Ambev S.A.

Good morning, and thank you for waiting. We would like to welcome everyone to AMBEV's fourth quarter 2018 results conference call. Today with us we have Mr. Bernardo Paiva, CEO for AMBEV, and Mr. Fernando Tenenbaum, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website at 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 that all participants will be in a listen-only mode during the company's presentation. After AmBev's remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach an operator. Before proceeding, let me mention that forward-looking statements are made under the Safe Harbor of the Securities Litigation Reform Act of 1996. The four 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, percentages changes refers to comparisons with fourth quarter 2017 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's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis on the earnings release. Now, I would like to turn the conference over to Mr. Fernando Tenenbaum, CFO and Investor Relations Officer. Mr. Tenenbaum, you may begin your conference.

Thank you. Hello, everyone. Thank you for joining our 2018 fourth quarter earnings call. I will guide you through our financial highlights of Brazil, CAQ, LAS, and Canada, including our below-the-line items and cash flow. After that, Bernardo will give more details about our operations in Brazil. Beginning with the main highlights of our consolidated results. The fourth quarter was marked by different challenges across our regions, though we saw success from many of our initiatives, including innovation and continued premiumization. On a consolidated basis, in the fourth quarter, top line was up 5.3%, as volume dropped 3.8%, was more than offset by the growth in net revenue per hectolitre of 9.4%. In the full year, net revenue was up 6.9%, with volume declining 2.6%, and net revenue per hectolitre growing 9.7%. EBITDA grew organically by 5.3%, reaching R$7.5 billion, with an EBITDA margin of 46.7%, which organically was flat in relation to Q4 2017. In the full year, EBITDA was up 9.4%, with margin expansion of 100 base points to 42%. Normalized net profit was 3.7 billion reais, 17.3% lower than in Q4 2017. In the full year, normalized profit was 11.6 billion reais, 5% lower than 2017. Following the categorization of Argentina as a country with a three-year cumulative inflation, rate greater than 100%, the country is considered highly inflationary in accordance with IFRS. This fourth quarter, we will continue to report the results of our operations in Argentina applying hyperinflation accounting. These quarter adjustments are the same, but with different impacts due to the peso appreciation in relation to the real. One, no monetary assets and liabilities had to be restated using an inflation index translating to higher cost of goods sold and depreciation values, but in this time only for the past three months. And second, the full year P&L, which used to be converted to Brazilian reais at the average exchange rate of the period, had to be adjusted for the cumulative inflation from January 1st, 2018 on, and then converted using the end of the period exchange rate, which is the closing rate of December 31st, 2018. The fourth quarter P&L is the difference between the full year and the nine-month results reported in the last quarter. Given that the peso real appreciated in the quarter, we reported IPA inflation accounting positive impacts of R$685 million on net revenues and of R$220 million on normalized EBITDA, which contributed to a negative impact on the normalized profit attributed to equity holders of R$15 million. In the full year, the impact was R$558 million negative on net revenue and R$353 million negative on normalized EBITDA, which contributed to a negative impact of R$291 million on the normalized profits attributable to record shareholders. Having said that, I will now move to our divisional results and start with Brazil. In the quarter, Brazil EBITDA was down 7.4%, reaching R$4.1 billion, with margin contraction of 350 base points to 47.9%. In the full year, Brazil EBITDA grew 3.3%, with margin expansion of 70 base points to 43.9%. In year Brazil, in the fourth quarter, top line was up 0.9%, supported by net revenue per hectolitre growth of 3.1%, is slightly below inflation for the period as price increase was offset by geographic mix. Volume in the quarter was down 2.1%, outperforming the industry. In the full year, net revenue was up 2.2%, with net revenues per hectolitre growing 5.4%. Volume was down 3.1%, slightly underperforming the beer industry. Bernardo will give you further comments on this matter. Edita for Beer Brasil was slightly down in the quarter, with margin contraction of 80 base points to 50.4%. In the full year, Edita was up by 3%, with margin expansion of 40 base points to 45%. Regarding costs and expenses in the quarter, cash cogs per hectolitre grew by 27.9%, mainly impacted by commodities prices, especially aluminium and ballet, and by a hard comparable in 4Q17, marginally offset by savourable effects. Cash SG&A was down 20%, mostly driven by phasing of bonus accruals, which were fully booked in the fourth quarter of 2017, and only this year was split between 3Q and 4Q, as well as projects related to non-working money expenses. In the full year, cash COGS per hectolitre grew 8.2% and cash SG&A was down 3.2%. We expect the full year cash total COGS per hectolitre in Brazil to increase by mid-teens in 2019 as we will face pressures from currency depreciation and commodity prices. In ADBrasil, Top line was down by 9.1% in the fourth quarter, with net revenue per hectolitre growth of 0.8%, driven by geographic mix. Volume declined by 9.8%, underperforming the industry. In the full year, top line was down 1%, with net revenue per hectolitre growth of 8.4%, more than offset by volume decline of 8.7%. EBIT in the quarter was down by 44.9%, with margin contraction of approximately 2,100 base points to 31.9%. In the full year, EBITDA was up by 5.1%, with margin expansion of 210 base points to 37.1%. In terms of cost and expenses, cash COGS per hectolitre was up 31.9%, as we already anticipated there would be volatility between quarters. In the full year, cash COGS per hectolitre was down 1.1%. Cash SG&A in the quarter was up 0.5%, also due to phasing of bonus accruals and the savings related to non-working money expenses. In the full year, cash SG&A was up by 2.2%. Moving now to Central America and the Caribbean. In the quarter... net revenue in Central American Caribbean rose 9.6% as a result of strong volume of 7.9%, coupled with a net revenue per hectolitre increase of 1.5%. In the full year, top line increased 12.6%, with volume growing 8.3%, and net revenues per hectolitre growing 4%. Editing the quarter reached 712 million reais, increasing organically by 12.4%, with margin expansion of 110 basis points to 41.5%. In the full year, EDT was 2.3 billion, up 14.1%, with margin expansion of 50 basis points to 39.4%. Cash COGS per hectolitre increased 8.6%, negatively affected by Panama, where the strong volume evolution since 2017 has driven additional temporary costs in order to supply the market with no disruption. In the full year, cash costs per hectolitre was up by 6.6%. Further, cash SG&A in the region was down 18.8%, supported by lower SG&A expenses, mainly due to savings to non-working money expenses and phasings of bonus accruals. In the full year, cash SG&A was up 0.3%. Despite short-term cost pressures, our commercial strategy in Kaki remained on track, supporting the health volume performance in virtually all countries in which we operate. In the core segment, we continue to invest in our trade programs, strengthening our connection with our consumers through commercial platforms to further enhance the present brands in the Dominican Republic. In Panama, We keep investing in our main brand, Atlas Golden Light, by creating experience through proprietary events. We also continue developing our premiumization strategy in the region by investing in our brands, Corona, Stellar Plan, and Budweiser, through a customized execution both for the on-premise and off-premise channels. It is important to point out that premium accounts for less than 5% of the beer industry volume in CAC, representing a great opportunity for the filter. I'd like to take this occasion to say that we are very excited about our business development and strong volume performance in Central American Caribbean, reinforcing our positive outlook for the region moving forward. Switching now to Latin America South. Net revenue in Latin America South grew organically by 21.8% in the quarter, with net revenue per hectolitre increasing 30.3%. Volume was down 7.3%, mostly driven by Argentina, where volume declined by low double digits as a consequence of a challenging macro environment. In the full year, top line was up by 21.5%, with net revenue per hectolitre increasing 22.1%, and volumes down 0.8%. Editing loss for the quarter was up 38.9%, with margin expansion of 700 base points to 51.4%. In the full year, Edita reached 4.9 billion reais, with margin expansion of 310 base points to 45.5%. Cash cogs per hectolitre in the quarter went up 9.1%, most driven by favorable effects, while cash SG&A increased by 16.8%. In the full year, cash COGS per hectolitre and cash SG&A were below inflation, increasing 10.8% and 22.2% respectively. Despite the macroeconomic volatility throughout the region, we remained focused on what we can control in our business and had positive developments. In Argentina, We maintained the strategy of differentiating the core brands, Kilmis, our classic lager, and Brahma, our easy-drinking lager. In addition, we launched the Brahma 269 ml with the can, a product for the summer season, reinforcing our single-service strategy. Regarding the cordless segment, Budweiser continued to embrace the music platform. Bud-X hosted the main parties in the quarter, sponsoring several DJs. We also launched a limited edition IPA for Andes Origin, which was presented for the first time in the most important gastronomic festival in Mendoza. Our premiumization strategy has also shown promising results in last, with our premium portfolio outpacing the industry across all countries in which we operate. Looking ahead at 2019, it will be a divided year for Argentina. In the first half, consumer environment will be challenging, but costs will not be significantly impacted by FX due to our 12-month rolling hedge policy. In the second half, we will face FX headwinds reflecting our 12-month hedging policy and the significant devaluation of the peso starting in May 2019. But at this point, we believe consumer environment is likely to be in a better shape. Going forward, while cash flows with Argentina in the short term We have positive mid- and long-term perspectives in the county, and we remain confident in our ability to deliver solid top line and a beat in the whole region, supported by strong brands. Turning now to Canada. In the fourth quarter, top line in Canada was down 2.2%, a combination of net revenue per hectare increase of 1.5%, and a volume decline of 3.6%, which was mostly driven by a slowdown in the beer industry. In the full year, top line was down 0.9%, which is explained by volume decline of 1.9% and a net revenue per hectolitre growth of 1%. EBITDA reached 575 million reais, which is 3.4% lower than in the fourth quarter of 2017. In the full year, EBITDA was down by 8.1% to 2.2 billion reais, with margin contraction of 250 base points. In the quarter, cash COGS per hectolitre grew 1.4%, mainly due to higher commodity prices, especially aluminum. In the full year, cash COGS per hectolitre increased 9.6%. Cash SG&A declined by 2.5% in the quarter, driven by lower administrative costs that benefited from savings initiatives and lower variable compensation accrues. In the full year, cash SG&A declined by 2%. Despite industry challenges, we had good achievements with our portfolio during the quarter. In the core segment, Bud Light kept its momentum supported by strong commercial and trade activations, and Michelob Ultra has continued its fast start, accelerating growth in the quarter. In the premium segment, Stellar Toire and Corona Volume ramped up, enabling us to sustain our leadership position in the country. Moreover, the Kraft portfolio continued to perform well, growing by double digits, already accounting for approximately 5% of our bid volume in the country. Now back to consolidated figures below EBITDA. In the fourth quarter, our net financial results totally earned an expense of R$1.6 billion, 29.8% higher than in Q4 2017. Main items in the financial expense in the quarter were First, interest income of R$ 152 million driven by our cash balance. Second, interest expense of R$ 345 million that also included interest incurred in connection with the Brazilian tax regularization program, as well as non-cash accrual of approximately R$ 60 million related to the poor option associated to our investment in the Dominican Republic business. Third, R$ 586 million of losses on derivative instruments which were upped year over year, explained by equity swap losses and the increasing of carry costs of FX hedges linked to our COGS and CAPEX exposure in Argentina. Fourth, losses on non-derivative instruments in an amount of R$ 360 million, mainly related to an adjustment in the fair value of the poor option in the Dominican Republic. Fifth, taxes on financial transactions on the amount of R$ 103 million. Sixth, to R$165 million of other financial expenses, partially explained by intercompany transactions. 7. R$179 million of exceptional financial expenses related to non-cash expenses due to foreign exchange variations on intercompany loans. 8. R$67 million of financial income related to non-cash incomes resulting from the adoption of interinflation accounts in Argentina. The normalized effective tax rate was 24.6% in the quarter, lower than in Q4 2017. In the full year, the normalized effective tax rate was 13.6% versus 17.7% in the full year of 2017. Cash generated from operating activities in Q4 2018 was of 8.8 billion reais, which is 1.3% lower than last year. In the full year, The cash generated from operating activities was R$17.9 billion, which is 0.2% higher than 2017. CAPEX reached R$1.4 billion in the quarter and R$3.6 billion in the full year, increasing 11.5% versus the full year of 2017. Finally, during 2018, we announced approximately R$8.6 billion to equity holders in dividends, 7.5 billion of which related to 2018 net profit, and 1.1 billion related to 2017 net profit. Thank you very much. Bernardo will now share some initiatives and thoughts on the Brazilian market before going to Q&A. Thank you, Fernando. Hello, everyone. As mentioned by Fernando, during this fourth quarter, we saw success from many of our initiatives, with highlights for innovation and continued premiumization. Before detailing the fall of quarter, let's recap how was 2018 in Brazil, which was a year marked by external volatility. In the first four months, we had a tough industry, affected by bad weather across the country and an earlier carnival. The good consumption momentum of June and July were offset by the trucker's strike in May. From August to October, we had our price increase and the uncertainty around elections. which led to a challenged consumption environment. This fourth quarter was a divided quarter. In October, the industry was still impacted by low consumer confidence. But in November and December, we started to see some better trends. To illustrate that, the value segment that had peaked started to reduce its share of the industry throughout the quarter. And also, the industry was gradually reducing its declining pace. As a result, in this quarter, our pre-year Brazil volume declined 2.1%, which was better than the industry. In the full year, our market share declined 0.4 percentage points, after 0.6 percentage points gained in 2017, according to our estimates. Now, let's talk about this year's performance. We made structured investments in our portfolio, with innovation in new liquids and new packets, As owners, we always focus on sustainable value creation, and as we've been saying, we are leaving this crisis in Brazil in a much better shape than we got in, and ready to full benefit of the economy recovery going forward. Let's start with the premium segment. Premiumization is a continuous trend, and it's always important to reinforce that our strength in the segment is a great portfolio of brands, combining global and domestic brands. We are certain that the premium market is a portfolio gain, as we can see in many mature markets, and that we are in a very strong competitive position to continue to gain share in the segment. Each of our premium brands maintain its own territory, brand position and price point, reaching different consumers and occasions. Our premium portfolio, combined, is growing in a solid way and regained share in the past several months. Our global brands, comprised of Budweiser, Stella, and Corona, grew more than 35% in the quarter, with robust expansion of our client base. In the full year, the growth represents way more than 1 million hectoliters. Budweiser is our largest global brand and the leading trade-up alternative for consumers entering in the premium segment. Budweiser is an easy-drinking lager which stands for authenticity and inspires people to follow their own values. It has been part of the pop culture worldwide, exploring the nightlife, rock-pop concerts, and great moments of consumers' lives, and continues to grow double-digit quarter after quarter. Stella Trois is the reference of premium beer quality in Brazil. A classic Belgian lager with distinctive taste that experienced accelerated growth from the second semester on. In 2018, we expanded the brand presence in gastronomic cultural events. We highlighted to Vila Estela Artois a proprietary event successfully deployed during this quarter in Rio de Janeiro, one of the main cities of Estela in Brazil. Estela Artois volume grew more than 60% in the fourth quarter. These amazing results was also supported by the expansion of new packed formats, such as the sharing size bottles and the new cans, that offer to Stella Pla consumers new options to take Stella in different occasions and venues. Corona is a jewel of our global brand's portfolio, a brand that invites to disconnect from routine and reconnect with our essential nature. After a few years of careful introduction in Brazil, it is now ready to leave its potential. and in the fourth quarter, more than double its volume. Corona has an unmatchable line ritual and is part of the international surf community sponsoring the World Surf League. And since this quarter, we are also proudly supporting our Brazilian world champion, Gabriel Medina. Corona is strongly connected to the beach, surrounded by the ocean, and has teamed with Polly for the Oceans to clean 20 Brazilian beach in 2019. And since Brazilians are also proud of our traditions and values, our premium portfolio is also strengthened by the domestic brands, Original and Serra Malte. Our domestic premium portfolio also had important results in the quarter, with Serra Malte growing more than 50%, mainly driven by recently launched canes. Now, let's talk about the core segments. Brahma, our classic lager beer, continues to grow way above the industry, quarter after quarter, reinforcing the brand's beer expertise across all consumers' touchpoints, such as, first, a complete portfolio of seven different liquids with recognized quality and tradition that go from Brahma Shope, the loved, best-selling classic lager, to Brahma Essa, a pure malt alternative, up to Shop Brahma, the best experience in draft beer. And second, Brahma's quality message in communication, trade activations, and brand experience. The brand had a strong commercial plan and calendar activations in 2018. Fertanejo and soccer events were boosted by FIFA World Cup in the first semester, a major occasion and key selling moment for Brahma. In addition, Brahma's 130-year celebration campaign in the second half of 2018 reinforces the brand's tradition and Brahma's beer knowledge while interacting real-time with consumers, increasing even further the brand relevance. Now, moving to Skol. Our main highlight of the year were the line extensions of Skol. So now, I will take time to tell you about the journey of a single liquid that goes down round to become a family of liquids that go down round. Launched nationally in the end of third quarter, Skull Hops opened the way of new easy drinking territories. Skull Hops is inspired in the IPA beers. It is an innovative beer brewed with exclusive aromatic hops that provide a unique combination of lightness, freshness, and slightly bitter flavor. It provides relevant brewing credentials to the Skoll brand. With summer approaching, easy-drinking brands become more evident in the market, and so we invested in the new modern visual brand identity of Skoll, highlighting its liquid, aggregating more quality perception to the brand. The Skoll brand communication in the fourth quarter was the wheel never stops turning, not only in the reference of the new visual brand identity, but also preparing the market for another Skol innovation, the Skol Puro Malte. Skol Puro Malte is a pure malt beer which maintains the unique lightness associated with the Skol brand and also brings the signature flavor of a pure malt beer. It's a 100% natural process with no additives and no preserving agents, like all of our beers. The distinct balance between drinkability and flavor is a result of years of research and development. The result is a pioneer easy-drinking pure malt beer. Sculpture Malt is the only pure malt beer that really goes down the route. Early results of the launch are very, very promising. I will now spend some time to talk about the smart affordability initiatives. To talk about affordability in the core segments, We have developed in the past several initiatives related to packaging, such as the 1L bottle, the 300ml RGB, and more recently, the 1810 pack. We are already boosting these affordable packs to make them available to all around the country, with prices accessible to every consumer and the brands they like most. When it comes to the value segment, it is always important to highlight that although the segment is somewhat relevant in terms of volume, each share of the industry profit pool is insignificant. It's also important to remind that it is a segment marked by the unimportance of brand equity, and we believe that when disposable income begins to improve, consumers will trade up. We have seen that happening in other markets in the world. By the way, we've been seeing a contraction of the value segment in the short term as the economy shows signs of recovery. When it comes to value segment brands, our strategy is to launch brands with regional connection, but always looking to healthy margins, as we did with Nossa. Cassava-based beer launched in the third quarter that already posted strong growth in Pernambuco, reaching 5 percentage points of market share in the States. Following this successful initiative, we launched in December the beer Magnifica in the state of Maranhão. Magnifica replicates the same successful strategy and is also brewed with cassava from local farmers and connects with local culture while delivering affordability to consumers. Regarding our strategy to shape in-home and boost out-of-home, on the on-premise side, Passeiro Ambevi is one of the largest e-commerce in the country. and has reached approximately 100,000 clients. On the off-trade channel, we are doing several initiatives, guided by the idea that consumers should always be able to have our products close, cold, and at the right price. We've been putting great efforts to assure a high service level both in the on-premise and the off-premise. We have been stepping up our role to market across the country via several different initiatives, always focused on excellence in client service. Regarding NAB divisions, we continue to invest in the premiumization with brands such as Lipton, H2OH, Dubain, Tonica, and Gatorade. Premium accounts for more than 13% of our total volume. We also continue to do important investments in our main brand, Guaraná Antarctica. To conclude, it's important to highlight how we evolved on Sustainability 2018. Sustainability is an important platform to pursue the dream of giving a better world and also enhance Ambev's reputation. We already took some relevant steps towards these achievements. We completed the test phase of the first Volkswagen electric truck, powered 100% by clean energy, which was integrated into the fleet that serves our brewer. Our plan is to have 1,600 trucks by 2023. In the water pillar, there is also AMA, our mineral water, which 100% of its profit goes to projects that facilitate the access to drink water in the semi-arid region of Brazil. AMA has just reached the mark of R$ 3 million converted to this social cause, benefiting 26,000 people. Another highlight is our program VOA, created to help NGOs to optimize their process, budgets, and also manage people and careers. We are proud to help by doing what we do best. The project has impacted socially over 2 million people, with 185 NGOs and 200 company volunteers. Finally, we also highlight the 100 Plus Accelerator, which focuses on boosting startups that develop solutions to foster sustainability. Only in Brazil, we had more than 400 projects interested in being part of it. Let's talk about the outlook for 2019. In the past few years, we've implemented transformation initiatives in our business, which put us in a strong position to compete in each of the segments of the Brazilian beer market. and to fully benefit of the rebound of the economy. We see plenty of opportunities ahead of us, and we are confident that we have a strong portfolio to capitalize on such opportunities. We have a solid premium portfolio, and strongly believe in the portfolio gain strategy. We will keep investing and increasing it. For the core segment, we have the best-selling, strong, loved brands. that we will continue to innovate and renovate. We will also continue to deliver smart affordability and play regionally with healthy margins. Finally, we are optimistic about Brazil this year, confident in our strategy, and the initial signs of the year shows we are in the right path. We can now move to the Q&A. Thank you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Antonio Gonzalez with Credit Suisse. Please go ahead with your question.

Hello, Bernardo and Fernando. Thank you for taking my question. Just two quick ones, please. The first one is Brito at ABI's conference call gave a pretty detailed presentation on the high end, and he qualified it as the single largest opportunity for the company in the next few years. So I just wanted to ask, even if you cannot quantify at the AMBEV level, just conceptually, do you see this as your largest opportunity as well? Or because, obviously, We've seen a downtrading from mainstream to value, and the Brazilian industry arguably is in a different stage compared to the rest of the ABI portfolio. I just wanted to ask if you can mention qualitatively whether you see a more balanced growth or more skewed versus premium or mainstream in the very specific case of Brazil. And then secondly... Bernardo, you seem very bullish about innovation at Skoll, right? And this is perhaps the second iteration, the pure malt variant. So I wanted to ask if you have an early reading of how much is genuine growth, how much is cannibalization of the mother brand, and is the mother brand starting to grow sort of as a halo effect from the line extensions that you're putting in the market? Thank you.

Thanks a ton for the questions. I think the first one in premium, we really think that premium will grow in the future in Brazil. It has been growing even with the crisis. And we've been gaining share in this segment in the past several months. It's a strong portfolio of brands that meets multiple consumer needs and occasions. So there isn't a market in the world that the premium segment is dominated by a single brand. So it's a portfolio strategy and it's a portfolio game. And as we said, we're in very good shape to win this game. By the way, again, we're gaining share in the last several months with this portfolio of international brands and domestic brands. I mean, for the premium segment overall, there's a strong preference for premium beers in Brazil. And the segment is still under... I mean... It's not growing in the pace that we think compared to the other markets. Just to give an example, in Paraguay, the weight of the segment is 20%. In Brazil, it's around 10%, 10+. So with the rebound of the economy, for sure, the premium segment, it's our reading, will grow. And I think that the execution and the road to market and the excellence in how to execute better our brands in the trade have been evolving a lot. So not only with the message of the brands that I mentioned in my speech, but in the way that those brands in the market. So yes, we think that the premium segment will continue to grow and in a faster pace in Brazil. And yes, we think that you continue to gain share in the segment because it's a portfolio game. You can check all the information. It's very hard for one single brand in the premium segment in a mature market that has more than 15%, 17% of the market. So it's a portfolio game. And you build your portfolio in stages. So, I mean, seeding the brand caught on in the past, in the last three years, and then you go to Stella, and then Budweiser was there to really win this game via a portfolio approach. So the second question is linked to the Skoll family. I think it was very, very important for the Skoll, as we did with Brahma, to bring, I would say, all the peer knowledge to the brand. So we'll start to talk even more about the Skoll family. And then, based on all the research that we've done, not only Skoll Hops, but Skoll Pure Malt is a creative. Not only helps the mother brand in terms of equity, but really help us to expand the industry and to gain share with Skoll. So, again, the initial signs that we have, they're not comments of Skoll, pure mouth, but as I said in my speech, I promise that I can say two, that I could say two. So it will be a family game for Skoll as well that was with Brahma in the past and think that all the research that we have shows that we are in the right path. approach. All right. Thank you so much, Fernando. Thanks for the time.

And our next question comes from Luca Cepicchia with Goldman Sachs. Please go ahead. Hi.

Good morning, Fernando. Thanks for taking my question. I actually wanted to ask about the guidance. I think the wording and the structure has changed a little bit over the last few years, you know, one year from the other. And I think this time around, I was a little surprised that even the In light of the consideration that you made earlier about the fourth quarter having improved sequentially in November and December, the relatively comfortable comps that you're going to face in Q1 and to some extent also in the second quarter, the macro environment in Brazil getting better, some of the qualitative comments that you made, you didn't really... mentioned or commented much about the top line that you expect in 2019. I don't expect you to do that now, but I was wondering if you could maybe elaborate a little bit more and explain why that is the case. And also, more generally, do you expect the industry to grow? At least if you can make some comments on that point. And then also on the guidance, I think your message is that EBITDA is growth should be faster than in 2018. I would assume that refers to the comparable of organic EBITDA growth that we had in 2018 of 9.4%. So I just want to confirm that that's the right way to interpret the guidance. So 2019 organic leisure growth of more than 9.4% that it did in 2018. That would be my question. Thank you.

Hi, Lucas. So I'm going to start with the second one. Just to clarify, the VISA growth should be for Brazil that should be faster than the 2018. And then we are not giving any guidance. We are just providing an outlook. The only guidance that we are providing is the guidance on cost of goods sold that should be growing for Brazil, should be growing meat teams for next year. But on the outlook, what we are saying, and this is not a guidance, is that we are optimistic about Brazil. We are excited about what we've been seeing so far, but we cannot say much more than that. And, Luca, I think that thanks for the question. I mean, your question about the fourth quarter and some of the comments about the fourth quarter, what you have been saying is that I've been doing structural changes in our evolution, in our business in the last years during the crisis to be ready to full benefit when the economy of the country, Brazil, rebounds. So what I said is that, I mean, the fourth quarter was a kind of mixed feelings. October was a tough month in terms of the industry. I mean, the economic environment was not good and the industry was very bad. And then after the election, We started to see, gradually, a better, I would say, industry and a better consumer confidence. That's why it was a mixed quarter. That's exactly what I said to you. Another short-term sign that we saw, that November and December, we saw the value segment that had peaked That was a big headwind for us because we know that our participation in the value segment is not relevant. I mean, we are doing lots of things and new brands like NOS and other things, but still below our fair share. So the market, the value segment had peaked, but in the short term, it started to contract. So that's another sign that the economy, at least in the fourth quarter, was better in November and at the end of the year.

Just a quick follow-up. I would assume that that trajectory should have continued in 2019. I mean, we only have two months into the year, but it's already something. But I wouldn't think there's anything to suggest. that those trends would have inverted, or if they did, that would be somewhat surprising. Is that correct?

What I could say, what I said in my speech, Luca, that the initial signs of 2019 shows that you are in the right path. That's what you can say. Just repeating what I said in my speech. All right.

Thank you very much. Thank you. And the next question comes from Diego Duarte with BTG. Please go ahead.

Hi, good afternoon, everybody. Thanks for the question. There are two questions on my side. First, I would like to go back to the discussion on pre-immunization. It's clear from the ABI call and even from your initial remarks, Bernardo, that it looks like at least that you guys are doubling down on the strategy even more than you used to, which was a lot already. But I want to, if you could please elaborate a little bit on how we should think of premiumization in the numbers. I mean, you look at the quarter, what we saw in beer Brazil, for instance, even though it looks like your premium portfolio grew even faster than it was growing in the previous quarter, we still saw revenue per hectolitre growing, well, somewhat in line with the general beer inflation that we've been seeing around. So if you could elaborate a little bit more on why net revenue has failed to capture some of that, or what were the effects that are offsetting what we believe is the positive impact from premiumization in your average pricing, I think that would be very helpful. And the second question is regarding government grants. ABI, in their release, they said something about the phasing effect. of the government grant. If you look in Brazil, we saw that as a percentage of revenues going down substantially in the fourth quarter, particularly in the non-alcoholic segment. So just if you could guide us through a little bit of where we should think of that number going forward, if it was something specific for the fourth quarter. Because I would actually, with the increase in, with the growth of brands like NOSSA and and Magnifica would expect the government grants to start growing again as a percentage of revenue. So it would be nice to hear from that as well. Thank you.

Hi, Thiago. This is Fernando. Thanks for your question. Let me start by the last one, the government grants. At the end of the day, the government grants, they are a function of volume. So since volume was down in the quarter, this is a headwind, if you could say so, in government grants. and it's also on your volume mix depends on the state. So I don't think there is any structural change here. It's much more a function of volume mix and actually overall volume. You mentioned specifically North and Magnifica, but it's fair to say I think these brands, they carry a very high margin on the value segment, but I wouldn't boil all that down to government grants. I think they have much more than that I think since we work with the local communities, the cost of goods sold, the liquid, is actually cheaper. Since you have a much more local marketing and selling expenses, you ended up costing less. And also, we focus on the most profitable packages, mostly the 600 ML, and this helps a lot with profitability. So I wouldn't be thinking that it's all to do with government grants, but there is a lot of other factors that impact the profitability, and actually sometimes they're even more relevant. On your question on premiumization of net revenue, there is an effect of The problem is that sometimes given package mix and other things, you end up not seeing that very clearly. But it's definitely, and we're not breaking down to the outer world, but I can say that definitely there is a benefit both on top line and in margins. And I think, Duarte, you have been saying a lot. If the economy of Brazil, depends on the region you could have or everyone could have, they call rebounds. the trade-up will happen. I would say if the next three, the last three, four years, if the economy were better, for sure, based on every mature market that we know, evolution, many markets, the weight of the premium segment would be high. If you think that Brazil will be in a better shape in terms of the macroeconomic, I mean, KPIs or whatever, the trade-up will happen based on all the markets that we know. And we always, we know as well that it's a portfolio game. That's why I have been building a portfolio in-stage to do it the right way in the last years. It's not a one-trick pony winning, I would say, plan. It's a portfolio one. And then we will see a trade-off as well based on what I saw in other markets from the value to core. By the way, in the short term, we saw a contraction in the value segment. So we should think that the economy of Brazil will be in a better shape. As we have been saying, I mean, to you a lot and to everyone, we are in a much better shape in the portfolio as a company compared to years ago to fully benefit of that rebound of the economy.

Thank you. Very helpful. And just to follow up on Fernando's comments on the tax grants and specifically for Nossa Magnifica, I appreciate the comments that you made on the cost and the profitability of the presentations that you're using and so on. But would you say it's fair to say that the amount of tax grant as a percentage of revenues for these particular brands that you're launching, the value segment and so on, it's still higher than the rest of the portfolio? I think it's fair to say that, or am I wrong?

We don't go into these details, Thiago. We don't disclose to the external world. But as I mentioned, it's not only tax incentives. There are a lot of other components that make the case for these brands to be, at the same time, affordable and quite profitable to us. So it's kind of a win-win-win. You help the community, you deliver an affordable product to the consumer, and you also have a very healthy margin. And all the link with the local culture is very important to us as well. I mean, the regional approach... have been structured on marketing to be more regional as well, with regional structures, more digital. And I think that, in the end, it's a good thing for the FG&A, the expense that you do in the marketing, connect much better with the local people there. So it's much more than an affordable product is that as well, but it's really built a brand within regional areas emotional link with the people in those particular cases.

I appreciate it. Thank you both.

Thank you.

And our next question comes from Daniela Eiger with Bank of America. Please go ahead with your question.

Hi. Thank you for taking my question. Actually, my first question is regarding the guidance on EBITDA acceleration in Brazilian operations. If you could just elaborate a little bit further on the drivers for this acceleration, should it be pricing or what is the main source of this acceleration? And on the last results, actually, I wanted to understand a little bit better on the strong results there. What was the hedge effect on the quarters? And how can we expect these effects coming in the next quarters? And also, I don't know if you can disclose that, but what was the effects on your COGS for the quarter? And finally, if you could just enter a third one and quick one. Just regarding the strong decline on SG&A in Brazil, could you just explain what were the main drivers of this decline in 2004 and if they are sustainable? Thank you.

Hi Daniela, Fernando here. So you asked me to elaborate a little bit more in terms of our guidance to accelerate the Brazil EBITDA growth comparing to this year. We don't want to go too much into details because I think we are seeing a bit at the end of the day and probably what we are trying to look is probably some sort of view on margins What I can say is that whenever I look at individual lines in our income statement, there are always opportunities to be more efficient, to dilute fixed cost of volume, to improve process, and as a consequence, improve margins. Of course, there is always effects and commodity volatility during quarters, years, which might make such improvement harder or easier on a given year. On top of what we've been doing, there are incremental opportunities to our business, One good example is serving more remote areas. That could come with a very good additional margin, but not necessarily the same margin levels. As long as they also help profitability and help us to extend the industry, bring incremental profits, we should also explore it. So my EBITDA growth is going to be a combination of all these different factors going to 2019. And as a summary, I think we still have opportunities to grow margin. But not necessarily we're going to be focusing on specific numbers. But above all, we are committed to consistent EBITDA growth. And I think definitely we can achieve that in 2019. And more important, the thing about accelerating EBITDA growth is not a guidance, but it's something that we always try to accomplish year over year. On the hedge effect, I think it was important to give some guidance, especially because the fourth quarter, we saw a meaningful increase in the costs. And this was down to commodities going up, specifically aluminum and barley. And what we've been having in the other prior quarters in Brazil, where effects was also a huge tailwind, didn't happen because effects was a little help, but much... almost flattish. So when we go into next year, I think it was important to give a guidance to set the right expectations, and then we expect our costs throughout the year for Brazil as a whole to grow by mid-teens.

Okay, thanks. But just on the, actually, the costs and the fact that I was mentioning about lab operations, Just to understand there, what was the impact?

Okay. On last operations, our hedging is always a rolling 12-month hedge. So if you want to understand what are the costs for a given year, you need to look 12 months back and see what the current was. Since the depreciation in Argentina happened in May 2018, you expect that until May I have a much better cost of goods sold than after May. So I think that's the message. So you saw a lot of margin expansion in Argentina throughout the fourth quarter. This has a lot to do that my cost of goods sold is still one year before, while on the top line you have the benefit of inflation, which also increased prices, but your cost didn't follow suit. Eventually they will follow suit with a year delay. So for 2019, you could expect a better effect in the first half until more or less May, and then throughout the second half of the year, you should expect a tougher effect. But this is a consequence of our rolling 12-month hedging policy.

That's perfect. Thank you.

And our next question comes from Robert Ottenstein with Evercore. Please go ahead with your question.

Great, great. Thank you very much. I want to circle back to Skoll. And the challenge which I'm getting from talking to some of the players down in Brazil and throughout the supply chain is that Heineken's actually been doing a very good job at a kind of a core plus level with brands like Amstel and Eisenbahn. And so the question is kind of three-part on Skoll. One, kind of the brand health of the brand, how are the brand health indicators? Two, I know you're seeing some good signs from spreading out the brand a little bit that you think it's got broad shoulders, but how do we have comfort that that's not going to be at the end of the day, dilutive to brand equity? And three, what about bringing in a brand like Beck's if it appears that there is a strong interest in Brazil for more European-type beers? So thank you very much.

Robert, quick question. Yes, let's go. talk a little bit about the Core and Core Plus segment. So I think that the brand that really goes to the Core and Core Plus with more liquid and so on initially was Brahma. So Brahma with Brahma Extra. That has been growing a lot. So Brahma is a huge success, growing quarter for quarter in the last three years. So Brahma really is a big winner brand in the, I would say, in the market in the core, core plus segment. For specifically the core plus, so we have been growing a lot of Bohemia. Bohemia is really, I mean, it's amazing the kind of moves that I've been having with this brand. So it's very, very important to highlight that. And then we can, I mean, I can expand a little bit about Skoll. What we saw, I mean, the brand power, I mean, to have all the indications of new world brands, The leading brand in Brazil in terms of brand power is Skoll. Second is Brahma. Almost 50% of the brand power of those brands have the third one in the market. I think Skoll is the leader brand on that. The fact that it was important to bring the concept of the family of beers that goes down around for Skoll. to bring more attributes of beer knowledge for this brand because people are very emotionally linked to this brand. It's the leading brand in Brazil. It's an amazing brand power. So that's what we have been doing. So why we launched SkullHops first? Not exactly because of the volume. It's a good volume. It's the size of Brahma Extra. But because it's co-op, it really brings all the beer knowledge. I mean, including one price of the best hopi lager in a liquid that's completely different. So it's fresh, it's light, but with this kind of slightly bitter taste. flavor that the aromatic hops bring. So it was very, very good. So when we researched that, that Skull Hops helped the mother brand, the equity of the mother brand, and this happened. And then after that, we saw opportunity in the Brazilian markets to launch the only pure malt beer really with the drinkable. So with a drinkable liquid. So a drinkable liquid is but we still have the signature of a pure malt beer. It's not easy to do. I mean, that's why all the pure malt beers in the market, or they are bitter, or they have a kind of a flavor that not goes down round. So we have a patent process to really brew a liquid that really fresh, really light in this sense, drinkable, but with this signature. We tested a lot. We learned in terms of the liquid design a lot in the last years. All the research that was done, that's not only volume upgraded for the brand, expand the industry, gain share for the brand, and help the other brands like the variants of Brahma did with Brahma. So in my reading, based on the research, In the initial, I'll say, results that we have for the family of Skoal and for Skoal Pure Malt, we're very excited about this concept of the family of beers that goes down round and excited about the launch of Skoal Pure Malt as the last variant that just launched in the market. By the way, the carnival of this year will be a great opportunity for the Brazilians to try Skull Pure Mouth. That's really amazing. If you come here to Brazil, we invite you to drink and you'll understand what we're saying. Drinkable, light, but with the signature and the flavor of a pure mouth. The only one in the market that has that.

Thank you very much.

Thank you.

And our next question comes from Alex Robarts with Citi. Please go ahead with your question. Hi, everybody.

Thanks a lot for taking the question. So it really is just around your big picture thoughts on innovation. You know, we've seen now in the last six months four launches, right, in Brazil beer. And a couple responding to the value segment growth, a couple to this flavor, malt hops concept that you were just describing. And so it's an unprecedented amount of innovation when we think about the history of your company. So the question is twofold. Are we kind of at the point where you're feeling comfortable with the portfolio? Are we in midstream of a spurt of innovation? Just kind of getting your sense on the on the kind of phasing of this innovation as we think about this year. And then the benefits clearly you're describing to us, you know, volume uplift, consumer preference, and alignment and such. What about if you could comment on the cost side or the expense cost side of this innovation? You know, you've told us in the past that there's room for efficiencies in OPEX. I would assume these small batch type of productions in the northern states are costlier. More malt and more hops are costlier than rice and corn. And I guess just do you feel comfortable on the cost side and expense side that there is not expected to be an incremental change in this year in Brazil beer, or any comments around that would be great. Thanks so much.

Alex, thanks for the question. I think that's, I mean, go back and, I mean, Talk again about the long-term plan that we have and the pillars of the top-line growth and BD growth that we, in terms of growing volumes and revenues. So, first thing is to accelerate cleaning. Second, we have been talking to elevate the core. And the third one is drive smart affordability. And innovation is part of all of those things. So, it's part of the DNA of the company. have been investing a lot, not only in process, but in training our team, investments in terms of trying to find the best liquids. For instance, two years ago, we launched a new innovation center in Rio de Janeiro that is an amazing place with technology, with the best brewmasters of the world ready to test liquids We have been working on that for the last, I mean, three years, so big time. And sometimes the process is not so, you know, two plus two is four. Sometimes you find a liquid and then that's not the perfect one because you are talking about big, big brands. You need to really, I mean, do it right, you know. Sometimes, I mean, we could launch Skoll Pure Mountain in July, but we thought it was important to go to Skoll Hops first to bring this knowledge, the quality, I mean, knowledge of beer that Skoll, it's a great beer and needed. And then, of course, let's go to Skoll Hops, even knowing that the volume will not be amazing for Skoll because, you know, it's a hop lager. It's slightly bitter, drinkable. To really assure that we would launch Skoll Hops during the summer, during the carnival. That's what we're doing. So we don't manage the innovation process that we have, I mean, quarter by quarter to come here in the call and, I mean, ease ourselves and all the analysts. I mean, we think long term, and we really make the calls to do the right things. So we ask, maybe, I mean, given all of the things that I've been seeing in all of those years, last year was a year that lots of innovation were ready to go. And then we prepare our road to market, our execution system here to deal with them. We are doing very, very well. And I think that will always be part of our DNA. We continue to innovate for the future. But, yes, I'm very happy with the portfolio that we are, that we have. So premium is amazing. It's growing. It's gaining share. It's a portfolio gain. And you continue to gain share. I can see not only the numbers of market share, but I can see when I go to the street, talk to people. So, I mean, people who drink premium brands on different occasions, and the portfolio is there. I've seen a lot of people talk about Bax, maybe. You know, we are studying, because the portfolio is really good to offer that. And then you have the two most important brands in Brazil, with the brand power, that's Skoll and Brahma. And I think innovation is part of that. The variants are doing well. And then we have all the initiatives of smart affordability that, I mean, just comment, NASA, and the others that could come as well. So in terms of the cost of the liquids and stuff like that, I think that we know, I mean, we have this culture of owners to be efficient, really to try to find the money, better process. the technology helping us to really make sure that our cost base is low. But we will never, and we never in the past, and we will never compromise the quality of our liquids. Everything starts from the liquid that's in a bottle in a can. And this is, I mean, always being the part, and even more, a mantra. We have the better, the best liquids in the market, and we will not compromise the quality. I mean, never because of cost. We could find the cost elsewhere, and then we'll have the ZPPs and have all this stuff. But make sure that the liquid is the best liquid that we have, the best quality in all of our brands. So I'm really confident and happy with the portfolio that we have nowadays and I'm pushing the team to continue to innovate because this is a market that will continue to change and I need to be ready for the next five years. But currently, happy with the portfolio.

Very clear. Thank you very much.

Thank you.

And our next question comes from Leandro Fontesi with Prodisco. Please go ahead with your question.

Hi, good morning, and thanks for the opportunity. I also have two questions. The first one is, we have been seeing bottom makers in Brazil reporting that they are at a high-capacity utilization. I was just wondering if you have been seeing any sort of restrictions or bottlenecks so far, or if this is a concern for you, if indeed volumes are accelerating the market going forward. And the second thing is if you could bring some more color on Canada, so a volume decrease 4%. Correct me if I'm wrong, this used to be a fairly stable market, and we saw this big decrease in volume. So just wondering what happened there, if it's something related to cannabis-infused drinks or something like that. Thank you.

Hi, Leandro. Thanks for your question. On the first one, on the bottle makers, we have no issues at all. Not only we are seeing no issues from our suppliers, but we also have some of our own bottle plants. So combining both, it's not an issue, and then we are not even hearing anything about it in our operations. On your second question, on Canada, I think Canada is a very mature market. It's a very profitable market. But of course, as all mature markets, it has its own challenges. I think what we've been seeing is that, similar to other places, it's getting more and more premium. And we are investing a lot behind that. Our premium strategy is working. But it's even more of a portfolio game than in other less mature markets. So you should expect consistent growth over time. although it's fair to say that 2018 was not necessarily a great year. On your question about cannabis, it's too early to say. There is a lot of discussions about it, but there is no hard evidence that it's helping, working against, or making any meaningful impact on the beer category so far. I think it's something we have to learn about.

Got it. Just a follow up on the first question. What percentage of your production you can supply internally for bottles? Do you disclose that?

It's around 50%. So 50% of our volume we can supply by our own verticalized facilities.

Perfect. Thank you very much. And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks.

Okay, thanks for the attention of everyone. Before I finish our call, I'd like to close saying that we are confident, very confident, that we are evolving in a consistent way with our commercial strategy and the innovation pipeline. In Brazil specifically, we are certain that the premium market is a portfolio game. As I said, I've been saying a lot. and that we are in a very strong path with a portfolio that we have to continue to gain share in this segment, like we have been doing in the past several months. We're also very positive about the rebound of the economy in the country, in Brazil. We have a portfolio of brands in our core that are really, I mean, amazing. We have Brahma, we have Skoll, Antarctica as well, but Brahma and Skoll are really, really leading. The way the innovations behind those brands, Grammar in the past and Skoll now are really proving to be a success. So the core segment is even more strong. We have been launching initiatives for the value segment to increase our share of segment, but we think that the segment will contract like we saw in the last two or three months because the economy is doing better. if you think that will, and I think that will, this will be a trade-off. So the premium will and the quality will, and it will be in a much better shape to really for the benefit of this part of Brazil. I think that we are exiting this crisis I mean, the country, I hope, and embed in a much better place and shape than exactly what we entered years ago. So ready to fully benefit for the rebound of the economy that everyone here expects in the country. So thank you. Have a great day. Enjoy the rest of your day. Thanks again.

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