Lucas Lira: Yes. If I may just add one thing, Carlos, to your question about managing reputational risks, especially right in the short-term, every given, all that’s happened, right? Since the beginning of the year here in Brazil. I think Jean alluded to this on the last call, but I think it’s important stressing it, because one of the things that happened in 2020 when COVID hit was really a decision on our part, right, to be there for our ecosystem. And that applies to consumers, that applies to customers, that applies to wholesalers, to suppliers, right, to local communities. And this was right, genuine was intentional, was deliberate because we thought it was the right thing to do. We needed to be there given what was happening in the country at the time.
And fast forward, right, two, three years, one of the things that really caught our attention in Q1 was when this whole noise hit, the support that we got right from the ecosystem was really impactful for us to see consumers standing by us, to see customers standing by us, to see suppliers, wholesalers really stepping up, former employees of the company, right? Being vocal about the company, what we’ve been doing? Why we’ve been doing it? And how we’ve been doing? It really struck a chord with us, and I think is a good illustration of how our consistent focus around right, building and improving on the cultural revolution and the reputation of the company is important as a matter of principle. Okay. And I think Q1 was a good example.
Carlos Laboy: This is very thoughtful and impressive. Thank you.
Operator: Thank you. The next question comes with Isabella Simonato with Bank of America. Please go ahead.
Isabella Simonato: Thank you. Good afternoon Jean and Lucas, thank you for the call. I have two questions mostly on the international division. Starting with last I think was this quarter showed a great focus right? On pricing even though volume suffered, right? And combined with the hedging strategy for mainly for Argentina, right? Is this something that we should continue to think for the upcoming quarters? I mean even though macro conditions should be tough and volume, elasticity should be higher, will pricing be the key focus here in a way to maximize this equation for the company? And on just to come back and try to relate this with cash flow in any sense? I mean, Lucas, is there an impact on, in any way of working on working capital from this procurement strategy in Argentina?
Or nothing that we should that – nothing that should be impactful? And the second question is on Central American Caribbean. I mean, obviously it has been a tough recovery on the margin side and on the top-line side, I wonder if you could give us more color on what are you looking in terms of recovery going forward? What will be the drivers, and eventually the timing of a more normalized level of results? Thank you.
Lucas Lira: Hi, Isabella, thanks for the question. Let me – let’s Jean start off on the top-line aspect of Argentina then I can complement.
Jean Jereissati: Yes. So thank you for the questions, Isabella. So, yes, so LAS, talking about LAS, we have some countries over there. Of course, Argentina is representative, but we have Argentina, Chile, Paraguay, Bolivia. And we are working for a while in LAS to really LAS shine. And the truth is that we LAS entered 2023 more productive overall. So we knew the democracy scenario is volatile. So we really get more efficient over there more productive. If you look at Chile, the capacity expansion made us much more agile to have supply more supply capacity in Chile. If you look even at Argentina, so we are really working with cost discipline over there. So overall LAS is it’s more productive, more efficient. It is lighter because somehow we were kind of overpaying for protection to be – to feel protected over there.
So LAS is lighter, the discipline on pricing execution it is a priority for us over there. And so that’s why you saw the P&L that went very well. It’s not just Argentina, Chile, we performed very well compared with the previous year. In Bolivia, we saw volumes going on the positive side. Paraguay overall has momentum in all the lines doing well. And, but – so this thing about the volumes that were, we had a steep decline over there. I think it’s, the volatility is more the volatility of the country, country with big inflations that were rearranging. So, I would not say that this type of volume performance would stick around. So there is the adjustment zone on salaries, everything, even Chile, that had a tough industry in Q1 too, we see it getting better month-by-month.
So, somehow LAS we are very prepared for the volatility. We are more efficient, lighter discipline on pricing is really what matters for us now. And the volumes, I think that, that would be better than what we saw in Q1. So, then Lucas on the financial – on the financial hedging.
Lucas Lira: Okay, so hi Isabella. On the hedging side to put things into perspective, it’s also, I think it’s important to remind everyone that since our decision in Q3 of last year to start reducing gradually our financial hedge this came alongside a decision on our part to also elevate the focus of the organization around free cash flow in U.S. dollars as a key KPI to define success in Argentina going forward, just given the environment that we’re facing in the country. Okay? And as a result of this decision to elevate free cash flow in dollars as an important KPI, what this has translated into on the hedging side is to continue to have some protection in Argentina, but not to the same extent, right, we had historically the average 12 months of the hedging policy, as you well know, and we continue to be right below 10 months, as I mentioned last time.
That continues to be a reality. But just given the current conditions of temperature and pressure in the market, we actually are looking at this call on how much to hedge on a monthly basis. So this is a monthly exercise that we do together with the local team to see what’s the right, what’s the optimal level of financial hedge that we should carry going forward looking at currency performance carry cost, and trying to optimize that balance. So that’s, I think, the important message on the financial head side. On the operational hedge side, which we decided to increase, and this speaks to your, the working capital aspect of your question. On the operational side, we’ve made good progress in Q1. So we challenged ourselves to review the full suite of our agreements with suppliers to see what could, should change and how to implement that in a dialogue with our suppliers.
Okay. And that made good progress during Q1, slightly ahead of what we originally had planned for. So good progress there, but again, we’re being very careful and disciplined to do things gradually. Okay. So that, we’re – we just the environment requires a lot of discipline and caution not to kind of jolt the business and the relationship with suppliers. Okay? And then on the working capital, which is also impacted, the challenge that we’ve been facing and this is still work in progress is to really find the optimal balance for the current environment. So, right, the cash conversion cycle for Argentina in today’s world in the short term is going to be different, right, than the cash conversion cycle that we had last year or the year before.
And it’s a constant to see to what extent we need to revisit our payment terms with suppliers, payment terms with customers, level of inventories, be it raw materials, be it finished goods. Okay. And this is work in progress, again Q1, so far so good. But since the short-term environment is so volatile, I think it’s going to be a constant point of attention that we’re going to be actively managing going forward. Just the short-term reality requires us to be very nimble, flexible and on our toes to manage all these aspects of the, that impact free cash flow generation. But again so far, so good. And then on CAC, I think overall we made okay progress in the quarter. Okay. Overall, the highlight in terms of sequential improvement continues to be the Dominican Republic, which is good and important, because it’s our biggest market.
So despite inflationary pressures locally that continue to impact to some extent the volume recovery, the pace of volume recovery, but also cost pressures that still persisted in Q1 to some extent, sequentially we continue to make steady progress. And then when you kind of look under the hood of the Dominican Republic kind of improvement drivers what we continued to see in Q1 was the improvement of three very important KPIs that relates to the main SKU in the country, which was the 22-oz Presidente bottle, which was the supply chain issue that kind of sparked the whole – the big challenge that we had last year. And so the level of coverage of the 22-oz Presidente bottle continues to improve in Q1. The price, the suggested price adherence with customers, with clients continue to improve for a third quarter in a row.
And the inventory levels for this SKU also continue to improve sequentially, and that translates into better service level. That translates into better net promoter score. On top of that, we’re investing in the market; we’re investing behind our brands, the focus around the digital ecosystem, right? These and the marketplace continues to be front-end center in our strategy in there. So again, there’s no silver bullet for recovery, but we know what we have to do. We have to execute extremely well going forward. But the team is confident and their ability to sequentially continue to recover. How much time it’ll take. I think ultimately time will tell, but I think we’re talking more about; it’s a matter of quarter, months and quarters, not a matter of years.
Okay. Just to give you a way to think about it. And we really need to get the Dominican Republic back to where it was free 2022, because since we did the combination with Cervecería Nacional Dominicana right? The Dominican Republic has had a great ride up until 2022. We need go back to that type of performance. And it’s going to be a lot about execution, top-line, cost management, expense management, we’re going to have, everything’s going to have to work from an execution standpoint. Okay. Hope this helps.
