Ambev S.A. Q2 FY2020 Earnings Call

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's second-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, our 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. 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 the second-quarter 2019 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. Jean Jereissati. You may begin your conference.

Thank you. Hello, everyone. Thank you for joining our call. Before I share with you an overview of our business during the second quarter, and Lucas cover the highlights of our financial performance, I would like to deeply thank all those who are helping our societies during the COVID-19 pandemic. Those who are fighting on the front line on a daily basis are the real heroes and are making a real difference as the world battles the pandemic. Thank you very much. Our second quarter was certainly marked by the pandemic, but also by our team's incredible collective and positive reaction to it. Last quarter, I mentioned the main factors that I believe would make the difference in navigating the crisis: being the leanest and most efficient player in the market, having the highest reach in terms of distribution network built over the last 20 years, mitigating the rises with a solid cash position, and finally, leveraging our technological and innovation platforms that we have been investing in for a while. In what was probably the most difficult quarter of our history, we demonstrated the strength of our business, the resilience and creativity of our people, and our ability to impact the world in a positive way. In almost all the countries in which we operate, we ended the quarter better than we started. COVID-19 brought new challenges to our business and the ecosystem of our industry. Everybody is reinventing themselves. Consumers are changing their habits, demanding more convenience and new ways of entertainment. The on-trade channel is rethinking itself. The good news is that we have been setting up the company to respond quickly to these changes, and we are starting to see the benefits of this new mindset and strategy. From April to June, we saw a sequential improvement in consolidated volumes. April volumes declined by 27% year over year, May declined by 7%, and June actually grew by 5%. Despite this positive trend, there is still plenty of uncertainty in the market. Things can change rather quickly, and profitability was and should continue to be a challenge, as our great socializing occasions are and will continue to be impacted moving forward. Restrictions are still very fluid and macroeconomic factors and currencies remain volatile. In terms of openings, Bolivia, the Dominican Republic, and Panama were hit the hardest. These countries started the quarter with more severe restrictions on vehicle circulation and alcohol sales, adopting on- and off-trade opening hours. As the quarter progressed, such restrictions were gradually eased, but there are still some in place as we speak. Chile and Paraguay suffered less because our volumes are heavily weighted toward the off-trade channel. Nonetheless, a challenging macro environment has led to a slower recovery in Argentina. In Brazil, where the on-trade channel played an important role, restrictions varied between regions, with big cities and urban centers being more affected. We saw a gradual improvement as part of the on-trade began to adapt, operating with deliveries and takeaways, and cities started to reopen. These small mom-and-pop stores gained relevance as customers chose local consumption to avoid longer journeys, partially offsetting the impact on the on-trade channel. Canada, despite an industry decline, our volumes benefited from the strong performance of our premium core plus and beyond beer portfolio. As I have mentioned before, we have a strategy built on three pillars. First, we want to work as an ecosystem. We are reframing our purpose of bringing people together for a better world, and we have mobilized ourselves by donating our capabilities and competencies of our teams to help solve urgent social challenges. We were recognized by the United Nations with the Solidarity Award. This award is given to impactful work that individuals and organizations have been doing to support communities as we navigate the pandemic. All this because we have been able to move fast to respond to these social needs. In Brazil, we also participated in Movimento Nos, a coalition of end consumer goods companies that will help approximately 300,000 points of sale to reopen with a total of BRL 370 million, impacting indirectly more than 3 million people. Besides all this, it was a moment for us to renew the pact we have with our customers, suppliers, and the community. We achieved all-time high customer satisfaction measured by the NPS metric, doubling our result compared to last year for the same period. Second, innovation as a mindset. As markets mature, consumers demand more options for different occasions, and we are transforming our business to respond faster to demands like that and shifts in market trends. As a result of this transformation, in Brazil, for example, our market share of products launched in the past three years now over-indexes our total market share. What is driving these results is a step-up in consumer-centric capabilities, flexibility to create unique recipes with exclusive ingredients, a pilot-testing approach, the creation of an ecosystem that benefits clients, consumers, and suppliers with superior value, and the logic of creating demand ahead of production. Following this formula, we developed Brahma Duplo Malte. We managed to deliver in three months the volumes we originally planned to deliver by the year two of our business plan. The brand took advantage of the livestream phenomenon. Incrementality has been higher than expected, and margins are healthy for the company. There is still much to do, but we are off to a great start. The livestreams were a groundbreaking innovation in media and entertainment. Where there was fear, we brought joy. This quarter, we promoted almost 400 livestreams with more than half a billion views. Brands that engaged in lives had exponential growth on social media. We also learned that opportunities before and during the lives are excellent opportunities for us to engage with consumers through our B2C platforms. The third pillar of our strategy is business transformation enabled by technology. Where there were movement restrictions, we offered convenience. Our direct delivery systems to consumers' homes have grown exponentially. Our DGC platform, such as Ze Delivery in Brazil, Cerveza in the Dominican Republic, and Appbar in Argentina are gaining significant traction, as well as our partnerships with third-party home delivery platforms. This quarter, Ze Delivery registered 5.5 million deliveries, 3.6 times more than the full year of 2019. Another example is the proprietary B2B platform that we call BEES, which has been piloted in the Dominican Republic, and we have started to roll it out in other markets. In the Dominican Republic, we already generate the majority of our revenues through BEES, and we also see an opportunity to incorporate different segments such as food, dairy products, wine, and spirits. Although April seems to have been the low point, we will continue to see uncertainty in the market going forward. We are here for the long term and are confident in our ability to bounce back. We will continue to focus on our people, be there for our consumers and clients, continue to invest toward a winning and fresher portfolio, serve our communities, and collaborate with our wholesalers, suppliers, commercial partners, and governments. Finally, I would like to thank my team with all my heart. This was the most challenging quarter of our history, and we could only get through it and achieve these results thanks to the amazing people who have always formed the foundation of our company. So, thank you all, and let me hand this over to Lucas.

Thank you, Jean. Good morning, and good afternoon, everyone. Going into Q2, we anticipated a very tough quarter because of the impact of COVID-19, and that's exactly what happened. The combination of steep volume decline, which led to operational deleverage and a significant change in channel, package and brand mix, had a big effect on our EBITDA performance and profitability. And although the team managed to find considerable savings in terms of costs and expenses, simply put, that was just not enough to offset the COVID headwinds. Going quickly over our business units, Brazil Beer's financial performance was actually better than we originally anticipated at the start of the quarter, thanks primarily to volume trends. This was also the case for Canada. CAC had a tougher time in terms of top line, but the team did a great job to minimize the impact on our profitability. LAS and NAB Brasil were the two divisions that struggled the most in terms of financial performance; LAS because of Argentina's macro and Bolivia's COVID-related restrictions, and NAB Brazil, thanks to volume decline and higher costs. Having EBITDA decline by 33%, EBITDA margin contracted nearly 1,000 basis points, and net income declined roughly 50%, thanks mostly to the EBITDA decline, and that finance results are not something that we're happy about. But we're facing the brutal facts head-on, and we're going to keep working harder and harder to improve our results consistently going forward. But not everything is bad news, though. For instance, we managed to protect our liquidity while working with our suppliers, wholesalers, and customers to weather the storm. What was already a robust liquidity profile just got stronger, as we quickly accessed credit markets in select countries to enhance our liquidity position, and this has made a difference in terms of our ability to be a reliable partner for these stakeholders. Our wholesalers and suppliers managed to adapt fairly well to the new reality. And although the trade has struggled more, we have been working with them on several initiatives to support their recovery. Also, another thing to mention is that we quickly revisited our cost structure and expenses. Initiatives like revisiting trade spend given changes in channel mix, renegotiating commercial contracts, and revisiting the calendarization of our spend, outsourcing less and leveraging more internal capabilities like our draft line content creation team, and significantly reducing discretionary expenses all had a positive overall impact. We always strive to be as lean and nimble as possible, and frankly, we think this is going to be a must going forward because we simply don't know exactly how long COVID-19 will be around and how things will evolve. And finally, we continue to invest in the future. We preserved key sales and marketing investment behind the renovation of our portfolio and behind innovation, and we will continue to do so going forward. Even though we reviewed our capex plans and raised the bar to focus on the must-haves, we still invested a significant amount of money behind the safety of our people, the quality of our products, commercial priorities, and big bets for the future and technology-related initiatives. Several good examples here that I think are worth mentioning, but we kept that investment. Cap production and filling capacity are going to be key for the future. Returnable glass bottles for innovation, the brewery of the future, B2B, and B2C platforms were also preserved. Just to wrap up, looking ahead, one of the biggest challenges we’re going to face will be on how to improve our profitability, no doubt. This won’t happen overnight, and volume growth and channel, package, and brand mix are going to be decisive, which is precisely why we’re going to focus on that going forward. Yes, things will continue to be volatile. We will continue to face some well-known headwinds, but we will focus on the levers we control to support, in a very disciplined way, the commercial agenda, and manage the business targeting consistent improvement of our financial performance over time. With that, let's turn it over to Q&A. Thank you very much.

[Operator instructions] Our first question is from Thiago Duarte of BTG. Please go ahead.

Thank you very much. Hello everybody. Thanks for taking my question. I have two questions, actually. The first one is related to the box per hectoliter increase in Brazil beer. You guys mentioned in the release the impact of FX translation, as well as mix in channels. So, just wondering if you could elaborate a little bit on the impacts of each one of those in terms of COGS, unitary COGS, and Brazil Beer. And the second one, if you could -- you mentioned that you believe that you're up through the market year over year in the quarter, in Brazil Beer itself. Just wondering if you could elaborate in terms of the different segments in the market, how you perform relative to the competition in premium and mainstream specifically? It was a little bit of a surprise to see the drop in premium, how on-premise seems to be so important there. So, just to understand the magnitude of the variations in each of these categories in your volumes.

Okay. So, thank you very much for the question. So, I'll get the volumes and the market share first, and then, Lucas can talk about the COGS, okay? So, as you see in our report, we saw a recovery on volumes sequentially from April in Brazil. This was a mix of things that we have seen in the market. It is pretty much the resilience of our category. What we saw in terms of occasions is that the socialized out-of-home occasion has been compensated by the relaxation at-home location. So, this is something that is going on in the market that normally happens in more mature markets, and it was accelerated here in Brazil. The strength was clear here in Brazil, weekdays improved performance, consumers drinking at home on Mondays, Tuesdays, and Wednesdays. I really believe that we were the first to really pick this journey up and accelerate it. This was important; not all the countries saw this transition of occasions and new occasions popping up. We saw that very clearly here in Brazil. We also noticed some reduction in the beach drinking. When we conduct consumer research, that was good news for the industry overall. Having said that, we were pleased with the resource allocation following the consumer and going in that direction. We were very happy with our channel strategy being agile, and we were successful in migrating all the resources that we had for mom-and-pop stores, which was the channel growing the most during the pandemic, and we have a great reach to get this right. The small formats of off-trade are really picking up, and we moved our entire resource allocation team to support these two channels, which was a very effective strategy. Additionally, the innovation pipeline that we rolled out during the pandemic, Brahma Duplo Malte, surprised us with significant trade-up and penetration. So, this was an important part of our plan, helping us outperform our best estimates in almost all channels, particularly in small formats and mom-and-pops. We are happy with this type of growth during the pandemic, and we saw no material trade down in the beer category. We were also pleased with the global brands growing at double digits, and we noticed that the premium category is a long-term trend. It's true that the VIP entry, draft beer, Chopp Brahma, and Original are more affected during this time, but we are delighted with the performance of our global brands.

Thiago, Lucas here. So, with respect to your question on COGS per hectoliter, I would say there were three main impacts, okay? The first one, which was anticipated given our hedging strategy, was really the headwinds stemming from the devaluation of the real year over year. That was a headwind coming into the quarter. Then, the other two are more COVID-related. The first one being volume deleverage in April, right? With such a steep decline in volumes, it's very difficult to offset that. Having less volume to offset, fixed costs took a toll, particularly in April. The third one, which was the biggest impact overall, was really mix because of the massive shift in a short period of time between one-way packaging and returnable glass bottles. We shared some numbers in the release; historically, one-way cans are not the majority of our volumes, but during the quarter, they became the majority. With the off-premise where one-way tends to over-index, they represented 70% of our volumes in the quarter. Such a swing in channel mix had a severe impact on our COGS per hectoliter in the quarter because the cost for cans is higher than the cost per returnable glass bottles, where you have the returnability element to it. So, the biggest impact was the mix due to the package swing, followed by operational deleverage, mainly in April.

And just a follow-up on that, Lucas, how does that link to the cautionary statement you guys made on profitability going forward? Is this mainly the reason? We've talked about specialty mix, I believe, channel as well, but specialty mix. Would that make sense to assume that it is related?

Yes. I think when you refer to the cautionary statement in the prepared remarks, am I right to assume it’s in reference to the remarks toward the end of my part, where I covered a bit about what we're seeing going forward? Is that what you're referring to?

Yes.

Yes. I think the concern comes from an acknowledgment of the world we're living in. Things have changed drastically since last year. Things are much more fluid and can change really fast. I think it's an acknowledgment of that, number one. Number two, again, back to our hedging policy, right? If you track how the main currencies that impact us vis-à-vis the dollar are trending, that’s likely to be a relevant headwind into next year. So, we think it's worth flagging that to the market sooner rather than later because it's a reality. We need to be upfront about it, right? And three, on the mix side, yes, that's going to be a challenge going forward. Historically, we've seen the Brazilian market to be more on-premise returnable glass bottle-weighted than off-premise one-way weighed. That inverted in the quarter, and we have a road ahead of us to try and bring that back, restore the balance toward returnable glass bottles and the on-premise as the country reopens, right, as consumers make their way back to the on-premise. But it's going to be a process; as I said in my opening remarks, it's not going to happen overnight, right? There's still a lot of uncertainty out there, and we also have to keep an eye on how COVID-19 is going to develop.

That's very clear. Thank you guys. Thank you for detailed answers.

The next question is from Rob Ottenstein of Evercore. Please go ahead.

Great. Thank you very much. I'm just wondering if you could give us a little bit more about Ze Delivery. Obviously, it's doing extremely well. What percentage of the country is covered now in terms of May, June, July? Roughly what percentage of your sales is through this channel, and where do you think that can go? And my understanding is that the Ze Delivery does encompass competitors' brands as well. In terms of actual Ze Delivery orders, what is your market share?

Thank you very much, Robert. Yes, so let's talk about Ze Delivery. It is a project that we have been working on for five years now. We have the right mindset and the right platform for us to grow exponentially during this crisis. It's part of our direct-to-consumer strategy, helping us engage in-home occasions more efficiently. We’re pleased; we processed 5.5 million orders in Q2. Last year, that was 3.5 times above the full year of 2019. We were able to add 100 new cities during the pandemic in Q2. We are now in 142 cities in Brazil, covering approximately 40% of the Brazilian population, and we believe we will reach 60% by the end of the year. It’s still a developing channel in terms of volumes, but we see significant potential. Our long-term view is to have 10% of our net revenue covered by direct-to-consumer strategies including delivery, which encompasses various brands, including competitors' products like wine and some types of food. Our market share is over 95% today, and we treat that delivery as a very consumer-centric approach to meet our customers' demands efficiently.

Great. That's super. And can you also just mention how the Beck's brand is doing this year?

Yes. So, Beck's is doing very well; we are very excited about it. It's been growing triple to four digits, but off a very small base. We have been working on the positioning, launching new packs, and we recently ran a market campaign positioning Beck's in Brazil. We are focusing on creating brand equity and the correct positioning with the right level of patience from our side. Last month, we launched with a popular DJ in Brazil, Vintage Culture, through a livestream that became a global trend topic on Twitter. We had 1.6 million viewers tuned in to the launch, and we aim to create the coolest brand in the market.

The next question is from Alan Alanis of Santander. Please go ahead.

Thank you so much. My question has to do with this premium segment, Jean. You just mentioned a moment ago that you saw it growing double-digit during the quarter. Is that the case? If that means the rest of the portfolio saw more mid-single-digit declines, if I'm doing the math right. My specific question is, if we continue to see this premiumization, what should we expect in terms of profitability? Because these brands are much more expensive than the rest of the portfolio, yet when we saw the big premiumization movement in '16, '17, and '18, we didn't seem to have a contribution to margin? Will this be reversed, or should we continue to expect that this will be the case? That would be my first question.

So first of all, yes. We saw no material trade down during this pandemic, and we were surprised by the resilience of the core. We previously spoke about finding the right mix of brands where affordable brands were growing and high-end were growing too, providing a great opportunity to see how high-end products can contribute to margin. The moment we find that the core is resilient allows us to better understand the performance of high-end products as accretive to the company. The Brazilian beer category has been quite resilient, demonstrating strong consumer excitement toward innovation and new products, which is why premium brands like Stella, Budweiser, Beck's, and Corona are performing well, even during the pandemic.

No, that's very clear, Jean. We look forward to seeing that resurgence of core. If I could ask one more question quickly regarding capital structure. I guess it’s more for Lucas; you have 2 billion of net cash in your capital structure. What is the ideal level of cash? How are you thinking in terms of the priorities of deploying that cash beyond interest on capital and dividends? Are there any changes in your thinking around that?

OKAY. Alan, in terms of capital structure and our cash position, the first thing is that ever since the crisis hit, we saw benefits from having such a robust cash position. It provided peace of mind, not only for our team but also for our wholesalers, clients, and suppliers. Our robust cash position has been instrumental in weathering this storm. Given the uncertainty we were facing at the beginning of the crisis, we decided to enhance our liquidity, especially in markets where we suffered liquidity issues. We accessed credit markets to strengthen our cash position, which positively impacted our ability to maintain reliability for our stakeholders. Going forward, we believe it's important to remain conservative regarding our cash position. Obviously, we're continually assessing how things progress, looking at strength across various scenarios. Conceptually, the way we think about capital structure and allocation of cash hasn’t changed. We're going to continue to focus on our organic growth and look for M&A opportunities, especially in alcoholic beverages outside of beer. If we don’t identify these opportunities, we will consider returning excess cash to shareholders primarily through interest on capital, given the tax benefits associated with it. Once we have maximized interest on capital, we will assess additional opportunities for returning cash through dividends or share buybacks, but that's going to be a judgment call discussed between management and the board at the appropriate time.

Got it. That was very clear. Thank you so much. Thank you, Jean. Thank you, Lucas. Appreciate it.

The next question is from Lucas Ferreira of JP Morgan. Please go ahead.

Good afternoon, Jean and Lucas, and good afternoon, everybody. I have two questions. The first one is to understand if you have some flavor, some views on the reopening of the on-premise channel, which is very important for you. So, how NOS has been helping? How has the sort of traffic been? Are your clients coming back in line with your expectations, maybe above your expectations? How do you think about the reopening of the on-premise channel in these first two months? The second question is to understand a bit better the core-plus segment, which seems to be a bright spot right now for you guys with Duplo Malte. How significant is this segment, how fast is it growing? What innovation are you working on for this segment, and is there space for perhaps another brand or to expand geographically? Could you discuss the core-plus and the value it offers to consumers?

Okay. Let me tackle first the reopening. More and more, it’s getting clearer that everybody is reinventing bars, mainly when we talk about average bars in Brazil, which really are trying to remain open, changing the way they do business by adapting packaging for delivery. We believe if you look at all Brazilian bars, roughly around 15% of the bars are really closed but are reopening. The volumes per box remain small. The government really still follows some plans to help reopen, helping bars find solutions as we believe this channel will recover. However, the challenges will remain regarding occasion; getting consumers back is key to the reopening. As we have seen during the pandemic, there is an upward trend towards relaxation at home that we had known occurred in more mature markets, but it has clearly gained traction in Brazil. I believe this is how we are adapting. Regarding core-plus, my experience from China suggests that the core-plus segment there accounts for around 20% of the market. Markets like the U.S. also boast a well-established core-plus segment. In Brazil, we don’t see a firm establishment of that segment yet. Still, it’s important to note that despite our premium offerings, there’s an opportunity for us to develop the core-plus segment. Our primary initiative now is Brahma Duplo Malte. We repositioned Bohemia to participate, and we believe we can strategically expand to one or two brands in that space. Currently, Brahma Duplo Malte is seeing significant growth, and penetration is promising. Our active engagement in the core-plus segment is a significant part of our innovation strategy.

The next question is from Marcella Recchia of Credit Suisse. Please go ahead.

Thank you for having my question. Basically, I have two quick questions. The first one is about the trends. You have seen larger retailers signaling solid trends in July, largely in line with June. So, could you give us some color on July trading for Brazil Beer if this is also the case for you guys? And secondly, with the likelihood of having the Carnival postponed toward second Q, could you elaborate how you see such events with regard to your activation strategy and beer sales performance?

Yes, so first of all, I will get back to our performance on June, and we’ve seen some of the best performance this quarter really recovering and went into positive territory by July. However, we won’t comment during this quarter’s performance of July as it was a decision made internally. Regarding the Carnival, the situation remains fluid. There’s a big agenda about the celebration of Carnival, but all indications suggest it may indeed get postponed. We are already adjusting our innovation strategy for next year, with some innovations dependent on Carnival being delayed. We will closely follow this phenomenon, which we think is manageable but we will need to prepare to implement it properly.

OKAY. And if I may have just a quick follow-up concerning the non-alcohol category. Can you comment a bit on your strategy to tackle the trend we saw in the second quarter in order to reverse it for the remaining year?

NAB? So NAB took a little more time to decline. Beer volumes were affected faster. We had higher hopes in this business due to a lower tax credit from the free trade loan in Brazil. The performance of NAB is affected by the reduction of consumption occasions. For example, we have Gatorade in our portfolio, which people normally buy on the go while exercising. And all these occasions have been severely affected. We talked a lot about mix in beer, but the change from single-serve to multi-serve has significantly impacted the non-alcoholic beverages, which have a completely different proposition in terms of revenue per hectoliter and margins. These changes had a major impact. Some trade-downs have also happened in soft drinks, unlike what we saw in beer. It’s important to continue focusing on our brands despite these challenges.

OKAY. Thank you very much, guys.

The next question is from Isabella Simonato of Bank of America. Please go ahead.

Thank you. Good morning, Jean. Good morning, Lucas. Thank you for the call. I have two questions. First on Brazil, you usually mentioned how the market performed during the quarter in December. This might be more difficult this time, but can you give us a sense of how you see the evolution of market sales during Q2? The second question will be about the last division where we saw a big drop in margins, and I understand that the social distancing in Argentina and Bolivia, as well as the economic situation, are not easing. How can we think about profitability in LAS going forward?

Okay. First, we will see a slight decline in our volumes; our volumes declined by 1.3%, generally outperforming the industry based on our estimates. It’s been challenging due to the absence of clear data, and the COVID restrictions have worsened this. There’s more uncertainty in terms of accessing accurate industry performance data. However, we do see signs of recovery in the industry and believe it's beginning to approach prior years' performance. Now regarding LAS, the volumes in Argentina declined by low teens during the quarter, but revenue per hectoliter increased by double digits due to our revenue management initiatives in a hyper-inflation environment. Restrictions in Argentina's beer category remain stricter than in Brazil, but our business is oriented toward off-trade, helping to offset some of the challenges we faced. Our e-retail platforms performed well despite industry declines; our premium mix remains healthy.

To add to that, it's fair to say that Bolivia experienced the slowest pace of recovery, and it could likely stay this way. The country is still tackling important issues regarding healthcare infrastructure, significantly impacting our operations there.

That's very clear. Thank you.

The next question is from Leandro Fontanesi of Bradesco. Please go ahead.

Hi. Thank you. Good afternoon. I have three questions. First one regarding pricing. I understand this time last year and historically, you used to implement price increases. Could you comment on where we stand on price increases this year? The second question, you mentioned that volumes, of course, are a component explaining your margin decline. But when we look at June, which was a month where you did not have a volume decline, could you comment on what the margin contraction was? The third question; last year, in the last quarter, you mentioned that second half 2020 was going to be a challenging quarter because of competition. I want to ask if that view has changed.

Next quarter?

Yes, could you repeat the last question? It wasn't clear. Could you repeat it?

Last year in the last quarter, you mentioned that you expected the second half of 2020 to be a challenging half in regards to competition. I would like to know if that view has changed at this moment.

Okay. So, talking about pricing first. I mentioned in the first call that I participated that we had to learn from Q3 last year. We were not successful in our revenue management strategies. We’ll take that learning to develop a more rigid pricing strategy this time around. Second, as we think about pricing, we know the environment is heavily impacted by COVID. Our previous learnings need to be intrinsic as we assess disposable income, packaging channel mix, and economic factors that can shape our strategy. Overall, margins will be challenged in the short term, given volume declines and external conditions. However, our plan remains the same: to follow the consumer, keep operational reliability, and maintain our strategy for the future. Regarding the competitive environment, our toughest comp was Q1. Q1 is when we over-indexed market share last year. In the second half, while still competitive, I believe we have an easier comp due to lower volumes in Q3 last year. Overall, we are well-positioned, leveraging our distribution strengths and customer relationships.

I think it's hard to predict exactly what will happen with competition going forward, right? The important thing is, at least how we look at it, to focus on what the consumer wants and where the demand is. Focus on the customers and strengthen the ties with trade. We made some good decisions around that in Q2. We're increasing reliability and operational excellence.

OKAY. Thank you very much.

The last question comes from Joao Soares of Citigroup. Please go ahead.

Hi. Good afternoon. Thanks, everybody. So, I have two questions. First, I wanted to touch base on the topic of government subsidies and vouchers. You mentioned this in the release as being one of the factors that helped guarantee some resilience of the volumes. What do you think happens when this is no longer available? How do you think consumer disposable income will be affected? Second point, just to be clear, I think looking at the revenues per hectoliter declining in Brazil Beer by less than 2% year over year. We have a series of headwinds, and the mix shift going from on-premise to off-premise is notable; can you discuss what may counteract the negative trends? When we compare to NAB, which experienced a 15% decline year over year, it’s important to note the resilience of Brazil Beer earnings per hectoliter.

Okay. So, first of all, regarding the corona vouchers. They play a significant role in supporting the government. It's our perspective that these vouchers will come and go, and the volumes we’ve seen benefit from that effect. As these things phase out, it is likely to create some marginal impacts, but the structural volume recovery we’ve seen shouldn’t materially change. However, consumer disposable income will definitely be affected. We also see the government providing support with debt assistance to retailers. Overall, right now, the mix and performance observed are typically business as usual, emphasizing the valuable elements of our strategy. We keep seeing a positive impact from our efforts in Brazil. For example, the high-end VIP products experienced a tremendous drop, but those aspects are not where we expect a direct recovery. We remain immersed in a volatility environment. We recognize the challenges and the environment we are in, but we are following as closely as we can. The opportunities we are observing are aligned with our distributions and partnerships.

Regarding net revenue per hectoliter performance in NAB compared to beer, we have to consider that non-alcoholic beverages changed in their mix. For example, sales of premium soft drinks were affected more than our premium portfolio in beer and we continue to see that playing out. The shift from single-serve where revenue per hectoliter is higher to multi-serve which impacts net revenue per hectoliter had a pronounced toll on NAB.

Just one more follow-up very quickly. Jean, based on what you see in China, what do you think when the situation starts to normalize? How aggressive do you think the pricing environment could be based on that?

Yes. It’s very hard to say what will happen regarding pricing, honestly. Again, we're going to focus on the consumer and our brand initiatives.

I think it's important to note that normality will take time to restore, but our category is exceptionally resilient. We see new occasions for consumption such as relaxation at home and e-commerce events that will remain following this recovery process. The trend of consumer confidence in bars will take a while to return as well, but we are well-positioned to adapt.

Thanks so much.

So I think that's pretty much it, no? Thank you very much. Thanks for joining this call. We still have a long and bumpy road ahead of us, but we believe we are on the right track. So, see you next quarter. Thank you very much.