Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's second quarter 2018 results conference call. Today with us we have Mr. Bernardo Paiva, CEO for Ambev, and Mr. Fernando Tennenbaum, CFO and Investor Relations Officer. We would like to inform you that this event is being recorded, and all participants will be in listen-only mode during the company's presentation. After Ambev's remarks are completed, there will be a question-and-answer session. 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 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. Unless otherwise stated, percentage changes refer to comparisons with second quarter 2017 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities.
As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis in the earnings release. Now I'll turn the conference over to Mr. Bernardo Paiva, CEO. Mr. Paiva, you may begin your conference.
Thank you. Hello, everyone. Thank you for joining our 2018 second quarter earnings call. Before starting, I would like to announce that we have here Fernando Tennenbaum, our new CFO since July 1st. Fernando joined Ambev in 2004, and while at Ambev, he served in many finance functions. Since January 2012, he has been the Global Treasurer of Anheuser-Busch InBev. I would like to thank Ricardo Rittes for all his support during his almost three years as our CFO, during which he delivered great results. I would also like to welcome Fernando and to wish him all the best in his new role. I will now hand over to Fernando to go through our results in all the zones, and next, I will come back to take you through our commercial highlights in Brazil and to share with you our outlook for the country.
Thank you very much, Bernardo. I'm really happy to be here. Throughout these 14 years in the group, I had the opportunity to work as Investor Relations, Head of M&A, and Treasurer of Ambev. Rittes has set a very high bar as CFO, and I'm deeply committed to continue his remarkable work and keep pursuing sustainable value creation for our shareholders. After this quick introduction, I will start with the main highlights of our consolidated results. In the second quarter, we posted strong growth in most of our markets. On a consolidated basis, top line was up 11.4%, positively impacted by volume growth of 2.6%, coupled with a net revenue per hectoliter increase of 8.6%.
After 10.1% EBITDA growth year-over-year in Q1, we further accelerated EBITDA growth to 16.7% in Q2 versus the same period last year, expanding margin by 180 basis points to 39.4% and reaching BRL 4.5 billion. Normalized net profit was BRL 2.3 billion, 9.7% higher than Q2 2017, as the inorganic growth and lower tax rates were partially offset by higher financial expenses. Moving now to our divisional results and starting with Brazil. Brazil EBITDA was up 14.8%, reaching BRL 2.4 billion with margin expansion of 190 basis points to 41.1%. Our beer business in the country delivered good results.
Net revenue increased by 9.2% and EBITDA grew by 11.1%, with margin expansion of 70 basis points to 41.5%. After an anticipated soft start in 2018, beer volume resumed its growth to 1.7%, despite the negative impact from the truck drivers strike, which was offset by the 2018 FIFA World Cup. The beer industry, according to our estimates, was flattish. Net revenue per hectoliter remained strong and grew by 7.4%, benefiting from the carryover of the price adjustment implemented in Q3 2017, as well as from our continued revenue management initiatives. Cash COGS per hectoliter for Brazil was at 2.7%. A combination of FX tailwinds and pressure from inflation, higher commodity prices, and higher cost of cans.
Cash SG&A grew by 11.4%, mostly driven by increased sales and marketing expenses associated with timing of investments related to the FIFA World Cup as anticipated. Year- to- date, top line in Beer Brazil increased by 3.7% and EBITDA was up 7.9% with margin expansion of 170 basis points to 42.7%. Our NAB business in Brazil also posted healthy results in this second quarter. Top line was at 10.2% and EBIT increased by 44.2% with margin expansion of 920 basis points to 38.9%. Volume grew by 1% amid a soft industry that declined by mid-single digits.
Net revenue per hectoliter increased by 9.2% and benefited from the annualization of our revenue management initiatives implemented in the second half of 2017. In terms of cost and expenses, cash COGS per hectoliter in NAB was down 9.8%, favorably impacted by effects and lower sugar prices. Cash SG&A was up 13.5%, also driven by a higher concentration of sales and marketing expenses encouraged in connection with the FIFA World Cup. Year to date, top line in NAB Brazil grew by 1.2% and EBITDA was up 24.8% with margin expansion of 650 basis points to 34.2%. Moving now to Central America and Caribbean region. We continue to experience the positive trends seen last quarters.
EBIT in CAC reached BRL 548 million, increasing organically by 21.2% with margin expansion of 170 basis points to 39.8%. Net revenue increased by 16.2% and on a per hectoliter basis by 4.9%. Volume was strong, growing by 10.8% with Dominican Republic and Panama, the two largest countries in the region, delivering a healthy performance. In the Dominican Republic in particular, we continue to activate the Presidente brand through a remarkable execution that comprises, among other initiatives, the sponsorship of micro events and the introduction of new coolers in the market. In Panama, we embraced Panama's first World Cup with some memorable activation of Balboa, which contributed to a strong volume increase in the country.
Cash COGS per hectoliter in CAC was slightly positive, growing by 1.5%, benefiting from a tight cost management. Further, cash SG&A was up 20.9%, mostly driven by phasing sales and marketing expenses related to the 2018 FIFA World Cup. Year to date, top line in CAC was up 12.5% and EBITDA grew by 20% with robust margin expansion of 260 basis points to 39.3%. I would like to highlight that we are pleased with the evolution of our business in CAC and remain enthusiastic about the opportunities within the region in both the short as well as the long term. Moving now to Latin America South. Our last region had a strong quarter.
EBITDA was 37.4% above that of last year, reaching BRL 941 million with a margin expansion of 360 basis points to 39.4%. Net revenue grew by 25.6% as a result of volume growth of 4.9%, coupled with net revenue per hectoliter increase of 19.5%, which was a consequence of high inflation and revenue management initiatives. In Argentina, in particular, beer volumes grew by mid-single digits on a hard comparable of more than 20% growth in the second quarter of 2017. This performance was mainly fueled by Brahma and Quilmes Clásica that continued to deliver strong results in the country. Cash COGS per hectoliter in LAS went up 7.3% benefited by FX effects, while cash SG&A increased by 20.9%.
As below inflation market expenses were impacted by higher distribution costs associated to volume increase. Year to date, top line in LAS rose by 25% and EBIT increased by 30% with margin expansion of 170 basis points to 41.5%. In LAS, while cautious about the Argentinian macroeconomic environment, we have a track record of delivering solid results in the region and we remain confident in our ability to maintain this pattern, supported by the strength of our brands and by our financial discipline. Turning now to Canada. We delivered in the second quarter BRL 650 million of EBITDA in Canada, which is 60.6% lower than in the second quarter of 2017.
Top line was down 2.0% as net revenue per hectoliter increase of 0.8% was impacted by volume decline of 2.7%, driven by a soft industry as well as a difficult comparable in Q2 2017 when we outperformed the market. Despite volume decline, our core brands Bud Light and Michelob ULTRA continued to deliver strong results, being among the fastest growing brands in Canada. On top of that, our high-end brands Stella Artois and Corona outpaced the industry, and our local craft brand portfolio, comprised of Mill Street, Archibald, and Stanley Park, grew by double digits. Cash COGS per hectoliter in Canada was up 11.8%, mostly due to a hard comparable in Q2 2017, when cash COGS per hectoliter was low single digits.
On the other hand, cash FCGA declined by 7.4%, benefiting from cost savings in our non-working capital, as well as from saving and efficiency gains on our working capital. Year-to-date, top line in Canada decreased by 1% and EBITDA was down 11.3%, with margin contraction of 340 basis points to 29.5%. Finally, while not satisfied with our recent results, we will cycle COGS hard comparable as of 3Q 2018. Supported by our strong portfolio, we are committed to continuing to pursue an improved performance in the country to resume EBITDA growth. Now back to consolidated figures.
Other operating expenses totaled BRL 242 million in Q2, mainly explained by government grants related to state VAT, long-term tax incentives that were up 4.1% year-over-year, mainly due to higher revenues. Finally, moving below EBITDA. In the second quarter, our net financial results totaled an expense of BRL 1 billion, increasing by 60% when compared to the second quarter of 2017. This increase is mainly driven by higher non-cash losses related to equity swaps and foreign exchange variations on intercompany loans. Going to more details. Main items in the financial expenses in the quarter were, first, interest income of BRL 94 million, driven by our cash balance, mainly Brazilian reais, U.S. dollars, and Canadian dollars.
Second, interest expenses of BRL 295 million that include, among other items, interest incurred in connection with the Brazilian tax regularization program, as well as non-cash accrual of approximately BRL 50 million related to the put option associated to our investment in the Dominican Republic business. As expected, this non-cash accrual declined by approximately 65% year-over-year as a result of the partial exercise of the put option in January 2018, which will result in the decrease from 45%-50% of ELJ ownership in the business. Third, BRL 232 million of losses in derivatives instruments, mainly driven by non-cash expenses related to negative results of equity swap. Fourth, losses on non-derivative instruments in the amount of BRL 389 million impacted by non-cash negative results incurred in connection with foreign exchange variation on intercompany loans.
Fifth, taxes on financial transactions on the amount of BRL 104.7 million. Six, BRL 123 million of financial expenses, mainly driven by interest on contingencies. The effective tax rate decreased from 9.4% to 6.9%, mainly explained by an easy comparable in Q2 2017, when the tax rate was adversely impacted by a one-time tax adjustment. Year-to-date, the effective tax rate was 13.7% versus 11.2% in the half year of 2017, mostly driven by an increase in taxable income. Cash generated from operations in Q2 2018 was BRL 3.5 billion, which is 45.6% higher than in Q2 2017.
Year-to-date, cash generated from operating activities is growing by 9.7%, reaching BRL 6.1 billion. CapEx reached BRL 805 million in the quarter and BRL 1.3 billion in half year, declining 2.5% versus the first half of 2017. Finally, during this year, we announced approximately BRL 3.6 billion to active holders in dividends. Thank you very much. I'll now hand back to Bernardo before going to Q&A.
Thank you, Fernando. Let's start talking about beer. Our Beer Brazil results in the second quarter were strong and demonstrate that we are on track with our commercial strategy. What is a result of consistency and excellence in the implementation of our growth platforms. These results also confirm what I said in our fourth quarter earnings call when I focused on explaining the main drivers that led to beer volume decline in Brazil in Q1 and on the reasons that our volume performance in that quarter was not indicative of any structural change in our business. I would like to highlight that we faced several challenges during this quarter as a result of the truck drivers' strike that took place in May. However, our relentless focus on excellence in go-to-market and service levels were decisive to, one, keeping our products on shelves during this period.
Second, react fast after the strike, restoring inventory levels in the market quickly. Along with that, we also had a successful execution during the 2018 FIFA World Cup. All the factors that I just mentioned contributed to a beer volume growth of 1.7%, outperforming the industry. In this context, as was said by Fernando, we've managed to deliver solid top line and EBITDA growth. Our non-alcoholic business also posted great results. Volume grew by 1%. Meanwhile, the soft drink industry was down mid-single digits. Solid top line and cost performance also allowed us to increase our EBITDA by more than 40% with significant margin expansion. Having said that, our commercial strategy in Brazil remained consistent during the quarter, and we continue to focus on our growth platforms, which have the following highlights.
Starting with Elevate the Core, our first and most relevant platform. As I mentioned in the previous calls, Brahma, our classic lager, has been experiencing memorable momentum and growing strongly quarter after quarter. Brahma connects with consumers through relevant platforms, including soccer, Brazilians' greatest passion. As such, Brahma's momentum was reinforced by the 2018 FIFA World Cup. The brand sponsored the Arena Brahma, set up in traditional venues in seven Brazilian cities, São Paulo, Rio de Janeiro, Belo Horizonte, Recife, Salvador, Curitiba, and Florianópolis, where consumers watched the games while enjoying free entertainment. Brahma also promoted several other smaller events across the whole country, bonding with its core target consumers and leveraging this opportunity to drive volume growth while enhancing its brand equity.
The brand's activation during the World Cup was also marked by a meaningful campaign that evoked all its tradition and its connection to the Brazilian national team, coupled with a bold 360 activation that boosted the brand visibility, always reinforcing its heritage and recognized quality. Now talk about Skol, our easy drinking lager. Innovation is very important for Skol, a brand that has always been setting the trends and inviting consumers to enjoy new experiences. During the quarter, we launched Skol Hops, an innovative pure malt beer brewed with aromatic hops that provide that unique combination of lightness, freshness, and flavor. Positioned within the Core Plus segment, Skol Hops was launched in the northeast of Brazil and is expected to be rolled out across the country during the second half of 2018, reinforce Skol innovative DNA.
To still talk about the Core Plus segment, our brands within this segment also continue to deliver great results. Brahma Extra and Bohemia grew more than 50% during the second quarter, providing consumers the best trade-up alternative. In the second half of the year our mainstream brands will continue to leverage key branding moments like the World Cup. We continue to invest in relevant equity campaigns, and we continue to connect with their target consumers to support top line and EBITDA evolution. Now talk about premium. The 2018 FIFA World Cup was also marked by a fully integrated activation for Budweiser as a global official sponsor of the event. The brand's activation in Brazil was based on the Light Up the World campaign and the creation of Bud Basements in 10 cities, which are proprietary events that reinforce Budweiser's values such as authenticity and freedom.
Besides broadcasting the most important matches, we took to the Bud Basements, good music, tattoo studios, barber shops, as well as cool and trendy parties. The World Cup initiatives was also highlighted by a consistent execution in the off trade and by extensive distribution of the Red Light Cup across the country, which lights were activated through the sound of the fans watching the games. Still on premium, I would like to reinforce that our strength in the premium segment is a great portfolio of brands. Each of our premium brands maintain its own territory, brand position and price point, reaching different consumers in different occasions. With that in mind, both Stella Artois and Corona also had a great quarter, allowing our premium portfolio of global brands to grow by more than 30%.
Corona's performance was supported by a great activation during the World Surf League event in Saquarema, Rio de Janeiro. Corona encouraged consumers to spend more time outside, disconnecting from the daily grind. As such, the WSL activation was highlighted by the Corona House, where consumers could engage in several outdoor activities and have access to cool attractions. Stella, on its turn, with a brewing heritage dating back to 1366, continued to explore new occasions with its taste elevating the food experience, supported by Stella draft and by its unique package, such as the 550 ml bottle and the 310 sleek can. Moving on, our premium portfolio for the non-alcoholic business, which comprise Fusion, H2OH, Lipton, Gatorade, and do Bem, also delivered great results in the quarter, growing double digits and outpacing the traditional CSD industry.
Going forward, we reinforce that our premium portfolio is well-positioned to keep driving the beer category upward and supporting a positive mix. Now moving to driving market affordability. As I mentioned in our last call, fostering beer consumption in Brazil is crucial, and we have incorporated affordability initiative into our growth platform. Our most important initiative to address the affordability issue in Brazil is the expansion of the returnable glass bottles in the off-trade channel. This year, we are focusing on growing this package penetration in pit stops and small store formats, those with less than four checkouts, which are closer to consumers' houses with the purpose of continuously enhancing consumer shopping experience while delivering affordability. Finally closing with different occasions in home and out of home. We've been stepping up our go-to-market across the country via several different initiatives, including the use of new technologies.
As such, as I mentioned before, a strong go-to-market was key to support our operations during the truck driver strike. On top of that, during the World Cup, along with meaningful campaigns for Budweiser, Brahma, and Guaraná Antarctica, we also delivered remarkable execution in the on-trade and off-trade. Particularly in the on-trade, we implemented special activations for the 2018 FIFA World Cup in 1,000 parks using this opportunity to deliver memorable experience to consumers. With that, we managed to execute a truly integrated 360 sales and marketing approach across the whole country, allowing us to build momentum not only for the second quarter but also for the future. Before moving to the Q&A, I will spend a few minutes sharing with you our outlook for Brazil.
First, for beer, I would like to highlight that we are implementing our annual price adjustment during the third quarter, as we did in 2017. Having said that, our expectations for Brazil for the balance of the year remain mostly unchanged. We are optimistic about our business. Although the environment is still challenged and volatile, we are confident in our strategy and remain committed to maintaining a disciplined execution of our growth platforms to accelerate the BPA growth versus 2017. Our long-term perspective didn't change either. We believe that Brazil is a unique market which provides a combination of growth, opportunities and profitability. Such as favorable demographics, the closing of regional gaps in per capita income and consumer demand for innovative and premium products should support and will support long-term growth. We can move now to the Q&A. Thank you.
At this time, if you would like to ask a question, please press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question comes from Robert Ottenstein with Evercore ISI. Please go ahead.
Great. Thank you very much, and, congratulations, Fernando. Two questions. One, just a simple one on the Skol Hops. I was just wondering if you could talk a little bit more about that brand extension and sort of what are the opportunities you're going after or the occasions, what you're trying to solve for. That's question one. The second question is, you know, ABI announced today, you know, a fairly meaningful reorganization, some new roles, within the top tier of the management. I was just wondering to get your perspective on how some of those changes may or may not impact Ambev and specifically, on the opportunity in terms of retail.
It looks like at least on the corporate level at ABI, looking to perhaps put more emphasis on the retail channel and ownership of that. Thank you.
Thanks, Robert. Great question. Just first of all, Skol Hops, I think we have been involving the portfolio here in Brazil, as I've been talking in every call. It's key to have a full portfolio of brands to offer to people in general, great beers in different flavors, different tastes and occasions as well. In 2016, we launched, just to remind us, Brahma Extra. We launched three Brahma Extra, you know, creating and we created at that time, we have to call the core plus segment in Brazil, offering the first opportunity to trade up. It's very important for us, you know, not only the premium, but to create this core plus.
It was the first step up in terms of the profitability and then a more experience, but let's say a different experience that people would have with beer. Since we launched Brahma Extra, this brand has grown quarter by quarter, I mean, after quarter strongly, and is already 1% of the beer volume, our beer volume in the country. On top of that, what we saw that the Brahma Extra has a positive impact in the mother brand, Brahma, because it's coming the family and helped Brahma Chopp to grow as well. Skol, that's the most innovative brand in the Brazilian market should be part of this as well. Skol could not be left behind in the core plus segment. That's why we launched the Skol Hops.
I mean, I've been studying this a lot. I want to do this in a different way. It's a very light beer, but it's a refreshing beer with this aromatic hops that we study a lot about. Brewmasters have been working on this for a long period. That, just like Brahma Extra, we expect a major success to reinforce the Core Plus segment. Bringing just in the perspective of the Core Plus, three years ago, we didn't have the Core Plus segment in Brazil. We shaped the industry, and we created a portfolio that already accounts for 2% of our beer volume with a higher profitability.
Skol Hops will be part of that, and for sure, we will grow big time, and we will help us to even enhance and grow the Core Plus segment, helping the mother brand of Skol as well, like Brahma Extra did with Brahma Chopp.
Hi, Robert. Fernando here. On the question about the ABI announcement, at a certain level, our operations remains exactly the same, so there will be no change from an Ambev perspective.
Great. Is there any increased emphasis on owning retail? That was something that on the ABI level seems like is gonna get more attention. Are there any plans for that in any part of your region?
I think, Robert, the first focus that we have is work with the retail network that we have in Brazil. The point of sales, the chain, they work very well, and we commit to work with them. We have here some own stores, some franchise business. It's becoming relevant, having talked about the pit stops. This retail focus is not new for Ambev. It's something that we have been doing for a long time, and we continue to do when makes sense, in the occasion that makes sense.
The first focus is work with the retail network that we have in Brazil that have been supporting our brands, that have been working hard in terms of improving the go-to-market, the service level to serve our point of sales in an even better way, year-over-year.
Thank you very much.
Thanks, Robert, for the question.
The next question comes from Antonio Gonzalez with Credit Suisse. Please go ahead.
Morning, Bernardo, and hello, Fernando. Good luck on this new role. I also wanted to ask a couple of questions on your relationship with ABI. First, I wanted to come back to the previous question on the announcements that ABI did this morning. I understand your comment, Fernando, that there are no organizational changes at Ambev. I want to get some, I guess, perspective from you guys to understand if you can better leverage on your access to ABI, specifically as it relates to two areas. First, you're sending some part of your talent as part of this reorganization from ABI, Carlos Lisboa and Bernardo Novick and so on.
I want to ask if you are, in this occasion, importing some talent as well. Second, I wanted to ask if, specifically in the soft drinks business, volumes have been soft for a number of quarters now, no? In the second quarter, we saw a rebound, but I guess if we see the last 18 months or so, there's been some weakness. I wanted to ask if there is something that you think you should be doing structurally different in that business, and perhaps this reorganization from ABI helps.
I'm sorry to make it a long question, but the last point I wanted to ask is, I wanted to see if you can add some perspective on also, I guess, corporate governance and your broader relationship with ABI, not only because of these changes that ABI announced today, but also, you know, there's a shareholders' agreement between several shareholders at Ambev, the controlling shareholders at Ambev that is expiring next year. Obviously, since the creation of this agreement, a lot has changed, no? You formalized several committees at the board, the merger of the two share classes, et cetera. I just want to ask Bernardo if, you know, from your conversations with Brito, has the strategic view of the relationship changed at all?
How have these formal bodies, such as the compliance committees and so on, improved the relationship between yourselves and ABI? Sorry for the very long question, but I wanted to address those three points.
Antonio Gonzalez, thanks for the questions. I'll touch first one, people. I think that we are exporting people as you said. I think that you said it's very important for our culture to people continue to see they have opportunities of growth. This attracts great people. Part of the development of great people is really to give them different challenges, so they become better partners in the future. It's true as well that you always import people. That's a flow. I mean, outflow, it's an inflow. We have here Fernando Tennenbaum, who was the global treasurer of ABI, who wasn't in Ambev at that time, five years, six years ago. Went there, became much more experienced, I mean, knowledgeable and so on, then back to Brazil now to help us here.
You will see this flow, no? Now you're first, I mean, seeing the export flow. Then, I mean, I think that we could see next month some inflow as well, people coming. That's good, because it's good not only for export people, because when they come back, they come back with a different view, helping all of us, helping me. Let's say that eight, nine years outside of Brazil, and help me the way, and Paula and the other people with the team, how we can shape the strategy here. The experience you have to have outside. I think that's a good thing. It's a good thing for the culture because people grow.
You can attract great people because they see that a place that they can grow, opportunities and so on. It's good to have better partners because they have a broader experience. Export now, we import, for sure, in the future, and more news to come. Linked to the second point, I think for the soft drink business. I think that our approach and we know us, and I've been talking with you, I think we really like to work in the fundamentals of the business. We have good fundamentals always and not bad. I mean, given the challenge that we have ahead, have been working hard to really assure that the fundamentals would be there.
One example in terms of service level, in terms of elevating the core, in terms of our core brands, in terms of the portfolio of premium. You have been doing the same in the soft drink business. We focus initially being a little bit more focused on those basic things and fundamental things, doing well, excellence in the beer business. We have been doing this in the non-alcoholic business as well. That creates maybe in a period of time a disruption because we are, I mean, changing some structural things. In a point of time, if you are true and like we are doing the right things, this will start to come to appear.
I think that soft drinks is in the non-alcoholic business in a moment that, you know, some of the things that you put the seed in the past, I think that start to come. The portfolio is much broader. The execution of our non-alcoholic business is better. Still lots of room to increase. I think that, you know, the way that we promote in the market as well, you know, becoming more, I mean, more clever in terms of intelligence, in terms of technology, algorithms and so on that have been used for beer for more time. I think that this is becoming better as well. I mean, better, the country is evolving. You know, we can see there could be even more in the future for sure.
Structurally, I think that our business is in better shape. The good thing that we see lots of opportunities to further increase the way that we operate, the non-alcoholic business. That's a great opportunity and we will continue to focus on that. Good momentum for soft drinks ahead, and we continue to work in the fundamentals. Now move to Fernando for your last question, if you allow me.
Hello, Antonio. Thanks for your question. A little bit on the corporate governance. The current shareholders' agreement was executed in 1999 in the context of the merger between Ambev and Brahma for a 20-year term. That meant that if nothing happens, there will be no shareholder agreement after 2019. In 2013, at the time where we merged the brands and the assets to have one single class of share, which I think was a very positive outcome for all shareholders. Another agreement was negotiated to be enforced at the time that the original shareholders' agreement would expire, from 2019 and onwards. It's fair to say the scope is different for this agreement than the first one.
I think the more important corporate governance points, they are still valid and nothing changes. The foundation is still gonna be on the shareholder agreement. Under the new shareholder agreement, any matter shall be in best efforts aligned between the shareholders. If consent is not reached, M&A transaction shall be approved by the majority of the board members. Of course, we say by controlling the majority of the board members, they will be able to approve it. Having said that, if there is a M&A transaction carried out with related party, then we are not talking about shareholders agreement. We are talking about Brazilian corporate law, which is over and above the shareholders agreement.
Under the local regulation and the company bylaws, shareholders and board members must abstain from voting matters when they have conflicting interests with the company. We end up being a little bit even more restrictive here. Whenever we perceive there is a conflict, the shareholders even abstain from the discussion, not only the voting, but from the discussion. Just to follow up a little bit more on the transactions with related party. We have the compliance and related party committee. We first analyze each one of the transactions, including its arm's length aspect, before it's submitted to the board. I think we have all the controls and tools in place to make sure that the relationship is the right one.
I think that on top of that, Antonio, and all of you guys, on top of all of these controls and so on, we are partners of Ambev. We have a reputation here, Fernando, Nicole, myself, I'm 27 years in this company. We will do always what's the best for the shareholder of Ambev. This for sure. I think that it's not a technical question answer, but it's the real one. I think that's the final part, despite of the laws and so on, that I mean protects everything. This is the most important thing. Shareholders of Ambev. We are founders of Ambev, and we will protect the shareholders of Ambev always.
Fantastic. Thanks for the color on the three themes.
Thank you.
Thank you, Antonio.
The next question comes from Isabella Simonato with Bank of America Merrill Lynch. Please go ahead.
Thank you. Good afternoon, Bernardo, Fernando. I have two questions. First of all, Brito in the ABI call, he mentioned that the impact of the truck driver strike in beer in Brazil was 3 percentage points. I was wondering if you could share with us what sort of impact you saw from the World Cup, which is set to pretty much offset the impact from the strike. That would be the first one. The second one on soft drinks in Brazil. You have been having good tailwinds regarding costs, but your guidance for the year overall still shows an increase versus 2017. I was wondering if you could share the drivers of that cost inflation for soft drinks specifically. Thank you.
Isabella, thanks for the question. First I'll touch the volume part and then I'll talk about the cost of soft drinks. Volume. We all should take a look at two things, the effects of the strikes and the World Cup as we said. Let's start with the strikes. As you know, now you've covered us for a long time, we've been stepping up the go-to-market across the country via several different initiatives. Now I've been talking personally with you guys in the last three years about that. That was a long-term initiative, but we knew that at a point in time, and we start to reap the benefits from that. I think that it was done, and this year we continue to do.
The strong distribution that we have, the elevated service level were key to keeping our products on shelves during the truck driver strike. It also enabled us to react quickly after the strike. Just one example, we knew, I mean, that the strike could end was in a holiday. We worked every day during the holiday. I mean, all the sales force, all the brewers, all the trucks. I mean, to react even faster to really assure that we mitigate the volume loss. And the volume loss, yes, we have, because we saw at that moment a change in the consumer behavior during that specific period, which led to a volume loss.
We estimate that was your comment, as Brito said, that during this quarter, we lost approximately three percentage points of volume as a consequence of the strike. We estimate that this could be even higher. Given all the excellence in terms of service levels, so that I said it could be, I mean, we estimate that, but at the end of the day, given the demand deceleration of around 3% for the quarter. The World Cup. The World Cup, I mean, we have been working hard for four years to ensure that the World Cup will be a strong one. Brahma was amazing, strong. Budweiser as well.
Yes, the World Cup was able to fully offset this 3% of volume that we had lost with the strike. The volume grew 1.7%. All in all, two things. First message, we're able to mitigate the effect of the strike given the excellence in operations. Secondly, the World Cup was very positive, not only for the volume, we're able to mitigate that loss of the strike, but for the brand building as well of those two brands that are very strong. Just to finish, we see that the consumer environment is recovering. It's low pace, but the trend is positive. From my part, that's it, Fernando, you can comment on the-
Isabella, Fernando here. Your question was on CSD. Our cost performance for NAB was very strong this quarter. However, in the second half of the year, there are tailwinds and headwinds that impact our performance. Among them are lower sugar prices and the reductions of the Manaus Free Trade Zone benefits. When you consider there will be a lot of moving parts that make the NAB cost projection difficult, we decided to give this guidance to make sure that people don't get it wrong. But this is not the case for beer. That's why we are only looking at soft drinks and providing this kind of a range, so people don't get surprised by the fluctuations quarter on quarter.
Perfect. Thank you.
Thank you, Isabella.
Thank you.
The next question comes from Thiago Duarte with BTG. Please go ahead.
Hi. Hello, everyone. Hello, Bernardo. Hello, Fernando. I have two questions, actually. The first one is trying to understand a little bit more the net revenue per hectoliter performance. I mean, the performance was very strong, I think, across the board, across all the divisions. Of course, unfortunately, you don't provide the breakdown by how net revenues and gross revenues performed for each of the division. Even if you look on a consolidated basis, we've been seeing the last few quarters the total deductions on gross revenues going down. The net revenue per hectoliter has been growing more than gross revenues per hectoliter. This has been true in the last few quarters, and it was particularly true in this quarter.
I understand there were some changes in the excise tax calculations with the changes in PIS/COFINS and ICMS in Brazil. When we look at the breakdown, the discounts are also going down. I wanted to get a sense from you, why is that happening? Does it have something to do with what you just said, Bernardo, which is related to the economic environment improving slowly, so you're not having to give more discounts, has something to do with the World Cup. It'll be interesting to hear whether you think this trend where net revenue outperforms gross revenues could continue to be the case going forward. It'll be interesting to hear.
The second question is more on a longer-term question, you know, and has also to do with the portfolio of the company. You know, if you look at this quarter and several quarters behind us, when you talk a little bit about the performance of the brands, you got the core plus segment doing great. You got the premium segment doing great, everything growing double digits. It has clearly been outperforming the mainstream market. Even if you try to run the math, it looks like the mainstream market is not still picking up. Your mainstream brands are not still picking up, which is not necessarily a problem as you've been saying, Bernardo, because it's more about building the portfolio.
My question would be, you have historically talked to us about a balanced growth between volumes and prices, trying to find the right balance between volumes and prices for top line growth. When we look at core plus premium outperforming mainstream for so long, it looks like consumers are replacing one for another. My question to you would be, should we start thinking more about a top line growth more driven by pricing rather than volumes? That would be the second question. Thank you.
Thiago, thanks for the question. It's a very good one. It starts from the net revenue pricing, and just to always remind ourselves and you guys that our, I mean, price strategy is to increase price in line with inflation plus taxes over time. Because we know that affects the industry, and then this is a strategy that we have been doing in a, I mean, a longer period of time. But it's very important, we always like to highlight that our net revenue per hectoliter performance is a combination of price increase and revenue management initiatives. Operating excellence positively affects the net revenue in two fronts.
Again, everything that we are talking about of serving more point of sales, serving better, understanding better and executing better the levers that activate demand in each point of sale, in each channel, helps volume, helps other things, but helps the net revenue as well in two fronts. First, better management of discounts in a win-win deal or that we do with the trade in a way that's good for us and is good for the trade as well. We only do that if you have a better relationship with the point of sales. If you serve better, you can understand better their business. With that, yes, it's possible to manage better discounts.
That's a good way to grow net revenue per hecto because you are not affecting the consumer, in the end, and things. The first one. Second, make sure that the products, given the way that we serve the market, the way that we deal and serve the point of sales, we arrive in the market with the right consumer price, good for everyone. Why this is important not only for the industry, not only for the share and so on, it affects the net revenue as well. Because discounts are set, but you know that most taxes are calculated on full price and not discounted price to consumers. A more efficient taxation is a positive consequence of excellence in revenue management. This affects net revenue per hecto as you have seen as well.
We believe that there's still room to evolve in the initiatives linked to revenue management discounts. This can be done through the use of algorithms, for instance, having talked about technology, like sales with you guys, all those things can be supported for the grant of more effective discounts in a win-win proposition to the trade. This is basically the first question. Linked to the mainstream brands, I think that we have all the non-super segment. In the core segment, our mainstream brands are strong, and our share is very stable, including in the last year, all the information that we have from Nielsen. Yes, it's a segment that's under pressure, the full mainstream. First, because of the premium is growing.
That's not bad news, no, because when premium grows, better margin. Then we are boosting premium in the first step up of the core. That's the core plus. That, it's a very good segment to shape because it's a good segment that you offer great brands, I mean, quality beers that we offer for all of our brands, and at the same time, talks to the business model that we have, you know, in our brewers and so on. Boosting the core plus and boosting premium, yes, the trade-up will happen. That's a good driver of mix. That helps net revenue per hecto, not price increase, net revenue per hecto given to the mix. This is good.
What we think that happened, and there are other factors affect the mainstream segment category, is that the disposable income in Brazil that really makes the value segment, that we don't have margins in value segment. The value segment just volume. If you get the profitability of the value segment, Brazil kind of, you know, not meaningful. Have a pressure of increase of the value segment because of the, you know, all disposable income and crisis that we have been having in Brazil in the last years. The good news is that in all of countries that we know that we operate, when the country start to recover, disposable income will start to, I mean, to be back, the value segments always shrink again and the core segment grows again.
If the brands in the core segment are in good shape, and they are, if you are building a core plus based on those brands. We'll talk about Brahma. Brahma is growing, and Brahma is strong. Skol has the same thing. This could be a positive effect for the core segment and for our brands in the future, when disposable income comes. If we were to think that, and I think that Brazil will recover from that, I mean, long period of crisis, this positive news for the core segment, for our brands. Positive news that premium is growing. Good for us because better margins. It's positive news that we're successfully shaping the core plus segment. That's good for the margins, that's good for our brands as well.
That's why I think in terms of the portfolio approach, we have been doing that and working hard to build this full portfolio, strong brands. I think that it's an asset that Ambev has, not only for the current period, but for the future when Brazil becomes in a better macroeconomic environment, I would say.
Thank you. That was very helpful, Bernardo. Thank you.
Thanks, Tiago.
Our last question today will come from Luca Cipiccia with Goldman Sachs. Please go ahead.
Hi. Good afternoon, Bernardo, Fernando. Thanks for the question. I have a couple of add-ons on the price mix discussion that we were just having. First, maybe on the short term or looking at the third quarter, it seems to me you're gonna get into that with a positive momentum across brands and positive tailwinds in market share as well, at least related to the comments you made about the industry growth in the second quarter. I was hoping you could share maybe some more comments on, you know, how do you think pricing will play out? Is this gonna be a fairly smooth process this time around?
How do you see both the competitive environment, from that perspective as well as, you know, consumer receptiveness, in the tail end of the positive quarter that you had as you move into the third quarter? Secondly, still on pricing, you know, expanding maybe on your last answer.
You know, as you keep, you know, elevating the core, expanding the core plus, growing faster in premium, would you expect, you know, the rest of the market to follow or rather, given the differences in portfolio breadth and reach, you know, maybe further polarization or a drive for competitors to polarize more and, you know, pressure more at the lower end of the market where you don't necessarily participate, it seems you're moving, if not away from, you're still, you know, you're still trying to drive the mix and the brand portfolio higher. Maybe if you can, you know, comment additionally on these two points, both short-term and more in the medium term on price mix, that would be great.
Thanks, Luca. Thanks for the question. Looking to the price, I mean, the short term. We normally increase price in Brazil in the third quarter, and this year not be different. And again, we do it and we implement our annual price adjustment for portfolio brands throughout the third quarter, exactly as we did last year. I think that's including good to compare volumes because it'll be apples to apples, I mean, comp. That was well not exactly what happened in 2017 against 2016. This year, 2017, 2018 is apples to apples of quarter, including for you guys to have a better view in terms of the volume and so on. We will adjust the prices as we did last year.
You know, we adjust prices in line with inflation plus any tax offset over time. This is unchanging what's been doing. In terms of the long term, I think that it's very important as leaders here in the market in terms of the volume, in terms of the profitability, I mean, even more, so we have a responsibility to drive the industry in the right track. The responsibility of our business here in Brazil is not only, I mean, to get a better share, but ensure that the beer category will go in the right track. That's why we like to work and to build brands in the core segment, in the core plus segment, in the premium segment.
Not only because it could have a good side effect in terms of Brazilians' better disposable income, our core brands are strong and so on, we grow because of the trade up, we will capture margins. Because what differentiates our category from maybe others that are basically people buy by price because we have brands, because an emotional link, because you have a really a clear that we have for quality of our products, the liquids and so on, and then you build something different that a consumer values and pay for that. First, I mean, we don't comment on the other companies we do. I mean, that's their job.
What we will do, we are committed to build a much better beer category. We think that to sell value brands with no brands, with no equity, like to sell, you know, I would say, paper. Nothing against paper, but again, something that's, you know, unbranded, is not something good for the industry. We will always be committed for a healthy industry, which means strong brands, which means core plus, and up. We like to look up, not look down. We have alternatives of a smart affordability to tackle the affordability issue in a profitable way. The returnables is one. The service level is very important because if you are serving better parts, we'll be able to assure that the consumer price should be fair and then tackle affordability as well.
We now have a focus in the pit stops. Our franchisor talking about RGBs, great brands, close to people because on gas stations and so on. There are ways and then more things to come in terms of smart affordability to tackle the affordability issue in a smart way without compromising our commitment to build a better category, beer category in Brazil.
Perfect. Thanks. Thank you, Bernardo. If I can squeeze just a very last one, just a small question on the Skol Hops initiative that you mentioned. I think you mentioned that you rolled it out first in the North, and I was curious if this type of approach is in any form unusual. I remember in the past you commented on some of the benefits of the practices that you were incorporating from SABMiller on how you segment the market. Are you further tuning the go-to-market? I was just curious if this type of staged rollout, if anything to read there or if there's any additional comment you can make.
I think, I mean, the launch of Skol Hops in one area. I think that we have been putting out lots of our innovation pipeline. For the many stages of the pipeline, the one that you have the ideas, you diverge, you test, and so on, you have to think that the pilot is very, very important to learn, you know. To learn how to launch better and so on. That's why we've done there in the Northeast because I think that is a region that will be our best asset because, you know, I mean, our market share in Northeast is below average of Brazil.
We said, "Look, let's pilot Skol Hops there, and to do well there for sure you'll be, I mean, even better in other places." You learn with that process. We knew all the initial information I have for the launch. Skol Hops has been in a successful way, getting people understanding in the core plus segment and so on. I think that with those learnings and so on, the pilot, we'll go national. I cannot explain for competitive reasons when, but we think that the second half would be a good moment to re-roll out with the learnings of the pilot. That's the.
It's not limited to any region, not just innovation process that I think that's the best for sure, that there are a national launch will be even more successful with the learnings of the pilot in the initial test.
Understood. Very clear. Thank you.
Thanks. Before I finish our call, I would like to close saying that we will continue to put great efforts in our commercial initiatives in a consistent way, in a relentless way, and really assure that we have a better business in the future. That will help us to deliver healthy results across all the regions in which we operate. We are confident that we are well positioned to drive long-term sustainable growth and shareholder value creation. Thank you. Have a great day, and enjoy the rest of your day. Bye-bye.
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