Ambev SA (ABEV) 2022 Q2 法說會逐字稿

We would like to welcome everyone to Ambev's Second Quarter of 2022 Results Conference Call. Today with us, we have Mr. Jean Neto, CEO for Ambev, and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website ri.ambev.com.br as well as through the webcast link of this call. We would like to inform you that this event is being recorded (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 our 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 the 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 change 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 first quarter of 2022 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 will turn the conference over to Mr. Jean Neto, CEO for Ambev. Mr. Jean Neto, you may begin your conference.

Good morning, and good afternoon, everyone. Thank you for joining our earnings call for the second quarter of 2022. During our last call, I mentioned that we started 2022 well positioned and that I came out of Q1 encouraged with what we delivered. As I review Q2 results, I see even more evidence to be confident going forward and here's why. This quarter provided a glimpse of consumption patterns in a post-Covid world. In several of our markets, reopening continues well underway with services and on-premises businesses coming back. And as this takes place, we have once again been able to meet the moment. Ambev grew 6% in volumes, reaching 42 million hectoliters, which is 15% higher than 2019 levels. It is the first time we reached more than 40 million hectoliters in a second quarter.

This led to a net revenue growth of almost 20%. In addition, organic EBITDA and cash flow grew over 17% compared to the same period of last year. So let's talk about Brazil. In Brazil, we witnessed more clearly the consumer come back journey to the on-trade and overall out-of-home occasions leading to another quarter of solid top line performance. In beer, we estimate we gained market share versus last year and sequentially versus Q1 this year in both volumes and value. Volumes grew by 8.5% in the quarter and by 5.2% in the first half. To date, we grew 2.2 million hectoliters, leading the industry expansion as we estimate that the industry grew almost 0.5 million hectoliters. In terms of segments, premium grew more than 20%, led by Original and Chopp da Brahma, which are more relevant in their own train channel.

In fact, this quarter, Chopp da Brahma achieved its highest volume in the second quarter with 40% more buyers than the prepandemic levels, while our core portfolio sustained its momentum, increasing volumes low teens, and we continue to invest behind developing our Core+ brands, (inaudible) and Spaten. Net revenue grew 23% with net revenue per hectoliter growing about 13%. And finally, EBITDA in Brazil beer grew 27.5% organically with margins expanding by 80 bps. Talking about NABs in Brazil, we delivered another great performance this quarter. Volumes grew 16%, driven by healthy brands, especially in the out-of-home occasions supported by BEES. We estimate we gained market share again this quarter. In CSD, Pepsi brand grew more than 20%, driven by the great success of Pepsi Black, which almost doubled its weight within our PEP brand.

Net revenue per hectoliter grew 22% driven by revenue management initiatives, the premium mix and package mix as single-serve packaging grew 37% this quarter. EBITDA grew organically 92%, expanding margins versus last year by 500 bps. Regarding our technology platforms, over 86% of our revenues are coming through BEES. On the marketplace, in June, we announced a partnership with Grupo (inaudible), who will offer a vast range of products on our platform via a 3P model, just like BRF, delivering an even better assortment and service level for our clients. The delivery fulfilled 15 million orders, 2% below the previous year, mostly impacted by the rise of out-of-home occasions. GMV grew by 7% compared with last year and we kept a 4 million month active users in the delivery. We continue to invest behind adding more features to our app and delivering a better user experience to our consumers and BEES back grew TPV quarter-over-quarter by almost 40% and now reaches about 300,000 customers.

Turning to our international operations, in last, overall volumes grew by 1.5%, led by Bolivia, which benefited by the reopening. In Argentina, we remain cautious about the impact of rising inflation on consumption despite flattish overall volumes in the quarter. In Chile and Paraguay, Premium and Core+ continued to gain weight among our brands. Last net revenue per hectoliter grew 38%. In CAC, overall glass supply constraints remained, coupled with a tougher short-term competitive environment in Panama, this all contributed to a 10% decline in volumes and a flattish net revenue in CAC. Talking about Canada, despite the reopening that took place, industry is still sluggish. We estimate that beyond beer industry declined by almost 9% in the quarter. Talking about beer, we estimate to have gained market share led by core and value brands. Now I would like to talk about brand building.

During our Investor Day, we explained our framework based on 3 pillars: mind, mouth and heart. And this is a quarter to be proud of, of how much we have evolved in the last few years in brand building. This evolution is no longer going unnoticed. Last year, we were awarded 7 prizes in an festival of creativity, in this year, 12. Ambev was the most awarded Brazilian company in the festival with lines for all of our beverages categories. Brahma and Budweiser were awarded in beer, Guarana in ads and Mikes in beyond beer. Talking about our framework, starting with mind, we strongly believe that being creative is the best way to not only capture consumers' attention but also engage with them in a meaningful way. Brahma brought home its first-ever Golden Lion and 7 Lions in total, which is an absolute record. It was the most awarded brand in the world in the social media category with our Foamy haircut campaign.

The results of all this creative effort helps Brahma continued growth in brand, health KPIs. Now moving to mouth, key recent innovations continue to grow as we keep launching products to delight all Brazilian tastes. Our most recent project is Brahma (inaudible) a special limited edition, which is brewed with 2 types of mouth to create a darker and even creamier beer. We continue to collect awards for our innovations. In June, we were listed one of the 20 most innovative companies in Brazil by the MIT Technology Review, a study that evaluated innovation capabilities in more than 1,000 companies in the country. Finally, going to our third pillar, the heart, here, it's all about being relevant in consumers' lives and connecting through their passion points. After the 2 years gap due to COVID-19, our brands continue to be a fantastic platform for tiering together.

Brahma helped bring back [sjonestivities] in the Northeast of Brazil, one of the largest and most traditional celebrations in the country. Budweiser presented the NBA House 2022 a space where more than 40,000 people had the opportunity to watch the season’s playoffs and bags created the Urbex festival, an urban music and art circuit that helped to awaken different areas in the main urban centers of Brazil. We will keep consistently focusing on mind, mouth and heart to make sure we are relevant, innovative and loved by our consumers, which will make stronger brands in the long term and help our organic growth trajectory. To conclude, our performance in Q2 accelerated in Brazil even more than we expected, more than offsetting some headwinds we had in our international operations.

It was a great H1 and we will work to deliver an even stronger H2 in terms of both top and bottom line despite facing a tough comp in Brazil beer volumes in the third quarter and the continued volatility and inflationary pressures. We are not making any changes to our guidance for the year relating to Brazil beer cash COGS per hectoliter growth between 16% and 19%, excluding the sale of non-Ambev marketplace products. Moreover, we remain on track in terms of our main ambitions for the year, that is to get Brazil back to bottom line growth, to have a consolidated Ambev organic EBITDA growth ahead of the organic growth that we had in 2021 and to improve our return over invested capital. Lastly, I would like once again to thank the entire team for the ownership mindset in delivering results and transforming the company and a special shout out to the marketing team, congratulations for the amazing performance at [Cannes]. Thank you for your time.

And now I will hand over back to Lucas.

Thank you, Jean, and hello, everyone. Our financial performance in Q2 was fairly consistent with the first quarter in terms of what should be the same and what should change in 2022. What would not change? First, top line growth remains key. We delivered nearly 20% net revenue growth overall with Brazil once again being the main highlight. Second, input cost pressure remains a sticking point. Cash COGS per hectoliter grew nearly 18% at the consolidated level, while for beer Brazil, it grew almost 14%, excluding non-Ambev marketplace products. And third, we would continue to focus on value creation drivers. The name of the game here continues to be improving our return on invested capital, building on our progress in 2021. And in terms of what would change, first, net revenue performance more driven by net revenue per hectoliter than volumes as we adapt to a higher inflationary environment.

Net revenue per hectoliter grew almost 13% and volumes grew around 6% in the quarter. Second, cost headwinds would come mostly from commodity inflation rather than FX. Commodity inflation was more explained by the increase in Brazil beer cash COGS per hectoliter, driven mostly by aluminum and barley, which was partially offset by better RGB mix. Third, SG&A growth should improve. Cash SG&A grew about 15% in the quarter with sales and marketing growing almost 22%, thanks to continued investment behind our brands and innovation, distribution growing 18%, mainly due to rising diesel prices and admin expenses growing just around 2% given lower variable compensation accrual once again. And fourth, tax credit one-offs in Brazil that positively impacted our EBITDA, financial results and effective tax rate in Q2 of last year would be a factor this quarter.

And it was a factor but for a different reason than we originally anticipated. We recognized in the quarter about 1.2 billion in tax credits, of which a little over 900 million in other operating income and approximately 300 million in our financial results. This gain also relates to the inclusion of the ICMS state tax in the taxable basis of the PC and the COFINS federal taxes, which was declared unconstitutional. As I have mentioned in prior calls, there is still pending litigation in this matter. And during the quarter, we concluded together with counsel and external advisers, both the legal viability assessment as well as the quantification of this additional portion of tax credits for the PC and the COFINS that we overpaid over the years. As a reminder, these tax credits are technically part of our normalized results from an accounting standpoint but we disregard them for purposes of calculating our organic performance, treating them as a scope change.

Please refer to our financial statements for further details. Now given our performance in the quarter, we are well on track to deliver a better organic EBITDA growth in 2022 than the 10.9% organic growth we delivered in 2021. Brazil's recovery this year is turning out to be stronger than expected, which is more than offsetting the declines in CAC and Canada year-to-date. As for last, year-to-date, Argentina is delivering EBITDA growth slightly ahead of local inflation while the other last countries delivered EBITDA growth in H1, driven mainly by Bolivia, which is finally recovering from COVID. And putting this quarter's performance into perspective, since Q3 2020, we've managed to deliver net revenue growth above 13% quarter after quarter, and this was true again in Q2. So the growth is there despite all the headwinds we faced. And the good news is that in Q2, we finally managed to deliver growth and profitability in Brazil, which had been lagging for a while.

Brazil beer expanded EBITDA margins by 80 bps, while Brazil NAP expanded EBITDA margin by 500 basis points. No doubt, there's still work to do on the gross margin side and in terms of consistency, but it's a start. Speaking of profitability, as I've mentioned in prior calls, we've also looked at profitability in terms of working to consistently improve returns on invested capital year after year. And here, we're also happy with the progress we've made so far this year. As first, we continue to look at ways to optimize our business through financial discipline on the cost and expense side as well as improved resource allocation across our businesses and markets; and second, improve return on invested capital as we look to digitize and monetize our assets. Here, the scale-up of the technology platforms such as BEES and Z delivery are helping us improve not only no-PAT growth, no-PAT margin but also asset turnover.

It's still relatively early days for these platforms, so we definitely see more upside going forward. Now let's turn to our cash flow and our financial performance below EBITDA, and I will close with some words on ESG. Cash flow from operating activities totaled about 2.2 billion in the quarter, which represents an increase of about 17%. Normalized profit grew a little over 4% in the quarter, given EBITDA growth and a lower effective tax rate, partially offset by higher net finance expenses versus Q2 2021 of around BRL 200 million. Net finance expenses were mainly impacted by the continued increase in the carry costs associated with our FX and commodity hedges in Brazil and Argentina, which should continue to be an issue going forward. Our interest expense grew mainly due to fair value adjustments of payables under IFRS 13 but it was fully offset by higher interest income resulting from the Brazilian tax credits we recorded in the quarter.

Before I wrap up, I want to briefly highlight our progress in terms of some important sustainability milestones. On the environmental side, we announced 3 more carbon-neutral plants in Brazil. [Aroucaromas] in the state of Amazons, Jatoba in the state of Minas Gerais and Curitiba in the State of Parana, together, they represent an emission reduction of over 5,000 tons of greenhouse gases per year, and we intend to deliver an additional 4 carbon-neutral operations by year-end. And on the social side, our people that volunteer within the VOA social transformation program have recently joined Gerando Falcoes, a Brazilian NGO of social development in an initiative to mentor social leaders of Brazilian favelas that are graduating at the NGOs Falcons University. We plan to hold our ESG day during Q3 and we hope you can engage with us in this dialogue. So to wrap up, a few final messages.

First, we delivered a stronger H1 than we expected, which gives us more confidence going into H2, particularly in Brazil. Second, our guard remains high since challenges and short-term volatility remain a reality, particularly in countries like Argentina, Panama and Chile. And third, we remain focused on delivering continuous and consistent improvement in our results as we progress on Ambev's transformation journey. Now let me turn it back to the operator so we can go to Q&A.

The first question comes from Marcella Recchia from Crédit Suisse.

Congrats on results. I have 2 questions. First, on price. Based on conversations with the industry participants, we heard that Ambev implemented an off-cycle price increase in the second quarter, so I just would like to confirm that? And if so, it's which channel and pack and by how much? On top of that, based on third quarter hard costs, can we expect the usual price increase to come or could you increase discounts or reduce price in order to push volumes? Let me wait the answer of that before asking the second question.

Marcella, thank you very much for your question. As you know, we are really focusing on finding the right elasticity in the sustainable balance between volumes and net revenue per hectoliter, always with mid and long-term pricing strategy unchanged and prioritizing to do not lag inflation but really work on a favorable brand back in channel mix. So this is a strategy pretty much does not change. Since 2019, we have been growing volumes while improving pricing performance. And we continue to monitor the environment moving forward. But in a flexible way, watching inflation, disposable income, really working on elasticities to make the decisions on revenue management. So having said that, we did a more tactical price increase in May. It was a small one. It was granular in some packs by channel some regions that it was around 2.5%, both on off-trade and on the (inaudible) trade.

So usually, we see in Q2 net revenue per hectoliter going down sequentially, so this is more of an effect on mix in the North, Northeast regions gain weight and then we get the winter coming in the Southeast. But this quarter, what surprised us, it was really that the actions that we took in the channel mix, in the pack mix, during the COVID and the reopening of bars mainly seeing RGB600 MLs bottles, original Chopp da Brahma really getting traction, so this helped us to somehow to mitigate this usually net revenue per hectoliter decline that we have Q2 to Q1. H2, I can't really comment on the competitive, it's competitively sensitive on pricing decisions moving forward.

And the second question very quickly is about the Core+ segment, which was the only segment you did not mention how much volumes grew in the quarter. So it would be nice to hear from you how the segment performed in the second quarter? And also, if you can give us some color on how has been the rollout and acceptance of Spaten?

So that's a good question. Let me give a step up to talk about the dynamics that we saw in this Q2 and then we'll talk about the segments. What we see, Marcella, during a deep study on the previous 2 years is that we developed a lot of actions really to fulfill the in-home occasion, so since the pandemic arrived, we designed ourselves to get the in-home occasion right and we went deep on that, so you could see that (inaudible) was a tax load. Brahma (inaudible) it was a brand in the Core+ segment designed in this Link350ML cans to the in-home occasion, we expanded the 300 ml bottles focused on the traditional trade to get inside homes. So it was really a strategy that we are very happy with it. It's really step changed our volumes. If you combine all these things, it's really something that really led our 10 million hectoliters change in the company.

But what we are seeing in Q2, it is that, so there is a lot of residual of this in-home actions but consumers travel back to our strength that it was, the bars, and then we see everything around this social out-of-home occasion really shining and a lot of residual on in home but really shining the out-of-home occasion. So because of that, we see high end, very strong with Original, Chopp da Brahma that they were waiting for to come back. They suffered a lot and they came back. We've seen somehow big core, I mean 600 ml bottles and led bottles coming back that they were really growing more on the 300 ml bottles in the corporate strategy, it continues. So Bohemia, we kind of unplugged with market initiatives, we are really focusing on Spaten and (inaudible), which owned that segment. And if you see the combination of these 2 brands, Spaten, it was designed more on the 600 ml bottles, (inaudible) the home occasion, if we get this 2 combined, we are growing double digits in this quarter but with Bohemia with negative volumes.

The next question comes from Isabella Simonato with Bank of America.

Just to follow-up, 2 questions. Just first of all, a follow-up on the volume discussion in Brazil. It's interesting when you mention, based on the remarks, pretty much all the main segments grew double digits this year while when we look at the printed volume, they're going to have looks below the average of those segments. So if you just give a little bit more color per segment or what exactly brings the average a little bit down, I think that would be helpful? And the second question is, when we think about the performance of the first half and you guys mentioned it has been a positive surprise, however, you didn't change guidance or I don't know if you think there is more room for positive surprise or if you guys are seeing a more challenging second half? And if that's the case, what would be those challenges, right?

It is in the international market, given what you're now in Argentina or a tough comp in Brazil, so just to get a little bit more color how you guys see the second half?

Let me get the first one and then, Lucas, get the second one. Isabella, so volume-wise, we are very excited about. So 8% volume, it's a great volume in the quarter. But in the end, to look quarter-by-quarter, sometimes it's misleading because consumer is moving from one occasion to another. If you look back to 2019, we are 20% above our volumes in 2019, so we've seen a structural brands in the high end doing well consistently in this period and then we landed in above '20s in the high-end brands with like Original and Chopp da Brahma, as I mentioned, really leading more than that. Somehow, I mentioned that Core+, so (inaudible) plus Spaten, they are double digits. The mainstream is around that 2, so it's low teens too. What really went down, it was the value brands that we really unplugged brands like (inaudible) brings up some regional brands that we have like (inaudible) so they were brands that really took the hit overall.

But we see somehow Core and Core+ taking (inaudible) in the same pace in the high end ahead of the portfolio. Our specialty brands, they are doing very well too, so the (inaudible) they are going doing very well to specialty. So this is one thing. Talking about the guidance, I will hand over to Lucas but just to mention, just to guarantee that he put the right words here on the call but somehow, we are excited. We mentioned that Q1, we had that strange January, that was a one-off hit with Omicron in many markets. Then we had this Q2. Then when we look at H1, it's more something like what we was expecting in Q1, if it was not Omicron. And it's a place that we are better than we were in Q1. And what I mentioned in my initial statement is that we believe that H2 will be strong. We are confident that we will be better in top line and bottom line in H2 when we compare with H1.

So somehow, if you put the numbers, we are confident but I will get Lucas to kind of round it up.

Sure. Thank you, Jean. Thanks for the question. Starting with the guidance, the guidance that we gave for the year was related to cash COGS per hectoliter in Brazil beer, excluding non-Ambev marketplace products. And that was the guidance that we gave in Q4 when we announced the full year results and announced our expectations for the year. And that guidance stands. Year-to-date, the cash COGS per hectoliter in Brazil beer, excluding non-Ambev marketplace products is trending at 14.5%, so below the range, which is good. But again, given that not 100% of our costs are hedgeable, we still see merit in keeping the 16% to 19% outlook for the year as our official guidance.

On top of that, when you think of our ambitions for the year, just to add on to what Jean mentioned, when we look at our H1 performance, our view is that we come out of H1 more confident on our ability to deliver our ambition of growing ahead of 10.9% organically at a consolidated level, which is what we delivered in 2021. When we shared this ambition on one of our prior calls, I remember I got the question on why we believed growing ahead of 10.9% was feasible. And the answer then was that if we manage to deliver a Brazil bottom line coming back to growth that in and of itself, would be a significant tailwind in our ability to deliver this ambition. And if you look at our results in H1, there was a step-up in Q2 in terms of our overall performance and that made an enormous difference on our total EBITDA growth for Ambev in the first half, which is around I believe, 14%, 15%.

So within H1 at 15% and Brazil, stronger than we expected, we think that if we manage to do a better job in CAC and Canada and last continues to deliver good performance and mindful of the challenges in Argentina but outside of Argentina. last in Q2, the other countries, Bolivia, Paraguay, Chile and Uruguay, they grew double digits in Q2, just for instance, just another data point for you to have. So if we manage to have Brazil continuing momentum in H2, last continuing to deliver, that can be helpful in offsetting potential headwinds in CAC and Canada. But again, we still have work to do there and we're still going to pursue better results in Canada and in CAC in H2.

Just one minor confirmation. When Jean says second half could be better on top line and bottom line than half 1, is in nominal terms for growth, just to double check that?

Yes, inorganic growth.

The next question comes from Lucas Ferreira with JPMorgan.

And the first one is regarding SG&A, if you can. If we're discussing in the second half how to think about SG&A, you have some important events ahead, such as the World Cup, potentially provisioning for bottles again, it's going to be a strong year. So how to think about that? There was already kind of heavy SG&A this first half, so should we see similar trends into second half or that should somewhat alleviate to help you deliver this growing expectations you're talking about? And the second question, Lucas, last year, you guys had some issues with sort of unhedged position because, I guess, the company ended up selling much more beer than you expected, so how to think about that this year? Are you also probably performing a bit better than expected? Are you guys having sort of unhedged positions to do as well? And would those come maybe now at a lower cost given the foreign commodity prices but you cannot say that yet?

Sure. Lucas, thanks for the question. Let me start with the second one on the hedges. So everything that's hedgeable for 2022 has been done, and has been done for quite some time now, so the issue is not around hedging per se looking into H2, the issue is more on the unhedgeable side of our cost base. And you're right, that was an issue last year. There was an increase in the second half of the year on the unhedged portion of our costs. This year, there has been some impact, not enough to compromise the guidance that we gave in Brazil beer but that remains a risk for H2 and that's one of the reasons why we're not making any changes to our guidance of 16% to 19% in Brazil beer, as I mentioned in my prior answer. So again, the issue is not the hedging side, that's done for 2022, the issue is more on the unhedgeable portion of our cost.

And again, we are living in higher inflationary environments overall that applies to cost, that apply to expenses and that's a good segue to try and answer your first question around the SG&A. What we anticipated directionally for SG&A in 2022 was a lower growth of SG&A year-over-year as compared to 2021 to 2022 because of the lower accrual for variable compensation. As you will recall, Lucas, last year, one of the main factors that led to a higher SG&A growth year-over-year versus 2020 was precisely the fact that the recovery was much stronger than we expected and 2020 was a no bonus year, so that created a double whammy effect, if you will, on the admin side through higher bonus accruals. That's not the case this year so far. Obviously, H2 will depend on how we do versus our budget and then we will accrue accordingly.

So with admin expenses growing at a lower rate because of lower year-over-year bonus accruals, that should help us, for the year, deliver a better SG&A growth. And then on the sales and marketing side, I think the point to call out is really Q4 and Q3 as we prepare for the World Cup. So there is sales and marketing investment for an event of that proportion. It's a great opportunity that we have coming up in Q4 to really leverage not only our brand portfolio but also our technology platforms, to really meet the moment, serve clients better, serve consumers better during such an important event for markets like ours. So yes, there is a calendarization that's different than CR because of the events that we have coming forward. And in terms of distribution, I think the watch out is really what happens to diesel. I mean diesel has been a factor on our distribution expenses, not only in Q1 but also in Q2, it was a factor.

I think the glass half-full side of the equation in terms of sales and marketing and in terms of distribution is that year-to-date, it's growing below net revenue growth. And I think that's good news. That's something that we always do that sense check. And in addition to that, we're applying our typical financial discipline, making sure that we are as focused as possible on being strict on the non-working money side of our business, which is everything that consumers don't touch POC to release funds to be able to invest more in things like sales and marketing that are going to continue to develop the health of our brands going forward.

The next question comes from Thiago Bortoluci with Goldman Sachs.

I have 2. The first one, a follow-up on the cash cost guidance. Obviously, there are a lot of different moving parts here and we understand that to have an average pay of hedging as part of our commodity needs on a 12 month forward basis but you might also be kind of opportunistic on aluminum price as well. So I'm just curious to hear from you if we should see the impact from lower commodity prices just 12 months from now or you could have decided to go from more or to meet big deal when we could see some part of this reflecting early on over the next quarter? This is the first question. And the second one is regarding the World Cup and the outlook for the first quarter.

Obviously, that there are also a lot of different moving parts just in Brazil with the election but typically, we know that this event is very positive to (inaudible) hear a little bit from you, how much of an opportunity do you see for and beyond that if you believe this volume should be really incremental as you head into 2023 or this might create an overhead for volume next year? Those are the questions.

Thanks, Thiago. This is Lucas. Let me take the first one, then I'll hand it over to Jean to talk about the preparations for the World Cup on the commercial side. So in terms of the exposure to aluminum specifically, I think this is more of a 2023 issue than a 2022 issue. And the good news is that, of course, it's still early to give any sort of specific outlook for 2023. We still have a good portion of hedging to do through the end of the year but the good news is that so far, aluminum is no longer a tailwind. It's no longer a headwind as it has been over the last 2, 3 years. On the currency side, the BRL hedge versus the U.S. dollar is also a tailwind for a change. It has been a headwind for the last 2 and 3 years as well. And so that's the good news so far. Again, still a lot of hedging to do through the end of the year.

And on the glass half empty side of the hedge for 2023, so far, our hedges with respect to barley are continuing to be a headwind but to a lower extent than the levels that we saw in 2022. And the Argentinian peso FX hedges should continue to be a headwind, at least that's what we've seen so far this year. So aluminum, more of a 2023 issue and kind of that's where we are so far this year, let's see how things unfold on the hedging for commodities and FX through the remainder of the year. Over to you, Jean.

So let me talk about the World Cup here. So the question that we are for you to get the information yesterday, we had a World Cup day. So we put like 50 people in the room from inside the company outside to have the best insights of what could we do in this World Cup and we learned a lot yesterday. And the question that we did for ourselves is the statement, so the briefing of the day is what can we do in this World Cup that will make us better in 2023. So that was the statement that we did to 50 people, to outside, to people from agencies, consultants. And it was a day that we learned a lot and we went out with great plans on that, opportunity to resolve problems to make this World Cup more inclusive, to make in the end the young people more interested to make soccer something that can be enjoyed by women.

So we are really thinking about how can we solve problems with our brands with this World Cup strengthening the brands, we are connecting that delivery, how can we acquire users during the World Cup that they will stay, how can we touch the hearts of the Brazilian. The sentiment that we find with the survey is that everybody is waiting for this World Cup as a breadth. Everybody knows that the next 3, 4 months, it will be about politics, polarization, looks like the World Cup is up is a moment that Brazil can come together again. So it will be a very important moment. We are very intuit. We are prepared on the logistics side. We are prepared on the marketing side. It's the first time that we have a World Cup in the summer in this context after 1 year of pandemic and for sure, it will help us this year. The big question is what are the structural things with brands and digital products that we can do to get together with the Brazilian and to make it residual for 2023. We are very excited about the World Cup.

The next question comes from Thiago Duarte, BTG Pactual.

Three questions on my side. The first one is clear at this point that you're positively surprised by the performance in Brazil relative to when you provided the guidance or when you even said that the momentum was strong in the end of the first quarter but it's not clear to me what exactly is the biggest source of surprise? So if I think Jean could comment a bit on that, so if it's the consumer demand or how strong consumers are going back to on-premise? Is it the evolution of (inaudible) Is it the cost side, which is it's on the more favorable side in terms of your guidance, so if you could elaborate a little bit on what you are seeing are the biggest sources or a positive surprise for the performance that the company had in the second quarter and in the first half, that would be great?

The second question is going back on the pricing in Brazil, Jean, you mentioned a small price increase in the second quarter, if you could elaborate a little bit more when we look at the 11.2% revenue per hectoliter growth in Brazil beer excluding marketplace, how mix and particularly packaged mix with the incremental margin is driving that number? That would be very helpful as well. And a third question would be on working capital. It's not only on Q2 but also in the entire first half. There was a shift in working capital consumption, which is not very common, considering that you guys are growing volumes and BEES is gaining share and then I presume that is positive for the working capital of the company as you guys (inaudible) if you could elaborate a little bit on what's driving that working capital consumption ahead of the second half, it will be nice as well?

What surprised us in Brazil in Q2, it was so the moving pieces we knew but surprises are that we continue to gain market share. So sequentially, we gained the market share and the strength of the bars reopening, it was something that came on the top of our range of expectations. So somehow, there was this discussion about when the bars really fully reopen, and it's not just the bars, and the social out-of-home occasion gets a full potential, so what's the size of it and what's the residual volumes of the home initiatives and the occasion that it was created during the pandemic. And this mathematics surprised us. Or at some point in time, we believe that the in-home could go down more for their own trade to go to be reopened or the on-trade was not that strong. So it was the combination of this equation, the residue of the in-home with the strength of the out-of-home that surprised us and then 8.5% in terms of volumes, it was above this map.

And talking about revenue management, you know that we are very granular now on the revenue management. You know that we have a strategy that we have been very inclusive and really maintaining be competitive in the basket of the Brazilian consumers. And what we liked about this quarter is that we really challenged the elasticity in general like good net revenue per hectoliter with good volumes and it was about the carryovers of the previous year, the special things we did, as I mentioned here in May. But a big part of it, it was the 600 ml bottles in the high end, the brand mix helping us in the value brands going down to so the combination of brand mix and 600 ml bottles coming back that made this number that you see in our Q2.

I think in terms of working capital, I would say that the bigger issue was actually Q1 on the payable side. I mean like if we recall our conversation last quarter, our payables in Q1 had an issue around the payment of the variable compensation. And also, there was a higher level of payments to suppliers given the calendarization of our CapEx, so CapEx that was booked, in H2 of 2020 ended up being paid in Q1. So that double effect created a bigger gap in terms of working capital in Q1. And that's by far kind of the biggest factor year-to-date. I think Q2, what the outlier here is more on the receivables side, and it relates to the tax credits that we recognize, unlike last year, when we recognized the tax credits but did not immediately monetize this year, the monetization was faster than last year, and that has an impact on our receivables.

In terms of inventories, no major change in terms of inventory building, there was some more inventory build in Q2 this year than last year but again, it's more of a calendarization effect. And then on the payable side, in Q2, also no big major change other than just a different calendarization of our CapEx spend and when the payments are falling. So I think it's better to look at working capital more on a yearly view because on a quarterly view, you will have, from time to time, these swings related to specific events like the bonus, like calendarization of CapEx, like the tax credit.

The next question comes from Alan Alanis with Santander.

My question just had to do with the competitive dynamics and the connection between soft drinks and beer. I mean, I understand that we've been gaining market share on beer. I think that there are reasons also among your competitors, the separation with your distribution of Heineken from the Coca-Cola system. So congratulations, you're doing a lot of things right in taking advantage of that and gaining market and value share. So what's a bit of a surprise for me is that you're also gaining a lot of market and value share in soft drinks after the Coca-Cola Company lease (inaudible) what are you seeing and what are you doing differently in soft drink in order to be gaining market share and how sustainable is this going forward?

In reality, soft drinks was really the star of this quarter. We are very proud of the performance of soft drinks. And somehow, I've been mentioning for a while now that we've been transforming ourselves into more of a platform. In the past, we were like a beverage company, now, we are a platform, so this is something that people do not understand somehow but we did a huge structural change inside the company in terms of breaking the silos, in terms of having the marketing areas as a marketing as a service, have my frontline team working for the whole portfolio in the best I had siloed teams. So we did a big change to prepare the company to really unlock it's potential of top line growth. On top of that, we focused our efforts on soft drinks, on brands of the future, so somehow, the PepsiCo partnership is stronger than ever.

The lack of Pepsi Black, it was just a surprise for us how the product is getting into the face of the cities and the places that we are launching. So with this strategic view, with the good partnership of Pepsi, this are rising where we had, in the past, sales rep that somehow was a bundle in terms of number of SKUs that they could offer. So the combination of these 3 things really put MABs on fire. We estimate that we are gaining market share. So Pepsi brand, there is a whole ocean of colas that we never tackled, reality is really accelerating and gaining market share and this is really allowing us to do much more things that we would do in the past. So it's an important avenue of growth for us that we are really into it. So I think this is structural.

So you're pushing more towards the total beverage and you are deleveraging your scale of (inaudible) to move more soft drinks?

Yes.

The next question comes from Carlos Laboy with HSBC.

Jean, it's nice that the creative team is winning awards and I was thinking it's a landmark really that you can celebrate your marketers and they're growing importance but can you speak to the (inaudible) to evidence a lasting brand rehabilitation and renovation is happening? Maybe you can expand on the Brahma case or on any other incremental proof points that you have that your core brand and build strategy and renovation strategy are working here?

Thank you for the question, Laboy. Yes, so I could mention. I think Brahma is really one brand that is really on fire, that as a family with Chopp da Brahma appearing a long time that we don't talk about that as the reference of beer in Brazil and the reopening of bars like so on fire Chopp da Brahma with (inaudible) Brahma brand doing very well in (inaudible) in the middle of all this family making an texture of brand and family that is really getting consumers. If you add up, it's really the brand most valuable of Brazil is really Brahma that has more lovers is really the overall brand of Brahma doing very well and it was not like that like 2 or 3 years ago. We rejuvenated Brahma with Brahma double mouth and we stepped up again the quality cues of the brand with Chopp da Brahma coming back as it come in the stage in the Q2.

I think somehow is a combination of mind, mouth and heart that we were able to tackle in the right way these 3 themes with the Brahma brand, for example. Another brand that is doing very well, so we are somehow biased this quarter that Original just explode too. It's a brand that is about the traditional routes of the Brazilians, about the bars, so the bars were closed at the occasion, so everybody is coming to our original brand and Pasco regional. So this is one thing another way that we can mention. And I'm very excited about Beck's. There is a brand that we are cooking in a very low temperature. I don't know how we say this in English but we are cooking it slowly. It's really about getting the pallets right in the edginess of the ruble centers and it's on fire to us. It's the brand that everybody is talking about, the edge of the palate, European, trendy, moving the boundaries.

So we showed you (inaudible) architecture of brands that we have and the archetypes and somehow, I think that our focus brands are doing just amazing. You've seen the numbers. Our price, it was very resilient this quarter. This just means that the channels are right, this means that the consumers are paying and this is what the combination of renovation and innovation. So I don't know if I really answered your question but the last thing that I would mention is that prepandemic levels, in today levels, we have 1.5 million people that's saying to us that that they love one of our brands, so prepandemic level to now, 1.5 billion consumers that lets one of our brands as their loved brands.

The next question comes from Sergio Matsumoto with Citigroup.

I wanted to circle back on the (inaudible) improvement of the new metrics discussed in the (inaudible) With the recent improvement in the top line and the recent decreases in the spot prices of the commodities, I'm wondering if perhaps you can see some changes in how the composition of that return on investment capital might be improved over the coming years with? You had mentioned investment capital turnover as the first phase and then transitioning into more of a no-PAT margin improvement, would just say that transition might occur faster than expected than a few months ago?

Sergio, in all honesty, I think it's very hard to speculate at this point to what extent, our longer-term perspective on the 2 drivers for improving our return on invested capital could change in view of the latest movements in Q2. And the reason I say that is, in Q1, the picture was strikingly different because commodities were on the rise in Q1. So to me, I would be speculating here if I gave you any indication of what change this can imply longer term. I think we have to really wait and see how commodities behave going forward, how currencies move going forward. I think what's important for us on the commodity side and on the currency side is the discipline that we have in following our hedging policy. That's key to give us predictability, that's key to give us time to react as headwinds may arise, so that discipline remains intact and we will continue to focus on that.

Having said that, if we continue to deliver top line growth as we have in the last 2 years, that's obviously helpful for the margin recovery and so let's see how things progress on the top line side. But as we've mentioned time and time again, top line growth remains a priority for us. Some quarters, some years, it may be more volume than price, it may be the other way around like we're seeing in 2022 but we remain kind of steadfast in continuing the momentum that we've built on the top line growth side. And on top of that, we have the better asset turnover potential given the platforms such as BEES with Marketplace and D2C and fintech and as these scale up, we see opportunity to have a better asset turnover profile than in the past but we have to deliver. Let's see.

The next question comes from Leandro Fontanesi with Bradesco BBI.

One question or one discussion that we have with investors is regarding Argentina. So recently, the depreciation of the Argentinian peso at the bond market was much stronger relative to the official rate than it was in previous quarters, and so there's a concern that the net income that you're generating in Argentina, you may have issues to take that money out of Argentina, and especially relative to what you report on your accounting numbers, they use the official rate. So to help us address or to help us understand the risk, if you could like provide us with some information such as what percentage of our total EBITDA comes from Argentina, also how you are addressing that risk going forward?

And actually, I understand that you report how much you have in cash in Argentina and Cuba, which I think is like BRL 600 million, does not look relevant, but it has been reducing in previous quarters, that means you are burning cash in Argentina and then generating the majority of your cash outside of this operation. So to understand if you could potentially allocate some of your costs from other operations in that country, in that way, you don't need to depend that much on taking that money out of the country?

Regarding Argentina, I think, I mean, first, there is a lot of short-term volatility in the country. The good news is that on the operational side, the business continues to perform relatively well when you think of top line, when you think of the portfolio and the health of the portfolio and how that's translating into our performance, not only in core but in above-core segments such as Core+ and premium brands with good brand health indicators, market share in line with what we expected, so on and so forth. However, on the macro side, we are once again seeing more volatility coming out of Argentina, that's a fact. The last time we faced something similar was 2019. And there have been other instances in the past 10, 15 years where there have been years of more volatility and currency devaluation and so on and so forth.

So I think for us here, the way we approach it is stay focused on the micro and the commercial performance because it's a sizable market, it's a growing market, it's a profitable market for us, so that remains a priority number one. Number two, protect what we can protect, what we control on the cost side, do that's where the hedging policy comes in. So we continue to adhere to our on average 12 months hedging for the Argentinian peso and for the commodities, as they apply to the Argentinian business and that helps us protect our costs in Argentina and the EBITDA performance in Argentina. We're constantly looking into cash management, how we manage counterparty risk in Argentina between local banks, international banks and so there's a lot of tracking and monitoring of the situation on the ground to make sure that we're very disciplined and diligent in terms of our cash management, so the operation can keep running, we can continue to work with our clients, work with our suppliers.

We want to keep things running in as seamless a way as possible. And then on the taking money out of the country side, I think the point here is more of, there are restrictions in place for operating in foreign exchange markets, our focus is more accessing foreign exchange markets in Argentina to keep the operation running, the level of imports is fairly low but we want to make sure that we still have access to keep the operation running, so thus, that's the bigger priority. And in terms of cash generation, historically, the cash generation is in Argentina is more skewed towards the second half of the year than in the first half of the year. Hope this helps.

The Q&A session is over. I would like to turn the floor over to Mr. Jean Neto for his final remarks.

So thank you all. Thank all analysts, everyone, who joined today the call time for your time and attention. To wrap up, I like to look at better H1 than Q2. I think it was a great H1 for Ambev for Brazil, and we are confident that we can deliver an even stronger H2. We remain on track in terms of our main ambitions for the year to get Brazil back, to bottom line growth, to have consolidated Ambev organic EBITDA growth ahead of the organic growth that we had in 2021 and to improve our ROIC. And we will continue vigilant on the short-term volatility and cost strategy. Thank you very much. See you in October, and have a great day.

This concludes Ambev's conference call. Thank you for your participation, and have a good day.