20-F 1 d491590d20f.htm 20-F 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 31 December 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Anheuser-Busch InBev SA/NV

(Exact name of Registrant as specified in its charter)

 

 

N/A

(Translation of Registrant’s name into English)

Belgium

(Jurisdiction of incorporation or organization)

Brouwerijplein 1,

3000 Leuven, Belgium

(Address of principal executive offices)

Sabine Chalmers

Chief Legal and Corporate Affairs Officer

Brouwerijplein 1, 3000 Leuven

Belgium

Telephone No.: + 32 16 27 61 11

Fax No.: + 32 16 50 61 11

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

Ordinary shares without nominal value   New York Stock Exchange*
American Depositary Shares, each representing one ordinary share without nominal value   New York Stock Exchange
9.750% Notes due 2015 (November 2010)   New York Stock Exchange
Floating Rate Notes due 2014 (January 2011)   New York Stock Exchange
2.875% Notes due 2016 (January 2011)   New York Stock Exchange
4.375% Notes due 2021 (January 2011)   New York Stock Exchange
Floating Rate Notes due 2014 (July 2011)   New York Stock Exchange
1.500% Notes due 2014 (July 2011)   New York Stock Exchange
0.800% Notes due 2015 (July 2012)   New York Stock Exchange
1.375% Notes due 2017 (July 2012)   New York Stock Exchange
2.500% Notes due 2022 (July 2012)   New York Stock Exchange
3.750% Notes due 2042 (July 2012)   New York Stock Exchange
0.800% Notes due 2016 (January 2013)   New York Stock Exchange
1.250% Notes due 2018 (January 2013)   New York Stock Exchange
2.625% Notes due 2023 (January 2013)   New York Stock Exchange
4.000% Notes due 2043 (January 2013)   New York Stock Exchange

 

* Not for trading, but in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

1,606,787,543 ordinary shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨   No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ¨  Yes    x  No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*    ¨  Yes    ¨  No

 

* This requirement does not apply to the registrant in respect of this filing.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. N/A    ¨  Item 17    ¨  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A    ¨  Yes    ¨  No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

GENERAL INFORMATION

     iii   

PRESENTATION OF FINANCIAL AND OTHER DATA

     iv   

PRESENTATION OF MARKET INFORMATION

     v   

FORWARD-LOOKING STATEMENTS

     vi   

ITEM 1.

     

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     1   

A.

     

DIRECTORS AND SENIOR MANAGEMENT

     1   

B.

     

ADVISERS

     1   

C.

     

AUDITORS

     1   

ITEM 2.

     

OFFER STATISTICS AND EXPECTED TIMETABLE

     1   

A.

     

OFFER STATISTICS

     1   

B.

     

METHOD AND EXPECTED TIMETABLE

     1   

ITEM 3.

     

KEY INFORMATION

     1   

A.

     

SELECTED FINANCIAL DATA

     1   

B.

     

CAPITALIZATION AND INDEBTEDNESS

     2   

C.

     

REASONS FOR THE OFFER AND USE OF PROCEEDS

     2   

D.

     

RISK FACTORS

     3   

ITEM 4.

     

INFORMATION ON THE COMPANY

     24   

A.

     

HISTORY AND DEVELOPMENT OF THE COMPANY

     24   

B.

     

BUSINESS OVERVIEW

     28   
  

1.

  

STRENGTHS AND STRATEGY

     28   
  

2.

  

PRINCIPAL ACTIVITIES AND PRODUCTS

     33   
  

3.

  

MAIN MARKETS

     39   
  

4.

  

COMPETITION

     39   
  

5.

  

WEATHER AND SEASONALITY

     41   
  

6.

  

BREWING PROCESS; RAW MATERIALS AND PACKAGING; PRODUCTION FACILITIES; LOGISTICS

     41   
  

7.

  

DISTRIBUTION OF PRODUCTS

     44   
  

8.

  

LICENSING

     45   
  

9.

  

BRANDING AND MARKETING

     46   
  

10.

  

INTELLECTUAL PROPERTY; RESEARCH AND DEVELOPMENT

     47   
  

11.

  

REGULATIONS AFFECTING OUR BUSINESS

     48   
  

12.

  

INSURANCE

     50   
  

13.

  

SOCIAL AND COMMUNITY MATTERS

     50   

C.

     

ORGANIZATIONAL STRUCTURE

     52   

D.

     

PROPERTY, PLANTS AND EQUIPMENT

     53   

ITEM 4A.

     

UNRESOLVED STAFF COMMENTS

     53   

ITEM 5.

     

OPERATING AND FINANCIAL REVIEW

     53   

A.

     

KEY FACTORS AFFECTING RESULTS OF OPERATIONS

     54   

B.

      SIGNIFICANT ACCOUNTING POLICIES      59   

C.

     

BUSINESS ZONES

     64   

D.

     

EQUITY INVESTMENTS

     64   

E.

     

RESULTS OF OPERATIONS

     64   

F.

     

IMPACT OF CHANGES IN FOREIGN EXCHANGE RATES

     88   

G.

     

LIQUIDITY AND CAPITAL RESOURCES

     89   

H.

     

CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

     101   

I.

     

OFF-BALANCE SHEET ARRANGEMENTS

     102   

J.

     

OUTLOOK AND TREND INFORMATION

     102   

ITEM 6.

     

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     104   

A.

     

DIRECTORS AND SENIOR MANAGEMENT

     104   

B.

     

COMPENSATION

     114   

C.

     

BOARD PRACTICES

     131   

D.

     

EMPLOYEES

     134   

E.

     

SHARE OWNERSHIP

     135   

ITEM 7.

     

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     135   

 

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A.

     

MAJOR SHAREHOLDERS

     135   

B.

     

RELATED PARTY TRANSACTIONS

     138   

ITEM 8.

     

FINANCIAL INFORMATION

     142   

A.

     

CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION

     142   

B.

     

SIGNIFICANT CHANGES

     152   

ITEM 9.

     

THE OFFER AND LISTING

     153   

A.

      THE OFFER AND LISTING      153   

B.

      PLAN OF DISTRIBUTION      155   

C.

      MARKETS      155   

D.

      SELLING SHAREHOLDERS      156   

E.

      DILUTION      156   

F.

      EXPENSES OF THE ISSUE      156   

ITEM 10.

     

ADDITIONAL INFORMATION

     156   

A.

     

SHARE CAPITAL

     156   

B.

     

MEMORANDUM AND ARTICLES OF ASSOCIATION AND OTHER SHARE INFORMATION

     156   

C.

     

MATERIAL CONTRACTS

     163   

D.

     

EXCHANGE CONTROLS

     167   

E.

     

TAXATION

     167   

F.

     

DIVIDENDS AND PAYING AGENTS

     172   

G.

     

STATEMENT BY EXPERTS

     172   

H.

     

DOCUMENTS ON DISPLAY

     172   

I.

     

SUBSIDIARY INFORMATION

     173   

ITEM 11.

     

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     173   

ITEM 12.

     

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     175   

A.

     

DEBT SECURITIES

     175   

B.

     

WARRANTS AND RIGHTS

     175   

C.

     

OTHER SECURITIES

     175   

D.

     

AMERICAN DEPOSITARY SHARES

     175   

ITEM 13.

     

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     178   

ITEM 14.

     

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     178   

ITEM 15.

     

CONTROLS AND PROCEDURES

     178   

ITEM 16A.

     

AUDIT COMMITTEE FINANCIAL EXPERT

     179   

ITEM 16B.

     

CODE OF ETHICS

     179   

ITEM 16C.

     

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     179   

ITEM 16D.

     

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     180   

ITEM 16E.

     

PURCHASES OF EQUITY SECURITIES BY THE ISSUER

     180   

ITEM 16F.

     

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     181   

ITEM 16G.

     

CORPORATE GOVERNANCE

     181   

ITEM 16H.

     

MINE SAFETY DISCLOSURE

     182   

ITEM 17.

     

FINANCIAL STATEMENTS

     183   

ITEM 18.

     

FINANCIAL STATEMENTS

     183   

ITEM 19.

     

EXHIBITS

     183   

AB INBEV GROUP ACTUAL HISTORICAL FINANCIAL INFORMATION

     F-1   

 

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GENERAL INFORMATION

In this annual report on Form 20-F (“Form 20-F”) references to:

 

   

“we,” “us” and “our” are, as the context requires, to Anheuser-Busch InBev SA/NV or Anheuser-Busch InBev SA/NV and the group of companies owned and/or controlled by Anheuser-Busch InBev SA/NV;

 

   

“AB InBev Group” are to Anheuser-Busch InBev SA/NV and the group of companies owned and/or controlled by Anheuser-Busch InBev SA/NV;

 

   

“Anheuser-Busch” are to Anheuser-Busch Companies, LLC and the group of companies owned and/or controlled by Anheuser-Busch Companies, LLC, as the context requires; and

 

   

“Ambev” are to Companhia de Bebidas das Américas—Ambev, a Brazilian company listed on the New York Stock Exchange and on the São Paulo Stock Exchange.

 

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PRESENTATION OF FINANCIAL AND OTHER DATA

We have prepared our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and in conformity with International Financial Reporting Standards as adopted by the European Union (“IFRS”). The financial information and related discussion and analysis contained in this item are presented in U.S. dollars except as otherwise specified. Unless otherwise specified, the financial information analysis in this Form 20-F is based on our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012. Unless otherwise specified, all financial information included in this Form 20-F has been stated in U.S. dollars.

All references in this Form 20-F to (i) “euro” or “EUR” are to the common currency of the European Union, (ii) “U.S. dollar,” “$,” or “USD” are to the currency of the United States, (iii) “CAD” are to the currency of Canada, (iv) “R$”, “real” or “reais” are to the currency of Brazil, and (v) “GBP” (pounds sterling) are to the currency of the United Kingdom.

Unless otherwise specified, volumes, as used in this Form 20-F, include both beer and non-beer (primarily carbonated soft drinks) volumes. In addition, unless otherwise specified, our volumes include not only brands that we own or license, but also third-party brands that we brew or otherwise produce as a subcontractor, and third-party products that we sell through our distribution network, particularly in Western Europe. Our volume figures in this Form 20-F reflect 100% of the volumes of entities that we fully consolidate in our financial reporting and a proportionate share of the volumes of entities that we proportionately consolidate in our financial reporting, but do not include volumes of our associates or non-consolidated entities. Our pro rata share of volumes in Grupo Modelo, S.A.B. de C.V. (“Grupo Modelo”) and Tsingtao Brewery Co., Ltd. (“Tsingtao”) (the latter of which we disposed of in June 2009) are not included in the reported volumes.

Certain monetary amounts and other figures included in this Form 20-F have been subject to rounding adjustments. Accordingly, any discrepancies in any tables between the totals and the sums of amounts listed are due to rounding.

 

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PRESENTATION OF MARKET INFORMATION

Market information (including market share, market position and industry data for our operating activities and those of our subsidiaries or of companies acquired by us) or other statements presented in this Form 20-F regarding our position (or that of companies acquired by us) relative to our competitors largely reflect the best estimates of our management. These estimates are based upon information obtained from customers, trade or business organizations and associations, other contacts within the industries in which we operate and, in some cases, upon published statistical data or information from independent third parties. Except as otherwise stated, our market share data, as well as our management’s assessment of our comparative competitive position, has been derived by comparing our sales figures for the relevant period to our management’s estimates of our competitors’ sales figures for such period, as well as upon published statistical data and information from independent third parties, and, in particular, the reports published and the information made available by, among others, the local brewers’ associations and the national statistics bureaus in the various countries in which we sell our products. The principal sources generally used include Plato Logic Limited and AC Nielsen, as well as Beer Institute and SymphonyIRI (for the United States), the Brewers Association of Canada (for Canada), CCR (for Ecuador, Paraguay and Peru), CIES (for Bolivia), AC Nielsen (for Argentina, Brazil, Russia and Ukraine), FECU (for Chile), Belgian Brewers (for Belgium), German Brewers Association (for Germany), Seema International Limited (for China), the British Beer and Pub Association (for the United Kingdom), Centraal Brouwerij Kantoor—CBK (for the Netherlands), Association des Brasseurs de France (for France), Associazione degli Industriali della Birra e del Malto (for Italy) and other local brewers’ associations. You should not rely on the market share and other market information presented herein as precise measures of market share or of other actual conditions.

 

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FORWARD-LOOKING STATEMENTS

There are statements in this Form 20-F, such as statements that include the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “anticipate,” “estimate,” “project,” “may,” “might,” “could,” “believe,” “expect,” “plan,” “potential” or similar expressions that are forward-looking statements. These statements are subject to certain risks and uncertainties. Actual results may differ materially from those suggested by these statements due to, among others, the risks or uncertainties listed below. See also “Item 3. Key Information—D. Risk Factors” for further discussion of risks and uncertainties that could impact our business.

These forward-looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside our control and are difficult to predict, that may cause actual results or developments to differ materially from any future results or developments expressed or implied by the forward-looking statements. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others:

 

   

local, regional, national and international economic conditions, including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that impact;

 

   

financial risks, such as interest rate risk, foreign exchange rate risk, commodity risk, asset price risk, equity market risk, counterparty risk, sovereign risk, liquidity risk, inflation or deflation;

 

   

changes in government policies and currency controls;

 

   

tax consequences of restructuring and our ability to optimize our tax rate;

 

   

continued availability of financing and our ability to achieve our targeted coverage and debt levels and terms, including the risk of constraints on financing in the event of a credit rating downgrade;

 

   

the monetary and interest rate policies of central banks, in particular the European Central Bank, the Board of Governors of the U.S. Federal Reserve System, the Bank of England, Banco Central do Brasil, Banco Central de la República Argentina and other central banks;

 

   

changes in applicable laws, regulations and taxes in jurisdictions in which we operate, including the laws and regulations governing our operations, changes to tax benefit programs as well as actions or decisions of courts and regulators;

 

   

limitations on our ability to contain costs and expenses;

 

   

our expectations with respect to expansion, premium growth, accretion to reported earnings, working capital improvements and investment income or cash flow projections;

 

   

our ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

 

   

the effects of competition and consolidation in the markets in which we operate, which may be influenced by regulation, deregulation or enforcement policies;

 

   

changes in consumer spending;

 

   

changes in pricing environments;

 

   

volatility in the prices of raw materials, commodities and energy;

 

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difficulties in maintaining relationships with employees;

 

   

regional or general changes in asset valuations;

 

   

greater than expected costs (including taxes) and expenses;

 

   

the risk of unexpected consequences resulting from acquisitions, including the proposed combination with Grupo Modelo, joint ventures, strategic alliances or divestiture plans, and our ability to successfully integrate the operations of businesses or other assets that we acquire;

 

   

the outcome of pending and future litigation and governmental proceedings;

 

   

natural and other disasters;

 

   

any inability to economically hedge certain risks;

 

   

inadequate impairment provisions and loss reserves;

 

   

technological changes and threats to cybersecurity;

 

   

other statements included in this annual report that are not historical;

 

   

our success in managing the risks involved in the foregoing; and

 

   

the risk of unexpected consequences resulting from corporate restructurings, including the Ambev Stock Swap Merger, as defined below, and our ability to successfully and cost-effectively implement them and capture their intended benefits.

Our statements regarding financial risks, including interest rate risk, foreign exchange rate risk, commodity risk, asset price risk, equity market risk, counterparty risk, sovereign risk, inflation and deflation, are subject to uncertainty. For example, certain market and financial risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market or financial risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

We caution that the forward-looking statements in this Form 20-F are further qualified by the risk factors disclosed in “Item 3. Key Information—D. Risk Factors” that could cause actual results to differ materially from those in the forward-looking statements. Subject to our obligations under Belgian and U.S. law in relation to disclosure and ongoing information, we undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. DIRECTORS AND SENIOR MANAGEMENT

Not applicable.

B. ADVISERS

Not applicable.

C. AUDITORS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

A. OFFER STATISTICS

Not applicable.

B. METHOD AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

A. SELECTED FINANCIAL DATA

The selected historical financial information presented below as of 31 December 2012, 2011, 2010, 2009 and 2008, and for the five years ended 31 December 2012 has been derived from our audited consolidated financial statements, which were prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and in conformity with International Financial Reporting Standards as adopted by the European Union (“IFRS”).

The selected historical financial information presented in the tables below should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and the accompanying notes. The audited consolidated financial statements and the accompanying notes as of 31 December 2012 and 2011 and for the three years ended 31 December 2012 have been included in this Form 20-F.

Following the 2008 Anheuser-Busch acquisition, we completed a series of asset disposals in 2009 and have utilized certain of the proceeds from such disposals to repay indebtedness incurred to finance the Anheuser-Busch acquisition. See “Item 4. Information on the Company—A. History and Development of the Company—History and Development of the Company” for a description of the Anheuser-Busch acquisition. Accordingly, the scope of our business after the completion of the series of asset disposals differs materially from the scope of our business presented in this Form 20-F for the year ended 31 December 2009.

Effective 1 January 2009, we changed the presentation currency of our consolidated financial statements from the euro to the U.S. dollar, reflecting the post-Anheuser-Busch acquisition profile of our revenue and cash flows, which are now primarily generated in U.S. dollars and U.S. dollar-linked currencies. We believe that this change provides greater alignment of our presentation currency with our most significant operating currency and underlying financial performance. Unless otherwise specified, all financial information included in this Form 20-F has been stated in U.S. dollars.

 

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     Year ended 31 December  
     2012      2011      2010      2009      2008  
     (USD million, unless otherwise indicated)  
     (audited)  

Income Statement Data

  

Revenue(1)

     39,758         39,046         36,297         36,758         23,507   

Profit from operations

     12,733         12,329         10,897         11,569         5,340   

Profit

     9,434         7,959         5,762         5,877         3,126   

Profit attributable to our equity holders

     7,243         5,855         4,026         4,613         1,927   

Weighted average number of ordinary shares (million shares)(2)

     1,600         1,595         1,592         1,584         999   

Diluted weighted average number of ordinary shares (million shares)(3)

     1,628         1,614         1,611         1,593         1,000   

Basic earnings per share (USD)(4)

     4.53         3.67         2.53         2.91         1.93   

Diluted earnings per share (USD)(5)

     4.45         3.63         2.50         2.90         1.93   

Dividends per share (USD)

     2.24         1.55         1.07         0.55         0.35   

Dividends per share (EUR)

     1.70         1.20         0.80         0.38         0.28   
     As of 31 December  
     2012      2011      2010      2009      2008
(adjusted)(6)
 
     (USD million, unless otherwise indicated)  
     (audited)  

Financial Position Data

  

Total assets

     122,621         112,427         114,342         112,525         113,748   

Equity

     45,441         41,044         38,799         33,171         24,431   

Equity attributable to our equity holders

     41,142         37,492         35,259         30,318         22,442   

Issued capital

     1,734         1,734         1,733         1,732         1,730   

Other Data

              

Volumes (million hectoliters)

     403         399         399         409         285   

 

Notes:

 

(1) Turnover less excise taxes and discounts. In many jurisdictions, excise taxes make up a large proportion of the cost of beer charged to our customers (see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Excise Taxes”).
(2) Weighted average number of ordinary shares means, for any period, the number of shares outstanding at the beginning of the period, adjusted by the number of shares canceled, repurchased or issued during the period multiplied by a time-weighting factor.
(3) Diluted weighted average number of ordinary shares means the weighted average number of ordinary shares, adjusted by the effect of share options issued.
(4) Earnings per share means, for any period, profit attributable to our equity holders for the period divided by the weighted average number of ordinary shares.
(5) Diluted earnings per share means, for any period, profit attributable to our equity holders for the period divided by the diluted weighted average number of ordinary shares.
(6) In 2009, the company completed the purchase price allocation of the Anheuser-Busch acquisition in accordance with IFRS 3. IFRS 3 requires the acquirer to retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date. As such, total assets have been adjusted to reflect the final purchase price adjustments.

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

 

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D. RISK FACTORS

Investing in our shares involves risk. We expect to be exposed to some or all of the risks described below in our future operations. Such risks include, but are not limited to, the risk factors described below. Any of the risk factors described below, as well as additional risks of which we are not currently aware, could also affect our business operations and have a material adverse effect on our business activities, financial condition, results of operations and prospects and cause the value of our shares to decline. Moreover, if and to the extent that any of the risks described below materialize, they may occur in combination with other risks which would compound the adverse effect of such risks on our business activities, financial condition, results of operations and prospects. Investors in our shares and American Depositary Shares (“ADSs”) could lose all or part of their investment.

You should carefully consider the following information in conjunction with the other information contained or incorporated by reference in this document. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or of the potential magnitude of their financial consequences.

Risks Relating to Our Business

We are exposed to the risks of an economic recession, credit and capital market volatility and economic and financial crisis, which could adversely affect the demand for our products and adversely affect the market price of our shares and ADSs.

We are exposed to the risk of a global recession or a recession in one or more of our key markets, credit and capital market volatility and an economic or financial crisis, which could result in lower revenue and reduced profit. For example, recent concerns regarding the eurozone sovereign debt crisis and the level of U.S. federal debt have led to increased volatility in global credit and capital markets and may lead to reduced economic growth in Europe, the United States and elsewhere.

Beer and soft drinks consumption in many of the jurisdictions in which we operate is closely linked to general economic conditions, with levels of consumption tending to rise during periods of rising per capita income and fall during periods of declining per capita income. Additionally, per capita consumption is inversely related to the sale price of our products.

Besides moving in concert with changes in per capita income, beer consumption also increases or decreases in accordance with changes in disposable income.

Currently, disposable income is low in many of the developing countries in which we operate compared to disposable income in more developed countries. Any decrease in disposable income resulting from an increase in inflation, income taxes, the cost of living, unemployment levels, political or economic instability or other factors would likely adversely affect demand for beer. Moreover, because a significant portion of our brand portfolio consists of premium beers, our volumes and revenue may be impacted to a greater degree than those of some of our competitors, as some consumers may choose to purchase value or discount brands rather than super-premium, premium or core brands. For additional information on the categorization of the beer market and our positioning, see “Item 4. Information on the Company—B. Business Overview—2. Principal Activities and Products—Beer.”

Capital and credit market volatility, such as that experienced recently, may result in downward pressure on stock prices and credit capacity of issuers. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our shares and ADSs.

Our results of operations are affected by fluctuations in exchange rates.

Although we report our consolidated results in U.S. dollars, in 2012, we derived approximately 61.7% of our revenue from operating companies that have non-U.S. dollar functional currencies (in most cases, in the local currency of the respective operating company). Consequently, any change in exchange rates between our operating

 

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companies’ functional currencies and the U.S. dollar will affect our consolidated income statement and balance sheet when the results of those operating companies are translated into U.S. dollars for reporting purposes. Decreases in the value of our operating companies’ functional currencies against the U.S. dollar will tend to reduce those operating companies’ contributions in dollar terms to our financial condition and results of operations.

In addition to currency translation risk, we incur currency transaction risks whenever one of our operating companies enters into transactions using currencies other than their respective functional currencies, including purchase or sale transactions and the issuance or incurrence of debt. Although we have hedge policies in place to manage commodity price and foreign currency risks to protect our exposure to currencies other than our operating companies’ functional currencies, there can be no assurance that such policies will be able to successfully hedge against the effects of such foreign exchange exposure, particularly over the long-term. In particular, concerns regarding the eurozone sovereign debt crisis may result in increased volatility of euro exchange rates and make it more difficult for us to successfully hedge the effects of our euro foreign exchange exposure.

Moreover, although we seek to proactively address and manage the relationship between borrowing currency liabilities and functional currency cash flows, much of our debt is denominated in U.S. dollars, while a significant portion of our cash flows are denominated in currencies other than the U.S. dollar. From time to time we enter into financial instruments to mitigate currency risk, but these transactions and any other efforts taken to better match the effective currencies of our liabilities to our cash flows could result in increased costs.

See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk, Hedging and Financial Instruments” and note 28 to our audited financial information as of 31 December 2012 and 2011, and for the three years ended 31 December 2012, for further details on our approach to hedging commodity price and foreign currency risk.

Changes in the availability or price of raw materials, commodities and energy could have an adverse effect on our results of operations.

A significant portion of our operating expenses are related to raw materials and commodities, such as malted barley, wheat, corn grits, corn syrup, rice, hops, flavored concentrate, fruit concentrate, sugar, sweetener, water, glass, polyethylene terephthalate (“PET”) and aluminum bottles, aluminum or steel cans and kegs, labels, plastic crates, metal and plastic closures, folding cartons, cardboard products and plastic films.

The supply and price of raw materials and commodities used for the production of our products can be affected by a number of factors beyond our control, including the level of crop production around the world, export demand, quality and availability of supply, speculative movements in the raw materials or commodities markets, currency fluctuations, governmental regulations and legislation affecting agriculture, trade agreements among producing and consuming nations, adverse weather conditions, natural disasters, economic factors affecting growth decisions, political developments, various plant diseases and pests.

We cannot predict future availability or prices of the raw materials or commodities required for our products. The markets in certain raw materials or commodities have experienced and may in the future experience shortages and significant price fluctuations. The foregoing may affect the price and availability of ingredients that we use to manufacture our products, as well as the cans and bottles in which our products are packaged. We may not be able to increase our prices to offset these increased costs or increase our prices without suffering reduced volume, revenue and operating income. To some extent, derivative financial instruments and the terms of supply agreements can protect against increases in materials and commodities costs in the short term. However, derivatives and supply agreements expire and upon expiry are subject to renegotiation and therefore cannot provide complete protection over the medium or longer term. To the extent we fail to adequately manage the risks inherent in such volatility, including if our hedging and derivative arrangements do not effectively or completely hedge against changes in commodity prices, our results of operations may be adversely impacted. In addition, it is possible that the hedging and derivative instruments we use to establish the purchase price for commodities in advance of the time of delivery may lock us into prices that are ultimately higher than actual market prices at the time of delivery. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk, Hedging and Financial Instruments” for further details on our approach to hedging commodity price risk.

 

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The production and distribution of our products require material amounts of energy, including the consumption of oil-based products, natural gas, biomass, coal and electricity. Energy prices have been subject to significant price volatility in the recent past and may be again in the future. High energy prices over an extended period of time, as well as changes in energy taxation and regulation in certain geographies, may result in a negative effect on operating income and could potentially challenge our profitability in certain markets. There is no guarantee that we will be able to pass along increased energy costs to our customers in every case.

The production of our products also requires large amounts of water, including water consumption in the agricultural supply chain. Changes in precipitation patterns and the frequency of extreme weather events may affect our water supply and, as a result, our physical operations. Water may also be subject to price increases in certain areas, and changes in water taxation and regulation in certain geographies may result in a negative effect on operating income which could potentially challenge our profitability in certain markets. There is no guarantee that we will be able to pass along increased water costs to our customers in every case.

We may not be able to obtain the necessary funding for our future capital or refinancing needs and we face financial risks due to our level of debt and uncertain market conditions.

We may be required to raise additional funds for our future capital needs or refinance our current indebtedness through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. We may be required to issue additional equity under unfavorable conditions, which could dilute our existing shareholders. See “—Risks Related to Our Shares and American Depositary Shares—Future equity issuances may dilute the holdings of current shareholders or ADS holders and could materially affect the market price of our shares or ADSs.” Furthermore, any debt financing, if available, may involve restrictive covenants.

On 26 February 2010, we entered into USD 17.2 billion of senior credit agreements, including a USD 13.0 billion senior facilities agreement (the “2010 Senior Facilities Agreement”) (of which USD 10.1 billion was ultimately drawn) that consisted of a USD 8.0 billion five-year revolving credit facility and a USD 5.0 billion three-year term facility. Effective 25 July 2011, we amended the terms of the 2010 Senior Facilities Agreement to provide for an extension of the USD 8.0 billion five-year revolving credit facility under the 2010 Senior Facilities Agreement. In connection with the amendment, we fully prepaid and terminated the USD 5.0 billion three-year term facility under the 2010 Senior Facilities Agreement. The terms of the 2010 Senior Facilities Agreement, as well as its intended use, are described under “Item 10. Additional Information—C. Material Contracts.”

In connection with the publicly-announced combination with Grupo Modelo, S.A.B. de C.V., we entered into a USD 14.0 billion senior facilities agreement (the “2012 Senior Facilities Agreement”) on 20 June 2012 that consisted of an 8.0 billion USD three-year term facility and a 6.0 billion USD term facility with a maximum maturity of two years from the funding date. As of 31 December 2012, we have not drawn any amounts under the 2012 Senior Facilities Agreement.

We also access the bond markets from time to time based on our financing needs. For details of bond offerings in 2012 and the first quarter of 2013, see “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Funding Sources—Borrowings.”

The portion of our consolidated balance sheet represented by debt will remain significantly higher as compared to our historical position.

Our continued increased level of debt could have significant consequences, including:

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

impairing our ability to obtain additional financing in the future;

 

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requiring us to issue additional equity (possibly under unfavorable conditions); and

 

   

placing us at a competitive disadvantage compared to our competitors that have less debt.

Further, a credit rating downgrade could have a material adverse effect on our ability to finance our ongoing operations or to refinance our existing indebtedness. In addition, if we fail to comply with the covenants or other terms of any agreements governing these facilities, our lenders will have the right to accelerate the maturity of that debt.

Priority has been given to deleveraging, with surplus free cash flow being used to reduce the level of outstanding debt. Deleveraging remains a priority and may continue to restrict the amount of dividends we are able to pay.

In the absence of appropriate external growth opportunities and subject to maintaining an optimal capital structure, increasing cash flow generation should translate into increasing cash returned to shareholders, with dividends being a more predictable growing flow, balanced with share buy-back programs. Our objective is to achieve a long term dividend yield in line with other fast moving consumer goods companies, with low volatility consistent with the non-cyclical nature of our business. In the event of a significant acquisition in the future, we may restrict temporarily the amount of dividends we pay in order to prioritize deleveraging and maintain an optimal capital structure.

Our ability to repay and renegotiate our outstanding indebtedness will depend upon market conditions. In recent years, the global credit markets experienced significant price volatility, dislocations and liquidity disruptions that caused the cost of debt financings to fluctuate considerably. The markets also put downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors reduced, and in some cases, ceased to provide funding to borrowers. If such uncertain conditions persist, our costs could increase beyond what is anticipated. Such costs could have a material adverse impact on our cash flows, results of operations or both. In addition, an inability to refinance all or a substantial amount of our debt obligations when they become due, or more generally a failure to raise additional equity capital or debt financing or to realize proceeds from asset sales when needed, would have a material adverse effect on our financial condition and results of operations.

Our results could be negatively affected by increasing interest rates.

We use issuances of debt and bank borrowings as a source of funding and we carry a significant level of debt. Nevertheless, pursuant to our capital structure policy, we aim to optimize shareholder value through cash flow distribution to us from our subsidiaries, while maintaining an investment-grade rating and minimizing cash and investments with a return below our weighted average cost of capital.

Some of the debt we have issued or incurred was issued or incurred at variable interest rates, which exposes us to changes in such interest rates. As of 31 December 2012, after certain hedging and fair value adjustments, USD 5.7 billion, or 12.9%, of our interest-bearing financial liabilities (which include loans, borrowings and bank overdrafts) bore a variable interest rate, while USD 38.6 billion, or 87.1%, bore a fixed interest rate. Moreover, a significant part of our external debt is denominated in non-U.S. dollar currencies, including the euro, pounds sterling, Brazilian real and the Canadian dollar. Although we enter into interest rate swap agreements to manage our interest rate risk, and also enter into cross-currency interest rate swap agreements to manage both our foreign currency risk and interest-rate risk on interest-bearing financial liabilities, there can be no assurance that such instruments will be successful in reducing the risks inherent in exposures to interest rate fluctuations. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk, Hedging and Financial Instruments” and note 28 to our audited financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012, for further details on our approach to foreign currency and interest-rate risk.

 

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Certain of our operations depend on independent distributors or wholesalers to sell our products.

Certain of our operations are dependent on government-controlled or privately owned but independent wholesale distributors for distribution of our products for resale to retail outlets. See “Item 4. Information on the Company—B. Business Overview—7. Distribution of Products” and “Item 4. Information on the Company—B. Business Overview—11. Regulations Affecting Our Business” for further information in this respect. There can be no assurance as to the financial affairs of such distributors or that these distributors, who often act both for us and our competitors, will not give our competitors’ products higher priority, thereby reducing their efforts to sell our products.

In the United States, for instance, we sell substantially all of our beer to independent wholesalers for distribution to retailers and ultimately consumers. As independent companies, wholesalers make their own business decisions that may not always align themselves with our interests. If our wholesalers do not effectively distribute our products, our financial results could be adversely affected.

In addition, contractual restrictions and the regulatory environment of many markets may make it very difficult to change distributors in a number of markets. In certain cases, poor performance by a distributor or wholesaler is not a sufficient reason for replacement. Our consequent inability to replace unproductive or inefficient distributors could adversely impact our business, results of operations and financial condition.

There may be changes in legislation or interpretation of legislation by regulators or courts that may prohibit or reduce the ability of brewers to own wholesalers and distributors.

In certain countries we have interests in wholesalers and distributors, and such interests may be prohibited if legislation or interpretation of legislation changes. Any limitation imposed on our ability to purchase or own any interest in distributors could adversely impact our business, results of operations and financial condition.

If we do not successfully comply with laws and regulations designed to combat governmental corruption in countries in which we sell our products, we could become subject to fines, penalties or other regulatory sanctions and our sales and profitability could suffer.

We operate our business and market our products in certain countries that are less developed, have less stability in legal systems and financial markets, and are potentially more corrupt business environments than Europe and the United States, and therefore present greater political, economic and operational risks. Although we are committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to our business, there is a risk that the employees or representatives of our subsidiaries, affiliates, associates, joint-ventures or other business interests may take actions that violate applicable laws and regulations that generally prohibit the making of improper payments to foreign government officials for the purpose of obtaining or keeping business, including laws relating to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. In respect of the U.S. Foreign Corrupt Practices Act, we have been informed by the U.S. Securities and Exchange Commission that it is conducting an investigation into the relationships of our affiliates in India, including our non-consolidated Indian joint venture. See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”

Competition could lead to a reduction of our margins, increase costs and adversely affect our profitability.

We compete with both brewers and other drinks companies and our products compete with other beverages. Globally, brewers, as well as other players in the beverage industry, compete mainly on the basis of brand image, price, quality, distribution networks and customer service. Consolidation has significantly increased the capital base and geographic reach of our competitors in some of the markets in which we operate, and competition is expected to increase further as the trend towards consolidation among companies in the beverage industry continues. Consolidation activity has also increased along our distribution channels – in the case of both on-trade points of sale, such as pub companies, and off-trade retailers, such as supermarkets. Such consolidation could increase the purchasing power of players in our distribution channels.

 

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Competition may divert consumers and customers from our products. Competition in our various markets and increased purchasing power of players in our distribution channels could cause us to reduce pricing, increase capital investment, increase marketing and other expenditures, prevent us from increasing prices to recover higher costs, and thereby cause us to reduce margins or lose market share. Moreover, because we rely on only a limited number of brands across a limited number of markets for the majority of our sales, any dilution of our brands as a result of competitive trends could also lead to a significant erosion of our profitability. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. Innovation faces inherent risks, and the new products we introduce may not be successful, while competitors may be able to respond quicker than we can to emerging trends, such as the increasing consumer preference for “craft beers” produced by smaller microbreweries.

Additionally, the absence of level playing fields in some markets and the lack of transparency, or even certain unfair or illegal practices, such as tax evasion and corruption, may skew the competitive environment in favor of our competitors, with material adverse effects on our profitability or ability to operate.

The ability of our subsidiaries to distribute cash upstream may be subject to various conditions and limitations.

To a large extent, we are organized as a holding company and our operations are carried out through subsidiaries. Our domestic and foreign subsidiaries’ and affiliated companies’ ability to upstream or distribute cash (to be used, among other things, to meet our financial obligations) through dividends, intercompany advances, management fees and other payments is, to a large extent, dependent on the availability of cash flows at the level of such domestic and foreign subsidiaries and affiliated companies and may be restricted by applicable laws and accounting principles. In particular, 41.6% (USD 16.5 billion) of our total revenue of USD 39.8 billion in 2012 came from our Brazilian listed subsidiary Companhia de Bebidas das Américas—Ambev (“Ambev”), which is not wholly owned and is listed on the São Paulo Stock Exchange and the New York Stock Exchange. Certain of our equity investments contribute cash flow to us through dividend payments but are not controlled by us, and our receipt of dividend payments from these entities is therefore outside our control. In addition to the above, some of our subsidiaries are subject to laws restricting their ability to pay dividends or the amount of dividends they may pay. See “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Transfers from Subsidiaries” and “Item 10. Additional Information—F. Dividends and Paying Agents” for further information in this respect.

If we are not able to obtain sufficient cash flows from our domestic and foreign subsidiaries and affiliated companies, this could adversely impact our ability to pay dividends, and otherwise negatively impact our business, results of operations and financial condition.

An inability to reduce costs could affect profitability.

Our future success and earnings growth depend in part on our ability to be efficient in producing, advertising and selling our products and services. We are pursuing a number of initiatives to improve operational efficiency. Failure to generate significant cost savings and margin improvement through these initiatives could adversely affect our profitability and our ability to achieve our financial goals.

We are exposed to emerging market risks, including the risks of devaluation, nationalization and inflation.

A substantial proportion of our operations, representing approximately 47.7% of our 2012 revenue, are carried out in emerging markets, including Brazil (which represents 27.1% of our revenue), Argentina, China, Russia, Bolivia, Paraguay, and Ukraine. We also have equity investments in brewers in China and Mexico.

Our operations and equity investments in these markets are subject to the customary risks of operating in developing countries, which include potential political and economic uncertainty, application of exchange controls,

 

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nationalization or expropriation, crime and lack of law enforcement, political insurrection, external interference, financial risks, changes in government policy, political and economic changes, changes in the relations between the countries, actions of governmental authorities affecting trade and foreign investment, regulations on repatriation of funds, interpretation and application of local laws and regulations, enforceability of intellectual property and contract rights, local labor conditions and regulations. Such factors could affect our results by causing interruptions to our operations or by increasing the costs of operating in those countries or by limiting our ability to repatriate profits from those countries. Financial risks of operating in emerging markets also include risks of liquidity, inflation (for example, Brazil, Argentina and Russia have periodically experienced extremely high rates of inflation), devaluation (for example, the Brazilian and Argentine currencies have been devalued frequently during the last four decades), price volatility, currency convertibility and country default. These various factors could adversely impact our business, results of operations and financial condition. Due to our geographic mix, these factors could affect us more than our competitors with less exposure to emerging markets, and any general decline in emerging markets as a whole could impact us disproportionately compared to our competitors.

Economic and political events in Argentina may adversely affect our Argentina operations.

We indirectly own 100% of the total share capital of a holding company with operating subsidiaries in Argentina and other South American countries, the net revenues of which corresponded to 4.9% of our total revenue for the year ended 31 December 2012. In the past, the Argentine economic and social situation has rapidly deteriorated, and may quickly deteriorate in the future; we cannot assure you that the Argentine economy will not rapidly deteriorate as it has in the past. The political instability, fluctuations in the economy, governmental actions concerning the economy of Argentina, the devaluation of the Argentine peso, inflation and deteriorating macroeconomic conditions in Argentina could indeed have a material adverse effect on our Latin American South operations, their financial condition and their results. Also, if the economic or political situation in Argentina deteriorates, our Latin American South operations may be subject to additional restrictions under new foreign exchange, export repatriation or expropriation regimes that could adversely affect our liquidity and operations, and our ability to access such funds from Argentina.

We may not be able to successfully carry out further acquisitions and business integrations or restructuring.

We have made in the past and may make in the future acquisitions of, investments in, joint ventures and similar arrangements with, other companies and businesses. We cannot make such further transactions unless we can identify suitable candidates and agree on the terms with them. We may not be able to successfully complete such transactions including the proposed combination with Grupo Modelo announced on 29 June 2012. After completion of a transaction, we may be required to integrate the acquired companies, businesses or operations into our existing operations. In addition, such transactions may involve the assumption of certain actual or potential, known or unknown liabilities, which may have a potential impact on our financial risk profile. Further, the price we may pay in any future transaction may prove to be too high as a result of various factors, such as a significant change in market conditions, the limited opportunity to conduct due diligence prior to a purchase or unexpected changes in the acquired business.

Our proposed combination with Grupo Modelo has exposed us to risks related to the closing of the transaction, significant costs related to the combination and potential difficulties in integration of Grupo Modelo into our existing operations and the extraction of synergies from the transaction.

On 29 June 2012, we announced an agreement with Grupo Modelo agreeing to acquire the remaining stake in Grupo Modelo that we do not already own for USD 9.15 per share in cash in a transaction valued at USD 20.1 billion (the “combination with Grupo Modelo”). In a related transaction, Constellation Brands, Inc. (“Constellation”) agreed to purchase Grupo Modelo’s 50% stake in Crown Imports LLC (“Crown Imports”), the joint venture that imports and markets Grupo Modelo’s brands in the United States, for USD 1.85 billion, giving Constellation 100% ownership and control of Crown Imports.

 

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Process

The combination of us and Grupo Modelo will be completed through a series of steps that will simplify Grupo Modelo’s corporate structure, followed by an all-cash tender offer by us for all outstanding Grupo Modelo shares that we will not own at that time. Following the combination, two Grupo Modelo board members will join our Board of Directors, and they have committed, only if they tender their shares, to invest an aggregate amount of USD 1.5 billion of their proceeds from the tender offer into our shares to be delivered within five years via a deferred share instrument. Such investment will happen at the share price of USD 65.

Antitrust and other regulatory approvals

Completion of the combination with Grupo Modelo has been conditioned upon, among other things, antitrust approval from U.S. and Mexican authorities. We received approval from Mexican authorities. In July 2012, we and Grupo Modelo filed notification and report forms under the Hart-Scott-Rodino Act with the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice (“DOJ”). In August 2012, we received a request for additional information from the DOJ. In January 2013, the DOJ brought a lawsuit seeking to block the proposed combination between us and Grupo Modelo.

In February 2013, we announced a revised agreement with Constellation valued at USD 2.9 billion in which Constellation will acquire Grupo Modelo’s Piedras Negras brewery in Mexico, and Crown Imports will be granted a perpetual and exclusive license for the Modelo brands produced in Mexico and distributed by Crown Imports in the United States. As previously announced, Constellation will also acquire Grupo Modelo’s 50% stake in Crown Imports for USD 1.85 billion. The terms of our combination with Grupo Modelo, announced in June 2012, are unchanged. Completion of the sale of Piedras Negras has been conditioned upon, among other things, any antitrust clearance from U.S. and Mexican authorities that may be required.

We, Grupo Modelo, Constellation and Crown Imports are engaged in discussions with the DOJ seeking to resolve the DOJ’s litigation challenging the combination with Grupo Modelo. In connection with such discussions, the parties and the DOJ jointly approached the court to request a stay of all litigation proceedings until 9 April 2013, and the court approved the request. There can be no assurance that the discussions will be successful.

The terms and conditions of any authorizations, approvals and/or clearances still to be obtained from the DOJ or any other governmental authority prior to or following the consummation of the combination with Grupo Modelo may require, among other things, the divestiture of additional assets or businesses to third parties, changes to our operations, restrictions on our ability to operate in certain jurisdictions following the combination with Grupo Modelo, or other commitments to regulatory authorities regarding ongoing operations. Any such actions could have a material adverse effect on our business and diminish substantially the synergies and the advantages which we expect to achieve from the combination with Grupo Modelo. Further, if the parties and the DOJ are unable to resolve the litigation through settlement, the court could enjoin the parties from completing the combination with Grupo Modelo. Finally, any delay in obtaining any authorizations, approvals and/or clearance in any of the jurisdictions pending may require us or Grupo Modelo not to consummate the combination or integrate our businesses and operations in these jurisdictions.

Other legal challenges

We are now and may in the future be party to legal proceedings and claims related to the combination with Grupo Modelo. For example, certain private parties have brought a legal challenge to the transactions, and the court in this private action could enjoin the parties from completing the combination with Grupo Modelo or could further delay it. We intend to defend against it vigorously. For further information, see “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”

Financing

We have obtained financing for the combination with Grupo Modelo with a USD 14.0 billion senior facilities agreement dated 20 June 2012 that consists of an 8.0 billion USD three-year term facility and a 6.0 billion USD term facility with a maximum maturity of two years from the funding date. We have also raised USD 7.5 billion in senior unsecured bonds in July 2012 and EUR 2.25 billion in euro medium-term notes in September 2012 to support the combination with Grupo Modelo. In addition, in January 2013, we issued a further USD 4.0 billion in senior unsecured bonds, a further EUR 500 million in euro medium-term notes and CAD 1.2 billion in a private offering in Canada. For further information, see “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Borrowings.”

The increased level of debt could have significant consequences, including increasing our vulnerability to general adverse economic and industry conditions, limiting our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities or to otherwise realize the value of our

 

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assets and opportunities fully because of the need to dedicate a substantial portion of our cash flow from operations to payments of interest and principal on our debt or to comply with any restrictive terms of our debt, limiting our flexibility in planning for, or reacting to, changes in its business and the industry in which we operate, impairing our ability to obtain additional financing in the future, and placing us at a competitive disadvantage compared to our competitors who have less debt.

In addition, if we fail to comply with the covenants or other terms of any agreements governing our facilities or bonds, our lenders may have the right to accelerate the maturity of that debt. Our ability to repay our outstanding indebtedness will depend upon market conditions, and unfavorable conditions could increase costs beyond what is anticipated. Such costs could have a material adverse impact on cash flows or our results of operations or both. In addition, an inability to refinance all or a substantial amount of these debt obligations when they become due would have a material adverse effect on our financial condition and results of operations.

See also “Item 3. Key Information—D. Risk Factors—Risks Relating to our Business—We may not be able to obtain the necessary funding for our future capital or refinancing needs and we face financial risks due to our level of debt and uncertain market conditions.”

Downgrade

Ratings agencies may downgrade our credit ratings below their current levels as a result of the combination with Grupo Modelo and the incurrence of the related financial indebtedness. A downgrading of our credit rating below investment grade may result in the need to refinance some of our outstanding indebtedness or the acceleration of existing indebtedness. Any credit rating downgrade could materially adversely affect our ability to finance our ongoing operations, and our ability to refinance the debt incurred to fund the combination with Grupo Modelo, including by increasing our cost of borrowing and significantly harming our financial condition, results of operations and profitability, including our ability to refinance our other existing indebtedness.

Synergy

Achieving the advantages of the combination with Grupo Modelo will depend partly on the rapid and efficient combination of our activities with Grupo Modelo, two companies of considerable size which functioned independently and were incorporated in different countries, with geographically dispersed operations, and with different business cultures and compensation structures.

The integration process involves inherent costs and uncertainties and there is no assurance that the combination with Grupo Modelo will achieve the anticipated business growth opportunities, cost savings, increased profits, synergies and other benefits we anticipate. We believe that we will be able to achieve annual synergies of approximately USD 1 billion, and we believe the consideration paid for the combination with Grupo Modelo is justified, in part, by the business growth opportunities, cost savings, increased profits, synergies, revenue benefits and other benefits Grupo Modelo expects to achieve by combining its operations with ours. However, these expected business growth opportunities, cost savings, increased profits, synergies and other benefits may not develop, and the assumptions upon which we determined the consideration paid for the combination with Grupo Modelo may prove to be incorrect.

Implementation of the combination with Grupo Modelo and the successful integration of Grupo Modelo will also require a significant amount of management time and, thus, may affect or impair management’s ability to run the business effectively during the period of the combination with Grupo Modelo and integration. In addition, we may not have, or be able to retain, employees with the appropriate skill sets for the tasks associated with our integration plan, which could adversely affect the integration of Grupo Modelo.

Although the estimated expense savings and revenue synergies contemplated by the combination with Grupo Modelo are significant, there can be no assurance that we will realize these benefits in the time expected or at all. Any failures, material delays or unexpected costs of the integration process could therefore have a material adverse effect on our business, results of operations and financial condition.

 

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An impairment of goodwill or other intangible assets would adversely affect our financial condition and results of operations.

As a result of the 2008 Anheuser-Busch acquisition, we recognized USD 32.9 billion of goodwill on our balance sheet and recorded several brands from the Anheuser-Busch business (including brands in the Budweiser brand family, the Michelob brand family, the Busch brand family and the Natural brand family) as intangible assets with indefinite life with a fair value of USD 21.4 billion. As of 31 December 2012, goodwill amounted to USD 51.8 billion and intangible assets with indefinite life amounted to USD 23.0 billion. If our business does not develop as expected, impairment charges may be incurred in the future that could be significant and that could have an adverse effect on our results of operations and financial condition.

We rely on the reputation of our brands.

Our success depends on our ability to maintain and enhance the image and reputation of our existing products and to develop a favorable image and reputation for new products. The image and reputation of our products may be reduced in the future; concerns about product quality, even when unfounded, could tarnish the image and reputation of our products. For example, in late February 2013, lawsuits were filed against us (which we will vigorously defend against) relating to the alcohol-by-volume in several of our beer brands that allege that the products contain lower alcohol-by-volume levels than what is stated on the labels. An event, or series of events, that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that brand or business. Restoring the image and reputation of our products may be costly and may not be possible.

Moreover, our marketing efforts are subject to restrictions on the permissible advertising style, media and messages used. In a number of countries, for example, television is a prohibited medium for advertising alcoholic beverage products, and in other countries, television advertising, while permitted, is carefully regulated. For example, the Brazilian Federal Prosecutor’s Office (Ministério Público Federal) in 2012 filed suits against the Brazilian Government to increase the restriction of beer advertising in Brazil. Any additional restrictions in such countries, or the introduction of similar restrictions in other countries, may constrain our brand building potential and thus reduce the value of our brands and related revenues.

Negative publicity, perceived health risks and associated government regulation may harm our business.

Media coverage, and publicity generally, can exert significant influence on consumer behavior and actions. If the social acceptability of beer or soft drinks were to decline significantly, sales of our products could materially decrease. In recent years, there has been increased public and political attention directed at the alcoholic beverage and food and soft drink industries. This attention is the result of health concerns related to the harmful use of alcohol, including drunk driving, excessive, abusive and underage drinking, as well as health concerns such as obesity and diabetes related to the overconsumption of food and soft drinks. Negative publicity regarding alcohol or soft drink consumption, publication of studies that indicate a significant health risk from consumption of alcohol or soft drinks, or changes in consumer perceptions in relation to alcohol or soft drinks generally could adversely affect the sale and consumption of our products and could harm our business, results of operations, cash flows or financial condition as consumers and customers change their purchasing patterns. For example, the Global Monitoring Framework (GMF) for Non-Communicable Diseases (NCDs) approved by the Executive Board of the World Health Organization (WHO) in January 2013 raised the profile of health risks related to the harmful use of alcohol. After a year-long discussion and numerous consultations, the GMF for NCDs calls for at least a 10% relative reduction in the harmful use of alcohol, as appropriate, within national contexts. For example, the Russian and Ukrainian authorities are considering legislative changes linked to concerns about the harmful use of alcohol. Russia adopted bans on the sale of beer in kiosks and the sale of beer between the hours of 11:00 pm and 8:00 am, a ban on beer advertisements on television, internet, printed media, radio and outdoor beer advertisements and a further increase in excise taxes by 25%, 20% and 11% in 2013, 2014 and 2015, respectively. Other legislative proposals discussed in Russia include a ban on PET packaging, stricter regulations on the ingredients and definition of “beer” and new labelling and health warning requirements. For 2013, the excise tax rate was increased in the Ukraine from UAH 0.81/liter to UAH 0.87/liter, and the government continues to look at proposals such as banning the sale of beer in kiosks and other points of sale close to social institutions, banning beer advertising and further increasing excise taxes. Concerns over alcohol abuse and underage drinking have also caused governments, including those in Argentina, Brazil, Russia, the United Kingdom and the United States, to consider measures such as increased taxation, implementation of minimum alcohol pricing regimes or other restrictions upon our commercial freedoms.

 

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Key brand names are used by us, our subsidiaries, associates and joint ventures, and are licensed to third-party brewers. To the extent that we, one of our subsidiaries, associates, joint ventures or licensees are subject to negative publicity, and the negative publicity causes consumers and customers to change their purchasing patterns, it could have a material adverse effect on our business, results of operations, cash flows or financial condition. As we continue to expand our operations into emerging and growth markets, there is a greater risk that we may be subject to negative publicity, in particular in relation to labor rights and local work conditions. Negative publicity that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that brand or business, which could adversely impact our business, results of operations, cash flows and financial condition.

Demand for our products may be adversely affected by changes in consumer preferences and tastes.

We depend on our ability to satisfy consumer preferences and tastes. Consumer preferences and tastes can change in unpredictable ways due to a variety of factors, such as changes in demographics, consumer health and wellness, concerns about obesity or alcohol consumption, product attributes and ingredients, changes in travel, vacation or leisure activity patterns, weather, negative publicity resulting from regulatory action or litigation against us or comparable companies or a downturn in economic conditions. Consumers also may begin to prefer the products of competitors or may generally reduce their demand for products in the category. Failure by us to anticipate or respond adequately either to changes in consumer preferences and tastes or to developments in new forms of media and marketing could adversely impact our business, results of operations and financial condition.

Seasonal consumption cycles and adverse weather conditions may result in fluctuations in demand for our products.

Seasonal consumption cycles and adverse weather conditions in the markets in which we operate may have an impact on our operations. This is particularly true in the summer months, when unseasonably cool or wet weather can affect sales volumes. Demand for beer is normally more depressed in our major markets in the Northern Hemisphere during the first and fourth quarters of each year, and our consolidated net revenue from those markets is therefore normally lower during this time. Although this risk is somewhat mitigated by our relatively balanced footprint in both hemispheres, we are relatively more exposed to the markets in the Northern Hemisphere than to the markets in the Southern Hemisphere, which could adversely impact our business, results of operations and financial condition.

Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business or operations, and water scarcity or poor quality could negatively impact our production costs and capacity.

There is a growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain agricultural commodities that are necessary for our products, such as barley, hops, sugar and corn. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment due to increased regulatory pressures. As a result, the effects of climate change could have a long-term, material adverse impact on our business and results of operations.

We also face water scarcity risks. The availability of clean water is a limited resource in many parts of the world, facing unprecedented challenges from climate change and the resulting change in precipitation patterns and frequency of extreme weather, overexploitation, increasing pollution, and poor water management. As demand for water continues to increase around the world, and as water becomes scarcer and the quality of available water deteriorates, we may be affected by increasing production costs or capacity constraints, which could adversely affect our business and results of operations.

 

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If any of our products is defective or found to contain contaminants, we may be subject to product recalls or other liabilities.

We take precautions to ensure that our beverage products are free from contaminants and that our packaging materials (such as bottles, crowns, cans and other containers) are free of defects. Such precautions include quality-control programs and various technologies for primary materials, the production process and our final products. We have established procedures to correct problems detected.

In the event that contamination or a defect does occur in the future, it may lead to business interruptions, product recalls or liability, each of which could have an adverse effect on our business, reputation, prospects, financial condition and results of operations.

Although we maintain insurance policies against certain product liability (but not product recall) risks, we may not be able to enforce our rights in respect of these policies, and, in the event that contamination or a defect occurs, any amounts that we recover may not be sufficient to offset any damage we may suffer, which could adversely impact our business, results of operations and financial condition.

We may not be able to protect our intellectual property rights.

Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how. We have been granted numerous trademark registrations covering our brands and products and have filed, and expect to continue to file, trademark and patent applications seeking to protect newly developed brands and products. We cannot be sure that trademark and patent registrations will be issued with respect to any of our applications. There is also a risk that we could, by omission, fail to renew a trademark or patent on a timely basis or that our competitors will challenge, invalidate or circumvent any existing or future trademarks and patents issued to, or licensed by, us.

Although we have taken appropriate action to protect our portfolio of intellectual property rights (including trademark registration and domain names), we cannot be certain that the steps we have taken will be sufficient or that third parties will not infringe upon or misappropriate proprietary rights. Moreover, some of the countries in which we operate offer less efficient intellectual property protection than is available in Europe or the United States. If we are unable to protect our proprietary rights against infringement or misappropriation, it could have a material adverse effect on our business, results of operations, cash flows or financial condition, and in particular, on our ability to develop our business.

We rely on key third parties, including key suppliers, and the termination or modification of the arrangements with such third parties could negatively affect our business.

We rely on key third-party suppliers, including third-party suppliers for a range of raw materials for beer and soft drinks such as malted barley, corn grits, corn syrup, rice, hops, water, flavored concentrate, fruit concentrate, sugar and sweetener, and for packaging material, such as glass, PET and aluminum bottles, aluminum or steel cans and kegs, labels, plastic crates, metal and plastic closures, folding cartons, cardboard products and plastic films.

We seek to limit our exposure to market fluctuations in these supplies by entering into medium- and long-term fixed-price arrangements. We have a limited number of suppliers of aluminum cans and glass bottles. Consolidation of the aluminum can industry, and glass bottle industry in certain markets in which we operate has reduced local supply alternatives and increased the risk of disruption to aluminum can, and glass bottle supplies. Although we generally have other suppliers of raw materials and packaging materials, the termination of or material change to arrangements with certain key suppliers, disagreements with suppliers as to payment or other terms, or the failure of a key supplier to meet our contractual obligations or otherwise deliver materials consistent with current usage would or may require us to make purchases from alternative suppliers, in each case at potentially higher prices than those agreed with this supplier, and this could have a material impact on our production, distribution and sale of beer and soft drinks and have a material adverse effect on our business, results of operations, cash flows or financial condition.

 

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A number of our key brand names are both licensed to third-party brewers and used by companies over which we do not have control. However, we monitor brewing quality to ensure our high standards. For instance, our global brand Stella Artois is licensed to third parties in Algeria, Australia, Bulgaria, Croatia, Czech Republic, Hungary, Israel, New Zealand, and Romania, and another global brand, Beck’s, is licensed to third parties in Algeria, Bulgaria, Croatia, Hungary, Turkey, Australia, New Zealand, Romania, Serbia, Tunisia and Montenegro. Finally, Budweiser is licensed to third parties in, amongst other countries, Argentina, India, Japan, South Korea, Panama, Italy, Ireland and Spain. See “Item 4. Information on the Company—B. Business Overview—8. Licensing” for more information in this respect. To the extent that one of these key brand names or our joint ventures, investments in companies in which we do not own a controlling interest and our licensees are subject to negative publicity, it could have a material adverse effect on our business, results of operations, cash flows or financial condition.

For certain packaging supplies and raw materials, we rely on a small number of important suppliers. If these suppliers became unable to continue to meet our requirements, and we are unable to develop alternative sources of supply, our operations and financial results could be adversely affected.

The consolidation of retailers may adversely affect us.

The retail industry in Europe and in many countries in which we operate continues to consolidate. Large retailers may seek to improve profitability and sales by asking for lower prices or increased trade spending. Although retailers purchase products from wholesalers (including in a number of markets, from our wholesaler operations), rather than directly from us, the efforts of retailers could result in reduced profitability for the beer industry as a whole and indirectly adversely affect our financial results.

We could incur significant costs as a result of compliance with, and/or violations of or liabilities under, various regulations that govern our operations.

Our business is highly regulated in many of the countries in which we or our licensed third partners operate. The regulations adopted by the authorities in these countries govern many parts of our operations, including brewing, marketing and advertising (in particular to ensure our advertising is directed to individuals of legal drinking age), transportation, distributor relationships and sales. We may be subject to claims that we have not complied with existing laws and regulations, which could result in fines, penalties or loss of operating licenses. We are also routinely subject to new or modified laws and regulations with which we must comply in order to avoid claims, fines and other penalties, which could adversely impact our business, results of operations and financial condition. We may also be subject to laws and regulations aimed at reducing the availability of beer products in some of our markets to address alcohol abuse and other social issues. There can be no assurance that we will not incur material costs or liabilities in connection with compliance with applicable regulatory requirements, or that such regulation will not interfere with our beer or soft drinks businesses.

The level of regulation to which our businesses are subject can be affected by changes in the public perception of beer and soft drinks consumption. In recent years, there has been increased social and political attention in certain countries directed at the alcoholic beverage and soft drinks industries, and governmental bodies may respond to any public criticism by implementing further regulatory restrictions on advertising, opening hours, drinking ages or marketing activities (including the marketing or selling of beer at sporting events). Such public concern and any resulting restrictions may cause the social acceptability of beer or soft drinks to decline significantly and consumption trends to shift away from these products, which would have a material adverse effect on our business, financial condition and results of operations. For common regulations and restrictions on us, see “Item 4. Information on the Company—B. Business Overview—11. Regulations Affecting Our Business” and “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Governmental Regulations.”

 

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We are exposed to the risk of litigation.

We are now and may in the future be party to legal proceedings and claims and significant damages may be asserted against us. See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings” and “Item 5. Operating and Financial Review—H. Contractual Obligations and Contingencies—Contingencies” and note 31 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012 for a description of certain material contingencies which we believe are reasonably possible (but not probable) to be realized. Given the inherent uncertainty of litigation, it is possible that we might incur liabilities as a consequence of the proceedings and claims brought against us, including those that are not currently believed by us to be reasonably possible.

Moreover, companies in the alcoholic beverage industry are, from time to time, exposed to collective suits (class actions) or other litigation relating to alcohol advertising, alcohol abuse problems or health consequences from the excessive consumption of alcohol. As an illustration, certain beer and alcoholic beverage producers from Brazil, Canada, Europe and the United States have been involved in class actions and other litigation seeking damages for, among other things, alleged marketing of alcoholic beverages to underage consumers. If any of these types of litigation were to result in fines, damages or reputational damage for us, this could have a material adverse effect on our business, results of operations, cash flows or financial position.

See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings” for additional information on litigation matters.

The beer and beverage industry may be subject to adverse changes in taxation.

Taxation on our beer and non-beer products in the countries in which we operate is comprised of different taxes specific to each jurisdiction, such as excise and other indirect taxes. In many jurisdictions, such excise and other indirect taxes make up a large proportion of the cost of beer charged to customers. Increases in excise and other indirect taxes applicable to our products either on an absolute basis or relative to the levels applicable to other beverages tend to adversely affect our revenue or margins, both by reducing overall consumption of our products and by encouraging consumers to switch to other categories of beverages. These increases also adversely affect the affordability of our products and our profitability. In 2012, Brazil, France, Russia, Ukraine and the United Kingdom adopted legislation to increase beer excise taxes.

On 1 January 2010, Russia implemented an increase in the excise tax on regular-strength beer by 200% and, in 2009, Ukraine almost doubled the excise taxes on all beers. Since that time, taxes continue to increase. For example, as of 1 January 2011, the water tax in Ukraine further increased by 65%. In 2012, the Russian Parliament again passed a law to index excise taxes by 25%, 20% and 11% in 2013, 2014 and 2015, respectively, and Ukraine also increased its excise tax on beer. These tax increases have resulted in significant price increases in both countries, and continue to reduce our sales of beer. See “—Negative publicity, perceived health risks and associated government regulation may harm our business.”

In the United States, the brewing industry is subject to significant taxation. The U.S. federal government currently levies an excise tax of USD 18 per barrel (equivalent to 1.1734776 hectoliters) on beer sold for consumption in the United States. All states also levy excise and/or sales taxes on alcoholic beverages. From time to time, there are proposals to increase these taxes, and in the future these taxes could increase. Increases in excise taxes on alcohol could adversely affect our United States business and its profitability.

Minimum pricing is another form of fiscal regulation that can affect our company’s profitability. In 2012, the Scottish Government legislated to introduce a minimum unit price for alcoholic beverages. However, the implementation faces a delay, as the measure has been challenged in the Scottish courts and at the EU level. In November 2012, the UK Government published for consultation its own proposal to introduce a minimum unit price for alcoholic beverages, and Northern Ireland and the Republic of Ireland are also considering introducing a cross-border minimum unit price for alcoholic beverages.

 

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Proposals to increase excise or other indirect taxes, including legislation regarding minimum alcohol pricing, may result from the current economic climate and may also be influenced by changes in the public perception regarding the consumption of alcohol and soft drinks. To the extent that the effect of the tax reforms described above or other proposed changes to excise and other indirect duties in the countries in which we operate is to increase the total burden of indirect taxation on our products, the results of our operations in those countries could be adversely affected.

In addition to excise and other indirect duties, we are subject to income and other taxes in the countries in which we operate. There can be no assurance that the operations of our breweries and other facilities will not become subject to increased taxation by national, local or foreign authorities or that we and our subsidiaries will not become subject to higher corporate income tax rates or to new or modified taxation regulations and requirements. Any such increases or changes in taxation would tend to adversely impact our results of operations.

We are exposed to antitrust and competition laws in certain jurisdictions and the risk of changes in such laws or in the interpretation and enforcement of existing antitrust and competition laws.

We are subject to antitrust and competition laws in the jurisdictions in which we operate, and in a number of jurisdictions we produce and/or sell a significant portion of the beer consumed. Consequently, we may be subject to regulatory scrutiny in certain of these jurisdictions. For instance, our Brazilian listed subsidiary, Ambev, has been subject to monitoring by antitrust authorities in Brazil (see “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings—Ambev and its Subsidiaries—Antitrust Matters”). There can be no assurance that the introduction of new competition laws in the jurisdictions in which we operate, the interpretation of existing antitrust or competition laws or the enforcement of existing antitrust or competition laws, or any agreements with antitrust or competition authorities, against us or our subsidiaries, including Ambev, will not affect our business or the businesses of our subsidiaries in the future.

Our operations are subject to environmental regulations, which could expose us to significant compliance costs and litigation relating to environmental issues.

Our operations are subject to environmental regulations by national, state and local agencies, including, in certain cases, regulations that impose liability without regard to fault. These regulations can result in liability which might adversely affect our operations. The environmental regulatory climate in the markets in which we operate is becoming stricter, with a greater emphasis on enforcement.

While we have continuously invested in reducing our environmental risks and budgeted for future capital and operating expenditures to maintain compliance with environmental laws and regulations, there can be no assurance that we will not incur substantial environmental liability or that applicable environmental laws and regulations will not change or become more stringent in the future.

We operate a joint venture in Cuba, in which the Government of Cuba is our joint venture partner. Cuba has been identified by the U.S. Department of State as a state sponsor of terrorism and is targeted by broad and comprehensive economic and trade sanctions of the United States. Our operations in Cuba may adversely affect our reputation and the liquidity and value of our securities.

We own indirectly a 50% equity interest in Cerveceria Bucanero S.A., a Cuban company in the business of producing and selling beer. The other 50% equity interest is owned by the Government of Cuba. Cerveceria Bucanero S.A. is operated as a joint venture in which we appoint the general manager. Cerveceria Bucanero S.A.’s main brands are Bucanero and Cristal. In 2012, Cerveceria Bucanero S.A. sold 1.2 million hectoliters, representing about 0.31% of our global volume of 403 million hectoliters for the year. Although Cerveceria Bucanero S.A.’s production is primarily sold in Cuba, a small portion of its production is exported to and sold by certain distributors in other countries outside Cuba (but not the United States). Cerveceria Bucanero S.A. also imports and sells in Cuba a quantity of Beck’s branded products produced by one of our German subsidiaries that is less than 5,000 hectoliters.

 

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Cuba has been identified by the United States government as a state sponsor of terrorism, and the U.S. Treasury Department’s Office of Foreign Assets Control and the U.S. Commerce Department together administer and enforce broad and comprehensive economic and trade sanctions based on U.S. foreign policy towards Cuba. Although our operations in Cuba are quantitatively immaterial, our overall business reputation may suffer or we may face additional regulatory scrutiny as a result of our activities in Cuba based on Cuba’s identification as a state sponsor of terrorism and target of U.S. economic and trade sanctions. In addition, there are initiatives by federal and state lawmakers in the United States, and certain U.S. institutional investors, including pension funds, to adopt laws, regulations or policies requiring divestment from, or reporting of interests in, or to facilitate divestment from, companies that do business with countries designated as state sponsors of terrorism, including Cuba. If investors decide to liquidate or otherwise divest their investments in companies that have operations of any magnitude in Cuba, the market in and value of our securities could be adversely impacted.

In addition, the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 (known as the “Helms-Burton Act”) authorizes private lawsuits for damages against anyone who traffics in property confiscated without compensation by the Government of Cuba from persons who at the time were, or have since become, nationals of the United States. Although this section of the Helms-Burton Act is currently suspended by discretionary presidential action, the suspension may not continue in the future. Claims accrue notwithstanding the suspension and may be asserted if the suspension is discontinued. The Helms-Burton Act also includes a section that authorizes the U.S. Department of State to prohibit entry into the United States of non-U.S. persons who traffic in confiscated property, and corporate officers and principals of such persons, and their families. In 2009, we received notice of a claim purporting to be made under the Helms-Burton Act relating to the use of a trademark by Cerveceria Bucanero S.A., which is alleged to have been confiscated by the Cuban government and trafficked by us through our ownership and management of Cerveceria Bucanero S.A. Although we have attempted to review and evaluate the validity of the claim, due to the uncertain underlying circumstances, we are currently unable to express a view as to the validity of such claims, or as to the standing of the claimants to pursue them.

We may not be able to recruit or retain key personnel.

In order to develop, support and market our products, we must hire and retain skilled employees with particular expertise. The implementation of our strategic business plans could be undermined by a failure to recruit or retain key personnel or the unexpected loss of senior employees, including in acquired companies. We face various challenges inherent in the management of a large number of employees over diverse geographical regions. Key employees may choose to leave their employment for a variety of reasons, including reasons beyond our control. The impact of the departure of key employees cannot be determined and may depend on, among other things, our ability to recruit other individuals of similar experience and skill. It is not certain that we will be able to attract or retain key employees and successfully manage them, which could disrupt our business and have an unfavorable material effect on our financial position, income from operations and competitive position.

We are exposed to labor strikes and disputes that could lead to a negative impact on our costs and production level.

Our success depends on maintaining good relations with our workforce. In several of our operations, a majority of our workforce is unionized. For instance, a majority of the hourly employees at our breweries in several key countries in different geographies are represented by unions. Our production may be affected by work stoppages or slowdowns as a result of disputes under existing collective labor agreements with labor unions. We may not be able to satisfactorily renegotiate our collective labor agreements when they expire and may face tougher negotiations or higher wage and benefit demands. Furthermore, a work stoppage or slowdown at our facilities could interrupt the transport of raw materials from our suppliers or the transport of our products to our customers. Such disruptions could put a strain on our relationships with suppliers and clients and may have lasting effects on our business even after the disputes with our labor force have been resolved, including as a result of negative publicity.

Our production may also be affected by work stoppages or slowdowns that affect our suppliers, distributors and retail delivery/logistics providers as a result of disputes under existing collective labor agreements with labor unions, in connection with negotiations of new collective labor agreements, as a result of supplier financial distress, or for other reasons.

 

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A strike, work stoppage or slowdown within our operations or those of our suppliers, or an interruption or shortage of raw materials for any other reason (including but not limited to financial distress, natural disaster, or difficulties affecting a supplier) could have a material adverse effect on our earnings, financial condition and ability to operate our business.

Information technology failures could disrupt our operations.

We rely on information technology systems to process, transmit, and store electronic information. A significant portion of the communication between our personnel, customers, and suppliers depends on information technology. As with all large systems, our information systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers or other security issues.

We depend on information technology to enable us to operate efficiently and interface with customers, as well as to maintain in-house management and control. We have also entered into various information technology services agreements pursuant to which our information technology infrastructure is outsourced to leading vendors.

In addition, the concentration of processes in shared services centers means that any technology disruption could impact a large portion of our business within the operating zones served. If we do not allocate, and effectively manage, the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. As with all information technology systems, our system could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes.

We take various actions with the aim of minimizing potential technology disruptions, such as investing in intrusion detection solutions, proceeding with internal and external security assessments, building and implementing disaster recovery plans and reviewing risk management processes. Notwithstanding our efforts, technology disruptions could disrupt our business. For example, if outside parties gained access to confidential data or strategic information and appropriated such information or made such information public, this could harm our reputation or our competitive advantage. More generally, technology disruptions could have a material adverse effect on our business, results of operations, cash flows or financial condition.

We experience from time to time attempted breaches of our technology systems and networks. In 2012, we experienced and expect to continue experiencing attempted breaches of our technology systems and networks. None of the attempted breaches on our systems (as a result of cyber-attacks, security breaches or similar events) had a material impact on our business or operations or resulted in material unauthorized access to our data.

Natural and other disasters could disrupt our operations.

Our business and operating results could be negatively impacted by social, technical or physical risks such as earthquakes, hurricanes, flooding, fire, power loss, loss of water supply, telecommunications and information technology system failures, political instability, military conflict and uncertainties arising from terrorist attacks, including a global economic slowdown, the economic consequences of any military action and associated political instability.

Our insurance coverage may not be sufficient.

The cost of some of our insurance policies could increase in the future. In addition, some types of losses, such as losses resulting from wars, acts of terrorism, or natural disasters, generally are not insured because they are either uninsurable or it is not economically practical to obtain insurance. Moreover, insurers recently have become more reluctant to insure against these types of events. Should an uninsured loss or a loss in excess of insured limits occur, this could adversely impact our business, results of operations and financial condition.

 

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The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection

Auditors of companies that are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because our auditors are located in Belgium, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Belgian authorities, our auditors are not currently inspected by the PCAOB.

This lack of PCAOB inspections in Belgium prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in Belgium, including our auditors. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in Belgium makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of Belgium that are subject to PCAOB inspections.

Risks Related to Our Shares and American Depositary Shares

The market price of our shares and ADSs may be volatile.

The market price of our shares and ADSs may be volatile as a result of various factors, many of which are beyond our control. These factors include, but are not limited to, the following:

 

   

market expectations for our financial performance;

 

   

actual or anticipated fluctuations in our results of operations and financial condition;

 

   

changes in the estimates of our results of operations by securities analysts;

 

   

potential or actual sales of blocks of our shares or ADSs in the market by any shareholder or short selling of our shares or ADSs. Any such transaction could occur at any time or from time to time, with or without notice;

 

   

the entrance of new competitors or new products in the markets in which we operate;

 

   

volatility in the market as a whole or investor perception of the beverage industry or of our competitors; and

 

   

the risk factors mentioned in this section.

The market price of our shares and ADSs may be adversely affected by any of the preceding or other factors regardless of our actual results of operations and financial condition.

Our controlling shareholder may use its controlling interest to take actions not supported by our minority shareholders.

As of 31 December 2012, our controlling shareholder (Stichting Anheuser-Busch InBev) owned 41.27% of our voting rights (and Stichting Anheuser-Busch InBev and certain other entities acting in concert with it held, in the aggregate, 52.23% of our voting rights), in each case based on the number of our shares outstanding on 31 December 2012 (see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders”).

 

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Stichting Anheuser-Busch InBev has the ability to effectively control or have a significant influence on the election of our Board of Directors and the outcome of corporate actions requiring shareholder approval, including dividend policy, mergers, share capital increases, going-private transactions and other extraordinary transactions. See “Item 10. Additional Information—B. Memorandum and Articles of Association and Other Share Information—Description of the Rights and Benefits Attached to Our Shares” for further information in this respect. The interests and time horizons of Stichting Anheuser-Busch InBev may differ from those of other shareholders. As a result of its influence on our business, Stichting Anheuser-Busch InBev could prevent us from making certain decisions or taking certain actions that would protect the interests of our other shareholders. For example, this concentration of ownership may delay or prevent a change of control of Anheuser-Busch InBev SA/NV, even in the event that this change of control may benefit other shareholders generally. Similarly, Stichting Anheuser-Busch InBev could prevent us from taking certain actions that would dilute its percentage interest in our shares, even if such actions would generally be beneficial to us and/or to other shareholders. These and other factors related to Stichting Anheuser-Busch InBev’s holding of a controlling interest in our shares may reduce the liquidity of our shares and ADSs and their attractiveness to investors.

Fluctuations in the exchange rate between the U.S. dollar and the euro may increase the risk of holding our ADSs and shares.

Our shares currently trade on Euronext Brussels in euros and our ADSs trade on the New York Stock Exchange (“NYSE”) in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the euro may result in temporary differences between the value of our ADSs and the value of our ordinary shares, which may result in heavy trading by investors seeking to exploit such differences. For example, uncertainty regarding the ability of eurozone governments to resolve the eurozone sovereign debt crisis, including the possibility of an exit by one or more eurozone countries from the single currency, could lead to euro exchange rates becoming highly volatile and unpredictable. Similarly, uncertainty over fiscal and budgetary challenges in the United States may negatively impact global economic conditions, and could trigger sharply increased trading and consequent market fluctuations, which would increase the volatility of, and may have an adverse effect upon, the price of our shares or ADSs.

In addition, as a result of fluctuations in the exchange rate between the U.S. dollar and the euro, the U.S. dollar equivalent of the proceeds that a holder of our ADSs would receive upon the sale in Belgium of any shares withdrawn from the American Depositary Receipt (“ADR”) depositary and the U.S. dollar equivalent of any cash dividends paid in euros on our shares represented by the ADSs could also decline.

Future equity issuances may dilute the holdings of current shareholders or ADS holders and could materially affect the market price of our shares or ADSs.

We may in the future decide to offer additional equity to raise capital or for other purposes. Any such additional offering could reduce the proportionate ownership and voting interests of holders of our shares and ADSs, as well as our earnings per share or ADS and net asset value per share or ADS, and any offerings by us or our main shareholders could have an adverse effect on the market price of our shares and ADSs.

Investors may not be able to participate in equity offerings, and ADS holders may not receive any value for rights that we may grant.

Our constitutional documents provide for preference rights to be granted to our existing shareholders unless such rights are disapplied by resolution of our shareholders’ meeting or the Board of Directors. Our shareholders’ meeting or Board of Directors may disapply such rights in future equity offerings. In addition, certain shareholders (including those in the United States, Australia, Canada or Japan) may not be entitled to exercise such rights even if they are not disapplied unless the rights and related shares are registered or qualified for sale under the relevant legislation or regulatory framework. As a result, there is the risk that investors may suffer dilution of their shareholding should they not be permitted to participate in preference right equity or other offerings that we may conduct in the future.

If rights are granted to our shareholders, but the ADR depositary is unable to sell rights corresponding to shares represented by ADSs that are not exercised by, or distributed to, ADS holders, or if the sale of such rights is not lawful or reasonably practicable, the ADR depositary will allow the rights to lapse, in which case ADS holders will receive no value for such rights.

 

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ADS holders may not be able to exercise their right to vote the shares underlying our ADSs.

Holders of ADSs may exercise voting rights with respect to the shares represented by our ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of a notice of any meeting of holders of our shares, the depositary will, if we so request, distribute to the ADS holders a notice which shall contain (i) such information as is contained in the notice of the meeting sent by us, (ii) a statement that the ADS holder as of the specified record date shall be entitled to instruct the ADR depositary as to the exercise of voting rights and (iii) a statement as to the manner in which instructions may be given by the holders.

Holders of ADSs may instruct the ADR depositary to vote the shares underlying their ADSs, but only if we ask the ADR depositary to ask for their instructions. Otherwise, ADS holders will not be able to exercise their right to vote, unless they withdraw our shares underlying the ADSs they hold. However, ADS holders may not know about the meeting far enough in advance to withdraw those shares. If we ask for the instructions of ADS holders, the depositary, upon timely notice from us, will notify ADS holders of the upcoming vote and arrange to deliver our voting materials to them. We cannot guarantee ADS holders that they will receive the voting materials in time to ensure that they can instruct the ADR depositary to vote their shares. In addition, the ADR depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that ADS holders may not be able to exercise their right to vote, and there may be nothing they can do if the shares underlying their ADSs are not voted as requested.

ADS holders may be subject to limitations on the transfer of their ADSs.

ADSs are transferable on the books of the depositary. However, the ADR depositary may refuse to deliver, transfer or register transfers of ADSs generally when the books of the ADR depositary are closed or if such action is deemed necessary or advisable by the ADR depositary or by us because of any requirement of law or of any government or governmental body or commission or under any provision of the deposit agreement. Moreover, the surrender of ADSs and withdrawal of our shares may be suspended subject to the payment of fees, taxes and similar charges or if we direct the ADR depositary at any time to cease new issuances and withdrawals of our shares during periods specified by us in connection with shareholders’ meetings, the payment of dividends or as otherwise reasonably necessary for compliance with any applicable laws or government regulations.

Shareholders may not enjoy under Belgian corporate law and our articles of association certain of the rights and protection generally afforded to shareholders of U.S. companies under U.S. federal and state laws and the NYSE rules.

We are a public limited liability company incorporated under the laws of Belgium. The rights provided to our shareholders under Belgian corporate law and our articles of association differ in certain respects from the rights that you would typically enjoy as a shareholder of a U.S. company under applicable U.S. federal and/or state laws. In general, the Belgian Corporate Governance Code is a code of best practice applying to listed companies on a non-binding basis. The Code applies a “comply or explain” approach, that is, companies may depart from the Code’s provisions if, as required by law, they give a reasoned explanation of the reasons for doing so.

We are relying on a provision in the NYSE Listed Company Manual that allows us to follow Belgian corporate law and the Belgian Corporate Governance Code with regard to certain aspects of corporate governance. This allows us to continue following certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on the NYSE. In particular, the NYSE rules require a majority of the directors of a listed U.S. company to be independent while, in Belgium, only three directors need be independent. Our board currently comprises three independent directors and eight non-independent directors. See “Item 6. Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors.” The NYSE rules further require that each of the nominating, compensation and audit committees of a listed U.S. company be comprised entirely of independent directors. However, the Belgian Corporate Governance Code recommends only that a majority of the directors on each of these committees meet the technical requirements for independence under Belgian corporate law. All voting members of the Audit Committee are independent under

 

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the NYSE rules and Rule 10A-3 of the Securities Exchange Act of 1934. Our Nomination Committee and Remuneration Committee have members who would not be considered independent under NYSE rules, and therefore our Nomination Committee and Remuneration Committee would not be in compliance with the NYSE Corporate Governance Standards for domestic issuers in respect of independence of these committees. However, both our Nomination Committee and Remuneration Committee are composed exclusively of non-executive directors who are independent of management and whom we consider to be free of any business or other relationship which could materially interfere with the exercise of their independent judgment. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—General—Information about Our Committees.”

Under Belgian corporate law, other than certain limited information that we must make public, our shareholders may not ask for an inspection of our corporate records, while under Delaware corporate law any shareholder, irrespective of the size of his or her shareholdings, may do so. Shareholders of a Belgian corporation are also unable to initiate a derivative action, a remedy typically available to shareholders of U.S. companies, in order to enforce a right of Anheuser-Busch InBev, in case we fail to enforce such right ourselves, other than in certain cases of director liability under limited circumstances. In addition, a majority of our shareholders may release a director from any claim of liability we may have, including if he or she has acted in bad faith or has breached his or her duty of loyalty, provided, in some cases, that the relevant acts were specifically mentioned in the convening notice to the shareholders’ meeting deliberating on the discharge. In contrast, most U.S. federal and state laws prohibit a company or its shareholders from releasing a director from liability altogether if he or she has acted in bad faith or has breached his or her duty of loyalty to the company. Finally, Belgian corporate law does not provide any form of appraisal rights in the case of a business combination.

For additional information on these and other aspects of Belgian corporate law and our articles of association, see “Item 10. Additional Information—B. Memorandum and Articles of Association and Other Share Information.” As a result of these differences between Belgian corporate law and our articles of association, on the one hand, and U.S. federal and state laws, on the other hand, in certain instances, you could receive less protection as a shareholder of our company than you would as a shareholder of a U.S. company.

As a “foreign private issuer” in the United States, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC.

As a “foreign private issuer,” we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions under Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Accordingly, there may be less publicly available information concerning us than there is for U.S. public companies.

It may be difficult for investors outside Belgium to serve process on or enforce foreign judgments against us.

We are a Belgian public limited liability company. Certain of the members of our Board of Directors and Executive Board of Management and certain of the persons named herein are non-residents of the United States. All or a substantial portion of the assets of such non-resident persons and certain of our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process upon such persons or on us or to enforce against them or us a judgment obtained in U.S. courts. Original actions or actions for the enforcement of judgments of U.S. courts relating to the civil liability provisions of the federal or state securities laws of the United States are not directly enforceable in Belgium. The United States and Belgium do not currently have a multilateral or bilateral treaty providing for reciprocal recognition and enforcement of judgments, other than arbitral awards, in civil and commercial matters. In order for a final judgment for the payment of money rendered by U.S. courts based on civil liability to produce any effect on Belgian soil, it is accordingly required that this judgment be recognized or be declared enforceable by a Belgian court pursuant to the relevant provisions of the 2004 Belgian Code of Private International Law. Recognition or enforcement does not imply a review of the merits of the case and is irrespective of any reciprocity requirement. A U.S. judgment will, however, not be recognized or declared enforceable in Belgium if it infringes upon one or more of the grounds for refusal which are exhaustively listed in

 

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Article 25 of the Belgian Code of Private International Law. In addition to recognition or enforcement, a judgment by a federal or state court in the United States against us may also serve as evidence in a similar action in a Belgian court if it meets the conditions required for the authenticity of judgments according to the law of the state where it was rendered.

Shareholders in jurisdictions with currencies other than the euro face additional investment risk from currency exchange rate fluctuations in connection with their holding of our shares.

Any future payments of dividends on shares will be denominated in euro. The U.S. dollar — or other currency — equivalent of any dividends paid on our shares or received in connection with any sale of our shares could be adversely affected by the depreciation of the euro against these other currencies.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. HISTORY AND DEVELOPMENT OF THE COMPANY

We are the world’s largest brewing company by volume, and one of the world’s four largest consumer products companies. As a consumer-centric, sales-driven company, we produce, market, distribute and sell a strong, balanced portfolio of well over 200 beer brands. These include global flagship brands Budweiser, Stella Artois and Beck’s; multi-country brands such as Leffe and Hoegaarden; and many “local champions” such as Bud Light, Michelob, Skol, Brahma, Antarctica, Quilmes, Jupiler, Hasseroder, Klinskoye, Sibirskaya Korona, Chernigivske, Harbin and Sedrin. We also produce and distribute soft drinks, particularly in Latin America.

Our brewing heritage and quality are rooted in brewing traditions that originate from the Den Hoorn brewery in Leuven, Belgium, dating back to 1366, and those of Anheuser & Co. brewery, established in 1852 in St. Louis, U.S.A. As of 31 December 2012, we employed approximately 118,000 people, with operations in 23 countries across the world. Given the breadth of our operations, we are organized along seven business zones or segments: North America, Latin America North, Latin America South, Western Europe, Central & Eastern Europe, Asia Pacific and Global Export & Holding Companies. The first six correspond to specific geographic regions in which our operations are based. As a result, we have a global footprint with a balanced exposure to developed and developing markets and production facilities spread across our six geographic regions.

We have significant brewing operations within the developed markets of North America, and the North America business zone accounted for 31.1% of our consolidated volumes for the year ended 31 December 2012. We also have significant exposure to fast-growing developing markets in Latin America North (which accounted for 31.3% of our consolidated volumes in the year ended 31 December 2012), Asia Pacific (which accounted for 14.3% of our consolidated volumes in the year ended 31 December 2012) and Latin America South (which accounted for 8.5% of our consolidated volumes in the year ended 31 December 2012).

Our 2012 volumes (beer and non-beer) were 403 million hectoliters and our revenue amounted to USD 39.8 billion.

On 29 June 2012, we announced our agreement to acquire the remaining stake in Grupo Modelo that we do not already own in cash in a transaction valued at USD 20.1 billion, subject to regulatory approvals in the United States and Mexico and other customary closing conditions. See details in “—History and Development of the Company” below.

Registration and Main Corporate Details

Anheuser-Busch InBev SA/NV was incorporated on 2 August 1977 for an unlimited duration under the laws of Belgium under the original name BEMES. It has the legal form of a public limited liability company (naamloze vennootschap/société anonyme). Its registered office is located at Grand-Place/Grote Markt 1, 1000 Brussels, Belgium, and it is registered with the Register of Legal Entities of Brussels under the number 0417.497.106. Our global headquarters are located at Brouwerijplein 1, 3000 Leuven, Belgium (tel.: +32 16 27 61 11). Our agent in the United States is Anheuser-Busch InBev Services LLC, 250 Park Avenue, 2nd Floor, New York, NY 10177.

 

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We are a publicly traded company, listed on Euronext Brussels under the symbol ABI. ADSs representing rights to receive our ordinary shares trade on the NYSE under the symbol BUD.

History and Development of the Company

Our roots can be traced back to Den Hoorn in Leuven, which began making beer in 1366. In 1717 Sébastien Artois, master brewer of Den Hoorn, took over the brewery and renamed it Sébastien Artois.

In 1987, the two largest breweries in Belgium merged: Brouwerijen Artois NV, located in Leuven, and Brasserie Piedboeuf SA, founded in 1853 and located in Jupille, resulting in the formation of Interbrew SA (“Interbrew”). Following this merger, Interbrew acquired a number of local breweries in Belgium. By 1991, a second phase of targeted external growth began outside Belgium’s borders. The first transaction in this phase took place in Hungary with the acquisition of Borsodi Sorgyar in 1991, followed in 1995 by the acquisition of John Labatt Ltd. in Canada and then in 1999 by a joint venture with SUN Brewing in Russia and Ukraine.

Interbrew operated as a family-owned business until December 2000, the time of its initial public offering on Euronext Brussels.

The period since the listing of Interbrew on Euronext Brussels has been marked by increasing geographical diversification. In 2000, Interbrew acquired Bass Brewers and Whitbread Beer Company in the United Kingdom, and in 2001 it established itself in Germany with the acquisition of Brauerei Diebels GmbH & Co KG. This was followed by the acquisition in 2002 of Brauerei Beck GmbH & Co KG. and of the Gilde Group. In 2002, Interbrew strengthened its position in China by acquiring stakes in the K.K. Brewery and the Zhujiang Brewery. In 2004, Interbrew acquired Spaten-Franziskaner Bräu KGaA.

2004 marked a significant event in our history: the combination of Interbrew and Ambev, a Brazilian company listed (and currently still listed) on the New York Stock Exchange and on the São Paulo Stock Exchange, resulting in the creation of InBev. At the time of the combination, Ambev was the world’s fifth largest brewer, with a significant presence in the Brazilian market, as well as strong positions throughout Latin America. As of 31 December 2012, we had a 74.05% voting interest in Ambev, and a 61.87% economic interest.

In 2003, we also acquired, through Ambev, our initial 50.64% interest in Quilmes Industrial S.A. (“Quinsa”), thereby strengthening our foothold in Argentina, Bolivia, Chile, Paraguay and Uruguay. Following a series of transactions and a restructuring in 2010, Ambev now owns 100% of the total share capital of the holding company with operating subsidiaries in Argentina and other South American countries. The Ambev and Quinsa transactions allowed InBev to position itself in the Latin American beer market and also to gain a presence in the soft drinks market (as Ambev is one of PepsiCo’s largest independent bottlers in the world).

In 2004, InBev acquired the China brewery activities of the Lion Group.

In 2004, InBev and Sun Trade (International) Ltd. (“Sun Trade”), the controlling shareholders of Sun Interbrew Ltd. reached an agreement whereby InBev acquired Sun Trade’s voting and economic interests in Sun Interbrew Plc (then known as “Sun Interbrew Ltd.”). Furthermore, in January 2005, InBev reached an agreement with Alfa-Eco, whereby InBev acquired all of Alfa-Eco’s holding of voting and non-voting shares in Sun Interbrew Ltd. On completion of the above transaction, and taking into consideration market purchases performed in 2005, InBev owned a 99.8% economic interest in Sun Interbrew Ltd.

In 2006, InBev acquired Fujian Sedrin Brewery Co. Ltd., the largest brewer in the Fujian province of China, making InBev a major brewer in China, the world’s largest beer market by volume. The acquisition of the Sedrin brand also allowed InBev to strengthen its Chinese products portfolio.

 

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In May 2007, InBev announced a long-term joint venture agreement with the RKJ group, a leading beverage group operating in India. As of 1 April 2009, the joint venture vehicle began selling, marketing and distributing Budweiser in India. We expect that the venture will build a meaningful presence in India over time.

In March 2008, InBev reached an agreement with its Chinese partner in the InBev Shiliang (Zhejiang) Brewery to increase InBev’s stake in this business to 100%. The deal was approved by the relevant authorities in June 2008. This step enabled InBev to strengthen its position in the Zhejiang province in China.

On 13 July 2008, InBev and Anheuser-Busch announced their agreement to combine the two companies by way of an offer by InBev of USD 70 per share in cash for all outstanding shares of Anheuser-Busch. The total amount of funds necessary to consummate the 2008 Anheuser-Busch acquisition was approximately USD 54.8 billion, including the payment of USD 52.5 billion to shareholders of Anheuser-Busch, refinancing certain Anheuser-Busch indebtedness, payment of all transaction charges, fees and expenses and the amount of fees and expenses and accrued but unpaid interest to be paid on Anheuser-Busch’s outstanding indebtedness. InBev shareholders approved the 2008 Anheuser-Busch acquisition at InBev’s extraordinary shareholders meeting on 29 September 2008 and, on 12 November 2008, a majority of Anheuser-Busch shares voted to approve the transaction at a special shareholders meeting of Anheuser-Busch. The 2008 Anheuser-Busch acquisition was completed, and the certificate of merger filed, on 18 November 2008. As a result of the merger, we changed our name to Anheuser-Busch InBev SA/NV.

In November 2008, InBev agreed to divest the assets of InBev USA LLC as a condition for clearance from the U.S. Department of Justice for its acquisition of Anheuser-Busch. On 13 March 2009, we announced that we had completed the sale of the assets of InBev USA LLC (d/b/a Labatt USA) to an affiliate of KPS Capital Partners, LP. Under the terms of the agreement announced on 23 February 2009, KPS Capital Partners, LP acquired the assets of Labatt USA and an exclusive license, granted by Labatt, (i) to brew Labatt branded beer in the United States or Canada solely for sale for consumption in the United States; (ii) to distribute, market and sell Labatt branded beer for consumption in the United States; and (iii) to use the relevant trademarks and intellectual property to do so. On 11 August 2009, the U.S. District Court for the District of Columbia gave final approval to the settlement proposed by the U.S. Department of Justice in connection with our acquisition.

Beginning in 2003, Anheuser-Busch participated in a strategic alliance with Tsingtao, one of the largest brewers in China and producer of the Tsingtao brand. Through the 2008 Anheuser-Busch acquisition, we acquired Anheuser-Busch’s 27% economic ownership interest and a 20% voting interest in Tsingtao. On 30 April 2009, we completed the sale of a 19.9% minority stake in Tsingtao to Asahi Breweries, Ltd. On 8 May 2009, we announced that we had entered into an agreement with a private investor, Mr. Chen Fashu, to sell our remaining 7% stake in Tsingtao. On 5 June 2009, we announced that the transaction had closed.

On 24 July 2009, we completed the sale of our South Korean subsidiary, Oriental Brewery, to an affiliate of Kohlberg Kravis Roberts & Co. L.P. for USD 1.8 billion, which resulted in USD 1.5 billion of cash proceeds and receipt of a USD 0.3 billion note receivable at closing. On 12 March 2010, the note receivable was sold for USD 0.3 billion in cash. Under the terms of the agreement, we will continue our relationship with Oriental Brewery through granting Oriental Brewery exclusive licenses to distribute certain brands in South Korea including Budweiser, Bud Ice and Hoegaarden, and by having an ongoing interest in Oriental Brewery through an agreed earn-out. In addition, we have the right, but not the obligation, to reacquire Oriental Brewery five years after the closing of the transaction based on predetermined financial terms.

On 29 September 2009, we completed the sale of our Tennent’s Lager brand and associated trading assets in Scotland, Northern Ireland and the Republic of Ireland (part of InBev UK Limited) to C&C Group plc for a total enterprise value of GBP 180 million. Included in the sale were the Glasgow Wellpark Brewery in Scotland, where Tennent’s Lager is brewed, rights to the Tennent’s Lager brand itself, Tennent’s Ales and assets located in Scotland, Northern Ireland and the Republic of Ireland. As part of the agreement, we appointed C&C Group as distributor of certain of our brands in Scotland, Northern Ireland and the Republic of Ireland, and C&C Group granted us a license to use the Tennent’s Super and Tennent’s Pilsner brands in certain jurisdictions.

On 1 October 2009, we completed the sale of four metal beverage can and lid manufacturing plants from our U.S. metal packaging subsidiary, Metal Container Corporation, to Ball Corporation for approximately USD 577

 

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million. The divested plants were primarily responsible for the production of cans for soft drinks. In connection with this transaction, Ball Corporation entered into a long-term supply agreement to continue to supply us with metal beverage cans and lids from the divested plants and committed, as part of the acquisition agreement, to offer employment to each active employee of the plants.

On 1 December 2009, we completed the sale of our indirect wholly-owned subsidiary, Busch Entertainment Corporation, to an entity established by Blackstone Capital Partners V L.P. for up to USD 2.7 billion. The purchase price was comprised of a cash payment of USD 2.3 billion and a right to participate in Blackstone Capital Partners’ return on its initial investment, which is capped at USD 400 million.

On 2 December 2009, we completed the sale of our Central European operations to CVC Capital Partners for an enterprise value of USD 2.2 billion, of which USD 1.6 billion was cash, USD 448 million was received as an unsecured deferred payment obligation with a six-year maturity and USD 165 million represents the estimated value to minorities. Under the terms of the agreement, our operations in Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia were sold. On 15 July 2011, the deferred payment obligation, including accrued interest, was sold for USD 0.5 billion in cash. At the time of the 2009 sale to CVC Capital Partners, we also received additional rights under a Contingent Value Right Agreement to a future payment that was contingent on CVC’s return on its initial investments. On 15 June 2012, CVC sold the business to Molson Coors Brewing Company for an aggregate consideration of EUR 2.65 billion. We believe that as a result of the sale to Molson, the return earned by CVC Capital Partners triggered our right to a further payment under the CVR Agreement. On 25 October 2012, CVC Capital Partners issued proceedings against us in the English Commercial Court in relation to the CVR Agreement and sought a declaration that the return it received following the sale to Molson did not trigger our right to payment. We served our defense and counterclaim on 19 December 2012. The amount we are able to recover will depend on discovery and calculation criteria to be explored at trial.

By the end of 2009, we had completed our formal divestiture program resulting from the 2008 Anheuser-Busch acquisition, exceeding our target of USD 7.0 billion, with approximately USD 9.4 billion of asset disposals of which approximately USD 7.4 billion were realized cash proceeds.

On 20 October 2010, Ambev and Cerveceria Regional S.A. closed a transaction pursuant to which they combined their businesses in Venezuela, with Regional owning an 85% interest and Ambev owning the remaining 15% in the new company, which may be increased to 20% over the next four years.

On 28 February 2011, we closed a transaction with Dalian Daxue Group Co., Ltd and Kirin (China) Investment Co., Ltd to acquire a 100% equity interest in Liaoning Dalian Daxue Brewery Co., Ltd., which is among the top three breweries in Liaoning province. Daxue brews, markets and distributes major beer brands including “Daxue”, “Xiao Bang” and “Da Bang” which are popular beer brands in the south of Liaoning province, with a total sales volume of over two million hectoliters in 2010.

On 1 May 2011, we acquired Fulton Street Brewery LLC, also known as Goose Island, a Midwest craft brewer in the United States. Goose Island brews ales, such as 312 Urban Wheat Ale, Honkers Ale, India Pale Ale, Matilda, Pere Jacques, Sofie and a wide variety of seasonal draft only and barrel-aged releases, including Bourbon County Stout, the original bourbon barrel-aged beer.

On 31 May 2011, we closed a transaction with Henan Weixue Beer Group Co. Ltd to acquire its brands (Weixue and JiGongshan), assets and business, including its Xinyang brewery, Zhengzhou brewery and Gushi Brewery.

Effective as of 1 October 2011, our subsidiary Anheuser-Busch Companies, Inc., a Delaware corporation, converted to Anheuser-Busch Companies, LLC, pursuant to Section 266 of the Delaware General Corporation Law and Section 18-214 of the Delaware Limited Liability Company Act.

On 30 December 2011, we acquired Premium Beers of Oklahoma in Oklahoma City, United States, a major wholesaler in that territory.

 

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On 11 May 2012, Ambev and E. León Jimenes S.A. (“ELJ”), which owned 83.5% of Cervecería Nacional Dominicana S.A. (“CND”), entered into a transaction to form a strategic alliance to create the leading beverage company in the Caribbean through the combination of their businesses in the region. Ambev’s initial indirect interest in CND was acquired through a cash payment of USD 1.0 billion and the contribution of Ambev Dominicana. Separately, Ambev Brazil acquired an additional stake in CND of 9.3%, which was owned by Heineken N.V., for USD 237 million at the closing date. During the second half of 2012, as part of the same transaction, Ambev acquired an additional 0.99% stake from other minority holders, through a cash payment of USD 36 million. As of 31 December 2012, Ambev owns a total indirect interest of 52.0% in CND.

On 29 June 2012, we announced an agreement with Grupo Modelo agreeing to acquire the remaining stake in Grupo Modelo that we do not already own for USD 9.15 per share in cash in a transaction valued at USD 20.1 billion. Completion of the combination with Grupo Modelo has been conditioned upon, among other things, antitrust approval from U.S. and Mexican authorities. In a related transaction, it was announced on 29 June 2012 that Grupo Modelo would sell its existing 50% stake in Crown Imports, the joint venture that imports and markets Grupo Modelo’s brands in the United States, to Constellation for USD 1.85 billion, giving Constellation 100% ownership and control. In February 2013, we announced a revised agreement with Constellation valued at USD 2.9 billion, which has been conditioned upon, among other things, any antitrust clearance from U.S. and Mexican authorities that may be required. For further information, see “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings—Anheuser-Busch InBev SA/NV—Grupo Modelo Transaction” and “Item 8. Financial Information—B. Significant Changes.”

On 21 September 2012, we entered into an agreement with Dragon Group to acquire its stake in Keytop group for an aggregate purchase price anticipated to be approximately USD 400 million. The Keytop group owns majority participations in four breweries located in the Jiangxi, Henan and Shandong provinces in China. This acquisition is expected to support our growth strategy in China through the addition of approximately nine million hectoliters in total production capacity, and the closing of the acquisition is subject to customary regulatory approvals.

For further details of our principal capital expenditures and divestitures, see “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Investments and Disposals.”

B. BUSINESS OVERVIEW

 

1. STRENGTHS AND STRATEGY

Strengths

We believe that the following key strengths will drive the realization of our strategic goals and reinforce our competitive position in the marketplace:

Global platform with strong market positions in key markets

We are the world’s largest brewing company and believe we hold leading positions in the majority of our key markets. We have strong market positions based on strong brands and the benefits of scale. We believe this positions us well to deploy significant resources in sales and marketing to build and maintain our brands, achieve attractive sourcing terms, generate cost savings through centralization and operate under a lean cost structure. Our global reach provides us with a strong platform to grow our global and multi-country brands, while developing local brands tailored to regional tastes. We benefit from a global distribution network which, depending on the location, is either owned by us or is based on strong partnerships with wholesalers and local distributors.

 

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We believe that in 2012 the approximate industry volumes and our approximate market shares by volume in the world’s six largest beer markets by volume are as follows:

 

     Total
industry
volume
(million
hectoliters)(1)
     Our
market
share
(%)(1)
 

China

     429.0         13.4   

United States

     238.6         47.6   

Brazil

     126.5         68.5   

Russia

     85.6         15.6   

Germany

     84.1         9.4   

United Kingdom

     44.2         17.8   

 

Note:

 

(1) Total industry volume figures are based on total beer industry sales or consumption volumes in the relevant market, except for the China volume figures, which are based on total industry production volumes, and both Russia and Brazil volume figures, which are based on retail audits. Sources: China—Seema International Limited; United States—Beer Institute and SymphonyIRI; Brazil—AC Nielsen Audit Total Trade; Russia—AC Nielsen Audit Off Trade; Germany—German Brewers Association (GBA); United Kingdom—British Beer and Pub Association.

We have been the global leader in the brewing industry by volume for the past three years. Measured by EBITDA, as defined, for 2012, we are ranked among the top four consumer products companies worldwide. We have significant positions in the United States and Brazil, two of the most stable and profitable beer markets in the world, and in China, the world’s largest beer market by volume. Management believes that it can realize significant upside potential by continuing to roll out Anheuser-Busch InBev’s brands using our global distribution platform.

Geographic diversification

Our geographically diversified platform balances the growth opportunities of developing markets with the stability and strength of developed markets. With significant operations in both the Southern and Northern Hemispheres, we benefit from a natural hedge against market, economic and seasonal volatility. Developed markets represented approximately 51.0% of our 2012 operating profit and developing markets represented 49.0% of our 2012 operating profit.

Strong brand portfolio with global, multi-country and local brands

Our strong brand portfolio addresses a broad range of demand for different types of beer and offers a range of international and local brands in our Zones in three brand categories:

 

   

Global brands: Capitalizing on common values and experiences which appeal to consumers across borders, our global brands of Budweiser, Stella Artois and Beck’s have the strength to be marketed worldwide;

 

   

Multi-country brands: With a strong consumer base in their home market, our multi-country brands of Leffe and Hoegaarden bring international flavor to selected markets, connecting with consumers across continents; and

 

   

Local brands: Offering locally popular tastes, local brands such as Bud Light, Michelob, Skol, Brahma, Antarctica, Quilmes, Jupiler, Hasseroder, Klinskoye, Sibirskaya Korona, Chernigivske, Harbin and Sedrin connect particularly well with consumers in their home markets.

Our strategy is to focus our attention on the core to premium brands. As a result, we undertake clear brand choices and seek to invest in those brands that build deep connections with consumers and meet their needs. We seek to replicate our successful brand initiatives and best practices across geographic markets.

 

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Strong innovation and brand development capabilities

As a consumer-centric, sales-driven company, we continue to strive to understand the values, lifestyles and preferences of both today’s and tomorrow’s consumers, building fresh appeal and competitive advantage through innovative products and services tailored to meet those needs. We believe that consumer demand can be best anticipated by a close relationship between our innovation and insight teams in which current and expected market trends trigger and drive research processes. Successful examples of recently developed products include Beck’s Sapphire, Bud Light Platinum, Bud Light Lime Lime-A-Rita (United States), Skol 360 and Antarctica Sub-Zero (Brazil), Quilmes “Night” (Argentina), Stella Artois Cidre (United Kingdom), Leffe Royale (Belgium), Franziskaner Royal (Germany), Chernigivske Chezz (Ukraine) and Harbin Ice GD (China).

We believe that our excellence programs, including our “World Class Commercial Program,” are one of our competitive advantages. As part of our consumer-centric, sales-driven approach, we have established an integrated marketing and sales execution program, the “World Class Commercial Program,” which is designed to continuously improve the quality of our sales and marketing capabilities and processes by ensuring they are understood and consistently followed.

Strict financial discipline

World-class efficiency has been, and remains, a long-term objective across all lines of business and markets as well as under all economic circumstances. Avoiding unnecessary costs is a core competency within our culture. We distinguish between “non-working” and “working” expenses, the latter having a direct impact on sales volumes or revenues. We currently have a greater focus on reducing non-working expenses, given that they are incurred independently from sales volumes or revenues and without immediate benefit to customers or consumers. By maintaining strict financial discipline and turning non-working expenses into working expenses, our “Cost—Connect—Win” model aims to fund sustainable sales and marketing efforts throughout an economic cycle in order to connect with our customers and win by achieving long-term, profitable growth. We have a number of group-wide cost efficiency programs in place, including:

 

   

Zero-Based Budgeting or ZBB: Under ZBB, budget decisions are unrelated to the previous year’s levels of expenditure and require justification starting from a zero base each year. Employee compensation is closely tied to delivering on zero-based budgets. ZBB has been successfully introduced into all of our major markets, as well as our global headquarters.

 

   

Voyager Plant Optimization or VPO: VPO aims to bring greater efficiency and standardization to our brewing operations and to generate cost savings, while at the same time improving quality, safety and the environment. VPO also entails assessment of our procurement processes to maximize purchasing power and to help us achieve the best results when purchasing a range of goods and services. Behavioral change towards greater cost awareness is at the core of this program, and comprehensive training modules have been established to assist our employees with the implementation of VPO in their daily routines.

In addition, we have set up business service centers across our business zones which focus on transactional and support activities within our group. The centers help standardize working practices and identify and disseminate best practices.

Experienced management team with a strong track record of delivering synergies through business combinations

During the last two decades, our management (or the management of our predecessor companies) has executed a number of merger and acquisition transactions of varying sizes, with acquired businesses being successfully integrated into our operations, realizing significant synergies. Notable examples include:

 

   

the creation of Ambev in 2000 through the combination of Brahma and Antarctica. Between 2000 and 2004, operating income after financial income and financial expense increased from 331.7 million reais to 2,163.3 million reais;

 

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the acquisition of Beck’s in 2002, which today is the number one German beer in the world, with distribution in over 80 countries;

 

   

the combination of Ambev and Quilmes in 2003, where Quilmes’ operating profit increased substantially from 2003 to 2008;

 

   

Ambev gaining control of Labatt in 2004, where profitability increased by approximately 10% within the first three years;

 

   

the creation of InBev in 2004, through the combination of Ambev and Interbrew, where operating profit margin has increased from 11.9% on a standalone basis in 2003 to 22.7% in 2008; and

 

   

our successful merger and integration of the Anheuser-Busch and InBev businesses starting in 2008.

Our strong track record also extends to successfully integrating portfolios of brands such as Spaten-Löwenbräu in 2003 and leveraging cross-selling potential and distribution networks such as the distribution of Stella Artois through Ambev’s channels in Latin America.

If the proposed combination with Grupo Modelo closes as expected, we believe that the combination should yield annual synergies of approximately USD 1 billion. These synergies are expected to be phased in over the first four years following the closing of the transaction and are expected to come from economies of scale through combined purchasing opportunities and the sharing of best practices around the world.

Strategy

Our strategy is based on our dream to be “the Best Beer Company in a Better World”

The guiding principle for our strategy is a dream to be “the Best Beer Company in a Better World” by uniting strong brand development, sales execution and best-in-class efficiency with the role of a responsible global corporate citizen. The “Best Beer Company” element relates primarily to our aim of maintaining highly profitable operations in all markets with leading brands and market positions where we operate. The term “Better World” articulates our belief that all stakeholders will benefit from good corporate citizenship, finding its expression in our work to promote responsible enjoyment of our products, protecting the environment and giving back to the communities in which we operate. We discourage consumers from excessive or underage drinking through marketing campaigns aimed at moderate and legal consumption, as outlined in our Commercial Communications Code.

A clear and consistent business model is fundamental to our strategy

Our business model is focused on organic growth. We aim to create sustainable value for our shareholders through revenue growth ahead of the industry and strong cost management, leading to margin enhancement. The business model is supported by strict financial discipline in the generation and use of cash, including selective external growth opportunities, and is underpinned by our powerful Dream-People-Culture platform.

First, we aim to grow our revenue ahead of the benchmark of industry volume growth plus inflation, on a country by country basis.

 

   

We aim to do this through strong consumer preference for our brands, continued premiumization of our brand portfolio, and sales and marketing investment.

 

   

We seek to win new consumers and secure their long term loyalty.

 

   

In a rapidly changing marketplace, we focus on understanding consumer needs and aim to achieve high levels of connection with our brands by delivering on those needs.

 

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We intend to further strengthen brand innovation in order to stay ahead of market trends and maintain consumer appeal.

 

   

In partnership with distributors, off-trade retailers and on-trade points of sale, we seek to build connection with our consumers at the point-of-sale by further improving the quality of the consumer’s shopping experience and consumption occasions.

 

   

We have established a number of consumer-dedicated activities, such as specific outdoor events, which are designed to provide consumers with a brand experience that exceeds the pure enjoyment of beer.

 

   

We leverage social media platforms to reach out to existing and potential consumers. Social media is becoming increasingly important to the development of our brands.

Second, we strive to continuously improve efficiency by unlocking the potential for variable and fixed cost savings.

 

   

We aim to maintain long-term cost increases at below inflation, benefiting from the application of cost efficiency programs such as ZBB and VPO, internal and external benchmarking, as well as from our scale.

 

   

We aim to leverage the Global Procurement Center, located in Belgium, to generate further cost synergies and leverage supplier relationships to bring new ideas and innovation to our business.

 

   

Our management believes cost savings are not yet fully realized across all geographies, and will continue to share best practices across all functions, as well as benchmark performance externally against other leading companies.

 

   

A combination of revenue growth ahead of the industry and inflation and cost increases below inflation should enable us to deliver on our commitment to long term margin enhancement.

Finally, we will continue to exercise strict financial discipline in the generation and use of cash.

 

   

We have consistently demonstrated our ability to generate significant operating cash flow from growth in our operating activities, tight working capital management and a disciplined approach to capital expenditure.

 

   

Since our combination with Anheuser-Busch in 2008, we focused on deleveraging the company and achieved our optimal capital structure by the end of 2012, in line with our commitment.

 

   

In the absence of appropriate external growth opportunities, surplus cash flow should be returned to shareholders with dividends being a more predictable growing flow, balanced with share buy-back programs, while maintaining an optimal capital structure.

While organic growth is the focus for our management, we will continue to drive external growth as and when appropriate opportunities arise.

 

   

Our management has repeatedly demonstrated its ability to successfully integrate acquisitions and drive revenue growth ahead of our competitors. External growth will remain an opportunity in the future.

 

   

The combination between Anheuser-Busch and InBev has provided us with global scale and a global footprint, and we see significant opportunities to continue to internationalize Anheuser-Busch’s key brands.

 

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The combination with Grupo Modelo is also expected to create a significant growth opportunity worldwide from combining two leading brand portfolios and distribution networks. It would bring together five of the top six and seven of the top ten most valuable beer brands in the world, each with distinct brand imagery and consumer positioning. The combined company would unite Grupo Modelo’s number one position in Mexico, the world’s fourth-largest profit pool for beer companies, with our leading global position, further increasing our exposure to fast-growing developing markets. There will be meaningful opportunities to grow Corona globally outside the United States given our established platform for distribution worldwide and the resources at its disposal as the leading global brewer.

General factors facilitate the implementation of our corporate strategy

We have identified certain key tools which we believe will enable us to implement our corporate strategy, including:

 

   

a disciplined approach to innovation at all levels, aimed at revitalizing the beer category and increasing our share of value and our market share;

 

   

a strong company culture, investing in people and maintaining a strong target-related compensation structure;

 

   

best-in-class financial discipline spread throughout the whole organization; and

 

   

creating a Better World by supporting social responsibility initiatives connected to our business objectives and our consumers.

 

2. PRINCIPAL ACTIVITIES AND PRODUCTS

We produce, market, distribute and sell a strong, balanced portfolio of well over 200 beer brands and have a global footprint with a balanced exposure to mature and emerging markets and production facilities spread across our six geographic regions.

We are a consumer-centric, sales-driven company. Consequently, our production facilities and other assets are predominantly located in the same geographical areas as our customers. We set up local production when we believe that there is substantial potential for local sales that cannot be addressed in a cost efficient manner through exports or third-party distribution into the relevant country. Local production also helps us to reduce, although it does not eliminate, our exposure to currency movements.

The table below sets out the main brands we sell in the markets listed below.

 

Market

  

Global brands

  

Multi-country brands

  

Local brands

North America         
Canada   

Beck’s,

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Alexander Keith’s, Bass, Bud Light, Kokanee, Labatt, Lakeport, Lucky, Oland
Mexico (Grupo Modelo)    Budweiser       Beer: Corona, Bud Light
United States   

Beck’s,

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Bass, Bud Light, Busch, Goose Island, Michelob, Natural Light, Shock Top
Latin America         
Argentina   

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Andes, Brahma, Norte, Patagonia, Quilmes
Soft drinks: 7UP, Pepsi, H2OH!
Bolivia    Stella Artois      

Beer: Ducal, Paceña, Taquiña

Soft drinks: 7UP, Pepsi

Brazil   

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Antarctica, Bohemia, Brahma, Skol
Soft drinks: Guaraná Antarctica, Pepsi

 

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Market

  

Global brands

  

Multi-country brands

  

Local brands

Chile   

Budweiser,

Stella Artois

      Beer: Baltica, Becker, Brahma
Dominican Republic    Budweiser      

Beer: Brahma, Presidente

Soft drinks: Pepsi, 7UP, Red Rock

Ecuador    Budweiser       Beer: Brahma
Guatemala    Budweiser       Beer: Brahva
Paraguay   

Budweiser,

Stella Artois

      Beer: Baviera, Brahma, Ouro Fino, Pilsen
Peru    Stella Artois      

Beer: Brahma, Zenda

Soft drinks: Concordia, Pepsi, 7UP, Triple Kola

Uruguay   

Budweiser,

Stella Artois

     

Beer: Pilsen, Norteña, Patricia

Soft drinks: 7UP, Pepsi, H20h

Western Europe         
Belgium   

Beck’s, Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Belle-Vue, Jupiler, Vieux Temps
France   

Beck’s,

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Belle-Vue, Boomerang, Loburg
Germany    Beck’s       Beer: Diebels, Franziskaner, Haake-Beck, Hasseröder, Löwenbräu, Spaten, Gilde
Luxembourg   

Beck’s,

Stella Artois

   Hoegaarden, Leffe    Beer: Diekirch, Jupiler, Mousel
Netherlands   

Beck’s,

Stella Artois

   Hoegaarden, Leffe    Beer: Dommelsch, Jupiler, Hertog Jan
United Kingdom   

Beck’s,

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Bass, Boddingtons, Brahma, Whitbread, Mackeson
Italy   

Beck’s,

Budweiser,

Stella Artois

   Hoegaarden, Leffe    Beer: Franziskaner, Löwenbräu, Spaten
Central & Eastern Europe         
Russia    Bud, Stella Artois    Hoegaarden, Leffe    Beer: Bagbier, Brahma, Klinskoye, Löwenbräu, Sibirskaya Korona, T, Tolstiak
Ukraine   

Beck’s,

Bud, Stella Artois

   Hoegaarden, Leffe    Beer: Chernigivske, Rogan, Yantar
Asia Pacific         
China    Beck’s, Budweiser, Stella Artois    Hoegaarden, Leffe    Beer: Double Deer, Harbin, Jinling, Jinlongquan, KK, Sedrin, Shiliang

The table below sets out our sales broken down by business zone for the periods shown:

 

     2012     2011     2010  

Market

   Revenue(1)
(USD  million)
     Revenue
(% of  total)
    Revenue(1)
(USD  million)
     Revenue
(% of  total)
    Revenue(1)
(USD  million)
     Revenue
(% of  total)
 

North America

     16,028         40.3     15,304         39.2     15,296         42.1

Latin America North

     11,455         28.8     11,524         29.5     10,018         27.6

Latin America South

     3,023         7.6     2,704         6.9     2,182         6.0

Western Europe

     3,625         9.1     3,945         10.2     3,937         10.8

Central & Eastern Europe

     1,668         4.2     1,755         4.5     1,619         4.5

Asia Pacific

     2,690         6.8     2,317         5.9     1,767         4.9

Global Export & Holding Companies

     1,270         3.2     1,496         3.8     1,479         4.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     39,758         100     39,046         100     36,297         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Notes:

 

(1) Gross revenue (turnover) less excise taxes and discounts. In many jurisdictions, excise taxes make up a large proportion of the cost of beer charged to our customers.

 

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For a discussion of changes in revenue, see “Item 5. Operating and Financial Review—E. Results of Operations—Year Ended 31 December 2012 Compared to the Year Ended 31 December 2011—Revenue” and “Item 5. Operating and Financial Review—E. Results of Operations—Year Ended 31 December 2011 Compared to the Year Ended 31 December 2010—Revenue.”

The table below sets out the breakdown between our beer and non-beer volumes and revenue. Based on our actual historical financial information for these periods, our non-beer activities accounted for 11.9% of consolidated volumes in 2012, 11.5% of consolidated volumes in 2011, and 11.5% of consolidated volumes in 2010. In terms of revenue, our non-beer activities generated 9.7% of consolidated revenue in 2012, compared to 11.0% in 2011 and 10.1% in 2010 based on our actual historical financial information for these periods.

 

     Beer      Non-Beer(3)      Consolidated  
     2012      2011      2010      2012      2011      2010      2012      2011      2010  

Volume(1) (million hectoliters)

     355         353         353         48         46         46         403         399         399   

Revenue(2) (USD million)

     35,914         34,747         32,616         3,844         4,299         3,681         39,758         39,046         36,297   

 

Notes:

 

(1) Volumes include not only brands that we own or license, but also third-party brands that we brew or otherwise produce as a subcontractor and third-party products that we sell through our distribution network, particularly in Western Europe. Our pro-rata shares of volumes in Grupo Modelo are not included in this table.
(2) Gross revenue (turnover) less excise taxes and discounts. In many jurisdictions, excise taxes make up a large proportion of the cost of beer charged to our customers.
(3) The non-beer category includes soft drinks and certain other beverages, such as Stella Artois Cidre.

Beer

We manage a portfolio of well over 200 brands of beer. In terms of distribution, our beer portfolio is divided into global, multi-country and local brands. Our brands are our foundation and the cornerstone of our relationships with consumers. We invest in our brands to create a long-term, sustainable and competitive advantage, by meeting the various needs and expectations of consumers around the world and by developing leading brand positions around the globe.

On the basis of quality and price, beer can be differentiated into the following categories:

 

   

Premium brands;

 

   

Core brands; and

 

   

Value, discount or sub-premium brands.

Our brands are situated across all these categories. For instance, a global brand like Stella Artois generally targets the premium category across the globe, while a local brand like Natural Light targets the value category in the United States. In the United States, Bud Light targets the premium light or mainstream category, which is equivalent to the core category in other markets. We have a particular focus on core to premium categories, but will be present in the value segment if the market structure in a particular country necessitates.

We make clear category choices and, within those categories, clear brand choices. Examples of these choices include the focus on the core Quilmes brand in Argentina, on the core category in Brazil, on the light and premium categories in Canada, on core and premium brands in Russia and on the international premium, domestic premium and core categories in China. The majority of our resources are directed to our “focus brands,” those brands that we believe have the greatest growth potential in their relevant consumer categories. In 2012, our focus brands accounted for 69% of our volume.

 

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From the early 2000s through 2007, we observed a trend where the premium category drove growth in the beer industry. Based on this trend, we established a strategy to select focus brands in certain markets (such as our North America, Western Europe and Central & Eastern Europe business zones) within the core and premium categories. Consumer preferences can change over time, especially in the face of challenging economic circumstances, such as those faced in many markets between 2008 and 2012. However, we believe we are well placed to deal with short-term trend changes from a portfolio perspective, particularly in key countries like the United States, while continuing our long-standing strategy of accelerating growth in the core and premium beer categories. Our own United States business saw positive mix change in 2012. We aim to continue our strategy of focusing on selected brands, which seeks to address consumers’ desire to trade up from value to core and from core to premium. Another trend is the growing need for consumer choice. Again, with our strong brand portfolio and best practice sharing, we believe we are well-placed to take advantage of this opportunity.

Our portfolio includes three global beers with worldwide distribution:

 

   

Budweiser, which we consider to be the United States’ first truly national beer brand, had an 8% share of the U.S. market (based on Beer Marketer’s Insights estimates). Budweiser is our number one global flagship brand with global volumes returning to growth in 2010 after many years of decline. This trend continued in 2011 and 2012, due in part to the August 2011 launch of Budweiser in Brazil and the 2012 launch of Bud in Ukraine. Global Budweiser volumes grew 6.3% in 2012, and the brand accounted for 11% of our total company volumes. Budweiser sold outside the United States now represents over 51% of global Budweiser volume, driven by strong growth in China, a sharp volume increase in Bud sales in Russia, and gains in the premium segment in Brazil. Budweiser has confirmed its sponsorship of the 2014, 2018 and 2022 FIFA World CupsTM. Budweiser is also a sponsor of the FA Cup in the United Kingdom for the three years starting in 2012.

 

   

Stella Artois, the number one Belgian beer in the world according to Plato Logic Limited. Stella currently is distributed in over 70 countries worldwide and has strong global potential. The brand can rely on a heritage dating back to our foundations in 1366. Stella Artois is a premium lager. Building upon the strength of the brand in the United Kingdom, we launched Stella Artois Cidre in April 2011 and launched Stella Artois Cidre Pear in June 2012.

 

   

Beck’s, the number one German export beer in the world according to Plato Logic Limited, which is distributed in over 80 countries. Beck’s has been brewed using only four key natural ingredients for over 125 years and according to the traditional German Reinheitsgebot (purity law). In 2012, Beck’s and its line extensions accounted for 1.9% of our total company volumes.

In addition, we have a multi-country portfolio of brands, which increasingly transcend the distinction between global and local. The key multi-country brands include:

 

   

Leffe, a rich, full-bodied beer that hails from Belgium, available in over 60 countries worldwide, with sales volumes that have more than doubled over the last decade; and

 

   

Hoegaarden, a high-end Belgian wheat (or “white”) beer. Based on a brewing tradition which dates back to 1445, Hoegaarden is top fermented, then refermented in the bottle or keg, leading to its distinctive cloudy white appearance.

 

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More locally, we manage numerous well-known “local champions,” which form the foundation of our business. The portfolio of local brands includes:

North America

 

   

Bud Light, originating from the United States and the official sponsor of the NFL (National Football League), having signed a six-year sponsorship agreement in 2011. In the United States, its share of the premium category is approximately 42%, more than the combined share of the next two largest core brands (excluding Budweiser).

 

   

Bud Light Lime, a high-end brand extension of Bud Light introduced in 2008. Based on Bud Light Lime shipments, it became one of the top 25 U.S. beer brands by volume in its first year. In 2012, it was the number 19 U.S. beer brand according to Beer Marketer’s Insights.

 

   

Bud Light Platinum, 6% alcohol by volume, a blue cobalt bottle line extension aimed at the party time/night-life occasion, which became the most successful innovation of 2012 in the beer market.

 

   

Bud Light Lime Lime-A-Rita, an 8% alcohol by volume line extension designed to be served over ice, was rolled out in April 2012, and was the second most successful innovation in the beer market, behind Bud Light Platinum, in 2012.

 

   

Michelob ULTRA, which was rolled out nationally in 2002, estimated to be the number 12 brand in the United States according to Beer Marketer’s Insights.

 

   

Natural Light, the largest sub-premium (value) brand in the United States, with a 20% share of the sub-premium category in 2012 based on Natural Light shipments compared to Beer Marketer’s Insights sub-premium volume estimates. On the same basis, Busch Light and Busch are the number two and number three sub-premium brands, respectively, and all of our sub-premium brands combined have a 54% market share in this category in the United States.

 

   

Import and domestic craft beers, led by Stella Artois, Hoegaarden, Leffe, Beck’s, Land Shark and Shock Top. Stella Artois grew 18% in the United States in 2012, while the Shock Top brand family grew by over 62% in 2012.

Latin America

 

   

Skol, the leading beer brand in the Brazilian market according to Plato Logic Limited. We have invested in pioneering and innovation of the Skol brand, creating new market trends and involvement in entertainment initiatives, such as music festivals.

 

   

Brahma, the second most consumed beer in Brazil according to Plato Logic Limited. It was one of the Brazilian official sponsors of the 2010 FIFA World CupTM.

 

   

Antarctica, the third most consumed beer in Brazil according to Plato Logic Limited.

 

   

Bohemia, the leading brand in the premium category in Brazil according to Plato Logic Limited.

 

   

Quilmes, the leading beer in Argentina in 2012, according to Nielsen, and a national symbol with its striped light blue and white label linked to the colors of the Argentine national flag and football team.

Western Europe

 

   

Jupiler, the market leader in terms of sales volumes in Belgium and the official sponsor of the highest Belgian football division, the Jupiler League. It is also the sponsor of the Belgian national football team.

 

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Hasseröder, a leading brand in eastern Germany, gained country-wide exposure following national marketing campaigns and by leveraging of global assets such as the 2010 FIFA World Cup™ sponsorship.

Central & Eastern Europe

 

   

Sibirskaya Korona, first established as a local Siberian brand with proud Siberian values, has grown into a national premium brand sold throughout Russia and is the benchmark for Russian quality beer and Russian pride.

 

   

Klinskoye, our largest brand in Russia, originated near Moscow and has been the leading brand of Russian consumers for over ten years.

 

   

Chernigivske is the best-selling brand of beer in Ukraine and the proud sponsor of the Ukrainian national football team. The reputation of this great beer experience continues to grow and its recognition is expanding into Russia, where sales have grown in the past three years.

Asia Pacific

 

   

Harbin, a well-known national brand with its roots in the northeast of China.

 

   

Sedrin, a strong regional brand from the southeast of China.

The branding and marketing of our global brands, Budweiser, Stella Artois and Beck’s, is managed centrally within our group. Multi-country brands are managed with more flexibility at the local level for branding and marketing, while the marketing and branding of our local brands is generally managed at a local level. See “—B. Business Overview—9. Branding and Marketing” for more information on brand positioning, branding and marketing.

In certain markets, we also distribute products of other brewers.

Non-Beer

Soft Drinks

While our core business is beer, we also have a presence in the soft drink market in Latin America through our subsidiary Ambev and in the United States through Anheuser-Busch. Soft drinks include both carbonated soft and non-carbonated soft drinks.

Our soft drinks business includes both our own production and agreements with PepsiCo related to bottling and distribution. Ambev is one of PepsiCo’s largest independent bottlers in the world. Major brands that are distributed under these agreements are Pepsi, 7UP and Gatorade. Ambev has long-term agreements with PepsiCo whereby Ambev has the exclusive right to bottle, sell and distribute certain brands of PepsiCo’s portfolio of carbonated and non-carbonated soft drinks in Brazil. The agreements will expire on 31 December 2017 and are automatically extended for additional ten-year terms unless terminated prior to the expiration date by written notice by either party at least two years prior to the expiration of their term or on account of other events, such as a change of control or insolvency of, or failure to comply with material terms or meet material commitments by, our relevant subsidiary. Ambev also has agreements with PepsiCo to bottle, sell, distribute and market some of its brands in the Dominican Republic and in some regions of Peru, including the north and the Lima regions. Through our Latin America South operations, Ambev is also PepsiCo’s bottler for Argentina, Bolivia and Uruguay.

Apart from the bottling and distribution agreements with PepsiCo, Ambev also produces, sells and distributes its own soft drinks. Its main carbonated soft drinks brand is Guaraná Antarctica.

 

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In December 2012, Ambev and Monster Energy Company (“Monster”) announced that they had signed a distribution agreement for the sale and distribution of Monster Energy drinks in Brazil. This partnership is expected to benefit both companies through the increase of their presence in the fast growing energy drink segment in Brazil. Operations began at the end of January 2013 under a long-term agreement renewable every five years.

In the United States, Anheuser-Busch also produces non-alcoholic malt beverage products, including O’Doul’s, O’Doul’s Amber and related products. On a limited basis, we have also entered into arrangements under which other non-alcoholic products, such as Monster Energy drinks, are distributed and sold in select markets though the Anheuser-Busch distribution network. In Europe, we also produce non-alcoholic products, including Jupiler Force, Hoegaarden 0.0 and related products.

 

3. MAIN MARKETS

We are a global brewer, with sales in over 120 countries across the globe.

The last two decades have been characterized by rapid growth in fast-growing emerging markets, notably in regions in Latin America North, Latin America South, Central & Eastern Europe and Asia-Pacific, where we have significant sales. The table below sets out our total volumes broken down by business zone for the periods shown:

 

     2012     2011     2010  

Market

   Volumes
(million
hectoliters)
     Volumes (%
of total)
    Volumes
(million
hectoliters)
     Volumes (%
of total)
    Volumes
(million
hectoliters)
     Volumes (%
of total)
 

North America

     125         31.1     125         31.3     129         32.5

Latin America North

     126         31.3     120         30.1     120         30.1

Latin America South

     34         8.5     35         8.7     34         8.5

Western Europe

     30         7.3     31         7.7     32         8.0

Central & Eastern Europe

     23         5.7     26         6.4     27         6.7

Asia Pacific

     58         14.3     56         14.0     50         12.6

Global Export & Holding Companies

     7         1.8     7         1.8     7         1.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     403         100     399         100     399         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

On an individual country basis, our ten largest markets by volume during the year ended 31 December 2012 were the United States, Brazil, China, Argentina, Russia, Ukraine, Canada, the United Kingdom, Germany and Belgium. Each market has its own dynamics and consumer preferences and values. Given the breadth of our portfolio, we believe we are well placed and can launch, relaunch, market and ultimately sell the beer that best addresses consumer choice in the various categories (premium, core and value) in a given market.

Our marketing approach is supported by three solid pillars: brands, connections and renovation/innovation. We are committed to innovation generated from consumer and shopper insights. Through this approach, we seek to understand the values, lifestyles and preferences of today’s and tomorrow’s consumers and shoppers, with a view to building fresh appeal and competitive advantage through innovative products and services tailored to meet those needs. We have advanced our ability to deliver these innovative products and tailored services through globally deployed tools. See “—B. Business Overview—10. Intellectual Property; Research and Development” for further information.

 

4. COMPETITION

Historically, brewing was a local industry with only a few players having a substantial international presence. Larger brewing companies often obtained an international footprint through direct exports, licensing agreements and joint venture arrangements. However, the last couple of decades have seen a transformation of the industry, with a prolonged period of consolidation. This trend started within the more established beer markets of Western Europe and North America, and took the form of larger businesses being formed through merger and acquisition activity within national markets. More recently, consolidation has also taken place within emerging markets. Over the last decade, the global consolidation process has accelerated, with brewing groups making significant acquisitions outside of their domestic markets and increasingly looking to purchase other regional

 

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brewing organizations. Recent examples of this trend include SABMiller’s acquisition of Bavaria in 2005, the acquisition of Scottish & Newcastle by Carlsberg and Heineken in 2008, Heineken’s acquisition of FEMSA Cerveza in April 2010, SABMiller’s acquisition of Foster’s in 2011, Kirin’s acquisition of Schincariol in Brazil and Heineken’s acquisition of Asia Pacific Breweries in 2012. As a result of this consolidation process, the absolute and relative size of the world’s largest brewers has increased substantially. Therefore, today’s leading international brewers have significantly more diversified operations and have established leading positions in a number of international markets.

We have participated in this consolidation trend, and have grown our international footprint through a series of mergers and acquisitions described in “—A. History and Development of the Company—History and Development of the Company,” which include:

 

   

the acquisition of Labatt in 1995;

 

   

the acquisition of Beck’s in 2002;

 

   

the combination of Ambev and Quilmes Industrial S.A. in 2003;

 

   

the creation of InBev in 2004, through the combination of Interbrew and Ambev;

 

   

the Anheuser-Busch acquisition in November 2008; and

 

   

the announced agreement to acquire the remaining shares of Grupo Modelo in June 2012.

The ten largest brewers in the world in 2011 in terms of volume were as set out in the table below.

 

Rank

  

Name

   Volume
(million
hectoliters) (1)
(2)
 
1   

AB InBev

     354.5   
2   

SABMiller

     269.8   
3   

Heineken

     205.1   
4   

Carlsberg

     121.8   
5   

Tsingtao (Group)

     71.5   
6   

Molson Coors Brewing Company

     68.3   
7   

Modelo

     55.1   
8   

Beijing Yanjing

     55.1   
9   

Kirin

     45.1   
10   

Anadolu Group (Efes)

     30.2   

 

Notes:

 

(1) Source: Plato Logic Limited. AB InBev volumes indicated here are Plato Logic Limited’s estimates of our beer-only volumes and do not include volumes of associates. Our own estimate is that our adjusted beer volumes as of 31 December 2011 were 349.8 million hectoliters.
(2) Calendar year basis.

In each of our regional markets, we compete against a mixture of national, regional, local and imported beer brands. In many countries in Latin America, we compete mainly with local players and local beer brands. In North America, Brazil and in selected countries in Latin America, Western Europe, Eastern Europe and Asia Pacific, we compete primarily with large leading international or regional brewers and international or regional brands.

 

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5. WEATHER AND SEASONALITY

For information on how weather affects consumption of our products and the seasonality of our business, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Weather and Seasonality.”

 

6. BREWING PROCESS; RAW MATERIALS AND PACKAGING; PRODUCTION FACILITIES; LOGISTICS

Brewing Process

The basic brewing process for most beers is straightforward, but significant know-how is involved in quality and cost control. The most important stages are brewing and fermentation, followed by maturation, filtering and packaging. Although malted barley (malt) is the primary ingredient, other grains such as unmalted barley, corn, rice or wheat are sometimes added to produce different beer flavors. The proportion and choice of other raw materials varies according to regional taste preferences and the type of beer.

The first step in the brewing process is making wort by mixing malt with warm water and then gradually heating it to around 75°C in large mash tuns to dissolve the starch and transform it into a mixture, called “mash,” of maltose and other sugars. The spent grains are filtered out and the liquid, now called “wort,” is boiled. Hops are added at this point to give a special bitter taste and aroma to the beer, and help preserve it. The wort is boiled for one to two hours to sterilize and concentrate it, and extract the flavor from the hops. Cooling follows, using a heat exchanger. The hopped wort is saturated with air or oxygen, essential for the growth of the yeast in the next stage.

Yeast is a micro-organism that turns the sugar in the wort into alcohol and carbon dioxide. This process of fermentation takes five to eleven days, after which the wort finally becomes beer. Different types of beer are made using different strains of yeast and wort compositions. In some yeast varieties, the cells rise to the top at the end of fermentation. Ales and wheat beers are brewed in this way. Lagers are made using yeast cells that settle to the bottom. Some special Belgian beers, called lambic or gueuze, use yet another method where fermentation relies on spontaneous action by airborne yeasts.

During the maturation process the liquid clarifies as yeast and other particles settle. Further filtering gives the beer more clarity. Maturation varies by type of beer and can take as long as three weeks. Then the beer is ready for packaging in kegs, cans or bottles.

Raw Materials and Packaging

The main raw materials used in our beer production are malted barley, corn grits, corn syrup, rice, hops, and water. For non-beer production (mainly carbonated soft drinks) the main ingredients are flavored concentrate, fruit concentrate, sugar, sweetener and water. In addition to these inputs into our products, delivery of our products to consumers requires extensive use of packaging materials such as glass, PET and aluminum bottles, aluminum or steel cans and kegs, labels, plastic crates, metal and plastic closures, folding cartons, cardboard products and plastic films.

We use only our own proprietary yeast, which we grow in our facilities. In some regions, we import hops to obtain adequate quality and appropriate variety for flavor and aroma. We purchase these ingredients through the open market and through contracts with suppliers. We also purchase barley and process it to meet our malt requirements at our malting plants.

Prices and sources of raw materials are determined by, among other factors:

 

   

the level of crop production;

 

   

weather conditions;

 

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export demand; and

 

   

governmental regulations.

We are reducing the number of our suppliers in each region to develop closer relationships that allow for lower prices and better service, while at the same time ensuring that we are not entirely dependent on a single supplier. We hedge some of our commodities contracts on the financial markets and some of our malt requirements are purchased on the spot market. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk, Hedging and Financial Instruments” and note 28 to our audited financial information as of 31 December 2012 and 2011, and for the three years ended 31 December 2012, for further details on commodities hedging.

We have supply contracts with respect to most packaging materials as well as our own production capacity as outlined below in “—Production Facilities.” The choice of packaging materials varies by cost and availability in different regions, as well as consumer preferences and the image of each brand. We also use aluminum cansheet for the production of beverage cans and lids.

Hops, PET resin, soda ash for our own glass plant and, to some extent, cans are mainly sourced globally. Malt, adjuncts (such as unmalted grains or fruit), sugar, steel, cans, labels, metal closures, plastic closures, preforms and folding cartons are sourced regionally. Electricity is sourced nationally, while water is sourced locally, for example, from municipal water systems and private wells.

We use natural gas as our primary fuel, and we believe adequate supplies of fuel and electricity are available for the conduct of our business. The energy commodity markets have experienced, and can be expected to continue to experience, significant price volatility. We manage our energy costs using various methods including supply contracts, hedging techniques, and fuel switching.

Production Facilities

Our production facilities are spread across our six geographic regions, giving us a balanced geographical footprint in terms of production and allowing us to efficiently meet consumer demand across the globe. We manage our production capacity across our geographic regions, countries and plants. We typically own our production facilities free of any major encumbrances. We also lease a number of warehouses and other commercial buildings from third parties. See “Item 4. Information on the Company—B. Business Overview—11. Regulations Affecting Our Business” for a description of the environmental and other regulations that affect our production facilities.

Beverage Production Facilities

Our beverage production facilities comprised 141 breweries and/or soft drink plants as of 31 December 2012 spread across our six geographic regions. Of these 141 plants, 111 produced only beer, 12 produced only soft drinks and 18 produced both beer and soft drinks. Except in limited cases (for example, our Hoegaarden brewery in Belgium), our breweries are not dedicated to one single brand of beer. This allows us to allocate production capacity efficiently within our group.

The table below sets out, for each of our geographic zones in 2012, the number of our beverage production plants (breweries and/or soft drink plants) as well as the plants’ overall capacity and production volumes.

 

            2012 volumes      Annual engineering
capacity as of
31 December 2012
 

Business zone

   Number of
plants
     Beer (khl)      Soft drinks
(khl)
     Beer (khl)      Soft drinks
(khl)
 

North America

     19         125,139            149,200         n/a   

Latin America North

     36         91,495         34,692         139,900         58,600   

Latin America South

     23         21,623         12,669         33,200         25,500   

Western Europe(1)

     16         29,531            48,754         n/a   

Central & Eastern Europe

     11         22,747            38,395         n/a   

Asia Pacific(2)

     36         57,667            103,392         n/a   
  

 

 

    

 

 

    

 

 

       

Total(3)

     141         348,202         47,361         512,841         84,100   
  

 

 

    

 

 

    

 

 

       

 

Notes:

 

(1)

Includes cider volumes.

 

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(2) Excludes our joint venture in Hyderabad, India.
(3) Excludes Global Export & Holding Companies with 2012 beer volumes of 7 million hectoliters.

Non-Beverage Production Facilities

Our beverage production plants are supplemented and supported by a number of plants and other facilities that produce raw materials and packaging materials for our beverages. The table below provides additional detail on these facilities as of 31 December 2012.

 

Type of plant / facility

  Number of plants
/ facilities
 

Countries in which plants / facilities are located

Malt plants

  12   Brazil, Argentina, Uruguay, Russia, United States

Rice mill

  1   United States

Corn grits

  6   Brazil, Argentina, Bolivia

Hop farms

  2   Germany, United States

Hop pellet plant

  1   Argentina

Guaraná farm

  1   Brazil

Glass bottle plants

  3   United States, Brazil, Paraguay

Bottle cap plants

  1   Brazil

Label plant

  1   Brazil

Can plants

  6   Bolivia, United States

Can lid manufacturing plants

  2   United States

Crown and closure liner material plant

  1   United States

Syrup plant

  1   Brazil

In addition to production facilities, we also maintain a geographical footprint in key markets through sales offices and distribution centers. Such offices and centers are opened as needs in the various markets arise.

Capacity Expansion

We continually assess whether our production footprint is adequate in view of existing and potential customer demand. Footprint optimization by adding new plants to our portfolio not only allows us to boost production capacity, but the strategic location often also reduces distribution time and costs so that our products reach consumers rapidly and efficiently and at a lower distribution cost. Conversely, footprint optimization can lead to the divesting of plants through sales to third parties, or to plant closures in order to minimize our fixed costs and keep a healthy return on assets. In the third quarter of 2012, we completed the closure of our brewing and malting facilities in Kursk in Russia.

Additional production facilities can be acquired from third parties or through greenfield investments in new projects. For example, following an increased demand for our products in the northeast of Brazil, a decision was made to construct a greenfield plant in Pernambuco state which opened in the fourth quarter of 2011 in time to support year-end peak season activities and the long-term growth of the region.

In addition to building or acquiring additional facilities, we also upgrade and expand capacity in our existing operations. For example, we invested in a new canning line in our facility in Montreal to keep up with the demand for that type of packaging in the province of Quebec.

 

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In 2013, we expect to invest in new capacity projects in China, Brazil and Argentina to meet our future demand expectations in these countries. Our capital expenditures are primarily funded through cash from operating activities and are for production facilities, logistics, improving administrative capabilities, hardware and software in our operational zones.

We also outsource, to a limited extent, the production of items which we are either unable to produce in our own production network (for example, due to a lack of capacity during seasonal peaks) or for which we do not yet want to invest in new production facilities (for example, to launch a new product without incurring the associated full start-up costs). Such outsourcing mainly relates to secondary repackaging materials that we cannot practicably produce on our own, in which case our products are sent to external companies for repackaging (for example, gift packs with different types of beers).

Logistics

Our logistics organization is composed of (i) a first tier, which comprises all inbound flows into the plants of raw materials and packaging materials and all the outbound flows from the plants into the second drop point in the chain (for example, distribution centers, warehouses or wholesalers) and (ii) a second tier, which comprises all distribution flows from the second drop point into the customer delivery tier (for example, pubs or retailers).

Transportation is mainly outsourced to third-party contractors, although we do own a small fleet of vehicles in certain countries where it makes economic or strategic sense.

Most of our breweries have a warehouse which is attached to its production facilities. In places where our warehouse capacity is limited, external warehouses are rented. We strive to centralize fixed costs, which has resulted in some plants sharing warehouse and other facilities with each other.

Where it has been implemented, the VPO program has had a direct impact on our logistics organization, for example, in respect of safety, scheduling, warehouse productivity and loss prevention actions.

 

7. DISTRIBUTION OF PRODUCTS

We depend on effective distribution networks to deliver products to our customers. We review our priority markets for distribution and licensing agreements on an annual basis. The focus markets will typically be markets with an interesting premium category and with sound and strong partners (brewers and/or importers). Based on these criteria, focus markets are then chosen.

In addition, the distribution of beer varies from country to country and from region to region. The nature of distribution reflects consumption patterns and market structure, geographical density of customers, local regulation, the structure of the local retail sector, scale considerations, market share, expected added-value and capital returns, and the existence of third-party wholesalers or distributors. In some markets brewers distribute directly to customers (for example, in Belgium), while in other markets wholesalers may, for legal reasons (for example, in certain U.S. states and Canada where there may be legal constraints on the ability of a beer manufacturer to own a wholesaler), or because of historical market practice (for example, in China, Russia and Argentina), play an important role in distributing a significant proportion of beer to customers. In some instances, as is currently the case in Brazil, we have acquired third-party distributors to help us self-distribute our products. The products we brew in the United States are sold to approximately 445 wholesalers for resale to retailers. As of the end of 2012, we owned 15 of these wholesalers and have ownership stakes in another three of them. The remaining wholesalers are independent businesses. In Mexico, Budweiser, Bud Light and O’Doul’s are imported and distributed by a wholly-owned subsidiary of Grupo Modelo. Under the distribution agreement with Grupo Modelo, it has exclusive distribution rights to those brands in all of Mexico. In return it agrees not to sell Budweiser, Bud Light and O’Doul’s outside of Mexico, and not to sell in Mexico any other beer that is brewed outside of Mexico without our consent. In certain countries, we enter into exclusive importer arrangements and depend on our counterparties to these arrangements to market and distribute our products to points of sale. In certain markets we also distribute the products of other brewers.

 

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We generally distribute our products through (i) direct distribution networks, in which we deliver to points of sale directly, and (ii) indirect distribution networks, in which delivery to points of sale occurs through wholesalers and independent distributors. Indirect distribution networks may be exclusive or non-exclusive and may, in certain business zones, involve use of third-party distribution while we retain the sales function through an agency framework. We seek to fully manage the sales teams in each of our markets. In case of non-exclusive distributorships, we try to encourage best practices through wholesaler excellence programs.

See “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Distribution Arrangements” for a discussion of the effect of the choice of distribution arrangements on our results of operations.

As a customer-driven organization, we have, regardless of the chosen distribution method, programs for professional relationship building with our customers in all markets. This happens directly, for example, by way of key customer account management, and indirectly by way of wholesaler excellence programs.

We seek to provide media advertising, point-of-sale advertising, and sales promotion programs to promote our brands. Where relevant, we complement national brand strategies with geographic marketing teams focused on delivering relevant programming addressing local interests and opportunities.

 

8. LICENSING

In markets where we have no local affiliate, we may choose to enter into license agreements or, alternatively, international distribution and/or importation agreements, depending on the best strategic fit for each particular market. License agreements entered into by us grant the right to third-party licensees to manufacture, package, sell and market one or several of our brands in a particular assigned territory under strict rules and technical requirements. In the case of international distribution and/or importation agreements, we produce and package the products ourselves while the third party distributes, markets and sells the brands in the local market.

Stella Artois is licensed to third parties in Algeria, Australia, Bulgaria, Croatia, Czech Republic, Hungary, Israel, New Zealand, and Romania, while Beck’s is licensed to third parties in Algeria, Bulgaria, Croatia, Hungary, Turkey, Australia, New Zealand, Romania, Serbia, Tunisia and Montenegro.

In Japan, Budweiser is brewed and sold through license and distribution agreements with Kirin Brewery Company, Limited. A licensing agreement allows Guinness Ireland Limited to brew and sell Budweiser and Bud Light in the Republic of Ireland. Budweiser is also brewed under license and sold by brewers in Spain (Sociedad Anonima Damm), India (RKJ Group) and Panama (Heineken). Compañía Cervecerías Unidas, a subsidiary of Compañía Cervecerías Unidas S.A., a leading Chilean brewer, distributes Budweiser under license in Chile and distributes Budweiser in Argentina through a subsidiary. In Italy, Budweiser is brewed and packaged by Heineken under a brewing contract agreement. We also sell various brands, including Budweiser, by exporting from our license partners’ breweries to other countries.

On 24 July 2009, we sold our South Korean subsidiary, Oriental Brewery, to an affiliate of Kohlberg Kravis Roberts & Co. L.P. See “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Investments and Disposals.” Under the terms of the sale agreement, we granted Oriental Brewery exclusive distribution rights over certain brands in South Korea including Budweiser, Bud Ice and Hoegaarden.

On 2 December 2009, we sold our Central European operations to CVC Capital Partners. See “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Investments and Disposals.” The business we sold to CVC Capital Partners in 2009 has rights to brew and/or distribute, under license from us, Beck’s, Hoegaarden, Leffe, Löwenbräu, Spaten and Stella Artois, in Albania, Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Kosovo, Macedonia, Moldova, Montenegro, Romania, Serbia, Slovakia and Slovenia. On 15 June 2012, CVC sold the business to Molson Coors Brewing Company for an aggregate consideration of EUR 2.65 billion. As of 31 December 2012, we retain rights to brew and distribute Staropramen in Ukraine and Russia and to distribute Staropramen in Germany, Canada and Italy.

 

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See “Item 3. Key Information—D. Risk Factors—Risks Relating to our Business—We rely on key third parties, including key suppliers, and the termination or modification of the arrangements with such third parties could negatively affect our business.”

We also manufacture and distribute other third-party brands. Ambev, our listed Brazilian subsidiary, and some of our other subsidiaries have entered into agreements with PepsiCo. Pursuant to the agreements between Ambev and PepsiCo, Ambev is one of PepsiCo’s largest independent bottlers in the world. Major brands that are distributed under this agreement are Pepsi, 7UP and Gatorade. See “—B. Business Overview—2. Principal Activities and Products—Non-Beer—Soft Drinks” for further information in this respect. Ambev also has a license agreement with Anheuser-Busch InBev allowing it to exclusively produce, distribute and market Budweiser and Stella Artois in Brazil and Canada. Ambev also distributes Budweiser in Ecuador, Paraguay, Guatemala, El Salvador and Nicaragua.

 

9. BRANDING AND MARKETING

Our brands are our foundation, the cornerstone of our relationships with consumers and the key to our long-term success. Our brand portfolio, its enduring bonds with consumers and its partnerships with customers are our most important assets. We invest in our brands to create long-term, sustainable, competitive advantage by seeking to meet the beverage needs of consumers around the world and to develop leading brand positions in every market in which we operate.

Our brand portfolio consists of global flagship brands (Budweiser, Stella Artois and Beck’s), multi-country brands (Leffe and Hoegaarden) and many “local champions” (Jupiler, Skol, Quilmes, Bud Light, Sibirskaya Korona and Harbin to name but a few). We believe this global brand portfolio provides us with strong growth and revenue opportunities and, coupled with a powerful range of premium brands, positions us well to meet the needs of consumers in each of the markets in which we compete. For further information about our focus brands, see “—B. Business Overview—2. Principal Activities and Products—Beer.”

We have established a “focus brands” strategy. Focus brands are those in which we invest the majority of our resources (money, people, and attention). They are a small group of brands which we believe have the most growth potential within each relevant consumer group. These focus brands include our three global brands, key multi-country brands and selected “local champions.” In 2012, our focus brands accounted for 69% of our beer volume.

We seek to constantly strengthen and develop our brand portfolio through enhancement of brand quality, marketing and product innovation. Our marketing team therefore works together closely with our research and development team (see “—B. Business Overview—10. Intellectual Property; Research and Development” for further information).

We continually assess consumer needs and values in each geographic market in which we operate with a view to identifying the key characteristics of consumers in each beer category (that is, premium, core and value). This allows us to position our existing brands (or to introduce new brands) in order to address the characteristics of each category.

Our marketing approach is based on a “value-based brands” approach. A value-based brands proposition is a single, clear, compelling values based reason for consumer preference. We have defined 37 different consumer values (such as ambition, authenticity or friendship) to establish a connection between consumers and our products. The value-based brands approach first involves the determination of consumer portraits, secondly brand attributes (that is, tangible characteristics of the brand that support the brand’s positioning) and brand personality (that is, the way the brand would behave as a person) are defined, and finally a positioning statement to help ensure the link between the consumer and the brand is made. Once this link has been established, a particular brand can either be developed (brand innovation) or relaunched (brand renovation or line extension from the existing brand portfolio) to meet the customers’ needs. We apply zero-based planning principles to yearly budget decisions and for ongoing investment reviews and reallocations. We invest in each brand in line with its local or global strategic priority and, taking into account its local circumstances, seek to maximize profitable and sustainable growth.

 

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We own the rights to our principal brand names and trademarks in perpetuity for the main countries where these brands are currently commercialized.

 

10. INTELLECTUAL PROPERTY; RESEARCH AND DEVELOPMENT

Innovation is one of the key factors enabling us to achieve our strategy. We seek to combine technological know-how with market understanding to develop a healthy innovation pipeline in terms of production process, product and packaging features as well as branding strategy. In addition, as beer markets mature, innovation plays an increasingly important role by providing differentiated products with increased value to consumers.

Intellectual Property

Our intellectual property portfolio mainly consists of trademarks, patents, registered designs, copyright, know-how and domain names. This intellectual property portfolio is managed by our internal legal department, in collaboration with a selected network of external intellectual property advisors. We place importance on achieving close cooperation between our intellectual property team and our marketing and research and development teams. An internal stage gate process promotes the protection of our intellectual property rights, the swift progress of our innovation projects and the development of products that can be launched and marketed without infringing any third-party’s intellectual property rights. A project can only move on to the next step of its development after the necessary verifications (for example, availability of trademark, existence of prior technology/earlier patents and freedom to market) have been carried out. This internal process is designed to ensure that financial and other resources are not lost due to oversights in relation to intellectual property protection during the development process.

Our patent portfolio is carefully built to gain a competitive advantage and support our innovation and other intellectual assets. We currently have more than 100 patent families for which patents are pending or registered; that means we have or are seeking to obtain patent protection for more than 100 different technological inventions. The extent of the protection differs between technologies, as some patents are protected in many jurisdictions, while others are only protected in one or a few jurisdictions. Our patents may relate, for example, to brewing processes, improvements in production of fermented malt-based beverages, treatments for improved beer flavor stability, non-alcoholic beer development, filtration processes, beverage dispensing systems and devices or beer packaging.

We license in limited technology from third parties. We also license out certain of our intellectual property to third parties, for which we receive royalties.

Research and Development

Given our focus on innovation, we place a high value on research and development (“R&D”). In 2012, we spent USD 182 million (USD 175 million in 2011 and USD 184 million in 2010) in the area of market research and on innovation in the areas of process optimization and product development at our Belgian R&D center and across our zones.

R&D in process optimization is primarily aimed at capacity increase (plant debottlenecking and addressing volume issues, while minimizing capital expenditure), quality improvement and cost efficiency. Newly developed processes, materials and/or equipment are documented in best practices and shared across business zones. Current projects range from malting to bottling of finished products.

R&D in product innovation covers liquid, packaging and draft innovation. Product innovation consists of breakthrough innovation, incremental innovation and renovation (that is, implementation of existing technology). The main goal for the innovation process is to provide consumers with better products and experiences. This includes launching new liquids, new packaging and new draft products that deliver better performance both for the consumer and in terms of financial results, by increasing our competitiveness in the relevant markets. With consumers comparing products and experiences offered across very different beverage categories and with choice increasing, our R&D efforts also require an understanding of the strengths and weaknesses of other beverage categories, spotting opportunities for beer and developing consumer solutions (products) that better address consumer needs and deliver better experiences. This requires first understanding consumer emotions and expectations in order to guide our innovation efforts. Sensory experience, premiumization, convenience, sustainability and design are all central to our R&D efforts.

 

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Knowledge management and learning make up an integral part of R&D. We seek to continuously increase our knowledge through collaborations with universities and other industries.

Our R&D team is briefed annually on our business zones’ priorities and approves concepts which are subsequently prioritized for development. Launch time, depending on complexity and prioritization, usually falls within the next calendar year.

In November 2006, we opened our Global Innovation and Technology Centre in Leuven, Belgium. This state of the art building accommodates the Packaging, Product, Process Development teams and facilities such as Labs, Experimental Brewery and the European Central Lab, which also includes Sensory Analysis.

In addition to our Global Innovation and Technology Centre, we also have Product, Packaging and Process development teams located in each of our six geographic regions focusing on the short-term needs of such regions.

 

11. REGULATIONS AFFECTING OUR BUSINESS

Our worldwide operations are subject to extensive regulatory requirements regarding, among other things, production, distribution, importation, marketing, promotion, labeling, advertising, labor, pensions and public health, consumer protection and environmental issues. In the United States, federal and state laws regulate most aspects of the brewing, sale, marketing, labeling and wholesaling of our products. At the federal level, the Alcohol & Tobacco Tax & Trade Bureau of the U.S. Treasury Department oversees the industry, and each state in which we sell or produce products, and some local authorities in jurisdictions in which we sell products, also have regulations that affect the business conducted by us and other brewers and wholesalers. It is our policy to abide by the laws and regulations around the world that apply to us or to our business. We rely on legal and operational compliance programs, as well as local in-house and external counsel, to guide businesses in complying with applicable laws and regulations of the countries in which we operate.

See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Certain of our operations depend on independent distributors or wholesalers to sell our products,” “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Negative publicity, perceived health risks and associated government regulation may harm our business,” “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We could incur significant costs as a result of compliance with, and/or violations of or liabilities under, various regulations that govern our operations,” “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our operations are subject to environmental regulations, which could expose us to significant compliance costs and litigation relating to environmental issues,” “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We operate a joint venture in Cuba, in which the Government of Cuba is our joint venture partner. Cuba has been identified by the U.S. Department of State as a state sponsor of terrorism and is targeted by broad and comprehensive economic and trade sanctions of the United States. Our operations in Cuba may adversely affect our reputation and the liquidity and value of our securities,” and “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Governmental Regulations.”

Production, advertising, marketing and sales of alcoholic beverages are subject to various restrictions around the world. These range from a complete prohibition of alcohol in certain countries and cultures through the prohibition of the import of alcohol, to restrictions on the advertising style, media and messages used. In a number of countries, television is a prohibited medium for advertising alcohol products, and in other countries, television advertising, while permitted, is carefully regulated. Media restrictions may constrain our brand building potential. Labeling of our products is also regulated in certain markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. Specific warning statements related to the risks of drinking alcohol products, including beer, have also become prevalent in recent years. Introduction of smoking bans in pubs and restaurants may have negative effects on on-trade consumption (that is, beer purchased for consumption in a pub or restaurant or similar retail establishment), as opposed to off-trade consumption (that is, beer purchased at a retail outlet for consumption at home or another location).

 

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The distribution of our beer products may also be regulated. In certain markets, alcohol may only be sold through licensed outlets, varying from government or state operated monopoly outlets (for example, in the off-trade channel of certain Canadian provinces) to the common system of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in many countries (for example, in much of the European Union). In the United States, states operate under a three-tier system of regulation for beer products from brewer to wholesaler to retailer, meaning that we must work with licensed third-party distributors to distribute our products to the points of connection.

In the United States, both federal and state laws generally prohibit us from providing anything of value to retailers, including paying slotting fees or holding ownership interests in retailers. Some states prohibit us from being licensed as a wholesaler for our products. State laws also regulate the interactions among us, our wholesalers and consumers by, for example, limiting merchandise that can be provided to consumers or limiting promotional activities that can be held at retail premises. If we were found to have violated applicable federal or state alcoholic beverage laws, we could be subject to a variety of sanctions, including fines, equitable relief and suspension or permanent revocation of our licenses to brew or sell our products.

Governments in most of the countries in which we operate also establish minimum legal drinking ages, which generally vary from 16 to 21 years, impose minimum prices on beer products or impose other restrictions on sales, which affect demand for our products. Moreover, governments may respond to public pressure to curtail alcohol consumption by raising the legal drinking age, further limiting the number, type or operating hours of retail outlets or expanding retail licensing requirements. We work both independently and together with other brewers and alcoholic beverage companies to limit the negative consequences of inappropriate use of alcohol products and actively promote responsible sales and consumption.

Similarly, we may need to respond to new legislation curtailing soft drink consumption at schools and other government-owned facilities.

We are subject to antitrust and competition laws in the jurisdictions in which we operate and may be subject to regulatory scrutiny in certain of these jurisdictions. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We are exposed to antitrust and competition laws in certain jurisdictions and the risk of changes in such laws or in the interpretation and enforcement of existing antitrust and competition laws.”

In many jurisdictions, excise and other indirect duties, including legislation regarding minimum alcohol pricing, make up a large proportion of the cost of beer charged to customers. In the United States, for example, the brewing industry is subject to significant taxation. The United States federal government currently levies an excise tax of USD 18 per barrel (equivalent to 1.1734776 hectoliters) of beer sold for consumption in the United States. All states also levy excise taxes on alcoholic beverages. Proposals have been made to increase the federal excise tax as well as the excise taxes in some states. In the past few years, Bolivia, Brazil, Russia, the United Kingdom and Ukraine have all adopted proposals to increase beer excise taxes. Rising excise duties can drive up our pricing to the consumer, which in turn could have a negative impact on our results of operations. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—The beer and beverage industry may be subject to adverse changes in taxation.”

Our products are generally sold in glass or PET bottles or aluminum or steel cans. Legal requirements apply in various jurisdictions in which we operate, requiring that deposits or certain ecotaxes or fees are charged for the sale, marketing and use of certain non-refillable beverage containers. The precise requirements imposed by these measures vary. Other types of beverage container-related deposit, recycling, ecotax and/or extended producer responsibility statutes and regulations also apply in various jurisdictions in which we operate.

We are subject to different environmental legislation and controls in each of the countries in which we operate. Environmental laws in the countries in which we operate are mostly related to (i) the conformity of our operating procedures with environmental standards regarding, among other things, the emission of gas and liquid effluents and (ii) the disposal of one-way (that is, non-returnable) packaging and (iii) noise. We believe that the regulatory climate in most countries in which we operate is becoming increasingly strict with respect to environmental issues and expect this trend to continue in the future. Achieving compliance with applicable environmental standards and legislation may require plant modifications and capital expenditure. Laws and

 

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regulations may also limit noise levels and the disposal of waste, as well as impose waste treatment and disposal requirements. Some of the jurisdictions in which we operate have laws and regulations that require polluters or site owners or occupants to clean up contamination.

Our facilities in the United States are subject to federal, state and local environmental protection laws and regulations. We comply with these laws and regulations or are currently taking action to comply with them. Our expenditures in connection with complying with such laws and regulations are not expected to materially affect our earnings or competitive position.

Certain U.S. states and various countries have adopted laws and regulations that require deposits on beverages or establish refillable bottle systems. Such laws generally increase beer prices above the costs of deposit and may result in sales declines. The United States Congress and other states continue to consider similar legislation, the adoption of which would impose higher operating costs on us while depressing sales volume.

The amount of dividends payable to us by our operating subsidiaries is, in certain countries, subject to exchange control restrictions of the respective jurisdictions where those subsidiaries are organized and operate. See also “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Transfers from Subsidiaries”, “Item 3. Key Information—D. Risk Factors.”

 

12. INSURANCE

We maintain comprehensive insurance policies with respect to casualty, property and certain specialized coverage. Our insurance program is mainly divided into two general categories:

 

   

Assets: these insurance policies cover our physical properties and include global property and business interruption; and

 

   

Liabilities: these insurance policies cover losses due to damages caused to third parties and include general and product liability, executive risks (risks related to our board and management) and driver’s insurance (which is taken out in accordance with local requirements).

We believe we have adequate insurance cover taking into account our market capitalization and our worldwide presence. We further believe that the level of insurance we maintain is appropriate for the risks of our business and is comparable to that maintained by other companies in its industry.

 

13. SOCIAL AND COMMUNITY MATTERS

Our dream is to be the Best Beer Company in a Better World. In all we do, we strive to ensure that we produce the highest quality products, provide the best consumer experience, and maximize shareholder value by building the strongest competitive and financial position. We aim to use this increasing financial capacity and our global reach to deliver on our Better World commitment. Our Better World actions focus on three key areas — responsible drinking, environment and community.

Responsible Drinking

As a leader in the beer industry, our primary responsibility is to provide the highest-quality products and to encourage consumers to enjoy them responsibly at all times. That means we are adamantly opposed to the harmful use of alcohol, including drunk driving, underage drinking and excessive or abusive drinking.

We promote responsible drinking and discourage alcohol abuse by informing and educating consumers through focused campaigns and marketing activities that support our position on responsible drinking. These programs include:

 

   

Communicating regularly on topics such as the importance of designated drivers, the role parents play in helping prevent underage drinking by talking with their children, and encouraging young people to respect drinking-age laws.

 

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Promoting our position and beliefs internally through our employee responsible drinking policies.

 

   

Promoting education for bar, restaurant and store staff to help them learn how to properly check a patron’s age to prevent underage sales and to discourage binge drinking.

 

   

Supporting the enforcement of blood alcohol content (BAC) laws to help prevent drunk driving around the world.

In 2012, we continued to develop and promote responsible drinking programs in our 23 key markets, often expanding their reach across the countries where we operate. Where possible, we established partnerships with governments, community organizations, educators and law enforcement agencies, focusing on preventing drunk driving, high-risk drinking and underage-drinking to maximize these efforts. In 2011, we issued global responsible drinking goals to be achieved by the end of 2014. In September 2012, we reported our progress:

 

   

We are on pace to reach at least 100 million adults with programs that help parents talk to their children about underage drinking. Thus far, we have reached almost 30 million adults.

 

   

In the first year, we provided ID-checking materials to more than 150,000 bars and other retailers, reaching roughly one-third of our target of at least 500,000.

 

   

In 2011, we trained almost 160,000 bartenders, waiters, grocery store clerks, servers and sellers of alcohol on responsible beverage sales. We aim to train a total of at least one million people who serve or sell alcohol by the end of 2014.

 

   

We have resoundingly spread the word about the importance of using a designated driver or safe ride home. In 2011, we had reached more than 270 million legal-age consumers, which is over 50 percent of our target of reaching at least 500 million consumers.

 

   

We invested almost USD 55 million with this message in 2011 in responsible drinking advertising and programs. We aim to invest at least an additional USD 245 million by the end of 2014.

 

   

We have committed to celebrating Global Be(er) Responsible Day annually to promote the importance of responsible drinking among employees, partners and consumers.

Environment

Beer is a product of natural ingredients, and the stewardship of our natural environment—land, water and air—is fundamental to the quality of our brands in the long term. To be a responsible and resource-efficient global brewer, we must continually look for ways to incorporate practices that help us make the most of our raw materials, while also reducing the impact of our packaging and transportation on the environment.

Environmental key performance indicators and targets are fully integrated into our VPO global management system. It is designed to bring greater efficiency to our brewery operations, generate cost savings and improve environmental management, in accordance with our Environmental Policy and Strategy.

In 2010, we announced global companywide targets on key environmental measures covering water and energy use, carbon emission reductions, and waste and byproduct recycling. All targets were met by the end of 2012.

 

Key Performance Indicator

   2012 Commitment    2009 – 2012 Actual

Water Usage - Hl/hl

   3.5    3.5 (18.6% reduction)

Energy Usage - Mj/hl

   10% reduction    12.0% reduction

Greenhouse Gas Emissions Kg/hl

   10% reduction    15.7% (met in 2011)

Recycling Rate - %

   99.0    99.2

Beyond operations management, we are also engaged with the international community and local groups to support key environmental initiatives. We are a signatory to the CEO Water Mandate, a public-private initiative of the United Nations Global Compact, which focuses on developing corporate strategies to address global water issues. We actively work to better understand and manage water risks across our supply chain and publicly report

 

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our risks and opportunities to the Carbon Disclosure Project. We were also active participants in the United Nations Environment Program’s annual World Environment Day, through which we engaged with many community stakeholders around the world.

Energy conservation has been a strategic focus for us for many years, especially with the unpredictable cost of energy and evolving climate change regulations. Our continued progress is based on the importance we place on sharing best technical and management practices across our operations. We publicly report our risks and opportunities related to climate change to the Carbon Disclosure Project.

We work with suppliers, wholesalers and procurement companies, as well as packaging experts, to help make decisions that minimize the cost and environmental impact of packaging materials. We use many types of product packaging, from bulk packaging (i.e., beer kegs, crates and pallets), which is almost always returnable and reusable, to cardboard boxes, glass bottles, aluminum cans and PET bottles, which are recyclable. We also continue the light-weighting of packaging to reduce material costs, minimize the use of natural resources, reduce waste and lessen our transportation fuel consumption. We are continually exploring new forms of packaging that meet consumer needs with fewer resources. In 2011, by working with supply chain partners to identify new ways to minimize the environmental impact and cost of our packaging, we reduced material use by more than 62,000 metric tons.

Operating ethically is also part of our environmental mission. We have a Responsible Sourcing Policy that includes standards on labor issues and business conduct. We are committed to operating ethically and with high integrity, maintaining our commitment to quality, and encouraging similar conduct for our business partners.

Community

We make significant contributions to the well-being of the communities where we do business, around the world. This occurs through the jobs we provide, the salaries and wages we pay, the taxes we contribute to local and national governments, and the community support we provide in the form of donations and volunteer activities. For example, we have been involved in supporting Hope Schools in poverty-stricken areas in China, constructing temporary houses in Uruguay and Paraguay, supporting education and community development programs in Argentina and Russia, and contributing water to victims in disaster stricken areas in the United States.

Our People

It takes great people to build a great company. That’s why we focus on attracting and retaining the best talent. Our approach is to enhance our people’s skills and potential through education and training, competitive compensation and a culture of ownership that rewards people for taking responsibility and producing results. Our ownership culture unites our people, providing the necessary energy, commitment and alignment needed to pursue our dream—to be the Best Beer Company in a Better World.

Having the right people in the right roles at the right time—aligned through a clear goal-setting and rewards process—improves productivity and enables us to continue to invest in our business and strengthen our social responsibility initiatives.

C. ORGANIZATIONAL STRUCTURE

Anheuser Busch InBev S.A./N.V. is the parent company of the AB InBev Group. Our most significant subsidiaries (as of 31 December 2012) are:

 

Subsidiary Name

   Jurisdiction of
incorporation
or residence
   Proportion of
ownership
interest
    Proportion
of voting
rights held
 

Anheuser-Busch Companies, LLC

       

One Busch Place

   Delaware,     

St. Louis, MO 63118

   U.S.A.      100     100

Companhia de Bebidas das Américas—Ambev(1)

       

Rua Dr. Renato Paes de Barros 1017

       

4° Andar (parte), cj. 44 e 42—Itaim Bibi

       

São Paulo

   Brazil      61.87     74.05

 

Note:

 

(1) The difference between economic interest and voting interest for Ambev results from the fact that Ambev has issued common shares (with voting rights) and preferred shares (without voting rights).

 

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For a more comprehensive list of our most important financing and operating subsidiaries see note 35 of our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012.

D. PROPERTY, PLANTS AND EQUIPMENT

For a further discussion of property, plants and equipment, see “Item 3. Key Information—D. Risk Factors—Our operations are subject to environmental regulations, which could expose us to significant compliance costs and litigation relating to environmental issues”, “Item 4. Information on the Company—B. Business Overview—6. Brewing Process; Raw Materials and Packaging; Production Facilities; Logistics—Capacity Expansion,” “Item 5. Operating and Financial Review—G. Liquidity and Capital Resources—Capital Expenditures” and “Item 5. Operating and Financial Review—J. Outlook and Trend Information.”

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW

The following is a review of our financial condition and results of operations as of 31 December 2012 and 2011, and for the three years ended 31 December 2012, and of the key factors that have affected or are expected to be likely to affect our ongoing and future operations. You should read the following discussion and analysis in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Form 20-F.

Some of the information contained in this discussion, including information with respect to our plans and strategies for our business and our expected sources of financing, contain forward-looking statements that involve risk and uncertainties. You should read “Forward-Looking Statements” for a discussion of the risks related to those statements. You should also read “Item 3. Key Information—D. Risk Factors” for a discussion of certain factors that may affect our business, financial condition and results of operations.

We have prepared our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union (“IFRS”). The financial information and related discussion and analysis contained in this item are presented in U.S. dollars except as otherwise specified. Unless otherwise specified the financial information analysis in this Form 20-F is based on our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012.

 

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See “Presentation of Financial and Other Data” for further information on our presentation of financial information.

A. KEY FACTORS AFFECTING RESULTS OF OPERATIONS

We consider acquisitions, divestitures and other structural changes, economic conditions and pricing, consumer preferences, our product mix, raw material and transport prices, the effect of our distribution arrangements, excise taxes, the effect of governmental regulations, foreign currency effects and weather and seasonality to be the key factors influencing the results of our operations. The following sections discuss these key factors.

Acquisitions, Divestitures and Other Structural Changes

We regularly engage in acquisitions, divestitures and investments. We also engage in start-up or termination of activities and may transfer activities between business zones. Such events have had and are expected to continue to have a significant effect on our results of operations and the comparability of period-to-period results. Significant acquisitions, divestitures, investments and transfers of activities between business zones in the years ended 31 December 2012, 2011 and 2010 are described below.

Events in the year ended 31 December 2012 that have scope effects on our results include:

 

   

On 11 May 2012, we announced that Ambev and E. León Jimenes S.A. (“ELJ”), which owned 83.5% of CND, entered into a transaction to form a strategic alliance to create the leading beverage company in the Caribbean through the combination of their businesses in the region. Ambev’s initial indirect interest in CND was acquired through a cash payment of USD 1.0 billion and the contribution of Ambev Dominicana. Separately, Ambev Brazil acquired an additional stake in CND of 9.3%, which was owned by Heineken N.V., for USD 237 million at the closing date. During the second half of 2012, as part of the same transaction, Ambev acquired an additional 0.99% stake from other minority holders, through a cash payment of USD 36 million. As of 31 December 2012, Ambev owned a total indirect interest of 52.0% in CND.

Events in the year ended 31 December 2011 that have scope effects on our results include:

 

   

On 28 February 2011, we closed a transaction with Dalian Daxue Group Co. Ltd and Kirin (China) Investment Co. Ltd to acquire a 100% equity interest in Liaoning Dalian Daxue Brewery Co. Ltd., which is among the top three breweries in Liaoning province. Daxue brews, markets and distributes major beer brands including “Daxue,” “Xiao Bang” and “Da Bang” which are popular beer brands in the south of Liaoning province.

 

   

On 1 May 2011, we acquired Fulton Street Brewery LLC, also known as Goose Island, a Midwest craft brewer in the United States. Goose Island brews ales, such as 312 Urban Wheat Ale, Honkers Ale, India Pale Ale, Matilda, Pere Jacques, Sofie and a wide variety of seasonal draft only and barrel-aged releases, including Bourbon County Stout, the original bourbon barrel-aged beer.

 

   

On 31 May 2011, we closed an agreement with Henan Weixue Beer Group Co. Ltd (China) to acquire its brands (Weixue and JiGongshan), assets and business, including its Xinyang brewery, Zhengzhou brewery and Gushi Brewery.

 

   

On 30 December 2011, we acquired Premium Beers of Oklahoma distributor in Oklahoma City, United States, a major wholesaler in that territory.

Events in the year ended 31 December 2010 that have scope effects on our results include:

 

   

On 20 October 2010, Ambev and Cerveceria Regional S.A. closed a transaction pursuant to which they combined their businesses in Venezuela, with Regional owning an 85% interest and Ambev owning the remaining 15% in the new company, which may be increased to 20% over the coming years.

 

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The sale of a series of non-core activities in North America.

 

   

The acquisition of a local distributor in the United States.

In addition to the acquisitions and divestitures described above, we may acquire, purchase or dispose of further assets or businesses in our normal course of operations. Accordingly, the financial information presented in this Form 20-F may not reflect the scope of our business as it will be conducted in the future.

Economic Conditions and Pricing

General economic conditions in the geographic regions in which we sell our products, such as the level of disposable income, the level of inflation, the rate of economic growth, the rate of unemployment, exchange rates and currency devaluation or revaluation, influence consumer confidence and consumer purchasing power. These factors, in turn, influence the demand for our products in terms of total volumes sold and the price that can be charged. This is particularly true for developing countries in our Latin America North, Latin America South, Central & Eastern Europe and Asia Pacific business zones, which tend to have lower disposable income per capita and may be subject to greater economic volatility than our principal markets in North America and Western Europe. The level of inflation has been particularly significant in our Latin America North, Latin America South and Central & Eastern Europe business zones. For instance, Brazil has periodically experienced extremely high rates of inflation. In 1993, the annual rate of inflation, as measured by the National Consumer Price Index (Indice Nacional de Preços ao Consumidor), reached a hyper-inflationary peak of 2,489.1%. As measured by the same index, Brazilian inflation was 5.8% in 2012. Similarly, Russia and Argentina have, in the past, experienced periods of hyper-inflation. Due to the decontrol of prices in 1992, retail prices in Russia increased by 2,520% in that year, as measured by the Russian Federal State Statistics Service. Argentine inflation in 1989 was 4,923.6% according to the Instituto Nacional de Estadística y Censos. As measured by these institutes, in 2012, Russian inflation was 6.5% and Argentine inflation was 10.8%. Consequently, a central element of our strategy for achieving sustained profitable volume growth is our ability to anticipate changes in local economic conditions and their impact on consumer demand in order to achieve the optimal combination of pricing and sales volume.

In addition to affecting demand for our products, the general economic conditions described above may cause consumer preferences to shift between on-trade consumption channels, such as restaurants and cafés, bars, sports and leisure venues and hotels, and off-trade consumption channels, such as traditional grocery stores, supermarkets, hypermarkets and discount stores. Products sold in off-trade consumption channels typically generate higher volumes and lower margins per retail outlet than those sold in on-trade consumption channels, although on-trade consumption channels typically require higher levels of investment. The relative profitability of on-trade and off-trade consumption channels varies depending on various factors, including costs of invested capital and the distribution arrangements in the different countries in which we operate. A shift in consumer preferences towards lower margin products may adversely affect our price realization and profit margins.

Consumer Preferences

We are a consumer products company, and our results of operations largely depend on our ability to respond effectively to shifting consumer preferences. Consumer preferences may shift due to a variety of factors, including changes in demographics, changes in social trends, such as consumer health concerns, product attributes and ingredients, changes in travel, vacation or leisure activity patterns, weather or negative publicity resulting from regulatory action or litigation.

Product Mix

The results of our operations are substantially affected by our ability to build on our strong family of brands by relaunching or reinvigorating existing brands in current markets, launching existing brands in new markets and

 

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introducing brand extensions and packaging alternatives for our existing brands, as well as our ability to both acquire and develop innovative local products to respond to changing consumer preferences. Strong, well-recognized brands that attract and retain consumers, for which consumers are willing to pay a premium, are critical to our efforts to maintain and increase market share and benefit from high margins. See “Item 4. Information on the Company—B. Business Overview—2. Principal Activities and Products—Beer” for further information regarding our brands.

Raw Material and Transport Prices

We have significant exposure to fluctuations in the prices of raw materials, packaging materials, energy and transport services, each of which may significantly impact our cost of sales or distribution expenses. Increased costs or distribution expenses will reduce our profit margins if we are unable to recover these additional costs from our customers through higher prices (see “—Economic Conditions and Pricing”).

The main raw materials used in our beer production are malted barley, corn grits, corn syrup, rice, hops and water, while those used in our non-beer production are flavored concentrate, fruit concentrate, sugar, sweetener and water. In addition to these inputs into our products, delivery of our products to consumers requires extensive use of packaging materials, such as glass, PET and aluminum bottles, aluminum or steel cans and kegs, labels, plastic crates, metal and plastic closures, folding cartons, cardboard products and plastic films.

The price and supply of the raw and packaging materials that we use in our operations are determined by, among other factors, the level of crop production (both in the countries in which we are active and elsewhere in the world), weather conditions, supplier’s capacity utilization, end user demand, governmental regulations and legislation affecting agriculture and trade. In 2012, our commodity prices continued to be volatile. Packaging materials like aluminum, PET resin, steel and corrugated board had price declines, while the price of raw materials like corn and wheat increased due to drought. Accordingly, we expect that commodities will continue to experience volatility. We are also exposed to increases in fuel and other energy prices through our direct and indirect distribution networks and production operations. Increases in the prices of our products could affect demand among consumers, and thus, our sales volumes and revenue.

As further discussed under “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk, Hedging and Financial Instruments,” we use both fixed-price purchasing contracts and commodity derivatives to minimize our exposure to commodity price volatility when practicable. Fixed-price contracts generally have a term of one to two years although a small number of contracts have a term up to five years. See “Item 4. Information on the Company—B. Business Overview—6. Brewing Process; Raw Materials and Packaging; Production Facilities; Logistics—Raw Materials and Packaging” for further details regarding our arrangements for sourcing of raw and packaging materials.

Distribution Arrangements

We depend on effective distribution networks to deliver our products to our customers. Generally, we distribute our products through (i) direct distribution networks, in which we deliver to points of sale directly, and (ii) indirect distribution networks, in which delivery to points of sale occurs through wholesalers and independent distributors. Indirect distribution networks may be exclusive or non-exclusive and may, in certain business zones, involve use of third-party distribution while we retain the sales function through an agency framework. We use different distribution networks in the markets in which we operate, as appropriate, based on the structure of the local retail sectors, local geographic considerations, scale considerations, regulatory requirements, market share and the expected added-value and capital returns.

Although specific results may vary depending on the relevant distribution arrangement and market, in general, the use of direct distribution networks or indirect distribution networks will have the following effects on our results of operations:

 

   

Revenue. Revenue per hectoliter derived from sales through direct distribution tends to be higher than revenue derived from sales through third parties. In general, under direct distribution, we receive a higher price for our products since we are selling directly to points of sale, capturing the margin that would otherwise be retained by intermediaries;

 

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Transportation costs. In our direct distribution networks, we sell our products to the point of sale and incur additional freight costs in transporting those products between our plant and such points of sale. Such costs are included in our distribution expenses under IFRS. In most of our direct distribution networks, we use third-party transporters and incur costs through payments to these transporters, which are also included in our distribution expenses under IFRS. In indirect distribution networks, our distribution expenses are generally limited to expenses incurred in delivering our products to relevant wholesalers or independent distributors in those circumstances in which we make deliveries; and

 

   

Sales expenses. Under fully indirect distribution systems, the salesperson is generally an employee of the distributor, while under our direct distribution networks and indirect agency networks, the salesperson is generally our employee. To the extent that we deliver our products to points of sale through direct or indirect agency distribution networks, we will incur additional sales expenses from the hiring of additional employees (which may offset to a certain extent increased revenue gained as a result of direct distribution).

In addition, in certain countries, we enter into exclusive importer arrangements and depend on our counterparties to these arrangements to market and distribute our products to points of sale. To the extent that we rely on counterparties to distribution agreements to distribute our products in particular countries or regions, the results of our operations in those countries and regions will, in turn, be substantially dependent on our counterparties’ own distribution networks operating effectively.

Excise Taxes

Taxation on our beer and non-beer products in the countries in which we operate is comprised of different taxes specific to each jurisdiction, such as excise and other indirect taxes. In many jurisdictions, such excise and other indirect taxes make up a large proportion of the cost of beer charged to customers. Increases in excise and other indirect taxes applicable to our products either on an absolute basis or relative to the levels applicable to other beverages tend to adversely affect our revenue or margins, both by reducing overall consumption and by encouraging consumers to switch to lower-taxed categories of beverages. These increases also adversely affect the affordability of our products and our ability to raise prices. For example, see the discussion of taxes in the United States, Brazil, Russia and Ukraine in “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—The beer and beverage industry may be subject to adverse changes in taxation.”

Governmental Regulations

Governmental restrictions on beer consumption in the markets in which we operate vary from one country to another, and in some instances, within countries. The most relevant restrictions are:

 

   

Legal drinking ages;

 

   

Global and national alcohol policy reviews and the implementation of policies aimed at preventing the harmful effects of alcohol misuse (including, among others, relating to underage drinking, drunk driving and excessive or abusive drinking);

 

   

Restrictions on sales of alcohol generally or beer specifically, including restrictions on distribution networks, restrictions on certain retail venues, requirements that retail stores hold special licenses for the sale of alcohol, restrictions on times or days of sale and minimum alcohol pricing requirements;

 

   

Advertising restrictions, which affect, among other things, the media channels employed, the content of advertising campaigns for our products and the times and places where our products can be advertised, including in some instances, sporting events;

 

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Restrictions imposed by antitrust or competition laws;

 

   

Deposit laws (including those for bottles, crates and kegs);

 

   

Heightened environmental regulations and standards, including regulations addressing emissions of gas and liquid effluents and the disposal of waste and one-way packaging, compliance with which imposes costs; and

 

   

Litigation associated with any of the above.

Please refer to “Item 4. Information on the Company—B. Business Overview—11. Regulations Affecting Our Business” for a fuller description of the key laws and regulations to which our operations are subject.

Foreign Currency

Our financial statements presentation and reporting currency is the U.S. dollar. A number of our operating companies have functional currencies (that is, in most cases, the local currency of the respective operating company) other than our reporting currency. Consequently, foreign currency exchange rates have a significant impact on our consolidated financial statements. In particular:

 

   

Changes in the value of our operating companies’ functional currencies against other currencies in which their costs and expenses are priced may affect those operating companies’ cost of sales and operating expenses, and thus negatively impact their operating margins in functional currency terms. Foreign currency transactions are accounted for at exchange rates prevailing at the date of the transactions, while monetary assets and liabilities denominated in foreign currencies are translated at the balance sheet date. Except for exchange differences on transactions entered into in order to hedge certain foreign currency risk and exchange rate differences on monetary items that form part of the net investment in the foreign operations, gains and losses resulting from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities in currencies other than an operating company’s functional currency are recognized in the income statement. Historically, we have been able to raise prices and implement cost saving initiatives to partly offset cost and expense increases due to exchange rate volatility. We also have hedge policies designed to manage commodity price and foreign currency risks to protect our exposure to currencies other than our operating companies’ respective functional currencies. Please refer to “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk, Hedging and Financial Instruments” for further detail on our approach to hedging commodity price and foreign currency risk.

 

   

Any change in the exchange rates between our operating companies’ functional currencies and our reporting currency affects our consolidated income statement and consolidated statement of financial position when the results of those operating companies are translated into the reporting currency for reporting purposes. Assets and liabilities of foreign operations are translated to the reporting currency at foreign exchange rates prevailing at the balance sheet date. Income statements of foreign operations are translated to the reporting currency at exchange rates for the year approximating the foreign exchange rates prevailing at the dates of transactions. The components of shareholders’ equity are translated at historical rates. Exchange differences arising from the translation of shareholders’ equity into the reporting currency at year-end are taken to other comprehensive income (that is, in a translation reserve). Decreases in the value of our operating companies’ functional currencies against the reporting currency tend to reduce their contribution to, among other things, our consolidated revenue and profit.

For further details regarding the currencies in which our revenue is realized and the effect of foreign currency fluctuations on our results of operations see “—F. Impact of Changes in Foreign Exchange Rates” below.

 

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Weather and Seasonality

Weather conditions directly affect consumption of our products. High temperatures and prolonged periods of warm weather favor increased consumption of our products, while unseasonably cool or wet weather, especially during the spring and summer months, adversely affects our sales volumes and, consequently, our revenue. Accordingly, product sales in all of our business zones are generally higher during the warmer months of the year (which also tend to be periods of increased tourist activity) as well as during major holiday periods.

Consequently, for most countries in the Latin America North and Latin America South business zones (particularly Argentina and most of Brazil), volumes are usually stronger in the first and fourth quarters due to year-end festivities and the summer season in the Southern Hemisphere, while for countries in North America, Western Europe, Central & Eastern Europe and Asia Pacific business zones, volumes tend to be stronger during the spring and summer seasons in the second and third quarters of each year.

Based on 2012 information, for example, we realized 54% of our total 2012 volumes in Western Europe in the second and third quarters, compared to 46% in the first and fourth quarters of the year, whereas in Latin America South, we realized 41% of our sales volume in second and third quarters, compared to 59% in the first and fourth quarters.

Although such sales volume figures are the result of a range of factors in addition to weather and seasonality, they are nevertheless broadly illustrative of the historical trend described above.

B. SIGNIFICANT ACCOUNTING POLICIES

The U.S. Securities and Exchange Commission (the “SEC”) has defined a critical accounting policy as a policy for which there is a choice among alternatives available, and for which choosing a legitimate alternative would yield materially different results. We believe that the following are our critical accounting policies. We consider an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant or complex judgments and estimates on the part of our management. For a summary of all of our significant accounting policies, see note 3 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012 included in this Form 20-F.

Although each of our significant accounting policies reflects judgments, assessments or estimates, we believe that the following accounting policies reflect the most critical judgments, estimates and assumptions that are important to our business operations and the understanding of its results: revenue recognition, accounting for business combinations and impairment of goodwill and intangible assets; pension and other post-retirement benefits; share-based compensation; contingencies; deferred and current income taxes; and accounting for derivatives. Although we believe that our judgments, assumptions and estimates are appropriate, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Our products are sold for cash or on credit terms. In relation to the sale of beverages and packaging, we recognize revenue when the significant risks and rewards of ownership have been transferred to the buyer, and no significant uncertainties remain regarding recovery of the consideration due, associated costs or the possible return of goods, and there is no continuing management involvement with the goods. Our sales terms do not allow for a right of return.

Our customers can earn certain incentives, which are treated as deductions from revenue. These incentives primarily include volume-based incentive programs, free beer and cash discounts. In preparing the financial statements, management must make estimates related to the contractual terms, customer performance and sales volume to determine the total amounts recorded as deductions from revenue. Management also considers past results in making such estimates. The actual amounts ultimately paid may be different from our estimates. Such differences are recorded once they have been determined and have historically not been significant.

 

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In many jurisdictions, excise taxes make up a large proportion of the cost of beer charged to our customers. The aggregate deductions from revenue recorded by us in relation to these taxes was approximately USD 10.1 billion, USD 10.1 billion and USD 9.2 billion for the years ended 31 December 2012, 2011, and 2010, respectively.

Accounting for Business Combinations and Impairment of Goodwill and Intangible Assets

We have made acquisitions that included a significant amount of goodwill and other intangible assets, including the acquisition of Anheuser-Busch. Our acquisition of Anheuser-Busch was accounted for using the purchase method of accounting under IFRS and, in 2009, we completed the purchase price allocation in compliance with IFRS 3.

As of 31 December 2012, our total goodwill amounted to USD 51.8 billion and our intangible assets with indefinite life amounted to USD 23.0 billion.

We exercise significant judgment in the process of identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and in determining their remaining useful lives. We generally engage third-party valuation firms to assist in valuing the acquired assets and liabilities. The valuation of these assets and liabilities is based on the assumptions and criteria which include, in some cases, estimates of future cash flows discounted at the appropriate rates. The use of different assumptions used for valuation purposes including estimates of future cash flows or discount rates may have resulted in different estimates of value of assets acquired and liabilities assumed. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

We test our goodwill and other long-lived assets for impairment annually or whenever events and circumstances indicate that the recoverable amount, determined as the higher of the asset’s fair value less cost to sell and value in use, of those assets is less than their carrying amount. The testing methodology consists of applying a discounted free cash flow approach based on acquisition valuation models for our major business units and the business units showing a high invested capital to EBITDA multiple, and valuation multiples for our other business units. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. Our estimates of fair values used to determine the resulting impairment loss, if any, represent our best estimate based on forecasted cash flows, industry trends and reference to market rates and transactions. Impairments can also occur when we decide to dispose of assets.

The key judgments, estimates and assumptions used in the discounted free cash flow calculations are as follows:

 

   

The first year of the model is based on management’s best estimate of the free cash flow outlook for the current year;

 

   

In the second to fourth years of the model, free cash flows are based on our strategic plan as approved by key management. Our strategic plan is prepared per country and is based on external sources in respect of macroeconomic assumptions, industry, inflation and foreign exchange rates, past experience and identified initiatives in terms of market share, revenue, variable and fixed cost, capital expenditure and working capital assumptions;

 

   

For the subsequent six years of the model, data from the strategic plan is extrapolated generally using simplified assumptions such as constant volumes and variable cost per hectoliter and fixed cost linked to inflation, as obtained from external sources;

 

   

Cash flows after the first ten-year period are extrapolated generally using expected annual long-term consumer price indices, based on external sources, in order to calculate the terminal value, considering sensitivities on this metric. For the two main cash generating units, the terminal growth rate applied ranged between 0.0% and 2.0% for the United States and 0.0% and 3.2% for Brazil;

 

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Projections are made in the functional currency of the business unit and discounted at the unit’s weighted average cost of capital (“WACC”), considering sensitivities on this metric. The WACC ranged primarily between 5% and 14% in U.S. dollar nominal terms for goodwill impairment testing conducted for 2012. For the two main cash generating units, the WACC applied in U.S. dollar nominal terms ranged between 5% and 8% for the United States and 6% and 10% for Brazil; and

 

   

Cost to sell is assumed to reach 2% of the entity value based on historical precedents.

The above calculations are corroborated by valuation multiples, quoted share prices for publicly-traded subsidiaries or other available fair value indicators.

Impairment testing of intangible assets with an indefinite useful life is based on the same methodology and assumptions as described above.

For additional information on goodwill, intangible assets, tangible assets and impairments, see notes 13, 14 and 15 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012.

Pension and Other Post-Retirement Benefits

We sponsor various post-employment benefit plans worldwide. These include pension plans, both defined contribution plans, and defined benefit plans, and other post-employment benefits. Usually, pension plans are funded by payments made both by us and our employees, taking into account the recommendations of independent actuaries. We maintain funded and unfunded plans.

Defined contribution plans

Contributions to these plans are recognized as expenses in the period in which they are incurred.

Defined benefit plans

For defined benefit plans, liabilities and expenses are assessed separately for each plan using the projected unit credit method. The projected unit credit method takes into account each period of service as giving rise to an additional unit of benefit to measure each unit separately. Under this method, the cost of providing pensions is charged to the income statement during the period of service of the employee. The amounts charged to the income statement consist of current service cost, interest cost, the expected return of any plan assets, past service costs and the effect of any settlements and curtailments.

The net defined benefit plan liability recognized in the statement of financial position is measured as the current value of the estimated future cash outflows using a discount rate equivalent to high quality corporate bond yields with maturity terms similar to those of the obligation, less any past service cost not yet recognized and the fair value of any plan assets. Past service costs result from the introduction of a new plan or changes to an existing plan. They are recognized in the income statement over the period the benefit vests. Where the calculated amount of a defined benefit plan liability is negative (an asset), we recognize such asset to the extent of any unrecognized past service costs plus any economic benefits available to us either from refunds or reductions in future contributions.

Assumptions used to value defined benefit liabilities are based on actual historical experience, plan demographics, external data regarding compensation and economic trends. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligation and our future expense. Actuarial gains and losses consist of the effects of differences between the previous actuarial assumptions and what has actually occurred and the effects of changes in actuarial assumptions. Actuarial gains and losses are fully recognized in other comprehensive income. For further information on how changes in these assumptions could change the amounts recognized see the sensitivity analysis within note 24 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012.

 

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A significant portion of our plan assets is invested in equity and debt securities. The equity and debt markets have experienced volatility in the recent past, which has affected the value of our pension plan assets. This volatility may make it difficult to estimate the long-term rate of return on plan assets. Actual asset returns that differ from our assumptions are fully recognized in other comprehensive income.

Other post-employment obligations

We and our subsidiaries provide health care benefits and other benefits to certain retirees. The expected costs of these benefits are recognized over the period of employment, using an accounting methodology similar to that used for defined benefit plans.

Share-Based Compensation

We have various types of equity settled share-based compensation schemes for employees. Employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments as of the date of grant. Fair value of stock options is estimated by using the binomial Hull model on the date of grant based on certain assumptions. Those assumptions are described in note 25 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012 included in this Form 20-F and include, among others, the dividend yield, expected volatility and expected life of the stock options. The binomial Hull model assumes that all employees would immediately exercise their options if our share price were 2.5 times above the option exercise price. As a consequence, no single expected option life applies, whereas the assumption of the expected volatility has been set by reference to the implied volatility of our shares in the open market and in light of historical patterns of volatility. In the determination of the expected volatility, we excluded the volatility measured during the period 15 July 2008 to 30 April 2009 given the extreme market conditions experienced during that period.

Contingencies

The preparation of our financial statements requires management to make estimates and assumptions regarding contingencies which affect the valuation of assets and liabilities at the date of the financial statements and the revenue and expenses during the reported period.

We disclose material contingent liabilities unless the possibility of any loss arising is considered remote, and material contingent assets where the inflow of economic benefits is probable. We discuss our material contingencies in note 31 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012.

Under IFRS, we record a provision for a loss contingency when it is probable that a future event will confirm that a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated. By their nature, contingencies will only be resolved when one or more future events occur or fail to occur and typically those events will occur over a number of years in the future. The accruals are adjusted as further information becomes available.

As discussed in “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings,” and in note 31 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against us. We record provisions for pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates.

Deferred and Current Income Taxes

We recognize deferred tax effects of tax loss carry-forwards and temporary differences between the financial statement carrying amounts and the tax basis of our assets and liabilities. We estimate our income taxes

 

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based on regulations in the various jurisdictions where we conduct business. This requires us to estimate our actual current tax exposure and to assess temporary differences that result from different treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we record on our consolidated balance sheet. We regularly review the deferred tax assets for recoverability and will only recognize these if we believe that it is probable that there will be sufficient taxable profit against any temporary differences that can be utilized, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date. We reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available. If the final outcome of these matters differs from the amounts initially recorded, differences may positively or negatively impact the income tax and deferred tax provisions in the period in which such determination is made.

We are subject to income tax in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income tax. There are some transactions and calculations for which the ultimate tax determination is uncertain. Some of our subsidiaries are involved in tax audits and local enquiries usually in relation to prior years. Investigations and negotiations with local tax authorities are ongoing in various jurisdictions at the balance sheet date and, by their nature, these can take considerable time to conclude. In assessing the amount of any income tax provisions to be recognized in the financial statements, estimation is made of the expected successful settlement of these matters. Estimates of interest and penalties on tax liabilities are also recorded. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period such determination is made.

Accounting for Derivatives

Our risk management strategy includes the use of derivatives. The main derivative instruments we use are foreign currency rate agreements, exchange traded foreign currency futures, interest rate swaps and options, cross currency interest rate swaps and forwards, exchange traded interest rate futures, commodity swaps, exchange traded commodity futures and equity swaps. Our policy prohibits the use of derivatives in the context of speculative trading.

Derivative financial instruments are recognized initially at fair value. Fair value is the amount for which the asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Subsequent to initial recognition, derivative financial instruments are remeasured to fair value at balance sheet date. For derivative financial instruments that qualify for hedge accounting, we apply the following policy: for fair value hedges, changes in fair value are recorded in the income statement and for cash flow and net investment hedges, changes in fair value are recognized in the other comprehensive income and/or in the income statement for the effective and/or ineffective portion of the hedge relationship, respectively.

The estimated fair value amounts have been determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. The fair values of financial instruments that are not traded in an active market (for example, unlisted equities, currency options, embedded derivatives and over-the-counter derivatives) are determined using valuation techniques. We use judgment to select an appropriate valuation methodology and underlying assumptions based principally on existing market conditions. Changes in these assumptions may cause us to recognize impairments or losses in future periods.

Although our intention is to maintain these instruments through maturity, they may be realized at our discretion. Should these instruments be settled only on their respective maturity dates, any effect between the market value and estimated yield curve of the instruments would be eliminated.

 

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C. BUSINESS ZONES

Both from an accounting and managerial perspective, we are organized along seven zones: North America, Latin America North (which includes Brazil, the Dominican Republic, Guatemala, Ecuador and Peru), Latin America South (which includes Bolivia, Paraguay, Uruguay, Argentina and Chile), Western Europe (which also includes Cuba), Central & Eastern Europe, Asia Pacific and Global Export & Holding Companies. In 2013, Peru and Ecuador became part of the Latin America South business zone.

The financial performance of each business zone, including the business zone’s sales volume and revenue, is measured based on our product sales within the countries that comprise that business zone rather than based on products manufactured within that business zone but sold elsewhere. The Global Export & Holding Companies business zone includes our headquarters and the countries in which our products are sold only on an export basis and in which we do not otherwise have any operations or production activities, as well as certain intra-group transactions.

In 2012, North America accounted for 31.1% of our consolidated volumes, Latin America North for 31.3%, Asia Pacific for 14.3%, Latin America South for 8.5%, Western Europe for 7.3%, Central & Eastern Europe for 5.7% and Global Export & Holding Companies for 1.8%. A substantial portion of our operations is carried out through our two largest subsidiaries, Anheuser-Busch (wholly owned) and Ambev (61.87% owned as of 31 December 2012) and their respective subsidiaries.

Throughout the world, we are primarily active in the beer business. However, we also have non-beer activities (primarily consisting of soft drinks), within certain countries in our Latin America business zones, in particular, Brazil, the Dominican Republic, Peru, Bolivia, Uruguay and Argentina. Both the beer and non-beer volumes comprise sales of brands that we own or license, third-party brands that we brew or otherwise produce as a subcontractor and third-party products that we sell through our distribution network.

D. EQUITY INVESTMENTS

As of 31 December 2012, we held a 35.29% direct interest in Grupo Modelo, Mexico’s largest brewer and producer of the Corona brand, and a 23.25% direct interest in Grupo Modelo’s subsidiary Diblo, S.A. de C.V. (the “Modelo entities”). Our direct investments in Grupo Modelo and Diblo, S.A. de C.V. give us an approximate (direct and indirect) 50.34% equity interest in the Modelo entities. We have the right to appoint nine of 19 positions on Grupo Modelo’s board of directors (and the holders of Grupo Modelo’s Series A Shares have the right to appoint the other ten positions) and also have membership on the Executive Committee. However, we do not have voting or other effective control of either Diblo or Grupo Modelo and consequently account for our investments using the equity method. On 28 June 2012, a trust holding Series A Shares in Grupo Modelo that represented a controlling interest in the Modelo entities was dissolved and the shares previously held by the trust were distributed to the trust beneficiaries. In connection with such dissolution, we entered into covenant agreements with substantially all of the trust beneficiaries setting forth certain rights and obligations of the parties with respect to their shares in the Modelo entities. On 28 June 2012 we entered into a transaction agreement with Grupo Modelo to acquire the remaining stake in Grupo Modelo that we do not already own. For further details of the combination with Grupo Modelo, see “Item 10. Additional Information—C. Material Contracts—Grupo Modelo Transaction Agreement.”

See note 16 to our audited consolidated financial statements as of 31 December 2012 and 2011, and for the three years ended 31 December 2012 for further details on our equity investments.

E. RESULTS OF OPERATIONS

Year Ended 31 December 2012 Compared to the Year Ended 31 December 2011

Volumes

Our reported volumes include both beer and non-beer (primarily carbonated soft drinks) volumes. In addition, volumes include not only brands that we own or license, but also third-party brands that we brew or otherwise produce as a subcontractor and third-party products that we sell through our distribution network, particularly in Western Europe. Volumes sold by the Global Export & Holding Companies businesses are shown separately. Our pro rata share of volumes in Grupo Modelo is not included in the reported volumes.

 

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The table below summarizes the volume evolution by zone.

 

     Year ended
31 December 2012
     Year ended
31 December 2011
     Change  
     (thousand hectoliters)      (%)(1)  

North America

     125,139         124,899         0.2   

Latin America North

     126,187         120,340         4.9   

Latin America South

     34,292         34,565         (0.8

Western Europe

     29,531         30,887         (4.4

Central & Eastern Europe

     22,785         25,690         (11.3

Asia Pacific

     57,667         55,980         3.0   

Global Export & Holding Companies

     7,030         7,004         0.4   
  

 

 

    

 

 

    

 

 

 

Total

     402,631         399,365         0.8   
  

 

 

    

 

 

    

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our consolidated volumes were 402.6 million hectoliters for the year ended 31 December 2012. This represented an increase of 3.3 million hectoliters, or 0.8%, as compared to our consolidated volumes for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012.

 

   

The 2011 acquisitions include the acquisitions in China of Liaoning Dalian Daxue Brewery Co. Ltd (“Daxue”) and Henan Weixue Beer Group Co. Ltd (“Weixue”), and the acquisitions in the United States of Fulton Street Brewery LLC (“Goose Island”) and certain distribution rights. Furthermore, our volumes were impacted by the progressive termination of the transitional supply agreement to brew and supply Labatt branded beer to KPS Capital Partners, L.P. (“KPS”) following the disposal of InBev USA in 2009 and the termination of certain Staropramen brewing and distribution rights in 2011 (collectively, the “2011 acquisitions and disposals”). The 2012 acquisitions include the acquisition in Dominican Republic of CND (the “2012 acquisitions,” together with the 2011 acquisitions and disposals, the “2012 and 2011 acquisitions and disposals”). The 2012 and 2011 acquisitions and disposals impacted positively our volumes by 2.1 million hectoliters (net) for the year ended 31 December 2012 compared to the year ended 31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

Excluding volume changes attributable to the acquisitions and disposals described above, our total volumes increased 0.3% in the year ended 31 December 2012 compared to the same period 2011. On the same basis, our own beer volumes and non-beer volumes increased 0.1% and 2.2%, respectively. Our focus brands, which represent approximately 70% of our total global beer volumes, grew 1.5% in the year ended 31 December 2012 as compared to the same period in 2011, with our three global brands, Budweiser, Stella Artois and Beck’s growing by 4.1%.

North America

In the year ended 31 December 2012, our volumes in North America increased by 0.2% compared to the year ended 31 December 2011. Excluding the acquisitions and disposals described above, our total volumes would have increased by 0.6% over the same period. Our shipment volumes in the United States grew 0.7% and domestic United States beer sales-to-retailers grew 0.4% for the year ended 31 December 2012 compared to the same period 2011.

We estimate that our market share trends continued to show improvement in the United States, declining by less than 20 bps in the year ended 31 December 2012, with significant improvements in the premium-plus category

 

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following the roll-out of Bud Light Platinum and Bud Light Lime Lime-A-Rita. We estimate that these innovations helped to grow the market share of the Bud Light Family by approximately 70 bps in the year ended 31 December 2012. Michelob Ultra, Shock Top, Stella Artois and our other high-end brands also grew share, while our market share remained under pressure as a result of softness in Budweiser and our pricing strategy of closing the gap between our sub-premium and premium brands within our portfolio.

In Canada, our beer volumes increased by 0.1% during the year ended 31 December 2012 compared to the year ended 31 December 2011, mostly driven by a tough comparison in terms of industry and the ice hockey lock-out. We estimate that our market share for the year ended 31 December 2012 was 40.6%.

Latin America North

In the year ended 31 December 2012, our volumes in Latin America North increased by 5.8 million hectoliters, or 4.9%, compared to the same period in 2011. Excluding the acquisitions and disposals described above, our total volumes would have increased by 3.0% over the same period, with beer volumes increasing 2.7% and soft drink volumes increasing 3.7% on the same basis.

In Brazil, our beer volumes increased 2.5% during the year ended 31 December 2012 compared to the same period in 2011, benefiting from an estimated industry growth of 3.2%, a strong 2012 Carnival execution, the positive effect of higher consumer disposable income in 2012, additional price promotions in the fourth quarter of 2012 following the partial postponement of the tax increase announced on September 2012, as well as strong execution of our commercial initiatives. However, the year over year volume growth was also impacted by an earlier than normal price increase taken during the third quarter of 2012. Our premium brands continued to grow ahead of the rest of our portfolio. We estimate that Budweiser, which has been in the market over a year, became the largest international premium brand in Brazil during the fourth quarter of 2012. Stella Artois is also growing quickly with over 45% volume growth during the year ended 31 December 2012, compared to the same period last year. We estimate that our market share was down by 50 bps during the year ended 31 December 2012 compared to the same period in 2011, reaching an average of 68.5%, primarily due to price increases in the third quarter of 2012.

Latin America South

Latin America South volumes for the year ended 31 December 2012 decreased by 0.3 million hectoliters, or 0.8%, with beer volumes increasing 0.1% and non-beer volumes decreasing by 2.2%, compared to the same period in 2011. Our beer volumes in Argentina declined 0.4% in the year ended 31 December 2012 compared to the same period in 2011 driven by an uncertain consumer environment and a weak industry. However, a strong performance from Quilmes and Stella Artois led to continued strong market share performance.

Western Europe

Our volumes, including subcontracted volumes, for the year ended 31 December 2012 decreased by 1.4 million hectoliters, or 4.4%, compared to the same period 2011. Excluding the acquisitions and disposals described above, our volumes would have decreased by 4.2% over the same period. Own beer volumes for the year ended 31 December 2012 decreased 3.5% compared to the same period 2011. On the same basis, total own products, including cider, declined by 3.0%.

In Belgium, own beer volumes decreased 4.1% in the year ended 31 December 2012 compared to the same period in 2011, driven by a weak weather-related industry performance in the first half of 2012. We estimate that market share was stable at 56.3% for the full year. In Germany, own beer volumes decreased 1.4% in the year ended 31 December 2012. We estimate that our market share was ahead during the year ended 31 December 2012, driven by a strong performance of our focus brands Beck’s and Hasseröder. In the United Kingdom, own product volumes decreased 8.2% in the year ended 31 December 2012 compared to the same period in 2011, mainly driven by a weak industry and market share pressure due to competitive activity in the off-trade channel.

Central & Eastern Europe

Our volumes for the year ended 31 December 2012 decreased by 2.9 million hectoliters, or 11.3%, compared to the year ended 31 December 2011. In Russia, our beer volumes fell 12.0% over the same period driven by industry weakness following regulatory changes. Market share loss was driven by the implementation of tax-related and other selective price increases ahead of competitors, and promotional pressure in key account channels. However, we continued to make progress with the optimization of our brand portfolio, with our premium and super-premium brands, including Sibirskaya Korona, Bud, Stella Artois, Hoegaarden and Löwenbräu gaining an estimated 90 bps share, and now representing 35% of total volumes. We estimate that Bud achieved an estimated market share of 1.4%.

 

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In Ukraine, our beer volumes decreased 10.3% for the year ended 31 December 2012 compared to the same period in 2011, driven by a weak industry and market share loss. However, Bud achieved an estimated market share of 1% during the nine months since launch.

Asia Pacific

For the year ended 31 December 2012, our volumes grew 1.7 million hectoliters, or 3.0%, compared to the same period in 2011. Excluding the acquisitions described above, our total volumes would have increased by 1.9% in the year ended 31 December 2012 compared to the same period in 2011. On the same basis, our beer volumes in China grew 1.9% as industry volumes in our footprint declined by almost 12% during the last quarter of 2012 due to severe cold and wet weather. In China, our focus brands Budweiser, Harbin and Sedrin grew 8.1% in the year ended 31 December 2012 compared to the same period in 2011. We estimate that we gained market share in the year ended 31 December 2012 compared to the same period in 2011.

We continue to strengthen our position through distribution expansion, selective acquisitions and greenfield developments. We entered into an agreement with the Dragon Group on 21 September 2012 to acquire its stake in Keytop group for an aggregate purchase price anticipated to be approximately USD 400 million. The Keytop group owns majority participations in four breweries located in the Jiangxi, Henan and Shandong provinces in China. This acquisition is expected to support our growth strategy in China through the addition of approximately nine million hectoliters in total production capacity, and the closing of the acquisition is subject to regulatory approvals and customary closing conditions.

Global Export & Holding Companies

For the year ended 31 December 2012, Global Export & Holding Companies remained fundamentally unchanged, compared to the same period in 2011. Excluding the acquisitions and disposals described above, our volumes would have increased by 3.6%.

Revenue

Revenue refers to turnover less excise taxes and discounts. See “—A. Key Factors Affecting Results of Operations—Excise Taxes.”

The following table reflects changes in revenue across our business zones for the year ended 31 December 2012 as compared to our revenue for the year ended 31 December 2011.

 

     Year ended
31 December 2012
     Year ended
31 December 2011
     Change  
     (USD million)      (%) (1)  

North America

     16,028         15,304         4.7   

Latin America North

     11,455         11,524         (0.6

Latin America South

     3,023         2,704         11.8   

Western Europe

     3,625         3,945         (8.1

Central & Eastern Europe

     1,668         1,755         (5.0

Asia Pacific

     2,690         2,317         16.1   

Global Export & Holding Companies

     1,270         1,496         (15.1
  

 

 

    

 

 

    

 

 

 
Total      39,758         39,046         1.8   
  

 

 

    

 

 

    

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

 

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Our consolidated revenue was USD 39,758 million for the year ended 31 December 2012. This represented an increase of USD 712 million, or 1.8%, as compared to our consolidated revenue for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012 and currency translation effects.

 

   

The 2012 and 2011 acquisitions and disposals (defined above) positively impacted our consolidated revenue by USD 312 million (net) for the year ended 31 December 2012 compared to the year ended 31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated revenue for the year ended 31 December 2012 also reflects an unfavorable currency translation impact of USD 2,421 million mainly arising from currency translation effects in Latin America North, Latin America South and Western Europe.

Excluding the effects of the business acquisitions and disposals described above and currency translation effects, our revenue would have increased 7.2% for the year ended 31 December 2012 compared to the year ended 31 December 2011. Our consolidated revenue for the year ended 31 December 2012 was partly impacted by the developments in volumes discussed above. On the same basis, revenue per hectoliter improved 7.8%, resulting from favorable brand mix and revenue management best practices.

The main business zones contributing to growth in our consolidated revenues were North America, driven by the benefit of the price increase implemented at the end of 2011, as well as positive brand mix; Latin America North, due to the price increases implemented the third quarter of 2012, positive premium brand mix and higher direct distribution, partly offset by higher taxes; Latin America South, as a result of revenue growth offsetting high cost inflation; and Asia Pacific driven by volume, brand mix and selective price increases.

Cost of Sales

The following table reflects changes in cost of sales across our business zones for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

North America

     (6,637     (6,726     1.3   

Latin America North

     (3,650     (3,738     2.4   

Latin America South

     (1,114     (1,040     (7.1

Western Europe

     (1,550     (1,652     6.2   

Central & Eastern Europe

     (914     (984     7.1   

Asia Pacific

     (1,565     (1,319     (18.7

Global Export & Holding Companies

     (1,018     (1,174     13.3   
  

 

 

   

 

 

   

 

 

 

Total

     (16,447     (16,634     1.1   
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our consolidated cost of sales was USD 16,447 million for the year ended 31 December 2012. This represented a decrease of USD 187 million, or 1.1%, compared to our consolidated cost of sales for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012 and currency translation effects.

 

   

The 2012 and 2011 acquisitions and disposals described above negatively impacted our consolidated cost of sales by USD 95 million (net) for the year ended 31 December 2012 compared to the year ended

 

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31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated cost of sales for the year ended 31 December 2012 also reflects a positive currency translation impact of USD 762 million mainly arising from currency translation effects in Latin America North, Latin America South and Western Europe.

It should also be noted that the U.S. distribution system was amended at the start of 2012, from a freight pass-through to a delivered price model. Consequently, in 2012, our cost of sales decreased and our distribution expenses increased, with no net impact on EBITDA, as defined. The adjustment for the year ended 31 December 2012, therefore, includes a scope adjustment between cost of sales and distribution expenses of approximately 6% of 2011 North America cost of sales.

Excluding the effects of the business acquisitions and disposals described above, currency translation effects, and the effects of the amendment of the distribution system in the United States from a freight pass through system to a delivered price model as described above, our cost of sales would have increased by 5.4%. Our consolidated cost of sales for the year ended 31 December 2012 was partly impacted by the developments in volumes discussed above. On the same basis, cost of sales increased 7.0% on a per hectoliter basis as compared to the year ended 31 December 2011, primarily driven by higher commodity costs in most zones, higher labor costs in Latin America South, and brand mix in North America and China.

Operating Expenses

The discussion below relates to our operating expenses, which equal the sum of our distribution expenses, sales and marketing expenses, administrative expenses and other operating income and expenses (net), for the year ended 31 December 2012 as compared to the year ended 31 December 2011. Our operating expenses do not include exceptional charges, which are reported separately.

Our operating expenses for the year ended 31 December 2012 were USD 10,546 million, representing an increase of USD 741 million, or 7.6% compared to our operating expenses for the same period 2011.

Distribution expenses

The following table reflects changes in distribution expenses across our business zones for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

North America

     (1,317     (807     (63.2

Latin America North

     (1,311     (1,332     1.6   

Latin America South

     (263     (227     (15.9

Western Europe

     (364     (409     11.0   

Central & Eastern Europe

     (184     (224     17.9   

Asia Pacific

     (235     (193     (21.8

Global Export & Holding Companies

     (111     (120     7.5   
  

 

 

   

 

 

   

 

 

 

Total

     (3,785     (3,313     (14.2
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

 

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Our consolidated distribution expenses were USD 3,785 million for the year ended 31 December 2012. This represented an increase of USD 472 million, or 14.2%, as compared to the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012 and currency translation effects.

 

   

The 2012 and 2011 acquisitions and disposals described above negatively impacted our consolidated distribution expenses by USD 24 million (net) for the year ended 31 December 2012 compared to the year ended 31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated distribution expenses for the year ended 31 December 2012 also reflect a positive currency translation impact of USD 279 million.

Excluding the effects of the business acquisitions and disposals, the currency translation effects described above, and the effects of the amendment of the distribution system in the United States from a freight pass through system to a delivered price model as described above, the increase in distribution expenses for the year ended 31 December 2012 as compared to the same period in 2011 would have been 8.9%, driven by (i) higher transportation costs and additional own distribution operations in both the United States and Brazil; (ii) the roll-out of our innovations in the United States, particularly Bud Light Lime Lime-A-Rita; and (iii) higher labor and transportation costs in Argentina and China.

Sales and marketing expenses

Marketing expenses include all costs relating to the support and promotion of brands, including operating costs (such as payroll and office costs) of the marketing departments, advertising costs (such as agency costs and media costs), sponsoring and events and surveys and market research. Sales expenses include all costs relating to the selling of products, including operating costs (such as payroll and office costs) of the sales department and sales force.

The following table reflects changes in sales and marketing expenses across our business zones for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

North America

     (1,798     (1,640     (9.6

Latin America North

     (1,245     (1,263     1.4   

Latin America South

     (296     (272     (8.8

Western Europe

     (649     (760     14.6   

Central & Eastern Europe

     (400     (420     4.8   

Asia Pacific

     (670     (588     (13.9

Global Export & Holding Companies

     (200     (200     —     
  

 

 

   

 

 

   

 

 

 

Total

     (5,258     (5,143     (2.2
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our consolidated sales and marketing expenses were USD 5,258 million for the year ended 31 December 2012. This represented an increase of USD 115 million, or 2.2%, as compared to our consolidated sales and marketing expenses for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012 and currency translation effects.

 

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The 2012 and 2011 acquisitions and disposals described above negatively impacted our consolidated sales and marketing expenses by USD 50 million (net) for the year ended 31 December 2012 compared to the year ended 31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated sales and marketing expenses for the year ended 31 December 2012 also reflect a positive currency translation impact of USD 286 million.

Excluding the effects of the business acquisitions and disposals described above and currency translation effects, our overall sales and marketing expenses for the year ended 31 December 2012 as compared to the same period in 2011 would have increased 6.8% due to higher investments behind our brands and innovations.

Administrative expenses

The following table reflects changes in administrative expenses across our business zones for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

North America

     (458     (475     3.6   

Latin America North

     (600     (535     (12.1

Latin America South

     (93     (85     (9.4

Western Europe

     (267     (305     12.5   

Central & Eastern Europe

     (113     (108     (4.6

Asia Pacific

     (274     (221     (24.0

Global Export & Holding Companies

     (382     (314     (21.7
  

 

 

   

 

 

   

 

 

 

Total

     (2,187     (2,043     (7.0
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our consolidated administrative expenses were USD 2,187 million for the year ended 31 December 2012. This represented an increase of USD 144 million, or 7.0%, as compared to our consolidated administrative expenses for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012 and currency translation effects.

 

   

The 2012 and 2011 acquisitions and disposals described above negatively impacted our consolidated administrative expenses by USD 41 million (net) for the year ended 31 December 2012 compared to the year ended 31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated administrative expenses for the year ended 31 December 2012 also reflect a positive currency translation impact of USD 151 million.

Excluding the effects of the business acquisitions and disposals and the currency translation effects described above, administrative expenses would have increased by 12.4% for the year ended 31 December 2012 as compared to the same period in 2011 with higher variable compensation accruals in most zones, as well as geographic expansion costs in China, partly offset by tight cost management in North America and Western Europe.

 

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Other operating income/(expense)

The following table reflects changes in other operating income and expenses across our business zones for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
     Change  
     (USD million)      (%)(1)  

North America

     64        54         18.5   

Latin America North

     426        462         (7.8

Latin America South

     4        1         300.0   

Western Europe

     24        37         (35.1

Central & Eastern Europe

     5        2         150.0   

Asia Pacific

     121        90         34.4   

Global Export & Holding Companies

     40        48         (16.7
  

 

 

   

 

 

    

 

 

 

Total

     684        694         (1.4
  

 

 

   

 

 

    

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

The net positive effect of our other operating income and expenses for the year ended 31 December 2012 was USD 684 million. This represented a decrease of USD 10 million, or 1.4%, compared to the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect a negative translation impact of USD 73 million.

Excluding the effects of currency translation effects, the net positive effect of our other operating income and expenses would have increased by 8.3% for the year ended 31 December 2012 as compared to the same period in 2011.

Exceptional Items

Exceptional items are items which, in our management’s judgment, need to be disclosed separately by virtue of their size and incidence in order to obtain a proper understanding of our financial information. We consider these items to be of significance in nature, and accordingly, our management has excluded these items from their segment measures of performance.

For the year ended 31 December 2012, exceptional items consisted of restructuring charges, business and asset disposals, and acquisition costs of business combinations. Exceptional items were as follows for the year ended 31 December 2012 and 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
 
     (USD million)  

Restructuring (including impairment losses)

     (36     (351

Business and asset disposal (including impairment losses)

     58        78   

Acquisitions costs business combinations

     (54     (5
  

 

 

   

 

 

 

Total

     (32     (278
  

 

 

   

 

 

 

 

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Restructuring

Exceptional restructuring charges (including impairment losses) amounted to a net cost of USD 36 million for the year ended 31 December 2012 as compared to a net cost of USD 351 million for the year ended 31 December 2011. The 2012 charges are primarily related to organizational alignments in North America and Europe and to the integration of CND in order to eliminate overlap or duplicated processes. These one-time expenses as a result of the series of decisions provide us with a lower cost base in addition to a stronger focus on our core activities, quicker decision-making and improvements to efficiency, service and quality.

Business and asset disposal

Business and asset disposals (including impairment losses) amounted to a net benefit of USD 58 million for the year ended 31 December 2012 compared to a net benefit of USD 78 million for the same period in 2011. The 2012 net benefit relates mainly to the sale of certain non-core assets, with a net gain of USD 51 million, and USD 7 million reversal of provisions for contractual exposures related to divestitures of previous years.

Acquisition costs business combinations

Acquisition costs of USD 54 million for the year ended 31 December 2012 relate to costs incurred for the combination with Grupo Modelo announced on 29 June 2012 and the acquisition of CND on 11 May 2012.

Profit from Operations

The following table reflects changes in profit from operations across our business zones for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

North America

     5,928        5,521        7.4   

Latin America North

     5,049        5,139        (1.8

Latin America South

     1,261        1,076        17.2   

Western Europe

     817        733        11.5   

Central & Eastern Europe

     57        21        171.4   

Asia Pacific

     69        77        (10.4

Global Export & Holding Companies

     (447     (238     (87.8
  

 

 

   

 

 

   

 

 

 

Total

     12,733        12,329        3.3   
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our profit from operations increased to USD 12,733 million for the year ended 31 December 2012. This represented an increase of USD 404 million, or 3.3%, as compared to our profit from operations for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2011 and 2012, currency translation effects and the effects of certain exceptional items as described above.

 

   

The 2012 and 2011 acquisitions and disposals described above positively impacted our consolidated profit from operations by USD 89 million (net) for the year ended 31 December 2012 compared to the year ended 31 December 2011. For further details of these acquisitions and disposals, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated profit from operations for the year ended 31 December 2012 also reflects a negative currency translation impact of USD 1,070 million.

 

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Our profit from operations for the year ended 31 December 2012 was negatively impacted by USD 32 million of certain exceptional items, as compared to a negative impact of USD 278 million for the year ended 31 December 2011. See “—Exceptional Items” above for a description of the exceptional items during the years ended 31 December 2012 and 2011.

EBITDA, as defined

The following table reflects changes in our EBITDA, as defined, for the year ended 31 December 2012 as compared to the year ended 31 December 2011:

 

      Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

Profit

     9,434        7,959        18.5   

Net finance cost

     2,206        3,137        29.7   

Income tax expense

     1,717        1,856        7.5   

Share of result of associates

     (624     (623     0.2   
  

 

 

   

 

 

   

 

 

 

Profit from operations

     12,733        12,329        3.3   

Depreciation, amortization and impairment

     2,747        2,783        1.3   
  

 

 

   

 

 

   

 

 

 

EBITDA, as defined

     15,480        15,112        2.4   
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

A performance measure such as EBITDA, as defined, is a non-IFRS measure. The financial measure most directly comparable to EBITDA, as defined, presented in accordance with IFRS in our consolidated financial statements, is profit. EBITDA, as defined, is a measure used by our management to evaluate our business performance and is defined as profit from operations before depreciation, amortization and impairment. EBITDA, as defined, is a key component of the measures that are provided to senior management on a monthly basis at the group level, the zone level and lower levels. We believe EBITDA, as defined, is useful to investors for the following reasons.

We believe EBITDA, as defined, facilitates comparisons of our operating performance across our zones from period to period. In comparison to profit, EBITDA, as defined, excludes items which do not impact the day-to-day operation of our primary business (that is, the selling of beer and other operational businesses) and over which management has little control. Items excluded from EBITDA, as defined, are our share of results of associates, depreciation and amortization, impairment, financial charges and corporate income taxes, which management does not consider to be items that drive our company’s underlying business performance. Because EBITDA, as defined, includes only items management can directly control or influence, it forms part of the basis for many of our performance targets. For example, certain options under our share-based compensation plan were granted such that they vest only when certain targets derived from EBITDA, as defined, are met.

We further believe that EBITDA, as defined, and measures derived from it, are frequently used by securities analysts, investors and other interested parties in their evaluation of our company and in comparison to other companies, many of which present an EBITDA performance measure when reporting their results.

EBITDA, as defined, does, however, have limitations as an analytical tool. It is not a recognized term under IFRS and does not purport to be an alternative to profit as a measure of operating performance, or to cash flows from operating activities as a measure of liquidity. As a result, you should not consider EBITDA, as defined, in isolation from, or as a substitute analysis for, our results of operations. Some limitations of EBITDA, as defined, are:

 

   

EBITDA, as defined, does not reflect the impact of financing costs on our operating performance. Such costs are significant in light of our increased debt;

 

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EBITDA, as defined, does not reflect depreciation and amortization, but the assets being depreciated and amortized will often have to be replaced in the future;

 

   

EBITDA, as defined, does not reflect the impact of charges for existing capital assets or their replacements;

 

   

EBITDA, as defined, does not reflect our tax expense; and

 

   

EBITDA, as defined, may not be comparable to other similarly titled measures of other companies because not all companies use identical calculations.

Additionally, EBITDA, as defined, is not intended to be a measure of free cash flow for management’s discretionary use, as it is not adjusted for all non-cash income or expense items that are reflected in our consolidated statement of cash flows.

We compensate for these limitations, in addition to using EBITDA, as defined, by relying on our results calculated in accordance with IFRS.

Our EBITDA, as defined, increased to USD 15,480 million for the year ended 31 December 2012. This represented an increase of USD 368 million, or 2.4%, as compared to our EBITDA, as defined, for the year ended 31 December 2011. The results for the year ended 31 December 2012 reflect the performance of our business after the completion of the acquisitions and disposals we undertook in 2011 and 2012 discussed above and currency translation effects. Furthermore, our EBITDA, as defined, was negatively impacted by USD 32 million (before impairment losses) of certain exceptional items in the year ended 31 December 2012, as compared to a negative impact of USD 245 million during the year ended 31 December 2011. See “—Exceptional Items” above for a description of the exceptional items during the years ended 31 December 2012 and 2011.

Net Finance Cost

Our net finance cost items were as follows for the years ended 31 December 2012 and 2011:

 

     Year ended
31 December 2012
    Year ended
31 December 2011
    Change  
     (USD million)     (%)(1)  

Net interest expense

     (1,802     (2,333     22.8   

Accretion expense

     (270     (209     (29.2

Other financial results

     (116     (55     (110.9
  

 

 

   

 

 

   

 

 

 

Net finance costs before exceptional finance costs

     (2,188     (2,597     15.7   

Mark-to-market adjustment on derivatives

     —          (246     —     

Accelerated accretion expense

     —          (77     —     

Other financial results

     (18     (217     91.7   
  

 

 

   

 

 

   

 

 

 

Exceptional finance costs

     (18     (540     96.7   
  

 

 

   

 

 

   

 

 

 

Net finance costs

     (2,206     (3,137     29.7   
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our net finance cost for the year ended 31 December 2012 was USD 2,206 million, as compared to USD 3,137 million for the year ended 31 December 2011, or a decrease of USD 931 million.

 

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Net interest expenses reached USD 1,802 million for the year ended 31 December 2012 compared to USD 2,333 million for the same period in 2011, mainly as a result of reduced net debt levels and the lower coupon resulting from the debt refinancing and repayments which occurred in 2011.

Other financial results for the year ended 31 December 2012 amount to a net cost of USD 116 million primarily due to non-cash unrealized foreign exchange translation losses on intercompany payables and loans, costs of currency and commodity hedges, the payment of bank fees and taxes on financial transactions in the normal course of business, partially offset by gains from derivative contracts to hedge risks associated with different share-based compensation programs. Accretion expense of USD 270 million in the year ended 31 December 2012 increased primarily due to the IFRS accounting treatment for the put option associated with our investment in CND in Dominican Republic, following the closing of the transaction in May 2012. This non-cash expense will be approximately USD 30 million in a full quarter.

In light of the proposed acquisition of the remaining stake in Grupo Modelo, we recognized an exceptional finance cost of USD 18 million during the year ended 31 December 2012 related to commitment fees for the 2012 facilities agreement we entered into to fund the acquisition. Such commitment fees accrue and are payable periodically on the aggregate undrawn but available funds under these facilities.

Share of result of associates

Our share of result of associates for the year ended 31 December 2012 was USD 624 million as compared to USD 623 million for the year ended 31 December 2011, attributable to the results of our investment in Grupo Modelo in Mexico.

Income Tax Expense

Our total income tax expense for the year ended 31 December 2012 amounted to USD 1,717 million, with an effective tax rate of 16.3% (as compared to 20.2% for the year ended 31 December 2011). The decrease in the effective tax rate mainly results from a shift in profit mix to countries with lower marginal tax rates, incremental tax benefits, the non-taxable nature of gains from certain derivatives related to the hedging of share-based payment programs, as well as the favorable outcomes of tax claims and uncertain tax positions recognized in prior years amounting to USD 203 million.

In 2012 and 2011 we recognized the benefit at the Ambev level from the impact of interest on equity payments and tax deductible goodwill resulting from the merger between InBev Holding Brasil S.A. and Ambev in July 2005 and the acquisition of Quinsa in August 2006. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ambev Special Goodwill Reserve.” The impact of the tax deductible goodwill resulting from the merger between InBev Holding Brasil S.A. and Ambev in July 2005 was to reduce income tax expense for the year ended 31 December 2012 by USD 180 million, and the impact of the tax deductible goodwill resulting from the acquisition of Quinsa in August 2006 was to reduce income tax expense for the year end 2012 by USD 55 million. In December 2011, Ambev received a tax assessment related to the goodwill amortization resulting from the merger between InBev Holding Brasil S.A. and Ambev. In the event Ambev is required to pay these amounts, we shall reimburse Ambev the amount proportional to the benefit received by us pursuant to the merger protocol, as well as the respective costs. See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings—Ambev and its Subsidiaries—Special Goodwill Reserve” for further information.

Profit Attributable to Non-Controlling Interests

The profit attributable to non-controlling interests was USD 2,191 million for the year ended 31 December 2012, an increase of USD 87 million from USD 2,104 million for the year ended 31 December 2011, as improved operating performance in Ambev was partially reduced by currency translation effects.

Profit Attributable to Our Equity Holders

Profit attributable to our equity holders for the year ended 31 December 2012 was USD 7,243 million with basic earnings per share of USD 4.53, based on 1,600 million shares outstanding, representing the weighted average number of shares outstanding during the year ended 31 December 2012. Excluding the exceptional items discussed above, profit attributable to our equity holders for the year ended 31 December 2012 would have been USD 7,283 million and basic earnings per share would have been USD 4.55.

 

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Year Ended 31 December 2011 Compared to the Year Ended 31 December 2010

Volumes

Our reported volumes include both beer and non-beer (primarily carbonated soft drinks) volumes. In addition, volumes include not only brands that we own or license, but also third-party brands that we brew or otherwise produce as a subcontractor and third-party products that we sell through our distribution network, particularly in Western Europe. Volumes sold by the Global Export & Holding Companies businesses are shown separately. Our pro rata share of volumes in Grupo Modelo is not included in the reported volumes.

The table below summarizes the volume evolution by zone.

 

     Year ended
31 December 2011
     Year ended
31 December 2010
     Change  
     (thousand hectoliters)      (%)(1)  

North America

     124,899         129,476         (3.5

Latin America North

     120,340         120,056         0.2   

Latin America South

     34,565         33,854         2.1   

Western Europe

     30,887         31,833         (3.0

Central & Eastern Europe

     25,690         26,750         (4.0

Asia Pacific

     55,980         50,268         11.4   

Global Export & Holding Companies

     7,004         6,681         4.8   
  

 

 

    

 

 

    

 

 

 

Total

     399,365         398,918         0.1   
  

 

 

    

 

 

    

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our consolidated volumes for the year ended 31 December 2011 increased 0.4 million hectoliters, or 0.1%, to 399.4 million hectoliters compared to our consolidated volumes for the year ended 31 December 2010.

The results for the year ended 31 December 2011 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2010 and 2011. The 2010 acquisitions and disposals include the acquisition of certain distribution rights in the United States and the transaction entered into between Ambev and Cerveceria Regional S.A in Venezuela. The 2011 acquisitions include the acquisitions in China of Liaoning Dalian Daxue and Henan Weixue Beer Group Co. Ltd. and the acquisitions in the United States of Fulton Street Brewery LLC (“Goose Island”) and certain distribution rights. Furthermore, our volumes were impacted by the progressive termination of the transitional supply agreement to brew and supply Labatt branded beer to KPS Capital Partners, L.P. following the disposal of InBev USA in 2009 and the termination of certain Staropramen brewing and distribution rights in 2011. These transactions impacted positively our volumes by 1.3 million hectoliters (net) for the year ended 31 December 2011 compared to the year ended 31 December 2010. For further details of these acquisitions and dispositions, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

Excluding volume changes attributable to the acquisitions and disposals described above, our own beer volumes remained basically flat in the year ended 31 December 2011 compared to our volumes for the year ended 31 December 2010, with a difficult comparison with the 2010 volumes, which saw strong growth in certain zones driven by the FIFA World CupTM. Our focus brands, which globally represented approximately 70% of our total beer volume in 2011, grew 0.8% in year ended 31 December 2011 as compared to 2010 led by Quilmes in Argentina, Antarctica in Brazil, and Budweiser and Harbin in China and Bud in Russia. On the same basis, in the period ended 30 December 2011, our non-beer volumes increased by 1.5% compared to the same period in 2010. Third-party volumes decreased by 29.5% year on year due to the termination of legacy third-party commercial products contracts in Western Europe.

 

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North America

In the year ended 31 December 2011, our volumes in North America declined by 4.6 million hectoliters or 3.5% compared to the year ended 31 December 2010. Excluding the acquisitions and disposals described above, our total volume would have decreased by 3.1%. Shipment volumes in the United States declined 3.2% with domestic United States beer sales-to-retailers decreasing 3.0% for the year ended 31 December 2011 compared to 31 December 2010.

In the United States, industry volumes were impacted by weak consumer confidence, as well as poor weather and high gas prices during the second quarter of 2011. We estimate both that the industry volumes as a whole, and our market share, declined in the year ended 31 December 2011 in comparison to 2010. We estimate that we gained share with Michelob Ultra and our high end portfolio (led by Stella Artois and Shock Top) and that we maintained share with Bud Light, but as anticipated, we continued to experience market share loss in the sub-premium segment following the implementation of our strategy to close the price gap between our sub-premium and premium brands in the last quarter of 2010. We estimate that Budweiser lost market share during 2011, but that the rate of decline continued to decelerate.

In Canada, our beer volumes fell 1.3% during the year ended 31 December 2011, partly attributable to the benefit of the Winter Olympics in the first quarter of 2010, as well as industry weakness at the beginning of 2011. During the second half of 2011, the industry showed some recovery, but remained soft. We believe that Budweiser continued to consolidate its position as the country’s number one brand, gaining market share in 2011.

Latin America North

In the year ended 31 December 2011, our volumes in Latin America North remained flat compared to the same period in 2010. Excluding the transaction related to Venezuela described above, our total volumes would have increased by 0.7%, with beer volume increasing 0.5% and soft drink increasing 1.1% on the same basis. In Brazil, we estimate that industry beer volumes grew by 1.8% with our beer volume remaining basically flat for the year ended 31 December 2011, compared to the same period in 2010, following our decision to focus more on revenue management and profitability, rather than volume. Additionally, volumes in 2011 reflect difficult comparables with the strong beer growth experienced during the year ended 31 December 2010 compared to the same period in 2009, when our beer and soft drink volumes in Brazil grew by 10.7% and 7.9%, respectively, helped by the FIFA World CupTM, successful innovation launches and market share gains. Low growth in real disposable income in the zone also impacted our volumes in 2011.

We estimate that our market share for the year 2011 was the second highest level in the last ten years.

Latin America South

Latin America South volumes for the year ended 31 December 2011 increased by 0.7 million hectoliters, or 2.1%, with beer and non-beer volumes increasing 3.0% and 0.6%, respectively, compared to the same period in 2010. Beer volumes in Argentina grew 4.7% in the year ended 31 December 2011 compared to the same period in 2010 as a result of industry growth and market share gains. Stella Artois continued to deliver a strong performance in the premium segment. We saw growth in the Quilmes brand in 2011, supported by product innovations, including the launch of the aluminum bottle in the night-life channel.

Western Europe

Own beer volume for the year ended 31 December 2011 increased 0.4%. Our volumes, including subcontracted volumes and excluding the acquisitions and disposals described above, for the year ended 31 December 2011 decreased by 2.8%, compared to the year ended 31 December 2010, following the termination of third-party legacy commercial products contracts in the United Kingdom in March 2011. We estimate that third-party products volumes in the United Kingdom represented approximately 6% of our total Western Europe volumes for the year ended 31 December 2011, down from nearly 10% in 2010.

In Belgium, own beer volume grew 1.6% in year ended 31 December 2011 mainly driven by positive industry dynamics, with market share marginally ahead of 2010. The increase was partially offset by an exceptionally cold and rainy summer period. In Germany, own beer volumes increased 5.2% in the year ended 31 December 2011 driven by the relisting of our products by a major retail customer and a strong performance from our focus brands.

 

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We estimate that our market share in Germany reached its second highest level in history. In the United Kingdom, own beer volumes declined 6.0% in the year ended 31 December 2011, impacted by poor summer weather and with a difficult comparison with the growth experienced in the first half of 2010, which was driven by the FIFA World CupTM and the re-launch of Budweiser.

Central & Eastern Europe

Our volumes for the year ended 31 December 2011 decreased 4.0% compared to the year ended 31 December 2010. In Russia, beer volumes fell 5.6% for the year ended 31 December 2011 as market conditions continued to be challenging and with difficult volume comparisons due to an exceptionally hot summer in 2010. We estimate we gained market share in value terms as a consequence of our premiumization strategy, driven by a strong performance of our super premium brands Bud, Hoegaarden and Stella Artois.

In Ukraine, beer volumes decreased 1.4% for the year ended 31 December 2011 driven by lower industry volumes, which were partially offset by market share gains following several product and packaging innovations supporting our main brand Chernigivske, including Chernigivske Gold Premium and Chezz.

Asia Pacific

For the year ended 31 December 2011, our volumes grew 5.7 million hectoliters, or 11.4%, compared to the same period in 2010. Excluding the acquisitions described above, our total volume would have increased by 6.6%. Beer volumes in China grew 6.4% for the year ended 31 December 2011 compared to the same period in 2010. Our three “focus brands” in China, Budweiser, Harbin and Sedrin, which represent almost 70% of our volume in China, grew by double digits with all three brands contributing to growth, benefiting from further geographic expansion and product innovations.

Global Export & Holding Companies

For the year ended 31 December 2011, Global Export & Holding Companies volume increased 0.3 million hectoliters, or 4.8%, compared to the same period in 2010. Excluding the transfer of activities from North America, volumes for the year ended 31 December 2011 would have increased by 3.4%.

Revenue

Revenue refers to turnover less excise taxes and discounts. See “—A. Key Factors Affecting Results of Operations—Excise Taxes.”

The following table reflects changes in revenue across our business zones for the year ended 31 December 2011 as compared to our revenue for the year ended 31 December 2010.

 

      Year ended
31 December 2011
     Year ended
31 December 2010
     Change  
     (USD million)      (%) (1)  

North America

     15,304         15,296         0.1   

Latin America North

     11,524         10,018         15.0   

Latin America South

     2,704         2,182         23.9   

Western Europe

     3,945         3,937         0.2   

Central & Eastern Europe

     1,755         1,619         8.4   

Asia Pacific

     2,317         1,767         31.1   

Global Export & Holding Companies

     1,496         1,479         1.1   
  

 

 

    

 

 

    

 

 

 

Total

     39,046         36,297         7.6   
  

 

 

    

 

 

    

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

 

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Our consolidated revenue was USD 39,046 million for the year ended 31 December 2011. This represented an increase of USD 2,749 million, or 7.6%, as compared to our consolidated revenue for the year ended 31 December 2010. The results for the year ended 31 December 2011 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2010 and 2011 and currency translation effects.

 

   

The 2010 acquisitions and disposals include the acquisition of certain distribution rights in the United States, the transaction entered into between Ambev and Cerveceria Regional S.A. in Venezuela and the disposal of certain non-core assets in the United States (collectively the “2010 acquisitions and disposals”). The 2011 acquisitions include the acquisitions in China of Daxue and Weixue, and the acquisitions in the United States of Goose Island and certain distribution rights. Furthermore, the 2011 volumes were impacted by the progressive termination of the transitional supply agreement to brew and supply Labatt branded beer to KPS following the disposal of InBev USA in 2009 (collectively the “2011 acquisitions and disposals” and together with the 2010 acquisitions and disposals, the “2010 and 2011 acquisitions and disposals”). These acquisitions and disposals negatively impacted our consolidated revenue by USD 137 million (net) for the year ended 31 December 2011 compared to the year ended 31 December 2010. For further details of these acquisitions and dispositions, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated revenue for the year ended 31 December 2011 also reflects a favorable currency translation impact of USD 1,137 million mainly arising from currency translation effects in Latin America North, Western Europe, North America (Canada) and Asia Pacific.

Excluding the effects of the business acquisitions and disposals described above, currency translation effects and the conversion in 2011 of certain sales expenses into discount programs in Asia Pacific, our revenue would have increased 4.6% for the year ended 31 December 2011 compared to the year ended 31 December 2010. On the same basis, revenue per hectoliter improved 5.0%. The increase was driven by the consistent execution of our brand-building strategies across our markets, the implementation of revenue management best practices, as well as selective price increases in the latter part of the year in anticipation of higher commodity costs in 2012. Our consolidated revenue for the year ended 31 December 2011 was partly impacted by the developments in volume discussed above.

The main business zones contributing to growth in our consolidated revenues were Latin America North, driven by price adjustments implemented in Brazil and higher direct distribution volumes, partially offset by the impact of the federal tax increase on beer and soft drinks which took effect in April 2011; Latin America South as a result of industry growth in Argentina; Asia Pacific supported by improved brand mix, package mix and selective price increases; and estimated growth in market share by value terms in Central and Eastern Europe during 2011 driven by the performance of our super premium brands Bud, Hoegaarden and Stella Artois.

Cost of Sales

The following table reflects changes in cost of sales across our business zones for the year ended 31 December 2011 as compared to the year ended 31 December 2010:

 

      Year ended
31 December 2011
    Year ended
30 December 2010
    Change  
     (USD million)     (%)(1)  

North America

     (6,726     (6,946     3.2   

Latin America North

     (3,738     (3,410     (9.6

Latin America South

     (1,040     (842     (23.5

Western Europe

     (1,652     (1,883     12.3   

Central & Eastern Europe

     (984     (857     (14.8

Asia Pacific

     (1,319     (1,008     (30.9

Global Export & Holding Companies

     (1,174     (1,206     2.7   
  

 

 

   

 

 

   

 

 

 

Total

     (16,634     (16,151     (3.0
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

 

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Our consolidated cost of sales was USD 16,634 million for the year ended 31 December 2011. This represented an increase of USD 483 million, or 3.0%, compared to our consolidated cost of sales for the year ended 31 December 2010. The results for the year ended 31 December 2011 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2010 and 2011 and currency translation effects.

 

   

The 2010 and 2011 acquisitions and disposals described above positively impacted our consolidated cost of sales by USD 139 million (net) for the year ended 31 December 2011 compared to the year ended 31 December 2010. For further details of these acquisitions and dispositions, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

   

Our consolidated cost of sales for the year ended 31 December 2011 also reflects a negative currency translation impact of USD 389 million mainly arising from currency translation effects in Latin America North, Western Europe, North America (Canada) and Asia Pacific.

Excluding the effects of the business acquisitions and disposals described above, currency translation effects, and the effect of the review of the useful lives of certain of our fixed assets performed in 2010 on depreciation expenses, our cost of sales would have increased by 1.6%. Our consolidated cost of sales for the year ended 31 December 2011 was partly impacted by the developments in volume discussed above. On the same basis, cost of sales increased 1.7% on a per hectoliter basis as compared to the year ended 31 December 2010, primarily driven by higher input and production costs in Central and Eastern Europe, Latin America South and Asia Pacific. This increase was partially offset by favorable currency hedges and lower aluminum can costs in Latin America North, procurement savings and the implementation of best practice programs in North America, and the benefits of terminating legacy third-party commercial product contracts in Western Europe.

Operating Expenses

The discussion below relates to our operating expenses, which equal the sum of our distribution expenses, sales and marketing expenses, administrative expenses and other operating income and expenses (net), for the year ended 31 December 2011 as compared to the year ended 31 December 2010. Our operating expenses do not include exceptional charges, which are reported separately.

Our operating expenses for the year ended 31 December 2011 were USD 9,805 million, representing an increase of USD 824 million, or 9.2% compared to our operating expenses for the same period 2010.

Distribution expenses

The following table reflects changes in distribution expenses across our business zones for the year ended 31 December 2011 as compared to the year ended 31 December 2010:

 

      Year ended
31 December 2011
    Year ended
31 December 2010
    Change  
     (USD million)     (%)(1)  

North America

     (807     (774     (4.3

Latin America North

     (1,332     (1,128     (18.1

Latin America South

     (227     (180     (26.1

Western Europe

     (409     (393     (4.1

Central & Eastern Europe

     (224     (191     (17.3

Asia Pacific

     (193     (140     (37.9

Global Export & Holding Companies

     (120     (106     (13.2
  

 

 

   

 

 

   

 

 

 

Total

     (3,313     (2,913     (13.7
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

 

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Our consolidated distribution expenses were USD 3,313 million for the year ended 31 December 2011. This represented an increase of USD 400 million, or 13.7%, as compared to the year ended 31 December 2010. The results for the year ended 31 December 2011 reflect a negative currency translation impact of USD 133 million.

Excluding the effects of the currency translation effects described above, the increase in distribution expenses would have been 9.2%, resulting primarily from Latin America North, as a result of higher transportation costs in Brazil due to the temporary transfer of products between geographies in advance of new capacity coming on stream and a higher mix of direct distribution; Latin America South, due to labor cost increases above inflation; Central & Eastern Europe, led by higher transport tariffs in Russia and Ukraine at the beginning of the year; and Asia Pacific, as a result of higher volumes and fuel costs.

Sales and marketing expenses

Marketing expenses include all costs relating to the support and promotion of brands, including operating costs (such as payroll and office costs) of the marketing departments, advertising costs (such as agency costs and media costs), sponsoring and events and surveys and market research. Sales expenses include all costs relating to the selling of products, including operating costs (such as payroll and office costs) of the sales department and sales force.

The following table reflects changes in sales and marketing expenses across our business zones for the year ended 31 December 2011 as compared to the year ended 31 December 2010:

 

      Year ended
31 December 2011
    Year ended
31 December 2010
    Change  
     (USD million)     (%)(1)  

North America

     (1,640     (1,565     (4.8

Latin America North

     (1,263     (1,238     (2.0

Latin America South

     (272     (228     (19.3

Western Europe

     (760     (716     (6.1

Central & Eastern Europe

     (420     (353     (19.0

Asia Pacific

     (588     (439     (33.9

Global Export & Holding Companies

     (200     (174     (14.9
  

 

 

   

 

 

   

 

 

 

Total

     (5,143     (4,712     (9.1
  

 

 

   

 

 

   

 

 

 

 

Note:

 

(1) The percentage change reflects the improvement (or worsening) of results for the period as a result of the change in each item.

Our consolidated sales and marketing expenses were USD 5,143 million for the year ended 31 December 2011. This represented an increase of USD 431 million, or 9.1%, as compared to our sales and marketing expenses for the year ended 31 December 2010. The results for the year ended 31 December 2011 reflect the performance of our business after the completion of certain acquisitions and disposals we undertook in 2010 and 2011 and currency translation effects.

 

   

The 2010 and 2011 acquisitions and disposals described above positively impacted our consolidated sales and marketing expenses by USD 11 million (net) for the year ended 31 December 2011 compared to the year ended 31 December 2010. For further details of these acquisitions and dispositions, see “Item 5. Operating and Financial Review—A. Key Factors Affecting Results of Operations—Acquisitions, Divestitures and Other Structural Changes.”

 

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Our consolidated sales and marketing expenses for the year ended 31 December 2011 also reflect a negative currency translation impact of USD 167 million.

Excluding the effects of the business acquisitions and disposals described above, currency translation and the conversion in 2011 of certain sales expenses into discount programs in Asia Pacific, our overall sales and marketing expenses for the year ended 31 December 2011 would have increased 4.1%, as greater brand investments across our business more than offset savings in non-working money, specifically in North America.

Administrative expenses

The following table reflects changes in administrative expenses across our business zones for the year ended 31 December 2011 as compared to the year ended 31 December 2010:

 

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