Ambev SA (ABEV) 2006 Q1 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 first quarter of 2006. [OPERATOR INSTRUCTIONS].

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of AmBev’s management and on information currently available to the Company. Forward-looking statements involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. The future results and shareholder values of AmBev may differ materially from those expressed and/or suggested by these forward-looking statements.

Today with us we have Mr. Joao Castro Neves, CFO and Investor Relations Officer, Mr. Luiz Fernando Edmond, CEO for Latin America, Mr. Bernardo Paiva, Sales Executive Officer, Mr. Miguel Patricio, CEO for North America. Now I will turn the conference over to Joao Castro Neves, CFO and Investor Relations Officer. Please, Mr. Neves, you may begin your conference.

Thank you. Good morning, everyone, and welcome to AmBev’s first quarter results conference call. I am Joao Castro Neves, CFO of AmBev. And, as was just stated, I have here Luiz Fernando with me, General Executive Officer for Latin America, Miguel Patricio, General Executive Officer for North America, and Bernard Paiva, our Sales Executive Officer.

I would like to start the call by sharing a brief overview of what was a very good first quarter for AmBev. Luiz Fernando, Miguel and Bernardo will then provide you with details about our operations in Brazil, HILA and Canada. I will come back and wrap up, providing specifics regarding SG&A costs and first quarter financials.

During the first quarter, our consolidated EBITDA reached BRL1.7b, which represents a 17.7% growth when compared to the first quarter ’05. Operational results were even better, as Brazilian real appreciation diminished the contribution of our international operations.

For example, in Canada, while EBITDA in Brazilian reais presented a drop of 2.9%, local currency yielded a growth of 12.1%. Beer volumes presented consistent growth in all Latin American core markets. And our earnings per share, excluding goodwill amortization, presented a growth of 52.5%, already adjusted for the stock bonus that was issued in May 2005.

Our beer operation in Brazil increased EBITDA in 25.5%, and reached the all-time high EBITDA margin of 52.6.

We are also very happy with our soft drinks operation. In Brazil our EBITDA increased 45.2%, reaching BRL177m and an EBITDA margin of 40.4%.

Those are really excellent results. And I am pretty confident that our initiatives will continue to be effective and successful throughout the year of 2006.

With that, I would like to turn the call over to Luiz Fernando.

Thank you, Joao, and good morning, everyone. I am pleased to provide you details regarding our first quarter ’06 results.

During this quarter, AmBev delivered solid results in Brazil. Beer volumes achieved 8.1% growth in the first quarter ’06, boosted by the magnificent weather in January and February, and a 90 basis point market share gain over the fourth quarter, which reached 68.7% for the quarter and 68.9% in March.

The strong performance of our core and premium brands, and the outstanding execution of our market program, contributed to reach the good results Joao just talked about.

Due to this unexpected growth in the first quarter, we are revisiting our guidance to provide you with better estimates for this year. Incorporating this to our model, we now can expect a volume growth of around 4% for 2006.

Looking forward, we don’t expect to maintain these volume growth levels in the next quarters. But we will keep working hard on execution and efficiency of our operations to guarantee a high performance.

In the pricing front, our net revenues per beer hectoliter grew by 7.1% when compared to the first quarter ’05, and by 4.5% in relation to the fourth quarter. First quarter ’06 net revenues per hectoliter were BRL137.6 versus BRL128.5 in the first quarter ’05 and BRL101.7 in the fourth quarter.

Brand and revenue management. Good performance of the premium segment and our direct distribution strategy continues to increase net revenues beyond inflation. Last December, we made an average price reposition of around 5%, and we managed to quickly recover the market share loss we had in January. This is the second year in a row we don’t lose significant share right after a price increase, due to the expertise of our team in developing and managing price repositioning.

We are very happy with our beer business and reaffirm the commitment to [work with that], and take any necessary measure to ensure the continuous growth, both in terms of share and profitability of our operations. This quarter, I invited Bernardo, our Head of Sales, to talk about the sales strategy and execution of our Brazilian beer business.

We are also very proud of our soft drinks and Nanc business. Our volumes were 12.5% higher compared to the first quarter ’05. You see this is driven by an increase of market share, reaching 17.4% in the first quarter ’06 versus 17.2% in the first quarter ’05 in the market growth.

We were able to grow market share more than our main competitors, even with the price adjustment in March, and raise our EBITDA margins even further to 40.4% for the quarter, 900 basis points above first quarter ’05.

Our move with the larger PET 2.5 liter is in the right direction since multi-serve presentations are growing at a faster pace than the market average. This successful strategy helps to explain the volume and EBITDA growth, while at the same time [pressing] net sales per hectoliter, which grew 0.3% over the first quarter, reaching BRL82 per hectoliter.

We are enthusiastic about the implementation of 4 liters in the soft drinks, which will start to be implemented next September and should be 100% by the end of ’07. Just like the beer business, they will provide a fair playing field for the industry, reducing the discounting pressure from the former competitors.

Commodities, mainly sugar and aluminum, are adding some pressure on the cost side. While being able to keep roughly the levels up to now, this increase led us to partially offset the impact by anticipating our price initiatives. We now expect such high margins level for the rest of the year are going to depend somehow on the leader’s pricing behavior.

Our HILA operation presented mixed figures. While Quinsa delivered an awesome result, with EBITDA growth of over 17.2% in U.S. dollars for the quarter, and volumes growth of 12.8%, HILA faced a much tougher competitive landscape. I believe we still have room to improve even further these numbers after the closing of the transaction, through capturing back-office synergies and even greater integration of our management teams, sharing best practice from both sides.

Peru and Venezuela delivered solid market share increase, while Central America, Dominican Republic and Ecuador beer operations faced a tougher competitive scenario, mostly affected by price and market share poor performance.

Looking forward, we affirm the commitment with regard to [inaudible], which continues to present good margins and encouraging perspectives for the future. Since AmBev is in the early stages in these operations and is still in the lodging phase at the beer production in two significant markets, we don’t expect any significant contributions to the AmBev results in 2006.

In conclusion, I would say that 2006 has been fantastic so far. And I would like to reinforce my belief to all AmBev employees, whose capacity and focus, once again, led us to achieve a major result, and reassure our commitment for our financial discipline.

I will now turn the call to Bernardo.

Hello, everyone. As Luiz Fernando mentioned, we have outstanding results in our Brazilian operations, both in terms of market share and volume. I would like to add that our premium beer portfolio is growing at a faster pace than our mainstream brands.

The brands that are driving this growth are mainly Bohemia and Original. Bohemia has grown 10.4% in the first Q ’06 compared to first Q ’05, after having already grown 28.4% comparing full-year volume in ’05 versus ’04, while Original has grown 51.2% in the first Q after full-year growth of 44.5%.

All of our consistent policy performance is a combined outcome of our strong brands and powerful sales platform. Regarding the last one, I want to focus today on availability and price to consumers.

Talking about availability, we have two core initiatives. First, as well you know, there is direct distribution. We have been increasing our direct distribution points strongly for the last 10 years, reaching 52% of our total volume in the first Q ’06, compared to 48% in the first Q ’05.

The second initiative is a three-brand distribution system. All our direct distribution centers do operate the three-brand model. Regarding the 35 distributors, we have been qualifying them during the last years, and currently we reached 60% of their volume through three-brand distributors compared to 25% on first Q ’05.

Just to remind you, the three-brand model allows us to increase the coverage base with better execution, and supports premium volume growth.

Moving ahead, to understanding the importance of pricing -- to end prices, keep in mind that beer is a product with strong elasticity. So it would be no use to have an excellent availability if price were growing beyond inflation. We are constantly pursuing revenue management opportunities in order to assure profitability with minimal impact over price to consumers.

This was especially important in the first Q because we have just repositioned our price by around 5% in December. Over the last year, the price -- the end price grew 4.1%, which is [rationalization] of 5.1. In the last quarter, our net revenues per hectoliter grew 1.9% above inflation due to our revenue management initiatives.

Moving forward, we still have plenty of opportunities. We are now focusing on our execution initiatives for the workers. We will have investments and specific marketing campaigns for beer and soft drinks during the period. Additionally, we will leverage these by supporting every point of sale, improving execution and relationships.

Regarding competitive environment, we have the best people, process, military-like execution and the attitude of being [inaudible]. In that sense, we remain committed to work on a daily basis to assure the market share growth and long-term profitability of our business.

With all of this in mind, we are raising our guidance for 2.5, 3% to around 4% for beer volumes growth in Brazil.

Now I pass on to Miguel Patricio.

Good morning. Let’s now review AmBev’s operations in Canada for the first quarter.

As you saw in the press release, we achieved 12.1% EBITDA growth in the first quarter. This was driven by three factors - volume growth, our continued success in cost control, and increases in plant efficiency. I will start with the costs side.

We are now realizing the benefits of our plant optimization program that was implemented in ’05. We are also seeing cost improvements from the right sizing of our local organization. Our plant optimization program has significantly reduced fixed costs and increased plant efficiency.

This benchmark initiative has been in place since the time of Interbrew-AmBev combination. As discussed in the past, the program tracks and benchmarks core KPIs, such as extract loss, packaging loss, energy and water usage, plant efficiencies, etc. Then action plans are designed and implemented to drive those KPIs in Canada to the same levels that exist in other organizations -- in our organization globally.

With respect to ZBB in ’05, we implemented strict policies and procedures related to business conduct. Examples are our negotiation of consulting fees, centralization of indirect purchasing, traveling, lodging, etc. Our new policies have created a strict cost awareness throughout the Company.

In ’06, we are taking ZBB one step further. We are working on implementing operating KPIs to help us benchmark expenditures across functions and regions in Canada and, ultimately, across all countries of AmBev and InBev. Regardless of the enormous savings achieved last year, we are confident that there is still a lot more to be realized. With our Company, cost reduction and control is not a one-time initiative, but a permanent mindset to be embedded in our daily decisions.

As most of you probably read in a previous release, we are also working on the implementation of a shared service center in North America. These initiatives follow the model implemented in Brazil, and we will leverage a lot of the infrastructure already in place there. We expect the centralization of a number of regular business transactions will allow us to implement more effective standards. It will also create -- it will also increase the reliability of our systems and enhance profit flows. And that should, in turn, lead to further cost saves.

Finally, I emphasize we are committed to the long-term development of our Canadian operations. The only way to grow is to increase the strength of our brand portfolio and sales operations. That means improving the effectiveness of expenditures and making more resources available to drive revenue.

The results will have to come from other parts of our organization. You’ll see efforts similar to those we put in place in ’03/’04 when we committed ourselves to recover the market share lost in Brazil.

Well, that was the costs side. On the commercial front, we continue to face a challenging market in Canada and this is reflected in our net revenue growth of 1%. But we remain positive on the outlook for the Canadian beer market and we have a number of initiatives in place to improve our position. All of the initiatives underway are focused on developing either the core premium or the super premium segment. These are the segments we are determined to dominate.

We have launched Kokanee in Ontario, and Kokanee is now 100% produced in our [Crafton] brewery in the heart of the Rocky Mountains. Kokanee, by the way, is the one and the only genuine brand in the world produced in the Rockies.

We have also introduced Keith’s Red in Quebec. This is a line extension of our successful Keith’s range. Results so far are encouraging. Finally, we rolled out Brahma nationally in April and it’s in its early days. It’s still early days but I have to say we are really excited about the initial performance and the brand perspectives.

Our market challenges in Canada haven’t changed. We have to better compete with the discount brands in Ontario market and, at the same time, we have to fight the irrational behavior of some of our competitors in this regard, as also the fact that we are committed not to enter into a sort of price war. However, we must not still -- sit still when it comes to our rate.

This is why we run a number of promotions in March, April and early May and, from now on, we will swiftly react to any and all competition threats, or competitive threats. We won’t take the lead when it comes to price provocations, but we will not accept further market share loss. We are confident that we will be able to further increase promotional activities through our ongoing success in cost reduction.

I will now hand it back to Joao.

Thank you, Miguel. First, I would like to talk about the SG&A evolution. As always, we place huge focus on the cost side. Although our SG&A numbers grew 25.7% year on year in Brazil, this is mostly explained by the deferred assets amortization of InBev Brazil Incorporation.

If we exclude the depreciation amortization, our SG&A grew 6.5%, which is composed by a below-inflation fixed-cost growth, a higher direct distribution percentage, and a volume-linked cost [since the strike]. Important to highlight our operational average, by which in Brazil volumes were up by 9.2%, net revenues by 14.9%, and EBITDA by 27.4%.

I would like to comment also on the CSD and Nanc SG&A. Those figures were impacted by lower sales and marketing expenditures allocated in the first quarter, leaving more expenses to the remainder of the year.

Regarding our hedging strategy, we managed to lock in good sugar and aluminum prices which, together with our FX hedges, delivered a 6.7 lower COGS per hectoliter for the Brazilian business. For the remaining of the year, although we are fully hedged in FX, sugar and aluminum, we didn’t manage to get such low prices. But the hedging strategy definitely yielded a gain over all the numbers for 2005.

Having said that, the COGS per hectoliter we achieved in Brazil is not sustainable for the whole year. To have such high margins, mainly for soft drinks, are not likely to be sustainable. But we, of course, stick to our guidance, which is better than last year.

Now I’ll be guiding you on the main lines between EBITDA and net income. We achieved an EBITDA of 1.7 and a net income of 655m. Other operational expenses produced a loss of 246m in the quarter, which is pretty much explained by Labatt’s goodwill amortization of 242m.

In the first quarter ’05, we had higher Labatt’s goodwill amortization, reaching 335m, and also goodwill expenses arising from Labatt’s operation of 78.7m.

Our net debt dropped 743m, totaling BRL5.3b, yielding a financial expense of BRL170m.

Non-operating revenues presented a gain of 4.8m, mainly connected to a non-cash gain of 5.5 related to the participation in investments. In the first quarter ’05, this line presented a loss of BRL176m, mainly due to the closing of two plants at Labatt’s. This line, lower goodwill amortization on the operational expenses and higher EBITDA, explains most of the net income increase quarter on quarter or year on year.

The provision for income taxes and social contribution totaled an expense of 276m. And therefore net profit per share amounts to about 10, with an increase of 259% when compared to the first quarter figures adjusted for the stock bonus on May 31.

Regarding dividend strategy, we remain committed to distributing all of the excess cash we generated. But this year, some of the cash will be used to fund the Quinsa acquisition. But, of course, we are sure that there still should be a strong payout.

Our performance was the result of AmBev’s people’s hard work, with a sharp focus on growing our top line, improving our distribution systems, and continuing to permanently reduce costs and ensure our financial discipline. Our people make AmBev proud of all the investments done over the past years in recruiting, training and assuring our employees’ growth within the organization.

I would also like to add that people have always been AmBev’s strength, and it’s what gives certainty of another excellent result to come. Now we are open for questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Juliana Rozenbaum of Deutsche Bank.

Hi everyone. Could you please discuss a bit the perspective and timeframe for the turnaround on HILA ex? Is that enough or do you still expect the 0 to 2% margin at HILA ex that you guided in the end of 2005 results?

Yes, in terms of -- morning, Juliana. We still continue. We have the same guidance that we released last quarter. We haven’t changed. The only change was the volume of beer Brazil.

I think, as Luiz stated in his comments, this is our -- this is the area where we see a lot of opportunities going forward. I think the numbers we are seeing at this point reflects the launching phase that we are at in some of those countries. But also, as Luiz well pointed out, some of countries we are achieving important market share gains, such as in Peru and in Venezuela. And I think maybe Luiz wants to add some comments to this.

We have -- we treat HILA ex as one region, but the fact is they are different countries -- different results coming from these countries in different phases. We have mature countries like Venezuela, where we have been for a long time, and we have new countries like Dominican Republic. And we are having different results in these countries.

We want to keep committed with our guidance. I think we can deliver that result. We have different challenges in these countries. In the [entry] countries we are having more pressure in the price side from our competitors, so trying to avoid market share losses. So the results -- the financial results are not as good as we expected. But I believe, during this year, we’ll still see improvements in the HILA ex operations that can be more promising for ’07 in terms of EBITDA.

For this year we are keeping the guidance. We are working hard with the teams there. They are more integrated than ever. More and more the structure that we have here in Brazil is supporting the countries. And I am sure, I am very confident that in ’07 we can have much better financial results.

Okay. Thank you. On the cost pressures that you mentioned in your opening remarks, can you give us a little bit of the magnitude of higher sugar and aluminum prices that you hedged going forward?

Yes, sure. I think we mentioned a few times in the last few quarters that we had hedged our currency for the whole year, at an average of about 2.67 which yields a gain of about 170m. Sugar prices have been stable for the past few months but since December 31 it’s up above 20%. And aluminum is up above 30%, while in the first quarter it was just 8%.

Hence we have the rolling hedge strategy also for aluminum and for sugar. I would say, net/net, the 170 that we are gaining just about in the dollar, we will probably lose another 82 to 100 in aluminum. Therefore the net/net will be about 70 to 80m gain when we put together the FX hedge, the sugar hedge and the aluminum hedge.

So we’re better than the marketplace in sugar and aluminum, but we are worse than last year. For FX we’re better than last year, but worse than the marketplace. But again, on a full year, 2006 against the full year 2005, it’s a net gain of about 70 to 80m.

Okay. Thank you.

Yes.

Thank you. Our next question is coming from Bob Ford of Merrill Lynch.

Hi. Good morning, everybody. Congratulations on the quarter. With respect to the ICMS increases, could you indicate which states raised their ICMS rates and what the magnitude of increase was?

You mean the impact of the ICMS in the results?

I know that they impacted the results. I’m just curious which states actually raised and how much the increase was on the reference prices.

It’s difficult to discuss ICMS because, in Brazil, these factors are based on state by state, and you get a different impact in different states. In average, the ICMS is pretty much in line with inflation, so following our price increases. But there are different figures in different states. So [inaudible] with our total impact, but to explain you in detail I’ll have to discuss each state.

So we have higher taxes in states in the northeast, in the countryside of Brazil, a slightly lower impact in Sao Paulo and Rio. But again, it can be reviewed in a monthly basis, since it’s not price linked and it is not necessarily going to raise prices. Taxes would increase immediately after that. So in some states that happens immediately, next month. In some states that could take more time.

So for the full year we expect the ICMS to be more pretty much in line with our price increase; that means 5% -- 5 to 6% impact over last year. But difficult to discuss in more details.

Okay. Completely understood. And when you talked about full-year volume guidance of 4%, are you -- and I know you got this question last quarter, but are you -- is that just because it reflects the embedded or the inherent uncertainty of the marketplace or does that suggest you may be taking price a little bit more on the margin than volume?

As we discussed before, we have a robust model that the output of this model tells us now that the volume should be around 4% over last year. Of course, one of the most important levers on this model is the weather. That’s why it’s so difficult to predict exactly what will happen next month or next two or three months. We always say that in average.

And that’s exactly what happened in the first quarter. We had excellent weather in Brazil, higher temperatures, lower rain, and that impacted not only the volume but that impacted the market share too, because we had better performance in the return of glass bottle.

So when you take a look at our forecast for the rest of the year, we always diminish the impact of good weather. So if we had great weather last year or this quarter, we take this advantage from the model. And, of course, that could be different. The weather could be more positive or more negative than expected.

So that’s why, when you take the revenues, disposable income, market share and take the weather out of the model and diminish the impact of the weather in the model, because it’s not as predictable as the rest of the levers. Maybe that’s why we have this difference between your expectations, or the market expectations in our models.

Okay. Thank you. And just one last question. Provision for bonuses was down 63%. Should I read anything into that?

No. There’s no change. This is just pretty much in line with our compensation program that you are familiar with, structured targets and the regular achievements. So no reading into this. Pretty much the same number between ’04 and ’05.

Okay. Thank you.

Thank you. Our next question is coming from Carlos Laboy of Bear Stearns.

Good morning, everyone. A couple of things. One is you made reference to irrational strategies or irrational pricing strategies in Canada. Could you expand on that? And could you expand on the magnitude of discounting that you’re starting to see by your competitor? I gather you’re speaking about Molson Coors.

And also, while on the issue of Canada, could you speak to the role of the Budweiser brand in Canada?

Okay, Carlos. Well, talking about the irrationality of our competition, we all know that in Ontario we are facing a pretty tough situation with the discount segment. But outside of Ontario, with the exception of Alberta, the discount segment is much lower. And we would expect our other competitors to be more financial disciplined in the rest of Canada.

But -- well, unfortunately, this is not what’s happening in the Canadian market during the first quarter, probably because of -- exactly because of that our -- the financial results of our competitors were not that good.

But, to give you an idea or give you a couple of examples of what I’m talking about, so Sleeman just yesterday presented their results and they were pretty bad. They increased the volume 10% but the EBITDA decreased on 60%. This is basically because they discounted everything. So basically they had discounts, they dropped their value brands to the floor price. They discounted Sleeman. They discounted Okanagan. They discounted basically their whole portfolio. So they had a lift on volume, a big one, 10%. But their financial results were a disaster.

And Molson as well, we see them very, very, very starving for volume and share, and doing things that they didn’t use to do in the past. So giving you examples, [NBC], after many, many years, last month they did LTOs, 18s for the price of 15s on Molson Canadian. They never did that before. Only on price brands, never on core premium.

In Alberta we raised the prices in September, after two years without price increases, and the whole market increased prices. But they didn’t. So we are in May and they haven’t increased prices. We have a situation where we have prices much higher than they do. And they do not show any interest on increasing prices, even when the whole competition increased prices.

In Ontario, we increased prices after two years in draft. They didn’t. And we had to go back on pricing in draft. In Quebec, they introduced 28s for 24s, so LTOs. On Coors X, Molson Dry, 15s for the price of 12s. 30 packs with basically 30% discount on cans. So a lot of price activities in the -- and in the Classic, they have basically promotions every day on everything.

So in Nova Scotia they are promoting 12 packs almost every day, LTOs, and even promotions -- case promotions. So there’s a lot of price activity going on in Canada. Unfortunately not only in Ontario, but everywhere in Canada right now.

Okay, the other question about the role of Budweiser, it’s a very important role in our portfolio. We have a contract with AB for 100 years. So we treat the brand as if it was our brand and it is the number-one brand in Canada. And despite the fact that the core premium segment is declining and has been declining, Budweiser continues to grow in volume and share, which is pretty good, which is great. The brand is pretty healthy.

The Bud Light, Bud Light is extremely important in our portfolio, especially to fight Coors Light. And it’s growing in preference numbers right now. So we treat the Budweiser portfolio as our brand, and I think this is a big statement.

Just one follow up, do you see yourselves dropping prices then this summer, if this pricing activity continues in Canada?

Carlos, as I said, we do not want to get into a price war. We are not going to lead any activity on that matter but we will have to be more aggressive. But at any moment my expectation is that after the disaster of the financial results of our competitors during the first quarter, they move backwards. And if they do, we will do the same. But I cannot predict what they are going to do. If they continue the way they are, we will have to be more aggressive than we were on the first quarter.

Thanks.

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

Good morning. Just going back a little bit to your guidance for Brazil beer, your revenue per hectoliter is already above the expected average for the year, that’s in your guidance. Does that mean you still expect to see some pull back in the revenue per hectoliter as the states catch up to your price increase, or is that guidance at this point conservative?

And then just a quick follow up, if you could tell us what’s happening with April volumes in both soft drink and beer, that would be great.

With that, the guidance side [inaudible]. I mean we’ll maintain the guidance because what you always see in the first quarter is the impact of cans. And the carnival this year was very, very strong here in Brazil due to very good weather, and the timing when it happened. So cans performed very, very well in Brazil.

So I would say in the first quarter we were above the average for the year, that meaning maintaining the price level we have now. As you know, we don’t disclose our price strategy. But basically we maintain the long-term commitment to have prices in line with inflation. So I think we are pretty much in line with the guidance for the rest of the year.

And the July volumes?

July?

No, for April, Jose, like last quarter, we will not be commenting on April volumes, neither for beer or soft drinks.

But what I can anticipate that they won’t be as strong as we had in the first quarter. But the weather, it’s more normal now than it was in the first quarter, that’s all we can say.

Alright. Thanks a lot.

And Jose, just a comment that that’s for the beer business, because in the soft drinks business we are having more pressure from the sugar. And the impact of the sugar is in the full volume on the soft drinks, only 25% of our volume is in cans. So aluminum linked. In soft drinks we have 100% linkage to the sugar.

So our strategy as follows to, let’s say, pass some of this commodity price or some of this sugar pressure to the soft drinks price will depend on the leader. So I can’t predict what the leader will do here in Brazil, if they are having good results. But, of course, we are having some pressure on the margins due to sugar. And depending on what happens -- we believe they have the same kind of pressure. So the guidance for soft drinks, in terms of net [revenues], could [provide], depending on what happens to the market.

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

Great. Thanks. I have a couple of questions. Maybe I’ll just stick to the volumes for just one second. When you guys go back and analyze the historical patterns of the World Cup, and I understand that the volume impact depends on how the tournament actually goes, but can you give us a range of expectations in terms of how much it adds to your volume in years when you have a World Cup?

Lore, you’re right that we -- of course, we have some positive expectations on the World Cup impact. We have all the numbers for the World Cup in ’98. And the World Cup in 2002, the impact was very low due to the games here in Brazil, since they happened in Asia, were at 1am, 3am, 5am. So people usually don’t have beer at this time here in Brazil.

So we are working hard. We have lots of initiatives to capture this opportunity, as Bernardo just mentioned. But I would say that the impact if Brazil -- if Brazil has a great performance, would never be higher than 400,000, 500,000 hectoliters above the regular curve.

So each game is a different weekend -- it’s an additional weekend. Of course, when they happen during the week, each game Brazil plays, I would say it would be an extra weekend. And we have a lot of our sales concentrated in the weekends here in Brazil. So if we have additional weekends in Brazil, plays like eight times, that is what is required to play the final game, I think we could have, at most, an impact of 500,000 hectoliters. That’s the most we can imagine that will happen.

Okay. Okay, just going back to this issue of raw materials, and I know there’s a lot of things that you don’t want to get too specific in terms of your costs. But what I’m trying to understand is that the cost trends were extremely tight in the first quarter, I guess most specifically in the soft drink business. When we look at the charge, the sugar pricing over the last couple of years seems to be a one-way bet.

So I’m not sure how, on a year-on-year basis, you couldn’t have felt some impact on that. And I think aluminum is almost the same. I guess aluminum, it depends a bit more in terms of when you’re hedged. So when we look at those cost trends year over year, I know the foreign exchange impact was a big part of that, I’m not sure it can be all of it, particularly in soft drinks. And I’m trying to reconcile where that came from in the first quarter with your statements that we now will see more cost pressure - I guess that’s what you’re saying - into the rest of the year. I guess, if we zero in on the soft drinks side of the business, you’re starting here with a 40% EBITDA margin, which is extraordinary, and thinking about 33% for the year. Was there something that wasn’t in the first quarter, that’s going to be in the next three quarters? Could you help reconcile that?

Yes, sure. Well, starting with the last part of your question, in terms of soft drinks, you have to remember that the 40% is a combination of lower COGS but also lower SG&A than we expect for the remainder of the year. There will be a lot of activities for soft drinks second, third, fourth quarter, so the sort of SG&A that you saw in the first quarter, you saw a decline of about 6%, you should expect that going forward.

We pretty much said that the expectation in terms of SG&A, excluding of course depreciation and amortization, is to grow with inflation or slightly below inflation. Of course, this depends on how much volume you are growing. So let’s just say, if we are growing, even for beer or soft drinks, about 4% and assuming that about 30% of the volume, translating additional expenses such as freight and direct distribution expenses, this would be a 1.2% increase. Plus, I’d say a 4.5% to 5% inflation. It’s fair to say that with a 4% increase you would be looking at something like 6.2% as an increase. In Motts, for example, that was the case for soft drinks, [and not a] minus 6% for the quarter.

So part of the reason for the 40% to go back to the 31 to 33% is this expectation that the SG&A on the year will be, let’s say, around that figure, depending on the volume. Okay? So that’s an important part of the answer regarding soft drinks.

Talking in terms of COGS as a whole, also in particular for sugar, since we have this rolling -- the rolling hedge, we had older, let’s say, sugar hedge for the first quarter, before we were significantly below market prices. We’re still below market price because we hedged six to eight months before the increase. This helps, again, the first quarter COGS being potentially a greater drop than the drop that you will see [when we start]. You will see a drop -- you should see a drop on the cost per hectoliter, on a year-on-year basis, because of the gain I mentioned on the dollar. So the dollar fully compensates for the sugar and aluminum prices. But you should not see the same drop that you’re -- that you saw in the first quarter. So going forward this will decrease.

And on top of that, you also have to remember that the package mix going forwards more -- multi-serve package presentations will [lead to] a lower COGS as well, and of course a lower net sales per hectoliter also.

Okay, but I guess what I don’t understand is your COGS per hectoliter on a cash basis in soft drinks were BRL42.5 in the first quarter of ’05, and they fell to BRL37.5, and I know the hedge was part of that. But did your sugar and aluminum costs drop in the first quarter versus a year ago? I understand they were at good levels, I just don’t understand why, year on year, there was that kind of decline in your COGS.

They didn’t drop, they didn’t drop. But, again, the combination of the dollar and the package mix, very important, and the package mix makes the cash drop the way it did.

Okay.

Lore, it’s Luiz. If you see the net revenues per hectoliter, it’s in line with last year. And, as you know, we raised prices during last year, in the second trimester last year, and we raised the prices in March again. So when you see net revenues in line with last year, it doesn’t mean that we didn’t increase prices. That means that we shift the mix towards multi-pack presentations, where we have lower net revenues, and you see -- part of the compensation you’ll see in the COGS, because we have lower costs to produce multi-pack presentations.

Okay. And I guess if I could ask on beer, if you could talk a little bit about what you’re seeing in terms of the competitive environment. We’ve seen a change in terms of Sao Paolo, and in terms of the distributor there. My impression, from the recent Nielsen data, is that if [inaudible] continues to do well - I don’t know if that’s in Sao Paolo, but nationwide -- can you talk about the competitive environment in beer right now, as you see it?

Well, what -- I would say first that the environment is in line with what happened last year, so no changes, no changes at all. [Inaudible] very concentrated in the north and northeast, doing well in that region. Not doing as well in the rest of the country. At the same time we don’t see -- we’re still not seeing any major change coming from Femsa. Of course we don’t expect them to keep losing market share for the rest of their lives, something they’ve got to do.

We are keeping very close to the market and following any initiative in the marketplace to react when and how they move. And you will see [Petropoulos] increasing their market share through expansion. They were basically concentrated in the Sao Paolo region. They expanded their operations into Rio last year, they increased market share in Rio last year. And this year they are expanding operations into other states. Basically, if you compare the same regions, they are still growing but at a lower rate than last year. And their expansion comes from more regions where they were not present in the past and they are now.

So they are -- you can’t forget that all the brands in Brazil, they’re all like 12% in the past, 12% market share in the past. And Petropoulos is kind of consolidating the low-price brands in these regions. So that’s why it’s happening for, I would say, 18 months now, since the end of 2004 or the beginning of 2005. I would say the trend should be the same for the next quarter at least, whilst we are not seeing Femsa changing immediately, and we don’t see anything coming from [inaudible] in the short term.

So I would say the trends are the same. We are following all the initiatives. We have many, many market programs in place. I think we are very strong now and our brands are performing very well. We have not only trade initiatives for the World Cup to capture volume. We have many brand linkage campaigns to associate with the World Cup and the Brazilian soccer team’s sponsorship. So I think we’ll be in shape for next summer.

Terrific. And just one last question for Joao. If we look at distribution -- shareholder distributions for 2006, you’ve already dividended out, I think it was BRL400m in February. And if I’m not -- if I read the press release correctly, you’ve already done BRL500m of buybacks in the first quarter, which I think was the program that you had announced in February, if I remember correctly. I know you’ve got the Quinsa payment coming up. Could you give us target ranges for 2006 in terms of total dividends and total share-backs for the year?

Yes, sure. That’s a good question. We -- I mentioned last quarter that -- what is kind of the market consensus is a cash generation of about BRL4b. And what I said -- and also at the same time, kind of the consensus was a net income around BRL2.6b. So what I said last time is that we will make full use of interest on our capital. Let’s say it’s about 50% of net income, so out of the BRL4b, about BRL1.3b would be interest on our capital. So there is another BRL2.7b out of the BRL4b.

What I said last time is that we would probably use most of that BRL2.7b for share buyback, because our plan was to use the shares to give to the back shareholders. And we started the program. There was actually -- we were ending a program of last year, and then we announced the program -- the new program in the beginning of -- around February [this time]. So what you see for the quarter is the end of the old program and the beginning of the second program. So you are right about the figures you mentioned, just a combination of the two programs.

Now we’ll no longer have to use those shares. There will be a cash transaction as we release in the -- when we announce the transaction. And it is BRL1.2b, so let’s say it’s about BRL2.5b. We will probably -- we’re still finalizing the [amount]. We will probably be using, let’s say, around -- maybe 70% of that and 30% of cash. So if we ended around this number, it means that about BRL700m to BRL1b, a little bit more, will come from the BRL2.7b. Therefore we would still have maybe about BRL1.5b to BRL2b to use, either through dividends, or share buyback.

Okay. Thank you.

Yes.

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

Hi, everybody. Just back to Canada, please, and a question that relates to the gap that you guys are seeing in Ontario, taking a look at the mainstream 24-pack versus the value segment. And my sense is that gap has gone to about CAD10 from about CAD9 in the fourth quarter. I’m just wondering, does that sound about right? And where do you think that gap can go? Do you want to try to narrow that, going forward?

And I guess the second part of this is really, as Canada shapes up to be a real [cost] story, can you give us a sense of, excluding the ZBB program, but is there any room left for the synergies that you had talked about earlier in ’05? In other words, 60m was the number you had given us. Is there any piece of that left to be had in ’06?

Okay, I’m getting the data for the first question.

The second question, the answer is no. We have our ZBB program in place. We have a very, very strong program, the VPO program, which is in the -- in our breweries, and to drive efficiencies and so far is very, very successful, as you could see on the COGS part. And the shared service that I mentioned before will have a very good impact in ’07 numbers but not in the ’06 numbers. So I do not have other new costs programs that have not been initiated this year, so far.

I didn’t understand.

So, the gap you mentioned, the gap right now is exactly CAD9. So it’s -- the 24-pack of discount is CAD26.4 and the 24-pack is CAD35.9 -- the premium 24-pack is CAD35.9. It’s about CAD9. However, as I mentioned before, there are a lot of discounts going on and in reality, every time that there are LTOs, the brewers decrease the premium price from CAD35.90 to CAD29.90 -- about CAD29.90, which reduces the gap between discount and premium. So that’s the gap we have right now.

And how did that just compare - sorry, Miguel - to the fourth quarter? Was it stable, or --?

It’s absolutely stable. Well, it’s stable, if we talk about regular prices. It’s not stable if we talk about the amount of discount activity. So there is much more discount activity this year than there was before -- than there was during the first quarter of last year.

And versus fourth quarter?

Also more. Yes, there’s much more discount going on right now. Let’s keep in mind that, like Sleeman, just to give you an idea, here in Ontario, during the first quarter reduced all their SKUs, specifically Sleeman Original Draught, decreased CAD2 below the premium -- the core premium price. So it was CAD2 below [Blue]. So just to mention one, but we had much more activity -- price activity from our competitors and at the end we followed, because we could not stay in that situation. So, much more price activity.

Great. That’s helpful. And I guess just the second question is more on this -- on the BAC and Quinsa asset sale. When the news came out last month, you guys gave us the sense that the payment to BAC would be four to 12 months. What is that really depending on? If you could give us a sense of where that payment might fall, or what are you looking for, or waiting for, to actually complete that transaction?

And is there a relationship with the asset sale in Quinsa and how is that going? Do you think it’s really going to go into ’07 before that’s sold, or do you think it could be this year? And perhaps that’s a Quilmes question directly, but if you could give us any color on that, that’d be great.

No problem. Well, starting by the end. Regarding the asset sale, the asset sale of course has started back in 2002, when the transaction was completed. What took so -- we have -- the agreement with local antitrust [inaudible] gave us 12 months to sell the assets. Back then, we had two months, and then there was a court injunction that didn’t allow the process to go forward. This injunction went to the Supreme Court. The Supreme Court ruled it out. So the clock’s ticking again, and therefore we have 10 months. This was back in March, so two months ago.

Therefore we have still about eight months in current law to sell those assets. This is in full force, so the asset sale is going on, of course, and we believe we can complete it at the most in the next four months. So that means before the end of the year.

And the final approval of the transaction, which is not necessarily, or not legally, related to the asset sale, the final approval -- when we announced the transaction we had to submit a few reports to the antitrust. They had to review them. They have 45 days to ask questions. Those 45 days stops when they put questions to us. That’s why we gave the broad range of four to 12 months. This is also going full force.

I think -- I don’t think it’s going to take 12 months. Our impression now, after one month has passed, hopefully it will be done in the next four to six. And so, again, before the -- slightly before the end of the year, I would say it’s -- would be the most time we would imagine at this point that we’ll get to get this done. Which is basically a regular antitrust approval to the transaction. I think that answers your question, right?

Yes. Thank you very much.

Thank you. Our next question is coming from Andrea Teixeira of JP Morgan.

Hi, good morning, everyone. Thanks for taking my call. Actually, I just wanted to congratulate you guys and also, in terms of the market share - maybe it’s a question for Luiz and possibly to Bernardo. Well, you got an additional 10 basis points in March. I was just wondering if you can explain exactly what happened in terms of the mix, if it went to more premium brands in beer?

And also, if you can explain who you believe you got the market share from, since Petropoulos is, as you mentioned before, is the more aggressive, and also increasing capacity. Can you explore more on that, and also Kaiser taking back some momentum? That’d be great. Thank you.

So, Andrea, first, when we say the March numbers, they are more linked to the February market activities and the real volumes or real market activities that happened in March. Nielsen captures like two-thirds of their results are based on the two months previous to the month they issued the results. So this is a reflection.

The result we have in March is a reflection of the very good blend we had in place for the Carnival. We had lots of activities, especially in supermarkets, for the Carnival and we capture a lot of market share in this segment, so cans and supermarkets were very positive in Feb.

And then, of course, the Nielsen numbers in March. We don’t expect to maintain this same level in this -- for this month, for the [inaudible] numbers, since we reduced the activities we had in place during March and April, months where volume -- it’s -- in this channel, it’s less representative than in other months for the year. So we plan to use our resources in the most important months of the year.

And I would say the share is coming from the same sources that it came last year. So -- and it’s exactly my answer to Lorre. It’s coming from mostly Molson, not any more from Femsa now, from Kaiser. I’d say from part of the low-price brands too. [Inaudible] is pretty much stable, more concentrated in the north and northeast, and Petropoulos keeps growing, more -- still more concentrated in Sao Paolo and Rio. But they are expanding their operations into the countryside in Mato Grosso, Mato Grosso do Sul. So we -- I would say we should expect them to keep growing, but of course we have many initiatives in place and we believe we can grow too.

Okay, that’s great, Luiz. Also, for Joao, just a follow-up question on the payments for Quilmes. So in that sense you’re using BRL700m in actually cash, from cash generation. So you have told me you’re probably going to be raising that, as I understand, local debt for the balance, right, around BRL1.8b? Is that what I understood?

Hi, Andrea. Yes, that’s correct. I said, in case we ended up with a mix of 70/30, that an own cash -- internal cash generation, that would be the BRL1.8b in back, and the BRL0.7b in internal cash generation, you’re right.

We could be anywhere from 60/40 to 80/20. Just use the 70/30 to somewhat give you a direction, which is -- I think is the best one we have at this point. But definitely we will take this opportunity, as we’ve discussed in the past, to leverage up the Company a little bit more.

So that means also that neither InBev or you guys are going to be doing any buybacks until the end of the year, also, right?

No, as I said, not necessarily. Because if I have -- as I said, if the consensus is right when it talks about a cash generation of BRL4b, then I have BRL1.3b in internal capital, plus a BRL0.7b of internal cash, I still have -- let’s say if it’s 60/40 instead of 80/20, I would still have maybe BRL1.5b to BRL1.8b -- BRL1.3b to BRL1.8b in cash to use either for dividends or to increase my share buyback.

Okay, that’s great. Alright, Joao, thank you very much. Thank you, Luiz, again. Congratulations as well.

Thank you, Andrea.

Thank you. You’re welcome.

Thank you. Our next question comes from Celso Sanchez of Citigroup.

Yes, hi, good morning. I’ll try to be brief. Thanks for the call. On Canada, I have three questions, first is on the D&A increase of 25% in SG&A. Can you explain that to us a bit? Is that the shared services center beginning, because of the fixed plant rationalizations, some other moves, I would have thought that maybe some of that would help you through there?

Yes, you are right. The increase is basically the Toronto Metro and the other plant that we closed last year, and the investments that are behind that.

Sorry, so the closure gets rids of D&A but investments to make up for that are the reason for the 25% increase? Is that --?

We are already depreciating those investments, that’s why.

And just to follow up on the Canadian situation, it sounds like in Ontario your problems with the larger competitor, with Molson, sounds like they’re more outside of Ontario, if I can -- I understand it correctly, and in Ontario it sounds like more of a Sleeman issue. Is that -- does that sound right, because pricing that we’ve seen, it seems like Molson, at least in Ontario, is acting much more rationally than they did last year, so far at least.

Well, basically, no. What I said -- what I mean is that in -- last year, the -- we basically did not have price activities outside of Ontario, and right now we have everywhere in Canada. In Ontario specifically, so -- but that is not only by Molson. Molson and Sleeman, everywhere in Canada. In Ontario specifically, this year, we have much more activity from everybody, from Sleeman, from Molson. Lakeport is still growing; not at the same pace as it was last year, but it is still growing. And there’s much more activity in Ontario as well.

But just to give you a number, just to compare, in Ontario the first three months last year, Molson and Labatt had promotions just two weeks during the first quarter, and this month -- this first quarter there were promotions on nine weeks. So much more price activity in Ontario.

It just seems odd that we’ve seen them do one week Easter promos, and then some of your branches have done two weeks, so it just seemed like they were actually being more constructive, but maybe it’s on different packages. The core brands I was more focused on, it seems like they’re doing [inaudible].

Well, I don’t see that rationality right now, unfortunately. So there’s -- actually, at the beginning of the year, until March, our feeling was that they had the strategy of LTO every week. So that was what we had in mind, because they had a different SKU, a different LTO every week. And that’s what we were reading. Then in April they stopped for one week, and came back, and then stopped. So we are having a little bit of difficulty in understanding their strategy on LTOs, but definitely it’s an aggressive strategy.

Right. Thank you. And then just on Brazil, just can I clarify [inaudible] I heard you say before. Flow meters, you said next September. Can I be clear on -- my understanding was this September, the next one, but this 2006 September they would be implemented. But did you also say the end of 2007 you expected 100% implementation? Can you clarify that, please?

Joao will clarify that for you.

Yes, it was not clear. Celso, thanks for asking the question. Everybody -- about 90% of soft drinks producers in Brazil have to have the flow meters implemented by September 2006. Okay? So 90% by September 2006. And between September 2006 and March 2007 is the remainder. The reason for this, let’s say, wave approach by having one, two and three is because the law that was enacted gives the minimum volume. Therefore the minimum volume by September will be the whole thing. Then you have December and then you have 2007, in March.

What I think we’re trying to convey when we said the end of 2007 is one thing is the implementation, the other thing is the full fact of the implementation. So the full fact will take longer, but by the end -- by March 2007 everybody must have the flow meters installed.

Very helpful. Thank you very much.

Yes, my pleasure.

Thank you. Our next question is coming from Anthony Bucalo of Bear Stearns.

Thanks, guys. One quick question on Canada. Brito referenced this morning, in the InBev call, that Sleeman was selling itself. Do you have any feedback on that, or any comment on what Brito said this morning?

Well, we -- what else can I say? They are up for sale, as Brito says? What else -- is it true?

Is this a known fact?

It’s a known fact, yes. It’s -- at least after that he said on the call, it became public, right? But it’s known. It’s a process being conducted by an investment bank, and they are approaching a number of companies, and we already know. And that’s it.

Okay. Thank you.

Yes, my pleasure.

Thank you. Our next question is coming from Julia Rizzo of Credit Suisse.

Hi, good afternoon, everyone. Just a quick question on the Canada. I would like to know if you could give me some color on the market share side, on the region, and what is your expectation for 2006? I understand that you’re not being competitive in terms of price, preferring profitability, but how much market share is being affected within that? Sorry?

Sorry, that was on mute. We were -- you know that we do not have an official -- we do not have Nielsen here, right? So we have -- always we work with different numbers from Molson, but basically it’s pretty close. On our estimation, we’re getting certain provinces. The [leaker] boards provide us numbers, others don’t. But in -- we began -- if we compare from the beginning of the year, we are growing share. So we had a very bad January; we are in a much better place right now. So we were in the 39 share and now we are in the 40.5 share in April. So we are in better shape, so we are growing.

If we compare with last year, we are basically accumulated, till April, about 0.8% share below last year. So losing share versus last year, short term, and getting a little bit better.

Okay, thank you. Just --

But the industry -- sorry, just to explain, the industry’s been pretty good, so the industry year to date April is 3.4% above last year, which is pretty impressive.

Thank you. For 2006, what do you expect from the industry? Because I remember that during [the deal] you were expecting about 1% growth.

Yes. We believe that it’s not going to grow more than 1%. Actually, below that. And the reason is basically because last year’s summer was the best summer in many, many, many years. So we are comparing -- the first quarter is a quarter that is not that representative. It’s the wintertime in Canada. And we had a very good temperature spurt, especially in January and February, that drove this growth. But in our -- our expectations is that summer is not going to be as good as last year, and because of that reason -- because of that volumes will drop a little bit. So we work with about 1% growth during the year.

Okay. And do you think that you will be able to maintain this market share through the year, given the good trend of the [inaudible]?

I hope so. We are working on that. And, as I said, we are being a little bit more aggressive now. Absolutely responsible, no price war, but being more proactive. And I -- our expectations are to recuperate a little bit the market share we have right now.

Okay, thank you. Just the last question. I got a little bit surprised with the SG&A, and could you give me a breakdown of the new structure, mainly on commercial, depreciation, which [included loss], and the direct distribution expenses?

Well, I apologize for that, but I’d rather, for competition reasons, not to give you a disclosure on this figure.

I guess even on [inaudible] at least the depreciation line would be very helpful.

Well, the depreciation -- we have opened, as we said last time and just reaffirming what we have just said, you are now getting for all the divisions the SG&A grouped together. But we opened the depreciation and amortization line, so that it would be easier for understanding of the true expense, and not polluted by depreciation and amortization. So we’re not going to be opening up within SG&A, either for Brazil or Canada or any other division, whether this is marketing, commercial, administrative, general.

Okay. Thank you very much.

Yes.

Thank you. Our final question is coming from Andrew Hollins of DKW.

Hi, just a question on Peru. Can you tell me what your market share in Peru had reached in the first quarter? Can you tell me what your pricing levels -- or what market pricing levels are in the first quarter of this year compared to the first quarter of last year? And can you give us a view on when you expect to break even in that market?

Andrew, in HILA we are trying not to be very specific in market share data in each country, because we face much, much tougher competition than in Brazil. We are -- all I can say is we are doing great in Peru. We are increasing our share in our distributions into new areas in the country. We had some restriction in the bottle implementation in the market, and once we are going over these difficulties, we are being able to expand distribution into new areas.

So we have very positive trends in Peru. They have encouraged us to work hard in that country. And we have some pressure on the price side in Peru, because we believe that once SAB took over from [inaudible], the management there, they would never go for a price war. And they are reducing their prices as we increase market share, so we are keeping an eye on what they do and what happens to our volume. But once we are in a positive trend, we are not reacting and having a negative impact in our results so far.

But, of course, at some point in time, if we stop growing to the levels that we believe we can achieve in that country, then we’ll think of what kind of initiative -- price initiative we can have here. So that’s basically what I can tell you from Peru. And that’s -- I am sorry for not disclosing much more than that, but it’s really, really tough competition there, and any information I provide they use immediately against us there.

Okay. I had heard you’d reached 15% market share in Lima. Is that a figure you recognize?

And growing.

Right. Thank you.

You’re welcome.

Thank you. This concludes the question and answer session. At this time, I would like to turn the floor back over to Mr. Neves for any closing remarks.

Thank you. Well, I’d like to end by saying that we’re enthusiastic -- very happy with the results we’ve just released. Although we do have challenges ahead, as Miguel and Luiz and Bernardo have mentioned, we are very positive and we will work very hard to reach our guidance, but even more to maintain the exceptional results that we have had so far. And we’ll start by working very hard in this World Cup, which we think it’s -- we’ll win some more momentum to us.

Thank you, everyone, and see you again next quarter. Bye-bye.

Thank you. This does conclude today’s presentation. You may disconnect your lines at this time and have a nice day.