Ambev S.A. Q2 FY2022 Earnings Call

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's Second Quarter 2022 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 a listen-only mode during the company's presentation. After Ambev's remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. 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 a comparison with first quarter 2022 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 profits, EPS, EBIT, and EBITDA on a fully reported basis in the earnings release. Now, I will turn the conference over to Mr. Jean Jereissati, CEO for Ambev. Mr. Jereissati, you may begin your conference.

Good morning and good afternoon, everyone. Thank you for joining our earnings call for the second quarter of 2022. During our last call, I mentioned that we started 2022 well-positioned and that I came out of Q1 encouraged with what we delivered. As I review Q2 results, I see even more evidence to be confident going forward. And here is why. This quarter provided a glimpse of consumption patterns in a post-COVID world. In several of our markets, reopening continues well underway with services and on-premises businesses coming back. And as this takes place, we have once again been able to meet the moment. Ambev grew 6% in volumes, reaching 42 million hectoliters, which is 15% higher than 2019 levels. It is the first time we reached more than 40 million hectoliters in the second quarter. This led to a net revenue growth of almost 20%. In addition, organic EBITDA and cash flow grew over 17% compared to the same period of last year. So, let's talk about Brazil. In Brazil, we witnessed more clearly the consumer comeback journey to the entrée and overall out-of-home occasions, leading to another quarter of solid topline performance. In Beer, we estimate we gained market share versus last year, and sequentially versus Q1 this year in both volumes and value. Volumes grew by 8.5% in the quarter and by 5.2% in the first half. To-date, we grew 2.2 million hectoliters, leading the industry expansion as we estimate that the industry grew almost 0.5 million hectoliters. In terms of segments, premium grew more than 20% led by Original and Chopp Brahma, which are more relevant in their own tray channel. In fact, this quarter, Chopp Brahma achieved its highest volume in the second quarter with 40% more buyers than the pre-pandemic levels. While our corporate volume sustained its momentum, increasing volumes in the low teens, and we continue to invest behind developing our core plus brands, Brahma Duplo Malte and Spaten. Net revenue grew 23%, with net revenue per hectoliter growing about 13%. And finally, EBITDA in Brazil beer grew 27.5% organically, with margins expanding by 80 basis points. Talking about NABs in Brazil, we delivered another great performance this quarter. Volumes grew 16%, driven by healthy brands, especially in the out-of-home occasions supported by BEES. We estimate we gained market share again this quarter. In CSD, Pepsi brands grew more than 20%, driven by the great success of Pepsi Black, which almost doubled its weight within our Pepsi brand. Net revenue per hectoliter grew 22%, driven by revenue management initiatives, the premium mix and package mix as single-serve packaging grew 37% this quarter. EBITDA grew organically 92%, expanding margins versus last year by 500 basis points. Regarding our technology platforms, over 86% of our revenues are coming through BEES. On the marketplace, in June, we announced a partnership with Grupo Pão de Açúcar, who will offer a vast range of products on our platform via a third-party model, just like BRS, delivering an even better assortment and service level for our clients. Zé Delivery fulfilled 15 million orders, 2% below the previous year, mostly impacted by the rise of out-of-home occasions. GMV grew by 7% compared with last year, and we kept a 4 million monthly active users in the delivery. We continue to invest behind adding more features to our app and delivering a better user experience to our consumers. And BEES bank grew TPV quarter-over-quarter by almost 40% and now reaches about 300,000 customers. Turning to our international operations. In LAS, overall volumes grew by 1.5%, led by Bolivia, which benefited by the reopening. In Argentina, we remain cautious about the impact of rising inflation on consumption, despite flattish overall volumes in the quarter. In Chile and Paraguay, Premium and Core Plus continued to gain weight among our brands. LAS net revenue per hectoliter grew 38%. In CAC, overall glass supply constraints remained, coupled with a tougher short-term competitive environment in Panama; this all contributed to a 10% decline in volumes and a flattish net revenue in CAC. Talking about Canada, despite the reopening that took place, industry is still sluggish. We estimate that Beyond Beer industry declined by almost 9% in the quarter. Talking about beer, we estimate to have gained market share led by core and value brands. Now I would like to talk about brand building. During our Investor Day, we explained our framework based on three pillars: mind, mouth, and heart. And this is a quarter to be proud of, of how much we have evolved in the last few years in brand building. This evolution is no longer going unnoticed. Last year, we were awarded seven prizes at the Cannes Festival of Creativity and this year, 12. Ambev was the most awarded Brazilian company in the festival with Lions for all of our beverages categories; Brahma and Budweiser were awarded in beer, Guarana in ads and mind in Beyond Beer. Talking about our framework, starting with mind, we strongly believe that being creative is the best way to not only capture consumers' attention but also engage with them in a meaningful way. Brahma brought home its first-ever Golden Lion and seven Lions in total, which is an absolute record. It was the most awarded brand in the world in the social media category with our Foamy haircut campaign. The results of all this creative effort help Brahma continued growth in brand health KPIs. Now moving to mouth. Key recent innovations continue to grow as we keep launching products to delight all Brazilian tastes. Our most recent project is Brahma Duplo Malte Escura, or Brahma Duplo Malte Black, a special limited edition, which is brewed with two types of malt to create a darker and even creamier beer. We continue to collect awards for our innovations. In June, we were listed as one of the 20 most innovative companies in Brazil by the MIT Technology Review, a study that evaluated innovation capabilities in more than 1,000 companies in the country. Finally, going to our third pillar, the heart. Here it’s all about being relevant in consumers' lives and connecting through their passion points. After the two years gap due to COVID-19, our brands continue to be a fantastic platform for cheering together. Brahma helped to bring back some of the festivities in the Northeast of Brazil, one of the largest and most traditional celebrations in the country. Budweiser presented the NBA House 2022, a space where more than 40,000 people had the opportunity to watch the season playoffs, and Beck’s created the Urbeck’s festival, on urban music and our circuit that helped to awaken different areas in the main urban centers of Brazil. We will keep consistently focusing on mind, mouth, and heart to make sure we are relevant, innovative, and loved by our consumers, which will make stronger brands in the long term and help our organic growth trajectory. To conclude, our performance in Q2 accelerated in Brazil even more than we expected, more than offsetting some headwinds we had in our international operations. It was a great H1, and we will work to deliver an even stronger H2 in terms of both top and bottom line despite facing a tough comp in Brazil Beer volumes in the third quarter and the continued volatility and inflationary pressures. We are not making any changes to our guidance for the year relating to Brazil Beer cash COGS per hectoliter growth between 16% and 18% and excluding the sale of non-Ambev marketplace products. Moreover, we remain on track in terms of our main ambitions for the year. That is to get Brazil back to bottom line growth, to have a consolidated non-Ambev organic EBITDA growth ahead of the organic growth that we had in 2021, and to improve our return on invested capital. Lastly, I would like once again to thank the entire team for the ownership mindset in delivering results and transforming the company, and a special shout-out to the marketing team. Congratulations for the amazing performance at Cannes. Thank you for your time. And now I will hand over back to Lucas.

Thank you, Jean, and hello everyone. Our financial performance in Q2 was fairly consistent with the first quarter in terms of what should be the same and what should change in 2022. What would not change, first, top line growth remains key. We delivered nearly 20% net revenue growth overall, with Brazil once again being the main highlight. Second, input cost pressure remains a sticking point. Cash COGS per hectoliter grew nearly 18% at the consolidated level, while for Beer Brazil, it grew almost 14%, excluding non-Ambev marketplace products. And third, we would continue to focus on value creation drivers. The name of the game here continues to be improving our return on invested capital, building on our progress in 2021. And in terms of what would change, first, net revenue performance more driven by net revenue per hectoliter than volumes as we adapt to a higher inflationary environment. Net revenue per hectoliter grew almost 13% and volumes grew around 6% in the quarter. Second, cost headwinds would come mostly from commodity inflation rather than FX. Commodity inflation was more explained by the increase in Brazil Beer cash COGS per hectoliter driven mostly by aluminum and barley, which was partially offset by better RGB mix. Third, SG&A growth should improve. Cash SG&A grew about 15% in the quarter with sales and marketing growing almost 22%, thanks to continued investment behind our brands and innovation, distribution growing 18%, mainly due to rising diesel prices, and admin expenses growing just around 2%, given lower variable compensation accrual once again. And fourth, tax credit one-offs in Brazil that positively impacted our EBITDA, financial results, and effective tax rate in Q2 of last year would be a factor this quarter. And it was a factor, but for a different reason than we originally anticipated. We recognized in the quarter about $1.2 billion in tax credits, of which a little over 900 million in other operating income and approximately 300 million in our financial results. This gain also relates to the inclusion of the ICMS state tax in the taxable basis of the PIS and COFINS federal taxes, which was declared unconstitutional. As I have mentioned in prior calls, there is still pending litigation in this matter. And during the quarter, we concluded together with counsel and external advisers, both the legal viability assessment as well as the quantification of this additional portion of tax credits for the PIS and COFINS that we overpaid over the years. As a reminder, these tax credits are technically part of our normalized results from an accounting standpoint, but we disregard them for purposes of calculating our organic performance, treating them as a scope change. Please refer to our financial statements for further details. Now, given our performance in the quarter, we are well on track to deliver a better organic EBITDA growth in 2022 than the 10.9% organic growth we delivered in 2021. Brazil's recovery this year is turning out to be stronger than expected, which is more than offsetting the declines in CAC and Canada year-to-date. As for last year-to-date, Argentina is delivering EBITDA growth slightly ahead of local inflation, while the other last countries delivered EBITDA growth in H1, driven mainly by Bolivia, which is finally recovering from COVID. And putting this quarter's performance into perspective, since Q3 2020, we've managed to deliver net revenue growth above 13% quarter-after-quarter, and this was true again in Q2. So the growth is there, despite all the headwinds we faced. And the good news is that in Q2, we finally managed to deliver growth and profitability in Brazil, which had been lagging for a while. Brazil beer expanded EBITDA margins by 80 basis points while Brazil NAB expanded EBITDA margin by 500 basis points. No doubt, there is still work to do on the gross margin side and in terms of consistency, but it's a start. Speaking of profitability, as I've mentioned in prior calls, we've also looked at profitability in terms of working to consistently improve returns on invested capital year-after-year. And here, we're also happy with the progress we've made so far this year. First, we continue to look at ways to optimize our business through financial discipline on the cost and expense side, as well as improved resource allocation across our businesses and markets; second, improved return on invested capital as we look to digitize and monetize our assets. Here, the scale-up of the technology platforms such as BEES and Zé Delivery are helping us improve not only NOPAT growth, NOPAT margin, but also asset turnover. It's still relatively early days for these platforms, so we definitely see more upside going forward. Now let's turn to our cash flow and our financial performance below EBITDA, and I will close with some words on ESG. Cash flow from operating activities totaled about $2.2 billion in the quarter, which represents an increase of about 17%. Normalized profit grew a little over 4% in the quarter given EBITDA growth and a lower effective tax rate, partially offset by higher net finance expenses versus Q2 2021 of around BRL200 million. Net finance expenses were mainly impacted by the continued increase in the carry costs associated with our FX and commodity hedges in Brazil and Argentina, which should continue to be an issue going forward. Our interest expense grew mainly due to fair value adjustments of payables under IFRS 13, but it was fully offset by higher interest income resulting from the Brazilian tax credits we recorded in the quarter. Before I wrap up, I want to briefly highlight our progress in terms of some important sustainability milestones. On the environmental side, we announced three more carbon-neutral plants in Brazil; Arosuco Aromas in the State of Amazonas; Juatuba in the State of Minas Gerais; and Curitiba in the State of Parana. Together, they represent an emission reduction of over 5,000 tons of greenhouse gases per year, and we intend to deliver an additional four carbon-neutral operations by year-end. And on the social side, our people that volunteer within the VOA social transformation program have recently joined Gerando Falcões, a Brazilian NGO of social development in an initiative to mentor social leaders of Brazilian favelas that are graduating at the NGOs Falcons University. We plan to hold our ESG date during Q3, and we hope you can engage with us in this dialogue. So to wrap up, a few final messages. First, we delivered a stronger H1 than we expected, which gives us more confidence going into H2, particularly in Brazil. Second, our guard remains high since challenges and short-term volatility remain a reality, particularly in countries like Argentina, Panama, and Chile. And third, we remain focused on delivering continuous and consistent improvement in our results as we progress on Ambev’s transformation journey. Now let me turn it back to the operator so we can go to Q&A.

Hi, Lucas. Hi, Jean. Thank you for addressing my questions and congratulations on the results. I have two inquiries. First, regarding pricing. From discussions with industry players, I learned that Ambev raised prices off-cycle in the second quarter. I would like to confirm this, including which channel and pack it affected and the extent of the increase. Additionally, considering the hard costs in the third quarter, should we anticipate the typical price increase, or is there a possibility of increasing discounts or reducing prices to boost volumes? Please address this before I move on to my second question.

Okay, Marcella. Thank you very much for your question. As you know, we are really focusing on finding the right elasticity in the sustainable benefit between volumes and net revenue per hectoliter, always with a medium to long-term pricing strategy unchanged, prioritizing not to lag inflation, but really working on a favorable brand-back in channel mix. So this strategy pretty much does not change. Since 2019, we have been growing volumes while improving pricing performance, and we continue to monitor the environment moving forward but in a flexible way, watching inflation, disposable income, really working on elasticities to make decisions on revenue management. So having said that, we did a more tactical price increase in May; it was a small one. It was granular in some packs by Jan, and there were some regions where it was around 2.5%, both on off-trade and on-trade. So usually, we see in Q2 net revenue per hectoliter going down sequentially, so this is more of an effect on mix in the Northeast regions gaining weight, and then we get the winter coming in the Southeast. But this quarter surprised us; it was really that the actions that we took, the channel mix, and the PET mix during the COVID and the reopening of bars, maybe seen RGB 600 ml bottles or regional opportunities really getting traction. So, this helped us to somehow mitigate this usual net revenue per hectoliter decline that we have between Q2 to Q1. Page two, I can't really comment. I can't really comment on the competitor's sensitivity on pricing decisions moving forward.

Perfect. That's very helpful. And the second question, very quickly, is about the core plus segment, which was the only segment you did not mention how much volumes grew in the quarter. So, it would be nice to hear from you how the segment performed in the second quarter? And also, if you can give us some color on how has been the rollout and acceptance of this new product.

That's a good question. Let me provide an overview of the dynamics we observed in Q2 before discussing the segment. During our extensive review of the past two years, we implemented various strategies to enhance our presence in the in-home market. Since the onset of the pandemic, we focused on optimizing the in-home experience. We noted a slowdown in delivery, particularly with Brahma Duplo Malte, a brand aimed at in-home occasions. We expanded the 300 ml bottles targeted at traditional trade to facilitate home consumption. This strategy has proven successful and contributed significantly to our volume growth, which was pivotal in achieving a notable increase of 10 million hectoliters for the company. However, in Q2, we observed that although there is still some momentum from in-home actions, consumers are returning to our strengths in bars. Consequently, we're seeing vitality in social out-of-home occasions. Brands like Original and Brahma, which had been eagerly awaited, are rebounding well after a difficult period. We've also noticed growth in our core offerings in the 600 ml and liter bottles, which had previously been focused mostly on the 300 ml size. Regarding our corporate strategy, we've shifted our focus to market initiatives for Bohemia while concentrating on Spaten and Brahma Duplo Malte. The combination of these two brands has resulted in double-digit growth this quarter, despite Bohemia experiencing negative volumes.

Excellent. Thank you so much, and congrats again.

Thank you. Good morning, Jean, Lucas, and everyone. I have two follow-up questions. First, regarding the volume discussion in Brazil, you mentioned that almost all main segments grew in double digits this year, yet the printed volume appears to fall below the average for those segments. Can you provide more details on each segment and what is causing the lower average? Secondly, you noted that the first half's performance was a positive surprise, but you did not change the guidance. Do you think there is room for further positive surprises, or are you anticipating a more challenging second half? If so, what specific challenges are you seeing? Is it related to the international market situation in Argentina or a tough comparison in Brazil? I would appreciate any insights you can provide on your outlook for the second half. Thank you.

Let me take the first part, and then Lucas can follow with the second. Isabella, we are very excited about the volume, which is up 8% this quarter. However, looking at things quarter-by-quarter can sometimes be misleading because consumer behavior is shifting. If we compare to 2019, we are currently 20% above our volumes from that year. We have consistently seen strong performance in our high-end brands, with brands like Original and Skol, as well as Brahma, exceeding that performance. Our core plus and sparkling segments are also in double digits. The midstream segment is around two, while we've seen a decline in our value brands and small regional brands, which have faced challenges. Nonetheless, our core and core plus brands are growing at a similar pace, and high-end brands are leading the portfolio. Our specialty brands are performing exceptionally well, and the craft segment is expected to continue thriving. Regarding guidance, I'll pass it to Lucas to ensure he conveys the appropriate information. We acknowledge that Q1 was affected by Omicron in several markets, followed by Q2. Looking at the first half, it aligns more with our expectations for Q1 if not for Omicron. Overall, we believe the second half will show strong performance, and we are confident that both top-line and bottom-line results will improve in H2 compared to H1. So, if we analyze the numbers, we feel optimistic. Now I'll hand it over to Lucas for further insights.

Sure. Thank you, Jean. Hi, Isabella. Thanks for the question. Starting with the guidance. The guidance that we gave for the year was related to cash COGS per hectoliter in Brazil beer, excluding non-marketplace products. And that was the guidance that we gave in Q4 when we announced the full-year results and announced our expectations for the year. And that guidance stands year-to-date, the cash cost per hectoliter in Brazil beer excluding non-Ambev marketplace products is trending at 14.5%. So below the range, which is good. But again, given that not 100% of our costs are hedgeable, we still see merit in keeping the 16% to 19% outlook for the year, okay, as our official guidance. On top of that, when you think of our ambitions for the year, just to add on to what Jean mentioned, when we look at our H1 performance, our view is that we come out of H1 more confident in our ability to deliver our ambition of growing ahead of 10.9% organically at a consolidated level, which is what we delivered in 2021. When we shared this ambition on one of our prior calls, I remember I got the question on why we believed that growing ahead of 10.9% was feasible. And the answer then was that if we managed to deliver a Brazil bottom-line coming back to growth that in and of itself would be a significant tailwind in our ability to deliver this ambition. And if you look at our results in H1, there was a step-up in Q2 in terms of our overall performance, and that made an enormous difference in our total EBITDA growth for Ambev in the first half, which is around 15%, I believe, 14%, 15%. So, within H1 at 15% and Brazil, stronger than we expected, we think that if we manage to do a better job in Cochin, Canada, and last continues to deliver good performance and mindful of the challenges in Argentina. But again, we still have work to do there, and we're still going to pursue better results in Canada and in CAC in H2, okay?

No, that is super clear. Jean, just one minor confirmation. When Jean said the second half could be better on topline and bottom-line than half one, is it nominal terms or growth, just to double-check that?

Inorganic growth.

Hi, everybody. Thanks for the questions. The first one is regarding SG&A. If you can discuss the second half of how to think about SG&A, you have some important events ahead, such as the World Cup, potentially provisioning for bottles; again, it's going to be a strong year. So, how to think about that? There was already kind of heavy SG&A in this first half. So, should we see similar trends in the second half or that should see somewhat alleviated to help you deliver this growing expectations you're talking about? And the second question, Lucas, last year, you guys had some issues with sort of an unhedged position because, I guess, the company ended up with selling much more beer than you expected, right? So, how to think about that this year? Are you also probably performing a bit better than expected? Are you guys having sort of unhedged positions to do as well? And would those come maybe now at a lower cost given the foreign commodity prices or you cannot say that yet? Thank you.

Sure. Lucas, thanks for the question. Let me start with the second one on the hedges. So, everything that's hedgeable for 2022 has been done, right? And has been done for quite some time now. So, the issue is not around hedging per se, looking into H2. The issue is more on the unhedgeable side of our cost base. And you're right, that was an issue last year. There was an increase in the second half of the year on the unhedged portion of our costs. This year, there has been some impact, not enough to compromise the guidance that we gave in Brazil beer. But that remains a risk for H2, and that's one of the reasons why we're not updating – we're not making any changes to our guidance of 16% to 19% in Brazil beer, as I mentioned in my prior answer. So again, the issue is not the hedging side; that's done for 2022. The issue is more on the unhedgeable portion of our cost. And again, we are living in a higher inflationary environment overall that applies to cost and expenses. And that's a good segue to try and answer your first question around SG&A. What we anticipated directionally for SG&A in 2022 was a lower growth of SG&A year-over-year as compared to 2021 to 2022 and because of the lower accrual for variable compensation. As you will recall, Lucas, last year, one of the main factors that led to a higher SG&A growth year-over-year versus 2020 was precisely the fact that the recovery was much stronger than we expected, and 2020 was no bonus year. So, that created a double whammy effect, if you will, on the admin side through higher bonus accruals. That's not the case this year so far. Obviously, H2 will depend on how we do versus our budget, and then we will accrue according. So, with admin expenses growing at a lower rate because of lower year-over-year bonus accruals, that should help us deliver a better SG&A growth. And then on the sales and marketing side, I think the point to call out is really Q4 and Q3 as we prepare for the World Cup; right? It's a great opportunity that we have coming up in Q4 to really leverage not only our brand portfolio but also our technology platforms to really meet the moment, serve clients better and serve consumers better during such an important event for markets like ours. So yes, there is a calendarization that's different than this year because of the events that we have coming forward. And in terms of distribution, I think the watch out is really what happens to diesel, right? I mean diesel has been a factor in our distribution expenses, not only in Q1, but also in Q2; it was a factor. I think the glass half-full side of the equation in terms of sales and marketing and in terms of distribution is that year-to-date, it's growing below net revenue growth. And I think that's good news. That's something that we always do, that sense check. In addition to that, we're applying our typical financial discipline, making sure that we are as focused as possible on being strict on the non-working money side of our business, which is everything that consumers don't touch, feel, see to release funds to be able to invest more in things like sales and marketing that are going to continue to develop the health of our brands going forward.

Perfect, super clear. Thank you.

Yes. Hi, Jean and Lucas, good morning everyone. Thanks for taking the questions. I have two. The first one, a follow-up on the cash from guidance. Obviously, there are a lot of different moving parts here, and we understand that you have an average policy of hedging in part of our commodity needs on a pro forma, but you might also be kind of hitting a low capacity. So I'm just curious to hear from you if we should see the impact from lower commodity prices just 12 months from now, or you could have decided to go for more to meet the dealer and you could see some part of business selection early on over the next quarter? This is the first question. And the second one is regarding the World Cup and the outlook for the first quarter. Obviously, there are also a lot of different moving parts just in Brazil, the election typically. We know that this event is very positive for volume, right? So just try to explain and hear a little bit from you, how much of an opportunity do you see for the first quarter and beyond that if you believe this volume should be really incremental as you head into 2023, or this might create an opportunity? Thank you. Those are the questions. Thanks, guys.

Okay. Thanks, Thiago. This is Lucas. Let me take the first one, and I'll hand it over to Jean to talk about the preparations for the World Cup on the commercial side. Okay? So in terms of the exposure to aluminum specifically, I think this is more of a 2023 issue than the 2022 issue. And the good news is that, of course, it's still early to give any specific outlook for 2023. We still have a good portion of hedging to do right through the end of the year. But the good news is that so far, aluminum is no longer a tailwind. It's no longer a headwind as it has been over the last two, three years. On the currency side, the BRL hedge versus the US dollar is also a tailwind for a change. It has been a headwind for the last two and three years as well. And so that's the good news so far. Again, still a lot of hedging to do through the end of the year. And on the glass half-empty side of the hedge for 2023, so far our hedges with respect to barley are continuing to be a headwind, but to a lower extent than the levels that we saw in 2022 and the Argentinean peso FX hedges should continue to be a headwind, at least that's what we've seen so far this year. So aluminum, more of a 2023 issue, and kind of that's where we are so far this year; let's see how things unfold on the hedging for commodities and FX through the remainder of the year. Over to you, Jean.

Let me discuss the World Cup. We are focusing on what we can do during this event to improve in 2023. This was our message to a group of 50 people from both inside and outside the company, aiming to gather valuable insights about the World Cup, and we gained significant knowledge yesterday. The surveys indicate that many are viewing this World Cup as a breath of fresh air, as it is seen as a pivotal moment for Brazil to unite again. We feel prepared in terms of logistics and marketing. This year marks the first World Cup in the summer following a year of the pandemic, and we believe it will positively impact us. The key question is what structural initiatives involving brands and digital products we can implement to connect with Brazilians and create lasting benefits into 2023. We are very enthusiastic about the World Cup.

Very interesting. Thank you.

Hello, thank you. I have three questions. First, it seems you were pleasantly surprised by Brazil's performance compared to your earlier guidance and your comments about strong momentum at the end of the first quarter. However, I'm unclear on the main source of this surprise. Is it primarily due to consumer demand and their return to on-premise locations, the increase in e-commerce, or favorable cost factors? I would appreciate further insights on the significant contributors to the positive performance in the second quarter and the first half of the year. For my second question, regarding pricing in the Brazil business, you mentioned a slight price increase in the second quarter. Could you provide more details on how the 11.2% revenue per hectoliter growth in beer, not accounting for marketplace effects, relates to the mix and packaging with the additional RGB? Lastly, concerning working capital, there's been some consumption noted not just in Q2 but throughout the first half, which is unusual given that you are expanding volumes and gaining market share. This seems positive for your working capital as you previously indicated. Could you elaborate on what is causing this working capital consumption as we approach the second half of the year? Thank you.

I'll address the first and second questions, and then Lucas will take the third one. In Brazil during Q2, we were surprised to see that, despite the expected moving pieces, we continued to gain market share. Sequentially, our market share increased, and the strength of the bars reopening exceeded our upper expectations. There was discussion around the full reopening of bars and the potential for social out-of-home occasions. We wondered about the size of that potential and the residual volumes from in-home initiatives created during the pandemic. This combination surprised us. At one point, we thought in-home consumption would decrease more significantly as on-trade reopened or that the on-trade would not be very strong. However, it was the combination of the residual in-home consumption and strong performance out-of-home that caught us off guard. An increase of 8.5% in volumes exceeded these expectations. Regarding revenue management, we are now very granular and have a strategy that remains inclusive, ensuring our beer remains competitive in the Brazilian consumer basket. What stood out this quarter was how we effectively challenged elasticity, achieving good net revenue per hectoliter along with solid volumes. This success primarily stemmed from our tactical decisions last year, particularly regarding 600 ml bottles and the high-end brand mix, which also supported value brands. This combination contributed to the impressive numbers we posted in Q2. Now, Lucas will discuss working capital.

Sure. Hi, Thiago. Thanks for the question. I think in terms of working capital, I would say that the bigger issue was actually Q1 on the payable side, okay? I mean like if you recall our conversation last quarter, our payables in Q1 had an issue around the payment of the variable compensation, right? And also, there was a higher level of payments to suppliers, given the calendarization of our CapEx. So, CapEx that was booked, right, in H2 of 2020 ended up being paid in Q1, right? So that double effect created a bigger gap in terms of working capital in Q1. In terms of Q2, and that's by far the biggest factor year-to-date, I think Q2, what the outlier here is more on the receivables side, and it relates to the tax credits that we recognize, unlike last year when we recognized the tax credits but did not immediately monetize. This year, the monetization was faster than last year, and that has an impact on our receivables. In terms of inventories, no major change in terms of inventory building; there was some more inventory building in Q2 this year than last year, but again, it's more of a calendarization effect. And then on the payables side, in Q2 also no big change other than just a different calendarization of our CapEx spend and when the payments are falling. So I think it's better to look at working capital more on a yearly view because on a quarterly view, you will have, from time to time, these swings related to specific events like the bonus, like calendarization of CapEx, like the tax credit.

That's clear. Thank you so much.

Hi everyone. Thanks very much for taking my question. Congrats on the results! My question has to do with the competitive dynamics and the connection between soft drinks and beer. I understand you’ve been gaining market share on beer. I think that there are reasons also among your competitors, the separation of Heineken from the Coca-Cola system. Congratulations, you’re doing a lot of things right in taking advantage of that in gaining market and value share. What's a bit of a surprise for me to see that you're also gaining a lot of market and value share in sales after the Coca-Cola Company. What are you seeing and what are you doing differently in soft drink in order to be gaining market share, and how sustainable is this going forward?

Thank you, Alan, for the question. In reality, soft drink was really big start of this quarter. We're very proud of the performance of soft drinks, and somehow, I've been mentioning for a while now that we've been transforming ourselves into more of a platform; in the past, we were like a beverage company. Now we are a platform. So, this is something that people do not understand somehow, but we did a huge structural change inside the company in terms of breaking the silos in terms of having the marketing areas as a marketing-as-a-service; having my frontline team working for the whole portfolio instead of siloed teams. So, we did a big change to prepare the company to really unlock its potential of top-line growth. On top of that, we focused our efforts on soft drinks, on brands of the future. So, somehow, the PepsiCo partnership is stronger than ever. The launch of Pepsi Black, it was just a surprise for us how the product is getting into the face of the cities and the places that we are launching. So, with this strategic view with a good partnership with Pepsi and this arising where we had in the past a sales rep that was a fun in terms of number of SKUs that they could offer; so the combination of these three things maybe put NAB on fire. We estimate that we are gaining market share. So, Pepsi brand, there is a whole ocean of colas that we never tackled; reality is really accelerating and gaining market share. This is really allowing us to do much more than we would have done in the past. So, it's an important avenue of growth for us that we are really interested in. I think this is structural.

Good afternoon everyone. Jean, it's nice that the creative team is winning awards, and I was thinking it's a landmark really, that you can celebrate your markers and they're growing in importance. But can you speak to proof points to evidence a lasting brand rehabilitation and renovation is happening? Maybe you can expand on the Brahma case or any other incremental proof points that you have that your core brand build strategy and renovation strategy are working here.

Okay. Thank you for the question, Laboy. Yes, so I could mention I think Brahma is really one brand that is really on fire as a family with Chopp Brahma appearing a long time that we don't talk about it as the reference of beer in Brazil when the reopening of bars like. So, on fire; Chopp Brahma with the using Brahma brand doing very well, and Brahma Duplo Malte coming in the middle of all this family, making a stature of brand and family that’s really getting consumers. If you add up, it's really the brand most valuable of Brazil; it really has more lower. It's really the overall brand Brahma doing very well, and it was not like that two or three years ago. We rejuvenated Brahma with Brahma Duplo Malte, and we stepped up again the quality use of the brand with Chopp Brahma coming back as it came in this stage in the Q2. I think somehow, it's a combination of mind, mouth, and hearts that we were able to tackle in the right way these three themes with the Brahma brand, for example. Another brand that is doing very well; we are somehow biased this quarter that Original just exploded too. It's a brand that is about the traditional routes of the Brazilian bar. So, the bars were closed at the occasion. Everybody is coming to our Original brand and Pasco regional. So this is one thing another way that we can mention. I'm very excited about BEX; there is a brand that we are cooking at a very low temperature, like, I don't know how we say this in English, but we are cooking it slowly. It's read about getting the pallets right in the edginess of the ruble centers. And it's on fire to us; it's a brand that everybody is talking about with the edge of the palate, European, trendy, moving the boundaries. So we showed you that architecture of brands that we have in their archetypes. And somehow, I think that our focus brands are doing just amazing. You've seen the numbers. Our price was very resilient this quarter. This means that the channels are right; this means that consumers are paying. This is the combination of renovation and innovation. So I don't know if I answered your question, but the last thing that I could mention is that pre-pandemic levels to today levels, we have 1.5 million people that say to us that they love one of our brands. So pre-pandemic levels to now, 1.52 million consumers that elect one of our brands and their loved brand. So, I think that's it.

Good morning, and thank you for taking my question. I wanted to follow up on the improvements in the new metric regarding voice, particularly with the recent growth in the top line and the decline in spot prices for commodities. I'm curious whether we might see changes in the composition of return on investment capital improving over the next few years. You mentioned that investment capital turnover would be the first phase, followed by a shift towards enhancing NOPAT margins. Do you think this transition could happen more quickly than anticipated compared to a few months ago?

Yes. Hi, Sergio, thanks for the question. This is Lucas speaking. Sergio, in all honesty, I think it's very hard to right – it's very hard to speculate at this point to what extent, right, our longer-term perspective on the two drivers for improving our return on invested capital, right, could change in view of the latest, right, the latest movements in Q2, right? And the reason I say that is in Q1; the picture was strikingly different because commodities were on the rise in Q1. So to me, I would be speculating here if I gave you any indication of what change this can imply longer term. I think we have to really wait and see how commodities behave going forward, how currencies move going forward. I think what's important for us on the commodity side and on the currency side is the discipline that we have in following our hedging policy, right? That's key to give us predictability; that's key to give us time to react as headwinds may arise. So that discipline remains intact, and we will continue to focus on that. Having said that, if we continue to deliver top-line growth as we have in the last two years, that's obviously helpful for the margin recovery. And so let's see how things progress on the top-line side. But as we've mentioned time and time again, top-line growth remains a priority for us. Some quarters, some years, it may be more volume than price. It may be the other way around, like we're seeing in 2022. But we remain kind of steadfast in continuing the momentum that we've built on the top line growth side. And on top of that, we have the better asset turnover potential given the platforms such as these with marketplace and D2C and fintech and as these scale up, we see opportunity to have a better asset turnover profile than in the past, but we have to deliver. Let's see.

Hi everyone. One question or one discussion that we have with investors is regarding Argentina, right? So recently, the depreciation of the Argentinean peso at the black market was much stronger relative to the official rate than it was in previous quarters, right? And so there's a concern that the net income that you're generating in Argentina you may have issues to take that money out of Argentina, and especially relative to what you report on your accounting numbers, right, they use the official rate. So to help us address or to help us understand the risk, if you could like provide us with some information such as what percentage of your total EBITDA comes from Argentina, also how you are addressing that risk going forward? And actually, I understand that you report how much you're having cash in Argentina and Cuba, which I think is like BRL600 million, does not look relevant. But it has been reducing in previous quarters that means you are burning cash in Argentina, and then generating the majority of your cash outside of this operation. So to understand if you could potentially allocate some of their costs from other operations in that country in that way, you don't need to depend that much on taking the money out of the country? Thanks.

Thank you for your question, Leandro. This is Lucas. Regarding Argentina, there is significant short-term volatility in the country. The positive aspect is that operationally, our business is performing well in terms of revenue, portfolio health, and our performance in both core and premium segments, with brand health indicators and market share aligning with our expectations. However, we are experiencing more macro volatility in Argentina, reminiscent of the situation in 2019, and there have been similar instances over the last 10 to 15 years involving heightened volatility and currency devaluation. Our strategy focuses on maintaining a strong emphasis on micro and commercial performance since Argentina is a sizable and growing market for us. Our second priority is to safeguard our controllable costs, which is where our hedging policy is essential. We continue our average 12-month hedging for the Argentine peso and relevant commodities to protect our costs and EBITDA in Argentina. We are also actively managing cash and monitoring counterparty risk with local and international banks to ensure disciplined cash management, allowing us to work with both clients and suppliers effectively. On the matter of repatriating funds from the country, we are facing restrictions in foreign exchange markets, thus our priority is to ensure operational continuity through access to these markets, even as our import levels remain relatively low. Historically, cash generation leans more towards the second half of the year compared to the first half. I hope this provides clarity.

Thank you all for joining today's call. I appreciate the time and attention of all the analysts present. To conclude, I believe we performed better in the first half of the year compared to the second quarter. It has been a strong first half for Ambev and for Brazil, and we are optimistic about delivering an even stronger second half. We are on track with our key goals for the year, which include restoring Brazil to bottom line growth, achieving consolidated Ambev organic EBITDA growth that surpasses our organic growth from 2021, and enhancing our return on invested capital. We will remain vigilant regarding short-term volatility and cost trends. Thank you once again, and I look forward to seeing you in October. Have a great day.

This concludes Ambev's conference call. Thank you for participating and have a good day.