© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's Third 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, ri.ambev.com.br, as well as through the webcast link of this call. We would like to inform you that this event is being recorded [Operator Instructions] After Ambev's remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. [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 the third quarter of 2017 results. Normalized figures refer to the 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. Fernando Tennenbaum, CFO and Investor Relations Officer. Mr. Tennenbaum, you may begin your conference.
Thank you. Hello, everyone, thank you for joining our 2018 Third Quarter Earnings Call. I'll guide you through our financial highlights of Brazil, CAC, LAS, and Canada, including our below-the-line items and cash flow. After that, Bernardo will give more details about our in operations Brazil. Beginning with the main highlights of our consolidated results. The third quarter was marked by different challenges across all regions, though we saw success for many of our initiatives, including innovation and continued premiumization. On a consolidated basis, top line was up 5.8%, as the volume drop of 2.4% was more than offset by the growth in net revenue per hectoliter of 8.3%. EBITDA continued to accelerate and grew organically by 9%, reaching BRL 4.5 billion with an EBITDA margin expansion of 120 basis points to 40.2%. Normalized net profit was BRL 2.9 billion, 10.2% lower than in Q3 2017 as EBIT organic growth was impacted by the effects of Hyperinflation Accounting in Argentina. 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. As a consequence, starting this quarter, we are reporting the results of our operation in Argentina applying Hyperinflation Accounting. What led to the following main impacts: one, non-monetary assets and liabilities had to be restated using an inflation index, translating to higher cost of goods sold, and depreciation of values; and second, the P&L accounts, which used to be converted to Brazil reals at the average exchange rate of the period, had to be adjusted for the cumulative inflation from January 1, 2018 on, and then converted using the end of the period exchange rate, which is the closing rate of September 30. With that, we reported Hyperinflation Accounting negative impact of BRL 1.3 billion on net revenues, and of BRL 574 million to normalized EBITDA, which contributed to an adverse effect on the normalized profit attributed to direct to holders of BRL 275 million. Having said that, I will now move to our division of results and start with Brazil. Brazil EBITDA was up 11.1%, reaching BRL 2.6 billion, with margin expansion of 350 basis points to 42.9%. In Beer Brazil, top line was up 1.3%, so quarter by net revenue per hectoliter growth of 4.6%, which was favorably impacted by the price adjustment implemented during the quarter. Volume declined by 3.1%, is slightly underperforming the beer industry, which fell by approximately 2.5% according to our estimates, as the consumer environment in the country remained volatile. Bernardo will give you further comments on this matter. EBITDA for Beer Brazil was slightly up, with margin contraction of 50 basis points to 41.7%. Regarding costs and expenses. Cash cost per hectoliter grew by 5%, as favorable FX was offset by inflation, and higher aluminum prices. Cash SG&A was down 1%, mostly driven by lower sales and marketing expenses, which had a higher concentration in Q2, due to the 2018 FIFA World Cup. Year-to-date, top line in Beer Brazil increased by 2.9%, and EBITDA was up 5.2%, with margin expansion of 100 basis points to 42.4%. In NAB Brazil, top line increased by 7% in the third quarter, supported by a strong net revenue per hectoliter growth of 11.3%, which benefited from the carryover of the revenue management initiatives implemented at the end of 2017. Volume declined by 3.9%, affected by a too soft industry that was now approximately 6%, according to our estimates. EBITDA grew by 136%, with a margin expansion of approximately 2,700 basis points to 49.6%. In terms of costs and expenses, cash COGS per hectoliter was down 30.6%, benefiting from favorable FX and sugar prices. I'd like to take this opportunity to highlight that despite such strong cost performance, we reiterate guidance that we expect cash COGS per hectoliter for NAB Brazil to increase by mid-single digits in the full year of 2018. Cash SG&A was down 4.5%, also driven by lower sales and marketing expenses. Year-to-date, top line in NAB Brazil grew by 3.1%, and EBITDA was up 56.7%, with margin expansion of 1,350 basis points to 39.5%. Moving now to Central American and the Caribbean. Net revenues in CAC rose 16.5% as a result of a strong volume that grew by 10.3%, coupled with the net revenue per hectoliter increase of 5.7%. EBITDA reach BRL 585 million, increasing organically by 5.8%, with margin contraction of 380 basis points to 37.2%. EBITDA growth rate in COGS decelerated when compared the previous quarters due to the increase of cash COGS per hectoliter of 15% which is fully explained by Panama, where the strong volume evolution since 2017 has driven additional temporary costs in order to supply the market with no disruption. Further, cash SG&A in the region was up 6%, as higher administrative expenses were partially offset by lower sales and marketing expenses. Despite short-term cost pressures, our commercial strategy in CAC remained on track, supporting the healthy volume performance in virtually all countries in which we operate. In the core segment, we continued to invest in the introduction of new coolers in the market to further enhance Presidente brand in the Dominican Republic. In Panama, we launched a new visual brand identity for Balboa, our classic lager, highlighting the attributes of quality and heritage. We also continued to rollout our premiumization strategy in the region, developing our brands Corona, Stella Artois and Budweiser, through a customized execution, both for the on-premise and the off-premise channels.
Premium accounts for less than 5% of the beer industry volume in CAC, representing a great opportunity for the future. Year-to-date, top line in CAC was up 13.9%, and EBITDA grew by 14.8%, with margin expansions of 40 basis points to 38.5%. I'd like to take this occasion to say that we are very excited about our business development and strong volume performance in CAC reinforcing our positive outlook for division moving forward. Switching now to Latin America South. Net revenues in LAS grew organically by 13.9% in the quarter, with net revenue per hectoliter increase of 19.4%. Volume was down 5%, mostly driven by Argentina, where volume declined by high single digit as a consequence of the challenging macro environment. EBITDA in LAS was up 14.5%, with margin expansion of 20 basis points to 44.4%. Cash COGS per hectoliter went up 12.8%, below inflation, mostly driven by favorable FX, while cash SG&A increased by 23.4%. Despite the macroeconomic volatility throughout the region, we remain focused on what we can control in our business and had a positive development. In Argentina, we kept elevating our core brands through the differentiation of Quilmes, our classic lager, and Brahma, our easy drinking lager, in addition to continuing investing in a single-serve packaging presentation. Regarding the core plus segment, we continue to promote Budweiser in Argentina, and launched BUDx, a proprietary platform that celebrates electronic music culture, reinforcing the brand’s attributes of energy and internationality. We also launched Andes Origen in the country, a beer brewed in the province of Mendoza, which further enhances our core plus portfolio. Our premiumization strategy has also shown promising results in LAS, with our premium portfolio outpacing the industry across all countries in which we operate. Year-to-date, top line LAS rose 21.3%, and EBITDA increased by 24.6%, with margin expansions of 110 basis points to 42%. Going forward, while cautious with Argentina in the short term, we have a positive mid- and long-term perspectives 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. Top line in Canada was up 0.4%, as the net revenue per hectoliter increase of 1% was impacted by a volume decline of 0.6%, which was mostly driven by a slowdown in the beer industry. EBITDA reached BRL 652 million, which is 7% lower than in the third quarter of 2017, explained by: One, cash COGS per hectoliter grow for 5%, mainly due to higher aluminum prices; and second, cash SG&A increased by 4.9% as a consequence of phasing of marketing expenditures, which presented a higher concentration during this quarter, coupled with higher distribution costs through related to inventory rebalancing activities across the country. Despite industry challenges, we had good achievements with our portfolio during the quarter. In the core segment, Bud Light and Michelob Ultra maintained their momentum, ranking among the fastest-growing brands in Canada. 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 in Canada, once again grew double digits, already accounting for close to 5% of beer volume. Year-to-date, top line in Canada fell by 0.5% and EBITDA was down 9.6%, with margin contraction of 310 basis points to 30.4%. Now back to consolidated figures below EBITDA. In the third quarter, our net financial results totaled an expense of BRL 611 million, 9.5% lower than in Q3 2017. Main things in the financial expense in the quarter were: first, interest income of BRL 105 million, driven by our cash balance; second, interest expense of BRL 293 million, that also included interest incurred in connection with the Brazilian Tax Regularization Program as well as a noncash accrual of approximately BRL 6 million (sic) [ BRL 60 million ] related to the put option associated to our investment in the Dominican Republic business; third, BRL 181 million of losses on derivative instruments, which were up year-over-year, explained by a hard comparable in 3Q 2017, when we incurred gains related to the equity swaps, and by the increase of carry costs of FX hedges linked to our COGS exposure in Argentina; fourth, losses on nonderivative instruments in the amount of BRL 215 million, mainly related to noncash expenses due to foreign exchange variation on intercompany loans, as a result of the Brazilian reals and the Argentina peso depreciation; fifth, taxes on financial transactions on the amount of BRL 39 million; sixth, BRL 103 million of other financial expenses, mainly driven by interest in contingencies; and finally, seventh, BRL 150 million of financial incomes, related to noncash income resulting from the adoption of Hyperinflation Accounting in Argentina. The normalized effective tax rate was minus 5% in the quarter, in line with Q3 2017. Year-to-date, the normalized effective tax rate was 7.7% versus 4.8% in the same period of 2017, mainly driven by a different phasing in the recognition of the [ IOE ] benefit. Cash generated from operational activity in Q3 2018, was of BRL 5.3 billion, which is 16.2% higher than last year. Year-to-date, cash generated from operating activities is growing by 1.7%, reaching BRL 9.1 billion. CapEx reached BRL 940 million in the quarter and BRL 2.2 billion year-to-date, increasing 8.8% versus the first 9 months of 2017. Finally, during this year, we announced approximately BRL 3.6 billion direct to holders in dividends. Thank you very much. I will now hand back to Bernardo before going to Q&A.
Thank you, Fernando. Hello, everyone. As mentioned by Fernando, during this quarter, we saw success for many of our initiatives, including innovation and continued premiumization. In Beer Brazil, volume declined by 3.1%, after a scheduled price increase, slightly below the bottled beer industry. After showing early signs of recovery from May to July, the beer industry faced quite a shortfall in August and especially in September. This is a consequence of a volatile macroeconomic environment which is affecting consumption, mainly due to high unemployment rate, disposable income recovering at a slow pace and is still at low levels, and consumer confidence, that's in the very negative territory. However, despite of the short-term trials, the shape of our volume shows very positive signs, and premium brands are increasingly delivering a good performance. Having said that, we remain confident that Brazil presents a great potential for the future, and that's why, I would like to take this opportunity to walk you through the different segments of the Brazilian beer market, and the main initiatives that we're implementing in our growth platforms to compete in each of these segments. So the Brazilian beer market can be divided into 3 segments: one, premium, that accounts for approximately 10% of the total industry; second, core, which represents roughly 65%; and third, value, that accounts for the remaining 1/4 of the market. So I would like to start with premium. Premiumization is a trend that can be expected to continue to drive the beer category upwards. As I just mentioned, premium currently represents approximately 10% of the industry. As we have been highlighting in our recent calls, we have a portfolio approach to compete in this segment, which is comprised of global brands and domestic brands, with difference in complementary positioning, addressing multiple consumer need space, and minimizing overlaps. I'll explain more about them. Starting with the global brands, Budweiser, Stella Artois and Corona. Budweiser is our largest global brand and the main trade up alternative for consumers entering the premium segment. Budweiser is a need-to-drink lager, which stands for authenticity and aspiration of a true pop culture, exploring the nightlife, music concerts and great moments of consumers' lives, combined with the quality from its brewing tradition. We have forecast during this quarter, Brazil became the first country to launch the new Budweiser's proprietary long neck and sharing size bottles. With a modern, visual brand identity, exclusive shape, the clear bottle, and special metallized labels, the new pack highlights the brands signature that is of modernity, quality, and authenticity, supporting Budweiser's remarkable growth. Stella Artois, on its turn, is a classic lager priced right in the middle of Budweiser and Corona. The brand is there for literally any moment in a consumers' life, especially occasions where food is present. This quarter, Stella Artois grew more than 55%, supported by a strong expansion in the on-trade channel with its new sharing size bottle. The brand also boosted visibility with the sponsorship of the Rio Gastronomia, the largest food event in the country, taking this opportunity to definitely embrace gastronomy as its proprietary platform. Finally, Corona. Corona exploits the old brewer lifestyle. This is the coolest, premium beer brand in Brazil. This quarter, Corona's volume was up more than 75%, being one of the fastest-growing brands in the country. We are confident that Corona will continue to ramp up at the fast pace, being far from reaching its full potential. Now I would like to spend a few words about the domestic portfolio, Original and Serramalte in particular. These brands were first developed in the on-trade channel, delivering amazing experience to consumers. Original and Serramalte will continue to play an essential role in our portfolio going forward. Their combined volumes increased by more than 10% during the third quarter, supported by the launch of Serramalte cans. Domestic brands, along with global brands volume performance translating to double-digit premium volume growth and significant market share gains in the premium segment. The solid growth of premium is a positive trend for our business, as all brands are margin accretive. With that in mind, we are proud of the evolution of our premium strategy in recent years, and we will continue to further enhance the portfolio to drive us towards sustainable long-term growth. Now talking about the core segment. Core is the largest segment representing approximately 65% of the industry, and is a segment in which we have the highest market share. Core brands deliver high volume and solid profitability. Over the last couple of years, we've implemented several initiatives in order to facilitate and differentiate our core brands when they reach consumers' experience, such as improving primary and secondary packaging, introducing new visual brand identities, activating key branding [ ceremonies ] among others. So I would like to take a few minutes to talk a little bit more about our 2 main core brands, Brahma and Skol. Let me begin with Brahma, our classic lager. Brahma has been outperforming the industry quarter after quarter, mainly explained by: one, the implementation of very successful commercial initiatives, such as its new visual brand identity, the World Cup campaign that connects Brazilian consumers through the soccer passion point, the Sertanejo events, that bring the consumers closer to the love of music, to name a few; second, the wide and strong portfolio of 7 different liquids, with recognized quality and tradition, that goes from Brahma Chopp, the largest best-selling classic lager, to Brahma Extra lager, a pure malt alternative and through Chopp Brahma, the best experience with the glass beer; and third, the growth of the attribute of flavor among Brazilian consumers. Surveys conducted with consumers had indicating that the beer market is becoming more balanced and the driver of lightness, which historically has been, by far, the most important on the -- finding consumers preference. It shares its space with flavor. This change in consumers’ preference is causing a shift from easy-drinking lagers, such as Skol, to classic lager such as Brahma. And that's why we have a portfolio approach, so that we can address the different consumer need space and absorb structure change in consumer preferences. Now, switching to Skol. Even though the added attribute of lightness is declining among consumer preference, Skol is the most powerful beer brand in the market, and we will continue to invest behind the brand with marketing, quality, and more importantly, innovation. So with the summer approaching, the brand is launching its new campaign. The campaign conveys the underlying message that, for Skol, the wheel never stops turning. And that the brand will continue to bring great innovations to the market, such as Skol Hops, which was considered the Best Brazilian Hop business at the World Beer Awards. After its introduction in the markets of Brazil during the second quarter of this year, Skol Hops has been rolled out across the country during the third quarter. Preliminary results are encouraging, making us confident that Skol Hops has a meaningful role to play in our portfolio. The launch of Skol Hops also opens the door for Skol to launch new products in the beer segment, with a view towards more exciting innovations under the brand. It also comes to reinforce our position in the so-called core plus segment, which began to shape in 2016 with the launch of Brahma Extra. The core plus segment represents the first trade-up alternative for consumers, and with Brahma Extra, Bohemia and Skol Hops already make up almost 3% of our total beer volume in Brazil. Finally, I would like to take this occasion to highlight that the core segment has been favorably impacted during the last few years, not only because of the premium growth, but also because of the growth of the value segment, which with consumer disposal income under big pressure, grew from 19% to nearly 1/4 of the market. However, the core segment is the one that tends to benefit the most with the rebound of the economy, representing a great opportunity going forward.
I'll spend a few minutes talking about that. The value segment is characterized by the -- an importance. I repeat, an importance of brand equity. Moreover, even though it's quite relevant in terms of volume, its share in the industry profit pool, it's very, very low. Our participation in value has historically been very small. However, considering its relevance in terms of volume, we have been challenging ourselves to tackle affordability, with relevant brands and as well disruption in profitability. As a consequence, we have developed initiatives through latest packaging, such as the 300 mL returnable glass bottles. And more recently with the liquor, such as Nossa. Nossa is a beer that was launched in the state of Pernambuco during this quarter, which has stronger brew with cassava, produced by local farmers. Nossa is being commercialized in the 600 mL returnable glass bottle in the on-trade, and in the 300 returnable glass bottle in the off-trade, our most profitable pack. And while driving affordability to consumers with healthy margins, the brand fosters social engagement, promotes local economy development and enhances the culture of the state of Pernambuco. Lastly, it's a great example of how we can compete in the value segment, driving affordability to consumers and capturing incremental volume with good margins and brands that have a significant meaning to consumers. In summary, in the last few years, we've made structure investments in our business, which are putting us in a strong position to compete in each of the segments of the Brazilian beer market, and to fully benefit from expected 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 can now move to the Q&A. Thank you.
[Operator Instructions] The first question comes from Antonio Gonzalez with Crédit Suisse.
I just have 2 quick ones. First, Bernardo thank you so much for the incremental color on how you see the different price segments in Brazil at the moment. I wanted to ask now that especially you are innovating in the lower end of the market, with the profitable proposition of Nossa, what is your view about the value segment or the economy segment more recently and going forward? Can you share if you've seen any signs at all of these roughly 6% touch points, entire participation that value now has in the beer market in Brazil, has that stabilized at all? Do you see any evidence of that reverting to more normalized levels that we saw precrisis? Or you have no evidence of that at the moment? And then secondly, maybe for Fernando, I wanted to ask very quickly. Obviously, you know, ABI, today, announced a big 50% cut on their dividend, and I wanted to ask if you can remind us how you are thinking about the dividend policy at the Ambev level? There were a number of extraordinary events last year that I would assume impacted your dividend -- acquisition of the Dominican Republic and the Tax Regularization Program in Brazil, et cetera. But if you can just share any perspective on what to expect in terms of dividend payout at the Ambev level going forward, that would be super helpful.
Antonio, thanks for the question. I mean, first let's talk about the value segment. We all know that in the last 4 years, I mean, all the crisis -- the economic crisis that Brazil faces puts lots of, tons of pressure on disposal income, and it has the value segment. I mean, grew, I mean, from almost 19% up to 25%. So what I think that -- I mean what will happen in the future depends on what will peak -- what will be the rebound of the economy. If the hypothesis that I think that the Brazilian economy will be in a better place next year. In my opinion, being based on the numbers that I have seen in this year in the first 2 quarters, I think that we are in a stable weight of the value segment. And if the economy becomes better, could even shrink. Don't know if it shrinks for the 19% it was in the past. But in every market as we saw after a crisis, if the rebound of the economy, we see again a trade up from value to core. Because you have to bear in mind that beer is not only exactly the liquid, but it's the brand, it's the emotional link that a consumer has with the brand. With that, and we know that the value segment is not basically no branded segment. No brand is active there. So better economy, trade up will happen from the value to core. So again, my perspective for the country for next year that the economy will be better. I don't know if it will be much better but it should be slightly better, but I think that it will be better, let's see. If this happens, I think that the value segment tends to reduce the waste in the -- I mean, in the full market.
Hi, Antonio, Fernando here, thanks for your question. So from an analyst's standpoint, there is no meaningful changes in our dividend policy. We continue to pay out the available free cash flow. The only thing, and I think this is not news, we are not so prescriptive on the timing on the dividend because it depends on various factors. But the idea is that we keep paying out every year with free cash flow available.
The next question comes from Robert Ottenstein with Evercore.
A couple of small questions. One, I have had some discussions with some convenience store owners in Brazil and they've mentioned to me that they love the returnable glass bottles, they love the pit stops, but they're having some supply issues. And I've heard that from a few so I don't know if that's kind one-offs or whether there is something else going on there? And then second, I wondered if you can give us any kind of sense at all you know, we're hearing Heineken has followed the price increases in September, October. Are you seeing any kind of improvement in market share in October? Thank you.
Robert, thanks for the question. I think that all the slide deck that we have put in place to shape the in-home occasion, I think the pit stops are very, very important. It has been growing a lot, it's returnable, good margins, close to the homes of the people who sell cold beer. And really growing big, big time. I mean, we don't see any problems in supply for specific stores as -- I mean -- overall in the marketplace. But most -- I'll check, maybe here or there one or another store is selling a lot and maybe we could have problem. But it's not something that's structure and is not in our grader. So it's a good match here, but I will check that. But a good match is that, it's a very good franchise model, very profitable, and aligned with the shopper mission of people that go to a gas station and can buy cold beer, nice price and great drinks. The second question, basically, I mean, we talk about -- we don't talk a lot about price behavior of the other companies. But what I could say this year that overall the price adjustment took longer to happen. That's what we can say.
Are you seeing any signs that you will be able to recover market share from your primary competitor in the fourth quarter?
I think...
Just kind of based on what you're seeing in October now?
It's a good question. Maybe we can talk a little bit and take the opportunity to talk about the volume and this channel. So when you -- when I think about the chef, not to throw off the question, so lets' go step-by-step. So first, the industry in the quarter was negative. No matter which source you used to cut the industry, it was between minus 2 and minus 3. So we have all the sources, all different sources and maybe this is the number, minus 2 and minus 3. Keep in mind that sellout, that depending on the inventory levels can have some difference to selling that, of all the players. So thinking in account of our third quarter results, our market share is likely below last year. That we don't like, but it's under control. So second, about the share again, we gained significant share in premium, the most profit share set. So all global brands are performing strong and momentum is great. And even in a quarter, that's increased price and the price behavior of the other players are not exactly, I mean, we think in the beginning, we gained share in the premium cycle. That's something very, very good and supports further gain as I said. Third, in a course of price increase, the core segment tends to be more affected. Its value tends to outperform. So for instance, one information. In this quarter that we had despite adjustment, our core, more affordable brand that's [ cachacais to the Belo ] grew more than, I mean, double digits with a strong growth. So in the acquire of price increase, given the dynamics of the market or the price behavior of the market, of course, suffered a lot. And fourth, what we see in the market is a strong shift of volume amongst value brands from different players. It's an important thing and then it continues. In all the various segments, that's good. And then a big shift on the bottom of this time for our nonprofitable segment. Having said that, we remain committed to our price discipline, investing in the profitable segments of the Brazilian market. Core, which should be the segment to benefit the most with the rebound of the economy. And premium, that is growing despite the economic crisis or whatever and that we are gaining share. So basically, that's what I could say. I hope that could answer the question, Robert.
The next question comes from Luca Cipiccia from Goldman Sachs.
I also wanted to follow up on the portfolio and Brazil. I think, nobody can say that you were not proactive in the last 4 years during the crisis with the various initiatives in beer and soft drinks, in channel, in package and so on and so forth. Yet, there was always this message around the value segment that was not an area where you wanted or you thought it was economical to -- attractive to participate in. And now you have this new initiative with an offset brand coming quite late, one could say, in the decline or in the changes, et cetera, of the industry -- the changes in the industry. So my questions is, on the one end, what is it that surprised you? Was it like the duration of the pressure on the consumer relative to your original plan? Did you think that maybe whether it was returnable, whether it was sort of the core initiative that helped you -- would have helped you more than what they really did? Or was there something else that changed maybe in the way consumers are relating to the current category, in the way some of your competitors are operating in that segment that made you enter arguably in the later part of the -- this negative cycle as compared to other initiatives that you did very quickly early on compared to most others? And then secondly, related to this, when you say that you are now in the value segment very -- in a profitable way, is it in -- maybe expand a little bit more on what does that mean? Given that on -- you're also trying to build equity, and I would assume that requires some investments, so maybe if you can clarify what does it mean to do it profitably? And maybe what does it mean in terms of potential dilution to margins overall? Thank you.
Thanks, Luca, for the question. First, it not was a surprise that the value segment would grow, not at all. So basically, we would build in the last years 2 avenues: One, the portfolio gain in the premium, that you are much better in gaining share. That's very important to say. And portfolio gained with the core brands that we knew that the segment would suffer during that crisis. But the moment that Brazil would rebound, you would -- you have to trade up again. So have been investing in our easy-to-drink, the lager, classic lager, a portfolio approach in packaging, BDI, campaigns, new liquids, bringing the brewing -- all the brewing knowledge that we have for the core brands. So the momentum is good, not for the segment, but for those brands. So this is the avenue, and we really think that if Brazil rebounds, that's my opinion that could happen. We'll -- the core segment will take the benefit of that, and our core brands are in good shape, this is the first avenue. The second avenue is basically how we could play in the value segment in a profitable way? So the 300 mL returnable bottle, it's one that have been implemented. And the other way is how can we launch regional brands that stay in our ecosystem of that specific state who could build a business case together with the state that you can provide jobs for local farmers, where good wealthy -- I mean, improve the wealth for those farmers. And together with each government, who can have a win-win. So create jobs in the countryside. That's very, very important. So very, very important for a brand like Nossa, again, it helps to create wealth in the countryside for people that live there, with the farmers moving from subsistence agriculture towards the commercial agriculture, promoting a better life for their families. So with that, with the state together with us, we're able to have a great brand, connect it to local people, creating jobs there with a nice price point and with a very, very good margin. So we have been working this project for 2 years. I would say it's not so simple to put all the -- I would say all the pieces of this puzzle to get Nossa there, because it has to have the local farmers, the government and us. And I think at -- in Pernambuco, we're able to do that. And I'm very proud of that. And it sets an example for other states in Brazil. So Nossa, you'll be the brand only be sold in Pernambuco, is the brand for the state. The flag there. But yes, we have other exciting projects in other states on the pipeline, which are not public.
Right. So just to verify this point, so it's not that Nossa is going to be rolled out more broadly across Brazil, it's rather the model of this initiative could be applied to other regions, other states. Is that the right way to think about it?
Basically, Nossa will be only sold there in Pernambuco. Because it's not only a price point with good margins. Because margins good. Its margin is at least neutral when I compare to core. It's, I would say, a partnership between local farmers, core and us to provide jobs in the countryside. As I said, and at the same time bringing a nice brand with a nice -- I mean hook for the local culture, for nice price point that could drive volume and that can be good for everyone, good for the farmers that they have the job, good for the government, that would increase tax revenue, because, I mean, increase the penetration of beer, and good for us, because we have a great brand with a good price point and with no dilution of margin. So as I said, that Nossa is only one state. But again, we have other exciting projects not Nossa name, but could be others, other states on the pipeline that I would say, with this -- I mean a more stable environment in each state after the elections will be I would say an easier path to roll out the concept.
The next question comes from Lucas Ferreira with JP Morgan.
If you can comment a little bit on Argentina on the volume decline there? And the condition of the market, if you see that this specific quarter the drop was greater than you'd expected? And what you expect to see for the quarters to come? And if you have already some reading on the conditions of that market specifically, moving to October? And my second question is regarding your leverages to keep your margins stable going forward on the costs side, also SG&A, if you can comment on how you are seeing those leverages to avoid any potential compression coming from the raw material cost pressures that I imagine that we could see in 2019? Thank you.
Hi, Lucas, Fernando here. Thanks for your question. It's fair to say that global which can affect, those coupled with Argentina doing that, has led to effect of depreciation. So far, year-to-date into September, it's something like 130% and now inflation acceleration. Consumer confidence is reaching September the lowest level in the last 3 years. So that further impacted consumption. But having said all that, we are used to operate in Argentina, it's not something new for us. And we have a very strong track record of delivering solid results in the country, despite all the ups and downs. We acknowledge that inflation is very high and that the consumer environment could be challenged in the short term. But we continue using our revenue management initiatives in order to keep the driver for that mainly to consumers, such as the 340 mL returnable glass bottles for both Quilmes and Brahma. We also continue to believe in the commercial strategy, which has shown volume growth year-to-date in both our core brands, Quilmes and Brahma, as well as continued growth in the premium segment, especially through Stella Artois, Corona and the local brand in Patagonia. The Core Plus segment, which is something that we are also developing in Argentina is very promising. So we are enhancing Budweiser. And we just launched our new brand in this region, the one I mentioned on my opening remarks. So in summary, short-term volatility in Argentina. But when you see where we think the country could go, where the market could go, we have a -- we continue to be opportunistic about Argentina. In terms of the leverage to margin, I'll let Bernardo go over it.
So basically, it shows that the FX should be a headwind for next year. But first, I would like to highlight that 2019 will be very different from 2016 when you had a major FX movement and a pressure in our markets. Back then, there were a lot of other things even more relevant than FX, such as state tax increase, with the reduction of government grants, and operational deleverage due to volume decline. In addition, we will continue to evolve in excellence, better process, technology, operating a new way in order to mitigate the hazards. We are constantly searching for opportunities to reduce and optimize costs, saving the nonworking money. Having said that, even though we cannot provide any margin guidance for 2019, we continue to believe that over the long term, we can further expand our margins supported by healthy topline increase and tight cost management. What I would say for you.
The next question comes from Thiago Duarte with BTG.
I have 2 questions. The first one is I wonder if you could draw an analogy between the price increase process that you're implementing this year in Brazil beer compared to what happened last year? Last year, you implemented price increases a little bit earlier than normal, just like you did this year. Last year, we saw the company losing a good amount of market share in the third quarter versus the second quarter. It looks like the same happened this year once again. But when you look at what happened in the fourth quarter of last year, we not only saw the full capturing of the price increase but we also saw a good recovery of volume growth and market share so I just wonder whether you think we could be seeing more or less the same film, if you look both in terms of capturing the price increases, in terms of net revenue per hectoliter and the volume and market share performance. So that would be the first question. And the second question, it's a quick one. Just wondering when you look at the other operating results or the tax subsidies, we saw a decline in the beer segment in Brazil as a percentage of revenues to 2.1%, but we saw a big jump in NAB to I think almost 10% of revenues. So just if you could clarify towards why that volatility took place? And how we should think of those tax incentives in both divisions going forward, it would be very helpful.
So Thiago, thanks for the question. I mean, I'll take the first one, and Fernando will take the second one. I mean, first one, Thiago, I will reinforce what I said. I mean, no matter the number we cut here, for all the internal information that we have, the industry was between minus 2 and minus 3, and all volume was kind of 3-plus below the industry. And that we don't like. But the market shapes on this, a range that make sense for our price increase that we have. Regarding specifically, the price increase, what I can say again, that this year the overall price adjustment took longer to happen. That took longer to happen, but that's was the inside that was kind of a little bit different than last year. And the other thing is that, what we see in the market in a moment that you have a kind of adjustment of price like that, is that the value segment grows more. Yes, put the pressure in the core. As I said, that we are able to -- I mean compensate in the overall share, a good part of that gaining share in premium that we have done. But we saw a huge shift among value brands from different places. So really, I mean an important shift in many main reasons. That we don't play that, I mean, we don't say that and we don't play with camps, selling camps, you know of BRL 199 and BRL 175. We don't do that. And then you see in the marketplace, they want do that, they get more volume and they stop doing that, they probably go to another place. That's basically the view of the third quarter. Again, the share loss was -- I mean for an industry of minus 2 to minus 3 for our volume is 3-plus, so slightly ahead there. The price adjustment, the overall price took longer to happen but happened. And the value segment shift among different players in terms of those brands could explain big time market share among different players in the market.
Hi, Thiago, this is Fernando here. And also thanks for your question. Your question on the order operating, it's more quarter-specific, it's not something we expect to see going forward. It is somewhat related to due to the inventories on soft drinks for December. I think this is somewhat related also to the impact that we had in the costs of goods sold. The result ties to the same initial goods in inventories. But I don't expect the same effect to happen in the fourth quarter.
Okay, that's clear. Would you -- you would keep the, let's say the historical pattern as a percentage of revenues as the normalized level of tax subsidies going forward, right?
We don't like to give any guidance, we're not giving any guidance. But this seems to be a more reasonable approach.
Next question comes from Rafael Shin with Morgan Stanley.
I was wondering if you can provide a little bit more color specifically on the Skol? I mean, if I understand correctly, it seems that a lot of the volume is going into Brahma, a lot of it is also going into the value segment. I was wondering if there's any other competitor you see in the core segment? And also, if you can share some information about what's happening in different channels? Do you see more competition on the on-premise or off-premise? And where are you losing more market share?
Thank you. I mean talking about Skol, so again very important of how to -- and thanks for the question to talk about the core segment again. I mean, the core segment, that has been suffering. The 2 segments in the last few years, even the growth of the value. So as I said that inside the core segment, as I mentioned in my speech, there was a change in the last years in the attributes of lightness, like a switch in terms of -- continues to be the most important one. But the attributes of flavor become even more important. So in terms of the beauty of having the portfolio. Because brand -- Brahma is our classic lager and has been capturing this trend big, big time in the years. Because of the attributes of lightness is going, I mean, down, it's still the most important -- is going down. Skol is an easy-drink lager is suffering more than Brahma, that's a classic lager, that's negative to the more flavor attributes but it's growing. But the most important thing that we have been doing of -- with those brands is really separate those brands. So repositioning Brahma in 2016, and then I mean, have been working hard and the brand is doing pretty, pretty well, amazing with 7 different liquids, with the soccer platform, with the Sertanejo country music here in Brazil powerful, so it's growing big, big time. New packs. In Skol, we are bringing more brewing knowledge for the brands, as a rule. I think that Skol Beats was very, very important but was not exactly a liquid that, I mean, tastes specifically like beer. But it's importance is there. And I think that's why we launched Core Plus Skol Hops, because it not only helped to grow the Core Plus segment, but bring a new, I would say speech or a new flavor to Skol. Because Skol have the Skol Pilsner and you have Skol Hops with different hops and so on. It's brings definitely the brewing knowledge to Skol that is needed, as is needed for Brahma. But we're doing for Skol in a different way. It's a drinkable beer, Skol Hops, very drinkable 4% alcohol. But brings this flavor in a different way. It's good for the market brand and it's helping the other brands. So that fact, at the end of the day, core segment, the beauty that you have it's a portfolio there, with a very strong, easy-to-drink lager that Skol is the most powerful brand in Ambev, following course, you go the external research, Skol is a very strong internal as well. Easy drinking, still lightness is the most important one going down. And good thing, that we repositioned Brahma and it's taking all the tailwind of the flavor attributes going up. In terms of the channels, I mean, Brazilian market is very -- I mean, you know that's a -- it's a very competitive market. And there is no trade in the off-trade, I mean, nothing structurally changed.
The next question comes from Antonio Barreto with Itau BBA.
When you mentioned that the direction of the company is to increase the differentiation of brands, I'm just trying to understand here. When you really launched the Skol Hops, for example, doesn't Skol communicate lightness to the consumer and in a certain sense it confuses a little bit the message that you convey with Brahma, which at least in my point of view, it communicates a little bit more flavor. So how do you guys think of that? And why the decision to launch Skol Hops and not another new brand? Or even a different liquid on Brahma, for example? You mentioned that you already have 7 on Brahma, so I just wanted to understand a little bit why that move on Skol and not on other brands?
It's a very good question. I think that for Brahma, the portfolio that we have it's strong. We have 7 different liquids. Brahma is doing pretty, pretty well. We do in and out for fit -- Brahma is in very good shape there. I think what was important to Skol to bring, I mean, the Core Plus segment and different liquids, you know, I would say in a drinkable way. After, I mean, some time, I mean, when you are out trying to get a very drinkable liquid but with a different flavor, that's the Skol Hops. It's a 4% alcohol. This aromatic hops brings the aroma, but -- of the Hops, but not the bitterness, so it's very drinkable. It's not bitter. And it's a 4% liquid. So in just for the reference in 3 months, Skol Hops already accounts for almost 50% of volume of Brahma Extra. And you launched naturally less much less money, so full, net no loss of just one month. And really doing really, really well. And we will go to the markets that people in general drinks more premium beer and so on, they really understand the idea of the brand is of the hops, try to understand the impact of different hops in the liquid. But we still -- the drinkability is there. I mean, if you would be able to taste, the liquid will understand what I'm saying. The big challenge for our brewer masters, we want a beer that's in Skol, it's -- is drinking, it's drinkable. I can drink -- in the beach, summer with a different aroma, with some signature of flavor. But still very, very drinkable because Skol is drinkable. It's a 4% alcohol brand Skol Hops. I think that we're able to bring a beer liquid to Skol and expand the Skol family and bringing I would say, bring knowledge for the brand. If you go to the social media, here in Brazil even with Skol, I mean, the Facebook, the page of Skol Hops, you can see the comments here. Very drinkable, light. People like a lot, with the women big, big time. But I mean, with this different aroma, but very drinkable. I think that it's very good for the mother brand. Because again brings to Skol, this brings knowledge that the brand has and should be more recognized by everyone.
Thank you, Bernardo. And if I can add just one question. You mentioned several times that you believe that according to all of the estimates that you look at, the beer market has shrunk between 2% and 3%. But when you talk to industry stakeholders, we heard from more than one that they believe that the market -- the beer market is not actually decreasing. The estimates, the traditional estimates don't cover a big chunk of the market that may be growing more. First of all, I would like to understand if you agree with that kind of statement? And if not, why do you think that the beer market is so weak right now? We understand that the consumer environment in Brazil is not the best, but it has been like this for some time. So if you don't agree with that kind of statement, why do think the beer market is so weak at this point?
It's a good question. I mean, the first one, I mean we have been working in the coverage of the research that we have and then to a contract. So I would say that today, our coverage -- our data from the industry, it's not the same that probably 2, 3 years ago. I have been working with partners to assure that this coverage is huge. It's much better than we have in the past, I would say, I mean, close to 100, it's not exactly 100% of the market, but it's close. And based on those data, that's a sellout data. I think again, no matter it could be maybe between 2 and 3, these are numbers that we have. Have to always think about the sellout in selling data, we have difference. It can vary according to the inventory levels during specific quarter. So basically, I think the industry, it was negative for all the information that we have in that quarter. And why? I think that yes, we had a better quarter in the second quarter even with the strike, the truck strikes, had a better quarter in the industry because of the World Cup. Even July was very, very interesting month for the industry and for us. But we don't have disposable income in the very low levels and consumer confidence going down and the main, I would say, player of the market pricing adjustment and together with that, I would say this is my -- it's not technical, it is my feeling that I go to the market. The environment of the country, I mean, is not the best one, I would say I mean, in probably you know what I mean, no elections. People aren't -- people talking to each other. I mean, friends fighting because of this and that. And I think that does not help, those 2 things. I mean, in terms of the biggest players yes, building price in the market, then has an impact in the industry in the short term. And secondly, I have seen that this whole environment that's why I'm living here in Brazil, that's at one point of time Brazil can't because I mean elections will be in one -- a few days. So that's my view. I think that was -- industries continue under pressure this quarter a little bit more, given those 2 reasons. And for -- in terms of the industry, we are, I mean, have all the numbers that I got here and there, and we are, I mean, pretty sure that the industry is negative and you have always to bear in mind sell-in, sellout, balance.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bernardo Paiva for any closing remarks.
Thanks, Jerry. Before finishing our call, I'd like to close saying that we remain confident that we are evolving in a consistent way with our commercial strategy. In Brazil, we will continue to push premium further. And we will continue to increase our participation in this segment. Portfolio is very, very strong. We are, I mean, doing a great job, the team, with the brands, from the brands to the trade and we're very confident that we continue to bring share there. And we are also positive about the rebound of the economy in Brazil. What should be a tailwind for the core segment that has been suffering a lot in the last 4 years and could be a tailwind for us as well given the portfolio of brands, strong brands that we have in the core sector. 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.