Ambev SA (ABEV) 2011 Q2 法說會逐字稿

Good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev's second quarter 2011 results conference call. Today with us, we have Mr. Joao Castro Neves, CEO for Ambev, and Mr. Nelson Jamel, CFO and Investor Relations Officer. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After Ambev's remarks are completed, there will be a question and answer section. (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.

Okay. Thank you, Maureen, and good afternoon, everyone. I'm pleased to be with you today to discuss our 2011 second quarter results. And 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. And 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 profit, EPS, EBIT, and EBITDA on a fully reported basis in our earnings release.

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

During the second quarter, our consolidated EBITDA was close to BRL2.6 billion, which represents a 9% organic increase when compared to the second quarter of 2010, while our margins expanded 110 basis points to 44.5%.

Our Brazil EBIT increased by 9.9% in the quarter, supported by a 4.3% revenue growth and EBITDA margin expansion of 240 bps to 47.6%. Our LAS operation delivered during the quarter volume growth in beer of 2.9% and decline in soft drinks of 4.7% while growth EBIT by 20%.

In Canada, beer domestic volumes increased by 1.1% in the quarter due to industry decline and our margins decreased by 70 bps, mainly due to phasing of market investments. As a result, our EBITDA decreased by 3%.

Normalized profit reached BRL1.8 billion in the quarter, which was 20.4% higher than last year, and normalized earnings per share increased by 20.1% in the quarter. I'll comment further on profit at the end of this call.

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

Thank you, Nelson, and good afternoon, everyone.

Starting with the industry evolution in Brazil, we faced a tough comparison against the second quarter 2010, due to the World Cup and poor weather in May and June. In Canada, although the industry improved, it was still slightly negative versus last year. In the other business, HILA-ex, a Latin American soft beer, the industry was positive, driven mainly by economy recovery, while Latin Americans offset the industry is still recovering at a slower pace.

Going deeper into Brazil, our beer volume decline was 2.6 in the quarter, impacted by a softer industry and a 160 basis point share loss year on year as a result of our price increase, which widened the price gap to competitors, mainly in the off brands channel. Our market share in second quarter 2011 was 69%, the third best ever market share ever for the second quarter. Also, we have gained 110 bps every month since February.

Our beer net revenues per hectoliter in Brazil increased by 8.1% this quarter, mainly as a result of price increase and higher rate of direct distribution, partially offset by higher taxes, mainly the excise, the federal one.

Both our liquid and package innovations continued to deliver a solid performance. Our 300-mil returnable glass bottle and the Skol 360 reached already an important market share level in our rollout strategy nationwide remains on track. Innovation continues to gain relevance in our portfolio and is helping to drive both market share and bring preference upwards.

Our next important launch this year is Budweiser that will hit the market at the end of this month. This year we are also increasing our focus in the premium beers through our local (inaudible), Bohemian Original and also enhancing still up to our execution, which has been growing at the fastest pace between our brands.

Now talking about our COGS, Brazil beer cost of goods sold per hectoliter was up by 8.9% in the quarter, as we were negatively affected by higher packaging, mainly aluminum, which went up by over 40% up against the previous year, and raw material costs as well as the lower fixed cost dilution, partially offset by better currency hedges. We believe we remain on track to deliver cost of goods sold per hectoliter for the year in line with inflation.

Beer SG&A, excluding depreciation and amortization, decreased by 1.2% in the period as a result of our cost initiatives and lower accruals for variable compensation, partially offset by general inflation and higher logistics costs, due to the increase of direct distribution and to product trends for 15 breweries. Our capacity expansion year to date has already reduced the actual impact of these logistics costs and we believe the new investments to come will help our results further in the second half.

Normalized beer EBITDA finished the quarter with a 10.9% growth versus the same period last year, and EBITDA margin expanded by 240 basis points.

Moving now to soft drinks and our non-alcoholic, non-carbonated business, our volumes in Brazil delivered a 1.3% growth in the quarter as a result of industry conditions, while we had a 10 bps market share gain, standing now at 17.8% as an average for the quarter.

Net revenues per hectoliter group was negative 1.9% in the quarter, mainly as a result of a 20% excise tax increase that took place in April. While COGS per hectoliter increased organically by 4.5% due to packaging costs and lower fixed cost dilution, partially also offset by better currency hedges.

SG&A, excluding depreciation and amortization, decreased by 16.6% in the period, mainly as a result of lower bonus accrual and phasing of sales and marketing investments. We're able to deliver a 4.9% EBITDA growth, driven mainly by up to 140 bps points margin expansion in volume growth.

In the innovation front, we're prepared to haul out nationwide some of our recent successful (inaudible), such as our 1-liter returnable glass bottle (inaudible).

Turning to HILA-ex, volumes increased by 10.6% in the period, mainly as a result of industry recovery for the region and also market share gains in some regions, which helped deliver a 25.2% organic EBITDA growth.

Moving on to Latin America South, we achieved a 20% EBITDA growth as a result of strong revenue management in solid support of our brands. Within a context of beer volume growth compensated by a soft drinks volume decline.

We are enjoying market growth ratios in more of our beer operations, including Argentina, where the market is regrouping from a poor 2010, but the market remains tough in soft drinks. We gained market share in the region as a result of strong support to our mainstream brands and innovations in the beer segment.

In first half of 2011, volume growth in Argentina came from the national wide launching of Quilmes Bajo Zero in the non-alcoholic [light] Quilmes [Liber] recently introduced. We also launched a Brahma wide mouth in Argentina, and Pasena Black in Bolivia, among others. We heavily support our main brands in the region through communication and sponsorship related to the soccer South American Cup that took place in Argentina.

Our beer net revenues per hectoliter grew as a result of price increases in line with the inflation and effective trade spend management aimed at maximizing our top line. The premium segment continues to grow with our brands gaining market share. Stella Artois strong performance keeps being an important source for volume and profitability growth in Argentina.

Our soft drinks business is now experiencing market contraction. Price increases were introduced to offset severe cost pressures. We also launched Twister, a flavored non-carbonated water aiming at gaining presence in a growing market. We will continue to focus on revenue management initiatives and innovations to keep recovering our margins.

In terms of costs and expenses, we are experiencing higher costs of raw material, labor, and inflation. We are suffering increases in beer commodity and packaging materials. Price increases in soft drinks included sugar, PET, juices, and others. We keep working hard on implementing cost cutting initiatives to overcome these cost pressures and maintain our margins.

In spite of this cost pressure and poor market performance, we have been able to deliver double-digit EBITDA growth in Latin America South in both beer and soft drinks as a result of strong revenue performance and continuous effort to achieve higher efficiency levels.

Turning to Canada. The second quarter was one of relative stability for Labatt, characterized by an improvement in the industry, which was still slightly negative versus Q2 2010 and marginal gains in both market share and domestic net revenues per hectoliter versus the prior year. However, as indicated, as indicated in the second quarter, we increased our market investments versus the prior year, which is the main driver for 3% decline EBITDA.

The Canadian beer industry showed a slight decline in the second quarter, representing a significant improvement in the negative trend that has persisted since second quarter 2010. This momentum is likely due to a cycling weaker comp in the second of 2010 and improvement in the weather.

Over the first half of this year we have launched new marketing campaigns on both Bud Light and (inaudible), while investing heavily behind Budweiser and our plans to establish this as the beer of hockey, Canada's most popular sport.

Although we are still in the early days of these campaigns, we're starting to see progress in the market share in the (inaudible) half of our focused brands, which now make up more than 60% of our total volume and drove Labatt share gain of 0.1 basis points in the quarter versus last year.

Having spent the last five quarters stabilizing our market share in Canada, our main focus now is to maintain the space while growing overall profitability in the market. Said differently, we are working to leverage the positive brand health in market share momentum into net revenue per hectoliter growth. Our net revenue per hectoliter was roughly flat versus prior year as we cycled a final quarter or [harmonized] sales tax in Ontario, which reduced our net sales per hectoliter by roughly 1%.

COGS increased by 0.6% versus last year as higher aluminum costs were offset by productivity initiatives and better currency hedges. SG&A excluding depreciation increased by 3.5% in the quarter as the higher marketing investments were partially offset by a lower fixed cost base.

Over the balance of 2011 we plan to continue optimizing the market share and profitability equation in Canada, while continuing to execute against our new focused brand campaigns to ensure continued momentum in market share and brand health.

Going back to the overall Ambev business, I want to wrap up by saying we are pleased with our consolidated results, as we were able to offset negative volume performance through pricing strategy, in cost management initiatives to deliver 110 basis points EBITDA margin expansion. Looking into the different businesses, in Brazil beer we expect to continue delivering profitable growth by balancing (inaudible) and net revenue per hectoliter growth while margins should improve as we have an easier comparison in the second half due to higher impact of 2010 imported cans and logistics costs.

In soft drinks we will focus on top line growth drawing (inaudible) rollout to improve our market position and by fine-tuning our pricing strategy to increase our profitability.

Latin America South, where again delivered solid EBITDA growth and strengthened even further our brands as well as continued to lead the way in the previous segment while investing in our mainstream beers.

In Canada the industry volume trend has improved and we will keep investing further in our focus managed to drive top line growth and pushing any cost savings opportunity to go back to the positive organic growth.

Finally in HILA-ex, we continue on track to deliver our long-term strategy in the region while being able to improve the short-term profitability.

To conclude, I'd like to congratulate our people, our major asset and are supporting us to deliver positive results in a tough environment.

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 the normalized EBIT of BRL2.2 billion and the profit of BRL1.8 billion, as disclosed on page 3 of our release.

Our net financial results were BRL25.4 million negative, which is BRL80 million better than last year. This is explained 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 16.3%, compared to 22.2% last year. The main reasons were an increase in the income tax incentives related to our investments in the North and Northeast regions of Brazil, higher tax benefit from interest on capital payments, and some one-time tax credits.

Our net cash position was close to BRL700 million in the second quarter compared to the net cash position of BRL200 million at the end of December 2010. And during the second quarter of 2011, we announced a BRL1.2 billion dividend and interest on capital payment that took place on August 5th.

Finally, I want to add that we remain committed to our CapEx plan, particularly in Brazil where we invested BRL1.4 billion year to date as we do see relevant growth opportunity in the beer industry moving forward, despite some short-term softness.

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

(Operator instructions) Lauren Torres, HSBC.

I was hoping to get a bit of an update on the consumer environment in Brazil. I think last quarter you seemed rather cautious I guess to talk about notable improvements this year and I guess now that we're looking into the second half. Curious if you have any greater clarity about trends for the second half or should we just really be more optimistic and think about better growth returning next year?

And I guess the second part of the question also, and this is on primarily your beer Brazil division. Seeing the pricing gap being somewhat wide for quite some time last year and this year, I mean any preliminary thoughts about your next round of pricing? Do you feel the need to be less aggressive as a result of what happened last year? Or are you committed to your previous plans?

(Technical difficulty)

Basically the macro that we see now it's similar to what we thought, which it might have been as sort of good news because I think our industry saw a decline or a volume deceleration in the first quarter, which some other sectors of Brazil are seeing in the second quarter as we're looking at the second quarter results of other industries. I think the government had decided to sort of decelerate the economy from the 7.5% to the 4% and they're doing different things.

Of course our industry, beverages overall, not just beer, but also beer and soft drinks, were slightly more impacted than other industries just because we have the (technical difficulty) increase for beer. And also the 20% increase for soft drinks. So we saw the deceleration I think sooner than everybody else, therefore we were I think more cautious than the average. We see that as the current momentum overall in the economy, but still very optimistic about the pickup in the beginning of next year with the 14% increase in the minimum wage.

I think in a way the fact that we saw the impact of this quote-unquote transition year in the first quarter, we were able to take a lot of actions in terms of our SG&A, some of them showing in the second quarter and more to come as we go forward. What we're doing therefore is taking a close look and a cautious look on the expenses, but still being let's say quote-unquote aggressive on our capital expenditures plans because we are optimistic about 2012.

So we are also making this a transition year for us. We took the option, we're exercising the option of protecting our profitability in the short term. Of course especially in beer where our leader's a little less than soft drinks because we're [followers].

Going to the second part of your question, which is the price gap, I think the fact that our beer market share is back to about 69%, we are right now 69.3%, shows that some of the price gaps were closed. I would say that the price gap through the first price increase was totally closed and there are minor adjustments to the second one. We are doing much better in returnables than in one-way, given that we had a much higher price increase in cans. Which in a way are bringing competitors to close that gap in a way, which is I think net net very positive for us. So that's where we stand right now.

Do you have any comments with respect to the next round of pricing? I mean do you think you were too aggressive and the market's not absorbing those types of increases? Or looking into next year you feel confident that you could do something similar?

Thanks for the follow-up. I missed that part. Well, I think we did let's say the combination of the -- of both price increases we had this year. They took in consideration above the average federal tax increase because they were lagging for 2.5 years. Assuming a regular tax increase, there is no reason to have the same sort of price increase, therefore I feel very confident giving our share level, which is a very good one, given that we have been able to maintain or enhance our brand preference. We are definitely very ready for the next price increase, which should come in the regular time. We'll probably not need to be as high as the one this year, but mainly for tax reasons.

Lore Serra, Morgan Stanley.

I was wondering, Joao, if you could talk a little bit about some of the actions you took to control SG&A in the quarter. It was very impressive to see a decline, given all that we know about kind of the inflationary pressures that are the reality in Brazil right now. So if you could give us a little bit of color on what exactly you did and how you see that sort of playing out through the rest of the year, that would be really helpful.

Lore, for the first piece, I think I missed exactly how aggressive we were in the price you mentioned or?

No, I just want to understand what kind of actions you took to control the SG&A so tightly in the quarter.

Well, it's a combination of many things. So I give you a few examples, okay? Let's say and then Jamel can also add on this. But as we looked for, let's say, a flattish (inaudible) for the first half and we will be prepared for that for any growth in the second half. There are parts of your business that have a part -- its variable part is fixed.

So for example, logistics costs. So logistics has a component of fixed that you cannot apply, but has a component of variable that you can do. So let's say you have 3,000 trucks available for you if you don't want to buy [spot]. As we look at the sort of year that we're going to have, we can diminish sort of the inventory of trucks that we have. So by diminishing the quote-unquote inventory of trucks that our system has, not that we have inventory, but we contract them to our distributors or through transportation companies we work with. By decreasing that available inventory, you are decreasing your variable, which part variable, part fixed.

Same thing happens for your plants as you add or diminish extra shifts. So we thought early on that extra shifts on the plants, extra shifts on logistics and things like that, and you can look at this across the board or not necessary. So the fact that we have the cost matrix very well mapped helps us to quickly take some actions on the plant level, on the logistics level, as well as some commercial and marketing investments, especially of course in the non-working money that we are also to do with other [causing] effect, either volume or preference of our brands, which we can see, let's say by the combination of very good share and also very high preference level.

And part of what we said also in the release is a lower bonus accrual. So the combination of those things allows us to have some impact already in the second quarter, but I hope there's more yet to come in the second half.

Lore, this is Nelson. Just to build on what Joao said, I think he clearly mentioned there is no silver bullet, no one thing or no single action that can drive this sort of improvement. I think besides what he said in terms of shifting or transforming some of the fixed or semi-variable costs into more variable, like in the examples he gave, I think it's important to emphasize the opportunity we kept to procurement savings. I think we have been putting even more emphasis on some of the negotiations we have for our supplies.

For instance, for many, many items in Brazil, we have what we call hidden effects. Of course there are some things we buy that are really traded in dollar terms like in our costs and therefore we have a full exposure. But even for if we're going to the supply chain all the way down, you find some opportunity there because it has an implied dollar exposure in our supplier, which of course if the real appreciation was an opportunity for us to seek, negotiate, sit at the table and negotiate, that was important.

Other thing we have improved a lot here is in terms of e-auctions. These are two that we have been investing more and more behind it and expanding it from the direct materials that we had before. Also, to our SG&A sort of scope, our [ZBB] scope, the way we call it. So e-auctions and the combination of a very detailed and diligent approach into our procurement opportunities led us to these results.

Robert Ford, Bank of America Merrill Lynch.

I was hoping you could expand a little bit on Budweiser and the launch later this month. Maybe you could touch on the contract, perhaps the economics, the choice of the timing. And any investment you'll have to make and any co-investment that ABI might make to support the brand or the infrastructure that's needed.

This is Joao. I mean first the timing of the launch, we've been working on this since last year. We're appointing time -- plans to launch at the end of last year, but given all the capacity constraints, we took our time to really fine tune. I think we have a very good combination on our value based brand approach, both from a functional standpoint, which is how the liquid will go into our demand -- planning demand landscape, and also from an emotional standpoint. So we have had enough time to work on both aspects for the launch.

We will be using some of the things that we have also learned through research, not just here, but in the other global launches so very good that were, let's say later on compared to other countries that we could learn from. So I think we really have a good combination. I think we really have a good combination. I think we're able to surprise our consumers.

Clients are very much excited when you talk to the off trade, the Wal-Marts of the world, the (inaudible) of the world, the (inaudible) of the world. They're really excited about seeing this US global brand coming into Brazil. So consumers I think will be a bit surprised. Clients are very excited.

Then when we look at the portfolio, I think with the arrival of Budweiser, we really have a winning portfolio in the premium segment by having two local (inaudible) with the two different approaches, Bohemian and Original having still more on the super premium segment and then having Budweiser also involved. Okay?

In terms of investment/royalties, we'll have (inaudible) contract with the margin or very low royalty fees to ABI with also some co-op investments with them. So that's the combination. At the end, what we want with this agreement is the best for the brand. And this brand, we've only grown -- will only make sense if it's good for both of us. So I think we have the right agreement to foster the brand and for this brand at the core plus premium sort of pricing to be able to succeed in Brazil.

So very excited. I think we have a great addition to the premium portfolio. In that manner we can look at the 2012 year where we can win both on the mainstream, but also on the premium side.

Joao, when you look at this compared to the economics of maybe a core Brahma, right, how would the economics compare? And then you mentioned the other learnings in different marketplaces around the world. Which marketplace do you think is a good reference point? Is this like in Argentina in terms of the potential for the brand in Brazil in your opinion?

Well, when you look at Budweiser in Brazil and learnings are coming from the different sources and I'll get to that, we're probably going to be positioning this between let's say 120 to 130 when Brahma, let's say it's 105. Okay? That's why I'm calling between or core plus and a premium, so the four with good economics for us.

I think there are different learnings that come from different markets, because as you see Budweiser in Argentina, it's positioned more at the 100%. When you look at Russia, it's more of a premium. When you look at the US, not that we're learning specifically from there because the brand has been there for a long time, but with a lot of consumer research that you know that has been doing, we've been learning a lot about the packaging.

So we are coming with a great packaging that we have developed here. Of course in combination with the US and it was mentioned today some of the new news that they have for the US market will benefit from that. Will benefit from the learnings of our container, but with a different pricing strategy, and also benefit from the early learnings from the Russia launch.

So that combination. But of course, customized to Brazil because the brand has been in a way launched here in previous times. So we have the combination of the learnings here from all the research from all the research we did in the past 18 months with those other markets. And that combination I think it's a very good portfolio mix for us to come into the market right now.

Alan Alanis, J.P. Morgan.

My question has to do also with pricing, like the first question that you got. But I want to understand a little bit better what happened in pricing in beer in Brazil in the second quarter. I think the decline of -- sequential decline. We know that there's a seasonal component to it, but 5.5% to almost 6% decline at the year was higher than expected.

Could you elaborate how much of this move quarter-over-quarter is coming from packaging mix, which is kind of surprising given what you commented regarding the prices of cans. But how much is packaging make? How much is geography? And I know you already mentioned that you're expecting another price increase as expected, which would be closer to the fourth quarter. I guess a more short-term question would be what should we expect in the third quarter?

Very good question. I think there were a lot of questions regarding this. I think before getting to the details, I still think that the 8.1%, although there's a decline and there is a seasonality, as you mentioned, is still very strong pricing, way above inflation, especially given an important tax increase. So throw in the revenue managed, throw in the exercising the options that we built, and still was a very good share.

But having said that, I would say that there are three or four components that will explain this decrease. I think first on top of the usual (inaudible) that if you look in the past three years we've been talking about this. The fact that it put the price in and the state taxes will come catch up later. And let's say this is -- just for the sake of using one-third of the explanation, not being exactly one-third.

Then the package mix. What happens is actually that the net sales per hectoliter of cans, although the macro is lower, the net (inaudible) per hectoliter is higher. So the forward shift towards returnable will help you on the macro but will not help you on the net sales per hectoliter. Okay?

And then there is the usual market adjustment that we mentioned that if we felt that the market was too flat we would adjust to that market condition. So that's why this quarter we have a slightly greater decrease on the net sales per hectoliter, then you're flat in different quarters in previous years.

I hear you, but could we expect for the third quarter at least to remain stable?

But what usually happens, Alan, and I think it should not be very different, usually we have a price increase that shows a bigger net sales per hectoliter in the first quarter, then a lower on the second and third. And then again greater on the fourth. Okay? So that's what I would expect. This is the normal cycle, not giving any guidance, but usually if you look at 2010, 2009, 2008, if you're going to (inaudible) that softness, calling softness is decreased on the second and third, and then again it's stronger, greater on the fourth. That's the usual trend and that's what you see. Okay?

And usually the third -- sometimes the third quarter's slightly below the second. I mean but look at the trends. Shouldn't see much different trends than what we saw. And there's slightly more decrease in this quarter was more due to the package mix shifting to returnable, wish is overall positive, but negative on the net sales per hectoliter.

That's very useful, that's very clear. Now a final quick question, more on a technical side. Was there any change in the depreciation rate? I mean we're seeing here a slight change from -- again from previous quarters. It's something relatively minor. Was there any change there or am I reading this incorrectly?

Hi, Alan, it's Nelson here. Let me pick up this question. Indeed we had implemented changing Q4 last year and then had made an impact in the quarter as we made the adjustment for the full-year in Q4 we've introduced a scope change and tried to give some visibility and reported last quarter.

Of course from -- on a recurring basis now, we have less appreciation. And there was indeed a change in the appreciation rates. Some were moved up, some moved down. Of course we have to take into consideration that even the CapEx is stepped up. We have been doing since last year. Total depreciation is also going to increase because of that, that's natural. But this change was definitely much more significant in Q4 last year. But from now on, we should see this if over a more organic basis for the following quarters.

Got it, so this is like a new normal.

Yes.

Jose Yordan, Deutsche Bank.

Just two questions. One is a clarification. When you said COGS per hectoliter would go up with inflation this year, are you still talking AmBev consolidated or for AmBev Brazil or Brazil beer?

And then my second question is the inconsistency in your statements in the press release about soft drink industry contractions in Latin America South, because as you know the Coke bottlers that operate there, the two public ones, have been reporting upwards of 10% volume growth there. So any color you can give us on any of these two would be great. Thanks.

Hi Jose, it's Nelson here. Regarding COGS per hectoliter, the sentence is valid for both. So in Brazil, we expect to be pretty much in line with inflation. If we think last jobs month, inflation in Brazil is around 6.7%. All the forecasts we see for the full-year is somehow this should go down a little bit. We should remain on track for the full-year number. So end of December, rolling 12 months, so it's going to be the full-year number by December, we should be in line with inflation.

And this is also valid for our consolidated results. Of course we have to weight -- a weighted average, let's say inflation between Canada, Quinsa region, and Brazil. So again, we will benefit a lot in the second semester, especially in Brazil because of the impact of the imported cans we had last year. So we talked about that on a full-year basis, but also if we think of the impact of the imported cans in Brazil, roughly 75% of it was considered in the second semester last year. The (inaudible) going to really have an easy comp and that of course will help margins to improve even further in the course of the year. So that's the good news.

In terms of [CSD] volumes in Argentina, what we have there is still we clearly see the industry, the soft drinks industry recovering at a lower pace than the beer industry. If you look on that quarterly basis, this quarter we had mainly, as we said, an impact of the industry decline, which explains pretty much two-thirds or 70% of our volume drop there, which was 3.4%. We also had in the quarter some market share loss, which explained the remaining 30% decline.

But if you look on a year-to-date basis, for instance, our market share is pretty much flat versus the previous year in the volume performance therefore. And that's according to Nielsen, okay? But the volume performance therefore is mainly driven by the industry performance. When you compare to other public players there, of course there are some different regions in the current rate some of them operating in a more restricted area.

And so the numbers may change a little bit. Of course not dramatically, but according to all the research we have here, we do see market share flat at this stage. Of course with a declining Q2, which was of course was also consequence of the sort of pricing we put there. The decision was to protect our margins in the soft drink business in Latin America South, particularly (inaudible). We had there an important increase that helped our model. We have even a reduction to the price gap we have to the liter. The price gap liter to be 5%, now is down to 2%. So this is also part of the explanation.

If I can follow-up really quick on your COGS per hectoliter. Presumably you've been taking advantage of the very strong real to lock in next year's FX hedges. Can you give us any sense at this point of whether you're maintaining your 12 months? Or have you gone up to your limit of 15 months per hedging as far as FX and/or your grain hedges?

What we have been doing I mean have of course acting consistently with our policy, which you know. I mean we can be at 12, plus or minus 2, so could be up to 14. Of course we think it's too early as we had still somewhere midway in the year. So prices are definitely not locked for 2012 yet. And we are of course looking closely to the market performance. As you know, I mean there is a lot of volatility. But I think it's too early to provide any specific number for 2012.

But again, the key message is that we remain totally aligned for our policy and overall we should have for 2012 a benefit on the effects impact. Of course given the evolution that is in the marketplace. On the other hand, some commodities are going to be probably locked at the higher level than what we had this year. But again, the key message is about our disciplined approach towards our hedging policy.

Celso Sanchez, Citigroup.

Want to go back to the discussion on the premium segment a little bit. Obviously some punchy numbers in there, 200% growth in Stella, the Budweiser launch coming. One of the smaller brewers or one of the competitors in Brazil just recently sold to Kiran and their comments were they wanted to focus on the premium segment. We know Heineken said the same thing.

So it sounds like the stars are finally aligned after all these years for all the big players, or at least by my calculations 85% plus of the market to focus on the premium segment. And on top of that, you have, as you mentioned, the real wage increase and then you have the Olympics -- or the World Cup, excuse me, then the Olympics. So it seems like you have an unprecedented good set of factors supporting that.

Ten years after we started talking about this I think, or at least publicly it started being discussed, the thing it the market's still 5% only of premium. Can you give us a sense of how you see with all these other factors involved and the Bud launch and all this other stuff how you see the premium segment evolving. Do you think it could be from 5% now to 10% in just a couple of years' time? Is it still going to grow very small basis points of share in the market over time? How do you think about that?

This is Joao. Very good exciting question. As we are seeing now with the global launch, I mean I just paraphrase Budweiser, great times are coming. So in terms of great times are coming, I think you are right. I think we had the stars aligned 10 years ago when we -- when that was created. And we back then took the premium market from 2.5% to 5%. And then was stable for a long time.

And I think now we have a good combination of, as you said, the players in the marketplace, Heineken and now (inaudible) and us, focusing on this. And also consumers willing to pay more and to try more to upgrade to those brands. And I think having the brands that we have, having our full portfolio when we research either here, either other segments or abroad, having four strong brands, this is sort of a segment that one brand alone usually don't do it. So having maybe four of the best brands out there I think will help us.

Whether this will grow -- so I feel that we're very well positioned. Having learned a lot from the past, having, as you said, the stars aligned, I think what is the -- still one of the challenges -- and when I say challenges to go from 5% to 10% in a few years because you're already like setting a target, is that Brazil was one of the few countries, and I hope will continue to be that way, where both class C and D, but also A and B is growing. It's not an exchange where you're seeing A and B not growing in exchange of seeing it.

The good thing about Brazil and assuming that the trend that we saw in the past couple of years will continue is that you cannot have the growth of C and D and also the growth of A and B. I think the difference from 2012 onwards, when you compare to 2009, 2010, I think 2009 and 2010 we have a very strong strategy for classes C and D and not as strong for class A and B. When I look at 2012 onwards, we'll have a significant and very good strategy brand and resource behind both the mainstream and the premium segment.

So which one's going to grow faster because to grow from 5% to 10% it will have to grow faster than the mainstream. But we also have still very good programs, not just through the launch of different back (inaudible) strategy. We also have very strong on and off trade programs that will help both. So we will be sort of a race between the mainstream brands and the premium brands for the premium brands to grow double the rate of the mainstream.

So I think we have everything for that to happen, but the macroeconomics are actually helping both groups. So I think the difference that we will be winning -- looking to win in both cases.

And then I guess the follow-up question is will you be disappointed if when we get to the World Cup in mid-2014 the percentage of the overall market, not just of your brands, but of the overall market is the percentage is still about 5% for premium. Would that be disappointing to you?

Yes, this would be disappointing for sure.

Gustavo Oliveira, UBS.

The first question is on the Brazilian beer. It seems to us that the industry had pretty much flattish volume growth in this quarter. And although you're coming from a much higher base and you had the price increases, do you think that we are already at the bottom for the industry in terms of volume growth? And that essentially as the price gap closes you could see already a good and better solid grow in the third quarter?

And also I would like to see if you can comment. It seems that you are -- one of your many competitors in the Northeast could be a little bit distracted by the corporate activity that they are going through. And you are launching -- and you are going to be more aggressive there in your opening a new production facility in the region. So how do you think you could benefit from all this situations over the next two, three quarters?

Thanks for the question. I think starting with whether we are at the bottom or not, as you know we'll not be giving any guidance for second half or volumes going forward. I think what we can say is that we have very strong second and third quarter last year. Okay? So we have pretty much two quarters in a row growing above 12%, so I think the third quarter is still a tough quarter to beat. And then we have easier comps as we go into the fourth quarter, where growth was between 3% and 4%. So that's as much as I want to say about having reached the bottom or not.

Looking at what we're calling the nano strategy, the Northeast and the North, we have started this last year. I mean we all follow how much we have invested, not just in transferring products, in launching new products, taking them to the North, Northeast, but also committing a major CapEx investment to what could be the second largest plant in the Company in [Plano Bucu] to start now in the second half. So this is our commitment.

The good thing is that both share and preference are improving in that region, so we're already benefiting from a volume standpoint, from a share standpoint, and also from a preference standpoint in that region. Whether there are going to be further opportunities I hope there will be. As you mentioned, our job is to take those opportunities. Of course, we are seeing one formal local player being sold to a listed multinational. So there are the consequences of that. So I think that combination is altogether a positive combination and we'll be prepared to take any opportunities that come along.

When you segmented market for your brother strategy in the Northeast, do you think that because the economics are a little bit different and the GDP per comp is lower than it is if your price -- are your pricing points lower as well or are you able to sustain like very good pricing points in the region?

When you open that up, it depends a lot. There are places where you have higher, there are places where you have lower and therefore wouldn't like to go into the details of this strategy because it will throw maybe some of the opportunities that we have in place. But it really changes across the board.

My last question is on the (inaudible) business in Brazil. I don't know if there was an impact in gross margins. You mentioned some of them on the PT but I don't know if also if there was some impact in your gross margins related to your returnable presentation strategy. Or if there were any accounting changes because your gross margins were very weak, but your operating margins overall were excellent, right? Because it obviously you move a lot of your costs out of the systems and perhaps with the strategy already commented on.

But a (inaudible) would be better. And also on the (inaudible) Brazil, if you could give us a little bit of color and on how you stand in the returnable presentation strategy. You mentioned that you are rolling out the Guarana to other parts of the country. And if you could give us a little bit more color on what's happening there.

I'll give you some of the overall commercial and the strategy. And then if Nelson wants to touch a little bit more on the margin. But I mean basically starting with the top line -- well, number one we are not the market leaders, so we're followers, so we'll be subjected to the movement of the industry. I think second it's good to remember that we have a much higher tax increase in soft drinks than we have in beer. So the combination at the industry in soft drinks didn't move as much as we did in beer. As well as the higher tax, that combination on the net -- on the total sales of course have affected gross margins because I mean taxes took a great portion.

When I look at the strategy that we have in soft drinks, we are much more prepared to fight the right fight, that -- a profitable fight today than we were about a year ago. Not just because of the one-liter returnable, but we mentioned about the new H2OH flavors. I mentioned about the new introduction package that we have in isotonics, about the new energy drinks.

But the big, big bet is really on the one-liter returnable, as you mentioned. We have expanded this now for two regions. We were in the being up there in just one region of the country, now we're in two. We're providing eight in the total country from a sales perspective. It's already two and we've been introducing in more regions and it will take a couple more quarters to see that all over the country.

The result so far. Everywhere we go, very positive. We are seeing already some of their reactions from the competition, but to be quite honest competition has been alone there for many years, so it's our time to take some share in that segment. So continue to be very, very optimistic about the future, given the difficult moment that the industry is going through because of the higher tax.

So I think we have the right strategy, we have a very good pipeline in hand. We have much better flexibility with that price right now. And remember also that the (inaudible) plant in the Northeast is not just a beer plant, but it's also a soft drinks plant, so that it will also give us more flexibility in the North, Northeast.

And then last but not least, we must fight back, especially in the net sales per hectoliter in the next quarters to come, so we'll be doing that so that we have a good combination of not just EBITDA margin, but also absolute growth, finding growth as well as net sales per hectoliter, but that's an area where we see it. It's still a few tough quarters in the sense of the whole impact of the tax increase, okay? But I think we are much better prepared to fight the right fights in that segment than we were before.

Just to complement on -- I think Joao talked a lot about the (inaudible) business. Talk about COGS, which certainly part of the equation for the margin expansion and the point you raised. There we have -- I don't if you remember, but the beginning of the year we even indicated that we had a very good start in terms of COGS spread to it in soft drinks, but that the full-year we could get up to high singles. And that was mainly a concern around the commodities that you're not able to hedge in CSDs, mainly PET rising.

But since then as PET costs are at least looking to the screens, we have today a better outlook, we have probably -- we are also aligning our expectations to inflation for the full-year COGS spread hectoliter evolution in CSD as well. There we have benefited from better currency hedges. Sugar is not a gap because last year it was already at a very high price, different from beer where we have aluminum growing 40% year-over-year. And this is impacting our beer, a COGS spread to it in this quarter (inaudible) you have more of a stable condition. So we are confident that it get delivered. Also COGS spread (inaudible) with inflation this year in soft drinks.

So it seems then that if you have sustainable SG&A and you improve your COGS obviously there is room for a lot of margin expansion going forward.

In terms of COGS per hectoliter, the impact could have in terms of margins as well is -- I forgot to mention that because it talked about the one-liter bottle. Of course it's -- you asked the reason about if there's any difference in terms of accounting treatment. And there is, right, because that returnable bottle, so we're going to have in soft drinks the same situation we have with beer, which is we treat the package in this case for the one-liter returnable bottle as CapEx instead of an inventory item, or instead of COGS. So that will improve COGS overall, but it's still a very tight volume, right. It's still a very small way from our total volume, so there is no major impact in our COGS (inaudible) to moving forward.

Gabriel Lima, Barclays.

Joao, also my question is also about the Northeast, such as the latest question. Could you give us a sense regarding the stage of the production ramp-up in the region? Maybe any sense regarding the capacity utilization for the plants that are already operating?

Well, for the plants we are in lines that we already started the end of last year. We already -- the ramp-up period is over, right, it's behind us. We have the productivity and efficient at the level of the other plants. Well that is great and that's given us extra capacity of course for the plants in line that we will have starting and going live this year. We will have the same ramp-up, but of course that's all taken into account when it forecasts our ability to deliver especially the fourth quarter volume, which is where the capacity we will build in the course of the year really makes a difference and is really useful for us to deliver and to address demand.

One advantage that we have this year is that on average the start-up of the new lines and new plants is earlier. One or two months earlier than it was last year. So we have this ramp-up starting earlier in the quarter seasonality that is helpful so it can get into a better shape towards Q4.

That sounds interesting. And could you relate recent market share gains in Brazil beer to the Northeast ramp-up now. So this one-tenth basis points gain. Could you relate that to the Northeast market share gain?

Yes, I think the capacity that we build there in the Northeast also is an element of the whole strategy and the whole focus we are putting in the region, both North and Northeast. As you know, these are regions that we have a share below our average. These are the regions that are growing the most in Brazil, or have been growing the most in Brazil. So of course we have this focus in the region where per capita as well is growing above average because of the middle class growth.

So I think there's a lot of positives around this region and therefore increasing capacity in this part of the country is important to support our market share gain objective there.

As you know, while the market is primarily a returnable market, therefore having the proper logistics around it is critical to enable this market share growth.

And just last thing. I don't know if anyone asked that, I just jump it in. But you mentioned at the beginning of the call that the tax rate was lower due to Northeast -- some Northeast benefits. So is it fair to assume that it's a recurring benefit?

Yes, in terms of our effective tax rate for income tax, as part of the counterpart for the investments we do in the region, there is also incentives in terms of for income tax. That's -- we break this down into our press release.

I also mentioned there was a one-time credit there, so the type of growth we have there is (inaudible). For instance, year-to-date results when you look at it there on the table on the page that's related to income tax we see an increase from a positive BRL91 million that we had last year to BRL210 million this year. So this growth, I would say half of it is primarily organic and half of it was a one-time credit that we got. So we can assume an important amount of this growth is on the recurring basis.

Thiago Duarte, BTG Capital.

Just a quick follow-up question on the use of cash. As you guys mentioned you ended the quarter with a net cash position of almost BRL700 million. I was just wondering if there -- going forward if there is any change on your target of net debt -- zero net debt and consequently the amount of dividends that you intend to pay going forward. Thank you.

Hi, Thiago. It's Nelson here. Well, the position was indeed a net cash position, which of course after the payment we did in August, the BRL1.2 billion payout. But this has already changed. So we'll say we have been consistently using our cash over the recent years and there is no change in terms of our priorities for use of cash. So it has to do of course in first place invest behind the business, but then at this stage you have pretty much paid pretty much more than the year-to-date free cash flow in terms of payout, because again it's a cash generating business. And even with the (inaudible) have been doing CapEx and so on, we still are delivering I would say attractive returns for our shareholders. So no change so far in this strategy.

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

Thank you, Maureen. Thank you, everybody, for your attention and your question this morning. And looking forward to talk to you guys again. Thank you very much. Bye-bye.

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