Ambev SA (ABEV) 2008 Q3 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to AmBev's third 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, and all participants will be in listen-only mode during the Company's presentation. After AmBev's remarks are completed, there will be a question-and-answer section.

At that time further instructions will be given. (Operator Instructions) Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996.

Forward-looking statements are based on the belief 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 over to Mr. Graham Staley, CFO and Investor Relations Officer. Mr. Staley, you may begin your conference.

Well, thank you, Maureen, and good morning, good afternoon, everyone. I'm pleased to be with you today again to discuss our 2008 third quarter results.

As usual, I'll 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 third quarter financials.

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

So turning to the results, during the third quarter, our consolidated EBITDA reached more than BRL2 billion, which represents a 6.4% growth when compared to the third quarter of 2007, and was driven by strong results in the Brazilian soft drinks and Quinsa businesses.

Brazil EBITDA grew by 8.8%, behind a very strong quarter from our soft drinks operation. Brazil beer volumes closed the quarter at 1.1% while Brazil's CSD and NANC volumes grew by 14.8%. Luiz Fernando will be providing you with more details of the drivers in a few minutes.

Our EBITDA margin in Brazil continues to recover from the full first quarter [start], increasing by 120 basis points in the third quarter, behind good topline growth, and as expected, a good performance in both COGS and SG&A.

Our Quinsa operations continue to deliver very strong results with EBITDA growing 37.2% from beer volume growth of 14.2% and CSD and NANC volume growth of 11.2%.

In North America, third quarter volume grew by 2%, accompanied by market share growth again, although EBITDA declined by 5.2% as a result of anticipated commodity cost pressures.

Net income increased in the quarter by almost 61%, and is 24.4% higher than last year after nine months. Earnings per share, excluding goodwill amortization, grew by 46.2%, and is up 24.7% year-to-date. 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 take a little deeper dive into the results of each of our operations. Luiz?

Yes, thank you, Graham, and good morning everyone, hi there. Before I discuss the third quarter results, let me make a quick comment on ITI and PIS/COFINS since I know this is a subject which interests you.

We're still waiting for a final decision regarding the recently proposed tax centering the beer and soft drinks industries in Brazil, and expect the changes to be effective from the beginning of next year.

At this stage, there is very little new information to report, and we cannot estimate how an increase would impact the industry or AmBev until the tax authorities determine how the tax will be regulated.

We continue to believe that the government will not make unreasonable changes to the current tax levels nor jeopardize its tax evasion controls during the regulations process.

Let me now discuss our performance in Beer Brazil. Our third quarter volumes started strong, the continued pressure on consumer spend from food inflation, and more importantly, food industry volumes, in the month of September, due to cold and wet weather in the main regions in Brazil, resulting in volumes growing by only 1.1% in the quarter.

After losing 70 basis points of share in July, we recovered 60 basis points and 40 basis points in August and September respectively, and are now at 67.5% year-to-date which is flat against last year.

We are particularly pleased with our share performance in Rio where we have seen share gains for each of the last four months. Our focus will remain on improving our market share as we head into this summer.

Our innovations in the Skol portfolio, namely the 630 ml, the 1-liter bottle, and the multi-packs that we introduced during the year, are performing well and contributing not only to the equity of the brand, but also to our market share performance.

We are also very pleased with the progress of Brahma Fresh, which according to Nielsen, has now around 0.7% share, despite being sold only in markets of the north and northeast region.

Our beer net revenues per hectoliter in Brazil grew 3.1% when compared to last year. This increase partly reflects our price increases in December and February, as well as an increase in the scope of our direct distribution network.

Unfortunately, due to aggressive pricing from our competitors, we were forced to pull back most of our can pricing as the year progressed.

Year-to-date, we have grown net revenues per hectoliter by 4.6%, which we believe is a very credible performance, given our competitors having reported flat pricing year-over-year and moving [vastly] in the market.

The growth in our beer COGS per hectoliter continues to decelerate as expected, increasing only 3.6% when compared to last year, due to our current strategies and efficiency projects. We expect this trend to improve in Q4, at a time when we expect our competitors will be feeling increased pressure from the strength of the dollar.

We have seen SG&A, excluding depreciation amortization grew by 6.9% due principally to inflation, the volume growth, increases in direct distribution, and target investments to help recover share.

Beer EBITDA finished the quarter 3% above Q2 -- Q3 last year with EBITDA margin flat compared to 2007 for the first time this year.

Turning to Brazil CSD and NANC, we had a very strong Q3 with volumes increasing by 14.8%. Our market share reached 17.8% for the quarter, 80 basis points higher than last year. It was encouraging to see our organic performance so much better than our main competitor in both volume and market share. Our successful innovations are the main reason behind this improvement, and we continue to see plenty of opportunities in the CSD business, both from market share and profitability perspective.

CSD and NANC net revenues per hectoliter grew 4.9% in the period as a result of pricing in selected market -- markets and easier comparisons to 2007. We will continue to track and monitor pricing opportunities closely.

Soft drinks COGS per hectoliter fell by 3.5% in the quarter despite a tougher comparison, as our hedged gains in sugar and currency continued to benefit us. This trend will continue in the fourth quarter.

Soft drinks SG&A expenses, excluding depreciation and amortization, declined by 6.1% in the quarter, due to tougher comparisons from higher spend in Q3 last year.

CSD delivered another strong EBITDA result, 63% higher than last year with EBITDA margin improving by 950 basis points to 43.4%.

As the summer draws closer here in Brazil, all of our beer and CSD plans are in place, and our people are focusing on ensuring we outperform our competitors at the point of connection.

Turning briefly to HILA-ex, we continue to face challenge in the region, with an EBITDA loss of BRL32.8 million for the quarter. Beer volumes declined 6.4% in the period, despite stronger performance in Peru and Ecuador, both of which grew volumes by double digits and grew market share.

However, our challenges in Venezuela continued to significantly impact the overall performance for the region. Despite the challenges, we remain committed to pursuing our long-terms goals in the region.

Looking ahead to 2009, the current global financial crisis and economic slowdown effect and poses challenges for everyone. It is impossible to predict the future, but I'm more optimistic about the beverage industry than I'm about other industries. Beverages have proven to be resilient in the past, and I believe they'll be resilient in the future.

At difficult times like this, our brands, our people, our management systems are put to the test, and I'm confident that they are well prepared to meet this challenge. And before I pass on to Joao, I would like to comment on the recent announcement and also the management changes in AmBev.

I'm sure you have read the detail of the changes which will take place following the closing of InBev/Anheuser Busch transaction. Joao, Bernardo and I will be taking on new challenges, and Marcio Froes, who joined the Company as a trainee in 1993, will become the new head of Labatt, having spent the last three years working in Canada.

I know I speak for all of us when I say we are all excited about our new responsibilities and we remain 100% committed to delivering against our remaining 2008 plans. I'll now turn to Joao, who will talk about Quinsa business.

Thank you, Luiz. Good afternoon, good morning to everyone. Well, our beer and soft drinks operation continued to deliver outstanding results, both in terms of volume growth and EBITDA, with double-digit growth in every market where we operate.

This happened in spite of a perfect scenario in some of the countries within the region. Consolidated volumes increased 12.9% organically in the quarter based on the excellent performance of both the beer and the soft drinks business.

Our volume growth was 14.2% in the case of beer and 11.2% in soft drinks. Solid market growth across the region and higher market shares in Argentina and Chile were the main factors for the significant growth in volumes.

We continue to be successful at introducing innovation, and expanding the beer category against wine. Our actions included the launching of dark premium beers, first in Argentina and Chile, and now also in Uruguay, and in general the focus on the premium segment across the region.

We were very active in the marketplace, supporting our brands, sponsoring music festivals, and building effective and long-term relationship with distributors and points of connection.

Net revenues per hectoliter grew organically, both in beer and soft drinks, as a result of higher price across the region, focused revenue management, and strong performance from our premium brands.

Analyzing the individual beer markets, Argentina had another quarter with outstanding growth based on market expansion and higher market share. The Company performed very well in the premium segment through Stella, Quilmes Stout, and the recently launched Quilmes Red Lager.

The Bolivian business continued to post strong growth rates, despite an uncertain environment that resulted in severe confrontations during the last couple of months.

Our performance was based on market growth with our market share remaining stable. We focused also on some product innovations, such as Pacena Red Lager, Pacena Porter, and Pacena Ice, to keep strengthening our core brands.

Our Chilean operations showed another quarter of both market growth and market share gain. We performed particularly well in the supermarkets and traditional distribution channels, helped by promotions and innovations such as Brahma Black, Stella Artois, [Chopp], and Becker Amber Lager.

The beer market in Paraguay continued to recover which allowed us to show another quarter with important volume growth. The Company was very active in the marketplace, launching promotional activities, loyalty programs, to defend market share from imported beers.

The Brahma brand had an excellent result again, gaining market share and becoming the most significant penetration of our global brand within the region.

Our beer business in Uruguay has also benefited from market expansion in premium segment growth. Our premium brand Patricia showed an impressive performance, gaining market share and contributing with higher profitability.

We successively aimed our efforts at increasing beer consumption in the winter, and introducing dark beer -- dark premium beer to further develop the beer category.

The soft drink also had a good quarter in terms of volume and net revenues, with market share gains both in Argentina and Uruguay. In Argentina, all of the Pepsi brands grew within their segments, while the A-segment as a whole gained market share versus the B-brands.

We outperformed our competitors with Pepsi, 7up, Mirinda and our tonic water -- popular stores. The H2OH! products also continued gaining market share within the flavored waters having recently launched the apple and orange flavors.

Regarding our costs in SG&A, we are introducing the initiatives within our control to mitigate the negative effect of higher cost of raw materials, fundamentally soft drinks, transportation and labor, with strong focus on achieving industrial procurement efficiency and also the ZBB consolidation.

Solid growth rates in all the markets where we operate, together with focused revenue management and the cost initiatives, have resulted in EBITDA organic growth of 37.2% in the quarter, with a 41.1% EBITDA margin.

I'd like to end my comments by congratulating my team for succeeding on market execution and financial discipline, and fully adapting to the AmBev's ways of achieving results.

Having been able to over-perform in a region that has been unstable and threatened by diverse conflicts in recent months, we're in good shape to face the coming challenge with solid fundamentals to maximize our topline, adequate [trends] to become more cost efficient, and effective coverage to protect ourselves from situations in commodities and currencies.

Now, I'd like to invite Bernardo to literally take over.

Thank you, Joao. Hello, everyone. The third quarter was a very challenging one for Labatt. We posted an organic EBITDA decline of minus 5.2% in the quarter, driven mainly by the costs, as we anticipated. On the other hand, I continue to be pleased with our results on topline, driven by market share growth and by net revenue growth.

I remain strongly confident on our dream to deliver a fullyear EBITDA growth, with no loss of our market share. Our topline showed very healthy growth in the quarter, driven by interest growth of 2.8%, share growth of 10 basis points, and by net revenue per hectoliter initiatives.

Moreover, our market share gains were consistent with our overall strategy of focusing on fewer brands. I'm happy to say once again that Budweiser, Bud Light, Keith's, Stella and Lakeport grew their share in the quarter and the year-to-date as well.

On the bottom side, the interest growth in share gains [helped us], but was partially offset by the discontinuation of Lakeport subcontracting volumes and by declining export volumes outside of US.

Excluding this Lakeport issue, our domestic volume grew by 3%. On the cost side, as anticipated, our costs per hectoliter posted an increase of 15.9% which is higher than Q1 and Q2.

As you saw in the markets the price of many imports peaked in the second quarter, but advance purchase of imports allowed us to delay the [heat] until the third quarter.

This heat was partially offset by year-over-year efficiencies in our breweries and by improvements on ZBB. I believe that the recent softening on price will help us deliver better results in cost per hectoliter in Q4.

SG&A excluding the depreciation showed a year-over-year increase of 4.9%. This increase is driven mainly by the transportation costs as a result of fuel price, and by saving on catch-up in our sales and marketing expense.

Cost management remains the strength of Labatt, and excluding these two items, we once again showed a year-over-year reduction on operating expense.

Looking ahead, as we close out '08, we will continue to focus on few and [big] things. I reinforce that I'm very confident that our topline strategy of focused investments in key brands, disciplined revenue management, trade programs that deliver market share -- each dollar that goes to the market has to return in market share -- and [obsessive] sales execution is paying off. To support this strategy we have been -- put in place a process to build a world-class sales business here, and marketing skills, focus and discipline to ensure consistent and sustainable brand strategy.

On the cost side, costs per hectoliter continues to be a constant, I -- although I do expect that the worst of the cost inflation is now behind us. In addition of driving ZBB savings on all working dollars, we will continue to work on revenue management opportunities, excluding -- including price increases in specific regions, and we expect some better net revenue per hectoliter in Q4 to partially offset [this year's].

I continue to be fully -- I worked hard to deliver the '08 results here, in Canada, and I remain very confident in our ability to deliver the fullyear EBITDA growth. We will deliver that with no loss of our market share. That's the dream that I shared with you in the start of this year.

Well, that's it. Now I'd like to go back to Graham.

Thank you, Bernardo. In this final section before Q and A, I'd like to guide you through the main lines between the reported EBIT of over BRL1.6 billion and the net income of BRL949 million, as disclosed on Page 17 of our release.

Other operational income and expense was a net expense of BRL78 million in the quarter, significantly lower than the expense of BRL335 million in the same period last year.

The main reason for this decline was translation gains from our equity investments as a result of the strong appreciation of the US dollar in the quarter.

Our net financial result was an expense of BRL286 million, down 8.5% when compared to BRL313 million in Q3 last year. Our net financial expense for Brazil, including local and foreign currencies denominated debt, was fairly stable in the period despite changes in exchange rate as a result of our hedges.

Our effective tax rate in the period was 28.2%, compared to 38.5% last year, despite strong improvements in our earnings before taxes. This improvement is a result of non-taxable translation gains recorded in Q3 this year compared to non-deductible translation losses recorded last year.

At times like this, cash is certainly king and our strong cash flow generation, cost and working capital discipline, plus geographical footprint, will prove to be valuable assets. Of course, the uses of cash going forward will depend on the changing economic and financial environment.

We have not faced any liquidity issues during the recent crisis, but nevertheless we want to retain flexibility, and therefore, are likely to hold on to slightly more cash than normal going forward, given the continuing uncertainty in world markets.

The distribution of excess cash in 2009 is still under review, and the balance between dividends, interest on capital, share buybacks, and the possible retirement of inefficient debt has not been determined at this stage.

So far, through the end of September 2008, we have distributed to shareholders [BRL616] million by way of share buyback and BRL2.05 billion in dividends and interest on capital. We also paid a further [BRL814] million of dividends and interest on capital, beginning on October the 13th.

In the light of recent announcements in Brazil, I would like to take this opportunity to make it very clear that AmBev has a clear and conservative financial risk management policy in place, and that this policy does not allow us to enter into any speculative or exotic derivative contracts.

I can also confirm that in terms of commodities, we have already covered our estimated exposure to the price of hedgeable commodities, mainly sugar, aluminum, and barley for the full year of 2009.

We have also covered our estimated US dollar exposure for both hedgeable and non-hedgeable commodities for 2009. The average rate for our 2009 hedges in Brazil is BRL1.88 to $1, compared to an average rate of BRL2.00 in 2008.

In closing, AmBev once again reported EBITDA growth in the third quarter, with good performances in Brazil, and another very strong performance by Quinsa. We have robust business plans in place for the summer season, addressing volume and market share growth, and we'll be leaning heavily on our strong executional capabilities and the qualities about people. I'll now hand back to Maureen, and open up for questions.

(Operator Instructions) The first question is from Robert Ford, Merrill Lynch. Go ahead, sir.

Hi, thank you. Good morning, everybody. Graham, I'm aware that you don't want to address dividends and buybacks, but as you look at your debt amortizations going forward, you've got a very admirable balance sheet, but you have BRL4 billion in short-term debt, right, BRL2 billion in cash before the payment of this last dividend.

And I was curious as to what your plans are for your short-term debt and with respect to the remaining cash on the balance sheet, I was wondering if -- how much, if any of it, is pledged as collateral, or is it all unencumbered, so you have a little bit more flexibility.

Thank you, Bob. These are difficult and unusual times, and therefore, it may sound unusual that we haven't made any final decisions on how to distribute our cash in 2009.

We would obviously love to continue with a mixture of share buybacks and dividends, and as you say, we do have BRL4 billion of debt that is due during the course of 2009, which under normal circumstances, one should be able to replace that with other short-term -- other debt as well.

But at this point in time we haven't made any decision. We do want to retain all the flexibility we can, let these markets settle down a little bit longer. Another month could make a huge difference to the status of the credit markets, money could free up again, and sensible prices, or alternatively they could [tie], no one knows.

So that's why we are fortunate to have good strong cash flow and want to -- as I say, hold on to slightly more cash in the near future. And when I say the near future, as the next two or three months unfold, it should become a lot clearer.

Some of the cash balances are, as you said, in pledge. I can't give you the precise number here, but there are obviously some balances that are under-bidding our derivative positions. But I think going forward, we will be holding something between BRL800 million and BRL1 billion in cash balances as a normal ongoing level of cash. Obviously at certain points in time that will build up as we come up to a dividend payment, but the underlying balance will be between BRL800 million and BRL1 billion, I would say.

In general terms, can you say that your collateral is below $250 million?

No, it's a little bit higher than that. It's more like $400 million-$500 million.

Okay, and can you give us some sense of where you put on your sugar and barley hedges please?

When or where? At what prices?

Yes, prices.

I don't want to go into commodity prices at this stage. I think it's a little bit early in the year to do that. I think we just have to wait and we'll probably talk a little bit more of that -- about that early in the new year. So let's not give too much away to our competitors at this stage of the game.

Fair enough. Thank you very much.

Thank you.

The next question is from Lore Serra, Morgan Stanley. Go ahead please.

Yes, good morning. I wanted to ask a question on Brazil Beer. You were successful, which is great, in terms of gaining back your market share, but I guess it came at the expense of some pricing action.

So can you just comment a bit on how you see the competitive dynamics into the market? I assume the yearend may be challenging, I don't know that for a fact given what's going on in the economy.

And this morning in the InBev call, Brito mentioned that you'll pass on whatever excise tax increase that would get passed. Can you talk about what gives you confidence on the 2009 pricing outlook, when the 2008 pricing environment has been a little bit touch and go?

Hi, Lore, this is Luiz. Well, with regards to the competitive scenario, what we've seen so far is of course we maintain our discipline in terms of our pricing. So at the beginning of the year, we've passed the inflation into our prices for both the on- and off-trade, and returnables, and non-returnables.

Usually, as you're used to, our competitors follow-up prices in 45 to 60 [base], not necessarily 100% -- not necessarily with exactly the same strategy. But I believe given the positive scenario that we had in the past, our market is still growing, and of course opening the gap -- the price gap against those who would benefit volume growth.

And our competitors are pursuing more market share strategies than necessarily really trying to deliver better results year-on-year. What happened is basically our competitors gave a price, and opened the gap against us. We tried to maintain the gap with our brands -- reinforcing investments in our brands, reinforcing our trade programs, but at a certain point, you don't resist and the gap is too much for the brands to resist.

I am very pleased that the brands resisted this far, and year-to-date, we are able to maintain the share. But of course, the results that we had in July kind of put a red line here -- a red light on us. And we decided that it was time to react and to demonstrate that we will not give up our share in the market, our participation in the market, just because in the short-term we will be under pressure in our profitability, or in our pricing strategy.

So we put in place several initiatives both for the topline and the bottomline. So we've been trying to capture as much as we can. Now, I would say the moment is more in our favor, since demand is constraining, I think it would be easier to negotiate with our suppliers and implement some of the initiatives -- the cost-related initiatives going forward.

But also in the top-line, we continue to implement programs in the market and accelerating some of the things that were planned to do ahead of us, but also we had to close the gap in the off-trade. The off-trade is something that is more price sensitive than other channels, since distribution skills and execution is -- doesn't make that much difference as it does in the on-trade segment.

So we had to give up some of the price that we put at the beginning of the year, and of course on top of that we had launched at end of last year, beginning of this year, some price pack initiatives. So we had to roll out of our 18-, 24-pack, can pack, as our competitors launched same kind of an innovation. That is not something that you really can maintain for a long time; if you're successful, it's not that difficult to copy. They not only launched the innovation, but they brought prices down.

And when we introduced the packs in the market, what we did is we managed in a way that we could increase prices and maintain share. It was not a share strategy. What they did was exactly the opposite, they launched at a lower price than they had in the regular pack.

So that put a lot of pressure on us and we had to react. I think this is the main reason for that and of course the volume of the market, the market growth didn't help us this year, but of course didn't help anyone this year. So we are suffering both in share and market growing below our expectations.

We have several big initiatives in place, so we're rolling out the Brahma Fresh in other north and northeastern regions, very successful in that market, above 4% in most of the states now. If you look at Brazil, it's 0.7% share in a brand that we launched only one year ago. The [liter] is being rolled out into all southeast and south regions of Brazil. Of course it takes time until it becomes relevant, but it's being implemented everywhere in the key ranges.

But the scenario remains tough. I'm very happy to have the 3% growth on the net revenues per hectoliter when I compare to what happened with my competitors. You probably have seen that both Schincariol and FEMSA announced results, so year-to-date they say that they haven't increased net revenues per hectoliter compared to last year. And we did 3% in the quarter and 4.5% year-to-date.

So I think we are in better shape to face what is ahead of us, but I can guarantee you that we have even stronger market plans, investments in our brands, very, very efficient to be put in place, and of course our innovations pipeline is very strong and will be implemented short and long term.

So we will defend the health of our brands, our share in the market, but we try to keep the price discipline as long as we can. I hope going forward our competitors will be more rational given the pressure that we're having in cost.

I'm not sure if they have the same hedging policies as we have. We suffered from that in the past, because of course dollars have been hedged in the past, but the trend was negative, so we had it at a higher price than the spot market in the country every year.

But we did that to protect our price strategy going forward, and of course for next year, we should be in better shape. At least they would be, in my view, more under pressure than they were this year. That doesn't mean that we increase prices ahead of us, but at least they will be more rational. That's my feeling, ma'am.

Thank you very much.

Welcome.

The next question is from David Belaunde, Barclays Capital. Go ahead, sir.

Yes, good morning. Just a quick question on your price gap, and I'm thinking particularly going into next year, the price gap versus competition obviously could be affected by the change in the tax regime.

And if you look at the current text -- I know it's not finalized, but if you look at the current text of [MP436], it looks as if this is going to be a lot more proportional taxation than ad valorem taxation. So effectively, you will be penalized.

And the question is if you have to choose between increasing your price gaps, versus the competition, to account for a higher taxation for you than for the competition, will you do that, or will you just take a hit on your profit in order to maintain the price gap stable for next year?

Yes, first of all, as I said in my speech we don't expect the government to be too aggressive on that. Of course, they will implement changes, it is early to say exactly how the changes will impact and how much they will impact.

Again they will impact beer and soft drinks in different ways. We are not the price leaders in soft drinks; we are in beer. We will always defend our profitability, but we always defend the long term of the Company. So price is something that we will manage short and long term as we did this year.

We [tried] hard to pass prices to customers. We wouldn't have been able to keep the prices that we implemented as our competitors have followed us. I don't expect that the changes in ITI to be more relevant than inflation for example, and more relevant than the price pressures, for example.

So yes, you're right, but you have to consider other factors. And on top of that, as we believe the government will not only maintain the discipline in pursuing competitors not paying taxes, I think they will also implement more initiatives to reinforce the system.

When you compare what you should pay with what is really paid, that doesn't mean that increasing our excise more than our competitors means that proportionally we'll pay much more, because if you can make them pay, then it's much better.

I would accept very well an increase in my tax if we had a 100% fair playing field in terms of taxes in Brazil. So we still have competitors not paying taxes, and we hope the government will implement more -- even more initiatives and stronger initiatives to stop it.

So there are pros and cons both in the beer and soft drinks side, but it's still [wait]; we'll try to maintain the discipline, we will maintain the discipline. Of course, we expect not to have a significant impact in the ITI next year. We believe government will be rational with that. It's not the time to implement things that will impact consumers negatively.

So we're still waiting, but we're prepared with not only the price strategy, but also with initiatives. If we have to implement behind brands and behind-trade programs to compensate for that, we'll be ready.

Okay, thank you. And just one question on the dividends. It looks as if you're on target to distribute in dividends and IOC about 100% of net income, thereabouts for the year. Is that something we could use as an indication for the full year, or the position is very open for the fourth quarter?

I think you answered it -- hello, David, I think you answered the question yourself. We haven't made that final decision yet. We need to take a look at our final taxable position, because IOC is something that is impacted by our tax position. We wanted to take a look at the final numbers, once we have quantified all the translation gains and losses, et cetera.

So it's work-in-progress for the balance of this year, so stay tuned.

Okay, thanks.

The next question is from Lauren Torres, HSBC. Go ahead, ma'am.

Hi, everyone. I was hoping you could talk a bit more about the current consumer environment in Brazil. Obviously you mentioned pressure at the consumer level due to food inflation. I was just hoping if you could give a sense over the last few months, have these pressures become tougher for you. And also more specific to your beer division, have you changed -- seen a change in trends, be it trading out of premium brands, [shifting] in channels, maybe more on-premise versus off-premise or vice versa? What do you think there?

Yes. Overall consumer behavior I would say it's different in different industries, so as I mentioned, if you go back two or three years in Brazil, you would see some of the durables growing very, very fast.

Car industry, metals, and construction -- everything growing very fast, much ahead of us, given all the credit -- and the new credit subsidies that were put in place in Brazil. So these industries probably are suffering more in the short-term than we are.

There has been for last few years a shift between durables and non-durables in the country, people taking more credit than before, having less money to consume the non-essentials, let's put it this way.

And what we see now is that these areas where we were growing more in the past are suffering more in the short-term. In our case, the industry performance is more related -- and believe me or not, to weather conditions that we had in the country this year.

So in 10 months, I think seven months out of 10 were worse than last year in terms of rainy and temperature, and of course that impacts a lot of the beer business and not as much in the soft drinks business. That is more related to real income and real prices than beer. So of course, consumers will be impacted at some point, but we believe the beer industry is more resilient. Especially in Brazil, you don't see those big variations, not up, not down.

So difficult to predict, difficult to say exactly what -- how people will change their behaviors, but short term what I can tell you is that I would say in Brazil people are probably less concerned than average when you go to other countries.

But of course they are changing the short term that they are -- the credit taking and of course not committing for long-term investments in fixed assets specifically. So this is one thing.

In terms of the premium that -- as you asked, of course premium brands are suffering more, but it's difficult to say right now how much of the premium is because of temperature because you've got the [Beck's] beer which is one of the premium brands.

As you -- it's a very strong on-trade consumption, and when we have this wet weather we lose some performance, so this year has been the case so far. How much is of course consumption restrictions in terms of purchasing power or how much is an effect of the drink and drive restrictions that were implemented during the year, that if the volume is more related to the on-trade, then people could be compensating more with the off-trade than in the on-trade.

So we are following that very, very closely but it's very, very soon to say that we -- what kind of long-term behaviors will change and how that would affect our business.

And I guess just a follow-up on that whole drinking-driving, and the change that we've seen over the last couple of months, it seems last quarter you didn't think there was a significant impact. Has any of that changed? Is it still manageable to you or are you seeing a lot of less traffic as a result of that?

As I said last time people learn how to deal with that, so I think the behavior is improving in terms of both how to compensate the restrictions, having a friend driving the car, or planning somehow to go by taxi or any of these -- or the trade itself implementing initiatives to drive you back home, or to drive your car and then go back with a motorcycle or anything like that, so there are several initiatives in that sense.

So there was a lot of pressure to educate people at the very beginning, and now I think people are learning and acting accordingly. And we have, let's say, less impact in terms of consumption because people educate themselves and if they want to go out and have beers, they do that in an organized way and also because we are implementing initiatives to compensate for that and to help customers act accordingly.

And of course there is a benefit of that because traffic accidents have come down. So I think that is the right thing to do, as we said, and we are in the right direction.

Okay. Thank you.

The next question is from Celso Sanchez, from Citi. Go ahead, please.

Hi, good morning. You talked, I think a couple of times, a couple of you referenced that you're very committed of course for this year -- of delivering this year's fullyear '08 targets.

But your allocations for profit sharing and bonus are down substantially from last year's. So I'm just wondering was the expectation always for a lower level of achievement, relative to last year, not that you would achieve at a lower incremental level, and therefore bonuses should have been down by that amount, or is the idea that the fourth quarter is critical to achieving that target for the year?

Thanks, Celso. Obviously, AmBev is made up of different business units, and I think you probably know, our bonus plan is geared very much to individual targets within business units, and targets for market share, volume cost, et cetera, et cetera.

And clearly different zones are having a different experience this year. We set aggressive targets and clearly in Brazil we're not doing exactly what we would have liked to have done. We're not hitting the targets we would have liked to achieved. It's clear we would have liked to have had more beer volume growth than 1.1% in the third quarter, for example.

So the provision we have represents how we think the year will finish. It doesn't necessarily mean that it will be a disappointing year in overall results, but it just means we won't be hitting some of those really stretched targets that we've always set for ourselves, and in the future we'll continue to set for ourselves.

It's our philosophy, it's in line with shareholder expectation and we'll continue to set targets that are really demanding. I don't know if Luiz has anything to add to that.

I'll just say that I think that the bonus provisions, it's difficult to go into details for that, but if you take Latin America south, for example, the Quinsa operation, they're doing very well, Canada, very well too, according to the targets.

In Brazil, the soft drinks division is doing well, but the biggest business is the Brazilian beer business, and of course, we are not happy with the results that we achieved. So the industry -- we're expecting the industry to grow more than we are having and we expect our share to grow. We are under pressure with that. And we expect our net revenues per hectoliter to grow ahead of that.

So as I said, the industry is not helping us this year, and on top of that our competitors decide to be more aggressive in price. So this is a kind of a reflection of our decision to maintain our long-term commitment with our market-evolved brands and not just to push the Company too hard to deliver targets in the year and then compromise our future. So I think that that's all you have to read there.

And just a follow-up if I could. I guess the last, because I thought that they would have obviously loved to change in the last several weeks, and probably will change going forward. Can you give us a bit of an update?

We see that weather was quite bad, days of rain again in October, so it doesn't seem to be that trend improving very much recent, Brazil. Can you give us an update of how volumes performed, not just in Brazil actually, but also in Argentina given some of the (inaudible) and things like that, at least this far this quarter?

Yes, Celso, I don't want to get into a forward-looking forecast. I think it's a dangerous thing to do. So -- but we have no comment on that at this stage of the game. But your observations are correct and reinforced by Luiz's comments on Brazil climate in the last nine months or so.

All right. Thank you.

(Operator Instructions) We have a follow-up question from Lore Serra, Morgan Stanley. Go ahead, please.

Yes, I wanted to -- thank you for taking the follow up -- I just wanted to ask a follow-up on the hedging and I don't want to get into the specifics you say but I just want to understand a bit more what exactly that you're hedging.

You mentioned, when you were talking about Canada, that the peak of the barley cycle was in the second quarter, and you felt it in the third quarter, but you're expecting it to get better into the fourth quarter. And if you've locked in most of your supply, I guess I'm surprised that a move in the spot would affect your costs in the fourth quarter versus the third quarter.

And I guess similarly, philosophically, if I think about what you've done for '09 in, let's say in Brazil, you've clearly locked in a much better currency level, versus what you would get now on the spot, but I would presume that you've locked into some of the commodities at higher levels than you would today. So could you help us understand how to reconcile that, at least philosophically?

Complicated subject, Lore, we've talked about this in the past. There's -- we talk in terms of hedging our hedgable commodities. We always talk in terms of aluminum, sugar and barley, which are the main ones here in Brazil.

But in Canada, for example, some of those commodities are not hedgable based on -- grains, for example, in many cases are controlled by the Canadian government in terms of pricing. So we can't always hedge. So when we talk specifically about COGS improving in Canada in the fourth quarter, it's because those contracts are not hedged, and therefore we know what the likely prices will be in the fourth quarter, but we can anticipate some improvement.

In Brazil and up in Quinsa we have different hedging profiles. And so you well know, the whole of 2008 has been locked in Brazil for aluminum, barley, and sugar and it's been locked for 10 months now. So we're very clear on what's going to happen in Q4 in terms of those commodities. And as I've said many times in Brazil, cost of goods will be -- continue to improve as we get towards the end of the year.

Brazil was only 3% cost of goods per hectoliter increase in the quarter, and it's only 5.1% for full nine months, and that's against an inflation now for Brazil which is more like 6.2%-6.3%. So we're very pleased with what's happening in Brazil, and as I've said, because of strong currency and sugar hedges, Q4 will continue to improve.

In terms of our hedges for next year, the same profile. We've now locked for Brazil expected aluminum, sugar, barley and associated dollars. Of course, this is not a science, it's an art.

If we all knew what the prices -- what the volumes are going to be next year, and what the mix is going to be, we could do a perfect hedge. But we always have to use estimates and anticipate those exposures.

And we like to get better and better every year, and we think we are getting better. But it's still, at the end of the day, the best estimate we can come up with.

We've allocated -- we've hedged aluminum in both Canada and Quinsa, so we're covered there as well. And we've taken also some other hedges out in Canada on other products that are hedgeable, smaller items in the context of the big scheme of things that are not very significant.

So -- and I think you also mentioned the dollar. Yes, we hedged at BRL1.88. It was an interesting experience the last couple of months as we were closing out 2009 for the Brazilian business, but the average for next year is BRL1.88, and it will vary considerably.

As you know, a 1-point spot in Brazil was probably BRL1.55-BRL1.56 at some point. So clearly when we were putting in those forward hedges, we were getting very good rates. So the phasing next year will be quite dramatically changing month-to-month as we go through the year. But BRL1.88 is the average for the year.

And yes, we also hedge the commodities at the same time. We check -- we can have a little bit of variation between when we hedge the commodity, and when we hedge the associated currency, but generally speaking, we hedge them at the same time.

So we lock into better currency rates, but of course you lock into a higher commodity rate. Looking forward into 2009, commodities certainly are going to be under a lot of pressure. We expect to see them easing a great deal. I'm sure that's positive news for the industry.

And I think a general comment on COGS for next year -- very difficult to predict because the world is -- still is changing, but I think we had so many discussions about commodities and costs in '08 versus '07 -- it was a big issue for ourselves, and obviously for investors -- I think as we look forward to 2009, it's certainly going to be a less impactful year in terms of commodities based on what we see at the moment. And we all know what can happen in two months. But based on what we're seeing at the moment, 2009 should be a less impactful year for COGS than 2008.

Just one other point, we were talking about commodities, I think it was -- Bob Ford asked the question about restricted cash. I think I gave a number of half -- BRL450 million to BRL500 million for our restricted cash.

I was actually thinking at that point about cash that we'd also got on deposit, in terms of our legal deposits that we have to place security against losses, et cetera, and tax factors here in Brazil. So I was including about BRL450 million of legal deposits in that, which actually are not cash. They're held on our balance sheet as an asset.

So just to restate what Bob was asking me, I think probably we're looking more like BRL150 million of cash allocated to our derivatives trading, and the rest is excess cash that we use within the business, working capital, et cetera. So I just wanted to clarify that before we end the call.

Thank you.

Okay.

The next question is Jose Yordan, Deutsche Bank. Go ahead please.

Hi, I had a good question for Joao. The way your volumes have been increasing in Argentina, it's a matter of time, a relatively short time probably, that you're going to run out of capacity in Argentina.

And I was just wondering whether -- what do you do about this? Do you keep on increasing prices as you have been, or do you have the chance potentially to buy some assets such as the Isenbeck plant that has been for sale for years?

Is that a possibility to buy that plant, without buying the brands, which presumably you would not be allowed to buy? But in general, how do you expect to solve the capacity versus pricing problem in 2009?

Hi, Jose. Well, basically for this summer season, for example, we still have the contract of -- contract brewing that we had when we sold the [Luja] plant.

Okay, we had this contract for last summer season, and we have renewed it for this summer season predicting that we would have a good summer. So we are okay for the summer season. And when you look at the next summer season, then -- everything will depend how strong the market continues to be.

And of course, the maintenance of a much higher market share than we have for last year, where we were like 3 points above what we were. So I think for next year, I think it will be a combination of again, trying to renew this contract packing which will not be a problem.

There is not a lot of other options. There is the Luja plant. I don't think the reason that plant is -- it's open for that sort of situation. But we have been able -- I think what's interesting is that we have been able in the last couple of years, with very little investment, to increase our capacity a lot.

And I think we still have a few tweaks here and there to not having to overspend in CapEx and continue to sustain an important growth going forward.

So the combination of this contract packing agreement that we have, as well with minor investments, or the minimum level possible for CapEx, will allow us to continue to grow at the mid-type of growth, not double-digit growth, but mid-singles type of growth for next year.

Without having to use the price level -- to be quite honest, what you see in terms of price, of course the price level is always something that you can try to use to regulate, I think our strategy that you've known for years, is the same one that we have used here.

We've been growing prices inline, when inflation is sometimes likely to be low, given the ramp-up of inflation. And I think that's been the right strategy, because given the cost efficiency that we have, the approach we have for [DIC] and ZBB have allowed us to move price pretty much inline, but getting a lot of share and putting pressure on the cost-side of competitors.

So I believe we're going to be able to repeat this strategy going forward, without necessarily needing to over-invest, or to build, let's say, a new plant or anything like that.

Yes, I wasn't suggesting you do contract brewing with Isenbeck, I was just suggesting you buy the plant altogether.

No, no, I don't think they are open for one or the other, that's my view on this. It's always an opportunity, but given the contract that we already have in place, and plus the infrastructure -- the footprint that we have, I feel that we can continue to sustain a mid-singles growth type of situation.

Without needing to buy that, of course, if that plant was for sale, of course we will be -- we would be after that. I don't think that is the case.

All right, thanks a lot.

(Operator Instructions) The next question is from Alan Alanis, JPMorgan. Go ahead please.

Yes, hi. My question has to do with -- in the pace of growth of beer versus soft drinks, sometimes -- I was wondering if you can help us understand better, why is soft drinks growing so much faster than beer?

I know that something has to do with the base of comparison, which in much smaller in soft drinks, but there also seems to be a big discrepancy in terms of the beer -- I'm sorry, in terms of the pricing that you're taking in the two categories.

It seems to be much more aggressive on pricing on beer rather than soft drinks. Which other elements should we consider when trying to understand this -- the different paces of growth in the quarter?

Yes. First, let me explain you how it works. Because in beer, there are three major levers to impact the market. You have the real disposable income, you have real prices to consumers, and then you have weather.

So the weather variances, they are very, very relevant for the beer business, since in Brazil we still have a lot of our market that is on-premise market, and the tradition, the occasions that people use beer is more a non-premise kind of a consumption than the off-premise.

Then when you have such a bad weather as you had in Brazil this year, there is a huge impact over the industry. The second is, in soft drinks we implemented innovations last year, very, very strong and successful innovations basically in the 3.3 liter pack that gave us more ability to play with price positions.

We had the Guara innovation which is big, with a new occasion, a new segment that we call in Brazil -- unfortunately, we still, because of the legislation, we call it CSD, but it's not, it's a flavored water. But it's inside the business and complementary to the business.

We had the great innovation that as the business became more profitable, we could introduce other flavors that we were not competing in the market, and very successful innovation in sales.

So we gained a lot of share this year. So when you look at the 80 basis points that our share, when you compare to a 17% share, that represents a lot in terms of the growth.

So the share gains driven by innovation are the main levers for the share. And then, of course, you have the market that is less impacted by the weather conditions that we're facing this year.

In terms of the pricing, we have different dynamics in terms of the way we implement prices in beer and soft drinks, because of course, in beer we're the leaders, in soft drinks we're the followers.

And as the off-trade is more representative for CSD, price points are kind of a markup of the price that we sell to the trade -- to the off-trade and is a more percentage business.

In beer, when you go to the on-trade, the BRL0.10 multiple in the price that we sell, if you lose control of that and then the price instead of growing BRL0.10, it grows BRL0.20, there is a negative impact in market share. So we prefer to have less price increases in beer than in soft drinks. In soft drinks, if you get Q3, our [NCO] product leader grew 4.9% versus 3.1% in beer, and year-to-date, they are pretty much inline, 4.6% and 4.7%.

But if you look at margins, soft drinks are increasing faster just because in the NCO you have a negative impact of mix shifting towards more of the PET, than in cans, and cans are much more profitable but of course volume is flat, it's not increasing.

So in terms of price, both businesses are pretty much in line. But there's a negative effect in mix for soft drinks that is again compensated by lower costs, and then you have a positive impact in margins.

That was very useful. Thank you.

Welcome.

Your next question is from [Julia Rizzo], at [Howell] Asset Management. Go ahead ma'am.

Hi, good afternoon, thank you for picking up my question. I just would like to -- if you could discuss a little bit more regarding Venezuela, what's going on in that market, the industry volumes, your main competitor?

Yes, several things, some of them our responsibility, some of them more market conditions. So we introduced some initiatives in Venezuela, it didn't work.

We didn't manage the best prices in a good way. Therefore we lost share, a significant loss of share in that country. Of course, the share base is low and any other basis points that you lose, there's a huge impact in your volume.

And so part of it is because we didn't manage our business well in that country. We lost some people there. We had union problems, so we're here implementing several management changes in the country, we did at the second Q to recover. But on top of that, you have a country that is struggling to fix its own problems, restrictions, and initiatives.

It's very difficult to say what will be the scenario going forward, since you have all this oil (technical difficulty) and the currency's variation. So you still have lots of controls in terms of the currency in the market.

So it's very difficult to say what will happen. But I would say that there is such a bad year like we have in Venezuela, couldn't be worse going forward. So with everything that we did there, including price increases, closing some gaps that we had, and our competitors continue to push prices ahead, can help us in the future.

So I think now we're in much better shape, and in going forward, you should see -- not necessarily in the fourth Q, but next year you should see results improving again.

Do you know when would you consider to step out or issue [whatever] thinking in this option?

Well, I'm -- you're asking myself, Luiz, right?

Yes.

Yes, I think all of us will stay in place until --

Actually I was asking regarding leave Venezuela -- step out the country.

Oh, I thought here you were asking about --

No, not you.

Well, we're not discussing leaving Venezuela. We want to succeed in the country. We've been there for a long time now.

We have a strategy in place in the country. It's the highest beer consumption -- per capita consumption that we have in the region. It is a profitable market, and of course, it's not -- sometimes it's (inaudible) because everything that you know from the way the country is operated. But we are committed to that market. We believe we have a good plan going forward.

We had a very bad year. We were improving until last year. So we're not leaving unless we have a very, very good reason for that, and we don't have today.

Okay, thank you very much.

This does conclude the question-and-answer session for today. I would like to turn the floor back to Mr. Graham Staley for final remarks.

Thank you everyone again for your interest and attention this morning, and I look forward to talking to you again in the new year, when we will be discussing our final results for 2008. Thank you very much. Bye-bye.