6-K 1 ambevsaitr3q20_6k.htm AMBEVSAITR3Q20_6K
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of November, 2020

Commission File Number 1565025
 

 

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

AMBEV S.A.
(Translation of Registrant's name into English)
 

Rua Dr. Renato Paes de Barros, 1017 - 3rd Floor
04530-000 São Paulo, SP
Federative Republic of Brazil
(Address of principal executive office)
 

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____

 
 

Ambev S.A.

Unaudited interim consolidated

financial statements at
September 30, 2020
and report on review

 


 
 

 

 

 

 

Report on review of interim

consolidated financial statements

 

To the Board of Directors and Shareholders

Ambev S.A.

 

 

Introduction

 

We have reviewed the accompanying interim consolidated balance sheet of Ambev S.A. and its subsidiaries ("Company") as at September 30, 2020 and the related interim consolidated statements of income and comprehensive income for the three-month and nine-month periods then ended, and the interim consolidated statements of changes in equity and cash flows for the nine-month period then ended, and a summary of significant accounting policies and other explanatory notes.

 

Management is responsible for the preparation and fair presentation of these interim consolidated financial statements in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting, issued by the International Accounting Standards Board (IASB). Our responsibility is to express a conclusion on these interim consolidated financial statements based on our review.

 

Scope of review

 

We conducted our review in accordance with International Standards on Reviews of Interim Financial Information (ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity). A review of interim information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim consolidated financial statements is not prepared, in all material respects, in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB).

 

 

São Paulo, November 10, 2020   

 

 

 

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

 

 

 

Alessandro Marchesino de Oliveira

Contador CRC 1SP265450/O-8

 

 

 

PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil, 05001-903, Caixa Postal 60054, T: +55 (11) 3674 2000, www.pwc.com.br

 


 
 

 

AMBEV S.A.

 

Interim Consolidated Balance Sheet

All amounts in thousand of Brazilian Reais unless otherwise stated

 

Assets Note 09/30/2020 12/31/2019
       
Cash and cash equivalents 5 21,660,450 11,900,666
Investment securities 6 1,442,923 14,558
Derivative financial instruments 22 198,377 172,147
Trade receivable   4,156,923 4,495,525
Inventories 7 7,341,837 5,978,557
Income tax and social contributions recoverable   2,038,964 1,831,401
Other recoverable taxes   1,433,917 2,242,726
Other assets   825,405 985,557
Current assets   39,098,796 27,621,137
       
       
Investment securities 6 188,670 163,570
Derivative financial instruments 22 - 1,221
Income tax and social contributions recoverable   3,083,736 4,331,901
Other recoverable taxes   1,321,629 671,084
Deferred tax assets 8 6,312,208 2,950,109
Other assets   1,823,620 1,751,699
Employee benefits   77,313 56,228
Investments in joint ventures   340,201 303,423
Property, plant and equipment 9 25,435,683 22,576,299
Intangible   8,062,660 6,306,364
Goodwill 10 41,312,271 35,009,909
Non-current assets   87,957,991 74,121,807
       
Total assets   127,056,787 101,742,944

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

1 
 

AMBEV S.A.

 

Interim Consolidated Balance Sheet (continued)

All amounts in thousand of Brazilian Reais unless otherwise stated

 

Equity and liabilities Note 09/30/2020 12/31/2019
       
Trade payables 11 16,145,956 15,069,575
Derivative financial instruments 22 302,453 355,314
Interest-bearing loans and borrowings 12 4,318,163 653,149
Bank overdrafts 5 678,882 24
Wages and salaries   1,229,339 833,025
Dividends and interest on shareholders’ equity payable   1,315,963 956,560
Income tax and social contribution payable   1,317,411 1,394,178
Taxes and contributions payable   3,265,135 4,108,521
Other liabilities   1,583,652 1,530,654
Provisions 13 118,363 110,033
Current liabilities   30,275,317 25,011,033
       
Trade payables 11 709,840 309,567
Derivative financial instruments 22 868 56
Interest-bearing loans and borrowings 12 2,536,844 2,409,655
Deferred tax liabilities 8 3,184,147 2,371,098
Income tax and social contribution payable   2,128,076 2,219,551
Taxes and contributions payable   686,924 645,155
Put option granted on subsidiary and other liabilities   4,081,232 3,145,393
Provisions 13 468,771 370,972
Employee benefits   3,410,623 2,704,459
Non-current liabilities   17,207,325 14,175,906
       
Total liabilities   47,482,642 39,186,939
       
Equity 14    
Issued capital   57,899,073 57,866,759
Reserves   75,815,322 75,685,730
Carrying value adjustments   (61,314,038) (72,274,464)
Retained earnings / (losses)   5,605,921 -
Equity attributable to equity holders of Ambev   78,006,278 61,278,025
Non-controlling interests   1,567,867 1,277,980
Total Equity   79,574,145 62,556,005
       
Total equity and liabilities   127,056,787 101,742,944

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

2 
 

AMBEV S.A.

 

Interim Consolidated Income Statements

For the nine and three-month period ended September 30

All amounts in thousand of Brazilian Reais unless otherwise stated

 

    Nine-month period ended:   Three-month period ended:
  Note 2020 2019   2020 2019
             
Net sales 16 39,822,425 36,742,911   15,604,498 11,957,652
Cost of sales   (18,868,215) (15,298,734)   (7,423,149) (5,229,732)
Gross profit   20,954,210 21,444,177   8,181,349 6,727,920
             
Distribution expenses   (6,002,127) (4,994,743)   (2,307,695) (1,717,853)
Sales and marketing expenses   (4,453,687) (4,196,538)   (1,591,003) (1,360,307)
Administrative expenses   (2,051,435) (2,001,388)   (704,057) (632,466)
Other operating income/(expenses), net 17 404,196 559,747   168,020 137,727
Costs arising from business combinations 18 (17,535) -   (819) -
Restructuring 18 (93,653) (64,136)   (43,618) (13,116)
Effect of application of IAS 29 (hyperinflation) 18 (3,396) (2,744)   (2,935) (1,442)
COVID-19 impacts 18 (183,114) -   (111,635) -
Stella recall 18 (14,092) -   (789) -
Income from operations   8,539,367 10,744,375   3,586,818 3,140,463
             
Finance expenses 19 (4,327,237) (2,950,104)   (1,514,253) (1,173,003)
Finance income 19 851,859 1,404,801   369,477 867,205
Net finance result   (3,475,378) (1,545,303)   (1,144,776) (305,798)
             
Share of result of joint ventures   (33,856) (11,115)   (11,002) (8,248)
Income before income tax   5,030,133 9,187,957   2,431,040 2,826,417
             
Income tax expense 20 (188,597) (1,218,603)   (72,072) (222,032)
Net income   4,841,536 7,969,354   2,358,968 2,604,385
             
Attributable to:            
Equity holders of Ambev   4,593,384 7,680,260   2,274,801 2,497,677
Non-controlling interests   248,152 289,094   84,167 106,708
             
Basic earnings per share – common - R$   0.2920 0.4884   0.1446 0.1588
Diluted earnings per share – common - R$   0.2894 0.4843   0.1433 0.1576

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

3 
 

AMBEV S.A.

 

Interim Consolidated Statements of Comprehensive Income

For the nine and three-month period ended September 30

All amounts in thousand of Brazilian Reais unless otherwise stated

 

  Nine-month period ended:   Three-month period ended:
  2020 2019   2020 2019
           
Net income 4,841,536 7,969,354   2,358,968 2,604,385
           
Items that will not be reclassified to profit or loss:          
Recognition of actuarial gains/(losses) (3,682) 4,013   (84) 340
           
Items that may be subsequently reclassified to profit or loss:          
Exchange differences on translation of foreign operations (gains/(losses)          
Investment hedges on foreign operations (2,943) -   (3,075) -
Investment hedges - put options granted on subsidiaries (576,737) (58,555)   (74,859) (95,741)
Gains/losses on translation of other foreign operations 11,350,957 663,001   1,359,553 1,111,356
Gains/losses on translation of foreign operations 10,771,277 604,446   1,281,619 1,015,615
           
Cash flow hedge - gains/(losses)          
Recognized in equity (Hedge reserve) 1,776,868 802,486   561,039 515,519
Removed from equity (Hedge reserve) and included in profit or loss (1,200,526) (683,259)   (477,786) (58,868)
Total cash flow hedge 576,342 119,227   83,253 456,651
           
Other comprehensive (loss)/income 11,343,937 727,686   1,364,788 1,472,606
           
Total comprehensive income 16,185,473 8,697,040   3,723,756 4,076,991
           
Attributable to:          
   Equity holders of Ambev 15,598,099 8,371,303   3,644,619 3,902,001
   Non-controlling interests 587,374 325,737   79,137 174,990

 

 

The accompanying notes are an integral part of these interim consolidated financial statements. The consolidated statements of comprehensive income are presented net of income tax. The income tax effects of these items are disclosed in Note 8 - Deferred income tax and social contribution.

 

4 
 

AMBEV S.A.

 

Interim Consolidated Statements of Changes in Equity

For the nine-month period ended September 30

All amounts in thousand of Brazilian Reais unless otherwise stated

 

   Attributable to equity holders of Ambev      
   Capital  Capital reserves  Net income reserves  Retained earnings Carrying value adjustments  Total   Non-controlling interests Total equity
At December 31, 2018 57,710,202 54,781,194 15,341,367 - (71,584,756) 56,248,007   1,206,801 57,454,808
                   
 Net Income - - - 7,680,260 - 7,680,260   289,094 7,969,354
                   
Comprehensive income:                  
Gains/(losses) on translation of foreign operations - - - - 567,764 567,764   36,682 604,446
Cash flow hedges - - - - 119,253 119,253   (26) 119,227
Actuarial gains/(losses) - - - - 4,026 4,026   (13) 4,013
Total comprehensive income - - - 7,680,260 691,043 8,371,303   325,737 8,697,040
Capital increase (Note 14) 156,557 (143,742) - - - 12,815   - 12,815
Effect of application of IAS 29 (hyperinflation) - - - 985,076 - 985,076   (1,934) 983,142
Gains/(losses) of controlling interest´s share - - - - (352) (352)   109,201 108,849
Tax on deemed dividends - - - - (6,936) (6,936)   - (6,936)
Paid dividends - - - - - -   (370,112) (370,112)
Purchase of shares and results from treasury shares - (17,342) - - - (17,342)   - (17,342)
Share-based payments - 159,188 - - - 159,188   - 159,188
At September 30, 2019 57,866,759 54,779,298 15,341,367 8,665,336 (70,901,001) 65,751,759   1,269,693 67,021,452

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

5 
 

AMBEV S.A.

 

Interim Consolidated Statements of Changes in Equity

For the nine-month period ended September 30

All amounts in thousand of Brazilian Reais unless otherwise stated

 

   Attributable to equity holders of Ambev      
   Capital  Capital reserves  Net income reserves  Retained earnings Carrying value adjustments  Total   Non-controlling interests Total equity
At December 31, 2019 57,866,759 54,811,462 20,874,268 - (72,274,464) 61,278,025   1,277,980 62,556,005
                   
 Net Income - - - 4,593,384 - 4,593,384   248,152 4,841,536
                   
Comprehensive income:                  
Gains/(losses) on translation of foreign operations - - - - 10,432,373 10,432,373   338,904 10,771,277
Cash flow hedges - - - - 576,017 576,017   325 576,342
Actuarial gains/(losses) - - - - (3,675) (3,675)   (7) (3,682)
Total comprehensive income - - - 4,593,384 11,004,715 15,598,099   587,374 16,185,473
Capital increase (Note 14) 32,314 (32,314) - - - -   - -
Effect of application of IAS 29 (hyperinflation) - - - 1,009,699 - 1,009,699   (1,905) 1,007,794
Options granted on subsidiary - - - - (37,446) (37,446)   - (37,446)
Gains/(losses) of controlling interest´s share - - - - (950) (950)   196 (754)
Tax on deemed dividends - - - - (5,893) (5,893)   - (5,893)
Dividends paid - - - - - -   (295,778) (295,778)
Purchase of shares and results from treasury shares - 7,365 - - - 7,365   - 7,365
Share-based payments - 154,541 - - - 154,541   - 154,541
Prescribed/(complement) dividends - - - 2,838 - 2,838   - 2,838
At September 30, 2020 57,899,073 54,941,054 20,874,268 5,605,921 (61,314,038) 78,006,278   1,567,867 79,574,145

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

6 
 

AMBEV S.A.

 

Interim Consolidated Cash Flow Statements

For the nine-month period ended September 30

All amounts in thousand of Brazilian Reais unless otherwise stated

 

  Note 2020 2019
       
Net income   4,841,536 7,969,354
Depreciation, amortization and impairment   3,803,147 3,411,113
Impairment losses on receivables and inventories   241,276 101,408
Additions to/(reversals of) provisions and employee benefits   166,072 139,533
Net finance cost 19 3,475,378 1,545,303
Losses/(gain) on sale of property, plant and equipment and intangible assets   (14,913) (59,180)
Equity-settled share-based payment expense 21 167,876 159,588
Income tax expense 20 188,597 1,218,603
Share of result of joint ventures   33,856 11,115
Other non-cash items included in the profit   (1,206,774) (783,669)
Cash flow from operating activities before changes in working capital and use of provisions   11,696,051 13,713,168
       
(Increase)/decrease in trade and other receivables   2,138,317 253,111
(Increase)/decrease in inventories   (755,225) (653,589)
Increase/(decrease) in trade and other payables   (1,074,351) (2,082,369)
Cash generated from operations   12,004,792 11,230,321
       
Interest paid   (454,409) (336,051)
Interest received   261,493 394,305
Dividends received   5,550 2,245
Income tax paid   (1,355,202) (2,544,414)
Cash flow from operating activities   10,462,224 8,746,406
       
Proceeds from the sale of property, plant and equipment and intangible assets   41,979 67,186
Proceeds from the sale of subsidiaries operations   - 203,557
Acquisitions of property, plant and equipment and intangible assets   (3,298,254) (3,065,552)
Acquisitions of subsidiaries, net of cash acquired   (406,912) (79,264)
Acquisitions of other investments   (11,396) (45,484)
Investment in short term debt securities and net proceeds/(acquisitions) of debt securities   (1,474,941) (9,246)
Net proceeds/(acquisitions) of other assets   - 2,867
Cash flow from investing activities   (5,149,524) (2,925,936)
       
Capital increase   - 12,814
Capital increase/(decrease) of non-controlling interest   659 2,275
Proceeds from/(repurchases of) treasury shares   (6,141) (17,016)
Acquisition of non-controlling interest   - (471)
Proceeds from borrowings   3,573,775 900,050
Repayment of borrowings   (124,687) (1,136,386)
Cash net of finance expenses other than interest   (1,896,970) (1,105,900)
Payment of lease liabilities   (388,410) (363,814)
Dividends and Interest on shareholder´s equity paid   (181,258) (227,032)
Cash flow from financing activities   976,968 (1,935,480)
       
Net increase/(decrease) in cash and cash equivalents   6,289,668 3,884,990
Cash and cash equivalents less bank overdrafts at the beginning of the year   11,900,642 11,463,498
Effect of exchange rate fluctuations in cash and cash equivalents     2,791,258 (331,574)
Cash and cash equivalents less bank overdrafts at the end of the year   20,981,568 15,016,914

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

7 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

1. Corporate information
2. Statement of compliance
3. Summary of significant accounting policies
4. Use of estimates and judgments
5. Cash and cash equivalents
6. Investment securities
7. Inventories
8. Deferred income tax and social contribution
9. Property, plant and equipment
10. Goodwill
11. Trade payables
12. Interest-bearing loans and borrowings
13. Provisions
14. Changes in equity
15. Segment reporting
16. Net sales
17. Other operating income/(expenses)
18. Exceptional items
19. Finance expenses and income
20. Income tax and social contribution
21. Share-based payments
22. Financial instruments and risks
23. Collateral and contractual commitments with suppliers, advances from customers and other
24. Contingent liability
25. Non-cash items
26. Related parties
8 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

1.CORPORATE INFORMATION

 

(a)Description of business

 

Ambev S.A. (referred to as “the Company” or “Ambev”), is headquartered in São Paulo-SP, Brazil, and either directly or through participation in other companies, produces and sells beer, draft beer, soft drinks, other non-alcoholic beverages, malt and food in general, as well as advertising its own and third-party products, selling promotional and advertising materials and directly or indirectly exploiting bars, restaurants, snack bars and other establishments.

 

The Company’s shares and ADRs (American Depositary Receipts) are listed on the B3 S.A.- Brasil, Bolsa, Balcão as “ABEV3” and on the New York Stock Exchange (NYSE) as “ABEV”, respectively.

 

The Company’s direct controlling shareholders are Interbrew International B.V. (“IIBV”), AmBrew S.A. (“Ambrew”), both subsidiaries of Anheuser-Busch InBev N.V. (“AB InBev”) and Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficência (“Fundação Zerrenner”).

 

The interim financial statements were approved, by the Board of Directors on October 28, 2020.

 

(b)Major corporate events in 2020 and 2019:

 

COVID-19 impacts

 

The outbreak of the new coronavirus (SARS-CoV-2 or COVID-19) on a global scale has increased the volatility of the national and international markets and has been affecting the economies of the countries in which we operate and, consequently, the results of our operations. The response to the COVID-19 pandemic has developed rapidly across the globe in a fluid and uncertain manner: voluntary and, in some cases, mandatory quarantines, restrictions on travel, commercial and social activities, and ban on the distribution, sale and consumption of alcoholic beverages in some countries where we operate – are directly affecting our sales, distribution and final consumer demand for our products.

 

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

9 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

During the third quarter of 2020, the implementation of the Company's strategy, the release of restrictions in some regions and the impact of government aid for the community in some countries, led to a gradual increase in the volume in most of our operations, especially in Brazil. The most affected countries, Bolivia and Panama, also presented less restrictions on the circulation of people and the production of beverages. However, there is some uncertainty regarding the likelihood of further restrictions by each government on commercial and operating activities, as well as the economic effects on the financial market and exchange rates. Those impacts may result in material adverse impacts on our business, liquidity, financial condition, and outcome of operations, as well as volatility in the trading price of our shares. However, we are continuously managing our liquidity and capital resources with discipline. As such, management concludes there is no substantial doubt about the Company's ability to continue as a going concern.

 

As required by IAS 1 - Presentation of Financial Statements, the Company updated the analysis on the impact of COVID-19, as at September 30, 2020, which involved, mainly (i) a review of the assumptions of the annual impairment test, as described in Note 10 (ii) analysis of possible credit losses and inventory obsolescence, (iii) a review of the measurement assumptions of financial instruments, including hedges, (iv) analysis of the recoverability of deferred taxes, and (v) evaluation of the relevant estimates used in the preparation of the interim financial statements, among other analyses.

 

Any impacts derived from these analyses are reflected in the financial statements and Explanatory Notes. In addition, due to the protective actions taken for our staff and donations made by our community, the Company incurred exceptional expenses of R$183,114, at September 30, 2020, as reported in Note 18.

10 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Renegotiation of Tenedora’s shareholders agreement

The Company and E. León Jimenes, S.A. (“ELJ”), as shareholders of Tenedora CND, S.A. (“Tenedora”), a holding company with its headquarters in the Dominican Republic, the owner of almost the entire share capital of Cervecería Nacional Dominicana, S.A., on July 2, 2020, signed the second amendment to Tenedora’s Shareholders Agreement (“Shareholders Agreement”), extending their partnership in the country and postponing the terms of the put and call options defined in the original Agreement. ELJ is currently the owner of 15% of Tenedora’s shares, and its put option is now divided in two tranches: (i) Tranche A, corresponding to 12.11% of the shares, exercisable in 2022, 2023 and 2024; and (ii) Tranche B, corresponding to 2.89% of the shares, exercisable starting in 2026. The Company, on the other hand, has a call option over the Tranche A shares exercisable starting in 2021 and of the Tranche B shares to be exercised starting in 2029. The details of the assumptions used for this option are described in Note 22 (Item IV (d)).

 

Distribution agreement Cervecería Chile S.A.

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

Addendum to the agreement with PepsiCo Bolivia

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

New acquisitions

On January 22, 2020, the company acquired G&W Distilling Inc., a company that produces a portfolio of ready-to-drink alcoholic beverages, through our subsidiary Labatt Brewing Company Limited.

11 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

Red Bull distribution contract

On November 7, 2019, the company entered into a long-term distribution agreement with Red Bull do Brasil Ltda. (“Red Bull”), whereby we have been granted the exclusive right to sell and distribute certain brands of Red Bull’s portfolio in specific limited points of sale for the on-trade channel in Brazil. We also have agreements with Red Bull to distribute their portfolio in a few limited channels in Argentina and the Dominican Republic.

 

Information released by the press

 

In the third quarter of 2019, there were news reports based on alleged leaks of statements by Mr. Antonio Palocci in a legal procedure, to which the Company subsequently had access. As previously stated in a press release dated August 9, 2019, the Company, in accordance with its Code of Business Conduct and principles, has remained committed to reviewing and monitoring this matter. In this regard, the Company has not identified evidence supporting Mr. Palocci’s claims of illegal conduct by Ambev. 

 

The Company reiterates its commitment to conducting business in a legal and ethical manner, and it will continue to monitor this matter and will respond as appropriate to any requests from authorities.

 

Exchange contracts for future financial flows - equity swap

 

On May 15, 2019, the Board of Directors of Ambev approved the conclusion of new equity-swap contracts, without losses upon liquidation, within the regulatory term, of the equity-swap contracts still in force. The settlement of the newly approved equity-swap contracts will occur within a maximum period of 18 months from the date of approval, and such contracts may result in an exposure of up to 80 million common shares (of which all or part may be in the form of ADRs), up to a value limit value of R$1.5 billion.

 

On December 19, 2019, the Board of Directors of Ambev approved new equity-swap contracts, without prejudice to the liquidation, within the regulatory term, of the equity-swap contracts still in force. The settlement of the new approved equity-swap contracts will occur within a maximum period of 18 months from the date of approval, and such contracts may result in an exposure of up to 80 million common shares (of which all or part may be in the form of ADRs), up to a value limit of R$1.5 billion.

 

On May 13, 2020, the Board of Directors of Ambev approved new equity-swap contracts, without prejudice to the liquidation, within the regulatory term, of the equity-swap contracts still in force. The settlement of the new approved equity-swap contracts will occur within a maximum period of 18 months from the date of approval, and such contracts may result in an exposure of up to 65 million common shares (of which all or part may be in the form of ADRs), up to a value limit of R$1.0 billion, in addition to contracts already executed in the context of the approvals of May 15, 2019 and December 19, 2019, and which have not yet been settled as at the date of approval, may result in an exposure of up to 122,014,453 common shares (all or part of which may be in the form of ADRs).

12 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

Addendum to the agreement with PepsiCo

 

The long-term agreement with PepsiCo, under which the Company has the exclusive right to bottle, sell and distribute certain brands on PepsiCo’s portfolio of soft drinks in Brazil, including Pepsi Cola, Gatorade, H2OH! and Lipton Ice Tea, was amended in October 2018 to reflect certain changes in the trade agreement between the parties. The new terms of the agreement were approved by CADE in December 2018 and became effective as of January 1, 2019. The agreement will be in force until December 31, 2027.

 

2.STATEMENT OF COMPLIANCE

 

The consolidated interim financial statements have been prepared using the accounting basis of going concern and are being presented in accordance with IAS 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).

 

The information does not meet all disclosure requirements for the presentation of full annual financial statements and thus should be read in conjunction with the consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) for the year ended December 31, 2019. To avoid duplication of disclosures which are included in the annual financial statements, the following notes were not subject to full filling:

 

(a)   Summary of significant accounting policies (Note 3);

(b)  Trade receivables (Note 19);

(c)   Investments securities (Note 16);

(d)  Intangible (Note 15);

(e)   Goodwill (Note 14);

(f)   Interest-bearing loans and borrowings (Note 22);

(g)  Employee benefits (Note 23);

(h)  Changes in equity (Note 21);

(i)    Additional information on operating expenses by nature (Note 10);

13 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

(j)    Payroll and related benefits (Note 09);

(k)  Contingent liabilities (Note 29);

(l)    Group Companies (Note 32); and

(m) Insurance (Note 33)

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There were no significant changes in accounting policies and calculation methods used for the interim financial statements as of September 30, 2020, in relation to those presented in the financial statements for the year ended December 31, 2019.

 

(a)Basis of preparation and measurement

 

The interim financial statements are presented in thousands of Brazilian Real (“R$”), unless otherwise indicated, rounded to the nearest thousand indicated. Depending on the applicable IFRS requirement, the measurement basis used in preparing the interim financial statements is historical cost, net realizable value, fair value or recoverable amount.

(b)Recently issued IFRS

 

There were no new standards for the period ended September 30, 2020 for the preparation of these interim financial statements.

 

Other standards, interpretations and amendments to standards

 

There are no other standards, interpretations and amendments to standards that are not yet effective that would be expected to have material impact on the Company consolidated interim financial information.

 

4.USE OF ESTIMATES AND JUDGMENTS

 

The preparation of interim financial statements in conformity with IFRS requires Management to make judgments, estimates and assumptions that affect the application of accounting practices and the reported amounts of assets and liabilities, income and expenses. The estimates and judgments are based on past experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for decision making regarding the judgments about carrying amounts of assets and liabilities that are not readily evident from other sources. Actual results may differ from these estimates.

14 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

The estimates and assumptions are reviewed on a regular basis. Changes in accounting estimates may affect the period in which they are realized, or future periods.

Although each of its significant accounting policies reflects judgments, assessments or estimates, the Company believes that the following accounting practices reflect the most critical judgments, estimates and assumptions that are important to its business operations and the understanding of its results:

(i) predecessor accounting;

(ii) business combinations;

(iii) impairment;

(iv) provisions;

(v) share-based payments;

(vi) employee benefits;

(vii) current and deferred tax;

(viii) joint arrangements;

(ix) measurement of financial instruments, including derivatives;

(x) inflation accounting and financial reporting in hyperinflationary economies; and

(xi) leasing

 

The fair values of acquired identifiable intangibles of indefinite useful life are based on an assessment of future cash flows. Impairment analyses of goodwill and intangible assets with an indefinite life are performed at least annually and whenever a triggering event occurs, to determine whether the carrying value exceeds the recoverable amount.

 

The Company uses its judgment to select a variety of methods, including the net fair value of expenses approach and option valuation models, and makes assumptions about the fair value of financial instruments that are mainly based on market conditions existing at each balance sheet date.

 

Actuarial assumptions are established to anticipate future events and are used in calculating pension and other long-term employee benefit expense and liability. These factors include assumptions with respect to interest rates, rates of increase in health care costs, rates of future compensation increases, turnover rates, and life expectancy. Such estimates are reviewed annually by independent actuaries.

 

The Company is subject to income tax in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income tax. There are some transactions and calculations for which the ultimate tax determination is uncertain. Some subsidiaries within the Company are involved in tax audits usually in relation to prior years. These audits are ongoing in various jurisdictions at the balance sheet date and, by their nature, these can take considerable time until their conclusion.

15 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

5.CASH AND CASH EQUIVALENTS

 

  09/30/2020 12/31/2019
     
Cash 206,970 207,529
Current bank accounts 5,753,494 5,403,536
Short term bank deposits (i) 15,699,986 6,289,601
Cash and cash equivalents 21,660,450 11,900,666
     
Bank overdrafts (678,882) (24)
Cash and cash equivalents less bank overdraft 20,981,568 11,900,642

 

(i) The balance refers mostly to bank deposit certificates – (CDB), which have a high liquidity, are readily convertible into known amounts of cash and are subject to an insignificant risk of change in value.

 

Current account balances included guarantee deposits in the amount of R$485 million as at September 30, 2020 (R$348 million on December 31, 2019) held by the subsidiary of Cuba, which are not freely transferable to the parent company for reasons of exchange restrictions.

 

6.INVESTMENTS SECURITIES

 

  09/30/2020 12/31/2019
     
Financial asset at fair value through profit or loss-held for trading 1,442,923 14,558
Current investments securities 1,442,923 14,558
     
Investment on debt securities (i) 188,670 163,570
Non-current investments securities 188,670 163,570
     
Total 1,631,593 178,128

 

(i) The balance refers substantially to CDB linked to tax incentives and do not have an immediate convertibility in a known amount of cash.

 

16 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

7.INVENTORIES

 

  09/30/2020 12/31/2019
     
Finished goods 2,650,428 2,080,668
Work in progress 535,777 450,807
Raw material and consumables 3,154,630 2,637,360
Spare parts and other 792,853 602,548
Prepayments 360,627 328,347
Impairment losses (152,478) (121,173)
  7,341,837 5,978,557

 

Write-offs and losses on inventories recognized in the income statement amounted to R$151,537 in the period ended on September 30, 2020 (R$64,840 in the period ended on September 30, 2019).

 

8.DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION

 

Deferred taxes for income tax and social contribution taxes are calculated on temporary differences between the tax bases of these taxes and the accounting calculation of the Company, among which, tax losses. The rates of these taxes in Brazil, which are expected at the realization of deferred taxes, are 25% for income tax and 9% for social contribution. For the other regions in which the Company operates, the expected nominal rates are as follow:

 

Central America and the Caribbean from 15% to 27%
Latin America - South (i) from 10% to 30%
Canada 26.5%

 

(i) Amendments to Argentine tax legislation approved on December 29, 2017 affected the Company beginning in October 2018 and reduced the income tax rate in the first two years from 35% to 30%, and, after, to 25%. Further, new amendments to the Argentine tax legislation approved on December 23, 2019 postponed for one year the application of the income tax rate of rate of 25% and extended for a third year the application of the 30% rate.

 

Deferred tax assets are recognized to the extent that it is probable that future taxable profit is probable, which may be offset against temporary differences recorded currently, with a special emphasis on tax losses.

 

17 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

The amount of deferred income tax and social contribution by type of temporary difference is detailed as follows:

 

  09/30/2020   12/31/2019
   Assets  Liabilities  Net    Assets  Liabilities  Net
Investment securities 10,115 - 10,115   10,007 - 10,007
Intangible - (1,360,078) (1,360,078)   - (1,067,471) (1,067,471)
Employee benefits 962,526 (3,915) 958,611   749,988 (3,950) 746,038
Trade payables 4,262,868 (224,015) 4,038,853   2,330,349 (246,651) 2,083,698
Trade receivable 61,448 (4) 61,444   45,513 (3,267) 42,246
Derivatives 31,201 (558,568) (527,367)   38,873 (217,204) (178,331)
Interest-Bearing Loans and Borrowings - (430) (430)   - (23) (23)
Inventories 346,820 (54,008) 292,812   372,014 (67,066) 304,948
Property, plant and equipment 419,379 (1,614,346) (1,194,967)   290,383 (1,423,367) (1,132,984)
Withholding tax over undistributed profits and royalties - (1,536,877) (1,536,877)   - (1,115,123) (1,115,123)
Investments in joint ventures - (421,589) (421,589)   - (421,589) (421,589)
Interest on shareholders' equity 1,177,921 - 1,177,921   - - -
Loss carry forwards 1,161,263 - 1,161,263   877,308 (148,350) 728,958
Provisions 527,895 (3,762) 524,133   465,863 (2,284) 463,579
Complement of income tax of foreign subsidiaries due in Brazil - (147,089) (147,089)   - - -
Impact of the adoption of IFRS 16 (Leases) 57,993 (1,822) 56,171   44,587 (1,910) 42,677
Other items 85,154 (50,019) 35,135   88,979 (16,598) 72,381
Gross deferred tax assets / (liabilities) 9,104,583 (5,976,522) 3,128,061   5,313,864 (4,734,853) 579,011
Netting by taxable entity (2,792,375) 2,792,375 -   (2,363,755) 2,363,755 -
Net deferred tax assets / (liabilities) 6,312,208 (3,184,147) 3,128,061   2,950,109 (2,371,098) 579,011

 

The Company only offsets the balances of deferred income tax and social contribution assets against liabilities to net presentation when they are within the same entity, of the same nature and expected to be realized in the same period.

The critical estimates of Ambev’s Management, as well the main contingent liabilities related to uncertainties about the tax treatment of income, are disclosed in Notes 4 and 24, respectively.

18 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

On September 30, 2020 the deferred taxes assets and liabilities related to combined tax losses had an expected utilization or settlement by temporary differences as follows:

 

  09/30/2020
Deferred taxes not related to tax losses to be realized until 12 months to be realized after 12 months Total
       
Investment securities - 10,115 10,115
Intangible (1,509) (1,358,569) (1,360,078)
Employee benefits 92,281 866,330 958,611
Trade payables (193,334) 4,232,187 4,038,853
Trade receivable 50,270 11,174 61,444
Derivatives (83,433) (443,934) (527,367)
Interest-bearing loans and borrowings (215) (215) (430)
Inventories 288,979 3,833 292,812
Property, plant and equipment (108,877) (1,086,090) (1,194,967)
Withholding tax over undistributed profits and royalties (152,580) (1,384,297) (1,536,877)
Investments in joint ventures - (421,589) (421,589)
Interest on shareholders' equity 1,177,921 - 1,177,921
Provisions 284,008 240,125 524,133
Complement of income tax of foreign subsidiaries due in Brazil (147,089) - (147,089)
Impact of the adoption of IFRS 16 (Leases) (554) 56,725 56,171
Other items 30,519 4,616 35,135
Total 1,236,387 730,411 1,966,798

 

Most tax losses and negative social contribution bases on which deferred income tax and social contribution were calculated do not have a limitation period. Their use is based on the projection of the future existence of taxable profits, according to past performance and to the projections of the Company's business in the economies where it is located, in compliance with the applicable fiscal and accounting rules.

 

Deferred tax related to tax losses 09/30/2020
2020 411,768
2021 399,478
2022 72,299
2023 50,778
2024 191,222
2025 to 2027 (i) 35,718
Total 1,161,263

 

(i) There is no expectation of realization that exceeds the term of 10 years.

 

As of September 30, 2020, there were deferred tax assets in the amount of R$1,024,744 (R$707,102 in December 31, 2019) related to tax losses that were not recorded as the realization was not probable.

The major part of the tax losses does not have a carryforward limit for utilization and the tax losses carried forward in relation to the credit were equivalent to R$4,085,418 on September 30, 2020 (R$2,811,614 in December 31, 2019).

19 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

The net change in deferred income tax and social contribution is detailed as follows:

 

At December 31, 2019 579,011
Recognition of actuarial gains/(losses) (5,869)
Investment hedge in foreign operations (968)
Investment hedge - put option of a subsidiary interest 297,107
Cash flow hedge - gains/(losses) (207,246)
Gains/(losses) on translation of other foreign operations 1,566,085
Recognized in other comprehensive income 1,649,109
Recognized in the income statement 953,929
Changes directly in the balance sheet (53,988)
Recognized in other group of balance sheet (53,988)
At September 30, 2020 3,128,061

 

9.PROPERTY, PLANT AND EQUIPMENT
  09/30/2020 12/31/2019
Property, plant and equipment 23,342,372 20,547,670
Right of use assets 2,093,311 2,028,629
  25,435,683 22,576,299

 

20 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

 

  Land and buildings Plant and equipment Fixtures and fittings Under construction Total
Acquisition cost          
At December 31, 2018 10,375,533 28,075,659 5,690,374 1,422,048 45,563,614
Effect of movements in foreign exchange in balance sheet (240,897) (979,470) (300,798) (19,484) (1,540,649)
Effect of application of IAS 29 (hyperinflation) 291,291 1,169,934 399,652 11,108 1,871,985
Acquisition through business combinations 209 14 2,074 5,687 7,984
Acquisitions 14,833 606,150 147,860 3,707,089 4,475,932
Disposals and write-off (33,384) (739,348) (133,343) - (906,075)
Transfer to other asset categories 479,318 1,543,128 561,639 (2,942,166) (358,081)
Others - - - 15 15
At December 31, 2019 10,886,903 29,676,067 6,367,458 2,184,297 49,114,725
Effect of movements in foreign exchange in balance sheet 1,114,257 3,056,958 747,918 257,118 5,176,251
Effect of application of IAS 29 (hyperinflation) 180,538 723,393 179,247 104,417 1,187,595
Acquisition through business combinations 4,038 10,236 1,646 - 15,920
Acquisitions 10,423 301,710 38,700 2,717,318 3,068,151
Disposals and write-off (17,517) (1,179,123) (41,669) - (1,238,309)
Transfer to other asset categories 376,983 1,116,892 298,016 (1,974,082) (182,191)
Others - 49 - - 49
At September 30, 2020 12,555,625 33,706,182 7,591,316 3,289,068 57,142,191
           
  Land and buildings Plant and equipment Fixtures and fittings Under construction Total
Depreciation and Impairment          
At December 31, 2018 (3,031,365) (18,246,620) (4,185,211) - (25,463,196)
Effect of movements in foreign exchange in balance sheet 23,858 549,124 237,854 - 810,836
Effect of application of IAS 29 (hyperinflation) (51,120) (686,010) (288,131) - (1,025,261)
Depreciation (350,349) (2,516,578) (663,234) - (3,530,161)
Disposals and write-off 9,229 649,837 125,122 - 784,188
Others (786) (130,957) (11,718) - (143,461)
At December 31, 2019 (3,400,533) (20,381,204) (4,785,318) - (28,567,055)
Effect of movements in foreign exchange in balance sheet (261,507) (2,033,950) (557,723) - (2,853,180)
Effect of application of IAS 29 (hyperinflation) (21,502) (356,311) (211,704) - (589,517)
Depreciation (291,072) (2,054,771) (534,652) - (2,880,495)
Disposals and write-off 6,096 1,157,026 43,286 - 1,206,408
Others (2,935) (112,841) (204) - (115,980)
At September 30, 2020 (3,971,453) (23,782,051) (6,046,315) - (33,799,819)
           
Carrying amount:          
At December 31, 2019 7,486,370 9,294,863 1,582,140 2,184,297 20,547,670
At September 30, 2020 8,584,172 9,924,131 1,545,001 3,289,068 23,342,372

 

21 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

Capitalized interests and fixed assets provided as security are not material.

 

Right-of-use asset:

  Buildings Machinery and equipment Others Total
Acquisition cost        
At December 31, 2018 972,470 1,343,267 78,333 2,394,070
Effect of movements in foreign exchange in balance sheet 17,719 599 1,205 19,523
Additions (i) 317,824 521,243 59,776 898,843
Transfer from (to) other asset categories 31,758 - 16,907 48,665
At December 31, 2019 (i) 1,339,771 1,865,109 156,221 3,361,101
Effect of movements in foreign exchange in balance sheet 167,078 12,406 11,885 191,369
Additions 283,995 72,756 3,087 359,838
Transfer from (to) other asset categories (2,199) - - (2,199)
At September 30, 2020 1,788,645 1,950,271 171,193 3,910,109
         
  Buildings Machinery and equipment Others Total
Depreciation and Impairment        
At December 31, 2018 (308,415) (490,668) (57,397) (856,480)
Effect of movements in foreign exchange in balance sheet (4,574) (547) (554) (5,675)
Depreciation (173,292) (263,337) (30,638) (467,267)
Transfer (from) to other asset categories (8,207) (2,354) 7,511 (3,050)
At December 31, 2019 (494,488) (756,906) (81,078) (1,332,472)
Effect of movements in foreign exchange in balance sheet (55,703) (5,060) (4,592) (65,355)
Depreciation (199,773) (198,702) (23,026) (421,501)
Transfer (from) to other asset categories (257) 3,412 (625) 2,530
At September 30, 2020 (750,221) (957,256) (109,321) (1,816,798)
         
Carrying amount:        
At December 31, 2019 845,283 1,108,203 75,143 2,028,629
At September 30, 2020 1,038,424 993,015 61,872 2,093,311

 

(i) Adjusted balances for comparative purposes.

The Company estimated discount rates, based on risk-free interest rates observed in the Brazilian market, for the terms of its contracts, adjusted to their reality (credit spread). Spreads were obtained with financial institutions. The following table shows the rates applied:

Lease Term Rate %
2020 - 2025 6.57%
2026 - 2030 8.33%
2031 - 2035 9.04%

 

22 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

10.GOODWILL

 

  09/30/2020 12/31/2019
     
Balance at the end of the previous year 35,009,909 34,276,176
Effect of movements in foreign exchange in balance sheet 5,484,055 16,086
Effect of application of IAS 29 (hyperinflation) 468,522 691,198
Acquisition, (write-off) and disposal through business combinations 349,785 26,449
Balance at the end of the year 41,312,271 35,009,909

 

The carrying amount of goodwill was allocated to the different cash-generating units as follows:

  Functional currency 09/30/2020 12/31/2019
       
Brazil BRL 17,696,645 17,694,842
  Goodwill   102,939,278 102,937,475
  Non-controlling transactions (i)   (85,242,633) (85,242,633)
       
CAC:      
Dominican Republic DOP 4,419,301 3,476,862
Panama PAB 1,960,830 1,400,457
       
Latin America - South:      
Argentina ARS 2,638,587 1,972,177
Bolivia BOB 1,995,244 1,425,746
Chile CLP 62,889 47,322
Paraguay PYG 1,078,671 836,593
Uruguay UYU 196,483 160,108
       
Canada CAD 11,263,621 7,995,802
    41,312,271 35,009,909

 

(i) This refers to the exchange of the shareholdings operation that occurred in 2013 as a result of the adoption of the predecessor basis of accounting.

Impairment testing

 

The impairment tests were updated from September 30, 2020 considering the best estimates calculated by the Company management. For the second year of the model, as we did not have the strategic plan approved by board yet, we used the assumptions that were already considered for the projection of the upcoming years using the best estimate for 2020.

 

 

 

 

 

 

 

 

 

 

23 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

11.TRADE PAYABLES

 

  09/30/2020 12/31/2019
     
Trade payables 15,023,057 14,178,858
Related Parties (Note 26) 1,122,899 890,717
Current 16,145,956 15,069,575
     
Trade payables 244,116 309,567
Related Parties (Note 26) 465,724 -
Non-current 709,840 309,567
     
Total 16,855,796 15,379,142

 

12.INTEREST-BEARING LOANS AND BORROWINGS

 

  09/30/2020 12/31/2019
     
Secured bank loans (i) 3,851,702 176,673
Unsecured bank loans (i) 1,303 94
Other unsecured loans 35,979 40,378
Lease liabilities 429,179 436,004
Current liabilities 4,318,163 653,149
     
Secured bank loans (i) 252,324 284,481
Unsecured bank loans (i) 267,248 212,574
Debentures and unsecured bond issues 108,064 106,611
Other unsecured loans 88,423 94,088
Lease liabilities 1,820,785 1,711,901
Non-current liabilities 2,536,844 2,409,655

 

(i) In the second quarter Ambev approved new loans for working capital financing. These include the issuance of promissory notes and bank credit notes (CCB), among other types of loans, for a total amount of R$ 3,526.5 million.

 

Additional information regarding the exposure of the Company to the risks of interest rate and foreign-currency changes are disclosed in Note 22 – Financial instruments and risks.

 

Contractual clauses (covenants)

As of September 30, 2020, the Company's loans had equal rights to payment without subordination clauses. Except for the credit lines due to FINAME contracted by the Company with Banco Nacional de Desenvolvimento Econômico e Social – BNDES (“BNDES”), where collateral was provided on assets acquired with the credit granted, which served as collateral; other loans and financing contracted by the Company had only guarantees as personal collateral or were unsecured. Most loan contracts contained financial covenants covering matters such as limitations on new indebtedness, the Company’s ability to continue as a going-concern, the Company’s assets maintenance, the condition of the business, restrictions on acquisitions, mergers, sale or disposal of its assets, and disclosure of financial statements, and no constitution of real guarantees for new loans contracted, except if: (i) expressly authorized under the loan agreement; or (ii) in new loans contracted from financial institutions linked to the Brazilian government - including the BNDES or foreign governments; - or foreign governments, multilateral financial institutions (e.g. World Bank) or institutions located in jurisdictions in which the Company operates.

24 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Additionally, all agreements with BNDES are subject to certain “provisions applicable to agreements entered into with BNDES” (“the Provisions”). The Provisions require the borrower, to obtain prior consent from BNDES if they, for instance, wish to: (i) raise new loans (except for the loans described in the Provisions); (ii) give preference and/or priority to other debts; and/or (iii) dispose of or encumber any items of their fixed assets (except as provided for in the Provisions).

These clauses apply to the extent that the events mentioned produce material adverse effects on the Company and/or its subsidiaries, or the rights of its creditors, and, in the event of any of the events provided in the clauses, the Company may be granted a grace period to resolve such defaults.

As of September 30, 2020, the Company was in compliance with all its contractual obligations for its loans and financing.

 

13.PROVISIONS

 

(a) Provision changes

 

  Balance as of December 31, 2018 Effect of changes in foreign exchange rates Provisions constituted  Provisions used Provisions reversed Other movements (i) Balance as of December 31, 2019
               
Provision for disputes and litigations              
Taxes on sales 137,841 (12) 195,598 (113,012) (38,076) - 182,339
Income tax 169,289 1,229 181,872 (1,896) (98,848) (251,646) -
Labor 118,167 (4,351) 193,111 (148,784) (38,016) - 120,127
Civil 54,916 (2,798) 65,974 (52,618) (1,451) - 64,023
Others 110,283 (18,548) 49,108 (10,113) (24,823) - 105,907
Total provision for disputes and litigations 590,496 (24,480) 685,663 (326,423) (201,214) (251,646) 472,396
               
Restructuring 8,728 754 - (873) - - 8,609
               
Total provisions 599,224 (23,726) 685,663 (327,296) (201,214) (251,646) 481,005

 

(i) Refers to the adoption of IFRIC 23 - Uncertainty over Income Tax Treatments.

25 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

  Balance as of December 31, 2019 Effect of changes in foreign exchange rates Provisions constituted  Provisions used Provisions reversed Balance as of September 30, 2020
             
Provision for disputes and litigations            
Taxes on sales 182,339 1,290 28,864 6,611 (22,632) 196,472
Labor 120,127 2,077 120,922 (91,073) (17,529) 134,524
Civil 64,023 2,581 67,022 (33,124) (6,482) 94,020
Others 105,907 9,278 43,399 (6,185) (219) 152,180
Total provision for disputes and litigations 472,396 15,226 260,207 (123,771) (46,862) 577,196
             
Restructuring 8,609 2,844 - - (1,515) 9,938
             
Total provisions 481,005 18,070 260,207 (123,771) (48,377) 587,134

 

(b)The provisions are expected to be settled within the following time windows

 

 

  Balance as of September 30, 2020 1 year or less 1-2 years 2-5 years Over 5 years
           
Provision for disputes and litigations          
Taxes on sales 196,472 41,363 143,689 2,674 8,746
Labor 134,524 27,949 46,175 32,802 27,598
Civil 94,020 22,599 56,582 9,482 5,357
Others 152,180 18,540 36,221 93,259 4,160
Total provision for disputes and litigations 577,196 110,451 282,667 138,217 45,861
           
Restructuring 9,938 7,912 - 2,026 -
           
Total provisions 587,134 118,363 282,667 140,243 45,861

 

The expected settlement of provisions was based on Management’s best estimate at the balance sheet date.

(c) Main lawsuits with probable likelihood of loss:

(c.1) Income and Sales taxes

 

In Brazil, the Company and its subsidiaries are involved in several administrative and judicial proceedings related to Income tax, ICMS, IPI, PIS and COFINS taxes. Such proceedings include, among others, tax offsets, credits and judicial injunctions exempting tax payment.

 

26 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

(c.2) Labor

The Company and its subsidiaries are involved in labor proceedings with former employees, including from service providers. The main issues involve overtime and related effects and respective charges.

 

(c.3) Civil

The Company is involved in civil lawsuits with probable likelihood of loss. The most relevant portion of these lawsuits refers to former distributors, mainly in Brazil, which are mostly claiming damages resulting from the termination of their contracts.

 

The processes with possible probabilities are disclosed in Note 24 - Contingent liability.

 

14.CHANGES IN EQUITY

 

(a) Capital stock

 

    09/30/2020     09/30/2019
  Thousands  of common shares Thousands  of Real   Thousands  of common shares Thousands  of Real
Beginning balance 15,733,575 57,866,759   15,722,147 57,710,202
Capital increase (i) 1,543 32,314   11,428 156,557
Final balance (ii) 15,735,118 57,899,073   15,733,575 57,866,759

 

(i) Capital increase related to the issue of shares.

 

(ii) The capital stock is totally subscribed and paid up.

 

(b)Capital reserve

 

  Capital Reserves  
  Treasury shares Share Premium Others capital reserves  Share-based Payments  Total
At December 31, 2018 (882,734) 53,662,811 700,898 1,300,219 54,781,194
Capital Increase (43,515) - - (100,227) (143,742)
Purchase of shares and results from treasury shares (17,342) - - - (17,342)
Share-based payments - - - 159,188 159,188
At September 30, 2019 (943,591) 53,662,811 700,898 1,359,180 54,779,298

 

  Capital Reserves  
  Treasury shares Share Premium Others capital reserves  Share-based Payments  Total
At December 31, 2019 (955,135) 53,662,811 700,898 1,402,888 54,811,462
Capital Increase - - - (32,314) (32,314)
Purchase of shares and results from treasury shares 7,365 - - - 7,365
Share-based payments - - - 154,541 154,541
At September 30, 2020 (947,770) 53,662,811 700,898 1,525,115 54,941,054
27 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

(b.1) Purchase of shares and result of treasury shares

 

The treasury shares comprise shares that were previously issued by the Company and then reacquired, and the result on treasury shares that refers to gains and losses related to share-based payment transactions and others.

Below are the changes to treasury shares:

 

  Purchase/disposal of shares   Result on Treasure Shares   Total Treasure Shares
  Thousands  shares   Thousands  Brazilian Real   Thousands  shares   Thousands  Brazilian Real
       
At December 31, 2018 1,028   (20,841)   (861,893)   (882,734)
Changes during the year 2,338   (41,800)   (19,057)   (60,857)
At September 30, 2019 3,366   (62,641)   (880,950)   (943,591)

 

  Purchase/disposal of shares   Result on Treasure Shares   Total Treasure Shares
  Thousands  shares   Thousands  Brazilian Real   Thousands  shares   Thousands  Brazilian Real
       
At December 31, 2019 3,622   (68,017)   (887,118)   (955,135)
Changes during the year (1,934)   37,389   (30,024)   7,365
At September 30, 2020 1,688   (30,628)   (917,142)   (947,770)

 

(b.2) Share premium

 

The share premium refers to the difference between the subscription price that the shareholders paid for the shares and their nominal value. Since this is a capital reserve, it can only be used to increase capital, offset losses, redemptions, reimbursement or repurchase shares.

(b.3) Share-based payment

Different share-based payment programs and stock purchase option plans allow the senior Management from Ambev economic group to acquire shares of the Company.

The share-based payment reserve recorded a charge of R$167,876 on September 30, 2020 (R$159,588 at September 30, 2019) (Note 21 – Share-based payments).

28 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

(c)Net income reserves
  Net income reserves
  Investments reserve  Statutory reserve  Fiscal incentive Total
At December 31, 2018           6,617,327                4,456        8,719,584    15,341,367
         
At September 30, 2019           6,617,327                4,456        8,719,584    15,341,367

 

  Net income reserves
  Investments reserve  Statutory reserve  Fiscal incentive Total
At December 31, 2019         10,798,106                4,456      10,071,706    20,874,268
         
At September 30, 2020         10,798,106                4,456      10,071,706    20,874,268

 

(c.1) Investments reserve

From net income after deductions, an amount not exceeding 60% of the adjusted net income is allocated to the investment reserve to support future investments.

(c.2) Statutory reserve

From net income, 5% will be applied before any other allocation to the statutory reserve, which cannot exceed 20% of capital stock. The Company is not required to supplement the statutory reserve in the year when the balance of this reserve plus the amount of capital reserves exceeds 30% of the capital stock.

(c.3) Tax incentives

The Company has tax incentives framed in certain state and federal industrial-development programs in the form of financing, deferred payment of taxes or partial reductions of the amount due. These programs aim to promote the expansion of employment generation, regional decentralization, complement and diversify the industrial base of the states. In these states, the grace periods, enjoyment and reductions are permitted under the tax law.

The portion of income for the period related to tax incentives, which will be allocated to the profit reserve at the end of the fiscal year on December 31, 2020 and therefore not being used as a basis for dividend distribution, was composed of:

  09/30/2020 09/30/2019
 ICMS (Brazilian state value-added tax) 1,205,815 1,298,214
 Income tax 120,038 187,001
  1,325,853 1,485,215

 

(c.4) Interest on shareholders’ equity and dividends

Brazilian companies are permitted to distribute interest attributed to shareholders’ equity calculated based on the long-term interest rate (TJLP); this interest is tax-deductible, in accordance with the applicable law and, when distributed, may be considered part of the minimum mandatory dividends.

29 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

As determined by its by-laws, the Company is required to distribute to its shareholders, as a minimum mandatory dividend in respect of each fiscal year ending on December 31, an amount not less than 40% of its net income determined under Brazilian law, as adjusted in accordance with applicable law, unless payment of such amount would be incompatible with Ambev’s financial situation. The minimum mandatory dividend includes amounts paid as interest on shareholders’ equity.

There was no payment of dividends or interest on shareholders' equity in the nine-month period ended September 30, 2019 and September 30, 2020.

 

30 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

(d) Carrying-value adjustments

   Carrying value adjustments
  Translation reserves Cash flow hedge Actuarial gains/ (losses) Options granted on subsidiary Gains/(losses) of non-controlling interest´s share Business combination        Accounting adjustments for transactions between shareholders Total
At December 31, 2018 4,089,221 777,123 (1,116,114) (120,083) 19,558 156,091 (75,390,552) (71,584,756)
Comprehensive income:                
Gains/(losses) on translation of foreign operations 567,764 - - - - - - 567,764
Cash flow hedges - 119,253 - - - - - 119,253
Actuarial gains/(losses) - - 4,026 - - - - 4,026
Total Comprehensive income 567,764 119,253 4,026 - - - - 691,043
Gains/(losses) of controlling interest´s share - - - - (352) - - (352)
Tax on deemed dividends - - - - (6,936) - - (6,936)
At September 30, 2019 4,656,985 896,376 (1,112,088) (120,083) 12,270 156,091 (75,390,552) (70,901,001)

 

 

   Carrying value adjustments
  Translation reserves Cash flow hedge Actuarial gains/ (losses) Options granted on subsidiary (i) Gains/(losses) of non-controlling interest´s share (i) Business combination        Accounting adjustments for transactions between shareholders Total
At December 31, 2019 3,583,386 644,965 (1,220,882) (50,083) 14,434 156,091 (75,402,375) (72,274,464)
Comprehensive income:                
Gains/(losses) on translation of foreign operations 10,432,373 - - - - - - 10,432,373
Cash flow hedges - 576,017 - - - - - 576,017
Actuarial gains/(losses) - - (3,675) - - - - (3,675)
Total Comprehensive income 10,432,373 576,017 (3,675) - - - - 11,004,715
Options granted on subsidiary - - - 45,300 (82,746) - - (37,446)
Gains/(losses) of controlling interest´s share - - - - (950) - - (950)
Tax on deemed dividends - - - - (5,893) - - (5,893)
At September 30, 2020 14,015,759 1,220,982 (1,224,557) (4,783) (75,155) 156,091 (75,402,375) (61,314,038)

 

(i) Adjusted balances for comparative purposes.

31 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

(d.1) Translation reserves

 

The translation reserves comprise all foreign currency exchange differences arising from the translation of the interim financial statements with functional currency different from the Real.

The translation reserves also comprise the portion of the gain or loss on the foreign currency liabilities and on the derivative financial instruments determined to be effective net investment hedges.

 

(d.2) Cash flow hedge reserves

 

The hedging reserves comprise the effective portion of the cumulative net change in the fair value of cash flow hedges to the extent the hedged risk has not yet impacted profit or loss (For additional information, see Note 22 – Financial instruments and risks).

 

(d.3) Actuarial gains and losses

The actuarial gains and losses include expectations with regards to future pension plan obligations. Consequently, the results of actuarial gains and losses are recognized on a timely basis considering the best estimate obtained by Management. Accordingly, the Company recognizes on a monthly basis the results of these estimated actuarial gains and losses based on the expectations presented in the independent actuarial report.

The actuarial gain of R$95,589 arising from the surplus that reverted to the sponsor (originating from Ambev Private Pension Institute) from the defined benefits plan was fully recorded under actuarial gains and losses.

(d.4) Accounting for acquisition of non-controlling interests

Transactions with non-controlling interests of the same business, even when performed at arm's length, that present valid economic grounds and reflect normal market conditions, will be consolidated by the same applicable accounting standards as are used within the same accounting entity.

As determined by IFRS 10, any difference between the amount paid (fair value) for the acquisition of non-controlling interests that is related to the carrying amount of such a non-controlling interest will be recognized directly in controlling shareholders’ equity. For the acquisition of the non-controlling interest related to Old Ambev, the above-mentioned adjustment was recognized in the carrying value adjustments when applicable, due to the adoption of the predecessor basis of accounting.

32 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

15.SEGMENT REPORTING

 

(a) Reportable segments – Nine-month period ended in:

 

  Brazil CAC (i) Latin America - South (ii) Canada Consolidated
  09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019
                     
Net sales 20,064,330 19,831,103 4,876,648 4,804,768 7,940,270 6,781,521 6,941,177 5,325,519 39,822,425 36,742,911
Cost of sales (9,754,062) (8,490,991) (2,239,690) (2,090,371) (4,104,171) (2,737,358) (2,770,292) (1,980,014) (18,868,215) (15,298,734)
Gross profit 10,310,268 11,340,112 2,636,958 2,714,397 3,836,099 4,044,163 4,170,885 3,345,505 20,954,210 21,444,177
Distribution expenses (3,120,955) (2,748,628) (517,444) (481,685) (1,085,307) (746,127) (1,278,421) (1,018,303) (6,002,127) (4,994,743)
Sales and marketing expenses (2,285,455) (2,286,738) (402,946) (401,948) (877,802) (755,332) (887,484) (752,520) (4,453,687) (4,196,538)
Administrative expenses (1,151,165) (1,246,309) (210,876) (195,170) (385,098) (307,646) (304,296) (252,263) (2,051,435) (2,001,388)
Other operating income/(expenses) 531,789 565,557 (18,903) 52,829 (65,538) (32,581) (43,152) (26,058) 404,196 559,747
Exceptional items (111,207) (27,958) (49,307) (5,720) (99,844) (33,202) (51,432) - (311,790) (66,880)
Income from operations (EBIT) 4,173,275 5,596,036 1,437,482 1,682,703 1,322,510 2,169,275 1,606,100 1,296,361 8,539,367 10,744,375
Net finance cost (2,062,727) (568,638) 5,330 (52,103) (1,382,949) (870,161) (35,032) (54,401) (3,475,378) (1,545,303)
Share of result of joint ventures (4,927) (3,736) (5,908) (2,211) - - (23,021) (5,168) (33,856) (11,115)
Income before income tax 2,105,621 5,023,662 1,436,904 1,628,389 (60,439) 1,299,114 1,548,047 1,236,792 5,030,133 9,187,957
Income tax expense 628,667 (34,822) (334,037) (444,600) 73,380 (252,481) (556,607) (486,700) (188,597) (1,218,603)
Net income 2,734,288 4,988,840 1,102,867 1,183,789 12,941 1,046,633 991,440 750,092 4,841,536 7,969,354
                     
Normalized EBITDA 6,432,737 7,739,569 1,978,710 2,077,359 2,249,230 2,865,489 1,993,552 1,539,951 12,654,229 14,222,368
Exceptional items (111,207) (27,958) (49,307) (5,720) (99,844) (33,202) (51,432) - (311,790) (66,880)
Depreciation. amortization and impairment (2,148,255) (2,115,575) (491,921) (388,936) (826,876) (663,012) (336,020) (243,590) (3,803,072) (3,411,113)
Net finance cost (2,062,727) (568,638) 5,330 (52,103) (1,382,949) (870,161) (35,032) (54,401) (3,475,378) (1,545,303)
Share of result of joint ventures (4,927) (3,736) (5,908) (2,211) - - (23,021) (5,168) (33,856) (11,115)
Income tax expense 628,667 (34,822) (334,037) (444,600) 73,380 (252,481) (556,607) (486,700) (188,597) (1,218,603)
Net income 2,734,288 4,988,840 1,102,867 1,183,789 12,941 1,046,633 991,440 750,092 4,841,536 7,969,354
                     
Normalized EBITDA margin in % 32.1% 39.0% 40.6% 43.2% 28.3% 42.3% 28.7% 28.9% 31.8% 38.7%
                     
Acquisition of property, plant and equipment 2,371,569 2,045,381 322,811 416,094 366,445 471,596 237,429 132,481 3,298,254 3,065,552

 

33 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

(continued)

 

  Brazil CAC (i) Latin America - South (ii) Canada Consolidated
   09/30/2020  12/31/2019  09/30/2020  12/31/2019  09/30/2020  12/31/2019  09/30/2020  12/31/2019  09/30/2020  12/31/2019
                     
Segment assets 43,146,122 44,161,917 14,671,231 11,393,314 18,547,944 14,453,984 17,227,775 12,034,975 93,593,072 82,044,190
Intersegment elimination                 (2,239,212) (2,286,215)
Non-segmented assets                 35,702,927 21,984,969
Total assets                 127,056,787 101,742,944
                     
Segment liabilities 19,616,735 19,907,373 4,152,734 3,932,812 4,351,661 4,411,757 6,735,447 4,078,743 34,856,577 32,330,685
Intersegment elimination                 (2,239,215) (2,286,406)
Non-segmented liabilities                 94,439,425 71,698,665
Total liabilities                 127,056,787 101,742,944

 

(i) CAC: includes operations in Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala, El Salvador, Nicaragua, Honduras, Barbados and Panama.

 

(ii) Latin America – South: includes operations in Argentina, Bolivia, Chile, Paraguay and Uruguay.

 

 

34 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

(b) Reportable segments – three-month periods ended in:

 

  Brazil CAC (i) Latin America - South (ii) Canada Consolidated
  09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019
                     
Net sales 7,684,525 6,340,561 2,064,789 1,656,862 2,956,464 1,971,400 2,898,720 1,988,829 15,604,498 11,957,652
Cost of sales (3,822,730) (2,824,005) (901,448) (726,182) (1,569,901) (897,711) (1,129,070) (781,834) (7,423,149) (5,229,732)
Gross profit 3,861,795 3,516,556 1,163,341 930,680 1,386,563 1,073,689 1,769,650 1,206,995 8,181,349 6,727,920
Distribution expenses (1,171,511) (936,719) (215,303) (168,629) (403,154) (220,100) (517,727) (392,405) (2,307,695) (1,717,853)
Sales and marketing expenses (741,721) (738,384) (152,789) (147,452) (293,238) (199,840) (403,255) (274,631) (1,591,003) (1,360,307)
Administrative expenses (366,053) (417,805) (83,948) (57,930) (134,260) (72,743) (119,796) (83,988) (704,057) (632,466)
Other operating income/(expenses) 228,437 152,115 (5,807) (3,371) (39,968) (5,294) (14,642) (5,723) 168,020 137,727
Exceptional items (62,925) (6,127) (22,528) (2,695) (62,001) (5,736) (12,342) - (159,796) (14,558)
Income from operations (EBIT) 1,748,022 1,569,636 682,966 550,603 453,942 569,976 701,888 450,248 3,586,818 3,140,463
Net finance cost (iii) (523,237) (67,830) (67,466) 93 (548,291) (216,175) (5,782) (21,886) (1,144,776) (305,798)
Share of result of joint ventures (2,050) (1,843) 155 (430) - - (9,107) (5,975) (11,002) (8,248)
Income before income tax 1,222,735 1,499,963 615,655 550,266 (94,349) 353,801 686,999 422,387 2,431,040 2,826,417
Income tax expense 167,852 (98,895) (104,534) (112,062) 79,354 163,462 (214,744) (174,537) (72,072) (222,032)
Net income 1,390,587 1,401,068 511,121 438,204 (14,995) 517,263 472,255 247,850 2,358,968 2,604,385
                     
Normalized EBITDA 2,527,260 2,404,579 902,275 688,134 803,578 752,479 840,363 565,286 5,073,476 4,410,478
Exceptional items (62,925) (6,127) (22,528) (2,695) (62,001) (5,736) (12,342) - (159,796) (14,558)
Depreciation. amortization and impairment (716,313) (828,816) (196,781) (134,836) (287,635) (176,767) (126,133) (115,038) (1,326,862) (1,255,457)
Net finance cost (iii) (523,237) (67,830) (67,466) 93 (548,291) (216,175) (5,782) (21,886) (1,144,776) (305,798)
Share of result of joint ventures (2,050) (1,843) 155 (430) - - (9,107) (5,975) (11,002) (8,248)
Income tax expense 167,852 (98,895) (104,534) (112,062) 79,354 163,462 (214,744) (174,537) (72,072) (222,032)
Net income 1,390,587 1,401,068 511,121 438,204 (14,995) 517,263 472,255 247,850 2,358,968 2,604,385
                     
Normalized EBITDA margin in % 32.9% 37.9% 43.7% 41.5% 27.2% 38.2% 29.0% 28.4% 32.5% 36.9%

 

 

(i) CAC: includes operations in Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala, El Salvador, Nicaragua, Honduras, Barbados and Panama.

 

(ii) Latin America – South: includes operations in Argentina, Bolivia, Chile, Paraguay and Uruguay.

 

(iii) Amounts adjusted for comparative purposes.

35 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

(c) Additional information – by business unit:

        Nine-month period ended:         Three-month period ended:
  Brazil   Brazil
  Beer

Soft drink and

Non-alcoholic and

non-carbonated

Total   Beer

Soft drink and

Non-alcoholic and

non-carbonated

Total
  09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019   09/30/2020 09/30/2019 09/30/2020 09/30/2019 09/30/2020 09/30/2019
                           
Net sales 17,233,745 16,743,208 2,830,585 3,087,895 20,064,330 19,831,103   6,650,535 5,313,882 1,033,990 1,026,679 7,684,525 6,340,561
Cost of sales (8,270,558) (6,990,220) (1,483,504) (1,500,771) (9,754,062) (8,490,991)   (3,295,574) (2,285,623) (527,156) (538,382) (3,822,730) (2,824,005)
Gross profit 8,963,187 9,752,988 1,347,081 1,587,124 10,310,268 11,340,112   3,354,961 3,028,259 506,834 488,297 3,861,795 3,516,556
Distribution expenses (2,592,037) (2,243,569) (528,918) (505,059) (3,120,955) (2,748,628)   (984,997) (759,198) (186,514) (177,521) (1,171,511) (936,719)
Sales and marketing expenses (2,008,066) (1,992,198) (277,389) (294,540) (2,285,455) (2,286,738)   (632,458) (632,627) (109,263) (105,757) (741,721) (738,384)
Administrative expenses (985,295) (1,075,355) (165,870) (170,954) (1,151,165) (1,246,309)   (321,992) (363,767) (44,061) (54,038) (366,053) (417,805)
Other operating income/(expenses) 407,767 398,007 124,022 167,550 531,789 565,557   159,763 127,781 68,674 24,334 228,437 152,115
Exceptional items (111,207) (27,958) - - (111,207) (27,958)   (62,901) (6,127) (24) - (62,925) (6,127)
Income from operations (EBIT) 3,674,349 4,811,915 498,926 784,121 4,173,275 5,596,036   1,512,376 1,394,321 235,646 175,315 1,748,022 1,569,636
Net finance cost (i) (2,062,727) (548,145) - (20,493) (2,062,727) (568,638)   (523,237) (61,189) - (6,641) (523,237) (67,830)
Share of result of joint ventures (4,927) (3,736) - - (4,927) (3,736)   (2,050) (1,843) - - (2,050) (1,843)
Income before income tax 1,606,695 4,260,034 498,926 763,628 2,105,621 5,023,662   987,089 1,331,289 235,646 168,674 1,222,735 1,499,963
Income tax expense 628,667 (34,822) - - 628,667 (34,822)   167,852 (98,895) - - 167,852 (98,895)
Net income 2,235,362 4,225,212 498,926 763,628 2,734,288 4,988,840   1,154,941 1,232,394 235,646 168,674 1,390,587 1,401,068
                           
Normalized EBITDA 5,672,962 6,705,415 759,775 1,034,154 6,432,737 7,739,569   2,208,203 2,143,514 319,057 261,065 2,527,260 2,404,579
Exceptional items (111,207) (27,958) - - (111,207) (27,958)   (62,901) (6,127) (24) - (62,925) (6,127)
Depreciation, amortization and impairment (1,887,406) (1,865,542) (260,849) (250,033) (2,148,255) (2,115,575)   (632,926) (743,066) (83,387) (85,750) (716,313) (828,816)
Net finance cost (i) (2,062,727) (548,145) - (20,493) (2,062,727) (568,638)   (523,237) (61,189) - (6,641) (523,237) (67,830)
Share of result of joint ventures (4,927) (3,736) - - (4,927) (3,736)   (2,050) (1,843) - - (2,050) (1,843)
Income tax expense 628,667 (34,822) - - 628,667 (34,822)   167,852 (98,895) - - 167,852 (98,895)
Net income 2,235,362 4,225,212 498,926 763,628 2,734,288 4,988,840   1,154,941 1,232,394 235,646 168,674 1,390,587 1,401,068
                           
Normalized EBITDA margin in % 32.9% 40.0% 26.8% 33.5% 32.1% 39.0%   33.2% 40.3% 30.9% 25.4% 32.9% 37.9%

 

(i) Amounts adjusted for comparative purposes.

36 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

16.NET SALES

 

Reconciliation between gross sales and net sales:

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Gross sales and/or services 58,473,136 53,631,259   22,642,040 17,239,068
Excise duty (12,616,685) (11,376,548)   (4,971,690) (3,556,572)
Discounts (6,034,026) (5,511,800)   (2,065,852) (1,724,844)
  39,822,425 36,742,911   15,604,498 11,957,652

 

17.OTHER OPERATING INCOME / (EXPENSES)

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Government grants/NPV of long term fiscal incentives 481,942 510,959   207,381 115,761
(Additions)/reversals of provisions (34,027) (1,365)   (5,778) 6,979
Gains/(losses) on disposal of property, plant and equipment, intangible assets and operation of associates (22,157) 27,603   (20,880) 14,774
Other operating income/(expenses), net (21,562) 22,550   (12,703) 213
  404,196 559,747   168,020 137,727

 

Government grants are not recognized until there is reasonable assurance that the Company will meet related conditions and that the grants will be received. Government grants are systematically recognized in income during the periods in which the Company recognizes as expenses the related costs that the grants are intended to offset.

 

18.EXCEPTIONAL ITEMS

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Costs arising from business combinations (17,535) -   (819) -
Restructuring (i) (93,653) (64,136)   (43,618) (13,116)
Effect of application of IAS 29 (hyperinflation) (3,396) (2,744)   (2,935) (1,442)
COVID-19 impacts (ii) (183,114) -   (111,635) -
Recall Stella (14,092) -   (789) -
  (311,790) (66,880)   (159,796) (14,558)

 

(i) The restructuring expenses recognized refer mainly to the realignment of the structures and processes in the Latin America geographical segment, CAC and Brazil.

 

(ii) Covid-19 expenses refer to additional expenses to ensure the safety of our people - additional expenses with alcohol in gel, masks and additional cleaning at our facilities and donations realized to other institutions.

37 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

19.FINANCE EXPENSES AND INCOME

 

(a)Finance expenses

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Interest expense (1,397,918) (1,168,072)   (539,329) (393,842)
Capitalized borrowings - -   75 -
Net Interest on pension plans (84,885) (76,322)   (30,783) (25,801)
Losses on hedging instruments  and exclusive investment funds (i) (1,710,707) (710,313)   (562,748) (311,664)
Interest on provision for disputes and litigations (112,224) (65,818)   (44,343) (42,013)
Exchange variation (567,190) (416,804)   (232,689) (286,810)
Interest and foreign exchange rate on loans (18,003) (34,887)   - (4,282)
Financial instruments at fair value through profit or loss (4,266) (4,266)   - (2,133)
Tax on financial transactions (179,888) (130,281)   (44,361) (57,631)
Bank guarantee expenses (130,644) (97,246)   (29,673) (27,776)
Other financial results (121,512) (147,078)   (30,402) (21,051)
  (4,327,237) (2,851,087)   (1,514,253) (1,173,003)
           
Non-recurring finance cost - (99,017)   - -
  (4,327,237) (2,950,104)   (1,514,253) (1,173,003)

 

(i) The variation refers, for the most part, to the Equity Swap, which changes according to the change in the share price.

 

Interest expenses are presented net of the effect of interest rate derivative financial instruments which mitigate Ambev’s interest rate risk (Note 22 – Financial instruments and risks). The interest expenses were as follows:

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Financial instruments measured at amortized cost (591,399) (400,830)   (331,228) (136,605)
Financial instruments at fair value through profit or loss (806,519) (767,242)   (208,101) (257,237)
  (1,397,918) (1,168,072)   (539,329) (393,842)

 

(b)Finance income

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Interest income 370,223 916,803   72,819 625,879
Interest and foreign exchange rate on loans 19,744 -   19,744 -
Financial instruments at fair value through profit or loss 166,760 36,942   166,760 266
Other financial results 36,582 22,902   16,527 (2,519)
  593,309 976,647   275,850 623,626
           
Exceptional finance income - 173,693   - 173,693
Effect of application of IAS 29 (hyperinflation) 258,550 254,461   93,627 69,886
  851,859 1,404,801   369,477 867,205

 

38 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Interest income arose from the following financial assets:

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Cash and cash equivalents 187,547 317,888   54,814 115,621
Investment securities held for trading 4,015 4,233   3,570 100
Other receivables 178,661 594,682   14,435 510,158
  370,223 916,803   72,819 625,879

 

20.INCOME TAX AND SOCIAL CONTRIBUTION

 

Income taxes reported in the income statement were as follows:

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Income tax expense - current (1,142,526) (2,435,979)   (415,548) (649,270)
           
Deferred tax expense on temporary differences 669,974 1,118,269   400,093 446,993
Deferred tax over taxes losses carryforwards movements  in the current period 283,955 99,107   (56,617) (19,755)
Total deferred tax (expense)/income 953,929 1,217,376   343,476 427,238
           
Total income tax expenses (188,597) (1,218,603)   (72,072) (222,032)

 

The reconciliation from the weighted nominal to the effective tax rate is summarized as follows:

 

  Nine-month period ended:   Three-month period ended:
  09/30/2020 09/30/2019   09/30/2020 09/30/2019
Profit before tax 5,030,133 9,187,957   2,431,040 2,826,417
Adjustment on taxable basis          
Others non-taxable income (i) (720,153) (710,518)   (157,198) (342,664)
Government grants related to sales taxes (1,205,815) (1,298,214)   (451,455) (372,355)
Share of result of joint ventures 33,856 11,115   11,002 8,248
Non-deductible expenses 244,957 293,834   91,707 68,628
Complement of income tax of foreign subsidiaries due in Brazil 432,616 253,564   147,667 2,042
  3,815,594 7,737,738   2,072,763 2,190,316
Aggregated weighted nominal tax rate 27.48% 29.25%   28.25% 29.06%
Taxes payable – nominal rate (1,048,545) (2,263,427)   (585,626) (636,550)
Adjustment on tax expense          
Income tax Incentives 120,038 187,001   88,729 30,584
Deductible interest on shareholders' equity 1,177,921 1,139,682   502,576 383,701
Tax savings from goodwill amortization 58,097 61,183   19,366 19,366
Withholding income tax (555,855) (354,241)   (140,808) (120,444)
Recognition/(write-off) of deferred charges on tax losses (86,591) (141,251)   (26,099) (93,680)
Effect of application of IAS 29 (hyperinflation) (47,829) (39,202)   (18,277) (999)
Others with reduced taxation (i) 194,167 191,652   88,067 195,990
Income tax and social contribution expense (188,597) (1,218,603)   (72,072) (222,032)
Effective tax rate 3.75% 13.26%   2.96% 7.86%

 

(i) Adjusted balances for comparative purposes.

39 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

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

 

§Government subsidy on sales taxes: Related to regional incentives and local production, which, when reinvested, are not taxed for income tax and social contribution purposes; this explains the impact on the effective tax rate. The amount above is impacted by the fluctuation in volume, price and eventual variation on state VAT (ICMS).

 

§Complement of income tax of foreign subsidiaries due in Brazil: shows the result of the calculation of universal taxation of profits, according to the regulations of Law 12.973/14.

 

§Withholding income tax: The amount is mainly related to dividends distributed and to be distributed by subsidiaries located outside of Brazil, applicable according to local tax legislation. The increase in the amount in 2020 is mainly due to the exchange rate variation of the balances held in liabilities

 

§Deductible interest on shareholders’ equity: under Brazilian law, companies have an option to remunerate their shareholders through payment of interest on capital (“IOC”), which is deductible for income tax purposes.

 

 

21.SHARE-BASED PAYMENTS

 

There are different stock-option and share-based payment programs which allow the employees and senior Management from the Company and its subsidiaries to acquire (through of exercise of the stock option) or receive shares of the Company. For all stock option programs, the fair value of the shares is estimated at the options grant date, using the “Hull Binomial” pricing model, adjusted to reflect the IFRS 2 requirement that assumptions about forfeiture before the end of the vesting period cannot impact the fair value of the option.

 

This current model of stock option, ruled by the Company’s stock option plan (“Stock Option Plan”), includes two types of grants: (I) Grant 1- the beneficiary can be allocated 30%, 40%, 60%, 70% or 100% of the amount related to the profit share the beneficiary received in the year, to the immediate exercise of options, thus acquiring the corresponding shares of the Company, which transfer to third parties or the Company will only be allowed after the five-year period counted from the date of exercise of the options; and (II) Grant 2 - the beneficiary may exercise the options after a five-year grace period, for a period of five years.

In addition, the Company has implemented a share-based compensation plan (“the Share-Based Plan”) under which certain employees and members of the Management of the Company or its subsidiaries are eligible to receive shares of the Company including in the form of ADRs. The shares that are subject to the Share-Based Plan are designated as "restricted shares".

40 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Additionally, as a mean of creating a long term incentive (wealth incentive) for certain senior employees and members of Management considered as having “high potential,” the Company grants, under the Share-Based Plan, shares to be delivered in the future divided in two separate lots (Lot A and Lot B), which will be delivered to the participants of the relevant program, subject to maturation periods of five and ten years, respectively.

The weighted average fair value of the options and assumptions used in applying the Company’s option pricing model of 2020 and 2019 grants was as follows:

 

In R$ 09/30/2020 (i) 12/31/2019 (i)
         
Fair value of options granted 4.04   4.50  
Share price 18.05   17.66  
Exercise price 18.05   17.66  
Expected volatility 22.3%   23.8%  
Vesting year 5   5  
Expected dividends 5%   5%  
Risk-free interest rate 6.8% (ii) 7.8% (ii)

 

(i)     Information based on weighted average plans granted, except for the expected dividends and risk-free interest rate.

 

(ii) The percentages include the grants of stock options and ADRs during the period, in which the risk-free interest rate of ADRs are calculated in U.S. dollars.

 

The total number of outstanding options developed was as follows:

Thousand options 09/30/2020   12/31/2019
       
Options outstanding at January 1st 141,736   141,328
Options issued during the period 22   24,593
Options exercised during the period (2,728)   (7,849)
Options forfeited during the period (3,867)   (16,336)
Options outstanding at ended period 135,163   141,736

 

The range of exercise prices of the outstanding options was between R$9.36 (R$0.001 on December 31, 2019) and R$42.25 (R$34.37 on December 31, 2019) and the weighted average remaining contractual life was approximately 6.18 years (6.33 years on December 31, 2019).

 

Of the 135,163 thousand outstanding options (141,736 thousand on December 31, 2019), 42,991 thousand options were vested on September 30, 2020 (46,640 thousand on December 31, 2019).

 

 

41 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

The weighted average exercise price of the options was as follows:

 

In R$ per share 09/30/2020   12/31/2019
       
Options outstanding at January 1 st 18.53   16.16
Options issued during the period 18.05   18.05
Options forfeited during the period 19.98   21.24
Options exercised during the period 6.87   9.07
Options outstanding at the end of the period 19.60   18.53
Options exercisable at the end of the period 22.53   19.12

 

For the options exercised during the period ended September 30, 2020, the weighted average share price on the exercise date was R$15.78 (R$18.68 as of December 31, 2019).

 

To settle the exercised stock options, the Company may use treasury shares. The current limit of authorized capital is considered sufficient to meet all stock option plans if the issue of new shares is required to meet the grants awarded in the programs.

 

During the period, the Company did not grant deferred stocks under the stock option plan (as at December 2019, 208,000 deferred stocks had been granted related to the exercise of stock options granted in the previous years, and such shares were valued based on the share price of the trading session immediately prior to the stock option grant, representing a fair value of R$3,787 on December 31, 2019). Such deferred stock options are subject to a vesting period of five years from the date of their grant.

During the period, the Company granted 1,565,000 (11,838,000 as at December 31, 2019) restricted shares under the Share-Based Plan, which are valued based on the share price of the trading session immediately prior to the grant of shares, representing a fair value of approximately R$28,866 on September 30, 2020 (R$211,728 as at December 31, 2019). Such restricted share units are subject to a grace period of five years counted from the date of the grant.

The total number of shares purchased or granted by employees, according to each category, under the Stock Option Plan and Share-Based Plan is demonstrated below; the grant of these shares will be performed in the future under certain conditions (deferred stock and restricted shares).

Thousand deferred shares 09/30/2020   12/31/2019
       
Deferred shares outstanding at January 1st 7,926   12,308
New deferred shares during the period -   208
Deferred shares granted during the period (1,901)   (4,167)
Deferred shares forfeited during the period (91)   (423)
Deferred shares outstanding at the end of the period 5,934   7,926

 

42 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

 

Thousand restricted shares 09/30/2020   12/31/2019
       
Restricted shares outstanding at January 1st 23,836   12,656
New restricted shares during the period 1,565   11,838
Restricted shares forfeited during the period (558)   (658)
Restricted shares outstanding at the end of the period 24,843   23,836

 

Additionally, certain employees and managers of the Company received options to acquire AB Inbev shares, the compensation cost of which is recognized in the income statement against equity.

The transactions with share-based payments described above generated an expense of R$160,781 on September 30, 2020 (R$177,725 on September 30, 2019), recorded as administrative expenses.

 

22.FINANCIAL INSTRUMENTS AND RISKS

 

Risk factors

The Company is exposed to foreign currency, interest rate, commodity price, liquidity and credit risk in the ordinary course of business. The Company analyzes each of these risks both individually and to define strategies to manage the economic impact on the Company’s performance consistent with its Financial Risk Management Policy.

 

The Company’s use of derivatives strictly follows the Financial Risk Management Policy approved by the Board of Directors. The purpose of the policy is to provide guidelines for the management of financial risks inherent to the capital markets in which Ambev carries out its operations. The policy comprises four main aspects: (i) capital structure, financing and liquidity, (ii) transactional risks related to the business, (iii) financial statements translation risks and (iv) credit risks of financial counterparties.

The policy establishes that all the financial assets and liabilities in each country where Ambev operates must be denominated in their respective local currencies. The policy also sets forth the procedures and controls needed for identifying, measuring and minimizing market risks, such as variations in foreign exchange rates, interest rates and commodities (mainly aluminum, wheat, corn and sugar) that may affect Ambev’s revenues, costs and/or investment amounts. The policy states that all the known risks (e.g. foreign currency and interest) will be hedged by contracting derivative financial instruments. Existing risks not yet recorded (e.g. future contracts for the purchase of raw material or property, plant and equipment) are mitigated using projections for the period necessary for the Company to adapt to the new cost scenario, which may vary from ten to fourteen months, also through the use of derivative financial instruments. Most of the translation risks are not hedged. Any exception to the policy must be approved by the Board of Directors.

43 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Derivative financial instruments

 

Derivative financial instruments authorized by the Financial Risk Management Policy are futures contracts traded on exchanges, full deliverable forwards, non-deliverable forwards, swaps and options. On September 30, 2020, the Company and its subsidiaries had no target forward, swaps with currency verification or any other derivative operations representing a risk level above the nominal value of their contracts. The derivative operations are managed on a consolidated basis and are classified by strategies according to their purposes, as follows:

 

i) Cash-flow-hedge derivative instruments – The highly probable forecast transactions contracted in order to minimize the Company's exposure to fluctuations of exchange rates and prices of raw materials, investments, equipment and services to be procured, are protected by cash flow hedges that will occur at various different dates during the next fourteen months. Gains and losses classified as hedging reserve in equity are recognized in the income statement in the period or periods when the forecast and hedged transaction affects the income statement.

 

ii) Fair-value-hedge derivative instruments – operations contracted with the purpose of mitigating the Company’s net indebtedness against foreign exchange and interest rate risk. Cash net positions and foreign currency debts are continually assessed for identification of new exposures.

 

The results of these operations, measured according to their fair value, are recognized in financial results.

 

iii) Net-investment-hedge derivative instruments transactions entered in order to minimize exposure of the exchange differences arising from conversion of net investment in the Company's subsidiaries located abroad for translation account balance. The effective portion of the hedge is allocated to equity and the ineffectiveness portion is recorded directly in financial income statement when identified.

 

The following tables summarize the exposure of the Company that were identified and protected in accordance with the Company's Risk Policy. The following denominations have been applied:

 

Operational Hedge: Refers to the exposures arising from the core business of Company, such as purchase of inputs, purchase of fixed assets and service contracts linked to foreign currency, which is protected using derivatives.

 

Financial Hedge: Refers to the exposures arising from cash and financing activities, such as foreign-currency cash and foreign-currency debt, which is protected using derivatives.

44 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Investment hedge abroad: Refers mainly to exposures arising from cash held in foreign currency in foreign subsidiaries whose functional currency is different from the consolidation currency.

 

Investment hedge - Put option granted on subsidiary: As detailed in item IV (d) the Company constituted a liability related to acquisition of a non-controlling interest of the operations in the Dominican Republic. This financial instrument is denominated in Dollar (Tranche A) and Dominican Pesos (Tranche B) and is recorded by an entity, whose functional currency is the Real. The Company assigned this financial instrument as a hedging instrument for part of its net assets located in the subsidiaries which functional currency is the US Dollar and Dominican Pesos, in such a manner that the hedge result can be recorded in other comprehensive income of the group, following the result of the hedged item.

45 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

Transactions protected by derivative financial instruments in accordance with the Financial Risk Management Policy

 

                   Nine-month period ended: 09/30/2020    Three-month period ended: 09/30/2020
               Fair Value    Gain / (Losses)    Gain / (Losses)
Exposure    Risk     Notional   Assets Liability   Finance Result Operational Result Equity   Finance Result Operational Result Equity
                                 
Cost     (15,053,042)   14,782,288   182,805 (202,353)   (509,924) 1,070,964 1,607,166   (187,260) 403,002 284,377
    Commodity (3,115,652)   2,844,898   128,584 (79,207)   (99,873) (126,464) (98,268)   (15,447) (35,575) 186,470
    American Dollar (11,713,122)   11,713,122   43,768 (106,444)   (415,797) 1,225,210 1,743,782   (173,226) 440,407 118,031
    Euro (115,870)   115,870   4,991 (355)   (3,249) 6,554 14,700   (499) 4,787 4,557
    Mexican Pesos (108,398)   108,398   5,462 (16,347)   8,995 (34,336) (53,048)   1,912 (6,617) (24,681)
                                 
Fixed Assets     (1,046,727)   1,046,727   7,614 (19,087)   (615,355) 130,812 379,463   (242,207) 74,071 217,450
    American Dollar (1,046,727)   1,046,727   7,614 (19,087)   (615,355) 130,812 379,463   (242,207) 74,071 217,450
                                 
Expenses     (351,150)   351,150   1,868 (7,073)   (1,794) 3,532 1,900   (711) 2,075 1,430
    American Dollar (351,150)   351,150   1,868 (7,073)   (1,794) 3,532 1,900   (711) 2,075 1,430
                                 
Debts     (821,854)   -   - -   - - -   - - -
    American Dollar (137,191)   -   - -   - - -   - - -
    Euro (456,311)   -   - -   - - -   - - -
    Interest rate (228,352)   -   - -   - - -   - - -
                                 
Equity Instrument     (978,217)   783,998   5,674 (74,808)   (556,676) - -   (111,155) - -
    Stock exchange prices (978,217)   783,998   5,674 (74,808)   (556,676) - -   (111,155) - -
                                 
Foreign Investments     281,645   (281,645)   416 -   1,515 - (1,975)   (2,686) - (2,175)
    American Dollar 281,645   (281,645)   416 -   1,515 - (1,975)   (2,686) - (2,175)
September 30, 2020     (17,969,345)   16,682,518   198,377 (303,321)   (1,682,234) 1,205,308 1,986,554   (544,019) 479,148 501,082

 

 

46 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

 

               12/31/2019    Nine-month period ended: 09/30/2019    Three-month period ended: 09/30/2019
               Fair Value    Gain / (Losses)    Gain / (Losses)
Exposure   Risk     Notional   Assets Liability   Finance Result Operational Result Equity   Finance Result Operational Result Equity
                                 
Cost     (11,823,740)   11,630,267   122,211 (266,416)   (682,365) 625,482 692,234   (258,155) (35,042) 621,355
    Commodity (2,293,500)   2,100,027   36,767 (74,796)   (40,789) (129,016) (108,277)   (20,246) (63,030) (90,141)
    American Dollar (9,192,368)   9,192,368   44,319 (188,568)   (522,648) 798,256 821,660   (121,354) 38,741 695,255
    Euro (177,565)   177,565   - (3,052)   (2,290) (3,419) (10,258)   (864) (718) (3,979)
    Mexican Pesos (160,307)   160,307   41,125 -   (116,638) (40,339) (10,891)   (115,691) (10,035) 20,220
                                 
Fixed Assets     (816,909)   816,909   11,394 (53,782)   (187,186) 155,916 177,313   (67,190) 154,147 135,450
    American Dollar (816,909)   816,909   11,394 (53,782)   (187,186) 155,916 177,313   (67,190) 154,147 135,450
                                 
Expenses     (262,098)   262,098   2,229 (17,268)   (2,155) 2,269 1,937   33,259 1,705 (10,312)
    American Dollar (262,098)   262,098   2,229 (17,268)   (2,157) 2,427 2,043   33,259 1,705 (10,312)
    Rupee -   -   - -   2 (158) (106)   - - -
                                 
Cash     -   -   - -   (42) - -   20 - -
    Interest rate -   -   - -   (42) - -   20 - -
                                 
Debts     (362,773)   -   - -   5,306 - -   - - -
    American Dollar (114,358)   -   - -   - - -   - - -
    Interest rate (248,415)   -   - -   5,306 - -   - - -
                                 
Equity Instrument     (1,873,396)   1,057,829   37,534 (17,904)   159,369 - -   (36,241) - -
    Stock Exchange Prices (1,873,396)   1,057,829   37,534 (17,904)   159,369 - -   (36,241) - -
                                 
Foreign Investments     -   -   - -   - (28,487) 28,487   - - -
    American Dollar -   -   - -   - (28,487) 28,487   - - -
Total     (15,138,916)   13,767,103   173,368 (355,370)   (707,073) 755,180 899,971   (328,307) 120,810 746,493
47 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

I.Market risk

 

a.1) Foreign-currency risk

The Company is exposed to foreign currency risk on borrowings, investments, purchases, dividends and/or interest expense and income whenever they are denominated in a currency other than the functional currency of the subsidiary. The main derivative financial instruments used to manage foreign currency risk are futures contracts, swaps, options, non-deliverable forwards and full deliverable forwards.

 

a.2) Commodity risk

A significant portion of the Company’s inputs comprise commodities which historically have experienced substantial price fluctuations. The Company therefore uses both fixed price purchasing contracts and derivative financial instruments to minimize its exposure to commodity price volatility of aluminum, sugar, wheat and corn. These derivative financial instruments have been designated as cash-flow hedges.

 

a.3) Interest rate risk

The Company applies a dynamic interest rate hedging approach whereby the target mix between fixed and floating rate debts is reviewed periodically with purpose of achieving an optimal balance between cost of funding and volatility of financial results, taking into account market conditions as well as the Company’s overall business strategy and this strategy is reviewed periodically.

 

The table below demonstrates the Company’s exposure related to debts, before and after interest rates hedging strategy, within the limits established by our risk policy. In 2020, the Company is not applying hedge for the exposures described below:

 

  09/30/2020
  Risk
  Interest rate Amount in Brazilian Real
Brazilian Real 5.4%                       2,940,677
Working capital in Argentinean Peso 21.5%                          678,882
Argentinean Peso 23.3%                              5,390
Dominican Peso 9.8%                          375,061
Guatemala´s Quetzal 8.4%                            16,535
Others 8.6%                            44,504
Bolivian Peso 5.2%                          158,123
American Dollar 4.2%                              4,434
Canadian Dollar 3.5%                          364,998
Interest rate pre-set                         4,588,604
     
     
Brazilian Real 4.7%                       1,511,688
American Dollar 4.1%                          132,758
Canadian  Dollar 3.2%                          844,528
Euro 1.5%                          456,311
Interest rate post fixed                         2,945,285
48 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

  12/31/2019
  Risk
  Interest rate Amount in Brazilian Real
Brazilian Real 10.4%                          2,006,718
Working capital in Argentinean peso 94.0%                                     24
Dominican Peso 10.0%                             209,737
American Dollar 4.7%                               19,054
Guatemala´s Quetzal 6.3%                               12,009
Canadian Dollar 3.5%                             243,738
Others 9.2%                             126,252
Interest rate pre-set                            2,617,532
     
     
Brazilian Real 9.3%                             171,809
American Dollar 4.1%                               95,304
Canadian  Dollar 2.7%                                   472
Interest rate post fixed                               267,585

 

a.4) Terms and debt repayment schedule

 

            09/30/2020
  Carrying amount Less than 1 year 1-2 years 2-3 years 3-5 years More than
5 years
Trade and other payables(i) 27,421,899 22,417,146 4,081,741 67,138 314,342 541,532
Secured bank loans 4,104,026 3,851,702 67,640 51,660 36,084 96,940
Unsecured bank loans 268,551 1,303 267,248 - - -
Debentures and Bonds 108,064 - 108,064 - - -
Unsecured other loans 124,402 35,978 35,279 21,499 5,118 26,528
Lease liabilities 2,249,964 429,180 545,686 381,567 477,398 416,133
  34,276,906 26,735,309 5,105,658 521,864 832,942 1,081,133

 

             12/31/2019
   Carrying amount  Less than 1 year  1-2 years  2-3 years  3-5 years  More than
 5 years
Trade and other payables(i) 25,589,612 21,498,681 3,282,421 253,629 214,291 340,590
Secured bank loans 461,154 176,673 55,564 54,748 62,541 111,628
Unsecured bank loans 212,668 94 209,831 2,743 - -
Debentures and Bonds 106,611 - 106,611 - - -
Unsecured other loans 134,466 40,378 34,725 31,277 5,725 22,361
Lease liabilities 2,147,905 436,004 485,275 367,675 317,349 541,602
  28,652,416 22,151,830 4,174,427 710,072 599,906 1,016,181


(i) Includes mainly the amount related to suppliers, taxes, fees and contributions payables, dividends and interest on equity payable, salaries and charges, put option related to our participation in subsidiary and other liabilities, except for related parties, which payment term is less than 1 year.

 

Sensitivity analysis

The Company mitigates risks arising from non-derivative financial assets and liabilities substantially through derivative financial instruments. In this context, the Company has identified the main risk factors that may generate losses from these derivative financial instruments and has developed a sensitivity analysis based on three scenarios which may impact the Company’s future results and/or cash flow, as described below:

49 

AMBEV S.A.

 

Notes to the interim consolidated financial statements

For the period ended September 30, 2020

All amounts in thousand of Brazilian Reais unless otherwise stated

 

1 – Probable scenario: Management expectations of deterioration in each transaction’s main risk factor. To measure the possible effects on the results of derivative transactions, the Company uses parametric value at risk (VaR), which is a statistical measure developed through estimates of standard deviation and correlation between the returns of several risk factors. This model results in the loss limit expected for an asset over a certain period and confidence interval. Under this methodology, we used the potential exposure of each financial instrument, a range of 95% and horizon of 21 days after September 30, 2020 for the calculation, which are presented in the module.

 

2 – Adverse scenario: 25% deterioration in each transaction’s main risk factor as compared to the level observed on September 30, 2020.

 

3 – Remote scenario: 50% deterioration in each transaction’s main risk factor as compared to the level observed on September 30, 2020.

 

           
Transaction Risk Fair Value Probable scenario Adverse scenario

Remote

scenario

           
Commodities hedge Decrease on commodities price 49,377 (193,060) (661,848) (1,373,072)
Input purchase (49,377) 218,245 729,536 1,508,449
Foreign exchange hedge Foreign currency decrease (68,925) (165,949) (3,053,272) (6,037,620)
Input purchase 68,925 165,949 3,053,272 6,037,620
Costs effects   - 25,185 67,688 135,377
           
Foreign exchange hedge Foreign currency decrease (11,473) (15,124) (273,155) (534,837)
Capex Purchase 11,473 15,124 273,155 534,837
Fixed assets effects   - - - -
           
Foreign exchange hedge Foreign currency decrease (5,205) (6,644) (92,992) (180,780)
Expenses 5,205 6,644 92,992 180,780
Expenses effects - - - -
           
Debt Foreign currency decrease - 9,171 148,376 296,751
Interest expenses Increase in interest rate - 713 11,089 20,864
Debt effects   - 9,884 159,465 317,615
           
Equity Instrument Hedge Stock exchange price decrease (69,134) (118,490) (265,133) (461,133)
Expenses 69,134 129,236 313,688 558,242
Equity effects   - 10,746 48,555 97,109
           
Equity Instrument Hedge Stock exchange price increase 416 (2,044) (69,995) (140,407)
Expenses (416) 2,044 69,995 140,407
Equity effects   - - - -
    - 45,815 275,708