Ambev SA (ABEV) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to your AmBev fourth quarter 2004 conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Mr. Carlos Brito. Sir, the floor is yours.

Thank you very much. Good morning everyone. Thank you for joining us for the AmBev fourth quarter and full year results conference call today.

I'll be talking about the results and also I'll be providing some details on our North American Operations. Then I'll pass it on to Luiz Fernando who will discuss our Brazilian business. Then to Juan Vergara who will reveal all our Hispanic Latin American business and then finally to Joao Castro Neves, our CFO, who will give you full details on the financials and EBITDA and the below the EBITDA lines details.

First I'd like to start by saying that we're very pleased to share this set of results with you, and very proud of our accomplishments during this very successful year.

As of December 2004, we achieved market share in our core Brazilian Beer business of 68.1%, significantly improving on our 62.5% position in November '03, which was our lowest market share ever in that industry.

During the year '04, we made deliberate investments to build our brand equity and those investments paid off in market share gain. I am also happy to report that these investments did not diminish our Brazil Beer EBITDA margins, which, by the way increased by 200 basis points to reach 42%.

Beer Brazil was not our only highlight for the year. All AmBev operations contributed to the solid growth. EBITDA for InBev, excluding Labatt grew by 22% in real terms on a pro forma basis for the year.

AmBev as you all know, has a meritocracy and we share results with our employees when we meet results. In ‘03 we had a tough year. It was a challenging year. Our targets were not met and therefore no bonus was paid.

At the start of 2004, all employees were focused on our core competencies to recover market share and preserve profitability. We also worked once more with reducing our fixed cost base and furthermore to fund all market initiatives. So this year, we're very pleased to say that with regard to the results we will be paying out bonus.

Our Soft Drink business also reported impressive results with a EBITDA growth of 62% in real terms. And substantially improving EBITDA margins which reached 30% and which would leave us a bench mark for the industry.

All Latin American operations outside Brazil contributed significantly to the fourth quarter results as well. Quinsa contributed to deliver outstanding growth in our Hispanic Latin American expansion. Outside of Quinsa presents a long term growth platform in a very profitable region.

Now let me say a couple of words about our Canadian business.

First, let me say it's a pleasure for me to join the Labatt team. It's a great team with great, talented people. We have a great portfolio of brands in the great market Canada.

Second, we are committed to continue to grow the business in a sustainable and profitable fashion in Canada. So that's our commitment as we had in Latin America.

Third, Labatt delivered on the guidance as stated by AmBev for the fourth quarter of last year, achieving EBITDA of CAN$187m.

Moreover, I want to share with you some evidence supporting our enthusiasm in Canada.

Firstly, the Canadian Beer market continued to deliver volume growth in '04, around 1%. Second, Labatt's consolidated market share remained stable throughout last year. All of us in Canada are excited about Labatt's value creation prospectus and we re-enforce our commitment towards the cost reduction opportunities in revenue performance previously disclosed by AmBev.

Although it's too early in the game to comments on actions or achievements, I can anticipate that some major efforts are underway way. And some of them are for the whole revision of our portfolio and price points. A little bit of revenue management in there as well, and also implementation of our zero base approach, zero base budget for our fixed costs structure.

Just a couple of examples of some things that we already see in the market place or within the Company as a result of those efforts.

First, we're re-assessing the whole price points and the role of our different brands within our portfolio. In January we did increase the price of our discount brand or our value brand proposition Lucky about 11% from BRL23.70 in Ontario to BRL26.40. That was pretty much followed by the market which increased before in Ontario markets. So that was something that was important for us.

Second, we're undergoing within Labatt a right finding approach to our Admin structure and we eliminated 240 salaried people. We felt it was the right thing to do given the conditions we have in the market place and we had an opportunity to operate in a more efficient way. So that was a reduction of 15% when we talk about the salaried workforce.

Third, also in Canada, CBB is well under way. We have in place today, the whole thing about the package, sub-package [expanding] the owners. So we have great visibility of our cost structure in moving towards, in delivering promised synergies.

So moving to fourth quarter results, I want to emphasize and clarify what was already said in yesterday's earnings release in relation to net sales increase for the fourth quarter.

On the domestic side, the reasons for the volume drop in Canada is not related to Labatt's market performance. But mostly to the inventory build-up that took place in the fourth quarter of 2003 because of the end of the Montreal strike. So the Montreal strike ended pretty much around September and we had of course to launch the trade back on through the fourth quarter of 2003. So that is 1 of the reasons why the '04 number came down volume-wise for Canada.

On the export side, Labatt's brand performed well the fourth quarter, increasing shipments by roughly 10%. However, due to the Canadian dollar appreciation, net sales per hectoliter came down as we had disclosed yesterday.

And so now I'd like to pass over to Luiz Fernando to give some guidance and some details on our Latin American performance. Luiz.

Thank you Brito and good morning everyone. Let me start by saying that I'm very excited for the chance and opportunity documenting our Latin American business. My team and I are committed to keeping the company on track for long term growth while remaining faithful to AmBev's core imperatives. I'm also very pleased to have won support managing our HILA operations while focusing more in Brazil.

Latin America is currently enjoying some very positive momentum. We are capturing maximum value from that. I will address Brazil now and leave HILA for Juan to discuss in a moment.

As Brito mentioned, 2004 was a great year for us in Brazil. We brought our share of the Beer market back to around 68%. But not only preserving, but actually enhancing profitability. We also reaffirmed our 3 mainstream brands as the leaders of the Brazilian market and our Soft Drink achieved benchmark EBITDA margins of roughly 10%.

Consolidated EBITDA grew 12.3% in real terms and our EBITDA margin increased 300 basis points to 39.9%.

Looking at some highlights from the fourth quarter results. Year volumes were up 14.3% supported by a solid market growth in market share recovery.

Net sales per hectoliter increased to BRL1,022.8 due to more direct distribution in the sales mix, revenue management initiatives and a price increase implemented at the end of December. Prices were adjusted in the [indiscernible] in value fashion with a different approach for each brand, package and region. The average increase was 5%.

Fourth quarter EBITDA margins were up 240 basis points to 44.2%. Despite the fact that sales and marketing expenses were higher than our previous guidance we delivered on our profit targets and clearly demonstrated the equity and health of our brands.

Soft Drinks continued to deliver a strong performance in Brazil with volumes up 6.2%. Market share reached 17.2% in December, stable in comparison to fourth quarter 2003 when EBITDA grew by 34.4% in real terms, with EBITDA margins reaching 32.4%. Consolidated EBITDA for Brazilian operations grew by 16.4% in real terms and margins, increased 350 basis points to 42.5%.

We firmly believe that our achievements in 2004 were made possible by AmBev's solid foundation. Our strong proprietary distribution system, which has been carefully developed over the past several years, affords us a deeper understanding of market dynamics. They have all responded to consumers' and customers' needs and better equipped them to face new competitor initiatives.

Volumes sold through our proprietary distribution system reached from 6.8% in fourth quarter 2004, up to 41.9% in fourth quarter 2003.

We are expanding our Brazil business system. We were also successful in consolidating our distribution operations in every Brazilian sales district. In the past, each district had 3 separate operators. As you know, our objective is to reduce these to a single consolidated operation in all regions. This will provide for improved execution in the market place brand portfolio strategy, might also allow the logistical cost savings improvements in truck loading efficiency, warehousing and administrative expenses.

These efforts worked in those regions served by either proprietary or third party operations.

In addition to distribution initiatives, we have worked hard to reinforce customers' preference and loyalty to our brands. We're happy to say that our brand preference has returned to the same levels we had in the beginning of 2003.

We have made good progress from product utilizations around Skol, Lieber, Bohemia, [Royal Ale] and innovative advertising campaigns for our 3 mainstream brands. We are also keen to improve our relationship with customers via greater exchange of ideas and better than expected service levels.

Our achievements over the last year are great reward for the hard work and remarkable commitment shown by our employees.

We enter 2005 with great enthusiasm and can offer the following outlook.

Brazil has experienced a virtuous cycle of growth and we expect that to drive Beer consumption upwards. In Brazil we expect this year to achieve a 5% volume growth, which will be a consequence of both market volumes increase in the higher market share than 2004. The most successful market share AmBev has had in 2004 was 66.6%. We reached in December 68.1%. In January, however, a record 36 points. Nonetheless, that was expected as a consequence of the 5% price increase implemented at the end of 2004 which as usual is not immediately followed by competitors and historical [indiscernible] mix in December.

We reaffirm our commitment to maintain stable prices to consumers in real terms. And we are confident that the flow meters in place this year will provide a fair point of view for the industry field, reducing the discounting pressure for informal competitors.

On the Soft Drinks side, we work hard to preserve the high profitability we achieved and further boost those net sales.

Finally, we always remain committed to constantly improving our efficiency and successfully reducing costs and expenses.

With that I would like to turn things over to Juan for a discussion of our HILA operations.

Thank you Luiz and good morning again.

As Luiz just mentioned, Latin America overall is facing a very positive momentum and we definitely want to leverage this opportunity to maximize growth in all the operations which we have established.

Our Hispanic Latin America or HILA business units delivered strong performance in 2004 and we are already working very hard to keep the pace in 2005.

In Southern HILA, that's Quinsa, Quinsa's management did a fantastic job across the board, including fully merging AmBev’s assets into its business. On top of that, the region's economy is a whole continued to experience significant recovery versus prior years.

Going to the northern part of HILA, that is both countries in Hispanic Latin America which exclude Quinsa, our people that work very hard to complete a very sizable chapter for growth. And we already see some benefits showing up. For several of the Pepsi distribution systems have been substantially upgraded, both in Peru, as well as in the Dominican Republic. In Peru, with AmBev Brazil by direct distribution being established with only Lima, but in other major cities in the north. In the Dominican Republic, AmBev sales profits and sales technology are quickly and -- I would say -- very successfully being implemented. In the direct distribution system, which came from our partner Embodom.

The launch of Brahma in Ecuador, which took place in October 2004, was very well executed and we estimate our share to be in the mid-teens. Very interestingly in Ecuador, and differently from prior experiences, we're showing at price parity to the market leader.

In Venezuela, strategy worked and led to positive EBITDA and consistent share growth.

More specifically, in relation to 2004 fourth quarter, HILA delivered EBITDA of BRL182.3m. That's a growth of 33.7% and that accounts for 10.3% of AmBev's consolidated EBITDA.

Quinsa delivered in Brazilian GAAP figures, 10.5% EBITDA growth in dollar terms, which was operationally driven by high beer volume growth in Bolivia and Paraguay, very successful price repositioning in Argentina. And EBITDA markets are stable at the 37% range.

And on top of the operating performance, Quinsa's share buy-back public offer last September increased our economic stake in the Company to 54.8%, which is 5.1 percentage points higher than December 2003. Quinsa's overall contribution for fourth quarter EBITDA amounted to BRL150.3m which represents over 80% of HILA's total contribution to EBITDA.

Northern HILA, again which is those countries which excludes Quinsa within HILA. Northern HILA operations also posted positive results, contributing an EBITDA BRL32m with the largest contributor still being our Soft Drinks business, of which the Dominican Republic is the largest operation.

Some highlights of the Soft Drinks business in the fourth quarter.

First, in the Dominican Republic, which sustained share at the 50% level. In Peru, as mentioned earlier, the expansion of our direct distribution system into major cities in the north, also supported by a very careful selection of third party distributors in rural areas, had a very positive impact in our distribution business levels.

Also in northern HILA Beer business Cerveceria from Guatemala, posted strong results, both in Guatemala and in Nicaragua, whilst [indiscernible] in Venezuela was very well armed, I would say, both in the industrial and logistical fronts to take full advantage of a very strong market recovery, which ended up with delivering a volume increase of 39% and a positive EBITDA in Venezuela.

Overall, Beer profits however were impacted, as planned, by the sales and marketing expenses related to the October launch of Brahma in Ecuador. Which, as I've just mentioned was in the mid-teens share level already in December, selling at price strategy to the market leader.

Moving into 2005, we are fully focused both on the organic growth of existing and established operations as well as the completion of our Beer plants in both Lima and Santo Mingo, which will enable us to enter both Beer markets.

That said, we will always keep our eyes open for new opportunities. For example, a few weeks ago we went ahead with the expansion of Cerveceria Rio from Guatemala with the distribution of Brahma into El Salvador.

Thank you and I will now pass it onto Joao.

Thank you Juan. Good morning everyone. I will guide you now on the lines between EBITDA and net income.

Starting then by EBITDA, the contribution of each AmBev's business units provided consolidated EBITDA of BRL1.7m in the fourth quarter, representing 66.2% growth. That is compounded by a 23.5% organic growth and 42.8% growth through new investments.

Also, I wanted to highlight the 15.4% growth in EBITDA per share achieved this quarter when AmBev first consolidated Labatt results for the full period. The substantial growth achieved on a per share basis demonstrates, in our view, the accretion potential underlying AmBev's operations.

Quickly passing to depreciation. The 37.9% increase of -- to BRL284m is a consequence of AmBev's expended footprint which major contributor is Labatt. The higher stake in Quinsa and Labatt's enlarged direct distribution system, also contributed to higher depreciation.

Moving to provision for contingencies, in this case, 2 major impacts can be named as the drivers for such a higher than usual expense, which amounted to BRL183m. First, AmBev legal advisers indicated that the current labor dispute should be reclassified from "possible" to "probable", demanding the Company to approve provision of BRL128m.

In addition to that, AmBev also bought a provision of BRL39m related to an ICMS dispute in which the IRS questioned AmBev on the accounting of ICMS tax due, suggesting AmBev paid less than it should actually have done.

I will address now other operating income and expenses which net amount represented a loss of BRL103.6m. The business line in the P&L became much more relevant for business where the goodwill from AmBev is booked. The first thing to mention, total goodwill amortized in relation to Labatt in the fourth quarter amounted to BRL266m. The current net balance for Labatt goodwill booked in AmBev's balance sheet is BRL16.3b. In addition to the amortized goodwill related to the merger of Labatt into AmBev, additional BRL422m goodwill was amortized this quarter, which relates to past actions.

Apart from goodwill, the other major relevant impact on other operating items were exchange rate gains in foreign investments, which amounted to BRL156m. As well as goodwill, there is a non-cash impact represented by the volatility in Reais of investment in AmBev's balance sheet denominated in foreign currency. As indicated by Quinsa and Labatt.

Nevertheless, there were actually cash or cash related items classified as other operations. The most relevant of them was a gain of BRL89m related to tax incentives granted to AmBev. While this is not exactly a cash inflow, this gain represents a tax shield that will improve cash flows in the future.

On the other hand, AmBev had an other operating cash loss of BRL15.8m related to PIS/COFINS charged on other operating income. The most relevant income charged in this case is the interest on capital paid by AmBev's subsidiaries to the Holding Company. It is important to mention, however, that this loss is more than compensated by the tax shield provided by interest on our equity.

I will address now AmBev's financial results.

In relation to AmBev's initial result is specifically, allow me now to guide you through the most relevant lines.

In the fourth quarter, AmBev booked financial income of BRL23.8m. Interest expenses of BRL104m. A net expense of BRL11.9m related to hedging cost of AmBev. Foreign currency debt which relates to the interest rate differential from the dollar and real. The BRL37m paid in taxes charged to financial activity, mainly Brazilian IOF and withholding taxes generated by the service of AmBev's senior notes traded in the U.S.

The remaining balance is due to a number of distinct concepts.

We get down to non-operating expenses. In this case, the only major impact is the severance provision of the BRL198.9m accrued in Canada for the restructuring at Labatt mentioned by Brito. The tax reimbursement for the severance costs are expected to be in the first half of '05.

Income tax before taxes and profit sharing achieved BRL859m representing an 87.6% increase. In a first share basis, income before tax and profit sharing amounted to 15.4% improving by 30.2%, even including goodwill amortization. As well as EBITDA share this figure demonstrates the crucial potential of the Labatt deal.

Moving now into income tax. The provision of BRL280m in the fourth quarter, representing an effective tax rate over reported earnings of 37.9%. This is pretty higher compared to the historical average of AmBev. The explanation for that, apart from the Labatt goodwill, is related to AmBev's regular tax plan strategy, which is based on an underlying assumption of purchasing power parity between the real and the U.S. dollar. Because of the significant appreciation of the real in the fourth quarter, that strategy worked backwards, increasing the tax rate instead of reducing it. In order to provide you with some evidence on that, I recall AmBev’s effective tax rate in the second quarter of '03 of 39.6 when Brazil experienced a similar currency appreciation.

In terms of guidance, that is too premature for us to precise which should be the effective tax rate on the profit lines going forward. We're still revising tax planning strategies to come out with an optimized alternative.

Finally, net income after profit sharing and minority interest amounted to BRL459m, 6% higher than '03. Net income per share, however, decreased 26.4% to BRL8.42. I point out, however, that such a decrease is truly explained by non-operating items I have already addressed. Namely, the severance cost provision in Canada, goodwill amortization, the higher tax rate, and on top of that, a [variable] comp for the financial results in '03, which were a very positive impact, by hedging effects carried over from '02.

Finally, I would like to share some thoughts regarding capital structure and destination cash flow. First, AmBev has, as of December 31, consolidated net debt of BRL66.3b in a pro forma basis, considering an EBITDA at Labatt of CAN$647m for 2004. The implied net debt to EBITDA ratio is up 1.2 times. Accounting for the dividend payment in February, that figure should have slightly increased to range between 1.3 and 1.4 times. Going forward, that should serve as a reference for AmBev's leverage.

On the cash flow side, I can anticipate that CapEx for consolidated AmBev should be stable at roughly $450m per year and also that the Company does not need to hold any excess cash on the balance sheet.

The preferred alternative for pay-out will always be the most AmBev can pay in its return on capital. The remaining balance should be paid out in optimized EVA perspective. However, I anticipate we care to preserve AmBev’s free float so that our stock provider won't [indiscernible] maturity for shareholders.

We will open now for questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Bob Ford of Merrill Lynch. Please go ahead.

Good morning everybody. Congratulations on the quarter. I wanted to ask a question with respect to your branded element in Brazil during the quarter. Particularly in January. I understand you lost 30 basis of market share. However, I'm sensing that you're actually growing your higher margin contribution brands and it appears as if you're taking the hit in your flanker offering, particularly Antarctica. Can you talk a little bit about why that's occurring and perhaps a little bit about how you can try to migrate more volume into higher contribution brands and perhaps -- I understand that you're stepping a few points over for [indiscernible] investments. Can you talk about how that flows into the strategy as well please?

I think Luiz can pick up that 1.

Yes. Brito. As we said, we increased prices in December and we lost 3 basis points market share in January. Of course, part of this loss occurred in December since Nielsen takes data from December and January when reporting the January data -- January results. And the losses recorded both by the price increase and by a worse channel mix. Always in December supermarkets grow a lot and we have a lower market share in cans in the segment. So what's why we lose market share in December every year if you compare it to November for example.

Well, our mix is stable now. Skol, Brahma, Antarctica are stable. During last year, Antarctica grew more than the other brands. This has to do with our strategy and its performance -- fantastic performance in São Paulo specifically. We did very well in São Paulo. In December Skol performed very well and we believe with all this strategy we have developed where we discussed the mainstream brands, Skol should grow more than Brahma and Antarctica during 2005.

We don't have the same questions we had last year. We have a more stable market, even after our price increase, both in January and February. So we believe that Skol should perform better than the other 2 brands during this year.

Bohemia is doing very well. We had a very good beginning this year with Bohemia. We producing -- we implemented some price initiatives to reduce price consumer without reducing our price to retailers. Since October last year, the brand is performing very well, and the same is happening with Lieber, for example, the non-alcohol beer that we had launched last year. We have 5 to 10% premium over our Kronen Beer, our non-alcohol beer, that we have in the past, those to have. But we are [advertising] the Lieber and the Super Premium brand and Lieber is performing very well. It now accounts for almost 50% of non-alcohol beers. So we believe that the portfolio should perform towards the higher margins in 2005.

Thank you very much Luiz Fernando. The other question I had was with respect to the Coke bottlers. It's clear that they're working harder to develop a returnable price point in brand named Coke and when they do that it's probably going to have some implications for you in terms of perhaps a more superior value proposition for lower income segments. I was wondering how do you respond to the growing availability of returnables and what does that imply for you in terms of price points?

Then lastly, can you share with us some details in terms of your strategy to lobby for flow meters in the CSD business in Brazil?

I'll take the first 1 and then I'll give it to Juan to answer the flow meters. You're right. Coke has implemented several initiatives to find new price points in the market, both for returnables and non-returnables. Based on analysis, they've been more successful in the non-returnables balance, the 2.5 and the 3 liter bottles. And is exactly what we are trying to develop -- or what we are developing, and we have other plans to have some news in the next few months. But more in the big bottles, 2.5, 2 liters, where we are being successful they are being successful, then in the returnable models. We really don't see them improving their market share in this specific segment at the same cost because consumers are really learning to like more the non-returnables and priced position doesn't seem to be very successful in returnables.

And then the investment required in CapEx to change all the lines and in the bottles, for returnables, would not pay back for us.

Thinking on the flow meters, we are very optimistic. The government has given its go ahead with the flow meters. Our scenario is that by year-end, just like we have in Beer, we have them installed for the industry. We have internal goals for this and we are quite confident it will happen. It will come true.

So, are you saying by year end 2005, you anticipate flow meters at your main plants.

That's correct.

Thank you very much.

Thank you. Our next question is coming from José Yordán of UBS. Please go ahead.

José Yordán: Good morning. Just a couple of questions on your comment on how to return cash to shareholders. If your dividends are going to be limited by interest on capital thresholds and you want to keep the liquidity the same in the PN shares, how do you return the cash otherwise? Or is limited buy-backs still consistent with high liquidity for the PN shares, which I assume it is, as the BRL1b level. Does it really detract a lot from the liquidity until a few years out?

That's the first question and the second question may be -- looking at 2 or 3 years after you've captured all the synergies on Labatt, it's going to be pretty tough as a company to grow 15% in non-real terms EBITDA per year. How does the management plan to reassess the performance targets for the bonus payments, if at all?

Juan can you take the first 1 I'll take the second one?

Okay. For the first one. Basically, we believe we will be able to pay close to BRL1.0b BRL1.1b in our capital. So the limitation is created it's quite high, so this will account for nearly 25% of the cash we'll generate in 2004 to give you a reference on that. All the additional cash, as I said before, we will continue with use dividends and the share buy-back programs.

José Yordán: Sorry. What was the first thing?

The first thing I said. Interest on capital which will be the number 1 alternative, would probably be close to BRL1b.

José Yordán: Great.

Then the second will be dividends, just like we did also this year, and the third will be the share buy-backs.

José Yordán. Okay. Great.

Thank you. Our next question --

Just a second. I didn't address the second question for Jose. I think you asked about the 15% growth, right?

José Yordán: Yes.

Okay. We think that -- in a way -- we all got used to look at, for example, Brazil, with no growth, in terms of country, as it has been the case for the last 5 or 6 years. When Brazil starts moving like it has done in the second half of last year, then we're very optimistic that '05 will be the same. Then you see that there are still lots of sources for growing our bottom line if you look at Brazil alone. Then you have to look at the synergies as you mentioned. So there are synergies that are going to be captured in the next couple of years, as we announced, and we are very confident we can deliver on them. Also, you have the whole Latin American expansion opportunities that will continue to add to the bottom line. So we're very optimistic that we can continue to pursue the 15% real growth as an internal target, even after all the synergies have been captured.

José Yordán: Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Tania Sztamfater of Unibanco. Please go ahead.

Hello everybody. I'd like to know, in terms of your direct distribution, we saw a high progress over the fourth quarter. I'd like to know if you have a target if you've already going to reach 50% participation in 2005? And if you actually want to increase to more than 50% of the direct distribution participation in the volume sales?

You're right. We'll probably achieve this 50% direct distribution during 2005. This was our target since we started implementing the new distribution system. We don't have a plan to extend that more than 50%. Of course that could happen, depending on the marketing environment, in opportunities to add more direct distribution to the actual direct distribution centers. So to reduce fixed cost in capacity base. But I assure you to say that we will go for more than 50%.

Okay. Thank you.

Thank you. Our next question is coming from Celso Sanchez of Citigroup. Please go ahead.

Hello. Good morning. Just a couple of questions on pricing. In Brazil, the 5% that you announced at the end of December. You said in the past that your goal was to keep consumer prices flat in real terms, which suggests keeping inflation on a year by year basis. By our estimates I think that'll be a little below what we're looking for, for inflation. Is 5% your target for inflation for the year or do you see phasing in another price increase over the course of the year? That's the first question?

Well part of the price increase as to do with 2004, part of it has to do with 2005. So if you compare our net sales that we earned on a year per year basis 2004 with 2003, that's exactly what we've done. We've kept the net sales practically in real terms base constant. And that's exactly what we're going to do in 2005. Of course we foresee some opportunities to more management initiatives. That's exactly what we did with last year. So some adjustments during the year in brand strategies or in new initiatives based on our proprietary system. But of course the guidance to keep prices in line -- price to consumers, in line with inflation is suspended.

Okay. Thank you. Then the second question has to do with Canada. You talked a bit about having raised the pricing on Lucky about 11%. But it seem to us that that's still about 26% or so below the mainstream pricing. Since pricing is such an important driver in the past of profitability, can you relate for us how you see things evolving over the next several quarters, or couple of years in terms of that pricing gap and if you see prices -- do you think you'll be able to increase the gap if the lower end segment that has been having a lot of potential it seems in the Labatt side doesn't increase its prices along with you?

Hi, this is Brito. The problem with the discount segment that we have today is mainly in Ontario which is of course is very important because it's the biggest province, but it's not countrywide. We don't have the kind of problem -- the same magnitude of problem in the other provinces or other regions.

In Canada, you're right with the move from 23.70% in the case of 24% to 26.40%, 11% increase, we are now 26% below our core domestic premium price point of [$85.50]. So we think that is only sustainable if we go back to support our new proposition with innovation and good positioning. The relevant position with consumers. So we've been doing a lot of consumer research to understand why consumers do buy this brand or that brand. So again, as I said in my opening speech, we're reassessing the role of brands and the price points within our portfolio and we still need a couple of months to do that.

In the meantime, we have to recognize that the way we deliver results in Canada, at least for this year and indeed for the next year, will have to be more well rounded I think. Instead of being 100% based on price increases or 80% or 90% based on price increase, you have to be more balanced. That's why we started the year with the right siding of the salaried workforce and also with the CBB initiatives. So we're very confident that we can deliver all the synergies announced and be even a little over that. So we're counting on that to give us a break so we can deal with the discount threat in Ontario, put this to bed, solve that question, before we proceed with price increases as in the past.

But having said that, there are a lot of revenue management initiatives, as opposed to general price increases across the board that we'll be executing, and we are executing, throughout the regions and our portfolios on a FTU basis and on a regional basis.

Just to follow up on the administrative reduction in the fourth quarter. Is that something that was above and beyond the synergies that wasn't compensated? Was that part of the plan that this was done a little bit earlier than the ‘05 sort of start date.

It was above the synergies. Above and beyond the synergies.

Okay.

Thank you. Our next question is coming from Alex Robarts of Santander. Please go ahead.

Hi guys. The first question just really on marketing in Brazil. I guess the first question just really on marketing spend in Brazil this year. I can appreciate the kind of ramp up in 4Q with this price increase and such. But can you give us a sense of where that might move this year versus ’04? And specifically, as I look out and we've seen some news about the Brahma brand launch through the InBev network. And I guess March 17 was 1 date that we saw. When this brand gets rolled out kind of in the export context, does the marketing spend come -- well fall really within InBev? Do you participate at all and do you plan to participate at all in any of the marketing spending?

Luiz, why don’t you take the first 1. I’ll take the second 1.

Okay. Alex, well first let me comment on the 2004 marketing expenses. We had a guidance we had to spend more, mostly in the last quarter, since we've understood competitors and exactly what it did actually. We passed more in December. And Kaiser and King Cariole were launched. They had new campaigns in December. At the same time that we were increasing prices. So we decided to increase our investment to support those brands during this period.

Marketing expenses for 2005 for Beer should be in line with 2004 in nominal terms. And we’ll spend something like BRL25m more in Soft Drinks in order to support our profitability. That’s basically what's going to happen. So Brito, why don’t you take the second 1?

Okay Alex, in terms of the second 1. Yes we’re very excited and we’re on track for the Brahma in our introduction through the InBev system. I'm not going to give you a whole bunch of details. I'm sorry about that. But we’re still in the planning phase. We should have news about it in March. Part of the negotiations going through is exactly the split in the market investment and also the transfer pricing. And always the margin will hit AmBev and InBev. So that’s been negotiated as we speak.

Okay. So it is probably perhaps safe to assume that there could be a portion of that that comes onto the AmBev books. Is that a fair assumption?

It could be. But also could have -- also don’t count an increase in terms of net sale because of all the exports that we’re going to be doing from Brazil. So that’s also part of the equation.

Okay. I guess the second question is more on the strategic side. You know there has been obviously various comments starting in January and then I think there was something yesterday as well about what, or how you are looking at outright acquisitions specifically? The Bavaria example. I know there has been also some mention in Venezuela. Could you just give us a basic update in how you look out at this kind of activity as far as where you see things happening? What might be the hurdle rate and kind of just give us some color there please?

Well we could make a first comment on that and maybe Joao could follow if you want to jump in. I mean I think our position strategy has always been 1 of EVA based type approach. So I meant we've always committed ourselves at delivery on doing things that make sense for our shareholders on an EVA approach. And we’ll continue to pursue opportunities. We just seen some holes when you look at Latin America and as Juan said, we just started in some countries with the connection with the Pepsi franchise. A very successful fashion. So that’s 1 way to go about it.

But again, it has always been EVA approach. I don’t know if Juan or Joao can add anything to it?

No further comments.

So Bavaria at 9b is something though that’s not in the books? Is that--?

No.

Okay. Final, just to kind of clear -- I mean Venezuela going through I guess a devaluation today and just any thoughts on how you might be thinking about that. I mean is the budget for you guys there still at the VEB1,900? I mean what kind of adjustments might be needed there as far as Venezuela is concerned?

That’s not an issue. It’s absolutely on the dot of what we had planned. So we already have plans for that and everything is in place to continue business as usual exactly on the dot as planned.

Great. Thank you.

Thank you. Our next question is coming from Lore Serra of Morgan Stanley. Please go ahead.

I have a couple of questions as well. Let me start in Brazil with sort of a general question. You guys are talking about 5% volume growth this year and obviously it’s going to be an uneven year because you have the market share gains that are largely concentrated in the first half. I would expect you to be growing well in excess of that 5% in the first half. But I guess my question is, if you think about the second half where the comparison base gets difficult, I guess it has become difficult for us to analyze the underlying market trends because of some of the inconsistencies in the Nielsen data. I guess I'm wondering do you think you can grow in the second half of ’05 in an important way? I guess what I'm trying to say is that the volume growth was very impressive in absolute terms in the second half of ’04 for you guys. But a lot of it was just recapturing the volume lost in ’03. Can you build upon that and maybe if you higher volume growth for the year in Brazil this year?

Well Lore, you're right. You're absolutely right when you think that first semester will be an easy comp compared to last year based on market share increase and market growth. But we believe in the second half of the year we can still grow against last year. Of course that depends on all the interest rates being increased by the government. We never know exactly impact that it will have in the long-term. Government now says that this is -- the interest rates should not increase any more. But we haven’t seen the impact in the market yet.

But we are confident that we can still grow from 1 to 3% compared to second half last year since our volumes started growing only in September. So we have at least July and August to increase. And still in December, we did not have good weather in Brazil. So we still think we have some opportunity to increase volumes in the second half of the year.

Terrific. Next, just moving to Canada briefly. I mean we've heard the Molson Corrs people talk about targeting their marketing spending on some of the core brands a bit more. And increasing the marketing spending behind Canadian and Corrs Light. As we think about AmBev finding additional synergies at Labatt, should we think about that falling to the bottom line? Or do you think you might need to be increasing marketing spending in Canada from the current levels?

Well Lore, again our plans for Canada is 15% EBITDA growth for this year in nominal terms. And what we’re trying to do in Canada for this first year is really to rebalance the way we look at the business. Try to get more of the synergies in year 1. Try to get from the right side in CBB some internal funds. And you're right, I mean if we need to well mostly behind our brands as we've done in the past to support, especially non-carb, that price premium that we have to date to the discount segment.

Okay. And lastly, just on InBev USA, a couple of quick questions. 1 is how important is it a priority for AmBev/Labatt to improve the focus on the Canadian brands in the U.S.?

And in general, can you help us understand what are some of the changes being implemented at InBev USA with the exit of the FEMSA brands and what kind of changes are being made organizationally to adjust for that?

Well starting from the end, I mean at InBev USA with the exit of the FEMSA brands is finally that organization is able to control its own destiny. So what we've done was that the back unit, it was an autonomous unit which merged with Labatt USA to form 1 company. So that was in September last year. And now InBev USA decided to focus its actions on the 3 global brands which is Stella, Beck’s, Bass and in the future Brahma. So the 4 global brands and also on the Canadian brands.

So I mean that’s you know your question in terms of how InBev USA changed in the second half last year with the exit of the FEMSA brands.

But there have been--

We think that this [indiscernible] in the US even with us not having the FEMSA brands any more. I mean InBev USA not having the FEMSA brands any more is that they are still very interested in our portfolio brands because the premium segment continues to grow in the U.S. and the margins are very, very good.

Our distributors, they make 50% more on a case of our brands as opposed to the Budds and Millers of the world. So they're very interested and continue the partnership they have with us and so with InBev USA.

In terms of the Canadian brands, it represents around 4 to 5% of our EBITDA in Canada. So it is very important. And as Canadian business we’re very interested in continuing to pursue growth in the U.S.

What we’re doing for ’05 is that we are changing a little bit the strategy in terms of supporting the brands as opposed to ’04 and ’03. In ’04 and ’03 we tried to get our brands, Canadian brands, to be national in the US. Now we learn that 70% of the volume really comes from trading in 3 to 4 States and we would like the most out of it before we go to other States. So in ’05 we will see some increased investments behind the brands in those key States as opposed to trying to get into a national brand status.

Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Victor [Galiano] of HSBC. Please go ahead.

Hello there. Just on current trading in Brazil. You’ve already said that there is -- that the recovery is pretty robust and there’s quite a lot of consumer activity. But can you give us a bit more color in terms of how you expect that continuing during the year? And is there any evidence of any sort of revival on the part of Kaiser? Thank you.

Well Victor, as I said the first half of the year should perform compared to last year very well. And comparisons for the second half will be tougher. We still believe we can grow in the second half. So probably, based on our January and February results I could say -- what I can say now is that our first quarter should be around 10% over last year. That’s all I can say now.

Great.

Going forward we believe we still have opportunity to grow based on our employment increase in Brazil, export in Brazil. So my center in the country. So the country should keep growing. Probably not as fast as it did last year, but everything that we read, everything that we have listened from the government is really optimistic. So this is what we can say now.

Do you see some trading up in terms of brand consumption?

We performing very well. We've implemented some price initiatives in order to reduce price to consumers. Not reducing our price, but reducing price to consumers. Convincing the trade that they can have a lower margin that they have now in Bohemia but still have much higher margin there than the other brands. And we are very confident that Bohemia will perform very well this year.

Thanks.

Thank you. Our next question is coming from Ronaldo Santana of Deutsche Bank. Please go ahead.

Yes good morning. In terms of the tax rate, what can we expect going forward given the non-deductibility of the Labatt goodwill in 2005?

Hello. As I mentioned in my earlier statement, a bit early for us to give guidance on the effective tax rate as we’re still deciding on the tax strategies and the tax claim that we have for this year.

Thank you.

Thank you. Our next question is coming from Chris Pitcher of UBS. Please go ahead.

Hi there. Just a quick follow up question from Jose really is basically you're happy with the degree of leverage in the business at the moment. But we note that at the InBev presentation that you’ve received investment grade rating from S&P at the end of last year. Has this increased the likelihood of you being able to refinance some of the higher coupon debt in your debt portfolio at the moment? I was wondering if you could comment on the outlook for that?

Yes. From what I heard it was hard to understand your question. Your voice kept going away. Basically in terms of the investment grade, we do see an opportunity as we refinance to get lower [investment] grade. That’s where we stand.

Thank you. At this time there are no further questions. I'd like to turn the floor back over to the speakers for any closing remarks.

Well this is Brito here back. I would like to thank you very much for spending the time with us. We’re very proud of the achievements we had in ’04. Very optimistic about ’05. So we’ll meet you in the next quarter. Thank you very much. Have a nice day. Bye bye.

Thank you all.

Thank you.

Ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.