Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's first quarter 2018 results conference call. Today with us, we have Mr. Bernardo Paiva, CEO for Ambev, and Mr. Ricardo Rittes, 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 Private Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company.
They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions 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 first 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. Ricardo Rittes, CFO and Investor Relations Officer. Mr. Rittes, you may begin your conference.
Thank you. Hello, everyone. Thank you for joining our 2018 first quarter earnings call. I will guide you through our financial highlights of Brazil, Central America and the Caribbean, Latin America South and Canada, including our below the line items and cash flow. After that, Bernardo will give more details about our performance in Brazil, evolution of our growth platforms, as well as our outlook for the remainder of the year. Beginning with the main highlights of our consolidated results. We started the year with growth in CAC, LAS and Brazil. On a consolidated basis, top line was up 5.9% in the quarter, with volume going down 5.8%, mainly due to a shortfall in Brazil. Volume decline was more than offset by a healthy net revenue per hectoliter increase of 12.4%.
EBITDA was up 10.1% in the quarter, reaching BRL 4.6 billion with margin expansion of 160 basis points to 39.9%. Normalized net profit was BRL 2.6 billion, 12.7% higher than that of the first quarter of 2017 as EBITDA organic growth and lower interest expenses were partially impacted by a higher tax rate. Moving now to our divisional results and starting with Brazil. Brazil EBITDA was up 5.3% with margin expansion of 280 basis points to 41.8%. In Beer Brazil, top line was down 1%.
As anticipated, we started the year facing challenging volume that declined by 8.1%, mainly driven by the combination of a weak industry and a tough comparable in the first quarter of 2017. On the other hand, net revenue per hectoliter remained strong and grew by 7.7%, benefiting from the carryover of the price adjustment implemented in the third quarter of 2017 and from our continued revenue management initiatives. Despite volume not being supportive, we still managed to grow Beer Brazil EBITDA by 5.2% and expand margin by 260 basis points to 43.8%. Cash COGS per hectoliter in Beer Brazil was now 4.8%, driven by favorable effects, partially affected by inflation and higher commodity prices.
Cash SG&A was up 3.1% as higher logistics costs impacted by operational deleverage were partially offset by below inflation sales and marketing and administrative expenses. In non-alcoholic beverage Brazil, NAB as we call, EBITDA was up 6.1% with margin expansion of 250 basis points to 29.5%. Despite posting solid net revenue per hectoliter growth of 16.2%, which benefited from the annualization of our revenue management initiatives implemented in the second half of 2017, top line was down 6.4%, impacted by a volume decline of 19.4%. Similarly to Beer, NAB weak volume was driven by mainly two factors. One, a still declining industry. Second, a hard comparable in the first quarter of 2017. Bernardo will expand on this topic.
In terms of costs and expenses, cash COGS per hectoliter in NAB was up 4.9% as favorable effects was adversely impacted by higher raw materials, including sugar, coupled with volume decline effect in fixed cost dilution. Cash SG&A on the other hand grew below inflation at 1% as high logistics costs affected by operational deleverage were partially offset by lower sales and marketing expenses. Moving now to our international operations. In Central America and the Caribbean, we continued to experience a positive momentum. In the first quarter of 2018, EBITDA in CAC reached BRL 445 million, increasing organically 18.7% with margin expansion of 330 basis points to 38.7%. In US dollars, reported EBITDA grew close to 16%.
Net revenue increased by 8.7% and on a per hectoliter basis by 4.2%. Volume was up 4.3% with Dominican Republic and Panama, the two largest countries in the region for us, delivering strong growth. In the Dominican Republic, our performance was supported by a continued investment in the Presidente brand that in the first quarter promoted a notable Carnival along with a strong 360 Holy Week activation. In Panama, this quarter we continued to witness the success of our portfolio of brands led by Atlas Golden Light, which delivered consumers a great experience during two major events, Carnival and the Atlas Golden Fest.
Cash costs per hectoliter in CAC was slightly positive, growing 0.2%, benefiting from a tight cost management and further cost savings in our non-working capital as well as efficiency gains in our working capital. This translated into a decline in cash SG&A by 0.2%. Moving now to Latin America South. In LAS, we started the year maintaining the good trend of 2017. EBITDA was up 25.2% organically, reaching BRL 1.3 billion with margin expansion of 30 basis points to 43.1%. Net revenue grew by 24.6% explained by a combination of, number one, strong volume that grew 5.7% with all the countries performing well, enabling us to reach record beer volume in the first quarter in the region.
Second, net revenue per hectoliter increase of 17.8%, which were a consequence of the high inflation in those countries, plus revenue management initiatives and a favorable brand mix. In Argentina in particular, beer volumes grew by high single digits, fueled by Brahma, coupled with the successful launch of Quilmes Clásica. Our premium portfolio in the country also led the way with Stella Artois, Corona, and local craft brand Patagonia presenting strong growth and driving a positive mix. Cash costs per hectoliter in LAS went up by 13.5%, benefited by the FX, while cash SG&A increased by 28%, mostly impacted by phasing in sales and marketing expenses. Turning now to Canada. We delivered in the first quarter BRL 275 million of EBITDA, which is 20.4% lower than that in the first quarter of 2017.
Topline grew by 0.5% and net revenue per hectoliter rose by 1% as our favorable brand mix was negatively impacted by excise tax increases. Volumes were marginally down, declining 0.4%, predominantly driven by a soft industry. On the other hand, our strong portfolio helped us retain our leading position in the Canadian market with, number one, Bud Light, Corona, Stella Artois, and Michelob Ultra outperforming the industry. Number two, our craft portfolio comprised of Mill Street and Archibald among other brands growing double digits year-over-year. Cash costs per hectoliter, however, was up 26% in Canada due to a hard comparable in the first quarter of 2017 and the impact of imports.
On the other hand, cash SG&A was down 2.9%, benefiting from cost savings in our non-working money as well as phasing and efficiency gains in our working money. Still on our international operations, and before going back to consolidated figures, I would like to highlight that we are enthusiastic with the evolution of our businesses in LAS and CAC, reinforcing our positive outlook for both regions. Especially in LAS, we are also pleased that we closed the transaction in Argentina that resulted in the perpetual license of Budweiser brand. Such transaction brings us a unique opportunity to further develop Budweiser, which is a very strong global brand with great potential for growth going forward.
Finally, in Canada, while not satisfied with our performance this quarter, as we cycle tough comps, we're confident that we will be able to deliver improved results supported by our strong portfolio of brands. Now back to consolidated figures. Other operating expenses totaled BRL 258 million in the first quarter, mainly explained by government grants related to state VAT and long-term tax incentives that were down year-over-year. Lower revenue and the revenue geographic mix explain this reduction. Finally, moving below EBITDA. In the first quarter, our net financial results totaled an expense of BRL 544 million, declining 37.6% when compared to the first quarter of 2017.
Going into more details, main items in the financial expense for the quarter were, first, interest income of BRL 103 million driven by our cash balance, mainly Brazilian reais, US dollars, and Canadian dollars. Second, interest expenses of BRL 348 million that includes, among other items, interest incurred in connection with the Brazilian tax regularization program, as well as a non-cash accrual of approximately BRL 65 million related to the put option associated with our investment in the Dominican Republic business. Such non-cash accrual declined more than 50% year-over-year as a result of the partial exercise of the put option in January 2018, which resulted in the decrease from 45- 15% of ELJ ownership in the business.
Third, BRL 183 million of losses on derivative instruments, mainly driven by the carry cost of our FX hedges, primarily linked to our cross exposures in Brazil and Argentina. Losses on derivative instruments declined by 26% year- over- year, benefiting from positive results of equity swaps coupled with lower interest rates in Brazil that contributed for the reduction of carry costs. Fourth, gains on non-derivative instruments of BRL 92 million that comprises a gain related to the adjustment in the fair value of the put option in the Dominican Republic that, as I just mentioned, was partially exercised at the beginning of the year. Finally, fifth, BRL 119 million of other financial expenses, mainly driven by interest in contingencies.
The effective tax rate in the quarter was 19.2% versus 12.9% last year, mainly explained by the negative impact of foreign exchange variation on intercompany transactions due to the depreciation of the Brazilian real. From a cash flow perspective, cash flow from operating activities before changes in working capital was BRL 4.7 billion versus BRL 4.6 billion in 2017. Starting from the higher cash flow generation before working capital, during this quarter, we had a negative cash impact from working capital due to volume decline in both beer and NAB business in Brazil. Given that we have a negative working capital position, every time we grow a business, there is a positive impact from working capital, as cash generated by payables is significantly higher than the cash tied up in receivables and inventories.
The opposite is also true. Every time we face volume deceleration, there is a negative effect on working capital. As a result, the first quarter of 2018 cash generated from operations was BRL 2.5 billion versus BRL 3.1 billion during the same period of 2017. This quarter, we also had a higher cash tax payment when compared to the same period of 2017, mostly due to negative effects on tax paid abroad and phasing, as this figure is expected to be partially diluted over the year. Similarly, we also completed a transaction that I alluded to, whereby we increased our ownership in the Dominican Republic business from 55 - 85%, leading to a cash outflow of roughly BRL 3 billion.
Finally, in the first quarter, we paid out BRL 1.1 billion in dividends to shareholders. Thank you very much. I will now move to Bernardo before going to Q&A.
Thank you, Ricardo. Hello, everyone. As mentioned by Ricardo, we started the year delivering EBITDA growth and margin expansion for Beer Brazil despite volume decline of 8.1%. When we announced the 2017 full year results, we mentioned that we expected a challenged volume for Beer Brazil in the first quarter, but that we had a positive outlook for the remainder of the year. In this context, I believe it's worth sharing with you our view on two questions. One, what are the main drivers that led to such volume decline? And second, is there any change in our outlook going forward? What happened? There are a few factors that explain beer volume decline in Q1. First, early Carnival. The earlier the Carnival, vacation is cut short, and as a consequence, beer consumption levels tend to suffer. Second, poor weather.
Especially in January and February, we had more rain and lower temperatures across the country when compared to the first quarter 2017, particularly in the southeast region, where we have a stronghold. Third, macro. The consumer environment in Brazil remains volatile. It is a reality that unemployment rate is still very high, and the real disposable income is recovering at a slow pace. These three drivers together led to a weak beer industry that, according to our estimates, declined between low and mid-single digits in the quarter. In addition, we also faced a hard comparable in Q1 2017 when we substantially outperformed the industry. With that, I would like to highlight that even though we underperformed the industry this first quarter, we don't see any structural change in our market position.
One of the reasons for that is that when we mention industry figures, we are referring to sell out and not sell-in data. Depending on inventory levels at the retail channel and pace of the stocking, there may be significant difference between the two of them. As such, in fourth quarter 2017, our volume was up 5.1%, while the industry was flattish. It is fair to say that at that time, retail was expecting a strong summer season. Regarding first quarter 2018, summer was actually impacted by a poor weather, and as a consequence, the sell-out was lower than expected, leading to a slower de-stock. If you analyze our performance during fourth quarter 2017 and first quarter 2018 combined, volume was down approximately 1% in line with the industry.
Having said that, I will now move to the second question, if there is any change in our outlook for the balance of the year, and the answer is no. Our positive outlook remains unchanged as, one, since the close of the quarter, the trends are positive. We have seen an improved performance in April, and our beer volume is back to a positive territory. Second, we have the World Cup, a major event with a strong execution approach. Third, we remain consistent on our commercial strategy, leverage our growth platforms, and despite the challenging quarter, we still managed to make a good progress in each of them. The strategy to elevate the core. Skol, our easy drinking lager, closed the summer season with a strong carnival.
The brand promoted the most important street parties in Brazil, providing breakthrough experience to more than 40 million consumers in more than 40 cities. Also during the quarter, Skol maintained its position of being the most innovative brand in the market and launched a new package, Skol Long Neck Thin with a pull off on its crown, helping consumers open the bottle more easily. Now talking about Brahma, our classic lager. In Q1, Brahma maintained a good trend of 2017, strongly outperforming the industry. Looking forward, Brahma is building momentum as the World Cup approaches. The brand has been part of the Brazilians' consumer life since the first edition of the World Cup in 1930. For the 2018 edition, we will keep the tradition alive, executing strong activation that will evoke all its heritage.
Brahma's most recent action was the reprinting of historic labels that adorned its bottles during the years in which Brazil won the World Cup, 1958, 1962, 1970, 1994, and 2002. The new labels were distributed across the whole country with an incredible positive response from consumers. Still on Brahma's family, Brahma Extra, with its three variants, lager, red lager, and rice, delivered strong performance in Q1, with a volume growing almost 100% and reaching more than 1% of our beer volume in Brazil. Going forward, we see that Brahma Extra has a great potential to continue to grow, providing to consumers the first three double alternative and driving positive mix. Finally, Antarctica also delivered a memorable carnival in Rio de Janeiro and in Brasília, reaching more than 20 million people.
Along with that, as I mentioned in our last call, Antarctica launched its new visual brand identity during the quarter. Early results indicate that the new VBI will be a major success. Now moving to premium. Our global portfolio of premium brands comprised of Budweiser, Stella Artois, and Corona grew double digits in Q1 2018, meeting the rising awareness of Brazilians for premium brands while delivering memorable experience such as the Lollapalooza. Budweiser sponsored the first edition of the festival in the U.S. back in 1991, and inspired by this heritage, in March, the brand sponsored the Lollapalooza in Brazil, featuring several iconic singers. As we move to Q2, Budweiser will also execute a remarkable activation during the World Cup, increasing its awareness and further consolidate its strong position in the premium segment. Still in premium, Stella Artois is also doing well.
For the second consecutive year in a row, the brand launched a global campaign, Buy a Lady a Drink, in partnership with Water.org to help raise awareness of the global water crisis, inviting its consumers to lea
ve a legacy. Going forward, we're excited that our premium brands are well positioned to keep delivering strong results, not only in the short term, but also in the long term. It's fair to say that even though we have substantially improved our premium volume performance in the last five years, there is still much more to be done, especially considering that premium volume remains underpenetrated in Brazil as compared to the other markets. Now talking about smart affordability. We have been developing several initiatives related to package and go to market, which tackle the affordability issue in Brazil without impact on profitability.
We believe that to foster beer consumption in the country, especially in the underdeveloped regions, we have to steadily evolve with this type of initiatives. Given the importance of affordability, we incorporated this as one of our growth platforms. Having said that, our returnable glass bottle strategy in the off-trade remains high in our agenda with the 300 ml returnable glass bottles for our minis delivering more competitive consumer price. Finally, moving to different locations, in home and out of home. As we start the year, we continue to accelerate our trade programs, putting great effort to ensure high service levels everywhere. We are confident that a consistent execution in the on-trade and in the off-trade enables us to step up consumer experience in both channels while building strong brands. Before closing, a quick run through our non-alcoholic business in Brazil.
NAB had a very challenging quarter in terms of volume that was down 19.4%. There are mainly two drivers that explain such performance. One, a hard comparable in first quarter 2017 when the soft drink industry declined by high single digit and our volume was flat-ish. Second, an industry that's still being impacted by low discretionary spending, falling by mid-single digit in first quarter 2018. However, as mentioned by Ricardo, despite facing weak volume, we still managed to increase the EBITDA and expand margin. While we are not satisfied for our NAB volume result this quarter, we are confident that we are implementing the right initiatives needed to strengthen our foundation and which will enable us to deliver improved volume with a more profitable business, and as a consequence, deliver a stronger EBITDA growth.
Before moving to the Q&A, I would like to close with a final message. As I just mentioned, as we turn the page on Q1, the trend is positive. In this context, and also supported by a strong execution during the World Cup, we expect beer volume to resume growth in Q2 2018. The World Cup will also bring a great opportunity for NAB with Guaraná Antarctica as the official sponsor of the Brazilian team. With that in mind, we are optimistic about our business in Brazil, and we are committed to keep consistency in executing the initiatives implemented under the growth platforms. Remaining confident that we have a strong plan and great portfolio to further accelerate EBITDA growth versus 2017. Finally, we are also excited that all the important countries in which we operate, Argentina, Uruguay and Panama, will participate in the World Cup.
We also have a great plan to execute a strong 360 activation in all these countries, further enhancing direct equity of our brands. 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 touch tone 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Luca Cipiccia with Goldman Sachs. Please go ahead.
Hi, good afternoon, Bernardo, Ricardo. Thanks for taking my question. I wanted to ask two very briefly. The first on the beer volumes outlook. I appreciate the details that you gave on the second quarter, but maybe if you can add, if we look at the industry overall as we size the type of catalyst or contribution that the World Cup may have and the improvement, the sequential improvement that it seems you are expecting, do you think the industry will be able to show positive growth in volumes overall this year? Do you have any visibility on that? Maybe if you have any comment, that would be the first one.
Then secondly, on the non-alcoholic beverages, it seems that the debate on affordability in that category has also been quite relevant. You know, the Coca-Cola system seems to have moved more focus on that. I'm just wondering, you know, the relative underperformance of your portfolio, does it have to do more with the type of, let's say, price positioning that you have or mix positioning that you have? Or rather, you know, as the biggest player in the market pushes a little more on affordability, maybe you don't have as many tools as they have, given the difference in scale and brand portfolio. If you have any additional qualifier there as well, it would be really useful. Thank you.
Thanks, Luca. Thanks for the question. I think first, linked to the industry and the outlook, I think we're not commenting for the full year. As I commented in my speech, we really expect for the second quarter for the volume to resume to grow. Our performance will be better in the second quarter. I mean, we have the EBITDAs of April and the initial numbers of May. We are positive about our volumes in terms of the second quarter. For the affordability issue, I think that as we now have been implementing initiatives in this front since the last meeting.
We acknowledge that we need to keep developing affordability initiatives to boost the beer volume and expand the beer category, especially in the underdeveloped regions like the Northeast, for instance, where the disposable income is low. What could be done? For instance, one, what we've been doing in terms of packaging, such as the return of glass bottles in the off-trade, which we are now expanding even more in subsegments of the off-trade. That takes time because we have to go there to visit, I mean, to put the crates and so on. But we're doing this in market bots and pick stocks and among other subsegments of the off-trade. Second, the go-to-market. That's very important. We are serving better and serving more points of sale enables us to deliver our products direct.
It's and able to manage the right price across the whole country. Doing that and increasing the number of point of sales that we're selling with the right price, a consumer price, and doing this in a profitable way helps a lot to be more affordable SKUs and brands overall in many regions in Brazil. The third thing is that innovation pipeline. We have been studying that and working on that to really bring to the market innovation like it's done with the 300 ml, but not only package in other fronts as well, that you could not and will not comment, I mean, for competitive reasons. The only thing that we not do is to play in the value segment with no margins.
That we don't do. We have a strong role in our core. Our premium is evolving. The portfolio is doing very, very well. Really to bring volumes, with no margin, selling one way cans, with zero margin or negative margin is not our game. Having said that, for the big scheme, that's why we put in our platform, I mean, now it's even more clear. Then we wrote that, thrive is micro affordability, that's it's a profitable one, the kind of affordability that you are searching for.
Just quickly. Oh, sorry.
Going to the question that you ask about, low alcoholic beverages specifically. Just to highlight that, you know, that our pricing strategy is to increase price level inflation. When you look at when price was taken in the second half of 2017, Q4 2017 after price increase, the beverage category grew by 9.6%. Then Q4 versus Q1 2018, the beverage category was actually down 11.2% as a result of the catch up of the state taxes. Again, I think the no alcoholic business is a more elastic one, and all the issues that Bernardo discussed get a little bit amplified in the very short term that were discussed.
We are very confident in the strength of our brands in that portfolio, Guaraná Antarctica and Pepsi specifically.
Just quickly, with the premium segment of the non-alcoholic business, is that showing a similar resilience or relative outperformance as what you commented about in beer or like what you would call premium within non-alcoholic? Is that also doing better even though it's much, much smaller? I appreciate that.
Yes, Luca, it's doing better. The portfolio of premium, the juices and the fusion energy drinks are doing very, very well. That's one of the bets for the future.
Thank you. Thanks.
Thank you, Luca.
The next question comes from Isabella Simonato with Bank of America. Please go ahead.
Thank you. Good afternoon, Bernardo Paiva, Ricardo Rittes. My first question is on beer more in line with what Luca Cipiccia asked. I mean, considering looking for Q2 or maybe beyond, aside from maybe a better weather in April or the positive impact from the World Cup, are you seeing real signs of consumer consumption recovering on the beer? And also, thinking about affordability, do you think consumers are ready to take more significant price increases going forward without affecting volumes a lot at this point? That's my first question on beer. And second, regarding SG&A, this has been a line that has been very under control with selling below inflation. What sort of impact should we see from Q2 on that line because of the World Cup? Thank you.
Thanks, Isabella. Thanks for the question. I think, I mean, same question that Luca asked, that you just said in terms of, I mean, kind of view of the industry for the future. I think at first have to acknowledge that the consumer environment in Brazil is still soft. Disposable income is growing at a slow pace, and unemployment is still high. In any case, a gradual improvement of macro indicators should be supportive for the beer industry as the year progresses. We should also keep in mind that the beer industry is one of the last to get into the crisis and one of the last to leave this crisis as well. All in all, leaving the first quarter behind, we are optimistic about our business in Brazil.
We're confident that we'll be on the right track. We really expect going, I mean, for the future, yes, better industry given that, again, Brazil's disposable income one day will be better, and it will, and then with the impact in the industry. The industry, again, is one of the last ones to enter in a crisis and one of the last ones to leave the crisis as well. Looking to the SG&A, I think Ricardo Rittes can say much.
Hi, Isabella. Then again, just highlighting what Bernardo just said. We are excited about the future and noting what Bernardo also said that we are already in May, so we have visibility aside from the World Cup on somehow an improvement because of the reasons that Bernardo explained in his. Regarding SG&A, you recognize that we don't provide any specific guidance on SG&A by quarter.
You know, it's fair to assume that there might be some phasing, but nothing that will be notable. What we have been doing recently in the last couple of years is always to provide or highlight or provide like specific guidance or anything that should be notable, going forward. I think that you had a question regarding affordability. Could you repeat, Isabella?
Yeah. Thank you, Bernardo. Just in line with the comments for the industry. I mean, if you given the scenario of a slower consumption recovery, if you think consumers are ready to take more significant price increases, without having still a significant impact on volumes.
I mean, we don't comment on our pricing policy. I mean, the only thing that we comment is that our natural inflation factor is our long-term policies to grow in line with inflation plus any tax increase over time, so that we need to offset. I think the only thing that it's fair to say is that when you execute better, when you serve the box better, we'll be able to manage the consumer price better. Sometimes, the number in terms of the price to a point of sale, and then this number goes to the P&L, is not exactly the same number. It could be higher than the number that goes to the final price of beer in the off trade, in the on trade.
We think that we're doing pretty well in terms of evolution of our service level, and we're getting much, much better, providing much better service to the point of sales. Then this has an impact in the way that they price our beers. Which means that we can mitigate any impact, including in terms of price, PTR increase, for the point of sale level. Excellence in service helps affordability as well. That's one kind of thing that I try to highlight in the comments that I need to look.
Great. Thank you.
The next question comes from Lauren Torres with UBS. Please go ahead.
Hi, everyone. Earlier today on InBev's call, Brito talked about Brazil being in margin recovery mode. You know, he talked about factors that we heard from you before, particularly the cost environment being better as the hedges rolled off. But he also spent a little time on positive mix with respect to premium brands and the growth of RGBs. I was hoping you could just talk a little bit more about, you know, positive mix for this year, because sensing that the volumes are recovering, the cost environment's better, the pricing is in place, something incremental could be more from the mix side. And looking at your historical EBITDA margins, we've been north of 50% in the past, now we're closer to the low 40s%. How should we think about this progression?
Is there a lot of upside from mix to consider or should we not get too excited about the lift on the mix side? Thanks.
Hi, Lauren. Thank you very much for the question. Going a little bit long term, we're very excited with the evolution of the Brazilian business, if you will. I think that's what Brito mentioned as a recovery mode. Of course, a part of our business has like a fixed cost. Every time you grow the business, you have like a evolution in terms of the margins. I think that's. As Brazil gets out of the crisis, GDP starts to go to the positive side and et cetera, there's like a top-line benefit when you look ahead and we look forward. I think that's the first important, if you will, dimension. The second dimension on the cost side.
If you take like a very, very long term, we have managed to, over time, to have like costs to grow a little bit lower than inflation. With the size of our costs linked to FX, for example, there's some volatility in this. We use hedges to smooth that volatility for us to be able to react operationally to market risk shocks. As a result, we have some visibility in a couple of quarters ahead of us in terms of what to expect, in terms of the impact of the FX on our costs going forward.
As we explained in the last quarter's call, the average effects for this year is 3.16, and the current effects, which is closer to 3.5-3.6, is much higher. As a result of that, also there's an improvement year-over-year that flows into the P&L in a way of that impact in itself in a way of a positive trend towards margins. In terms of the mix itself, long term, premium has grown from 5% of the total volumes to more than 10% of the total volumes, and that continues to be the case quarter after quarter after quarter. Over time, that also serves as a positive force into our, like let's say, margins.
Net, if I could like summarize all that, I think Brito also a couple of quarters ago mentioned that, the way we see the margins is just like a high water mark and not it's not something that we believe was like the peak of the margins or anything. It's just a high water mark that we need to run the business. Over time, you know, there's no reason for us, not to, you know, not to work towards that direction. I think, Lauren, linked to the, to the premium segment, I think if you see globally on, I mean, premium average rate is around 20% of the mix of the industry. In Brazil, it's a little bit, I mean, around 10%, a little bit higher than that.
If you see some regions of Brazil or even countries like Paraguay, that premium is already 20% of that industry, shows us that we have room to grow the premium segment in Brazil with good impact in margins as well.
I guess with that said, I mean, you know, I quoted that over 50% margin you've given us in the past, and I think today you did say there's no structural changes as far as your market position. There's no reason why we shouldn't get back to some of your historical margin levels.
It's like again, it's not a guidance, but it's just a high watermark. The 50%+ margins, that was a reference to us. Nothing prevents us from reaching those margins again. The only structure change in our P&L comparing, for instance, 2012, 2013, is the other operating income line, which has declined. It was designed to represent 7-8% of net revenues. Now it represents around 4%. Besides that, I think the strategy of the company is the same and there's no reason for us not to get there.
Okay, great. Thank you.
The next question comes from Thiago Duarte with BTG. Please go ahead.
Hi, good morning. Well, a couple of questions on my side. First, I would cycle to Canada, and I would appreciate if you could comment a little bit more on the cost things there. You know, you mentioned, of course, the tough comps as one reason for the increase in the cost year-over-year and the increase in imports. But even if you look on a unit basis, what we see is the costs are much higher level than we saw in the last many quarters. Just wanted to understand whether this import issue is something that we could see in the coming quarters. That would be like a new normal in terms of cost magnitude in the operations there, or something that we should be seeing as non-recurring going forward.
I would appreciate some comments on that. Second, I would love to hear from you guys a little bit more on the mix in Brazil. You guys commented on further growth in the premium segment. In RGB, we know that they are all accretive on the net revenue per hectoliter. If you could a little bit disclose to us how much this mix has contributed to the increase in net revenue per hectoliter year-over-year. As well, I would love to hear if you could comment on the impact on the net revenue per hectoliter from the exclusion of the ICMS from the fiscal things basis as part of the calculation of the total deduction on gross revenue. I would appreciate that as well. Thank you.
Hi, Duarte. Ricardo here. First, let me start with Canada. With Canada, if you remember, like the first quarter of 2017, EBITDA grew 17.5% at that time and was also impacted by the COGS line, creating a little bit of a reference base. If you look at the full year, and again, the shorter period of time they look, the more volatility you might have due to specifically the imports of that goes to Canada. If you look at the full year, EBITDA of Canada grew 0.9%. Over even like just four quarters, this is analysis of the business adjusted because you get a full year, you don't see that type of noise flowing to the P&L.
To answer your question, whether it's a new normal, no, this is not a new normal. I think, just the same way that last year created a comparable basis, I think you again, over time, you shouldn't see anything different in the Canadian business. Related specifically to the tax issue, meaning you specifically asked how much of the net revenue per hectoliter increase came from the VAT from the excise taxes specifically. Again, it's not that much because if you remember, in addition to this, we had also the increase in taxes based on the law approved in 2015.
There's a reduction in the reductor of the beer business import taxes, and that was the steepest one in 2017 since the law was approved. Again, in 2015, that reduction was 20%, 2016 was 15%, 2017 was 10%, and 2014, 0% in the beer for up to 400 ml containers. It's a big change. One thing and the other, you have to look at the difference in the net basis, which is not that relevant.
I think, Thiago Duarte, to talk about the mix, thanks for the question. I mean, just something to reinforce before that, the taxation, there is an upside in the VAT, but a downside in the federal tax. That's what exactly Ricardo said in this first quarter. To the mix, I mean, very difficult for us to really disclose the numbers. But to grow 7.7% year-over-year in net revenue per hectoliter, I mean, compare this quarter to the other quarter in the last year, for sure, you have an annualization of the price increase that we've done in the third quarter.
Yes, mix and RGBs help us on that because it's a good growth in terms of the net revenue. That makes sense in our policy, as we always say, our mantra that, I mean, we increase net revenue in line with inflation plus any tax offset. That's what I could say to you.
Is it fair to say that on a constant mix basis, your net revenue per hectare is growing in line with inflation, as you just said? Or should I think in terms of the gross revenue per hectare in terms of a constant mix basis, sorry.
No. If you look at over time, the answer is yes. If you look at specific local or other, no. If you look, for example, the last three years or five years, if you do that calculation, you're probably gonna get very close to the exact number in terms of net revenue growing exactly in line with inflation.
Thank you.
Thank you very much.
The next question comes from Antonio Barreto with Itaú BBA. Please go ahead.
Hi, thanks for the question. My question is going back to the mainstream. When we talk to our channel checks, we believe that you guys are suffering a bit more on Skol than on the other brands. So my question is, if you could comment, at least on a qualitative basis, how the brand preference for Skol has evolved. You mentioned that the Carnival was a very good period and brand activation for Skol in the first quarter of the year. I would like to see if you guys have seen any kind of uptick in the brand preference for this brand. Looking for the rest of the year, it seems to us that most of the activities are related to Brahma, especially the World Cup.
I was wondering if you guys are seeing anything else relevant to make us think of any kind of recovery or any kind of uptrend on Skol brand preference?
Thanks, Antonio. It's a very good question. I think that first, I mean, we have been studying, I mean, in the last years, all the trends that are coming in many markets including here. We know from that one thing that is important in terms of attributes for brands, I mean, drinkability is key, but all of the things about the flavor and so on, this attribute of flavor, it's important as well. This is the beauty that we have, Ambev has a portfolio that can cover that. That's why I have been saying to you for, I mean, two or three years, that we have easy-drinking lager and a classic lager. That's why both brands are very, very important.
In terms of the equity, both brands are very, very strong. Then all the indicators that we have from many kind of research companies show that Skol is the most powerful brand in Brazil by far. But yes, I mean, this attribute of flavor is growing in Brazil. The good news there is that we have Brahma, and Brahma is booming, growing big time. That's what I always say to you that it's not a one brand game, it's a portfolio game. That's why Ambev is so, I mean, the portfolio that Ambev has is so strong because it can play in the need states, different need states, attributes that consumers value for specific occasion or for specific brands. Skol is doing well in terms of equity. It's even younger.
I mean, we're talking about the diversity a lot with Skol, connecting young people. We just launched the Skol One Next thing, that's amazing. All the comments that you see in the social media is doing pretty well, and we have innovation ahead of us. On top of that, yes, Brahma is doing pretty well. It's our classic lager that delivers more flavor. Brahma is a huge success. In our core business, we are very well in terms of the market share, in terms of the equity. I'll say to you, the only segment that we really it's an issue for us is the value segment. The value segment, we don't play because the value segment is just volume that goes for one guy to another guy selling brands with no margin.
That's not our game. In terms of the core brands and the core segments, we are very, very strong. Brands are strong. The variants are strong as well. In the premium segment, global brands are growing, the portfolio is becoming even stronger.
Just to add something to what Bernardo just said. Regarding Skol specifically, your concern about, you know, the remainder of the year. We have a lot of exciting innovations in the pipeline, which we cannot disclose in advance for competitive reasons, but we do have a lot of exciting things for Skol.
I think that given that all these studies and the deep dive that we've done in the last years really are making I mean, ensuring that we are building a portfolio to last. And based on the innovation that we do in the market. Just to I mean, if you see two years ago, Brahma Extra, that's a variant of our classic lager and more bolder I mean, it was basically nothing in Brazil. Today, it probably be around 1% of our volume. Core plus, we are very profitable. We always prefer to look up from core and up, and build the portfolio from there and not look down and go to the value segment.
Thank you. Just a small follow-up on that. Looking at the VBI changes that you guys have implemented on Skol, are you satisfied with the results? Anything that you can comment on that front?
Yes, we are. I think it was very important for us. It really was part of the change of the VBI and then for this brand become even more younger. Because all the arrow thing had come back to use the arrow. Then you see after changing the VBI, all the campaigns, we started to use again in a different way, but use again the Desce Redondo claim, and the positive results in terms of equity started to appear. I think that, yeah, they must be different, Antonio Barreto, because Brahma is one, is a classic lager, Skol is an easy drinking lager.
Yes, I mean, for all of the brands, including for Skol, we always have room to improve in terms of the innovation that Ricardo just said, and in terms of the VBI as well, if you see any opportunity to any kind of adjustment.
Thank you.
Thank you.
The next question comes from Alex Robarts with Citi. Please go ahead.
Hi, everybody. Thanks for taking the question. I mean, I also had a question on portfolio in Brazil, and then a second one on Brazil COGS. One of the trends, at least our research has shown is that there's emerging growth or accelerating growth of this category of pure malt or in, you know, what you call the puro malte. You don't really talk about it in your literature and such. Now, I wonder if you could comment a little bit about how that segment is doing. I mean, I have the impression that pure malt beer is as a category kind of similar in size to the premium space. How are you thinking about that?
Is it in fact the growth there outperforming the industry? What is the competition doing? Are there some strategies around that pure malt category? That's the first question. I'd like to come back with a COGS one.
Thanks, Alex. I think at first, I mean, if you see the history of beer, more than 11,000 years was marked by the diversity. Beers were, I mean, people grew beers, I mean, 11,000 years ago, and then with the ingredients that they had in that specific region. Including malt is not even an ingredient. You can, I mean, you can malt everything. I mean, barley, rice, corn, everything. The issue is that what we always say, but the point is of Ambev, I mean, as being a beer company, we would like to and doing that to provide diversity in beer. Which means that we will have, I mean, beer, beers and for, I mean, classic lagers, easy drinking lagers, full body, light.
Pure malt, one beer, 100% of barley, malted barley, it's an option as well, and we have, like Tramessa. I think that the most important thing again is the portfolio game. It's very, very important for us to have, yes, for people that would like the pure malt so-called beer, we have, and we already have. Yes, it can improve as well. Yes, it can. I mean, it can reinforce that part of the portfolio. The most important thing is diversity in beer. It's not a trend because for us, we're not here for two years. It's not the trend of the day. We have to see 10, 30, 50 years from now, just to give an example.
Just to confirm, this is a segment that's growing faster than the industry that's equal or bigger than the premium. It sounds like with the initiatives of Brahma Extra, you might be under indexed there. Is that fair to say in that category or it's a work in progress?
Alex, I think that it's a segment that is growing. It's Ricardo here. It's a segment that's growing. As Renato said, our strategy, our approach is a portfolio approach. If there's any segment in the market that we under index, over time, what we tend to do, we evolve our portfolio in order to address consumer needs. Again, consumer needs are first. If that is the case, again, we have a large operation, a very strong portfolio. At any given time, we could evolve our portfolio to address that.
Again, that provided that there is a consumer need, long-term sustainable, that is changing, not just a fad, if you will.
Got it. Fair enough. Just on COGS, sorry. You know, the 2.5% cash COGS decrease in the quarter in Brazil was an interesting one for us. We had, I guess, thought it would fall a little bit more, and I appreciate your detail around how, you know, the sugar costs with a non-alcoholic were higher and then the FX gains and FX dollar COGS hedge helped the beer COGS fall. Net, you're down this 2.5%. As we think about, you know, going forward, is it fair? How should we think about aluminum in terms of the commodity hedge?
I guess we understand that it only kind of started a bit in the COGS in the first quarter, but it'll probably be more of a factor starting in the second quarter. However, we have the sugar also kind of rolling off and coming back down to the international prices. So as we look maybe in the short term, the cash COGS in Brazil, would it be fair to say that the FX hedge effect continues to offset the commodity, particularly aluminum and kind of with that, you know, we've seen a new fresh five-year high with aluminum on the back of several things, including what Trump has done with those tariffs for China.
How should we just kind of think of that commodity hedge for the remaining of the year? Thanks very much.
Hi, Alex. Brazil beer cash COGS corrected a little about 2.5%, as you said, as we continue to cycle our favorable effects. Beer Brazil was down 4.8% as higher commodity prices are more than favorable effects. The non-alcoholic business was up 4.9%. The 2.5% is a combination of both. Despite favorable effects, we're still impacted by higher sugar prices and volume decline effect on fixed cost evolution. Variable costs. Our variable costs will be impacted by higher commodity prices, especially aluminum, which will be benefited by favorable effects. For reference, our average implied foreign exchange hedge rate for 2018, as we said, is gonna be 3.16 this year, which compares to the 3.59.
Again, this is like the highest market risk factor that we have within our P&L. Aluminum is the second one, which represents around 10% of the Brazil total COGS. Again, it's on one hand, FX helping us a lot. On the other hand, aluminum with positive hedges, but going forward, aluminum going up. Overall, for the next couple of quarters, if you will, is a more favorable environment than what we have had in the last.
Okay, thanks.
The next question comes from João Soares with Bradesco. Please go ahead.
Hi, good morning, everyone. I basically have two questions on outlook. The first one is in Argentina. Has the recent macro developments affected your outlook for beer consumption in the country? Or should we continue to see this trend in gaining share for beer to continue to positive volumes there? The second is on Canada. You have basically, you know, five quarters of flattish to negative volumes in a year-over-year basis. Is it fair to assume that we should expect some sort of a volume rebound in the country? Or do you still see the industry there on a negative trend?
Hi, João. First in terms of the hedging policy or in terms of Argentina specifically, given the hedging policy, the current movement will impact our COGS just next year. There's no impact, immediate impact on that, for Argentina. Of course, we will continue to monitor the situation and, in Argentina specifically, and our concerns are much more longer term in terms of consumption, GDP and et cetera, and how this relates into the economy. We're very excited with the prospects of the Argentina and the last region overall. Very excited. Regarding Canada specifically, you know, it's a different country when you compare to the rest of the portfolio of countries that we have, in Latin America South, Latin America North, including Central America and the Caribbean.
Here we have essentially three main drivers in terms of volume growth longer term. Number one, demographics. Number two is the disposable income. Number three, all the innovation within the industry can do, including, for example, in Brazil, the 300 mL returnable that we over time, we contribute to the long-term growth of the overall industry. In Canada, demographics not necessarily longer term help us that much, but it's a very profitable market. It's a market in which it serves also as a laboratory in terms of innovation. It's a market where, for example, craft and some of the premium have a higher weight in comparison to most of our other countries.
Again, it's a market that we're excited also for the long-term prospects and our relative and competitive position there have improved significantly over the last couple of years.
Okay. Okay, thank you. Thanks. Very good.
The final question comes from Mohammed Ahmad with FGP. Please go ahead.
Hi. Thank you very much for taking my question. Just a quick one on Canada again. Could you give us a little color from a longer term perspective, when should we expect profitability to bottom, and to what level can you get the improvements? Because if I look at it, say, over a three-year view, volume's essentially been flat. You've had a certain degree of net revenue per hectoliter or liter improvement, maybe sort of like 1-2% a year, which in itself, those two combined is not bad for a mature market, but COGS over three years has gone up a lot. Could you just give us a sense of what we should expect sort of medium term, 2-3 years out?
Also, recent changes in Ontario distribution that I see, does that impact your business in any material way? Thank you very much.
Hi, Mohammed. Thank you for your question. Again, we don't provide that specific guidance long term for Canada. Canada grew top line 0.5%, year-on-year in the first quarter. Net revenue per hectoliter also healthy. Michelob Ultra specifically had a great start in 2018, finishing Q1 with 50% organic growth. If you notice Canada, one of the things in terms of trends that we see in Canada, when you look at the craft industry and you compare that to the U.S. or so, is relatively underdeveloped but growing a lot. In the last couple of years, what we have done, so we adjust somehow our portfolio.
If you look at Mill Street, for example, the organic beer that we launched there or Archibald and even like the cider ready to drink type of products that we created there, it's a moving portfolio. It's a change. It's evolving portfolio. Again, there's no reason for us, despite of not giving any guidance and specifically again, the shorter the term that you look, the harder for you to see. There's no reason for us not to have not only the profitability that we have in the Canadian business, but also to resume a growth, if you will, in terms of margins overall. Remember that in 2017 full year, again, EBITDA grew by 0.9%.
Thank you very much.
Thank you.
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, Operator. Before finishing our call, just a quick comment regarding Brazil. I'd like to reinforce that with the first quarter behind us, we have a positive view about our business in Brazil. We remain very confident in our strong growth platforms. Very confident in a solid innovation pipeline that will help us to resume beer volume growth in the second quarter and further accelerate EBITDA growth for the rest of the year. 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.