Ambev S.A.

Good morning and thank you for waiting. We would like to welcome everyone to AMBEV 3rd Quarter 2022 Results Conference Call. Today with us we have Mr. Jean Gereissati, CEO for AMBEV and Mr. Lucas Vira, 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 conference presentation. After EMBAV'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 TAS0 to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of MBEV's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of AMBEV and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature. And, unless otherwise stated, percentage changes refer to comparisons with 3Q2022 results, normalized figures. Refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of MBEV's normal activities. As normalized figures are no-gap measures, the company discloses the consolidated profit, EPS operating profit, and EBITDA on a fully reported basis in the earnings released. Now, I will turn the conference over to Mr. Jean Gerisati, CEO for EMBAV. Mr. Gerisati, you may begin your conference call.

Hello, everyone. Thank you for joining our earnings call for the third quarter of 2022. Following a great first half of the year, I'm happy with our performance in Q3. Brazil's momentum continued to increase, not only in beer, but also in abs. And as a result, we are on track to deliver a strong second half in terms of both net revenue and a bit organic growth, despite the headwinds in some of our international operations. This quarter was marked by two things that we have been talking about since the beginning of this year. First, how the consistent implementation of our strategy is the key to continuous improvement in our operating and financial performance. And second, how macro volatility continues to bring several challenges in the short term. And the good news is that we managed to deliver once again. Led by net revenue per hectare growth continuing to pick up, as the year progresses and volumes growing despite a very difficult comp in Brazil beer, showing strong execution and resilient elasticities. In fact, our commercial initiatives continue to yield results across most of our markets. Consolidated volumes grew 1.3% in the quarter, exceeding 46 million hectolitres. Once again, an all-time high volume performance for a third quarter. Not only consolidated volumes performed well, premium brands gained weight in 9 of our 10 top beer markets. At least 85% of our customers in Brazil, Argentina, Dominican Republic and Panama are using BIS. Marketplace is generating 400 million in revenues at the consolidated level, and organic EBITDA grew double digits once again. However, macro conditions and the persistent high inflation in some of our international markets are not only impacting the consumer, but also our supply chain. especially in the countries with less flexibility in capacity and logistics, like Chile, Canada and the Dominican Republic. Not only commodities were more expensive, but also oil prices hiked, raising inbound and outbound transportation costs. Therefore, results in our international operations were rather mixed. We saw a good resilience in loss. Canada declined year over year, but continues to improve performance sequentially. And CAC is the region that suffered the most. So, let's start with CAC. The volume downside was mostly driven by the Dominican Republic and Panama. In the Dominican Republic, bottle supply issues were solved. But demand didn't pick up as fast as we expected because of high inflation rates pressuring consumption. In Panama, we witnessed a tough industry driven mostly by our large-scale protest against rising prices, which halted the country for more than a week in late July. Lastly, weather was significantly impacted by hurricanes Jan and Fiona in the end of the quarter. Our costs were impacted by the high inflation as the region is dependent on imports. We are now adjusting ourselves the production plans to account and optimize importation. As for demand, we still have some work to do both in the Dominican Republic and Panama. We will focus on offering our consumers the right product at the right price to meet their needs. And we will continue to invest in our brands and work to develop a sustainable industry. But not everything was bad news there this quarter. Premium brands gained weight across most of the markets driven by Corona and McLeod Ultra. Except for Panama, there was no significant change in sequential market share in our main markets, and marketplace net revenue grew in the 20s, driven by both Dominican Republic and Panama. That said, we need to do better there. Turning to Canada, industry improved versus last quarter, but still negative versus a weak comp as last year COVID restrictions were still in place. Volumes grew over 3%, driven by estimated market share gains in beer and a rebound in the beyond beer industry from a weak performance last quarter. Premium brands gained weight and share in their segments, driven by a good performance of Corona and Stella Artois. Finally, in Las, volumes grew 4.5%, driven by Argentina, where industry grew versus last year, and we estimate to have gained market share, driven by our premium brands. Bolivia is recovering from the COVID impacts. However, industry in Chile and in Paraguay declined, impacting volume performance. Nevertheless, Core Plus Mix continued to gain weight in both countries. Marketplace continues to progress in Argentina and was fully rolled out in Paraguay. Now, moving into Brazil. Non-alcoholic beverages delivered another stellar quarter. in what had been a great year for the team. Volumes grew over 10%, resulting in estimated market share gains. Our portfolio is very well positioned to serve consumer needs, with energy drinks growing almost 50%, the health and wellness brands over 30%, and the premium growing 10%, with a highlight to Pepsi Black, that now represents approximately 10% of our cola brands. And Bees is allowing us to serve a higher number of customers to Nabs, 6% more than last year. Talking about beer, as we leapt over a very tough comp, volumes were flat in the quarter, but 35% above 2019. And on a 12-month rolling perspective, 13 million hectoliters above the same period of 2019. In terms of segments, premium led the growth with a high single-digit performance driven by Original and Shop da Brahma. Our core brands remain resilient. And we continued to invest behind developing our core plus brands like Brahma Duplo Multi and Spaten. Numbers of fans and brand health of focus brands continued to improve versus last year. And revenue per hectolitre grew 17%, driven by disciplined revenue management initiatives and brand mix impact. And finally, EBITA in Brazil beer grew almost 18% organically, with margins expanding by 20 bps. Our performance in Brazil gives us confidence that we enter the summer season ready to deliver a FIFA World Cup. This event is always an important moment to connect with our customers and clients, especially in Brazil. Our team has been preparing for the event, and I believe this year's World Cup can be better than we had in 2018. First, because this year it will take place in the end of the year, during our summer season, which is the peak consumption season. Second, because our business is much better prepared than last time around. Since the beginning of last year, I have spent each earnings call talking about our transformation journey, starting with cultural evolution across the organization, then moving the technological capabilities that we have been building through Zed Delivery and Biz, and also the step change in our logistics footprint and service model. Finally, the evolution of the brand building strategy. During this year's Investors' Day, we unveiled our embed as a platform framework. So I would like to use it, that same framework, to explain how each of the five pillars will come to life during the FIFA World Cup. So first pillar, brands for each and every one. Our brands are healthier than ever. If we compare to 2018, our premium brands grew year-to-date about 4 million hectoliters. Our corpus brands grew over 5 million hectoliters, while the core segment grew approximately another 5 million hectoliters. We're going to use the World Cup to support four main brands. Rama, Budweiser, Mike's, Guaraná, And on top of all that, the delivery. Second pillar, thirst to live the future. Our innovation as a mindset is a reality now. More than 25% of the volume growth compared to 2018 came from innovation. Brands that didn't exist in Brazil back then. Third pillar, a toast to our customer success. These allow us to interact more frequently with our customers. Orders delivered on time and in full will be key for their business during peak days. Also, we now offer, on average, more than four delivery dates per week per customer, a number that is 64% above 2018 levels. Fourth pillar, experiences that come to you. Z Delivery has evolved significantly since 2018. It is now available in almost 300 cities, covering more than half of Brazil's population, who can order beverages and other products from the convenience of their homes during and after the World Cup games. And we just announced that Z Delivery is the official sponsor of the Brazilian soccer team. A big move to that. Fifth pillar, and finally, together for a better world. 100% of our beers in Brazil for this World Cup are now made with 100% of renewable electricity. And it's important to mention that the plan has been developed not only to meet the moment during the days of the event itself, but to deliver loved brands, quality products, unparalleled services, and memorable experiences to our customers and consumers in order to create a longer-lasting effect going forward, moving into 2023. So, we are very excited with what Q4 can bring. Not only do we want to deliver a strong finish to the year, but we also are looking ahead and working towards starting 2023 better positioned. 2023 will certainly bring challenges and risks, but also opportunities. After all, we are living in a more uncertain and volatile times. With a business that is over 80% located across Latin America, we are no strangers to volatility, macro challenges, and inflation. So we will continue to focus on the things we can control. And from my perspective, what matters the most is that since 2020, we are building a business that is fundamentally better, improving results consistently year after year. First, we turned around volumes, then cash flow, then return on invested capital. More to do still, but I have no doubt we are on the right track and I'm proud of what the team has accomplished so far. With that, let me hand over to Lucas.

Thanks, Jean. Good morning, good afternoon to everyone. If Brazil was the main highlight of our operational performance, that was also true from a financial perspective. It's great to see Brazil driving once again the improvement in Ambev's overall results. Brazil's top line grew nearly 20% in the quarter, with net revenue per hectolitre growing almost 17%, while volumes were up 2.4%. And this growth led to around 24% EBITDA increase, with gross margins flat and 100 basis points of EBITDA margin expansion. Although input cost pressure remained an issue thanks to higher commodity inflation, cash COGS per hectolitre for Brazil beer, excluding the sale of non-AMBEV marketplace products, grew a little over 18%, thus within our guidance. And cash SG&A grew about 16% in the quarter, with sales and marketing growing around 13% as we continued to invest behind our portfolio, distribution expenses growing around 18%, once again impacted by higher diesel prices, while administrative expenses grew 13%, mainly due to our investments behind enhancing our technological capabilities. So all in all, continuous and consistent progress in our main market. Turning to our operations abroad, the financial picture for the quarter in some markets was certainly not what we would like it to be. particularly in Central America and the Caribbean. Over the last decade, the region went from roughly R$200 million of EBITDA in 2012 to almost R$4 billion in 2021. But following a strong post-COVID recovery in 2021, 2022 has not been Cox's year. H1 already faced relevant headwinds, and Q3's financial performance was severely impacted by nearly 20% volume decline, which led to about 13% net revenue decline and 900 basis points of gross margin contraction, while inflation regarding distribution costs and supply chain losses were the biggest drivers behind the higher SG&A, and as a result, EBITDA margin contracted nearly 1,500 BIPs. On the other hand, despite higher COGS and SG&A levels, last posted resilient EBITDA growth driven by Argentina and Canada showed some sequential improvement. Moving on to cash flow, cash flow from operating activities totaled about R$6.1 billion in the quarter, which represents a 4.5% decline versus Q3 2021. Here, we also saw a similar dynamic to the P&L. strong cash flow generation in Brazil, resilience in Argentina, but a harder time in important regions such as CAAC and Canada. Despite the lower profit in the quarter year over year, cash flow from operating activities before changes in working capital actually improved in the quarter. However, in terms of working capital, some important operational factors played against us in the short term. Receivables in Canada increased given top-line acceleration. Inventory levels rose in Brazil given build-up during the quarter ahead of Q4 with the FIFA World Cup. And payables in CAQ were negatively impacted by the lower production volumes, offsetting the increase in payables in Brazil. also it's worth reminding everyone that in q3 2021 we monetized over 800 million reais in brazilian tax credits related to the icms in the taxable basis of the peace and the coffee's litigation which was a one-off year-to-date cash flow from operating activities is down 20 percent given primarily our performance in q1 when we faced, first, higher cash outflows to suppliers given 2021 CapEx calendarization, and second, payment of variable compensation related to our 2021 performance. And finally, normalized profit declined by nearly 14% in the quarter. Despite the EBITDA growth, net finance expenses were higher mainly because of an increase in carry costs in Brazil and Argentina in connection with our hedging strategy for currency and commodities. And our effective tax rate faced a tough comp because in Q3 2021, we recognized the gain of over 750 million reais related to a one-off income taxes favorable legal decision by the Brazilian Supreme Court. Nevertheless, year to date, our normalized profit is up 4%. Before I close, I would like to invite everyone to attend our ESG Day next week, on November 3rd, when we plan to share in detail our progress in terms of environment, social, and governance agendas. The idea is to cover how we are trying to build climate resilience along the value chain, how our cultural transformation is enabling change in the company from within, and how increasing diversity and inclusion can create value. And we will close with a roundtable with the new members of our board of directors and some of our executive officers. In closing, Q3 was a good start to H2, and we are on track to deliver our ambitions for the year. First, Brazil back to bottom line growth, Second, deliver organic EBITDA growth at the consolidated level ahead of the 10.9% organic growth in 2021. And third, do so with a stronger consolidated net revenue and EBITDA organic growth in H2 versus H1, supported by also better cash flow generation and consequently a better return on investment for shareholders. And looking ahead, we want to continue to build momentum and pave the way for a good start to 2023. Speaking of next year, we will keep pursuing continuous and consistent improvement in our financial performance by, one, continuing to protect liquidity, two, improving profitability through increasing our return on invested capital and improve profitability by also focusing on gross margin and EBITDA margin expansion, And three, delivering strong cash flow generation in order to allow us to not only allocate capital towards organic and non-organic growth opportunities at attractive returns, but also return excess cash to shareholders from time to time. That's it for me. Let's go to Q&A.