Ambev SA (ABEV) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Ambev conference call to discuss the accounting results for the second quarter of 2006. We inform that all participants will only be able to listen to the conference during the Company's presentation. After the Company's remarks are over there will be a question and answer period. At that time further instructions will be given. [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. Carlos Lisboa, Marketing Executive Officer, Mr. Miguel Patricio, CEO for North America and Graham Staley, CFO for North America. Now I'll turn the conference over to Joao Castro Neves, CFO and Investor Relations Officer. Please, Mr. Neves, you may begin your conference.

Thank you. Well, good morning everyone and welcome to Ambev's second quarter results conference call. I am, as stated, Joao Castro Neves, CFO of Ambev, and with me today I have Luiz Fernando Edmond, our General Executive Officer for Latin America, Miguel Patricio, General Executive Officer for North America, Carlos Eduardo Lisboa, Marketing Executive Officer for Latin America, and Graham Staley, CFO for North America.

I'd like to start the call by sharing a brief overview of what was a good second quarter for Ambev. Luiz Fernando, Miguel and Lisboa will then provide you with the details about our operations in Brazil, HILA and Canada. I will wrap up providing the specifics regarding the second quarter financials.

During the second quarter our consolidated business reached BRL1.586b, which represents 11.9% growth comparing to the second quarter '05. And our earnings per share, excluding goodwill amortization, presented a growth of 23%. Total beer volume grew 5.2% and CSD 14.2%. We had a good performance on our Brazilian business with EBITDA growing 14.3%. We're also very happy with our Quinsa and Canada operations, which deliver an EBITDA growth of respectively 25.2% in U.S. dollars and 11.3% in Canadian dollars.

In HILA-ex, although we are not delivering any positive EBITDA results, we are succeeding in our strategy of growing volumes. In the second quarter '06, for example, we presented a 17.8% beer volume growth and 11.5% soft drinks volume growth.

All of our operations together bought a net income of BRL483m, which is 58.3% higher than second quarter '05. Those are excellent results and I’m 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 details regarding our second quarter results.

During the quarter in Ambev we saw exciting results in Brazil. Beer volumes achieved a 4.4% growth as a very -- as a result of a very good month of June, on the back, of course, of the World Cup, which managed to compensate the bad weather we had on the last two months.

We had 68% beer market share for the second quarter, which is 60 basis points above the second quarter '05 numbers, and achieved a 69% market share in July, which reassures of strong brand equity and excellent execution, also helping to grow volumes.

Our team was very much prepared to get the most from the opportunity brought by the World Cup. And the strong performance of our core and premium brands, boosted by much stronger marketing campaigns and outstanding execution of our marketing programs, contributed to reach such results. We invited Lisboa today, our head of the marketing department in Latin America, to talk about our marketing efforts and some of the excellent work done for the World Cup.

On the pricing front, net revenues per beer hectoliter in Brazil reached BRL137.9, a growth of 7.8% when compared to the BRL128 in the second quarter '05.

Brand [and revenue investment] good performance of the premium segment and our direct distribution strategy continues to increase net revenues beyond inflation. We are enthusiastic about the way our beer business is growing and continue to work at full-speed to catch all opportunities presented, such as economic growth.

The World Cup momentum was also good for us, for our soft drinks operation. The decision to concentrate marketing [pressure] in this quarter brought positive results and Lisboa will also comment on that.

The result was an 8.6% volume growth and even with high SG&A investment, a 3.6% EBITDA growth, reaching BRL126m. In addition, we had an increase of 40 basis points in market share, reaching 16.8% in the second quarter of '06 versus 16.4% in second quarter '05. July market share reached 17.2%.

Our net revenues per hectoliter decreased 1.8%, highly impacted by a package mix shift toward multi-serving packaging. Important to highlight that this shift also lowered the cost of goods sold. The mix shift effect, together with a better FX, has again in the second quarter '05 more than offset the commodity pressure, allowing us to drop the price per hectoliter.

We continue to expect positive results from implementation of 4 liters in the soft drinks, which are both starting next month and should be 100% implemented in the market in September of next year. Just like in the beer industry, the 4 liters will provide a fair playing field for the industry due to the discounting pressure from former competitors.

It's important to highlight that our increasing of the SG&A, to a lesser extent in beer Brazil and to a high extent in soft drinks, is mainly linked to the World Cup and we don't expect such growth in the following quarters.

We continue to execute our strategy for our HILA-ex operation, which is to grow volumes minimizing our cash outlays. We are still in what we consider start-up phase in some countries and we don't expect any significant contribution to the Ambev results for 2006.

We are managing to build local partnerships and brand monopolies. We are now focusing on strengthening our operations by gaining volume and market share, as well as building brand equity.

In the second quarter we were able to grow 40.6% on consolidated volumes. Peru and Dominican Republic delivered market share increase, while Central America and Ecuador operations faced a tougher competitive scenario, most affected by price.

Despite our negative EBITDA on this quarter, mainly due to comparisons for launching beer in Peru and Dominican Republic, we see a lot of perspective on the long run and are particularly happy with the share gains in Peru. And we are working hard to deliver the guidance for the year.

On the other hand, once again we achieved very good results for Quinsa with 21.2% of EBITDA growth and 16.6% of volume growth. We are enthusiastic with the transaction closed last week. And although Quinsa soft drinks revenue improved a lot since the first part of the transaction, we believe we still have synergies to capture with an even greater integration of our management teams and best practice sharing from both sides. From now on we will be consolidating 100% of the Quinsa results.

We are already working on detailing synergies, and for sure there are some, such as procurement synergies. But I won’t provide any figures yet. Having first been asked about leasing, we’ve made no decisions yet. So, for the moment, it should remain as it is. The last question I’ve been asked is regarding structure. Once again, we plan to keep the current management team, which is doing very good.

In conclusion, I would say that 2006 has been very good for us with a great execution during the World Cup. I would like to reiterate my thanks to all Ambev employees, whose high capacity and continued efforts have brought us some strong results. I'm pretty comfortable to say that our team is prepared to take profits from all the good opportunities we foresee and also quickly react to any challenge that the competitive scenario might bring.

I'll now turn the call to Lisboa, who will bring -- will be talking about our marketing strategy. Thank you.

Good morning, everyone. As Joao and Luiz just mentioned, we are very pleased with the quarter's results, and especially with the outcome of our World Cup plan.

As an obvious opportunity to not only capitalize on new consumption occasions and therefore boost volumes, but also to strengthen brand equity through intensified bonds with consumers, we have designed an extensive and very detailed plan for the World Cup. Our plan started over one year ago and involved the entire Ambev team, focused on both beer and soft drinks.

I should mention that I will eventually speak on behalf of Franciso Sa, the Head of our CSD and Nanc business, to exemplify some of the successfully implemented strategies. We have developed a variety of actions in different fronts but I will spare your time and limit this presentation to some examples.

First, the communications front. We actually reached consumers and stand out from the crowd in the context of several categories, tackling the same subject. We will carefully study the alternatives and negotiate a meticulous media plan involving open TV, cable, radio, Internet and magazines. And based on extensive research with consumers, our brand created messages that were able to trigger emotional reactions within the target audience. For instance, [inaudible] traditionally associated with Brazilian icons, emphasized their bonds with the national team, while Skol approached the soccer subject in its own audacious way with a lot of humor and irreverence.

This strategy generates results beyond the beer category. We are the first advertiser to approach the World Cup in national television. According to Datafolia Institute, in Sao Paolo capital, brand Antarctica, Brahma and Skol emerged in the list of top four brands in that [inaudible], all of them occupying the top three positions in favorite ads. In addition, Brahma was elected by consumers as the most related brand to the World Cup in Brazil, also according to Datafolia, and was the first, if not only, brand to approach the country team's elimination, an interest that was highly emphasized by the local press.

Second, the trade front. A variety of actions were developed across the entire country since the early in the year, to fortify our relationship with customers, maximize game occasions and stimulate consumption. To this front, point of connection support for the tradition of TV sets and cable TV to stimulate on-premise game watching, point of connection enjoyment highlighting our brands. Point of connection training on how to operate under happy demand conditions and how to stimulate consumption before, during and after the games. And that is clever marketing. We call point of connections before and after the games to present our stocks.

Third, the promotions front. In order to increase brand equity and volume, we have created major promotions such as with an Ambev official sponsored t-shirt, which actually became the official outfit for Brazilians, with an [Antarctica] joint and Pepsi joint SMS promotion, and Brahma [collect bull] direct to beer glasses.

Finally, the innovations front. We have developed new products and packaging especially for the occasion. Based on internal research, we learnt that Brahma is recognized as an example of a credible Brazilian that overcame [inaudible] and successfully went abroad, and therefore had endorsement to also bring news from overseas. Keeping this in mind, we have created Brahma beer, our first innovation mainstream segment. A genuine German beer recipe to celebrate the World Cup, launched nationwide in main beer presentations in Brazil, 600ml bottles and cans.

Another innovation was [inaudible], a 28 pack of cans with a heavy grip and easy to carry, in order to promote upsizing. As the first from the conventional 12 pack presentation, [inaudible] was very convenient for those who preferred to watch games with friends at home.

But our innovations were not limited to beer. Also, based on consumer research, we have designed a unique soft drinks recipe, Guarana [inaudible], combining the flavors of Guarana [Basica] with a variety of tropical fruits. Moreover, [inaudible] celebrate the occasion with a limited edition of two special flavors designed based on the colors of the Brazilian flag.

The measures that remains, careful planning and military execution, definitely paid off. Despite Brazil's early and regretful elimination, the World Cup was indeed a second summer for Ambev. Volumes in June were strong enough to compensate for the very bad weather during April and May. And, as a result, we celebrated best month of June in terms of volume in the history of Ambev.

In addition, we were able to reinforce the position of our brands and seriously improve the healthy indicators. I think this change reinforced our commitment to keep on dedicating our efforts and creativity to building brand equity and creating value to shareholders.

Thank you. Now I'd like Miguel to take over.

Good morning. I would now like to address Labatt's results for the second part of '06.

First of all, we are very pleased to report that in Canadian dollars we delivered double-digit growth in EBITDA. It follows double-digit growth in the first quarter, resulting in a strong first-half growth of 11.6%. Top line growth and continued improvements in costs remain our dual engines of growth. Industrial effort here has been stronger than we anticipated and [believe] that our market share has stabilized in the second quarter.

In Northern Canada our business has tremendous momentum, benefiting from both industry and market share growth. In addition, a number of initiatives we have put in place in country wide, mainly incremental investments behind the acceleration of Bud Light and the launch of Brahma, are generating very, very, good results, accounting for most profitable growth this quarter.

However, on the negative side, Ontario remains a major challenge and we have plenty of work to do in this province. We have sustained or increased our net revenues per hectoliter in most regions of Canada, Ontario being the sole exception. However, because we are growing more quickly in regions like British Columbia and Alberta, where net revenues per hectoliter are lower than the national average, there has been a negative impact on Labatt's consolidated figures.

Cost management continues to be a challenge for the Company. Higher brewery efficiencies have translated into 8.1% Canadian dollars reduction in COGS per hectoliter reported in the quarter. Needless to say, zero base budgeting is a well-established part of our way to do business, securing a truly cost-conscious attitude across the whole Company.

Continued cost savings are of vital importance in funding the additional marketing investments we are making in Canada. Increasing investment levels are necessary in light of the challenging environment in which we operate, especially in Ontario. Going forward, our strategy will be unchanged with a permanent commitment to cost reduction, the continued pursuit of top-line growth, both via price and volume, and disciplined execution.

In the coming months, cost reduction will remain critically important for profit growth. Our team will have to absorb any cost inflation that may come our way. In light of both increasing competition of value brands in Ontario and the step-up of trade spending [inaudible], we are unlikely to achieve any net price increase for the balance of the year. As I said in the last quarter, we will react to price provocation from our competition. We are expecting price promotions to be reduced this quarter but if it does not happen, we will adapt very, very quickly.

In conclusion, Canada remains a challenging environment in which to do business but we are progressing. Thank you very, very much. I will now hand back to Joao.

Thank you, Miguel. First, I'd like to talk about the SG&A evolution. As always, we create huge focus on price. Our SG&A numbers grew 36.8% year-on-year in Brazil, explained by a higher amount of the foreign assets amortization of Ambev’s Brazilian corporation, reaching BRL227m in the second quarter '06.

Excluding the depreciation and amortization our SG&A grew 23.6%, mainly due to higher marketing investments in the World Cup. Particularly in soft drinks operations, we had a higher SG&A increase due to the shift in that investment to this quarter, as already explained last quarter and also today by Luiz Fernando.

It's always important to highlight our operational average, by which in Brazil volumes were up 5.5%, net revenues 10.6% and EBITDA by 14.3%.

Regarding our hedging strategy, we managed to lock in good [inaudible] price, which together with favorable FX hedging, delivered 8.2% lower COGS per hectoliter for the Brazilian business.

Now I will be guiding you on the main lines between EBITDA and net income. We achieved a BRL1.586b EBITDA and a net income of BRL483m. Other operational expenses presented a loss of BRL243m in the quarter, which is pretty much explained by Labatt’s goodwill amortization of BRL242m. Our net debt dropped BRL112m, totaling BRL5.2b, yielding a financial expense of BRL340m. Not only our net debt dropped, but we also enhanced the profile but reducing short-term debt.

Non-operation revenues presented a loss of BRL21m, mainly connected to a BRL14m provision for the creation of the shared service center in North America, which is now up and running.

The provision for income tax and social contributions totaled an expense of BRL139m. We have exposed this position in our income tax and social contribution. In order to eliminate this effect, we had this position. On previous quarters this hedge was accounted as a financial result. For this quarter we reclassified this hedging result for the quarter’s income tax result and resulted in a gain of BRL87m, in line with hedge accounting.

We presented a profit sharing provision of BRL54m. Minority participation in other subsidiaries presented a loss of BRL17.9m. Therefore our net profit per thousand share amounts to BRL7.4, an increase of 59.9% compared to second quarter '05 figures.

Regarding our business strategy and our policy, we remain committed to distribute all excess of the cash we generate. We have just issued a local debt by the bankers in the amount of approximately [BRL2b], which we used to pay for the acquisition of back remaining shares in Quinsa. The portion of internal cash generated used for this purpose was not very significant. We had to pay 2.6 and we have used about 0.6/0.3m with internal generated cash. Therefore, there will be little impact on the payout for the year.

We're very proud of this debt issuance. It was the first time we approached the local market in a significant way and ended up achieving the lowest cost ever for comparable figures, achieving 101.75% of CDI for three years at local interest rates and 102.5% of CDI for six years. We understand these figures are a recognition from the market of our excellent credit profile and consistent growth pattern. Another positive sign was a credit rating increase from BBB-, which is already investment grade, to BBB from both Fitch and S&P.

Once again I'd like to emphasize the importance of our people in achieving such extraordinary results. Now we are open for questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Tufic Salem from Credit Suisse.

Hello. Good morning everyone. Could you please break down Canada growth between industry growth and market share gains?

Sure. Well, for the quarter the growth was -- the market was about the same as our growth, about 3%. So we were stable in market share this quarter versus last year. So industry had a very good result and at least in the quarter we changed a long-term declining trend.

Okay. Could you please also give a bit more color on your strategy for exports - what is a normal level, what can I work for and the main drivers in Canada?

Well, we are in depletion versus last year, so we have variations every quarter because with the U.S. their shipment's in depletion. So shipments are basically what we sell to the wholesalers, depletions are what we sell to consumers. In this quarter we had a bigger change in terms of shipments. But year-to-date the depletions of the Canadian brands in Canada are about 1% below last year.

And what's your anticipations for the second half?

Well, I would prefer not to comment on the expectations for the second half, if you don't mind.

Okay. So can I -- one more question on Quinsa. I would like you to do the same breakdown in terms of performance. How much was industry growth and how much was market share gains on Quinsa?

Well, Quinsa, of course it depends on its five different countries, so the breakdown is a little bit more complicated. As you’ve seen in the press release, we have a real gain on Paraguay. And then of course in Paraguay, Uruguay and Bolivia we have very high market shares, but although we have very market share we still have gained some market share in Paraguay. We have pretty much stable share in Argentina and we are gaining share in Chile.

I think what made some outstanding comments were performance of Bolivia, which had very significant growth. And mostly, of course, is the share was a stable volume coming from the marketplace and that is also true for most of our operations in soft drinks. Both in Uruguay and in Argentina, we have also had slight gain in market share but also very good performance of the marketplace.

Okay, thank you very much.

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

Yes, maybe I could start in Canada. Your competitor mentioned on their conference call that July got off to a very weak start in terms of volumes for them and they seem to be adopting a posture of greater price promotion. So I was wondering if you could reconcile that with your hopes that the market will be less promotional into the third quarter, and any comments on whether or not what we're hearing is industry-related or not. That would be helpful, thanks.

Lore, if you don't mind, I would prefer not to talk about July. What I can tell you is that the results for July were not that bad for us, were not that bad, let me put it that way and were better than we anticipated before [inaudible]. So -- but in terms of price environment, last quarter I made it official that we would answer any provocation from competition. We did this quarter, specifically in Ontario. We were more aggressive in pricing. But based on the comments from our competitors in their calls, I would expect the environment to get less competitive in terms of pricing. Obviously if they increase the price strategy, we will do the same. So I'm expecting to have a reduction in terms of pricing but, again, we are prepared to go if that is necessary.

Okay. And just a follow-on, your guidance for the year has been zero to 4% EBITDA growth. And as you mentioned in the comments, you've gotten off to a very good start in 2006. Are you thinking that your guidance may be conservative? Or you mentioned in your comments that you’d be spending more on marketing and expecting to increase the marketing for the second half of the year. Or are there just too many moving parts to have confidence at this point?

Well, Lore, I think we still have the summer ahead of us, so July, August are very important months and September as well. So, the second half is more important than the first half of the year. It’s too early to talk about the new guidance. I think that next quarter I’ll be more optimistic and positive about it. I would prefer to play on the conservative side right now. But, of course, we are far above our expectations till now but that doesn’t mean that the rest of the year will continue in a very positive way.

Okay, thanks.

Miguel, if you’ll allow me to just add on this. Lore, I think we’ve been getting a lot of questions regarding the guidance and you saw in the presentation we are not updating the guidance in any way. I think what we can say is [inaudible] in term of our other operations we are definitely in the upper range of the guidance we have provided so far. And -- but there is a mixed seasonality, as Miguel said, in our business, not just in Canada but also in the other operations. And if we are to make any changes, we’ll probably wait to end the third quarter and give you more updating on this.

Thanks.

Thank you. Our next question is coming from Juliana Rozenbaum of Deutsche Bank.

Hi, good morning everyone. [Can I have] a breakdown how much was put on marketing expenditures in the second quarter and how much of your marketing budget for the year have you already spent year to date?

Hi. Well, we -- as we stated last quarter, we are not opening up those lines any longer. What I can tell you, and also consistent what we said in the first quarter, is that when compared to other years the investments or the expenses in the second quarter were much above the average. And they are definitely no reference for a projection for the rest of the year. It was heavily concentrated in the second quarter, or if you take -- given the growth for the second, they are not a good reference for the rest of the year.

Okay. Can I just ask then the underlying cost pressures from raw materials during the quarter? They weren’t that meaningful.

Yes.

And specifically, if you could discuss the price level that you have embedded in your hedging during the quarter?

Sure. Well, if you want I can give you a little more color on the SG&A, and it’s basically what we’ve been saying all along since we started doing SG&As. We always strive for maintaining our SG&A growing in line with inflation, right, as a reference.

Second, also to -- we also said it’s true that around 30% of that SG&A for both beer and soft drinks in Brazil, they have a -- volumes will have an impact on about 30% of the SG&A. So, for example, if we have volumes in beer, as we have in the guidance, of around 4% and you have inflation of 5%, then our SG&A should be going up around 6.2%, for example. It equals just inflation and volume.

It’s also true, we mentioned it in the beginning of the year, that we expect this year to be -- our investment will be slightly above last year, because of the investment in the World Cup. And, of course, those investments they will pay off during the year, given the good results we are having for the World Cup, as we had expected. So, a little bit more color on help in the projection for SG&A for the year.

Regarding the hedge situation, we are locked for the year in both sugar, aluminum and the currency here for Brazil and we have pretty much closed. Of course, this will always depend on less or additional volume. But we have mentioned last call that we have gained net/net, gaining FX and losing on sugar and aluminum, about BRL100m. So, that will help the comparison, of course, of the cost of goods sold of 2006 against 2005. So, 2006 will be, if we take FX, sugar and aluminum, BRL100m hedged better than 2005.

Okay. Can you discuss the entire prices on your hedges going forward?

Well, going forward, as I just mentioned, for 2006 it’s closed. There is no more effects, given the projections we have for volumes. That’s definitely backed, how much we are going to be buying of sugar and aluminum. So, we are done for the year. We are basically totally hedged for 2006 in currency and in commodities.

Okay, great, thank you.

Okay, thank you.

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

Good morning, everyone, two questions. Just you spoke to some share gains in Peru and the Dominican Republic and then a little bit of difficulty in Central America. Could you provide a little bit of detail on the dynamics in those areas?

And the second question is for Miguel and Graham. Thinking about the transaction that occurred in Canada last week, Sapporo coming in, do you see anything in the short or longer term that may change substantially in the Canadian market looking ahead? Thank you.

Hello, Anthony, this is Luiz. Well, as you know, we don’t actually give any details in a country-by-country basis, just because we have much more movement again in terms of all these details in the hands of our competitors that are very strong, very dynamic. And of course the impact on the HILA-ex results and our EBITDA are not significant at this point in time.

But anyhow, what I can tell you is that, of course, we have different scenarios in different countries. In Dominican Republic we’ve launched the Brahma only six to eight months ago. And I think Presidente had a lot of time to prepare a reaction against us. So, of course, we’re having tough competition there in terms of increasing there the mix of our SKUs, liquid and in packages, of course putting more pressure against Brahma to compete with only one brand.

And we had a very positive two first months, then we lose momentum. And I think we believe we are now recovering some of the momentum we lost from the beginning. So, we have a lot to do in terms of increasing distribution, increasing our presence, but I think we are in the right way.

In Central America it’s different, because we’ve been there for three years. And after reaching a very strong market share after the first year, we increased prices and after that first price increase we have recovered market share. So, we started to lose and we haven’t -- in my view, we haven’t found the alternatives, or the stresses, in terms of both distribution and in brand equity, to recover share in Central America.

Then, if we go to Peru, where we launched Brahma only one year ago, and we believe we are doing very well. We are gaining market share. We continue to gain more customers. We again -- our presence is growing and we are gaining market share. We’re improving distribution. We have a very good distribution network, because we base that on the soft drinks business that we acquired from [Padfit]. That means within both distribution, brand equity and, of course, market share.

So, different scenarios for the countries, different initiatives that we have to put in place, but, again, I won’t comment in more detail just because everything that we say they use against us, because they are too big. And, of course, we are the only competition they have in those countries.

So, Miguel, if you want to answer the second part of the question?

Go ahead.

This is Graham Staley. Hello, Tony, long time no speak.

Yes, it’s been a while, Graham.

It’s been a while. Yes, I think maybe it was a surprise for you as well; it was certainly a surprise for us that Sapporo came in with a winning bid. We don’t know them very well. As with many Japanese companies, it’s difficult to find out much about strategies and their perspective on the future. But obviously we’ll welcome them into the market, learn over time what they’re trying to achieve.

I think the one good thing about the Japanese companies is they do take a long-term perspective. So, we’re unlikely to see any short-term irrational behavior and that’s good. So, we look forward to them coming into the market and we’ll stay posted to learn more about them.

Great, thank you so much.

Okay, take care.

You too.

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

Hi, everyone. I wanted to ask on your Brazil beer sales. Perhaps you could talk about July, since we have seen a good weather. And how do you see Itaipava? We’ve seen them gaining market share recently and I wanted to know how they’re doing -- in Havana how much they’re doing. If you are seeing any of your brands losing market share for yourselves? How are you positioning your brands against Itaipava?

Luiz?

Well, as you know, we are not giving any details on the July volumes until the end of the quarter. But what I can tell you is that, of course, the weather helps a lot. And so, usually -- we remember when we have good weekends and good sunny days, but not necessarily remember when we have cold days. So, in average I would say that July was positive. And I would say that until this point in time August is still positive. So, I would expect the quarter to be at least in line with our expectations in terms of the guidance that we provided. Difficult to anticipate anything in terms of the rest of the year because, of course, during the winter season volumes are weaker, even with better weather volumes are weaker than the first and the last quarters.

In terms of competition, you’re right, the trouble is that they are adding a lot of pressure in terms of market share, not necessarily you’ll see this fact. We know our market share in terms of the industry. You see a lot of our market share that they’re again coming from -- specially from Femsa and from [inaudible] in some regions. So, in average I would say that AmBev is not losing market share in [inaudible].

In average, if you take all the leaders together, some of our brands are doing very well to compete not only against Itaipava, which is the strongest brand in Sao Paolo capital and in Rio, but against Crystal too, because in terms of Sao Paolo and in the countryside of Brazil, they’re using Crystal against us. So, it’s different competition in different brands and of course we are using different strategies against them too.

But in average terms we are not losing marketing share. We have more pressure, of course, in the region where they are launching or they’re expanding distribution, because in these regions we have nothing to gain. In some regions we have nothing to gain. We have only to lose. So, I think we are reacting well with our brands, but in terms of our marketing programs they are fairly attractive. But we have to keep an eye on them.

Until this point, there is no effect on our market share. But they are growing and, of course, will become more and more important for us if they continue to grow. So, we’ll see more effect from the competition, and especially not only in Femsa and in [inaudible], but especially in the low price brands, in very small -- in the producers that we have in some regions they are not significant, but they are -- they concentrate the low price brands volume into their own brand.

Okay. Thank you. And in that sense, would you be able to talk about how much the premium brands are amounting on percentage in your total portfolio, given your strategy of pushing the participation of those brands in the portfolio?

Yes, the premium brands all together, they are growing 1.5 to 2 times the average of the mainstream of the core business [inaudible]. And they -- the share in our mix is around 6% and growing. So, we came from 5% last year. In the average of the first half of the year we did 6%.

Okay, great. Thank you. And finally, on your soft drink operation, just wanted to know if you could talk about the second half of the year, if we should expect growth to keep -- the strong level that we’ve seen in the first half, given the -- also mentioned so far, the offering of multi-serving packs?

Yes. We remain with our guidance.

Okay

Of course, the same impact that we can expect from weather in beer we could expect in soft drinks [inaudible] on the weather, even having had a very positive pressure this year. So, we will stick to our guidance.

Okay, thank you.

Welcome.

Thank you. Our next question is coming from Trevor Stirling of Sanford Bernstein.

Hi. Two questions please, one relating to Brazil and coming to the question of ForEx hedges. You’ve clearly stated what your hedges are for the rest of this year and locked in. But I was wondering, have you started to hedge for ’07? And can you give us any indication, clearly the current spot is quite a lot lower than the hedge, on this year’s hedge rate?

And the second question relates to Canada. You’re still delivering very impressive drops in COGS per hectoliter. Clearly, that’d be an ongoing process, but at some stage momentum is likely to slow a little bit. Can you give us any guidance or will that later momentum continue all through ’06? Or are we likely to see it slowing towards the end of the year?

Okay. I may as well take the first one. Let me tell you. If we were to hedge -- to fully hedge 2007 by now, combining FX, sugar and aluminum, would be gaining, 2007 against 2006, anywhere between BRL50m to BRL60m.

Okay.

And since we have the peak period that we explained a few times here, that we try to hedge between six to 12 months ahead from where we are, we are now moving more towards 12 than to six months as we used to be before, we have -- yes, we have already started hedging part of those out.

Okay.

Okay?

Great, thank you.

Yes, thank you.

Okay, now talking about Canada, yes, well, it’s true we are having an amazing result in terms of COGS. And if you look at the results last year, we’re also pretty impressive in terms of cost reduction.

Of course you cannot have forever this type of -- or the amount of cost reductions we are having now. However, I think that, as I said, ZBB is part of our day to day and we have to look for creativity every day to reduce our costs, so we can increase investment on our brands and have a good result in terms of profitability. So, we’ll always be looking for things to reinvent ourselves. So, let me -- I can share with you one thing that we are doing now.

We are implementing our shared service center in North America with Brazil. So, we centralize a lot of functions in Canada, in Mississauga in Ontario, and also in Brazil. So, we have today 90 people in Jaguariuna in Brazil in a shared service center working for the North American organization. We’re talking in English and in French as a shared service center. And we’ll always be looking for this type of opportunity to reduce costs. Of course, we have more in our top line -- pipeline. And, well, it’s part of our culture and we are very proud of that. But I cannot give you a guidance for the future.

I understand. Thank you very much indeed.

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

Hi. A couple of questions, first of all just taking a look here at the cash SG&A growth in Brazil, I understand that a piece of that did relate to the direct distribution expenses. And I’m wondering if you could give us a sense of how much of that growth is associated with that.

And I guess the second part of this is where are you right now in your total direct distribution vis-a-vis year-end soft drink and where do you want to go at this point? I know you’ve -- now that you’ve passed the 50% mark, is 60/70% a goal? Maybe you could give us some color there?

Yes, Alex. Well, in terms of opening up, let me answer first the second part of your question. Yes, we are now slightly above -- probably a little bit above 51%. We are not disclosing this figure on a quarter-by-quarter basis any longer. We are a little bit above. And we still see opportunities for organic growth. So, we’re not setting up a new target, talking on we are going to go to 70%. But we -- there is organic growth, i.e. we have direct distribution centers that can be enlarged and are being enlarged and that can take us up to -- can add a few hundred points in the next few years. So, we are not sitting and waiting for things to happen. We are doing a few things. But we don’t have a new number, to say in two years we’ll get to 60%.

In terms of the cash SG&A growth, as I said a little bit before, we are not opening up by the S, by the G and by the A, or in the selling, what is direct distribution expenses or not. In the quarter I think what’s meaningful to note is we had the growth of volume of 4.4% for beer and 8.6% for soft drinks. And that, of course, has an impact on this 30% that I mentioned to you. So, of course, it has a big impact on our distribution expenses and everything related to transportation. But I think more meaningful than that is the expenses -- R&D expenses related to the World Cup, especially for soft drinks, as we stated.

And just right now, roughly what’s the split on direct distribution beer and soft drink? Can you disclose that for us?

We have always worked with the number of the total. So, I’d rather just give you the total, which is slightly above 51%.

Okay, fair enough, good. The second question relates to this upcoming Quilmes asset sale and I guess I just wanted to confirm a couple of things. Is this really going to be price based? In other words, I’m assuming you can talk a little bit about this, since you’re about to purchase these back shares. But will this be an option process -- be based on price? Can you basically control this and sell this up until the last moment, which I guess I understand is [day] ’07?

And to the extent that the new purchaser, or the successful bidder, uses the distribution network of Quilmes in Argentina, is that going to be really access for the national distribution network in Argentina or will it be just certain areas? Maybe if you could just give us a sense there, that would be helpful.

Sure. Well, first, when we talk about the back shares that we’re about to buy, actually we already bought and we closed the transaction last Tuesday. So, that’s one thing behind. We got the transaction and closed them. That’s behind. We actually have already paid and got the shares from the Bemberg family. So, that part which is in our view the most important part of this transaction was completed.

Regarding the sale of assets, Alex, I think the best way to think about it is to compare that with what happened with Brahma-Antarctica when it was joined together and we created AmBev. This is a very similar decision. The antitrust decision of Argentina was a very similar decision by the one taken by the Brazilian authorities. And if you remember that process, it was also an option process where we hired an investment bank to conduct that process. It’s the same thing here. We have between now until actually February 2007 to complete. We are, of course, working to complete this before February ’07.

And regarding the distribution agreements, right now the agreements they are -- again, they are very close or very similar to the ones stated back when Brahma and Antarctica joined with access to distribution -- to national distribution. There are some details on that. But basically they -- the buyer should have access to our national distribution. To the most part we have the brands that are being sold, already we participate in the country. So, the volume of the brand is what somewhat works a limit, that distribution.

But, again, very similar. If you remember, when we sold Bavaria to -- back then to Molson, Molson had some years to distribute the products in our trucks. But it’s very hard to predict what will be the buyer’s strategy regarding the brand or regarding distribution. So, I’d rather not talk too much. That would be basically speculating on who is going to be the buyer and what they’re going to do with the brands and with the distribution rights that they acquire when they acquire those assets. Okay?

But it’s safe to assume that it’s really going to be the highest bidder in terms of price?

It’s an auction process, but there is many components. There is a distribution component. There is a brand component. There is the plant component. So, it’s the total offer that we will look at.

Okay, okay.

The price is one of the components of the offer, not the only one.

And the last piece of this is just pulling together Norte, Bieckert and Palermo. I guess those three brands, my understanding, it’s roughly 8 to 10% market share. Is that about right, in your opinion?

Actually what’s required is Palermo, Bieckert and Imperial. It’s a very, very small brand. So, Palermo and Bieckert really the brands’ required markets, it’s optional. There are some details on that also. So, Palermo and Bieckert together, they have between 6.5/7.5% of the marketplace.

Thank you.

Okay.

Thank you. Our next question is coming from Victor Galliano of HSBC.

Hello, yes. Most of my questions have been answered, but maybe a follow-on on Canada. Could you give us -- I mean a follow-on on the ZBB question there. Could you give us some sort of indication of what your target EBITDA margin would be there, given a reasonable development of the market?

I think -- this is Graham Staley. I think it’s fair to say that we’re very pleased with our continuing cost performance. Miguel’s already alluded to that. We see no end to that. We just see tremendous opportunities for going forward and we’ll continue to leverage those. Obviously it gets more difficult as time goes by but the creativity of our people continues to amaze us. I think it would be wrong to give any further guidance, though. I think we’ll just have to wait and see what those -- that third quarter looks like. But we remain very confident that we can keep this momentum going.

Okay, fair enough. Thank you.

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

Yes, I’m sorry, just a follow up to some of the cost questions that have been asked during the call. You mentioned that you’ve locked in commodities for the balance of 2006. Can you give us a sense of whether, as we head into second half ’06, we should see a material increase sequentially from where you were in the first half in terms of commodity costs? I guess that would be an assumption that might -- one might make, given the trends until very recently in the commodity prices.

Well, Lore, you have to remember, I think as we stated during the first few comments also, that this will also depend on the mix. Right? When you look at soft drinks, you saw a drop on a per-hectoliter basis that is higher than maybe you would expect, because of the shift in mix more towards multi-serve presentations. So, it’s hard to tell exactly what to expect, but --

Well, maybe if we look at beer where the mix change hasn’t been as much of an issue, that would be helpful.

Yes, I think also to be in line with what we said in the beginning of the year, we expect cost of goods sold, of course depending on how much money -- much volume you have, to be at most not -- equal [nominal] terms with 2005.

Sorry --

And you have a total gain of BRL100m that you can work with for the total year for the combination of beer and soft drinks.

Okay. And just on the marketing expenditures, I understand what you’re saying about 2Q being higher than what you expect for the year. But if we look at beer, should we think about the year as a year where your marketing expenditures will be more or less in line with inflation? Or should we think about the year as a year in which we might see marketing costs above inflation?

No, yes. What I said is that it should be above last year because of the World Cup, slightly above.

Above inflation?

Yes, but just remember you have inflation -- again, just to repeat, you have inflation. You have volume. And you have the World Cup. Right? So, in order to predict the SG&A or to forecast the SG&A for the year, you have to account for inflation, which we have more since it’s a carry-over inflation of 5% last year. You have the volume, whatever you’ve projected for. We had [some 4] for beer and you have the net revenues of 11 to 13 in soft drinks. And then you have the World Cup. But again, the World Cup our investments that the most part we see those investments will pay back during the year.

Okay, thanks.

Okay.

Thank you. This concludes the answer -- the question and answer section. At this time I would like to turn the floor back to Mr. Joao Castro Neves for any closing remarks.

Well, I’d just like to thank you, everyone, for attending AmBev’s conference regarding the second quarter results. Continue to -- we work hard to deliver the results. We have been giving you the guidance for third and fourth quarter. And it’s -- we’ll see you again for the third quarter results.

Thank you, have a good day.

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