Ambev SA (ABEV) 2011 Q1 法說會逐字稿

Good afternoon, and thank you for waiting. We would like to welcome everyone to AmBev's First Quarter 2011 results conference call. Today with us, we have Mr. Joao Neves, CEO for AmBev, and Mr. Nelson Jamel, CFO and Investor Relations Officer.

We would like to inform you that this event is being recorded and all participants will be in listen only mode during the Company's presentation. After AmBev's remarks are completed, there will be a question and answer section. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the 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, Maureen, and good morning, good afternoon, everyone. I'm pleased to be with you today to discuss our 2011 first quarter results.

Before I start, I would just like to remind you that, as usual, the percentage changes discussed during this call are both organic and normalized in nature. Normalized figures refer to performance measures before special items. Special items are either income or expenses which do not occur regularly as part of the normal activities of the Company. As normalized figures are non-GAAP measures, we disclose our consolidated profits, 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 first quarter financials.

Turning to the results, during the first quarter, our consolidated EBITDA was close to BRL3.1 billion, which represents a 12.4% organic increase when compared to the first quarter of 2010, while our margins expanded 80 basis points to 47.2%.

Our EBIT Brazil increased by 11.4% in the quarter, supported by a 10.1% revenue growth and EBITDA margin increasing by 60 basis points to 50.8%.

Our Latin America South operation delivered during the quarter volume in both beer and soft drinks of 4.4% and 2.5% respectively while growing EBITDA by 20.6%.

In Canada, domestic volumes decreased by 6.5% in the quarter due to both industry decline and market share losses year over year, despite 30 bps gains versus Q4 2010, while our EBITDA increased by 3.7%, with margins increasing by 290 basis points due to the effective cost management.

Normalized profit reached close BRL2.21 billion in the quarter, which was 21.7% higher than last year, and normalized earnings per share increased by 20.9% in the quarter. I'll comment further on profit at the end of this call.

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

Thank you, Nelson and good afternoon, everyone.

As previously stated, a strong beer industry growth in Brazil from previous quarters has decelerated mainly to a tougher comparison against first quarter 2010. Also the heavy rains in January, which has also negatively affected the soft industry.

In Canada, the industry was down as a result of tough comps versus last year due to the 2010 Winter Olympic games as well as some weather.

In the other business, HILA-ex, Latin American soft beer and Latin American soft CSD the industry was positive, driven mainly by economic recovery.

Going deeper into Brazil, our beer volume growth was 0.2% in the quarter, impacted by a softer industry and a 100 bps share loss year-on-year as a result of our price increase for the summer, which widened the gap, the price gap to competitors. Our market share in Q1 was 68.3%.

Our beer net revenues (inaudible) in Brazil increased by 11.7% this quarter, mainly as a result of price increases widely above inflation, higher weight of direct distribution and also flat excise taxes, which were adjusted by the government April 4th by on average 11% for our beer volume. We have passed through our sales price the impact of this tax increase.

Both our liquid and package innovation continue to deliver a solid performance. Our (spoken in Spanish) returnable glass bottle in the 250, and now one-way bottle, are two examples on the packaging front and our strategy of rolling out part of the innovations nationwide like we just did for Skol 360, is also an important step to make innovation even more relevant for top line growth. Besides our brand health indicators keep showing the strength of our brands.

This year we're also increasing our focus in premium beers through our local juice Bohemia Original and also enhancing (inaudible) to execution while getting ready for the launch of Budweiser in the second half.

Now talking about our cost of goods sold, Brazil beer cost of goods sold per hectoliter was up by 12.4% in the quarter as we were negatively affected by higher packaging costs, including the impact of imported cans, which should not affect our results for the remainder of the year.

Beer SG&A grew by 11.8% in the period, as a result of general inflation, higher logistics costs due to the increase of direct distribution and to product transfers between breweries. And we still have relevant capacity increase plans to execute in the first half of this year, which should help our results in the second half of 2011.

Normalized beer EBITDA finished up the quarter with a 12.3% growth versus same period last year and EBITDA margin expansion by 20 points.

Moving to soft drinks, our volumes in Brazil delivered a negative 5% growth in the quarter as a result of industry conditions, while we kept our market share almost flat standing at 17.7% as an average for the quarter.

Despite negative volume versus last year, we were able to deliver a 5.8% EBITDA growth, driven mainly by a 210 basis point margin expansion. Net revenues per hectoliter grew 6.2% in the quarter, as a result of price increase in line with inflation with COGS per hectoliter increased organically by 0.2% as a result of sugar hedges, PET resins, and packaging mix, offset by a better currency hedge in product mix. Looking towards the year-end, we anticipated a higher cost per hectoliter, mainly due to PET resin, which are not able to hedge longer term.

SG&A, excluding depreciation and amortization increased by 8.5% in the period mainly as a result of higher logistics costs and sales and marketing investment phasing.

For 2011, we continue to see opportunity in the CSD business, despite the commodities pricing environment and the challenging competitive landscape. We will keep our focus on innovation, such as our recently launched one-liter returnable glass bottle for Guarana Antarctica in the CSD segment, and the Lipton (inaudible) in the non-carbonated business.

During to HILA-ex, volume increased by 13.2% in the period, mainly as a result of industry recovery for the region and also the bottom market share gain in Dominican Republic.

Moving to Latin America South, our net revenues per hectoliter increased by 18.6% mainly due to pricing (inaudible) inflation in the region, while we faced higher input costs, mainly sugar, and a high SG&A to deliver at 20.6% EBITDA growth.

We're enjoying market share growth (inaudible) in most of our beer operations, including Argentina, where the market is recovering from a poor 2010. We continue heavily supporting our mainstream brands through communication, value-added innovation, and market programs to take full advantage of the better momentum in Argentina and the region. In this quarter, we launched the Quilmes bottled zero beer at the national level while Quilmes mother brand looks even more renewed.

The (inaudible) continue to grow, while our brands gain market share. Still up to our impressive performance keeps being an important source for volume growth in Argentina. Our cost per hectoliter (inaudible) increased by 19.2% and our cash has generally by 27.9% as we experienced higher cost of labor and high inflation. We are also suffering freezes in commodities, mainly soft drinks raw materials, such as mentioned, juice, sugar, and PET. We are already working hard on implementing cost cutting initiatives to overcome discussed prices and maintain our margins towards year end.

Turning to Canada, Labatt posted its third consecutive quarter of growth, delivering a 3.7% EBITDA increase versus first quarter 2010 as lower volumes were compensated by a lower cost base. The Canadian beer industry declined 6% in the first quarter, mainly due to a double-digit drop in March, which was particularly the effect as we were cycling the 2010 Winter Olympic Games and also faced a much colder Q1 across the country, with significant increase in precipitation versus last year.

The combination of industry volume and a 50 bps share loss led to overall domestic volume decline of 6.5% in the quarter versus last year. Nevertheless, our efforts of the past four quarters to (inaudible) share in Canada have been successful and we improved shares sequentially versus the fourth quarter 2010 by 30 basis points, reaching 41.2%. Our focused vendor showed strong brand health and they're starting to see this translated to better share and positive brand momentum.

In the first quarter gross margin expanded by 320 basis points as net revenues per hectoliter grew 0.9% while comps declined by 8.3% as we benefited from lower commodity hedges versus prior year and our continuous improvement effort, as well as cycling of the savings from the Hamilton Brewery closure in April of last year.

SG&A excluding depreciation declined by 4.2% in the quarter on the back of lower volumes and we were able also to offset 8% increase in sales and market expense through a lower fixed cost base. Overall, we believe that the market share profitability equation has improved in Canada. Looking forward, we plan to build off this base.

Going back to the overall AmBev business, I want to wrap up by saying that we are pleased with our consolidated results as we delivered a double-digit top line growth combined with 80 basis points EBITDA margin expansion as a result of margin improvement in almost all of our countries.

Looking into the different businesses, in Brazil we built options during 2010 given the market share and preference gains in beer, which have allowed us to improve our profitability in Q1 versus last year and still hold one of the highest ever market share ever for a first quarter.

Going forward we expect to continue to deliver strong top line by balancing volume and net revenues per hectoliter growth, wider margins for the improvements we cycle the impact of 2010 importing cans and higher logistics cost.

In soft drink, we will keep focusing on innovations to improve our market share positioning in a challenging cost environment. In Latin America South, we also delivered solid EBITDA growth and strengthened even further our brands as well (technical difficulty) why we invest in our mainstream beers. In Canada, despite a still challenging top line environment, we continue to deliver a positive EBITDA growth through an effective cost management.

And finally, HILA-ex we remain on track to deliver our long-term strategy in the region.

To conclude, I would like to congratulate our people, our major asset and our most important one, to say that I'm confident we will be ready to take the advantage of every opportunity going forward.

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 BRL2.7 billion and profit of BRL2.1 billion as disclosed on page three of our release.

Our net financial results were BRL45.5 million negative, which is BRL141.1 million better than last year. This explains by lower net interest expense as a well as better results on derivatives related to our ongoing hedging policy.

Our effective tax rate in the period improved to 22.2% compared to 25.4% last year. The main reason for this was an increase in the income tax incentives related to our investments in the northeast and north, and higher tax benefits from interest on capital payments.

Our net debt was close to BRL1 billion in the first quarter, compared to a net cash position of BRL207 million at the end of December 2010. And during the first quarter we paid BRL1.8 billion in dividends.

We remained committed to our CapEx plan, particularly in Brazil, where it may add up to BRL2.5 billion this year as we do see relevant growth opportunity in the beer industry moving forward and plan to invest adequately to fully seize them over the medium and long-term.

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

(Operator instructions) Robert Ford, Bank of America Merrill Lynch.

Congratulations on the quarter. I had a question with respect to some of the non-operating stuff. And there was a sharp decline in depreciation, particularly if you just look at that portion, which is associated with selling and distribution. I was wondering what was behind that.

I also was hoping that you might give us some expectations with respect to your effective tax rate for the year, as well as maybe touch on the life and size of some of the tax investment incentives that you're obtaining, particularly as you expand. And those that you anticipate this year as a result of the bigger CapEx numbers.

And then lastly, Nelson, you touched on the sharp decline or reversal in some of the derivative and non-derivative instruments that you have on that financial expense line. I was wondering if you could expand a little on what's behind those and whether -- what the timing of those cash flows are like.

Let me start with the point on depreciation. What we did end of last year we made an assessment of the useful lives of our assets and made some adjustments that led to a one-time adjustment in Q4. I'm not sure if you remember, but we even took (inaudible) a scope change versus Q4 2009. So since then our depreciation rate has changed. There were some revised up, some revised down. Net we had an increase on the effective impact on our P&L, which in the end is relating to a tax benefit as we have an acceleration of the depreciation of the assets.

And we are still treating these changes as a scope in Q1, Q2, and Q3. We are going to do in that course of this year so that you can get a better view of the organic performance in the sense that last year in Q4 we made the adjustment entirely for the year in Q4 while this year we're going to have it spread over the different quarters. So that's the main reason why you see some swings on a quarter-by-quarter basis, which again we are trying to treat the impact of the new useful life of the (inaudible) scope change.

Overall it is natural to expect that if you look into Brazil specifically the higher CapEx of the last year and also this year is translated to higher depreciation and specifically in our Brazil, let's say P&L. While outside Brazil, for instance, the (inaudible) through the closure last year implies a reduction of the depreciation moving forward. So we have a net impact in the end of the day in our consolidated figure.

Moving into effective tax rate, what we had was an important decrease versus last quarter, but as you know, I mean there are some swings on a quarter-by-quarter basis, maybe because of the timing of the different fiscal planning. So for last year we had full-year 21%, about 21%, 22% effective tax rate. So Q1 was pretty much in line with last year and that's what we should see as an ongoing effective tax rate.

Of course it is always challenging in the sense that as we increase our earnings before tax, we are modeling tax at the corporate tax rate of 34%. So we have to come up with ways to try to offset for that. So longer term, we could assume some increase year-over-year, but still this year we think we can match last year effective tax rate. Of course on a quarterly-by-quarterly basis this is always with some ups and downs.

Specifically on the incentives we get as a counterpart for the investments we are doing, some of them, they flow over the income tax line. You can see that in our press release. And that was an important increase. We break it down in the specific table on the income tax section. We had a positive impact of BRL43 million last year in Q1 while this year we had a BRL77.6 billion, an important upside in this line.

And we also have on the other operating line incentives related to VAT book it there. And that was one of the drivers for the increase. If you look into our other operating income lines, there was an increase from BRL94 million to BRL135 million. And we think this number, majority of it is linked to government grants, VAT government grants that flow into our P&L.

Sorry, what was the last point, Bob, that you mentioned? Because it was about depreciation, effective tax rate? And derivatives. Sorry. There we have to -- we also have this specific table in our press release where you see the overall net finance result moving from BRL187 million last year to BRL45 million this quarter. And we break down the different elements in there.

So what we show there is that of course in terms of interest income where we had an increase because of not only high interest rates, but also an average, let's say cash higher than last year. Our average cash moved from BRL4.8 billion to close to BRL6 billion. So that's impacting the upside in interest. (Inaudible) experts who had somehow the other impact have also higher interest rates there because of the interest rates evolution here in Brazil. Remember they're fully hedged on our debt towards real through (inaudible).

And then we have two lines there on gain and loss of derivative instruments and non-derivative instruments. So everything related to derivative instruments has to do with the mark-to-market adjustment of all the transactions we have, for instance on our debt. While the non-derivative instruments has to do with exposure we have in our operations abroad, and of course since there are (inaudible), for instance on payables, we do recognize this as a financial expense.

So a little bit maybe too detailed and complicated. Can always go into more details and provide extra elements. They're also available in our 20F. But I hope I kind of answered your question.

It's very helpful. And then on the derivatives or the hedging on the debt obligations, you've hedged both the principle -- or all the amortization and the interest payments, is that correct?

That's correct. Everything is hedged into reals.

And then on the VAT assets, what life do you have on most of those state tax investment incentives?

It's really, really long term. We have the maturity in our 20F. I don't know it by heart but I can tell you not yet above five or can reach up 10 years depending on the specific incentives we get. Which are all, let's say, different state-by-state and they are according to the local legislation in each state. So this is really detailed in our 20F as well.

And with the new investments you have, because if I look at your 20F I'll see it through 2009, but the 2010 one isn't out yet and -- or [Moses] is telling me it is. I'm sorry. But on the new investments that you're making, do you see tax investment incentives that are in line or better than the ones that you've recently been obtaining?

Yes, they normally rise in the sense that they always follow the local legislation, right? So in some states you have better incentives. In others you have incentives let's say from a pure financing perspective less attractive. These all take into account when for instance we decide to make an investment. So we of course did the logistics in (inaudible) quarter the primary impact when you want to localize a plant we look into the logistics bank but also take into account to look into the net present value of the investment as a whole. We balance also the different sort of incentives we may get, which as I said, is different state-by-state.

Alan Alanis, JPMorgan.

I have a couple of questions. The first one has to do with working capital. I mean we see your operating cash flow declined year-over-year. And if the working capital would have been stable, it would have not declined. So getting a look into the filing you did on BOVESPA, we see that there's storage there in inventory both in raw materials and finished product. And I was wondering if you could comment a little bit more on this increasing inventory and what would be the kind of level that we should be expecting going forward in terms of working capital needs? Please, that will be my first of two questions.

Well, as we have been pointing out in our calls, we have been putting a lot of focus in terms of our working capital measurements since 2009. We even have an active working capital. So payables are bigger than inventories and accounts receivable. That's to the case, but in fact when you compare versus last year or versus December, for instance, our working capital, which is negative and that's great, but it's less negative than it was before. So we (inaudible) it less value from this lever if you well. Or we couldn't generate cash from working capital.

The main reasons are you already took it on inventories, that's the first one. And the reason why our inventory level is above what we were kind of -- we've been expecting is that we hadn't yet looked at the sales that didn't materialize as we planned, so our volumes -- our total volumes was -- we're a little bit off of our expectation, which means at the end of the day you not only lose eventually the margin but also stick with the -- we'll have the inventory in your plans on the distribution center. So that's one.

This (inaudible) that you finish good inventories that are above what you would expect, but that again acts, I'll say relatively quickly and fix. And that's what we are doing as we speak.

The other element that is impacting our inventory level is that specifically on raw materials. Specifically on barley, we had a harvest that was better than what we were forecasting. And even much better than last year's. So of course since we are (inaudible) on that, and have commitments with the farmers, we already bought more malt and barley than what we would need for let's say the next months. Of course we can either use that and that of course would take us a little bit longer to normalize the situation, and maybe decide on some spot sale. So we're going to be managing this as part of our efforts of maximizing our -- or improving our working capital.

The other elements is on the payable sides where, especially on a quarterly-by-quarterly basis we could see and will see some ups and downs. It was some shifts in the sense that we have -- I'm talking here more about CapEx related payments. So since we are stepping up CapEx and we have very good terms on equipment and machinery, so we may have on any given quarter a concentration of payment with eventual CapEx, which will trigger increase and decrease our payable in relative terms.

So for instance, last quarter, the last quarter of 2010, we had a step up in CapEx. All of CapEx being realized. But the payment only materialized in Q1. So that's why payables reduced first what we had in December 2010. That's normal and on a quarterly-by-quarterly basis you have some strings. But I mean to conclude, I would say that to -- as I said before, we are very focused on working capital management on generating cash and (inaudible) value through this lever. We remain focused on that this year. There is no reason why it couldn't continue to extract value from that. And again, it is to an active cash -- a negative working capital position and we think can grow even better as we fix inventories and have these adjusted on the payable side.

That's extremely useful. Now my second question has to do with Canada. And I think it would be more for Joao. And it's more of a longer-term question regarding the structure of the industry. I'm kind of surprised. Correct me, please correct me if I'm wrong. The two main players in Canada seem to be losing market share versus the much smaller players. And that's not very common that we see that kind of situation when you have two very dominant players in a particular industry. What's happening in Canada? How do you see that market of evolving, Joao? And from the part of the role of these smaller players, and the overall growth of the market share and of the overall industry?

In the last couple of years, combined with the crisis that like in the US hit Canada harder than it did other markets, both us and our main competitor have lost a few points. I think this trend, to be quite honest, has started a long time ago from two ends. I think from one end in the value segment, the value segment was a segment that for a long period of time neither us or our competitor were tapping into that segment. And that segment was predominantly smaller players. So this was a value -- this was a segment that was growing for some time. I mean we in a way played an important role with the acquisition of Lakeport, that somewhat to us playing an important role in that segment.

And then you also have, I mean some of that participation also the very high end. I would say that on average the biggest portion would be in the value on a total. More important than other markets and different from other markets it was a smaller player, so likely export, which was the main one. And now it's a combination, okay? Still a more sizable one in the value, but now both us and our competitors having a better position, let's say, to compete on that segment.

So I wouldn't say it's a sudden change, but it has been a longer-term change, which has continued in a very short-term. I wouldn't say it's been dramatic, but continued. I think from our side, and I believe this also holds true to a certain extent to the competitor, we've been trying to broaden our portfolio to be able to compete and halt that decline from our standpoint against competition. So I do see a possibility that we'll revert that situation in the very short-term.

Or to be quite honest, in the longer-term, not just the acquisition of Lakeport, which gives us a good position to fight on that segment, but on the focused brands, when you look at the investments on Budweiser, Bud Light, like (inaudible) and Stellar, we are able to broaden our attack in different segments, be it the core premium or be it the premium side. So I do think we are building options, trying to build options in Canada to avoid a situation that, as you said, has occurred in the past.

Lore Serra, Morgan Stanley.

I wanted to go back to Brazil for a second and ask a couple of questions. And let me start on pricing. If we look at the pricing over the last, let's say two quarters, your revenue per hectoliter is up something like 15%, 16%. And I understand some of that is mix and it's hard for us to separate that out, but I'm guessing most of that is frontline pricing.

And if I understood correctly, you took another 3%, 4% at the end of March for the excise taxes, so your frontline pricing could be up 15% or maybe up to 20%. So could you help me understand? I mean we've not see a price increase like this -- I can't remember one. And can you talk a little bit about how the consumer is taking it, and how competition is reacting to those price moves please?

This is Joao. I think we're not going back to Brazil since maybe to the first big question on Brazil and probably the one that has shown. I think the first important point you mention here is that I think we mentioned last quarter, but we've been talking about this. I think given the successful commercial strategy we built in the last couple of years, we've been saying that that has allowed us, that has given us options on the market share/profitability. But I would also include volume equation here. Okay?

So we have after an important price increase, and I go back to some of the numbers, I like where we stand. Always hope to be better, but I think after an important price increase, given the options that we built we sit on a much more comfortable situation, which makes us feel very positive for the near-term.

On terms of the increase, I think you are a little bit on the higher end. It hasn't been that -- I don't see the 15%, 16%, 17%. But the high teens you see is a combination of a high single digit and then some of the things that we mentioned, such as high (inaudible), flat excise tax on the first quarter, which we don't see in the second, right? There is always the state taxes, in fact that always seem to happen in third quarter that pick up some effect on the second.

And on the pass through of taxes, it's maybe closer to 1.5%, 2.5% than from 3% to 4% to offset. Okay? But we did that. We think it's important to show some discipline in the marketplace. And we did that not just by protecting the profitability by the beginning of the summer, and then once again showing the discipline of passing through the government excise tax increase.

In terms of how consumers are reacting to that, I would say that it's a little bit difficult to say how they're reacting from the second price increase. Because given that the tax increase was on April 4th, the price increase to compensate for that was not due by the end of March, it was due in the month of April. So we will see the effect of that price increase really in May and not in April. Because most of this ended up going towards the second half of the month. Okay? So I think May and June will help us see a little bit more how they're reacting.

I think after the combination of our price increase, but also the government is fighting hard the issue of inflation and fighting hard the issue of a strong FX, which I think they are right in doing so. But in order to do that they've been trying to decelerate the economy a little bit, trying to hit their magic number's 4.5% versus the 7.5% of last year. And that can take a -- that has also some impact on the overall beverage industry, not just beer, but beverage industry in a whole.

I would say that towards the end of the first quarter we started to see greater consumer acceptance of the price increase, so we start to feel better towards the end of the quarter related to volume. So I think that's good news. The same trend continuing into April and I will see during the month of May how really consumers will react to this second price increase, which was not as significant. So we think this consumer acceptance will continue into the second quarter.

And in the fourth quarter conference call you talked about how you raised prices and your competitors lagged a bit. Can you just update us on that? And can you also give us a sense of what your expectations are for volumes for the year for the industry? I understand -- or yourselves -- I understand that the first quarter was a low point, I'm suspecting from your comments in the press release. But lots of moving parts between an economy that's still pretty strong but obviously a lot of front line pricing and some more inflationary pressures, but pretty good wage increases. So can you kind of see how -- give us a sense of how you see all those factors balancing out to growth this year?

Sure. Well, let me start first with terms of competitors following up. We see a closing the gap regarding returnables faster. Okay? So I mean up to let's say this second price increase the catch up was within a lengthy period, but happened within this three or four months. So we already see our share in returnables, again very close to the all-time high. So very good situation there.

In terms of cans, we had a price increase that was not different let's say from the returnables, but the difference is that in the last few years the pricing return in cans had not matched in the price in returnables. So we see they haven't closed the gap, in certain months they actually had widened the gap. But during the month of April, maybe because of the tax increase, we see them closing the gap for the first price increase at the end of last year. So they decided to take a longer period of time in the one-way presentation. For most of the first quarter they were not there.

In the beginning of the second quarter they did follow the most important one, which was the first one. And now we'll see how they will follow or not the second price increase during the month of May. So I would say moderate to good news in this particular piece.

I think a comparison that is worth taking, you mentioned the wage increase. As you know, this year will be the lowest real wage increase of the last eight years or the last government because it's very close to zero when you only look about the minimum wage. When you talk about total income, there is some growth, but again, will be the lowest gain in the past eight.

And if things go as planned, next year will be the highest within the last eight, nine years. So we're playing with that combination a little brash on the very short term, although the economy, as you said, is too strong, but in particular the wage increase is not where it comes, it's more the total wage rather than in the minimum wage one.

But a comparison I think also worth taking is when you compare beer and soft drinks, we know beer, it's less vulnerable or more resilient, if you want, than soft drinks. But we see the soft drinks industry suffering or being hit more with a lower price increase than the beer one. So I think beer is more resilient, I think the brands are very strong. Our market share position is very good and we feel good about the near-term future. As you know, we're not giving any specific guidance. I just said that I feel it's -- the market is accepting this price increase and within the next few months we should see a better outlook.

Of course we're going to be cycling two years of above 10% or close to 10% growth, so these comps will be there for every quarter, and not just in the first quarter, but given that the first was probably the toughest comparison given the overall situation, we feel it could get better from here on. On top of the macroeconomic change we also had the weather, we had the price increase, so all those three things will not be there in every quarter.

In soft drinks situation was I think even stronger. We had a price increase in line with inflation as our competitors also did and mentioned in their own calls. But the market in the very short term showed less resilience than they did in beer, which for the time being is what we expect. A softer soft drinks than the softness in the beer side.

Lauren Torres, HSBC.

Just quickly following up I guess on the previous question with respect to Brazil. Just kind of pulling together the answer to that question. Just curious though if that price gap is narrowing? I understand it may take another month or two to really become more normalized. But what that said, thinking about volume share gains, do you think it's something that we may see in the second quarter? Or is that really a second half event for you?

With that said too, I felt some of the comments with respect to returning to better growth in Brazil and focusing on next year to be directionally what you were referring to. So just really curious as that price gap narrows and thinking about the second half growth, why shouldn't we expect those growth rates to return to similar growth rates that we saw a year ago?

Let me try to go a little bit deeper. I think you asked two things, right? One is the volume and the other one is the share, right? What we're referring to first, but it could be for both things, is we see a strong situation in terms of -- a better situation in terms of volume overall as we go on. Right? And then that in the first quarter of course.

And I mentioned that we already feel very good about the share in returnable and not as much in the one-way because they have followed for the most part in returnables and not as much in the one-ways.

Going forward, I mentioned at the beginning that I feel very good about the share profitability equation. We are exercising some of the options we built in the last couple of years, defending our profitability in the short-term. We can make that choice. And we have also many choices still to make on the SG&A front to protect not just the gross margin, but also the EBITDA.

Why I don't see us going back to a situation as strong as last year is a combination of two things. One is you are a not seeing the sort of wage increase that you saw last year. Okay? The wage increase this year in total income of the population, the gross year-over-year is not the same. The inflation, which also eats from our consumer pockets, is also higher, also with food inflation. So the combination of the wage, some more inflation, and also a, to a certain extent, a higher price increase this year compared to last year, volume will not increase as much as it did last year.

Why do we continue to feel very positive on the medium term? It's because everything could go back to where it was in January 1st, 2012, because it seemed a law now that they will have to make a 13% to 14% wage increase in the beginning of next year. If they do that and inflation is even more under control, going back from 6% to 4.5%, which is the government objective, then you could have the macroeconomic situation in 2012 that you had in 2010. That allowed us, together with a, let's say a price strategy that was more in line with the inflation to see that sort of growth. Right? I'm just making up a scenario here to explain why in 2011 the scenario that we're living in is not exactly the same one that we were living in in 2010.

If I could also just ask about cost inflation. I know you were speaking on the soft drink side and PET resin costs, things like that being an issue. How about on the beer side as far as your exposure, whether it be to ingredient or packaging costs there and your comfort level is maybe hedges and/or contracts maybe rolling off what your exposure is, particularly in light of some of these costs may be going up in the next six to 12 months?

I'll give an overall comment and then I'll ask Nelson to give you a little bit more color or detail. But we mentioned on purpose on the press release that we see margin expansion for the beer side for a combination of two things. We have a better situation when we look at the hedgeable commodities and hedgeable currency and also the non-hedgeable ones. We see a better situation in beer and that's why we mentioned that what you saw in the first quarter we hope it will be better going forward.

And then for soft drinks we see the other way around. We see the, let's say we know about the hedgeable ones of course, but the non-hedgeable ones, such as PET, if for the remainder of the year we continue to see the level that we're seeing for the second quarter, we gave the outlook that that margin will be the other way around. We saw an important increase for the first quarter and then we'll say a decrease in the other quarters because of that.

And then my other hard thing that I mentioned, not just on COGS but on SG&A overall, I mean we are in a situation that we still see many opportunities to find cost savings on the SG&A front in order to compensate, let's say, this way for an overall market softness that we see. I mean if -- compared against -- to last year. So we think we have a lot of things in the two blocks, not just on the top line, but also on the SG&A, to respond to that situation.

Having said that, I'll let Jamel give you a few more data points on this.

So in terms of our costs, as I say structural, there is an important amount that is related to commodities and currency, and of course a smaller amount that's really true to the local stuff, like some fixed costs, label costs, and so on. So what we saw, and we have to really make a split here and differentiate beer from CSD because why with beer we had an important increase, which was primarily driven by the imported cans and that's a very important observation.

Because (inaudible) talked about that in the last call that in the course of 2011 we would have some easy comps in terms of beer COGS because of the polycans that affected our results last year. But when you look on a quarter-by-quarter basis, we are in Q1 2011 with an important impact of the imported cans, while in Q1 2010 there was zero impact of the imported cans. That as we started to use them as of the second quarter last year.

So we thought it was important to provide this guidance so that you guys can have a better view on what is the real underlying, let's say, trends on our COGS. Because from now on, from Q2 on, we are going to have it the other way. We are going to have zero impact of the imported cans in beer in 2011 and that base of 2010 where it's going to be there and the (inaudible) is going to be a natural upside on there.

So again in beer the main impact was linked to the imported cans of course. We had commodities, the key commodities there being barley and aluminum. We think what an increase, which is part of our hedging policy, which somehow has moved a little bit the impact of the commodity increase that we saw in the marketplace.

It's an important impact there, partially offset by currencies. So broadly speaking, we should see COGS -- beer COGS going down. And even on (inaudible) elements in there is that in Q1 the dilution of the label cores and the fixed part in these COGS didn't happen because of the flat volume. Once you just had a 0.2% growth as it gets better we would also start to benefit from the (inaudible) dilution of the fixed costs.

Difference in soft drinks, the commodity sides and currency, which is even more relevant in specific terms, commodity for soft drinks, at least sugar was already at a very high level last year, so why with beer the commodities price increase happened more towards year-end and also in the course of 2011.

In soft drinks, we already have sugar at the very high level. Actually sugar costs for us in reality, even when down in Q1 because of the currency benefit we got, so that's why you saw it a 0.2% growth. But there are also commodities we are not able to hedge there, and particularly PET with the recent spike in oil prices. I mean we anticipate some pressure in the course of the year.

So a lot of data points, but net net we are still aligned with this guidance of COGS spreads during the year growing in light of inflation, in which beer should grow, even slightly below inflation and their soft drinks going ahead of inflation, but given the different size of each, given the different volumes, right, of beer and soft drinks, it could end up around inflation.

Luis Miranda, Santander.

Just a [formal] more question regarding the logistic cost and the potential savings that you might experience during this year. I want to know if you give us some color if the benefits of the expansions during the second half of last year have already been implemented or you still have some potential for the first half? What could we expect on the second half on the back of the expansion in (inaudible)? Thank you.

Nelson here. So well regarding logistic costs as we already mentioned before, of course might start to feel some of the benefits of the investments we did. Of course as we said before, our footprint is not yet ideal. We have been and we have important investments right now being executed. And for instance, we have the Pernambuco plant, which should be up and running during the second semester and is expected to be the second biggest plant in our entire footprint. As a key investment too is a little bit depression on the actual this course, that's driven by this change in the sales mix towards the northeast of Brazil.

If you take the fact of logistical costs and our SG&A this particular quarter Q1, I would say the above inflation growth was half of it roughly linked to high direct distribution, which of course more than pays off at EBITDA level because we have an upside in the net revenue product 2 liter, so that's just a shift on the business model somehow.

And the other half of the above inflation growth as linked to these extra transfers that are at the lower level than we saw first in Q3 and Q2 last year. But it still can get better and that's part of what you have mentioned in terms of our opportunity in improving our SG&A towards year-end.

Celso Sanchez, Citigroup.

I have two questions actually. One sort of shorter term and one a little bit longer term, bigger picture. The shorter term one, just to follow up on the logistics. If I read the press release right, and please correct if I'm wrong, it sounded like there was maybe some degree of transfers in this quarter to the northeast, preparing for volume demand that didn't quite materialize. So I wonder if going into the second quarter specifically you might have slightly lower logistics costs, even before Pernambuco comes online because of the fact that you've got inventories kind of where you need them, where the demand presumably is. Is that one way to think about it or not?

Yes, Celso. It's Nelson here. So some of the costs indeed we transfer (inaudible) the single (inaudible) that (inaudible) was ended up higher than what expected because we didn't sell as much as we planned for. Some of the logistics also you could say that we transferred and we didn't sell, so was a kind of anticipation of transfer costs. That probably we'll not have to do in Q2 and beyond. Right? So part of this we can say well, what is inventory already transferred. We are going to save not only the inventory, the working capital side, but also the logistics associated with that.

But there is also an element there of innovation rollouts. Right? I mean part of the investments we are doing is not only about viewing per capacity, but also making the footprint more appropriate to handle the rollout of our innovations, just some of it on a national base.

So the point here is CapEx for sure we use discretion at all the capacity front, but also in terms of farther to innovation as the ability in a more balanced way. And indeed, part of the logistics we could save in the course of the year because as volumes catch up or you reduce structure if they don't. So that's a thing -- a balance of the data management. But the major driver to get this better is going to be the CapEx plans that we have in 2011.

Actually that answered -- dovetails very nicely with my bigger picture question, which was specifically about innovation. Can you help us understand a little bit -- I know this has been a theme, Joao, when you were at (inaudible) and now obviously you've been pushing it much harder now that you had the record market share last year. How shall we think about the contribution of innovation in the portfolio? However you decide to measure it, whether it's last 12 months worth of launches or whatever it is, how that contribution has been to incremental growth and how you see that evolving, let's say over the next 18 months?

I think I'll start by adding to what Nelson was saying, that there is an ideal footprint, but an ideal overall footprint, which means overall volume, total volume. And as the year progressed we'll be in a better situation for, let's say, that ideal overall footprint. But the ideal innovation footprint is a model moving target. Right? I mean if you launch, let's say, a 250 ml long neck and you see that business working very well for different reasons, you may start moving those things around, not just necessarily to the north, northeast, but moving to the different place where we think it too will have an important use. And then if that has the expected value, the expected result, then we can build innovation capacity differently.

So I would start by saying that. And second by saying that we will look because it is in our DNA and we think it's the right thing to do now for a lot of savings in different areas, including the logistics costs. But we'll not be looking, I mean the (inaudible) for savings where we think we have an opportunity in terms of innovation, be it Skol 360, be it Sub Zero, that is Sub Zero that we just launched. And also in the -- (inaudible) the (inaudible).

So there is still national rollouts of things that we launched last year that are working as well as new innovations that we are bringing to the table as we speak. And we'll definitely not save on the CapEx related to that.

I fear you asking whether we lost some of the potential threat that we have against tax increase. I don't think so because I mean we have -- we always have ways to stop some of the things we are doing. Because there's many, many things going on in terms of number of lines we're increasing during 2011. Much more than to increase during 2010. So there are different things that we can do.

And the government is worried about the combination of not just seeing inflation but also the GDP. So when we get there and say economy's soft, that combination, that in a way is bad news, but if we see that for longer term we would start to be taking out CapEx and that is still I think a credible track, but we will not in any ways compromise our strategy for 2012 and beyond. Therefore we're still sticking to the number and especially on the production number. Okay?

And in terms of how do we calculate for that, which I think is a very good question, we have a different -- a few different ways. I'll say that the most pragmatic one that we have used internally is the innovation volume, without breaking that down here, but we've been -- we give a certain period of time for whatever that is, whether it's liquid or whether it's packaging. And during 2010 one of the ways we said we would protect 2011, therefore start 2011 during 2010 is reaching X percentage innovation volume towards the last quarter. So that's one way.

The second way is also to measure the brand preference or the key brand health indicators of our brands. We think we're in a good position, not just share and volume, but also in preference because we brought things to the marketplace that they're the (inaudible) to consumers. They respond by saying that they increase the preference that they have for our brands. So that will also always be a measure.

Besides they say the innovation volume in the market, it's the contribution margin generated by that, the key brand health indicators, and preference being one of them, will also be important. And I think that will be two to three metrics that we'll continue to use in the next 12 to 18.

And again, and we have more things to bring into the marketplace to continue to not just surprise consumers, clients, but also continue to build options for us going forward. And we're already starting working in options for 2012. Okay?

Gustavo Oliveira, UBS.

My question is related again to the soft drink business. As you were pushing for the returnability on that business, how we should think about volume growth and price mix growth? Because apparently on this quarter you had like very negative volume growth, and a very high price mixed growth, but going forward should we think exactly the opposite? Or -- and how fast the rollout of Guarana and of the other projects you were bringing to the market should impact volume growth?

A very good question. I think I answered part of it when I was talking before about volume. Of course we were not pleased whatsoever with the volume in soft drinks. The volume in soft drinks suffered more than beer for the combination of income, weather, and some a bit of the price, but to be quite honest, there was not so much price in soft drinks. In soft drinks there were pricing on the deflation. You saw the prices in soft drink less than in beer.

But what you had there is the impact of the flat excise tax in the first quarter. So price is in line with inflation, with the absence of an increased excise tax gave you the net revenue per hectoliter that seems to be higher than what it really is.

Going forward, we see better volumes, because I mean we are at minus 5, right? So zero, for example, because if it was the case it's much better than minus 5. So I see better volumes going forward. Again, not the sort of volume yet that we saw in the previous year. And you're going to see less volume, not necessarily from price to consumer. Okay, think price to consumer will continue to go up in line with inflation or higher.

What's going to happen with net sales per hectoliter is going to be [heard] by excise taxes that was higher than in beer. We mentioned that in beer was around 11% while soft drinks was closer to 16%, 17%. Okay? That combination gave for (inaudible) something around 12.5%, 12.8%. Okay? So soft drinks, which are raising prices less than beer, because again we are following somewhat the liter. We can try to push a little bit, but we're following the liter. The liter hasn't put much more price than inflation, although they are facing in their business a higher excise tax increase than we are -- than the whole sector is facing in terms of beer and specifically us because we have a lower than average increase.

So you are right, volumes will be -- there will be a change, but I hope I gave you the reasons why you are going to see a change. It's more an excise tax effect going forward and a price increase is more in line with inflation, the amount of salary fully still true to pass on the excise tax. But it may be that we will see competitors open up a gap and then we have a chance to close that gap again.

And then volumes will be better, but not still the sort of ones that we were seeing last year for the same reasons that we mentioned in the -- for beer.

And the return of (inaudible) packaging. What would be the expected volume mix that that could have like by the year-end?

Yes, we don't give guidance in that specific detail. What I can tell you is that this was just launched during the month of March. So you'll see very close to zero effect during the first quarter. But I can also tell you that we are very, very happy with the results so far. So given that this will take some time to be national wide, you will see some effect, but will not be a major effect. But you're right. The direction is in that particular case, you will see the same thing that you saw in our main competitor result is that that usually brings you more volume with a positive, of course markup, but at a lower net sales per hectoliter.

David Belaunde, Barclays Capital.

So I just wanted to see if we consider all the new packages and liquids that you have introduced in the market in Brazil since early 2009, like the liter bottle and then the 269 milliliter cans and so on, on target of Sub Zero, what percentage of your volumes is now accounted by those liquids and packages? And how does that compare to let's say a year ago?

And what do you think was the costing, particularly on your COGS of the great complexity created by those packages? And also (multiple speakers).

Very good question. As you know we don't open up to that level of detail. In terms of direction, our innovation volume continues to grow, okay, on a somewhat important manner. At a -- not maybe at the same speed because now we're starting to have cycles of the new innovation. Okay? And at a point in time we take that innovation out of the total innovation volume, just because it's not no longer an innovation. But we continue to grow and we are happy with the fact that it's growing.

In terms of the costs of goods sold off that, the main effect, which we have talked in many quarters, is more on the mix. It's not necessarily that it has -- it could have a higher COGS, but sometimes it could have a lower markup. So there is a markup mix effet, okay, which has been greater in the past than what it is now because of the liter mainly, because liter among those is more than 50%. And at a point in time have a lower market therefore and impact the mix for some time. But of course in the overall equation much more than paid itself. And going forward, this will continue.

Therefore I think one of the things that it brings to the table and that we're learning to work with is on the efficiency of the plants. Okay? Because as you bring more complexity into the plants you have to learn and to learn how to be more flexible and change your footprint. So those are the two effects.

One is the mix effect that you can see more on the market front. And then there is the complexity that you build within the plant and we are every month getting better and better and having, for example, when you bring a new plant to the table, as we are bringing to Pernambuco, the lines are much more flexible and you are getting (inaudible) lines that can work with two, three, four presentations and you can -- we're also getting returnable lines that can work with two, three presentations. And that also helps us to have more flexibility in the marketplace.

And regarding competitor reaction to that, I mean have you seen competitors trying to match this enhanced pace of innovation that you had for the past couple of years? Or are you seeing they're just dropping the towel and saying well, we're just going to fight on pricing, particularly in the off trade since we cannot match that pace of innovation.

Yes, David, I considered the Brazilian market one of the toughest markets we operate for a combination of reasons. And that's why maybe, I mean, we always also try to do a better job every month, every year. For two reasons. One is they do focus at least in copying us fast, so definitely they try to do that. Sometimes they will bring new news also to the marketplace, but they are always bringing a lot of attention.

But I think one thing that we have to remember, I think for me that worries me less in the sense that of course I mean I always try to be one, two, three years ahead of them. That's part of our job. But what worries me sometimes that we still see a lot of tax evasion in this marketplace and that continues to be much more of an opportunity than a trap for us. Because I mean this feels at such a high level that it can only get better, right?

You have a new system put in place by the government, but we still see some pricing in the marketplace, like some competitors that for the present they are standing there market, their contribution market is zero or negative. So I mean this is sort of a situation that's sort of an example. We keep showing that to the government so that we can try to bring the level playing field to a better situation.

While that doesn't -- because we cannot to just wait for that, that's why we bring a very strong and aggressive commercial story to the marketplace based on innovation, better brand health for our brands in order really to stay competitive and to excel in the marketplace and to get the best share profitability equation in the marketplace.

Just one last question on that point specifically. When you talk about continued tax evasion, I mean obviously we would have expected now tax compliance to be very high in terms of federal taxes. Are you mainly talking about state taxes, the ICMS or across the board?

No, David, unfortunately, I mean without mentioning names, I mean but unfortunately we still see very important tax evasion at the federal level. Okay? So I mean I think there's still a big, big opportunity out there whenever this gap is closed. For example, someone buying the competitors in the marketplace as the rumors are there. I mean those -- this would definitely change the equation for a much better situation going forward.

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

Well, thank you, Maureen, and thank you, everyone for your questions. So see you again next quarter. Have a nice day. Bye-bye.

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