Ambev S.A. Q4 FY2022 Earnings Call

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's Fourth Quarter and Full-Year 2022 Results Conference Call. Today, we have with us Mr. Jean Jereissati, CEO of 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. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1995. 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. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the Securities and Exchange Commission from time to time. 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. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify 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 2021 results as the case may be. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as a part of Ambev's core 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. These normalized figures must not be considered as an alternative to GAAP measures to evaluate our financial performance. Now, I'll turn the conference over to Mr. Jean Jereissati. Mr. Jereissati, you may begin your conference.

Hi, everyone. Welcome to our Q4 and full-year 2022 earnings call. We have a lot to cover today: how we ended 2022, which was a great year for us, how we have planned for 2023 and how the year has started. So let's begin. We are a company that dreams big to create a future with more tiers. 2022 was a year of many achievements in bringing this dream to life. Our team's engagement remains at great levels. Interestingly, the question about pride in working at Ambev reached its highest score since 2018. My team came through once again. I want to thank and tell them how proud I am to be on their side, every day, transforming this company. Our reputation and connectivity with our ecosystem also improved, with NPS up 14%, which meant more positive impact in shared value creation with clients, wholesalers, suppliers, and the community we serve. Operationally, our Brazilian business was the highlight, with our platform framework showing its potential. Thanks to the healthier brands, continued innovation, improved service levels, and the scale-up of our technology, B2B, and DTC Big BEES. Financially, there were many reasons to celebrate. 2022 was another year of record volumes, this time with better net revenue per hectoliter performance and with double-digit normalized EBITDA growth, ahead of our growth in 2021. Furthermore, normalized net income also grew double-digits, and ROIC expanded, thanks to better asset turnover, all backed by another year of consistent free cash flow generation. Q4's performance allowed us to deliver a stronger H2 and positioned us well to start 2023. Volumes grew 1.5% in the quarter, marking our 10th consecutive quarter of volume growth, reaching the highest volume in any given quarter in the history of this company. Net revenue per hectoliter grew nearly 20% compared to Q4 2021, with growth in all regions. Additionally, normalized EBITDA grew a little over 27% in the quarter, despite inflationary pressures impacting our costs and expenses. The commercial execution during the FIFA World Cup stood out in the quarter. In Brazil Beer, for instance, despite the poor weather and Brazil's early elimination, we managed to activate our brand with clients and consumers throughout the tournament, led by our high-end brands, which grew volumes north of 25%, and our mainstream brands, which grew mid-single digits. We sponsored more than 40 events, reaching over 20 million consumers with Brahma and Budweiser as the official sponsors of the tournament. This enabled us to serve our clients better, with demand peaking at 480,000 hectoliters in a single day for the first time in our history. While the Delivery was the official delivery app of the Brazilian national team, increasing not only awareness from 50% to 62% but also expanding to over 350 cities across Brazil. As for Brazil NAB, Guarana Antarctica, the official sponsor of the Brazilian national team, was one of the most talked about brands on social media during the World Cup. Meanwhile, Pepsi Black remained on fire, more than doubling volumes compared to Q4 2022, and we were awarded the Bottler of the Year for PepsiCo in Latin America. In Argentina, we organized the biggest celebration to welcome the Champions, with Quilmes leading the national team's parade upon their arrival in Buenos Aires, and Budweiser hosted celebrations in every region to give consumers the birds we brought home. In LAS, overall, although volumes were down 1.6% in the quarter, net revenue per hectoliter increased 56.4%, and normalized EBITDA was up 93.6%. For the year, LAS delivered around BRL 5.8 billion of normalized EBITDA, out of which approximately BRL 3.6 billion came from Argentina. Not everything went well in the quarter. In Canada, despite market share gains in beer, we were unable to grow volumes due to a weak industry, and normalized EBITDA declined about 4%, primarily due to commodity and full inflation, which more than offset net revenue growth. Meanwhile, despite a sequential improvement overall, CAC volumes were down by over 13% in the quarter, while normalized EBITDA declined nearly 11%. In the Dominican Republic, high inflation continued to be a pressing issue, and in Panama, volumes were impacted by short-term competitive dynamics and challenges in traditional trade. We have not yet recovered from previous market share loss. There was a tax settlement in the Dominican Republic, which led to higher other operating expenses, a one-off occurrence. Absent this tax settlement, normalized EBITDA would have increased about 1% in the quarter. So that's it for 2022, and now let's talk about 2023. I am starting the year more confident than I was in 2022. Even though we face challenges and volatility in many countries, there are plenty of opportunities ahead, particularly in Latin American markets, as I believe the region is set to benefit in the current environment. Our business continues to have momentum, thanks to the execution of our commercial strategy, which leads to continued top-line momentum. For the past several years, we have witnessed significant inflation impacting our costs and expenses well ahead of our top-line performance. Now there is no longer this disconnection between top-line and cost and expenses inflation. In fact, we are observing quite the opposite: continued top-line momentum while costs and expenses, inflation come down—excellent news. Finally, our balance sheet and cash generation remains strong. The fact that our cash generation has been consistent even during COVID-19, despite all the macro challenges we faced, is clear evidence of our financial capabilities. What do we want to accomplish in 2023? Our ambition in 2023 is to deliver consistent improvement across the board. First, we aim for another year of consistent top-line and bottom-line growth with Brazil keeping its momentum while our international operations work to bounce back with CAC and Canada recovering performance. Our biggest focus will be Argentina, where we will work to keep operational momentum while preparing our business to be flexible and agile to adapt to the macro environment as volatility may require. Second, we aim to pursue another year of normalized EBITDA growth acceleration, surpassing the 17.1% we delivered in 2022. As for profitability, we are committed to not only improving ROIC but also improving our margin performance. We have work to do here, but we believe we are on the right track, and it's good to see that cost and expense headwinds seem to be easing. We've had a busy start to the year, with a lot of noise from events unrelated to us. We've already set the record straight and will continue to do so to protect our company and reputation. The silver lining, however, is how our ecosystem has had our back. It has been amazing to see how much my team has shown leadership to carry on, and how much support we have received from former employees, consumers, clients, wholesalers, suppliers and partners. Lucas will share more details soon, but I wanted to thank everyone for being there for us. If you put distractions aside, the business continues to do well. We are kicking off the year with Carnival in Brazil finally coming back for Rio. Our plan for Carnival was built around bringing our platform to life at various festivities across the country. This was the carnival of the Brahma franchise, executed nationwide and presented through traditional media, social street vendors, and points of sale. Brahma was not alone; our BEES franchise innovated with CAC BEES, the hottest innovation of the season, while Ze Delivery showed up big time to deliver a broad assortment of mainstream, core plus and premium brands to consumers. Brahma, CAC BEES, and Ze Delivery were ranked among the four brands with the most earned impressions on social media during Carnival, with Brahma ranking first, more than doubling the number of impressions that Brahma and Skol together had during the Carnival of 2020. To wrap up, as I have said before, 2023 will certainly bring challenges and risks, but also opportunities, with a business that is over 80% located across Latin America. We know how to navigate uncertainty and volatility, and we will continue to focus on the things we can control, executing our plan to deliver consistent results. What gives me additional confidence is that since 2020, we have been building a better company on the back of our transformation journey. First, we have a solid culture that has continued to evolve, embracing active listening across our ecosystem, fostering more collaboration internally and externally, and promoting long-term thinking embedded in our planning, decision-making, and compensation model. Second, our operations are strong. In 2020, we developed a sound long-term strategy for the next ten years, which we have been executing consistently since then. We prioritized top-line growth to recover from COVID, resulting in a step-change in our volume performance, thanks to a more client and consumer-centered platform model. The plan has been successful. Third, we are financially solid. Our cash generation has remained robust, with an implicit finance cost in the amounts we charge suppliers needing segregation and allocation in financial results. As a result, our effective cost reported in COGS excludes this component, and our accounts payable are accounted for at present value. Regarding tax litigation in Brazil, it presents relevant complexity, leading to extensive litigation—a reality for several Brazilian companies, large, medium, or small. According to a study published by Ian Smith in 2020, when considering all tax litigation in Brazil, it amounts to approximately 75% of the country's GDP. And as disclosed in our public filings, a significant amount of tax litigation has a possible but not probable chance of loss based on external counsel's advice. About 90% of this amount relates to fifteen specific tax positions that have endured challenges from tax authorities over the years. We believe in the merits of our legal position regarding these cases and are confident we will ultimately prevail. Regarding the Manaus free trade zone, it's important to note that these tax incentives are established in the Brazilian constitution. Our subsidiary has been producing concentrate for Guarana Antarctica and other non-alcoholic beverages in the region for over 20 years, investing in local production capacity, sourcing Guarana seeds locally, and creating jobs for local communities. Tax disputes can extend over 12 years, and the part of the case reaching the Supreme Court in 2019 actually ruled in taxpayers' favor. Lastly, regarding the Brazilian tax reform and IOC, it's been widely reported that a tax reform is under discussion that may be passed in 2023. We support any tax reform that reduces the complexity of the Brazilian tax system without increasing the industry's total tax burden, one of the highest globally. In the context of the legislative debate about direct taxes reform, there have been discussions toward ending the tax deductibility of the IOC. Should the IOC no longer be deductible for tax purposes, we will find alternative ways to mitigate the impact on the company to some extent. As the legislative debate is ongoing, it's still early to comment further. We will keep the market informed as appropriate. Now, moving on to our performance for 2022 and priorities for 2023. Starting with 2022; we delivered on all our ambitions. First, Brazil returned to bottom-line growth, with normalized EBITDA up 15.6%. Second, at the consolidated level, normalized EBITDA grew 17.1% versus 10.9% growth in 2021. Third, H2 was stronger than H1: consolidated net revenue growing 20.3% versus 19.1% in H1, and normalized EBITDA increasing 20% in H2 versus 13.4% in H1. Normalized profit also increased by 12.6% due to normalized EBITDA growth, lower growth of net finance expenses, and a lower effective tax rate. ROIC ex-tax credits improved from 20% to almost 25%, with asset turnover showing consistent gains. Cash flow generation reached BRL 20 billion for the year, despite year-over-year shortfalls in Q1 and much lower cash generation in CAC and Canada throughout the year. We invested for the future, with BRL 6.5 billion of CapEx and BRL 6.5 billion in sales and marketing. Lastly, for the year, our payouts totaled BRL 12 billion related to IOC concerning our 2022 fiscal year and also prior years. Consequently, we start 2023 with a cash position of nearly BRL 15 billion and less than BRL 4 billion in debt, an excellent liquidity position to maintain. Regarding sustainability, we made significant strides toward our 2025 goals, ending 2022 with 11 carbon-neutral operations: eight plants in Brazil, two in Uruguay, and one in Argentina, which combined will avoid the emission of 30,000 tons of CO2. We achieved 100% renewable electric energy in our operations across Brazil, Argentina, Paraguay, Chile, and Uruguay, in addition to the Dominican Republic, Panama, and Guatemala, where we reached this threshold in 2021. We also reduced carbon emissions from Scopes 1 and 2 by more than 40% since 2017, and for Scope 3, we partnered with over 200 stakeholders in our supply chain in Brazil as part of our collective effort to reduce Scope 3 emissions, representing more than 70% of total value chain emissions, keeping our 2025 commitments on track. Now regarding 2023, first, what should be similar to last year? One, top-line growth remains a priority with net revenue driven once again by net revenue per hectoliter rather than volumes. Two, we anticipate a tougher Q1 due to heightened input cost pressures, primarily from commodities rather than FX. Three, our focus on drivers of value creation, such as return on invested capital, economic profit, and free cash flow generation, remains unchanged. In terms of differences from last year, one, despite input cost pressure being a headwind, we expect our cash COGS per hectoliter for Brazil Beer, excluding non-Ambev marketplace products, to grow between 6% and 9.9% for the year, significantly lower than the 16.6% growth in 2022, driven by commodity hedges, with aluminum becoming a tailwind and our FX hedges reflecting an average BRL-USD exchange rate of 5.10 for the year, after 4 years as a significant source of pressure. Two, SG&A growth should improve due to lower overall inflation and internal restructurings designed to optimize our B2B, D2C and fintech technology big bets. We invested heavily from 2020 until 2022 to scale these platforms swiftly, and we will now capitalize on a more integrated approach structurally. Three, CAC in Canada will return to organic growth. We will continue to focus on reigniting demand for our portfolio through key selling moments via brand and trade investments alongside disciplined commercial execution. In Canada, we will concentrate on resuming momentum by directing investments towards above-core and beyond-beer brands while also advancing in the ongoing digital transformation with BEES. Lastly, regarding our financial priorities for the year, there will be no change. We will focus on four factors: improving our financial discipline with a concentration on liquidity, cost, and expense management while reinvesting for growth, improving profitability through an increased return on invested capital alongside a focus on margin expansion, and advancing our value creation agenda with an emphasis on growing economic profit and free cash flow, while returning excess cash to shareholders over time. In other words, we will pursue another year of steady and consistent improvement in our financial performance as we continue to transform this company. That concludes my updates; it's time for Q&A.

Thank you. Our first question comes from Rodrigo Alcantara with UBS. Please go ahead.

Hi. Thanks for taking my question, and congrats on the great results, Lucas. My question would be regarding Canada. Just curious if you can explain a bit better how you plan to resume growth there? It appears to be more of a structural problem and market product rather than a debt situation, right? So just curious if you can comment on how you try to grow in this trend if this is the case? And also again in Canada, perhaps if you can comment on an EBITDA minus CapEx perspective and how did the quarter look like, that will be my question. Thank you.

Okay. Hi, Rodrigo. Thank you for your question. This is Lucas speaking. In terms of reasons to believe for Canada in 2023, I think there are a few points worth highlighting. Okay? First, we're going to continue to work to resume momentum, by continuously allocating resources behind our brands within the core plus premium segments in the market. We've had, over the last few years, very good market share performance across segments and regions within Canada, despite a decline in the industry in the same period. Second, we're betting on beyond beer. In 2022, this industry suffered, particularly more than other beverage categories. But we did see some sequential recovery towards the back end of the year. Should the beyond beer industry continue to regain momentum, and as we invest in our portfolio there, that should also be beneficial looking ahead. Third, we are focused on stabilizing mainstream in the Canadian market. Above core, core plus, and premium brands have momentum: Michelob Ultra, Corona, and Salvador. We started to stabilize mainstream in 2022, with Bud Light outperforming in that case. And we need to maintain that performance for Bud Light and improve Budweiser's performance in that segment going forward. Lastly, macro conditions in Canada show inflation remains high, but it's expected to mitigate somewhat in 2023, which is also worth noting. We're not seeing evidence of widespread trade down. Combining these factors, there isn't a one silver bullet solution; it will be about executing our commercial strategy. Oh, and I forgot to mention BEES in Canada. It started to be rolled out in 2022, and we have plans for continuous expansion in 2023. That's also a significant focus for us going forward.

That's great. And also, if you could just provide on the cash flow generation perspective in Canada, any figures you can comment there?

Yes. So regarding Canada, I mean, initial EBITDA performance has hindered cash flow generation. Cash flow generation also ended up being impacted. We need to improve. If you break cash flow down for Canada, the bigger issues in Q4 revolved around payables. That was a significant issue related to working capital, especially given our CapEx curve for the year. Overall performance at the back end of the year, particularly in December, was a concern. December is typically critical for cash flow generation, and our performance in Q4, with that volume shortfall, impacted our working capital. CapEx remained consistent with what we have seen in the past; it was just the timing that affected payables last year.

Got it. That's very clear. Thank you, Lucas.

Thank you.

Our next question comes from Lucas Ferreira with JPMorgan. Please go ahead.

Hi. Good afternoon, everybody. My question is about your outlook for beer sales in 2023. If you can comment about your expectations for the industry, if you think there is space for growth in consumption after a very strong 2022? In the case of Ambev, do you think you can still gain market share, and which part of the market should we expect to grow more? Also, if you can provide any brief comments on the start of the year, as there were also rainy conditions, especially in Sao Paulo, considering the issues you had in the fourth quarter. Could you share any early views on the first quarter of 2023?

Thank you, Lucas, Jean here. It's a good question about volumes. We had a strong year in 2022. Overall, we have a plan for 2023 to continue to gain market share in our key markets, including Brazil. We have been working on the brands and on innovation. Our RTM is unparalleled now with BEES. Therefore, we are confident in our plans for market share gains. As for the industry, yes, we faced poor weather at the end of Q4 and into Q1, but under typical circumstances, this tends to balance out. We believe the industry should remain positive across most of our markets and expect to see continued market share gains, that’s the agenda.

Okay. Thank you very much, Jean.

Our next question comes from Marcella Recchia with Credit Suisse. Please go ahead.

Hi, Jean. Hi, Lucas. Thank you for taking my questions. Let me just first do a follow-up on Lucas's questions regarding Brazil. Can you just remind us of the price increases taken throughout 2022 for Brazil Beer and what's the expected carryover for 2023? I will ask you my other two questions very quickly.

So during Q4, Marcella, we typically adjust our prices just before summer. Most of the pricing adjustments for 2023 have already been rolled out in Q4. Resilience in elasticities is apparent across most of the carryover, so we are in a good starting position for the year.

Okay. And the other two questions very briefly. First, on Brazil Beer, we see that volumes are up 17% versus 2019, top line up 48%, but margins down around 13 percentage points. How much of that margin do you think we can recover, and do you have any time frame for that? The second question is regarding the guidance for consolidated organic EBITDA growth ahead of 17%. Which regions can we expect to outperform or underperform this level? Thank you so much.

Marcella, you've followed us closely. We made a conscious decision in our ten-year strategic plan during the pandemic to accelerate our performance across Ambev. We decided to exit the pandemic with a top-line led recovery, focusing on reconnecting with consumers and innovating our market opportunities. This strategy allowed us to accelerate top-line growth, and we see improvements on the margin side as costs stabilize. We provided guidance for cash COGS moving between 6% and 9.9%, a significant reduction from 22% in 2021 and around 16% last year. We expect margin expansions if we maintain this strategy. It's hard to provide a specific time frame, but we believe this is the year we will actively pursue margin recovery alongside top-line growth and improved ROIC.

We aim to accelerate our EBITDA performance; last year was an improvement over this year, and now we want 2023 to be better than 2022. Brazil will maintain its momentum, both in Beer and NABs; there will be an unlock of value in LAS, particularly in Chile. We intend to improve our operational capabilities and capitalize on investments made, while in Argentina, we will closely manage our currency hedging and local contracts. Overall, Brazil stays strong, and we forecast positive reversion for international operations.

Okay, Jean. Thank you so much.

Our next question comes from Carlos Laboy with HSBC. Please go ahead.

Yes, hello, everyone. I have two questions. One for Lucas, how does ABI dropping its net debt to EBITDA below 3% change your flexibility regarding Ambev's capitalization differently? And for J.J., can you speak to how some of your brand marketing keeps evolving to appeal more broadly to men and women more evenly? Is it working? Perhaps you could provide insight into Corona specifically for its progress.

Let me take the first question then, and then Jean can address the second. Hi, Carlos. Thanks for the question. When we think about capital structure, we need to keep in mind the current state of our capital structure is impacted by the deductibility of the IOC. When considering ABI's net debt, that is more of an issue for them and less relevant for us. We focus on finding the optimal capital structure for Ambev, which must include the IOC consideration.

Talking about brands, yes, over the previous three years we have been working on prioritizing our brands, effectively organizing a portfolio with less overlap and targeting consumers correctly. We're pleased with this overall strategy; brand equity is improving overall. Particularly, Brahma Duplo Malte rejuvenated our key brand, Brahma, and during Carnival, it has strengthened the franchise significantly, connecting with a younger demographic as we had hoped. Our innovation strategy performed exceptionally well, significantly impacting beyond beer during Carnival. The brand Corona is very important to us; we’re focusing on enhancing brand equity significantly in Brazil.

Thank you.

Next question comes from an unidentified analyst with Bank of America. Please go ahead.

Good afternoon, everyone. Just some clarification on the last question. Jean, you mentioned that there is much to be done in Chile and emphasized the capacity to unlock there. We know that the company had to deal with another distribution deal; I'm just trying to understand how much capacity you are adding to the region and the relevance of that distribution channel for you in Chile? The second question relates to Tunabe. Could you share a bit about the potential cross-sell you had with the beer business using BEES and what we can expect for that in 2023?

Thank you for your question. Chile ended the year with a 30% increase in local capacity, which was an important move for us to unlock and sustain momentum there. Our distribution partnerships, particularly with Andina, have transitioned our operations significantly. They are our primary partner, particularly in traditional trade execution. We have nurtured our business in Chile for an extended period, and with the increase in supply capacity, we are well-positioned to unlock significant future value. Now regarding the growth of NABs, our partnership with PepsiCo is stronger than ever, bolstered by better decisions on our portfolio. The potential for BEES in facilitating cross-sell within our beer business is promising, as last year we grew significantly across all partnerships.

Thank you, Jean.

Our next question comes from Thiago Callegari with BTG Pactual. Please go ahead.

Hello, Jean. Hello, Lucas. Two questions from my side. First, on Brazil Beer. Looking at the product mix in Q4, we see premium core growing in the 20s, core plus growing roughly non-consolidated, and on Beer, that core plus underperformed. I'd like to know how you see the portfolio changing among these categories throughout 2023. During 2022, if you could also comment on how much mix contributed to the 12% price gain for Brazil Beer. That’s the first question. Second, regarding CAC, could you share more on the recovery path ahead? What was achieved in Q4, and how do we reach historical volumes and profitability levels?

Let me answer the first question. We had a very strong year for volumes. Overall, we grew 4% in Q4 and 3.5% in the full year. We saw an accelerating premium product segment. Our core portfolio remains resilient, and we are experiencing strong volume in total. We are observing a strong uplift in premium categories. Regarding the core plus, during the pandemic, we launched Brahma Duplo Malte, designed for in-home consumption. As consumers return to the market, we see a positive interaction between Brahma Duplo Malte and Brahma, benefiting the overall Brahma franchise significantly. Spaten also shows promise as it moves into the premium segment. Moving forward, I'd categorize Spaten in that way while Brahma Duplo Malte enhances the entire franchise of Brahma. This combination has yielded excellent results for us and, notably, looks promising. Regarding the pricing breakdown, I estimate that of our total net revenue per hectoliter increase, approximately 75% is attributed to price changes. The remaining 50% is roughly split between mix adjustments and channel margin pool adjustments.

Thiago, regarding CAC, there are two key points. First, in Q4, we made meaningful strides to stabilize the supply chain issues we faced earlier in the year. We addressed the coverage of SKUs that previously faced availability constraints, and we saw a sequential improvement in product coverage from Q3 to Q4. Secondly, our suggested pricing adherence has also improved, reflecting good progress in Q4. Inventory levels have normalized, and though we're working towards our historical benchmarks in terms of profitability, we are seeing some early positive signs. While the Dominican Republic shows significant progress, Panama still requires more focused actions. We’re targeting a return to organic EBITDA growth in CAC this year while continuing to improve overall brand health.

Let me address the second question in summary. Our consistent volume growth of 10 quarters has solidified our position. We have seen a natural path from cost stabilization to pricing recovery, thus encouraging margin growth alongside top-line expansion. We can’t precisely time that margin recovery, but we're optimistic that 2023 will be beneficial.

That’s very helpful, Jean and Lucas. Thank you.

Our next question comes from Ricardo Alves with Morgan Stanley. Please go ahead.

Hi, Jean, Lucas. Thanks for the call. A couple of questions. One for Jean, Brazil Beer. I wanted to talk a little bit more about competition. The 4% volume performance indicates the company is running at a high level, but back in October, expectations were higher due to the World Cup. What, in your view, held back volumes from exceeding that 4%, aside from the weather issues already discussed? Did you witness any consumer deceleration, or was there competitive pressure from your two largest competitors in the market? Would love some insights on that. The second question, Lucas, about derivatives. The line in the quarter was BRL 530 million or so. Based on our expectations, we anticipated a higher number linked to Argentina and Brazil hedges. Can you elaborate on that, particularly regarding Argentina hedging or the carry costs running above 100%?

So thank you for your question, Ricardo. The 4% volume performance indicates our commitment. In Q4, we observed sequential improvement in overall market share, and although we gained, we were unable to exceed expectations. My assessment suggests that the World Cup drove about 1.5% of the volumes in the quarter. We assume that if Brazil had reached the finals, we could have seen an additional 1% gain. However, it’s been rainy, particularly in Brazil, mitigating our volume forecast for Q4. We are pleased with our market share gains, and we believe there is still further room to grow, particularly in the premium segments.

Regarding the losses on derivative instruments, Ricardo, we need to look at both the carry costs for hedging the dollar against the Brazilian real and the Argentinian peso against the U.S. dollar. In Q4, there was not a significant increment for hedging the Brazilian real. While exposure in Q4 of 2022 increased compared to 2021, carry costs remained about the same. In the case of Argentina, the carry costs accelerated around 100%, leading us to reduce hedging when costs became prohibitively high in Q3. For modeling purposes, the Q4 figures could be expected as somewhat consistent moving forward...

That's very helpful. Thank you, Jean. Thank you, Lucas.

Next question comes from Robert Ottenstein with Evercore. Please go ahead.

Great. Thank you very much. A couple here. You mentioned in the call, I think in the press release, positive brand health metrics in Brazil in beer. Can you quantify that? How does it compare to the past, just so that we can contextualize your statement—perhaps for specific brands? Any metrics would be appreciated. Secondly, a couple of years ago, you went on a journey to change Ambev's culture. You adjusted some incentive programs and targets. Could you provide an update on how those changes have impacted execution, highlighting what you liked from these changes and what still needs to be done?

Regarding brands, we monitor a portfolio metric asking if our brands are loved by consumers. We're happy to report that in Brazil, the number of consumers indicating they love our brands grew from 44 million at the end of 2019 to 49 million in 2022. The growth is concentrated in brands we've prioritized to ignite: Brahma, particularly Brahma Duplo Malte, and Corona among others. On cultural evolution, we identified our growth metrics needed a shift for the future. We've maintained a company culture that is ambitious yet adaptable, emphasizing collaboration, active listening, and long-term perspectives. The progress has been promising, and cultural evolution is a journey that requires time and consistent reinforcement.

Okay. And any geographic insights on the brand health improvement? Is it concentrated in any specific areas or demographics?

Indeed. We've seen notable improvements in brand health among the legal drinking age demographic of 18 to 25. We are also successfully engaging more women with our brands, which has been a significant driver for connection.

That's fantastic. Thank you very much.

Our next question comes from Thiago Bortoluci with Goldman Sachs. Please go ahead.

Yes. Hey, Jean. Hey, Lucas. Good afternoon, everyone. Thanks for taking my question. I’d like to explore a bit more the dynamics on cost inflation and pricing. You provided guidance that indicates cost inflation for Brazil Beer is more front-loaded in the first half. If this is correct, do you intend to revise your pricing strategy or traditional pricing calendar for the year to offset inflation? Additionally, your guidance range is 6% to 10%, but should we anticipate any major changes to that uncovered part of cash COGS, currently the largest component not yet covered?

We have made a decisive choice to dissociate our pricing actions from costs. To be clear, our pricing decisions will focus on consumer pockets, brand power, and demand rather than cyclical timing or the calendar. We are committed to understanding consumer behavior and their preferences and will price accordingly. The resilient elasticities and consumer demand are encouraging, and we see costs returning to a more normalized state, improving our margin positioning.

Let me add regarding inflation: mix plays a critical role in the pricing approach. Our returnable glass volumes versus cans can drive different financial outcomes. The pricing equation also involves fixed industrial costs and labor, which need consideration apart from commodity cost alignments.

Great insight, thank you.

Our next question comes from Felipe Ucros with Scotiabank. Please go ahead.

Thanks, operator. Good morning, Jean, Lucas. Following up on BEES. Clearly, there's focus in Canada, a market that's quite different from ours. How are you approaching the market considering those differences? I also want to inquire about the efficiency of selling and marketing expenses. ABI mentioned that their expenses have been fixed at approximately BRL 7 billion for the last four to five years, yet they've managed to rank higher in various awards. Can you talk about how this translates for Ambev?

We are very excited about BEES. It’s critical that we have detailed the marketplace and partnerships involved with BEES. We’re enhancing all collaborations, providing visibility and value to customers and suppliers. The transformation that BEES is undergoing is allowing for increased productivity. BEES is essentially the forefront of our company. As we expand into markets like Canada, we plan to encourage users to fully utilize BEES across their operations, and it's designed for current B2B scenarios. In Canada, there will be specific adjustments for how BEES integrates into the beverage industry, with a continuous focus on the efficiency it can provide.

In Quebec, we have a route that allows us to directly reach clients, making it a benchmark for more developed markets in BEES execution. Other regions will require adjustments due to their distribution network. Nonetheless, BEES will enable us to evolve by offering leading positions. It’s a platform that will promote operational synergy, streamline functions, and eventually become an industry-standard.

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

Thank you all for joining the call today. 2022 was a robust year in terms of strategic, operational, cultural, and financial performance. We achieved record volumes, improved net revenue per hectoliter performances, and double-digit normalized EBITDA growth compared to 2021. Normalized net income also grew in double digits while ROIC expanded, demonstrating our financial robustness. Moving into 2023, our priorities include focusing on top-line growth, driven more by revenue per hectoliter rather than just volumes. We aim to improve profitability, work on margins, and ensure consistent cash flow generation. While Q1 poses challenges, I remain optimistic about the overall prospects for the year ahead. I'm grateful for your engagement and look forward to reconvening in May. Have a great day.

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