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 and all participants will be in listen-only mode during the company's presentation. After Ambev's remarks are completed, there will be a question-and-answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator.
Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. 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 operations in Brazil. Beginning with the main highlights of our consolidated results. The third quarter was marked by different challenges across our regions, though we saw success from 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 EBITDA organic growth was impacted by the effects of hyperinflation accounting in Argentina. Following the categorization of Argentina as a country with a three-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, which 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 values.
Second, the P&L accounts, which used to be converted to Brazilian 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 impacts of BRL 1.3 billion on net revenues and of BRL 574 million on normalized EBITDA, which contributed to an adverse impact on the normalized profit attributable to equity holders of BRL 275 million. Having said that, I will now move to our divisional 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%, supported 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%, 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 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 effects 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 still soft industry that was down 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 the 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 America and the Caribbean.
Net revenues in CAC grew 16.5% as a result of strong volume that grew by 10.3%, coupled with a net revenue per hectoliter increase of 5.7%. EBITDA reached BRL 585 million, increasing organically by 5.8% with margin contraction of 380 base points to 37.2%. EBITDA growth rate in CAC decelerated when compared to 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 2013 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 partly offset by lower sales and marketing expenditures.
Despite short-term cost pressures, our commercial strategy in CAC remained on track, supporting the health volume performance in virtually all countries in which we operate. In the core segment, we continue 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 its attributes of quality and heritage. We also continue to roll out 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're very excited about our business development and strong volume performance in CAC, reinforcing our positive outlook for the region 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 digits as a consequence of the challenging macro environment. EBIT 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 remained 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 presentations. 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 in LAS rose 21.3% and EBIT 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 remain confident in our ability to deliver solid top line and EBIT in the whole region, supported by strong brands. Turning now to Canada. Top line in Canada was up 0.4% as the natural 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 662 million, which is 7% lower than in the third quarter of 2017, explained by, one, cash COGS per hectoliter growth of 5%, mainly due to higher aluminum prices and, second, cash SG&A that increased by 4.9% as a consequence of phasing of marketing expenditures, which presented a higher concentration during this quarter, coupled with a higher distribution cost 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 our 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 items 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 non-cash accrual of approximately BRL 6 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 non-derivative instruments in the amount of BRL 215 million, mainly related to non-cash expenses due to foreign exchange variation on intercompany loans as a result of the Brazilian reals and the Argentine peso depreciation.
Fifth, taxes on financial transactions in the amount of BRL 39 million. Six, BRL 103 million of other financial expenses, mainly driven by interest and contingents and finally, seventh, BRL 150 million of financial income related to non-cash income resulting from the adoption of hyperinflation accounting in Argentina. The normalized effective tax rate was -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 phase in the recognition of the IOC benefits. Cash generated from operating activity in Q3 2018 was 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 nine months of 2017. Finally, during this year, we announced approximately BRL 3.6 billion to equity holders in dividends. Thank you very much. I'll 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 from many of our initiatives, including innovation and continued premiumization. In Beer Brazil, volumes declined by 3.1% after the scheduled price increase, slightly below the total beer industry. After showing early signs of recovery from May up to July, the beer industry faced volume 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 challenge, 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 under our growth platforms to compete in each of these segments. The Brazilian beer market can be divided into three 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. 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 I've 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 different and complementary positioning, addressing multiple consumer need states and minimizing overlaps. I will 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 an easy drink lager, which stands for authenticity and aspiration of a true pop culture, exploring the nightlife, music concerts and great moments of consumers' life, combined with the quality from its brewing tradition. We are proud that 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, detailed embossing and special metallized labels, the new packs highlight the brand's signature values 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 to elevate any moment in consumers' life, especially occasions where food is present. This quarter, Stella Artois grew more than 55%, supported by a strong expansion in the on-prem 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 explores the outdoor 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 brand in the country. We are confident that Corona will continue to ramp up at a 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 their own 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 launching of Serramalte cans. Domestic brands, along with global brands' foreign performance, translating to double digits 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 been implementing several initiatives in order to elevate and differentiate our core brands and enrich consumers' experience, such as improving primary and secondary packaging, introducing new visual brand identities, activating key brand and selling moments, among others. I would like to take a few minutes to talk a little bit more about our two 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 connect Brazilian consumers to the soccer passion point, the Sertanejo events that bring the consumers close to the loved music, to name a few.
Second, the wide and strong portfolio of seven different liquids with recognized quality and tradition that goes from Brahma Chopp, the loved best-selling classic lager, to Brahma Extra Lager, a pure malt alternative, up to Chopp Brahma, the best experience within draft beer. Third, the growth of the attribute of flavor among Brazilian consumers. Surveys conducted with consumers has indicated that the beer market is becoming more balanced, and the drive of lightness, which historically has been by far the most important on defining consumers' preference, is sharing space with flavor. This change in consumers' preference is causing a shift from easy-drinking lagers such as Skol to classic lagers such as Brahma. And that's why we have a portfolio approach, so that we can address the different consumer need states and absorb structural change in consumer preference. Now switch to Skol.
Even though the 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. With the summer approaching, the brand is launching its new campaign. The campaign conveys the underlying message that for Skol, the world 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 hoppy pilsner at the World Beer Awards. After its introduction in the northeast 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 other 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 severely 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 disposable 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 will now spend a few minutes talking about value. The value segment is characterized by the unimportance, I repeat, the unimportance of brand equity. Moreover, even though it's quite relevant in terms of volume, its share in the industry profit pool is very, very low. Our participation in value has historically been very small. However, considering its relevance in terms of volume, we've been challenging ourselves to track affordability with relevant brands and without disruption in profitability. As a consequence, we've developed initiatives related to packaging, such as the 300 ml returnable glass bottles, and more recently related to liquids such as Nossa.
Nossa is a beer that was launched in the state of Pernambuco during this quarter, which is partly brewed 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 packs. While driving affordability to consumers with healthy margins, the brand fosters social engagement, promotes local economy development, and enhance the culture of the state of Pernambuco. Nossa is a great example of how we can compete in this 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 structural 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.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Antonio Gonzalez with Credit Suisse. Please go ahead.
Hi, good morning, Bernardo and Fernando. Thank you for taking my question. I just have two 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 six percentage points higher 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 pre-crisis or you have no evidence of that at the moment? Then secondly, maybe for Fernando, I wanted to ask very quickly. Obviously, you know, ABI today announced a big 50% cut on their dividend. 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, the acquisition of the Dominican Republic and the tax regularization program in Brazil, et cetera. 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 four years, I mean, all the crisis, the economic crisis that Brazil faced, put lots of tons of pressure in disposable income. Yes, the value segment, I mean, grew, I mean, from almost 19% to up to 25%. So what I think that, I mean, will happen in the future depends on what we think 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 been seeing this year, in the first two quarters, I think that we are in a stable wave of the value segment. If the economy become better, could even shrink. Don't know if it shrink for the 19% that was in the past, but in every market that we saw after a crisis, with 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 brands.
With that, we know that the value segment is something, basically no branded segment, no brand equity there. Better economy trade up will happen from the value to core. 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 or if it will be slightly better, but I think that will be better. Let's see. If this happen, I think that the value segment tends to reduce the wave, I mean, in the full market.
Hi, Antonio. Fernando here. Thanks for the question. From an Ambev standpoint, there is no meaningful changes in our dividend policy. We will continue to pay out the available free cash flow. The only thing, and then I think this is not news, we are not so prescriptive on the timing on the dividend because it depends on various factors. The idea is that we keep paying out every year the free cash flow available.
That's very clear. Thank you.
Thank you, Antonio.
The next question comes from Robert Ottenstein with Evercore. Please go ahead.
Great. Thank you very much. A couple of small questions. One, you know, I've 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. I've heard that from a few, so I don't know if that's kind of one-offs or whether there's something else going on there. Then second, wondered if you could give us any kind of sense at all, you know, we're hearing that Heineken has followed the price increases in September, October. Are you seeing any kind of improvements in market share in October? Thank you.
Robert, thanks for the question. I think that all the strategies that we have been putting in place to shape the in-home occasion. I think the pit stops are very important because they've been growing a lot. It's returnable, good margins. Close to the homes of the people who sell cold beer and really growing big time. I mean, we don't see any problems in supply for specific stores or I mean overall in the marketplace. I would check. Maybe here and there, one or another store is selling a lot, and maybe you could have a problem. It's not something is structured, and it's not in our radar. We need a good message here, but I would check that.
The good message 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 brands. The second question, basically, I mean, we don't talk a lot about price behavior of other companies. What I could say this year is that overall, the price adjustment took longer to happen. That's what we can say.
Are you seeing any signs that you'll be able to recover market share from your primary competitor, you know, in the fourth quarter?
I think it depends.
Just kinda 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 the share, no? When you think about the share, not, that's your question, so let's go step by step. First, the industry in the quarter was negative, no matter which source you use to cut the industry, it was between -2% and -3%. We have all the sources, all different sources, and this basically is the number, -2% and -3%. Keep in mind that sellout data, that depends on the inventory levels, can have some difference to sell-in data of all the players. Taking into account for our third quarter results, our market share is likely below last year.
That we don't like, but it's under control. Second, about the share again. We gained significant share in premium, the most profitable share segment. All global brands are performing strong and momentum is great. Even in a quarter that increased price and the price behavior of the other players were not exactly, I mean, the same, in the beginning, we gain share in the premium segment. That's something very, very good and support for the gain, as I said. Third, in a quarter of price increase, the core segment tends to be more affected, and value tends to outperform. For instance, one information. In this quarter that we had this price adjustment, our more core more affordable brand, that Antarctica Subzero grew more than, I mean, double digits. It was a strong growth.
In the quarter of price increase, given the dynamics of the market, of the price behavior of the market, cores suffer a lot. Fourth, what we see in the market is a strong shift of volume among value brands from different players. It's an important thing, and then you can see. You have all the value segment that grew, and then a big shift on the bottom of the pyramid, for a non-profitable segment. Having said that, we remain committed to our price discipline, investing in the profitable segments of the Brazilian market. Core, which would be the segment to benefit the most with the rebound of the economy. Premium, that is growing despite the economic crisis, whatever, and that we are gaining share.
Basically, that's what I could say, and I hope that could answer your question, Robert.
No, very clear and very helpful. Thank you.
Thank you.
The next question comes from Luca Cipiccia with Goldman Sachs. Please go ahead.
Hi, good morning, Bernardo, Fernando. Thanks for taking my question. I also wanted to follow up on the portfolio in Brazil. I think you know, nobody can say that you were not, you know, proactive in the last four years during the crisis with various initiative in beer, in soft drinks, in channel, in packaging, so on and so forth. You know, there was always this message around the value segment that was, you know, not an area where you wanted or you thought it was economical to, you know, to attract it, to participate in.
Now you have this new initiative with the Nossa brand, coming, you know, quite late, one could say, in the decline or in the change in the structural industry changes in the industry. My question is, on the one end, what is it that surprised you? Is this like the duration of the pressure on the consumer relative to your original plan? Did you think that, you know, maybe, you know, whether it was returnable, whether it was sort of the core initiatives that helped you, it would have helped you more than what they really did?
Was there something else that changed, maybe in the way consumers are relating to the category, in the way some of your competitors are operating in that segment, that made you enter, you know, arguably, in the later part of this negative cycle as compared to other initiatives that you did very quickly early on, compared to most others. Secondly, related to this, when you say that you are now in the value segment, but in a profitable way, if you can maybe expand a little bit more on what that, you know, what does that mean, given that, you know, you're also trying to build equity, and I would assume that requires some investment.
Maybe if you can clarify, you know, what does it mean to do it and profitably and maybe what does it mean in terms of potential dilution to margins overall? Thank you.
Thanks, Luca, for the question. I think at first, it was not a surprise that the value segment would grow not at all. Basically, we built in the last years, two avenues. One, the portfolio gain in the premium that we are much better and gain share. That's very important to say. A portfolio gain with the core brands that we knew that the segment would suffer during that crisis. In a moment that Brazil would rebound, we would have the trade up again. Have been investing in our usual drinking lager, classic lager, a portfolio approach in packaging, BBI, campaigns, new liquids, bringing the brew, all the brewing knowledge that we have for the core brands. The momentum is good not for the segment, but for those brands.
This is the avenue, and we really think that if Brazil rebounds, that's my opinion, that could happen. The core segment will, you 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. The 300 ml returnable bottle, it's one that have been implementing. The other way, how we can launch regional brands that based in an ecosystem of that specific state, we could build a business case together with the state that we can provide jobs for local farmers, a good wealth, I mean, improve the wealth for those farmers.
Together with each government, we can have a win-win. Create jobs in the countryside. That's very, very important. Very, very important for a brand like Nossa. Again, it helps to create wealth in the countryside, poor people that live there, with the farmers moving from the subsistence agriculture towards the commercial agriculture, promoting a better life for their families. With that, with the state together with us, we'll be able to have a great brand connected to local people, creating jobs there, with a nice price point, and with a very, very good margin. We have been working this project for two years.
I would say it's not so simple to put all the pieces of this puzzle to get Nossa there because we have to have the local farmers, the government, and us. I think that in Pernambuco, we're able to do that, and very proud of that. It's like an example for other states in Brazil. Nossa will be the brand only be sold in Pernambuco, is the brand of the state.
Right.
As the flag there. Yes, we have other exciting projects in other states on the pipeline, which are not public.
Right. Just to verify this point. It's not that Nossa is going to be rolled out more broadly across Brazil, it's rather that the model of this initiative could be applied to other region, other states. Is that the right way to think about it?
Basically, Nossa, and Nossa will be only sold there in Pernambuco.
Right.
Because it's not only, you know, a price point with good margins because margin is good, is margin at least neutral when compared to core. It's a partnership between local farmers, government, and us to provide jobs in the countryside, as I said. At the same time bringing a nice brand with a nice, I mean, hook on the local culture with a nice price point that could drive volume and that could be good for everyone. Good for the farmers that will have the job, good for the government that will increase tax revenue because, I mean, we increase the penetration of beer, and good for us because we have a great brand with a good price point and with no dilutive dilution of margin.
As I said, that Nossa, it's only one state. But again, we have other exciting projects, not Nossa name, but could be others, in other states, on the pipeline that I would say with this, I mean, in a more stable environment in each state after the elections will be, I would say, a easier path to roll out the concept.
Understood.
Thank you. Thanks.
Thank you.
The next question comes from Lucas Ferreira with JPMorgan. Please go ahead.
Hi, gentlemen. Good afternoon. If you can comment a little bit on Argentina on the volume decline there and the conditions of the market, if you see that this specific quarter, the drop was greater than you 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? My second question is regarding your leverages to keep your margins stable. Going forward, on the cost side and 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 pressure that I imagine that we could see in 2019?
Thank you.
Hi, Lucas. Fernando here. Thanks for the question. It's fair to say that global external factors coupled with Argentina's devaluation has led to FX depreciation. So far year- to- date and to September is something like 130% and inflation acceleration. Consumer confidence reached in September, the lowest level in the last three years. That further impacted consumption. Having said all that, we are used to operating 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 will be challenging in the short term.
We will continue using our revenue management initiatives and our toolkit to drive affordability 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 a continued growth in the premium segment, especially through Stella Artois, Corona and the local brand, Patagonia. The core plus segment, which is something that we are also developing in Argentina, is very promising. We are enhancing Budweiser, and we just launched the new brand, Andes Origen, the one I mentioned on my opening remarks.
In summary, short-term volatility in Argentina, but when you see where we think the country could go, where the market could go, we continue to be optimistic about Argentina. In terms of the levers to margin, I'll let Bernardo go over it.
Basically it's true that the FX will be a headwind for next year. First, I would like to highlight that 2019 will be very different from 2016 when it had a major FX movement and a pressure in our margins. Back then, there were a lot of other things even more relevant than FX, such as state tax increase, 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 lean way in order to mitigate the headwinds. We are constantly searching for opportunities to reduce and optimize costs, saving the non-working 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 top line increase and tight cost management. That's what I would say for you.
Thank you very much.
Thank you.
The next question comes from Thiago Duarte with BTG. Please go ahead.
Hi. Hello, Bernardo. Hello, Tennenbaum. Hello, everyone. I have two questions. The first one is, I wonder if you could draw an analogy between the price increase process that you are 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, you know, a good amount of market share in the third quarter versus the second quarter. It looks like the same happened this year once again. 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.
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. That would be the first question. 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 revenue.
Just, if you could clarify to us why that volatility took place and how we should think of those tax incentives in both divisions going forward, it would be very helpful. Thank you very much.
Thiago, thanks for the question. I mean, I'll take the first one, and Fernando 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 had, the industry was between -2% and -3%, and our volume was kind of 3%+ below the industry. And then that we don't like, but the market share's under a range that makes sense for a price increase that we had. Regarding specifically the price increase, what I can say again that this year the overall price adjustment took longer to happen but happened.
That was the insight that was kind of a little bit different than last year. 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 grow more. Yes, put the pressure in the core, as I said, that we're able to, I mean, compensate in the overall share good part of that gain sharing premium that we've done. But you saw a huge shift among value brands from different players. So really, I mean, an important shift in many regions. That we don't play that. I mean, I say that we don't play with cans, selling cans, you know, BRL 1.99, BRL 1.75 reals.
We don't do that. Then you see in the market players that want to do that, they get more volume. When they stop doing that, the volume go to another place. That's basically the view of the third quarter. Again, the share loss was, I mean, for our industry -2% to -3%, for our volume +3%, so slightly had that. The price adjustment, the overall price took longer to happen, but happened. 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 other operating, it's more quarter specific. It's not something we expect to see going forward.
It is somewhat related to building inventories on softer drinks for the summer. I think this is somewhat related also to the impact that we had in the cost of goods sold. This all ties to the same issue of building the inventories. I don't expect the same effect to happen in the fourth quarter.
Okay. That's clear. 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 or not give any guidance, but this seems to be a more reasonable approach.
Okay, perfect. Thank you, guys.
The next question comes from Rafael Shin with Morgan Stanley. Please go ahead.
Yeah. Hi, everyone. Thanks for taking my question. I was wondering if you can provide a little bit more color specifically on 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. 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 think that, I mean, talking about Skol is, again, very important, Rafael, and thanks for the question, to talk about the core segment again. I mean, core segment that has been suffering the full segment the last two years, given the growth of the value. Having said that, inside the core segment, as I mentioned in my speech, there was a change in the last years in the attribute of lightness, like a switching in terms of continues to be the most important one, but the attribute of flavor is becoming even more important. This is the beauty of having the portfolio, because brand Brahma is our classic lager and have been capturing this trend big time.
Yes, because of the attribute of lightness going, I mean, down, it's still the most important one is going down. Skol is an easy-drinking lager is suffering more than Brahma. That's a classic lager that's linked to the malt flavor attribute that is growing. The most important thing that we have been doing with those brands is really separate those brands. We repositioned Brahma in 2016. And then, I mean, have been working hard, and the brand is doing pretty well, amazing, with seven different liquids, with the soccer platform, with the Sertanejo country music here in Brazil platform. It's growing big time, new packs. In Skol, we are bringing more brewing knowledge for the brand, as a rule.
I think that Skol Beats was very, very important, but was not exactly a liquid that I mean tastes specific like beer. It's important, it's there. I think that that's why we launched our Core Plus, Skol Hops, because it not only helps to grow the Core Plus segment, but brings a new I would say speech or a new flavor to Skol. Because Skol has the Skol Pilsen and has a Skol Hops with different hops and so on. It brings definitely the brewing knowledge to Skol that is needed as is needed for Brahma. 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 mother brand, and it's helping the mother brand. That's, at the end of the day, core segment, the beauty that you have, it's a portfolio there with a very strong easy drinking lager. The Skol is the most powerful brand in everything that occurs. You go to the external research. Skol is a very strong internal as well. Easy drinking. Still lightness is the most important one going down. Good thing that we repositioned Brahma, and it's taking all the, I would say, the tailwind of the flavor attribute going up. In terms of the channels, I mean, the Brazilian market is very competitive, we know that, and there is on trade and the off trade. I mean, nothing structurally changed.
Okay. Thank you.
Thank you.
The next question comes from Antonio Barreto with Itaú BBA. Please go ahead.
Hi, guys. Good morning. When you mentioned the direction of the company is to increase the differentiation of brands, I'm just trying to understand here. When you launched 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 seven on Brahma. 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 seven different liquids. Brahma is doing pretty well. We do in and out. I think Brahma is in very good shape there. I think that what was important to Skol to bring, I mean, the Skol Plus segment and different liquids in a, I would say, drinkable way. After, I mean, sometimes, and I mean, one year and a half trying to get a very drinkable liquid, but with a different flavor. That's Skol Hops. It's a 4% alcohol. This aromatic hops brings the aroma of the hops, but not the bitterness. It's a very drinkable, it's not bitter, and it's a 4% liquid.
Just for the reference, in three months, Skol Hops already accounts for almost 50% of volume of Brahma. You launched nationally last month only. Full national launch is just one month. It's really doing really well. We go to the markets that people in general drinks more premium beer and so on. They really understand the idea of the brand, this 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'll be able to taste the liquid, we understand what I'm saying. The big challenge for our brew masters, we want a beer that's in Skol. It's easy drinking. It's drinkable.
I can drink in the, I mean, in the beach, summer, with a different aroma, with some signature of flavor, but still very drinkable because Skol is drinkable. It's a 4% alcohol brand, Skol Hops. I think to be able to, you know, 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, Facebook, the page of Skol Hops, you could see the comments there. Very drinkable, like, people like a lot, with the women, 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, bring to Skol this brewing knowledge that the brand has and should be more recognized by everyone.
Thank you, Bernardo. If I can add just one question. You mentioned several times that you believe that according to all the estimates that you look at, the beer market has shrank between 2%-3%. When you talk to industry stakeholders, we heard from more than one that they believe that the beer market is not actually decreasing, that 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.
If you don't agree with that kind of statement, why do you think the beer market is so weak at this point?
It's a good question. I mean, the first one, I mean, have been working in the coverage of the research that we have and that we contract. I would say that today our coverage, our data from the industry is not the same that probably two, three years ago. I have been working with partners to assure that this coverage is huge. It's much better than we had in the past. I would say, I mean, close to 100, not exactly 100% of the market, but it's close. Based on those data, that's a sellout data. I think again, no matter how you cut it could be a bit between two and three. These are the numbers that we have. As you always think about the sellout and sell-in data, they have difference.
It can vary according to in inventory levels during specific quarter. Basically, I think that the industry it was negative for all the information that we have in that quarter. Why? I think that, yes, we had a better quarter in the second quarter, even if with the strike, the truck strikes had a better quarter in terms of the industry, had the World Cup. July was very interesting month for the industry and for us. We do have disposable income in a very low level, and consumer confidence going down. The main player of the market do a pricing adjustment. Together of that, I would say, this is my. It's not technical, it's my feel that I go to the market.
The environment of the country, I mean, is not the best one, I would say. I mean, probably you know what I mean, no? Elections divide people, you know, talking to each other. I mean, friends fighting because of this and that. I think that does not help those two things. I mean, in terms of the biggest player, yes, putting price in the market, that has an impact in the industry, in the short term. Secondly, I think that this whole environment that we're living here, in Brazil, that in one point of time, this will, I mean, end because, I mean, elections will be in a few days. That's my view. I think the industry is continuing under pressure. This quarter is a little bit more given those two reasons.
In terms of the industry, I mean, we have all the numbers that come here and there, and I mean, we are pretty sure that the industry was negative. We have always to bear in mind sell-in, sell-out data.
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, Gary. Before I finish our call, I would 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 gain share there. 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 four years, and could be a tailwind for us as well, given the portfolio of brands, strong brands that we have in the core segment. 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.