Ambev SA (ABEV) 2008 Q2 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to AmBev's Second 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.

We would like to inform you that this event is being recorded. (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 1995. 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 the results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Graham Staley, CFO and Investor Relations Officer. Mr. Staley, you may begin your conference.

Thank you, Judith. Good morning and good afternoon, everyone. I'm pleased to be with you again today to discuss our 2008 second quarter results.

As usual, I'd 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 second quarter financials.

Before I start, I would just like to remind everyone that all numbers are in Brazilian GAAP and that percentage changes used in this call are on an organic basis unless otherwise stated.

Turning to the results, during the first quarter, our consolidated EBITDA reached almost BRL 2 billion. This represents a 10.1% growth when compared to the second quarter of 2007, driven by a recovery in the Brazilian beer and CSD market, a solid performance in North America, and another quarter of strong results from Quinsa.

The Brazilian business bounced back from a challenging first quarter and is now back in growth. Beer volumes, which we previously reported had grown by 3.1% in April, closed the quarter up 3.8%, while CSD and NANC volumes grew by 2.5%. Luiz Fernando will be providing you with more detail on the key drivers in a few minutes.

Our EBITDA margin in Brazil increased by 90 basis points behind good top line growth, and, as expected, a much better performance in cost of goods sold and SG&A, despite higher commercial investments in our CSD and NANC business.

Our Quinsa operations continued to deliver strong results, with EBITDA growing 37.9% on the back of beer volume growth of 14.5% and CSD and NANC volume growth at 11.5%.

In North America also, EBITDA grew by 5.3%, despite declining Canadian industry volumes due to poor weather in the month of June. Market share grew again this quarter.

Net income declined in the quarter, but it's ahead 4.7% after six months. Excluding goodwill amortization, net income declined by only 2.7% in the quarter. Earnings per share, excluding goodwill amortization, grew by 5.9% and is up 13.8% year to date. And I will comment further on net income at the end of this presentation.

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

Thank you, Graham. Good morning, everyone. Let me start with beer Brazil.

As Graham mentioned, our second quarter results rebounded from our weak first quarter, which supports our view that, despite full inflation putting pressure on net disposable income, the main reason for the beverage industry slowdown in the first three months was unexpected and unusually cold and wet weather, together with an early Carnaval.

Good revenue management together with strong and (inaudible) execution allowed us to maintain a flat market share of 67.3% in the quarter. You may have seen early this week that our market share, according to the latest Nielsen report, fell by 70 basis points compared to the previous months, although, year to date, our share is still flat versus 2007.

June volume growth was well below the quarterly average, but July was good, in line with the overall growth seen in Q2. We are obviously [dipping] guidance due to the market share results. And, once we fully understand them, we'll respond in a rational and disciplined way, implementing initiatives and recovering our share position. As usual, we will not react across the board but selectively and with precision, using our (inaudible).

Looking forward, I'm optimistic about two innovations in our Skol portfolio, namely the new 630-ml proprietary returnable bottle in Rio and the rollout in selected regions just two days of our new 1-liter proprietary returnable bottle. Both innovations are helping to drive the Skol brand forward and, of course, the share.

Returning to the second quarter, our beer net revenues per hectoliter in Brazil [which] BRL 150.8, a growth of 4.9% when compared to the BRL 144.3 reported in the second quarter of 2007. This increase partly reflects our price increases in December and February, as well as an increase in the scope of our direct distribution network and the continued excellent performance of our premium brands, which were around 11.8% in the quarter.

Our beer net COGS per hectoliter grew 8.3%, due to the anticipated increase in the cost of malt and corn, general inflation, and the benefits of currency. As expected, this was a big improvement on the first quarter's 13.1%, and it's consistent with our expectations of delivering a considerable improvement in beer COGS per hectoliter as the year progresses, as our [sugar]-hedging gains and our plant productivity and efficiency initiatives start to come through.

Beer SG&A, excluding depreciation and amortization, grew by 7.5%, due principally to inflation, volume growth, and increase in direct distribution, partly offset by the timing of certain marketing programs and investments which we launched in the first quarter.

Beer EBITDA finished the quarter at 8% above Q2 2007 with EBITDA margin essentially flat compared to 2007.

Turning to Brazil CSD and NANC, volumes increased by 2.5% in the quarter, and we delivered market share growth to take us up to 17.4% for the quarter, 60 basis points higher than last year. The latest Nielsen shows a subtle increase to 17.8%.

During the quarter, we continued to invest in soft drinks innovation from the launch of new products like [Guara], which brings the guarana flavor into the flavored water category, the consolidation of the success of H2OH! in apple and Sukita grape, and the 3.3-liter (inaudible) packages which were launched in the first Q.

Despite continuous pressure from full inflation consumer spend, we continue to see good opportunities in the CSD business in terms of market share and profitability, and we'll continue to invest in this segment. We believe we are well positioned for the future.

CSD and NANC net revenues per hectoliter grew 3.3% in the period, impacted by a tough comparison from 2007. We continue to track and monitor pricing opportunity in detail, and, as a result, we have put through a number of increases in selected markets in the last two weeks.

Soft drinks COGS per hectoliter fell 6.1% in the quarter as a result of our anticipated hedge gains in sugar and currency. As discussed in our first quarter call, the benefits from our hedges and our plant productivity and efficiency initiatives should help to improve the soft drinks COGS results even further during the second half of the year.

Soft drinks SG&A expenses in Q2 grew by 12.1% when compared to last year as a result of investments postponed from Q1 and moved into Q2. Year-to-date growth is 7.7%.

Despite this, CSD delivered another strong EBITDA result, which was 18.4% higher than last year with improved EBITDA margin of 37.5%.

Before turning to HILA-ex, I would like to comment on a couple of topics concerning Brazil which have been receiving significant attention from both the media and the investment community in recent weeks; firstly, the proposed federal tax changes in the beer and CSD industry in Brazil, which will take effect on or after January 1, 2009. At this stage, there is no new information to report. The tax authorities still need to determine how the tax will be regulated, and we are in discussions with the relevant departments. [Ultimately], we cannot estimate how an increase will impact the industry of AmBev.

Last week the government announced a 30% tax rate change for non-beer alcoholic beverages. We do not think this has automatic implications for beer for a couple of reasons. Firstly, tax revenues from beer have grown substantially as a result of the recent introduction of flow meters, and, secondly, beer prices have not grown as quickly as other alcoholic beverages in recent years. Therefore, an increase as high as 30% is not appropriate.

I would also like to comment on the new launch introduced in June, which has established new limits for drinking and driving, the so-called Lei Seca. First and foremost, I would like to emphasize our full support for any law which addresses the subject of drinking and driving. We have always actively supported the government through our responsible consumption program and the donation of more than 5,000 breathalyzers to authorities, and we will continue to do so.

We are still in the early stages, and it will be a few months before we are able to estimate the impact on volumes, if any. So far, we have not seen any dramatic changes in the trends from the second quarter. Brazilians are used to adapting to changes in their environment, and I'm sure they will do the same quite frequently in this case. In fact, we have a number of initiatives already underway or in the planning stage to help consumers handle the transition. In the long term, we do not believe the new law poses a material threat to our business.

Well, let me now briefly turn to HILA-ex. The region generated an EBITDA loss of BRL 28 million for the quarter. The beer business grew by 3.3%, with Peru, Ecuador, and Dominican Republic delivering another quarter of market share gains and double-digit volume growth. However, we continue to face several problems in Venezuela which have significantly impacted overall beer performance for the region.

Our strategy in the region remains unchanged. In most of the countries in which we operate, beer volumes and share are growing quickly, and we continue to reduce the fixed costs in the business. Although the challenge we face in Venezuela will prevent us from being EBITDA and cash neutral in 2008, we remain committed to pursuing our long-term goals in the region.

As stated in our last conference call, 2008 will remain a challenging year, even though the beer industry has returned to growth during the quarter and we expect market growth in the second half to be similar to the second quarter trend.

In conclusion, we have confidence in the long-term health of the Brazilian economy and the beverage industry, the strength of our brands, and the quality of our people. We rely upon the strength of our portfolio and our (inaudible) of precise execution in the market, pricing discipline, and cost management to continue to improve our performance in the second half of the year. Our people respond well after the results of the first quarter, and I have confidence in their ability to continue to deliver.

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

Thank you, Luiz, and good morning, everyone. Our beer and soft drinks operation delivered what I think is an attractive result in terms of volume growth and increasing profitability with double-digit growth in almost every market where we operate. This has happened in spite of, let's say, difficult political scenario in some of the countries within the region.

Consolidated volumes increased 13.3% organically in the quarter based on excellent performance of both the beer and the soft drink business. Our volume growth was 14.5% in the case of beer and 11.5% in soft drinks. Solid market growth throughout the region and higher market share in Argentina, Chile, and worldwide were the main factors for the significant growth in volumes. The market growth achieved in the period is a result of actions implemented throughout the region to develop the beer category. Our innovation includes the launch of dark, premium beers - first Argentina and then Chile and now also in Uruguay - and other successful actions which permitted us from gaining share from the wine category in Argentina.

Net revenue per hectoliter grew organically, both in beer and soft drinks, as a result of higher prices throughout the region and strong performance from our premium brands. The Company performed particularly well in the premium side in Argentina and Chile with Stella Artois, delivering outstanding growth. In the case of Bolivia, the premium segment consolidated its position through the [Y] brand, a traditional Bolivian beer. In Paraguay, the Brahma brand is over-performing the rest, accounting for the important volume growth of our business.

Analyzing the individual beer markets, Argentina posts an all-time record in the quarter in terms of volume, even exceeding the volume reached before the divesture of the three brands due to the antitrust requirements. The Company performed very well in the premium segment, through Stella Artois and the recent launch of Quilmes Red Lager, gaining market share in a growing and competitive market.

The Bolivian business continued to post strong growth rates, despite an uncertain operating environment. Performance has been particularly good in the main cities of La Paz and Cochabamba. We took advantage of the industry volume (inaudible) with our market share remaining stable. We also focused on some product innovation, like Pacena Red Lager, Pacena Porter, and Pacena Ice to keep strengthening our core brands.

Our Chilean operations showed an important recovery in the quarter, based not only on a growing industry but, fundamentally, in an important market share gain. We performed particularly well in supermarket and traditional distribution channels, helped by promotions and innovation.

The beer market in Paraguay continues to recover, which allowed us to show another quarter with important volume growth. The Company launched its promotional activities and loyalty programs to compete against imported beers, achieving good results in the quarter. The Brahma brand had an excellent result, gaining market share and becoming the most significant penetration of a global brand within the region.

Our beer business in Uruguay has also performed very well, reflecting significant volume growth with increasing market share. Our premium brand Patricia showed an impressive performance, gaining market share and contributing with higher profitability to the portfolio. We are also developing a category in Uruguay for the introduction of dark, premium beers in a focused campaign to increase beer consumption in the wintertime.

In soft drinks, we had an excellent quarter in terms of volume and net revenue, with market share gains in growing markets, both in Argentina and Uruguay. In Argentina, Pepsi, Seven-Up, and Mirinda brands grew within their segment, while the A segment as a whole gained market share versus the B brands, explaining a great part of our outstanding performance. At the same time, the Company also performed very well with the flavored water segment, where the H2OH! products continued growing and gaining market share in this growing market. Our net revenues per hectoliter benefit from price increases and better sale mix.

Regarding our costs and SG&A expenses, we are introducing the initiatives, or have introduced the initiatives, within our control to mitigate the negative effect of higher cost of raw materials for the metal and soft drinks-- mostly, on bigger-scale, soft drinks-- transportation, and labor. We're still focused on achieving industrial and procurement efficiency as well as the ZBB consolidation.

Solid growth rates in all the markets where we operate, together with focused revenue management and cost initiatives, have resulted in EBITDA organic growth of 37.9% in the quarter, with a 40.8 % EBITDA margin, which is 300 basis points above last year.

I'd like to end my comments by congratulating my team for going the extra mile towards our aggressive targets. We have been able to over-perform in a region that has been particularly unstable during the recent months. I am actually very confident that with the (inaudible) we will continue on this path, overcoming the obstacles that appear and fighting hard to keep our operations growing if the economy slows down.

I would now like Bernardo to take over.

Thank you, Joao. Hello everyone. Looking at the second quarter, I am happy to say that Labatt delivered results consistent with our dream of growing EBITDA with no loss of our market share for the second quarter in a row, which is the first time in many years. On EBITDA, we grew 5.3% in the quarter on an organic basis. The growth came from top line, driven by share growth, and by pricing in line with the industry. The industry volume as a whole in the quarter was below last year by 1%, mainly due to the bad weather in May and June. Even with this poor industry, Labatt's volume was almost flat against '07 due to market share gain. Our market share of Labatt grew by 30 basis points on an organic basis in the quarter, resulting in a gain of (inaudible) 30 basis points for the first half of the year. I am happy to see that consistent with our strategy to focus on the premium brands, all of our key brands - Budweiser, Bud Light, (inaudible), Stella, and Lakeport - grew their share in the quarter and year to date as well.

Talking about the import segment, we launched Stella Legere, or Light, in mid-June. The light imports segment are the fastest growing ones in Canada, and Stella Legere will meet this trend. Stella Legere will bring the same quality and heritage of Stella to the light segment. It will also address greater [dinner drinking occasions]. We had a good start, but it's too early to draw conclusions.

On the cost side, our Q2 costs (inaudible) inflation, were roughly in line with what we saw in Q1, as we continue to partially offset the cost of input pressures through plant efficiencies and ZBB initiatives. Our SG&A is also under control, showing a reduction of minus 4.9% on an organic basis due to (inaudible) by ZBB initiatives and gains on non-working dollars.

Looking ahead, '08 continues to be a tough year. We will continue to focus on fuel and big things. I am confident that our top line strategy of focused investments in key brands, disciplined revenue management, trade programs that deliver market share, and (inaudible) execution is paying off. To support this strategy, we have been putting in place processes to build our world-class sales organization in Canada and marketing discipline too, to ensure consistent and sustainable brand communication.

Looking at market share, Canada is a very tough and competitive market, and you can be sure that our competitors will try to recover share during the rest of the year. What I can say is, again, we are ready to start the fight.

On the cost side, raw material price continues to be a concern. In the second half of the year, inflation on input price will be more challenging for our COGS per hectoliter than in the first half.

In addition, to drive (inaudible) on non-working dollars, we will continue to work on revenue management opportunities, which includes pricing to partially offset (inaudible).

Just to wrap up, I remain very confident in our ability to deliver full-year EBITDA growth with no loss of our market share, in line with the dream that I shared with you as I started the year.

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 almost BRL 1.6 billion and the net income of BRL 402 million, as disclosed on Page 16 of our Release.

Other operational income and expense is a net expense of BRL 437 million in the quarter, in line with the expense of BRL 444 million in the same period last year. The main item on this line continues to be goodwill amortization and translation gains or losses in foreign investments.

Our net financial result is an expense of BRL 334 million, almost flat when compared to BRL 337 million in Q2 last year. An increase in interest charges on real-denominated debt is fully offset by higher interest on cash and cash equivalents, higher interest on taxes and judicial deposits, and lower interest on contingencies.

The position for income tax and social contribution was an expense of BRL 354 million versus BRL 295 last year. This increase is mainly the result of improved earnings before taxes, main interest on owned capital, and higher non-deductible items, such as goodwill amortization and translation losses from investments.

Our net debt remained relatively stable at BRL 8.1 billion through the end of June compared to BRL 8.2 billion at the end of March, as we distributed our excess cash flow from operations by way of dividends and interest on capital on April 28.

Our payout strategy remains unchanged. We will continue to distribute all excess cash generated, if we cannot identify value enhancing alternative uses within the business. Payout will continue to include a combination of dividends, interest on capital, and share buybacks. The timing of execution of the buyback program will always depend on a number of factors, including the Company's perspective on valuation and the goal of not squelching the price of the stock.

During the second quarter, we adopted a conservative approach to our share buyback program, given the market rumors and uncertainty surrounding an InBev/Anheuser Busch transaction.

At the end of June 2008, we have distributed to shareholders BRL 610 million by way of share buyback and BRL 1.07 billion in dividends and interest on capital. We also paid a further BRL 987 million as dividends and interest on capital starting on July 31.

We will continue to review the balance between dividends, (inaudible), and share buybacks on an ongoing basis.

In closing, AmBev once again reported EBITDA growth in the second quarter with good performances in Brazil and North America and yet another strong performance by Quinsa. We have diverse business plans in place for the rest of the year, addressing both top line growth and costs, and we'll be leaning heavily on our strong execution capabilities as the year progresses.

I will now hand back to Judith and open up for questions.

Thank you. (Operator Instructions). Your first question is coming from Robert Ford of Merrill Lynch. Please go ahead.

Luiz Fernando, you touched base on competitive dynamics within the context of the Nielsen figure that recently came out. Can you elaborate on that a little bit more with respect to which geographies, which brands are being most impacted, and historically which responses have been most effective in that sort of situation?

Bob, first, I think it's important to say that, year to date, including July, share is flat versus last year. And the trend month after month during the year-- The trend and the share itself came in line with last year. So we were very confident that we would repeat the same numbers we had in 2007 or maybe even higher with the strategy we have in place. July refers mostly-- The Nielsen July report refers mostly to June volumes. And, as I said, June volumes were weak in our view, mostly aligned with the bad weather we had during the month. July volumes were much better than June and in line with the average of the second quarter.

So the share that was reported by Nielsen was unexpected. We knew we had some pressure in the off trade channel, where the competitive environment became more aggressive after Schincariol's launch of the 18-pack and the half-liter can. They decided to implement a different strategy than we did that was basically to maintain share and profitability in balance. So they came with the packages at a more aggressive price than the price they had before. But they didn't take the opportunity to increase their 12-pack or the single can price. That means that, on average, their price came down, and, as we already anticipated in the first Q, in cans, our competitors didn't have the same behavior and they continue not to have the same behavior as they had in returnables. So not only they did not follow our price increases in the same pace they did with returnables, but, on top of that, Schincariol with the allowances they have, they put more pressure in can prices.

So we knew that, and we believe that we could compensate that with our returnables included. And the fact is that we lost share - on average, like, 70 basis points, more in the off trade but also in the on trade and in traditional channels. We lost across the board, and we lost mostly to Schincariol. I think 80% of the losses were for Schincariol. The other players were pretty much flat. And we lost in most of the regions. But the main contribution, of course, because of the weight we have was Sao Paulo - the great Sao Paulo. I saw some people relating that with the traffic restrictions. We don't see that correlation, and (inaudible) was not in the regions where the police did all the controlling thing. So it was in different regions different performance. So Sao Paulo was the main contributor to the loss. We have similar situations-- not as relevant-- But we have the same situations in other regions of the country.

So far, we don't have all the details yet because Nielsen only reports-- They report the numbers in a very summarized way the first day. Then they forward the whole database to the competitors one or two days later. So our team is working very hard to understand if it was something that happened in one month or if it's really reflecting the trend that we have. Again, first we have to understand the Nielsen numbers and, from there, with our internal researchers, be very precise in the planning in terms of where we should act, how we should act. But we believe it is still a little early to predict if the trend reverted. And, of course, we'll not just watch what is happening; we'll have to react accordingly. So, of course, if it will be stronger (inaudible)-- if we realize it's a trend, I will-- Of course, I know there is concern that we have to react with price, but we always react with price very precisely, very surgically. We have to react with the right brands and not across the board. So I don't think [wine] should be a big concern going forward. But, of course, we have to understand and react if needed.

Great. Thank you. And then Bernardo mentioned some rising raw materials pressure in the second half in Canada. Our perception was that you cycle in the better FX hedges in the second half of the year. Can you more comprehensively address some of your expectations around hedges and maybe some raw materials commitments that exist in other regions and what you've done going into 2009, please?

You recall, Bob, that we previously said that our reference for AmBev consolidated weighted cost of goods was just 5%. We are still driving very aggressively towards beating that type of (inaudible) number on a per hectoliter basis. And all the action plans are in place to do that, despite the fact that, obviously, we're seeing higher inflation in Brazil. And the fact that Quinsa's performing very well means that the weighted average is obviously increasing because the inflation in that business is obviously higher than it is in the rest of the Company. But, nevertheless, we're still striving to beat the 5% target that we've given you in the past.

In terms of the hedges, the most effective hedges are, as always, in Brazil. And the big benefits come in the second half of the year with both sugar and currency. I think we started to see some of that in Q2 with the 6.1% decline on a per hectoliter basis for CSD in Brazil, and we continue to expect good performances from CSD in the balance of the year, which will overall bring Brazil down and allow us to get to that 5% target.

Canada doesn't have quite as many hedges in place. Some of the commodities-- We just can't hedge those items. And so we're facing, as everyone else is, increasing day-to-day prices, which Bernardo and his team have worked very hard to mitigate with ZBB and efficiency savings. But it's fair to say that, yes, we will see some increasing cost of goods for Canada moving forward for the balance of the year.

As we look at 2009, we continue to follow our 12-month hedging strategy; as I've always said, plus or minus a small margin, which gives us some discretion to take a position on a particular commodity. So we're well hedged, well into the first half of 2009, and that gives us, obviously, a lot of visibility over, let's say, about 40% of our cost of goods.

And it's fair to say that the pressures that we saw in 2008 versus 2007 are not quite as great in 2009 versus 2008. Of course, that is all dependent on the current situation continuing. If we see prices for specific commodities increasing dramatically in the next six months, obviously, it's going to affect the hedges we can place for the second half of 2009.

So just a note of cautious optimism that 2009 cost of goods doesn't look quite as serious as 2008 versus 2007. Hopefully, that answers the various questions.

Very reassuring. Thank you very much, Graham.

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

I wanted to go back to Brazil for a second and just ask a little bit about pricing. We saw your pricing fall a little bit sequentially, and, as I look at your revenue per hectoliter levels in the second quarter, they were up about 3.5% or so from the fourth quarter level. So can you talk a little bit about why we're seeing revenue per [hector] a little bit softer than I would have expected? Is that focused in the supermarket channel in cans as you sort of implied some of the recent pricing action has been? Or what's driving trend, please?

The first thing is seasonality. Of course, first Q, with all the anticipation of Carnaval and even Easter at the very beginning of April, that moved the can mix higher. So the balance of cans and returnables was more favorable to cans. That makes our prices, on average, be higher than in second Q, when the mix comes back to the average with the spring.

But, also, even in cans, we expected the competitors to follow our price increases as they did in returnables. And, of course, as they didn't we had to close a little bit the gap. So we had to give more discounts in the big supermarkets than we expected. But we had also the returnables being less representative, because, when you rebalance the pricing strategy, the mix shifts towards the off-premise. So, on average, when you compare to last year, that mix, of course, came down. The cans came down from the first quarter but not in the same way it did last year. So you have both consequences - one, the can prices lower than our expectations and because we have to close the gap, and, of course, that makes the mix shift towards just the supermarkets and to the specific (inaudible). That's what happened.

But I think when you compare to what happened in July - or June [shares] effective in July - there was a price change because of the introduction of the 18-pack from Schincariol. They brought prices down again, even more than they had in the past. So I wouldn't think that the reaction to this share loss is a consequence of-- The share loss we had in July is a consequence of the Schincariol new packs and the average price reduction but not in the second quarter. Second quarter was more a known price increase from our competitors overall in the market.

So, if you look to the full year 2008-- I know you don't like to give guidance on margins. But it seems like you've got less pricing going into the second half than you would like. And maybe, depending on how quickly this Schincariol pricing reverts-- maybe even tougher than what we're seeing into the second quarter. Your SG&A spending is trending up a lot. In the first half of the year it's up, I don't know, 12% to 12.5% ex the depreciation. And your COGS are obviously up. So is there a way you can somehow shoot for flat margins in Brazil this year? How can you offset some of those trends, because I see near term somewhat negative, notwithstanding your comments on your optimism on volume at the beginning of the call.

I think there are several reasons to the (inaudible) that margin could expand in next quarters. First, of course, we already mentioned the (inaudible) fact. They will be more relevant quarter over quarter. So you saw that second Q was better than the first, and we believe it will be even better in Q3 and Q4. Of course, more in CSD but also in beer. This is one of the reasons.

The second reason, of course, volumes help a lot. So you dilute more fixed costs. And then the solution is not linear. So the move volume you have-- The more volume on top of previous years-- Of course, the absolute volumes increase more in the fourth quarter than they increase in the rest of the quarters because of the seasonality, being higher in October and November and December. Therefore you dilute more the fixed costs that we have. The fixed costs don't progress in line with the volume quarter by quarter.

Of course price is a concern. We don't want to react with price. That means we have to react-- As I said, we will react very precisely and not across the board. We don't believe in that. So when you look at the progress, you may have the impression that we didn't touch as much prices as wanted. But the fact is that we did it, but we don't control our competitors. They have to decide their initiatives. What I see today is basically the low price brands, if you want to call them in this way, are being more aggressive (inaudible). So some of the competitors are deciding to be more aggressive in discounts and in pricing. It's not necessarily against AmBev. It could affect the other players. So today we really have specifically in the off trade a more (inaudible) among our low-price brand competitors that somehow is affecting us. So, of course, we cannot push prices as much as we would like because we have to maintain the balance in profitability and share in the short term, but also making sure that the long-term health of our market is okay.

So, of course, again, it's early to anticipate the initiatives. Of course, we'll do that [greatly]. We are trying to understand first if it's something that happened in one month or before we did the initiatives; of course, understanding the causes, the drivers, and then deciding what to do. It's really early to anticipate a possible consequence of that.

Okay. If I could just ask one more question. The volume comparisons get tough into the second half of the year, and your market share levels were pretty strong. So can you just give us a sense of why you're optimistic about the volume growth in the second half of the year? Does this relate to some of the new launches? You mentioned the 1-liter returnable and the 600-ml. Or, are there other factors you're seeing in the market that make you optimistic?

As I said, June was a weak month and, again, because of the weather. If you compare the seven months of the year, we only had weather flat or better than last year in two months. And June was really poor. That's why, I would say, that we are not expecting the share loss, because somehow it can be mixed with the weather effect.

July was, again, good and in line with the average or slightly better than the average of the second Q. And the inflation starts to reduce the acceleration. If you compare month after month, inflation came down. And then, as we said last quarter, the government-- The central bank was taking initiatives. So they basically increased interest rate. And, in Brazil, it's not only about the past inflation - the 12-month rolling or the last months - but also the expectation of the inflation going forward that impacts the business. So, in our view, the market is more-- We don't expect the market to be strong, but we do expect it to be at least in line with what we saw in the second Q.

On top of it, we are implementing several initiatives, some of them very important, like the 1-liter returnable glass bottle that we are launching now. It's in the launching phase. Again, early to anticipate end results, but it's a relevant one. It's probably the biggest returnable innovation we did since I remember. So we are confident that these kind of initiatives can persuade the market and give us more flexibility to (inaudible) prices and share.

Thank you. (Operator Instructions). Your next question is coming from Alex Robarts of Santander. Please go ahead.

I'd like to go back to the Lei Seca comment that you made earlier. Clearly, this is important for just general visibility in terms of 3Q volumes and the Brazilian operation. And I can appreciate that you, I guess, as you say, need a few more months to kind of fully-- kind of grasp the impact. But if we could kind of just get a better understanding what you've seen since late June when the law came in force-- just some thoughts maybe you could share with us vis-a-vis the geographical impact, city/suburban. Do you think that this is creating a behavioral shift in consumption patterns generally for beer vis-a-vis the on-premise/off-premise? Are you seeing kind of some trend there?

And I guess the last bit of this question is the political aspect. To what extent does the beer industry in Brazil have a chance to kind of fight this or suggest that the 0.2 level can be higher or changed in any way?

I guess it's kind of a long question, but it would be great if you could give us some sense of kind of, finally-- When you talk about no dramatic change expected in 3Q versus 2Q, can we get potentially negative volumes in beer year on year in 3Q? Again, perhaps you don't want to give any numbers now, but any comments would be great. Thanks.

Very straightforward to your last point. When you put together market growth, inflation, consumer inflation or trends, weather-- If you put all these regular impacts and compare that with the Lei Seca, I will say it's impossible to explain any of the shift in line with the Lei Seca introduction in Brazil. I mean, it's not as relevant as any of the other drivers that we know in the industry that are tracked in the industry today. This is the first comment I can make.

Second, of course, we are tracking and monitoring the consequences. In our [PTI] week after week, we've tracked [reduce] because people learn the kind of behavior they have to have, and they start going to the restaurants with a determined friend that will drive and that will not drink and drive. So they drink soft drinks, or they drink a low-alcohol beer, which, by the way, we lead the segment. We have the only zero-alcohol beer in the country. The trade reacts. So we have several restaurants in Brazil, for example, that have kind of a driver that will bring your car back home. And then they have kind of a motorbike that will drive the driver back to the restaurant to pick up the next consumer. So I think, to be honest, for a long time AmBev has been supporting government initiatives to restrict the drink and drive thing because we believe it's the right thing to do and, of course, because we believe the impact is very small compared to the benefit of having the consumers in good shape. And all the negative image that all these accidents related to alcohol bring to it-- I think net/net, of course, we always-- The volume impact is, of course, neutral to negative. It cannot be 100% neutral. But we believe, long term, we will get benefits of that.

Again, there was an improvement week after week. At the very beginning, we felt more effect on the premium segment - on the premium and super-premium segment - because, of course, (inaudible) don't have a car. They don't go out to have food and beer. It's not like that. People drink their beer in the neighborhood, in the places they're used to go. None of the (inaudible) in other very developed countries compared to Brazil. We are confident that, with the time coming, things will be more to neutral than to negative. And so far we haven't seen any strong consequence of the introduction of the law. But all the media that you probably saw is because, of course, it's part of the educational content-- I think not necessarily proportional to what really happens. But the brass, the government, the media-- they all try to educate people and to make them change behavior. So that's what you saw from the outside world.

Thank you. Your next question is coming from Jose Yordan of Deutsche Bank. Please go ahead.

My first question was answered, but I had a question about Venezuela. Other consumer companies seem to be making at least some money in Venezuela. In a high-inflation environment, it's pretty easy to pass on your added costs to consumers. I just want to understand what's different about your position in Venezuela that does not allow you to enjoy, frankly, what some other companies are seeing as perhaps rising margins in that environment.

I think we have several facts in our business there in Venezuela. First, starting last year, we increased prices ahead of our competitors. And we told them very-- We thought that our brands would not suffer, closing slightly the gap we have versus our competitors, both (inaudible) and Polar. And not only that, but we fall in much faster than we usually do. So we did not have time to read the market accordingly and to make-- to [size the move] as we should. After that, Polar attacked us in our stronghold market with [Polar Light] that had really performed in this region. But, given the price (inaudible) they got and several initiatives they implemented, they were able to capture a lot of market share in some of these regions where we were much stronger than the average.

And we had several problems in our industrial facility dealing with unions. We had some turnovers in our people. That means we really did bad in Venezuela. We were not able to manage all the problems we had. Of course, there is an effect, and what you see today is the consequence of several problems we had throughout the last quarter of last year and the first quarter this year.

Things are more under control today, and we, of course, believe we can recover. We've already made the changes we have to make, and now we have to work hard to recover our share position, which is low. So it shouldn't be so difficult. I think moving 1 or 2 points share up in Venezuela is much easier than in Brazil. Of course, we have to fix our problems, and we are working on it. And I see a better second half compared to the first half we had there. But it's true that Venezuela is the biggest market - the biggest volume and, today, the most profitable market in HILA-ex. It has a big impact on the HILA-ex results. We don't disclose it country by country, again. But don't mix things. We continue to have a great performance in Dominican Republic, Peru, and Ecuador, all of them growing double-digit volume and in line with our strategy.

Okay. Great. Thanks a lot.

Thank you. Your next question is coming from Alan Alanis of JPMorgan. Please go ahead.

I have two questions - one for Graham regarding EBITDA and operating cash flow and one for Bernardo regarding Labatt and Anheuser Busch. The one regarding EBITDA and operating cash flow-- EBITDA is up 10% in the quarter and 7% year to date organically. However, net cash provided by operating activities is down to 28% for the quarter and 34% year to date. Could you give us some details of what is happening with AmBev's working capital and other operating line items in order to reconcile the differences? And what should we expect going forward? That's the first question.

And the second question is regarding Anheuser Busch and Labatt. What is the expected level of collaboration and potential synergy between Labatt and Anheuser Busch? And how will these benefits be shared between InBev and AmBev? Thank you.

Thanks, Alan. I didn't quite catch all those numbers on the operating cash flow. But let me talk in general terms, and maybe we can have another conversation offline.

We have a very high, intense focus on working capital. We did see some-- As Luiz mentioned earlier, in Brazil, we did see some channel mix changes during the course of the year as the business moved slightly towards off-premise, where trends of collection on receivables are longer than they are on the on-premise. So that has led to some deterioration. But, at the same time, we have very aggressive approaches on inventory levels and accounts payable, which will stay in place for the long term. There are probably some noncash items which are perhaps (inaudible) picture for you here a little bit. But I'll probably reassure you that there is no lack of focus on working capital - no lack of focus whatsoever. Perhaps we can talk a little bit more separately and go through some of those percentages you gave.

I'll let Bernardo make some comments if he wishes but only on the Anheuser Busch/InBev transaction. It would be totally inappropriate for AmBev to comment on that transaction. That's a transaction between two other parties. It's far too early to comment on any implication for AmBev. Obviously, it's part of-- With InBev having control and stake in AmBev, we hope there will be some opportunities in the future. But it's far too early to comment on those.

And, Graham, just to add, (inaudible) 100% (inaudible) deliver and fragile for them - their shareholders. This is our focus and the way that we are operating here.

That's right, Bernardo - absolutely right. So, Alan, I'll answer your call separately on the detailed cash flow question.

Thank you very much.

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

I wondered if you could give us a bit more color. I know there's been an intense focus on this short-term market share shift. The bigger-picture stuff going not just into the second half of this year but, really, next year with the IPI looking to be some sort of increase - whatever the quantifiable number is. Can you give us a sense of how you look at your priorities? Obviously, volume helps the fixed costs, and, at the end of the day, pricing is always much more beneficial than margin. So can you give us a sense-- If the IPI goes through-- I'm sure it does vary somewhat based on the absolute amount of the increase. But I would assume that pricing and pass through of that price increase along the supply chain would be more of a priority than necessarily keeping volume at a high level, which is not going to be just volume contraction but, rather, a more modest volume growth rate. That would be my base assumption. Could you comment on how you look at that and, specifically, with respect to any kind of price increase?

I'll try to answer the question, though I lost some of your words here. So correct me if I don't understand.

With regards to IPI, again, the government-- There are two different things with the IPI. The first one is the tax changes that the government submitted to the congress and was approved. And then the government submitted another bill [not] changing some of the rules and moving the effectiveness of the new law to next year - starting next year, probably January 1. But they still have a lot to regulate. So it's really difficult for us to anticipate the kind of impact that it could imply because we don't have the relevant details - the cut of differentiation they could implement, how they're going to research the market to establish the differentiation, the size of the gaps. So it's really difficult to say today what kind of consequences we may have. But we have to wait. We continue to work close to the government and to all the authorities that are involved with that. There are two sides, of course. There is the side of the ones that really want to defend a fair playing field in the market, and there are the ones that are trying to take benefit and to make things more flexible for them. This is the first piece.

The second one is the announced 30% increase for an IPI for the non-beer alcohol industry. Most of the alcohol-- That does not include beer on that. I think, as I said, the 30%, of course, is now a reference that some people can use. But, in our case, we don't believe that's the right reference because of the fact that, during the same period we had the flow meters' implementation in the country, that brought scheduled tax collection up by more than the 16% compared to any other industry - for the alcohol industry. So the government was able to reduce tax evasion. I'm not saying that they reduced 100%, but reducing tax evasion using the flow meters increased tax collection and making the market more fair. So this is one thing.

Another thing is consumer prices. Consumer prices includes retailer margin, blah, blah, blah. They didn't move up as much as other alcohol beverages and for several different reasons. It's not aligned with our price to consumers. So we believe that 30% will be too much for us. And, of course, we'll interact with the government when it's appropriate. So far, we don't have any discussion with them in that regard. We do have in terms of the regulation, but we haven't had any discussion in terms of any tax increase.

So, again, early to anticipate. We are working hard in both directions. But we'll have to live with this uncertainty for some time. And, of course, at the moment, it comes-- The size it comes - we'll try to pass as much as we can into consumers, balancing our profitability with our share. Of course, we believe, if that impacts us, it will impact our competitors too. So share-wise, I think we should be in good shape. And, of course, the industry, depending on the size of the impact, will suffer as much as inflation will suffer in the country because of the relevance of the industry in the inflation index. We'll try to pass, if not 100%, as much as we can to prices when it comes and if it comes.

Great. That's a helpful answer - at the end, especially. Thank you. And just a second question. Can you give us a sense--? You talked earlier-- I think, Graham, you mentioned this about share buybacks and, when there's [value], obviously, you're restricted while the deal is sort of in progress. Now that it's been announced, is there any restriction that's come off? Are you still kind of restricted? And, if not, I would imagine at this low price you see a fair amount of value. Is that just more a function of what the controlling shareholders' priorities in terms of value are, whether it's cash flow for your dividends, or is there an opportunity to see some buybacks now that things have been resolved?

Celso, the transaction has been announced, but the transaction still hasn't closed. And there's still a lot of (inaudible) out there. We place corporate governments very high on our list of priorities. And, because there are obviously some officers and board members of InBev which are also members of the board of AmBev, we think it's the right approach to be conservative and to stay out of the buyback market for the time being. We'll review that as things develop and as things progress towards what InBev say, I think, will be a closing toward the end of this year. But, at this point, we're just being very conservative and staying out. Obviously, we will review our payout strategy accordingly, and that will have some impacts on our dividend policy as well.

Just to be clear, based on the corporate government's policy, there couldn't be a buyback realistically until the deal closes (inaudible).

Definitely, you can never say never. At this point in time, there is still far more work to be done, from what I can see, between Anheuser Busch and InBev, and, obviously, the shareholders of those companies have got to vote on the transaction. The regulators have got to review it. So, for the time being, I don't think I can say anything more for the time being. As we get close towards the end of 2008, perhaps things will become more crystal clear. And, at that point, any issues or concerns we may have corporate government will dissipate. And, at that point, we could go back into the market. But we haven't got a timeframe. We haven't got an event in mind. We're just taking it week by week.

Okay. Thank you.

Thank you. We have a follow-up question coming from Alex Robarts of Santander. Please go ahead.

Actually, that was really it. Graham, going to your comment, to paraphrase, basically, what you're saying is that the buyback will basically be on hold for the coming months until you guys feel that there could be no potential conflict of interest vis-a-vis this transaction with Anheuser Busch and InBev. Is that fair to say?

I'm not sure it's as strong as on hold; we're just not buying at the moment. But, yes, you basically got it in a nutshell.

Okay. Thank you.

Thank you. There appear to be no further questions at this time. I will turn the floor back over to Mr. Graham Staley for any closing remarks.

Okay. Thank you very much, Judith, for your help today. And thank you, everyone, for joining us. As usual, we look forward to discussing the Q3 results with you in early November. Take care. Thank you very much.

Thank you. This concludes today's AmBev Second Quarter 2008 Earnings Conference Call. You may now disconnect.