Ambev S.A.

Good morning, and thank you for waiting. We would like to welcome everyone to AMBEV's second quarter 2019 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, ri.com. .ambev.com.br as well as through the webcast link of this call. We would like to inform you that this event is being recorded and all participants will be in 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 the operator. 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, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of AMBEV and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and, unless otherwise stated, percentage changes refer to comparisons with 2Q 2018 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 in the earnings release. Now, I'll 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 2019 second quarter earnings call. I'll guide you through the financial highlights of our operations, including our below-the-line items and cash flow, as well as commercial initiatives of CAC, LAS and Canada. After that, Bernardo will give more details about our operations in Brazil. Beginning with the main highlights of our consolidated results. In the second quarter, top line grew 7.2%. a combination of volume increasing 0.8% and net revenue per hectolitre up 6.3%. EBITDA reached 4.7 billion reais, an organic growth of 0.3%, while EBITDA margin decreased to 160 base points to 38.6%. Normalized net profit for the quarter was up 16.1%, delivering 2.7 billion reais. Similar to the last three quarters, we continue to report the results of our operations in Argentina, applying hyperinflation accounting. Having said that, I will now move to our divisional results and start with Brazil. In the quarter, Brasil EBITDA reached R$ 2.4 billion, a decline of 5.1% versus Q2 2018, while margins contracted 520 base points to 38.1%. Beer Brazil had a very solid top-line performance, with volumes growing 2.9%, while the industry was flattish, according to Nielsen. Net revenue per hectolitre grew 3.7%, and revenues 6.7% higher than Q2 2018. Net revenues per hectolitre ended up being in line with inflation, a combination of cycling of last year's price increase, higher premium mix, somewhat offset by regional mix, as north and northeast regions grew faster than the country average. EBITDA for Brazil beer was down by 8.5% in the quarter, with margin contraction of 620 base points to 37.5%. This contraction was explained by the cost pressures we already had anticipated in the full year 2018 and its release. Cash COGS per hectolitre grew by 24.7%, impacted by aluminum, barley and effects. Cash SG&A declined 0.2%, even accounting for the increase in variable compensation accruals in relation to QQ18, which were more than offset by sales and marketing expenses phasing and efficiency gains in non-working money expenses. Top line in beer Brazil increased by 11.2% and EBITDA was down 1.1%, with margin contraction of 500 base points to 39.9%. In NAB Brazil, top line was up by 14.2% in the second quarter, the result of 8.1% net revenue per hectolitre growth and 5.6% volume increase. Industry grew low single digit, according to Nielsen. EBITDA in the quarter grew 15.9%, with margin expansion of 60 base points to 41.8%. In terms of costs and expenses, cash COGS per hectolitre was up 0.1%, with higher aluminum costs being offset by lower sugar prices. Cash SG&A was up 30.1%, impacted by higher variable compensation accruals and distribution expenses related to volume growth. Year-to-date, top line in our Brazil increased by 19.6%, and EBITDA was up 22.9%, with margin expansion of 100 base points to 37.5%. For Brazil Consolidated, we reiterate our guidance of cash cogs per hectolitre growth of mid-teens in Brazil for this year, which should be more pressure in the first three quarters, easing off towards the end of the year. Moving now to Central America and the Caribbean. CAC continues to show good momentum with an 11.6% net revenue growth, which is a combination of 5.7% increase in volumes and a healthy 5.6% net revenue per hectolitre growth. EBITDA in the quarter reached R$811 million, posting a double-digit growth of 33.9%, and a margin expanding 800 base points to 48.1%. Cash COGS per hectolitre increased 8.8%, mostly affected by Panama, where our strong volume evolution keeps our costs under pressure in order to assure there is no disruption in the market. Further, cash SG&A in the region was down by 20.1%, driven by savings in non-working money an easy comparable in 2Q18 due to the 2018 FIFA World Cup in Russia, and phasing of sales and marketing expenses. The other operating income increase in the quarter is mainly explained by the $14 million insurance compensation we received for the damage caused by the 3Q17 hurricane season. Year-to-date, top line in CAC increased by 12.1% and EBITDA was up 25.2%, with margin expansion of 460 base points to 44.1%. We are pleased with our commercial strategy in CAC, delivering health volume performance in virtually all countries in which we operate. In the core segment, we continue to enhance Presidente, our leading brand in the Dominican Republic, through trade activations and a campaign that promoted consumers' pride of the brand. We added more than 2.6 thousand coolers in the quarter. One of the most important selling moments, Easter, was covered by the campaign Una Fria Nos Iniega, with an important price execution supported by activations in the entire country. In Panama, our second largest market, Core brands continued connecting with consumers through Outlast Golden Light campaigns, UNETEL Pacto de Sol a Sol, and Balboa Ice experiential events, such as concerts. Also, Balboa Ice introduced ring-pull innovation to its RGB, driving differentiation among competitors. We also continue to roll out our premiumization strategy in the region, developing Corona, Stella Artois, Modelo, and Budweiser through a customized execution both for these on-premise and off-premise channels. Corona was the highlight of the quarter, engaging consumers to act on the protection of the oceans against plastic. Premium accounts for less than 5% of the beer industry volume in CAC, with margin contraction of 290 base points to 39.3%. Cash COGS per hectolitre in the quarter increased 21.9%, mostly driven by favourable FX hedges, while cash SG&A increased by 21.5%. Tailwinds from the hedge position in Argentina, which led to gross margin expansion, were more than offset by increased distribution expenses due to the inflation and operation of the leverage. Year-to-date, top line in LAS increased by 13% and EBITDA was up 24.2%, with margin expansion of 400 base points to 43.9%. 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 a strategy of differentiating the core brands, Quilmes, our classic lager, continues to enhance its national credentials with the launch of the Echa Con Carinho campaign and the activation of a new Soccer 360 strategy linked to Copa America. Brahma, our easy-drinking lager, relaunched its affordability campaign, Brahma's, offering consumers a more accessible option that minimizes out-of-pocket spend-tour. The Core Plus segment has shown sustainable growth over the past few quarters in Argentina. Andes Origin has been consistently outperforming the market following its launch last year. The repositioning of Budweiser was supported by two digital campaigns, one reinforcing its quality credentials and the other promoting the BuildX challenge, strengthening the brand's connection with music, a key passion point for the Budweiser consumer. Our high-end strategy continues to show promising results. Both Stella Artois and Corona continue to embrace better world campaigns with important repercussions in Argentina. Stella Artois continued Stella Blue Challenge and Corona launched Pay with Plastic campaign in order to raise awareness of the plastic in the ocean. Stella also embraces the gastronomy platform in Argentina with its proprietary event Mesa Compartida, inviting important chefs of the country to cook in unique locations. Copa America was an important event for activation in Las, with important campaigns with Becker in Chile and Pacena in Bolivia. Going forward, while cautious with Argentina in the short term, we have positive mid- and long-term perspectives in the country and remain confident in our ability to deliver solid top line and a beat in the whole region, supported by a strong portfolio. Turning now to Canada, in the second quarter, top line in Canada declined at 1.2%, a combination of a 2.3% net revenue per hectolitre increase and a 3.4% volume decline, which was mostly driven by a declining beer industry. EBITDA reached 646 million reais, which is 8.8% lower than in the second quarter of 2018, with margin contraction of 260 base points to 31.6%. In the quarter, cash cogs per hectare increased 6.2%, negatively impacted by increased commodity prices, especially aluminum, higher mix of important beers, and lower dilution of fixed costs. Cash SG&A increased 1.8%, driving by higher logistic expenses and impacted by variable compensation accruals. Year-to-date, top line in Canada decreased by 1.9%, and EBITDA was down 4.2%, with margin contraction of 70 base points to 29.2%. Despite the industry challenges, we had positive achievements with our portfolio during the quarter. Our Focus Core and Core Plus brands continued to deliver strong results. Michelob Ultra, supported by a campaign on Global Running Day, remains the fastest-growing brand in Canada, while Bud Light, strengthened by Bud Light Orange Launch, maintained its momentum. In the premium segment, our high-end portfolio is growing ahead of the industry, led by double-digit volumes growth of our premium import brands. The country also joined Corona's Better World efforts, enabling Canadians to take action with 50 clean-ups coast to coast and promoting trade activations with plastic-free solutions. Now back to consolidated figures below EBITDA. In the second quarter, net financial results totaled an expense of R$567 million, 48.5% lower than in Q2 2018. Main items in the financial expense in the quarter were First, interest income of 156 million reais driven by our cash balance. Second, interest expense of 383 million reais that also include interest incurred in connection with the Brazilian tax regularization program, as well as non-cash accrual of approximately 60 million reais related to our put option associated to our investment in the Dominican Republic business. Third, 204 million reais of losses on derivative instruments, which were up year over year, explained by the increase of FX hedge's carry costs linked to our cost of goods sold and capex exposure in Argentina, partially offset by equity swap gains. Fourth, losses on non-derivative instruments in the amount of 13 million reais. Fifth, taxes on financial transactions on the amount of 19 million reais. Six, 94 million reais of other financial expenses partially explained by accruals on legal contingencies and pension plan expenses. Seven, 99 million reais of exceptional financial expenses explained by non-cash intercompany transactions. Finally, eight, 88 million reais of financial income related to non-cash incomes resulting from the adoption of hyperinflation account in Argentina. The normalized effective tax rate was 12.2% in the quarter, higher than in Q2 2018. Year-to-date, the normalized effective rate was 15.7% versus 13.6% in the same period of 2018. Cash generated from operating activities in Q2 2019 was of 3.1 billion reais, which is 3.1% lower than last year. Year-to-date, cash generated from operating activities is growing by 25%, reaching R$ 5.2 billion. CAPEX reached R$ 896 million in the quarter and R$ 1.4 billion year-to-date, increasing 12.8% versus first six months of 2019. 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 the second quarter, we saw success from many of our initiatives, including innovation and continued premiumization. Our beer Brazil volumes increased 2.9% in the second quarter, with a flat-ish industry, according to Nielsen. Year-to-date volume grew 7.2% in relation to the first half of last year, while the industry grew low single-digit. I'm very excited about the consistent implementation of our strategic platforms, which allowed us to deliver a very healthy top line, both in volumes and in net revenue per hectolitre, despite an improving but still challenging macro. We remain confident that Brazil presents a great potential for the future, as half of the population above 18 years old is not drinking beer yet. The legal drink age population grows on average 1.5% per year. The penetration of beer among women is lower than in more mature markets. And, premiumization is still in early stages. So, now let's talk about our first strategic platform, which is Premiumize at Scale. Premiumization is a continuous trend and it is always important to reinforce that our strength in the segment is a great portfolio, combining global and domestic brands. This quarter, we officially launched BAX in Brazil. BAX is a legit pure malt that follows the pure law since 1873. It has a unique bitter flavor and is the biggest selling German lager in the world. As we highlighted last quarter, brand building goes through an investment in experience, which allow consumers to live the values of each brand in a deeper way. Such approach continues to deliver tangible results. This quarter, our global brands, comprised of Budweiser, Stella Artois, and Corona, grew together double digits. Stella grew more than 50%, and Corona, once again, more than doubled its volume. Budweiser stands for authenticity, explore nightlife, rock-pop culture, and great moments of consumer's life. Our proprietary event, NBA Halls, was again a huge success, especially this year when the NBA Finals were broadcasted on free-to-air television. Budweiser has been sponsoring NBA for the last past years. Bud Baseman was a hot spot for support in Brazil in Copa America. It was present in six main Brazilian capitals, with music and brand activation. More than 100,000 people attended and over 28.4 million were impacted by social media. Stella Artois continued to embrace the food platform, participating in cool food events across the country, as well as leveraging the final episode of Games of Thrones. In the video, that reached almost 3 million views, Brazilian influencers shared that Stella paired with food while chatting with Sean Bean, one of the TV show stars. Stella Artois' volume was also supported by the continued expansion of new pack formats, such as the sharing size bottle and the new cans. Corona continues to embrace the Better World platform. The campaign Listen to the Ocean had a very positive and strong impact. the brand took advantage of this fantastic momentum to call the attention of the plastic dampen in the oceans. The video with Donovan Franker-Harter and Cell reached almost 4 million views and led in June to the brand's all-time high number of mentions in social media. Colorado, our biggest premium craft brand and the leading brand on the craft segment in Brazil, launched Colorado Ribeirão Lager, It's an easy-to-drink craft with distinctive taste, following our obsession of quality and differentiation. Ribeirão Lager will act as an entry point to the craft segment. As the brand power of our premium portfolio continues to evolve and to increase, we are able to release new packages allowing consumers to taste our products in different occasions, delivering strong, sustainable volume growth. We are certain that the premium market is a portfolio game, and that we are in a very strong position to continue to gain share in the segment. Now moving to differentiate the core. Brahma, our classic lager beer, has been experiencing memorable momentum and growing strongly. The brand connects with consumers to relevant platforms, such as sertarejo, the Brazilian pop music, and soccer. Brahma's momentum was reinforced by the digital reality show, The Next Number One. In this six-episode YouTube show, in partnership with Vila Mix, Brahma searched for the next number one pop singer. The show was the biggest digital reality show ever produced in Brazil, with over 157 million views, with 98% of positive health. The launch of the first episode was the peak of years ever registered by Google Brazil, and five episodes were trending topics on Twitter on their launch. The quarter was also marked by an amazing Copa America execution. Brahma exposed 27 arenas, set up traditional venues in five main Brazilian capitals, where consumers watched the games while enjoying free entertainment. More than 230,000 people attended such events, and over 45 million were impacted by social media. Brahma also did a campaign with Marta, one of the greatest Brazilian soccer players of all time, and awards six times best FIFA Women's Player of the Year. Finally, in June, the brand reached its all-time high number of organic mentions on social networks, surpassing 200,000. Skoll's quarter was marked by the exciting results of Skoll Family Campaign and the national rollout of Skoll Puro Malte after its remarkable launch during Carnival. Skoll Family Campaign reinforces the family concept in the Skoll way of approaching consumers, young, modern, and innovative. The campaign had more than 100,000 organic mentions on social media with 91% positive health. which is the best result ever achieved for a Skoll campaign. So far, Skoll Puro Multi continues to show very, very encouraging results. Also in the quarter, we launched the Skoll Puro Multi Flint Bottle with an easy-to-open bottle cap, allowing the brand to join special consumer occasions. I will now spend a few moments to talk about Drive's smart affordability. As we mentioned before, the value segment is characterized by the importance of brand equity. Moreover, even though it's quite relevant in terms of volume, its share of the industry profit pool is very low. During the second quarter, the share of the value segment of the total industry remains stable versus the first quarter, but below second quarter 2018. We are confident that once we start to see disposable income improving, we are likely to see the value segment trending back to its historical levels. One of our approaches to the value segment is to build regional connections, thus creating brand equity at an affordable price point. And, given local raw materials, local marketing, and only most profitable package, we are also able to deliver very healthy margins. After the successful launch of NOSSA and Magnifica, We rolled out in June the beer Legitima in the state of Ceará. The brand replicates the same successful strategy. Now moving to operational excellence. Our mantra is, wherever we call it Brazil, there has to be a bet. Operational excellence has always been one of our biggest strengths and key differentials. Given that point of sales connect our brands to consumers, customers' experience is a strong focus. We have been measuring the net promoter score of for-or-cost customers in a consistent basis in order to understand and address the main pain points and improve their experience. As the premium segment advances, we are also able to implement a hyper-segmentation for mature markets, mature cities, that we are rolling out to the country's main capitals. That strategy trickles down to safe structure, differentiated trademark execution, flexibility on delivery times, among others. Such initiatives translate into premium volume growth, brand building, and market share gain. Talking about technology, as we highlighted last quarter, technology has been a key enable for us to support our strategic growth platforms. To optimize AMBEV's operations, one of the focus of the Quora was the integration of HBCs, expanding and improving technology to all the areas of AMBEV with more agility and scale. On our relationship with customers, we are focused on freeing up sales representative time in order to focus on activities that add more value to the point of sales. As a consequence, sales which are not conducted by sales reps at sites now account for 29% of the total volume of on-premise, compared to 18% in the second quarter 2018. Part of this was driven by Paceiro Ambev, our B2B tool, and one of the largest e-commerce in the country, with more than 100,000 clients. Let's talk briefly about a project called DraftLine. With DraftLine, our main ambition is to reach out directly to consumers, The levers for that goal are, first, improving consumer intimacy, anticipating consumer needs, and establishing one-to-one relationship at scale. Second, building up a proprietary audience base. Third, being able to extract real-time consumer insights. And last, precise media. It's the digital transformation helping us to understand deeply our consumers and connect better with them. Now moving to our NAB division. We are quite pleased with our performance this quarter. Volume growth came from all different segments in our portfolio. An important highlight is the premium brands such as Lipton and Tonic Antarctica, which grew double digits, bringing a health contribution to the portfolio mix. Talking about sustainability. This year, we are conducting the second edition of the program VOA, an internal consulting company with voluntary participation of our people, created to help NGOs optimize their process, budgets, and also measure people and careers. In this edition, 200 AMBEV employees are working together with 75 selected NGOs, impacting around 2 million people nationwide. AMA, our mineral water that converts all the profit obtained with the product to initiatives of access of potable water in the Brazilian semi-arid, has reached its 30 projects, benefiting 30,000 people. Finally, so far, 2019 has been a good year. Our portfolio of brands is delivering a healthy top-line growth, helping to offset the cyclical pressures arising from effects and commodities, When you look beyond such cost-handling, you get even more excited about the strong fundamentals and growth potential of our business. We are only able to achieve such results in the first half given the amazing people who have always been the foundation of our company. With our team, our culture, and our consumer-centric business model, we are confident and in a strong position to deliver long-term sustainable growth. We can now move to the Q&A. Thank you.