Ambev SA (ABEV) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the AmBev conference call to discuss the earning results for the second quarter of 2003. (CALLER INSTRUCTIONS). Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of AmBev's management, and on information currently available to the company. Forward-looking statements involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. The future results and shareholder values of AmBev may differ materially from those expressed and/or suggested by these forward-looking statements. Now I will turn the conference over to Mr. Marcel Telles, co-chairman of the Board of Directors. Please, Mr. Telles, you may begin your conference.

Thank you. Good morning, everyone. Today, again, I have with me on the call from our management team (indiscernible ), Sales Director; Juan, Software Director; Brito, our Director of Operations; Felipe, our CFO; and Luis Felipe Pedreira Dutra Leite, IR (indiscernible) of Internationale.

Well, despite a challenging environment characterized by significant depreciation of the local currency, year-on-year, including the additional impact of our hedging (ph) quality, inflationary pressures and increasing taxation, and an increase in the cost of some commodities, AmBev's Brazilian operations reported a 13 percent year-on-year EBITDA growth for this quarter. We believe that this performance is (indiscernible) that we are on the right track by sticking to AmBev's long-term strategy. More importantly, however, recognizing the tough environment and as a result of the Company's culture and its ability to adjust the shift in direction, if necessary, we undertook several measures and have accelerated implementations of some projects that should translate into important savings throughout the second half of 2003.

For instance, during the quarter, we advanced significantly in improving revenue management by shifting our mix towards higher contribution margin products. In the Beer Segment, Skol accounted for 56 percent of our sales mix versus 54. On soft drinks, our core portfolio now accounts for 85 percent of sales versus 77 percent in the year ago quarter. And Luis Felipe Pedreira Dutra Leite and Juan will elaborate more on that. Also, maximizing our distribution and execution efficiency, which is of paramount importance to dominate the point sales, and, improving productivity and reducing costs, as evidenced by the fact that our efficiency improvements were able to almost fully offset the impact of the increase in the cost of commodity and other indirect costs. Once the impact of the commodities softens, we expect our efficiency and productivity improvements to become more evident. Importantly, these improvements are recurring, and should be perpetuated, going forward. And, again, (indiscernible) and Felipe will talk more about these improvements, going forward.

From a market perspective during the quarter, sales volume of beer increased by 2.5 percent while sales of soft drinks remained at essentially flat. The core soft drinks portfolio was up 10 percent. Market share in both segments increased relatively to March 2003. And that illustrates the company's successful point-of-sale execution in the Beer Segment. As of June, 2003, AmBev now has the three leading brands in the Brazilian beer market, further consolidating our number one position.

Finally, this is the first quarter that includes three months of (indiscernible) to our results. AmBev's international operations generated an EBITDA of 25 million AIs, which keeps the proportional consolidation accounting for 30 million of debt. We have no doubt that the prospects, going forward, are exciting, and we will continue working hard to gather -- to capture all synergies, both on the cost and revenue fronts.

Quinsa's second quarter '03 conference call just ended, and I'm convinced that you had a chance to share its management's enthusiasms about the Company's prospects, going forward. I will turn the conference to Luiz to talk more about sales and (technical difficulty).

LUIS FELIPE PEDREIRA DUTRA LEITE: Thanks, Marcel. In the second quarter, we posted a 2.5 percent volume growth compared to the year ago quarter. Market share was up .7 percentage points, reaching 70.1 percent in June. We continue to see the benefits of our (indiscernible) to improve on a daily basis, point-of-sale execution, both from our own distribution network as well as AmBev's third party exclusive distribution system. Importantly, as Marcel mentioned before, in June, 2003, AmBev had the three leading brands in the Brazilian beer market --Skol, Brahma and Antarctica gained market share related to March 2003. We remain focused on our long-term growth (indiscernible). On the revenue management front, this quarter, in the mainstream segment, we sold more of our higher margins brand, Skol, which increased its rate in our sales mix to 56 percent from 54 in the year ago quarter.

In addition, also helping our profitability, our packaging mix shifted towards lower prices, but higher margins returnable (indiscernible) bottles, which represents almost 72 percent of our sales compared to 69 percent in the second quarter of 2002, and 70 percent in the previous quarter.

(indiscernible) on the revenue management front, there is some other good use. During the quarter, sales of Skol (indiscernible) was also rolled out nationally, and volumes increased by 80 percent, sequentially. (indiscernible) now was relaunched, and we expect a positive impact on volumes during the third quarter. And finally, we also launched (indiscernible) Bohemia, whose sales were expected to end in September of 2003. However, given the strong performance, sales should be over one month earlier than expected.

Considering this additional execution on the point-of-sale, direct distribution for beer increased by more than 3 full percentage points compared to the year ago quarter, and two full percentage points compared to the previous quarter. Direct distributions accounted for almost 30 percent of our beer sales volume, and roughly 35 percent of total volumes. Moreover, we're also able to increase our market share in the bar (ph) channel by 1.1 percent. Compared to March, we now have a 74.2 percent market share.

Given the complexity of this channel, we believe that this growth advanced our further improvements on the distribution front. Regarding beer, net sales by the hectoliter, they reached R$100.8 per hectoliter in the quarter, up 9.8 (ph) percent compared to the year ago quarter, mainly due to the price adjustment that we did in October 2002, to compensate for higher cost and taxation, higher volume distribution through our direct distribution system, and also, as a result of our strategic revenue management initiative.

Comparing the first quarter 2003, our revenue by the hectoliter remains almost flat, as slightly better pricing and more direct distribution were offset by higher taxation and increases in return on presentation in our packaging mix. As anticipated in our last conference call in May, 2003, during the second quarter, the Company decided to increase its prices to offset the cost pressure coming from the depreciation of the currency, inflation the increasing commodity costs, and further increasing taxation.

During June, the Company started to implement the price increase. On bad stock (indiscernible) adjusting beer prices, in one-way packaging and rates (indiscernible) presentation towards the end of June. The average price increase to consumers was around 12 percent. This is below the inflation (ph) between October 2002 and June, 2003, and in line with our strategy to keep real prices in line to consumers. The price increase was not across the board. A variety of brands, (indiscernible) presentation in the region. Importantly, this year, we decided to adjust our prices during winter, as we expect this strategy to improve our stake of the margin (indiscernible).

From our past experience, our market share tends to fluctuate from 70 to 68 percent, depending on how fast our competitors follow our pricing initiatives. In average, it takes them two months to raise prices. That said, we expect the third quarter of single digit volume decline; but we remain confident that a regain of market share in the fourth quarter will place our volumes growth around 2 percent.

On the per capita front, we are very proud to announce the launching of our Brahma Light. Brahma Light is positioned as the lowest-calorie beer in the mainstream price market, targeting people whose main concern on beer consumption is the calories level.

Initially, Brahma Light will be available in two different packages, cans and long necks. And the launching is restricted to (indiscernible) San Paulo (ph), the most important market in Brazil. Although it's really early to talk about results, we are very confident the response of both our distributors in point of sales was very positive. Moreover, Brahma Light will be supported by a huge advertising campaign, starting on the first week of September. We will have TV commercials, magazine ads, are the most important vehicle, (indiscernible) impact out of home media; (indiscernible) is part of sales material and sampling activities.

In summary, although our short-term volumes could be impacted, our long-term strategic (indiscernible) are the long-term (indiscernible) drivers of the company such as (indiscernible), revenue management and obsessive search for improvements on the distribution execution front remain in place.

Thank you, and I will now pass it to Juan.

Thank you, Luiz. This quarter in soft drinks, obviously, we felt the impact of a declining sales and market and higher costs. But, we gained share; we improved mix; and improved pricing versus last year and versus the prior quarter. Our EBITDA this quarter of R$39 million, that's about three times higher when we compared it to the same quarter a year ago. It was an EBITDA margin of 14.2 percent in this last quarter, which compares favorably to last year's 5.5 percent EBITDA margin.

This second quarter, our net sales for hectoliter grew by 15 percent compared to last year. Our core portfolio (indiscernible) grew in volume by 10 percent and grew in importance in our mix and now represents 85 percent of our sales compared to 77 percent in the second quarter of 2002. Market share for these two brands -- our core portfolio (indiscernible) Fresca (ph) and Pepsi reached 14.2 percent, and (indiscernible) the market that's up 1 full share point versus the prior quarter; and slightly over 2 points versus last year's, which was exactly 12.2 percent.

Despite the -- I would say sluggish economy and economic environments of this last quarter, and our focus on higher value added products, our total volumes remained essentially flat year-over-year. In the cola segment, our (indiscernible) portfolio gained 360 basis points, compared to March last year, with Pepsi still performing very well, achieving 3.8 percent of the cola segment in Brazil this last quarter. In the (indiscernible) segment, (indiscernible) gained share versus the prior quarter and versus last year, and continues to certainly consolidate its leadership of the (indiscernible) market.

We basically did nothing different this quarter. We just stick firmly to our (indiscernible) view strategy, focusing on a few (ph) but profitable brands, focusing on few (ph) programs, all those (indiscernible) synergy with beer, and always looking at maximizing our profitability rather than (indiscernible) costs. Which, looking forward, is exactly what we will continue to do.

I will now pass it onto (indiscernible).

Thanks, Juan. This quarter, we have to recognize that we have some mismatch between real cost of goods, COGS, and market consensus. We decided, therefore, to answer five (indiscernible) questions that we think should be in everyone's mind at this point.

The first question -- why did COGS increase by 23.4 percent, quarter-over-quarter? In the press release, Page Nine, we depicted that almost 100 percent of this variation could be explained by means of foreign exchange variation, hedge costs of this year, vis-a-vis the spot rate and inflation that affected the part of COGS that's exposed to local currency. These effects together account for 98 percent of the increase, or 23 percent, quarter-over-quarter.

Second question -- if this is the case, is it fair to say that the operations area -- my area of responsibility -- had no role in getting anything working for the company in this quarter? Be that of negotiations or higher efficiencies? Well, this is not so. As also explained in the press release on Page Nine. As a matter of fact, we had some commodities that increased, in dollar terms, quarter-over-quarter, that is in real terms, for example, sugar 25 percent; PET (ph), 12 percent; oil, 10 percent. And some local currency the nominated (ph) commodities that also increased in real terms, that is over and above inflation, for example, corn syrup that we use for beer, 28 percent above (ph) inflation, and energy, 20 percent above inflation, quarter-over-quarter. Efficiency gains that we realized in the quarter, for example, lower extract loss for beer, better line efficiency, packaging line -- and lower fixed costs -- among others, offset almost all of those increases in real terms. It's also fair to say that the more favorable package mix also helped COGS this quarter.

Third question -- why did COGS per hectoliter increase from first quarter this year to second quarter this year? It appeared where the local currency, the Real, appreciated against the U.S. dollar. One thing that helped the first quarter this year was the carryover effect of the raw material we have in-house. Normally, this effect is not relevant, but this first quarter '03 was -- had a benefit from an inventory that was priced at the 2002 dollar hedge at 2.52 in the last four months versus the spot rate in the first quarter this year of 3.49. This impacted, mostly the beer business, since we do have malts and aluminum tolling (ph) operations, which have this foreign exchange effect on its pipeline inventory. This, for example, would explain almost half of the 7 percent increase first quarter this year versus second quarter this year. Moreover, the commodity prices had only peaked during the second quarter this year affected, adversely, the COGS in the second quarter '03, as well as aiming toward a carryover into the second quarter '03, priced at a foreign exchange of 3.49 from the first quarter this year versus a hedged dollar -- hedged dollar of 3.31 in the second quarter this year.

Fourth question -- where do we see cost of goods sold, COGS going forward? There are a couple of points here. First, some important commodities have peaked during the first half of this year, and that should have a positive impact going forward. Second, although we have hedged ourselves against foreign exchange fluctuations as Felipe will comment in a moment, we're not hedged against commodity fluctuations, with the exception of aluminum. In other words, we buy the bulk of our commodities in the stock market, and therefore, we are exposed to commodity volatilities. Just to give you some examples. Sugar, which peaked in the first half of this year, had increased price by 20 plus percent in Brazil in local currency in the last three weeks of this quarter. But we think this upward trend is about to peak once more.

On the good front -- on the other hand, (indiscernible) prices decreased this quarter in dollar terms, vis-a-vis second quarter '03, by 18 percent. Also, corn syrup prices decreased in nominal local currency, this quarter over second quarter '03, by 11 percent.

Third, the fact of the matter is that commodities are behaving better this quarter, price-wise. And with this scenario in mind, we should expect that the (indiscernible) I referred to a moment ago, that we're getting this year, will begin to surface, and will have a positive influence on COGS going forward, and especially in this third quarter.

Fourth, we upped our 2003 commitment, as Marcel mentioned, as a consequence of this scenario, as well.

And the last question -- are we (indiscernible) some kind of protection for commodity pricing other than foreign exchange and aluminum, going forward, to avoid short-term volatility? Before anything else, let me see the obvious, and that is that we think we cannot beat the market in the long run, in all commodities, of course. What we believe we can do is twofold. First, have more (indiscernible) with our suppliers to avoid short-term volatility. Two, have more natural hedges like the one we have with the supplier of Brazilian barley to our malting plants. During this second quarter '03, this did not work 100 percent because of the bad barley crop we had in Brazil and the fact that we had some port (ph) barley to supply our market facilities, at, of course, a higher price. I guess these are the relevant points about COGS, and I would like now to pass it onto Felipe.

Thank you, (inaudible), and good morning, everyone. Our consolidated EBITDA reached R$550 million in the second quarter 2003. That is 17 percent compared to the pro forma EBITDA in the year ago quarter. Besides the (indiscernible) on the revenue management front explained previously by Luis Felipe Pedreira Dutra Leite and Juan, and on the variable cost front explained by (indiscernible) and the operating possibility also benefited from another decline in cash SG&A expenses of roughly R$36 million, and an improvement in the performance of our international operations.

Considering our commitment to reduce real costs and expenses by between R$150 to R$200 million in 2003 versus 2002, on the SG&A front, we achieved real savings of R$35 million. This is a combination of recurring savings in SG&A of R$9 million in the second quarter 2003, versus second quarter of last year, and the impact of the inflation for the entire period. In this amount, we are already excluding savings of R$27 million that occurred during the quarter, but, that we expect to incur, going forward. Direct distribution costs in Brazil increased to R$137 million from 160 in the year ago quarter, as the percentage of direct sales in Brazil increased to 34.6 percent from 32.5 percent.

On a per hectoliter basis, direct distribution expenses increased by 10 percent to R$22.7 from R$20.7 in the second quarter of last year. And this increase is primarily the result of higher freight costs and higher direct sales volume to bars and restaurants, which present a higher distribution cost per hectoliter relative to distribution to supermarkets, and that the same time, much better margins.

Concerning net interest income during the quarter, we reported a net income of R$17 million for the Brazilian operation. The decline in the net interest income is a result of two factors. First, although the dollar (indiscernible) will continue to decline during the quarter, this decline was less pronounced than during the first quarter this year. Second, (indiscernible) must be reported according to Brazilian legislation at the lower of market value or accrual basis. As the market value of our hedged instruments as of June 30 this year was higher than their accrual value, we had to book the assets based on an accrual basis rather than at market value. Had the company been able to reflect its assets at market value, it would have realized a gain of roughly R$96 million.

Our debt continued to be fully hedged. During the quarter, we fully improved our credit profile by reducing net debt by roughly R$80 million.

Finally, concerning our hedging policy of variable costs, we already know that it increased our cash cost of goods sold by R$41 million in the second quarter as a result of an increased hedge rate at the cash cost of goods sold level of R$3.31 per dollars versus, an average spot exchange rate of 2.99.

As mentioned in our last conference call, we started to hedge in Brazil as the spot rate was around 3.2 to 1. And, by applying the interest rate on top of that, we come up with the (indiscernible) rate mentioned for the second quarter.

Going forward, we do not intend to annualize (ph) our hedge position, as the hedge was structured to eliminate volatility from our results. For the third quarter, we estimate that our (indiscernible) hedge rate is around 3.33. And, for the last quarter of this year, we estimate an FX rate around 3.3.

Now, we can move onto the Q&A session. Thank you.

(CALLER INSTRUCTIONS).

Hello, operator?

(CALLER INSTRUCTIONS). Mr. Gustavo Hangria (ph).

Hello, everyone. My question is more in regards of your internal targets for the year. If you can elaborate a little bit more on that, I would appreciate just a comment on the (indiscernible) first quarter. I remember you had a target -- an internal target of growing EBITDA in real terms of something around 15 percent. And I would just like to know, for this, if you are reiterating these, or if you have changed your estimates for the year? And also if you can elaborate more on pricing and volumes, I would appreciate it. Thank you.

This is Marcel here. The 15 percent magic number is one of our internal numbers, and relates to our remunerations. (indiscernible), both of which we begin to paid on a variable basis. So, everyone here is very personally committed to this number, although the Company doesn't give guidance on its growth or results.

Okay. Now regarding your volumes and prices per hectoliter, if you could elaborate a little bit more on your expectations for the year. I know you that you talked a little bit about next quarter, that you're expecting some drop in volumes. But, if you could have more detailed comments for the year.

Basically, what we see for the year is a 2 percent volume growth. But, again, that's always dependent on the market. We still see a lot of Brazilians in the market for beer in Brazil, but most of the markets are very, very soft. And we are attributing any decline in volumes during the first month of this quarter, basically to the fact that we will be increasing, very aggressively, prices and competitors have historically lagged a lot, following ours, as they are now. No one followed those prices yet. Revenue per hectoliter -- (indiscernible) our calculations, you know that we basically raised our price around 12 percent.

(CALLER INSTRUCTIONS). Celso (ph) Sanchez with IND.

Good morning. I have a couple of questions, actually. The first one is pretty straightforward. Is there any way you could quantify for us the benefit of the hedge last year in the second quarter of 2002? In other words, just like the 29 million was a negative impact this year of the hedge, last year, I presume there was some benefit in that quarter. If you could quantify that for us, that would be the first question.

This is Brito. In terms of variable costs or cost of goods sold second quarter last year, the benefit was R$9.9 million. On the other hand, this quarter, the impact -- the negative impact is around R$40 million -- for the quarter, in terms of COGS.

Just to get -- maybe I'm splitting hairs -- but of the 9.9 million, can you tell me how much of that was beer? I know 29 million of that this year was beer. How much of that helped Brazilian beer?

Sorry. I don't have the numbers here with me. Maybe (indiscernible) and hand it over to you, off-line.

Off-line. Thank you. The second question is a bit more about the revenue management. Can you give us more of an update, or a bit more color perhaps, on the (technical difficulty) in terms of penetration, volume growth relative to the total portfolio pricing activity? Anything really that just gives us a sense of how that's progressing. I thought that was a very interesting story when you had the conference in March, and I just wanted to get an update. Thank you.

We didn't do very well this last quarter. Still, we have 4 percent growth in the first semester -- the first six months. And we believe that these bad results in Quilmes in the second quarter is basically some San Paulo. Because here, we depend a lot on supermarkets; in supermarkets did very bad these last three months. And 50 percent of our volume film -- in Quilmes volume -- still depends on San Paulo. So we are doing very well in other areas. But, as we depend a lot on San Paulo, we felt bad. We hope for the next month, of course, as other markets keep on growing, we can recover some of this volume. And we believe all the brands can recover part of the volume, like Antarctica do Genal (ph), and Skol Beats, and Brahma Light; they are growing very fast. So we believe some of the volume that we lost can be recovered, with the rest of the mix. And well, let's see what happens with San Paulo markets in the next few months.

Is there any indication that things have picked up in the third quarter yet? Or is it still consistent with the second quarter's results?

It's too early to say.

Okay. And with respect to Brahma Light, my understanding was that the light segment tends to be a premium segment or super-premium, if you want to call it, in Brazil. Is this a conscious decision to try to push it more mainstream? I would have thought that you would have tapped into the higher priced segment with the light beer.

Yeah. We are calling that the super-premium since we are targeting 5 percent price over the leader, basically, over Skol. It's lower than Bohemia or (indiscernible) Skegunal (ph). So it's premium because it compares with Skol; but it's not at the same price as Behemia, and Skol Beats, for example. So we think there is a lot of volume to take from the market.

Do you think it will be incremental volume, or what allowance for cannibalization do you think there might be?

Yeah, of course some of that would be cannibalization. But it is focused on consumers that want low calorie products. And so we believe there are a lot of consumers that could increase volumes for us. So it is per capita. And of course, it's with a better price, even if there's a cannibalization; it will be with higher margin too. So, that's the point.

Steven Dixon. Mr. Dixon, your line is live, sir.

I don't have a question. Thank you.

Thank you, very much. Alex Robars (ph).

I wanted to drill a little bit more into the volume trend here. And, I had a few questions on this. I mean, first of all, just to understand the -- I know the beer price increase starts in June. I wanted to get a sense of about when did it end? Was it in July? Particularly, was it at the end of the month in June? Maybe some color as to what you've seen so far in July as far as the volume impact there. The second volume question relates to the premium segment. You talked about, in March, in Rio (ph), this segment being very attractive, kind of eight to ten percent growth rate. Is this the kind of growth rate that we saw in 2Q, and is this still a number that you might expect for the year? And the third volume question that I found interesting was this idea that with the core brands in soft drinks growing 10 percent, it seems that really the other brands, i.e., the 15 percent of your portfolio was significantly in double-digit negative territory. Is that kind of a conscious decision? Or was there a pricing action there? Or maybe -- those were really the issues on volume.

Let me answer the soft drinks first, as far as the non-Pepsi and (indiscernible) brands. Yes, they have declined, and yes, it is a conscious decision. We believe very much on being extremely focused. We know that there is opportunity in those other segments, as well. But, our strategy, which has been doing few right things and an experienced (ph) synergy with beer, brought us to focusing on Guanantas (ph) and Pepsi, which are growing very nicely. So, it is a conscious decision that we, for the foreseeable medium, short-term future, will maintain, because we see significant room for growth still for both our Guanantas and Pepsi. So yes, it is conscious. And yes, there is pricing behind that. We have -- if you look at the last twelve or 18 months, those brands increased pricing significantly above Guanantas (indiscernible) and Pepsi, to put us in a minimum discount level for those brands.

Well, we implemented our price increases from the end of June -- from the end of May, with cans -- with some of the cans, and we finished that at the end of July, with the long necks. But basically, what we did was to differentiate when to raise prices through the package, and we differentiated prices through -- price increases through -- brand. So (indiscernible) (indiscernible) Skol, in different areas had different raises. But basically, what we do is that -- we're going to have just one price increase this year. And we differentiated during the time. It's a market strategy. But for the rest of the year, we don't see any room to increase more prices. So, that's it.

You asked about the impact on July. It is too early to say. We would like to comment (ph) that, of course, our competitors are still deciding how to implement the price increases. So, I would like not to say anything about our volumes in July. But, of course, we suffered, since they didn't follow us immediately.

In the premium segment, our expectations are for higher growth in the premium portfolio than in the mainstream portfolio. We still have expectations over 5 to 10 percent. So, that will depend a lot on how Bromelad (ph) goes in the second semester. And we expect we can give you some more information next quarter.

Okay. Great. And just the very last one, more of an interesting thing I noticed in the 20F about you purchasing roughly one million Quilmes B-shares I guess through June 16. What's the thinking on purchasing these shares in the open market in Quilmes? Is it just kind of -- maybe you could shed some light on -- I know you have the right option to buy more. What would be the thinking behind buying more?

Alex, hello. This is Felipe. Basically, from the agreement we have with Quinsa, we may buy up to 12 million Class-B shares in the marketplace. We already bought roughly one million as disclosed in the 20F -- 13D, sorry. And basically, it is an option -- it's a liquidity option for the shareholders that want to leave (ph) and cease their (indiscernible) liquidity in the marketplace. We are providing a (indiscernible) to that.

So, further purchases, really, are going to be based perhaps on some of these Quilmes shareholders that are keen to sell?

Yes.

Pablo Vueneck (ph).

Good morning, everyone. Felipe, one question just on pricing. I'm just trying to get an idea of your (indiscernible) management in the first half. If you will just tell us, what would have been your revenue per hectoliter in the first quarter and in the second quarter, had there been no tax increase during the first half of the year -- or in the second half of '02?

Pablo --

Is it R$3, is it R$8 per hectoliter. I'm just trying to gauge that. Thank you.

Probably, we would have to do this calculation. We did not have this figure available on a net basis. But we could provide you with information around that.

Okay. I guess if you're going to expand in terms of of the impact, in terms of of your (indiscernible) per hectoliter (indiscernible) in the third and the fourth quarter, I guess basically one could take the second quarter number and one could divide by 1.12; but that's your point-of-sale price increase. I would assume that, given that taxes are flat, the increase at the factory level should be higher than that. Am I correct in assuming that?

Yes, you are correct.

Okay. And then just - in terms of if you can expand in terms of sensitivity by channel. It is particularly surprising to me that volumes can suffer in July as much by a 12 percent price increase at the bar level. I mean, I would understand at supermarkets, maybe would be more sensitive to pricing. But is really the bar channel that more sensitive? Will people buy more (indiscernible) because you guys increased prices?

Pablo, no. Actually, we felt that in both channels -- in bars and supermarkets. But we raised prices -- canned prices in May. So we had suffered that before in cans. And all the price increases in bottles, in 600 million (indiscernible), during the end of June -- during June. So that's why in July, we've talked (ph) more in bottles. That's it.

Okay. And just --

As to your prior question, basically, the tax increase from the first to second quarter this year affected our net sales per hectoliter like R$2 (ph) per hectoliter.

Okay. Thanks. Just two last questions. In terms of your effective tax rate, you know, it was 34 percent in the first quarter, almost 39 in the second -- what can we assume for the second half? It seems to me that you haven't made use of your tax carryforwards; is the idea to make use of them -- of that -- in the fourth quarter mainly? Or what should we assume for the second half, in terms of -- assuming the currencies stay relatively flat now? What could be the effective tax rate?

We are using the long-term, on average, tax rate from 15 to 20 percent. But depending on the dollar volatility, you would see ups and downs on the tax line, as you saw during the second quarter. Basically, (indiscernible) the currency value in Brazil, we benefit from having a deductible expense in shore while a non-taxable gains offshore. And the reverse happens. When the Real (ph) appreciated during the second quarter, we had the opposite effect that explained, basically, such a higher tax rate that we incurred any second quarter. It is always hard to forecast. But, I think it's fair to work on the long-term with something from 15 to 20 percent.

Okay. Thank you. And just the last question, for Marcel. Marcel, if I look at the transaction with Antarctica, with Quinsa, either you have taken control in those transactions, where you have taken a 50 percent control -- and the case of Quinsa basically taking control -- if a 30 percent stake in a brewery in Latin America was available, would you guys buy that just to keep the 30 percent? Or would you need to have the assurance publicly disclosed that eventually you would take control of that hypothetical brewery?

I think that we would like to have this pass. Because, in the end, I think what we can add to any operation is people and processes. And, as you have some degree of control, or at least a (indiscernible) to control, that would be very difficult to implement from a minority position or a simple board (ph) position. But again, I mean, each case is a case. But, theoretically, we are very hands-on, and we like to be very involved in what we buy or with whom we associate ourselves.

Jose Galvin (ph).

My question was already answered. Thank you.

Robert Ford.

Good morning, guys. My first question has to do with Brahma. I was curious as to why light beers have failed in the past? My understanding is that most recently in Venezuela, they have taken the market by storm. And I'm curious is there any less of a concern from your experience in Venezuela, that are transferable to Brazil? And I'm also curious as to how the badge values of Brahma Light will overlap with those of Brahma (inaudible)?

Robert, this is Juan. Let me answer about the (indiscernible). I was a little bit involved in that in the past. First, obviously, the market has evolved significantly. And so has our understanding and our know-how in developing new products. So, we certainly did a much better job this time around than we did the previous time.

Two previous attempts -- those were definitely not -- were more tactical at the time that we introduced light than strategic as we did this time. We certainly did not -- we felt that it was the right moment for different reasons at whatever time, back in the early '90s and late '90s. And these were launches that we decided and developed and executed in both locations, in, I would say, less than a month. This time around, it took us over a year -- almost two years -- to get the right product, the right packaging, the right marketing. (technical difficulty) and again, the market is much more prepared, given the Skol effect in the market to receive a light product. Does that answer your first question? I don't remember your second question.

I was curious as to how the badge values of Brahma Light will overlap with those of Brahma?

It is definitely positioned as a non-extension, and all the marketing package has been designed to add to the overall Brahma brand equity. We will be reinforcing product positioning all the time. It's not a niche product, but it's a low-calorie option for beer drinkers, in general. And let me -- if I remember right, you mentioned Venezuela. Our reading of the Venezuela phenomenon is more of a flint (ph) bottle phenomenon than a light phenomenon. So they are not necessarily comparable. And we are extremely optimistic about Brahma Light. (indiscernible) back in the site visit earlier in the year, it was an obvious answer to many of the questions that were raised during the site visit; but, it was obvious that we could not answer and disclose everything that we were going to do because this is our big launch this year. And, very, very enthusiastic about it.

Thank you. I share your enthusiasm. My understanding of Skol is it's historically been positioned as a lighter beer, another beer that (indiscernible) round, right? How do you minimize the potential cannibalization against your power brand?

Well, we are talking about calories and not about light, and that's one of the big differences. We are, yes, projecting some cannibalization. But we are projecting entry into new locations. We are projecting -- week day usage -- week day usage -- (indiscernible) the calorie issue that today we're not getting. And that's why (indiscernible) so concentrated on weekends.

And is this a product that could be found in 600 ml glass if it's -- if good indications in September, October, by December? Can you be in 600 ml returnable glass?

I wouldn't say that there's a (indiscernible) for that. But the answer is, if the product performs as expected, yes, that'll be certainly in the targets.

And, I was curious with respect to cooler placements this year. My understanding was that they're going to be beefed up a little bit. So I wanted to get an update on CapEx -- specifically with respect to cooler placements this year. And we're also hearing a shakeup in terms of the distribution of Moulson, and perhaps things that sound like they could make a material impact in terms of of their point of sale execution. And I was wondering if you're noticing anything of that nature in July, as well?

Let me answer your first question on the coolers. We've decided, based on some bad results in maintenance and in spare parts for replacement -- we have decided to reduce our (indiscernible) from 100,000 to 70,00. This last quarter, we faced problems with cooler producer, which is exclusive. So, we decided to reduce (indiscernible) and recover equipment in the market that was not performing very well. We are committed to guarantee return on this investment. And, we've learned that disciplined maintenance are very, very important. So, during the last three months, we reduced (indiscernible), and we now recovered the (indiscernible); but of course, we lost some time, and we had to reduce 30,000 installments this year. We still believe it's a very, very strong (indiscernible), and we continue to bring forth execution to guarantee that they perform well. You had a second question on --

This is Brito. Just to comment on Moulson -- what we hear is pretty much public information. But what we see in the marketplace is what I can tell you. They had a problem with execution that they made publicly. They had a problem with the bottlers in terms of alignment. They are trying to decide who does what and how. And of course, the reason is, it has to be that they're going through a transition period, with I think, (indiscernible) reflects in the marketplace. But we begin to see some actions that they are taking in terms of hiring new teams, putting in place distribution in some key areas. And of course, be getting for a come back. And we do respect them a lot because they have the kinds (ph) of brands and they have the Coca-Cola distribution and a Moulson as a world player behind them in terms of knowledge. So we are just getting ready here for when their come back comes.

Marco Verra (ph).

That was a very articulate and comprehensive statement about COGS. (indiscernible) several points. Just a technicality -- are you, in fact, intending to swap your two (indiscernible) for some (ph) of the (ph) shares at all?

Just a second, please.

That was Marcel. He was kind of eating a cracker. (laughter)... No plans right now.

Okay. Since -- now that I have you on a roll, can you update us on Central America? It seems that there are better (indiscernible) trends there. And can you also update us on other exploratory projects and investments?

Well, I mean, we are going to launch in Guatemala next month. We have a lot of free PR. The press is discussing, everyone is excited about our new entrance, our new brand. So it is a positive environment to come to a market where the consumer has not been very well treated in the past. It is one of the highest prices for beer, I would say, probably in the world. So I think that both the consumer and the trade -- the consumer and the trade are kind of expecting us; that's very nice. We have -- like we did in Argentina in the beginning, we have a great team of young up and comers there. And it's very likely they'll have to make or break. So we see it very positively, and as a means of expanding into other Central American countries. We have a great partner there, one of the best Pepsi bottlers in the world. in my opinion. So, distribution is -- I would not say taken for granted, but it is a huge step in getting access to the point of sales. So Guatemala is (indiscernible) a small market, but a interesting and profitable margin pool, and with the possibility to expanding into other countries. There are countries there where we see some competitors paying close to 1 billion for getting into those markets. And I mean, we are doing that in the 30 to 50 million range. So, we are comfortable with that.

The same thing applies to other ventures. We are very intent to go into Peru. And also, Peru could be a natural exporter to Ecuador. We already have land. We already have equipment. We already have the team. We are beginning to move there.

And from Guatemala, since you're making a fixed investment, it's a very exciting project. You mentioned expanding into other countries; you're going south, and north, or just south?

South.

Okay.

(laughter)... Our partners there have distribution -- distribution of Pepsi in two other countries and are looking into a third.

Jose Jurdin (ph).

Good morning. I just had a question -- going back to the Brazilian volume growth potential. A couple of years ago, when AmBev first got started and hit a stride, you used to mention that you thought you could grow volumes at 1.5 times the rate of GDP (ph) growth. And it seems to me for the last couple of years that have passed that the market has basically been flat, even though GDP has grown about 1.5 percent. And, of course, it may be a problem with measuring the size of the market, which is never easy in Brazil. But, what would be your explanation for the lagging growth of the market versus GDP if in fact you think there is one? And do you still expect the same kind of multiplier going into the future?

I think that maybe the most relevant relationship is not directly to GDP but with disposable income. And although GDP is growing, you have less disposable income, or at least, stable disposable income in this period. On top of that, again, quite frankly, we had to compensate a lot of what happened in terms of our costs, with the valuation with price increases. We are (indiscernible) and we are managing to keep our price increases to the consumer to stay below inflation. That is a long-term proposition for us. But, having said that, the total amount of disposable income didn't grow at all at the same pace of inflation. Actually, it declined. So, I would say that at least for this period, that things still relate.

On the long run, (indiscernible) we are confident. But there's still a bet on the country. I mean, it's a country where you have -- it was the highest growth country of the world in terms of GDP, for 70 years of this century. And then kind of move it sideways for twenty years or something. So, the potential is here. The people is here. We see a lot of sound policies being put in place right now. So again, it is a huge bet on the future.

The other thing is, our market is affected by consumer confidence. So, when you have a period like we had for the last 12 or 18 months, where people were kind of unsure if the country was going to have (indiscernible), I mean, everyone kind of holds back a little. Actually, as I mentioned earlier, we were very surprised at how resilient the market has been to all those external factors. Price, consumer confidence, disposable income, when put into the context of what is happening with other consumer products and with what is happening like say with supermarket sales in Brazil.

But in a scenario of relatively stable currency and so forth, you, internally, you would expect the growth in the market to get back to the sort of 2, 3, or 4 percent?

Yes, definitely. If we really see a scenario where the right things continue to be done, where people recognize those things are providing a stable environment for both investment and consumption, and the country starts to grow again, definitely. And remember, that on top of that, you always have the (indiscernible) opportunity.

There is no problem right now with substitute products such as Cashasa (ph) or anything else? Has there been a fluctuation in those prices that could affect us positively or negatively (multiple speakers) --

No. Our -- basically problem is with our competitors. I mean, into the Beer Segment. We still have a lot of tax evaders into this segment. You know most of the initiatives we've been sponsoring are working together with the government. And we hope that most of them will take place by the second semester of this year, (indiscernible) semester of 2004. You also have Kaiser, which has a strategy that is probably like ours in soft drinks. I mean, they are following us in terms of pricing. And seeing how much affect their volumes were. I would guess that it unless it really hurts them in the cash flow, they will hold for a period before increasing prices. Operator, are there any other questions online?

Lori Sara (ph).

Thanks. I will make this brief because it's been a long call. Because those comments are were helpful on the commodity costs, inflation; but I guess I'd still like to understand -- if you look at the most important commodities for the beer operations, malt and barley, you mentioned that you had a bad domestic crop and you had to import. Can you give us some direction and hopefully some quantification of how you expect those commodities to perform in the next couple of quarters --compared to where they were in the second quarter? Because you made it clear that it's peak. But could you give us some sense of how much you think the decline could be?

Yeah, I mentioned here, at the beginning of the call, that we did have some commodities behaving a much better price-wise this quarter as opposed to the second quarter. For example, on the soft drinks side, (indiscernible), which decreased in dollar terms by 18 percent, and we already have this fixed for this third quarter. So this is something that we can say for sure. And on the beer side, an important one, that's the corn syrup, that we use with the malt, together, and that's declined in (indiscernible) local currency by 11 percent. And that's also fixed for the entire third quarter. So, other than that, Lori, I think because of some of the other things I mentioned and the questions I tried to answer at the beginning of the call -- the second quarter was pretty much the worst-case, I think, in terms of commodity pricing, some carryovers compared to the first quarter. And I think the third quarter, we were more optimistic, because we do see commodities heading down, at least so far. And again, we buy spots (ph), so it's very hard to give any guidance on that. And we also see an opportunity for our efficiency efforts to emerge as these commodities also behave better. We do have a set of things that we have to accelerate to try to offset some of these commodity (indiscernible) real term increases. And I think this will pay off and more than offset some of the commodities, and it will emerge now in the third quarter.

The 11 percent -- just to be clear -- is versus the second quarter and you think --

Third (ph) quarter.

For the second quarter -- and you think is representative for your beer raw material costs, (multiple speakers) one item?

No, I wouldn't say that. I just gave one example of the corn syrup prices. At this point, I wouldn't like to commit with any particular number in terms of raw materials. I'm just giving you the trends and what we expect again. We buy commodity in the stock (ph) and they are going down; they could go up. It is very hard to commit. (multiple speakers )

And what percentage of your raw materials in beer are the corn syrup, roughly?

I don't have the number here with me. Let me see if the guys have it here. If not, (indiscernible) will give you an additional call. But I don't have the numbers here on top of my head.

And just a question for Luis Felipe Pedreira Dutra Leite. You mentioned that -- I guess Marcel just mentioned that Moulson hasn't followed you yet. I assume the lower-priced brands don't. I'm just wondering when you're anticipating maybe some reaction? And whether there's any question in your mind whether or not this price increase can stick?

Lori, just one thing. Brito here. I just got the number. The corn syrup is about 25 percent of our beer raw material.

Thanks.

Lori, we've been hearing from sales force from -- in different places and different areas of Brazil, since two weeks ago, that they are going to raise their prices. But, they haven't done that yet. We haven't seen that yet. So we believe that they are preparing to raise prices; they are (indiscernible), and it should happen next month -- next week. So I expect during (indiscernible), they increase their prices. I hope they do. (laughter).

Carlos Roga (ph). Mr. Carlos Roga, your line is live, sir. (CALLER INSTRUCTIONS). Dan Cuetcowski (ph).

(indiscernible). First question is market share. Your volumes grew 2.5 percent; Moulson's were down 27 percent. Who's picking up the remainder of the share there?

Could you repeat that please?

Your volumes grew 2.5 percent in beer. Moulson's were down 27 percent year-on-year. So who is picking up the rest of the beer share? And could you share with us what the share is at the moment?

First thing, I don't have your numbers to compare. But you have to consider some aspects. First, that they don't have distribution all of the country. so they depend a lot on San Paulo (ph) market. And that's shrinking a lot, much more than happens in the other areas in Brazil. So San Paulo's suffering (indiscernible) industry and supermarkets depends. Then, you have to consider, (indiscernible) are much more important for them than for us. And then the supermarkets affect their volumes. It doesn't mean that we can recover the volumes. We believe that supermarkets shrink. And since we raised (ph) it -- comparing bottles with cans, our mix went more to bottles than to cans. Of course, their volumes should have raised -- should have fallen more in cans. There, you have to consider that not necessarily, the volume is flat -- the market volume is flat. Our 2.5 percent is, of course, a consequence of our market share increases, too. So, it doesn't mean that all their volumes should come to us, of course. Some of our competitors -- other competitors -- gained -- one percentage point in market share. But, the market is not necessarily flat. Okay?

So, was that (indiscernible) picking up the 1 percent, or was that divided between all the rest?

All the rest.

Okay. The second question is on the flow meters. What has the progress been on their rollout? And when do you think they will start to kick in?

Right now, -- this is Felipe -- we're are working with government in order to get the full specifications and to approve the suppliers. We are expecting the final regulation (ph) being released later this year. And flow-meters will be starting to be (indiscernible) as soon as we get this final regulation.

Okay. Thanks. On further state taxes, do you expect any other states to increase taxes over the course of the next year?

Well, they normally increase taxes gradually throughout the year, despite the fact taxes are fixed, or at least most taxes, are fixed on a per hectoliter basis. From time to time, they collect the new price level at the marketplace, and they do some adjustments. Then, we do expect that to grow readily next year. But, we will depend a lot on our pricing strategy and our ability to roll back consumers' price. If we are successful of doing that, probably, they -- taxes won't increase that much.

Okay. Thanks. On the price point of light beers, can you talk about that in comparison to the rest of your portfolio, and what the contribution margin of light beers is compared to your portfolio?

Price should be 5 percent over the leader, basically Skol, in most of the country. And margins should be 10 to 15 percent over the average margin.

Okay. Great. And then the last question, is more of a technical question. You, in terms of buybacks, in terms of purchasing Quilmes shares -- could you share what (ph) it is more useful to buy your own shares rather than buying Quilmes' shares?

We basically have a buyback program here at AmBev. We're buying '01 (ph) shares and TM (ph) shares, regularly in the marketplace. It's an ongoing program. And besides that, we have this ability to buy up to 12 million Quinsa shares -- Class B shares.

But considering where prices are today, is it not more -- is it not a better use of your cash to buy back your own shares -- dedicate more money to buying back your own shares rather than buying back Quilmes shares?

We are buying as much shares as our program allows. (indiscernible), we are basically extending it. But those are not excluded. And we do want to provide liquidity to Quinsa shareholders.

At this time, I would like to turn the floor back over to your host, Mr. Telles.

Thanks to everyone. It's been a very long conference call. And, I hope it was ... (technical difficulty)... (CONFERENCE CALL CONCLUDED)