Anheuser-Busch Inbev SA (BUD) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and that you very much for waiting. Welcome to your InBev First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

I’d like to hand over to Carlos Brito, CEO of InBev. Please begin your meeting sir, and I will be standing by.

Thanks Sam; hi everyone, this is Brito speaking. I’d like to welcome you all to our InBev performance First Quarter Conference Call, First Quarter ’06. I am joined here by Felipe Dutra, our CFO. Again, thanks a lot for joining us.

I’m happy to have the opportunity to present these results today. Note please that all comments unless otherwise stated refer to organic growth. This means any impact of acquisitions, divestitures, or currency translations are excluded.

I want to start by outlining the progress we made against our long-term objectives. First, we realized balanced organic volume growth across all zones. Other than the volume decline in Western Europe of 50 basis points, we achieved organic volume growth in all other 4 zones. We entered a consolidated volume increase of 6.2%.

Second, next to volume growth we’re focused on driving revenue growth by increasing revenue [inaudible], implementation of revenue management programs, including global brands growth of 8.6% were very important in our revenue growth program, which ended up with revenue [inaudible] year-on-year +7.8% in the first quarter.

Third, we remain firmly committed to become more efficient in all areas of InBev. We’re rolling out Voyager plant optimization and our zero-based budget program further into the organization, which helps to avoid full inflation pass through in our cost space. Better procurement is also critical support to fully exploit these programs.

Organically, cost of sales was up 3.3% while operating costs were up 2.7%, therefore below our weighted average inflation which is considered to be in the countries we operate between 4% and 4.5%.

Fourth; while our focus is and will continue to be growing our business organically, we took two significant actions which will strengthen our Company going forward. In January, we announced the acquisition of Fujian Sedrin, a very profitable brewery in China. This is a great [inaudible] not only due to the geographic location in Fujian and Jiangxi Province but because they bring great people with a performance-oriented culture, a strong and proven mark-to-market model and a solid brand portfolio.

Next to that, InBev recently announced an agreement to increase its participation in Quinsa to over 90%. The performance of the countries managed by Quinsa has been very good this year as well.

Let’s turn now to performance in trading conditions zone-by-zone. In North America volumes increased in both Canada, +1.0% and in the U.S., +10%, and thanks mainly to a tight grip on costs and expenses EBITDA was up by 18% for the zone North America. However, I should point out that the comparable shipment figure for the U.S. was very weak last year, so it provided us an easy comp this time around in the U.S. and depletions were shipments from wholesalers to retailers in the U.S. were up by 4% in this quarter, so below the shipment level.

In Canada, the market was up close to 3% with the result that we lost some share, less than one percentage point in this first quarter. There is a lot to be done in Canada, a lot of work that our team is pursuing there in getting our top line to resume growth and we’re prepared for this challenge. We have good programs in place and we’re not going to engage in any destructive-type activity in that country.

Latin America, our business performed solidly delivering top-line growth and driving most of these gains to the bottom line. Beer volumes were up by almost 7% while soft drinks had an excellent quarter with a volume increase of more than 15%. EBITDA increased by 33% although it should be noted that this was boosted by the release of provisions of €2w2 million without which the EBITDA growth would have been 27%, which is also very good, of course.

Our beer market share in Brazil increased to 68.7 in the first quarter on the back of a very strong 8.1 organic volume increase. Our operations in Northern Latin America, Central America didn’t have the same kind of performance, volumes were down by 15% year-on-year and we are faced with very tough competitive conditions in those countries.

And in the Southern countries managed by Quinsa, volume continued to develop positively, up by 4% year-on-year which fully offset the decline in Latin America outside of Brazil.

Now going to Western Europe, our marketing volume remains a challenging one; volumes are down by 0.5%, mainly as a result of very sluggish trading conditions in the on-trade business. Despite this, for better cost management EBITDA was up by almost 10% -- 9.6%. In Belgium, lower volumes in the on-trade led to a decline of 1.7% overall. In Germany, volumes decreased by 0.8% although Beck’s kept a good momentum that started last year.

Turning to the UK, our market was down by an estimated 2%, again mainly through on-trades volume decline. Against this we started to roll out our new Stella Artois to ensure our ideal pouring conditions for our draft beer on premise, and we will continue to take a long-term approach to ensure that the premium position Stella Artois in the UK is reinforced even further.

For Central and Eastern Europe, beer volume started poorly as our normally low temperatures in January interrupted our supply chain in Russia and Ukraine. Those temperatures meant no truck shipments took place for several days in parts of Russia for example. And this had a material impact on results with EBITDA low for the quarter by 8% year-on-year.

Despite this start, we grew volumes in Eastern Europe and Russia continues to experience stronger growth in the East of the country than in the West, which increases our distribution expenses. Still in Central Europe, volumes improved in Hungary and Czech Republic as well as across the Balkans led by Romania, while we were very slightly down in Croatia.

Turning now to Asia Pacific, Asia Pacific zone was hit by materially lower volumes in South Korea due to a government-led initiative to reduce trade inventory levels. While we believe that the main impact of this initiative will be merely in the first quarter, the overall beverage industry in South Korea has been weak so far this year.

Our business in China, on the other hand, experienced significant volume growth versus last year on the back of better water conditions, but mainly improved execution to marketplace. However, this growth had much lower revenue [inaudible] levels in South Korea together with good cost control were not enough to offset the lower South Korean volumes resulting in EBITDA down by 25% in Asia Pacific zone year-on-year.

So to summarize, I would say that the hard work of our people helped to make further progress in moving InBev from biggest to best. We’re working hard on restoring top-line growth in more difficult markets and accelerating volumes in those markets on the growth pattern. At the same time, we are ensuring that we run the business as efficiently as possible. This would not be possible with the support of great people and the performance culture that we are building and developing throughout the Company.

At this point, I’d like to open this call for q-and-a session. Operator, if you could just ask for the first question please.

Thank you sir. [OPERATOR INSTRUCTIONS].

James Edwardes Jones, Execution Ltd.

James Edwardes Jones from Execution in London; three questions if I may. First of all, could you expand a bit more on what’s happening in Canada, specifically could it be the management struggling to cope with implementing the various cost-saving initiatives at the same time as managing the top line?

Second question; admin costs in Latin America were down by about 200 basis points. Could you put a bit more color on that?

And third, I’d be very interested in seeing how you gauge the level of political risk in Latin America.

In terms of Canada, again the market, the industry grew by 3%; our growth was only 1%; therefore we’re not happy with it. We did lose some share, less than one percentage point, but we did lose some share. We have information from Moulson that they grew 1.6% and we have information from [Sleiman] that they grew 10%, but Sleiman is putting the company for sale so I’m not sure of what their strategy is at this point.

But yeah, we’re not happy with the top-line performance and our guys are working on that.

On the other side, going back to your question the cost program initiatives in Canada are going really well, and that’s one of the reasons why our EBITDA in North America grew by 18% even on weak volumes in Canada, which drives most of the profitability in that zone anyway. So that could be the answer to your first question.

Going to the third question before I go to the second one, in terms of the political unfoldings in some countries in Latin America, we cannot comment on those. Some of those have no influence on our business at all. So we tend to focus on execution in the marketplace and try to control what we can control. What we have to say, of course, is that Latin America is a zone with great growth, great profitability, but also with some volatility. So we all know that, and our business has proven able to cope with those volatilities, at least in the past. So our people have some experience with that.

And the second question I’ll pass on to Felipe on the admin costs in Latin America.

Yes, the admin costs in Latin America organically were reduced by €8 million, implying a 14% better performance as compared to the first quarter last year. In fact, our goal is to keep costs moving below inflation over time, and I don’t think the first quarter is necessarily a good reference that could be extrapolated for the whole year because it takes into account when different initiatives and projects are executed.

The other line that was there is the other operating expenses; there is €22 million positive contribution for EBITDA which is mainly driven by a reversal of pre-tax revision related to the [inaudible] dispute as described in our press release.

Nick Bevan, Deutsche Bank.

Nick Bevan, Deutsche Bank in London; 2 questions please. Firstly, on Western Europe you reported a revenue growth of 3%. I see quite a positive price mix element there. I just wondered was that a fairly consistent performance across the sort of 3 main European markets, Germany, UK and Belgium; are you getting positive pricing in all 3 of those territories?

And then second question, I guess primarily for Felipe, could you just update us where you are on the share buyback program, both in terms of InBev and AmBev?

Well, the first question, Western Europe we did implement some price increases in some markets, I mean minor price increases so that happened. We also did have some better brand mix in some markets, and also country mix. I mean, behind this 3% you do have 1-plus percent of price and you do have everything else being brand mix going the right way and the country mix this quarter helping us on the whole revenue management initiative. So that’s pretty much what’s behind it.

Could I ask specifically on the UK, have you been able to push through positive pricing in the UK business?

At this point, I hope you understand but I’d rather not comment on that because we don’t have that -- we’re not giving that level of disclosure for competitive reasons.

Okay.

In regard to your second question, Felipe will help pus on this one.

Okay, in terms of buybacks at AmBev level €[426] million were acquired of AmBev shares; and InBev level we acquired no shares. Basically we are setting our captive structure ready for the disbursements of Quinsa [inaudible], $1.2 billion in Latin America, and for the Fujian Sedrin closing to take place during the course of this year, it’s about €600 million or so. Then with that in mind, we should be fine in terms of leverage for 2006.

Right, so no InBev buyback; what’s the target this year on AmBev buyback?

There is no target on buyback; the target is to maintain the leverage within the optimum level at InBev Consolidated is net debt EBITDA from 1.8 to 2 times, and AmBev level giving tax optimization, this leverage is likely lower, around 1.1 times, and given the disbursement to take place, we’ll be quite close to this level in comparison to the cash flow to the ratio we have had this year.

Tony Bucalo, Bear Stearns.

Good afternoon; quick question on Canada and the U.S.; first question on Canada is we keep hearing that the discounting share is leveling off, but it doesn’t seem to be indicated by this quarter results. Any comments there on what you can do on discounters?

And second question, there’s a lot of speculation in the U.S. on Rolling Rock in terms of possibility of being sold, and I wonder if you have any comment on that?

Okay Tony, this is Brito; what is happening in Canada is that the discount segment in Ontario, for example, is pretty much stable at a high level so we don’t like that level but it’s the level that we have today. But what’s happening in there is that the deep discount within the discount is growing. So that’s why brewers like Lakeport have performed better than other brewers because the deep discount, that is for 24-type proposition which is the minimum pricing in Ontario is gaining ground within discounts and hurting the discount brands of the other brewers. So that’s one thing that’s taking place in Canada.

In terms of Rolling Rock in the U.S. we have said that we are evaluating how Rolling Rock can be best managed and that could be internally or externally. That’s up to now what has been public in terms of Rolling Rock.

Chris Pitcher, UBS in London.

Good afternoon; 3 questions please. Firstly, could you talk a little bit about the competitive environment in Central and Eastern Europe in a bit more detail because I noticed that was where you’d stepped up in terms of A&P spend.

Secondly, you mentioned that there was an impact from fair-value hedge account on your interest line. I was wondering if you could give us that amount so we can see what the underlying interest charge in that was.

And then finally would you be able to give us sort of the element of the minority that was with AmBev and any exceptional costs that might be allocated to the AmBev business rather than the old InBev.

Thanks very much.

Okay Chris, when you talk about Central and Eastern Europe, I’m going to talk about Russia and Ukraine, the 2 main markets. The information we have from our competition is public information from BBH, Baltic; their volume was down 1% for the quarter, this first quarter, and ours was up by north of 5%. So that’s the competitive environment there.

Of course, in Russia we have to watch out in terms of mix because in Russia, almost half the market is on the value category, so we have to watch out that we do grow with the right type mix between our brands.

In the Ukraine, they had a better performance than we did in that they grew according to their numbers 12% and we grew 3.5% in the Ukraine, and we think market is growing by 3%, so we did lose some share in the Ukraine also because of some capacity constraints that we had there that we are working hard to try to fix.

So that’s pretty much the 2 main countries; both countries were hit by a very tough January and seasonal type weather. I mean, I hate to use weather as an excuse, but in Russia for example on some days we could just not ship beer, so that is a pragmatic thing; it’s a fact, and that of course impacted the whole market, but we are recovering. And we do still have some volume that we need to recover through the summer.

And could you just expand a bit on the Russian market because there was some discussion about higher sales in 2.5 liter PT pack for BBH. I just wondered if you could comment on that.

Yeah, that’s a new pack that we have on the marketplace; BBH said that they lost some volume to this new pack of ours. Of course, we have to understand that pack and brands in Russia are linked, so most of the value brands are sold, not all, but most of them are sold in [pack] packages and most of the core and premium brands are sold in cans and glass bottles. So again, we are working hard to get our mix right in Russia. We’re not 100% happy with all the developments that we have in terms of brand-specific volumes in Russia, but we’re working hard to get it on average going in the right direction.

And for the other 2 questions, Felipe will help me.

Chris, regarding your second question were you asking about hedge accounting? Is that the correct question?

Yeah, you commented on a statement saying that impact from that was offset by lower other financial results as a consequence of fair-value hedge accounting. I was wondering if you could break up what that impact was, the reported interest charge.

Yeah, if you recollect most of last year starting from first quarter we were not able to apply hedge accounting for the InBev debt since there was no perfect match between the debt and the specific hedge. We have been managing that and looking for a perfect match of assets and liability and as of the end of last year, most of the debt was already in synch with the hedge transactions; therefore being able to apply hedge accounting.

The reference in our press release is pretty much comparing the 118 net financing cost for this year out of which about €106 million is related to interest charges and why we are comparing that number to the first quarter last year with the slightly difference, not only because of currency translation but also hedge accounting, that was not in place last year.

Okay and just in terms, you mentioned before with regards to hedge accounting you were using instruments that didn’t qualify because they were effectively were cheaper. Does that mean that your cost of your hedging has increased?

No, it is not like that; basically we have outstanding debt between 2011 and 2013, and there was very low liquidity in long term derivatives in Brazil to extend the hedge transactions up to that date, and basically we were a little bit short in duration why a fully-hedged currency exposure. Now we, for most of the debts, we already have a perfect match, but it should not translate into a material increase of net financial cost as a result of that.

Philip Morrisey, Citigroup in London.

Could I ask 3 questions if I may; the first regarding South Korea; Q1 volumes obviously down 16%. I think you said that the impact of the [inaudible] stock will be biased toward the fourth quarter, and I wonder if that’s the case, whether you could give us any indication as to what you think this fiscal year the full impact of that would be on the Korean volumes.

Secondly, just getting back to the original InBev/AmBev merger, you had a target then I think for revenue percentages in volumes of 3 million hectoliters, roughly half Stella and half Brahma and I just wondered not going back just to the first quarter, but again for the full fiscal year this year, how close to that 3 million hectoliter target you think you might get. And perhaps you could elaborate a little bit on the launch and prospects of Brahma particularly.

And thirdly, finally the announcements regarding the shared services center Europe and North America, I just wondered how long it would be before those were in position such that the efficiency of the respective sales forces would begin to kick in and prove top line.

Thanks.

Okay Philip, the first one in terms of Korea, again what we said was that there were 2 things going on; first the industry is down in Korea so that’s something that affects all players, and that’s of course the first thing.

The second one is that there was a change in the way business is done there in terms of [inaudible] inventory levels mandated by the government and we’re implementing that change. We think that most of the impact of this change was felt in the first quarter, but I can anticipate that April was also, we also did feel some of that impact, so we think most of it again was in the first quarter, but not all of it.

What else can I say about Korea? That’s pretty much it; of course, we are share-wise we did have a dip in January as we trimmed shipments as we tried to implement the new policies. We recovered towards March, but in terms of the average for the first quarter share-wise total market we’re still down if we compare it to the same period of last year. But we’re on the way to recovery, but again I don’t want to give any false impressions in terms of the inventory to what was your question. Most of it was first quarter, but April we still had some.

Felipe, would you like to answer the second question?

Yeah, the second question back to the synergies announced in 2004, we said about 1.5 million hectoliters of Stella and Beck’s being sold in Latin America and about the same amount of Brahma being sold worldwide up to 2007. Last year was the first year and opposite from the cost synergies in which we were expecting a much more linear curve in capturing synergies from the volume side much more exponential as a result of brand building and brand development.

That said, 2005 was the first year for Brahma; we were well ahead of original plan; we sold about 600,000 hectoliters in year one. We are fully on track with 1.5 million as of 2007.

For the Stella, we started a soft launch first in Argentina; very successful, followed by Sao Paulo; not the whole Sao Paulo city but restricted to selected point of sales, about 400 point of sales, and so far results are very encouraging.

In terms of business-shared service in both North America and Western Europe, what we can say at this point is what’s public given that we are still in the negotiation phase with our social partners, so that’s pretty much what I have to say about shared service centers.

[OPERATOR INSTRUCTIONS].

Michael Bleakley, Credit Suisse First Boston in London.

Good afternoon guys; it’s a quick question again on the international road ad of Stella and Brahma where obviously you’re on track to deliver the synergies there from a volume point of view. Can you just give us an indication in terms of price index and margin index on those 2 brands, what they look versus the base business. Presumably, there’s a bit of a premium we can factor in.

Well, in terms of price position, you are right, both brands are positioned as indicates of Brahma. In some countries we are already producing locally and in some we are forced to export such as U.S. which caused the cost to go up. But net/net the contribution margins to be captured by the cross-license agreements is basically €30 million for Stella and €30 million for Brahma, which means in other words they will be delivering about the same margins, and it is just a matter of dividing the €30 million by 1.5 million hectoliters and you will get the kind of margin you are looking for.

Sure, and that presumably is based on an incremental ramp-up in advertising, marketing, etc.

Yeah, it is all embedded into this number.

Okay, thank you.

You’re welcome.

Alex Robarts, Santander Central Hispano in New York.

Yes hi everybody; 2 questions; first of all just on Western Europe, interesting to see the operating leverage that you came through here with, and it seems to me most of that really is rather than revenue growth on the fixed-cost management side, and just wanted to get a sense here to the extend that [ZBB] is playing a role here, maybe you could give us some color behind that fixed-cost management, how are we in the whole process of implementing and seeing results from the ZBB program in Western Europe?

And then just to kind of remind us where else are we going to be seeing this year the impact of ZBB?

Hi Alex; this is Brito. You’re right, and most of the progress, of course, has been as I said at the beginning on the cost side in Western Europe, although there was volume we were 0.5% down revenue, 3% up gross profit, 6% up and EBITDA 9.6% up, so you’re right, it was more of a cost story. It’s not all ZBB; it’s also VPO. I mean both sides of the equation in terms of cost have been touched here, they have been managed which affects the variable.

And in terms of other places we’re going to implement ZBB this year, we’re going to implement in Central and Eastern Europe and we’re going to implement it in Korea.

Okay, but I mean as far as, you’re comfortable with the system and the way it’s set up now in Western Europe so now going forward, we should be seeing this type of fixed-cost management, going forward.

: Yeah, we’re very happy with the first quarter results in terms of cost management in Western Europe; of course, it’s too early to make any predictions, but we’re very happy with the plan we have in place. The people have really embraced the new way of looking at costs, which is a cultural way of looking at costs, not a structural way of looking at costs. And I think that gives us, as you said, greater confidence in rolling this out to other parts of our business.

So yeah, you’re right.

Okay, I guess just the second question is on one specific cost, which is aluminum, and just looking at what happened yesterday as well, and really year-to-date, should we be concerned about can costs really at InBev and maybe you could just give us some color on that.

Well, you’re right; aluminum went over $3,000, which is really way ahead of our budget. What we can say though is that for InBev, we’re fully hedged because we do have multi-year contracts in cans, and for AmBev Latin American business, we’re hedged until pretty much the full year until October/November. So of course December is an important month; it’s the biggest month. But we hedged until let’s say October this year.

Roughly how much Carlos is your kind of packages that are in the aluminum can format roughly on a consolidated basis?

Well in Brazil, which is a big seller of cans, it’s roughly 23% in Brazil for InBev…

We’ll have to check and get back to you.

Yeah, sorry I don’t have the number in front of me but in Brazil it’s 23%.

Trevor Stirling, Sanford C. Bernstein.

Good afternoon; 2 questions please. The first one really expanding on the previous question about aluminum prices; [Kelly Luis Fernando Edmund] commented on commodity hikes coming through; we talked about the aluminum price. Could you give us some guide roughly of what proportion of costs in Brazil are dollar-denominated and hence covered by the hedge?

And the second question is relating to [Hela-X]; clearly, there are some very difficult markets there. Can you give us any more guidance on is there one particular country that’s a particular headache, or are there a number of problems in that region?

Well, in terms of your first question, in terms of what kind of costs in Latin America are dollar-denominated it’s pretty much half of it, and we do hedge against those.

It’s been fully hedged since the beginning of this year.

It’s been fully hedged since the beginning of this year. So that’s half of our variable costs, which is of course aluminum cans, PT, malt, mainly those three.

In terms of Hela-X, I’d rather not comment on country-by-country specifics because again of competitive situations that we have with some big competitors there. But I would say we’re not happy with our performance overall, and we are putting a lot of resources behind to try to put it back on track.

Ian [Sheckleson], Lehman Brothers in London.

Yes Brito, perhaps we can come back to Asia Pacific which you did describe as your worst performing division, and I guess one feels it probably isn’t coincidental that you have changed the management in that region this week. If we focus particularly on South Korea, [Hite] today has released some figures that show your volumes down nearly 3% in Q1 versus your 16. Why are they so dramatically different? Are they not subject to the same type of inventory reduction measures that you are or is there something else going on here?

That’s a very good point; let me tackle this in 2 ways; first about the management change it had nothing to do with performance. You need to understand that performance and impact is driven by a mix change between South Korea and China. China is performing ahead of our expectations; Korea is my second point [inaudible]. But again, just to make it clear, the management change was decided by [Brent Willis]; it was for personal reasons he decided to leave the Company. We think he’s a great guy, a great player, knows the business, was very committed to our Company, but he had some personal issues that he had to deal with, so nothing to do with performance.

In terms of South Korea, what happened is that if you look at, if you go back to Q4 you’re going to see that Hite had a much bigger volume swing than we did in the Q4 and Q1 was the opposite. So maybe that’s due to difference in ways of implementing the same type of mandate from the government.

And where would you see your market share in Korea now?

Again, our market share I’m not going to give you figures because we don’t do it on a quarterly basis, but on an annual basis. But I already said that our figures for market share on average for the quarter are down. In January, we had a dip, then we were recovering in February and March. But if you take the average for the quarter, it’s down from the same quarter last year.

[Frans Hoyer], Proactive Independence.

Good afternoon; I have just a quick question on the minorities and the way they have developed; if you look at minorities’ share of net income it was up 110% year-on-year, but that income that was attributable to InBev shareholders was up 186%. And I guess that surprised me given that the growth in InBev was heavily biased in favor of minorities, i.e. in North America and Latin America. But on the other hand we have the share buyback activity, and I was just wondering if you could help me analyze that a bit.

Okay, minorities’ charges in our results are primarily driven by AmBev in which we have close to 58% ownership; this is the first quarter and is one of the most profitable quarters together with the fourth quarter for AmBev as a Company in contrast to the second and third quarters which are more profitable for the InBev/AmBev, notably Western Europe, Central and Eastern Europe, so on and so forth.

Yes okay; well that kind of would suggest that the minorities’ share of net income would grow given that most of the growth was in these areas where there are minorities I would have thought -- it just surprised me that it was the other way around, that it was actually InBev’s share of income that grew more rapidly.

Well in fact, the growth is coming primarily from Latin America at the EPS level, or net earnings level, let’s put it this way. That had some quite positive results below the EBITDA line, which means below the operating line that caused its net income to go up under Brazilian GAAP local currency by 350%, which means that this proportion of increase of net earnings as compared with EBITDA that also caused for our minority charges to be higher during the first quarter.

Yes I’m surprised they’re not even higher if you see what I mean. But okay, you mentioned that the ownership in AmBev was roughly almost 58% in the first quarter. What was the comparison number for Q1 last year?

Well let me double check if I have one table here that shows that number; it’s about 50.

All right, so that explains quite a lot anyway.

And then you’re making huge progress again towards your 30% EBITDA margin target, helped I suppose somewhat by the [4-X] development, but if we look at it on an underlying basis, how are you making progress, and doesn’t it look like you are going to reach your target sooner than you are currently suggesting?

Yeah, so again we did have a good quarter in terms of EBITDA margin progress or acceleration. You’re right in the sense that some of it was explained, or could be explained by the depreciation mainly of the Brazilian currency, Canadian dollar, and the pound sterling. So that meant we had a little bit of a tailwind there again this quarter and that helped. And that’s one of the reasons whey we’re still keeping our guidance for 30% for the average year for next year because we know that foreign exchange could go either way, and it’s an important component given our global business and footprint in our total EBITDA margin.

But if you look at our business this quarter, you’d see that with the exception of A-PAK, where we have an issue with Korea, and with the exception of Central/Eastern Europe where we did have again a very strange month of January in Russia mainly, we had organic growth in all other 3 zones. So Western Europe 10%; North America 18%; Latin America 33%, or 27% if you take the reverse of the provision. So I would say that we’re progressing everywhere; North America 77 basis points; Western Europe 80 basis points, which I think is also part of the margin expansion.

Would you say that at the local level where we don’t have the distortion from 4-X trends that you are on target with your cost control measures, or are you ahead of target at this stage?

On average, I would say we’re on target.

Nico Lambrechts, Merrill Lynch in London.

Can you hear me?

Yes.

Hello Felipe, hello Carlos; I’ve got 4 questions if I may. I’ll just start on the Russian PT-pack which you made some comments about. Just a question; is the PT-pack that you launched at a discount or a value pricing, or is it at a premium pricing level?

Well as I said in the previous questions PT in Russia with the exception of what we call some value pack, which is linked to mainstream or premium brands, PT packaging in Russia is linked more towards value packs. When we launch for 2.5 liter, it’s linked to the value part of our portfolio.

What was the decision to launch a value pack when in your previous comments you did say that the value growth is more in the glass; what was the decision that drove that you actually launched this pack?

Well, what we need to do in Russia as in all markets is about the "and", not the "or". We need to be competitive in the marketplace, and we need to drive volume in the right direction, so in Russia 50% of the market is in the value segment so we need to be active in that segment but not too active; not enough to get industry to go even more to the value side. Those are the things that we need to manage on a daily basis, and I also said that I was not 100% happy with the unfolding, or the way our portfolio is going this year. We had some targets, and we have to adhere to those targets.

Excellent, second question on Western Europe, the pricing which is part of that mix, does part of the mix benefit from some discontinued volumes? I see there are about 600,000 hectoliters which are discontinued.

You mean in Western Europe?

In Western Europe, yes.

Yes, you’re right.

So some of the mix benefit is what are those volumes that are discontinued? What does that relate to?

Well, that’s [Cola] in Germany and also maybe one or two beer brands that we didn’t renew contracts in terms of core packing. But I mean small impacts in relation to everything else.

Okay so that’s the main part of the mix, excellent.

Then in terms of ZBB, I know you’re not giving targets; could you confirm if the ZBB budget was fully implemented at the beginning of the financial year and if the benefit that you expect for the full year will be equally phased over the 4 quarter or if the benefits from ZBB will be biased towards the second, third, or fourth quarter? Just so that we’re making our own assumptions on ZBB cost savings, just give us a guidance on how we should phase whatever we assume.

Well, we’re not giving guidance on ZBB; the only thing I can tell you is that since we’re implementing in this calendar, there is a learning curve, and therefore we expect some of the savings to pick up as we go through the year.

Right, okay so more phased towards, or biased towards later part of the year.

Yeah, we’re going to ride the learning curve.

Okay, then third question on progress and the hedging in Brazil, are there any -- you’ve given us the hedging rates for your [inaudible]. Are there any exposures in Brazil which are not hedged and therefore that if the dollar continues to strengthen that you might get that benefit? Or another way to answer the question, would your total hedging or currency benefit still be around 180 million Brazilian rial for the full year?

For the full year, we already had it and if the currency continues to appreciate, we won’t benefit; we have no hedge in place for 2007 but if the interest rates differentials remain very high, the cost of being hedged long term remains very high. That’s something that we’ll have to monitor quite closely.

Excellent; then a final question is on Quinsa; you’ve announced a deal; you did say that decisions are still pending. Could you give us some idea that if the deal is approved what we should assume in terms of cost of financing that transaction?

Well, the original idea is to finance that transaction locally in Brazilian currency but this decision has not taken place yet.

Okay excellent, and what are the potential plans or who are the earners of the remaining approximately 9% of the shares? Is that all publicly held and any idea how you would approach that?

No plans at this stage.

Gerard Rijk, ING in Amsterdam.

Good afternoon; question on Asia and more specifically China; strong growth in volumes. Can you elaborate on the profitability of these businesses?

The second question is on Fujian Sedrin; now a few months later do you still feel comfortable with the one in a ten million synergies that you at that time expected?

And my final question is on cost saving targets; is there any plan to communicate the savings when you have agreed to deal with Unions, etc.?

Starting with our last question, at this point we have no plans to communicate our internal targets in terms of cost savings.

In terms of Fujian Sedrin, we are very happy the more we get to know the company the happier we are, not only in terms of the business we are in the process of acquiring; in terms of the people and mainly the people that we found within that business; very aligned in terms of culture; very high-performance culture and with a great track record. So we’re very enthusiastic with it.

And on China, I’d rather not give specific figures; what I can say is that China of course, has a low profitability compared to some other markets that we have; that is a challenge going forward that we need to fix. It is a great growth market, but we still need to do a lit in terms of getting our footprint right and get some economies of scales right.

Andrew Holland, Dresdner Kleinword in London.

Yes hello; a few questions, firstly a number of companies in the sector are able to give sensitivity guidance on exchange rates. I wonder whether you could give us any sort of ready reckoner for the impact of the changes in the Euro/rial exchange rate. It would help us to estimate the impact of changes in that exchange rate.

Secondly, in Korea, I don’t really understand what’s going on there and why the government has found it necessary to get involved apparently in your stock levels. I just wonder if you could tell us what the background to that is.

And thirdly, five months now into ZBB in Western Europe, we’re picking up anecdotal evidence that suggests that far from being embraced it is actually upsetting quite a lot of employees in Europe, particularly in the UK. I just wonder whether you have any comment of the morale of your workforce in Western Europe.

Well starting from the second question, we know that change is not, is never comfortable, but I think people understand why we’re changing it. I think the case for change is clear in terms of ZBB, and you mentioned the word “employee” and what we try to tell our people is that our culture is a culture of ownership and we have to do what’s right for the business before we do anything else. So what we’re trying to get people to embrace is really again, the case for change, which I think is clear we need more money to put in the higher brands. And if we can find money within the Company that we call non-working dollars, we should identify those dollars, get those dollars and put them to work towards what matters, which is the marketplace and our brands, and therefore our consumers.

But you’re right, change is not easy. Some people would rather be in the old world, but I can say it’s a minority. Most people agree that we need to change because they see the case for change and they see that we are going to a better place. So that’s -- and I’ve been traveling a lot and been interacting a lot with people.

In terms of Korea, the government mandated that the industry would implement some steps in getting inventory levels at wholesalers down so that was a government mandate. We and our competitors implemented that maybe in different ways, but again, we both had to implement it. And inventories are down, most of the effect for our business has been felt in the first quarter; not all of it. I’ve said that twice, so in April we’re still going to have some impact and yeah, we had a bad start for this year in Korea the first quarter in terms of shipments; it was not very good and that impacted of course, the whole A-PAK zone.

Thank you, and the other question was any sensitivity guidance you can give us on the Euro/rial exchange rate.

Well you know this is subject to several different drivers, and sensitivity may change very rapidly, but overall for each ten cents difference in the Brazilian Euros affects rates that cause about 10%, sorry 10 basis points exchange in change of the [bitte] margin. It’s basically one to one at the bitte margin level, but this never should be viewed very carefully given the different moving pieces that could affect, therefore that could change.

Thank you, and obviously there is also an impact on your debt and interest charge from that movement. Are you able to say what the net effect at the pre-tax level is on that movement?

No, not at this stage.

Okay, and can I just go back to Brito’s comment on the case for change in Europe, you said it’s easy to persuade people the case for putting more money behind brands. Can we interpret that where you’re making cost savings you are actually putting some of that into higher brand support, higher marketing?

Well, that’s the idea; of course, it’s not the case every quarter. But that is for sure the idea.

Unfortunately due to a time limit, we are unable to take any further questions. Therefore, Mr. Brito I hand the conference back to you for any closing comments.

Well, thank you very much for joining the call; that was a great call. Thanks for your questions, and we’ll see you next quarter, in September. Thank you very much.

Ladies and gentlemen, thank you very much for your participation today. This concludes today’s conference and you may now disconnect your lines. Thank you.