Ambev SA (ABEV) 2006 Q3 法說會逐字稿

Good afternoon, and thank you for waiting. We would like to welcome everyone to AmBev's 3Q 2006 earnings conference call. Today with us we have Mr. Joao Castro Neves, CFO and Investor Relations Officer, Mr. Luiz Fernando Edmond, CEO for Latin America, Francisco Sa, Soft Drinks Executive Officer, Mr. Miguel Patricio, CEO for North America, and Mr. Graham Staley, CFO for North America.

We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during the Company's presentation. After AmBev's remarks are completed there will be a question and answer session. 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. They involve risks, uncertainties and assumptions, because they relate to future events and, therefore, depend on circumstances that may or not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of AmBev, and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Joao Castro Neves. Please, Mr. Joao, you may begin your conference.

Thank you very much. Well, good early morning to everyone. And welcome to AmBev's third quarter results conference call. I'd like to start the call by sharing a brief overview of what was a good third quarter for AmBev. Luiz Fernando, Miguel and Francisco will then provide you the details about our operations in Brazil, HILA and Canada. I will then wrap up, providing the specifics regarding the third quarter financials.

Well, during the third quarter our consolidated EBITDA reached BRL1.8b, which represents an 18% growth when compared to the third quarter results of 2005. Our earnings per share, excluding goodwill amortization, presented a growth of 23.4%. The Brazilian business delivered a very good performance, with EBITDA growing 16.4% which is higher than in the same period of last year, and volume growing 4.3% for Beer and 10.4% for CSD and Nanc.

We are also very happy with our Quinsa operations, which delivered an EBITDA growth of 31.9% in U.S. dollars, which excludes the effect of the higher AmBev stake. In Canada, despite a tough quarter for the whole industry, we managed to deliver a 4.5% EBITDA growth in Canadian dollars. In HILA-ex we managed to achieve positive EBITDA for the first time this year. This result leaves us much more confident about our strategy in those countries.

Our operations together brought a net income of BRL486m, which is 21.8% higher than third quarter '05. Those excellent results report the effectiveness of our initiatives leading AmBev to a strong 2006.

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

Well, thank you Joao and good morning everyone. I am pleased to provide the details regarding our third quarter results.

Starting from Brazil Beer, we see a 4.3% volume growth in the third quarter, as a result of market growth and higher market share, achieving 68.6% compared to 68.1% for the same period last year. Despite all the recent pressures of the competitive environment, we keep going our way to deliver what we expect to, reaching the upper range of our guidance for volumes and EBITDA margin, possibly even surpassing it a little.

On the pricing front, our net revenues for Beer here in Brazil reached BRL137.8 a growth of 5.3% when compared to this BRL130.9 in third quarter '05. [Brand and revenue] management good performance of the premium segment and our direct distribution strategy continues to increase net revenues beyond inflation. This quarter, our premium brands presented another strong growth, with Bohemia growing almost 28%, and Original more than 40%.

This quarter has also brought the important innovations. First Skol Lemon, the Skol Lemon is the first Beer in Brazil mixed with fruit flavor. [Skol Lemon] has been growing a lot worldwide, and is already responsible for 5% of the [general] market. It's a light a refreshing Beer, with great appeal for the summer.

Another one is Brahma Black, launched after two years of intense research and development. Brahma Black is a black draft Beer with a peculiar process of production, as well as the way the product is served, creating a new drink experience to the consumers, and represents one more step towards the development of the premium segment in Brazil.

Following the great acceptance the Puerto del Sol launched in May this year, we now also have Puerto del Sol in cans and in 600 returnable bottles. This initiative is a further development of the Latin segment in Brazil.

And in the CSD and Nanc segment we now have H20H, launched in the beginning of September. H20H is a type of beverage different from everything we have seen in Brazil, and this is starting to confirm the great potential we expect for it.

As leaders we want to play this role of developing new categories in Brazil, and bringing new opportunities of consumption for our customers. These initiatives, together with other many initiatives, close to the summer, the most important period for our business, makes us even stronger and fully prepared to capture all opportunities, and overcome any trap that appear in the market. We continue to grow share, rising from 68.5% in September to 68.7% in October, which put on a year to date of 68.7%, 60 basis points better than last year.

On the Soft Drinks and Nanc side, another quarter of strong volume growth, reaching 10.4%. Revenues per hectoliter also presented growth of 1.4% despite the higher share of new [preferred] packaging. We brought today Francisco Sa that will make further comments on the CSD and Nanc segment.

In HILA-ex we achieved low positive EBITDA for the quarter, with highlights for the good performance of Soft Drinks in the Dominican Republic. We see this result as a strong demonstration that we are following the right path. We will continue to execute our strategy, always targeting the long-term profitability business.

We are still, in what we consider, start up phasing HILA-ex countries, and we don't expect any significant contribution to [be on our] our results for 2006. But we are managing to build local partnerships and great [monopolies]. We continue to focus on the strengthening operation, by gaining volume and market share, as well as building brand equity.

On the other hand, once again, we achieved excellent results for Quinsa, with 31.9% EBITDA growth in U.S. dollar terms, which doesn't consider our higher stake. We had a very good performance pretty much across the board, with highlights for the Soft Drinks business, with EBITDA growing in excess of 40% in dollars.

I'd like to conclude by saying that 2006 has been a very good year so far. And I don't have any reason to believe it will be different in the fourth quarter. We expect, and we will do our best, to finish the year on a high note.

I'll now turn the call to Francisco Sa who will take -- will be talking about our Soft Drinks business.

Good morning everyone. I am proud to announce our CSD and Nanc results for the third quarter of 2006. We are having an extremely good year, with EBITDA margin as high as 34.5% in the first nine months. We are working on our brand packaging, and exploring all opportunities presented to keep up with the good momentum.

The CSD and Nanc operations delivered solid volume growth of 10.4% in the third quarter. It's still profiting from very nice campaigns during the World Cup. Guarana Antarctica was the most remembered of all beverage brands. And it's in and out product Guarana Antarctica [inaudible] was a big hit, selling 60,000 extra liters in just two months. Our promotion Amor a Camisa was highly celebrated during the year, selling an additional volume of 100,000 extra liters. Pepsi-Cola achieved its highest [reference] numbers with our DaDaDa campaign.

In this quarter we still see a migration to multi-serve packages, which led to a smaller revenue per hectoliter, but contributed with an even lower cost per hectoliter, and also helps to bring in higher volumes.

COGS per hectoliter was affected by higher costs of sugar compared to last year, as anticipated. For the fourth quarter, we expect sugar to continue to add pressure, but not in the same extent as in the third quarter. Joao will go through the commodities and FX performance later on.

The Nanc segment also delivered very nice results, with Gatorade delivering 47.9% of volume growth. Even with those pressures on costs EBITDA for the CSD and Nanc segment was up 4.4%, reaching BRL132.4m.

Throughout the last five years, CSD markets present huge developments, both in terms of profits, innovation and profitability. AmBev, more than any other player, has successfully identified and captured the opportunities. Our EBITDA margin rose from 8% in 2001 to 31.4% in 2005. In absolute figures, our EBITDA grew from BRL77m to BRL517m a strong 61% [cager]. For the nine months the EBITDA reached BRL435.2m, up 17.6% with a margin of 34.3%.

We continue to see opportunities, on the [furnace] side we are very excited about the implementation of the flow meters, which are ready in place -- it's already in place in R&R plants for both Soft Drinks and Nanc segments. We expect to see some update on that matter throughout the year 2007, when flow meters should be fully implemented for the whole industry.

We also have good news on the innovation side, and grasping the Health and Wellness trend, Pepsi and AmBev launched in September H20H, a fresh and slightly sparkling beverage with no sugars and flavored with lemon. Different from any existing product in Brazil, H20H aims to start a new category. This kind of product has already a very high acceptance in other Latin American countries. And we believe it has a huge growth potential in the Brazilian market. It's too early to say, but first results are promising.

Before I pass on to Miguel, I would like to end by confirming our guidance for the CSD business, and reinforce my enthusiasm for the first quarter and for 2007.

Well, good morning everyone. Our draft Labatt operations in Canada in Q3, this has been the most challenging quarter for us in the year, mostly because of flat industry volumes, quite different than in the first half, when we had 3% growth. This soft industry, combined with continued pressure on Labatt's market share in the province of Ontario, are the two major causes for the reduced rate growth this quarter in comparison to Q1 and Q2. Labatt's results, however, remain absolutely on track with the guidance provided for '06.

On the costs side, we continue to be focused on driving operating efficiencies, and decreasing the fixed cost structure. Regardless of lower sales volumes, our breweries continued this quarter to further improve efficiencies, primarily in packaging lines. On top of that, our procurement operations succeeded in minimizing the negative impact of increased prices, for both [aluminum] and malt. These two factors combined, drove a reduction in Canadian dollars of 1.9% in variable production costs.

In relation to our fixed cost structure, we concentrated on opportunities in business aggregation, and further enhancement of the Zero Based Budget process implemented last year. The savings derived from business aggregation are in line, with the business case we've developed, for the shared service center in Latin America. We have captured benefits generated by both reduced headcount, and also a more effective administrative process.

For example, we now have an enhanced procure to pay process in place. The process provides high visibility for transactions, and allows significant savings in direct in procurement. By centralizing the purchasing of a larger number of [indirect] items, we increase our bargaining power, and ensure that every department sources its needs from preferred suppliers.

In regard to Zero Based Budget I am pleased to say that its, today, part of our culture in Canada. Nevertheless, we know that there are still significant opportunities for cost savings ahead of us. Although we have made significant strides in cost reduction, bringing a lot of the know-how previously developed in Latin America, there are still areas of expenses that require customized analysis, namely logistics, marketing and sales expenses. We are working on the areas as I speak.

Let's shift now to revenues. As I mentioned, we faced two major challenges in this quarter, flat industry volumes after a strong industry in the first half of the year, and increased pressure in our market share in Ontario. As a result, we experienced a 1.5% decline in domestic volumes.

Labatt's consolidated results for Canada remain a mix of significantly different realities. In regions where we are the market leader, namely Atlantic Canada, British Columbia and The Prairies, we have focused on increasing brand equity and value creation. And we clearly see the results reflected in considerable growth of our profitability and share.

However, year to date in Ontario, both Labatt and our main competitor in the core premium segment continue to lose market share to discount brewers. Both of us were ineffective in addressing the issue, by using across the board pricing action to stop share decline. At the end of the day the limited time offer activity proved to be quite harmful to core premium profitability, and caused no significant impact on discount segment.

Our goal in '07 in Ontario is simple, we need to stop this share loss against the discount brewers. In order to do this, you can expect to see significantly less limited time offers from Labatt. And instead a much more focused approach to address discount segment growth.

Our learning's from the intensive competitive environment in Ontario in '06, have allowed us to develop a plan that, we believe, will leave us to achieve our objectives in '07. While we are planning for less limited time offers, we are going to be more aggressive on various focused activities against discount segments.

We will not provide specific guidance on our pricing strategy for '07. But we expect a more [beleaguered] environment than in '06. By which, I mean -- we mean industry prices more in line with inflation. However, the pricing evolution in '07, of course, will largely depend on the behavior of our main competitors in the market, especially in Ontario during the first quarter.

Although we hope [technical difficulty] that an environment, I have to say we are fully prepared to react in case the [LPO] activities is equals or even more aggressive than in '06. We are fully hedged on our most important commodities reducing [anticipated] cost pressures for '07.

In summary, the competitive scenario in Canada remains a very tough challenge. Nevertheless, we managed in every quarter this year to deliver top line growth in our domestic operations. And the year-to-date growth in the revenues for total Labatt is in line with our guidance of 1%.

We are confident in our strategy. Despite these challenges, I trust that the combination of Labatt's portfolio of core brands, combined with a smarter approach to deal with the competitive pressures, will bring the results we are looking for.

I now turn over the discussions to Joao.

Thank you Miguel. Well, first I'd like to talk about the AmBev Brazil the [forward asset] fiscal benefit. We changed the recording criteria of the effects resulting from the incorporation of AmBev Brazil, aiming to adjust it to what mostly represents the core of the transactions, in agreement with the provisions and CDM instructions 319 and 349.

We also believe it is more clear to investors and analysts. However, it's very important to highlight that in terms of cash generation and net income, there will be absolutely no change.

On the income statement, we will see a reduction in the D&A expense line, which is approximately to 87.7 each quarter of 2006. In the same way, one would expect to have a higher income tax in the amount of 87.7, resulting in exactly same net income. Although the income tax is higher, we are not going to increase our income tax payment, still maintaining the benefit of goodwill [deductibility], which is recorded in shareholders' equity.

In conclusion, it is just a different way of presenting exactly the same operation, with exactly the same benefits. To make it clear we will be publishing two income tax rates, being one under the new accounting presentation and another under the former one.

As you will probably know, and have seen on Wednesday, our Board approved a plan to make an offer for the outstanding Quinsa shares. The offer has not yet commenced, and we still need to obtain approval of the offer documentation from the Luxemburg Regulatory Authorities.

In the coming days we plan on filing the offer documentation for the Luxemburg Authorities review. They will have 30 business days to review everything. Should they approve the offer documentation, we will launch the offer as quickly possible, and file everything with the SEC.

It is hard to anticipate a definitive timeframe, but we hope to be able to complete the offer in the first months of 2007. We will disclose additional information once the offer documentation is approved in Luxemburg.

Now getting to the numbers, on the cost side, as already said, our SG&A did not grow as much as on the second quarter. It was expected in and given our careful planning, we head toward the summer with enough budget to assure that our brands remained strong, without comprising the Company's profitability, and margin expansion guidance.

The main reasons for SG&A growth were higher volume, higher direct distribution and fixed costs, growing with inflation. Soft Drinks get a little bit more penalized due, of course, to the higher volume, its growing two times the rate of Beer a little bit more, yielding also higher expenses, such as freights, which are more than compensated, of course, by the extra revenues.

I don't expect to have a change in the status regarding SG&A behavior for the fourth quarter, when compared to the third quarter.

Regarding our hedging strategy, the FX gains partially offset the sugar pressure on the CSD, on the Soft Drinks business, while in the Beer business, the gains with FX more than offset the aluminum pressure. On the fourth quarter '06 sugar and aluminum should once again penalize Soft Drinks, which is partially offset by FX yielding a loss of approximately BRL0.61 per hectoliter.

On the other hand, for the Beer the FX gains, once again, more than offset aluminum losses, yielding an important gain of approximately BRL1.07 per hectoliter. On the full year 2006 the hedge impact of COGS [multitude again] of BRL1.75 for Beer and a loss of BRL0.45. Overall this total gain is expected to be around BRL100m for 2006.

For 2007, we have already hedged 92% of our total FX exposure and 100% of our commodity exposure. So far, compared to 2006, once again we have approximately BRL100 to BRL105m gains given our hedging strategy. These gains [width] made to be around 0.999 per hectoliter for Beer, so we are talking, if we are using the same volumes, up to see around BRL60, BRL62m, mostly concentrated in the second half of '07.

In the gain of around BRL2, BRL2.1 per hectoliter for the CSD, which is approximately BRL42m to BRL45m strongly concentrated in the second half of the year.

Now I'll be guiding you on the main lines between the 1.8 EBITDA and the BRL486m of net income. Other operational expenses presented a loss of [BRL262m] in the quarter, which is pretty much explained by Labatt's goodwill amortization of BRL242m. Quinsa's goodwill amortization mounted to BRL64m, out of which, BRL39m is linked to the latest portion of the transaction which was concluded on August 8.

Our net debt increased to BRL1b totaling BRL7.2b yielding a financial expense of BRL273m. The reason for the debt increase was the Quinsa transaction, for which we issued a debenture in the amount of around BRL2b.

Non-operational revenues presented a gain of BRL7.2m. The provision for income tax and social contribution totaled an expense of BRL257. This number includes the fiscal benefit of BRL87.7m which is a non-cash expense as we already explained.

We presented a profit sharing provision of BRL85.4m. Minority's participation and other [subs] presented a gain of BRL2.1m. Net profits per thousand share amounts of BRL7.5, an increase of 23.9% when compared to the third quarter '05 figures.

Regarding dividend strategy, we remain committed to distribute all excess of cash generated. This year so far, we returned to shareholders approximately BRL880m in interest and on capital, BRL390m in dividends and BRL1m in buy backs, totaling BRL2.3b. Once again, we would like to reinforce our belief in our people to deliver another very good year, and start 2007 with our operations stronger than every.

Now we are open for questions.

Thank you. [OPERATOR INSTRUCTIONS]. And we'll take our first question from Julia Rizzo of Credit Suisse. Please go ahead.

Hi, good morning everyone, congratulations for the results. Actually I have a couple of questions, I would like to start asking to Graham which will be the new CFO for Brazil, what he considers the main challenges ahead, and his new position in the Company.

Well thank you Julia this is Graham Staley here. And firstly I'd like to say I am delighted to be taking on this new assignment. I'm joining a great team, and I'm looking forward to not only adding value, but learning a great deal from that team as well.

Immediate first challenge is Portuguese, and I've already started my Portuguese lessons, and I'm doing pretty well there. I clearly want to understand, on a more serious note, the Brazilian market in great detail, I need to understand that very quickly. Obviously get to know the people very quickly as well and understand the key drivers in the business.

Tough question for you to ask me, obviously, over the telephone like this, but very much looking forward to the challenges facing the business, and looking forward to making a contribution to the team down there.

Okay. Thank you very much. Now back into the Brazilian operations, I would like to ask about how is market share, how the industry volumes are doing in October and November, I am [showing here] that recently in Sao Paolo the weather is somewhat cold for the season. Could you say how was that market share in October, and how industry volumes are going so far?

You know Julia, this is Luiz speaking, we are not disclosing the volumes after the quarter any more. So, you know in Sao Paolo we are really having bad days. The weather is bad today, it was bad yesterday. But in average, I would say, we are positive, and we expect that the weather can recover fast in some of the regions.

When you compare to the Quinsa operations and the fact that they delivered very strong results in the third quarter, the weather contributed a lot to that. And, of course, if we can have the same positives here we can deliver a very good fourth quarter. But it's too early to say, we cannot control the weather. And if it's bad in Sao Paolo we hope that in other regions it could be positive.

I can add to this that Argentina had the warmest, hottest October in the last 70 years. So maybe it will help compensate a little bit of this [inaudible] days that you are seeing.

With regards to the market share, and this is, of course, Nielsen saying he issued the share yesterday, we have all the time to analyze the figures yet. And they basically refer to September/October numbers was positive again 1.2% market share, so up to 68.7% in Brazil. And we hope it will continue to grow.

This compared to what, in September and October last year?

October last year, was pretty much the same 68.7.

And do you have any figures from Kaiser or Sol launching how is that going?

You mean from Nielsen or for [inaudible].

Yes for [inaudible].

I would say that the Nielsen numbers they won't reflect an initiative on the Sol front. They probably reflect the initiatives on the Kaiser pricing are lower than the average price for the year. They reduced prices like 10 to 12% in supermarkets. They gained 0.2% market share. So, both us and FEMSA gained market share but [Petrovas] and other smaller -- [big] brands lost some market share.

Okay great. My last question would come from the new CSD strategy on the Guarana, it's on the papers that you decreased its prices by 20%. Could you give us some color on that, how relevant it is, the impact on margins? And for how long are you guys going to keep this?

Well, Francisco is here and he probably can add on that, but we didn't decrease prices by 20% across the board. We increased the level of promotions that we are doing more with Pepsi than with Guarana. We saw an opportunity because we were prepared for FEMSA to react. They were losing market share in the year for the whole year, after three or four years that Kaiser is losing share.

So we, as we said, during the whole year at some point in time they would have to react. And when they started reacting we realized that they were not taking care of the Soft Drinks business as they were in the past. They were giving space away in the supermarkets to Beer instead of Soft Drinks. They were allowing the [coolers], in the market, to be used with their Beer brands, giving some merchandising value space from the Soft Drinks into the Beer business. And, of course, if they have an opportunity on the Beer, challenging us on the Beer segment, we have exactly the same opportunity. So why not take advantage of this moment and put pressure on the Soft Drinks business? That's exactly what we are doing.

So we don't expect our prices to decrease by 20%. As Francisco said, we expect to have a very good fourth quarter, as well, as we had to this point in the year. We are maintaining our guidance in the CSD business. We are saying that for the total business we will be in the upper range of volumes, and EBITDA margin -- volumes in Beer and EBITDA margin for the total business. So we are not, of course, entering into a less profitable momentum. We will continue to increase our profitability, as well as our volume, and we will do everything we can to gain market share.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from Jose Yordan of UBS, please go ahead.

Hi, good morning. Joao if I could just have a -- just the average hedging that you have -- the hedging level that you have for 2007 for your FX hedge for raw materials? This year, if I remember correctly, it was 260 something, if I could have clarification on what it was this year and then for next year? Thank you.

Jose just to clarify, you are talking only about FX?

Only about FX yes.

Yes, well basically the 267 that we talked about, you have to remember as the -- as we moved the guidance from the 2.5 to the 3% to the 4% for Beer, and we had that piece, of course, it was an opportunity, the effective of FX rate came down. So we say it came down to somewhere between 258 and 260, for the new volume that we have. So its -- so that we had even more gains than we had expected in the beginning. That could also happen for next year. And for 2007, we are looking at something around 2.3, so we were comparing roughly 2.58 to 2.30.

Okay. Thank you.

Okay.

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

Okay. I wanted to ask one question on Soft Drinks and one on Beer. On Soft Drinks, just to make sure I understand what you said. We saw a big increase sequentially in the cost of producing Soft Drinks that I assume was the sugar and aluminum that you were referencing. In the opening comments you talked about how you'd see continued pressure, but not at the same rate in the fourth quarter as the third quarter.

What I'd like to understand is when we look at the COGS per hectoliter for Soft Drinks in the third quarter, would you expect that to be relatively stable in reais terms sequentially? Or do you expect the pressure to get reduced so that your cost per hectoliter reduced into the fourth quarter?

When we look at the third quarter, mostly the impact was on sugar. When you compare the sugar impact to the aluminum impact the aluminum impact is five times [higher] than the sugar impact. And for the fourth quarter what happens is, you will see also a negative impact for the sugar and aluminum but we have more gains on the FX for the fourth quarter. So, net/net, we actually have -- the fourth quarter is still a loss, as I said, for the Soft Drinks but it's a much smaller loss. Okay. So it's like one third of the type of loss. When you look at the net of FX and commodities, it's one third of what you saw in this quarter.

So sequentially you're expecting COGS to get better?

That's right.

Okay.

And just to -- I'd like to understand why are the aluminum hedges not affecting you, or the higher aluminum costs rather, not affecting you in the Beer business this year and they are affecting you in the Soft Drink business?

Well, again, what I just said that actually the impact is much greater for us on the sugar side. It's not that it doesn't affect us on the Beer. It does affect us on Beer but to the FX aims -- the FX gains, more than -- much more than compensate for the pressure of the aluminum.

In the case of Soft Drinks it's -- what we suffer in aluminum it's also more than compensated by what we gain in the FX. So what really takes the result in Soft Drinks is the sugar. Okay.

Okay. Great. And I guess in Brazil Beer, I just -- you've touched on some of these points in the call so I don't mean to be repetitive but, as you mentioned, that you think you can do at the upper end of the guidance or a bit better. 4% volume growth, I think, equates to 0% growth into the fourth quarter, which I assume is something that you think you can beat. Your market share level in December of '05 was 69.4%, so it's above where you are now although you're tracking where you were in October of last year. So if you think about the upcoming summer season, how confident are you in terms of the market share, the trade-off between profits and market share? Can you give us a little color in terms of some of the market dynamics we've been reading about in the press?

Hi, Lore. You're right. Probably we can make better than 4% that's why we're saying EBITDA margin we can be at the upper range -- the upper level of the range. And of course part of it would come from volumes. As you've heard before the weather is not helping a lot so it could -- we could do better than that if weather recovers going forward. So we are confident that we can make 4% of course. I'm pretty much sure that we can make the 4%. And we can make even better than that depending on the weather conditions, because market share is stable or even growing going forward. That's our expectation. So you could consider something that could be higher than that.

In terms of the market dynamics that we are facing right now, what we see in the Beer market is basically some pressure on the cans price and supermarket price. Which of course when FEMSA decreased the prices on Kaiser by this 12% other competitors started to react. So the price effect is not only the effect of Kaiser going down but the price of -- the effect of [Patror Pazinski] following their decrease and, therefore, we have to sustain or to even increase some of our initiatives in this segment, in this package, to -- not to lose market share.

In the own trade it's pretty much different from that. What we see so far is they're trying to increase coverage and in many cases combining their sales in Beer and Soft Drinks. We don't know exactly what has been affected in terms of revenues, if it's the Soft Drinks business financing the Beer business or the Beer business accounting for 100% of the discounts on the Beer to increase distribution.

Of course, the COGS system has the power to cover a lot of points of sales in the country, but we are managing to keep volumes under control and we have enough initiatives to offset some losses that we can have due to the coverage. So we have a lot of initiatives that could take share from there or from other competitors because they have to protect their babies to. So a lot of people talking about Sol but never forget that they have Kaiser to protect and a lot of volume in the market to protect here, and are not in a very good shape yet. Not because you start making -- you spot something big, it means that the brand can recover, not what we see so far.

So protecting. At the same time they have to increase or to develop a new brand is not that easy. So we see opportunities to compensate for our losses in one or two regions, or one or two point of sales, by gaining in order they are now protected as well. So we are confident that we can at least maintain the market share that we have today. We just gained market share last month. Of course, we cannot -- we can't guarantee that we'll be at exactly the same level because you have different rates for different segments in the end of the year, for the channels increase their weight in the end of the year, thing like that. But we are very confident that the brands are performing very well. We had one of the best performance in our brands last month so we are -- the brands are in shape.

Our people, I have never seen the people so motivated to keep going, to keep growing, to keep moving and implementing all the strategies that we have. We are prepared because, as we said during many times in this year, we are not expecting FEMSA to be accepting the losses that they have. I believe they invested almost BRL300m in the business. So at some point they will have to react and we've prepared ourselves different from the past. We've prepared ourselves in terms of restructure, in terms of branding, in terms of incentives, initiatives, everything to face this moment. So we are very confident, everyone here is very confident, mostly because we prepared ourselves to fight this moment.

Terrific. Thank you very much.

You're welcome.

Thank you. Our next question is coming from Bob Ford of Merrill Lynch. Please go ahead, sir.

Hey, good morning, everybody. I had a question with respect to Soft Drinks as well. And I'm just curious, if you could remind me, how do you pay Pepsi for concentrated? Have there been any changes in their structure?

We pay that as a percentage of sales but it -- there has been no change.

Okay. And.

But what you probably have to know is that they are committed with any price discount that we have. So they are together with us. If prices go up they take advantage. If prices go down we lose together.

Okay.

Yes. You probably heard us saying in the past, Bob, 10 years ago the contract was based on volume only and we divorced and then re-married again and every time we gets to have the chance of marrying again the same person. You try to make sure you correct the mistakes of the past. And this time around, basically, our contract is based on margins and, therefore, we go up together. We will come together if that was the case.

Great. Thanks.

Just to add to that, if I may, just to add on that, Bob, it's important to say that AmBev we see an opportunity to fight in the Soft Drinks market more than ever but import to analyze that Pepsi see this opportunity as big as we do. So they are very, very committed with the moment.

And I would suspect that the weak link in the coke system has got to be the other bottlers around Brazil. Do you see any of them backing off on Beer whatsoever at this point?

I think it's too early to say that because Kaiser just launched a new brand but I think that we can expect that.

Great. Thank you very much.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS]. We have our next question coming from Alex Robarts of Santander. Please go ahead.

Hi everybody. Thanks. I wanted just to start out by saying I personally really appreciate the guidance that you have been giving us this year. It's extremely comprehensive and I think it's an industry standard that should be followed by more people. So I think I just want to highlight that.

And I guess that leads me into the first question on Soft Drinks. You guys are pretty keen on maintaining the margin guidance in Soft Drinks and I guess, as I look at the first nine months, to get to the high end of the guidance you really have to have a margin contraction or lower margins. Is this somehow going to be related to the Pepsi discounts and what other factors might that imply as we go into the fourth quarter?

And I guess the related question is when you look at the flow meters, which I do think is an interesting factor next year, we saw it very successful with the -- in the Beer segment. We had gaps of discount pricing narrow, as well as perhaps some smaller brewers lose share. Do you think that the flow meters, in the Soft Drink business next year, with have those kind of effects?

To your first question, just -- that you are saying that -- the only thing we can say that we have won in the fourth quarter, to take advantage of the opportunities that have been presented now so that's why we are maintaining the guidance.

And on the second question of the flow meters, we can't predict what the -- what exactly will happen but, as we said, we are optimistic of -- with the development of the flow meters.

But I mean -- I guess going back to the margin question, you're tracking at 34 -- the 34.3%, that's well above what the guidance is so I'm just wondering, is it safe to assume that you'll comfortably beat your guidance then?

We are saying that we are confident that we will be in the upper levels -- upper level and we might beat our guidance but we have the room to take advantage of the opportunities. That's basically it.

And I guess then, in terms of the flow meters, there's really -- you expect all these to be in place by year end '07, is that right, for the industry?

Actually, by May '07 we will have most of the industry already with flow meters.

Alright. I guess the second question really relates to the hedging book for next year. The last conference call we heard that the estimated net benefit was around the BRL50m and I guess you're doubling that now and I'm just wondering what happened in the last three months that has given you more confidence and higher guidance? And just understanding where are these commodities roughly year to date in terms of the sugar and the aluminum prices?

Hi, Alex, it's Joao. I don't recall exactly we talked about BRL50m. Maybe we have said that if we were to -- back then we definitely had not hedged the position as we have now. What I basically said in the beginning is that we made around a little bit more than BRL100m this year and it was going to make more than BRL100m next year and it's going to be, as I said, around BRL60m -- BRL60m something in Beer and BRL40m plus on the Soft Drinks. So when you compare 2007 with 2006 you have -- you had most of the gain of the total hedging between FX and commodities mostly concentrated in Beer and that you are seeing for next year it's going to be more than that. We have very important significant gains on the FX, once again, just like we had during 2006.

For the aluminum, I think we have more pressure and it will be in sugar pretty even. And that's why you see therefore an important gain in Soft Drinks for 2007 that you didn't see in 2006. And basically if we had at today's rate maybe it could be a little less. But since the hedging is done, as we've spoke in the past, on the six to 12 months rolling, that's why you're seeing a gain greater than that.

Okay. And just roughly, the price increase magnitudes this year in sugar and aluminum in your market in Brazil?

I think when you look at sugar you have seen many changes in price. At the point in time, sugar this year went all the way up to 18. When you look at the pounds from the stock exchange that we follow, and it came down again to 11. So actually sugar has fluctuated a lot. Going from anywhere to being 30% above what was last year to basically what it is -- what it was last year. Okay. So actually it was all over the place. What you're going to see when you compare 2007 with 2006 is that they're going to be in line, or actually probably 2007 a little bit below 2006, giving the moments where the sugar for 2007 was hedged.

And aluminum?

Aluminum, also both -- I think aluminum was even more volatile during this year. It went all the way up to 3,000. It came all the way down to 2,300 and now is around 2,700. Okay. So when you actually look at aluminum against 2007, against 2006, you have 2007 above 2006 but, for example, below what it is today in the marketplace. So if you were to say that aluminum keeps on 2.7, 2.8 against the market place next year we would have a very important gain. But, again, once you hedge, there's no point in continuing to compare that to the market. It's -- you do compare it because you compare it to somebody else that may be fluctuating. But what matters here I think is that to understand the projection or the comparison year-on-year, we're going to be better off, overall, which is much better of in the FX, slightly worse in aluminum, and slightly better in sugar.

That's helpful. And just a final clarification, Joao, you mentioned on the call that you do not expect the Brazil SG&A to be different in the 4Q from the 3Q is -- and I'm assuming that's on a percentage of sales basis as opposed to an absolute basis, obviously.

Yes. I would say following the pattern, right, on a percentage basis, so that's right. That's basically it. It could be even lower but I think we are seeing a pattern. Of course, when you compare it year-on-year right.

Okay. Thank you very much.

Okay.

Thank you. Our next question is coming from Timothy Ramsey of Bear Stearns. Please go ahead.

Good morning, everyone, this is Carlos Laboy at Bear. Two questions, two secondary issues. One is, could you expand on Gatorade in Brazil. What's the size of the brand, its penetration and if you could speak to the change in economic proposition or the clarity of economic position from PepsiCo that is leading you to drive these kind of volume growth rates.

Hi, Carlos, it is Luiz. Let me try to answer the perspectives on Gatorade. Basically, I would say that part of the growth has to do with a change in the package that we made. Up until last year we were only selling 24 packs in a glass bottle. We decided to move towards smaller packs now with six bottles so that allows us to increase coverage a lot and to increase the presence of the brand in many of the small [mining] parts up and down stream kind of point of sales that we have. So the introduction of the brand in the past, of the Gatorade in the past, was highly concentrated in the working out type of consumption. And, in terms of channel, mostly concentrated in the supermarkets.

With this new package we were able to increase a lot the distribution and that's generating more people to try it and take the liquid into their portfolio. So this is one of the reasons for that.

The other, in terms of profitability, Gatorade is much -- but much more profitable than the Soft Drinks business and even higher than the mainstream Beer brands that we have, so a very profitable brand. And the kind of contract that we have with Pepsi is almost the same that we have with the Soft Drinks business so it's in line with the other agreements that we have with Pepsi.

I don't know if that answers your question.

That's very helpful, thank you. The only other issue I had was if you could comment on what you're hearing on the discount Beer entrance into the Peruvian Beer market and, as a lower price player, are you worried about it?

I -- it's difficult to say because we haven't had this situation before so it's difficult to predict what can happen. I think at least more people challenge in the monopolies would be helpful. We have a good base there of volume, it's stable. The brand is doing well. And of course we are the only ones to face competition there. We are fighting alone against SAB in that market. So if others put more pressure I think that could be helpful.

Of course, we cannot just watch what's going on. We have our own strategy and we have news to implement in that market going forward. But we have to learn from the experience. We never had in our Greenfield strategies in the past any kind of low price competitors as strong as you may consider [Kor Royale] in that market with the Soft Drinks that they have. So we are very aware of that. We are following all their steps but we are ready to keep growing with our local operation there.

Is there any sense of when they might start operations?

Maybe to the half of next year. I would say it's difficult to predict but I would say the second quarter of 2007 probably.

Thank you.

You're welcome.

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

Hi, everyone. I would like an update of the transaction of the CSD brands in Argentina, was that approved already? And do you think there is a chance that FEMSA gets a favorable ruling in their appeal?

Hi, Juliana, this is Joao. The sale of assets has not been approved. Right now it's under analysis by the CNDC. You -- we notified you guys when we actually announced that we had chosen Cerveceria and presented their bid to the CNDC. Timing with CNDC is something that is hard to predict. I don't think it will take very long. We don't see this going on beyond the end of the year. So hopefully in one month, two months at most, we should see their view on approving the sale of assets.

But do you think FEMSA has a case?

No. I don't think FEMSA has a case.

Okay. Going back to the Soft Drinks, can you specify a little bit in which point of sales is specifically Pepsi and Guarana are being discounted the most and in which kind of presentations.

Well, I don't think we should clarify that. Then we would be giving away our strategy to get the opportunity.

Okay.

Is that what the -- what we have to know, Juliana, is that it's not across the board. In very specific channels and, of course, where we believe there are the biggest opportunities we won't make the same discount everywhere because the opportunity is not the same everywhere. And I repeat that, until this point, what we're doing is we are much more aggressively in touch with Guarana because the opportunity is bigger in Pepsi than in Guarana. Of course, as we see opportunities in Guarana we will move on but Pepsi is really the biggest opportunity that we have in the short term. Because, of course, we count on the distraction on the Coke brand due to the Beer initiatives that they have put in place.

Okay. And are those [following] on your pricing discounts and how your pricing is now in relation to the [combinedness] in those specific points of sales?

Well, as we said, the discount is a factual discount so overall you won't see our pricing changing much against the two [buyings]. Our price is, overall, it's pretty much stable. And we have seen Coke reacting in some of these markets already.

It's important to highlight that we're doing in the Soft Drinks, we are doing exactly with the same kind of tools that we have in the Beer. So [solution for size], base it on the information that we have, we are not giving price across the board. And the price is only a small piece of the whole strategy.

We have other initiatives being H2OH. That's a great new brand that we are launching, great successful so far. Of course it's too early to say but we are very excited with the results that we achieved so far. [Guarana] is launching new promotions. We have learned a lot from the promotion that we during this year for the World Cup. We are brining in new promotions for that. We have new campaigns in place. Not very common to have new campaigns being launched in the end of the year for Guarana, but we are doing that after the very good results that we achieved during the World Cup.

Again, Guarana achieved its best performance, in terms of all beverages in Brazil, during the World Cup. So we are leveraging on these very good results that we had in the middle of the year. And we have now the agreement to be the supplier for all non-alcoholic beverage for the pan-American games in 2007 in Brazil. Gatorade will be there as well. So we are putting pressure now in our system because we learn a lot with Beer and we can use a lot of our knowledge and tools and systems to help the Soft Drinks business to grow.

Okay, great, and just out of curiosity, do you consider H2OH as a soft drink or a flavored water?

The problem that we have here in Brazil is that don't have a special segment, because it's a different beverage that we are launching in Brazil and we don't have the regulations. So this is something that we have -- we are working on to have a specific regulation for this beverage and it's different from the beverage that we have today in Brazil.

[With the same taxes].

Formally speaking -- sorry, Juliana, formally speaking in Brazil, formally speaking in Brazil H2OH is considered a soft drink. Formally speaking, right. But it has to be like that because we don't have this category specified in our legislation. If you go to the U.S., if you go to Argentina, if you go to other countries, they created this special category so it's easier to communicate and to explain people why it is.

In terms of what it does for you, we are pretty much sure that is much better than water and much better than the Soft Drinks for those that are trying to hydrate, to have something different, lighter and so that's unique.

But would it imply different taxes if you can create the category?

It would be a flavored water.

Then it would be lower taxes, right?

Yes, slightly lower than Beer, slightly lower taxes, yes.

Okay. Thank you very much.

You're welcome.

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

Hi. I just wanted to clarify a bit the Puerto del Sol launch in the 600ml and the cans. Is that going to be at a similar premium to the mainstream, for Brahma, for example, and it's price positioning? And particularly I guess on the on premise, how do you see that, Puerto del Sol, being positioned? As I recall, it was at about 60 or 70% from cases in the long neck to the mainstream?

Well, Puerto del Sol, in cans, in 600 will probably be above the average margin that we have. That will depend on the competition, of course, and how successful we are or not. But I would say, in average terms that could be 5 to 7% higher than the average that we have. To be in line with Skol, slightly higher than Skol, that means higher than the average that we have.

Okay. So just to be clear for the consumer the intention is to have the price not very different but a little bit higher than Skol and the mainstream rather than the very substantial period in which it was first launched a few months ago, is that right?

That's right.

Thanks. And then, just more broadly, speaking about the industry growth. Do you expect the greater level of competition ultimately to be a zero sum game, that is, it doesn't really affect industry growth very much and, therefore, whoever gains share has to take it from someone else, or do you think that it can spur growth to a greater level at least in the coming few quarters given all the activity in innovation around it?

Well, for the last three, five years more than 40 new brands were launched in Brazil. So we are facing competition for a long time in this market as you know, though, some people don't believe that. It's a strong competition in all regions; different players every time trying to hurt us, to take market share from us because, of course, we have the profitable share of the market. And I really don't believe that in a medium to long term that will have any impact on the size of the market. Because, in the end, the competition it's increasing in the very short term because you have someone concentrating all the investments in a specific period of time.

But I don't think that's sustainable going forward and I don't see any effect in the average price in the market. You have some work, you can be more aggressive and more channel, in one package for a certain time. I really don't see a -- I see more a cannibalization than market growth. It's different from other countries. As maybe when you compare to Peru where the market grew a lot when we entered that market, because we were only two competitors in the market compared to one competitor in the past. The same happened in Guatemala, the same happened in Dominican Republic. But, in Brazil, the competition was already in place for a long time.

Okay. Thank you.

Thank you. Our next question is a follow-up question coming from coming from Lore Serra of Morgan Stanley. Please go ahead, madam.

Yes, just very quickly, could you give us what the volume growth was in Argentina in Beer in the quarter? And also what the revenue per hectoliter trend was in Argentina in dollar terms?

Lore, in the cans we're still thinking on how we will disclose those numbers so we don't have those specific numbers right here. And we haven't --

Not even volumes?

No. We have volumes for the [Turra] region, that's what we disclosed. We had a good quarter and, as I said in the beginning of the call, October was a very strong month and November also started very well in Argentina.

Okay, thanks.

Thank you. I'd now like to turn the floor back to Mr. Joao Castro Neves for any closing remarks.

Well, before Joao makes his closing remarks, I would like to -- just to give you the new sale numbers for Soft Drinks, we've just received these numbers and we are, of course, very proud to gain market share, up 0.2% to 16.5% in October. Well, let's keep on that our competitors are not so good so you'll receive the data from them. But we, as we've said, we are pursuing new strategies because we really believe there is a lot of room to grow the Soft Drinks business in Brazil. So thank you all and Joao will now close the call.

I think on this high note, again, we are very pleased with the quarter, very pleased that we see we are looking forward. This is my last opportunity as AmBev CFO to present the results. We're very excited to have Graham on board and starting to take my position and present the full year results in our next conference call, and I'll be presenting the Quinsa numbers. So thank you everyone and hope to see you again in our full year 2006 results. Thank you. Goodbye.

Thank you. This does conclude today's AmBev conference call. You may now disconnect your lines and have a wonderful day.