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, 2020

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)
Lucas Machado Lira, 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: ri@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.

15,734,914,780 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Yes x No ¨

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 1
PRESENTATION OF FINANCIAL AND OTHER INFORMATION 1
MARKET DATA 3
CURRENCY TRANSLATION 3
TRADEMARKS 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 3
PART I 6
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 6
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE 7
ITEM 3.   KEY INFORMATION 8
ITEM 4.   INFORMATION ON THE COMPANY 36
ITEM 4A.   UNRESOLVED STAFF COMMENTS 60
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS 61
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 87
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 102
ITEM 8.   FINANCIAL INFORMATION 107
ITEM 9.   THE OFFER AND LISTING 115
ITEM 10.   ADDITIONAL INFORMATION 118
ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 139
ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 144
PART II 146
ITEM 13.   DEFAULT, DIVIDENDS ARREARAGES AND DELINQUENCIES 146
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 147
ITEM 15.   CONTROLS AND PROCEDURES 148
ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT 150
ITEM 16B.   CODE OF BUSINESS CONDUCT 151
ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES 152
ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 154
ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 155
ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 156
ITEM 16G.   CORPORATE GOVERNANCE 157
ITEM 16H.   MINE SAFETY DISCLOSURE 158
PART III 159
ITEM 17.   FINANCIAL STATEMENTS 159
ITEM 18.   FINANCIAL STATEMENTS 160
ITEM 19.   EXHIBITS 161

 

 
 

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, 2020 and 2019 and for the three years ended December 31, 2020, 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.

PIS and COFINS Recovery - exclusion of ICMS (VAT tax) from the basis of calculation

In March 2017, the Supreme Federal Court (“STF”) decided for, in the judgment of RE 574,706/PR, with binding effects, the unconstitutionality of the inclusion of ICMS in the PIS and COFINS calculation basis. Currently, the General Attorney's Office (PGFN) filed an amendment to clarify the criteria for calculating the portion of the ICMS that shall be excluded from the calculation basis of the PIS and COFINS contributions (ICMS paid versus ICMS declared on the invoice) and the definition of the effects of the STF decision is pending a decision.

In addition, the Company and its controlled companies are parties to several lawsuits related to the matter, some with final and unappealable favorable decisions. Due to the tax regime applicable to the soft drinks and beer sector, which has changed over time, the Company has lawsuits for three different periods: (i) 1990 to 2009, (ii) 2009 to 2015 (the period during which the “REFRI Taxation Model” was in effect - special soft drinks and beer regime, provided for Article 58-J of Law No. 10,833, of 2003) and (iii) from 2015 onwards (also known as “New Model Taxation").

In 2019 and 2020, the Company and its controlled companies recognized, in accordance with IAS 37/CPC 25, recoverable tax credits related to this matter in the total amount of R$5.4 billion, of which R$1.1 billion is related to periods from 1990 to 2009 and from March 2017 (“New Model”) and R$4.3 billion, recorded in 2020, related to periods from 2009 to 2015 (as explained below) as (i) the gain is virtually certain based on the specific circumstances of each case; and (ii) the amounts could be estimated with sufficient reliability, by collecting the respective documents and quantifying the related amount.

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In relation to the amount of R$4.3 billion mentioned above, the Company recorded a tax credit (before tax effects), of which R$ 2.5 billion were recorded in Other Operating Income, as described in Note 7 - Other Operating Income (Expenses), and R$1.8 billion in Financial Income, as described in Note 11 - Finance Expenses and Income. This amount is related to the final and unappealable decision in a lawsuit recognizing the right of the Company and its controlled companies to obtain refund of the overpaid amounts while the REFRI taxation model was in place. In addition to the gain being virtually certain due to the circumstances of the case, the amount could also be estimated with sufficient reliability after various analysis made (with the assistance of our external consultants), allowing: (i) the identification of the total ICMS included per liter in the retail selling prices that were verified by the Federal Government at the time and that had impact in the reference prices used as calculation basis for determination of the PIS and COFINS; and (ii) the result of exclusion of such total ICMS from the calculation basis of PIS and COFINS in the Company’s operations in the period.

In addition, as to the transactions realized after the decision of the STF, the Company and its controlled companies have judicial decisions in place (in lawsuits filed prior to the decision of the STF) that recognize the right to exclude the ICMS declared on the invoice from the calculation basis of the PIS and COFINS, which corresponded to a total of R$ 2.7 billion already excluding the amount mentioned above. This amount represents a reduction in the PIS and COFINS expense recognized in a monthly basis, once it is not an extemporaneous credit.

For the period of the New Model before the STF decision, the Company estimates that the contingent asset corresponds to R$1.9 billion, which will be recognized once the gain is virtually certain given the specific circumstances of the cases and upon confirmation of the estimated values with sufficient reliability.

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 replaced the previous lease accounting requirements and introduced significant changes in the accounting, removing the distinction between operating and finance leases under IAS 17 Leases and related interpretations, and required a lessee to recognize a right-of-use asset and a lease liability at lease commencement date. The impact to the financial statements was demonstrated in the recognition of right-of-use assets and lease liabilities in the balance sheet for the financial statements as of December 31, 2019.

As a result of the above, our audited consolidated financial statements for the year ended December 31, 2018 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.

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 (beginning in the reporting period in which hyperinflation is identified).

Under IAS 29, the non-monetary assets and liabilities, equity and income statements of subsidiaries operating in hyperinflationary economies are restated to reflect changes in the general purchasing power of the local currency by applying a general price index.

2 
 

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, 2019 and 2020 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, 2020.

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, 2020 of R$5.20 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.

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.

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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 forward-looking statements include, among others:

· the economic, financial, political, public health and other effects of the outbreak of the 2019 novel strain of coronavirus, or COVID-19, (or other pandemics, epidemics and similar crises) and governmental responses thereto, particularly as such factors impact markets where we operate and continue to cause severe ongoing negative macroeconomic effects, thus heightening many of the other risks described in the “Item 3. Key Information—D. Risk Factors” in this annual report, which may impact our business operations, demand for our products, or overall economic activity globally;
· general economic, political and business conditions both in Brazil and abroad, including, in Brazil, developments and the perception of risks in connection with ongoing corruption and other investigations and increasing fractious relations and infighting within the administration of President Bolsonaro, as well as policies and potential changes to address these matters or otherwise, including economic and fiscal reforms and in response to the ongoing effects of the COVID-19 pandemic, any of which may negatively affect growth prospects in the Brazilian economy as a whole;
· our ability to timely and efficiently implement any necessary measure in response to, or to mitigate the impacts of, the COVID-19 pandemic on our business, operations, cash flows, perspectives, liquidity and financial condition;
· our ability to predict and efficiently react to the temporary or long-term term changes in our customers and consumers’ behavior as a result of the COVID-19 pandemic, even after the outbreak is sufficiently controlled;
· 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, our customers and our consumers, 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;
4 
 
· 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 and consumptions habits;
· the outcome of pending and future litigation and governmental proceedings and investigations;
· 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;
· 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 or other currencies in which we operate, which has been particularly affected by the COVID-19 pandemic and economic effects thereto;
· fluctuation and volatility of foreign exchange rates;
· the declaration or payment of dividends;
· changes in government policies regarding tax subsidies and incentives;
· availability and our ability to secure raw and packaging material that goes into our products;
· 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.

5 
 

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.

 

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

 

 

6 
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

 

 

7 
 
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 on December 31, 2020, 2019, 2018, 2017 and 2016 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,

 

2020(3)

2019(3)

2018(1)(2)

2017(2)

2016

  (in R$ million)
Net sales 58,379.0 52,005.1 50,231.3 47,899.3 45,602.6
Cost of sales

(27,066.1)

(21,678.2)

(19,249.4)

(18,028.4)

(16,678.0)

Gross profit 31,312.9 30,326.9 30,981.9 29,870.9 28,924.6
Sales, marketing and distribution expenses (14,619.6) (12,647.5) (12,328.5) (11,807.4) (12,010.5)
Administrative expenses (2,948.5) (2,680.0) (2,363.4) (2,620.0) (2,166.1)
Other operating income/(expense) net 2,679.4 1,472.7 947.3 1,217.3 1,223.1
Exceptional items

(452.0)

(397.2)

(86.4)

(108.7)

1,134.3

Income from operations 15,972.2 16,074.9 17,150.9 16,552.1 17,105.4
Net finance result (2,434.5) (3,109.5) (4,030.3) (3,713.8) (3,702.0)
Share of results of joint ventures (43.3) (22.3) 1.0 (3.1) (5.0)
Income before income tax

(1,762.5)

(754.7)

(1,773.9)

(5,047.7)

(315.0)

Net Income

11,731.9

12,188.4

11,347.7

7,787.5

13,083.4

Attributable to:          
Equity holders of Ambev 11,379.4 11,780.0 10,995.0 7,269.0 12,546.6
Non-controlling interest 352.5 408.4 352.7 518.5 536.8
 
(1) We adopted IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers on January 1, 2018 in accordance with the modified retrospective application. Under this approach, the financial information comparative to prior periods is not being restated and remains as previously reported. 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 have 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 Company changed its accounting policy used to account for extemporaneous (related to previous periods) tax credits and debits in 2020. See Note 3 to our audited consolidated financial statements. The year ended December 31, 2019 has been restated for comparative purposes. The years ended December 31, 2018, 2017 and 2016 derived from our historical financial statements and were not restated for this change in accounting policy as amounts deemed immaterial.

 

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Earnings per Share and Dividend per Share

 

 

Year Ended December 31,

 

2020

2019

2018(1)(2)

2017(2)

2016

           
  (in R$, unless otherwise indicated)
Earnings per common share and per ADS(3):          
- Basic 0.72 0.75 0.70 0.46 0.80
- Diluted 0.72 0.74 0.69 0.46 0.79
Dividends and interest on shareholders’ equity per share and per ADS (weighted average)(4):          
- Basic (R$) 0.44 0.50 0.56 0.56 0.66
- Basic (US$) 0.08 0.13 0.14 0.17 0.20
Weighted average number of shares (million shares):          
- Basic 15,733 15,728 15,718 15,706 15,697
- Diluted 15,868 15,869 15,856 15,838 15,823
 
(1) We adopted IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers on January 1, 2018 in accordance with the modified retrospective application. Under this approach, the financial information comparative to prior periods is not being restated and remains as previously reported. 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 have 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.
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Selected Consolidated Balance Sheet Data

 

 

As at December 31,

 

2020

2019

2018(1)(2)

2017(2)

2016

  (in R$ million)
Non-current assets 89,854.0 74,121.8 70,384.8 64,048.3 59,954.6
Property, plant and equipment 24,768.4 22,576.3 21,638.0 20,705.1 19,153.8
Goodwill 40,023.5 35,009.9 34,276.2 31,401.9 30,511.2
Intangible 7,580.6 6,306.4 5,840.6 4,674.7 5,245.9
Deferred tax assets 4,560.8 2,950.1 2,064.7 2,310.9 2,268.1
Income tax and social contributions recoverable 10,190.8 5,003.0 4,374.2 2,537.7 347.6
Trade and other receivables 2,145.0 1,752.9 1,722.3 1,999.6 1,989.9
Other assets 584.9 523.2 468.8 418.4 438.0
Current assets 35,342.3 27,621.1 25,329.6 24,718.1 23,886.9
Inventories 7,605.9 5,978.6 5,401.8 4,319.0 4,347.1
Trade and other receivables 5,659.0 5,653.2 6,302.2 6,662.1 5,956.9
Income tax and social contributions recoverable 3,287.1 4,074.1 2,148.7 3,370.5 5,423.3
Cash and cash equivalents 17,090.3 11,900.7 11,463.5 10,354.5 7,876.8
Investment securities

1,700.0

14.6

13.4

11.9

282.8

Total assets

125,196.3

101,742.9

95,714.4

88,766.4

83,841.4

           
Shareholders’ equity 75,151.2 62,556.0 57,454.8 47,919.7 46,651.3
Equity attributable to equity holders of Ambev 73,815.7 61,278.0 56,248.0 45,945.7 44,825.0
Non-controlling interests 1,335.5 1,278.0 1,206.8 1,974.0 1,826.2
Non-current liabilities 16,567.3 14,175.9 13,050.6 11,779.9 8,416.5
Interest-bearing loans and borrowings 2,053.5 2,409.7 2,162.4 2,831.2 1,765.7
Employee benefits 3,544.0 2,704.5 2,343.7 2,310.7 2,137.7
Deferred tax liabilities 3,043.4 2,371.1 2,424.6 2,329.2 2,329.7
Income tax and social contributions payable 2,596.9 2,864.7 2,903.4 3,189.6 681.4
Trade and other payables 4,882.4 3,454.8 2,790.4 606.6 736.6
Provisions 447.1 371.0 426.2 512.6 765.4
Current liabilities 33,477.8 25,011.0 25,209.0 29,066.7 28,773.7
Interest-bearing loans and borrowings 2,738.8 653.1 1,941.2 1,699.4 3,630.6
Trade and other payables 24,897.3 18,745.1 17,754.5 21,702.8 20,692.0
Income tax and social contributions payable 5,716.8 5,502.7 5,340.2 5,493.8 4,282.4
Provisions 124.9 110.0 173.0 169.0 168.6
Bank overdraft

-

0.0

0.0

1.8

0.0

Total shareholders’ equity and liabilities

125,196.3

101,742.9

95,714.4

88,766.4

83,841.4

           
 
(1) We adopted IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers on January 1, 2018 in accordance with the modified retrospective application. Under this approach, the financial information comparative to prior periods is not being restated and remains as previously reported. 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 have 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”.
10 
 

 

Other Data

 

 

As at and for the Year Ended December 31,

 

2020

2019

2018(1)(2)

2017(2)

2016

  (in R$ million, except for operating data)
Other Financial Data:          
Net working capital(3) 1,864.5 2,610.1 120.6 (4,348.6) (4,886.8)
Cash dividends and interest on shareholders’ equity paid 6,850.3 7,871.3 8,814.1 8,819.8 10,330.6
Depreciation and amortization(4) 5,167.4 4,675.2 4,448.4 4,036.9 3,512.0
Capital expenditures(5) 4,692.7 5,069.4 3,571.0 3,203.7 4,132.7
           
Operating cash flows - generated(6) 18,855.8 18,381.3 18,346.1 18,424.2 12,344.5
Investing cash flows - used(6) (6,799.6) (4,838.6) (3,675.7) (3,073.0) (5,897.9)
Financing cash flows - used(6) (8,602.0) (12,283.5) (13,656.4) (13,414.2) (11,645.1)
Other Operating Data:          
Total production capacity - million hl(7) 250.8 257.6 270.1 276.5 280.4
Total volume sold - million hl(8) 165.8 163.2 158.7 162.8 159.8
Number of employees(9) 50,479 51,352 49,617 51,432 53,250
 
(1) We adopted IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers on January 1, 2018 in accordance with the modified retrospective application. Under this approach, the financial information comparative to prior periods is not being restated and remains as previously reported. 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 have 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 Ambev’s preferred shares or common shares by individuals or legal entities based on location and/or nationality of the respective investor. However, the right to convert dividends and interest on shareholders’ equity payments arising from Ambev’s shares, as well as proceeds from the sale of Ambev’s shares, into U.S. dollars and to remit such amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation. Such operations generally require that the relevant investments be registered with the Brazilian Central Bank and foreign investors are registered with the Brazilian Securities Commission (“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 “Custodian”, or holders who have exchanged Ambev’s ADSs for Ambev’s shares, 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’s securities could be adversely affected by delays or difficulties to meet any regulatory requirement for conversions of real payments and remittances abroad.

Investors residing outside Brazil, including institutional investors, may either register their investments in securities in Brazil, (i) as a foreign direct investment under Law No. 4,131, dated September 3, 1962, or “Law 4,131”; or (ii) as a portfolio investment under CMN Resolution No. 4,373, dated September 29, 2014, or “CMN Resolution 4,373”, and CVM Ruling No. 560, dated March 25, 2015. Foreign investors, regardless of whether their investments are made as direct investments or portfolio investments, must be enrolled with the Brazilian Internal Revenue. This registration process is undertaken by financial institution or by an institution authorized to operate by the Brazilian Central Bank as the investor’s legal representative in Brazil.

Foreign direct investors under Law 4,131 may directly hold and sell securities in both private and open market transactions, but these investors are likely to be subject to a different tax treatment on gains, apart from being subject to taxation on the execution of foreign exchange transactions.

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On the other hand, CMN Resolution 4,373 establishes the possibility for foreign investors to make investments in local currency with funds held in their foreign bank accounts. With certain exceptions, CMN Resolution 4,373 allows investors to carry out various type of transactions in the Brazilian capital markets involving a security traded on a Brazilian stock or futures exchange, or through an organized over-the-counter market, but investors may not transfer the ownership of investments made under such regulation to other non-Brazilian holders through private transactions. Investments and remittances outside Brazil for gains, dividends, profits or other payments under Ambev’s securities are made through the foreign exchange market.

In addition, under Law No. 4,131 any investor must also 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.

In order to be accredited to invest under Resolution No. 4,373, foreign investor must:

· appoint a legal representative duly accredited with the Brazilian Central Bank, that will be responsible for complying with the registration and periodically reporting requirements of the Brazilian Central Bank and the CVM;
· appoint a custodian duly accredited with the CVM;
· hold a brokerage account with the accredited custodian;
· appoint a tax representative in Brazil;
· be registered with the Brazilian Federal Revenue, to obtain the enrollment of taxpayer registration;
· be registered as a foreign investor with the CVM;
· through the appointed representative in Brazil, register the foreign investment with the Central Bank.

The foreign investment in Ambev’s shares underlying the ADSs was registered by the Custodian on behalf of The Bank of New York Mellon, the depositary for the ADS programs of Ambev, or “Depositary”, enabling the Custodian to convert dividends and other amounts distributed by Ambev into foreign currency and remit such proceeds outside Brazil to the Depositary.

If a holder of ADSs decides to exchange such ADSs for the underlying Ambev’s shares, the holder will be entitled to (i) sell the shares in the stock exchange and rely on the Depositary’s electronic registration to obtain and remit U.S. dollars abroad; (ii) convert its investment into a foreign portfolio investment under CMN Resolution 4,373, or (iii) convert its investment into a foreign direct investment under Law 4,131. If a holder of ADSs wishes to convert its investment into either a foreign portfolio investment under CMN Resolution 4,373 or a foreign direct investment under Law 4,131, it should begin the process of obtaining its own foreign investor registration with the Brazilian Central Bank and/or with the CVM, as the case may be, in advance of exchanging the ADSs for Ambev’s shares.

The Custodian is authorized to update the Depositary’s electronic registration to reflect conversions of ADSs into foreign portfolio investments. If a holder of ADSs elects to convert its ADSs into a foreign direct investment under Law 4,131, the conversion will be effected by the Brazilian Central Bank after receipt of an electronic request from the Custodian with details of the transaction.

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. 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.

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C.       Reasons for the Offer and Use of Proceeds

Not applicable.

D.       Risk Factors

Before making an investment decision, you should consider all of the information set forth in this annual report, including the consolidated financial statements and our periodic public information released by Ambev from time to time. 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. Our business, financial condition and operational results may also be significantly affected not only by the risks set forth below but also by other risks that are currently unknown or considered irrelevant to us.

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 rate of inflation, as measured by the Índice Nacional de Preços ao Consumidor (National Consumer Price Index), was 6.6% in 2016, 2.1% in 2017, 3.8% in 2018, 4.3% in 2019 and 4.5% in 2020. Brazil may experience high levels of inflation in the future and such inflationary pressures may lead to the Brazilian government intervening in the economy and introducing policies that could adversely affect the Brazilian economy, the securities market and our business. In the past, the Brazilian government’s interventions included the maintenance of a restrictive monetary policy with high interest rates that restricted credit availability and reduced economic growth, causing volatility in interest rates.

The SELIC official interest rate in Brazil oscillated from 7.25% in 2012 to 4.50% in 2019, as established by the Central Bank’s Monetary Policy Committee (Comitê de Política Monetária do Banco Central do Brasil, or COPOM). On February, 2020, the COPOM reduced the official interest rate to 4.25% and further reduced it in March 2020 to 3.75% . In an effort to offset the impact of the COVID-19 pandemic on domestic demand, the COPOM further reduced the rate in May, June and August 2020, with the interest rate at 2.0% on December 31, 2020. On March 17, 2021, the COPOM increased the SELIC to 2.75%, the applicable rate as of the date of this annual report. Conversely, more lenient government and Central Bank’s policies and interest rate decreases have triggered and may continue to trigger increases in inflation, and, consequently, growth volatility and the need for increases in interest rate. 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.

13 
 

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.

As of the date of the submission of this 20-F form, President Jair Bolsonaro is being investigated by the Federal Supreme Court for supposed practice of improper acts alleged by the former minister of justice, Mr. Sérgio Moro. If the president is convicted, any consequence - including a potential impeachment - may lead to political instability and could have relevant adverse effects on the political and economic environment in Brazil, as well as on businesses operated in Brazil, including our business.

The potential outcome of this and other investigations is uncertain, but they have already negatively affected the image and reputation of the companies involved, as well as the general market perception of the Brazilian economy. The development of the cases of unethical conduct has affected and may continue to adversely affect our business, financial condition and operating results, including the trading price of our shares. We cannot predict whether investigations in progress will lead to further political and economic instability, or whether new allegations against government officials and executives and/or private companies will emerge in the future. We also cannot predict the outcome of these investigations nor their impact on the Brazilian economy or the Brazilian stock market.

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. 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.

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;
14 
 
· 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;
· response to COVID-19 pandemic, including social benefits and restriction of businesses operations;
· fiscal policy and changes in tax laws; and
· other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty as to whether the Brazilian federal government will implement changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil and to heightened volatility and lack of liquidity in the Brazilian capital market and securities issued by Brazilian companies. For example, the deterioration in federal, state and municipal governments’ fiscal results in recent years has led to an unprecedented increase in gross debt as well as in the gross debt to GDP ratio, which led Brazil to lose its investment grade from credit rating agencies, decreasing the influx of foreign capital and contributing to a lower level of economic activity. In addition, the Brazilian economy has experienced a sharp drop in recent years due, in part, to the interventionist economic and monetary policies of the Brazilian federal government and the global drop in commodity prices.

We cannot predict the measures that the Brazilian federal government will take due to mounting macroeconomic pressures or otherwise. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which also may adversely affect us. Indecision as to changes in policies and regulations implemented by the Brazilian federal government may contribute to economic uncertainty in Brazil and greater volatility in the Brazilian capital markets. Prior to the COVID-19 pandemic, Brazil was just emerging from a prolonged recession and a period of slow recovery, with only meager GDP growth in 2017, 2018 and 2019. Brazil’s incipient economic recovery in 2020 was torpedoed with the onset of the COVID-19 pandemic and governmental measures in relation thereto, all of which have introduced an additional level of economic and political uncertainty.

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 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 aluminum 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. Our current policy is to hedge substantially our cost of sales against changes in foreign exchange rates, we cannot assure you that such hedging will be possible, accurate or available at reasonable costs at all times in the future.

15 
 

In addition, we have historically reported our consolidated results in reais. In 2020, we derived 48.3% 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, 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 depreciated 17.8% against the real in 2016, closing at R$3.25 per U.S.$1.00 as of December 31, 2016, while in 2017, the U.S. dollar appreciated 1.8% against the real, closing at R$3.31 per U.S.$1.00 as of December 31, 2017. The U.S. dollar appreciated 17.2% 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 3.6% against the real in 2019, closing at R$4.02 per U.S.$1.00 as of December 31, 2019. The U.S. dollar appreciated 29.2% against the real in 2020, closing at R$5.20 per U.S.$1.00 as of December 31, 2020, with a high degree of volatility over the course of 2020, particularly as a result of uncertainties arising from the COVID-19 pandemic. For example, in May 2020 the real depreciated to its lowest level since the commencement of the currency to R$5.94 per US$1.00 and as of March 5, 2021, the exchange rate was R$ 5.69 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.

Other exchange rate devaluations or political decisions related to exchange rates may impact our business as well. For instance, on January 1st, 2021, Cuba started the unification of currencies and the process of elimination of the Cuban Convertible Peso. There are uncertainties regarding the process, its timeline and the effects in inflation, exchange rates and local economy. The Cuban currency may depreciate or appreciate substantially against the U.S. dollar. In light of the foregoing, there can be no assurance we will be able to protect ourselves against the effects of fluctuations of the Cuban currency. The process may impact the Cuban economy in general and as a consequence our Bucanero business.

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). Besides, with the enactment of the referred Law, the PIS/COFINS rates applicable for beer and soft drinks were increased and the rates for IPI were reduced.

16 
 

Moreover, in May 2018, the Brazilian Federal Government enacted Decree No. 9,394/2018 reducing IPI rate 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%. Other Decrees were issued with temporary rates. On November 2020, Decree No. 9,394/2018 was revoked by Decree No. 10,554/2020. Currently, the applicable legislation on this matter is Decree No. 10,523/2020, which was enacted on October 2020, providing that the IPI tax rate of 8% shall apply for transactions with concentrate units from February 2021 onwards.

On the state level, in 2015 the States of São Paulo, Rio de Janeiro, Minas Gerais, Distrito Federal, Rio Grande do Sul, Ceará, Amapá, Rondônia, 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. In 2020, no Brazilian state raised ICMS Value-Added Tax rate for either beer or non-alcoholic beverages.

In addition, certain tax laws may be subject to controversial interpretations by tax authorities. If the tax authorities interpret the tax laws inconsistently with our interpretations, we may be adversely affected, including the full payment of taxes due, plus charges and penalties.

Moreover, the pandemic of the new Coronavirus (COVID-19) and the declaration of the state of calamity can result in socioeconomic impacts, including an eventual reduction of tax revenues in Brazil and an increase in public spending, especially in key sectors. In this scenario, the Federal, State and Municipal Governments may promote legislative changes to impose, even if temporarily, a more onerous tax burden to our activities. Such measures may adversely affect our business and results.

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 19.8% of our consolidated results of operations in 2020. 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, 2019 and 2020), 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, price controls, 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. In 2020, the devaluation was less drastic (7.9%) but also impacted the same figures. The 2018, 2019 and 2020 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.”

17 
 

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. In 2020, the government implemented multiple measures in response to the economic crisis resulting from the COVID-19 pandemic including increased health spending, financial support for workers (including funding of wages), vulnerable groups and certain industry sectors, as well as price controls. These measures further deteriorated the country’s fiscal situation.

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, on November 10, 2019, the Bolivian president Evo Morales resigned after social unrests. The unrest in the country led to a decrease in consumption and restrictions to production, which were normalized by the end of that year. On November 8, 2020, Luis Arce took office as the new president of Bolivia, having won the elections in the first round with the majority of votes. With these results, the Movement towards Socialism (Movimiento al Socialismo or MAS) was returned to power and obtained an absolute majority in the parliament after a one-year interregnum following the ballot in 2019. It is difficult to assess the impact that the changes to the Bolivian political scenario will have in the Bolivian economy and, as a result, on our future operations and financial results.

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.

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Risks Relating to Our Operations

The extent of the pandemic declared by the World Health Organization due to the spread of COVID-19, the perception of its effects or the way in which this pandemic will impact our business, depends on future developments which are highly uncertain and unpredictable, and may result in a material adverse effect on our business, financial condition, results of operations and cash flow.

Outbreaks or potential disease outbreaks may have an adverse effect on our operations. Historically, some epidemics and regional or global outbreaks, such as the one caused by the Zika virus, the Ebola virus, the H5N5 virus (popularly known as avian influenza), the foot and mouth disease, the H1N1 virus (influenza A, popularly known as swine flu), the Middle East Respiratory Syndrome (MERS) and the Severe Acute Respiratory Syndrome (SARS), have affected certain sectors of the economy in the countries where these diseases have spread. On March 11, 2020, the World Health Organization, or the WHO, declared a pandemic due to the global spread of COVID-19, a disease caused by the new coronavirus (Sars-Cov-2), or COVID-19. This spread has generated significant macroeconomic uncertainties, volatility, and disruption. In response, many governments have implemented policies designed to prevent or delay the spread of the disease, such as the restriction on circulation of people and even social isolation, and these measures may remain in place for an extended and uncertain period.

As the pandemic progressed in the countries in which we operate, including Brazil, Argentina, Canada and several other countries in Central and South America, states and municipalities have adopted guidelines that varied in terms of scope and intensity to control the spread of COVID-19, such as the restriction on circulation of people and social distancing, which resulted in the closing of and operating restrictions on stores, restaurants, hotels, shopping centers, crowded areas, parks and other public spaces. These restrictions changed consumer behavior and channel dynamics that adversely impacted our profitability. See “Item 5. Operating Financial Review and Prospects—A. Operating Results.” As of December 31, 2020, restrictions to people circulation of various levels are still in place across our operations. These measures may remain in force for a significant period of time and even more restrictive measures may be adopted by the authorities at any time.

The dissemination of COVID-19 made us change our business practices (including additional hygienic practices for workplaces and employees, in addition to canceling in-person meetings, events and conferences) during the pandemic. We may take additional actions, as required by government authorities or as determined by management, considering the best interests of our employees, customers and business partners. We cannot guarantee that these measures will be sufficient to mitigate the risks posed by the pandemic or that they will meet the demands of government authorities.

The extent to which the COVID-19 outbreak will affect our business, financial condition, results of operations or cash flows will depend on future developments, which are highly uncertain and unpredictable. These developments include, among others, the duration and geographic distribution of the outbreak, its severity, actions to contain the virus or minimize its impact, and how quickly and to what extent normal economic and operational conditions can be resumed. Even after containing the outbreak of COVID-19, our business may continue to suffer adverse and material impacts due to the global or regional economic impact, including recession, economic slowdown or increase in unemployment levels, which may affect the purchasing power of our customers.

In addition, we cannot guarantee that other regional and/or global outbreaks will not occur. Furthermore, new waves of COVID-19 have already started to emerge in some regions in which we operate and may spread. We cannot guarantee that we will be able to take the necessary measures to prevent an adverse impact on our businesses of equal or greater dimension than the impact caused by the COVID-19 pandemic, in case of new regional and/or global outbreaks or new large-scale waves of COVID-19.

Any outbreak of a disease that affects human behavior or that requires public policies to restrict the circulation of people and/or social contact may change consumer behavior, having an adverse impact on our business, as well as on the economies in the countries in which we operate. Disease outbreaks may also make it impossible for our employees and customers to go to our facilities (including for preventative reasons or avoiding large-scale contamination), which would adversely affect the development of our business.

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As there are no comparable recent events that can provide us with guidance regarding the effect of a severe global pandemic, we cannot predict the final impact of the COVID-19 outbreak. Finally, the impact of the COVID-19 pandemic can also precipitate or exacerbate the other risks described in this annual report.

We face operational risks that can result in the partial or temporary shutdown of our operations, which may adversely affect our financial condition and results of operations.

We face operational risks that may result in partial or temporary suspension of our operations and in loss of production. Such outages may be caused by factors associated with equipment failure, information system disruptions or failures (including due to cyber-attacks), accidents, fires, strikes, weather, exposure to natural disasters, regional water crisis, electricity power outages and chemical product spills, accidents involving water reservoirs, availability of our suppliers to meet demand of raw and packaging materials, among other operational and environmental hazards. The occurrence of these events may, among other impacts, result in serious damage to our property, assets and reputation, a decrease in production or an increase in production costs, any of which may adversely affect our financial condition and results of operations.

During the normal course of our business, we depend on the continuous availability of logistics and transportation networks, including roads, railways, warehouses and ports, among others. Such operations may be disrupted by factors beyond our control, such as social movements, natural disasters, electricity shortages and labor strikes. Any interruption in the supply of inputs for the operation of our industrial units or in the delivery of our products to clients could cause a material adverse impact on our results of operations.

Moreover, the transportation and infrastructure system in Brazil and other countries we operate is under development and needs improvements so that it can work efficiently and serve better our business. Any significant interruptions or reductions in the use of transport infrastructure or in its operations in the cities where our distribution centers are located, may delay or impair our ability to distribute goods and cause our sales to drop, which may negatively impact our financial and operating results.

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 2020. 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 2020 prices of the principal commodities we purchase:

Commodity

High Price

Low Price

Average in 2020

Fluctuation

Aluminum (US$/ton) 2,051.5 1,421.5 1,0702.3 10%
Sugar (US$ cents/pounds) 15.78 9.21 12.88 15%
Corn (US$ cents/bushel) 4.84 3.03 3.64 25%
Wheat (US$ cents/bushel) 6.41 4.74 5.50 15%
PET (US$/ton) 718.83 430.93 535.68 (20)%

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. 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.

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.

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The purchasing decisions of consumers are affected by factors including brand recognition, product quality and performance, price and subjective preferences. Some of our competitors may have marketing investments substantially larger than ours. If our advertising, promotional and marketing strategies do not succeed and if we are unable to offer new products to meet the market demands, our market share and results may be adversely affected. If we cannot introduce new products in a timely manner or if our end consumers believe that our competitors’ products are more attractive, our sales, profitability and our results of operations may be adversely affected.

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, environmental aspects, 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.

In Brazil, the Ministry of Agriculture (“MAPA”) or its agencies are responsible for the registration, standardization, classification, labelling and for the inspection and surveillance of beverage production and commerce. MAPA regulation sets forth that the registration of establishments and beverages products is valid throughout the country and must be renewed every ten years, except for imported beverages that do not require registration with the MAPA. Moreover, some products and beverages (i.e. energy drinks) may be subject to prior registrations or post-production regulations issued by the Brazilian National Health Surveillance Agency (“ANVISA”).

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.”

Additionally, we may be unable to timely comply with recently enacted laws and regulations in the countries we operate or to comply with laws and regulations in countries we recently started to operate. 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. ("Labatt"), our Canadian subsidiary, and Tilray Inc., or Tilray, to research non-alcoholic beverages containing tetrahydrocannabinol, or THC, 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.

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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. Such licenses or regulatory approvals 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.

Due to the COVID-19 pandemic in Brazil certain local authorities have extended the validity of our licenses, permits or authorizations. In addition, in order to control the spread of COVID-19, new rules were enacted on June 18, 2020 by the Ministry of Health setting forth health protocols and limitations applicable to different industries that resulted on the restriction on circulation of people and social distancing. These protocols and limitations resulted in the closing of and operating restrictions on pubs, stores and restaurants, which adversely affected our sales.

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 Pessoais (Brazilian General Data Protection Law) or LGPD, was enacted and came into effect as of September 18, 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 Autoridade Nacional de Proteção de Dados (National Data Protection Authority), or ANPD, with powers to enforce the law.

In the midst of the COVID-19 pandemic, Law No. 14,010/2020 was approved, which, among other measures, postponed the applicability of the administrative sanctions provided for in the LGPD to August 1, 2021. On August 26, 2020, after the Brazilian House of Representatives approved the conversion into law of Provisional Measure No. 959 (with some changes and postponing the entry into force of the LGPD until December 31, 2020 with the exception of sanctions), the Brazilian Senate considered the postponement of the entry into force of the LGPD to be preemptive because the legislative branch had discussed the delayed entry into force of the LGPD in Law No. 14,010/2020. As a result, the President of Brazil signed Conversion Bill No. 34/2020 with respect to the other provisions of Provisional Measure No. 959 and the LGPD entered into force on September 18, 2020, except for the administrative sanctions to become effective in August 1st, 2021.

In the current scenario (prior to the effectiveness of the administrative sanctions provided for in the LGPD), failure to comply with data protection legislation may result in the following: (i) the filing of lawsuits, individual or collective, claiming damages resulting from violations, based not only on the LGPD, but also on the sparse legislation that address data protection matters; (ii) the application of specific penalties foreseen in the sparse legislation, such as Marco Civil da Internet (Brazilian Internet Act) and the Consumer Protection Code (“CDC”), in case of violation of its provisions, by some consumer protection bodies and public prosecution offices.

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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. In August 2021, when the LGPD administrative sanctions will be effective, failure to comply with the LGPD may result in the following penalties: (a) Warning; (b) One-time fine, of up to two percent of the turnover of the infringing entity´s conglomerate in Brazil, up to R$ 50,000,000.00 reais per violation; (c) Daily fine, which is also subject to the limit set above; (d) Press release; (e) Blocking or deletion of personal data; (f) Partial suspension of the database to which the infraction refers for 6 months, extendable for another 6 months; (g) Suspension of the data processing activity to which the infraction refers for 6 months, extendable for another 6 months; (h) Partial or complete prohibition of any data processing activities, which could harm our reputation and negatively affect our business and operating results. Moreover, we may be liable for property, moral, individual or collective damages caused by us, including by third party providers that process personal data for us, and jointly liable for property, moral, individual or collective damages caused by our subsidiaries, due to non-compliance with the obligations established by the LGPD.As a result of our business activities, we hold large volumes of personal data, including that of employees, dealers, customers and consumers. Therefore, we have designed and implemented a privacy governance framework in order to comply with the LGPD and improve some of the existing guidelines. 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.

Additionally, as a result of the remote work measures adopted in response to the COVID-19 pandemic, there is a possibility of an increase in cyberattacks through our employees’ personal computers, since the cyber security of the networks used by them in their homes may not maintain the same level of security as that of our corporate work environment, which may impair our ability to manage our business.

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. Finally, if we fail to ensure the security of personal data, we may be subject to the obligation to notify the ANPD and the data subjects involved in the security incident or data breach.

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.

We have implemented an anti-corruption compliance program designed to detect, prevent and remediate potential violations of applicable anti-corruption 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.

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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.

As any company operating in Brazil, we are subject to the Brazilian antitrust law and regulation, which sets forth the conducts that should be considered a violation to the economic order and the penalties applied. We have a substantial share of the beer market in Brazil and thus we are subject to scrutiny and enforcement by Brazilian antitrust authorities (mainly the Administrative Council for Economic Defense – CADE). We are committed to conducting business in a legal manner, having implemented what we understand to be a sound competition compliance program to prevent anticompetitive practices. Nevertheless, 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 allegations of violations of laws, regulations or acts, either from competitors, clients and other third parties or initiated by CADE. Therefore, 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 scrutiny 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 30 to our audited consolidated financial statements as of and for December 31, 2020, 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 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 third-party 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 fixed-price 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.

We have also entered into contracts with third parties to provide transportation and logistics services in connection with part of our products. The early termination of these contracts or our inability to renew them or negotiate new contracts with other service providers with similar conditions could adversely affect our financial and operating condition. In addition, the majority of our suppliers of transportation operate under concessions granted by the Brazilian government and the loss or non-renewal of such concessions may also adversely affect our results of operations and financial condition.

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.

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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.

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 quality control 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 a wide range of Brazilian federal, state and municipal safety and environmental laws and regulations related to licenses or authorizations necessary to our business, as well as use of water resources and management of solid waste and take-back scheme obligations.

Our activities require the constant obtaining and renewal of environmental permits, on which the installation and operation of the production units depend. Technical difficulties or failure to meet license renewal terms and the requirements of environmental agencies may have adverse effects on our business, as we may be subject to the imposition of successive fines, interruption of activities or the shutdown of units, as applicable (worse-case scenario). This may adversely affect our image, results of operations and financial condition. As environmental laws and their application have become increasingly stringent, our expenditures to meet environmental requirements may increase substantially in the future.

The failure to comply with these laws and regulations may result in the revocation of licenses and suspension of our activities or in the payment of environmental repair costs, which can be substantial, as well as civil, administrative and criminal liabilities.

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 and consequently negatively affect our results of operations

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, industrial design, 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 before the relevant intellectual property authorities in the variety of markets we conduct our business, always 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. Therefore, events such as the definitive rejection of our trademark applications before the authorities, the unauthorized use or other misappropriation of our trademarks may diminish their value and reputation, so that we may suffer negative impact on the operating results. There is also a risk that we could, by omission, fail to renew a trademark, domain name, industrial design 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. In case of judicial questioning of any trademarks the judicial decision may negatively affect their use and may be prohibited from continuing to exploit them.

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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. In addition, any dispute or litigation related to intellectual property assets may be costly and time consuming due to the uncertainty of litigation on the matter.

Natural and other disasters and accidents caused by human and technological errors 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 (including floods, fires), social, technical (technological or human errors) or physical risks such as large-scale epidemics and pandemics, including the COVID-19 pandemic, 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. The exemplified events and others can affect our business in general or be specific to certain strategic locations, where our plants, distribution center or logistic hubs may be located. Such disruptions may result in reduced economic activity and business sentiment, both in the Brazilian market and internationally.

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, 48.3% (R$28.2 billion) of our total net revenues of R$58.4 billion in 2020 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.

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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.

Ambev currently owns 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 2020, Bucanero sold 0.9 million hectoliters of beer, representing about 0.5% of our total volume of 165.8 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, including 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.

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. On January 11th, 2021, the United States government designated Cuba as a state sponsor of terrorism, a list from which Cuba had previously been removed in 2015. 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 former 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.

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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.

Deterioration in economic and market conditions in Brazil and other emerging market countries, as well as in developed economies (including 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. Crises in emerging markets, such as in Southeast Asia, Russia and Argentina, historically caused volatility in the Brazilian stock market and other emerging countries. 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 and outside of Brazil. Additionally, monetary policy changes and/or implementation of protectionist policies in the United States and other relevant countries for the international economy may impact, directly or indirectly, the economy in the countries where we operate, generating several risks, especially exchange rate, interest rate and increase in the price of commodities, and, consequently, affecting our results.

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.

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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 arising from Ambev's 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. Such restrictions may hinder or prevent the Custodian or holders who have exchanged ADSs for Ambev’s underlying shares from converting distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In the event the Custodian is prevented from converting and remitting amounts owed to foreign investors, the Custodian will hold the reais it cannot convert for the account of the holders of ADSs who have not been paid. The Depositary will not invest the reais and will not be liable for interest on those amounts. Any reais so held will be subject to devaluation risk against the U.S. dollar.

In addition, 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 and the size of Brazil’s debt service burden relative to the economy as a whole. We cannot assure you that the Brazilian 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 foreign capital markets. For further information on this matter, see “—A. Selected Financial Data—Exchange Controls.”

The surrender of ADSs may cause the loss of the ability to remit foreign currency abroad and of certain Brazilian tax advantages

While ADSs holders benefit from the electronic certificate of foreign capital registration obtained in Brazil by the Custodian, which permits the Depositary to convert dividends and other distributions with respect to the shares underlying the ADSs into foreign currency and remit the proceeds abroad, the availability and requirements of such electronic certificate may be adversely affected by future changes to the applicable regulation.

If an ADS holder surrenders the ADSs and, consequently, receives shares underlying the ADSs, such holder will have to register its investment in Ambev’s shares with the Brazilian Central Bank either as (i) a foreign direct investment, subject to Law 4,131, which will require an electronic certificate of foreign capital registration, the Electronic Declaratory Registration of Foreign Direct Investment (RDE-IED), or (ii) as a foreign investment in portfolio, subject to CMN Resolution 4,373, which among other requirements, requires the appointment of a financial institution in Brazil as the custodian of the preferred shares and legal representative of the foreign investor in the Electronic Declaratory Registration of Portfolio (RDE – Portfolio).

The failure to register the investment in the Ambev’s shares as foreign investment as described above (e.g., RDE – IED or RDE – Portfolio) will impact the ability of the holder to dispose of Ambev’s shares and to receive dividends. Moreover, upon receipt of Ambev’s shares underlying the ADSs, Brazilian regulations require the investor to enter into corresponding exchange rate transactions and pay taxes on these exchange rate transactions, as applicable.

In addition, if a holder of Ambev’s shares attempts to obtain an electronic certificate of foreign capital registration, such holder may incur expenses or suffer delays in the application process, which could impact the investor’s ability to receive dividends or distributions relating to Ambev’s shares or the return of capital on a timely manner.

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.

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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.

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);
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· 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.

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, 2020.

ABI indirectly held shares in us representing 61.8% of our total and voting capital stock (excluding treasury shares) as of December 31, 2020. 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 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 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.”

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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. In addition, we might not pay dividends to our shareholders.

In any particular fiscal year based on the opinion 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, including deterioration of its financial condition resulting from the COVID-19 pandemic.

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, 04530-001, São Paulo, SP, Brazil, and its telephone number and email are: +55 (11) 2122-1414 and ri@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 its put option in connection with shares representing 30% of Tenedora's capital stock, in accordance with Tenedora’s shareholders’ agreement. 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.

On July 2, 2020, the Company and ELJ, as shareholders of Tenedora, signed the second amendment to Tenedora’s Shareholders Agreement (“Shareholders Agreement”), extending their partnership in the country and postponing the terms of the put and call options defined in the original Agreement. ELJ is currently the owner of 15% of Tenedora’s shares, and its put option is now divided in two tranches: (i) Tranche A, corresponding to 12.11% of the shares, exercisable in 2022, 2023 and 2024; and (ii) Tranche B, corresponding to 2.89% of the shares, exercisable starting in 2026. The Company, on the other hand, has a call option over the Tranche A shares exercisable starting in 2021 and of the Tranche B shares to be exercised starting in 2029. The details of the assumptions used for this option are described in Note 28 of the notes to the interim consolidated financial statements).

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.

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In December 2018, our Canadian subsidiary Labatt entered into a joint venture named Fluent Beverages, or Fluent, with High Park Farms Ltd., a subsidiary of Tilray, a global player 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.

The long-term agreement with PepsiCo, under which the Cervecería Boliviana Nacional, subsidiary of the Company in Bolivia, has the exclusive right to produce, sell and distribute certain brands on PepsiCo’s portfolio in Bolivia, was amended in June 1st, 2020, extending the agreement for more 10 years and reflecting certain changes in the commercial agreement between the parties.

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.

On January 22, 2020, our subsidiary Labatt Breweries has acquired Goodridge & Williams distillery known for spirits and canned cocktails. The acquisition includes the craft distiller’s ready-to-drink brands along with an innovative range of sugar-free, low calorie NÜTRL products as we look to further expand our ready-to-drink offerings in the Canadian market.

On February 18, 2020, our subsidiary Cervecería y Maltería Quilmes has acquired Dante Robino, an Argentine winery located in Mendoza, with almost 100 years of history. The acquisition puts itself as an opportunity to complement the beer portfolio and learn about a new segment that has grown consistently in Argentina over the years and has a significant market share in the country.

On August 16, 2020, Cervecería Chile S.A., a Chilean subsidiary of the Company, entered into a long-term distribution agreement with Embotelladora Andina S.A., Coca-Cola Embonor S.A. and Embotelladora Iquique S.A. (the “Distributors”), by which the Distributors were granted the right to sell and distribute certain products within the Company’s portfolio, with exclusivity in specific zones and sales channels in Chile.

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, other alcoholic beverages and 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, 2020, we conducted our operations through four business segments, as follows:

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

The following map illustrates our four business segments as of December 31, 2020:

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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,

 

2020

2019

2018

 

Sales

% of Total

Sales

% of Total

Sales

% of Total

Brazil 30,196.5 51.7% 28,129.9 54.1% 26,814.2 53.4%
Beer Brazil 25,953.0 44.5% 23,765.5 45.7% 23,008.5 45.8%
NAB 4,243.5 7.3% 4,364.4 8.4% 3,805.7 7.6%
CAC 7,319.3 12.5% 6,757.9 13.0% 5,813.9 11.6%
Latin America South 11,560.8 19.8% 10,028.7 19.3% 10,753.9 21.4%
Canada

9,302.4

15.9%

7,088.6

13.6%

6,849.3

13.6%

Total

58,379.0

100.0%

52,005.1

100.0%

50,231.3

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,

 

2020

2019

2018

 

Volume

% of Total

Volume

% of Total

Volume

% of Total

Brazil 111,285.4 67.1% 106,806.7 65.4% 101,642.9 64.0%
Beer Brazil 84,791.7 51.1% 80,263.7 49.2% 77,784.2 49.0%
NAB 26,493.7 16.0% 26,542.9 16.3% 23,858.8 15.0%
CAC 11,451.2 6.9% 13,859.5 8.5% 13,159.8 8.3%
Latin America South 33,062.4 19.9% 32,991.1 20.2% 33,971.2 21.4%
Canada

9,998.9

6.0%

9,585.7

5.9%

9,942.9

6.3%

Total

165,797.9

100.0%

163,243.0

100.0%

158,716.9

100.0%

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.

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Strategic Pillars

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

· Ambev as an ecosystem: Despite the challenges brought by COVID-19, we believe that the pandemic has helped us to reframe our purpose as a company and change our approach towards our ecosystem, with the development of what we believe to be more sustainable relationships with our customers and communities in regions we operate. We constantly seek to prioritize the health and safety of our employees together with actions that we believe can cause a positive impact on the regions we operate and stakeholders generally. These actions are leveraged by our capabilities and resulted in the following actions:

 

o In Brazil, we donated 30 million reais for two COVID-19 vaccine plant projects, took part in Movimento NÓS, a coalition of eight consumer goods companies that will help approximately 300,000 POCs to reopen with a total investment of R$370 million to support working capital, impacting indirectly more than three million people and established a partnership with another start up Lemon Energia, aimed at providing cheaper clean energy to more than 50,000 small businesses by 2023.
o In CAC, with Colmados Seguros in the Dominican Republic and Paisano Seguro in Panama, we have helped POCs to secure space for consumers during reopening and helped creating new safe social spaces.
o In LAS, Quilmes, our subsidiary in Argentina, was recognized by both the public and opinion leaders as the company that is making the greatest efforts to face solidarity actions in the areas where our production is located.
o In Canada, we worked to support our communities and customers through our Stella Artois Rally for Restaurants campaign, aimed at providing financial relief to bars and restaurants.

 

As a recognition to the role we have played since the outbreak of COVID-19, Ambev has received the Solidarity Award from the United Nations that recognizes impactful work.

 

· Innovation and Business Transformation: We consider innovation as one of our most important pillars for our commercial strategy. We consider innovation not only to cover products but also our relationships with customers and consumers. As markets mature and new trends appear, consumers demand more alternatives for the different consumption occasions. To connect with our consumers and provide them products that satisfy their preferences, we must continue to seek flexibility adapt quickly and deliver the best products and experience. We have a framework of five growth tools that guide our innovation efforts: (i) new flavors & enhanced value proposition; (ii) convenience for consumers; (iii) innovation in service to our customers; (iv) health & wellness and; (v) beyond beer.

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 is 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.

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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.

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.

Zé Delivery and Bees

In order to increase convenience to our consumers, we are exploring solutions to deliver on demand cold beverages at reasonable prices directly to consumers. Our solutions solve several pain points identified in the consumers’ buying journey: (i) late hours availability, (ii) fast service that is time saving for consumers, (iii) reasonable prices, and (iv) cold products ready to be consumed.

· In Brazil, our direct-to-consumer platform Zé Delivery continued to grow exponentially, being now present in more than 200 cities across all 27 Brazilian states and reaching almost 50% of the country’s entire population. Zé Delivery delivered more than 27 million orders in 2020.
· In LAS, in Argentina, Appbar continues to grow exponentially, growing almost 10x versus 2019.
· In CAC, in Dominican Republic, Colmapp continued to expand after the merger with the Tucerveza.do website and the Colmapp delivery into a single platform.

Our B2B marketplace platform, Bees, centralizes different solutions in one 24/7 platform, creating a constant and customized touchpoint with our customers, improving overall service level through: (i) providing portfolio suggestions based on customers’ profile and product relevance, (ii) enhancing order tracking and real time support through the app, (iii) allowing our business development representatives to be focused on helping customers improve their sales performance (sell out), and (iv) increasing our total interaction time with our customers, directly connecting to our innovation strategy and increased portfolio complexity.

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· In Brazil, we continued to roll-out Bees and currently have already almost half of our active buyers purchasing through the platform. Continuing the expansion of our full digital strategy, we expect to have all our distribution centers integrated in the platform by the end of 2021.
· In CAC, Dominican Republic continues to lead the expansion of the Bees platform, actively sharing know-how and best practices with other operations. The country has already reached the status of a full digital operation, with 90% of B2B buyers already purchasing through the platform and 85% of the country’s net revenues already coming from Bees. We are also exploring Bees marketplace in the country with eight different categories and 70 SKUs available for customers.

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:

 

2020 Quarterly Volumes
(as a percentage of annual volumes)

 

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Brazil 22.5% 20.8% 25.6% 31.2%
Beer Brazil 21.9% 21.2% 25.8% 31.1%
NAB 24.3% 19.4% 24.9% 31.4%
CAC 24.0% 18.2% 27.1% 30.6%
Latin America South 28.2% 16.3% 23.8% 31.7%
Canada

19.2%

28.9%

29.7%

22.3%

Total

23.5%

20.2%

25.6%

30.7%

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 2020 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 149 operations, and (2) our proprietary direct distribution system, involving 95 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.”

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Future Beverages

Some of our products stretch beyond typical beer consumption occasions, such as the Beats 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. Our Nutrl portfolio of seltzers in Canada and Dante Robino wines in Argentina add to our wide portfolio of future beverages, a market that we have been assessing in different regions and countries.

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 95% of the volumes of our NAB unit.

According to our estimates, the leading CSD flavors in Brazil are (1) cola (with 52.6% of the market in 2020), (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. Since 2016, when we acquired the Brazilian juice company “Do Bem”, the brand has been integrated to our portfolio, improving our value proposition in health and wellness categories. In 2020, we launched For Me wellness shots, a functional beverage, in a record-breaking sixty days to start this new category, and also launched Natu, our new version of Guaraná made with 100% natural ingredients. We expanded the Sukita family with Sukita Lemon to increase our offering in the value segment and have continued to invest in lowering the sugar content in our portfolio.

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 4.0 million hectoliters in 2020.

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.

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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 2020. 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 2.8 million hectoliters in 2020.

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 3.2 million hectoliters in 2020.

In the Dominican Republic, the annual sales volume of the beer market was 4.5 million hectoliters in 2020, 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, Presidente Golden 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 0.1 million hectoliters in 2020, 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 2020. 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 300 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 20.9 million hectoliters in 2020. With a population of approximately 45 million, Argentina is Latin America South’s largest and most important beer market.

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In Argentina, 34% of our beer volume is distributed directly by us and 66% is distributed through exclusive third-party distributors. Our main package presentation in Argentina is the 1-liter returnable glass bottles, which accounted for 63.7% of our sales in 2020.

According to our estimates, the on-premise consumption represented 5.9% of beer volumes in Argentina in 2020, and supermarkets sales represented 14.6% of beer volumes. The main channels of volume consumption in Argentina are through kiosks and small grocery stores.

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 2020, annual sales volume of the Argentine CSD market was 6.1 million hectoliters. In Argentina, 36% of our CSD volume is distributed directly by us and 64% is distributed through exclusive third-party distributors. Non-returnable bottles represented 70% of our CSD sales in Argentina in 2020.

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 2020, 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 2.6 million hectoliters in 2020. The Bolivian market is strongly influenced by macroeconomic trends and governmental regulatory and fiscal policies.

In Bolivia, 30% of our beer volumes is directly distributed by us and 70% is distributed through exclusive third-party distributors. Our main package presentation in Bolivia is the 620-milliliter returnable glass bottle, which accounted for 40% of our sales in 2020.

Our most important beer brands in Bolivia are Paceña, Taquiña and Huari. According to our estimates, we are the leading beer producer in Bolivia.

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 2020, the annual sales volume of the Bolivian CSD market was 5.4 million hectoliters. Of our total CSD volumes in Bolivia in 2020, 30% was directly distributed by us and 70% was distributed through exclusive third-party distributors, while 96% of our CSD sales in that country in 2020 were through non-returnable bottles.

Chile

According to our estimates, the annual sales volume of the Chilean beer market was 11.1 million hectoliters in 2020. 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.

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Paraguay

According to our estimates, the annual sales volume of the Paraguayan beer market was 4.6 million hectoliters in 2020, excluding smuggling.

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.

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 940-milimeter returnable glass bottle, which accounted for 49% of our sales in 2020.

Our most important beer brands in Paraguay are Brahma, Pilsen and Ouro Fino, with a leader market position in the country in 2020, 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 1.0 million hectoliters in 2020. 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, 32% of our beer volumes is directly distributed by us and 68% is distributed through exclusive third-party distributors. Our main package presentation in Uruguay is the 1-liter returnable glass bottle, which accounted for 56.5% of our sales in 2020.

Our most important beer brands in Uruguay are Pilsen and Patricia, with a leader market position in 2020, according to our estimates.

The Uruguayan CSD Market

According to our estimates, in 2020, the annual sales volume of the Uruguayan CSD market was 3.1 million hectoliters.

In Uruguay, 44.9% of our CSD volume is directly distributed by us and 55.1% is distributed through exclusive third-party distributors. Non-returnable bottles accounted for 91.1% of our sales in that country in 2020. Our most important brand in Uruguay is Pepsi-Cola, with The Coca-Cola Company being our main competitor.

Canada

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 2020, driven mainly by the rapid expansion of the seltzer segment. Labatt’s RTD portfolio in Canada includes the Nutrl, Palm Bay and Mike’s brands.

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

 

The COVID-19 pandemic had significant changes in consumer behavior and channel dynamics as governments imposed restrictions that varied in terms of scope and intensity in response to the virus spread. As consumption occasions moved in-home, and as consumers looked for convenience, the demand for one-way packaging, especially cans, increased significantly, pressuring the supply chain and generating punctual product shortages.

Beer

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

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Barley and Malt

Malt is widely available, and our requirements are met by domestic and international suppliers as well as our own six 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.

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 and Cargill. 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 guarana seeds (roasted grains) per year, or about 10% of our needs, currently purchased directly from farmers and their organizations in Maués, 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 supply Guaraná seedlings to local producers and to promote the sustainable cultivation of Guaraná in the Amazon Region. About 40 thousand seedlings are donated each 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.

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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.

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 2020 such unit attended to more than 44 % 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. Also, in September 2020, we opened our can plant facility in the state of Minas Gerais, which has a production capacity of 1.5 billion cans per year, the only national capacity expansion in 2020 among all players.

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; (5) antitrust laws; and (6) foreign exchange 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 regulation and standards regarding, among other issues, the emission of gas and liquid effluents and (2) the disposal of one-way packaging.

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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;

·        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 2020, sales volumes of PepsiCo products represented approximately 30% of our total NAB sales volumes in Brazil, nearly 47% of our total NAB sales volumes in the Dominican Republic and 99% of our NAB sales volumes in Argentina, 96% in Bolivia and 99% in Uruguay.

Red Bull

We have a long-term distribution agreement with Red Bull, providing for 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. 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 2020, 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.

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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 and Becks brands 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.

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. ("Cervecería Modelo" - formerly Grupo Modelo, S.A.B. de C.V.), a subsidiary of ABI, to produce, 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 2020, 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; 35.6 % in Bolivia; 24.2% in Chile; 11.7% in Paraguay; and 29.8% 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 2020, represented as a percentage of gross sales, was: 36.1% in Brazil; 18.0% in the Dominican Republic; 7.0% in Panama; 17.3% in Argentina; 28.1% in Bolivia; and 30.1% in Uruguay.

Changes to Brazilian Taxes on Beverages

In January 2015, it was enacted Law No. 13,097 by the Brazilian federal government, introducing 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 (in force from 2009 to 2015), the referred taxes were due exclusively by the manufacturer at fixed amounts per liter of beer or soft drink produced (ad rem). As to this 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, which are no longer applicable as of January 2018. Without such reduction, PIS Contribution and COFINS rates have increased between 5% and 11% 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.

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In 2015 the States of São Paulo, Rio de Janeiro, Minas Gerais, Distrito Federal, Rio Grande do Sul, Ceará, Amapá, Rondônia, 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 became effective in early 2020. In 2020, no Brazilian state raised ICMS Value-Added Tax rate for either beer or non-alcoholic beverages.

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. In October, 2020, a new decree (10,523/2020) was issued to establish the 8% rate from February 2021 onwards.

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, 2020.

ABI indirectly holds shares in us representing 61.8% of our total and voting capital stock (excluding treasury shares) as of December 31, 2020. ABI thus has control over us, even though (1) ABI is subject to the 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 Shareholders’ Agreement.”

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, 2020 based on total share capital owned.

 

 

 

 

 

 

 

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Organizational Structure

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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, 2020, our aggregate beer and non-alcoholic beverages production capacity was 250.8 million hectoliters per year. In 2020, the total production at the facilities set forth below was equal to 163.4 million hectoliters.

The following is a list of our principal production facilities as of December 31, 2020:

Brazil  
Plant Type of Plant
Almirante Tamandaré, Paraná Soft Drinks
Anápolis, Goiás Mixed
Aquiraz, Ceará Mixed
Camaçari, Bahia Mixed
Cuiabá, Mato Grosso Mixed
Estancia, Sergipe Mixed
Guarulhos, São Paulo Beer
Itapissuma, Pernambuco Mixed
Jacareí, São Paulo Beer
Jaguariúna, São Paulo Mixed
Juatuba, Minas Gerais Mixed
Jundiai, São Paulo Soft Drinks
Lages, Santa Catarina Beer
Cachoeiras de Macacu, Rio de Janeiro Mixed
Manaus, Amazonas Mixed
Pirai, Rio de Janeiro Mixed
Ponta Grossa, Paraná Beer
Rio de Janeiro, Rio de Janeiro Mixed
São Luis, Maranhão Beer
Sapucaia do Sul, Rio Grande do Sul Soft Drinks
Sete Lagoas, Minas Gerais Mixed
Teresina, Piauí Mixed
Uberlândia, Minas Gerais Beer
Viamão, Rio Grande do Sul Mixed
Crown Manaus, Amazonas Crown Cap
Glass Rio, Rio de Janeiro Glass Bottles
Label São Paulo, São Paulo Labels
Malt. Navegantes, Rio Grande do Sul Malt
Malt. Passo Fundo, Rio Grande do Sul Malt
Cans Minas, Minas Gerais Cans
Contagem, Minas Gerais Bag in box plant
SAZ Zitec Research Pilot Brewery, Rio de Janeiro Research Plant
Wals, Minas Gerais Beer
Colorado, São Paulo Beer
Bohemia, Rio de Janeiro Beer
Pratinha, São Paulo Beer
Joao Pessoa, Paraíba CO2 Plant
SD Aromas, Manaus Soft Drinks Kits

 

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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
Acheral, Argentina Beer
Cordoba, Argentina Soft Drinks
Corrientes, Argentina Mixed
Manantial, Argentina Soft Drinks
Mendoza, Argentina Beer
Pompeya, Argentina Beer
Quilmes, Argentina Beer
Zarate, Argentina Beer
Cerveceria Argentina, Argentina Beer
Cochabamba, Bolivia Beer
El Alto, Bolivia Soft Drinks
Huari, Bolivia Beer
La Paz, Bolivia Beer
Sacaba, Bolivia Soft Drinks
Santa Cruz, Bolivia Beer
Santiago, Chile Beer
Ypane, Paraguay Beer
Minas, Uruguay Beer
Montevideo, Uruguay Mixed
Malt. Pampa, Argentina Malt
Crown Coroplas, Argentina Crown Cap
Malt Tres Arroyos, Argentina Malt
Can Oruro, Bolivia Cans
Glass Ypane, Paraguay Glass Bottles
Malt Nueva Palmira, Uruguay Malt
Malt Paysandu, Uruguay Malt
Hop Fernandez Oro, Argentina Hops Pellets
Zarate Research Pilot Brewery, Argentina Research Plant
Patagonia, Argentina Beer
Dante Robino, Argentina Wine
Tarija, Bolivia Beer

 

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Canada   
Plant Type of Plant
St. John’s Beer
Halifax Beer
Montreal Beer/RTD
London Beer/RTD
Edmonton Beer/RTD
Creston Beer
Mill Street Beer/Spirits
Turning Point Beer/RTD/Cider
Archibald Beer
Alexander Keith Beer
Goodridge&Williams…………………………………………………………………………… RTD/Spirits
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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, 2020, 2019 and 2018 and for the three years ended December 31, 2020 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.

Impact of Ongoing COVID-19 Pandemic

 

A novel strain of coronavirus, COVID-19, was first identified in China in December 2019 and became a global pandemic in March 2020. As the pandemic progressed, the significant changes in consumer behavior and channel dynamics that started in mid-March affected the full year results with meaningful impact to our profitability, as governments imposed restrictions that varied in terms of scope and intensity in response to COVID-19.

 

Although still in a very volatile environment, during the whole year the countries we operate and our operations were differently affected. In some cases, mandatory quarantines, restrictions on travel, commercial and social activities and ban on the distribution, sale and consumption of alcoholic beverage.

 

The impact of the pandemic on our operations and the restrictions imposed in response by national governments, especially since March 2020, have generated significant changes in market dynamics both in the off-trade sales channel, composed of supermarkets, and in the on-trade channel, which is composed of bars and restaurants. In countries with higher levels of income, more mature beer market and a greater weighting towards the off-trade sales channel, such as Canada, the negative impact on the sales volume has been smaller. On the other hand, in countries with lower income levels and less mature beer markets, volume has been impacted according to the market segmentation between the on-trade and off-trade channels. In those cases, the reduction in volume is higher depending on the weighting of the on-trade channel. In all the cases, the more severe the restrictions on the sale and consumption of our products, the greater the reduction in volume, which is why Bolivia and Panama were among the worst-affected countries. On the other hand, we observed an increase in sales related to e-commerce in all countries, although this channel represents a small portion of the Company's total volume.

During 2020, the implementation of the Company's strategy, the gradual reduction of restrictions in some regions and the impact of government aid to the community drove a gradual improvement in volume performance in most of our operations, especially in Brazil. Our strategy for 2021 will continue to be built around innovation, technology and collaboration with our ecosystem. Given that the challenges brought by the COVID-19 pandemic remain a reality, we believe operational excellence and financial discipline will once again make a difference as we work towards a consistent recovery of our top line and bottom line performance. As was the case in 2020, we continue to expect the former to recover faster than the latter. The outlook for 2021 reflects our current assessment of the scale and magnitude of the COVID-19 pandemic, which is subject to change as we continue to monitor ongoing developments.

See “Item 3.D. Key Information—Risk Factors—Risks Relating to Our Operations—The extent of the pandemic declared by the World Health Organization due to the spread of COVID-19, the perception of its effects or the way in which this pandemic will impact our business, depends on future developments which are highly uncertain and unpredictable, and may result in a material adverse effect on our business, financial condition, results of operations and cash flow”, and other risk factors included herein and “—Trend Information” below.

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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.

Accounting policies for the recognition of extemporaneous tax credits and debts – The accounting policy for the recognition of extemporaneous (related to previous periods) tax credits and debits considered the account origin of the credit or debit up to September 30, 2020. For example, “cost of products sold” is the account of origin for the extemporaneous tax credits or debits related to the acquisition of raw materials. In the same way depreciation expenses is the account of origin of extemporaneous tax credits or debits related to acquisitions of property, plant and equipment. Following this accounting policy, which has been applied consistently up to the third quarter of 2020, credits referring to the exclusion of circulation of goods and services tax (“ICMS”) from the social integration program (“PIS”) and contribution to the financing of social security (“COFINS”) calculation base have been recognized as a reduction in sales tax expenses, with a positive effect on Net Revenue.

 

In the third quarter of 2020 the Company (i) obtained final favorable decisions on: (a) lawsuits involving controlled companies claiming refunds of the PIS and COFINS portion calculated with the inclusion of the ICMS and/or ICMS-ST relating to the period from 1990 onward, and (b) lawsuits involving the Company and its controlled companies, specifically for the period in which the Special Beverage Regime – (“REFRI”) was in place (2009 to 2015), and (ii) is awaiting decisions in lawsuits related to the current taxation model (“New Tax Model”) from 2015 onwards. The amounts involved in these lawsuits, referred to in items (i.b) and (ii), are significantly higher than those previously recognized, both for credits of the same type, as for recoveries or tax payments.

 

The Company changed its accounting policy to one which better reflects the effects of the recognition of credits arising from final favorable decisions in the lawsuits mentioned above. The previous accounting policy could have given a distorted analysis of the performance for the year, due to the significant increase in the value of credits, so the Company changed its accounting policy to record credits and other extemporaneous tax payments, of any nature, in Other Operating Income (expenses) and, thus is no longer following the original accounting treatment. However, this change in accounting policy does not impact the Net Income, or any of the other balance sheet schedules previously presented, or the amounts recorded in the financial results. The change in accounting policy did not apply for state amnesties which are presented separately in income statement given their one-off exceptional nature, please refer to Note 8 of our audited financial statements included elsewhere in this form.

 

As determined by IAS 8, the new accounting policy is applicable from October 1, 2020 and, for comparative purposes, the relevant balances of extemporaneous credits and debits for 2019 have been reclassified from the account of origin to “Other Income and Expenses”. The balances for the year ended December 31, 2018, were not reclassified for this change in accounting policy as the amount is deemed immaterial.

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:

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· IFRS 9 Financial Instruments, which replaces IAS 39 Financial Instruments: Recognition and Measurement for 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.
· 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 borrowing rates. The weighted average rate applied is of 12.6% until December 31, 2018.
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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 the current cost approach, must be stated in terms of the unit of measurement current in force 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.

Goodwill

Goodwill arises on acquisitions of subsidiaries, associates and joint arrangements. Goodwill is determined as the excess (1) of the consideration paid; (2) the amount of any non-controlling interests in the acquiree (when applicable); and (3) the fair value, at acquisition date, of any previous equity interest in the acquiree, over the fair value of the net identifiable assets acquired as at the date of acquisition. All business combinations are accounted for using 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 (“CGU”) to which the goodwill has been allocated could 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 CGU 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 costs 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. IFRS 3 is the standard 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, Management has adopted the predecessor basis of accounting, which is consistent with United States Generally Accepted Accounting Principles (“USGAAP”) and United Kingdom Generally Accepted Accounting Principles (“UKGAAP”), the predecessor basis of accounting to record the carrying amount of the asset received, as recorded by the parent company.

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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 as at the transfer date. If the book value of the assets and liabilities transferred by the parent is different from the historical cost recorded 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, in as a counter-entrypart to shareholders' equity against the carrying value adjustments.

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 the consolidated financial statements) the Company assesses the existence of: (i) any conflicts of interest; and (ii) the economic substance and purpose of the transaction. Having fulfilled these assumptions, the Company adopted as a policy the concepts of IAS 16 in order to provide adequate visibility and a fair impact on the amount of the distributable results to our shareholders, specially the non-controlling interests. This policy also includes assets acquired through the swapping of non-cash assets, or swaps 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: (i) the swap transaction is not commercial in nature; or (ii) the fair value of the asset received (and the asset assigned) cannot be reliably measured. The acquired asset is measured in this way even if the assignor entity cannot immediately remove the asset from its books. If the acquired asset is not measurable at fair value, its cost is determined based on the book value of the assigned asset.

Whenever there is a distribution of assets that are not recorded as cash, the asset, before its distribution, is recorded at its fair value in the income account. This procedure is applicable to the distributions in which the assets are equal in nature and therefore can be treated equitably. However, similarly to IFRIC 17, in the absence of a specific accounting practice for transactions under common control, we apply these procedures as part of our accounting practices. We also apply the same procedure to sales (products, supplies, etc.) 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 either as 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 - (“IAPP”), post-employment dental benefits and post-employment medical benefits are managed by Fundação Zerrenner. Usually, pension plans are funded by payments made by both the Company and its participants, considering the recommendations of independent actuaries. Post-employment dental benefits and post-employment medical benefit obligations are funded using the returns on the assets of the Fundação Zerrenner’s plan assets. If necessary, the Company may contribute some of its profits to Fundação Zerrenner.

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

The Company maintains both 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.

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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 level.

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 that each period of service as giving rise to an additional unit of benefit and measures each such unit separately. Based on this method, the cost of providing pensions is charged to the income statement over the period of service of the employee. The amounts charged to the income statement consist of current service costs, interest costs, 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 respective obligation and the fair values of the plan assets.

Past service costs arise 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: (i) when the settlement/curtailment occurs; or (ii) when the Company recognizes the related restructuring or termination costs, unless those changes are conditional upon the employee’s continued employment, for a specific period of time (the period in which the rights are acquired). In such cases, the past services costs are amortized using the straight-line method over the period in during which the rights were acquired. 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, the 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 expenses at the earlier of: (1) when we are demonstrably committed, without a 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.

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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.

Our aggregate weighted nominal tax rate applicable for the years ended December 31, 2020, 2019 and 2018 was 30.3%, 28.9% and 30.1%, respectively. For the years ended December 31, 2020, 2019 and 2018, our IFRS effective tax rate was 13.1%, 5.8% and 13.5%, respectively.

The main events that impacted the effective tax rate in 2020 were:

· government subsidies for 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 2020 we distributed approximately R$ 6.509,5 million as interest on equity, of which R$ 2.213,2 million was deductible, resulting in a tax impact of approximately R$ 2.213,2 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 Management’s judgment need to be disclosed separately. In determining whether an event or transaction is special, Management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence, and the potential impact on the variations in 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, amnesties, acquisitions of subsidiaries, impairment losses, and gains or losses on disposal of assets and investments.

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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.

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

 

Consolidated Financial Highlights

 

2020(2)

2019(1)(2)

% Change

  (in R$ million, except volume amounts,
percentages and per share amounts)
Sales volume—’000 hectoliters 165,797.9 163,243.0 1.4%
Net sales 58,379.0 52,005.1 12.3%
Net revenue per hectoliter—R$/hl 352.1 318.6 10.5%
Cost of sales (27,066.1) (21,678.2) 24.9%
Gross profit 31,312.9 30,326.9 3.3%
Gross margin (%) 53.6% 58.3% 470bps
Sales, marketing and distribution expenses (14,619.6) (12,647.5) 15.6%
Administrative expenses (2,948.5) (2,680.0) 10.0%
Other operating income/(expenses) net 2,679.4 1,472.7 81.9%
Exceptional items (452.0) (397.2) 13.8%
Income from operations 15,972.2 16,074.9 (0.6%)
Operating margin (%) 27.4% 30.9% 350 bps
Net income 11,731.9 12,188.4 (3.7%)
Net margin (%) 20.1% 23.4% 330bps

 

(1) The financial information for 2018 and 2017 have 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”.
(2) The Company changed its accounting policy used to account for extemporaneous (related to previous periods) tax credits and debits in 2020. See Note 3 to our audited consolidated financial statements. The year ended December 31, 2019 has been restated for comparative purposes. The years ended December 31,2018, 2017 and 2016 derived from our historical financial statements and were not restated for this change in accounting policy as amounts deemed immaterial.
70 
 

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, 2020 and 2019:

 

Year Ended December 31,

 

2020

2019

  (%) (%)
Net sales 100.0 100.0
Cost of sales (46.4) (41.7)
Gross profit 53.6 58.3
Sales, marketing and distribution expenses (25.0) (24.3)
Administrative expenses (5.1) (5.2)
Other operating income/(expenses) net 4.6 2.8
Exceptional items (0.8) (0.8)
Income from operations 27.4 30.9

Selected Financial Data by Business Segment

The following table sets forth selected financial data by business segment for the years ended December 31, 2020 and 2019:

 


 

Year Ended December 31,

 

2020

2019

 

Brazil

CAC

LAS

Canada

Total

Brazil

CAC

LAS

Canada

Total

  (in R$ million)
Net sales 30,196.5 7,319.3 11,560.8 9,302.4 58,379.0 28,129.9 6,757.9 10,028.7 7,088.6 52,005.1
Cost of sales

(14,112.9)

(3,307.5)

(5,937.4)

(3,708.3)

(27,066.1)

(12,096.3)

(2,934.1)

(3,998.0)

(2,649.8)

(21,678.2)

Gross profit 16,083.6 4,011.8 5,623.4 5,594.1 31,312.9 16,033.6 3,823.8 6,030.7 4,438.8 30,326.9
Sales, marketing, distribution and administrative expenses

(9,315.6)

(1,598.9)

(3,233.3)

(3,420.3)

(17,568.1)

(8,585.7) (1,494.0) (2,540.5) (2,707.3) (15,327.5)
Other operating income/ (expenses)

2,887.2

(23.5)

(159.9)

(24.4)

2,679.4

1,421.0 85.8 (18.0) (16.1) 1,472.7
Exceptional items

(173.8)

(70.5)

(145.7)

(62.0)

(452.0)

(328.2)

(17.1)

(51.9)

0.0

(397.2)

Income from operations

 

9,481.4

 

2,318.9

 

2,084.5

 

2,087.4

 

15,972.2

8,540.7

2,398.5

3,420.3

1,715.4

16,074.9

Net Sales

Net sales increased by 12.3% in 2020, to R$58,379.0 from R$52,005.1 million in 2019, as shown in tables set forth below:

 

Net Sales
Year Ended December 31,

 

2020

2019

 
 

Sales

% of Total

Sales

% of Total

% Change

  (in R$ million, except percentages)
Brazil 30,196.5 51.7% 28,129.9 54.1% 7.3%
Beer Brazil 25,953.0 44.5% 23,765.5 45.7% 9.2%
NAB 4,243.5 7.3% 4,364.4 8.4% (2.8)%
CAC 7,319.3 12.5% 6,757.9 13.0% 8.3%
Latin America South 11,560.8 19.8% 10,028.7 19.3 % 15.3%
Canada

9,302.4

15.9%

7,088.6

13.6 %

31.2%

Total

58,379.0

100.0%

52,005.1

100.0%

12.3%

           

 

71 
 

 

 

Sales Volumes
Year Ended December 31,

 

2020

2019

 
 

Volume

% of Total

Volume

% of Total

% Change

  (in thousands of hectoliters, except percentages)
Brazil 111,285.4 67.1% 106,806.7 65.4% 4.2%
Beer Brazil 84,791.7 51.1% 80,263.7 49.2% 5.6%
NAB 26,493.7 16.0% 26,542.9 16.3% (0.2)%
CAC 11,451.2 6.9% 13,859.5 8.5% (17.4)%
Latin America South 33,062.4 19.9% 32,991.1 20.2% 0.2%
Canada

9,998.9

6.0%

9,585.7

5.9%

4.3%

Total

165,797.9

100.0%

163,243.0

100.0%

1.6%

 

 

 

Net Revenue per Hectoliter
Year Ended December 31,

 

2020

2019

% Change

  (in R$, except percentages)
Brazil 271.3 263.4 3.0%
Beer Brazil 306.1 296.1 3.4%
NAB 160.2 164.4 (2.6)%
CAC 639.2 487.6 31.1%
Latin America South 349.7 304.0 15.0%
Canada

930.3

739.5

25.8%

Total

352.1

318.6

10.5%

Brazilian Operations

Total net sales from our Brazilian operations increased by 7.3% in 2020, to R$30,196.5 from R$28,129.9 million in 2019.

Our net sales of beer in Brazil increased by 9.2% in 2020, to R$25,953.0 from R$23,765.5 million in 2019. This variation is a consequence of a 5.6% increase in volume sold, coupled with an increase in net revenue per hectoliter in 2020. Despite the impacts generated by the COVID-19 pandemic, we were able to grow volumes in the full year as a result of the implementation of our commercial strategy, the success of our innovations and our flexibility and adaptability to changes in the market.

Our net sales of NAB in Brazil decreased by 2.8% in 2020, to R$ 4,243.5 from R$ 4,364.4 million in 2019 mainly due to the restrictions imposed by local governments on people circulation in response to COVID-19 that impacted consumption occasions.

CAC Operations

Net sales from our CAC operations increased by 8.3% in 2020, to R$7,319.3 from R$6,757.9 million in 2019, mainly driven by the restrictions imposed by local governments on people circulation in response to the COVID-19, with a significant impact in our largest countries in the region, Dominican Republic and Panama only partially offset by our revenue management initiatives that had a positive impact in net revenue per hectoliter. Reported variation increased due to currency translation impacts as local currencies appreciated in relation to the Brazilian real during the period.

Latin America South Operations

Net sales from our Latin America South operations increased by 15.3% in 2020, to R$11,560.8 from R$10,028.7 million in 2019, mainly due to the high inflation in Argentina and to currency translation impacts as local currencies appreciated in relation to the Brazilian real during the period.

72 
 

Canada Operations

Net sales from our Canadian operations increased by 31.2% in 2020, to R$9,302.4 from R$7,088.6 million in 2019. The result was mainly due to the positive volumes in the region driven by market share gains in the premium segment partially offset by a negative net revenue per hectoliter impacted by the channel and package mix that resulted from the restrictions imposed by local governments on people circulation in response to the COVID-19. Reported variation increased mainly due to currency translation impacts as local currency appreciated in relation to the Brazilian real during the period.

Cost of Sales.

Cost of sales increased 24.9% 2020, to R$27,066.1 from R$21,678.2 million in 2019. As a percentage of our net sales, total cost of sales increased to 46.4% in 2020 from 41.7% in 2019.

The table below sets forth information on cost of sales per hectoliter for the periods presented:

 

Cost of Sales per Hectoliter
Year Ended December 31,

 

2020

2019

% Change

  (in R$, except percentages)
Brazil 126.8 113.3 12.0%
Beer Brazil 140.8 125.1 12.6%
NAB 82.0 77.5 5.7%
CAC 288.8 211.7 36.4%
Latin America South 179.6 121.2 48.2%
Canada

370.9

276.4

34.2%

Total

163.2

132.8

22.9%

Brazilian Operations

Total cost of sales for our Brazilian operations increased by 16.7% in 2020, to R$14,112.9 from R$12,096.3 million in 2019. On a per hectoliter basis, our Brazilian operations’ cost of sales increased by 12.0% in 2020, to R$126.8 from R$113.3 in 2019.

Cost of sales for our Brazilian beer operations increased by 19.0% in 2020, to R$11,941.7 from R$10,037.9 million in 2019, mainly explained by volume growth and the increased weight of aluminum cans in the sales packaging mix.

Cost of sales for our Brazilian NAB segment increased by 5.5% in 2020, to R$2,171.2 from R$2,058.4 million in 2019, mainly due to input costs. The cost of sales per hectoliter increased by 5.7% in 2020, totaling R$82.0 from R$77.5 in 2019, mainly as result of the same factors.

CAC Operations

Cost of sales for our CAC operations increased by 12.7% in 2020, to R$3,307.5 from R$2,934.1 million in 2019 despite our lower volumes sold in the region in 2020, mainly driven by the restrictions imposed by local governments on people circulation in response to the COVID-19, with a significant impact in our largest countries in the region, Dominican Republic and Panama. Reported variation increased due to currency translation impacts as local currencies appreciated in relation to the Brazilian real during the period.

Latin America South Operations

Cost of sales for our Latin America South operations increased by 48.5% in 2020, to R$5,937.4 from R$3,998.0 million in 2019 mainly due to the high inflation in Argentina and the increased weight of aluminum cans in the sales packaging mix and also impacted by currency translation as local currencies appreciated in relation to the Brazilian real during the period.

73 
 

Canada Operations

Cost of sales for our Canadian operations increased by 39.9% in 2020, to R$3,708.3 from R$2,649.8 million in 2019, mainly due to the increased weight of aluminum cans in the sales packaging mix. Reported variation increased mainly due to currency translation impacts as local currency appreciated in relation to the Brazilian real during the period.

Gross Profit

As a result of the foregoing, gross profit increased by 3.3% in 2020, to R$31,312.9 from R$30,326.9 million in 2019. The table below sets forth the contribution of each business segment to our consolidated gross profit:

 

Gross Profit

 

2020

2019

 

Amount

% of Total

Margin

Amount

% of Total

Margin

  (in R$ million, except percentages)
Brazil 16,083.6 51.4% 53% 16,033.6 52.9% 57%
Beer Brazil 14,011.3 44.7% 54% 13,727.6 45.3% 58%
NAB 2,072.3 6.6% 49% 2,306.0 7.6% 53%
CAC 4,011.8 12.8% 55% 3,823.8 12.6% 57%
Latin America South 5,623.4 18.0% 49% 6,030.7 19.9% 60%
Canada

5,594.1

17.9%

60%

4,438.8

14.6%

63%

Total

31,312.9

100.0%

54%

30,326.9

100.0%

58%

Sales, Marketing, Distribution and Administrative Expenses

Our sales, marketing, distribution and administrative expenses increased by 14.6% in 2020, to R$17,568.1 from R$15,327.5 million in 2019. An analysis of sales and marketing and administrative expenses for each business segment is set forth below.

Brazilian Operations

Total sales, marketing, distribution and administrative expenses in Brazil increased by 8.5% in 2020, to R$9,315.6 from R$8,585.7 million in 2019.

Sales, marketing, distribution and administrative expenses for our Brazilian beer operations increased by 9.4% in 2020, to R$7,933,2 from R$7,252.5 million in 2019, primarily due to the higher volumes and the cost of last mile delivery.

Sales, marketing, distribution and administrative expenses for the NAB segment in Brazil increased by 3.7% in 2020, to R$1,382.4 from R$1,333.2 million in 2019 mainly due to higher distribution costs related to positive volume performance in northern regions of the country.

CAC Operations

Sales, marketing, distribution and administrative expenses for our CAC operations increased by 7.0% in 2020, to R$1,598.9 from R$1,494.0 million in 2019, mainly due to the disciplined execution of our cost saving initiatives. Reported variation increased due to currency translation impacts as local currencies appreciated in relation to the Brazilian real during the period.

Latin America South Operations

Sales, marketing, distribution and administrative expenses for our Latin America South operations increased by 27.3% in 2020, to R$3,233.3 from R$2,540.5 million in 2019 driven by the high inflation in Argentina, despite effective management of our expenses in the region, and also by currency translation as local currencies appreciated in relation to the Brazilian real during the period.

74 
 

Canada Operations

Sales, marketing, distribution and administrative expenses for our Canadian operations increased by 26.3% in 2020, to R$3,420.3 from R$2,707.3 as a result of the disciplined execution of our cost saving initiatives that were more than offset by currency translation as local currency appreciated in relation to the Brazilian real during the period.

Other Net Operating Income (Expense)

Other net operating income increased by 81.9% in 2020, to R$2,679.4 from R$1,472.7 million in 2019.This result is mainly explained by the recognition of tax credits related to a 2017 Brazilian Supreme Court decision that declared unconstitutional the inclusion of the ICMS in the PIS and COFINS calculation basis.

Exceptional Items

Exceptional items amounted to a R$452.0 million expense in 2020 compared to a R$397.2 million expense recorded in 2019. The expenses recorded in 2020 were mainly due to exceptional expenses incurred in relation to the COVID-19 pandemic, including the actions taken to ensure the health and safety of our employees, such as the acquisition of hand-sanitizer, masks and additional cleaning of our facilities, as well as donations to the broader community, and restructuring expenses primarily linked to centralization and sizing projects in Brazil and Latin America South.

Income from Operations

As a result of the foregoing, income from operations decreased by 0.6% in 2020, to R$ 15,972.2 from R$16,074.9 million in 2019.

Net Finance Result

Our net finance result decreased by 21.7% in 2020, to an expense of R$2,434.5 from R$3,109.5 million in 2019. This result is mainly explained by the recognition of tax credits related to a 2017 Brazilian Supreme Court decision that declared unconstitutional the inclusion of the ICMS state tax in the taxable basis of the PIS and the COFINS federal taxes.

Our total debt, including current and non-current interest-bearing loans and borrowing, increased by R$1,729.5 million in 2020, while our cash and cash equivalents less bank overdrafts and current investment securities increased by R$6,875.0 million in 2020.

Income Tax Expense

Our consolidated income tax and social contribution on profits totaled R$1,762.5 in 2020 from R$754.7 million in 2019. The effective tax rate in 2020 was 13.1%, compared to 5.8% in the previous year. Such increase in our effective tax rate in 2020 was primarily due to an increase in taxable income and a reduction in the interest on equity (IOC) deductibility benefit.

Net Income

As a result of the foregoing, net income decreased by 3,7% in 2020, to R$ 11,731.9 from R$12,188.4 million in 2019.

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;
75 
 
· 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.

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

 

Consolidated Financial Highlights

 

2019 (2)

2018(1)(2)

% 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 52,005.1 50,231.3 3.5%
Net revenue per hectoliter—R$/hl 318.6 316.5 0.7%
Cost of sales (21,678.2) (19,249.4) 12.6%
Gross profit 30,326.9 30,981.9 -2.1%
Gross margin (%) 58.3% 61.7% 340bps
Sales, marketing and distribution expenses (12,647.5) (12,328.5) 2.6%
Administrative expenses (2,680.0) (2,363.4) 13.4%
Other operating income/(expenses) 1,472.7 947.3 55.5%
Exceptional items (397.2) (86.4) 359.7%
Income from operations 16,074.9 17,150.9 -6.3%
Operating margin (%) 30.9% 34.1% 320bps
Net income 12,188.4 11,347.7 7.4%
Net margin (%) 23.4% 22.6% (80bps)

(1) The financial information for 2018 and 2017 have 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”.

(2) The Company changed its accounting policy used to account for extemporaneous (related to previous periods) tax credits and debits in 2020. See Note 3 to our audited consolidated financial statements. The year ended December 31, 2019 has been restated for comparative purposes. The years ended December 31, 2018, 2017 and 2016 derived from our historical financial statements and were not restated for this change in accounting policy as amounts deemed immaterial.

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 (41.7) (38.3)
Gross profit 58.3 61.7
Sales, marketing and distribution expenses (24.3) (24.5)
Administrative expenses (5.2) (4.7)
Other operating income/(expenses) 2.8 1.9
Exceptional items (0.8) (0.2)
Income from operations 30.9 34.1
76 
 

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

 

Brazil

CAC

LAS

Canada

Total

Brazil

CAC

LAS

Canada

Total

  (in R$ million)
Net sales 28,129.9 6,757.9 10,028.7 7,088.6 52,005.1 26,814.2 5,813.9 10,753.9 6,849.3 50,231.3
Cost of sales

(12,096.3)

(2,934.1)

(3,998.0)

(2,649.8)

(21,678.2)

(10,014.8)

(2,559.1)

(4,261.7)

(2,413.8)

(19,249.4)

Gross profit 16,033.6 3,823.8 6,030.7 4,438.8 30,326.9 16,799.4 3,254.8 6,492.2 4,435.5 30,981.9
Sales, marketing, distribution and administrative expenses (8,585.7) (1,494.0) (2,540.5) (2,707.3) (15,327.5) (8,127.4) (1,470.9) (2,580.4) (2,513.2) (14,691.9)
Other operating income/ (expenses) 1,421.0 85.8 (18.0) (16.1) 1,472.7 965.0 20.0 (24.6) (13.1) 947.3
Exceptional items

(328.2)

(17.1)

(51.9)

0.0

(397.2)

(43.7)

62.4

(88.3)

(16.8)

(86.4)

Income from operations

8,540.7

2,398.5

3,420.3

1,715.4

16,074.9

9,593.3

1,866.3

3,798.9

1,892.4

17,150.9

Net Sales

Net sales increased by 3.5% in 2019, to R$52,005.1 million from R$50,231.3 million in 2018, as shown in tables set forth below:

 

Net Sales
Year Ended December 31,

 

2019

2018

 
 

Sales

% of Total

Sales

% of Total

% Change

  (in R$ million, except percentages)
Brazil 28,129.9 54.1%  26,814.2 53.4% 4.9%
Beer Brazil 23,765.5 45.7%  23,008.5 45.8% 3.3%
NAB 4,364.4 8.4%  3,805.7 7.6% 14.7%
CAC 6,757.9 13.0%  5,813.9 11.6% 16.2%
Latin America South 10,028.7 19.3%  10,753.9 21.4% -6.7%
Canada

7,088.6

13.6%

6,849.3

13.6%

3.5%

Total

52,005.1

100.0%

50,231.3

100.0%

3.5%

           

 

 

Sales Volumes
Year Ended December 31,

 

2019

2018

 
 

Volume

% of Total

Volume

% of Total

% Change

  (in thousands of hectoliters, except percentages)
Brazil 106,806.7 65.4% 101,642.9 64.0% 5.1%
Beer Brazil 80,263.7 49.2% 77,784.2 49.0% 3.2%
NAB 26,542.9 16.3% 23,858.8 15.0% 11.2%
CAC 13,859.5 8.5% 13,159.8 8.3% 5.3%
Latin America South 32,991.1 20.2% 33,971.2 21.4% (2.9)%
Canada

9,585.7

5.9%

9,942.9

6.3%

(3.6)%

Total

163,243.0

100.0%

158,716.9

100.0%

2.9%

 

 

Net Revenue per Hectoliter
Year Ended December 31,

 

2019

2018

% Change

  (in R$, except percentages)
Brazil 263.4  263.8 -0.2%
Beer Brazil 296.1  295.8 0.1%
NAB 164.4  159.5 3.1%
CAC 487.6  441.8 10.4%
Latin America South 304.0  316.6 -4.0%
Canada

739.5

688.9

7.4%

Total

318.6

316.5

0.7%

 

77 
 

 

Brazilian Operations

Total net sales from our Brazilian operations increased by 4.9% in 2019, to R$ 28,129.9 million from R$ 26,814.2 million in 2018.

Our net sales of beer in Brazil increased by 3.3% in 2019, to R$ 23,765.5 million from R$ 23,008.5 million in 2018. The growth is a consequence of a 3.2% increase in sales volume driven by industry expansion resulting from a slight improvement in the consumer environment, coupled with a 0.1% increase in net revenue per hectoliter in 2019, reaching R$ 296.1 that year as a result of a price increase. Despite an overall growth, the Brazilian beer market is still under the continued effects of (1) a high unemployment rate; (2) the slow growth of disposable income; and (3) low consumer confidence.

Our net sales of NAB in Brazil increased by 14.7% in 2019, to R$ 4,364.4 million from R$ 3,805.7 million in 2018 mainly due to a 11.3% increase in sales volume driven by industry expansion driven in part by a slight improvement in the consumer environment, coupled with a 3.1% increase in net revenue per hectoliter in 2019, reaching R$ 164.4 that year as a result of our revenue management initiatives and price increase. Despite an overall growth, the Brazilian NAB market is still under the continued effects of (1) a high unemployment rate; (2) the slow growth of disposable income; and (3) low consumer confidence.

CAC Operations

Net sales from our CAC operations increased by 16.2% in 2019, to R$6,757.9 million from R$5,813.9 million in 2018, mainly driven by (1) a 5.3% increase in sales volume, primarily reflecting better sales in most of the Central America and the Caribbean countries where we operate, resulting from favorable macroeconomic conditions and (2) higher net revenue per hectoliter. Net revenue per hectoliter increased by 10.4% in 2019, reaching R$487.6 that year, as the effect of our price increases was amplified by currency translation due to the appreciation of local currencies in relation to the Brazilian real during the period.

Latin America South Operations

Net sales from our Latin America South operations decreased by 6.7% in 2019, to R$10,028.7 million from R$10,753.9 million in 2018, mainly due to (1) the negative currency translation due to the weakening of the Argentine peso over the period, and (2) a 2.9% decrease in volume sold, which was primarily driven by the adverse macroeconomic conditions in Argentina that had a negative impact on consumption in such country. Net revenue per hectoliter decreased by 4.0% in 2019, reaching R$304.0 that year, as the positive impact of our revenue management initiatives was largely offset by the impact of the Argentine peso devaluation.

Canada Operations

Net sales from our Canadian operations increased by 3.5% in 2019, to R$7,088.6 million from R$6,849.3 million in 2018. The result was mainly due to (1) the positive impact from currency translation reflecting the appreciation of the Canadian dollar when compared to the real over the period, (2) an increase in net revenue per hectoliter by 7.4%, reaching R$739.5 in 2019, and (3) a favorable brand mix, which was partially offset by a 3.6% decrease in sales volume reflecting the overall contraction of the Canadian beer industry in 2019 driven in part by unfavorable weather conditions and the growth of other categories of beverages.

78 
 

Cost of Sales

Cost of sales increased 12.6% in 2019, to R$21,678.2 million from R$19,249.4 million in 2018. As a percentage of our net sales, total cost of sales increased to 41.7% in 2019 from 38.3% in 2018.

The table below sets forth information on cost of sales per hectoliter for the periods presented:

 

Cost of Sales per Hectoliter
Year Ended December 31,

 

2019

2018

% Change

  (in R$, except percentages)
Brazil 113.3 98.5 14.9%
Beer Brazil 125.1 105.6 18.4%
NAB 77.5 75.5 2.8%
CAC 211.7 194.5 8.9%
Latin America South 121.2 125.5 (3.4)%
Canada

276.4

242.8

13.9%

Total

132.8

121.3

9.5%

Brazilian Operations

Total cost of sales for our Brazilian operations increased by 20.8% in 2019, to R$12,096.3 million from R$10,014.8 million in 2018. On a per hectoliter basis, our Brazilian operations’ cost of sales increased by 14.9% in 2019, to R$113.3 from R$98.5 in 2018.

Cost of sales for our Brazilian beer operations increased by 22.2% in 2019, to R$10,037.9 million from R$8,214.2 million in 2018, mainly explained by (1) depreciation of the real in 2018, impacting our costs in 2019, and (2) an increase in hedged commodities prices on the purchase of raw materials, especially barley in 2018, impacting costs in 2019. The impact of fluctuations of the local currency against the dollar and of commodity prices are typically postponed to the subsequent period as our policy is to hedge operational transactions reasonably expected to occur within a designated period of approximately 12 months from the current month. On a per hectoliter basis, cost of sales for our Brazilian beer operations increased by 18.4%, to R$125.1 in 2019 from R$105.6 in 2018, mainly as result of the same factors.

Cost of sales for our Brazilian NAB segment increased by 14.3% in 2019, to R$2,058.4 million from R$1,800.6 million in 2018, mainly due to (1) increased costs associated with higher sales volumes, and (2) depreciation of the real in 2018, impacting our costs in 2019, partially offset by lower sugar prices in 2018, also impacting our costs in 2019. The cost of sales per hectoliter increased by 2.8% in 2019, totaling R$77.5 from R$75.5 in 2018, mainly as result of the same factors.

CAC Operations

Cost of sales for our CAC operations increased by 14.7% in 2019, to R$2,934.1 million from R$2,559.1 million in 2018 in line with the corresponding increase in our net sales over the same period, due mainly to (1) increased costs associated with higher sales volumes, (2) increased temporary costs to supply the Panamanian market with no disruption, as our current infrastructure in Panama was unable to support the strong sales volume growth since 2017 leading to production capacity restraints in the country, and (3) the currency translation impact due to the strengthening of local currencies, primarily the peso, in the Dominican Republic, and the dollar, in Panama, in relation to the Brazilian real during the period. On a per hectoliter basis, our cost of sales per hectoliter for our CAC operations increased by 8.9% in 2019, to R$211.7 from R$194.5 in 2018, mainly as a result of the same factors.

Latin America South Operations

Cost of sales for our Latin America South operations decreased by 6.2% in 2019, to R$3,998.0 million in 2019 from R$4,261.7 million in 2018 mainly due to (1) the impact of currency translation reflecting the depreciation of the Argentine peso over the period, and (2) the reduced costs associated with lower sales volume. Such impacts were partially offset by higher inflation in Argentina in 2019, and depreciation of the Argentine peso in 2018, impacting our costs in 2019. On a per hectoliter basis, our cost of sales for our Latin America South operations decreased by 3.4% in 2019, to R$121.2 from R$125.5 in 2018, mainly as a result of the same factors.

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Canada Operations

Cost of sales for our Canadian operations increased by 9.8% in 2019, to R$2,649.8 million from R$2,413.8 million in 2018, mainly due to (1) the negative impact of currency translation reflecting the strengthening of the Canadian dollar in relation to the Brazilian real over the period, (2) an increase in hedged commodity prices, especially aluminum in 2018, impacting costs in 2019, which was partially offset by a 3.6% decrease in sales volume over the period. Cost of goods sold per hectoliter increased by 13.9% in 2019, to R$276.4 in 2019 from R$242.8 in 2018, mainly as a result of the same factors.

Gross Profit

As a result of the foregoing, gross profit decreased by 2.1 % in 2019, to R$ 30,326.9 million from R$30,981.9 million in 2018. The table below sets forth the contribution of each business segment to our consolidated gross profit:

 

Gross Profit

 

2019

2018

 

Amount

% of Total

Margin

Amount

% of Total

Margin

  (in R$ million, except percentages)
Brazil 16,033.6 52.9% 57%  16,799.4 54.2% 63%
Beer Brazil 13,727.6 45.3% 58%  14,794.3 47.8% 64%
NAB 2,306.0 7.6 % 53%  2,005.1 6.5% 53%
CAC 3,823.8 12.6% 57%  3,254.8 10.5% 56%
Latin America South 6,030.7 19.9% 60%  6,492.2 21.0% 60%
Canada

4,438.8

14.6%

63%

4,435.5

14.3%

65%

Total

30,326.9

100.0%

58%

30,981.9

100.0%

62%

Sales, Marketing, Distribution and Administrative Expenses

Our sales, marketing, distribution and administrative expenses increased by 4.3% in 2019, to R$15,327.5 million from R$14,691.9 million in 2018. An analysis of sales and marketing and administrative expenses for each business segment is set forth below.

Brazilian Operations

Total sales, marketing, distribution and administrative expenses in Brazil increased by 5.6% in 2019, to R$8,585.7 million from R$8,127.4 million in 2018.

Sales, marketing, distribution and administrative expenses for our Brazilian beer operations increased by 2.9% in 2019, to R$7,252.5 million from R$7,050.4 million in 2018, primarily due to (1) increased administrative expenses, driven by higher variable compensation accruals, (2) inflation-increases in distribution expenses, and (3) higher depreciation, which were partially offset by lower sales and marketing expenses due to efficiency gains.

Sales, marketing, distribution and administrative expenses for the NAB segment in Brazil increased by 23.8% in 2019, to R$1,333.2 million from R$1,077.0 million in 2018, mainly due to (1) higher sales and marketing expenses, reflecting the volume growth and our continued investment in our brands, and (2) slightly higher distribution expenses, mainly driven by inflation, (3) higher depreciation, and (4) an increase in administrative expenses, mainly due to higher variable compensation accruals.

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CAC Operations

Sales, marketing, distribution and administrative expenses for our CAC operations increased by 1.6% in 2019, to R$1,494.0 million from R$1,470.9 million in 2018, reflecting (1) the currency translation effects driven by the appreciation of local currencies, primarily the Dominican peso, and the U.S. dollar, in Panama, in relation to real over the period, and (2) higher depreciation. This was partially offset by lower distribution, sales and marketing, and administrative expenses in local currencies, due to efficiency gains in sales, marketing and administrative expenses.

Latin America South Operations

Sales, marketing, distribution and administrative expenses for our Latin America South operations decreased by 1.5% in 2019, to R$2,540.5 million from R$2,580.4 million in 2018, primarily driven by the currency translation effect resulting from the depreciation of the Argentine peso over the period partially offset by higher inflation in the region.

Canada Operations

Sales, marketing, distribution and administrative expenses for our Canadian operations increased by 7.7% in 2019, to R$2,707.3 million from R$2,513.2 million in 2018, mainly as a result of (1) the currency translation effect resulting from the appreciation of the Canadian Dollar over the period, (2) higher administrative expenses, due to higher variable compensation accruals, partially offset by lower distribution and sales and marketing expenses, resulting from efficiency gains.

Other Net Operating Income (Expense)

Other Net Operating Income increased by 55.5% in 2019, to R$ 1.472,7 million from R$ 947.3 million in 2018, mainly explained by the recognition of tax credits related to a 2017 Brazilian supreme court decision that declared unconstitutional the inclusion of the ICMS in the PIS and COFINS calculation basis recognized in 2019, only partially offset by a decline in government grants related to state vat long-term tax incentives in Brazil, due to revenue geographic mix and the expiration of a tax incentive in the state of Santa Catarina.

Exceptional Items

Exceptional items amounted to a R$397.2 million expense in 2019 compared to a R$86.4 million expense recorded in 2018. The expenses recorded in 2019 were mainly (i) due to an amnesty program in the State of Mato Grosso, in connection with requirements imposed in the context of the final validation of fiscal incentives granted by such state in the past, without the formal acceptance of other states; and (ii) by restructuring expenses primarily linked to centralization and sizing projects in Brazil and LAS, with blueprint review due to optimization of Full Time Equivalent (FTE), such as the centralization of processes in our shared services center.

Income from Operations

As a result of the foregoing, income from operations decreased by 6.3% in 2019, to R$16,074.9 million from R$17,150.9 million in 2018.

Net Finance Result

Our net finance result decreased by 22.8% in 2019, to R$3,109.5 million from R$4,030.3 million in 2018. This result is mainly explained by (1) higher interest income, driven by our cash balance, mainly in Brazilian reais, US dollars and Canadian dollars, and the recovery of a tax claim, and (2) a positive impact resulting from the application of hyperinflationary accounting as prescribed by IAS 29, since the effect of the adjustment for cumulative inflation, from January 1, 2019, of non-monetary assets on the balance sheet of our operations in Argentine was reported in a dedicated account in the finance results.

The above effects were partially offset by (1) higher losses on derivative instruments, mainly driven by the carry cost of our currency hedges, primarily linked to the exposure of our cost of goods sold in Argentina, and (2) higher losses on non-derivative monetary financial instruments related to non-cash expenses due to exchange rate variation on intercompany loans held in local currency, mainly Brazilian reais and the Argentine peso.

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Our total debt, including current and non-current debt, decreased by R$1,040.8 million in 2019, while our cash and cash equivalents less bank overdrafts and current investment securities increased by R$438.4 million in 2019.

Income Tax Expense

Our consolidated income tax and social contribution on profits totaled R$754.7 million in 2019 from R$1,773.9 million in 2018. The effective tax rate in 2019 was 5.8%, compared to 13.5% in the previous year. Such decrease in our effective tax rate in 2019 was primarily due to a higher tax benefit resulting from a higher payment of interest on shareholders’ equity.

Net Income

As a result of the foregoing, net income increased by 7.4% in 2019, to R$ 12,188.4 million from R$ 11,347.7 million in 2018.

B.       Liquidity and Capital Resources

Sources and Uses

The information in this section refers to 2020 and 2019. Our primary sources of liquidity have historically been cash flows from operating activities and borrowings. Our material cash requirements have included the following:

· Opex expenses, such as raw and packaging material, sales & marketing investments and overheads;
· debt service;
· capital expenditures;
· payments of dividends and interest on shareholders’ equity;
· increases in ownership of our consolidated subsidiaries or companies in which we have equity investments;
· investments in companies participating in the brewing, NAB and malting industries; and
· investments in companies that address emerging consumer’s needs, such as ZX Ventures, Ztech, Future Beverages and technology.

Our cash and cash equivalents and current investment securities at December 31, 2020 and 2019 were R$18,790.3 million and R$ 11,915.3 million.

We believe that cash flows from operating activities, available cash and cash equivalents and current investment securities, along with our derivative instruments and our access to borrowing facilities, will be sufficient to fund our capital expenditures, debt service and dividend payments going forward.

During the 2020 COVID-19 pandemic, the market faced uncertainty about the period for the restrictions imposed by each government on commercial and operational activities, on the circulation of people and on the sale, distribution and consumption of alcoholic beverages, as well as the economic effects on the financial market and exchange rates. As a consequence, Ambev raised R$ 3,6 billion in new debt to improve its liquidity. As volume and profitability partially recovered towards the end of 2020, more than 50% of the loans were already settled. As the scenario and the market conditions remain uncertain, Ambev may enter into new debts to protect its liquidity.

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Cash Flows

Ambev entered the second quarter of 2020 with two main priorities: (i) ensure our solid financial position by preserving liquidity in the short and long term and (ii) navigate the “new normal” brought by COVID-19 pandemic, protecting our people and adapting to changes while continuing to invest in what the Company believed would be a competitive advantage going forward: consumer centricity, client service level, digital transformation, innovation and strengthening our ties with the broader ecosystem.

We managed to protect our liquidity, while working with our suppliers, wholesalers and customers. What was already a robust liquidity profile was further strengthened as we accessed the credit markets in select countries to enhance our liquidity position.

Also, the Company revisited its cost structure and expenses, reprioritizing trade spend given changes in channel mix (by redirecting certain trade spent for the off-trade), renegotiating commercial contracts and reassessing the calendarization of its spend  (postponing certain marketing campaigns), outsourcing less and leveraging more internal capabilities (internalizing activities such as marketing campaigns and promotion of livestream concerts), and reducing discretionary expenses (including travel-related expenses).

On the other side, the Company continued to invest in the future, preserving key sales and marketing investment behind the renovation of its portfolio and behind innovation. Even though we reviewed our capital investment plans, Ambev still invested a significant amount of money behind the safety of our people, the quality of our products, our commercial priorities and big bets for the future, and technology-related initiatives.

Despite the strong volatility on a quarterly basis, full year cash flow from operating activities grew 2.6%, and we managed to further strengthen our solid liquidity position, which proved critical in the very volatile operating environment of 2020, which we expect to continue into 2021.

Operating Activities

Cash flows from our operating activities increased by 2.6% in 2020, to R$18,855.8 million from R$18,381.3 million in 2019, mainly as a result of the increase in trade and other payables given a higher spend led by prices, FX and a strong fourth quarter in 2020 in beer production perspective.

Investing Activities

Cash flows used in our investing activities increased by 40.5% in 2020, to R$6,799.6 from R$4,838.6 million in 2019, mainly explained by the increase in net proceeds of debt securities.

Financing Activities

Cash flows used in our financing activities decreased by 30.0% in 2020, to R$8,602.0 from R$12,283.5 million cash outflow in 2019, mainly driven by larger proceeds from borrowing in order to increase our liquidity position.

The table below shows the profile of our debt instruments:

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Maturity Schedule of Debt Portfolio as of December 31, 2020

Debt Instrument

2021

2022

2023

2024

2025

Thereafter

Total

  (in R$ million, except percentages)
BNDES Currency Basket Debt Floating Rate:              
Currency Basket Debt Floating Rate 0 0 0 0 0 0 0
UMBNDES + Average Pay Rate 0 0 0 0 0 0 0
International Debt:              
Other Latin America Currency Floating Rate 0 0 0 0 0 0 0
Average Pay Rate - - - - - - -
Other Latin America Currency Fixed Rate  436.3  95.3  9.7  7.2  14.2  27.2 590.0
Average Pay Rate 8.11% 8.11% 8.11% 8.11% 8.11% 8.11% -
US$ Fixed Rate  4.9 - - - - - 4.9
Average Pay Rate 4.19% - - - - - -
US$ Floating Rate - - - - - - -
Average Pay Rate - - - - - - -
CAD Fixed Rate  64.9  54.8  51.1  42.8  24.7  104.3 342.6
Average Pay Rate 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% -
CAD Floating Rate - - - - - - -
Average Pay Rate - - - - - - -
Reais Denominated Debt Floating Rate – TJLP & TR:              
Notional Amount 11.6 12.3 12.3 13.4 14.7 96.9 161.2
TJLP & TR + Average Pay Rate 9.33% 9.33% 9.33% 9.33% 9.33% 9.33% -
Reais Debt – ICMS Fixed Rate:              
Notional Amount 36.7 34.1 20.7 3.0 5.6 35.5 135.7
Average Pay Rate 4.54% 4.54% 4.54% 4.54% 4.54% 4.54% -
Reais Debt –Fixed Rate:              
Notional Amount  1,333.1  337.0  278.2  169.1  195.0  393.1 2,705.5
Average Pay Rate 5.42% 5.42% 5.42% 5.42% 5.42% 5.42% -
Reais Debt – Floating Rate:              
Notional Amount 851.3 1.1 - - - - 852.4
Average Pay Rate

3.90%

3.90%

-

-

-

-

-

Total Debt

2,738.8

534.6

372.0

235.6

254.2

657.1

4,792.2

Borrowings

Most of our borrowings are for general use, based upon strategic capital structure considerations. Although seasonal factors affect the business, they have little effect on our borrowing requirements. We accrue interest based on different interest rates, the most significant of which are: (1) fixed, for the 2021 debentures; (2) Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or the TJLP, for loans of the Brazilian Economic and Social Development Bank (Banco Nacional de Desenvolvimento Econômico e Social), or the BNDES; (3) the Interest Rate Benchmark (Taxa Referencial), or TR, for Bank Credit Notes (Cédula de Crédito Bancário) and (4) floating for international loans. For further information, see Note 23 of our audited consolidated financial statements.

The following table sets forth our net cash consolidated position as of December 31, 2020 and 2019:

 

Net Cash Consolidated Position
As of December 31,

 

2020

2019

 

LC(1)

FC(2)

Total

LC(1)

FC(2)

Total

  (in R$ million)
Short-term debt (2,232.7) (506.1) (2,738.8) (474.3) (178.9) (653.1)
Long-term debt

(1,622.1)

(431.4)

(2,053.5)

(1,881.9)

(527.7)

(2,409.7)

Total

(3,854.8)

(937.4)

(4,792.3)

(2,356.2)

(706.6)

(3,062.8)

Cash and cash equivalents (net of bank overdrafts)     17,090.3     11,900.7
Current Investment securities    

1,700.0

   

14.6

Net cash position    

13,998.0

   

8,852.5

 
(1) LC refers to our local currency indebtedness.
(2) FC refers to our foreign currency indebtedness.
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Short-term Debt

As of December 31, 2020, our short-term debt totaled R$2,738.8 million, 18.5% of which was denominated in foreign currencies. As of December 31, 2019, our short-term debt totaled R$653.1 million, 27.4% of which was denominated in foreign currencies.

Long-term Debt

As of December 31, 2020, our long-term debt, excluding the current portion of long-term debt, totaled R$ 2,053.5 million, of which R$ 1,622.1 million was denominated in local currency. As of December 31, 2019, our long-term debt, excluding the current portion of long-term debt, totaled R$2,409.7 million, of which R$1,881.9 million was denominated in local currency.

The table below shows a breakdown of our long-term debt by year:

 

As of December 31, 2020

Long-term Debt Maturity in: (in R$
million)
2022 534.6
2023 372.0
2024 and Later

1,146.9

Total

2,053.5

In accordance with our foreign currency risk management policy, we have entered into forward and cross-currency interest rate swap contracts in order to mitigate currency and interest rate risks. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for our policy with respect to mitigating foreign currency and interest rate risks through the use of financial instruments and derivatives.

On October 30, 2015, Ambev issued R$1.0 billion in Brazilian debentures with a maturity date of October 30, 2021, or the 2021 debentures, to qualified investors as defined by applicable CVM regulations. The 2021 debentures bear interest at a rate of 14.476% per annum, payable semi-annually in arrears. This rate is subject to upper or downward adjustments in accordance with upgrades or downgrades to the credit rating of the Company, respectively, as set forth in the respective indenture. The 2021 debentures are unsecured and unsubordinated obligations of Ambev (except for statutorily preferred credits set forth in Brazilian bankruptcy laws). The 2021 debentures are denominated and payable in reais. The net proceeds of the offering were used for capital expenditure investments and, therefore, the 2021 debentures enjoy certain Brazilian federal income tax incentives pursuant to Law No. 12,431/2011.

On April 14, 2020, Ambev completed the first issuance of commercial promissory notes, in a single series, in the total amount of R$ 850,000,000.00, under the terms of CVM Ruling 566. The notes were publicly distributed with restricted efforts, according to CVM Ruling No. 476, with a maturity of 365 days. The proceeds were used to fund the Company's working capital and interests under the notes correspond to 100% of the daily average rates of DI - Interbank Deposits of one day plus 2.60% per year.

As of December 31, 2020, our local currency long-term debt borrowings consisted primarily of the 2021 debentures and BNDES debts. Long-term local currency also includes long-term plant expansion and other loans from governmental agencies and special BNDES credit lines and programs, such as the Fund for Financing the Acquisition of Industrial Machinery and Equipment (FINAME), the Enterprise Financing Program (FINEM) and leasing of furniture, vehicles, machinery and equipment.

Secured Debt

Certain loans provided by the BNDES are secured by some of our facilities and some of our equipment (mainly coolers).

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Sales Tax Deferrals and Other Tax Credits

Many states in Brazil offer tax benefits programs to attract investments to their regions. We participate in ICMS Value-Added Tax Credit Programs offered by various Brazilian states which provide (1) tax credits to offset ICMS Value-Added Tax payables and (2) ICMS Value-Added Tax deferrals. In return, we are required to meet certain operational requirements including, depending on the state, production volume and employment targets, among others. All of these conditions are included in specific agreements between Ambev and the state governments. In the event that we do not meet the program’s targets, future benefits may be withdrawn. The total amount deferred (financing) as of December 31, 2020 was R$135.6 million with a current portion of R$36.7 million, and R$98.9 million as non-current. Percentages deferred typically range from 50% to 80% over the life of the program. Balances deferred generally accrue interest and are partially inflation indexed, with adjustments generally set at 60% to 80% of a general price index. The grants (tax waivers) are received over the lives of the respective programs. In the years ended December 31, 2020 and 2019, we recorded R$1,489.42 million and R$1,842.2 million, respectively, of tax credits as gains on tax incentive programs.

Capital Investment Program

In 2020, consolidated capital expenditures on property, plant and equipment and intangible assets totaled R$ 4,692.7 million consisting of R$ 3,114.9 million for our Brazil business segment, R$ 492.3  million for our CAC business segment, R$ 621.8 million related to investments in our Latin America South operations and R$ 463.7 million related to investments in Canada. These expenditures primarily included investments in capacity expansion, quality controls, automation, modernization and replacement of packaging lines, innovations, warehousing for direct distribution, coolers, expenditures for the replacement of bottles and crates, market assets from former dealers, and continued investments in information technology.

In 2019, consolidated capital expenditures on property, plant and equipment and intangible assets totaled R$5,069.4 million consisting of R$3,176.5 million for our Brazil business segment, R$578.4 million for our CAC business segment, R$1,025.0 million related to investments in our Latin America South operations and R$289.5 million related to investments in Canada. These expenditures primarily included investments in capacity expansion, quality controls, automation, modernization and replacement of packaging lines, innovations, warehousing for direct distribution, coolers, expenditures for the replacement of bottles and crates, market assets from former dealers, and continued investments in information technology.

C.       Research and Development

Although the COVID-19 pandemic has created significant challenges for our business, it has also accelerated consumer trends that we have been investing on, primarily reinforcing the need for an innovative, consumer-centric mindset and advancing our business transformation enabled by technology. Innovation has become one of the main pillars of our business and front and center to our commercial strategy and despite a detailed revision of our discretionary expenses in order to ensure our liquidity, research and development is and continued to be seen as fundamental for us to continue providing our consumers with innovations.

We maintain an innovation, research and development center in the city of Rio de Janeiro, State of Rio de Janeiro, at the Universidade Federal do Rio de Janeiro (UFRJ). This new center (ZITEC – Zone Innovation and Technology Center) replaces the previous R&D structure based in Guarulhos. ZITEC commenced operations in the final months of 2017, ramping up activities in 2018, in order to accelerate product innovation by developing new liquids and the most modern packaging to assure continuous product differentiation and yearly increases in quality and efficiency. One of the main features of the development center is the prototype laboratory, which enables the creation of complete prototypes, supporting the process of creating new products. ZITEC made it possible for Ambev to reduce the time to launch innovations, from eight to four months. In 2020, continuing with our innovation driven strategy, we launched Berrió and Esmera, two brands made with local crop productions from in the States of Piauí and Goiás, respectively, Andes Origens and the most successful innovation in Ambev’s history, Brahma Duplo Malte. Another objective of the development center is to carry out studies of consumer perception and behavior, in order to capture future trends. The investment made in the center in the last three years was approximately R$180 million, including the installation, in 2018, of solar panels that produce enough energy to supply 100% of the center’s operations and the renovations, in 2019, of production lines in the prototype laboratory.

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D.       Trend Information

Our strategy for 2021 will continue to be built around innovation, technology and collaboration with our ecosystem. Given that the challenges brought by the COVID-19 pandemic remain a reality, we believe operational excellence and financial discipline will once again make a difference as we work towards a consistent recovery of our top line and bottom line performance. As was the case in 2020, we continue to expect the former to recover faster than the latter.

In 2021 we will face more significant transactional FX as well as commodity headwinds, both of which will put pressure on our EBITDA margin. Our average hedge rate for the BRL versus the USD for 2021 is 5.29 (+31.9%). As a result, we expect our cost of goods sold excluding depreciation and amortization per hectoliter to increase in the low-twenties in Brazil Beer.

Volume growth coupled with improved NR/Hl performance, thanks to the implementation of our commercial strategy and better mix, will be two of the key drivers for us to partially offset the cost headwinds.

With respect to our business in LAS, our focus will be on growing the category through premiumization and smart affordability initiatives, together with further developing our technology platforms to better serve our customers and consumers. In CAC, we continue to see an opportunity to drive per capita consumption through innovation, as well as drive growth of our core plus and premium brands. Finally, in Canada, we aim to maintain commercial momentum behind our core plus and premium brands, while also continue tapping into different consumer occasions with our beyond beer portfolio based on our category expansion framework.

The outlook for 2021 reflects our current assessment of the scale and magnitude of the COVID-19 pandemic, which is subject to change as we continue to monitor ongoing developments.

For detailed information regarding the latest trends in our business, see “—A. Operating Results—Year Ended December 31, 2020 Compared to Year Ended December 31, 2019” and “Item 4. Information on the Company—B. Business Overview—Description of the Markets Where We Operate.”

E.       Off-balance Sheet Arrangements

We have a number of off-balance sheet items which have been disclosed elsewhere in this annual report, under “Item 4. Information on the Company—B. Business Overview—Beer and CSD Production Process—Sources and Availability of Raw Materials,” under “Item 4. Information on the Company—B. Business Overview—Beer and CSD Production Process—Packaging” and under “Item 17. Financial Statements,” Note 29 to our consolidated financial statements, “Collateral and contractual commitments with suppliers, advances from customers and other.” Off-balance sheet items include future commitments of R$ 17,768.4 million as of December 31, 2020, as set forth in the table below:

Contractual Obligation

As of December 31, 2020

  (in R$ million)
Purchase commitments with respect to property, plant and equipment 446.7
Purchase commitments with respect to raw materials 2,128.5
Purchase commitments with respect to packaging materials 13,611.5
Other commitments

1,581.9

Total

17,768.4

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F.       Commitments and Contingencies (Tabular Disclosure of Contractual Obligations)

The following table and discussion provide additional disclosure regarding our material contractual obligations and commercial commitments as of December 31, 2020:

 

Payments Due by Period

Contractual Obligations*

Total

Less Than
1 Year

1-3 Years

3-5 Years

More Than
5 Years

  (in R$ million)
Short-term and long-term debt 3,063.5 2,485.9 218.7 70.7 288.3
Leases liabilities 2,715.0 532.7 956.4 566.2 659.7
Trade and other payables 25,565.7 21,082.4 3,931.1 294.8 257.4
Sales tax deferrals

1,950.0

127.1

343.5

125.0

1,354.4

Total contractual cash commitments**

33,294.3

24,228.1

5,449.7

1,056.7

2,559.8

_________________
* Contractual obligations referred to in the table above do not include tax payments to be made by the Company, except payments made in connection with tax benefits.
** The long-term debt amounts presented above differ from the amounts presented in the Note Interest-Bearing Loans and Borrowings in the financial statements in that they include our best estimates on future interest payable (not yet accrued) in order to better reflect our future cash flow position as presented in the Note Financial Instruments and Risks.

The above table does not reflect contractual commitments discussed above in “Off-Balance Sheet Arrangements.”

We are subject to numerous commitments and contingencies with respect to tax, labor, distributors and other claims. To the extent that we believe it is probable that these contingencies will be realized, they have been recorded in the balance sheet. We have estimated the total exposures of possible (but not probable) losses, which are not recorded as liabilities, to be R$81.547,1 million as of December 31, 2020. These are not considered commitments. Our estimates are based on reasonable assumptions and management assessments, but should the worst-case scenario develop, subjecting us to losses in all cases, our expected net impact on the income statement would be an expense for this amount.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       Directors and Senior Management

The Board of Directors oversees Ambev’s executive officers. The Board of Directors is currently comprised of eleven effective members and two alternate members, and provides the overall strategic direction of Ambev. Directors are elected at general shareholders’ meetings for a three-year term, re-election being permitted. Day-to-day management is delegated to the executive officers of Ambev, of which there are currently thirteen. The Board of Directors appoints executive officers for a three-year term, re-election being permitted. The Shareholders’ Agreement regulates the election of directors of Ambev by the controlling shareholders. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Ambev’s Major Shareholders—The Shareholders’ Agreement—Management of Ambev.”

Directors

The following table sets forth information with respect to the current directors of Ambev:

Board of Directors(1)

Name

Age

Position

Director Since(2)

Term Expires(3)

Victorio Carlos De Marchi 82 Co-Chairman and Director 1999 2023
Carlos Alves de Brito 60 Co-Chairman and Director 2006 2023
Milton Seligman 69 Director 2018 2023
Roberto Moses Thompson Motta 63 Director 1999 2023
Fabio Colletti Barbosa (4) 66 Director 2021 2023
Fernando Mommensohn Tennenbaum (4) 44 Director 2021 2023
Lia Machado de Matos (4) 44 Director 2021 2023
Nelson José Jamel 49 Director 2017 2023
Antonio Carlos Augusto Ribeiro Bonchristiano 53 Director (Independent) 2014 2023
Marcos de Barros Lisboa 56 Director (Independent) 2014 2023
Claudia Quintella Woods (4) 45 Director (Independent) 2021 2023
Michel Dimitrios Doukeris 47 Director (Alternate) 2018 2023
Carlos Eduardo Klutzenschell Lisboa 51 Director (Alternate) 2018 2023
 
(1) Victorio Carlos De Marchi, Co-Chairman of the Board of Directors of Ambev, was appointed by FAHZ, the former controlling shareholder of Antarctica, while Carlos Alves de Brito was appointed by ABI and is also the Chief Executive Officer of ABI. ABI appointed five directors: Milton Seligman, Roberto Moses Thompson Motta, Nelson José Jamel, Fernando Mommensohn Tennenbaum and Lia Machado de Matos in addition to the alternate directors Michel Dimitrios Doukeris and Carlos Eduardo Klutzenschell Lisboa. FAHZ also appointed Fabio Colletti Barbosa. The three independent directors Antonio Carlos Augusto Ribeiro Bonchristiano, Marcos de Barros Lisboa and Claudia Quintella Woods were appointed jointly by ABI and FAHZ.
(2) Directors first elected to our board of directors prior to 2013 were originally appointed as directors of Old Ambev. Directors first elected to our Board of Directors on or after 2013 were originally elected as directors of Ambev S.A.
(3) Annual Shareholders’ General Meeting held in April 2023.
(4) Directors elected by the board of directors in March 2021 pursuant to our bylaws to replace directors who previously resigned.

The following are brief biographies of each of Ambev’s directors:

Victorio Carlos De Marchi. Mr. De Marchi is Co-Chairman of the Board of Directors of Ambev. He also serves as president of the Operations, Finance and Compensation Committee and the Related Parties and Antitrust Conducts Committee of Ambev. Mr. De Marchi joined Antarctica in 1961 and held various positions during his tenure, including Chief Executive Officer from 1998 to April 2000. Mr. De Marchi is currently a member of the board of directors and a Vice President of FAHZ, the president of the deliberative council of Instituto Ambev de Previdência Privada, a member of the board of Instituto de Estudos para o Desenvolvimento Industrial, a member of the board of directors of ITAUSA S.A., a member of the deliberative council of Instituto Brasileiro de Ética Concorrencial, the president of the deliberative council of Centro de Informações sobre Saúde e Álcool and a member of the board of Diálogos pelo Brasil of FIESP- Federação das Indústrias de São Paulo. Mr. De Marchi has a degree in economics from Faculdade de Economia, Finanças e Administração de São Paulo and a law degree from Faculdade de Direito de São Bernardo do Campo.

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Carlos Alves de Brito. Mr. Brito is Co-Chairman of the Board of Directors of Ambev. Since December 2005, he also serves as Chief Executive Officer of ABI. He joined Brahma in 1989 and has held various management positions during his tenure. He served as Chief Operating Officer of Ambev from 1999 to 2003, as Chief Executive Officer for Latin America in 2004 and as Chief Executive Officer for North America in 2005. Mr. Brito holds a degree in mechanical engineering from the Universidade Federal do Rio de Janeiro and an MBA from Stanford University.

Milton Seligman. Mr. Seligman is a member of the Board of Directors of Ambev. He served as Corporate Affairs Officer of the Company from 2004 until 2013 and was also a member of the board of directors of Tenedora CND S.A. from 2013 to 2016. He is currently the managing partner of Milton Seligman e Associados Consultoria e Participações Ltda., president of the board of directors of Instituto Sonho Grande, consultant member of Fundação Brava, consultant member of Fundação Lemann, member of the board of directors of FAHZ, fellow of the INSPER Management and Public Policy Center and Global Fellow of the Brazil Institute at the Woodrow Wilson International Center for Scholars, in Washington D.C. Mr. Seligman has a degree in electrical engineering from Universidade Federal de Santa Maria.

Roberto Moses Thompson Motta. Mr. Thompson is a member of the Board of Directors and the Operations, Finance and Compensation Committee of Ambev. He currently is a member of the board of directors of Anheuser Busch InBev, StoneCo Ltd. and Restaurant Brands International. Mr. Thompson is also co-founder and board member of 3G Capital (private equity entity formed by the indirect controlling shareholders of the Company) and a former board member of Lojas Americanas S.A. and of São Carlos Empreendimentos. He holds a degree in engineering from Pontifícia Universidade Católica do Rio de Janeiro, and an MBA from the Wharton School of the University of Pennsylvania where he is member of the Graduate Executive Board.

Fabio Colletti Barbosa. Mr. Barbosa is a member of the Board of Directors and the Related Parties and Antitrust Conducts Committee of Ambev. Mr. Barbosa is currently a member of the board of directors of the United Nations Foundation, Itaú-Unibanco, Cia Brasileira de Metalurgia e Mineração, Cia. Hering and Natura. He is also member of the Investment Committee and partner of Gávea Investimentos and the chair of Fundação Itaú para Educação e Cultura. Mr. Barbosa holds a degree in business administration from Fundação Getulio Vargas and a MBA from the Institute for Management Development (Switzerland).

Claudia Quintella Woods. Ms. Woods is a member of the Board of Directors of Ambev. She is also the General Manager of Uber in Brazil since 2019. Ms. Woods was previously the CEO of Webmotors, a leading online marketplace for cars from 2018 until 2019 and Director and Superintendent of Banco Original from 2014 to 2018. She holds a bachelor degree from Bowdoin College, a MBA from COPPEAD/Universidade Federal do Rio de Janeiro and a certificate from Harvard Business School.

Fernando M. Tennenbaum. Mr. Tennenbaum is a member of the Board of Directors and of the Operations, Finance and Compensation Committee of Ambev. Mr. Tennenbaum is Anheuser-Busch InBev SA/NV Chief Financial Officer since April 29, 2020. He joined our Company in 2004 and has held various roles in the finance function (including Treasury, Investor Relations and M&A). He most recently served as the Vice President of Finance (South America Zone) of ABI and Ambev’s Chief Financial and Investor Relations Officer. He is a dual citizen of Brazil and Germany and holds a degree in industrial engineering from Escola Politécnica da Universidade de São Paulo and a corporate MBA from Ambev.

Lia Machado de Matos. Ms. Matos is a member of the Board of Directors of Ambev. Since 2016 she is the Chief Strategy Officer of Stone Co. Prior to that, Ms. Matos was a Family Office Director for Varbra from 2012 through 2016 and previously she served in several positions at McKinsey from 2006 through 2012, including Associate Partner. Ms. Matos holds a degree in Physics from the Universidade Federal do Rio de Janeiro and a PhD in physics and electrical engeneering from the Massachusetts Institute of Technology.

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Nelson José Jamel. Mr. Jamel is a member of the Board of Directors of Ambev. He joined the Company in 1997 and has held various positions in the Company. From 2009 to 2015, he served as Chief Financial and Investor Relations Officer of the Company. From 2016 to 2019, he served as Vice President for North America Zone of ABI, initially as Finance VP and since 2017 as Finance and Solutions VP. Currently he is the Chief People Officer of ABI. Mr. Jamel holds a degree in production engineering from Universidade Federal do Rio de Janeiro and a M.Sc in production engineering from the Universidade Federal do Rio de Janeiro.

Antonio Carlos Augusto Ribeiro Bonchristiano. Mr. Bonchristiano is an independent member of the Board of Directors of Ambev. He currently is the Co-Chief Executive Officer of GP Investments and also serves as a member of the board of directors of Rimini Street, FoodFirst Global Restaurants, BR Properties S.A. and Advisory Board da Bodleian Library, University of Oxford. Mr. Bonchristiano has a degree in politics, philosophy and economics from the University of Oxford.

Marcos de Barros Lisboa. Mr. Barros Lisboa is an independent member of the Board of Directors of Ambev. He has also acted as executive officer of Unibanco S/A and vice-president of Operational Insurance, Controls and Support of Itaú Unibanco S/A, both companies with main activities in the financial segment. Further, between 2003 and 2005, he acted as Secretary of Economic Politics of Federal Revenue Office (Ministério da Fazenda). He is currently a member of the board of directors of Cerradinho Bioenergia S.A. Mr. Barros Lisboa has a degree and a masters’ degree in economics from Universidade Federal do Rio de Janeiro and a Ph.D. in economics from the University of Pennsylvania. Since the end of the 80s, he has developed activities in the faculty of several teaching institutions in Brazil and abroad.

Michel Dimitrios Doukeris. Mr. Doukeris is an alternate member of the Board of Directors of Ambev. Since he joined the Company in 1996, he held various positions, including Global Chief Sales Officer of ABI and Operations General Manager for the APAC Zone (Asia Pacific) of ABI. Currently he is Chief Executive Officer for the North America Zone at ABI. Mr. Doukeris holds a degree in chemical engineering from Universidade Federal Santa Catarina and a master’s degree in marketing from Fundação Getulio Vargas. He has also completed post-graduate programs in marketing and marketing strategy from the Kellogg School of Management and Wharton Business School in the United States.

Carlos Eduardo Klutzenschell Lisboa. Mr. Klutzenschell Lisboa is an alternate member of the Board of Directors of Ambev. He joined the Company in 1993 and, since then, has held several positions in the Company. He served as Marketing Vice-President between 2005 and 2011, as President of BU Austral at Latin America South Zone of Ambev between 2011 and 2012, and as President of Labatt, our operation in Canada, between 2013 and 2014. Mr. Klutzenschell Lisboa held the positions of Global Vice President for Global Brands at ABI, between 2014 and 2016, and of Zone President of Latin America South Zone of Ambev, between 2016 and 2018. Currently he serves as Zone President of Middle Americas Zone of ABI.

Executive Officers

The following table sets forth information with respect to the current executive officers of Ambev:

Name

Age

Position

Executive Officer Since

Term Expires(1)

Jean Jereissati Neto 46 Chief Executive Officer 2019 2021
Lucas Machado Lira 44 Chief Financial, Investor Relations and Shared Services Officer 2020 2021
Leticia Rudge Barbosa Kina 44 Legal and Compliance Vice President Officer 2019 2021
Ricardo Morais Pereira de Melo 49 People and Management Vice President Officer 2016 2021
Eduardo Braga Cavalcanti de Lacerda 44 Commercial Vice President Officer 2018 2021
Mauricio Nogueira Soufen 47 Industrial Vice President Officer 2016 2021
Paulo André Zagman 44 Logistics Vice President Officer 2019 2021
Ricardo Gonçalves Melo 50 Corporate Affairs Vice President Officer 2019 2021
Rodrigo Figueiredo de Souza 45 Procurement Vice President Officer 2015 2021
Eduardo Eiji Horai 35 Information Technology Vice President Officer 2020 2021
Daniel Cocenzo 46 Sales Vice President Officer 2020 2021
Daniel Wakswaser Cordeiro 36 Marketing Vice President Officer 2020 2021
Pablo Firpo 40 Non-Alcoholic Beverages Vice President Officer 2020 2021
 
(1) The term of office will be unified until December 31, 2021.
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The following are brief biographies of each of Ambev’s executive officers:

Jean Jereissati Neto. Mr. Jereissati is Ambev’s Chief Executive Officer. He joined Ambev in 1998 and has held various positions at Ambev and ABI, including Chief Executive Officer of the Central America and Caribbean business unit of Ambev, Chief Executive Officer of China’s operations of ABI, Chief Executive Officer of Asia and Pacific North zone of ABI and Chief Sales and Marketing Officer of Ambev. Mr. Jereissati holds a degree in business administration from Fundação Getulio Vargas and a Corporate MBA from Ambev.

Lucas Machado Lira. Lucas Lira is our Chief Financial, Investor Relations and Shared Services Officer. He joined the Company in 2005 and, since then, has held leadership positions in the legal and finance areas, including Global Vice-President of Finance and M&A at ABI, Head of Investor Relations department, Corporate & Compliance Legal Officer, PMO – Supply Chain and Legal Manager HILA and M&A. Lira holds a degree in law from Universidade Federal de Minas Gerais – UFMG and a LL.M. from Columbia University School of Law.

Leticia Rudge Barbosa Kina. Ms. Kina is Ambev’s Legal and Compliance Vice President Officer. She joined the Company in 2002 and has held several positions, including Legal Manager and Tax, Corporate and Litigation Officer. Ms. Kina holds a law degree from Pontifícia Universidade Católica de Campinas and a degree in economics from Universidade Estadual de Campinas, in addition to a Corporate MBA from Ambev, specialization in tax law from Universidade de São Paulo and a corporate reputation course from Stanford.

Ricardo Morais Pereira de Melo. Mr. Melo is Ambev’s People and Management Vice President Officer. Since he joined the Company in 1996, he has held various sales positions, including Sales Manager, Commercial Manager in Salvador and in São Paulo, Regional Sales Executive Officer in the Northeast and in Rio de Janeiro, as well as Sales Vice President of Ambev operations in Canada and Sales Strategy Vice President at ABI, in the United States. Mr. Melo holds a degree in civil engineering from Universidade Católica de Pernambuco and a Corporate MBA from Ambev.

Eduardo Braga Cavalcanti de Lacerda. Mr. Lacerda is Ambev’s Commercial Vice President Officer. Since 2001, when he joined the Company as a trainee, he has held various positions, including as the Budget and Business Performance Officer of ABI, as head of Mergers and Acquisitions in Europe for ABI, as Financial Officer in Europe for ABI and as Chief Executive Officer of the Central America and Caribbean business unit of Ambev. Mr. Lacerda holds a degree in business administration from Pontifícia Universidade Católica do Rio de Janeiro.

Mauricio Nogueira Soufen. Mr. Soufen is Ambev’s Industrial Vice President Officer. Since he joined the Company in 1996 as a Production Supervisor, he has held positions of Brewery Manager in Scotia and Belgium, where he was the only foreigner ever to lead the historical Stella Artois brewery, in Leuven. When Mr. Soufen returned to Brazil, he served as Regional Officer for the North/Central-West region and as Officer of our Engineering Center based in Jacareí, State of São Paulo. Along with the title of brewmaster, Mr. Soufen holds a degree in mechatronics engineering from Escola Politécnica da Universidade de São Paulo and an MBA from MIT - Sloan School of Management.

Paulo André Zagman. Mr. Zagman is Ambev’s Logistics Vice President Officer. Since 2002, when he joined the Company, he has held several positions, including Chief People Officer and Chief Logistics Officer in Latin America South zone of Ambev. Mr. Zagman holds a degree in civil engineering from Pontifícia Universidade Católica do Rio de Janeiro and a specialist degree in supply chain and logistics from Massachusetts Institute of Technology and Stanford Graduate School of Business Executive Education.

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Ricardo Gonçalves Melo. Mr. Gonçalves Melo is Ambev’s Corporate Affairs Vice President Officer. Since 1991, when he joined the Company, he has held several positions, including Tax Manager, Litigation Legal Manager, People Manager – Production and Legal Officer. Mr. Gonçalves Melo holds a law degree from Universidade do Estado do Rio de Janeiro and a MBA from Coordenação dos Programas de Pós-Graduação e Pesquisa de Engenharia. In addition, he concluded an executive program with the INSEAD-Wharton Alliance.

Rodrigo Figueiredo de Souza. Mr. Figueiredo is Ambev’s Procurement Vice President Officer. Since 1997, when he joined the Company, he has held various positions in the Company and ABI, including Logistics Executive Officer in Latin America North zone of ABI, Vice-President of Supply Chain in Russia and Ukraine and Vice-President of Logistics in Europe. Mr. Figueiredo holds a degree in civil engineering from Escola Politécnica da Universidade de São Paulo, an executive MBA from INSEAD-Wharton Alliance and a Corporate MBA from Ambev.

Eduardo Eiji Horai. Mr. Horai is Ambev’s Information Technology Vice President Officer. Before joining the Company on January 1, 2020, he served as Solutions Architecture and Customer Solutions senior manager and officer for Latin America at Amazon Web Services and was also part of the Enterprise Architecture department at Toyota Motor Europe - Belgium. Mr. Horai holds a degree in computer science from Universidade de Campinas - UNICAMP and a degree in innovation and entrepreneurship from the Vlerick Leuven-Gent Management School.

Daniel Cocenzo. Mr. Cocenzo is Ambev’s Sales Vice President Officer. Since 1999, when he joined the Company, he has held various positions, including Premium and High-End Executive Officer of Ambev, People and Management Officer for the Central America and Caribbean business unit of Ambev, Sales Officer in Dominican Republic and Regional Sales Officer in Rio de Janeiro and Espírito Santo. Mr. Cocenzo holds a degree in business administration from Pontifícia Universidade Católica do Rio de Janeiro, an MBA from IBMEC and a Corporate MBA from Ambev.

Daniel Wakswaser Cordeiro. Mr. Wakswaser is Ambev’s Marketing Vice President Officer. He joined the Company as a trainee in 2008 and has held several positions in Ambev and ABI. Wakswaser created and led the digital strategy area at Ambev, at the start of 2010. He was also involved in the creation of ZX ventures globally, and also led, in Brazil, the acquisition and integration of breweries Colorado and Wäls. In the recent years, he held leadership roles in Brazil, Europe and the United States, including Global Vice President of Adjacencies, Global Marketing Vice President of Consumer Connections & Capabilities, Craft & Specialties Beer Director in Europe and Craft Beer Officer in Brazil. Wakswaser holds a degree in marketing from ESPM.

Pablo Firpo. Mr. Firpo is the Non-Alcoholic Beverages Vice President Officer of Ambev. Since 2002, when he joined the Company as a trainee, he held various positions at the Company and ABI in marketing organization, including Marketing Manager at Quilmes (a Company’s subsidiary in Argentina), Marketing Head in Chile, Marketing Officer for Core Brands at the Company’s Latin America South zone and Global Communications Officer for Budweiser. In 2017 he became the Non-Alcoholic Beverages Vice President Officer at the Company’s BU Rio de la Plata and held such position until the beginning of 2020. Mr. Firpo has a bachelor’s degree in economics from Universidad del CEMA, in Argentina.

B.       Compensation

The aggregate remuneration of all members of the Board of Directors and Executive Officers of Ambev in 2020 for services in all capacities amounted to R$70.7 million (fixed and variable remuneration and share-based payment), as presented below:

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Management’s Remuneration
Year Ended December 31, 2020

  (in R$ million, except where otherwise indicated)
   

Fixed Remuneration

Variable Remuneration

       
 

Number of Members

Fees

Direct and Indirect Benefits

Remuneration for Sitting on Committees

Others

Bonus

Profit Sharing

Remuneration for Attending Meetings

Commissions

Others

Post-Employment Benefits

Termination Benefits

Share-based Payment

Total

                             
Board of Directors 13.0 5.8 - - 1.2 - - - - - - - 5.8 12.8
Fiscal Council 6.0 1.7 - - 0.3 - - - - - - - - 2.1
Executive Officers

11.6

15.4

-

-

2.9

-

-

-

-

-

0.7

-

36.8

55.8

Total

30.6

22.9

-

-

4.4

-

-

-

-

-

0.7

-

42.7

70.7

In addition, the executive officers and members of the Board of Directors received some additional benefits provided to all Ambev employees and their beneficiaries and covered dependents, such as health and dental care. Such benefits were provided through FAHZ. These executive officers and directors also received benefits pursuant to Ambev’s pension and stock ownership plans. For a description of these plans, see Notes 24 and 25 to our audited consolidated financial statements.

On various dates in 2020, pursuant to the terms and conditions of our stock option plan, we acquired from our directors and executive officers a total of 334,562 shares of Ambev for R$6.2 million. Such amounts were calculated and paid taking into consideration the closing market price on the day of the transaction.

The table below sets forth the minimum, maximum and average individual compensation figures attributable to our directors, executive officers and Fiscal Council members for each of the indicated periods:

 

Management's Remuneration

Year Ended December 31,

 

2020

2019

2018

  (in R$ million, except where otherwise indicated)
 

Number of Members

Minimum

Average

Maximum

Number of Members

Minimum

Average

Maximum

Number of Members

Minimum

Average

Maximum

Board of Directors 13,0 0,3 1,5 7,9 13,0 0,3 1,8 9,0 13,0 0,5 1,7 8,7
Fiscal Council 6,0 0,2 0,3 0,5 5,7 0,2 0,3 0,4 5,6 0,2 0,3 0,4
Executive Officers 11,6 1,7 4,8 16,5 10,9 3,1 5,6 14,2 10,7 2,1 3,8 12,2

Ambev Stock Ownership Plans

Under the Ambev Stock Option Plan dated as of July 30, 2013, or the Plan, senior employees and management of either Ambev or its direct or indirect subsidiaries are eligible to receive stock options for Ambev common shares, including in the form of ADSs. As of December 31, 2020, there were outstanding rights under the Plan providing for the acquisition of 127.2 million Ambev common shares by approximately 560 people (including executive management and employees).

The Plan establishes the general conditions for granting options, the criteria for defining the strike price and other general terms and conditions of these stock options. Restrictions apply to the divestment of the shares acquired through the Plan, which also defines the various duties and responsibilities of the Board of Directors as Plan Administrator.

Pursuant to the Plan, the Board of Directors is conferred with ample powers for the organization and management of the Plan in compliance with its general terms and conditions. The Board of Directors grants stock options and establishes the terms and conditions applicable to each grant through Stock Option Programs, or the Programs, which may define the relevant beneficiaries, the applicable number of Ambev common shares covered by the grant, the respective strike price, the exercise periods and the deadline for exercising the options, as well as the rules regarding option transfers and possible restrictions on the acquired shares, in addition to penalties. Additionally, targets may be set for Ambev’s performance, with the Board of Directors also being empowered to define specific rules for Ambev employees who are transferred to other countries or to other companies of the group, including to ABI.

Beneficiaries to whom stock options are granted must sign Stock Option Agreements, or the Agreements, with Ambev, according to which those beneficiaries have the option to purchase lots of Ambev common shares in compliance with the terms and conditions of the Plan, the corresponding Program and such Agreement.

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There are currently three models of stock options that may be granted under the Plan. Under the first model, beneficiaries, in accordance with their internal category, may choose among allocating (1) 30% or 100%, (2) 40% or 100%, and (3) 60% or 100% of the amounts received by them as profit sharing during the year to the immediate exercise of options, thereby allowing them to acquire the corresponding amount of Ambev shares. Under this model, a substantial part of the shares acquired is to be delivered only within five years from the corresponding option grant date. During such five-year period, the beneficiary must remain employed at Ambev or any other company of its group. Under the second model, the beneficiary may exercise the options granted only after a period of up to five years from the corresponding grant date. Vesting of the options granted under the second model is not subject to company performance measures; however, the right to exercise such options may be forfeited in certain circumstances, including the beneficiary’s resignation or dismissal prior to the options’ vesting. Under the third model, the beneficiaries, in accordance with their internal category, may choose among allocating (1) 20% or 100%, (2) 30% or 100%, and (3) 50% or 100%, of the amounts received by them as profit sharing during the year to the immediate exercise of options, thereby allowing them to acquire the corresponding amount of Ambev shares. The totality of the shares acquired is to be delivered to the beneficiary within forty-five days from the corresponding exercising date (which shall not be later than forty-five days from the option grant date). The beneficiaries are under a five-year lock-up period.

Before our adoption of the three stock options models, as described above, six Programs were approved by the Board of Directors from 2006 to 2009 that allowed their beneficiaries to choose between allocating 50%, 75% or 100% of the amounts received by them as profit sharing during the year to the immediate exercise of options, thereby permitting them to acquire the corresponding amount of Ambev shares. Company performance measures applied in order for those stock options to vest and the right to exercise them could be forfeited in certain circumstances, including the beneficiary’s resignation or dismissal prior to the options’ vesting. Rights for the acquisition of a significant number of Ambev shares under this previous stock option model remain outstanding.

As a means of creating a long term incentive (wealth incentive) for certain senior employees and members of management considered as having “high potential,” share appreciation rights in the form of phantom stocks have been granted to those employees, pursuant to which the beneficiary shall receive two separate lots of phantom stock – Lot A and Lot B – subject to lock-up periods of five and ten years, respectively. On the fifth or tenth anniversary of the granting of such lots, as the case may be, a beneficiary still employed with us shall receive, in cash, the amount corresponding to the B3 closing price of the relevant Ambev shares (or NYSE closing price in the case of ADSs), on the trading session immediately preceding such anniversary, with each phantom stock corresponding to one share (or ADS, as the case may be). Such share appreciation rights shall not give the beneficiary the right to actually receive any Ambev shares or ADSs; those securities shall merely serve as basis for the calculation of the cash incentive to be received by such beneficiary. Although not subject to performance measures, the right to receive the cash incentive deriving from the phantom stocks may be forfeited in certain circumstances, including the beneficiary’s resignation or dismissal prior to the relevant anniversary of the share appreciation right.

We implemented a Share Based Payment Plan, or the Share Plan, dated as of April 29, 2016, which was amended on April 24, 2020 at the annual general shareholders’ meeting. Under the Share Plan, employees and management of Ambev or its direct or indirect subsidiaries are eligible to receive Ambev shares, including in the form of ADRs. The shares which are subject to the Share Plan are designated as Restricted Shares.

Pursuant to the Share Plan, the Board of Directors is conferred with ample powers for the organization and management of the Share Plan in compliance with its general terms and conditions. The Board of Directors may appoint a committee to assist its members in the management of the Share Plan. The Board of Directors or the committee establishes the terms and conditions applicable to each Share Based Payment Programs, or the Share Plan Programs, which defines the relevant beneficiaries, the applicable number of Restricted Shares subject to the Share Plan Program, the Restricted Shares’ transfer procedure and vesting periods, and any possible penalties.

Under the Share Plan, up to 3.0% of the shares corresponding to Ambev’s corporate capital may be granted in total in an amount that may vary according to Ambev internal policies. The delivery of the Restricted Shares is free of charges. Such Restricted Shares shall vest within up to three or five years from the corresponding grant date, depending on the Share Based Payment Programs, provided that the beneficiary remains employed at Ambev during such vesting period.

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Beneficiaries of the Share Plan must sign a Share Based Payment Agreement, or the Share Based Agreements, with Ambev, according to which, those beneficiaries have the right to receive a maximum number of Ambev Shares or ADRs, as applicable, provided that the terms and conditions set forth in the Share Plan, Share Plan Programs and in the Share Based Agreements are complied with.

The Restricted Shares may entitle beneficiaries to receive additional shares with the same vesting conditions as compensation for dividends and interest on shareholders’ equity paid during the vesting period on the Restricted Shares. The right to receive the Restricted Shares and the additional shares may be totally or partially forfeited in certain circumstances, including the beneficiaries’ resignation or dismissal during the vesting period.

Pursuant to the outstanding programs under the Plan or the Share Plan, following the lock-up or vesting periods, as applicable, in the event beneficiaries intend to sell the Ambev shares or ADRs, beneficiaries must first offer such shares or ADRs to Ambev.

ABI Exceptional Stock Option Grants

To encourage its and its subsidiaries’ employees to help with its deleveraging efforts, ABI granted a series of stock options to its executives, including Ambev executives, that had their vesting subject to, among other things, ABI’s net debt-to-EBITDA ratio falling below 2.5 before December 31, 2013. Such condition had been complied with at that date. Specific forfeiture rules relating to these ABI option grants apply in case of employment termination. Such grants were confirmed on April 28, 2009 by ABI’s annual general shareholders’ meeting. Though the exercise of these ABI exceptional stock options will not cause any dilution to Ambev, we record an expense in connection with them on our income statement.

On November 25, 2008, ABI’s board of directors had approved a grant of approximately 28 million of these exceptional stock options to several executives, including approximately 7 million options granted to Ambev executives. Each option gave its beneficiary the right to purchase one existing common share of ABI at an exercise price of EUR 10.32, which corresponded to their fair value at the time of granting of the options. On the date hereof, all of these options have been duly exercised. The other half had a term of 15 years as from granting and became exercisable on January 1, 2019.

Ambev Pension Plan

Ambev’s pension plans for employees in Brazil are administered by the IAPP. The IAPP operates both a defined benefit pension plan (closed to new participants since May 1998) and a defined contribution plan, which supplements benefits that the Brazilian government’s social security system provides to our employees. The defined contribution plan covers substantially all new employees. The IAPP was established solely for the benefit of our employees and its assets are held independently. The IAPP is managed by a Governing Board (Conselho Deliberativo), which has three members, two of whom are appointed by Ambev, and one member represents active and retired employees. The IAPP also has an Executive Board (Diretoria Executiva) containing three members, all of whom are appointed by IAPP’s Council Board. The IAPP also has a Fiscal Council with three members, two of whom appointed by Ambev and one member represents active and retired employees.

Any employee upon being hired may opt to join the defined contribution plan. When pension plans members leave Ambev before retirement, but having contributed at least three years to the IAPP plan, they have some options such as: (a) having their contributions refunded, (b) transferring their contributions to a bank or insurance company, (c) keeping their investment in IAPP to be paid in installments, and (d) continuing to IAPP for future retirement under the existing terms. In the event the employee leaves the Company prior to completing three years as a participant, such employee will only be entitled to refund his/her contributions to the plan.

As of December 31, 2020, we had 8.776 participants in our pension plans, including 406 participants in the defined benefit plan, 7.317 participants in the defined contribution plan, and 1.053 retired or assisted participants.

Plan assets are comprised mainly of equity securities, government and corporate bonds and real estate properties. All benefits are calculated and paid in inflation-indexed reais.

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Labatt provides pension plan benefits in the defined contribution model and in the defined benefit model to its employees, as well as certain post-retirement benefits.

For information on amount recorded by us on December 31, 2020 as liabilities for pension plan benefits, see Note 24 to our audited consolidated financial statements, included elsewhere in this annual report on Form 20-F.

Profit-Sharing Plan

Employees’ performance-based variable payments are determined on an annual basis taking into account the achievement of corporate, department or business-unit and individual goals, established in accordance with the profit-sharing plan.

The distribution of these payments is subject to a three-tier system in which Ambev must first achieve performance targets approved by the Board of Directors in accordance with the profit-sharing plan. Following that, each department or business segment must achieve its respective targets. Finally, individuals must achieve their respective performance targets.

For employees involved in operations, we have a collective award for production sites and distribution centers with outstanding performances. The bonus award at the distribution centers and production sites is based on a ranking between the different distribution centers and production sites (as the case may be), which, based on their relative ranking, may or may not receive the bonus.

Our expenses under these programs amounted to R$57.2 million for the year ended December 31, 2020, R$271.6 million for the year ended December 31, 2019, and R$286.0 million for the year ended December 31, 2018.

C.       Board Practices

During 2020, our management held individual and group meetings with shareholders, investors and analysts to talk about the performance of our business and our opportunities for growth both in the short-term as well as in the future. We also participated in conferences and non-deal road shows in Brazil, the United States and Europe. We hosted quarterly conference calls, transmitted simultaneously on the Internet, to clarify financial and operating results as well as answered questions from the investment community.

Fiscal Council (Conselho Fiscal)

Ambev’s Fiscal Council is a permanent body. At our annual general shareholders’ meeting held on April 24, 2020, the following members of the Fiscal Council were appointed for a term expiring upon the annual general shareholders’ meeting of 2021: José Ronaldo Vilela Rezende, Elidie Palma Bifano and Vinicius Balbino Bouhid, and, as alternates, Emanuel Sotelino Schifferle, Eduardo Rogatto Luque and Carlos Tersandro Fonseca Adeodato (the latter of whom serves as alternate only to Vinicius Balbino Bouhid). All of them are “independent” members as per Rule 10A-3(c)(3) of the Sarbanes-Oxley Act of 2002.

The responsibilities of the Fiscal Council include supervision of management, performing analyses and rendering opinions regarding our financial statements and performing other duties in accordance with the Brazilian Corporation Law and its charter. None of the members of the Fiscal Council is also a member of the Board of Directors or of any committee of the Board.

Minority holders representing at least 10% of our common shares are entitled to elect one member and respective alternate to the Fiscal Council without the participation of the controlling shareholders. CVM’s interpretation is that such right is applicable as long as at least 10% of our shares are held by minority shareholders, regardless of the equity percentage held by the minority shareholders attending the shareholders’ meeting having in the agenda the election of the Fiscal Council members.

We have relied on the exemption provided for under Rule 10(c)(3) of the Sarbanes-Oxley Act of 2002, which enables us to have our Fiscal Council perform the duties of an audit committee for the purposes of such Act, to the extent permitted by Brazilian law. We do not believe that reliance on this exemption would materially adversely affect the ability of our Fiscal Council to act independently and to satisfy the other requirements of such Act.

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The Board of Directors

Most of our Board members have been in office for several years and were elected or reelected to the Board of Directors of Ambev at the Company’s extraordinary general shareholders’ meeting held on April 24, 2020 for a term expiring at the annual general shareholders’ meeting to be held in 2023. These Board members use their extensive knowledge of our business to help ensure that we reach our long-term goals, while maintaining our short-term competitiveness. Another objective of the Board of Directors is to encourage us to pursue our short-term business goals without compromising our long-term sustainable growth, while at the same time trying to make sure that our corporate values are observed.

Under our bylaws, at least two members of the Board of Directors shall be independent directors. For the applicable director independence criteria, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Board of Directors.”

Ambev’s Chairman of the Board of Directors and the Chief Executive Officer are separate positions that must be held by different individuals.

The Board of Directors is supported in its decision-making by the following committees:

Operations, Finance and Compensation Committee

The Operations, Finance and Compensation Committee is the main link between the policies and decisions made by the Board of Directors and Ambev’s management team. The Operations, Finance and Compensation Committee’s responsibilities include:

· to present medium and long-term planning proposals to the Board of Directors;
· to analyze and issue an opinion on the decisions of the Board of Directors regarding the compensation policies for the Board of Directors and Executive Management, including their individual compensation packages, to help ensure that the members of the Board and executive management are being adequately motivated to reach an outstanding performance in consideration for proper compensation;
· to monitor the investors relations strategies and the performance of our rating, as issued by the official rating agencies;
· to monitor the evaluation of the executive officers, senior management and their respective succession plans;
· to analyze, monitor and propose to the Board of Directors suggestions regarding legal, tax and relevant regulatory matters;
· to analyze and monitor our annual investment plan;
· to analyze and monitor growth opportunities;
· to analyze and monitor our capital structure and cash flow; and
· to analyze and monitor the management of our financial risk, as well as budgetary and treasury policy.

The current members of the Committee are Messrs. Victorio Carlos De Marchi (Chairman), Fernando Mommensohn Tennenbaum and Roberto Moses Thompson Motta. The members of this committee are elected by the Board of Directors.

Related Parties and Antitrust Conducts Committee

The responsibilities of the Related Parties and Antitrust Conducts Committee responsibilities are to assist the Board of Directors with the following matters:

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· related party transactions;
· any general conflict of interest situations that may arise between the Company and related parties;
· compliance, by the Company, with legal, regulatory and statutory provisions concerning related party transactions;
· compliance, by the Company, with legal, regulatory and statutory provisions concerning antitrust matters; and
· other matters the Board of Directors may consider relevant and in the interest of the Company.

The current members of the Related Parties and Antitrust Conducts Committee are Messrs. Victorio Carlos De Marchi (Chairman), Fabio Colletti Barbosa, Marcos de Barros Lisboa, Everardo de Almeida Maciel and Carlos Emmanuel Joppert Ragazzo. The members of this committee are elected by the Board of Directors.

Differences Between United States and Brazilian Corporate Governance Practices

In November 2003, the SEC approved corporate governance rules that had been adopted by the NYSE pursuant to the Sarbanes-Oxley Act of 2002. According to those governance rules, foreign private issuers that are listed on the NYSE must disclose the significant differences between their corporate governance practices and those required by the NYSE’s regulations for U.S. companies.

In November 2016, the Brazilian Corporate Governance Code, which provides for corporate governance practices guidelines for publicly-held companies, was released by a workgroup formed by several entities, such as ABRAPP, ABRASCA, ANBIMA, ABVCAP, AMEC, APIMEC, B3, BRAIN, IBGC, IBRI and Instituto IBMEC, after the contribution and comments made by the CVM. In June 2017, the CVM approved a new rule, which establishes that companies must inform whether they adhere to the principles and practices set forth in the Brazilian Corporate Governance Code, or otherwise justify the reasons for non-compliance with such principles and practices. Our report on the Brazilian Code of Corporate Governance, prepared in accordance with such rules, is available on our website at http://ri.ambev.com.br/. Additionally, the B3 and the IBGC-Brazilian Institute of Corporate Governance have issued guidelines for corporate governance best practices.

The principal differences between the NYSE corporate governance standards and our corporate governance practices are as follows:

Independence of Directors and Independence Tests

NYSE corporate governance standards require listed companies to have a majority of independent directors and set forth the principles by which a listed company can determine whether a director is independent. “Controlled companies,” such as Ambev, need not to comply with these requirements. Nonetheless, our bylaws require that (i) the majority of the members of our Board of Directors must be external directors (i.e. with no current employment or managerial relationship with the company) and (ii) at least two of our directors be independent. In addition, our bylaws set forth that directors elected by a separate ballot vote of minority shareholders holding at least 10% of our capital stock shall be deemed independent.

As of the date of this annual report on Form 20-F, all of our directors, including the independent ones, had been appointed by our controlling shareholders.

The Brazilian Corporation Law and the CVM establish rules in relation to certain qualification requirements and restrictions, compensation, duties and responsibilities of a company’s officers and directors.

Executive Sessions

NYSE corporate governance standards require non-management directors of a listed company to meet at regularly scheduled executive sessions without management.

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According to the Brazilian Corporation Law, up to one-third of the members of the Board of Directors can also hold executive officer positions. However, none of our directors holds an executive officer position in us at this time and, accordingly, we believe we would be in compliance with this NYSE corporate governance standard if we were a U.S. company.

Nominating/Corporate Governance and Compensation Committees

NYSE corporate governance standards require that a listed company have a nominating/corporate governance committee and a compensation committee each composed entirely of independent directors with a written charter that addresses certain duties. “Controlled companies” such as Ambev need not to comply with this requirement.

In addition, we are not required under the Brazilian Corporation Law to have, and accordingly we do not have, a nominating committee or corporate governance committee. According to the Brazilian Corporation Law, Board committees may not have any specific authority or mandate since the exclusive duties of the full Board of Directors may not be delegated. The role of the corporate governance committee is generally performed by either our Board of Directors or our executive officers.

Audit Committee and Audit Committee Additional Requirements

NYSE corporate governance standards require that a listed company have an audit committee composed of a minimum of three independent members that satisfy the independence requirements of Rule 10A-3 under the Exchange Act, with a written charter that addresses certain duties.

We maintain a permanent Fiscal Council, which is a body contemplated by the Brazilian Corporation Law that operates independently from our management and from our registered independent public accounting firm. Its principal function is to examine the annual and quarterly financial statements and provide a formal report to our shareholders. We are relying on the exemption provided by Rule 10A-3(c)(3) and believe that our reliance on this exemption will not materially affect the ability of the Fiscal Council to act independently and to satisfy the other requirements of Rule 10A-3.

Shareholder Approval of Equity Compensation Plans

NYSE corporate governance standards require that shareholders of a listed company must be given the opportunity to vote on all equity compensation plans and material revisions thereto, subject to certain exceptions.

Under Brazilian Corporation Law, shareholder pre-approval is required for the adoption and revision of any equity compensation plans. Our existing stock ownership and share based payment plans were approved by our extraordinary general shareholders’ meetings held on July 30, 2013 and on April 29, 2016. An amendment to the share based payment plan was approved by the annual general shareholders’ meeting held on April 24, 2020.

Corporate Governance Guidelines

NYSE corporate governance standards require that a listed company must adopt and disclose corporate governance guidelines that address certain minimum specified standards, which include, director qualification standards, director responsibilities, director access to management and independent advisors, director compensation, director orientation and continuing education, management succession and annual performance evaluation of the Board.

We believe the corporate governance guidelines applicable to us under the Brazilian Corporation Law are consistent with the guidelines established by the NYSE. We have adopted and observe our Manual on Disclosure and Use of Information and Policies for Trading with Securities issued by Ambev which deals with the public disclosure of all relevant information as per CVM’s guidelines, as well as with rules relating to transactions involving the dealing by our management and controlling shareholders in our securities.

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Code of Business Conduct

NYSE corporate governance standards require that a listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or officers. Each code of business conduct and ethics should address the following matters: (1) conflicts of interest; (2) corporate opportunities; (3) confidentiality; (4) fair dealing; (5) protection and proper use of company assets; (6) compliance with laws, rules and regulations (including insider trading laws); and (7) encouraging the reporting of any illegal or unethical behavior.

We have adopted a Code of Business Conduct that applies to all directors, officers and employees. Our Code of Business Conduct is available on our website at http://ri.ambev.com.br/. The information included on our website or that might be accessed through our website is not included in this annual report and is not incorporated into this annual report by reference. There are no waivers to our Code of Business Conduct.

Certification Requirements

NYSE corporate governance standards require that each listed company’s chief executive officer certify to the NYSE each year that he or she is not aware of any violation by the company of the NYSE corporate governance standards.

As required by Section 303A.12(b) of the NYSE corporate governance standards, our Chief Executive Officer will promptly notify the NYSE in writing after our executive officer becomes aware of any material non-compliance with any applicable provisions of the NYSE corporate governance standards.

D.       Employees

As of December 31, 2020, we and our subsidiaries had a total of 50,479 employees, of whom approximately 54% were engaged in production, 35% in sales and distribution and 11% in administration.

The following table sets forth the total number of our employees as of the end of the periods indicated:

As of December 31,

2020

2019

2018

50,479 51,352 49,617

The following table shows the geographical distribution of our employees as of December 31, 2020:

Geographical Distribution of Ambev Employees as of December 31, 2020

Location

Number of Employees

Brazil 28,522
CAC 8,642
Dominican Republic 6,158
Cuba 175
Guatemala 769
Panama 1,540
Latin America South 9,851
Argentina 6,145
Bolivia 1,836
Uruguay 800
Paraguay 536
Chile 534
Canada

3,464

Total

50,479

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Industrial Relations

As per the determined under Brazilian labor legislation, all of our employees in Brazil are represented by labor unions, but only less than 5% of our employees in Brazil are actually members of labor unions as of December 31, 2020. The number of administrative and distribution employees who are members of labor unions is not significant. Salary negotiations are conducted annually between the workers’ unions and us. Collective bargaining agreements are negotiated separately for each facility or distribution center. Our Brazilian collective bargaining agreements have a one- or two-year term, and we usually enter into new collective bargaining agreements on or prior to the expiration of the existing agreements. We conduct salary negotiations with labor unions in accordance with local law for our employees located in our CAC, Latin America South and Canadian operations.

Health and Severance Benefits

In addition to wages, our employees receive additional benefits. Some of these benefits are mandatory under Brazilian law, some are provided for in collective bargaining conventions and/or agreements and others are voluntarily granted. The benefits packages of our employees in Brazil consist of benefits provided both directly by the Company and through FAHZ, which provides medical, dental, educational and social assistance to current and retired employees of Ambev and their beneficiaries and covered dependents, either for free or at a reduced cost. We may voluntarily contribute up to 10% of our consolidated net income towards the support of FAHZ in connection with these benefits, as determined pursuant to the Brazilian Corporation Law and our bylaws.

We are required to contribute 8% of each Brazilian employee’s monthly gross pay to an account maintained in the employee’s name with the Brazilian government’s Severance Indemnity Fund (Fundo de Garantia por Tempo de Serviço), or the FGTS. Under Brazilian law, we are also required to pay termination benefits to Brazilian employees dismissed without cause equal to 40% of the accumulated contributions made by us to the terminated employee’s FGTS account throughout the employee’s period of service, among other mandatory termination fees.

We provide health and benefits in accordance with local law for our employees located in our CAC, Latin America South and Canadian operations.

E.       Share Ownership

The following table shows the amount and percentage of our shares held by members of our Board of Directors and by executive officers as of March 5, 2021:

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Name

Amount and Percentage of Common Shares

Victorio Carlos De Marchi(1) *
Carlos Alves de Brito *
Milton Seligman *
Roberto Moses Thompson Motta *
Fabio Colletti Barbosa *
Claudia Quintella Woods *
Fernando Mommensohn Tennenbaum *
Lia Machado de Matos *
Nelson José Jamel *
Antonio Carlos Augusto Ribeiro Bonchristiano *
Marcos de Barros Lisboa *
Michel Dimitrios Doukeris *
Carlos Eduardo Klutzenschell Lisboa *
Jean Jereissati Neto *
Lucas Machado Lira *
Eduardo Braga Cavalcante de Lacerda *
Ricardo Morais Pereira de Melo *
Mauricio Nogueira Soufen *
Eduardo Eiji Horai *
Ricardo Gonçalves Melo *
Rodrigo Figueiredo de Souza *
Paulo André Zagman *
Leticia Rudge Barbosa Kina *
Daniel Cocenzo *
Daniel Wakswaser Cordeiro *
Pablo Firpo *

 

 
* Indicates that the individual holds less than 1% of the class of securities.
(1) This Board member is also trustee of FAHZ. For information regarding the shareholdings of FAHZ in Ambev, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Ambev’s Major Shareholders.”
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       Major Shareholders

Introduction

Ambev has only one class of shares (i.e, voting common shares), including in the form of ADSs (evidenced by ADRs), with each ADS representing one Ambev common share. The Ambev common shares and ADSs are registered under the Exchange Act. As of March 5, 2021, Ambev had 15,734,907,799 shares outstanding. As of March 5, 2021, there were 1,460,123,966 Ambev ADSs outstanding (representing 1,460,123,966 Ambev shares, which corresponds to 9.3% of the total Ambev shares outstanding). The Ambev shares held in the form of ADSs under the Ambev ADS facilities are deemed to be the shares held in the “host country” (i.e, the United States) for purposes of the Exchange Act. In addition, as of March 5, 2021, there were 136 registered holders of Ambev ADSs.

On December 19, 2019, our Board of Directors authorized us or our subsidiaries to enter into equity swap transactions, or First Swap Agreements. The First Swap Agreements must be liquidated within 18 months from our Board of Directors’ approval and may cause an exposure of up to 80 million common shares (which may be, partially or totally, referenced in ADRs), also limited to R$1.5 billion.

On May 13, 2020, our Board of Directors authorized us or our subsidiaries to enter into additional equity swap transactions, or Second Swap Agreements, without prejudice of the regular liquidation of the First Swap Agreements still in force, if applicable. The Second Swap Agreements must be liquidated within 18 months from our Board of Directors’ approval and may cause an exposure of up to 65 million common shares (which may be, partially or totally, referenced in ADRs), limited to R$1 billion.

On December 9, 2020, our Board of Directors authorized us or our subsidiaries to enter into additional equity swap transactions, or Third Swap Agreements, without prejudice of the regular liquidation of the First and Second Swap Agreements still in force, if applicable. The Third Swap Agreements must be liquidated within 18 months from our Board of Directors’ approval and may cause an exposure of up to 80 million common shares (which may be, partially or totally, referenced in ADRs), limited to R$1.2 billion.

The Third Swap Agreements considered together with the outstanding balances of the First and Second Swap Agreements to be liquidated do not reach the threshold set forth in CVM Instruction No. 567/2015.

Control

Our two direct controlling shareholders, IIBV and AmBrew, both of which are subsidiaries of ABI, together with FAHZ, held in aggregate 72.1% our total and voti