Ambev S.A.

Good morning, and thank you for waiting. We would like to welcome everyone to AMBEV's third 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.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 session. 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 today during today's call are both organic and normalized in nature and, unless otherwise stated, percentage changes refer to comparisons with the third quarter 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, EBS, 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 Third 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 third quarter, top line grew 5.9%, a combination of volume increase in 0.8%, and net revenue per hectolitre up 5.1%. EBITDA reached R$4.4 billion, an organic decline of 5.4%, while EBITDA margin decreased 450 base points to 36.9%. Normalized net profit for the quarter was down 15.8%, delivering R$2.4 billion. Similar to last quarter, we continue to report the results of our operations in Argentina applying hyperinflation accounting. Having said that, I'll now move to our divisional results and start with Brazil. In the quarter, Brasil EBITDA reached R$ 2.4 billion, a decline of 13.3% versus Q3 2018, while margins contracted 710 base points to 37.9%. Dear Brazil top line grew 1.1%, with a volume decline of 2.8%, while the industry grew low single-digit, according to Nielsen. Net revenue per hectolitre grew 4%. EBITDA for Beer Brazil was down by 7% in the quarter, with margin contraction of 350 base points to 40.3%. This contraction was explained by the cost pressures we already had anticipated in the full year 2018 earnings release. Cash COGS per hectolitre grew by 26.5%, impacted by commodities and FX. Year-to-date, top line in beer Brazil increased by 7.8%, volumes are up 3.9%, and EBITDA was down 3.1%, with margin contraction of 450 base points to 40.0%. In NAB Brazil, top line was up by 13.6% in the third quarter, the result of a 6.6% net revenue per hectolitre growth and 6.5% volume increase. Industry grew low single-digit, according to Nielsen. Ebit in the quarter declined 44.3%, with margin contraction of 2,640 base points to 25.4%, due to hard COGS comparables in Q3 2018. Year-to-date, top-line in-app Brazil increased by 17.5%, and EBITDA was down 5.8%, with margin contraction of 830 base points to 33.5%. 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. CAAC continues to show good momentum with a 6.8% net revenues growth, which is a combination of 2.8% increase in volumes and a healthy 3.8% net revenues per hectolitre growth. Ebit in the quarter reached R$688 million, posting a double-digit growth of 20.1%, driven by a strong growth in Dominican Republic and margin expanding 470 base points to 41.5%. Year-to-date top-line in khaki increased by 10% and EBITDA was up 23.3%, with margin expansion of 460 base points to 43.2%. We are pleased with our commercial strategy in khaki, delivering health volume performance in virtually all countries in which we operate. In the core segment, Presidente launched a summer campaign, La Fria Mas Fria, while delivering experience to consumers with a refreshing ritual. In Panama, our second-largest market, we celebrated this quarter the 110th anniversary of Cerveceria Nacional, reinforcing the last connection with consumers through a multi-category activation. We also continue to roll out our premiumization strategy in the region, developing Corona, Stellar 2A, Modelo, and Budweiser through a customized execution both for the on-premise and off-premise channels. Highlights of the quarter were triple-digit growth of Modelo in Dominican Republic and of Budweiser in Panama. 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 continue to be very excited about our business development and strong volume performance in CAC, reinforcing our positive outlook for the region moving forward. Switching now to Latin America's salt. Volumes in the region increased 6% during Q3 2019. Driven by Argentina, where volume increased by mid-single digits as a result of shipment phasing ahead of schedule price increase in October 2019 and benefiting from favorable comparable in the prior year. Net revenues per hectolitre increased 15.3%, which led to a 22.3% top-line growth. Editing last for the quarter was up 7.9%, with margin contraction of 530 basis points to 38.2%. Cash cogs per hectolitre in the quarter increased 28.6%, mostly driven by effects and commodities. Year-to-date, proper lining laws increased by 14.1%, and EBITDA was up 15.9%, with margin expansion of 70 basis points to 42.3%. 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, continues to enhance its national credentials with the launch of the Etia Con Carinho campaign. Brahma, our easy-drinking lager, activated a campaign in Friends Day capturing attention of younger public above legal drinking age. In the Core Plus segment, Andes Origin led the growth with the launch of its single-serve returnable glass bottle of the Red Lager and in September it broke its all-time high volume of sales. Budweiser embraced a new platform of international soccer, exploiting the global sponsorship of Spanish La Liga and the English Premier League. We continue to see strong growth from our portfolio of brands in the premium segment in the region, with double-digit growth of the portfolio in Argentina. In Chile, the premium portfolio grew double-digit as well, with Cusqueña being the highlight delivering triple-digit volume growth in the country. 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 EBITDA in the whole region, supported by a strong portfolio. Turning now to Canada. In the third quarter, top line in Canada declined 3.2%, a combination of a 2% net revenue per hectolitre increase and a 5.1% volume decline, which was mostly driven by a declining beer industry. EBITDA reached R$ 565 million, 14.9% lower than in the third quarter of 2018, with margin contraction of 390 base points to 28.4%. Cash cogs per hectolitre increased 7.6%, negatively impacted by increased commodity prices, higher mixes of imported beers, and lower dilution of fixed costs. Year-to-date, top line in Canada decreased by 2.4%, and EBIT was down 8.6%, with margin contraction of 200 base points to 28.9%. Despite the industry challenges, we had positive achievements with our portfolio during the quarter. our focus core and core plus brands continue to deliver strong results. Nickelode Ultra, supported the health and wellness platform, remains the fastest growing brand in Canada. In the premium segment, our high-end portfolio is growing ahead of the industry, led by a double-digit volume growth of our premium import brands, such as Corona and Rougarden. Now, back to the consolidated figures below EBITDA. In the third quarter, Net financial results total an expense of R$ 306 million, 54% lower than in Q3 2018. The main items in the financial expense in the quarter were First, interest income of R$ 626 million driven by our cash balance and recovery of a tax dispute. Second, interest expense of R$ 394 million that also includes interest incurred in connection with the Brazilian tax regularization program as well as a non-cash accrual of approximately R$60 million related to the per option associated to our investment in the Dominican Republic business. Third, R$312 million of losses on derivatives instruments, which were up year over year, explained by the increase of the tax hedge carry costs linked to our COGS and CAPEX exposure in Argentina and by equity swap losses. Fourth, losses on non-derivative instruments in the amount of R$ 291 million, mainly explained by non-cash intercompany effects variation, mostly linked to the Argentinian peso depreciation. Fifth, taxes on financial transactions on the amount of R$ 58 million. Sixth, R$ 121 million of other financial expenses, partially explained by accruals on legal contingencies and pension plan expenses. Seventh, R$174 million of the exception of financial income explained by non-cash intercompany transactions. Finally, R$7 million of financial income related to non-cash incomes resulting from the adoption of hyperinflation accounting in Argentina. The normalized effective tax rate was 7.9% in the quarter. Year-to-date, the normalized effective tax rate was 13.3%, versus 7.6% in the same period of 2018. Cash generated from operating activities in Q3 2019 was of 3.6 billion reais, which is 34.2% lower than last year. Year-to-date, cash generated from operating activities is declining by 8.5%, reaching 8.7 billion reais. CAPEX reached 1.6 billion reais in the quarter and 3.1 billion reais year-to-date. increasing 38.2% versus the first nine months of 2019. Thank you very much. Bernardo will now share some initiatives and thoughts on the Brazilian market before going to the Q&A.

Thank you, Fernando. Hello, everyone. Before coming to the key highlights of the quarter, I would like to spend some more time to talk about the transformational change in our business towards becoming even more consumer-centric, and more technology-driven company. This transformation has two main pillars. First is our culture, never forgetting the core values that brought us here, such as our ownership mindset, high and developed great people, the culture of opening gaps and closing gaps, and never taking shortcuts. These values will continue to be the basis for us to achieve our objectives in the changing society. Second, our strategic growth platform. We've been very consistent on applying this strategy to all areas of the company, and we strongly believe this is the correct path for sustainable growth and value creation for investors. Consumer is changing, and we are changing and evolving as well. Regarding becoming an even more technology-driven company, we have some key milestones that are important to highlight. such as the acquisition of an IT solutions company, streamlining the IT area to give more focus to our core and new business, and adding a position of VP of technology. Now, talk about this quarter. As mentioned by Fernando, we continue to deliver on our main initiatives, including innovation and continued premiumization. During the quarter, volumes were down 2.8%, while the industry increased low single-digit, which means we lost share. The impact of our price increase was amplified by simultaneous competitive discounting and a challenging macroeconomic scenario. But in the first nine months of 2019, volume grew 3.9%, while the industry grew low single-digit, delivering a share gain year-to-date. We continue to be excited about the prospects for Brazil. Demographics are supported, as population older than the legal drinking age is growing at 1.5% per year. On the penetration side, there are also meaningful opportunities, as half of the population older than 18 didn't have a beer over the last 12 months, and most of them due to affordability. As the country evolves, we will continue to see strong development of the premium segments, as well as an opportunity to increase consumption of beer by women, in order to close the gap to more mature markets. We remain confident in the growth potential of Brazil, given our superior portfolio, which allows us to play in all the segments of the Brazilian market, reaching a more balanced top-line growth between volume and revenue, our unmatched distribution capability, exciting innovations we have in the pipeline, consistent investments in our strategic platforms and our people. So, now let's begin to talk about our first strategic platform, which is premiumized 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. Our premium segment grew double-digit this quarter, led by our global brands, continue the strong momentum we have been having in the previous quarters. Budweiser, our largest global brand, plays a key role as a bridge for consumers who are trading up towards the premium segment. The brand's quarter was marked by a 360 campaign highlighting its functional attributes. Budweiser liquid is striking at first, with a smooth finish, make it the king of beers. Stella Artois continues to embrace the food platform with another edition of Vita Stella, our proprietary event. The brand volume was also supported by the continued expansion of new pack formats, such as the returnable sharing size bottle. As a result, Stella Artois continues to grow very strong all over the country. Corona continues to embrace the Better World platform, calling attention to the plastic dumping in the ocean. The campaign, undesirable museum, impacted approximately 22 million people. We are very excited with our latest launch, BEX and Colorado Ribeirão Lager. The volumes of those brands are very, very incremental to our portfolio. 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, continues to experience a memorable momentum. The brand connects with consumers through relevant platforms, such as sertanejo, the Brazilian pop music, and soccer. These quarter's campaigns were focused on Shop da Brahma, the authentic Brazilian draft beer, and the Sertanejo Paraform. Shop Brahma campaign highlighted the main attributes of the brand with a six-episode digital show about iconic Brazilian bars and linked that to our franchise business, Shop Brahma Express, the in-home experience. For the Sertanejo Paraform, Brahma was present in more than 150 sertanejo festivals throughout Brazil, including the two largest, Barretos and Jaguariúna. Approximately 7 million people attended these events. Skol's quarter was marked by the continued campaign of the Skol family, reinforcing the most recent launch, Skol Porumauti. which, from a volume perspective, has been our biggest innovation in recent years, and continues to expand quarter after quarter. Bohemia, a core plus pure mouth lager, also posted amazing results, growing triple-digit for the third consecutive quarter and over a meaningful base. I will now expand a few minutes talking about driving smart affordability. 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 market, and only most profitable packaging, we are also able to deliver very healthy margins. This quarter, we rolled out Legitima in the state of Ceará. Nosta, Magnifica and Legitima are performing very well with strong share gains in the states in which they were launched. Before moving to operational excellence, I would like to talk about Beats. This quarter, we announced that Beats and the Brazilian pop singer Anitta will join forts to develop and create new products. The first outcome of this partnership, the Ready to Drink Beats 160 BPM, was launched on the beginning of October. Going back to operational excellence, our mantra is, whenever we call it Brazil, there has to be a man. Operational excellence has always been one of our biggest strengths and key differential. Given that point of sales connect our brands to consumers, customer experience is a strong focus. Complementing this strategy, we have our Customer Experience Center. All customers' requests, open in any Ambev channel, such as the B2B, the telesales, WhatsApp, and our sales rep during the visit, are direct to this center and solved in one single place. Talking about technology, as we highlighted last quarter, technology has been a key enabler for us to support our strategic growth platforms. To optimize Ambev's operation, we continue with HBC's integration, expanding and improving technology to other areas of Ambev with more agility and scale. HBC's ended the quarter with more than 500 developers. Also, to give some update on numbers, sales which are not conducted by sales reps at SAI now account for 32% of the total of the on-premise channel. And Paceiro Ambevi, our B2B2, just surpassed 200,000 clients in September, compared to 66,000 in January. Now moving to our non-alcoholic business division. We are quite pleased with our performance this quarter, as a consequence of the implementation of our strategic growth platform. Volume increase came from all different segments in our portfolio. An important highlight are the premium brands such as Tonic Antarctica and Gatorade, which rule double digits, bringing a healthy contribution to the portfolio mix. Talking about sustainability. A quality beer starts with the best ingredients, and this requires a healthy, natural environment, as well as great communities. We have been brewing for more than a century and want to make sure that we are here for the next centuries. bringing people together for a better world. That's why sustainability isn't just part of our business. It is our business. Through our 2025 sustainability goals, we are connecting thousands of farmers to technology and skills, ensuring water access and quality in high water stress communities, partnering with our suppliers to increase recyclable content, and investing into renewable electricity capacity. Finally, so far 2019 has been a good year as our portfolio of brands is delivering a healthy top-line growth, which is helping to offset the cyclical pressures arising from the tax and commodities. When we look beyond such cost hedging, we get even more excited about the strong fundamentals and growth potential of our business. We are only able to achieve such results year to date, 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 to be in a strong position to deliver long-term, sustainable growth. We can now move to the Q&A. Thank you.