Ambev S.A. Q3 FY2022 Earnings Call

Good morning and thank you for waiting. We would like to welcome everyone to Ambev Third Quarter 2022 Results Conference Call today. With this, 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 conference presentation. After Ambev’s remarks are completed there will be a question and answer session, by 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 Security 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 useful, 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 3Q 2022 results. Normalized figures refer to performance measures before exceptional items, which are either e-comp 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 operating profit 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 call.

Hello everyone. Thank you for joining our earnings call for the third quarter of 2022. Following a great first half of the year, I'm happy with our performance in Q3. Brazil's momentum continued to increase not only in beer but also in non-alcoholic beverages. As a result, we are on track to deliver a strong second half in terms of both net revenue and organic growth, despite the headwinds in some of our international operations. This quarter was marked by two themes that we have been talking about since the beginning of this year. First, how the consistent implementation of our strategy is the key to continuous improvement in our operating and financial performance and second, how macro volatility continues to bring several challenges in the short term. The good news is that we managed to deliver, once again, led by net revenue per hectoliter growth, continuing to pick up as the year progresses, and volumes growing despite a very difficult comparison in Brazil beer showing strong execution and resilient elasticities. Our commercial initiatives continued to build results across most of our markets. Consolidated volumes grew 1.3% in the quarter, exceeding 46 million hectoliters, once again, an all-time high volume performance for a third quarter. Not only did consolidated volumes perform well, but premium brands gained weight in nine of our ten top beer markets. At least 85% of our customers in Brazil, Argentina, the Dominican Republic, and Panama are using our marketplace, generating 400 million in revenues at the consolidated level, and organic EBITDA grew double digits once again. However, macro conditions and the persistent high inflation in some of our international markets are not only impacting consumers but also our supply chain, especially in countries with less flexibility in capacity and logistics like Chile, Canada, and the Dominican Republic. Not only were commodities more expensive, but also oil prices hiked, raising inbound and outbound transportation costs. Therefore, results in our international operations were rather mixed. We saw a good resilience in Canada, which declined year-over-year but continues to improve performance sequentially, and CAC is the reason that suffered the most. So let's start with CAC. The volume downside was mostly driven by the Dominican Republic and Panama. In the Dominican Republic, bottle supply issues were solved, but demand didn't pick up as fast as we expected because of high inflation rates pressuring consumption. In Panama, we encountered a tough industry driven mostly by large-scale protests against rising prices, which halted the country for more than a week in late July. Lastly, weather was significantly impacted by Hurricane Zen and Fiona at the end of the quarter. Our costs were impacted by high inflation as the region is dependent on imports. We are now adjusting our production plans to account for and optimize importation. As for demand, we still have some work to do in both the Dominican Republic and Panama. We will focus on offering our consumers the right product at the right price to meet their needs, and we will continue to invest in our brands and work to develop a sustainable industry. Not everything was bad news this quarter, as premium brands gained weight across most of the markets, driven by Corona and Michelob Ultra. Other than in Panama, there was no significant change in sequential market share in our main markets, and marketplace net revenue grew in the twenties, driven by both the Dominican Republic and Panama. That said, we need to do better there. Turning to Canada, the industry improved versus the last quarter, but it is still negative compared to a weak comparison from last year when COVID restrictions were still in place. Volumes grew over 3%, driven by estimated market share gains in beer and the rebound in the beyond beer industry from a weak performance last quarter. Premium brands gained weight and share in their segments, driven by a good performance of Corona and Stellar. In the last segment, volumes grew 4.5%, driven by Argentina where the industry grew compared to last year, and we estimate to have gained market share driven by our premium brands. Bolivia is recovering from the COVID impacts; however, the industry in Chile and Paraguay is declining, which impacts volume performance. Nevertheless, the core plus mix continues to gain weight in both countries. The marketplace continues to progress in Argentina, it was fully rolled out in Paraguay. Now moving into Brazil, the non-alcoholic beverage segment delivered another stellar quarter in what has been a great year for the team. Volumes grew over 10%, resulting in estimated market share gains. Our portfolio is very well positioned to serve consumer needs, with energy drinks growing almost 50%, health and wellness brands over 30%, and the premium segment growing by 10%, highlighted by Pepsi Black, which now represents approximately 10% of our Cola brands. Beer is allowing us to serve a higher number of customers in non-alcoholic beverages, 6% more than last year. Talking about beer, as we leapt over a very tough comparison, volumes were flat in the quarter, but 35% above 2019, and on a 12-month rolling perspective, it is 13 million hectoliters above the same period of 2019. In terms of segments, premium led the growth with a high single-digit performance driven by Les Chop Ramma. Our core brands remain resilient, and we continue to invest in developing our core plus brands like Brahma, Brachi, and Spot. The number of fans and the brand health of focused brands continue to improve compared to last year. Revenue per hectoliter grew 17%, driven by disciplined revenue management initiatives and brand mix impact. Lastly, EBITDA in Brazil beer grew almost 18% organically, with margins expanding by 20 basis points. Our performance in Brazil gives us confidence that we entered the summer season ready to deliver during the FIFA World Cup. This event is always an important moment to connect with our customers and clients, especially in Brazil. Our team has been preparing for the event, and I believe this year’s World Cup can be better than we had in 2018. This is because this year it will take place at the end of the year during our summer season, which is the big consumption season. Secondly, our business is much better prepared than last time. Since the beginning of last year, I have spent each earnings call talking about our transformation journey—starting with cultural revolution across the organization, moving on to the technological capabilities that we have been building through Zé Delivery and BEES, as well as this major change in our logistics footprint and service model. Finally, the evolution of the brand building strategy will also come into play this year. During this year’s Investors Day, we unveiled our Ambev as a platform framework. So I would like to use that same framework to explain how each of the five pillars will come to life during the FIFA World Cup. First, our brands are healthier than ever. If we compared to 2018, our premium brands grew year-to-date by about four million hectoliters. Our Core Plus brands grew over five million hectoliters, while the core segment grew approximately another five million hectoliters. We are going to use the World Cup to support four main brands: Brahma, Budweiser, Michelob Ultra, Guarana, and on top of all that, Zé Delivery. Second pillar: a thirst to lead the future. Our innovation mindset is now a reality; more than 25% of the volume growth compared to 2018 came from innovation brands that didn't exist in Brazil back then. The third pillar is a toast to our customers' success. BEES allows us to interact more frequently with our customers. Orders delivered on time and information will be key for their business during peak days. Additionally, we now offer on average more than four delivery dates per week per customer, a number that is 64% above 2018 levels. The fourth pillar is experiences that come to you. Zé Delivery has evolved significantly since 2018. It is now available in almost 300 cities, covering more than half of Brazil's population, who can order beverages and other products from the convenience of their homes during and after the World Cup games. We just announced that Zé Delivery is the official sponsor of the Brazilian soccer team. A big move for us. The fifth pillar is, finally, together for a better world: 100% of our beers in Brazil for this World Cup are now made with 100% renewable electricity. It is important to mention that the plan has been developed not only to meet the moment during the days of the event itself, but to deliver beloved brands, quality products, unparalleled services, and memorable experiences to our customers and consumers in order to create a longer-lasting effect going forward into 2023. We are very excited about what Q4 can bring. Not only do we want to deliver a strong finish to the year, but we are also looking ahead and working towards starting 2023 with a better position. 2023 will certainly bring challenges and risks, but also opportunities. After all, we are living in more uncertain and volatile times with a business that is over 80% located across Latin America. We are no strangers to volatility, macro challenges, and inflation. So we will continue to focus on what we can control. What matters most is that since 2020, we are building a business that is fundamentally better, improving results consistently year after year. First we turned around volumes, then cash flow, then return on invested capital. There is more to do still, but I have no doubt we are on the right track, and I am proud of what the team has accomplished so far. With that, let me hand over to Lucas.

Thanks, Jean. Good morning and good afternoon to everyone. If Brazil was the main highlight of our operational performance, the same applies from a financial perspective. It is great to see Brazil driving once again the improvement in Ambev's overall results. Brazil's top-line grew nearly 20% in the quarter, with net revenue per hectoliter growing almost 17% while volumes were up 2.4%, and this growth led to around a 24% EBITDA increase with gross margins flat and 100 basis points of EBITDA margin expansion. Although input cost pressure remained an issue thanks to higher commodity inflation, cash COGS per hectoliter for Brazil beer, excluding the sale of non-Ambev marketplace products, grew a little over 18%, thus within our guidance. Cash SG&A grew about 16% in the quarter, with sales and marketing growing around 13% as we continue to invest behind our portfolio. Distribution expenses grew around 18%, once again impacted by higher diesel prices, while administrative expenses grew 13%, mainly due to our investments behind enhancing our technological capabilities. So all-in-all, continuous and consistent progress in our main market. Turning to our operations abroad, the financial picture for the quarter in some markets was certainly not what we would like it to be, particularly in Central America and the Caribbean. Over the last decade, the region went from roughly BRL200 million of EBITDA in 2012 to almost BRL4 billion in 2021. But following a strong post-COVID recovery in 2021, 2022 has not been a good year. The first half faced significant headwinds, and Q3's financial performance was severely impacted by nearly a 20% volume decline, which led to about a 13% net revenue decline and 900 basis points of gross margin contraction. While inflation regarding distribution costs and supply chain losses were the biggest drivers behind the higher SG&A, the EBITDA margin contracted nearly 1500 basis points. On the other hand, despite higher COGS and SG&A levels, our last posted resilient EBITDA growth driven by Argentina and Canada showed some sequential improvement. Moving on to cash flow. Cash flow from operating activities totaled about BRL6.1 billion in the quarter, which represents a 4.5% decline versus Q3 2021. Here, we also saw a similar dynamic to the P&L. Strong cash flow generation in Brazil, resilience in Argentina, but a harder time in important regions such as CAC and Canada. Despite the lower profit in the quarter year-over-year, cash flow from operating activities, before changes in working capital improved in the quarter. However, in terms of working capital, some important operational factors played against us in the short-term. Receivables in Canada increased given top line acceleration, inventory levels rose in Brazil given buildup during the quarter ahead of Q4 with the FIFA World Cup, and payables in CAC were negatively impacted by the lower production volumes, offsetting the increase in payables in Brazil. It is worth reminding everyone that in Q3 2021, we monetized over BRL800 million in Brazilian tax credits related to the ICMS in the taxable basis of the fees and the co-fees litigation, which was a one-off. Year-to-date cash flow from operating activities is down 20% primarily due to our performance in Q1, when we faced first, higher cash outflows to suppliers given 2021 CapEx calendarization, and second, payment of variable compensation related to our 2021 performance. Lastly, normalized profit declined by nearly 14% in the quarter. Despite the EBITDA growth, net finance expenses were higher, mainly because of an increase in carry costs in Brazil and Argentina in connection with our hedging strategy for currency and commodities. Our effective tax rate faced a tough comparison because in Q3 2021, we recognized a gain of over BRL750 million related to a one-off income tax favorable legal decision by the Brazilian Supreme Court. Nevertheless, year-to-date, our normalized profit is up 4%. Before I close, I would like to invite everyone to attend our ESG Day next week on November 3rd when we plan to share in detail our progress in terms of environment, social, and governance agendas. The idea is to cover how we are trying to build climate resilience along the value chain, how our cultural transformation is enabling change in the company from within, and how increasing diversity and inclusion can create value. We will close with a roundtable with the new members of our Board of Directors and some of our executive officers. In closing, Q3 was a good start to H2, and we are on track to deliver our ambitions for the year. First, Brazil back to bottom-line growth. Second, deliver organic EBITDA growth at the consolidated level ahead of the 10.9% organic growth in 2021. Third, do so with a stronger consolidated net revenue and EBITDA organic growth in H2 versus H1, supported by better cash flow generation and consequently a better return on investment for shareholders. Looking ahead, we want to continue to build momentum and pave the way for a good start to 2023. In 2023, we will keep pursuing continuous and consistent improvement in our financial performance by, one, continuing to protect liquidity; two, improving profitability through increasing our return on invested capital and improved profitability by focusing on gross margin and EBITDA margin expansion; and three, delivering strong cash flow generation to allow us to allocate capital towards organic and non-organic growth opportunities at attractive returns, but also return excess cash to shareholders from time to time. That is it for me. Let's go to Q&A.

Thank you. Our first question comes from Alan Alanis with Santander. Please proceed.

Thank you so much for taking my question and congratulations on the results. Lucas, my question is regarding two matters. One of them is how do we understand the discrepancy in trends between soft drinks and beer in Brazil? I mean, with such strong growth in soft drinks. The second question requires just a quick context regarding the performance of your brands in the beer portfolio in Brazil. You are seeing high single digit in premium and also mid-single digit in core. That means either one of them or the two of them are declining. Could you expand a little bit more in terms of what you are seeing in terms of the composition of the portfolio of beers within the different price points, and how do you see this going forward? Thank you.

Thank you very much, Alan, for the question. First, I will try to elaborate on soft drinks and beer. What we are seeing is that all this transformation that we started about three or four years ago with an innovation mindset and this vision to innovate in beer led to the introduction of more brands, including Brahma, Duplo Malte, and Spot. A lot has happened between 2019 and today. Beer has really performed well during this period. If you look at our numbers of beer compared to 2019 levels, our performance for this quarter is approximately 34% above. We unlocked significant growth during this time and reached all-time high volumes last year in beer that we are very proud of. It is commendable that we maintained flat volumes this year, confirming the volumes and transformation that occurred during the pandemic, creating more occasions to consume beer. If you look at beer long-term, it has performed very well overall compared to the previous year. As we felt comfortable with this performance, we turned our attention to non-alcoholic beverages. We are just beginning this journey with non-alcoholic beverages, and while we are not yet where we want to be in terms of innovation, I am very pleased with our portfolio's performance. Pepsi Black is gaining traction, and we are seeing resilience in the non-alcoholic beverage industry as return-to-work boosts consumption. The industry is resilient, and our portfolio is well-established. Beers are helping us gain market share and perform well. In short, we foresee the ability to outperform the market moving forward, but in terms of non-alcoholic beverages, we are just getting started. Regarding the portfolio dynamics, I want to clarify that the high-end segment combines premium and super-premium brands. The figures we mentioned reflect growth in both by a high single-digit rate. When we look at this combined metric, the growth in premium and super-premium volumes compared to 2019 is 57%, while total beer grew by 34%. It is very solid growth indeed. Although it was a tough comparison, the premium and high-end segment has consistently delivered 16% CAGR over three years, while core brands remain resilient, and our value regional brands have struggled. Overall, we see our portfolio improving; our core brands are resilient, we are creating this core plus category that now represents a lot for us, and premium and super-premium segments are truly resilient. So, this paints a good picture of our portfolio's evolution.

Got it. That is very useful. Thank you so much and congratulations again on the results.

Thank you very much.

Our next question comes from Marcella Recchia with Credit Suisse.

Hi Jean and Lucas, thank you for taking my question. Let me circle back on the international division first. During the second quarter, we had the impression that you were about to see recovery trends there. What was missing back then, what is the current outlook ahead, and what have been the main initiatives to stabilize the operation? My first question. Secondly, during the presentation, Lucas, you alluded to improvements in margins and ROIC to be a focus next year. So what can be shared about the main levers for that? And if you can share anything or say anything about the cost outlook for next year? Thank you so much.

Hi, Marcella. Thank you for the question. This is Lucas speaking. In terms of the evolution in CAC from Q2 to Q3 and what we are trying to do to improve performance going forward, first, it is important to note that in Q2, we also saw a challenging operating environment, not only in the Dominican Republic, but also in Panama for different reasons. In the Dominican Republic, we had a specific issue with the glass supplier, and the good news is that that issue has been addressed. However, supply chains take time to stabilize, especially in this region where we rely heavily on imports, and the infrastructure in the region is not at the same level as in Northern Europe or South America. This has proven to be tougher to re-stabilize both the resolution of the glass supply issue in Q2 than we would have hoped. Regarding Panama, the two main issues were one, market share loss during the first half of the year, which we are still working on reverting, and two, supply chain issues. The level of imports in Panama is higher than in other markets, so as supply chain constraints were a factor in the entire region, Panama was not immune, especially due to the higher reliance on imports. Moving forward, our focus is first on stabilizing the supply chain. Without product availability, everything becomes much tougher. Secondly, we need to improve commercial execution, ensuring we have great price execution with the right SKUs at the right price for the right occasions. We have seen improvements in July, August, and September in terms of both price execution and coverage levels for our broader assortment in the Dominican Republic, so we are heading in the right direction. Lastly, we need to continue investing in developing the marketplace to serve customers better not only with our traditional beverage portfolio but also with other products and services that add value to our clients. Regarding Panama, we are focusing on returnable glass volumes, which are significant in the market and ensuring we have the right SKUs at the right price. We also took BEES to Panama this year, which gives us an opportunity to improve overall performance. I hope that addresses your first question in sufficient detail. As for margins in the future, the overall levers remain unchanged. We still believe that continuing our journey of improving profitability requires consistent top-line growth. We have built a strong momentum in top line growth over the last few years since the pandemic lows. We have managed consistent double-digit top-line growth overall, and we need to keep it up by balancing volume and improving net revenue per hectoliter growth. To do this, we must keep the premium and innovation portfolios healthy and growing, support the return of on-trade sales, focus on returnable glass bottles, and enhance our revenue management. Our B2B and direct-to-consumer tech capabilities help us better understand client and consumer needs and consumption desires, allowing us to offer better assortments at the right prices. Top-line growth remains the most crucial lever for improving margins. In terms of costs, we will share more during our full-year conference call early next year. However, what I mentioned in July stands true: after several years of cost headwinds with the BRL depreciating against the U.S. dollar, the Argentine Peso, and rising commodity prices, 2023 is shaping up to be the first year in a while where we don't have all these headwinds at the same time. Given our hedging policy, we have good visibility into next year. By the end of October, there is still some hedging to do, of course, but we have a good sense of things. Generally, the BRL tends to be a tailwind, as do aluminum prices, while the Argentine Peso should remain a headwind, and wheat and barley could be headwinds as well. Overall, we are looking at a better picture than we had entering 2022. We cannot underestimate the challenges, but we face many risks and challenges in our markets, and our visibility today looks much better than it did at this time last year. Lastly, regarding SG&A, there are different levers regarding sales and marketing, distribution, and administrative costs. We remain focused on being as disciplined as possible in managing our expenses. We are continuously looking for ways to invest more strategically and efficiently, especially with our direct-to-consumer channels and the distribution side in Brazil. We have invested over the last few years in building tech capabilities, and we are always striving for greater efficiency as we grow these platforms. We can discuss this in more detail later.

Just a quick follow-up, if I may, on the guidance of a more robust second half. How dependent is this ambition on the recovery of the international division?

Jean wants to comment, but I think it is based on what we have seen so far this year. The good news is Brazil has really carried a lot of improvement for the company at the consolidated level. We see momentum going into Q4 for the reasons mentioned in our prepared remarks. We still see good momentum in Brazil, and as it continues to show resilience, Canada is improving sequentially, and COGS starts to rebound. This hopefully will all help us deliver our ambition for the year, but I believe it is more about Brazil than the international operations.

Yes, if I could add, Marcella, we are confident in that statement. We need to improve international operations, but I think of that statement more in the long term. We are certain that H2 will indeed be better than H1.

Our next question comes from Lucas Ferreira with JPMorgan. Please proceed.

Hi, everybody. Thanks for taking my question. The first one is on your whole direct leader pricing. How should we think about that going forward as we approach the fourth quarter? Have you completed all the necessary adjustments that you started doing? Is there anything left to be done still? In terms of market position, do you expect any more discounts punctually? How do you see the pricing environment in general going forward? The second question is similar, but I want to look at it for 2023. With such strong pricing this year, what is your expectation for the next year? Do you think inflation is something to aim for, or will the carryover from the highs you've achieved this year suffice for you? So how should we think about pricing strategies for 2023?

Okay, Lucas. That is an important and sensitive question, and let us see what I can share. When we started the year, we mentioned the desire to accelerate organic EBITDA growth that we were well-prepared for given the momentum we have in net revenue per hectoliter. The year so far has seen significant improvements; our portfolio is trading up, the high-end products are working, and our channel adjustments are completed. I mentioned that the big question would really be about volumes because I was confident that the net revenue per hectoliter would hold firm due to the adjustments we’ve made. I have seen that the elasticity has been better than we expected, which allows us to maintain solid volumes. As we enter Q4, my focus is entirely on service levels. I think demand will be high as we have never had a World Cup in the summer before. We are prepared to have a spectacular World Cup in terms of connecting with consumers, and my commercial plan is solid. We are betting on five brands: Brahma, Budweiser, Michelob Ultra, and Zé Delivery. My confidence is in our resilient elasticity, and I am not overly concerned about what's to come. As for 2023, while I cannot say precisely what will transpire beyond next year, we believe Brazil's main market shows momentum. Overall consumption has momentum; unemployment is low, and we feel well-positioned to end the year strongly. So, fundamentally, elasticity remains robust.

Additionally, as I mentioned earlier, to the extent we manage to continue growing the weight of the Core Plus and premium segments within our overall mix, and continue growing returnable glass bottles in both home and out-of-home occasions, along with innovation that adds value, all these levers help net revenue per hectoliter performance and maintain the momentum we have built over the last few quarters.

Thank you guys, thank you very much.

Our next question comes from Thiago Duarte, BTG Pactual. Please proceed.

Hello, good afternoon, Jean, Lucas, and everyone. Two things on our side here. The first thing is more about the long-term outlook for the beer category in Brazil. Looking at the volumes and per capita consumption, it seems to have recovered really well over the last two to three years. I don't know exactly where we are, but I think we are very close to historical highs. It is no secret that Ambev has repositioned itself, as you mentioned earlier, since 2019, and it seems to be working. My question is really what you think the long-term potential of the category is considering everything you are doing to foster growth and innovation, and where you see per capita consumption in Brazil now, and where you believe it can go looking ahead a few years. That is my first question. My second question is actually a follow-up, trying to gather a bit more insight on the different segments within your volume performance in Brazil beer. You mentioned premium, core being resilient, and premium growing. However, I still do not fully understand the core plus and how core plus, which we know is one of your biggest bets for your portfolio, is performing. It appears that the performance per segment is similar to what we had in the second quarter. I would appreciate any clarification on that.

Let me elaborate on the category and its long-term potential. Beer is a significant part of Brazilian culture, and I believe it is stronger than ever. The beer category has reinvented itself. Up until a century ago, light lagers like Brahma and Skol were the primary styles, but over the past few years, we have introduced many new recipes and innovations, allowing us to stay culturally relevant among the new generation of Brazil. Hence, we see a healthy beer category. While there are questions about this year, the industry demonstrates resilience. There are two main engines of growth for Brazilian beer: frequency and new occasions. Frequency remains low compared to mature markets. Drinking beer on less traditional days like Tuesday nights has persisted, reinforcing industry health. Additionally, areas in Northeast and Midwest Brazil show ample opportunity for growth. Per capita consumption still has room to rise, especially in more rural areas where access remains limited. As income levels rise, beer affordability also increases. Furthermore, we are working on expanding beyond beer, reinforcing our growth trajectory. We have plans to elevate Mike's brand during the World Cup, which should pair well with Budweiser's initiatives. The beer category is resilient and has significantly more growth potential in the long term. Regarding the portfolio breakdown, we have made a conscious decision to move some resources toward Brahma and Spot from Bohemia, which used to be a mainstay in the core segment. We've concentrated on Brahma Duplo Malte and our two main brands. Their combined performance remains robust, and we look forward to additional innovations. The Octoberfest with Spot is gaining traction, and Brahma Duplo Malte is still seeing considerable growth.

Thank you, Jean.

Our next question comes from Carlos Laboy, HSBC.

Yes. Good afternoon, everyone. Thank you for taking my question. J.J., Lucas, a substantial portion of your portfolio rate is now comprised of core plus and premium. Could you provide us insights into what you have learned from the market maturity model regarding your current share of core plus and premium and its potential for growth? Any examples of growth opportunities you want to highlight? Furthermore, could you provide an update on Spaten, which falls in the core plus category? I understand that you were planning significant initiatives for that brand this past month.

Thank you for the question, Laboy. When we first analyzed our market potential in 2019, pinpointing what would be successful over the next decade, we were heavily influenced by our studies of markets like Mexico, the U.S., and China to make accurate predictions about portfolio expansion. We recognized that the high-end segment was developing as expected, but the potential for core plus was underdeveloped. When we identified this opportunity for faster development, we committed resources to expand it. We believe there remains considerable room for growth, indicating that this segment could reach upwards of 20% market share as we've seen in other markets. Our data shows that the core plus segment attained a five million hectoliter increase when comparing this World Cup with the last, highlighting our successful efforts. Spaten is performing exceptionally. Feedback indicates that the quality resonates with consumers, and the brand's established heritage has driven excitement around it. The integration during our recent October fest mirrors our Munich events and has been well-received. The brand enjoys robust growth and offers significant potential moving forward.

Yes. Thank you very much.

Our next question comes from Ricardo Alves, Morgan Stanley.

HI Jean and Lucas, thanks so much for the call. I wanted to discuss the World Cup impact on your overall operations. Should we expect any major mix effects, both in terms of channel penetration and product brands? Can you provide any qualitative insights regarding the historical performance of the World Cup and its revenue management? Additionally, I wanted to address the derivatives line item, the 1.1 billion. You mentioned in the release that the primary driver for this was the higher hedge carrying cost. However, when we assess the 69% figure mentioned for Argentina, we initially anticipated a higher number due to the results we have seen in the country from July to September. Could you share any insights on this transition from 65% to 69% throughout the quarters regarding specific actions taken to control these costs or if we should anticipate further increases in the fourth quarter?

Regarding the World Cup, the occasion offers significant potential to drive overall creativity. Scale is essential during this period, helping us manage fixed costs. Out-of-home occasions will see an uptick due to this increased scale. I expect an overall positive mix for us through this period. We have begun our World Cup efforts already, front-loading some sales and marketing expenses to prepare for the event, which could influence our numbers in the next quarter. For expenditures, we are focused on reallocating resources strategically away from non-soccer regions and concentrating them in markets more aligned with soccer to ensure our customers' passion remains engaged.

Let me address your second question on the losses related to derivative instruments. The quarterly impact involved two primary factors. First, the carrying cost in Brazil has increased significantly year over year, rising from about 5% to nearly 10% over a broader exposure base. Secondly, in Argentina, we observed an uptick in carrying costs too. Last year during Q3, this was around 40%, while this year, it's closer to 70%. If you inspect month-by-month data, you can see spikes towards September, exceeding 100%. Please remember that we remain hedged for around 12 months as per our policy, but we sometimes use our window of flexibility as market conditions change. We monitor how attractive it is to hedge timely based on prevailing costs. It's essential to keep this perspective when considering cost behaviors.

Very clear, Lucas. Thanks for that and thanks to Jean as well.

Thank you. This concludes our question-and-answer session. I would now like to invite Mr. Jean Jereissati for any closing remarks. Please proceed.

Thank you very much to all analysts and everyone who joined the call. To wrap up, our industry is strong and resilient. Our business is structurally better due to all the changes we've implemented. We are confident about delivering a better H2 than H1. We remain on track for our key ambitions for the year: returning Brazil to bottom-line growth, achieving consolidated organic EBITDA growth ahead of 2021's 10.9%, and ensuring stronger consolidated net revenue and EBITDA organic growth in H2 versus H1, which is also supported by improved cash flow generation and consequently better return on investment for shareholders. Looking ahead, we aim to build on this momentum and position ourselves for a strong start to 2023. There will certainly be challenges and risks, but there are also opportunities. Our business has consistently improved since 2020, and I am proud of what our team has accomplished. I look forward to seeing you all at our ESG Day next week. Have a great day.

Thank you. The conference call for Ambev is now ended. Have a great day.