Ambev S.A. Q2 FY2024 Earnings Call

Good morning, good afternoon, and thank you for your patience. We are pleased to welcome everyone to Ambev's 2024 Second Quarter Results Conference Call. Joining us today are Mr. Jean Jereissati, Ambev's CEO, and Mr. Lucas Lira, CFO and Investor Relations Officer. A slide presentation is available for download on our website, ir.ambev.com.br, as well as through the webcast link for this call. Please note that this event is being recorded and all participants will be in listen-only mode during the company’s presentation. Following Ambev's remarks, there will be a Q&A session. Before we begin, I want to highlight that forward-looking statements are being made under the safe harbor provisions of the Securities Litigation Reform Act of 1996. These statements are based on the beliefs and assumptions of Ambev's management and on current information available to the company. They involve risks, uncertainties, and assumptions due to their nature relating to future events, which depend on circumstances that may or may not happen. Investors should be aware that general economic conditions, industry conditions, and other operational factors could influence Ambev's future results and may cause them to differ significantly from what is expressed in these forward-looking statements. Additionally, I want to remind everyone that the percentage changes discussed during today's call are organic and normalized, unless specified otherwise, and refer to comparisons with the 2023 second quarter results. Normalized figures account for performance measures excluding exceptional items, which are irregular income or expenses in Ambev's normal operations. Since normalized figures are non-GAAP measures, the company provides the consolidated profit, EPS, operating profit, and EBITDA on a fully reported basis in the earnings release. Now, I’ll turn the call over to Mr. Jean Jereissati. Mr. Jereissati, you may begin your presentation.

Hello everyone. Thank you for joining our Q2 earnings call. In our last call, I mentioned several initiatives regarding the heavy rains that impacted many cities in Rio Grande do Sul. I also mentioned that we wouldn't stop until our ecosystem was back on its feet. During this quarter, we continued with several initiatives in the region focusing on helping to rebuild the local communities. For instance, we donated more than five million liters of water to people and hospitals. We also contributed over BRL 16 million to support the local customers, helping with structure and commercial initiatives. For our people, we have supported them to rebuild their homes. It's part of our role as a leading Brazilian company to support our ecosystem so we can grow together. Now shifting gears to our business. This quarter's performance was very consistent when compared to Q1. Volumes grew led by Brazil and CAC, more than offsetting softer industries in Argentina and Canada. EBITDA grew double-digits with margin expansion, free cash flow performance improved versus last year, and normalized profit was impacted by higher income taxes. Let me now go a little bit more in detail starting from CAC and Canada. Similar to last quarter, CAC had another good quarter led by the Dominican Republic with Corona and Presidente families of brands. Volumes increased by 3.4% and EBITDA by 18% with 330 bps of margin expansion. While Canada continued to experience a tough industry, we continued working to offset top line performance with disciplined cost management delivering a 2% EBITDA decline while cash flow increased. In Argentina, despite some improvement in terms of monthly inflation readings, the beverage industry continued to suffer in the short term. Our volumes declined by over 21% as the consumption environment remained challenging. In nominal terms EBITDA reduced significantly because of the currency devaluation that took place in December last year. In Brazil NABs, we had another great quarterly performance. Volumes grew almost 8% with our non-sugar portfolio continuing to outperform, growing 15% with a highlight to Corona Cero that grew over 40%. Also, earlier this year, we were awarded the best Pepsi bottler in the world for the first time. This marks how our consumer-centric approach has improved not only our business but our partners. Net revenue per hectoliter grew 6.8% on the back of revenue management initiatives and a positive brand mix. Cash COGS per hectoliter decelerated to an increase of 1.2%, while lower spending in marketing activities from a heavier Q1 due to Carnival contributed to EBITDA growth of 40% and margin expansion of 500 basis points. In Brazil Beer, volumes grew 2.9% with our premium and super premium brands up in the low teens led by Corona, Spaten, and Original; core plus brands growing in the high teens led by Budweiser and core brands up low single-digit. Net revenue per hectoliter grew 3.9%. Fresh retailers grew nearly 6% ahead of general consumer inflation once again, which was partially offset mainly by the carryover impact from VAT taxable base that we explained last quarter. In addition to a healthy and consistent beer performance, the marketplace grew GMV sequentially and 32% versus last year, and represents close to 10% of our net revenue growth year-to-date. And EBITDA grew to 81% also supported by a decrease in cash COGS per hectoliter with margin expanding 350 bps to 30. I'm very satisfied with our performance in Brazil. For a while, we have been delivering a solid operational performance reaching in Q2 2024 all-time high record volumes for a second quarter and significant EBITDA growth. Last quarter I spoke about our commercial momentum in Brazil beer and how that's tied to brand innovation, BEES, and Ze Delivery. Today, I would like to talk more deeply about brands. We decided to allocate our resources prioritizing four brands that we call focus brands. They received additional investments be it in media, experiential, trade, or sales. Each of these focused brands has clear reasons to believe why it can win. Corona in the super premium is the brand with the highest brand health-to-market share ratio in the market. And it relates to values like balance, enjoying life, traveling, and unwinding. On top of that, it has distinctive packaging, a liquid that is made with 100% natural ingredients, and is more refreshing. Spaten in premium is one of the highest growing brands of the market. And it has very clear beer credentials, which positions it as a beer authority in Brazil. It has been selected as Brazil's best pure malt beer by a group of beer specialists in a survey from O Estado de Sao Paulo newspaper. Budweiser is the most aspirational core plus brand in the market. Through its global events like the World Cup and international music festivals such as Lollapalooza and Tomorrowland it is seen as an iconic youth brand. On top of that in both blinded and branded liquid tests, Budweiser scores as the highest beer of the market. Brahma in core is the biggest brand of the market and it connects to Brazilian culture like no other, being part of people's lives for generations through soccer, Sertanejo, Carnival, and San Juan. It has the biggest brand health and salience of the market, and its unique functional attributes Brahmosidade Cremosidade solidifies it as the number one high-quality brand in core. The good news is the strategy is working. Our focus brands are at all-time high levels of brand health and volumes. In terms of year-to-date volumes, focus brands grew over 10% combined representing over 120% of the company's growth. Excluding the value segment, which is our largest detractor, other brands are virtually flat this year. And Brazil became one of the largest markets for Corona and for Spaten. Brand building is a journey and we need to be consistent throughout, but the results are very encouraging. Now to close, I have been conveying three messages since the start of the year. First, we are confident about volume growth, especially in Brazil. Second, our main challenge in the year is taxes in Brazil. And third, despite the headwinds in taxes, we don't expect cash flow to be impacted materially, and we continue working to deliver solid free cash flow generation. We will continue acting on what we can control. And in the short-term, we will focus on keeping our business momentum and protecting cash flow generation. Thank you very much. Now let me hand over to Lucas.

Thanks, Jean and hello, everyone. If I were to summarize our financial performance in Q2, I would highlight three things: more growth than in Q1, more profitability than in Q1, and consistent cash flow generation despite the Brazil taxes and Argentina headwinds. Let's go through the numbers. EBITDA grew nearly 16%, almost 18% ex-Argentina. Gross margins expanded 200 basis points organically, 240 basis points ex-Argentina. EBITDA margin expanded 300 basis points organically, 330 basis points ex-Argentina, and although normalized profit declined around 8%, cash flow from operating activities decreased by nearly 2%, totaling about BRL 3.4 billion. Jean already covered the operational performance so let me break down our beyond EBITDA performance. Net finance results improved approximately BRL 450 million compared to last year. The main drivers of such improvement were consistent with Q1 namely: first, lower losses on derivative instruments given lower carry costs to implement our hedging strategy for FX in Brazil. Second, lower fair value adjustments of payables pursuant to IFRS-13 and CPC-46. And third, our hedging decisions and lower USD exposure in Argentina albeit to a lesser extent than in Q1, which by the way should also be the case for H2. In addition, the devaluation of the Brazilian real in the quarter had a positive impact of over BRL 130 million given cash balances in US dollars. Turning to income taxes. As anticipated, the tax headwinds in Brazil impacted our performance in the quarter. And we didn't have the positive one-off from Q1. Our income tax expense totaled almost BRL 1 billion in Q2, which was equivalent to an effective tax rate of nearly 29%. There were three main drivers here. First, higher EBIT which grew from roughly BRL 2.4 billion to over BRL 3.4 billion. Second, less deductibility related to state VAT government grants and IOC as was already the case in Q1, and which should also impact H2. And third, given the roughly 10% depreciation of the Brazilian real during the quarter, a non-cash effect due to higher withholding tax provision related to Labatt undistributed profits as per IAS-12 requirements. By the way, speaking of taxes, let me share a quick update in terms of litigation and the tax reform on consumption. In terms of litigation, since our last call, we obtained favorable administrative court decisions totaling about BRL 2.6 billion, as per Note-25 to our financial statements, and one partially unfavorable decision regarding IOC deductibility, which we will appeal at the judicial level once we are notified of the decision. And as for the tax reform on consumption in Brazil, in mid-July, the draft legislation was voted in the House of Representatives. And the debate now moves to the Senate, which should vote on the matter before year-end. We will keep everyone posted. Now over to cash flow, cash flow from operating activities totaled almost BRL 3.4 billion, just BRL 60 million below Q2 2023, with higher EBITDA and lower net finance costs, offset primarily by working capital in Brazil and Argentina as well as cash taxes in Brazil. Cash flow used in investing activities totaled approximately negative BRL 1 billion, with year-over-year performance mostly impacted by lower CapEx. And finally, cash flow from financing activities was in line with Q2 2023 at about negative BRL 1.7 billion, with approximately BRL 300 million in share repurchases in connection with our share-based compensation plan. All in all, our cash balances at the end of the quarter increased ahead of last year, so we finished H1 on solid footing cash flow wise, while the bulk of our cash generation historically takes place in H2, particularly Q4. Before wrapping up, a quick update in terms of sustainability. As part of our ongoing efforts in partnership with our ecosystem to reduce Scope 3 carbon emissions, we've identified that more than 75% of our main suppliers in Brazil, which together represent over 30% of Scope 3 emissions, already operate with some level of electricity from renewable sources. We've also mapped with such suppliers a potential reduction of more than 100,000 tonnes of CO2, representing a reduction of approximately 4% of our Scope 3 emissions in Brazil going forward. We still have a long way to go towards our 2040 net zero ambition, but we believe we're on the right track and for more details on our sustainability strategy and results, please check out our annual and sustainability report, which can be found on our Investor Relations website. With that, let me hand it back to the operator for Q&A.

Thank you. Hello, everyone, Jean and Lucas, and the team. I have a question and a follow-up, if I may. My question is about pricing in Brazil for beer. From the presentation you just shared, it seems that the pass-through pricing for the increase in ICMS for beer has mostly, if not entirely, already been implemented. Could you clarify if that's the case? Also, could you comment on the upcoming pricing season that typically occurs between the third and fourth quarters? Should we expect to continue considering inflation as the baseline for pricing, or are you willing to provide guidance in a different direction? That's my first question. For my follow-up, Jean, I found the brand health discussion in your presentation very interesting. Could you elaborate on how you are measuring brand health? What kind of data are you collecting? When you mention all-time high brand health, are you referring to the four focus brands or the entire portfolio? I would appreciate your insights on that. Thank you.

Thank you, Duarte. Thank you for the question. Q2, Brazil beer net revenue per hectoliter versus last year was 3.1% ex-marketplace, right? And it was mainly driven by revenue management initiatives with the price to consumer and price to retailers ahead of inflation. But still, net revenue per hectoliter was a little bit below. We didn't take prices in Q2. We took prices at the end of Q1. And moving forward, we will remain nimble in our pricing strategy, focusing really on the sustainable balance between volume and net revenue per hectoliter growth. With medium to long-term pricing strategy unchanged prioritizing price increase in line with inflation and favorable brand back and channel mix, okay? So that's what I can mention. I would add to that. So we don't talk exactly about the pricing moving forward. But in the end, the strategy is unchanged. What I can say is that we are very happy with the momentum that we have in Brazil. So Q1 was good, Q2 was better and we started July well, okay? So that's what I would mention. And when we go for brand health, the KPIs that we measure are true. We measure how meaningful our brands are to the consumers, how differentiated our brands are, and how remembered our brands are. And then we combine these three metrics in one that kind of picture the power of our brands. My presentation, I was particularly talking about the focus brands growth.

Thank you. Hi Jean and Lucas. Hi everyone. So I have two questions. First of all, it's about here in Brazil and especially the mainstream segment which I think we saw different performances right between you and peers and different impact right from more aggressive competitive environment in some of the segments, right? And it's interesting that in the release you mentioned that, Brahma and Antarctica were supporters, right of the mainstream category, especially Antarctica which if I'm not wrong, you guys have not been highlighting that right as a key driver of growth in a while. So I wanted to understand a little bit more the dynamics on mainstream. And especially if you could touch base on Brahma and Antarctica and how you're looking, you talked a lot about Brahma already. But I mean, how you're looking at those three brands I think will be interesting to understand the dynamics. And my second question is to Lucas more regarding capital allocation, right? We're looking at CapEx down year-over-year. I'm not sure if that will continue to be the pace for the remainder of 2024. But as you guys pointed out right free cash flow has been strong despite the higher taxes. So I was wondering if you could elaborate a little bit more on how you're thinking about further capital allocation. Thank you.

Thank you for the question, Isabella. Now, let's discuss the core brands. Core experienced low single-digit growth this quarter, which we consider a solid performance. Our long-term goal is to align mainstream growth with the total industry, and it appears we achieved good results. Within this range, Brahma is performing exceptionally well, as we have prioritized it as a key national brand in Brazil. Additionally, Antarctica, which we view as a supporting brand, is also doing well, particularly in its regional premium offerings and core versions. When we look at the overall performance of Brahma and Antarctica, they are showing positive results, even though one part is experiencing negative territory. Nevertheless, we see mainstream growth rising in the low single digits. Lucas?

Yes. Hello, Isabella, thank you for the question. Isabella, with respect to CapEx, I think it's good to put the first half's performance and also kind of 2024 a bit into perspective. If you go back to the pandemic, we didn't refrain from investing during the pandemic. We made a decision perhaps to counter-cyclically continue to invest behind our supply footprint as we had an innovation pipeline coming through. And we needed to have more capacity, more spread out for the broader portfolio across the country. And we also decided to kind of go big behind B2B and B2C, which required also some tech investments. And so if you look at between 2020 and 2023, or 2022 better said, we went through this higher CapEx investment cycle. And since 2023 I think we've started to go through a lower investment cycle as we start to kind of reap the benefits of the investments that we made in the prior investment cycle. So I think in 2024, what you're seeing is a continuation of this kind of trend consistent with what we saw in 2023, so far lower than last year. And I think for the full year, I think it makes sense to think about all in all a lower CapEx investment. And when you double-click within the CapEx kind of the different CapEx line items, the bulk of it continues to go to capacity, investments to have again more of our portfolio the broader SKU assortment present closer to consumption also cost projects with obviously attractive ROIs. And then the third big destination is really around returnable packaging and tech investments, which were bigger in the previous investment cycle is now kind of – is at a lower level. So lower CapEx so far. I think for the year lower CapEx as well. And then connecting that to the second part of your question the capital allocation right mindset has not changed in the company. So we have good visibility around reinvestment for growth organically as I just mentioned, non-organic opportunities, right? We’re always in the water, nothing to report for now. And as we've seen historically at the end of the year which is when we have the greatest visibility around residual cash available to be returned to shareholders, the Ambev Board decides how much to return to shareholders. If you look at the last 10 years I believe, we've managed to pay out on average 80% of net income in the form of dividends and IOC. And so at the end of the year, the Board will reconvene. And we'll decide how much to return and in what form that will take, either dividends, either IOC, always looking to maximize IOC, and share buybacks are also a possibility. But again, this is a December conversation with the Ambev Board, right? Keep in mind that the bulk of our cash flow generation comes in H2, particularly in Q4. So we like to take this kind of decision which is more of a structural decision, with kind of full visibility or maximum visibility going into the next year, okay?

That’s very clear. Thank you. And Jean, just a quick follow-up if I understand correctly. Can we think that's call in this environment that you talked about Brahma and Antarctica has been still a volume detractor or not necessarily?

It's called in this quarter was a volume detractor, yes.

Hello, everyone. Lucas, why keep Ambev stock listed? We have you at six times EBITDA. And for perspective, Carlsberg just paid what like 14 times EBITDA for a pretty weak Pepsi bottler, 14 times more than double where you are at. Are there any conditions that need to be in place for you to start deploying some of your BRL 4 billion in cash to retire the float or for ABI to tender for it? I mean either one would be greatly accretive for ABI. Does the Board of Ambev at some point say, hey, if Latin American investors don't see value in our business, maybe we shouldn't be listed at all?

Yes, thanks for the question. I can’t speak on behalf of ABI for obvious reasons. From Ambev's perspective, we see value in being a listed entity. Brazil has always been and should continue to be our main market. We believe that being publicly listed in Brazil is important given the significance of our business in the country. Additionally, we have seen a positive impact on talent attraction and retention. One of the advantages we have observed is that our publicly listed status, combined with our management compensation model that aligns management's interests with those of shareholders, has helped us attract and retain great talent over the years and utilize our shares for that purpose as well. We've generated value and shared it with the company's partners over time. These reasons for being a public company still hold true today. Regarding stock buybacks, we recently completed our latest share repurchase program, initiated a few months ago, specifically to acquire stock for future share-based payments to our partners. We saw an opportunity to buy back stock at current prices and have executed nearly 100% of that plan, which you can see in our cash flow statement. As I mentioned in response to Isabella's question, we will discuss capital allocation with the Ambev Board towards the end of the year, and future share buybacks will be a topic for consideration.

Thank you very much everybody. Jean, Lucas thanks for the call. Thanks for the opportunity. Back to unit revenue in Brazil Beer, but maybe if we can focus more on competition, I guess you had been highlighting the share evolution of Brazil Beer in recent releases. I was wondering how you performed versus the industry in terms of share. If it's possible to break that down as much as you can by category or maybe for focusing on selling or sell out that would be helpful because our understanding at least initially was that some of your peers were more aggressive on pricing. But in the end it actually seems that versus what we saw in the first quarter, second quarter it seems that you gained some ground over your main competitors. So I don’t know, maybe it's an issue of discount activity more intense in the economic in the value side of the market, or anything that you can share on the competition and discount activity by your peers that would be helpful. Thank you very much.

Thank you, Ricardo, for your question. The beer industry in Brazil continues to show strong fundamentals. Our estimates of the industry and market share are based on various sources including sell-out data, industry production, our own volumes in direct-to-consumer platforms, and channel mix. We arrived at a figure that we use internally, which is why we don't discuss it much publicly since it reflects our estimates. We are very pleased with our performance, even though we still lack complete production data for the quarter. Petropolis is actively engaged in the market, but our company is under-indexed in the value segment, which seems to affect other competitors more. Overall, I can say that Q2 demonstrated strength in volumes as we worked to align our prices. The Brazilian market remains very competitive, but there are no significant surprises in the current conditions.

Hi, everyone. Good morning. Thanks so much for taking my question. It's actually a follow-up regarding the core portfolio and the strategic view of the company. So we are seeing that the premium and the upstream segments are growing more than the core portfolio. And, obviously, they will take a higher share in the company. The importance will grow over time. So my question is regarding the strategic view of Ambev today. So in the last 10 years or five years or the industry is really talking about the premiumization. Do you think that in the short-term can happen that the core portfolio will reward its strength or the company is looking at innovative portfolio like non-alcoholic beer? What is the next theme for the beer industry in Brazil? That's my question. Thanks so much.

Thank you for the question, Renata. Let's discuss the core and the industry. These are the two main points. The beer industry in Brazil is healthy and structurally improving, with the premium and super premium segments significantly outperforming expectations. I am pleased with Corona's performance and excited about the capabilities we developed over the past two years to strengthen the brand. With the Olympics currently taking place and Medina's impressive performance, our partnership with Corona has also been a highlight. I am excited that Spaten was recognized as the best pure malt beer in Brazil by experts and that Original continues to perform well. Overall, I am very enthusiastic about our performance in the core. If I maintain this strategy and keep our execution aligned with the total industry, our core will remain relevant and healthy at the current levels. I successfully delivered on this in Q2 and intend to continue this forward. The core is still very appealing to many Brazilians, and Brahma is performing well in various regions, especially in the Northeast and Midwest, contributing positively across our growth areas. Aligning our performance with the industry is key to our success. Additionally, Budweiser has grown significantly in the below premium segment and showed the strongest growth among our brands and competitors in the core plus segment. Our strategy has been to establish a presence between core and premium to seize opportunities worldwide, including in Brazil. Budweiser’s performance has been encouraging. Our long-term innovation strategy comprises 20% of revenues from products introduced in the last two years. Innovation continues to exceed the overall company market share. We are focusing on three avenues of growth to stimulate excitement in the Brazilian industry. One involves developing a portfolio of zero-alcohol beverages, including strong Brahma and our newly launched Corona Cero. The second avenue focuses on low-calorie, gluten-free options, represented by Michelob and Stella Pure Gold, which are gaining relevance. Lastly, our beyond-beer strategy targets sweet palate preferences, also performing well. In summary, we aim to keep the core relevant in Brazil while fine-tuning our strategies for core plus and premium offerings. We have consistently excelled in the high-end market quarter after quarter, and we plan to harness innovation to enhance frequency and penetration in the category by addressing barriers such as alcohol and gluten. The combination of these factors has driven strong volume growth, connecting the industry with the entire population and the new generation.

Great. Thank you. Let me just first echo Carlos Laboy's comments. The valuation really looks absurd to us and I would think there's opportunity. My question is to get more details on your award as the top Pepsi bottler. Can you talk to us a little bit about what metrics Pepsi uses to make that decision? And what changes you have made to improve your execution for Pepsi? And maybe does that tie into BEES and some of your other IT initiatives? Thank you.

Thank you very much for the question Robert. The first part I agree, okay? The second part, I will talk broadly about our NAB business and we are very excited about our NAB business. First of all, because we feel that the trends are in our favor. So, we over-index in the market share of the non-sugar products. So, we have something around 17%, 18% of market share in the total industry. When we go just for the portfolio without sugar, this goes to 30%. And we are seeing like strength and consumers really switching to non-sugar and in this process my portfolio gets stronger. We are seeing Guarana doing very well overall as a brand helped by the Guarana Zero new launch. We got it right. Three years ago Pepsi Black that is really something that is doing very well in Brazil. And so this combination of a good view on the portfolio of the future and the capabilities that this brought to us for us to really get innovation right. So, the combination of these few things is really doing the performance of the NAB business being very exciting. And then Pepsi, for the first time in 20-something years, elected us last year the best bottler in Latin America and this year the best bottler around the world. I think they do many metrics the upside on distribution. They got it right execution on brands the performance. I think they have a broad analysis on our performance that they don't share that much. But it looks like they are really happy with our performance. It's a long-term partner that we have. And we have many plans together moving forward thinking about how to accelerate Gatorade for example. We still don't have Gatorade Zero and we are just starting. It's a very relevant avenue of growth. We are talking about overall about energy. So, it's a great partner that looks like we are in a great place together with a lot of ambition for the business in Brazil.

Hi, Jean. Hi, Lucas. First of all thank you for taking my questions and congratulations on the results. I understand that you already mentioned lots of information regarding the pricing strategy, brand strategy, and performance in Brazil. Just to get some more details. We had a very favorable weather this year. So this was expected to be positive for beer consumption, but when we look at the industry data that doesn't really correlate. So if you could just comment on that or what could have happened or if this was a brand right not for all players in the market. And one more thing regarding Brazil, we saw a very steep increase in aluminum prices and then prices came down again. But the FX rate is at a very different level right now. So we could expect the COGS to be at a different level by maybe end of 2024 or even 2025? If it continues at this level, of course, do you think that could change the strategy from some peers in the Brazilian market, especially focusing on the economy sector? Or do you think in that environment you managed to have a better strategy? And just a very small comment from you guys. Do you think that we've reached bottom in Argentina? That's it. Thank you.

Thank you very much, Leonardo. I'll take the first and third questions, while Lucas will address the second one. The industry in Brazil appears promising, and we are enthusiastic about it. We are paying attention to external factors beyond just category relevance, including new generation innovation and other influences. The weather played a beneficial role in the second quarter, but we also need to consider rainfall, which negatively impacts our performance when it increases. We have seen more rain recently, adding complexity to the situation. Additionally, the job market, unemployment rates, and overall economic activity are positively affecting the industry. Regarding Argentina, April and May were particularly challenging months. While it's early to make definitive statements, it seems those months represented the lowest point for our performance there. However, June and July are showing signs of recovery, though we still have a long way to go. On a positive note, we are optimistic about Argentina's future. Our brands are performing well, and if the government implements the right measures, we could be well-positioned for a strong year in 2025.

Hi, Leonardo, Lucas here. Thanks for the question. In terms of where we are on the cost outlook, given our hedging strategy right pursuant to which we hedge on average 12 months out. What we're seeing today is a headwind in FX and so far as the BRL is concerned and a headwind in aluminum. So as of now it's a net headwind and nowhere kind of close to what we saw a few years back, but a net headwind. But we still have a good amount of hedging to do through the end of the year. So I think it's early to draw any sort of conclusions on what to expect going forward. Let us kind of implement the hedging, implement the hedging through year-end. And we'll come with more visibility once we have it. And in terms of what potential headwinds may mean, in terms of kind of competitive dynamics, the different levels of exposure that each player has and how they protect themselves varies by company. So we will continue to focus on our business. Our commercial strategy continues to execute it, continue to build our portfolio to deliver to customers, to deliver to consumers the best brand experiences that we have. So our focus is going to be on us. And the competition needs to see what they're going to do.

Can I add something on Lucas' answer just because we don't talk that much about it. But in the last three years, we invested BRL 1.5 billion in projects of cost efficiency. And there are a lot of things that are coming and maturing bottle supplier verticalization footprint production capabilities on North Northeast and Midwest. We are going through a massive productivity gain on this view of the amount of people per hectoliter produced. Especially during 2024, we aim to increase 6% this number of hectoliters per person total company in terms of production. So there is a lot of things coming on this matter today and moving forward.

Hi, guys. Thanks for the space to ask a question. My question is if you can slice the good performance of Brazil by channel and then tying it with the comments you already made with the competition with prices. I'm just wondering if this is sort of a maybe bigger competition at the bottom of the pyramid is more so in the cash and carry in the off-premise. And then how was your performance in the on-premise as well? In other words, how do you see your channel performance? And how has happened; you to deliver the good results in Brazil you delivered this quarter? Thank you.

Thank you, Lucas. Let me provide some insight into this question. One thing that is really capturing our attention and on which we are focusing is the current segment. We can analyze it in various ways, such as by channels and segments. However, what is experiencing significant growth for us is third-party distributors, which are those that do not involve direct distribution. This channel is one that we are actively supporting. As a result, we have completely transformed the relationship we have with our customers. We are managing logistics in a more streamlined manner, reducing capital expenditures. The wholesalers involved in this third-party distribution strategy are very enthusiastic and performing excellently across Brazil. This is important to note as it slightly alters our net revenue per hectoliter and changes distribution costs. Nonetheless, this segment is growing and is less capital-intensive. Overall, we are observing that the off-trade is performing slightly better than the on-trade this year, though not significantly. Additionally, we are noticing that the core plus segment is growing and was the most successful segment for us in the previous quarter. I’m not sure if my response directly addressed your question about the channel mix, but I aimed to provide a broader perspective on our various segments. So thank you very much. Thank you all who joined the call for your time and attention. We kicked off the year with a very good operational performance. And we maintained it during all the H1 delivering strong results in Q2. We are confident in volume specifically in Brazil and CAC given our commercial momentum despite Argentina and Canada tougher industries. Taxes will continue to impact our net income as you saw in H1. And we will continue to work to deliver consistent and sustainable results really focusing and trying to compensate this on the cash flow generation. So thank you very much. See you in October. Have a great day.

This does conclude today's presentation. Thank you. And wish you a nice day.