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.