Ambev SA (ABEV) 2003 Q3 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 third quarter of 2003. We inform that all participants will only be able to listen to the conference during the company's presentation.

After the company's remarks are over, there will be a question-and-answer period, limited to two questions per person.

At that time, further instructions will be given. Should any participant need assistance during this conference, please press star zero for an operator.

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, depends 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'll turn the conference over to Mr. Marcel Telles, Co-Chairman of the Board of Directors.

Mr. Telles, you may begin your conference.

Thank you, and good morning, everyone. Today I have with me on the call from our management team (Luis Fernando), our sales and distribution director, Miguel Patricio, our beer and marketing director, who is currently our CFD and non-carbonated director and recently appointed COO to our international operations from 2004 hallmarks, Brito, currently our director of operations and also recently appointed COO for Brazil's operations beginning in 2004, Felipe Dutra our CFO, and from our IR team (Terbus Fernando).

Once more, AmBev reported a double-digit EBITDA growth in the quarter. EBITDA for the Brazilian operations in the quarter grew by almost 17 percent year on year despite another very challenging environment, characterized by a 12.3 percent decline in beer sales volumes in Brazil, the negative impact of our currency hedging (policy on dollar link) and (Verbo), plus by inflationary pressures and the increase in the cost of some commodity.

We also have massive market investments from one of our competitors, that in September alone invested more than we did invest in our (leading brands core) up to that date.

However, as already evidenced in other opportunities in the past, like as in the (Delvalia) case, the quotient combining low prices and high market investments is not sustainable in the long run.

The company has already several actions in place that should translate in marketing recovery, but that's without compromising profitability or reducing price. Reducing price is not another great strategy, in our view, and we prefer it. We invest in the market and in the strength of our brand. Moreover, the company counts with the strength of its people, which always becomes more evident during challenging times.

Finally, regarding our international operations, once more we are very pleased with our performance and excited with the prospects going forward. International operations generated an EBITDA of 66 million reals in the quarter, with Quinsa's proportional consolidation contributing with 58 million real. Quinsa's this conference call just ended, and hopefully you also had a chance to share, as we do, its management enthusiast about the company's prospects going forward.

We would like to highlight as well that during the last month we have been also further consolidating our international expansion strategy. We started to sell in Guatemala, and we both have been very encouraging to date. We also announced the acquisition of (Sonasis) in Peru, which will grow PepsiCo's franchises for northern Peru and Lima as well as obviously the strength of (our beer).

Finally, we also increased our economic stake in Quinsa to 48 percent, given the purchase of 12 million class B shares. We (enforce) that this positive performance is evidence again that we are on the right track by sticking to AmBev's strategic drivers and long-term strategy. As we have been doing in the last conference calls, let's provide you an update about how we continue to improve our strategy to deliver sustainable growth during the (last years).

During the first quarter, we advanced again, improving revenue management by shifting our mix towards higher contribution margin products. In the beer segment (skoal) accounted for around 56 - around (66 percent) of our sales mix versus 65 in the year ago quarter. On soft drinks, our (quarter volume) accounts for about 85 percent of the sales versus 78 percent in the year ago quarter. And (this on) November 1 we will operate more on that.

The second point was maximizing our distribution and execution efficiency, which, as you know, is of paramount importance to dominate a point of sale. During the quarter we increased the percentage, as we sell directly to 37 from 31 percent in the year ago quarter, and we also installed close to 32,000 (additional quarters).

And finally, the third point of improving productivity and reducing costs. As anticipated on our second quarter conference call, on a sequential basis cost of goods sold per hectoliter for both beer and soft drinks declined, indicating that our efforts on that front are (pretty hard). And (Brit) will talk more about what we have been doing.

Now I'll pass the conference to Luis Fernando, who will elaborate on the sales and market activities.

Thanks, Marcel. We posted a 12.3 percent volume decline in third quarter 2003 compared to the year ago quarter. Our market share declined to 66.1 percent in September 2003 from 7.1 percent in June 2003. Before we address how we have been doing in our long-term strategy, (the sales revenue) management, distribution and execution at the point of sale, let's address some issues behind the volume and market share decline.

We were expecting a single digit volume decline for beer In Brazil during the quarter. However, the decline was above our expectations due to a combination of (factors including) In (region ray) temperatures in the quarter. We do not like to blame weather for a weak performance.

However, it's important to (deny) that it has a negative impact on sales volumes. (As well as) the current environment that is (super due) during the quarter. Indeed, there are some signs that the (economy is) starting to improve due to third quarter and (the climbing) rates were at record levels and (real wages) considered under pressure.

Personally (a postponement) in the price realignment of our competitors. As the market leaders, clearly the industry (in adjusting) price to compensate exceptional glasses, special and higher taxes. It takes on average two to three months for competitors to follow, which leads to a temporary (market share entrance). This time was no exception to this rule. The difference, however, is that competitors postponed a little longer the (price improve) as well as the (weighted) prices by a small amount in some cases.

And finally, volumes declined more than expected due to massive market investments from one of our competitors. The first effect (not only) economy affected beer and budget control. And they explain an important portion of the value decline. Some has indicated the market as a whole declined around 4.3 percent during the quarter.

Considering the other two factors, namely our (pricing quality) and the competitive environment, we believe that (there have been breakthroughs) - we have (breakthroughs) to manage them. I'll discuss some of (this too) shortly.

However, let me first provide a brief update about our volume forecast going forward.

In light of the higher than anticipated volume decline during the third quarter 2003 and considering that volumes for October were weak, on a year over year basis, given the very strong volumes for October 2002, it's good and (hard year). And even to (I do that) before our price adjustments, we expect overall volumes for 2003 to slightly decline related to 2002. However, we continue to do our best to reverse this trend.

But to tell it so, we expect that the situation will improve, (partly) as we believe that the economy touch bottom during the third quarter. And there are several indications that this area is improving. And this operation is increasing, which could fuel a decrease in unemployment rates, translating into choosing power recovery. And we are maintaining scenario.

Moreover, there are several other signs such as the trade (balance), the strength performance of the aggregate factor - actually our volumes in contrary have been better than (exceeded) - and forecast about GDP growth that should translate into a rebound in 2004.

Now going back to the short-term, (the net new to understand) what the company is doing to improve its market share without compromising profitability. In first place, it's important to mention that as a public company focused on the results and increase in value to shareholders we do not take any action without (deeply) understanding its competence and before making a (material) analysis of all the information that we have from the market. We have (very certificated sense) to manage our distribution and execution at the point of sale, and we are using this (intelligence) as we successfully did in the past.

We know that you would like to get as many (of the tape) as possible about our strategy going forward. However, although we are very commitment to transparency, given the competitive environment in Brazil right now we are in the middle of the relaunch of a product, we cannot provide any (relative pace) about what we are doing. But be assured - we assure that we (act on a rational) basis without jeopardizing profitability.

Let me give you some examples of what the company (doing) to address the market share issue. We have the (decision. The beer assess went great). It has helped a lot in reducing prices (consumer) and price gap without affecting our prices. (And we arrange decide) to extend this campaign until December 2003.

At this moment 180,000 point of sales have added this decision. Moreover, we have also some other initiatives in the pipeline which should further improve our position and relationship with the point of sale. This combined with the fact that there will be no additional price increase and some indication that some competitors recently announced a price increase should result into market share recovery during the coming months.

Moreover, we just (rent) a (55) version of our (tom house) research, and we decide exactly at the point of sale level (really less) market share. Thus, we (may decide) where we have to concentrate our (artillery).

Finally, (a small analysis), we also increased our market investments compared to the previous quarter. Since the creation of AmBev, our market share has situated between 67 and 70 percent. Thus, we are clear not comfortable with the 66 percent that we achieved in September. And with some additional (gap) market share risen around 100 basis points that we might (witness through) October.

Now, talking about our strategic pillars, we continue to improve on the revenue management front as well as our distribution and execution at the point of sale. On the revenue (management) front, this quarter in the mainstream segment we sold more of our higher margin brands (call). This increased its rate in our sales mix to 56 percent from 55 percent in the year ago quarter.

Here on the revenue management front we have some other good news. During the quarter sales of (Scoby) also continued to increase significantly. Volumes increased by over 60 percent sequentially. On (Tanta de Janal), which was (realigned to do) second quarter 2003, some increase in volumes of 23 percent year over year. Sales of (Brimma Light) are very still small, are well ahead of its (plan). And as we continue to develop the (super premium) market, we just launched another special edition of (Bulemia) called (Bulemia Light).

In a summary, (although the super prima) segment has been also deeply affected by the overall environment, its performance has been above the mainstream segment. During the quarter volumes decreased by roughly (eight) percent, including (draft) sales. However, excluding (draft) volumes, which are extremely impacted by weather, the volume decline moves to five percent.

(Perform) distribution and execution at the point of sale, direct distribution for beer increased by more than 700 basis points compared to the year ago quarter and three full percentage points compared with previous quarter. Direct distribution accounted for almost 32 percent of our beer sales volume and roughly 37 percent of our total volumes.

Regarding beer, net sales (that were) they reached 120 (reals per year) in the quarter, and the sequential increase is explained by (undived) revenue management initiatives, including the price re-alignment, (perceived) in the sales mix, and higher sales through direct distribution.

In summary, we believe that we have the right things in place to recover our market share without compromising profitability (due to) profit sale (data), (accumulate) strategy and (wise) people. I'll now pass it over to (Juan).

Thank you, and good morning. This quarter I will start talking about the soft drinks business and then I will provide you a brief update of our progress in the international front.

In soft drinks we continue fully committed and focused on the right (juice) strategy, which is working. With EBITDA of 63 million reals, 20 percent higher compared to a year ago quarter, our EBITDA margin achieved roughly 23 percent in the quarter compared to 21 percent last year's third quarter. This third quarter our net sales per hectoliter grew by 14 percent and three percent compared to the year ago quarter and the previous quarter, respectively.

Despite the sluggish economic environment, which affected total soft drink's market sales, and despite our focus on higher value added products, our total (CSD) volumes remained essentially flat year over year. On the other hand, our core portfolio, Guarana Antaractica and Pepsi brands, grew in volume by eight percent this quarter and grew in importance in out mix. They now represent 85 percent of our sales compared to 78 percent in this - in the third quarter last year.

Again, we basically did nothing different but stick firmly to our right (view) strategy, which once again mean focusing on (few but) profitable brands, few programs in complete synergy with beer, and (approximation) of our profitability rather than volume at any cost, which, looking forward, it's exactly what we will continue to do.

Now, talking a bit about international operations, let's start with Guatemala. On September 18th, after about two months teaser campaigns, Cervezeria Rio, which is the name of our company in Guatemala, launched its Brava brand in the metropolitan area of Guatemala City. With nearly a month in the market now, acceptance has been fantastic. And this very positive consumer response to our launch led to sales to exceed our volume projections by a two to one factor in those areas where we have effectively initiated sales.

In light of limited product availability is normal following the start up of a new plant, distribution today is limited to about 12,000 clients in the metropolitan area out of 70,000 beer selling customers all around Guatemala. And returnable glass introduction performance sales has been limited. Our partnership with (Topquart), which is Pepsi's distributor in Guatemala, has been keen in allowing us to very rapidly penetrate old channels, which has allowed us to reach an estimated 40 percent share of market. That's within the geographical area where we are currently serving, and those numbers according to our estimates.

As anticipated, our competitor has responded to our launch by discounting and promoting two of its (blanket) brands, (Sol) and Victoria, and has maintained the positioning of its flagship Gallo brand. This strategy has not affected our launch, and we obviously expect to see further action by the competitor over the next few months. We think that national distribution in Guatemala will be initiated during the fourth quarter, as we get the plant up to speed, which will allow us to distribute unrestrictedly. As of to date, this combination of a world class (beer) distribution network with AmBev's pure know-how has produced very, very promising results.

Regarding the Peruvian market, as anticipated, we bought some assets of (Imbolio Rivera), which granted AmBev PepsiCo's franchise agreement for northern Peru and Lima. The purchase price of some of (Rivera's) assets was set at roughly $32 million, and we will use local Peruvian financing to partially fund the transaction. The acquisition of this asset is expected to significantly improve our business plan for the Peruvian market - the Peruvian beverage market as a whole. Turning to Quinsa, (Marcel) mentioned before, we are very, very excited with Quinsa's prospects looking forward.

I will now pass it on to Carlos Brito.

Thanks, Juan.

Total cash cost of goods sold per hectoliter increased 24.8 percent in the third quarter this year versus the year ago quarter. I discussed in our press release the increase in cash cost of goods sold as primarily a consequence of our currency hedge policy for both years, which explains around 85 percent of the increase reported in the quarter. (Eliminating) the impact of the currency hedge, cash cost of goods sold were negatively impacted year over year, mainly by an increase in some commodity costs, mainly barley, corn, sugar and (pet revenue) and inflationary pressures on the (real) denominated things we use.

On a sequential basis, as anticipated in our second quarter conference call, AmBev reported that five percent decline in cash cost of goods sold per hectoliter adjusted for the change in the sales mix resulting from higher sales of no (returnable presentation) during third quarter '03, a sequential decline in cash cost of goods sold, which achieved 7.4 percent quarter over quarter. The sequential decline was a result of several factors, including better price of commodities and efficiency gains.

(While I can increase) the four percentage points in (line) efficiency, allowing a reduction of approximately 400 FTEs over the second quarter, further reduction of fixed costs at the plant level through (centralization), new entries to the open energy market with better pricing, and, fourth, changes in transportation due to the centralization of (start) negotiations for specialty beer transportation.

Looking ahead, we expect a good fourth quarter, given though some commodities such as (pet revency) have reached their lows and they're now showing upward trend. (On the fact) that should help us (larger) volumes (allowing) economies of scale, leveraging even higher (line efficiency), the impact of actions taken in the third quarter, which will show up for the whole of the fourth quarter, and (no) migration from some of the big plants (with open) energy market. In this context, we remain confident that we'll reach our target (operating yields) savings on a cash cost of goods - cash cost of goods sold front, and on the SG&A front (between a minimum 250 million) reals in '03 versus last year.

I'll now pass it on to Felipe.

Thank you, Brito. Hello, everyone.

Our consolidated EBITDA reached 778 million reals in the first quarter 2003, up 21 percent compared to the pro forma EBITDA in the year ago quarter. (Despite being affected) from the revenue management front explained previously by (Luis Fernando) and (Juan), and on the variable cost front, explained by Brito, AmBev's operating profitability also benefited from AmBev's commitment to keep a tight rate on expenses during the quarter, an improvements again in the performance of our international operations.

Concerning cash (chef's DNA) excluding direct distribution, on a nominal basis they decreased by roughly eight million reals year on year, by adding the impact of inflation and adjusting for expenses that were postponed during first half 2003 but occurred in the third quarter 2003. AmBev reported (real) savings on the cash SG&A front of 54 million reals.

Direct distribution costs in Brazil increased to 146 million reals from 113 million reals in the year ago quarter, as the percentage of direct sales in Brazil increased significantly to 37 percent from 31 percent one year ago. As (Luis) mentioned a couple of minutes ago, on a (first exponential) basis direct distribution expenses increased by 19 percent to 24 reals from 20 reals in the third quarter of last year.

And this increase is primarily the result of higher freight costs and higher direct sales volumes to the most profitable channels. And by that I mean bars and restaurants, which present a high distribution cost per hectoliter relative to direct distribution to supermarkets.

Concerning our financial results, during the quarter we reported net interest expense of 82 million reals for the Brazilian operations. It's worth mentioning that assets must be recorded at the level of market value or accrual basis. Had the company been able to reflect its assets at a market (said), it would have reported an increase in interest income of 99 million reals.

As we anticipated, there was a slight change in the (accounting debt profile) as the syndicated loan maturing in 2004 migrated from long-term to short-term debt. On September 30, 2003 our net debt for Brazilian operations was 2.33 billion reals.

Taking into consideration our (gross) cash flow generation over the last 12 months, net debt to EBITDA was below one, evidencing the company's strong credit profile.

Concerning our hedging (policy) of (variable) costs, we remain fully hedged until the end of this year at - and that includes the exchange rate around 3.3. We are not headed for our variable cost exposure going forward 2004.

However, in terms of our U.S. dollar debt exposure, we remain fully hedged, as always.

Finally, concerning our (reforce) to (level field) the game in the Brazilian beer industry, recently the IRS published the final specifications for the flow meters to be installed by the industry.

Right now, we are in the process of assuring the specification of the first supplier. And once this period is conclude, beer producers will have six months to install the equipment, which we expect to take place during the first half 2003.

We are very confident that our (reforce) with respective agent, which has unbalanced the competition - competitive environment and harmed the Brazilian society should start to pay off. Despite our enthusiasm about the (four meters), our business plan remains supported on our strategic advisors. However, a reduction in (taxation) will promote a much more balanced competition in the marketplace.

Now we can move to the Q&A section - operator.

Thank you. At this time, the floor is open for questions. If you do have a question, please press the numbers one followed by four on your touch-tone phone at this time. And as a reminder, there is a two question limit per person. Please hold while we poll for questions.

Our first question is coming from Robert Ford of Merrill Lynch.

Hey, good morning, guys. My first question was with respect to the former (Bonamco) franchise in Brazil. And I was wondering if you could discuss how (cop) is changing the way that that business was run with respect to new packages, new products - I understand they've launched Coke with Lemon - how that's impacting Pepsi Twist and the changes that they're making to their beer operations. That's my first question.

OK. Let me answer. This is Juan here. First, I'll talk about the soft drinks.

What we've seen is a good competitor first. We see a very smart revenue management, which we'll use as a benchmark. As you know, we've been learning a lot, benchmarking them outside of Brazil. So, now we're looking very close to them in Brazil. That doesn't mean we'll do everything that they're doing, but we certainly feel that we're going to have a much more - at least in their area, a much more ordered market.

I won't comment on the results. You know the results. I'll just speak to pricing and revenue and revenue management. As far as Lemon, which you mentioned, it's very early to tell. We haven't really felt an impact yet. It's too early to tell. It is probably early to tell for the Coke system, our Pepsi (X) introduction in (Porto Rela), which just took place a few weeks ago.

Did that answer all your questions?

No. No, it didn't. I was curious with respect to the impact, I guess, of all the different packages, if any. And I didn't hear that addressed.

And the other issue was how they're changing the way they manage the beer part of the business.

OK. Now, we're referring - to answer your soft drink question, so now I will turn it onto (Luis Fernando) to talk about beer.

Yes. Well, in terms of beer - this is Carlos Brito. In terms of beer, what we are trying to do is really - first, what you see in the marketplace is that they're focusing a lot on the soft drink side of the business because they inherited the business with a very low EBITDA margin as compared to the other countries you operate. So, from what we see in the marketplace they are focused on what (Juan) just described.

In terms of beer, we know that (motion) has been developing some of the areas direct sale force, a sales force dedicated to the (Moso) beer brands, with Coke distribution as a complement. So, the (Moso) would sell the beer and Coke (trucks) would continue with product handling and delivery. So, we expect at some point that they'll come to Sao Paolo with the same kind of strategy.

That's it from the Sao Paolo area, where they operate.

Great. Thanks, Carlos Brito. And then with respect to what you're prepared for in terms of a sustained period of higher advertising spend for (Skia) - and I understand that what they spent in the last couple months is an incredible sum, clearly not sustainable over time. But what are you preparing AmBev for in terms of what (Scancario) is capable of doing in terms of their advertising and promotional budget for a longer period of time.

Well, we have already planned to increase our marketing expenses for the fourth quarter. And actually currently for the last two weeks we have been on (air) various fronts. And they haven't been that strong. We have a good investment till the end of the year, and we are pretty comfortable with our answer in terms of marketing (Scancario).

For next year, we still haven't finalized our plans. I think with beer it'd be too early to talk about 2004.

Robert, this is (Marcel). I would like to remind that, of course, a huge investment is important, but also the quality of the investment is important. Last year we had (Kaiser Mussels) brand, (to share our voice), almost equal to the sum our three brands. And when you look at the performance of the brands, the preference of the brands, we basically won on all aspects.

Having said that, we, quite frankly, never saw in Brazil this kind - this level of (GRPs) concentrated in just one month. So, it's been effective. It was coupled with a good campaign. It was a good campaign, so - but again, it's not sustainable in the long run. So, I think that, as (Miguel) said, in those months we already have both the market investment and the quality in the commercial that we are going to put in (here).

And, of course, for next year again we have to keep the market investors (up), but what we think is a reasonable level. And again, this has affected us (possible) in the (GRPs) that we are going to be (losing).

Thank you. As a reminder, I'd like to remind everyone that there is a two-question limit per person. Please hold while we poll for questions.

Our next question is coming from Alex Robars of Santander.

Yes. Hi. OK. Question one is really on the beer volume trends here going into the end of the year. I mean, clearly in August you talk about two percent volume growth for the full year. Now we're seeing that the guidance is being lowered to slightly negative. And I'm just trying to get a sense of how negative that will be. And it seems to me - I mean, the bet is on (Fistesia).

And I just wondered if you could give us a little bit of color about that. You talk about the impact of that happening in November 180,000 points of sale kind of being involved here. How much of your volume is actually covered by these 180,000 points?

And is it - I mean, is the incentive then really of the point of sale to say, well, with a five to 10 percent price decrease at, say, (Anbrano), whatever brand, I will get the volume simulated enough and that's really the proposition that you're putting to these points of sale?

Yes. Let me answer your first question (just last year) volume for the year. We believe it's too early to say how much a slight decline is going to be because it depend a lot on December. November has began much better than October.

The weather is much better than we had in the third quarter. We believe it's too early to say how it's going to be this quarter. So, we're going to be working hard to change the strength. We believe there's room to improve the volume. But at this time, compared to the volumes that we did last month, we believe we're going to be under last year.

It's very difficult to record this volume, but we'll be working hard. (Sustaining) is one of the actions that we are taking in the market. This one has already 1,000 points of sales, represent something around (slightly 50) percent of our volume.

The price discounts are really between five and 10 percent. And when we compare volumes between point of sales with (Fistesia) actions and point of sale without the actions, we have (improves) of five to 20 percent. So, an average of, say, we have 10 to 15 percent increases when we use (Fistesia), the price discounts based on (Fistesia). So, it's been very effective the action.

We don't have to reduce our prices. That's very important. So, we convinced point of sales to reduce their consumer prices based on all the ads that we're doing show them to attract consumers to their point of sales to generate (traction) in the point of sales. So, it's been very effective, but again volumes in November and December will depend a lot on basically the weather condition, revenues and et cetera.

OK. The second and final question really just turning to the international operations, and clearly the initiatives that you talk about with Guatemala and then with (Rivero). Specifically, do you think you'll get to be EBITDA positive in Guatemala in 2004? And does the soft drink operation in Peru do they get consolidated as of, I guess, fourth quarter? And do you think they can give you some positive EBITDA into 2004, just the soft drink bit?

Well, the answer to results, yes, we expect positive contribution EBITDA for both this year. And we'll probably be giving better guidance early next year on that one.

As far as consolidation, yes, we will consolidate fourth quarter being Peru November and December, in Guatemala for fourth quarter.

Great. Thank you.

Thank you. Our next question is coming from Lori Sara of Morgan Stanley.

Good morning. My question is on market share. I understand that you don't want to be too specific about market actions. But can you give us some idea of when you're expecting to get back to your target zone of 67 to 70 percent? And I guess part of what I'm wondering about is whether there's any concern that there's been any semi-permanent damage to the market with this lag that we've seen on the low price competition. And I guess, as part of that, if you can talk about updates in terms of where price gaps are that would be helpful. Thanks.

Lori, this is Marcel. Let me start on that and then a few of the others can elaborate here.

I think that in a sense this should be seen as some positive. We are - we have seen a competitor investing, maybe over-investing in markets, but at the same time taking price. That's what we've seen in October and now in the beginning of November. So, we are (an order) maybe our efforts (will still mute for one), but paying off already in terms of people recognizing that this will be a market where sales expertise (dominate) at the point of sale. And obviously marketing will become a much important tool than price by itself. So, this is only a caveat to see it from another angle.

I think about how far we go. I think Luis Fernando already expressed that we can expect to lose an additional even 100-point in share. And, again, we're prepared to live with that and gradually (record) our share. I think that in the summer you'll begin to see some positive signs already. But there's no magic answer to that.

Again, I would like to bring you back to the (Bavaria Pines) and a lot of analyst investors kept asking me what's going on. Is (Bavaria) going to change the whole market environment in Brazil? And remember, we talk a lot going from eight to 10, but (Bavaria) came from zero to 10 percent of the Brazilian market, was one of the best campaigns and one of the most massive investments in market.

In the end, and when you have this combination, and we always said, this doesn't add up. It's going to take time, but we'll respond in our own way. We want double marketing (expenditures). We won't lower our price. We'll concentrate on doing the basic things that we know how to do. Of course, with (regulated) vigor and very, very strongly - I mean, everyone here is in a kind of (war mode and so on). And the company performs very well on this (kind). We won't do anything stupid. We do what we know how to do. And the time that it will take it's the time that it will take.

Having said that, I think that we will see a positive trend beginning this summer.

I don't know if (Miguel) or (Luis) want to complement on that.

Yes. Of course, if you compare with the last price increase that we - price increase that we (did) last two years, it took us like three months, four months to recover the good level - the good market share level. This year not only out competitors took some more time to increase their prices, but we have this new campaign coming up at the same time. So, maybe I think (more than) three or four months, but I'm sure that we're going to get there.

We have some (advantage) at this moment. We have increased our prices already. So, we don't see in the coming months any need to increase our prices. Our competitors are increasing their prices. Of course, depending on how much they increase their price and how fast we can recover market share faster or slower, and of course that will depend on the (activities) of our actions in the market. We believe they are starting to (bring) some results already. So, we can't say for how long it's going to take, but we are very confident.

OK. And let me just ask a follow-up and then a different question. Some of the market share you lost is to the competitor that you guys are referencing. But there's also - it seems like an equally large size market loss to the very low end of the market. And I'm just wondering if you've seen - I know there's a bunch of brands down there and I know some of them have moved pricing. But have you seen sort of a general trend on the very low end?

And then the second question I wanted to was really a question to Carlos Brito, or maybe a clarification of what he said. In your press release you reiterated the 200 million to 250 million real goal.

And if I added up the numbers correctly in the first three press releases you sort of realized on your own accounting about 150. So, you're expecting about 50 to 100 in the second - in the fourth quarter, rather. And I think I heard Carlos Brito say that there were no new programs in place, but I just wanted a clarification on where the additional savings were going to come from. Thanks.

Well, Lori Sara, it's Luis. To answer your first question, (what we saw that) some specific brands, some one or two specific brands that we have (been fired) they really have an important growth during these price increases that we did. But what happened is that they increased the prices of - they're increasing the prices at this moment.

We believe it took them some more time this year because as the market volume was very bad - the weather and the economy and everything - they were not very comfortable to increase their prices. And now they are doing that. So, the price gap tends to decrease. And so, we believe that we can recover this market share better. So, I don't think there is any trend at this moment.

Lori, this is Carlos Brito. On the year of cost question and the commitment, yes, we're committed to the 200 million to 250 million reals this year. Your accounts year to date is right, is 150 roughly. And we expect to be able to reach the annual commitment with the fourth quarter.

Most of the difference coming this time from variable cost, based pretty much on what we had said. Also, last month (we described) that commodities are beginning to behave the way we wanted and that the (already) accounted for in the third quarter versus second quarter. And we still see a trend in terms of (lost) of cost of goods sold going for the last quarter of the year. Don't forget the last quarter of the year is very important in terms of volume, which impact many of the costs on a (per quarter) basis, and also that during the third quarter we did pressure a lot some of our big suppliers trying to get more of existing negotiations, and mostly for the fourth quarter. So, that's where the difference is going to come from. And at the end of the year we expect the balance to be pretty much like (half that), 60 from SG&A and 40 from cost of goods sold, 200 million to 250 million commitment.

Thank you.

Thank you. Our next question is coming from Jose Jurdin of UBS.

Good morning. I have two questions. The first one is - and I know you guys don't like to give specific numbers, but if we were to assume that next year there's no price increase on a nominal basis or on a per package basis, how much - what's your estimate or a range of your estimates of where revenue per hectoliter could be at the end of 2004?

And then my second question is regarding the - your famous 15 percent growth target that you presented in the analyst meeting in March, you basically had mentioned at the time that this growth target was going to be based on Brazil results only.

And I believe sometime between then and now the basic comparison has changed to basically the consolidated pro forma numbers including Quinsa on the base last year as well as on the number this year. Can I ask you when that changed and whether - and how you feel you're doing versus that new target and what's your chance of meeting the 15 percent target by yearend are at this point?

OK. This is (Marcel) here. I think we have a change. And I remember some people asking me about - it's not a commitment. It's just something that we have in place, and it's our target. But someone (comment) with me on the site visit (about it) and asked about how Quinsa would be treated.

And our answer was basically that the growth in Quinsa will be added to our Brazilian growth, meaning that of course we can't concentrate only in Brazil because if it was the other way around everyone would be asking for us to deduct the loss. And also, we cannot add the whole of Quinsa's proportional EBITDA because of course there was a cost of capital to capture reduced EBITDA. So, our internal (picture concern pile) for all (our bonus) is basically the EBITDA growth in Brazil from 2002 to 2003 plus the consolidated proportional EBITDA growth of (cumits) for other period. And I spoke so much that I lost your first question. What was it?

How much would revenue per hectoliter rise? Where would it be in December and, therefore, if there were no price increases in Brazil based on your current pace, sort of ...

I'd rather forget it again. We cannot be specific on that. I just say (that) probably our best bet on our EBITDA growth in Brazil - again, of course, the (courses) will be the cost cutting will always be in place. The revenue enhancement (metrics) will always be in place. But, quite frankly, next year should be a (bottom) year. This (moment) was a year that was pretty flat after another couple of pretty flat years in terms of volume.

And the revenue level was the most important one. We have mentioned it. We feel very comfortable with the pricing level we have right now, and we don't see having to adjust it, even to get to our commitment to keep up with inflation until around midyear. So, I think that for next year the thing that should benefit us is, number one, volume, secondly the exchange rate.

And, quite frankly, I'm feeling a little bad here inside AmBev because if we miss the 15 target by a very few (margin) it will be the bad hedge that I did for variable cost this year. Inflation will be much lower, of course. And basically we (must feel) the beginning what seems to be a consistent GDP growth. I mean, in the beginning we were seeing basically (wells) being created in the interior.

Now we see in that (was) being transformed into buying consumer goods. And we see output growing again. So, as I said, don't pay that much attention to revenue next year. And again, we would be very uncomfortable to give any guidance. But the real question about next year is the volume which (we'll seek) is going to be very (prevalent).

OK. Thank you.

Thank you. Once again, the floor is open for questions. If you do have a question, please press the numbers one followed by four on your touch-tone phone at this time. And as a reminder, there is a two-question limit per person. Please hold while we poll for questions.

Our first question is coming from (Bernardo Arajo) of (Arks Capital).

Hey, good afternoon. My question goes to (Juan) and is about the international business. I would like to know if it is reasonable to think in the long and middle term that international that will be able to work at a same level cost efficient that (involve) in Brazil, like in terms of EBITDA margins around 38, 40 percent. Thanks.

Well, if you look at Quinsa and some of Quinsa's operations, it is (doable). Now, we have a very comprehensive program of what we call international best practices, which we took as a base all the work that we did for the merger, the AmBev merger.

And we're in the process of setting up a program to take all those practices to all our countries. So, we'll do what we know how to do and hopefully we feel we will see the effect of - I hope we'll get to Bolivia's 55 percent, but we'll work on that.

Thanks a lot.

Thank you.

Our next question is coming from Celso Sanchez of ING.

Hi. My first question relates to the hedging loss in the third quarter. It was not as steep as I would've thought, given the strength of the currency. And I think I understood that the - it might have had something to do with the below budgeted volumes and, therefore, there might be a heavier allocation to the hedge loss in the fourth quarter.

And (I would like to announce) that all your cost savings projections are net of that hedge loss. But I was just wondering if you could clarify for me will we see more hedge loss in the fourth quarter given that the accounting allocation issue was affected by the unusually depressed third quarter volume?

This is Felipe here. Basically during the third quarter we (forcefully) aligned some of our hedge positions in a more (FX) rate that we were expecting to incur. Based on that we were able to incur on an FX rate of 3.27, which is lower than the guidance we gave during the second quarter conference call, which was around 3.33. Lower losses from the FX operations during the third quarter was basically due on that initiative.

Going forward, we're still trying to do the same for the fourth quarter. At the present moment most probable FX rate that we will be incurring is around 3.3 level. And again, we'll be trying to leverage - to average down this FX rate for the fourth quarter. And there is no further adjustments to be done either for the fourth quarter or 2004 based on lower than expected volumes.

OK. ((inaudible)).

Yes.

OK. If I could follow-up then, my second question would be can you discuss a little bit - and I missed the very beginning of the call - perhaps you already did so - but a little bit of the health indicators or progress with (Brama Light) in terms of its positioning in the market, its acceptance and its price point and how that has changed, if at all, since its new launch in September.

Well, we just introduced (Brama Light) in Sao Paolo about three months ago. Volumes are pretty good, are about 30 percent above our expectation. And we have - we just have (Brama Light) currently in cans and longneck bottles. So, we are very pleased with the volumes. The trends continue to be positive. So, every month we have higher sales. But it's still a niche product and (it the) markets we'll see what's going to happen and when we are going to introduce it nationally.

The price is five percent above (call), and that means the seven percent higher than the regular (Brama) in terms of marketing contribution.

I'm sorry, I didn't get the last part.

And that means five - the price is five percent above (call), and that means 70 percent higher in terms of margin contribution when compared with regular (Brama). And just to add on the niche product and new products, we are just introducing (Brama Light) this month on the (super premium) area. (One of ours) is with beer and has been extremely successful and extremely good for the image of (Brama). And the price is very high. It's about four reals per bottle, and it's doing extremely well.

Thank you.

Thank you. Once again, if there are any final questions, please press one followed by four on your touch-tone phone at this time.

Our next question is coming from Gustavo Hangria of (Banco Tactuel).

Hello, everyone. I have actually two questions. The first one is regarding volumes. Since you're saying that perhaps next year is going to be the volume year, I just would like to understand if you have any targets for that or if you would say that the historical long-term relationship of (one times) GDP could (be better) for next year.

And my second question is regarding the capital structure of the company. I remember that back in the second quarter you were mentioning that a net debt over EBITDA below two would be good enough for you to maintain your credit profile. So, I would just like to (mention) if you are going to be more aggressive perhaps on dividends going into next year or on the buyback program. And, by the way, if you have any plans to reopen the buyback program anytime soon.

Thank you.

Hi. This is Felipe. We - as part of our strategy in terms of capital structure management, we recently announced the 100 percent of the net earnings dividends based on the (seventh) first month of the year. And we're still keeping our ongoing share buyback program in place. By yearend we should keep our leverage in terms of net debt to EBITDA around one. However, going forward, we see huge cash flow generation, very low cap ex, meaning that in (one or two month) the current leverage of the company we should be much more aggressive in both fronts.

Regarding your first question in terms of next year's expectations, it's true that we (yielded) in the past the correlation between GDP and volumes growth, which gave us 1.5 times. However, there is no statistical evidence that that should occur on a regular basis.

That said, we also - there's a lot much more (deeper study) on what was volumes in Brazil and basically volumes can be explained, which 92 percent level of confidence based on four different (drivers), which are demographics - we have a very (end) population in Brazil, definitely a positive trend - the level of consumer confidence that was higher. By the beginning of the year we saw some slowdown during the second and third half, but we believe it will recover going forward. That's our expectation on that front.

The third driver is real disposable income that has to deal with GDP growth and lower inflation. We expect much more positive scenario going forward. The level of GDP growth we see on average based on market expectations is around 3.5 percent. And the final driver is the only one that we really again command as a market leader, which is the real price level. That's something we want to maintain and we are committed to maintain stable going forward, not negatively affect volumes.

OK. Thank you.

Thank you. Our next question is coming from (Greg Handel) of Transamerica.

Hi. Yes. Hi. I'm just wondering who the competitor is that is taking - or that is taking market share in the Brazilian beer market, if you can comment on that.

It's (Cincareal). (Cincareal) is a local family-owned company that was already in the market. And the re-launched themselves as (novaskine) that (means new Cincareal). And also, we believe we are not comfortable, of course, (with losing share). We think it's pretty natural because they invested a huge amount of money just saying the words that (Marcel) said before. They invested in (a mass) where we had been investing through the whole year for our leading brand. So, with such a huge investment we believe is natural to gain a certain amount of market share. However, we are pretty comfortable that with our directions in place we'll recover.

Thank you.

Thank you. At this time, I would like to turn the floor back over to Marcel Telles for any closing remarks.

I just want to thank you all for (staying around) during this conference. And see you everyone again next year. Bye-bye.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a great day.