Commission File Number 1565025

 

 

 

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. 

Form 20-F ___X___ Form 40-F _______

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No ___X____

 

1.0 – Individual Statements and Identification of Persons Responsible for the Content

 

 

 

 

 

 

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Individual Statement of the Chief Executive Officer

 

 

The aforementioned executive officer states that:

 

a.                   He has reviewed the reference form;

 

b.                   All information contained in the form complies with the provisions of CVM Instruction 480, especially sections 14 and 19; and

 

c.                   The combined information contained therein is a true, precise and complete reflection of the economic and financial condition of the issuer and the risks inherent to its business, as well as the securities issued by it.

 

São Paulo, July 7, 2020.

 

 

 

 

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Individual Statement of the Investor Relations Officer

 

 

The aforementioned executive officer states that:

 

d.                   He has reviewed the reference form;

 

e.                   All information contained in the form complies with the provisions of CVM Instruction 480, especially sections 14 and 19; and

 

f.                    The combined information contained therein is a true, precise and complete reflection of the economic and financial condition of the issuer and the risks inherent to its business, as well as the securities issued by it.

 

São Paulo, July 7, 2020.

 

 

 

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2.1/2.2 – Auditors’ Identification and Compensation

 

 

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2.3 – Other material information

 

Not applicable, since there was no replacement of Company’s auditor.

 

 

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3.1 – Financial Information – Consolidated

 

 

 

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3.2 – Non-accounting measurements

 

a) Amount and b) Reconciliations between the amounts disclosed and the amounts in the audited financial statements

 

The Company uses performance indicators as adjusted earnings of the consolidate transaction before the financial result and taxes on income (adjusted EBIT) and adjusted earnings of the consolidated transaction before the financial result, taxes on income and expenses with depreciation and amortization (adjusted EBITDA).

 

 

⁽¹⁾ Non-recurring items consist of the following:

 

 

c) Reason why it is assumed that this measure is more appropriate for correctly understanding the Company’s financial condition and result of operations

 

The Company Management uses performance indicators as adjusted earnings of the consolidate transaction before the financial result and taxes on income (adjusted EBIT) and adjusted earnings of the consolidated transaction before the financial result, taxes on income and expenses with depreciation and amortization (adjusted EBITDA) as segment performance measurers to take decisions on the allocation of resources and performance analysis of the consolidated transaction.

 

It should also be emphasized that Adjusted EBITDA is used by management to measure performance, for which reason the Company believes it is important to include it in this reference form. The Company’s management believes that Adjusted EBITDA is a practical measurement for assessing its operating performance, while enabling a comparison with other companies in the same segment, even though other companies may calculate it differently. Finally, it should be emphasized that adjusted measurers are additional measures used by the management and shall not replace the measurers calculated in accordance with IFRS as a performance indicator of the Company.

 

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3.3 – Events subsequent to the latest financial statements

 

There are four events subsequent to the last consolidated financial statements related to the year ended 2019, as provided below:

Arosuco – Disallowance of Tax Incentive Deduction of Income Tax

In January 2020, Arosuco Aromas e Sucos Ltda. (subsidiary of the Company) received a tax assessment from the Brazilian Federal Revenue Office regarding the disallowance of the Income Tax reduction benefit set forth in the Provisional Measure No. 2199-14/2001, based on the margin profit. In this context, an administrative defense was filed within the legal term and its respective decision by the Regional Judgment Office of the Brazilian Federal Revenue Office is currently awaited. The Company, supported by the opinion of its internal and external attorneys, considers the chances of loss relating to such tax assessment, in the amount of R$2.0 billion, as possible and, therefore, did not make any provision for this purpose. For more details on this proceeding, see item 4.3 of this Reference Form.

 

Disallowance of Credits on Income Tax

As mentioned in note 30 (contingent liabilities) of the Company’s financial statements, regarding the discussion on the disallowance of credits on income tax paid abroad by the entities controlled by the Company, in January 2020, CARF rendered unfavorable decisions in four cases referring to the years 2015 and 2016, in an updated and approximate amount of R$3.6 billion. Regarding the 2015 cases, the Company was subpoenaed and filed a motion for clarification (embargos de declaração). Regarding the 2016 cases, the Company is currently awaiting notification of the content of the relevant decisions to submit the applicable appeals. The Company, supported by the opinion of its internal and external attorneys, maintains the classification of chances of loss relating to these cases as possible. For more details on the proceedings involving such discussion, see item 4.6 of this Reference Form.

 

CND Holdings – Goodwill Amortization

As mentioned in note 30 (contingent liabilities) of the Company’s financial statements, regarding the discussion about the Tax Assessment relating to the amortized goodwill arising from the merger of CND Holdings into the Company, in February 2020, CARF rendered a partially favorable decision. The Company was subpoenaed of the decision and filed a motion for clarification (embargos de declaração) and will also present counterarguments (contrarrazões) to the Special Appeal of the National Treasury, regarding the portion of the decision that was favorable. For more details on this proceeding, see item 4.3 of this Reference Form.

 

Working Capital Financing

In April 2020, Ambev’s management approved the contracting of loans by the Company and its controlled entities in order to finance its working capital. Up to the date of disclosure of the financial results of the Company’s first quarter, commercial notes had been issued and bank credit notes, among other types of loans, had been contracted, which totaled R$ 1,450 million, and, in May 6, 2020 another agreement was executed in the amount of 200 million Canadian dollars, which corresponds to approximately R$ 796 million, then totaling R$ 2,246 million. After such date, new loans were contracted by the Company, aiming at the same purposes, which corresponded, on May 31, 2020, to an additional amount of R$1,327 million.

 

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3.4 – Policy on Allocation of Results

 

 

 

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(Reais)	Year ended December 31, 2019	Year ended December 31, 20181	Year ended December 31, 2017
Adjusted Net Income	13,250,321,404.10	14,319,466,610.94	7,442,547,766.57
Dividend distributed in relation to the adjusted net income	58.24	68.44	63.32
Rate of return on issuer’s shareholders’ equity	21.18	19.16	15.51
Total dividend and IOE (JCP) distributed	7,717,419,618.63	7,545,608,313.44	4,712,417,426.89
Net income retained	5,532,901,785.45	6,733,858,298.00	2,730,130,340
Retention approval date	April 24, 2020	April 26, 2019	April 27, 2018

	Year ended December 31, 2019		Year ended December 31, 2018		Year ended December 31, 2017
Net income retained	Amount	Payment	Amount	Payment	Amount	Payment
JCP
Common	7,717,419,618.63	12/30/2019	5,030,507,250.56	12/28/2018	4,869,768,533.43	12/28/2017
Dividends
Common			2,515,101,062.88	07/30/2018	1,099,765,076.41	02/22/2018
Common					2,513,076,740.16	07/17/2017

 

3.6 – Declaration of dividends for the account of retained earnings or reserves

 

 

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3.7 – Indebtedness

 

 

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3.8 – Obligations according to their nature and maturity period

 

The following table shows the Company’s consolidated obligations, according to their nature and maturity period as of December 31, 2019:

 

 

 

 

 

Note: In line with the Circular Letter/CVM/SEP/No. 02/2020, item 10.2.3.(g), unsecured or floating debts, regardless the fact that they have personal guarantee, were classified as unsecured debts.

 

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3.9 – Other material information

 

In the period ended March 31, 2020, the debts of the Company had equal rights of payment with no subordination among them. Except for the credit lines due to FINAME contracted by the Company with BNDES, where collateral is provided on assets acquired with the credit granted which serve as collateral; other loans and financing contracted by the Company provide personal guarantees as collateral or are unsecured. Most of the loan contracts contain financial covenants including:

 

(i)            financial covenants, including limitation to new indebtedness;

(ii)           guarantee of the Company's existence;

(iii)          maintenance, in use or in good conditions for business, of assets of the Company;

(iv)          limitation for conducting transactions for acquisition, merger, sale or disposition of its assets;

(v)           disclosure of accounting statements and balance sheets; (v) prohibition related to collateral on new debts undertaken, except if: (a) expressly authorized pursuant to that loan agreement; or (b) in new debts undertaken before the Brazilian Government-related financial institutions – including the BNDES – or foreign governments, irrespectively of they are multilateral financial institutions (for example, the World Bank) or located in jurisdictions in which the Company carries on its activities.

 

On March 31, 2020, the Company had complied with the contractual commitments of its loan and financing transactions.

 

 

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4.1- Description of Risk Factors

 

The investment in securities issued by the Company involves significant risks. The Company’s current and potential investors must carefully consider all information contained in this Reference Form, including the risks described in this section, the financial statements, and their accompanying notes, before deciding to maintain or increase their investment in the Company’s securities. The Company’s business, financial condition and operational results could be significantly affected by the risks listed below. The market price of shares may fall due to the occurrence of any of the risks listed below; thus, investors may lose a portion or all the investment made in the Company’s shares. Risks that are currently unknown to us, or that we usually consider as irrelevant, may also have a material adverse effect on our business, financial condition, operational results and the trading price of our shares.

 

For purposes of this section 4, “Risk Factors”, except when otherwise stated in this Reference Form, and where the context so requires, mentioning the fact that a risk, uncertainty or problem may cause or have “adverse” or “negative” effects on us, or similar expressions, means that such risk, uncertainty or problem may have significant adverse effects on the business, financial condition, operational results, cash flow, liquidity and/or future business of the Company and/or its subsidiaries, as well as on the price of the securities issued by the Company. Similar expressions included in this section 4, “Risk Factors”, must be understood within this context. Notwithstanding the subdivision of this section 4, “Risk Factors”, certain risk factors included in one item may also be applicable to other items regarding the Company.

 

a) With regard to the Company:

The Company relies on the reputation of its products and brands and damages to their reputation may have an adverse effect on the Company’s results.

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 the Company’s products is defective or found to contain contaminants, the Company 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 detected.

In the event of any failure to comply with accepted food safety and regulatory standards (such as contamination or a defect) 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 contamination or a 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.

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The Company is subject to risks associated with noncompliance with any data protection laws in the countries in which it operates and can be adversely affected by any penalties or other sanctions imposed.

In the year 2018, Law No. 13.709/2018, the Lei Geral de Proteção de Dados (Brazilian General Data Protection Law) or LGPD, was enacted and will come into effect between 2020 and 2021. Inspired by the General Data Protection Regulation of the European Union, the LGPD sets forth a comprehensive set of rules that promise to reshape how companies, organizations and public authorities collect, use, process and store personal data when carrying out their activities.

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

The LGPD, as well as any other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions in which we operate, may subject us to, among other things, additional costs and expenses and may require costly changes to our business practices and security systems, policies, procedures and practices.  Starting in August 2021, failure to comply with the LGPD and/or other personal data protection laws may result in formal warnings, public sanctions, the deletion of data, or the suspension of data processing activities. Furthermore, a company may be subject to a fine equal to up to 2% of its gross sales, or the gross sales of its economic group in Brazil, in the preceding fiscal year, excluding taxes, but limited to a total of R$50 million per violation. Notwithstanding, convictions in proceedings before the Judiciary Branch due to potential breach of the LGPD and/or other data protection laws can occur once LGPD comes into effect.

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

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

The Company may not be able to protect its intellectual property rights.

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

Although we have put in place appropriate actions to protect our portfolio of intellectual property rights (including patent applications, trademark and domain name registration), we cannot be certain that the steps we have taken will be sufficient to protect our intellectual property rights portfolio or that third parties will not infringe upon or misappropriate the Company’s 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.

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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.

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, hacker 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 operational 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, 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 security breach. As with all information technology systems, our system could also be penetrated by outside parties with the intent of extracting or corrupting information or disrupting business processes.

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 parties security breaches, burglaries, “cyber attacks”, errors by our 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 and 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.

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The Company's business units are subject to obtaining and maintaining licenses and their absence may negatively impact the Company's activities and cause the Company to incur in additional costs.

The Company's business units are subject to obtaining and maintaining licenses and required regulatory approvals issued by competent authorities in the countries in which it operates. The Company cannot guarantee that such licenses or regulatory approvals will be granted, renewed, or extended, and may be withdrawn, or made subject to limitations or onerous conditions. The absence of such licenses or regulatory approvals may result in the interruption of the activities of a certain plant or distribution centers, which may adversely affect the Company's results. In addition, for the granting and/or renewal of such licenses or regulatory approvals, the competent authorities may determine that the Company makes certain changes in its operations and/or facilities, which can cause the Company to incur in additional costs.

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.

Our shareholders may not receive any dividends.

According to our Bylaws, we generally pay our shareholders 40% of our annual adjusted net income, calculated according to Brazilian Law No. 6404/76, as amended (the “Law No. 6,404/76”), according to the mechanisms described in our Bylaws and as presented in our unconsolidated financial statements prepared under IFRS. The main sources for these dividends are cash flows from our operations and dividends from our operating subsidiaries. Therefore, that net income may not be available to be paid out to our shareholders in a given year (for example due to a material impact arising from the COVID-19 pandemic in the activities of the Company).

We might not pay dividends to our shareholders in any particular fiscal year upon the determination of the Board of Directors that any distribution would be inadvisable in view of our financial condition. While the law does not establish the circumstances rendering the payment of dividends inadvisable, it is generally agreed that a company need not pay dividends if such payment threatens its existence as a going concern or harms its normal course of operations.

Any dividends not distributed would be allocated to a special reserve account for future payment to shareholders, unless it is used to offset subsequent losses or as otherwise provided for in our Bylaws or in Law No.6,404/76. It is possible, therefore, that our shareholders will not receive dividends in any particular fiscal year.

The relative volatility and illiquidity of securities of Brazilian companies may substantially limit your ability to sell the Company’s securities 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 Company’s securities at the price and time you desire.

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Future share issues may reduce the value of equity held by the current shareholders, significantly affecting the future market price of Company’s shares.

 

The Company may need to raise additional capital in the future, also by means of the issue of shares or debt securities convertible into shares. Any additional capital obtained from the issue of shares may reduce the proportional interest held by the investors in the Company’s capital, and reduce the earnings per share and the net equity value per share; thus, any issue made by the Company or its major shareholders may have adverse effects on the future market price of the Company’s shares.

 

We are subject to risks related to pending legal and administrative proceedings, and court decisions not favorable to the Company in such actions may adversely affect its results of operations, cash flows and financial condition.

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. The results of legal and administrative proceedings are uncertain, and, regardless of the merits of the claims, litigation can be expensive, lengthy and adversely affect the Company. Company’s management may also be exposed to sanctions due to legal proceedings against its members involving our operations. The results of judicial and administrative proceedings are uncertain and, independently of merit of the requests, claims may be expensive, long and prejudicial to the Company. We can give no assurance that the decisions or resolutions in any particular action will be favorable to the Company. Unfavorable court decisions may adversely affect our business, brands, financial condition and results of operations. For further information about the Company’s court and administrative contingencies, see items 4.3 to 4.7 of this Reference Form.

 

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

 

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

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 S.A./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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b) In regard to the Company’s direct or indirect controlling shareholder, or the controlling group:

Our controlling shareholders may adopt several corporate measures without the approval of non-controlling shareholders.

 

As of December 31, 2018, our two direct controlling shareholders, that is, Interbrew International B.V. and AmBrew S.à.r.l., which are subsidiaries of Anheuser-Busch InBev S.A./NV, together with Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficência, held a 72.1% interest in the Company’s stock, except for treasury shares. As of the same date, Anheuser-Busch InBev S.A./NV indirectly held a 61,8% interest in the Company, except for treasury shares. Accordingly, Anheuser-Busch InBev S.A./NV controls the Company, although (i) Anheuser-Busch InBev S.A./NV is still subject to the shareholders’ agreement entered into by Interbrew International B.V. and AmBrew S.à.r.l. with Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficência on April 16. 2013 and effective until July 2, 2019; and (ii) Anheuser-Busch InBev S.A./NV is controlled by Stichting Anheuser-Busch InBev (formerly Stichting InBev and Stichting Interbrew), or Stichting, a foundation organized under the laws of the Netherlands, which represents an important part of interests of the Belgium families who founded Interbrew International B.V. (previous name of ABI) (represented mainly by Eugénie Patri Sebastién S.A.) and of interests of the Brazilian families who were previously our controlling shareholders (represented by BRC S.à.R.L.).

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 Law No. 6404/76, 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.

 

c) In regard to the Company’s shareholders

 

Please check item (b) above. There are no other risk factors regarding the Company’s shareholders.

 

d) In regard to the Company’s subsidiaries and affiliates

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

Our foreign subsidiaries’ ability to distribute cash (to be used, among other things, to meet our financial obligations) through dividends, intercompany advances, management fees and other payments is, to a large extent, dependent on the availability of cash flows at the level of such foreign subsidiaries and may be restricted by applicable laws and accounting principles. In particular, 45%, which equals to R$ 23.9 billion, of our total net revenues of R$52,6 billion in 2019 came from our foreign subsidiaries. In addition, some of our subsidiaries are subject to laws restricting their ability to pay dividends or the amount of dividends they may pay.

If we are not able to obtain sufficient cash flows from our direct or indirect foreign subsidiaries, this could negatively impact our business, results of operations and financial condition, since it can limit the Company’s ability to pay all of its obligations.

 

e) In regard to the Company’s suppliers

We rely on external suppliers for our production and distribution, and the termination or modification of the arrangements with such third parties could negatively affect our business.

We rely on external suppliers for a range of raw materials for beer and other non-alcoholic beverages, and for packaging material, including aluminum cans, glass, kegs and PET bottles. The Company seeks to limite its exposition to fluctuations on the supply of such raw materials entering into agreements with fixed price with medium and long term.

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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 a material adverse effect on our business, results of operations, cash flows or financial condition.

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

 

In relation to its distribution network, the Company hires the services of several transportation companies in Brazil. In case these suppliers are unable to continue to meet the Company's needs, due to national or regional shutdowns, fuel availability, road conditions, among other reasons, the Company may not be able to transport its inputs/supplies and products throughout the production/ distribution chain or in part of it, and therefore its business, results of operations and financial condition could be adversely affected.

 

Additionally, we have licenses to bottle and/or distribute brands held by other companies over which we do not have control. 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.

 

f) In regard to the Company’s clients

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.

 

g) In regard to the sector in which the Company operates

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, which prices changes substantially in 2019. An increase in commodities prices directly affects our consolidated operating costs. Although our current policy is to mitigate our exposure risks to commodity prices whenever financial instruments are available, we cannot assure that such hedging will be possible or available at reasonable costs at all times in the future.

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

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

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If we do not successfully comply with the anti-corruption laws and regulations designed to combat governmental corruption in countries in which we sell our products, we could become subject to fines, penalties or other regulatory sanctions, as well as to adverse press coverage, which could affect our reputation, our 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 (“BCCA”) and the U.S. Foreign Corrupt Practices Act (“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, as well as other countries in which the Company operates, 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.

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 what we view as a robust anti-corruption compliance program designed effectively to detect, prevent and remediate potential violations of applicable anti-corruption laws, including a strict requirement prohibiting our employees and agents from violating these laws. Nevertheless, there remains some risk that improper conduct could occur, thereby exposing us to potential liability and the costs associated with investigating and remediating such potential misconduct.

Our existing internal controls and compliance procedures may not be sufficient to prevent or detect all inappropriate conduct, fraud or violations of applicable law by our employees, agents, and other business partners. If we are not in compliance with anti-corruption and other similar laws, including the BCCA and FCPA, we may be subject to administrative, civil and criminal penalties. This could harm our brand and reputation and have a material adverse impact on our business, financial condition, results of operations and prospects. Adverse press coverage also may result from having our name or brands associated with any misconduct and, even if unwarranted or baseless, could damage our reputation, brands and sales. Therefore, if we become involved in any investigations or other proceedings under the FCPA, BCCA or other applicable anti-corruption laws, in Brazil or in other countries in which the Company operates, our business could be adversely affected.

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

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

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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 the Company can do to emerging trends.

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.

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 (i) alcohol-related problems, including drunk driving, (ii) underage drinking, as well as (iii) health consequences resulting from the excessive consumption of beer and soft drinks (for example, alcoholism and 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 consumption patterns.

Key brand names are used by us, our subsidiaries, associates and joint ventures, and licensed to third-party brewers. To the extent that we or one of our subsidiaries, associates, joint ventures or licensees are subject to negative publicity, and the negative publicity causes consumers and customers to change their purchasing patterns, it could have a material adverse effect on our business, results of operations, cash flows or financial condition. As we continue to expand our operations into emerging and growth markets, there is a greater risk that we may be subject to negative publicity, in particular regarding 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.

 

h) In regard to the regulations of the sector in which the Company operates

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, and they may adversely affect our results.

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.

Potential new similar actions that might be taken by the Brazilian government concerning the economy may have important effects on the market conditions, prices of Brazilian securities, Brazilian corporations and other entities, including the Company, its inputs, products, distribution, sales force and financial condition. 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;

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·                     unemployment levels and labor regulation;

·                     social instability;

·                     price instability;

·                     energy shortages;

·                     water rationing;

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

·                     interest rates and monetary policies;

·                     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;

·                     tax policy and changes in the tax law; and

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

 

Any of the situations above may have material adverse effects on the Company’s financial condition and its results.

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 those expected. Inflation, along with governmental measures to fight inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. The annual rates of inflation, as measured by the Índice Nacional de Preços ao Consumidor (National Consumer Price Index), were 11.3% in 2015, 6.6% in 2016, 2.1% in 2017, 3.8% in 2018 and 4.3% in 2019. Future governmental actions, including actions to adjust the value of the real, may trigger increases in inflation. We cannot assure you that inflation will not affect our business in the future. In addition, any efforts by the Brazilian government to preserve economic stability, as well 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 future operations and financial results.

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.

Due to such instability, among other factors, Brazil has been facing difficulties, including the increasing unemployment rates, decreasing consumer and business confidence, falling industrial output, a deficit in the Brazilian primary accounts, shrinking in gross domestic product up to 2017 and limited growth since then, increasing uncertainties with regards to Congressional decisions and the significant devaluation and volatility of the real.

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

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

Increases in high 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 revenues. Lower net revenues 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 local governments will not increase current tax levels, and that this will not impact our business.

In Brazil, for example, in January 2015 the Brazilian federal government enacted Law No. 13097, 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 and the 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).

Moreover, in May 2018, the Brazilian federal government enacted Decree No. 9,394/2018 increasing IPI taxes applicable to transactions with concentrate units and, in so doing, effectively reducing the value of the IPI presumed credits that we recorded on acquisitions of soft drinks concentrates from companies located in the Manaus Free Trade Zone from 20% to 4%. Such increase of IPI rate has been occurring in phases and must be concluded until December 1, 2020.

On the state level, in 2015, the Federal District and the States of São Paulo, Rio de Janeiro, Minas Gerais, 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  increased the respective ICMS Value-Added Tax rate once again, which came into force in 2017. In 2017, the Goiás and Amazonas States increased their ICMS rates applicable to soft drinks and beer, respectively. In 2018, the States of Maranhão and Pernambuco increased their ICMS tax rates applicable to non-alcoholic beverages and Bahia and Maranhão increased their ICMS tax rate applicable to beer, which became effective at the beginning of 2019. In 2019, State of Maranhão reduced the ICMS tax rate on alcoholic beverages, which is in force since the beginning of 2020. No assurance can be given that the Brazilian government, at both state and/or federal levels, will not consider further tax increases on beverages in the future.

We are subject to regulation on alcoholic and CSD beverages in the countries in which we operate.

Our business is regulated by federal, state, local laws and regulations governing many aspects of our operations, including brewing, marketing and advertising, consumer promotions and rebates, workplace safety, transportation, distributor relationships, retail execution, sales and data privacy, among others. We may be subject to claims that we have not complied with existing laws and regulations, which could result in fines and penalties. Additionally, the Company may be subject to laws and regulation aimed at reducing the offer of beer and soft drinks in some markets in which the Company conducts activities, in order to address the alcohol abuse, sales of alcoholic beverages to minors, issues related to the health and other social concerns. For example, certain Brazilian states and small municipalities in which we operate have enacted legislation limiting the time for operating some points of sale, prohibiting the sale of soft drinks in schools, and imposing restrictions to the advertisement of alcoholic beverages. Moreover, 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. In addition, 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.

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

In addition, the partnership between Labatt Brewing Company Ltd., our Canadian subsidiary, and Tilray to research non-alcohol beverages containing tetrahydrocannabinol (THD) and cannabidiol (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. While this partnership is currently limited to research in Canada, 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.

We are subject to Brazilian and other antitrust regulations.

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

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

 

i) In regard to the foreign countries where the Company operates

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

Economic and market conditions in Brazil and other emerging market countries, especially those in Latin America, influence the market for securities issued by Brazilian companies as well as investors’ perception of economic conditions in Brazil. In addition, global financial crisis originating in developed economies, including the subprime debt crisis in the United States and the sovereign debt crisis in Europe, have had an impact on many economies and capital markets around the world, including Brazil, which may adversely affect investors’ interest in the securities of Brazilian issuers such as Ambev.

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. In addition, changes in monetary policy and/or implementation of protectionist policies in the United States and in other countries relevant to the international economy may directly or indirectly impact the economy in the countries in which we operate, generating many risks, especially in relation to exchange rates, interest rates, increase in the prices of commodities, and therefore, impact the Company's results.

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

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

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

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

The Company’s operations in Latin America South are subject to substantial risks relating to its businesses and operations conducted in Argentina and other South American countries.

The Company owns 100% of the total share capital of Latin America South Investment, S.L. (“LASI”), whose net revenues corresponded to 19.1% of our consolidated results of operations in 2019. Considering that LASI is a holding company with operating subsidiaries in Argentina and other South American countries, the financial condition and results of its 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.

In recent years, the results in reais of our Argentinean operations have been significantly impacted by political instability, fluctuations in the economy (such as the devaluation of the Argentine peso in December 2015, 2018 and 2019), governmental actions concerning the economy (such as the selective default on its restructured debt in July 2014, and the default of interest payment of its debt in 2020), inflation and deteriorating macroeconomic conditions in the country. Continued deterioration of the Argentine economy, or new foreign exchange, export repatriation or expropriation regimes could adversely affect our liquidity and ability to access funds from Argentina, notwithstanding our financial condition and operating results.

For example, in the early 2000s, Argentina experienced political and economic instability. A widespread recession occurred in 2002, including a 10.9% decrease in real GDP, high unemployment and high inflation. In the past, the Argentine economic and social situation has rapidly deteriorated, and may quickly deteriorate in the future; we cannot assure you that the Argentine economy will not rapidly deteriorate as in the past. Additionally, in 2018 and 2019 the Argentine peso underwent a significant devaluation, losing 51% and 36.9%, of its value relative to the real, impacting the net assets, results and cash flows of our Argentinean operations. The 2018 and 2019 devaluations of the Argentine peso relative to the real, and further devaluations of the Argentine peso in the future, if any, may decrease our net assets in Argentina, with a balancing entry in our equity.

Following the categorization of Argentina in our results for the third quarter of 2019 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.

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

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

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

The Company operates a joint venture in Cuba, in which the Government of Cuba is a joint venture partner. Cuba is still subject to broad and comprehensive economic and trade sanctions of the United States. Our operations in Cuba may adversely affect our reputation and the liquidity and price of our securities.

In January 2014, one of our wholly-owned subsidiaries acquired from Anheuser-Busch InBev S.A./NV, or ABI, the indirect equity held by ABI in Cerbuco Brewing Inc., 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 2018, Bucanero sold 1.5 million hectoliters of beer, representing about 0.9% of our total volume of 163.2 million hectoliters for the year. Although Bucanero production is primarily sold in Cuba, a small portion of its production is exported to and sold by certain distributors in other countries outside Cuba (but not the United States).

Based on U.S. foreign policy, the U.S. Treasury Department’s Office of Foreign Assets Control and the U.S. Commerce Department together administer and enforce broad and comprehensive economic and trade sanctions against Cuba. These sanctions were strengthened by the Trump administration through a National Security Presidential Memorandum, issued on June 2015, 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. Although the United States government has, on June 2017, ceased to identify Cuba as a state sponsor of terrorism, this position may be revised by action of the U.S. government’s executive branch. If U.S. government policy towards Cuba were to be reversed, with that country being once again designated as a state sponsor of terrorism, Cuba could return to being a target of possible restrictions for U.S. investment. If U.S. investors decide to liquidate or otherwise divest their investments in companies that have operations of any magnitude in Cuba, the market in and value of our securities could be adversely impacted.

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In addition, 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. Separately, Title IV of the Helms-Burton Act authorizes the U.S. Department of State to prohibit entry into the United States of non-U.S. persons who traffic in confiscated property, and corporate officers and principals of such persons, and their families. Although Title III of the Helms-Burton Act has been suspended by discretionary presidential action since its inception in 1996 (and no action has been taken under this provision since its inception), on May 2, 2019, the Trump Administration activated Title III of the Helms-Burton Act, thereby allowing nationals of the United States that hold claims under the Helms-Burton Act to file suit in U.S. federal court against all persons trafficking in property confiscated by the Cuban government. In relation to Title IV of the Helms-Burton Act, although it has been in effect since the law was passed in 1996 (and since then no actions have been taken), the Trump Administration has announced its intention to implement Title IV of the Helms-Burton Act by denying visas to persons who traffic in confiscated property. 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 this company. We are uncertain how the activation of Title III of the Helms-Burton Act will impact our U.S. litigation exposure with respect to this notice of claim.

 

j. In regard to environmental issues:

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 the Company 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.

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. The Company implemented an internal strategy to considerably reduce the water consumption in the operational 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.

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Natural and other disasters could disrupt our operations.

 

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

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

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, which could adversely affect the Company’s financial condition and results.

 

 

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4.2- Description of the main market risks

 

The Company’s operating results are affected by fluctuation in commodity prices.

 

This risk involves the possibility of fluctuations in the prices of the products sold by the Company or by its subsidiaries, or in the price of raw materials and other inputs used in the production process. Since it operates in a commodities market, sales revenues and costs of sales of the Company and its subsidiaries can be affected by changes in the international prices of the products they sell and the raw materials they purchase.

 

The Company’s results of operations are affected by fluctuations in currency rates, by the depreciation of the Brazilian real against other currencies, including the US dollar, which may adversely affect the Company’s financial performance.

 

Most of the Company’s sales are in Brazilian Reais, while a significant portion of its debt is denominated in other foreign currencies, including the US dollar. Furthermore, a significant portion of the Company’s production costs in 2019, especially those involving packaging, such as cans and PET bottles, as well as sugar, hops and malt, are denominated in or linked to the US dollar, which appreciated significantly against the Brazilian Real in the last years.

 

In this case, any depreciation of the Brazilian Real against those foreign currencies may increase financial expenses and operating costs, affecting the Company’s ability to meet its foreign currency obligations. Although the Company’s current policy is to hedge practically all its US dollar-denominated debts and production costs, the Company cannot guarantee that it will always be possible to hedge in the future.

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

We also incur currency transaction risks whenever one of our operating companies enters into transactions using currencies other than their respective functional currencies, including purchase or sale transactions and the issuance or incurrence of debt. Although we have hedging policies in place to manage commodity price and foreign currency risks to mitigate our exposure to currencies other than our operating companies’ functional currencies, there can be no assurance that such policies will be able to properly and successfully cover such risks, particularly in 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, since 2011, the U.S. dollar appreciated by 12.5%, 8.9%, 14.6%, 13.4% and 47.0% against to the Real in 2011, 2012, 2013, 2014 and 2015, respectively, closing at R$3.905 per USD1.00 as of December 31, 2015. However, the U.S. dollar depreciated by 16.5% against the Real in 2016, closing at R$3.259 per USD1.00 as of December 31, 2016. In 2017, the U.S. dollar again valuated against Real, closing at R$3.3080 per USD1.00. In 2018, the U.S. dollar valuated, closing at R$3.8748 per USD1.00. In 2019, the U.S. dollar appreciated, closing at R$4.0307 per USD1.00. On May 31, 2020, the exchange rate was R$5.4263 per USD1.00.

 

 

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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, further 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

Sensitivity analysis

 

The Company mitigates its non-derivative financial assets and liability risks substantially by entering into derivative financial instruments. Within this context, the Company has identified the main risk factors that could lead to losses in its transactions with derivative financial instruments and, therefore, it has developed a sensitivity analysis based on three scenarios that may affect its future results and/or cash flows, as described below:

 

1 – Probable Scenario: management’s expectation of deterioration in the principal risk factor of each transaction. To estimate the possible effect on the results from derivative transactions, the Company calculates Value at Risk –parametric VaR. VaR is a statistical measurement arrived at by estimating standard deviations and correlations between the returns from the different risk factors. The outcome of this model is the expected stop-loss for an asset during a given time frame and reliability interval. According to this methodology, we have used as calculation parameters the potential exposure of each financial instrument, a reliability interval of 95% and a horizon of 21 days commencing December 31, 2019, which are shown in the module.

 

2 – Adverse Scenario: a 25% deterioration in the principal risk factor of each transaction, in relation to the level ascertained as of December 31, 2019.

 

3 - Remote Scenario: a 50% deterioration in the principal risk factor of each transaction, in relation to the level ascertained as of December 31, 2019.

 

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4.3 – Non-confidential and material judicial, administrative or arbitration proceedings

 

The Company and its controlled subsidiaries are parties to judicial and administrative proceedings, of a labor, tax and civil nature, as described below, arising from the normal course of its operations, with probable, possible and remote chance of loss. The provisions of the Company and its controlled subsidiaries are registered in accordance with the applicable accounting rules, based on the individual analysis of each proceeding by its internal and external attorneys, with provisions for proceedings assessed by its legal advisors being set up for proceedings with a probable chance of loss.

 

For purposes of this item 4.3, the Company considers in its materiality analysis the capacity that the information would have to influence investment decisions, based on quantitative criteria combined with qualitative criteria. The quantitative criterion covers proceedings that may have a significant impact on the Company’s equity or business. The qualitative criterion considers available evidence and precedents based on the analysis of case law, legislation and, mainly, the facts that encompass the specific claim, of proceedings that deal with sensitive matters, especially those that represent potential risks to the image of the Company and its subsidiaries.

 

Labor claims

 

As of December 31, 2019, the Company and its controlled subsidiaries were parties to approximately 18,000 labor claims filed by former employees and outsourced employees. The claims primarily involve matters concerning overtime, dismissals, severance payments, health hazard and risk premiums, supplementary retirement benefits, social security contributions, charges, among other issues, all of them of legal or administrative nature.

 

In relation to social security matters, the Company is party to claims relating to social contributions on payroll. The Company’s management estimates the possible losses relating to such claims to be approximately R$319.4 million, as of December 31, 2019. The Company registered provisions of approximately R$33 million for proceedings in which we consider the chances of loss as probable. The amount relating to social security contingencies is considered within the total amount of tax contingencies of the Company.

 

There are no labor claims where the Company and its controlled subsidiaries appear as defendant or plaintiff which are individually material to their business.

 

Tax claims

 

As of December 31, 2019, the Company and its controlled subsidiaries were parties to approximately  5,000 judicial and administrative tax proceedings. The chances of loss in these proceedings are classified as remote, possible or probable.

 

The proceedings mainly involve matters relating to Corporate Income Tax – IRPJ, Social Contribution on Net Profit – CSLL, State Goods and Services Tax  – ICMS, Tax on Manufactured Products – IPI, Social Integration Programs – PIS, Social Security Financing Contribution – COFINS and social contributions on payroll. The ongoing tax proceedings also include claims filed by the Company against the tax authority alleging illegality and/or unconstitutionality of certain taxes. Assets resulting from such proceedings that may, in the future, arise in favor of the Company as a result of final favorable rulings will only be recognized by the Company when it is certain that it will receive the amounts previously paid and deposited.

 

As of December 31, 2019, Company’s management estimated the losses in proceedings considered to have a probable chance of loss to be approximately R$251.6 for claims involving Income Tax matters and R$288.2 million for other tax claims, for which provisions of the same amount were registered.

 

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Below are the tax proceedings individually material for the business of the Company and its controlled subsidiaries:

 

 

 

 

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39

 

 

 

 

40

 

 

 

 

 

41

 

 

 

 

 

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Civil claims

 

As of December 31, 2019, the Company and its subsidiaries appeared as parties in approximately 9,000 civil, criminal and environmental proceedings. The proceedings primarily involve matters concerning Company’s products and relations with its distributors and resellers, all of them of legal or administrative nature.

 

The management of the Company estimated, on December 31, 2019, losses in proceedings with a chance of loss considered as probable in approximately R$64.0 million, for which provisions of the same amount were registered.

 

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Below is the individual relevant civil proceeding for the Company’s business and that of its subsidiaries:

 

 

Other

 

Other than the proceedings described above, there are no other types of lawsuits in which the Company and its controlled subsidiaries appear as plaintiffs or defendants that are individually relevant to their business.

 

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4.3.1. Indicate the total amount provisioned, if any, for the proceedings described in section 4.3.

 

Not applicable, given that there are no claims mentioned in item 4.3 above where the Company and its controlled subsidiaries appear as defendant or plaintiff that are individually material to their business and with a probable chance of loss.

 

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4.4 – Non-confidential Judicial, Administrative or Arbitration Proceedings Whose Opposing Parties are Managers, Former Managers, Majority Shareholders, Former Majority Shareholders or Investors

 

As of December 31, 2019, the Company and its controlled subsidiaries appeared as parties in 7 judicial, administrative or arbitration proceedings, whose opposing parties are managers or former managers, controlling shareholders or former controlling shareholders or investors, as follows:

 

 

 

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47

 

 

48

 

 

49

 

 

50

 

 

 

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4.4.1. Indicate the total amount provisioned, as the case may be, for the proceedings described in section 4.4.

 

As of December 31, 2019, the Company registered provisions of R$ 379.6 million with respect to the proceedings described in item 4.4 above.

 

 

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4.5 – Relevant confidential proceedings

 

As of the date of this Reference Form, there are no confidential proceedings considered relevant in which the Company or its controlled subsidiaries are a party to.

 

 

 

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4.6- Repetitive or Related Non-Confidential Judicial, Administrative or Arbitration Proceedings Collectively Material

 

Labor proceedings

 

There are no repetitive or related non-confidential judicial, administrative or arbitration proceedings that are collectively material in which the Company and its controlled subsidiaries appear as plaintiffs or defendants that are relevant to their business.

 

Tax proceedings

 

Without prejudice to individual relevant proceedings presented in the tables of item 4.3 above, below are the description of the judicial and administrative proceedings, based on similar facts and legal matters, non-confidential and collectively material, to which the Company and its controlled subsidiaries are parties to. As indicated below, some amounts in this item include amounts that have already been reported in item 4.3, under the scope of individual relevant proceedings.

 

 

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55

 

 

 

 

56

 

 

 

 

 

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Civil proceedings

 

Notwithstanding the proceedings individually material indicated in items 4.3 and 4.4 of this Reference Form, there are no repetitive or related non-confidential judicial, administrative or arbitration proceedings, whether civil or criminal, that are collectively material, in which the Company and its controlled subsidiaries are plaintiffs or defendants that are considered relevant to their business.

 

Other proceedings

 

There are no repetitive or related non-confidential judicial, administrative or arbitration proceedings of other nature that are collectively material in which the Company and its controlled subsidiaries are plaintiffs or defendants that are considered relevant to their business.

 

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4.6.1. Indicate the total amount provisioned, if any, for the proceedings described in section 4.6.

 

Labor claims

 

Not applicable, as there is no judicial, administrative or arbitration labor proceedings involving the Company or its controlled subsidiaries that fall within the requirements of item 4.6 above.

 

Tax proceedings

 

As of December 31, 2019, the Company had a registered provision of R$65.5 million for the tax proceedings described in section 4.6 above.

 

Civil proceedings

 

Not applicable, as there is no judicial, administrative or arbitration civil proceedings involving the Company or its controlled subsidiaries that fall within the requirements of item 4.6 above.

 

Other proceedings

 

Not applicable, as there is no judicial, administrative or arbitration proceedings of other nature involving the Company or its controlled subsidiaries that fall within the requirements of item 4.6 above.

 

 

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4.7 – Other Material Contingencies

 

Tax Recovery Program

 

During the third quarter of 2017, the Company adhered to the Federal Tax Amnesty Program set forth by Provisional Measure No. 783, of May 31, 2017, postponed by Provisional Measure No. 798 and converted into Law No. 13,496, of October 24, 2017 (“PERT 2017”), undertaking to pay some tax assessments that were under dispute, including debts of its subsidiaries, totaling the amount of approximately R$3.5 billion, which already considered the discounts set forth by the said program, having paid the approximate amount of R$968 million in 2017, and undertaking to pay the remaining amount in 145 monthly installments, plus interest, to be paid starting in January 2018. As of December 31, 2019, the Company had already paid installments that summed up to approximately R$ 427 million. Additionally, approximately R$ 74 million had been paid between January 1^st, 2020 and April 30, 2020.

 

Moreover, in 2013 (through Law No. 12,865/2013) and in 2014 (through Law No. 12,996/2014), the term set forth in Law No. 11,941/2009 was reopened, which allowed taxpayers to pay or pay in installments, upon concession of certain discounts, tax debts with suspended enforceability or not, registered in active debt or not, individually considered, even if with a tax foreclosure phase already filed, or that had been subject to a previous installment program, not fully paid, even if canceled due to default (“Installment Programs”). In view of such grants, the Company formalized its options in both Installment Programs and, on December 31, 2013, the tax liabilities that were included by the Company in the 2013 program totaled R$ 178.4 million.

 

On November 28, 2014, the Company prepaid all debts relating to both Installment Programs, in the amount of R$ 201 million, having a portion of the payment been made in cash and the remaining amount through the use of the income tax and CSLL losses from subsidiaries as payment. Up to the date of this Reference Form, the Company remains awaiting the ratification of such early payment and the validation of the income tax and CSLL losses that are being discussed at the administrative level.

 

Class Action against Brewers Retail, Inc.

 

On December 12, 2014, a class action was filed with the Court of Justice of the Province of Ontario, Canada, against the Liquor Control Board of Ontario (“LCBO”), Brewers Retail Inc. (“TBS”) and the shareholders of TBS (Molson Coors Canada, Sleeman Breweries Ltd., Labatt Breweries of Canada LP and Labatt Brewing Company Limited). The lawsuit proposed pursuant to the Ontario Class Proceedings Act sought to obtain the declaration that LCBO and TBS had entered into agreements on allocation of sales, territory or markets for beers sold in Ontario since June, as well as a declaration that the shareholders of TBS had entered into agreements to fix prices. In March 2019, the Supreme Court of Ontario rendered the prior judgment of the case and denied the requests of the class action. In April 2019, the Ontario Court of Appeals denied the appeal presented to such decision. The deadline of plaintiffs to request permission to appeal to the Supreme Court of Canada expired and, therefore, in July 2019 the favorable decision by the Supreme Court of Ontario was confirmed as final. The amount involved in this proceeding was approximately R$ 4.4 billion at the time of closure (R$ 3.6 billion as of December 31, 2018).

 

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4.8 – Rules of the country of origin and the country where the securities are held in custody

 

Not applicable, since the Company’s principal place of business is located in Brazil.

 

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5.1. With regard to the risks mentioned in section 4.1, inform:

 

a) whether the issuer has a formalized risk management policy and, if so, inform the body that approved it and the date of the approval and, if not, the reasons why the issuer has not adopted such a policy

 

Policy on Risk Management

 

Aiming at providing guidelines for the management of the risks to which it is subject, the Company follows a Policy on Risk Management approved by the Board of Directors on February 2^nd, 2005 and updated on September 19, 2018 and May 15, 2019.

 

The Policy on Risk Management defines the financial and non-financial risks of which the Company seeks protection, establishing guidelines for definition of acceptable limits for the exposure of the Company to each one of them. The policy also determines the Company’s risk management system, indicating the adopted protective instruments and the organizational structure dedicated to risk assessment and management, as well as the performance of appropriate internal controls.

 

The Policy on Risk Management may be found on the following electronic address: ri.ambev.com.br, in field “Corporate Governance", “Policies, Codes and Internal Regulations”, “Policies and Codes”, “Policy on Risk Management”.

 

In addition to the Policy on Risk Management, the Company adopts other forms of managing the risks indicated in section 4.1 of this Reference Form, among which we highlight the main ones below.

 

Code of Business Conduct

 

The Company’s Code of Business Conduct establishes the guidelines for the behavior that all directors, officers and employees (“Employees”) of the Company and its subsidiaries must abide by in Brazil or abroad, as well as lays down the principles that the Company expects that the individuals and entities that act on our behalf uphold. Worthy of note are:

 

(i)                   incorporation of the principles of the Company disclosed to the Employees and compliance with all applicable laws, regulations and policies, including the Code of Business Conduct, and with the high standards business ethics;

 

(ii)                 relations with customers, suppliers, competitors, employees and government bodies and representatives must be based on compliance with all applicable laws and regulations;

 

(iii)                business practices that do not infringe human rights and are aligned with several international responsible business conduct standards;

 

(iv)               respect to diversity, authenticity and the individual, being all forms of discrimination forbidden, whether by race, religion, gender, sexual orientation, age, political opinion, nationality, social status, origin and others;

 

(v)                 promotion of smart consumption;

 

(vi)               performance respecting the applicable antitrust legislation and requirement of approval of commercial practices and policies by the Company’s Compliance Area;

 

(vii)              obligation to report any conflicts of interest with the Company;

 

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(viii)            no tolerance towards any and all acts of corruption, being compliance with all local and international laws that forbid corruption in all the locations where the Company operates mandatory, as well as compliance with the Company’s rules, policies and internal procedures. The Company has in place an Anti-Corruption Policy that establishes the forbidden conducts according to the (local and foreign) anti-corruption legislation applicable to the Company, as well as regulates subjects such as (i) gifts, donations, entertainment and hospitality for public agencies and servants, (ii) political contributions, (iii) contracting with public agencies, (iv) compliance due diligence procedures for service providers and suppliers (intermediaries), and (v) reporting channels, among others;

 

(ix)               hiring of and payment to service providers that may have occasional contact with government employees, on behalf of the Company, must abide by the rules defined by the Company’s Compliance Area;

 

(x)                 prohibition on accepting presents, corporate gifts, favors, loans, services or special treatment of any kind from individuals or organizations that do or attempt to do business with the Company, regardless of value;

 

(xi)               upholding the proper professional standards in documentation involving accounting and financial matters, so that the Company’s financial statements, its books and records precisely, clearly and completely reflect, in proper details, all businesses and operations of the Company;

 

(xii)              preservation of the confidentiality of the Company’s information and prohibition on disclosing or providing passwords to other people;

 

(xiii)            guidelines about social networks and instant messaging applications, in order to preserve the Company’s image;

 

(xiv)            use of the Company’s entire assets solely for legitimate corporate purposes; and

 

(xv)             Guidelines about communication with the market and with the press.

 

The Company’s Board of Executive Officers, within the Ethics Committee, is responsible for managing the Code of Business Conduct, receiving advice from Company’s Compliance Department, which is in charge of (i) evaluating how the entire procedures contained in the Code of Business Conduct are applied, so as to ensure their efficacy and effectiveness, (ii) ensuring that all the Employees and third parties that do business with the Company are aware of the Code of Business Conduct, and (iii) ruling on and managing the cases of infringements of the Code of Business Conduct, taking the necessary measures. For more information, see item 5.4 of this Reference Form.

 

All the subjects addressed by the Code of Business Conduct, including anti-corruption practices, are disseminated to the entire Company through internal communications and videos. Moreover, all leadership employees (specialists, managers and officers) and members of the Board of Directors participate in online and/or face-to-face trainings on the Code of Business Conduct and anti-corruption practices annually.

 

The entire content of the Code of Business Conduct is available on the Company’s investor relations webpage at ri.ambev.com.br, in the field “Corporate Governance”, “Policies, Codes and Internal Regulations”, “Policies and Codes”, “Code of Business Conduct”.

 

Manual on Disclosure and Use of Information and Policy on Trading Securities

 

The Manual on Disclosure and Use of Information and Policy on Trading Securities (“Manual”) sets the rules regarding:

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(i)                   the use, notification and disclosure of material information involving the Company’s business and activities, arising from decisions by its management bodies or controlling shareholders, among others, which might reflect on how the negotiable securities of Ambev are traded on the market;

 

(ii)                 the policy on trading the Company’s securities pending disclosure of a material act or fact, including during certain blackout periods, so as to avoid improper use of inside information; and

 

(iii)                the adoption of mechanisms that ensure control and transparency of trades involving the Company’s securities, among others.

 

For further details about the Manual see sections 20 and 21 of this Reference Form. The Manual is available at the following electronic address: ri.ambev.com.br, in the field “Corporate Governance”, “Policies, Codes and Internal Regulations”, “Policies and Codes”, “Manual on Disclosure and Use of Information and Policies for Trading with Securities issued by Ambev”.

 

Insurance

 

The Company has in place a risk management program with the purpose of delimiting the risks, going to the market to take out coverage compatible with its size and operations. Coverage was taken out for amounts considered by the Company to be sufficient to meet any claims arising, bearing in mind the nature of its business, the risks involved in its operations and the advice from its insurance consultants.

 

Provisions

 

The Company constitutes provisions in certain situations, as explained in its financial statements. Generally speaking, provisions are recognized when: (i) the Company has a current (legal or not formalized) obligation arising from past events; (ii) future disbursement is likely to be required to liquidate a current obligation; and (iii) the amount can be estimated with reasonable certainty. The provisions, except for the provisions of disputes and litigations, are measured by discounting the expected future cash flows, at a rate before taxes, which reflects the current market evaluations on the value of money along time, and, when appropriate, the specific risks of the obligation. Provisions for disputes and litigation are recognized when it is likely that the Company will be required to make future payments arising from past events. These payments include, but are not limited to various claims, proceedings and lawsuits filed both by third parties and by the Company, involving competition laws, breaches of distribution and licensing agreements, environmental issues, labor claims, assessments by the tax authorities and other litigation issues.

 

Crisis Committees (COVID-19)

 

Considering the uncertainties arising from the COVID-19 pandemic, the Company has been taking measures to mitigate the possible adverse effects that may occur due to the current global situation. Accordingly, the Company created crisis committees in the countries it operates, with focus on facing the negative impacts of the global crisis and on discussing the main pillars of Company’s business, which aims to:

 

(i)            follow and monitor the daily evolution of the pandemic;

(ii)           prioritize actions that preserve the health of employees, partners, suppliers and customers;

(iii)          address necessary responses to the crisis;

(iv)          ensure that the Company continues to fulfill its social role; and

(v)           establish collaborative initiatives in order to offer relevant contributions to the community in general.

 

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b) the objectives and strategies of the risk management policy, as the case may be, including:

 

(i)                  risks against which hedging is sought;

 

The Policy on Risk Management and the other risk management measures adopted, as described in the previous section, seek to protect against corporate risks (i) strategic risks (e.g. risks inherent to the business environment in which the Company is engaged and which are related to its business plans, strategic decisions and to the markets in which it performs); (ii) operational risks (e.g. risks related to the possibility of losses due to operational inefficiencies arising out of failures in processes, internal controls, technological environment and people); (iii) financial risks (e.g. risks that may affect the financial operations of the Company); (iv) legal and regulatory risks (e.g. risks associated with the regulatory environment and with the legal system to which the Company is subject); and (v) image risks (e.g. risks of occurrence of events often associated with substantiation of other risks, which may cause damage to the reputation and affect the Company’s credibility). In this sense, such Policy and internal measures cover the most diverse risks identified in item 4.1 of this Reference Form that may have a negative impact on the objectives set by the Company's management, such as (a) damage to the Company's reputation; (b) risks of liability for products and other losses that may be suffered by the Company; (c) failures in information technology; (d) unfavorable decisions in judicial and administrative proceedings; (e) risks associated with transactions between related parties; (f) risks in relationship with suppliers and customers; and (g) compliance with antitrust and anti-corruption legislation.

 

(ii)                hedging instruments used for protection; and

 

The instruments used and the strategies adopted are described in the previous section.

 

(iii)              organizational risk management structure

 

The Board of Directors shall determine the general guidance of the Company’s businesses, approving the guidelines on which its performance is based, including those regarding the definition of the level of tolerance to different risks to which the Company is subject, observing its short- and long-term purposes.

 

The Board of Directors shall evaluate, on a periodical basis, the exposure of the Company to the main material risks, as well as the efficacy of its internal controls and risk management systems, making sure that the limits defined by it are obeyed. Regarding the risks of financial nature, the Board of Directors also counts on the advisement of the Operations, Finance and Compensation Committee both for defining the Company’s guidelines for tolerance to risks and for examination of its exposure to such risks, as well as for monitoring of the financial risk management structure.

 

The Board of Directors delegates to the Chief Executive Officer the necessary oversight of the corporate risk management. Thus, the Chief Executive Officer must make sure that he/she is aware of the most significant material risks and that the necessary actions shall be taken in order to ensure an effective risk management.

 

The corporate risk management mapping for all areas is upon the Chief Financial and Investor Relations Officer. On annual basis, the mapping of identified risks with the respective existing controls for mitigating such risks shall be presented to the Chief Executive Officer.

 

The internal control department is responsible for evaluating, on an annual basis, each existing material risk and the controls designed and implemented in the Company’s internal controls matrix, as well as for identifying the need for inclusion of compensatory controls, if any risk is not being addressed in the respective internal controls matrix. The conclusions are presented to the Chief Executive Officer, the Chief Financial and Investor Relations Officer, the Board of Directors and the Fiscal Council of the Company, so they can evaluate the efficiency of the internal controls of the Company.

 

c) suitability of the operating and internal controls structure for assessing the effectiveness of the policy adopted.

 

The Company believes that its Policy on Risk Management and other control measures adopted are appropriate for ensuring the effectiveness of its risk management practices.

 

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