Ambev SA (ABEV) 2016 Q3 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's third 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. 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 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 Q3 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.

Thanks, Kate. Hello, everyone. Thank you for joining our 2016 third quarter earnings call. I will guide you through our operational highlights of Brazil, CAC, LAS, and Canada including our below-the-line items and cash flow. After that, Bernardo will give you more details about our performance in Brazil and how we are positioning ourselves for the quarters to come.

Starting with our consolidated results, third quarter proved to be the toughest quarter of an already very challenging year. Despite solid growth in most of the countries we operate, our performance in Brazil was impacted by a temporary effect of our FX hedges and the weak consumer environment.

Consolidated top line was up 2.3% in the quarter with a volume decline of 3.4%, more than offset by a net revenue per hectoliter growth of 5.9%. EBITDA was down 14% to BRL4 billion with an EBITDA margin of 41.5%. Net income was up 3.6%. Year to date, top line is up 2.7%, EBITDA down 4%, and net income down 6.7%.

In Brazil, our EBITDA was down 31.3% in the quarter. We are nothing but disappointed with our short-term EBITDA performance. But it is very important to understand the drivers behind the numbers so I will start by discussing the two main reasons that explain the temporary decline of our EBITDA in Brazil.

The first one is related to cash COGS, which explains more than half of our EBITDA decline. As you know, we have a hedge policy pursuant to which we hedge all the FX and commodity exposure that can be hedged. Timing will depend on the nature of the exposure, time to react, and other factors. Particularly, we hedge our transactional currency exposure one year in advance.

Given that, the material devaluation of Brazilian real in the second half of 2015 is full impacting our COGS now. During that time, Brazil real suffered close to 60% year-over-year devaluation before peaking at 4.18 BRL to the U.S. dollar in September 2015. This is inflating our cost of sales denominated in U.S. dollars, which represent around 40% of our COGS in Brazil.

With COGS inflated due to BRL devaluation, the easy decision to protect our profitability in the short term would have been to offset this through price. But given our hedges, we know this is a temporary headwind and will ease in the next quarters before becoming a deflationary driver.

In summary, the high volatility of BRL experienced in the second semester of 2015 when it peaked at 4.18 BRL to the dollar is temporarily impacting us now. But given the reversion of the currency to current levels of 3.20, this will be a positive for the Company in the second semester of 2017.

The second reason is connected to the top line decline due to adverse macroeconomic scenario in Brazil. We have seen consumer confidence improving in recent months and inflation decelerating, which will be a strong positive for consumers, but reality in the short term is that the real disposable income continued to decline, pressured by higher unemployment.

In this environment, our top line declined by 6.6% in the quarter with a net revenue per hectoliter down 1.6%. This was driven primarily by our decision to implement our price adjustments in the fourth quarter of this year compared to the third quarter last year.

In addition, as part of our revenue management strategy, we are using our complete portfolio of packs and brands to achieve attractive and more competitive consumer price points. This initiative includes growing our mix of returnable glass bottles especially in supermarkets where this format now accounts for roughly 25% of our volume.

These two temporary drivers, FX impact on cash COGS and weak macro impact on top line, explain most of the EBITDA decline in the quarter.

Now, going into more detail of our operational results in Brazil. Our beer volumes were down 4.1%, facing a tough comparable in the third quarter of 2015. We estimate that the beer industry volumes declined by approximately 3% in the third quarter given the challenging macroeconomic environment. Brazil beer top line was down 5.3%.

While our average market share in the third quarter of 2016 was down year over year, we delivered sequential improvement versus the second quarter of 2016, going back to our historical market share range and reaching the best market share level in the year. Bernardo will expand on this topic and discuss how we are positioning ourselves for the future in the current scenario.

Now, talking about Brazil CSD and NANC. CSD and NANC top line was down 13.8%. Volumes declined by 8.1%, in-line with the industry as we estimate, as the adverse consumer environment is temporarily driving consumers away from CSDs to tap water and low-cost powdered juices.

Net revenue per hectoliter was down 6.2% due to negative mix, the impact of taxes, and the fact that we also decided to implement our price initiatives in the fourth quarter, facing a tough comparable base due to the early timing of our price initiatives last year.

Brazil cash COGS was up 24% while, on a per hectoliter basis, 30.6%. As already discussed, the main driver for this performance was a temporary impact of our FX hedges. Brazil cash SG&A was up 5.8% due to; number one, phasing of sales and marketing expenses that were more concentrated in this quarter mainly due to the Olympics. And, number two, higher distribution expenses, which were partially offset by savings in administrative expenses. As a result, Brazil EBITDA was down 31.3% in the quarter while year to date it is down 13.2%.

Now, moving to Central America and the Caribbean. In CAC, we delivered another solid quarter. Our performance in the region was mainly driven by double-digit top-line growth with a good balance between volume and price. EBITDA was up 9% to BRL353 million with EBITDA margins of 37.6%.

In Dominican Republic, we continue to invest behind our brands, connecting with our consumers and activating demand in key selling moments such as Verano Presidente and Corona SunSets throughout the quarter. We were able to expand our presence in different consumption occasions, reaching the all-time high share in total alcoholic beverages base in September. In Guatemala, we had another quarter of market share gains driven by strong performance from Modelo brands, mainly Corona.

While we're still benefiting from our solid cost management discipline in the region, EBITDA performance was impacted by the timing of sales and marketing expenses in the quarter. Year to date, our EBITDA margin is up 80 basis points driving an EBITDA growth of 19.4% in organic terms.

Going forward, we continue to be extremely excited with top line and EBITDA growth potential for our current operations and other known organic opportunities, including Panama that will become of CAC, pushing us a little bit closer to our dream of $1 billion EBITDA in the region.

In Latin America South, our top line was up 22.1% and EBITDA 22.6% above that of last year. Our volumes, however, were down 1.4% as adverse macroeconomic conditions, specifically in Argentina, led to another quarter of volume decline in the country.

Almost fully offsetting this we reached record volumes in Bolivia, Paraguay, and Chile. In Bolivia, this growth was driven by our RGB strategy and route to market improvement. In Paraguay, this growth was led by the successful rollout of the 340ml returnable glass bottle. And, in Chile, we had a strong performance across all of our global brands in the country.

Net revenue per hectoliter increased by 23.8% in the region due to the successful implementation of our revenue management strategy linked to inflation and premium mix. Despite costs and expenses, and still pressure by high inflation and unfavorable currency movements made in Argentina, we were able to offset these impacts for top line growth and procurement savings, delivering EBITDA margin expansion of 20 basis points to 42.8%. Year to date, our EBITDA is up 16.2% in organic terms with an EBITDA margin expansion of 90 basis points. As we move forward, we remain confident in our ability to deliver a solid top-line growth in LAS, while protecting our profitability over time, despite the economic volatility in Argentina.

Turning now to Canada, reported volumes grew 6.5% mainly driven by strong performance of our global brands, which grew high double digits, and the benefit from our strategic acquisitions with Mike's Beverage brands and Mill Street growing solid double digits in the quarter. Including the new brands we acquired, we have achieved the highest market share in 17 years.

Organic volumes were down 1.3% with the industry negatively impacted by unfavorable weather, which was partially offset by solid performance of Bud Light, Stella Artois, and Corona. Net revenues increased by 0.1% with net revenue per hectoliter growing 1.3% mainly driven by our revenue management initiatives, in-line with inflation.

EBITDA declined 7.4% on an organic basis negatively impacted by currency devaluation and negative mix along with higher administrative expenses. Year to date, our EBITDA is down 2.4% in local currency with an EBITDA margin compression of 130 basis points. In nominal terms, however, our EBITDA is growing 14.6%. Going forward, we remain excited with our complete portfolio including our recent acquisitions in 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 total a net expense of BRL723 million versus BRL317 million last year. The main items in the financial expense were; first, interest income of BRL139 million driven by our cash balance mainly in Brazilian reals, U.S. dollars, and Canadian dollars.

Second, an expense of BRL408 million due to interest expenses. Close to half of this is a non-cash accrual related to the put option associated with our investment in the Dominican Republic. As many of you remember, as part of the CND deal in 2012, a put option exerciseable until 2019 was issued, which may result in an acquisition by Ambev S.A. of the remaining shares of CND for a value that's based on an EBITDA multiple. This non-cash accrual expense increases over time as we approach 2019, as EBITDA growth, among other factors.

Third, BRL287 million losses on derivative instruments mainly driven by the carry cost of our FX hedges primarily linked to our COGS exposures in Brazil and Argentina. Given the interest rate differential between Brazilian reals or Argentine pesos and the U.S. 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 U.S. dollar appreciation and high interest rate differentials, but are sequentially coming down mainly due to the reversal of the Brazilian real. Everything else equal, if BRL and/or Argentine peso appreciates or interest rates in these countries go down, carry costs are expected to decline even further.

Non-derivative gains and losses have been another source of volatility in our net financial results as most of the results included in this line are related to FX translation and currencies have fluctuated a lot in previous quarters. But with lower FX volatility this quarter, we had no material gain nor loss in this line.

Our effective tax rate was negative this quarter due to one-off tax adjustments. First, around BRL400 million is explained by reversion of a withholding tax provision related to unremitted earnings from Argentina. In 2013, a new withholding tax over dividend remittance was created under the previous government in Argentina. From that time until now, we have been provisioning for this tax as earnings were generated but not distributed yet. As of July 23, 2016 legislation in Argentina was enacted revoking this tax, leading to our reversion of these provisions.

Second, close to BRL800 million driven by a one-time impact from the recognition of deferred tax assets on carried losses related to international subsidiaries. As an example of these losses, in the first quarter of 2015 we highlighted a BRL350 million one-time negative impact for intercompany loans. We mentioned at that time that this impact came as a result of taxable profits generated from intercompany loans in certain affiliates, which were not offset by equivalent deductible losses due to, mainly, the lack of sufficient taxable profits in the corresponding affiliates. We also said that once profits were to be generated in the tax loss carrying affiliates this negative impact was expected to be reverted. That's exactly what happened in the third quarter due to a review in our capital structure outside of Brazil.

With that, net income was up 3.6% in the third quarter of 2016. Year to date, net income is down 6.7%.

From a cash flow perspective, cash flow from operating activities before changes in working capital was BRL4.1 billion. We started to revert the negative cash impact from the working capital seen in the first and second quarters, generating almost BRL1 billion from working capital in the third quarter. Cash generated from our operation was BRL5.1 billion while CapEx reached BRL900 million. Year to date, we have generated BRL9.1 billion in cash from operations.

On October 19th, we announced approximately BRL2.5 billion in dividends to paid as from November 25th. Year to date, we have paid our announced BRL6.6 billion in interest on capital and dividends. As our free cash flow generation continues to grow sequentially in the year of 2016 we have the opportunity to continue to return the excess cash to shareholders.

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

Thanks, Ricardo. Hello, everyone. Third quarter was a very tough one and we will be never satisfied with these sort of results.

But when faced with a scenario like the one we are facing in 2016, one can decide to either go for quick fixes that can save results in a single quarter or in year, but jeopardize future growth; or, what we believes is the right way, take advantage of disruptions that crises brings to better position itself in a structural way. As owners, we are always focused on sustainable value creation even if temporary volatility pressures our performance in the short term.

As discussed in detail by Ric (ph), FX has a significant impact to our EBITDA in the quarter. And the fix for that short term results would have been to offset this through price. But given our hedge, we know this is a temporary impact that will be reverted in the next quarters. That alone explains more than half our EBITDA decline in Brazil in the quarter.

The other main headwind was the impact of the weak consumer environment to our top-line performance. We have already been dealing with a volatile macroeconomic scenario for more than a year. And we have started to see early positive signs for consumer confidence, inflation. But, in the short term, consumers remain under significant pressure with direct impact on our top-line and EBITDA performance in Brazil.

On one hand, the recession is bringing a lot of volatility to our results this year. On the other, it's also creating unique opportunities to bring strength for our business for the years to come. And we cannot lose sight of these opportunities. During this challenged time, we have been boosting key initiatives focused on the five commercial platforms. We have been successful in these initiatives and we have confidence we will leave this crisis in a significantly stronger position than the one we were when we entered.

Starting with elevate the core. In an environment like this, it's more important than ever to be close to the people in general who drinks our beers every day. Skol sponsorship to Rio 2016 Olympic Games became another mark in the history of the brand. Skol delivered a great experience through a complete 360 approach ranging from activations in the on-trade and off-trade in the main regions of Brazil to a unique experience in Rio directly reaching more than 4 million people during the event.

And last month we launched the new visual brand identity for Skol to highlight the brand strengths and reaffirm its leadership on the mainstream segment. Along with the Desce Redondo campaign, the iconic arrow and the yellow color are still there, but in a totally new design evoking Skol's quality, energy, and young attitude and enduring how we connect with our core target.

Another successful initiative to connect for our core target was brands like Brahma Extra. Launched one year ago, with three variants, lager, red lager, and Weiss, Brahma Extra has shown strong growth year to date solidifying its presence in the core-plus segment in Brazil. Targeting the food and savor need state, Brahma Extra is not only bringing the food pairing experience to mainstream, but also enhance the equity of Brahma mother brand.

So, let's move to premium. Premium has been growing, gaining weight in our mix every year in the last five years, including 2016. Working with a complete portfolio from international to domestic brands, premium already represents 10% of our volumes, but with preference of premium already at 30%, there is still a lot of room to grow. The most successful case is Budweiser, leader of the premium segment since 2015. Budweiser is growing volume by double digits and gaining market share once again this year.

Near beer also became a new reality in Brazil and within our mix of brands, representing 2% of our total beer volumes, driving incremental volumes and positive price mix. Launched in 2013, Brahma 0.0 boosted this growth, disrupting the non-alcoholic beer segment in Brazil with an innovative liquid and brand ideal. The opportunity for non-alcoholic and low-alcoholic beer in Brazil is still big and we have a plan to tackle that.

Beats Senses, launched at the end of 2014, allowed us to target volume occasions where we were not present before with beer. It became one of the most successful launch in Ambev's history, with strong volume growth, very incremental, and solid preference. With the addition of Skol Beats Spirit at the end of 2015 and Skol Beats Secret last month, Beats family is growing by double digits even in a challenged 2016.

Moving to occasions, let's try to bring it home. RGBs have always been a key component of our business in the on-trade. However, as our consumer are increasingly looking for more attractive price points and more affordable ways to enjoy our beers, RGBs have gained popularity in the off-trade as well. And it's become a reality with our mini's reaching 25% of our volumes in supermarkets in the third quarter of 2016. Boost RGBs in the homes of the people is one of the most important opportunities we see in 2016 and years to come. It brings affordability with a higher profitability.

Another big initiative to shape in-home has been the expansion of our market programs not only to the big, but also small store formats, improving shopper experience and elevating the beer category in the off-trade.

And in the area of home occasion, we are boosting our market initiatives in existing and new key selling moments. In the current environment, we have been able to enter in the long-term sponsorship contracts at attractive rates, opportunities which may not have been available in a stronger economy. For 2017, we have already confirmed our presence in two of the biggest street parties in the world. Antarctica will be the official beer of Rio Carnival for the seventh consecutive time and Skol will be once again sponsor in El Salvador Carnival after the last two years sponsored by our competitors.

Finally, we have been also make use of our portfolio of packs to improve affordability in the on-trade, mainly for our 1 liter returnable glass bottles, which is growing by mid-single digit this year.

In summary, 2016 has been a very challenging year in Brazil bringing a lot of volatility to our results. We are nothing but disappointed for our short-term results. That said, we continue to be confident about the growth opportunities in the country and optimistic about the future for our business in Brazil. We expect favorable demographics, the closing of regional disparities in the per capital incomes, and the consumer that will demand much more about premium products that will help drive long-term growth. We also have a very consistent commercial strategy based on the five platforms and we are using the current environment as an opportunity to boost these initiatives and to better position Ambev to maximize these structural growth drivers.

With that, let's move to the Q&A.

We will now begin the question and answer session. (Operator Instructions). Isabella Simonato, Bank of America Merrill Lynch.

Thank you and good afternoon, Bernardo, Ric. I have one question on Brazil. Considering the price increase that you will probably do or have done already in Q4 for beer and considering also the positive outlook for costs going forward, how fast do you think we can see beer margins recovering throughout 2017? And also, if you could discuss a little bit how you see volume recovery for beer and soft drinks going forward, considering the consumption outlook in Brazil that would be great. Thank you.

Okay. Thanks, Isabella. I think that, in terms of -- I will start for the second question in terms of volumes. The long term drivers in Brazil I think given that, we continue to be bullish in Brazil. We know that's not a straight line up, but solid. And every time, five years or so, we have one or two years (inaudible). And then you know that's how a market like Brazil works.

Having said that, I think that for the long term, we continue to be bullish in the volume growth because I mean, as I said, the legal drink age, young adults in Brazil, I mean they're increasing 1.5% every year. Per capita, we know that you have some regions as much higher than the others. And then this (inaudible) happening in this as well. And people are much more open to the premium brands. And then we leaders in this segment, in the premium brands, and the global brands and the local brands that we have will help us to do that.

So, we don't comment a lot in 2017 and the future, but I think, again, we expect, always expect Brazil to be back when you have a crisis like that every five years or so.

And, Isabella, just for me to add, consumer confidence is improving. Inflation is decelerating. We know that the consumer environment is still challenged with unemployment, but I think one lags the other. So, we are, like Bernardo said, excited with the prospects of Brazil. We know it's not a straight line, but we're excited.

Thank you.

Thank you, Isabella

Luca Cipiccia, Goldman Sachs.

Hi. Good afternoon. Thanks for taking my question. I wanted to understand a bit better if you can explain the decision on pricing in this sense; I think you both mentioned the fact that the FX was a major headwind and that it would have been easier to increase prices to offset that. But, arguably, you knew all along that that type of pressure was going to emerge in this quarter. And, seasonally, typically you do the price increase in September.

So, when I look back to the other revision in guidance that you made after the second quarter, was the timing of the pricing already incorporated and therefore the incremental negative was the volume or the mix? Or, rather, when did you decide to change the strategy -- the pricing timing, sorry?

And related to this, maybe on the market share, given that you no longer disclose the absolute value, but what drove that incremental sequential improvement by segment or channel or region? I think you mentioned premium. You mentioned some of the returnable. But I don't know if you can qualify relative to the second quarter where you increased market share overall primarily from this segment rather than the other segment. That would be great.

So, Luca, thanks for the question. I think we have not changed the way that we manage the revenue management and the price strategy. Our strategy continues to be to increase price (inaudible) in the long term was FX offset.

In the short term, in order to balance volume and market share, I mean you always volume, market share, and price and we decide to implement the adjustments in the fourth quarter instead of the third quarter next year. Another thing that you always see is the way that disposable income, I mean how we can connect with that and assure that the price increase would be in the right moment to mitigate the impact in the industry. So, when we put it all together, we thought that was better to delay the price increase for the fourth quarter. But, again, we have not changed our strategy in terms of price that we have been saying to you for many, many years.

So, I think the second question was linked specifically to the market share, no? The third one. I think that market share we know has many, many sources. I mean one is Nielsen. One is (inaudible) industry as well.

But at the end of the day, I mean we are very pleased that we are back to our historical range. We know that the initiatives that we are doing that are tackling affordability is helping those. I mean the growth of 300ml returnable bottles in the off-trade. I mean covering some price points that were not covered using pack price helped us. But all the initiatives that we are doing help us as well. So, we are pleased to see that even in a tough quarter, we are able to get our market share, our best market share of the year in this quarter.

But, very quickly, but the delta in the guidance then is more explained by the decision on the late pricing or is more explained by mix and volumes as compared to your earlier expectation?

Yes. I think that two things basically. I think first I think we always have to remind ourselves that expectation of inflation of this year is much lower than last year. Last year was around 11%, the inflation. This year is 7%. So, if capture all guidance that we have that's increased pricing line inflation, only that it's a kind of difference now that you see in this price increase of this year compared to the last year.

And we know that the market economic scenario is not unusual. We expect this to recover over time. Brazil will get back. But, in the short term, disposable income continues to be a big, big issue. So, I think that those are the two things that I mean was really the ones that we have to revise likely guidance of the top line.

Thank you.

Thank you, Luca.

Lauren Torres, UBS.

Yes. Hi, everyone. My question actually was also related to the change in guidance. But I think, with you answering that, I'm just curious to get your perspective on the general environment because we are hearing in Brazil consumer products companies talking about seeing some stabilization in trends, if anything maybe a directionally less trading down or things of that perspective.

So, I appreciate that you don't give specific guidance for next year, but if you're a bit more conservative than the rest, if that's what I'm hearing, is this strategy more about this affordability angle, the returnable glass bottles? Do you feel you have to lean on that more or there's opportunities with an environment potentially getting a bit more stable that this could reverse a little bit and we could see the upside coming through?

Hi, Lauren. Thank you for the question. So, summarizing, we have a very challenging scenario in the short term.; unemployment close to 12%, 1 million jobs reduction year to date, worse figures in the series, real disposable income down mid-single digits for another quarter.

But as you said, and like we also and I think everybody else is seeing, we see positive early signs. We see inflation decelerating since December 2015 and expect it to decelerate even further even at a speed higher than anticipated at the beginning of the year. Consumer confidence also improving from the bottom in the first quarter of 2016. Remember, still below 2008, 2009, but rebounding. So, we do see the same early signs that you mentioned.

And can you address the returnable glass bottle? I think you gave that 25% number that you're at now. Is that optimal or how you thinking about that for next year?

We have some areas of Brazil and regions that it's more than that. It's very difficult to say what the number will be in future. But we strongly believe that will be more than that because it's a way to offer great brands that people like, like Brahms, Skol, and Antarctica, in a nice pack, affordable ways. So, we expect to continue to grow.

Okay, thank you.

Thank you.

Thiago Duarte, BTG.

Thank you very much. Good afternoon, Bernardo, Ric, everyone. I'd like to follow on the RGB question. Actually two questions regarding RGB. I mean there's been a great evolution in terms of penetration. You mentioned it's already 25% of your volumes in supermarket.

So, the first one is basically, I mean if you look at Siquavi (ph) and you look that the different packaging forms that the industry produces in Brazil, my understanding is that one-way presentation has actually continued to gain share versus returnable presentations in Brazil, while you, as the market leader, has been making good progress in increasing returnable presentations in one of the most important channels. So, just wondering where is the RGB in the supermarkets? Who is RGB in supermarket gaining share from in your perspective, in your mix? So, that's the first question.

And the second question, you mentioned that RGB has a positive EBITDA contribution versus other packages in your mix so that's perfect. But I was just wondering whether this contribution can actually improve further. I mean the penetration has increased in a very fast pace in the last two years, maybe. So, I wondered whether this is being subsidized by you in order to increase or to accelerate that penetration with the retailers and, therefore, there is room for us to see better margins coming from RGB in the coming years. Thank you very much.

Thanks a lot, Thiago. I think two things. I mean first one, you have to always add in the mix of channels and packs. So, RGB is growing the mix in the on-trade and in the off-trade. But the fact that the off-trade channel is growing more than the on-trade and the size of the pie that the one-way has in the off-trade is much higher, this channel mix one-way is still growing in Brazil. But if you get the RGB in both channels, I think that you are on the right path.

And I think for the off-trade the thing that we always say is that it's very relevant because probably in the last year that we had RGBs in the off-trade, in the main key accounts and so on, was kind of 20 years ago. So, then you are bringing back RGB and I think that's just the start because, at the end of the day, we have to now to not only do a good job with the channel, but start to reeducate people in their homes to get the bottles there and the crates there. And I think that's why I think it will continue to grow.

That's why the margins -- I mean they are good. I mean only with the way that they will grow will benefit us. And I don't see RGBs in the off-trades at the price going too much up. I think that the price tree that you always respect. It's important for people. They expect to have a lower price. And with the price that we have nowadays, the margins are better than the one-way.

So, I think that we're on the right path to reeducate people to bring bottles to their homes and crates to their homes. And that's why I think that it will be steady, but will be up the weight of the RGB in the off-trade channel. Not only the big ones, but in the small ones as well. There's more formats.

Thank you. That's helpful.

Thank you, Thiago.

Robert Ottenstein, Evercore.

Great. Thank you very much. I was wondering if you could talk a little bit about what's going on in Brazil in terms of share of alcohol, whether you think you're gaining share of alcohol, and how the consumer has responded to whether to spirits or cocktails, other forms of alcohol relative to beer during this difficult time.

Robert, thanks for the question. I think -- I don't have exactly a number here. But, for sure, we're gaining share of throat because Skol Beats Sense, I mean it's a huge volume. It's incremental. And I think that, for a consumer that's under pressure in terms of disposable income, have alternative to drink a great liquid and a great brand like Skol at 7.9% of alcohol; it's sweet, it's co-ed. And that, with our machine that put this product in the right point of sales in the right events, for sure Skol Beats Sense, it's growing and it's gaining share of throat.

So, I think that our core brands, beer brands, are more under pressure because of the disposable income, but everything that's premium is growing including Skol Beats Sense. We just launched a Skol Beats Secret. That's like the pink one. And, for sure, it will be a big hit in the Carnival for next year.

Terrific. And then, just one follow-up. ABI has introduced, pretty successfully, Bud Light in Mexico and obviously there's a general overall goal of getting 20% of volume to be lower alcohol and no alcohol. And I know you've got an issue. There's a Brahma 0.0. Any thoughts about bringing Bud Light down to your regions? And how exciting could that possibly be?

I think that for the goal I mean for NA beers or low alcohol beers are big bet continues to be Brahma 0.0. So it is doing pretty, pretty well. And then continue to invest. I think we'll have room to grow with this product. It's amazing. The liquid delivers big, big time. I think to Bud Light, I mean no comments. Don't have any plan to launch Bud Light in Brazil at the moment.

Okay. Thank you very much.

Thanks, Robert.

Jeronimo De Guzman, Morgan Stanley.

Hi. Good morning. I wanted to just follow up on pricing and just ask the question a little bit different. I just wanted to understand; how does delaying the pricing until the fourth quarter kind of change your positioning? So, I know you mentioned that an easy fix would jeopardize growth. But what I'm still trying to understand is; why not take the pricing already if you're going to do it anyway in the fourth quarter? So, is there something about the fourth quarter that you think helps the consumers better absorb the pricing or anything else that's different in the fourth quarter that drove this?

Thanks for the question. I think, basically, what I said before. I mean you always try to balance the volume and the price and the share. I think the biggest issues is disposable income and October we know that the industry tend to be better because the warmer months. We don't like to talk about temperature here and forecasts, but we had a tougher winter, many in the Southeast.

So, we thought I mean how to balance volume and share and price. We've taken into account disposable income and then we thought that it would be better to go later in October, given even I mean the approach in the summer that would have less impact in the industry in a month like that. I mean that's basically what is done and I think it's the right decision to do.

Thanks. And then, just a follow-up here. I mean how much latitude do you think you have on the pricing just given that the competitors aren't necessarily seeing the pressure you're seeing? I mean they saw the pressure a year ago. And the fact that the value brands are taking share, I mean is there a concern about them just not following on their price increases?

Brazil industry has always been a tough one. What's happened now this year is not related to a specific one company and that's putting price down or up. I mean basically it's linked to the crisis that we have. So, we don't see -- I think that everyone in this market is struggling or is in the sense because of the inflation, because of the disposable income. So, that's what we can comment.

Okay. Thank you.

Okay. Thank you, Jeronimo.

Alex Robarts, Citigroup.

Hi, everybody. Thank you. And a confirmation and then a question. The confirmation is; will we see Panama in the fourth quarter results?

And the question, just going back to the cash COGS. And, first of all, definitely appreciate the visibility you gave us showing the 17 percentage points in that Brazil EBITDA decline coming from the cash COGS. And so, what I'm interested to hear about is the pressure or the impact I mean from just the fact that you have more glass, you have more returnable glass, and that was an incremental cost year on year as you've pointed out. RGBs doubled. I guess the last conference call you said that it was 100%.

Within the 17 percentage points, I mean I appreciate the hedge and the pressure from that, but is there also a piece related to the fact that you guys have more glass cost? And, if that's so, is that something that I assume would continue into the coming quarters.

And the corollary to this cash COGS question is on the other graphic you show us that implies you're buying 12 months forward. Is it safe to assume that, in the fourth quarter, from the hedge effect you'll have less pressure on the margins? So, thanks very much.

Hi, Alex. Thank you for your question. So, first of all, using just outside information from the Company, given how we are very systematic in the way we hedge our COGS, one could infer the type of quarterly impacts that we have. So, one year ago, roughly, when we did the hedges we knew a little bit how the hedge would be.

What we didn't know back then is that these impacts would be temporary, which is great news. A hedge can only protect you to buy time. If this is temporary, I think it's even better than having like a market move above your hedge. So, that's great news.

On the specific RGB impact on the hedges, it's very important to highlight that aluminum is internationally-traded commodity and, as a result, is important portion of the COGS for our packaging. And, as a result of that, is denominated in U.S. dollars.

On the other hand, glass being returnable, if you can use a returnable glass bottle for like 20, 30 times, the impact that you have both in your exposure and in the COGS is to reduce it. So, your exposure to the dollar gets reduced by a shift towards returnable glass bottles and your COGS gets reduced. So, just highlighting that two main temporary drivers that explain our EBITDA decline in the quarter is, first, the hedge part effect we discussed and the second, like Bernardo and we discussed extensively as well, is connected to the adverse market economic scenario.

Related specifically to the fourth quarter, you asked a question specific about Panama; we never comment the quarter, the ongoing quarter in the call. But I think the most important thing is that we are very excited with including Panama in our portfolio of countries and we're very excited specifically within the region in which Panama is going to be inserted. Our CAC business is growing very much in the year and we expect it to continue to grow.

Okay. Thank you.

Thanks, Alex, too.

Pedro Leduc, JPMorgan.

Thank you all for the question and the call. Quickly on pricing and beer Brazil, again. And you mentioned you always move pricing with inflation long run. If we look at the just the regular inflation data, it seems like beer inflation is already tracking general inflation. So, I'm curious to see, your negative 1% slide, if it also has to do with (inaudible) mix within beer brands or within packaging. Of course, RGB maybe had an impact on this as well.

And so, then, looking into the next quarter, if you're already raising prices, the base is really high from last year. It appears that you have to take at least 20% pricing to match it. So, going back to my mix question, is there mix component in this pricing slide that we're seeing? Thank you.

Hi, Pedro. Thank you very much for your question. So, that's exactly what we said in our press release; that we don't already expect to achieve our goal of flat-line revenue in Brazil for the full year given an environment, but specifically the high net revenue per hectoliter comparable of the previous year.

And now, we can take this offline as well, but you have to run the math on the next revenue per hectoliter including the taxes that go above that for consumers. So, we can go that and then you're going to see how it plays and how -- for example, I think for last year, if I'm not mistaken, it was like around 20% delta from Q3 to the Q4. But you can look into our numbers and we can check that. We are going to explain to you how this translated on the price to consumers and the impact. We can go into detail with you.

Okay, appreciate it. But still on the 3Q minus 1%, is there a mix effect here? I mean the same product pricing versus 3Q last year is up, I'm imagining.

So, net revenue per hectoliter was down 1.6% primarily driven by our decision to implement our price adjustment in the fourth quarter this year when you compare it to the third quarter of last year. In addition, as part of our revenue management strategy, we are using the complete portfolio of packs and brands to achieve attractive more competitive consumer price points. So, this includes the RGB, but is not limited to that.

So, I think the important point there is to highlight that we are not changing our revenue management strategy. Our strategy continues to be to increase our price in-line with inflation and pass on any tax increases over time.

Got it. Talk to you later. Thank you.

Thank you.

Carlos Laboy, HSBC.

Yes. Good afternoon, everyone. I was hoping you could expand a little bit on Robert's question earlier. How is the beer category doing in this environment? But my question is against informal alcohol. I think your response to Robert was geared more around formal alcohol.

Thanks, Carlos, for the question. I mean we don't have information of the informal alcohol, but I would say that Skol Beats Sense and Spirit and Secret, it's a great alternative because I mean it's a very, very I mean quite liquid. I mean it's cold; it's sweet; it's 7.9% of alcohol. It delivers what people want in a specific occasions. And the price point, it's attractive when you compare it to other kinds of spirits.

The informal alcohol I would say, cachaca, I think that everyone in Brazil traded up I mean in the last years. And then, they start to taste differently because including Beat Sense. And I think that I continue to trust the ability of I mean this mix of drinks that we are launching in the market to gain share of throat to the lower price home.

And on the other hand, you have to bear in mind that this RGB in the off-trade brings affordability for I mean beer brands like Skol, Brahma, Antarctica, and maybe some core plus brands as well in the future. So, again, great products, great liquids, great brands in affordable price. That should put pressure on this lower alcohol. So, I don't think that a lower-price alcohol, they are threat for us. On the opposite, I think they are an opportunity.

Thank you.

Thank you, Carlos.

Gabriel Lima, Bradesco.

Hi. Thanks. Good morning and -- I'm sorry good afternoon. And I just have one confirmation here. When you say, Bernardo, you're back to, and he just added, to historical range of market share that you reached, I think, during the third quarter. I recall that the historical range is around 67%, 69% share. So, I just wanted to confirm, is that the numbers we are talking about? So, that would be the first question.

And the second just you mentioned taxes and we have seen lots of headlines here regarding state taxes; that it's a very tough situation at the state level here in Brazil. And the state moved the state taxes. They increased it last year. And you actually changed your footprint based on that is likely. But how are you looking into taxes, mainly at the state level, going to next year? Thank you.

Thanks, Gabriel. So, first question that you asked was about share. So, we measure I mean many, many sources. One source is Nielsen. Siquavi is another one. And we have internal as well. So, the main thing of you have many, many because it will limit our initiatives that you put in the market based on the coverage of one source or another source. I mean you always do what's good for the business and every case counts, if it's rated in one source or not. Having said that, we have ranged in the Siquavi and we have ranged on Nielsen. On both, we are within this range. And if you ask for Nielsen, yes, we are in the 67%, 69% range. But it's not the only one because having growing volume outside of this rating of Nielsen, regular one. But you are in the range of both readings.

And, Gabriel, regarding your question about the state taxes. As you know, in Brazil, each state has its own model, own tax rate, and there's always discussions ongoing.

That said, I can assure, that similar to the discussion, held at the federal government level, in the recent years the cold beverage industry 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 investment. As a result it allows for tax collections to continue to grow, but no pressure on inflation, job creation, on investment.

I mean we say a lot that the model that we believe is the model of the positive cycle in which we do investments; investments generate jobs; jobs generate consumption; consumption generates increasing tax collection; and we have, of course all that permeating stability in terms of rules so that you increase tax collection throughout what we believe to be a sustainable way.

Okay. Thank you very much.

Yes.

There are no additional questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Mr. Bernardo Paiva for closing remarks.

So, thanks, Kate. Thanks, everyone, for the part of the call.

Just a final message. We continue to be bullish here in Brazil. That's the main topic of this call. We know that it's not a straight line, but it's up. We have a strong plan. I mean I have been discussing there for you for the last one year and a half and our elevate the core, all our initiatives, we are able to do that. I mean new Skol, it's is doing pretty, pretty well in the market. And then you do even more for the other brands as well. So, premium is growing. We are there. Near beer. We are doing important things in terms of out of home, in home, route to market, service level, to the (inaudible).

And, on top of that, again, we know that Brazil is still facing this year a tough moment in terms of macro, but you know that we are very confident that next year we will be better. All the indicators and macro numbers that we have shows that. And we'll be completely ready to capture this opportunity that the country will we offer to us again. So, very bullish, continue to be bullish with Brazil and about our plans for the future. Thanks a lot. See you next quarter.

Thank you.

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