Ambev S.A.

Good morning and thank you for waiting. We would like to welcome everyone to Ambev's second quarter of 2022 results conference call. Today with us we have Mr. Jean-Gilles Satchez, 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.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 a listen-only mode during the company's presentation. After Ambed's remarks are completed, there will be a question and answer section. At the time, further instructions will be given. Should any participant need assistance during this call, please press star 0 to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Security 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 the general economic conditions, industry conditions, and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with first quarter of 2022 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis in the earnings release. Now, I will turn the conference over to Mr. Jean Gerissati, CEO for Ambev. Mr. Gerissati, you may begin your conference.

Good morning and good afternoon, everyone. Thank you for joining our earnings call for the second quarter of 2022. During our last call, I mentioned that we started 2022 well positioned and that I came out of Q1 encouraged with what we delivered. As I review Q2 results, I see even more evidence to be confident going forward. And here's why. This quarter provided a glimpse of consumption patterns in a post-COVID world. In several of our markets, reopening continues well underway, with services and on-premises businesses coming back. And as this takes place, we have once again been able to meet the moment. Ambev grew 6% in volumes, reaching 42 million hectoliters, which is 15% higher than 2019 levels. It is the first time we reached more than 40 million hectoliters in a second quarter. This led to a net revenue growth of almost 20%. In addition, organic EBITDA and cash flow grew over 17% compared to the same period of last year. So let's talk about Brazil. In Brazil, we witnessed more clearly the consumer comeback journey to the on-trade and overall out-of-home occasions, leading to another quarter of solid top-line performance. In beer, we estimate we gained market share versus last year and sequentially versus Q1 this year in both volumes and value. Volumes grew by 8.5% in the quarter and by 5.2% in the first half. To date, we grew 2.2 million hectoliters. leading the industry expansion, as we estimate that the industry grew almost 0.5 million hectoliters. In terms of segments, premium grew more than 20%, led by Original and Shop da Brahma, which are more relevant in their own trade channel. In fact, this quarter, Shop da Brahma achieved its highest volume in the second quarter, with 40% more buyers than the pre-pandemic levels. While our core portfolio sustained its momentum, increasing volumes low teens, and we continue to invest behind developing our core plus brands, Brahma Duplo Malte and Spaten. Net revenue grew 23%, with net revenue per hectolitre growing about 13%. And finally, EBITDA in Brazil beer grew 27.5% organically, with margins expanding by 80 bps. Talking about NABS in Brazil, we delivered another great performance this quarter. Volumes grew 16%, driven by healthy brands. especially in the out-of-home occasions, supported by bees. We estimate we gained market share again this quarter. In CSD, Pepsi brand grew more than 20%, driven by the great success of Pepsi Black, which almost doubled its weight within our Pepsi brand. Net revenue per hectolitre grew 22%, driven by revenue management initiatives, the premium mix, and package mix, as single-serve packaging grew 37% this quarter. EBITDA grew organically 92%, expanding margins versus last year by 500 bps. Regarding our technology platforms, over 86% of our revenues are coming through BISP. On the marketplace, in June, we announced a partnership with Grupo Pão de Açúcar, who will offer a vast range of products on our platform via a 3P model, just like BRF, delivering an even better assortment and service level for our clients. The delivery fulfilled 15 million orders, 2% below the previous year. mostly impacted by the rise of out-of-home occasions. GMV grew by 7% compared with last year, and we kept a 4 million month active users in the delivery. We continue to invest behind adding more features to our app and delivering a better user experience to our consumers. And BizBank grew TPV quarter over quarter by almost 40% and now reaches about 300,000 customers. Turning to our international operations. In last, overall volumes grew by 1.5% led by Bolivia, which benefited by the reopening. In Argentina, we remain cautious about the impact of rising inflation on consumption, despite flattish overall volumes in the quarter. In Chile and Paraguay, Premium and Core Plus continued to gain weight among our brands. Last net revenue per hectolitre grew 38%. In CAC, overall glass supply constraints remained Coupled with a tougher short-term competitive environment in Panama, this all contributed to a 10% decline in volumes and a flattish net revenue in CAC. Talking about Canada, despite the reopening that took place, industry is still sluggish. We estimate that beyond beer industry declined by almost 9% in the quarter. Talking about beer, We estimate to have gained market share, led by core and value brands. Now, I would like to talk about brand building. During our investor days, we explained our framework based on three pillars, mind, mouth, and heart. And this is a quarter to be proud of, of how much we have evolved in the last few years in brand building. This evolution is no longer going unnoticed. Last year, we were awarded seven prizes in Cannes Festival of Creativity, and this year, 12. Ambev was the most awarded Brazilian company in the festival, with lions for all of our beverages categories. Brahma and Budweiser. were awarded in beer, Guaraná in abs, and Mike's in beyond beer. Talking about our framework, starting with mind, we strongly believe that being creative is the best way to not only capture consumers' attention, but also engage with them in a meaningful way. Brahma brought home its first ever golden lion and seven lions in total. which is an absolute record. It was the most awarded brand in the world in the social media category with our foamy haircut campaign. The results of all this creative effort helps Brahma continue growth in brand health KPIs. Now moving to mouth. Key recent innovations continue to grow as we keep launching products to delight all Brazilian tastes. Our most recent project is Brahma Duplo Malte Escura, or Brahma Double Malt Black, a special limited edition which is brewed with two types of malts to create a darker and even creamier beer. We continue to collect awards for our innovations. In June, we were listed one of the 20 most innovative companies in Brazil by the MIT Technology Review, a study that evaluated innovation capabilities in more than 1,000 companies in the country. Finally, going to our third pillar, the heart, here is all about being relevant in consumers' lives and connecting through their passion points. After the two years gap due to COVID-19, our brands continue to be a fantastic platform for cheering together. Brahma helped to bring back São João festivities in the northeast of Brazil, one of the largest and most traditional celebrations in the country. Budweiser presented the NBA House 2022, a space where more than 40,000 people had the opportunity to watch the season's playoffs. And BAX created the Urbex Festival, an urban music and art circuit that helped to awaken different areas in the main urban centers of Brazil. We will keep consistently focusing on mind, mouth and heart to make sure we are relevant, innovative and loved by our consumers, which will make stronger brands in the long term and help our organic growth trajectory. To conclude, our performance in Q2 accelerated in Brazil even more than we expected. more than offsetting some headwinds we had in our international operations. It was a great H1, and we will work to deliver an even stronger H2 in terms of both top and bottom line, despite facing a tough comp in Brazil beer volumes in the third quarter and the continued volatility and inflationary pressures. We are not making any changes to our guidance for the year relating to Brazil beer cash cogs per hectolitre growth between 16% and 19%, excluding the sale of non-AMBEV marketplace products. Moreover, we remain on track in terms of our main ambitions for the year, that is, to get Brazil back to bottom line growth, to have a consolidated AMBEV organic EBITDA growth ahead of the organic growth that we had in 2021, and to improve our return over invested capital. Lastly, I would like once again to thank the entire team for the ownership mindset in delivering results and transforming the company, and a special shout-out to the marketing team Congratulations for the amazing performance at Cannes. Thank you for your time. And now I will hand over back to Lucas.

Thank you, Jean. And hello, everyone. Our financial performance in Q2 was fairly consistent with the first quarter in terms of what should be the same and what should change in 2022. What would not change? First, Top-line growth remains key. We delivered nearly 20% net revenue growth overall, with Brazil once again being the main highlight. Second, input cost pressure remains a sticking point. Cash COGS per hectolitre grew nearly 18% at the consolidated level, while for beer Brazil, it grew almost 14%, excluding non-AMBEV marketplace products. And third, we would continue to focus on value creation drivers. The name of the game here continues to be improving our return on invested capital, building on our progress in 2021. And in terms of what would change, first, net revenue performance more driven by net revenue per hectolitre than volumes as we adapt to a higher inflationary environment. Net revenue per hectolitre grew almost 13% and volumes grew around 6% in the quarter. Second, cost headwinds would come mostly from commodity inflation rather than effects. Commodity inflation was more explained by the increase in Brazil beer cash cogs per hectolitre, driven mostly by aluminum and barley, which was partially offset by better RGB mix. Third, SG&A growth should improve. Cash SG&A grew about 15% in the quarter, with sales and marketing growing almost 22%, thanks to continued investment behind our brands and innovation, distribution growing 18%, mainly due to rising diesel prices, and admin expenses growing just around 2%, given lower variable compensation accrual once again. And fourth, tax credit one-offs in Brazil that positively impacted our EBITDA, financial results, and effective tax rate in Q2 of last year would be a factor this quarter. and it was a factor, but for a different reason than we originally anticipated. We recognize in the quarter about $1.2 billion in tax credits, of which a little over $900 million in other operating income and approximately $300 million in our financial results. This gain also relates to the inclusion of the ICMS state tax in the taxable basis of the PIS and the COFINS federal taxes, which was declared unconstitutional. As I have mentioned in prior calls, there is still pending litigation in this matter, and during the quarter we concluded, together with counsel and external advisors, both the legal viability assessment as well as the quantification of this additional portion of tax credits for the PIS and the COFINS that we overpaid over the years. As a reminder, these tax credits are technically part of our normalized results from an accounting standpoint. but we disregard them for purposes of calculating our organic performance, treating them as a scope change. Please refer to our financial statements for further details. Now, given our performance in the quarter, we are well on track to deliver a better organic EBITDA growth in 2022 than the 10.9 organic growth we delivered in 2021. Brazil's recovery this year is turning out to be stronger than expected, which is more than offsetting the declines in CAQ and Canada year-to-date. As for last, year-to-date, Argentina is delivering EBITDA growth slightly ahead of local inflation, while the other last countries delivered EBITDA growth in H1, driven mainly by Bolivia, which is finally recovering from COVID. And putting this quarter's performance into perspective, since Q3 2020, we've managed to deliver net revenue growth above 13% quarter after quarter. And this was true again in Q2. So the growth is there, despite all the headwinds we faced. And the good news is that in Q2, we finally managed to deliver growth and profitability in Brazil, which had been lagging for a while. Brazil Beer expanded EBITDA margins by 80 BIPs, while Brazil Knob expanded EBITDA margin by 500 basis points. No doubt there is still work to do on the gross margin side and in terms of consistency, but it's a start. Speaking of profitability, as I've mentioned in prior calls, we've also looked at profitability in terms of working to consistently improve returns on invested capital year after year. And here, we're also happy with the progress we've made so far this year, as first, we continue to look at ways to optimize our business through financial discipline on the cost and expense side, as well as improved resource allocation across our businesses and markets. And second, improve return on invested capital as we look to digitize and monetize our assets. Here, the scale-up of the technology platforms, such as Beast and Zed Delivery, are helping us improve not only NOPAT growth, NOPAT margin, but also asset turnover. It's still relatively early days for these platforms, so we definitely see more upside going forward. Now let's turn to our cash flow and our financial performance below EBITDA, and I will close with some words on ESG. Cash flow from operating activities totaled about 2.2 billion in the quarter, which represents an increase of about 17%. Normalized profit grew a little over 4% in the quarter given EBITDA growth and a lower effective tax rate, partially offset by higher net finance expenses versus Q2 2021 of around 200 million reais. Net finance expenses were mainly impacted by the continued increase in the carry cost associated with our FX and commodity hedges in Brazil and Argentina, which should continue to be an issue going forward. Our interest expense grew mainly due to fair value adjustments of payables under IFRS 13, but it was fully offset by higher interest income resulting from the Brazilian tax credits we recorded in the quarter. Before I wrap up, I want to briefly highlight our progress in terms of some important sustainability milestones. On the environmental side, we announced three more carbon-neutral plants in Brazil. Arosuco Aromas in the state of Amazonas, Juatuba in the state of Minas Gerais, and Curitibana in the state of Paraná. Together, they represent an emission reduction of over 5,000 tons of greenhouse gases per year. and we intend to deliver an additional four carbon-neutral operations by year-end. And on the social side, our people that volunteer within the VOA Social Transformation Program have recently joined Gerando Falcões, a Brazilian NGO of social development, in an initiative to mentor social leaders of Brazilian favelas that are graduating at the NGO's Falcons University. We plan to hold our ESG day during Q3, and we hope you can engage with us in this dialogue. So to wrap up, a few final messages. First, we delivered a stronger H1 than we expected, which gives us more confidence going into H2, particularly in Brazil. Second, our guard remains high since challenges and short-term volatility remain a reality, particularly in countries like Argentina, Panama, and Chile. And third, we remain focused on delivering continuous and consistent improvement in our results as we progress on AMBEV's transformation journey. Now let me turn it back to the operator so we can go to Q&A.

Ladies and gentlemen. We will now begin the question and answer session. If you would like to ask a question, please press the star button. If at any point your question has been answered, you may remove your question from the queue by pressing star 2. Please wait while we gather the query requests. The first question comes from Marcella Ricci with credits to it.

Hi, Lucas. Hi, Jean. Thank you for taking my questions, and congrats on results. I have two questions. First, on price, based on conversations with industry participants, we heard that Amba has implemented an off-cycle price increase in the second quarter. So, just would like to confirm that, and if so, if we channel and pack and by how much? On top of that, based on third quarter hard counts, can we expect a usual price increase to come, or could you increase discounts or reduce price in order to push volumes? Let me wait the answer of that before asking the second question.

Okay, Marcela, thank you very much for your question. As you know, we are really focusing on finding the right elasticity in the sustainable balance between volumes and net revenue per hectolitre, always with a medium and long-term pricing strategy unchanged. prioritizing to do not lag inflation, but really work on a favorable brand back in channel B. So this is a strategy pretty much does not change. Since 2019, we have been growing volumes while improving price and performance. And we continue to monitor the environment moving forward, but in a flexible way, watching inflation, disposable income, really working on elasticities to make the decisions on revenue management, okay? So having said that, we did a more tactical price increase in May. It was a small one. It was granular in some packs by channels, some regions. that it was around 2.5%, both on off-trade and on trade, right? So usually we see in Q2 net revenue per hectolitre going down sequentially. So this is more of an effect on mix, on the north, northeast regions gain weight, and then we get the winter coming in the southeast region. But this quarter was surprising us. It was really that The actions that we took in the channel mix, in the PET mix, during the COVID, and the reopening of bars, maybe seeing RGB 600 ml bottles, original Shukda Brahma, really getting traction. So this helped us to somehow to mitigate this usually net revenue for hectoliters decline. that we have Q2 to Q1. H2, I can't really comment on the competitively sensitive on pricing decisions moving forward.

Perfect. That's very helpful. And the second question, very quickly, is about the corpus segment, which was the only segment you did not mention how much volumes grew in the quarter. So, it would be nice to hear from you how the segment performed in the second quarter. And also, if you can give us some color on how has been the rollout and acceptance of stopping. Thank you.

Okay. So, that's a good question. Let me give a step up to talk about dynamics that we saw in the Q2, and then we talk about the segments. Okay. What we see, Marcela, doing this, doing a deep study on the previous two years, is that we developed a lot of actions really to fulfill the in-home occasion, right? So since the pandemic arrived, we designed it ourselves to get this in-home occasion right, and we went deep on that, right? So you see that we – that delivery was – It explodes. Brahma Duplo Multi, it was a brand on the corpus segment, designed it in a sleek 350 ml cans to the home occasion. We changed it. We expanded the 300 ml bottles focused on the traditional trade to get inside homes. So it was really a strategy that we are very happy with it. It really step changed our volumes. If you combine all these things, it's really something that really led our 10 million hectoliters change in the company. But what we have seen in Q2, it is that there is a lot of residual of this in-home actions, but consumers travel back. to our strength that it was the bars. And then we see everything around this social out-of-home occasion really shining and a lot of residual on the home, but really shining the out-of-home occasion. So because of that, we see high-end, very strong with Original, Shop da Brahma, that they were waiting for the comeback, right? And they suffered a lot and they came back. We've seen somehow decor in 600 ml bottles and little bottles coming back that they were really growing more on the 300 ml bottle. And the corporate strategy, it continues. So Bohemia, we kind of unplugged with marketing initiatives. We are really focusing on Spati and Brahma Duplo Mouch on that segment. And if you see the combination of these two brands, Spati, it was designed more on the 600 ml bottles, Brahma Duplo Mouch more on the in-home occasion. If you get these two combined, we are growing double digits in this quarter, but with Bohemia with negative volumes.

Excellent. Thank you so much, and congrats again.

The next question comes from Isabella Simonato with Bank of America.

Thank you. Good morning, Joana, Lucas. Good morning, everyone. Just a follow-up, two questions. First of all, a follow-up on the volume discussion in Brazil. It's interesting when you mention, right, based on the remarks, pretty much all the main segments, right, grew double digits this year, while when we look at the printed volume, right, at eight and a half, looks below the average of those segments. So if you just give a little bit more color per segment or what exactly brings the average a little bit down. I think that would be helpful. And the second question is, when we think about the performance, right, of the first half, and you guys mentioned it has been a positive surprise. However, you didn't change guidance, right? Or I don't know if you think there is more room for positive surprise or if you guys are seeing a more challenging second half, and if that's the case, what would be those challenges, right? It is an international market, given what's going on in Argentina, or a tough comp in Brazil. So, just to get a little bit more color, how are you guys seeing the second half? Thank you. Thank you.

Okay. Let me get the first one, and then Lucas get the second one. Isabela, so volumes-wise, we are very excited about. So 8% volume, it's a great volume in the quarter. But in the end, to look quarter by quarter, sometimes it's misleading because consumer is moving. And from one occasion to another, it was really, if you look back to 2019s, We are 20% above our volumes in 2019, okay? So, we've seen a structural brand in the high end doing well consistently in this period, and then we landed in above 20s in the high-end brands with, like, Original and Shock Davenport, as I mentioned, really leading more than that. Somehow I mentioned that Core Plus, so Brahma Duplo Multi Plus spotting, they are double digits. The mainstream is around that too, okay? So it's low teens too. What really went down, it was the value brands that we really unplugged. Brands like Fantastica Subzero, brands that some regional brands that we have like Serrana. So they're they were brands that really took the heat overall. But we see somehow Core and Core Plus taking Bohemia out in the same pace and in high end ahead of the portfolio. Our specialty brands, they are doing very well too, okay? So the craft, Patagonia, doing very well too, especially. So this is one thing. Talking about the guidance, I will hand over to Lucas, but just to mention, just to guarantee that he put the right words here on the call, but somehow we are excited. We mentioned that Q1, we had that opportunity Strange January that it was a one-off hit with Omicron in many markets. Then we had this Q2. Then when we look at H1, it's more something like what we were expecting in Q1 if it was not Omicron. And it's a place that we are better than we were in Q1. And what I mentioned in my initial statement is that we believe that H2 will be strong. We are confident that it will be better in top line and bottom line when we compare with H1. So, somehow, if you put the numbers, we are confident. But I will get to look as kind of rounded up.

Sure. Thank you, Jean. Hi, Isabella. Thanks for the question. Starting with the guidance, the guidance that we gave for the year was related to cash costs per hectolitre in Brazil, beer, excluding non-marketplace products, right, AMBEV products, non-AMBEV marketplace products. And that was the guidance that we gave right in Q4 when we announced the full year results and announced our expectations for the year. And that guidance stands year to date. The cash cost per hectolitre in Brazil beer, excluding non-AMBEV marketplace products, is trending at 14.5%, so below the range, which is good. But again, given that not 100% of our costs are hedgeable, we still see merit in keeping the 16% to 19% outlook for the year as our official guidance. On top of that, when you think of our ambitions for the year, just to add on to what Jean mentioned, when we look at our H1 performance, Our view is that we come out of H1 more confident on our ability to deliver our ambition of growing ahead of 10.9% organically at a consolidated level, which is what we delivered in 2021. When we shared this ambition on one of our prior calls, I remember I got the question on why we believed growing ahead of 10.9% was feasible. And the answer then was that if we manage to deliver a Brazil bottom line coming back to growth, that in and of itself, right, would be a significant tailwind in our ability to deliver this ambition. And if you look at our results in H1, right, there was a step up in Q2 in terms of our overall performance, and that made an enormous difference on our total EBITDA growth for AMBEV in the first half, which was around 15%, I believe, 14, 15%. So with an H1 at 15% in Brazil, stronger than we expected, right, we think that if we manage to do a better job in CAAC in Canada, And last, continues to deliver good performance and mindful of the challenges in Argentina. But outside of Argentina, last in Q2, the other countries, Bolivia, Paraguay, Chile, and Uruguay, they grew double digits in Q2. Okay, just for instance, just another data point for you to have. So if we manage to have Brazil continuing momentum in H2, last continuing to deliver, that can be helpful in offsetting potential headwinds in CAC in Canada. But, again, we still have work to do there, and we're still going to pursue better results in Canada and in CAC in H2. Okay?

No, that is super clear, Jean-Lucas. Just one minor confirmation. When Jean says second half could be better on top line and bottom line than half one is in nominal terms. Or growth, just to double-check that.

Inorganic growth.

Inorganic growth. Okay. Perfect. Thank you.

The next question comes from Lucas Ferreira with Banco JP Morgan.

Hi, everybody. Thanks for this space to ask questions. And the first one is regarding SG&A. If you can, since we're discussing second half outlook, how to think about SG&A. We have some important events ahead, such as the World Cup, potentially provisioning for bonus. Again, it's going to be a strong year. So how to think about that? There was already kind of heavy SG&A this first half, so should we see similar trends into second half or – or that should somewhat alleviate to help you deliver this growing expectations you were talking about. And the second question, Lucas, last year you guys had some issues with sort of an unhedged position because I guess the company ended up selling much more beer than you expected, right? So how to think about that this year? You're also probably performing a bit better than expected. are you guys having sort of unhedged positions to do as well? And would those come maybe now at the lower cost given the falling commodity prices? Or you cannot say that yet? Thank you.

Sure. Hi, Lucas. Thanks for the question. Let me start with the second one on the hedges, okay? So everything that's hedgeable for 2022 has been done, right, and has been done for quite some time now. So the issue is not around hedging per se, okay, looking into H2. The issue is more on the unhedgable side of our cost base. And you're right, that was an issue last year. There was an increase in the second half of the year on the unhedged portion of our costs. This year, there has been some impact. not enough, right, to compromise, right, the guidance that we gave in Brazil Beer, but that remains a risk for H2, and that's one of the reasons why, right, we're not updating, we're not making any changes to our guidance of 16 to 19 in Brazil Beer, as I mentioned in my prior answer, okay? So, again, the issue is not the hedging side that's done for 2022. The issue is more on the unhedgeable portion of our costs. And again, we are living in higher inflationary environments overall that applies to costs, that apply to expenses. And that's a good segue to try and answer your first question around the SG&A. What we anticipated directionally for SG&A in 2022 was a lower growth of SG&A year over year as compared to 2021 to 2022 because of the lower accrual for variable compensation, right? As you will recall, Lucas, last year, one of the main factors that led to a higher SG&A growth year over year versus 2020 was precisely the fact that the recovery was much stronger than we expected. And 2020 was a no bonus year, right? So that created a double whammy effect, if you will, on the admin side through higher bonus accruals. That's not the case this year so far. Obviously, H2 will depend on how we do versus our budget, and then we will accrue accordingly, right? So with admin expenses growing at the lower rates because of lower year-over-year bonus accruals, that should help us, right, for the year deliver a better SG&E growth. And then on the sales and marketing side, I think the point to call out is really Q4 and Q3 as we prepare for the World Cup, right? So there is sales and marketing investments. for an event of that proportion. It's a great opportunity that we have coming up in Q4 to really leverage not only our brand portfolio, but also our technology platforms to really meet the moment, serve clients better, serve consumers better during such an important event for markets like ours. So, yes, there is a calendarization that's different this year because of the events that we have coming forward. And in terms of distribution, I think the watch out is really what happens to diesel, right? I mean, diesel has been a factor on our distribution expenses, not only in Q1, but also in Q2, it was a factor. I think the glass half full uh, side of the equation in terms of sales and marketing and in terms of, of distribution is that year to date, it's growing below net revenue growth. Right. And I think that's, uh, that's good news. That's something that we, we, we always do that sense check. Um, and, and in addition to that, right, we were applying our typical financial discipline, making sure that we are as, as, as focused as possible on being strict on the non-working money side of our business, right, which is everything that consumers don't touch, feel, see, right, to release funds to be able to invest more in things like sales and marketing that are going to continue to develop the health of our brands going forward.

Okay? Perfect. Super clear. Thank you.

The next question comes from Tiago Bertolucci with Goldman Sachs.

Yes. Hi, Jean-Lucas. Good morning, everyone. Thanks for taking the questions. I have two. The first one, a follow-up on the cash flow guidance. Obviously, there are a lot of different moving parts here, and we understand that you have an average policy of hedging as part of your commodity needs on a total amount for a day. But you might also be kind of opportunistic on aluminum prices, right? So I'm just curious to hear from you if we should see the impact from lower commodity prices just 12 months from now, or you could have decided to go for a more optimistic view and we could see some part of this reflecting early on over the next quarter. This is the first question. And the second one is regarding the World Cup and the outlook for the first quarter, right? Obviously, there are also a lot of different moving parts, the Auxilio Brasil, the election, but typically... we know that this event is very positive for volumes, right? So I'd just like to explain and hear a little bit from you, how much of an opportunity do you see for the point four and beyond that, if you believe this volume should be really incremental as we head into 2023, or this might create an overhead for volumes next year? Those are the questions.

Okay, thanks, Thiago. This is Lucas. Let me take the first one, and I'll hand it over to Jean. to talk about the preparations for the World Cup on the commercial side, okay? So in terms of the exposure to aluminum specifically, right, I think this is more of a 2023 issue than a 2022 issue, okay? And the good news is that, of course, it's still early to give any sort of specific outlook for 2023. We still have a good portion of hedging to do right through the end of the year. But the good news is that so far, okay, aluminum is no longer a tailwind, is no longer a headwind, as it has been over the last two, three years, okay? On the currency side, the BRL hedge versus the US dollar is also a tailwind for a change, right? It has been a headwind for the last two and three years as well. And so that's the good news so far, right? Again, still a lot of hedging to do through the end of the year. And on the glass half empty side of the hedge for 2023, so far, um our hedges with respect to to barley uh are continuing to be a headwind but to a lower extent than than the levels that we saw in 2022 and the argentinian peso fx hedges should continue to be a headwind at least that's what what we've seen so far this year okay So aluminum, more of a 2023 issue, and kind of that's where we are so far this year. Let's see how things unfold on the hedging for commodities and effects through the remainder of the year. Over to you, Jean.

Okay, so let me talk about the World Cup here, right? So the question that we are – for you to get the information, yesterday we have – we had a World Cup day, okay? So we put like 50 people in a room from inside the company, outside, to have the best insights of what could we do in this World Cup. And we learned a lot yesterday. And the question that we did for ourselves is the statement. So the briefing of the day is, what can we do in this World Cup that will make us better in 2023? Okay, so that was the statement that we did to 50 people, to outside, to people from agencies, consultants, and it was a day that we learned a lot and we went out with great plans on that opportunity to resolve problems, to make this World Cup more inclusive to make in the end the young people more interested to make soccer something that can be enjoyed by women so we are really thinking about how can we solve problems with our brands With this World Cup, strengthening the brands, we are connecting that delivery. How can we acquire users during the World Cup that they will stay? How can we touch the hearts of the Brazilian? The sentiment that we find with the surveys is that everybody is waiting for this World Cup as a breath. Everybody knows that the next three, four months, it will be about politics, polarization. Looks like the World Cup is a moment that Brazil can come together again. So it will be a very important moment. We are very into it. We are prepared on the logistics side. We are prepared on the marketing side. We believe that it is the first time that we have a World Cup in the summer in this context. after one year of pandemic, and for sure will help us this year. The big question is what are the structural things with brands and digital products that we can do to get together with the Brazilian and to make it residual for 2023. We are very excited about the World Cup.

Very interesting.

Thank you.

Thank you.

The next question comes from Thiago Duarte .

Hello, thank you. Hello, Jean, Lucas, and everybody. Yeah, three questions on my side. The first one, it's clear at this point that you are positively surprised by the performance in Brazil relative to when you provided the guidance or when you even said that the momentum was strong in the end of the first quarter. But it's not clear to me what exactly is the biggest source of surprise. So I think Gilles could comment a bit on that. So is it the demand, the consumer demand, or how strong consumers are going back to on-premise? Is it the evolution of RGP? Is it the cost side, which is on the faithful side in terms of your guidance? So if you could elaborate a little bit on that. What do you say are the biggest sources of positive surprise for the performance that the company had in the second quarter and in the first half? That would be great. The second question is going back to the pricing in Brazil. Jean, you mentioned a small price increase in the second quarter, but if you could elaborate a little bit more When we look at the 11.2% revenue per hectolitre growth for Zubir, excluding marketplace, how mixed, and particularly packaging with the incremental RGV is driving that number, that would be very helpful as well. And a third question would be on working capital. It's not only on Q2, but also in the entire first half. There was some certain working capital consumption, which is not very common, considering that you guys are growing volumes and that these are gaining and sharing, and I presume this is positive for the working capital of the company, as you guys mentioned before, so you could elaborate a little bit on what's rising as working capital consumption ahead of the second half. That would be nice as well. Thank you. Thank you.

I'll get the first and the second, and then Lucas jump into the third one. Okay, so what surprised us in Brazil in the future? It was the moving pieces we knew, okay, but surprises are that we continue to gain market share, okay, so sequentially we gained in market share, and the strength of the bars, okay, reopening, it was something that came on the top of our range of expectations, okay? So somehow there was this discussion about when the consumer, when the bars really fully reopen, and it's not just the bars, and the social out-of-home occasion gets at full potential. So what's the size of it? And what's the residual volumes of the in-home initiatives and the occasion that it was created during the pandemic? And this mathematics surprises us. Or at some point in time, we believe that the in-home could go down more for their own to be reopened or the on-trade was not that strong. So it was the combination of this equation, the residual of the home with the strength of the out-of-home that surprised us. And then 8.5% in terms of volumes, it was above this map. And talking about revenue management, you know that we are very granular now on the revenue management. You know that we have a strategy that we have been very inclusive and really maintaining beer competitive in the basket of the Brazilian consumers. And what we like about this squad is that we really challenged the elasticity in general. Okay, it was like good net revenue, perhaps a little bit with good volumes. And it was about... The carryovers of the previous year, the tactical things we did, as I mentioned here in May, but a big part of it, it was the 600 ml bottles and the high-end, the brand mix, helping us in the value brands going down, too. So the combination of brand mix and 600 ml bottles coming back, that made this number that you see in our Q2.

Okay, so working capital with Luca. Sure. Hi, Thiago. Thanks for the question. I think in terms of working capital, I would say that the bigger issue was actually Q1 on the payable side. Okay. I mean, if we recall our conversation last quarter, right, our payables in Q1 had an issue around the payment of the variable compensation. And also there was a higher level of payments to suppliers given the calendarization of our CapEx. So CapEx that was booked in H2 of 2020 ended up being paid in Q1. So that double effect created a bigger gap in terms of working capital in Q1. In terms of Q2, And that's by far kind of the biggest factor year to date. I think Q2, what the outlier here is more on the receivable side, and it relates to the tax credits that we recognized. unlike last year when we recognized the tax credits but did not immediately monetize. This year the monetization was faster than last year, and that has an impact on our receivables. In terms of inventories, no major change in terms of inventory building. There was some more inventory building in Q2 this year than last year, but, again, it's more of a calendarization effect. And then on the payable side, in Q2 also, no big major change other than just a different calendarization of our CapEx spend and when the payments are falling. So I think it's better to look at working capital more on a yearly view because on a quarterly view, you will have from time to time these swings related to specific events like the bonus, like calendarization of CapEx, like the tax credits.

That's clear. Thank you so much.

The next question comes from Alan Alonis with Santander.

Hi, everyone. Thank you so much for taking my question. Congrats on the result, Lucas. My question has to do with the competitive dynamics and the connection between soft drinks and beer. I mean, I understand how you've been gaining market share on beer. I think that there are reasons also among your competitors, the separation of the distribution of China from the Coca-Cola system. And I think that, well, congratulations, you're doing a lot of things right in taking advantage of that and gaining market and value share. But what's a bit of a surprise for me is to see that you're also gaining a lot of market and value share in South Korea after the Coca-Cola company released and acknowledged that they're losing share. What are you seeing and what are you doing differently in soft drinks in order to be gaining market share and how sustainable is this going forward?

Thank you, Alain, for the question. In reality, soft drinks was really the star of this quarter, right? We are very proud of the performance of soft drinks. And somehow I've been mentioning for a while now that we've been transforming ourselves into more of a platform. In the past, we were like a beverage company. Now we are a platform. So this is something that people do not understand somehow, but we did a huge structural change inside the company in terms of breaking the silos, in terms of having the marketing areas as a marketing as a service, have my frontline team working for the whole portfolio. In the past, I had siloed teams. So we did a big change to prepare the company to really unlock its potential of top-line growth. On top of that, we focused our efforts on soft drinks, on brands of the future. So somehow the PepsiCo partnership is stronger than ever. The launch of Pepsi Black, it was just a surprise for us how the product is getting into the face of the cities and the places that we are launching. And somehow, so with this strategic view, with the good partnership of PECS, and these arriving where we had in the past a sales rep that somehow was a funnel in terms of number of SAUs that they could offer. So the combination of these three things really puts NABs on fire, right? We estimate that we are gaining market share. So Pepsi brand, there is a whole ocean of colas that we never tackle in reality. It's really accelerating and gaining market share. And this is really allowing us to do much more things that we would do in the past. So it's an important avenue of growth for us. that we are really into it. So I think this is structural.

Got it. So you're pushing more towards the total leverage, and you are leveraging your power, your scalability to move more subjects. Thank you so much, and again, congrats on the results.

The next question comes from Carlos Laboy with HSBC.

Good afternoon, everyone. Jean, it's nice that the creative team is winning awards. I was thinking, it's a landmark, really, that you can celebrate your marketers and their growing importance, but can you speak to the proof points, to evidence of lasting brand rehabilitation and renovation efforts? is happening. Maybe you can expand on the Brahma case or on any other incremental proof points that you have that your core brand build strategy and renovation strategy are working here.

Okay. Thank you for the question, Lavoie. Yes, so I could mention... I think Brahma is really one brand that is really on fire as a family with Chope da Brahma appearing a long time that we don't talk about it as the reference of beer in Brazil when the reopening of bars like so on fire Chope da Brahma with the Brahma brand doing very well and Brahma Duplo Multi coming in the middle of all this family, making an architecture of brand and family that it's really getting consumers. If you add up, it's really the brand most valuable of Brazil. It's really Brahma that has more lovers. It's really the overall brand of Brahma doing very well. And it was interesting. Not like that, like two or three years ago. We rejuvenated Brahma with Brahma Double Mouth and we stepped up again the quality fuse of the brand with Choco da Brahma coming back as it comes in this stage in the future. I think somehow it's a combination of mind, mouth, and heart that we were able to tackle in the right way these three things with the Brahma brand, for example. Another brand that is doing very well, so we are somehow biased this quarter that Original just exploded through. It's a brand that is about the traditional brand. roots of the Brazilians about the bars. So, the bars were closed at the occasion. So, everybody's coming to our original brand, Antasco Original. So, this is one thing, another way that we can mention. And I'm very excited about BEX. That is a brand that we are cooking in a In a very low temperature, like, I don't know how we say this in English, but we are cooking it slowly. It's really about getting the palates right and the edginess of the urban centers. And it's on fire, too. It's the brand that everybody's talking about. the edge of the pallet, European, trendy, moving the boundaries. So, you know, we showed you Laboeira, isn't it? So that architecture of brand that we have and their archetypes, and somehow I think that our focus brands are doing just amazing. You've seen the numbers. Our price, it was very resilient. This quarter, this means that the channels are right. This means that the consumers are paying. And this is what the combination of renovation and innovation. So I don't know if I really answered your question, but the last thing that I could mention is that pre-pandemic levels and today levels, we have – 1.5 million people that's saying to us that they love one of our brands. So pre-pandemic level to now, 1.5 million consumers that elect one of our brands and they love the brand. I think that's it.

Thank you, JJ. Cash Cog Surfer. for hedge funds, but this brand renovation is the real lasting stuff of a turnaround. Congratulations.

Thank you.

The next question comes from Sergio Matsumoto with Citigroup.

Yes, good morning, and thanks for taking my question. I wanted to circle back on the ROIC improvement of the new metric discussed in the AMBEV. With the recent improvement in the top line and the recent decreases in the spot prices of the commodities, I'm wondering if perhaps we can see some changes in how the composition of that return on investment capital might improve over the coming years with, you had mentioned investment capital turnover as the first phase and then transitioning into more of a no path to margin improvement. Would you say that the that transition might occur faster than expected than a few months ago?

Yeah. Hi, Sergio. Thanks for the question. This is Lucas speaking. Sergio, in all honesty, I think it's very hard to speculate at this point to what extent our longer-term perspective on the two drivers for improving our return on invested capital could change in view of the latest movements in Q2. And the reason I say that is in Q1, the picture was strikingly different because commodities were on the rise in Q1. So to me, I would be speculating here – if I gave you any indication of what change this can imply longer term, I think we have to really wait and see how commodities behave going forward, how currencies move going forward. I think what's important for us on the commodity side and on the currency side, is the discipline that we have in following our hedging policy, right? That's key to give us predictability. That's key to give us time to react as headwinds may arise. So that discipline remains intact, and we will continue to focus on that. Having said that, if we continue to deliver top-line growth, right, as we have in the last two years, that's obviously helpful for the margin recovery. And so let's see how things progress on the top-line side. But as we've mentioned time and time again, top-line growth remains a priority for us. Some quarters, some years, it may be more volume than price. It may be the other way around, like we're seeing in 2022. but we remain kind of steadfast in continuing the momentum that we've built on the top line grill side. And on top of that, we have the better asset turnover potential given the platforms such as these with Marketplace and D2C and FinTech. And as these scale up, we see opportunity to have a better asset turnover profile than in the past. But we have to deliver. Let's see.

Understood. Thank you very much.

The next question comes from Leandro Fontanesi with Fredesco BBI.

Hi, everyone. One question that we have with investors is regarding Argentina. Recently, the depreciation of the Argentinian peso at the black market was much stronger relative to the official rate than it was in previous quarters. There's a concern that you know, the net income that you're generating in Argentina, you may have issues to take that money out of Argentina, especially relative to what you report on your accounting numbers, right? They use the official rate. So to help us address or to help us understand the risk, if you could, like, provide us with some information such as what percentage of a total EBITDA comes from Argentina, also how you are addressing that risk going forward. And actually, I understand that you report how much you have in cash in Argentina and Cuba, which I think is like 600 million reais. It does not look relevant, but it has been reducing in previous quarters. That means you are burning cash in Argentina and then generating the majority of your cash outside of this operation. So to understand if you could potentially allocate some of your costs from other operations in that country. That way you don't need to depend that much on taking that money out of the country. Thank you.

Yeah. Hi, Leandro. Thanks for the question. This is Lucas speaking. Regarding Argentina, I think, first, there is a lot of short-term volatility in the country. The good news is that on the operational side, The business continues to perform relatively well when you think of top line, when you think of the portfolio and the health of the portfolio and how that's translating into our performance, not only in core, but in above core segments such as core plus and premium brands with good brand health indicators, market share indicators. in line with what we expected, so on and so forth. However, on the macro side, we are once again seeing more volatility coming out of Argentina. That's a fact. The last time we faced something similar was 2019, and there have been other instances in the past 10, 15 years where there have been volatility years of more volatility and currency devaluation and so on and so forth. So I think for us here, the way we approach it is stay focused on the micro and the commercial performance because it's a It's a sizable market. It's a growing market. It's a profitable market for us. So that remains a priority, number one. Number two, protect what we can protect, what we control on the cost side. So that's where the hedging policy, right, the hedging policy comes in. So we continue to adhere to our on average 12 months. hedging for the Argentinian peso and for the commodities, right, as they apply to the Argentinian business, okay? And that helps us protect our costs in Argentina, okay, and the EBITDA performance in Argentina. We also look into – we're constantly looking into, right, cash management, how we manage counterparty risk in Argentina between local banks, international banks. And so there's a lot of tracking and monitoring of the situation on the ground to make sure that we're very – disciplined and diligent in terms of our cash management so the operation can keep running. We can continue to work with our clients, work with our suppliers. We want to keep things running in as seamless a way as possible. Then on the taking money out of the countryside, I think the point here is more of There are restrictions in place, right, for operating in foreign exchange markets. Our focus is more accessing foreign exchange markets in Argentina to keep the operation running. The level of imports is higher. It's fairly low, but we want to make sure that we still have access to keep the operation running. So thus, that's the bigger priority. And in terms of cash generation, historically, the cash generation in Argentina is more skewed towards the second half of the year than in the first half of the year. Hope this helps.

Yes, thank you, Lucas.

The Q&A session is over. I would like to turn the floor over to Mr. Jean-Geray Satch for his final remarks.

So thank you all, thank all analysts, everyone who joined today, the call, for your time and attention. To wrap up, I think it was, I like to look at better H1 than Q2. I think it was a great H1 for AMBEV. for Brazil, and we are confident that we can deliver an even stronger H2. We remain on track in terms of our main ambitions for the year, to get Brazil back to bottom line growth, to have consolidated and have organic EBITDA growth ahead of the organic growth that we had in 2021, and to improve our ROIC. And we will continue vigilant on the short-term volatility and cost thresholds. Thank you very much. See you in October, and have a great day.

This concludes Ambev's conference call. Thank you for your participation, and have a good day.