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.

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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Our first question comes from Luca Cepicchia with Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for the question. Congratulations on the results. I wanted to ask a couple of things. Maybe first, I think you make a comment in the release about stronger performance in the north and the northeast, which partially explained the mix and the revenue per hecto. Can you maybe expand on whether that is coming from, you know, stronger industry growth overall, market share gains, some of the initiatives in the portfolio that you had over the last few months, including in value, even though I would assume that's still a pretty low contribution, but anything that you can share there in terms of regional performance that would be helpful? And then secondly, which is related to this, maybe an update on the sort of value of the mainstream segment relative growth performance. I think earlier in Q1 you mentioned, you saw that inflection already. I think it was interesting that earlier today Coca-Cola FEMSA made similar comments in saying that, you know, the lower income consumers are coming back to some of those segments and their categories, which in itself would be a sign of sort of the trading down, maybe abating or over-inverting. So, you know, anything else that you can add on that discussion also would be very interesting to hear. Thank you.

Hi, Luca. Thanks for the question. Let me get to the volume. So, I'll just start talking about the overall volume numbers that we had. And as I said, it was a 2.9% above last year while the industry was flourishing. So good news that we grew volume ahead of the industry. And again, the performance that we had is a consequence of the investment, consistent investment behind our strategic platform that we've been doing all of those years. And it's important to point out that we have not seen this positive income yet resuming growth, which would likely to provide a meaningful positive impact. When it goes to the premium segment, I mean, I have been saying this, I mean, for many, many quarters, that our strength is superior portfolio of brands, global brands, domestic brands. And you continue to gain share in this segment, led by mainly for the south and southeast, because the industry of premium segment, it's bigger in the south of Brazil, in the southeast of Brazil, and given the disposable income that's higher here. When you go to the core, I think that we have been doing a very good job in differentiating the families, the brands, Skoll and Brahma, and creating the families. We started with Brahma two, four years ago, and then we replicated this to Skoll. I mean, it's performing pretty well. Now we have Skoll Pilsen, Skoll Robson, Skoll Pure Mountain. And then I think that the growth in the core in the Northeast, it's really above the average in the country because our market share there was lower. And I think because all those innovations that are bringing in the core was really helping us there. Not only the core, but core plus. We're growing Sculpium out there a lot and Bohemia as well. So the growth in the Northeast just to answer specifically your questions, it's basically innovation, serving better the customers, the portfolio is stronger, and we are growing volumes ahead of the industry. And not only with the core brands, but with our brands, local brands, like Magnifica Nossa, that are really performing very, very well. And let's always... Remember that those brands, given the agreement that we have with the local farmers, the market is local, digital and so on, we are talking about good margins. They are in a very good price point, but they have kind of core margins that help us to grow in the value segment. which means that we are creating brand equity for those brands. People really like this regional link. And specifically linked to the value segment, the peak was at the end of last year, and then we saw in the first quarter a decline of 200 basis points in the size of the segment that remained stable from the second quarter to the first one, but below last year and below the peak of December of the last quarter last year, which means that we really think that the trade-off from value to core started to happen. We think that with disposable income increasing or becoming better, in a better shape in the future, the core segment will benefit the most. And the position that you have in the core segment was always strong, and even stronger now with the famous of Brahma and its core performing pre-pre-work.

Very clear. Thank you. Thank you, Bernardo. Thank you very much.

Thanks, Luca.

The next question comes from Antonio Barreto with Itao. Please go ahead.

Hi, guys. Thank you for your question. First of all, when we think about, when we talk to our pricing checks and our channel checks, we see prices of a couple of brands in the premium segment, like Stella Dua in Budweiser, for example, being gradually decreased. First of all, but my first question, do you agree with that? And the second one, is it fair to say that you are pushing a little bit to the lower end of the pricing point in the premium segment? And as a commentary on that, there was one slide in your presentation for this quarter talking about expanding at the premium-width scale. And I understand that that mostly means more brands in the premium segment, but could I interpret that as well as increasing the reach of the consumers in the premium segment with lower prices as well, maybe even transitioning some of these brands to the mainstream-plus segment? And if that is the case, wouldn't you run the risk of cannibalizing some brands in the core segments? Can you comment on that?

Okay, Antonio, thanks for the question. I think it'll first link it to the price. It's very important to highlight that each brand has a different role in its own price point. And given that in the premium, it's a portfolio game, this is very, very important. So in the premium segment, for an example, Budweiser is our largest premium global brand in Brazil. And it plays a key role as a bridge from people who are trading up towards the premium segment. So this is the role of Budweiser. Stella Artois, its prices are both Budweiser and Corona above Stella. And we just launched BAX in Brazil. That will be prices between Stella and Corona. So basically, this is our pricing strategy. It didn't change. Linking to the channel, specifically, like you said, beer sales in Brazil, and mainly premium, big, big volume in the off-trade, are usually done via promo based on part of the retailer's strategy to attract consumers to the stores. There wasn't any difference in pricing policy of the off-premise in relation to the past quarters. By the way, if you see the performance in the next record, was above inflation, even with a very strong growth in the north and northeast of the country that we have lower price, given the price of the industry there is lower, as you know. So, having said that, no change in the pricing policy. Link it to the innovation. So, this was the insight that you had studying other markets years ago. So, we had all the numbers, we studied other markets, we leave it there, and we knew that the premium would be a portfolio gain. You don't find in a mature market any brand that has more than 67% of market share. So we knew that Brazil would grow in the urban centers in the more healthy cities and states to the premium segment with the trade that would happen. So to build the portfolio was very, very important. And that's why we created kind of an innovation mindset internally with skills, process, people to ensure that this innovation machine would deliver a portfolio and a broader portfolio in the future. So that's happening and will continue to happen because it's a portfolio game and you have amazing brands. You have global brands, regional brands, you have craft brands and so we think that the premium will continue to be a portfolio game. We need to prepare ourselves for what we have been doing or prepare. That's why we're again sharing the premium segment for many, many quarters and we're very confident that we'll continue to do so. Looking at the trade-up in specific, what I see, I don't see a trade-up, a big trade-up from the core to the premium. What I see for the future that could be an opportunity for us, if the disposable income in the country resumes growth, I mean, if it happens, and then we always think that this could happen, the most important segment that would have the benefit of that would be the core segment. The biggest change in terms of the size of the segment in the last four or five years was exactly core going down and value going up. disposal income going up, the trade-up from core, from value to core would happen, like it happened in many, many markets, and our core portfolio is very, very strong. I don't see any issue in terms of a big trade-up from core to premium. And if it happens, it's not bad because the margin of premium are better. So, basically, that's what I have to answer.

Okay, thank you, Bernardo. Very clear. Just another question. If we think about the other revenues, and this time around we saw a little bit of a lower gain in the beer segment in Brazil. We have seen volatility in the past on that line, but you mentioned that you lost some benefits in Santa Catarina, for example. So my question is, how much of this loss can you attribute to Santa Catarina, and how much is just normal volatility on the mix, as you mentioned as well? and if you have any other benefit in sight to expire in the upcoming years.

Hi, Antonio. This is Fernando here. Most of the volatility was due to the regional mix and to where you are being produced because different states have different incentives. The one that expired in Santa Catarina, but it was a smaller portion of that, and there is no other, I think at least in the short term, there is no other meaningful one expiring. Thank you, Fernando.

The next question comes from Tiago Duarte with BTG. Please go ahead.

Hi. Hello, everybody. I have a question circling back a little bit to the discussion about pricing in Brazil beer. You guys made it pretty clear that the geographic mix somewhat offsets the premiumization, even though you still manage to grow roughly in line with inflation. I just wanted to get a little bit more detail, two things that you didn't comment on, and I just wanted to make sure if there was an impact or not on the pricing side. The number one is regarding packaging or presentation. What we heard in our channel checks is that there was, if you look on a year-over-year basis, the industry is much heavier on cans as opposed to returnable bottles, so I just want to to see and to hear from you guys whether you saw something like that affecting the mix, especially the presentation mix in the quarter. And secondly, in terms of discounts, right, when we look at your financials, and of course you don't break it down for the Brazil Beer Division, but you do offer the parent company and the consolidated perspectives there. I mean, we continue to see discounts as a percentage of gross revenues going down. And I remember, I think, Fernando, we discussed that a few quarters ago, and your point was that you continue to see room for reducing discounts from the levels that we had a year or two years ago. So just wanted to see if you really had lower discounts this quarter versus the last few quarters, and whether, of course, you see more room for reduction because we are really at a much lower level compared to what we were some time ago. Thank you.

Thanks for the question. I think at first I'm going to link it to the, I mean, you talk about the initially talk about the revenues and then how the mix of regions can affect that. The fact that the portfolio in the north and northeast is stronger now. It's more a core market and value market, less than premium. And I think that we've moved a lot in both segments, the portfolio approach. Not only in the value, that I've been talking a lot, in terms of the regional brands, Magnific, et cetera, but as well in terms of core. So core, core plus, we're gaining volume way ahead of the industry in those regions, and ahead of the average of the full country. And the portfolio, of course, is helping. Not only Brahma is doing well, but Skoll Family is doing well, Skoll Pure Mountain, and Bohemia. And because of the price of those markets, although it's below the parts of the surface, you have this regional mix impact. Because really, the growth there is really significant. That's good news. It's good news because we have been working hard in terms of the road to market there with the portfolio approach there to really be able to grow. That was always the reason that our market share was not as we expected and below average of the full country. So opportunity there and attacking this with the portfolio approach in the main segments there that score and value in as much way like I said before. Moving to the camps. RGBs, we'll continue to push the RGBs in the right way. So the 300 ml, the one year. So that's very, very important. We continue to see opportunities of growth on that because we know that in 50% of people, LDA plus in Brazil, they don't be in 80% of the 50%. It's not because they have money constraints. And then with disposable income going up, I think RGB would be even more important to expand the availability, to accessibility to our core brands. But having said that, what we saw, first, the premium segment's growing, and premium segment's growing, and we are gaining share in this segment. And premium segment is mostly one way. So, yes, we saw camps growing, but because of that. And the second thing, When we launch a new brand, we innovate in something in a very strong way, like Skol Pure Malt, like the Bohemia Pure Malt. The first volume that comes, because it's a big trial on that, comes from one way, because mix-up. People will try a new brand, a new liquid. They will not buy one little bottle of returnable to do that. They buy a can, they buy a long rack. So those two effects, yes, push a little bit the weight of the cans in our mix, but for good reasons. Premium is growing and innovation in the core is doing pretty well. So that explains a little bit the trend in the cans based on your question. So now, I'll turn around and finish.

Thiago, on your question on discounts, At the end of the day, you will always find ways to be more efficient, be it through the 18-pack, be it through how you price it, because you know that there are some inefficiencies, especially on the off-trade. And over time, as this process improves, as you get more efficient, you try to find ways to be more efficient on that line. And that's why we've been seeing the difference between gross and net revenues diminishing over time. Of course, the bulk of that has already been done, but there is always room to be a little bit better on that. But I wouldn't say there is a huge space to improve a lot.

And just to add on that, in terms of the mix, And the biggest, by far, effect in our cost of goods sold in this quarter was effects in aluminum. That is cyclical. That's why the performance in top line is so important, because we know that's cyclical, including the last numbers that we saw for aluminum, good numbers, and including the currency went down to zero. So the dollar was kind of 4, 3.75, 3.76. to continue, and there are plans to continue to perform well in pipeline and discuss the facts is cyclical, it's very good news for the future.

Yeah, thank you very much. Just a little follow-up here, just to make sure I understood the message, especially on the first part. So, you described, Bernardo, the increase in the one-way presentations, you know, at least a big part of that, mostly as a let's say, innovation and introduction of several liquids and extinctions that you guys introduced in the recent past. So would you say that if you exclude that effect, you could see more room for growth in returnables or a more favorable mix? Just for me to understand how you guys see this packaging and presentation mix evolving in the future. Just a follow up here.

It's not, I mean, we're not going to give a guidance on that because the market can move, but just to, if the one-way growth, because innovation and profitable innovation in core with new brands, and because the premium segment is growing with higher margins, innovation with higher margins coming, we are again sharing in premium. It's not bad. It's good for the business. Because at the end of the day, I mean, we're expanding the industry, and we're gaining share in each specific segment. That's the aim, and that's why that's our plan for the premium segment. So that's good news. So cam's growing for premium. It's very good. Margins are better. They're expanding the industry, and I'm gaining share in the segment that's growing. But having said that, I see, I've not given numbers, the opportunity of the RGBs to help us in this trade up from value to core when disposable incomes start to resume growth in our country here in Brazil. This happening with the core brands, the innovation that we have, the Skoll family, the Bremer family, I think that yes, one liter, 200 ml represents a great opportunity of trade up from value and to core and including from people that not even drink today because of money restrictions. So it's both. Both opportunities. RGB in core, trade-up in premium innovation with better margin even sold with one-way packets. Clear now?

Yeah, very clear. Thank you very much. Thank you very much.

The next question comes from Antonio Gonzalez with Credit Suisse. Please go ahead.

Good morning, Bernardo and Fernando. Thank you for taking my question. Just two quick ones. The first one on Skoll. Last quarter, you mentioned that the entire family was growing, right? And this quarter, you made some very positive comments on the pure malt line extension, but you didn't comment on the family overall. Can you comment on whether that growth for the family continued into 2Q? And I don't know if you can mention any trends, you know, as you do the rollout of Pure Malt. Is cannibalization on Skoll pills increasing? Is it in line with your expectations? And also perhaps the up-trading from value to mainstream remained flattish, right, quarter on quarter. So I don't know if that has any impact on the mother brand Skoll. So that's number one. And then number two, very quickly, you've been – talking about these tech-enabled solutions, right, over the last few quarters, Parseiro Ambev and so forth. And this is enhancing your ability to serve the points of sale. I presume this is also explaining part of the growth in the north and the northeast. You can increase frequency of visits in remote places and so forth. So I wanted to ask, at this stage, what is the bottleneck to accelerate these better services? Is it the macro environment itself? You are waiting for the macro to recover even further to accelerate these investments? Or really, it is just the pace of execution that you can sustain at the moment in order to increase the frequency of visits and the quality of service in these, particularly in the north, northeast, in the more difficult-to-access areas. Thank you.

Okay, Antonio, thanks for the question. I mean, the first question related to Skoll, I'm very happy with the Skoll family. We don't disclose the growth per brand. And we could say that Skoll Pure Mouth is a medium-success launch. It's a creative. and change this whole family volume trend, big time. That helped the full business a lot. Always to bear in mind that the second quarter with Copa America and with the country music platform was heavy more on drama. And we activated school, not we activated drama in the second quarter. It's clear that the trends for the Skoll family is a big, big change. And Skoll pure mulch is not even 100% launching, because as I said before here in the Q&A, people, I mean, when you launch a product like that, it's a huge success. People start to trial the product, and then you start to front pack, and then go to other pack, to other channels. So we're still launching Skoll Pure Malt and it's helping the brand equity of the Skoll mother brand and the full family. So very happy with the results of Skoll overall. We have a major trend shift in terms of volume of that brand and Skoll Pure Malt is really doing amazingly well. This is our first question. The second question, I have been working in this digital transformation in the company for some years and I just bought ABCs to help us to go even faster. I think that it's helping us in many, many fronts, not only when we talk about the point of sale, but I discussed about the draft line. We can discuss about process internally, how we can optimize the process using technology to assure that our SG&A will continue to be in good shape. I think specifically to the point of sale, I think it's a huge opportunity for us because we have a right to win there. We have contacts of those points of sales weekly for many, many years. We are increasing big time our basic service for those customers. Our NPS is growing. We created three years ago a client service area internally here in Brazil and other countries as well to assure that the NPS will continue to evolve and is evolving big time. And with that, it makes it much more easier and to implement a B2B tool. So that's growing a lot, and I think that the pace of growth, it's more linked, and that's growing fast. It could grow faster, it could, but there is an adoption time of the tool from the customers. It's not to think of lack of focus or even lack of investment. So we're investing our focus on that. It's very, very important. Technology matters. It's embedded in our DNA, and the adoption will happen. And it's very strong. Last year, 80% of our sales in the own trade was done in the same quarter in site visits via other ways of order taking, which means that 82% was in site visits. This number was 18%. The other quarter, this quarter is 29. It's a big evolution in terms of the complex strategy to the point of sales.

That's very helpful. Thank you, Bernardo.

Thank you, Antonio. The next question is from Robert Odensein with Evercore ISI. Please go ahead.

Great. A couple of questions. I think you were asked this, but I'm not sure I heard the answer. Net revenue per hectoliter up 3.7%. Did you give us a number of what that would have been on a constant geographic basis?

Hi, Robert. We don't disclose that, but you can bet it would be better than that on a constant geographic basis.

Okay. And then in terms of pricing this year, will it be the normal time frame or perhaps in August like you've done in other years?

It's not going to be much different than in past years. Some of the pricing is already in the market. Some of that already started in July for some SKUs.

So a little bit earlier.

It's more or less similar to last year. You don't increase all the packages exactly the same day. So for some SKUs, you already started, but it's happening in the third quarter like it happened last year.

Great. And then my last question, you now have a very strong portfolio of global, international brands, bringing BEX in, so you have Bud, Stella, BEX, Corona, and you gave us a little bit of sense of kind of the pricing ladder. Would your expectations also be that the volume will be kind of correlated such that the lower-priced ones would have the most volume, so that Bud would be the largest volume, Corona the least? And tied to that, have you had any surprises in terms of the customer acceptance of these brands? I think a lot of these brands are new customers. to the customers in Brazil? Any thoughts in terms of how they've been accepted and surprises along those lines?

I think, Robert, as you always said, the portfolio approach will be the winning approach. By the way, what's happening? The last many, many quarters have been gaining share in the premium segment. And the beauty of that, that you have entry brands in that specific segment, like Budweiser, that's an amazing brand, a very good equity, it's a bigger brand, and you build a portfolio from there. And then I'm not even talking about some brands here. You have a local craft that we just launched, a lager, like a little bit bitter in terms of liquid, but we launched the Colorado Hiberon lager. That's growing a lot. So we are really in another stage of that specific brand, and then we start to scale up, and the price is way up. Last year, I mean, we have been evolving a lot in the way that we innovate. So we do more pilots, we understand in small cities, in regions. So last year, we launched a brand, not specifically an important brand in the portfolio in the south of the country. And it was an amazing result. It was an amazing result that will scale up for the future. I'm not 100% comfortable to say the name of the brand, but I'm just saying that when I talk about the expansion of a portfolio of premium, it's not only the expansion, but the way that we do it, the way that we innovate. doing small pilots and then, I mean, make success case there and then go, I mean, new things to big things and bigger to bigger things. So, I mean, we adjusted in the last years the innovation process that helped us to have a healthy pipeline in not only the premium, in the core as well, but specifically premium, bringing brands with different price levels. That will show to us that the profitability of the overall portfolio is pretty good, and we'll have one brand for a specific occasion, for a specific price point. For each specific occasion, each specific price point.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks.

Thank you. So thanks for the attention. I think that we continue to be very excited about the implementation of our strategic platforms, not only in Brazil but in the other countries. I think that consistency is the name of the game to win in a market that demands a connection even more with people that drink our beers every day. We are a really, truly consumer-centric company and really... I'm very excited about the prospects of the portfolio of the brands of the way that we operate. Thanks a lot. Have a nice day.

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