Ambev S.A.

Good morning, good afternoon, and thank you for waiting. We would like to welcome everyone to Unbev's third quarter 2023 results conference call. Today with us, we have Mr. Gian Gidesacci, CEO for Unbev, and Mr. Lucas Leda, CFO and Investor Relations Officer. As a reminder, a live presentation is available for downloading on our website, ri.unbev.com.pr, 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 Ambav's remarks are completed, there will be a Q&A section when we kindly ask that each participating analyst asks only one question. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Abaf'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 Unbev 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 third quarter 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 Unbaf's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, operating profit at EBITDA on a fully reported basis in the earnings release. Now, I'll turn the conference over to Mr. Giorgio Deissati. Mr. Giorgio Deissati, you may begin your conference.

Hello everyone and thank you for joining our Q3 earnings call. In our last call, I left you with two final messages. We were confident in terms of our ability to deliver operational leverage thanks to sustained commercial momentum and an improved cost and expenses outlook, but that we had less visibility in terms of industry volumes in Brazil and on the overall operating environment in Argentina. Looking at our Q3 results, it's great to see that the team delivered operational leverage once again, while industry volumes in Brazil and our business in Argentina were both resilient. In fact, our performance really came together in Q3. Net revenues grew roughly 19%, EBITDA grew nearly 44%, and grew over 30% ex-Argentina, with 560 basis points of EBITDA margin expansion. Normalized profit grew about 25%, thanks to better EBITDA and better finance results. And cash flow from operating activities increased almost 30%, totaling close to 8 billion, which is about 1.8 billion ahead of 2022. What's more, it was great to see that our focus on the things we can control has continued to pay off. let's look by geography starting with brazil beer industry was slightly positive while our volumes declined by about one percent as we cycle the record levels set in q3 2022 premium volumes outperformed once again while our core brands grew pretty much in line with the industry and our value brands declined more than 40% versus last year. Our commercial strategy remains in good shape. Our premium and super premium brands grew low teens, led by Corona, Original, and Spaten. We estimate we gained market share in the premium and super premium segment once again this quarter. Also, the continued investments in our brands led to another quarter of focused brand health improvement, with our premium and super premium brands improving in health metrics ahead of competition. Net revenue per hectolitre, excluding non-AMBEV marketplace products, continued to grow ahead of inflation and grew 6.4%, thanks to revenue management initiatives, price increase carryover, and positive brand mix. This is the fifth consecutive quarter of net revenue per hectolitre growth outperforming inflation, as we remain nimble regarding pricing decisions. EBITDA grew 35%, with margin expansion of 720 basis points. Cash COGS per hectolitre, excluding non-AMBEV marketplace products, actually decreased 2%, driven by expected effects and aluminum tailings, as well as more efficient supply chain, given a better production and distribution footprint, contributing to a gross margin expansion of 340 basis points. And cash SG&A also decreased by 4% as continued investments in sales and marketing were more than offset by savings in distribution and administrative expenses. Turning to Brazil NAB, volume grew almost 3% with market share pretty much flat according to our estimates. The momentum of our health and wellness brands continued. as our Diet Light Zero brands grew volumes in the mid-20s, resulting in market share gains for this category, where we over-indexed compared to non-alcoholic beverages overall. Pepsi Black continued to be the highlight, with growth above 90% versus last year, and already representing over 20% of our Diet Light Zero volumes. Net revenue per hectolitre grew 2.3%, as our revenue management initiatives and price carryovers were partially offset by an increase in state VAT taxable base in certain states across Brazil and also package and channel mix. EBITDA grew 1% in the quarter, with cash COGS per hectolitre growing 4.5% and cash SG&A up 5%. International operations also had a consistent performance overall. Starting with CAC, where we remained steady on the recovery track, this quarter we lapped the toughest quarter of last year. As a recap, by Q3 last year, we had solved most of our bottle supply constraints. However, we faced a tougher than expected demand and inefficient supply chain, given logistics and import needs. This time, volume grew more than 13%, with Presidente in the Dominican Republic improving health and reaching volumes above Q3 2019 levels. Revenue grew 22%, on the back of the continued recovery in the Dominican Republic, as we see improved commercial execution in the country, with overall client NPS above 75. EBITDA grew by over 62%, with EBITDA margin expanding to over 37%. In last, the highlight is that preparation pays off. On one hand, top line performance was primarily impacted by volumes declining in Argentina, where the highly inflationary environment continued to impact consumer purchasing power. On the other hand, cash flow generation in dollars, which has been a particular focus of ours in Argentina, was ahead of last year despite the 22% currency devaluation that took place in the mid-August. This shows that all the work that started back in Q3 2022 is being rewarded. The combination of reducing our financial hedge while also lowering dollars exposure in supplier agreements and readiness in terms of revenue management as well as cost and expenses management are making the difference. Outside Argentina, performance was driven by corporates and premium brands in Chile and Paraguay. All in all, Lazer beta grew 94% with gross margins expanding 200 basis points and the beta margins expanding 360 basis points. Lastly, Canada delivered stable EBITDA growth of 3.5% in line with H1 2023 and 310 basis points of margin expansion where a challenging industry was more than offset by revenue management initiatives and cost and expenses management. Commercially, our corpus and premium brands improved health and gained market share, with a highlight to Corona, that is the leading brand in the premium segment in the country. Before wrapping up, I would like to spend some time on our digital platforms. As this time last year, I mentioned that we were excited about the prospects of having Bees and Zed Delivery doing a memorable FIFA World Cup. for our clients and consumers. And since then, both platforms have continued to grow in the right way. Starting with Bees, this quarter, Bees marketplace products totaled an annualized GMV of 1.8 billion reais, 32% above last year. Over 80% of Bees customers also benefited from the marketplace. The top three categories, food, non-alcoholic beverages, and spirits, had roughly similar weight in terms of GMV. As we've previously mentioned, we see that SKU per POC as one of the major growth opportunities for the marketplace. And we've seen another quarter of evolution with 21% growth year over year as we continue to improve the user experience. As far as Z delivery, this quarter awareness increased 25% versus last year. We reached 4.7 million monthly active users and GMV grew by 8% year over year. We more than doubled our coverage versus last year, with ZED now available in more than 640 cities across Brazil. We continue to develop and expand our marketplace by increasing the assortment of products and brands available in the platform, thus enhancing the consumer experience. This also represents a great opportunity to monetize the beer delivery network we build through a marketplace with a creative returns on invested capital to the company similarly to this marketplace and results have been promising. Year to date we sold over 3,000 non-unbath SKUs on the marketplace And about 20% of the orders contain at least one known Ambev marketplace product, representing low teens of Zest GMV. Given that this is our last call for the year, I would like to put our performance into perspective before wrapping up. You know, I talk about our transformation journey since 2020 and how consistency is a priority for us. So I believe it's important to highlight how things are coming together, quarter after quarter, despite all the challenges that have been thrown our way. Since the beginning of 2021, we grew net revenue double digits in all quarters, thanks to our consistent commercial strategy execution. We delivered 10 quarters of EBITDA growth, out of which 7 were above inflation, despite FX and commodities headwinds and continued SG&A investments in the short and long term, and EBITDA margins have expanded for the last 4 consecutive quarters. In closing, Q4 is always an exciting time for us, And I am looking forward to what my team has in store for the peak season with the arrival of summer in South America. As usual, we want to deliver a strong finish for 2023 and position ourselves well for 2024. So thank you very much. Thank you for your time. And now let me hand it over to Lucas.

Thanks, Jim. Hello, everyone. Our financial performance in the quarter illustrates well how our renewed focus around value creation is translating into results. I'd like to say to our team that there is life beyond EBITDA, and that the way forward is to keep embedding into our decision-making process greater focus around cash flow generation and invested capital. The changes we implemented in Argentina that Jean alluded to are a great example of this approach working well. But let me focus on our consolidated performance. We delivered in the quarter about R$4 billion of normalized profit, a 25% increase versus last year. In addition to our EBITDA growth, what made a big difference were our net finance results, which improved a little over R$400 million year over year. And within our net finance results, the biggest factor was the reduction in losses on derivative instruments, thanks to our decisions relating to hedging in Argentina, namely structural reduction of our USD exposure and a shorter hedging time horizon, as well as lower carry costs in Brazil. We should continue to see a benefit for the remainder of the year, albeit to a lesser extent. Cash flow from operating activities totaled nearly 8 billion reais in the quarter, which is about 1.8 billion reais above Q3 2022. Year to date, we've delivered almost 2 billion Reais more than 2022. Performance improved across the board, with better cash flow from operating activities in all regions, led by Brazil and CAAC. And in terms of working capital, the highlight was around reduced inventory levels, particularly in terms of packaging and raw materials, which continued to improve year over year, given our team's focus and how much input cost pressures and supply chain disruptions in recent years adversely impacted our inventory costs going into 2023. Despite the stronger performance through September 30, Q4 is historically the most relevant quarter in terms of cash flow generation, so we still have a lot of work to do. Now I want to turn to a couple of other relevant topics, taxes and the exercise of the put option related to the Dominican Republic. Let me start with tax reforms in Brazil. As you may recall, The tax reform on consumption is intended to simplify the different federal, state, and municipal indirect taxes while not increasing the overall tax burden. The text approved by the House of Representatives is currently being reviewed in the Senate, and the amended text is expected to go to a vote in the Senate floor in November. We will be better positioned to comment further upon the final approval by Congress, which is still expected before year-end. In our view, the focus of any tax reform should be on reducing the complexity of the Brazilian tax system and not increasing the total tax burden, which is already among the highest in the world. As for income taxes, there are two important updates. First, during Q3, draft legislation was finally submitted to Congress by the federal government regarding the deductibility of the IOC. The text is currently in the House of Representatives, and timing going forward remains unclear. However, it's worth noting that instead of the complete elimination of the IOC deductibility, the potential changes to the existing framework may also include either adjustments to the legal parameters for purposes of the calculation and deductibility of the IOC, or substitution of the IOC with an allowance for corporate equity mechanism. We will keep the market informed should the legislative process move forward. And the second important update is that the federal government also submits of state VAT tax incentives. The potential implications to our business will ultimately depend on the nature and the extent of potential changes to the existing framework, which are still rather unclear and therefore may or may not have a relevant impact to the company. And regarding the put option in the Dominican Republic, Last week, we received notice that Empresas León Jiménez decided to exercise its put option that was set to expire next December with respect to part of their stake in our business in the Dominican Republic and certain other caqui markets. We expect the disbursement to acquire such stake to take place in January 2024 and should total approximately 1.8 billion reais, subject to the terms of the existing agreements with Empresas León Jiménez. For further details, please refer to Note 27 to our financial statements. Finally, I would like to invite everyone to join our sustainability update, which will take place on November 23rd. In addition to providing an update on our progress in terms of sustainability initiatives, the idea for this year's broadcast is to also cover how, for us, sustainability is about ensuring a solid governance and ethics framework for creating long-term value. The program includes the participation of our senior management, as well as representatives of our board of directors and fiscal council. That's it for me. Thank you, and we can move to Q&A.