Earnings Call Transcript - ABEV Q2 2021

Operator, Operator

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev Second Quarter 2021 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. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks and 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 the 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 second quarter of 2021 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit EPS, EBIT and EBITDA on a fully reported basis in the earnings release. Now I'll turn the conference over to Jean Jereissati, CEO for Ambev. Mr. Jereissati, you may begin your conference.

Jean Jereissati, CEO

Good morning, good afternoon. Thank you very much for joining our second-quarter earnings call. I hope you and your families are well and safe. This quarter, we completed one year since the negative impacts of the first wave of COVID-19 pandemic. And I'm happy to see that the choices we made in the last 12 months continue to deliver results. We achieved the highest consolidated volumes in the second quarter on record, which led to an all-time high rolling 12 months volumes, 5 million hectoliters above the peak back in 2015. We have previously mentioned that we were better prepared to navigate challenges brought by the pandemic but at the same time, we also got ready for the economic reopening as vaccination rates increased. Our commercial strategy, innovations, tech platforms and operational excellence supported once again our performance as mobility restrictions were partially lifted in many of our markets. Nine of our top 10 markets delivered volume growth versus last year, and seven of them grew volumes ahead of 2019. Net revenue per hectoliter continued with solid growth driven by a flexible and agile approach on pricing and premiumization efforts. Our above core brands continue to gain relevance within our portfolio. Our international operations continued the recovery best in the quarter growing top line ahead of 2019 and helping to offset transactional FX impacts on a consolidated level. In fact, top line growth was led by the Dominican Republic followed closely by Guatemala which continues to show good momentum. Panama is bouncing back from tighter restrictions. In fact, we grew volume ahead of 2019 levels. In Argentina and Chile, our global brands showed again a great volume performance. Driving premium mix which supported margin recovery versus last year in both countries. Bolivia, on the other hand, remains impacted by the pandemic where we continued focusing on preparing the company for recovery, Canada still suffered from mobility restrictions however, delivering growth in top line in EBITDA. In July, we saw restrictions being partially lifted as vaccination rate reached more than 50% of the population. Brazil beer continues to show great commercial momentum with double-digit volume growth versus 2019. This was also the fourth quarter in a row that we gained in market share according to our estimates and that innovation continues to represent more than 20% of our revenues. We grew volume in all segments with highlights to our premium portfolio that grew volumes by approximately 35%. This comes with more than 70% of our active customer base helping Ambev to reach all-time high customers for both beer and NAB as well as all-time high customer satisfaction measured by NPS rating in June. While reaching BRL9 billion of GMV this quarter, Zé Delivery fulfilled more than 15 million orders, continuing to grow significantly versus last year. Talking about brands, we continued to invest in our portfolio and I'm glad to see the growth of our brand power metrics and the recognition of our marketing team at the Cannes Lion Awards in France. Ambev received seven prizes, two golds, three silver and two bronzes from campaigns in Brazil and Argentina. In the first half of the year on a consolidated basis, EBITDA grew 25% versus 2020. However, we are still 7% behind 2019 impacted by commodity headwinds and SG&A expenses for the second half. Our outlook remains unchanged; we are on track with our V-shaped top line recovery despite all challenges. We will continue to pursue volume performance at this new rolling 12 months levels reached in the last quarter. Cost pressures will continue, especially in Brazil. As for bottom line, normalized consolidated EBITDA performance for the full year should improve as we work to get back to 2019 levels. On a longer-term perspective, we are building an ambidextrous organization focusing on delivering the short-term while at the same time transforming our business for the future. As we continue this journey our business vision is to transform Ambev into a platform with inspiring brands that connect people and the ecosystem creating shared value. As part of our transformation, today I would like to talk about our fintech, Donus. We believe that our customers can increase their chances of success if they become more digitized and have access to more insights, more adequate financial resources, lower bank and financial transaction fees and even more convenience. Today, more than 80,000 customers registered on Donus can enjoy solutions such as POS terminals, digital wallets and credit lines. On the credit lines, we believe our long history with customers makes our credit scoring assessment very reliable. So far, default rates are within expectations and we are now fundraising to expand this operation. In 2021, our focus is to rollout Donus across all distribution centers in Brazil as we did for BEES starting last year. To close, our top line momentum is real, and we put this to the test in H2 given the excellent results we had last year. And I'm confident in our ability to keep taking our business to new levels, and I would like once again to thank the Ambev team for their dedication during these tough times. Thank you very much for your time and attention. And I will hand this over to you, Lucas.

Lucas Lira, CFO

Thank you, Jean and hi everyone. As you will remember, Q2 2020 was very tough because of the impact of COVID-19; volumes collapsed in many markets and the mix shift was severe. However, despite these short-term headwinds, we didn't panic; we did what we had to do to adapt quickly, getting even closer to our ecosystem. Most importantly, we did not lose sight of the long-term and decided to seize the opportunities brought by the crisis and placed some big bets to set us up for a sustainable recovery. Fast forward 12 months, our Q2 2021 financial performance brings more evidence of the continuous and consistent improvement that I've been talking about so much, and the good news is that our team’s disciplined execution behind these bets is continuing to pay off big time. Net revenue grew a little over 36%, EBITDA grew 24%, normalized profit grew nearly 116% while operational cash flow remains unabated and grew about 2%. In addition, our financial performance in the quarter was boosted by BRL1.6 billion in tax credits, of which BRL1.2 billion in other operating income and BRL1.4 billion in our financial results. Just to recap, these tax credits resulted from a favorable Brazilian Supreme Court decision last May that confirmed its 2017 ruling that the inclusion of the ICMS state tax in the taxable basis PIS and the COFINS federal taxes was unconstitutional. Given the nature of this dispute, these tax credits are technically part of our normalized results from an accounting standpoint. However, as was the case in our Q4, 2020 financials, we disregarded these tax credits for purposes of calculating our organic performance treating them as a scope change. We still have some pending litigation in this matter going forward and we will keep the market updated as things progress. However, as disclosed in the notes to our financial statements, the amounts that remain under dispute are not material. While I'm on the subject of taxes, I also wanted to briefly comment on the proposed income tax reform in Brazil, which has generated a lot of questions from investors lately. The draft legislation is currently being discussed in Congress, and we are monitoring the proposed changes under public debate very closely. It is too early to speculate on what will unfold, so we cannot comment on what impact, if any, this part of the broader tax reform will have on us and our shareholders. Should there be any material developments, we will of course keep everyone informed. Now back to Q2, as expected, the quarter presented meaningful headwinds in terms of costs and expenses. COGS per hectoliter grew nearly 16% on a consolidated basis. These headwinds were mostly felt in Brazil where our cost of goods sold was negatively impacted by adverse FX and commodity costs; on the other hand, better than expected mix thanks to our commercial initiatives and on-trade reopening witnessed towards the end of the quarter drove our returnable glass bottle volumes up which reached nearly 40% of our total volumes, up from 30% in Q2 2020. Also, cash SG&A was higher growing about 42% on a consolidated basis, where sales and marketing grew 35%, pretty much in line with our net revenue growth of 36% as we implemented our commercial plans for the quarter. Distribution expenses grew 28% also below our net revenue growth mainly because of higher volumes, growing innovation, returnable glass bottle mix and expansion of DTC platforms in countries like Brazil and administrative expenses doubled with most of the increase coming from provisions for variable compensation, since our performance for the year continues to be better than expected. Remember 2020 wasn’t a bonus year. Should our performance remain on track during the second half of the year, variable compensation should continue to impact our year-over-year SG&A performance. Having said all of that, the most important message is that despite all these headwinds, we remain on track towards our main ambitions for the year: strong and balanced top line-led recovery across our markets with better net revenue per hectoliters performance versus 2020. We continue to expect Brazil Beer cash COGS per hectoliters to grow in the low '20s for the full-year with better than expected mix pretty much offsetting increasing non-hedged commodity exposure, and normalized consolidated EBITDA performance for the full-year should improve as we work to get back to 2019 levels. Let me now turn to our financial priorities of protecting liquidity and improving our return on invested capital. Liquidity remains under control, thanks to the strong cash generation during our recovery. We decided to pay down in Q2, the remainder of the debt we raised at the height of the COVID-19 crisis to create an additional liquidity cushion. Having said that, going forward, we still believe it is warranted to maintain a prudent approach towards liquidity given the uncertainty and volatility that persist across our markets. As for the journey of improving our return on invested capital, we remain laser-focused on operating as efficiently as possible. But we are also more and more focused on improving our resource allocation across the company. Think of it this way: we have great people, we have great assets, and we have very strong cash generation. So the better we get at resource allocation, the greater the chance of consistently creating value; this value creation mindset is becoming a big focus of ours. A good example of this approach is how we are looking at our technology platforms. Platform business models like BEES, Zé, and Donus in Brazil not only make total business sense from a customer and consumer standpoint, but they also make sense from a return on investment perspective. Of course, we are still scaling them up, but we believe that once at scale, these platforms can drive important value creation for the company. The reason I say this is two-fold: First, connecting these tech platforms to Ambev's base of customers, consumers, and brands will broaden our total addressable market with potential for further growing both the top line and bottom line in absolute terms. Second, over the last decades, we have developed this amazing asset base in terms of distribution, capabilities, and reach, as well as trusted relationships with millions of points of sale across Latin America that provide our technological platforms with a very solid foundation to build on and scale in terms of speed, autonomy, and leverage. The more we are able to use the core business as a springboard, the less capital we will require to grow these businesses. In terms of use of cash, after taking into consideration the appropriate liquidity levels for our more unpredictable and changing environment, after allocating resources efficiently towards organic growth and keeping some M&A dry powder, we intend to continue returning excess cash to shareholders over time. To wrap up a quick word on the ESG. On June 28, we held our ESG day, when we shared our thinking in terms of how we are approaching sustainability, which after all is our business. Thanks to everyone who joined, and for those of you who were unable to make it, the materials can be found on our IR website. We look forward to continuing this dialogue with the investment community because there is still much more to share, learn, and do. Thank you. And with that, let's move to Q&A.

Operator, Operator

Thank you. Our first question comes from Marcella Recchia with Credit Suisse. Please Marcella go ahead.

Marcella Recchia, Analyst

Hi, Jean Hi, Lucas. Thank you for taking my questions. I have two questions here. First on Brazil Beer, could you explore a little bit more about the strong top line growth. We have seen now for a few quarters in a row and your expectations to sustain this momentum going forward? I will wait before going to my second question.

Jean Jereissati, CEO

Sure. So yes Brazil beer has been with good momentum for a while. Right now, we know that last year in the pandemic the comps are all over the place. But if you look at the clean reference there is 2019. You can see clear how Brazil is still gaining momentum quarter after quarter, and Ambev is accelerating. I think this is based on many decisions that we took over the last year that was really a mindset of being the leader in expanding the industry. The industry had this opportunity to develop the in-home occasion increasing and helping to increase frequency, a lot of the mindset on innovation where 20% of our revenues are really coming from products that did not exist three years ago. This is up a pipeline of brands that are coming in quarter-by-quarter and maintaining their performance. So I'm very excited about that. There is one information that we have here in Brazil above the brand equity, the brand power of our portfolio. When we compare H2 2021 with H2 2020, we gained 3 million new fans of our brands. So that's a KPI that we focus on and follow very closely, so consumers that elect one of our brands as their preferred brand. So this number is a real increase in our portfolio that is really stronger. Moving forward, I think the good news will come as the vaccination rates increase with the reopening. We return to our stronghold in socializing in out-of-home occasions. So, somehow I feel very confident that we have a structural movement on our top line with momentum.

Marcella Recchia, Analyst

Perfect, Jean. Thank you very much for the clear answer. My second question now is more of an update about your venture initiative, Menu. Could you share with us more about the recent developments on this business line?

Jean Jereissati, CEO

Menu? The marketplace, right?

Marcella Recchia, Analyst

Exactly.

Jean Jereissati, CEO

So that was our start-up that we accelerated two years ago. We grew 60 times their GMV with us. And then we made a decision to when we accelerated in Menu, we didn't have this developed, and then now we decided to combine these initiatives. The marketplace in the new assortment will strengthen our journey of becoming more digital. In our vision of moving from a beverage company into a platform, we have two big communities: the consumer community that Zé leads and the customer community that BEES leads. We are in a long journey of building this capability and this muscle. We acquired back two years ago the company that was really the company that helped us in the beginning. Then we internalized and invested in BEES and now in Zé Delivery, we have around 2,000 coders working with us, really with this mindset of being able to get digital products, not just beverage products in the market. Both BEES and Zé give us a lot of visibility and granularity to significantly increase our revenue management capabilities. BEES now has 70% of our customers, and we know when they buy. We are really learning that they prefer to use the app during weekends and not wait for the sales rep. There’s a learning that we didn’t figure out before that they buy. B2B business is more imposed, and if you have good promotions, we can add different products to our basket. So BEES is a completely different muscle that will help us get insights on pricing strategy much better than we had before. BEES has already helped us manage discounts big time and we are successfully acquiring new customers. Zé is another aspect; we have a 5 million community in the app and we are just targeting now one occasion, there is this focus on ultra convenience within 20-30 minutes we can deliver beer at home with supermarket prices; but there is a lot of room for us to follow the consumer journey and think about when our consumers have parties, to anticipate that and have a different kind of revenue management for that occasion. We have the potential to increase significantly the apps Zé Delivery may later decide to go for this new mission as all these initiatives allow us to capture data to smartly decide on revenue strategy. We are in a completely new moment in terms of capability of using data to drive revenue initiatives.

Unidentified Analyst, Analyst

So you have more tools and capabilities for protecting the value of your brands by offering other areas and services where you don't have to give away value in your brands essentially right?

Jean Jereissati, CEO

That's it, because we add convenience. We understand our consumers and with a broader portfolio, when we put all these four levers together, we can really elevate our revenue management approach with the technology that we have added.

Unidentified Analyst, Analyst

This is excellent. Thank you very much, I appreciate your insights.

Operator, Operator

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

Thiago Duarte, Analyst

Hello, Lucas, hello Jean, hello everybody. Thanks for the opportunity. I'd like to ask three questions actually. The first one is if you can help us navigate through the SG&A particularly in Beer Brazil, but I think it goes for the rest of the geographies, particularly in Brazil. I mean it's clear the year-over-year pressure on G&A coming from bonus accruals, but it also feels like there is more to it? I was wondering how much that's coming from the digital initiatives and the last mile logistics, that is arguably impacting your cost there, particularly coming from BEES and Zé. So if you can help us navigate through it in terms of how we should think of it in percentage of revenues going forward for SG&A, that would be nice. The second question is on BEES and you mentioned the BRL9 billion GMV in Brazil, how 70% of your clients are already active in the platform? But can you detail a little bit more on how that GMV breaks down between Ambev's products and third-party products? In other words, how much your clients of those 70%, you know how much of their purchases they are doing effectively from the platform, and that would be nice to hear as well. The third question is, can you talk a little bit, I think more to Jean? Can you talk about the resilience of the beer industry? You already discussed in a previous question about the momentum that you guys have built over the last four or five quarters, but can you talk about the industry itself? It looks like the industry Ambev is stronger than the industry now, but it looks like the industry is strong on its own? So can you talk about this in terms of the demand and how the occasions have built during the pandemic, how you expect this normalization to affect your mix, in particular because it also looks like premium has gained more ground on the back of these changes provoked by the pandemic? So if you could elaborate on that that would be nice? Thank you so much.

Jean Jereissati, CEO

Okay. Good questions Thiago. Thank you for the questions, I will start backward. We start with the industry then BEES and then we go for SG&A. Okay. So industry first of all yes, we are seeing our resilient industry. We always mention that our industry is resilient, and the indicator is that we really made the decision a little bit before the pandemic to be a leader in this industry, we studied a lot the different industries and performance of Brazil and Mexico to establish our approach here in Brazil. Then the pandemic came, we decided to really accelerate towards the future, towards the market maturity, and what's our approach for channel, innovation, and occasions. Big part of the industry expansion—probably all of the industry expansion—is really coming from our volumes, and in what we are seeing in the market: beer in Brazil is a healthy form of consumer approach. It’s not losing share of growth, it’s a healthy category that we observe as very healthy. The interest in new products is still very important in the culture and in people's lives. The second thing is that moving forward to a more mature market, new occasions would emerge. We see part of the increase in the industry in Brazil is coming from frequency and in-home consumption. It’s really coming from Mondays and Tuesdays; this relaxation mindset is helping us. We believe the residual of that will be maintained. With vaccination and further lifting of restrictions, we expect the return of out-of-home occasions, where we dominate. With our investments in innovation, we are confident of our growth there. Now regarding BEES, our vision is digitalizing our customers, so we have to get them on board with the app. BEES usage has to be good, and we should be able to accomplish that with beer, focusing on new roles for our sales representatives as we bring e-commerce into B2B, and this is where we are going. We guarantee that BEES has access to our entire wholesaler ecosystem. Our growth is derived primarily from beer GMV, while BRL100 million is linked to products outside our portfolio. The growth here is fast as we continue expanding our e-commerce portfolio. Now about SG&A, it is hard for us to discuss it as combined because they have very different dynamics. Sales and marketing is aligned, we have seen this quarter, while distribution expenses have increased mainly due to higher volume and operational inflation. The complexity from digital capabilities and last-mile distribution does add pressure, so the landscape here continues to evolve; we expect ongoing improvement in our operational efficiency.

Lucas Lira, CFO

Okay. Thank you, Jean. Thanks for the question Thiago. On sales and marketing, the way to think of it is really around sales and marketing which is what we saw in H1. We saw net revenue growth ahead of Sales and Marketing. So we're not targeting specifically any sort of trend going forward. If you look at the performance over the last few quarters, that's what you've seen there. With distribution, the way Jean broke it down makes sense. On the variable side, it is linked to volume growth and the mix of returnable glass models on the one hand. As volumes continue to grow, it's reasonable to expect distribution expenses to also grow, and as returnable glass models recover we could see increases in distribution per hectoliter as a result. On the other end, we have the innovation and initiatives like DTC providing opportunities to improve efficiency as we expand more production capabilities. Finally, the main organic variance year-over-year in admin comes from variable compensation; that explains more than half of the increase; that’s a function of the strong recovery we are seeing.

Thiago Duarte, Analyst

Great answers. Thank you so much, guys.

Operator, Operator

Our next question comes from Isabella Simonato with Bank of America. Ms. Isabella go ahead.

Isabella Simonato, Analyst

Hi, good afternoon everyone. Jean, Lucas, thank you for the call. My question is on the cost side. Right. I remember Lucas you mentioned last quarter that Q2 was likely going to be the peak when we think about cost per hectoliter and in reality, it was better than Q1, right? At the end of the day, you're keeping the guidance for the year. So I was wondering, what is actually changed this quarter, and how you're phasing this for the second half of the year?

Jean Jereissati, CEO

Okay. Hi, Isabella. Thanks for the question. You're right, we had a positive surprise in Q2 on the COGS per hectoliter performance that improvement came mainly from mix. The reason for that improvement is really better than expected returnable glass bottle volumes, which recovered much faster than we anticipated. Good news for the remainder of the year. As we continue to work on the increase of returnable glass bottles in our mix. The reason we are maintaining the full guidance for the year is that in Q1 I referred to part of our commodity costs being not hedged. Given the way commodities have continued to trend since then, the commodity cost pressure is continuing to become more of a headwind. Overall, we think it will be a wash, means the higher unhedged commodity costs will be offset by better mix, which allows us to reiterate our guidance of cash COGS per hectoliter in the low '20s for the full year.

Isabella Simonato, Analyst

That's clear. Thank you very much.

Operator, Operator

Our next question comes from Ben Theurer with Barclays. Please go ahead.

Ben Theurer, Analyst

Thank you very much, Jean, Lucas, congrats on the results. Just wanted to follow-up a little bit on the strategic initiatives around the B2C and the B2B business and how that is aligned with your more flexible pricing strategy. How you think of the back half of the year and then into 2022 regarding potential pricing initiatives and leverage what you established on the B2C and B2B business? Thank you.

Jean Jereissati, CEO

Yes, so let me try to give you a broader answer on that. Yes we are reviewing our strategy moving forward. Our vision is that we are much more than a beverage company; we want to transform into a platform of inspiring brands that connect people in the ecosystem so that we can all grow together. There's a big bet on the tech piece, upgrading the company into a platform where we have two communities that we serve perfectly: the customers’ community and the consumer community. Zé is addressing our consumers, and we want to think about how to add more technology to that. We should become more omnichannel. BEES is for our customers, and then we’ll integrate more with Donus. We’re really upgrading BEES to serve Ambev customers while also expanding into a broader portfolio; we are ready to talk about more on this call. We are working with fintech to address financial problems for our customers; providing credits, etc. Significant revenue management possibilities exist. Long-term, we are extending discounts more as cashbacks in our combos with BEES, leveraging the granular assortment and customer information we have.

Lucas Lira, CFO

Yes, Ben, Lucas here. The answer is yes, moving forward we can partially offset any incremental raw material cost pressures as we have hedged what we could. Remember that given how the BRL and the Argentinean peso trended in the last 12 months, the bigger portion of our cost headwind this year is coming from FX. Looking into 2022, the pressures we face are far lower than the headwinds we faced in 2021. There is still half of the year to go, but some key things on the FX side provide reassurance.

Ben Theurer, Analyst

Okay perfect, fingers crossed for the second half and thank you very much.

Operator, Operator

Our next question comes from João Soares with Citibank. Please João go ahead.

João Soares, Analyst

Thanks. Good afternoon everybody, Jean, Lucas. I just have two quick ones on my side. The first one, I just wanted to understand with the vaccination accelerating in key cities here in Brazil and the on-trade recovering. I just wanted to understand, I mean you're of course developing very well on BEES. And we were close to the client through the most critical moment of the pandemic. So that's my first question. The second question, Jean, I know that BEES is developing very well. Thanks for sharing that information on the GMV and the growth, but I wanted to understand about competition looking more into the long-term. Do you identify any potential competitive pressure coming from potential wholesalers developing their own online businesses that compete with the B2B clients and BEES? I just wanted to understand more about the long-term outlook for BEES? Thanks.

Jean Jereissati, CEO

So first let's talk about market share reopening in the on-trade. Based on our information, our market share is very strong, and if you think about the last quarters in Q2, it’s something we are with a very good market share; we've been building and are on a solid trend in Brazil. I believe this, if you think about channel mix—we can maintain the market share that we have channel-by-channel as the on-trade recovers—it should be positive for us, especially as we typically over-index in that channel. I’m optimistic about market share, but let’s see how H2 progresses. There is a lot of structural factors as well; Brahma brands are much healthier than ever. The Brahma Duplo Malte is driving the category. The whole family of Brahma is experiencing good equity growth. My RTM is also structurally better than before. I'm reaching more customers and my service level is at an all-time high. Digitalization is providing significant new features and opportunities that many customers appreciate, so I feel confident. Regarding wholesalers and BEES, we started this in the right moment. Our wholesalers are really aligned and excited; thus I feel we are ahead of the game. We started ahead, my wholesalers are all on my ecosystem and they see tremendous value in BEES. Many of our competitors haven’t coordinated well in this, so I think we are ahead. Bear in mind that this market is still very fragmented and there are abundant opportunities. The leader in this industry has only 3% or 4% market share. We have a strong distinctive service level, and capability of reaching unparalleled opportunities; I think we’re well positioned.

Lucas Lira, CFO

And I think it's less about competition, because it's very fragmented; it's more about under serving customers who are in need. There is more retailer need for productivity; they have to spend on things that help their business. Our competition isn't as much about developing online businesses but rather serving needs in ways that haven't been properly approached.

João Soares, Analyst

Understood, thanks.

Operator, Operator

Our next question comes from Alan Alanis with Santander. Please Alan go ahead.

Alan Alanis, Analyst

Thank you so much. So we look at—congratulations on the results and then the integration and the strategic direction of the company particularly. Just a couple of quick questions, one of the more strategic and tactical ones, could you help us understand the 4% sequential decline in pricing in beer in Brazil from the first to the second quarter? How much of that is product mix, brand mix, channel mix, and so forth? The equal to that is Chile; if you could give us a lot bigger in terms of the relationship with the Coca-Cola system over there. I understand that it's working very well. What are the lessons that you have learned and what are the opportunities for those partnerships in other parts of Latin America? Thank you.

Jean Jereissati, CEO

Thank you, Alan. Let me handle this one. The price reduction quarter-over-quarter usually occurs mainly due to region mix and a little bit of channel mix. It’s something a bit more structural than seasonal. It’s historically more normal for this to happen. Regarding Chile, the good part of that partnership is that everyone appears happy and this cooperation is working well. It just solidifies our confidence in forming more alliances in the future. We have the leading brand in equity in Chile, with Corona; they have the leading distribution platform. What we were trying to do was parallel, and when we decided to go together, the governance is working and it makes us confident for further alliances. We are looking to assist with BEES technology in various markets. We are now much more open to different platforms than historically so this opens us to various opportunities.

Ben Theurer, Analyst

Just a follow-up; could you talk a little bit about the high-end business in Brazil beer? What percentage of your business now is high-end? Is that part gaining share and any nuances regarding craft beers, imports, or the premium segment?

Jean Jereissati, CEO

Yes, the high-end segment is growing by an estimated 35%. This growth is not just a recovery since the pandemic; the structural growth continues to be strong. We have set brand equity as a priority; we are investing in branding above any market share gains. The premium strategy ensures sustainable growth for our portfolio. We're growing equity fast, and we’re excited. Overall portfolio performance in Brazil, specifically on how Corona is standing out, has been extremely positive. We have seen this energetic approach bring desirable results.

Robert Ottenstein, Analyst

Thank you very much. Could you also discuss notable innovations this year, particularly around ready-to-drink products, and where they stand within your overall product lines?

Jean Jereissati, CEO

Regarding innovation, our focus on healthier awareness has been important. We recently launched Michelob Ultra during the Olympics, which has a big advertising push with Usain Bolt; it's a great opportunity. We're focused on growth in health-oriented products, and we’ve also launched more core brands with deep German heritage. We're rolling out our hard lemonade and entering into the hard seltzer scene, which is progressive for us as well. Health-focused innovation is key, and our portfolio is evolving smoothly.

Operator, Operator

Ladies and gentlemen, that concludes our question-and-answer session for today. Now I would like to turn the conference over to Mr. Jean Jereissati, CEO for Ambev for his final remarks.

Jean Jereissati, CEO

I would like to thank again my team at Ambev for their dedication during these tough times. I also want to thank analysts and everyone who joined this call for your time and attention. To wrap up, I am really confident about the future. I feel our company is structurally better amidst commodities and currency cycles, and when you look at the underlying trends, we are structurally better; our commercial strategy, innovations, tech platforms, and operational excellence continue to deliver results. We seized opportunities brought by the crisis and made big bets toward a sustainable recovery. Transformation is our business; we envision a platform serving customers and consumers with our strong brands. Our portfolio is more robust than before, and brand equity and power are reflecting that. We’ve gained 3 million consumers as loyal brand advocates. I'm very excited about our portfolio. Cash generation remains strong. Thank you for your time and attention; have a great day.

Operator, Operator

Ambev's conference call is now concluded. Thank you so much for attending. Have a nice day. And you may now disconnect.