Ambev S.A. (ABEV) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's first quarter 2013 Results Conference Call. Today with us, we have Mr. João 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. [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 first quarter 2012 results. Normalized figures refer to performance measures before special items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis in the earnings release. Now I will turn the conference over to Mr. Nelson Jamel, CFO and Investor Relations Officer. Mr. Jamel, you may begin your conference. Nelson José Jamel: Thank you, Joseph. Good afternoon, everybody, and welcome to our 2013 first quarter earnings call. I will begin by sharing a few performance highlights. João will give some color on what exactly went on in Brazil during the quarter and how that impacts us going forward. And I'll come back to give an overview of our international divisions and comment on our financial results before moving to Q&A. So let's get started. In the first quarter, net revenues were up 2.4%, and EBITDA grew 2.3% with normalized EBITDA margin contracting 10 basis points to 46.3%. If we break this down by division, Brazil net revenues grew 0.8% and EBITDA 1.6% with EBITDA margin actually expanding 40 basis points to 50.5%. Latin America South had a 7.9% increase in net revenues with EBITDA rising 10% and EBITDA margin expanding 90 basis points to 45%. Canada's net revenues declined by 0.6% and EBITDA was down 11.4%. EBITDA margin contracted 370 basis points to 13.7%. And HILA-ex delivered 27% of net revenue growth, BRL 68 million of EBITDA and an EBITDA margin of 24.3%. João, over to you. João Mauricio Giffoni de Castro Neves: Thanks, Nelson. Good morning, and good afternoon, everyone. Today, we'd like to spend bit more time than usual on Brazil. We witnessed a strong deceleration of the industry in March, so I believe it's worth sharing with you our views on, first, what actually happened; second, what we plan to do about it; third, what changed in our outlook for the year; and fourth, what does not change. So first, what actually happened. During our last earnings call, I said we expect the first quarter to be especially challenging for the Brazilian industry. The reason for that was because even though we had a very good January, we believed the earlier Carnival and poor weather would lead to lower performance as compared to what we expected for the year. But things actually turned out to be even more challenging than we expected. In addition to the earlier Carnival and the poor weather, which, by the way, continued into March in the form of lower temperature and more rainfall. We also witnessed a strong deceleration in consumption levels, which led to high teens volume decline in March. Several factors contributed to this, but the main insight comes from the fact that consumption has suffered mostly because of 2 things. First, higher food inflation; and second, a deceleration in disposable income growth. On food inflation. We have witnessed an acceleration in the last few months, and it remains at high levels. We believe this has been putting more and more pressure in people's pockets, and we have begun to feel this more and more. This issue is not specific to beverages. Actually, we have seen many other Brazilian companies to be impacted by this phenomenon. Though we expect food inflation to remain a relevant headwind in the coming months, the good news is that the Brazilian federal government has reacted to this and has already announced a series of measures designed to ease inflationary pressures going forward, such as tax cuts on basic food items and increasing interest rates. Moreover, we have seen food deflation at the wholesale level for the last 12 weeks, which we believe should trickle down to retailers and consumers later this year. After the deceleration in disposable income growth, even though during the first quarter we continue to see disposable income increasing, thanks to the increasing minimum wage into the employment growth, it's also a reality that the growth rate in both normal and real terms has been decelerating. In fact, during the first quarter, the growth in disposable income was well below the improvement showed in the first quarter of 2012. Finally, as we mentioned in our release, in the environment that combines high food inflation and a deceleration of disposable income growth, the fact that we had to increase beer prices to offset higher federal taxes that became effective October 2012, it's of course not helpful. Although food inflation and the lower growth in disposable income will continue to be a reality, particularly in the short term, we believe we have a number ways to deal with this, which brings me to the second question: What are we going to do about it? First and foremost, we need to react quickly and we did. We have already completed the review of our 2013 plan and made the necessary adjustments to reflect a lower volume outlook and still try to deliver a good year. We have faced similar challenge to our operating environment before, and we know what needs to be done. Part of the answer comes from the cost and expense side, where we have already looked at each and every line and identified what would be tackled through either productivity and more cost-saving initiatives. Those costs and expenses that vary according to volume have already been revisited. But particular emphasis was given to what we call nonworking money opportunities as we want to remain investing behind the brands not only to support our top line this year, but also thinking about what's in store for 2014. The bigger part of the challenge ahead of us, however, is the top line. With food inflation and decelerated growth in disposable income still being a relevant issue in the very short term, our plan is to focus on those commercial initiatives such as the pack price strategy that can help us improve our top line performance by delivering to consumers more affordable packs as long as disposable income remains under pressure. The challenge is not being taken lightly, but we believe we have a good number of options to work with. For instance, our pack price strategy has delivered great results since 2008. Pursuant to each, we have managed to deliver to consumers more affordable packs and/or targeted and smarter promotions to tap into the rising middle class. Today, we have a wide array of can sizes that give us many options to work with when it comes to finding pricing strategies that can help drive volumes, while protecting overall profitability. Also, let's not forget about the 1 liter and the 300 ml returnable glass bottle presentation. The 1 liter represents, as you know, a more-for-less proposition, and we believe there are still a lot of room for us to increase distribution. And as for 300 ml, which represents a lower out of pocket for consumers, it's important to keep in mind that we are only starting the second year of the rollout, and that during 2012, given its success, we more than doubled our bottling capacity for 300 ml. Now moving to the question number 3: What changes in our outlook for the year? As mentioned in our press release, our volume expectation for the beer industry have changed. Instead of growth around the same levels of 2012, we are now guiding for the flat to low-single-digit decline in the industry for the year. The reason for this is a product of 3 things: first, the industry's first quarter volumes; second the fact that a food inflation and deceleration in disposable income growth will persist in the coming months as discussed; and three, the trends that we have seen since the close of the quarter. Accordingly, we have seen a much improved performance for the industry in April, although it's still in the negative territory, which means that industry sales volumes are trending in mid-single-digit decline as opposed to the high-teens drop that we experienced in March. As I'm sure many of you have been tracking SICOBE production data for April, it is still showing high teens decline in volume, but I believe it's worth pointing out that these are production figures and consequently are not the best proxy for industry sales volume performance, especially on a monthly basis. Even though volume has been recovered, it may take a couple of months for production to resume growth as inventory levels adjust. The other change to our outlook relates to SG&A, which we expect to grow below inflation for the year. Our revised plan contemplates many adjustments to our expenses that are targeted at adjusting to the lower volume expectation, but also helping us protect the profitability of our business, while simultaneously not hurting the brand investments that are critical to support our top line strategy this year and in 2014 given the FIFA World Cup. Now moving on to the last question: What does not change? I would try to answer this from a short-term perspective and then putting into a medium and long-term point of view. First, our commercial strategy remains basically the same. Yes, we have decided to make certain adjustments as I have mentioned before, but our 4 main priorities remain unchanged. And the positive news is that despite a very tough industry overall in the first quarter, we still manage to make good progress in each of them. First, we continued to gain market share in the North and Northeast, which shows that our decision to invest more in this region not only in terms of footprint to improve portfolio profitably but also towards brand investment continues to pay off. Second, premium volumes actually grew, thanks mostly to Budweiser and Stella Artois' double-digit growth, both of which continue to meet the growing interest of Brazilian consumers for international brands. Third, innovation volumes are also up with the new 550 ml can delivering solid results following its fourth quarter 2012 launch and there is more to come soon. And forth, our returnable glass -- our returnable strategy remain on track with both the 1 liter and the 300 ml returnable glass bottles growing volumes, particular in the off-premise channel, where we still have significant room for improvement. As our capacity for the 300 ml grows, consumers find it more and more in the supermarkets, and our execution improves. We believe this is evidence that these are the right opportunities worth pursuing. Especially when you look further down the road. These 4 commercial priorities have been key to our growth in the last few years, and we believe will continue to be so in the future. However, though the first quarter was, we continue to see Brazil as the place to be in terms of combining long-term growth prospects and profitability. Looking first at Brazil's opportunities. First, our population is still young and growing. Second, the federal government continues working to accelerate GDP growth having recently announced an investment plan of more than BRL 400 billion infrastructure for the coming years, which sooner or later will have an impact in the economy. Third, we have major events such as the World Cup and the Olympics to look forward to with the Confederations Cup approaching quickly and giving us a unique opportunity to help the market recover, while allowing us to test many of the commercial initiatives we intend to execute in much greater scale during the World Cup. Now if we focus on our industry opportunities. First, per capita consumption levels have continued to grow and are still below some mature markets, particularly in regions like the North and Northeast where per capita is estimated to be around the mid-40s. Second, despite a short term pressure, disposable incomes still has room for growth, and we continue to expect to benefit from the positive changes in terms of social mobility with more and more people improving their lives -- living standards and having greater access to more goods and services. And third, though we have improved considerably our premium volumes performance in the last couple of years, they're still much more to be done. Premium volumes remain underrepresented as compared to other beer markets. The world average is 13 of total volumes, and we are between 5 and 6. And if we look at Ambev's specific opportunities, first, we are not done innovating. Our pipeline of new packages and route-to-market initiatives remains very healthy. Although I cannot give you more color for competitive reasons, I can assure you that there are plenty of exciting new things on the way. And second, we also have market share opportunities worth pursuing, such as the North and Northeast, it's the first, and in the off-premise channel. It will not come overnight, but our view is that if we successfully reintroduce returnable glass bottles into supermarkets alone, better channel execution, our market performance should continue to improve. So it should really come as no surprise that we remain committed to investing around BRL 3 billion in CapEx for Brazil this year. Part of this investment will go to making sure that we have the capacity in place to support our commercial initiatives, such as the 300 ml returnable glass bottle and Budweiser. And another part is directed towards ensuring that we have, by the end of this year, the capacity required for the 2014 World Cup in next year's summer season, as we will not have the ability to add capacity in any material way during 2014 given the World Cup. With that, I would like to quickly run through the performance highlights of our Brazil business. In terms of Beer Brasil, EBITDA grew 0.6%, thanks to a combination of 8.2% volume decline, while COGS per hectoliter grew 18.2% and cash SG&A increased 6.9%. Despite the lower EBITDA growth, we still managed to grow EBITDA margin by 40 basis points to 52.1%. Our top line performance was primarily impacted by the industry decline, but we also lost 80 basis points of market share against a tough comparison. At quarterly in Q1 of 2012, we averaged 69% market share, which was our second best performance ever in the first quarter. Sequentially, however, our market share grew 20 basis points quarter-over-quarter, which is good news as it shows we have been regaining the share we lost following last year's pricing take in Q3. Net premium volume per hectoliter remains strong and grew 8.6%. We benefited from the carryover of last year price increase, but the fact that premium volumes performed well and their exhibition also grew weight, both helped our pricing performance. In terms of cost and expenses, COGS per hectoliter grew 18.2%, impacted not only by currency headwinds, but also higher commodity cost, particularly barley and aluminum, industrial depreciation, negative effects to mix and the impact of the volume decline on fixed cost dilution. We do, however, continue to expect COGS pressure to ease going forward in this year as our commodity hedge become a tailwind for the remainder of the year. In addition to the saves, we expect to generate as we have adjusted our cost record to a lower volume growth outlook. In terms of expenses, cash SG&A in the quarter was up 6.9%. We continue to invest behind our brands and distribution costs were higher given greater weight of the distribution and increase freight expenses. As I mentioned before, we expect SG&A in Brazil to grow below inflation for the year. Turning now to Brazil soft drinks. Overall, EBITDA grew 8.1% with EBITDA margin expanding 60 basis points to 42.7%. Despite the pressure coming from food inflation higher price, we also -- which also impacted the soft drink industry, our Brazil soft drinks volumes actually suffered less and declined only 0.5%. We believe that the main reason behind such performance has to do with the fact that brands like Guarana Antarctica continue to improve performance and gain share thanks to the success implementation of the 1 liter returnable glass bottle, for instance. Meanwhile, solid net revenue per hectoliter performance, which is up 7% in the quarter, was also important for our top line to grow 6.5%. As for costs and expenses, COGS per hectoliter was up 13%, mostly impacted by the currency headwinds, higher raw material costs, primarily sugar, and the changes to the federal excise tax framework back in October 2012. Our outlook for COGS per hectoliter in Brazil soft drinks continues to be of high teens growth for the full year. Cash SG&A grew below inflation at 4.1%. Before turning back to Nelson, I just wanted to wrap up with a final message. We know our first quarter results may be read in many ways or mean different things to different audiences. What it means for us is the following. First, this is not the first time we have faced volume decline and possibly won't be the last. The Brazilian industry has faced plenty of ups and downs in the past with volumes eventually bouncing back and growing in the long run. And given the fundamental growth opportunities to which I alluded to moments ago, we believe that this continues to be the case. Second, we have reacted quickly in the depth of our plan for the year. Put simply, we have turned a page in Q1 and are already looking ahead. Third, we will have to work harder as the ability of our team to execute the revised plan will be decisive once again. Although our track record has shown that we have managed to deliver good EBITDA growth even when volumes are not supportive, what really made the difference in the past was the commitment of our people to deliver the plan. We believe we have a plan in place that can help us deliver better top line and EBITDA performance in the next 3 quarters. As our team is as committed as ever, we like to say when times get tough, we get even tougher. We are not underestimating the challenge we have before us and it may take some time, but we are confident in our people, our brands, our plan, and our ability to execute it. Nelson, over to you. Nelson José Jamel: Thank you, João. I will now walk you through the main highlights of our international operations. Starting with HILA-ex, our EBIT improved BRL 85 million against the first quarter of 2012. Our overall performance remains on the right track with the acquisition in Dominican Republic delivering on the synergies, whereas organic volume performance in Guatemala continues to show promising trends. We have a significant volume uplift against the first quarter of 2012 and consistent market share gains year-over-year and quarter-over-quarter. Latin America South, EBITDA grew 10% and EBITDA margin expanded 90 basis points to 45%. The performance is most explained by top line growing 7.9% despite the 10.2% volume decline which, by the way, was up against a tough comparison as volumes actually grew 3.2% in Q1 2012. In other words, even though we have witnessed consolidation since the second quarter of last year, we have, nonetheless, managed to offset this through our net revenue per hectoliter results, which grew 20.2% in the quarter. [indiscernible] performance remains very strong with our overall market share growing once again innovation such as Quilmes Night 1890. Quilmes Night, Stella Artois Noire, H2Oh! Limoneto still play an important role in our commercial strategy. Meanwhile, COGS per hectoliter grew 13.4% and cash SG&A rose 14.6% for the region, driven primarily by inflation in Argentina. Looking forward, we have also witnessed much improved volume performance in April. Though the overall environment in Chile remains concerning, especially with regard to our ability to distribute dividends. Heading north to Canada. After 7% EBITDA growth in the first quarter of 2012, with volumes growing 1.9%, net revenue per hectoliter of 3.4% and COGS per hectoliter down 2.6%, it almost goes without saying that we're up against a very tough comparison. With that, volumes were down 3%, largely on the back of a weakened industry, which in turn was impacted by much colder weather and taxation hikes in Québec. Price, on the other hand, remains strong and grew 2.3%. In terms of costs, cost per hectoliter rose 5.4% due to higher material costs, negative packaging mix and the impact of the volume decline on fixed cost dilution. Cash SG&A improved 7.2%, but this was mainly due to phasing of sales and marketing expenses to support our commercial plan such as the launch of Bud Light Platinum and the Budweiser Red Light campaign, both of which were very successful. Now I'd like to cover the main items between the normalized EBIT of nearly the BRL 3.1 billion and profits of about BRL 2.3 billion in the quarter. Net finance results were a negative BRL 240.7 million. The non-cash accretion expense of around BRL 65 million related to the put option regarding our investments in Cervecería Nacional Dominicana was among the main drivers behind such increase. But we also faced higher losses related to non-derivative instruments. The effective tax rate was 17.6%, thanks to interest on capital, higher goodwill amortization and other tax adjustments. And last but not the least, in terms of financial discipline, which delivered a another quarter of consistent improvement. Cash flow generated from operating activities included 37.5% and totaled BRL 1.7 billion, which we returned to shareholders a total of BRL 5.1 billion in the form of dividends and interest on capital. As a result, our net cash position reduced significantly from BRL 6.3 billion on December 31 down to roughly BRL 1 billion at the end of the last quarter. Joseph, can you please remind us the procedure for the Q&A, please?

[Operator Instructions] Our first question comes from Alan Alanis with JPMorgan. Alan Alanis - JP Morgan Chase & Co, Research Division: João, could you help us reconcile something regarding prices, market share and the premiumization process, specifically the question would be -- I mean, if I'm reading the release right, you had a price per hectoliter beer in Brazil of BRL 218 in the fourth quarter. In the fourth quarter -- in the first quarter, that declined by 5% to BRL 208. What's driving that? And how do we reconcile that move? Or does it have anything to do with the comment that Brito did to in his call earlier today regarding gaining -- you gaining share in the Northeast, which would imply that if you're losing share overall year-over-year, you might be struggling versus the private competitor in the South. And how do we reconcile this price movement with the volume increase that you're flagging on the superpremium brands, please? João Mauricio Giffoni de Castro Neves: Okay, sure. Thanks for the question. I mean, basically, you also saw a decline on the first quarter 2012 to 2011. It was minus 2.8% and now it's minus 4.8%, the BRL 218.5 to the BRL 208.1 that you mentioned. Alan Alanis - JP Morgan Chase & Co, Research Division: But not in the previous 2 years to that but you're right. João Mauricio Giffoni de Castro Neves: Yes. [indiscernible] the same. It was not like that in the other 2 years, but it was like that. You have to remember that before compared to the past, sometimes pricing -- those years, pricing was taken during the first quarter, which had a carryover effect towards the first quarter. This time around, with the tax increase that was done on October 1, you had -- most of the price taken by the end of the third quarter, beginning of the fourth, so very little carryover going to the fourth quarter. This is true for the first quarter of 2012 and true for the first quarter 2013. And in the past, when you have the carryover, that would be sufficient to offset the state tax that usually moves on a quarter-by-quarter basis. So this time around, it didn't have the carryover to offset the regular state tax increase that takes place. So that combination gave us the net of the minus 4.8%. So very little to do with the premium volume growth [indiscernible] Alan Alanis - JP Morgan Chase & Co, Research Division: Yes, with the actual pricing of the consumer, yes. Okay, okay. Now in terms of -- I mean, we've discussed, I think, this in the past. We're seeing this competition for shared wallet of the consumer, the social economic level C and D. I mean you saw the prices of cigarettes of more than 40%, processed foods to more than 20% and so on. Beer, 15%. I mean, how does that context impact your thinking regarding pricing ahead? I mean, you would've seen that -- yes, let me stop the question there. João Mauricio Giffoni de Castro Neves: I think that's a key point, Alan. And the one that we're taking -- what we took most of the time as we planned for the rest of the year. You're right, I mean all the numbers that you have are public numbers that you mentioned. And even if you compare ourselves, our fourth quarter with our first quarter, I mean, the price to consumer was there already, right? There were no changes in terms of price to customer. That's why the net per hectoliter, that change was basically the timing of carryovers and state tax increases. No change whatsoever to the price to the consumer pretty much, right? And what really changed was more the macroeconomic environment in 2 ways, 2 that we already said during the speech. I mean, food inflation accelerating that according to most macro economists in Brazil and the data that we saw for deflation of the wholesaler level, should ease during the year. It will not be a walk in the park, but will ease during the year. And the disposable income that is not growing as much is being counterbalanced by all the different increases that are just mentioned. So we think, going forward, different from the first quarter, although, okay, not the best environment. You have the food inflation deceleration, and then you have disposable income that should continue to grow. What we have done in order to respond to that is to fine tune the commercial initiatives using much more the pack price strategy. I mean, we were being more selective in terms of the growth, for example, of the liter in the 300 ml. But we think we can do much more than what we're doing right now. This is true for RGB. That's true for some of the different one-way cans that we have. That's true for smarter promotions that we have. That's true for the [indiscernible] activation that we can have with the assets that we have both for the Confederations Cup now and the World Cup next year. And on top of that, true, you have the mix management of premium, although small coming back now to 6%. So remember, we were 5% at a point in time, came down to 3.5%, and now this quarter, we're back to 6%. Not a huge number. We mentioned that 13% of other markets. I mentioned a couple of calls ago that this actually get to 8% in a couple of years, and we're on our way to do that. So that's why we feel we can be more confident that we can continue on the strategy of the high single-digits increase for net sales per hectoliter. And one bit of point that helps towards that direction. We mentioned that April is better than what it was March. Of course, March was very bad. I mean, not that I like mid-single decline, but that was a mid-single decline with the same price level in terms of price to consumer, net sales per hectoliter that we have for March or for the quarter.

Our next question comes from Lore Serra with Morgan Stanley.

I guess I have a bit of a follow-on and extend it. So I guess what you're saying is you think that the consumer can absorb these sort of double-digit price increases of beer at the retail level with the kind of strategy you've talked about. So I guess 2 sub-points. One is that, one of the competitors have sort of published volumes that are up mid-single digit for the first quarters. So somebody's losing more market share. And just wondering from a competitive point of view, given the volume weakness that you're seeing, any signs of that cracking? And then the second question is, I think in your press release you said that some of the COGS pressure came from packaging mix, which I guess I thought meant can. So why are cans growing if you're trying to focus on the returnables, please? João Mauricio Giffoni de Castro Neves: Okay. Lore, Very good question. I mean, as a follow-up, of course, I mean, the puzzle for the year will be to protect the combination of volume market share in price without sacrificing profitability. And we think we have the right plan to do that. You have to remember also that all players are facing higher taxes, FX, commodity pressures and higher food inflation. And that 3 out of the main players are publicly listed companies which there's greater formality in the marketplace. Regarding the one company that you mentioned and judging by what I think you're talking to -- judging by their public disclosure, it may have something to do with the fact that they had an easy comp in the first quarter of last year, which declined by 5.5%, it was a moment where they were actually publishing the volume. Now it's just a combination of total sales, so difficult to compare. So we're not in a position to comment, but that's the public information that we have. In terms of the COGS, I will let Jamel answer that for you. Nelson José Jamel: Hi, Lore. Regarding COGS in Q1, yes, we had some of packaging mix affecting our performance, but the key driver was really the negative impacts we had not only from currency but mainly from commodities. So packaging mix was less of an issue and, as we see, for the balance of the year. I think that's why we retail it with our guidance. We have a good visibility that we have in place. We should see specially commodities getting much better in the fourth supporting this sort of guidance we gave you for.

Great. But are returnables growing as a percentage of your mix currently? Nelson José Jamel: Yes. We have returnables in total growing many on the back of the litter and the returnable glass bottle 300 ml. So that's the driver for returnable growth that we have. But for us, boost in returnables doesn't mean losing grounding on ways. We always like to say we're not about returnables all one ways. In the end it's about having the best optimal mix growing both returnables and one ways. We don't want to lose share in the end of this grounds. Of course, we will always protect our product with a new glass bottle strategy, which we think is the more profitable and more sustainable long-term. But we have, of course, the impact of both in our results, and the COGS impact again was mainly driven by commodities and FX rather than in the packaging mix.

Our next question comes from Robert Ford with Bank of America.

I was surprised there was no mention of Lei Seca. And I was just curious how your volumes did on and off premise, and if you perceived any impact at all from Lei Seca. And what was the impact the last time there was a crackdown? João Mauricio Giffoni de Castro Neves: This is Joao. Very good question. We saw some of the other beverage players mention about Lei Seca. Of course, we don't think there is a 0 impact, okay? We look out to other markets, we look also at some of our numbers in Brazil in 2008, especially in Rio, when the Dry Law was enacted back in August of 2008. So you do see some complaints. You do market visits, and people talk about it. But to be quite honest when you run the number on a more statistical basis, and when you also do qualitative research as we did, it's very difficult to say that important portion of the decline was driven by the change, if you want, okay? So there is a change we didn't mention because we do not think it was significant one. Of course, there is a time lag, which we saw in 2008, for consumers to adapt. Their consumption habits in the 4 consumption levels are not materially impacting the longer term, but there are some adjustment in the short term. Because it's more short term than longer term, and because that's what our analysis shows, we didn't miss. So in other words, there is some impact, but we think they are not significant.

And if I could just one other question. Is there anything you can do to accelerate the rollout of the 300 ml? You mentioned some of the greater focus in terms of the Pit Stops, but can you talk a little bit about the acceptance in the trade of the 300 ml, and anything you can do to increase availability of the package? João Mauricio Giffoni de Castro Neves: Yes. I think first thing, Bob, I mean as you saw and you know and you probably noticed by the speech, I mean, yes, definitely there are. And we will be -- we will expedite more the rollout than initially planned. I think the first and most important point for us to do that is to have the capacity. And as we mentioned in the speech, we doubled the capacity from 2012 to 2013. So we have the resources, plant-wise and bottles and crates and all that to further expand to the rest of Brazil. We have pretty much almost in every region of Brazil. And actually the 2 reasons out of the 8 or 9 that we cover -- the way we structure the sales organization. Only 2 don't have right now and will have by -- towards the end of the year. So we're ready from that standpoint. From a consumer standpoint, there is very good acceptance. It's a new news. So as -- like in any introduction, you present them to the trade, the trade presents to the consumer. And after the product is there, after a while, I mean, both the consumer and the trade are getting very excited about it. And we're also very excited about it. So we have many internal goals attached to this now to make the next 8 months, to make the whole year and recover the shortfall that we have right now.

Our next question comes from Gustavo Oliveira with UBS.

I want to understand a little bit better the behavior of your gross margin in this quarter. I thought that contraction was a little bit higher than I was expecting, and I thought that the currency headwinds was a bigger effect. And my understanding is that, that would be falling to your second quarter results going forward. So if you could please help us understand what happened in the first quarter 2013 for Brazil Beer, and what is your expectation for the second quarter and going forward in your COGS spread and your gross margin period? Nelson José Jamel: Sure, Gustavo. Nelson here. So what you saw in Q1, the negative impact in gross margin, first of all, we had the volume decline, which in a way doesn't help the dilution of our fixed costs. That's probably something that you didn't have in your calculation or expectations. So that's one element that's kind of new in there. The other is -- and we probably talked about it before is, on average, our currency hedges on a quarterly by quarterly basis, this is the easiest we had. So when you look versus last year in terms of currency hedges, we guided for an average of 193 for 2013, and we mentioned that the toughest impact, the worst impact was going to be in Q2. But on the other hand, in terms of commodities, we are still lacking very tough comps. So to give one example, although for the year we expect barley to be down high-single digit, the commodity itself in the first quarter, it was up double digits, and we're going to have, as of 2Q, a double-digit decline in barley. So there's always this net impact, net effect of currency and commodity, which normally are going to be on different direction, the opposite way. But as I mentioned before, the sort of guidance we gave the [indiscernible] COGS, we remain committed to it given the sort of outlook. But in Q1, maybe the new news there was the lower volume therefore affecting fixed cost dilution, but all the rest came as expected.

So when you look for -- I think you mentioned in your opening remarks that it could deliver like high teens COGS to [indiscernible] growth and -- but from the 61.5 COGS per hectoliter that we have now, it's probably the new base that we'll be sustaining going forward, it shouldn't go up that much, right? That already will give you the [indiscernible] Nelson José Jamel: The other way, I think. It should go down as a result of the, let's say, the effects is less commodity impact that I just mentioned. So what we saw in beer this quarter is going to be called the worst performance quarter-over-quarter in beer. And in soft drinks, the other way, you may get -- it's going to get worst because of the -- even for the sort of guidance we gave for the year, which is about high teens growth in soft drinks, it's going to be pressured on -- I mean quarter-over-quarter. While in beer, we're going to start to benefit from the commodities improvement for the balance of the year.

Okay. And I have one last question, if I may. On your price increase strategy, given the volume growth that you -- the volume decline that we have in the first quarter and a week later. When you look forward and I think at the AVI call Brito said that you don't need to push any price increases for this to offset the price -- tax increases that you have in April. But theoretically it could be a lot more difficult in October when you have to increase those prices for beers and soft drinks. So what changed in your strategy for the rest of the year given the volume results in the first quarter? João Mauricio Giffoni de Castro Neves: Gustavo, this is João. I think it is a lot in line with Alan's question in the beginning of the call. Our ability to sustain the pricing going forward, if you listened to the answer. But basically, what we said in the beginning of the call was that we think there is pressure, of course, coming from food inflation as well as from disposable income accelerating. We think this -- in a way, it's one of the worst moments of the year in terms of food inflation. It should ease, but I mean, it will be a headwind. It's not that it will be a walk in the park. And therefore what we did is we have replanned a lot of the commercial initiatives behind pack price in order to help consumers to bridge between this moment of pressure into a better moment. So we're going to find a sweeter spot in terms of price point given that we have the resource, we have the plans, we have the footprint to do that, we have the speed to do that, while maximizing also the share equation. That will be deployed. It's being already deployed as we speak. And therefore we have maintained the high-single-digit net per hectoliter outlook for the year.

Our next question comes from Luca Cipiccia with Goldman Sachs.

I have 2 actually. The first is a bit of a rephrasing on the previous point about pricing, and it's the following. Should we see a change, a further change in beer taxes in Brazil going forward? Would you still feel comfortable to act on pricing the same way that you did last year or would you think that in this case, you may have to take some of that on your margins? That's the first question. And the second is more on the share restructure. If you could give us an update on where you stand in the upcoming calendar. And also, although I understand you can't quantify the impact, but if you can help us clarify what accounting treatment this will bring as well as what reserves it may impact. I think there's a little bit of a confusion in the market on how this may play out. It would be great if you could get back on this as well. Nelson José Jamel: Okay. Let me start with the question on the share restructuring, then, Joao, you'll the question on the beer taxes. In terms of the schedule that we announced, we are pretty much on track, and then of course we are working on the filings right now. We are talking with the SEC, working on the prospectus. And we believe we're going to be in a position to go public with the F-4 and also with the setting of the date for the shareholder meeting, probably around mid-June. So we should hear something about this over the next 2 weeks. And regarding the benefits of the transaction, of course, we talked about different benefits, right, in terms of improved corporate governance, increasing the liquidity, simplifying the cost restriction, therefore, saving some admin costs. There is goodwill that we'll also be able to benefit from at the holding company level. It's going to be the [indiscernible]for the share swap merger. Then we also talked about increasing our flexibility in terms of capital structure. The way we are explaining these and putting this in the market is that we have been -- we're going to be able probably to potentially solve an issue that we have been facing more and more which relates to the fact that we have a very strong cash flow generation, and it has been growing at a faster pace than our profit reserves. So if this imbalance remains for a longer period of time, we could create some hurdle in the medium to long term. We've got our ability to implement our payout strategy and manage our capital structure. The way the transaction is proposed in terms of the share swap merger, it probably will help us in addressing this as we were able to implement our payout due to the change we expect to have in terms of our capital structure. So the share swap merger is supposed to be the net market value, and we should have an impact in our capital and capital reserves in accordance with Brazilian legislation. So be it through incremental dividends, incremental interest on capital or even share buybacks, should the company decide do that in the future, we will have to leave room, and that's why we're saying we have the flexibility to manage it over time. But since this transaction is not approved and even the disclosures are not public, we test how far we can go at this stage.

But is it right to interpret that the profit reserve would be impacted because through the amortization of the goodwill that it will generate over time? Is that the right way to read it? Because the link between profit reserve and transaction is the one, in a sense, I may be missing. Nelson José Jamel: Yes. No, there is no goodwill. So that's important that once we have the F-4 registration statement disclosed that things are going to be more clear what will be the accounting impacts. But again it has nothing to do with goodwill. And the account details will be in the registration statement that will be disclosed between 2 weeks or so. João Mauricio Giffoni de Castro Neves: Okay, for the first part of the question, Luca, I think we were very specific on the price outlook for the year. In terms of the longer term, we always said prices, we want prices to grow in line with inflation. That was our story for most of our lives. It has somewhat changed in the past 2 years given the tax increase. We always also say that price in line with inflation plus the tax increase, so I think that's the outlook that we should incorporate. And then I think an additional comment in terms of the tax framework. The tax framework is there. It was announced by the government both in 2009 and revised again and mentioned sometime last year. We're always there talking to them. I think the government has the task to balance investment jobs and tax collection, while we have to balance price volume, share and also investment. So we always try to find the best compromise as we're trying to defend our industry, and we will be at that table discussing that.

Our next question comes from Alex Miguel with Itaú. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: Just questions. First on the -- if you can comment and be more specific about the performance of the nonreturnable glass bottle during the quarter. But taking a look at the breakdown of productions, we saw a super decline in returnable glass bottle packaging versus other packaging, almost a 7% decline in the first quarter of the year. So I was wondering, to what you attribute that decline in returnable glass bottle packaging during the first quarter? Is it less consumption in bars and that's related to the Lei Seca? Or also the issue with disposable income? My only concern is that there could be a trend, a market trend going forward that I understand you're trying to counteract on that. But I just want to get your views on what you think happened in the first quarter and your outlook for returnable glass bottle for the year. That will be my first question. And the second question, if you can comment on the volume performance on the Latin America South region, which was not good as well. And kind of what you would expect for the remainder of the year? That would be great. João Mauricio Giffoni de Castro Neves: Okay, I'll start by the second part. Yes, Latin America South also had a tough quarter volume wise. They are already looking at April numbers much improved. The story was similarly had a very tough March. So March was tough just like it was in Brazil. And quick recovery in April. So April looking at much better numbers. As you know there is a price increase in place but with some exceptions or some negotiation going forward, I mean, some of the beverage companies have mentioned that. So I think the outlook going forward is -- it's getting better as we speak. In terms of our RGB and one ways, I think the numbers you are looking at is recovery production. You have to remember that the first quarter of the year is when Carnival takes place. So this is an important moment for one way. And maybe the explanation you are looking -- actually, we look at production not sales, and people did prepare for the Carnival. And usually when you prepare for the Carnival you work on the one ways. Actually, our investment behind strengthening returnable glass bottle in the marketplace has been an important volume market share driver for us. I mean we started 2012 with a bigger focus on reinforcing the on-premise channel to the [indiscernible] micro event reintroducing returnable. Also in the off-premise channel to the Pit Stop, the artificial, we continue to see great, great volume in value of doing that. Execution getting better and more opportunities arising. But we want to win the game in both. We think it's not an 'or' game that we can win in the RGB and not in the one ways end game. We've got to win in both. But we have been supporting the reintroduction of returnable glass bottle in some channels, but they no longer exist. And we have many great examples of chains that you had basically 0 very large account chains and now have 20% of their sales already in returnable glass bottles. So I think it's working, and we do the right strategy in place. But again, we want to win both games, not just one. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: So wrapping up that, you think that during the quarter, you don't see a significant difference regarding your sales effective mix? João Mauricio Giffoni de Castro Neves: Exactly. I see the regular change in the one ways giving the seasonality of carnival. I mean, that's summertime, Carnival, end of the year. It's the type of event where people many times work with the one ways. And there's always a growth during the Carnival and then it comes back to the more regular mix. Nelson José Jamel: I think just one way to exemplify it, and I think that was also somehow a question from Lore a few moments ago. Of course, both presentations went down right? We had volumes down 80%. So of course, I mean, both one ways and RGB went down in terms of total war actual volumes. Of course when you look in size, the same way we're going to see 1 liter and returnable 300 ml bottles growing as opposed to going down. Of course there's not enough to offset for the entire packaging type the same way we saw that in one ways. We saw the new king size, like the 550 ml growing as opposed to the 250 ml. So there was a mix change. And for you to have an idea, out of the total COGS per hectoliter growth that we had in Q1 for beer, around 1% of it was packaging-mix driven. So it was really minor into the total double-digit growth that we had for hectoliters. So it was a minor shift, and we're seeing each presentation or group of presentations. There are different behaviors. Again their innovation is playing an important role in both, and that's why we want to move forward. We want to have innovations driving volume growth both in RGB and one ways.

The next question comes from Lauren Torres with HSBC.

I guess you've covered the pull pack price strategy. But I was hoping you could talk a little bit more about the cost management capabilities you mentioned. It seems that historically Ambev has been a good company with respect to -- or a great company with respect to managing the cost line. So I was just curious if you could give us any details about where the upside from either productivity or cost to outlook is going to come from this year being that you've done a lot on that front historically. Nelson José Jamel: Nelson here. Just of course more than ever, we're going to use our capabilities of cost management in such an environment, right? When we see a tougher outlook volume-wise, of course, we put together the whole team, looking into it line by line, package by package. And both in COGS and in SG&A, the first exercise, to be honest, was to adapt our plan and our restructure for the sort of volume we have. So be it by reducing shift in the plants, by adapting our distribution centers to the new volume outlook. So for you to have an idea, we have around -- close to 3,000 trucks in our fixed fleet, and we're already starting to adjust that, reducing our fixed fleets to cope with the volume outlook. So that's the sort of thing that if you don't do right away or if you take too much or too long to do it, 3 -- 2, 3 months later, it's too late because the volume was not there, but the fixed strategy was. So you have to really adapt quickly. Of course you need a disproportional focus on the, what we call, the nonworking money. So we're really leveraging on procurements here to increase coverage, negotiate better contracts, push back inflation [indiscernible]. So that's why we feel very confident about the guidance -- for the new guidance that we gave in which we want to grow SG&A below inflation for this year. And we think we have everything at our hand to do. And the [indiscernible] of it is that stuff that we control, right? I mean, it's much more difficult to influence behavior, but you control the cost so it's totally into our hands. And we do all that of course without hurting our brands, right? So I'm not here for short term. I'm here for the long term. We have important events coming up, so we are taking care of it, be it from a commercial spend standpoint, be it from a CapEx standpoint. We are committed to the investments around BRL 3 billion that we mentioned for this year as we think it's critical for the short term and also for the medium to long term, right? So bottom line, of course, we have this capability to test again, but we think more than ever, we have everybody worldwide to do this, and we'll do it.

Okay. I guess I'm just trying to get a sense of as we think about next year, obviously these reductions are specific to this year. And then once we see return to better growth, obviously the World Cup, that reversal of how you spend is easily changed back I assume to what we've seen historically. It's not something that it's hard to get back what your pulling back on? Nelson José Jamel: Definitely not. I mean every time we're just a structure looking into the volume outlook. I mean, if you have to do it fast enough, then you need to be prepared. And that's why for instance, we're going to be more -- we're going to work hard and adapt more the SG&A rather than CapEx because CapEx you don't build a capacity in less than one year, right? So while scaling up commercial spend, you can do it much faster than adding CapEx. So that's why we're going to be more focused on SG&A rather than adjusting our CapEx outlook.

Our next question comes from Tobias Stingelin with Santander.

Jamel, quick questions. The first one, can you just provide me some clarity on the SICOBE numbers. I know that the SICOBE numbers there are quite different from sales numbers. But SICOBE indicated like a 0.5% decline in the first quarter and volumes were down almost 7% based on what you said. And if you look at SICOBE data for April, they were pretty weak, and we know that volumes are pretty weak as well from what you said. Do you think that they skew a lot of volumes sitting around like inventories in the shelves in the supermarket or something like that because really the information is too different in regards to production and to sales at this point? That's the first question. João Mauricio Giffoni de Castro Neves: This is João. You are right. It's different, we mentioned in the call because we know people are looking at the SICOBE numbers on a monthly and sometimes weekly basis. And it's not a good proxy for sales. I mean on a longer term, it's a good idea, but not in the short term. So what you saw in March, actually sales in March were worse than SICOBE data. And now April is the opposite because the market is recovering and the production of April is still adjusting. What we mentioned in the speech is that it will take a few months for you to "synchronize" or to be a better proxy once again. So in the short term it's not because you fell, less production then sales in March and now it's the other way around in April. It's basically that. There was a lot of inventory, let's say, burned down "that are being deployed" during March and much less in April.

Perfect. Just another question. I think this is for Jamel. I'm sorry if the question was answered before. But you had like a big increase in the other operating income in the first quarter, around like 120%. What is this line exactly, tax incentives or -- what's that exactly? Nelson José Jamel: Yes, Tobias, this is exactly tax incentives. Normally, when we make a higher CapEx for a couple of years now, so we have been obtaining government grants as a counterpart of this impact. So they are related to state long-term tax incentives. That was the driver for the upside you saw. By the way, in this line, in Q1, we had, let's say, almost half of it was one-time credit related to this long-term tax incentives. So maybe the best way to think about -- for the following quarters is, yes, is to continue to grow versus the previous year, but at half of the speed that you saw in Q1.

Great. And there is like no other provisions like bonus or something like that? There has been no adjustments so far here? Or you just basically did a smaller provision probably just because of the quarter, but there's no change in the outlook there? João Mauricio Giffoni de Castro Neves: No, no. This line doesn't include any provision for bonus. This goes directly into other lines in the SG&A. I mean, the -- I think the disclosure that we provided in the release on Page 17 gives you the breakdown. For instance, what you have in this line is essentially the net gain on disposal of properties, plant and equipment, this sort of stuff, right? So that's why other operating results. And of course there the biggest line is the government grant, government grants benefit that we get, be it normally waiver or a long-term incentive.

Our next question comes from Robert Ottenstein with ISI.

Can you give us some numbers in terms of market share, sequential market share improvement in March? Do you have anything for April? And exactly where do those numbers stand, please? João Mauricio Giffoni de Castro Neves: No, Robert, we don't open up those number on a monthly basis.

Did it continue? Can you tell us -- I know they were up for the quarter. Was there sequential improvement in March and do you see it in April? João Mauricio Giffoni de Castro Neves: We've been reporting on a quarterly basis. I'm not opening up by month, and April hasn't arrived yet.

Okay. And how should we look at profitability for Argentina in the second quarter? I know you said volumes were picking up, but given the price controls, how is that going to impact and how should we think about profitability in Argentina in the second quarter? João Mauricio Giffoni de Castro Neves: Yes, I think what you saw in Q1, it was primarily an issue of volume rather than price controls. Of course you know the environment there, there are some price controls in place, but again, you also have some room to negotiate and do it in line with the inflation we are faced. So at the end of the day, we have more of an issue of volume drop rather than margins, right? So margin is even extended in a volume-decline situation. So our sell-through was much better than what we saw in Q1. I think that's the driver to follow. It's more a volume issue rather than a pricing issue.

But given the inflation is in your cost still going up in the second quarter, and my understanding is you don't have the opportunity to increase prices, are you going to start lapping some of increases that you've had? Nelson José Jamel: No, not really. Most of the price increase that we took was in the end of last year. There was more in Q4 last time. And at the end of the day you do have the opportunity to work on your top line, right? Be it trying to put or increase prices in line with inflation or also trying to improve mix, which is the reality that we are having more and more shifting to premium brands. So as we saw in Q1, we are not anticipating any different behavior in terms of [indiscernible] performance, and we are more focused on the industry volume and the industry outlook. Of course, not to mention the difficulties we are facing to repatriate funds from the country, which we had alluded to before. When we published our full year results, we mentioned that we had roughly BRL 1 billion there in the way of declared but unpaid dividends. The situation hasn't changed.

Our last question comes from Alex Robarts with Citi.

Most of my questions have been answered. Both why don't I just kind of focus here on the outlook and commentary. And there's really 2 things I was keen to ask about. First of all, I kind of appreciate that you have the revised plan, right, in Brazil Beer for the rest of the year. And the delta, right, in the volumes that you thought about for the industry earlier this year and now is about 4 percentage point, kind of, right, I mean roughly. And you're keen to stick to the high single-digit revenue per hectoliter in Brazil. And I guess I'm still not clear, and it'd be great if you could kind of comment on this, how do you pick up that delta of 4 percentage points in price given the environment looking out for the rest of the year when it seems like a lot of your revised plan, right, is about pushing pack price, 300 ml, growing in the North and Northeast and all of these kind of factors, right, have a little bit of a downward effect on your price per hectoliter? So it'd be great -- I mean, is there an outside impact that you're expecting on the premium segment this year? If you could kind of help or just comment on that piece. And, kind of, I guess, secondly related to that is, does it make sense to really kind of keep to your cash OpEx guidance below inflation given these kind of initiatives that you're going to be trying to rollout? And I'm wondering how you're balancing, right, this guidance of cash OpEx growing below inflation with some of the activities like the Confederates Cup that's coming up in June and some of these other rollouts. So it'd be great if you could touch on those 2 points. João Mauricio Giffoni de Castro Neves: Hi Alex, Joao. Very good question. I mean it's almost a summary of the whole call because we touched on some of those, but it's a long story. But I think at the end, trying to sum up everything we said, I mean if we think 2011 and 2012, they also started as tough years, okay? And I think what we were proud of back then, and that was also for 2009 and 2010, is actually for different reasons. But in those first 2 years, volume grew a lot and we very quickly moved to take advantage of that in '11 and '12. I mean, first quarter also we felt the year was not going to be a very strong year. And we very quickly replanned for that sort of situation. Of course, now is the more important decline. So we had to be even stronger replanning exercise. We think the best way to tackle this for the short term and for the long term, given that we also mentioned outlook that we still feel very confident about the Brazilian long-term prospects, we think the right way is first to continue investing in capacity. To have a great year, election year, World Cup year in 2014, we don't want to take any shortcuts here much the opposite. Then let's do everything we have to do to protect the future. So number one in our decision-making process. I think second is we need to have enough money to support and grow our brands during 2013, but I mean resize everything else. Everything else that doesn't touch the consumer, have the right number of trucks, the right number of ships at the plants and to cut as much on working money as possible. And of course, we want to do a great Confederations Cup. So we have all the resources necessary to do the best Confederations Cup possible that will start 45 days from now, and we're already working on it. If you turn on TV, then you'll see the first promo. So a lot of excitement at the consumer level, at the trade level, at our key account clients as well. So I mean we're going to take full advantage of that. We also have all the right resources behind the growth and the introduction of the returnable glass bottles. We also have all the resource needed to continue to grow our premium brands such as Budweiser and Stella, as well as the local domestic crucial. We have found a way to balance this. But at the same time, being conscious to the issue of the consumer being pressured in the short term. So we think the smarter way to find the right price points to them is through the pack price strategy. So we use it at another level that we used in the past to try to build and to use this bridge-gapping exercise for the time being while there is this momentary pressure. So that's sort of in a nutshell what we cover during the quarter. I hope that answers the question.

Fair enough, okay. So I guess just a follow-up here, sorry, Is that the new -- we're going to see -- it seems to be critical here to your hitting your high single digits revenue guidance for hectoliter is the premium segment. Just the last thing there is, how is the premium segment growing today? Is it 1x? Is it 2x or 3x kind of mainstream? And I appreciate, we have -- we've just gone through a tough quarter. And our channel check seems to suggest there's a lot more price segmentation happening within this 4% or 5% of the industry that is premium. Can you kind of confirm that? I mean, it seems like there's a lot more product launches and such in that average premium price within that segment. Is it stable? Is it kind of down, up? I mean, any color around the premium segment outlook would be helpful. Nelson José Jamel: Yes, sure. Well, premium, as I mentioned a little bit earlier, we were at around 5% in the past. And then in the years where we grew the mainstream a lot, it declined to about 3.5%. I mentioned that in the quarter already very close to 6%. So it's growing a lot coming from around 5-ish in the same quarter last year. So it continues to grow and taking more importance in the mix, but still 6%. So the premium overall, it's growing despite the industry decline and the international premium is double digits, to give you an idea. So that's sort of a summary of what's going on.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Nelson Jamel for any closing remarks. Nelson José Jamel: Okay, thank you, Joseph, and thank you, everybody, for joining us today. And we are looking forward to speaking with you again on July 31. So that's it for today and thank you very much. Bye-bye.

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