Ambev SA (ABEV) 2014 Q1 法說會逐字稿

Good morning and thank you for waiting. We would like to welcome everyone to Ambev's first quarter 2014 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 instruction 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 Q1 2013 results. Normalized figures refers to performance measures before special items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities.

As normalized figures are non-GAAP measures, the Company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully-reported basis in the earnings release.

Now, I'll turn the conference over to Mr. Nelson Jamel, CFO and Investor Relations Officer. Mr. Jamel, you may begin your conference.

Thank you, Maurine and good afternoon, everyone. Welcome to our 2014 first quarter earnings call. I will begin by sharing a few of our performance highlights. Joao will then talk about Brazil, the performance during the quarter, and what to expect going forward, and I'll come back to give an overview of our international division and comment on our financial results before moving to Q&A. So let's get started.

In the first quarter, net revenues were up 16.9% and EBITDA grew 14.8% with normalized EBITDA margin contracting 90 basis points to 44.8%. If we break this down by division, Brazil, net revenues grew 19.1% and EBITDA increased 15.1%. The EBITDA margin actually contracting 170 basis points to 49%.

HILA-Ex delivered 9.6% of net revenue growth with EBITDA up 12.1% to BRL105.5 million, and EBITDA margin of 25.1%. Latin America South had a 21.5% increase in net revenues with EBITDA rising 22.1% and EBITDA margin expanding 60 basis points to 45.2%, and Canada net revenues declined by 3.1% and EBITDA was down 16.3%, with an EBITDA margin contraction of 280 basis points to 24.4%.

Joao, over to you.

Thank you, Nelson and good afternoon everyone. We had a strong start of the year in Brazil with volume expansion and solid net revenue per hectoliter performance in the both beer and soft drinks leading to a 15.1% EBITDA growth. Particularly in beer, volumes were up by strong 10.9%, Brazilian beer industry momentum improved in the first quarter helped by lower food inflation and better than expected weather as well as the easier comps versus the first quarter of 2013 including an earlier Carnival holiday. As we benefited from this better industry momentum, our execution was crucial to make most of out of the tail end during the quarter while maximizing our top line EBITDA growth.

When we look at our initiatives, our sales and marketing team executed a terrific job promoting and enhancing our presence in Carnival events around Brazil delivering record volumes during the period, all in Rio de Janerio with a total attendance estimated at above 5 million people and Antarctica was the official sponsor of more than 150 parades around the streets of the city.

The success of our summer without price increase campaign was also a determinant driving beer price to consumer to grow below general inflation from January to March as this is probably the first time we have seen this in a season when beer prices will typically grow above inflation regardless of our pricing activities.

Our premium portfolio continued to outpace the beer industry with Budweiser, Stella in the region now leading this growth. It is also important to highlight the improvement of our execution in the premium space with a dedicated sales force and trade marketing initiatives driving higher penetration and a better consumer experience (inaudible).

There is still a lot to be done but I am confident we are on the right track. Innovation has also been an important growth driver in our search to fill the white spaces.

Brahma 0.0% became the leading brand in the non-alcoholic beer category in a few months and Skol Beats and Skol Beats Extreme continued to increase its presence in the night out occasion growing more than 40% year-over-year.

Last but not least, we maintained our focus on economic packages while always looking for new opportunities, we continued to increase the 300 ml returnable bottle coverage and to new areas and to consolidate the results, we were already present.

The 300 ml returnable bottle represents the lower out of pocket for consumers and along with the returnable bottle allow us to offer more affordable package to consumer in a profitable way. When I look at our market share, we are down 60 basis points year-over-year but flat on a sequential basis at 67.5% and within the 67% to 69% historical range.

In the CSD and NANC division, our volumes grew 2.1% with year-over-year market share gain in CSD at 18.3% in solid growth from non-alcoholic, non-carbonated. Our marketing initiatives continued to pay off.

This year, we are once again launching a national TV promotion with Neymar, the Brazilian soccer star, and Felipe, coach of the national team, where consumers can register the goals they find in the packet of Guarana (inaudible) Pepsi through (inaudible) for a chance to win more than 10,000 different prizes.

Last year, we had more than 20 million pin code registrations driving brand loyalty new consumers and enhancing the equity of our brand. At the beginning of this year, we also launched the Pepsi 1 liter returnable bottle in addition to our successful initiative with Guarana [basket], which continued to gain share in this segment.

Liquid innovation has also been an important growth driver, a good example is the new H2Oh! Limoneto which was launched at the end of last year and it's increasing volume in our asset base.

Going forward, we expect CSD and NANC segment to keep its healthy performance as we extend the volume of our main brands, roll out our recent innovations and launch new products.

With the volume overview of beer in CSD operations, let's turn to our operational highlights. In Beer Brazil our top line grew 21% with volume expansion of 10.9% and the solid net revenue per hectoliter growth of 9.2%.

During this quarter, we benefited from our revenue management strategy, but the fact that premium volumes performed well (inaudible) also grew rate both helped our top line performance. Cost of goods sold grew 15.8% due to volume expansion and COGS per hectoliter growth of 4.4%.

The higher COGS per hectoliter was mainly explained by higher currency hedges partially offset by lower commodity prices mainly aluminum and barley and better dilution of fixed costs.

In terms of SG&A, our SG&A increased 18% year-over-year, a higher than usual number but in line with our plan for the year as one should expect that different investment calendar this year given the 2014 FIFA World Cup.

This growth is explained by three lines. First, higher sales and marketing expense as we continue to support our commercial initiatives but have also started to get prepared for the 2014 FIFA World Cup.

During the first quarter, we have already launched our national TV campaign led by Brahma and Budweiser and kicked off some of our trade marketing initiatives.

Second, higher logistics costs driven by volume as well as the increased rate of their [execution]. And third, higher admin expenses, while we still expect our admin expense to grow below inflation. In 2014, the timing of variable compensation drove a double digit growth in the first quarter.

Our EBITDA in the beer segment grew 17.8% with an EBITDA margin of 50.9%, a compression of 150 basis points when compared to the first quarter of 2013, explained by lower order for an income given our one-time credit we reported last year.

Turning to CSD and NANC segment, our top line grew 8.8% with a volume expansion of 2.1% as already explained and net revenue per hectoliter growing up 6.5%, mainly driven by our revenue management initiatives and the higher weight of [distribution].

On the cost side, COGS per hectoliter grew -- COGS per hectoliter was up by 4.3% in the quarter due to higher currency hedges partially offset by lower sugar and aluminum prices.

SG&A grew 18.2%, explained by higher sales and marketing expenses driven by the saving of some investments also possibly related to initiatives planned for the 2014 FIFA World Cup and high distribution costs, higher volumes and weight of the [distribution].

EBITDA in CSD segment was down 1.2% also impacted by lower other operating income. Our EBITDA margin was 38.8% decreasing 390 basis points year-over-year.

I will turn it back now to Nelson but I will come back at the end to talk about what we expect for the next quarter. Nelson, over to you.

Thank you, Joao. I'll now walk you through the main highlights of our international operations. Starting with HILA-Ex our EBITDA reached BRL105.5 million with an EBITDA margin of 25.1%. Our overall performance remained on the right track with acquisition in Dominican Republic continue to deliver on top line and margin expansion opportunities as we approach the second anniversary of our strategic alliance with Cerveceria. Besides we managed to grow the beer category in the country while also improving our CSD volume performance.

In Latin America South, EBITDA grew 23.1% and EBITDA margin expanded 6 basis points to 45.2%. The performance is most explained by top line increase of 21.5%, helped by both beer and CSD volumes growing once again with 4.6% and 2.9% respectively.

The net revenues per hectoliter grew 16.9% in the quarter. Despite the tough macroeconomic scenario in Argentina we had been able to grow top line in a consistent way quarter-over-quarter for quite some time in Latin America South division. And this quarter was no exception thanks to our Latin America initiatives, innovation pipeline, strong brands and trade execution.

The beer industry expanded in most of the countries we operate including Argentina. Besides positive performance in all beer brands in the country we have also benefited from CSD innovations once again since H2Oh! Limoneto (inaudible) flavors played an important role in our commercial strategy. In Rio, COGS per hectoliter grew 10.5% and cash SG&A rose 23.4% for the division driven primarily by higher inflation in Argentina.

Going forward we continue to be cautious about Argentina macroeconomic environment. However, we are confident that we have an experienced team in place and we can continue to deliver solid results.

Heading north to Canada now. Labatt reported an EBITDA of BRL210.7 million in the quarter, down 16.3% year-over-year with a margin compression of 380 basis points to 24.4%. Our volume performance was mainly driven by a negative decline of approximately 3% due to very low temperatures and high precipitation, coupled with the calendar shift of the Easter holidays from end of March to mid to late April.

These are partially offset by incremental volumes from Grupo Modelo brands, which we started to distribute on March 1st, and strong performance from both Bud and Bud Light.

Similarly Michelob Ultra [ONS] continues to grow and our high end brands are picking up [transaction] momentum (inaudible) both significantly ahead of last year.

Our COGS per hectoliter increased by 1.8% while SG&A cash expense excluding depreciation and amortization rose 5.2% driven by the phasing of sales and marketing expenses.

Looking forward, we continue to focus on the balance between re-integrating the [quarter 4] business by taking leadership of the segment growing the most in Canada, the high end. Regarding Corona we also remain very excited about the Group for 2014 and beyond.

Now, I would like to cover the main aspects between the normalized EBIT of around BRL3.5 billion and profit of about BRL3.6 billion in the quarter. Net financial results were an expense of BRL368.8 million. Our result was negatively impacted by non-cash accretion expense, (inaudible) to the Group's option regarding our investment in Cerveceria Nacional Dominicana, now around BRL800 million in the quarter, and also by higher losses related to derivative instruments in connection with our hedging strategy. At the same time our effective tax rate which is 17.5%, which is in line to what we had last year.

And last but not least in terms of our financial discipline which delivered another quarter of consistent improvement. Cash flow generated through operations increased to 48.8% and total around BRL2.6 billion, while we returned to shareholders a total of nearly BRL4 billion in form of dividends and interest on capital. As a result, our net cash position reduced expressively from BRL8.9 billion on December 31st down to roughly BRL4.9 billion at the end of the quarter. And this figure does not account for a BRL2 billion of dividends paid as of April 25th.

With that said, I will turn back now to Joao for his closing remarks. Joao

Thank you, Nelson. Before going to Q&A I would like to quickly talk about what we expect for the next quarters including the recent tax development. On April 29, the Federal Government announced they would update the reference based prices used to calculate federal excise taxes for the cold beverage industry to take effect on June 1st. While representing no change on current legislation or any sort of new tax we were certainly not expecting another federal tax hike within 30 days from the previous one, when the federal government increased the multiplier by 4%.

We appreciate the fact that the government is trying to address its short term issues to deliver this year primary surplus target, but we see any increase way above inflation in a given year as totally inappropriate due to potential volume impact and its consequences for investment, job creation, and inflation. The cold beverage industry will continue to work on a dialog with the federal government with the intent of showing once again to the authorities that tax revenue can grow the same way but based on a lower tax burden on the industry, enabling a greater volume growth and for the investments with no pressure on inflation.

Important to highlight that in any scenario we will keep our strategy of passing on any tax increase, always looking for managing the optimal balance between price and volume in order to keep growing our EBITDA in a profitable way. For competitive reasons, we are not commenting about timing or amount of our pricing strategy.

With that in mind we are maintaining our target of high single to low double digit top line growth, but our investment plans are under review and our previous guidance for 2014 CapEx in Brazil is revised downwards to be below last year level of BRL2.8 billion. And to achieve growth for this year there are no shortcuts we have a committed and motivated team, strong and very loved brands although the finest brands for the year, robust but flexible enough to be adapted to the new scenario, and winning commercial strategies going from our economic packaging offers to a complete premium portfolio.

On top of that of course we have the 2014 FIFA World Cup ahead of us. When the opening match begins in five weeks from now, almost 200 million Brazilians and more than 2 billion people around the world will be watching and celebrating the biggest show on Earth. (Inaudible) we are already very excited to celebrate along with our consumers our complete portfolio of beer and non-alcoholic beverage. Brahma and Budweiser are the official beer brands of the 2014 FIFA World Cup and will be present in all of the 64 matches. But along with our presence in the stadiums, more than 1 million points of sale around Brazil. We will deliver a unique experience for Soccer fans to celebrate the preferred brands.

(Inaudible) in the whole series, presenting all of the 64 matches along with music attractions. On Brazil games more than 40,000 attendance is expected in some of these events delivering experience only similar to a Rio soccer stadium. More than 14,000 [events] in bars and restaurants of [150-seaters] all over the country where we expect directly reach almost 2 million consumers.

For better results such as [Arenna] Brahma and Bud [Mansion] in major capitals with average capacity of 2,000 people each for submitting Brazil and weekend matches along with after game parties. VIP parties during Brazilian games target on and off premise marketing activations. All in, we will reach millions of soccer fans during the event, in the stadium, in the bar or at home with family or friends we will bring the 2014 FIFA 2014 World Cup experience for all, and we will celebrate together.

Along with the volume opportunities in 2014, we firmly believe that by providing consumers with unique and memorable life experience with their favorite brands will contribute a lot towards maintaining and improving brand health indicators even further.

So let the games begin. Maurine, can you remind folks for the procedure for the Q&A.

(Operator Instructions) Lauren Torres, HSBC.

I respect your decision, not to be very specific on pricing plans for competitive purposes, but Joao, probably you could give us a little sense of what the changes will be on the price reference table and any, I don't know broad comments on the industry, what do you expect to see on pricing? Meaning, what the price increases or additional price increases will be?

And then I guess, just the second half of the question has to do with the consumer, because, I am just curious, we have the benefit in the quarter from good weather and the timing of Carnival. But I curious, if you are seeing some pick up in consumer behavior and this is excluding weather and event, but if you think, further pricing is taking, we're going to see a notable hit on the volume line. Thanks.

Yes, Lauren, it's difficult to give you a lot of details without getting into the, of course the price strategy. The thing is, what I mentioned just now in the speeches, before setting this taxing line, a tax increase, and that has not changed. From there you pretty much can figure out, I mean, looking at the tables and different analysts have published, it's public information.

There's all sorts of different increases, people know that federal tax is about one third of everything we pay, that the margin will be, take a little bit more than one third of the total pool. Starting from the price of the consumer, you can somewhat figure out, where this will end, right? I think if I am to comment just on the tax piece, what I just said, we of course appreciate, the government is trying to address the fiscal challenges, right? But we believe that no tax increase is a better situation because in fact tax increase will always impact industry volume growth, right?

We think the government can achieve a similar level in a different manner. But once this is decided and nothing changes from here until June 1st. Second will be, to pass on any tax increase to the price, we'll not get into details of the amount and this and that. There is the slight review on the CapEx for now.

Talking about consumer environment, I think we are on a better consumer environment than we were last year. For all kinds, I mean, we have a very bad weather throughout, not just in the first quarter. So I mean, this according to all the different forecasts is a warmer year than last year. So, that's one positive. The second is, food inflation is also better than last year for the first quarter only. The Carnival makes a big difference, and then you have the World Cup. Of course the World Cup makes a big difference, it is a much more favorable situation.

We are seeing our own performance from an execution standpoint get better, day by day, I think the portfolio is stronger day by day, both from the premium but also on our mission to find more affordable matter, so that we can be present throughout the moments of consumption.

So, I think all-in-all, having said that I think it is bad timing for a tax increase, I mean or the amount and other stuff, having said that and assuming nothing will change and we'll pass that on, I think it's a much better environment to have a tax increase. Price through increase of the tax from our consumer standpoint from the things that I just said, from the execution level, that we are at also throughout, and I think we get better every day at managing more complex portfolio than it was when we look a few years ago.

And then third, the World Cup has an important effect in the next three months. So I am talking about May, June and July, more so of course June and July. But that also leaves a legacy for the brands given the memorable experience that we're going to go through.

That's sort of where we stand. And at the very end, we're still expecting the industry volume to resume growth in 2014, and moreover, we are maintaining our guidance of high single digits to more double digits top line growth for 2014.

Okay. Very good, thank you.

Thank you. Thanks for the question.

Andrea Teixeira, J.P. Morgan.

I just want to understand if some -- and I appreciate your comments before. If this is the possibility of being negotiated, I understand that you would not, for competitive reasons, and you also not giving exact numbers for CapEx. That would be my first question.

The second question, obviously you do a tremendous job on distribution and the initiatives that you described for the World Cup, but if you feel there is any chance that at the trade, especially at the modern trade, there could be some disruptions, if any manifestation or anything can happen during this time of the year.

And lastly, regarding the World Cup with no price increase. I mean, since you probably will have to change that strategy, is there anything that could be, that we could think from the disruption for your ad campaigns? Thank you.

In terms of -- but we cannot speculate whether or not change may occur or not. So, we're just assuming what (inaudible) is going to happen. We think, the tax is already pretty high, right, we already pay BRL5 billion in federal taxes, the whole industry probably pays around BRL10 billion, the industry has been investing (inaudible) BRL7 million per year.

The industry could choose to work with the (inaudible) showing once again to the authorities that the lower tax burden on the industry, the greater the potential for volume growth, further investments, and as a result of that great tax revenue with no pressure inflation should be the way to go.

So, having said all this, which I think is very important we continue to talk about this. Furthermore, what we have just (inaudible) is going to happen. Therefore, we have somewhat a bitter struggle passing on any tax increase. We are saying that we'll be below the level of last year, in terms of CapEx, which I think was the first part of your question.

The last piece, regarding to the (inaudible) the reason we will not get into any details of timing, amount, strategy is always to manage the optimal balance between price, mix, and volume, in order to keep growing your top line in a proximal way. Therefore, (inaudible) refers, it's our strategy we'll not be further updating it in any manner.

Regarding, logistics and execution, I think the combination of having a lot of experience in managing Carnival and down the Confederation Cup last year. It was a great pilot, for 15 days in 6 cities. We had a lot to do, we did very well, if you remember, we'd mentioned about, 200,000, 400,000 hectoliters of growth last year, which was the best moment of last year. It was a lot of work to get it done and manifestation is actually -- had no impact last year, we, no one was planning for that but once they were out, we had our own ways to finding intel to try to do our best. Given that situation and giving that, even with that situation we managed well with thinking, regardless of what happened, we're really very, very ready for putting out the biggest show on earth, helping the whole country, helping the government is something that we'll think will be a such a amazing.

I think at the end it will be an amazing World Cup, Bud and Budweiser are the official brands. We'll be present in the 64 matches, 2 million people obtaining down, just going to reinforce what I said, no (inaudible) in the whole city, 50,000 to 40,000 capacity to meet up down to get a total of another 2 million, we're going to put out close to 15,000 micro vans in more than 150 cities reaching above 2 million people, we will have all the proprietary events.

Given that, we're a sponsor such as Brahma, the Bud mentioned, this will be in this desire to be part of it, that is part of the event. Not to mention all the targets on and off premise marketing initiatives.

So, this will be an experience for all. Our idea is really to bring the World Cup for all the different bars and the bar is the living room of most of us Brazilians, we love to be with our friends, watching games.

Last time we had a World Cup, it's 64 years ago, we've been preparing for this for the past four years. I'm sure and confident that this will be amazing and we're really ready for it in any way, shape or form, be it product, the right product at the right place at the right time to really do an amazing, an amazing job.

Thank you Joao.

Eric Serotta, ISI Group.

This is Eric Serotta on behalf of Robert Ottenstein. How're you? Wondering, if you could give some additional color on how you're thinking about the, evaluating the return that you're expecting on the increased investment that you're putting behind the World Cup.

Could you give us any frame of reference as to how we from the outside should look at measuring that return on the investments?

Sure, I think the first thing is, given the World Cup, we mentioned last year, throughout the 300,000 and 400,000 volume per hectoliter growth. Okay. And, we said this year, this would be four times that. So, talking about 1.5 million 1.6 million, hectoliters which is about 2 percentage points additional growth of volume for the total industry.

The industry would not grow 2 more points, if it was not for that, so that's one way to measure on a very specific way. And then the other thing is what I was just saying, is that, by providing consumers, this unique and (inaudible) life experience with their favorite brands, it will contribute a lot towards improving our brand health indicators for the years to come.

So, I think that is one very specific manner which is through volume, and there is this other one, which is more medium to long term, is that your brands are going to be much stronger by you doing this in a amazing manner.

Thanks. And just moving north a bit, any early read on Corona, actual roll out in Canada, and any comment on your pricing, on the price point there, is that being positioned in the sort of super premium space? Any color would be appreciated.

So, talking about Corona in Canada, of course we just started and what we're seeing this quarter results, first quarter results is just the contribution of the brand in March, so it was still very small but we never expect about the opportunity that the brand brings to our portfolio, to our position in Canada, very strong, very important addition to our total portfolio and more important a brand that has an even higher breadth under it's market share.

So, it's going to be the game changer for us and difficult to take over the number one position at high end. That is what we are looking for, we are investing, better execution, what was in the old premise, in the high end of incentives but also looking to shelf space in off premise and take advantage of the whole position of the brand.

The price point of course, is consistent with the high end segment, so it is above average and that's why we think it's going to be not alone for market share but also for EBITDA performance this year in Canada.

Great, thanks, I'll pass it on.

Thiago Duarte, BTG

I want to get a sense, a little bit on your guidance, why you decided not to change your 2014 revenue guidance in spite of the government decision to increase tax hike.

I understand that you're not disclosing your price strategy, but is it because that you don't expect a large impact, or is it because you're already expecting some sort of tax hike, when you first disclosed the guidance or simply I don't know because you're being conservative.

So, just to want to get a sense, if you changed your view or not in terms of the revenue growth for the year?

Basically, what we wanted to do this year and we've said this many times is to find a better balance between price and volume and the idea was to try to bring the price increases towards the average of inflation.

That's what we've been trying to do. Regardless of what was our assumption for taxes, what we're seeing now by maintaining the strategy of taxing -- going on tax increases, this is probably going to be a different mix than we initially thought. Okay.

But continue to believe industry volume will resume growth, that's what we said and continue to believe. And that (inaudible) to single digits or double. The only difference that maybe potentially before we wanted to and we still think is better for everyone. Volumes would grow more than they were growing and potentially inline or more, that's impressive matter.

And now with this as you press it on, taxes to prices, there will be once again a bigger impact in this, high single to a low double, a bigger impact on price, than it was there before, if there were no price increases at the moment or at the magnitude, that was announced.

Okay, thanks, that is helpful. And just if I could make another follow-up question on the SG&A. Can you quantify how much of G&A expenses increase had to with these bonus accrual timing thing.

And another way to put this is, is it fair to assume that when you think of the SG&A increase this year, since I know that you're keeping your guidance for the year, is it in fact to say that you're going to seeing a pattern that's similar to what we saw last year, which was a very big increase in the first half of the year and then you adjust that in the second half of the year, of course the World Cup, we'll have to do a lot with that.

Regarding the SG&A, what we guided for the year, actually we'll have sales and marketing as well as expense growing double-digit, but (inaudible) should grow below inflation and despite the quarterly results, we also grow double digit.

This is just about phasing because of the timing of bonus accrual you might remember that last year. We had full performance in the first quarter, there was - it's consistent with that. We did not have as much as bonus accruals we just had this quarter, so just about timing, we might change this to, totally we're seeing the plan for the year.

While you (inaudible) as you anticipated it has to do a lot with the phasing before the World Cup, actually in Q1, we have even lot of different call in terms of timing of sales and interest expense because Q2 last year, we already had the Confederation Cup effect.

So the differences for the World Cup, we kind of started earlier, the investments, and therefore, it rather appeared affecting Q1 2014, with the other case last year, but that should be more consolidated as well as in the second quarter, and then for the balance of the year, also still working - to get more favorable in terms of growth rates for 2013.

Okay. Thanks.

Lore Serra, Morgan Stanley

I wanted to ask a bit about the first quarter revenue per hectoliter in Brazil. We saw 7% sequentially which is one of the biggest declines we've seen.

I know last year, it declined and you talked about the phasing of [ICMS], but I'm wondering if in addition to that, you also are seeing the industry moving to a bit more of a -- sort of a more moderated price increases or whether there was pricing pressure or, what drove it.

And then, along those lines and I guess intend on what the question asked earlier. The industry is making good to try to sort of get pricing to a level that's not so high relative to inflation, and volumes are responding, and clearly you were surprised by this tax news, I think that's pretty clear. And I know you don't want to comment whether it can change, but do you sense that there's an openness to those kind of an argument, or do you sense that, okay, June 1st is coming and that's kind of where we are.

Net revenue per hectoliter did decline, between fourth quarter and Q1. It is somewhat usual, I mean, we have seen this, at different levels in the past 3 years as you actually mentioned in your question. The reasons for it to happen are the same ones; from last year actually, now the state (inaudible) tax update in the beginning of the year, sort of a calendar.

The seasonal promotional activity mainly around the Carnival, in terms of, I guess you're trying to refer, how those really in terms of competitive landscape. We feel that people are under pressure for the most part and either from us, executing well and gaining momentum towards the World Cup, which are really excited about.

And as you also wrote in your report this is the type of tax increase that is impacting everyone. So, what should I actually think from a competitive standpoint is also a good momentum for us. We're going into a very strong quarter, we have everything going for us, you have got some tail wind from volume and sheer perspective, and I see people under pressure so that doesn't change my view on the timing or anything.

In terms of expectations, after the increase, I guess after the increase of 4% in April, we did not expect another set of tax hikes within 30 days. I mean, that's not expecting because it was the first one. That said, it's fair to say that what was not consistent with the tax framework we don't -- any changes in terms of legislation or anything like this.

So the fact is that I do update the reference based price from time to time is usually in October. It is important to remember that (inaudible) has been postponed by the government. The time for the (inaudible) date was not set, although directionally, I guess, after April, most of the people was expecting after the World Cup.

Yes, we are of course trying to address the all primary surplus target there, issues. We think at the end, you can get their through volume and that usually helps investment and job creation and inflation.

And we will, as an industry, continue to work on a dialog with them, with intent of showing once again that we can get to the same place or close to with a different mix but I don't want to get into any speculation whether there is change or not but what I can say is that we are always looking for a seat at the table to fill this. There is no reason for saying because it will establish or because of this or that you will give up, oh, we never give up. We will be there day in day out the team the industry the business to try to -- to revert always or to revert it then to avoid, so that's why we are being very transparent in this sense.

At this stage, we will put the price on in terms of timing. Better than last year in terms of competitive pressure, better than last year so on and that's sort of where we stand on this.

Okay, that's helpful. And then I mean understand that the soft drink business is in a different cycle in terms of it didn't have such a tough first quarter 2013.

But if you think about soft drink versus beer at the consumer level, obviously there is a big competitor in soft drinks but probably would act in a similar way. Do you see any difficulty or more challenges in terms of the outlook there with the taxation you faced versus what you are seeing in there?

From a taxation standpoint, if you add up the increase in October 2012 with this one, they add up pretty much to same number arithmetically with the mix being different. It was higher for soft drinks than beer in October 2012 and now it's higher for the year than it is for soft drink.

In terms of consumer environment, I think it's the same with maybe soft drinks in the past couple of years suffering a bit more from the elasticity of the industry. So for the type of price increase, they have suffered more volumes than not -- than beer, right?

On top of what you say the easy comps and this and that we -- at the same time we are not outperforming the industry. So the proposition from a commercial priority or brands, it is good I mean I don't think that was behind Guarana, it's been working well, and we have some of those same things going on for the other brands and the launch of Limoneto H2Oh! major success, early results from the last (inaudible) was very good.

But using some of those concepts of (inaudible) performed very good. We have maybe the best market share for the first quarter ever in a long time. So consistently rolling gaining this year lot of Guarana in fact continues to have growth. The activation of last year with [Folkstone] and Neymar was great. It will be the same or better with [city prowl] this year (inaudible) should be the number one brand, consumer brand, and the number of fans in the Facebook.

So I think we have a good top line momentum easing the pressure that the industry does feel, giving the elasticity and the different price increase that went through in the past 2 years. And when you look at the price tables, you will see that a lot of the retail brands are suffering also very big increases and that's why the a brand or the two biggest companies continue to gain share.

And just lastly, I know you guys don't like to comment or give guidance on the tax rate but do you see the first quarter tax rate as representative of what it might be for the full year?

Our effective tax rate in Q1 was well in line with last year. As you said, we don't provide specific guidance on each year, but as we disclosed in the press release, and well I think what's important to keep in mind that we should continue to maximize [IOC] since it is a most efficient way to return excess cash which I hold, and this has a clear impact in our tax rate and should be the main driver to explain improvement versus last year or go other line which are also part of the effective tax rate, may vary or behave different from last year. So for instance some of the goodwill amortization would have the expiry and some other (inaudible) should decrease.

So I think what we saw in Q1 is consistent with what we have been talking about and the driver that should probably behave the same moving forward.

Thank you very much.

Fernando Ferreira, Bank of America Merrill Lynch.

I had a few questions actually, first one, I appreciate your comments on the taxes, but I just wanted to understand what do you think happens in October? Are you expecting other increase to the multiplier?

Well, Fernando, thanks for question. In accordance with the current inflation there is another increase of 2% which is just one-twentieth of what's happening now for the so called multiplier.

That's pretty much what is in the legislation. There is no schedule in terms of price tables. So that's where things stand in terms of what is said in the legislation. We appreciate that government is looking for always to improve their own primary results, but we'll continue to work on a dialog with them with the intent of showing once again that tax revenues can grow the same way based on lower tax burden in the industry, greater volume growth, I mean, we'll continue to do exhibit that, showing the numbers, showing the data, showing there is a different way to get there to impact whatever, this one, the next one, whatever it is. So it's now a part of one of the things we do for living. There is a 2%, what's going to happen, can be the truth and can be a schedule (inaudible). And for sure we'll be back to try to minimize whatever impact possible, given that we don't manage this line, we have to invest strongly behind our brand, make the best World Cup possible, continue to improve our market share position, and really execute as far as the World Cup, and mission affordability, and the price premium or the premium strategy overall with Bud, Stella (inaudible) which are really doing well but with a lot to do and get you to I think the deserved position for all of those brands.

And then shifting out of Brazil, when we look at the HILA-Ex, we have been observing very strong margin expansion in each and every quarter last year, and this quarter you had flat margins relative to first quarter last year.

So just want to really an update on where you are on your synergies plant and what can we expect for the balance year in terms of margins? Thank you.

Yes, I mean -- I still think there is definitely room for margin expansion. From a synergy standpoint the first phase of the announced synergies two years ago of (inaudible) has been achieved.

So we are doing much better. There are some months or quarters in beer we already have sort of 50% margin. But the business there has soft drinks, has malt, has other things, there is no reason for the business not to have the types of margins that you see in Brazil. You have to remember that in HILA-Ex you have Guatemala, you have Cuba also, so you a collection of other countries where we have different strategies, right, I mean, in Cuba we know there is more synergies to be captured for sure. So, and then in Guatemala there is the strategy is gaining share on a very important manner, we tripled the share from a couple of years ago, we tripled the volume from a couple of years ago.

We have just launched the Corona (inaudible) which is actually doing great, and very quickly took about 10% of our volume, but is a very competitive country. So, if you were to look the expansion in there continues to be substantial, but still away from where we want. Guatemala big investment especially given the launch of Corona, very special end the big fight between Brava our main brand and the two other brands of our competitor. And then Cuba which is a new addition to (inaudible) which already is showing margin expansion but still a lot to do, so what you saw in this quarter is not a reflection of what we see going forward for the next couple of years.

Okay. Thank you.

Thank you very much.

Armando Perez, Credit Suisse.

And my question is regarding the state taxes, if you could give us a sense on how are these -- how have these increased in the last years, and what is the current level. And following this question and what's the general environment of the state taxes right now, and I guess, what I want to ask is if this updating reference prices and change in anything to state taxes, thanks.

Yes, we have 27 states (inaudible), there is eventual changes here and there, but there are no specific changes worth commenting. So, they are based on the different legislations of the different states and they are mostly based, mostly not all, but mostly based on price surveys, and that's it. So if there are impacts on price, then there is a catch up between three months to once a year depending on, again on the state, of catch ups of price increases which are indirectly, if you want related, but zero direct relation between reference price tables of federal tax and the state tax, that's pretty much it.

Okay, thanks.

Yes, you are welcome.

Jose Yordan, Deutsche Bank.

My first question was answered already, but I had another question on Canada because you mentioned a change in accounting methodology deconsolidating from distribution companies, but I would think deconsolidating a lower margin with presumably a lower margin business would actually raise your margins in Canada. So any color you can give us if it's appropriate in this call, about the accounting change in Canada, and just in general what do you expect for the year in terms of revenue growth and profitability given the additional, the Corona brands and these accounting changes, mixing it all in, what's the final impact, any color would be great on that.

Okay, Jose, well, actually we had this change in accounting method, the outcome of the distribution company, so that's why we even disclosed it as a separate, let's say we did it as a scope to give more clarity on the performance, and then as you said in your question in the margin drop, it's not leakage it's deconsolidation. You mentioned a distribution, a business, the margin drop is mainly driven by phasing off SG&A, we had a concentration of marking these investments in Q1 that should be of course be floated in the following quarter. So that is the main driver for the margin compression we saw there. Not to mention the industry decline, (inaudible) was very tough. We had a little Easter, and despite this industry decline, I think it is important to say that the [beverage] industry declined 2% broadly, our reported volumes declined only by 1.3%. So as expected we have been improving our share in the market with the addition of Corona and Mexican brands into our portfolio. Of course Q1 had just the beginning as we said, but we are confident that for the remainder of the year, I mean, (inaudible) the Mexican brands brings you a slow execution, they are not in terms of topline, but also in terms of the bigger perspective. So, if you want to have a sort of one last component, as I said, given different timing of promotional calendar, sales and marketing expenses, so that should be reported in the following quarters.

Okay. But we should assume that your economics for the Corona business are better than your existing business overall in Canada or -- and obviously it's a higher price, but it doesn't necessarily have to be higher margin for you depending on what the arrangement between Modelo.

The components are definitely attractive. It's positioned in the high end segment (inaudible) better pricing, more important, the growth potential is one of the best we have because it's a segment that is growing, there is a very high bracket -- of course we are investing up front to capture this full potential by focusing on improved distribution, improved execution, but we have no doubt that the economics is -- I have no doubt that the economics are attractive. The whole production process is done on an (inaudible) basis like all of the licenses we have, and we are (inaudible) in effect at three different parts of top line, but also following data bottom line given the higher margin for the deal we have with the brand.

Great, thanks a lot.

Alex Robarts, Citi.

I do want to go back to the Brazil SG&A and there is two questions around that if I may. I think the 18% growth here that we saw year-on-year in Brazil SG&A, the cash SG&A, what's little surprising for us and I guess, the first question relates to this opportunity that I sense you are talking about and you referred to it in your comments around the premium segment, okay, and it's very interesting to note Brazil's situation globally, the upside to grow the segment is measurable, and you talk about the double digit growth in that segment in the quarter. And as we gauge the impact of that on revenue, and that's pretty straightforward, but I guess in terms -- but the question is really around the opportunity costs this year of building out this segment World Cup and such, so how scalable are your current mainstream marketing and selling activities and programs to the premium segment. And you talk about the dedicated trade and sales team here. Are these incremental or are they being financed by perhaps lower expenses on mainstream marketing. Could you kind of help us understand how this might evolve, this piece of SG&A around the premium segment, that would be great.

Okay. Hi Alex, I appreciate the question. We have today a much better segmented sales force than we ever had, I mean, it's a process that started more than a couple of years ago that every year you tweak to make it better. So, today if you come to Sao Paulo and you go to an upscale restaurant or a trendy bar or a fancy disco, the mix is different, the attention is needed, it's different, the sort of supervisor that you need is different, sometimes the delivery truck could be different. So, it's not that you now multiply sales force, but you do have different dedication by having a much smarter segmentation than what you did in the past so that you can provide a better service to the client, which will therefore enhance the brand health indicator and it will provide you with a better sales volume perspective. So the combination, it's very positive. Every time you make those changes from a logistic service levels standpoint.

It takes you some time to get this done, usually we do a pilot as we did in Sao Paulo capital, you see whether we make sense, you see whether or not the NPV is there, whatever further investment that you need or the eventual cost of segmentation is more than paid off by the sales and by the brand health indicator which was the case and then you start rolling that out for the different urban centers, the main cities of Brazil which is what we're doing as we speak after a very successful situation here, pilot here in Sao Paulo capital.

This is true for other situations such as the specific of trade, different size and different things which I think will continue to put us in a better position. So for us to make the premium happen, you continue to have the right positioning for the brand, the right prices for the brand -- premium brands need to be premium priced and that's what we're doing and certainly all the competitors but that's what we are doing, that's given very good results in terms of sales and market. For you to get there you need to have the backbone right and I will have the backbone right from a distribution standpoint and with greater and better package.

So all in all, I think this will continue to make the premium segment to grow in fashion than what was growing in the passion of course World Cup, it's again a very important moment to get this done.

So Alex, just to go back to the first part of your question, I mean we missed about the SG&A increase, just to make sure, I think we've also (inaudible) also in the release and the previous (inaudible) it was fully consistent with the guidance we give for the full year. So we remain very confident about delivering on our guidance and the double digit sort of growth we show that the 18% which we mentioned was a bonus expectation, has to do with phasing as I said of certain marketing (inaudible) this year given the World Cup, and specific timing of bonus accruals. When you adjust for that despite the full it would be adjusted interest, yes, this is all for quarters, we are back to the guidance we gave before.

Thank you. I appreciate that clarification Jamel. But just going back to the team, so if we get up to 10%, 9% 10% of your volume in premium this year, compared to let's just assume 7% last year, the revenue -- the marketing spend on a per hectoliter basis, it's higher necessarily, it's not a zero sum game, you've got to finance the build out of the --

Hello?

Yes, can you hear me?

No, you got cut, now we can hear you.

Yes, Alex, just to turn eyes on the question, it's a net positive as I said. The SG&A increased, Jamel just explained on the quarter, and when you look forward I mean we are as I said premium brands had to be premium pricing in premium market and premium business, I mean at the end that's what it is, it's not a zero sum game, you cannot be earning less dollars or less reais on premium than you do in mainstream, basically it. So I mean the strategy is one that is the win-win, win in the top line, win in the bottom line.

Okay, I got it, now listen. That's very helpful. And the last one is just, I was going to ask about the rest of the year and the trend of the SG&A, and it sounds like you guys are very much confident that you are going to hit the low double digit growth which basically implies 9%, it seems for the next few quarters but then I guess -- then I would just go to the tax question which is that -- the last time we saw the reference table move was in October 2012 and obviously there were some, you had a very interesting process there.

Could you share with us, I know you don't want to comment about timing and magnitude but could you share with us some other kind of lessons that you learned in terms of executing in this type of price increase? I mean we've seen this happen with the sugary drinks in Mexico earlier this year and what's gone on there. I mean is it safe to say that right now then with this tax happening in June rather than October, you are going to focus more on the affordability and is going to be a kind of increased attention to the pricing architecture and kind of any color of how you might think about going into the second half for the year as you push through those with the pricing on the packet.

Yes Alex, as we have said before we want to stay very high level here with just by saying that the strategy of we continue to be passing on any tax increase that has not changed, and for competitive reasons we will never get into the detail of the timing or amount of the price increase. I'm sure it's always to manage the optimal balance between price volume and mix, and of course addressing the point that I just mentioned to keep growing our top line in a proper way.

Sorry, I was not getting into more details but that's what we can say at this point.

Okay. Fair enough.

Thank you.

Luca Cipiccia, Goldman Sachs.

Just a couple of follow up, first again on the taxes. As you reminded, the change that we saw last week was unexpected but very much in line with the framework that was in place. So if we use that as a backdrop then other adjustment in the multiplier that is scheduled for October this year. So my question is shouldn't the working assumption be that this adjustment will happen as well and otherwise you have been just sitting up for disappointment, my point being the difference between what was the competitive was largely due the fact that the government last year didn't make the changes that were scheduled. So that would be just the first question if you could comment on that.

And secondly, just quickly related to this. If we assume that beer prices will simply keep going up in line with this plan adjustment, are you expecting somewhat of a change in market share dynamics towards even assuming that the premium will continue to grow with somewhat more affordable brand. Are you willing to take more market share losses if we start seeing consumers recently mainstream trading down maybe to some of your competitor? How would you see that play out vis-a-vis market share and not only pricing? Thank you.

Starting with the second part of your question, we will not be accepting any share losses, our stated desired range continues to be the same, 67% to 69%. But we want to be in the range in a profitable manner, we've been able to do this throughout the last 24 years since we put together the Company we are -- or less 14 if you want, since Ambev was created.

So being able to manage market share at the profitable level. I believe we have everything going on for us to continue to do that, right. So because we want to be there in a profitable manner, that's why we have to have the -- I mean the price policy was desired to be in line with the inflation because we say that to be the sweet spot for us and for consumers. When there is a tax increase, we'll have to manage this in whatever sort of or timing to maintain this balance and we'll continue to do.

So I think when you look at research for the next 10 years, the population will continue to earn more than what they were earning before. So in the past 10 years, maybe people were earning 100 billion more than they earned before when you enter 10 years. Projection is that people will go up another 100 billion so the people because they already went from B to C and now they are going from C to C plus or B minus, they have even more, they are in a better situation, they don't want to come back to lower price brand.

So I think the portfolio going forward that to have today is the best we ever had and very comfortable with the portfolio be it from a value or a value plus a mainstream minus a mainstream plus or a premium or a super-premium. But having said that, we'll make the portfolio even better, right, either by working better with the things I just said either by continue to work with innovation so we have different things such as a liquid, that's liquid everywhere from zero, five months, leader in the segment, 40 plus share. The 300 addressing (inaudible) other things that could come from CSD and NANC, with terrible impacts -- we have a lot to do. And I think with the demographics that actually will help us and there will be no hiccups along the way. I mean we are an emerging market, there are things we have to manage, we'll be close -- managing closely. But I think portfolio is better to face that type of situation even knowing what's going to happen. To the first part of your question, I think whatever happens in October will be much smaller, in any way shape or form than what's happening now.

Let's say thinking of something unless there is any changes to legislation which is of course not expect. So I think whatever was big, that was out there, it's what was now announced last week.

Okay. Thank you. Very clear. Thank you very much.

Thank you.

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

Well, thank you Maurine and thank you all for joining us today and we look forward to speaking to you again on July 31st. Thank you, bye, bye.

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