Ambev SA (ABEV) 2010 Q1 法說會逐字稿

Good afternoon. And thank you for waiting. We would like to welcome everyone to AMBEV's First Quarter 2010 Results Conference Call. Today with us, we have Mr. Joao Castro Neves, CEO for AMBEV, and Mr. Nelson Jamel, CFO and Investor Relations Officer.

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. Nelson Jamel, CFO and Investor Relations Officer. Mr. Jamel, you may begin your conference.

Okay. Thank you, Maria. And good morning, everyone. I'm pleased to be with you today to discuss our 2010 first quarter results. Before I start, I would just like to remind you that as usual the percentage change discussed during this call are both organic and normalized in nature. Normalized figures refer to performance measures before special items. Special items are either income or expenses, which do not occur regularly as part of the normal activities of the Company. And as normalized figures are non-GAAP measures, we disclose our consolidated net income, EPS, EBIT, and EBITDA on a fully reported basis in our earnings release.

I will start the call by sharing a brief overview of the quarter. And then Joao will provide with an overview of our results in Brazil, HILA-Ex, Quinsa, and Canada. I'll close by providing more specifics regarding the first quarter financials.

Turning to the results, during the first quarter, our consolidated EBITDA was close to BRL2.8 billion, which represents a 15.3% organic increase when compared to the first quarter of 2009, while our margins contracted 40 basis points to 45.8%. Our Brazil EBITDA increased by 17.8% in the quarter, supported by a 14.1% volume growth and by a 5.2% revenue-per-hectoliter growth with EBITDA margin decreasing by 90 basis points to 50.2%, driven by higher SG&A, mainly due to market investments to support our brands and our innovations as well as by higher cost of goods sold in the period. Joao will provide you more details of the key drivers in a few minutes.

In HILA-Ex, we delivered a negative EBITDA of BRL22.8 million in the quarter and registered an organic growth of BRL4.5 million versus last year as a result of improvements in our top line and also the industry recovery in most countries where we operate.

Our Quinsa operations have once again delivered strong results with EBITDA growing 14% during the quarter, thanks to revenue management and cost saving initiatives despite volume contraction in the region and higher market expense.

In Canada, domestic volumes increased by 2.3% in the quarter, while our EBITDA declined by 3% with margins declining 140 basis points. Normalized net income reached BRL1.7 billion in the quarter, which was 25.2% higher than last year. Normalized earnings per share increased by 24.7% in the quarter. I'll comment further on net income at the end of this call. Now I will hand it over to Joao as we start to look a little deeper into the results of each of our operations. Joao?

Thank you, Nelson. And good morning, everyone. Let me start by discussing our consolidated performance for the quarter. During the first quarter, our normalized consolidated EBITDA totaled BRL2.8 billion, representing 15.3% organic increase. Industry performance across most markets in which we operate improved from the last quarter trends, except for Argentina and Chile. And consolidated volumes delivered really solid growth of 9% in the period, mainly driven once again by our Brazilian operation.

Going deeper into Brazil, the positive macroeconomic environment continues to support the good performance of the industry. And our focus and innovation and brand equity continue to deliver very good results in terms of market share. Our normalized Brazil EBITDA for the first quarter increased organically by 17.8%, driven by strong top-line growth with somewhat lower margins, mainly due to higher market investments prior to the world cup and also some higher variable costs.

Specifically regarding Beer Brazil, the positive trend in the market continues as a result of two main factors from the external side. The first is a better-than-expected macroeconomic scenario, which has disposable income and impairment levels somewhat better than last quarter last year. The second factor is weather, which despite larger amounts of rain in the quarter, which certainly didn't help, it was somewhat hotter than the first quarter of 2009.

We have taken advantage of this improved macroeconomic scenario, weather, and we continue to invest behind our brands and behind all the innovations that we introduce in the marketplace, which led our market share to an average in the quarter of 69.3%, which is 220 basis points higher than last year. As a result of the combination between market share and industry growth, our Brazil beer volumes grew by 15.9%, almost 16% in the quarter, also benefiting somewhat from early Easter versus 2009.

Talking about some of the innovations, Antarctica Subzero rollout to other states in Brazil, including Rio de Janeiro continues delivering important results along with the rollout of the 1-liter bottle to some additional regions in Brazil, which we were not present last year. In addition, we expect to throughout also other innovations continuing on the path of liquid and packaging. And one example is the 5-liter keg for Skol, which could continue to be an important contributor to our results this year.

In terms of net revenues per hectoliter for beer, it increased 4.8% as a result of price increases done last year before the summer season. Our price increases during the period were slightly offset by a packaging mix and a higher tax on sale while excise tax remained flat versus 2009.

Now talking about COGS, Brazil beer COGS per hectoliter was up 4.7% in the quarter, as we were negatively impacted by higher packaging costs and currency hedges. We were negatively impacted by the shortage -- also by the shortage of cans for CSD and beer in Brazil and therefore are paying more for the imported aluminum cans due to the local suppliers' lack of capacity, which could be the case for the remainder of the year if volumes grow. And if that happens, we could adversely be impact on our average cost in 2010 depending again on the volume growth.

Beer SG&A grew by 23.8% in the period as a result of volume growth, general inflation, incremental investments to support our innovations, the phasing of expenses prior to the World Cup, and somewhat new, the higher logistic costs as a result of changing the sales mix more towards the north and the northeast of Brazil. Normalized beer EBITDA finished the quarter with strong 20.1% growth versus last year EBITDA, declining by 60 basis points.

Our CSD and NANC business in Brazil performed broadly in line with our expectation, delivering a 9% volume growth in the quarter as a result of again improved macroeconomic and industry condition and slightly impacted by a negative 40 basis points declining in share. We're now at 17.7% in average for the quarter.

Our net revenues per hectoliter in CSD grew 3.5% organically in the quarter as we continued to be impacted by price increases from last year and partly offset by the higher state taxes. Costs per hectoliter increased organically by 9.3% as a result of our currency and sugar hedges, partially offset by means of productivity initiatives and lower price for the non-hedged commodities, such as corn.

SG&A, excluding depreciation and amortization, increased by 13.5% in the period as a result of general inflation, volume growth, market investment, and also logistic costs, like in beer. Our EBITDA continued to grow, increasing by 5.9%, reaching BRL300 million in the quarter with a margin contraction of 290 basis points.

Turning now to HILA-Ex, volumes increased by 7.4% in the period as a result of good performance, mainly in Peru and Dominican Republic, and also better industry growth in most of the countries where we operate. We're improving volumes in the Dominican Republic and in Peru mainly due to our focus on brand initiatives and production efficiencies.

HILA-Ex EBITDA improved by BRL4.5 million, as Jamel said, as our teams in HILA-Ex continue to make important progress towards our long-term growth in each country across the region.

Moving now to Quinsa, to Latin America and south operation, we reached the 14% EBITDA growth in the quarter, despite the industry contraction observed mainly in Argentina. Our track record in terms of EBITDA growth was reinforced as we achieved consecutive quarters with double-digit growth for over three years. Even though our volumes still suffered the impact of 2009 economic slowdown, we are optimistic as some of our operations are already back to the growth in terms of volume.

We overcame the tough context with revenue management initiatives, cost discipline and strong support through our main brands. In Argentina, we reinforced the Quilmes brand leadership with strong innovative campaigns. The new thermo sensitive label, our campaign to celebrate 120 years for the brand, and the World Cup sponsorship campaign are a few examples of the focus and innovation we're putting in our brand in Argentina. We're also supporting our local brewers in the region, such as Pilsen in Paraguay, Pacena in Bolivia, and [Pilsen] in Uruguay. The good thing is that the World Cup also involves important campaigns in Paraguay and Uruguay to support our flagship brands.

This quarter, our volumes were down 3.5% with Argentina soft drink operations suffering most of the volume decline. We suffered a market share loss in soft drinks business as a result of drinks and management initiatives aiming at maximizing our profitability. We have launched a 3-liter bottle and implemented other actions aiming at reverting the recent share losses.

Net revenues per hectoliter grew organically both in beer and soft drinks as a result of price increases introduced in line with inflation and focused initiatives in terms of trade spend and revenue management. We are also successfully exploring the premium moment in the last region, in the Latin American south region. Still onto our market share, in preference are at record levels since they were launched. In Argentina, it became the absolute leader among premiums, over performing its direct competitor once again this quarter. Local premium brands, such as [wine] in Bolivia and [Sebertan] in Uruguay are also growing above average, improving our margins and helping to develop the category.

Our efforts to reduce costs and expenses compensate the negative impact of higher labor and transportation costs. We benefited from the effective hedges in aluminum and currencies while suffering increases in soft drinks concentrate as a result of higher sales and sugar. In addition, we are already achieving important synergies in Bolivia with the Pepsi bottling acquisition, higher SG&A as a result of strong investment in our brands with clear objective of sustaining our brand health.

Turning to Canada, Labatt's first quarter was characterized by three features. One, a strengthening economy and Winter Olympics combined to lift beer industry volumes. Two, continued industry competition pressured top-line growth. Three, Labatt's hedging and productivity programs led to a reduction in variable costs base versus prior year.

The sectors combined for a first quarter EBITDA decline of 3% versus the prior year. Volume improved by 6.2% versus first quarter 2009. Domestic volumes were boosted 2.3% on the back of industry growth and export volume increase over 30% driven by a sharp comparison in first quarter 2009.

The result in a sizable mix -- this, of course, resulted in a sizable mix shift between domestic and export volume, which explained over half of Canada's year-over-year decline of 4.6% in net revenues per hectoliter. The remainder of first quarter net revenue per hectoliter decline is the outcome of two factors, first, a strong promotional offering in British Columbia during the Winter Olympics to compete against competitive sponsorship rights and secondly, carry forward of the aggressive fourth quarter pricing environment in Central Canada.

Canada market declined by 0.9 percentage points in the quarter, as share gains in March were not enough to offset the declines experienced in January and February. The January and February share declines were fueled by the same factors that impact net revenue per hectoliter as Labatt saw a balanced response to the competitive environment. Entering March, we made a number of adjustments, which put us in a better position to address both net revenues per hectoliter and market share gaps open in the quarter.

COGS of hectoliters declined by 5.5% in the first quarter as a result of decreased material pricing and improved efficiency throughout our supply chain. As an example, the Canadian breweries consume 8% less water and energy per hectoliter than last year and improved productivity by a similar margin.

At the end of March, we announced the closure of Lakeport Brewery in Hamilton, Ontario. This was a necessary step to address excess production capacity in central Canada and ensure the Company is structured to compete most effectively in the Canadian marketplace. It resulted in a one-time close provision of BRL46.1 million. Following this move, Labatt has now six brewers across Canada, two in the west, two in central Canada, and two in the east.

SG&A, excluding depreciation, increased by 3.6% in the first quarter of 2010 as an improvement in the distribution efficiencies were offset by incremental commercial expenses in the quarter. The second quarter we will again see additional commercial investments versus prior year as the Canadian team launches some exciting initiatives at the start of the busy summer selling season as opposed to midway through, as was the case in 2009.

Now going back to the overall AMBEV business, I want to wrap up by saying that we are confident to be in the right direction. We started 2010 with a great first quarter based on our cost connect win approach. And we will make again innovation and productivity our priority this year to continue delivering sustainable and profitable EBITDA growth. For the balance of the year, we expect to take advantage of the improving macroeconomic scenario for most of the countries where we operate.

But we are desperate to have in the second quarter and to the certain extent in the third quarter more challenging comparisons for variable cost as a result of higher sugar and packaging costs, including the potential impact of imported cans and currency [rates] as well as for market investment phasing due to the World Cup.

Finally, I would like to say in confidence and we'll succeed in our plans, thanks to the quality of our people, who is the major asset of our company. Now I'd like to go back to Nelson.

Thank you, Joao. In this final section, I would like to guide you through the main items between the normalized EBIT of BRL2.5 billion and net income of BRL1.65 billion, as disclosed on page three of our release. Our net financial expense reached BRL186 million, which is 42.6% lower than last year. This explained by lower net interest expense are the results of our lower debt and interest rates, which were offset by loss on derivative instruments, which relates to the results of our ongoing hedging activities and loss related to currency effects over trade payables, mainly Venezuela and Argentina.

Our effective tax rate in the period was 25.4% compared to 23.9% last year. The main reasons for this increase are the lower income without taxation, higher deferred tax liabilities, plus a higher EBT, which is taxable at full rate. Our operating cash flow generation in the first quarter reached BRL2.4 billion, which is around 26% better than the first quarter of '09. And we were able to achieve all that while growing our profitability and advancing our brands, as evidenced by our market share and brand health indicators in our markets.

Our net debt decreased to BRL1.7 billion at the end of March, compared to BRL3.2 billion at the end of December '09, driven by cash and equivalents increase. However, we paid BRL1 billion in dividends and interest on capital on April 1st. Therefore, this cash settlement is not reflected yet in this payment.

Finally, we'll continue to pursue opportunities to improve our cash flow generation while investing to increase capacity and meet demands. I'll now hand back to the operator and open up for questions. Maria, please?

We will now begin the question and answer session. (Operator Instructions) Our first question is from Bob Ford, Merrill Lynch. Please go ahead, sir.

Thank you. And good day, everybody. I had a question -- it wasn't really economic. But it's been about ten years since the last time you guys decided to split the stock. And I know it's not fundamental or economic. But it does have an impact in terms of market making. It does have an impact in terms of retail. And as you consider that, what might influence or delay the decision to split? Thank you.

Hi, Bob. It's Nelson here. We, I mean, usually look into this possibility of a stock split as we did it in the past. I mean, always trying to adjust -- I mean, what we have always learned is that if the share price is out -- is way above a certain range, it's hard to compromise the liquidity, be it the ADR or be it the shares in Brazil. We always consider the possibility of a stock split. Today, it's not something that we are looking at deeply. But eventually, it could happen, but nothing that we could anticipate at this stage.

And the other thing I wanted to just follow-up on is my understanding is that [Sucoby] -- well, my perception, is that Sucoby's having an impact in terms of some of the prices upon the industry. What's the likelihood that you see Sucoby system being used somewhat for soft drinks? I know it's a little bit expensive. But it seems as if the industry's moving in that direction.

Yes, hi, Bob. This is Joao. I mean, definitely, Sucoby is already having, to be quite honest, an impact also on soft drinks industry. Okay? We have about 170 companies that are considered medium to small soft drinks companies that are in an association. That association has already said that they will -- want and will comply to the Sucoby. Maybe around 20% of their associates have already entered the Sucoby system. And more are going to join.

Therefore, I think we're actually already seeing an impact on a lot of the small players in soft drinks. And I think this will continue to be the case going forward, as they have announced that we will try to adjust as soon as possible. So there is already a timeline. Given that you have many more players than you have in the beer industry that will take a little bit more time. They've been asking for some delays. They've been asking for a few changes. But they are definitely going to join. And again, the impact -- we already see the impact in their pricing strategy.

Great. Thank you very much.

Yes.

The next question is from Lore Serra, Morgan Stanley. Please go ahead.

Good morning and congratulations on a really strong quarter. I guess I wanted to ask a couple questions in Brazil beer. The first is that your pricing did look real solid in the quarter. And I know you mentioned some issues in terms of mix in the past. And I'm wondering if you're seeing -- I don't know the switch to 1-liter start to level off. I wonder if you could comment a little bit about what you're expecting in terms of state excise taxes as we progress throughout the year. So that's one question to just get a better outlook for your pricing in Brazil throughout the rest of 2010.

And the second is -- not withstanding some amazing revenue growth you had in the quarter, your margins were down again. And obviously, it's the SG&A. And I know there've been a lot of one-off factors, the bonuses last year, some of the timing of marketing investments. But assuming you have a positive or continued positive momentum top line, at some point, should we expect to see your EBITDA margin grow? I mean, why shouldn't you start to see positive operating leverage as we progress throughout 2010, please?

Okay. Hi, Lore. Well, I think just to -- as an overview, talking about the Brazil beer strength that we talked about just now, we're really very excited with the result, excited and probably think we -- a lot of things that we've done in the last few years are coming to fruition. I mean, everything worked in our favor for this quarter -- market share, industry growth, as well as pricing.

And tackling straight the pricing question, pricing to be quite honest, there are two components. I mean, one is a lot of things have not changed regarding to last year. We said during the last year that actually the main impact on the pricing were taxes, around 75% of the impact of the price issues that we had, and maybe 25% were the mix effect. What happens now is that state taxes continue to evolve exactly as they've been evolving for the past four or five years. They usually go up in line or slightly above inflation.

Federal tax is what makes a huge difference. We have a federal tax increase of 15% last year and a 5% decline for competitors, including FEMSA, Itaipava, (inaudible), those guys. And now we have so far zero federal tax increase. So the mix effect that you actually see this year is not very different from what you saw last year. Of course, the liter, it's not growing every, let's say, every month in terms of the mix effect.

It is leveling off a little bit. But you still have the same sort of impact than you had before because you're comparing the first quarter with the first quarter last year, where we had very little liter. So the impact, let's say, for the third and fourth quarter, in terms of mix, is pretty much the same as you have in the first quarter.

So therefore, it just reinforces what we were saying last year is that we were putting prices in line with inflation, price to consumer. But taxes were taking a major toll. What happens now is mix continues to take a small effect. But with tax increases of federal are not there. That's why you see a much more solid growth, which we're used to see 2005, '06, '07, and '08, where there were no federal tax increase. And you did not see 2009 because there was a federal tax increase.

So going forward, as we progress, the mix effect should continue to be small and maybe could diminish a little bit. The state tax will continue to have the same effect. I think the big question mark will be federal taxes, right? So we mentioned last quarter that we're talking to the government for the reasons why we should not need to have a federal tax increase from our standpoint because we think we're investing a lot. The volume is growing. So they can actually have a bigger tax collection without needing to increase the tax. And the counterpart, somewhat to that is that we are investing between BRL1.5 billion and BRL2 million. And that would also generate jobs and also generate other taxes because there are also taxes on investment.

They have not given any final answer to that. It looks like first, of course, and second quarter it will not be there. But it could be decided for the second half. I think the good thing is that we went as an industry, as a whole industry, to talk to the government, which makes a difference. So it was the first time that we were able to gather the whole industry to go with that request because we think it's a win-win.

It will depend on a lot of things. We will continue to preach what we just said. If nothing happens, then you should continue to see the same trend in terms of price. If it happens, it will depend on the sort of tax increase that the federal government could put there. So that's the pricing outlook let's say from a tax perspective and from a mix perspective.

I think the final part of the equation on price is competitive response. So we've seen most competitors actually following us with the usual time lag, maybe a little bit less, with the exception of FEMSA. FEMSA has not really followed the industry price increase for whatever reason, whatever they did last year. So that's the lagging piece. So it will -- we will see where we go with that. So I would say that's a good momentum for pricing competitive wise because we've all seen a much better share position and preference position.

Going to your last question in terms of the margin, we continue, Lore, to believe on this sort of an SG&A growth related to the equation that we've talked about in the last few years, which is that our SG&A should first move up in line with inflation, let's say, 4.5% to 5%. Then the volume -- of course, when volumes grow by 10%, this is probably an additional 3 to 4 points to your SG&A. So that would take us to 8% or 9%, which is a reasonable number if we have that sort of volume growth.

What's happened in the short term that should not continue to happen in the longer term or for the year is that we are making all those investments and a good majority being the north-northeast, which should decrease the important impact of the logistics cost that we had in the first quarter. So that should diminish somewhat in the second and the third and even during the fourth because then most of our new openings of plants will be in place. So that should diminish that.

Regarding marketing expense, of course, there's the phasing of the World Cup for the first and the second quarter, which would not be there in the third and fourth. So that combination should help us to find some additional leverage, operating leverage from the top line to the bottom line. I think the only new from the equation is that what we said all along last year and continue to say is that we will invest behind good ideas. I think we found good ideas last year.

We continue to find good ideas. And if we need -- if we find that they are working, we will continue to invest behind them, okay, because that's what I think will guarantee the future and guarantee the health of our brands, which in the end, that's what drives the whole equation of the P&L. Okay? That's pretty much where we are in that front.

Great. Thank you so much.

Yes.

The next question is from Alan Alanis, JPMorgan. Please go ahead.

Yes, thank you. Good morning, everyone. And again, congratulations for an excellent quarter. I have two questions, one of them regarding working capital and the other one regarding Canada. Regarding working capital, I think this is one of the best quarters that we've seen in quite awhile. I mean, you've consistently improved on working capital. And you continued to do so. So I guess the first question is, should we expect further improvements, in terms of working capital for the remaining of the year? And what is driving this type of improvement?

And then the question regarding Canada, if you could explain to us which are the main brands that you're exporting. And if you can give us more color in terms of the pricing dynamics, and I know that there was an easy comp in terms of the exports and in terms of the overall volumes for Canada. But I would like to understand better how those exports will be influencing the volumes of Canada going forward. Thanks.

Hi, Alan. Thanks for your comments and questions. It is Nelson.

Yes.

Well, starting with the working capital, that is something that we have been consistently focusing on for awhile now if you look into the type of results we are getting. We could go back to 2007 and then also 2008 and '09. And now we continue to focus on that. I mean the combination is the whole focus on top-line growth and EBITDA growth. We're always trying to seek opportunity in our working capital management.

I think a couple of things that I think we have been doing right there -- we have been on the payables side giving a bigger focus on the negotiation between terms and price, making sure of course we're not paying more for the longer term but trying to optimize it for supplier is terms (inaudible), for instance, the payment terms. And now it's trying to harmonize then in a way to -- could extract value from the whole negotiation.

There are areas that we still can improve, as you can imagine with the whole incremental complexity that we have been implementing and increasing the supply area with the whole -- I mean, new SKUs and innovation. We said we have opportunity to improve our inventory management since we live in a new world right before -- we used to say we were living in a world of pretty much a type of [package]. Now we have four or five different packages. That even increases the complexity of plants, after plants not only in few plants that were complex now. I mean, the number of plants that are complex today is increasing. So that's why we believe we do have opportunity to improve our overall working capital.

Then of course, when you talk about accounts receivable, it's more a focus on making sure that we collect our money. We put a lot of emphasis on that last year, especially when we're in the beginning of the whole macroeconomic crisis and we're worried about what could happen, especially if there's more board and in terms of their liquidity and possibility of bankruptcy. I think in the end in Brazil, in the domestic market you had less than -- the impact was lower than what we could have anticipated. But anyway, they had to focus much [more] on keep moving, collecting the money, make sure that we are invoicing properly the supermarkets and avoid disputes and so on.

So the final message is, yes, we improved a lot. We don't think the low-handing fruits are there anymore. But we do believe that opportunities to continue improving our working capital is an important source of funds for us. Going back to your second question, I'll turn now to Joao to talk about the Canadian brands.

Yes, thank you, Jamel.

Hi, Alan.

Hey, Joao.

Basically in terms of the brands with the sale to KPS, I mean, basically Labatt, on the Labatt volume is going to KPS. But we also have some exports of [Cokany] in that and some other brands that will go to ABI. That's basically the two sales. And there is a phasing when we -- and basically, Labatt is the big volume there. And there was a phasing effect because of the timing of the sale to KPS. And that's why only in this quarter you see this big jump that should not be the case going forward to the other quarters.

Okay. And are you seeing the pricing environment in Canada stabilizing or improving if I may?

Yes, we think -- again, price in Canada is always an issue. The perception we have now as we entered April and prices were moved up --

Okay.

--the impression we have is that prices are now more stable than they were for the fourth quarter and the beginning of the first quarter. So we do believe that. And I think one way -- one example to that is that we just launched [Bud 4] above the minimum price, which is consistent with that profitable growth objective that we have. And that was for Quebec, Bud 4. Okay? And we also moved prices in the province in April. But it's early to say whether they will stick. But I think those are two right now somewhat positive standpoint.

Okay. Thank you so much. And congratulations again. Bye.

Thank you very much.

The next question is from Luis Miranda, Santander. Please go ahead.

Yes, hi. Good morning and congratulations. My question is regarding carbonated soft drinks in Brazil. I wonder if you could give us an idea of the market dynamic, you mentioned the 9% volume growth with some erosion in market share. I would like to know if this is a trend we could expect or what are the initiatives that you're taking, I mean, we should be expecting a stabilization in the market share.

Sure, Luis. Basically, when you look on a yearly basis, we have been able to somewhat maintain our share in the very -- if you look back three, four, five years, actually gaining somewhat. So we went from 17% then to 17.1%, 17.8%. And that's the average we have maintained. So actually, if we maintain the current level that we have today, we would be pretty much in the same level of last year. So it's much more of a quarter theme, let's say, than an issue. So we should be able this year to either maintain or have a slight growth in the market share. So although we see this 40 bps -- this 40 basis points from 18.1% to 17.7%, we don't see a market share loss for the year. Okay?

I think the issue -- I mean, the dynamics are actually very good. I mean, the growth has been in line to what we expected but is still very aggressive for the first quarter. I mean, 9% is still a solid growth. I think the World Cup will also help us in the short term, not just beer but also soft drink for the second quarter.

The issue that we have more -- and again, especially in the second quarter, is the cost of goods sold. Okay. Cost of goods sold, we have the worst comparison because of the currency hedges, when we look year against year. And that has an important impact on the EBITDA for the year, because the sugar hedges are for the year, but specifically for the second quarter, because a combination of the sugar hedges and the worst moment for the currency hedges.

So I see more of an issue this year for the EBITDA growth than I see for the top line. I think we'll be fine in top line, both in terms of price, given that we have I think two rational players, Coke and us, looking to actually grow the market. So I think we're both working towards that object. And that's helping, both rational in price. And given what we just said regarding the Sucoby question, I think the B brands, which still have a little bit less than 30% in the market place, I see a positive outlook also for top line [necessity]. But again, the issue is on cost of goods sold and therefore its impact on EBITDA growth.

Thank you very much.

Yes.

The next question is from Marcel Moraes, Credit Suisse. Please go ahead.

Good morning, everyone. My first question is also regarding production costs but for the beer division in Brazil. If you could, Joao, say -- I mean, follow the same rationale for production costs, because what we saw in the first quarter was COGS per hectoliter increase of about 4%. But we saw at the same time aluminum prices with prices going down a lot last year and probably hedged. So I thought that for the full year in the beer division in Brazil we would see kind of a decline in the COGS per hectoliter. Could you just comment on that?

Sure. Hi, Marcel. It's Nelson speaking. We got in the beer of COGS. And that is some of the elements, as Joao mentioned, about soft drinks. They also apply to beer. So what we have been saying for awhile is that our expectations for our COGS per hectoliter for the full year will be pretty much in line with inflation. And why's that? Because if from one side we have overall commodities hedging at a better price level, so that's the case for aluminum. That is the case for other commodities. The only commodity that we have hedged for 2010 at a level that was higher than 2009 was sugar. So that's why the situation is more complicated for -- in soft drinks.

But the fact is, if from one side you have a positive impact from our commodities hedges for 2010, on the other side, the average implied FX rate in our COGS for 2010, given the hedge we put in place last year, is around BRL1.99 versus the BRL1.88 we had last year. So an important part of our COGS, not only in soft drinks but also in beer, we had this negative impact of the currency that we -- the currency hedges. So in a nutshell, we have higher currency impact partially offset by commodities. But the currency impact is bigger than the upside from the commodities side in our COGS also for beer.

On the other hand, I think it's important to emphasize that on a quarterly basis everything I'm saying is going to be more or less intense. So for instance, you have -- just to give an example, in Q2, we're going to have the toughest comparison in terms of currency hedges. So on average, as I said, going to be from BRL1.88 to BRL1.99. But in Q2, the increase is going to be higher than the average BRL0.11 that we had for the full year. So Q2 will have a combination of a higher impact of currency hedge.

The logistic cost that Joao mentioned, they're going to be at a higher level, given the type of growth we see today towards the north and northeast, also because of the fact that our plants are not going -- the new plants or the new investments we are making in the course of the year, that we will now optimize our footprint. They will be ready only for Q4. So we're going to see in the course of the year different variables affecting the overall cost in the business.

I think the other points to emphasize is that we already had a little bit of that in Q1. And of course, depending on the volume growth evolution, we could have a higher impact of imported cans in our COGS. So in a way, during last call when we said that costs as a whole in Brazil, right, should be in line with inflation, COGS per hectoliter, we start to see a scenario that depends on the volume growth. The number could be above inflation if we would have an even higher impact of imported cans in our mix.

So I think this will see as we move on, of course, higher volumes or higher than anticipated would mean bottom line and upside of course. But specifically on the COGS per hectoliter, they can put a little bit of a pressure on top of inflation, in terms of our outlook for the balance of the year.

Right. And, Nelson, what is the -- I mean, what is the level in terms of volumes that you think would start pressuring your COGS per hectoliter above inflation? Is it double-digit growth or what kind of volume growth that you're referring to?

Well, Marcel, we don't give any specific guidance on volume. I mean, what we had said, I mean, already for awhile is that we are investing this year to be ready for a volume growth between 10% and 15%. That's what the additional capacity, the investments we are making. So we want to be ready for that. And of course, the higher the volume, then the higher is going to be the impact.

I think it's also important to emphasize that in terms of volumes and specifically talking about Beer Brazil, the 15.9% we had in the first quarter, you have to take into consideration that from one side the industry continues to be strong but also have an easy comp in terms of market share. And since we have been gaining market share in the course of 2009, we entered 2010 at a level that, again, is above the 69%. So that impacted positively the volume growth. Of course, this is going to become tougher and tougher as we go -- as we evolve along the way.

Another element that we -- is always difficult to quantify, but there was an impact of an earlier Easter in 2010. So part of the volumes that we saw last year, the upside (inaudible) that we saw last year in April this year they were presenting in March. So in a way, we had easy comps in market share, had an earlier Easter. So things are going very well in the top line. But you have to factor all these other elements. So we should see that the volume growth for the balance of the year -- of course, we're going to have tougher comps until December.

Right, right. And finally, on soft drinks in Brazil, do you see any need of a price adjustment to compensate for this very strong increase in the COGS per hectoliter going forward -- still in 2010?

Yes, we don't open the details -- this is Joao. We don't open the details of the pricing strategy. I think what I said is the direction -- it's a rational industry that wants to grow the industry profitably. The movements we make, again, we are the runner up. We're not the leader in soft drinks. So any price moves will also depend on the liter. As the liter moves, we may have some more space. But I would say that both companies have moved prices at the end of last year before the summer season. There's no other, I mean, necessarily plans to move away from that.

Okay. Thank you very much. Congratulations on the result.

Thank you very much.

Thank you, Marcel.

The next question is from Celso Sanchez from Citi. Please go ahead.

Hi. Good morning. On the cans issue, I guess a couple of questions, one, if you do have to continue importing cans, is there any reason to believe you wouldn't pass on some of that additional cost through prices or at least for that presentation? That would be the first question.

Okay. Again, Celso, this is a little bit similar to what we saw. Of course, we were importing cans, it will be a positive macro sale, right? We will not being having negative macro on can imports. So we'll have a smaller macro but a positive macro. Therefore, I would not say that we expect -- what I think could be positive is that if you take the last few years, when there is a sort of price fight, it's usually on cans. So if you look at the behavior of cans in the past maybe three, four years, you always have price activity, mostly on cans in the second and third quarter.

Given that no one -- everyone is having problems just by the market with cans, what could be positive is not a price increase but is the lack of a price decline, okay, which is actually positive on comp terms. Okay? That's what I see as a potential positive outlook for can pricing.

Okay. Great. And then another kind of can-related question, of the cans that are -- it sounds like if everyone else is suffering, it's not necessarily just the innovative cans, the thermo graphic ones that turn blue when the can gets cold. Is it any specific type of can? Or does it affect those innovative cans that have done pretty well for you particularly or less?

No, it's also -- yes, it's actually for most presentation. But it does include, for example, one big hit we had was the 269.

Right.

So the 269 is a big hit. I mean, we basically sell what we got.

Yes.

Right? So the lack of cans is across the board because, I mean, for the can makers, there are two issues. I mean, first, what sort of plants and formats that they can produce in those plants because every time they change format, they lose efficiency. And sometimes, they're not even able. And then what do they have outside of Brazil to be able to export to Brazil, because not necessarily also have the same format.

So the short answer is, yes, it makes a difference for all the cans and will also make a difference for some of the innovative cans that we have, sometimes capping the sort of growth that we could have. Okay. That's why we -- in a little bit, we anticipated this. So we were ready to supply the hot summer season and also to supply the good momentum that we have for the last few months with imported cans.

So the good thing I think is that we were prepared for that situation from the extent we could be because, of course, you cannot build a can plant with your supplier overnight. So we were able to actually fill that hole with imported cans. But the impact was somewhat across the board.

Great. Thank you for that. And kind of a follow-up question on how the FX hedging, if I look at the performance of the real a year ago, it seems like the worst part was really kind of in the middle of the first quarter. So I know that you don't always adhere to a strict 12-month policy, that there's some leeway around that. But you've talked about second quarter being an even worse hedge base for you, even though the currency started improving somewhat materially last year in the second quarter.

So, one, I just want to be as precise as possible. Is that definitely the case that the second quarter hedge terms are worse than they were? And then related to that, I know we've talked about this before offline at least -- the benefits of having a much stronger spot currency when you have to buy materials, particularly imported ones for volume growth that's extraordinary, that presumably does mitigate some of that margin pressure, yes?

Yes, you're right, Celso. Two things I'd like to clarify there based on your questions. So in terms of the hedge terms, when I said the second quarter is the tougher for us, it's not because the hedge for Q2 2010 are higher than the level we had in Q1 2010. And you are right. I mean, they are slightly lower. But the problem is if you go Q2 2009 hedge, there was a major appreciation of the real in 2008 in this exact period.

So the decline was even more intense between Q2 '09 and Q1 '09 vis-a-vis what we have between Q2 2010 and Q1 2010. You see what I mean? The gap is bigger, even with a lower level of currency hedge between first -- second quarter and first quarter of 2010. It's more the comparison that is tougher, not the absolute number of the currency.

Okay.

And the second point about what they call the under hedge, right, because every time you hedge on a rolling 12 months based on a certain expectation of volume and purchase of the products, and you're right. I mean, since the volumes are above our expectations, or the amounts that we hedged before, there is an upside, given the current FX rate, I mean, around [BRL1.73], BRL1.74, although, it's too volatile, right. Then it goes up to 1.78 and goes down. So it's really volatile. But on average, everything that we have purchased on top of the hedged amount is at a better rate. And that may imply in a couple of cents of reals an advantage in our COGS.

Great. Thank you very much.

Welcome.

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

Yes, I had three questions, two on Brazil beer. First one would be just a general question on how you see the outlook for the industry in 2010. Obviously, we have the number of good factors, including the World Cup in the second quarter. Also, there was quite a bit of packaging innovation last year. And there is some more this year. So I'm just wondering to what extent you see that having a good impact on industry volumes. You mentioned the [Novista] being more important. So I imagine that there is a lot of growth coming from there. So if you could comment on that.

And secondly, if you could give a sense of what the market share was towards the end of the quarter. I know you've given us an average market share for the quarter. But I'm just wondering in terms of direction between the beginning and the end of the quarter and related to that how these could potentially affect your pricing and the levels of discounting in the market. So those are the first two questions on Brazil. I'll come back to the third question afterwards.

Okay. Hi, David. Well, I think, first, of course, we have a very good momentum in the business here. Again, as I said in the beginning, we're excited that a lot of the things that we did are now coming to fruition at a time where Brazil is quickly recovering from a very tough year last year, where GDP declined by five points, basically didn't grow, although our volumes were very strong.

We're in that positive slope. We had a very strong first quarter. It's true, as Nelson said, if you remember our volumes last year, we basically grew 7% in the first half, 7% and 7% and then 12% on the third and fourth, 12% in the fourth quarter.

So we have a lot of things going for us. But it's also true that we have -- the first half is an easier comp because you're growing above 7%. And the second half, you're growing above 12%. So you have easier -- tougher comps for the second half in volume terms and also in terms of market share comparisons because, I mean, we went from, let's say, somewhat, the 66%, 67% to the 69% to 70% from the beginning of the year, end of 2008 to the end of -- beginning of 2010.

Yes.

Therefore, I think when we're having conversations throughout 2009, we went from cautiously pessimist to cautiously optimistic. And now we are somewhat optimistic. So I think we're more optimistic going forward, given that everything that we're doing is working, given that Brazil is having a good recovery. We are an emerging economy. So we have always to be watching out.

But we put our money where our mouth is. So we put the capacity in the market place where we'll put the capacity towards the end of the year. And we will continue to play the role that I think a leader should be playing, which is to grow the category. So I think we found a way to do that. I think the packaging innovations and the liquid innovations are actually helping us to grow the market place.

So I don't think it's just, let's say, Brazilian economy, given there is a decouple somewhat sometimes from the economy, up or down, because of the income, because of different things. But we also found a way as a leader to help the category to grow. So in that respect, we are -- we have a positive outlook for the volume going forward because of all those things, innovations working. The category is growing because innovations are helping, both packaging and liquid, as well as we are positioning ourselves for this growth in the north and the northeast.

In terms of share, I would not like to disclose the details. I think what matters is that we are at what I think is a good market share average for the quarter, the one we disclosed, after a price increase. So we are in a better position to fight potential price activities, if there are, we're not seeing that being the case, or actually to enjoy a growth if our innovations continue to grow. So we'd not talk a lot about share, but positive outlook in terms of pricing for that respect.

And just on the -- the third question I had was regarding Canada. And there, it's mostly about pricing. And I understand there was some issue around timing of promotions. And I think Molson, of course, had a comment on that during their conference, the Q1 results. So I'm just wondering if you could give us a sense of how the year-on-year price (inaudible) will be looking like in Canada for you going forward in the next few quarters.

Yes, okay. I think that's a fair question, a very good one. And we heard some of the comments in the Molson call. I think basically we had a great start with the Bud Light Lime launch in May of last year. Okay? We did see softer volumes in the fourth quarter of 2009 due, to be quite honest, to extremely competitive prices on Molson's import brands, with both Corona and Heineken at minimum price levels in Quebec. So therefore, so far this year, they've continued to gain share in the import specialty segment, which is one of the growing segments in Canada.

So I don't foresee them continuing to do what they did, very heavy promotion in important brands, such as Corona and Heineken. If they do, we will find a balanced response. But if not, then we should see better comps. One way to signal that, to show that to the marketplace is that we launched Bud 4, as I said, above the minimum price. Corona and Heineken were playing at the end of the year at the minimum price level. But not because of that, we launched the new brand at that level. So we launched that above that in Quebec, Bud 4. So that's sort of I think our response to the comments we saw. And hopefully, we'll not see that going forward.

Okay. Thank you.

Yes.

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

Yes, hi, everyone. Not to spend too much time and I know you've talked a lot about today on the call about cost pressures. But I'm just trying to clarify that, it seems like a lot of these issues, whether it be from a comparison standpoint of the hedges, the issues of the hedges, that this was something that you did anticipate as you were thinking about planning for this year, that nothing has actually incrementally gotten worse from that cost perspective standpoint. So I just want if you can highlight the change there if there's been any change with expectations on the COGS line.

And then if I could also ask about CapEx spend this year, you've given some preliminary guidance I guess as far as investing more behind the Brazilian business. So if you could just give us a sense of how that's trending and how that spend may flow through over the course of this year.

Okay. I think there is a change, Lauren, to what we said before, what we actually said in the beginning of the year in our last call. We said we did expect cost of goods sold to be in line with inflation. Okay. That's what we gave as a, I think very specific outlook for COGS. There is one big change, there're also minor changes. But there is one big one, which is the need to import cans.

So we were prepared to import cans, if needed. But when we started the years, given the, I guess let's say the volume outlook we had, when we talked about the COGS per hectoliter, we did income that potential need given the outlook of volume we had. That's why what we're saying is that if the markets continue to outrun the perspective we had, we will be above the guidance of COGS per hectoliter being in line with inflation. Okay?

If it comes back to other levels, then we will continue to be closer to the inflation. Of course, we already impacted in the first quarter by that. So we were closer to inflation in the first quarter already because of that. So going forward, one of the biggest levers, whether we'll be very close or further away, it will depend on that. Basically that's it. So you know that we don't give guidance on this. We give an outlook of the COGS per hectoliter being in line with inflation. The changes will depend a lot on what happens going forward.

So for example, there is a federal tax increase in the second half. We decided to pass that on. This could have an impact on volumes, could have an impact in can volumes. We will not have a need to import more cans. And therefore, COGS will get closer again to inflation. If, that doesn't happen, for example, and volumes continue to boom. Then we may need to continue to import cans. And then we will move away from that sort of direction we use for the COGS per hectoliter. So basically, there was a change in perspective.

Regarding the CapEx, we -- what we said is that we would be investing. We were at the point in time closer to BRL1.5 billion. And then we said that we will be closer to BRL2 billion investment in Brazil (inaudible) in reals, not in dollars. And we are in full speed to put those investments in place. So a lot of those investments have already taken place, we have already inaugurated some of the lines that we bought in some different states. And we have a lot of new lines coming into place every month from now until September. So the CapEx that we mentioned is still the CapEx that we see happening for the remainder of the year. Okay?

Yes. Very good. Thank you.

Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Okay. Thank you very much, Maria. Thank you, everybody for this -- for your questions today and for your attendance. And have a nice day. Bye, bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.