Ambev SA (ABEV) 2014 Q2 法說會逐字稿

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's second quarter 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 a listen-only mode during the Company's presentation. After Ambev's remarks are completed, there will be a question-and-answer section. At that time, further 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 Q2 2013 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.

Okay. Thank you, Chad. Good day to all and thanks for attending our 2014 second quarter earnings conference call. I'll start with the performance highlights for the quarter and then Joao will cover the Brazilian operations in more detail. I'll then return to go over the results of HILA-Ex, Latin America South and Canadian business units, Ambev's financial performance, before opening up for q-and-a.

So let's get started. On a consolidated basis, our net revenues were up 9.2% in the quarter, mainly driven by the double-digits top line performance in Brazil and Hila-Ex, finished the first half with a solid 13.1% increase over the same period of 2013.

When looking at our second quarter EBITDA performance, our top line growth was partially offset by one time gross margin impact in Brazil and a flattish performance in Latin America South and Canada, leading to a 5.4% EBITDA growth. Nevertheless, we finished the first half of the year with a solid double-digit EBITDA growth.

Looking at our divisional performance, for Brazil net revenues are up 11.3% and EBITDA increased 7.2%. Hila-Ex net revenues rose 19.2% with EBITDA increasing 18.4%. Latin America South net revenues were up 6.9% while EBITDA was down 0.6%. And finally, in Canada net revenues grew 0.8% with EBITDA at minus 0.3%.

Joao, over to you.

Thank you, Nelson, and good afternoon everyone. It will be impossible not to start talking about the 2014 FIFA World Cup and the big party that took over Brazil during June and July.

Since 2011 when we starting planning for the event, we embraced the dream of making this the best FIFA World Cup ever. It was a big dream, even more without the skepticism we saw around the upcoming event. But we like to dream big and we never give up.

The FIFA World Cup is the biggest sporting event in the globe and we wanted to make it even bigger. And that's what we did and results were better than expected.

During slightly more than 30 days, soccer and non-soccer fans experienced a huge party that took over Brazil, celebrating with their loved beer brands in stadiums, funfests, homes, bars, restaurants and thousands of events organized around the country. An event so big that, on June 11, we had the best selling day of our history, with more than 400,000 hectoliters of beer sold in Brazil. Just to give you an idea, this would be similar to selling in one day more than all of the incremental volume estimated from the Confederations Cup last year.

According to our estimate, the FIFA World Cup drove approximately 1.4 million hectoliters of incremental beer volume to our business, above our initial forecast of four times the benefit of the Confederation Cup.

Along with strong volume growth, we gained 90 basis points of market share sequentially, with the best monthly figure in the last 2 years in June. Brahma and Budweiser were the official sponsors of the event in an outstanding performance. Brahma preference was up 10% and now from -- going forward, it will be impossible to think about soccer and not to think about Brahma.

Along with market share gains, Budweiser also reached its all time high preference. Brahma 0.0 also continued to outperform, leading our non-alcoholic beer segment that more than doubled during this period. Brahma 0.0 has been one of the most successful innovations in the last few years.

Another very successful initiative was our stadium cups. Customized for each match, it became a must have collectible item for anyone that went to the stadium and even the ones that didn't. They were also so [distributed] that you can still find them on online auctions websites.

Within CSB, another strong performance led by Pepsi and Guarana Antarctica, the official sponsor of the Brazilian national team. Our promotion with Neymar and other soccer stars was once again a big success with more than 10 million pin code registrations during the quarter, driving brand loyalty, new consumers and enhancing the equity of all of our CSD brands. We actually leave the second quarter with the best market share in CSD history, 19.3%.

The FIFA World Cup is just over and the results have so far been encouraging. But we are just halfway of our plan for the year. We will continue to invest behind our brands and commercial initiatives in the second half, enhancing the equity of our brands, driving volume and market share and confident we are on the right track for building the momentum in our business we are looking for.

With that said, let me walk through our operational performance in Brazil. We had another quarter of double-digit top line growth in Brazil, with an increase of 11.3% year-over-year, mainly driven by strong volume performance in beer and CSD. Given our strong top line performance in the first half, we now expect to reach the upper end of our guidance in Brazil of net revenue growth of high single to low double-digit.

Our EBITDA grew 7.2% in the quarter and 11.4% year-to-date. During the quarter, we experienced an EBITDA margin compression of 170 basis points, fully explained by a one-time packaging mix impact that I will go into detail when we talk about COGS.

Brazil beer net revenue grew 11.2%, with a volume expansion of 7.2% and a net revenue per hectoliter growth of 3.8%. After a very strong performance in the first quarter when our volumes were up 10.9%, we continued to grow in April and May and even a stronger performance in June driven by the World Cup and a 90 basis points of market share gain quarter-over-quarter, as already highlighted when I talked about the World Cup.

Our premium brands led by Budweiser also had a very strong performance along with innovation, mainly through Brahma 0.0 and Skol Beats Extreme. Net revenue per hectoliter growth was driven by our revenue management initiative, including the World Cup without price increase initiative as well as specific promotions during the time of the event.

At a time when you would expect prices to soar overall, beer price to consumers are actually growing below general inflation since December of 2013. The campaign is over, but as we move forward, pursuing the optimal balance between volume and price will continue to be key for the success of our strategy in the short and medium-term.

Our CSD & NANC business had an outstanding volume performance, mainly driven by market share gains. Net revenues are up 11.7%, while volumes expanded 8.8%, driven by a market share gain of 120 basis points on top of an industry that grew 1.1% in the quarter. Both Guarana Antarctica and Pepsi had a positive performance, growing market share and volumes.

Our non-alcoholic non-carbonated portfolio also saw the good performance led by the energy drinks. Net revenue per hectoliter were up 2.6% as a result of our revenue management strategy and specific promotions during the World Cup.

Our COGS performance was the negative highlight in Brazil, as COGS per hectoliter grew 12.3%, driving gross and EBITDA margin compression. Half of this impact was one-time though, driven by a negative mix impact related to the World Cup.

Our performance was also impacted by higher currency hedges, partially offset by more favorable commodity hedges, in line with our view for the year. Important to mention, our guidance for COGS per hectoliter remains the same and we don't expect any significant quarter impact year-over-year from mix shift as we head into the second half of 2014.

SG&A was 5.3% higher, driven by increased sales and marketing expenses, as we kept investing in our commercial priorities and behind the initiatives related to the 2014 FIFA World Cup and higher distribution costs explained by volume growth and increased rate of the distribution. Going forward, while continuously investing in our commercial priorities after the World Cup, we remain committed to our full year guidance.

Before I hand it over to Nelson, I just wanted to close with a quick summary of Brazil. First, we closed the first half with a solid double-digit growth for both top line and EBITA in Brazil, which grew 15.3% and 11.4% respectively, while gaining 90 basis points of market share on a sequential basis to 68.4.

Second, the 2014 FIFA World Cup was a great success by any measure and a very unique opportunity to leverage our sales and marketing strategy. Third, we reiterate our full year guidance, but now expect our net revenues to be at the upper end of our high single to low double-digit growth.

And finally, as we move forward, this is the year to once again build momentum into our business after 3 years of softer volumes and a particular tough 2013, when we faced high food inflation, at a time beer price were up double-digits to have set a big tax increase into late 2012. Weather also didn't help and disposal income growth while still positive was weaker.

We decided to take advantage of the positive industry momentum that should happen in 2014 and take the most out of it to fuel our top line growth, pursuing an optimal balance between volume and net sales per hectoliter and aiming at price to consumers back to January inflation levels. This is what we mean by fueling the momentum that will drive our business not only in 2014, but 2015 and beyond.

As we go after that, we have a robust sales and marketing plan that started in January and will continue to be executed throughout the year, focusing on enhancing the equity of the brands and connecting with our target consumers in different -- each states and consumer occasions, improving our pack price strategy, expanding the distribution of the 300 ml and the 1 liter returnable glass bottles, leading the growth in the premium segment through our international brands Budweiser and Stella along with the local jewels like Original and the Bohemia family, expanding consumer occasions through packaging and equal innovation, improving the consumer experience with our brands through investments in points of sales in our franchises, and executing specific plans at target geographies where we see volume and market share opportunities.

As said, the World Cup is over, but we'll continue to invest behind our brands and commercial initiatives, while balance the volume and price to maximize our top line growth.

Nelson, over to you.

Thanks, Joao. Let's take a look at our performance outside Brazil now. Beginning with Hila-EX, we delivered BRL141 million of EBITDA, 18.4% above last year. This performance was led by the Dominican Republic as our top line was up double-digits, mainly driven by a strong volume performance.

Our EBITDA also grew double-digits to come out of the quarter of margin expansion as we continued to capture cost opportunities from the integration.

In Guatemala, our World Cup execution and the launch of Presidente were important drivers of volume growth and market share gains.

Let me turn to Latin America South; EBITDA declined 0.6%, driven by a challenging economic environment in Argentina that significantly impacted the second quarter volume performance. In the second quarter, we faced in Argentina a double-digit decline in April, followed by lower mid single-digit decline in both May and June. Important to say, July volumes already showed signs of recovery.

Top line in Latin America South was up 6.9%, with volume decline of 4.4% offset by net revenue per hectoliter growth of 11.8%, impacted by the late timing of price increase and targeted promotions. COGS per hectoliter in LAS was up 13%, impacted by packaging and labor related costs as well as lowered evolution from volume decline.

SG&A, excluding depreciation and amortization, was up by 16.2%, driven by higher sales and marketing expense and distribution expense driven by the World Cup and inflationary pressures in Argentina. We remain cautious about the overall environment in Argentina. Nevertheless, we had seen similar conditions before and had the know how to deal with it, leveraging on our strong brands and a very experienced team in place fully committed to keep delivering strong results in the short and middle-term.

Looking to the second half of the year, our revenue management initiatives and our focus on tighter cost management in Latin American South to adapt to the industry conditions will be key drivers to protect our profitability.

Finally, Canada; in the second quarter, advanced reported volume grew by 7.1%, driven by the inclusion of the Modelo brands in Canada into our portfolio for the first full quarter, as well as some signs of industry resurgency due to improved weather.

Despite the continued competitive environment, our brands had a good performance in the second quarter as Budweiser and Bud Light both retained their momentum from first quarter. Likewise, our high-end portfolio continued to build equity and was further boosted by strong share performance from Stella Artois to start the summer, as well as successful innovation routes for Shock Top and Rita families.

Our net revenue per hectoliter was roughly flat at 0.4%, offset by the real impact of our revenue management strategy, while COGS per hectoliter increased by 3.4%, driven by product mix and currency hedges.

SG&A, excluding depreciation and amortization expense, was 1.2%, driven by our sales and marketing investments, which are mainly concentrated in the first half of the year, including innovations such as Shock Top extension, the 8oz Quickie cans and the 3 Below Coolers.

As a result, our normalized EBITDA was almost flat in Canada versus a year ago. Looking forward, we continue to focus on the balance between reinvigorating the core of our business, while taking leadership of the segment growing the most in Canada, the high-end.

As we execute our plans, we expect a stronger top line performance through the second half, mainly driven by our revenue management strategy that allows an improvement in cost management, should drive better results as the year progresses.

With that, I'd now like to go through the main items between the normalized EBIT of a little over BRL2.8 billion and profit of nearly BRL2.2 billion in the quarter. Our net financial results were a massive BRL298 million, an increase of BRL30.7 million versus second quarter last year, due to high interest rates mainly driven by a one-time expense associated with litigations.

Effective tax rate corresponded to 10.4%, benefiting from high interest on capital and partially offset by lower benefit from amortization on tax books and other tax adjustments. As a result, our normalized profit was BRL2.2 billion in the quarter, 16% above last year and our normalized EPS was up 16.7% to BRL0.14 in the quarter.

In terms of cash flow, we generated from operating activities almost BRL3 billion in the second quarter, which represent an increase of nearly 16% versus the second quarter of 2013 with an improved working capital management. And this strong cash flow generation supported the announcement on July 14th of a dividend and interest on capital distribution of BRL2.5 billion that will be paid as of August 28th.

Year-to-date, we have announced close to BRL8.5 billion in cash payout, a 6% increase over the same period of last year.

Now, Chad, could you please repeat the instructions for Q&A?

(Operator Instructions).

Fernando Ferreira, BOA-Merrill Lynch.

My first question, just looking at your guidance, it seems that you are still confident that this margin pressure was mostly a one-off in Brazil and that we should see normalized levels in the second half. Just wanted to get more color on that front.

Okay. Hi, Fernando. This is Nelson. I think the main, as I tried to highlight -- I mean the main item that put pressure on all the margins in Brazil, our EBITDA margins -- and actually not the gross margins -- in the second quarter was the COGS per hectoliter performance. That was a double-digit increase. And when you look into what drove this increase, I would say that more than half or around half of it was driven by a mix situation which was an important change in terms of packaging mix in connection with the World Cup.

So the special packaging and the increase of cans as a percentage of our total mix drove this increase. And we don't expect any material impact as such for the second half. So that's why we really emphasized this impact as the element that drove the margin compression in Brazil in this quarter -- if you would say just for the sake of the analysis, right?

I mean just consider or look at the cost at a constant mix, our margins would be pretty much flattish in Brazil. And of course given the strong top line performance, that's what we would have seen.

That's pretty clear. Thank you. And I had a question on Beer Brazil. I mean given the decoupling we saw from the production data and sales in Q2, I just would like to get a sense I mean how are inventories in the systems and what can this mean for your sell-in volumes there in the third quarter?

Hi, Fernando. This is Joao. We never talk really about the specific levels of inventory or the stock there. I mean there -- is available, and it's production and not sales. Right. But what we said is there was no necessary build up when you put everything together. So I mean we continue to be optimistic, as I think we said in the speech. We had the idea of really building momentum this year. As in the year we already promised a few things to ourselves, which was to take advantage of the World Cup as a good year and give also the tough comps to work on the volume side.

I mean we came from 3 years of, let's say, tough volumes, of a good pricing, which overall give us good results, better results in 2011 and 2012 and softer on 2013, but still double-digits. And we're talking -- this is the year to have prices to come in line with the inflation and there is a cost to that. And the volume so far is more than offsetting it. And in the World Cup, as I said in the beginning, life is working better than expected.

One from the volume side, which we said 1.4 against 1.2, but for sure from the market share and from all the brand health indicators. So when I look forward not just on 2014, but 2014 and beyond, I get excited. I mean if you look at the volume drivers -- let's just talk about inventories in the short-term, which is definitely not a problem. I mean I look at price to consumers, trending below inflation, which is in line with the stuff I just mentioned for the year and for building momentum going forward as we did in other times of our history.

Second, real disposable income growth continuing to hold regardless of GDP deceleration. And we know in our industry model that's what counts, real disposable income and price to consumers. And third, of course there is the better summer that we had in the first quarter, which is something that we don't control, different from price or real disposable, which we don't control but it's a macro indicator. But that combination even without the World Cup, the second quarter underlying volume growth would have been 2.8%, which is maybe one of the best we've seen in the last 3 years and around 7% for the full semester, of course which is impacted by a better summer. But you can just see how much an impact that can be either on the year or because of the tough comp.

But I think that's a pretty healthy and good combination, the 2.8% for the quarter and the 7% for the full semester. I mean that gets me excited in the sense that what we've been doing so far has been working. So we are taking the brands, we are taking the share to new levels. Then we still have a lot in store to give then for the year and for the middle term.

That's clear. Thanks, Joao.

Thank you, Fernando.

Lauren Torres, HSBC.

If I could just follow-up on the EBITDA margin comment -- some question you had. I understand the issue and the concern obviously in the second quarter and that shouldn't be as much of a factor in the second half. And I know you don't give quarterly guidance. But with that said, I think you'll be cycling some tough margin comps in the second half. So I don't know if it's fair to say that looking at the first half and what you'll be cycling in the second half that it will be hard for you to actually achieve a margin improvement on the EBITDA line for the full year. Is that an okay assumption or there is an issue where you think you can improve margins?

This is Nelson. I just said we don't provide a specific guidance on the EBITDA margins. I mean the guidance we provide on the different drivers of the business, I mean we already talked about that, what to expect for net revenue, which today is at the upper range or upper end of the range. We provided COGS per hectoliter and SG&A. But also no doubt about it, I mean we are going to have a tougher comp particularly in Q4, as you know when I talked about that before, given the one-time gains we had last year and again particularly Q4, the one related to the [pension] comps.

So as I said, I mean there is no specific guidance or margins. But at the same time, we stick to our full year guidance. And actually when you look at our EBITDA margin on a quarterly basis -- I mean what we think is not the best approach as you have different factors such as seasonality, business commercial investments which were first concentrated in Q2 and Q1 this year given the preparation for the World Cup, the one-offs I just mentioned.

So the quarterly margins are something we don't really look and we don't even look it as a best way of looking at the investment. I think the bottom line is that we like the margins we have. I mean we don't say ourselves that the margin is big. That actually has been the view of the last 5-10 years. And at the end of the day, we always were able increase it over time in the longer run. Of course there's some quarterly volatility because of the factors I just said. And always bear in mind the low hanging fruits are not there anymore. But still we think we have the levers like commercialization, the unique innovation, EBIT growth, a healthy -- especially with the -- during momentum of this year, which could drive fixed cost evolution, we know that, the next time volumes are up.

We have a natural improvement in margins given fixed cost evolution, for the deficiencies, for the EBIT improvement to name a few. So we like to say though the EBITDA margin is big, but what -- comments on a quarterly by quarterly basis because of the natural volatility.

I think particularly this year, as was said, I mean we are working to build momentum into our business and at the same time results are coming, right. I mean we look at both top line and EBITDA growing double-digits. So that's what you want. I think I already emphasized it in terms of the strategy for this year.

Joao, you want to add something?

I would like to say -- I mean, first, I think as stressed by Nelson, I think there is still a lot to gain in terms of margin when we look long-term. And from time to time I mean you have to take advantages of the -- as we also said before, when you have strong commercial initiatives, when you have a big event as we had in Brazil, how can you best position yourself to do this. And it's good to do that from time to time to either revert the trends that you don't like or to attribute trends that you want to get to.

So I think this is one of those special years that we can either revert things that we don't -- that we say that we don't like, but really also fuel and enhance and take advantage of either a big event or things that we have in store that can combine to -- and I mentioned some of them, right? I mentioned enhancing the equity of our brands. And guess what? I mean best levels for Brahma ever. Best levels for Budweiser ever. One of the best overall that we had in the last few years.

And then I said improving also share. One again, best in a couple of years. And depending on how you look, also best in 3 or 4 years. We said we will double the size of the premium segment. I mean guess what? We pretty much got there for one quarter. I mean we said let's lead that segment with a combination of our brands. Once again guess what? We are there.

Let's give consumers new occasions with different programs and franchises. Let's provide events for everybody so that they come back to the bar. I mean guess what? We are going to do close to 100,000 events this years, a knowledge that we build along the last 2 and 3 years that are very hard to copy, that knowledge and the know how that we didn't have 3 years ago making a huge difference in order to bring this World Cup for everybody. But also that means people once again going out, enjoying our beers, enjoying an occasion. So I mean that's sort of it. I mean a long answer for a short question. But excited with the long-term and for sure building the right things in the short-term.

Okay. If I could just ask a quick follow-up to that. I appreciate those comments on your business and obviously that's where the focus is, about initiatives you have in place. And yourself and InBev seem rather confident or modestly positive I guess on the consumer. But in the next 12 months are you seeing signs of a recovery? Obviously, you have the bump from the World Cup. But as we think 6 to 12 months out, are there indications that the consumer is kind of coming back and you are seeing more glimmers of hope in the whole story?

I mean, again without giving any volume outlook -- you know we are not going to get to that level of detail. I think there is a couple of ways to try to give you some of our views.

First, too early to talk about, let's say, 2015. I think we have been saying for sure the World Coup will be a hard comp. But we continue to see on the long-term very important drivers. I mean GDP growth for Brazil projected to be 1.5% every year until at least 2030. I mean we will be a young nation on the -- the way the books are written or the way the theories looked at that. Real income growth, which is a big lever for us, continues to be positive, continues to hold despite the GDP. So GDP is not the best metric.

There is incremental benefits from all the things that I told you that are not macro. I mean how do you prepare yourself for a tougher macro? I mean it was the right year to bring prices more in line with inflation.

When we look at the underlying 2.8% of the second quarter, again that's a healthy growth. In July it's too early to think about it because you are still impacted by the World Cup. So we haven't entered August yet. So if July was a reference -- but I don't think it is. So it's not worth going there because the World Cup was here, was until July 13th.

So I think those are the good things, short-term positive, long-term positive. This semester we will have to have a few more months. There will be ups and downs and volatility, but too early to give a view. I rather give a view on the very short-term that we went through or we are looking. And the long-terms is, let's say, 2015 and beyond. The semester is -- we are not going to give the details then. There is election; there is volatility. But again we are very excited with the plans which make a difference. So, whatever, the bottom outlook or the total top line, which is what we gave the guidance for.

Okay, great. Thank you.

Thank you.

Lore Serra, Morgan Stanley.

I guess I wanted to ask a couple of question around the theme of pricing. Yes, I understand the point that you are making that it was right year to take the pricing down and support volume growth. But the amount of pricing change quarter-on-quarter seems very strong and I wondered if you could just comment on where all the change was coming from in terms of the steps of pricing? Will you leading now? Was the market leading that?

And then as you think forward and you think about what's coming towards the end of the year, what's your level of comfort that you still have the pricing lever if the taxation scenario doesn't get any better? I take the point that the volume growth was 3% ex-World Cup, which is good, but the pricing in the quarter seemed to go down more than just what -- the mix alone which sort of imply? Thanks very much.

Thank you, Lore. Thank you for the question. I mean the sequential price impact was all related to the -- to all of our commercial initiatives related to the World Cup. When we look at the first half results, the net revenue growth is actually in line with the top most inflation -- I think that's important -- which is consistent with our revenue management strategy. And volumes are up high single-digit when you take the full semester leading to double-digit top-line growth, which is the focus for the year.

So it's not only looking at volumes, it's not only looking at price, but looking at the combination. Totally led by us -- I mean given that if it's led by the World Cup and we are the main sponsors as a consequence. And the drop is totally related to that. So it's activation, it's promotions, it's the cans, that combination and things that happened during the World Cup, with all the benefits of the memorable experiences and the volume. So there is the lasting effect of the brand health, okay -- as always the very positive volume pickup that we had.

Talking about going forward, the longer we can work with situations like summer without price increase, World Cup without price increase with minimum impact on your net sales practically -- the best. That for sure of course will depend on the tax outlook. So pricing in consumer, I think we are in a good situation today. But this will be impacted by the decision of what's going to happen with federal taxes, which we don't know. I mean we of course continue to work very closely with the sector, with the government.

I mean that's why we have been seeing those postponements, which of course were official. The decree was fully reverted, okay, which of course is good news. Dialogue is working. What was said out there is that whatever comes should be gradual. So the combination of postponing, say, is going to be gradual. It's a welcome decision, which I think was done because we are doing our part of the work showing that there is a win-win situation in tax collections, jobs and investments. And I think they are seeing that this is a reality.

If volumes grow 10%-12%, whatever, in the first quarter or semester, I mean this affects collections, right. With us maintaining high levels of investment, jobs are being created and all that. So I think it has been a win-win so far. And at the same time, I think we are both looking for a situation where there is less pressure on the pockets of our consumers. So by coincidence or not, we both want the same thing.

So having us coincide on at least three things, which is investments, jobs and pressure inflation. The only part that we may not totally criticize of course are the tax collection. I mean we can bring that through volume growth, then maybe we can fully expect the same thing. And we can continue this healthy dialogue that has been taking place not just in the last two years, but to be quite honest probably in the last six years or so. Whatever happens, we will back our decision. We are working to the scenario where we can have the less pressure on our consumers. But you know -- I mean -- what's (inaudible) gradual and postponement.

Great. Thank you very much.

Thank you so much.

Luca Cipiccia, Goldman Sachs.

Just starting with one point on capital allocation, if possible. Your balance sheet keeps getting stronger, even now somewhat a slight reduction in CapEx guidance for this year and looking ahead arguably it doesn't seem a reality to expect that that may reaccelerate. So assuming that acquisition opportunities are not necessarily there -- if not, secondary -- but if so, what will happen at the [API side]. What really should we factor in or consider? Is there really a constant increase in dividend payout? Is there another way we should think about this? Can you maybe discuss a bit that looking forward for -- not necessarily for this year, but also for the other years, for the other outlook?

Okay. Hi, Luca. I think in terms of use of cash and capital allocation, we have been consistent over time, and other results, I mean, of course, we also (inaudible) invest in the organic growth of our business. We have o course some tighter M&A opportunities, particularly in Central America. And we are always looking to maintaining the adequate level of liquidity.

But given the strong cash flow generation -- and I just talked about, for instance, Q2 cash flow generation from operation was around BRL3 billion. And of course that supported the announcement we did of BRL2.5 billion, which add up, as I talked, to a BRL8.5 billion announced payout between dividend and interest on capital year-to-date, which is close to 7% higher than what we had last year.

So I think under this scenario -- and of course I'm not making any -- or give any guidance on what to expect moving forward. But I mean the moving period -- that those that I just talked about. And I think, as we always said, I mean we will continue to make [five inches] of cash, while the most efficient way to return cash for shareholders. But bottom line, I mean would say these drivers or this rational around use of cash remains the same. And as the business continues to deliver as we expect -- I mean of course there is a growing trend with the payout to be of course defined over time.

If I can just rephrase my question. Do you feel that you are moving to a place where ultimately you are lacking options for capital allocation. I mean I understand the point of the payout, but are you satisfied -- I mean is this the type of balance sheet structure that you would like to have? Do you mean that nothing else comes on the horizon?

All right, I think look -- just to reinforce I think the point Nelson is making. I think what we are trying to say and we've been saying this for some time and actually been consistent with this, is we always look for new opportunities and I think there is lots of organic opportunities that's tied to the things I've just said for Brazil. I see that being true for many other countries we operate.

And we continue to look for non-organic opportunities as well. I mean we saw two of them in the last 2 years. I mean we entered Dominican Republic, I mean tripling results and becoming pretty meaningful. We entered Cuba as well. And we will continue to look for bigger things as well, whether they are in Central America or the Caribbean or beyond Latin America. I think opportunities will arise from time to time and we will take full opportunity of them.

In the meantime what we don't want to stop is continue to give back to shareholders in different forms the excess cash, because this is the theme since 1998, let's say, when we adopted indeed to do this, we continue to do so. So we continue to do both things; returning the excess cash and looking relentlessly for the organic and non-organic opportunities to deploy the cash.

Okay, thank you. Just very quick; I don't want to take too much time. Just as a follow-up, on the SG&A front, on the investments related to the world cup, you gave an indication of how much the second quarter was for volumes related to the overall. When we think about the cost and the investments, how should we allocate those between the second and the third quarter?

Well, of course there was an important impact of the investments behind the World Cup. And when you run the math, of course they were always EBITDA positive there, great volume (inaudible) we got. So I guess that's the first message.

Regarding allocation of SG&A between semesters, if that was the question, we stick to the full year guidance. I mean I'm not talking about a specific breakdown between quarters. Bear in mind that the thing where we invested in the winning commercial activities we had so far this year, as Joao said, we continue to support the great plans into the second semester as well. But again we stick to full year guidance.

Thank you. Thank you very much.

Thank you. You're welcome.

Pedro Leduc, JP Morgan.

Thank you for taking the question, and that will be on Brazilian beer and soft drinks, both of them. Historically, when we see Ambev gaining substantial market share like we see in this quarter, we usually see a little bit of pricing in the following quarters, exchanging market share for profitability, if you will.

So is this something that -- is the current market share at comfortable level, something that you guys have goaled for and now it's achieved so we could see now more this revenue path that you have increased guidance for actually to the high end, more pricing driven to balance as well the EBITDA growth in the coming quarters?

Hi, Pedro. This is Joao. It's a very good question. Whenever we look at our long-term price strategy, has been to have prices going up in line with inflation. And there are times when you are more pressured or there are times where you are less pressured, okay, by the market condition. I mean we saw more pressure from the market since 2008, much less pressure at end of 2010, and we have to be smart to take advantage of the things we build.

So I'm not going to answer the details of our short-term pricing strategy, right, which we never do. But what we say is, it's always better to look into the pricing strategy when you have a better market position, which, as you stated and as I said in the speech and during the Q&A, we are in a much better place than we were [2013]. So it's great. So whenever the time comes, we are in a better situation than we were before.

Great. Thank you.

Thank you.

Jose Yordan, Deutsche Bank.

A question -- a quick follow-up to the topic you were talking about in Lore's question about taxes. I already noted your reaction to the government's latest announcement, et cetera. But I was just wondering when we might expect some developments, some news flow on this. Is it -- does it have to wait till after the elections or will there be something -- now that the World Cup is over, will there be something within the next couple of weeks or month or so?

And I guess a related question is, you talked about higher litigation expenses, et cetera, during the quarter. Does that have to do with any of the long standing tax cases that you always discuss in your 20-F? I mean if there is any meaningful change in the status of those cases I would love to hear about it.

Hi, Jose. This is Joao. On the first part, I mean there is no control over the timeframe. The official announcement was it would be done gradual, saying or implying that we should hear back or something could happen in September or October. But there is no specific date being set. Ongoing negotiations always. But that's I think what was said by them; gradual and that we should hear from them between September and October. That's pretty much it.

Right

And, Jose, just going to your second question, I mean, yes, we talked about extraordinary financial results, some one-time interest expense associated with litigations that were -- actually, those files were provisioned for in 2009. Nothing really to the bigger files you refer to, which of course are also described in our 20-F and that have the full details. Actually, those files were provisioned for 2009 in connection with Federal Amnesty Program and those would be paid over 15 years.

What we decided to do this quarter was to sell it upfront with of course a discount on [NPVs]. There was a gain for us. But then we had to accrue for the interest that incurred to that, otherwise will be booked over time, over the remaining 10 years.

So that was the -- this is a one-time expense we had, was close to BRL16 million, and pretty much explains the full increase in interest expense booked in this line this quarter.

Very clear. Thanks. And if I can just follow-up real quick with another accounting question. Are you able to tell us how much excess cash is still trapped in Argentina?

So in terms of cash in Argentina, it's a reality that our ability to take the money out remains an issue given all the volatility in the country. And we have an amount of excess cash in the country. We continue to look for investments either to support the business growth or to repatriate them.

But it, as I said, remains an issue given the lack of some kind of central bank authorization. We are not disclosing specifically the amount we have there. But Argentina regardless of how you look at the results, they are around 10% -- I mean (inaudible) of every single line of our balance sheet of P&L. So that's pretty much how we manage that. But we continue to work for the repatriation of this cash, and that is part of the struggle we have there.

Great. Thanks a lot.

Thank you, Jose.

Robert Ottenstein, ISI Group.

Can you give us an update of where you are in terms of the Budweiser brand and the Corona brand in the region in terms of what countries you have it in and where you may be able to get in within the end of this year or next year?

Hi, Robert. It's Joao. Thank you. I mean starting with current situation, I mean in Brazil outstanding result with Budweiser, as I said, both in terms of share and preference and actual volumes, growing significantly with a premium contribution margin. So enhancing our premium position (inaudible).

With Corona, this will be a super premium brand here in Brazil. We will launch now in the second half and increase stores the end of the year. And increasing from there with the goal of mimicking the prestige, position that the Modelo group built along the last few years in many other countries.

Actually, I think what happened is that they attribute a very strong position in most of Latin American countries. I think we did a good job of not giving them much space to grow in Brazil. So right now the brand is in existence in Brazil, which is great. So it can start from a fresh scratch -- fresh start and we will do a very good job on doing that.

And at the same time, it's great that it has very strong position in other places throughout the Americas. I mean, Canada, growing 7%. I mean it's a very strong position now in our portfolio giving us 2.6-2.7 percentage points of share growth, 7% plus of volume growth. So Canada is done.

With Guatemala is also done. We have launched not just Corona, but also the Modelo special brands at different price levels. So it gives us a full portfolio, a very strong portfolio for Guatemala, especially if you look at neighboring countries.

Also closed the deal for Argentina. Already have closed the deal for other countries such as Uruguay, Peru. So a lot to be done, still a few countries to go. I mean, we are also doing that for -- now we have a strong position in the Caribbean. The Caribbean I think I mentioned last call. And we have a very strong portfolio as we go to those countries with Presidente.

We have three local island brands. And you go with Corona and Stella and Budweiser, I mean you are a full shop when you get to countries like this. So a very strong position. We are getting them in most countries. There is still one or two big countries to be negotiated, but already have in many of them. In some of them like Canada and Guatemala, big launches being done this year. And with the closing of the [deal] in Argentina, big launches also for next year, very exciting with both brands.

That's terrific. And as you look at your strong market share sequential increase, I mean, obviously the World Cup was a large part of that, and I'm assuming a lot of those gains were with Brahma, and it sounds also like Budweiser. How do you -- I mean, would you expect in the second half of the year on a sequential basis for your market share naturally to ease up a little bit, or do you think you have enough momentum to keep or perhaps even increase where your market share is for Beer Brazil?

Yes, Robert. I mean we don't really give any guidance in terms of market share outlook in specific. Historically, in Brazil, we increased share after certain months of price increase and so forth and so on. We have set as more of a market share guidance long-term to be in the 67-69 range. So that's more of the guidance. So we always like to be looking for being in the upper range and this gives us more flexibility.

So I think the nice thing about where we are right now is that we are building that momentum, building the flexibility, looking for the upper end of the 67 to 69, and therefore, that will give us options. It's always better to be at the strong commercial momentum position. That's what we are building. I don't think we are there yet. I think there is still momentum to be built, right. And I think that's as much as I can say without compromising any particular strategy.

Understood. Could you perhaps give us any kind of sense of how much market share Brahma 0.0 was able to get?

I think what we can say is what we said in the speech that we said, has grabbing more than half of the market in a very short period of time.

Great. Thank you very much.

Thank you very much.

Antonio Gonzalez, Credit Suisse.

This is actually Armando Perez. And my question is regarding Argentina. Do you think that with the increasing salaries in the second quarter you can increase prices to cover for higher labor cost, and how has these salary increases resulted in pricing maybe in July or at least in a qualitative level? Thanks.

Okay. Well, I think the key message around the whole situation in terms of salary increase and catch up with inflation is that -- as we've said, obviously the macroeconomic environment remains challenging, but we've seen an improvement on a sequential basis since April. April was kind of a double-digit drop and then it has improved. (Inaudible) started to kick in. I think that's the most obvious way to just see how it can impact our business.

But of course we go beyond that. I mean, we continue to work on our revenue management strategies. And of course without getting to the details for competitive reasons, our goal is always to drive top line growth in line with inflation. And of course work on the cost side, which is part of the DNA of the Company and I think is what's always emphasized.

I mean we have a strong team. We have very strong brands. I mean a great portfolio in the country. Any (inaudible) to keep -- to manage costs. I mean we have been there many times and know how to work in this environment. So we had still volatility in Argentina before. We know how to deal with it.

And back to your point, I think once -- inflation was accelerating since the beginning of the year, consumer real disposal income was -- got significantly under pressure. But this has been easing and salaries increased and started to kick in along the way once labor agreements were reached. So that's what we see as good news and the main driver for the outlook for the balance of the year.

Okay, thanks a lot.

Alex Robarts, Citi.

Two questions on Brazil, and I wanted to put the first one on the COGS per hectoliter trend. I mean when we think about the quarter's margin contraction in Brazil as well as the margin contraction in the first half, I mean it seems that really the driver is COGS per hectoliter outpacing the revenue per hectoliter. And I appreciate that half of this is structural because of the net effect of your hedges and such. But the other half it seems is this packaging mix shift and is connected to the cans.

And I'm wondering as we think about it into the third quarter. You have July that still has the cans related to the World Cup. How should we think about this COGS per hectoliter trend into the third quarter? What did cans actually get up to, if you could kind of share that with us, in your product mix for Brazil? I'm talking about Brazil beverage here. And what could be a more normalized level looking out into the second half?

And I appreciate you haven't changed your COGS per hectoliter guidance in a constant packaging mix basis, but we can't see that, right. So maybe you could help us, what was the COGS per hectoliter on a constant mix basis movement in the quarter? So that's the first question and I have one on soft drinks. Sorry. Thanks.

Okay. So specifically about the COGS, I mean, I think we talked about that. It not only explains half the packaging mix impact, right, not only explains half of the COGS per hectoliter growth, but the full impact of EBITDA margin compression in Brazil.

So I think then of course we tried to emphasize that it was a unique situation in the sense that as part of the World Cup all the special editions, the activation in the (inaudible) -- the promotions drove of course (inaudible) mix into the -- into our portfolio, was -- the same as what we have seen while during carnival periods. But instead of a week of carnival or two, we had the full month.

So we quite expected it in a way. And then when you look towards the year, we see a more balanced mix back to the normal ways, if you will. And so, like I said, going forward don't expect any further significant packaging mix impact in our COGS that are driving a negative impact anymore. I think that's the first key message to take.

Okay. But as far as the percentage of your packaging mix, can we think about cans being 20%, 25% of your mix on a normalized basis and with the growth of supermarkets -- and I appreciate that 300 ml is there, returnable, trying to offset this. But I mean can we -- when we think about cans looking out 2 or 3 years, does the percentage of cans in the package mix, do you see it increasing over time or is it something that really can be mitigated with the 300 ml returnable glass?

Yes. Hi, Alex. This is Joao. I mean if you look at the last 25 years, there has been some growth in cans, right, with supermarkets being one of the trends, although the trends of supermarkets today is that the growth of supermarkets are more the ones for checkout beyond the hypermarkets. So the ones for checkouts supermarkets are the ones that have more RGVs when you compare with hypermarkets, for example.

And then for the trend in cans, actually from 2011 to 2013 has decelerated when you compare from 2008 to 2010. So the last 3 years was growing less with a lower pace than what they grew in the three years before, probably from the combination of this growth of supermarkets for ones for checkout and the introduction of the liter in the 300 ml, right.

And 2014, I think what Nelson was saying, is that it's a one-off type of year, because you have three summers in a row. I mean you had the summer and then you had the World Cup, which is a big summer with given events and giving stadiums and giving cups and giving all this, you know, cans had a higher participation, a higher mix. And then you have the summer again. So this is a one-off year and that's why we said in the gross margin this is a one-off quarter. And before -- then it should be more of a secular trend rather than anything different from that.

And even when you think of Q3, I think what we can say is that -- as we said that the significant impact of the FIFA World Cup uplift was around 1.4 million hectoliters, with the 80% of it, let's say, belong -- belonging to the second quarter. So it would be a marginal impact into Q3 of investments that you --

That's helpful. So first half COGS per hectoliter in Brazil, right, up 8.3%. What would that have been on your guidance metric, which is the COGS per hectoliter on a constant mix basis? Would it have been much lower, right? Is that fair?

Out of the 12 that we had in Q2, we said half of it was mix driven. So, let's say, take 6 out, you have still 6. We were around 5 or 4.8 in the first quarter. So the blend of the first half would have been mid single-digits, consistent with our full year guidance. And I just say, I don't expect any further relevant impact going forward into the second half. So we should again be more in line with the guidance of the product -- constant product mix.

Okay, that's helpful. Nelson, thanks. And the last one is just on soft drink. I mean clearly looking at your volume trend in CSD and NANC in Brazil, in the quarter you had almost 9% of volume growth, industry was 1%. We understand from Coke system that they were low single-digit.

So the market share was substantial. And I guess just trying to understand the driver here. You had the [CBF] sponsorship around Guarana. Is that kind of really the main tailwind as we come into the third quarter? Do you see this kind of volume expansion into the third quarter with the sponsorship in Guarana and pricing there? Or, is this kind of maybe your non-COGS that are doing and getting some new traction? So I'm just kind of trying to get a sense of this very, very heady volume growth that you've posted here in the soft drink income business?

Well, a very good question, Alex. We are very excited with the quarter, but really very excited with the whole CSD, NANC business unit. To be quite honest -- you're right. I mean it was a hefty -- pretty heavy gain, especially for a World Cup. I mean, during the World Cup maybe -- for some people may be somewhat unexpected, giving the [other] sponsor. But we have really been gaining share since the first quarter of 2011 on a rolling 12 months basis.

So I mean this is the third year in a row where we are gaining share, in a way looking to the share. And therefore the initiatives are not just a one thing. There is no silver bullet. It's really a combination of many things, starting with the pack price. So pack price, I think we are doing a good job both in the single serve as well as in the multipack.

So when you think about the single serve, we have the [P-237]. It has been doing great since its launch three years ago. We've been launching this throughout the country. We have it pretty much everywhere. It's growing 20%, 30%, 40% every year since the launch of that.

In terms of multi serve, I mean we have launches in 2011, beginning of 2012 the Guarana Antarctica liter bottle. Once again doing great in every way, shape, or form. And then in the beginning of this year, late last year, we also launched the Pepsi liter, which is far away from where it can get.

So that combination of 237, the liter, the liter we are going to have delivered for Pepsi, that helps. We are increasing our execution in the off trade. Very good job is being done by the business unit through different ways. So if you were in Brazil in the past few months, you would see a really great execution, taking advantage that we had the sponsorship, taking advantage that we had Neymar, taking advantage that we have all the other soccer stars.

Building new platforms also for Pepsi. So it's also doing great. That combined volume growth for both CSD and NANC. So therefore the share gained, that we focuses more towards the CSD. But again we launched both Fusion and Monster as energy drinks and in some channels we are already the number two player. So in a very short period of time, depending on the channel, already the number two player. We are waiting for more. The total market is profitable, industry as well. So no silver bullets, a combination of many things, brighter future ahead in terms of market share, continuing to be strong.

Very helpful. Thank you.

Thank you.

You're welcome.

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

Okay. Thank you, Chad, and thanks everyone for attending to this call. And I'll speak with you again on October 31st. Thank you.

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