Ambev SA (ABEV) 2013 Q2 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's second quarter 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 a 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 risk, 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 Q2 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, sir.

Thank you, Mike. Good day to all, and thanks for attending our 2013 second quarter earnings conference call. I will kick off with the performance highlights for the quarter, and then Joao will cover the Brazil operations in more detail. I will then return to go over the results of our HILA-ex, Latin America South, and Canadian businesses, as well as financial performance, before opening it up for Q&A.

So, let's get going.

Overall, EBITDA performance improved during the second quarter, with Brazil Beer's top line performance leading the way. On a consolidated basis, after 2.3% of EBITDA growth year over year in Q1, we delivered 6.8% of EBITDA growth as compared to last year.

As for net revenues, year-over-year growth jumped from 2.4% in the first quarter to 8.3% in Q2.

When you look at the divisional highlights, EBITDA performance improved across the board. For Brazil, net revenues were up 8.8%, and EBITDA increased 5.8%. In Latin America South, net revenues rose 17.3%, with EBITDA growing 15.6%. Canada net revenue was down 2.5%, but EBITDA actually grew 0.7%. And finally, in HILA-ex, we delivered 3.7% growth in net revenues and BRL94 million of EBITDA, which represents an improvement of 36.5%.

Now, I'll turn it Joao. Joao, please.

Thank you, Nelson, and good afternoon, everyone.

On the last conference call, I spent a considerable amount of time on Brazil, focusing on what actually happened during the first quarter, what we planned to do about it, what changed in our outlook for the year, and what did not change, thinking both short term and middle-long term.

And I also mentioned that the tougher than expected start for the year meant for us that in order to deliver better top line and EBITDA performance for the remainder of the year, we would have to work harder, get tougher, as the ability of the team to execute the revised plan would be decisive once again. So, during the second quarter, we need to ensure that we read the causes for the market decline in Q1 correctly, we focus on the right things to start improving our performance, and we execute [flawlessly].

The environment surrounding us in Brazil during the second quarter was not as bad as the one we witnessed in the first quarter, and we got some help on the volume side from the FIFA Confederations Cup, despite the public demonstrations that took place in the country in June. But things were still pretty challenging.

Nevertheless, I believe that the results we managed to deliver are the initial evidence that we are on the right track to deliver better top line and EBITDA for the rest of the year.

So, before moving on to the numbers, I just want to quickly congratulate and thank the team for the results we are sharing with you today. They showed the necessary sense of urgency; they focused on the few right things that could make a big difference; they showed resolve; and they executed extremely well.

There is a lot to be done. The first quarter was very difficult, and I was able to see for myself that our people definitely rose to the challenge in Q2, and they are ready for the second half.

Let's look to the results then. In Brazil Beer, EBITDA increased 9.2%, driven by solid top line growth of 9.6%, while COGS per hectoliter rose 13.3% and cash SG&A increased 17.7%. EBITDA margin contracted 20 basis points, to 47.1%.

What I would like to highlight in Brazil Beer is that such EBITDA improvement came mostly from the strong top line growth, where we delivered a better balance in terms of volume, net revenues per hectoliter, and market share. Let's look at each of these, starting with the volumes.

During the second quarter, the Brazilian beer industry still faced the two main headwinds we discussed during our Q1 call, namely food inflation at very high levels and the deceleration of disposable income growth. We began seeing signs of deceleration in food inflation growth year over year, but it remained growing double-digit on a rolling 12 months basis.

Meanwhile, [tough] disposable income did grow in real terms. It was once again [by last] in the same period of the prior year. We continue to believe there is some room for improvement during the second half of the year, but it should continue to be only gradual.

In addition, as anticipated, volumes for the quarter were positively impacted by the FIFA Confederations Cup. The two-week events took place in six cities that hosted 16 matches in total. This was also a unique opportunity for us to test many of the commercial initiatives we plan on executing at a much, much larger scale next year during the FIFA World Cup, and we are very pleased with the results.

Our initiatives included -- first, new product launch, such as a special edition celebratory Brahma aluminum bottle, also celebratory Confederations Cup aluminum can, as well as the launch of Brahma Zero Alcohol; target promotions like the well-known now here in Brazil like the three-for-two Brahma promotions select of [Remske] accounts and the limited edition promo pack with the jersey of the Brazilian national soccer team; third, [trade] activation with Budweiser at the stadiums and at hundreds of VIP points of sales in major cities across the countries, and with Brahma in points of sale surrounding the stadiums and in the off-premise channel; and finally, our events platform, not only to larger scale events in Sao Paulo, Rio, Belo Horizonte, where thousands of Brazilians came together to watch the Brazilian team's matches, but also to the beer gardens that we set up outside a few of the stadiums and the many micro-events in hundreds of points of sales.

Net-net, we estimated that the FIFA Confederations Cup contributed with roughly 300,000 hectoliters of incremental volumes, and all despite the demonstrations that took place in several cities nationwide.

The takeaways from the events are many, and we definitely need to make sure we scale up these initiatives in [months] to come in order to really make the most of the FIFA World Cup in 2014. But, the FIFA Confederations Cup result really give us reasons to remain optimistic for next year.

And in terms of weather, following a cooler April, we enjoyed better weather in May and June, with warmer temperatures and less rainfall.

Meanwhile, market share remained flat sequentially and averaged 68.1% for the quarter, which is well within the historical range of 67% to 69%. In addition, we built some momentum within the quarter, which is good news. Year over year, however, our average market share for the quarter was 70 basis points lower than Q2 2012.

Finally, regarding net revenue per hectoliter, we managed to deliver 10% growth, showing that the pack price strategy worked in terms of producing better volumes while not compromising our profitability.

Moreover, the fact that the weight of direct distribution was higher than last year and that premium volumes grew mid-teens were certainly help for us, as well.

Now, our top line performance will not have been possible had we not executed our commercial plan as we did. I cannot stress this enough. In addition to our efforts to make the most of the FIFA Confederations Cup as previously mentioned, our greater focus behind the pack price strategy is off to a good start, while our top commercial priorities made continuous progress.

Our decision to increase the presence of the 1-liter returnable glass bottle and accelerate the rollout of 300-milliliter returnable glass bottle are proving to be valuable tools for us to help Brazilian consumers cope with the short-term pressures on disposable income. The 1-liter grew well ahead of our overall volumes, while the 300 nearly tripled its volumes.

At the same time, we did not lose sight of the commercial platforms that have consistently delivered great results for us in the last two years and which we believe will be the primary source of growth in the medium and long term, namely, innovation, which almost doubled volumes during the quarter; premium, with each of our top four brands growing double-digits; returnable, which was driven by the growth as mentioned in the 1-liter and the 300-ml; and the north and northeast expansion, where we gained market share and continued closing the gap to our national average.

Turning to the cost side, our COGS per hectoliter grew be less than what we saw in the first quarter, and rose 13.3%, impacted by greater currency headwinds only partially offset by tailwinds coming from our commodity hedges, while product mix and industrial depreciation also were against us in the quarter.

In terms of SG&A, expenses grew 17.5%, primarily due to greater distribution costs given more direct distribution, but predominantly because of the higher sales and marketing expenses.

On this point, three factors played a role. First, different, very different [calendarization] of our commercial investment as compared to last year. In Q2 2012, our sales and marketing spend actually grew low single-digits, where the main source of high SG&A expense came from the distribution and admin expense side.

Second, investments that were specifically linked to the FIFA Confederations Cup such as [many] spend with Brahma, specific product launch, our events platform, on-premise trade activation initiatives for Brahma and Budweiser, as I already pointed out moments ago.

And third, greater focus on the on-trade activation in commercial programs target in the off-premise channel during the month of June, in order to fully leverage the market opportunities brought by the FIFA Confederations Cup.

As you can see, although the sales and marketing spend increase was a relevant one, very relevant one, part of it has to do with timing, while those associated directly or indirectly with the FIFA Confederations Cup are in our view [warranted], given what we are trying to accomplish during the event and what it produced in terms of volume contribution and brand equity.

Moreover, and perhaps equally important, is the higher commercial investment in the quarter should not in any way get in the way of our cash SG&A guidance for Brazil growing below inflation for the year, which still stands.

So, just to sum up Brazil Beer before moving on to Soft Drinks, we delivered better and more balanced top line growth when looking at the volume, market share, and price mix, as compared to the first quarter, despite the macro-related headwinds that remain but helped by the Confederations Cup.

Second, COGS also improved versus Q1, thanks mostly to the commodity hedges becoming a tailwind.

And SG&A, higher but due to phase-in of sales and marketing spend [on] the FIFA Confederations Cup, but guidance for the year remains.

Now, moving to Brazil Soft Drinks and Non-Alcoholic, Non-Carbonated drinks, this was a very difficult quarter for the division and should be the most challenged one of the year. All in all, EBITDA declined 10.7%, with EBITDA margin contraction of 730 basis points, to 41.1%.

Our top line grew 5%, thanks to the net revenue per hectoliter growth of 10.2% more than offsetting the 4.7% decline in volume.

The industry faced the same challenging environment as beer, with the additional burden of having to continue to implement the higher level of real price increase to offset last year's changes in the tax legislation specific to CSD, which hurt CSD more than Beer.

Looking ahead, however, our top line performance should benefit from the fact that in late May the Brazilian federal government reinstated most of the benefit of the so-called Juice Law.

Moreover, we also believe that the pack price strategy which is Q2 worked very well for our Brazilian Beer business can also help us improve our top line performance in the second half of the year for the Brazilian Soft Drinks division through, for instance, increasing the distribution of the 1-liter returnable glass bottle for Guarana Antarctica.

Market share was a bright spot. We gained 30 basis points of the market share. Our Guarana Antarctica brand did great again, and was the primary responsible for the market share evolution.

The 237-milliliter PET bottle and the 1-liter returnable glass bottle of Guarana Antarctica were the main drivers on the packaging side, but the brand also benefitted from the activation around the FIFA Confederations Cup in the fact that it is an official sponsor of the Brazilian national soccer team.

Plus, during the quarter we launched our biggest ever promotion for Guarana Antarctica, which began in the second quarter and has just started to deliver better results in terms of volume share and brand equity. Since such promotion is expected to run through September, we also believe that it could definitely help us to add to overall better performance for the second half of the year.

On the cost and expense side, COGS per hectoliter grew 19.7%, and SG&A was up 32.8%. This spike in COGS per hectoliter was caused by -- higher currency and adverse sugar hedges which should get better as the year progresses; the impact of the changes to the federal excise tax regime which came into effect in October 2012; higher industrial depreciation; the impact of the volume decline on fixed cost dilution; not to mention a very tough comp we faced against the second quarter of 2012.

Year-to-date COGS per hectoliter is growing 16.2%, which is consistent with our expectation of high-teens growth for the full year.

As for the SG&A, the 32.8% uplift was also impacted by higher distribution expenses, given the greater weight of direct distribution, but also by the phase-in of commercial investments associated with the FIFA Confederations Cup and the Guarana Antarctica promotional campaign. But to be clear, there is no change to the cash SG&A guidance for Brazil in the year.

Before handing over to Nelson, I just want to close by quickly commenting on our expectations for the second half of the year. In terms of guidance, as we mention in our press release, there is no change. We expect the Brazilian beer industry to be either flat or show a low single-digit decline for the year. The macro-related headwind remains, but we expect them to continue gradually easing in the second half of the year.

However, net revenue per hectoliter for Brazil should grow high single-digits for the year. Disciplined execution of our pack price strategy is showing that it's possible to grow volume in a profitable way.

Meanwhile, COGS per hectoliter in Brazil for the full year should grow from high single- to low double-digit, as we have mentioned since our fourth quarter 2012 call, with Brazilian SG&A growing high-teens.

Cash SG&A in Brazil should grow below inflation for 2013, benefitting from the front-loading of sales and marketing spend in the first half, but also with a lot of efforts during the second half on non-working money initiatives.

And finally, Brazil CapEx remains around BRL3 billion for the year, to support our commercial initiatives and to get ready for 2014.

So, wrapping up, we got tougher in Q2, which was great, but definitely much remain during the second half of the year. No question about it. We continue not underestimating the many challenges that lie ahead, but remain very confident in our people, our brands, our plan, and our ability to execute it.

Nelson, back to you.

Thanks, Joao. Let's take a look at our performance outside Brazil now. Beginning with HILA-ex, we delivered BRL94 million of EBITDA and 30.5% of EBITDA margin, with 580 basis points of EBITDA margin expansion.

Most of the improved EBITDA performance came from the Dominican Republic, as we completed the one-year anniversary of the CND acquisition. We delivered the anticipated EBITDA performance of approximately $190 million in the first 12 months of combined operations, despite a tough industry since [late-2012] given the local tax reform.

Now looking ahead, to keep improving our organic performance in the Dominican Republic, while continuing to expand into the Caribbean. Just to illustrate, following the closing of the transaction between Anheuser-Busch InBev and Grupo Modelo, we already began working with the Corona brand in several islands in the Caribbean and are very excited with the growth opportunities for the brands to team up with Presidente [D'Origen]. As for Guatemala, volume market share performance remained, delivering good results for us.

[Moving to] Latin America South, we delivered 15.6% of EBITDA growth, driven primarily by an increase in the top line of 17.3%, even though volumes [reversed to] negative territory, declining 0.8%.

Once again, our net revenue per hectoliter and market share performance remained strong and helped us navigate the still tough environment in Argentina. Accordingly, net revenue per hectoliter rose 18.3%, and our innovation platform and premium brands delivered another quarter of market share improvement, led by Quilmes 1890 and Stella Artois Noire.

As for cost and expense, COGS per hectoliter was up 15%, while cash SG&A grew 20.8%. Input cost pressure came mostly from packaging costs and labor-related costs, while union salary renegotiations also affected expense for the quarter due to higher freight expense.

Looking ahead, the overall environment in Argentina remains difficult, including our ability to distribute dividends. Also, we have faced similar difficult times in the country before, and we still managed to endure the tougher times and remain committed to the region in the short and long term.

Finally, Canada. Our EBITDA performance improved and grew 0.7%, after the 11.4% decline in the first quarter. The industry remained tough, declining 3.4% in the quarter, on the back of poor weather and real pricing required to offset tax hikes in Quebec in late-2012.

And we also had a small market share loss.

As a result, volumes were down 3.8%, though our net revenue per hectoliter performance in the quarter remained positive and grew 1.3%.

On the innovation side, Bud Light Platinum and the launch of Bud Light Lime-a-Rita and the Alexander Keith's Hop Series all produced good results for us.

COGS per hectoliter grew 4.3%, mainly due to the impact of the volume decline on fixed cost dilutions. On the other hand, cash SG&A [decreased] 10.1%, thanks to the front-loading of sales and marketing expense to support our commercial plan during Q1.

With that, I would now like to go through the main items between our normalized EBITDA of a little over BRL3.2 billion and profits of nearly BRL1.9 billion in the quarter.

Our net finance results were a negative BRL268 million. A non-cash accretion expense of around BRL65 million related to the put option we got in our investment in Cerveceria Nacional Dominicana continued to impact our performance, though we also faced higher expense associated with derivative instruments, which are only partially offset by lower tax on financial transactions, primarily the IOF in Brazil, and gains resulting from our net cash position in the quarter.

The effective tax rate was 21.5%. The main driver behind such increased [rate was the fact that we did not make any IOC payments during the quarter].

And in terms of cash flow generation from operating activities, we generated close to BRL2.6 billion, which represents a decline of 6.5% versus second quarter of 2012. The main reasons for said decline had to do with the negative impact of change in our working capital [yielded].

On the receivable side, the greater concentration of sales in the off-premise channel in the last two weeks of June, given the FIFA Confederations Cup, but also on the favorable side adjustments resulting from the lower volume growth outlook.

We ended the quarter with a net cash position of about BRL1.9 billion, compared to BRL6.3 billion on December 31.

Finally, we are very pleased that an overwhelming majority of our minority shareholders approved the [Aspy], the proposed share class restructuring, and we will now work towards listing Ambev S.A.'s common shares on the BM&FBOVESPA (inaudible) as fast as possible during the 30-day withdrawal rights period for dissenting holders of common shares.

Mike, can you please repeat the instructions for Q&A now?

Yes, sir. We will now begin the question-and-answer session. (Operator Instructions)

Fernando Ferreira, Bank of America Merrill Lynch.

Thank you, and congratulations for the results. Thanks for taking my question. I had a question regarding the price to consumer. It seems to be a very important initiative for you guys in Beer Brazil and seems a little overlooked, as this quarter we saw CPI for beer decelerating marginally in Brazil while you were still able to grow revenues per hectoliter. So, I'd just like to understand how advanced you are in this strategy? How has been the response and the adherence to this strategy? And how important it is?

And then, I had a follow-up regarding the SG&A guidance that you have. Aren't you concerned that the market slowdown in the second half can impact your sales volumes for the year?

Thank you.

Hi, Fernando. This is Joao. Of course, I think as you mentioned in your question it's a very important point and maybe the one that makes us really motivated for the second half. I think being able to deliver pretty much the same growth, despite that the same level per hectoliter, with a much better volume is what makes us believe that the plan has worked well for the second quarter.

Much better situation to have a, quote-unquote, 10% and a basically flat volume, comparing with an 8% and a minus 8%. So, that combination is much better. Price is sticky. Volume is sticky. And share is sticky. And with a positive momentum -- so, even better if you want to build a case -- which give us even more room to maneuver.

So, I feel very confident that everything that we laid out in terms of pack price, smart promotions should bring back our consumer not just to the franchise, but also to the overall market, are yielding very good results and we enter the third quarter feeling the same good momentum that we can continue to build upon that, despite the macro headwinds that you also mention.

If you compare this year with '11 and '12, '11 and '12 also started off difficult. Also if we compare with the GDP expectations that the market had for Brazil, they were declining during '11. They were declining during '12. And they are declining during 2013, and we made the opposite direction. We started off difficult in both years. Of course this year, we started more difficult, but we are also increasing faster the recovery.

So, I think we can do it. I think the early signs that we saw in the second quarter, we are seeing them continue into the third quarter.

And regarding the SG&A, I think the most important point that we tried to make, both in the release and on the speech, is that we feel very confident that we can get to the guidance. Jamel can answer in some of the details why we feel that way.

Yes, Joao and Fernando. Regarding SG&A, I think it's important to understand what drove the increase particularly in Q2 and how we feel confident about delivering the guidance for the year.

So, to start with, let's split out SG&A between working and non-working money, by the way we normally handle it here internally. So, working money normally is linked to sales and marketing expense. I think Joao talked a lot about all the investments we did in terms of [pro-] activation on the FIFA Confederations Cup, all the new rollouts we've had also in this period. So, there is a phase-in element.

So, [if we were] to put some numbers around it, I think it's fair to say that if you look at our full-year sales and marketing expenses, while last year the breakdown between first half and second half was more like a 50/50, for this year our planned spread is more like a 60/40. So, clearly, an important concentration in the first half, which of course will get better as we evolve in the second half, doing that, while supporting the commercial strategy, making the launches we did, but the most part of it was already behind us. So, that's why we feel comfortable about getting better on the working money side of it.

On the non-working money, or overhead, if you will, I think it's clear. We have proved time and time again that we quickly react to the overall environment. So, we have a new volume outlook for the year for a while now. So, during the second quarter, we started to implement. We talked about that, late April when we announced the Q1 results.

We are adjusting our structure to be coherent, if you will, with the volume outlook. We also are looking at taking a deeper look into everything that relates to overhead or non-working packages in (inaudible) year, which has to with some maintenance costs, some IT costs. We see opportunities in there, and we should see important savings in the second semester around these lines.

So, that's why we feel very comfortable about maintaining our guidance, and so that we control all the levers behind this SG&A line, and we reinforce our guidance to be in line with inflation for the year.

And, of course, just to finalize that, some of the things that we did during the second quarter have a lasting effect during the second half. So, if we launched Brahma Zero, for example, during the second half, you have more of the costs on the second quarter and more of the benefits from the volume uptick that it will bring during the second half. So, that's true for some of the things that we saw, the impacts in the second quarter.

Perfect. Thanks very much, Joao and Jamel. If I may, just a follow-up on what you commented, Joao, regarding your confidence for second half. Can you share with us some high level comments on what you saw in July?

What I was trying to imply -- we never give the full disclosures -- that we are seeing a positive, definitely a positive trend during July. We continue to see gradual improvement in line with our expectations for the year. It's good, both in Beer and Soft Drinks.

Perfect. Thank you.

Gustavo Oliveira, UBS.

Hello, Joao. Hello, Nelson. Good afternoon, everyone. I want to understand a bit better the initiatives on the Soft Drinks side, because clearly the initiatives for the Confederations Cup in the Beer side of the business generated very positive results and you mentioned the 300,000 incremental hectoliters. What would have been --? And how you judged the success of the initiatives in the Soft Drinks side of the business. What would have been the volume without the spending and investments in sales and marketing investments in the quarter?

OK, Gustavo. Very good question. Of course, the low point of the second quarter was CSD. If you look at the net revenue on Brazil Beer for the first quarter, it was basically zero. So, Beer went from 0% to 9%. If you look at Soft Drinks, it went from 6.5% to 5%. So, OK, it was decline, but it's a much closer situation than the 0% to 9% that you saw in Beer.

So, most of the trouble that you had in Soft Drinks came below that. You had a top line that was somewhat close, but you had COGS that got worse, and then you have an SG&A that got much worse.

In the cost side, it was the toughest comp of the year. We were also impact by the higher currency hedges. We continue to have an impact for the October 2002 tax change. And, as for the SG&A, the main impact was the phase-in of sales and marketing. Guarana is also a sponsor of the Brazilian national soccer team, and we decided to make full use of it.

And on top of that, for anyone that came to visit the market, we had the biggest promotion ever, that we are already seeing results during the second quarter but that will yield more results in the third quarter. And, given what Jamel just said in terms of the SG&A guidance, we will have better quarters as we move on.

Why do we think that? First and foremost, the Brazilian federal government went back in their decision -- which shows how important it is to be at the table every time, in permanent negotiation -- on the so-called Juice Law. So, that came in late May. So, very little impact during the first half, or even during the second quarter. It's full impact for the second half of the year.

We also give that the pack price strategy that we [started focusing on working] on Beer on the second quarter. There's more juice to be brought out. There's more results to be taken. For example, with the 1-liter bottle, we think we can do more and use the learnings from the second half of year also to Soft Drinks.

As I mentioned, I think the Guarana Antarctica special promotion will bring more volume, as well as brand equity and share, for the remainder of the year, and we consider two rollouts our main sales initiatives for the year. That's why we believe we're going to have a much better top line for the second half.

And on top of that, it's increasing and should increase even further the weight of the more profitable non-alcoholic beverage segments in which we've begun to invest in the last couple of years, or last 18 months, such as for example energy drinks.

And one thing to confirm what we're saying, in the July performance we're already seeing that all of those drivers that I just mentioned are delivering a more balanced top line performance when it comes to volume and net sales per hectoliter.

Understand. It's very clear. Just one quick follow-up on the same subject. I remember that you launched a Guarana returnable bottle, the 1-liter returnable bottle, a few years back. And do you think that you also need to roll it out -- to deploy the same package to the Pepsi brands, and it's something that would help you in the overall result? Or, you are even (multiple speakers)?

Yes, it's a very good question. We have been looking at this, not for a while. We wanted to do first with Guarana, because it was the right thing to do to start that with the first [brand]. We started with one plant, went for a second plant, went now for the third plant.

There are two regions of Brazil mainly that we would consider that, but it's one of the possibilities either for the remainder of the year or for 2014. It's neither ruled out or approved. It's something in the pipeline that when we think we have the right economics for it, we'll consider to go ahead.

OK. Thank you. Very clear.

Lauren Torres, HSBC.

Hi, everyone. My question relates to your commodity and currency hedges. As we know in the quarter, the commodity hedges were a tailwind while the currencies were a headwind. And I guess you did mention that the currency headwind will continue in the second half. So, I was hoping you could just provide some more color about the impact of those things and how we should think about the impact on the second half?

Sure, Lauren. Nelson, here. I think you already touched on pretty much what is happening. Of course, we have a very tough impact from currency which was already fully reflected in Q2, and that should continue to be the case for the coming quarters.

[While] in terms of commodites, we didn't have a tailwind in Q1. We already had it in Q2, but it's going to get better for most of the commodities. So, if we think of sugar for instance, which in this quarter was still -- that it was up positive to our cost in Soft Drinks. For the coming quarters, it's going to become much better. So, that's why, at a certain point in time, I think Joao already referred to the fact that we had the toughest comp in Soft Drinks this quarter, this Q2.

The same when you look into aluminum, which was already a positive in Q2. It's going to get even better in Q3, and further better down the road in Q4.

So, you start to see this upside from commodity getting better quarter for quarter while, if you will, the currency hedge negative impact is already fully priced in in Q2.

OK. That's helpful. And if I could also ask --? I know you don't give explicit margin guidance, but as you mention that you expect your EBITDA to improve but we've seen margins decline in the first half, do you mean that we'll just see less of a decline in the second half? I know you're cycling some tougher comps, I guess, on the margin front. So, should we expect margins still to be down for the year?

I think -- as you said, we don't give specific guidance for the year, but if you add the pieces. For instance, SG&A, we already made it clear that what happened year to date and therefore which drove margin contraction so far is not going to be the case for the second half, because it's expected to end the year in line with inflation.

So, I'd say we had a big impact of SG&A in the first semester, regarding SG&A, which is not going to be the case for the remainder of the year. So, then it is a matter of making your overall forecast around it. And also in terms of COGS, [as we're going to start to face] some positive, even more positive impact from commodity hedges for the coming quarters, that will also in a way improve our gross margin.

So, the key question is how much of a volume impact we're going to have for the year? The bigger it is -- if you look into our full-year guidance from flattish to a low single-digit decline, of course the closer we get to the flattish, the better will be our margin.

So, it's a matter of adding the pieces, but we feel confident that in the second semester we're going to have a better EBITDA growth, if you will, than what we had so far in the year.

OK. Very good. Thank you.

Jose Yordan, Deutsche Bank.

Hi. Good morning, guys. I just had a question about a comment that Brito made in the ABI conference call. He mentioned that -- obviously very upbeat about the Modelo acquisition, et cetera, and mentioned that the Corona brand could be in Brazil very soon, or pretty soon -- I forget how he phrased it -- but didn't elaborate on that. But, I was under the impression that because you guys already have Stella and Bud it's not clear when and how Corona will enter the portfolio, et cetera. So, any --? If there's been a change of plan there, I would love to hear any updates.

And then, just a follow-up to the hedging question, because you've known your hedge for this year for a while, but as you build the hedges for next year, are we looking into another repeat of the COGS per hectoliter growth in Brazil in double digits? Or, will it be somewhere south of that? Any sort of ideas you could give us there would be great, as well.

Thanks.

Hi, Jose. I'll start with the premium portion. I would start by saying that I've never been as excited about the premium as I am today. I think we came a long way, both from a marketing standpoint as well as from a sales standpoint. We spend previous years developing a lot the mainstream, and so we have a much stronger franchise in the mainstream.

And then, we had the time to go from mainstream and not mainstream -- or -- premium, but mainstream -- and -- premium. So, now we have the mainstream solid with a lot of options in terms of [Nano], some innovation on the mainstream, returnables on the mainstream, but we also have now a very strong franchise, maybe as strong as -- stronger than ever.

You saw the numbers. Bohemia, growing double digits. Originale, growing double digits. Bud, growing double digits. Stella, growing double digits. We have in four of the top five brands, the domestic brands, leading the way, growing now pretty much at the same level as the international brands, which I think it's pretty amazing. And growing from just a few years ago 4% of our mix, to now this quarter above 6%. So, we're getting closer to that dream of maybe getting to 8%.

Solid, solid in the marketing, and now also solid in sales, because it's also a challenge for you to have all the brands. And, therefore, I think we have a much smarter segmentation in terms of channels to be able to have the sort of results, solid results, in the second quarter, and going forward I feel in the same manner.

Therefore, Corona it's more of an addition. I also listened to the call. I noticed Brito's comments. It's a good opportunity to have. I like the brand a lot. I actually like the brand a lot for all the countries we manage in Latin America. So, this brand is very strong in most, if not all, the countries we operate, and very, very, very strong in some particular ones. I don't mean to get into some detail, but very, very strong.

In Brazil, it's a little bit the opposite, because it has never been in Brazil. While it's been in Chile for a long time, while it's been in Guatemala for a long time, while it's been in other countries for a long time, it has never been in Brazil. I guess maybe for the good work we did.

Now that we have the possibility of having it here, we have a white space to find the right spot, but again, we will study what's the right place in the portfolio. But I think we came a long way to finding a way to work with premium, and having very -- the leading two domestics, which are the number one and number two brands now, in premium, and then have the four and fifth which give us four out of five, I think gives us a lot of room to maneuver and to continue to grow in this double-digits [scenario].

Corona will certainly add to it. We'll find the right manner to include that in our portfolio as time goes by, as we did with Bud, as we did with Stella, and as we've done for a long time with Bohemia and Originale.

OK, Jose, regarding the hedging for 2014, of course you have [of course a right] to know our hedging policy of protecting ourself on an average 12 months, on a rolling basis.

So, in this, we already faced a big negative impact from currency this year in Brazil. Last year, we had a BRL1.66 average rate in (inaudible). This year, we're going to have BRL1.93. For next year, we have been building hedges of course since the beginning of the year. So, it depends on how the currency behaves through year-end. We may have a worse or less worse impact, but probably will be negative, maybe not as much as it was this year, but again, depends on we still have an important exposure to close.

We prefer to talk about this and give more specific guidance as we approach year-end and then we have all our hedges in place. So, that's why we're not going to give specific (inaudible) 2014.

But bear in mind that the same way currency is going to be a headwind again for next year, we have commodities also working on the opposite direction. We see commodities getting to lower levels and as we implement our hedges, we're going to have again a sort of offset, or wash, which we'll definitely comment more precise and with a quantitative way as we get closer to year-end.

Great. Very clear. Thank you.

Lore Serra, Morgan Stanley.

Hi. Good morning. I wanted to ask a little bit -- and I guess good afternoon -- a bit about the revenue trends in the first quarter. You mentioned a bunch of things on mix, but I guess given your comment on cans in the supermarket channel, I'm guessing that means that on balance your one-way mix grew in the quarter and toward the off-premise channel.

So, I know it's tricky to compare quarters because of all the data, but what was the offset that gave you the better revenue per hectoliter in the second quarter sequentially, if you were having more 1-liter, more 300-milliliter, more cans which are all lower presentations? Is it premium? Is it topping up pricing? Is there something else?

And then, just thinking in general about the upcoming timing for pricing -- I know you can't comment on specifics, I'm sure -- but saying any kind of color you can give us in terms of how you're thinking about the environment, looking into that sort of September/October timeline, that would be really helpful.

Thanks.

Hi, Lore. This is Joao. Yes, very important question for a few reasons. I think, first, the Confederations Cup as the World Cup will be, the country a little bit goes through like a period like Carnival -- a lot of people in the streets, a lot of celebration. And Carnival, as the Confederations Cup was, is a moment of the year skewed towards disposable packages, as the can is.

So, in events or in stadiums or in different situations like that, that happens. So, there is a higher mix, much more related to that sort of situation than as of a trend.

Of course, that helps the net sales per hectoliter, and it's not to the detriment. There seems to be a perception -- I think some even of the late reports -- that there is a big difference between the contribution margin between the off-premise and the on-premise, which is not the case. After the prices that were implemented since 2011 in cans, the average profitability it's pretty close nowadays, whether we are comparing returnables and cans or whether we are comparing on-premise and off-premise.

Therefore, there is a [shifting] change, yes, but it's quite small compared to some of the things I read out there.

So, that's one important point.

And then, second, the overall combination of the strength in the returnable mix, which gives a lot of room to maneuver from a pricing standpoint of having the right 1-liter, in the case of a consumption occasion of price per liter, and the 300-ml giving [once-a-year] that base price point occasion. This gave us a lot of room to maneuver.

A lot of supermarket chains, as we mentioned in the past, big ones, large, large key accounts that were selling just 18 months ago 0% of returnables, now are up to 20%, some 25%, and some even 35% depending on the region you're looking at.

But, we are not forgetting about disposable. We launched the 550-ml can, which is flying, which is also giving us more room to maneuver. We launched -- although volumes are small, it helps a lot the image -- the aluminum bottles for nowadays basically all the brands. Skol has its own. We have a lot of campaign going on now about it. Brahma had its own. Bud has its own. So, everything is working towards having also disposable working better, not just from a price point standpoint, also from an image standpoint, and now after what we did in 2011 with contribution margins that are much closer than in the past.

OK. And any thoughts on the environment for pricing, as you head into the second half of the year?

Sure. That's also quite important. We feel after what happened in the second quarter, and I mentioned at the beginning where we had the 8% on price and minus 8% on volume, and now the 10% on price with a 0% on volume, and the good start of July, and with a much better momentum, or a very good momentum, in terms of market share, we go into the third and fourth quarter feeling good about it.

Pricing is sticking. Volume is sticking. Share is sticking. The pressure that is out there in terms of FX, [commodities], good inflation, higher tax is for everybody. So, that may help explain. Cannot speculate on what competitors do or don't do, but we enter the first half from a pricing environment feeling much better than we were just a couple of months ago.

And not just that, feel much better overall, because as we said we will finish the year and therefore start 2012 on a much leaner structure, with the right structure, not just to deliver the guidance on the SG&A on the second half but entering with a very good structure-wise on 2014 with the right footprint, because we're going to be with a great capacity footprint and ready for a much better volume situation in 2014 with a premium portfolio much stronger and the preference of our brands in a very good situation, as the last report [that we did with a] thousand consumers, also.

So, I think very good situation going into the second half. And if we do the right things as we plan to do also from a cost structure base, I think we'll finish the year on a high note and start with the right foot on 2014.

OK. And then, last question, we saw again a big increase in that Other Operating income in the quarter, and I keep thinking those are mostly tax incentives. But I think in the first quarter you said they were going to -- there was some one-time stuff in there. But it seems to have kept up at the same level in the second quarter. So, I'd just like to understand better exactly what's driving that, what's the sort of stability of the numbers?

And then, also, just in terms of reaching your internal goals, it's really giving you a lot of tailwind. When you think about the goals for the organization in terms of growth for the year or for employees, is this something that's part of the equation? Because I would think that, in a way, you could think about it as something that is not really related to operations, per se, or what employees can control in either direction, whether it's there or not?

So, I'd love to understand how you're thinking about that line.

Sure. I think that there might be sort of a misunderstanding on this, Lore. Maybe we haven't spent enough time explaining this, but this is totally operational. Total operation. This is totally related to volume and investments. If I have no volume growth, there is no government grants. It will be zero. If there is no investment, there's no government grant.

So, the greater the capacity, the greater the volume, the greater the grants. So, those are contracts that will last and have a timespan for the next eight to ten years.

This has existed now for many, many years, and we have increased them steadily. I think that what you see in terms of difference is that you had the easy comps on Q1 and Q2, but if you think about the absolute level, the number was like BRL272 million in the first quarter, BRL241 million for, for example, Brazil Beer in the second half. That's the sort of level.

That should continue, because it's totally operational and totally related with the investments that we have made in the northeast and investments that were already announced and disclosed for south and southeast, such as the [Ubderoger] plant in Minas Gerais and the [Potogrof] plant in Parana. So, maybe there's a misunderstanding.

Totally operational. Has been here forever and ever, but the overall number has increased because capacity is greater, investments are greater. And maybe the number became a bigger one. Totally related to the ongoing negotiations with government and totally part of the EBITDA and the target. Particularly since the third quarter last year, this has maybe shown a gap bigger then, and maybe caught the attention of people.

Right. Well, it's not proportional to volume, because it was 80% and the volumes weren't. So, what you're saying is the current run rate of around BRL300 million a quarter -- I guess I'm looking at Latin America North -- that's the right run rate, on a quarterly basis?

Yes, that's why I think it's more important to look at the absolute figure, than the percentage increase. That's what I was referring to -- BRL270-x million, BRL240-x million. Even if you look at Brazil overall, it's [BRL327] million, BRL304 million. So, the overall number I think is a good reference, and not necessarily the growth, because the growth depending on the comps that you have. Jamel can add on this a little bit.

Yes, be careful regarding the comps, Lore. If you look into our quarterly results last year, already as of Q3 we started to see an important growth in this line, and this is not be coincidence. It's because we had impressive CapEx in the previous years, particularly the plant in [Pernambuco] I think is a good example, in which the cost of 2012 we saw the volume ramping up, investment was made. It was a big investment we did. So, as Joao said, it's totally operational, linked to investment and volumes.

So, our volume started to grow in the northeast. We started to see an increase of cost accelerated with the greenfields in the second quarter of last year, or the second half of last year. And, therefore, we're going to have -- it's real tougher comps in the following quarters, because it's going to -- it was already there in Q3 and Q4 in a way last year.

It is recurring.

OK.

There was -- [it primarily occurs as a one-off gain]. Again, the contracts are for eight to ten years, and it's part of our way of doing business in Brazil for (inaudible). We have been intensified this because of having intensified our CapEx with this sort of plants, and they exist for ages, now.

No, no, I understand that. I'm just trying to understand how to forecast them. So, you're saying that we should see them grow. They're at the right, steady-state level, but they'll grow over the course of this year as volumes go up. That's how we should think about it? You're at the right run rate, but as volumes go up in the fourth quarter, these should go up proportionally?

And the comps, [think of] forecast. I think (inaudible) Q3 and Q4 last year. You'll see that [there was a] bigger contribution from this line. The forecast is not simply apply the percentage growth of the first half into the second half. You have to look into the actual numbers, quarter over quarter, from now on.

Got it. Understood. Thank you.

You're welcome.

[Samburda Rey], J.P. Morgan.

We will proceed to our next question. Alex Robarts, Citi.

Hi. Thanks, and I guess, sorry, I have to go back to this Other Operating income. That was one of my questions. The other one was on SG&A. So, this operating income basically doubles, and that delta basically explains your growth in EBITDA in Brazil. And I'm not sure I understood you answer just now. So, what you're saying is that as the volumes increase sequentially in the northeast, you have a discretion -- you can take these government grants and book them as Other Operating income. And, so, what we should be thinking about for third and fourth quarter, if we assume that in the northeast sequential volume will increase, that the BRL300 million that we get will increase in the next quarters? If you could clarify that, that would be helpful. So, that's my first question.

OK. Let me try to address this question, Alex. To start with, [and to be sure], let's take the second quarter results [according] to this Other Operating line. Government grants or this [misconception real], they are an important amount of the line, but they are not the only components. You can see that on the press release. We talk about BRL220 million, BRL228 million to be more precise, out of BRL300 million. So, it's just around 70%, or two-thirds of the line. So, that's the first remark. So, other things also affect Other Operating income or expenses.

But, about the grants, the point is as part of -- as a result of the investment we do, particularly in the north and northeast but it can also happen in the southeast and other parts of Brazil, it's a local or a state decision of course for seeing the laws not only for us, for any company investing in each state. You have this sort of benefit in which parts or eventually entirely all the VAT you had to collect you can get an exemption for a certain period of time, and according to IFRS that's where you have to book it.

So, how this will grow over time? Its growth depends on volume, primarily. So, the more I sell or the more I use a certain plant that's not at full capacity, more grant I'll generate. So, that's why we said it's operational. It grows with volumes, primarily, and is associated with the investments we did.

So, since we did very relevant investment in the last two years in Brazil, this is going to last for eight to ten years at the average terms of the contract. So, if we start with the BRL228 million, that should evolve over time, primarily driven by volume. The more we grow in this plant, the more we're going to have this impact.

And, Alex, just to add a little bit of figures to this discussion, just to look at the last five years, and assuming for a second, which is not the case, that this Other Operating income/expense were only government grants, which is not -- again, it's not the case -- but just to give an idea, it was BRL400 million in 2008, BRL500 million in 2009, BRL600 million in 2010 -- I'm quoting rough figures --close to BRL800 million in 2011, and close to BRL900 million in 2012.

So, this has been growing for the past five years, BRL100 million to BRL150 million per year, and it has expedited in the past few years, given that we have been expediting CapEx in the last three years.

OK. OK. That's --.

It's no news. No news. If you open up the numbers of the last five years, that I just quoted, rounded, for you, you will see this trend. Of course, when you see a five-year trend, it's easier to forecast the next three years.

It's just that line item basically doubles almost, and for the first half of the year that line item basically explains your whole growth in Brazil.

That's why we said don't look at the percentage growth, and think about the overall number for the year and look about what was the absolute figure for the first quarters, and that will probably help you forecast the year.

Yes, just the Other Operating income line. It's not only about government grants. We may have some swings on a quarterly basis, and I think we even tried to highlight that through the press release in Q1 -- or that I mentioned that during the call of last quarter, either one or the other -- that half of the growth we had in Q1 was a one-off, but the other half was consistent with the growing trends that Joao just referred to.

So, I think it's best you look on a full-year basis, rather than a quarterly, because on a quarterly basis we may have some one-offs, positive or negative, that you always mix up a little bit the analysis. If you take a longer period of time, it's easier to understand the trend.

No, fair enough, guys. I can follow up offline, as well. Just, that was definitely a surprise for us, that doubling of that line time.

But, the second question really just on the SG&A, this was a surprise, the spiking. And I guess how you've explained it is that you've got the commercial piece to that in the second quarter as well as the distribution-related piece. And I guess when I think about it, for the first half in Brazil, you're up 13% in the cash SG&A. To get to the guidance, you're basically saying for the full year you're going to have no growth in the second half, which leads you, full-year, around 6.5%, which is inflation.

But, so, just I appreciate the 60/40 breakdown that you gave us earlier in the call, but is that the right way to think about it? So, you're going into this second half of the year with this market condition, thinking there'll be no growth over your second-half last year's SG&A? Is that what you're saying?

That's exactly what we are saying, in different words, but again, that's exactly you should look at it. And I think important to go back to the element that drove the growth so far.

So, as we said, we are in the first half growing 13% in SG&A, total in Brazil. But when you look in absolute figures, more than two-thirds of it is sales and marketing, and there is a big phase-in component in it as previously mentioned. Instead of having, which was the case last year, kind of a half, 50/50, allocation between first half and second half, this year we decided to concentrate and front-load investments to fully leverage and fully benefit from the events coming up, the FIFA Confederations Cup, also to earlier in the year launch the projects we had in our pipeline for this year.

So, we're going to have more like a 60/40, rather than a 50/50 in terms of our sales and marketing allocation between semesters. So, this is going to be a big savings for the second semester.

And we are also going to work on the overhead part, like we normally do. We already did [make adjustments to] our structure for the new volume outlook, but we did it in the course of Q2. So, it didn't fully benefit from the right-sizing of having a more coherent structure vis-a-vis the evolution of the business for the remainder of the year.

So, we're going to fully benefit also on the overhead side, some things we did in the course of Q2. But, when you put all of that into numbers, it boils down to a flattish SG&A in the second semester, so that we can deliver the full-year guidance.

Got it. And you talked about overhead. You talked about commercial. On the distribution, which you talk about as one of the drivers of the SG&A in the second quarter to execute your revised plan. Is that distribution involved in -- and I'm talking more about Beer, not on Soft Drink -- but is that to roll out? Did you increase direct distribution in Beer in the quarter? Or, was that distribution-related spike in expenses related to this activation initiatives that you did? If you could give some color on that, that would be great, too.

Thanks very much.

No, for sure. Part of the increase in distribution particularly was driven by a higher percentage of direct distribution in our total volume. So, that has a positive impact on our net revenue, but there is also a negative impact in SG&A. That's why when we look at EBITDA level, we control it and of course check this is an accretive growth, which is the case.

So, it's 61% in Beer? Is that where you are now?

No. No. We are not talking about this number on a quarterly basis, Alex. But it has been growing marginally. Of course, the biggest increase happened in the previous years. But we are to date total in fact around 65%, but we don't open this on a quarterly basis. Just talk about the average full-year number.

Got it. thank you.

You're welcome.

Robert Ottenstein, ISI.

Thank you very much, and great job in a tough environment, guys.

As you look at your distribution and manufacturing footprint, given all the different changes in your geographic emphasis more to the north, northeast and the kind of volumes that you're looking to have next year, how close are you to having an optimal distribution footprint with the distribution centers I think you put on, and how close are you in terms of having an optimal manufacturing footprint?

I would say I referred to that a minute ago, Robert. This is Joao. From a plant standpoint, I would say that we will start off in the best situation ever, in terms of plant footprint. Distribution footprint, it's always ongoing and has a smaller impact than the plant footprint.

So, very close to ideal. Ideal is also somewhat of a moving target, but very, very close to it. And as well as in terms of distribution has a smaller impact, and it's also a moving target given that you are always increasing direct distribution and therefore redesigning the perfect footprint there, too.

So, very happy with the fact that we're getting there and therefore being able to have a smaller impact in terms of variable logistics cost, given that start having returnables everywhere, different size of cans everywhere, move the premium liquids closer to everywhere. So, we start off on a really much better situation when we end this year, begin the next year.

But again, moving target, because we have already announced two new plants, one that will be ready somewhat in the first half of next year and then the other one towards the beginning of the last year -- or the beginning of the other, which is 2015.

Great. And if I heard you right, it's sounds that the competitive activity in Brazil remains rational. You're gaining share. It sounds like there's not too much discounting from the competition. How would you characterize things in Argentina and Canada on the competitive front?

Yes, you heard me right. I said the total, all the pressure that we have is a pressure that is not only on us, but is a pressure on the industry. So, that's true for Brazil.

I would say it's much more (inaudible), even further than this in Argentina. So, any tough environment hits everyone. I would say that we are always, given our scale in Argentina, we are always much more prepared to face adverse effects in Argentina than in any other market. Very strong operation. Continue to deliver very solid numbers. And ready for the situation, and gaining share which shows now, for many years now. That's just another way to qualify.

I think the final ability to show that scale is helping you and execution is helping you is when you get combination of price and share, which is the case in Argentina now for many years, many quarters in a row.

In terms of Canada, we are seeing -- it's a different market environment. Also tough. You have the 70%-plus, closer to 80%, [share in] Argentina. And you have the 70%, 68%, in Brazil. And you have the [40%-ish] in Canada. Canada, a little bit different because you have a slight decline in terms of share, with the price pretty good for the environment.

While you're in Argentina, you had price and share. While you're in Brazil, you had price and share. In Canada for the quarter, you had price but didn't have the share, although a very small decline. But, the industry was tougher, like you saw the decline of close to 3.4% in Canada, which is a tough market contraction when you look at the last eight quarters. So, it's a tougher -- the toughest one when you look back eight quarters.

At this time, we will go ahead and conclude our question-and-answer session. I would now like to turn the floor back over to Mr. Nelson Jamel for any closing remarks. Sir?

OK, Mike, thank you. And thanks to everyone for attending to this call, and thanks for the questions. And we'll speak with you again on October 31, where I expect to have enjoyed more of the positive trends and positive results we have seen in Q2.

See you then. Bye, bye.

And we thank you, sir, and to the rest of the management team for your time. The conference call is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day, everyone.