Earnings Call Transcript - ABEV Q1 2023

Operator, Operator

Good morning, good afternoon and thank you for waiting. We would like to welcome everyone to Ambev’s First Quarter 2023 Results Conference Call. Today with us we have Mr. Jean Jereissati, CEO for Ambev; and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website, ri.ambev.com.br, as well as through the webcast link of this call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company’s presentation. After Ambev’s remarks are completed, there will be a Q&A section, where we kindly ask that each participating analyst asks only one question. At that time, further instructions will be given. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 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. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today’s call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with first quarter 2022 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as a 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’ll turn the conference over to Mr. Jean Jereissati. Mr. Jereissati, you may begin your conference.

Jean Jereissati, CEO

Hello everyone. Thank you for joining our Q1 earnings call. During our last call, I had two key messages. First, that I was starting 2023 more confident than I started 2022 because of our business momentum, overall cost and expense inflation coming down, and our financial strength. Second, that in 2023, the plan was and still is to maintain top-line momentum and accelerate EBITDA growth with Brazil leading the way and international operations bouncing back as we continue to improve profitability not only in terms of ROIC, but also gross and EBITDA margins. Well, I was happy to see that in this first quarter, we delivered on both fronts. Top-line momentum persists growing above 26% ahead of costs and expenses. EBITDA growth accelerated nearly 40% year-over-year, which by the way was ahead of last year’s growth with or without taking Argentina into account with Brazil continuing to perform well while international operations are recovering. And profitability improved with gross margin expanding 290 basis points and EBITDA margin expanding 310 basis points. In other words, a good start to the year. Let’s see how we got there. In Brazil beer, according to our estimates, the industry grew mid-single-digit in the quarter backed by Carnival celebrations returning to the streets despite the rainy weather. Such growth, however, was partially offset by tough comps as the mask mandate was lifted in March last year. With that, our volumes grew around 1% with flat market share versus last year according to our estimates as our sellout volumes were higher than selling due to disciplined revenue management during the typically discounted carnival season. Our premium and super premium brands such as Original, Spaten, Stella, and Corona grew almost 35% and the core segment remained resilient thanks to consistent investments behind our brands and capabilities. The health of our super premium and premium focus portfolio continued to improve. We estimate our brands added over 700,000 fans versus last year and almost 4 million since 2019. Also, our relationship with our customers continues to make progress with NPS reaching over 60 points. Net revenue per hectoliter increased above 13% versus last year and almost 3% sequentially following our revenue management strategy. And despite expected pressure on cash COGS per hectoliter, EBITDA grew 24%, the highest increase since the first quarter of 2009 with margin expansion of 250 basis points supported by a deceleration of distribution expenses growth as well as savings initiatives on administrative expenses. In NAB, commercial momentum also continued. Volumes grew above 7%, thanks to a strong portfolio and wider distribution boosted by BEES. Pepsi Black grew over 200%, now representing 14% of the Pepsi-Cola portfolio and Guaraná Antarctica grew almost 7% led by Guaraná Zero. Net revenue per hectoliter increased almost 11% following a consistent revenue management strategy and a positive brand and pack mix. EBITDA grew 47% supported also by cash COGS per hectoliter growth deceleration leading to a 530 basis points margin expansion. Regarding our tech platforms, our marketplace in Brazil continues to go in the right direction. GMV grew by 36% versus last year, and cash gross margin increased 790 basis points. We have been working with our partners to expand the offering of their set of products as we still see room to improve SKUs per customer on top of continuing to expand the assortment of marketplace products. After the FIFA World Cup and carnival activations, Zé Delivery’s awareness continued to grow sequentially, and it is present in almost 450 cities in Brazil. As a result, Zé reached five million monthly active users and GMV grew 5% versus last year. Turning to our international operations, in LAS, the macro environment remains a challenge, bringing volatility to our operations and inflationary pressure on disposable incomes. Volumes decreased almost 8%, driven mostly by Argentina and Chile. Revenue grew 66% driven by revenue management initiatives, especially in Argentina, which supported EBITDA margin expansions of 600 basis points. In Argentina, despite industry decline and our market share going slightly down, premium brands gained weight in our portfolio. Our plan to perform operational hedging continues to evolve, and we are more agile in making decisions to protect our cash flow generation in dollars as macro conditions change. The decision to lower the coverage of our financial hedge still stood this quarter and resulted in improvements in cash flow. In Chile, volumes suffered mostly due to continued industry slowdown, even with less volume, EBITDA improved supported by expanded local production capacity, reducing import levels. Bolivia, on the other hand, grew volumes as it continues on the recovery path after COVID-19 restrictions last year. In CAC, sequential improvement continued this quarter; revenue is back to growth driven by net revenue per hectoliter and gross profit grew almost 9% after a year of decline. EBITDA declined by 2% as we lap it over a low base in SG&A. The Dominican Republic continues ahead in terms of recovery. Volumes grew by low single digits led by the Presidente brand family, which suffered from lack of bottles last year. In Canada, volume grew by 5%, driven by both industry lapping historically bad weather and COVID-19 restrictions in early 2022 and estimated market share gains in both beer and beyond beer. Our premium brands led the pack, growing above 10%. In terms of brand health, our above-core brands are healthier with a highlight to Corona, having the highest brand power in the country. Net revenue per hectoliter grew above 9% following the revenue management strategy and favorable mix impacts, and EBITDA grew 3.5%. So the numbers for the quarter were good, but one thing that I would like to highlight today is that in order for Ambev to do well in a sustainable way, our ecosystem also has to do well. On the last call, I mentioned why I believe that the company is more and more solid from a cultural, operational, and financial perspective. What I did not mention was that it’s not just about us, but it’s about the whole ecosystem. Our platform serves a purpose that goes beyond the company itself. For instance, as I mentioned before, it has been great to see a number of fans of our brands growing and our NPS with customers continuously improving. Another piece of information is that the NPS with our suppliers also reached the highest level of the past six years, as we have been collaborating more. We are also proud to see that as a result of our partnerships and relationships with different stakeholders of our ecosystem, we obtained significant results in terms of reputation, with Merco, the leading corporate reputation monitor in Latin America, ranking the company in the second place for the fifth consecutive year in Brazil and in the first position for the sixth consecutive year in Bolivia. In Argentina, we evolved from fifth to fourth place. And finally, in terms of value creation, the value that’s being created is also being shared with our ecosystem. To illustrate this point, I wanted to share some data from our value-added statement contained in our financials. In the first quarter, we generated roughly BRL 30 billion in gross revenues, of which approximately BRL 14 billion were paid to suppliers, about BRL 8 billion in taxes were collected. Remuneration of our people and third-party capital were about BRL 1.8 billion each. Potential remuneration to shareholders corresponded to about BRL 3.8 billion. What this all means is that as Ambev grows, the ecosystem also benefits and for Ambev to grow sustainably, the ecosystem also needs to thrive. And this is important to us as we think about creating a future with more cheers. Now looking ahead, we continue to expect 2023 to bring both challenges and opportunities, but I remain confident that we are on the right track and the team is committed to deliver once again. Short-term volatility and challenges vary market by market, but we believe that our long-term strategy is sound, and we will continue to focus on the things we can control and on executing our plan to deliver our ambitions for the year, which is continuous and consistent growth with profitability. In terms of growth, we are talking about Brazil’s momentum and we are talking about international operations recovery leading to a consistent top and bottom line growth. And in terms of profitability, we are talking about not only improving ROIC once again, but also looking to improve growth in EBITDA margins as top-line momentum remains while costs and expenses headwinds continue to ease. So having said all that I would like to thank you all, and let me hand this over to Lucas. Thank you.

Lucas Lira, CFO

Thanks, Jean. Hello everyone. I would like to kick things off by putting our Q1 performance into perspective in terms of what we expected would be the same and what should change during this year compared to 2022. Starting with what would be the same, first, top-line growth remains a key priority with net revenue performance once again driven more by net revenue per hectoliter than volumes. The result was nearly 27% net revenue per hectoliter growth with consistent performance across our regions. Second, we expected a tougher Q1 given higher input cost pressures, but this time more from commodities than FX. The result was cash COGS per hectoliter increased about 20% driven mainly by the timing of our barley and aluminum hedges. And third, our focus on value creation drivers, such as return on invested capital, economic profit, and free cash flow generation all remain. The result, cash flow from operating activities declined almost BRL 1 billion year-over-year, driven mostly by payables. Q1 payables are historically negative given the seasonality of our business, which has Q4 as our strongest quarter. Specifically with respect to Q1 2023, the decline is mainly a result of three things. Number one, lower non-income tax payables in Brazil given lower sales volumes versus March 2022. Number two, lower volumes in CAC. And number three, a tough comp on non-income tax in Canada. However, for the full year, we expect cash generation to improve. Now, regarding what should change this year. First, we expected our cash COGS per hectoliter for Brazil Beer, excluding non-Ambev marketplace products to be significantly lower than the 16.6% growth in full year 2022. The result was cash COGS per hectoliter rose about 15% and we expect this performance to improve materially during the remainder of the year as our aluminum hedges become a tailwind and the benefit from our FX hedges increase from Q2 onwards. Second, SG&A growth should improve given lower inflation overall as well as the implementation of internal restructurings designed to streamline and optimize our B2B, D2C and fintech technology big bets. The result was cash SG&A grew 27% with administrative expenses growing 17% as we begin to capture projected savings, particularly in Brazil. And third, CAC in Canada to deliver organic EBITDA growth. The result was CAC EBITDA was still about 2% below Q1 2022, but once again showed sequential improvements with the nearly flat EBITDA performance in the Dominican Republic, and Canada EBITDA was back to growth delivering 3.5% improvement year-over-year. Our EBITDA reached BRL 6.4 billion in the quarter in our organic growth of almost 40% year-over-year, and which is 8% above our compiled consensus that we now disclose on our website. So we start the year definitely on track to deliver better organic EBITDA growth in 2023 than the 17% organic growth we delivered last year. Turning to our net income performance. Normalized profit totaled around BRL 3.8 billion in Q1 in organic growth of about 8% year-over-year, and which is 22% above our compiled consensus. This performance was driven mostly by the EBITDA growth we delivered, but also due to net finance results growing at a lower pace. Here although on the one hand, interest expenses increased mainly due to fair value adjustments of payables pursuant to IFRS 13 and losses on non-derivative instruments that were primarily a result of non-cash losses on intercompany balance sheet consolidation and third-party payables increased. On the other hand, losses on derivative instruments were actually lower than last year because of lower carry cost expenses in Brazil and Argentina. As you may recall, starting in Q3 2022, we have gradually reduced our financial hedging in Argentina, and this decision led to a positive year-over-year impact this quarter. Before moving to Q&A, a quick update on tax litigation in Brazil. Since our full year 2022 earnings call, there have been new developments in some of our relevant cases that are worth mentioning. Accordingly, the Brazilian Supreme Court and the administrative tax courts recently issued rulings in connection with certain of our tax positions involving approximately BRL 9.5 billion that are classified as a possible but not probable chance of loss. And the good news is that the results were mostly favorable to the company, some of which we’ve already reclassified from possible to remote chance of loss. We expect the administrative and judicial courts to continue ruling on certain of our tax positions in the coming months, such as tax assessments received in connection with the deductibility of the IOC, the deductibility of goodwill amortization expenses, and the Manaus free trade zone, as well as the case related to the ICMS substitute in the taxable basis of the PIS and the COFINS. We will keep the market updated accordingly, and as we mentioned before, we believe in the merits of our legal position and that we will ultimately prevail. Finally, we will publish our 2022 ESG report on our website in the next few days. Stay tuned. That’s it for me. Let’s go to Q&A.

Operator, Operator

Thank you. We’ll now be conducting a question-and-answer session. First question comes from Lucas Ferreira with JPMorgan. Please go ahead.

Lucas Ferreira, Analyst

Hi, good morning everybody. I hope you’re hearing me well. My question is regarding your outlook for volumes, in the beer volumes in Brazil. From listening to your comments and also looking at some industry data, apparently March was a fairly weak month. I don’t know if you know parts of Brazil. But just wondering if you have any views on why March was so weak and how if you see a rebound in volumes in April or eventually in May. And your overall expectations given the tough comps for the second quarter and third quarter if you think these comps are really tougher than the first quarter, like you said, it’s tough. So, your outlook for volumes for the remainder of the year. Thank you very much.

Jean Jereissati, CEO

Okay. Thank you very much, Lucas. So I mentioned in my call that we are 7% in this quarter above the 2019 levels. So this is an important number for us to keep following because there was a lot of noise during the pandemic and back and forth, but this quarter we were 7%. Something happened this quarter, so that our sellout volumes were ahead of our selling volumes. We kept our revenue management strategy disciplined while we saw overall market competitors really intensifying promotional activities. So that was one of the reasons why we couldn’t put more products out in the trade. But overall market share with consumers with sellout volumes, they were okay, they were in line. When we think about the performance compared with last year, in reality we did good in January, but could have done better in our view because of this promotional activity and our discipline on revenue management. We knew that March and April would be tough comps because masks were lifted in the previous year. They were good months when we think on a broader deseasonalized volume level for a given March and April in a historical context. So in terms of deseasonalized, it was okay. We have to wait a little bit more to understand how it’s going to go May and June to really give a proper more colored outlook on the year. But we are confident market share sequentially is growing, it is going up. Our brands are strong. The minimum salary is coming. So somehow we believe that it will be a good year in terms of volumes.

Lucas Ferreira, Analyst

Perfect. Thank you, Jean.

Operator, Operator

Thank you. The next question comes from Camila Azevedo with UBS. Please go ahead.

Camila Azevedo, Analyst

Hi, Jean and Lucas. Thank you for taking the questions. My question is about BEES. So could you give us more color on what drove the deceleration of the growth coming from BEES? Thank you.

Jean Jereissati, CEO

Okay. So yes, so we are probably talking a little bit about the marketplace, right? We are talking about this as responsible overall for 88% of our customers and 75% of our volumes are really covered by BEES. We are very proud that we reached 1.1 million customers accessing BEES and making their orders at some point in time. Customers are spending more than 20 minutes in the app per week. 95% of them are registered in our reward program. So the platform is – and our NPS went to above 60 in the first quarter. And all this is really related to BEES. Now talking about the marketplace, the GMV of non-Ambev products sold, we reached 400 million this year. It was 36% above the last three years. Looking at our portfolio, there is some seasonality. When we think sequentially when Q4 is compared with Q1. So we have a part of our portfolio that we are trying to learn about how they perform in terms of seasonality. So we have hard liquors, we have water, food. There is a seasonality that we are learning, but compared with last year, it was 36% above. Now we have more than 630 SKUs. There is this opportunity to increase. And we are really working on building deeper alliances on that. So we are learning with the GMVs and how each product performs month by month. But I would say that I’m happy. So if we – another thing is that the gross margin of the products that we had this quarter were much better than the gross profit that we had last year. Last year we were with a lot of commodities; now we have alliances and brands. So somehow I’m confident with the potential of the marketplace platform. It will sweat our assets, low investment with good returns and increasing margins and consistent growth.

Camila Azevedo, Analyst

Thank you, very pleased.

Operator, Operator

Thank you. Next question comes from Thiago Duarte with BTG Pactual. Please go ahead.

Thiago Duarte, Analyst

Thank you. Hello, Jean. Hello, Lucas. Hello, everybody. I have a question and a follow up. I’ll start with a follow up on the remarks regarding working capital in the beginning of the call, Lucas, and this actually circles back to discussion we had in this call last year with regards to working capital consumption. So I appreciate the one-offs that you clarified to us. But looking at the level of working capital of the business relative to sales or to costs, it looks like the cash conversion cycle of the business has worsened. So I understand the seasonality, understand the tax payables adjustments in Canada and so on. But just wondering if there is something else that could be changing in a more structural way regarding the working capital intensity of the business, so we can think of this line going forward would be great to hear. And the question more on a big picture level is with regards to top-line health and top-line performance and brand health. I mean, Jean, you mentioned in your remarks and you guys put in the earnings release that the brand health is improving, particularly talking about Brazil Beer. So just wondering what kind of metrics you’re looking at to think of brand health, which brands are performing better and which brands are performing not as well? And how that drives in your view going forward the capacity of the portfolio to recompose margins via pricing without jeopardizing share or the category, which is something you guys have been putting a lot of effort into preserving in the last few years. So just if you could summarize a little bit how that impacts the capacity of the company to drive pricing that would be great as well. Thank you.

Lucas Lira, CFO

Go ahead, Mr. Jean.

Jean Jereissati, CEO

I will – okay. So I’ll get the second one, Thiago, and then Lucas will go back to the first one. So – yes – so when we present our strategy, the pillar, number one and number two is really about having love for brands as pillar number one. Pillar number two is really about our ability to innovate. So these are the most important topics of our strategy. We follow a metric that we call the number of lovers that I mentioned, so the number of consumers that mention that they love one of our brands has been growing. This is more of a portfolio metric for us to understand if the overall portfolio has been more loved. So we increased this metric by 4 million consumers when we compared to pre-pandemic levels. In the short-term, we increased 700 thousand lovers or fans of our brands that mentioned that one of our brands became one of the brands that they love. Another metric is really about the brand power. The brand power is a metric that we believe represents future market share. We are doing well in this metric. The brands that are performing well include Corona, Spaten, Stella, Budweiser, and Brahma. Original is also doing very well. The long tail will suffer a little bit more, so we are seeing some struggles with Bohemia. But the focus brands—the brands that we prioritize—are doing extremely well. If you look at our net revenue per hectoliter this quarter, it was well ahead of the consumer pricing, we’re gaining a big chunk of it, that was really the high-end performance, the high-end premium performance, and the brand mix. So we are seeing these brands really being able to grow and drive mix and even to sustain more price than we previously expected. For example, you know that when we designed the innovation strategy for the company, we brought Spaten with the view that the core plus segment, the entry-premium, core plus segment would be a wide space that we should bring international brands with quality cues, and heritage and performing so well that now we are seeing Spaten grow and it went from about 125%, 130% price index to really 140%, 145%. So as it grows, it’s really been sustaining higher prices. So this is one example. So yes, significant part of our strategy regarding pricing on brands is really to strengthen our brands to gain market share and drive mix and price growth. And this is working. So a big part of this net revenue per hectoliter that you saw was due to this strategy.

Lucas Lira, CFO

Hi, Thiago. Lucas here. Thank you for the question. In terms of the cash conversion cycle kind of being structurally worse, I think the short answer is no. Okay. The reason for that is I think, as you know, we have right, a negative working capital and given the seasonality of our business, Q1 is typically a quarter of less cash generation, and Q4 is actually the quarter where the bulk of our cash flow generation and our performance in terms of working capital really moves the needle, okay? So I think it’s important not to necessarily draw any longer-term conclusions based on Q1 performance. It’s important to look at the full year. But speaking specifically about Q1, I focused more on payables in my prepared remarks, but I think it’s important to break down and give some – shed some light also on receivables and inventories. Okay? If you start looking at receivables in Q1 2022, we actually had a monetization of tax credits of about BRL 600 million. That positively impacted our receivables performance last year, whereas this year, we didn’t have any relevant monetization of tax credits. Okay? So that’s an additional element that needs to be factored in when looking at the year-over-year performance of our working capital, and so far as receivables are concerned. In terms of inventories, the performance was actually positive because we continue to actively manage inventory planning, not only of raw materials but also finished goods. And so I mean, we continue to focus on the levers we control and having a lot of discipline to make sure that our cash conversion cycle, which historically has been one of our strongholds, obviously it’s a high threshold for us, but we’re continuing to look at ways to sustain and/or improve our cash conversion cycle. Okay? Then just to add a little bit more on the payable side. As I mentioned in my prepared remarks, the biggest impact came from Brazil. Okay? This was mostly non-income taxes payables because given the way tax collection mechanics for State VAT for excise taxes work in Brazil, taxes that are owed given March volumes are actually paid in April. So the higher the volumes are in March, the higher the payables. The opposite is also true. And this is exactly what happened this time around; March 2022 volumes were very high, as Jean mentioned. So more payables. In March 2023, we had a tough comp, volumes declined, so less payables. This is a temporary effect and should not be a relevant factor from a full-year perspective. Okay? So that’s the first issue we faced this time around. The second issue was a decline in CAC volume leading to lower payables. Generally speaking, lower production volumes lead to lower payables. Our payables for the region ended up being impacted by volume decline. But as volumes continue to recover, this should translate into improvements here as well as we look ahead. Lastly, we also had an issue in Canada. It was a specific impact, also non-income tax related, and this was a H1 2022 effect because payables were positively impacted by tax deferrals in Ontario to cope with COVID-19 recovery. This was not the case this quarter. Again, looking at the full-year picture, these things should even themselves out. I would invite everybody to focus more on the full-year picture reminding everybody that Q4 is the needle driver, the needle mover for our cash generation and our working capital performance. Clear?

Thiago Duarte, Analyst

Very clear. Thank you both.

Operator, Operator

Thank you. The next question comes from Carlos Laboy with HSBC. Please go ahead.

Carlos Laboy, Analyst

Yes. Hello everyone. Jean, I was hoping we could go back to a conversation from a couple of weeks ago regarding driving a new culture. You modified the behavioral model and emphasized three new core behaviors, right? Active listening, collaboration, and long-term thinking. But as you reflect on recent events in the ABI systems, are these behaviors, how do you modify these behaviors to think about risk and risk vigilance? Are those behaviors perhaps too geared toward revenue enhancement? I’m asking because reputational risk can come from many unexpected places. Sometimes they just happen to you, as in the case of Lojas, but sometimes they come from within the organization too unexpectedly. How do you think about mitigating reputational risk? And how do you integrate that into the culture of your organization based on the reality of what you’re looking at in Brazil?

Jean Jereissati, CEO

Thank you very much for the question, Laboy. Yes. We’ve been on a journey; everything evolves. Biology evolves, culture helps evolve, and we have this clear view that the growth matrix that we need for the future had to, so we had to evolve on our culture to maintain, first of all, the great traits that we have in the company, where people think as owners and that act with integrity and accountability. This is a very important trait that we’ve always had. So this ability to dream in our company has to continue, but we had to really bring more listening, collaboration, and long-term vision. I’m happy with this journey. Of course, it takes time for you to see the organization performing. Culture is truly about habits and is about example. It is about living every day and talking about the listening, collaboration, and the ability to think horizon 2, horizon 3, while making decisions. We’ve been living this in our company. When it comes to reputation, a company’s reputation is my responsibility. It's the responsibility of each person that works here. We know that we live with that this is personal to us. We take it very seriously. What we are doing, so more and more, is really to be able first to talk about everything that is happening inside the company and to talk about our company to the outside world. We are proud of the things we are building and the things we are doing. We are very confident about this transformation we are living and this top-line growth we are having. We trust our management model. This is about taking responsibility and being completely transparent inside the company and outside the company.

Lucas Lira, CFO

Yes. If I may just add one thing, Carlos, to your question about managing reputational risks, especially in the short term, given all that’s happened since the beginning of the year here in Brazil. One of the things that happened in 2020 when COVID hit was really a decision on our part to be there for our ecosystem. That applies to consumers, to customers, to wholesalers, to suppliers, and to local communities. This was genuine, intentional, and deliberate because we thought it was the right thing to do. We needed to be there given what was happening in the country at that time. Fast forward two to three years, one of the things that really caught our attention in Q1 was the support that we got from the ecosystem was really impactful for us to see consumers standing by us, to see customers standing by us, to see suppliers and wholesalers really stepping up, even former employees of the company being vocal about the company, what we’ve been doing, why we’ve been doing it, and how we’ve been doing it. This really struck a chord with us and I think is a good illustration of how our consistent focus on building and improving on the cultural revolution and the reputation of the company is important as a matter of principle.

Carlos Laboy, Analyst

This is very thoughtful and impressive. Thank you.

Operator, Operator

Thank you. The next question comes from Isabella Simonato with Bank of America. Please go ahead.

Isabella Simonato, Analyst

Thank you. Good afternoon Jean and Lucas, thank you for the call. I have two questions mostly on the international division. Starting with LAS, I think this quarter showed a great focus on pricing even though volume suffered. And combined with the hedging strategy mainly for Argentina, is this something we should continue to think about for the upcoming quarters? I mean even though macro conditions should be tough and price elasticity should be higher, will pricing be the key focus here in a way to maximize this equation for the company? And just to come back and try to relate this with cash flow in any sense? I mean, Lucas, is there any impact in working capital from this procurement strategy in Argentina? Or nothing that we should be concerned about? And the second question is on Central America and Canada. I mean, obviously it has been a tough recovery on the margin side and on the top-line side, I wonder if you could give us more color on what you’re looking at in terms of recovery going forward? What will be the drivers, and eventually the timing of a more normalized level of results? Thank you.

Lucas Lira, CFO

Hi, Isabella, thanks for the question. Let’s Jean start off on the top-line aspect of Argentina, then I can complement.

Jean Jereissati, CEO

Yes. So thank you for the questions, Isabella. Yes, regarding LAS, talking about LAS, we have some countries over there. Of course, Argentina is representative, but we have Argentina, Chile, Paraguay, and Bolivia. We’ve been working for a while in LAS to really help LAS shine. The truth is that we entered 2023 more productive overall. We knew the democratic scenario is volatile. So we really were more efficient over there. If you look at Chile, the capacity expansion has made us much more agile in terms of supply. If you look even at Argentina, we are really working with cost discipline over there. So overall, LAS is more productive, more efficient. It is lighter because we were kind of overpaying for protection to feel secure there. So LAS is really lighter, and the discipline on pricing execution is a priority for us over there. That’s why you saw the P&L that performed very well. It’s not just Argentina; Chile performed very well compared to the previous year. In Bolivia, we saw volumes going in the positive direction. Paraguay overall has momentum in all the lines doing well. But with the volumes, we had a steep decline; I think the volatility is more related to the country's inflation which is always rearranging. I would not say that this type of volume performance would stick around. So there is the adjustment zone on salaries, and everything, even in Chile that had a tough industry in Q1 too, we see it getting better month by month. So overall, LAS we are very prepared for the volatility. We are more efficient, disciplined, and pricing is really what matters for us now. Volumes, I think that will be better than what we saw in Q1. Lucas, on the financial side.

Lucas Lira, CFO

Okay, so hi Isabella. On the hedging side to put things into perspective, it’s also important to remind everyone that since our decision in Q3 of last year to start reducing our financial hedge came alongside a decision on our part to elevate the focus of the organization around free cash flow in U.S. dollars as a key KPI to define success in Argentina going forward, just given the environment that we’re facing in the country. As a result of this decision to elevate free cash flow in dollars as an important KPI, what this has translated into on the hedging side is to continue to have some protection in Argentina, but not to the same extent we had historically. We continue to operate below the average of 12 months of the hedging policy, and we continue to be right below 10 months, as I mentioned last time. This continues to be a reality. But given the current market conditions, we are now looking on a monthly basis at how much to hedge. This is a monthly exercise carried out with the local team to see what’s the right optimal level of financial hedge that we should carry going forward considering currency performance, carry cost, and trying to optimize that balance. This is the important message on the financial hedge side. On the operational hedge side, we made good progress in Q1. We challenged ourselves to review the full suite of our agreements with suppliers to see what could and should change and how to implement that in dialogue with our suppliers. We made good progress during Q1, slightly ahead of what we originally had planned for. So we are making good progress in that area. The working capital aspect is also under constant management and attention due to the volatility. So the cash conversion cycle for Argentina currently is going to be different than in previous years. And we’re constantly managing to find the best balance of factors impacting cash flow generation. So far, so good in Q1. We need to be disciplined in our approach. On CAC, we have made okay progress this quarter. The highlight in terms of sequential improvement continues to be the Dominican Republic, which is important because it’s our biggest market. Despite inflationary pressures locally continuing to impact the volume recovery pace, we continue to make steady progress. In terms of drivers for the Dominican Republic, we’ve seen improvement in the coverage of the 22-oz Presidente bottle, suggested price adherence with customers, and inventory levels for this SKU continue to improve sequentially, which translates to additional positive performance metrics. Net promoter scores are also improving. So, no silver bullet for recovery, but we know what we have to do. The team is confident in their ability to sequentially continue to recover. How much time it will take, time will tell, but we’re talking about quarters, not years. We need to get the Dominican Republic back to where it was pre-2022, which required us to execute across the board. Hope this helps.

Isabella Simonato, Analyst

Sure. Thank you very much.

Operator, Operator

Thank you. The next question comes from Ben Theurer with Barclays. Please go ahead.

Ben Theurer, Analyst

Yes. Good morning or good afternoon. Thank you very much for taking my question. Just JJ maybe following up a little bit on the development of BEES and Zé Delivery just on the electronic platforms, you’ve had a very successful story here in all markets growing the penetration. Depending on the region, somewhere between 70, 80 if not even more percent usage, where do you see the potential to get this even higher? And what do you need to do in order to get maybe those last customers converted as well, just as it feels like you have better loyalty with those than maybe what you used to have in the past? Thank you.

Jean Jereissati, CEO

Thank you very much Ben for the question. So BEES, our focus is to deliver the best solution to our clients and consumers with there, talking about BEES specifically. So the majority of our customers are out there, but we have to learn that in terms of that we have always been evolving in terms of users experience. So we are learning customer by customer how we can deliver a better experience. Sometimes the customers have a big assortment that they prefer to order from a computer, not a cell phone. So there is a lot of learning consumer by consumer for us to evolve and provide different services, overall products, and categories. We still have the wholesaler, we still have the sales representatives helping the customers overall. We are seeing that these two things combined, the platform and the business representative, are actually helping to bring more information to evolve the UI, upgrade services, and get better usage. The majority of BEES is already the platform of our customers; they are using it widely. Thinking about the future and the growth of it, we have a huge addressable market that BEES can address. There is an opportunity for increasing the number of SKUs per client, increasing overall distribution and frequency. We are learning a lot from the partnerships that we are executing. It’s really about understanding the industry pain points, and understanding the customer pain points while upgrading UI, user experience, and services. We are just beginning this journey, and we are very confident about the potential compared to other platforms we have in the market. We have made great strides in advancing ahead.

Ben Theurer, Analyst

Thank you.

Operator, Operator

Thank you. The next question comes from Gustavo Troyano with Itaú BBA. Please go ahead.

Gustavo Troyano, Analyst

Good afternoon, Jean, Lucas. Good afternoon, everyone. So Jean mentioned that the goal for this year was to improve both gross margins and EBITDA margins. I’d like to explore your SG&A expenses for 2023, especially in Brazil. From a COGS perspective, it seems that the upcoming quarter should be better than the first one as commodity prices decelerate, but from the SG&A standpoint, should we expect EBITDA margins to increase ahead of gross margins? Specifically on commercial expenses, I’d like to hear from you about the strategy of the deployment curve of sales and marketing throughout the year. How do you see sales and marketing expenses in this first quarter and relative to the upcoming quarters? If you consider that this quarter was closer to a heavy quarter in terms of investment and sales and marketing. And also, I was wondering if you could share an overall view for your SG&A perspectives as we move into the second half of 2023 and if there are efficiencies to be captured in these lines. Thank you very much.

Jean Jereissati, CEO

Okay. So let me get half of the question and then Lucas will jump into the other half. Overall, we think that what we will see overall in Ambev P&L, is that there is an opportunity for SG&A transforming into margins for EBITDA margins. We should improve that over time. We grew a lot in the company in the previous two or three years. We’ve been since last year doing a great assessment on a new way to operate our company, a new way to work. We really had a company that at some point was very siloed that we have like divisions and the NABs were one, Zé Delivery, the BEES and everyone has their own structures. We really moved into a company that understands itself more like a platform. There is a lot of change in the way we operate in our structures and how we think about the business. We can integrate more effectively. There is a stream of value and efficiency that comes from this vision that we’re going to see in the next quarters. We’ve been working on it for six months to a year now. On the distribution part too, we are gaining a lot of scale and when we think about all these orders and volumes, there is an opportunity to be more efficient and synergize in the distribution. Moving forward, we are going to see diesel prices going down. In sales and marketing, we are ramping up. This is something that we want to continue to invest in to support the portfolio, support our brands. Overall, this is a little bit the picture of Ambev. In Brazil Beer should be more or less this vision that should be replicated in Brazil overall, not just Brazil Beer but Brazil as a whole when we are looking at NABs and beer together.

Lucas Lira, CFO

And just to add, I think looking ahead, Gustavo, just to give you a way to think about it directionally. For the reasons Jean mentioned around the opportunities that we see to streamline and to optimize our structure so far as the technology platforms are concerned, we should see reductions. Within the three of them, but also with what we call the machine, the legacy business. If we continue to deliver well as we did in Q1, this would translate into a lower year over year growth for admin expenses, number one. Followed by lower growth in distribution. Sales and marketing will depend on how we execute our plan for the year. We want to continue to invest behind our brands. The portfolio has momentum; the health indicators don’t let me, and don’t let me lie. So we’re not going to compromise on sales and marketing investment because that helps the short term and builds the long term. The good news is we’re off to a good start on the admin side. We’re off to a good start on the distribution side. To the extent we continue to deliver, these should grow at a lower pace than sales and marketing. But net-net, SG&A hopefully will help us deliver better margin performance at the EBITDA level this year.

Gustavo Troyano, Analyst

Thank you, Jean and Lucas. That’s clear.

Operator, Operator

Thank you all very much. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jean Jereissati for final remarks. You may proceed, sir.

Jean Jereissati, CEO

So thank you everybody, all analysts, everyone who joined the call for your time and attention. The first quarter of the year was solid. Strategically, operationally, and culturally we are feeling very strong and solid. Brazil continues to improve and grow. And international operations are rebounding. Top line recovery, gross margin expansion, and EBITDA margin expansion happened already in Q1. Our ambitions for the year are that top line growth remains a key priority with net revenue performance driven more by net revenue per hectoliter than volumes. Profitability, both in terms of ROIC as well as margins and free cash flow generation improvement is what we want along with EBITDA margin expansion with and without Argentina. It’s a must for us. So thank you very much, see you in August and have a great day.

Operator, Operator

This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a great day.