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Edited Transcript of ABEV3.SA earnings conference call or presentation 26-Jul-18 3:00pm GMT

Q2 2018 Ambev SA Earnings Call

Sao Paulo Aug 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Ambev SA earnings conference call or presentation Thursday, July 26, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernardo Pinto Paiva

Ambev S.A. - CEO & Member of Executive Board of Officers

* Fernando Mommensohn Tennenbaum

Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers

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Conference Call Participants

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* Antonio Gonzalez Anaya

Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research

* Isabella Simonato

BofA Merrill Lynch, Research Division - VP

* Luca Cipiccia

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Robert Edward Ottenstein

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

* Thiago Callegari L. Duarte

Banco BTG Pactual S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's Second Quarter 2018 Results Conference Call. Today with us we have Mr. Bernardo Paiva, CEO for Ambev; and Mr. Fernando Tennenbaum, CFO and Investor Relations officer. We would like to inform you that this event is being recorded. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements.

I would also like to remind everyone that as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with second quarter 2017 results.

Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT and EBITDA on a fully reported basis in the earnings release.

Now I'll turn the conference over to Mr. Bernardo Paiva, CEO. Mr. Paiva, you may begin your conference.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [2]

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Thank you. Hello, everyone. Thank you for joining our 2018 second quarter earnings call. Before starting, I would like to announce that we have here Fernando Tennenbaum, our new CFO since July 1. Fernando joined Ambev in 2004 and while at Ambev, has served in many finance functions. Since January 2012, he has been the global treasurer of AB InBev. I would like to thank Ricardo Rittes for all his support during his almost 3 years as our CFO, during which he delivered great results.

I would also like to welcome Fernando and to wish him all the best in his new role. I will now hand over to Fernando to go through our results in all the zones. And next, I will come back to take you through our commercial highlights in Brazil and to share with you our outlook for the country.

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [3]

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Thank you very much, Bernardo. I'm really happy to be here. Throughout this 14 years in the group, I had the opportunity to work as the investor relations, head of M&A and Treasurer of InBev. [Rittes] has set a very high bar as CFO and I'm deeply committed to continue his remarkable work and keep pursuing sustainable value creation for our shareholders. After this quick introduction, I will start with the main highlights of our consolidated results. In the second quarter, we posted a strong growth in most of our market. On a consolidated basis, topline was up 11.4%, positively impacted by volume growth of 2.6%, coupled with a net revenue per hectoliter increase of 8.6%.

After 10.1% of EBITDA growth year-over-year in Q1, we further accelerated EBITDA growth to 16.7% in Q2, versus the same period last year, expanding margin by 180 basis point to 39.4% and reaching BRL 4.5 billion.

Normalized net profit was BRL 2.3 billion, 9.7% higher than Q2 '17, as a deep organic growth and lower tax rate were partially offset by higher financial expenses.

Moving now to our divisional results and starting with Brazil. Brazil EBITDA was up 14.8% reaching BRL 2.4 billion, with margin expansion of 190 basis points to 41.1%. Our beer business in the country delivered good results. Net revenue increased by 9.2% and EBITDA grew by 11.1%, with margin expansion of 70 basis points to 41.5%. After an anticipated soft start in 2018, beer volume resumed growth to 1.7%. Despite the negative impact from the truck drivers' strike, which was offset by 2018 FIFA World Cup, the beer industry, according to our estimates, was flattish.

Net revenue per hectoliter remained strong and grew by 7.4%, benefiting from the carryover of the price adjustment implemented in Q3 2017 as well as from our continued revenue management initiatives.

Cash COGS per hectoliter for Brazil was up 2.7%, a combination of FX tailwind and pressure from inflation, higher commodity prices and higher weight of cans. Cash SG&A grew by 11.4%, mostly driven by increased sales and marketing expenses associated with timing of investments related to the FIFA World Cup as anticipated. Year-to-date, topline in Beer Brazil increased by 3.7% and EBITDA was up 7.9% with margin expansion of 170 basis points to 42.7%.

Our NAB business in Brazil also posted healthy results in the second quarter. Topline was up 10.2% and EBITDA increased by 44.2%, with margin expansion of 920 basis points to 38.9%.

Volume grew by 1%, amid a soft industry that declined by mid-single digits. Net revenue per hectoliter increased by 9.2% and benefited from the annualization of our revenue management initiatives implemented in the second half of 2017.

In terms of cost and expenses, cash COGS per hectoliter in NAB was down 9.8%, favorably impacted by FX and lower sugar prices.

Cash SG&A was up 13.5%, also driven by a higher concentration of sales and marketing expenses [encouraging] connection with FIFA World Cup. Year-to-date, top line in NAB Brazil grew by 1.2% and EBITDA was up 24.8%, with margin expansion of 650 basis points to 34.2%.

Moving now to Central American and Caribbean region. We continue to experience the positive trends seen last quarters. EBIT in CAC reached BRL 548 million, increasing organically by 21.2% with margin expansion of 170 basis points to 39.8%.

Net revenue increased by 16.2% and on a per hectoliter basis by 4.9%. Volume was strong, growing by 10.8% with Dominican Republic and Panama, the 2 largest countries in the region, delivering a healthy performance.

In the Dominican Republic in particular, we continue to [take the] Presidente brand through a remarkable execution that comprises, among other initiatives, the sponsorship of micro events and distribution of new coolers in the market. And in Panama, we embraced Panama's first World Cup with some memorable activation of Balboa, which contributed to a strong volume increase in the country.

Cash COGS per hectoliter in CAC was slightly positive growing by 1.5%, benefiting from a tight cost management. Further, cash SG&A was up 20.9%, mostly driven by phasing sales and marketing expenses related to 2018 FIFA World Cup. Year-to-date, topline in CAC was up 12.5% and EBITDA grew by 20%. We saw good margin expansion of 250 basis points to 39.3%.

I would like to highlight that we're pleased with the evolution of our business in CAC and remain enthusiastic about the [opportunity] we see in the region in both the short as well as the long term.

Moving now to Latin America South. Our last region have a strong quarter. EBITDA was 37.4% above that of last year, reaching BRL 941 million with a margin expansion of 360 basis points to 39.4%. Net revenue grew by 25.6%, as a result of volume growth of 4.9%, coupled with net revenue per hectoliter increase of 19.5%, which was a consequence of high inflation and revenue management initiatives.

In Argentina in particular, beer volumes grew by mid-single digits on a hard comparable of more than 20% growth in the second quarter of 2017. This performance was mainly [fueled by] Brahma and Quilmes Clásica that continue to deliver strong results in the country. Cash COGS per hectoliter in LAS went up 7.3% benefited by FX, while cash SG&A [increased] by 20.9%, and below inflation marketing expenses were impacted by higher distribution cost associated through volume increased.

Year-to-date, topline in LAS rose by 25% and EBIT increased by 30%, with margin expansion of 170 basis points to 41.5%.

In LAS, while cautious about the Argentina market economic environment, we have a track record of delivering solid results in the region, and we remain confident in our ability to maintain this [pattern], supported by the strength of our brands and by our financial discipline.

Turning now to Canada. We delivered in the second quarter BRL 650 million of EBITDA in Canada, which is 6.6% lower than in the second quarter of 2017. Topline was down 2.0%, as net revenue per hectoliter increase of 0.8% was impacted by volume decline of 2.7%, driven by soft industry as well as a difficult comparable in second Q 2017, when we outperformed the market.

Despite volume decline, our core brands Bud Light and Michelob Ultra continued to deliver strong results, being among the fastest growing brands in Canada. On top of that, our high end brands Stella Artois and Corona outpaced the industry, and our local craft brand portfolio comprised of Mill Street, Archibald and Stanley Park grew by double digits.

Cash COGS per hectoliter in Canada was up 11.8%, mostly due to a hard comparable in Q2 2017, when cash COGS per hectoliter was low single-digits down. On the other hand, cash SG&A declined by 7.4%, [in efficiency] cost savings in our non-working money as well as from savings and efficiency gains in our working money.

Year-to-date, topline in Canada decreased by 1% and EBITDA was down 11.3% with margin contraction of 340 basis points to 29.5%.

Finally, while not satisfied with our recent results, we'll cycle COGS hard comparable as of [2Q] 2018 and supported by our strong portfolio, we're committed to continue to pursue and approve performance in the country to resume EBITDA growth.

Now back to consolidated figures. Other operating expenses totaled BRL 242 million in Q2, mainly explained by government grants related to State VAT, long-term tax incentives that were up 4.1% year-over-year, mainly due to higher revenues.

Finally, moving below EBITDA. The second quarter, our net financial results totaled in expense of BRL 1 billion, increasing by [16%] when compared to the second quarter of 2017. This increase is mainly driven by higher noncash losses related to equity swaps and foreign exchange variations [related to] company loans. Going into more details. [Mainly,] the financial expenses in the quarter were, first, interest income of BRL 94 million, driven by our cash balance mainly in Brazilian reais, US dollars and Canadian dollars. Second, interest expenses of BRL 295 million that include among other items, interest incurred in connection with the Brazilian tax regularization program as well as noncash accrual of approximately BRL 50 million related to the put option associated to our investment in the Dominican Republic business. As expected, this noncash accrual declined by approximately 65% year-over-year, as a result of the partial exercise of the put option in January 2018, which resulted in the decrease from [45% to 15%] of ELJ ownership in the business.

Third, BRL 232 million of losses in derivative instrument, mainly driven by noncash expenses related to negative results of equity swaps. Four, losses on nonderivative instruments in the amount of BRL 389 million impacted by noncash negative results incurred in connection with foreign exchange variation on intercompany loan. Fifth, taxes on financial transactions on the amount of BRL 104.7 million and 6 -- BRL 123 million of financial expenses, mainly driven by interest on contingencies.

The effective tax rate decreased from 9.4% to 6.9%, mainly explained by an easy comparable in Q2 2017, when the tax rate was adversely affected by a one-time tax adjustment. Year-to-date, the effective tax rate was 13.7%, versus 11.2% in the half year of 2017, mostly driven by an increase in taxable income. Cash generated from operations in Q2 2018 were BRL 3.5 billion, which is 45.6% higher than in Q2 2017.

Year-to-date, cash generated from operating activity is growing by 9.7%, reaching BRL 6.1 billion. CapEx reached BRL 805 million in the quarter and BRL 1.3 billion in half year, declining 2.5% versus the first half of 2017.

Finally, during this year, we announced approximately BRL 3.6 billion to active holders in dividends. Thank you very much. I will now hand back to Bernardo before going to Q&A.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [4]

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Thank you, Fernando. Let's start talking about beer. Our Beer Brazil results in the second quarter were strong and demonstrate that we are on track with our commercial strategy, that is a result of consistency and excellence in the implementation of our growth platforms.

These results also confirm what I said in our first quarter earnings call, when I focused on explaining the main drivers that led to beer volume decline in Brazil in Q1 and on the reasons that our volume performance in that quarter was not indicative of any structural change in our business. I'd like to highlight that we faced several challenges during this quarter as a result of the truck drivers' strike that took place in May. However, our relentless focus on excellence in go-to-market and service level were decided to: one, keeping a products on shelves during this period; and second, react fast after the strike, restoring inventory levels in the market quickly. Along with that, we also had a successful execution during the 2018 FIFA World Cup. All the factors that I just mentioned contributed to a beer volume growth of 1.7% outperforming the industry. In this context, as said by Fernando, we've managed to deliver solid topline and EBITDA growth. Our Non Alcoholic business also posted great results. Volume grew by 1%, meanwhile the soft drink industry was down mid-single digit. Solid top line in cost performance also allowed us to increase EBITDA by more than [40%] with significant margin expansion.

Having said that, our [alcoholic measures] in Brazil remain consistent during the quarter and we continue to focus on our growth platforms, which had the following highlights, [such as] elevate the core, our first and most relevant platform. As I mentioned in the previous calls, Brahma, our classic lager has been experiencing a memorable momentum in growing strongly quarter-after-quarter. Brahma connects with consumers through relevant platforms, including soccer, Brazilians greatest passion. As such, Brahma's momentum was reinforced by the 2018 FIFA World Cup. The brand sponsored the Brahma Arenas, set up in traditional venues in 7 Brazilian capitals: Sao Paulo, Rio de Janeiro, Belo Horizonte, Recife, Salvador, Curitiba and Florianópolis, where consumers watched the games while enjoying free entertainment.

Brahma also promoted several other smaller events across the whole country. Holding with its core target consumers and leveraging this opportunity to drive volume growth while enhancing its brand equity. The brand's activation during the World Cup was also marked by a meaningful campaign that focused all its tradition and its connection to the Brazilian national team, coupled with a bold [indiscernible] that boosted the brand visibility, always reinforcing its heritage and recognized quality.

Now I'll talk about Skol, our easy drinking lager. Innovation is very important for Skol. Our brand has always been setting the trends and inviting consumers to enjoy new experience. During the quarter, we launched a Skol Hops, an innovative pure malt beer brewed with aromatic hops that provide a unique combination of lightness, freshness and flavor.

Positioned within the core plus segment, Skol Hops was launched in the northeast of Brazil and is expected to rolled out across the country during the second half of 2018, reinforcing Skol's innovative DNA.

To still talk about the core plus segment, our brands in this segment also continue to deliver great results. Brahma Extra and Bohemia grew more than 50%, 5-0, during the second quarter, providing to consumers the best [trade up] alternative.

In the second half of the year, our mainstream brands will continue to leverage key branding moments like the World Cup. We continue to invest in relevant equity campaigns and we continue to connect with their target consumers to support topline and EBITDA evolution.

Now I'll talk about Premium. The 2018 FIFA World Cup was also marked by a fully integrated activation for Budweiser, as a global official sponsor of the event. The brand's activation in Brazil was based on the Light Up the World campaign, and the creation of Bud Basements in 10 cities, which are proprietary events that reinforce Budweiser's status such as authenticity and freedom. Beside broadcasting the most important matches, we took to the Bud Basements good music, tattoo studios, barbershops as well as cool and trendy parties. The World Cup initiatives was also highlighted by a consistent execution in the [off trade], and by extensive distribution of the Red Light Cup across the country, which lights were activated through the sound of the fans watching the games.

In Q1 Premium, I would like to reinforce that our strength in the premium segment is a great portfolio of brands. Each of our premium brands maintain its own territory, brand position and price point reaching different consumers in different occasions. With that in mind, both Stella Artois and Corona also had a great quarter, allowing our premium portfolio of global brands to grow by more than 30%. Corona's performance was supported by a great activation during the World Surfing League event in Saquarema, Rio de Janeiro. Corona encouraged consumers to spend more time outside, disconnected from the daily grind. As such, the (inaudible) activation was highlighted by the Corona house where consumers could engage in several outdoor activities and have access to cool attractions. Stella on its turn, with a brewing heritage dating back to 1366, continues to explore new occasions. With its base, elevating the food experience, supported by Stella Draft and by its unique package, such as the 550 ML bottle and the 300 [milliliter] cans.

Moving on, our premium portfolio for the nonalcoholic business, which comprise Fusion, HOH, Lipton, Gatorade and (inaudible) also delivered great results in the quarter, growing double-digit and outpacing that traditional CSD industry.

Going forward, we reinforce that our premium portfolio is well positioned to keep driving the beer category upward and supporting a positive mix.

Now moving to Drive Smart Affordability . As I mentioned in our last call [social] beer consumption in Brazil is crucial, and we've incorporated affordability initiative into our growth cross-platform. Our most important initiative to address the affordability issue in Brazil is expansion of the returnable glass bottles in the off trade channel.

This year, we're focusing on growing this package penetration in pit stops and small store formats, those with less than 4 check-outs, which are closer to consumer house, with the purpose of continuously enhancing consumer shopping experience while delivering affordability.

Finally, closing with different occasions in home and out of home. We've been stepping up our go-to-market across the country via several different initiative, including the use of new technology. As such, as I mentioned before, our strong go-to-market was key to support our operations during the truck drivers' strike. On top of that, during the World Cup, along with meaningful campaigns for Budweiser and Brahma and Guaraná Antarctica, we also delivered remarkable execution in the on trade and off trade. Particularly in the on trade, which implemented a special activations for the 2018 FIFA World Cup in (inaudible), using this opportunity to deliver memorable experience to consumers. With that, we managed to execute a truly integrated (inaudible) sales and marketing approach across the whole country, allowing us to build momentum not only for the second quarter, but also for the future.

Before moving to the Q&A, I will spend a few minutes sharing with you our outlook for Brazil. First for beer, I would like to highlight that we're implementing our annual price adjustment during the third quarter as we did in 2017. Having said that, our expectations for Brazil for the balance of the year remain mostly unchanged. We are optimistic about our business. Although the environment is a true challenge and volatile, we are confident in our strategy and remain committed to maintaining a disciplined execution of our growth platforms for (inaudible) EBITDA growth versus 2017.

Our long-term perspective didn't change either. We believe that Brazil is a unique market, which provides combination of growth, opportunity and profitability, favorable demographics, the closing of regional gaps in per capita income and consumer demand for innovative and premium products should support and will support long-term growth. We can move now to the Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Robert Ottenstein with Evercore ISI.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages Research [2]

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Two questions. One just a simple one on the Skol Hops. I was just wondering if you could talk a little bit more about that brand extension and sort of what are the opportunities you're going after, or the occasions? What you're trying to solve for? So that's just question one. And the second question is ABI announced today a fairly meaningful reorganization. Some new roles within the top tier of the management, and I was just wondering to get your perspective on how some of those changes may or may not impact Ambev and specifically on the opportunity in terms of retail. And it looks like at least on the corporate level at ABI, looking to perhaps put more emphasis on the retail channel and ownership of that.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [3]

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Thanks, Robert. Great question. So just first of all Skol Hops, I think we have been evolving the portfolio here in Brazil as we've been talking in every call. So it's key to have our full portfolio of brands to offer to people in general. Great beers in different flavors, different taste and locations as well. So in 2016, we launched, just to remind, Brahma Ales and we launched 3 Brahma Ales. And we created at that time what we call the core plus segment in Brazil, offering the first opportunity to trade up. So it's very important for us not only the premium, but to create the core plus. It was the first step up in terms of the profitability and in a more experience, better -- not a better but a different experience that people would have with beer. Since we launched Brahma Extra, this brand has grown quarter-by-quarter, I mean, after quarter strongly. And is already 1% of the beer volume -- our beer volume in the country. And on top of that, but we saw that Brahma Extra has a positive impact in the mother brand because, I mean, the family help Brahma [surely] to grow as well. So Skol, that's the most innovative brand in the Brazilian market should be part of this as well. So Skol could not be left behind in the core plus segment. So that's why we launched the Skol Hops. I mean, I've been studying this a lot. So why to do this in a different way? So it's a very light beer, but it's a refreshing beer with this aromatic hops that we study a lot. Our brew masters have been working on this for a long period. They're just like Brahma Extra, we expect a major success to reinforce the core plus effect. And bringing just the perspective of the core plus, 3 years ago, we didn't have the core plus segment in Brazil. We shaped the industry and we created a portfolio of that is radical for [2%] of our beer volume with a higher profitability. So Skol Hops will be part of that and for sure we will grow big time and it will help us to even enhance and grow the core plus segment, helping the mother brand of Skol as well like Brahma Extra did with [Brahma short-term].

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [4]

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Hi, Robert. Fernando here. On the question about ABI announcement at Ambev level, our operation remain exactly the same. So there will be no change from that perspective.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages Research [5]

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Great. And just -- is there any increased emphasis on owning retail? That was something that on the ABI level seems like there's going to get more attention. Are there any plans for that in any part of your region?

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [6]

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I think probably the first focus that we have is work to retain that work that we have in Brazil. So -- and the point of sales, the change, they worked very, very, very well and we're really committed to work with them. If you have -- I mean, we have here some owned stores, some franchise business. It's becoming relevant having talked about the pit stops. So this retail focus is not new for Ambev. There are some things that we've been doing for a long time and will continue to do when makes sense and the occasion that make sense. But again, the first focus is work of the retaining the [market] we have here in Brazil. That is working our brands that have been working hard in terms of a pull from the go-to-market to service level to serve our point of sales in a even better way year-over-year.

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Operator [7]

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Your next question comes from Antonio Gonzalez with Crédit Suisse.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [8]

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I also wanted to ask a couple of questions on your relationship with ABI. First, I wanted to come back to the previous question on the announcements that ABI did this morning, and I understand your comment Fernando that there are no organizational changes at Ambev. But I want to get some, I guess, perspective from you guys to understand if you can better leverage on your access to ABI specifically as it relates to 2 areas: first, you're sending some part of your talent as part of these reorganizations from ABI, Carlos [Desboa] and Bernardo [Novique] and so on. I want to ask if you're in this occasion importing some talent as well. Second, I wanted to ask if specifically in the soft drink business, volumes have been soft for a number of quarters now, no? In the second quarter, we saw a rebound but, I guess, if we see the last 18 months or so, there's been some weakness. So I wanted to ask if there's something that you think you should be doing structurally different in that business? And perhaps this reorganization from ABI helps. I'm sorry to make it a long question, but the last point I wanted to ask is I wanted to see if you can add some perspective on also, I guess, corporate governance and your relation -- your broader relationship with ABI, not only because of these changes that ABI announced today, but also there's a shareholders agreement between several shareholders at Ambev, the control shareholders at Ambev that is expiring next year. And obviously since the creation of this agreement a lot has changed now. You formalized several committees at the board, the merger of the 2 share classes, et cetera. So just I want to ask Bernardo if, from your conversations with Brito has the strategic view of the relationship changed at all? And how have these formal bodies, such as the compliance committees and so on, improved the relationship between yourself and ABI? Sorry for the very long question, but I wanted color on those 3 points.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [9]

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Antonio, thanks for the questions. So first one, people will think that we are exporting people as you said, in the thing that you said. It's very important for our culture that people continue to see they have opportunities of growth. So this attracts great people. And part of our development of great people is really to give them different challenges. So they'll become better partners in the future. It's true as well that you always import people. So that's a flow, an outflow and it's an inflow. So we have here Fernando, who was the global Treasurer of ABI, wasn't at InBev at that time in 5 years, 6 years ago. He went there, become much more experienced, knowledgeable and so on, then back to Brazil now to help us here. So you will see this flow, no? So now you first, I mean, seeing the exports flow, and then, I mean, I think that we could see in the next months some inflow as well. People coming, so that's good, because it's good for -- the export people because when they come back, they come back with a different view. Helpful for all of us (inaudible) stayed 8, 9 years outside of Brazil and helped either way. And Paula and the other people with the team how we can shape the strategy here. The experience you have to have outside. So I think that's a good thing. It's a good thing for the culture, because people grow, you can attract great people because they see a place that they can grow and so on. And it's good to have better partners because they have a broader experience. So exporting now, we import for sure in the future and more news to come. Leading to the second point, I think for the soft drink business, so I think that our approach and we know having talked with you and we really like working the fundamentals of the business. You have good fundamentals always in Ambev, but given the challenges that we have had, we've been working hard to really ensure that fundamentals would be there. One example in terms of service level, in terms of elevating the core, in terms of our core brands, in terms of the portfolio of premium. So -- and you've been doing the same in the soft drink business. We're focused initially -- a little bit more focused on those basic things, the fundamental things doing well, excellent, in the beer business and have been doing this in the nonalcoholic business as well. That creates, within a period of time, disruption, because we're changing some structural things. But in a point of time, if you're true owner like we are, doing the right things, this will start to come, to our peers. And I think that soft drink it's in -- the nonalcoholic business in a moment that, some of things that you could see in the past that you think will start to come, the portfolio is much more broader. The execution of our nonalcoholic business is better. we see a lot of room to increase. So I think that the way that we promote in the market as well, I know becoming more clever in terms of intelligence, in terms of the technology, algorithms, the one that we have been using for beer for more time. So I think that Brazil is becoming better as well. The country is evolving and we can see that more in the future for sure. And structurally, I think that our business is in better shape and I would think that we see a lot of opportunity to further increase the way that we operate the nonalcoholic business. That's a great opportunity, and we will continue to focus on that. So good momentum for soft drinks ahead. And it could change work in the fundamentals. So we'll now move to Fernando for your last question, if you allow me.

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [10]

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Hello, Antonio. Thanks for the question. So a little bit on the corporate governance. The current shareholders agreement was executed in 1999 in the context of the merger between (inaudible) and Bremer for a 20-year term. So that meant that if nothing happens, there will be no shareholder agreement after 2019. In [2013], at the time where we merged the (inaudible) to have one single class of share, which we think it was a very positive outcome for our shareholders. Another agreement was negotiated to be enforced at the time that the original shareholders agreement would expire. So from 2019 and onwards, so it's fair to say the scope is different for this agreement than the first one. But I think the more important corporate governance point there is still valid and nothing changes. So the foundation is still going to be on the shareholder agreement. Under the new shareholder agreement any matter shall be in best efforts aligned between the shareholders. If consent is not reached, M&A transaction shall be approved by the majority of the board members. And of course, we said by controlling the majority of the board members we will be able to approve it. But having said that, if there is a M&A transaction carried out with related party, then we're not talking about shareholders agreement, we're talking about Brazilian corporate law, which is over and above the shareholders agreement. So when [you develop a relation] and the company bylaws, shareholders and board members must abstain from voting matters when they have conflicting interest in the company. We ended up being a little bit even more restricted here. So whenever we perceive there is a conflict, the shareholders even abstain from discussion, not only the voting but from the discussion. So just to follow up a little bit more on the transactions. If a related party, we have the compliance and related party committee. We'll first analyze each one of the transactions, including its arm's length prospect before it's submitted to the board. So I think we have all the controls and tools in place to make sure that the relationship is the right one.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [11]

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And we think that on top of, Antonio, and all of you guys, on top of all of this controls and so on, we are partners of Ambev. We have a reputation here Fernando, [Nicolai], myself. I'm 27 years in this company. We'll do always what is the best for the shareholders of Ambev. So that's for sure. I think that is not a technical question -- answer, but it's a real one. I think that's the final part, this part of the law and so on that protects everything and most importantly shareholders of Ambev. We are partners of Ambev and we'll protect the shareholders of Ambev, always.

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Operator [12]

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Your next question comes from Isabella Simonato with Bank of America Merrill Lynch.

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Isabella Simonato, BofA Merrill Lynch, Research Division - VP [13]

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I have 2 questions. First of all Brito, in the ABI's call, he mentioned that the impact of the truck driver strike in beer in Brazil was 3 percentage points. I was wondering if you could share with us now what sort of impact you saw from the World Cup, which as you said, pretty much offsets the impact from the strike. That would be the first one. And second one on soft drinks in Brazil. You have been having good tailwinds regarding cost, but your guidance for the year overall still shows an increase versus 2017. So I was wondering if you could share the drivers of that cost inflation for soft drinks specifically.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [14]

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Isabella, thanks for the questions. First I'll touch volume part and Fernando will talk about the cost of soft drinks. So volume. We should take a look in 2 things: the effects of the strikes and the World Cup, as we said. Let start with the strikes. As you know, you cover us for a long time, have been stepping up the go-to-market across the country via several different initiatives. We've been talking personally with you in the last 3 years about that the total long-term initiatives. But we knew that in a point of time and we start to reap the benefits on that and then I think that's the EBITDA and this year we continue to do. So the strong distribution that we have, the evolved service level were key to keeping our products on shelves during the truck driver strike. It also enable us to recreate quickly after the strike. So just one example. We knew that the strike could end, was in a holiday. We worked every day during the holiday. So all of the sales force, all of the brewers, all of the trucks. So to react even faster to reassure that we will mitigate the volume loss. So the volume loss, yes, we have, because we saw at that moment a change in the consumer behavior during that specific period, which led to a volume loss. So we estimate that was, as your (inaudible) said, that during this quarter, we lost approximately 3 percentage points of volume as a consequence of the strike. We mitigate that, this could be even higher. So given all the excellence in terms of service revenue that I said could be -- I mean, we mitigate that. We demand [acceleration] of around 3% for the quarter. And the World Cup. So the World Cup, we've been working hard and then in terms, I mean, 4 years we are sure that the World Cup would be a strong one. Brahma was amazing, strong but wise as well. And yes, the World Cup -- with the World Cup was able to fully offset the 3% of volume that we had lost with the strike. So the volume grew 1.7%. So all in all, 2 things: first message we were able to mitigate the effect of strike given the excellence in operations. Secondly, the World Cup was very positive not only for the volume, we were able to mitigate that loss of the strike, but for the brand building as well of those 2 brands that are very strong. And just to finish, we see that the consumer environment is recovering. It's [a low] space, but the trend is positive. So for my part, and you can comment on the...

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [15]

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Isabella, Fernando here. So to your question was on CSD. So our cost performance for any view was very strong this quarter. However, in the second half of the year, there are tailwinds and headwinds that impact our performance. Among them, lower sugar prices and the reductions of (inaudible) trade zone benefits. So when considering there would be a lot of moving parts that make any cost projection difficult, we decided to give this guidance to make sure that people don't get it wrong. This is not the case for beer. That's why we're only looking at soft drinks and providing this kind of range. So people don't get surprised by the preparations quarter-on-quarter.

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Operator [16]

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The next question comes from Thiago Duarte with BTG.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [17]

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I have 2 questions actually. The first one is trying to understand a little bit more the net revenue per hectoliter performance. The performance was very strong I think across the board, across all the divisions. And of course unfortunately you don't provide a breakdown by how net revenues and gross revenues performed for each of the division. But even if you look on a consolidated basis, we've been seeing the last few quarters the total deductions on gross revenues going down. So the net revenue per hectoliter has been growing more than gross revenues per hectoliter. This has been true in the last 2 quarters and it was particularly true in this quarter. So I understand there were some changes in the excise tax calculations with the changes in fiscal themes and ICMS in Brazil. But when we look at the breakdown the discounts are also going down. So I wanted to get a sense from you, why is that happening? Does it have something to do with what you just said Bernardo, which is related to the economic environment improving slowly, so you're not having to give more discounts? Is there something to do with the World Cup? So it would be interesting to hear whether you think this trend where net revenue outperforms growth revenues continue to be the case going forward. It would be interesting to hear. And second question is more on a longer-term question and has also to do with the portfolio of the company. If you look at this quarter and several quarters behind us, when you talk a little bit about the performance of the brands, you've got the core plus segment doing great. You got the premium segment doing great, everything growing double-digits. But it has been clearly been outperforming the mainstream market. And even if you try to run the math, it looks like the mainstream market is not still picking up. Your mainstream brands are not still picking up, which is not necessarily a problem as you've been saying Bernardo. Because it's more about building the portfolio. But my question would be you have historically talked to us about a balanced growth between volumes and prices, trying to find the right balance between volumes and prices for top line growth. When we look at the core plus, Premium outperforming mainstream for so long, it looks like consumers are replacing one for another. So my question to you would be should we start thinking more about a top line growth more driven by pricing rather than volumes? So that would be the second question.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [18]

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Thiago, thanks for the question. Start from the net revenue price. We always have to remind ourselves and you guys that our price strategy is to increase price in line with inflation plus taxes over time, because you know that affects the industry. And then this is the strategy that we have been doing in, I mean, a longer period of time. But it's very important we always like to highlight that our net revenue per hectoliter, the performance is a combination of price increase and revenue management initiatives. And operating excellence positively affect the rate revenue in 2 fronts. So again, everything that we're talking about of serving more point of sales, serving better, understanding better and educating better the levels [indiscernible] demand in each point of sale and each channel helps volume, help other things, but helps the net revenue as well in 2 fronts. First, better management of discounts. In a win-win view that we do with the trade in a way that's good for us and it's good for the trade as well. We want to do that if you have a better relationship -- with the point of sales, if you serve better, understand better their business. And then with that, yes, it's possible to manage better discounts. That's a good way to grow net revenue [there is] you are not affecting the consumer and the [mix] And things. So that's the first one. Second, make sure that the products, given the way that you serve the market, the way that we deal and serve the point of sales, we're raising the market with the right consumer price. Good for everyone. And why this is important not only for the industry, not only for the shares and so on, it affects the net revenue as well, because discounts as I said, but most taxes are calculated on full price and not discounted price to consumers. So a more efficient taxation is a positive consequence of excellence in revenue mix. And then this affects net revenue (inaudible) as we have seen as well. So we believe that there's still room to evolve in the initiatives if you think in terms of revenue management discounts. This can be done through the use of our essence, for instance, having talked about technology, tax sales, with you guys. That which -- all those things can be supportive for the [break] of more effective discounts in a win-win proposition to the trade. So this is basically the first question.

Taking to the mainstream brands, I think that we have all the knowledge per segment. In the core segments our mainstream brands are strong. And our share it stays stable, including the last year all the information that we have, it grew. So yes, it's a fragmented [upfront] under pressure, the full mainstream. First, because of the premium is growing. That's not bad news, because when premium grows, better margins. And then we are boosting premium in the first step up of the core, that's the core plus -- that it's a very good segment to shape because it's a good segment that you offer great brands, I mean, [quite] beer you offer for all of our brands and at the same time talks to the business model that we have, no? In our brewers and so on. So boosting the core plus and boosting premium, yes, the trade up will happen. That's a good driver of mix that helps net revenue [per mix] and not price increase. Net revenue giving to the mix. And because we know -- so this is good. So what we think that happens and the other factors that affect the mainstream segment category is that the disposable income in Brazil that really makes the value segment that we don't have margins in [revenue] segment. The value segment just volume. So if you get the profitability of the better segment in Brazil kind of be -- not meaningful. Had a pressure of increase of the value segment because of the all the disposable income and crisis that we have been having in Brazil in the last years. But the good news is that in all of the countries that we know that we operate, when the country starts to recover, disposable income starts to -- to get back the value segments always shrink again. And the core segment grows again. And then if the brands in the core segment are in good shape, and they are, they are building the core plus based on those brands. So we talk about Brahma Extra and Brahma is growing. Brahma is strong. Skol Hops, the same thing. So this could be a very positive effect for the core segment and for our brands in the future when disposable income comes. So if you think, and I think that Brazil will recover for that, I mean, long period of crisis. That's positive news for the core segment, for our brands. Positive news that premium is growing. Good for us, because better margins. Positive news that we are shaping, successfully shaping the core plus segment. That's good for the margins. That's good for our brands as well. So that's why I think in terms of the portfolio approach and have been doing that and working hard to get this full portfolio, strong brands. I think that it's an asset that Ambev has not only for the current period, but for the future when Brazil becomes a better macroeconomic environment market, I would say.

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Operator [19]

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And our last question today will come from Luca Cipiccia with Goldman Sachs.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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I have a couple of add-ons on the price mix discussion that we were just having. First, maybe on the short term or looking at the third quarter. It seems to me you're going to get into that with a positive momentum across brands, some positive tailwinds in market share as well. It is related to the comments that you made about industry growth in the second quarter. So I was hoping you could share maybe some more comments on how do you think pricing will play out? Is it going to be a fairly smooth process this time around? How do you see both the competitive environment from that perspective as well as consumer receptiveness in the tail end of the positive quarter that you had as you move into the third quarter? And then secondly, still on pricing. Expanding maybe on your last answer, as you keep elevating the core, expanding the core plus, growing faster in premium, would you expect the rest of the market to follow? Or rather given the differences in portfolio breadth and reach maybe further polarization or a drive for competitors to polarize more and pressure more at the lower end of the market where you don't necessarily participate? It seems you're moving, if not away from -- you're still driving -- trying to drive the mix and the brand portfolio higher. Maybe if you can comment additionally on these 2 points both short term and more on the medium term on price-mix, that would be great.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [21]

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Thanks, Luca. Thanks for the question. So related to the price, I mean, the short term so we normally push price in Brazil in the third quarter. And this year, not different and, again, we'll do it and we'll implement our annual price adjustment for the portfolio of brands throughout the third quarter exactly as we did last year. That -- I think that's including good to compare volumes because it would be an apples to apples to apples comp. That was not exactly what happened in 2017 against 2016. But this year '17, '18, is apples to apples apart, including for you guys to have a better view in terms of the volume and so on. So we will increase the -- adjust the prices as we did last year. And then we adjust prices in line with inflation plus any tax offset over time. So this is -- changing what we have been doing. In terms of the long term, I think that it's very important, as we did this year in the market, and in terms of the volume, in terms of the profitability even more, we have a responsibility to drive the industry in the right track. So the responsibility of our business here in Brazil is not only to get a better check. It's that to assure the beer category is moving to the right track. So that's why we like to work and to build brands, in the core segment, in the core plus segment, in the premium segment. Not only because it could have good side effect in terms of Brazilian better disposable income with our core brands that are strong and so on will grow because of the trade up. We'll capture margins because what differentiates our category from some of the others that basically people buy price because we have brands, because we have an emotional link. Because you have a really -- clear that you have -- quality of our products, the liquids and so on. And then you build something different that a consumer give value and pay, value and pay for that. So first, we don't comment what other companies do. It's their job. But we will do, we are committed to build a much better beer [catalyst]. And we think that to sell valued brands, with no brands, with no [indiscernible], like you sell, I would say paper, nothing has paper. But again, something that not -- and branded, is not something good for the industry. We will always be committed for a healthy industry, which means strong brands, which means core, core plus and up. We like to look up not look down. And we have alternatives, there's market affordability issue but in a profitable way. The return indiscernible , the service level is very important, because if you are serving better (inaudible), they'll be able to assure that the consumer pricing would be fair and the impact of affordability as well. When you have a focus in the big stocks our franchise you're talking about RGB's, great brands, close to people, because we're patient and so on. So there are ways and there are more things to come in terms of this market affordability to tackle the affordability issue in a smart way without compromising our commitment to build a better category -- beer category in Brazil.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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If I can just squeeze in a very last one, just a small question on the Skol Hops initiative that you mentioned. I think you mentioned that you rolled it out first in the north. And I was curious if this type of approach is in any form unusual? I remember in the past, you commented on some of the benefits of the practices that you were incorporating from SAB Miller on how you segment the market, how you further tuned the go-to-market. So I was just curious if this type of staged rollout, if there's anything to read there or if there are any additional comments you can make.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [23]

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I think the launch of the Skol Hops in [one] area, I think that we have been putting a lot of innovation pipeline for the many stages of the pipeline. The one that you have the ideas, you buy this, you test and so on. And I think that the pilot is very, very important to learn, to learn how to launch better, and so on. So that's why we've done that in the northeast because I think that is a region that would be -- [indiscernible]. Because our market share in the north is below average in Brazil. And then we said look, let's pilot Skol Hops there and for sure it will be even better in other places. And you learn with that process. So when you saw all the initial information on that for the launch, so Skol Hops, it has been in a successful way getting people understanding the core plus segment and so on. And I think that with those learnings and so on, the pilot, we will go national -- and will not explain for competitive reasons, when. But we think that the second half could be a good moment to really rollout the learnings of the pilot. That's not linked to any region, just innovation process that I think that's the best for sure that a national launch will be even more successful with the learnings of the pilots in the initial test.

So before finishing our call, I would like to close saying that we will continue to put great efforts in our initiatives in a consistent way, in a relentless way and really assure that you have a better business in the future. That you help us to deliver healthy results across all the regions in which we operate. We are confident that we are well positioned to drive long-term sustainable growth in shareholder value creation. Thank you. Have a great day, and enjoy the rest of your day. Bye-bye.

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Operator [24]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.