Ambev SA (ABEV) 2013 Q3 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's third quarter 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 future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements.

I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature, and, unless otherwise stated, percentage changes refer to comparisons with Q3 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.

Thanks, Maureen. Hello, everyone, and thank you for joining our 2013 third quarter earnings conference call. I'll begin with an overview of the quarter. Joao will then walk through our results in Brazil, and I'll return to go over our international operations and financial performance before moving to Q&A.

So, let's get started.

In a nutshell, in the third quarter we managed to deliver improved year-over-year EBITDA performance despite the challenging industry conditions in many markets, with operational leverage and a strong EBITDA margin expansion. [According], after 2.3% of EBITDA growth year over year in Q1 on a consolidated basis and 6.8% growth in Q2, in the third quarter we delivered 9.4% EBITDA growth as compared to the same period in 2012.

Meanwhile, net revenues increased 4% versus Q3 2012.

And the quarter was also marked by 250 basis points of EBITDA margin expansion, helped by COGS per hectoliter growing year over year at a lower pace; cash SG&A improving considerably, and actually declining 0.5%; and continued good performance in our operating income line, giving us operational leverage in the quarter and for the year to date.

Such improved performance resulted from better results in each of our divisions, as compared to the first half of the year. In Brazil, EBITDA was up 8%, with net revenues growing 1.5% and EBITDA margin expanding 330 basis points.

Latin America South delivered 20.3% of EBITDA growth, while net revenues increased 14.8% and EBITDA margin expanded 190 basis points.

Canada's EBITDA grew 0.6%, while net revenues declined 0.1% [also with] an EBITDA margin expansion of 30 basis points.

And as for HILA-ex, the division delivered 37.5% EBITDA growth, 10.7% net revenue growth, and 630 basis points of EBITDA margin expansion.

Joao, over to you.

Thanks, Nelson. And good day, everyone.

During the second quarter call, I mentioned that we were not underestimating the many challenges that lied ahead, but that we remained confident in our people, our brands, our plan, and our ability to execute it, as we strive to deliver improved EBITDA performance in the second half of the year.

Our third quarter performance shows two things. First, there is no question that the industry remains challenging in the short term, particularly in Brazil. And second, despite a tough volume performance, EBITDA growth improved, because all other operational indicators were better than the first half of the year. For this to happen, the ability of our team to react quickly and execute the revised plan that we shared was decisive once again.

Of course, we're not happy with a 5% volume decline in our Beer Brazilian business for the quarter. We continue to follow the market very, very closely and focus a lot on our commercial initiatives that work best in this type of environment. But in our experience, whenever the volume tailwind is not there, what makes the difference is our management's ability to offset volume softness by focusing even more on the remaining levers of the business to still deliver good EBITDA growth.

On this front, I think we actually did okay, as EBITDA grew more year over year as compared to the first half, delivering operational leverage through flat SG&A and a better COGS which led to EBITDA margin [strength] once again. But as you can imagine, in the fourth quarter we will have to do a better job yet again, and I will come back to this later.

Another important event during the quarter was the Brazilian federal government decision not to further increase the excise tax in 2013. One thing I would like to highlight is that in our view said decision is perhaps indicative of the federal government openness to finding an alternative path that does not further increase the tax burden of the cold beverage industry while still growing their tax revenues.

Though the planned increase for 2014 remains in place, we believe that the cold beverage industry will continue to work together with the federal government with the intent of creating a scenario that combines greater potential for volume growth, further investments, and with less pressure on inflation, while still growing tax revenues. So, it's a win-win position for all.

So, let's quickly run through the highlights for Brazil. Brazil Beer business delivered EBITDA growth of 7.3%, with net revenue per hectoliter up 6% against the toughest comp of the year, while COGS per hectoliter rose 8.5%, well below the average of the first half. Cash SG&A declined 0.1%, which is fully consistent with our guidance for the year. As a result, EBITDA margin expanded 330 basis points and reached a 54.2% margin.

In terms of volume, we estimate that the Brazilian beer industry declined 4.3% in the quarter. We continue to witness a weak economy [and a pressured] consumer, while weather was not particularly helpful either.

On the macro side, though clearly improving, food inflation continues to grow year over year, ahead of general inflation, while real growth in disposable income continued to increase by less than last year's trend. Moreover, during the quarter we also lacked the volume uplift from the FIFA Confederations Cup.

Market share averaged 68% in the quarter, which corresponds to a sequential decline of 10 basis points and continues to be well within historical range of 67% to 69%. Year over year, our average market share for the quarter was 50 basis points lower than Q3 2012, as we still faced a tough comp.

Net revenue per hectoliter remained strong, as I'm sure you will remember that last year we delivered an 18.3% of net revenue per hectoliter in the third quarter. So, this was a very difficult comp. However, thanks to a combination of pricing, premium volumes still growing well ahead of the industry, and the weight of direct distribution increasing further, we managed to deliver 6% growth.

And despite the tough environment, our commercial initiatives all made progress. Innovation nearly doubled in volumes again, with the 550 aluminum can continuing strong, but also Brahma 0.0%, our non-alcoholic line extension for the brand which was launched in the second quarter, also resonating very well with consumer and already becoming in a very short term the leading non-alcoholic brand in the marketplace.

Premium, which in the quarter got close to 7% of our total mix, mainly thanks to another quarter of growth of Budweiser and Stella Artois.

Returnables, which continue to enable us to be more competitive and deliver to consumers more affordable presentations, particularly in the off-premise channel, thanks to the successful reintroduction of the 1-liter and the 300-ml into supermarkets, both large and small formats.

North and northeast expansion, where we posted another quarter of market share gains, thanks to the accelerated growth of the 300-milliliter returnable glass bottle and our continued focus behind Brahma and the soccer platform.

Now, let's shift gears to cost and expenses. COGS per hectoliter grew 8.5%, which is well below what we saw in the first half of the year. Our commodity hedges helped offset a greater portion of the headwinds stemming from currency hedges, the product mix, and the industrial depreciation.

Cash SG&A, on the other hand, actually declined 0.1%, which was an important accomplishment as we strive to protect the profitability of the business while not compromising our commercial strategy for this year and the next.

The sources of such improved performance were threefold. First, the non-working money cost saving initiatives. As we mentioned during our Q1 call, we quickly adapted our plan for the year to, among other things, make sure we got tougher on the expense side. During the third quarter, we began to see more clearly the impact of such initiatives, because in the second quarter savings we were somewhat overshadowed by the higher level of sales and marketing expense, given the FIFA Confederations Cup.

Second, commercial spend growing at a lower pace as compared to the first half. Part of the lower growth rate is [phase-in] related, given the higher concentration of sales and marketing in the second quarter. However, it is important to emphasize that we did not refrain from investing behind our commercial initiatives and brands. Quite the contrary. For instance, in terms of innovation, late in the quarter we announced the launched of Skol Beats Extreme, a line extension of Skol Beats, which is part of our plan to further premiumize the market and be more competitive in the night-out occasion.

And in terms of brand equity, we have continued to focus on growing our share of [weiss], and in the third quarter we also launched the Skol design aluminum bottle focusing on the young, innovative, and aspirational attributes of our brand.

We believe that initiatives such as these are important to maintain brand health [in the theaters] at a very strong level, which continues to be the case.

And third, SG&A also benefited from lower variable compensation accrual as compared to last year.

Other operating income delivered another quarter of strong growth, increasing R$143 million. State VAT long-term tax incentives, given the higher level of capital expenditures in recent years, continued to help performance considerably, though during the quarter there was an additional one-off positive impact from gains associated with certain legal proceedings.

Let's now turn to Brazil soft drinks and non-alcoholic, non-carbonated drinks. Following a very difficult second quarter, results for the Brazil CSD and NANC bounced back nicely. We delivered an 11.3% EBITDA growth, with EBITDA margin expanding 290 basis points to 53.9%.

The top line grew 5.4%, with solid net revenue per hectoliter growth of 7.6%, which was more than enough to compensate the 2% volume decline in the quarter. Volumes were still impacted by the same challenging environment as beer.

On the commercial side, the PET pack-price strategy, our package innovation, and the continuation of our biggest ever brand promotion for Guarana Antarctica continued to deliver great results in terms of volume, market share, and brand equity.

By the way, this was a very special quarter for Guarana Antarctica's market share, which give us a good reason to celebrate. During the quarter, Guarana Antarctica hit its all-time high market share of 10% of the total CSD market, and it continues to be the clear leader in the Guarana flavored category. The brand is as healthy as ever. Innovations are working. Execution in the marketplace has been extremely consistent. So, congrats to the whole team.

In terms of costs, COGS per hectoliter grew 10% -- we no longer face the very tough comp of Q2 -- while sugar hedge got better as expected, allowing us to offset a greater portion of the currency hedge headwinds. So, for this year, COGS per hectoliter is growing 14.1%, and we continue to expect high-teens growth for the full year.

As for expenses, SG&A declined 14.8%, benefiting from our non-working money cost-saving initiatives, phasing of commercial spend, and lower variable compensation accruals.

Before calling Nelson back, I would like to quickly remind everyone of our updated outlook for 2013. And then, I will wrap up with a few words.

As mentioned in the release, we now believe that volumes for the Brazilian beer industry for the full year should be at the lower end of the flat to low single-digit decline range. Other than that, our guidance for the net revenue per hectoliter, COGS per hectoliter, cash SG&A, and CapEx for Brazil in the full year all stand.

So, to wrap things up, yes, 2013 is definitely proving to be the toughest year of the last few years, and volumes should remain under pressure in the short term. On the other hand, we believe that our third quarter results are also clear evidence that we are on the right track to deliver the improved EBITDA performance in the second half we are aiming for.

We have a lot to look forward to in 2014, but we have not yet turned the page on 2013. There is still one very important chapter to go, the most important one. We have been put to task quarter after quarter this year. So, Q4 should be no different. But our teams is certainly ready to face these challenges head on. Every day will count.

As for 2014, we will be able to share more details during our Q4 and fiscal year 2013 conference call early next year. With that said, we believe that the maintenance of our R$3 billion record level of CapEx in Brazil, despite a short volume picture, clearly shows how excited and committed we are about next year.

Nelson.

Thank you, Joao. Results for HILA-ex keep getting better and better. EBITDA increased 37.5%, with an EBITDA margin of 32.2%, which represents an expansion of 630 basis points year over year, not to mention the sequential improvement.

The top line grew 10.7%, with 10.9% [of revenue] per hectoliter growth more than offsetting the 0.2% decline in volumes, pressured primarily by a tough industry in the Dominican Republic. Meanwhile, COGS per hectoliter rose 10.1%, while cash SG&A actually declined 10.5%.

There is definitely still much more to be done, but we are seeing quarter after quarter that there are plenty of growth opportunities for the division. First, in the Dominican Republic, a market of about 3.5 million hectoliters, we continue to capture synergies from the integration of Cerveceria Nacional Dominicana, and we see a lot of room to keep growing the beer category through innovations and premiumization.

Second, the Caribbean Islands, comprised of 25 countries, excluding Cuba and Puerto Rico, that combined have a market of nearly 3 million hectoliters, should be an important source of incremental EBITDA going forward, as we are still in the very early stage of increasing our presence through Presidente, Corona, Budweiser, and Stella Artois.

And third, in Guatemala, a market comparable in size with the Dominican Republic, we have managed to deliver consistent volume and market share growth, both of which reached new heights during the quarter.

In terms of Latin America South and Canada, both also delivered improved performance as compared to the first half. In Latin America South, we achieved a 20.3% EBITDA growth in the quarter, with an EBITDA margin expansion of 190 bps. Volumes declined 0.3% for the region, mostly impacted by industry, though volumes in Argentina actually grew 0.4%, thanks to an easier comp and good performance in terms of premium, innovation, and market share.

Net revenue per hectoliter on the other hand grew 15.1% overall, 17% in beer and 12.7% in CSD and NANC.

As for costs and expense, COGS and SG&A excluding depreciation and amortization grew 13.5% and 7.8%, respectively, mainly impacted by inflationary pressures in Argentina.

In Canada, EBITDA increased organically by 0.6% versus a year ago, with EBITDA margin expanding 30 basis points, as the 2.2% growth in net revenue per hectoliter and lower COGS per hectoliter growth, as compared to the first half of the year, more than offset the industry-driven 2.2% volume decline, while still making the necessary investments behind innovation launch of Bud Lime Light Lime-A-Rita in the summer and Budweiser Crown in August.

Our light portfolio continued to deliver strong results in share and volume, driven by Bud Light, Michelob Ultra, and innovations in the form of Bud Light Platinum and Bub Lime Lime-A-Rita. Likewise, we have seen positive signs in the Budweiser family on the strength of innovation in the third quarter 2013 with the launch of Budweiser Crown. As a result, market share remained in line with the previous quarter, at 40.2%, also showing an improvement in trend relative to the first half.

Now, I'd like to move to the main items between the normalized EBIT of R$3.7 billion and profit of about R$2.3 billion for the quarter. Net financial results were a negative R$496.1 million. Interest income was higher, mainly due to our net cash position in the quarter, while our interest expense continued to be impacted by the non-cash accretion expense related to the put option regarding investment in Cerveceria Nacional Dominicana. The most relevant impact however came from loss on non-derivative instruments which are only partially offset by improved year-over-year results in terms of losses on derivative instruments.

Our effective tax rate totaled 26.7%. We faced a very tough comp in the quarter, because during third quarter 2012 our effective tax rate had been only 15.2%. In addition, the higher tax expense for the quarter resulted primarily from the fact that we did not make any interest on capital payments during the quarter, [plus] the impact of a new law passed in Argentina in late September which has required us to accrue expenses with respect to a 10% withholding tax on earnings generated by our subsidiaries in the country.

Turning to cash flows, cash generated from operations improved 7.4% in the quarter and reached almost R$4.7 billion. Moreover, during the quarter we invested approximately R$1 billion of CapEx and paid approximately R$2 billion in dividends in late September, giving us a net cash position of about R$2.4 billion through the end of the quarter, which is down from R$6.3 billion in December 31. Year to date, we have paid out roughly R$7.1 billion, which compares to R$3.8 billion through September 2012. Therefore, a relevant increase in our payouts.

Before handing it back to the operator for Q&A, a few words on the proposed share [collateral] restructure. On October 30, 2013, Ambev S.A. received from the CVM its registration as a public company. As disclosed in the past, we will now move to [list Ambev's] common shares and respective ADSs on the BM&FBovespa and the New York Stock Exchange, which should take place about mid-November.

Finally, as we mentioned in our release, the operational and financial information contained herein and discussed today refer to Companhia de Bebidas das Americas - Ambev, not yet Ambev S.A. That said, for full transparence, we have also filed with the CVM and submitted to the SEC Ambev S.A.'s quarterly financial information for the period ended September 30, 2013, where all details of the operational and financial performance as well as the balance sheet can be found.

This corporate restructure represents a very important step for the Company and should create value for shareholders thanks to improved corporate governance standards; more liquidity for our shares; a simpler, cleaner corporate structure; and a greater flexibility to manage our capital structure onwards -- all of which remain.

Maureen, can you remind everyone the procedures for Q&A, please?

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Antonio Gonzalez, Credit Suisse.

Hi. Good morning. Thank you so much for taking the question. Actually, I just have two quick questions. First, on the share merger, could you please just confirm for us that the increase in the capital reserve and the capital stock accounts comparing Ambev S.A. versus Ambev as it is today is roughly the increase? The combined increase in those accounts is roughly R$90 billion. And also, if you can give us any update on the appointment of the two independent board members? That's my first question.

And then, just secondly, very rapidly, is there any color that you can share maybe on the evolution throughout the quarter of volume trends in Beer Brazil? I recall last conference call you mentioned that July started better than the second quarter. And then, I guess as the quarter progressed we saw some weakness. So, if maybe you can just share how the quarter evolved? And obviously taking into account that October data from SECOVI is on the rather weak side, is there any comment that you can make to reconcile those October numbers from SECOVI with your maintain guidance for full-year 2013? I understand there's not a perfect correlation there, but just to hear any [opinion] you might have would be really helpful.

Thanks.

Sure, Antonio. This is Nelson. I'll start talking about the share restructuring, and then Joao will take the question on volumes.

So, as we announced, [Ambev S.A.] was an important milestone for us. We got the registration confirmation from CVM. And as a result, we expect the company to be listed around mid-November. And after that, there will be a couple of steps that we still have to follow.

And so, after the listing we will be able to call for the shareholder meeting in which we are going to have the appointment of the independent board members. Later on, we also have -- we are going to take the steps that we announced with regards to the simplification of our corporate structure in terms of the reduction of the number of companies and all that.

So, it was an important milestone. It's not over. And in due time, we're going to be able to provide clearer guidance and dates, as I said, for the shareholders meeting to discuss the new board members, and so on, so forth.

Regarding the financial information, as we said, we filed not only [Companhia de Bebidas das Americas - Ambev] but also Ambev S.A. So, there you'll have all the details on our balance sheet, on our financial and operational performance for Ambev S.A. as part of our --. Of course, we're going to give full transparence to the market on everything that's going on. And in there, you're seeing this, an increase in terms of capital and in capital reserves around the number you mentioned, as well as all the other detailed information that you might require to analyze the numbers.

I'll turn to Joao to comment on volume trends and how it relates to our full-year guidance.

Antonio, this is Joao. Regarding SECOVI, and I think we've mentioned a few times, SECOVI represents the production volumes and not the sales. So, not really the best proxy to look at the performance in the short run.

We mentioned in Q1, volume performance was primarily impacted by strong deceleration in March. But in Q2, we saw improvements month after month, with June benefiting even further thanks to the Confederations Cup, which was not of course present in Q3. Q3, more impacted by the macro, weather, pricing. So, fair to say that it's better than March type of situation, but still challenging.

We did refer to a better beginning of July back when we met. Therefore, of course August and September were worse than the initial trends. Therefore, I think you heard us saying that we expect to be in the lower end for the Brazilian beer industry of our guidance, which I think gives an indication of what we expect for Q4 and the year.

Perfect. Very useful. Thanks so much for the comments.

Thank you.

Fernando Ferreira, Bank of America.

Thank you. Good morning, everyone. I had two questions. The first one would be on the tax rate. I just wanted to understand how much this new provision in Argentina impacted your effective tax rate? And I assume this will be a recurring factor going forward?

And then, related to the same question, you guys stopped paying IOC, and I expect now that you will start paying again after they approve the transaction? So, I just wanted to confirm that.

That will be my first question.

OK. Fernando, this is Nelson. Regarding our effective tax rate, what we had in Q3 was we had the impact of a new law that was passed in Argentina, which is going to mean that we're going to have from now on a 10% withholding tax on earnings generated within the country. And the fact that we had to recognize in Q3 not only the 10% over the earnings generated in the quarter but also for all the retained earnings and declared but unpaid dividends in the country made it of course a bigger impact.

So, as discussed in our press release, there was a R$135 million accrued expense, but most of it refers to previous quarters' results of retained earnings. Therefore, if you think of the impact moving forward, of course it's going to be less than R$135 million, because this amount refers to earnings generated since early 2012 which have not been distributed so far.

So, it was an accrued expense. It was not a cash impact, because it will come over time. And it was a much bigger impact than what one could expect for the following quarters.

Regarding IOC, as you know IOC is the most efficient way to return tax to shareholders. But having declared an IOC payment in Q3 -- and that was also the case in Q2 -- what [we end up with this,] we had generated a tax loss carryforward which will now be quite a while to use it going forward because of the corporate restructuring that we have.

So, that's the reason why we did not declare IOC, neither in Q2 nor in Q3. But this should be resumed as we conclude the corporate restructuring, and [that's as well a separate performance] we can give at this stage.

Sure. That's clear. Thank you. And then, I had a second question, more a strategic one, related to Brazil. We've continued to see more focus on pricing and price mix over the last two years. So, my question would be, what's your view if the consumer is able to take much more pricing for beer going forward? And what about the elasticity of demand now? Do you think that has changed after the price increases? Or, not really?

Hi, Fernando. It's Joao. I think we always mention that we are always trying to get to the right balance between price and volume. And you are right. When you look at 2011, 2012, indeed price was there, but volume was still healthy.

As we went into 2013 -- we talked about this in the first quarter. That was the worst quarter we ever had, with a minus 7%, minus 8% type of decline, industry and our own business. And we replanned the commercial strategy for the year, with a better Q2 and not happy with what happened to the Q3.

And I think we're going through a phase where I think we have a chance of being able to get a more balanced price and volume equation, which with more volume and less price going forward. That's something that we want to have a better balance going forward, and I think 2014 given the macro environment, given the World Cup --. As you can imagine, as I said in the speech, we continue to be very positive on 2014, and that's why we have the CapEx.

From a macro standpoint, the macro is better than what it was in the beginning of the year. That continues to improve. Federal government with the agenda of keeping inflation under control, stimulating investment. Demographics continues to be in our favor. And in terms of beer, the consumption per capita, although increased by a lot in the last four, five years, we still have a lot to do.

Premiumization went from 4.5% to 7% already, which shows that we could increase and we still can go further. Brands continue to be at an excellent place, and we still have opportunities.

And I think last but not least for that equation, to close, we think 2014 we will continue to work as an industry to this constructive dialogue which we have been building with the federal government with the intent of showing once again to the authorities that the lower the tax burden on the industry, the greater the potential for volume growth and for the investment, which will give us less pressure on inflation and still growing tax revenue.

So, if we can make that work as we did, as we go through, let's say, for the fourth quarter, I think that's an additional positive for striking the balance going forward, a better balance going forward between price and volume.

So, I think macro and micro will be there in 2014 for us to strike a better balance for the consumer, for the government, and for the Company.

That's very clear. Thank you.

Thank you.

Lore Serra, Morgan Stanley.

Thank you. And thanks for the call. I wanted to go back a little bit and touch upon some of the things that have been asked already. But I'm just trying to understand the transition into the third quarter and what that means for the pricing and competitive environment. So, you were likely I suppose in the midst of taking pricing in September ahead of the news on the excise taxes. And obviously, the positive news there gives you a lot of flexibility.

But can you comment on as you're trying to take pricing up and the volumes are so weak, particularly for some of your competitors, because we've seen some reporting, what's your level of confidence on two things? One is that you can land a normal price increase into the year-end as you typically do? And then, second, that the competitors will follow? I suppose it's always tough to know if competitors will follow. You always have that lag. But with competitors down as much as 8%, you sort of wonder whether or not they will say -- look, we just can't take as much pricing. And you see a less disciplined market than we've seen year to date. So, if you could comment on those two things, I'd really appreciate it.

Sure, Lore. Joao, here. And thanks a lot for the question. I think we probably read the same reports from two of the listed competitors in Brazil, one talking about high single-digit decline and the other one talking about minus 70% decline in EBITDA. That's a tough combination.

So, I think actually people are pressured both ways. People are pressured by the volume and by the results. So, I think that combination will have its effect, and I cannot comment upon other competitors' strategy. I'm just reading the same text that you are.

I think that just confirms what we've been saying, that the entire industry is pressured by FX, commodities, and the macro headwinds. So, you have to choose in a way between volume and EBITDA. You have to try to do that.

As I said in the speech, I think given the tough situation we very quickly came back to the cost initiatives but also the replanning of the commercial initiatives. And we're at a better place, let's say, looking at the 7% to 9% EBITDA growth, with a minus 5% going into the third and now going into the fourth, and having as an industry worked with the government to find the no tax increase whatsoever for October 1 onwards.

So, that's the first part of your question, talking about reactions out there, given the facts that are now public from the three companies that are listed.

In terms of volume going forward -- our pricing going forward, not just about competition, but ours, price increase as you know has been taken in line with our historical practice of keeping it (inaudible), on average around inflation with the appropriate pass-through of taxes whenever needed. Price increases are implemented over a period of weeks. So, it's not like day one across the board. It's different for regions, different for packaging, for channel, (inaudible) target. More now, than ever.

And therefore, we don't go into too much detail for competitive reasons. I think it's fair to say that the price increase this year was around the same time of last year, which is consistent our historical practice of taking price in the back half of the year.

Regarding the price strategy going forward, I cannot comment a lot, for the competitive reasons, but as mentioned our expectations for the year continues to be net revenue per hectoliter in Brazil to grow high single-digits. The good news is as for taxes since there will be no further federal tax increase in 2013, no pass-through is necessary, which translates into lower price increase to consumer over time. So, over time, we're not talking necessarily Q4.

But that, together with the other question, I think we go forward with the potential that our situation, the further we can postpone further price increases and also given that we do believe in a better macro for next year, and as you mentioned in the question, I think we are now in a better flexible position than we were before.

Great. That's helpful, but I'm still not sure --. As you look into next year -- and I'm not asking about the fourth quarter, because it's too tight. But as you think about what's happened this year and you think about the category and the competition and the environment and you think about your policy, your pricing with inflation, is there any reason to think that some of that is changed as you look into 2014, in terms of what you're seeing right now?

What I tried to answer in the first part of the question -- and I do appreciate your trying to fine tune it -- is I think there are a couple of things. What I tried to say is I think, first, in Brazil competition is pressured by everything, not just us, and given the results you just mentioned, it seems like other people may be even more pressured than we are, from volume or results. So, that's point number one.

I think, second, so, let's say positive. I think the macro, the World Cup, the election, all these go for industry, for us, for our industry.

Price in line with inflation, if we can do that next year I think that's a super positive versus 2011, 2012, and 2013, where prices went above inflation because of taxes.

So, if this so-called sweet spot that we reached for the fourth quarter and if things move on, people only talking about the multiplier for April 1, that's already a sweet spot further than just the fourth quarter.

So, with competition, our industry still under pressure from external factors such as FX, commodity; second, with the macro being positive; and thirdly, the openness showed by the federal government to discuss a better balance -- if that combined leads to price in line with inflation, that will be the first time in three and a half years.

So, I think that would for sure help volumes in 2014.

Great. That's really helpful. And if I could just ask a quick financial question to Jamel, the financial expenses keep rising from a lot of these gains from non-derivative instruments that are particularly large. Can you just give us a --? I don't know if there's a simple explanation why they were so high this quarter?

Sure, Lore. What we have impacting this quarter results are losses that are mainly related to FX, [and they are in connection with the] exposure which generated -- as part of our inter-company transactions, we have a lot of [companies abroad] and also our cash management policy. So, as long as we have, let's say, volatility in the financial markets, that's the sort of result we can have. But it was particularly more relevant this quarter.

Some of it is linked to, as I said, the corporate transaction. So, there is no economic loss. At the end of the day, you have the negative impact in our financial results, but there is a counterpart in our equity, but because of IFRS standards they are booked in separate places.

And also, part of this is a real loss [financial for cash management policy].

Thanks very much.

Lauren Torres, HSBC.

Hi. Curious to get your thoughts -- I'm not sure if you're able to answer this question -- but your thoughts on the excise tax looking into next year? It seems like a lot of your comments with respect to the environment are still rather cautious. And I was curious if you think there's a possibility that some of this excise tax will be withheld next year and that could actually work as a benefit for you if that does occur?

Sure. I can try to give a little bit more details on what we said previously on the speech. Federal excise taxes did went up on April 1. They did not at all on October 1, which is great news as we said, because the respective pass-through to consumers will not be required.

We cannot speak of course for the whole industry, as a whole here, but we welcome a lot to the federal government decision, because it is indicative that they are open to find these alternative [actions] that I am referring to. There is a possibility of a win-win without further increase of the tax burden for the industry, which brings volume, brings investment, brings less pressure for inflation.

So, without the crystal ball, I think we can refer to things that already happened. So, facts. Fact is that 2010 there were no tax increase whatsoever. So, there is another year where that happened. By coincidence, an election year.

Last year, there was no multiplier in October. This year, there was no multiplier and no tax table, showing there is room to talk. It's a government that is open to talk, that wants to fix the economy, wants to fix the industry, wants to get to a better place.

So, I cannot guarantee anything of course, but we've been doing this for now four or five years and we have some wins, we have some losses. And we will work every day in order for this to continue going forward and find this win-win situation for everyone -- consumers, government, the Company. And as I said, it did happen before.

OK. That helps. And if you could also just address the SG&A reduction in the quarter? You mentioned that the commercial spend was lower than what you had in the first half. I was just curious if you could talk about that a little bit more? And as we think about next year, if there's room to improve on the SG&A line and what those improvements could be? Thanks.

Hi, Lauren. Nelson, here. Yes, we mentioned that our expectation for the year is to have SG&A growing below inflation, which of course would imply a much better performance in the second half versus what we showed in the first half, and actually we're delivering with the results we show today.

I would say part of it has less of a merit between [codes], if you will, because we knew that we were front-loading part of the marketing investment. And so, it was one of a phasing issue with the investments behind the FIFA Confederations Cup. So, it's kind of a natural improvement.

But on the other hand, as Joao said, and since the beginning of the year we saw a very tough year ahead of us, and we went back to all the details and (inaudible). And we took actions that in the course of the second and mainly the third quarter we could see the benefits.

So, we expect more to come in Q4 and as we look into 2014. We think it's still a little bit early to give any sort of guidance there. But we are confident that we can not only have the full-year impact of the things we are realizing along the way this year, but also to pursue the alternatives. As you know, we are always facing more (inaudible) operations, redesigning process. What has been increasing and we continue to increase the impact of the procurement [theme] in terms of increasing corporate, specializing purchase, leverage a lot on [your] options.

So, all that is in the pipeline. Again, there is no silver bullet. As you know, we are in this journey for a long time. But we are confident that we can continue to leverage and improve operational leverage by managing our costs in an even more efficient way.

OK. And if I could just lastly ask, any visibility or any comments on commodities for next year, particularly grains, if you're seeing anything different?

We also think that it's a bit early to talk about 2014, let's say, guidance for commodities and FX. You know our hedging policy in place. So, what we have already locked most of it, and it's not going to be a surprise to anyone when we announce by year-end that we're going to have a year-over-year negative impact coming from currency. But at the same time, commodities are indeed much better than what they were, let's say, 12 months ago. So, the net impact, we are going to see probably a less negative impact than what we saw this year. But we'll come back with a more explicit guidance as we close the year.

OK. Good. Thank you.

You're welcome.

Alan Alanis, J.P. Morgan.

Thank you. Hi, everyone. Two questions. The first one has to deal with this per capita consumption in the premiumization process, Joao, that we're seeing in beer in Brazil. Moving from 4.5% to 7% of total mix in the super-premium category, that's a huge increase in terms of that category. Clearly, more than double-digit [solidly] in each of the years. How do we reconcile that such accelerated growth within the context of a total industry volume decline? I guess that's the first question.

And the second question regarding, I understand the excitement of continued growing per capita consumption, but we're already seeing levels particularly in the south and southeast of Brazil where the level of per capita consumption resembles the levels of the United States. Are we seeing --? Is it right to think that in the south and southeast it is mainly a process of premiumization, and that's where you're seeing this double-digit growth in super-premium brands? And in the north and the northeast is where the main opportunities will lie in terms of per capita consumption? Or, there's more going on into this trend?

Hi, Alan. Joao. A very good question. I think the easier part of the answer is that of course we are still an emerging nation. We're still somewhat poor. That's a lot of more per capita income that I think this country will get in the next 10, 15 years. So, I think it's a positive outlook. So, I think that's the easy part.

I'm sure you're talking more about the next 12 to 24 months. Long term, I see no doubts about it. Actually, when you run regressions off past 5 to 10 years trying to understand that -- and we now have that sort of data, with big data type of analysis on a region-per-region basis -- it's quite interesting to see that there are curves which are almost like step-changes.

So, the step-changes that --. Probably one step-change that we saw was, let's say, from the 2007-2008 time to the 2010-2011 where you saw a big increase, and either people -- with a combination of people coming from cheaper alcohol into beer, better price points. And then, you see some stability for a while.

But then, you see another step-change, and the step-change could be twofold. One is the next level of per capita income jumping in and helping the overall consumption. And the second is, let's say, people that were making -- x -- and now make -- y -- and that makes them a little bit less price sensitive.

So, you're starting to have Brazil -- you know about this [document in India] type of thing that people used to use -- if you ask people that are really less price sensitive, that are more of the high-end consumer. So, they are able to continue to increase their baskets of consumption within beer. And of course, we have activated more and made more available our own domestic premium, our own international premium brands. So, the combination of the activation and the per capita income of those consumers that are less price sensitive brought us from 4.55% to the 7% that we see today.

So, moving along the line that we said we thought we could be around 8% two years from now, it seems that maybe we'll be able to go to 10%. So, the good thing is that we have the perfect product mix, the perfect brand portfolio to go after those consumers.

But, because Brazil is that combination of, let's say, (inaudible) and (inaudible), we still have the working group, more pressured by the affordability. And that's why we continue to think now it's more of the -- and -- rather than the -- or. So, we do have the very strong pack-price initiative with the 300 that is definitely not everywhere, with the 1-liter that is in more places, having more cans at the 500 and 60 that we launched also being more available, with the [Nor Sur Bock] which can go to the poorer neighborhoods and bring a better experience.

So, now the twofold strategy of having the perfect mix for premium but also the perfect mix for the consumers that are more pressured I think will lead us to this better place. I do think we will live in this [two-bet] country for a while before we get to the more developed nations. Being all very present on the developed nations help us to learn a lot of the things that are happening there and bring some of the new news, sometimes sooner, sometimes later.

As we have a good reading of the situation and with big data type of analysis we have more and more stasitical views combined with the overall strategy and [quali-quant] analysis to get us to the right point or the right mix or the right launch, as we did with the Brahma 0.0% which we're selling everything we have. So, Brahma 0.0% non-alcoholic for the past three months is growing like 40%, 50%, because the right proposition was not there. It was not in place.

We just launched Skol Beats Extreme which we think for the night-out occasion, super type of super premium situation. We also have now a better mix.

So, we are combining both things. I think the fact that we invested those CapEx that we did in the past two, three years now will give us the flexibility that we didn't have before, pretty much across the nation, across Brazil, to do this in top-end cities, for example, which our premium are very important. In the not as nice parts of the top-end cities, when we think maybe about the affordable piece.

So, I think really a much better footprint today, and much better mix today than we had a few years ago to face the situation.

That's very clear. If I may, another question, just for Jamel, more on the technical side. This line called Other Income moved from 3% to 4% of revenues, Jamel, growing slightly from 2009 to 2012. And now, it represents 6% of revenues, and it has been accelerating. How should we think of this Other Income for the next quarters and 2014? That's the question.

[It's not clear], Alan. This is a line, as you said, it has been growing for a while now. I think we mentioned that in the last call. And the key driver behind this evolution which if you look 2008 is around R$100 million, R$120 million a year. The key drivers for this evolution are the higher government grants related to state VAT long-term tax incentives as a consequence of the high level of capital expenditures invested in Brazil.

[This year, we moved] CapEx in Brazil from the historical R$1 billion to R$2.5 billion, a previous record. In this year, we are heading to a new record of R$3 billion of CapEx in Brazil. This is driving the improvement in this line as a consequence of this sort of incentives which are not [stealed] for us. That is the law, and they are by the way for the long term, all these incentives.

You asked about how to think [with] for the next quarter or the next year. Those incentives are 8- to 10-years incentives. So, as long as we continue to grow volumes from now and deliver all the investments we have in the pipeline, these will continue to grow.

Particularly this quarter though, there was a specific gain, more like a one-off gain, associated with certain legal procedures where we had the conclusion, and we obtained this gain. So, this gain explain pretty much the growth in the net Other Operating income from R$44 million to R$144 million.

So, there is R$100 million which is one-off in this quarter. But most of the result comes from the government grants as disclosed in our press release.

Thank you so much.

You're welcome.

Alex Robarts, Citi.

Hi, everybody. Thanks. Two questions, going back to more of the short-term situation here with your guys. First question, on operations. Second, on a non-operating item.

I appreciate the wording that you're using -- the short-term environment remains challenging. And we have had some macro trends improving recently, but it seems in the shorter term we've seen a little bit more irrational competitive behavior. You're kind of guiding now to an industry decline in beer Brazil toward the low end, minus 3%. And we have a very difficult comp here, probably one of our toughest year-on-year, in the fourth quarter.

And I'm just trying to understand here -- and I know the visibility is low -- but can you help us kind of get a sense of you've been talking all year about the pack price, RGB, one, issue; second, the premium segment; third, the north and northeast. Which one of these three seems to really be working better than the other? Are they all working the same? And how should we think about the effectiveness of these initiatives that you've been working on all year as we come into this seemingly critical fourth quarter period with the visibility very low?

And if the answer could also touch on this idea of to the extent that you seem to be straight-jacketed by this idea that SG&A can't grow beyond inflation? And that means no growth for SG&A in the fourth quarter. You have a volume capital intensive business. Might it make sense to increase the SG&A in this fourth quarter? So, that's the first question.

And then, I have a non-operating one as my second one. Thanks.

Hi, Alex. This I Joao. So, trying to review our situation in the short term, first, everything that I think you are referring to here works for the cold beverage industry. So, I'm talking beer and soft drinks. Both industries are pretty much declining the same. Year to date for beer, it's minus 3.5%. Year to date for soft drinks, it's minus 2.8%. So, pretty close.

What I said, just to make sure, is that everyone is pressured. I cannot speculate on the others' behavior, but because of (inaudible) pressure, I actually see from what you're saying --. I'm not sure what you said the irrational [action]. But because everybody is pressured, I see more rational behavior than not. There's price competition in the market place. Everyone has their [petco] initiatives. But as you look at our price guidance, we will be reaffirming that.

So, if we are reaffirming that and we are within our market share range and so forth, and so on, I think from that standpoint the reading is positive. But, given that volume declines are bigger than people expected, we of course react very quickly without taking shortcuts to [the beginning].

So, we're very close to one of the highest ever share of [voice] that we have, which show that we are committed of putting money behind our brands to grow the preference, the grow the [truck fleet], to grow the consideration, and we're actually very happy with the results.

Also, we had a lot of innovation. We haven't postponed anything. We're full force. Turn on the TV. Turn on the social media. You see the brands all around.

But in non-working money, if we can produce the same volume or spend the same amount of money overall at the plants with either more lines with less volume, that's the type of response we have to bring into the table to help our commercial initiatives. So, be as slim as possible from the non-working or the from the operation standpoints, [distribution], everything else, so to put money back behind the commercial initiatives to have the wheels spinning in the right direction, as we mentioned in the other questions.

So, quick response, everybody pressured. Overall, the combination for the top line is not where we would like, but EBITDA it's keep improving on a quarter-by-quarter basis. As we said, we are working towards a new delivery and a better second half than the first half, with increasing share of voice with a percentage number like given that of course Confederations Cup being the second quarter, there were more expenses towards that because of that specific event.

Given the strategy, there is the other four pillars that we mentioned like with the direction. That's what we like to share in terms of what are we doing, but we don't like to go into more details than this in terms of what's working. We said we are happy with the [nano]. We are happy with the RGB. We are very happy with the premium. And we're happy with innovation. Without going into specifics which one we're happier with.

I think I mentioned on the premium, the 7%. I think I mentioned on the innovation, doubling the volume. I mentioned in the nano, that we are increasing the share. And for the RGB piece, we continue to increase the presence of RGB in the off-trade.

So, all of those initiatives are hitting its objectives. Of course, this is not enough. This has not been enough to offset the volume decline. So, we don't stop there, and we continue to look for other things that further compensate this. But those are some of the things that -- some we can share. Some we'd rather work on as a strategic anything that can bring a better result for next year.

I guess I see the focus on that when I talk about the competition scrambling to get the key volume footprint ahead of the World Cup. And it's seems to me what you're saying is that you would be okay to sustain -- I guess 70 basis points was the market share loss in the third quarter in beer -- but you'd be okay to lose more share in the fourth quarter at the expense of hitting this guidance with flat or below-inflation SG&A for the year. Is that a safe statement?

No. I'm not sure exactly what you meant. So, I'd rather give you my view on this.

We always look at market share in conjunction with volume and pricing, as our primary challenge in terms of our top line is to strike the appropriate balance between volume, price, mix, and market share. We believe that despite the 5% volume decline, we are averaging 68% in the third quarter which is nearly flat versus the second quarter and well within the 67% to 69%, while delivering the 6% net revenues per hectoliter, with the growth of EBITDA.

So, that's as much I will -- I will not infer anything regarding that I would be happy, which I would not be, for losing market share in the fourth quarter. That doesn't make any sense.

So, what makes sense is that I am happy to be well within the 67% to 69% with 68%, and the fact that we are nearly flat versus the second quarter with the price increases that we mentioned that happened during the third quarter, targets within the expected, and delivering the 6%. That's what I believe.

Gotcha. OK. Fair enough. The non-operating question is really on a tax question, this foreign subsidiary offshore tax. I guess there's a deadline as you know in a couple of weeks to declare, maybe come forth, to the government's tax amnesty proposal. And as I understand what Ambev's liability here is roughly R$2.6 billion. You haven't made a provision. I guess your lawyers are saying it's I think a possible claim or negative outcome. How are you thinking about this? Will you go ahead and participate in the government tax amnesty program regarding offshore profit and then engage in some payments and provisions? Or, do you feel like the legal strategy right now is not to participate and go and adjudicate this in the courts?

Hi, Alex. This is Nelson. I think you mentioned [probably right]. We have an exposure in September 30 of possible R$2.7 billion, and all the related details of the exposure is part of our disclosure in our financial and public filings. And as you also mentioned, we have made no provisions. [This is the opinion] of our legal counsel. We are [suing in the courts], and even in case we would not prevail there we will continue to litigate the matter in the judicial process. We believe that our position is very strong and we should prevail. Remember that we already had [successes] that were ruled in our favor and brought the [recent] exposure down to R$2.7 billion.

On top of that, and referring to the federal tax amnesty program which has been enacted by the federal government, we [are not able to take any kind of decision] because we are still waiting for the publication of the final terms and conditions of the policy to decide on the appropriate course of action. But given the [set] of our legal case, what we wait to see what are the specific terms coming up. So, at this stage, of course, no position can be taken.

OK. Thank you.

You're welcome.

Gustavo Oliveira, UBS.

Hi, Nelson and Joao. Good afternoon, everyone. I have a question regarding the overall capacity utilization that you may have and also the system, knowing that volumes are going down and everyone has been adding capacity. It seems that the market is expecting a reacceleration in volume during (inaudible). But could you put yourself in a situation where the value brand is performing very poorly next year and also because you don't have price, you have such a high capacity that it continues to rise, which would lead to pressures on prices, and therefore your premium volumes may not be able to offset all that and therefore you won't have any operating leverage next year?

It seems that when we look at your impressive results in 2013, part of it is probably coming from the premiumization strategy and the premiumization volumes has been accelerating. But do you foresee a scenario like that? Or, you're very comfortable with your capacity utilization in your value brands? Or, not only yours, but the industry capacity utilization [trend now]?

And that's my question.

Hi, Gustavo. Joao. Let's see if I understand your question. I'm assuming that you're calling value, the mainstream. We don't really (multiple speakers).

(multiple speakers) Not only you, but I imagine that most of your competitors, especially your competitors, have been adding a lot of their mainstream brands -- they don't necessarily have a very strong premium portfolio -- that it would affect your business?

Well, let me give you my view. I think pricing has been driven much more by cost pressure, and cost pressure I would include dollar, FX, but also state and federal taxes.

Price comes from two places. It comes from disposable income of course from consumers. That's the ultimate pressure. But people also look at what's happening from an [inside cost] perspective, which has been very strong in this last 12 to 18 months.

I think we will be in both cases in a better situation in 2014, actually. I think the macro will be better. I think the macro and the micro, both things will be better. I think there will be less pressure from both the internal cost pressures on a delta, year-over year, type of a situation.

And therefore, sometimes the capacity non-utilization could be in effect, but I don't think it is this year and I don't think it will be next year.

Actually, I thought the question was more coming from, how do you feel about the capacity utilization. What I answered previously is that I think we are going forward with a better footprint we ever had. So, I think the capacity utilization is more a positive than a negative, because we're getting closer of being able to sell every type of portfolio that we would like to across the country, rather than the opposite. So, I like the fact that we have that.

I think, second, we've been working a lot in these past three, four years to have a better line efficiency, because we went from selling maybe -- I'm just exaggerating for a second -- let's say, two SKUs -- 600-ml bottle and 350-ml aluminum cans. And now, we have everything -- 1-liter, 600, 300, 269, 473, 350, 550. And when you turn yourself into this multi-package operator, of course the line efficiency in the beginning is pressured.

And now, through many different projects we run and being focused a lot on turnover, being focused on maintenance, focused on getting the right model, the right people in every line, and the owners having the tools to better operate their machines, we have been increasing line efficiency a lot month after month now for 18 months.

So, the combination of investment, the combination of a much better line efficiency gives the flexibility to be in a much better situation from a commercial standpoint, but actually also from a cost standpoint, because it's very quickly we can adapt because the line efficiency gives you so much more room to operate that you can very quickly right-size if needed, or not add additional full-time employees to face more volume.

So, I think we will actually go onwards, 2014, both from a commercial standpoint and both from a cost standpoint in a better situation than we were in 2013. So, I think it's more of an asset, than a liability.

OK. Thank you very much. Very clear.

Thank you so much for your question.

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

Thank you, all, once again for joining today's call. We are looking forward to speaking to you again on our Q4 and full-year 2013 call, when we'll have the opportunity to discuss with you guys our performance from what we expect to be an even stronger finish of the year.

Thank you very much, and bye, bye.

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