Ambev SA (ABEV) 2008 Q1 法說會逐字稿

Good morning and thank you for waiting. We would like to welcome everyone to AmBev's first quarter 2008 earnings conference call. Today with us we have Mr. Luiz Fernando Edmond, CEO for Latin America, Mr. Graham Staley, CFO and Investor Relations Officer, Mr. Joao Castro Neves, CEO for Quinsa, and Mr. Bernardo Paiva, CEO for North America. (OPERATOR INSTRUCTIONS).

Before proceeding, let me mentioned 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 may 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 call over to Mr. Graham Staley, CFO and Investor Relations Officer. Mr. Staley, you may begin your conference.

Thank you, Elsa. And good morning, good afternoon everyone. I'm pleased to be with you today to discuss our 2008 first quarter results. As usual, I would like to start the call by sharing a brief overview of the quarter, and then Luiz Fernando, Joao and Bernardo will provide you with an overview of our results in Brazil, HILA-ex, Quinsa and North America. I will close by providing more specifics regarding the first quarter financials.

Before I start, I would just like to remind you that all the numbers are in Brazilian GAAP and that the percentage changes used in this call are on an organic basis. So let's turn straight away to the results.

During the first quarter, our consolidated EBITDA reached almost BRL2.1b, which represents a 4.9% growth when compared to the first quarter of 2007, driven by strong results in Quinsa and North America, and good EBITDA performance in our Brazil CSD and NANC business, but offset by weak volumes in Brazil Beer following a general slowdown in the Brazilian beverage industry during the first quarter.

The Brazilian business had a challenging first quarter compared to 2007, with Beer volumes declining by 1.9%, and CSD and NANC volumes declining by 1.4%. Luiz Fernando will be providing you with more detail of the key drivers in a few moments. Lower than expected volumes resulted in a less favorable fixed cost absorption which, together with malt and corn costs and the timing of beer market investments, resulted in a marginal Brazil EBITDA decline of 0.7% for the quarter.

Our Quinsa operations continued to deliver strong operational and financial results, as EBITDA grew 29.3% on the back of Beer volume growth of 10.7% and CSD and NANC volumes growth of 8.5%. In Canada, despite a tough competitive environment, domestic volumes grew by 1.5%, leading to market share gains and resulting in an EBITDA growth of 9.7%. Net income grew by 15.2%, reaching BRL744m, and earnings per share, excluding goodwill amortization, grew by 22.1%. I will comment further on net income at the end of this presentation.

I will now hand over to Luiz Fernando as we start to look a little deeper into the results of each of the operations.

Thank you, Graham. Hello everyone. I will now provide you with details regarding the Brazilian and HILA-ex operations Beer Brazil. Our first quarter results were below expectations as we faced beverage industry slowdown due to three main factors. Firstly, an expected and unusually cold and wet weather. Secondly, an early carnival. And finally, higher core food prices which have put pressure on consumer disposable income. The slowdown was not visible until well into the quarter since the early carnival led to strong volumes in the first 45 days.

Our Beer net revenues per hectoliter in Brazil reached BRL151.7, a growth of 5.9% when compared to the BRL144.7 last year, reported in the first quarter 2007. This increase probably reflects our price increase in December, as well as an increase in our direct distribution network and the continued excellent performance of our premium brands which grew around 9% in the quarter.

We completed implementation of our price increases for cans and long necks after carnival. And due to strong and focused execution we were able to deliver market share growth of 20 basis points year over year, reaching leverage of 67.8% in the quarter. We're very pleased with this result in such a difficult first quarter for the industry.

Our Beer COGS per hectoliter grew 13.1%. In addition to the [disappointing] increase in malt and corn, cellar inflation and the benefits of currency, Q1 COGS were impacted by the purchase of third party malt, and the less favorable fixed cost absorption due to lower volumes. As the year progressed, we expect to see considerable improvement in Beer COGS for the year, from both more favorable hedging gains and our planned productivity and efficiency initiatives already in place.

The SG&A, excluding depreciation and amortization, grew by 17.4%, due principally to the timing of certain marketing programs and investment. For example, our Skol investment with [Genero], where we sold a giant branded ferris wheel for a month during carnival. It was very successful in bringing the consumers even closer to the brand. The launch of our 630ml proprietary bottles in Rio for Skol which is perceived by consumers as the most relevant innovation in returnable packaging in the Brazilian market. And the [Primero] campaign which reinforced the brand proposition to its consumers and the rollout of [Rima Fresh] into additional five states in the north east region. SG&A was also impacted by inflation and the growth of direct distribution.

Although there will be some quarterly evaluations in the timing of marketing spend during 2008, we expect full year SG&A, excluding appreciation and amortization, for both Beer and soft drinks to continue to grow in line with volume growth, the increase in our distribution and inflation. The EBITDA finished the quarter 4.7% below Q1 2007, with EBITDA margin contracting 430 basis points, but it's still reaching 47.5%.

2008 will remain a challenging year, but we believe there will be a return to industry growth as the year progresses. In fact, we saw an early sign of this in April, with Beer volumes growing 3.1%. We are confident we have the right people and commercial plans in place to recover market share during the year. Furthermore, a more favorable phasing of our selling and marketing investments, plus our currency hedge, will improve profitability as the year progresses. Last but not least, the market in the remainder of the year should perform better than the first quarter.

Turning to Brazil CSD and NANC, net revenues per hectoliter grew 5.8% in the period. The cold and wet weather impacted volumes, particularly for Gatorade and H2O, with an overall decline of 1.4%. However, we are pleased to see that the average market share grew to 17.7% for the quarter, 40 basis points higher than last year.

We continue to invest in soft drinks innovation for the launch of new products and packages. And the first quarter saw the launch of our new H2O apple flavor and the [Supita Grape]. Soft drinks COGS per hectoliter decline by 7% in the quarter as a result of our anticipated hedge gains in sugar and currency, partly offset by fixed cost absorption. As the year progresses, the benefits from our hedges and our planned productivity and efficiency initiatives will help to improve the soft drinks COGS results even further. Soft drinks SG&A expenses in Q1 grew by only 1.7% when compared to last year as a result of the favorable timing of investments. This has helped to deliver very strong EBITDA result, as 23% higher than last year with an improvement EBITDA margin of 44%.

Looking forward, despite some short-term slowdown in the industry, we continue to see good opportunity in the soft drinks business in terms of market share and profitability and no concerns to invest in this sector. We are well positioned for the future.

Let me now turn to HILA-ex. The region generated an EBITDA loss of BRL15.5m for the quarter. The beer business continues to show good volume growth of 7%, principally due to double-digit growth in Peru, Ecuador and Dominican Republic which was partly offset by the market challenge we continue to face in Venezuela. The HILA-ex CSD business delivers more positive EBITDA as we reposition our brands to better address local market conditions.

Our strategy in the region remains unchanged. Beer volumes and share are both progressing. We are reducing the fixed cost in the business and are nearing EBITDA and cash flow neutrality, giving us the confidence and flexibility to pursue our long-term goals.

In conclusion, Q1 was certainly a very difficult quarter and the challenge will remain for the rest of 2008. However, we have confidence in the long-term health of the Brazilian economy and the beverage industry. With this in mind, we will continue to invest behind our business in terms of both brands and people. We will rely upon the strength of our portfolio and our core competencies of precise execution in the market, pricing discipline and cost management. Our people are ready for the challenge and I have confidence in their ability to deliver as we have done in the past.

I will now turn the call to Joao who will talk about the Quinsa business.

Thank you, Luiz. And good morning everyone. Our beer and soft drinks operation maintained the growth trends observed in 2007 during the first quarter of 2008, achieving higher volumes in every country where we operate. Consolidated margins increased 9.7 organically in the quarter, based on excellent performance of both the beer and the soft drink business. Our volume growth was 10.4% in the case of beer, and 8.5% in soft drinks.

Our double-digit growth in Bolivia and Paraguay, the continuous growth of Argentina and Uruguay and the recovery of Chile results in an impressive quarter in terms of volumes. Net revenues per hectoliter grew organically, both in beer and soft drinks, as a result of higher price throughout the region and a strong performance of our premium brands. The Company performed particularly well in the premium segment in Argentina, with Stella Artois and Iguana posting outstanding growth ranges. Stella Artois has also performed above the rest of the portfolio in Chile and Uruguay. In the case of Paraguay, it is the Brahma brand, the one that over-performed the rest, accounting for important volume growth of our business.

Analyzing the individual beer markets, Argentina posted its all-time high record in the quarter in terms of volume, even exceeding the volumes reached before the divesture of the two brands due to the antitrust requirements. The Company performed very well all over the country, gaining market share in a growing and competitive market.

The Bolivian business continued to post strong growth rate in an uncertain operating environment. Performance has been particularly well in the main cities of La Paz and [Cochabamba]. We took advantage of industry volume records, with our market share remaining stable. We focused on some product innovation, like Pacena Red Lager and (inaudible) to keep strengthening our core brands and increasing the per capita.

Chile showed an important recovery in the quarter, mainly based on a growing industry. Our premium brands performed very well in a country where the premium segment continues to grow.

The beer market in Paraguay posted solid growth which allowed us to show a strong recovery in terms of volume. The comparison with last year is [positive] due to better weather conditions, the dengue epidemic, the disease that was spread out last year, and the increasing activity related to elections. We kept implementing actions to defend our market share from imported beers. The Brahma brand had excellent performance in the quarter, gaining market share and becoming the most significant penetration of our global brands within the region.

Our beer business in Uruguay has also performed very well, reflecting volume growth but stable market share and strong performance by our premium brand attrition.

In soft drinks we had an excellent quarter of volume, with market share gains in both markets of Argentina and Uruguay. In Argentina, the Pepsi brand grew within the A segment of the business, while the H2oH and Gatorade brands delivered very important growth rates as well. H2oH gained market share compared to the excellent performance of its citrus flavor.

Regarding our cost and SG&A expenses, the initiative to mitigate the negative effect of higher cost of raw materials for the metal and soft drinks, transportation and labor, are focused in achieving industrial and procurement efficiency, as well as consolidating our ZBB efforts.

Solid growth rates in all the markets where we operate, together with focused revenue management cost initiatives, have resulted in EBITDA organic growth of 29.3% in the quarter, with a 46.7% EBITDA margin.

I'd like to end my comments by congratulating my team for setting a tough challenge and over-delivering again. We have been able to show high growth rates despite the tough comparison of a very successful 2007. I am confident we will continue to [understand], based on the strength of our brand and the excellence of our people, products and market execution.

I would now like to turn over to Bernardo.

Thank you, Joao. Hello everyone. Looking at the first quarter, I am happy to say that Labatt delivered results consistent to our goal of growing EBITDA with no cost on market share. On EBITDA, we grew 9.7% in the quarter on an organic basis. That growth came from top line, driven by share growth, price in line with the industry, and from phasing on our marketing sales investments. I fully expect to use this marketing money in the coming three quarters to support our top line initiatives. On market share, we grew by 0.4 share points in the quarter on a pro-forma basis, and 0.3 share points on an organic basis for the first time since the third quarter '04. I am happy to see that consistent for our strategy, all of our key brands, Budweiser, [Keats], Lakeport, Bud Light and Stella, grew share in the quarter.

Looking ahead, I know that '08 will be a tough year, so we continue to focus on fuel and big things. I am confident that our top-line strategy of focused investments in key brands, of effective trade products that deliver market share, of certain, safe execution and disciplined revenue management is paying off. Looking at market share, Canada has a very competitive market, and you can be sure that the other companies will try to recover shares during the high volume summer months. However, we are ready to fight the fight. On the cost side, the cost of inputs continues to be a concern. In the first quarter they drove up our cost per hectoliter. In the rest of '08 you could take a higher hit from input price, in line with industry trends. We push hard on the costs in order to partially offset it. I am more and more confident in the skills and the will of our team to deliver EBITDA growth with no cost of our market share.

Now I'd like to go back to Graham.

Thank you, Bernardo. In this final section I would like to guide you through the main lines between the reported EBIT of BRL1.7b and the net income of BRL744m, as disclosed on page 16 of our release.

Other operational income and expense was a net expense of BRL285m in the quarter, compared to an expense of BRL370m in the same period last year. This decrease on expense is primarily due to translation gains on foreign investments reported by Quinsa, resulting from the depreciation of the Argentinean peso against other Latin American currencies. Higher goodwill amortization on the acquisitions of Lakeport and Cintra in 2007, a change in the amortization curve for Labatt, and the acquisition of an increased stake in Quinsa in 2008 partly offset these gains.

Our net debt at the end of the quarter stood at BRL8.2b, compared to BRL7.4b at the end of 2007 Q1. The drivers of this increase were the acquisition of the increased stake in Quinsa for around BRL617m, and our share buybacks, which amounted to around BRL515m in the period. Our net financial result was an expense of BRL272m, compared to BRL296m in Q1 last year. Marginally lower interest rates and the ending of CPMF in Brazil drove this improvement.

The provision for income tax and social contribution was an expense of BRL341m, versus BRL423m last year. This increase is mainly the result of improved earnings before taxes, higher interest on own capital, and certain one-time charges recorded in Q1 2007.

Net profit per 1,000 shares in the quarter amounted to BRL1.22, compared to BRL1.03 in Q1 2007. When we exclude goodwill amortization, earnings per share rose 22.1% in the first quarter, to BRL2.02.

Regarding our pay out strategy, our policy of distributing all excess cash generated, if we cannot identify value-enhancing alternative uses within the business, remains unchanged. As I mentioned earlier, during the first quarter we returned to shareholders approximately BRL515m in share buybacks. We will continue to review the balance between dividends and share buybacks on an ongoing basis, taking into account markets and industry norms and the impact on shareholder value.

In closing, AmBev once again reported EBITDA growth in the first quarter, with strong performances in Quinsa and North America, helping to offset the challenges we faced in Brazil. We have robust business plans in place for the rest of the year, addressing both top-line growth and costs, and will be leaning heavily on our strong execution capabilities as the year progresses.

I will now hand back to Elsa as we open up for questions.

(OPERATOR INSTRUCTIONS). Our first question is coming from Andrea Teixeira with JP Morgan. Please go ahead.

Hi. Good morning everyone. I just wanted to have you give us a sense of how, given that this is the second most important quarter of the year, how you're looking for -- and I understand from your prepared comments that you have a plan, and looking for the SG&A increases in Brazil, how you see the effectiveness of these marketing campaigns so that you can recover the volumes throughout the year.

I also understand that you are facing the second most important quarter is the fourth quarter. You are facing tough comparisons. How are you going to be looking -- how we should be looking in terms of volumes for beer in 2008?

And in terms of competition as well, pricing? Thank you.

Hi Andrea. This is Luiz. So -- well, let me first say something on the volume piece. Of course, I think we made it very clear during the speeches and in our press releases that this is not a regular quarter. First Q was disappointing for us in terms of industry volume. But we have to accept the fact that the weather didn't help. The weather is basically the biggest negative effect that we have. I think for those that are Brazilians that live here in the country, you have the opportunity to see, to read and to live in such a very bad weather.

And, of course, carnival is not something unexpected. We knew the calendar. But the fact is the earlier the carnival happens, the earlier the year starts for everyone. So schools start before, then you have all the expenses for the school. People get back to their regular routines. So when you have such bad weather, that impacted mostly -- most of the regions, but it's specifically south east and south even more. And you have early carnival in the year. It's clear that the first Q does not represent our expectations for the year, though it's disappointing for us, of course.

And in terms of the pricing, Luiz, thank you so much for your comment, but in terms of the pricing, we saw that some of your competitors delayed even more in your second tranche of the price increase in March. Can you comment if they're following that and if you're seeing the price gap reducing? Hello?

We do ask that you please hold the line one moment as the conference will begin momentarily. We do ask that you please stay connected, the conference will resume momentarily. Thank you. Their line is now live. (OPERATOR INSTRUCTIONS). We will resume with Andrea Teixeira. Please proceed with your question.

Yes. Thank you very much. So I was just following up of what Luiz was saying in terms of pricing -- I mean the volumes. Just on his comment, so I would like to know more about the pricing strategy. I understand that the Company has placed two price increases in the last couple of months, one in December and another one in March. And if competitors seem to have delayed the price increase so there's some possible momentum if they do increase prices now, which I believe they are doing. So if you can comment on the price environment, I would appreciate it. Thank you.

Yes, Andrea. The price environment I said didn't change from our last call. We increased prices in [internals] during December in different moments for the brands. Most of our competitors followed that price increase during January and February. Not all of them, but most of them. Then we wait until carnival to increase can prices this year. We did that. But unfortunately most of our competitors didn't follow the price. So the gap opened a little bit in can prices.

We don't know yet what's going to happen. We heard some of them in their results announcement say that they did increase prices at the end of March. We haven't seen that so far in the market. We have to wait and see if they are under pressure or not in terms of cost and how they are going to react to the can prices.

But even though our share in the first Q was higher than last year, and it's not only the comparison against last year, but it's also the comparison in the moment before the price increase and the moment after the price increase. So when you compare how much we lost during this period, we lost only 60% of the losses we had from '06 to '07. So we think we did a good implementation of the price and we put several and are still putting out several initiatives in the market to recover the same level at the end of last year. So environment for beer is pretty much the same that we had last quarter.

Okay, Luiz. And if you can comment, I understand that you had a market share, it's about to be released, the market share for April. Can you give us an idea of what that was?

I wish I could, but I don't have the number. So it's probably going to be issued in the next couple of days and you'll know as soon as we have it. We -- of course, we have our own numbers. We track them, we monitor, but it's very difficult to predict. But I would say we continue positive that we'll recover share during the year as we've done last year, in 2006, in 2005. So we have the skills, we have the people and the programs in place to recover the share.

Okay. Thank you very much, Luiz.

You're welcome, Andrea.

Thank you. And our next question is coming from Lore Serra with Morgan Stanley. Please go ahead.

Yes. Hi. Good morning everyone. I wanted to start with looking at the COGS per hectoliter, the increase that you saw in the quarter of 13%. In the InBev call earlier they mentioned that you had bought some malt at the end of the year because of the strong fourth quarter that you didn't end up needing because of the volume trends, but that caused your costs to be higher. I guess I'd love to understand, have you used up all of that higher cost malt. And if you could help us understand what your cost inflation would have been had you not had that higher malt cost in the first quarter.

Good morning, Lore. It's Graham Staley. Yes, the 13.1% was driven by a combination of things. We knew about the cost of malt in general terms. We knew we'd got a higher cost of corn, salary inflation, all of that being offset by the benefits of currency that we also anticipated. We're not self-sufficient in malt in Brazil as you well know. So we did have to buy some malt at some point during the year.

We took the decision to buy that early in the year. That's basically a procurement decision based on what we think the trends are going to be. It happened to coincide with that soft volume performance, so it meant we were basically using higher priced third party malt during the first quarter.

Substantially used up, I couldn't give you a percentage, but substantially used. There may be a little bit left. We have a small amount to buy for the rest of the year, but it's small. So therefore our barley and malt costs are now very predictable for the balance of the year because we won't have this further purchase of third party malt impacting.

Also as the year progresses, of course, we're hoping for better volumes and that will obviously help on fixed cost absorption as well. So as we look forward at the COGS, as I say, most of our commodity cost we now know, coupled with the productivity and efficiency initiatives that Luiz mentioned, we have very good visibility on these COGS as the year progresses.

But I guess I'd love to understand, and maybe it's hard for you to break out what the cost of that third party malt is, but it seemed like it's awfully early in the year for you to be feeling lots of inflation from malt and barley if you're hedging one year forward, given that a lot of the grains pressure we see, at least in the publicly traded quotes was in the second half of the year. So can you just explain to us, was it just that malt, barley effect from the third party malt, or is there something else that's causing the commodity inflation to be so much disproportionately felt in the early part of the years?

Let me make it very clear, we're not self-sufficient on malt, so we do have to buy some malt. It's a small percentage, between 10% to 20% that we have to purchase. We have to purchase that at some point during the year. We've purchased it in the first quarter. So that cost is obviously higher than our own produced malt because there's no profit margin for the third parties of our own produced malt.

That cost is now in the books. It's out of the way. There's a tiny bit of it to use up. But substantially the malt we will use in the future is based on our barley hedges that are already in place, and that's our own malt production. So we know what those costs are going to be. So you shouldn't be seeing a third party malt impact in remaining quarters.

Okay. And one more question on this if I could and then I wanted to ask another question. So what I'm understanding is that you have a good sense of what your costs are for the grains. And if we strip out the malt and barley effect of this third party in the first quarter, you would see a more stable environment for COGS per hectoliter for the rest of the year?

Yes. The three drivers, then I'll summarize it, the three drivers was the third party malt, not barley, third party malt. That cost will go away as we now go into the remaining three quarters. There was some increased corn cost which we can't hedge because there's insufficient market to hedge corn. We're seeing corn costs coming down which is positive for us. And the third part or the third driver in the first quarter was fixed cost absorption. Obviously we expect volumes to improve.

We've closed our numbers, as you well know. And we still keep our guidance that AmBev, as a whole, will keep its cost of goods per hectoliter below the weighted average inflation rate, and Brazil obviously clearly will be well below, but low inflation will also offset some of the challenges in other parts of the Group.

I might as well deal here with sugar, while we're on the line. Sugar you will see continued good performance from the CSD and NANC business because sugar is favorable as we look forward with our hedges, and in the -- so is currency with the CSD and NANC business. So cost of goods per hectoliter on the CSD and NANC will certainly improve as well.

Okay, perfect. That's helpful. And just in terms of what are using as your target, or your estimate rather, for weighted average inflation in your franchises for '08?

All that is, simply, we look at our cost of goods by market and then we take the CPI in those markets and we do a weighted average calculation.

Yes, I'm just asking what is the number for '08?

That comes out at around 5%.

5% okay. And just if I could ask quickly to Luiz Fernando, you mentioned that competitors lag their price increase in the supermarkets. And I know that some have, but it seems like the market share in March was lost to Schincariol. And maybe it's anecdotal, but I didn't see that when I was recently in Brazil that their prices looked like they lagged. So can you comment specifically on why you think Schincariol took as much share in March, if it's -- is it nationwide they lag pricing? Do you see them moving pricing? That would be helpful.

Well, in terms of returnables, Schincariol follows our prices, in cans not really. So, after our price increase in -- since our price increase mid-February until now, we haven't seen any competitor, most of the volume from our competitors increasing can prices, alright? So, what is different here is that [Schincariol] did not follow any price increase, both in cans, nor in -- no, not in cans nor in returnables compared to last year, according to the news update we have and according to what we see in the market so far.

Okay, thank you.

Welcome.

Thank you. Our next question is coming from Robert Ford with Merrill Lynch. Please go ahead.

Thank you. Good day, everybody. Luiz Fernando, I had a question with respect to any evidence, anecdotal or otherwise, of a stepped up environment of tax evasion amongst some of the less formal brewers in Brazil.

Can you repeat the question once more?

Yes, Luiz. I'm hearing that there could be some stepped up kind of evasion activity amongst some of the less formal brewers in Brazil. And there's even talk in the trade with respect to complete breweries that are off flow monitors. Is there any evidence of that, anecdotal or otherwise?

I don't know exactly what you're mentioning, but I think the environment in Brazil has improved a lot since the flow meter's implementation. You look at the tax collection from the Federal Government and that improves a lot since 2004, 2005, ahead of industry growth. So that's what we see so far.

Of course, we don't have any guarantee of that the system's perfect and all the tax collection is being made from all of the competitors. So we still have reasons to believe that it hasn't been solved completely in the Beer side, and the CSD side we haven't seen implementation of the flow meters yet. That's what I can mention to you.

Great, thank you. And then the next question was really with respect to the opportunities that you see in Argentina. And I was wondering, Joao, very impressed with the revenue management activity in Argentine CSDs. What other opportunities of that magnitude continue to be out there for you and Quinsa?

Hi, Bob. Well, basically, as I was saying before, in Argentina we are -- have been taking advantage of somewhat rude economic condition. This economic condition is giving much more purchasing power to middle class and low income classes, which is leaving a good opportunity for trading up.

So what you're seeing the top line, you're seeing two things. One is, in one side, affordable products. A lot of people that need to have much -- potentially they need to have much higher prices and it's impacting their volume growth. We have prices in line with inflation and just by having in line with inflation it's having a very good impact on volume. So that's one positive effect.

The second positive effect, because people also have more purchasing power, they are trading up. So you are seeing volume growth rates of premium brands above 50%, 60%. And from year against year, the segment is doubling its percentage in terms of the mix participation. So that's also a boost in volume and also a boost in our sales per hectoliter.

Looking forward a little bit, we have in 2008 so far with good economic condition as well as good weather, when last year we had good economic conditions and bad weather. So it's a good comparison, looks like it's going to stay for some time. So I think we will continue to benefit from the same things. There is also leadership in concern of capturing margin from trade and from distribution, so we are also benefiting from some of that. Slightly increased in terms of the (inaudible) distribution participation. So I think those are the good news.

If you like what -- why worry about them then? I think the worry is whether those conditions change, which we don't foresee for the moment. But I mean it's a type of a roller-coaster situation. Right now, I think the Company's prepared to take full advantage. I think we should continue to see this going forward as long as the marketplace remains the same.

What we are also doing, which I think is very interesting, is the launch of new products. We launched last year Quilmes Stout, which, very quickly became almost the third most important product we have. We just launched it now, last week, Red Lager, which is another innovation and I mean [dispensaries] were very excited. And the same thing is happening in CSD. CSD, we had also launched new higher margin products. We launched last year [Flotel], with a concept of non-sugar isotonic, which also quickly took 10% of the mix with a higher price. New products in the H20H! line, with also higher margins. So very healthy pipeline, healthy product innovation pipeline and new products. So I think those are the main points that we have going on right now and going forward in the short term.

No, it sounds great. Thank you very much, Joao.

Yes.

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

Hi, everybody. Yes, I wanted just to go back to the cash SG&A in Brazil, the year. I mean I guess in prior calls you've given a sense of how to model this going in line with inflation and volume growth curve. But I have to say that in the last couple of quarters there seems to be a pretty important disconnect. Cash SG&A fourth quarter fell, or flat, you had very good volumes, and in this past quarter, seasonally strong quarter, you've had a [surge] in this cash SG&A and falling volumes. And, I guess, just trying to get a handle on what's really going with your spend. Do -- I mean if you could give us some color. I mean are you basically trying to put more money behind brand equity initiatives? In other words, rather than volume activation efforts, is it really just behind maybe some of your premium brands? Just if you could give us some sense of really why are we seeing such a disconnect here between volume and the cash SG&A?

Okay, good morning Alex. It's Graham Staley. I'll take a shot at this, then I'll hand over to Luiz who'll talk about the brand building side. It is very difficult to use that algorithm on a quarterly basis. But, if you recall from the Q4 call, I did stress it was an annual algorithm. So that basically, if you take the full year, both in soft drinks and beer, you will see SG&A growing in line with about 30% of the volume growth in line with inflation and plus a small amount for direct distribution expansion.

As you know, we have very detailed plans, very detailed forecasting models. We know exactly what we are going to spend for the rest of the year and that algorithm still holds true as far as we are concerned. Now, individual quarters, the commercial guys clearly take decisions based on opportunities that they see for the brands or in particular marketplaces. And so it's very difficult for you to model it on a quarterly basis but, annually, the algorithm holds.

And I'll hand over to Luiz who may have some specific comments on timing of expense.

Yes, hi Alex.

Hi.

First, it's important that you understand that we are competing in such a very, very competitive market today. So we cannot become very predictable, because if we are very predictable for you we are predictable also for our competitors. So we are competing with some companies they are learning how to compete, they learn from our practice, they are very active in the market. So this is, first, learning.

Then, the issue you are right that if you go back last year, for the third quarter we spent more than you could imagine, then in the fourth quarter we came down again because we decided to anticipate some of the initiatives for the pre-summer initiatives and to prepare our market to the summer. This year, we decide to anticipate a little bit because we had the price increase not, not in the same way as last year. And we had an earlier carnival this year, so we knew our competitors would concentrate a lot of money in the first few. So it's also how our competition concentrates or not their investments during the year.

So, yes, it doesn't have to do with a higher level of investment. Of course, we continue to increase investments as our volume progresses, and of course as the profitability of the business becomes more attractive. And for our competitors it is the same, we have to maintain our brands performing well. We have to maintain our market programs and we have to increase our share of the market. So it's nothing to do with a long-term shift in terms of how we are supporting the commercial initiatives. But it has to do with moving the initiatives back and forth, sometimes postponing, sometimes anticipating, but looking at the market how it's going and the best ways to invest the money in the market.

So you -- it'd be fair then to look at the full year '08 cash SG&A for beer and soft drinks you mentioned earlier to be in line with, roughly in line with the volume growth, plus inflation? I mean is that the algorithm as you are going to discuss it for '08?

Yes, let me clarify that again. Roughly 30% of the volume growth translates into a growth in SG&A. So if volume growth is 3% or 5%, then the SG&A would grow by 1% or 1.5%. We then add on inflation, 4% to 5%, plus a small amount between 1% and 2% for the expansion of direct distribution. That algorithm has proved reliable for the last two or three years and we see no reason to deviate from it in 2008.

Okay. And just the second and last question. Graham, I know you've had a chance to take a look at some of your beer, your raw material cost into at least the future prices for the first part of '09. And could you give us a sense of roughly how that might be looking if you take, let's say, the first three or four months of the prices that you've seen in that future market for your inputs in '09 versus where you've just finished here in the first three or four months of '08?

I think I'd prefer not to at this point in time. I think it's a little bit early to do that. I don't want to flag up too much for competition either. We do have a -- we do have an understanding of it, as you say, for the first four months, but I think I'd prefer to wait until later in the year to give you some insight into that.

Okay. Fair enough. Thanks.

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

Yes, hi. My first question actually, sorry to go back to the barley issue, but just to understand the mechanics behind that third party purchase. I understand that you said you purchased it back in the third quarter, if I understood you correctly. And, if that's the case, did that therefore effectively weigh on margins in some way since it was a higher part of the mix in '07 for the fourth quarter? And that, given the volume and revenue performance you had, it diluted it that much more? Does that -- is that the right way to think about it?

Hi, Celso, good morning. No, I don't think we said it was Q3. It was at the end of 2007, beginning of 2008 when we purchased it.

Okay.

We've revised and it effects the average costs that we incur for the quarter, and that's why you've seen that increase in cost of goods for that first quarter.

Okay.

And just to clarify it's substantially used and we've only got a small amount more to buy on the market and that will obviously depend on volumes.

Okay. And, whereas last year, you presumably also had to buy third party, you bought it at different time of the year and obviously at a different price.

Yes, Celso, it depends on availability, it depends on pricing.

Fair enough. Okay. The second question is --

Celso, let me explain something. We were, in the fourth quarter last year, volumes were growing very fast, right?

Right.

We had to make a decision because if the first Q had performed same way as fourth Q, then we needed the malt to complement or to on top of the own malt that we produce. Of course, when you take the balance of the year, we don't need as much malt, right? But, in the first Q, we had the imported malt to guarantee that could produce the volume according to our expectations. That didn't happen, but we used the malt anyway, right? That's exactly what happened. So we are already used the imported malt. We don't need the same amount for the rest of the year.

Yes.

I mean I don't want to get everyone -- I don't want to educate everyone on imported malt, but another factor of course is that not only is the timing of the purchase of that third-party malt, but the price of malt this year is high anyway because of the cost of barley over the last nine months or so.

Yes.

So that's extra impact as well in Q1.

No, that's great. I think we just want to understand the mechanics a bit better. Also, along the mechanic questions unfortunately, on the bottle roll out, the 630mls, we understand that you're rolling out Rio I think you said, if I understood correctly. There are reports that they're in another state as well. Is that something you anticipate to be rolled out much more fully across the country?

And, also within the mechanics side, is that expense incurred in the COGS line or is it an SG&A number?

Yes, we launched the bottle last year as a pilot in the South of Brazil, in [Juges de Sul], using Bohemia as a pilot just to test the mechanics. In Rio, we had a great opportunity. In fact that has been performing very well, and Skol was not in the same, in the same pace. So, given the analysis we have for the Rio market, we saw that there's a huge opportunity to change the way we were doing business in returnables.

So we decide to bring in a much more relevant fashion than the pilot. There was a premium brand, a small volume in the south, and consumers reacted very well to the proposition because they could acquire more beer for the same price. So they get additional 30ml at the same price, which doesn't cost the same for us because of course you dilute all your costs, the logistic cost and the production cost. So we could offer a better proposition to our consumers. They love the bottle, it's more beautiful, it's younger, it's more sophisticated than the traditional and old 600ml bottle. And we had the opportunity to solve other problems, too, related to the old bottle.

And so far the decision is to implement that only with Skol in Rio. We are analyzing the results. We are happy with the results but not still confident, not yet confident, that we can roll out in other regions. Of course, if that goes very well and that proves to be a great alternative, we are going to roll out, but it's still too early to say.

Just a follow up, though, on the mechanics side in terms of the accounting. Should we see that roll out expense, which I imagine is a one off, whether you time that it's phased in, in the COGS line as an -- or in the SG&A?

Well, basically, we are replacing bottles so we bring 600ml -- 600ml bottles back in exchange for the 630ml so you don't any additional costs. You have a CapEx anticipation, that's what we did, we usually buy bottles to replace breakage during the year. So we anticipate the acquisition of the bottles and then we place that into the market, bringing back the 600ml. So, during the year, we're going to use these 600ml bottles that we brought back to Antarctica, for Antarctica, for Brahma and, of course, for the other regions.

So there's -- I thought I understood it as partially an explanation for the SG&A spike, but that sounds like it would make this just a simple replace.

You are right, that has nothing to do with the bottle. It has to do with the campaign to launch the bottle in Rio, right? So we, of course, we do with -- we not only implemented the bottle but we provide consumers with a new, so that we share with them of course to motivate them to go for Skol.

And that campaign, which, I think was a one quarter roll out in Rio rather than a four quarter roll out?

Yes, you're right.

Great, thank you.

Okay.

Thank you. Our next question is coming from Trevor Stirling with Sanford Bernstein. Please go ahead.

Good morning, good afternoon gentlemen. A couple of questions for you. Firstly, focusing in on the consumer issue or the Beer volume issues in Brazil, you mentioned that April is looking much more positive with volumes coming back about 3.1%. Is that applying for CSD's as well? Are you seeing a similar recovery in CSD volumes?

And, I guess partly a link to that, in many other Latin American countries we're seeing similar levels of high food inflation which should be impacting the levels of the C&D consumers in those countries, but we don't seem they've have quite had the same volume weakness. Does that imply it's maybe more a weather related thing in Brazil rather than the consumer income?

And the third question, specifically about HILA-ex, that the price mix, the revenue per hectoliter in HILA-ex seems to have dropped by almost 5% in the period. And I was wondering is that a mix effect or does that reflect increased pricing or pricing competition in one of the HILA-ex countries?

Well, first on the soft drinks side, you are right, the performance in April in soft drinks was better than in the first Q, but not yet as good as beer. We are suffering more in soft drinks in Gatorade, in H20. These are products that have proven to be much more related to the weather. That's why in beer we don't see the same effects of the weather.

On average, you have soft drinks less dependent on weather, but when it's too poor, that's what will happen in the short term, we suffered more because H20 became very relevant. And Gatorade was really weak at the beginning of the year and continued to be in April. It's improving, but not in the same pace of beer.

Difficult to say what is market, what's the market share. Of course, when you look at soft drinks, we are above last year on average. We were until March, let's see the April numbers. But of course we have to accelerate some of the initiatives. When we have the peer pressure -- of course you know that after price increase, we mobilize our sales force because we know there will be other pressure in the market share of beer. Of course, that brings some (inaudible) from the CSD side into the beer side, given that we don't lose more than is planned and to recover faster. And we believe that it will be recovered during the next two months. Right.

Well, and -- but inflation, you're probably right, there are differences among countries, there's the effect of the food inflation amongst countries. But consider the fact that in Brazil we -- you have the Carnival on top of the weather. So the weather was very negative. And the early Carnival makes people spend money at the very beginning of the year, then they have to pay their taxes, they are -- they have to put the children in the school. And, on top of that, you have an acceleration of the food inflation. That is partly, of course, for the international demand, and partly for the internal demand compared to the crops we have in some specific products.

Right, so it's really difficult to compare because we don't have all the drivers in all the countries and we had other effects that brought the, that brought us, our volume down. So I think for the next few months, so and in the second and third quarter will be easier to compare and to see if the effects of (inaudible).

One thing that I could add is that, when you look at premium brands, we grew around 9%. And premium brands, of course, they are more consumed by the classes A and B, compared to the mainstream brands, they are more consumed by the classes C and D. So, yes, there was an effect on the food inflation in the short term, but of course last, then, the impact of the weather in the early part.

Very helpful. Thank you.

I think you have a question on HILA with regards to price, is that right? You have --

Yes, that's right. It appears revenue per hectoliter dropped about 5% in the quarter for beer in HILA-ex.

Yes. Yes, when you compare quarter-on-quarter, really it's difficult because volumes were much better than last year, but the volume increase, it's in the back of the share increase. There, of course, we implemented several initiatives, the Smart Choice initiatives in Peru, in Dominican Republic, that in the bottom line they are positive compared to the historical that we have. But, when you look at net revenues, they brought our prices down. And, on top of that, we had some tax increases in Dominican Republic and in Venezuela, at the very end of last year that we haven't recovered with price increases yet.

Understand.

Okay.

Thank you.

Thank you. Our final question is coming from Juliana Rozembaum of Itau. Please go ahead.

Hi, good morning. Thank you for your attention. I have just a very quick question as regards taxes. I would like to know, if possible, how much is the IPI on all your sales tax per hectoliter represents of your average price?

I would have to check that because I don't have exactly numbers broken by different taxes we have.

Could be an average or just figure out?

Let me check if I have the numbers available.

Yes, the question means I'm a bit concerned with the potential impact of the change to taxations on the margin system instead of a fixed price.

Yes, of course, every tax increase will have an impact on our prices, or, depending on our decision to increase prices on top of the inflation to compensate for that or not, and of course depending on the level of the increase. We know there are rumors of a possible change in the IPI, but it's too early to comment on that because we haven't been informed by anyone that there will be a tax increase, a federal tax increase. Or, at least we haven't discussed that with any authority so far.

If it comes, depending on the size of it, we'll have to make a decision as we did, for example, in Venezuela, not to pass to prices in the short term. Well, we're probably doing in the future, but of course we have to make a decision on that. On average, if you take a longer term it's natural that we try to compensate tax increases with price increases. We see government concerned with inflation so they know increasing taxes would have an effect on the inflation, the overall inflation. So and we see the collection, tax collection at the federal level increasing, given the volume performance, given the industry performance last year. So it's too early to say anything about that.

Sure. I agree with you in terms of the inflation. That's a very good argument for the government. But, the price at least on the newspapers they said about something 40% percentage in terms of tax rate. But that's -- would like to know how it compares today for AmBev, because in my understanding that's much higher than what you paid, given your brands which are much better and have much higher price.

Yes. I think we would need a lot of time to discuss the tax system in Brazil and how this really effects the -- because you have, for the IPI, you have the fiscal things, you have the VAT, the [ICMS]. There -- the legislation is one thing, the way it's applied, applies in the different calculation from the theory to the practice. So maybe if we could pick that up offline. It will be a long, long answer and I'm not sure that I'm prepared to share all the discussions with you guys now.

Okay, thank you very much.

Thank you.

Thank you. At this time, I'd like to turn the floor back over to Mr. Graham Staley for any further final remarks.

Thank you, Elsa. Just like to thank all of you for your participation today. And no doubt we'll be talking to you in follow up conversations or meetings in the days and weeks ahead. So have a great day and thank you for your participation. Bye bye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.