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Edited Transcript of ABEV3.SA earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Ambev SA Earnings Call

Sao Paulo Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Ambev SA earnings conference call or presentation Thursday, July 25, 2019 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

* Antonio Costa Barreto

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* 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 & Fundamental Research Analyst

* 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 2019 Results Conference Call. Today with us, we have Mr. Bernardo Paiva, CEO for Ambev; and Mr. Fernando Tennenbaum, CFO and Investor Relations Officer.

As a reminder, a slide presentation is available for downloading on our website, ri.ambev.com.br as well as through the webcast link of this call. (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 2Q 2018 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. Fernando Tennenbaum, CFO and Investor Relations Officer. Mr. Tennenbaum, you may begin your conference.

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [2]

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Thank you. Hello, everyone. Thank you for joining our 2019 second quarter earnings call. I'll guide you through the financial highlights of our operations, including our below-the-line items and cash flow as well as commercial initiatives of CAC, LAS and Canada. After that, Bernardo will give more details about our operations in Brazil.

Beginning with the main highlights of our consolidated results. In the second quarter, top line grew 7.2%, a combination of volume increasing 0.8% and net revenue per hectoliter, up 6.3%. EBITDA reached BRL 4.7 billion, an organic growth of 0.3%, while EBITDA margin decreased 260 basis points to 38.6%. Normalized net profit for the quarter was up 16.1%, delivering BRL 2.7 billion. Similar to the last 3 quarters, we continued to report the results of our operations in Argentina applying Hyperinflation Accounting.

Having said that, I will now move to our divisional results and start with Brazil. In the quarter, Brazil EBITDA reached BRL 2.4 billion, a decline of 5.1% versus Q2 '18, while margins contracted 520 basis points to 38.1%. Beer Brazil had a very solid top line performance with volumes growing 2.9%, while the industry was flattish according to Nielsen. Net revenue per hectoliter grew 3.7% and revenues 6.7% higher than Q2 '18. Net revenues per hectoliter ended up being in line with inflation, a combination of cycling of last year's price increase, higher premium mix, somewhat offset by regional mix as North and Northeast regions grew faster than the country average.

EBITDA for Brazil Beer was down by 8.5% in the quarter with margin contraction of 620 basis points to 37.5%. This contraction was explained by the cost pressures we already had anticipated in the full year 2018 earnings release. Cash COGS per hectoliter grew by 24.7%, impacted by aluminum, barley and FX. Cash SG&A declined 0.2%, even accounting for the increase in variable compensation accruals in relation to 2Q '18, which were more than offset by sales and marketing expenses phasing and efficiency gains in nonworking money expenses. Year-to-date, top line in Beer Brazil increased by 11.2%, and EBITDA was down 1.1%, with margin contraction of 500 basis points to 39.9%.

In NAB Brazil, top line was up by 14.2% in the second quarter, the result of 8.1% net revenue per hectoliter growth and 5.6% volume increase. Industry grew low single digits according to Nielsen. EBITDA in the quarter grew 15.9%, with margin expansion of 60 basis points to 41.8%. In terms of costs and expenses, cash COGS per hectoliter was up 0.1% with higher aluminum costs being offset by lower sugar prices. Cash SG&A was up 30.1%, impacted by higher variable compensation accruals and distribution expenses related to volume growth. Year-to-date, top line in NAB Brazil increased by 19.6%, and EBITDA was up 22.9% with margin expansion of 100 basis points to 37.5%.

For Brazil consolidated, we reiterate our guidance of cash COGS per hectoliter growth of mid-teens in Brazil for this year, which should be more pressured in the first 3 quarters, easing off towards the end of the year.

Moving now to Central America and the Caribbean. CAC continues to show good momentum with an 11.6% net revenues growth, which is a combination of 5.7% increase in volumes and a healthy 5.6% net revenues per hectoliter growth. EBITDA in the quarter reached BRL 811 million, posting a double-digit growth of 33.9% and a margin expanding 800 basis points to 48.1%. Cash COGS per hectoliter increased 8.8%, mostly affected by Panama, where our strong volume evolution keeps our cost under pressure in order to assure there is no disruption in the market. Further, cash SG&A in the region was down by 20.1%, driven by savings in nonworking money, an easy comparable in 2Q '18, due to the 2018 FIFA World Cup Russia and phasing of sales and marketing expenses. The other operating income increase in the quarter is mainly explained by the [$40 million] insurance compensation we received for the damage caused by the third Q '17 hurricane season.

Year-to-date, top line in CAC increased by 12.1%, and EBITDA was up 25.2% with margin expansion of 460 basis points to 44.1%. We are pleased with our commercial strategy in CAC, delivering helpful volume performance in virtually all countries in which we operate.

In the core segment, we continue to enhance Presidente, our leading brand in the Dominican Republic, through trade activations and a campaign that promoted consumers' pride of the brand. We added more than 2,600 coolers in the quarter. One of the most important selling moments, Easter, was covered by the campaign, Una Fria No Se Niega, with an important price execution supported by activations in the entire country.

In Panama, our second largest market, core brands continued connecting with consumers through Atlas Golden Light campaigns, Unete al Pacto de Sol a Sol and Balboa Ice experiential events, such as concerts. Also, Balboa Ice introduced [ring for] innovation to its RGB, driving differentiation among competitors. We also continued to roll out our premiumization strategy in the region, developing Corona, Stella Artois, Modelo and Budweiser through a customized execution, both for these on-premise and off-premise channels. Corona was the highlight of the quarter, engaging consumers to act on the protection of the oceans against plastic. Premium accounts for less than 5% of the beer industry volume in CAC, representing a great opportunity for the future. I'd like to take this occasion to say that we continue to be very excited about our business development and strong volume performance in CAC, reinforcing our positive outlook for the region moving forward.

Switching now to Latin America South. Volumes in the region declined 8.9% during Q2 '19, mostly driven by Argentina, where volume decreased by mid-teens impacted by a challenging macro environment. Net revenues per hectoliter increased 21.2%, which led to a 10.6% top line growth. EBITDA in LAS for the quarter was up 1.9%, with margin contraction of 290 basis points to 39.3%. Cash COGS per hectoliter in the quarter increased 21.9%, mostly driven by favorable FX hedges, while cash SG&A increased by 21.5%. Tailwinds from the hedge position in Argentina, which led to gross margin expansion, were more than offset by increased distribution expenses due to the inflation and operational deleverage. Year-to-date, top line in LAS increased by 13%, and EBITDA was up 24.2%, with margin expansion of 400 basis points to 43.9%. Despite the macroeconomic volatility throughout the region, we remained focused on what we can control in our business and had positive developments.

In Argentina, we maintained a strategy of differentiating the core brands. Quilmes, our classic lager, continues to enhance its national credentials with the launch of the Hecha con Cariño campaign and the activation of a new soccer 360° strategy linked to Copa América. Brahma, our easy drinking lager, relaunched its affordability campaign, Brahmás, offering consumers a more accessible option that minimizes out-of-pocket expenditure.

The core plus segment has shown sustainable growth over the past few quarters in Argentina. Andes Origen has been consistently outperforming the market following its launch last year. The repositioning of Budweiser was supported by 2 digital campaigns. One, reinforcing its quality credentials, and the other promoting the BUDx challenge, strengthening the brand's connection with music, a key passion point for the Budweiser consumer.

Our high-end strategy continues to show promising results. Both Stella Artois and Corona continue to embrace better world campaigns with important repercussions in Argentina. Stella Artois continued #StellaBlueChallenge and Corona launched Pay With Plastic campaign in order to raise awareness of the plastic in the ocean. Stella also embraces the gastronomy platform in Argentina with its proprietary event, Mesa Compartida, inviting important chefs of the country to cook in unique locations. Copa América was an important event for activation in LAS with important campaigns with Becker in Chile and Paceña in Bolivia.

Going forward, while cautious with Argentina in the short term, we have positive mid- and long-term perspectives in the country and remain confident in our ability to deliver solid top line and EBIT in the whole region, supported by a strong portfolio.

Turning now to Canada. In the second quarter, top line in Canada declined 1.2%, a combination of a 2.3% net revenue per hectoliter increase and a 3.4% volume decline, which was mostly driven by a declining beer industry. EBITDA reached BRL 646 million, which is 8.8% lower than in the second quarter of 2018, with margin contraction of 260 basis points to 31.6%. In the quarter, cash COGS per hectoliter increased 6.2%, negatively impacted by increased commodity prices, especially aluminum, higher mix of imported beers and lower dilution of fixed costs. Cash SG&A increased 1.8% driven by higher logistic expenses and impacted by variable compensation accruals. Year-to-date, top line in Canada decreased by 1.9%, and EBITDA was down 4.2%, with margin contraction of 70 basis points to 29.2%.

Despite the industry challenges, we had positive achievements with our portfolio during the quarter. Our focused core and core plus brands continued to deliver strong results. Michelob Ultra, supported by a campaign on Global Running Day, remains the fastest-growing brand in Canada, while Bud Light, strengthened by Bud Light Orange launch, maintained its momentum.

In the premium segment, our high-end portfolio is growing ahead of the industry, led by double digits volume growth of our premium import brands. The country also joined Corona's better world efforts, enabling Canadians to take action with 50 cleanups coast-to-coast and promoting trade activations with plastic-free solutions.

Now back to consolidated figures below EBITDA. In the second quarter, net financial results totaled an expense of BRL 567 million, 48.5% lower than in Q2 2018. Main items in the financial expense in the quarter were first, interest income of BRL 156 million driven by our cash balance; second, interest expense of BRL 383 million that also include interest incurred in connection with the Brazilian Tax Regularization Program as well as noncash accrual of approximately BRL 60 million related to our put option associated to our investment in the Dominican Republic business; third, BRL 204 million of losses on derivative instruments, which were up year-over-year, explained by an increase of FX hedges carry costs linked to our cost of goods sold and CapEx exposure in Argentina, partially offset by equity swap gains; fourth, losses on nonderivative instruments in the amount of BRL 13 million; fifth, taxes on financial transactions on the amount of BRL 19 million; sixth, BRL 94 million of other financial expenses, partially explained by accruals on legal contingencies and pension plan expenses; seventh, BRL 99 million of exceptional financial expenses explained by noncash intercompany transactions; finally, eighth, BRL 88 million of financial income related to noncash incomes resulting from the adoption of Hyperinflation Accounting in Argentina.

The normalized effective tax rate was 12.2% in the quarter, higher than in Q2 2018. Year-to-date, the normalized effective rate was 15.7% versus 13.6% in the same period of 2018. Cash generated from operating activities in Q2 2019 was of BRL 3.1 billion, which is 3.1% lower than last year. Year-to-date, cash generated from operating activities is growing by 25%, reaching BRL 5.2 billion. CapEx reached BRL 896 million in the quarter and BRL 1.4 billion year-to-date, increasing 12.8% versus first 6 months of 2019 (sic) [2018].

Thank you very much. Bernardo will now share some initiatives and thoughts on the Brazilian market before going to Q&A.

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

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Thank you, Fernando. Hello, everyone. As mentioned by Fernando, during the second quarter, we saw success from many of our initiatives include innovation and continued premiumization. Our Beer Brazil volumes increased 2.9% in the second quarter with a flattish industry according to Nielsen. Year-to-date volume grew 7.2% in relation to the first half of last year, while the industry grew low single digits. I'm very excited about the consistent implementation of our strategic platforms, which allowed us to deliver a very healthy top line, both in volumes and in net revenue per hectoliter, despite an improving, but still challenging macro. We remain confident that Brazil presents a great potential for the future as half of the population above 18 years old is not drinking beer yet. The legal drink age population grows on average 1.5% per year. The penetration of beer among women is lower than in more mature markets. And premiumization is still in early stages.

So now let's talk about our fourth strategic platform, which is premiumize at scale. Premiumization is a continuous trend and it is always important to reinforce that our strength in the segment is a great portfolio, combining global and domestic brands. This quarter, we officially launched Beck's in Brazil. Beck's is a legit pure malt that follows the purity law since 1873. It has a unique bitter flavor and is the biggest selling German lager in the world.

As we highlighted last quarter, brand building goes through an investment experience, which allow consumers to live the values of each brand in a deeper way. Such approach continues to deliver tangible results. This quarter, our global brands comprising of Budweiser, Stella Artois and Corona, grew together double digits. Stella grew more than 50%, and Corona, once again, more than doubled its volume. Budweiser stands for authenticity, explore night life, rock-pop culture and great moments of consumer's life. Our proprietary event, NBA House, was again a huge success, especially this year, when the NBA Finals were broadcasted on free-to-air television. Budweiser has been sponsoring NBA for the last past years.

Bud Basement was a hot spot for support in Brazil and Copa América. It was present in 6 main Brazilian capitals with music and brand activation. More than 100,000 people attended and over 28.4 million were impacted by social media. Stella Artois continued to embrace the food platform, participating in [cool] food events across the country as well as leverage the final episode of Game of Thrones. In the video that reached almost 3 million views, Brazilian influencers shared Stella paired with food, while sharing with Sean Bean, one of the TV show's stars. Stella Artois volume was also supported by the continued expansion of new pack formats, such as the sharing size bottle and the new can.

Corona continues to embrace the Better World platform. The campaign, Listen to the Ocean, had a very positive and strong impact. The brand took advantage of this fantastic momentum to call the attention of the plastic dumping in the oceans. The video with Donavon Frankenreiter and Céu reached almost 4 million views and led in June to the brand's all-time high number of mentions in social media. Colorado, our biggest premium craft brand and the leading brand on the craft segment in Brazil, launched Colorado Ribeirao Lager. It's an easy-to-drink craft with distinctive taste following our obsession of quality and differentiation. Ribeirao Lager will act as an entry point to the craft segment.

As the brand power for our premium portfolio continues to evolve and to increase, we are able to release new packets, allowing consumers to taste our products in different occasions, delivering strong, sustainable volume growth. We are certain that the premium market is a portfolio gain, and that we are in a very strong position to continue to gain share in the segment.

Now moving to Differentiate the Core. Brahma, our classic lager beer has been experiencing memorable momentum and growing strongly. The brand connects with consumers through relevant platforms, such as Sertanejo, the Brazilian pop music and soccer. Brahma's momentum was reinforced by the digital reality show, The Next Number One. In this 6-episode YouTube show in partnership with VillaMix, Brahma searched for the next #1 pop singer. The show was the biggest digital reality show ever produced in Brazil, with over 157 million views, with 98% of positive health. The launch of the first episode was the peak of views ever registered by Google Brazil and 5 episodes were trending topics on Twitter on their launch. The quarter was also marked by an amazing Copa América execution. Brahma sponsored 27 arenas, set up traditional venues in 5 main Brazilian capitals where consumers watched the games while enjoying free entertainment. More than 230,000 people attended such events, and over 45 million were impacted by social media.

Brahma also did a campaign with Marta, one of the greatest Brazilian soccer players of all time and awarded 6-time best FIFA Women's Player of the Year. Finally, in June, the brand reached its all-time high number of organic mentions on social network, surpassing 200,000.

Skol's quarter was marked by the exciting results of Skol family campaign and the national rollout of Skol Puro Malte after its remarkable launch during Carnival. Skol family campaign reinforced the family concept in the Skol way of approach to consumers: young, modern and innovative. The campaign had more than 100,000 organic mentions on social media with 91% positive health, which is the best result ever achieved for a Skol campaign. So far, Skol Puro Malte continues to show very, very encouraging results. Also in the quarter, we launched the Skol Puro Malte [flint] bottle with an easy-to-open bottle cap, allowing the brand to join special consumer occasions.

I will now spend a few moments to talk about Drive Smart Affordability. As we mentioned before, the beer segment is characterized by the importance of brand equity. Moreover, even though it's quite relevant in terms of volume, its share of the industry profit pool is very low. During the second quarter, the share of the value segment of the total industry remained stable versus the first quarter, but below second quarter 2018. We are confident that once we start to see disposable income improving, we are likely to see the various segments trend back to its historical levels. One of our approach to the value segment is to build regional connections, thus creating brand equity at an affordable price point. And given local raw materials, local marketing and only mostly front-of-package, we are also able to deliver very healthy margins. After the successful launch of Nossa and Magnifica, we rolled out in June the beer Legítima in the state of Ceará. The brand replicates the same successful strategy.

Now moving to operational excellence. Our mantra is, "Wherever we call it Brazil, there has to be Ambev." Operational excellence has always been one of our biggest strengths and key differentials. Given that point of sales connect our brands to consumers, customers' experience is a strong focus. We have been measuring the Net Promoter Score of (inaudible) customers in a consistent basis in order to understand and address the main pain points and improve their experience. As the premium segment advance, we are also able to implement a hyper segmentation for mature markets, mature cities that we are rolling out to the country's main capitals. That strategy trickles down to sales structure, differentiated trademark execution, flexibility on delivery times, among others. Such initiatives translate into premium volume growth, brand building and market share gain.

Talking about technology. As we highlighted last quarter, technology has been a key enabler for us to support our strategic growth platforms. To optimize Ambev's operations, one of the focus of the quarter was the integration of HBSIS, expanding and improving technology to other areas of Ambev with more agility and scale.

On our relationship with customers. We are focused on freeing up sales representatives' time in order to focus on activities that add more value to the point of sales. As a consequence, sales which are not conducted by sales reps at site, now account for 29% of the total volume of on-premise compared to 18% in the second quarter '18. Part of this was driven by Parceiro Ambev, our B2B tool and one of the largest e-commerce in the country with more than 100,000 clients.

Let's talk briefly about the project called Draftline. With Draftline, our main ambition is to reach out directly to consumers. The levers for that goal are, first, improving consumer intimacy, anticipating consumer needs and establishing one-to-one relationship at scale. Second, building up a proprietary audience base. Third, being able to extract real-time consumer insights. And last, precise media. It's the digital transformation, helping us to understand deeply our consumers and connect better with them.

Now moving to our NAB division. We are quite pleased with our performance this quarter. Volume growth came from all different segments in our portfolio. An important highlight is the Premium brands such as Lipton and Tônica (inaudible), which grew double digits, bringing a healthy contribution to the portfolio mix.

Talking about sustainability. This year, we are conducting the second edition of the program VOA, an internal consulting company with voluntary participation of our people created to help NGOs optimize their process, budgets and also manage people and careers. In this edition, 200 Ambev employees are working together with 75 selected NGOs, impacting around 2 million people nationwide. AMA, our mineral water, that converts all the profits obtained with the product to initiatives of access of potable water in the Brazilian semi-arid, has reached its 30 (sic) [30th] project, benefiting 30,000 people.

Finally, so far, 2019 has been a good year. Our portfolio of brands is delivering a healthy top line growth, helping to offset the cyclical pressures arising from FX and commodities. When you look beyond such cost headwinds, we get even more excited about the strong fundamentals and growth potential of our business. We are only able to achieve such results in the first half, given the amazing people who have always been the foundation of our company. With our team, our culture and our consumer-centric business model, we are confident and in a strong position to deliver long-term sustainable growth.

We can now move 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) Our first question comes from Luca Cipiccia with Goldman Sachs.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Congratulations on the results. I wanted to ask a couple of things. Maybe first, I think you made a comment in the release about stronger performance in the North and the Northeast, which partially explained the mix and the revenue per hecto. Can you maybe expand on whether that is coming from stronger industry growth overall, market share gains, some of the initiatives in the portfolio that you had over the last few months, including in value, even though I would assume that's still a pretty low contribution, but anything that you can share there in terms of regional performance. That would be helpful.

And then secondly, which is related to this, maybe an update on the sort of value of the mainstream segment, relative growth performance. I think earlier in Q1, you mentioned how you saw that inflection already. I think it was interesting that earlier today, Coca-Cola FEMSA made similar comments in saying that the lower-income consumers are coming back to some of those segments in that categories, which in itself would be a sign of sort of the trading down maybe abating or inverting. So anything else that you can add on that discussion also would be very interesting to hear.

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

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Luca, thanks for the questions. Let me get to the volume. So I'll just start talking about the overall volume numbers that we have. And as I've said earlier, 2.9% above last year, while the industry was flattish. So good news that we grew volume ahead of the industry. And again, the performance that we had is a consequence of the investments -- consistent investment behind our strategic platforms that we have been doing all of those years. And it's important to point out that we have not seen disposable income yet resuming growth, which would likely to provide a meaningful, positive impact. When it comes to the premium segment, I mean, and I have been saying this I mean for many, many quarters that our strength is our superior portfolio of brands, the global brands, domestic brands. And you continue to gain share in this segment, led by mainly for the South and Southeast because the industry of premium segment, it's bigger in the south of Brazil, in the southeast of Brazil, and given the disposable income that's higher here.

When I look to the core, I think that we have been doing a very good job in differentiating the families, the brands, Skol and Brahma created a fence. We started with Brahma 3, 4 years ago, and then we replicated this to Skol that -- I mean, it's performing pretty well. We now have a Skol Pilsen, Skol Hops and Skol Pure Malt. And then I think that the growth in the core in the Northeast, it's really above the average in the country because our market share there was lower. And I think because all these innovations that we are bringing in the core was really helping us there, not only the core but core plus. So we are growing Skol Pure Malt there a lot and Bohemia as well.

So the growth in the Northeast, just to answer specifically your questions, it's a -- it's basically innovation, serving better the customers. The portfolio is stronger, and we are growing volumes ahead of the industry. And not only with the core brands, but with the -- our brands, local brands, like Magnífica, Nossa that are really performing very, very well. And let's always remember that those brands, given the (inaudible), the agreement that we have with the local farmers, the marketing is local, digital and so on, we are talking about good margins. They are in a very good price point, but they have kind of core margins that help us to grow in the value segment with enough profitability. So which means that we are creating brand equity for those brands because we really like this regional link.

And specifically linked to the value segment, the peak was in the end of last year, and then we saw in the first quarter a decline of 200 basis points in the size of the segment that remained stable from the second quarter -- the first one, but below last year and below the peak of December of the last quarter last year, which means that I really think that the trade-up from value to core started to happen. We think that the disposable income increasing or becoming better, in a better shape in the future, the core segment will benefit the most. And the position that we have in the core segment was already strong and even stronger now with the families of Brahma and Skol performing pretty -- pretty well.

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Operator [4]

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The next question comes from Antonio Barreto with Itaú.

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Antonio Costa Barreto, Itaú Corretora de Valores S.A., Research Division - Research Analyst [5]

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First of all, when we think about -- when we talk to our pricing checks and our channel checks, we see prices off a couple of brands in the premium segment, like Stella Artois and Budweiser, for example, being gradually decreased. First of all, my first question, do you agree with that? And the second one, is it fair to say that you are pushing a little bit to the lower end of the pricing point in the premium segment? And as a commentary on that, there was one slide in your presentation for this quarter talking about extending the premium with scale. And I understand that, that mostly means more brands in the premium segment. But could I interpret that as well as increasing the reach of the consumers in the premium segment with lower prices as well, maybe even transitioning some of these brands to the mainstream plus segment? And if that is the case, wouldn't you run the risk of cannibalizing some brands in the core segment? Can you comment on that?

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

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Okay, Antonio, thanks for the question. I think I'll firstly get to the price. It's very important to highlight that each brand has a different role in some price point. And given that the premium is a portfolio gain, this is very, very important. So in the premium segment, for an example, Budweiser is our largest premium global brand in Brazil. And it plays a key role as a bridge from people who are trading up towards the premium segment. So this is the role of Budweiser. Stella Artois, it's priced at both Budweiser and Corona [bolster]. And we just launched Beck's in Brazil, that will be priced between Stella and Corona. So basically, this is -- our pricing strategy didn't change. Linking to the channel, specifically, like you've said, beer sales in Brazil, in mainly premium found a big, big volume in the [off street] are usually done via promo based on part of the retailer strategy to attract consumers to the stores. There wasn't any difference in pricing policy of the off brands in relation to the past quarters. By the way, as you'll see our -- the performance in the net revenue per hecto, it was above inflation; even with our very strong growth in the North and Northeast of the country, that we had lower price. Given the price of the industry there is lower, as you know.

So having said that, no change in the pricing policy. Linked to the innovation, so this was the insight that you had to study other markets years ago. So we have -- I mean, we had all the numbers, we studied other markets. We leave it there. And we knew that the premium would be a portfolio gain. You don't find in a mature market any brand that has more than 67% of market share. So we knew that Brazil would grow in the urban centers, in the more healthy cities and states to the premium segment, with the trade that would happen. So to build the portfolio was very, very important. And that's why we created kind of an innovation mindset internally with skills, process, people to ensure that this innovation machine would deliver a portfolio and a broader portfolio in the future. So that's happening and will continue to happen because it's a portfolio gain. And then you'll have amazing brands. You will have global brands, regional brands. You will have craft brands. And so we think that the premium will continue to be a portfolio gain. We need to prepare ourselves, what we have been doing to prepare. That's why we are gaining share in the premium segment for many, many quarters. And we're very positive we'll continue to do so.

Linked to the trade-up specific, what I see -- I don't see a trade-up -- a big trade-up from the core to the premium. What I see for the future that, that could be an opportunity for us. If the disposable income in the country resumes growth, then that -- I mean, if it happens, and then we always think that this could happen. The most important segment that will have the benefit of that will be the core side. That was the biggest change in terms of the size of the segment in the last 4, 5 years. It was exactly core going down and value going up, disposable income going up, the trade-up from core -- from value to core would happen, like happening in many, many markets, and our core portfolio is very, very strong. I don't see any issue in terms of a big trade-up from core to premium. And if it happens, it's not bad because the margins in premium are better. So basically, what I have to answer.

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Antonio Costa Barreto, Itaú Corretora de Valores S.A., Research Division - Research Analyst [7]

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Okay. Very clear. Just... well, I've got another question. If we think about the other revenues in -- at this time around, we saw a little bit of a lower gain in the beer segment in Brazil. We have seen volatility in the past on that line, but you mentioned that you lost some benefits in Santa Catarina, for example. So my question is, how much of this loss can you attribute to Santa Catarina? And how much is just normal volatility on the mix, as you mentioned as well? And if you have any other benefit in sight to expire in the upcoming years.

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [8]

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Antonio, this is Fernando here. Most of the volatility was due to the regional mix and to where you have introduced it because different states have different incentives. The one that expired in the Santa Catarina, but it was a smaller portion of that. And there is no other -- I think, at least in the short term, there is no other meaningful and expiring.

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Operator [9]

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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 [10]

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I have a question circling back a little bit to the discussion about pricing in Brazil beer. You guys made it pretty clear that the geographic mix somewhat offsets the premiumization, even though you still managed to grow roughly in line with inflation. So I just wanted to get a little bit more detail, 2 things that you didn't comment on, and I just wanted to make sure if there was an impact or not on the pricing side? The number one is regarding packaging or presentation. What we heard in our channel checks is that there was a -- if you look on a year-over-year basis, the industry is much heavier on cans as opposed to returnable bottles. So I just want to see and to hear from you guys whether you saw something like that affecting the mix, especially the presentation mix in the quarter.

And secondly, in terms of discounts, right? When we look at your financials, and of course, you don't break it down for the Brazil beer division, but you do offer the parent company and the consolidated perspectives there. I mean we continue to see discounts as a percentage of gross revenues going down. And I remember, I think, Fernando, we discussed that a few quarters ago. And your point was that you continue to see room for reducing discounts from the levels that we had a year or 2 years ago. So just wanted to see if you really had lower discounts this quarter versus the last few quarters. And whether, of course, you see more room for reduction because we are really at a very lower -- much lower level compared to what we were some time ago.

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

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Duarte, thanks for the question. I think that, first, I mean linked to the -- I mean you talk about the -- initially talked about the revenues and then how the mix of regions can affect that. I think that the fact that the portfolio in the North and Northeast, it's stronger now. It's more a core market than a value market, well, less than premium. And I think that we improved a lot in both segments, in the portfolio approach. Not only in the sale that we've been talking a lot in terms of the regional brands, Magnífica, et cetera. But as well in terms of core. So core, core plus. We're gaining volume way ahead of the industry in those regions, and ahead of the average of the full country.

And the portfolio, of course, is healthy. Not only Brahma is doing well, but I mean Skol family is doing well. Skol Puro Malte and Bohemia. And so -- and because the price of those markets was always below the price of (inaudible), you have this regional mix impact because really, the growth there is really significant. That's good news. It's good news because we have been working hard in terms of the route-to-market there with the portfolio approach. You have to really be able to grow. That was the -- always was the reason that our market share was not as we expected and below average of the full country. So opportunity there, and we're tracking this with the portfolio approach in the main segments there that is core and the value [is much weak], like I said before.

Linked to the cans and RGBs, we will continue to push the RGBs in the right way. So the (inaudible), 1 liter, so that's very, very important. We continue to see opportunity to grow on that because you know that, I mean, [60%] of people (inaudible) plus in Brazil, they don't drink beer. And 80% of this 60% is not -- it's not because they have money constraints. And then, with disposable income going up, I think RGB will be even more important to expand the availability, to accessibility to our core brands.

But having said that, what we saw -- first, the premium segment's growing. And premium segment's growing and we are gaining share in this segment. And premium segment is mostly one way. So cans, we see -- we saw cans growing, but because of that. And the second thing, when we launch a new brand or we innovate something in a very strong way like Skol Pure Malt, like the Bohemia Pure Malt, the first volume that comes becomes a big driver of that, comes from one way because mix (inaudible). When people try a new brand, a new liquor, they will not buy 1 beer bottle returnables to do that. They will buy a can, they will buy a long neck. So those 2 effects, yes, push a little bit the weight of the cans in our mix, but for good reasons. Premium's growing, and innovation in the core is doing pretty well. So that explains a little bit the trend in the cans based on your question. So now Fernando can finish.

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [12]

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Thiago, on your question on discounts, at the end of the day, you will always find ways to be more efficient, be either through the 18-pack, be either through -- how we'll price it because you know that there are some inefficiencies, especially in the off-trade. And over time, as process improves, as you get more efficient, you try to find ways to be more efficient on that line. And that's why we've been seeing the difference between gross and net revenues diminishing over time. Of course, the bulk of that has already been done, but there is always room to be a little bit better on that. But I wouldn't say there is a ton or a huge space to improve a lot.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [13]

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And just to -- another. I mean just to add on that in terms of the mix. And the biggest, the biggest, by far, effect in our cost of goods sold this quarter was FX and aluminum. That -- it's cyclical. That's why the performance in top line is so important because we know that it's cyclical, including -- the last numbers that we saw for aluminum, I mean, are good numbers, and including the currency went down in Brazil. So dollars, kind of BRL 4, BRL 3.75 to BRL 3.76. So if we continue, and there are plans to continue to perform well in top line and this cost effect is cyclical, it's very good news for the future.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [14]

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Yes. Just a little follow-up here. Just to make sure I understood the message, especially on the first part. So you described, Bernardo, the increase in the one-way presentations, at least a big part of that mostly as a, let's say, innovation and introduction of several liquids and extensions that you guys introduced in the recent past. So would you say that if you exclude that effect, you could see more room for growth in returnables or a more favorable mix? Just for me to understand how you guys see this packaging and presentation mix evolving in the future. Just a follow-up here I guess.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [15]

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It's not -- I mean, we don't give a guidance on that because the markets can move, but just to -- yes, the quarterly growth because innovation and profitable innovation in core with new brands. And because the premium segment is growing with higher margins; innovation, higher margin's coming. We're gaining share in premium. It's not bad. It's good for the business. Because at the end of the day, I mean, we are expanding the industry, and we are gaining share in each specific segment. That's the aim and that's why that's our plan for the premium segment. So that's good news. So cans growing for premium, it's very good. Margins are better, we're expanding the industry and yes, I'm gaining share in the segment that's growing.

But having said that, I see a lot in the numbers the opportunity of the RGBs to help us in this trade-up from value to core when disposable incomes start to resume growth in our country here in Brazil. This is happening with the core brands. The innovation that we have, the Skol family, the Brahma family, (inaudible), 1 liter (inaudible) represents a great opportunity of trade-up from value and -- to core, and including from people that not even drink today because of money restrictions. So it's both, in both opportunities, RGB in core, trade-up in premium innovation with better margins even sold in -- with one-way packages. Clear enough?

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [16]

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Yes, very clear.

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Operator [17]

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The 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 [18]

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Just 2 quick ones. The first one on Skol. Last quarter, you mentioned that the entire family was growing, right? And this quarter, you made some very positive comments on the Pure Malt line extension. But you didn't comment on the family, overall. Can you comment on whether that growth for the family continued into 2Q? And I don't know if you can mention any trends. As you do the rollout of Pure Malt, is cannibalization on Skol Pilsen increasing? Is it in line with your expectations? And also, perhaps, the up-trading from value to mainstream remained flattish, right, quarter-on-quarter? So I don't know if that has any impact on the mother brand, Skol? So that's number one.

And then number two, very quickly. You've been talking about these tech-enabled solutions, right, over the last few quarters, Parceiro Ambev, and so forth. And this is enhancing your ability to serve the point of sale. I presume this is also explaining part of the growth in the Northern and the Northeast, you can increase frequency of visits in remote places and so forth. So I wanted to ask, at this stage, what is the bottleneck to accelerate this better service? Is it the macro environment itself? You are waiting for the macro to recover even further to accelerate these investments? Or really it is just the pace of execution that you can sustain at the moment in order to increase the frequency of visits and the quality of service in these, particularly in the North, Northeast and the more difficult-to-access areas?

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [19]

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Antonio, thanks for the question. I mean the first question related to Skol. I'm very happy with the Skol family. We don't disclose the growth per brand, and we could say that Skol Pure Malt is a major success launch which had created and changed the Skol family volume trend big time. That helped the full business a lot. Always to bear in mind that the second quarter with Copa América, and with the country music platform was heavy more on Brahma. But -- and we activated Skol not as we activated Brahma in the second quarter. So -- but it's clear that the trends for the Skol family is a big, big change in Skol Pure Malt. Not even I mean 100% launched because as I've said before here in the Q&A, people -- I mean, when you launch a product like that, it's a huge success as people start to try the product. And then they start to try the pack and then go to other packs, to other channels. So we're still launching Skol Pure Malt. It's helping the brand equity of the Skol mother brand and the full family. So very happy with the results of Skol, overall. We have a major trend shift in terms of volume of that brand and Skol Pure Malt is really doing amazingly well. This is your first question.

The second question, we have been working on this digital transformation in the company for some years. And I just bought HBSIS to help us grow even faster. I think that the -- and it's helping us in many, many fronts, not only the -- when I talk about the point of sale, but I discussed about the Draftline. We can discuss about process internally, how it can optimize the process using technology to assure that our SG&A will continue to be in good shape. I think specific to the point-of-sale, I think we see a huge opportunity for us because we have a right to win there. We have context of those point of sales weekly for many, many years. We are increasing big time our basic service for those customers. Our NPS is growing. We created 3 years ago a client service area internally here in Ambev in Brazil and in other countries as well. For sure, the NPS will continue to evolve, and it's evolving big time. And with that, it's much more easier to implement a B2B too. So that's growing a lot.

And I think that the pace of growth, it's more linked, and that's growing fast. Could it grow faster? It could, but there is an adoption time of the 2 from the customers. It's not, I think, a lack of focus or even lack of investment. So we invest and are focused on that. It's very, very important technology. It's embedded in our DNA, and the adoption will happen. And it's very strong. The next -- last year, 80% of our sales in the on-trade was done in the same quarter in site visits in the -- via other ways of order taking. So which means that 82% was, in fact, this number was 18 prior quarter. This quarter it's 29. It's a big evolution in terms of the context strategy to the box, to the point of sales.

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Operator [20]

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The next question is 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 & Fundamental Research Analyst [21]

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A couple of questions. I think you were asked this, but I'm not sure I heard the answer. Net revenue per hectoliter up 3.7%. What -- did you give us a number of what that would have been on a constant geographic basis?

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [22]

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Robert, we don't disclose that, but you can bet it would be better than that on a constant geographical base.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [23]

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Okay. And then in terms of pricing this year, will it be the normal time frame or perhaps in August, like you've done in other years?

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [24]

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It's not going to be much different than in past years. Some of the pricing is already in the markets, like -- some of that we already started in July for some SKUs.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [25]

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So a little bit earlier.

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Fernando Mommensohn Tennenbaum, Ambev S.A. - Chief Financial & IR Officer and Member of Executive Board of Officers [26]

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It's more or less similar to last year. It -- we don't increase all the package that we pack in the same day. So for some SKUs, we already started, but it's going to be -- it's happening in the third quarter like it happened last year.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [27]

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Great. And then my last question. You now have a very strong portfolio of global international brands, bringing Beck's in; Bud, Stella, Beck's, Corona, and you gave us a little bit a sense of kind of the pricing ladder. Would your expectations also be that the volume will be kind of correlated, such that the lower-priced ones would have the most volume, so the Bud would be the largest volume; Corona, the least?

And tied to that, have you had any surprises in terms of the customer acceptance of these brands? Like a lot of these brands are new to the customers in Brazil. Any thoughts in terms of how they've been accepted and surprises along those lines?

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [28]

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I think, Robert, as we always said, the portfolio approach will be the winning approach. And despite what's happening in the last many, many quarters, we have been gaining share in the premium segment. And the beauty of that, that you have entry brands in that specific segment, like Budweiser. It's an amazing brand with very good equity. It's a bigger brand and it'll be a portfolio from there and up. And then not even talk about some brands here. And we have a local press that we just launched a lager, like a little bit bitter in terms of the liquid, but we launched that Colorado Ribeirao Lager, that's growing a lot. So it's how I really -- we are not in a stage of that specific brands -- brand in the U.S. such as scale up and the prices way up.

Last year, I mean, we have been improving a lot in the way that we innovate. So we do more pilots who understand in small cities, in regions. So last year, we launched a brand, not specifically an important brand in the portfolio in the south of the country and it was an amazing result. It was an amazing result that we would scale up for the future. Not give 100% cover to say the name of the brand. But I'm just saying that, when I talk about the expansion of a portfolio of premium, it's not only the expansion, but the way that we do it, the way that we innovate, doing small pilots. And then, I mean, make success case there and then go, I mean, new things to big things and bigger to bigger things. So I mean, we adjusted, in the last years, the innovation process that help us to have a healthy pipeline in not only the premium in the core as well but specifically with premium. Bringing brands with different price levels that result towards the profitability of the overall portfolio is pretty good, and we have one brand for a specific occasion, for a specific price point. For each specification occasion, each specific price point.

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Operator [29]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks.

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Bernardo Pinto Paiva, Ambev S.A. - CEO & Member of Executive Board of Officers [30]

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So thanks for the attention. I think that we continue to be very excited about the implementation of our strategic platforms, not only in Brazil but in the other countries. I think that consistency is the name of the game to win in a market that demands a connection, even more with people that drink our beers every day. We're a really truly consumer-centric company and really very excited about the prospects of the portfolio of the brands of the way that we operate. Thanks a lot. Have a nice day.

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Operator [31]

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