Ambev - Q3 2024

Transcript

Operator (participant)

Good morning, good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev's 2024 third quarter results conference call. Today with us we have Mr. Jean Jereissati, Ambev's CEO. Mr. Lucas Lira, 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, and all participants will be in a listen-only mode during the company's presentation. After Ambev's remarks are completed, there will be a Q&A section when we kindly ask that each participating sell-side analyst ask only one question. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996.

Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements.

I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and, unless otherwise stated, percentage changes refer to comparisons with 2023 third quarter results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities.As normalized figures are non-GAAP measures, the company discloses the Consolidated Profit (EPS), Operating Profit, and EBITDA on a fully reported basis in the earnings release. Now, I'll turn the conference over to Mr. Jean Jereissati. Mr. Jereissati, you may begin your conference.

Jean Jereissati (CEO)

Hello everyone, thank you for joining our Q3 earnings call. I would like to start by putting this quarter's performance into perspective. First of all, we delivered another solid quarter of growth and profitability against our toughest comp of the year. Just as a reminder, Q3 2023 was our strongest quarter last year, where EBITDA grew over 30% ex-Argentina, and EBITDA margin expanded 630 basis points ex-Argentina. Normalized profit grew around 25%, and cash flow from operating activities increased nearly 30%. Second, we built this quarter on our performance during the first half of the year, with Brazil and CAC delivering once again, LAS and Canada improving sequentially, and cash flow generation continuing to improve despite the well-known tax headwinds in Brazil.

As a result, this quarter brought us one step closer toward delivering another year of consistent top-line growth with record volumes in Brazil, consistent EBITDA growth, gross and EBITDA margins expansion, and a solid cash flow generation. So let's dive into our operational performance, starting with what remained a reality: resilient consolidated top-line performance in the mid-single digits, gross profit growth in the high single digits, and EBITDA growth with gross and EBITDA margins expansion, continued investments behind our brands across our main markets. If we break down volume performance in LAS, despite some sequential improvement, we continued to see a tough consumption environment in Argentina as volumes declined in the mid-teens on the back of the easiest comp of last year. In this scenario, we are better prepared for the future with estimated market share gains and improved brand health indicators in the country.

Ex-Argentina volumes increased by mid-single digits, led by Bolivia and Chile performances. Canada volumes sequentially improved with our premium back-to-growth. Premium and core brands grew by low single digits. Our market share remained stable in the country according to our estimates, and our brand health improved versus last year, with a highlight to Corona that has the highest brand health in the market and is growing. In CAC, the continued strength of our business in the Dominican Republic delivered mid-single digit volumes growth, led by Corona and Presidente, which presented a strong brand health performance. However, in Panama, the industry contraction was primarily driven by the recent tax increases amid a tougher macro scenario, which weighed on our volumes, and in Guatemala, a temporary logistics shipment phasing faced by our local distributor impacted our quarterly performance.

In Brazil, NAB continued with a great commercial performance, reaching all-time high volumes for a Q3, led by our health and wellness portfolio, with Guaraná Zero up high 50s% and Pepsi Black and Gatorade up low 20s%. Volumes of no sugar grew low 20s%, with a highlight to our energy and hydration brands presenting solid performances as well. In beer, based on our estimates, industry in July and August grew low single digits%, below production data reported. This quarter, we reached our all-time high rolling 12-month volumes. Our brand strategy continued to work, with premium, super premium, and core brands growing ahead of total volumes, and our brands improving brand health indicators. Our premium brands grew above 20%, led by Corona, Spaten, and Original, all of which rose volumes over 25%. The core brands grew in the low teens%, led by Budweiser, that increased volumes by nearly 50%.

Although Brahma and Antarctica each grew high single digits, our core brands declined by low single digits. Our pricing strategy remains nimble, and we took pricing starting in September, which was earlier than last year. In addition, one very important point to make regarding Brazil beer is that we ended this quarter better prepared for the summer season, and here's why. Last quarter, I spoke about our four focus brands: Brahma, Budweiser, Spaten, and Corona, and I'm glad to see that the investments behind these brands are starting to pay off, and they have momentum. Each of such focus brands reached all-time high rolling 12-month volumes, with Bud, Spaten, and Corona reaching record brand health indicators in the quarter. Combined, these brands grew almost 10% in the quarter.

Also, our inventory levels are much healthier this year than they were at the same time last year, giving a better production in the quarter. On top of that, we have been sustaining all-time high service level to our customers. And before I hand this over to Lucas, as you know, this is also my last earnings call as Ambev's CEO. And as I transition to a new challenge, I would like to share some reflections on the last five years. Ambev was built on great people, strong culture, big dreams, and amazing brands. And I'm proud of how our talented team has evolved over the past few years. We are now better prepared to listen to our ecosystem, to innovate, and to drive continued transformation throughout the company through technology. We are making better decisions.

The team embraced change, dreamed big, and created incredible initiatives, from producing hand sanitizers in our breweries during the pandemic to creating some of the largest innovations in the company's history. We have accomplished so much, too many achievements to list here, but each one reminds us on how our business can drive positive impact across our ecosystem while strengthening our performance. Over the past five years, we have attracted around 4 million new fans, thanks to the amazing work our team has done with our brands. As you can see, we are winning in the premium and super premium segment, and we are leading in the core and popular segments. I'm also proud of our results on innovation across our entire portfolio.

We made a significant push into Beyond Beer and into Balanced Lifestyle brands, where we were pioneers here launching gluten-free brands and low-calorie beers, and also leading the zero alcohol category. Another significant evolution was in technology. We leveraged tech to enhance our capabilities, and we built a platform. With this, we digitized our route to market, increasing the number of POCs served to over 1 million, while improving service levels. We also used all these assets that we have to build a marketplace that offers a broader assortment of products for our customers, and on the consumer front, Zé Delivery is a reality, is a loved digital brand, which is now available and relevant in more than 700 cities across Brazil.

On our journey to create a future with more tears, we embraced sustainability in our operations, adding 15 carbon-neutral plants to our footprint as part of our decarbonization plan, and we have reduced water usage per liter of beverage produced by over 7%. And through all these changes, we have created substantial value. Over the past five years, we generated BRL 68 billion in free cash flow. We expanded ROIC and achieved positive EVA every year. As a result, we have returned over BRL 43 billion to shareholders since 2020, and yesterday, our board approved a BRL 2 billion share buyback program, demonstrating our disciplined approach to capital allocation, and our belief that all these evolutions made our business better.

I am proud to say that we accomplished an unparalleled and remarkable transformation as an FMCG company. The combination of a stronger portfolio, BEES, and Zé Delivery, driven by our talented team, put us in a solid position to tackle a much bigger addressable market in the future. We have built a stronger business with the stamina to go the distance. So thank you very much, and now I will hand it over to Lucas.

Lucas Lira (CFO)

Good day, everyone. Our financial performance in the quarter was all about continuous growth and continuous improvement in terms of profitability. EBITDA grew 8.5%, 8.7% ex-Argentina. Gross margin expanded 180 basis points organically, 220 basis points ex-Argentina. EBITDA margin expanded 110 basis points organically, 130 basis points ex-Argentina. And even though normalized profit declined around 11%, cash flow from operating activities grew a little over 2%, totaling about BRL 8.1 billion.

What's more, year-to-date cash flow generation was pretty much in line with last year's, despite having invested BRL 1.7 billion in connection with a Dominican Republic put option back in January. Additionally, we benefited from exchange rate fluctuations on cash held in our international operations. So let me cover our Beyond EBITDA performance, starting with net finance results. Net finance results improved roughly BRL 150 million versus 2023, with the same drivers as the first half of the year. First, lower losses on derivative instruments given lower carry costs to implement our hedging strategy for FX in Brazil. Second, lower fair value adjustments of payables pursuant to IFRS 13 and CPC 46. And third, our hedging decisions and lower USD exposure in Argentina, albeit to a lesser extent than in H1, which should continue to be the case in Q4. Moving to income taxes.

Tax headwinds in Brazil once again impacted our net profit performance in the quarter. Our income tax expense totaled around BRL 1.1 billion in Q3, which was equivalent to a consolidated effective tax rate of almost 24%. The two main drivers were consistent with H1. First, higher EBT, which grew from BRL 4 billion to nearly BRL 4.7 billion. And second, less deductibility related to state VAT government grants and IOC. Regarding state VAT government grants, one important update: In August and October, we obtained injunctions with respect to certain of our subsidiaries, which should help partially offset the adverse impact going forward. Let me now provide a brief update in terms of litigation and the tax reform on consumption. Regarding litigation, since our Q2 call, as per note 14 to our financial statements, favorable administrative court decisions totaling about BRL 2 billion became final in Q3.

And we also obtained favorable administrative court decisions totaling about BRL 2 billion that are not yet final and may be subject to appeal by tax authorities. And with respect to the tax reform on consumption in Brazil, we continue to expect the Senate to vote on the matter before year-end. We will keep everyone posted as the legislative process progresses. Turning to cash flow, we're off to a good start to the second half of the year. Cash flow from operating activities totaled nearly BRL 8.1 billion, almost BRL 200 million above last year, with higher EBITDA, better working capital performance in Brazil, and net interest more than offsetting higher cash taxes. Cash flow used in investing activities totaled approximately negative BRL 1.1 billion, with year-over-year performance mostly impacted by lower CapEx.

And finally, cash flow from financing activities totaled about negative BRL 1.1 billion, an improvement of BRL 300 million versus Q3 2023, driven mostly by lower net finance costs. Looking ahead, Q4 is critical in terms of cash generation, given the seasonality of our business, and we also face a tough comp because in Q4 2023, our cash generation benefited from one-off payables in Canada in connection with the 100-year agreement for the long-term licensing of Corona in the country, as disclosed in note one of our 2023 full-year financial statements. So we still have work to do on the cash flow front.

Having said that, given the strong cash generation year-to-date and the completion of the share buyback program announced earlier this year, the board has approved the launch of a new share buyback program totaling BRL 2 billion, with the primary purpose of cancellation of shares as a means to begin returning excess cash to shareholders this year. Any shares that are not canceled may be held in treasury, transferred, and/or cover any share delivery requirements contemplated in our share-based compensation plans. One final remark before handing it back to the operator. I would like to thank and congratulate our finance, shared services, and legal teams for receiving, for the second year in a row, the 2023 Transparency Award by ANEFAC regarding the integrity and quality of our financial statements. Well done, team. Thank you and time for Q&A.

Operator (participant)

We will now begin the Q&A session. To ask a question, we kindly ask sell-side analysts to click on the raise hand button at the bottom. To remove a question from the queue or after your question has been made, please click the lower hand button. We reinforce our request that each participant asks only a single question. Our first question comes from Isabella Simonato with Bank of America. You can open your microphone.

Isabella Simonato (Managing Director)

Thank you. Good afternoon, Jean, Lucas, everyone. Congrats, Jean, on your work on Ambev and all the best in your new role. My question is regarding pricing in Brazil. I think when we look at our checks here, it seems that there were some weaknesses on pricing in September and maybe not yet a full or a clear price movement in October, so ahead of the summer season. So I was wondering if you could give us a little bit more color on what can we expect in terms of pricing in Q4. And second, you showed that the Focus brands are performing pretty well.

Even Antarctica performed well when we look at the core. So it leads us to believe that Skol was under greater pressure, which ultimately contributed negatively for the overall beer volume performance. So also, if you could give us a little bit more color on what exactly has been or the recent strategy on Skol and if that read is right, that has been suffering a little bit more on the competition on the economy segment. Thank you.

Lucas Lira (CFO)

So thank you, Isabela. Thank you for the words and for the question. Let's talk a little bit about Brazil, then I jump into your two questions, okay? Brazil beer had a solid performance this quarter. It was a mid-single-digit top-line growth with margin expansion and bottom-line growth. We've seen the industry structurally better in general. We have seen the industry growing and premiumizing. We are seeing it too that at the levels of today, our hedges protect us, but we are seeing aluminum and currencies going in a different direction for the next year. Based on that, with the strength of our business, with the brands doing well, with the solid commercial execution, we decided to take prices earlier during September. This is behind us now. September, we suffered on volumes. We started better than Q3. We knew it was a conscious decision for us to lead.

Overall, our focus brands doing very well, our innovation performing very well, Corona working, Antarctica and Brahma resilient. But when we took the relativity of and the core minus, and as you mentioned, Skol suffered more than we expected, we believe that to some extent, this is short-term, the things will come back to normality in the future. October already has been a month that is coming to normality. So I think I addressed a little bit of the pricing and brands.

Isabella Simonato (Managing Director)

Yes. And just if I may do a quick follow-up, when you say you anticipated the price movement in September, this is pretty much across the portfolio or it's more on the core?

Lucas Lira (CFO)

That was pretty much across the portfolio.

Isabella Simonato (Managing Director)

Okay. Thank you so much.

Operator (participant)

Our next question comes from Thiago Duarte with BTG. You can open your microphone.

Thiago Duarte (Senior Equity Analyst)

Thank you. Hello, Lucas. Hello, Jean. Jean, same to you. It was an honor to interact with you all these years, and good luck on the new role in the company, and now to the question. I also wanted to tap on the pricing or maybe even better on the revenue per hectoliter discussion in Brazil beer. I appreciate the breakdown that you guys provide in the presentation when looking on a year-over-year basis. And based on that, two little questions.

One, how much would you say premiumization is pushing on the price mix part of the equation? That would be the first. And the second, if you could elaborate the best you can on how revenue per hectoliter evolved on a Q-over-Q basis. If we were to think of these three elements that you show in the chart there, price mix, ICMS taxes, and others, that would be helpful to think on a sequential basis instead of looking on a year-over-year basis. Those would be my questions. Thank you.

Jean Jereissati (CEO)

Thank you, Duarte. So yeah, so looking back, Q3 2024, beer net revenue per hectoliter grew 2.6%, right? But the point is that we saw it too sequentially growing from Q2 to Q3, right? And that was what I mentioned that in one month in September, we decided to move. The brand mix has been very positive, okay? So mix overall is positive with brand mix very positive. We have this part of channels that we are making a conscious decision on expanding our wholesalers' network participation

in our business once we have BEES implemented, that this brings a bit of the mix down. But in the end, this is a much lighter model that, when we look, it impacts the distribution costs that are in a good momentum, in a good shape, and our CapEx investments because we do more of third-party. So looking at mix, pure brand mix, it's doing very well. And what more? And that's it. That's pretty much it.

Thiago Duarte (Senior Equity Analyst)

That's helpful. Thank you, Jean.

Operator (participant)

Our next question comes from Robert Ottenstein with Evercore. You can open your microphone.

Robert Ottenstein (Senior Managing Director)

Great. Thank you very much. I was wondering if you can talk a little bit about strategy at the lower end of the market now that you have a new competitor or that competitors come back? And by comparison in the U.S., you may be aware that more recently, ABI has given a lot of life to Busch Light. And really, in the past, really hadn't spent much time on brand building at the lower end.

They've really got that brand going, and it's been very additive to the overall growth. And I know that you don't have a brand similar to that. You don't really have a large value brand. But I'm just wondering if there are ways within your current portfolio, as well as some of the local regional brands that you developed a few years ago with local ingredients, that there's a way to sort of stem some of the losses at the low end of the market? Thank you.

Jean Jereissati (CEO)

Oh, thank you for the question, Robert. So Robert, let me give you a broader picture, and then we jump into the opportunity that you mentioned. What is amazing about the market that we have here in Brazil is that it's really premiumizing. And it is something that we see when you look at consumers, a lot of interest in the portfolio, in the category. Our category continues culturally relevant. We brought a lot of new propositions to the market that really open the possibilities that our consumers have in terms of continuing or coming to the category.

We brought, for example, the Stella Pure Gold gluten-free that has like 1 million consumers that they were out of the market before we launched it. We are with a near beer, with Beyond Beer, really addressing the palates and the sweet seekers. So the category is very relevant, growing. And the biggest opportunity that we have, first of all, is really win on this trade-up. I think this is something that we've been very consistent for a while now with the brands and really to get the segments right and to win in high-end and to build this core plus opportunity that we see in other markets that we don't have it here. And then we made a conscious decision to maintain or to make core relevant more than to play in the value segment. So that is a decision of our marketing understanding where it is going.

Our plan is really to maintain the core relevant for the future. And the way we tackle this opportunity that you mentioned is through the pack price strategy where we give more options with great brands to consumers that somehow are short or don't have the money to have the right frequency on beer. And that's where we are working on for a while. We had Brahma growing high single digits in this quarter. We had Antarctica growing high single digits. We have this strategy of bigger cans and smaller RGB bottles. These two strategies are working on good brands. And that's how we believe a healthy business will be in the future. We have to keep the core relevant with the right affordability and moving forward. What happened in Q3? We believe that specifically in Q3, the moment that we decided to be ahead, these things naturally happen.

We don't think this is something that it will come back to some normality, our volumes. And it's part of the strategy of the company to have the mainstream active flattish growing, okay? So this is the way that we want to tackle the opportunity of the Brazilian market. And then on top of that, there is a lot of growth on Corona, a lot of growth on premium, a lot of growth on zeros, a lot of growth on Beyond Beer. Can I just ask a follow-up? So on those points, could you just give us maybe just a little bit of insight, early insight in terms of key innovations for 2025? Maybe a little more detail on that. Yeah, Robert. So let me try to elaborate a little bit on the journey that we had here in innovation.

You know that I'm betting a lot in innovation on the portfolio of the future, and if you looking back, we had a moment that we decided to re-energize the core. So we had like Brahma Duplo Malte helping the Brahma franchise, and then at some point in time, we brought the international premium with a bolder proposition that was Spaten that we brought up. We picked one brand in the whole world that we had that really could have this positioning, this liquid, this relationship with the Brazilian consumer that were looking for something stronger, and then we went to a pack expansion on the high-end.

So we look at that Corona and Original, and it were two brands that they were bigger than what they were selling, and then we gave more packs for Original and for Corona that they are doing very well because of that. And then we went on this vision that now was time to do functionality in beer. So somehow, we strengthened our zero alcohol portfolio right now. So we just launched Corona Cero before the Olympics. We launched Budweiser Zero one year ago. And we launched gluten-free, low-calorie propositions that it was Stella Pure Gold and Michelob Ultra. So I would say that in a framework that we treat innovation here, that we have to follow innovation for three years, that's where we are. We are betting on functionality in beer. The zeros has a lot of room.

We lead this segment. The gluten-free and low-calorie, it's amazing the response that we are having in the market. So heavy users of beer are sticking with Michelob Ultra and Stella Pure Gold because of the additional benefits on calories on gluten-free. So I would say that the functionality, the zeros, the Stella Artois Pure Gold, Michelob Ultra, Beyond Beer that we have really betting on would be the area that we would continue to innovate.

Robert Ottenstein (Senior Managing Director)

Terrific. Thank you very much.

Operator (participant)

Our next question comes from Lucas Ferreira with J.P. Morgan. You can open your microphone.

Lucas Ferreira (Senior Equity Research Analyst)

Hi everyone. Thanks for the time. Jean, congrats on the move. I'm going to be missing you here in this conference call. My question is regarding the buyback and maybe to Lucas in the same context, Lucas, of many discussions we had in the past of Ambev eventually in the future changing a little bit its capital structure, adjusting, maximizing its capital structure. So do you see this BRL 2 billion buyback as part of a sort of maybe the initial step of levering up the balance sheet of Ambev?

Lucas Lira (CFO)

Or it's just something punctual regarding the free cash flow generation we've been having over the last 12 months and, as you mentioned, return of cash to shareholders? And if it's potentially sort of a first step of levering up the balance sheet of the company, why not doing something bigger than BRL 2 billion regarding the fortress balance sheet of the company today and the free cash flow generation? So that's my question to you. Thank you.

Lucas Ferreira (Senior Equity Research Analyst)

Okay. Hi. Good afternoon, Lucas. Thanks for the question. I would say that the decision to launch the buyback program now is more related to the visibility that we have at the end of September, right? At the end of September, with respect to the excess residual cash that we are holding, okay? Less about kind of the long-term capital structure of the company and the roadmap to reach an optimal capital structure for the company. The discussion around capital structure, right, has been a live discussion throughout the year with the Ambev board, and it's going to continue through the end of the year. But despite the capital structure discussion, when we looked at the cash generated year to date, what we held of excess cash on September 30th, we saw enough residual cash to start returning to shareholders this year on the one hand.

On the other hand, when we look at where the stock price is today and compare that with our views on the intrinsic value of the company based on our plans, doing the financial analysis with the same rigor that we've typically kind of applied for this type of exercise, we concluded that investing now BRL 2 billion in our own shares is an attractive investment opportunity with plenty of scenarios to generate a return above and beyond either our cost of capital and/or our return on invested capital. We continue to apply the same methodology we've applied to looking at capital allocation decisions, and the board concluded that the time was ripe to start returning excess cash for the year in the form of a share buyback program, okay?

As it relates to why not a bigger share buyback program, keep in mind that under Brazilian law, there are legal limits to the size of the float you can repurchase. In our case, that would total somewhere around 5.5 billion BRL. When we compare the 5.5 billion BRL, which is the legal limit, and what we had of excess cash at the end of the quarter, we thought to be kind of consistent with our historical approach as it relates to returning excess cash to shareholders, 2 billion BRL was the right amount for this share buyback program.

Super clear. Thank you.

Operator (participant)

Next question from Henrique Brustolin with Bradesco BBI. You can open your microphone.

Henrique Brustolin (Senior Equity Research Analyst)

Hello, Jean, Lucas. Thanks for taking my questions. Jean, congratulations, and I wish you the best of luck in your next challenge. My question is about the contribution margins that you are seeing in premium beer in Brazil. Now that you have many of the brands that the company invested on over the past few years are gaining, I think, more relevant scale, how do you see the profitability in the segment when compared to the mainstream or even to what it was in the past? And when it comes to the growth that you are seeing in premium, how much this has been driving a change in the company's channel and packaging mix? And how could this also be a driver of potentially better margins going forward, in part also driven, I think, on the RGB rollout for premium beers that I think had been in the strategy that you mentioned in the past? This is my question. Thank you.

Jean Jereissati (CEO)

Thank you, Henrique. Thank you for the question. So as I mentioned, what is good about the Brazilian industry is that there is this premiumizing trend happening for a while. And all the decisions that we did of betting on the brands, on the premium brands, pick the premium brands, premium propositions, innovate, bring new propositions, we have this creativeness mindset that we really check in general what we are launching, what is the role, how consumers will interact, but in the end, how this will be a creative to our business.

And that's a mindset that is implemented. And when we come to the high-end, so yes, you saw what you mentioned is true. We started most of these brands, the high-end brands with one-way presentations. The Corona, we have the long necks, right? Now the expansion, the journey of expansion of the premium brands that we have generally go in the direction of RGBs, and this is even better for us. I don't know if you saw, but we begin to do the Corona long neck RGB through Zé Delivery, right?

So it's really something that makes all sense for a brand like Corona that really embraces the world, how natural should be the world and sustainability. We are moving to have, if consumers want, a proposition of returnability of the Corona long neck in the market. So we are talking about bringing. We launched, for example, Stella Pure Gold with a premium price compared with Stella. Now we are moving these propositions to RGB bottles. So what we see is that there is a lot of consumer connection to make, and there is a lot of volume to bring as the packs expand

Henrique Brustolin (Senior Equity Research Analyst)

That's helpful, Jean. Thanks very much.

Operator (participant)

Next question from Guilherme Palhares with Santander. You can open your microphone.

Guilherme Palhares (Senior Equity Research Analyst)

Good afternoon, everyone. Thank you, Jean and Lucas, for taking the questions here. Jean, I just wish you the best in your next position and wish you have a career with more cheers. My question goes to Lucas. Lucas, you mentioned a lot about the fact that the company had a pretty strong cash generation, right? And if you could go through a bit on the taxation, it seems that the company reduced a bit of the tax recoveries this quarter. And if you could go through about the strategy of monetization of taxes going forward, that would be super helpful. Thank you.

Lucas Lira (CFO)

Hi, Guilherme. Thank you for the question. Lucas here. I think on the one hand, we're still, right, we're still being impacted by lower deductibility when it comes to government subventions given the tax changes at the end of last year. I think the glass half full side of the story here is that, as I mentioned in my prepared remarks, in August, we obtained an injunction, and in October, we attained another injunction with respect to two of our subsidiaries. And so going forward, we should continue to see a benefit to partially offset the impact that we've seen.

And when it comes to the IOC deductibility, we do have much less deductibility, right, have had and will continue to have as compared to last year. But when you look at it from a cash flow perspective, we have other means to offset this lower deductibility by using other tax credits that we have available. We have north of BRL 11 billion of deferred tax assets, some of which are more readily available in the short term. Others are more of a medium to long-term horizon for utilization, okay?

So that's why there is this difference between our effective tax rate, which has been going up, and our cash flow generation, where EBITDA growth, lower net finance results, working capital, lower CapEx have been able to offset and even more than offset a higher cash tax bill in the quarter per se. So looking long term, we still see and still like to remind folks that an increase in our effective tax rate will not necessarily reduce our ability, right, to generate cash flows and subsequently return these cash flows to shareholders over time.

Guilherme Palhares (Senior Equity Research Analyst)

Thank you, Lucas. That's very clear.

Operator (participant)

Next question from Leonardo Alencar with XP. You can open your microphone.

Leonardo Alencar (Equity Research Analyst)

Hi, Jean. Hi, Lucas. But first of all, congratulations on the journey, Jean. We'll really keep track of your job on Middle Americas. I wanted to probably do some two follow-ups. The first one on the competitive landscape. I appreciate all the color you gave on the strategy, brand strategy, and pricing strategy. But there was a big difference probably when we look in 2025. Since this year, cost was a tailwind, and we are expecting cost to be a headwind on the next year. I believe there is more room for price increase, price hikes on the premium and core segments. And I understand that working with packaging and pushing for increase in volumes in core is a very solid and also a defensive strategy against peers focusing on mainstream.

But then with this cost increase for 2025, if we could expect, well, probably a recovery on volumes on your side, it makes sense even to consider that. But then I would appreciate some color on 2025 if this strategy continues and taking into consideration the cost perspective. And then the second follow-up would be for a question I did on the second quarter regarding Argentina that if you've already seen the bottom for Argentina. And it looks like volumes continue to decrease there. Even if you want to perform in the industry, the industry is kind of shrinking there. If you expect that to bottom this quarter or anytime soon, just to get an idea if the situation there will stop to be a drag on the results. Thank you.

Jean Jereissati (CEO)

Okay. Thank you, Leonardo. Talking about a little bit, I will focus on the price, as you mentioned, the costs going up, and we talked about the competitive landscape for a while now. So we remain nimble in our pricing strategy, focused on finding the sustainable balance between the net revenue per hectoliter growth with medium to long-term pricing strategy. We didn't change. We prioritize, we prefer price increase in line with inflation, and then to have this favorable brand pack and channel. Looking at our costs, and we are hedged, as you mentioned, this year has been a good year on the cost side. And we know that aluminum and currencies will impact in the next year.

We believe somehow that aluminum, we are the company less impacted by aluminum on a weighted. So somehow this is something that will hit overall the category. And we have a commitment to continue to expand margins moving forward. So I think this is the most I can say. So we don't change what we aim for pricing, but we are committed to margin expansion moving forward. Just one thing to add on my end with respect to the cost outlook, Leonardo, as I'm sure you'll appreciate, right, given our hedging policy, there's still some hedging taking place. If you take a look at the picture, right, at the close of the quarter, directionally, the BRL is a headwind so far. Aluminum is a headwind so far. While on the other hand, you have corn, sugar, and wheat, malt barley as tailwinds, okay?

The net net is a headwind so far. But this headwind is nowhere close to the sort of headwinds we faced between 2020 and 2022, okay? Just to add some color there on the cost outlook, and then to jump into the Argentina question, Leonardo. The macro environment. We like when we see the numbers of the country, controlling inflation, deficits. It looks like there's something that is going in the right direction, the CPI deceleration, the gap reduction on the parallel exchange rates and the exchange rates in general. But somehow we've seen impact on the consumer ability to continue buying FMCG goods in general, okay? But having said that, we have a feeling that we bottomed in April and May. That was really the bottom.

This quarter, we understand there was some sequential improvement, and we believe that we're going to continue to have sequential improvements moving forward. The good part is that the Q4 of 2024, the Q4, as I mentioned, Q3 2023 was my toughest comp. But when we go to Q4 2024, Argentina already on the operation and a bit the performance was already suffering last year. So somehow now we're going to begin to cycle it and still sequentially improving, still not where the industry were, but sequentially improving and with an easier P&L for us to go when we compare. So I think next year will be a good year for Argentina. Now is about to get sequentially better.

Just to complement, Jean, on the Q4 lapping in Argentina, given hyperinflationary accounting as per IAS 29, in Q4 of last year, right, we had to reflect the devaluation of the currency, the Argentine peso, and we also had to catch up Qs 1, 2, and 3. And so there was a material impact in our last reported figures, if I recall correctly, north of BRL 1.2 billion in Q4 for Latin America South. And now we cycle that. So in organic terms, it's a different conversation, but in nominal terms, we cycle this easy comp.

Leonardo Alencar (Equity Research Analyst)

Okay. That's a lot of information. Thank you. Thank you for both of you.

Operator (participant)

Next question from Renata Cabral with Citi. You can open your microphone.

Renata Cabral (Senior Equity Research Analyst)

Hi. Thank you so much for taking my question. And Jean, congrats for all the achievements and leadership I have done. I wish you all the success in your new role. My question is to get your view on these two strategic fronts. One on the delivery. You have mentioned some new initiatives recently. If you could elaborate a little bit on what the company has made, especially this year and opportunities there. And on the other front, the RGB, especially in Brazil and Argentina, where affordability is really important at this moment. Thank you.

Jean Jereissati (CEO)

Okay. Thank you very much, Renata, for the words and for the question. So yeah, so let's talk about the delivery. I was happy that these days there was an article in the newspaper that mentioned that millennials, right, that were born in between 1980 and 1995, they really put Zé Delivery as a top two retail brands in Brazil. And that's a great achievement for us. The brand is a loved brand. It is not just about the marketing of the brand. It is about really delivering the proposition of 30 minutes, cold beer, the right price to our consumers. This really is something that consumers really appreciate, the new generation, and this will just get better, okay? Zé Delivery will just get better.

We are super excited about it, so Zé Delivery, it has on an yearly basis, 25 million yearly active users, so this is the number of consumers that go into Zé and buy something and survey a price and understand something. On a monthly basis, recurrent, we have 4.9 million. That is 5% that really go there and buy something, so the GMV is growing 14%. It's super important, Zé Delivery, for our mega brands strategy. Somehow our brands are performing super well, Spaten, Corona in Zé Delivery. RGB continues to have a key role in Zé.

So bringing the convenience for our consumers to keep their bottles at home that we pick, we deliver, and we collect. So this brings something that is very unique for Zé Delivery. And it represents, I don't know if you know this number, more than 45% of the Zé Delivery platform volumes. They are RGB. That's why we elected to start the Corona RGB project for the consumers that are more conscious about their impact in the world through Zé Delivery. So we are really beginning on that front. And now we are moving to expand assortment in Zé Delivery.

So the marketplace of other products that are not ours, that they are really growing. They are growing at a 30% rate in GMV. And finally, now for a year, we are monetizing this piece of the equation. There is this marketplace that Zé Delivery is offering. And so really excited about Zé Delivery. And connected with your second question, it's an important play on the RGB in-home play that we are doing with RGB. And RGB is doing well, and we are bringing more and more premium propositions for the RGB. So I think I went over the two questions, right?

Renata Cabral (Senior Equity Research Analyst)

Yeah. Yeah. That was very helpful. Thank you so much for the call.

Operator (participant)

Next question from Ricardo Alves with Morgan Stanley. You can open your microphone.

Ricardo Alves (Managing Director)

Hey, everyone. Jean, it's been a pleasure. Thank you so much for the call, for your energy on the calls. Really appreciate it. I have two follow-ups as most of my questions have been answered. First of all, on Skol, beyond the implied contraction of the brand, I'm curious going forward, Jean, what is the strategy for the brand? We all know that it's not been a focus brand. We've discussed the brand in many different ways in the past, but given the size to your portfolio, it still should have a role. I'm curious about any updates on the role that Skol's going to have, maybe protecting the lower end of the core.

You mentioned a couple of times keeping your core relevant. How is Skol playing that role for you going forward on your core brands? That's the first follow-up. The second follow-up on revenue per hectoliter would be, in spite of the mixed evolution of your brands in the quarter, the price move that you mentioned in September. We still noticed the discount as a percentage of gross revenues increasing in the third quarter. So I just wonder if you could elaborate on that specifically, or if there's something more significant that would have explained more discount or promotion activity, maybe a specific segment or channel that could explain that. That would be a helpful color as well on the discounts. Thank you so much.

Jean Jereissati (CEO)

Okay. Okay. Thank you, Ricardo, for the question. So it's a good question about Skol, right? So as I mentioned, we want our core main segment stable and growing, okay? And when you look at our core brands compared with 2019, we're growing 12%. So it's a CAGR of something close to 2% in the combination of the core brands. Brahma is really leading. So that's our brand. So the brand that we elected, the mega brand to lead this journey, a Brazilian brand, it is growing ahead of it.

In this, making it clear that Brahma is our priority for us to get the core growing in health, we have to maintain the consumers that love Skol today. Our strategy is to really maintain the consumers that we have today. Of course, that the consumers are more and more with more products in their basket. They are trying new propositions. They are trading up. But we want to really maintain the lovers that we have for Skol today, okay? Talking about the second question that was about discounting. There is no difference on what we've been doing for now one. Our price has been our level of discounts, they are not that high. We reduced a lot during time. Somehow, the Q3, we grew 2.9% versus last year.

It was mainly driven by revenue management initiatives with the price to consumer going in line with inflation. And then brand mix bringing a positive impact that was partially offset by higher VAT, taxable basis, and channel mix. So no big difference, no change. We just did it, took a decision ahead of what we used to do. As I always mentioned, that we were nimble and seeing the opportunity. So no big difference on that front.

Ricardo Alves (Managing Director)

Okay. Thanks a lot. Thanks a lot.

Jean Jereissati (CEO)

Thank you. So.

Operator (participant)

This concludes the Q&A session. I would like to invite Mr. Jean Jereissati to proceed with his closing remarks. Please go ahead, sir.

Jean Jereissati (CEO)

Okay. Thank you very much. As we finish this call, I would like to thank the whole ecosystem that we are part of. First, I would like to thank my colleagues. The Ambev team is an incredible group of talented people focusing on meeting consumer needs and helping our ecosystem to thrive. It's been a huge pleasure working with you all. I also want to thank our clients who believe in our products and help deliver them to our consumers who choose us, to our suppliers and partners. Thank you for your support and for believing in our transformation to take us to an even better place. Finally, my thanks goes to each of you, analysts and investors, for the time we spent together.

Your trust, honest feedback, and partnership have been invaluable on this journey. We have shared. It has been a privilege. We are more than prepared for the future. And the best news is that this progress does not stop here. Carlos Lisboa is coming. He's an old friend, someone I've known for over 20 years. With his experience, business knowledge, passion for the brands, I am confident he is the right person to lead our company forward. I really do. So please, really welcome Lisboa with the same warmth you showed me. Thank you very much and see you soon.

Operator (participant)

Thank you. This does conclude today's presentation.