Ambev S.A.

Good morning, and thank you for waiting. We would like to welcome everyone to AmBev's fourth quarter and full year 2022 results conference call. Today we have with us Mr. Gian Giarascotti, CEO of 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. I would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation. After AMBEV's remarks are completed, there will be a question and answer section. We kindly ask that each analyst asks only one question. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor and Security Litigation Reform Act of 1995. Forward-looking statements are based on 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. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the Securities and Exchange Commission from time to time. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of AMBEV and to cause results to differ materially from those expressed in such forward-looking statements. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, and future or conditional verbs such as will, may, could, should, and would, as well as any other statement that necessarily depends on future events are intended to identify 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 fourth quarter or full year 2021 results, as the case may be. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as a part of AMBEV's core activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, operating profit, and EBITDA on fully reported basis in the earnings release. These normalized figures must not be considered as an alternative to GAAP measures to evaluate our financial performance. In addition, they may not be comparable to non-GAAP measures used by other companies in the industry. Now I'll turn the conference over to Mr. Jayanth Dharastati. Mr. Dharastati, you may begin your conference.

Hi, everyone. Welcome to our Q4 and full year 2022 earnings call. We have a lot to cover today. How we ended 2022, which was a great year for us, how we have planned for 2023, and how the year has started. So let's begin. We are a company that dreams big to create a future with more tiers. And 2022 was a year of many achievements in bringing this dream to life. Our team's engagement remains at great levels. And interestingly, the question on pride to work at Ambev reached its highest score since 2018. My team came through once again. So I want to thank and tell them how proud I am to be on their side every day transforming this company. Our reputation and connectivity with our ecosystem also improved, with NPS up 14%, which meant more positive impact and shared value creation with clients, wholesalers, suppliers, and the community we serve. Operationally, our Brazilian business was the highlight, with our platform framework showing its potential, thanks to the healthier brands, continued innovation, improved service level, and the scale-up of our technology B2B and DTC big bets. And financially, there were lots of reasons to celebrate. 2022 was another year of record volumes, and this time with better net revenue per hectolitre performance, and with double-digit normalized EBITDA growth, which was ahead of our growth in 2021. And in addition, normalized net income also grew double digits, and ROIC expanded thanks to better asset turnovers. And all this backed by another year of consistent free cash flow generation. And Q4's performance allowed us to deliver a stronger H2 and put us in a good position to start 2023. Volumes grew 1.5% in the quarter, our 10th consecutive quarter of volume growth. reaching the highest volume in any given quarter in the history of this company. Net revenue per hectolitre grew nearly 20% versus Q4 21, with growth in all regions. And normalized EBITDA grew a little over 27% in the quarter, despite inflationary pressures impacting our costs and expenses. The commercial execution during the FIFA World Cup stood out in the quarter. In Brazil Beer, for instance, despite the poor weather and Brazil's early elimination, we managed to activate our brand with clients and consumers throughout the tournament, led by our high-end brands, which grew volumes north of 25%, and our mainstream brands, which grew mid-single digits. We sponsored more than 40 events reaching over 20 million consumers with Brahma and Budweiser as the official sponsors of the tournament. Also, this enabled us to serve our clients better with demand peaking at 480,000 hectoliters in a single day for the first time in our history. YLZ Delivery was the official delivery app of the Brazilian national team, increasing not only awareness from 50% to 62%, but also expanding to over 350 cities across Brazil. As for Brazil NAB, Guaraná Antarctica, the official sponsor of the Brazilian national team, was one of the most talked brands in social medias during the World Cup. Meanwhile, Pepsi Black remained on fire, more than doubling volumes versus Q4 2022, and also we were awarded the bottler of the year for PepsiCo in Latin America. In Argentina, we organized the biggest celebration to welcome the champions. with Kilmis leading the national team's parade upon their arrival in Buenos Aires and Budweiser hosting celebrations in every region to give consumers the buds we brought home. In last, overall, although volumes were down 1.6% in the quarter, net revenue per hectolitre increased 56.4% and normalized EBITDA was up 93.6%. For the year, last delivery, the round, 5.8 billion reais of normalized EBITDA, out of which approximately 3.6 billion reais came from Argentina. Now, not everything went well in the quarter. In Canada, despite market share gains in beer, we were unable to grow volumes on the back of a weak industry, and normalized EBITDA declined about 4%. thanks to commodity and full inflation, more than offsetting net revenue growth. Meanwhile, despite a sequential improvement overall, CAC volumes were down more than 13% in the quarter, while normalized EBITDA declined nearly 11%. In the Dominican Republic, high inflation continued to be a reality, and in Panama, volumes continued to be impacted by short-term competitive dynamics challenges in traditional trade, and we have not yet recovered previous market share loss. Finally, there was a tax settlement in Dominican Republic, which led to higher other operating expenses, which is a one-off. Absent this tax settlement, normalized the beta would have increased about 1% in the quarter. So that's it for 2022. And now let's talk about 2023. I'm actually starting the year more confident than I started 2022. Even though there are still challenges and volatility in many countries, there are plenty of opportunities ahead. particularly in Latin America markets, as I believe the region is set to benefit in the current environment. Also, our business continues to have momentum thanks to the execution of our commercial strategy, leading to continued top-line momentum. And for the past several years, we witnessed significant inflation impacting our costs and expenses well ahead of our top-line performance. Now, there is no longer this disconnection between top line and cost and expenses inflation. In fact, what we are seeing is quite the opposite. Continued top line momentum while cost and expenses inflation comes down. And this is excellent news. And finally, our balance sheet and cash generation remains strong. The fact that our cash generation has been consistent even during COVID and despite all the macro challenges we face is a clear evidence of our financial capabilities. So what do we want to accomplish in 2023? In 2023, we want to deliver another year of continuous and consistent improvement. So let me break it down what I mean by this. In terms of growth, our ambition is to deliver two things. First, another year of consistent top line and bottom line growth, with Brazil keeping its momentum, while our international operations work to bounce back, with CAC and Canada recovering performance. And in last, our biggest focus will be Argentina, where we will work to keep operational momentum while preparing our business to be flexible and agile to adapt to the macro environment to the extent that volatility may require. And second, at the consolidated level, pursue another year of normalized EBITDA growth acceleration, growing above the 17.1% we delivered in 2022. And in terms of profitability, we want to continue working towards not only improving our OIC, but also improving our margins performance. We have work to do here, but we believe we are on the right track. And it's good to see that costs and expenses headwinds seem to be finally easing. Having said that, it's been a busy start to the year. There has been a lot of noise from events unrelated to us. We have already set the record straight and will continue to do so to protect our company and our reputation. The silver lining, however, has been to see how our ecosystem has had our back. It has been amazing to see how much my team has shown leadership to carry on, but also how much support we have been receiving from former employees, consumers, clients, wholesalers, suppliers, and partners. Lucas will go into a bit more detail, but I wanted to nonetheless thank everyone for being there for us. And if you put the distractions aside, the truth is that the business continues to do We are kicking off the year with Carnival in Brazil finally coming back for real. Our plan for Carnival was built around bringing our platform to life at the different festivities across the country. This was definitely the Carnival of the Brahma franchise, which was executed nationwide and presented at traditional media, social, street vendors, and point of sales. And Brahma was not alone with our Beats franchise innovating with Kype Beats, the hottest innovation of the season, while Z Delivery showed up big time to deliver a broad assortment of mainstream, core plus, and premium brands to consumers. Brahma, Kype Beats, and Z Delivery were ranked among the four brands with the most earned impressions on social media during Carnival, with Brahma ranked in the first place, more than doubling the number of earned impressions that Brahma and Skoll together had in the Carnival of 2020. To wrap up, as I have said before, 2023 will certainly bring challenges and risks, but also opportunities. With a business that is over 80% located across Latin America, we know how to navigate uncertainty and volatility. We will continue to focus on the things we can control, executing our plan to deliver consistent results once again. And in fact, what gives me additional confidence is that since 2020, we have been building a better company on the back of our transformation journey. So first, we have a solid culture that has continued to evolve as we have embraced active listening across our ecosystem, more collaboration internally and externally, and more long-term thinking embedded in our planning, decision-making, and compensation model. Second, our operations are solid. In 2020, we developed a sound long-term strategy for the next 10 years, and we have been executing the plan consistently since then. We decided to recover from COVID, prioritizing top-line growth, step-changing our volume performance, thanks to a more client- and consumer-centered platform model. And the plan has been working. And third, we are growing. financially solid.

Our cash... ...that there's an implicit finance cost in the amounts charged by suppliers that needs to be segregated and allocated in financial results. Therefore, the effective cost that's reported in our COGS excludes this component. and our accounts payable are accounted for at present value. Second, tax litigation in Brazil. Brazil has an extremely complex tax system that often gives rise to different interpretations and, as a result, extensive litigation. This is a reality of several Brazilian companies, whether large, medium, or small. Just to give you an idea, according to a study published by INSPIR in 2020, If you add up all the tax litigation in Brazil, it amounts to approximately 75% of the country's GDP. Anyway, as we've abundantly disclosed in our public filings, we have a relevant amount of tax litigation that, based on the advice of external counsel, there is a possible, but not probable, chance of loss. About 90% of this amount relates to 15 specific tax positions, such as goodwill amortizations, IOC, Manaus Free Trade Zone, foreign profits, among others. These tax positions have been challenged by tax authorities over the years and will continue to be litigated for several years to come. We believe in the merits of our legal position in each of these cases and that we will ultimately prevail. And regarding specifically the Manaus Free Trade Zone, in addition to what we've publicly stated and disclosed, It's worth reminding everyone that these tax incentives are set forth in the Brazilian Constitution, and our subsidiary, Arosuco, has been producing concentrate for Guaraná Antarctica and other non-alcoholic beverages in the region for over 20 years, investing in our local production capacity, sourcing Guaraná seeds locally, as well as generating jobs for local communities. The disputes between tax authorities and taxpayers are known for more than 12 years, and the part of the case that reached the Supreme Court in 2019 was actually ruled in favor of taxpayers. And third, the Brazilian tax reform and IOC. It's been widely reported that there's a tax reform under discussion that may be passed in 2023. This reform may include changes to indirect taxes, but also direct taxes. We support any tax reform that reduces the complexity of the Brazilian tax system, and that does not increase the total tax burden of the industry, which is already among the highest in the world. Now, in the context of the legislative debate about the direct taxes reform, there have been discussions towards ending the tax deductibility of the IOC. If the IOC is no longer deductible for tax purposes, we will look for alternative ways to mitigate, at least in part, the impact on the company. Since the legislative debate on the tax reform is ongoing, it's still early to comment further. We will keep the market informed as appropriate. Okay, with that out of the way, let's move on to our performance for 2022 and our priorities for 2023. Starting with 2022. 2022 was another year where we delivered on all our ambitions. Number one, Brazil back to bottom line growth. with normalized EBITDA up 15.6%. Number two, at the consolidated level, normalized EBITDA grew 17.1% versus 10.9% growth in 2021. And number three, H2 was stronger than H1, with consolidated net revenue growing 20.3% versus 19.1% in H1, and normalized EBITDA increasing 20% in H2, versus 13.4% in H1. What's more, normalized profit increased 12.6% thanks to normalized EBITDA growth, lower growth of net finance expenses, and lower effective tax rate. ROIC ex-tax credits expanded from 20% to nearly 25%, with asset turnover improving once again. Cash flow generation topped 20 billion reais for the year, despite the year-over-year shortfall in Q1 and much lower cash generation in CAC and Canada throughout the year. And all this while still investing for the future, with 6.5 billion reais of CAPEX and 6.5 billion reais in sales and marketing. And finally, for the year, our payouts totaled 12 billion reais in the form of IOC, related to our 2022 fiscal year, but also from prior years. Consequently, we start 2023 with a cash position of nearly 15 billion reais, with less than 4 billion reais in debt, which is a great liquidity position to be in. And in terms of sustainability, we also made meaningful progress towards our 2025 goals. For instance, we ended 2022 with 11 carbon neutral operations, eight plants in Brazil, two in Uruguay, and one in Argentina. That combined will avoid the emission of 30,000 tons of CO2. Also, We reached 100% of renewable electric energy in our operations of Brazil, Argentina, Paraguay, Chile, and Uruguay, adding to the Dominican Republic, Panama, and Guatemala, where we had reached such threshold in 2021. And lastly, we already managed to reduce carbon emissions from scopes one and two by more than 40% since 2017, while for scope three, we reached over 200 active partners of our supply chain in Brazil in the collective effort led by us to reduce Scope 3 emissions, representing more than 70% of the total value chain emissions, keeping our commitments for 2025 on track. Now let's quickly talk about 2023. First, what should be similar to last year? Number one, top-line growth remains a key priority, with net revenue performance once again driven more by net revenue per hectolitre than volumes. Number two, we expect a tougher Q1, given higher input cost pressures, but this time more from commodities than effects. And number three, our focus on value creation drivers, such as return on invested capital, economic profit, and free cash flow generation, all remain. And in terms of what should be different from last year, number one, Although input cost pressure remains a headwind, we expect our cash cogs per hectolitre for Brazil beer, excluding non-AMBEV marketplace products, to grow between 6 and 9.9% for the year, which is significantly lower than the 16.6% growth in 2022. This cost outlook is a result of our commodity hedges, where aluminum became a tailwind, as well as our FX hedges, with the average BRL USD exchange rate at 5.10 for the year after four years as a significant source of pressure. Number two, SG&A growth should improve given lower inflation overall, as well as internal restructurings designed to streamline and optimize our B2B, D2C and FinTech technology big bets. We invested heavily from 2020 until 2022 to scale up these platforms quickly, and we now see room for a more integrated approach as far as structure is concerned. And number three, CAAC and Canada back to organic growth. In CAAC, we will continue to focus on reigniting demand for our portfolio by activating key selling moments via brand and trade investments, as well as a disciplined commercial execution. While in Canada, we will focus on resuming momentum by focusing our investments in above-core and beyond beer brands, but also evolving in the digital transformation that is currently underway with Bees. And finally, speaking to our financial priorities for the year, no change here. We will continue to focus on four things. Improving our financial discipline with a focus on liquidity, as well as cost and expense management while reinvesting for growth. improving profitability through increasing our return on invested capital, but also focusing on margin expansion, furthering our value creation agenda with a focus on growing economic profit as well as free cash flow, and returning excess cash to shareholders over time. In other words, we will pursue another year of continuous and consistent improvement in our financial performance as we continue to transform this company. That was it on my side. Time for Q&A.