Company Quick10K Filing
Ambev
Price14.41 EPS3
Shares4,245 P/E5
MCap61,155 P/FCF3
Net Debt-1,991 EBIT20,434
TEV59,164 TEV/EBIT3
TTM 2019-12-31, in MM, except price, ratios
20-F 2019-12-31 Filed 2020-03-24
20-F 2018-12-31 Filed 2019-03-22
20-F 2017-12-31 Filed 2018-03-19
20-F 2016-12-31 Filed 2017-03-22
20-F 2015-12-31 Filed 2016-03-14
20-F 2014-12-31 Filed 2015-03-25
20-F 2013-12-31 Filed 2014-03-25

ABEV 20F Annual Report

Item 17 ¨ Item 18 ¨
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Default, Dividends Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 15T. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Business Conduct
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-8.1 exhibit08_1.htm
EX-11.2 exhibit11_2.htm
EX-12.1 exhibit12_1.htm
EX-12.2 exhibit12_2.htm
EX-13.1 exhibit13_1.htm
EX-13.2 exhibit13_2.htm

Ambev Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
35282114702013201520182021
Assets, Equity
2016128402013201520182021
Rev, G Profit, Net Income
10.07.04.01.1-1.9-4.92013201520182021
Ops, Inv, Fin

20-F 1 ambevsaform20f_2019.htm FORM 20-F ambevsaform20f_2019.htm - Generated by SEC Publisher for SEC Filing  

 

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2019

Commission file number: 001-36165

AMBEV S.A.
(Exact name of Registrant as specified in its charter)

Federative Republic of Brazil
(Jurisdiction of incorporation or organization)

Rua Dr. Renato Paes de Barros, 1017, 3rd floor
04530-001 São Paulo, SP, Brazil
(Address of principal executive offices)
Fernando Mommensohn Tennenbaum, Chief Financial and Investor Relations Officer
Address: Rua Dr. Renato Paes de Barros, 1017, 3rd floor, 04530-001, São Paulo, SP, Brazil
Telephone No.: +55 (11) 2122-1200
e-mail: ir@ambev.com.br
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

American Depositary Shares,

 

New York Stock Exchange

evidenced by American Depositary

ABEV

 

Receipts, each representing

 

 

1 (one) common share*,

 

 

no par value

 

 

 

*        Not for trading, but in connection with the registration of American Depositary Shares, pursuant to the       requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Title of each class

Name of each exchange on which registered

Not applicable

Not applicable


 
 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

15,729,953,382 common shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ¨No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x            Accelerated filer ¨          Non-accelerated filer ¨                               Emerging growth company ¨

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ¨

International Financial Reporting Standards as issued by the International Accounting Standards Board x

Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. N/A

Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x


 
 

TABLE OF CONTENTS

Page

INTRODUCTION

i

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

i

MARKET DATA

ii

CURRENCY TRANSLATION

ii

TRADEMARKS

ii

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

iii

PART I

1

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1

ITEM 2.        OFFER STATISTICS AND EXPECTED TIMETABLE

2

ITEM 3.        KEY INFORMATION

3

ITEM 4.        INFORMATION ON THE COMPANY

26

ITEM 4A.      UNRESOLVED STAFF COMMENTS

49

ITEM 5.        OPERATING AND FINANCIAL REVIEW AND PROSPECTS

50

ITEM 6.        DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

74

ITEM 7.        MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

88

ITEM 8.        FINANCIAL INFORMATION

97

ITEM 9.        THE OFFER AND LISTING

105

ITEM 10.      ADDITIONAL INFORMATION

107

ITEM 11.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

128

ITEM 12.      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

133

PART II

135

ITEM 13.      DEFAULT, DIVIDENDS ARREARAGES AND DELINQUENCIES

135

ITEM 14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

136

ITEM 15.      CONTROLS AND PROCEDURES

137

ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT

139

ITEM 16B.    CODE OF BUSINESS CONDUCT

140

ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

141

ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

143

ITEM 16E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

144

ITEM 16F.    CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

145

ITEM 16G.    CORPORATE GOVERNANCE

146

ITEM 16H.    MINE SAFETY DISCLOSURE

147

PART III

148

ITEM 17.      FINANCIAL STATEMENTS

148

ITEM 18.      FINANCIAL STATEMENTS

149

ITEM 19.      EXHIBITS

150

 

 

 


 
 

INTRODUCTION

This annual report on Form 20-F relates to the registered American Depositary Shares, or ADSs, of Ambev S.A., or Ambev, evidenced by American Depositary Receipts, or ADRs, each representing one common share, no par value, of Ambev.

In this annual report, except as otherwise indicated or as the context otherwise requires, the “Company,” “Ambev,” “we,” “us” and “our” refers to Ambev S.A. and its subsidiaries and, unless the context otherwise requires, the predecessor companies that have been merged out of existence with and into it. All references to “Old Ambev” refer to Companhia de Bebidas das Américas – Ambev, our former subsidiary that had common and preferred shares listed on the São Paulo Stock, Commodities and Futures Exchange (B3 S.A. – Brasil, Bolsa, Balcão), or the B3 (previously named as BM&FBovespa S.A. – Bolsa de Valores, Mercadorias e Futuros), and common and preferred ADSs listed on the New York Stock Exchange, or the NYSE, and that was merged out of existence with and into us in January 2014. All references to NAB are to the non-alcoholic beverages in our portfolio other than non-alcoholic beer. All references to “Brazil” are to the Federative Republic of Brazil, unless the context otherwise requires. All references to the “Brazilian government” are to the federal government of Brazil. All references to percent ownership interests in Ambev do not take into account treasury shares.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

We prepare our audited consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB. The financial information and related discussion and analysis contained in this annual report on Form 20-F are presented in reais, except as otherwise specified. Unless otherwise specified, the financial information analysis in this annual report on Form 20-F is based on our consolidated financial statements as of December 31, 2019 and 2018 and for the three years ended December 31, 2019, included elsewhere in this document. Percentages and some amounts in this annual report on Form 20-F have been rounded for ease of presentation. Any discrepancies between totals and the sums of the amounts listed are due to rounding.

Unless otherwise specified, volumes, as used in this annual report on Form 20-F, include both beer (including future beverages) and NAB volumes. In addition, unless otherwise specified, our volumes refer not only to the brands that we own or license, but also third-party brands that we brew or otherwise produce as a subcontractor, and third-party products that we sell through our distribution network. Our volume figures in this Form 20-F reflect 100% of the volumes of entities that we fully consolidate in our financial reporting. In addition, market share data contained in this annual report on Form 20-F refers to volumes sold.

Application of IFRS 16 – Leases

On January 1, 2019, we adopted IFRS 16 which establishes principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. IFRS 16 Leases replaces the current lease accounting requirements and introduces significant changes in the accounting, removing the distinction between operating and finance leases under IAS 17 Leases and related interpretations, and requires a lessee to recognize a right-of-use asset and a lease liability at lease commencement date. The impact to the financial statements is demonstrated in the recognition of right-of-use assets and lease liabilities in the balance sheet.

As a result of the above, our audited consolidated financial statements for the years ended December 31, 2018 and 2017 included in this annual report have been restated for comparative purposes using the full retrospective method.

For further information regarding the new standards effective as of January 1, 2019 and new accounting requirements, including IFRS 16 Leases, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Policies” and note 3 to our audited financial statements included elsewhere in this annual report.

i


 
 

Application of IAS 29 – Argentine Hyperinflation Accounting

In July 2018, the Argentine peso underwent a severe devaluation resulting in the three-year cumulative inflation of Argentina exceeding 100%, thereby triggering the requirement to transition to hyperinflation accounting as prescribed by IAS 29 Financial Reporting in Hyperinflationary Economies, or IAS 29, applicable to all our business entities whose functional currency is the Argentine peso. Such adjustments were required to be shown from January 1, 2018 (period in which hyperinflation was identified).

IAS 29 requires that the financial information recorded in a hyperinflationary currency be adjusted by applying a general price index and expressed in the measuring unit (the hyperinflationary currency) current at the end of the reporting period.

As a result of the above, our audited consolidated financial statements for the years ended December 31, 2018 and 2019 included in this annual report reflect hyperinflation accounting for our Argentinean subsidiaries applying IAS 29 rules.

For additional information, see note 1(b) to our audited consolidated financial statements as of and for the year ended December 31, 2019.

MARKET DATA

Market information (including market share, market position and industry data for our operating activities and those of our subsidiaries or of companies acquired by us) or other statements presented in this Form 20-F regarding our position (or that of companies acquired by us) relative to our competitors largely reflect the best estimates of our management. These estimates are based upon information obtained from customers, trade or business organizations and associations, other contacts within the industries in which we operate and, in some cases, upon published statistical data. Except as otherwise stated, our market share data, as well as our management’s assessment of our comparative competitive position, has been derived by comparing our sales volumes for the relevant period to our management’s estimates of our competitors’ sales volumes for such period, as well as upon published statistical data, and, in particular the reports published and the information made publicly available by, among others, the local brewers’ associations and the national statistics bureaus in the various countries in which we sell our products. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect and believe and act as if they are reliable, we have not independently verified it.

CURRENCY TRANSLATION

In this annual report, references to “real,” “reais” or “R$” are to the legal currency of Brazil, references to “U.S. dollar” or “US$” are to the official currency of the United States and references to “Canadian dollar” or “C$” are to the legal currency of Canada.

We maintain our books and records in reais. However, solely for the convenience of the reader, we have translated certain amounts included in this annual report from reais into U.S. dollars using the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank, as of December 31, 2019 of R$4.03 to US$1.00 or, where expressly indicated, at an average exchange rate prevailing during a certain period. We have also translated some amounts from U.S. dollars and Canadian dollars into reais. All such currency translations should not be considered representations that any such amounts represent, or could have been, or could be, converted into, U.S. or Canadian dollars or reais at that or at any other exchange rate. See “Item 3. Key Information—A. Selected Financial Data—Exchange Controls” for more detailed information regarding the translation of reais into U.S. dollars.

TRADEMARKS

This annual report includes the names of our products which constitute trademarks or trade names which we own or which are owned by others and are licensed to us for our use. This annual report also contains other brand names, trade names, trademarks or service marks of other companies, and these brand names, trade names, trademarks or service marks are the property of those other companies.

 

ii


 
 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Some of the information contained in this annual report may constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events, industry and financial trends affecting our business.

Many of these forward-looking statements can be identified by the use of forward-looking words such as “anticipate,” “project,” “may,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate,” “potential,” among others. These statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are subject to certain risks and uncertainties that are outside our control and are difficult to predict. These risks and uncertainties could cause actual results to differ materially from those suggested by forward-looking statements. Factors that could cause actual results to differ materially from those contemplated by forwardlooking statements include, among others:

·        greater than expected costs (including taxes) and expenses;

·        the risk of unexpected consequences resulting from acquisitions, joint ventures, strategic alliances, corporate reorganizations or divestiture plans, and our ability to successfully and cost-effectively implement these transactions and integrate the operations of businesses or other assets that we acquire;

·        our expectations with respect to expansion plans, projected asset divestitures, premium growth, accretion to reported earnings, working capital improvements and investment income or cash flow projections;

·        lower than expected revenue;

·        greater than expected customer losses and business disruptions;

·        limitations on our ability to contain costs and expenses;

·        local, regional, national and international economic conditions, including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that impact;

·        the monetary and interest rate policies of central banks;

·        continued availability of financing;

·        market and financial risks, such as interest rate risk, foreign exchange rate risk, commodity risk, asset price risk, equity market risk, inflation or deflation;

·        our ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

·        the effects of competition and consolidation in the markets in which we operate, which may be influenced by regulation, deregulation or enforcement policies;

·        changes in pricing environments and volatility in commodity prices;

·        regional or general changes in asset valuations;

·        changes in consumer spending;

·        the outcome of pending and future litigation and governmental proceedings and investigations;

iii


 
 

·        global political and economic developments;

·        changes in government policies, international trade policies, applicable laws, regulations and taxes in jurisdictions in which we operate including the laws and regulations governing our operations, as well as actions or decisions of courts and regulators;

·        natural and other disasters;

·        outbreak of contagious diseases or epidemic and pandemic health crises, which may impact our business operations, demand for our products, or overall economic activity globally;

·        any inability to economically hedge certain risks;

·        inadequate impairment provisions and loss reserves;

·        technological changes;

·        our success in managing the risks involved in the foregoing;

·        governmental intervention, resulting in changes to the economic, tax or regulatory environment in Brazil or other countries in which we operate;

·        inflation, appreciation, depreciation and devaluation of the real;

·        the declaration or payment of dividends;

·        the utilization of Ambev’s subsidiaries’ income tax loss carry forwards; and

·        other factors or trends affecting our financial condition or results of operations, including those factors identified or discussed under “Item 3. Key Information—D. Risk Factors.”

We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Forward-looking statements reflect only our current expectations and are based on our management’s beliefs and assumptions and on information currently available to our management. Actual results may differ materially from those in forward-looking statements as a result of various factors, including, without limitation, those identified under “Item 3. Key Information—D. Risk Factors” in this annual report. As a result, investors are cautioned not to place undue reliance on forward-looking statements contained in this annual report when making an investment decision.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

Investors should consider these cautionary statements together with any written or oral forward-looking statements that we may issue in the future.

 

 

iv


 
 

PART I

ITEM 1.               IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

 

 

1


 
 

ITEM 2.               OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

 

 

2


 
 

ITEM 3.               KEY INFORMATION

A.           Selected Financial Data

The following financial information of Ambev is only a summary and should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and related notes which are included elsewhere in this annual report on Form 20-F.

The tables below represent the selected consolidated income statement and balance sheet data as at and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 that has been derived from our audited consolidated financial statements, which were prepared in accordance with IFRS as issued by the IASB.

Selected Consolidated Income Statement Data

 

 

Year Ended December 31,

 

2019

2018(1)(2)

2017(2)

2016

2015

 

(in R$ million)

Net sales

52,599.7

50,231.3

47,899.3

45,602.6

46,720.2

Cost of sales

(21,678.2)

(19,249.4)

(18,028.4)

(16,678.0)

(16,061.4)

Gross profit

30,921.6

30,981.9

29,870.9

28,924.6

30,658.8

Sales, marketing and distribution expenses

(12,647.5)

(12,328.5)

(11,807.4)

(12,010.5)

(11,177.9)

Administrative expenses

(2,680.0)

(2,363.5)

(2,620.0)

(2,166.1)

(2,281.3)

Other operating income/(expense)

878.1

947.3

1,217.3

1,223.1

1,936.1

Exceptional items

(397.2)

(86.4)

(108.7)

1,134.3

(357.2)

Income from operations

16,074.9

17,150.9

16,552.1

17,105.4

18,778.5

Net finance cost

(3,109.6)

(4,030.3)

(3,713.8)

(3,702.0)

(2,268.2)

Share of results of associates

(22.3)

1.0

(3.1)

(5.0)

3.1

Income tax expense

(754.7)

(1,773.9)

(5,047.7)

(315.0)

(3,634.2)

Net Income

12,188.3

11,347.7

7,787.5

13,083.4

12,879.2

Attributable to:

 

 

 

 

 

Equity holders of Ambev

11,780.0

10,995.0

7,269.0

12,546.6

12,423.8

Non-controlling interests

408.4

352.7

518.5

536.8

455.4

 

(1)     The financial information for 2018 is presented under IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which was adopted by us with effect on January 1, 2018 in accordance with the modified retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies.”

(2)     The financial information for 2018 and 2017 has been restated to reflect the impact of adoption of IFRS 16 Leases on January 1, 2019 in accordance with the full retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

Earnings per Share and Dividend per Share

 

 

Year Ended December 31,

 

2019

2018(1)(2)

2017(2)

2016

2015

 

 

 

 

 

 

 

(in R$, unless otherwise indicated)

Earnings per common share and per ADS(3):

 

 

 

 

 

- Basic

0.75

0.70

0.46

0.80

0.79

- Diluted

0.74

0.69

0.46

0.79

0.79

Dividends and interest on shareholders’ equity per share and per ADS (weighted average)(4):

 

 

 

 

 

- Basic (R$)

0.50

0.56

0.56

0.66

0.73

- Basic (US$)

0.13

0.14

0.17

0.20

0.19

Weighted average number of shares (million shares):

 

 

 

 

 

- Basic

15,727

15,718

15,706

15,697

15,696

- Diluted

15,869

15,856

15,838

15,823

15,820

 

(1)     The financial information for 2018 is presented under IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which was adopted by us with effect on January 1, 2018 in accordance with the modified retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

(2)     The financial information for 2018 and 2017 has been restated to reflect the impact of adoption of IFRS 16 Leases on January 1, 2019 in accordance with the full retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

(3)     The calculation of basic earnings per share is based on the net income attributable to equity holders of Ambev and the proportional weighted average number of shares outstanding during the year. Diluted earnings per share is based on the net income attributable to equity holders of Ambev and by adjusting the weighted average number of shares outstanding during the year to assume conversion of all potentially dilutive shares.

(4)     Dividend and interest on shareholders’ equity per share information was calculated based on the amount paid during the year net of withholding tax.

3


 
 

Selected Consolidated Balance Sheet Data

 

 

As at December 31,

 

2019

2018(1)(2)

2017(2)

2016

2015

 

(in R$ million)

Non-current assets

74,121.8

70,384.7

64,048.3

59,954.6

61,861.8

Property, plant and equipment

22,576.3

21,638.0

20,705.1

19,153.8

19,140.1

Goodwill

35,009.9

34,276.2

31,401.9

30,511.2

30,953.1

Intangible assets

6,306.4

5,840.6

4,674.7

5,245.9

5,092.2

Deferred tax assets

2,950.1

2,064.7

2,310.9

2,268.2

2,749.9

Taxes and contributions receivable

5,003.0

4,374.2

2,537.7

347.7

892.8

Trade and other receivables

1,752.9

1,722.3

1,999.6

1,989.9

2,191.6

Other

523.2

468.7

418.4

437.9

842.1

Current assets

27,621.1

25,329.6

24,718.1

23,886.8

28,314.5

Inventories

5,978.5

5,401.8

4,319.0

4,347.1

4,338.2

Trade and other receivables

5,653.1

6,302.2

6,662.1

5,956.8

6,946.1

Taxes and contributions receivable

4,074.1

2,148.7

3,370.6

5,423.3

3,194.9

Cash and cash equivalents

11,900.7

11,463.5

10,354.5

7,876.8

13,620.2

Investment securities

14.6

13.4

11.9

282.8

215.1

Total assets

101,742.9

95,714.3

88,766.4

83,841.4

90,176.3

 

 

 

 

 

 

Shareholders’ equity

62,556.0

57,454.8

47,919.7

46,651.3

50,333.7

Equity attributable to equity holders of Ambev

61,278.0

56,248.0

45,945.7

44,825.0

48,331.9

Non-controlling interests

1,278.0

1,206.8

1,974.0

1,826.3

2,001.8

Non-current liabilities

14,175.9

13,050.7

11,779.9

8,416.5

9,700.7

Interest-bearing loans and borrowings

2,409.7

2,162.4

2,831.2

1,765.7

2,316.9

Employee benefits

2,704.5

2,343.7

2,310.7

2,137.7

2,221.9

Deferred tax liabilities

2,371.1

2,424.6

2,329.2

2,329.7

2,473.6

Taxes and contributions payable

2,864.7

2,903.4

3,189.6

681.4

910.0

Trade and other payables

3,454.9

2,790.4

606.6

736.6

1,278.8

Provisions

371.0

426.2

512.6

765.4

499.5

Current liabilities

25,011.0

25,208.8

29,066.7

28,773.6

30,141.9

Interest-bearing loans and borrowings

653.1

1,941.1

1,699.4

3,630.6

1,282.6

Trade and other payables

18,745.2

17,754.5

21,702.8

20,692.0

24,391.6

Taxes and contributions payable

5,502.7

5,340.2

5,493.8

4,282.4

4,342.1

Provisions

110.0

173.0

169.0

168.6

123.1

Bank overdraft

0.0

0.0

1.8

0.0

2.5

Total shareholders’ equity and liabilities

101,742.9

95,714.3

88,766.4

83,841.4

90,176.3

           

 

(1)     The financial information for 2018 is presented under IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which was adopted by us with effect on January 1, 2018 in accordance with the modified retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

(2)     The financial information for 2018 and 2017 has been restated to reflect the impact of adoption of IFRS 16 Leases on January 1, 2019 in accordance with the full retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

 

 

 

 

 

4


 
 

Other Data

 

 

As at and for the Year Ended December 31,

 

2019

2018(1)(2)

2017(2)

2016

2015

 

(in R$ million, except for operating data)

Other Financial Data:

 

 

 

 

 

Net working capital(3)

2,610.1

120.6

(4,348.6)

(4,886.8)

(1,827.4)

Cash dividends and interest on shareholders’ equity paid

7,871.3

8,814.1

8,819.8

10,330.6

11,490.2

Depreciation and amortization(4)

4,675.2

4,448.4

4,036.9

3,512.0

3,074.6

Capital expenditures(5)

5,069.4

3,571.0

3,203.7

4,132.7

5,261.2

Operating cash flows - generated(6)

18,381.3

18,346.1

18,424.2

12,344.4

23,580.8

Investing cash flows - used(6)

(4,838.6)

(3,675.7)

(3,073.0)

(5,898.0)

(5,997.0)

Financing cash flows - used(6)

(12,283.5)

(13,656.5)

(13,414.2)

(11,645.1)

(15,327.9)

Other Operating Data:

 

 

 

 

 

Total production capacity - million hl(7)

257.6

270.1

276.5

280.4

269.9

Total volume sold - million hl(8)

163.2

158.7

162.8

159.8

169.1

Number of employees(9)

51,352

49,617

51,432

53,250

52,738

           

 

(1)     The financial information for 2018 is presented under IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which was adopted by us with effect on January 1, 2018 in accordance with the modified retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

(2)     The financial information for 2018 and 2017 has been restated to reflect the impact of adoption of IFRS 16 Leases on January 1, 2019 in accordance with the full retrospective application. For more information on changes in accounting policies, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies”.

(3)     Represents total current assets less total current liabilities.

(4)     Includes depreciation of property, plant and equipment, amortization of intangible assets and impairment losses related to these assets.

(5)     Represents cash expenditures for property, plant, equipment and intangible assets.

(6)     Operating, investing and financing cash flow data is derived from our consolidated cash flow statements contained in our audited consolidated financial statements.

(7)     Represents our available production capacity at year-end; capacity can vary from year to year depending on mix; “hl” is the abbreviation for hectoliters.

(8)     Represents our full-year volumes.

(9)     Includes all our production- and non-production-related employees.

Exchange Controls

There are no restrictions on ownership of the ADSs or the preferred shares or common shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments, interest on shareholders’ equity payments and proceeds from the sale of preferred shares or common shares into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation which generally requires, among other things, that relevant investments be registered with the Central Bank and the Comissão de Valores Mobiliários (the Brazilian Securities Commission), or the CVM.

Restrictions on the remittance of foreign capital abroad could hinder or prevent Banco Bradesco S.A., the custodian of Ambev’s ADS program, or the custodian, or holders who have exchanged Ambev’s ADSs for shares of Ambev, from converting dividend distributions, interest on shareholders’ equity or the proceeds from any sale of shares of Ambev into U.S. dollars and remitting such U.S. dollars abroad. Holders of Ambev ADSs could be adversely affected by delays in or refusal to grant any required governmental approval for conversions of real payments and remittances abroad.

Under Brazilian law relating to foreign investment in the Brazilian capital markets, or the Foreign Investment Regulations, foreign investors registered with CVM, and acting through authorized custodial accounts managed by local agents may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration for each transaction. Foreign investors may register their investment under Law No. 4,131/62, as amended, or Law No. 4,131, or Resolution No. 4,373, dated September 29, 2014, or Resolution No. 4,373, of the Conselho Monetário Nacional (National Monetary Council), or the CMN.

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Law No. 4,131 is the main legislation concerning foreign capital and direct equity investments in Brazilian companies and it is applicable to any amount that enters the country in the form of foreign currency, goods and services. Except for registration of the capital inflow/outflow with the Central Bank, non-resident investors directly investing in equity of Brazilian companies do not need any specific authorization to make such investments.

Portfolio foreign investments are regulated by Resolution No. 4,373 and CVM Rule No. 560, as amended.

Under Resolution No. 4,373, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 4,373, the definition of a foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.

In order to become a Resolution No. 4,373 investor, a foreign investor must:

·        appoint at least one representative in Brazil, with powers to perform actions relating to its investment;

·        appoint an authorized custodian in Brazil for its investments, which must be a financial institution or entity duly authorized by the Central Bank or CVM;

·        appoint a tax representative in Brazil;

·        through its representative in Brazil, register itself as a foreign investor with the CVM; and

·        through its representative in Brazil, register its foreign investment with the Central Bank.

In addition, an investor operating under the provisions of Resolution No. 4,373 must be registered with the Receita Federal do Brasil (the Brazilian Internal Revenue Service), or the RFB, pursuant to RFB Normative Instruction No. 1,548 of February 13, 2015, and RFB Normative Instruction No. 1,863 of December 28, 2018.

Pursuant to the registration obtained by Ambev with the Central Bank in the name of The Bank of New York Mellon, as depositary for the ADS programs of Ambev, or the Depositary, with respect to the ADSs to be maintained by the custodian on behalf of the Depositary, the custodian and the Depositary will be able to convert dividends and other distributions with respect to the Ambev shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. Pursuant to CMN Resolution No. 4,373, in order for an investor to surrender ADSs for the purpose of withdrawing the shares represented thereby, the investor is required to appoint a Brazilian financial institution duly authorized by the Central Bank and the CVM to act as its legal representative, who shall be responsible, among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank, which entitles registered foreign investors to trade the underlying shares directly on the B3.

Under current legislation, the Brazilian government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian government directives. We cannot assure you that the Brazilian government will not impose similar restrictions on foreign repatriations in the future. See “—D. Risk Factors—Risks Relating to Brazil and Other Countries in Which We Operate” and “—D. Risk Factors—Risks Relating to Our Common Shares and ADSs.”

B.           Capitalization and Indebtedness

Not applicable.

C.           Reasons for the Offer and Use of Proceeds

Not applicable.

6


 
 

D.           Risk Factors

Before making an investment decision, you should consider all of the information set forth in this annual report. In particular, you should consider the special features applicable to an investment in Brazil and applicable to an investment in Ambev, including those set forth below. In general, investing in the securities of issuers in emerging market countries, such as Brazil, involves a higher degree of risk than investing in the securities of issuers in the United States.

Risks Relating to Brazil and Other Countries in Which We Operate

Economic and political uncertainty and volatility in Brazil, and the perception of these conditions in the international financial markets, may adversely affect our business.

Our most significant market is Brazil, which has periodically experienced rates of inflation higher than expected. Inflation, along with governmental measures to fight inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. The annual rates of inflation, as measured by the Índice Nacional de Preços ao Consumidor (National Consumer Price Index), was 11.3% in 2015, 6.6% in 2016, 2.1% in 2017, 3.8% in 2018 and 4.3% in 2019. Future governmental actions, including actions to adjust the value of the real, may trigger increases in inflation. We cannot assure you that inflation will not affect our business in the future. In addition, any effort on the part of the Brazilian government to preserve economic stability, as well as any public speculation about possible future initiatives, may contribute significantly to economic uncertainty in Brazil and may heighten volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers. It is also difficult to assess the impact that turmoil in the credit markets will have in the Brazilian economy, and as a result on our operations and financial results in the future.

In addition, Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.

The economic and political instability in Brazil has contributed to a decline in market confidence in the Brazilian economy. In addition, since 2014, Brazil has experienced amplified economic and political instability derived from various currently ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as Lava Jato, as well as other derivative or independent investigations such as Cui Bono, A Origem, Sepsis, Patmos, Zelotes and Greenfield investigations. The potential outcome of such corruption-related investigations is uncertain, but they have already impacted the general market perception of the Brazilian economy, political environment and the Brazilian capital market. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political and economic instability.

Driven by the economic and political instability in Brazil, among other factors, Brazil has faced a series of economic and political difficulties since 2014, including increasing unemployment rates, decreasing consumer and business confidence, falling industrial output, a deficit in Brazil’s primary accounts, shrinking gross domestic product until 2017 and meager growth since then, increasing uncertainties with regards to Congressional decisions and the significant devaluation and volatility of the real.

Consumption of beer, other alcoholic beverages and soft drinks in many of the jurisdictions in which we operate, including Brazil, is closely linked to general economic conditions, such that levels of consumption tend to rise during periods of rising per capita income and to fall during periods of declining per capita income. Additionally, per capita consumption is inversely related to the sale price of our products. Besides moving in concert with changes in per capita income, consumption of beer and other alcoholic beverages also varies in accordance with changes in disposable income. Any decrease in disposable income resulting from an increase in inflation, income taxes, cost of living, unemployment levels, political or economic instability or other factors would likely adversely affect the demand for beer, other alcoholic beverages, soft drinks and other non-alcoholic beverages, as well as our results of operations. Moreover, the instability and uncertainty in the Brazilian economic and political scenario may continue to adversely affect the demand for our products, which in turn may negatively impact our operations and financial results.

7


 
 

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy; Brazilian economic and political conditions have a direct impact on our business.

The Brazilian economy has been characterized by significant involvement on the part of the Brazilian government, which has historically changed monetary, credit and other policies to influence Brazil’s economy. The Brazilian government’s actions to control inflation and affect other policies have involved wage and price controls, the Central Bank’s base interest rates, as well as other measures, such as the freezing of bank accounts, which occurred in 1990.

Actions taken by the Brazilian government concerning the economy may have important effects on Brazilian corporations and other entities, including Ambev, and on market conditions and prices of Brazilian securities. Our financial condition and results of operations may be adversely affected by the following factors and the Brazilian government’s response to the following factors:

·        devaluations and other exchange rate movements;

·        inflation;

·        investments;

·        exchange control policies;

·        employment levels and labor regulation;

·        social instability;

·        price instability;

·        energy shortages;

·        water rationing;

·        natural and other disasters, including large scale epidemics and pandemics;

·        interest rates and monetary policy;

·        liquidity of domestic capital and lending markets;

·        growth or downturn of the Brazilian economy;

·        import and export controls;

·        exchange controls and restrictions on remittances abroad;

·        fiscal policy and changes in tax laws; and

·        other political, diplomatic, social and economic developments in or affecting Brazil.

Our results of operations are affected by fluctuations in exchange rates, and devaluation of the real relative to other currencies, including the U.S. dollar, which may adversely affect our financial performance.

Most of our sales are in reais; however, a relevant portion of our debt is denominated in foreign currencies, including U.S. dollars.  In addition, a significant portion of our cost of sales, in particular those related to packaging such as cans and bottles made of polyethylene terephthalate, or PET, as well as sugar, hops and malt are denominated in or linked to the U.S. dollar, which was very volatile in recent years. Therefore, any devaluation of the real when compared to those foreign currencies may increase our financial expenses and operating costs and could affect our ability to meet our foreign currency obligations. Although our current policy is to hedge substantially all of our U.S. dollar-denominated debt and cost of sales against changes in foreign exchange rates, we cannot assure you that such hedging will be possible or available at reasonable costs at all times in the future.

8


 
 

In addition, we have historically reported our consolidated results in reais. In 2019, we derived 45% of our net revenues from operating companies that have functional currencies that are not reais (that is, in most cases, the local currency of the respective operating company). Consequently, any change in exchange rates between our operating companies’ functional currencies and reais will affect our consolidated income statement and balance sheet. Decreases in the value of our operating companies’ functional currencies against reais will tend to reduce those operating companies’ contributions in terms of our financial condition and results of operations.

We also incur currency transaction risks whenever one of our operating companies enters into transactions using currencies other than their respective functional currencies, including purchase or sale transactions and the issuance or incurrence of debt. Although we have hedging policies in place to manage commodity price and foreign currency risks to mitigate our exposure to currencies other than our operating companies’ functional currencies, there can be no assurance that such policies will be able to successfully hedge against the effects of such foreign exchange exposure, particularly over the long term.

The Brazilian currency has devalued frequently, including during the last two decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations and periodic mini-devaluations, during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. There have been significant fluctuations in the exchange rates between Brazilian currency and the U.S. dollar and other currencies. For example, the U.S. dollar appreciated 47.0% against the real in 2015, closing at R$3.905 per U.S. $1.00 as of December 31, 2015. However, the U.S. dollar depreciated 16.5% against the real in 2016, closing at R$3.259 per U.S.$1.00 as of December 31, 2016, while in 2017, the U.S. dollar appreciated 1.5% against the real, closing at R$3.308 per U.S.$1.00 as of December 31, 2017. The U.S. dollar appreciated 17.1% against the real in 2018, closing at R$3.88 per U.S.$1.00 as of December 31, 2018. The U.S. dollar appreciated 3.9% against the real in 2019, closing at R$4.03 per U.S.$1.00 as of December 31, 2019. As of March 5, 2020, the exchange rate was R$4.62  per US$1.00.

Devaluation of the real relative to the U.S. dollar may create additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary governmental policies to curb aggregate demand. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the current account and the balance of payments, as well as dampen export-driven growth. The potential impact of the floating exchange rate and measures of the Brazilian government aimed at stabilizing the real is uncertain. In addition, a substantial increase in inflation may weaken investor confidence in Brazil, impacting our ability to finance our operations through the international capital markets.

Increases in taxes levied on beverage products in the countries in which we operate and unfair competition arising from tax evasion may adversely affect our results and profitability.

Increases in levels of taxation in the countries in which we operate could adversely affect our profitability. Increases in taxes on beverage products usually result in higher beverage prices for consumers. Higher beverage prices generally result in lower levels of consumption and, therefore, lower net sales. Lower net sales result in lower margins because some of our costs are fixed and thus do not vary significantly based on the level of production. We cannot assure you that the countries’ governments will not increase current tax levels and that this will not impact our business.

For instance, in Brazil, in January 2015 the Brazilian federal government enacted Law No. 13,097, which introduced a new federal taxation model for beer and soft drinks, creating a less complex and more predictable tax system for the industry. The new tax model came into force on May 1, 2015. Among other changes, the new set of rules establishes that the Excise Tax (Imposto sobre Produtos Industrializados), or the IPI Excise Tax, the Social Integration Program Contribution (Programa de Integração Social), or the PIS Contribution and the Social Security Funding Contribution (Contribuição para Financiamento da Seguridade Social), or the COFINS, are due by manufacturers and wholesalers and shall be calculated based on the respective sales price (ad valorem). Under the previous legislation, the referred taxes were due exclusively by the manufacturer at fixed amounts per liter of beer or soft drink produced (ad rem).

9


 
 

Moreover, in May 2018, the Brazilian Federal Government enacted Decree No. 9,394/2018 increasing IPI taxes applicable to transactions with concentrate units and, in so doing, effectively reducing the value of the IPI presumed credits that we recorded on acquisitions of soft drinks concentrates from companies located in the Manaus Free Trade Zone from 20% to 4%. Such IPI taxes increase will be staggered until 2020.

On the state level, in 2015 the States of São Paulo, Rio de Janeiro, Minas Gerais, Distrito Federal, Rio Grande do Sul, Ceará, Amapá, Rondonia, Amazonas, Tocantins, Piauí, Maranhão, Rio Grande do Norte, Bahia, Pernambuco, Paraíba, Alagoas, Sergipe and Mato Grosso do Sul increased their ICMS Value-Added Tax rate applicable to beer and/or soft drinks. In 2016, the States of Rio de Janeiro and Acre also increased their respective ICMS Value-Added Tax rates, scheduled to take effect in early 2017. In 2017, the States of Goiás and Amazonas increased their soft drinks and beer ICMS rates, respectively. In 2018, the States of Maranhão and Pernambuco increased their non-alcoholic beverages ICMS rates and Bahia and Maranhão increased beer ICMS burden, which became effective in early 2019.

Our Latin America South operations are subject to substantial risks relating to the businesses and operations conducted in Argentina and other South American countries.

We own 100% of the total share capital of Latin America South Investment, S.L., or LASI, the net revenues from which corresponded to 19.1% of our consolidated results of operations in 2019. LASI is a holding company with operating subsidiaries in Argentina and other South American countries. As a result, LASI’s financial condition and results of operations may be adversely affected by the political instability, fluctuations in the economy and governmental actions concerning the economy of Argentina and the other countries in which its subsidiaries operate and, consequently, affect our consolidated results.

The results of our Argentinian operations have been significantly impacted in reais terms in recent years by political instability, fluctuations in the Argentine economy (such as the devaluation of the Argentine peso in December 2015, 2018 and 2019), governmental actions concerning the economy of Argentina (such as Argentina’s selective default on its restructured debt in July 2014), inflation and deteriorating macroeconomic conditions in the country. Continued deterioration of the Argentine economy, or new foreign exchange, export repatriation or expropriation regimes could adversely affect our liquidity and ability to access funds from Argentina, our financial condition and operating results.

For example, in the early 2000s, Argentina experienced political and economic instability. A widespread recession occurred in 2002, including a 10.9% decrease in real GDP, high unemployment and high inflation. In the past, the Argentine economic and social situation has rapidly deteriorated, and may quickly deteriorate in the future; we cannot assure you that the Argentine economy will not rapidly deteriorate as in the past. Additionally, in 2018 and 2019 the Argentine peso underwent a significant devaluation, losing 51% and 36.9%, of its value relative to the real, impacting the net assets, results and cash flows of our Argentinean operations. The 2018 and 2019 devaluations of the Argentine peso relative to the real, and further devaluations of the Argentine peso in the future, if any, may decrease our net assets in Argentina, with a balancing entry in our equity. See “—Risks Relating to Our Operations—Our results of operations are affected by fluctuations in exchange rates and devaluation of the real relative to other currencies, including the U.S. dollar, which may adversely affect our financial performance.”

Following the categorization of Argentina in our results for the third quarter of 2018 as a country with a three-year cumulative inflation rate greater than 100%, the country is considered as a hyperinflationary economy in accordance with IFRS rules (IAS 29), requiring us to restate the results of our operations for the year ended December 31, 2018, in hyperinflationary economies for the change in the general purchasing power of the local currency, using official indices before converting the local amounts at the closing rate of the period.

In addition, on July 30, 2014 Argentina entered into a selective default of its restructured debt and, in early 2016, U.S. courts ruled that Argentina must make full payments to the remaining holdout bondholders, which was settled in 2016 following negotiations between Argentina and bondholders.

Under the context of the significant devaluation of the Argentine peso in 2018, along with increased inflation and weak macroeconomic conditions Argentina signed, on June 7, 2018, an agreement with IMF to obtain a significant loan to stabilize the macroeconomic situation. In addition, in August 2019, Argentina held its primary election and the candidate Alberto Fernández defeated the incumbent president Mauricio Macri, which prompted further devaluation of the Argentine peso. In September 2019, the Argentine central bank imposed currency restrictions to stabilize the Argentine peso. In October 2019, Argentina held its general elections and the incumbent president Mauricio Macri was ousted by Alberto Fernández.

10


 
 

In light of the country’s ailing economy and market’s concerns as to the incoming administration’s commitment to fiscal responsibility, our liquidity and operations, as well as our ability to access funds from Argentina could be adversely affected to the extent the economic or political situation in Argentina deteriorates, or if foreign exchange restrictions are further implemented in the country. It is also difficult to assess the impact that the changes to the Argentine political scenario will have in the Argentine economy and, as a result, on our future operations and financial results.

If the economic or political situation in Argentina further deteriorates, our Latin America South operations may be subject to restrictions under new Argentinean foreign exchange, export repatriation or expropriation regimes that could adversely affect our liquidity and operations, and our ability to access funds from Argentina.

In addition, protests erupted in Chile and Bolivia, where we operate. In October 2019, political protests in Chile started in Santiago, initially over an increase in subway fares and expanded to a range of grievances, with temporary impacts on the business environment in the country. On November 10, 2019, the Bolivian president Evo Morales resigned after social unrests. New elections are to be held in Bolivia on May 3, 2020. The unrest in the country led to a decrease in consumption and restrictions to production, which were normalized by the end of the year. Political developments in Latin America, including government deadlock, political instability and civil strife could impact our Latin America South operations and have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Our Operations

Volatility in commodities prices may adversely affect our financial performance.

A significant portion of our cost of sales is comprised of commodities such as aluminum, sugar, corn, wheat and PET bottles, the prices of which fluctuated in 2019. An increase in commodities prices directly affects our consolidated operating costs. Although our current policy is to mitigate our exposure risks to commodity prices whenever financial instruments are available, we cannot assure that such hedging will be possible or available at reasonable costs at all times in the future.

Set forth below is a table showing the volatility in 2019 prices of the principal commodities we purchase:

Commodity

High Price

Low Price

Average in 2019

Fluctuation

Aluminum (US$/ton)

1,923.0

1,697.0

1,781.3

(3.7)%

Sugar (US$ cents/pounds)

13.6

10.8

12.3

11.7%

Corn (US$ cents/bushel)

454.8

346.0

385.4

23.4%

Wheat (US$ cents/bushel)

558.8

418.5

493.4

9.1%

PET (US$/ton)

1,019.8

665.8

833.2

(19.0)%

Sources: Aluminum LME, Sugar ICE, Corn CBOT, Wheat CBOT and PET IHS (formerly CMAI).

Competition could lead to a reduction of our margins, increase costs and adversely affect our profitability.

We compete with both brewers and other beverages companies and our products compete with other beverages. Globally, brewers, as well as other players in the beverage industry, compete mainly on the basis of brand image, price, quality, distribution networks and customer service. Consolidation has significantly increased the capital base and geographic reach of our competitors in some of the markets in which we operate, and competition is expected to increase further as the trend towards consolidation among companies in the beverage industry continues.

Concurrently, competition in the beverage industry is expanding and the market is becoming more fragmented, complex and sophisticated as consumer preferences and tastes evolve. Competition may divert consumers and customers from our products. Competition in our various markets could cause us to reduce pricing, increase capital investment, increase marketing and other expenditures, prevent us from increasing prices to recover higher costs, and thereby cause us to reduce margins or lose market share. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. Innovation faces inherent risks, and the new products we introduce may not be successful, while competitors may be able to respond more quickly than we can to emerging trends.

11


 
 

Additionally, the unfair pricing practices in some markets and the lack of transparency, or even certain illicit practices, such as tax evasion and corruption, may skew the competitive environment, with material adverse effects on our profitability or ability to operate.

Our business is subject to regulations in the countries in which we operate.

Our business is regulated by federal, state and municipal laws and regulations governing many aspects of our operations, including brewing, marketing and advertising, consumer promotions and rebates, workplace safety, transportation, distributor relationships, retail execution, sales and data privacy, among others. We may be subject to claims that we have not complied with existing laws and regulations, which could result in fines and penalties.

We may be subject to laws and regulations aimed at reducing the availability of beer and carbonated soft drink, or CSD beverages, in some of our markets to address alcohol abuse, underage drinking, health concerns and other social issues. For example, certain Brazilian states and small municipalities in which we operate have enacted legislation restricting the hours of operations of certain points of sale, prohibiting the sale of CSDs in schools and imposing restrictions on advertisement of alcoholic beverages. The Brazilian Congress is also evaluating proposed regulation imposing hygienic seals on beverage cans, as well as regulation on the consumption, sales and marketing of alcoholic beverages, including beer which, if enacted, may impose restrictions on the advertisement of alcoholic beverage products on television during specified times of the day and the hours of operation of certain points of sale, among other things. Furthermore, there are legal proceedings pending before Brazilian courts that may lead to restrictions on advertisement of alcoholic beverages. These rules and restrictions may adversely impact our results of operations. For further information, see “Item 4. Information on the Company—B. Business Overview—Regulation.”

There is a global trend of increasing regulatory restrictions with respect to the sale of alcoholic and CSD beverages. Compliance with such regulatory restrictions can be costly and may affect earnings in the countries in which we operate.

In addition, the partnership between Labatt Brewing Company Ltd., our Canadian subsidiary, and Tilray Inc., or Tilray, to research non-alcoholic beverages containing tetrahydrocannabinol, or THD, and cannabidiol, or CBD, both derived from cannabis, and also to commercialize a non-alcoholic CBD beverage in Canada only, could lead to increased legal, reputational and financial risks, as the laws and regulations governing recreational cannabis are still developing, including in ways that we may not foresee. For instance, the involvement in the legal cannabis industry in Canada may invite new regulatory and enforcement scrutiny in other markets. Cannabis remains illegal in many markets in which we operate, and violations of law could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings or criminal charges. Furthermore, the political environment and popular support for cannabis legalization is changing quickly and remains in flux.

If we are not successful in obtaining and maintaining the necessary licenses in the countries in which we operate, we may be subject to fines, penalties, or other regulatory sanctions, which could negatively impact our business and cause us to incur additional costs.

Our business is subject to obtaining and maintaining the necessary licenses and regulatory approvals issued by the competent bodies in the countries in which we operate. We cannot guarantee that such licenses or regulatory approvals will be granted, renewed, or extended, and may be withdrawn, or made subject to limitations or onerous conditions. The absence of such licenses or regulatory approvals may result in the interruption of the activities of a specific plant or distribution center, which may adversely affect our results. Additionally, for the granting or renewal of such licenses or regulatory approvals, the competent authorities may determine that we must make certain changes to our operations or facilities, potentially resulting in additional costs.

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We are subject to risks associated with noncompliance with any data protection laws in the countries in which we operate and can be adversely affected by any penalties or other sanctions imposed.

In the year 2018, Law No. 13.709/2018, the Lei Geral de Proteção de Dados (Brazilian General Data Protection Law) or LGPD, was enacted and will come into effect as of August 16, 2020. Inspired by the General Data Protection Regulation of the European Union, the LGPD sets forth a comprehensive set of rules that promise to reshape how companies, organizations and public authorities collect, use, process and store personal data when carrying out their activities.

The LGPD sets out a legal framework for the processing of personal data and provides, among others, for the rights of data subjects, the legal bases that legitimize processing operations, requirements for obtaining consent, obligations and requirements related to data breaches, requirements for international data transfers, among others. The LGPD also creates the Agência Nacional de Proteção de Dados (National Data Protection Authority), or ANPD, with powers to enforce the law.

The LGPD, as well as any other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions in which we operate, may subject us to, among other things, additional costs and expenses and may require costly changes to our business practices and security systems, policies, procedures and practices.  Failure to comply with the LGPD and/or other personal data protection laws may result in formal warnings, public sanctions, the deletion of data, or the suspension of data processing activities, which could harm our reputation, as well as subject us to government enforcement actions (including fines) or result in private litigation against us, which could negatively affect our business and operating results. Furthermore, a company may be subject to a fine equal to up to 2% of its gross sales, or the gross sales of its economic group in Brazil, in the preceding fiscal year, excluding taxes, but limited to a total of R$50 million per violation.

As a result of our business activities, we hold large volumes of personal data, including that of employees, dealers, and customers. Therefore, we are implementing a privacy governance framework in order to reach compliance with the LGPD until the law comes into effect. We have also implemented security measures to protect our databases and prevent cyberattacks, thereby reducing risks of exposure to data breaches and information security incidents.

Despite the security measures that we have in place, our facilities and systems may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events, and individuals may attempt to gain unauthorized access to our database in order to misappropriate such information for potentially fraudulent purposes. Our security measures may fail to prevent such incidents and breaches of our systems could result in adverse impact to our reputation, financial condition, and market value. In addition, if we are unable to prove that our systems are properly designed to detect and to try and detain a cyberattack, or even if we fail to respond to a cyberattack properly, we could be subject to severe penalties and loss of existing or future business, aside from damages awarded to our customers, dealers and employees whose personal data might have been mishandled or breached.

Information technology failures, including those that affect the privacy and security of sensitive customer and business information, could disrupt our operations.

We rely on information technology systems to process, transmit and store large amounts of electronic data, including personal information. A significant portion of the communication between our personnel, customers and suppliers depends on information technology. As with all large systems, our information systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers' attacks or other security issues.

We depend on information technology to enable us to operate efficiently and interface with customers, as well as to maintain in-house management and control. We also collect and store non-public personal information that customers provide to purchase products or services, including personal information and payment information.

In addition, the concentration of processes in shared services centers means that any technology disruption could impact a large portion of our business within the operating regions we serve. Any transitions of processes to, from or within shared services centers as well as other transformational projects, could lead to business disruptions. If we do not allocate, and effectively manage, the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, or failure to attract new customers, lost revenues resulting from the disruption or shutdown of computer systems, unexpected failure of devices and software in use by our IT platforms, operations or supply chain disruptions, alteration, corruption or loss of accounting financial or other data on which we rely for financial reporting and other purposes, which could cause errors or delays in our financial reporting or the loss of or damage to intellectual property through a security breach. As with all information technology systems, our system could also be penetrated by outside parties with the purpose of extracting information, corrupting information or disrupting business processes.

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We take various actions with the aim of minimizing potential technology disruptions – such as investing in intrusion detection solutions, proceeding with internal and external security assessments, building and implementing business continuity plans and reviewing risk management processes – but all of these protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, of contractors, misappropriation of data by employees, vendors or unaffiliated third parties, or other irregularities that may result in persons obtaining unauthorized access to company data or otherwise disrupting our business. Unauthorized or accidental access to, or destruction, loss, alteration, disclosure, misuse, falsification or unavailability of, information could result in violations of data privacy laws and regulations, damage to our reputation or our competitive advantage, loss of opportunities to acquire or divest of businesses or brands and loss of ability to commercialize products developed through research and development efforts and, therefore, could have a negative impact on net operating revenues. More generally, these or other similar technology disruptions can have a material adverse effect on our business, results of operations, cash flows or financial condition.

While we continue to invest in new technology-monitoring and cyberattack prevention systems, no commercial or government entity can be entirely free of vulnerability to attack or compromise given how rapidly and unpredictably techniques evolve to obtain unauthorized access or disable or degrade service.

If we do not successfully comply with applicable anti-corruption laws and regulations, we could be subjected to fines, penalties or other regulatory sanctions, as well as adverse press coverage, which could impact our reputation, operations and sales.

We are committed to conducting business in a legal and ethical manner in compliance with local and international laws and regulations applicable to our business. Nevertheless, there is a risk that our management, employees or other representatives may take actions that violate applicable anti-corruption laws, including Brazilian Federal Law No. 12,846/2013 (known as the Clean Company Act or BCCA) and the U.S. Foreign Corrupt Practices Act (known as the FCPA).

The BCCA imposes strict liability on companies for certain acts against the public administration, including corrupt acts involving public officials, whether foreign or local. Under the BCCA, companies may be held liable for such acts and face administrative and judicial sanctions, including severe fines and disgorgement of profits. When imposing sanctions under the BCCA, Brazilian authorities may consider whether a company has implemented an effective compliance program.

Notwithstanding the BCCA and related Brazilian enforcement efforts, Brazil still has a perceived elevated risk of corruption. To a certain degree, that may leave us exposed to potential violations of the BCCA, FCPA or other applicable anti-corruption laws and regulations. For example, a number of high-profile corporate corruption allegations have surfaced in Brazil, especially since the beginning of 2014. See “—D. Risk Factors—Risks Relating to Brazil and Other Countries in Which We Operate—Economic and political uncertainty and volatility in Brazil, and the perception of these conditions in the international financial markets, may adversely affect our business.”

Additionally, in the ordinary course of business, we regularly contract and deal with business partners and consulting firms. Some of these third parties have been managed or controlled by former government officials. Because Brazilian authorities are conducting ongoing investigations that target certain firms and business partners that we previously engaged, we have been cited as clients in connection with such investigations.

In the third quarter of 2019, there were news reports regarding alleged leaks of statements about the Company by a former consultant, Mr. Antonio Palocci, in a legal procedure to which we subsequently had access. In this regard, we have not identified evidence supporting Mr. Palocci’s claims of illegal conduct by Ambev and remain committed to monitoring this matter.

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               We have implemented what we view as a robust anti-corruption compliance program designed effectively to detect, prevent and remediate potential violations of applicable anti-corruption laws, including a strict requirement prohibiting our employees and agents from violating these laws. Nevertheless, there remains some risk that improper conduct could occur, thereby exposing us to potential liability and the costs associated with investigating and remediating such potential misconduct. Our existing internal controls and compliance procedures may not be sufficient to prevent or detect all inappropriate conduct, fraud or violations of applicable law by our employees, agents, and other business partners.

If we are not in compliance with anti-corruption and other similar laws, including the BCCA and FCPA, we may be subject to administrative, civil and criminal penalties. This could harm our brand and reputation and have a material adverse impact on our business, financial condition, results of operations and prospects. Adverse press coverage also may result from having our name or brands associated with any misconduct and, even if unwarranted or baseless, could damage our reputation, brands and sales. Therefore, if we become involved in any investigations or other proceedings under the FCPA, BCCA or other applicable anti-corruption laws, our business could be adversely affected.

We are subject to Brazilian and other antitrust regulations.

From time to time, we are and may become involved in litigation, investigations and other legal or administrative proceedings relating to antitrust claims arising from our operations, either in the normal course of business or not, or arising from violations or alleged violations of laws, regulations or acts. We have a substantial share of the beer market in Brazil and thus we are subject to constant monitoring by Brazilian antitrust authorities. We cannot assure you that Brazilian antitrust regulation will not affect our business in the future.

We also have substantial share of the beer market in other countries, such as Argentina, Bolivia and the Dominican Republic, in which our operations are subject to constant monitoring by local antitrust authorities. We cannot assure you that local antitrust regulations will not affect our business in such other countries in the future.

We are exposed to the risk of litigation.

We are now and may in the future be party to legal proceedings and claims (including labor, tax and alcohol-related claims) and significant damages may be asserted against us. See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings” and notes 26 and 29 to our audited consolidated financial statements as of and for December 31, 2019, included elsewhere in this annual report, for a description of our material litigation contingencies. Given the inherent uncertainty of litigation, it is possible that we might incur liabilities as a consequence of the proceedings and claims brought against us, including those that are not currently believed by us to present a reasonably possible chance of loss to us.  Our management may also be exposed to sanctions due to legal proceedings against its members involving our operations.

Our tax contingency has grown in recent years mainly because (1) their principal amount is adjusted on a monthly basis in accordance with the SELIC rate and (2) because of the highly litigious environment in Brazil in connection with tax disputes. Such environment is caused, among other reasons, by the highly complex tax legislation in Brazil, which in many instances reduces certainty of interpretation, as well as impossibility of out of court settlements between the Brazilian IRS and taxpayers. As the administrative phase of our tax proceedings ends and the judicial proceedings begin, the Company will be required to guarantee the amounts under discussion, through insurance bonds, bank guarantees or bank deposits. We will continue to vigorously defend our position in connection with such disputes and we may take, as we have done in the past, the benefit of tax amnesty programs that from time to time are issued by the Federal or State Governments.

Moreover, companies in the alcoholic beverage and soft drink industries are, from time to time, exposed to collective suits (class actions) or other litigation relating to alcohol advertising, alcohol abuse problems or health consequences from the excessive consumption of beer, other alcoholic beverages and soft drinks. As an illustration, certain beer and other alcoholic beverage producers from Brazil and Canada have been involved in class actions and other litigation seeking damages. If any of these types of litigation were to result in fines, damages or reputational damage to us or our brands, this could have a material adverse effect on our business, results of operations, cash flows or financial position.

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We rely on key third parties, including key suppliers, and the termination or modification of the arrangements with such third parties could negatively affect our business.

We rely on thirdparty suppliers for a range of raw materials for our beer and non-beer products, and for packaging material, including aluminum cans, glass, kegs and PET bottles. We seek to limit our exposure to market fluctuations in the supply of these raw materials by entering into medium- and long-term fixedprice arrangements. We have a limited number of suppliers of aluminum cans, glass and PET bottles. Consolidation of the aluminum can industry, glass and PET bottle industry in certain markets in which we operate has reduced local supply alternatives and increased the risk of disruption to aluminum can, glass and PET bottle supplies. Although we generally have other suppliers of raw materials and packaging materials, the termination of or material change to arrangements with certain key suppliers, disagreements with those suppliers as to payment or other terms, or the failure of a key supplier to meet our contractual obligations or otherwise deliver materials consistent with current usage would or may require us to make purchases from alternative suppliers, in each case at potentially higher prices than those agreed with this supplier. Additionally, we may be subject to potential reputational damage if one of our suppliers violates applicable laws or regulations. These factors could have a material adverse effect on our business, results of operations, cash flows or financial condition.

For certain packaging supplies, raw materials and commodities, we rely on a small number of important suppliers. If these suppliers became unable to continue to meet our requirements, and we are unable to develop alternative sources of supply, our operations and financial results could be adversely affected.

Additionally, we have licenses to bottle and/or distribute brands held by companies over which we do not have control. See “Item 4. Information on the Company—B. Business Overview—Licenses.” If we are unable to maintain such arrangements on favorable terms, this could have a material adverse effect on our business, results of operations, cash flows or financial condition.

Demand for our products may be adversely affected by changes in consumer preferences and tastes.

We depend on our ability to satisfy consumer preferences and tastes. Consumer preferences and tastes can change in unpredictable ways due to a variety of factors, such as changes in demographics, consumer health concerns regarding obesity, product attributes and ingredients, changes in travel, vacation or leisure activity patterns, weather, negative publicity resulting from regulatory action or litigation against us or comparable companies or a downturn in economic conditions. Consumers also may begin to prefer the products of competitors or may generally reduce their demand for products of our business segment. Failure by us to anticipate or respond adequately to changes in consumer preferences and tastes could adversely impact our business, results of operations and financial condition.

Negative publicity focusing on our products or on the way we conduct our operations may harm our business.

Media coverage and publicity generally can exert significant influence on consumer behavior and actions. If the social acceptability of beer, other alcoholic beverages or soft drinks were to decline significantly, sales of our products could materially decrease. In recent years, there has been increased public and political attention directed at the alcoholic beverage and soft drink industries. This attention is a result of public concern over alcohol-related problems, including drunk driving, underage drinking, drinking while pregnant and health consequences resulting from the misuse of beer (for example, alcoholism), as well as soft-drink related problems, including health consequences resulting from the excessive consumption of soft drinks (for example, obesity). Factors such as negative publicity regarding the consumption of beer, other alcoholic beverages or soft drinks, publication of studies indicating a significant health risk from consumption of those beverages, or changes in consumer perceptions affecting them could adversely affect the sale and consumption of our products and harm our business, results of operations, cash flows or financial condition to the extent consumers and customers change their purchasing patterns.

Key brand names are used by us, our subsidiaries, associates and joint ventures, and licensed to third-party brewers. To the extent that we or one of our subsidiaries, associates, joint ventures or licensees are subject to negative publicity, and the negative publicity causes consumers and customers to change their purchasing patterns, it could have a material adverse effect on our business, results of operations, cash flows or financial condition. As we continue to expand our operations into emerging and growth markets, there is a greater risk that we may be subject to negative publicity, in particular in relation to environmental impacts, labor rights and local work conditions. Negative publicity that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that brand or business, which could adversely impact our business, results of operations, cash flows and financial condition.

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We rely on the reputation of our brands and damages to their reputation may have an adverse effect on our sales.

Our success depends on our ability to maintain and enhance the image and reputation of our existing products and to develop a favorable image and reputation for new products. The image and reputation of our products may be reduced in the future; concerns about product quality, even when unfounded, could tarnish the image and reputation of our products. An event or series of events that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that brand or business. Restoring the image and reputation of our products may be costly or not possible.

Moreover, our marketing efforts are subject to restrictions on the permissible advertising style, media and messages used. In a number of countries, for example, television is a prohibited channel for advertising beer and other alcoholic products, and in other countries, television advertising, while permitted, is carefully regulated. Any additional restrictions in such countries, or the introduction of similar restrictions in other countries, may constrain our brand building potential and thus reduce the value of our brands and related revenues.

If any of our products is defective or found to contain contaminants, we may be subject to product recalls, individual or collective litigation and/or other liabilities.

We take precautions to ensure that our beverage products and our associated packaging materials (such as bottles, crowns, cans and other containers) meet accepted food safety and regulatory standards. Such precautions include qualitycontrol programs for primary materials, the production process and our final products. We have established procedures to correct issues or concerns that are detected.

In the event that any failure to comply with accepted food safety and regulatory standards (such as a contamination or a defect) does occur in the future, it may lead to business interruptions, product recalls or liability, each of which could have an adverse effect on our business, reputation, prospects, financial condition and results of operations.

Although we maintain insurance policies against certain product liability (but not product recall) risks, we may not be able to enforce our rights in respect of these policies, and, in the event that a contamination or defect occurs, any amounts that we recover may not be sufficient to offset any damage we may suffer, which could adversely impact our business, results of operations and financial condition.

Seasonal consumption cycles and adverse weather conditions may result in fluctuations in demand for our products.

Seasonal consumption cycles and adverse weather conditions in the markets in which we operate may have an impact on our operations. This is particularly true in the summer months, when unseasonably cool or wet weather can affect sales volumes.

Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business or operations, and water scarcity or poor quality could negatively impact our production costs and capacity.

There is a growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain agricultural commodities that are necessary for our products, such as barley, hops, sugar and corn. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment due to increased regulatory pressures. As a result, the effects of climate change could have a long-term, material adverse impact on our business and results of operations.

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We also face water scarcity and quality risks. The availability of clean water is a limited resource in many parts of the world, facing unprecedented challenges from climate change and the resulting change in precipitation patterns and frequency of extreme weather, overexploitation, increasing pollution, and poor water management. We have implemented an internal strategy in order to considerably reduce the use of water in our operative plants. However, as demand for water continues to increase around the world, and as water becomes scarcer and the quality of available water deteriorates, we may be affected by increasing production costs or capacity constraints, which could adversely affect our business and results of operations.

We have announced Sustainability Goals focused on smart agriculture, water stewardship, circular packaging, climate action, and entrepreneurship. If we fail to achieve these goals for any reason, there is a risk of reputational damage.

Our operations are subject to safety and environmental regulations, which could expose us to significant compliance costs and litigation relating to environmental issues.

Our operations are subject to safety and environmental regulations by national, state and local agencies, including, in certain cases, regulations that impose liability without regard to fault. These regulations can result in liability that might adversely affect our operations. The environmental regulatory climate in the markets in which we operate is becoming stricter, with greater emphasis on enforcement.

While we have budgeted for future capital and operating expenditures to maintain compliance with environmental laws and regulations, there can be no assurance that we will not incur substantial environmental liability or those applicable environmental laws and regulations will not change or become more stringent in the future.

We may not be able to protect our intellectual property rights.

Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how. We have been granted numerous trademark registrations and patents covering our brands and products and have filed, and expect to continue to file, trademark and patent applications seeking to protect newly developed brands and products. We cannot be sure that trademark and patent registrations will be issued with respect to any of our applications. There is also a risk that we could, by omission, fail to renew a trademark or patent on a timely basis or that our competitors will challenge, invalidate or circumvent any existing or future trademarks and patents requested by, issued to, or licensed by, us.

Although we have put in place appropriate actions to protect our portfolio of intellectual property rights (including patent applications, trademark registration and domain names), we cannot be certain that the steps we have taken will be sufficient or that third parties will not infringe upon or misappropriate proprietary rights. If we are unable to protect our proprietary rights against infringement or misappropriation, it could have a material adverse effect on our business, results of operations, cash flows or financial condition, and in particular, on our ability to develop our business.

Natural and other disasters could disrupt our operations.

The economy of countries in which we operate, as well as our business activity and operating results, may be adversely impacted by natural, social, technical or physical risks such as large-scale epidemics and pandemics, and the occurrence of natural disasters, terrorist events and military and other actions may result in significant widespread disruptions to commerce and the ability of businesses, including ours, to operate normally. Such disruptions may result in reduced economic activity and business sentiment, both in the Brazilian market and internationally. A recent and relevant example of large scale epidemics and pandemics risks is the outbreak of the novel strain of coronavirus, or COVID-19, which may negatively impact the results of our operations, by causing the decline in consumer demand for our products.

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Our insurance coverage may be insufficient to make us whole on any losses that we may sustain in the future.

The cost of some of our insurance policies could increase in the future. In addition, some types of losses, such as losses resulting from wars, acts of terrorism, or natural disasters, generally are not insured because they are either uninsurable or it is not economically practical to obtain insurance. Moreover, insurers recently have become more reluctant to insure against these types of events. Should a material uninsured loss or a loss in excess of insured limits occur, this could adversely impact our business, results of operations and financial condition.

The ability of our foreign subsidiaries to distribute cash upstream may be subject to various conditions and limitations.

Our foreign subsidiaries’ ability to distribute cash (to be used, among other things, to meet our financial obligations) through dividends, intercompany advances, management fees and other payments is, to a large extent, dependent on the availability of cash flows at the level of such foreign subsidiaries and may be restricted by applicable laws and accounting principles. In particular, 45% (R$23,875.2 billion) of our total net revenues of R$52,599.7 billion in 2019 came from our foreign subsidiaries. In addition, some of our subsidiaries are subject to laws restricting their ability to pay dividends or the amount of dividends they may pay.

If we are not able to obtain sufficient cash flows from our foreign subsidiaries, this could negatively impact our business, results of operations and financial condition because the insufficient availability of cash at our company level may constrain us from paying all of our obligations.

Contractual and legal restrictions to which Ambev and its subsidiaries are potentially or allegedly subject may be triggered upon the consummation of certain transactions involving our indirect controlling shareholder, Anheuser-Busch InBev SA/NV, or ABI, resulting in adverse limitations to our operations.

Ambev and its subsidiaries are a party to certain joint venture, distribution and other agreements, guarantees and instruments that may contain restrictive provisions that our contractual counterparties may try to interpret as being triggered upon the consummation of certain unrelated transactions of ABI. Some of those contracts may be material and, to the extent they may contain any such restrictive provisions, our counterparties may seek to enforce certain contractual remedies that may curtail material contractual rights and benefits that we have thereunder under the argument that ABI’s consummation of certain transactions has triggered the referred provisions. Similarly, unrelated transactions consummated by ABI may subject us to further antitrust restrictions in the countries in which we already operate. Any such restrictions may limit the amount and quality of business we conduct in each of those countries.

We operate a joint venture in Cuba, in which the Government of Cuba is our joint venture partner. Cuba is still targeted by broad and comprehensive economic and trade sanctions of the United States. Our operations in Cuba may adversely affect our reputation and the liquidity and value of our securities.

In January 2014, one of our wholly-owned subsidiaries acquired from ABI, a controlling interest of 50% in Cerveceria Bucanero S.A., or Bucanero, a Cuban company in the business of producing and selling beer. The other 50% equity interest in Bucanero is owned by the Government of Cuba. We have the right to appoint the general manager of Bucanero. Bucanero’s main brands are Bucanero and Cristal, but it also imports and sells in Cuba other brands produced by certain of our other subsidiaries. In 2019, Bucanero sold 1.5 million hectoliters of beer, representing about 0.9% of our total volume of 163,243.0 million hectoliters for the year. Although Bucanero’s production is primarily sold in Cuba, a small portion of its production is exported to and sold by certain distributors in other countries outside Cuba (but not the United States).

Based on U.S. foreign policy, the U.S. Treasury Department’s Office of Foreign Assets Control and the U.S. Commerce Department together administer and enforce broad and comprehensive economic and trade sanctions against Cuba. These sanctions were strengthened by the Trump Administration through a National Security Presidential Memorandum, issued on June 16, 2017, that, among other things, introduced prohibitions on certain financial transactions with certain entities and sub-entities identified by the U.S. Department of State. Although our operations in Cuba are quantitatively immaterial, our overall business reputation may suffer or we may face additional regulatory scrutiny as a result of our activities in Cuba based on the fact that Cuba remains a target of U.S. economic and trade sanctions.

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In addition, there have in the past been initiatives by federal and state lawmakers in the United States, and certain U.S. institutional investors, including pension funds, to adopt laws, regulations or policies requiring the divestment from, or reporting of interests in, companies that do business with countries designated as state sponsors of terrorism. Although the United States government ceased to identify Cuba as a state sponsor of terrorism in June 2015, this position may be revised by action of the U.S. government’s executive branch. If U.S. government policy towards Cuba were to be reversed, with that country being once again designated as a state sponsor of terrorism, Cuba could return to being a target of possible restrictions for U.S. investment. If U.S. investors decide to liquidate or otherwise divest their investments in companies that have operations of any magnitude in Cuba, the market in and value of our securities could be adversely impacted.

Also, Title III of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 (known as the “Helms-Burton Act”) authorizes private lawsuits for damages against anyone who traffics in property confiscated without compensation by the Government of Cuba from persons who at the time were, or have since become, nationals of the United States. The Helms-Burton Act also includes a section that authorizes the U.S. Department of State to prohibit entry into the United States of non-U.S. persons who traffic in confiscated property, and corporate officers and principals of such persons, and their families. Although Title III of the Helms-Burton Act has been suspended by discretionary presidential action since its inception in 1996 (and no action has been taken under this provision since its inception), on May 2, 2019, the Trump Administration activated Title III of the Helms-Burton Act, thereby allowing nationals of the United States that hold claims under the Helms-Burton Act to file suit in U.S. federal court against all persons trafficking in property confiscated by the Cuban government. As a result of the activation of Title III of the Helms-Burton Act, we may be subject to potential U.S. litigation exposure, including claims accrued during the prior suspension of Title III of the Helms-Burton Act. Given the unprecedented activation of Title III of the Helms-Burton Act, there is substantial uncertainty as to how the statute will be interpreted by U.S. Courts. In 2009, ABI received notice of a claim purporting to be made under the Helms-Burton Act relating to the use of a trademark by Bucanero, which is alleged to have been confiscated by the Cuban government and trafficked by ABI through their former ownership and management of Bucanero.  It remains uncertain how the activation of Title III of the Helms-Burton Act will impact our U.S. litigation exposure with respect to the notice of claim.

We may not be able to recruit or retain key personnel.

In order to develop, support and market our products, we must hire and retain skilled employees with particular expertise. The implementation of our strategic business plans could be undermined by a failure to recruit or retain key personnel or the unexpected loss of senior employees, including in acquired companies. We face various challenges inherent in the management of a large number of employees over diverse geographical regions. Key employees may choose to leave their employment for a variety of reasons, including reasons beyond our control. The impact of the departure of key employees cannot be determined and may depend on, among other things, our ability to recruit other individuals of similar experience and skill at an equivalent cost. It is not certain that we will be able to attract or retain key employees and successfully manage them, which could disrupt our business and have an unfavorable material effect on our financial position, income from operations and competitive position.

Risks Relating to Our Common Shares and ADSs

The relative volatility and illiquidity of securities of Brazilian companies may substantially limit your ability to sell our common shares and ADSs at the price and time you desire.

Investing in securities of companies in emerging markets, such as Brazil, involves greater risk than investing in securities of companies from more developed countries, and those investments are generally considered speculative in nature. Brazilian investments, such as investments in our common shares and ADSs, are subject to economic and political risks, involving, among other factors:

·        changes in the Brazilian regulatory, tax, economic and political environment that may affect the ability of investors to receive payment, in whole or in part, in respect of their investments; and

·        restrictions on foreign investment and on repatriation of capital invested.

The Brazilian securities markets are substantially smaller, less liquid and more concentrated and volatile than major U.S. and European securities markets. They are also not as highly regulated or supervised as those other markets. The relative illiquidity and smaller market capitalization of Brazilian securities markets may substantially limit your ability to sell the Ambev common shares and ADSs at the price and time you desire.

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Deterioration in economic and market conditions in Brazil and other emerging market countries, as well as in developed economies (includes as a result of the COVID-19 virus pandemic), may adversely affect the market price of our common shares and ADSs.

Economic and market conditions in Brazil and other emerging market countries, especially those in Latin America, influence the market for securities issued by Brazilian companies as well as investors’ perception of economic conditions in Brazil. In addition, global financial crisis originating in developed economies, including the subprime debt crisis in the United States and the sovereign debt crisis in Europe, have had an impact on many economies and capital markets around the world, including Brazil, which may adversely affect investors’ interest in the securities of Brazilian issuers such as Ambev. Also, more recently, the COVID-19 virus pandemic has resulted in significant financial market volatility and uncertainty around the globe. Therefore, the market value of our common shares and ADSs may be adversely affected by events occurring inside or outside of Brazil.

The outbreak of communicable diseases such as the coronavirus (COVID-19) outbreak on a global scale could materially and adversely affect our business, liquidity, financial condition and trading price of our common shares and ADSs.

The outbreak of communicable diseases such as the novel strain of coronavirus, or COVID-19, on a global scale has been affecting investment sentiment and causing disruptions which have been increasing volatility in global markets and affecting the outlook of the economies of the countries in which we operate. In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. This pandemic, as well as the reality or fear of any other adverse public health developments, could adversely and materially affect, among other things, our manufacturing and supply chain operations, including due to the reduction or closure of our production units and the interruption of the supply of raw materials.

The local, national and international response to the virus is quickly developing, fluid and uncertain. Responses have included voluntary and in some cases, mandatory quarantines as well as shut downs and other restrictions on travel and commercial, social and other activities. These and other responses could impact the ability to market our products, the availability of those who make the decision to purchase our products and the ultimate demand for our products. In the event the number of infected patients increases in the markets in which we operate, it is possible that these disruptions would affect the economy and the financial markets, consequently affecting our financial condition and results of operations.   On a business level, this could mean that our or other companies’ operations may be suspended.

While any disruption caused is currently expected to be temporary, there is uncertainty around the duration of these disruptions, the possibility of any government intervention or other measures, or the possibility of other economic effects on the stock market, foreign exchange rates and otherwise. Any such negative impact could result in a material adverse effect on our business, liquidity, financial conditions, results of operations and trading price of our common shares and ADSs, as well as our ability to achieve the forward looking expectations for the year of 2020 that we have previously disclosed. The extent to which COVID-19 could impact our business depends on future developments, which are highly uncertain and cannot be predicted and are outside of our control, including new information which may quickly emerge concerning the severity of the virus, the scope of the outbreak and the actions to contain the virus or treat its impact, among others.

Future equity issuances may dilute the holdings of current holders of Ambev common shares or ADSs and could materially affect the market price for those securities.

We may in the future decide to offer additional equity to raise capital or for other purposes. Any such future equity offering could reduce the proportionate ownership and voting interests of holders of our common shares and ADSs, as well as our earnings and net equity value per common share or ADS. Any offering of shares and ADSs by us or our main shareholders, or a perception that any such offering is imminent, could have an adverse effect on the market price of these securities.

Brazilian foreign exchange controls and regulations could restrict conversions and remittances abroad of the dividend payments and other shareholder distributions paid in Brazil in reais in respect of the Ambev common shares (including shares underlying the Ambev ADSs).

Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reasons to foresee such a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. For example, for approximately six months in 1989 and early 1990 the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors and had their remittance abroad withheld by the Central Bank in order to conserve Brazil’s foreign currency reserves at the time. These amounts were subsequently released in accordance with Brazilian government directives. Similar measures could be taken by the Brazilian government in the future.

As a result, the Brazilian government may in the future restrict the conversion and remittance abroad, to ADS holders or holders of Ambev common shares residing outside Brazil, of dividend payments and other shareholder distributions paid in Brazil in reais in respect of the Ambev common shares (including shares underlying the Ambev ADSs). The likelihood that the Brazilian government would impose such restrictions may be affected by the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole and other factors. We cannot assure you that the Central Bank will not modify its policies or that the Brazilian government will not institute restrictions or delays on cross-border remittances in respect of securities issued in the international capital markets. For further information on this matter, see “—A. Selected Financial Data—Exchange Controls.”

If you exchange your Ambev ADSs for the respective Ambev common shares underlying those ADSs, you risk forfeiting Brazilian tax advantages and losing the ability to timely remit foreign currency abroad.

The Ambev ADSs benefit from the foreign capital registration that The Bank of New York Mellon, as depositary of Ambev’s ADS program, or the Depositary, has in Brazil, which permits it to convert dividends and other distributions with respect to the Ambev common shares underlying the Ambev ADSs into foreign currency and remit the proceeds of such conversion abroad. Pursuant to CMN Resolution No. 4,373, in order for an investor to surrender ADSs for the purpose of withdrawing the shares represented thereby and be entitled to trade the underlying shares directly on the B3, the investor is required to appoint a Brazilian financial institution duly authorized by the Central Bank and the CVM to act as its legal representative, who shall be responsible, among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank. If you exchange your Ambev ADSs for the respective Ambev common shares underlying those ADSs, you may be subject to a less favorable tax treatment on gains with respect to these investments. Moreover, if such representatives fail to obtain or update the relevant certificates of registration, investors may incur additional expenses or be subject to operational delays which could affect their ability to receive dividends or distributions relating to the common shares or the return of their capital in a timely manner. The custodian’s certificate of registration or any foreign capital registration directly obtained by such holders may be affected by future legislative or regulatory changes, and we cannot assure such holders that additional restrictions applicable to them, the disposition of the underlying common shares, or the repatriation of the proceeds from the process will not be imposed in the future. For a more complete description of Brazilian restrictions on foreign investments and Brazilian foreign investment regulations, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Restrictions on Foreign Investment” and “—A. Selected Financial Data—Exchange Controls.” For a more complete description of Brazilian tax regulations, including any potential risks regarding the possibility that the sale or disposition of ADSs by a Non-Brazilian Holder may be subject to capital gains tax in Brazil, see “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations.”

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Certain shareholder entitlements may not be available in the U.S. to holders of Ambev ADSs.

Due to certain United States laws and regulations, U.S. holders of Ambev ADSs may not be entitled to all of the rights possessed by holders of Ambev common shares. For instance, U.S. holders of Ambev ADSs may not be able to exercise preemptive, subscription or other rights in respect of the Ambev common shares underlying their Ambev ADSs, unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements thereunder is available.

Holders of Ambev ADSs may be unable to fully exercise voting rights with respect to the Ambev shares underlying their ADSs.

Under Brazilian law, only shareholders registered as such in the corporate books of Brazilian companies may attend shareholders’ meetings. Because all the Ambev common shares underlying the Ambev ADSs are registered in the name of the Depositary (and not the ADS holder), only the Depositary (and not the ADS holder) is entitled to attend Ambev’s shareholders’ meetings. A holder of Ambev ADSs is entitled to instruct the Depositary as to how to vote the respective Ambev common shares underlying their ADSs only pursuant to the procedures set forth in the deposit agreement for Ambev’s ADS program. Accordingly, holders of Ambev ADSs will not be allowed to vote the corresponding Ambev common shares underlying their ADSs directly at an Ambev shareholders’ meeting (or to appoint a proxy other than the Depositary to do so), unless they surrender their Ambev ADSs for cancellation in exchange for the respective Ambev shares underlying their ADSs. We cannot ensure that such ADS cancellation and exchange process will be completed in time to allow Ambev ADS holders to attend a shareholders’ meeting of Ambev.

Further, the Depositary has no obligation to notify Ambev ADS holders of an upcoming vote or to distribute voting cards and related materials to those holders, unless Ambev specifically instructs the Depositary to do so. If Ambev provides such instruction to the Depositary, it will then notify Ambev’s ADS holders of the upcoming vote and arrange for the delivery of voting cards to those holders. We cannot ensure that Ambev’s ADS holders will receive proxy cards in time to allow them to instruct the Depositary as to how to vote the Ambev common shares underlying their Ambev ADSs. In addition, the Depositary and its agents are not responsible for a failure to carry out voting instructions or for an untimely solicitation of those instructions.

As a result of the factors discussed above, holders of Ambev ADSs may be unable to fully exercise their voting rights.

Our status as a foreign private issuer allows us to follow Brazilian corporate governance practices and exempts us from a number of rules under the U.S. securities laws and listing standards, which may limit the amount of public disclosures available to investors and the shareholder protections afforded to them.

We are a foreign private issuer, as defined by the Securities and Exchange Commission, or the SEC, for purposes of the Exchange Act. As a result, we are exempt from many of the corporate governance requirements of stock exchanges located in the United States, as well as from rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. For example, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions under Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Accordingly, there may be less publicly available information concerning us than there is for U.S. public companies.

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In addition, for so long as we remain as a foreign private issuer, we will be exempt from most of the corporate governance requirements of stock exchanges located in the United States. Accordingly, you will not be provided with some of the benefits or have the same protections afforded to shareholders of U.S. public companies. The corporate governance standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. For example, although Rule 10A-3 under the Exchange Act generally requires that a company listed in the United States have an audit committee of its board of directors composed solely of independent directors, as a foreign private issuer we are relying on an exemption from this requirement under Rule 10A-3(c)(3) of the Sarbanes-Oxley Act of 2002 that is available to us as a result of features of the Brazilian Corporation Law applicable to our Fiscal Council. In addition, we are not required under the Brazilian Corporation Law to, among other things:

·        have a majority of our Board of Directors be independent (though our bylaws provide that two of our directors must be independent and, in certain circumstances pursuant to the Brazilian Corporation Law, our minority shareholders may be able to elect members to our Board of Directors);

·        have a compensation committee, a nominating committee, or corporate governance committee of the Board of Directors (though we currently have a non-permanent Operations, Finance and Compensation Committee that is responsible for evaluating our compensation policies applicable to management);

·        have regularly scheduled executive sessions with only non-management directors (though none of our current directors hold management positions in us); or

·        have at least one executive session of solely independent directors each year.

For further information on the main differences in corporate governance standards in the United States and Brazil, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Differences Between United States and Brazilian Corporate Governance Practices.”

As a Brazilian company, Ambev is subject to different corporate laws and regulations than those typically applicable to U.S.-listed companies, which may result in Ambev’s shareholders having fewer or less well-defined shareholder rights than the shareholder rights of those companies.

Ambev’s corporate affairs are governed by its bylaws and the Brazilian Corporation Law, which may differ from the legal principles that would apply to Ambev if the company were incorporated in a jurisdiction in the United States, such as Delaware or New York, or in other jurisdictions outside of Brazil. In addition, shareholder rights under the Brazilian Corporation Law to protect them from actions taken by the board of directors or controlling shareholders may be fewer and less well-defined than under the laws of jurisdictions outside of Brazil.

Although insider trading and price manipulation are restricted under applicable Brazilian capital markets regulations and treated as crimes under Brazilian law, the Brazilian securities markets may not be as highly regulated and supervised as the securities markets of the United States or other jurisdictions outside Brazil. In addition, rules and policies against self-dealing and for the preservation of shareholder interests may be less well-defined and enforced in Brazil than in the United States or other jurisdictions outside Brazil, potentially causing disadvantages to a holder of Ambev ADSs as compared to a holder of shares in a U.S. public company. Further, corporate disclosures may be less complete or informative than required of public companies in the United States or other jurisdictions outside Brazil.

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Our current controlling shareholders will be able to determine the outcome of our most significant corporate actions.

Our two direct controlling shareholders, Interbrew International B.V., or IIBV, and AmBrew S.A., or AmBrew, both of which are subsidiaries of ABI, together with Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficência, or FAHZ, held in aggregate 72.1% of our total and voting capital stock (excluding treasury shares) as of December 31, 2019.

ABI indirectly held shares in us representing 61.8% of our total and voting capital stock (excluding treasury shares) as of December 31, 2019. ABI thus has control over us, even though (1) ABI is subject to the Ambev shareholders’ agreement among IIBV, AmBrew and FAHZ dated April 16, 2013 and effective as of July 2, 2019, or the 2019 Shareholders’ Agreement, and (2) ABI is controlled by Stichting Anheuser-Busch InBev, or Stichting, a foundation organized under the laws of the Netherlands, which represents an important part of interests of the founding Belgian families of Interbrew N.V./S.A. (as ABI was then called) (mainly represented by Eugénie Patri Sébastien S.A.) and the interests of the Brazilian families which were previously our controlling shareholders (represented by BRC S.à.R.L.), or the Interbrew Founding Families. For further information on these matters see “Item 4. Information on the Company—A. History and Development of the Company—The InBev-Ambev Transactions” and “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Ambev’s Major Shareholders—The 2019 Shareholders’ Agreement.”

Our controlling shareholders are able to elect the majority of the members of our Board of Directors and Fiscal Council, and generally determine the outcome of most other actions requiring shareholder approval, including dividend distributions, the consummation of corporate restructurings, issuances of new shares, sales of materials assets and bylaw amendments. Under Brazilian Law No. 6,404/76, as amended, or the Brazilian Corporation Law, the protections afforded to non-controlling security holders may differ from, or be less comprehensive than, the corresponding protections and fiduciary duties of directors applicable in the U.S. or other jurisdictions. See “—As a Brazilian company, Ambev is subject to different corporate laws and regulations than those typically applicable to U.S.-listed companies, which may result in Ambev’s shareholders having fewer or less well-defined shareholder rights than the shareholder rights of those companies.”

Our shareholders may not receive any dividends.

According to our bylaws, we generally pay our shareholders 40% of our annual adjusted net income, calculated and adjusted pursuant to Brazilian Corporation Law in accordance with the mechanisms described in our bylaws as presented in our consolidated financial statements prepared under IFRS. The main sources for these dividends are cash flows from our operations and dividends from our operating subsidiaries. Therefore, that net income may not be available to be paid out to our shareholders in a given year (for example due to a material impact of COVID-19 virus pandemic in our operations). In addition, we might not pay dividends to our shareholders in any particular fiscal year upon the determination of the Board of Directors that any such distribution would be inadvisable in view of our financial condition. While the law does not establish the circumstances rendering the payment of dividends inadvisable, it is generally agreed that a company need not pay dividends if such payment threatens its existence as a going concern or harms its normal course of operations. Any dividends not distributed would be allocated to a special reserve account for future payment to shareholders, unless it is used to offset subsequent losses or as otherwise provided for in our bylaws. It is possible, therefore, that our shareholders will not receive dividends in any particular fiscal year.

Foreign holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

We are organized under the laws of Brazil and most of our directors and executive officers, as well as our independent registered public accounting firm, reside or are based in Brazil. In addition, substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for foreign holders of our ADSs to expediently effect service of process upon us or those persons within the United States or other jurisdictions outside Brazil or to efficiently enforce against us or them judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain formal and procedural conditions are met (including non-violation of Brazilian national sovereignty, public policy and “good morals”), holders of our ADSs may face greater difficulties in protecting their interests in the context of legal, corporate or other disputes between them and us, our directors and/or our executive officers than would shareholders of a U.S. corporation. In addition, a plaintiff (whether or not Brazilian) residing outside Brazil during the course of litigation in Brazil must provide a bond to guarantee court costs and legal fees if the plaintiff owns no real property in Brazil that could secure such payment. The bond must have a value sufficient to satisfy the payment of court fees and defendant’s attorney fees, as determined by a Brazilian judge. This requirement does not apply to (1) the enforcement of debt instruments or awards, including foreign judgments that have been duly recognized by the Brazilian Superior Court of Justice (Superior Tribunal de Justiça); (2) counterclaims; and (3) circumstances where the plaintiff or other intervening parties (regardless of citizenship) resides in a country that is a party to a treaty in force in Brazil that establishes that no security, bond or deposit of any kind is required by reason only of their foreign nationality (e.g., the Hague Convention on International Access to Justice). Furthermore, Brazil does not have a treaty with the United States to facilitate or expedite the enforcement in Brazil of decisions issued by a state court in the United States, which shall necessarily be previously recognized by the Brazilian Superior Court of Justice in order to produce effects in Brazil. As to arbitral awards issued in the United States, it is important to note that Brazil has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Decree No. 4311/2002), and arbitral awards rendered outside of the Brazilian territory are enforceable if the requirements provided by such treaty are fulfilled, and the arbitral award is previously recognized by the Brazilian Superior Court of Justice.

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Judgments of Brazilian courts with respect to our shares will be payable only in reais.

If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we will not be required to discharge any such obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date of the effective payment. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of, or related to, our obligations under our common shares.

 

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ITEM 4.               INFORMATION ON THE COMPANY

Ambev’s principal executive offices are located at Rua Dr. Renato Paes de Barros, 1017, 3rd floor, 04530001, São Paulo, SP, Brazil, and its telephone number and email are: +55 (11) 2122-1414 and ir@ambev.com.br.

A.           History and Development of the Company

Overview

We are the successor of Brahma and Antarctica, two of the oldest brewers in Brazil. Antarctica was founded in 1885. Brahma was founded in 1888 as Villiger & Cia. The Brahma brand was registered on September 6, 1888, and in 1904 Villiger & Cia. changed its name to Companhia Cervejaria Brahma. However, the legal entity that has become Ambev S.A., the current NYSE- and B3-listed company, was incorporated on July 8, 2005 as a non-reporting Brazilian corporation under the Brazilian Corporation Law and is the successor of Old Ambev. Until the stock swap merger of Old Ambev with Ambev S.A. approved in July 2013 (see “—Stock Swap Merger of Old Ambev with Ambev S.A.”), Ambev S.A. did not conduct any operating activities and had served as a vehicle for ABI to hold a 0.5% interest in Old Ambev’s capital stock.

In the mid-1990s, Brahma started its international expansion into Latin America, and since then we have been buying assets in different parts of the continent including the South America, Central America and the Caribbean.

In the late 1990s, Brahma obtained the exclusive rights to produce, sell and distribute Pepsi CSD products throughout Brazil, and since then we have been distributing these products throughout that country. In addition, certain of our subsidiaries have franchise agreements for Pepsi products in Argentina, Bolivia, Uruguay and the Dominican Republic. See “Item 4. Information on the Company—B. Business Overview—Licenses—Pepsi.”

In the early 2000s, we acquired a 40.5% economic interest in Quinsa and the joint control of that entity, which we shared temporarily with Beverages Associates (BAC) Corp., or BAC, the former sole controlling shareholder of Quinsa. This transaction provided us with a leading presence in the beer markets of Argentina, Bolivia, Paraguay and Uruguay, and also set forth the terms for our future acquisition of Quinsa’s full control from BAC. In April 2006, we increased our equity interest in Quinsa to 91% of its total share capital, after which we started to fully consolidate Quinsa upon the closing of that transaction in August 2006.

In August 2004, we and a Belgian brewer called Interbrew S.A./N.V. (as ABI was then called) completed a business combination that involved the merger of an indirect holding company of Labatt one of the leading brewers in Canada, into us. At the same time, our controlling shareholders completed the contribution of all shares of an indirect holding company which owned a controlling stake in us to Interbrew S.A./N.V. in exchange for newly issued shares of Interbrew S.A./N.V. After this transaction, Interbrew S.A./N.V. changed its company name to InBev S.A./N.V. (and, since 2008, to Anheuser-Busch InBev SA/NV) and became our majority shareholder through subsidiaries and holding companies. (see “—The InBev-Ambev Transactions”).

The InBev-Ambev Transactions

The “InBev-Ambev transactions” consisted of two transactions negotiated simultaneously: (1) in the first transaction, BRC exchanged its Old Ambev shares for shares in Interbrew N.V./S.A. (as ABI was then called); and (2) in the second transaction, Old Ambev issued new shares to Interbrew N.V./S.A. in exchange for Interbrew’s 100% stake in Labatt.

Exchange of Shares Between BRC and the Interbrew Founding Families

In March 2004, various entities controlled by BRC entered into a contribution and subscription agreement with Interbrew N.V./S.A. (as ABI was then called) and various entities representing the interests of the Interbrew Founding Families to exchange their controlling interest in Old Ambev for newly issued voting shares of Interbrew N.V./S.A., which represented 24.7% of Interbrew N.V./S.A.’s voting shares.

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Upon closing of this transaction in August 2004, (1) BRC received approximately 44% of the voting interest in Stichting, which thereupon owned approximately 56% of Interbrew N.V./S.A.’s common shares, and (2) Interbrew N.V./S.A. received approximately a 53% voting interest and a 22% economic interest in Old Ambev. Such voting interest was subject to our shareholders’ agreement at the time, as amended in connection with the InBev-Ambev transactions. In addition, Interbrew N.V./S.A. changed its legal name to InBev N.V./S.A. (and, since its acquisition of Anheuser-Busch, Inc. in the U.S. in 2008, to Anheuser Busch-InBev N.V./S.A.).

Acquisition of Labatt

Pursuant to the incorporação agreement dated March 3, 2004, Labatt Brewing Canada Holding Ltd., or Mergeco, was merged into Old Ambev by means of an upstream merger under the Brazilian Corporation Law, or the Incorporação. Mergeco held 99.9% of the capital stock of Labatt Holding ApS, or Labatt ApS, a corporation organized under the laws of Denmark, and Labatt ApS owned all the capital stock of Labatt. Upon completion of the Incorporação, Old Ambev held 99.9% of the capital stock of Labatt ApS, and, indirectly, of Labatt. As consideration for the acquisition of Labatt, Old Ambev issued common and preferred shares to Interbrew N.V./S.A. (as ABI was then called).

With the consummation of this transaction in August 2004, (1) Labatt became a wholly-owned subsidiary of Old Ambev, and (2) Interbrew N.V./S.A. (as ABI was then called) increased its stake in Old Ambev to approximately 68% of common shares and 34% of preferred shares.

Ownership Structure of InBev N.V./S.A. and Old Ambev Upon Consummation of the InBev-Ambev Transactions

InBev N.V./S.A.

Upon closing the InBev-Ambev transactions, 56% of InBev N.V./S.A.’s voting shares were owned by Stichting, 1% was jointly owned by Fonds Voorzitter Verhelst SPRL and Fonds InBev-Baillet Latour SPRL, 17% were owned directly by entities and individuals associated with the Interbrew Founding Families and the remaining 26% constituted the public float.

BRC became the holder of 44% of Stichting’s voting interests, while the Interbrew Founding Families held the remaining 56% of Stichting’s voting interests. In addition, BRC and entities representing the interests of the Interbrew Founding Families entered into a shareholders’ agreement, providing for, among other things, joint and equal influence over the exercise of the Stichting voting rights in InBev N.V./S.A. (as ABI was then called).

Old Ambev

Upon closing of the InBev-Ambev transactions, InBev N.V./S.A. (as ABI was then called) became the owner of approximately 68% of Old Ambev’s voting shares, FAHZ retained approximately 16% of such shares, and the remaining shares were held by the public.

Mandatory Tender Offer

Pursuant to the Brazilian Corporation Law, InBev N.V./S.A. (as ABI was then called) was required to conduct, following the consummation of the InBev-Ambev transactions, a mandatory tender offer, or the MTO, for all remaining outstanding common shares of Old Ambev. The MTO was completed in March 2005, and InBev N.V./S.A. (as ABI was then called) increased its stake in Old Ambev to approximately an 81% voting interest and a 56% economic interest in that company. FAHZ did not tender its Old Ambev shares in the MTO.

Stock Swap Merger of Old Ambev with Ambev S.A.

On July 30, 2013, the minority shareholders of Old Ambev approved a stock swap merger of Old Ambev with us, according to which each and every issued and outstanding common and preferred share of Old Ambev not held by Ambev S.A. (including in the form of ADSs) was exchanged for five newly issued common shares of Ambev S.A. (including in the form of ADSs). As a result of the stock swap merger, Old Ambev became a wholly-owned subsidiary of Ambev S.A., which continued the same operations of Old Ambev. The ratio adopted for the stock swap merger did not result in any ownership dilution in the equity interest held in us by our minority shareholders, including our former non-voting preferred shareholders, who were granted a separate class vote on the transaction without the interference of our controlling shareholder.

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The stock swap merger combined our former dual-class capital structure, comprised of voting common shares and non-voting preferred shares, into a new, single-class capital structure, comprised exclusively of voting common shares. The purpose of this transaction was to simplify our corporate structure and improve our corporate governance, with a view to increasing liquidity for all shareholders, eliminating certain administrative, financial and other costs and providing more flexibility for the management of our capital structure. As a result of the stock swap merger, all shareholders of Old Ambev, including former holders of that company’s non-voting preferred shares, gained access to the same rights and privileges enjoyed by Old Ambev’s common shareholders, including full voting rights and the right to be included in a change-of-control tender offer under the Brazilian Corporation Law that ensures that holders of common stock are offered 80% of the price per share paid to a selling controlling shareholder in a change-of-control transaction.

Upstream Merger of Old Ambev with and into Ambev S.A.

In January 2014, and as a subsequent step of the stock swap merger, an upstream merger of Old Ambev and one of its majority-owned subsidiaries with and into Ambev S.A. was consummated. This upstream merger had no impact on the shareholdings that our shareholders held in us. As a result of this upstream merger, our corporate structure was simplified.

Recent Acquisitions, Divestments and Strategic Alliances

In September 2017, we entered into an agreement with ABI, pursuant to which our subsidiary Cervecería y Maltería Quilmes S.A., or Quilmes, agreed to transfer to a third-party, Compañia Cervecerías Unidas S.A. or its affiliates, or CCU, certain Argentinean brands (Norte, Iguana and Baltica) and related business assets as well as payment of US$50 million. In exchange, ABI has agreed to transfer to Quilmes the brewery of Cerveceria Argentina Sociedad Anonima Isenbeck, an Argentinean subsidiary of ABI. In addition, at closing ABI licensed to Quilmes in perpetuity the right to produce and commercialize the Budweiser brand, among other ABI brands, in Argentina upon ABI’s recovery of the distribution rights to such brands from CCU. The transaction was subject to certain conditions precedent and closed on May 2, 2018. Rothschild acted as our exclusive financial advisor.

In December 2017, E. León Jimenes, S.A., or ELJ, the other shareholder together with us in Tenedora CND, S.A., or Tenedora – a holding company incorporated in the Dominican Republic, owner of almost the totality of Cervecería Nacional Dominicana, S.A. – partially exercised, in accordance with the shareholders’ agreement of Tenedora, its put option in connection with shares representing 30% of Tenedora’s capital stock. The transaction was subject to certain conditions precedent and closed on January 18, 2018. As a result of the partial exercise of such put option, at closing we paid to ELJ the amount of US$926.5 million and became the owner of approximately 85% of Tenedora, with ELJ remaining with 15%. In addition, in light of the strategic importance of the alliance with ELJ, our Board of Directors approved amending from 2019 to 2022 the term for the call option granted by ELJ to us to become exercisable.

In June 2018, we concluded the sale of all shares of our subsidiary, Barbados Bottling Co. Limited, a subsidiary that produces and distributes carbonated soft drinks in Barbados, in the amount of US$53 million. We recorded a gain of approximately US$22 million as a result of this transaction.

In December 2018, our Canadian subsidiary Labatt Brewing Company Ltd. entered into a joint venture named Fluent Beverages, or Fluent, with High Park Farms Ltd., a subsidiary of Tilray, a global pioneer in cannabis production and distribution. Each company intends to invest up to US$50 million in such joint venture. Fluent’s main purpose is to research and commercialize non-alcoholic beverages containing cannabis extracts within Canada only. In December 2019, Fluent launched its first non-alcoholic CBD-infused beverage within Canada only.

In January 2019, the new terms of the long-term agreement with PepsiCo, under which the Company has the exclusive right to bottle, sell and distribute certain brands on PepsiCo’s portfolio of CSDs in Brazil, including Pepsi-Cola, Gatorade, H2OH! and Lipton Ice Tea, became effective after being approved by Brazilian antitrust authorities in December 2018. Such new terms were agreed by the parties in an amendment dated October 2018 and reflect certain changes in the commercial arrangement between them. The agreement with PepsiCo will be in force until December 31, 2027.

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In March 2019, our Brazilian subsidiary Arosuco Aromas e Sucos Ltda., or Arosuco, acquired 100% of HBSIS Soluções em Tecnologia da Informação Ltda., or HBSIS, a company that develops computer programs, systems and software, with an investment of R$50 million. Our integration with HBSIS is assisting in the expansion and improvement of technology to all areas of our business with agility and scale.

On November 7, 2019, we entered into a long-term distribution agreement with Red Bull do Brasil Ltda., or Red Bull, whereby we have been granted the exclusive right to sell and distribute certain brands of Red Bull’s portfolio in specific limited points of sale of the on-trade channel in Brazil.

B.           Business Overview

Description of Our Operations

We are the largest brewer in Latin America in terms of sales volumes and one of the largest beer producers in the world, according to our estimates. We currently produce, distribute and sell beer, CSDs and other non-alcoholic and non-carbonated products in 18 countries across the Americas.

Effective January 1, 2019, we reorganized our regional reporting structure.  We no longer report the Latin America North business segment (LAN) and, from now on, we are reporting the Brazil, Central America and the Caribbean business segments separately. On December 31, 2019, we conducted our operations through four business segments, as follows:

·       

Brazil, which includes the beer sales division and the NAB sales division;

·       

Central America and the Caribbean, or CAC, which includes our direct operations in the Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala (which also serves El Salvador, Honduras and Nicaragua), Barbados and Panama;

·       

Latin America South, or LAS, which includes our operations in Argentina, Bolivia, Paraguay, Uruguay and Chile; and

·       

Canada, represented by Labatt’s operations, which includes domestic sales in Canada and some exports to the U.S. market.

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The following map illustrates our four business segments as of December 31, 2019:

An analysis of our consolidated net sales by business segment for the periods indicated is presented in the table below:

 

Net Sales (in R$ million)
Year Ended December 31,

 

2019

2018

2017

 

Sales

% of Total

Sales

% of Total

Sales

% of Total

Brazil

28,724.5

54.6%

26,814.2

53.4%

26,353.0

55.0%

Beer Brazil

24,304.2

46.2%

23,008.5

45.8%

22,509.3

47.0%

NAB

4,420.2

8.4%

3,805.7

7.6%

3,843.7

8.0%

CAC

6,757.9

12.8%

5,813.9

11.6%

4,733.0

9.9%

Latin America South

10,028.7

19.1%

10,753.9

21.4%

10,769.7

22.5%

Canada

7,088.6

13.5%

6,849.3

13.6%

6,043.5

12.6%

Total

52,599.7

100.0%

50,231.3

100.0%

47,899.3

100.0%

An analysis of our sales volume by business segment for the periods indicated is presented in the table below:

 

Sales Volumes (‘000 hl)
Year Ended December 31,

 

2019

2018

2017

 

Volume

% of Total

Volume

% of Total

Volume

% of Total

Brazil

106,806.7

65.4%

101,642.9

64.0%

106,360.0

65.3%

Beer Brazil

80,263.7

49.2%

77,784.2

49.0%

80,233.6

49.3%

NAB

26,542.9

16.3%

23,858.8

15.0%

26,126.4

16.0%

CAC

13,859.5

8.5%

13,159.8

8.3%

12,271.8

7.5%

Latin America South

32,991.1

20.2%

33,971.2

21.4%

34,062.0

20.9%

Canada

9,585.7

5.9%

9,942.9

6.3%

10,135.7

6.2%

Total

163,243.0

100.0%

158,716.9

100.0%

162,829.4

100.0%

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Business Strategy

We aim to continuously create value for our stockholders. The main components of our business strategy are:

·        our people and culture;

·        our strategic growth platforms;

·        quality of our products;

·        sustainability;

·        permanent cost efficiency; and

·        financial discipline.

Our People and Culture

We believe highly qualified, motivated and committed employees are critical to our long-term success. We carefully manage our hiring and training process with a view to recruiting and retaining outstanding professionals. In addition, we believe that through our compensation program, which is based both on variable pay and stock ownership, we have created financial incentives for high performance and results. Another core element of our culture is our distinguished managerial capability, which is characterized by (1) a hardworking ethos, (2) results-focused evaluations, (3) the encouragement of our executives to act as owners and not only as managers, (4) leadership by personal example, and (5) appreciation of field experience.

Growth Platforms

We focus our efforts behind the following strategic growth platforms to support our sustainable long-term growth:

·        Differentiate the Core: we believe that building strong brands that create enduring bonds with our consumers is a fundamental prerequisite to assure the sustainability of our business in the future. By connecting with our consumers through relevant marketing platforms and breakthrough experiences, and differentiating between our main brands of the core segment, we are able to drive a superior top line performance by balancing volume and price/mix growth in a sustainable way;

·        Premiumize at Scale: premium volumes have been growing above the core segment in the markets where we operate and there is a significant opportunity to accelerate this growth and to increase even further the weight of premium volumes within beer and NAB. At Ambev, we are working towards leading this growth through our wide-ranging portfolio of domestic and global premium brands and by improving our route to market execution;

·        Drive Smart Affordability: in an effort to offer affordable products without sacrificing profitability, we have several initiatives to reduce product costs, from packaging to route-to-market and brand development. For instance, in Brazil, Nossa, Magnífica and Legítima beer brands are brewed with cassava from local farmers, an ingredient that provides a unique lightness to the beer. We are able to offer these products to consumers at a competitive price point with healthy profit margins, while simultaneously fostering social engagement, promoting the development of the local economy, and enhancing the culture of the states where the beers are produced and sold;

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·        Drive Operational Excellence: as a service-oriented company, we acknowledge that enhancing our relationship with our clients is an important lever to drive sustainable growth and, thus, a consistent evolution of our route to market and of our service level is at the core of our priorities. Likewise, we are continuously pursuing operational excellence that delivers both efficiency and quality; and

·        Business Transformation Enabled by Technology: Technology has been a key enabler for building an ecosystem at Ambev, supporting our strategic platforms. On the operations side, we are focused on expanding and improving technology to all areas of Ambev with agility and scale.

Quality of our Products

We brew a wide variety of beers, including ales, lagers, clear, dark and full-bodied beers, amongst others, offering consumers a unique portfolio of high-quality beers designed to satisfy different needs and tastes across different occasions. We also produce a number of non-alcoholic products, such as soft drinks, energy drinks and juices. The quality of our products is at the forefront of our priorities. We have strict processes, with more than 1,300 controls and more than 370 tests across our production lines, as we aim to provide to our consumers products matching the highest possible standards. Our R&D team is also constantly working to enhance our production process and the quality of our products.

Sustainability

Brewing quality beer starts with the best ingredients. This requires a healthy, natural environment, as well as thriving communities. We are building a company to last, bringing people together for a Better World, now and for the next 100 and more years. That’s why sustainability isn’t just part of our business, it is our business. Therefore, we have committed to achieving five Sustainability Goals by 2025: (i) empowering farmers: 100% of our direct farmers will be skilled, connected, and financially empowered; (ii) securing water access: 100% of our communities in high-stress areas will have measurably improved water availability and quality; (iii) driving sustainable packaging: 100% of our product will be in packaging that is returnable or made from majority recycled content; (iv) championing low carbon technology: 100% of our purchased electricity will be from renewable sources and we will have a 25% reduction in CO2 emissions across our value chain; and (v) entrepreneurship: 100% of our entrepreneurs will be skilled with the necessary tools to evolve.

Permanent Cost Efficiency

Cost control is one of the top priorities of our employees. Each of our departments must comply with its respective annual budget for fixed and variable costs. As a means of avoiding unnecessary expenses, we have designed a management control system inspired on “zero-base budgeting” concepts that requires every manager to build from scratch an annual budget for his/her respective department.

Financial Discipline

Our focus is not only on volumes and operating performance, but also on the disciplined management of our working capital and our cash flow generation. Our objective is to maximize the return to our shareholders through a combination of payments of dividends and interest on shareholders’ equity, while at the same time keeping our investment plans and holding an adequate level of liquidity to accommodate the seasonality of our business and cope with often volatile and uncertain financial market conditions.

ZX Ventures and Z-Tech

Our business strategy is also supported by ZX Ventures and Z-Tech, our innovation arms.

ZX Ventures is our growth and innovation arm whose mandate is to invest in and develop new products and businesses that address emerging consumer needs. We seed, launch and scale new products that deliver customer experiences, from services that step-change convenience to rethinking delivery. ZX Ventures operations are adjacent to our core beer business including eCommerce, craft (including our brands Colorado, Wäls and Patagonia) and specialty beer, and brand experience.

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Z-Tech is our innovation arm created in 2019 with the mission to catalyze the growth of small and medium businesses through technology, creating an environment where those businesses and their families can thrive for the long term. Z-Tech teams make use of an agile methodology as they define small and medium businesses’ needs, explore marketplace and payment technology solutions, validate through proof-of-concept and pilot before scaling across the globe.

Seasonality

Sales of beverages in our markets are seasonal. Generally, sales are stronger during the summer and major holidays. Therefore, in the Southern Hemisphere (Brazil, Central America and the Caribbean and Latin America South) volumes are usually stronger in the fourth calendar quarter due to early summer and year-end festivities. In Canada, volumes are stronger in the second and third calendar quarters due to the summer season. This is demonstrated by the table below, which shows our volumes by quarter and business segment:

 

2019 Quarterly Volumes
(
as a percentage of annual volumes)

 

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Brazil

25.8%

22.6%

22.2%

29.4%

Beer Brazil

26.2%

22.7%

21.7%

29.4%

NAB

24.5%

22.3%

23.8%

29.4%

CAC

22.9%

24.9%

24.9%

27.3%

Latin America South

26.6%

19.5%

23.9%

29.9%

Canada

19.2%

29.3%

28.2%

23.3%

Total

25.3%

22.6%

23.1%

29.0%

Description of the Markets Where We Operate

Brazil

Beer Brazil

The Brazilian Beer Market

In Brazil, the two main packaging presentations are standardized, returnable 600-milliliter glass bottles sold in bars for on-premise consumption and 350-milliliter one-way aluminum cans, which are predominantly sold in supermarkets for off-premise consumption.

According to our estimates, in 2019 we were the market leader of the Brazilian market in terms of beer sales volumes, mainly through our three major families of brands: Skol, Brahma and Antarctica. Our closest competitors in Brazil are: Heineken, particularly following its May 2017 acquisition of Brasil Kirin operations, and Cervejaria Petrópolis.

Distribution represents an important feature in this market, as the retail channel is fragmented into approximately one million points of sale. Our distribution is structured under two separate branches, comprising (1) our network of exclusive third-party distributors, involving 150 operations, and (2) our proprietary direct distribution system, involving more than 98 distribution centers located across most Brazilian regions. We have been focusing on direct distribution in large urban regions, while strengthening our third-party distribution system. See “—Business Overview—Business Strategy.”

Future Beverages

Some of our products stretch beyond typical beer consumption occasions, such as the Skol Beats Senses family of beverages, which are sweeter beverages with higher alcohol content, and Brahma 0.0%, a non-alcoholic beer, which, according to our estimates is the leader in the Brazilian non-alcoholic beer segment and represents another 1 % of our total beer volumes in the country.

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NAB

The Brazilian NAB Markets

The NAB markets in Brazil are comprised of many different segments, including CSD, bottled water, isotonic beverages, energy drinks, coconut water, powdered and natural juices and ready-to-drink teas. The CSD segment is the most significant to our business representing approximately 94.2% of the volumes of our NAB unit.

According to our estimates, the leading CSD flavors in Brazil are (1) cola (with 45% of the market in 2019), (2) guaraná, (3) orange, and (4) lime. Most CSDs in Brazil are sold in supermarkets in two-liter non-returnable PET bottles for in-home consumption. The 350-milliliter one-way aluminum can is also an important packaging format for our business and is mainly sold in supermarkets and restaurants.

Our main competitor in this market is The Coca-Cola Company. In addition to The Coca-Cola Company, we face competition from small regional bottlers that produce what are usually referred to as “B Brands.” The B Brands compete mainly on price, usually being sold at a significantly lower price than our products.

Our main CSD brands are Guaraná Antarctica, the leader in the “non-cola” flavor segment, and Pepsi Cola. Pepsi Cola is sold under our exclusive production and bottling agreements with PepsiCo. Our NAB portfolio also includes such brands as Gatorade in the isotonic market, H2OH! in the non-sugar CSD market, and Lipton Iced Tea in the ready-to-drink tea market, which are also sold under license from PepsiCo, and Fusion, a proprietary brand that is today the fourth largest brand in the energy drinks segment in Brazil. Also in 2016, we acquired the Brazilian juice company “Do Bem,” which enjoys brand strength in health and wellness categories.

Our NAB products are sold in Brazil through the same distribution system used for beer.

CAC (Central America and the Caribbean)

Central America

In Guatemala, the main packaging presentations are the returnable, 12 ounce and 1-liter glass bottles, and the 12 ounce and the 16-ounce cans. Our main competitor in Guatemala is Cerveceria Centro Americana, the market leader, which is a private company owned by local investors. According to our estimates, the total annual sales volume of the Guatemalan beer market was 4.2 million hectoliters in 2019.

In El Salvador, Honduras and Nicaragua, we are currently selling imported brands, and our main packaging presentation is the returnable one-liter glass bottle.

Specifically in Nicaragua, our main competitor is Compañía Cervecera de Nicaragua, the market leader, which is a joint venture between Guatemala’s Cerveceria Centro Americana and Florida Ice & Farm Co, an investor group from Costa Rica.

In all of these markets, beer is predominantly sold in returnable bottles through small retailers. We sell our Brahva, Brahva Gold, Extra, Budweiser, Bud Light, Stella Artois, Corona, Modelo Especial, Beck, Leffe and Hoegaarden beer brands in Central America, which are distributed through the CBC distribution system, jointly with CBC’s CSD portfolio.

In May 2016, we entered into an agreement with ABI pursuant to which we agreed to transfer to ABI our businesses in Colombia, Peru and Ecuador. In exchange, ABI has agreed to transfer SAB’s Panamanian business to us. We formally began operations in Panama on December 31, 2016. According to our estimates, we currently lead the beer market in Panama. The main packaging presentations are 285-milliliter bottles and 355-milliliter cans and our main beer brands in Panama are Atlas Golden Light and Balboa Ice. The main competitor in the Panamanian beer market is Baru. According to our estimates, the total annual sales volume of the Panamanian beer market was 3.4 million hectoliters in 2019. Our Panamanian business also produces and commercializes soft drinks, under franchise, being Pepsi, Canada Dry and Squirt the main brands distributed. In Panama, the annual sales volume of the CSD market was 3.1 million hectoliters in 2019.

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In May 2018, our board of directors approved the distribution, sale and marketing of the brand Budweiser in Panama, which has helped on the strategy of growing the market segment of beers priced higher than the core segment.

The Caribbean Beer Market

In Cuba, our main packaging presentation is the 12-ounce can. Our main competitor in Cuba is State Brewery. We currently sell the Bucanero, Cristal, Mayabe and Cacique local beer brands in Cuba. According to our estimates, the total annual sales volume of the Cuban beer market was approximately 2.2 million hectoliters in 2019.

In the Dominican Republic, the annual sales volume of the beer market was 4.6 million hectoliters in 2019, according to our estimates. The main packaging presentation in the Dominican beer market consists of the returnable 650-milliliter and 1-liter glass bottles, which are predominantly sold in small retail stores. We currently lead the beer market in the Dominican Republic after our acquisition of CND, with a leading portfolio of brands such as Presidente, Brahma Light, Presidente Light, Bohemia, The One, Corona, Modelo Especial, Stella Artois and Budweiser. Our distribution system in the Dominican Republic is comprised mainly of direct distribution operations.

In Barbados, the annual sales volume of the beer market was 0.15 million hectoliters in 2019, according to our estimates. We are the market leader with brands such as Banks and Deputy, which are produced locally by BHL. The main packaging presentation in Barbados is the 250-milliliter and 275-milliliter returnable glass bottles.

The Caribbean CSD Market

According to our estimates, the annual sales volume of the Dominican CSD market was 7.9 million hectoliters in 2019. The main packaging presentation in the Dominican CSD market is the returnable half-liter bottle, in either glass or PET format, which is predominantly sold in small retail stores. The Coca-Cola Company, represented by Bepensa, has the leadership of the Dominican CSD Market, followed by Ajegroup, which adopts a low price strategy. We are currently the third player in that market.

Our main CSD brands in the Dominican Republic are Red Rock, Pepsi-Cola and Seven Up, all of which are marketed under an exclusive bottling agreement with PepsiCo. Our distribution system in the Dominican Republic is comprised of direct distribution operations and third-party distributors.

Latin America South

Argentina

Argentina is one of our most important regions, second only to Brazil in terms of volume.

We serve more than 309 thousand points of sale throughout Argentina both directly and through our exclusive third-party distributors.

The Argentine Beer Market

According to our estimates, the annual sales volume of the Argentine beer market was 20 million hectoliters in 2019. With a population of approximately 44 million, Argentina is Latin America South’s largest and most important beer market.

In Argentina, 36% of our beer volume is distributed directly by us and 64% is distributed through exclusive third-party distributors. Our main package presentation in Argentina is the 1-liter returnable glass bottles, which accounted for 67% of our sales in 2019.

According to our estimates, on-premise consumption represented 10% of beer volumes in Argentina in 2019, and supermarkets sales represented 14.4% of beer volumes. The main channels of volume consumption in Argentina are through kiosks and small grocery stores.

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Our most important beer brands in Argentina are Quilmes Clásica, Brahma and Stella Artois. According to Scentia, we are the leading beer producers in Argentina, and our main competitor in Argentina is Compañía Cervecerías Unidas S.A.

The Argentine CSD Market

According to our estimates, in 2019, annual sales volume of the Argentine CSD market was 48.7 million hectoliters. In Argentina, 54% of our CSD volume is distributed directly by us and 46% is distributed through exclusive third-party distributors. Non-returnable bottles represented 75% of our CSD sales in Argentina in 2019.

We are the exclusive Pepsi bottlers in Argentina and our most important CSD brand in that country is Pepsi-Cola and Seven-Up. According to Scentia, we were second in the Argentine CSD market in 2019, only after The Coca-Cola Company.

Bolivia

The Bolivian Beer Market

According to our estimates, the annual sales volume of the Bolivian beer market was 3.5 million hectoliters in 2019. The Bolivian market is strongly influenced by macroeconomic trends and governmental regulatory and fiscal policies.

In Bolivia, 84% of our beer volumes is directly distributed by us and 16% is distributed through exclusive third-party distributors. Our main package presentation in Bolivia is the 620-milliliter returnable glass bottle, which accounted for 50% of our sales in 2019.

Our most important beer brands in Bolivia are Paceña, Taquiña and Huari. We are the leading beer producer in Bolivia, according to Nielsen.

The Bolivian CSD Market

In March 2009, we, through Quinsa, acquired from SAB 100% of Bebidas y Aguas Gaseosas Occidente S.R.L., becoming the exclusive bottler of Pepsi in Bolivia.

According to our estimates, in 2019, the annual sales volume of the Bolivian CSD market was 10.8 million hectoliters. Of our total CSD volumes in Bolivia in 2019, 64% was directly distributed by us and 36% was distributed through exclusive third-party distributors, while 99% of our CSD sales in that country in 2019 were through non-returnable bottles.

Chile

According to our estimates, the annual sales volume of the Chilean beer market was 10 million hectoliters in 2019. Beer consumption in Chile has increased every year since 2009, except for 2017. Our most important beer brands in Chile are Becker, Corona, Budweiser, Cusqueña and Stella Artois.

We are the second beer producers in Chile, according to Nielsen, and our main competitor and the leader in the country is Compañía Cervecerías Unidas S.A.

In 2015, we became the exclusive distributors of the Corona brand in Chile, and since January 2016 we also started to import and distribute Budweiser in Chile, followed by Cusqueña in 2018.

Paraguay

According to our estimates, the annual sales volume of the Paraguayan beer market was 4.3 million hectoliters in 2019, excluding contraband.

The market for beer in Paraguay has traditionally distinguished itself from those in the southern cone countries in certain respects because (1) beer has not faced significant competition from wine as an alternative alcoholic beverage; (2) the domestic beer market has faced significant competition from imported brands, which accounted for a far higher market share in Paraguay than in neighboring countries; and (3) the seasonality of our products is lower due to warmer conditions throughout the year.

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In Paraguay, 72% of our beer volumes is directly distributed by us and 28% is distributed through exclusive third-party distributors. Our main package presentation in Paraguay is the can, which accounted for 45% of our sales in 2019.

Our most important beer brands in Paraguay are Brahma, Pilsen and Ouro Fino, with a leader market position in the country in 2019, according to our estimates. We are also the exclusive distributor of the Budweiser brand in Paraguay.

Uruguay

The Uruguayan Beer Market

According to our estimates, the annual sales volume of the Uruguayan beer market was 1.04 million hectoliters in 2019. Our Latin America South business unit manages both the beer and CSD businesses in Uruguay out of a facility based in that country.

In Uruguay, 22% of our beer volumes is directly distributed by us and 78% is distributed through exclusive third-party distributors. Our main package presentation in Uruguay is the 1-liter returnable glass bottle, which accounted for 56% of our sales in 2019.

Our most important beer brands in Uruguay are Pilsen and Patricia, with a leader market position in 2019, according to our estimates.

The Uruguayan CSD Market

According to our estimates, in 2019, the annual sales volume of the Uruguayan CSD market was 3.3 million hectoliters.

In Uruguay, 37% of our CSD volume is directly distributed by us and 63% is distributed through exclusive third-party distributors. Non-returnable bottles accounted for 80% of our sales in that country in 2019. Our most important brand in Uruguay is Pepsi-Cola, with The Coca-Cola Company being our main competitor.

Canada - Labatt

The Canadian Beer Market

Our Canada business segment is represented by the Labatt operations, which sells domestic and ABI beer brands, a portfolio of ready-to-drink and cider brands, and exports the Kokanee beer brand to the United States.

According to our estimates, Labatt is the market leader in the Canadian beer market. The main packaging presentation in that country are the returnable, 341-milliliter glass bottle, and the 355-milliliter aluminum can, which are predominantly sold in privately owned and government-owned retail stores in addition to privately owned on-trade establishments. Our main competitor in Canada is Molson, but we also compete with smaller brewers, such as Sleeman Breweries Ltd., or Sleeman, and Moosehead Breweries Ltd.

Our main brands in Canada are Budweiser, Bud Light, Michelob Ultra and Busch (brewed and sold under license from ABI’s subsidiary Anheuser-Busch, Inc., or Anheuser-Busch), along with Corona, Labatt Blue, Alexander Keith’s, Stella Artois and Kokanee. Our distribution system in Canada is structured in different ways across the country, as further explained below.

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Other Canadian Markets

The ready-to-drink beverages (RTD) industry in Canada grew double-digits in 2019, driven mainly by the rapid expansion of the seltzer segment. Labatt’s RTD portfolio in Canada includes the Palm Bay and Mike’s brands, which recently launched low-calorie, 0g sugar seltzer offerings to compete in this segment.

Additionally, Labatt has a joint venture with Tilray, a global player in cannabis production and distribution, that researches non-alcoholic beverages containing THC and CBD, and also commercializes a non-alcoholic CBD beverage in Canada only.

Distribution in Ontario

In Ontario, the province with the largest beer consumption in Canada, we own together with other brewers a distribution and retail company incorporated in 1927 named Brewers Retail Inc., operating as The Beer Store, or TBS. In 2015, we finalized a new Master Framework Agreement, or MFA, with the government of the Province of Ontario that specifies TBS’s role as a retailer and distributor of beer.

Under the MFA, TBS will continue to be the primary retailer for pack sizes larger than six bottles or cans of beer. The Liquor Control Board of Ontario, or LCBO, a chain of liquor stores owned by the government of the Province of Ontario, will continue to have the ability to sell beer. Most LCBO stores are limited to selling pack sizes of six bottles or cans of beer or less. Under the MFA up to 450 grocery stores may also be granted a license to sell beer in pack sizes of six bottles or cans or less. The MFA came into force on January 1, 2016 and has an initial term of ten years, subject to renewal for successive five-year terms, unless the agreement is terminated after the initial term in accordance with the MFA.

TBS ownership is available to all qualifying Ontario-based brewers. TBS’s 15-member Board of Directors is made up of the following members: four directors nominated by Labatt; four directors nominated by Molson; four independent directors initially nominated by a selection committee jointly represented by the Province of Ontario, Labatt and Molson and now nominated by a majority vote of the independent directors; two directors nominated by larger brewer shareholders (other than Labatt and Molson) with TBS sales greater than 50,000 hectoliters per year; and one director nominated by smaller brewer shareholders with TBS sales less than 50,000 hectoliters per year.

TBS operates as a self-funding corporation on a break-even cash flow basis under which it charges volume-based fees for services it provides to the brewers. The nature of TBS’s business requires compliance with laws and regulations and oversight by the Province of Ontario and its agents. The Liquor Control Act, the Liquor License Act and the Alcohol and Gaming Regulation and Public Protection Act are administered by the Minister of Finance or the Attorney General, which maintains control of the beverage alcohol sectors through the Liquor Control Board of Ontario and the Alcohol and Gaming Commission of Ontario.

Distribution in Quebec

Quebec is the province in Canada with the second largest beer consumption. In this province there are no exclusive rights for the sales of beer, and both the on-premise and off-premise sales channels are mostly comprised of privately owned stores. The SAQ, a government-operated liquor store, sells a select few beer brands that are not available in the private retail system.

We (as well as our competitors) sell our products in Quebec through a direct sales and distribution system.

Distribution in the Western Provinces

Molson and Labatt are each a shareholder in Brewers Distributor Limited, which operates a distribution network primarily for beer in the four western provinces of British Columbia, Alberta, Manitoba and Saskatchewan, as well as three territories (Yukon, the Northwest Territories and Nunavut). In Alberta, some volume is also sold through a third-party wholesaler. In these Western Provincial markets, there are both privately controlled retail stores (such as in Alberta and British Columbia) and government-controlled retail stores (such as in British Columbia, Manitoba and Saskatchewan).

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Distribution in the Atlantic Provinces

We distribute and sell our products in the Atlantic Provinces (including New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island) through (1) distribution and retail networks controlled by the government in the provinces of Nova Scotia, New Brunswick and Prince Edward Island; and (2) private distributors in Newfoundland.

Beer and CSD Production Process

The basic brewing process for most beers is straightforward, but significant know-how is involved in quality and cost control. The most important stages are brewing and fermentation, followed by maturation, filtering and packaging. Although malted barley (malt) is the primary ingredient, other grains such as unmalted barley, corn, rice or wheat are sometimes added to produce different beer flavors. The proportion and choice of other raw materials varies according to regional taste preferences and the type of beer.

The first step in the brewing process is making wort by mixing malt with warm water and then gradually heating it to approximately 75°C in large mash turns to dissolve the starch and transform it into a mixture, called “mash,” of maltose and other sugars. The spent grains are filtered out and the liquid, now called “wort,” is boiled. Hops are added at this point to give a special bitter taste and aroma to the beer, and help preserve it. The wort is boiled for one to two hours to sterilize and concentrate it, and extract the flavor from the hops. Cooling follows, using a heat exchanger. The hopped wort is saturated with air or oxygen, essential for the growth of the yeast in the next stage.

Yeast is a micro-organism that turns the sugar in the wort into alcohol and carbon dioxide. This process of fermentation takes five to eleven days, after which the wort finally becomes beer. Different types of beer are made using different strains of yeast and wort compositions. In some yeast varieties, the cells rise to the top at the end of fermentation. Ales and wheat beers are brewed in this way. Pilsen beers are made using yeast cells that settle to the bottom.

During the maturation process the liquid clarifies as yeast and other particles settle. Further filtering gives the beer more clarity. Maturation varies by type of beer and can take as long as three weeks. Then the beer is ready for packaging in kegs, cans or bottles.

CSDs are produced by mixing water, flavored concentrate and sugar or sweetener. Water is processed to eliminate mineral salts and filtered to eliminate impurities. Purified water is combined with processed sugar or, in the case of diet CSDs, with artificial sweeteners and concentrate. Carbon dioxide gas is injected into the mixture to produce carbonation. Immediately following carbonation, the mixture is packaged. In addition to these inputs, delivery of the product to consumers requires packaging materials such as PET bottles, aluminum cans, labels and plastic closures.

For information on our production facilities, see “—D. Property, Plant and Equipment.”

Sources and Availability of Raw Materials

Beer

The main raw materials used in our production are malt, non-malted cereals, hops and water.

Barley and Malt

Malt is widely available and our requirements are met by domestic and international suppliers as well as our own malting facilities. In the case of our beer operations in Brazil, approximately 80% of our malt needs are supplied by our own malting facilities located in the south of Brazil, Argentina and Uruguay.

For the rest of our needs, our most significant malt supplier is Cooperativa Agroindustrial Agraria in Brazil. Market prices for malt are volatile, and depend on the quality and the level of production of the barley crop across the world, as well as on the intensity of demand.

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We purchase barley for our malting facilities directly from South America farmers. Barley prices depend on local winter crop markets, wheat market prices on the main boards of trade across the world and on the barley quality during the harvest. We enter into future contracts or financials instruments to avoid the impact of short-term volatility in barley and malt prices on our production costs. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Hops

There are two types of hops used in our beer production: hops used to give beer its distinctive bitter flavor, which we generally import from the United States, and hops used to give beer its distinctive aroma, which we generally import from Europe. The supply of hops is concentrated into a few international companies, namely the Barth-Haas Group, Hopsteiner, Kalsec and HVG.

Non-malted Cereals

Corn syrup is purchased from Ingredion, Cargill and Tereos. Corn is purchased to produce grits in-house in some plants and corn grits and rice are purchased in other plants from local suppliers and are generally widely available.

Water

Water represents a small portion of our raw material costs. We obtain our water requirements from several sources, such as: lakes and reservoirs, deep wells located near our breweries, rivers adjoining our plants and public utility companies. We monitor the quality, taste and composition of the water we use, and treat it to remove impurities and to comply with our high-quality standards and applicable regulations. As a result of advances in technology, we have continuously reduced our water consumption per hectoliter produced.

Non-alcoholic Beverages

The main raw materials used in our production are: concentrate (including guaraná extract), sugar, sweetener, juices, water and carbon dioxide gas. Most of these materials are obtained from local suppliers.

Guaraná Berries

We have a 1,070 hectare farm that provides us with 25 tons of guaraná seeds (berries) per year, or about 10.0% of our requirements, with the remainder purchased directly from independent farmers in the Amazon region as well as other guaraná available regions in Brazil. The focus of our own farm is to provide Guaraná seedlings for local producers and promote the sustainable cultivation of Guaraná in the Amazon Region. Approximately 40 thousand seedlings are donated per year.

Concentrates

We have a concentrate facility in the north of Brazil which produces the concentrates to meet our requirements for the production of our proprietary brand Guaraná Antarctica among others. The concentrate for Pepsi CSD products is purchased from PepsiCo.

Sugar

Sugar is widely available and is purchased by our regional sourcing entity. We use sugar in our CSD products mainly in Brazil, Argentina, Bolivia, Uruguay, and the Caribbean. We enter into derivative instruments to avoid the impact of short-term volatility in sugar prices on our production costs. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Juices

Orange, lemon, grape, apple, and other juices used in our CSD and juices products are purchased in Brazil. We also use lemon and grapefruit juices in our CSD products in Argentina and Uruguay. Our main suppliers are Louis Dreyfus Commodities, Cutrale, Citrus Juice, Litoral Citrus and San Miguel.

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Other

We buy all of the fruit juice, pulp and concentrate that we use in the manufacture of our fruit flavored CSDs.

Packaging

Packaging costs are comprised of the cost of glass and PET bottles, aluminum cans, plastic film (shrink and stretch), paper labels, plastic closures, metal crowns and paperboard, and other materials. We enter into derivative instruments to mitigate the risks of short-term volatility in aluminum and some other packaging materials prices on our production costs; for further information on this matter see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”. We also set a fixed price for the period in accordance with the prevailing macroeconomic conditions for some materials.

In April 2008, we started operating a glass bottle producing facility in Rio de Janeiro, which we expanded in November 2015. This unit’s capacity is of approximately 255 thousand tons of glass and in 2019 such unit attended to more than 60% of our glass needs.

We have supply contracts with respect to most packaging materials. The choice of packaging materials varies by cost and availability in different regions, as well as consumer preferences and the image of each brand.

Our aluminum cans are mainly sourced regionally by global companies, while our glass containers are sourced by a variety of suppliers, both regionally and globally. We obtain the labels for our beer and CSD primarily from local suppliers; in Brazil, the majority of our requirements are met by a printing house that belongs to FAHZ and is operated by us pursuant to a lease agreement. Plastic closures are principally purchased regionally, and PET pre-forms are principally purchased regionally by both local and global companies. Crown caps in Brazil are mainly sourced from our vertical operation in Manaus, Arosuco. These producers also supply some of our other Latin American operations.

Regulation

All our operations are subject to local governmental regulation and supervision, including (1) labor laws; (2) social security laws; (3) public health, consumer protection and environmental laws; (4) securities laws; and (5) antitrust laws. In addition, we may also be subject to regulations aimed at (1) ensuring healthy and safe conditions in facilities for the production, bottling, and distribution of beverages and (2) placing restrictions on beer and CSD consumption.

Environmental laws in the countries where we operate are mostly related to (1) the conformity of our operating procedures with environmental standards regarding, among other issues, the emission of gas and liquid effluents and (2) the disposal of one-way packaging.

Governmental restrictions on beer consumption in the markets where we operate vary from one country to another, and in some instances, from one local region to another. The most relevant restrictions are:

·        each country or province has a minimum legal drinking age that is established by the government; the beer legal drinking age varies from 18 to 21 years;

·        some local and federal governments require that retail stores own special licenses for the sale of alcohol; this is the case in some regions of Argentina, Bolivia, Chile, Panama and Canada;

·        some local and federal governments (including Bolivia, Argentina, Uruguay and Canada) prohibit the sale of alcoholic beverages within a certain distance from schools, hospitals and other designated areas, as well as place certain restrictions on the time of sale and consumption of these products in public places and private clubs;

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·        some local governments in Canada establish a minimum price for beer sales, which is named Social Reference Price, or SRP. There is a specific SRP for each different packaging presentation. The SRP may vary from one province to another;

·        in some provinces in Canada the off-trade is restricted to government-owned or licensed stores. See “—Business Overview—Description of the Markets Where We Operate—Canada - Labatt”; and

·        beer sales in the off-premise channel in Canada in the Province of Ontario are restricted to three retail channels. One of them is the LCBO, which is government-owned. The second retail channel is TBS, which is jointly owned by Labatt and 33 other brewers. The third retail channel is eligible grocery. The Alcohol and Gaming Commission of Ontario regulates the alcohol industry.

Many governments also impose restrictions on beer advertisement, which may affect, among other issues, (1) the media channels used, (2) the contents of advertising campaigns, and (3) the time and places where beer can be advertised.

Marketing

Our marketing initiatives are concentrated in off-trade and on-trade initiatives. Off-trade initiatives comprise mass media vehicles, such as television, radio, magazines and internet websites. On-trade initiatives include banners, and all types of enhancements to the point of sale, such as branded coolers and decorated furniture.

Licenses

Pepsi

We have a long-term agreement with PepsiCo whereby we have been granted the exclusive right to bottle, sell and distribute certain brands of PepsiCo’s portfolio of CSDs in Brazil, including Pepsi-Cola, Gatorade, H2OH!, and Lipton Ice Tea. We are also, through our subsidiaries, PepsiCo’s bottler for Argentina, Uruguay, Bolivia and Dominican Republic. In 2019, sales volumes of PepsiCo products represented approximately 30.7% of our total NAB sales volumes in Brazil, nearly 69% of our total NAB sales volumes in the Dominican Republic and 99% of our NAB sales volumes in Argentina, 99% in Bolivia and 30% in Uruguay.

Red Bull

We have a long-term distribution agreement with Red Bull, providing for theexclusive right to sell and distribute certain brands of Red Bull’s portfolio in specific limited points of sale of the on-trade channel in Brazil. We also have agreements with Red Bull to distribute their portfolio in a few limited channels in Argentina and the Dominican Republic.

Licensing Agreements with ABI

Effective January 1998, Labatt entered into long-term licensing agreements with ABI whereby Labatt was granted the exclusive right and license to manufacture, bottle, sell, distribute and market some of ABI’s brands, including the Budweiser and Bud Light brands, in Canada, including the right to use ABI’s trademarks for those purposes. The agreements expire in January 2098 and are renewable by either party for a second term of 100 years. In 2019, the ABI brands sold by Labatt represented approximately 70% of Labatt’s total sales volumes. According to our estimates, the Budweiser brand is currently the largest selling brand, while Bud Light is the third largest selling brand, in Canada in terms of volume.

We also have a licensing agreement with ABI which allows us to exclusively produce, distribute and market Budweiser in Brazil. We also have certain arrangements to sell and distribute Budweiser products in Paraguay, Guatemala, Dominican Republic, El Salvador, Nicaragua, Uruguay and Chile.

We also have a cross-licensing agreement with ABI through which we are allowed to produce, bottle, sell and distribute beer under the Stella Artois brand in Latin America and Canada on an exclusive basis, and ABI is allowed to produce, bottle, sell and distribute beer under the brand Brahma in Europe, Asia, Africa and the United States on an exclusive basis. Ambev has agreed not to directly or indirectly produce, bottle, distribute, sell or resell (or have an interest in any of these), any other European premium branded beer in Latin America, and ABI has agreed to be bound by the same restrictions relating to any other Latin American premium branded beer in Europe, Asia, Africa and the United States. As a result, in June 2005 we launched Stella Artois in Brazil and, since March 2005, ABI has been distributing Brahma beer in the United States and several countries such as the United Kingdom, Spain, Sweden, Finland and Greece.

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We also have ABI’s subsidiary, Metal Container Corporation, as one of our can suppliers.

We have also a licensing agreement with Grupo Modelo, S. de R.L. de C.V. (formerly Grupo Modelo, S.A.B. de C.V.), a subsidiary of ABI, to import, promote and resell Corona products (Corona Extra, Corona Light, Coronita, Pacifico and Negra Modelo) in Latin America countries, including Brazil, as well as in Canada.

Taxation

Beer

Taxation on beer in the countries where we operate is comprised of different taxes specific to each jurisdiction, such as an excise tax and a value-added tax. The amount of sales tax charged on our beer products in 2019, represented as a percentage of gross sales, was: 43.8% in Brazil; 21.5% in Canada; 9.0% in Central America; 47.8% in the Dominican Republic; 21.0% in Panama; 1.8% in Cuba; 8.5% in Barbados; 26.0% in Argentina; 35.2% in Bolivia; 23.8% in Chile; 12.0% in Paraguay; and 30.0% in Uruguay.

NAB

Taxation on NAB in the countries where we operate is comprised of taxes specific to each jurisdiction, such as an excise tax and a value-added tax. The amount of taxes charged on our NAB products in 2019, represented as a percentage of gross sales, was: 36.1% in Brazil; 18.0% in the Dominican Republic; 7.0% in Panama; 18.4% in Argentina; 27.0% in Bolivia; and 30.3% in Uruguay.

Changes to Brazilian Taxes on Beverages

In November 2008, the Brazilian Congress approved changes (effective as of January 1, 2009) to the taxable amount and tax rates for (1) the IPI Excise Tax, (2) the PIS Contribution and (3) the COFINS. Under the previous system, these taxes were paid as a fixed rate per hectoliter by all taxpayers. Under the system approved in 2008, higher priced brands pay higher taxes per hectoliter than lower priced brands based on a consumer price reference table. The taxable amount is calculated through the application of a rate to the consumer price established in the respective consumer price reference table. In recent years, taxes on the beverage industry were increased at the Brazilian federal and state levels. In April 2013, an aggregate increase of 2% was approved with respect to the rates of the IPI Excise Tax, the PIS Contribution and the COFINS on beer sales. In addition, in 2014 the IPI Excise Tax, the PIS Contribution and the COFINS were subject to another aggregate increase of 4% in April and 2% in October with respect to beer sales. Moreover, in January 2015 the Brazilian federal government enacted Law No. 13,097, which introduced a new federal taxation model for beer and soft drinks. The law is a result of the combined efforts of the Brazilian federal government and beverage companies with a view to creating a less complex and more predictable tax system for the industry. The new tax model came into force on May 1, 2015. Among other changes, the new set of rules establishes that the IPI Excise Tax, the PIS Contribution and the COFINS are due by manufacturers and wholesalers, and shall be calculated based on the respective sales price (ad valorem). Under the previous legislation, the referred taxes were due exclusively by the manufacturer at fixed amounts per liter of beer or soft drink produced (ad rem). The new taxation model introduced by Law No. 13,097, Decree No. 8,442/2015 brought temporary reductions on the tax rates applicable to beers and soft drinks. As of January 2018, such temporary reductions are no longer in force. Without such reduction, PIS Contribution and COFINS rates have increased between 5% and 12% over the previously reduced rates for breweries – except for special beers with limited production which have 75% or more of barley malt by weight on the original extract as a source of sugar.

In 2012, the following six Brazilian states increased their rates for ICMS Value-Added Tax applicable to beer: Minas Gerais, Sergipe, Amazonas, Mato Grosso, Bahia and the Federal District. In addition, in 2015 the States of São Paulo, Rio de Janeiro, Minas Gerais, Distrito Federal, Rio Grande do Sul, Ceará, Amapá, Rondonia, Amazonas, Tocantins, Piauí, Maranhão, Rio Grande do Norte, Bahia, Pernambuco, Paraíba, Alagoas, Sergipe and Mato Grosso do Sul increased their ICMS Value-Added Tax rate applicable to beer and soft drinks. In 2016, the States of Rio de Janeiro and Acre also increased their respective ICMS Value-Added Tax rates, scheduled to take effect in early 2017. In 2017, the States of Goiás and Amazonas increased their soft drinks and beer ICMS rates. In 2018, the States of Maranhão and Pernambuco increased their non-alcoholic beverages ICMS rates and Bahia and Maranhão increased beer ICMS burden, which became effective in early 2019. In 2019, the State of Maranhão decreased the non-alcoholic beverages ICMS Value-Added Tax rates, which will become effective in early 2020.

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In May 2018, the Brazilian Federal Government enacted Decree No. 9,394/2018 changing the IPI taxation applicable on transactions with concentrate units, consequently reducing the value of the IPI presumed credits registered by Ambev on acquisitions from companies located in the Manaus Free Trade Zone from 20% to 4%. Due to the severe effects of such change, the Brazilian Federal Government enacted Decree No. 9,514/2018 to make a gradual change of the IPI taxation, as follows: (1) taxation of 12% in the first half of 2019; (2) taxation of 8% in the second half of 2019; and (3) taxation of 4% from 2020 onwards. In July 2019, the Brazilian Federal Government enacted Decree No. 9,897/2019 determining the application of the 8% rate until September 30, 2019 and implementing a 10% rate from October 1, 2019 to December 31, 2019, maintaining the rate of 4% effective as of January 2020. In February 2020, Decree No. 10,254/2020 was issued, increasing the IPI rate to 8% for the specific period from July 1, 2020 to November 30, 2020. From December 1, 2020 onwards, the applicable rate will return to 4%.

C.           Organizational Structure

Our two direct controlling shareholders, IIBV and AmBrew, both of which are subsidiaries of ABI, together with FAHZ, held in aggregate 72.1% of our total and voting capital stock (excluding treasury shares) as of December 31, 2019.

ABI indirectly holds shares in us representing 61.8% of our total and voting capital stock (excluding treasury shares) as of December 31, 2019. ABI thus has control over us, even though (1) ABI is subject to the 2019 Shareholders’ Agreement and (2) ABI is controlled by Stichting that represents an important part of interests of BRC and the Interbrew Founding Families. For further information on these matters see “Item 4. Information on the Company—A. History and Development of the Company—The InBev-Ambev Transactions” and “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Ambev’s Major Shareholders—The 2019 Shareholders’ Agreement.”

 

 

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We conduct the bulk of our operations in Brazil directly. We also indirectly control Labatt and the operations conducted by our CAC and Latin America South units. The following chart illustrates the ownership structure of our principal subsidiaries as of December 31, 2019 based on total share capital owned.

Organizational Structure

 

D.           Property, Plant and Equipment

Our properties consist primarily of brewing, soft drink production, malting, bottling, distribution and office facilities in the countries where we operate.

As of December 31, 2019, our aggregate beer and non-alcoholic beverages production capacity was 257.6 million hectoliters per year. In 2019, the total production at the facilities set forth below was equal to 156.8 million hectoliters.

The following is a list of our principal production facilities as of December 31, 2019:

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Brazil

 

Plant

Type of Plant

Agudos, São Paulo

Beer

Equatorial, Maranhão

Beer

Jacareí, São Paulo

Beer

Lages, Santa Catarina

Beer

Guarulhos, São Paulo

Beer

Sete Lagoas, Minas Gerais

Mixed

Uberlândia, Minas Gerais

Beer

Petrópolis, Rio de Janeiro

Beer

Ponta Grossa, Paraná

Beer

Wals/Belo Horizonte, Minas Gerais

Beer

Colorado/Ribeirão Preto, São Paulo

Beer

Estância, Sergipe

Mixed

Aquiraz, Ceará

Mixed

Camaçari, Bahia

Mixed

Anápolis, Goiás

Mixed

Cuiabá, Mato Grosso

Mixed

Jaguariúna, São Paulo

Mixed

Cachoeiras de Macacu, Rio de Janeiro

Mixed

Itapissuma, Pernambuco

Mixed

Rio de Janeiro, Rio de Janeiro

Mixed

Manaus, Amazonas

Mixed

Minas, Minas Gerais

Mixed

Teresina, Piauí

Mixed

Viamão, Rio Grande do Sul

Mixed

Piraí, Rio de Janeiro

Mixed

Almirante Tamandaré, Paraná

Soft drinks

Contagem, Minas Gerais

Soft drinks

Jundiaí, São Paulo

Soft drinks

Sapucaia do Sul, Rio Grande do Sul

Soft drinks

São Paulo, São Paulo

Labels

Manaus, Amazonas

Crown Cap

Campo Grande, Rio de Janeiro

Glass Bottle

Manaus, Amazonas

Concentrate

Maltaria Navegantes, Rio Grande do Sul

Malt

Maltaria Passo Fundo, Rio Grande do Sul

Malt

Maués, Brazil

Guaraná Extract Plant

Yeast Plant, Brazil

Yeast

Manaus, Amazonas

Shrink film

 

 

 

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CAC

 

Plant

Type of Plant

Ambev Centroamerica, Guatemala

Beer

Santo Domingo, Dominican Republic

Mixed

Hato Nuevo, Dominican Republic

Mixed

Saint Vincent

Mixed

Cuba

Mixed

Barbados

Mixed

Panama

Mixed

 

Latin America South

 

Plant

Type of Plant

Cympay, Uruguay

Malt

Musa, Uruguay

Malt

Malteria Pampa, Argentina

Malt

Quilmes, Argentina

Beer

Corrientes, Argentina

Mixed

La Paz, Bolivia

Beer

Santa Cruz, Bolivia

Beer

Cochabamba, Bolivia

Beer

Huari, Bolivia

Beer

Tarija, Bolivia

Beer

Santiago, Chile

Beer

Minas, Uruguay

Beer

Ypane, Paraguay

Beer

Zarate, Argentina

Beer

Mendoza, Argentina

Mixed

Montevideo, Uruguay

Mixed

Cordoba, Argentina

Soft Drinks

CASA, Argentina

Beer

Buenos Aires South, Argentina

Soft Drinks and Juices

Manantial, Tucumán, Argentina

Soft Drinks

Tres Arroyos, Argentina

Malt

Acheral, Tucumán, Argentina

Beer

Coroplas, Argentina

Crown Cap

FPV, Ypane, Paraguay

Bottles

Sacaba, Bolivia

Soft Drinks

El Alto, Bolivia

Soft Drinks

Enalbo, Oruro, Bolivia

Cans

Bariloche Craft Beer, Argentina

Beer

Fernandez Oro, Argentina

Hops Pellets

 

 

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Canada 

 

Plant

Type of Plant

St. John’s

Beer

Halifax

Beer

Montreal

Beer

London

Beer

Edmonton

Beer/RTD

Creston

Beer

Mill Street

Beer

Turning Point

Beer/RTD/Cider

Archibald

Beer

Alexander Keith

Beer

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ITEM 4A.            UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 5.               OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.           Operating Results

Introduction

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements included elsewhere in this annual report on Form 20-F. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors including, without limitation, those set forth in “Cautionary Statement Regarding Forward-Looking Information” and the matters set forth in this annual report generally.

We have prepared our audited consolidated financial statements as of December 31, 2019 and 2018 and for the three years ended December 31, 2019 in reais and in accordance with IFRS as issued by the IASB.

The financial information and related discussion and analysis contained in this item are in accordance with IFRS as issued by the IASB. The amounts are in million reais, unless otherwise stated.

Critical Accounting Policies

The preparation of financial statements in conformity with IFRS requires our management to make judgments, estimates and assumptions that affect the application of accounting practices and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on past experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for decision making regarding the judgments about carrying amounts of assets and liabilities that are not readily evident from other sources. Actual results may differ from these estimates. Notes 3 and 4 to our audited consolidated financial statements include a summary of the critical accounting policies applied in the preparation of these financial statements. The estimates and assumptions are reviewed on a regular basis. Changes in accounting estimates may affect the period in which they are realized, or future periods.

We have adopted these new accounting standards on the effective date required and, therefore, the audited financial statements included in this annual report (i) as of and for the year ended December 31, 2018 reflect the application of IFRS 9 and IFRS 15; (ii) as of and for the year ended December 31, 2019 reflect the application of IFRS 16. For more information on our analysis and evaluation on the impact of the 2019 new accounting standards, please see notes 3 and 4 of our audited financial statements included elsewhere in this annual report.

The following standards issued by the International Accounting Standards Board became effective for annual periods beginning on January 1, 2018:

·       

IFRS 9 Financial Instruments, which replaces IAS 39 Financial Instruments: Recognition and Measurementfor periods beginning after January 1, 2018, introduces new requirements for the classification of financial assets, that depends on the entity’s business model and the contractual characteristics of the cash flow of the financial instruments; defines a new expected-loss impairment model that will require more effective recognition; and introduces a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new hedge accounting model represents a significant revision of the policy and aligns the accounting treatment with the risk management activities. IFRS 9 also removes the volatility in the result caused by changes in the credit risk of liabilities determined to be measured at fair value. We have applied IFRS 9 Financial Instruments as of the effective date, without restatement of the comparative information for the period beginning January 1, 2017. Consequently, the classification and measurement of the financial instruments for the comparative periods follow the requirements under IAS 39. We performed an impact assessment and concluded that IFRS 9 Financial Instruments does not impact materially our financial position, financial performance or risk management activities.

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·       

IFRS 15 Revenue from Contracts with Customers requires that the revenue recognition be done depict the transfer of goods or services to customers on amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services. The new standard for periods beginning on after January 1, 2018 result in more and enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. We have applied IFRS 15 Revenue from Contracts with Customers as of the effective date, January 1, 2018, in accordance with the modified retrospective application. Under this approach, the cumulative effect of initially applying IFRS 15 must be recognized as an adjustment to the opening balance of equity, in Retained earnings, at the date of initial application without the restatement of prior periods. On the implementation date, the adjustment to the opening balance of equity resulted in a decrease of the Retained earnings by R$355,383, to reflect the changes in accounting policies related to certain rebates granted to customers that, in accordance whit the IFRS 15, should be tied to the transaction price underlying 2017 revenue.

The following standards issued by the International Accounting Standards Board became effective for annual periods beginning on January 1, 2019:

·       

IFRS 16 Leases replaces the current lease accounting requirements and introduces significant changes in the accounting.  This change removes the distinction between operating and finance leases under IAS 17 Leases and related interpretations and requires a lessee to be recognized as right-of-use asset and a liability classified according to the contract period. Having adopted the standard as of January 1, 2019, we have adopted the retrospectively presentation for the consolidated financial statements. The impact to the financial statements is demonstrated in the recognition of right-of-use assets and lease liabilities in the balance sheet, initially measured at the present value of future lease payments, recognition of depreciation expenses of right-of-use assets in the income statement, recognition of interest expenses in the financial result on the lease liabilities in the income statement, and the segregation of the payment of the leases by a principal portion presented within the financing activities and an interest component presented within the operational activities in the cash flows. The new lease definitions have been applied to all identified contracts in effect on the date of adoption of the standard. IFRS 16 determines that the contract contains a lease if it transmits to the lessee the right to control the use of the identified asset for a period of time by exchange of counter payments. We have carried out an inventory of the contracts, evaluating whether or not they contain a lease in accordance with IFRS 16. This analysis identified impacts mainly related to the leasing operations of real estate from third parties, trucks, cars, forklifts and servers. Short-term (12 months or less) and low value (US$5,000 or less) leases were not subject to this analysis, as permitted by the standard. For these contracts, we will continue to recognize a lease expense on a straight-line basis, if applicable. When measuring lease liabilities, we discounted lease payments using the incremental borrowin rates. The wighted average rate applied is of 12.6% until December 31, 2018.

Financial statements in hyperinflationary economies

Hyperinflation accounting as prescribed by IAS 29 stipulates that non-monetary assets and liabilities, equity and income statement of subsidiaries operating in hyperinflationary economies must be adjusted to reflect changes in the general purchasing power of the local currency applying a general price index. The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, must be stated in terms of the measuring unit current at the end of the reporting period and translated into Brazilian real at the period closing exchange rate.

In July 2018, the Argentine peso underwent a severe devaluation resulting in the three-year cumulative inflation of Argentina exceeding 100%, thereby triggering the requirement to transition to hyperinflation accounting as prescribed by IAS 29.

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Goodwill

Goodwill arises on the acquisition of subsidiaries, associates and joint arrangements. Goodwill is determined as the excess (1) of the consideration paid; (2) of the amount of any non-controlling interests in the acquiree (when applicable); and (3) of the fair value, at acquisition date, of any previous equity interest in the acquiree, over the fair value of the net identifiable assets acquired at the date of acquisition. All business combinations are accounted for by applying the purchase method.

In conformity with IFRS 3 Business Combinations, goodwill is carried at cost and is not amortized, but tested for impairment at least annually, or whenever there are indications that the cash generating unit to which the goodwill has been allocated may be impaired. Impairment losses recognized on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is expressed in the functional currency of the subsidiary or joint operation to which it relates and translated to reais using the year-end exchange rate.

Regarding associates and joint ventures, goodwill is included in the carrying amount of the investment in the associate/joint ventures.

If our interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized exceeds the cost of the business combination such excess is recognized immediately in the income statement.

Expenditure on internally generated goodwill is expensed as incurred. Goodwill includes the effects of the predecessor basis of accounting.

Business Combinations Between Entities Under Common Control

Business combinations between entities under common control have not been addressed by IFRS’s. The IFRS 3 is the pronouncement that shall be applied to business combinations, however it explicitly excludes business combinations between entities under common control from its scope.

Predecessor basis of accounting

In accordance with IAS 8, we adopted the predecessor basis of accounting to record the carrying amount of assets received (as recorded by the parent company), which we believe is consistent with United States Generally Accepted Accounting Principles (USGAAP) and United Kingdom Generally Accepted Accounting Principles (UKGAAP).

Under the predecessor basis of accounting, when accounting for a transfer of assets between entities under common control, the entity that receives the net assets or the equity interests (the acquirer) shall initially record the assets and liabilities transferred at their parent book value at the transfer date. If the book value of assets and liabilities transferred by the parent are different from the historical cost registered by the controlling entity of the entities under common control (the ultimate parent), the financial statements of the acquirer shall reflect the assets and liabilities transferred at the same cost of the ultimate parent against equity (Other Comprehensive Income).

Swap of assets

For transactions between entities under common control that involve the disposal or transfer of assets from the subsidiary to its parent company, i.e. - above the level of our consolidated financial statement – we assess the existence of (1) conflict of interests and (2) economic substance and purpose. Following such evaluation, we adopt as a policy the concepts of IAS 16 in order to provide adequate visibility and fair impact on the amount of the distributable results to our shareholders, especially non-controlling interests. This policy also includes assets acquired through the swap of non-cash assets, or swap with a combination of cash and non-cash assets. The assets subject to the swap may be of equal or different nature. The cost of such asset is measured at fair value, unless (1) the swap transaction is not commercial in nature, or (2) the fair value of the asset received (and the asset assigned) cannot be reliably measured. The acquired asset is measured through this way even if the assignor entity cannot immediately exclude the asset from its books. If the acquired asset is not measurable at fair value, its cost is determined by the book value of the assigned asset.

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Whenever there is a distribution of assets that is not recorded as cash, the asset, before its distribution, is registered at fair value in the income account. This procedure is applicable to the distributions in which the assets are equal in nature and therefore treated equitably. However, similarly to IFRIC 17, in the absence of a specific accounting practice for transactions under common control, we apply this procedure in our accounting practice. Also, we apply the same procedure to sales (products, supplies, etc.) we perform to our controlling entity, where the positive result of the sale is recognized in the income account.

Joint Arrangements

Joint arrangements are all entities over which we share control with one or more parties. Joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor.

Employee Benefits

Post-employment benefits

Post-employment benefits include pensions managed in Brazil by Instituto Ambev de Previdência Privada, or the IAPP, post-employment dental benefits and post-employment medical benefits managed by FAHZ. Usually, pension plans are funded by payments made by both us and our employees, taking into account the recommendations of independent actuaries. Post-employment dental benefits and post-employment medical benefits are maintained by the return on FAHZ’s plan assets. If necessary, we may contribute some of its profit to FAHZ.

We manage defined benefit, defined contribution plans, medical and dental assistance for employees of its companies located in Brazil and in its subsidiaries located in the Dominican Republic, Barbados, Panama, Uruguay, Bolivia, Argentina and Canada.

We maintain funded and unfunded plans.

Defined Contribution Plans

A defined contribution plan is a pension plan under which we pay fixed contributions into a fund. We have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees for the benefits relating to employee service in the current and prior periods.

The contributions of these plans are recognized as expense in the period they are incurred.

Defined Benefit Plans

Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

For defined benefit plans, expenses are assessed separately for each plan using the projected credit unit method. The projected credit unit method takes into account each period of service as giving rise to an additional unit of benefit to measure each unit separately. Under this method, the cost of providing pensions is charged to the income statement during the period of service of the employee. The amounts charged to the income statement consist of current service cost, interest cost, past service costs and the effect of any settlements and curtailments. The obligations of the plan recognized in the balance sheet are measured at the present value of the estimated future cash outflows using a discount rate equivalent to the government’s bond rates with maturity terms similar to those of the obligation and the fair value of the plan assets.

Past service costs result from the introduction of a new plan or changes to an existing plan. They are recognized immediately in the income statement, at the earlier of when: (1) the settlements / curtailments occurs, or (2) we recognize related restructuring or termination costs, unless those changes are conditioned to the employee’s continued employment, for a specific period of time (the period in which the right is acquired). In such case, the past services costs are amortized using the straight-line method during the period in which the right was acquired.

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Actuarial gains and losses consist of the effects of differences between the previous actuarial assumptions and what has actually occurred, and the effects of changes in actuarial assumptions. Actuarial gains and losses are fully recognized in carrying value adjustments.

Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling and the return on plan assets, both excluding net interest, are recognized in full in the period in which they occur in the statement of comprehensive income. Re-measurements are not reclassified to profit or loss in subsequent periods.

When the amount of the defined benefit obligation is negative (an asset), we recognize those assets (prepaid expenses), to the extent of the value of the economic benefit available to us either from refunds or reductions in future contributions.

Other Post-Employment Obligations

We and some of our subsidiaries provide post-employment medical benefits, reimbursement of certain medication expenses and other benefits to certain retirees. These benefits are not granted to new retirees. The expected costs of these benefits are recognized over the period of employment, using an accounting methodology similar to that for defined benefit plans, including actuarial gains and losses.

Termination Benefits

Termination benefits are recognized as an expense at the earlier of: (1) when we are demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date, and (2) when we recognize costs for a restructuring.

Deferred and Current Income Tax and Social Contribution

Income tax and social contribution for the year comprises current tax and deferred tax. Income tax and social contribution are recognized in the income statement, unless they relate to items recognized directly in comprehensive income or other equity accounts. In these cases the tax effect is also recognized directly in comprehensive income or equity account (except interest on shareholder’s equity – see note 3(i) to our consolidated financial statements).

The current tax expense is the expectation of payment on the taxable income for the year, using tax rates enacted, or substantially enacted, at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred taxes are recognized using the balance sheet liability approach. This means that a deferred tax liability or asset is recognized for all taxable and tax deductible temporary differences between the tax and accounting basis of assets and liabilities. Under this method, a provision for deferred taxes is also calculated on the differences between the fair value of assets and liabilities acquired in a business combination and their tax basis. IAS 12 prescribes that no deferred tax liability on goodwill recognition, and no deferred tax asset/liability is recorded: (1) at the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss and (2) on differences related to investments in subsidiaries to the extent that they are not reversed in the foreseeable future. The amount of deferred tax provided is based on the expectation of the realization or settlement of the temporary difference, using currently or substantially enacted tax rates.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously.

The deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available. The deferred income tax asset is reduced to the extent that it is no longer probable that the future taxable benefit will occur.

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Our aggregate weighted nominal tax rate applicable for the years ended December 31, 2019, 2018 and 2017 was 28.9%, 29.9% and 29.2%, respectively. For the years ended December 31, 2019, 2018 and 2017, our IFRS effective tax rate was 5.8%, 13.5% and 39.3%, respectively.

The main events that impacted the effective tax rate in 2019 were:

·       

government subsidies on sales taxes: we have state tax incentives within certain local manufacturing that when reinvested are not taxed for income tax purposes, which explains the impact in the effective tax rate. The amounts above are impacted by fluctuations in production volumes, pricing and eventual fluctuations in state taxation rates;

·       

deductible interest on net equity: under Brazilian law, companies have the option to distribute interest on equity, or JCP, calculated based on the long-term interest rate, or TJLP, which are deductible for income tax purposes under the applicable legislation; in 2019, we distributed approximately R$7,717.4 million as interest on equity, of which R$2,623.8 million was deductible, resulting in a tax impact of approximately R$2,623.8 million;

·       

results from intercompany transactions: we make adjustments to reflect the tax scenario in countries in which some of Ambev’s subsidiaries are located and with whom Ambev has intercompany loan agreements. The non-taxability of the income arising from those countries is reflected in the effective tax rate; and

·       

foreign income tax complement from offshore subsidiaries: in accordance with Law No. 12,973, we make adjustments to reflect the application of tax credits in relation to profits generated from consolidated and non-consolidated subsidiaries abroad, outside of Brazil.

Financial Instruments and Hedge Accounting

We use financial instruments to implement our risk management strategy and policies. Derivatives are generally used to mitigate the impact of foreign currencies, interest rates, equity prices and commodity prices on our performance. Our financial risk management policy prohibits the use of derivatives when not related to the company’s core business.

Exceptional Items

Exceptional items are those that, in our management’s judgment, need to be disclosed separately by virtue of their size or incidence. In determining whether an event or transaction is special, our management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence, and the potential of impact on the variation of profit or loss. These items are disclosed in the income statement or separately disclosed in the notes to the financial statements. Transactions that may give rise to exceptional items are principally restructuring activities, acquisition of subsidiaries, impairment losses, and gains or losses on disposal of assets and investments.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

In the periods discussed below, we conducted our operations through four business segments as follows:

·       

Brazil, which includes the beer sales division and the NAB sales division;

·       

Central America and the Caribbean, which includes our direct operations in the Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala (which also serves El Salvador, Honduras and Nicaragua), Barbados and Panama;

·       

Latin America South, which includes our operations in Argentina, Bolivia, Paraguay, Uruguay and Chile; and

·       

Canada, represented by Labatt’s operations, which includes domestic sales in Canada and some exports to the U.S. market.

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The table below sets forth certain of our operating highlights for the years presented:

 

Consolidated Financial Highlights

 

2019

2018

(restated)

% Change

 

(in R$ million, except volume amounts,
percentages and per share amounts)

Sales volume—’000 hectoliters

163,243.0

158,716.9

2.9%

Net sales

52,599.7

50,231.3

4.7%

Net revenue per hectoliter—R$/hl

322.2

316.5

1.8%

Cost of sales

(21,678.2)

(19,249.4)

12.6%

Gross profit

30,921.6

30,981.9

(0.2)%

Gross margin (%)

59%

62%

(3.0)%

Sales, marketing and distribution expenses

(12,647.5)

(12,328.5)

2.6%

Administrative expenses

(2,680.0)

(2,363.5)

13.1%

Other operating income/(expenses)

878.1

947.3

(7.3)%

Exceptional items

(397.2)

(86.4)

359.7%

Income from operations

16,074.9

17,150.9

(6.2)%

Operating margin (%)

31%

34%

(3.0)%

Net income

12,188.3

11,347.7

7.4%

Net margin (%)

23%

23%

0.0%

Margin Analysis

The following table sets forth certain line items of our income statement expressed as percentages of net sales for the years ended December 31, 2019 and 2018:

 

Year Ended December 31,

 

2019

2018

 

(%)

(%)

Net sales

100.0

100.0

Cost of sales

(41.2)

(38.3)

Gross profit

58.8

61.7

Sales, marketing and distribution expenses

(24.0)

(24.5)

Administrative expenses

(5.1)

(4.7)

Other operating income/(expenses)

1.7

1.9

Exceptional items

(0.8)

(0.2)

Income from operations

30.6

34.1

 

 

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Selected Financial Data by Business Segment

The following table sets forth selected financial data by business segment for the years ended December 31, 2019 and 2018:

 

Year Ended December 31,

 

2019

2018

(restated)

 

Brazil

CAC

LAS

Canada

Total

Brazil

CAC

LAS

Canada

Total

 

(in R$ million)

Net sales

28,724.5

6,757.9

10,028.7

7,088.6

52,599.7

26,814.2

5,813.9

10,753.9

6,849.3

50,231.3

Cost of sales

(12,096.3)