Ambev SA (ABEV) 2016 Q2 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's second quarter 2016 results conference call. Today with us, we have 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 listen-only mode during the Company's presentation. (Operator Instructions).

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 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 Q1 2015 results. Normalized figures refer to performance measures 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. Ricardo Rittes, CFO and Investor Relations Officer. Mr. Rittes, you may begin your conference.

Thank you, Gary. Hello, everyone. Thank you for joining our 2016 second quarter earnings call. I will now guide you through our operational highlights of Brazil, Central America and Caribbean, LAS, and Canada, including our below-the-line items and cash flow. And after that, Bernardo will give you additional color on our operations in Brazil.

Starting with our consolidated results, second quarter presented high economic and political volatility in Brazil and Argentina, partially offsetting a solid growth in Central America and Canada. Consolidated top line was up 3.2% in the quarter, with a volume decline of 6.7% and a net revenue per hectoliter growth of 10.6%.

EBITDA was up 1.8% to BRL4.2 billion, with an EBITDA margin of 40.5%. Year to date, top line is up 2.9% and EBITDA up 1.4% to BRL9.5 billion.

In Brazil, our performance improved over the first quarter due to an uplift with the rate of that improvement. Top line was up 1.7% and EBITDA down 2.7% in the quarter. Year to date, top line is down 1.4%, while EBITDA down 4.3%.

Brazil beer top line increased by 2% in the second quarter 2016, with volumes decline being more than offset by net revenue per hectoliter growth. Volumes were down 4.5%, with great volatility during the quarter. Economic conditions continue to be adverse, with rising unemployment pressuring disposable income.

Our market share improved versus last quarter. And going forward, we continue to expect to fully recover our market share in a sustainable way. Bernardo will give you more details about our outlook for the rest of the year.

Net revenue per hectoliter was up 6.9%, driven by our revenue management strategy, including the benefit from premium, but partially offset by the higher weight of one liter and 300 mL returnable glass bottles. As discussed in previous calls, RGBs, while EBITDA margin accretive when compared to one-way, it's -- with one-way packaging, this was significant lower cash COGS, carry a relative lower net revenue per hectoliter.

Cash COGS was up 4.1%, while on a per hectoliter base was up 9%, mainly driven by overinflation and Brazil real devaluation, partially offset by procurement effects, RGBs, and effect in commodities hedges.

Cash SG&A was up 5.8%, mainly due to higher sales and marketing expenses, as we started to activate the Rio 2016 Olympic Games, higher logistics and administrative expenses due to inflation, but once again benefiting from efficiency gains in our nonworking money base.

Brazil EBITDA was down 2.4%. Year to date, Brazil beer EBITDA is down 5.6%.

In Brazil CSD and NANC, volumes were down 5.2%. The carbonated soft drink industry continued to be pressured by a negative real disposable income growth and its substitutions water and cheap powder juices. Within NANC, volumes were up double digit with a strong performance of Gatorade, Lipton, and Fusion.

Fusion continued to gain market share in the second quarter, strengthening its market position and aiming for the leadership of this category. CSD and NANC net revenue per hectoliter was at 5.7%, driving a 0.2% top-line growth in the segment.

Cash COGS increased 0.9%, while on a per hectoliter base was up 6.4%, as inflation and currency devaluation was partially offset by our FX commodity hedges and procurement savings.

Cash SG&A was up 24.5%, driven by inflation and timing of sales and marketing and administrative expenses. As a result, CSD and NANC EBITDA was down 4.7%. Year to date, CSD and NANC EBITDA is up 4.7%.

Moving now to CAC, the Central America and the Caribbean region, there we continue to deliver a very strong performance. Following the trend of double-digit EBITDA in the first quarter, we managed to increase our top line by 19.9% and our EBITDA by 25.1% in local currencies, with 150 basis points of EBITDA margin expansion. In Brazilian reais, our EBITDA was up 41.1%.

In Dominican Republic, we continue to expand the beer category by connecting our consumers to relevant platforms, such as Barbarella, which is the largest electronic dance music festival in the Caribbean. During the quarter, we also supported more than 1,000 microevents in the country, activating demand in new out-of-home occasions.

In Guatemala, we have been improving our execution with Modelo and Corona, allowing us to increase volumes in the country in a more profitable way.

We also have been growing our business in other islands of Caribbean through local presence and imports.

Along with this strong top line, our EBITDA performance also benefited from our solid financial discipline, leveraging on both cost and expense savings, expanding our EBITDA margins for another quarter. Going forward, we continue to see significant opportunities to grow inorganic and organic weight in the region.

Now, moving to Latin America South, in LAS, our top line was up 2.6% and EBITDA 8.7% above that of last year. Our volumes were down 19.8%, impacted by the Peru CSD exit in the third quarter of 2015 and double-digit volume decline in Argentina, as adjustments and structural reforms undergoing in the country continue to pressure disposable income and consumption in the short term. Adjusted for Peru CSD, our volumes would be down low teens.

Volume weakness in Argentina was partially offset by a solid revenue management in the country and strong top-line performance in Paraguay and Chile. In Paraguay, we had double-digit top-line growth, mainly driven by Pilsen and Brahma in the mainstream and Budweiser and Corona in the premium segment. In Chile, along with another quarter of solid performance of Stella Artois and Corona, we continued to benefit from the addition of Budweiser to our portfolio in the country.

Net revenue per hectoliter increased by 27.9% in the region, explained by our solid revenue management strategy linked to inflation and premium mix.

Regarding costs and expenses, we remain pressured by high inflation and unfavorable currency movements, mainly in Argentina. But, we were able to offset these impacts through top-line growth and procurement savings initiatives, expanding our margins, and driving EBITDA growth. Our EBITDA margin was up 210 basis points in the quarter to 36.7%.

As we move forward, we remain confident in our ability to deliver a solid top-line growth in LAS, while protecting our profitability, despite the economic volatility in Argentina.

Turning now to Canada, reported volumes grew 8.7%, mainly driven by the benefit of our strategic acquisitions in the fast-growing craft, ready-to-drink, and cider categories, leading to the 10th quarter in a row of market share gain.

Organic volumes were down 1%, where the industry negatively impact by unfavorable weather, which was partially offset by solid performance of Bud Light, Stella Artois, and Busch.

Net revenues increased by 1.6%, with net revenue per hectoliter growing 2.4%, mainly driven by our revenue management initiatives and the benefit of a premium mix.

EBITDA was up 9.4% in local currency, benefiting from our recent acquisitions, increasing by 2.5% on an organic basis, driven by top-line growth and EBITDA margin expansion of 40 basis points.

Going forward, we remain excited about our top-line momentum in Canada and the whole portfolio, including our recent acquisitions in the near beer, 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 a net expense of BRL900 million compared to BRL360 million last year. As discussed in previous quarters, we have seen higher net financial expenses mainly due to FX and interest rate moves.

Some of these expenses are cash; some of these are noncash and have a no economic impact. Main noncash items totaled around one-third of our net financial expense in the quarter. Main items of our financial results in the second quarter were, first, interest income of BRL104 million, driven by our cash balance, mainly Brazilian reais, US dollars, and Canadian dollars. This is cash.

Second, an expense of BRL358 million due to interest expenses. Of these expenses, around BRL150 million is a noncash accrual related to the put option associated with our investment in the Dominican Republic. As part of the CND deal in 2012, a put option exercisable until 2019 was issued, which may result in an acquisition by Ambev SA of the remaining shares of CND for a value that's based on an EBITDA multiple. This noncash accrual expense increases over time as we approach 2019, as EBITDA grows, currency devaluates, among other factors.

Third, BRL465 million losses on derivative instruments, mainly driven by the carry cost of our FX hedges, primarily linked to our COGS exposure in Brazil and Argentina and mark-to-market losses of CapEx hedges.

We have a disciplined hedge policy pursuant to which we are always hedging FX and commodity risk in our businesses. Given the interest rate differential between Brazilian reais or Argentine pesos and US dollars, we have financial costs associated to these hedges, which are called carry costs. Carry costs have increased significantly compared to recent years due to a US dollar appreciation and higher interest rate differentials.

One important thing to highlight is that, depending on the hedge instrument, the cash impact might differ in time from the expense accrual. Another important point is that, also depending on the instrument, interest rate moves generate noncash monthly gain or losses, which can explain the quarter volatility of this line.

Fourth, BRL39 million losses in nonderivatives, which include around BRL90 million noncash impact from foreign exchange translation losses on intercompany loans, which are offset by foreign exchange translation gains on equities. Both have no economic impact.

Moving to our effective tax rate, the effective tax rate was 9.4%, up from 6.1% last year. Year to date, our effective tax rate is 10% compared to 16.8% of that of last year. Due to higher financial expenses and slightly higher effective tax rate, our normalized net income is now 22.4% to BRL2.2 billion. Year to date normalized net income is down 12.2% to BRL5.1 billion.

From a cash flow perspective, despite a net income decline, cash flow from operating activities before changes in working capital was flat year over year at BRL4.1 billion. That said, we have a negative cash impact from working capital due to higher receivables, mainly driven by channel mix, and lower payables, as we have sequentially reduced our spending.

Cash generated from our operations was BRL2.5 billion, while CapEx reached BRL1.2 billion. Year to date, we have generated BRL4.7 billion in cash from operations.

In the quarter, we announced a BRL2 billion dividend to be paid as from today, July 29th. Year to date, we have paid or announced BRL4.2 billion in interest on capital and dividends.

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

Thank you, Ricardo. Hello, everyone.

As Ricardo said, we finished the quarter with high economic volatility in Brazil and in Argentina, almost fully offsetting strong results in Central America, Canada, and other countries in LAS.

In Argentina, structural reforms undergoing in the country present a great potential for the future, but are putting pressure on consumption in the short term. That said, we're still able to grow our EBITDA in LAS from the solid revenue management, disciplined cost control, and strong performance from other countries in the region.

In Brazil, our numbers improved month by month, but not at the speed that we anticipated, especially in the mainstream segment. So, I would like to concentrate my comments today on three topics: one, what's working; two, what's not working; and three, how we expect to be the stronger momentum going forward.

So, we'll start with the topic number one, what's working? In a challenging environment, having focused on the levers we can control, as we always did in the past, through our strategy, the five pillars that I always comment with you, we have been strengthening our competitive position in Brazil.

(inaudible), we have been expanding our presence and boosting major music and sporting events, the key selling moments. In the second quarter, we had the strongest average execution of St. John's festival in the northeast, where (inaudible) can be bigger than Carnival, and have started to promote St. John's festivals in other regions of Brazil.

Along with that, we've been giving a great experience to people in general. And we see an opportunity to build brand even more and activate demand in new occasions with huge volume uplift.

As another example, for the first time ever, a beer brand Skol partnered with the LGBT Pride Parade in Sao Paulo, the biggest LGBT parade in the whole world, bringing more than 2 million people to the streets, a long-term partnership that makes this an even bigger party going forward.

Now, to go to premium, premium volumes continue to grow in a strong way with Budweiser leading the segment in Brazil. In the second quarter, we launched a new one-way 600 mL bottle for Budweiser, highlighting its premium appeal through a unique and cool design. Premium preference is high, and it's going up in Brazil. At the same time, there is still significant opportunity to improve the performance. As a consequence, even in this environment, we see premium growing ahead of mainstream, driving positive price and [everyday] mix.

Within near beer, Brahma 0.0% continues to gain weight in more than three years after its launch. Coupled with that, we have the Beats family. Near beer is driving double-digit volume growth in 2016. And further improving the execution of Skol, Beats family, and Brahma 0.0% and -- .

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-- Stabilization in the macro front, with inflation is slowing down and the consumer confidence improving. But, the rising unemployment continues to put pressure on disposable income in the short term. Affordability remains a big issue.

To reflect this reality, we are updating our top-line guidance for 2016, also including the new scenario for RGBs in the full year and this impact in the net revenue per hectoliter. We are also updating our COGS guidance to reflect the benefit of RGBs, along with an important and strong evolution of our cost initiatives.

Now, we expect top line in Brazil to be flat in the full year instead of the mid to high single digits as previously expected; cash COGS in Brazil to go mid to high single digits in the full year instead of the low to teens as previously expected; have no change to our G&A and CapEx guidance.

In this context, we need to balance our initiatives to navigate through the short term, but also to build our long term, especially when you start see early signs of stabilization in the macro front. With that in mind, we see an opportunity to take advantage of an anticipated soft semester to build a stronger momentum for our core brands.

This leads me to the third topic, how we expect to build a stronger momentum going forward. Within our top-line platforms, we increase the focus on affordability, leverage the power of our core brands, mainly through our RGB and complete pack price strategy.

As we speak, we are boosting our RGB strategy in the off trade, launch a national campaign for the minis, the 300 mL bottles, and expanding our initiatives in the new areas in Brazil. For the first time in many years, we're activating returnables on TV and social media along with [C stores], pit stops, and supermarkets. We launched a national campaign to highlight the affordable proposition of returnables. Already in July, we had the strongest volume of RGB in the off trade at least for the last 20 years.

We are also boosting our top-line initiatives in the underperforming regions, ensuring that we have a complete portfolio and strong service level in the on trade and the off trade in all those areas. This will help us to close share gaps and improve efficiency of our revenue management initiatives through our [competitive] price strategy.

In the environment that we have nowadays, we are also seeing opportunities to expand Skol, Brahma, and Antarctica sponsorship in major music and sporting events that were not present until today, such as the important Salvador Carnival with Skol and the [Ville Mix] country festival with Brahma, big events that with direct and indirect meetings of people with [great] experience and [context] enhance the equity of our brand in key regions for us.

As a final example, we will take advantage of the Rio 2016 Olympic Games to deliver a once-in-a-lifetime experience to consumers, strengthening the equity of Skol brand. We will deliver a national 360 approach campaign in the Olympic Games, ranging from activation in the off trade and in the on trade in the main urban centers in Brazil to unique experience in Rio, such as microevents and Vila Skol, where thousands of people will be able to watch the games, eat at food trucks, drink great beers, and dance with DJs and bands, a big party going on in Rio de Janeiro during the Olympic Games fully organized by Skol.

To close, I'd like to highlight that, despite the short-term adversity, we are even more excited with the growth opportunities we're seeing. There is a strong, strong sense of urgency in our team to once again accelerate our results. But, we need to do it in a way that's the right for the business in the short term and the long term. Most of the initiatives we are taking carry structural components linked to brand equity enhancing to adapt our consumer behavior to different packs and to improve our execution in specific areas. That's why we expect our volume and momentum to reaccelerate towards the end of the year.

With that, we can move to the Q&A.

(Operator Instructions). Andrea Teixeira, JPMorgan.

Thanks for the question. I wanted to just pretty much explore a little bit more what Bernardo and also, I'm sorry, Ricardo also commented on the call, on the prepared remarks, on the -- pretty much on the guidance.

When you're thinking about the total, the top line, being flattish and given that the average pricing is relatively in the mid-single-digit growth, should we assume that, as you normally do with RGBs, more long term that the volume environment is still going to be difficult, and you are technically building it for the long term, as usual, and you're not going to go in any price war, because I was surprised? Usually, the second quarter market share dynamics, as you called -- in the first quarter call were improving. So, I wanted to just reconcile a little bit of the top line. Thank you.

Thanks, Andrea, for the question. We know that the first quarter was tough, some headwinds in terms of taxes that [have to put] price. And yes, we lost some market share on that. But, again, in the second quarter, we improved, not at the speed that we expected, but we improved. And we improved in many, many fronts, in our top line, from premium, near beer, execution at the points of sale. The market from is working well.

But, again, the mainstream industry remains very, very weak, Andrea. We have seen early signs, as I said in my speech, that 2017 could be better. Inflation's going down, consumer confidence improving. But, at the end of the day, the rising unemployment in the short term is putting pressure in the industry in the short term. And that's why, to reflect these and to reflect the new RGB reality and the impacting that we're having, we revised the top-line guidance as we speak.

Looking to the specific your question of market share, I think that, for the second half of the year, we are improving a lot and boosting those structure initiatives that I mentioned before. So, first, again, RGB is going and very, very well. July was very good, national campaigns, everything that we're doing in many, many regions, market programs to underperformed regions, expanding that, Olympic Games, expanding Skol and Brahma activations, many major sporting events and music events and doing (inaudible), so activating all the channels, digital as well, and above-the-line campaigns.

So, with that, we have been seeing that our market share is trending in the right path. And the early signs that we have for our July numbers shows that we're back to a range and in line with last year's numbers in terms of market share for July. So, we think that's right in the right path and we think in the right way.

All right. Thank you.

Lauren Torres, UBS.

Yes, hi, everyone. I guess, somewhat of a follow up to your comments on the last question, I've heard from yourselves, and ABI made a number of comments this morning about very competitive behavior going on in the industry right now in Brazil.

I know you don't like to talk too specifically about your competitors, but I'm just trying to get a better sense of the magnitude of this competitive behavior, I guess, that we're seeing. Looking into the second half of this year, your defense, I don't know if it's more on the mix RGB side or there are pricing opportunities or there's more on premium brands. But, like I said, I'm just trying to get a better sense relative to what you're seeing from a competitive standpoint, your reaction if things continue to remain as tough as they've been. Thank you.

Lauren, thanks for the question. I think that Brazilian industry has been always (inaudible). All that depressive industry that we have in the first half of the year, putting price plus tax, federal tax and state tax, was a tough call, but was needed. And then again, we lost some market share. I think that we took the right path that really -- to implement our top-line plan to boost structural moves in this market in a sustainable way and bring this share back in a sustainable way.

We could recover the share right away the next month, maybe putting price down. We didn't do that. We started to implement, again, structural initiatives like the RGBs. So, again, [depends for] the second half of the year, very confident on that. I think that the (inaudible) of the brands and have a great portfolio of brands. Our preference is way above our market share. Premium continues to grow. Budweiser's leading this segment.

You see the near beer growing as well. On top of that, execution in the points of sale in the (inaudible) were not 100% like we expected [evolving big, big time]. And those major events that we are sponsoring will help us to build a 360 campaign -- it's not only the event -- to really build the momentum through the second half of the year and even start next year in a much more stronger way.

And can I just ask that as a follow up? You mentioned boosting some specific initiatives. I'm assuming that there's not any incremental cost, kind of rebalancing cost. How are you thinking about spend behind these initiatives?

No, it's no incremental cost. But, think that, when you do structural things, like the returnable bottles and off trade, it's a learning curve how to operate it better. And then we are relearning that very, very fast, so don't expect no cost increase, all the opposite. Our costs are completely under control using the order technology that we have to do things in a more efficient, cheaper way.

Thank you.

Thank you.

Thiago Duarte, BTG.

Thank you. Good afternoon, everyone. Well, my question is regarding free cash flow generation and dividends. If you look at your free cash flow statement, you've been hit this year by lower trade payables, which I understand is because your production volume is going down and because your -- so, you're suffering on that. And therefore, your cash flow generation this year is a little bit lower than what we thought.

And if you look at your dividends payment and dividends announced so far, they're also lower than what we saw last year. So, just wondering how much you think you're going to be able to generate enough cash this year, considering that your outlook seems like considering further deceleration of volumes or at least flattish sales, kind of implied that, and how you think of dividend payouts, considering that historically you have guided for 100% dividend payout in terms of free cash flow. So, it'd be nice to hear your thoughts on that. Thank you.

Hi, Duarte. Thank you for your question. So, I will [now go] through the main drivers. So, we start from a very similar cash flow generation before working capital provisions of that of last year. And then we had a negative cash impact from working capital.

So, we do have a negative working capital position, which means that every time we grow -- and over the long term, we expect to grow -- so just quoting a little bit of what Brito said in his call, we continue to expect Brazil across the cycles to grow, maybe not grow in a straight line, but growing over time. So, it's a great position for you to be in, having a negative working capital position.

But, every time you grow a business, there's a partial working capital impact, but (inaudible) also true. So, as a consequence of the deceleration of Brazil economy can go through the drivers in there, we did have an impact when you compare to 2015 of both receivables and payables. And as a result of that, when you look at the cash flow generated from operations after that was BRL2.5 billion in the quarter and BRL4.7 billion in the year.

When you look at what we gave back to shareholders, and that's what we said even in the speech, we already paid or announced BRL4.2 billion in interest [on capital business]. We talked to the BRL4.7 billion.

And also, I'd like just to highlight that, of course, every time we have excess cash, return to our shareholders. That's what we have been doing. That's part of our financial discipline.

And as a result of that, also, one thing further to have in mind is that the seasonality helps going forward in the second part of the year. So, we have, like, a concentration in terms of cash flow generation. And as soon as this -- the growth resumes, we can get this working capital balance back.

Thank you. And if I could have a follow-up question, looking for more granularity on the volume performance, you mentioned in the first quarter that April was looking much better. And of course, we ended up having this negative performance. So, it would be interesting to see how the volume is performing throughout the quarter in a more -- with a little bit more granularity. That'd be great.

And if you could also mention or comment if there were any big discrepancies in terms of performance per region in Brazil, any specific region that you say different competitive pressures or demand hit or something like that. Thank you.

First of all, I'm going to start with the second part of your question. It's the easy one. We don't comment on any specific regions. And I apologize for that. But, our performance in the first quarter versus -- the second quarter versus the first quarter improved, like Bernardo said, not in the speed that we had anticipated.

And we have been involved in many commercial fronts, especially premium and near beer. Market share trends improved. Like Bernardo said, we are pretty much in July already in the range that we had been before in line with that of last year. But, the mainstream industry remains very weak.

So, the current trend and what we expect for the second half [is moved to] our guidance, which also includes (inaudible) RGBs, both on the top line and EBIT cost side.

And if you go back to what we said (inaudible) April, so as we already discussed, we have seen very high economic volatility. So, volumes indeed traded better in April compared to the first quarter. And our results in the second quarter improved versus the first quarter, but again, just to highlight, not to the speed that we anticipated.

And left the fact that the high unemployment rate that -- it's going up month by month, as I said in my speech, will put pressure in the mainstream industry in the second half. But, we will play [off sense] -- in the sense implementing our top line plan and really building this momentum through the end of the year. So, and we start even -- in an even more stronger position 2017.

Thank you so much.

Thank you.

Alex Robarts, Citigroup.

Hi, everybody. Thank you. I guess my main interest is understanding the cost inflation outlook here in the context of lower guidance, specifically how we were now at mid to high single-digit growth from the low to mid-teen growth in Brazil cost.

And so, you've got the hedges into place for the rest of the year that are both on the commodity cost side as well as FX. And is it safe to assume then that the fact that costs in Brazil are now expected to increase less is just solely a function of your expectation to sell less volume?

And I'm trying to relate this also to the fact that, as you ramp up more the RGB, I guess that's an incremental cost component. So, and definitely appreciate you giving us the range. It is a wide range. And so, kind of the motivation of the question is just to kind of get a sense of really, where do you think you could be in that range on the cost growth? Again, is it solely just a function of you're going to have less volume?

And the second part of the cost inflation question is any color or any thoughts about kind of the shorter-term outlook on some of your input costs? Specifically, I'm thinking of the soft drink inputs, the PET and the sugar, that seem to be trending up. So, that's my question. Thanks very much.

Alex, thank you very much for your question. Let me just go first with, among other things, cash COGS benefited from, number one a positive mix of RGB, procurement sales, and productivity gains and FX and commodity hedges.

So, when you look at the amended guidance that we provided, both for top line and COGS, they talk to each other. When you see, like, the opportunities that we have on the COGS side, they also talk somehow to the environment in which we are living in Brazil specifically. And that's one aspect of our culture in which (inaudible) such as this one, we have our procurement, but on the whole organization, supply organization, trying to get the same and partner with our suppliers to try to get the same productivity and into the system.

So, while being negatively impact by currency movements, operation deleveraging increased weight of premium products. We're able to somehow improve what we expected for the year in terms of COGS. And going specifically to the RGB, so [buying] affordability because we can get a benefit on the COGS side in the [top line for] 2016 because we believe that it's a win-win situation.

So, again, significant procurement savings were already achieved in the first quarter. Now, the second quarter accelerating, so we feel very confident in providing the guidance in the range that we gave.

Right. So, I'm sorry, but lower volume is probably I guess -- and this would be my follow up -- so, lower expected volume in Brazil is probably the main driver of having low cost. Is that a fair assumption?

No, Alex, actually not. What we -- what's the main impact is, whenever you have demand in the whole country, not only demand for beer, but demand for the supplies that we need to produce beer as well, going down, it presents opportunity -- .

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-- On top of this -- .

-- That into our guidance.

On top of that, Alex, our culture is a culture of operations excellence. So, I think our team is stepping up in terms of operational excellence that they're bringing the cost down as well, so to do the same and better with less money. So, it's part of our culture, what have been doing.

Sure. Thanks for that. Fair enough. Any thoughts, though, on the kind of cost inflation outlook on the commodities in the near term?

Actually, the only breakdown that we provided is within the guidance. So, it essentially is no -- there's no breakdown that we could provide at this moment.

Okay. All right. Thank you.

Jeronimo De Guzman, Morgan Stanley.

Hi, good morning. I wanted to ask this COGS question maybe from another angle. I'm just trying to reconcile the guidance with the fact that the year to date has been much lower. You're down 1.7% for the six months.

And considering that you still have kind of the expectations of lower top-line growth and higher returnable mix, I'm just wondering why your guidance implies such a big change in the trend, why you would expect such a big acceleration in the -- on the COGS side that you're not having on the top line. That would be my first question.

Thank you for your question, Jeronimo. So, we are amending the guidance downwards. And that's the guidance that we have for the full year. So, our expectations are included in the guidance. And of course, we can follow up exactly what the math that we're doing, what is the question that you have specifically.

But, our full-year expectation is embedded into the guidance. There's seasonality in the business. There's the impact of our hedges, which (inaudible) as we are very disciplined and methodical in the way we do it. We don't take a zero on anything. And as a result of that, what you see, you see a little bit of a mirror of what has been the effect the year before, roughly speaking. So, all that needs to be taken into consideration when you look at the full-year COGS performance.

Yes, I guess I'm just thinking that, if you brought the top line down, that in itself causes the COGS to be down. But, then on top of that, you've got the savings from RGB. So, I guess that's why I was thinking that it could be even kind of a lower increase in COGS for the year. But, anyway, we can leave it at that.

And then on the SG&A side, I guess a little bit different, how confident are you that you can maintain that guidance, just given that, yes, year to date, it seems like it's on track. But, the second quarter, you did have a bigger increase than the first quarter. So, any thoughts on that?

No, so, just like being very clear, the guidance that we have amended for COGS reflects more opportunities in terms of overall COGS per hectoliter in comparison to what we have anticipated, including the RGB acceleration, in which, like Bernardo said, we had the best month ever in terms of RGBs volumes in the last month in the supermarkets.

Okay. And on SG&A, sorry?

SG&A, we're very confident with the guidance that we have provided, very confident, and there's no amendment needed there.

Thank you.

Luca Cipiccia, Goldman Sachs.

Hi, good afternoon. Thanks for taking my question. It's a very general one, Bernardo. I think we had a relatively consistent picture from a number of consumer companies over second quarter that was even tougher than Q1. At the end of Q1, there was maybe some optimism for sequential improvement. And then things got worse very -- a lot of comments, understandably, about trading down, mix impact. And I think that's pretty consistent. I think it's very much in line with the situation in Brazil.

My question is, from where you stand, from where you see and how you're planning to the second half, where you stand with the view of second quarter may have marked the trough for consumer weakness or destable trend, and then from now on, we may see some better support?

Or, rather your changing guidance, your changing strategy reflects more the view that this is how things are? Probably they're going to stay like this for a while. And therefore, we are stepping up even more strategic initiatives, returnable affordability, and so on and so forth. Maybe just your sense on -- in this, there's a lot of wishful thinking I guess when it comes to the improvement in Brazil. So, maybe what do you think about that and if we may hit the bottom and even slowly from now there's more of a recovery?

Thanks, Luca, for the question. I think, first of all, have been operating in Brazil for more than 25 years in the country. The reaction is growth. The country will grow. And then we have some bumps here and there. We always know that. And we know how to deal with the environment like that.

Specific for the second half of the year, as I said in my speech, we expect a more soft industry because this industry is under pressure, given the higher unemployment, lower disposable income and that we're seeing in the short term. So, this will affect the second half of the year. And together with the RGB expansion that I explained before, this explains the guidance, the top-line guidance that we've changed.

So, going -- after that, in 2017, I think that we know that we have early signs that the country will back on track. And that's why we built a strong plan for the second -- we are double up our plan for the second half of the year to build the stronger momentum towards the end of the year and that we reaccelerate our volumes. That's what we expect.

And it'll help us to start 2017 in an even more stronger way. First signs of that, as I said before, was our July 1st views on our market share. That is in line with our range, within our range, and in line with what we have last year. So, we're confident that Brazil will be back to the game. And even more confident than when it happens, we'll be ready to fully profit off this growth that will be back.

Perfect. Thank you. Very clear. Thank you.

Thank you.

Carlos Laboy, HSBC Global Research.

Yes, good afternoon, everyone. I have a -- I want a -- I have questions on three areas of your RGB strategy. The first one is if you could please comment on what type of change in the industry is your refillable glass strategy maybe provoking. Is anyone following you with it? Are there similar package shifts happening among other brewers, or are you seeing response in the form of maybe discounting in cans? What change are you provoking with this strategy?

The second one is, can you speak about the next faces of the mini-bottle rollout? Beyond supermarkets, is there a role for these smaller packages and some on-premise occasions or channels?

And third, maybe you can speak on broader terms about any other markets around the world that have informed you on the potential of this mix shift strategy in beer.

Yes, Carlos, thanks for the question. I think that the RGB in the off trade, it's a really change in the consumption, a big change in consumption behavior. That's why it's not helped overnight, but happening in a faster pace.

So, basically, from the last time that we sell an important volume in Brazil with RGBs was in 1996, probably, 1997. And then after that, the one-way packs got there. See, in an environment like that, people are understanding that you have an everyday same price and lower price, affordable price proposal and these strong brands, like Skol, Brahma, Antarctica. It's a great deal.

On top of that, I think the society changes a lot in 20 years. People are much more concerned in terms of the environment impact of the packs. And I think that RGBs could be not only in the off trade, a proposition to the home occasion, not only because of their affordable price, but because it's cool. It really shows that people have a -- are connected what's happening outside in the world.

So, based on our research that we have, it's not only because it's affordable, but again, because it's good for the environment. And even some people say that tastes better, so when you have the buzz in the market.

So, that's why I think that we have room to improve, increase because, on the other markets that I have been visiting in my previous life -- as Chief Sales Officer of ABI, I visited many, many markets -- we can see markets that RGB in the off trade had a kind of 90% of weight.

I think that Brazil not get there, but I saw some markets, important markets and big markets like South Africa, for instance, Colombia, for instance, that it's an important -- Mexico as well --important way for RGB, Argentina as well, Uruguay as well, Paraguay as well.

So, I think that's -- it's a trend that it's tougher to operate. It's more complex, not means that's more costly. It's more complex. But, with our culture, product team, we have excellence operating, doing things with excellence. I think that we can do this in the right way, in a sustainable way, and helping as well to build our brands.

Can you speak about the next phases of the mini rollout and beyond supermarkets? Is the role for this on premise?

In the on premise, it's not our power pack on premise because I think that we have a great pack in the on premise, the one liter bottle -- the 600 mL and the one liter bottle -- because the on premise is on out-of-home occasions, a more sharing occasion. So, it's good for people to share. So, I think this case the 600 mL and the one liter are the packs -- are the power packs there.

But, I think that the returnables and minis could expand not only -- even more not only for the retail, big retail, but for the small formats as well. And off trade is growing in Brazil. So, I think that -- yes, I think that we have room to grow more. That means that, again, it's good for everyone. It's good for the great people that drink our beers because it's affordable. It's good for the environment. It's good for the margins. And lots of people say that tastes even better. So, I think that's a good proposition for the future.

Thank you.

Thank you, Carlos.

Rob Ottenstein, Evercore ISI.

Hey, guys. I know you've addressed this throughout the call a little bit. But, I'm still a little bit confused on the change in the top-line guidance. Just trying to get a sense of -- I know things aren't improving as fast as expected. Is that due to economic factors and the consumer, the elasticity of demand, given changes in disposable income, execution issues on your side, and/or the impact of returnable glass bottles? And if it's -- and to what extent is the impact of the returnable glass bottles a factor in the change of guidance? And what percentage of that change of guidance would be attributable to a faster-than-expected acceleration in the impact of returnable glass bottles?

Hi, Robert. Thank you very much for your question. Ricardo here. As Bernardo said, again, our performance in Brazil improved over the first quarter, but not at the rate that we had anticipated.

And as we have been involved in many commercial fronts, especially premium and near beer, we see that the mainstream industry remains weak. And then we have seen some early signs of stabilization on the macroeconomic front with inflation is going down and consumer confidence sequentially improving.

But, still rising unemployment should continue to pressure disposable income in the short term. That's all taken into consideration. And that reflects this reality. We decided to update our top-line guidance for 2016, which also included a new scenario for RGBs for the full year and its impact in net revenue per hectoliter.

As a consequence of that, we also updated our COGS guidance to reflect the benefit of RGBs, along with an important evolution of [procurement] initiatives, which also talk to that macroeconomic scenario that we discussed before.

So, is the answer the economic is a little bit worse than expected, and RGBs are a little better than expected?

Again, it is -- the way we [phrase] that, we have seen early signs of stabilization. But, again, inflation slowing, but unemployment continued to pressure disposable income in the short term. We are very happy to follow up with that with you with more detail offline. But, I think that that's the summary of it.

And of course, the top line connects also with the COGS, even the COGS per hectoliter, because the same macroeconomic front that presents a more challenging top-line scenario also presents more opportunities for us to go there and put efficiencies into the system that we believe are going to stay for the medium and long term.

Got it. Got it. And then -- and just given the economic situation, can you give us an update in terms of the outlook for any changes in taxation at either the national or state level, please?

In terms of taxation, we had a new model approved in 2016 with tax -- federal tax increases scheduled for 2016, 2017, and 2018. So, we already had the change. We believe this new system is an enhancement over the old one because it brings greater simplicity, predictability. And very important to emphasize, [we will ensure government] tax collection continues to grow, but be no material impact on volumes.

In terms of the state -- on the state level, what we have seen is that we believe that, in each state, each state has its own model, own tax rate. There's always discussions going forward. And I think that, in a similar way to the discussions that we had with the federal government level, the cold beverage industry as a whole holds a permanent and constructive dialogue with each state government with the intent of showing that a lower tax burden on the industry enables a greater potential for volume growth and further investments and, as a result, allows tax collections to continue to grow with no pressure on inflation, job creation, or investment.

And we also -- the industry as a whole communicates that, on the other hand, in the case of tax increases, the industry as a whole always pass through these tax increases to consumers. So, we believe that it's no news. And we continue to have a seat on the table.

Terrific. Thank you very much.

Thanks, Rob.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks.

So, thank you, Gary. So, as I think the final message, first, Brazil, we're back on track. We know that a short-term, second half continues -- the industry continues to be pressured, as Ricardo said and I said before, unemployment still high, but mid and long term, back on track, as always did in the past.

Second, our market share, based on our top-line plans [ends up] being well implemented, and we are in the good track to back our share -- to get our share back. And July is a good sign of that, so very positive on this and confident on that.

And third, the strong push and the strong plans that we have for the second half will build the momentum for the second half, reaccelerate volumes, and start the 2017 in a much stronger shape that we started this year or even the previous year. So, in a moment like that of crisis, these people of this Company, our culture, our team really works harder, be more creative.

And we are sure that we will end this turbulent moment in Brazil in a much better shape in terms of brands, execution, cost that we entered. So, that's the final message, a positive one, will keep here with the sense urgent and fighting every day to improve. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.