [3]

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Thank you, Brito. Let's start with an update on our synergies. In the first quarter of the year, we delivered $100 million of synergies, bringing the total synergies captured from the SAB combination to more than $3 billion. Our total synergy guidance remains at $3.2 billion, which will be delivered by the end of 2019. As a reminder, these synergies do not include any top line or working capital synergies.

Net finance costs in the quarter were $363 million compared to nearly $1.6 billion in the first quarter of 2018. This increase was primarily due to mark-to-market gains linked to the hedging of our share-based payment programs of more than $950 million compared to a loss of $242 million last year.

Excluding the impact of the gains and losses related to the hedging of our share-based payment programs, our effective tax rate this quarter was 27.7%. This increase is primarily driven by capital mix in the quarter. And we remain fully committed to deliver our 2019 guidance of ETR between 25% to 27%, excluding any gains and losses relating to the hedging of our share-based payment products.

Our underlying EPS, defined as our normalized EPS excluding the impact of mark-to-market related to our share-based programs and hyperinflation adjustments in Argentina, decreased by $0.06 from $0.85 to $0.79 as our strong organic performance was more than offset by the negative impact of unfavorable currency [revelations] in the quarter.

On the Slide 21, you'll see that our debt maturity profile is well distributed across the several years, and we maintain roughly $16 billion of liquidity at the end of 2018.

In the first quarter, we completed both the U.S. and euro notes offering and subsequent tender offer for notes maturing between 2020 and 2026, allowing us to significantly extend our debt maturity profile and eliminate refinancing pressure for the foreseeable future. This transaction enables us to repay our debt with free cash flow by facilitating deleveraging.

As a reminder, our debt portfolio remains isolated from interest rate volatility as 94% of our debt holds a fixed rate. Furthermore, the portfolio is comprised of a diverse mix of currencies, with 56% of our debt denominated in U.S. dollars, roughly 35% in euro. We use the euro currency as a proxy for the emerging market basket of currencies that are relevant to our EBITDA and cash flow generation. The euro has a strong correlation with our main emerging market currencies and has the advantage of providing access to bond markets with significantly higher liquidity and lower costs.

Following the recent notes offering, the tender offer, we have extended our weighted average maturity to roughly 14 years, and our debt maturity in any given year is considerably lower than our annual cash flow generation.

Finally, we continue to expect the average pretax gross debt coupon in the full year '19 to be between 3.75% and 4%.

As you can see on Slide 24, our capital allocation objectives remain unchanged, deleveraging to around 2x remain our commitment, and we will prioritize debt repayment in order to meet this objective. We expect our net debt-to-EBITDA ratio to be below 4x by the end of 2020. And as Brito said earlier, this commitment is not dependent on the completion of a potential IPO of a minority interest in our APAC businesses.

Before we move to the Q&A section, we want to acknowledge that you may be interested in learning more about the potential listing of our minority stake of the APAC business. However, given regulatory restrictions, we will not be able to provide any information as materially different from what we have disclosed in our press release from this morning and earlier in this call. We will share more information if and when there is news to share. Thank you for your understanding.

And with that, I will hand back to Maria to begin the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Olivier Nicolai of Morgan Stanley.

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Jean-Olivier Nicolai, Morgan Stanley, Research Division - Executive Director [2]

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Just one question and one follow-up. First, on the U.S., you were almost in line with the market this quarter, and you've said that it was your best performance since end of 2012. Now could you please give us an update on your portfolio strategy and why this time it is different and that this improvement is more sustainable than the one we have seen at the end of 2012? And just a follow-up on Mexico. I think your margin increased strongly in Q1. I was just wondering if there was any one-off here or is it going to be kind of the new run rate since you have new capacity coming up online?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [3]

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Olivier, so on your first point, we're very, very excited about the U.S. business. And then we have this evolved commercial strategy. And that is not one quarter alone. If you look at the last few quarters, we've seen a trend in market share getting better. It's still negative, for sure, but we're getting better, close to stabilization. So that's very encouraging. And this strategy is based on a portfolio approach as opposed to 1 or 2 brand approach. So that's very important.

So we have the core plus with Michelob Ultra, which remains very solid, and it remains a top share gain in the U.S. now for 4 years, more than 24 quarters. In Super Premium, our craft portfolio continues to gain overall share, and this is also growing double digits. So there's a big potential for us, great margins there. Innovation, also doing very well. So we led the industry last year in terms of innovation. And again, this quarter, the same thing. And also in the mainstream, if you consider the mainstream core value, this is getting a bit better mostly because of the value segment performance. And that altogether has enabled us to get from a minus 70 bps in '17 market share loss to have a first half of last year of a net loss of minus 40 and minus 20 for the last quarter and then minus 10 bps for this quarter 2019. So you see a trend there, and we're able to get the momentum. So let me give you the numbers again. So for '17, minus 70 bps, 7-0; first half of last year, minus 45 bps; second half of last year, minus 35 bps; and then coming to minus 10 this quarter.

So in your second question about -- what was the second question again?

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Jean-Olivier Nicolai, Morgan Stanley, Research Division - Executive Director [4]

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Mexico.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [5]

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Mexico, yes. So I wouldn't try to analyze margins on a per quarter basis because there's so many moving pieces. But what you said about capacity of course is something that will optimize our logistics and supply chain, for sure. But again, I wouldn't take 1 quarter to get any kind of reference in terms of margins. I think you'll have to take the full year or at least the half year.

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Operator [6]

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

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [7]

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Two questions from my side please, Brito. Two contrasting countries, I guess. Colombia, up low single digits despite the timing of Easter. It definitely appears that your new competitor in Colombia is having pretty significant impact so far. And in contrast, South Africa, where [volume is down], revenue per hectoliter flat, margins contracting 600 basis points. Could you talk a little bit about the reasons for the success in Colombia and why South Africa is so weak at the moment?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [8]

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Well, so first, I mean for Colombia, we have a solid position in Colombia for sure, with a strong portfolio in core in the premium segment. We continue to invest in Colombia not only for the global brands that are new to that market but very strong already but also revamping some of our corporate positions like Aguila, for example, new VBI, new packaging on the easy-drinking side. So I think Colombia has shown that our brands are very strong. The country is going through also some much better time in terms of macro compared to South Africa. So that of course benefits everybody in the market. And we've been also investing in trade tools like coolers, merchandiser -- merchandisers and sampling for the -- for new brands and stuff. So I mean, we have a very robust program in Colombia.

The difference with South Africa, where we also have very strong brands and a very strong market position, is that the macros are much worse in South Africa. If we look at unemployment, inflation, brownouts and then elections tomorrow and then lots of things going on in South Africa, and Easter in South Africa of course plays a role. But I think what's happened in South Africa is that consumers are under pressure. And given all this very strong position to core segment, the core segment and the core consumer tends to be more elastic and more subjected as pressures on the macro side. So there's also premiumization trend going on in South Africa and the premium segment going fast. Well, we now have brands to compete; before, we didn't. And these brands are doing very well. But we under-indexed, under shared in the high end compared to the core. So there's a mix effect at this point that's against, as in South Africa, [plays] the whole macro. So I think those 2 things are very different from the Colombia case.

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [9]

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And Brito, the 0 revenue or flat revenue per hectoliter in the quarter has presumably had a -- was a component of the 600 basis points of margin expansion. There's been no underlying pricing in the mainstream products at the moment?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [10]

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Which market are you talking about? Are you talking about South Africa?

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [11]

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South Africa. South Africa, sorry.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [12]

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Okay. So in South Africa, well, not only we have the price increase that was in the first quarter of last year, so there's a phase issue there. And you have, of course, the excise tax that went up by 7-plus percent also in the first quarter of this year. So if you put those 2 together, you have, let's say, a tough comp there, right there.

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Operator [13]

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Our next question comes from the line of Fernando Ferreira of Bank of America Merrill Lynch.

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Fernando Ferreira, BofA Merrill Lynch, Research Division - Director [14]

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Hello? Hi, can you hear me?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [15]

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We can't hear you.

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Fernando Ferreira, BofA Merrill Lynch, Research Division - Director [16]

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Can you hear me now?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [17]

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Yes.

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Fernando Ferreira, BofA Merrill Lynch, Research Division - Director [18]

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Sorry. I have 2, please. First one on M&A. Historically, ABI has been focused on controlling the assets that you invested in. But I wonder if it's -- that's still the case, or going forward, you could perhaps be more flexible than you were historically like the JV in Russia, for example. And then second question, a follow-up on your Brazil presentation. I mean, can you -- Brito, can you mention how relevant the value brands were in terms of your growth contribution in Q1? And if you could share some numbers on Nossa and Magnífica, that'd be great.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [19]

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Well, on M&A, I mean, as you know, most of our people in the company are focused into organic business. That's what we do every day. 99% of the people in the time are focused into organic basis. We do M&A from time to time. We recognize that's a strength as well of the company as well with -- on the organic side as on the inorganic side. Each situation is different. So the joint venture in Russia is different. But normally, of course we like to have control because then we can implement our priorities, our global brands and our strategies. So that's the key element. But again, each situation is different. But again, if you're referring to the potential Asia IPO, it's a minority stake that we could at some point (inaudible) to decide to do it. So of course, we remain with the control.

In terms of value brands in Brazil, let's just assume that the value segment grew in the last 2 quarters of last year, but now it's kind of retrenched again. It shrunk again. We think it's because consumers are feeling better, and they tend to upgrade. But given that the value segment in Brazil is north of 20% at this point, we decided to participate in a more intense way, but of course with initiatives that can create the price point we need to compete in that segment but with the kind of margins very close to the core business, which are the margins that we feel would justify such investment. That's where Magnífica and Nossa come into play. These are brewed with local cassava. So there's a very strong appeal for the local population. It also supports local farmers. And because of all that, we're able to have a lower, a competitive price point but with margins that are very close to our core business. So we'll remain -- now when we feel that we can be more competitive, not only with these 2 brands but also some pack price initiatives that we have, mostly on returnable bottles, the 340 returnable bottle, the mini and also the big 1-liter bottle that provide people more for less or an attractive price point in the case of the minis. So it's a strategy of not only new liquids but also pack price points.

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Fernando Ferreira, BofA Merrill Lynch, Research Division - Director [20]

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Brito, would you say that this trade-up is sustainable at this point? Or is it still early to say?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [21]

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Well, what we can say, Fernando, is that consumers, in terms of confidence, they feel better about the future. If you compare consumer confidence compared to 6 months ago, for example, it's been going up every month pretty much, especially after the elections. I think the elections was an important turning point in that the last 3 years that had been very tough in Brazil and the macro political and so many bad news every day in the paper. I think consumers are willing to -- a leap of faith that this new government will be able to pass through reforms. We are cautiously optimistic that these reforms will be passed. But of course that will be very important, so consumers continue with this frame of mind. It's also true to say that this new optimism has not yet translated in more consumer disposable income. So that's also true. That's a fact. But confidence is up, which is also -- normally, it's a predictor of good things to come. So again, we're cautiously optimistic and we saw a very strong quarter, helped of course a bit by the Carnival timing. But we outperformed the industry. We grew across all segments. So it's great to start the year like this.

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Operator [22]

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

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Simon Lynsay Hales, Citigroup Inc, Research Division - MD [23]

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Just following on -- Brito, on Brazil, we see clearly a strong performance in the quarter. Obviously, a lot of moving parts, as you referenced, in terms of the timing of Carnival, easy comp, et cetera. What do you think the underlying run rate is for volume growth that you're seeing at the moment with all those factors taken into account? And then secondly, I wonder if you could just talk a little bit about your low and no alcohol portfolio and maybe update us as to the trends you're seeing there and where you are now in terms of your 2025 targets as a potential of revenue from that portfolio.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [24]

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Yes. Thank you, Simon. So in Brazil, again, very strong volumes, 11.3% growth. And that was both in beer and non-beer. And I mean, it's very hard to give guidance at this point. But what we can say, again, growth was broad-based, outperforming the industry for us and across all segments. So these are all very positive news. I think a lot of those growth also came from investments that we did in transformational initiatives in the last 3 years when the country was in a tough macro situation, when consumers were not feeling that confident about the future, but because we know Brazil now for 30 years and we know that the fundamentals are very strong. In the last 3 years, we have invested in transformational things like global brands, new tax. So we have really enlarged the offerings we have in global brands. We have invested in new VBIs or visual identity to our core brands. Also, sleek cans came to market. The Brahma family continues to expand. The Skol family expanded with Puro Malte and Skol Hops. The value brands, we have new liquids that are taking advantage of local grain production to be able to compete better, more effectively in the value segment. We inaugurated a new R&D center in Rio, and we continue to make strides in mark-to-market, reaching more blocks as we go more and more granular in the Western side of the country and the North part of the country. So all these things are investments that are not new. I mean they're now for 3 years because, again, we've always believed Brazil -- that the potential and the fundamentals have not changed. And now I think we're in the best position of all companies in that market to take advantage of when consumers feel bad about life and about the future in general. We have a superior portfolio, and we have an amazing [well to market] and amazing people. So we are cautiously optimistic that this year could be -- with the reforms passed, that positive for our consumers in Brazil.

In terms of NABLAB, your second question, today we are 8% in terms of overall volume. So we made some progress. So we continue to be very committed to it. We have more than 76 brands today around the world in the NABLAB space. We believe it's going to be a portfolio gain, not 1- or 2-brand type gain. We have already 6 of our countries that are above the 20% threshold, be it emerging and developed markets. So we have role models for countries in what NABLAB kind of role can play in both kinds of markets, developing and developed. So I mean we feel that we have the toolkit, and we now have to get to our target, and we're very committed to do it. And those are very interesting propositions because first, it's go -- it goes along trends. We see in the consumer space; in terms of moderation, health and wellness; and also premium products because normally these products are sold at a premium price.

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Operator [25]

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

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Chris Pitcher, Redburn (Europe) Limited, Research Division - Partner of Beverages Research [26]

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A couple of questions. Firstly, your increased confidence on the United States in terms of market share improvement is happening without any change in your mainstream brands, Budweiser and Bud Light. Given the success you're seeing at the Super Premium and in core plus and also at the value end, is this changing the role of Budweiser and Bud Light to potentially playing within the portfolio? And then secondly, can you give us an update on the value scheme in South Africa? Because we believe you're due to deliver shares next year and how that's going to affect your share count (inaudible) [that we sourced] from?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [27]

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Okay, Chris. So in terms of the U.S., yes, we are confident that our evolved strategy is working. And this strategy is a strategy of a portfolio gain as opposed to 1 or 2 brands. So yes, it's true that [one of your guys here] 10 years ago, everything was about Bud and Bud Light. But today, Bud and Bud Light of course remain the 2 most important brands in our portfolio, but if you look at Michelob Ultra, it's already 10% of our portfolio and growing, the biggest share gain in the U.S. for now 4 years. And if you look at craft, if you look at Stella Artois, if you look at the new line extensions we've had like Pure Gold for Michelob Ultra, the Bud Light series -- I mean, the Bud Light series and the Bud Light Orange and Lime, I mean all these things are getting consumers to trade up. It is true that there's some cannibalization because Michelob Ultra of course is growing and Bud Light being the biggest brand in the U.S. is being cannibalized by Michelob Ultra as well for sure, but at a much better margin. So in a way, it's accretive to the business, and it's in line with consumer trends. So Bud and Bud Light will remain key brands for us in our portfolio, but maybe they'll be smaller in size going forward, and other brands will be bigger. But because they're trading up, those -- that is an -- a move that's accretive in nature. So again, it's a portfolio play, and some brands will be smaller, some brands will be bigger, for sure.

In terms of Zenzele, the (inaudible) Zenzele scheme matures next year, 2020, and we have already engaged with government authorities and other stakeholders on an outline for our plans to be adopted upon maturity. So as engagements are still ongoing, it would be premature to provide details at this time. But we'll continue to update you as we have new news on the scheme. But again, the scheme is -- will mature only next year.

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Operator [28]

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Our next question comes from the line of Carlos Laboy of HSBC.

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Carlos Alberto Laboy, HSBC, Research Division - MD, Global Head of Beverages Research, and Senior Analyst, Global Beverages [29]

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Brito, can you speak to how you determine whether a line extension is successful or not as it's rolling along? And what criteria guides you to make sure that you're doing it right and optimizing it? And then on an unrelated basis, if you can just give us an update on your thinking, how it's evolving regarding brewing capacity rationalization as a room for improvement here in the U.S., Canada and Mexico.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [30]

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Okay. So in terms of your second question, I mean, the brewing capacity in Mexico, we continue to invest. I mean we have just opened -- officially opened in the first quarter our central brewery in Hidalgo. That's going to be very important to rationalize the current footprint we have in Mexico in which we still import quite a sizable volume from the U.S. So being more self contained in Mexico is very important. We also added significant capacity to our grid by enabling 2 new lines, now you can turn plants, brewery, which we also invested some years ago. So -- and those are new capacity in Mexico.

In the U.S., of course, we have enough capacity, but we continue to invest in the U.S. capacity because we have craft breweries or craft beers that are extending. We have more premium beers, premium packaging. We have more assortment. And in the U.S., we continue to transfer line, ship this line, adapt to new line, to new package assortment. So this thing of brewery footprint is very dynamic, and it's always happened. Same in Canada. So -- but in Mexico, clearly we're adding capacity. In the U.S., we're managing the existing footprint. But we continue to invest because of package assortment and new brands.

In terms of line extension, I mean of course we try to do line extension on things that will make the mother brand stronger, things that connect to the mother brand, connects with the brand positioning of the mother brand. So it is key. So whenever we do something with Bud Light, it has to do with easy-drinking, the refreshment, the young side of the brand. Same we do with Skol in Brazil as we did in Pure Malte. And of course, we have a plan in terms of volume, in terms of distribution, in terms of consumer takeout. And we also have social listening that today is very active in our company. So that's a very quick way to look at what consumers are saying, behaving, talking about the brand, sharing with their friends about brand use. So I mean, all those things are things that are there for us to judge, for line extensions doing well or not, but not forgetting the mother brand. So line extension should always not borrow but also add to the mother brand franchise.

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Operator [31]

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Our next question comes from the line of Edward Hargreaves of Investec.

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Edward John Hargreaves, Investec Bank plc, Research Division - Analyst [32]

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First one, just briefly going back to South Africa. You've obviously gone through the macro and portfolio positioning issues there. In addition, you have been experiencing some distribution and stock-out difficulties. Can you confirm that those issues are now resolved? And then my second question is a broader one. I know you're constrained with what you can say on the potential partial IPO. But it was striking in your statement that you're talking about the creation of an APAC champion in consumer goods being the main merit of this. Can you explain how that would be advantageous for you? And surely -- you're a beer and soft drinks company, you're not thinking of expanding into infant milk or noodles, are you?

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [33]

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Yes. I think on your second question, you got it right. I mean it's more about the pursuing of the IPO at this point and the why we're doing it, the platform. I wouldn't get hung up on the consumer goods. And then it's, as you said, we're not going to go into infant milk or anything like that. So I think the important thing is the platform. And if you compare to InBev as another platform that has championed growth and expansion in Latin America, that's the kind of parallel we try to drive, not in terms of the percentage that we owe or anything like that, but just the idea of having something that we have a lot of experience with, which is the InBev platform, replicating that in a new, exciting growth market like APAC. So that's the main idea, and that's why we use the word platform.

On your first question about South Africa, in terms of out of stocks, it's pretty much resolved. Of course, when you look at things like Flying Fish, which is a growing brand we have in South Africa, we still have some issues there. We're expanding capacity because we still have some cap. So yes, there's still a few brands that are capped. But I mean, the bulk of our brands, the out of stocks are resolved. They were resolved by the end of last year.

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Operator [34]

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

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Andrea Pistacchi, Deutsche Bank AG, Research Division - Research Analyst [35]

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So I have 2 questions, please. The first one is on Argentina, where you had a difficult quarter unsurprisingly but mid-teens or teens volume decline. If you can talk a bit about whether the worst is behind there in your opinion. And then the second question is on Nigeria, please. If you could -- you gave us a lot of color on Nigeria at the Investor Day in South Africa in August where you said that you had about a 22% market share. If you could just give us an update, please, on Nigeria, what you're seeing in the market, maybe where your share is now and the progress you've made in the past 6, 9 months.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [36]

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Well, first, I mean, Andrea, let's go to Argentina. So you're right, I mean consumers are in a tough spot in Argentina. Very high inflation, 50% or more on a yearly basis. Elections coming up in October. A lot of uncertainty in terms of the future in the political side. Currency also devalued some and lots of pressure in the consumer. So yes, there is consumption contraction in Argentina as a result of all these things I just described. We believe in our commercial strategy. The premium portfolio, amazing enough, continues to show very strong performance with Stella Artois, Corona and the local brand of ours, Patagonia. We're very excited also to have Budweiser back. But of course, it's true that overall volume is suffering. We also have now some price controls that would not affect our business. We have 2 SKUs in the price control: 1 in soft drinks, 1 in beer. But those represent a small percentage of our volumes. So -- but just -- it's hard to predict what Argentina will look like. Consumers will remain under pressure, we think, this year. But we'll try to -- it's not the first time where people -- in a way, our people are used to deal with kind of situation. And that we have a great team in Argentina that's of course always looking at ways to adapt our strategy because we're there to service consumers and beyond our [best] part right now. So again, hard to predict, but we'll -- it's not the first time we see that in Argentina.

In terms of Nigeria, we had a very strong first quarter, continued volume revenue growth, double digits. So Nigeria remains a very successful story for us. Now with the capacity that we haven't had for some years in which we were capped, now we can (inaudible) our big brands alongside with Budweiser in a more [freely] way in Nigeria. So that's why growth continues. And growth can be seen across all regions in Nigeria. So doing very well, very excited now with the portfolio that's also has core but also a global premium brand with Budweiser. Budweiser was launched last year during the FIFA World Cup in Nigeria. And our consumers in Nigeria, they're very connected to soccer and very connected also to American brands. So that duo did very well, and Budweiser is off to a very strong start in Nigeria.

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Operator [37]

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Our final question will come from the line of Robert Ottenstein of Evercore.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages Research [38]

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You're clearly getting some nice progress on the top line and on the margins. And I'm wondering if you could tie that into some of the initiatives that you talked about in South Africa. Particularly, Felipe Dutra went into some good lengths on what you're doing with big data, artificial intelligence, machine learning. And I'd love to hear what's -- how that's helping you both connect to the consumer and be more of a consumer-centric company, giving consumers what they want as well as driving productivity.

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Carlos Alves de Brito, Anheuser-Busch InBev SA/NV - CEO & Member of Executive Management Board [39]

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Great question. I mean let's talk about 2 fronts, consumer and customer. But I think the most important one is that technology is all about business transformation first. So in business transformation, 70% of it is around people and ways of work, and 20% or 30% is around technology per se. That's what we've learned as we did it ourselves and benchmark with other companies that are ahead of us. So in terms of customer, as we showed in South Africa, there's a big effort. We showed many things, but our focus is on conflict strategy. There was a big effort on evolving our conflict strategy. Our conflict strategy with the parks, retailers used to be old days of the sales rep. Today, it's much more of a hybrid strategy in which we're evolving. From that model with the sales rep, they're becoming more of a business development rep to one where we have the business development rep plus a telesales support, plus we have our B2B strategy. So today, we have 40% of our sales are digital sales. And we want to get that to 70%. So 40% digital today, 60% to analog with the sales rep. So connected park is also something we showed in South Africa. That's the means by which we connect the point-of-sale equipment off the park, and we not only deliver an app in which the park can manage its business, but we also in return get access to data and consumer insights to better service our parks but also understand consumers on a more real-time basis. So that's getting closer to the consumer via the customer.

On the consumer front, we of course are trying to get closer to consumers and have a more to one -- one-to-one contact with consumers. That's what we showed in South Africa. And there were some verticals connected to that. So first, trying to get more insights as you get more consumers and get better consumer records. Second, that can help us in many fronts, including media efficiency because it can be more tailored and more customized. We also have a big B2C effort, business-to-consumer, and that's expressed in many ways. But I would say that our e-commerce platforms that today are in 20 countries, we're going to continue to expand that in those countries plus some new countries. We also have that brand building by tailored content. So our earned media today is 8% of our total media. We will get that to 30%. And all that should benefit top line growth because that's -- in the products we have, that's what we see. So again, many things happen also in supply chain, on logistics in general, production, brewing of beer and all that. But on customer and consumers, that's how I would summarize the efforts, and those are 3 important things, conflict strategy and customer level and consumers 1-to-1 on the consumer level.

Well, thank you. And in summary, I think we're in -- in summary, in the first quarter, we delivered strong results, and we saw improved performance in many of our key markets, especially Brazil and the U.S. We remain focused on driving the organic growth of our business while deleveraging towards our optimal capital structure and have taken significant steps to improve our debt maturity profile through our refinancing initiatives. We believe that our commercial plans, superior portfolio of brands, diverse geographic footprint, unparalleled operating efficiency and strong pipeline of committed and talented people position us to continue delivering strong results in 2019 and beyond.

So again, thank you very much for joining the call today. Thank you for your time, and enjoy the rest of your day.

Thank you. Bye-bye.

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Operator [40]

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Thank you. This concludes today's earnings conference call and webcast.

Please disconnect your lines at this time, and have a wonderful day.