Ambev SA (ABEV) 2012 Q3 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's third 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, percentage changes refer to comparisons with Q3 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 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 to all. Thank you for attending our 2012 third quarter earnings results call.

As usual, I'll kick things off by giving an overview of our results for the third quarter, and then Joao will discuss in more details the performance of each of our business units. And, to close, I'll be back with a summary of our financial figures before we go to Q&A.

So, let's get going.

Our consolidated EBITDA performance improved considerably in the third quarter, jumping 19.2% organically to a little over BRL3.8 billion. Consolidated EBITDA margin expanded [100] bps, arriving at 47.3%.

Looking at each of our divisions, we delivered 23.1% EBITDA growth in Brazil, with 220 bps of EBITDA margin expansion, reaching 51.2% in the quarter, and net revenues were up 17.8% with volume growth of 0.2%.

In LAS, we were back to double-digit EBITDA growth despite volume decline of 2.3%, [with our team] delivered 20.9% of organic EBITDA improvement and EBITDA margin expansion of 70 bps (sic-see press release). Net revenue grew 18.7% in the region.

Canada also witnessed an industry-driven decline in volumes, 0.9% organic to be precise, but still managed to deliver positive EBITDA for the quarter, growing 0.2%, with an EBITDA margin of 45.7%.

And, finally, HILA-ex continued on its steady path of growing EBITDA, and contributed BRL66.8 million to our overall EBITDA performance.

Normalized profits for the quarter reached over BRL2.5 billion.

Joao, over to you.

Thanks Nelson, and good morning and good afternoon everyone. Third quarter was a challenging and exciting quarter at the same time, challenging because some of the headwinds we have seen throughout this year, such as tax and sluggish economy in some of the centers we operate, in a way they remain to continue in the same manner. But, it was also an exciting quarter, because our team showed resilience, perseverance, and disciplined execution and therefore found ways to deliver what I would characterize as an outstanding result in leveraging an optimal price-mix strategy capable of translating into positive EBITDA results.

Let's dive right into each of our business units, beginning with Beer Brazil, which had an EBITDA growth of 22%, which since 2009 is second only to the fourth quarter of the last year, when they benefitted from the easy comparison related to reported comps.

Beer Brazil volumes were up 0.2%, and market share was down sequentially around 30 bps, averaging 68.5% for the quarter. We estimate industry grew by about 1.8%. We believe these results have mostly to do with our decision to time our price increases differently than past practices. As we mentioned in our press release, a substantial portion of our increase in price to retail actually ended up happening in the third quarter, which was much [shorter] than last year and obviously had a favorable impact on our net revenue performance, which grew 18.5%.

Since the Brazilian federal government announced on the eve of the excise tax increase to postpone part of such increase to April 2013, we have already announced certain price reductions to capture a lower tax growth, as the intent all along was to pass through to consumers whatever incremental taxes there may be.

But, the quarter was not just about [better] pricing. This result would not have been possible without the strength of our liquid and packaging mix and the successful implementation of our main commercial strategies. First, innovation volume continues to expand considerably and still represents more than 10% of our volumes, led by Skol 360 and Antarctica Sub-Zero, which keep delivering a larger array of consumers different functional and emotional benefits while adding more flexibility to our price strategy around the country.

Second, since early 2011, the accelerated growth of our premium volume has proven to be an important source for improving our price mix. And, in the third quarter, it was no different. Our premium brands growth volume was more than 19%, led by Budweiser which celebrated its one-year anniversary since we launched [in the area of] Sao Paulo last year. And, we believe that since then we are building a solid foundation for Budweiser to become the leading international [premium] brand in the country. In terms of distribution, for instance, Budweiser has been sold since the beginning of the year in major cities throughout the country, where its numeric distribution has doubled since then. From a consumer standpoint, the brand has steadily increased its level of awareness and preference among Brazilian consumers, [creating great results so far for us]. But, we think even greater times are coming.

Third, in north and northeast, we focus on executing our commercial strategy behind increasing Brahma ties with consumers in the region by leveraging our soccer platform with initiatives such as launching decorated cans of nine local soccer teams in the region. [Brewing] Brahma is key for us to continue closing our market share gaps in the region which is what we have managed to accomplish year to date and in the past two years.

The other highlight from the region was definitely the arrival of the 300-milliliter returnable glass bottle and the start-up of two packaging lines for such presentations in two of our northeastern breweries, which bring us to our fourth top commercial strategy, returnables. The main driver behind our returnable bottle performance in the quarter was our push behind reintroducing returnable glass bottles into the off-premise channel, with the 1-liter and 300-milliliter returnable glass bottles being placed either outside supermarkets, in the greater number of Pit Stops we have been operating, or making their way inside key account [personal format] supermarkets.

Through September, over 50% of key account stores in the region where the 300-ml bottle has been launched were already working with such presentation, which is a remarkable improvement when we consider that in the beginning of this year this figure was below 5%. And, as this strategy gains ground, the more we improve our pricing flexibility and, most important of all, the more we deliver to consumers new and more affordable pack sizes for different needs and occasions.

Turning now to COGS, our COGS per hectoliter was up 12.8%, hit by higher barley and aluminum, higher depreciation of our industrial assets, and negative packaging mix given the greater rate of one-way cans in the quarter. Year to date though, COGS per hectoliter, it's up only 5.2%.

As for expenses, SG&A rose 20.5% mainly as a consequence of higher accruals for variable compensation as compared to last year, part of which is explained by a tough comparison given low bonus accruals in the third quarter of 2011.

Commercial spend and distribution costs also grew, but at a lower rate. Growth in our sales and marketing expense is consistent with our plan for the year, whereas our incremental production capacity for certain presentations had a favorable impact on distribution costs.

All in all, for Brazil Beer, we delivered normalized EBITDA growth of 22% and an EBITDA margin expansion by 150 bps, giving us 50 bps of expansion for the year.

Moving on now to Brazil Carbonated Soft Drinks and Non-Alcoholic Noncarbonated Drinks, which had a second outstanding quarter this year and delivered the strongest performance in at least the last four years. Volume grew 0.4%, and market share was down 40 bps because in addition to the impact from pricing, as already mentioned in my comments on Brazil Beer, we're also up against a very tough comparison of volume and market share-wise due to the Pepsi two-for-the-price-of-one promotion carried out in September of last year. In any event, year to date, our market share remains flat at the record levels set in 2011.

Our three-project commercial strategy -- built around, first, reinforcing our presence in the single-serve; second, pack price for multi-serve; and, third, expanding ways of returnable packaging -- continued to show consistent improvement in the quarter. On the brand side, [Guarana Antarctica] volume in share growth in explainable among other things by the arrival of 1-liter returnable glass bottles to the northeast, with a packaging line that went live in our new (inaudible) facility. Distribution coverage for this presentation more than doubled since January.

Similarly, Fusion energy drink also benefitted from a significant increase in penetration since the beginning of the year.

Finally, CSD and NANC also received a helping hand from (inaudible), Sukita Orange, and Sukita Uva, our lemon-, orange-, and grape-flavored soft drinks which delivered great results thanks to the successful execution of a promotion for these three brands during the quarter in many parts of the country.

In terms of pricing, net revenues per hectoliter improved 13.9% thanks to the timing of our price increase, which followed a similar trend of what we saw in Beer and also increased [weight] of their execution.

As for cost of goods sold, we saw a rise in our numbers, as anticipated in our second quarter call. COGS per hectoliter grew 9.3%, because we faced a tough comparison against Q3 2011 which enjoyed a 2.4% decline, versus third quarter 2010, because of currency gains and favorable sugar hedges at that time. Net-net, COGS per hectoliter has grown 4.9% for the year so far.

SG&A grew much less than the second quarter, but was still up by 18.8% with general inflation, higher direct distribution, and higher variable compensation accrual being the main factors as was the case in Beer.

As a result, EBITDA for Brazil Carbonated Soft Drinks and Non-Alcoholic Noncarbonated Drinks increased 28.8%, while EBITDA margin expanded 570 bps which translated to an EBITDA margin expansion of 200 bps for the year.

Though there is still much to be done this year and beyond, I would really like to stress that so far it has been a truly great year for this division, combining the maintenance of our record market share levels of 2011 with a much better price and EBITDA performance.

Let's now move on to our international operations, starting with HILA-ex division. Normalized EBITDA totaled BRL66.8 million, with an EBITDA margin of 16.7% which is an enormous improvement thanks mostly to the consolidation of Cerveceria Nacional Dominicana's results, but it is still below the levels of other business units. Therefore, we believe there's still plenty of room for growing that business in a profitable manner.

By the way, a quick update on the integration. In the quarter, we already began capturing synergies through initiatives such as the integration of their [distribution] centers and the sales team, implementation of [ZBB], and leveraging on that scale and [tooth] for CND procurement efforts.

On the revenue side, we have been very disciplined, so as to achieve better profitability overall, while maintaining or enhancing the brand health indicators of our local jewels, like Presidente, which is among the best beer brands we have ever had in our portfolio.

Latin America South. Total volumes were 2.3%, with beer volumes remaining flat and CSD and NANC volumes declining by 5.9%. This volume performance results mainly from the Argentinian environment which has yet to improve, and from a [difficult] comparison on the CSD and NANC side given different kind of promotional activity year over the year. Nevertheless, thanks to our strong market share performance in most markets and our pricing initiatives across the region, we are able to deliver net revenues per hectoliter growth of 21.5%, overall -- 19.9% in beer and 22.9% in CSD and NANC.

On the brand side, Stella Artois and our recent innovation launch, Quilmes 1890 and Quilmes [Night], are the most noteworthy. But, in CSD and NANC, we are pleased to see H2OH Limonetto perform extremely well.

COGS and SG&A for the region grew 13.8% and 23.2%, respectively, mainly impacted by the inflationary pressures in Argentina. Despite this [sustaining] cost pressure, Latin America South EBITDA grew 20.9%, with gross margin expansion of 220 bps (sic-see press release) and EBITDA margin expansion of 70 bps (sic-see press release).

Wrapping up with Canada, Labatt's volume declined by 0.9% largely driven by a weaker industry. According to our estimates, the Canadian beer industry declined by 1.2% versus third quarter 2011, mainly driven by poorer weather across the country. Meanwhile, net revenue per hectoliter increased by 1%. Our innovations have continued to deliver strong results and help us offset historical seasonality in the market share during the summer, which has been stable in the quarter and has been gravitating around 40.7% for quite some time now. Also, Bud Light continued to show market share growth, and (inaudible) is evolving very positively.

COGS per hectoliter increased by 1.2% (sic-see press release) due to higher commodity costs as well as shifting mix towards one-way cans.

SG&A on the other hand decreased by 5.2% largely due to the timing of marketing investments in previous quarters, as we mentioned earlier this year.

The net result was an increase of EBITDA of 0.2%, [while reflecting] an EBITDA margin of 45.7%.

Before handing back the call to Nelson, I would like to briefly provide an update on our expectations for the full year results following our third quarter performance, as we approach the critical months of November and December. Our expectations for volumes and cost of goods sold per hectoliter growth for the year in Brazil have not changed. Accordingly, beer volumes in Brazil should resume growth with a better balance between volume and price, as compared to last year, while COGS per hectoliter should grow below inflation.

Net revenue per hectoliter, however, improved significantly in the third quarter which has caused us to update our guidance for the year to high single-digit growth, which is in line with what we have delivered in the first nine months of 2012.

As far as CapEx is concerned, we have reiterated our commitment of investing up to BRL2.5 billion in Brazil for the year. We believe that the changes promoted by the Brazilian federal government in connection with [Zypek's] increase creates a better environment for investment close to this level.

So, to finish off, some of you may remember that from the second quarter call I said we had done our homework since June and that it was time to execute. Well, our third quarter results show off that we are off to a good start, but there is still a lot of hard work to be done if we want to deliver a strong finish for the year. That's the goal we have before us and that our team, myself included, will pursue as determined as ever.

Nelson, over to you.

Thank you, Joao. I will now cover the main items between the normalized EBIT of more than BRL3.3 billion and profits of a little over BRL2.5 billion, as set forth on page 3 of our release.

Net finance results were a negative BRL344 million, which is BRL38 million worse than the third quarter of last year. The main cause behind this change was the non-cash accretion expense of approximately BRL63 million in connection with the put options associated with our investment in the Dominican Republic.

The effective tax rate for the quarter reduced to 15.2% as a consequence of higher tax benefits, which are interest on capital and other tax adjustments, that helped offset a higher taxable basis [contributed] by higher EBITDA performance. Through September 30, the effective tax rate was 17.3%, versus the 21.8% of last year, and, for the full year, we expect it to be between 20% and 22%, therefore a lower effective tax rate than what we had last year.

Finally, we ended up the quarter with a net cash position of approximately BRL2.1 billion, which does not yet account for additional dividends and IOC payments of roughly BRL1.7 billion which took place [as from] October 15. Approximately BRL5.5 billion has been distributed to shareholders to date, as dividends and IOC.

So, that's it. And, Maureen, could you now remind us about the procedures for Q&A so that we can take some questions, please?

Yes. Thank you. We will now begin the question-and-answer session. (Operator Instructions). Alan Alanis, J.P. Morgan.

Thank you so much. Congratulations, Nelson and Joao. The question I have is regarding the SG&A growth, 20%, that we have during the quarter. How much --? I know you've clarified that a lot of it is the accruals for variable compensation, but could you give us a bit more color regarding how much of this increase in SG&A is (a) regarding higher direct distribution on the one side, and (b) more regarding your initiatives such as (inaudible), the Pit Stops, and the [micro events]? And, if you could also give us some color in terms of how much of these initiatives, these three last initiatives, can be expenses that are more discretionary in the sense that you can come in and out any given quarter depending on numerous factors? Or, how much we should use in our model, of more this new kind of level of SG&A going forward? That would be the question. Thanks.

OK, Alan. Well, thank you. This is Nelson. I'll start mentioning of course about the SG&A. You already touched on the key elements of the 20% growth we had this quarter, which was the variable compensation accruals. We had a kind of a tough comp, so if we look at this growth, more than half of it was driven by variable compensation. So, that was the main element.

But, every time you talk about SG&A and think it on a longer term, like you, if that was in your question, I think that [you have to] go back and [revisit that] equation, that algorithm that you talk about, which is you [normally] should see SG&A growing pretty much in line with inflation, towards one or two points, depending on how fast it moves, direct distribution, and the (inaudible) effect of the volume growth. That between 30% or 40% of [total] volume growth, it will in a way or another affect our commercial [track], and that affects our SG&A.

So, let's say even with these new initiatives that we have in place, such as (inaudible), Pit Stop, and micro events, I think the question, it's not going to change fundamentally, because of course part of the investments associated with these new initiatives is CapEx related, not SG&A. So, like the micro events (inaudible), we buy [the art]. We have CapEx around that, [but not] SG&A.

But, again, back to the question, we also always said that we'd never be bound by the algorithm given --. If we have good ideas or we want to invest behind new initiatives, we are going to do it. So, definitely what's happened this year. So, (inaudible) [a little bit] to the algorithm because of, I'd say, different elements that are affecting our SG&A.

So, in a nutshell, we [might] talk about the different factors, if you want, in Q1, Q2, and now in Q3, but, I think it's fair to say that this year, [with one look with the price, the outlook] is it should get close to [something like] a high single-digit (inaudible) for 2012.

And, remember, that last year our SG&A grew only 3% to 4%. So, we have a third quarter this year but, again, [if we were sticking to the algorithm], instead of the high single-digit [between 8% and 9%], if you combine inflation plus volume driven impact and also [add] distribution, we are going to be beyond that, and that's going to be pretty much as a consequence of, first of all, increased sales and marketing investments, especially to support the sort of price increase we are taking.

So, we have put in the marketplace a real price growth, and a lot of this has to do with the (inaudible) but, in the end, we have to [sure give a] proper support to our brands given this extra price we put.

Also, distribution costs, they are going to be higher than, let's say, what the algorithm will prescribe, and that's not only going to affect distribution but mainly because we decided to accelerate some of the innovation rollouts and primarily the 300-milliliter glass bottle as I already mentioned in previous quarters.

And, we have also some incremental variable compensation accruals if you compare versus last year.

So, I think maybe the number to think of is, we're going to grow [for the year] definitely less than what we have grown year to date, which was in Brazil around 16%, but more than the [high single] that the algorithms would imply. So, we're going to be somewhere between these two numbers, as a consequence of the things I just described.

Yes, that's very useful and makes sense given the record high gross margins in the last 12 months that you have. It seems that the timing is right. If I may ask a quick follow-up just regarding if you could you give some comments regarding market share, both in beer and in soft drinks in Brazil, going forward? What are your expectations in terms of market share? That will be all. Thank you so much.

Hi, Alan. This is Joao. As you have seen in the past few years, if we take 2009 and 2010, we grew more than 5 points from low to high and on average around 2.6, getting [above 71%]. We have said in the past that we always would like to be between 67% and 69%, but of course if we can go above that, on a practical manner, of course why not? We are around 68.5%. So, we are, I'd say, well above still the 67% to 69%.

I think the commercial, or let's say, the economic pressures, be it currency or be it taxes, they are on everyone. Therefore, I think we can continue to fluctuate within this band of 67% to 69%, looking for the optimal price-mix strategy. So, that's sort of an outlook if we think about share. Of course, we always like to reach what we call our scenario [III], which is grow our EBITDA within what we want, growing share, or otherwise looking for the best balance possible.

I think for soft drinks it's not different in the sense that in the past we were fluctuating between 17% and 18%. We have finally broken, getting to a point [in time last year] above 19%, in a specific quarter. And, we actually have been gaining share for more than 18 months, with [Soda Antarctica] in this quarter, but I see potential for going somewhat further.

So, if we were to have some sort of range, which we never talked about, but thinking that we could be between 17% and 19%, which is above our historical trend, I would consider to be possible, as to where we are year to date and much better share, or in line with last year, but much better than historical which [was] the best result in the last three years.

So, that's sort of where I would be looking at or targeting for the foreseeable future.

Thank you so much. Congratulations, again.

Thank you.

Lore Serra, Morgan Stanley.

Good morning. Joao, I wonder if I could ask a little bit about pricing in the quarter. You explained in the price release that some of it was because of the timing of the price increases, but I wonder if you could just give us a sense of, as you're into the fourth quarter --? Two things, as you're into the fourth quarter and you're up against a year ago when you had a price increase and maybe you've rolled back a few things, how much are the consumer level prices, do you think, up year on year in the fourth quarter?

And, then, the second question is, traditionally you've raised prices, and there's been a catch-up in terms of VAT and margins in the system. How quickly do you expect that to catch up?

And, then, --? I guess, maybe there's three questions, here. Big price increase, how do you feel about, can the consumer take it? Antarctica is growing which traditionally has been lower price. I don't know if that's saying the consumer is a little bit resisting. Your volumes aren't as strong, but it's a big price increase. So, maybe I should have led with this question, but consumer competition, how's it taking the pricing? Thank you.

Right. So, I think I got like three or four questions within the same one. Let's see if I can tackle them all. I think first from a (inaudible) standpoint, I think what we said is, [what you call in the report early this morning], the HSD, the high single digit, we are up around 9% for the year, and we said HSD, or high single digit, for the year. So, I think from there you pretty much can get to where we're going to be in the fourth quarter. So much mathematical information is there to be able to forecast what fourth quarter we expect.

But, I think as you said the more important part to it is how consumers are reacting to it. I think twofold. I think with few [good], both in terms of the short term, as well as the medium or long term. Short term is what we're facing as we're talking to you and thinking a little bit more towards 2013. We have good impression about everything that is happening in the Brazilian macroeconomic environment in terms of the pick-up that we're starting to see in the fourth quarter. And, we also think that most of the things that the Brazilian federal government is doing, all the measures to stimulate the economy, that they should help the economy in 2013.

Minimum wage will not be as strong as this year, but will be a real growth of 2.7%, which is still quite a bit. So, bringing more money into the economy. The [Brazil Major] plan with a lot of its infrastructure projects as well as the reduction of interest rate, I think the combination of all those things, with the Confederation Cup in 2013 and the World Cup in 2014, give us room to be exercising the options towards this optimal price-mix growth. Of course, if we need -- we have gone up a little bit -- we can always roll prices back down, which we haven't felt the need, yet. And, if we feel so, we will do that.

I think there are other things that we don't talk a lot about but probably are also helping our outlook going forward, on top of the consumer environment which is positive right now, positive going forward, but also when we look at substitutes, important information, that the [Sicuario], or the control system for beverages done for the Brazilian government for beer and soft drinks, now is also fully implemented in what the government believes is where it should be for the [cash assets], for spirits. So, they are already catching like 80%.

And, when you look at some other alcoholic substitutes, price has gone up way above inflation and above what beer has done, because they feel the pressure of having the tax controls in place, which is also pro for us. And, the additional controls that we believe the states will also put in place, so in case there are any other tax opportunities, whether potentially some evasion that's going on, we think the controls will get tighter and tighter as we move on in the next two, three years. And, this will also make a big difference for us.

And, what about the issue of how much of the rest of the chain will adjust to the price increase you've had? Will it be on a shorter timetable than it's been in the past?

I think because the increasing taxes are impacting all the players at the same time, (inaudible), and everyone is also facing the same cost pressures or even greater than what we feel, our impression from the publicly available information suggests that some of them have already taken pricing, as well, maybe on a faster speed than the average. But, I prefer not to further speculate on what other competitors are doing.

No, I'm sorry. I was talking about VAT and retailer margins, things like that, adjusting to the price increase.

Every time you move the price, actually the first thing that happens, even in the very short term, you gain some margin. So, that's not being very different. But I think the difference this time around from all stakeholders or other competitors, retailers, anyone, this has been announced four months ago. So, because it was announced four months ago, I think everyone was ready to the October 1 date.

Therefore, pretty much you saw a lot of stakeholders acting upon it right away. I'm talking everyone but, when you ask about VAT, VAT hasn't really changed a lot. They have their -- whether it's yearly, quarterly, semester, depending on the state by state calendar, that doesn't change a lot on a year-on-year basis. So, VAT continues to move in the same manner that it has moved in the past. So, this [actual] movement has not made any significant change on VAT. The only difference that it will read, were the expected calendar, the price increases as we move forward. There's always a delay, which it's sort of [a process], if you think about it.

Great. Thanks very much.

Thank you so much.

Bob Ford, Merrill Lynch.

Thank you, and good day everybody. And, first of all, guys, congratulations on a very impressive quarter. I was hoping that you might be able to discuss the initial pricing, the market response, and the availability of the 300-ml presentation, not just in the northeast but in the trade as a whole place.

Hi, Bob. Thanks. I think, first, regarding the initial reaction, it is a little bit along the lines of Lore's question. So, I think from -- I think actually what I was trying to convey is that the response was positive given that we saw what we just said, most stakeholders moving along. And, the consumer sentiment it's a positive one given that, as I guess it was announced from different analysts, again, everybody was expecting the economy to pick up in the fourth quarter. We see that happening. So, I actually think that we are sort of lucky that our price increase is coming at the best moment from an GDP pick-up.

Joao. Excuse me, Joao, I wasn't talking about the price increases. My understanding is that you're putting in a 300-ml presentation at a substantially lower price. Right? So, I'm talking about the initial pricing of your 300-ml, which I think is a very --.

I have a -- yes, I understand your question.

OK.

I was going to get there, because when you understand the overall price strategy, the 300-ml has a very important part to it, which is we are able, as we've been able actually more and more in the past four years, to have a price increase but continue to have affordable presentations to consumer. So, we got [that] shoot a little bit, our price strategy. I think the 300-ml has already grown a lot this year, but we expected a lot of growth in 2013, in 2014, and in 2015. I think we will not reach a plateau for the 300-ml before the end of 2014. We will probably be more than doubling it for next year, and probably another significant growth in 2014. And, that should start to stabilize after that.

It continues to be a very important strategy for us, because it allows us to have a better pricing umbrella but, again, have an affordable presentation for consumers.

We have new lines, of course. We continue to have a lot of new lines, many of them as planned coming in the fourth quarter. And, we already have rollouts for other regions depending on where it is in 2013, somewhat in 2014.

So, still a lot to be done, already helping us a lot. As I mentioned in the beginning of the speech, being very well accepted. We are totally focusing it on the off-trade, on the Pit Stop, on the small formats, and we are still far away from the sort of coverage that we deem appropriate for it.

Joao, where are you putting it in, in terms of price, relative to competitors' cans for the mainstream brand, like you said, [Paba], Kaiser, and [Novusgin]?

OK. It will depend. It's slightly different from market to market. We try to price to perfection in different regions. But, I think the view [that you get] is in some places we continue to have, when we promote over special occasions, be it holidays or be it together with the key account change, we can have the liquid for [BRL0.99], with the bottle at [BRL1.49].

So, if you think though at -- even when you thinking at BRL149, it's competitive against cans of the competitors and, when we take the bottles, totally competitive. So, introducing it -- I would say that in many places we're still introducing it, because consumers are buying. We're selling many times [baskets], so that people can take home. There are other areas where you can see it at [BRL1.19], and then with the [BRL0.50] for the bottle, at [BRL1.69].

But, net-net, we consider it to be very competitive. And, as every other project, that I think Alan mentioned at the beginning, not so bad. Pit Stop, the micro events, they all have very strong -- very, very strong [MPP] positive project, and it's not margin dilutive because of the returnability, even at those price points, depending on the can you're competing against, has even better margin per hectoliter.

That's brilliant. Thank you very much.

Thanks so much.

Gustavo Oliveira, UBS.

Hello, Nelson, Joao, and good afternoon. Good afternoon, everyone. I have a question. I would like to understand a little bit your strategy or your understanding of why you need the price reductions now in the fourth quarter, if it's something [tied to trying] to recover a little bit of share loss, as of your competitors are not falling? And, in the sense from your response in some of your previous questions, is that perhaps you don't need to do that across the board? It's going to be more like on some tactical issues or perhaps in some channels? I'd like a little bit more color on what's the strategy in the short term, and how you would implement it, whether there's going to be some real price reductions or is it going to go by more with some sort of promotions?

Hi, Gustavo. So, I guess first to put into perspective, let's say, the commercial pricing strategy continues to be the same, which is price to consumer in line with inflation plus any new tax increase. So, that continues to be in place. So, when we understand that and we have prepared all of our prices for it, that's true of (inaudible). And, given that part of it was rolled back, we wanted to give part of it back.

But, of course, as we implement it, we implement on a very surgical manner. So, there are places, areas, cities, brands. So, the rollout is a smart rollout. It's where we need pushing the brand or the package or the combination of brand-pack in regions where we deem appropriate. So, you'll find some places actions with the liter, so what we call the (inaudible) for free. In some areas, you'll see some actions on the one-way. So, there is not one single silver bullet.

I think the smart way to roll back, some that we didn't expect that will come [slowly], it came at the last minute. So, that combination. It's a smart way to give back part of what was given back, and in line with our strategy of putting prices in line with inflation plus the tax increase.

Still a follow-up on that same question. When you think then about the first quarter, because then you're going to have the price increases in May for the tax increases in April, would you have to reverse it in the short term to a point that it would be a little bit confusing to your channels? Or, it's something that is manageable? Or, you won't have to raise prices again in the first quarter? Just to understand this short-term dynamics a little bit better.

I think it's too early to get into details of 2013. I think if I was to refer back to some of the things I said, I think we continue to have more pricing flexibility than we had in the past, either giving the pack price strategy and the different brand strategies that we have. Now, combined also with the Sicuario being implemented for different beverages. So, net-net, I feel that we are entering 2013 in a better pricing environment than we saw in the beginning of the last two years.

OK. I have then two more, a little bit of just some data-driven questions. If you could give us an idea of your effective tax rate for 2013? And, the last question would be also in terms of your tax increases in soft drinks, if there is any room for negotiations with the government for a process similar to what you achieved in the beer industry? And, if you achieve that, if there is room even for that to be retroactively to the beginning of the fourth quarter?

OK, Gustavo. This is Nelson. First, tackling the effective tax rate. We had a rather good quarter in that, but you know that it's [true] that you look at effective tax rates on a quarterly basis [for stock]. On a yearly basis, I think it's easier to understand the drivers there. So, [in effect] what we just said, we expect to be this year between 20% and 22%. So, that's going to be below last year level.

We are not giving any guidance for 2013, yet, but it's reasonable to assume -- we always refer to this -- is that as our earnings before taxes grow and all the tax initiatives we have are pretty much flattish, it's reasonable to assume that over time, this growth is marginally taxed at the nominal corporate tax rate, which is around 32%, 33% for Ambev as a whole. So, the trend is always of a slight increase over time.

The good news is that this year it's going to be below last year. But, again, we are not giving any specific guidance for 2013.

We prefer to stick to [that to be sure], short-term at this stage. OK?

OK.

And, I'm sorry. Actually, Joao is going to take the second part of your question.

Gustavo, regarding the soft drinks. Of course, we are positive towards the constructive dialogue that we have had with the federal government. [BevBrazil] has been created and since BevBrazil has been working closely with ABIA, both associations to which we are part of, in beer and in soft drinks, I think we've been able to try to get closer to an optimal balance between tax collection, volume growth, [end of four], job creation, and CapEx investment.

The decree that was first published on May 30 has been already renewed two times. You have to remember that the first time around that it was republished affected positively the soft drinks industry. The second was the beer. And, we continue to be at the table with the government trying to find even a better balance. We are in a better balance than we were, given both reviews of the decree. We think there is room to continue this dialogue and try to [prove] the government that other things can be done.

I don't think -- we're not going to see anything that's going to be retroactive, but I do see the possibility of a better environment than the one that we have right now for soft drinks.

OK. Thank you, Joao.

Yes.

Alex Robarts, Citi.

Thanks. Hi, everybody. I just want to go back to the price environment in Brazil Beer. Clearly, the rate hike, the magnitude of the increase in prices and the stickiness, the critical issues here going forward. And, I'm still not getting the sense -- and I appreciate this is a little bit strategic for you guys. But, I'm still not getting the sense to the extent that we've seen your competition lag or fall immediately. If you could give us a sense of, did these guys, did your main competitors in Brazil Beer, move as you expected that they would, faster or slower? Any type of color would be very helpful to understand this.

And, I guess the second thing is really on Argentina. I appreciate the industry is still not where you'd like it to be. You talked about hitting all time record beer market share last quarter with the industry declining mid-single digits. Can you tell us sequentially how has the Argentine beer industry fared versus 2Q?

And, the final thing is just a quick one on the Dominican Republic. You talked about BRL190 million -- I'm sorry, $190 million. Right? -- in EBITDA from the May 2012 to May 2013. Is that a number that you're still comfortable with? Thank you.

All right, Alex. Thanks for the question. I think starting from the end, we are committed to at least beat the [$190 million]. We are working hard towards that goal. So, a lot has been going on. Has [many] projects. Most of them have been developed. They have started. Some of them have already finalized. We have a very close follow-up. The team that is running it, it's a very senior one. And, we're actually very happy with the way things are progressing in the Dominican Republic and Central America, overall. So, point number one.

Point number two, I think in Argentina we have one of our strongest franchises, a very good team with a lot of experience in the beer business but also in the macro Argentinian environment. And, I feel that we are ready for whatever situation that may come, whether it's a pick-up, whether it is slow deceleration, or even a faster deceleration. I think we're ready for it.

One of the ways to show that, along your question, is what's happening to the market share. So, even in the stuffy environment and with some strong pricing increase, we continue to beat our, not just our share targets, but results of the previous year, whether in the quarter or whether in the year to date. So, that's also very positive, despite a slow growth to declining industry.

So, of course, the outlook is not great, but combination of strong team, strong brands, and a lot of experience facing that type of macroeconomic environment, I feel that we are ready for any of the three scenarios -- maintaining stable, picking up, or decelerating.

Regarding Brazil, as we said, tough to speculate on what other companies are doing, but important to remember this has been announced four months ago. The increase in tax impacts all the players. Actually, in some case, will impact our competitors even slightly more than it does for us, on average. Everyone is facing the new dollar level, which impacts of course the variable costs. But, the public information suggests that some of them have been taking pricing. So, that's positive news. And, the ones that have disclosed information to the market have been talking about the same things.

So, that's as far as I can go.

OK. Thank you.

Thank you.

Felipe Cruz, Itau BBA.

Hi, everyone. I have two questions. First one would be if you could give us a breakdown out of the price growth here in Brazil, how much comes from higher list price, distribution, packaging mix, and premium, and these other improvements in average prices? And, the second one, if you could give more detail on how much premium brand accounts for your carrying sales mix? You say that it is growing by 19% year to date. And, how it's been evolving in the last years? And, how do you expect it to evolve in the next couple of years?

Hi, Felipe. I think that given the first one, of course, we don't broken down in a lot of details, but in terms of direction, it's a bigger part from pricing, of course. And, second, but a distant second, is premium, which we've been saying that we were at around 4% about a year ago, and saying that we thought we could double in three or four years. This has been moving up very fast. We are already at around 5.9%. So, that's very positive. So, that's also helping. So, that's I think the second level.

And, the third level, but also distant to the premium, is the direct distribution. So, that's sort of the direction. Pricing, big time. Second, distant, is the premium, but growing fast in terms of our mix. And, then, third, direct distribution.

What was exactly the second part of your question?

No, you already answered the second part. This 4% a year goal of premium brands accounting for your sales mix, and at 5.9% right now. And, do you still expect it to go to 8% in the next two to three years? Or, do you expect given that it's growing in a faster pace than you expected to be a little bit above this 8% that you expected previously?

It's too early to tell. I think I'd rather keep the good news, growing close to 20%. A lot to be done. I think as we improve also our route to market, the more we get closer to what we think is our optimal route to market, I think better news regarding that will come. And, if we feel we should be talking about a greater number than doubling from 4% to 8% in three, four years, we will update you on that.

OK. Thank you.

Thank you.

Lauren Torres, HSBC.

Hi, everyone. I understand you're not ready or timely to talk about 2013, yet, but you've always talked about this goal or target for more balanced volume and pricing growth in Brazil, and I was just curious -- also of any visibility that you have now with respect to how the consumer is trending, GDP growth, you mentioned the minimum wage -- if you could get back to this mid-single digit volume growth? And, then, with that said, knowing any visibility that you have now on commodities or the excise tax increase next year, will pricing have to be above that, meaning that you won't achieve that more balanced volume price in 2013? And, like I said, very general comments is what I'm asking about.

OK. Hi, Lauren. It's Nelson, here. Let me start touching on the outlook for COGS. As you know, we're going to come back to this precise guidance for next year. We think it's a little bit too early to provide specific numbers around it but, of course, as our hedging policies probably can known by all of you, having a hedge put on a rolling 12-months basis, we don't [assume it] for next year. We're going to have of course a negative impact from currency given the real devaluations during the course of 2012.

But, on the other hand, I think the good part is that it was an amount. So, it's going to be mitigated by lower commodity costs. So, we're not ready to commit to, or to give any specific guidance, but the rationally, we have, we're going to see this sort of impact.

I think regarding top line, I think it's very useful to know that we have a [rate] outlined by the government. This is on the last version of the decree. Increases over time, over six years, in which we're not going to have any big impact in any single year. It's going to be an escalation of the so-called multiplier. In a way that will not going to face any major real increase in any given year. It's going to be more smooth movement, rather than what we saw, for instance, in the first version of the decree. So, also, this gives us also some confidence that we will be able to manage price without having to take any bigger price increase, or any big real growth price increase as part of our strategy, already mentioned by Joao.

OK, that's --.

Yes. I think Nelson covered most of it, and I think consumer environment getting better. Our mix from a supply standpoint getting better. We're also working on a better route to market to deliver all this sort of new and added complexity. We're already in the third or fourth year. So, I think we've been getting better year on year when you look at this. [VLC] coming down, [due to the elaboration] continues to be the same. So, we're learning from our own, whether lessons or mistakes.

It's overall positive and [if I work some right], we have a lot of new commercial initiatives that we quickly mentioned here, (inaudible), Pit Stop, (inaudible) for the returnable presentation growth. But, also to bring people more and more to the on-premise market which is the type of situation that Brazilian consumers like. We will work very hard to make their experience at the point of sale either a better one through (inaudible), or a much more fun with micro.

I think this, as we look towards 2013 and 2014, and all the events that are going to happen in Brazil, I think it's going to be a very good add-on. It will get better all along and hope to get even better consumer environment than the one we're already seeing.

Great. No, that's helpful. Thank you. And, if I could also just ask on your CapEx spend, obviously you didn't have to pull back on that as a result of any tax changes. So, I was just curious, year to date, how you're trending? Where the spend is going? If it's sufficiently covering your plans? And, I don't know, if looking forward, there's more room to increase that number?

Yes, sure. We maintain our CapEx. There's nothing to do with any concession or anything. We continue to need the added capacity, given whether the 300-million, even the 1-liter returnable (inaudible) allowance is a super big hit. And, we have only in three plants. So, there's a lot to be done. So, we still have a lot of very good ideas. And, the level of CapEx investment that we mentioned for the year we [consider] the right one for the year and, in due time, we'll talk about whatever the next level for next year.

Very good. Thank you.

Thank you so much.

Thank you, Lauren.

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, Maureen. And, thank you everybody for attending the call. I think it was a good opportunity to discuss with you guys not only our year-to-date results and the great results we had in this quarter, but also to talk about our strong expectations for the year-end closing and also for the future. So, very glad and looking forward to speaking with you guys again next year. Thank you. Bye, bye.

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