Ambev SA (ABEV) 2015 Q4 法說會逐字稿

Good morning and thank you for waiting. We would like to welcome everyone to Ambev's fourth-quarter and full-year 2015 results conference call. Today, we have with us Mr. Bernardo Paiva, CEO for Ambev; and Mr. Ricardo Rittes, CFO and Investor Relations Officer.

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 Ambev's remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions)

Before proceeding, let me mention that the forward-looking statements are being made under the Safe Harbor of Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management 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 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 today during today's call are both organic and normalized in nature; and unless otherwise stated, percentage changes refer to comparisons with Q4 2014 or full-year 2014 results. Normalized figures refer to performance measures that 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'll turn the conference over to Mr. Bernardo Paiva, CEO for Ambev. Mr. Paiva, you may begin your conference, sir.

Thanks, Dan. Hello, everyone. Thank you for joining our 2015 fourth-quarter and full-year earnings call. [Also note], we have Ricardo Rittes here, our new CFO since January 1, 2016. Ricardo has been with the Company for more than 11 years, a great partner. We've already been working as a team as you are the CIO of Ambev from 2012 and through the end of last year and are now even more excited to have him as our new CFO. Welcome, Ricardo.

Thank you very much, Bernardo. Hello, everyone. I'm very happy to be here. Within these 11 years in the Group, I had the opportunity to be the Treasurer of Ambev from 2005 to the end of 2006, Global Treasury of ABI from January 2007 to December 2011. I was based in Belgium and New York and has been the CIO of Ambev in the last four years. It is a great challenge to replace Jamel, but I'm deeply committed to preserve and improve whatever possible the outstanding job done by him and his team. And strongly motivate to make sure we continue to create sustainable value to our shareholders; please count on me.

From this quick introduction, I will guide you through our operational highlights and Bernardo will give his remarks at the end, before moving to Q&A. And let's start now with our consolidated results.

We had another quarter of double-digit topline growth. Top line was 10.4% above that of last year, leading to a strong 12% growth in the full year. EBITDA was up 7% in fourth quarter and 12.4% in the full year, reaching BRL22.2 billion, with an EBITDA margin expansion of 20 basis points to 47.5%. Operational cash flow generation in 2016 was BRL23.6 billion, nominally up 48% year-over-year. After CapEx of BRL5.3 billion, we generated BRL18.3 billion of free cash flow.

In Brazil, our team's ability to deliver was once again put to the test as along with a difficult comparable base of the 2014 FIFA World Cup, the macroeconomic environment continued to deteriorate throughout the whole year. Nonetheless, we managed to deliver 8% topline growth, which was at the upper end of our guidance range and a 10.8% EBITDA growth with a 140 basis points margin expansion to 53.6%.

More specifically in Beer Brazil, net revenues increased by 8.4% in the quarter and 9.6% in the full year. Volumes were down 2.5% in the fourth quarter of 2015, mainly driven by the adverse macroeconomic environment and unfavorable weather due to more rain than that of last year, partially offset by Premium and Near Beer growth. Premium now represents 10% of our beer volumes with Near Beer representing 1% of the total volume.

In the full year, volumes declined 1.8% as the challenging consumer environment was amplified by the difficult comparable base of the 2014 FIFA World Cup during the second quarter 2015, partially offset by the successful implementation of our commercial initiatives along the year. Net revenue per hectoliter was up 11.2% in the quarter and 11.7% in the full year, as we continued to implement our revenue management strategy in a solid way, leveraging on our pack price strategy and benefiting from the positive impact of premium mix and an increased weight of direct distribution. Net revenues increased by 8.4% in the quarter and 9.6% in the year.

Moving to CSD and NANC Brazil, topline was down 1% in the fourth quarter of 2015 and 0.8% in the full-year 2015, due to negative volumes and price mix throughout the year. Pressured by negative real disposable income growth, we saw consumers reduce their frequency of CSD consumption and trade down to water and powdered juices in 2015. Volumes were down 6.4% in the quarter and 5.2% in the full year, with market share gains partially offsetting a high-single-digit industry decline.

Within the energy drinks segments, Fusion continued to grow ahead of the industry and became the third largest brand nationally, while already being second in some regions. CSD and NANC net revenue per hectoliter increased by 5.8% in the fourth quarter and 4.7% in the full year. The Brazil cash COGS per hectoliter grew 6.2% in the quarter and 6.9% in the year, benefiting from procurement savings and productivity gains and FX hedges, while being negatively impacted by currency movements, a high inflation in Brazil and product mix, mainly driven by the increased weight of premium products in beer. In the full year, cash COGS increased by 4%, in line with our guidance of middle-single-digit growth. Gross margins were up 40 basis points in the year to 68.3%.

Brazil cash SG&A was up 9.3% in the quarter, with higher sales and marketing distribution expenses, partially offset by lower administrative costs. In the full year, cash SG&A was up 8.3%, in line with our guidance of below inflation, due to, number one, high-single-digit logistics costs, mainly driven by inflation and increased weight of direct distribution; two, administrative costs in line with inflation; and three, middle-single-digit sales and marketing expenses as we continued to invest behind our brands, but benefited from efficiency gains and easy comparable base, given the investment made during the 2014 FIFA World Cup.

Now, moving forward to Central America and the Caribbean which we will call CAC, we delivered another quarter of double-digit volume growth with a strong performance in the region. EBITDA declined in the quarter due to the time of sales and marketing and administrative expenses. But in the full year, EBITDA was up 25.2% in local currency, with a margin expansion of 220 basis points to 35.3%. In Brazilian reals, our EBITDA increased by more than 65%.

Presidente, our leading brand, continued to grow volumes in the Dominican Republic and expand its presence in other islands of the Caribbean region. Margins continued to expand as we moved a step forward in terms of operational excellence in the country. In Guatemala, we gained significant market share with an important contribution of the Modelo brand, driving volume growth in a profitable way.

Now, to put our CAC business in perspective, since 2012, when we acquired CND, our EBITDA in CAC moved from roughly BRL200 million to almost BRL1.2 billion in 2015. Building on that success, we are excited with the topline possibilities, organic and inorganic, while committed to improve our operational excellence to fully capture the margin expansion opportunities.

Moving to Latin America South, our top line was up 24.7% while EBITDA grew 12.3% in the quarter. In the full year, top line increased by 29.7% and EBITDA by 24.7%. Within Beer, we had another quarter of volume increase, leading to a 4.8% volume growth in the full year, driven by mainstream, Premium and Near Beer initiatives. In Argentina, Mixxtail family continued to drive incremental volumes that coupled with a solid performance from our mainstream portfolio and our Premium brands, mainly Corona and Patagonia, drove a low-single-digit volume growth. In Chile, while mainly benefiting from the first year of Corona distribution, all of our main brands grew volumes. In Paraguay, the 340-ml returnable glass bottle of Brahma, launched last year, continued to grow, leading to double-digits volume increase in the country; and in Uruguay, Premium volumes experienced a strong growth in the year.

In LAS, CSD and NANC volumes were down 22.1% in the quarter and 13.4% in the full year, mainly driven by the divestiture of our soft drinks business in Peru. As a result, we are no longer reporting CSD volumes in Peru with no mature impact at EBITDA level. Adjusted for Peru CSD, our volumes would have been down low-single digits in the year, reflecting the challenging trading conditions in the region. While the industry is still pressured by the macroeconomic environment in Argentina, we are particularly excited with opportunity coming from the recent launch of Guarana Antarctica in the country.

Topline benefited from a solid net revenue per hectoliter performance due to higher weight of premium and near beer in our beer volumes and inflationary pressure, particularly in Argentina. Our COGS per hectoliter was pressured by inflation, unfavorable currency movements and product mix. While benefiting from our FX hedges, SG&A was also negatively impacted by inflation coupled with high investment in sales and marketing. As we move forward, we remain confident in our ability to deliver a solid performance in the region in the short term and better position ourselves for the future.

Turning now to Canada, volumes increased by 2.9% in the quarter and 1.7% in the full year due to beer industry expansion and market share gain with solid performance of Bud Light, Corona and Goose Island in the year. Throughout the year, we remained focused on pursuing an optimal balance between volume and price with our revenue management initiatives and the benefit of increased premium mix driving a 2.2% net revenue per hectoliter growth in 2015.

Net revenue was 4% above last year, leading to the best topline performance of the last five years. EBITDA, on the other hand, declined 9% in the quarter and 2.4% in the year, negatively impact by the currency devaluation, higher administrative expenses, and higher sales and marketing expenses. Going forward, we remain excited with our topline momentum in Canada in the whole portfolio, while also committed to balance net revenue per hectoliter and market share to deliver profitable growth.

Now, moving below EBITDA. Our net financial results totaled an expense of BRL2.2 billion in the year. And today, I will spend a little bit more time than [usual] here, not only because this result was significantly worse than that of last year, but also because I would like to better explain the nature of these expenses, some of them non-cash.

So the full-year result is mainly explained by, first, interest income of BRL575 million, driven by our cash balance, mainly in Brazilian reals, US dollars and Canadian dollars.

Second, interest expense of roughly BRL1 billion of which around BRL600 million non-cash expense related to the put option associated with our investment in the Dominican Republic. As part of the Cerveceria Nacional Dominicana -- CND -- deal that we had in 2012, a put option exercisable until 2019 was issued, which may result in an acquisition by Ambev of the remaining shares of CND, for a value that is based on EBITDA from the operations. The remaining portion or close to BRL400 million was driven by usual interest expense from our total debt outstanding, mainly linked to interest rates in Brazil.

Third, BRL838.7 million losses on the derivatives instruments. These losses reflect the carry cost of our hedges. We have a disciplined hedge policy pursuant to which we are always hedging the US dollar denominated portion of our COGS in all countries we operate, along with any other cash risk that could arise from FX and commodity moves, both in payables and receivables. This result is primarily linked to our COGS exposure in Brazil and Argentina, partially offset by carry gains from our foreign cash position hedged to BRL.

One important thing to highlight is that depending on the hedge instruments, the cash impact might differ in time from the expense accrual. Another important point is that also depending on the instrument, interest rate moves can generate non-cash monthly gain or losses, which explains the quarterly volatility this year. That said, the consolidated figure in 2015 of BRL800 million is a good proxy of the carry cost we incurred this year. In short, while the spot-to-spot results flows into the COGS results, the interest rate deltas go into this line.

Now, fourth, the BRL460.4 million losses in nonderivatives are mainly due to non-hedgable foreign exchange translation losses on payables, primarily in Brazil and Argentina.

Let's move to our effective tax rate. The effective tax rate was up in the quarter from 14.9% to 28.3% as we do not only accrue lower benefit from interest on shareholders' equity in the fourth quarter 2015. But this benefit was also partially offset by negative other tax adjustments, mainly driven by higher withholding tax provisions in the quarter. In the full year, while our net cash tax expense was close to that of last year, we reported a 22% effective tax rate, significantly above that last year's 14% tax rate, mainly due to: one, higher nontaxable net financial and other income, mainly due to BRL devaluation. Two, a nondeductible expense reported in the second quarter of 2015 related to the BRL230 million agreement reached between Ambev and CADE, the Brazilian Antitrust Authority. Three, higher foreign taxable income in Brazil due to BRL devaluation and, mainly, the new Brazilian legislation for foreign profits. Four, slightly lower positive impact from interest and capital accrual. As discussed in the past, we always maximize the cash benefit from IOC and 2015 was no different, but the accrual, the difference in time from the cash benefit, was actually lower than that of last year. Fifth, a negative other tax adjustment mainly driven by close to BRL350 million one-time impact from inter-company loans reported in the first quarter of 2015. This came as a result of taxable profits generated through these transactions in certain affiliates, which were not offset by equivalent deductible losses due to the lack of sufficient taxable profits in the corresponding affiliates. Once profits are generated in the tax loss carrying affiliates, this negative impact is expected to be reverted.

Also including the other tax adjustments, there are higher withholding tax provisions due to FX variation associated with unremitted earnings from international subsidiaries. Given the significant devaluation of Brazilian real, unremitted earnings are worth more in reals, generating a positive impact in shareholders' equity and consequently a higher provision for withholding taxes. This provision is only converted into cash when we will meet these earnings as dividends. As a result, our normalized profit decreased in the quarter by 7.9% and closed the year 6.3% above that of last year.

Important to mention that while net profit increased only by 6.3%, operating cash flow was up 48% to BRL23.6 billion in 2015. This figure eliminates the non-cash nature of some financial expenses, reflects the cash spent on taxes and includes the significant improvement in working capital achieved this year. With this cash generation of BRL23.6 billion, we invested BRL5.3 billion in CapEx, BRL1.2 billion in acquisitions, mainly in Canada and the Bahamas, paid BRL700 million of debt, returned to shareholders more than BRL12 billion, and we still increased our cash position by BRL4 billion. Half of this will be used for the IOC payment announced on January 25, to be paid starting on February 29.

As my final message, I'd like to emphasize that in order to create sustainable shareholder value, we will be always maximizing cash flow generation, allowing us to, number one, invest for additional growth; and two, return a significant portion of this cash to shareholders.

Thank you very much. I will now move to Bernardo before going to the Q&A.

Thanks, Ricardo. It has been a very challenged year, but we're able to once again deliver a solid result. It was not easy. The macroeconomic environment in Brazil deteriorated in a material way along the year, but we know that our team's ability to quickly adapt to a new reality has been key in our passion to drive strong performance and this year, it was no different. But this [past], we had the opportunity to celebrate the [first thing], but the focus now is on 2016 and the years to come.

We all know that 2016 will be another challenging year. And as part of our DNA, our values, we will go to deliver big again and our strength and our attitude has not changed at all. We acknowledge the adverse reality you have in Brazil, our most important country. But, first, we have been through crisis before in Brazil and in other countries we operate. We have a strong culture and experienced team and know how to operate in scenario like this one.

Second, we are strongly, very strongly excited with some initiatives that are already helping us in the short term. But the biggest payoff will come in the future like the returnables back to the off-trade, premium boost and near beer, just to name three of them. So, we have decided to once again using this challenged year as an opportunity to stress our platforms and improve our operational excellence.

And third, we know that to build our future in a sustainable way, we have to deliver in the short term and we will do it. To do that, we have to focus on what we can control and be even more connected with a changing consumer needs in a volatile environment. This is what we did in 2015 and what we will continue to do going forward.

With that in mind, we entered 2016 ready for a tough year and very confident in our plan. In Brazil Beer, we continued to focus on the five commercial platforms. The first one, Elevate the Core, because it all starts with our core brands. Skol, Brahma and Antarctica are beloved brands in Brazil, part of the consumers' day-to-day lives and have the ability to deliver great experience through relevant initiatives such as summer festivals, Carnival, Sao Joao, music and sports events, including the 2016 Rio de Janeiro Olympic Games. These key branding and selling moments will be even more important in 2016. By leveraging on these initiatives, further improving our sales and marketing, way that you go to the market and boosting that consumption occasions, we create the base to drive superior topline performance in a sustainable way, while enhancing equity of our brands.

Premium, our second big bet platform, is already a reality in Brazil with the segment growing from 8% to 10% of our beer volumes; and Budweiser, leading the segment, is more than 30% volume growth in 2015, but the opportunity is bigger. Our premium brands continue to grow as we speak. Along with that, there are execution gaps to be closed and specific opportunities to enhance the portfolio, mainly with international brands and domestic specialties. With that, we see a significant room to grow the premium segment in Brazil even further, driving a positive price and margin mix.

Our third platform is Near Beer. When we started talking about Near Beer one year ago, you had to explain what was it, what it meant, the share of growth opportunities, et cetera. We always believed that could be transformational. Right now, Skol Beats Senses and Spirit already represent 1% of our beer volumes, with more than 70% of this volume coming from other liquids than beer and it keeps growing.

We're actually creating a whole new industry in the alcoholic beverage space in Brazil, targeting occasions that were not relevant before. Not only that, we have created one of the coolest brands within the portfolio, with a strong preference among young adults and also helping Skol as the mother brand. After launch of Senses, with these iconic blue bottles, and now the Spirit, the green one, consumers are trying to anticipate what will come next, the new color, the new taste and so on. It's an amazing success.

With slightly more than 1% of volumes, nonalcoholic beer also fits perfectly in our strategy of targeting new occasions, mainly [Ramazi Brazil], the leader in the segment. In the whole near beer segment, I was referring to distribution and carefully expand the portfolio of brands with a solid pipeline of new liquids. We see an exciting opportunity to grow our share of growth, capturing incremental volumes in a highly profitable way.

In the home occasion, the fourth big platform, we see a significant room to improve the way people buy beer and consume it at home. Leverage on strong shopper insights, research and taking advantage of the current environment. We have been enhancing the beer category execution in the small and big off-trade formats with initiatives both in quality shelves and cooler placements. We will be also accelerating returnable glass bottle in supermarkets. In the fourth quarter, returnable volumes grew 100% in the off-trades, driving affordability when people most need it with better margins than the one-way cans. What should I experience is a material shift in the shopping behavior of Brazilians, one that's good for consumers, good for the environment, good for the retailers and good for us.

And fifth, the out of home platform. [Beyond trade] is the place to build brands and activate demands. Along the time, we have been perfect in the occasion from new liquids, new packages and new trade marketing initiatives. In 2015, we launched Skol Draft, now present in more than 10,000 bars, promoted 35,000 music events in all regions of Brazil with Curtisom, our micro events platform, increased by 50% the introduction of new coolers in the market and continued to expand the one liter returnable glass bottle, driving affordability again when people most need it.

On top of that, technology is becoming the most powerful tool to improve the selling process, helping us to close gaps in terms of volume, assortment and price execution. It is also helping us to focus even more in the sell-out work with bars, restaurants, nightclubs to further enhance the levers that activate demand, also bringing great experience to consumers in the out of home occasion.

Moving from Beer to CSD, you have been seeing a tradedown to powder juice and other business with low -- due to the lower disposable income. And you see not many (inaudible) as well in this case. On the other hand, we have been gaining market share in a profitable way through innovations and our pack price strategy. In the last 12 months, we launched Guarana Antarctica Black, Black Zero, Pepsi Zero, Mountain Dew, further expanded the returnable glass bottle and have just relaunched [Past Place].

On the higher end of the nonalcoholic business, energy drinks continued to grow in Brazil and we continued to gain market share. Fusion is now the third largest energy drink brand in Brazil and already [settling] some important areas, driving positive EBITDA margin mix.

Along with our topline focus, operational excellence is something we are obsessive about. Year-over-year, we have been raising the bar for our cost performance and deliver superior profitability in the industry. That said, we have no doubt that is the time to push ourselves even and even and even further. On the other hand, we have some important cost headwinds to offset and on the other, the current environment presents us a unique opportunity for us. Technology as well has also been a significant source of efficiency gains from enhancing the hardware and software used by our sales reps to the introduction of real-time traffic [authentication] apps to truck drivers, improving not only safety, but also saving time and cost. Costs for sure [you will be] obsession in 2016.

These are our plans for Brazil. When the environment gaps differ, we need to push ourselves even harder to continue to deliver. With that in mind, we expect in this 2016, topline in Brazil to grow mid-to-high single-digit in the full year with an expected weak first quarter impact by a tough comparable. We have an early Carnival and a hard comp due to the timing of federal tax increase, which impacted our base only in the second quarter of 2015. We expect cash COGS in Brazil to grow low to mid-teens in the full year, mainly explained by the impact of the devaluation of the Brazilian real during 2015, partially offset by cost initiatives. Brazil SG&A to grow low-single digit in the full year with overall inflation being offset by efficiency gains. CapEx in Brazil to decline year-over-year.

Having significant operations outside of Brazil has proven to be a great asset some of the time. We continued to see significant topline growth and EBITDA margin opportunities in all countries we operate in CAC, not to mention some of non-organic opportunities we also see. In LAS, we remain confident in our ability to deliver solid topline and EBITDA growth in the region, supported by strong brands in all countries we operate. And in Canada, we've continued to pursue healthy topline growth with superior profitability and a great cash flow, levered by an improved portfolio of brands.

We can now move to the Q&A.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Luca Cipiccia, Goldman Sachs.

Hi, good morning, Bernardo; good morning, Ricardo. Thanks for taking my questions. I wanted to ask about the beer mix in Brazil. You commented about premium now becoming 10% of the mix and the performance of Budweiser within that. I was hoping you qualify a little more this growth in terms of -- has the premium accelerated, is this more of a sanction of mainstream being slower and premium being more resilient and which I assume is probably the case? And if that is correct, where do you see that going, given that this type of divergence is probably going to continue in 2016?

And then, in parallel to this on the mix front, if you can give us an update as well on the returnable mix for the off-trade. And on the on-trade, how are you managing and do you see a risk with inflation accelerating, with prices going ahead, where you would want them to be? It was the case a while ago, but it doesn't seem to have been a risk for a while, but how are you managing that, how are you seeing that going. That would be great if you could give us some more details on these points.

Look, thanks for the question. [If you think of] the first one, the premium. I think that's first, the premium industry is growing ahead of the overall industry. And we know that this will continue to happen years to come. Premium industry is growing not only in Brazil but in many, many countries, and we know that as well. So I think that our premium volumes grew first because of the industry. Second, because the brands had to have and not only Budweiser but Stella Artois, Corona, Original, Serramalte and the launches that are coming including here the Near Beer as well. I think that the portfolio of brands that we have address the need states that we see in the market, that we researched that.

I think that, again, we continue to grow our premium mix. Premium volume continue to grow ahead of the industry. And we will lead the premium segment as we've done last year, not only as a total Company, but we've done with Budweiser as well.

Another general data that I can not share numbers, but give some flavor to you that the premium brands that we have, their preference are way above the market share that they have. So we see for again the industry standpoint in the portfolio that we have, that's a strong one and it's evolving, it's become even more stronger, a big opportunity for us to continue to grow in the years to come including 2016.

Second one is the returnable in the off-trade. So, the full year was kind of 14%. But we have months that we went to 22%, 23%, in the areas of 33%, even 40%, depends on the affordability of each area. So we will see really a big opportunity. We see that this year it can go even further. Last year was the first year that we pushed this initiative, so we have some logistic issues, not only with first, but with the trade to deal stack in the off-trade. But again, all the customers understand that's good for them as well, it's good for everyone. So it will be a big initiative this year and (multiple speakers).

But the 14%, how does it compare with 2014, just to have an idea how much it improved?

It was around 6%, 5%, something like that or even 4%. I haven't here the right number, otherwise I'll remind you, 5% to 4%. So of a big evolution and a big evolution again in a year that I think that we had a strong finish since we start to push this initiative from March on. So I mean that there is a reason that you have to get to back this RGB in the off-trade. Having said that, we expect this year to grow it even more because our base is more -- base business, I mean, their operation is more structured to go with [Buga].

In terms of price, I mean we always say that our net revenue policy, the (inaudible) inflation in the long term and plus any tax that have been increased. So this is the price policy on top of that mix will help the net revenue per hecto, for sure. Not only mix of brands but mix of tax that you're working hard and mix of regions as well. So all the mix management is something that we are obsessed about and I think helped us last year big time not only in terms of net revenue per hecto but in terms of share as well as we understood regions and occasions that were under our fair share that we were able to boost. So that's my answer.

But are you afraid, are you seeing any risk of retailers pushing on the on-trade but are you pushing price ahead to where you would like them to be or is that under control? It's pretty tight. With inflation, general environment, the way things are going, do you see that risk any more or not, it's not the case?

Luca, we have been explaining for the retailers I think more than 20 years that, I mean, a consumer price that goes ahead of the retailer price is not good for a consumer. It's not good for them because they make less money. It's not good for the full industry. So I think that the operational excellence that we have is helping us to really get this message even more and assure that the end price [you're] be in line what should be. So, because it's good for everyone, these are obsession. Personally, I'm having -- 20 years ago, I was a sales manager and so on, have been working on that. So I can assure you that's kind of a must-have here in Ambev. So no doubt that PTC, price to consumer, will be in line what should be.

Thank you. Thank you very much.

Thank you, Luca.

Thank you.

Antonio Gonzalez, Credit Suisse.

Hello, Bernardo and Rittes. Thank you for taking my question. I have, first, a question on your cash flow from operations. Obviously it increased a very strong 48%. I would presume that some of the working capital improvements are permanent. And with your guidance for CapEx in Brazil down in 2016, I'd like to understand if you have any outlook of a higher payout in the future or more of these small and mid acquisitions like Canada that you're doing, that we should expect to accelerate. That would be the first question.

Second, in terms of COGS, obviously, you will see a lot of pressure because of the currency, et cetera. I guess you already shut down some capacity. That's my understanding that you shut down some capacity in 2015 already. I wanted to ask if you can share with us how many hectoliters did you shut down. And is there any other step change that you can do to I guess partially offset this FX pressure?

And then, just finally, a very quick follow-up on the tax rate comments, on your prepared remarks, Rittes. Distributed IOC was actually up from BRL4 billion to BRL9 billion roughly, but the IOC tax shield was flattish year-on-year. Do you expect that the tax shield can go up next year, is it just a timing thing, or you're just already capturing the maximum benefit that you can from interest on capital? Thank you.

Thank you, Antonio, for your question. So if I am going to recall there are like three questions here. The first one is about the payout, I'm going to start there; second one about costs; and then, we move to the below EBITDA and the potential impacts.

So first of all, like we said in the call, the operational cash flow is up 48% to BRL23.6 billion and that's a consequence of what we do here. We manage the comp in order to maximize cash flow generation. And also, that cash flow generation eliminates the non-cash nature of some financial expenses, reflects the cash spend on taxes and includes a significant improvement in working capital [that which] this year. So working capital management is one of the focus of the Company, has been already in the last couple of years, continues to be, and we will no doubt about accelerate these efforts in a moment that we are living.

The second question in terms of costs and the cost pressure. I'd say we tried to explain not only in our reports, but also in the speech what they're going to be the main drivers that we're going to have for the cost reductions initiatives. But in short, we are always looking for opportunities to run our business in a more efficient way with no impact in our operations. So we have the cost-connect-win platform is something that is not a program, is not something that we're going to do for the next few months, is not something that we're doing because of a price; is something that we do continuously. We optimize our fixed structure as a whole on a day-to-day base and that's what we do.

So while inflation is up, overall declining demand also creates opportunities for better deals that being like an opportunity standpoint or like an idle capacity from some of our suppliers. In the last years, we have expanded the use of, for example, e-auction. So we're using like technology to help us do that from traditional raw materials purchased to services and a lot of different kinds of expenses. Technology also has been a significant source of efficiency gains. So, from enhancing the sales hardware and software to an update of your time traffic like Bernardo just said.

So in the end, there is no silver bullet, there is no capacity reduction, there's nothing we can comment on that direction. It is like just cost managing as part of our DNA. And in tough times, I think this focus is even renewed or strengthened.

And the third part of your question, which is like the below EBITDA part of the question. I will go through not only the specific item that you asked, but I am going to do like a more comprehensive answer, so that we can tackle all these that may have [arised] on the below EBITDA question.

So number one, financial results. The main reason for the significantly net financial results difference from 2016 was the BRL600 million non-cash expense related to the put option associated with our investment in the Dominican Republic. There is also around BRL840 million derivative loss for the full year, which is essentially a running rate for the carry cost for hedges. And then if you do an approximate calculation, the carry of $1.5 billion currency COGS hedge, mainly in Brazil and Argentina, that's the number you're going to get. The quarter-over-quarter volatility generated by cash and non-cash mark-to-market gains and losses and specifically in that line related to the interest rate differential moves between those currency pairs. So the spot-to-spot result flows into the P&L to the COGS and the carry cost is accounted in this line.

Number two, and I'll go into the more specifics on your questions, when you look at the income tax and social contribution, it's very important to highlight that as per our cash flow statement reported today, income tax paid was BRL2.1 billion, which compares to BRL2.5 billion for the full-year 2014. The higher income tax and social contribution accrual expense in 2015 was mainly due to a non-deductible expense reported in the second quarter 2015 related to the BRL230 million agreement reached between Ambev and CADE. The impact of the BRL devaluation, also mainly with the high withholding tax provision due to FX variation associated with unremitted earnings from international subsidiaries, and close to BRL350 million one-time impact for inter-company loans.

Regarding the IOC specifically, so first of all, the interest of all capital benefit the ETR and it takes place on accrual basis. IOC is accrued based on the highest of, one, the pro rata of the best estimate for the full year to be paid out which today is capped by our profit generation of Ambev SA; and two, the year-to-date interest of [own] capital already paid out. The cash benefit will depend on how taxable profits at Ambev will move and the timing of our cash tax payments. We always maximize it on a cash perspective, not based on the full-year ETR, since it is the most efficient way to return cash to our shareholders.

So I think that -- sorry to make a little bit of a longer explanation, Antonio, but the I think that [answers] all your questions.

That's very useful, Rittes. Thank you so much.

Thanks. Thanks, Antonio.

Lauren Torres, UBS.

Yes, hi everyone. First, actually just a clarification on some of the cost guidance that you gave. I guess I'm just trying to get a better sense of your visibility on the full-year guidance. Thinking about your hedges, maybe some of your key commodities, if there is any component of this guidance that could cause some upward pressure to this low to mid-teens guidance. Just trying to get a sense of what you know now versus what would change over the course of the year that could make this a difficult or a more difficult hurdle to clear.

And then, if I could ask just a second question on expansion and uses of cash. Listening to ABI this morning and then talking about SAB and more diversification and expansion, just trying to get your perspective as far as where you see your opportunities if --. I know it's probably premature to talk about ABI's ventures and your potential role, but how do you think about investment outside of current markets? Is it more about doing more of the same or there is more that we can talk about as far as inorganic expansion? Thank you.

Hi, Lauren. Thank you very much for your questions. First of all, I'm going to go with the guidance. And I think the guidance, we stand by our guidance and so the guidance is the guidance. We're very carefully thought off and it is the guidance for the year.

If you move now to the uses of cash, I'm going to again highlight the fact that we had the BRL23.6 billion cash flow generation this year, of which -- I'm sorry, 2015 -- of which we used BRL5.3 billion in CapEx, BRL1.2 billion in acquisitions which in 2015 were mainly in Canada and the Bahamas. We paid BRL700 million of debt and returned to shareholders more than BRL12 billion.

As you already [saw] in the call of ABI, you heard Brito saying the SAB is an InBev transaction, but that didn't prevent us in 2015 or in the past to look for opportunities for expansion in some specific markets. So again, in order to create sustainable shareholder value, we will always be maximizing cash flow generation and, after that, the allocation in the best returning yield assets.

And one final comment here, Lauren. The cost part of the business is something that you control 100%. So, it's part of our DNA to be a lean organization, be an efficient one and it will be here, no doubt about that. So our guidance, it's a very clear one and we're committed to get there, for sure.

So is it fair to say of this cost guidance, you would hope and should see another year of broadly flat EBITDA margins?

And, Lauren, we don't provide a guidance for EBITDA. But, I think we have the elements for you to use your assumptions and get to where you want. That's what -- and by the way, if you want, afterwards, we can follow up on that on a specific call. Thank you.

Yes. Thanks.

Thanks, Lauren.

Jeronimo De Guzman, Morgan Stanley.

Hi, good morning. I wanted to shift to the CSD in Brazil and the CSD pricing, which has been throughout the year below inflation and then that definitely has lagged the beer side with, as you have said, kind of more of an impact on -- there has been more of an impact from the macro on the demand. So just wanted to see how much of an opportunity do you see going forward to move the pricing higher in 2016 to be closer to inflation.

I think that for beer, for CSD, I mean the [policy generally] is the same. No, I mean you're trying to get always price in line with inflation plus taxes. This is our main hope in terms of price [policy]. For beer, we were able to get there. For CSD, it was a little bit tough. But again, for 2016, we continue to try that as we have been doing in terms of a guidance, in terms of policy -- pricing policy in the last 20, 25 years. Price should be in line with inflation and should offset taxes.

Okay, thanks. And then, just another question on the beer side, I mean you talked about the consumer behavior shifting. We've seen kind over the years this shift towards in-home or off-premise consumption. But are you seeing -- did you see an acceleration in that trend last year? And then just -- I mean do you think the just kind of bigger picture is that what you're doing in returnables is enough to protect profitability or is there a concern about kind of what this has an impact, what impact this has on margins longer term?

We see the Out of Home occasion a very profitable one. And I think that we have great programs and brands and initiatives like the events and so on to create entertainment in bars. To continue to boost of that and make sure that this occasion [nice specifically] in the bars will continue to be big and profitable one.

Make it to the off-trade, I mean have many, many kinds of off-trade are the big off-trade, I mean the biggest ones and the smaller ones. So, the big ones I mean we are able to continue to serve well as have been doing in the past. But I think the trend to smaller stores, I mean fits in our -- I mean [road-to-market], no, because I mean [you go park by park] and so on. So, actually I see an opportunity to get if the returnable to grow the in-home. And is not a little bit, I'm not concerned about the mix of channels, I think that if their off-trade can grow in a profitable way with the returnables helping us in terms of profitability, I think that's good. It's good for the industry; it's good for the business. That's what we see. We don't see one channel, one occasion and expense of the odd occasion.

Okay, thank you. And just one last question on the topline guidance that you gave, mid-to-high. Just sanity checking it, I mean it basically seems in line with what you did in Brazil last year even though you had the World Cup comparison base and you have higher inflation. So, is there underlying kind of reason for it, just the fact that the macro has deteriorated versus where it was last year? Or kind of any other sense for that topline guidance would be helpful.

Hi Jeronimo, this is Ricardo. Let me tackle this one. So, we are facing a very challenged macroeconomic environment and our industry tends to be more resilient [in the offers]. But whenever there is a negative real disposable income growth, we have an impact in our business, mainly on volumes. Nevertheless, the most important message that our topline guidance already takes this adverse scenario into account. So in summary, I think that's it.

Okay. Thank you.

Thanks, Jeron.

(Operator Instructions) Alex Robarts, Citi.

Yes, hi. I guess in keeping in line here with the one question policy, I'll go to perhaps a trickier and line of questioning, which is government risk. And it's clearly a hot topic and I think as it relates to your industry and your Company, perhaps you can kind of comment on two sources of this, I mean specifically, when you track the literature and a discussion around IOC, certain folks are more vocal about changing and others aren't in the government.

What can you share with us about the risk of IOC being modified this year, high or low? And we appreciate that the commentary perhaps can be sensitive, but any ideas around your thoughts as to the sustainability of IOC in Brazil. And kind of the second piece of government risk is really also related to taxes at the state level. So we've seen, right, I mean ICMS at Sao Paulo state kind of get back into a little bit with kind of [lagging] in terms of the rate of the other states. What sense or how could you comment on your view of other states moving or trying to increase their state, their tax rates as you saw in Sao Paulo?

And I appreciate these are politically charged questions, but any comments around these two sources of potential government tax and risk to the business. Thanks very much.

Hi, Alex. Thank you. Thanks for your question. So I'm going to answer your question in like two parts. So the first one is the IOC. We cannot speculate on whether there will be a change or not in IOC Brazil, but we acknowledge that it is an important element in terms of how we allocate our free cash flow and manage our capital structure.

So therefore, what we can say is that if IOC changes in any shape or form, it could modify our target capital structure. And as a result, we would work on mitigating the potential impact of such a change in order to maximize return to shareholders.

And now, the second part of the question is the risk of state taxes increase. So in Brazil, each state has its own model on tax rate and there is always discussion ongoing. And similar to the discussion held at the federal government level in the recent years, the cold beverage industry holds a permanent and constructive dialog with each state government with the intent of showing that a lower tax burden enables a greater potential for volume growth in further investments. And as a result, allows tax collection to continue to grow with no pressure on inflation, job creation, or investment. And then, on the other hand, in case of any tax increase, as Bernardo just said, we have a policy to pass through inflation and pass the tax increase also to our customers.

Okay. If I get -- sorry, just to understand the first answer, the [e-FDI] receipt is modified. As you said, you would kind of look at the capital structure options. Is it fair to think or assume that one option can be to change Ambev's capital structure to lever up -- I mean is that a possible scenario among the scenarios that could be considered if the IOC were eliminated or modified?

I mean, we started by saying, we cannot expect late on whether there will be a change or not. And so, I think we shouldn't speculate, but then the point is we are where our day-to-day is to maximize shareholder value. So if there's a change, you have to input that in our model and find for alternatives and so that's what we're going to do. Thank you.

Okay.

Gabriel Lima, Bradesco.

Hi, thanks for taking my questions. So Bernardo, Ricardo, just two quick questions here. One is coming back to the premium beer, I appreciate the comments you made. So you guide to the 10% which was your target in your volumes. So it seems that you will reach it earlier than expected, but do you have any target, a new target for the coming years as a percentage of your volumes, that will be very interesting to hear, because that's important driver in your margin expansion? And the second question will be with regards to market share, which declined at a little bit year-on-year if I'm making the correct calculations here, it was 50 basis points down and it was a little bit surprising because we have been hearing here in Brazil that competition is being very weak. One of your competitors posted almost 20% volume decline this year. So just wanted to understand if you have any comments here will be really interesting, if you implemented price increases earlier than last year or price is higher than competition. So any comments in that front will be really interesting. Thank you.

Thanks, Gabriel. I think that first question link it to the premium, haven't been discussing with all of you the trends that you see globally and here as well, so premium [will grow] a new accelerate premium. So not have a specific target, but I can assure you, that's a big, big focus in our size, our site have the right brands that execution for sure that you continue to grow and grow fast. So big bet for us and will continue to really boosting accelerating. Link it to the market share, I think that's, it's a good question. Let's talk a little bit about what I have been talking to you guys in terms of the platforms of growth, no. Always said to you that those things on elevate the core, accelerate premium, near beer are building consumer needs and occasions and new occasions understanding exactly what we are, that the volume, the --- and that we're not even seen. So and then these driving in all of them in terms of the core, in terms of the premium, in terms of the near beer to innovation into new occasions. So innovations such as Senses, one important one. And new occasions such as the key [selling] branding moments like Carnival, like Sao Joao, and so on. So I would invest in these (inaudible) understanding in terms of the mix management, the mix of [reasons] as well in terms of more cities doing pretty well. So in terms of industry, in some of them, we are not growing a lot. So those things we're tackling and we tackled a lot last year big time. The fact is the instruments that measure share, they are perfect. So [news] is a very good instrument to show some reasons, some segments and so on, but unfortunately they don't capture those innovations, those new occasions, those small cities that are key in the big core of the structure that we are implementing. So because they don't read 100%, [it didn't] have a difference between maybe the news and share and our internal volumes. In the end, the final number that I pushed the team here, said, look, our [industry-wide CCOG] went down 1.8% and our internal volume went down 1.8%, maybe some inventory variances, more often here and there, but it seems to be that part of this volume is not the reason by using because they are in new occasions, innovations that are not able to capture that. So, again, I think the final number that I would like to really make sure that people understand, driving a better mix, the pricing agenda, a strong price agenda, I mean [there is some price inflation], we expect is in someone. We will be able to have our volumes in line with the industry. So that's the kind of what I can't comment on that.

Okay. Okay, Bernardo, thanks. And just a final question on the effective tax rate, I just to wrap up as far as understand most of the increasing our tax rate was one-off and you know related to some volatility on exchange rates and so on but it seems that for me there is just wanted to there is one structural change here that is on the higher taxation in Brazil because of this falling profits. So that will be structural changes that might increase your effective tax rate going forward. So just wanted to understand and confirm if that's the correct way to view your tax rate going forward?

Okay. So, Gabriel, thanks for your questions. This is Ricardo. We can follow up with you in [the sale] that you want, but I'm going to just highlight again that the high income tax and social contribution accrual for 2015 was due to the non-deductible expense in the second quarter, the impact of the BRL devaluation may leave the high withholding tax provision associated with our remitted earnings and the BRL350 million onetime impact for inter-company and now we can follow up or Marino to reconcile that for you. Thank you.

So Ricardo, thank you. Thank you, Bernardo.

Thank you. You bet.

Jose Yordan, Deutsche Bank.

Hi, good afternoon, guys. I really do just have one question. On the third bullet point of your guidance, and I appreciate that you do give a lot of thought to this. But the Brazil cash SG&A growing low single-digits, especially if it's 1% to 2%, rather than 3% or 4%, does seem a little low in light of a double-digit inflation in Brazil, the Olympics this year, et cetera. So I'd like to understand if you can share what is your inflation assumption in this model and perhaps how much money roughly in tens or hundreds of millions or whatever is there going to be in marketing spend behind the Olympics? I mean I guess one-third element of that could play into this guidance is whether it assumes bonus accruals or payments in each year of much differing amounts.

Jose, thanks for the question. I think that first of all, we always support our brands and the trade in the proper way and we always will do that. We are here for the long term. So no concerns at that point in the Olympics, it's very important for us and you take the opportunity to make it even bigger, not only Rio de Janeiro but take advantage of, I mean being one of the sponsors to use this first call to help even more the brand that's doing by the way pretty well. So, in terms of the support of (technical difficulty) this is the answer for you.

In terms of the cost, I mean it's the inflation. It's X or Y. I think that in a crisis like that, our values, our culture, our (inaudible) is here, make all the difference. So we think definite of that, you can't be more creative, you can't be more innovative to work with better efficiencies, to put the technology to help us, to have this ownership mindset, to really work in a lean way and offset that. So, this guidance, it's a challenge one, but it's a one that you get, so for sure. In a moment like, that on my part this year make the difference, and make sure that things that we control we'll get there. So that's my comment in terms of the cost, of the SG&A.

Okay. Now --

Sorry, go ahead.

No, that usually I mean given that you have back-to-back recessions here, achieving better efficiency. Since I know you do this every year, clean slate type of budgeting, it just gets more and more difficult to do, especially in an environment of high-single-digit inflation, but if you can share that assumption or what that I understand.

Yordan, again, thanks for your questions. Just as we -- while inflation is up, overall declining demand also creates opportunities and help us to get better dues. And so like we said, in the last year, we managed to do that. We are very confident that this year is not going to be any different. And we will manage to get a [non-working money] out of the system to compensate part of that inflation and a large part of that. So that's as far as we can go and on top of that, we see that we still have some other questions in the queue, in the line and we are already more than 10 minutes delayed already. So we're not going to be able to answer those questions, but we will reach out to everybody who is in the line to try to solve any doubts or questions that they have.

Okay, thanks a lot.

Thanks, Jose. Thanks for your question.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks.

Thanks, [Dan]. I think that the final message here is that, I mean I just total -- I think that in a moment like that or for clients that we know that we knowledge. That is mainly in Brazil and talk about Brazil specifically, it's our culture, our values of our team, as our ownership and staff again make all the difference. So we will not be able not only to work in the cost side, but be more creative to drive topline with that. So, even with some -- being more lean, more cost, I mean focus, with the creative team that we have here. His ownership mindset and pretty 100% confident that we will deliver our guidance and more than that, we will build the future. I think that every time that we had crisis here in Ambev, we were able to build and to boost some options and bets that you have that at the end of that specific moment, Ambev were even more stronger. So, we are here for the long-term, big, big time. We are not in short-term, it's very important and we work hard on that and have a strong plan. I'm confident on this, but we build things that will help us to be even more stronger in the long-term, starting working much better and I mean opening gaps and closing gaps, make it to our brands in the execution in the marketplace. So, count on us to continue to deliver in 2016 and the years to come.

And ladies and gentlemen, this concludes our presentation.

Thank you.

Thank you for attending today's presentation. You may now disconnect.