Ambev SA (ABEV) 2016 Q4 法說會逐字稿

Good morning and thank you for waiting. We would like to welcome everyone to Ambev's fourth-quarter and full-year 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 Q4 2015 or full-year 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. Ricardo Rittes, you may begin your conference.

Hello, everyone. Thank you for joining our 2016 fourth-quarter and full-year 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 year to come.

Starting with the main highlights of our consolidated results, 2016 proved to be one of the most challenging years of our history as solid growth in our international operations was offset by a negative performance in Brazil.

On a consolidated basis, top line was up 0.4% in the quarter and the full year. Top line was up 1.9% with a volume decline of 5.8%, more than offset by net revenue per hectoliter growth of 8.3%.

EBITDA was down 12.1% in the quarter and 6.9% in the full year, reaching BRL19.5 billion with an EBITDA margin of 42.7%. Net profit was up 13.5% in the quarter while, on a normalized basis, net profit was down 15.9%. In the full year, net profit was up 1.6% while adjusted by exceptional items, net profit was down 9.7%.

The difference between reported and normalized profit is driven by this [swath of assets] carried out with ADI, [percent] which we have agreed to transfer our businesses in Colombia, Peru and Ecuador in exchange for the Panamanian business originally owned by SABMiller. This transaction, when accounted for using the preceding value for the Panamanian asset and the cost strategy for the asset transferred to ADI, resulted in a BRL1.2 billion noncash gain.

In Brazil, our EBITDA was down 19.7% in the full year. We are nothing but disappointed with our performance, but it is important to understand the main drivers that have impacted our full-year results. The first one is connected to the adverse macroeconomic scenario in Brazil. Economic activity reduced for the second consecutive year with unemployment rate [reaching] the [higher] rate recorded in years leading to the continuous decline of disposable income. In this environment, we also lost 120 basis points of marketshare for beer from 67.5% in 2015 to 66.3% in 2016.

The second one is that, in the first quarter of 2016, we are subject to VAT increasing in some states, putting additional pressure on our top line. And a third one is related to the temporary impact of the FX in our cash COGS. As we are very schematic with our hedging policy, the devaluation of the Brazilian real in the second half of 2015 when the Brazilian real appreciated close to 60% year-over-year has inflated our COGS denominated in US dollars, partially in the second half of 2016.

Now, going into more detail of operational results in Brazil. Brazil beer top line was now 11.5% in the quarter and 5.7% in the full year. Our beer volumes were down 7.3% in the quarter and 6.6% in the full year given the challenging market economic environment.

Our total marketshare for the year according to Nielsen was 66.3% versus 67.5% in 2015. Net revenue per hectoliter in beer was up 4.6% in the quarter as we had a hard comparable in the fourth quarter of 2015 while, on a sequential basis, it was up 17.3% driven by our revenue management initiatives implemented during the quarter. In the full year, net revenue per hectoliter was up 1.1% mainly impacted by tax increases.

In addition, as part of our revenue management strategy, we (inaudible) our full portfolio of (inaudible) and brands to achieve more attractive consumer pricing, including the 300 ml returnable glass bottles that accounted for 23% of our volumes in supermarket in 2016.

Now talking about Brazil, CSD and NANC. Its top line was up 1.7% in the quarter and up 2.7% in the full year. Volumes declined 6.7% in the quarter and 6% in the full year, in line with the industry as we estimate as the adverse consumer environment is temporarily driving consumers away from CSD to low-cost powder juices or even to tap water.

Net revenue per hectoliter in CSD and NANC was up 9% in the quarter and 3.5% in the full year driven by our price management initiatives. Our marketshare according to Nielsen was 18.8%.

Brazil cash COGS per hectoliter and cash COGS increased respectively 20% and 11.5% in the quarter and the full year. Cash COGS per hectoliter was up 15.4% and cash COGS increased by 7.9%, in line with our guidance of mid to high single digit growth.

The main driver for this performance was a temporary impact of FX partially offset by the benefit of RGB, coupled with the continued evolution of our cost initiatives.

Brazil cash SG&A was up 2.2% in the quarter. In the full year, cash SG&A was up 3.5%, which, while the lowest (inaudible), is in the upper limit of our guidance due to mid-single digit logistics cost increase, decrease of administrative costs by low double digits and high single digit increase in sales and marketing expense as we continue to invest in our brand.

As a result, Brazil EBITDA was down 30.8% in the quarter and 19.7% in the full year. Bernardo will expand on this topic and discuss how we are positioning ourselves for 2017.

Moving now to Central America and the Caribbean. In CAC, we delivered another solid year. Our performance in the region was driven by double-digit top-line growth with a good balance between volume and revenue management.

Going into more details, in the fourth quarter, EBITDA in the region increased by 25.4%, reaching BRL398 million, mainly driven by a net revenue growth of 8.9%. In the full year, top line was up 14%, leading to an EBITDA of BRL1.4 billion, an increase of 21.3% with a margin expansion of 220 basis points to 37.3%.

While flattish in the quarter, volumes increased by 6.2% in the full year, mainly driven by the Dominican Republic, where we were able to significantly increase the beer category, reaching our highest ever share of throat and Guatemala, where we had another year of marketshare gains with a strong performance of our Mexican brands, led by Corona that grew double digits in the year.

Going forward, we continue to be extremely excited with top-line and EBITDA growth potential from our current operations and other more organic opportunities, including Panama that became part of CAC as of December 31, 2016, pushing us closer to our dream of BRL1 billion EBITDA in the region.

In Latin America South, in the quarter, top line was up 19.3% and EBITDA grew 27.6% in the full year. Top line increased by 15.8% and EBITDA by 20.6%. Volumes were down 2.8% in the quarter and 8.3% in the full year as the weakness in Argentina, given the adverse macroeconomic environment, was partially offset by strong performance in, number one, Bolivia, driven by the 710 ml returnable glass bottles launch of Pacena and route to market improvement.

Number two, Paraguay. With the successful rollout of our 340 ml returnable glass bottle and the premium growth led by Corona and Bud66.

And finally, Chile with strong performance of our global brands in the country. Top line benefited from a solid net revenue (inaudible) [positive] performance due to higher rate of premium in our beer volumes and implementation of our revenue management strategy.

[Reduced] cost and expenses were still pressured by high inflation and unfavorable currency movement, especially in Argentina. We were able to offset this impact through top-line growth, delivering a margin expansion in the quarter of 320 basis points to 48.4% and in the full year of 180 basis points to 44.1%.

As we move forward, we remain confident in our ability to deliver a solid top-line [division] in the short term and better position ourselves for the future.

Turning now to Canada, in the quarter, EBITDA in Canada increased by 3.2%, reaching BRL491 million as the organic top line decline of 0.5% was offset by lower costs driving margin expansion of 140 basis points. In the full year, our top line was up 0.7% and our EBITDA declined 0.8% organically while increasing 3% in local currency when including our strategic acquisition of brands of the fast-growing craft and near beer segment such as Mill Street and Palm Bay.

Our reported volumes grew 5.7% in the full year, mainly driven by the benefit of our recent acquisitions, helping us to achieve the highest marketshare figure in 17 years. Organic volumes were down 1.2% impacted by unfavorable weather, partially offset by strong performance from, number one, Bud Light in the premium segment as the fastest-growing brand in Canada in 2016 and, number two, Stella Artois in the high end, reaching its highest share ever in the fourth quarter.

Throughout the year, we remained focused on pursuing an optimal balance between volume and price with our revenue management initiatives and the benefit of increased premium mix driving a 2.3% net revenue per hectoliter growth in the fourth quarter and 1.8% growth in the full year.

Going forward, we remain excited with our momentum in Canada, with our complete portfolio and committed to continue to balance net revenue per hectoliter and marketshare to deliver profitable growth.

Now moving to other operating income. Other operating income totaled BRL158 million in the quarter versus BRL701 million off last year mainly driven by the reduction of VAT government grants in Brazil from BRL530 million to BRL196 million due to, number one, volume decline and revenue geographic mix as we have different incentives and different plans around Brazil and, number two, expiration of VAT government grant agreements that represent around 25% of the reduction in this line.

In the full year, other operating income totaled BRL1.2 billion versus $1.9 billion off last year, also mainly explained by the decline of government grants as a result of low volumes and revenue geographic mix.

Now moving to EBITDA. In the fourth quarter, we started to reverse the negative trends seen in the previous quarters as our net financial results declined almost 20% year-over-year from BRL1.1 billion in the fourth quarter of 2015 to BRL908 million in the fourth quarter of 2016.

Going into more details, main items in the financial expense in the quarter were, first, interest income of $86 million driven by our cash balance mainly in Brazilian reals, US dollars and Canadian dollars; second, an expense of BRL416 million due to interest expense. Of course, 40% of this is a non-cash accrual related to the put option associated with our investment into 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 InBev SA of the remaining shares of CND for a value based on an EBITDA multiple. This non-cash accrual expense increases over time as we approach 2019 as EBITDA grows, among other factors.

Third, BRL292 million losses on derivative instruments mainly driven by the carry costs of our FX hedge, primarily linked to our COGS exposure in Brazil and Argentina. Given the interest rate differential between Brazilian reals or Argentine pesos to the US dollars, we have financial costs associated to these hedges, which are called carry costs.

Carry costs started to go down mainly due to the reversal of the Brazilian real. If reals and/or Argentine peso appreciate or interest rates in these countries continue to go down, carry costs are expected to decline even further.

Fourth, non-derivative gains and losses have been another source of volatility in our net financial results as most of the results including this line are related to FX translation. As we have benefited from the real appreciation in the quarter, we had a gain of BRL220 million in this line.

Fifth, BRL401 million of other financial expense is mainly driven by interest on contingencies. In the full year, net financial results totaled BRL3.7 billion mainly driven by, number one, interest expenses, which include the put option of our investment in the Dominican Republic of around BRL600 million and losses on derivative instruments.

The effective tax rate in the quarter was 9.9% versus 28.3% last year in the full year. The effective tax rate was 2.4% mainly driven by gains on other tax adjustments reported in the third quarter of which, first, around BRL400 million is explained by reversion of withholding tax provision related to unremitted earnings from Argentina. As of July 23, 2016, a new legislation in Argentina was enacted revoking the levy of a withholding tax over dividend remittance that was created in 2013.

And second, close to BRL800 million driven by a one-time impact in the third quarter of 2016 on the recognition of deferred tax assets on carried losses related to international subsidiaries.

From a cash flow perspective, in the fourth quarter, cash flow from operating activities before changing in working capital was BRL6.1 billion. We continue to revert the negative cash impact from working capital seen in the first and second quarters generating almost BRL1.8 billion from working capital. In the full year, cash generated from operations reached BRL17.7 billion and CapEx totaled BRL4.1 billion with CapEx in Brazil declining 35% year-over-year to BRL2.0 billion, in line with our guidance.

Finally, during 2016, we returned approximately BRL10 billion to our equity holders in dividend and interest on capital. This figure does not include the dividend payment of approximately BRL1.1 billion announced on December 22, but made only in February 23, 2017.

As our free cash flow generation continued to grow sequentially in the year of 2016, we also continued to return the excess cash to shareholders. Thank you very much. I will now move to Bernardo before going to Q&A.

Thank you, Ricardo. Hello, everyone. We have been through a tough year, especially in Brazil, where, as anticipated and explained by Ricardo, three main drivers have impacted our results. One, the external conditions were very challenged with a volatile political and economic macroenvironment and negative disposable income leading to the industry decline.

Two, on top of a depressed industry, some states have significantly increased the VAT in spite of the industry's strong mobilization to qualify that higher taxation brings to a recession instead of additional revenues for the state.

And three, our COGS was impacted by the tax, especially in the second half of the year, compressing our margins. We acknowledge that Brazil's long-term growth involves unavoidable periods of volatility and that the Brazilians are facing a very tough environment, but we measure our performance based on the absolute values and we are not pleased with our 2016 results at all.

With that in mind, I want to concentrate my comments in Brazil before we move to the Q&A. The [pillar] steps that support our long-term growth in Brazil are still there, favorable demographics, reduction of regional disparities and consumers' continuous demand for innovative products and strong brands. Based on that, we made structural investments in our business, boosting our five commercial platforms in a transformational way.

Starting with elevate the core, our first and most relevant platform. In the last two years, elevate the core was even higher in our agenda and we invested more time and resources to have the right insights to bring innovation and innovation to our mainstream brands.

The good news is that some of the outputs of such initiatives are starting to hit the market as we speak. For instance, we are launching new VDIs for Skol and Brahma, differentiating and reinforcing the brand's attributes.

We are also improving our primary and secondary packaging, enhancing the brand's quality perception. These innovations started to implement at the end of 2016 and given its magnitude, it will continue to be rolled out along 2017.

Early results are rate-positive. For example, tests with consumers have shown that Skol's new visual brand identity has improved significantly its attributes of quality, drinkability and modernity. And it has also increased consumers' interest in the brand purchase.

Here I will talk about Skol, our easy-to-drink lager. (inaudible) campaign has been building [equity] attributes on top of its carefully crafted emotional connection of the brand with its core consumers. Skol also land our [summer] in Carnival [activation] sponsoring the most important (inaudible) in Brazil such as Sao Paulo and Salvador delivering great experience to its customers.

Our complete 360 execution through above-the-line digital media and the [in-trade] activation has enabled Skol to reach more than 35 million people, making this Carnival the biggest of its history.

Now I will talk about Brahma. Brahma is our classic lager recognized for its beer [expertise] and flavor. Brahma has a strong connection with its consumers through [distinct variance] together through soccer and country music platform. [Brazilians in strong fashion].

Brahma is a sponsor of several country music events such as Villa Mix, Brazil's largest country music festival. The soccer [platform], (inaudible), brings regional (inaudible) for the brand through team sponsorships and the (inaudible) program.

Brahma's (inaudible) is also composed by (inaudible), targeting the food and savory [meat space] and we have three variants -- lager, red lager and [vice]. Brahma (inaudible) has grown 250% vastly shaping the [core-plus] segment in the Brazilian market and enhancing the mother brand.

Finally, on [Batchka], Batchka has been strengthening its connection with Rio de Janeiro and with summer music. It just launched a novel media campaign, reached more than 10 million people with nine episode series in YouTube.

Batchka was the official sponsor of the Carnival in Rio de Janeiro for the eighth consecutive time. Those who were there could see the strong [breadth] of the brand and the blue ocean.

On top of being a strong regional brand, Batchka has become an aspiration in other regions such as the Midwest of Brazil, also becoming the number one brand in key states in this region.

Over the course of 2017, our three mainstream brands will continue to leverage key brands and (inaudible) to strengthen the connection of their core target, consumers and supports our top-line growth.

Moving to premium, premium has been growing (inaudible) over the years and in 2016, it was not different. Working with a complete portfolio of international to domestic brands, premium revenue represents more than 10% of our volumes. Premiums have also a very high preference, way above its marketshare.

Budweiser is our main brand and has been delivering amazing results. It's (inaudible) more than 20% in 2016, a double-digit growth for the fifth consecutive year and consolidated its position as the leading brand in the premium segment in Brazil. Budweiser's preference and brand attributes, such as authenticity, heritage and quality, are continually trending up.

Now I will talk about near beer. Near beer is driving incremental volumes in a profitable way. The Beats family, one of the most successful innovations in our history, continued to grow double digits in 2016. We have launched Secret, with its red bottle that together with Senses and Spirit already represents more than 1% of our beer volumes in Brazil.

With massive presence in the key brand (inaudible) and the strong activation during Carnival, the [cooling] trend in Beats family also enhances the equity of the mother brand.

Moving to different occasions starting with the in-home. RGBs are definitely a big focus this year. The returnable glass bottles were boosted by the national campaign -- Mini, everything that is good returns. (inaudible) our core brands and have an affordable proposition, they represented 22% of beer volumes in the supermarket in 2016.

Going forward, with a strong learning process, we will improve even more the execution and as a consequence, we see the opportunities of (inaudible) become even more important and definitely changing customers' behavior. This is a huge shift with important implications as it is good for everyone. [I mean] (inaudible), it's good for the environment as well and it's good for margins.

Finally, in the out of home occasion, we took the soft macroscenario as an opportunity to enter long-term sponsorship contracts, expanding our activation in key selling [markets]. Along with that, we are stepping up our route-to-market initiatives to assure an improved service level everywhere, building a strong platform to make our brands even more available at the point-of-sale with the best-in-class execution.

In summary, 2016 has been a tough year. On the other hand, we took this moment as an opportunity to strengthen our foundations for the future and we made structural investments in our business.

On top of that, 2017 is widely expected to be a year in which main macro headwinds will dissipate. First, inflation continues to decelerate. Second, GDP is estimated to be flattish after two consecutive years of decline. Third, and importantly, was to increase and expect to reverse the trend in the second semester and fourth, (inaudible) disposable income is likely to resume growth towards the end of the year.

In this environment, we are cautiously optimistic on the Brazilian beer industry in 2017, especially for the second half of the year. Our commitment is long term in nature and we have confidence in our ability to gain marketshare and resume our top line and EBITDA growth supported by structured investments we have made in recent years and by the strength of our brands.

As part of our culture, our motivation to deliver (inaudible) is not changing. It has even increased. That said, it is important to highlight that our marketshare for 2017 is increasing in a positive trend, showing that we are in the right (inaudible).

Along with that, we expect cash COGS per hectoliter to positively evolve over 2017, increasing double digits in the first half and low single digits to flattish in the second half, mainly explained by the impact of the devaluation of the Brazilian real during the first half of 2016.

We can move now to the Q&A. Thank you.

(Operator Instructions). Isabella Simonato, Bank of America.

Thank you for the call. I have two questions. First, you guys mentioned the expiration of some tax benefits impacted on the other operating income. If you could tell us if you are already able to renew those benefits or if not, if there is any expectation of doing that.

And second, when you look at the guidance for 2017, you guys provided much less details compared to what we saw in the previous years. If you could explain the rationale of doing that. Is it because there is more visibility at this point or for competitive reasons? Thank you.

Let me start with your second question. So just as a start for the answer, our guidance has varied along the years. So if you go back to 2010, we had only COGS per hectoliter in EBITDA. 2011 was COGS per hectoliter volume and CapEx 2012 was COGS per hectoliter volume via Brazil, net revenue per hectoliter in CapEx, so on and so forth. So we vary across the years. We have not been with the same guidance for a long period of time.

For 2017, we decided to provide a more qualitative guidance in the outlook session to limit the top-line substantive numbers. (inaudible) within the four main players in the Brazilian beer market gave guidance over the course of 2016. Therefore, driving to a [less] metric competitive dynamic and this is the reason behind our -- the way we gave the guidance for 2017.

And when we go to your first question discussing specifically the other operating income, it was down mainly driven by the reduction of the government grants, like you said and this reduction essentially came for the two reasons that we explained. Number one was the volume decline and the revenue geographic mix, which explains 75% of the decline and the expiration of VAT government grants agreement that represents around 25%.

We decided to give you this breakdown in order for people to be able to separate and differentiate between what is a consequence of the mix and the temporary impact and what has expired.

Within the expiration, and that's when you asked your question, is can you renew and etc., the comment that we can make is that the concession of government grants is primarily linked to CapEx and from time to time, we may decide not to make additional investments resulting in a loss of efficiency and tax incentives.

So when you look at the 2016 CapEx, which was down 35% in Brazil year-over-year from BRL3.1 billion to BRL2.0 billion, I think that is a driver that you need to take into consideration when projecting going forward. As we see Brazil accelerating, CapEx increasing, you could see a difference in this line.

Pedro Leduc, JPMorgan.

Thank you for taking the question. It will be regarding the pricing in Brazil beer. We saw a sequential improvement of about 17% to BRL284 per hectoliter this quarter. Now just trying to reconcile or imagine how we can carry this figure into 2017 because it would be a mid to high single digit increase if you keep the BRL284 into the full average of 2017. So just help us understand if here we already have the full pricing effect of 4Q, then how much usually in 1Q is not sequentially net price per hectoliter drop. If it's this year, it's going to be as substantial as it was in the last year, last 1Q. Just trying to reconcile here how we should imagine pricing if we can carry this nice number into 2017. Thank you.

So, like you said, on a sequential basis, net revenue per hectoliter was up 17.3% and just to remind everyone that the VAT and excise tax [valuations] impact prices to consumers, but even a fully compensated [buy] would not impact net revenue per hectoliter and therefore, as a result, net revenue per hectoliter is a good proxy of price increases net of tax increases, if you will.

As a consequence, the longer the period, the better or more precise is the visibility of the net revenue per hectoliter. As a result, you should expect some volatility in that line. For instance, if we go, for example, five years, our net revenue per hectoliter has increased in line with inflation despite some short-term volatility.

Having said that, we continue to be confident about our strategy to increase our price in line with inflation plus any tax offset. And for that, I think just to develop a little bit on that, I think first it is very important, most important for us to build strong brands as this is the key to ensure the profitability of our business and that's why our first commercial platform is elevate the core.

Second, along the time we have improved a lot of revenue management strategy initiatives mainly through technology and our (inaudible) strategy allowing us to capture also significant net revenue per hectoliter opportunity.

And third, when you look going forward, I think it's very important to take into consideration premium and near beer as they continue to grow driving a positive mix impact.

On the other hand, the growth of returnable glass bottles presents a challenge for the future when you look only at the net revenue per hectoliter perspective. Although they are margin accretive and they are good for the business.

Okay, Ricardo, thank you. And just again back a bit to 2017. Should we expect this figure growing in line with inflation again, or do you still expect adverse shift in mix and returnables, just to get us some color? Thank you.

So, again, Pedro, the type of guidance that we are giving this year, like we said in the guidance discussion previously, is a bit more of a qualitative guidance. We are not giving a guidance, especially net revenue per hectoliter on a quarter-by-quarter basis, but the drivers behind the volatility in that line, [they are that].

So we continue to be confident about our strategies to increase our price in line with inflation plus any tax offset and the shorter the period of time that you look, you will see like you have seen in the past some volatility in that line. The knocking out of the extraordinary and we continue to be very confident about the strategy.

Thank you. That helps.

Luca Cipiccia, Goldman Sachs.

I wanted to ask two. One is more of a clarification on the returnable penetration. I think in the third quarter you said it was 25% and I think in this release, I think it states 23%. I was wondering if this is just a function of seasonality or am I interpreting this incorrectly?

And more generally can you update us on not necessarily your push into this format, but how consumer reception/adoption is evolving and how much you think it will stick assuming that eventually, as you seem to adjust as well, the consumer will recover? That is my first question.

The second, very quickly, just going back on the guidance, we got used to the idea that you prefer to talk about the things that you can control. I think you have stressed that a lot in the past. I'm not sure I follow the rationale to not give indication about both SG&A and CapEx, which I think in the past were fairly discretionary items for you to decide on how to spend or how to invest in any given year.

And on the CapEx and your comment about either before, is it fair then to assume that, as a percentage of revenues, the other income, we should probably anchor it to what we saw in the fourth quarter given that some benefits are expiring and some others are more conditional on growth and CapEx. I would assume CapEx is not going to go up this year. So maybe you can clarify a little bit on these points; that would be great.

So in respect to RGB and (inaudible), it's important to highlight RGB came from 4% in (inaudible) in 2014 to 23% of our volumes in supermarkets in 2016. So no doubt it is already a great success. It is good for everyone. There is always talk for people to drink, good for environment, good for margins as well.

On top of that, plenty of research has shown that the minis have increased brand loyalty among their buyers with positive impact on brand attribute, such as flavor, eco-friendly and cost benefit proposal. It has also improved the perception of heritage of the brand due to its (inaudible) shape.

Having said that, going forward as we improve the execution, we see the opportunity to (inaudible) become even more important. That will change the consumer habits and quarter by quarter, this could vary I think but the main number actually came from, in 2014, 4% to 22% in 2016 and trending up. So we think we are trying the right path with this strategy.

And also to add to what Bernardo just said, the 25% was the number for the third quarter and 23% is the average number for the full year (multiple speakers) as we have been growing from say the average of 14% in 2015. You could expect that the average for the year tends to be in a growing pattern, a little bit lower than the end of the year. I think that might help you in your calculations.

And now going specific to the guidance, when you look at the historically speaking -- and you are right, we prefer to give guidance, number one, of things that we control and, number two, on things that will not allow [isometric] competitive dynamics. I think those are two important criteria.

But if you go back to the last -- and I am here with the guidance for the last seven years of the Company -- we gave guidance on SG&A only in four out of the last seven years and prior to 2010, I don't think we gave guidance at all.

I think going back to the discussion that we had in the first question, for 2017, we decided that why don't we provide a little bit more of a qualitative guidance in the outlook session, which might help you come to the conclusion, some of those that you ask in the question, we decided to limit the top line and some of the, like you said, even the CapEx, SG&A, quantitative numbers provided. Again, I think that's (multiple speakers).

Maybe just to qualify on the SG&A. On the stated ambition to rebuild marketshare, what role do you think investments in the brands comparatively to last year will take? I think that is going to impact, I think, that line in particular. You said you want to go back, you want to build marketshare. I think there has been a positive trend. How much of that do you think will come from investments in SG&A? How much of that do you think will be more a pricing-driven or mix-driven strategy?

So just to provide you some assurances, there is not going to be anything different than what we have done in the past couple of years, so you shouldn't expect any surprise. And I think when you look at the marketshare, for example, the only publicly available source to measure our marketshare in the full year of 2016 is Nielsen (inaudible) in December 2013.

The full-year, according to Nielsen, marketshare was down, below the range that we normally work to 66.3% in the average of the year, but, as Bernardo pointed out, in a growing trend and it is important in terms of answering your question specifically about SG&A that one of the cornerstones of our strategy is the [cost, connect, win] platform like we [sketched] internally and even externally.

And in this platform, I think control of costs and controlling expenses is not a program, is not something that is temporary here. It is a way of doing business and we try to be more efficient every year and every day on everything that we do. Internal SG&A is not different.

And adding to that, Luca, it seems our marketing and sales teams have been building toolkits to build brands in a way that doesn't mean necessarily more investment, but way more efficient and way more precise and that's what we have been doing the last years and that we are applying this year as we speak.

Thank you. Thank you very much.

Antonio Gonzalez, Credit Suisse.

The first one is a follow-up on Luca's last question. I was also curious about the wording that you used in the outlook for 2017 with respect to marketshare in particular. I think you didn't use the marketshare metric in the last few years in terms of your guidance and I wanted to ask in light of changes in the consolidation that is taking place in the industry, is 67% to 69% still the range or over the medium term, I understand that 2017 has low visibility, but over the medium term, do you think it makes sense to have a higher range for example?

If so, would you be willing to pursue marketshare even if it comes with lower EBITDA margin, more EBITDA in nominal terms with lower EBITDA margin, or that is not the case? And then I have a very quick follow-up question afterwards.

Thank you for your question. So let me just clarify that. I think what we have done in the past, the 67% to 69% is the optimal point in which us managing the Company want to maximize value for the shareholders. I think that is the objective.

Marketshare, of course, is a sustainable and long-term way of getting there and I think what we meant here in our [section] is the thing that we have always talked about, we work on a range, but from time to time we are up or down within that range. If you go back to five, six years ago, you see that we were way ahead of the range that we set for ourselves and then we used that over time.

I think that we have wanted to put in there our discomfort on being below the range and using the same platform, the cost, connect, win and the commercial platforms we will work very hard to go back to the range as soon as possible.

And adding to that, it is important to highlight that we started 2017, as I explained in my speech, with the marketshare increasing and in a positive trend. Just to add some flavor to Ricardo's comment.

All right. Secondly, if I may, total distribution of dividends plus IOC, obviously this year was a little bit lower compared to the previous 12 months. I obviously understand that it has to do with cash flow generation that was lower this year, etc.

But I wanted to ask, as you grow again and obviously working capital dynamics become more favorable as the Company grows and I don't know if CapEx will come back to the 2015 levels very rapidly or not, but do you see room to increase this figure from the last 12 months and maybe even have a little bit more of an aggressive balance sheet structure, or is it difficult to give some color on the specific number for the next 12 months or so?

I think just a couple of points there. During 2016, we returned approximately BRL10 billion to equity holders. Like you said, that was a little bit lower than that of 2015 and our policy for some time has been to return to excess cash to shareholders and have done that. And if you go a little bit back like three, four, five years, you see that our payout has more than doubled in that period.

If you look at how the year progressed or evolved over the course of 2016, this payout has increased. And why is that? Because when you look in terms of cash flow, there was specifically a normal cash flow in the tax line in the first quarter and that's, like we said in the first-quarter results of 2016, that was diluted over time. And so as a result, the shorter the period of time that you look at that line, the harder it is to reconcile, but that impacted the full-year cash flow generation for the year when you analyze it.

Without giving any guidance in terms of payout, I think what you should expect, what we have done in the past is that without that impact, you get to (inaudible) that we use our strong cash flow generation, which number one is reinvesting in the organic growth of our business, which we already discussed some of the uses of cash for that purpose.

Number two, investing in organic growth of our business, which we have already also discussed some of the opportunities and then return the excess cash to our shareholders, which we have been doing consistently over time. So again, that's as far as we can go to answer your question, Antonio.

All right. That is helpful, Ricardo. Thank you.

Lauren Torres, UBS.

I think you started the call mentioning that this was your most or one of your more challenging years in Brazil, but obviously you've had volatile conditions before. I guess I am asking you to look at the past to predict the future and as we think about trends and the consumer hopefully stabilizing and coming back more, maybe particularly more in the second half of this year, I was just curious to get your perspective if there's a lag effect on a return to better beer and soft drink growth. Meaning the consumer may feel better, but the categories that you participate in take longer to come back.

Just curious to get your perspective on that. Is this more of really a 2018 event, or just off of easier comps, do you feel better about this year too? Just general perspectives would be great. Thank you.

First, let's understand quickly 2016 again. Three main drivers led to the EBITDA decline that we had. The first one is connected to the macro here in Brazil. So we know that economic activity, it was going down for the second consecutive year. The unemployment rate is peaking at the highest rate recorded in years leading to the continuous decline in disposable income and declines in the industry.

So second is that, in the first quarter 2016, we were subject to the VAT increase in some states putting additional pressure on our top line.

And third one is really the temporary impact of the FX in our cash COGS as Ricardo explained. So we had good learnings in 2016, but again we will do the main calls that we made last year, we will do the same really looking for the long term and investing to make sure that there is ability to be healthy for the long term.

So moving to 2017, I think there's four points that are important to highlight. One, 2017 started with signs that the main macro headwinds are dissipating, will be dissipating. First, inflation continues to decelerate. GDP is continuing to be flattish after two consecutive years of decline. And importantly will are still increasing with respect to reverse the trend in the second semester.

And fourth, as a consequence, disposable income is likely to resume growth towards the end of the year, so better news for 2017 (inaudible).

Number two -- the second semester of 2017, the FX impact. Our COGS year-over-year will decelerate, even becoming [discretionary pricing]. And third, tax hikes in 2017 will not be so significant as in 2016 as the most representative VAT rate increase to impact us is Rio de Janeiro from 19 to 20 (inaudible) much, much lower than previous year.

And fourth, we have a strong plan, so I will not repeat my speech, but elevate the core is important investment in the [VBI] of our brands, the innovation for our brands, Skol and Brahma and really make sure that they have the right execution in the market, even better than we have now.

We are also improving our primary and secondary packaging, enhancing the brand's quality perception. So in all the packs that we have done shows that the new VBI of Skol (inaudible) significantly increase the attributes of quality, drinkability and modernity and has also increased the consumer interest in purchasing the brand.

Premium continues to be big, so just a reminder, preference of premium brand is already 30% way below the marketshare, have been growing in (inaudible) and Budweiser is leading the pack with the growth of more than 20% year-over-year gaining marketshare and leading the premium segment.

Near beer is a huge [success]. We continue to be there. In-home, have already explained about the RGBs and the off trade, so growing, going on the right path and in the (inaudible), the key (inaudible), the key brand in (inaudible), will continue to be key because it's a way to drive volumes and build brands. The Carnival is a great example. We have been investing in [high] Carnival for eight years, [strict] Carnival, that's basically with the [seat] of Rio de Janeiro, we created that again, supporting, despite that people walk the street and have fun in a responsible way.

So we continue to do that. We see the Carnival in Sao Paulo was almost double or more than that and Skol was there, so it's important to connect the brand with the people in each [stage], in each (inaudible). It's good for that. It's good for the volume as well.

In the out of home as well, we increased -- put a step up in our service level to the point of sale. That is good, but could be even better, to assure their assortment, their availability and the great execution that we need.

And then if we go to the long, long, long term, we continue to be bullish here in Brazil -- on Brazil. We know that is not a straight line up, but (inaudible). Every five years or so, you have one or two years where things go sideways or backwards. That's the reality of an emerging market. But we have a few markets in the size and the structure of growth drivers that we have in Brazil.

So first, demographics. LDA population continues to increase by 1.5% every year, per capita, despite a considerable upward social mobility in the last 16 years and the consumption boost driven by the emerging [middle] class. We did not even get to half of our journey. Brazil remains a country of different countries inside one. So the opportunity per capita here.

And innovation, given its size in a different reality (inaudible) in the country. There are a lot of opportunities for innovation driven by consumer trends, premiumization, health and wellness, near beer, among others. So we are continuing to be bullish in Brazil. 2017 seems to be macro-ized a better year and have a very strong plan to tackle this opportunity.

That's very clear. I guess I was just trying to get a sense if there is a lag effect. Meaning the consumer comes back, but the beverage category takes a little bit more time, but I think I understand your direction.

If I could ask just one other thing then. The VAT increases that we saw coming into last year and affecting you last year, is there more threats or circumstances we should be thinking about for this year?

So just reminding, in Brazil, each state has its own model, own tax rate and any state law that increases the VAT rate must be published until December 31 of the previous year and since we already have the visibility of the laws approved by the states, we know that the VAT rate increases for 2017, they are a small fraction of what we have seen in 2016 and we also know that the only meaningful impact is the one of Rio de Janeiro that came from 19% to 20% rate (inaudible) as of March 31 like Bernardo already mentioned.

That said, I think what we can say also in terms of VAT is that the cold beverage industry holds a permanent and constructive dialogue with each state government with the intent of showing that what we believe is that a lower tax burden on the industry enables a greater potential for volume growth, further investment and as a result allows tax collections to continue to grow with no pressure inflation or (inaudible) investment. That's the model that we believe and I think what we have seen in terms of evolution of the behavior of some of these states is that migration towards that model that we believe.

Thank you.

Robert Ottenstein, Evercore.

A couple of questions. First, earlier on in the year, one of your competitors started to pursue some fairly aggressive discounting. Can you give us any kind of update on whether that is continuing, whether it's getting worse and I understand the conditions, the competitive conditions are always tough in Brazil, but are you seeing things stabilize on that front?

So it is very important to start to answer a question like that by just restating what is obvious, but very important to say that the Brazilian industry has always been very competitive and today is no different. It is no different either way. What happened in 2016 we believe is not related to what one competitor is doing, but what is going on with Brazil. We are facing a severe crisis and with significant decline in consumer disposable income.

We see this in our own business providing affordability in a profitable way. Returnables are gaining a lot of weight in 2016 in spite of all the execution gaps that we still have no doubt about, represented 23% of the volumes in supermarkets.

On the other hand, some value brands from competitors also benefited from this scenario, sometimes not in a profitable way, which explains some of the marketshare volatility that we have had.

I think what is important to highlight is the sequential net revenue per hectoliter increase, which somehow is in line with what we have seen in the previous year, which shows I will say that there is a normalcy, if you will, in the Brazilian market at the moment. I think that's as far as we can go, Robert.

Understood. Possibly related, and I don't know if you can comment on it, but I guess [Cacobe] has been down now for a while. I understand it is going to be replaced. Are you seeing or sensing that competitors are -- are they paying their taxes from what you can tell, or is it having any effect on the competitive dynamics?

Robert, I think, first and foremost, I think one of the most important things that the government recognizes is that it's very important for the industry to have an external monitoring system and so I think that has been said time and time again by the government. This new monitoring system needs the time to be in place and I think the government is working to get that in place.

In the short term, we see no changes for anyone to behave differently. It would have to be like a structural change and I think just the intent of the government and the fact that the government is working to get this external monitoring in place I think is enough to prevent people from structurally changing their behavior. I think that's as far as also we can go, but again we also believe that it's very important [to have] external monitoring system for the beverage industry.

Thank you very much. Appreciate it.

Jose Yordan, Deutsche Bank.

I appreciate the whole conversation about not giving -- not tipping off competitors, etc. with asymmetric information, etc., which is why I'm a little more confused now about why you stopped giving marketshare information on a quarterly basis last year because obviously your competitors have that and you are not giving anything away because I think when you talk about 66.3% for the year, based on the estimates I had for marketshare for earlier in the year, it basically brings you to closer to 65% or something like that.

And I appreciate your comment about it increasing already in 2017, but wouldn't it be a lot more helpful in the absence of more specific top-line guidance to substitute that with going back to releasing the marketshare information on a quarterly basis I think would help the market to have the tools to do what you are not doing with guidance this year.

So is it possible for you to tell us now what the first three quarters of the year were in terms of marketshare for beer in Brazil?

I think, first, a couple of sources in terms of marketshare like we have said in previous calls. I think there's internal sources. There's Nielsen. There's [Cacobe] and there are other sources of marketshare. I think each of those sources, they are very important for specific reasons, but they are in nature very incomplete as well I think.

So Cacobe has the variations of inventories and (inaudible), so the shorter the time that you look, the harder it is for you to draw any conclusions. Trends are very important. However, trends are very, very important. We acknowledge and we hear you when you say specifically given the fact that Cacobe is no longer there for you guys to make your projections that it gets harder for you to read and etc., but the only publicly available source to measure marketshare in the full year of 2016 is Nielsen. That is a fact and we, as a company, we decided over the course of 2016 to disclose only during the full year the marketshare.

We can and I will go back and outside the call follow up with you in order for you to give you more color and how you could build your models with publicly available information, but the fact is that at this point the Company has decided not to provide quarterly inflow marketshare.

Part of the source -- the important thing is that the trends that the source shown to us are the same, so that's what I can say to you and then again we started the year with the marketshare increasing in a positive fact.

But it is fair to say that in the fourth quarter of 2016 that it did dip below the nine-month number?

(multiple speakers) we don't provide the quarterly March data.

All right. We will take it off-line. Thanks.

Alex Robarts, Citigroup.

I want to go back, sorry, to the marketshare number in Brazil beer and a couple of questions around that. The first one is, when we think about you reaching the 66.3%, the 120 basis point loss in 12 months, our research suggests that this was mostly within the value segment. Trading down spurs demand in the value segment. The response of RGB 300 ml, very effective and such during the year, giving us some numbers of how that has built up in the supermarkets, but is it fair to think about the 120 bps of loss in beer marketshare as happening mostly in the value segment, or any color that you can give us as to where that loss occurred during the year.

And the second part of the marketshare question, so when we think about your strategy to rebuild, you are being pretty open about that. That's a key priority this year and it also sounds like it's not going to be at the expense of necessarily a big hockey stick move in SG&A. You want to be more effective than that and might it be just perhaps possible to think about not going back to the 67% and 69% and thinking about maybe a lower marketshare range to get margins back quicker and any color you can give us beyond what you've hinted at or referred to as what do you think can be the pace of rebuilding that beer marketshare during the year? So a couple questions around the marketshare. Thanks very much.

Thank you for the question, Alex. So I think you are absolutely right. When you have an economic situation like the one that has been living in Brazil for the last couple of years, what you tend to see not only in our industry but overall in different consumer industries and even like the automotive industry, whatever it is, is that you have premium and value suffering less proportionally to the mainstream industries, as we are disproportional and again, the mainstream market disproportionately more important when you compare to some of our competitors.

Of course, it is mainstream customers proportionately who are in this environment like you, like you pointed out yourself. And again, that is the dynamics that we have, but like you also said, when you move forward, I think this is a segment that also benefits the most from the recovery (inaudible). So the same downside represents a higher upside for a recovery.

And like Bernardo said in his speech and like we put in our outlook session, Bernardo is going to develop that in a moment, I think we are -- I think the word that we are using was cautiously optimistic about 2017 for exactly the same reasons that made some of the previous year quarters like that so difficult for the organization. And I don't know, Bernardo, if you --?

Again, I don't know if you want to do any follow-up questions, but we see that there is a lot of questions still in the line, but, Alex, I think you are going to be the last one today. We will follow up with everyone that is in the line privately because we have already overcome our time by 12, 13 minutes already. So if you have a follow-up question, Alex, we can take it from you and then Bernardo is going to do a closing.

So when we think about the rebuild, it's just kind of -- do you think it is possible that this recovery of marketshare occurs really in function of the economy improving, or do you think that there can be something more company-specific that can perhaps anticipate that and does it frankly make sense to keep the 67% to 69% range for this year? So that's the follow-up on that.

So, Alex, taking your question and to do a closing as well. So (inaudible) why we think that 2017 in Brazil specifically will be a better year. So again, first one, just to repeat. The macro will be better; unemployment going down for the second half of the year; disposable income is likely to resume growth towards the end of the year.

Just to give one, two examples on the macro side, and this helps our business, it helps our core brands because (inaudible) and when disposable income increases, they have more the benefits of that. Our core brands mean Brahma, Skol and Batchka. The first point as to why in terms of we are cautiously optimistic in the industry.

The second impact in our COGS year-over-year will decelerate. So it is very, very important to us. It was a big deal last year.

And third, the tax hikes for 2017, as I explained, as Ricardo explained, will not be so significant as it was in 2016. So the only exception is Rio de Janeiro. That is a minor one compared to what happened last year. So the macro will help.

Those two things that I -- the FX and the taxes will help as well. But the most important one, we have a strong plan and then the economy, it is going back again. That will help our core brands and then you have boosting investment in a smart way in our core business. I think that could make a big difference for us.

So I repeat, so talk about new VBIs for the brands. Packaging enhancement, that helps the quality and perception of those brands. In terms of the core business stepping up, our service level, as well through the assortment, will be there. The key branding and selling moments like we've done in Carnival that not only drove the volume, but the brand actually as well, a fully integrated marketing sales plan. So that will help the core business and you will get this positive trend I would say (inaudible) in terms of disposable income and industry.

So premium continues to be very important. The portfolio is amazing that we have. Preference of premium brands is already 30% of both the marketshare. We have the leading brand of the market, that's Budweiser, and the portfolio, it's very relevant.

Near beer continues to help. The in-home occasion working hard, not only in the RGBs, but how it can really access -- improve the shop experience in the stores, some e-commerce initiatives as well and, in out of home, just to repeat one thing to keep (inaudible) continue to be significant.

So having said that, we would think that 2017 pretty sure that we are -- much better year. We are confident in our plan. Our team is very, very inspired by the brand, very engaged on that. So that is it. So we really think that the first signs of the year, January and February, as I said, in terms of the marketshare could tell us that this year we are on the right path. So thanks, everyone. Thanks for the call. Bye-bye. See you next quarter.

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