Good morning and thank you for waiting. We would like to welcome everyone to Ambev's Fourth Quarter 2018 Results Conference Call. Today with us we have Mr. Bernardo Paiva, CEO for Ambev; and Mr. Fernando Tennenbaum, CFO and Investor Relations Officer.
As a reminder, a slide presentation is available for downloading on our website at ri.Ambev.com.br, as well as through the webcast link of this call. We would like to inform you that this event is being recorded and that all participants will be in listen-only mode during the company’s presentation.
After Ambev’s remarks are completed, there will be a question-and-answer section. At that time, further instructions will be given. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are 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 the 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 percentages changes refer to comparisons with fourth 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 on the earnings release.
Now I would like to turn the conference over to Mr. Fernando Tennenbaum, CFO and Investor Relations officer. Mr. Tennenbaum, you may begin your conference..
Thank you. Hello, everyone, thank you for joining our 2018 fourth quarter earnings call. I will guide you through our financial highlights of Brazil, CAC, Latin and Canada including our below the line items and cash flow. After that, Bernardo will give more details about our operations in Brazil.
Beginning with the main highlights of our consolidated results, the first quarter was marked by different challenges across all regions though we saw success of many of our initiatives, including innovation and continued premiumization.
On a consolidated basis, in the fourth quarter, top line was up 5.3%, as volume drop 3.8%, was more than offset by the growth in net revenue per hectoliter of 9.4%. In the full year, net revenue was up 6.9% with volume declining 2.6% and net revenue per hectoliter growing 9.7%.
EBITDA grow organically by 5.3%, reaching BRL7.5 billion with an EBITDA margin of 46.7%, which organically was flat in relation to fourth quarter 2017. In the full year, EBITDA was up 9.4% with margin expansion of 100 basis points to 42%. Normalized net profit was BRL3.7 billion, 17.3% lower than in Q4 2017.
In the full year, normalized profit was BRL11.6 billion, 5% lower than 2017. Following the categorization of Argentina as a country for 3-year cumulative inflation rate greater than 100%, the country is considered highly inflationary in accordance with IFRS.
This first quarter we will continue to report the results of our operations in Argentina applying Hyperinflation Accounting. This quarter adjustments are the same but with different impacts due to the favorable appreciation in relation to the real.
Non-monetary assets and liabilities had to be restated using an inflation index, translating to higher cost of goods sold and depreciation values, but in this time only for the past three months.
And second, the full year P&L which you need to be converted to Brazil and at the other exchange rate of the period had to be adjusted for the commodity inflation from January 1, 2018 and then converted using the end-of-the-period exchange rate, which is a closing rate of December 31, 2018.
The first quarter P&L is a difference between the full year and the nine months results reported in the last quarter.
Given that peso real appreciated in the quarter, we reported hyperinflation accounting positive impact of BRL685 million on net revenues and of BRL220 million on normalized EBITDA, which contributed to a negative impact on the normalized profit attributed to equity holder of BRL15 million.
In the full year, the impact was BRL568 million negative on net revenue and BRL353 million negative on normalized EBITDA which contributed to a negative impact of BRL 291million on the normalized costs attributable to equity shareholders. Having said that, I will now move to our divisional results and start with Brazil.
In the quarter, Brazil EBITDA was down 7.4%, reaching BRL4.1 billion with margin contraction of 360 basis points to 47.9%. In the full year, Brazil EBITDA grew 3.3% with margin expansion of 70 basis points to 43.9%.
In Beer Brazil in the fourth quarter, top line was up 0.9%, so quarter by net revenue per hectoliter growth of 3.1% is slightly below inflation for the period as price increase was offset by geographical mix. Volume in the quarter was down 2.1%, outperforming the industry.
In the full year, net revenue was up 2.2% with net revenues per hectoliter growing 5.4%. Volume was down 3.1% is slightly underperforming the beer industry. Bernardo will give you further comments on this matter. EBITDA for Beer Brazil was slightly down with the quarter with margin contraction of 80 basis points to 50.4%.
In the full year EBITDA was up by 3% with margin expansion of 40 basis points to 45%. Regarding costs and expenses in the quarter, cash cost per hectoliter grew by 27.9% mainly impacted by commodity prices especially on the Dominican Republic and by a hard comparable in 4Q 17, marginally offset by favorable FX.
Cash and SG&A was down 20% mostly driven by phasing of bonus accruals, which were fully booked in the fourth quarter of 2017 and Beer was split between and 3Q and 4Q as well as project related to non-working money expenses. In the full year, cash COGS per hectoliter grew 8.2% and cash SG&A was down 3.2%.
We expect the full year cash COGS per hectoliter in Brazil to increase by mid-teen's in 2019 as we will face pressures from current depreciation and commodity prices. In NAB Brazil, top line was down by 9.4% in the first quarter with net revenue per hectoliter growth of 0.8%, driven by geographic mix. Volume declined by 9.8%, underperforming industry.
In the full year, top line was down 1% with net revenues per hectoliter growth of 8.4% more than offset by volume decline of 8.7%. EBITDA in the quarter was down by 44.9% with margin contraction of approximately 2,100 basis points to 31.9%. In the full year, EBITDA was up by 5.4% with margin expansion of 210 basis points to 37.1%.
In terms of cost and expenses, cash COGS per hectoliter was up 31.9% as we anticipated there would be volatility between quarters. In the full year, cash COGS per hectoliter was down 1.1%. Cash and SG&A in the quarter was up 0.5%, also good phasing of bonus accruals and the savings related to the non-working money expenses.
In the full year, cash SG&A was up by 2.2%. Moving now to Central American and the Caribbean. In the quarter, net revenue in Central American and Caribbean rose 9.6% as a result of strong volume of 7.9% coupled with the net revenue per hectoliter increase of 1.5%.
In the full year, top line increased to 12.6% with volume growing 8.3% and net revenues per hectoliter growing 4%. EBITDA in the quarter reached at BRL712 million, increasing organically by 12.4% with margin expansion of 110 basis points to 41.5%. In the full year, EBITDA was BRL2.3 billion, up 14.1% with margin expansion of 50 basis points to 39.4%.
Cash COGS per hectoliter increased 8.6%, negatively affected by Panama who had the strong volume evolution since 2018 has driven additional temporary costs in order to supply the market with no disruption. In the full year, cash COGS per hectoliter was up by 6.6%.
Further, cash SG&A in the region was down 18.8%, so quarter by lower SG&A expense, mainly due to savings to non-working money expenses and phases of bonus accruals. In the full year, cash SG&A was up 0.3%.
Despite short-term cost pressures, our commercial strategy in CAC remained on track, supporting the helpful volume performance in virtually all countries in which we operate.
In the core segment, we continue to invest in our trade problems, strengthening our connection with our consumers through commercial platform to further enhance the Presidente brands in the Dominican Republic. In Panama, we keep investing in our main brand, Atlas Golden Light by creating experience through proprietary events.
We also continue developing our premiumization strategy in the region by investing in our brand Corona, Stella, Artois and Budweiser through customized execution both for the on-premise and off-premise channels.
It is important to point out that Premium accounts for less than 5% of the beer industry volume in CAC, representing a great opportunity for the future.
I’d like to take this occasion to say that we are very excited about our business development and strong volume performance in Central American Caribbean, reinforcing our positive outlook for division moving forward. Switching now to Latin America South.
Net revenue in Latin America South grew organically by 21.8% in the quarter with net revenue per hectoliter increasing 30.3%. Volume was down 7.3%, mostly driven by Argentina, where volume declined by low double digits as a consequence of a challenging macro environment.
In the full year, top line was up by 21.5% with net revenue per hectoliter increasing 22.1% and volume down 0.8%. EBITDA for the quarter was up 38.9% with margin expansion of 700 basis points to 51.4%. In the full year, EBITDA reached BRL4.9 million with margin expansion of 210 basis points to 45.5%.
Cash COGS per hectoliter in the quarter went up 9.1%, mostly driven by favorable effects, while cash SG&A increased by 16.8%. In the full year, cash COGS per hectoliter and cash SG&A were below inflation increasing 10.8% and 22.2% respectively.
Despite the macroeconomic volatility throughout the region, we remain focused on what we can control in our business and had positive development. In Argentina, we maintained a strategy of differentiating the core brands, Quilmes, our Classic Lager and Brahma, our Easy Drinking Lager.
In addition, we launched the Brahma 269 ML sleek can, a product for the summer season, reinforcing our single service strategy. Regarding the core plus segment, Budweiser continued to embrace the music platform, BUDX hosting the main parties in the quarter, sponsoring several DJs.
We also launched a limited edition IPA for Andes Origen, which was presented for the first time at the most important gastronomic festival in Mendoza. Our premiumization strategy has also shown promising results in LAS, with our premium portfolio outpacing the industry across all countries in which we operate.
Looking ahead at 2019, it should to be a divided year for Argentina. In the first half, consumer environment will be challenging, but cost will not be seen impacted by affects due to our 12 months loading hedge policy.
In the second half, we will face effect headwinds reflecting our 12 months hedging policy and a significant evaluation of the phase starting May 2018, where at this point we believe consumer environment is likely to be in a better shape.
Going forward, while cautious with Argentina in the short term, we have positive mid-and long-term perspective in the country, and we remain confident in our ability to deliver solid top line and EBITDA in the whole region supported by strong brands. Turning now to Canada.
In the fourth quarter, top line in Canada was down 2.2%, a combination of net revenue per hectoliter increase of 1.5% and our volume decline of 3.6%, which was mostly driven by a slowdown in the beer industry. In the full-year, top line was down 0.9%, which is explained by volume decline of 1.9% and a net revenue per hectoliter growth of 1%.
EBITDA reached BRL575 million, which is 3.4% lower than in the fourth quarter of 2017. In the full-year, EBITDA was down by 8.1% to BRL2.2 billion with margin contraction of 250 basis points. In the quarter, cash COGS per hectoliter was 1.4% mainly due to higher commodity prices, especially aluminum.
In the full year cash COGS per hectoliter increased 9.6%. Cash SG&A declined by 2.5% in the quarter driven by lower administrative costs that benefited from saving initiatives and lower variable compensation accruals. In the full-year, cash SG&A declined 2%. Despite industry challenges, we had good achievements with our portfolio during the quarter.
In the core segments, Bud Light kept it's momentum supported by strong commercial and trade activations and Michelob Ultra has continued its fast start accelerating growth in the quarter. In the premium segment, Stella Artois and Corona volume ramped up, enabling us to sustain our leadership position in the country.
Moreover, the craft portfolio continue to perform well growing by double-digits already accounting for approximately 5% of our beer volume in the account. Now back to consolidated figures below EIBTDA. In the fourth quarter, our net financial results totaled an expense of BRL1.6 billion, 29.8% higher than in Q4 2017.
Main items in the financial expense in the quarter were, first, interest income of BRL152 million, driven by our cash balance.
Second, interest expense of BRL345 million, that also included interest incurred in connection with the Brazilian Tax Regularization Program as well as a non-cash accrual of approximately BRL60 million related to the put option associated to our investment in the Dominican Republic business.
Third, BRL586 million of losses on derivative instruments, which were up year-over-year, explained by equity swaps losses, and by the increase of carry costs of FX hedges linked to our COGS and CapEx exposure in Argentina.
Fourth, losses on non-derivative instruments in the amount of BRL360 million, mainly related to an adjustment in the fair value of the put option in the Dominica Republic. Fifth, taxes on financial transactions on the amount of BRL103 million. Sixth, BRL265 million of other financial expenses, partially explained by intercompany transactions.
Seventh, BRL179 million of exceptional financial expenses, related to non-cash expenses due to foreign exchange variations on intercompany loans. Finally, eight, BRL67 million of financial income related to non-cash incomes resulting from the adoption of Hyperinflation Accounting in Argentina.
The normalized effective tax rate was 24.6% in the quarter lower than in Q4 of 2017. In the full year, the normalized effective tax rate was 13.6% versus 17.7% in the full year of 2017. Cash generated from operating activity in Q4 2018 was of BRL8.8 billion, which is 1.3% lower than last year.
In the full-year, the cash generated from operating activities was BRL17.9 billion, which is 0.2% higher than 2017. The impacts reached BRL1.4 billion in the quarter and BRL3.6 billion in the full year increasing 11.5% versus the full year of 2017.
Finally, during 2018, we announced that approximately BRL8.6 billion to equity holders in dividend, BRL7.5 billion of which related to 2018 net profits and BRL1.1 billion related to 2017 net profit. Thank you very much. Bernardo will now share some initiatives and thoughts on the Brazilian market before going to Q&A..
Thank you, Fernando. Hello everyone. As mentioned by Fernando, during this fourth quarter, we saw success for many of our initiatives with highlight for innovation and continued premiumization. Before turning to fourth quarter, let's recap how was 2018 in Brazil, which was a year marked by external volatility.
In the first four months, we had a tough industry, affected by bad weather across the country in early time. The growth consumption momentum of June and July were offset by Truckers strike in May. From our growth structure, we had a price increase and the uncertainty of all the election which LED to a challenge consumption environments.
This fourth quarter was a divided quarter, in October the industry was too impacted by low consumer confidence, but in November and December, we started to see some better trends. To illustrate that, the value segment that had weakened, started to reduce its share of the industry throughout the quarter.
And also the industry was gradually reducing to the client base. As a result of this quarter, our Beer Brazil volume declined 2.1% which was better than the industry. In the full-year, our market share declined 0.4 percentage points after a 0.6 percentage points gain in 2017 according to our estimate. Now let's talk about this year's performance.
We made structure investments in our portfolio with innovation in new liquids and new packets. As always, we always focus on sustainable value creation and as we've been saying, we are leaving this crisis in Brazil in a much better shape than regarding and ready to full benefit of the economy recovery going forward.
Starting with the premium segment, premiumization is a continued strength and it's always important to reinforce that our strength in the segment is a great portfolio of brands combining global and domestic brands.
We are certain that the premium market is a portfolio gain as you can seen in many mature markets and that we are in very strong competitive position to continue to gain share in the segment. Each of our premium brands maintains it's own territory, we're in position and price point reaching different consumer and locations.
Our premium portfolio combining is growing in a solid way and we're gaining share in the past several months. Our global brands comprise of Budweiser, Stella and Corona grew more than 35% in the quarter with robust expansion for our client base. In the full-year, the group represents way more than one million hectoliters.
Budweiser is our largest global brand and the leading trade up alternative for consumers entering in the premium segment. Budweiser is a need-to-drink lager, which stands for authenticity and aspires people to follow their own values.
It has been part of the pop culture worldwide, exploring the nightlife, rock-pop concerts and great moments of consumer's life and continues to grow double-digit quarter-after-quarter. Stella Artois is the reference of premium beer quality in Brazil.
Our Classic Belgian larger with distinctive taste that experience accelerated growth for the second semester on. In 2018, we expanded the brand presence in the astronomy culture events we've highlight to Villa Stella Artois and preparatory event successfully deployed during this quarter in Rio de Janeiro one of the main series of Stella in Brazil.
Stella Artois volume grew more than 50% in the fourth quarter. This amazing result was also supported by the expansion of new pack such as the sharing size bottles and the new cans that offer to Stella consumers new options to take Stella in different occasions and venues.
Corona is a jewel of our global brands portfolio, a brand that invites disconnect from routine and reconnect for essential nature. After a few years of careful introduction in Brazil, it is now ready to leave its potential and in the fourth quarter more than double its volume.
Corona has an unmatchable line ritual and is part of the international surf community, sponsoring the awards surf league and since this quarter, we are also proudly supporting our Brazilian award champion Gabriel Medina.
Corona is a strongly connected to the beach surrounded by the ocean and has teamed with Parley for the oceans to clear 20 Brazilian beach in 2019. And since Brazilians are also proud of our traditions and values, our premium portfolio is also stretched by big massive brands, Original and Serramalte.
Our domestic premium portfolio also had important results in the quarter. With Serramalte growing more than 50%, mainly driven by recently launched cans. Now, let's talk about the core segment.
Brahma, our Classic Lager beer, continues to grow really above the industry quarter-after-quarter, reinforcing the brands beer expertise across all consumer touch-points, such as, first, a complete portfolio of seven different liquids with recognized quality and tradition that go from Brahma Chopp, the largest best-selling Classic Lager, to Brahma Extra, a pure malt alternative; up to short Brahma, the best experience within craft beer; and second Brahma's quality message in communication to reorganization and brand experience.
The brand had a strong commercial plan in calendar activations in 2018, Sertanejo and Soccer events or boosted FIFA world cup in the first semester, a major occasion and increase selling moment for Brahma.
In addition, Brahma 130 years year celebration campaign in the second 2018 reinforced the brand's tradition and Brahma's beer knowledge while interacting real time with consumers, increasing even further the brand relevance. Now moving to Skol. Our main highlight of the year were the line extensions of Skol.
So now I will take time to tell you about the journey of a single liquid that goes down ground to become a family of liquids that go down ground. Relative naturally in the end of third quarter, Skol Hops opened the way of new easy drinking territories. Skol Hops is inspired in the IPA beer.
It is an innovative beer brewed with exclusive aromatic hops that provide a unique combination of lightness, freshness and a slightly bitter flavor. It provides relevant drink credentials to the Skol brand.
With summer approaching easy drinking brands become more advent in the market and so we invested in the new modern visual brand identity of Skol, highlighting its liquid, aggregating more quality perception to the brand. The Skol brand communication in the fourth quarter was 'the wheel never stops turning'.
Not only in the reference of the new visual brand identity, but also preparing the market for another Skol innovation, the Skol Puro Malte. Skol Puro Malte is a pure malt beer which maintains the unique lightless associated with Skol brand and also bring the signature flavor of a pure malt beer.
It's a 100% natural process, with no additives and no preserving agents, like all of our beers. The distant balance between drinkability and favor is a result of years of research and development. The result is a plainer easy drinking pure malt beer. Skol Puro Malte is the only pure malt beer that really goes down ground.
Early result of the launch are very, very promising. Fernando, will spend some time to talk about the market affordability initiatives. To tackle affordability in the core segment, we have developed in the past several initiatives related to packaging, such as the one liter bottle, the 300 ML RGB and more recently the 18 can pack.
We are already boasting these affordable packs to make them available to all around the country with price accessible to every consumable in the brands they like most.
When it comes to the value segment, it is always important to highlight that although the segment is somewhat relevant in terms of volume, each share of the industry profit pool is insignificant.
It's also important to remind that it is segment marked by the daily importance of brand equity and we believe that when disposable income begins to improve consumer will trade up. We have seen that happening in all the markets in the world.
By the way we have been seeing a contraction of the value segment in the short-term as the economy shows signs of recovery. When it comes to value segment brands.
Our strategy is to launch brands with the regional connection, but always looking to healthy margins, as we did with Nossa, cassava based beer launched in the third quarter that already posted strong growth in Pernambuco, reaching 5 percentage points of market share in the stage.
Following this successful initiative we launched in December the Beer Magnifica in the state of Maranhao. Magnifica replicates the same successful strategy and is also brewed with Cassava from local farmers and connects with local culture while delivering affordability to consumers.
Regarding our strategy Shape In Home & Boost Out Of Home, on the on-premise side Parceiro Ambev is one of the largest e-commerce in the country and has reached approximately 100,000 clients.
On the off-trade channel, we are doing several initiatives guided by the idea that consumers should always be able to have our products close, cold and at the right price. We've been putting great efforts to assure a high service level, both in the on-premise and the off-premise.
We have been setting up our road-to-market across the country, by several different initiatives, always focused on excellence in client service. Regarding NAB decision, we continue invest in premiumization with brands such as Lipton, H2OH, Do Bem, Tonica and Gatorade. Premium accounts for more than 13% of our total volumes.
We also continue to do important investments in our main brand Guaraná Antarctica. To conclude, it's important to highlight how we have evolved on sustainability in 2018. Sustainability is an important part of us to pursue the dream of being in a better world and also enhance in best habitation.
We already took some relevant steps towards this achievement. We completed that phase of the first Volkswagen electric truck powered 100% by clean energy which was integrated into the fleet that servers our brewer. Our plan is to have 1600 trucks by 2023.
In the water pillar that is also warm, our mineral water, which 100% of its profit goes to projects that facilitate the access to drinking water in the semi arid region in Brazil. Ama has just reached the mark of BRL 3 million covered to this social cause, benefiting 26,000 people.
Another highlight is our program for created to help NGOs to optimize their process, projects and also manage people and careers. We are proud to help by doing what we do best. The project has impacted socially over 2 million people with 185 NGOs and 200 company volunteers.
Finally, we also highlight the 100 plus accelerator which focus on boosting startups that develops solutions to forward sustainability. Only in Brazil we had more than 400 projects interest in being part of it. Let's talk about the outlook for 2019.
In the past few years, we've implemented transformation initiatives in our business, which puts us in a strong position to compete in each of the segments of the Brazilian beer market and to fully benefit of the rebound of the economy.
We see plenty of opportunities ahead of us and we are confident that we have a strong portfolio to capitalize on such opportunities. We have a solid premium portfolio and a stronger belief in the portfolio game strategy. We will keep investing and increasing it.
For the core segment, we have the best-selling strong loved brands that we will continue to innovate and renovate. We'll also continue to deliver the market affordability and play reasonably with healthy margins. Finally, we are optimist about Brazil this year, confident in our strategy and the initial signs of the year shows we are in the right path.
We can now move to the Q&A. Thank you..
We will now begin the question and answer session. [Operator Instructions] And our first question comes from Antonio Gonzalez with Credit Suisse. Please go ahead with your question..
Hello, Bernardo and Fernando. Thank you for taking my questions. Just two quick ones, please. The first one is Brito at AVI's conference call gave a pretty detailed presentation on the high-end and he qualified as the single largest opportunity for the company in the next few years.
So I just wanted to ask, even if you cannot quantify at the Ambev level just conceptually and do you see this as your largest opportunity as well or because obviously we've seen a down-trading from mainstream to value and resilient industry arguably is in a different stage compared to the rest of the AVI portfolio.
I just wanted to ask if you can mention qualitatively whether you see a more balanced growth or more SKUs versus premium or mainstream in the very specific case of Brazil. And then secondly, Bernardo, you seem very bullish about innovation at Skol's, right? And this is perhaps a second iteration the Pure Malte variant.
So, I wanted to ask if you have an early reading of how much is genuine growth? How much is cannibalization of the mother brand and is the mother brand starting to grow sort of as a halo effect from the line extensions that you're putting in the market. Thank you..
Thanks Antonio for the question. I think first in premium, we really the premium will grow in the future in Brazil, it has been growing even with the prices and it's been gaining share in the segment in the past several months. It's a strong portfolio of brands that meets multiple consumer needs and occasions.
So, there isn't a market in the world that the premium segment is dominated by single brand. So, it's a portfolio strategy and it's a portfolio gain. And as we've said, we're in, I mean, very good shape to end this gain. By the way, again, we're gaining share in the last several months with this portfolio of international brands and domestic brands.
I mean for the premium segment, overall, there's strong reference for premium beers in Brazil and the segment is 200 -- I mean it's not growing at the pace that we think compared to the other markets. Just as an example, in Paraguay, the weight of the segment is 20%; in Brazil, it's around 10%, 10-plus.
So, it’s the rebound of the economy for sure in the premium segment, so we're reading real growth. And I think that the execution and road-to-market and excellence and how to execute better our brands in the tray, I mean, have been improving.
So, not only the message of the brands that I've mentioned in my speech, but in the way that -- those brands in the market. So, yes, we think the premium segment will continue to grow and in a faster pace in Brazil.
And yes, we think that we continue to gain share in the segment because it's a portfolio gain, you can check in all the information, very hard for one single brand in the premium segment in a mature market had more than 15%, 17% of the market. So, with the portfolio gain, we have been building our portfolio in stage.
So, I mentioned seeding the brand, caught on in the past in the last three years and then you go to Stella and then Budweiser was there to really win this game via portfolio approach The second question I think to the Skol family.
Think it was very, very important for the Skol, as we did with Brahma, to bring I'd say all the beer knowledge to the brand. So we will start to talk even more about the Skol family and then based on all the research that we've done not only its cohorts, but Skol Hops, but Skol Pure Malts is our greatest.
Not only helps the mother brand in terms of equity, but really help us to expand the industry and to gain share with Skol.
So, again, the initial signs that we have that are not comment of Skol, Pure Malts but as said in my speech are promising because I can say to -- that I could say too -- so will be from family gain for Skol as well that was with Brahma in the past and I think that all the research that we have, show that we are in the right path as this approach..
All right. Thank you so much, Bernardo..
And our question comes from Luca Cipiccia with Goldman Sachs. Please go ahead..
Hi good morning Fernando, Bernardo. Thanks for taking my question. I just wanted to ask about the guidance I think they structures change the awarding and the structure has changed a little bit over the last few years; one year from the other.
And I think this time around I was a little surprised that even in light of the consolidation that you made earlier about in the fourth quarter have improved sequentially in November and December.
The relatively comfortable comps that you're going to face in Q1 and to some extents also in the second quarter the macro environment in Brazil is getting better some of the qualities comments that you've made that you didn't really mention or commented much about the topline that you expect in 2019.
But I don't expect you to do that now what I was wondering if you could maybe elaborate a little bit more and explain why that is the case? And also -- or more generally, I do you expect in the industry to grow, at least even if you could make some comments on that point? And then also on the guidance you have messages that EBITDA growth should be faster than in 2018.
I would assume that refers to the comparable of organic EBITDA growth that we had in 2018 of 9.4%. So, just wanted to confirm that that's the right way to interpret the guidance of 2019 organically growth of more than 9.4% that we did in 2018. There will be my questions..
Hi Luca. So, I'm going to start with the second one just to clarify. The EBITDA growth should be for Brazil that should be faster than the 2018. And then we're not giving any guidance. We're just providing an outlook.
The only guidance that we're providing is the guidance on cost of goods sold that should be growing for Brazil, should be growing things for next year. What do -- on the outlook what we're saying and this is not our guidance is that we are optimistic about Brazil.
We are excited about what we've been seen so far, but we cannot say much more than that..
And Luca thanks for the question. I mean your question about the fourth quarter and some of the comments about the four quarter. What we have been saying is that in doing structural change in our evolution in our business in the last few years in the crisis to be ready to full benefit when the economy of the country Brazil re-bounces.
So, what I said is that I mean the fourth quarter was a kind of mixed feelings; October was a tough month in terms of the industry. I mean the economic environment was not good and the industry is very bad. And the last is election.
We touched to see growing better I would say industry and a better consumer confidence and then what -- that's why it was a mix of quarters and it's exactly what I said to you.
And not a short-term sign that we saw that November and December, we saw the value segment that had piquet, that was a big headwind for us because we know that our participation in segment is not relevant. I mean we are doing a lot things and new brands like Nossa and the things, but few below our fair share.
So, the market -- the value segment had piquet, but the structure has started to contract. That's another sign that the economy mix in the fourth quarter was better in November and in the end of the year..
But that is just as a quick follow-up I would assume that the trajectory should have continued in 2019 I mean we only have two months in that, but it's already something? But I wouldn't think there's anything to suggest that those trends would've been better or if they did, that would be somewhat surprising, is that correct?.
What I would say -- what I said in my speech Luca, that the initial signs of 2019 shows that you're in the right path, that's what you can see just repeating the what I said in my speech..
All right. Thank you. Thank you very much..
Thank you..
And the next question comes from Thiago Duarte with BTG. Please go ahead..
Hi good afternoon everybody. Thanks for the question. Yes, two question from my side. First, I would like to go back to the discussion on premiumization. It's clear from the ABI call and even from your initial remarks Bernardo that, well, it looks like you guys are doubling down on the strategy then more than you're use to which was a lot already.
But I want to -- if you could please elaborate a little bit on how we should think of premiumization in the numbers? I mean you look at the quarter, what we saw in Beer Brazil, for instance, for even though it looks like your premium portfolio grew even faster than it was growing in the previous quarter, we still saw revenue per hectoliter growing about somewhat in line with the general beer inflation we've been seeing around right? So if you could elaborate a little bit more on why net revenue has failed to capture some of that or what were the fact that are offsetting what we believe is the positive impact from premiumization in your average pricing, I think that would be very helpful? And the second question is regarding government grants.
ABI, in their release they said something about the phasing of the government grant, if you look in Brazil we saw that as a percentage of revenue going down substantially in the fourth quarter particularly in the nonalcoholic segment.
So just if you could guide us through a little bit of where we should think of that number going forward, if it was something specific for the fourth quarter because I would -- actually would increase in -- with the of brands like Nossa and Magnifica, I would expect the government grants to start growing as a percentage of revenue.
So it would be nice to hear from that as well? Thank you..
Hi, Thiago, this is Fernando, thanks for the question. Let me start by the last one the government grants. At the end of the day, the government grants they are a function of volume. So since volume was down in the quarter due to the headwind if you could say so in government grants and is also on your volume mix, depends on this things.
So I don't think there is any structural change here, it's much more a function of volume mix and actually overall volume. You mentioned Nossa and Magnifica, but it's fair to say, I think these brands they carry a very healthy margin on the value segment, but I wouldn't buy all that down to governmental grants. I think they had much more than that.
I think, so if you work with the local community, the cost of goods sold, the liquid is actually cheaper seems to have a much more local marketing and selling expenses. You ended up costing less and also we focus on the most profitable packages, mostly the 600 ML and this helps a lot of profitability.
So I wouldn't be thinking there's a lot to do with relevant brands, but there's a lot of other factors that impact the profitability and actually sometimes they're even more relevant.
On your question on premiumization on net revenue there's an effect, the problem is that sometimes given package mix and other things, you ended up not seeing that very clearly, but is definitely -- and we're not breaking down to the outer world. But I can say that definitely there is a benefit both from topline and in margins..
Have you seen a lot? No, it's the economy of Brazil depends on the region and you could have -- one could have the cost rebounce, the trade up will happen. Yes I would say in the last three to four years if the economy were better for sure based on every mature market that in lower evolution many markets the rate of the premium segment would be high.
If you think in Brazil you being a better shape in terms of the macroeconomic I mean, KPIs or whatever the trade up will happen based on the all markets that we know and we always -- we know as well that support for gain that's why I have been giving portfolio in stage to give the right way in the last few years, it's not the one trick pony and we need, I would say plan it's a portfolio on and then we will see a trade up as well based on the what assign another markets from value to core.
By the way in the short-term we saw contraction in the value segment. So we think that the comment of the Brazil would be in a better shape as we have been to you a lot and into a lot sent to everyone. We are much better shape in a portfolio as a company, that like it's compared to years ago to fully benefit of that rebound of the economy..
Thank you very helpful and just a follow up of Fernando comments on the tax grants and specifically for Nossa and Magnifica. I appreciate the comment that you made on the cost and the profitability of the presentation that you're raising.
So one, but would you say it's fair to say that the amount of text grant as a percentage of revenue for these particular brands that you are launching the value segment and so on. It's still higher than the rest of the portfolio.
I think it's fair to say that or am I wrong?.
No. We don't go into the details Thiago we don't disclose with the external work, but as I mentioned it's not only tech incentive there are a lot of other components that make the case for this brands to be at the same time affordable and quite profitable to us. So it's kind of a win-win-win.
You have the community to delivering affordable product to the consumer and you also have a healthy margin..
And all the link of the local culture is very important for us as well. I mean the regional approach have been in search of our marketing to be more regional as well with regional structures, more digital and I think that in the end it's a good thing for that SG&A that extends to do the marketing connect, much better with the local people there.
So it's much more them and affordable product is that as well, but it's really built a brand with the regional emotional link with the people in those specific regions..
Appreciate. Thank you both..
And our next question comes from Daniela Eicher [ph] with Bank of America. Please go ahead with your question..
Hi, thank you for taking my question. Actually, my first question is regarding the guidance on EBITDA acceleration in Brazilian operation.
If you could just elaborate a little bit further on the drivers for digital acceleration should it be pricing or what is the in source of this acceleration? And on the last results actually, I wanted to understand a little bit better on the strong results there what was the hedge effect on the quarter and how can we affect this effect coming in the next quarters.
And I also I don't know if you can disclose that, but what was the effects on your COGS cost for the quarter? And finally if you could just -- a third one quick one, just regarding the quick decline -- strong decline on the SG&A in Brazil.
Could you just explain what were the main drivers of this decline in -- to foreign if they are sustainable? Thank you..
Hi, Daniela, Fernando here. So you're asking to elaborate a little bit more in terms of our guidance facilitate the Brazil EBITDA growth compared to this year. We don't want to go to too much into details because I think we are seeing EBITDA at the end of the day and probably once we're trying to look is probably some sort of the view on margins.
What I can say is that, whenever I look at individual lines in our income statements there are always opportunities to be more efficient to dilute fixed cost of volume to improve process and as a consequence improve margin.
Of course, there is always effect when commodity will achieve during quarter years, which might make such improvement harder or easier on a given year. On top of what we've been doing, there are incremental opportunities to our business.
One quick example is serving volume a little higher, that could come with a very good additional margin, but not as the solid as same margin levels as long as they also help profitability and help us expanding goods industry bring incremental profits, we surely also explore it.
So my EBITDA growth is going to be a combination of all these different factors going to 2019. And as affirmative, I think we still have the opportunities to grow margin but not a single is going to be focused specifically on it, but overall we are committed to consider it EBITDA growth. And I think that we can achieve that in 2019.
And then more important, the thing about accelerating EBITDA growth is not a guidance, but as a single euro what we're trying to accomplish year-over-year.
On the hedge effect, I think it was important to give some guidance especially because the fourth quarter we saw a meaningful increase in the cost and this was down to commodities going up specifically aluminum and valley and while we're heading the other prior quarters in Brazil where effects was also a huge tailwind even had because effect was little help but almost flattish.
So when we go into next year. I think was important to give our guidance to set the right expectations and then we expect our cost throughout the year for Brazil as a whole to grow by mid-teens..
Okay. Thanks. But just on the – actually the cost and the hedge effect.
I was mentioning about LAS operations just to understand there what was the impact?.
Okay. LAS operations, our hedge is always a rolling 12 months hedge. So if you look at -- if you want to understand what are the cost for a given year, you need to look 12 months back and see what the occurrence was. Since the depreciation in Argentina happen in May 2018, you expected that into May I have much better cost of goods sold then after May.
So I think that's the message. So you should -- so you saw a lot of margin expansion in Argentina throughout the fourth quarter. This has a lot to do that my cost of goods sold one year before while on the top line you have the benefit of inflation, which also increase prices, but your cost given follow suits.
Eventually they will follow suits with a year delay. So for 2019, you could expect a better affect in the first half until last May, and then throughout the second of the year you should expect the total effects. But this is consequence of our rolling 12 month hedging policy..
That’s perfect. Thank you..
And our next question comes from Robert Ottenstien with Evercore. Please go ahead with your question..
Great. Thank you very much.
I want to circle back to Skol and the challenge, which I'm getting from talking to some of the players down in Brazil, and the supply chain is that Heineken has actually been doing a very good job at a core plus level with brands like Amstel and Aisenbond and so the question is kind of three-part on Skol; one, the brand, health of the brand? How are the brand health indicators? Two, I know you are seeing some good signs from spreading out the brand a little bit that you think it's got board shoulders, but how do we have comfort that that's not going to be a -- at the end of the day dilutive brand equity? And three what about bringing in brand like BAX [ph] if it appears that there is a strong interest in Brazil for more European type of beers? So, thank you very much..
Robert very good question. Maybe let's talk a little bit about the core and core plus segment. So I think that the brand that's really goes to the core and core plus is more liquid and so on the initial was Brahma, so Brahma with Brahma Extra, definitely growing a lot. So, Brahma is a huge success growing quarter-over-quarter for last three years.
So Brahma really big linear brand in the -- I'd say in the market -- in the core growth plus segment. For, specifically the core plus have been growing a lot to Bohemia. Bohemia is really I mean, it's amazing the kind of growth that they had been having with this brand.
So it's very, very important to highlight that, and then we can --- I mean, I can explain a little bit about Skol, what we saw I mean, the brand power I mean, all that indication of the word the brand. The leading brand in Brazil in terms of brand power is Skol, second is Brahma.
And I mean, almost I mean, 50% of the brand power of those brands have the third-one in the market. So, I think -- and Skol is a leader brand on that.
With Skol that was important to bring the concept of the family of beers that bodes down well for Skol to bring more attributes of beer knowledge for this brand because people are very emotional related to this brand. It's the leading brand in Brazil, it’s an amazing brand power. So that's what we have been doing.
So why we're launching Skol Hops, of course, exactly because of its volume, it has a good volume the service Brahma Extra, but particularly Skol Hops really bring all the beer knowledge, I mean, including one price of the best hoping lager in a liquid that's completely different.
So it's fresh, it's light but it's kind of slightly bitter flavor, so that’s the aromatic Hops brings, so it's very, very good.
So when we researched that Skol Hops helped the demand brand equity of the mother brand and is happening, and then after that we saw opportunity in the Brazilian markets to launch the only few malts beer was really drinkable. So a drinkable liquid, but with the signature of a pure malt beer.
That's not easy to do that's, I mean that’s why all the pure malt beers in the market, or they are bitter, or they have a flavor that not goes down well. So we have a patent process to really brew liquid that's really fresh, really light in the sense drinkable, but with this signature.
We've tested a lot, we learn in terms of the liquid designed a lot in the last year, all the research that we've done that's not only volume accretive for the brand, expand the industry, gain share gain share for the brand and it helped the mother brand like the Brahma, peace with Brahma.
So I'm reading based on the research, in the initial, I'll say results that we have for the Skol and for Skol pure malts, we're very excited about this concept of the family of beers that goes down well and excited about the launch of the scope for pure malts that have left -- variant that's just launched in the market.
By the way the carnival of this year will be a great opportunity for the Brazilians to try Skol Pure Malte that's amazingly to come here to Brazil, they want you to drink and do send us a feedback of what you think; drinkable, light but with the signature, in terms of the flavor of the Pure Malte, the only one in the market that has that..
Thank you very much..
Thank you..
And our next question comes from Alex Robarts with Citi. Please go ahead with your question..
Hi, everybody. Thanks a lot for taking the question. So it really is just around your big picture thoughts on innovation.
We've seen now in the last six months four launches in Brazil Beer, and couple responding to the value segment growth, a couple to this flavor malt hops concept that you're just describing, and so it's an unprecedented amount of innovation when we think about the history of your company.
So the question is twofold, are we kind of at the point where you're feeling comfortable with the portfolio? Are we in midstream of spur of innovation? Just kind of getting your sense on the kind of phasing of this innovation as we think about this year? And then the benefits clearly you're describing to us volume uplift consumer preference and alignment and such.
What about if you could comment on the cost side or the expense cost side of this innovation, you've told us in the past that there is room for efficiencies in OpEx, I would assume small batch type of productions in northern states are costly, more malt and where hops are costlier than rice and corn.
And I guess just do you feel comfortable on the cost side and expense side that there is not expected to be an incremental change this year in Brazil Beer or any comments around that would be great? Thanks so much..
All right. Thanks for the question. The thing -- let's I mean, go back and talk again about the long-term plan that we have been the pillars of the top-line growth on EBITDA growth that we -- in terms of growing volumes and revenues.
So first thing is to accelerate premium, second one been focused on elevate the core, and the third one is drive smart affordability. And innovation is part of all of those things. So it's part of the DNA of the company have been investing a lot not only in process, but in training our team, investments in terms of trying to find the best liquids.
For instance, two years ago we launched a new innovation center in Rio de Janeiro that is an amazing place with technology, with the best brew masters of award, really to pass liquids and then we have been working on that in the last three years, so big time. And sometimes the process not so, two plus two is four.
Sometimes you find liquid in there that's not the perfect one, because you're talking about a big, big brands. You need to really I mean, do it right. Sometimes I mean, we could launch Skol Puro Malte in July, but this start up was important to go to Skol Hops first to bring this knowledge of the quality.
I mean, knowledge of beer that Skol, it's a great big beer and needed. And therefore let's go to Skol Hops, even knowing that if one will not be amazing because it's Hops Lager. It’s slightly bitter, drinkable. To reassure we would launch the Skol Hops during the summer, during the carnival, that's what we're doing.
So we don't manage the innovation process that we have, I mean, quarter-by-quarter to come here in the call and I mean ease ourselves and no damage. We think long-term and we're really make the calls to do the right things.
So we asked, maybe given all of the figures that I've been feeding in all of those years, last year was a year that lots of additional reputable and then with the peer group marketer executions system here to deal with them, doing very, very well. And I think that we always be part of our DNA.
We continue to innovate for the future, but yes, I am very happy of the portfolio that we are -- that we have. So premium, amazing, it's growing, it's gaining share. It's a portfolio gain. And we continue to gain share.
I can see not only the number of market share, but I could see and I go the Street, talk to people, so I mean people who drink premium brands in different occasions, and their portfolio is there. I see Rodriguez talk about that maybe. We’re always steady, because the portfolio it's really good for to offer that.
And then you have the two most important brands in Brazil, the brands power that Skol and Brahma, and I think innovation is part of that. With variance are doing well, and then you have all the initiatives of this market affordability there. I mean, it's just a comment not ideas that could come as well.
So in terms of the costs of the liquids and stuff like that, I think that we know -- we have this culture of honors to be efficient really to pledge for the money, better process, technology helping us to really make sure that our cost base is low. But we will never in the past and we will never compromise the quality of our liquids.
Everything its start from the liquid that's in a bottle in a can, and this is always being the part and even more a mantra. We have the better, the best liquids in the market and we will not compromise the quality, I mean never intent because of cost. We could find a cost elsewhere. And then we have the [indiscernible] and have all other stuff.
But make sure that the liquor is the liquor to have the best quality in all of our brands. So I'm really confident and happy with the portfolio that we have nowadays.
And I'm pushing the team to continue to innovate, because this is are markets that we continue to change and I need to be ready for the next five years, but currently, happy with the portfolio..
Very clear. Thank you very much..
And our next question comes from Leandro Fontanesi with Bradesco. Please go ahead with your question..
Hi. Good morning. And thanks for the opportunity. I also have two questions. The first one is you have been seeing bottle makers in Brazil reporting that they are at a high capacity utilization.
I was just wondering if you have been seeing any sort of restrictions of bottlenecks so far? Or is this is a concern for you, do you think these volumes are accelerating the market going forward? And the second thing is if we could bring some more color on Canada, so volume decreased 4%, correct me if I'm wrong.
This used to be a fairly stable market and we saw this big decrease in volume. Just wondering what happened there is something related to Cannabis if you are doing to something like that? Thank you..
Leandro, thanks for your question. On the first one on the bottle makers, we have no issue at all. Not only we see no issues from our suppliers, but we also have some of our own bottle brands. So combining both -- it's not an issue and then we are not even hitting anything about it in our operations. On a second question on Canada.
I think Canada is a very mature market, it is a very profitable market, but of course, as all mature markets, it has its own challenges. I think what we've been seeing is that similar to other places, it's getting more and more premium. And we are investing a lot behind that.
Our premium strategy is working, but it's even more of a portfolio game and that in other less mature markets. So you should expect like consistent growth over time. Although, it’s fair to say that 2018 was not necessarily a great year. On your question about Cannabis.
It's too early to say, but there is a lot of discussions about it, but there is no hard evidence that it's helping, working against or making any meaningful impact on the beer category so far. I think is still something we have to learn about..
Got it.
Just a follow up on first question, you can -- what percentage of your production you can supply internally for bottles? Do you disclose that?.
We -- it's around 50%. So 50% of our volume, we can supply by our own escalated facilities..
Perfect. Thank you very much..
And this concludes our question-and-answer session. I like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks..
Okay. Thanks for the attention everyone. Before we finish our call, I'd like to close saying that we are confident, very confident that we are evolving in a consistent way with our commercial strategy and the innovation pipeline.
In Brazil, specifically, we are certain that the premium market is a portfolio gain and as I have been saying a lot that we are in very strong path with a portfolio that we have to continue to gain share in this segment, like we have been doing in the past several months.
We’re also very positive about the rebound of the economy in the country in Brazil. We have a portfolio of brands in our core that's really, I mean, amazing we have Brahma, we have Skol Hops as well, Brahma and Skol really leading the way. The innovation behind those brands Brahma in past and Skol now are really proving to be a success.
So a core segment is even more strong. We have been launching initiatives for the various segment to increase our share of segment, but thing that the segment will contract like we saw in the last two or three months, because I mean if the economy is doing better if you think that we were not seeing that will this will be trade up.
So the premium will grow and the quality grow and you'll be in a much better shape that and to really for benefit of this rebound of result. I think that we are exiting this crisis. I'm the country I hope embedded in a much matter place and shape that that exactly what we enter years ago.
So we’re ready to fully benefit for the rebound of the economy that everyone here expect in the country. So, thank you. Have a great day. Enjoy the rest of your day. Thanks, again..
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..