Ambev SA (ABEV) 2010 Q3 法說會逐字稿

Good afternoon and thank you for waiting. We would like to welcome everyone to Ambev's 3Q 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 even is being recorded and all participants will be in a listen-only mode during the Company's presentation. After Ambev's remarks are completed there will be a question and answer session. At that time further instructions will be given. Should any participant need assistance during this call please press star and then zero to reach the operator.

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 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 reflect 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 afternoon, everyone. I am pleased to be with you today to discuss our 2010 third quarter results. Before I start I just would 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 and special items are either income or expenses, which do no occur regularly as part of the normal activities of the Company.

As normalized figures are 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 us an overview of our results in Brazil, HILA-Ex, Quinsa, and Canada. I'll close by providing more specifics regarding the third quarter financial.

Turning to the results, during the third quarter our consolidated EBITDA was close to BRL2.65 billion, which represents a 12.3% organic increase when compared to the third quarter of 2009, while our margins contracted 10 basis points to 44.4%.

Our Brazil EBITDA increased by 15.4% in the quarter supported by a 12% volume growth and by a 6% revenue per hectoliter growth with the EBITDA margin decreasing by 130 basis points to 47.5%, driven by higher cost of goods sold in the period, as we had anticipated, mainly due to packaging costs and higher SG&A due to incremental logistic costs.

In HILA-Ex we delivered a negative EBIT of BRL21.4 million in the quarter and registered an organic decline of BRL43.3 million versus the same period last year, mainly due to a worse performance of the Venezuelan operation and a tough comp related to one time land disposal in the Dominican Republic during Q3 2009.

Our Quinsa operations delivered [16.8%] EBITDA growth during the quarter thanks to a 22.9% EBITDA growth in the beer business with volumes up 5.1%, while soft drinks volumes were down 2.2% and EBITDA down 17.4%, due to higher input costs, mainly sugar and also SG&A.

In Canada, domestic volumes decreased by 5.4% in the quarter due to both industry decline and market share loss, while our EBITDA decreased by 7.6% with margins increasing by 610 basis points.

Normalized profit reached BRL1.8 billion in the quarter, which was 47.5% higher than last year. Normalized earnings per share increased by 46.5% in the quarter. I'll comment further on profit 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 and good afternoon, everyone. Starting with industry trends, we saw better performance across most markets in which we operate, expect for Canada and Venezuela and consolidated beer volumes delivered solid growth of 10% in the quarter, mainly driven once again by our Brazilian operations.

Going deeper into Brazil, the positive macroeconomic environment continues to support the good performance of the industry and our continuous 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 half of the year continued and we gained 170 basis points market share compared to last year period. As a result of the combination between market share gains and industry growth, Brazil beer volumes grew 12.5% in the quarter. The market share gain was delivered in the right way since we were able to find new and better ways of connecting with our consumers. We are very pleased with the performance of our innovations over the last three years, both in liquid and packaging, which represents more than 10% of total beer market volume.

As we are looking forward to the summer season, we expect our innovations, like the recently launched Skol 360, to continue to play a key role in supporting our growth. Our beer net revenues per hectoliter in Brazil increased by 6.2% this quarter as a result of price increase in line with inflation and on top of that we increased our direct distribution while excise tax remained flat versus 2009.

Now talking about our cost of goods sold, Brazil beer cost of goods sold per hectoliter was up by 8% in the quarter as we were negatively affected by higher packaging costs, including the impact of imported cans, as previously stated, which shall also be the case for the last quarter of the year.

Beer SG&A grew by 19.4% in the period, as a result of volume growth, general inflation, incremental investments to support our innovation, and higher logistics costs as a result of increasing direct distribution and changing sale of mix towards the north and northeast of the Country.

Normalized beer EBITDA finished the quarter with growth of 17.1% versus same period last year and EBITDA margin declined by 100 basis points.

Our soft drink volumes in Brazil delivered 10.4% growth in the quarter as a result of improved macroeconomic and industry conditions, while we kept our market share almost flat standing at 17.6% as an average for the quarter.

In our soft drinks business regarding brands, we are also able to improve; most [Guarana Antarctica] brand held key performance indicators, which will support our long-term growth in the cycle. Net revenues per hectoliter grew 3.9% organically in the quarter, as we continue to be impacted by price increase slightly below inflation.

COGS per hectoliter increased organically by 19.2% as a result of our sugar hedge, PET resin and packaging mix.

SG&A, excluding depreciation and amortization increased by 9.5% in the period as a result of volume growth, general inflation and logistics cost.

Our EBITDA posted in the quarter a 7.5% growth with a margin contraction of 310 basis points. Year-to-date turned positive EBITDA, turned positive again at a 1.8% versus last year.

Turning now to HILA-Ex, volumes increased by 4.1% in the period as a better industry trend in most of the countries we operate except for Venezuela and Ecuador, while in the Dominican Republic we reached our all-time high market share.

HILA-Ex EBITDA was negative BRL21 million posting negative growth, mainly driven by our performance in Venezuela where we just closed a deal we announced last quarter. We are very glad in this important step to improve our performance through this business combination with [Regionale] reinforcing our long-term with the region. We closed the operation October 20th and are ready to start.

Moving on to Quinsa and our operations in the south of Latin America, we achieved a 16.8% EBITDA growth based on better volumes, better beer volumes, and strong revenue management. We are enjoying industry growth in most of our beer operations and higher market share throughout the region. However, Argentina remains our main challenge in terms of market recovery, mainly in soft drinks.

We continue heavily supporting our mainstream brands in all of the countries. We developed strong campaigns and innovations aimed at increasing communication, renewing [vis-à-vis] identities and gaining presence in all of our markets. Among our innovations we launched a new [Miller Light] label, more modern and attractive.

In [Cumus Baho Sero] a new variety on the [Cumus] family with a refreshing in new (inaudible) drink concern. We are also introducing varieties to the Patagonia brand such as Bohemian Pilsner and [Vice] a weak variety.

In our other beer operations we developed winter campaigns and increased our air time with great content to communicate our brand attributes. The premium segment continues gaining presence within the region. We still have to out perform this direct competitor in leading the segment in Argentina.

In soft drinks we have been very active in the market and in the media with a main event that recently took place, the Pepsi Music Festival. We focused on market execution with actions aimed at optimizing our sales price to precise strict spend management helped by premium beer sales increase in most countries.

In terms of costs and expenses, we experienced higher costs of labor and inflation. We are also suffering important increase in soft drinks raw materials, mainly in juices and sugar as [OSBP] performs while introducing initiatives to achieve savings and industry efficiency to offset these higher costs.

This quarter our soft drinks operations still show the strong EBITDA contraction but we are able to see important improvements from the preceding quarter. We are also confident that we will be enjoying better results soon as the industry begins to recover and revenue management initiatives already placed to recover margins.

Overall, we're confident we can continue delivering excellent results as we are focused on maximizing our top line, with solid support to our brands while achieving efficiency and further cost savings.

Turning to Canada, Labatt resumed a bit of growth in third quarter 2010 as lower volumes were compensated by a significantly lower cost base, leading to an EBITDA increase of 7.6%. Volumes were down 5.4% versus third quarter 2009, which is a similar decline to that reported in the second quarter. The decline remains due to domestic sales. However, it is characterized by an industry decline of 2.4% and a lower level of share loss at 110 basis points. In fact, Labatt improved 30 basis points versus the average second quarter 2010 level.

In regard to domestic net revenues per hectoliter, Labatt expressed a decline of 1.7%. This result was driven by three main factors. The first accounted for roughly half of the decline, was the harmonization of sales tax in Ontario and tough comp due to Bud Light line Europe. The final factor was the refreshed promotional grid we announced during our last conference call in order to stabilize our profitability share equation, that is to balance market share performance and net revenues per hectoliter.

COGS per hectoliter declined by 11% in the third quarter, as significantly lower commodity hedges and continued efficiency improvements combined to drive costs down versus last year. Also we began to see positive benefit of closing the [Hamilton] brewery in April of this year.

SG&A declined by 12.4% in the quarter due to lower volumes, market expense phasing and the lower variable compensation accrual versus last year.

Moving into the final quarter of 2010, our focus remains entirely on our core business. I am encouraged by our ability to deliver positive financial results through continued cost management while working to achieve a sustainable balance between profitability and market share.

Going back to the overall Ambev business, I want to wrap up by saying we are satisfied with our results in general. In Brazil we improved our margins compared to the first half of the year, mainly due to lower costs and kept the strong top line growth as well in Quinsa where we delivered double-digit EBITDA growth as a result of better industry and market share gains and in Canada where despite the difficult industry environment we are able to return to positive EBITDA growth and we put in place the necessary action plans to address our main challenges and opportunities.

Particularly in Brazil, we should continue benefiting from a positive momentum in terms of industry while moving steadily with our capacity expansion projects. In Latin America and south in Canada we expect to continuously focus on improving our results. We remain committed to our cost connect win approach and will continue investing behind our brands in focus on innovation to deliver sustainable and profitable results.

Finally, I would like to say I'm confident we will continue our drive to deliver our goals thanks to our great people, who are the major asset of our Company.

Now, I would like to go back to Nelson.

Thank you, Joao. In this final section I would like to guide you through the main items between normalized EBIT of [BRL42.3 billion] and profit of BRL4.8 billion as disclosed on page three of our release.

Our net financial results reached positive [BRL48.2 million] with [BRL291 million] better than last year. This explains by lower net interest expense as a result of a lower debt and higher cash and equivalents, gains on derivative instruments related to the results of our ongoing hedging policy as well as gains related to currency effects over trade payables, mainly Venezuela.

Our effective tax rate in the period improved 22% compared to 32.7% last year. the main reason for this decrease were lower reported tax on dividends received from [subsidiaries] abroad and higher non-taxable gains, mainly government grants as there was lower (inaudible).

Cash generated from operations in the year totaled BRL7.5 billion, which is 11.5% higher than same period of 2009. Our net debt decreased to negative BRL1 billion at the end of September compared to BRL43.2 billion at the end of December 2009. However, we have paid BRL2 billion of dividend and interest on capital on October 14th, leaving our payout totals to [BRL3 billion] year-to-date and we have announced additional BRL2 billion to be paid in December taking the full total 2010 amount close to BRL5 billion.

I will now hand back to the operator and open up for questions. Please, B.J.

(Operator Instructions). Our first question comes from Lore Serra from Morgan Stanley.

Good morning or good afternoon and congratulations on the results. I wanted to ask a question about the cash flow. You mentioned that the cash flow generation has been very strong and I think if we look after CapEx it's been something like BRL5 billion so far this year and you're going to dividend out a total of BRL5 billion I guess if you do the BRL2 billion. The implication of that is that you're going to deleverage a lot this year because I presume you would generate cash in the fourth quarter so can you talk about where you expect the balance sheet to end the year and whether or not there's a possibility of increasing those distributions beyond the BRL5 billion that you've ear marked so far?

This is Nelson here. Well, regarding the question what we have been experiencing in terms of use of cash, is well, first of all a strong cash flow generation as you said. Even after all the investments we did, we are trailing to an increase versus last year, a significant increase, and that's why we are also making an important increase versus last year pay out [tab] all right. With the BRL5 billion, with which we announced, BRL2 billion still to go, we will have between dividends and some capital right, we will have a 40% increase versus last year.

And again, the ongoing process here remains the same in the sense that once this cash is generated of course we first look into all investments possibilities, I mean be it investing even further behind our operation and assets in Brazil to cope with this growing demand, eventually looking to a transaction. For instance in the country that we are in in Central America, so while that has not changed our focus to invest in the business but of course even after all there is still this let's say between [cause] unnecessary cash the natural way is to pay it out. We always decide on the allocation of these payouts I would say on a regular basis with the Board.

An hour ago, as we said before, is definitely about pursuing a net cash position like the one showed in September, which was more a one-time type of situation keeping the constraints we had during the second and third quarters in connection with the capital increase process that took a little bit longer than we expected. So after that we were able to resume. That's why we have this BRL4 billion announced again, BRL2 billion to be still paid and we'll continue to assess the investment opportunity but in fact, with the strong cash flow generation, we should see this growth in payout ratio that again this year at this moment for this year 40% above what we had last year.

I understand that but you ended last year with about BRL3 billion of debt and if I just take the BRL1 billion of cash and I net the BRL4 billion you're already at that level and then you'll generate cash so it sounds like you will, in fact, deleverage this year. I mean can you give us a sense of where you expect the net debt to end the year?

Well, at (inaudible) it depends a lot on what they're going to have in Q4 right and then it's a very important quarter for us. it's a quarter where we normally do see [tough comps] and you see also improved movements in the market and (inaudible) bring some uncertainty and I wish I could give you more specific guidance on that but you're not making any forecasts at this stage for these numbers in December, which again will be a picture like September was and our goal is to manage on a constant basis and not on a quarter-by-quarter basis, right.

Robert Ford, Bank of America, Merrill Lynch.

Congratulations on the results, guys. I had a question with respect to some of these non-recurring adverse impacts, specifically with respect to the impact of having to import all the cans, particularly given how well the northeast is doing, the logistics as well and I know you've repositioned or re-launched Brahma Red so it seems to me that that's also adding to perhaps the shift in your mix per cans. How much of that, that this impact or the deterioration of gross margin year-on-year is attributable to the can impact? And when we look at the higher SG&A, how much of that is non-recurring in nature and when you go into the fourth quarter what do you expect it to be and then, as you transition into some of the new capacity, how much of an improvement can we -- or where do you think things will normalize out to as we go into 2011 please?

Hi, Bob. It's Joao here. Okay first with 2010 of course a lot of it is still going on, right? We still have a very important quarter to go. The fourth quarter is our most important quarter. I would say that as we started the year we had an impression that [VIC], our variable costs, would grow in line with inflation and it's not, right. And most of the reason why it's not is related to that, okay so one way to think about the variable costs is that you would probably be growing in line with the inflation if it was not for let's say imported cans and a little bit of the logistics piece that goes into the variable cost as well.

Depending on how strong the fourth quarter is in terms of volume, more of it will come into play. It's a little bit more difficult to predict 2011. Of course, we should need much less imported cans because all the suppliers have already announced new can lines that will come in place in the end of the first quarter, beginning of the second quarter. So if there were any imported cans they would -- they could be mainly in the first quarter if needed, right. We don't know yet whether it's going to be needed or not but it will be a much lower number, "regardless of the volume next year" because a lot of capacity is coming, as I said, in the second quarter less next year.

In terms of the logistics cost, that it's even more dependent, much more dependent on the volume growth of 2011 and the imported cans because the imported can suppliers, local suppliers are coming into production capacity. Logistics costs will be a combination of all the new plans that we have just starting now, starting the last few months and starting this month, that will be up and running next year.

These will, of course, offset a good portion of our logistics cost for next year. If it's going to be the total amount or a partial amount, it will depend how much we grow, specifically in those areas, the more distant areas of next year. So not giving a lot of numbers here but of course it's going to be a better year but difficult to give you a lot of idea how much exactly. I think the best one is really the [VIC] growth, the variable cost growth this year, with or without the impact of this.

That helps, Joao. Out of curiosity can you tell us how much of our volume today is in cans versus where it was this time last year and then how much volume are you shipping up into the northeast?

We don't open that much detail but of course the northeast is where we have gained most share this year and the north is how much we [dropped] the most. What we have been saying, what we have been opening let's say is that we grew around 25% overall, not necessarily in cans, our overall growth. And, to be quite honest, the growth was pretty good across the board, across packages and not just cans, okay. It was strong volumes in the 600 ml, in the one liter, in cans as we have. I think what's important to remember is that the north, the northeast and the Midwest were the three areas that we entered with innovation in the latter part of last year or the beginning of this year okay so that's why it took it a little bit more time to grow at the same comparable ratio as the rest of the country.

Great thanks, Joao, and again congratulations.

Lauren Torres, HSBC.

Actually if I could first just clarify your response to the previous question, so with respect to your comments on initiatives for margin improvement should we still assume though for the most part thinking about ingredient costs, packaging costs, logistics costs for the fourth quarter we should see similar pressure but as a result of comps and initiatives we should see gradual sequential improvements as we course through the year. Is that a correct way of thinking about it?

This is Nelson here. I think you're right what you think about it is with regard to the impact of imported cans in our COGS the last quarter will be the toughest of this year. It is where we're going to have the highest impact in terms of the imported cans, so that's going to be even worse that what we saw for instance in Q3. Of course, there are some elements that will bring on the other hand cost of impact in our COGS and the last quarter so one of them is the fact our current hedges is going to be -- is likely better than what they were in Q3. So in Q2 they're pretty much neutral versus previous year. In Q4 they're going to be as likely positive. So, by the way, both much better than what you saw in the first [semester] of this year when we had the worst currency hedge. But again, in terms of COGS it will be an important impact still in Q4 in terms of the imported cans and maybe some of it will also be there in Q1 2011.

On the SG&A part where we have the incremental logistic costs, as Joao mentioned, we already have the CapEx or the investment of 2010 up and running the fourth quarter so that will bring us some extra capacity in the north and northeast regions because in a way we are invested proportionally there so there will be logistical costs still above the average, the historical average, but they're going to be at the lower level for instance what is (inaudible) Q3 so two different directions in terms of COGS, extra pressure because of the imported cans.

In terms of SG&A it's still an impact, an important impact of logistic costs but it's going to be lower than what you saw so far because of the investments that we made in there already, I mean the lines, the new lines, are already live.

And on the sugar side?

Sorry, on the sugar side you know of our hedging policy, right. I mean, the normal hedge commodity in sugar is one of the hedges on the rolling 12 months base so it's going to be pretty much at the level where it is, so the point is different from other commodity. I mean, after a big, big day they went down and some of them are rebounding back now. Sugar is at a higher level, all right, for some time so it's going to be (inaudible) third quarter for us but extra no numbers, [African] number and depression of sugar remained down in Q4 as well.

Okay that's helpful. If I could ask just one other question too generally speaking, as we think about next year, you said you're seeing improvements in a number of your markets but excluding Venezuela and Canada I think a lot of that pressure is more market driven or industry driven. Curious as we think about next year initiatives you have in place like I guess thinking if these market conditions remain challenging how do you kind of manage that and your general outlook at this point as we think about those markets for next year?

Okay, Lauren, well I mean to be quite honest I mean we've been facing tough -- we face, in most markets we faced very tough markets in 2009 and a lot of them improved during 2010 so if they are to maintain the same as they did this year, we'll be a lot of the -- I mean the things we're going to do will be a lot of the things we did this year. I mean, tighten where necessary in terms of expenses, right? Put some money back if necessary again but I think we are very knowledgeable about the markets and very knowledgeable about running the business in these ups and downs so if things continue to be tough in some markets we have to continue to use the same tools we have.

I think what we have added lately to the tool kit, which I think will help us in any market, including a tough market, is to realign more in innovations that [feel] more to our consumers, whether it's the upturn or the downturn. I think if there is an upturn I mean most of our premium brands and in most of those markets we have very good market share positions. We'll benefit but if it's a tougher market I mean the mainstream brands where we also have a very good positioning also have a few with new price points, given the package, the different package that we have launched in different markets, so I think we're in a good situation in case that happens but, having said that, it is of course too early to talk about 2011 and whether the economic momentum or the macroeconomic scenario will be slightly different or very different from what it is today.

Alan Alanis, JPMorgan.

Hi, Joao and Nelson, and congratulations for the results, the clarification on the outlook for COGS and SG&A was very useful. Thanks. So my question has to do more with Canada. I mean, you are seeing there an under performance both in the quarter and year-to-date in terms of market share. That doesn't seem to be explained by a substantial difference in pricing actually. It seems that you're under performing there both in terms of volume and pricing versus your competitor, or your main competitor year-to-date, so I was wondering what are the kind of actions that you're taking in Canada and what should we expect going forward, specifically for next year in that territory please?

Alan, you are right. I mean we are -- we're not particularly happy with this quarter or the year-to-date in the Canadian results. I think what explains it, I mean the main difference, given that price and volume don't fully explain. Really the full combination is in terms of their innovation they came with innovation that are not lagging against themselves last year so they launched two new let's say line expansions, the [Miller 2] and the [Molson M] and they basically have close to [one point of share] this year while they had basically nothing last year. And in our case, our innovation is specifically Bud Light line. That's pretty much the same share this year against the share last year so we're totally -- the comps are much tougher in this particular case.

So going forward, what are the things that we started doing last quarter that I think are starting to show some improvement and we hope will take us from here to a better position against our main competitor. I think first we can say that Bud, that's [Bud 4] that we mentioned we launched last quarter, showed very strong performance in the third quarter 2010 so that's one positive.

Second, Bud Light line continues to show strong results, I mean Bud Light, which is now a 5% market share, a 5% share of the Canadian market so that continues to grow from last year to today. And Bud Light line left significant market demand in the third quarter of last year. The combination of all this is that from last quarter to this quarter we show the sequential market share growth of 30 bips. I think as we continue to invest behind those brands, we will continue to see a better performance in terms of share and volume and together with that will come better pricing. Remember also that we mentioned in the last quarter and I said in the speech about the promotional grid as we were rebalancing the prices of last year. At the end I mean it did grow 7.6%; margin did expand and I think we should go into the fourth quarter with easier comps so we should expect a positive fourth quarter and we will continue to build from there.

Thank you so much. That's useful. Thanks, congrats again.

Gustavo Oliveira, UBS.

I have a question on your accounts payable in your working capital. We saw a substantial spike in your accounts payable and I wonder whether debt is related to some of your can imports that you're getting better terms of your suppliers or if that is specifically negotiation you are going through so if you could provide more color on that.

Sure, Gustavo, I think gives us accounts payable you already touched on the fact that we have can imports that are more expensive before it grows the outstanding balance. The other thing that we have been doing is to always try to improve payment terms. We had some improvement in this area but the other important element here is that there is an increase in our [tactics] right and normally we have payment terms on all the equipment that are higher than the average so in that sense there is a kind of a mix impact that we are buying a more representative amount of things that have a longer payment term.

So deferred (inaudible) better said is more skewed towards longer payment term suppliers and typically we've talking about equipment and all the machines for the CapEx so a combination of better terms. The (inaudible) definitely there but more important the purchase for [file], the purchase mix has also increased towards suppliers with the longer term so all that is helping our say working capital and in the margins the need to invest cash to finance our business so in that sense today we have a negative or negative working capital, which is great. I mean we can grow business to generate cash through these roles.

And just to follow-up on the CapEx, the fourth quarter is where you are going to have the higher percentage of your like surplus billion and rising investment in CapEx. Is there already accounted for in the accounts payable or you're going to have -- you're going to continue to see an increase in accounts payable and then the first quarter of 2011 is when you're going to see more pressures in your cash generation because you're going to have to pay out this CapEx, just to get an idea of how the cash flow should behave over the next two quarters.

Okay I see your question. I think in reality we already have year-to-date something like BRL1.5 billion of the BRL2 billion. We have one that we invested [we have introduced] so it's pretty much -- I mean, if we think of nine months out of the 12 that will be even incremental -- I mean in relative terms a higher concentration of our CapEx the last quarter but that will build and that will even help our payables and the cash impact of this increase is going to be seen more towards 2011, given the type of terms we do have with our equipment.

I am talking more about the equipment side, right. That potentially gets you a see if it works and all sorts of services that's normally stayed within the quarter, just the last month that's a regular payment. They don't have long 30 days instead of pay for the beginning next year. But I would say the majority of it is already accounted for in the outstanding payables amount given that already did BRL1.5 billion year-to-date where that will be certain upside in Q4.

Jose Yordan, Deutsche Bank Securities.

My question is about -- I mean, I appreciate your talking about the can pressures remaining in the fourth quarter etcetera but I also noticed that the market is still growing 10% basically on what's essentially the toughest comparison in the third quarter '09 and I guess number one I'd like to get an idea of when you think the market will start growing 5% or 6% versus the 10% or so of the last five quarters at least?

And then tying into once they've been in the ABI press release that basically said that the fourth quarter EBITDA growth, organic EBITDA growth, would be materially higher than in the third quarter, how much of that comes from Ambev? I appreciate that part of that comes from the U.S. price increases they had but some of it almost mathematically has to come from Ambev, right, so if you can give us any color on those couple of items that will be great.

Hearing the call I think we answered that question so I wish we could talk more about it so there is not a lot we can talk about it. I mean, as you said, there is the math. I think what happens is I mean basically you have for both ABI and Ambev I think we have a somewhat easier EBITDA comps, which is not really the case for volume comps okay. So in terms of volume comps actually the fourth quarter is our toughest comp. Third quarter was actually very good, I mean better than I think anyone could predict because we grew the 12 on beer, Brazil talking about on top of 12 so of course this was very strong.

But I think the fourth quarter is a tougher comp for two reasons. I mean, one because the quarter before it was also as strong as the third but also you always have sort of a price increase during the fourth quarter, which usually has an impact on the fourth quarter and remember that in the fourth quarter last year we had a lot of innovations that were coming fresh into the marketplace and some of them with a very strong volume impact so I would say that the fourth quarter is tougher for those two reasons.

I think another thing that mattered for this year and will matter for next year in terms of what sort of volume growth anyone could expect is the tax increase. I mean, assuming there is a tax increase, again, it could be on the upper range or in the lower range so I think a lot of what happens next year, assuming that is a short-term will be somewhat dependent on taxes. I mean, of course, a year that has a higher than average tax increase has an impact on volume and we have to be ready for that and adjust our sizing, our structure to that but of course if for whatever reason a tax increase -- I am talking about [together] -- doesn't happen, we also have to be ready to go after the volume if there is an opportunity, so tough moment to be forecasting volumes. Of course, with three very good quarters behind us, I think the quarters going forward are more difficult, one because a tax increase should come at a point of time.

2010 was an election year; it was very important to have the investments, a lot of money was pumped into the economy. You should see some impact of all that in 2011. I think the good thing is that we start 2011 on a very good share position. We never had this share position. It gives us choices. I think it's sort of good to have choices. I mean we can choose how to play and how much to adjust and how much to wait for reactions from our competitors so assuming that a tax increase comes into place, I hope not, but assuming it will come we're in a better position to pass that price increase onto prices and see reactions of competitors.

So, making a long story short, difficult to project. I think the reference on ABI is much in terms of easier comps than anything else and for Brazil in a specific year tough comps in volumes, not as tough on the [bidder] level.

Right and if I could follow up on your comment on the market share because it sounds like sequentially third quarter versus second your market share went down 0.5 point. Was there any specific issue you can point to there, any competitive response or will that turn out to be a one time impact? Or I mean I can appreciate that when you raise prices you guys usually are the first to lose share but if that comes in late December, January why is it happening this early?

Jose, I am looking here through my numbers but actually I think we gained because we reached our all time high or actually last month so that accounts so I don't have the exact figure. As I am talking here, we're looking for the exact figure but it may be that should be up to maybe 0.5 point, 0.3 or 0.2 okay but considering line is likely higher so really there is no explanation. I think as prices usually move in the fourth quarter I think the fourth quarter is when we -- fourth quarter and first quarter are usually the quarters where we have some share movement because we enter with a price and then competitors will take between one month to four months to move their prices so fourth and the first are the quarters that you should watch and third is actually the one we actually reached our all-time high share.

Celso Sanchez, Citigroup.

Really just discussing the outlook for 2011 as the revenue line in Brazil continues to be supported by the macro, it's been a bit of a volume story or quite a bit of a volume story for a while now. I appreciate that you haven't made any public announcements on your pricing strategy yet and perhaps there's some dependence there on tax increase timing if there is a tax increase. But on the mix shift side, how can we think about in 2011 some of the drivers I guess specifically in the first instance the northeast growth?

Presumably the pricing there obviously is lower than it is in the southeast but, to the extent that you move and grow in the northeast via direct distribution more than you might in the rest of the country, I wonder how that affects mix. So I guess question number one is what's your direct distribution level in the northeast and the north relative to the national? Is it below the national level and if it is do you see a lot of the growth next year or in the months ahead coming from directly -- direct distribution, or do you see continuing through third parties in the northeast?

I mean, very good question. I think this is one of the questions that also the market will help us to answer. I would say to start answering that I would focus less. I mean we don't open the percentage exactly of direct distribution per region but I would say that the focus on the growth we're much more on the innovation front of everything that we launched in the north and the northeast.

And the fact that we had a much worse share there to begin with that led us -- the combination of the liquid innovation starting with Brahma Fresh that we launched more than two years ago and then coming with the liter and then coming with different cans I think that has a much bigger impact with price points that were price points that let's say the emerging class C of those markets is definitely appeal to them and also building a stronger burn equity with Skol and with Brahma Fresh and in certain regions also with Antartica. That's what led us last year to gain substantial share in the north and this year to gain substantial share in the northeast.

I think going forward we will learn where the market and us "will take the mix to." Okay I think, as I was saying before, we wanted and we were lucky and we worked well to be in a better share positioning so now that we can have choices, okay. And that includes an internal view on the mix. I think an opportunity for the next few years, why do I think 2009 and 2010 were years that where we supported a lot the mainstream brands with a combination of liquid and package. Maybe we can have an end equation starting in 2011, "starting." Of course we've been working for that for a long time but maybe we could have the mainstream and the premium being taken here so that's an opportunity going forward, deal with Skol 360, deal with Stella and deal with launch of bud. I think that combination of that stronger portfolio can be something that may help us on the mix side as 2011 evolves, okay?

In fact that premierization was just the follow-up question on the other side of the coin I suppose, which is we've talked about this for quite some time in Brazil and in Argentina clearly we've seen a major shift upwards on the premium side I think if I'm not mistaken the market share of the premium category for you is about double what it is for in Brazil. So you mentioned Bud; you mentioned Stella and mid perhaps the northeast's role here. Do you see that evolution in 2011 finally beginning to push premium as a percentage of the industry materially higher in 2011 or is it still a much more gradual pace as we've seen in the last few years?

I think, Celso, we have a challenge on the mainstream in Brazil, which was not the case necessarily in Argentina, as you saw when you visited the market a couple of times there. So there you have a more established and maybe a stronger share position and I think the team in Argentina did and still are doing a great job on the premiumization. They could do that given they had a very established let's say share position in the mainstream. I think we -- although of course we have had for a while a very strong share position, I think we were more under attack. We needed to protect and attack also in the mainstream and we did that in the last couple of years and luckily and good work it worked in our favor. And I think now we have the means and let's say the time to also focus. That's why I -- we're working to be an end here, of mainstream and premium and hopefully we can put some speed into place.

It was difficult during 2010. We wanted to do more things during 2010 but volume came very strong and we had to make choices at the point in time we planned to launch Bud this year but we -- given the capacity situation and given that we also wanted to launch the Skol 360, which I think is a great liquid that we now have a new line extension for us going in the marketplace so we've prioritized things that we had in the pipeline that were ready to go. We did that and I think next year with the new capacity that we brought into the place and the new share position we have in the mainstream I think that will give us the chance to have as an internal objective to grow both segments so this is something that we were planning to start in 2010. We were not able to for the reasons I just mentioned but we will have this objective for 2011.

Robert Ford, Bank of America Merrill Lynch.

And I just wanted to ask a little bit about a price increase, Joao. I mean, given all time record high market shares, given can cost pressures in the industry, it seems to me that this is a perfect time to push on price, irrespective of what the tax authorities do. I mean, they're getting more tax revenue right? They're tax rate is a percentage of value, not volume so they're doing just fine, no? Is it -- could you talk a little bit about the timing, the magnitude and how you might implement your pricing this year?

Hi, Bob, I mean let me take advantage of the question and report back on Jose on the market share so the right number is we have a 70.6 share in Q2 and it went to 71.1 in Q3 so gaining 0.5 so, as I mentioned, we gained share sequentially and that goes into your question that we are in a better position. You are right. I cannot anticipate anything where, you know, we still don't know what the government will do. Yu were right. We will be in a better position so we should take advantage of that but remembering that we -- I mean, as a leader, also whatever we do we will affect market demand and it is a very subtle equation on how we play that.

So, again, great to have choices. We will try to make the wisest choice between the equation of price and volume and we have that choice in beer Brazil, given what happened in the last few years. And we will see that in the last months. In the next months we will see what happens. Again, better position, choices but yet too early to give you much detail on the pricing strategy for the summer.

Can you just talk about competition then with respect to how rational competition is behaving, what kind of discipline you're seeing in the industry? It seems as if there's been a little bit more discounting and certainly from on Skol and some of the Heineken brand portfolio in Brazil. I was wondering if I could get your perspective.

I would say, Bob, I mean that's a very good question and one that of course we watch it on a daily basis. I would say on returnables in general more rational. I mean we haven't seen so much discounts. We've seen some promotions it's true on disposable but on and off. I wouldn't say that someone dropped the prices down by X and then [Cochino] that way. I mean I think we have seen the occasional discounting during holidays. We have had actually a lot of holidays during these last few months in Brazil and holidays is a time of the month or time of the year that people discount in general, everyone. So that may be why you are taking or seeing a few discounts here and there, nothing different than other years.

Actually I would say quite positive center overall but again this coming quarter, the fourth quarter I still want you to watch how competitors will respond to an event, to the price increase that the marketplace will see.

Celso Sanchez, Citi.

Just a quick follow-up that I guess no one has asked it so I might as well. You've talked in the past and you've disclosed in the past your forward year FX hedge rate. Can you remind us one, what the actual embedded rate was this year? You had 199 for the year but that was before volumes grew a lot better than you had expected. I mean, presumably you hedged a year ago so what was the rate that you will have effectively realized this year and then what range can we think about for next year on the FX side? Thanks.

Yes hi, Celso, indeed when we commented for 2010 on the implied FX which we're looking into at like 199 but of course the volume grew ahead of our expectations and also, given this quarter rates we had in the course of 2010 we are going to have a full year number better than this. Our current estimate it can be between BRL0.04 or BRL0.05 lower than this or around 194, 195. The effective rate for 2010 we are having -- we already have the majority of our 2011 exposure locked, given our policy, but since we still haven't finished that we believe it's better to provide a view on that in the next quarter when it amounts for full year results and before we can be able to talk with more certainty about for 2011.

But I just said it's going to be better than this year of course. I mean, when I said we have locked the majority of our exposure, not everything, what is left may change a few percent up or down. That's why I don't want to commit to anything at this stage but it's going to be lower if you take the average year-to-date, the spot rates by it's where the reference for us for 2011 hedges. We have seen [instantly] lower and that, of course, helped our costs for next year.

Okay thank you.

Thank you, ladies and gentlemen. This concludes the question and answer session for today's conference. I'll now turn the floor back over to Mr. Nelson Jamel for any final remarks.

Okay thank you, B.J. and thank you everybody for attending this call and thank you for your questions. See you next time. Bye, bye.

Thank you for attending today's presentation. You may now disconnect your lines and have a great day.