Ambev S.A.

Good morning, and thank you for waiting. We would like to welcome everyone to AMBEV's fourth quarter 2019 results conference call. Today with us, we have Mr. Jean-Jerry Sade-Naito, 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 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 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 4Q 2019 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-gap 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 fourth quarter and full year earnings call. I'll guide you through the financial highlights, including below-the-line items and cash flow. After that, Jean Gerasati will give more details about our operations in Brazil, CAAC, LAS, and Canada. Beginning with the main highlights, on a consolidated basis, in the fourth quarter, top line grew 5.7%, a combination of volume increasing 3.4% and net revenue per hectolitre up 2.2%. In the full year, net revenue was up 7.9%, with volume growing 2.7%, and net revenue per hectolitre growth of 5%. EBITDA reached R$6.9 billion in the quarter, an organic decline of 2.7%, and EBITDA margin decreased 370 base points to 43.7%. In the full year, EBITDA was up 1.5%, with margin contraction of 260 base points to 40.2%. Our bottom line performance was impacted mostly by a higher cost of sales resulting from significant commodity and transaction currency headwinds. Normalized net profit for the quarter was up 24.4%, delivering 4.6 billion reais. In the full year, normalized net profit was R$12.5 billion, 8.5% higher than in 2018. Our cash flow from operating activities was R$18.4 billion, in line with 2018. CAPEX in 2019 was 42% higher than in 2018, with most of the increment driven towards innovation. Similar to last quarters, we continue to report the results of our operations in Argentina applying hyperinflation accounting. I'll now move to our divisional results and start with Brazil. In the quarter, Brazil EBITDA reached R$ 4 billion, a decline of 6.6% versus Q4 2018, while margins contracted 450 base points to 45%. In the full year, Brazil EBITDA was R$ 11.7 billion, with a decline of 4.5% versus 2019, while margins contracted 500 base points to 40.9%. In the full year, cash clogs per hectolitre increased 18.4%. We initiated our guidance of mid-teens mainly due to package mix. In the quarter, Beer Brazil top line grew 1.2%, with a volume increase of 1.4%, while net revenue per hectolitre declined 0.2%. EBITDA for Beer Brazil was down 12.5% in the quarter, with measured contraction of 710 base points to 44.9%. Cash cogs per hectolitre grew by 17.5%, impacted by commodities and FX. In the full year, top line in Biel Brazil increased by 5.6%. Volumes were up 3.2%, while Nielsen reported industry growth of 2.4%. EBITDA was down 6.5%, with margin contraction of 530 base points to 41.6%. Such margin contraction was mostly linked to effects and commodities cost pressures. In NAB Brazil, Top line was up by 13% in the fourth quarter, the result of a 16% volume growth and a net revenue per hectolitre decline of 2.5%, driven by a different pricing calendar than in 2018 and affordability initiatives. EBITDA in the quarter increased 51.8%, with margin expansion of 1,160 base points to 45.3%. In the full year, top line in ABB Brazil increased by 16.1%, volume grew 11.3%, and EBITDA was up 9.5%, with margin contraction of 230 base points to 37%. Moving now to Central America and the Caribbean. We continue to be very excited about the Central American Caribbean. In the fourth quarter, net revenue grew 9.8%, a combination of a 4.3% increase in volume and a 5.3% net revenue per hectolitre growth. A bid in the quarter reached R$ 885 million, posting a double-digit growth of 19.1%. once again driven by a strong performance in the Dominican Republic and margin expansion of 350 base points to 45.3%. In the full year, top line in CAC increased by 10% and EBITDA was up 22% to R$3 billion, with margin expansion of 440 base points to 43.8%. The other operating income increase in the year is mainly explained by the $18.5 million insurance compensation we received for the damage caused by the Q3-17 hurricane season in the region. Without such compensation, EBITDA growth would have been 19% in the year. Switching now to Latin America South. Top line grew 13.8% in the quarter, with a net revenue per hectolitre growth of 13.7%. while the volume was flattish, increasing 0.1%. In Argentina, we saw the second half of the year with better trends than the first half. Meanwhile, social unrest in Chile, and especially in Bolivia, both affected performance in 4Q19. A beating last for the quarter was up 2.2%, with margin contraction of 540 base points to 46.9%. Cash COGS per hectolitre in the quarter increased 18.7%, mostly driven by effects and inflation. In the full year, top line in last increased by 15.1% and EBITDA was up 12.3%, with margin contraction of 110 base points to 43.8%. Turning now to Canada. In the fourth quarter, Top line in Canada declined 0.5%, a combination of a 1.0% net revenue per hectolitre increase and a 1.5% volume decline, which was mostly driven by a soft beer industry. EBITDA reached R$517 million, 16.4% lower than in the fourth quarter of 2018, with margin contraction of 560 base points to 29.3%. Cash cogs per hectolitre increased 17.8%, negatively impacted by increased commodities prices, higher mix of imported beers, and lower dilution of fixed costs. In the full year, top line in Canada decreased by 1.9%, and EBITDA was down 10.7%, with margin contraction of 290 basis points to 29%. As one of the main efforts to increase volume in our Red to Drink category, we announced the acquisition of Good Ridge and Williams Distillery, the producer of Neutral, one of the fastest growing R2D brands. Now back to consolidated figures below EBITDA. In the fourth quarter, net financial results totaled at an expense of 1.6 billion reais, 6% lower than in Q4 2018. The main items in the financial expense in the quarter were, first, interest income of 151 million reais driven by our cash balance. Second, interest expense of 346 million reais that also include interest incurred in connection with the Brazilian tax regularization program, as well as a non-cash accrual of approximately 70 million reais related to the per option associated to our investment in the Dominican Republic business. Third, 576 million reais of losses on derivative instruments, which were up year over year, explained by the increase of effects, hedges, carry costs, linked to our cost of goods sold and CAPEX exposure in Argentina. Fourth, losses on non-derivative instruments in the amount of 537 million reais, mainly explained by an adjustment in the fair value of the poor option in the Dominican Republic and by a non-cash intercompany effects variation, mostly linked to the Argentinian peso depreciation. Fifth, taxes on financial transactions in the amount of R$ 72 million. Sixth, R$ 183 million of other financial expenses, partly explained by accruals on legal contingencies and pension plan expenses. Seven, 93 million reais of exceptional financial expenses, mostly explained by a state amnesty payment. Finally, eight, 92 million reais of financial income related to non-cash incomes resulting from the adoption of the hyperinflation account in Argentina. In the full year, the effective tax rate was 5.8% versus 13.5% in 2018. Cash generated from operating activities in Q4 2019 was of R$ 9.6 billion, which is 9.6% higher than last year. In the full year, cash generated from operating activities is stable, reaching R$ 18.4 billion. CAPEX reached R$ 2 billion in the quarter and R$ 5.1 billion in the full year, increasing 42% versus 2018. Before I pass on to Jean, I'd like to welcome Lucas Lira as the incoming CFO as of April 29. I have been working closely with him for the last 15 years, and I couldn't think of anyone better prepared than him for the challenges ahead. Thank you very much. Jean will now share some of the initiatives and thoughts on Ambev's operations before going to Q&A.

Thank you, Fernando. Hello, everybody. Good morning, good afternoon. First of all, I would like to thank Bernardo Paiva for his almost 30 years of service to AMBEV. We wish him the best of luck and success going forward. Since this is my first call, I would like to focus on two things. Quickly review 2019, what worked, what didn't, and share my perspectives on 2020 and beyond. Facing the brutal facts, 2019 was not an easy year. Effects and commodities headwinds pretty much across the board significantly impacted our profitability. We had a tough operating environment in important countries like Argentina's macro environment and Bolivia's social unrest. The second half of the year was not good, particularly in Brazil beer, due to competitive dynamics, and we continued to see industry headwinds in Canada. On the other hand, 2019 was also a year where we delivered some important results and continued to invest behind our future growth. In Brazil, beer volumes were back to growth and our top line was more balanced. Our high-end portfolio delivered very solid performance, growing double digits. Our innovation pipeline continued to connect with consumers and increase its relevancy in our results. And NAB had an overall excellent performance. Meanwhile, CAC continued to deliver consistent, strong results, not only in Dominican Republic, but also in Guatemala and Panama. In Canada, we continued to place important bets in our innovation pipeline and Beyond Beer portfolio. And last but not least, we pushed ahead on our transformation journey of becoming more consumer-centric, more customer-centric and digitally transforming our business. If we take a closer look at Brazil Beer, volumes grew 3.2% and that revenue per hectolitre increased 2.4%. Meanwhile, industry, estimated by Nielsen, to have grown 2.4%. Speaking of our brands, The Skoll family was back to growth in the fourth quarter and in the year was stabilized with the launch of Skoll Curumount. Brahma brand power improved and the brand remained innovative, such as the recent launch of Brahma Duplumount. Each of Budweiser, Stella and Corona grew double digits. as was the case with some of our key domestic premium and craft brands, such as Original and Colorado. Though still early days, the debut of PECs in the Brazilian market has had a great momentum. Our smart affordability brands, such as Nossa, Magnífica and Legítima, continues to connect with more and more regional consumers. Turning to Brazil NAB, we had an outstanding year with 11.3% volume growth, 16.1% net revenue, and 9.5% EBITDA growth. This result was driven mainly by initiatives in premiumization and smart affordability. Also, our dedicated innovation team for NAB was responsible for the launch of NATOO, an all-natural soft drink made from Guaraná, different juices, fruits and stevia. And we also came out with the new visual brand identity for Guaraná Antarctica. CAC continued to deliver excellent results in 2019. A balanced top-line growth with 5.3% volume and 4.4% net revenue per hectolitre growth, 22% EBITDA growth, and 440 basis points of EBITDA margin expansion. These results were driven by the strong brand performance of Residente in Dominican Republic, Atlas Golden Light in Panama, and Corona and Modelo Especial in Guatemala, as well as package innovation. In last, we had a very volatile year. with a challenging macroeconomic and political backdrop throughout the region. Volumes declined 3.5%, while net revenue grew 15.1% and EBITDA increased 12.3%. Argentina suffered during the first half. However, volumes started to perform better in A2. Although given the FX devaluation cost remained under pressure. Both Chile and Bolivia suffered social unrest in Q4, which impacted volumes. On the other hand, we feel that our portfolio is healthy and we are well positioned in all countries to benefit from a more stable operating environment. Lastly, Canada had a very tough year with volume decline driven by a soft beer industry and commodity headwinds leading to a 10.7% decline in EBITDA and a margin contraction of 290 basis points. We will continue to focus on further developing our portfolio with brands like My Club Ultra, while in parallel, we will invest in other categories such as CBD, seltzers, and ready-to-drink beverages, Annex Apple being the recent acquisition of the Neutral brand, an award-winning spirits company. So, all in all, strong first half, weak second half, some important accomplishments related to our plans for the future. That's pretty much 2019. Now, let's talk about the future. 2020 is a year where we have to do better, and I believe we can do it, particularly resuming EBITDA growth in Brazil Beer while transforming the company. There will continue to be cost pressures due to FX headwinds, albeit to a lesser extent, given commodities tailwinds, and we will face tough comps in the beginning of the year. particularly in the first quarter, given the peak of cost pressures, as well as S&M phasing. That said, there is still plenty of opportunities going forward. It is up to us to leverage our capabilities and strengths to win in the markets. And to do that, we will focus on three things. First, AMBEZ as an ecosystem. We are part of a broader ecosystem that connects farmers to consumers, and we have to be protagonists and collaborative to accelerate the expansion of this ecosystem in a healthy and sustainable way. In the frontline, this translates into customer satisfaction, becoming the best partner to our clients. For instance, in Brazil last year, according to our internal figures, we saw an improvement of 16 points in Net Promoter Score, which measures customer satisfaction. Also, we have dreamed big and set the most ambitious goals in terms of plastic pollution of the industry. We want to get rid of 100% of our plastic pollution by 2025. In addition, we foster our people's creativity and drive to bring positive impact with initiatives like AMA in Brazil, our mineral water that reverts all the profits obtained with the product to give clean water access to Brazilians in need. Second, innovation as a mindset. The success of our innovation pipeline is the best metric of our consumer centricity. We are working on innovating more and smarter, moving faster, adjusting with learnings, and when successful, rolling out leveraging our scale. Just to illustrate how innovation is here to stay, in 2019, 10% of our Brazil beer revenues came from products that did not exist three years ago, versus a 5% in 2018. We are organized to innovate in five dimensions in Brazil beer. Flavors profile and bitterness, health and wellness, regionalism, convenience, and the future beverages. To support this, we reshaped the whole organization, creating the innovation hubs that work more autonomously and in agile modes. We have invested more capex to improve the flexibility of our breweries and ability to innovate, bringing the supplying time to market to 2.5 months. We believe this will be a competitive advantage as we continue to evolve along with consumers. Third, business transformation enabled by technology. I know there is a lot of hype around transformations, but we are going deep here and I'm happy with the early stage results. Through the continued expansion of our B2B platform, we believe we can deliver better service level and create new commercial opportunities for our customers. We will be ready for a 24 by 7 order taking, to talk in social platforms to drive traffic to customers, and have regional marketing structures to have the right timing and create the right content. In Brazil, we are connecting digitally with more than 220,000 point of sales today, from approximately 50,000 in the beginning of 2019. The Supply Chain of the Future is another initiative that combines autonomous operators, sensors and state-of-the-art lines. This will ensure we bring flexibility to address a more complex world without increasing costs. And on top of that, we are seeding new ventures to address in-home delivery, point-of-sale marketplace, and FinTech, just to name a few. So, to wrap up, we see a lot of opportunities across our operations, like trade-up, trade-up to core plus, trade-up to premium, per capita growth, and new beverage categories. just to name a few opportunities. All of this in a company with a strong team and a talented pipeline, a robust cash flow generation that allow us to have the right resources to invest behind our brands to connect with consumers, a large and diverse portfolio, and a clear strategy and priorities. I'm not saying the road ahead will be free of bumps and turns, but we are no strangers to operating in volatile and uncertain markets, and there will always be competitive pressure. We love a good challenge. Over the last decade, we have delivered consistent results more often than not, and it is up to me and my team to live up to that legacy. And we are looking forward to it. So thank you. Thank you, everybody. I think we can now move to the Q&A.