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.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Isabella Fominat with Bank of America. Please go ahead.

Good morning, Bernardo Fernando. Thank you for the call. I have one question in Brazilian beer. If you could, when you mentioned about competition in the release and you also say some headwinds should persist in Q4, can you elaborate a little bit more on how do you see the competitive environment if you see some sort of structural change happening Or if in the beginning of fourth quarter, now in October, you already saw some move from the competition in terms of pricing. I mean, when we look for Q4 and also forward to 2020, especially as your competitor should increase capacity, how do you see the market share equilibrium going forward? And if I may, a second question on soft drinks. We saw, I think, a very pressured margins in the quarter, not only on the gross margin side, but also on SG&A. How can we think the profitability of this business in the longer run? Thank you.

Isabella, thanks for the question. I think let's talk a little bit about the quarter in terms of the volume. So we know that was down 2.8% in the industry to grow single-digit, low single-digit. which means that we lost share. The impact of our price increase was amplified, yes, by a civil tennis competitor discounting and a challenging macroeconomic environment that we still have here in the country, in Brazil. We know as well, I mean, from decades that we operate in this market, that promotional activities is a tool to try to drive volumes in the short term, but does not build brand acting or sustainable business for the future. When you take a more longer view in terms of the volume and in terms of the industry, the first nine months, I mean, we are in still pretty good shape. Our volumes grew 3.9%, outperformed the industry. That was low single digits, which means that we are gaining share in this period, in the year. That's pretty good news. We had a very good and amazing first half. outperforming the industry big time. So we entered in this price increase in the third quarter. Yes, and we burned some volume compared to last year, given the points that I mentioned before. But again, we're still gaining share this year and outperforming the industry in relevant terms. It's important to point out that we have not seen any disposable income resuming as well that affect the industry. and when it happens and we have positive news in terms of disposable income, we will see a positive impact in our business for sure. We continue to be very excited with how the portfolio is performing, continue to deliver strong brand power. I mean, you have innovation in the markets called Pumalt, Bohemia, Pumalt, Colorado, Bex, all of them performing very, very well. Regarding the fourth quarter, I mean, we do not comment in the current trading. That's what I could say. So, all in all, it was a quarter that we underperformed the industry, yes. I think that the promotional activities of the other companies were, I mean, it was exactly in that moment that we increased the price. But, I mean, four years, doing well, gaining share on the few years after an amazing first half.

Hi, Isabella. Fernando here. Your question on soft links. On soft links, if you see what happened throughout the whole year, you saw that our SG&A was higher because volume was performing very well, so that's somewhat linked to volume and somewhat linked to investing behind the brands. And that's definitely paying off because we saw that top line in soft links continues to be very robust in the third quarter. What was... more of a one-off, you could say so, was the cost of goods sold. Because if you remember last year, we had a huge improvement on cost of goods sold on the third quarter. And this year is more of a normal year. So the basis was very high. That's why we see such a pressure. But actually, we are quite excited for our software business because top line is performing in a very healthy way.

And just to highlight some numbers, the volume in the third quarter was 6.5% above Last year, in nine months, year-to-date, 9.4. Industry low single digits, top line in nine months, 17.5%. I mean, business is doing very, very well. The growth platforms are working. Us, they are working in beer. They're working in the non-alcoholic business, driving premium, smart affordability. Our core brands are doing pretty, pretty well. So very happy with the soft drinks and the non-alcoholic results so far.

Thank you. The next question is from Lucas Ferreira with JP Morgan. Please go ahead.

Hi, gentlemen. Thanks for your time. I wanted to explore a bit more the volume performance in Brazil for beer. If you could give us some more information about which were the categories that suffered the most, which were the categories that you had more competition. And also region-wise, you have been having a very good performance in the north, northeast of Brazil, if that was still the case in the quarter. So if you can give us more color on the breakdown of this 2.8% volume performance and how competition was doing in each of the categories and regions. And then my second question is regarding the fourth quarter outlook as well. Do you also foresee more pressure coming from pricing? How your competition is shaping up in terms of adjusting prices closer to your portfolio? If you can give us more color on what could happen in the fourth quarter in this sense, that would be super helpful. Thank you very much.

Thanks, Lucas, for the question. Again, I mean, just to remind us and repeat what I said to Isabella, the portfolio in the year is working very, very well, gaining share in all segments, stable in the core, gaining share in premium, gaining share in value. So innovations are working. So in the first half, as I said, volumes grew big, big time. Third quarter, we increased price significantly. competitors with promotional activities, activities with discounts, go in the opposite way. And this activity was in all segments. When this happened, and then you have all the experience, we have the segment that really suffered more because of the affordability issue. No disposable income is more the core segment. That doesn't mean that the core brands are not doing well. They're doing pretty, pretty amazing. Brahma, Skoll Family, the innovations that are put in place to support the core as well. But because of affordability issues that we continue to have in Brazil, disposable income, that's very low. When we have a wider price gap, the core brands in the shorter term suffer more. But again, what is that? I mean, promotionals, discounts. are a tool to try to drive volume in the short term but does not build a business in the longer term. We are not in this game. We are in the game of building brands and building a strong business in the longer term. We are here in Brazil for decades. We have already seen the search of competitive behavior before and didn't work for any company in the past and have been working for us in the long run. So that's why despite of this price increase that we've done and then this in terms of lead competitor discount that happened, we continue to stick to our long-term approach, supporting strategic growth platforms, investing behind our brands, innovation in the MBEV ecosystem that we are, I mean, evolving and investing even more. Regarding any price increase, what we could see that, you know, after three or four months, you can see a kind of a historical base and equilibrium in the market. And that's what I would say the history says. But again, we don't comment in current trading or anything about the fourth quarter.

Yes, and Lucas, just Fernando, you are here. You asked about the fourth quarter outlook. We cannot give any outlook. The only thing we said in the release is that some of the headwinds might be carried into 4Q. And at the end of the day, when you mention something like that, it's always a combination of volume and net revenues, and the headwinds might impact each one of those in different ways. But I cannot comment much more on that.

Perfect. Thank you very much, guys.

Thank you, Lucas.

The next question comes from Lucas Epichia with Goldman Sachs. Please go ahead.

Hi, good morning. I'm going to hit as well, sorry, on Brazil, just to clarify a couple of points. So I think your point about the fact that the nine-month performance did show positive volume growth, I think it's fair. I guess what surprised us, and I would assume almost everybody else, is that the magnitude of the decline in the third quarter in beer, given the comps, and the timing of the price increase. And I think you point to two factors. You point to the macro environment. You point to the competitive landscape, competitive reaction. So my question would be, on the first point, for the longest time, we heard the thesis that soft drinks is a more macro-sensitive category. as compared to beer, yet it's been a while now that actually we see beer suffering proportionally more, at least at times of price increases, even where you have a clear leadership in that category. So my question would be why we're seeing this greater elasticity, if you like, in beer compared as compared to soft drinks, which seems to have rebounded, not just for you, but also for the market leader. And secondly, on the pricing, you've definitely done a lot. You're clearly doing a lot on innovation, bringing new products to the market, new launches, new packages, new initiatives. Yet it seems that your competitor is using the oldest trick in the book, and when they do holding prices, doing promotional work, they do have some significant result or they managed to disrupt a little bit the competitive landscape. So my question would be, are you doing enough on affordability or pricing or should you maybe re-oxygenate the market given that the beer volume growth seems to really struggle to come back or anytime pricing doesn't come through, then we have an impact on volume. So can you maybe expand a little bit on this comparison between the industry volume trends in soft drinks and in beer? And also, should there be an effort to increase further affordability for the beer segment? Thank you.

Lucas, thanks for the question. Let's talk a little bit about beer first. I mean, I think it's always important to see in the longer term. Because when you see quarter by quarter, and you have a specific this quarter and the third quarter, I will repeat, a price increase, as you can see on our natural evidence, per hectolitre, and competitors at the same time discounting, this is not so common in the market. I mean, not even in the Brazilian market, I mean, in the past. And when you have a situation like that in one quarter, the disposable income is still low, the volumes tend to suffer more. And on top of that, when you increase price, the leader, you contract, the industry always happens. So there are two effects. Every time that any company increases price, and the leading company like ours increases price, have contract, a little bit contract in the industry. And specifically, that affects our volume. Not that you lose lots of share in this third quarter. That's not the case at all. But when this happens, a price increase and competitors putting price down, this is not so common, not even in the Brazilian market. What we have experienced in the past is that this is a strategy that does not work because it does not build value in the longer term. So, again, I repeat, I've been here in Brazil for decades. We saw this before. Driving volume or try to drive in volume, try to drive in volume with a short-term price. This does not end well for any company in any industry. So we are not in this game. That's why I'm saying the strategy is working. Premium is growing, double-digit. Innovation is growing big, big time. Yes, in the short-term, the core brands, they suffer more because they have a bigger price gap. But when you see in a longer deal, nine months, the number that I can say to you, not even say ahead of us, we still are gaining share. So even with this thing that was very atypical, this behavior of competitors in terms of after a price increase, we're gaining share in the year. I mean, we are growing volume 3.9 in the industry's low single digit. So that shows the resilience of our business, the portfolio that's working, the innovation that's working. So even in a very typical pricing behavior in the market, in the third quarter, we're still getting share in the year. So this is the beer business. For the non-business, the industry is still low. We are gaining share significantly. a lot, so we can have the numbers here, but it's a low single digit, and the volumes in the third quarter was 3 point something, I give the right number, 6.9, and in the nine months, it's 9.4, so again, it shares big time, so the industry is low single digit, so this is the first point. Industry is very, very similar, and then I will say here that the competitive environment in the non-business is more rational. That's why it's reflected as well in the numbers. That's what I could say to you regarding both businesses.

If I can follow up, in an environment in BA where, to your point, there's been a lot of promotion, a lot of pricing, disruption, if you like. Is it somewhat surprising that volumes are not benefiting more on aggregate for the industry as compared to, again, NAB, where, in fact, pricing is coming through and volumes are growing? So I struggle to reconcile maybe the fact that the industry volumes struggle to come back in spite of pricing or promotional activity has been quite elevated on low comps.

I think that let's at least talk about the industry a little bit more. In Brazil, first, I mean, the industry in the quarter is low single digits, so we have this information. So with that, I mean, we know that the way that you measure that specific industry, you have some delays, because it's a new method, delays in terms of timing. And we know as well that one very important region in the country, that's the north and northeast in terms of volatility of volume, the coverage of the Nielsen that evolved a lot is not so good there. So with that, what I could say that our volume in the north and northeast is going ahead of the industry there. And the industry there is not so represented in the full industry of the country. So, which means that our performance compared to the industry, maybe it could be a little bit better what the numbers say here. But the numbers are the numbers. And have been using Nielsen, continue to use Nielsen, improving the coverage a lot, used to be 65%, today it's 80%, but it's not 100%. So, based on our internal numbers, probably the industry would be a little bit, including lower than the numbers that we show to you. But the numbers are the numbers. The new thing was around low single-digit.

Okay. That's it. Thank you. Thank you very much.

Thank you.

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

Fernando, thank you for taking my question. I am so sorry to come back to the same topic that everyone has asked so far, but just two quick follow-ups. The first one, you are highlighting extended headwinds into 4Q, right? But obviously, there's two months to be played yet. So I wanted to ask the status, without commenting on your strategy, which I understand you cannot, the status so far Are you still seeing a lot of discounting as we speak? Or what leads you to give the comment into 4Q having still two months ahead of us? That's the first question. And then the second question, I wanted to see if you can comment. You've shared with us in the previous quarters. what was the movement between mainstream and value, right? 200 bps at the beginning of the year, the market migrating to mainstream, then flattish in the second quarter. Can you share those trends with us for the third quarter?

Hello, Antonio. Fernando here. So let me start by your last question. We saw a decline in the first quarter on the value segment, and since then it's been stable. which means that probably year on year they are a little bit better. But it is stable since the first quarter. One question on the fourth Q. We cannot comment on the current trade or give guidance, but what is fair to say is once you increase prices, the market takes a little bit of time to find its new equilibrium, to go back to normal. Even the dynamics between the moment that you announce to increase prices, the trade kind of orders a little bit ahead to make sure they have the volume, then the volume goes down, takes a little bit for the price to go through for the final consumer. So the market takes a little bit of time, so two, three months to find its new equilibrium. It's something that we've seen before. It's something that every time that you do, you're going to see that your share is going to suffer a little bit. But then again, this is something normal. What I think we can see as the highlight is that even in a moment that increased prices, you see that the premium segment continues to perform very well. You see that the core, which is the one that expects to suffer, it suffered, but the brand power is still quite strong. So I think... Sorry, I cannot comment too much more about going forward. But despite this kind of setback, if we could say so, in the third quarter, we continue to be very excited with the strength of our portfolio.

And then, Antonio, just to share some facts, again, to reinforce. In the first half of the year, we had a more stable market environment. I could say our volume grew 7%. outperforming the industry. So good that the strategy is working, the volume is coming, share is coming, that you could enter in a quarter of a price increase. That was a typical, given all the promotional activities that we saw in the market. But we entered in this quarter with a very strong base in terms of share and volume, in a way that we continue to gain share in year-to-date numbers. And in a way, the total volume is 3.9% above last year, even with this very typical third quarter. So the fundamentals of the business are there. That's what I could, I mean, talk about the past regarding day-to-date numbers.

That's clear. And if I may just very quickly follow up on a different topic, is it possible to comment, and I presume it depends ultimately on your board's proposal and approvals, but Dividends, so far, would you expect more of a bullet payment at the end of the year as opposed to installments, which has been the case historically, obviously? Anything that you can comment on that front?

Hi, Antonio. Fernando here. On a normal year, normally, we would have already been paying some dividends throughout the year. But in Brazil, IOC is very important, kind of the way you pay it. And this year, given hyperinflation in Argentina and the impact that it had in our balance sheet accounts, it's much more optimal if you leave it later for you to pay IOC. So the idea is for us, as always, to maintain our policy to pay out over the long run all our free cash flow. But more than that, I cannot comment because, as you mentioned, well, it needs to be approved by the board and it should be disclosed in the proper way. But the long run, it doesn't change our approach. We always like to pay out all the free cash flow over time.

That's very clear. Thank you.

Thanks. The next question is from Robert Ottenstein with Evercore ISI. Please go ahead.

Terrific. Let me try to change the topic slightly. Two questions. One, can you give us a little bit more sense of the weakness in Canada, why the industry should be so weak? I don't think the weather was too bad. Tied to that, your plans on a CBD rollout there. So that's the first question. And then the second one, are you seeing any signs in Brazil that taxes, either at the national or state level, will go up? I know they have to be all done by the end of the year. We're two months or so away. So those would be the two key points I'd like to hear about. Thank you.

Okay, Robert. Fernando here. Thanks for the question. On your last question, so no signs, no news on that front. Too early to comment on taxes, but no news on that front, if there is anything I can say about it. On your first question on Canada, I think we saw an overall industry softness. From a market share standpoint, no issues there. I think we are in good shape, but the overall industry was quite weak. I think the weather was not terrible, but it was not great either. But overall, the industry as a whole, we can say, was soft. On your second question on cannabis, I think we announced that we will be launching a product, but only with CBD products. And I think the timing, I think we still need to wait for it to be properly regulated, to be available on the market. At the end of the day, Fluent, which is the company that we have a JV in Canada, they will launch the product. We intend to lead the cannabis industry in Canada when it comes to responsible marketing of its products. ensure that it's always focused on legal age consumers and full compliance with all Health Canada and provincial regulators. We intend to have the product for sale to adult consumers as early as December 2019. But of course, this is subject to the regulatory timelines implemented by the Health Canada and provincial regulators. So I think we are excited. but it is too early to make any comment. And even the timing, I cannot be 100% precise, but could be as early as December this year.

And just on that, do you currently have the necessary licenses? Does your facility that you have or your partner have, does it have the necessary license to produce products and whatever regulatory approvals you need at this point?

This is kind of a... We want to make sure that when the time is right, December 19, we have all the licenses. Without it, of course, we'll never be able to sell it. Canada is a very regulated market. So the moment that we come out with a product in the market, you can make sure that we have all the necessary approvals and licenses.

Okay, but do you have them now? No.

Right now, I cannot comment on that because the regulation was already approved, but even if you wanted to have your product validated, it takes a while in Canada. It's not something that is kind of the regulations approved that everybody can sell. I think I would be surprised if anyone would be in a position to sell right now. I think the earliest anyone can be in a position is probably December. Thank you very much. Thanks, Robert.

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

Hi. Good afternoon, everybody. Bernardo Fernando. I have actually two follow-ups on previous questions and answers. The first one, Fernando, you mentioned in the previous question on the performance of the value segment relative to the mainstream segment. You mentioned that the value segment lost ground in the first quarter of the year and that it's been stable ever since. So I just want to confirm that's the case because that would imply that the value segment, my understanding, lost share versus the mainstream segment on a year-over-year basis versus the third quarter last year. So I just want to make sure. Correct. Yeah, that's okay. Perfect. Thank you. And the second follow-up is, again, back to the statement that you guys had in your earnings release where you say that some of the headwinds specific for the third quarter, you see that carrying over into the fourth quarter. It's still not clear to me where do you see those coming from in the sense that you can anticipate it. So just I want to make sure. I mean, the cost environment should look better. and the fourth quarter, as per your guidance, since the beginning of the year. The industry is growing, as per what NewSync reported that you guys put. So it doesn't seem to be an industry issue or an overall demand issue. Even though the industry is not growing much, it seems to be growing over a reasonable comparison base. So just want to make sure, are you guys anticipating that the competition is going to remain promotional throughout the rest of the fourth quarter? Or just whatever you guys could add on that, just if you could be a little bit more specific would be great. And finally, my question is on the performance of the smart affordability initiatives in the northeast of Brazil. It's clear that those segments are doing very well since the launches started last year. So just wanted to hear a little bit more on how incremental those volumes have been to your portfolio or how much has there been some cannibalization between those new brands that you guys introduced in certain states relative to your mainstream portfolio and relative to the competition portfolio. Just want to see how those brand shifts are taking place in the Northeast. Thank you.

Hi, Thiago. Sorry to disappoint you, but we cannot give much more details on Q4 or discuss current rates. I think you flagged it right. On the cost side, we gave the guidance and we're not changing the guidance, so there shouldn't be too many surprises in that. What was a little bit of... of a new news and kind of is actually third quarter and the whole competitive environment coupled with the macro environment that get a little bit worse in Brazil. So I think these are the two main reasons we are kind of being a little bit more cautious going to 4Q. But on the cost side, as you said, we gave our guidance and we're not changing the guidance. So there should be no surprises in that.

And Tiago, link it to the brands for them, the smart affordability brands that we've launched in the Northeast. They're very incremental. They play in a segment that's the value segment that is big, that we are, I mean, under the fair share big, big time. So they're helping us in those states to gain share in the value segment. And link it to this specifically, I mean, again, I will repeat, because I think they have a slightly different view. specifically of this quarter and the volume and the share. In every market that we have been operating, that we have problems with disposable income, in any market, I mean, that I've been in other markets, not only in Brazil, I mean, many, many countries that I saw that I live in, when you increase prices and the competition has this kind of promotional activity that's had here, usually the facts in your volume, usually it's strong. It's very, very strong. But the good news, and then that shows that our strategy is working, our innovations are working, they are incremental of our business, that, I mean, we grew 7.2% volume in the first half of the year. And we're entering this price increase. That was very difficult in a very strong mode. And we end the three quarters gaining share with 3.9 volume both this year. I mean, it shows how resilient this portfolio is becoming. Because maybe in other countries, in other, I mean, we would lose share. That's not the case. So the fact that it continues in the year-to-date to gain share and outperform the industry in a meaningful way. I talk about the year-to-date of 3.9 and the industry's low single digits, which means that the portfolio is resilient, that innovation is working. And we see that kind of the shorter-term promotional activity does not create value to anyone. I've been here for decades, as we said. It's a shorter-term tool to try to drive volume. I mean, we saw this before many, many times, and it didn't work. So we are here to build brands, to gain share, building brands, and a sustainable business. And we are happy with the performance of a 3.9% volume in the first nine months against the industry that's a little single-digit, despite of this third quarter, very typical, whatever pricing behavior in the market. So very confident about our strategy and in the performance of our portfolio in Brazil.

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.

So, before I finish our call, I would like to close saying that we are confident, again, as I said, that we are evolving in a consistent way with our strategic platforms, not only Brazil, but in every country that we are operating in, despite the short-term volatility in the region that we know many countries like have been operating here in those countries for many, many times. We will continue to focus in the long run and sustainable value creation. Thank you. Have a great day. Enjoy the rest of your day. Thank you again.

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