Ambev SA (ABEV) 2010 Q2 法說會逐字稿

Good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev's 2q 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 that this event is being recorded. (Operator instructions).

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of [1995]. Forward-looking statements are based on the beliefs and assumptions of Ambev's management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Ambev and could cause 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.

Thank you, B.J., and good morning, everyone. I am pleased to be with you today to discuss our 2010 second quarter results.

Before I start, I would just like to remind that, as usual, the percentage change discussed during this call are both organic and normalized in nature. Normalized figures refers to performance measures before special items, and special items are either income or expense which do not occur regularly as part of the normal activities of the Company.

As normalized figures and non-GAAP measures, we disclose our consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis in our earnings release.

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

(Inaudible) results during the second quarter, our consolidated EBITDA was close to BRL2.42 billion, which represents a 4.7% organic increase when compared to the second quarter of 2009, while our margins contracted 270 basis points to 42.7%.

Our Brazil EBITDA increased by 11.7% in the quarter, supported by a 12.6% volume growth and by a 5.2% revenue per hectoliter growth with the EBITDA margin decreasing by 270 basis points to 45.1%, driven by higher cost of goods sold in the period, as anticipated, mainly due to currency and packaging costs and higher SG&A due to marketing investments to support our brands.

In HILA-Ex, we delivered a negative EBITDA of BRL23.4 million in the quarter and registered an organic decline of BRL28.9 million versus the same period last year, mainly due to a worse performance of the Venezuelan operation.

Our Quinsa operations delivered a 7.3% EBITDA growth during the quarter thanks to a 15.3% EBITDA growth in the beer business with volumes up 5.4%, while soft drinks volumes were down 2.2% and EBITDA 30% down, due to higher input costs, mainly sugar, as well as SG&A.

In Canada, domestic volumes decreased by 5.5% in the quarter, due to both industry decline and market share loss, while our EBITDA declined by 11.1% with the margins declining 230 basis points.

Normalized profit reached BRL1.5 billion in the quarter, which was 9.6% higher than last year. Normalized earnings per share increased by 9.1% in the quarter. I'll comment further on profit at the end of this call.

I will now hand it over to Joao to look a little deeper into the results of each of our operations.

Thank you, Nelson, and good morning, everyone.

Starting with the industry trends, we saw better performance across most markets in which we operate, except for Canada and Venezuela. And consolidated beer volumes delivered solid growth of 8.3% 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 on innovation and brand equity continued to deliver very good top line results. Specifically regarding beer Brazil, the positive trends we saw in the first quarter continued. And we reached a market share of 70.6% for the quarter, 220 basis points higher than last year. As a result of the combination between market share gains and industry growth, Brazil beer volumes grew 13.7% in the quarter, also benefiting from the World Cup event in June.

Talking about innovation, Antarctica Sub Zero brand continues to deliver important results, along with the 1-liter, returnable glass bottle rollout, while Brahma Fresh growth remains strong in the northeast. In addition, we had the first quarter of our new line extension, our Skol 360 and, recently, the new visual identity for Brahma as part of our innovation and renovation efforts, which have been and should continue to be very important contributors to our results this year.

All these innovations, combined with the relevant and differentiated brand positioning for our three mainstream brands - Skol, Brahma, and Antarctica - as well as the strong World Cup activation for Brahma and Skol, are also driving brand equity.

For example, while Brahma activated the event through the official sponsor [Engel], Skol (inaudible) bring to the market the talking can consumer promotion, which was a big hit here in Brazil.

As a result, even in very noisy media scenario, both brands were in the top-three ranking of the most recalled World-Cup-related advertising, which is very good news.

Our beer net revenues per hectoliter in Brazil increased by 5.2% this quarter as a result of increase in beer prices last year before the summer season. Our price increases during the period were slightly offset by packaging mix, while excise tax remained flat versus 2009.

Now talking about our COGS, our cost of goods sold, in beer Brazil. The COGS per hectoliter was up 15.2% in the quarter as we were negatively affected by higher packaging costs, including the impact of imported can and the currency hedges, as previously stated in the previous quarter. For the remainder of the year, currency hedges will have a neutral impact on a year-over-year basis.

Beer SG&A, excluding depreciation and amortization, grew by 14.8% in the period as a result of volume growth, general inflation, incremental investments to support our innovation, phasing of expense spread for the World Cup, as well as higher logistics costs as a result of the change in sales mix towards the north and northeast, as we also mentioned in the Q1.

Normalized beer EBITDA finished the quarter with growth of 16.5% versus same period last year, and EBITDA margin declined by 130 basis points.

Our soft drinks volumes in Brazil delivered a 9.3% growth in the quarter as a result of improved macroeconomic and industry condition while we kept our market share flat, standing at 17.7% as an average for the quarter.

Net revenues per hectoliter grew 2.9% organically in the quarter, as we continued to be impacted by price increase in line with inflation from last year, partially offset by product mix and promotional activities in isotonics.

COGS per hectoliter increased organically by 36.7% as a result of our currency and sugar hedge and PET resin.

SG&A, excluding depreciation and amortization, decreased by 5.3% in the period as a result of marketing phasing and lower bonus accrual, partially offset by general inflation, volume growth, and logistics costs.

Our EBITDA posted in the quarter a negative growth of 7.6%, with a margin contraction of 940 basis points. Year-to-date EBITDA is 1% over last year but will go back to the growth path for the balance of the year. The worst is behind.

Turning to the HILA-Ex, volumes increased by 1.5% in the period as a result of a better industry evolution in most of the countries where we operate, except for Venezuela.

HILA-Ex EBITDA decreased by BRL28.9 million, posting our first negative growth in four quarters, mainly driven by performance in Venezuela.

Moving on to our operations in the south of Latin America, we achieved a 7.3% EBITDA growth, supported by our beer business, which posted higher volumes as a result of a better industry performance in the region and market share either stable or above last year in every country. This beer growth was partly offset by poor soft drink results, where we have already put in place the necessary action plans aiming at improving revenues and recovering profitability.

We're heavily supporting our mainstream and premium brands in all of the countries. We developed strong campaigns and innovation and increasing communication, renewing visual identities and gaining presence in all of our markets. We used the soccer World Cup throughout the zone through sponsorship and campaigns; also developed winter campaigns and increased our time on air with great content to communicate our brands' attributes.

In the premium segment, we continued to achieve positive results with Stella Artois and the local premiums. Stella keeps gaining share in its segment and further developing the category. Our efforts at reducing costs and expense compensated the negative impact of higher labor and [interest rotation] costs. We're benefiting from effective hedges in aluminum and currencies, while certainly increases in soft drink [PET performance in sugar].

In this quarter, our soft drinks operation is showing a strong EBITDA contraction. Even though we recognized some difficulties to maintain the profitability we enjoy, this particular quarter has been affected by the phasing of price increases, marketing investments to defend our share, and increases in raw material. We are confident that we will achieve better results soon as the industry begins to recover and revenue management initiatives already in place to recover margins.

Turning to Canada, the Labatt second quarter was characterized by top line decline and higher commercial expenses due to phasing of our market investments, which drove an 11% EBITDA drop versus the prior year, despite positive COGS per hectoliter evolution.

Volumes were down 5.5% versus the second quarter 2009. It was mainly due to domestic sales, which were impacted by an estimated industry decline of 2.1% and a domestic market share loss of 1.8 share points. 80% of the share loss impact on our domestic volume was on the core (inaudible) segments, while we grew or kept stable our market share on the light and imports specialty segments, which were the ones growing in the Canadian market.

In the second quarter, our net sales per hectoliter declined 0.8%. The domestic business improved slightly versus prior year, despite a tough comparison. In the second quarter last year, we had increased 2.7% versus the second quarter of 2008. However, a 15% appreciation of the Canadian dollar to the US dollar ratio drove a decline in the export net sales per hectoliter and the overall measure.

We have [allowed today refreshed] promotional grid across the country to ensure we are competitive in all of our markets and appropriately leveraging our strong, national brands.

COGS per hectoliter declined by 5.8% in the second quarter, as lower commodity hedges, [significantly efficient] improvements, and a lower fixed-cost base all combined to drive costs lower versus the prior year.

SG&A, excluding depreciation , increased by 4.9% in the quarter, entirely due to incremental marketing investments phasing, while distribution and admin expenses actually declined as a result of lower volume and reduced overhead expenditures.

Moving into the back half of the year, our priorities are to improve the market share and profitability in a balanced way and to leverage the strength of our brands and commercial properties, combined with tight cost management in order to deliver top line improvement and bottom line growth.

Going back to the overall Ambev business, I wanted to wrap up by saying we are confident to be in the right direction. Although we had a softer EBITDA growth in the second quarter due to anticipated cost pressures and marketing investments in Brazil, as well as some issues in other markets, we outlined the necessary action plans to address all in each of our main challenges and opportunities. At the same time, we see easier comparisons for many regions, including Canada and Latin America South.

Particularly in Brazil, we should continue benefiting from a positive momentum in terms of industry and share, and we will have unfavorable currency hedges behind us while moving steadily with our capacity expansion projects. As a result, our consolidated year-over-year, organic EBITDA growth should be higher than the one delivered on the first half of 2010.

We remain committed to our [cost, connect, win] approach, and we will continue investing behind our brands and focusing on innovation to deliver sustainable and profitable results.

Finally, I would like to say I'm confident that we will succeed in our plans, thanks to the quality of our people, who are the major assets of our Company.

Now I'd like to go back to

Thank you, Joao. In this final section, I would like to guide you through the main items and lines between the normalized EBIT of BRL2 billion and normalized profit of BRL1.5 billion, as disclosed on page 3 of our release.

Our net finance results reached to BRL105.5 million, which is 57.7% lower than last year. This is explained by lower net interest expense as a result of lower debt and interest rates, which were offset by loss on derivative instruments relating to the results of our ongoing hedge policy, as well as loss related to currency effects over trade payables, mainly Venezuela in Labatt.

Our effective tax rate in the period increased to 22.2%, compared to 21.6% last year. The main reason for this increase is a higher EBT, earnings before tax, which is taxable at the full rate.

Cash generated from operations in the second quarter added up to BRL2.5 billion, which is 8.9% better than the second quarter of 2009, adding up to BRL4.97 billion year to date.

Our net debt decreased to BRL857 million at the end of June, compared to BRL3.2 billion at the end of December 2009, while year-to-date dividends and interest on capital payments were close to BRL1 billion.

On July 30, we submitted a request for registration of a simplified public offering in Brazil due to unsubscribed shares during the period from April 30 through May 31 in connection with the capital increase approved at the shareholders meeting held on April 28, 2010. We announced that, following the conclusion of this offer, estimated to be completed until September, a board meeting will deliberate with respect to the proposal of the Company's management for payment of dividend and interest on capital of approximately BRL2 billion.

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

(Operator instructions). Lauren Torres, HSBC.

You mentioned that you're working towards a performance improvement in Argentina and Canada. I was just curious if you could talk a little bit more about the initiatives that you have in place in those markets. It seems like you have been pressured by market issues and competitive issues. So I was curious if you see some of that subsiding a bit or if that's a result of some of the initiatives that you've put in place that you think those markets, I guess, on a sequential basis should improve.

I think this question raises a lot of points of the quarter, where we were under pressure somewhat in both markets. I would say that the difference-- There's a big difference between both markets.

I would say that Argentina-- Let's start with Argentina. I think Argentina in the short term had more unusual phasing, both on net revenues as well as marketing expenditures. So I think, given the scenario we saw for inflation, I think the COGS result for Argentina was good and can continue to be good or better. And the phasing of pricing should help us going forward.

In terms of [planning places], I would also differentiate in Argentina two situations. That's not true for the whole Latin American South. But, given that Argentina's 50% of the result, let's talk a little bit more about Argentina. I think there is a big difference between beer and soft drinks. As you saw, the beer results for the zone, and I'd say that reflects Argentina, grew 15%, while soft drinks declined by 30%. So it's a big difference.

I think in beer, therefore, everything that we did behind the Quilmes brand and everything that we're doing behind, also, the Stella Artois brand are paying off. Stella is on a run. I mean, it already has 5% points of market share. It has a price positioning 50% above Quilmes. It continued to gain share. It continued to gain preference. We made great results on that. Quilmes, of course, is our main brand. We are bringing a lot of new things into the brand. They're already in the marketplace. And we have some more news that I cannot get into a lot of details. They will continue to come as the year progresses. But even the current result, I think, is a very positive one. It will only get better from here on for the reasons I just mentioned.

Regarding soft drinks, soft drink has been under much more pressure in Argentina for two reasons. I think one is the same pressure that you see in the Brazilian results, which is COGS, mainly sugar but, to a certain extent, also PET. But the elasticity of soft drinks, which is usually higher than beer, reached a very strong impact in Argentina with some trading down to water sometimes, to power juices sometimes, which is something that we see in the Latin American markets from time to time. This is currently happening, or it happened for the past three or four quarters already in Argentina.

But we are seeing the market recover somewhat, both in terms of volume-- very slowly though-- but also in terms of profitability. I think part of the industry has tried to recover some of the volume loss through a little bit more aggressiveness in price. I think that is receding a little bit on phasing but I think a little bit on attitude as well. So I see, on one front, being strong but getting better, which is the beer one. I see the other one not as strong but getting better in both the marketing phasing standpoint, the pricing activity, and, then, the volume growth. I would say, out of the three I just mentioned, volume is the one that I think will be slower than the rest but more than enough to have a brighter second half.

Now talking a little bit more on Canada, I think Canada-- We are-- not that we're satisfied with the Latin American South results; I would say that we're less satisfied with the Canada results. Definitely not happy with this. We have seen since the second half of last year much more intense price activity in the marketplace. We thought this was going to be less so on this quarter, but it was really not the case. We continued to be committed to balancing market share goals and profitability. So we actually have been doing this in the past years. We had a view that the second quarter was going to be somewhat different. It wasn't. I mean, you saw our net revenues per hectoliter within the domestic was much more stable than the rest of the market. If we need to be a little bit more aggressive in the short term, we will, but we'll not forget profitability here. We do not look to gain share-- At any cost, we'll remain rational, but we will answer if things continue to be the way they were.

What you also saw in this last quarter or last half or so-- you see us supporting our brands and programs. There is some phasing, but there is also us supporting the programs. We may continue to do so [more in the past].

But, also, I would like to highlight two things. I think both-- We continue to have very good SG&A control in the results, and we are launching new programs. We continue to find non-working money to reinvest in marketing and sales without needing to increase or to substantially increase the SG&A.

Also, the cost of goods sold, which had a good result and, going forward, we think will continue to have that.

If we continue to have that and start solving the net revenue issue, I think we're going to do better. In order to do that, we're going to have to deal with the complexity of this market, which we know. And our challenge in the short term, I would say, is to design an effective approach on a province-by-province basis, understanding what are the opportunities that will yield the best results to our activities. This is what really happens in Canada - different responses in different markets.

One thing that we've been doing for the past year or so, successfully, and now competition is copying, following through is innovation. About a year ago, we came out with the Bud Light line. It was a big hit. Now we are lapping the launch of Bud Light line of last year, so tougher comps. We mentioned the launch of [Bud4] last quarter, and that's starting to yield some results also. The consequence of some of those things is that we have gained share on the light segment, which we have one of our lowest participations together with import, which are probably both of the areas where we have opportunities going forward. And some of the innovations that we are bringing will be direct those segments while we see competition gaining share more in the value segment in the short term.

That's why we feel that, in both cases, the worst is behind us in terms of in the first half, and we look to a brighter second half for both operations for the reasons I just stated.

And just as a quick follow-up on Canada, I know you mentioned pricing may be a little bit in flux there. But, in response to what your competitor's doing, do you think there is a need to really readjust your strategy for the second half, or you could just keep doing what you've been doing?

I think it will depend a lot on the very short term. What do I mean by that? I mean, what we see competition doing and actually also saying is that they felt they need to readjust the base. If the [readjust] of the base that they plan do is done, then I think there will be little to be done. If they are not done, it will be different. So it will depend on this readjusting the base. It's over or not over. If I have to give you my impression, I think this was done, and, therefore, there is less pressure than more pressure going forward.

That's very helpful. Thanks.

Bob Ford, Bank of America - Merrill Lynch.

Joao, I have a question with respect to the cash that's piling up. Within the next few months, it looks like you could be net debt negative. Right? So you'd be cash positive. And I was curious. Would you be willing to buy a non-controlling stake in a major Latin American brewing asset? And, absent a transaction, what do you think is the right capital structure for Ambev, and what do you think is the best use of your free cash flow?

Let me pick up your question. I think-- Regarding the cash that's piling up, as you said, I think, first of all, we are very proud of the cash flow generation we have in the sense that not only the EBITDA growth is also helping us to generate cash, but also our working capital management has been critical because we can fully benefit from this great momentum in terms of EBITDA. For you to have an idea, we generated so far BRL5.1 billion in terms of EBITDA. And, given the fact that, even stepping up the CapEx, investments this year, we were still able to generate BRL3.5 billion of free cash flow. So that was only possible because we are keeping, for instance, a negative working capital. Our working capital is a minus BRL1.2 billion, which has been evolving over a time and we continue to manage proactively.

So, that said, indeed, we start to have a good problem. And, as we always said, what we do with the cash-- We constantly assess the alternatives we have. You mentioned-- Of course, we are not going to speculate to any possible acquisition. So talking about the use of cash, what we have been doing is to look into the alternatives. We are investing into, as I said, higher-- We had a higher CapEx to invest in our plants in Brazil. If you look at our free cash flow year to date as part of our active or proactive capital structure management, we used-- Out of the BRL3.5 billion we generated in first semester, we have paid out BRL1 billion as interest on capital and through dividends. We already proposed to the board-- We have taken to the board a proposal of additional BRL2 billion that is just at this stage depending on the conclusion of the offer as we announced it. So BRL2 billion and then BRL1 billion is pretty much the majority of our free cash flow of BRL3.5 billion we generated in the first semester.

So, in the end of the day, we have always and are constantly assessing the best use of cash at this stage of prioritizing interest on capital and dividends. And we will always prioritize interest on capital. That's the historical reason why our leverage is so low - so we can fully benefit from the fiscal advantages that we get through the interest on capital payment. And that's how we are going to move you know. Every recommendation we took to the board in the last two years regarding capital structure were accepted. So my point is that the board usually accepts our recommendations. And, so far, we are recommending BRL3 billion. We recommended a BRL3 billion payout out of BRL3.5 billion free cash flow generation in the first semester.

And then, just lastly, with respect to the possibility of a non-controlling stake in any brewer in the region, is this something that you would entertain if the price is right, or is it something you'd kind of rule out without the control?

I think it's more of a speculation, Bob, than anything else. In the past, we have only taken non-controlling when we see some sort of a path to control later on. But, again, it depends on a case-by-case. I'd rather not speculate on that.

I understand. Thank you very much.

Lore Serra, Morgan Stanley.

I wanted to follow on with the same line of thought. If the cash flow generation stays at the current pace, I think you'll get to something like BRL7 billion for the full year. Should we expect to see--? In the absence of an acquisition, should we expect to see BRL7 billion of dividends or interest on capital? Or does it get to be-- the numbers get to be too inefficient, and you can't do it efficiently?

And, I guess, related to that, is there a point in time when, instead of kind of each half year we see kind of what you did with the cash, you'll actually sort of have a more regular dividend policy, because, I guess the other thing is that, even if you dividend all your cash flow, you still have an awful lot of spare debt capacity if something strategic does come about. So why not just have a stated policy of dividending out all the cash flow?

Again, following up on this question, as I said, it's a kind of a problem-- As we said, it's a good problem, but it's a problem in the sense that we have this important amount of cash that we are going to deal with the same way we did for the first half. My point is we are going to assess the opportunities. We cannot, say, speculate, let's say, on future board decisions or future recommendations to the board because we're maybe a little bit too early on that. For the second semester, yes, when I look at the consensus, we could really get to BRL7 billion, at least that's the average of the reports the analysts and the consensus you guys provide. But we can give no assurance that the same way we look at the first BRL3.5 billion in the first semester and then proposed pretty much to pay it out. There is no assurance we can give for the balance of the year. We'll take and the board will take the decision in due time.

Looking, again, at the debt level that we have, even if you'd be cashing out entire free cash flow, it's below the average of the industry. But, as I said, we always worked below this average, given that (inaudible) capital payment in Brazil. That's pretty much the key reason why we do that.

Thank you.

Celso Sanchez, Citi.

I think, on Canada, maybe a little more color, if we could ask for it, both-- The context that was given by your major competitor there for the second quarter suggested that the weather in BC was particularly bad. And, so, assuming you don't have that the rest of the year or you don't have such a bad spell, one would like to think that that would be a tailwind. And, in fact, the other comment that was made on their conference call was that volumes, so far this quarter, were benefiting industry-wide and, it sounded like, nationally from much better weather or very good weather, I should say, in July. Is that something that you experienced as well? Or was that maybe unique to them? I'm talking about the better weather now in July and August. And, also, if you agree that the BC issue was something that might have hit you a little bit harder, given your strength out there.

We are not going to give any comments regarding July or August so far. What we do expect-- It's maybe better volumes going forward. And, again, it's very early to say. We saw some of the job creations in Canada being better than in the US. So it seems like the economy's is reacting somewhat. That combination and the comps of last year give us some expectations, again, that the volume could be better going forward. But, still, it has been volatile enough that it's difficult for us to forecast and to give a better indication.

And, just to finish up on Canada, one of the-- You talked about a better second half as well. Obviously, there's a bit of a margin deficit in the first half of the year. Is it unreasonable to assume that, in spite of the fact that you mentioned perhaps slightly increasing marketing expenses, if I heard you right, that margins could be flattish with last year - i.e., profitability, structurally-- excuse me-- cyclically, it doesn't deviate that much on a year-to-year basis? Or is the marketing spend that you're contemplating potentially something that might weight on margins more in the second half than it might have in the first half?

I think my point there, Celso-- First, when we look at the things we control, I think the results of the first half were good in terms of cost of goods sold. And our view is that they will continue to be so; potentially, even better going forward. So that helps us in any way, shape, or form.

The same thing is true for SG&A; I think, an overall good result. I think it can continue to be good, controlled, but with enough power to fight in the marketplace and to support investment behind our brands.

So I think those two things plus the comps will certainly help us on the second half. It's also true that, share-wise, there is some potential comps there. But I would say that the things that I just mentioned are stronger and explain more why we feel that the second half will be a better one - a much better one than the first one.

Okay. Thanks.

Alan Alanis, J.P. Morgan.

Not to beat on a dead horse, but I do have a question regarding the use of cash. I think you've mentioned in the past that you would not go to a net cash position. Is that stand still valid?

And then I have a follow-up regarding the operations.

Sure. (Inaudible). We are not pursuing a net cash position. And, as I said, we remain committed to looking into the best investment alternatives or possibilities. It can be CapEx to grow organically our business in the different markets where we are. I think we have a great opportunity in Brazil. And we continue investing behind our assets in Brazil and also outside of Brazil in the countries where we are present. So we will always continue to look into good business opportunities. That's our business. Right? But, of course, in the end of the day, if we generate even more cash than we need or the opportunities [eventually are not that available] for the investment in the short term, we'll give the designation to the cash instead of move initial net cash position. That's not the goal at all.

Okay. Thank you. And the operating question that I have has to do with the gross margin in Brazil in beer. How much of the contraction is due to the hedges, and how much are we seeing some change in trend in the consumer towards more non-returnable presentations in the sense that-- Part of the issue had to do with that you had to buy extraordinary amounts of cans. I'm wondering if you're seeing some permanent, rather than cyclical, change in the trend of consumption in Brazil moving more towards can and non-returnable presentations that have a lower gross margin.

It's a very good question. For the most part, I would say we're talking about cycling. I think the currency hedges had a much, much bigger portion than anything else. A smaller portion, but still important, is the imported cans. So, even if disposable was growing, it's growing especially during the World Cup, those disposables, because of the imported cans, of course, they impacted the gross margin. So, therefore, I don't see any permanent change to the industry.

Got it. That's very useful. Thank you so much.

Jose Yordan, Deutsche Bank.

I'm not going to beat the dead horse because, obviously, you don't really want to make a further comment on that.

But I do have another question, about Venezuela. You're almost 15 years there, and still no real earnings. Politically, things are getting worse. Why are you still staying in Venezuela? What does it take to make the decision to pull the plug there?

You are right; we've been there for a long time. And we never fulfilled our dreams or our bigger goals. And, actually, the country is in a worse situation than it was when we started 15 years ago.

Even versus last year.

Yes, even versus last year. I think, in the very short term, I think the decline was even worse than anyone could have anticipated. We continue to look for different alternatives. I think that's as much as we can say. I would say that, at this point, we are considering several alternatives to have that situation solved. That's as much as we can say. Actually, we've been saying this for a few quarters now. But any sort of exit strategy to change the landscape of what we have there-- it's not the one that's overnight. So we continue to be on the track to find a solution. But I don't have a statement to tell you that, within the next six months or a year or so, this will be solved. But I will not say either that we're not looking, considering different strategic alternatives regarding Venezuela.

And could these alternatives involve M&A from-- regarding any of the other key brewers?

I would not like to enter into any further details.

Okay. Thanks.

Luis Miranda, Santander.

I don't know if you could give us some color on the expansion on beer in Brazil and the timing of the plant. And if that could bring to material impact on improvement in the logistics cost in the short term. Thanks.

First, when we mentioned at the end of last year or beginning of this year about the new capacity, we were saying they were starting simultaneously. So a lot of the new capacity is coming now. So, as you see our CapEx also in our reported statement, you see it's happening as we speak. If you come and visit some of the plants, you would be amazed by how much activity is going on. So those are good news.

In terms of what we see going forward and its impact on logistics costs, of course, you are also right. Given that we are expanding some of those plants in the north and northeast, as those plants come into fruition for the end of the year but also for 2011, we will definitely benefit on the logistics costs for the end of the year but, for the most part, for 2011.

Thank you very much. If I could just follow up with a question on market share, of the 220 basis points you mentioned on the year-over-year growth, is there any specific region you are gaining share or is overall due to the rollout of the new presentations?

We are gaining share in pretty much the whole country, for the most part. And it's a combination of the new presentation, be it either liquid or package. So different regions will respond differently for the different initiatives. We also have new market programs in place that are also helping us. But we are gaining different amounts for the different regions. And, of course, we also started the rollout, for the most part, last year in the south and in the southeast. And, towards the end of 2009 and the beginning of 2010, we started launching towards the north and the northeast, which also is continuing to this much higher growth in the north and northeast. We still have some light areas.

The new CapEx that is coming to fruition now will also help us in the next month or so, whether third quarter, fourth quarter, or first quarter next year, to continue to roll out the initiatives that are already working in some other areas but also regarding some of the new innovations that we just launched, in some cases, as pilots and, in other cases, as full implementation. And I mentioned in my initial speech the Skol 360. This is only in one state. It's working well. We're analyzing it so that, when we roll out, we do the best rollout possible.

So we still have some tricks in the toolbox as things move forward.

Thank you very much.

Trevor Stirling, Sanford Bernstein.

A quick question. The problems with imported cans-- is that finished now? And, as we go into Q3, should we expect that to go away? Or you're still having to import cans for Q3 as well?

No, it hasn't got any better in any way, shape, or form. In which sense-- I mean, when we-- I think-- Actually, I think the imported cans [I will actually sell you] is a good thing. Let me explain why. I think, earlier on, in the beginning-- or the end of last year, we noticed that there was a potential demand for this. And, early on, we started contacting suppliers abroad to import cans to Brazil. This growth continues to be in place. Time to fruition of an investment in cans for it to be running-- it's around one year. It could be 10 months to 16 or 18 months. So there is a lot of new can lines from our suppliers starting to work on first quarter 2011. So this problem will really go away only in the beginning of 2011, because they only noticed this late last year before they made the investment late last year, and these investments are going to start-- have their startup in the beginning of 2011.

So, for Q3 and Q4, we'll still have an important impact. But, remember, the biggest impact on COGS was more the unfavorable currency hedges and not the imported cans. So the unfavorable currency hedge will not be there, but the imported cans will be there for the remainder of the year.

Okay. I understood that. And a follow-up question, Joao. If you look at momentum and rate of momentum and Q2 versus Q3, clearly, Q2 benefited from the World Cup, and perhaps there is some element of overhang of stock after the relatively early exit of Brazil. Does that mean that we should expect slightly slower momentum in Q3 than in Q2, just because the World Cup isn't there and there might be a little bit of excess stock in trade?

We're, first, disappointed with the early exit of Brazil. It's sad that you had to remind me about that.

But we're also-- I would like to take advantage to say that we are very excited about the prospect of the Brazilian beer business going forward. Specifically talking about the impact of the early exit on the very end of June, I don't think this will make a huge difference, to be quite honest. What I think makes a difference when you look at our growth is that, in 2009 first half, we grew 7%, more or less, on average, and we grew around 12% on the second half. So, second half of 2010 has harder comps, if you want, for us to face. So the growth, if the compound is maintained, will be a lower one for the second half. But, again, we're still excited with the status of the [macroeconomy] in Brazil with its impact on the Brazilian beer business and especially with the different things that we're doing in the marketplace that we certainly think are helping the per capita consumption in Brazil increase, as well as helping us to gain some share.

Thank you very much, Joao.

Gustavo Oliveira, UBS.

The first question is on your CapEx plans. Because your volumes in Brazil beer and soft drink-- they're probably a little bit ahead of consensus and they're very strong, could you please remind us of your CapEx plan for 2010 and whether you see any incremental upside [risks] to that?

Our plans regarding CapEx-- We have since the beginning of the year kind of stipulated that range. We started talking about-- If we really go back two or three quarters ago, we were talking initially between BRL1.3 billion and BRL1.5 billion in Brazil. But, as soon as we saw the possibility of a higher growth, especially for a (inaudible), we started to review the number, and the new range became BRL1.5 billion to BRL2 billion, which would enable us to increase capacity from 10% to 15% in 2010.

Right now, we are definitely going to the upper end of this range. We actually are going to the BRL2 billion. And I think what was great was our fast reaction. I think we have been able to really review and react-- We could estimate and react fast. And so we are going to definitely get to the upper end of this range. We should have around BRL2 billion only Brazil. And, of course, when you look at Ambev as a whole, we should be reaching BRL2.4 billion CapEx in 2010, with an important increase versus last year. But, again, as I said, even with these incremental investments, we are [stably and strong resonating] free cash flow growth this year as well.

Okay. And any chance that you believe that you're going to have to revise your CapEx plans even higher to increase your capacity even further than the 15% or not, in Brazil?

No, not at this stage. And what we're starting to discuss right now is 2011 already because, given the, as I say, time it takes to get the brands up and running, between eight and ten months, we are already looking into 2011 to determine what type of orders we are going to start to put with our suppliers but, at this stage, nothing will affect 2010 (inaudible).

And a follow-up on the logistics costs. You mentioned that your COGS are essentially-- probably are at the worst part-- reached the worst level in the second quarter, but it should improve going forward. Do you expect material improvements already in the logistics costs or only in 2011?

Yes. Regarding the logistics costs, the improvement should come a little bit later than at the COGS level. As I said, the plants should be really up and running in the fourth quarter. So we should start benefiting from this additional capacity and a more optimized footprint, let's say, only as of Q4. And then the full benefit we should be seeing in the course of 2011.

Okay. And I have a last question, if I may, on your innovations and also on your plans for the Budweiser.

First, on the innovation, do you think that the growing volume has been driven more by the 1-liter bottle gaining share in the returnable presentation or from the new liquids and other innovations that you are launching?

And, also, if you could, give us an update if you're still on to launch the-- the relaunch of the Budweiser in Brazil in 2010 of if that's going to be in 2011. Thank you.

I think, first, regarding the breakdown, I would not like to go into too much details of the strategy on who is helping us more. I mean, it's really the combo, as I said before in a previous question. I said, depending on the market, depending on the region, depending on the city, one thing will be helping us more than the other. So the full combination is giving us different ways to connect with different consumers. So this is really what is making a difference - the whole combination. And, because we are still not in the whole country with everything that we have, I think we still have some upside from the things we have launched last year. And now we have new things that we are launching this year that hopefully will help us for the second half but also help us in maintaining momentum in 2011.

Regarding Bud, I think we will be ready with Bud, as we have mentioned, within a few months. We'll be ready in terms of the positioning, about the different execution that we'll have for the brand. We're really excited with what we're hearing from consumers and from different findings that we had. I don't want to get too much on the insights. But we think that we have something strong in our hands.

The timing of the launch will depend on different things. I would say that it will definitely happen in the next 6 to 12 months. The reasons for potentially not doing this year and postponing it for some time in the next year, using the 6- to 12-month range, is that we have a lot on our plate, and we're putting a lot of things in the marketplace. And, given the great work being done by the sales and marketing teams, the response for the things we put in the marketplace has been very good. So finding the right timing for a launch is very important. I don't want to just-- We don't want to throw Budweiser or any new launch in the market just like that. So, because we have a strong pipeline of things that are actually happening as we speak, we may take Bud for sometime next year, mostly because of the timing of the launch and given all the things that we are doing that-- thanks to everything we mentioned, has been very positive.

Juliana Rozenbaum, Itau.

There's been some talk here in Brazil of some potential tax changes that would affect distribution companies. I'd like to know if you think this is actually going to happen and if you see any impact on your distribution and distribution agreements. Thank you.

We saw that this new tax regulation is going on, but there is no impact to our business, as we already pay those taxes based on consumer prices. Of course, it's going to be different for other segments in the economy that have a different taxable base today. But there is no impact on our beer nor the soft drink business. So, again, no impact.

Okay. And, from your knowledge, would that in any way affect some of your competitors or everybody already working on the same tax system?

No. In the industry, they're already working on the same tax system. And it's not going to be affected by this change in legislation.

Perfect. Thanks. And just a follow-up. On the issue of packaging, I know we've been hearing from a lot of companies in different sectors that they have an issue with packaging and getting supplies of packaging. Does that in any way make you wonder in any specific segment that you would [verticalize] and maybe do some of your own packaging?

Sorry. Could you repeat?

If you would consider [verticalizing] and producing cans or in any way investing in glasses or anything.

I think that getting into too many details here would open sort of our strategy on the supply side. I think I'd rather remind ourselves about some of the facts. If you look back ten years, five years, or three years, we had no malting plants, and now we have most of our malt in-house. And we made a lot of money by following that strategy because we learned how to run and were able to run it better than the previous companies that were supplying to us. Sometimes we do it for that reason. Sometimes we do it to break a certain situation-- It could be a monopoly or duopoly or whatever in the marketplace-- or for synergy reasons. I mean, we have also opened a glass plant. We have-- In Bolivia, we have can lines. In Argentina, we have some hops production. So there's different strategies for different markets.

That just shows that, when we find an opportunity that has a return in margins but also on the [EVA] so that you also return on the capital employed, we'll always consider. I think that's as much as-- as far as I can go with the question.

Okay. Thank you so much.

Lore Serra, Morgan Stanley.

I just wanted to ask a question about the Brazilian operations, which continue to perform just so extremely well. I wanted to understand a little bit more about the revenue per hectoliter in the second quarter. We saw sequentially a decline. The same thing happened last year. And, at the time, you talked about how there were higher state taxes that sort of caught up and caused the second quarter '09 revenue per hectoliter to decline. I wondered if it was the same factor this year.

And, I guess, more generally, if you could give us any update on what we should expect for excise taxes-- whether you think there might be an increase in '10 or whether that's really pushed out into '11. Thanks very much.

I'm assuming you're talking about the [168 to the 164].

Yes.

I think this is much more in line, exactly with-- I mean, you had the question but also, in a way, the answer. Remember that the state probably do as a catch-up. You have a price increase; then you have the survey. And the survey will come in the quarter after. And so there's a catch-up. This has been going on for a long time. So, if you go back, usually, in Q2 or Q3, you have some of that. So say that, for the great, great, great majority, the explanation here is the delay on the ICMS tax.

Okay. And then you said (inaudible) federal excise taxes?

On the federal excise taxes, not much news on that. I think only good news. What we are seeing happening in the marketplace is that we mentioned in the beginning of the year that a lot of jobs were going to be created. That happened. Tax collection was going to be higher, given the volume. It also happened. So taxes were flat. Prices were in line with inflation, as we mentioned. So I think only good news. I think, because of that, the [IPI] was maintained flat. And, apparently, this will go on for a good portion of the remainder of the year. So I think mostly good news. Of course, at a point in time, whether at the very end of the year or the beginning of next year, maybe something will happen again.

Thanks very much.

Ladies and gentlemen, this concludes the question and answer session for today's conference. I'll now turn the floor back over to our hosts for any final, closing remarks.

Thank you, B.J. And thank you, everybody, for your attendance and for your questions. And hope to talk to you very soon with good results as well. Thank you. Bye-bye.

Thank you for participating in today's Ambev conference. You may disconnect your lines at this time, and have a great day.