Good morning and thank you for waiting. We would like to welcome everyone to Ambev's Second 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. We would like to inform you that this event is being recorded. And all participants will be in listen only mode during the company's presentation [Operator Instructions]. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with second 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. Bernardo Paiva, CEO. Mr. Paiva, you may begin your conference.

Thank you. Hello, everyone. Thank you for joining our 2018 second quarter earnings call. Before starting, I would like to announce that we have here Fernando Tennenbaum, our new CFO since July 1. Fernando joined Ambev in 2004 and while at Ambev, has served in many finance functions. Since January 2012, he has been the global treasurer of AB InBev. I would like to thank Ricardo Rittes for all his support during his almost three years as our CFO, during which he delivered great results. I would also like to welcome Fernando and to wish him all the best in his new role. I will now hand over to Fernando to go through our results in all the zones. And next, I will come back to take you through our commercial highlights in Brazil and to share with you our outlook for the country.

Thank you very much, Bernardo. I'm really happy to be here. Throughout the 14-years in this group I had the opportunity to work as the investor relation, head of M&A and Treasurer of InBev. Rittes has set a very high bar as CFO and I'm deeply committed to continue his remarkable work and keep pursuing a sustainable value creation for our shareholders. After this quick introduction, I will start with the main highlights of our consolidated results. In the second quarter, we posted a strong growth in most of our market. On a consolidated basis, topline was up 11.4%, positively impacted by volume growth of 2.6%, coupled with net revenue per hectoliter increase of 8.6%. After 10.1% of EBITDA growth year-over-year in Q1, we further accelerated EBITDA growth to 16.7% in Q2, versus the same period last year, expanding margin by 180 basis point to 39.4% and reaching BRL 4.5 billion. Normalized net profit was BRL 2.3 billion, 9.7% higher than Q2 '17, as a deep organic growth and lower tax rate were partially offset by higher financial expenses. Moving now to our divisional results and starting with Brazil. Brazil EBITDA was up 14.8% reaching BRL 2.4 billion, with margin expansion of 190 basis points to 41.1%. Our beer business in the country delivered good results. Net revenue increased by 9.2% and EBITDA grew by 11.1%, with margin expansion of 70 basis points to 41.5%. After an anticipated soft start in 2018, beer volume resumed growth to 1.7%. Despite the negative impact from the truck drivers' strike, which was offset by 2018 FIFA World Cup, the beer industry, according to our estimates, was flattish. Net revenue per hectoliter remained strong and grew by 7.4%, benefiting from the carryover of the price adjustment implemented in Q3 2017 as well as from…

Thank you, Fernando. Let's start talking about beer. Our Beer Brazil results in the second quarter were strong and demonstrate that we are on track with our commercial strategy, that is a result of consistency and excellence in the implementation of our growth platforms. These results also confirm what I said in our first quarter earnings call, when I focused on explaining the main drivers that led to beer volume decline in Brazil in Q1 and on the reasons that our volume performance in that quarter was not indicative of any structural change in our business. I'd like to highlight that we faced several challenges during this quarter as a result of the truck drivers' strike that took place in May. However, our relentless focus on excellence in go-to-market and service level were decided to: one, keeping a products on shelves during this period; and second, react fast after the strike, restoring inventory levels in the market quickly. Along with that, we also had a successful execution during the 2018 FIFA World Cup. All the factors that I just mentioned contributed to a beer volume growth of 1.7% outperforming the industry. In this context, as said by Fernando, we've managed to deliver solid topline and EBITDA growth. Our Non Alcoholic business also posted great results. Volume grew by 1%, meanwhile the soft drink industry was down mid-single digit. Solid top line in cost performance also allowed us to increase EBITDA by more than 40% with significant margin expansion. Having said that, our alcoholic measures in Brazil remain consistent during the quarter and we continue to focus on our growth platforms, which had the following highlights, such as elevate the core, our first and most relevant platform. As I mentioned in the previous calls, Brahma, our classic lager has been experiencing…

[Operator Instructions] And your first question comes from Robert Ottenstein with Evercore ISI. Please go ahead.

Two questions. One just a simple one on the Skol Hops. I was just wondering if you could talk a little bit more about that brand extension and sort of what are the opportunities you're going after, or the occasions? What you're trying to solve for? So that's just question one. And the second question is ABI announced today a fairly meaningful reorganization. Some new roles within the top tier of the management, and I was just wondering to get your perspective on how some of those changes may or may not impact Ambev and specifically on the opportunity in terms of retail. And it looks like at least on the corporate level at ABI, looking to perhaps put more emphasis on the retail channel and ownership of that.

So just briefly about Skol Hops, I think we have been evolving the portfolio here in Brazil as we've been talking in every call. So it's key to have our full portfolio of brand to offer to people in general. Great beers in different flavors, different taste and locations as well. So in 2016, we launched, just to remind, Brahma Ales and we launched three Brahma Ales. And we created at that time what we call the core plus segment in Brazil, offering the first opportunity to trade up. So it's very important for us not only the premium, but to create the core plus. It was the first step up in terms of the profitability and in a more experience, better -- not a better but a different experience that people would have with beer. Since we launched Brahma essa, this brand has grown quarter-by-quarter, I mean, after quarter strongly. And is already 1% of the beer volume -- our beer volume in the country. And on top of that, but we saw that Brahma essa has a positive impact in the mother brand because, I mean, the family help Brahma surely to grow as well. So in this corridor that's the most innovative brand in the Brazilian market should be part of this as well. So Skol could not be left behind in the core plus segment. So that's why we launched the Skol Hops. I mean, I've been studying this a lot. So why to do this in a different way? So it's a very light beer, but it's a refreshing beer with this aromatic hops that we study a lot. Brew masters have been working on this for a long period. They're just like Brahma essa , we expect a major success to reinforce the core plus effect. And bringing just the perspective of the core plus, three years ago, we didn't have the core plus segment in Brazil. We shaped the industry and we created a portfolio of that is radical for 2% of our beer volume with a higher profitability. So Skol Hops will be part of that and for sure we will grow big time and it will help us to even enhance and grow the core plus segment, helping the mother brand of Skol as well like Brahma essa did with Brahma short-term.

On the question about ABI announcement at Ambev level, our operation remain exactly the same. So there will be no change from that perspective.

And just -- is there any increased emphasis on owning retail? That was something that on the ABI level seems like there's going to get more attention. Are there any plans for that in any part of your region?

I think probably the first focus that we have is work to retain that work that we have in Brazil. So -- and the point of sales, the change, they worked very, very, very well and we're really committed to work with them. We have here some owned stores, some franchise business. It's becoming relevant having talked about the Pittsburgh. So this retail focus is not new for Ambev. There are some things that we've been doing for a long time and will continue to do when makes sense and the occasion that make sense. But again, the first focus is work of the retaining the market we have here in Brazil. That is working our brands that have been working hard in terms of a pull from the go-to-market to service level to serve a bunch of sales in a even better way year-over-year.

Your next question comes from Antonio Gonzalez with Crédit Suisse. Please go ahead.

I also wanted to ask a couple of questions on your relationship with ABI. First, I wanted to come back to the previous question on the announcements that ABI did this morning, and I understand your comment Fernando that there are no organizational changes at Ambev. But I want to get some, I guess, perspective from you guys to understand if you can better leverage on your access to ABI specifically as it relates to two areas: first, you're sending some part of your talent as part of these reorganizations from ABI, Carlos Desboa and Bernardo Novique and so on. I want to ask if you're in this occasion importing some talent as well. Second, I wanted to ask if specifically in the soft drink business, volumes have been soft for a number of quarters now, no? In the second quarter, we saw a rebound but, I guess, if we see the last 18 months or so, there's been some weakness. So I wanted to ask if there's something that you think you should be doing structurally different in that business? And perhaps this reorganization from ABI helps. I'm sorry to make it a long question, but the last point I wanted to ask is I wanted to see if you can add some perspective on also, I guess, corporate governance and your broader relationship with ABI, not only because of these changes that ABI announced today, but also there's a shareholders’ agreement between several shareholders at Ambev, the control shareholders at Ambev that is expiring next year. And obviously since the creation of this agreement a lot has changed now. You formalized several committees at the board, the merger of the two share classes, et cetera. So just I want to ask Bernardo if, from your conversations with Brito has a strategic view of the relationship changed at all? And how have these formal bodies, such as the compliance committees and so on, improved the relationship between yourself and ABI? Sorry for the very long question, but I wanted color on those 3s points.

Antonio, thanks for the questions. So first one, people will think that we are exporting people as you said, in the thing that you said. It's very important for our culture that people continue to see they have opportunities of growth. So this attracts great people. And part of our development of great people is really to give them different challenges. So they'll become better partners in the future. It's true as well that you always import people. So that's a flow, an outflow and it's an inflow. So we have here Fernando, who was the global Treasurer of ABI, wasn't at InBev at that time in five years, six years ago. He went there, become much more experienced, knowledgeable and so on, then back to Brazil now to help us here. So you will see this flow, no? So now you first, I mean, seeing the exports flow, and then, I mean, I think that we could see in the next months some inflow as well. People coming, so that's good, because it's good for -- the export people because when they come back, they come back with a different view. Helpful for all of us [indiscernible] stayed eight, nine years outside of Brazil and helped either way. And Paula and the other people with the team how we can shape the strategy here. The experience you have to have outside. So I think that's a good thing. It's a good thing for the culture, because people grow, you can attract great people because they see a place that they can grow and so on. And it's good to have better partners because they have a broader experience. So exporting now, we brought for sure in the future and more years to come. Leading to the second point, I…

So a little bit on the corporate governance. The current shareholders agreement was executed in 1999 in the context of the merger between [indiscernible] and Bremer for a 20-year term. So that meant that if nothing happens, there will be no shareholder agreement after 2019. In 2015, at the time where we merged the [indiscernible] to have one single class of share, which we think it was a very positive outcome for our shareholders. Another agreement was negotiated to be enforced at the time that the original shareholders agreement would expire. So from 2019 and onwards, so it's fair to say the scope is different for this agreement than the first one. But I think the more important corporate governance point there is still valid and nothing changes. So the foundation is still going to be on the shareholder agreement. Under the new shareholder agreement any matter shall be in best efforts aligned between the shareholders. If consent is not reached, M&A transaction shall be approved by the majority of the board members. And of course, we said by controlling the majority of the board members we will be able to approve it. But having said that, if there is a M&A transaction carried out with related party, then we're not talking about shareholders agreement, we're talking about Brazilian corporate law, which is over and above the shareholders agreement. So when you develop a relation and the company bylaws, shareholders and board members must abstain from voting matters when they have conflicting interest in the company. We ended up being a little bit even more restricted here. So whenever we perceive there is a conflict, the shareholders even abstain from discussion, not only the voting but from the discussion. So just to follow up a little bit more on the transactions, If a related party, we have the compliance and related party committee. We'll first analyze each one of the transactions, including its [indiscernible] prospect before it's submitted to the board. So I think we have all the controls and tools in place to make sure that the relationship is the right one.

And we think that on top of, Antonio, and all of you guys, on top of all of this controls and so on, we are partners of Ambev. We have a reputation here Fernando, Nicolai, myself. I'm 27 years in this company. We'll do always what is the best for the shareholders of Ambev. So that's for sure. I think that is not a technical question -- answer, but it's a real one. I think that's the final part, this part of the law and so on that protects everything and most importantly shareholders of Ambev. We are partners of Ambev and we'll protect the shareholders of Ambev, always.

Your next question comes from Isabella Simonato with Bank of America Merrill Lynch. Please go ahead.

I have two questions. First of all Brito, in the ABI's call, he mentioned that the impact of the truck driver strike in beer in Brazil was three percentage points. I was wondering if you could share with us now what sort of impact you saw from the World Cup, which as you said, pretty much offsets the impact from the strike. That would be the first one. And second one on soft drinks in Brazil. You have been having good tailwinds regarding cost, but your guidance for the year overall still shows an increase versus 2017. So I was wondering if you could share the drivers of that cost inflation for soft drinks specifically.

Isabella, thanks for the questions. First I'll touch volume part and Fernando will talk about the cost of soft drinks. So volume. We should take a look in two things: the effects of the strikes and the World Cup, as we said. Let start with the strikes. As you know, you cover us for a long time have been stepping up the go-to-market across the country via several different initiatives. We've been talking personally with you in the last three years about that the total long-term initiatives. But we knew that in a point of time and we start to reap the benefits on that and then I think that's the EBITDA and this year we continue to do. So the strong distribution that we have, the evolved service levels were a key to keeping our products on shelves during the truck driver strike. It also enables us to recreate quickly after the strike. So just one example, we knew that the strike could end, was in a holiday; we worked every day during the holiday; so all of the sales force, all of the brewers, all of the trucks; so to react even faster to reassure that we will mitigate the volume loss; so the volume loss, yes, we have, because we saw at that moment a change in the consumer behavior during that specific period, which led to a volume loss. So we estimate that was, as your [Indiscernible] said, that during this quarter, we lost approximately 3 percentage point of volume as a consequence of the strike. We mitigate that, this could be even higher. So given all the excellence in terms of service revenue that I said could be -- I mean, we mitigate that. We demand acceleration of around 3% for the quarter. And the World Cup -- so the World Cup, we've been working hard and then in terms, I mean, four years we are sure that the World Cup would be a strong one. Brahma was amazing, strong but [Indiscernible] as well. And yes, the World Cup -- with the World Cup was able to fully offset the 3% of volume that we had lost with the strike. So the volume grew 1.7%. So all in all, two things: first matter we were able to mitigate the effect of strike given the excellence in operations. Secondly, the World Cup was very positive not only for the volume, we were able to mitigate that loss of the strike, but for the brand building as well of those two brands that are very strong. And just to finish, we see that the consumer environment is recovering. It's a low space, but the trend is positive. So for my part, and you can comment on the...

Isabella, Fernando here. So to your question was on CSD. So our Cup performance for any of you is very strong this quarter. However, in the second half of the year, there are tailwinds and headwinds that impact our performance. Among them, lower sugar prices and the reductions of [Indiscernible] trade zone benefits. So when considering there would be a lot of moving parts that make any cost projection difficult, we decided to give this guidance to make sure that people don't get it wrong. This is not the case for beer. That's why we're only looking at soft drinks and providing this kind of range. So people don't get surprised by the preparations quarter-on-quarter.

The next question comes from Thiago Duarte with BTG. Please go ahead.

I have two questions actually. The first one is trying to understand a little bit more the net revenue per hectoliter performance. The performance was very strong I think across the board, across all the divisions. And of course unfortunately you don't provide a breakdown by how net revenues and gross revenues performed for each of the division. But even if you look on a consolidated basis, we've been seeing the last few quarters the total deductions on gross revenues going down. So the net revenue per hectoliter has been gross revenues per hectoliter. This has been true in the last two quarters and it was particularly true in this quarter. So I understand there were some changes in the excise tax calculations with the changes in fiscal themes and ICMS in Brazil. But when we look at the breakdown the discounts are also going down. So I wanted to get a sense from you, why is that happening? Does it have something to do with what you just said Bernardo, which is related to the economic environment improving slowly, so you're not having to give more discounts? Is there something to do with the World Cup? So it would be interesting to hear whether you think this trend where net revenue outperforms growth revenue continue to be the case going forward. It would be interesting to hear. And second question is more on a longer-term question and has also to do with the portfolio of the company. If you look at this quarter and several quarters behind us, when you talk a little bit about the performance of the brands, you've got the core plus segment doing great. You got the premium segment doing great, everything growing double-digits. But it has been clearly been outperforming the ministry market. And even if you try to run the math, it looks like the main stream market is not still picking up. Your mainstream brands are not still picking up, which is not necessarily a problem as you've been saying Bernardo, because it's more about building the portfolio. But my question would be you have historically talked to us about a balanced growth between volumes and prices, trying to find the right balance between volumes and prices for top line growth. When we look at the core plus, Premium outperforming mainstream for so long, it looks like consumers are replacing one for another. So my question to you would be should we start thinking more about a top line growth more driven by pricing rather than volumes? So that would be the second question.

Start from the net revenue price. We always have to remind ourselves and you guys that our price strategy is to increase price in line with inflation plus taxes over time, because that affects the industry. And then this is the strategy that we have been doing in, I mean, a longer period of time. But it's very important we always like to highlight that over net revenue per hectoliter, the performance is a combination of price increase and revenue management initiatives. And operating excellence positively affect the rate revenue in two fronts. So again, everything that we're talking about of serving more point of sales, serving better, understanding better and educating better the levels and increased demand in each point of sale and each channel helps volume, help other things, but helps the net revenue as well in two fronts. First, better management of discounts. In a win-win view that we do with the trade in a way that's good for us and it's good for the trade as well. We want to do that if you have a better relationship -- with the point of sales, if you serve better if you serve better their business. And then with that, yes, it's possible to manage better discounts. That's a good way to grow net revenue there is you are not affecting the consumer and the mix And things. So that's the first one. Second, make sure that the products, given the way that you serve the market, the way that we deal and serve the point of sales, we're raising the market with the right consumer price. Good for everyone. And why this is important not only for the industry, not only for the shares and so on, it affects the net revenue as well, because discounts are…

And our last question today will come from Luca Cipiccia with Goldman Sachs.

I have a couple of add-ons on the price mix discussion that we were just having. First, maybe on the short-term or looking at the third quarter. It seems to me you're going to get into that with a positive momentum across brands, some positive tailwinds in market share as well. It is related to the comments that you made about industry growth in the second quarter. So I was hoping you could share maybe some more comments on how do you think pricing will play out? Is it going to be a fairly smooth process this time around? How do you see both the competitive environment from that perspective as well as consumer receptiveness in the tail end the of the positive quarter that you had as you're moving into the third quarter? And then secondly, still on pricing. Expanding maybe on your last answer, as you keep elevating the core, expanding the core plus, growing faster in premium, would you expect the rest of the market to follow? Or rather given the differences in portfolio breadth and reach maybe further polarization or a drive for competitors to polarize more and pressure more at the lower end of the market where you don't necessarily participate? It seems you're moving, if not away from -- you're [sales] are still driving -- trying to drive the mix and the brand portfolio higher. Maybe if you can comment additionally on these two points both short term and more on the medium term on price-mix, that would be great.

Thanks, Luca. Thanks for the question. So related to the price, I mean, the short-term so we normally push price in Brazil in the third quarter. And this year, not different and, again, we'll do it and we'll implement our annual price adjustment for the portfolio of brands throughout the third quarter exactly as we did last year. That -- I think that's including good to compare volumes because it would be an apples to apples to apples comp. That was not exactly what happened in 2017 against 2016. But this year '17, '18, is apples to apples comparator, including for you guys to have a better view in terms of the volume and so on. So we will increase the -- adjust the prices as we did last year. And then we adjust prices in line with inflation plus any tax offset over time. So this is -- changing what we have been doing. In terms of the long term, I think that it's very important, as we did this year in the market, and in terms of the volume, in terms of the profitability even more, we have a responsibility to drive the industry in the right track. So the responsibility of our business here in Brazil is not only to get a better check. It's that to assure the beer category is moving to the right track. So that's why we like to work and to build brands, in the core segment, in the core plus segment, in the premium segment. Not only because it could have good side effect in terms of Brazilian better disposable income with our core brands that are strong and so on will grow because of the trade up. We'll capture margins because what differentiates our category from some of the other…

If I can just squeeze in a very last one, just a small question on the Skol Hops initiative that you mentioned. I think you mentioned that you rolled this out first in the north. And I was curious if this type of approach is in any form unusual? I remember in the past, you commented on some of the benefits of the practices that you were incorporating from SAB Miller on how you segment the market, how you further tuned the go-to-market. So I was just curious if this type of staged rollout, if there's anything to read there or if there are any additional comments you can make.

I think the launch of the Skol Hops in one area, I think, that we have been turning a lot of innovation pipeline for the many stages of the pipeline. The one that you have the ideas, you buy this, you test and so on. And I think that the pilot is very, very important to learn, to learn how to launch better, and so on. So that's why we've done that in the north because I think that is a region that would be -- act fast. Because our market share in the north is below average in Brazil. And then we said look, let's pilot Skol Hops there and sure it will be even better in other places. And you learn with that process. So when you saw all the initial information on that front for the launch, so Skol Hops, it has been in a successful way getting people understanding the core plus segment and so on. And I think that with those learnings and so on, the pilot, we will go national and will not explain for competitive reasons, when. But we think that the second half could be a good moment to really rollout the learnings of the pilot. That's not linked to any region, just innovation process that I think that's the best for sure that a national launch will be even more successful with the learnings of the pilots in the initial test. So before finishing our call, I would like to close saying that we will continue to put great efforts in our initiatives in a consistent way, in a relentless way and really assure that you have a better business in the future. That should help us to deliver healthy results across all the regions in which we operate. We are confident that we are well positioned to drive long-term sustainable growth in shareholder value creation. Thank you. Have a great day, and enjoy the rest of your day. Bye-bye.

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