Ambev S.A.

Good morning, and thank you for waiting. We would like to welcome everyone to AMBEV's second quarter 2020 results conference call. Today with us, we have Mr. Jean Gerasotti, CEO for AMBEV, and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website, ri.ambev.com.er, 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 AMBED'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 an 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 AMBED 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 the second quarter 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 AMBAP'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. John Gerasate, You may begin your conference.

Thank you. Hello, everyone.

Thank you for joining our call. Before I share with you an overview of our business during the second quarter and look us over the highlights of our financial performance, I would like to deeply thank all those who are helping our societies during the COVID-19 pandemic. Those who are fighting in the frontline on a daily basis are the real heroes and are making a real difference as the world tackles pandemic. Thank you very much. Our second quarter was certainly much very marked by the pandemic, but also by our team's incredible collective and positive reaction to it. Last quarter, I mentioned the main factors that I believed would make the difference in navigating the crisis were being the leader and most efficient player in the market, having the highest reach in terms of a distribution network built over the last 20 years, navigating the crisis with a solid cash position, And finally, leveraging on technological and innovation platforms that we have been investing behind for a while. In what was probably the most difficult quarter of our history, we demonstrated the strength of our business, the resilience and creativity of our people, and our ability to impact the world in a positive way. In almost all the countries in which we operate, we ended the quarter better than we started. COVID-19 brought new challenges to our business and the ecosystem of our industry. Everybody is reinventing themselves. Consumers are changing their habits, demanding more convenience and new ways of entertainment. And the OnTrade channel is rethinking itself. The good news is that we have been setting up the company to respond quickly to these changes. And we are starting to see the benefits of this new mindset and strategy. From April to June, we saw a sequential improvement in consolidated volumes. April volumes declined 27% year over year. May declined 7% and June actually grew 5%. Despite this positive trend, there is still plenty of uncertainty in the market. Things can change rather quickly and profitability was and should continue to be a challenge as on trade socializing occasions are and will continue to be impacted moving forward. Restrictions are still very fluid and macro and currencies remained volatile. In terms of volumes, Bolivia, Dominican Republic, and Panama were hit the hardest. These countries started the quarter with more severe restrictions on people circulation and alcohol sales and adopting an on-and-off trade opening hours. As the quarter progressed, Such restrictions were gradually eased, but there are still some in place as we speak. Chile and Paraguay suffered less because our volumes are heavily weighted towards the Austrade channel. Nonetheless, a challenging macro environment has led to a slower recovery in Argentina. In Brazil, where the Austrade channel plays an important role Restrictions varied between regions, with big cities and urban centers being more affected. We saw a gradual improvement as part of the on-trade start to adapt, operating with deliveries and takeaways, and cities started to reopen. The small mums and pops stores gained relevance as customers choose for local consumption to avoid longer buying journeys, partially offsetting the impact on the on-trade channel. Canada, despite an industry decline, our volumes benefited from the strong performance of our premium, corkless, and beyond beer portfolio. As I have mentioned before, we have a strategy built on three pillars. First, we really want to work as an ecosystem. We are reframing our purpose of bringing people together for a better world, and we have mobilized ourselves by donating our capabilities, competencies, and the time of our teams to help solving urgent social challenges. We were recognized by the United Nations with the Solidarity Award. This award is given to impactful work that individuals and organizations have been taking to support communities as we navigate the pandemic. All this because we have been able to move fast to respond to these social needs. Given a more creative and agile mindset, we could answer the demands of the communities we are part of. In Brazil, we also took part of Movimento Nos, a coalition of eight consumer goods companies that will help approximately 300,000 POCs to reopen with a total of R$ 370 million, impacting indirectly more than 3 million people. Besides all this, it was a moment for us to renew the pact we have with our customers, suppliers, and the community. We achieved the all-time high customer satisfaction measured by the NPS metric, doubling our results versus last year for the same period. Second, innovation as a mindset. As markets mature, consumers demand more options to the different occasions. And we are transforming our business to respond faster to demands like that and shifts in market trends. As a result of this transformation, in Brazil, for example, our market share of products launched in the past three years now over index our total market share. What is driving these results are a step up in consumer centricity capabilities, flexibility to create unique recipes with exclusive ingredients, a pilot testing approach, the creation of an ecosystem that benefits clients, consumers, and suppliers with superior value, and the logic of creating demand ahead of production. Following this formula, we developed Brahma DuploMount. We managed to deliver in three months the volumes we originally planned to deliver by the year two of our business plan. The brand took advantage of the live stream phenomenon. Incrementality has been higher than expected, and margins are healthy for the company. There is still much to do, but we are off to a great start. The live streams were a groundbreaking innovation in media and entertainment. Where there was fear, we brought joy. This quarter, we promoted almost 400 live streams with more than half a billion views. Brands that engaged in lives had an exponential growth on social media. Also, we learned that before and during the lives are excellent opportunities for us to engage with consumers through our D2C platforms. Third pillar of our strategy, business transformation enabled by technology. Where there were movement restrictions, we offered convenience. Our direct delivery systems at consumers' homes have grown exponentially. Our D2C platform, such as Zend Delivery in Brazil, to Cerveza in Dominican Republic, and App Bar in Argentina, are gaining significant traction, as well as our partnership with third-party home delivery platforms. This quarter, Zend Delivery registered 5.5 million deliveries, 3.6 times more than the full year of 2019. Another example is the proprietary B2B platform that we call BEAST that has been piloted in the Dominican Republic and that we have started to roll it out in other markets. In Dominican Republic, we already have the majority of our revenues generated through BEAST. And also, we see an opportunity that we could incorporate different segments such as food, dairy products, wine, and hard liquors. Although April seems to have been the low point, we will continue to see uncertainty in the market going forward. We are here for the long term and are confident in our ability to bounce back. We will keep focusing on our people being there for our consumers and clients, continue to invest towards a winning and fresher portfolio, serving our communities, and collaborating with our wholesalers, suppliers, commercial partners, and governments. Finally, I would like to thank my team with all my heart. This was the most challenging quarter of our history, and we were only able to go through it and achieve these results, given the amazing people that always have been the foundation of our company. So, thank you all, and let me hand over this to Lucas.

Thanks, Jean. Good morning, good afternoon, everyone. Going into Q2, we anticipated a very tough quarter because of the impact of COVID-19. And that's exactly what happened. The combination of steep volume decline, which led to operational deleverage, and a significant change in channel, package, and brand mix had a big effect on our EBITDA performance and profitability. And although the team managed to find considerable savings in terms of costs and expenses, simply put, that was just not enough to offset the COVID headwinds. Going quickly over our business unit. Brazil Beer's financial performance was actually better than we originally anticipated at the start of the quarter, thanks primarily to volume trends. This was also the case for Canada. Kaki had a tougher time in terms of top line, but the team did a great job to minimize the impact on our profitability. And last, Enambe Brasil were the two divisions that struggled the most in terms of financial performance. lost because of Argentina macro and Bolivia COVID-related restrictions, and not in Brazil thanks to volume decline and higher costs. Had the EBITDA decline 33%, EBITDA margin contract nearly 1,000 basis points, and had income decline roughly 50%, thanks mostly to the EBITDA decline and at finance results, not something that we're happy about. But, We're facing the brutal facts head-on, and we're going to keep working harder and harder to improve our results consistently going forward. But not everything is bad news, though. For instance, we managed to protect our liquidity while working with our suppliers, wholesalers, and customers to weather the storm. What was already a robust liquidity profile just got stronger as we quickly accessed credit markets in select countries to enhance our liquidity position, and this has made a difference in terms of our ability to be a reliable partner for these stakeholders. Our wholesalers and suppliers managed to adapt fairly well to the new reality, and although the trade has struggled more, we've been working with them on several initiatives to support their recovery. Also, another thing to mention is that we quickly revisited our cost structure and expenses, Initiatives like revisiting trade spend given changes in channel mix, renegotiating commercial contracts, and revisiting the calendarization of our spend, outsourcing less and leveraging more internal capabilities like our draft line content creation team, and significantly reducing discretionary expenses all had a positive impact overall. We always tried to be as lean and nimble as possible. And frankly, we think this is going to be a must going forward because we simply don't know exactly how long COVID-19 will be around and how things will evolve. And finally, we continue to invest in the future. We preserve key sales and marketing investments behind the renovation of our portfolio and behind innovation, and we will continue to do so going forward. And even though we reviewed our CapEx plans and raised the bar to focus on the must-haves, we still invested a significant amount of money behind the safety of our people, the quality of our products, commercial priorities and big bets for the future, and technology-related initiatives. Several good examples here that I think are worth mentioning. But I'm a diplomat. We kept that investment. Camp production and filling capacity are going to be key for the future. Returnable glass bottles for innovation, brewery of the future, B2B and B2C platforms were also preserved. And just to wrap up, looking ahead, one of the biggest challenges that we're going to face will be on how to improve our profitability, no doubt. This won't happen overnight, and volume growth and channel package and brand mix are going to be decisive. which is precisely why we're going to be focusing so much on that going forward. And yes, things will continue to be volatile. We will continue to face some well-known headwinds such as FX, but we will continue to focus on the levers we control to support in a very disciplined way the commercial agenda and manage the business targeting consistent improvement of our financial performance over time. With that, let's turn it over to Q&A. Thank you very much.

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 speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. Our first question is from Tiago Duarte of BTG. Please go ahead.

Thank you very much. Hello, everybody. Thanks for taking my question. I have two questions, actually.

The first one is related to COGS per hectometer increase in Brazil beer.

You guys mentioned in the release the impact of FX translation as well as mix and channel. So I just wondered if you could elaborate a little bit on the impacts of each one of those. in terms of COGS, unitary COGS in Brazil beer. And the second one, if you could, you mentioned that you believe that you went through the market over a year in the quarter in Brazil beer as well. Just wondered if you could elaborate in terms of the different segments within the market, how do you perform relative to the competition in premium and mainstream specifically? It was a little bit of a surprise to see the drop in premium and how on-premise seems to be so important there. So just to understand the magnitude of the variations in each of these categories within your volumes. Thank you.

Okay. So thank you very much for the question, Duarte. So I will get the volumes and the market share first. And then Lucas can talk about the COGS, okay? So as you see in our report, we saw a recovery on volumes sequentially from April in Brazil. And this was a mix of things that we have seen in the market. It is pretty much the resilience of our category. what we saw in terms of occasions, it is really that this socialized out-of-home occasion has been compensated by that relaxed at-home occasion. Okay, so this is something that is going on in the market that normally happens in more mature markets, and this trend was accelerated here in Brazil. And I think we were the first ones really to pick this journey and accelerate it and bet on it. So this was important. Not all the countries we saw this transition of occasions and the new occasions popping up. We saw that very clear here in Brazil. Weekdays, improving performance. consumers drinking at home on Mondays, Tuesdays, Wednesdays. And then I really believe that we were very happy in terms of resource allocation, following the consumer, and really going in that direction. Okay. We saw, too, some reduction on the binge drinking. Okay. So when we made – do research with consumers, and so that was good news for the industry overall. Having said that, our performance, we were with this mindset of really following the consumer. Our channel strategy was very agile, and we were very happy to really migrate all the resources that we have for moms and pops, That was the channel that's growing most during the pandemic, and we have a great reach to get this thing right. And because consumers are really looking for a purchase in shorter journeys. So this channel is the strong one, and we have been doing well on it. The other one is really the small format of off-trade. that are really picking up, and we really moved completely resource allocation team people to really support these two channels, and I think that was a very happy strategy. On top of that, we were with innovation in the pipeline that we have been piloting since Q1 in the Carnival, but we really rolled it out in the middle of the pandemic, that was Brahma Duplo Multi, and we saw a lot of trade-up, we saw a lot of interest, we saw a lot of of this new product. So this was really something that surprised us on the upside part of the volumes. A lot of incrementality and a good margin because we really positioned on the corporeal segment. So this was a part of our plan and made us outperform our best estimates of the industry, pretty much in all channels, in the small format, and big formats of trade. And what we are seeing, too, it is that our premium, we know that premium is a long-term trend. And our global brands grew double digits on this moment. So we are happy with this type of growth during the pandemic. It's true that the VIP entree, draft beer, Shop da Brahma, Original, these are type of brands that are very related for high-end, box, bargain, urban centers. They are suffering a little bit more. But we got it right with the global brands. And what we are seeing is that we are seeing no material trade-down on the beer category. What is really surprising us is the resilience of the core. is really something that we have been renovating our portfolio for a while now. So you know that we launched Sculpt ProMouch that's performing well. We repositioned Bohemia for the core segment, for the core plus, and we launched Brahma Duplo Mouch. So this combined strategy with our core brands is something that's really surprised us on Toto because of the resilience So the core is really with some excitement and with some resilience during this crisis, okay? So I think that's pretty much it about share. So we are happy with our global brand volumes. The core is more resilient. Can you hear me?

Yes, I'm still here.

The core is more resilient than we expected, so we are excited about it. No material strayed down. And our performance on the channels, the smaller ones, mums and pops and small formats, we are really gaining traction over there.

Hi, Thiago. Lucas here. So with respect to your question on COGS per hectolitre, I would say there were three main impacts, okay? The first one, which was anticipated given our hedging strategy, was really the headwind stemming from the devaluation of the real year over year. And so that was a headwind coming into the quarter. And then the other two are more COVID-related, so to speak. The first one being volume deleverage in April, right? So with such a steep decline in volumes, it's just very difficult to offset that. And having less volume to offset fixed costs took a toll, okay, particularly in April. And then the third one, which was the biggest impact overall, was really mixed, okay, due to the swing, the massive shift that we saw in a very short period of time between one-way packaging and RGB. And we shared some numbers in the release. Historically, one-way cans are not the majority of our volumes. And during the quarter, they became the majority of our volumes. With the off-premise, where one-way tends to over-index, the off-premise representing 70%, 70% of our volumes in the quarter. So such a swing in channel mix. has this severe impact on our cost per hectolitre in the quarter because the costs for CAN are higher than the costs for RGB where you have the returnability element to it. Okay? So biggest impact mix due to the package swing. Then second effects and third operational deleverage mainly in April. Thank you. And just to follow up on that, Lucas, I hope that how that links to this sort of cautionary statement that you guys made on profitability going forward. Is this mainly the reason we talk about, especially mixed, I believe channel as well, but especially mixed? Would that make sense to assume that it is related? Yeah, I think when you refer to cautionary statement in the prepared remarks, am I right to assume kind of towards the end of my part where I covered a bit kind of what we're seeing going forward, the challenges. Is that what you're referring to?

Yes.

Okay. Yeah, so I think where that caution, quote, unquote, is coming from, right, I think is more an acknowledgment of the world we're living in, okay, So, right, things have changed drastically since last year. Things are much more fluid, right? Things are changing, can change really fast. And so I think it's an acknowledgment of that, number one. Number two, again, back to our hedging policy, right? If you track how... The main currencies that impact us, right, vis-à-vis the dollar, are trending, right? That's likely to be a relevant headline into next year, so we think it's worth flagging that to the market sooner rather than later because it's reality. We need to be upfront about it. And three, on the mixed side, yes, that's going to be a challenge going forward. So historically, we've seen the Brazilian market be more on-premise RGB weight than off-premise one-way weight. That's inverted in the quarter. And we have a road ahead of us to try and bring that back. bring the pendulum back to RGB and the on-premise as the country reopens, right, as consumers make their way back to the on-premise. But it's going to be a process, right? As I said on my opening remarks, it's not going to happen overnight, right? There's still a lot of uncertainty out there, and we have to also keep an eye on how COVID-19 is going to develop. Yes, that's very clear. Thank you, Lucas, and thank you, Jill, for detailed answers. Thank you.

The next question is from Rob Ottenstein of Evercore. Please go ahead.

Great. Thank you very much. I was just wondering if you could give us a little bit more about the ZED delivery. Obviously, it's doing extremely well. Are you, you know, what percentage of the country is covered now? in terms of May, June, July, roughly what percentage of your sales is through this channel and where do you think that can go? And my understanding is that the Zed delivery does encompass competitors' brands as well. In terms of actual Zed delivery orders, what is your market share? Thank you.

Thank you very much, Robert. So Zed Delivery, let's talk about Zed Delivery. So Zed Delivery, it is a project that we have been for five years right now working on it. And so we get the right mindset and the right platform for us really to grow exponentially during this crisis. So it's part of our direct-to-consumer strategy. It's a way that we see in the future where we can really have this occasion, in-home occasion, relaxation, really more efficient from our side because we go direct to consumers, so we understand their insights. So this is really a way that we can believe that we will upgrade this occasion and get this occasion much more efficient, that we likely have a very efficient occasion on socializing on bars, okay? So it's a big bet for us. So having said that, so we made 5.5 million orders in Q2. Last year is 3.5 times above the full year of 2019. So it's really accelerated. We were able to add 100 new cities. During the pandemic, during Q2, so now we are with 142 cities in Brazil, most of the states. We believe that we are covering pretty much 60% of the Brazilian population, 40% of the Brazilian population. Sorry. And we're going to have 60% of the Brazilian population by the end of the year. It is still not that big in terms of volumes. We are ramping up at big time. I mentioned at some point in time that our long-term view is really to have 10% of our net revenue covered by DTC strategies, not just debt delivery, but the full package in the long term. And what I can say more is that, yes, we are treating debt delivery differently. as a stand-alone, very consumer-centric approach for delivering. Because of that, we are populating the app with different products, sometimes products from the competition, different categories like wines and some type of food. It is really targeted on this occasion. I'm at home. I need to have to watch TV, have some party. I need cold beer with some snacks very fast. So we're going to do everything that makes sense for this occasion on a consumer-centric way. But our market share is very high, very high, more than 95% today, just for you to know. It's very high. But we are really thinking of the delivery as a consumer-centric approach, and we want to really resolve all the demands that our consumers have.

Great. That's super. And can you also just mention how the BEX brand is doing this year?

Yeah, so VEX is really, so, you know, VEX is small. Now we have like one year launch at this moment. We are very excited about it. It is really growing triple, four digits, but it's from a very small base. And we have been working on the positioning, working on the new packs. Now we have long necks, cans, and 600 ml bottles. And last month was the month that we launched the new market campaign that will position the best brands here in Brazil. We are focusing on creating brand equity and the correct positioning with the right time, patience on it, This quarter was the quarter that we made the first launch with a DJ, a famous DJ in Brazil, Vintage Culture, a live stream. It became a global trend topic on Twitter, the launch that we had. 1.6 million people looking at the launch and very premium, very sophisticated. So doing very well, patient, marketing dollars ahead of volumes, and really what we want to really create is the coolest brand in the market.

Terrific. Thank you very much.

The next question is from Alan Alanis of Santander. Please go ahead.

Thank you so much. Hi, John. Hi, Lucas. Thank you so much for taking my question. I really appreciate it, and I hope everyone around you as well. My question has to do with this premium segment. John, you just mentioned moments ago that you saw a growing double-digit during the quarter. And is that the case, that means that the other rest of the portfolio saw more of a mid-single-digit decline from doing the math right? My specific question is, if we continue to see this premiumization, What should we be expecting in terms of profitability? Because these brands are much more expensive than the rest of the portfolio. Yet, when we saw the big premiumization movement in 16, 17, and 18, we didn't seem to have a contribution to margin. And will this be reversed, or we should just continue to, that this will be the case? That would be my first question. Thank you.

So first of all, so yes, so first of all, what is important to know is that we saw no material trade-down through independence, okay? And what surprised us was the resilience of the core, okay? So that was something that we have been talking in the past calls, that it was... try to find the right mix of brands where affordability, affordable brands were growing, high-end were growing too, and that at some point in time, these things would mend. And you could not see the profitability of the high-end because we were growing different segments in different speeds, and it was hard to understand how high-end is a creative process. and has good margins for the future. So the moment that we are living is good because we are seeing the core resilience, and then more and more we're going to begin to see the high-end bringing its additional performance being accreted for the company. When you are too much on the affordable and the premium, these things generally they get maxed, When the core has resilience, then you can begin to see the high-end. The high-end, we are happy with the performance of the high-end. So the category in Brazil, beer category, has been resilient. Water is very good. Consumers are on fire talking about innovation, new products, recipes. concept, meaning. It's amazing how the Brazilian consumer is open to talk and learn more about beer, and this is why the high-end has been growing for a while, and we believe that it will continue. We are very happy with the performance of our brands. In general, in terms of consumer sentiment, consumer pool, we have seen more and more Stella with a good performance, Budweiser doing well, Pax coming, Corona doing very well, even though with all this pandemic and the May and all the things, Corona doing very well in terms of consumer perspective. So global brands grew double digits. And we are happy as part of our plan. And you're going to, if the core is resilient, you're going to begin to see, so this will begin to be more a creative net-net.

Got it. No, that's very clear, Jean. Thank you so much. I mean, we look forward to seeing that resurgence of core. And as you said, once we have the resurgence of core, we should see the overall contribution expanding of the premium. My next question, really quickly, Regarding capital structure, I guess more for Lucas, you have $2 billion of net cash in your capital structure. What is the ideal capital structure? What is the ideal level of cash? And how are you thinking in terms of the priorities of deploying that cash beyond interest and capital and dividends? Is there some change in your thinking around that? Thank you so much.

Okay. Hi, Alan. How are you? In terms of capital structure and our cash position, I think the first thing is ever since the crisis hit, I think we saw the benefits of having such a robust cash position that gave us a lot of peace of mind. that gave our team a lot of peace of mind, that gave our wholesalers a lot of peace of mind, clients, customers, suppliers a lot of peace of mind, right, that we would continue to be, right, a very reliable kind of partner and be there and kind of weather the storm, right. So I think in hindsight it was – it was helpful to enter the crisis with the cash position that we entered. That's number one. Number two, given all the uncertainty that we were seeing at the beginning of the crisis, we decided to kind of have an additional cushion in terms of liquidity, especially in some markets where – We didn't have, we didn't enjoy the liquidity position that we enjoyed in Brazil, for instance. And so we decided to do some transactions to an excess credit market, either kind of direct bank debt or issuing security to reinforce our cash position, okay? So why am I saying these two things? It's because going forward, Right? The world is not out of the woods yet when it comes to COVID-19. We're certainly not out of the woods yet when it comes to COVID-19. So we believe there is merit, right, in being more conservative, if you will, in terms of our cash position going forward. Okay? Obviously, we're looking at how things progress. We're working with a multitude of scenarios going forward. And we will, as the months go by, as the quarters go by, we will look at the conditions of temperature and pressure, right, and analyze that. what's the optimal capital structure in the new normal that is going to shape up hopefully sooner rather than later, okay? But conceptually, right, the way we think about our capital structure and the way we think about our allocation of cash hasn't changed, okay? So we're going to continue to deploy money to reinvest in the organic growth of our business. Okay, we still see plenty of opportunity out there. Number two, we're going to still look for M&A opportunities. in beer or outside beer. We've been investing more and more in alcoholic beverages outside of beer. We've been investing more in non-alcoholic beverages as well. So we still think there's opportunity to be opportunistic when it comes to M&A and try to create value through that as well. And then to the extent, right, we don't find these opportunities, we will be returning excess cash to shareholders, okay, in the form of IOC primarily, given the tax benefits that come with IOC. So the desire to continue to maximize IOC hasn't changed and will continue to be kind of at the forefront of how we think of payout in particular. And then once IOC is maximized, we will look at additional opportunities to return cash to shareholders in the form of dividend buybacks. But that's going to be more of a judgment call to be discussed between management and the board at the right time, right? I mean, we follow this constantly, and we have these discussions. But let's wait towards the end of the year when we have a better picture of how the year is going to end We see what 2021 may look like, see where we stand in terms of our cash generation, our plans for the future, and we'll make a decision.

Okay? Yeah, that's very clear. Thank you so much. Thank you, John. Thank you, Lucas. Stay safe. Appreciate it.

The next question is from Lucas Ferrara of J.P. Morgan. Please go ahead.

Good afternoon, Gian and Lucas, and good afternoon, everybody. Thanks for taking my question. I have two questions. The first one is to understand if you have already some flavors, some views on the reopening of the on-premise channel, which is very important for you. So how North has been helping, how has been sort of a traffic, and how many of these places, if your clients are coming back, If it's coming in line with your expectations, maybe above your expectations, how to think about the reopening of the on-premise channel in this kind of first two months. And the second question is to understand a bit better also the core plus segment, which seems to be a bright spot right now for you guys with Duplo Malche. And so my question is, you know, how big this segment could be, how fast it's growing, and what sort of innovations you guys also kind of working on for this segment. Is there space for maybe another brand or to expand geographically? Can you discuss a little bit the Core Plus and sort of the value the Core Plus offers to the consumer? Thank you.

Okay, so let me tackle first the reopening. So more and more, it's getting clear for us that everybody is reinventing the bars, mainly when we talk about not the high-end urban centers bars, but when we talk average bar in Brazil, is really trying to maintain open, is really reopen fast, But really changing the way it's doing business, so like changing the packaging and then with this coming to collect, deliveries and takeaways. So the bars are getting, the average bar of Brazil is getting more close to a mom-and-pop. So they are working on some occasions like that. So we are seeing for now like if you get total Brazilian bars, maybe something like 15% of the bars are really, really closed. but reopening, but with the volumes per box still small. We know that government is really still with some plans to help the reopening, so we believe more it's gonna be that the main issue that we're gonna have is pretty much about the occasion and not about the channel. We believe that that the channel, in the speed that it's going, with the transformation and with some help of the government, we believe that the channel will get it right in the future. The issue is pretty much about the occasions, about consumers coming, it's about the protocols, it's about the number of people in bars restricted. So this occasion, I think it will take a little bit more time to get it back, to get it right. And so that's why it's important that we are really figuring out how to help to create new occasions, accelerate to be on new occasions like the weekdays, relaxation at home that we have seen as a trend in Brazil that we knew that it happened in mature markets, but it really accelerated for us. So this is where... This is how we are dealing with it, okay? So this is one thing. Second thing is about the corpus. So I came from China. The corpus segment there is kind of 20% of the market. We see it's an important market in the U.S. too. So all the markets, they have this well-established core segment that can go from 10 to 20-something. In Brazil, we don't have nothing established there. So even though we have the premium and then we have the core semblance, that came in the past fragile position there but quickly went for the core segment. So there is a space there that we really want to focus and develop. So the brand that we started that right, it was Brahma Diplomacy. We repositioned Bohemia to play there, but even though with Brahma Diplomacy with a price positioning ahead of Bohemia. So Bohemia is playing a role on that, and we believe that we still can have one or two brands on that opportunity, but still studying. So Brahma Duplomacy, that is our main initiative right now on that, is already in all the states of Brazil. It's something that is already growing very fast, acquiring new consumers, good repurchase. So it's really something that we are happy with it. It's part of our innovation strategy to populate and to find ways to make the core plus Right. We still believe there is an avenue of health and wellness in the core plus that we can tackle. So we are thinking of it, talking with consumers, understand expectations on that. But this also, the core plus and the innovation, it's really a bet that we have. We just started. Dramadu Promotion is doing very well, but more to come.

Thank you very much, John.

The next question is from Marcelo Recchia of Credit Suisse. Please go ahead.

Hi, Jen. Hi, Lucas. Thank you for having my question. Basically, I have two quick questions. The first one is about the trends. Basically, we have seen larger retailers signing solid trends in July, largely in line with June. So could you give us some color on July trading for the year if this is also the case for you guys? And secondly, with the likelihood of having the carnival postponed towards second kill, could you elaborate how do you see such events with regards to your activation strategy and the year sales performance? Thank you very much.

So let me try to get your question right again. So you are asking about margins?

Not really. No, not really. The first question was about if you can give us some color.

Can you make it your question?

Sure. The first question is about a trading update on July. Basically, we have seen larger retailers that are finaling solid trends in the month of July, largely in line with the trends seen in June. So if you can give us some updates on what you saw during July, it would be very helpful. And the second question would be a carnival with the likelihood of having the event postponed toward the second kill next year. Could you elaborate? How do you see such events with regards to your activation strategy and sales performance?

And so, first of all, so we – I will get back to our performance on June, on May, June, and July that we have been, as I'm back, really recovering and went to the positive territory on July, on June. And then we – in the end, July, we will not comment during this quarter the performance of July. So this is something that we decided internally here not to give any guidance on that. So this is one thing. The second thing, when you talked about the carnival, so yes, so situation is still very fluid. So there is all this Back and forth cities here and there, big agenda of carnivals being talked right now. The best guess that we have is really that probably the carnival will be really postponed. We have seen the conversation about merging it with in June with some with the São João calendar or even going further a little bit. We were, just for you to know, we were talking about our innovation strategy for the next year. We postponed one or two innovations that really depend on the Carnival for us to make it right. So we are following closely this phenomenon. And I don't think it's a big deal, but we just have to get it right when it is and use it properly.

Okay, thank you very much. And if I may have just a quick follow-up with regards to the non-alcoholic category. Can you comment a little bit your strategy to attack, you know, such a trend that we saw in the second quarter in order to revert that for the remaining of the year?

So NAB, it took a little bit more time to went down, so beer went down faster than that, and then that, at some point in time, we believed that this would be a category more resilient, but it didn't prove that right. Looks like beer is more resilient. In the end, we have pretty much some effect that impacted the performance of NAB. One is really the volumes that it was to impact. The second one is really the reduction of consumption occasions. For example, we have in our portuario Gatorade, so that people use to run and then get Gatorade on the go. So all these occasions on the go are occasions that are very being impacted. So we talked a lot about mix in beer, but it's reality that the single serve and the multi-serve is really something that it was a big impact on the category of soft links that has a completely different proposition in terms of net revenue per hectolitre, in terms of margin. It was a big impact. A little bit of trade-down in soft links too. Differently, that's what I mentioned. And then we had a hard comp in our business because of the lower tax credit of the free trade zone that we have in Brazil. So there is some kind of hard comp, some kind of phasing on the cost side that we have in the net business. So that's pretty much it. So that's, I think, what I can mention.

Okay, thank you very much, Vince.

Next question is from Isabella Simonato of Bank of America. Please go ahead.

Thank you. Good morning, Jen. Good morning, Lucas. Thank you for the call. I have two questions. First, on Brazil, you usually mention how the market performed during the quarter in the sense that this might be more difficult this time, but can you give us a sense on how do you see the evolution of the market sales during the months of Q2. And the second quarter will be the last division where we saw a big drop in margins. And I understand that the social distancing, right, in Argentina, Bolivia, as well as the economic situation are not easy. How can we think about profitability in last going forward? Thank you.

Okay, so let me get it right. So first we're talking about industry. Second question we are talking about LAF.

Yes.

And a little bit of the mix and competitive landscape that you mentioned.

Yeah, and the industry, if we could focus on Brazil for beer, that would be great to appreciate it. Thank you.

Yes. So you saw our volumes. Our volumes were 1.3% declined, and we believe that we outperformed the industry according to our estimates. So we are really trying to get exactly right where the industry is. It's not being easy. because we are really looking at all the information that we have to kind of to get this thing, to get the industry exactly right. So for example, new thing is a simple data set and it has its limitations and now during COVID restrictions have further exacerbate the limitations to really get the number of the industry right. So we are waiting a little bit more to get confident about this number. But in our internal estimates, we see a recovery on the industry. We saw an overshoot in March, and then we begin to see the recovery in the industry in general. And so we are seeing more and more the industry getting close to the last year. But it would be good to have a little bit more time to really get the right number on that. So that's what I can say about the industry. Talking about loss, in Argentina, volumes declined by low teams in the quarter, with revenue perhaps a little growing by double digits as a result of our revenue management initiatives. It's a highly inflationary environment. In this quarter, in Argentina, beer category was impacted by the restricted measures that they are even tougher than what we saw here in Brazil. But our business is more towards the off-trade, so we compensate the restrictions with the in-home occasions. There is more developed. And despite this declining in the industry, we saw good performance of our e-retail platforms. Our premium mix, it is something that is growing. As we saw in Brazil, premium mix is growing in Argentina. CorePlus is healthy there, too, with our Undis brands. Corona is doing well. Andes is doing well. So we are seeing this thing about excitement of consumers about high-end and differentiated core brands, which allowed us to perform ahead of the industry in Argentina. Bolivia, it's the country that we have more restrictions that have been more impacted because of COVID-19. and it will take a little bit more time to come back. All the country is still really dealing with the upgrade in the infrastructure, in the hospital infrastructure, so this is where our biggest restrictions as our industry are. Paraguay is recovering very well. In terms of country, it is the population that we have more confidence in our zone. So the volumes are really already coming back in Paraguay well.

And just to add to that, I think it's fair to say that Bolivia is where we have seen the slowest pace of recovery, right? And I think that's kind of what may end up happening going forward as well, depending on how the country tackles the pandemic. But it's been the... the slowest pace of recovery across kind of all our markets.

That's very clear. Thank you.

The next question is from Leandro Santinez of Bradesco. Please go ahead.

Hi. Thank you. Good afternoon. I have three questions. First one regarding pricing. I understand this time. last year and historically used to implement price increases. If you could comment where we stand on price increases this year. The second question, you mentioned that volumes, of course, is a component explaining your margin decline. But when we look into June, which was a month where you did not have a volume decline, if you could comment what was the margin contraction And the third question, last year, in the last quarter, you mentioned that second half 2020 was going to be a challenging quarter because of competition. I would like to know if that view has changed. Thank you.

Last quarter? Yeah, could you repeat the last question? Yeah, it wasn't clear. Could you repeat it?

Last year, in the last quarter, in the presentation, you mentioned that you expected the second half of 2020 to be a challenging, you know, half with regards to competition. And so I would like to know if that view has changed at this moment.

Okay. Okay. So talking about pricing first. I mentioned in the first call that we participated that we had to learn with the Q3 that we had in 2019. We were not successful on our revenue management strategies. We had to come back and come, and we usually had been very rigid on our strategies. revenue management strategy and that quarter was a quarter for us to look and learn with it. So this is one thing. Second thing is that as we think about pricing, we know that there is COVID. So we had the learning of the Q3 last year, and we are in the middle of a pandemic that will make us be paying even closer and special attention to disposable income. package and channel mix as well as the learnings of Q3 of last year that simply didn't work as expected. So despite this positive volume recovery trend in Q2, the consumption environment still remains volatile. The future is still uncertain. We are looking very close to it. So we want to really make sure that our category remains attractive and available, inclusive to consumers during this pandemic. Over the long run, prices should really grow in line with inflation and plus and minus the segments and the region's mix. What we have learned over the past last year is that depending on the moment in the economic environment, and prefer to adopt a more balanced pricing strategy or postpone it for the right moment. And we are looking very closely at the macro scenario, LSP's mixed trends, really to make our call, particularly here in Brazil. So having said that, margins, yes, we talked about the past, the future, that we recover top line on a V-shape and really margin, it will take more time to come through. We expected a bottom line to have a slower recovery than top line. That was pretty much our strategy. Follow the consumer. Do not lose the grip be on the new locations, enhance your consumer intimacy, and we are happy with that strategy, but the channel mix, in fact, shifts dynamics towards the off-trade and the cost pressures that we have on mix, on cans, and on transaction effects is something that we're going to take a little bit more time to digest. Having said that, we expect margins in the long term to improve as a result of the volume recovery, the on-trade reopening with the increased rate of RGBs, the cordless materializing and premiumization as a strategy, the continual innovations. We are so excited about the innovation outside of beer that we have, BitsGT, so different liquids, very incremental, very creative, price very above the beer, a completely different consumer. And one piece of our strategy is really the capex investments in technology, in our context strategy, in footprint, in the supply chain, really to get us to get more efficient going through this recovery of margins, okay?

And then, sorry, just before you go to competitive environment, Jean, to your question about June margins specifically, okay? We're not going to go into that level of detail just because it's one month, right? And we think margins is more about the direction and the journey, I think. But suffice to say that in June, you see the power of volume, right, recovery when it comes to margins, right? So it's fair to say that June margin performance was better than the prior months as a result of the volume recovery. But let's wait and see how things pan out going forward.

So when we look at talking about the competitive scenario in terms of tough comps in 2020, in reality, Our toughest comp was Q1. Q1 is where we over-indexed the market share last year. And H2, it was more like, in terms of competitive environment, an easier comp because the volumes were down in Q3 and because of the strategy on pricing that didn't work as expected in Q3. So volumes-wise, H2 is the most competitive one. The tougher comp is really Q1. It's not H2. So that's the point. So having said that, Brazilian market, very fluid. All is very competitive. And with the pandemic, it has been challenging the environment we operate. We are pretty much leveraging all the competitive advantages that we have. So it's very important in this moment to have reliability and operational excellence so we are increasing big time the customer satisfaction, the relation with our customers because we have been reliable so the reach of our strategy, of our distribution is something that really made the difference in this moment. And all the operational excellence, reliability is something that is being very counted by our clients. We focus a lot on consumers to be indispensable. So digital transformation is really helping us to have multiple points of contact for customers. Customers can make the orders by phone, by B2B, by the sales rep that can visit. So we have multiple points of contact. We have that delivery for customers. for consumers, so we are really upgrading the possibilities to get our network right and working. And the channel strategy that we have, it was really something that is paying off, and I think it will continue to pay off. So this group with Mums and Pops, this group with Small Off Trade is really something that we believe it will continue for a while.

Okay, so just to be clear, you don't expect competition to get stronger in the second half of 2020. So you expect to be about the same of what you're seeing up to now in the year?

Yeah, it's hard to tell, right, what exactly is going to happen with competition going forward, right? I think the important thing, at least how we look at it, right, is, one, focus on what the consumer wants, right, and where the demand is. okay number two focus on the customer right and really try to strengthen the ties with the trade and i think in q2 we made some good decisions around that okay and and then three as john mentioned we need to leverage our our competitive advantages as a company right so having a single well-established distribution network that was built over 20 years in terms of direct distribution having a very well-established network of wholesalers that also has been with us for over 20 years. These things at a time like this where the tide has arisen for everybody, right? It's tough for everybody, right? But the fact that we've had such powerful distribution reach, direct distribution, and wholesalers has made a difference, and we're going to continue to focus a lot on that, right? And then, yes, that's pretty much it.

All right. Thank you very much. One more.

The last question comes from Joel Suarez of Citigroup. Please go ahead.

Hi. Good afternoon. Thanks, everybody. So, I have two questions. First one, I just wanted to touch base on the topic of government subsidies and the vouchers. You mentioned it in the release as being one of the factors that helped guarantee some resilience of the volumes. And how do you view this when this is out of the picture? What do you think will have an effect on consumers' disposable income? So what do you think might be the effect in terms of how could this drive volumes? And the second point, just to be clear, I think looking at the revenues per hectare meter declining in Brazil per year by less than 2% year-over-year, we have a series of headwinds and a series of mixed shifts going from on-premise to off-premise, obviously some grand shifts. So, what do you think, what could have been the positive factors that could have upset this? I mean, when you compare to NAV, NAV went down 15% year-over-year. Of course, it has its specific dynamics, but just to compare the two, it really comes to attention the resilience in terms of the revenue per hectare as well in the Brazil. So, if you could discuss this as well, I'd appreciate it.

Okay. So, first of all, Corona Voucher. I think it's It's really something that is there. It's a relevant movement in support of the government. It's really something that we believe made some difference, had an impact on the consumer behavior. And this will be phased out at some point in time. And we have to understand that this part, it was a piece. that it was not like fundamental when it's structural for the volumes that we have seen, but there is some marginal, some incremental effect that we have to deal with when these things come out. We know that when these things come out, too, probably it will come some support for, in terms of depth, to retailers like we have seen a lot of the conversation about BNBF trying to support the channels. So I think we want to jump in a different type of incentive moving forward that should help at some extent too. But we know that this thing is something that it will come and go and we have to keep an eye on it. So talking about prices, so we are not seeing – so this number that you see, it is pretty much about the channel impact and the mix impact, just the performance that we have in Brazil. It is not something that – more than that. So this is really business as usual with these different channels and with this different mix going on and leading – to the price that you saw. We believe that when the things, so for example, we have draft beers that is really high-end VIP box that's like 70% below last year. So this is a little on that. So we have, so when these things should come back slowly, moving forward is not just about The reopening of the bars is really about the confidence of consumers really jumping into the socializing occasion when the bars are open, so we know it will take a little bit more time moving forward. And then we have, so the decisions that we have to do in terms of what to do with the revenue management, inflation, and and calendar moving forward. In this, we are pretty much paying even closer attention to the disposable income, how this coronavirus will impact the disposable incomes, really to make a call in a proper way, in a way, in a different way that we did last year.

And then just to clear part of your question around net revenue per hectare leader, performance in NAV, right, I think as it compares to beer, I think apart from the volume impact, which obviously is one thing to consider, just the way the mix changed within non-alcoholic beverages led to a more pronounced effect on net revenue per hectolitre, just to give you an example, right? Premium soft drinks, okay? So premium soft drinks suffered much more than our premium portfolio in beer, right? And so another example is single serve and multi-serve, right? So the swing from single serve, where net revenue per hecto liter tends to be higher, to multi-serve, right, that had a much more pronounced impact – in terms of non-alcoholic beverages than the mixed shift between one way and NRGB for beer. Thanks, Luca. Thanks, Jean. And just one more follow-up very quickly. Jean, based on what you see in China, what do you think, I mean, when the situation starts to, you know, reach a more normalized, you know, you can't say it that way, but... Looking into the pricing environment, how aggressive do you think the pricing environment could be based on what you see in China? Yeah, how aggressive the pricing environment based on – I think it's very hard to say, honestly. Okay? Again, we're going to focus on the consumer, the customer, our brand, tackling the consumer occasion. Okay? Time will tell what happens to the pricing environment.

I think the most relevant thing that I can mention is that things will take time to come back to normality, okay? But our category is very resilient, and we are seeing these new occasions popping up. So the socialized occasion, for example, nice life in China is really something that it will take time to recover. But there are new occasions in e-commerce, in-home, growing in China, growing in Brazil, relaxation, weekdays, Mondays, convenience. I want right now that delivery. So we really have to readjust to go through and then looks like it's possible, net-net. Category is very resilient. But the socializing occasion in bars, we saw it would take a little bit time here to come back for people to really get confident on that. We have seen this a little bit in China. But another occasions are popping up and you have to grab and you have to support. And that's a way for us to go through the situation. So resilience. but different for a while. Come back to normality, I believe normality will really be people confident in bars and then residual occasions that appeared during this pandemic that was not supposed to be here, relaxation at home, that will stay and will be incremental for the future.

Thanks so much.

So I think

That's pretty much it.

Thank you very much. Thanks for joining this call. We still have a long and bumpy road ahead of us, but we believe we are on the right track. So see you next quarter. Thank you very much.