Ambev SA (ABEV) 2012 Q2 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's second quarter 2012 results conference call. Today with us, we have Mr. Joao Castro Neves, CEO for Ambev, and Mr. Nelson Jamel, CFO and Investor Relations Officer.

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

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the 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.

I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature and, unless otherwise stated, the percentage changes refer to comparisons with Q2 2011 results.

Normalized figures refer to performance measures before special items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the Company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully-reported basis in the earnings release.

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. Good afternoon everyone, and thank you for joining our 2012 second quarter results conference call.

As usual, I'll begin by sharing with you some highlights of our second quarter performance, and then Joao will take over to go over in greater detail the operational results of our Brazil, HILA-ex, Latin America South, and Canada business units. And, before we take your questions, I'll wrap up things up with a summary of our financial figures.

So, let's get started.

In the second quarter, our consolidated EBITDA performance improved, growing 9.3% organically and reaching almost BRL3 billion. Consolidated EBITDA margin was 43.6%.

If we take a look at our divisional performance, Brazil delivered double-digit EBITDA growth of 12.2% organically, with EBITDA margin of 47.8%. Net revenues increased 11.5%, thanks to a 3.9% volume growth and 7.4% net revenue per hectoliter growth.

Latin America South EBITDA rose 7.8%, and EBITDA margin was 38.1%, with volumes declining 0.9% with net revenues 15% higher than the second quarter of 2011.

Canada saw a 2.1% decline in EBITDA, [combined with an] EBITDA margin of 41.1%. Organic volumes were 0.3% lower than Q2, while net revenues grew [2%], thanks to a 2.4% increase in net revenue per hectoliter.

And, as for HILA-ex, which since May also includes as a scope the results of Cerveceria Nacional Dominicana, as we'll discuss later on this call, our team delivered positive EBITDA of BRL37.2 million.

Our normalized profit for the second quarter reached nearly BRL2 billion, a 6.6% improvement versus the same period last year.

Normalized EPS grew 6.1%.

I'll now hand it over to Joao so he can walk you through our operational performance and comments on the outlook for the remainder of the year. Joao.

Thank you Jamel, and good afternoon everyone. Looking back at the second quarter, this was a quarter in which a myriad of questions surfaced around the short-term strength of the Brazilian economy and the state of the consumer, the possible headwinds arising from the announced increase in federal excise tax in Brazil for this year and beyond, as well as the concerns about the Argentinian economy. I will come back to each of those topics later, as they are surely important to understand the quarter's performance as well as the prospects for our business going forward.

But, I want to begin by saying that our team held its ground and managed to answer with a better overall performance than the first quarter. And, here's why. First, we were able to improve our top line performance by increasing the Ambev consolidated net revenue 10.4%, with 3.9% volume growth and 7.4% net revenue per hectoliter growth in Brazil being the main highlights.

Second, our COGS per hectoliter grew below inflation once more, at 3.4%, versus the second quarter of 2011, driven mostly by very limited growth out of Brazil, only 0.8%.

And, third, our HILA-ex division began a whole new chapter, performance-wise, given the closing of our strategic alliance in the Caribbean, and delivered positive EBITDA results of BRL37.2 million.

That said, we experienced volume decline in Latin America South and Canada, albeit less than 1%.

And, SG&A spend ended up being 18.7%, higher than the Q2, in part because of the timing of bonus accrual in Brazil, higher distribution costs also in Brazil and as well as in Latin America South, but also because of higher sales and marketing spend in Canada and LAS, which we view as the right thing to do in those two markets to support our innovation platform for the moment being.

In the end, we delivered 9.3% EBITDA growth, which we view as a good result, all things considered.

So, let's take a closer look at each of our business units, starting with Beer Brazil.

Volumes rose 2.8%, which was nearly in line with the industry growth, giving us an average of 68.8% for the second quarter. Our main focus was to make steady progress on the action plans for our four commercial priorities, namely -- innovation, premium, the north and the northeast, as well as the [pack] price strategy with returnables.

[On our] innovation, our volumes expanded significantly, mainly due to the [cycling] growth of Antarctica Sub-Zero as well as the Skol 360, as distribution for these brands increased during the course of last year. Meanwhile, volumes for our premium brands grew approximately 16% in the quarter, led by our domestic premium brand, Original, and Stella Artois, as well as Budweiser from our international premium portfolio.

Budweiser, by the way, continues to gain ground in the country through increased distribution. And, during Q2 2012, we gave it an extra push by launching our first major TV and digital ad campaign for the brand, with Anderson Silva, the Brazilian mixed martial arts fighter, and Steven Seagal. The campaign was recognized by Advertising Age as the second biggest digital campaign in the world at that time, with 11.4 million viewers on the YouTube in 8 days, which was also the third-most viewed video for Brazil on YouTube ever.

There's still a long way to go, but we're satisfied with the results thus far.

As for Bohemia, the leading premium brand in Brazil during the second quarter, we reopened the Bohemia brewery in the city of Petropolis in the state of Rio de Janeiro. The brewery will produce line extensions of the Bohemia family in long-neck bottles in certain limited edition Bohemia brewmaster creations.

More importantly, the brewery is now home to a complete brewery experience open for visitation, one of the larger and more complete in the world in order to celebrate the beer's heritage [since the merits] and beer cultures ties to Brazil dating back to Bohemia's launch in 1853 at the very same time. The brewery is a must visit for anyone coming to Brazil and is also an important pillar for [improving] the beer category image.

Turning to the north and northeast strategy, as you know, these two regions has been on top of our agenda for a while now. In the second quarter, our volumes there grew more than 3 times faster than the rest of the country, with further market share gains.

Events were once again important volume drivers for us, with strong brand activation for Skol and Antartica, during the summer's rock festivities in the northeast, as well as a first-time sponsorship of the Parintins Festival in the state of Amazonas. We launched the limited edition Skol decorated can just for the festival, even changed the brand color code for the first time to honor the cultural heritage of the event.

Best volume performance in the region came from Brahma, which we believe is beginning to benefit from certain of our initiatives for the brand in the region, such as what we call our soccer platform. Accordingly, we have established partnerships with 9 local teams in the region and set up fans pages on Facebook in order to find new ways to constantly and consistently engage with the fan base, enabling us to build more and more loyalty over time.

As for pack price strategy with focus on returnables, volumes for our returnable packages in Q2 2012 grew ahead of our run rate presentations for mainly two reasons. First, we cycled last year roll out and increased distribution of the one-liter glass bottle. And, second, we continue increasing distribution of the 300-milliliter returnable glass bottle in the southeast, as well as beginning to take it beyond this region. This strategy has been also supported by the launch of a TV ad campaign to remind consumers that returnables are making their way back to supermarkets, giving them their favorite brands at more attractive price points for different needs or occasions.

With respect to net revenues, following a first quarter marked by tough comps, higher taxes, and changes to our promotional calendar, our net revenues per hectoliter actually increased 7.2% this time around. A relevant portion of this performance is explained by the carryover from last year price increase in the fourth quarter, as well as the scaling back on promotional activity from Q1 2012, and cycling of the federal excise tax increase from April of last year. But, it also benefits from increased rate of direct distribution as well as the premiumization of our mix.

Moving on to the COGS side, our COGS per hectoliter in Brazil Beer grew 3.4%, mainly as a consequence of higher depreciation of our investor assets, while the product of the execution of our hedging policy was currency gains partially offsetting pressure coming from malt. On the other hand, SG&A rose 18% against a very tough comp in Q2 2011, which actually decreased 1.2% at the time.

A few comments here. First, the spike in admin expenses primarily results from the fact that, in the second quarter of 2012, there were lower accruals from variable compensation. Second, our distribution expenses were higher given volume growth, greater weight of direct distribution, and general inflation, particularly wages. And, third, as you may remember, our sales and marketing investments were higher in the first quarter of 2012 because we decided to concentrate more spending in the beginning of the year due to the Carnival strategy.

As a result, our commercial spend increased considerably less in Q2. When you add it all up, our Brazil Beer normalized EBITDA improved by growing 9.5%, with 110 bps of gross margin expansion, but 30 bps of EBITDA margin contraction.

Turning to Brazil soft drinks and non-alcoholic noncarbonated business, which had an outstanding quarter, our volumes were 6.9% better than Q2 2011, while market share according to Nielsen was stable at 17.8%. Guarana Antarctica continued to show impressive performance during the quarter, volume-wise, and in terms of market share. I believe Guarana Antarctica's performance illustrates well what we have been trying to accomplish with Brazil soft drinks business.

For a more strategic point of view. First, we continue to reinforce our presence in more profitable single-serve packaging to our 237-milliliter [PT] bottle and the 350-milliliter can. Second, our pack price strategy for multi-serve packages ranging from the 1-liter to the 3.3-liter has kept working. And, third, we further develop our returnable packaging by continuing to grow the 1-liter glass bottle.

On the innovation front, Antarctica Citrus has been delivering promising results. Fusion energy drink has increased distribution in general and can be found in major Brazilian cities around the country, in both the on- and the off-trade. And, in late May, we launched in Sao Paulo, our zero-calorie, grape-flavored H2OH [Frutas], which joins the orange and the citrus flavor launched this year, with major success.

On the pricing side, net revenues per hectoliter delivered 10.9% growth against the same period of last year, driven mainly by the carryover of our price increase of late last year and also favored by an easier comparison with the second quarter of 2011, when federal excise taxes went up. Our COGS per hectoliter, as anticipated during last quarter's call, declined considerably, by 6.9%, thanks to gaining currency hedging and lower raw materials and packaging costs overall.

We do not expect to repeat this type of performance during the second half of the year. So, one should expect COGS per hectoliter to increase going forward. But, our guidance of growing COGS per hectoliter in Brazil, meaning soft drinks and beer, below inflation still stands.

SG&A, excluding depreciation and amortization, escalated by 53%. In this case, we had an even tougher SG&A comparison than in Brazil Beer, as in the second quarter of last year, we saw a decline of 16.6% in addition to the previously mentioned low comparison base due to the timing of bonus. We also had a different phasing of commercial spend, [which] general inflation and greater distribution costs, driven by labor-related expenses and more volume growth, had a relevant impact as well.

But, all in all, our Brazil CSD and NANC EBITDA rose 26.5%, with an expansion in EBITA margin of 300 bps, giving us 48.7% for the quarter.

Now, let's talk about our new and improved HILA-ex division. As Nelson pointed out earlier, in May we closed the strategic alliance with the Leon family, controlling shareholders of Cerveceria Nacional Dominicana, or simply CND, and now own approximately [51%] of the company. So, the next four quarters, we'll present CND results together with the performance of our subsidiary called Ambev Dominicana, in the scope column of our HILA-ex division, while organic variations will only include the other countries.

Our focus during the second quarter was in kicking off and begin full speed implementation of our integration plan for both companies. The integration plan has been detailed with a series of top line and bottom line opportunities duly mapped, and the team is committed to delivering our guidance of generating by May 2013 approximately BRL190 million of EBITDA from combined operations.

Our partnership with the Leon family has surely started off on the right foot. I believe that in the next quarter, I will be able to begin sharing some more detailed figures.

Heading out to Latin America South, this is the first quarter of a single -digit EBITDA growth since the [second quarter of 2012]. EBITDA was up 7.8%, while our EBITDA margin for the quarter was 38.1%. During the second quarter, we experienced volume loss in Argentina, Bolivia, Paraguay, mainly driven by a decline in the industry in each of these countries, which in turn is explained by a slowdown in economic activity altogether. This was definitely the main blow to our business as beer volume decreased 1.7%.

The good news is that if we zoom in on Argentina, for instance, which is our largest operation in the region, we grew 70 bps of market share, reaching an all-time high average of 77.7% for the quarter, with Quilmes, Stella Artois, and Brahma, our top three brands in the country, all delivering positive market share performance.

Moreover, we remain active in the marketplace when it comes to innovation, with the launch in May of a domestic premium brand called Quilmes 1890, which [is] the year of the brewery foundation, and a new 1-liter returnable glass bottle for Quilmes Cristal in its line extension, which has a more modern outlook and feel to it.

Also, net revenues per hectoliter for beer grew 15% organically, as a result of price increase to keep up with inflation, also helped by the continued increased rate of premium, notably Stella Artois, in our portfolio.

With respect to CSD and NANC top line results in the region, in spite of market contraction in Argentina, our volumes improved by 0.3%, driven by market share growth in the country [in] H2OH, [Paso de la Torres, and Twister] volume performance.

Net revenue per hectoliter grew 19.8%, mostly due to price increase to keep up with inflation.

For total Latin America South, net revenues per hectoliter were 16% above the second quarter of last year. During the second quarter, Latin America South COGS per hectoliter grew 15.6%, with relevant cost pressure coming mainly from higher costs related to malt, aluminum, and bottles, as well as labor.

Increasing [wages] impacting distribution costs were yet again among the main causes for further pressure in SG&A, along with the different phasing related to our sales and marketing expense to support our innovation launches in the quarter, for example. SG&A grew 27.1% for Latin America South in the second quarter.

Looking ahead, though we continue to expect a tougher macroeconomic environment to remain a reality, especially in Argentina and Paraguay, we still believe we can deliver double-digit EBITDA growth for the year.

So, let's finish with Canada. The second quarter delivered performance in line with our expectations. Total volumes declined 0.3%, but with domestic volumes increased 0.2% and net revenue per hectoliter growing 2.4%, while SG&A increased by 6.7%, largely driven by higher marketing investments behind our innovation launches and Budweiser hockey programming.

COGS per hectoliter decreased by 1%, versus last year, driven by cycling of depreciated assets offsetting escalation from commodities.

The net result was a decline in EBITDA of 2.1% versus Q2 2011, while maintaining growth of 1.1% year to date.

Talking about our top line performance in a bit more detail, the Canadian beer industry was stable as compared to the same period last year, showing an [improvement] versus the trend over the previous year. We lost 20 bps market share in the quarter last year, but Bud Light continued to deliver strong market share performance, and Budweiser brand helped continue its positive evolution.

Innovation continues to be one of our top line levers, as we strive to keep striking the right balance of price and market share to further increase profitability. During this quarter, we launched Alexander Keith's Cider in Ontario, along with Michelob Ultra and Bud Light Lime Mojito nationally, all of which have positive initial results.

Before turning it over to Nelson, I would like to go back to my opening remarks around the Brazilian economy and the federal excise tax increase and share with you how they impact our outlook for the second half of the year.

We still expect beer volume in Brazil to resume growth for the full year, with a better balance between volume and price as compared to 2011. The Brazilian federal government continues to take measures to stimulate the Brazilian economy, which give us some degree of confidence that such measures will eventually begin changing our macroeconomic environment for the better during in the second half of the year.

Besides, our confidence in the medium- and long-term prospects for the Brazilian economy remains unaffected.

[And,] the cooled beverage industry, through its industry associations, have continued to seek a reversal of the announced tax increase in some shape or form though, at this stage, no assurance can be given if they will succeed. If the industry does not succeed, the more likely outcome is a real increase in consumer price, followed by some impact on volume. Our intent will be to minimize volume and share loss, leveraging the stronger portfolio we have nowadays, not only in terms of brands, but also [liquids] and packages, not to mention our sales execution capabilities.

Yes, it will be anything but easy. But, this is the challenge we have to overcome in order to have at least a good year. We have done our homework since June, and now it's time to execute.

Back to you, Nelson.

Thank you, Joao. In this final part of the call, I will walk you through the main items between our normalized EBIT of over BRL2.5 billion and profit of close to BRL2 billion, as you can find on page 3 of our release.

[Adding] special items, we had an expense of BRL26.8 million during the second quarter, nearly all of which relates to fees and expenses incurred with respect to the signing and closing of our strategic alliance in the Caribbean, CND.

Our net finance results were [BRL168] million, BRL143 million worse than the second quarter of 2011. The main cause behind this variation is the impact of the real devaluation on certain intercompany transactions, generating unrealized foreign exchange translation losses on intercompany payables and loans. This impact however is (inaudible) by the foreign exchange translation gains on offshore companies that are registered in equity.

Our effective tax rate was 16.8% for the quarter, against 16.3% in Q2 2011. Included tax benefits coming from [greater] interest on capital payments were more than offset by a higher taxable base. Keep in mind that we face a very tough comp in this regard, because last year we benefitted from certain one-time tax credits, as you may recall.

Year to date, our effective tax rate is 18.5%, compared to 19.5% last year.

And, finally, we ended the second quarter with a net cash position of about BRL1 billion, down more than BRL3.1 billion since December 31, 2011, which is entirely consistent with our goal of returning to the average levels [we applied to] end of last year. Approximately BRL3.8 billion has been distributed to shareholders through July 2012, as dividends and interest on capital, which is about BRL2 billion more than last year during the same period.

Back to Joao for a quick announcement about a leadership change in Canada and Latin America South.

Thanks, Jamel. After nearly three years leading our Canada team, Bary Benun will be moving to China effective January 1, 2013, to become the new president of AB InBev in that country. The new [Ambev] president for Labatt will be Carlos Lisboa, who currently heads our operations for Bolivia, Paraguay, Chile, and Uruguay in Latin America South. Lisboa takes to Canada over 19 years of experience at Ambev, the majority of which in marketing-related roles where he was responsible for Skol marketing strategy for 2001 through 2004, and later served as Ambev's marketing VP for 2005 until 2010. I'd like to congratulate both on their appointments, thank them for their contributions to date, and wish them the best of success in their new roles.

With that, let's now take your questions. Maureen.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Lore Serra, Morgan Stanley.

Good morning, and thanks for taking the questions. Can I ask, just to clarify, the guidance you've given of price, at least above, or at least with inflation, as well as volumes better than last year, is the underlying assumption there that the excise tax for October goes through? I understand you're still fighting it, or discussing it, but is the assumption in that guidance that it goes through in October?

Yes, definitely.

OK. And, can you give us a sense of, you know, how you see --? I mean, I guess the improvement in revenue per hectoliter this year had to do with the fact that taxation was a bit less earlier front-end loaded this year, and the pricing stuck. And, your market share looks solid but down a little bit. Can you talk about any market dynamics that you need to think about as you think about that second half pricing environment and that guidance. I guess I'm a little bit surprised that you're taking the guidance up in terms of the pricing outlook, given the trends we're seeing in terms of volumes and share.

Sure. Hi, Lore, this is Joao. We continue to feel very confident about the commercial strategy. I think, first, I mean, as I mentioned in the opening statement, I think the combination of liquid innovation with Sub-Zero and 360 give us, you know, continue to give us tools to fight in different regions of the country.

Then, of course, the pack price strategy with more returnable bottles, now being able to go from three plants. By the end of the year, we'll have seven plants able to produce 300-ml. So, that combination of liquid and pack price strategy being more widely available continues to give us a lot of confidence in the commercial strategy from that standpoint.

On top of that, we now have newly and enhanced trade programs such as also the soccer platform that I also mentioned in the opening statement, which has proved to be, together with a digital strategy, a great way to connect with our consumers.

That combination of commercial flexibility from liquid and packaging as well as in trade, as our marketing strategy also connecting to consumers, we feel that we continue to [build] new options as well as exercising them as we go along.

On top of that, premiumization continues to work, having the four brands, the two domestic, Original and Bohemia, but also Budweiser and Stella as international, growing, you know, sometimes 3 to 4 times or 5 times ahead of the average gives us also better tools to fight, as well as a premiumization of the net sales per hectoliter, that also helped, coupled with direct distribution.

When you put this whole thing together and giving the 68.8% share that we have, which is still the second or third best for the second quarter in the last 9 or 10 years, we feel that we can go into the second half having a lot of tools and actions to be taken regarding competition, which seems to be also, you know, fighting their own fights in terms of profitability, but also to face the tax increase.

What we wanted to do really in the first half, especially since April or May when we knew about the tax increase, was to get ready for October. I think what is yet to be seen is what exactly will be the impact on volumes for the fourth quarter, of this tax increase. I think this is the part on which -- you know, of course, we have the demand model to help us see where it is.

We feel confident on the guidance that we have of having growth resume as we saw in the first as well as in the second quarter. We'll see that also in the third quarter, but we have to see what will be the effects on the volumes of the fourth quarter.

Great. Well, I mean that's really helpful color. But, I guess what I'm not understanding is, since the second quarter -- I mean, I'm sorry, the first quarter -- was released, you had the excise tax announced. So, that's changed. I mean, a lot of what you talked about was there already. So, what's changed that your pricing outlook is more favorable now than it was when you announced the first quarter? Is it that the market environment is more favorable than you thought? I'm just not understanding why the guidance changed in light of the fact the taxation went up.

OK. I think the, in line, to the, at least, let's say, the subtle change was really to show our confidence that the -- the reason I started really to highlight once again the commercial strategy is that we feel that the combination of sales execution strategy, the marketing strategy, together with the premiumization of the portfolio with direct distribution, that whole combination make us feel that we can now be not just, at least, not just in line, but to be at least above inflation.

It's really the [combo]. It's not the one silver bullet that made the difference, but the whole combination as we see what's coming in terms of tax increase, but also how the market has also reacted for the pricing environment of whatever happened this year so far.

That combination of internal commercial strategy as well as how the market has responded so far this year, we feel we can make that subtle change.

Perfect. That's really helpful. Thank you very much.

Thank you so much for the question.

Robert Ford, Bank of America Merrill Lynch.

Hey, good morning everybody, and congratulations on the quarter, guys. Yes, I had a question with respect to just your existing business today, you know. What percent of the business in the last 12 months is [one-way] cans for you? And, that's just Brazil, in terms of volume.

Number of cans, you're saying Bob?

Yes. What percentage of Brazilian beer is going out in cans today?

We don't talk in that detail, Bob. But, mainly, I mean, it has been for the past, you know, few years, we're talking about one-third, two-thirds, on average. OK? From, you know, the early 2000 until let's say, you know, late 2009, every year cans grew a little bit, a little bit we're talking about 20 bps, 30 bps. In 2009, when we launched, you know, the strong returnable strategy, the growth has first diminished and then actually the participation decreased. OK?

So, I think that's the detail. So, one-third, two-thirds, on average. We had from 2000 to 2008 growing, and then 2009 starting to flattish. And, 2010, 2011, starting to decrease.

Great. That's very helpful. And, then, we were very impressed with the pricing in CSDs particularly given, you know, the big push in returnables, a lot more multi-serves. Can you comment a little bit about how you're getting the pricing in soft drinks and the outlook that you have, you know, given the bigger tax increases in CSDs, particularly for some of your rivals.

Sure. Well, I think a couple of things are happening in CSD and, to be quite honest, we're really harvesting some of the things we have seeded during, you know, the last two, three years.

I think we mentioned that, you know, while we learned a lot from the pack price in CSD to beer, we also have learned a lot from beer into CSD on flavor innovation and innovation as a whole.

So, we launched in the first quarter of last year five important CSDs, in terms of the 1-liter returnable, of course, and the pack price, the 237-milliliter was a big push in the last 18 to 24 months, now being one of the most important SKUs that we have. So, we had a very profitable single-serve packaging, which gives you greater net revenues per hectoliter growth, more than compensating, let's say, for the eventual, you know, potentially [last, not just pack] on the 1-liter returns, which gives you greater share positioning.

Compared with that, you know, I mentioned the citrus flavor, the energy drink, also new package for Gatorade, that coupled and coupling the CSD programs, many times working better with the beer programs on execution standpoint, give us a much better situation at the marketplace against our competitors, be either the main competitor, but I think also the other brands.

I think Coke had had a lot of success in the past taking share over from the B brands. That's also happening now also for Ambev. So, this quarter I think is the first time we're able to show this great combination of volume and price on a very strong [manner] and not shown that before.

And, I think also the market is feeling the pressure from the tax increase that will come later on in the year, and I think the whole market is protecting the profitability going forward, either for 2012, but I think this will certainly have an impact on 2013 and beyond, which from a profitability standpoint, I think, is good news. Not that I like the tax increase, but I think it will force the market to adjust in terms of its pricing strategy.

That's very helpful. Thank you very much.

Thank you so much for the question.

Jose Yordan, Deutsche Bank.

Hi, good morning, Joao and everyone. I wanted to ask about Argentina, because you're saying in the release that the soft drink industry was also down, but it's not really borne out by the numbers, because I'm sure as you looked at the Coca-Cola bottler results out of Argentina have been much better than what's happening in beer. And, so, if you can help me understand what's happening there? It sounds like you're gaining share in Argentina soft drinks. Sorry, that you're losing share in Argentina soft drinks, and you're also gaining share in beer, because if you talk on the [CCU] numbers, you know, even when you exclude their lack of shipments of Budweiser to Paraguay, their volumes were still down about 7%. And, it sounds like even though we don't have the disclosure, it sounds like your Argentina volumes were not down anywhere near that 7%. So, any color on Argentina would help.

Sure. Hi, Jose. This is Joao. You are right. I mean, this is -- as you know, let me first tell you in a small disclaimer that you know, but I think is always good to remind people from time to time, the Nielsen coverage numbers that we use for any kind, in most of the countries where we are, it's Nielsen. In some countries, it's CCR. In other countries, another, you know, a few other providers where Nielsen is not in place.

Their coverage goes anywhere from, you know, 55% to 75%, sometimes increasing, sometimes decreasing. And, you know, in the markets where we have our competition numbers open to the manner we have, when we feel there is a big discrepancy, of course, we go back to them to try to understand.

And, you are right. This quarter is a quarter, in some cases there's a big discrepancy, especially in Argentina when you look beer as against our main competitor, and also soft drinks when you include (inaudible). But, to be quite honest, that's also true for Soft Drinks Brazil, where also there was a big discrepancy, you know, where our share is shown as flat, but we are growing more than our main competitor. OK?

You know, if you look at the difference between [Agina] and Ambev, it's when you say CSD volume, and not total volume, because you always have this small discrepancy on sometimes people are adding flavored water or not, it's not that big. It's a 7.6 against a 6.5. If you want, when you look on a region by regional basis, because Agina has one region, but has another region.

So, you are right. There are discrepancies. But, I think the direction is the right one, which means our commercial strategy in Argentina and in Chile for beer working very well. I mean, you're seeing our results for the quarter or for the year doing both very well from a market standpoint.

And, in CSD, after a few quarters where we had, let's say, a tougher comparison -- although, it's also tough in this quarter. I think the launch of Twister during the last year, as well as strengthening some of the things we are doing with [possible stores] and H2OH, we are now getting very close, from a volume perspective, against our competitors.

So, I feel that we are on the right track, despite, you know, we are not satisfied at all with, let's say, the EBITDA results of the quarter. We feel that we will have a good year, from a Latin America South perspective. And, this quarter does not reflect what we hope for the year on an EBITDA basis.

Volume, it is what it is. We'll recover the profitability. But, we are pretty confident on the share front, both in beer and in soft drinks, going forward.

And, if I could just follow up real quick, you sound like into the third quarter, and the July numbers do not appear to be either stabilizing or getting a little better or, you know, less negative, than what happened in the second quarter. Is that right, directionally? Is that statement correct? Or, no?

No. No. I don't think I said that. I think what I think is I think what I tried to portray was more our -- in another manner, you know, you're talking along this year, on this balance between volume and price, for Brazil, coming from a, you know, a certain macro condition.

I think the macro conditions of Argentina and the other countries in Latin America South are slightly different, not totally, but slightly different, from Brazil. What I was trying to convey, we also use our market position to have the right balance also between volume and price. I think what's good in Argentina specifically is the very strong market share position we have conquered in the last few quarters, which again gives us a better base from which to take decisions on the third and the fourth.

That's great. Very helpful.

Thank you so much, Jose.

Pedro Leduc, J.P. Morgan.

Hi, and thank you for the question. This is Pedro Leduc, representing Alan Alanis' team from J.P. Morgan. And, our question is specifically regarding the 17% total SG&A rise seen in Beer Brazil, which is basically almost twice as fast as the top line growth base. And, you do mention that it's related to bonus payments and increased distribution expenses, but could you please elaborate a little more on each of these two drivers? And, then, as well as provide us some guidance of what we should see here for this line for the remaining of the year?

Sure. Hi, Pedro. This is Nelson, here. So, as we tried to explain in our release, and I'll try to give some more color on this, but the first point, important point to highlight is that we had a very tough comp. I think Q2 2011, our SG&A actually it was down versus 2010, while for the full year last year, it grew mid-single digits. So, it was really a tough comp.

And, the mainly fact for this was the timing of our bonus accruals. And, we pointed out also in the release [last year] that that was the main reason.

But, we also had, to start with, we also had some incremental sales and marketing expenses, at high single-digit growth in the quarter, to support our commercial initiatives, and that was particularly as the case for CSD in this quarter, not really for beer.

[Logistic COGS], they also grew double digit, and that was impacted in the first place by volume growth, a high rate of direct distribution, some increase in wages, primarily because truck drivers and helpers are linked to minimum wage, which grew 14% this year. We also commented on that in the beginning of the year, in the first quarter results announcement. And, as well as, to a certain extent, product shipping costs that from [one hand] are benefitting from our improved footprint, particularly in the northeast and north regions but, on the other side, are impacted by the rollout of our innovations, such as Budweiser, which we opened to major cities throughout the country but is still produced in one single location, and mainly our returnable glass bottles 300-milliliter [with] an important, let's say, commercial initiative for this year, which at this stage is only produced in 3 plants. But, by year end, we are going to have another 4 plants. So, in total, 7 plants with this product being produced.

So, that [we feel] is in a way, [logistic COGS is] throughout the year, as we implement our CapEx plans.

So, in a nutshell, let's say, with [logistic costs] growth getting smaller [vis-a-vis] in connection to CapEx plans, and also considering a more normalized bonus accrual, let's say, for the year to go, overall SG&A growth in the second half should for sure help us deliver stronger a EBITDA performance. I think that's the view there.

That's very useful. Thank you.

Lauren Torres, HSBC.

Hi, everyone. You already touched upon this, I think, on several occasions. But, the whole idea of getting this more balanced top line growth this year, I was just curious. Obviously, you'll hit that target relative to what you did last year, but when you made that comment earlier this year, and I guess I'm focusing on Brazil, you know, did you expect volume growth to potentially pace faster than it has, looking for more of a recovery than we've seen? Or, did you just take more pricing opportunities, which impacted volume, because they were there to take?

Hi, Lauren. If I understood correctly your question you were asking, compared to what we said in the beginning of the year, you were expecting more volume than price. Is that what you're --? Was that the question?

Well, I was just wondering if you were initially guiding to more balanced volume and pricing growth, as far as getting them more even, rather that more heavily weighted to pricing growth.

Yes. OK. Well, right now, I mean, more of a coincidence, but if you look at the combination of the two Brazilian businesses, on the year-to-date, it's like a 4.4% growth in price and a 4.4% growth in volume. So, this sounds pretty balanced. Right?

I think what we are trying to say is that when we said, you know, the balance, a more balanced approach than last year, in the beginning of the year, we were not considering the sort of tax increase that was announced later in May. Right?

So, with the announcement of the tax increase and our desire to protect our profitability, we have changed the guidance slightly on the pricing front, right, by saying, you know, in line to, at least. This, I think shows somewhat of a balance which will be still more balanced than last year, but with some more color on the pricing side than on the volume in order to pass on the tax increase to price. I mean, that's, it's a subtle thing, but very important question. Very important to understand what I'm trying to convey.

So far, it was very balanced. The tax increase was announced in May. From now until the end of the year, price will take a somewhat more important role than it did in the first half.

Sure. So, can I infer from that that the consumer in Brazil, as far as what you were expecting as far as firming up from what we saw last year, is on track? And, those types of growth rates just coming from the consumer environment is improving?

Oh, yes. No doubt. I think, you know, when we look at our volumes, in both beer and soft drinks, it's true. I think when we look, more now in terms of what people expect, in terms of consensus of GDP growth, there is an acceleration expected for the third quarter, and especially for the fourth quarter.

I think the difference from other consumer goods is that our fourth quarter will be positively impacted for this GDP growth that will most certainly come in the fourth quarter, but will be negatively impacted by the tax. Our price increase, given that, and therefore, it's somewhat slow in volume.

Great. OK. Thank you.

OK. Thank you so much.

Alex Robarts, Citi.

Yes. Thanks. Hi, everybody. The question relates really to this, you know, focus on the north and the northeast. And, clearly, the volume growth in the region for both beer and soft drinks, you know, have an outsized impact on the overall volume growth in the country. You talk about that growth being 3 times the national average. I just wanted to get a sense there, I mean, is that a kind of 3 times certain pockets of the region? Or, is it really for the north and northeast region as a whole? But, really more specifically, are we looking at kind of stable --? This level of outsized growth, is it stable? Is it decelerating? And, --?

No. No. Hi, Alex. This is Joao. Thanks for the question. I mean, you know, when I look today at our decision a few years back to focus on that region of the country, I think it was a very good one, because we changed our footprint. We did new launches. We're getting closer to consumer. And, when we mean 3 times, it's really 3 times. I mean, if the country is growing 3, it's growing 9. I mean, it's as simple as that. It's happening for both beer and soft drinks, and it's happening in both the [net] and in the north. OK?

So, you know, good thing. You know, we were there in our market visit, you know, several times this year. And, we continue to be, you know, the market being firm. And, you know, a lot of potential going forward. We continue to be happy with the strategic decision and happy with the volume results on a quarter-by-quarter basis.

OK. OK. No, I mean, the second part of that question was just, so, with this growth outlook, do you feel that the production footprint is right-sized, kind of, you know, with a, kind of, 12-month, 18-month view? And, as we think about this region vis-a-vis the profitability in the country, I guess, is it fair for us to assume that probably because of the low density population, maybe lower pricing, that the margin from this beverage business in this part of the country is lower than your national average, but that that gap is narrowing and, at some point, it gets to close the national level? I mean, how should we think about this region as it becomes a more of a meaningful impact on your, kind of, national profitability level? That would be great to hear your comments on that.

Sure. Well, I think there's two sides to the question. I start with the first one. In the last two and one-half years, the CapEx investment was, quote unquote, disproportional to the [nano]. So, let's say that nano is -- I'm just going to give numerical examples. They're not exact numbers. OK?

But, let's say if nano was 18% or 20% of our volumes, the CapEx that we did in the last two and one-half years was 35%. OK? So, we almost doubled the participation of the CapEx investment in relation to what is the current volume, because we didn't have the right footprint and, of course, because this is growing, you know, 3 times faster than the rest of the region.

At one point in time, which we're getting closer to as we speak, we will not need to spend, you know, 2 times the percentage of the CapEx in that region. We're not there yet. So, we still have some disproportional. Going forward, it will not be as disproportional as it was in the past. So, you know, if this was 35% in the last, you know, two and one-half years, probably next year, it would be, you know, 26%, 27%. And, then, at, you know, maybe one or two years down the road, this would go to the average of the rest of the country.

So, that's the first part of the question. There's still some to do, but a lot has been done already, which is, I think, is good news, because give us flexibility and also means that we are getting closer to our footprint. And, it is today. Of course, when you launch a new product as you do for, you know, new premium brands, you may want to, you know, do more footprint capacity also to be able to respond to those. But, for whatever we have today, we're getting closer.

From a profitability, let's say, EBITDA standpoint, it changes. You know, there are times -- well, first of all, let me say first of all, it's not significantly different, although it's different, but it's not significantly, and from time to time, this gap has been closing. OK? So, the gap was wider back in 2009. It is less today. And, therefore, at the point in time, it could get closer. But, I think here it's good to have the option to balance, because sometimes you may want to have a profitability that could be from a per-hectoliter standpoint slightly lower, but more than compensated from the volume standpoint, which gives a much greater absolute EBITDA growth.

So, that's the balance also that we keep an eye, between the per-hectoliter basis but also on the total, not to be making the wrong decisions. And, you know, so far, I think we've been taking the right decisions, and results are showing that.

That's helpful. Thank you.

Thank you so much.

Gustavo Oliveira, UBS.

Hi. Good morning, everyone. I have two questions. The first one, in the [earlier] call, you mentioned that you already have 500 Pit Stop stores, I imagine in the most important supermarket chains and hypermarket chains in the country. Could you please give an idea of at what stage of your rollout you are in those stores? And, also, what is the incremental contribution that you are seeing in these stores that you are adding the Pit Stop stores to your total sales in that store? And, if you already have a view on the project, whether the returnability is increasing at substantially in these Pit Stop stores? Or, whether you're having a negative impact in the higher inventory that you usually have to carry because of that? That's the first question.

OK. Gustavo, a very good question. Of course, you ask a lot of competitive sensitive information that we will be not, that we are not able to give it out. But, I mean, the number of Pit Stops are increasing, you know, every month. We are actually very happy with the results and that's why, you know, we keep increasing. I think we are, you know, probably at, you know, 25% of where we can get, in terms of, you know, number of stores covered by that. So, it's a long way to go. Very positive results from, you know, volume growth picking up, you know, returnables growing. So, you know, I would say very positive overall. That's why we continue to be working very hard. It's a reality already. It's not a pilot anymore, because I mean if you are in 500 stores. So, it's a matter of really implementation, executing, accelerating the speed, because I'm (technical difficulty).

You mentioned you had a second question?

The second question is related a lot about the bonus accruing, how was the impact that actually they're having in the quarter. You mentioned that the logistics costs, they went up a little bit, double-digit growth in the quarter. I was trying to understand, when we project the numbers for the second half for the bonus accrual, actually we're going to be below average to compensate for the probably above-average accrual in the first half. It's more -- I think the question is then the magnitude of the impact in the second quarter and whether the [monetization] will be actually below the average [in that time coming]?

Hi, Gustavo. This is Nelson, here. I mean, regarding bonus accruals, you know it's a function of how we perform versus our own targets, our budgets. And, so, it may have quite a different range, in terms of accruals on a quarter-by-quarter basis, even for the full year, depending on how we finish the year. And, as you know, Q4 is a very important one. So, many times, we make, it makes a difference in terms of how it performs versus our budget.

But, I think the key takeaway for you is that if you think of, let's say, [administrative costs], it should grow single digits. Right? There is no reason [in spite of] the inflation environment and all the productivity and efficiency initiatives we have in place, I mean, we should not see a double-digit admin cost growth. So, that's more, let's say, on controls expense.

And, regarding our logistics, that's the one that's really growing double digit, but should get better as we get to the second semester based on the CapEx investments we are doing. And, also depending on volume also, but there is strong correlation. The stronger our volume, the stronger will be [logistics] and also some of the [commercial] expense we have.

So, at this stage, I would say bonus, we should have a little accrual in the second semester. All the rest equal but, again, it also depends on how we perform versus our targets. And, logistics is the other important one, here, to look at and should get better.

OK. Thank you.

Gabriel Lima, Barclays.

Hi. Thanks, and good morning. Just initially I want to confirm what something Joao said in the opening remarks. COGS per hectoliter going into the second half should increase year on year but still below inflation for the full year. Is that correct?

Yes, Gabriel. It's Nelson. That's correct. I mean, we are keeping our guidance that for the full year we are going to have COGS in Brazil for both beer and soft drinks below inflation. Q2 was our best quarter for it, in terms of currency hedge when you compare year over year, that was the major upside we would get. For most of the [COGS], it's also the best quarter, especially in soft drinks as you may have noticed. So, in the end of the day, we should have COGS that are growing above what we saw in Q2, but still having the year below inflation as we guided since the beginning of the year.

OK. OK. That's clear, and thanks. And, just a follow up, you guys talked about, you know, government initiatives and going into the second half. So, just wanted to better understand how you expect, you know, your specific consumer responding to those initiatives, mainly in light of. you know, the consumer leverage that your main peers, consumer peers have been recently mentioning. And, also, if you could touch a little bit on weather conditions. At least here in the southeast, we have been very warm weather. So, I just want to understand if you are seeing this for the country and if you're benefitted to that in light also of the economic conditions and all? Thanks.

OK. You know, the recent information, you know, good consumer environment, you know, it varies of course from industry to industry. But, you know, if you think that we have pretty much the same, you know, pricing conditions of last year, volume is [certainly] much better. So, that's, you know, one of the ways we look at this to be able to answer or to say this.

Weather, to be quite honest, has been, you know, very volatile. I mean, we have had some, you know, great weeks, in terms of weather but, then, you know, the week after, it's so-so. So, I mean, pretty much on average, in terms of weather.

If we look at the second quarter impact, in particular, temperature was (technical difficulty) degrees higher on average, but rain was, you know, 3% higher. So, almost like one thing compensating the other. But, you know, it hasn't been bad, but hasn't been specifically, you know, great. So, it's been more on the neutral side. Therefore, you know, not being talked so much to explain either a spike or a slowdown.

OK. Thanks, Joao. Just a quick one. Effective tax rate, do you have a guidance for the full year.

We do not have a specific guidance. Right? I mean, what we consistently have is an effective tax rate that is lower than, of course, than the corporate tax rate given the benefits from [uses of cash] or goodwill amortization and all the rest. I mean, the absolute we think it's going to be slightly below last year's rate, which was 32.4%, although it, again, may vary on a quarterly basis.

We had an easy Q1. This one was a little bit tougher. But, for the balance of the year, it should be in line or slightly better than last year. No major surprise there.

OK. That's helpful. Thank you, Nelson. Thank you, Joao.

Thank you.

Alexandre Miguel, Itau BBA.

Good afternoon, Joao and Nelson. Just two quick questions. I just wanted to get more color on your strategy to keep, on soft drinks, to keep the profitability of share heading toward the end of the year, given that you'll probably have a [disadvantage] in terms of impact on the taxation. So, if you plan really to pass through all the prices and keep margins? Or, maybe use beer to get back some of the margins loss in the soft drinks? So, how you think about your strategy for soft drinks in this, given the current scenario of potential higher taxes?

OK. I mean, our idea and approach is straightforward for both beer and soft drinks. Our idea is, you know, once, you know, it's certain the tax increase, I mean, which we are considering certain but are working to try to revert some of that, showing that we don't think that this is the best win-win approach for both the industry and the government. Of course, in any projection, we are assuming, you know, what is in there is what is going to happen.

Our idea, as we mentioned, is to pass on the tax increase to prices for both beer and soft drinks. Of course, in beer, we are the leader. And, so, our decision is taken. In soft drinks, we are not. So, our idea is to do that. And, we will do that but, of course, if the market leader, you know, if we read, you know, somewhat later, if we don't see that happening, we may have to change. But, our idea for both businesses is definitely to pass tax into the prices.

OK. And, just to follow up on the beer related to the same subject, do you plan maybe to start increasing prices gradually before, maybe similar to what some players are doing in the soft drinks markets, for beer, since you are the leader? Or, are you still waiting for October?

You know, I don't know if you are referring to comments in other conference calls from, you know, some of the soft drinks players, but I think when you look year to date, both businesses have had, you know, not so different a price increase. So, to be honest, I don't see much difference between the two right now, and we're not planning to do anything right now in advance.

OK. Perfect. Final question, on Argentina. Are you anyhow concerned about FX controls? Or, has it impacted so far anything in your operations, maybe condition of raw materials or maybe payback of dividends? If you are concerned if this has affected your operations so far?

Yes. I think, Miguel, well the situation in Argentina is obviously a concern and has been following the developments closely. Right? I mean, to date, we have not experienced any material impact on our day to day operations [point of view]. I mean, the result of tighter FX regulation and control. We have a very low level of imports, and actually we are a net exporter in Argentina. So, given our [multiple facilities] in the country which export [much that comes] in Latin America, mainly Brazil.

The biggest challenge in this has been to obtain government approval to repatriate funds via dividends. This has become increasingly more difficult in recent months. But, at this stage, so far, we haven't had major issues with that.

OK. Perfect. Thank you.

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

OK. Thank you all for joining to this call, and I look forward to speaking to you guys again on October 31 to talk about our results for the second semester. Thank you very much. Bye, bye.

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