Ambev S.A.

Good morning, good afternoon, and thank you for waiting. We would like to welcome everyone to Unbev's 2024 Second Quarter Results Conference Call. Today with us we have Mr. Gian Gereissati, Unbev's CEO, and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website, ri.unbev.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 MBEV's remarks are completed, there will be a Q&A section when we kindly ask that each participating sell-side analyst asks only one question. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Ambev. and could cause results to differ materially from those expressed in such overlooking statements. I would also like to remind everyone that, as usual, the percentage of changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refers to comparisons with 2023 second quarter results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Unbev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, operating profit, and EBITDA on a fully reported basis in the earnings release. Now, I'll turn the conference over to Mr. Jean Gereissati. Mr. Gereissati, you may begin your conference.

Hello, everyone. Thank you for joining our Q2 earnings call. In our last call, I mentioned several initiatives regarding the heavy rains that impacted many cities in Rio Grande do Sul. I also mentioned that we wouldn't stop until our ecosystem was back on its feet. During this quarter, we continued with several initiatives in the region, focusing on helping to rebuild the local communities. For instance, we donated more than 5 million liters of water to people and hospitals. We also contributed over 16 million reais to support the local customers, helping with structure and commercial initiatives. For our people, we have supported them to rebuild their homes. It's part of our role as a leading Brazilian company to support our ecosystem so we can grow together. Now shifting gears to our business. This quarter's performance was very consistent when compared to Q1. Volumes grew, led by Brazil and CAC. more than offsetting soft industries in Argentina and Canada. EBITDA grew double digits with margin expansion, free cash flow performance improved versus last year, and normalized profit was impacted by higher income taxes. Let me now go a little bit more in details, starting from CAC and Canada. Similar to last quarter, CAC had another good quarter led by the Dominican Republic with Corona and Presidente families of brands. Volumes increased by 3.4% in the beta by 18, with 330 bps of margin expansion. While Canada continued to experience a tough industry, we continued working to offset top-line performance with disciplined cost management, delivering a 2% beta decline while cash flow increased. In Argentina, despite some improvement in terms of monthly inflation readings, beverage industry continued to suffer in the short term. Our volumes declined by over 21% as consumption environment remained challenging. In nominal terms, EBITDA reduced significantly because of the currency devaluation that took place in December last year. In Brazil NABS, we had another great quarterly performance. Volumes grew almost 8%, with our non-sugar portfolio continuing to outperform, growing 15%, with a highlight to Guaraná Zero that grew over 40%. Also, earlier this year, we were awarded the best Pepsi bottler in the world, for the first time. This marks how our consumer-centric approach has improved not only our business, but our partners. Net revenue per hectolitre grew 6.8% on the back of revenue management initiatives and a positive brand mix. Cash cogs per hectolitre decelerated to an increase of 1.2%. while lower spending in marketing activities from a heavier Q1 due to Carnival contributed to a beta growth of 40% and margin expansion of 500 basis points. In Brazil Beer volumes grew 2.9% with our premium and super premium brands up in the low teens led by Corona patent and original core plus brands growing in the high teens led by Budweiser and core brands up low single-digit net revenue per hectolitre grew 3.9 percent pressure retailers grew nearly six ahead of general consumer inflation once again which was partially offset mainly by the carryover impact from VAT taxable base that we explained last quarter. In addition to a healthy and consistent beer performance, marketplace grew GMV sequentially and 32% versus last year, and represents close to 10% of our net revenue growth year-to-date. and the beta grew 21%, also supported by a decrease in cash calls per hectolitres, with margin expanding 350 bps to 30. I am very satisfied with our performance in Brazil. For a while we have been delivering a solid operational performance, reaching in Q2-24 all-time high record volumes for a second quarter and a significant EBITDA growth. Last quarter, I spoke about our commercial momentum in Brazil beer and how that's tied to brands, innovation, bees, and the delivery. Today, I would like to talk more deeply about brands. We decided to allocate our resources prioritizing four brands that we call focus brands. They received additional investments, be it in media, experiential, trade, or sales. Each of these focus brands has clear reasons to believe on why it can win. Corona in the Super Premium is the brand with the highest brand health to market share ratio in the market. And it relates to values like balance, enjoying life, traveling, and unwinding. On top of that, it has a distinctive packaging, a liquid that is made with 100% natural ingredients, and is more refreshing. Spotting. in premium is one of the highest growing brands of the market. And it has very clear beer credentials which positions it as a beer authority in Brazil. It has been selected as Brazil's best pure malt beer by a group of beer specialists in a survey from o Estado de São Paulo newspaper. Budweiser is the most aspirational core plus brand in the market. Through its global events like the World Cup and international music festivals, such as Lollapalooza and Tomorrowland, it is seen as an iconic and youthful brand. On top of that, in both blinded and branded liquid tests, Budweiser scores as the highest beer of the market. And Brahma, in core, is the biggest brand of the market, and it connects to Brazilian culture like no other, being part of people's lives for generations, through soccer, sertanejo, carnival and São João. It has the biggest brand health and salience of the market, and its unique functional attributes, bramosidade, cremosidade, solidifies it as the number one high-quality brand in CORE. The good news is, strategy is working. Our focus brands are at all-time high levels of brand health and volumes. In terms of year-to-date volumes, focus brands grew over 10% combined, representing over 120% of companies' growth. Excluding the value segment, which is our largest detractor, other brands are virtually flat this year. And Brazil became one of the largest markets for corona and for spotting. Brand building is a journey and we need to be consistent throughout. But the results are very encouraging. Now, to close, I have been conveying three messages since the start of the year. First, we are confident about volume growth, especially in Brazil. Second, our main challenge in the year is taxes in Brazil. And third, despite the headwinds in taxes, we don't expect cash flow to be impacted materially, and we continue working to deliver solid free cash flow generation. We will continue acting on what we can control, and in the short term, we will focus on keeping our business momentum and protecting cash flow generation. Thank you very much. Now, let me hand over to Lucas.

Thanks, Jean. And hello, everyone. If I were to summarize our financial performance in Q2, I would highlight three things. More growth than in Q1, more profitability than in Q1, and consistent cash flow generation despite the Brazil taxes and Argentina headwinds. Let's go through the numbers. EBITDA grew nearly 16%, almost 18% ex-Argentina. Gross margins expanded 200 basis points organically, 240 basis points ex-Argentina. EBITDA margin expanded 300 basis points organically, 330 basis points ex-Argentina. And although normalized profit declined around 8%, cash flow from operating activities decreased by nearly 2%, totaling about 3.4 billion reais. Jean already covered the operational performance, so let me break down our beyond a bit the performance. Net finance results improved approximately 450 million reais compared to last year. The main drivers of such improvement were consistent with Q1, namely, first, lower losses on derivative instruments given lower carry costs to implement our hedging strategy for FX in Brazil. Second, lower fair value adjustments of payables pursuant to IFRS 13 and CPC 46. And third, our hedging decisions and lower USD exposure in Argentina, albeit to a lesser extent than in Q1, which, by the way, should also be the case for H2. In addition, the devaluation of the Brazilian real in the quarter had a positive impact of over R$130 million given cash balances in U.S. dollars. Turning to income taxes. As anticipated, the tax headwinds in Brazil impacted our performance in the quarter, and we didn't have the positive one-off from Q1. Our income tax expense totaled almost R$1 billion in Q2, which was equivalent to an effective tax rate of nearly 29%. There were three main drivers here. First, higher EBT, which grew from roughly R$2.4 billion to over R$3.4 billion. Second, less deductibility related to state VAT government grants and IOCs. as was already the case in Q1, and which should also impact H2. And third, given the roughly 10% depreciation of the Brazilian real during the quarter, a non-cash effect due to higher withholding tax provision related to Labatt undistributed profits as per IAS 12 requirements. By the way, speaking of taxes, let me share a quick update in terms of litigation and the tax reform on consumption. In terms of litigation, since our last call, we obtained favorable administrative court decisions totaling about 2.6 billion reais, as per Note 25 to our financial statements, and one partially unfavorable decision regarding IOC deductibility, which we will appeal at the judicial level once we are notified of the decision. And as for the tax reform on consumption in Brazil, in mid-July, the draft legislation was voted in the House of Representatives. and the debate now moves to the Senate, which should vote on the matter before year-end. We will keep everyone posted. Now, over to cash flow. Cash flow from operating activities totaled almost 3.4 billion reais, just 60 million reais below Q2 2023, with higher EBITDA and lower net finance costs offset primarily by working capital in Brazil and Argentina, as well as cash taxes in Brazil. Cash flow used in investing activities totaled approximately negative 1 billion reais, with year-over-year performance mostly impacted by lower capex. And finally, cash flow from financing activities was in line with Q2 2023 at about negative 1.7 billion reais, with approximately 300 million reais in share repurchases in connection with our share-based compensation plan. All in all, Our cash balances at the end of the quarter increased ahead of last year, so we finished H1 on solid footing cash flow-wise, while the bulk of our cash generation historically takes place in H2, particularly Q4. Before wrapping up, a quick update in terms of sustainability. As part of our ongoing efforts in partnership with our ecosystem to reduce Scope 3 carbon emissions, we've identified that more than 75% of our main suppliers in Brazil, which together represent over 30% of Scope 3 emissions, already operate with some level of electricity from renewable sources. We've also mapped with such suppliers a potential reduction of more than 100,000 tons of CO2, representing a reduction of approximately 4% of our Scope 3 emissions in Brazil going forward. We still have a long way to go towards our 2040 net zero ambition, but we believe we're on the right track. And for more details on our sustainability strategy and results, please check out our annual and sustainability report, which can be found on our investor relations website. With that, let me hand it back to the operator for Q&A.