Ambev SA (ABEV) 2013 Q1 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to AmBev's first quarter 2013 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 the 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 first quarter 2012 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, Joseph. Good afternoon, everybody, and welcome to our 2013 first quarter earnings call. I will begin by sharing a few of our performance highlights. Joao will then give some color on what exactly [went on] in Brazil during the quarter and how that impacts us going forward. Then, I'll come back to give an overview of our international divisions and comments on our financial results, before moving to Q&A.

So, let's get started. In the first quarter, net revenues were up 2.4%, and EBITDA grew 2.3%, with normalized EBITDA margin contracting 10 basis points, to 46.3%.

If we break this down by division, Brazil net revenues grew 0.8%, and EBITDA increased 1.6%, with EBITDA margin actually expanding 40 basis points, to 50.5%.

Latin America South had a 7.9% increase in net revenues, with EBITDA rising 10%, and EBITDA margin expanding 90 basis points, to 45%.

Canada's net revenues declined by 0.6%, and EBITDA was down 11.4%. EBITDA margin contracted 370 basis points, to 30.7%.

And, HILA-ex delivered 27% of net revenue growth, BRL68 million of EBITDA, and an EBITDA margin of 24.3%.

Joao, over to you.

Thanks, Nelson. Good morning and good afternoon, everyone. Today, I would like to spend a bit more time than usual on Brazil. We witnessed a strong deceleration of the industry in March. So, we believe it's worth sharing with you our views on -- first, what actually happened; second, what we plan to do about it; third, what changes in our outlook for the year; and, fourth, what does not change.

So, first, what actually happened? During our last earnings call, I said we expect the first quarter to be especially challenging for the Brazilian industry. The reason for that was because, even though we had a very good January, we believed the earlier Carnival and poorer weather would lead to lower performance as compared to what we expected for the year.

But things actually turned out to be even more challenging than we expected. In addition to the earlier Carnival and the poor weather which, by the way, continued into March in the form of lower temperature and more rainfall, we also witnessed a strong deceleration in consumption levels which led to high-teens volume decline in March.

Several factors contributed to this, but the main insight comes from the fact that consumption has suffered mostly because of two things -- first, higher food inflation and, second, a deceleration in disposable income growth.

On food inflation, we have witnessed an acceleration in the last two months, and it remains at high levels. We believe this has been putting more and more pressure in people's pockets, and we have begun to feel this more and more. This issue is not specific to beverages. Actually, we have seen many other Brazilian companies to be impacted by this phenomenon.

Though we expect food inflation to remain a relevant headwind in the coming months, the good news is that the Brazilian federal government has reacted to this, and has already announced a series of measures designed to ease inflationary pressures, going forward, such as tax cuts on basic food items and increasing interest rates. Moreover, we have seen food deflation at the wholesale level for the last 12 weeks, which we believe should trickle down to retailers and consumers later this year.

As for the deceleration in disposable income growth, even though during the first quarter we continued to see disposable income increasing, thanks to the increasing minimum wage and to the employment growth, it's also a reality that the growth rate in both nominal and real terms has been decelerating. In fact, during the first quarter, the growth in disposable income was well below the improvement shown in the first quarter of 2012.

Finally, as we mentioned in our release, in an environment that combines high food inflation and a deceleration of disposable income growth, the fact that we had to increase beer prices to offset higher federal taxes that became effective October 2012, it's of course not helpful.

Although food inflation and the lower growth in disposable income will continue to a reality, particularly in the short term, we believe we have a number of ways to deal with this, which brings me to the second question -- what are we going to do about it? First and foremost, we need to react quickly, and we did. We have already completed the review of our 2013 plan and made the necessary adjustments to reflect a lower volume outlook and still try to deliver a good year. We have faced similar challenges to our operating environment before, and we know what needs to be done.

Part of the answer comes from the cost and expense side, where we have already looked at each and every line and identified what will be tackled through either a productivity and/or cost saving initiative. Those costs and expenses that vary according to volume have already been revisited, but particular emphasis was given to what we call non-working money opportunities, as we want to remain investing behind the brands not only to support our top line this year, but also thinking about what's in store for 2014.

The bigger part of the challenge ahead for us, however, is the top line. With food inflation and decelerated growth in disposable income still being a relevant issue in the very short term, our plan is to focus on those commercial initiatives, such as the pack pricing strategy, that can help us improve our top line performance by delivering to consumers more affordable packs as long as disposable income remains under pressure.

The challenge is not being taken lightly. But, we believe we have a good number of options to work with. For instance, our pack pricing strategy has delivered great results since 2008, pursuant to which we have managed to deliver to consumers more affordable packs and/or targeted and smarter promotions to tap into the rising middle class. Today, we have a wide array of can sizes that give us many options to work with when it comes to finding pricing strategies that can help drive volumes while protecting overall profitability.

Also, let's not forget about the 1-liter and the 300-ml returnable glass bottle presentations. The 1-liter represents, as you know, a more-for-less proposition, and we believe there is still a lot of room for us to increase distribution. And, as for 300-ml, which represents a lower out-of-pocket for consumers, it's important to keep in mind that we are only starting the second year of the rollout and that during 2012, given its success, we more than doubled our bottling capacity for 300-ml.

Now, moving to the question number three -- what changes in our outlook for the year? As mentioned in our press release, our volume expectations for the beer industry have changed. Instead of growth around the same levels of 2012, we are now guiding for the flat, to low single-digit decline in the industry for the year.

The reason for this is a product of three things -- first, the industry first quarter volumes; second, the fact that the food inflation and deceleration in disposable income growth will persist in the coming months, as discussed; and, three, the trends that we have seen since the close of third quarter. Accordingly, we have seen a much improved performance for the industry in April, although it's still in the negative territory. We estimate that industry sales volumes are trending in mid-single digit decline, as opposed to the high-teens drop that we experienced in March.

As I am sure many of you have been tracking SECOVI production data for April, it is still showing high-teens decline in volume, but I believe it's worth pointing out that these are production figures and, consequently, are not the best proxy for industry sales volume performance, especially on a monthly basis. Even though volume has been recovered, it may take a couple of months for production to resume growth, as inventory levels adjust.

The other change to our outlook relates to SG&A, which we expect to grow below inflation for the year. Our revised plan contemplates many adjustments to our expenses that are [targeted at] adjusting to the lower volume expectation, but also helping us protect the profitability of our business while simultaneously not hurting the brand investments that are critical to support our top line strategy this year and in 2014, given the FIFA World Cup.

Now, moving on to the last question -- what does not change? I will try to answer this from a short-term perspective and then putting into a medium- and long-term point of view. First, our commercial strategy remains basically the same. Yes, we have decided to make certain adjustments, as I have mentioned before, but our four main priorities remain unchanged, and the positive news is that despite a very tough industry overall in the first quarter, we still managed to make good progress in (inaudible).

First, we continued to gain market share in the north and northeast, which shows that our decision to invest more in this region, not only in terms of [our] footprint's improved portfolio availability, but also towards [premium] investment, continues to pay off.

Second, premium volumes actually grew, thanks mostly to Budweiser and Stella Artois double-digit growth, both of which continued to meet the growing interest of Brazilian consumers for international brands.

Third, innovation volumes are also up, with the new 550-ml can delivering solid results following its fourth quarter 2012 launch, and there is more to come soon.

And, fourth, our returnables strategy remain on track, with both the 1-liter and the 300-ml returnable glass bottles growing volumes, particularly in the off-premise channel where we still have significant room for improvement. As our capacity for the 300-ml grows, consumers find it more and more in the supermarkets, and our execution improves.

We believe this is evidence that these are the right opportunities worth pursuing, especially when you look further down the road. These four commercial priorities have been key to our growth in the last two years, and we believe will continue to be so in the future. However, [though] the first quarter was, we continue to see Brazil as the place to be in terms of combining long-term growth prospects and profitability.

Looking first at Brazil's opportunities. First, our population is still young and growing.

Second, the federal government continues working to accelerate GDP growth, having recently announced an investment plan of more than BRL400 billion infrastructure for the coming years which, sooner or later, will have an impact in the economy.

Third, we have major events, such as the World Cup and the Olympics, to look forward to, with the Confederations Cup approaching quickly and giving us a unique opportunity to help the market recover, while allowing us to test many of the commercial initiatives we intend to execute in much greater scale during the World Cup.

Now, if we focus on our industry opportunities. First, the per capita consumption levels have continued to grow and are still below some mature markets, particularly in regions like the north and northeast where per capita is estimated to be around the mid-40s.

Second, despite the short-term pressure, disposable income still has room for growth, and we continue to expect to benefit from the positive changes in terms of social mobility, with more and more people improving their living standards and having greater access to more goods and services.

And, third, though we have improved considerably our premium volumes performance in the last couple of years, there's still much more to be done. Premium volumes remain underrepresented as compared to other beer markets. The world average is 13% of total volumes, and we are between 5% and 6%.

And, if we look at AmBev's specific opportunities, first, we are not done innovating. Our pipeline of new packages, (inaudible), and route to market initiatives remains very healthy. Although I cannot give you more color, for competitive reasons, I can assure you that there are plenty of exciting new things on the way.

And, second, we also have market share opportunities worth pursuing, such as the north and northeast, [in the first], and in the off-premise channel. It will not come overnight, but our view is that if we successfully reintroduce returnable glass bottles into supermarkets [along with] better channel execution, our market performance should continue to improve.

So, it should really come as no surprise that we remain committed to investing around BRL3 billion in CapEx for Brazil this year. Part of this investment will go to making sure that we have the capacity in place to support our commercial initiatives, such as the 300-ml returnable glass bottle and Budweiser. An\ another part is directed towards ensuring that we have by the end of this year the capacity required for the 2014 World Cup in next year's summer season, as we will not have the ability to add capacity in any material way during 2014, given the World Cup.

With that, I would like to quickly run through the performance highlights of our Brazil business. In terms of Beer Brazil, EBITDA grew 0.6%, thanks to a combination of 8.2% volume decline, while COGS per hectoliter grew 18.2% and cash SG&A increased 6.9%. Despite the lower EBITDA growth, we still managed to grow EBITDA margin by 40 basis points, to 52.1%.

Our top line performance was primarily impacted by the industry decline, but we also lost 80 basis points (sic-press release) of market share against a tough comparison. Accordingly, in Q1 of 2012, we averaged 69% market share, which was our second best performance ever in a first quarter. Sequentially, however, our market share grew 20 basis points, quarter over quarter, which is good news, as it shows we have been regaining the share we lost following last year's pricing taken in Q3.

Net revenue per hectoliter remains strong and grew 8.6%. We benefitted from the carryover of last year's price increase, but the fact that premium volumes performed well and their exhibition also grew weight both helped our pricing performance.

In terms of COGS and expenses, COGS per hectoliter grew 18.2%, impacted not only by currency headwinds but also higher commodity costs, particularly barley and aluminum, industrial depreciation, negative package mix, and the impact of the volume decline on fixed costs dilution. We do however continue to expect COGS pressure to ease going forward in Beer, as our commodity hedges become a tailwind for the remainder of the year, in addition to the savings we expect to generate, as we have adjusted our cost structure to a lower volume growth outlook.

In terms of expenses, cash SG&A in the quarter was up 6.9%. We continue to invest behind our brands, and distribution costs were higher, given greater weight of our distribution and increased freight expenses. As I mentioned before, we expect SG&A in Brazil to grow below inflation for the year.

Turning on to Brazil Soft Drinks, overall EBITDA grew 8.1%, with EBITDA margin expanding 60 basis points, to 42.7%. Despite the pressure coming from food inflation higher price, which also impacted the soft drink industry, our Brazil Soft Drinks volumes actually suffered less and declined only 0.5%. We believe that the main reason behind such performance has to do with the fact that brands like Guarana [Antarctica] continue to improve performance and gain share thanks to the successful implementation of the 1-liter returnable glass bottle, for instance. Meanwhile, solid net revenue per hectoliter performance, which is up 7% in the quarter, was also important for our top line to grow 6.5%.

As for COGS and expenses, COGS per hectoliter was up 13%, mostly impacted by the currency headwinds, higher raw material costs, primarily sugar, and the changes to the federal excise tax framework back in October 2012. Our outlook for COGS per hectoliter in Brazil Soft Drinks continues to be of high-teens growth for the full year.

Cash SG&A grew below inflation, at 4.1%.

Before turning it back to Nelson, I just wanted to wrap up with a final message. We know our first quarter results may be read in many ways, or mean different things to different audiences. What it means for us is the following. First, this is not the first time I have faced volume decline and possibly won't be the last. The Brazilian industry has faced plenty of ups and downs in the past, with volumes eventually bouncing back and growing in the long run. And, given the fundamental growth opportunities to which I alluded a few moments ago, we believe that this continues to be the case.

Second, we have reacted quickly and adapted our plans for the year. Put simply, we have turned the page on Q1 and are already looking ahead.

Third, we will have to work harder as the ability of our team to execute the revised plan will be decisive once again. Although our track record has shown that we have managed to deliver good EBITDA growth, even when volumes are not supported, what's really made the difference in the past was the commitment of our people to deliver the plan. We believe we have a plan in place that can help us deliver better top line and EBITDA performance in the next three quarters, as our team is as committed as ever.

We like to say -- when times get tough, we get even tougher. We are not underestimating the challenge we have before us, and it may take some time, but we are confident in our people, our brands, our plan, and our ability to execute it.

Nelson, over to you.

Thank you, Joao. I will now walk us through the main highlights of our international operations. Starting with HILA-ex, our EBITDA improved BRL85 million against the first quarter of 2012. Our overall performance remains on the right track with the acquisition in the Dominican Republic, delivery on the synergies, whereas organic volume performance in Guatemala continues to show promising trends, with a significant volume uplift against the first quarter of 2012, and consistent market share gains year over year and quarter over quarter.

For Latin America South, EBITDA grew 10%, and EBITDA margin expanded 90 basis points, to 45%. The performance is most explained by top line growing 7.9%, despite the 10.2% volume decline which, by the way, was up against a tough comparison, as volumes actually grew 3.2% in Q1 2012. In other words, even though we have witnessed [a deterioration in Argentina] since the second quarter of last year, we have nonetheless managed to offset this through our net revenue per hectoliter results, which grew 20.2% in the quarter.

Brand performance remains very strong, with our overall market share in Argentina growing once again in innovation, such as Quilmes 1890, Quilmes Night, Stella Artois Noir, and H2Oh! Limonetta still playing an important role in our commercial strategy.

Meanwhile, COGS per hectoliter grew 13.4%, and cash SG&A rose 14.6% for the region, driven primarily by inflation in Argentina.

Looking forward, we have also witnessed much improved volume performance in April, though the overall environment in Argentina remains concerning, especially with regard to our ability to distribute dividends.

Heading north to Canada, after a 7% EBITDA growth in the first quarter of 2012, with volumes growing 1.9%, net revenue per hectoliter up 3.4%, and COGS per hectoliter down 2.6%, it almost goes without saying that we are up against a very tough comparison. [Labatt] volumes were down 3%, largely on the back of a weakened industry which, in turn, was impacted by much colder weather and taxation hikes in Quebec. [Price] on the other hand remains strong and grew 2.3%.

In terms of costs, COGS per hectoliter rose 5.4% due to higher raw material costs, negative packaging mix, and the impact of the volume decline on fixed costs dilution.

Cash SG&A increased 7.2%, but this was mainly due to phasing of sales and marketing expenses to support our commercial plan, such as the launch of Bud Light Platinum and the Budweiser red light campaign, both of which were very successful.

Now, I'd like to cover the main items between the normalized EBIT of nearly BRL3.1 billion and profits of about BRL2.3 billion in the quarter. Net finance results were a negative BRL240.7 million. The non-cash accretion expense of around BRL65 million related to the put option regarding our investment in Cerveceria Nacional Dominicana was among the main drivers behind such increase, but we also faced higher losses related to non-derivative instruments.

The effective tax rate reached 17.6%, thanks to interest on capital, higher goodwill amortization, and other tax adjustments.

And, last but not least, [in terms of] financial discipline, which delivered another quarter of consistent improvement. Cash flow generated from operating activities increased 37.5%, and totaled BRL1.7 billion, which we returned to shareholders a total of BRL5.1 billion in the form of dividends and interest on capital.

As a result, our net cash position reduced significantly, from BRL6.3 billion on December 31, down to roughly BRL1 billion at the end of the last quarter.

Joseph, can you please remind us the procedure for the Q&A, please?

Yes, sir. (Operator Instructions)

Alan Alanis, J.P. Morgan.

Hi, everyone, and thank you for taking my question. Joao, could you help us reconcile something regarding prices, market share, and the premiumization process. Specifically, the question would be, if I'm reading the release right, you had a price per hectoliter of beer in Brazil of BRL218 in the fourth quarter. In the first quarter, that declined by 5% to BRL208. What's driving that? And, how do we reconcile that move? Or, does it have anything to do with the comment that [Brito] did in his call earlier today, regarding you gaining share in the northeast, which would imply that if you're losing share overall year over year, you might be struggling versus the private competitor in the south? And, how do we reconcile this price movement with the volume increase that you're flagging on the super-premium brands, please? That will be my question.

OK. Sure. Alan, thanks for the question. Basically, you also saw a decline on the first quarter 2012 to 2011. It was minus 2.8%, and now it's minus 4.8%, the BRL218.5 to the BRL208.1 that you mentioned.

But, not in the previous two years up to that. But, you're right.

Yes. So, I'm just saying, it was not just like that in other two years, but it was like that, and you have to remember that. So, before, when you compare to the past, sometimes pricing -- those years, pricing was taken during the first quarter, which had a carryover effect towards the first quarter. This time around, with the tax increase that was done on October 1, you had most of the pricing being taken at the end of third quarter, beginning of the fourth. So, very little carryover going to the fourth quarter. This is true for the first quarter 2012 and true for the first quarter 2013. And, in the past, when you had the carryover, that would be sufficient to offset the state tax that usually moves on a quarter-by-quarter basis.

And, so, this time around it didn't have the carryover to offset the regular state tax increase that takes place. So, that combination gave it a net of the minus 4.8%.

So, very little to do with the premium volumes, but not (multiple speakers).

(multiple speakers) with the actual pricing of the consumer. Yes. OK. OK. Now, in terms of -- we've discussed the things that's in the past. We're seeing this competition for share of wallet of the consumer at the socioeconomic levels C and D. You saw the prices of cigarettes up more than 40%; processed foods, more than 20%; and, so on.

Right.

Beer, 15%. How does that context impact your thinking regarding pricing, ahead? If you would have seen that --? Yes, let me stop the question there.

I think that's a key point, Alan. And, the one that we're taking -- or we took most of the time as we replanned for the rest of the year. You're right, and all the numbers that you have are public numbers that you mentioned. And, even if you compare ourselves, our fourth quarter with our first quarter, the pressure on the consumer was there already. There were no changes in terms of price to consumer. That's why the net (inaudible) per hectoliter, the change was basically the timing of the carryovers and state tax increase. So, no change whatsoever to the price to the consumer, pretty much.

And, what really changed was more the macroeconomic environment, in two ways, two that were already said during the speech. Food inflation accelerating, that according to most macroeconomists in Brazil and the data that we saw for deflation at the wholesaler level, it should ease during the year. So, it will not be a walk in the park but will ease during the year. And the disposable income that is not growing as much is being counterbalanced by all the different increases that you just mentioned.

So, we think, going forward, this is from the first quarter, although not the best environment, you have the food deflation acceleration and then you have disposable income that should continue to grow.

What we have done in order to respond to that is to fine tune the commercial initiatives, using much more the pack price strategy. We were being more selective in terms of the growth, for example, of the 1-liter and the 300-ml. But, we think we can do much more than what we are doing right now. This is true for RGB. That's true for some of the different one-way cans that we have. That's true for smarter promotions that we have. That's true for the product activation that we can have with the assets that we have, both for the Confederations Cup now and for the World Cup next year.

And, on top of that, true, you have the mix management of premium, although small, coming back now to 6%. So, remember, we were 5% at a point in time, came down to 3.5%, and now this quarter we're already back to 6%. Not a huge number. We mentioned the 13% of other markets. I mentioned a couple of calls ago the desire to get to 8% in a couple of years. We are on our way to do that.

So, that's why we feel we can be more confident that we can continue on the strategy of the high single-digits increase for net sales per hectoliter.

And I think one data point that helps toward that direction, we mentioned that April is better than what it was in March. Of course, March was very bad, not that I like mid-single decline, but that was a mid-single decline with the same price level in terms of price to consumer, net sales per hectoliter, that we had for March, or for the quarter.

Got it. Thank you so much, Joao.

Yes, my pleasure.

Lore Serra, Morgan Stanley.

Thanks very much. I guess I have a bit of a follow-on and extended. So, I guess what you're saying is you think that the consumer can absorb these double-digit price increases of beer at the retail level with the kind of strategy you've talked about. So, I guess, two sub-points. One is that one of the competitors has published volumes that are up mid-single digit for the first quarter. So, somebody is losing more market share. And, just wondering from a competitive point of view, given the volume weakness, if you're seeing any signs of that cracking?

And, then, the second question is, I think in your press release you said that some of the cost pressure came from packaging mix, which I guess I thought meant cans. So, why are cans growing if you're trying to focus on the returnables, please?

OK. Lore, very good question. As a follow-up, of course the puzzle for the year will be to protect the combination of volume, market share, and price without sacrificing profitability, and we think we have the right plan to do that.

You have to remember also that all players are facing higher taxes, FX, commodity pressures, and higher food inflation and that three out of the main players are public-listed companies, which there's greater formality in the marketplace. Regarding the one company that you mentioned and judging by what I think you're talking to, judging by their public disclosure, it may have something to do with the fact that they have an easy comp in the first quarter of last year, which declined by 5.5%. It was a moment where they were actually publishing the volume. Now, it's just a combination of total sales. So, difficult to compare. So, we are not in a position to comment, but that's the public information that we have.

In terms of the COGS, I will let Jamel answer that for you.

Hi, Lore. Well, regarding COGS in Q1, yes, we had some of packaging mix affecting our performance, but the key driver was really the negative impact we had not only from currency but mainly from commodities. So, packaging mix was less of an issue. And, as we see for the balance of the year, I think that's why we reiterated our guidance. We have a good visibility on the hedges that we have in place. We should see, especially commodities, getting much better and therefore supporting the sort of guidance we gave before.

Great. But\ are returnables growing as a percentage of your mix, currently?

Yes, we have returnables in total growing, mainly on the back of the 1-liter and the returnable glass bottle 300-ml. So, that's the driver for returnable growth that we have.

But, for us, boosting returnables doesn't mean losing volume in one-ways. We always like to say we're not about returnables or one-ways. It is about having the best optimal mix, growing both returnables and one-ways. We don't want to lose share in the name of this route, of course. We will always protect and productize our returnable glass bottle strategy which we think is the most profitable and most sustainable long term. But we have of course the impact of both in our results, and the cause of the impact, again, was mainly driven by commodities and FX, rather than a packaging mix.

Terrific. Thanks very much.

You're welcome.

Robert Ford, Bank of America.

Thank you, and good day everybody. I was surprised there was no mention of Ley Seca, and I was just curious how your volumes did on on and off premise and if you perceived any impact at all from Ley Seca? And, what was the impact last time there was a crackdown?

Hi, Bob. This is Joao. Very good question. We saw some of the other beverage players mention about Ley Seca. Of course, we don't think there is a zero impact. We looked at other markets. We looked also at some of our numbers in Brazil in 2008, especially in Rio when the dry law was enacted back in August of 2008.

So, you do see some complaints. You do market visits, and people talk about it. But, to be quite honest, when you run the number on a more statistical basis, and when you also do qualitative research as we did, it's very difficult to say that an important portion of the decline was driven by the change, if you want. So, there is a change. We didn't mention it, because we do not think it is a significant one.

Of course, there is a time lag which we saw in 2008 for consumers to adapt their consumption habits and, therefore, consumption levels are not materially impacted in the longer term, but there are some adjustments in the short term. Because it's more short-term than longer-term and because that's what our analysis shows, we didn't mention it. So, in other words, there is some impact, but we think they are not significant.

That's great. Thank you. And, if I could, just one other question. Is there anything you can do to accelerate the rollout of the 300-ml? You mentioned some of -- a greater focus in terms of the Pit Stops. But could you talk a little bit about the acceptance in the trade of the 300-ml, and anything you can do to increase availability of the package?

Yes. I think first thing, Bob, as you saw and you know and you probably noticed by the speech, yes, definitely there are, and we will expedite more the rollout than initially we planned. I think the first and most important point for us to do that is to have the capacity and, as we mentioned in the speech, we doubled the capacity from 2012 to 2013. So, we have the resources, plant-wise and bottles and crates and all that, to further expand to the rest of Brazil. We have [plants] pretty much almost in every region of Brazil, and actually the two regions out of the eight or nine that we cover, the way we structure the sales organization, only two don't have right now and will have by towards the end of the year. So, we're ready, from that standpoint.

From a consumer standpoint, there is a very good acceptance. It's a new news. So, as like in any introduction, you present them to the trade. The trade presents to the consumer. And, after the product is there, after a while, both consumer and the trade are getting very excited about it. And, we are also very excited about it.

So, we have many internal goals attached to this now to make the next eight months, to make the whole year, and recover the shortfall we have right now.

Great. Thank you very much.

Thank you.

Gustavo Oliveira, UBS.

Hello, and good morning. I'm trying to understand a little bit better the behavior of your gross margin in this quarter. (inaudible) and the contraction was a little bit higher than I was expecting. And I thought that the currency headwind was something you a bigger effect. And my understanding is that that would be following into your second quarter results, going forward. So, if you could please help us (inaudible) understanding what happened in the first quarter 2013 for (inaudible) beer? And what is your expectation for the second quarter, going forward, in your COGS per hectoliter and your gross margin (inaudible)? Thank you.

Sure. Hi, Gustavo. Nelson here. So, what we saw in Q1, the negative impact in gross margin, first of all, we had the volume decline which in a way doesn't help the dilution of our fixed costs. That's probably something that you didn't have in your, say, calculation expectations. So, that's one element that's kind of new in there.

The other is -- and we've probably talked about that before -- on average, our currency hedges on a quarterly-by-quarterly basis, this is the easiest we have. So, when you look versus last year, in terms of currency hedges, we guided for an average of BRL1.93 for 2013. And we may see that the toughest impact, the worse impact, is going to be as of Q2.

But, on the other hand, in terms of commodities, we are still lapping very tough comps. So, to give one example, although for the year we expect barley to be down high single-digit, the commodity itself, in the first quarter, it was up double-digits, and we're going to have as of Q2, a double-digit decline in barley.

So, there is always this net impact, or this net effect, of currency and commodity, which normally are going to be on different directions, the opposite way, but as I mentioned before, the sort of guidance we gave before for our COGS, we remain committed to it, given the sort of outlook. But, in Q1, the new news there was the lower volume, therefore it affecting fixed costs dilution, but all the rest came as expected.

So, when you look forward, I think you mentioned in your opening remarks that it could deliver high-teens, COGS per hectoliter growth. But, from the BRL61.5 COGS per hectoliter that we have it now, it's probably [a] new base that will be sustained, going forward? It shouldn't go up that much, right? (multiple speakers)

(multiple speakers) in Beer, it should go down, as a result of the, let's say, the effect is less commodity impact as I just mentioned. So, what we saw in Beer this quarter is going to be probably the worst performance quarter over quarter in Beer.

And, in Soft Drinks, the other way, it is going to get worst because of the different sort of guidance we gave for the year, which is about the high-teens growth in Soft Drinks. It's going to be pressured on quarter-over-quarter, where in Beer we are going to start to benefit, especially from the commodities improvement for the balance of the year.

OK. And, I have one last question, if I may, on your price increase strategy, given the volume decline that you have in first quarter and there's still a weak outlook. When you look forward, and I think at the ADR call that Brito said that you don't question price increase to offset the price and the excise tax increases that you may need to, but it's possible it could be a lot more difficult in October, when you have to increase the prices for beers and soft drinks. So, what changes in your strategy for the rest of the year, given the volume results in the first quarter?

Hi, Gustavo. This is Joao. I think it is a lot in lines with Alan's question in the beginning of the call, our ability to sustain the pricing going forward. I don't know if you listened to the answer. But, basically, what we said in the beginning of the call was that we think there is pressure, of course, coming from food inflation, as well as from disposable income accelerating. We think this, in a way, it's one of the worst moments of the year, in terms of food inflation. It should ease, but there will be a headwind. It's not that it will be a walk in the park.

And, therefore, what we did is we have replanned a lot of the commercial initiatives behind pack price in order to help consumers to bridge between this moment of pressure into a better moment. So, we're going to find sweeter spot in terms of price point, given that we have -- we have the resource. We have the plans. We have the footprint to do that. We have the speed to do that, while maximizing also the share equation. That will be deployed. It's being already deployed as we speak. And, therefore, we have maintained the high single-digit net sales per hectoliter outlook for the year.

OK. Thank you.

Thank you.

Luca Cipiccia, Goldman Sachs.

Thanks. Thanks for taking my questions. I have two, actually. The first is a bit of a rephrasing on the previous point, about pricing, and it's the following. Should we see a further change in beer taxes in Brazil, going forward, would you still feel comfortable to act on pricing the same way that you did last year? Or would you think that in this case you may have to take some of that on your margins? That's the first question.

And the second is more on the share restructuring initiative. If you could give us an update on where you stand on the upcoming calendar? And, also, although I understand you can't quantify the impact, but if you can help us clarify what accounting treatment this will bring, as well as what reserves it may impact? I think there is a little bit of a confusion in the market on how this may play out. It would be great if you could get back on this, as well.

OK. Let me start with the question on the share restructuring and then, Joao, you'll take the question on the beer taxes. In terms of the schedule that we announced, we are pretty much on track and, of course, they're working on the filings right now. We are in contact with SEC, working on the prospectus, and we believe we're going to be in a position to go public with the F-4 and also with the setting of the date for the shareholder meeting, probably around mid-June. So, we should hear something about this over the next two weeks.

And, regarding the benefits of the transaction, of course we talked about different benefits, in terms of improved corporate governance, decreasing (inaudible), simplifying the cost (inaudible) and therefore saving some (inaudible) costs. There is a goodwill that also we will be able benefit from at the holding company [level]. That's going to be the effect for the share swap merger. And we also talked about increasing our flexibility, in terms of capital structure.

The way we have explained this and putting this to the market is that we had been -- we're going to be able probably to potentially solve an issue that we have been facing more and more, which relates to the fact that we have a very strong cash flow generation and it has been growing at a faster pace than our profit reserves. So, if this unbalance remains for a longer period of time, we could create some hurdles in the middle to long term with regards to our ability to implement our payout strategy and manage our capital structure.

The way the transaction is proposed, in terms of the share swap merger, it probably will help us in addressing this as we will be able to increment our payout due to the change we expect to have in terms of our capital structure. So, the share swap merger is supposed to be the next market value, and we should have an impact on our capital and capital reserves in accordance with (inaudible).

So, be it through incremental dividends, incremental interest on capital, or even share buybacks, should the Company decide to do that in the future, we will have at least [that room], and that's why we are saying we will have the flexibility to manage it over time. But, [since] the transaction is not approved -- even the disclosures are not public -- that's how far we can go at this stage.

But is it right to interpret that the profit reserve would be impacted through the amortization of the goodwill that it will generate over time? Is that the right way to read it? Because the link between profit reserve and transaction is the one that, in a sense, I may be missing.

No, there is no goodwill. So, that's important that once we have the F-4 registration statement disclosed, I think it's going to be more clear what will be the accounting impacts. But, again, it has nothing to do with goodwill, and the account details will be in the registration statement that will be disclosed, we think, in two weeks, or so.

OK. We'll look forward to that, then.

All right.

OK. For the first part of the question, Luca, I think we were very specific, let's say, on the price outlook for the year. In terms of the longer term, we always said prices -- we want prices to grow in line with inflation. That was our story for most of our lives. It has somewhat changed in the past few years, given the tax increase. We always also say that -- price in line with inflation, plus the tax increase. So, I think that's the outlook that we should incorporate.

And, then, I think an additional comment in terms of the tax framework. The tax framework is there. It was announced by the government, both in 2009 and revised again in [nation] sometime last year. We are always there, talking to them. I think the government has the task to balance investment, jobs, and tax collection, while we have to balance price, volume, share, and also investment. So, we always try to find the best compromise as we're trying to defend our industry, and we'll be at the table discussing that.

Alex Miguel, Itau.

Hi. Good afternoon, everyone. So, just two questions. First, on the -- if you can comment and be more specific about the performance of the [non-returnable] glass bottle during the quarter. But taking a look at the breakdown of production figures, we saw a steeper decline in returnable glass bottle packaging versus other packaging, almost a 7% decline in the first quarter of the year. So, I was wondering to what you attribute that decline in returnable glass bottle packaging during the first quarter? Is it less consumption in bars, and that's related to the Ley Seca? Or, also, the issue of disposable income?

My only concern is that that could be a trend, a market trend going forward, that I understand you are trying to counteract on that, but I just wanted to get your views on what you think happened in the first quarter and your outlook for returnable glass bottles for the year. That will be my first question.

And, the second question, if you can comment on the volume performance on the Latin America South region, which was not good, as well, and what you expect, we would expect for the remainder of the year? That would be great.

OK. I will start by the second part. Yes, Latin America South also had a tough quarter volume-wise. They are already looking at the April numbers, much improved. The story was similar. They had a very tough March. So, March was tough, just like it was in Brazil. And quick recovery in April. So, April, looking at much better numbers.

As you know, there is a price freeze in place, but with some exceptions or some negotiation going forward. Some of the beverage companies have mentioned that. So, I think the outlook going forward, it's getting better as we speak.

In terms of RGB and one-ways, I think the numbers you are looking at is SECOVI production. You have to remember that the first quarter of the year, it's when Carnival takes place. So, this is an important moment for one-way, maybe the explanation of the things you are looking at SECOVI. You have to remember that SECOVI is production, not sales. And people did prepare for the Carnival and, usually when you prepare for the Carnival, you do work on the one-ways.

You have to remember our investment behind strengthening returnable glass bottle in the marketplace has been an important volume market share driver for us. We started 2012 with a bigger focus on reinforcing the on-premise channel to the [noche bar], micro events. We're introducing returnable also in the off-premise channel through the Pit Stop, the RGB.

So, we continue to see great, great, great volume and value of doing that, execution getting better, and more opportunities arising.

But we want to win the game in both. We think it's not an -- or -- game that we can win in the RGB and not in the one-ways. It's an -- and -- game. We've got to win in both. But, we have been supporting the reintroduction of returnable glass bottles in some channels that they no longer exist, and we have many great examples of change that had basically zero, very large key account change, and now have 20% of their sales already in returnable glass bottles.

So, I think it's working, and with the right strategy in place. But, again, we want to win both games, not just one.

So, Joao, wrapping up that, you think that during the quarter you don't see a significant [decline] regarding your sales, the packaging mix?

No. No. Exactly, I see the regular change in the one-ways given the seasonality of Carnival. That's summertime, Carnival, end of the year. It's the type of events where people many times work with the one-ways. And, there's always a growth during the Carnival, and then it comes back to the more regular mix.

I think just one way to exemplify and I think that was also somehow a question from Lore a few moments ago, of course both presentations went down. We had volumes down 8%. So, of course, both one-ways and RGB went down, in terms of total (inaudible) volumes.

Of course, when you look [inside], the same way you're going to see 1-liter and returnable 300-milliliter bottles growing, as opposed to going down, of course, there's not enough to offset for the entire packaging type. The same way we saw that in one-ways. We saw the new king size, like the 550-milliliters, growing, as opposed to the 250-milliliter. So, there was a mix change.

And, for you to have an idea, out of the total COGS per hectoliter growth that we had in Q1 for Beer, around 1% of it was packaging mix driven. So, it was really minor into the total double-digit growth that we had per hectoliter. So, it was a minor shift, and we're seeing each presentation or group of presentations there are different behaviors.

Again, [our] innovation is playing an important role in both, and that's why we want to move forward. We want to have innovation driving volume growth, both in RGB and one-ways.

OK. Thank you. Clear.

Lauren Torres, HSBC.

Hi, everyone. I guess you've covered the whole pack price strategy, but I was hoping you could talk a little bit more about the cost management capabilities you mentioned. It seems like historically AmBev's been a good company with respect to -- or a great company with respect to managing the cost line. So, I was just curious if you could give us any details about where the upside from either a productivity or cost outlook is going to come from this year, being that you've done a lot on that front historically?

Hi, Lauren. Nelson here. Of course, more than ever, we are going to use our capabilities of cost management in such an environment, right, when we see a tough outlook volume-wise. Of course, we've put together the whole team, looking into it line by line, package by package. And, both in COGS and in SG&A, the first exercise, to be honest, was to adapt our plan and our restructuring for the sort of volume outlook we have.

So, be it by reducing shifts in the plants, by adapting our distribution centers to the new volume outlooks, or --. For you to have an idea, we have around close to 3,000 trucks in our fixed fleet, and we have already started to adjust that, reducing our fixed fleet to cope with the volume outlook. So, that's the sort of thing that if we don't do right away or if we take too much or too long to do it, two or three months later it's too late, because the volume was not there, but the fixed structure was. So, you have to really adapt quickly.

Of course, there is a disproportional focus on what we call the non-working money. So, we're really leveraging on procurement things here to increase coverage, negotiate better contracts, push back inflation pass-throughs, and this sort of stuff.

So, that's why we feel very confident about the guidance, for the new guidance that we gave in which we want to grow SG&A below inflation for this year, and we think we have everything at our hand to do it.

And the beauty of it is that this is stuff that we control. It's much more difficult to influence consumer behavior, but to control our costs is something totally into our hands. And, you do all that of course without hurting our brands. We're not here for the short term. We're here for the long term. We have important events coming up.

So, we are taking care of it, be it from a commercial spend standpoint, be it from a CapEx standpoint. We have committed to the investment of around BRL3 billion that we mentioned for this year, as we think it's critical for the short term and also for the medium to long term.

So, bottom line, of course we have this capability being tested again, but we think more than ever we have everybody mobilized to this and you do it.

OK. I guess I'm just trying to get a sense though as we think about next year. Obviously, these reductions are specific to this year and, then, once we see return to better growth with obviously the World Cup, that reversal of how you spend is easily changed back, I assume, to what we've seen historically. It's not something that is hard to get back what you're pulling back on?

Definitely not. Every time we adjust the structure looking into the volume outlook, you have to do it fast enough, but you need to be prepared. And, that's why, for instance, we're going to be more -- we're going to work harder and adapt more the SG&A rather than CapEx, because CapEx -- you don't build a capacity in less than one year, so while scaling up commercial spend. You can do it much faster than adding CapEx. So, that's why we're going to be more focused with SG&A rather than adjusting our CapEx outlook.

OK. Very good. Thanks.

You're welcome.

Tobias Stingelin, Santander.

Thank you. Hi, Joao. Hi, Jamel. Quick questions. The first one, can you just provide me some clarity on the SECOVI numbers. I know the SECOVI numbers -- they are quite different from sales numbers. But, SECOVI indicates a 0.5% decline in the first quarter, and volumes were down around 7% based on what you said. And, if you look at SECOVI data for April, they were pretty weak, and we know that volumes are pretty weak, as well, from what you said. Do you think that there is still a lot of volume sitting around, like inventories in the shelves in the supermarkets, or something like that? Because, with this information, it's too different in regards to production and to sales at this point. That's the first question. Thank you.

Hi, Tobias. This is Joao. You are right. It's different. We mentioned in the call, because we know people are looking at SECOVI numbers on a monthly, and sometimes weekly, basis. And, it's not a very -- it's not a good proxy for sales. On a longer term, it's a good idea, but not in the short term.

So, what you saw in March, actually sales in March were worst than SECOVI data, and now April is the opposite, because the market is recovering and the production of April is still adjusting. What we mentioned in the speech is that it will take a few months for you to -- quote, unquote -- synchronize or to be a better proxy once again. So, in the short term, it's not, because you fell less production than sales fell in March, and now it's the other way around in April. It's basically that. There was a lot of inventory, let's say, burnt down -- quote, unquote -- or being deployed during March, and much less in April.

Perfect. Thank you. And, just one other question. I think this is for Jamel. I'm sorry if the question was answered before. But, you have a big increase in the other operating income in the first quarter, around 120%. What is this line exactly? Tax incentives? Or, what's that exactly?

Yes, Tobias. This is exactly tax incentives. Normally, when we have higher CapEx for a couple of years now. So, we have been obtaining government grants as a counterpart to this investment. So, they are related to state VAT long-term tax incentives. That was the driver for the upsize you saw.

And, by the way, in this line in Q1 we had, let's say, almost half of it was one-time credits related to these long-term tax incentives. So, maybe the best way to think about for the following quarters is, yes, it will continue to grow versus the previous year, but let's say at half of the speed that you saw in Q1.

Perfect. Great. And, there is no other provisions, like (inaudible) or something like that? There has been no adjustments so far, here? Or, you just basically did a smaller provision, probably just because of the quarter, but there's no change in the outlook there?

No, this line doesn't include any provision for bottles. This goes directly into other lines in the SG&A. I think the disclosure that we provide in the release on page 17 gives you the breakdown. For instance, what we have in this line is eventually a net gain on disposal on properties, plant and equipment, this sort of stuff. So, that's why other operating results and, of course, there the biggest line is the government grants benefit that we get, be it a nominal waiver or a long-term incentive.

Thank you very much, again.

You're welcome.

Robert Ottenstein, ISI.

Good morning. Can you give us some numbers in terms of market share, sequential market share improvement in March? And, do you have anything for April? And, exactly where do those numbers stand, please? For Brazil Beer.

No, Robert, we don't open up this number on a monthly basis.

Did it continue --? Can you tell us --? I know they were up for the quarter. Was there sequential improvement in March? And, do you see it in April?

Yes, we've been reporting on a quarterly basis. I'm not going to open it up by month. And, April hasn't arrived yet.

OK. How should we look at profitability for Argentina in the second quarter? I know you said volumes were picking up. But, given the price controls, how is that going to impact? And, how should we think about profitability in Argentina in the second quarter?

Yes, I think what we saw in Q1, it was primarily an issue of volume, rather than price. Probably, you saw (inaudible). There are some price controls in place. But, again, you also had some room to negotiate and do it in line with the inflation we are facing. So, in the end of the day, we had more of an issue of volume drop, rather than margins. So, margins even expanded in a volume declining situation. So, (inaudible) was much better than what we saw in Q1. I think that's the driver to follow. It's more a volume issue rather than a pricing issue.

But, given the inflation, isn't your cost still going up in the second quarter? And, my understanding is you don't have the opportunity to increase prices and you're going to start lapping some of the increases that you've had.

No, not really. I think most of the price increase we took was [still] in the end of last year. It was more in Q4 last time. And, in the end of the day, you do have the opportunity to work on your top line, be it trying to put increased prices in line with inflation, but also try to improve mix (inaudible) in Argentina have been more and more shifted to premium brands.

So, as we saw in Q1, we are not anticipating any different behavior, in terms of our net revenue per hectoliter performance, and we are more focused on the industry volume and the industry outlook, of course not to mention the difficulty we are facing to repatriate funds from the country, which were alluded to before, when we published our full-year results. We mentioned that we had roughly BRL1 billion there [and this rate] of undeclared but unpaid dividends. The situation hasn't changed.

Thank you very much.

You're welcome.

Alex Robarts, Citi.

Thanks. Hi. Most of my questions have been answered, but why don't I just focus here on the outlook commentary? And, there's really two things was keen to ask about. First of all, appreciate that you have the revised plan in Brazil Beer for the rest of the year. And, the delta in the volumes that you've thought about for the industry earlier this year and now is about 4 percentage points, roughly. And, you're keen to stick to the high single-digit revenue per hectoliter in Brazil. And, I guess I'm still not clear -- and, it would be great if you could comment on this -- that, how do you pick up that delta of 4 percentage points in price, given the environment looking out for the rest of the year, when it seems like a lot of your revised plan is about pushing pack price, 300-ml, growing in the north and northeast? And, all these factors have a little bit of a downward effect on your price per hectoliter. So, it'd be great -- is there an outsized impact that you're expecting on the premium segment this year? If you could help or just comment on that piece?

And, secondly, related to that is, does it make sense to really keep to your cash OpEx guidance below inflation, given these initiatives that you're going to be trying to roll out? And, I'm wondering how your balancing this guidance of cash OpEx growing below inflation with some of the activities like the Confederates Cup that's coming up in June and some of these other rollouts. So, it'd be great if you could touch on those two points.

Thanks very much.

Hi, Alex. Joao. Very good question. It's almost a summary of the whole call, because we touched on some of those, but it's a long story. But, I think at the end, trying to sum up everything you said, if we take 2011 and 2012, they also started as tough years. And, I think what we were proud of back then -- and that was also true for 2009 and 2010, actually, for different reasons. But, in those first two years, volume grew a lot, and we very quickly moved to take advantage of that. In 2011 and 2012, first quarter also we saw the year was not going to be a very strong year, and we very quickly replanned for that sort of situation. Of course, now is a more important decline. So, we had to be even stronger replanning exercise.

We think the best way to tackle this for the short term and for the long term, given as we also mentioned our outlook that we still feel very confident about the Brazilian long-term prospects, we think the right way is, first, to continue investing in capacity, to have great beer, [election] year, World Cup year in 2014. And, we don't want to take any shortcuts here, much the opposite. Let's do everything we have to do to protect the future. So, number one in our decision making process.

And, second, is we need to have enough money to support and grow our brands during 2013, but resize everything else. Everything else that doesn't touch the consumer. Have the right number of trucks, the right number of ships at the plants, and to cut as much as non-working money as possible.

And, of course, we want to do a great Confederations Cup. So, we have all the resources necessary to do the best Confederations Cup possible, that we will start 45 days from now. And, we're already working on it. If you turn on the TV, you're going to see the first promos. So, a lot of excitement at the consumer level, at the trade level, at our key accounts clients, as well. So, we're going to take full advantage of that.

We also have all the right resources behind the growth and the introduction of the returnable glass bottles. We also have all the resources needed to continue to grow our premiums brands, such as Budweiser and Stella, as well as the local domestic beer. So, we have found a way to balance this but, at the same time, being conscious to the issue of the consumer being pressured in the short term.

So, we think the smarter way to find the right price points to them is through the pack price strategy. So, we use it at another level than we used in the past to try to build and to use this bridge gapping exercise for the time being while there is this more intense pressure.

So, that's sort of in a nutshell what we covered during the call. I hope that answers the question.

Fair enough. OK. So, I guess just to follow up here, sorry, is that then we're going to see -- what seems to be critical here to your hitting your high single-digit revenue guidance for hectoliter is the premium segment. Just the last thing then is, how is the premium segment growing today? Is it 1x, 2x, 3x mainstream? I appreciate we have -- we have just gone through a tough quarter. And, our channel checks seem to suggest there's a lot more price segmentation happening within this 4% or 5% of the industry that is premium. Can you confirm that? It seems like there is a lot more product launches, and such, in that average price within that segment. Is it stable? Is it down? Up? And, any color around the premium segment outlook would be helpful. Thanks very much.

Yes, sure. Well, premium, as I mentioned a little bit earlier, we were at around 5% in the past. And, then, in the years where we (inaudible), it declined to about 3.5%. I mentioned that in the quarter, already very close to 6%. So, it's growing a lot, coming from around 5%-ish in same quarter last year. So, it continues to grow and taking more importance in the mix. But, still it's 6%.

So, the premium overall, it's growing despite the industry decline. And the international premium is double-digit, to give you an idea. So, that's a summary of what's going on.

OK. Fair enough.

All right? Thank you, Alex.

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

OK. Thank you, Joseph. And, thank you, everybody, for joining us today, and we are looking forward to speaking with you again on July 31. So, that's it for today, and thank you very much. Bye, bye.

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