Ambev S.A. (ABEV), a leading beverage company, reported a solid first quarter in 2024, with significant volume growth in Brazil for both beer and non-alcoholic beverages (NABs), despite facing challenges in Argentina and tax headwinds in Brazil. The company's CEO, Jean Jereissati, highlighted the best volume performance for a Q1 in history in Brazil, driven by premium and super premium brands.
EBITDA increased by 12%, and the company saw an improvement in gross margins and EBITDA margin. However, Argentina's volumes contracted by nearly 20% due to a challenging macro environment. The call also addressed the company's tax situation, including the renewal of income tax incentives, changes in legislation affecting deductions, and the anticipation of tax reform.
Key Takeaways
- Brazil's beer volumes grew by 3.6%, with premium brands leading.
- Net revenue per hectoliter in Brazil increased by 0.9%.
- Brazil's NABs volume saw a 6.5% rise, driven by health and wellness brands.
- Argentina faced a volume contraction of almost 20%.
- EBITDA grew by 12%, with an expansion in gross margins.
- Net finance results improved, with lower losses on derivatives.
- Income tax expense was affected by higher EBT and legislative changes.
- Operating activities generated positive cash flow; investing activities had a negative cash flow.
- Financing activities also showed a negative cash flow due to a disbursement in the Dominican Republic.
- The company plans to release its annual sustainability report soon.
Company Outlook
- The company is optimistic about maintaining market share and protecting cash in Argentina.
- Brand health indicators for Corona, Brahma, Budweiser, and Spaten are at record levels.
- The company aims to increase the number of consumers who love their brands.
- Market share gains are seen in the premium/super premium segment.
- Focus remains on innovation in the non-alcoholic segment and core brand performance.
Bearish Highlights
- Argentina's challenging macro environment led to a significant volume contraction.
- Increased distribution costs due to dedicated wholesalers' strategy.
- Tax headwinds continue to pose challenges, including changes in legislation.
Bullish Highlights
- Strong brand performance with consumers increasingly declaring love for Ambev's brands.
- Positive trends in premiumization in Brazil.
- Successful strategy and pricing in the industry.
- Positive impact of zero sugar products on margins.
- Focus on free cash flow, especially in Argentina, where hedging is limited.
Misses
- Negative cash flow from investing activities, attributed to lower CapEx investments.
- Negative cash flow from financing activities due to disbursement in the Dominican Republic.
Q&A Highlights
- The company is working to offset the impact of lower IOC deductibility.
- No material administrative or judicial rulings in tax litigation, but decisions are expected soon.
- Tax reform on consumption is under consideration by Congress.
- Interest expense is expected to have a positive impact for the remainder of the year.
- Efforts to reduce sugar content across products and focus on zero sugar offerings.
Ambev's first quarter of 2024 has shown resilience in its core markets, particularly in Brazil, with a strong performance in premium products. The company's focus on cash flow and strategic pricing, along with the anticipated release of its sustainability report, suggests a commitment to long-term growth and market leadership. However, the challenges in Argentina and the evolving tax landscape in Brazil will be critical factors to watch in the coming quarters.
InvestingPro Insights
Ambev S.A. (ABEV) has demonstrated a commendable performance in the first quarter of 2024, with a notable emphasis on premium and super premium brands in Brazil. This strategic focus is reflected in the company's solid financial metrics. With a Price to Earnings (P/E) ratio of 12.94 as of the last twelve months ending Q4 2023, the company is valued attractively relative to its earnings. This is supported by a robust gross profit margin of 50.72%, indicating efficient cost management and a strong pricing strategy that aligns with the company's bullish highlights mentioned in the article.
InvestingPro Tips suggest that the dividend yield of 5.48% as of December 2023 is a key aspect for income-focused investors, especially considering the company's dividend growth of 4.65% in the same period. This demonstrates Ambev's commitment to returning value to shareholders and may appeal to those looking for stable income streams in their investment portfolio.
Furthermore, the company's fair value is estimated at 3.13 USD by InvestingPro, indicating potential upside from the previous close price of 2.37 USD. This aligns with the company's positive outlook and the strong brand health indicators for its premium offerings.
For readers interested in a deeper dive into Ambev's financial health and future prospects, InvestingPro offers additional tips. There are currently 17 more tips available, providing a comprehensive analysis to aid in informed decision-making. For those seeking to access these insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - AmBev (ABEV) Q1 2024:
Operator: Good morning, good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev's 2024 First quarter Results Conference Call. Today, with us we have Mr. Jean Jereissati, Ambev's CEO; and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website ir.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 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 2023 first quarter 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, operating profit and EBITDA on a fully reported basis in the earnings release. Now I'll turn the conference over to Mr. Jean Jereissati. Mr. Jereissati, you may begin.
Jean Jereissati: So, hello everyone. Thank you for joining our Q1 earnings call. Today, before jumping into our first quarter results, I would like to say some words about the situation in the Rio Grande do Sul. Since last week, we have been working with all our energies to help our team and the population affected by the floods in the state. As a Brazilian company, we will always be at the side of Brazilians in all situations. So in addition to protecting and helping our colleagues, we have already donated more than 185,000 liters of water to 11 affected municipalities. We have also been taking water directly from our brewery in the Greater Porto Alegre to supply 4 hospitals in the capital of the state, totalizing 375,000 liters. In addition, we have stopped our production in Porto Alegre to start producing water to distribute to the local population. And we won't stop. We will continue our efforts to find other solutions to help our ecosystem. Now, talking about the first quarter, in our last call, I left you with three main messages regarding 2024. First, that we were and still are confident about volume growth, especially in Brazil. Second, we are working to deliver solid free cash flow generation. And lastly, our main challenge in the year is taxes in Brazil. And this quarter was a good example of this. Brazil had its best volume performance for a Q1 in history in both Beer and NABs. CAC grew volumes. In LAS, in Canada, volumes decline were mainly driven by industry. Cash flow from operating activities and free cash flow grew almost BRL 1.3 billion each versus last year. And net income was slightly negative, thanks to currency devaluation in Argentina into a higher effective tax rate due to lower deductibility from IOC and VAT government grants in Brazil. All in all, a good start to the year. Going into more details on this quarter's performance, I would like to focus on 3 topics. First, the Brazil Beer top line, then Brazil NABs and Argentina. So let's get started. Brazil Beer volumes grew 3.6% in the quarter. According to our estimates, industry was slightly positive this quarter and we estimate to have gained market share. Premium and super premium brands grew in the low-teens led by Corona that grew over 70%, Spaten and Original. And for the fifth consecutive quarter, we estimate to have gained market share within premium brands. In core plus, Budweiser family grew 55%, reaching the all-time high volumes in any given quarter. Our core brands remained healthy, growing slightly above the industry. Growth this quarter was led by Antarctica and Brahma. And our value brands declined double-digits. I'm very satisfied with this shape of volume growth led by premium and core plus with a resilient core, while trade inventory levels remained stable. Now onto net revenue per hectoliter that grew 0.9% versus last year. Let me break it down into the main components of growth. Price to retailers grew above CPI at about 5%. This is well aligned with our strategy of keeping prices in line with inflation plus and minus the mix impacts. In addition, when we look at [indiscernible] data, beer consumer inflation reached 4.2% in the quarter. Such data, coupled with a growing industry, showed how structurally healthier our industry is. However state VAT grew ahead of our pricing. This growth is mainly explained by the different schedule that states updated their consumer price reference tables on which VAT rate applies compared to our price calendar of the year. Although we might continue to see such an impact for the next quarters, that is not a structural headwind. With that, net revenue grew 4.5% in the quarter ahead of COGS delivering a 200 basis points gross margin expansion and a EBITDA margin of 33.6%, 260 basis points ahead of last year. In Brazil NAB, volume grew 6.5% versus last year. Growth was led by health and wellness brands. Pepsi Black grew 33% and now represents 25% of total Pepsi-Cola family. And Guarana Zero confirmed its momentum with a 61% growth. Number of buyers grew versus last year in all categories supported by beer with a highlight to Guarana Antarctica Zero that more than doubled the number of buyers. Net revenue per hectoliter grew 7% as revenue management initiatives coupled with a positive brand and single serve mix more than offset increased VAT taxable basis. Even though COGS per hectoliter grew in line with net revenue per hectoliter on the account of mixed sugar and overall inflation, EBITDA grew almost 18% reaching an EBITDA margin of 28.6%. And finally, Argentina. Volumes contracted almost 20% this quarter as macro environment continues to be challenging. In nominal terms, EBITDA reduced significantly given currency devaluation that took place in December 2023. Lastly, despite the industry performance, cash generation excluding cash [upstreams] was above last year performance. Regarding CAC in Canada, the Dominican Republic led CAC to another great quarter with volume increase, double-digit EBITDA growth and gross and EBITDA margins expansion. Canada saw a a tough industry again. However, we were able to offset top line performance, delivering a slight negative EBITDA performance with a resilient cash generation. And when we put things in a long-term perspective, we see that we made huge progress since 2019. Brazil Beer is a good example of how our commercial momentum continues. We have been making great progress in brand health. Together, our focus brands Corona, Spaten, Brahma and Budweiser reached an all-time high brand health indicator. Innovation continues to work with Stella Pure Gold and Budweiser Zero combined, growing over 40% versus last quarter. And we will add Corona Cero to the portfolio as the official sponsor of the Summer Olympic Games of Paris. These continued to expand and add new third-party products in the marketplace, resulting in a wider assortment of products and a better experience to our customers. And the delivery reached over 65% of the population coverage in Brazil with presence in more than 700 cities. And to close, no different than other years, this year presents challenges and opportunities along the way. Short-term uncertainties are part of operating in Latin America and that's why we focus on what we can control and on our long term strategy. For the year, we continue confident in volumes. Tax will continue to be a headwind, impacting both the top line and the net income. And we will work to deliver consistent and sustainable results, expanding margins and improving cash flow. So thank you very much. Now let me hand over to Lucas.
Lucas Lira: Thank you, Jean. Good morning and good afternoon everyone. I closed our February call by saying that in terms of our financial performance, the name of the game in 2024 would be consistency and delivering growth, profitability and resilient cash flows, despite the Brazil tax and Argentina headwinds. To do that, our focus would remain on financial discipline, value creation and capital allocation. And Q1 figures shows that we are off to a good start. EBITDA grew about 12%, 15% ex Argentina. Gross margins expanded 100 basis points organically, 150 basis points ex Argentina. EBITDA margin expanded 240 basis points organically, 290 basis points ex Argentina. Normalized profit declined slightly by 0.6% and cash flow from operating activities totaled BRL 718 million. Now, today I want to spend a bit more time on our net finance results, income tax and cash flow given the materiality of the impacts from Brazil taxes in Argentina. Starting with net finance results, which improved nearly BRL 600 million compared to last year. There were 3 main drivers of such improvement. First, lower losses on derivative instruments given lower carry costs to implement our hedging strategy for FX in Brazil and for commodities. Second, lower fair value adjustments of payables pursuant to IFRS 13 and CPC 46. Third, the impact of our financial performance decisions in Argentina, where higher cash flow generation during 2023 led to higher interest income. We had lower losses on derivative instruments given our change in hedging strategy and U.S. exposure. And we also had lower losses on non-derivative instruments, thanks to less third-party and intercompany payables exposures. Lower carry costs in Brazil and lower fair value adjustments of payables should continue to help our net finance results year-over-year performance going forward. However, the year-over-year gains related to Argentina will be significantly reduced as we lowered our hedging and U.S. exposure throughout last year. Also, we should continue to see higher costs associated with judicial bonds and judicial guarantee expenses. Now let’s move to income taxes. Our income tax expense totaled almost BRL 700 million in the quarter, which was equivalent to an effective tax rate of 15%. 4 main drivers here. First, higher EBT, which grew from roughly BRL 3.9 billion to nearly BRL 4.5 billion. Second, the final approval during the quarter of our 2023 request to renew the income tax incentive for Arosuco, our subsidiary in the state of Amazonas, which is a one-off. Third, following the December 2023 change in legislation, there were no deductions related to state VAT government grants. Although the new law is already being challenged, we are not yet technically in a position to continue accruing such deductibility. Should the situation change on the litigation front, we will then accrue the corresponding benefit retroactively. And fourth, following the December 2023 change in legislation, there was less IOC deductibility given lower IOC basis for the 2024 fiscal year. We continue to work towards offsetting this as much as possible. In other words, though net income was pretty much flat in the first quarter, these headwinds remain for the time being and should impact our performance during the rest of the year. Since I’m on the topic of taxes, let me provide a quick update on tax litigation and the tax reform on consumption in Brazil. In terms of litigation, there were no material administrative or judicial rulings during the quarter, but we continue to expect decisions at the administrative level in the coming quarters. As for the tax reform on consumption, on April 24, the federal government formally submitted to Congress the draft enabling legislation, which may be voted in the House of Representatives by mid year. Although the transition period will only begin in 2026 and the parameters for the excise tax are somewhat clearer, there are still some important topics to be addressed, such as what the federal and state VAT rates will actually be, what the excise tax rates for beer and sugary drinks will actually be, and finally, how the transition period will be structured so as to ensure that there is no increase in the total tax burden of the industry, which was already among the highest in the world. Okay, let’s quickly go over cash flow now. Cash flow from operating activities was positive, thanks to a combination of EBITDA growth, lower net finance expenses and better working capital performance, where higher inventories driven by a faster inventory buildup versus last year were more than offset by better payables, which benefited not only from a lower crop in Argentina that had adversely affected Q1 2023 but also from short-term raw material market dynamics in Argentina, which should revert going forward. Cash flow used in investing activities totaled approximately negative BRL 1.8 billion, and year-over-year performance was mainly impacted by CapEx investments, which were 12% lower than last year, and roughly BRL 800 million of investments in Brazilian treasury bonds, so there was ultimately no cash outflow. And cash flow from financing activities was about negative BRL 2.3 billion, with year-over-year performance pretty much entirely driven by the BRL 1.7 billion disbursement in January given the Dominican Republic put option. So we began 2024 better cash flow-wise than we did in 2023, which is great, but we still have work to do during the remainder of the year. And finally, regarding sustainability, we will publish our annual sustainability report on our website in the coming weeks. So stay tuned. And with that, now let me hand it back to the operator for Q&A.
Q - Unidentified Analyst: [Technical Difficulty] that you got an injunction for March so that you no longer have to pay fiscal things on top of the state-level subvention. So just wondering, number one, whether this had an impact as well in terms of your revenue per hectoliter. And finally, and also in a related question, historically, we would see the industry and the company passing on higher taxes into prices. It doesn't seem to be the case here. In my understanding from Jean's remarks in the beginning, it continues not to be the case going forward. So if you could elaborate on that. I'm trying to get the full picture on the taxation on sales.
Jean Jereissati: So let me give you some information on that. So, yes, you know that the VAT in Brazil is, we have this methodology that is a substitute, right? I'm responsible for the whole VAT of my customers. So it's a big chunk of an important line for us. What happened? If you look 10 years back to our performance in net revenue per hectoliter in Brazil Beer, some reduction on net revenue per hectoliter Q1 versus Q4 happens more frequently than not. So, if you look 10 years back, this would happen more frequently that what happened in this previous 2 or 3 years, that things changed a little bit because of the pandemic and because of the discussions on the tax reform. But it's important date when turned the year that the states decide to get their tables actualized right, and usually these impact on the net revenue per hectoliter. So this happens more frequently than not. It was different 2 or 3 years ago than the historical. We suffered, for example, this in the NAB business during Q3 and Q4. If you look at my numbers, we suffered a little bit on this VAT changes in NABs in Q3 and Q4. And now we are okay, as we pass it through and find revenue management initiatives. And what I mentioned in my initial remarks, and I'm not sure if you got it right, is that these things, long-term wise, they connect. So what's happening is more of a mismatch that in the long-term these things should grow together. So, we had 18 states that updated their VAT taxable bases during Q4 and the beginning of Q1. We protected the carnival with all these changes happens in March. We already started to passing it through to our customers and to consumers. And long term wise, this thing should be imbalanced. Okay. So let me get to Lucas for Lucas to update you on the theme of PIS/COFINS.
Lucas Lira: Regarding PIS/COFINS, you’re right, Note 17, right to our quarterly financials discloses the injunction that we obtained already in connection with the PIS/COFINS. However, that injunction was granted towards the end of March. So it didn’t really impact Q1. The impact will be seen going forward. Okay. So it’s more of a prospective impact than having any material impact on Q1.
Operator: Next question from Isabella Simonato with Bank of America (NYSE:BAC).
Isabella Simonato: I have just two quick topics. First of all, I wanted to explore a little bit more the cost performance of Beer Brazil, because I understand that this was maybe the quarter, right, when we look for the 4 quarters of 2024 with the easiest comp in terms of cost, right? So thinking about the guidance, right, that you guys provided in Q4, how should we think about this cost deceleration going forward? And if you can elaborate on what drove the minus 3.5% this quarter, I think will be helpful. And the second thing, Lucas, thanks for detailing the financial results performance. But if you could just recap a little bit, you mentioned about some of the effects that might be reversed right, in the next couple of quarters, if I understood correctly, the cash level that you run in Argentina and consequently, the financial revenues associated to that and other deposits and so on. So, if you could just reconcile to us what's the trend of these main lines, I think it would be helpful for us to understand the sustainability of this. That's it.
Jean Jereissati: I will get the first one and then Lucas get the second one. Yes, so our cash COGS in Q1 Brazil Beer ex marketplace declined 3.5%. As you mentioned, you were right, this Q1 was easy comp, but we have been working very hard to get this cash COGS down. So what happened? It was really FX and commodities tailwinds partially being offset by the premium mix and suppliers NPV and inflation overall. But even though the Q1, it's outside of the full-year guidance that we made that it was cash COGS will be in between minus 0.5 to minus 3, we should converge during the year inside this range that we mentioned in the previous quarter. So there is not that much news on here. The plan is going as we did and the guidance we maintained.
Lucas Lira: Let me break down financial results by the main lines just to try and give some additional color on the quarter performance and what shouldn’t change or what should change going forward, if that helps. So the first big impact that we saw in Q1 was related to losses on derivative instruments, which were significantly lower, the losses of last year. 2 main effects here, carry costs in Brazil and lower U.S. dollar exposure in Brazil. So that was big impact. #1, there was marginally some lower exposure to the U.S. dollar on our cost base in Brazil, BRL 1.8 billion versus BRL 2 billion last year. In addition to that, the carry cost declined from roughly 7.5% to 3.9%. So, that’s kind of the biggest chunk of gain year-over-year. And the second is really related to hedging in Argentina. As we disclosed in December, we started the year with no financial hedges. So we carried no carry cost in the quarter whatsoever, whereas in Q1 of 2023, we were still ramping down gradually our hedging. So there was some carry cost embedded into the performance for this line in Q1 of last year. Okay. So that was benefit #1. What this means going forward is with respect to the Brazil hedging strategy, we should continue to see kind of benefits throughout the year, right, assuming carry cost stays where they are today. So the Brazil portion of this gain, right, should continue to be a reality. And for Argentina, we continue to see some benefit going forward, but to a lesser extent, because as 2023 progressed, we reduced our hedging. So the carry cost was gradually lowering as well. So when we lap that, even though we remain unhedged, and as we continue to remain unhedged in Argentina, the year-over-year benefit is lower because we were already gradually reducing our hedging in Argentina. Okay. So that was the big effect, #1. The second one relates to NPV payables. So that was a lower expense in 2024 in Q1. That should continue to be positive throughout the year, right. Jean mentioned that in our cash COGS per hectoliter performance, there’s a negative impact coming from this. But on the flip side, there’s a positive impact in our net finance results pursuant to kind of IFRS 13 and CPC 46. So with the lower interest rates, this line should continue to be positive throughout the year, #1. And also, another important interest expense that’s coming down year-over-year is the CND put option that it was already exercised. So the tail that’s left is still going to impact, but to a much lesser extent. So interest expense should also flow through positively for the remainder of the year. And then I think the third big bucket relates more to Argentina. Argentina, I already talked about derivative instruments, but there are 2 other elements that are relevant. #1, interest income. Since we generated in 2023 more cash flows than we generated before, we started the year with a higher cash balance. And so that translated into more interest income on the cash balances that was deposited in Argentina year-over-year. So that was positive impact #1. And on the losses on derivative, non-derivative instruments line, even though there was an impact of the funds that we took out of Argentina through the blue chip swap, this was more than offset by lower balances that we had in Argentina with respect to third-party suppliers, with respect to intercompany payments. And so the lower cash balance more than offset the impact that we had as we took money out in the beginning of the year. Okay. Going forward, this line is really going to depend on what we do in terms of cash upstreaming in Argentina. Let’s see how the year progresses and also how these cash balances behave. We’ve been reducing them consistently since 2023. So if we continue to do a good job, this should continue to be a benefit going forward. And last but not least, I think the additional piece of information that I introduced in my prepared remarks was on the other financial expenses line we saw in Q1 and we should continue to see going forward. And this is not necessarily just a 2024 point, but it’s perhaps a longer term point to follow, is the expenses related to letters of credit that are necessary to the extent we decide to litigate in the judiciary, our tax litigation. So as you may recall of our tax litigation, roughly 70%, seven zero percent is still at the administrative level. And to the extent we don’t prevail on the administrative level, given that we believe in the merits of our case from a legal, technical perspective and looking into kind of case law in the judiciary, right, assuming we decide to litigate in the courts, which has been the case so far. That entails, right, some degree of letters of credit. So as our administrative cases move to the judicial system, that’s going to require some greater degree of guarantees. And so it already impacted to some extent in Q1. So I just wanted to flag that for everybody’s reference. But again, this is over time, depending on the pace of decisions at the administrative level, which we obviously don’t control, but directionally, this is a line that may continue to impact negatively down the road. Hope this helps.
Operator: Next question from Felipe Ucros with Scotia.
Felipe Ucros: You've had a very good performance on the zero sugar products for quite a few quarters in NAB in Brazil. And I imagine that's changing a little bit your mix in the NABs. So I'm just wondering if you can comment on any effects that, that has. Not sure how the cost of sugar relates to the sweeteners that you use. But for example, maybe less sugar per hectoliter may be good for margins in the long run as the 0 products continue to perform really well. Just wondering if you can comment on the effects that such high growth in the 0 products is having.
Jean Jereissati: So thank you very much for the question, Felipe. So yes, this is a big bet of ours. When you look at our business, our NAB business, we have something around 18% market share in the total business, but we have 30-plus in the no-sugar portfolio when we compare with other products that are no sugar. So this is a big trend that we are very well positioned to serve it more recently. So we stepped up the portfolio with Pepsi Black that is a success. And then last year, we renovated Guarana Zero. Both these products, they have a cash COGS, a VIC that is better when we compare with the sugared products, and they are doing very well. So we are very excited about the performance of more recently of Guarana Zero that we just started. In reality, we were not able to supply all the demand that we have. So we are having some SKUs that we could meet demand with our production. Guarana Zero grew 60%. And overall, we really believe that this rate of growing nonsugar products at 20% for 9 quarters in a row is really something structural that is happening in the business in our company. And yes, it's true it has a more -- a better margin overall this product.
Lucas Lira: And also, Jean, just to complement. And with respect to the part of the portfolio, right, that contains sugar, I think one of the things that the team has been focused and successful over the last few years is to consistently lower the sugar content of those products. So there has been also kind of very good progress on that front as well. So no low sugar, health and wellness trend, innovation targeted there to really leverage that kind of tailwind, but also with respect to the remaining part of the portfolio, consistently lowering the sugar content there.
Jean Jereissati: Through technology being able really to make the most from each gram of sugar.
Operator: Next question from Rodrigo Alcantara with UBS.
Rodrigo Alcantara: I mean I guess this is not the first time we asked this question, right? I mean on capital allocation, right, I mean you certainly have fulfilled your -- committed to cash flow generation, and we have seen that, right, you guys meeting your targets. But somehow, we see this mismatch with the share price in valuation. So I mean just curious here, I mean, if this situation persists, I mean, is this something that could lead us to maybe perhaps thinking on Ambev taking a different approach on buybacks or dividends? Is this -- could this be a potential scenario [indiscernible] to assume in the investment case? That would be my question.
Lucas Lira: Rodrigo, thank you for the question. In short, Rodrigo, the mindset around capital allocation has not changed. So we continue to look towards reinvesting the cash flows that we’ve generated consistently. The resilient cash flows that our business has delivered over the last, right, several years, reinvest in the growth of the business, be it organically, be it non-organically, and over and above those opportunities that we look at, right, on an annual basis or even shorter. We were always looking to return excess cash to shareholders over time. And this will be, over time, a combination of IOC. There has been less deductibility since the beginning of the year, but there’s still some deductibility. So we will continue to look to maximize the IOC that’s still available. So we will continue focusing on maximizing IOC deductibility, number one. And then the balance will be a combination of dividends and/or share buybacks from time to time as we discuss with the Ambev Board consistently, right? And so the Board always looks at capital allocation. So this is always a live discussion with the Board. Historically, our payout has been skewed towards December, given that our cash flow generation, our operational cash flow is very skewed towards Q4, particularly December. So that’s when we have the greatest visibility of the excess cash that’s available to be returned to shareholders, number one. Number two, that’s the moment in time when we’re looking at the budget for the next year, so we have a much better visibility on what we plan on reinvesting for growth in the year to come. And so I think this is going to be more of an H2 conversation than where we are now. But this is always a topic that we look very closely at and are very kind of diligent behind.
Operator: Next question from Lucas Ferreira with JPMorgan (NYSE:JPM).
Lucas Ferreira: My question is on Argentina. I know the situation remains hard to read. But in general terms, when you look at inflation coming down, we've been hearing from other companies that probably first quarter was the weakest point in terms of volumes. If you have the same perception that things could start improving on the margin from here? And then more maybe here to Lucas on how to think about margins from here because what we're seeing is FX relatively stable, right, even the blue, so the official effects kind of narrowing the gap to the blue while inflation remains high. So I would imagine that you guys keep on pace on the top line front in terms of passing on prices to the market. But I would suppose that the impact on cost has been probably smaller than that one on the top line. So my question is basically, if we could see an improvement in profitability in the country given that we're seeing this -- the changes in these effects and inflation kind of going to the right direction, put it this way?
Jean Jereissati: So let me start and then I hand this to Lucas -- hand over to Lucas. Lucas, so yes, Argentina is going through a stabilization plan where we know that there is the need of an adjustment in the country, but we are seeing favorable evolution month after month on the macro numbers, on the fiscal surplus, on CPI decelerations on central bank reserves, as you mentioned, the gap between dollar [indiscernible] is coming down. I think it's still early for us to access if we -- if the volumes will begin to recover from Q1 on. I think it is still early because the country is really adjusting the inventory levels, the wholesaler inventories, the consumers. So it's still -- we are still with the high guard on that. As we have been mentioning before, what we are looking is that -- so we want really to maintain the grip with our consumers and maintain our market share over there and really protecting the cash. So these are the 2 main important KPIs for us and then go through this correction that Argentina is doing. The good part -- so there is a possibility of Argentina really making it work for H2 and for 2025. So -- but for now, I think this is the most we can say. I think it's early to say that all the correction is done.
Lucas Lira: Hi, Lucas. Lucas here. Thank you for the question. Regarding margins for Argentina, a few comments. I think the tougher comp is going to be H2, particularly Q4, subject to everything that Jean mentioned, right? It’s a very volatile situation in the short term. But if the country continues to make progress, I think the bigger hurdle that we face on the margin side, I would say, is H2 and particularly Q4, number one. And number two, I think it’s important to call out that when we look at profitability, it’s important to kind of go beyond EBITDA. I mean, as a company, we don’t stop at EBITDA, right? We keep going and also spend a lot of focus and energy around free cash flow, but even more so in Argentina. But the reason I’m saying this is given our lack of hedging in Argentina, right, even though above EBITDA, our EBITDA margin, right, may be more impacted in H2 given that there is no hedging, no carry costs associated to that, if you look at kind of our margins from a net income standpoint, that could help, right? This dynamic could help offset kind of the headwinds from a margin perspective, from an EBITDA margin perspective, okay? So keep that in mind.
Operator: Next question from Robert Ottenstein with Evercore ISI.
Robert Ottenstein: You mentioned that you had record brand health indicators for Corona, Brahma, Budweiser and Spaten. Could you just remind us what those indicators are? How meaningful that is? And how the overall trend on brand health is in aggregate because presumably not everything is going in the same direction?
Jean Jereissati: So thank you, Robert, for the question. So having a broader perspective, a more long-term one. So we always mentioned that as part of our strategy, the Pillar 1 of our strategy was really to have a portfolio with more people declaring that love one of our brands. So this is the KPI that we follow. So the declaration of consumers that mentioned that one of our brands is one brand that they love. And when we compare today to 2019's, we had -- we have something around 4 million people declaring that they adopt one of our brands as a loved one when -- in this time horizon of 5 years. So it was something around 800,000 a year. The brands that really led this performance was -- they were the mega brands. So Corona is doing very well. Spaten is doing very well. Brahma is very solid. And Budweiser is more stable. But -- so these are the brands that made this uplift. We still have some headwinds on the long tail. So we have many brands like Bohemia, like we have regional brands like Polar that they -- when we adopt the long tail, we have not -- we have been concentrating on the 4 brands, but the brands that we believe that are the brands of the future and the total add-up of lovers in our portfolio, both they are positive.
Robert Ottenstein: And what about Beck's?
Jean Jereissati: So Beck’s, that’s a good question, Robert. Beck’s is, let me look at exactly the right number, is pretty much stable. And in the end, we mentioned in the Investor Day, and we’re going to show you again that Beck’s was really a bet on the super premium. And what happened from the investors – that Investors Day and today, it is that we unlocked a lot of capacity. We were constrained on Corona. We could not make this statement on Corona on that time. We unlocked capacity new Beck’s production. And then Corona is really leading our efforts on the super premium part of the segment, and Beck's will continue there, but Corona is really, really leading the super premium as we’ve been able to produce more.
Operator: Next question from Ben Theurer with Barclays (LON:BARC).
Ben Theurer: Just wanted to kind of get maybe a little more granularity as to just the general consumer trends in Brazil in particular and how you guys have been performing market share-wise in both beer and NAB. And what are the initiatives you're taking to potentially gain further share, particularly in beer? And maybe my sense is needing to catch up a little bit on NAB. So whatever strategies you're putting out as it relates to market share in Brazil?
Jean Jereissati: Okay. That’s a good question, Ben. Let me give you a broader answer on that. So first of all, good to talk about top line brands and the industry. So, industry in Brazil, very resilient, even though we have – and it is structurally better. So in our numbers, industry in Brazil was slightly positive in Q1, and our volumes were record volumes. We never had this volume, so showing that market share gains are there. So the industry is structurally better. So there is no trade down. There is a premiumization trend overall, our core resilient, growing ahead of the total industry. And then we are really trading up with the core plus brands. Now Budweiser is the one, they’re leading in the super premium brands, premium/super premium with Spaten and Corona, okay? So these are – we are very happy with the shape of these volumes. We are really over-indexing investments on the mega brands, making intentional choices on that. And now we are seeing for the fifth consecutive quarter, we’re gaining market share on the premium/super premium. The core plus that we talked for a while that we lose some steam with Brahma Duplo Malte. So now the combination of Brahma Duplo Malte and Budweiser now, they are back on double-digit growth, and this is an avenue that we really continue to bet. And all this strategy with BEES, distribution and finding the right execution for the core to maintain the core healthy is really paying off because we are having core volumes growing ahead of the total industry. So on top of that, we continue to think about brands of the future on innovation. And this year, we are pretty much focused on functionality. So we are upgrading our capabilities to do 0 alcohol beer. So Budweiser is doing very well, Brahma is performing. We are gaining market share in this segment. We launched a low-calorie beer, Stella, as the evolution of gluten-free, now it’s gluten-free and low calorie, very – with price very super premium is doing very well and Beyond Beer, so the portfolio that goes beyond the ready-to-drink. So these are our bets on innovation that add up for the total market share that we are planning. So the portfolio strategy, together with the distribution of BEES and Ze Delivery technology, so these are the 2 bets for us to continue to gain market share. And when we go to NABs, really, the trend – this trend of low sugar, no sugar, is really in our favor. We are well positioned in this trend. And we are – so we distribute the leader – so Red Bull, that is a very important brand on the energy segment that is growing a lot, so there is market share gain coming from the energy side. And Gatorade, there is hydration. That is a very healthy category and that we are very well positioned, again, okay? So these are pretty much the initiative. I could go over here the pack assortment that we are bringing to premium and super premium. I could go over here the returnable 300-ml bottles that give affordability to core. But overall, it’s a portfolio strategy that is really working and intentional bet on brands of the future, innovation on white spaces and a lot of technology to make these things happen.
Operator: Next question from Renata Cabral with Citi.
Renata Cabral: My question is a follow-up in terms of discussions on volume, specifically on the core portfolio. We saw that on this quarter, you grew above the industry. And it seems that the third player is seeking for growing volumes. So it could mean that we could have a more promotional environment in this segment from now on in the market. So my question is about the competitive environment, specifically on the core portfolio. If you're feeling already this pressure in terms of pass through pricing and how are you perceiving this continuation of the growth on the core portfolio, not only volumes but also in pricing?
Jean Jereissati: So thank you very much for the question, Renata. So what we are seeing is really an industry that is on the positive territory and more rational overall when we think about the whole industry. Of course, that we have the first player, the second player and the third player trying to find ground for some of their brands. It’s more like a brand strategy that everybody is trying to put the brands on the right places and have the right proposition in terms of value for consumers. But what we saw as overall industry is really more rationality on what’s happening. So I don’t see this thing about our – the portfolio and something different on the competitive landscape. And we are happy with our strategy. Talking specifically about the core. We still have a lot of room to continue to grow the core. The biggest opportunity that we have in Brazil, in the industry, it is to bring the C class to drink close to the medium income class. There is a big gap over there on affordability and ability to be more intense in this. So there is a huge opportunity for us that even though with this big per capita, the C class still drinks much less frequently than the average middle income population. So bridge this gap, it is something that we are working on to make the per capita consumption solid. So we have strategies for that with our core brands. So the RGB 300 ml for 5 years in a row have been growing. It’s a lower out-of-pocket strategy, a price point strategy that is really paying off, and we want to continue to invest on that. And that’s really some – a place where great brands with the right price point will really include a lot of consumers that they don’t have like the money to do. And they have great margins because they are returnable for us. So overall, what I could say is that, so the industry is healthy, rational with opportunities on the per capita and our strategy in the core is a strategy that is working.
Operator: Next question from Ricardo Alves with Morgan Stanley (NYSE:MS).
Ricardo Alves: I have a follow-up on the last two questions that were asked in Brazil Beer. And Jean, I think you just mentioned rationality in Brazil Beer. And actually, looking at that chart that was really helpful on the revenue per hectoliter, it does seem that your pricing on an ex ICMS effect was quite solid. So I think that, that underscores the message that you just conveyed on the rationality. But when we look at your volumes of 3%, 4%, Heineken (AS:HEIN) reporting high-single-digit volumes, that implies really, really tough numbers for Petropolis, right? I think that, that's just a basic math. And I also think -- correct me if I'm wrong, but I think that Jean mentioned specifically in the remarks that Antarctica and Brahma are doing better on the margin. So I'm curious about the competitive environment, particularly with your smaller competitor. But in particular, again, on the core, it seems that you may be gaining significant share on the margin. So specifically on those 2 brands that I mentioned for you, if there is something more specific you can elaborate on that given the relevance of them for your portfolio? And then just another follow-up on a prior question that was asked on revenue per hectoliter. I'm just curious if maybe there was some impact on the channel mix. I know that I asked this question in the last conference call, but I'm just wondering if besides the tax impact, maybe there was something related to third-party distribution or something that could be maybe a one-off for the quarter and improve down the road? So 2 follow-ups on competition and then revenue per hectoliter.
Jean Jereissati: Okay. Thank you for the question, Ricardo. Let me try to give some information on the competitive landscape and see if it fits your question. So we are – we have a great intelligence here on trying to put the numbers together on what’s going on in the competitive landscape. So we have a whole area that really reconcile Nielsen with our performance, with Ze Delivery information. So we really try to have a broader intelligence on what’s going on. I think what – some competitors mentioned their performance. So what we’ve heard from here is that some brands, some competitors sell out – selling ahead of sellout. So I think this was something that we saw in our numbers, and it was mentioned. So I think we have to understand how this plays. I saw some information coming from the industry overall that the first assessment was a negative industry. But in our assessment, the industry was positive. So when we put all this – put these things together in our numbers, Petropolis, the third player is really trying to find its ground and is performing better than the previous year. So you have to put all these things together and try to make your assessment. And in our numbers, we did increase inventories. In reality, when we begin to pass through the VAT changes, it was end of February, beginning of March. So in the end, we felt that our inventories in the market could be lower than the average because we were by the end of February really passing through the VAT. So we have to put all these things together to have the final assessment. We are confident with our portfolio, with our market share gains. And somehow, this is, I think, what I can mention more. When we talk about channels and the impact on net revenue per hectoliter, so yes, you are right, there is a piece of this happening. There are our dedicated wholesalers. This is an intentional strategy that we have, dedicated wholesalers with BEES going Brazil wide, northeast and north, and this brings – this is good on a narrow eye perspective. So it’s a satellite, there is a lot of reach, but there is some of this distribution cost that goes over the net revenue. When we go direct, it goes in our cash SG&A. So this impact is happening. But we think this is something intentional and structural that we should live with that, it pays off. There is another part positive. There is the brand mix is really positive. It’s really something that is helping. But when we put all these things together, what really came out, the impact was really taxes that impacted the net revenue per hectoliter.
Operator: This concludes the Q&A session. I would like to invite Mr. Jean Jereissati to proceed with his closing remarks. Please go ahead, sir.
Jean Jereissati: So thank you, everybody, who joined the call for your time and attention. We kicked off the year with a good operational performance. We remain confident in volumes, especially with Brazil commercial momentum. Tax is something that we have to handle. But in the long term, this thing should converge, and we will continue working to deliver consistent sustainable results. We are focusing on margins, volumes and cash flow generation, okay? So thank you very much. See you in August, and have a great day.
Operator: This concludes today's presentation. Thank you, and have a nice day.
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