Ambev S.A. (ABEV) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for waiting. We would like to welcome everyone to Ambev's Second 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 everyone 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 the general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature. And unless otherwise stated, percentage changes refer to comparisons with Q2 2012 results. Normalized figures refer to performance measures before special items, which are either income or expenses that do not occur regularly as part of Ambev's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT and EBITDA on a fully reported basis in the earnings release. Now I'll turn the conference over to Mr. Nelson Jamel, CFO and Investor Relations Officer. Mr. Jamel, you may begin your conference, sir. Nelson José Jamel: Thank you, Mike. Good day to all and thanks for attending our 2013 second quarter earnings conference call. I will kick off with the performance highlights for the quarter and then João will cover the Brazil operations in more detail. I will then return to go over the results for foreign HILA-ex, Latin America South and Canadian businesses, as well as financial performance before opening up for Q&A. So let's get going. Overall, EBITDA performance improved during the second quarter, with Brazil Beer's top line performance leading the way. On a consolidated basis, after 2.3% of business growth year-over-year in Q1, we delivered 6.8% of EBITDA growth as compared to last year. As for net revenues, year-over-year growth jumped from 2.4% in the first quarter to 8.3% in Q2. When you look at the divisional highlights, EBITDA performance improved across the board. For Brazil, net revenue is up at 8.8%, and EBITDA included, 5.8%. In Latin America South, net revenues rose 17.2%, with EBITDA growing 15.6%. Canada net revenue was down 2.5% but EBITDA actually grew 0.7%. And finally, in HILA-ex, we delivered 3.7% growth in net revenues and BRL 94 million of the business, which represents an improvement of 36.5%. Now, I'll turn it to you, João. João, please? João Mauricio Giffoni de Castro Neves: Thank you, Nelson, and good afternoon, everyone. On the last conference call, I spent a considerable amount of time on Brazil, focusing on what actually happened during the first quarter, what we plan to do about it, what changed in our outlook for the year and what did not change, thinking both short term and mid and long term. And I also mentioned that the tougher-than-expected start for the year meant for us that in order to deliver better [indiscernible] and EBITDA performance for the remainder of the year, we would have to work harder [indiscernible] as the ability of the team to execute the revised plan would be decisive once again. So during the second quarter, we need to ensure that we read the causes for the market decline in Q1 correctly, we focus on the right things to start improving our performance and we execute positive. The environment surrounding us in Brazil during the second quarter was not as bad as the one we witnessed in the first quarter. And we got some help on the volume side from the FIFA Confederations Cup, despite the public demonstrations that took place in the country in June, but things were still pretty challenging. Nevertheless, I believe that the results we managed to deliver are the initial evidence that we are on the right track to deliver better top line and EBITDA for the rest of the year. So before moving on to the numbers, I just want to quickly congratulate and thank the team for the results we are sharing with you today. This shows the necessary sense of urgency, be focused on the few right things that could make a big difference, these show results and they executed extremely well. There is a lot to be done. The first quarter was very difficult, and I was able to see for myself that our people definitely rose to the challenge in Q2 and they are ready for the second half. Let's go to the results now. In Brazil Beer, it did increase 9.2%, driven by solid top line growth of 9.6%, while the cost per hectoliter rose 13.3% and cash SG&A increased 17.7%. EBITDA margin contracted 20 basis points to 47.1%. What I would like to highlight in Brazil Beer is that such EBITDA improvement came mostly from the strong top line growth where we deliver a better balance in terms of volume, net revenues per hectoliter and market share. Let's look at each of these, starting with the volumes. During the second quarter, the Brazilian beer industry still face the 2 main headwinds we discussed during our Q1 call, namely, food inflation at very high levels and the deceleration of disposable income growth. We began seeing signs of deceleration in food inflation growth year-over-year, but it remains growing double digits on a rolling 12-month basis. Meanwhile, [indiscernible] disposable income did grow in real terms. It was launched again by less than [ph] the same period of the prior year. We continued to believe there is some room for improvement during the second half of the year that should continue to be only gradual. In addition, as anticipated, volumes for the quarter were positively impacted by the FIFA Confederations Cup. The 2-week event took place in 6 cities that hosted 16 matches in total. This was a unique opportunity for us to test many of the commercial initiatives we plan on executing at a much, much larger scale next year during the FIFA World Cup, and we are very pleased with the results. Our initiatives included: First, new product launch, such as special edition celebratory Brahma aluminum bottle, also a celebratory Confederation Cup aluminum can, as well as the launch of the Brahma Zero Alcool. Target promotions like the well known now here in Brazil, like the 3-for-2 Brahma promotion in select off-premise key accounts and the limited edition promo pack with a jersey of the Brazil national soccer team. Third, trade [ph] activation with Budweiser and the stadiums and at hundreds of VIP points of sales in major cities across the countries, and with Brahma, in points of sales around the stadiums and in the off-premise channel. And finally, our events platform, not only to larger-scale events in São Paulo and Rio, the latest [ph] launch where thousands of Brazilians came together to watch the Brazilian teams' matches, but also for the beer gardens that will be set up outside a few of the stadiums, and many micro events in hundreds of points of sales. Net-net, we estimate that the FIFA Confederation Cup contributed with roughly 300,000 hectoliters of incremental volumes, and all despite the demonstration that took place in several cities nationwide. The takeaways from the events are many. And we definitely need to make sure we scale up these initiatives in order to come -- in order to really make the most of the FIFA World Cup in 2014. But the FIFA Confederations Cup result really give us reasons to remain optimistic for next year. And in terms of weather, following a cooler April, we enjoyed better weather in May and June, with warmer temperatures in the last rainfall. Meanwhile, market shares remain flat sequentially and averaged 68.1% for the quarter, which is well within the historical rate of 67% to 69%. In addition, we built some momentum within the quarter, which is good news. Year-over-year, however, our average market share for the quarter was 70 basis points lower than Q2 2012. Finally, regarding net revenue per hectoliter, we managed to deliver 10% growth, showing that the pack price strategy worked in terms of producing better volumes, while not compromising our profitability. Moreover, the fact that the weight of their execution [ph] was higher than last year and that the premium volumes grew mid-teens were certainly helpful, as well. Now our top line performance will not have been possible had we not executed our commercial plan as we did. I cannot stress this enough. In addition to our efforts to make the most of the FIFA Confederation Cup as previously mentioned, our greater focus behind the pack price strategy is off to a good start, while our top commercial priorities made continuous progress. Our decision to increase the presence of the 1-liter returnable glass bottle and accelerate the rollout of 300-milliliter returnable glass bottle are proving to be valuable tools for us to help Brazilian consumers cope with the short-term pressures of disposable income. The 1-liter grew well ahead of our overall volumes, while the 300 nearly tripled its volumes. At the same time, we did not lose sight of the commercial platforms that have consistently delivered great results for us in the last few years. [Audio Gap] Versus Q1, thanks mostly to the commodity hedges becoming a tailwind. And SG&A higher, but due to fading of sales and marketing spend with the FIFA Confederation Cup, but guidance for the year remains. Now moving into Brazil soft drinks and nonalcoholic, noncarbonated drinks. This was a very difficult quarter for the division. It should be the most challenged one of the year. All in all, EBITDA declined 10%, 10.7%, with EBITDA margin contraction of 730 basis points to 41.1%. Our top line grew 5%, thanks to the net revenue per hectoliter growth of 10.2%, more than offsetting the 4.7% decline in volume. The industry faced the same challenging environment as the year with the additional burden of having to continue to implement the higher-level real price increase to offset last year's changes to the tax legislation specific to CSD, which hurts CSD more than beer. Looking ahead, however, our top line performance should benefit from the fact that in late May, the Brazilian Federal Government restated most of the benefit of the so-called Juice Law. Moreover, we also believe that the pack-price strategy, which, in Q2, worked very well for our Brazilian beer business, can also help both improve our top line performance in the second half of the year for the Brazilian soft drinks division through, for instance, increasing the distribution of 1-liter returnable glass bottles for Guaraná Antarctica. Market share was a bright spot, reaching 30 basis points of the market share. Our Guaraná Antarctica brand did great again and was the primary responsible for the market share evolution. The 237-milliliter PET bottle and the 1-liter returnable glass bottles Guaraná Antarctica were the main drivers on the packaging side, but the brand also benefited from the activation around the FIFA Confederation Cup, and the fact that it is an official sponsor of the Brazilian national soccer team. Plus, during the quarter, we launched our biggest ever promotion for Guaraná Antarctica, which began in the second quarter and has just started to deliver better results in terms of volume, share and brand equity. Seeing such promotion is expected to run through September, we also believe that it could definitely help us to add to overall better performance for the second half of the year. On the cost and expense side. COGS per hectoliter grew 19.7% and SG&A was up 32.8%. The spike in COGS per hectoliter was caused by higher currency and adverse sugar hedges, which should get better as the year progresses. The impact of the changes to the federal excise tax regime, which came into effect in October 2012, higher industry depreciation, the impact of the volume decline on fixed cost dilution, not to mention a very tough comp we faced against the second quarter of 2012. Year-to-date, COGS per hectoliter is growing 16.2%, which is consistent with our expectation of high teens growth for the full year. As for the SG&A, the 32.8%, I believe it was also impacted by higher distribution expenses given the greater weight of their execution [ph], but also by the phasing of commercial investments associated with the FIFA Confederation Cup and the Guaraná Antarctica promotional campaign. But to be clear, there is no change to the cash SG&A guidance for Brazil in the year. Before handing over to Nelson, I just want to close by quickly commenting on our expectations for the second half of the year. In terms of guidance, as we mentioned in our press release, there is no change. We expect the Brazilian beer industry should be either flat or show a low single-digit decline for the year. The macro-related headwind remains, but we expect them to continue gradually easing in the second half of the year. However, net revenue per hectoliter for Brazil should grow high single digits for the year. Disciplined execution of our pack-price strategy is showing that it's possible to grow volume in a profitable way. Meanwhile, COGS per hectoliter in Brazil for the full year should grow from high single to low double digit as we have mentioned since our fourth quarter 2012 call, with Brazilian CSD & NANC growing high teens. Cash SG&A in Brazil should grow below inflation for 2013, benefiting from the frontloading of sales and marketing spend in first half, but also, with a lot of emphasis, during the second half, on nonworking money initiatives. And finally, Brazil CapEx remains around BRL 3 billion for the year to support our commercial initiatives and be ready for 2014. So wrapping up, we got tougher in Q2, which was great, but that we must remain during the second half of the year. No question about it. We continue not underestimating the many challenges that lie ahead, but remain very confident in our people, our brands, our plan and our ability to execute it. Nelson, back to you. Nelson José Jamel: Thanks, João. Let's take a look at our performance outside Brazil now. Beginning with our HILA-ex, we delivered BRL 94 million of the business and 30.5% of EBITDA margins, with 580 basis points of EBITDA margin expansion. Most of the improved EBITDA performance came from the Dominican Republic, as we completed the 1-year anniversary of the CND acquisition. We delivered the anticipated EBITDA performance of approximately $190 million in the first 12 months of combined operations, despite a tough industry since late 2012 given the local tax reform. And we're now looking ahead to keep improving our organic performance in the Dominican Republic, while continuing to expand to the Caribbean. Just to illustrate, following the closing of a transaction between Anheuser-Busch Inbev and [indiscernible], we already began working with the Corona brand in several islands in the Caribbean, and I'm very excited with the growth opportunity for the brand to team up with precedence in the region. As for Guatemala, volume and market share performance remain delivering good results for us. Turning to Latin America South. We delivered 15.6% of EBITDA growth, driven primarily by an increase in the top line of 17.3%, even though volume there is too negative territory, declining 0.8%. Once again, our net revenue per hectoliter and market share performance remained strong and helped us navigate this too tough environment in Argentina. Accordingly, net revenue per hectoliter rose 18.3% and our innovation platform in premium brands delivered another quarter of market share improvement, led by Quilmes 1890 and the Stella Artois. As for cost and expense, COGS per hectoliter was up 15%, while cash SG&A grew 20.8%. Input costs pressure came mostly from packaging costs and labor-related costs, while the union renegotiations also impacted expense for the quarter due to higher freight expense. Looking ahead, the difficult [ph] environment in Argentina remains difficult, including our ability to distribute dividends. Also, we had faced similar difficult times in the country before and still managed to endure the tougher times and remain committed to the region in the short and long term. Finally, Canada. Our EBITDA performance improved and grew 0.7% after the 11.4% decline in the first quarter. The industry remained tough, declining 3.4% in the quarter on the back of poor weather and real pricing required to offset tax prices on -- in Québec in late 2012. And we also had a small market share loss. As a result, volumes were down 3.8%. So our net revenue for hectoliter performance in the quarter remained positive and grew 1.3%. On the innovation side, Bud Light Platinum and the launch of Bud Light Lime-A-Rita and Alexander Keith's Hop Series all produced good results for us. Cost per hectoliter grew 4.3%, mainly due to the impact of the volume decline on fixed costs dilution. On the other hand, cash SG&A decreased 10.1%, thanks to the frontloading of sales and marketing expense to support our commercial plan during Q1. With that, I would now like to go to the main items between the normalized EBITDA for a little over BRL 2.2 billion and profits of nearly BRL 1.9 billion in the quarter. Our net finance results were a negative BRL 268 million. The noncash accretion expense of around BRL 65 million related to the put option regarding our investment in Cervecería Nacional Dominicana continued to impact our performance. We were also facing higher expense associated with derivative instruments, which are only partially offset by lower tax on financial transactions, primarily the IOF in Brazil, and gains resulting from our net cash position in the quarter. The effective tax rate was 21.5%. The main driver behind such increased rates was the fact that we launched [indiscernible] payments during the quarter. And in terms of cash flow generation from operating activities, we generated close to BRL 2.6 billion, which represents a decline of 6.5% versus the second quarter of 2012. The main reason for such decline had to do with the negative impact of change in our working capital, given, on the receivables side, the greater concentration of sales on the off-premise channel in the last 2 weeks of June, even the FIFA Confederation Cup, but also on the payables side, adjusted results from the lower volume growth outlook. We ended the quarter with a net cash position of about BRL 1.9 billion compared to BRL 6.3 billion on December 31. Finally, we are very pleased that an overwhelming majority for minority holders approved the [indiscernible] the proposed share class restructuring and we'll now work towards embracing [ph] Ambev SA's common shares on the BM&FBOVESPA and [indiscernible] as fast as possible during the 30-day withdraw rights period for accepting [ph] holders of common shares. Mike, can you please repeat the instructions for Q&A now?

[Operator Instructions] The first question we have comes from Fernando Ferreira of Bank of America Merrill Lynch.

I had a question regarding the price to consumer, right? It seems to be a very important initiative for you guys in Beer Brazil and it seems a little overlooked. At this quarter, we saw CPI for beer decelerating marginally in Brazil while you were still able to grow revenues per hectoliter. So I just like to understand how advanced you are in this strategy, how has been the response and the adherence to this strategy and how important it is. And just -- and then I had a follow-up regarding the SG&A guidance that you have. Aren't you concerned that the market slowdown in the second half can impact your sales volumes for the year? João Mauricio Giffoni de Castro Neves: Fernando, this is João. Of course, I think, as you mentioned in your question, it's a very important point and maybe the one that make us really motivated for the second half. I think being able to deliver pretty much the same growth despite at the same level for hectoliter with a much better volume is what makes us believe that the plan has worked well for the second quarter. I mean, much better situation to have a 10%, let's say, "10% and a basically flat volume," comparing with the 8% and a minus 8%, right? So that combination, much better price is taking -- volume is taking share. It's taking. And with the positive momentum, so even better if you want build a case, which give us even more room to maneuver. So I feel very confident that everything that we laid out in terms of pack price, smart promotions to bring back our consumer, let's say, to not just to the franchise, but also to the overall market, are yielding very good results. Then we enter the third quarter, it's feeling the same good momentum that we can continue to build upon that despite, let's say, the macro headwinds that you also mentioned. If you compare this year with '11 and '12, '11 and '12 also started off difficult. Also let's say, if we compare with the GDP expectations that the market had for Brazil, they were declining during the '11, they were declining during '12, and they are declining during 2013, and we made the opposite direction. I mean, we started off difficult in both years. Of course, if you restart it, more difficult, but we're also increasing faster the recovery. So I think we can do it. I think the early signs that we saw in the second quarter, we are seeing them continue into the third quarter. And regarding the SG&A, I think the most important point that we try to make, both in the release and now in speech, is that we feel very confident that we can get to the guidance, okay? I mean, [indiscernible] some of the details why we feel that way. Nelson José Jamel: Yes, João, so -- and Fernando, regarding SG&A, I think it's important to understand what drove the increase, particularly Q2, and how we feel confidence about delivering the guidance for the year. So to start with the -- let's split this -- let's split out SG&A between working and nonworking money. By the way, we normally handle it here internally. So working money, normal linkage to sales and what expense, I think João talked a lot about all the investments we did in terms of activation on the FIFA Confederations Cup, all the new launch we've had also in this period. So there's a faint [ph] element, so -- if you will, to put some numbers around it, I think it's fair to say that if you look into our full year, sales and marketing expense is one [ph] less year, the breakdown between half -- first half and second half, was more like a 50-50. For this year, our plan is to have more like a 60-40. So clearly, an important concentration in the first half, which, of course, will get better as we evolve in the second half. While doing that, while supporting the commercial strategy and making the launch we did, but the most part of it was already behind us [indiscernible] about getting better on the working money side of it. On the nonworking money or overhead, if you will, I think it's clear and we have proven time and time again that we quickly react to the overall environment, right? So we have a new volume outlook for the year for a while now. So during the second quarter, we started to implement, we talked about that late April and announced it at the Q1 results. We are just now structured to be coherent, if you will, with the volume outlook. We also are looking at taking a different look into everything that relates to overheads or nonworking packages in order to be here, which has to do with some maintenance costs, some IT costs. We see opportunities in the air and we should be -- we should see important savings in the second semester around these lines. So that's why we feel very comfortable about maintaining our guidance and tax rate [ph] that we control right or deliver behind this SG&A line and we reinforce our guidance to be one [ph] in place for the year. João Mauricio Giffoni de Castro Neves: And of course, just to finalize is that some other things that we did during the second quarter have a lasting effect during the second half. So if we launched it from a 0, for example, during the second half, you have more of the cost on the second quarter and more of the benefits from the volume uptick that it will bring during the second half. So that's true for some of the things that we saw, the investment in the second quarter.

Perfect. João and Jamel, if I may, just a follow-up on what you commented, João, regarding your confidence for the second half. Can you share with us some high-level comments on what you saw in July? João Mauricio Giffoni de Castro Neves: Yes, I mean, what I was trying to imply, I mean, we never give the full disclosures that we are seeing a positive -- definitely a positive trend, okay, during July. We continue to see a gradual improvement in line with our expectation for the year. And it's good, both in beer and soft drinks.

Next, we have Gustavo Oliveira of UBS.

I want to understand a bit better the initiatives on the soft drinks side, because, clearly, the initiatives for the Confederations Cup in the beer side of the business generated very positive results, and you mentioned the 300,000 incremental hectoliters. What would have been and how you judge the success of the initiatives in the soft drink side of the business? What would have been the volume without the spending and investments in sales and marketing investments in the quarter? João Mauricio Giffoni de Castro Neves: Okay, Gustavo. I mean, very good question. I mean, of course, the low point of the second quarter was CSD. If you look at the net revenue on Brazil Beer for the first quarter, it was basically 0, okay? So beer went from 0 to 9%, okay? If you look at soft drinks, it went from 6.5% to 5%. So okay, it was a decline. But let's say, it's a much closer situation than the 0 to 9% that you find here. So most of the trouble that you had in soft drinks came below that. You had a top line that was somewhat close where you have cost that got worse. And then you have an SG&A that got much worse, okay? In the cost side, it was the toughest comp of the year. We were also impacted by the higher currency hedges. We continued to have an impact for the October 2002 tax change. And as for the SG&A, the main impact was the phasing of sales and marketing in Guaraná, it's also a sponsor of the Brazilian national soccer team, and we decide to make full use of it. And on top of that, [indiscernible] one that came through to visit [ph] the market that we had that it's the biggest promotion ever that we are already seeing results during the second quarter, but that we will yield more results in the third quarter. And given what Jamel just said in terms of the SG&A guidance, we will have better quarters as we move one. Why -- I mean, why do we think that? I mean, first and foremost, the Brazilian federal government went back in their decision, which means -- which shows how important it is to get the table every time a permanent negotiation on the so-called Juice Law. So that came in late May and saw very little impact during the second -- during the first half or even during the second quarter, its full impact for the second half of the year. We also give you the pack-price strategy that we saw in focusing on working on beer on the second quarter. There's more juice to be brought out. There's more results to be taken. For example, with the 1-liter bottle, we think we can do more and use it, the learnings, from the second half of the year, also true to soft drinks. As I mentioned, I think the Guaraná Antarctica special promotion will bring more volume, as well as bring equity and share for the remainder of the year. And we continue to roll out our main phase initiatives for the year, that's why we believe on a much better top line for the second half. And on top of that, it's increasing and should increase even further the weight of the more profitable non-alcoholic beverage segments in which we began to invest in the last couple of years -- or last 18 months such as, for example, energy drinks. And one thing to confirm, what we're seeing in the July performance, we're already seeing that both those drivers that I just mentioned are delivering a more balanced top line performance when it comes to volume and net sales per hectoliter.

I understand it very clear. Just one quick follow-up on the same subject. I remember that you launched the Guaraná returnable bottle, the 1-liter returnable bottle, like a few years back. And do you think that you also need to roll it out to deploy the same package to the Pepsi brand? And it's something that would help you in the overall result or your... João Mauricio Giffoni de Castro Neves: Yes, we -- yes, it's a very good question. I mean, we've been looking at this not for a while. We wanted to do first with Guaraná because it was the right thing to do, to start that to the first one [ph], we started with 1 plant, went for a second plant, went now for the third plant. There are 2 regions of Brazil, mainly, that we would consider, but it's one of the possibilities either for the remainder of the year or for 2014. It's neither ruled out or approved. It's something in the pipeline that when we think we have the right economics for it, we'll consider to go ahead.

The next question we have comes from Lauren Torres of HSBC.

My question relates to your commodity and currency hedges. As we know, in the quarter, the commodity hedges were a tailwind, while the currencies were a headwind. And I guess you did mention that the currency headwind will continue in the second half. So I was hoping if you just could provide some more color about the impact of those things, and how we should think about the impact on the second half. Nelson José Jamel: Sure, Lauren, Nelson here. I think you already touched on pretty much what is happening, right? I mean, of course, we have a very tough impacts from currency, which was already fully reflecting in Q2, and that should continue to be the case for the coming quarters. While in terms of commodities, we didn't have a tailwind in Q1. We already had it in Q2, but it's going to get better for most of the commodities. So if you think of sugar, for instance, which, in this quarter, was still -- definitely, it was up -- positive to our costs in soft drinks for the coming quarters. It will not become much better. So that's why, at a certain point in time -- I think João already referred to the fact that we had the toughest comp in soft drinks this quarter, this Q2. The same when you look into aluminum, which was already a positive in Q2. It's going to get even better in Q2 -- in Q3, sorry, and further better down the road in Q4. So we will start to see this upside from commodity getting better quarter-for-quarter, while, if you will, the currency hedge negative impact is about fully priced in Q2.

Okay, that's helpful. And if I could also ask, I know you don't give explicit margin guidance, but as you mentioned that you expect your EBITDA to improve, but we've seen margins decline in the first half. Do you mean that we'll just see less of a decline in the second half? I know you're cycling some tougher comps, I guess, on the margin front, so should we expect margins still to be down for the year? João Mauricio Giffoni de Castro Neves: I think, as you said, I don't give specific guidance for the year. But if you add the business, right, I mean, for instance, SG&A, we already, I mean, made it clear that what happened year-to-date on the -- which drove margin contraction so far is not going to be the case for the second half because it's expected end of the year in line with inflation. So I would say we had the big impact of SG&A in the first semester regarding the SG&A, which is not going to be the case for the remainder of the year, so then it's a matter of, I mean making your overall forecast around. And also in terms of COGS, as I'm going to start to face some positive or even more positive impact from commodity hedges for the coming quarters, that we will also, in a way, prove our gross margin. So the key question is, how much of a volume impact we're going to have for the year? The better or the bigger it is, if you look at our full year guidance, from flattish to a low single-digit decline, of course, the closer we get to the flattish, the better will be our margin. So it's a matter of adding the pieces, but with few comps that either second semester, we're going to have a better EBITDA growth, if you will, than what we had so far in the year.

Next, we have José Yordán of Deutsche Bank. José J. Yordán - Deutsche Bank AG, Research Division: I just had a question about a comment that Brito made in the ABI conference call. He mentioned that, obviously, very upbeat about the Modelo acquisition, et cetera, and mentioned that the Corona brand could be in Brazil very soon or pretty soon. I forgot how he phrased it. But he didn't elaborate on that. But I was under the impression that because you guys are already have Stella and Bud, it's not clear when and how Corona will enter the portfolio there. So any -- has there been a change of plan there? I would love to hear any updates. And then just a follow-up to the hedging question because -- I mean, you've known your hedge for this year for a while, but as you build the hedges for next year, are we looking into another repeat of the revenue per hectoliter -- sorry, the COGS per hectoliter growth in Brazil in double digits or will it be somewhere south of that? And any sort of ideas you could give us there would be great, as well. João Mauricio Giffoni de Castro Neves: I'll start with the premium portion. I would start by saying that I've never been as excited about the premium as I am today, right? I think we came along way, both from a marketing standpoint and also from a sales standpoint. I mean we spent the previous years developing a lot in the mainstream and so we have a much stronger franchise in the mainstream. And then we had the time to go from mainstream, and not mainstream or premium, but mainstream and premium. So now we have the mainstream solid with the lot of options in terms of menu [ph], some innovation on the mainstream, returnables on the mainstream, but we also have now very strong franchise. Maybe we have the strongest -- stronger than ever, right? We -- you saw the numbers. I mean Bohemia growing double digits, Original growing double digit, Bud is growing double digit, Stella growing double digit. We have 4 of the top 5 brands, right? With domestic brands leading the way, growing now pretty much at the same level as the international, which I think it's pretty amazing. And growing from just a few years ago, 4% of our mix to now this quarter, above 6%. So we're getting closer to that dream of maybe getting to 8% [ph] solid in the marketing and now also solid in sales, because it's also a challenge for you to have all the brands, and, therefore, I think we have a much smaller segmentation in terms of channels. It should be able to have the sort of results, solid results in the second quarter, and, going forward, I feel in the same manner. Therefore, Corona, it's more of an addition, okay? And I also listened to the call and I noticed Brito's comments. It's a -- let's say, a good opportunity to have. I like the brand a lot. I actually like the brand a lot for all the countries we manage in Latin America, so this brand is very strong in most, if not all, the country we operate in, very, very, very strong, in some particular ones. I don't want to get into some detail, but very, very strong. And in Brazil, it's a little bit the opposite because it has never been in Brazil. Why? It's been in Chile for a long time, or it has been in Guatemala for a long time, or it has been in other countries for a long time, it's never been in Brazil. I guess maybe for the good work we did. Now that we have the possibility of having here, we have a wide space to find the right spot. But again, we will study what's the right place in the portfolio. But I think we came a long way to finding a way to work with premium. And having very -- the leading 2 domestic, which are the #1 and #2 brands now in premium. And then we have the fourth and fifth, which gives us 4 out of 5. I think gives us a lot of room to maneuver and to continue to grow in this double-digits scenario. Corona will certainly add to it. We'll find the right manner to include that in our portfolio as we -- as time goes by, as we did with Bud, as we did with Stella, and as we've done for the for a long time with Bohemia and Original. Nelson José Jamel: Okay. José, regarding the hedging for 2014, of course, you have a [indiscernible] or hedging policy of protecting ourselves for an average 12 months on a rolling basis. So indeed, we already faced a big negative impact from currency this year. In Brazil, last year, we had a 1.66 [ph] average rate that implies to our cost. It's going to be around 1 93 [ph] for next year. We have been building hedges, of course, since the beginning of the year. So it depends on how the currency behaves till year end. We may have a worse or less worse. In fact, it will probably be negative, maybe not as much as it was this year, but, again, it depends on when you have an important exposure to close. We prefer to talk about this and give more specific guidance as we approach year end, and then we'll have our hedges in place. So that's why we're not going to give specifics for 2014. But bear in mind that the same way currency is going to be, let's say, a headwind again for next year. We have commodities also working on the opposite direction. We see commodities getting to lower levels and as in parental hedges, you're going to have again a sort of offset or wash, which you definitely comment more precise and in a quantitative way as we get closer to year end.

Next, we have Lore Serra of Morgan Stanley.

I wanted to ask a little bit, a bit about kind of the revenue trends in the first quarter. You mentioned a bunch of things on mix. But I guess, given your comment on cans in the supermarket channel, I'm guessing that means that, on balance, your one way mix grew in the quarter and toward the off-premise channel. So I know it's tricky to compare quarters because of all the data, but what was the offset that gave you the better revenue per hectoliter in the second quarter sequentially if you were having more 1 liter, more 300 ml, more cans, which were all lower presentations? Is it premium? Is it topping our pricing? Is there something else? And then just thinking about, in general, about the upcoming, sort of, timing for pricing -- I know you can't comment on specifics, I'm sure, but same, any kind of color you can give us in terms of how you're thinking about the environment, sort of, looking into that sort of September, October time line? That would be really helpful. João Mauricio Giffoni de Castro Neves: Lore, this is João, I guess very important question for a few reasons. I think, first, the Confederations Cup, as the World Cup will be, the country a little bit goes through like a period like carnival. A lot of people in the streets, a lot of celebration and it's carnival, as the Confederations Cup was, is a moment of the year. It's skewed towards disposable packages, as the can is. So in events or in stadiums or in different situations like that, that happens. So there is a higher mix much more related to that sort of situation than as of a trend. Of course, that helps the matrix per hectoliter, okay? And it's not to the detriment -- there seems to be a perception, I think, somewhat even of the late reports that there is a big difference between the contribution margin, between the off-premise and the on-premise, which is not the case. I mean, after the prices that were implemented since 2011 against -- our average profitability is pretty close nowadays, whether we are comparing returnables in cans or whether we are comparing on-premise and off-premise; therefore, there is a shipping change, yes, but, I mean, it's quite small compared to some of the things I read out there. So that's one important point. And then second, the overall combination of the -- strengthened the returnable mix, which gives a lot of room to maneuver from a pricing standpoint of having the right 1 liter in the case of a consumption occasion, of per liter -- price per liter. And the 300 ml giving us that unit base price point occasion. This gave us a lot of room to maneuver. A lot of supermarket change, as we mentioned in the past, they want large key accounts that we're selling. Just 18 months ago, 0% of return. Now, we're at 20-some, 25 and some, even 35 depending on the region you are looking at. But we are not forgetting about the disposable. We launched the 550 ml can, which is flying, which also giving us more room to maneuver. We launched it, although volumes are small. It helps a lot the image with a lot of the aluminum bottles nowadays, basically all the brands. Skol has its own. We have a lot of campaign going on now about it. Brahma had its own. Bud had its own. So everything is working towards having also disposable working better, not just from a price point standpoint, also from an image standpoint. And now, after what we did in 2011, with contribution margins that are much closer than in the past.

Okay. And any thoughts on, kind of, the environment for pricing as you head into the second half of the year? João Mauricio Giffoni de Castro Neves: Sure. I mean that's also quite important. We feel after what happened in the second quarter -- and I mentioned at the beginning, we had the 8 [ph] on price [indiscernible] and now the 10 [ph] on price with a 0 volume and a good start of July, and with a much better momentum -- or a very good momentum in terms of market share. We go into the third and fourth quarter feeling good about it. Pricing is peaking, volume is peaking, share is peaking. The pressure that is out there in terms of FX, commodities, [indiscernible], is for everybody. So let me help explain. You cannot speculate in what competitors do or don't do, but we entered the first half from a pricing environment feeling much better than we were just a couple of months ago. And not just that. We feel much better overall, because as we said, we'll finish the year. And therefore, start 2012 on a much leaner structure with the right structure, not just to deliver the guidance on the SG&A on the second half but entering with a very good structure wise on 2014 with the right footprint, because, I mean, we're going to be with a great capacity footprint and ready for our volume, a much better volume situation in 2014, with greener portfolio, much stronger, and the promise our brand and a very good situation as the last report that we did with 1,000 consumers. So I think it's very good situation going to the second half. And if we do the right thing as we plan to do also from a cost structure base, I think we'll finish the year on a high note and start with the right foot on 2014.

Okay. And then last question, we saw again a big increase in that other operating income in the quarter and I -- do you thinking those are mostly tax incentives? But I think in the first quarter, you said there were going to -- there were some onetime stuff in there, but it seems to have kept up at the same level in the second quarter. So I just like to understand better exactly what's driving that? What's the sort of stability of the numbers? And then also just in terms of reaching your internal goals, I mean it's really giving you a lot of tailwind, right? I mean when you think about the goals for the organization in terms of growth for the year or for employees, is this something that's part of the equation? Because I would think that in a way, you could be -- you could think about something that is not really related to operations, per se, or what a place can control. We need a direction, whether it's there or not. So I'd love to understand how you're thinking about that line. João Mauricio Giffoni de Castro Neves: Sure. I think there might be a sort of a misunderstanding of this, Lore. Maybe we haven't spent enough time explaining this. But this is a totally operational -- total operation. I mean this is totally related to volume and investments, right? I mean if I have no volume growth, there is no government grants. It will be 0. There is no investment. There's no government grants. So the greater the capacity, the greater the volume, the greater the grants, right? So I mean this is -- those are contracts that will last and have a time span for the next 8 to [indiscernible], right? This has existed now for many, many years, and we have increased that steadily, right? I think that what you see in terms of difference is that you had easy comps on Q1 and Q2. But if you think about the absolute level, the number was like 272 in the first quarter, 241, for example, Brazil Beer in the second half. I mean that's the sort of level that should consume [ph]. I mean, because it's totally operational and totally related with the investments that we have made in the Northeast. And the investments that were already announced and disclosed for South and Southeast, such as the [indiscernible] plant in Paraná. So maybe there's some sort of segment. Totally operational, has been here forever and ever. But the overall number has increased because capacity is greater, investments are greater, and maybe the number became a bit -- a bigger one. Totally related with the ongoing negotiations with the government and totally part of the EBITDA in the target, particularly since the third quarter last year, this has maybe shown a gap bigger then and maybe caught the attention of you.

Well, right. Well, it's not proportional to volume, right? Because it was up 80% and the volumes weren't. So what we're seeing is the current run rate of around 300 a quarter, I guess I'm looking at Latin America North, that's the right run rate, kind of, on a quarterly basis? João Mauricio Giffoni de Castro Neves: Yes, that's right. I think it's more important to look at the absolute figure than the percentage increase. That's why I was referring to 370 x million [ph], 240 x million [ph]. Even if you look at Brazil overall, it's 327 [ph], 304 [ph]. So I mean, the overall number, I think, is a good reference and not necessarily the growth, because the growth depending on the comps that you have, can add on this a little bit. Nelson José Jamel: Yes. I think here, regarding the comps, Lore, if you look into our quarterly results last year, already as of Q3, we started to see an important growth in this line. And this is not by coincidence, because we had the unprecedented CapEx in the previous years, particularly the [indiscernible], I think, is a good example in which in the course of 2012, we saw the volume ramping up, investment was made. I mean, it's a big investment we did. So as João said, we're stuck at operational, we can do better than volume. So our volume started to grow in the Northeast. We started to see an increase, of course, accelerated with big win fields [ph] in the second quarter of last year -- for the second half of last year and, therefore, we're going to have real tougher comps in the following quarters because it's going to -- it was already there in Q3 and Q4 in a way last year. João Mauricio Giffoni de Castro Neves: It is recurring. There wasn't -- there is [indiscernible] recourse at a one-off gain. Again, the quarter saw it for 8 to 10 years. And as part of our way of doing business in Brazil, I've foreseen the law and hence -- and you're right, we have intensified our CapEx, but this sort of [indiscernible], they exist for ages now.

No, no, I understand it. I'm just trying to understand how to forecast them. So you're saying that we should see them grow there at the sort of right steady state level, but they'll grow over the course of this year as volumes go up; that's how we should think about it. You're sure at the right run rate but [indiscernible]. João Mauricio Giffoni de Castro Neves: [indiscernible] Forecast, I think [indiscernible]. You'll see it was already a bigger contribution from this line. The forecast market [indiscernible] into the second half. We have to look into the [indiscernible].

Next we have Sambuddha Ray of JPMorgan. We will proceed to our next question, which is Alex Robarts of Citi.

And I guess, sorry, I have to go back to this other operating income. That was one of my questions. The other one was on SG&A. So just -- I mean, this operating income, basically, doubles, and that delta, basically, explains your growth in EBITDA in Brazil. And I'm not sure I understood your answer just now. So what you're saying is that, when -- as the volumes increase sequentially in the Northeast, you have a -- you can take these government grants and book them as other operating income. And so what we should be thinking about for third and fourth quarter, if we assume that in the Northeast, sequential volume will increase, that the BRL 300 million that we get will increase in the next quarters. If you could kind of just clarify that, that would be helpful. So that's my first question. João Mauricio Giffoni de Castro Neves: Okay, let me try to address this question. And so to start with, when I look at your -- let's take the second quarter results, right, including this large operating income line. Government grants or this concept [ph], this will -- they are an important amount of the line, but they're not the only components, right? You can see there on the press release. I talked about a BRL 220 million -- BRL 228 million, to be more precise, out of BRL 300 million. So it gets above -- or just around, let's say, 70 or 2/3 of the line. So that's the first remarks. A lot of things also affect our operating income -- or expense. And -- but above it the grant, the point is, as part of the -- as a result of the investment we do particularly in Northeast can also happen in the Southeast and other parts of Brazil. It's a local or the state decision, of course, foreseeing the laws, not only for us, for any company that in each states. You have the sort of benefits in which parts or eventually entirely how the VAT you have to collect. You can get an exemption for such a period of time. And according to IFRS, that's where you have to book it. So how this will grow go over time? It should grow based on volume, primarily, so the more I sell or the more I use a certain brand, so that's up at full capacity, more grants will generate. So that's why we said it's operational. The growth with volumes, primarily. And it's associated with investments we did. So since we did very relevant investments in the last 2 years in Brazil, this will not last for 8 to 10 years at the average terms of the quarter, but -- so it should start with the BRL 228 million. That should evolve over time from the Original-driven volume. The more we grow in this plant, the more we're going to have this impact. Nelson José Jamel: And Alex, just to add a little bit of figures to the discussion. Just to look at the last 5 years and assuming for a second, which is not the case, that this other operating income expense were only government grants, which is not, again, is not the case, but to just give an idea. It was BRL 400 million in 2008, BRL 500 million in 2009, BRL 600 million in 2010, I'm quoting rough figures, close to BRL 800 million in 2011, close to BRL 900 in 2012. So this has been growing for the past 5 years, BRL 100 million, BRL 150 million per year, and has expediting in the past few years, given that we have been expediting CapEx in the last 3 years. There's no news, no news. If you open up the numbers of the last 5 years, that I just "rounded" for you, you'll see this trend. Of course, when you see a 5-year trend, it's easier to forecast the next 3 years.

It's just that line item, right, basically doubles almost, and for the first half of the year, that line item basically explains your whole growth, I mean, in Brazil. João Mauricio Giffoni de Castro Neves: That's why we said, don't look at the percentage growth and think about the overall number for the year, and look about what was the absolute figure for the first quarters. And that will probably help you forecast the year. Nelson José Jamel: Again, since the other operating income line is not only about government grants, it may have some swings on a quarterly basis. And I think we even tried to highlight that [indiscernible] press release in Q1. I mentioned that during the call of last quarter, either one or the other, that half of the growth we had in Q1 was kind of a one-off, right? But the other half was consistent with the growing trends that we -- João just referred to. So I think it's better to look on a full year basis rather than a quarterly, because on a quarterly basis, we have some one-offs, positive or negative, that we always mix up a little bit the analysis. If you can take a longer period of time, it's easier to understand the trend.

No. Fair enough, guys, I can follow-up offline, as well. Just that was definitely a surprise for us, that doubling of that line item. But look, the second question really just on the SG&A. This was a surprise, the spiking, and I guess how you've explained it is that you've got the commercial piece to that in the second quarter, as well as the distribution-related piece. And I guess when I think about it, for the first half in Brazil, you are up 13% in the cash SG&A. To get to the guidance, right, you're basically saying for the full year, you're going to have no growth in the second half, which leads you full year around 6.5%, which is inflated. But so -- I mean, I appreciate the 60-40 breakdown that you gave us earlier in the call. But so is that the right way to think about it? So you kind of going into the second half of the year with this market condition, thinking there will be no growth, right, over your second half last year's SG&A; is that what you're saying? João Mauricio Giffoni de Castro Neves: That's exactly what we are saying, different words but again, that's exactly how we should look at it. And I think it's important to go back to the element that drove the growth so far, right? So as we said, we are in the first half growing 13% in the SG&A total in Brazil. But when you're looking in absolute figures, more than 2/3 of it is sales and marketing, and there is a big phasing component in it, as I previously mentioned. Instead of -- which was the case last year, right? Kind of a half, half, 50-50 allocation between the first half and second half. This year, we said we concentrate in front-load investments to fully leverage and fully benefit from the events coming up, the Confederations Cup, also to earlier in the year launch the products we had in our pipeline for this year. So we're going to have more like a 60-40 rather than a 50-50 in terms of parsing the market allocation between semesters. So this is going to be a big savings for the second semester. And we're also going to work on the overhead parts, right, like we normally do. We already did [indiscernible] structure for the new, let's say, [indiscernible] during the course of Q2, so you can fully benefit from the rightsizing of from, let's say, more coherent structure vis–à–vis the evolution of the business for the remainder of the year. So we're going to fully benefit also on the overhead side from things we did in the course of Q2. But when you put all that into numbers, it boils down to a flattish SG&A the second semester, so that it can deliver the full year guidance.

Got it. And you talked about overhead, you talked about commercial. On the distribution, which you talked about as one of the drivers of the SG&A in the second quarter. Is that -- just to execute your revised plan, is that distribution involved? And I'm talking more about beer not on soft drink. But is that the rollout? Did you increase direct distribution in beer in the quarter? Or was that kind of distribution-related spike in expenses kind of related to this activation kind of initiative that you did? If you could give us some color on that, that would be great, too. João Mauricio Giffoni de Castro Neves: No. For sure, part of the increase in distribution, particularly, was driven by our -- by a higher percentage of direct distribution on our total volume. So that has a positive impact in our net revenue. But there is also a negative impact in SG&A. That's why when you look at the EBITDA level, we control it and, of course, check this accretive growth, which is the case, right.

So 61% in beer; is that where you are now? João Mauricio Giffoni de Castro Neves: No, no. We are not talking about [indiscernible] on a quarterly basis, Alex. But it had been growing marginally. Of course, the biggest increase happened in the previous years, right? But we are today total, in fact, around 65%, but we don't open this on a quarterly basis. We'll just talk about the average full year number.

The next question we have comes from Robert Ottenstein of ISI.

As you look at your distribution and manufacturing footprint, given all the different changes in your geographic emphasis more to the North, Northeast, and the kind of volumes that you are looking to have next year, how close are you to having an optimal distribution footprint with the distribution centers, I think, you put on, and how close are you in terms of having an optimal manufacturing footprint? João Mauricio Giffoni de Castro Neves: Yes. I would say I referred to that a minute ago, Robert, if you want. From a plant standpoint, I would say that we will start off in the best situation ever in terms of plant footprint. Distribution footprint, it's always ongoing and has a smaller impact than the plant footprint, so very close to ideal. Ideal is also somewhat of a moving target but very, very close to it and, as well as in terms of distribution, has a smaller impact. And it's also a moving target, given that you're always increasing direct distribution and, therefore, redesigning the perfect footprint there, too. So very happy with the fact that we're getting there. And therefore, being able to have a smaller impact in terms of variable logistics cost, given that we'll start having returnables everywhere, different size of cans everywhere, more of the premium liquids closer to everywhere, so we start off on a really much better situation when we end this year, beginning the next year. But again, moving target because we have already announced 2 new plants, one that will be ready somewhat in the first half of next year and then the other one towards the beginning of the last year -- or the beginning of the order, which is 2015.

Great. And if I heard you right, it sounds that the competitive activity in Brazil remains rational. You're gaining share. It just sounds like there's not too much discounting from the competition. How would you characterize things in Argentina and Canada on the competitive front? João Mauricio Giffoni de Castro Neves: Yes. You heard me right. I said the total -- all the pressure that we have is the pressure that's not only on us. It was a pressure on the industry, so that's true for Brazil. I would say if much more, that situation is even further than this in Argentina. So -- and it's a tough environment, hits everyone. I would say that we are always -- given our scale in Argentina, we're always much more prepared to face adverse effect in Argentina than in other -- in any other markets. Our strong operation continue to deliver very solid numbers and ready for the situation. And gaining share, which shows now -- for many years now, that's just another way to qualify. I think the final ability to show that scale is helping you and execution is helping you is when you get a combination of price and share, which is the case in Argentina now for many years, many quarters in a row. In terms of Canada, we are seeing -- it's a different market environment, also tough. You have the 70-plus, closer to 80% share. In Argentina, you have the 70; 68 in Brazil; and you have the 40-ish in Canada. Canada, a little bit different because you had a slight decline in terms of share. With the price, pretty good, I mean for the environment. The one in Argentina, we had price and share. While in Brazil, we have price and share. In Canada, for the quarter, you had price but didn't have the share, although, a very small decline. But the industry was tougher, right? You saw the decline of close to 3.4% in Canada, which is a tough market contraction when you look at the last 8 quarters. So that's a -- it's a tougher, the toughest one and when you look back 8 quarters.

At this time, we will go ahead and conclude our question-and-answer session. I will now like to turn the floor back over to Mr. Nelson Jamel for any closing remarks. Sir? Nelson José Jamel: Okay. Mike, thank you, and thanks to everyone for attending today's call, and thanks for your questions. And we speak with you again on October 31, where I'd expect you have enjoyed more of the positive trends and positive results we have seen in Q2. See you there. Bye bye.

And we thank you, sir, and to the rest of the management team, for your time. The conference call is now concluded. We thank you, all, for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day, everyone.