Good morning and thank you for waiting. We would like to welcome everyone to Ambev's First Quarter 2018 Results Conference Call. Today with us we have Mr. Bernardo Paiva, CEO for Ambev and Mr. Ricardo Rittes, CFO and Investor Relations Officer. We would like to inform you that this event is being recorded. [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 first quarter 2017 results.

Normalized figures refer to performance measures before exceptional items which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis in the earnings release..

Now I'll turn the conference over to Mr. Ricardo Rittes, CFO and Investor Relations Officer. Mr. Rittes, you may begin your conference. .

Thank you. Hello, everyone. Thank you for joining our 2018 first quarter earnings call. I will guide you through our financial highlights of Brazil, Central America and the Caribbean, Latin America South and Canada, including our below the line items and cash flow.

After that, Bernardo will give more details about our performance in Brazil, evolution of our growth platforms, as well as our outlook for the remaining of the year..

Beginning with the main highlights of our consolidated results. We started the year with growth in CAC, LAS and Brazil. On a consolidated basis, top line was up 5.9% in the quarter with volume going down 5.8% mainly due to a shortfall in Brazil. Volume decline was more than offset by a healthy net revenue per hectoliter increase of 12.4%.

EBITDA was up 10.1% in the quarter reaching BRL 4.6 billion with margin expansion of 160 basis points to 39.9%. Normalized net profit was BRL 2.6 billion, 12.7% higher than that of the first quarter of 2017 as the EBITDA organic growth and lower interest expenses were partially impacted by a higher tax rate..

Moving now to our divisional results and starting with Brazil. Brazil EBITDA was up 5.3% with margin expansion of 280 basis points to 41.8%. In Beer Brazil, top line was down 1%.

As anticipated we started the year facing challenging volume that decline by 8.1% mainly driven by the combination of a weak industry and a tough comparable in the first quarter of 2017.

On the other hand, net revenue per hectoliter remained strong and grew by 7.7%, benefiting from the carry-over of the price adjustment implemented in the third quarter of 2017 and from our continued revenue management initiatives.

Despite volume not being supportive, we still managed to grow Beer Brazil EBITDA by 5.2% and expand margin by 260 basis points to 43.8%. Cash COGS per hectoliter in Beer Brazil was down 4.8%, driven by favorable FX partially affected by inflation and higher commodity prices.

And cash SG&A was up 3.1% as higher logistic costs impacted by operational deleverage were partially offset by below-inflation sales and marketing and administrative expenses..

one, a still declining industry and second a hard comparable in the first quarter of 2017. Bernardo will expand on this topic..

In terms of costs and expenses, cash COGS per hectoliter in NAB was up 4.9% as favorable FX was adversely impacted by higher raw materials including sugar coupled with volume decline effect in fixed cost dilution.

Cash SG&A, on the other hand, grew below inflation at 1% as higher logistic costs affected by operational deleverage were partially offset by lower sales and marketing expense..

Moving now to our international operation. In Central America and the Caribbean, we continue to experience a positive momentum. In the first quarter of 2018, EBITDA in CAC reached BRL 445 million, increasingly organically 18.7% with margin expansion of 330 basis points to 38.7%. In U.S. dollars reported EBITDA grew close to 16%.

Net revenue increased by 8.7% and on a per hectoliter basis by 4.2%. Volume was up 4.3% with Dominican Republic and Panama, the 2 largest countries in the region for us, delivering strong growth.

In the Dominican Republic, our performance was supported by continuing investment in the Presidente brand that in the first quarter promoted a notable Carnival along with a strong 360 Holy Week activation.

And in Panama this quarter, we continued to witness the success of our portfolio of brands led by Atlas Golden Light, which delivered to consumers' great experience during 2 major events, Carnival and the Atlas Golden Fest Festival.

Cash COGS per hectoliter in CAC was slightly positive growing 0.2%, benefiting from a tight cost management and further cost savings in our non-working money as well as efficiency gains in our working money. This translated into decline in cash SG&A by 0.2%..

Moving now to Latin America South. In LAS, we started the year maintaining the good trend of 2017. EBITDA was up 25.2% organically reaching BRL 1.3 billion with margin expansion of 30 basis points to 43.1%.

Net revenue grew by 24.6% explained by a combination of, #1, a strong volume that grew 5.7% with all the countries performing well, enabling us to reach record beer volume in the first quarter in the region and second, net revenue per hectoliter increase of 17.8%, which were a consequence of the high inflation in those countries plus revenue management initiatives and a favorable brand mix.

In Argentina, in particular beer volumes grew by high-single digit fueled by Brahma coupled with the successful launch of Quilmes Clásica. Our premium portfolio in the country also led the way with Stella Artois, Corona and local craft brand Patagonia presenting strong growth and driving a positive mix.

Cash COGS per hectoliter in LAS went up by 13.5%, benefited by the FX, while cash SG&A increased by 28%, mostly impacted phasing of sales and marketing expense..

Turning now to Canada. We delivered in the first quarter BRL 275 million of EBITDA, which is 20.4% lower than that in the first quarter of 2017. Top line grew by 0.5% and net revenue per hectoliter rose by 1% as a favorable brand mix was negatively impacted by excise tax increase.

Volumes were marginally down, declining 0.4% predominantly driven by a soft industry.

On the other hand, our strong portfolio helped us retaining our leading position in the Canadian market with #1 Bud Light, Corona, Stella Artois and Michelob Ultra outperforming the industry and #2, our craft portfolio, comprised of Mill Street and Archibald, among other brands, growing double-digit year-over-year.

Cash COGS per hectoliter, however, was up 26% in Canada due to a hard comparable in the first quarter of 2017 and the impact of imports. On the other hand, cash SG&A was down 2.9%, benefiting from cost savings in our non-working money as well as phasing and efficiency gains in our working money.

Still on our international operation and before going back to consolidated figures, I would like to highlight that we're enthusiastic with the evolution of our business in LAS and CAC reinforcing our positive outlook for both regions.

Especially in LAS, we're also pleased that we closed the transaction in Argentina that resulted in perpetual license of Budweiser brand. Such transaction brings us the unique opportunity to further develop Budweiser, which is a very strong global brand, with great potential for growth going forward.

Finally, in Canada, while we're not satisfied with our performance this quarter as we cycle COGS hard comparable, we're confident that we will be able to deliver improved results supported by our strong portfolio of brands..

Now back to consolidated figures. Other operating expense totaled BRL 258 million in the first quarter mainly explained by government grants related to State VAT long-term tax initiatives that were down year-over-year. Lower revenue and the revenue geographic mix explain this reduction. Finally, moving below EBITDA.

In the first quarter, our net financial results totaled an expense of BRL 144 million, declining 37.6% when compared to the first quarter of 2017. Going to more details, main items in the financial expense in the quarter were, first, interest income of BRL 103 million, driven by our cash balance mainly Brazilian reais, U.S.

dollars and Canadian dollars. Second, interest expenses of the BRL 348 million that include among other items, interest incurred in connection with the Brazilian tax regularization program as well as a non-cash accrual of approximately BRL 65 million related to the put option associated with our investment in the Dominica Republic business.

Such non-cash accrual declined more than 50% year-over-year as a result of the partial exercise of the put option in January 2018, which resulted in the decrease from 45% to 15% of ELJ ownership in the business.

Third, BRL 183 million of losses on derivative instrument, mainly driven by the carry cost of our FX hedges, primarily linked to our COGS exposures in Brazil and Argentina.

Losses on derivative instrument declined by 26% year-over-year benefiting from positive results of equity swaps, coupled with lower interest rates in Brazil that contributed further reduction of carry cost.

Fourth, gains on non-derivative instruments of BRL 92 million that comprises a gain related to the adjustment in the fair value of the put option in the Dominican Republic that, as I just mentioned, was partially exercised at the beginning of the year.

And finally, #5, fifth, BRL 119 million of other financial expenses mainly driven by interest income contingencies.

The effective tax rate in the quarter was 19.3% versus 12.9% last year mainly explained by the negative impact of foreign exchange variation on intercompany transactions, due to the depreciation of the Brazilian real on a cash flow perspective.

Cash flow from operating activities before changes in working capital was BRL 4.7 billion versus BRL 4.6 billion in 2017..

Starting from the higher cash flow generation before working capital, during this quarter, we had a negative cash impact on working capital due to volume decline in both beer and NAB business in Brazil.

Given that we have a negative working capital position, every time we grow our business, there is a positive impact from working capital as cash generated by payables is significantly higher than the cash tied up in receivables and inventories.

The opposite is also true, every time we face volume deceleration there is a negative effect on working capital. As a result, the first quarter of 2018 cash generated from the operations was BRL 2.5 billion versus BRL 3.1 billion during the same period of 2017.

This quarter, we also had a higher cash tax payment when compared to the same period of 2017, mostly due to FX negative impact from tax paid abroad and phasing and this figure is expected to be partially diluted over the year..

Similarly, we also completed the transaction that I alluded to, whereby we increased our ownership in the Dominican Republic business for 55% to 85% leading to a cash outflow of roughly BRL 3 billion. Finally, in the first quarter, we paid out BRL 1.1 billion in dividends to shareholders. Thank you very much.

I will now move to Bernardo before going to Q&A. .

Thank you, Ricardo. Hello, everyone. As mentioned by Ricardo, we started the year, delivering EBITDA growth and margin expansion for Beer Brazil, despite volume decline of 8.1%.

When we announced the 2017 full-year results, we mentioned that we expected a challenging volume for Beer Brazil in the first quarter, but that we had a positive outlook for the remainder of the year.

In this context, I believe it's worth sharing to you our view on 2 questions; one, what are the main drivers that led to such volume decline and second, is there any change in our outlook going forward. So what happened? There are a few factors that explain beer volume decline in Q1. First, earlier Carnival.

The earlier the Carnival vacation is cut short and as a consequence, beer consumption levels tend to suffer. Second, poor weather. Especially in January and February, we had more rain and lower temperatures across the country when compared to the first quarter 2017, particularly in the South East region where we have a stronghold. And third, macro.

The consumer environment in Brazil remains volatile. It is a reality that unemployment rate is still very high and the real disposable is recovering at a slow pace. These 3 drivers together led to a [ lean beer industry ] that according to our estimate declined between low and mid-single digit in the quarter.

In addition, we also faced a hard comparable in Q1 2017 when we substantially outperformed the industry..

With that, I would like to highlight that even though we underperformed the industry this first quarter, we don't see any structural change in our market position.

One of the reasons for that is that when we mention industry figures, we are referring to sell-out and not selling data and depending on inventory levels at the retail channel and pace of the stocking, there may be significant difference between the 2 of them. As such in fourth quarter 2017, our volume was up 5.1%, while the industry was flattish.

It is fair to say that at this time, retail was expecting a strong summer season..

Regarding first quarter '18, summer was actually impacted by a poor weather and as a consequence the sell-out was lower than expected, leading to [ a slower lift time ]. If you analyze our performance during fourth quarter 2017 and first quarter 2018 combined, volume was down approximately 1%, in line with the industry.

Having said that, I will now move to the second question. If there is any change in our outlook for the balance of the year and the answer is no. Our positive outlook remains unchanged as; one, since the quarter-to-quarter the trends are positive. We have seen an improved performance in April and our beer volume is back to positive territory.

Second, we have the World Cup, a major event with the strong execution approaching. And third, we remain consistent on our commercial strategy leveraging our growth platforms and despite the challenging quarter, we still managed to make a good progress in each of them. [ We start usual elevate the core ].

Skol, our easy drinking lager closed the summer season with the strong Carnival. The brand promoted the most important street parties Brazil, providing breakthrough experience to more than 40 million consumers in more than 40 cities.

Also during the quarter, Skol maintained its position of being the most innovative brand in the market and launched a new package [indiscernible] with a pull-off on its crown, helping consumers open the bottle more easily..

Now talking about Brahma, our classic lager. In Q1, Brahma maintained the good trend of 2017 strongly outperforming the industry. Looking forward, Brahma is building momentum as the World Cup approaches. The brand has been part of the Brazilian's consumer life since the first edition of the World Cup in 1930.

For the 2018 edition, we will keep the tradition alive, executing strong activation that we evoke all with heritage..

1958, 1962, '70, '94 and 2002. The new labels were distributed across the whole country with an incredible positive response from consumers.

Still on Brahma's family, Brahma Extra, with its three variants, Lager, Red Lager and Weiss, delivered a strong performance in Q1 with the volume growing almost 100% and reaching more than 1% of our beer volume in Brazil.

Going forward, we see that Brahma Extra has a great potential to continue to grow, providing the consumers the first [indiscernible] and driving positive mix. Finally, Antarctica. Antarctica also delivered memorable carnival in Rio de Janeiro and in Brazil, reaching more than 20 million people.

Along with that as I mentioned in our last call, Antarctica launched its new Visual Brand Identity during the quarter. Early results indicate that the new VBI will be a major success..

Now moving to premium, our global portfolio of premium brands comprised of Budweiser, Stella Artois and Corona, grew double digits in Q1 2018 meeting the raising awareness of Brazilians for premium brands while delivering memorable experience such as Lollapalooza. Budweiser sponsored the first edition of the festival in U.S. back in 1991.

And inspired by this heritage, in March the brand sponsored the Lollapalooza in Brazil, featuring several iconic singers. As we move to Q2, Budweiser also achieved a remarkable activation during World Cup increasing its awareness and further consolidating its strong position in the premium segment.

Still in premium, Stella Artois is also doing well for the second consecutive year in a row. The brand launched the global campaign, Buy a Lady a Drink in partnership with Water.org to help raise awareness of the global water crisis, inviting its consumers to leave a legacy.

Going forward, we are excited that our premium brands are well positioned to keep delivering strong results not only in the short term but also in the long term. It's fair to say that even though we had substantially improved our premium volume performance in the last 5 years, there is still much more to be done.

Especially considering that premium volume remains underpenetrated in Brazil as compared to the other market..

Now talking about the smart affordability. We have been developing several initiatives related to package and route-to-market which tackle the affordability issue in Brazil without impact on profitability.

We believe that to foster beer consumption in the country, especially in underdeveloped regions, we have to steadily evolve with these types of initiatives. And given the importance of affordability, we incorporated this as one of our growth platforms.

Having said that, our returnable glass bottle strategy in the off-trade remains high in our agenda with the 300 ml returnable glass bottles, our minis, delivering more competitive consumer price..

Finally, moving to a different occasion, in home and out of home. As we started the year, we continued to accelerate our trade programs, putting great efforts to assure a high service level everywhere.

We are confident that a consistent execution in the on-trade and in the off-trade enables us to step up consumers' experience in both channels while building strong brands..

one, a hard comparable in first quarter 2017 when the soft drink industry declined by high single-digit and our volume was flattish. And second, and industry that's still being impacted by low discretionary spending, falling by mid-single digit in first quarter 2018.

However, as mentioned by Ricardo, despite facing weak volume, we still managed to increase EBITDA and expand margin.

While we are not satisfied with our NAB volume result this quarter, we are confident that we are implementing the right initiatives needed to strengthen our foundation and which will enable us to deliver improved volume with a more profitable business and as a consequence, deliver a stronger EBITDA growth..

Before moving to the Q&A, I would like to close with a final message. As I just mentioned, as we turn the page on Q1, the trend is positive. In this context, and also supported by a strong execution during the World Cup, we expect beer volume to resume growth in Q2 2018.

The World Cup will also bring a great opportunity for NAB with Guaraná Antarctica as the official sponsor of the Brazilian team. With that in mind, we are optimistic about our business in Brazil and we're committed to keep consistency in executing the initiatives implemented under the growth platform.

We remain confident that we have a strong plan and great portfolio to further accelerate EBITDA growth versus 2017. Finally, we are also excited that all the important countries in which we operate Argentina, Uruguay and Panama, will participate in the World Cup.

We also have a great plan to execute a strong 360 activation in all these countries, further enhancing the equity of our brands..

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

[Operator Instructions] The first question comes from Luca Cipiccia with Goldman Sachs. .

I wanted to ask 2, very briefly.

The first on the beer volumes outlook, appreciate the detail that you gave on the second quarter, but maybe if you can add, if we look at the industry overall, as we size the type of catalysts, the contribution that the World Cup may have and the improvement -- the sequential improvement that it seems you're expecting, do you think the industry will be able to show positive growth in volumes overall this year? Do you have any visibility on that and maybe if you have any comment? That will be the first one.

And then secondly, on the non-alcoholic beverages, it seems that the debate on affordability in that category has also been quite relevant and the Coca-Cola system seems to have moved more focus on that.

And I'm just wondering the relative underperformance of your portfolio, does it have to do more with the type of, let's say, price positioning that you have or mix positioning that you have or rather as the biggest player in the market, pushes a little more on affordability, maybe you don't have as many tools as they have given the difference in scale and brand portfolio? If you have any additional qualifier there as well, it would be useful.

.

Thanks, Luca. Thanks for the question. First linked to the industry and the outlook, we'll not comment for the full year, but as I commented in my speech, we really expect for the second quarter for the volume to resume to grow. So our performance will be better in the second quarter.

I mean we have the visibility of April and the initial numbers of May. So we are positive about our volumes in terms of the second quarter. For the affordability issue, I think that as we know all have been implementing initiatives in this front for the last years.

So we acknowledge that we need to keep developing affordability initiatives to boost the beer volume and expand the beer category, especially in the -- underdeveloping regions like the Northeast for instance, where the disposable income is low.

So what could be done, for instance, one, what are we doing in terms of the packaging, such as the returnable glass bottles in the off-trade, which we are now expanding even more in sub-segments of the off-trade. That takes time because we'll have to go there to visit, I mean to put the crate and so on.

But we're doing this in mom and pops and [ tips tops ] and among other sub-segments of the off-trade. And second, the go-to-market, that's very, very important. We're serving better and serving more point of sales enable us to deliver our products direct and able to manage the right price across the whole country.

So doing that and increasing the number of point of sales that we're selling with the right price, a consumer price and doing this in a profitable way helps a lot to bring more affordable SKUs and brands overall in many regions in Brazil. The third thing is the innovation pipeline.

So [ Herbe ] is turning that and working on that to really bring to the market innovation like we've done with the 330 ml but not on package and in other fronts as well that we could not and we'll not comment, I mean, for competitive reasons. The only thing that we not do is to play in the value segment with no margins, that we don't do.

So we have a strong hold in our core, our premium is evolving, the portfolio is doing very, very well, but really to bring volumes with no margin starting one-way camps with zero margin or negative margin is not our game. So having said that, affordability is key.

That's why we put in our platform I mean now it's even more clear and then we wrote that it drives much affordability that it's a profitable one the kind of affordability that you are searching for. .

But just quickly. Sorry. .

Going to the question that you ask about non-alcoholic beverage specifically, just to highlight that you know that our pricing strategy is to increase price level inflation. So when you look at the -- when price was taken in the second half of 2017, Q4 '17 after price increase that revenue per hectoliter grew by 9.6%.

And then Q4 versus Q1 2018 that revenue per hectoliter was actually down 11.2% as a result of the catch-up of the state taxes. So again, I think the non-alcoholic business is the more elastic one and all the issues that Bernardo discussed get a little bit amplified in the very short term that that were discussed.

But we are very confident in the strength of our brands in that portfolio Guaraná Antarctica and Pepsi specifically. .

Just quickly, the premium segment of the non-alcoholic business is that showing a similar resilience or relative outperformance as what you commented about in beer or like what you will call premium within non-alcoholic? Is that also doing better even though it's much, much smaller? I appreciate that. .

Yes, Luca, it's doing better. So the portfolio of premium, the juices and the Fusion, the energy drinks are doing very, very well. So that's one of the bets for the future. .

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

My first question is on beer more in line with what Luca asked.

I mean considering -- looking for Q2 or maybe beyond aside from maybe a better weather in April or the positive impact from the World Cup, are you seeing real signs of consumer consumption recovering on the beer? And also thinking about affordability, do you think consumers are ready to take more significant price increases going forward without affecting a lot volumes at this point? That's my first question on beer.

And second, regarding SG&A, this has been a line that has been very under control with selling below inflation.

What sort of impact should we see from Q2 on that line because of the World Cup?.

Thanks, Isabella. Thanks for the question. I think linking for the same question that Luca asked that I'll just add in terms of kind of a view of the industry for the future. First, we have to acknowledge that the consumer environment in Brazil is still soft, disposable income is growing at a slow pace, unemployment is too high.

In any case a gradual improvement of macro indicators should be supportive for the beer industry as the year progresses. We should also keep in mind that the beer industry is one of the last to getting into the crisis and one of the last to leave this crisis as well.

But all-in-all, leaving the first quarter behind, we are optimistic about our business in Brazil and confident that we're on the right -- we will be at the right -- we'll be on the right track.

So we really expect going -- I mean, for the future, yes where the industries given that again, Brazil disposable income one day it will be better and it will and then we see the impact in the industry. And beer industry again is one of the first ones and the last ones to enter in a crisis and one of the last ones to leave the crisis as well.

So related to the SG&A, I think Ricardo can answer. .

Isabella, then again, just highlighting what Bernardo just said. So we are excited about the future and noting what Bernardo also said that we are already in May. So we have visibility aside for the World Cup on somehow an improvement because of the reasons that Bernardo explained in his.

And regarding SG&A, you recognize that we don't provide any specific guidance on SG&A by quarter. But it's fair to assume that there might be some failing, but nothing that will be notable.

What we have been doing recently in the last couple of years is always to provide or highlights or provide like specific guidance or anything that should be notable going forward. And I think that you had a question regarding affordability.

Could you repeat that?.

Yes, Bernardo. It's just in line with the comments for the industry.

I mean if you -- given the scenario of a slower consumption recovery, if you think consumers are ready to take more significant price increases without having a -- still a significant impact on volumes?.

I mean, we don't comment on our pricing policy. I mean, the only thing that I comment that our net revenue per hectoliter our -- I mean long-term policy is to grow in line with inflation plus any tax increase over time. So that we need to do offset.

I think the only thing that -- it's fair to say that when you execute better when you serve the [ box ] better, we'd be able to manage the consumer price better. So sometimes the number in terms of the price to point of sale, and then this number goes to the P&L, is not exactly the same number.

It could be higher than the number that goes to, I mean, the final price of beer industry in the country. So -- and we think that we are doing pretty well in terms of evolution of our service level, maybe getting much, much better, provide a much better service to the point of sales. And then this has an impact in the way that they price our beers.

So which means that you can mitigate any impact including in terms of price [ PTI ] increase for the point of sale. So excellence in service helps affordability as well. That's what the kind of figure that I tried to highlight in the comments that I need to look. .

The next question comes from Lauren Torres with UBS. .

Earlier today on Inbev's call Brito talked about Brazil being in margin recovery mode. He talked about factors that we've heard from you before, particularly the cost environment being better as the hedges rolled off, but he also spent a little time on positive mix with respect to premium brands and the growth of RGBs.

I was hoping if you could just talk a little bit more about positive mix for this year because sensing that the volumes are recovering, the cost environment better, the pricing is in place, something incremental could be more from the mix side.

And looking at your historical EBITDA margin, we've been north of 50% in the past, now are closer to the low 40%s.

So how should we think about this progression? Is there a lot of upside from mix to consider or should we not get too excited about the lift on the mix side?.

Lauren, thank you very much for the question. So [indiscernible] a bit longer term we are very excited with the evolution of the Brazilian business, if you will. And I think that's what Brito mentioned as a recovery mode. Of course, the part of our business has like a fixed cost.

So every time we grow the business, you have like evolution in terms of the margins. I think that's -- so as Brazil gets out of the crisis, as we -- GDP starts to go to the positive side and et cetera, so there is like a top line benefit when you look ahead and when you look forward. I think that's the first important, if you will, dimension.

The second dimension on the cost side. So if you take like a very, very long term, we have managed to, over time, to have like COGS to grow a little bit lower than inflation, but with the size of our COGS linked to FX, for example, there is some volatility into this.

We use hedges to smooth that volatility for us to be able to react operationally to market risk shocks. And as a result, we have some visibility in a couple of quarters ahead of us in terms of what to expect, in terms of, if you will, of the impact of the FX into our COGS going forward.

So as we explained in the last quarter's call, the average FX for this year is 3.16. And the current FX, which is closer to 3.5, 3.6 is much higher. And as a result of that, also there is an improvement year-over-year. That flows into the P&L in a way of that impact in itself in a way of positive trend towards margins.

In terms of the mix itself, long term, premium has grown from 5% of the total volumes to more than 10% of the total volumes. And that continues to be the case quarter after quarter after quarter. So over time that also serves as a positive force into our like, let's say, the margins.

So net, if I could like summarize all that, I think, Brito also a couple of quarters ago mentioned that the way we see the margins is just like a high watermark and is not something that we believe was like the peak of the margin or anything, just a high watermark that we need to run the business.

And over time, there is no reason for us not to work towards that direction. .

I think, Lauren, linked to the premium segment, I think, if you see globally -- I mean premium average weight is around 20% of the mix of the industry. In Brazil, it's a little bit -- I mean [ around 10% ] a little bit higher than that.

If you see some regions of Brazil or even countries like Paraguay that premium is already 20% of the industry shows us that we have room to grow the premium segment in Brazil with good impact in margins as well. .

So, I guess, with that said, I mean, I quoted that over 50% margin you've given us in the past and I think today you did say there is no structural changes as far as your market position and so there's no reason why we shouldn't get back to some of your historical margin levels?.

It's -- again, it's not a guidance, but it's just a high watermark and the 50%-plus margins numbers are reference to us, nothing prevents us from reaching those margins again. The only structural change in our P&L comparing for instance 2012-2015 is the other operating income line, which has declined.

The line used to represent 7% to 8% of net revenues and now represents around 4%. But besides that, I think the strategy of the company is the same and there's no reason for us not to get there. .

The next question comes from Thiago Duarte with BTG. .

Couple of questions on my side. First, I would cycle to Canada and I would appreciate if you could comment a little bit more on the cost things there? You mentioned, of course, the tough comps as one reason for the increase in the cost year-over-year and the increase in imports.

But even if you look on a unitary basis what we see is the costs are at a much higher level than we saw in the last many quarters.

So just wanted to understand whether this import issue is something that we could see in the coming quarters, so there would be like a new normal in terms of cost magnitude in the operations there? Or something that we should be seeing as nonrecurring going forward? I would appreciate some comments on that.

And second, I would love to hear from you guys a little bit more on the mix in Brazil. You guys commented on the further growth in the premium segment. In RGB, we know that they are all accretive on the net revenue per hectoliter.

So if you could a little bit disclose to us how much this mix has contributed to the increase in net revenue per hectoliter year-over-year and as well I would love to hear if you could comment on the impact on the net revenue per hectoliter from the exclusion of the ICMS from the PIS/COFINS basis as part of the calculation of the total deduction on gross revenue? Would appreciate that as well.

.

Duarte, Ricardo here. So first let me start with Canada. With Canada, if you remember, in the first quarter of 2017, EBITDA grew 17.5% at that time. And was also impacted by the COGS line creating a little bit of a reference base.

If you look at the full year and again the shorter period of time they look the more volatility you might have due to specifically the imports of -- that go to Canada. If you look at the full year, EBITDA of Canada grew 0.9%.

So over like just 4 quarters and this is an [ element of the ] business adjusted because you get a full year, you don't see that type of noise flow into the P&L. So to answer to your question whether this is the new norm, no, is not a new normal.

And again, I think just the same way that last year create a comparable basis, I think again, over time, you shouldn't see anything different in the Canadian business.

Related specific to price and to the tax issue or meaning you specifically asked how much of the net revenue per hectoliter increase came from the VAT from the excise taxes, specifically, again, it's not that much, because if you remember in addition to this, we had also the increasing taxes based on the law approved in 2015.

So there is a reduction in the [ reductor ] of the beer business import taxes, and that was the steepest one in 2017 since the law was approved. So again, in 2015, that reduction was 20%, '16 was 15%, '17 was 10% and '14, 0% in the beer for up to 400 ml containers. So it's a big change.

So one thing and the other, you have to look at the difference in the net basis, which is not that relevant. .

I think, Duarte to talk about the mix. Thanks for the question, I mean, and just I mean to reinforce before the other tax issue, we had upside in the VAT, but a downside in the federal tax that's what exactly I think Ricardo said in this first quarter. So linked to the mix, I mean, very difficult for us to really disclose the numbers.

But to grow 7.7% year-over-year, the net revenue per hectoliter, I mean, compared this quarter to the other quarter in the last year for sure you have annualization of the price increase of -- that we've done in the third quarter. But yes mix and RGBs help us on that. Because it's -- I think it was a good growth in terms of the net revenue.

That makes sense in our policy that we always say our mantra that I mean we increase net revenue in line with inflation plus any tax offset so that [indiscernible]. .

[ You're trying to ] say that on a constant mix basis, your net revenue per hectoliter is growing in line with inflation as you just said or should I think in terms of the gross revenue per hectoliter in terms of on a constant basis -- on a constant mix basis, sorry?.

No, if you look at over time, the answer is yes, but if you look at specific quarter or other, no. But if you look for example, the last 3 years or 5 years, if you do that calculation you're probably going to get very close to the exact number in terms of net revenue growing exactly in line with inflation. .

The next question comes from Antonio Barreto with Itau. .

My question is going back to the mainstream. When we talk to our channel checks, we believe that you guys are suffering a bit more on Skol than on the other brands.

So my question is if you could comment at least on a qualitative basis, how the brand preference for Skol has evolved? You mentioned that the Carnival was a very good period and brand activation for Skol in the first half -- in the first quarter of the year.

And I would like to see if you guys have seen any kind of uptick in the brand preference for this brand? And looking for the rest of the year, it seems to us that most of the activities are related to Brahma, especially the vodka, and I was wondering if you guys are seeing anything else relevant to make us think of any kind of recovery or any kind of uptrend on Skol brand preference.

.

It's a very good question. I think that, first, I mean, we have been steady, I mean in the last 3 years, all the trends are coming, many markets including here. So -- and we know for that [ one thing that's ] important in terms of attributes for brands.

I mean drinkability is key, but all of this thing about the flavor and so on, this attribute of flavor, both the flavor, it's important as well. So it is the beauty that we have, Ambev has a portfolio that can cover that. So that's why we have been saying for years -- I mean 2 or 3 years that we have easy drinking lager and a classic lager.

And then that's why both brands are very, very important, in terms of the equity, both brands are very, very strong. And then all of the indicators that we have from many kind of research companies show that Skol is the most powerful brand in Brazil by far -- by far. But, yes, I mean this attribute of flavor is growing in Brazil.

And the good news here is that you have Brahma and Brahma is booming, it's growing big, big time. So that always hints to you that it's not a one brand gain, it's a portfolio gain.

And that's why Ambev is so -- I mean the portfolio that Ambev had is so strong because it can play in the need space, different need space attributes that a consumer did value for, specific occasion for specific brands. So Skol is doing well in terms of equity, it's even more young.

I mean you're talking about the diversity a lot which Skol connect to young people. And just launched this Skol [indiscernible] that's amazing. All the comments that you see in the social media is doing pretty well. And we have innovation ahead of us. And on top of that, yes, Brahma is doing pretty well, it's our classic lager that delivers more flavor.

Brahma, it's a huge success. So in our core business, we are very, very well in terms of the market share, in terms of the equity.

So I will say to you and the only segment that we really -- it's unusual for us [indiscernible] segment, we don't play because [indiscernible] segment, it's just providing that goals for one guy from another guy selling brands with no margin. That's not our game.

But in terms of the core brands and the core segment, we're very, very strong, brands are strong. The [ variants are ] strong as well. And in the premium segment, global brands are growing, the portfolio has become even stronger. .

And just to add something that Bernardo -- what Bernardo just said, regarding Skol specifically your question about the remaining of the year, we have a lot of exciting innovations on the pipeline, which we cannot disclose in advance for competitive reasons, but we do have a lot of exciting things for Skol. .

I think, given that, all these studies and a deep dive that is done in the last years really are making -- I mean, ensuring that building a portfolio to last. So pacing the innovation that's a goal in the market. If you see 2 years ago, Brahma Extra, that's a variant of classic lager and more bolder.

It was basically nothing in Brazil, and today probably be around 1% of our volume, core plus we are very profitable. So we always prefer to look up from the core and up and build the portfolio from there and not look down and go to the better segment. .

Just a small follow-up on that.

Looking at the VBI changes that you guys have implemented on Skol, are you satisfied with the results, anything that you can comment on that front?.

Yes, we are, I think it was very, very important for us.

It really was part of the change of the VBI and then for this brand become even more younger because all the [indiscernible] saying it come back to use the [ arrow ] and then you see after changing the VBI, all the campaigns started to use again in a different way, but use again, the best has claim, and the positive results in terms of equity started to appear.

So I think that -- they must be different employment because Brahma is one Classic Lager as Skol, it's an easy drinking lager. I mean for all of the brands including for Skol, we always had room to improve in terms of that innovation that Ricardo just said and in terms of the VBI as well, if we see an opportunity or any kind of adjustment. .

The next question comes from Alex Roberts with Citi. .

So, I mean I also had a question on portfolio in Brazil and then a second one on Brazil COGS. So one of the trends at least our research had shown is that there is an emerging growth or accelerating growth of this category of pure malt, what you call the [indiscernible]. And you don't really talk about it in your literature [indiscernible].

I wonder if you could comment a little bit about how that segment is doing. I mean, I have the impression that pure malt beer is, as a category kind of similar in size to the premium space. And how are you thinking about that? In fact the growth there outperforming the industry.

What is the competition doing and are there some strategies around that pure malt category? That's the first question. And I'd like to come back with the COGS one. .

Thanks, Alex. I think that the first -- I mean if you see the history of beer more than 11,000 years was market by the diversity. So beers -- I mean people brewed beers I mean, 11,000 years ago and then with the ingredients that they had in their specific region. So including malt, not even an ingredient, I mean you can malt everything.

I mean, barley, rice, corn everything. So the issue is that what you always say, but the point is as Ambev, I mean as a beer company you would like to do that to provide diversity in beer, which means that we will have, I mean, beers and 4 classic lagers, easy drinking [indiscernible].

And pure malt, when beer 100% of barley -- malted barley it's an option as well. And we like Brahma Extra. So I think that the most important thing again is the portfolio win. It's very, very important for us to have -- yes, for people that would like the pure malt so-called beer we have and we already have. And yes, can we improve as well? Yes.

We can, I mean, can reinforce that part of the portfolio. But the most important thing is diversity in beer and it's another trend because, for us, we're not here for 2 years. It's not the trend of the day. Have to see 10, 30, 50 years from now. Just to given example. We had the brand [indiscernible] that's one.

The most important price in Germany so-called the land of the pure malt -- for beer [indiscernible]. So I think that diversity it's very important value in the society nowadays. And I think that diversity in beer follows that. So -- and then you see this brand, craft brand that's growing fast.

Potential to grow even, even more, and mix everything [indiscernible] But I mean I can show to you when it comes here in Brazil. So all in all, pure malt is a segment, it's important. But most important than that is diversifying beer, that's why Ambev is the big brewer in Brazil is providing choice for everyone.

That's basically what I could talk to you about. .

Thanks for that. So -- I am sorry, go ahead. Sorry. .

I understood that we have a question, Alex, for the SG&A. .

I did. It was the COGS. So just to confirm, so this is a segment that's growing faster than the industry. That's equal or bigger than the premium.

And it sounds like with the initiatives of extra Brahma you might be under indexed there, is that fair to say in that category, or it's a work in progress?.

Alex, I think it's a segment that is growing. It's Ricardo here. So it's a segment that's growing. And as Bernardo said, our strategy, our approach is a portfolio approach. And if there is any segment in the market that we under index over time what we tend to do, we evolve our portfolio in order to address customer needs.

Again consumers' needs are first and if that is the case, again, we have like a large operation, a very strong portfolio. So at any given time we could evolve over portfolio to address that. But again, provided that there is a consumer need long-term sustainable that is changing, not just the fed, if you will. .

Got it. Fair enough. And just on COGS, the 2.5% cash COGS decrease in the quarter in Brazil, was an interesting one for us.

We had, I guess, thought it would fall a little bit more and I appreciate your detail around how the sugar costs with non-alcoholic were higher and then the FX gains and FX dollar COGS hedge helped the beer COGS fall and net-net, you're down this 2.5%.

But as we think about going forward, is it fair -- how should we think about aluminum in terms of the commodity hedge? I guess, we understand it only kind of started a bit in the COGS in the first quarter, but it will probably be more of a factor starting in the second quarter.

However, we have the sugar also kind of rolling off and coming back down to the international prices.

So as we look in the short term, the cash COGs in Brazil, would it be fair to say the FX hedge effect continues to offset the commodity, particularly aluminum and kind of with that we've seen a new fresh 5-year high with aluminum on the back of several things, including what Trump has done with those tariffs to China.

But so, how should we just kind of think of that commodity hedge for the remaining of the year?.

Alex, so Brazil beer cash COGs correct it was down 2.5% as you said as you continue to cycle unfavorable effects. Beer Brazil was down 4.8% as higher commodity prices were more than offset by favorable FX, but the non-alcoholic business was up 4.9%. So the 2.5% is a combination of both.

And despite favorable effects, we're still impacted by higher sugar prices and volume decline effect on fixed cost dilution. Then [indiscernible] costs will be impacted by higher commodity prices, especially aluminum, which will be benefited by favorable FX.

For reference, our average implied foreign exchange hedge rate for 2018 we said was -- is going to be 3.16 this year, which compares to 3.59. So again, this is like the highest market risk factor that we have within our P&L. And aluminum is the second one, which represents around 30% of the Brazil total COGS.

So, again, it's on one hand FX helping us a lot, on the other hand, aluminum with positive hedges, but going forward, aluminum going up. But overall, for the last couple -- for the next couple of quarters, if you will, is a more favorable environment than what we have had in the last couple of years. .

Your next question comes from Joao Soares with Bradesco. .

I think I have 2 questions on outlook. So first one, in Argentina, so the recent macro development backed your outlook for beer consumption in the country, or should we continue to see this trend in gaining share throughout the year to continually to positive volumes there? And the second is on Canada.

So we have basically 5 quarters of flattish to negative volumes on a year-over-year basis.

So is it fair assume that we should expect some sort of volume rebound in the country, or do you still see the industry there on a negative trend?.

So first in terms of the hedging policy -- or in terms of Argentina specifically, given our hedging policy, the current movement, we impact our COGS just next year. So there is no impact -- immediate impact on that for Argentina.

Of course, there we continue to monitor the situation and -- in Argentina as specifically and our concerns are much more longer term in terms of consumption GDP and et cetera and how this translates into their economy. But we're very excited with the prospects of the Argentina and the large region overall, very excited.

Regarding Canada, specifically, Canada is a different culture when you compare it to the rest of the portfolio of countries that we have in Latin America, South Latin America and North, including Central America and the Caribbean. Here we have essentially 3 main drivers in terms of volume growth longer term.

Number one is demographics; number two is the disposable income; and number three, all the innovation that the industry can do, including for example in Brazil the 300 ml returnable that over time will contribute to the long-term growth of the overall interests.

In Canada, demographics not necessarily longer term help us that much, but it's a very profitable market. It's a market in which -- it serves also as a laboratory in terms of innovation, it's market where for example, craft and some of the premium have a higher weight in comparison to the most of our other countries.

And again it's a market that we're excited also for the long-term prospects and our relative and competitive position there has improved significantly over the last couple of years. .

The final question comes from [Mohammed Amar ] with [ FGP ]. .

Just a quick one on Canada, again. Could you give us a little color from a longer-term perspective, what we should expect the profitability to -- when should we expect the profitability to bottom and to what level can you get the improvements? Because if I look at it, say, over a 3-year view volume has essentially been flat.

You've had certain degree of net revenue per hectoliter improvement maybe sort of like 1% to 2% a year, which in itself those to combined is not bad for a mature market but COGS over 3 years has gone up a lot.

So could you just give us a sense of what we should expect sort of medium term, 2 to 3 years out? And also recent changes in Ontario distribution that I see, does that impact your business in any material way?.

Thank you for your question. So again, we don't provide a specific guidance long-term for Canada but Canada grew top line 0.5% year-on-year in the first quarter. Net revenue per hectoliter also healthy. Michelob Ultra specifically had a great start in 2018, finishing Q1 with a [ 15% ] growth.

And if you know with Canada, one of the things in terms of trends that we see in Canada, when you look at the craft industry and you compare that to the U.S. so it's relatively underdeveloped or growing a lot.

And in the last couple of years what we have done, so we are adjust some of our portfolio, if you look at New Street, for example, the organic beer that we launched there or Archibald and even like the cider ready to drink type of products that we created there, is a moving portfolio, as change, moving portfolio.

And we again, there is no reason for us in spite of not giving any guidance, and specifically again the shorter the term that you look the hardest for you to see. There is no reason for us not to have, not only the profitability that we have in the Canadian business but also to resume a growth if you will -- in terms of margin overall.

Remember that in 2017 full year, again EBITDA grew by 0.9%. .

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

Thanks, Gary. So before finishing our call, just a quick comment regarding Brazil. I'd like to reinforce that the first quarter behind us, we have a positive view about our business in Brazil.

We remain very confident in our strong growth platforms, very confident in our solid innovation pipeline that will help us to resume beer volume growth in the second quarter and further accelerate EBITDA growth for the balance of the year. So, thank you. Have a great day. Enjoy the rest of your day. .

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