Ambev S.A. Q1 FY2020 Earnings Call

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's First Quarter 2020 Results Conference Call. Today with us, we have Mr. Jean Jereissati, CEO for Ambev, and Mr. Lucas Lira, 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. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation. 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 the results to differ materially from those expressed in such forward-looking statements. I would 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 first quarter 2019 results. Normalized figures refer to the 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. Jean Jereissati, CEO for Ambev. Mr. Jereissati, you may begin your conference.

Thank you. Good morning and good afternoon to everyone. Thanks for joining our Q1 call. Today I will share the overall view on our business, and Lucas will cover the highlights of our financial performance. We will be as brief as possible so we can dedicate more time to Q&A. Since COVID-19 has been so life-changing, I want to share what we have seen so far on the ground, what we are doing about it, and how we plan to come out of this stronger. During Q&A, I will happily take any questions you may have regarding our Q1 performance. I would like to start by thanking my team. They have risen to the challenge and have made a big difference in how we are managing the crisis so far. Above all, I want to thank our people at the breweries, at the distribution centers, and everyone who has been servicing the market despite all the risks they are facing. As you know, we already knew Q1 would be challenging. We expected COGS pressure, front-load of sales and marketing investments as part of our commercial plan, and a tough comp, as we had the peak of our market share in Q1 '19. But then COVID-19 came. It was an unprecedented event that really negatively affected our performance on top of everything. I would like to explain how each region was affected in terms of volume impact. Panama, Dominican Republic, and Bolivia were hit the hardest. Those countries had more severe restrictions on people's circulation, adopting on-and-off trade opening hours and alcohol sales bans. Brazil suffered quite a bit, given the relevance of the on-trade channel, which was significantly impacted by state and local government measures to contain the spread of the virus. Argentina, Paraguay, and Chile suffered less because our volumes are heavily weighted toward the off-trade channel. Canada volumes benefited in the short term, given the pantry loading. It has been challenging to manage through COVID. People are scared and there is a lot of uncertainty. But as far as Ambev is concerned, our dream of bringing people together for a better world is more relevant than ever. I believe we have been able to move very fast because we entered this crisis very well positioned. What I believe is making the difference for us is the following. First of all, we are taking care of our people. Our top priority has been the safety and health of our team. We have focused on providing a safe working environment. Thankfully, we have had a limited number of cases, and we have provided full support to our people and their families. Our team has shown great resilience, agility, and sense of ownership. In fact, I think it is fair to say, this crisis has brought the team closer together. Second, our size and scale are making the difference. Being present in 18 markets across the Americas and being part of AB-InBev gives us a unique position to learn from each other. We can share best practices, anticipate issues, and be prepared for what's about to come. We entered this crisis with ample liquidity. Our financial discipline also helped. We quickly revisited our costs, expenses, and investments to focus on what matters most in the current environment. But we did not lose sight of product quality, the long-term health of our brands, and our desire to continue to innovate. Third, our strategy. COVID-19 is becoming a catalyst to accelerate the changes we have been implementing in the company so far. I would like to recall that our strategy is based on three pillars: Ambev as an ecosystem, innovation as a mindset, and business transformation enabled by technology. Let me share with you what we are doing in each of these three pillars. Starting with Ambev as an ecosystem. We know our businesses are local. We understand it is our role to help the countries and communities where we operate. We knew we had to collaborate, repurpose the company's competencies and capabilities to really solve real problems. So what are we doing? First, we need to be there for our community. Let me give you three examples of what we have been doing so far to impact people's lives in a relevant way. In most of our markets, we converted some of our production lines to produce and donate hand sanitizers to most of our markets. In Brazil, for example, we put out a team into a project to build a 100-bed hospital in 36 days, just being delivered before the peak of the virus. We will also produce and donate 3 million PET protection masks for health professionals in Brazil. In Argentina, we are donating beer barley to produce bread. We are also helping to distribute the bread through our route to market in collaboration with NGOs. We need to be there for our customers too, particularly the on-trade. Stella Artois had a campaign to support restaurants and bars in most of our markets where consumers can support their favorite bars and restaurants by buying vouchers for future consumption. Finally, we need to be there for our wholesalers, suppliers, and commercial partners, and we need to work together with governments. We are being as flexible as possible to work with the stakeholders while protecting our business. Lucas will speak more about this later. The second pillar of our strategy is innovation as a mindset. On Carnival, we had a successful nationwide launch of Beats GT. It was consumed by four out of every 10 people who attended the street celebration. And among younger people above the legal drinking age, the number increases to six out of 10. In the first quarter, we were also piloting Brahma Duplo Malte as an innovation on the core plus pure malt segment, with a different concept of liquid supply. And because every crisis brings opportunities, we quickly identified a social need that people need to have access to entertainment while staying at home, the livestream concerts, and we were able to ramp Brahma Duplo Malte up, achieving in two months what was supposed to be done in two years. We expanded the livestream's platform into a full calendar of concerts with different musical genres and included our broader portfolio such as on top of Brahma Duplo Malte, Bohemia, Budweiser, and Original. We had 375 million views so far breaking all viewing records possible. We had 24 times more earned media impressions than the FIFA World Cup in 2018. On our first livestream with Bohemia, we had 272,000 mentions on social media, which means about 8% of the total number of mentions that we had from all of our brands in 2019. The third pillar of our strategy is business transformation enabled by technology. Here I would like to highlight the acceleration of our B2B and B2C across our markets. We boosted our capability and reach, solving client pain points and bringing convenience to consumers. For example, our B2C platform in Brazil, Ze Delivery, more than doubled the coverage of POCs since mid-March. Only in April, it made more than 1 million deliveries, compared to 1.5 million during all of the year 2019. To wrap up, I would like to say, we are not only focused on surviving the storm, but we really want to come out of this stronger. Thanks to the transformation that we had begun. Q2 will be tougher than Q1 as all our markets cope with volume declines that result from COVID-19 and the operational deleverage that comes with it. But we are here for the long term and are confident in our ability to bounce back, and we will do that by focusing on our people, being there for our consumers and clients, continuing to invest toward a winning portfolio, and serving our communities and collaborating with wholesalers, suppliers, commercial partners, and governments. So thank you very much. See you in the Q&A. And Lucas, over to you.

Thank you, Jean. Good morning, good afternoon, everyone. Great to be back at Ambev after 6.5 years at AB-InBev. I'd like to thank Tennenbaum for his support during the transition and for leaving behind a great team, which has made a huge difference since I arrived. I've already had the opportunity to reconnect with some of you on the sell-side and the buy-side in the last couple of months, and I look forward to working with the investment community going forward. Our Q1 financial performance was mainly impacted by the EBITDA decline and a significant increase in our financial expenses due to the settlement of equity swaps and higher carry costs related to the hedging of our FX and commodity exposure in Argentina. In terms of our financial performance since the COVID-19 outbreak, we've been focusing on two things: one, managing our liquidity in a disciplined way, and two, revisiting our cost structure and expenses to minimize the impact on our profitability. Regarding liquidity, although we entered the COVID-19 crisis with a very solid cash position, we haven't lowered our guard. We've increased the level of tracking of receivables, being flexible where we can to support our wholesalers and POCs. We are sitting down with governments to see where we can work together to support trade; we're working with our suppliers as everyone adapts to the tougher outlook; we're revisiting our CapEx and reprioritizing our investments, and we've access to credits in select markets as an additional safeguard. As for costs and expenses, we conducted a bottom-up exercise with each line item owner to tighten the belt, revising the budget and reprioritizing, particularly what we call non-working money. As an example, we have significantly reduced our travel spend and internal events. We've internalized certain services and revisited our entire people spend toward avoiding furloughs or layoffs while taking advantage of government relief initiatives. We're also looking into working money. We reviewed our trade spend on the on-premise channel, we've leveraged more from our draft lines content creation team, as well as revisited our marketing investments. For instance, we've suspended investments that are tied to large-scale events that have been suspended or postponed. In content creation, that does not speak to what consumers are currently going through has been either suspended or shifted toward our prioritized marketing initiatives, like the one Jean mentioned. All of this while maintaining or even boosting service levels to clients, sticking to our main investments behind key innovation, and without compromising the quality of our products. Finally, our hedging policy for FX and commodities remains in place. Given the increased level of volatility, we see even more value in the predictability that hedging our exposure on average 12 months ahead gives us. To wrap up, given all the uncertainty that lies ahead, we will continue with a dual focus on protecting liquidity on the one hand and minimizing the impact of volume decline on our profitability on the other hand, while trying to seize opportunities that come up. It is fair to say, however, that protecting profitability will be our biggest challenge on the financial side, particularly in Q2. With that, let's go to Q&A. Thank you.

Thank you. Good afternoon, everyone. Jean, Lucas, congratulations on your new role, and welcome back. I have two questions. First of all, we are seeing China finally opening up again right after almost four months of lockdown. Which lessons can we learn or can you actually learn from the opening of the country and from the early recovery of the consumption, right, in terms of channels and in terms of the size of the recovery? How can you anticipate some of that to what Brazil may face in Q3? And second of all, looking at the volumes in March specifically and what we are seeing in April, can you provide some color on the performance per channel specifically discussing what's going on in the retail, right, and also for the category of beer between the mainstream and the premium, if you could quantify a little bit the performance. Thank you.

Okay, thank you very much, Isabella. I have been in China; I worked in China for four years. I left China at the end of 2018. So, the team over there is pretty much the team I have worked for a while, and we are in very close communication. I have been working on the crisis in China. Since the beginning of February, I was invited to participate to understand what's going on at first to help China and then, at some point in time, to understand and learn and use the learnings here in Brazil, and we have seen a lot of things over there. So what we see is that this crisis has some phases: the first is about putting people first. Then, we saw that you have to be very accurate on predictability and volumes for not stopping production or losing the timing on the follow-up of S&OP, which is something that has to be very well run with all the company looking at it. What we saw too is that this comeback comes in stages, so we see different types of returns in different types of channels. Of course, the off-trade channel has been more resilient during this crisis. And then we saw e-commerce really accelerating and then the restaurants coming back slowly, with nightlife taking a little bit more time. So we have to have this type of proxy of the comeback here in Brazil. When you look at this in Brazil, these trends that we see are really in small off-trade formats and mom and pop stores, which are the channels that have shown more resilience during this crisis. For sure, e-commerce and convenience channels are growing rapidly. Another thing that we need to think about is that everybody has to think like an ecosystem in this comeback. We have to find a way to guarantee that the ecosystem is healthy so you don't lose wholesalers and you can stabilize the system as fast as possible for recovery moving forward. So there are lots of learnings from China. Doing this proxy to what's going on in Brazil is pretty much what we are seeing: in-home consumption going up, local purchases mainly from small off-trade and mom-and-pop outlets, and core brands showing more resilience than before. Everything is going digital; orders, entertainment, conversation, media. So everything is really going digital. If you are not prepared, it's very hard for you to move fast and we have to have a base for us to serve what's going on. We are seeing convenient packs, cans, and long-necks really moving much more ahead than returnable packs, those packs that are more related to the on-trade channels.

Hi Jean, Lucas, good morning. Thanks for the question, and I hope you all are well. My question is the following: if I think about the discussions over the last couple of years, I have seen a lot of focus around the health of the brand portfolio, consumer preferences shifting or evolving, as well as the right balance between premium, mainstream, affordability. So my question would be, do you see opportunities in this environment to, let's say, recognize maybe initiatives or certain sort of brand initiatives that you may have not been able to pursue in the past? Or if so, how could you find maybe some competitive advantages in taking this time and this sort of pause in the operating environment to maybe reinforce some of the connections with consumers with certain brands? And secondly — I'm talking beer in particular here. And secondly, how do you see the market coming out of this with regards to affordability that, as we discussed in Q4 in the last call, was already an ongoing effort or an initiative in normal market conditions? So how should we think about that balance between premium, affordability, and maybe some of the value initiatives that you've done over the last few months? Can you discuss a little bit brands, portfolio health, and maybe opportunities as well as the price/mix balance as we hopefully come out of this in the next few months?

Okay, thank you. Somehow I don't see a major change in consumer trends in preference because of the crisis. What I really see is really an acceleration of what's going on, with the caveat that everybody looks like they are a little bit more pressured in terms of money, in terms of disposable income. So this is an important piece; there is a little bit of a push for a trade down, but I cannot confirm that yet. Having said that, Brazilian consumers are very -- the category of beer is very healthy in terms of share of growth. So the consumers are very open to understand and to have more occasions and to understand the heritage and the meaning of the products or the concepts of innovations. We see this being very accelerated during the crisis because digital media is the most important media, and then you can go deep and you can create more storytelling. So, in the end, what I see is an acceleration of trends that are already there, and the good part is that things that we were doing, things that would have taken two years, three years to mature are maturing much faster, for example. So we are really -- the innovation of 2019 was really Skol Puro Malte, and that is doing well. It continues to grow. Brahma Duplo Malte will come a little further. It will take time, but we're really seeing it picking up much faster because of the platforms, the moment, and how well we have hit with the live platform. I really think that we're going to get out of this crisis stronger in terms of consumer connections and brand connections. Just to give you an information, Ambev is the number one brand, in terms of doing good during this crisis, according to the Croma Institute and other institutes, so it has its value. So I really think we will come out of this crisis stronger in terms of brand connections.

Jean, as a quick follow-up. Are you seeing some of that coming through in the off-trade market share or portfolio mix performance, given that that traditional channel, the market, the competitive balance, the competitive structure has been more balanced than the on-trade? So are you seeing some signals in that channel that are continuing to operate with some of the variables that you mentioned?

So, what I'm seeing is really the -- so in terms of channel, what I'm really seeing is that small formats, small off-trade formats, and mom-and-pop stores are stronger and much more granular. I think people are not traveling as much to faraway supermarkets or hypermarkets. I think people are really buying closer to home, so mom-and-pop stores and small supermarkets are really important. This granularity is more volume from mom-and-pop and supermarkets, which is really making a difference, and those who can deliver that even during the crisis are making a difference.

Yeah. Hey, good afternoon, and thanks for taking my question. So clearly challenging times. One question for Lucas on the financial side. So you've mentioned you're accelerating some of the reviews, strategic cost savings, etc. Can you give us a little bit of a sense of the magnitude where you think you can work through SG&A savings and other cost savings that will allow you to be stronger once the challenges are over? Just like what is the recurring cost you might have been identifying during the recent review, that you can save further on? And then I have one quick follow-up. Thanks.

Okay. Thank you, Ben. I think with respect to how we're approaching tightening the belt, a few things are very important to us. Number one, the bar is higher when it comes to reprioritizing and allocating resources. We really try to focus on what are the must-have investments, what are the must-have expenses, not only to survive in the short term but also to protect the key initiatives that we don't want to compromise, precisely because they're very connected to our long-term strategy. For example, Brahma Duplo Malte, that Jean mentioned, is a big bet for us as we look to roll it out across Brazil. So the investment that goes behind that is one that we want to preserve. There are other areas where there is less flexibility when it comes to fixed versus variable, for example, logistics, where there is less flexibility. But that's where the good old ZBB cost discipline, having the visibility, and having the routines to work with each package owner across the country really helps us look for opportunities more frequently. There are many examples of things that we are doing and will continue to do.

Perfect. That was very clear. And then just your positioning within competition, and you've mentioned in the press release that you feel you lost some share against competition. Now how do you think of pricing in the different core premium segments to even maintain share, or maybe you're willing to give up some share to keep profitability in check? So what's the strategy on pricing in an environment where volumes, as you said, in April are down, consolidated almost 30% on a year-over-year basis?

Hello? So I can pick this one, Lucas?

Yeah, go ahead.

So volumes declined 11%. OK, Brazil, let's talk about Brazil here. While the industry declined by mid-single digits, according to Nielsen. So let me break down this number. We had a soft start in terms of industry in Brazil, declining, so what Nielsen told us, January plus February, industry was declining low-single digits through February, while our volumes traded slightly at around minus 4%. So that's where we were, January plus February, Nielsen, industry low-single digits, we minus 4%. That was a little bit underperforming. It was pretty much because of the channel mix, and then came COVID, and then things completely changed. Nielsen will take time to get from March on all these impacts. And then we have to see a little bit more time moving forward. Having said that, I think the big issue is not about giving discounts; it's not about fighting for market share with discounts. I think the ability of distribution and granularity will be key and will make a difference. The concern that we have is really the channel mix because the question is when the on-trade channel will come back after reopening and if it will come back fast or take time, because the channel mix has an impact on the net revenue per hectoliter since it's a channel with important profitability for us.

Hi. Thank you, everybody. Hi Jean, Lucas. Congratulations on your efforts to help out the community in this very complicated environment. So I have two questions. The first one regarding working capital. I just wanted to understand how -- I mean, you're operating in a very high cash position for some time, so I imagine you will be allocating -- as you mentioned, be more flexible, probably extending the payment deadline. So can you just talk a little bit more about how that is playing out? How could that reflect also on your internal cash generation? And also talk about the other -- the underlying suppliers and internally as well. So that's my first question. The second question is on CapEx. You noticed there was a big jump in the CapEx this year versus last year. So I just wanted to know what's behind this increase? In which region was that CapEx allocated? And how should we think about CapEx going forward? Thanks.

Okay. Juval, this is Lucas. Let me start with the second question because it's quicker on CapEx. So our BRL1.3 billion of CapEx in the quarter was mostly concentrated in Brazil. And within the CapEx in Brazil, we had two large commitments. One was the can plant that we were building, and also, we've been adapting the production of many of our lines to enable them to brew our pure malt brands. So having a strong pure malt portfolio is a commercial priority for us, and so we have to invest behind that, and that's what the investment we did. When it comes to working capital, in the same way we've been very disciplined around protecting liquidity of the company. Despite our strong cash position, we've been very, very cautious and prudent in managing this. We are also very mindful, and we've been working together with points of sale, with our wholesalers, with our suppliers to make sure that our liquidity is protected, but where we can be flexible, we are flexible. But again, this is day-to-day work. This is having a lot of visibility and having the routines in place. Just to give you some color, we have weekly meetings, me together with my team and members of our procurement organization, our sales organization, we have weekly meetings to track our performance in terms of receivables, bad debt, which had an initial spike toward the end of March and the beginning of April, but have now started to trend back toward historical levels. So that's good news. Again, very fluid still, so we have to stay very vigilant and manage very closely. But the initial spike has started to trend down positively. When it comes to payables, the same thing — having lots of granularity and see where the pain points are. We have a very concentrated payment cycle, which puts some strain on our interim month cash position, but we've been able to manage that so far. In that regard, we have been identifying key suppliers and sitting down with them. We are not taking any unilateral action. This is all working together with them to see what needs to be adjusted and how we can adjust that. No major disruption in terms of our payables. And then in terms of inventory, again, this is going to fluctuate according to our reduction in production given the volume decline in March and in April. But as we ramp up production going forward depending on the pace of recovery, we're going to try to smooth out the inventories curve as much as possible without compromising service level. That's key for us. We want to have the right SKUs at the right place at the right time, and so you need a certain level of inventory to be able to accomplish that.

Thank you. Hello, Jean. Hello, Lucas. Hello, everybody. Three questions on my side, if I may. First, ABI, in their call, they shared some color on the breakdown for COGS per hectoliter increase, mentioning the percentage of it coming roughly from operational deleverage, commodity effects, and mix. I was wondering if you could do that, the same thing for Ambev as well, that would be very helpful. My second question is related to pricing; in your opening remarks, you mentioned the challenge to protect profitability during these difficult times, at a time when we are seeing much less inflationary beer market in Brazil, which I think has a lot to do with what you have been saying in the recent past about balancing volumes and pricing a little bit more in this market. But Jean also mentioned a sort of alienated competition. So just wondering whether we should expect a different behavior from Ambev on the pricing side in Beer Brazil in terms of protecting profitability and ignoring a little bit more irrational competition, that would be nice to discuss as well. And lastly, if I could, can you explain a little bit more the impact on the financial expenses, particularly coming from the derivatives? You booked BRL945 million impact in the quarter. I was just wondering if this is particularly related to the mark-to-market of the FX volatility in the quarter or if it was just the increase in hedging costs that you put in there. So just if you could guide us through a little bit of your expectations for that in the coming quarters, that would be nice as well. Thank you so much.

Okay. Thiago, this is Lucas. Let me kick off by talking about your last question, financial expenses, and then I can speak to the COGS per hectoliter question. And then maybe Jean can speak to pricing going forward. So with respect to the financial expenses, that's exactly right; the main impact that we saw in Q1 was really the losses on derivative instruments. If you break that down, we had primarily two main impacts. One was the mark-to-market accrual of our position on the equity swaps, so as the stock price declines, as it did in Q1, we obviously have to adjust for that, but again, this is for the most part a non-cash impact. And then the second big effect within the losses on derivative instruments was really around the carry cost during Q1 in connection with our hedging of our exposure in Argentina. So that carry cost evolved over the course of 2019 and is at a higher level nowadays, and so this ended up impacting our financial expenses in a relevant way. Then when it comes to our losses on non-derivative instruments, that's mostly FX-related and mostly non-cash. Then moving to COGS per hectoliter, I think it's hard to give you a precise breakdown at this time. What I can say and what I would emphasize is number one, we had already flagged this in our Q4 full-year call, given the hedging curve that was implemented last year, we already anticipated that we would have a very tough impact on the product of the FX commodity, hedging equation. So this was the quarter where we already anticipated the largest impact, and so that explains most of the impact, I would say. The second impact on the COGS per hectoliter that I would flag is the deleveraging effect of the volume decline, granted the volume decline related to COVID was mostly during March. But given that part of our COGS is fixed — historically, our COGS has been roughly 20% fixed, 80% variable. As volumes decline, there is a deleveraging effect there as well. So I think those are, I would say, the two main elements that are in play.

So about pricing, I've been saying that what I believe is that over the long run, price really should grow in line with disposable income and inflation, these are two metrics that we like to compare. What we've learned over the last few years is that depending on the economic environment, we've preferred to adopt a more balanced pricing strategy in order to bring more consumers into the category. What I was saying here is based on our historical performance, always trying to use this lever, and what I'm saying is that we have to find the balance. I don't see any context, even though with the COVID crisis, where we could bounce to the other side and engage in price wars or big discounts; I don't see that. What we are really trying to see is to find that balance. The issue we have when I look at net revenue per hectoliter is really the mix trends, that is really about the channels. Restaurants and bars, supermarkets, all of this is going to be impacted by how this recovery will be, as this mix is going to impact our net revenue per hectoliter. Besides that, I really think that this is the moment to leverage distribution, to find volumes that enhance capillarity, and where service level reliability with the supplier is very important. So I'm really advocating for volume in that regard.

Hi. Thank you, everybody. Hi Jean, Lucas. Congratulations on your efforts to help out the community in this very complicated environment. So I have two questions. The first one regarding working capital. I just wanted to understand how -- I mean, you're operating in a very high cash position for some time. So I imagine that you will be allocating -- as you mentioned, be more flexible, probably extending the payment deadline. So can you just talk a little bit more about how that is playing out? How could that reflect also on your internal cash generation? And also talk about the other -- the underlying suppliers and internally as well. So that's my first question. The second question is on CapEx. You noticed there was a big jump in the CapEx this year versus last year. So I just wanted to know what's behind this increase? In which region that CapEx was allocated? And how should we think about CapEx going forward? Thanks.

Okay. Juval, this is Lucas. Let me start with the second question because it's quicker on CapEx. So our BRL1.3 billion of CapEx in the quarter was mostly concentrated in Brazil. Within the CapEx in Brazil, we had two large commitments. One was the can plant that we were building, and also, we've been adapting the production of many of our lines to enable them to brew our pure malt brands. Having a strong pure malt portfolio is a commercial priority for us, and so we have to invest behind that. When it comes to working capital, in the same way we've been very disciplined around protecting the liquidity of the company. Despite our strong cash position, we've been very, very cautious and prudent in managing this. We are also very mindful, and we've been working together with points of sale, with our wholesalers, with our suppliers to make sure that our liquidity is protected. But where we can be flexible, we are flexible. That said, this is day-to-day work. This is something that requires lots of visibility and having the routines in place. We have weekly meetings to track our performance in terms of receivables. Bad debt had an initial spike toward the end of March, and the beginning of April, but have now started to trend back to historical levels. So that's good news. When it comes to payables, we have lots of granularity to see where the pain points are. We have a very concentrated payment cycle, which puts some strain on our interim cash position. But we've been able to manage that so far. In that regard, we have been identifying key suppliers and sitting down with them. This is all working together with them to see what needs to be adjusted and how we can adjust that. No major disruption in terms of our payables. When it comes to inventory, this is going to fluctuate depending on our reduction in production, given the volume decline we experienced in March and April. But as we ramp up production going forward, depending on the pace of recovery, we're going to try and smooth out the inventories curve as much as possible without compromising our service level. That is key for us.

Thank you. Hello, Jean. Hello, Lucas. Hello, everybody. Three questions on my side, if I may. First, ABI, in their call, they shared some color on the breakdown for COGS per hectoliter increase, mentioning the percentage of it coming roughly from operational deleverage, commodity effects, and mix. I was wondering if you could do that, the same thing for Ambev as well that would be very helpful. My second question is related to pricing, right? In your opening remarks, you mentioned the challenge to protect profitability during these difficult times, which is right at a time when we are seeing much less inflationary beer market in Brazil, which I think has a lot to do with what you have been saying in the recent past about balancing volumes and pricing a little bit more in this market. But Jean also mentioned a sort of alienated competition. So just wondering whether we should expect a different behavior from Ambev on the pricing side in Beer Brazil in terms of protecting profitability and ignoring a little bit more irrational competition, that would be nice to discuss as well. Lastly, if I could, can you explain a little bit more the impact on the financial expenses, particularly coming from the derivatives? You booked BRL945 million impact in the quarter. I was just wondering if this is particularly related to the mark-to-market of the FX volatility in the quarter or was it just the increase in hedging costs that you put in there? So just if you could guide us through a little bit of your expectations for that in the coming quarters, that would be nice as well. Thank you so much.

Okay. Thiago, this is Lucas. Let me kick off by talking about your last question, financial expenses, and then I can speak to the COGS per hectoliter question. And then maybe Jean can speak to pricing going forward. So with respect to the financial expenses, that's exactly right; the main impact that we saw in Q1 was really the losses on derivative instruments. If you break that down, we had primarily two main impacts. One was the mark-to-market accrual of our position on the equity swaps, so as the stock price declines, as it did in Q1, we obviously have to adjust for that, but again, this is for the most part a non-cash impact. And then the second big effect within the losses on derivative instruments was really around the carry cost during Q1 in connection with our hedging of our exposure in Argentina. So that carry cost evolved over the course of 2019 and is at a higher level nowadays, and so this ended up impacting our financial expenses in a relevant way. When it comes to losses on non-derivative instruments, that's mostly related to FX and is also mostly non-cash.

So about pricing, what I believe is that over the long run, price should grow in line with disposable income and inflation. These are two metrics that we use to compare. What we've learned over the last few years is that depending on the economic environment, we have preferred to adopt a more balanced pricing strategy to bring more consumers into the category. What I said earlier was based on our historical performance, always trying to leverage this and what I'm saying is that we have to find that balance. I don't see any context, especially with the COVID crisis, where we could engage in price wars or substantial discounts. What we are really trying to see is finding that balance. The issue we have when I look at net revenue per hectoliter is really the mix trends, specifically about the channels, restaurants and bars, supermarkets. This will be impacted by how this recovery unfolds. Overall, I am confident we will leverage distribution to find volumes that can enhance capillarity and ensure service levels with the supplier, which is critical.

Great. Thank you very much. A couple of questions and my apologies if you covered this earlier on, as I had to jump on a little bit later. But number one, can you talk, particularly about the Beck's brand that rolled out, I think, late last year, very promising? Is that something that you're in the current environment able to continue to put time and investment behind or do you perhaps back off on that? So that's number one on Beck's, and how it was doing. Number two, maybe give us an update on the smart affordability initiatives, what percentage of sales are under that classification now and how is that business doing? And then third, based on your comments about how well the smaller mom-and-pop channel is doing, presumably you have advantage distribution to that channel. Therefore, in terms of on-premise by itself, taking out the on-premise, but if you just look at off-premise by itself, would you expect to gain share this year, all things equal? Thank you.

Hi Robert. Let me see what I can answer to your questions. So Lucas, help me here. So first of all, talking about Beck's, we are excited about it because it was really something that came with a much more pull ahead of the push even in the beginning of its launch. It is a concept that resonated big time with Class A consumers. We are so excited about it. It's our priority, and we want to invest ahead of the curve. This is a piece of the business that I would not consider decelerating or cutting investments. It's really a part of the business that is performing well. Smart affordability is still a play we are pursuing. We are seeing that during this crisis, we have to understand where it's going to land in terms of any potential trade down of consumers. That's a consistent strategy we have been adopting for a while. We launched Nossa, Magnifica, and Legítima. Magnifica is the brand that's really inspiring us, and the other ones are performing strongly, gaining market share in states like Maranhão. We are going to continue this; it's an important piece of our strategy. Regarding market share, Robert, it's very early to say. The market is changing so rapidly. What I can say is that those who are prepared to navigate well during this crisis, understand and assist the ecosystem in recovering the bars and access mom-and-pop stores will be most successful. I believe that our distribution capabilities, granularity, and service levels to consumers will make a significant difference during this crisis.

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

Okay. Thank you very much for being here with us today. It may be a cliche to say to never waste a crisis, but what we are living is unprecedented moments in our history. It is really something that is impacting us significantly. To be the leanest and most efficient player in the market at this moment has its value, to have the highest reach in terms of distribution with fewer intermediaries has its value, and having entered this crisis with a solid cash position means we are not lowering our guard but are prepared to capitalize on shifting channels and granular growth opportunities is making a difference too. To be the most remembered brand for doing good during this COVID-19 pandemic speaks volumes about our values. Hitting a home run with the live platform in Brazil supporting our innovation of the year, Brahma Duplo Malte, is also a key factor that will make a difference. We've been investing in new technologies for a while, and our B2B and B2C strategies are designed to ensure we use this moment to grow significantly over the solid foundation we've already created. This gives us confidence as we look to come out of this crisis stronger. Thank you very much. I hope you all stay safe.

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