Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's Fourth Quarter and Full Year 2016 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 section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the company.
They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with Q4 2015 or full year 2015 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.
Hello, everyone. Thank you for joining our 2016 Fourth Quarter and Full Year Earnings Call. I will guide you through operational highlights of Brazil, CAC, LAS, and Canada, including our below-the-line items and cash flow. After that, Bernardo will give you more details about our performance in Brazil and how we are positioning ourselves for the year to come. Starting with the main highlights of our consolidated results. 2016 proved to be one of the most challenging years of our history, as solid growth in our international operations was offset by a negative performance in Brazil. On a consolidated basis, top line was up 0.4% in the quarter.
In the full year, top line was up 1.9%, with volume decline of 5.8%, more than offset by a net revenue per hectoliter growth of 8.3%. EBITDA was down 12.1% in the quarter and 6.9% in the full year, reaching BRL 19.5 billion with an EBITDA margin of 42.7%. Net profit was up 13.5% in the quarter, while on a normalized basis, net profit was down 15.9%. In the full year, net profit was up 1.6%, while adjusted by exceptional items, net profit was down 9.7%.
The difference between reported and normalized profit is driven by the swap of assets carried out with ABI, pursuant to which we have agreed to transfer our businesses in Colombia, Peru, and Ecuador in exchange for the Panamanian business originally owned by SABMiller. Such transaction, when accounted for using the preceding value for the Panamanian asset and the cost value for the asset transferred to ABI, resulted in a BRL 1.2 billion non-cash gain. In Brazil, our EBITDA was down 19.7% in the full year. We're nothing but disappointed with our performance. It is important to understand the main drivers that have impacted our full-year results. The first one is connected to the adverse macroeconomic scenario in Brazil.
Economic activity reduced for the second consecutive year, with unemployment rate peaking the higher rate it recorded in years, leading to the continuous decline of disposable income. In this environment, we also lost 120 basis points of market share for beer, from 67.5% in 2015 to 66.3% in 2016. The second one is that in the first quarter of 2016, we are subject to VAT increase in some states, putting additional pressure on our top line. The third one is related to the temporary impact of the FX in our cash cost.
As we are very systematic with our hedging policy, the devaluation of the Brazilian real in the second half of 2015, when the Brazilian real depreciated close to 60% year-over-year, has inflated our cost denominated in U.S. dollars, especially in the second half of 2016. Now, going into more detail of operational results in Brazil. Brazil beer top line was down 11.5% in the quarter and 5.7% in the full year. Our beer volumes were down 7.3% in the quarter and 6.6% in the full year, given the challenging macroeconomic environment. Our total market share for the year, according to Nielsen, was 66.3% versus 67.5% in 2015.
Net revenue per hectoliter in beer was down 4.6% in the quarter as we had a hard comparable in the fourth quarter of 2015, while on a sequential basis, it was up 17.3%, driven by our revenue management initiatives implemented during the quarter. In the full year, net revenue per hectoliter was up 1.1%, mainly impacted by tax increase. In addition, as part of our revenue management strategy, we use along the year our full portfolio of packs and brands to achieve more attractive consumer prices, including the 300 ml returnable glass bottles that accounted for 23% of our volumes in supermarkets in 2016. Now talking about Brazil, CSD, and NANC. Its top line was up 1.7% in the quarter and down 2.7% in the full year.
Volumes declined 6.7% in the quarter and 6% in the full year, in line with the industry as we estimate. As the adverse consumer environment is temporarily driving consumers away from CSD to low cost powder juices or even to tap water. Net revenue per hectoliter in CSD and NANC was up 9% in the quarter and 3.5% in the full year, driven by our price management initiatives. Our market share according to Nielsen was 18.8%. Brazil cash COGS per hectoliter and cash COGS increased respectively 20% and 11.5% in the quarter. In the full year, cash COGS per hectoliter was up 15.4% and cash COGS increased by 7.9%, in line with our guidance of mid to high single-digit growth.
The main driver for this performance was the temporary impact of effects, partially offset by the benefit of RGB, coupled with the continuous evolution of our cost initiatives. Brazil cash SG&A was up 2.2% in the quarter. In the full year, cash SG&A was up 3.5%, which while below inflation, is in the upper limit of our guidance due to mid-single digit logistics cost increase, decrease of administrative cost by low double digit, and high single digit increase in sales and marketing expense as we continue to invest in our brand. As a result, Brazil EBITDA was down 30.8% in the quarter and 19.7% in the full year. Bernardo will expand on this topic and discuss how we are positioning ourselves for 2017. Moving now to Central America and the Caribbean.
In CAC, we delivered another solid year. Our performance in the region was driven by double-digit top line growth with a good balance between volume and revenue management. Going into more details, in the fourth quarter, EBITDA in the region increased by 25.4%, reaching BRL 398 million, mainly driven by a net revenue growth of 8.9%. In the full year, top line was up 14% leading to an EBITDA of BRL 1.4 billion, an increase of 21.3% with a margin expansion of 220 basis points to 37.3%.
While flat-ish in the quarter, volumes increased by 6.2% in the full year, mainly driven by Dominican Republic, where we were able to significantly increase the beer category, hitting our highest ever share of throat, and Guatemala, where we had another year of market share gains with a strong performance of our Mexican brand, led by Corona, that grew double digits in the year. Going forward, we continue to be extremely excited with top line and EBITDA growth potential from our current operations and other non-organic opportunities, including Panama that became part of CAC as of December 31, 2016, pushing us closer to our dream of $1 billion EBITDA in the region. In Latin America South, in the quarter, top line was up 19.3% and EBITDA grew 27.6%.
In the full year, top line increased by 15.8% and EBITDA by 20.6%. Volumes were down 2.8% in the quarter and 8.3% in the full year. As the weakness in Argentina, given the adverse macroeconomic environment, was partially offset by strong performance in, number one, Bolivia, driven by the 710 ml returnable glass bottles launch of Paceña and route to market improvement. Number two, Paraguay, with the successful rollout of our 340 ml returnable glass bottle and the premium growth led by Corona and Bud 66. Finally, Chile, with strong performance of our global brands in the country. Top line benefited from a solid net revenue per hectoliter performance due to higher rate of premium in our beer volumes and implementation of our revenue management strategy.
While costs and expenses were still pressured by high inflation and unfavorable currency movement, especially in Argentina, we were able to offset this impact through top line growth, delivering a margin expansion in the quarter of 220 basis points to 48.4%, and in the full year of 180 basis points to 44.1%. As we move forward, we remain confident in our ability to deliver a solid top line in the region in the short term and better position ourselves for the future. Turning now to Canada. In the quarter, EBITDA in Canada increased by 3.2%, reaching BRL 491 million, as the organic top line decline of 0.5% was offset by lower costs through the margin expansion of 140 basis points.
In the full year, our top line was up 0.7% and our EBITDA declined 0.8% organically, while it increased 3% in local currency including our strategic acquisitions of brands in the fast-growing craft and near beer segment, such as Mill Street and Palm Bay. Our reported volumes grew 5.7% in the full year, mainly driven by the benefit of our recent acquisition, helping us to achieve the highest market share figure in 17 years. Organic volumes were down 1.2%, impacted by unfavorable weather, partially offset by strong performance from, number one, Bud Light in the premium segment as the fastest-growing brand in Canada in 2016. Number two, Stella Artois in the high end, reaching its highest share ever in the fourth quarter.
Throughout the year, we remained focused on pursuing an optimal balance between volume and price with our revenue management initiatives and the benefit of increased premium mix, driving a 2.3% net revenue per hectoliter growth in the fourth quarter and 1.8% growth in the full year. Going forward, we remain excited with our momentum in Canada with our complete portfolio and committed to continue to balance net revenue per hectoliter and market share to deliver profitable growth. Now moving to other operating income.
Other operating income totaled BRL 158 million in the quarter versus BRL 701 million of last year, mainly driven by the reduction of VAT government grants in Brazil from BRL 530 million- BRL 196 million due to number one, volume decline and revenue geographic mix as we have different incentives in different plans around Brazil. Number two, expiration of VAT government grants agreements that represent around 25% of the reduction in this line. In the full year, other operating income totaled BRL 1.2 billion versus BRL 1.9 billion of last year. Also mainly explained by the decline of government grants as a result of low volumes and revenue geographic mix. Now moving below EBITDA.
In the fourth quarter, we started to revert the negative trends in the previous quarters as our net financial results declined almost 20% year-over-year from BRL 1.1 billion in the fourth quarter of 2015 to BRL 908 million in the fourth quarter of 2016. Going to more details. Main items in the financial expense in the quarter were, first, interest income of BRL 86 million driven by our cash balance, mainly in Brazilian reais, U.S. dollars, and Canadian dollars. Second, an expense of BRL 416 million due to interest expense. Close to 40% of this is a non-cash accrual related to the put option associated with our investment in the Dominican Republic.
As part of the Cervecería Nacional Dominicana deal in 2012, a put option exercisable until 2019 was issued, which may result in an acquisition by Ambev S.A. of the remaining shares of Cervecería Nacional Dominicana for a value based on EBITDA multiple. This non-cash accrual expense increases over time as we approach 2019 as EBITDA grows, among other factors. Third, BRL 292 million losses on derivative instruments, mainly driven by the carry cost of our FX hedge, primarily linked to our COGS exposure in Brazil and Argentina. Given the interest rate differential between Brazilian reais or Argentine pesos to the U.S. dollars, we have financial costs associated to these hedges, which are called carry costs. Carry costs started to go down mainly due to the reversal of the Brazilian real.
If BRL and/or Argentine peso appreciates or interest rates and discounts continue to go down, carry costs are expected to decline even further. Fourth, non-derivative gains and losses have been another source of volatility in our net financial results, as most of the results included in this line are related to FX translation. As we benefited from the BRL appreciation in the quarter, we had a gain of BRL 220 million in this line. Fifth, BRL 401 million of other financial expenses, mainly driven by interest on contingencies. In the full year, net finance results totaled BRL 3.7 billion, mainly driven by, number one, interest expenses, which include the put option of our investment in the Dominican Republic of around BRL 600 million, and losses on derivative instruments.
The effective tax rate in the quarter was 9.9% versus 28.3% last year. In the full year, the effective tax rate was 2.4%, mainly driven by gains on other tax adjustments reported in the third quarter, of which, first, BRL 400 million is explained by reversion of withholding tax provision related to unremitted earnings from Argentina. As of July 23, 2016, new legislation in Argentina was enacted, revoking the levy of withholding tax over dividend remittance that was created in 2013. Second, close to BRL 800 million, driven by a one-time impact in the third quarter of 16 on the recognition of deferred tax assets on carried losses related to international subsidiaries.
From a cash flow perspective, in the fourth quarter, cash flow from operating activities before changing working capital was BRL 6.1 billion. We continued to revert the negative cash impact from working capital seen in the first and second quarters, generating almost BRL 1.8 billion from working capital. In the full year, cash generated from operations reached BRL 17.7 billion and CapEx totaled BRL 4.1 billion, with CapEx in Brazil declining 35% year-over-year to BRL 2.0 billion, in line with our guidance. Finally, during 2016, we returned approximately BRL 10 billion to equity holders in dividends and interest on capital. This figure does not include the dividend payment of approximately BRL 1.1 billion announced on December 22, but made only in February 23, 2017.
As our free cash flow generation continued to grow sequentially in the year 2016, we also continued to return the excess cash to shareholders. Thank you very much. I will now move to Bernardo before going to Q&A.
Thank you, Ricardo. Hello, everyone. We've been through a tough year, especially in Brazil, where, as anticipated and explained by Ricardo, three main drivers have impacted our results. One, the external conditions were very challenging with a volatile political and economic macro environment and negative disposable income, leading to the industry decline. Two, on top of a depressing industry, some states have significantly increased the VAT despite of the industry's strong mobilization to clarify that higher taxation brings to recession instead of additional revenues for the state. Three, our COGS was impacted by the FX, especially in the second half of the year, compressing our margins. We acknowledge that Brazil's long-term growth involves unavoidable periods of volatility and that the Brazilians are facing a very tough environment. We measure our performance based on absolute values, and we are not pleased with our 2016 results at all.
With that in mind, I want to concentrate my comments in Brazil before we move to the Q&A. The pillars that support our long-term growth in Brazil are still there. Favorable demographics, reduction of regional disparities, and consumers' continuous demand for innovative products and strong brands. Based on that, we made structural investments in our business, boosting our five commercial platforms in a transformational way. Start with Elevate the Core, our first and most relevant platform. In the last two years, Elevate the Core was even higher in our agenda, and we invested more time and resources to have the right insight to bring innovation and renovation to our mainstream brand. The good news is that some of the outputs of such initiatives are starting to hit the market as we speak. For instance, we are launching new VBIs for Skol and Brahma, differentiating and reinforcing the brand's attribute.
We are also improving our primary and secondary packaging, enhancing the brand's quality perception. This innovation started to be implemented in the end of 2016 and given its magnitude, it will continue to be rolled out along 2017. Early results are way positive. For example, tests with consumers have shown that Skol's new Visual Brand Identity has improved significantly its attributes of quality, drinkability, and modernity, and it has also increased consumers' interest in the brand purchase. Still talking about Skol, our easy to drink lager, the Redondo é Sair do Seu Quadrado campaign has been building equity attributes on top of a carefully crafted emotional connection of the brand with its core consumers. Skol also led our summer and carnival activation, sponsoring the most important street parties in Brazil, such as São Paulo and Salvador, delivering great experience to its customers.
A complete 360 execution through above the line TV ads, digital media, and in-trade activation has enabled Skol to reach more than 35 million people, making the Carnaval de Skol the biggest of its history. Now talk about Brahma. Brahma is our classic lager, recognized for its beer expertise and flavor. Brahma has a strong connection with its consumers through distinct variants together with soccer and country music platform. Football is a strong passion. Brahma is the sponsor of several country music events, such as the Villa Mix, Brazil's largest country music festival. The soccer platform, on its turn, brings regional proximity for the brand through team sponsorships and the Sociedade do Programa. Brahma's family is also composed by Brahma Extra, targeting the food and savor need state.
With three variants, lager, red lager, and vice, Brahma Extra has grown 250%, definitely shaping the core plus segment in the Brazilian market and enhancing their mother brand. Finally, Antarctica. Antarctica has been strengthening its connection with Rio de Janeiro and with the samba music. It just launched an innovative media campaign, reaching more than 10 million people with nine-episode series in YouTube. Antarctica was the official sponsor of the carnival in Rio de Janeiro for the eighth consecutive time. Those who were there could see the strong presence of the brand in the blocos. On top of being a strong regional brand, Antarctica has become aspirational in other regions, such as the Midwest of Brazil, also becoming the number one brand in key states in this region.
Over the course of 2017, our three mainstream brands will continue to leverage key brands in selling moments, strengthening the connection in their core target consumers and support our top line growth. Moving to premium. Premium has been growing and gaining weight over the years, and in 2016 it was not different. Working with a complete portfolio of international to domestic brands, Premium represent more than 10% of our volumes. Premium has also a very high preference way above its market share. Budweiser is our main brand and has been delivering amazing results. It grew more than 20% in 2016, a double-digit growth for the fifth consecutive year, and consolidated its position as the leading brand in the premium segment in Brazil. Budweiser's preference and brand attributes such as authenticity, heritage and quality are continually trending up. Now talking about near beer.
Near beer is driving incremental volumes in a profitable way. The Beats family, one of the most successful innovations in our history, continued to grow double-digit in 2016. We have launched Secret with its red bottle that together with Senses and Spirit already represent more than 1% of our beer volume in Brazil. With massive presence in the key brand selling moments and the strong activation during carnival, the cool and trendy Beats family also enhanced the equity of the mother brand. Moving to different occasions, starting with the in-home. RGBs are definitely a big focus this year. The returnable glass bottles were boosted by the national campaign, meaning everything that's good returns. Carrying our core brands and have an affordable proposition, they represented 22% of beer volumes in the supermarkets in 2016.
Going forward, with a strong learning process, we improve even more the execution, and as a consequence, we see the opportunity for our means becoming even more important and definitely changing consumers behavior. It is a huge shift with important implications as it's good for everyone. I mean, the people that drink, it's good for the environment as well, and it's good for margin. Finally, in the out of home occasion, we took the soft macro scenario as an opportunity to enter long-term sponsorship contracts, expanding our activation in key selling moments. Along with that, we are stepping up our go-to-market initiative to assure an improved service level everywhere, building a strong platform and make our brands even more available in the point of sale with the best-in-class execution. In summary, 2016 has been a tough year.
On the other hand, we took this moment as an opportunity to strengthen our foundations for the future, and we made structural investment in our business. On top of that, 2017 is widely expected to be a year in which main macro headwinds will dissipate as, first, inflation continues to decelerate. Second, GDP is estimated to be flattish after two consecutive years of decline. Third, unemployment, while still increasing, is expected to revert the trend in the second semester. Fourth, as a consequence, disposable income is likely to resume growth towards the end of the year. In this environment, we are cautiously optimistic in the Brazilian beer industry in 2017, especially for the second half of the year.
Our commitment is long-term in nature, and we are confident on our ability to gain market share and resume our top line and EBITDA growth, supported by structural investment we've made in recent years and by the strength of our brands. As part of our culture, our motivation to deliver big has not changed. It has even increased. That said, it's important to highlight that our market share for 2017 is increasing in a positive trend, showing that we are in the right path. Along with that, we expect cash COGS per hectoliter to positively evolve over 2017, increasing double digits in the first half and low single digits to flattish in the second half, mainly explained by the impact of the devaluation of the Brazilian real during the first half of 2016. We can move now to the Q&A. Thank you.
Excuse me. 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 Isabella Simonato with Bank of America. Please go ahead. Ms. Simonato, your line is open on our end. Is it muted on yours?
Sure. Good morning, everyone. Thank you for the call. I have two questions. First, you guys mentioned that the exploration of some tax benefits impacted the other operating income. If you could tell us if you're already able to renew those benefits or if not, if there is any expectation of doing that. Second, when you look at the guidance for 2017, you guys provided much less details compared to what we saw in the previous years. If you could explain the rationale of doing that, if it's because there is lower visibility at this point or for competitive reasons. Thank you.
Hi, Isabella. This is Ricardo. Thank you for your question. Well, let me start with your second question. Just as I start for the answer, our guidance has varied along the years. If you go back to 2010, we had only COGS per hectoliter and EBITDA. 2011 was COGS per hectoliter, volume, and CapEx. 2012 was COGS per hectoliter, volume in Brazil, net revenue per hectoliter and CapEx, so on and so forth. We vary across the years. We have not been like with the same guidance for a long period of time.
For 2017, we decided, while providing a more qualitative guidance in the outlook session, to limit the top-line quantitative numbers, as only Ambev within the four main players in the Brazilian beer market gave guidance over the course of 2016, therefore, driving to an asymmetric competitive dynamic. This is the reason behind our the way we gave the guidance for 2017. When we go to your first question, discussing specifically the other operating income, it was now mainly driven by the reduction of the government grants, like you said. This reduction essentially came for the two reasons that we explained. Number one was the volume decline and the revenue geographic mix, which explains 75% of the decline, and the expiration of VAT government grants agreement that represents around 25%.
We decided to give this breakdown in order for people to be able to separate and differentiate between what is consequence of the mix and the temporary impact and what has expired. Within the expiration, that's when you ask your question is can you renew and et cetera, just the comment that we can make is the concession of government grants is primarily linked to CapEx. From time to time, we may decide not to make additional investments, resulting in a loss of efficiency in tax incentives. When you look at the 2016 CapEx, which was down 35% in Brazil year-over-year from BRL 3.1 billion to BRL 2.0 billion, I think that's a driver that you need to take into consideration when projecting going forward.
As you see, Brazil accelerating, CapEx increasing, you could see a difference in this line.
Thanks.
Thanks, Isabella.
The next question comes from Pedro Leduc with J.P. Morgan. Please go ahead.
Good morning, everybody. Thank you for taking the question, and it will be regarding the pricing in Brazil beer. We saw a sequential improvement, you know, of about 17% to BRL 284 per hectoliter this quarter. Now, just trying to reconcile or imagine how we can carry this figure into 2017, 'cause it would be like a mid to high single-digit increase if you keep the 284 into the full average of 2017. Just help us understand if here we already had the full pricing effects of 4Q, then how much usually in 1Q is not sequentially net price per hectoliter drop. If it is this year, it's gonna be as substantial as it was in the last year, last 1Q.
Just trying to reconcile here how we should imagine pricing, if we can carry this nice number into 2017. Thank you.
Hi, Pedro. Thank you very much for your question. Like you said, I mean, on a sequential basis, net revenue per hectoliter was up 17.3%. Just to remind everyone that the VAT and excise tax variations impact prices to consumers. But even if fully compensated, would not impact net revenue per hectoliter. Therefore, as a result, net revenue per hectoliter is a good proxy of price increase, net of tax increases, if you will. As a consequence, the longer the period, the better or more precise is the visibility of the net revenue per hectoliter. As a result, you should expect some volatility in that line. For instance, if we go five years, our net revenue per hectoliter has increased in line with inflation, despite of some short-term volatilities.
Having said that, we continue to be confident about our strategy to increase our price in line with inflation plus any tax offsets. For that, I think just to develop a little bit on that, I think first, it's very important and most important for us to build strong brands, as this is the key to ensure the profitability of our business. That's why our first commercial platform is Elevate the Core. Second, over time, we have improved a lot of revenue management strategy initiatives, mainly through technology and our pack price strategy, allowing us to capture also significant net revenue per hectoliter opportunities. Third, when you look going forward, I think it's very important to take into consideration premium and near beer as they continue to grow, driving a positive mix impact. On the other hand.
The growth of returnable glass bottles presents a challenge for the future when you look only at the net revenue per hectoliter, you know, perspective, although they are margin accretive and they are good for the business.
Okay. Ricardo, thank you. Just again, back a bit to 17, should we expect this figure growing in line with inflation again, or do you still expect an adverse shift in mix and returnables? Just to get us some color. Thank you.
Again, Pedro, the type of guidance that we're giving this year, like we said in the guidance discussion previously, is a little bit of a more qualitative guidance. We're not giving like guidance, especially net revenue on a quarter-by-quarter basis. The drivers behind the volatility in that line, they're there. We continue to be confident about our strategy to increase our price in line with inflation plus any tax offset. The shorter the period of time that you look, you'll see, like you have seen in the past, some volatility in that line. Nothing out of the ordinary and we continue to be very, very confident about the strategy.
Thank you. That helps.
Thank you.
Thanks, Pedro.
The next question comes from Luca Cipiccia with Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. I wanted to ask two. One is more of a clarification on the returnables penetration. I think in the third quarter you said it was 25%. I think in this release, I think it states 23%. I was wondering if it's just a function of seasonality or am I interpreting this incorrectly? More generally, can you update us on not necessarily your push into this format, but how consumer reception, adoption is evolving and how much do you think it will stick, assuming that, you know, eventually, as you seem to suggest as well, you know, the consumer will recover? That's my first question.
The second, very quickly, just going back on the guidance. We sort of got used to the idea that you prefer to talk about, you know, the things that you can control. I think you've stressed that a lot in the past. I'm not sure I follow the rationale to not give indication about both SG&A and CapEx, which I think in the past were, you know, fairly discretionary, items for you to decide on how to spend, on how to invest in any given year.
On the CapEx and your comment about other before, is it fair then to assume that, you know, the as a percentage of revenues, put it this way, the other income should, you know, we should probably anchor it to what we saw in the fourth quarter, given that some benefits are expiring and some others are more conditional on growth and CapEx. I would assume CapEx is not gonna go up this year. Maybe if you can clarify a little bit on these points, it would be great.
Hi, Luca. As per the RGB and the off-trade, I mean it's important to highlight that RGB came from 4% in the off-trade in 2014 to 23% of our volumes in supermarket in 2016. I mean, no doubt it's already a great success. I mean, it's good for everyone, as always talked. I mean, for people to drink, good for environment, good for margins as well. On top of that, plenty research have shown that the minis have increased brand loyalty among their buyers with positive impact on brand attributes such as flavor, eco-friendly, and cost-benefit proposal. It has also improved the perception of heritage of the brand due to this heritage shape. Having said that, going forward, as we improve the execution, we see the opportunity of the minis becoming even more important, definitely changing the consumer habits.
Quarter by quarter this could vary, I think, but the main number is that we came from 4% in 2014 to 23% in 2016 and trending up. I think we are trying the right path with this strategy.
Luca, this is Ricardo. Also, to add to what Bernardo just said, the 25% was the number for the third quarter, and 23% is the average number for the full year.
For the year. Yeah.
As we have it growing from, let's say the average of 14% in 2016, you could expect that the average for the year tends to be in a growing pattern, a little bit lower than the end of the year. I think that's, I think that might help you in your calculations.
Right.
Now going specifically to the guidance. I mean, when you look at, historically speaking, and you're right, I mean, we prefer to give guidance, number one, on things that we control, and number two, on things that will not allow this, you know, asymmetric competitive dynamic. I think those are two important criteria. If you go back to the last, and I'm here with the guidance for the last, seven years of the company, we gave guidance on SG&A only in four out of the last seven years. Prior to 2010, I don't think we gave guidance at all.
I think, you know, going back to what the discussion that we had in the first question, for 2017, we decided that while providing a little bit of a more qualitative guidance in the outlook session, which might help you to come to the conclusion of some of those that you asked in the question, we decided to limit the top line and some of the, like you said, even the CapEx or SG&A qualitative numbers provided. Again, I think that's
Maybe just to qualify on the SG&A, on the stated ambition to rebuild market share, right? What role do you think investments in the brands comparatively to last year will take? I think that's gonna impact that line in particular. Is that what you said you wanna go back, you wanna rebuild market share. I think there's been a positive trend. How much of that you think will come from investments in SG&A? How much of that you think will be more sort of a pricing driven or mix-driven strategy?
I mean, just to you know, to provide you some assurance. There's not gonna be anything different than what we have done in the past couple of years. It's. You shouldn't expect any surprise. I think, when you look at market share, for example, the only publicly available source to measure our market share in the full year of 2016 is Nielsen, as the company disclosed in December 2013. The full year, according to Nielsen, market share was down below the range that we normally work to 66.3% in the average of the year.
As Bernardo pointed out in a growing trend, and it's important in terms of answering your question specific about SG&A, that one of the cornerstones of our strategy is the Cost, Connect, Win platform like we discussed internally and even externally. In this platform, I think it's you know, control of costs and controlling you know, expenses is not a program, is not something that is temporary here. It's a way of doing business. We try to be more efficient every year and every day on everything that we do internally. SG&A is not different.
I think adding to that, Luca, since our marketing and sales team have been building toolkits to build brands in a way that doesn't necessarily mean more investment, but way more efficient and way more precise. That's what we have been doing the last years, and then we are applying this year as we speak.
Thank you. Thank you very much.
The next question comes from Antonio Gonz``alez with Credit Suisse. Please go ahead.
Hi. Good morning, Bernardo and Ricardo Rittes. Thank you for taking my question. The first one is follow-up on Luca Cipiccia's last question. I was also curious about the wording that you used in the outlook for 2017 with respect to market share in particular. I think you didn't use the market share metric in the last few years in terms of your guidance. I wanted to ask, in light of the changes in the consolidation that is taking place in the industry, is 67%-69% still the range or over the medium term? I understand that 2017 has low visibility. Over the medium term, do you think it makes sense to have a higher range, for example? And if so, would you be willing to pursue market share even if it comes with lower EBITDA margin?
I mean, more EBITDA in nominal terms with lower EBITDA margin, or that is not the case. I have a very quick follow-up question afterwards.
Antonio, thank you for your question. I mean, let me just clarify that. I think what we have done in the past, 67%-69% is the optimal, you know, point in which us managing the company want to maximize value for the shareholders. I think that is the objective. Market share, of course, is a sustainable and long-term way of getting there. I think what we meant here in our outlook section is the same that we have always, you know, talked about. We work on that on a range, but from time to time we are up or down within that range.
If you go back to, you know, five, six years ago, you see that we were like way ahead of the range that we set ourselves, and then we use that over time. I think, we have, we wanted to put it there, like our discomfort in being, below the range. That's, you know, using the same platforms, the Cost, Connect, Win and the commercial platforms, we will, you know, work very hard to go back to the range, as soon as possible.
Adding to that, I think it's important to highlight that we started 2017, as I explained in my speech, with the market share increasing and in a positive trend. Just to add some flavor to that comment.
All right. Secondly, if I may, the total distribution of dividends plus IOC, obviously, this year was a little bit lower compared to the previous 12 months. I obviously understand that it has to do with the cash flow generation that was lower this year, et cetera. But I wanted to ask, as you get growth again, and obviously working capital dynamics become more favorable as the company grows. I don't know if CapEx will come back to, let's say, 2015 levels very rapidly or not, but do you see room to increase this figure from the last 12 months, and maybe even have a little bit more of an aggressive balance sheet structure? Or difficult to give some color on this specific number for the next 12 months or so?
Yeah. Thank you for the question. I think just a couple of points there. During 2016, we returned approximately BRL 10 billion to equity holders. Like you said, that was a little bit lower than that of 2015. Our policy for some time has been to return excess cash to shareholders and have done that. If you go a little bit back, like three, four, five years, you see that our payout has more than doubled in that period.
If you look at how the year progressed or evolved over the course of 2016, this payout has increased. Why is that? Because when you look in terms of cash flow, there is specifically a normal cash flow in the tax line in the first quarter, and that's like we said in the first quarter results of 2016, that was diluted over time. As a result, the shorter the period of time that you look at that line, the harder it is to reconcile, but that impacted the full year cash flow generation for the year when you analyze.
Without giving any guidance in terms of payouts, I think what you should expect, what you have done in the past is that without that impact, you'll get to, you know, the priorities that we use our strong cash flow generation. Which number one is reinvesting the organic growth of our business, which we already discussed some of the uses of cash for that purpose. Number two, invest in the non-organic growth of our business, which, you know, we have already also, you know, discussed some of the opportunities. And then return the excess cash to our shareholders, which we have been doing consistently over time. So again, that's as far as we can go trying to answer your question, Antonio.
All right. That's helpful, Ricardo Rittes. Thank you.
Thank you.
Thanks, Antonio.
The next question comes from Lauren Torres with UBS. Please go ahead.
Yes. Hi, everyone. I think you started the call mentioning that this was your most or one of your more challenging years in Brazil, but obviously you've had volatile conditions before. I guess I'm asking you to look at the past to predict the future. As we think about trends and the consumer hopefully stabilizing and coming back more, maybe particularly more in the second half of this year, I was just curious to get your perspective if there's a lag effect on a return to better beer and soft drink growth. Meaning the consumer may feel better, but the categories that you participate in take longer to kind of come back. Just curious to get your perspective on that.
Is this more of really a 2018 event or just off of easier comps to feel better about this year too? Just general perspective would be great. Thank you.
Thanks, Lauren. Thanks for the question. First, let's understand quickly the 2016 again. I mean, three main drivers led to the EBITDA decline that we had. I mean, the first one is connected to macro here in Brazil. We know the economic activity, I mean, is going down for the second consecutive year with unemployment rate peaking in the higher rate recorded in years, leading to the continuous decline of disposable income and declining in the industry. Second is that in the first quarter of 2016, we are subject to the VAT increase in some states, putting an additional pressure in our top line. Third one is related to the temporary impact effect of that tax in our cash costs, as Ricardo explained. We have good learnings in 2016.
Again, we'll do the main calls that we made last year. We will do the same, really looking for the long term and investing to make sure that our business will be healthy for the long term. I mean, moving to 2017, I think four points are important to highlight. One, 2017 started with signs that the main macro headwinds will dissipate, will be dissipating. First, inflation continues to decelerate. GDP is estimated to be flattish after two consecutive years of decline. Unemployment is still increasing. We expect it to reverse the trend in the second semester. Fourth, as a consequence, disposable income is likely to resume growth towards the end of the year. It's good, better news for 2017, the macro front.
Number two, I mean, as the second semester of 2017, the effects impacting our costs year-over-year will decelerate, even becoming a deflationary driver. Third, tax hikes in 2017 will not be so significant as in 2016, as the most representative VAT rate increase to impact us is Rio de Janeiro from 19%-20%, that will be effective March 31st, much lower than previous year. Fourth, I mean, we have a strong plan. So not repeat my speech, but Elevate the Core. I mean, it's important investment in the VBI of our brands, the innovation for our brands, Skol and Brahma, and really make sure that they have the right execution in the market even better than we have now.
We are also improving our primary and secondary packaging, enhancing the brand's quality perception. In all the tests that we've done shows that the new VBI of Skol, for instance, significantly increased the attributes of quality, drinkability, and modernity, and has also increased the consumer interest in purchase the brand. Premium continue to be big. Just remind us, preference of premium brands already 30%, way below the market share, have been growing a lot. Budweiser is leading the pack with the growth of more than 20% year-over-year, gaining market share and leading the premium segment. Near beer is a huge success. We'll continue to be there. In home, have already explained about the RGBs in the off trade. Growing, going in the right path.
In the out-of-home, the key selling moments, the key brand and selling moments will continue to be key because it's a way to drive volumes and build brands. I think the Carnival was a great example, have been investing behind Carnival for eight years, Street Carnival, that basically we with the city of Rio de Janeiro recreated that again, supporting this party that people go to the street and have fun in a responsible way. We'll continue to do that. You see the carnival in São Paulo was, I mean, almost double or more than that, and Skol was there. It's important to connect the brand with the people in each stage, in each city. It's good for the equity. It's good for the volume as well.
In the out-of-home as well, we increase and put a step up in our service level to the point of sale. That's good, but could be even better. That we are sure the assortment, the availability and the great execution that we need. Then you go to the long term, we continue to be bullish here in Brazil, on Brazil. We know that's not a straight line up, but every five years or so, you have one or two years where things go sideways or backwards. That's the reality of an emerging market. There are few markets in the size and the structure growth drivers that we have in Brazil. First, demographics. LDA population continues to increase by 1.5% every year.
The per capita, despite a considerable upward social mobility in the last 15 years, and the consumption boost driven by the emerging C class, we did not even get to half of our journey. Brazil remains a country of different countries inside one. Opportunity per capita here. Innovation. Given size and the different reality that coexist in the country, there are a lot of opportunities for innovation driven by consumer trends, such as feminization, health and wellness, near beer, among others. We continue to be bullish in Brazil. 2017 seems to be macro-wise a better year, and we have a strong, very, very strong plan to tackle this opportunity.
Okay. That's very clear. I guess I was just trying to get a sense if there is a lag effect, meaning the consumer comes back, but the beverage category takes a little bit more time. I think I understand your direction. If I could just ask one other thing then, the VAT increases that we saw, you know, coming into last year and affecting you last year, is there more threat or circumstances we should be thinking about for this year?
Hi Lauren, this is Ricardo. Just reminding, in Brazil, each state has its own model, own tax rate. Any state law that increases the VAT rate must be published until December 31st of the previous year. Since you already have the visibility of the laws approved by the state, we know that, you know, the VAT rate increases for 2017, they are, you know, a small fraction of what we have seen in 2016. We also know that the only, let's say, more meaningful impact is the one of Rio de Janeiro that came from 19%- 20% rate to be effective as of March 31st, like Bernardo already mentioned.
You know, that said, I think what we can say also in terms of VAT is that the cold beverage industry holds a permanent and constructive dialogue with each state government with the intent of showing that what we believe is that a lower tax burden on the industry enables a greater potential for volume growth, further investment, and as a result, allows tax collections to continue to grow with no pressure on inflation, job creation, or investment. That's the model that we believe. I think, you know, what we see in terms of evolution of the behavior of some of these states is a migration towards that model that we believe.
Okay. Thank you.
Thanks, Lauren.
The next question comes from Robert Ottenstein with Evercore. Please go ahead.
Great. Thank you very much. A couple of questions. First, earlier on in the year, one of your competitors started to pursue some fairly aggressive discounting. Can you give us any kind of update on whether that's continuing or whether it's getting worse? I understand, you know, the conditions, the competitive position conditions are always tough in Brazil, but are you seeing things stabilize on that front?
Hi, Robert. Thank you for your question. So it's very important to start to answer a question like that, but just to stating what's obvious, but very important to say that is the Brazilian industry has always been very competitive, and today is no different. It's no different either way. What happened in 2016, we believe is not related to what one competitor is doing, but what is going on with Brazil. We're facing a severe crisis and with significant decline in consumer disposable income. We see this in our own business, providing affordability in a profitable way. Returnables are gaining a lot of weight, and in 2016. In spite of all execution gaps that we still have, no doubt about, represented 23% of the volumes in the supermarkets.
You know, on the other hand, some value brands from competitors also benefited from this scenario. Sometimes, you know, not in a profitable way, which explains some of the market share volatility that we have had. I think what's important to highlight is the sequential net revenue per hectoliter increase, which somehow is in line what we have seen in the previous year, which shows, I'll say that, you know, there's a normalcy, if you will, in the Brazilian market at the moment. I think that's as far as we can go, Robert.
Understood. Possibly related, I don't know if you can comment on it, but I guess SICOBE has been down now for a while. I understand it's gonna be replaced. Are you seeing or sensing that competitors are they paying their taxes from what you can tell, or is it having any effect on the competitive dynamics?
Robert, I think, you know, first and foremost, I think one of the most important things that the government recognizes that it's very important for the industry to have an external monitoring system. I think that has been said time and time again by the government. This new monitoring system needs the time to be in place. I think the government is working to get that in place. In the short term, you see no changes as, you know, for anyone to behave differently would have to be like a structural change. I think just the intent of the government and the fact that the government is working to get the external monitoring in place, I think is enough to prevent people from structurally changing their behavior.
I think that as far as we can go. Again, we also believe that's a very important external monitoring system for the beverage industry.
Thank you very much. Appreciate it.
Thank you.
Thanks, Robert.
The next question comes from Jose Yordan with Deutsche Bank. Please go ahead.
Hi, good afternoon, everyone. I mean, I appreciate the whole conversation about not tipping off competitors, et cetera, with asymmetric information, et cetera. Which is why I'm a little more confused now about why you stopped giving market share information on a quarterly basis last year, because obviously your competitors have that, and you're not giving anything away. Because I mean, I think, when you talk about 66.3% for the year, based on the estimates I had for market share for earlier in the year, it basically brings you to, you know, closer to 65% or something like that. And I appreciate your comment about it increasing already in 2017.
Wouldn't it be a lot more helpful in the absence of more specific top line guidance to substitute that with going back to releasing the market share information on a quarterly basis? I think would help the market, you know, to have the tools to do what you're not doing with guidance this year. Is it possible for you to tell us now what the first three quarters of the years were in terms of market share for beer in Brazil?
Hi, Jose. This is Ricardo. I think you know, first, there are a couple of sources in terms of market share like we have said in the, you know, in previous calls. I think there are internal sources. There's Nielsen, there's SICOBE, and there are other source of market share. I think each of those sources, you know, they are very important for specific reasons, but they are in nature very incomplete as well. I think so. You know, SICOBE has the variations of inventories and that into this. The shorter the time that you look, the harder it is for you to draw any conclusions. Trends are very important. However, trends are very, very important.
We acknowledge and we hear you when you say specifically, given the fact that SICOBE is no longer there, for you guys to make your projections, that you know, it gets harder for you to read and et cetera. You know, the only publicly available source to measure market share in the full year of 2016 is Nielsen. That is a fact. We as a company decided over the course of 2016 to disclose only during the full year, you know, the market share. We can, you know, go back and outside the call, follow up with you in order to give you like more color and how you could build your models, you know, with publicly available information.
The fact is, at this point, the company has decided not to provide quarterly info on market share.
Okay.
In spite of the source, I mean, the important thing is that the trends that the source shown to us are the same. That's what I can say to you. Again, we started the year, I mean, with the market share increasing in a positive sign.
Is it fair to say that in the fourth quarter of 2016 it did dip below the year, you know, the nine-month number?
Yeah.
Yeah.
We don't provide the quarterly market share data.
All right. Okay. We'll take it offline. Thanks.
Thank you.
Thank you.
The next question comes from Alexander Robarts with Citigroup. Please go ahead.
Yeah, hi. I wanna go back, sorry, to the market share number in Brazil beer and a couple of questions around that. The first one is when we think about you reaching the 66.3, the 120 basis point loss in 12 months, is it—I mean, our research suggests that this was mostly within the value segment. I mean, trading down kind of spurs demand in the value segment, the response of RGB 300 ml, you know, very effective and such during the year. You've given us some numbers of how that's built up in the supermarkets.
Is it fair to think about the 120 basis points of loss in beer market share as happening mostly in the value segment? Or
Any color that you could give us as to where that loss occurred during the year. The second part of the market share question. When we think about, you know, your strategy to rebuild, you're being pretty open about that's a key priority this year. It also sounds like it's not gonna be at the expense of necessarily a big, you know, hockey stick move in SG&A. You would wanna be more effective in that.
Might it be just perhaps a possible thing to think about not going back to the 67% and 69%, and thinking about maybe a lower market share range to get margins back quicker, and just any color you can give us beyond what you've kind of hinted at or referred to as, what do you think can be the pace of rebuilding that beer market share during the year? A couple questions around the market share. Thanks very much.
Thank you for your question, Alex. I think you're absolutely right. When you have an economic situation like the one we've been living in Brazil for the last couple of years, what you tend to see not only in our industry, but overall in different consumer industries, and even like automotive industry, whatever it is, that you have premium and value, you know, suffering less proportionately to the mainstream industry. As we are disproportional, and again, the mainstream market for it is disproportionately more important when you compare to some of our competitors. Of course, it is mainstream, suffers proportionately more in this environment like you pointed out yourself. Again, that's the dynamics that we have.
Like you also said, when you move forward, I think this is the segment also that benefits the most from the recovery in the economy. You know, the same downside represents a high upside for a recovery. Like Bernardo said in his speech, and like we put in our outlook session, Bernardo is going to develop that in a moment. I think the word that we use, I mean, it was cautiously optimistic about 2017 for exactly the same reasons that made some of the previous year or like quarters like so difficult for the organization. I don't know, Bernardo, if you again, I think.
This is the last question.
Again, I don't know if you wanna do any follow-up questions, but we see that there's a lot of questions still in the line. But Alex, I think you're gonna be the last one today. We'll follow up with everyone that is in the line privately, as we have already overcome our time by 12, 13 minutes already. If you have a follow-up question, Alex, we can take from you, and then Bernardo is gonna do a closing.
I mean, when we think about the rebuilds, right? It's just kind of, I mean, do you think it's possible that this recovery of market share occurs really in function of the economy improving, or do you think that there can be something more company specific that can perhaps anticipate that? Does it frankly make sense to keep the 67%-69% range for this year? That's kind of the follow-up on that.
Alex, I mean your question. I need to do a closing as well. I think that's why we think that 2017 Brazil specifically will be a better year. Again, first one, just to repeat. The macro will be better. Unemployment going down toward the second half of the year. Disposable income is likely to resume growth towards the end of the year. I mean, just to give one, two examples on the macro side, and this helps our business, it helps and helps our core brands. Because when you have a price, they sell for more, and when disposable income increase, they have the more the benefit of that. Our core brands mean Brahma, Skol and Antarctica.
The first point as to why we are cautiously optimistic in the industry. The second, the tax impact in our costs year-over-year will decelerate. Important, very, very important. It was a big hit last year. Third, the tax hikes for 2017, as I explained, as Ricardo explained, will not be so significant as it was in 2016. The only exception is Rio de Janeiro, that's a minor one compared to what happened last year. The macro will help those two things, the effects and the taxes will help as well. The most important one, we have a strong plan. Then the economy, I mean, it's going back again, I mean, that will help our core brands.
We are boosting investment in a smart way in our core business. I think that could make a big difference for us. I repeat, I talk about new VBIs for the brands. Packaging enhancement that helps the quality perception of those brands. In terms of the core business, stepping up our service level as well, that are through the assortment will be there. The key brand and selling moments like we've done in Carnival, that not only drove the volume, but the brand equity as well, a full integrated market and sales plan. That will help the core business, and you'll get this positive trend, I would say, that's the thing that for next year in terms of disposable income and industry. Premium continues to be very important. Portfolio is amazing that we have.
The preference for premium brands is already 30% above the market share. We have the leading brand of the market, I mean, that's Budweiser, and the portfolio, it's very relevant. Beer continues to help the in-home occasions. They're working hard, not only in the RGBs, but how we can really access, I mean, improve the shopper experience in the stores. Some e-commerce initiatives as well. In the out-of-home, just to repeat one thing, the key brands and selling moments will continue to be significant. Having said that, I mean, we think that 2017 will be a much better year. We are confident in our plan. Our team is very inspired by the plan, very engaged on that. That's it.
We really think that the first signs of the year, January and in February, as I said, in terms of the market share, could tell us that this year we are in the right path. Thanks, everyone.
Thank you. Thanks for the call. Okay. Bye-bye. See you next quarter.
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