Nov 9, 2007
Executives
Graham David Stanley - CFO and IR Officer Luiz Fernando Ziegler de Saint Edmond - CEO, Latin America Joao Castro Neves - CEO, Quinsa Miguel Nuno da Mata Patricio - CEO, North America
Analysts
Robert Ford - Merrill Lynch Andrea Teixeira - JP Morgan Alexander Robarts - Santander Investments Lauren Torres - HSBC Celso Sanchez - Citigroup
Operator
Good afternoon and thank you for waiting. We would like to welcome everyone to AmBev's Third Quarter '07 Earnings Conference Call.
Today with us we have Mr. Luiz Fernando Edmond, CEO for Latin America; Mr.
Miguel Patricio, CEO for North America; Mr. Graham Staley, CFO, Investor Relations Officer; and Mr.
João Castro Neves, CEO for Quinsa. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation.
After AmBev's remarks are completed, there will be a question-and-answer section. At that time, further instructions will be given.
[Operator Instructions]. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996.
Forward-looking statements are based on the beliefs and assumptions of AmBev's management, and on information currently available to the company. They involve risks, uncertainties and assumptions, because they relate to future events and therefore depend on circumstances that may or may not occur in the future.
Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of AmBev, and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr.
Graham Staley. Mr.
Staley you may begin your conference.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Thank you very much Ray. And good morning, everyone and welcome to Ambev's third quarter results conference call.
I'm Graham Staley, CFO of AmBev and as Ray said, joining me today are Luiz Fernando Edmond, CEO for Latin America; João Castro Neves, CEO for Quinsa; and Miguel Patricio, CEO for North America. We also have [inaudible] with Miguel today.
I would like to start the call by sharing a brief overview of the quarter. As usual Luiz Fernando, João and Miguel will then provide you details about our operations in Brazil, US, Quinsa and Canada.
And then before opening up to questions, I'll make a few comments on items between EBITDA and net income. Before we start, I would like to comment on the changes we've made to the release for this quarter.
In order to provide readers with more insights into the underlying trends, we've decided to segregate the organic performance from the impact of currency translation and scope. Scope for example being the acquisition of Cintra in Brazil.
I am sure that you will agree with us that this helps to explain and interpret trends far more easily. So, moving to the results.
I am pleased to report that our consolidated EBITDA reached R$1.99 billion, which represents growth of 10.6% and a margin expansion for the 130 basis points on an organic basis compared to the same period in 2006. Our earnings per share growth excluding goodwill amortization were 26.3%.
The Brazilian business delivered a solid performance with EBITDA up 12.7% and EBITDA margin up 90 basis points on the same period last year, both on an organic basis. Volumes grew organically 4.9% for beer and 3.4% for CSD & Nanc.
Quinsa also had a good quarter despite pressures on costs due to inflation, higher commodity prices and the energy crisis, growing EBITDA 13.7% and EBITDA margins 60 basis points on an organic basis. In Canada, EBITDA grew 3.5% and margins 210 basis points organically on the back of strong cost savings.
The Lake Port acquisition helped drive reported volume growth of 7.6% and the strengthened the portfolio in a challenging competitive environment. US delivered a positive result of R$3.5 million with margin up 170 basis points organically.
Although it is still showing a loss for the year in HILA-ex, the position has much improved compared to 2006 on each quarter, at least it is closer to breakeven. Our combined operations delivered net income of R$589.8 million, 21.3% higher than the first quarter last year.
The main reasons for this year-over-year increase are of course higher EBITDA, liabilities associated with income taxes, the impact of currency translation on foreign investments as a result of the strengthening Reais, and the inclusion of the contingency provision in Q3 last year for a litigation settlement relating to warrants issued by the company. With that brief introduction, I'll now turn you over to Luiz Fernando, who will comment on Brazil and HILA-ex.
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
Thank you Graham and good morning everyone. I'll now provide you with details regarding the Brazilian and HILA-ex operation.
Starting with Beer Brazil, we were able to grow our volumes by 4.9% in revenues per hectoliter by 5.8% both on an organic basis. Our [inaudible] brands to support and drive preference for our brands coupled with disciplined execution, a healthiness to record the market share loss at the beginning of the year while maintaining our 5% profitability.
Although we're still behind last year, we've been increasing share every month since April and we already 120 basis points ahead of the March figures. Beer COGS per hectoliter grew by 5% organically impacted by higher labor cost, some raw material price increases and packaging mix offset by the gains on commodities and FX hedging.
The packaging mix impact on COGS was compensated by higher can volumes [inaudible] revenues per hectoliter. The SG&A for Beer Brazil excluding depreciation and amortization presented 8.2% organic growth driven by higher revenues, direct distribution expansion and the impact of inflation on other costs.
Putting it all together, we ended our third quarter of 2007 with an organic result of 12.4% higher EBITDA for Beer Brazil. We've got 70 basis points margin improvement.
I'd also like to comment on the Cintra acquisition. Cintra did not sell the brand to other parties.
We're in the process of acquiring it under the term disclosure at the time of the transaction. And it's too early to comment on the strategies at this time.
CSD and Nanc operations forced 3.4% higher than last year presenting 30 basis points of market share increase. Revenues per hectoliter grew 5% organically, attributable to a better product mix and some price adjustments done throughout the year.
The SG&A costs per hectoliter fell 7.7% organically due to anticipated gains on commodities and foreign exchange hedge, partially offset by product mix due to significant increase H2OH volumes year-on-year. SG&A expenses excluding depreciation and amortization were 24.8% higher organically.
This higher than average growth is a result of two phasing effects. In 2006, we moved from selling and market expenses from Q2, Q3 into Q4 while this year we did the opposite as we anticipated some of initiatives to be developed there for the summer season.
This delivers better position to concentrate on execution in Q4. The CSD and Nanc business delivered 20.6% EBITDA growth, with 340 basis points increase in margins.
Beer volumes in HILA-ex were down by 4.9% impacted by volume losses in Venezuela, where the whole market declined. However, Dominican Republic and Peru delivered double-digit growth in the quarter.
Year-to-date we improved EBITDA by R$34 million. Year-to-date the EBITDA performance is less than last year despite the full volume performance in Peru in Q3.
Wrapping up I'd like to say that I'm pretty satisfied in the quarter results and we're in good shape entering the summer. But as I always say, nothing would have been achieved without the commitment of our team and focus on constantly delivering results.
I'll now turn the call to João.
Joao Castro Neves – Chief Executive Officer, Quinsa
Thank you Fernando and good morning everyone. The region continues to grow laying the base for another good quarter for the company.
Consolidated volumes increased 7.6% organically based on an outstanding performance of the soft drink business, which grew 13.2% on an organic basis and a 3.3% organic growth in beer, and in spite of the negative impact of the distributors and truck revenues impacting Argentina and poor weather conditions in both Argentina and Paraguay. But even otherwise, kept strong growth rates, while our business in Chile showed [inaudible] higher sales and market share.
Net revenues per hectoliter grew organically both in beer and soft drinks. In the beer business growth in the revenue per hectoliter [inaudible] was motivated by strong performance of premium brands and some price increases throughout the region.
In the case of [inaudible] we've benefited from price increases introduced in Argentina as well as the carry over of increases in produce by the end of 2006. The company performed particularly well in the premium segment in Argentina, where the premium beer sales doubled its participation in the whole beer business.
And also in Chile with increasing proportion of sales by [inaudible] and our two recently launched Brahma beers. In terms of individual beer markets, Argentina continues to perform very well despite the distribution strike that precluded us from selling in Buenos Aires for about a week in poor weather conditions in July and August.
Net of the three brands sold grew while we were able to increase our market share. The Bolivian business continues to pose very strong growth rate despite an uncertain operating environment with volumes increasing and market share remaining stable.
In fact we are doubling capacity at our Santa Cruz plant this year to meet the increasing demand for the past two years. In Chile we have benefited from a growing beer market while gaining market share.
Our recently launched [inaudible] outstanding performance by the Brahma beers has strongly contributed to this increase in volumes and revenues. This performance in premium segment of the beer business is particularly important in Chile where it accounts for an estimated 10% of the total margin.
The beer market in Paraguay was exceptional in the region since its contract [inaudible] 2006 basically due to the very poor weather that I just mentioned in July and August. This was the many reason for decline of our volumes.
We are already taking some actions to boost market volume such as the recent launch of Labatt, the main one. Price increase implemented last year resulted in the average sales price increase, also helped by higher mix of Brahma, which is the leader with higher price in this marketplace.
Even though Brahma declined in the quarter, it is important to highlight that the month of September reflected an important recovery both for the industry and business volume as well. Our beer business in Uruguay is also performing very well reflecting volume growth and stable market share and a strong performance by our premium brand Patricia.
In soft drinks, we had an excellent quarter in terms of volume despite the very tough comparisons last year as a result of strong performance in both Argentina and Uruguay. Strong execution in sale has helped to increase market share in Argentina.
In Uruguay volumes were fuelled by market growth, by the introduction of the H2OH! flavored water brand in the end of last year, which already accounts for more than 30% of its segment and by strong actions aimed at recovering the market share lost during the month long strike during October last year.
We have already recovered a large part of that loss. Keeping our sustained growth in Argentina, Bolivia and Uruguay together, with improving performance of Chile, we look to bringing business in Paraguay back in the global [inaudible] have resulted in organic growth of 13.7% in the quarter despite the distribution [inaudible] in Argentina and the increasing cost for energy and labor.
EBITDA $R212 million with [inaudible] EBITDA margin of 39.8 and 6 basis points better than last year as Graham mentioned. I would like to end my comments by saying that I am very excited by the outstanding performance that we’ve been delivering in 2007 and for continued growth.
In spite of the unstable environment and some cost pressures I find that the fourth quarter gets back to the same growth trend of the first half of the year. Thank you and I will now invite Miguel to take over.
Miguel Nuno da Mata Patricio – Chief Executive Officer, North America
Thanks João and good morning everybody. Let me start by sharing with you my excitement about our third quarter results.
Of course it could have been better if the industry had not been negative versus last year. The acquisition of Lakeport starts to bear fruit.
This quarter Lakeport and Labatt combined market share were stable in Canada for the first time in many, many years. Moreover more than that, we actually achieved a slight share growth in the profitable market of Ontario after many quarters of decline.
And very important, we achieved these at no cost to profitability. I have to say that a few goods to acknowledge that Labatt is progressing in our challenge to get back on track for topline growth.
Meanwhile, we have kept a relentless drive on cost control. The tight grip on our cost structure has played a key role in assuring continued profit growth and effective support for brand building.
And that is not likely to change any soon. You have surely noticed that the 7.9% decrease in SG&A excluding depreciation was fundamental to deliver the 3.5% organic growth in EBITDA.
But we did that much increase versus last year. Despite the fact that we already captured the obvious upsides in cost reduction, such as the role of our CDB and the centralization of back office process inside service center, I am confident we have a pipeline loaded with initiatives to further improve our business.
To give you just an example, you can mention the implementation in '07 of a specialized service organization jointly with BHE dedicated to procure non-strategic resources ranging from air tickets to office supplies to printing services. This was a key driver for savings in operating expenses achieved this year.
I have to say that I remain confident on the prospect of our business and also fully conscious about the challenges of our environment. In Canada, we are never on calm water.
But before I conclude, I would like to comment on the management changes at Labatt. As you probably know, I'm taking the role in [indiscernible], and I should leave Canada by the end of '07.
I wanted to take the chance here to welcome Bernardo Pinto Paiva, which I consider a 100% prepared to replace me. Bernardo's experience on sales will be very, very important to take Labatt to the next level of marketing execution.
During these three years I spent in North America, I focused my energies on changing the culture at Labatt, to solve a very long time-share decline and to be obsessed about cost controls. I can assure you that at Labatt today, we have a company totally aligned with the AmBev culture, which was quite a big challenge.
In terms of topline, the Lakeport acquisition sold [inaudible] and this quarter we basically had the same share as last year when combined Labatt and Lakeport. In cost, we've been able to reduce cost significantly quarter after quarter.
Now with Bernardo in Canada, Labatt will grow to the next level. His experience on finance and supply, but especially on logistics and sales will certainly transform Labatt into a sales machine.
That is the piece that is still missing in the puzzle that Bernardo is bringing to Canada. Thank you all and I will now pass it to Graham.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Thank you Miguel. I would now like to briefly address the main lines between the reported EBIT of R$1.6 billion and a net income of R$590 million as shown on page 16 of our release.
As I have already mentioned, the year-on-year comparisons benefited from the inclusion of a contingency division in Q3 last year for a litigation settlement relating to warrant issued by the company. Other operational expenses amounted to R$335 million in the quarter compared to R$269 last year, which is mainly explained by the impact of currency translation on foreign investments as a result of the strengthening reais.
We recognized a foreign exchange translation loss on overseas investments, which amounted to R$69 million in the quarter compared to R$15 million gain in Q3 2006. This is a non-cash, non-tax adjustable expense.
Our net financial results amounted to an expense of R$313 million, slightly ahead of Q3 last year, mainly impacted by higher interest expenses associated with the Quinsa bonds issued in the second half of 2006. At this stage, I should point out that at the end of the quarter, net debt totaled R$7.4 billion, and was impacted by higher cash and cash equivalents.
This higher than normal level of cash on hand is purely a result of timing as we are preparing to make a dividend payment of almost R$1 billion on October 10. The provision for income tax from social contribution was an expense of R$374 million versus R$258 million last year.
This increase is mainly the result of higher income before taxes and slightly higher non-deductible goodwill amortization. Earnings per share in the quarter amounted to R$0.95, an increase of 26% compared to third quarter 2006.
Excluding goodwill amortization, earnings per share increased 26.3%. With respect to our payout situation, so far in 2007 we had distributed R$4.1 billion in dividends and buybacks, excluding the dividend declared in September…sorry including the dividends declared in September and paid in October.
This is completely aligned with our strong cash generation, resulting from a healthy and growing business, combined with a clear and consistent payout strategy. Finally, I would like to comment on the impact of commodity cost in 2008.
Given the competitive environment, we're not providing guidance on next year's commodity costs at this time other than to say that recent pressure on prices, especially barley and malt, will impact cost of sales in all business units next year. However, this is likely to be offset by favorable results from sugar and US dollar hedge contract that we already have in place, plus the continuing program of productivity and efficiency initiatives throughout the company.
Overall, we expect to keep increases in total cost of sales per hectoliter below the level of inflation in 2008. With that, I'll now turn it back to Ray and open up for questions.
Thank you Ray. Question and Answer
Operator
Thank you. [Operator Instructions].
Our first question comes from Bob Ford of Merrill Lynch. Please go ahead.
Robert Ford - Merrill Lynch
Hey, good morning everybody, and congratulations guys. I think relative to the challenges in the industry, this might be one of the best comps in the world.
But as you touched, Graham, on the raw materials pressure, can you discuss where you feel you have the best pricing color across the different geographies, if you were to resort to that to try to offset kind of the raw materials pressure. And to the extent that you feel comfortable, can you touch on the one litigation that is ongoing [inaudible] local press.
Thank you.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Mike, when you talk about pricing power, I presume you are talking about our ability to influence those cost of commodities?
Robert Ford - Merrill Lynch
Exactly, and then in some cases the competitive dynamics may not allow you to, right?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Yes, it is good for the competitive dynamics, just for that reason we are not closing the detail that we've provided you in the past. I'll say that obviously we have more exposure to the dollar here in Brazil as you know from previous disclosures.
So, that clearly brings us a benefit in 2008. Last year we locked our dollar exposure in something like 2, 2.3.
The spot rate today is about 1.75. So, clearly here in Brazil we have an opportunity, which will obviously compensate the [inaudible] of AmBev.
So, I'm not prepared to go any further on that, because clearly this information we would like to keep to ourselves. In terms of the loss litigation, that's an ongoing legal matter.
Clearly I can't comment on that, it would be inappropriate for me to do so.
Robert Ford - Merrill Lynch
Is there any pressure from any of these earlier rulings that might allow us to be a little bit more comfortable in terms of the implications for [inaudible]?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
I think it would be wise not to comment at all. I mean whatever I say is could be taken out of context.
So, I am sorry I am going to have to [Technical Difficulty].
Operator
Thank you. Our next question comes from Andrea Teixeira of JP Morgan.
Please go ahead.
Andrea Teixeira - JP Morgan
Hi, good morning everyone. I just...
again congratulations on the results. In general just one quick comment regarding the pricing.
I see here and I thought [inaudible] going up in Brazil but not as much as used to be in the past. So, I just wanted to see what is...
inorganically was it 5.8 or was it distant increase here? Can you guide us for 2008 and [inaudible] it is slightly tougher in Brazil now.
Should we see a deceleration? This is...
has been above the inflation for most of the year and the past few years because of the direct distribution and other business factors, but as you are getting to the 60% level of direct distribution, which I believe is the case now. Should we see that decelerating?
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
First, let's see if we agree with the numbers. As we are reporting this breakdown between organic and scope, it's important to highlight that when you look at the organic numbers you're not including the Cintra valuation.
So, when we did the report, I see 5.8% net revenue per hectoliter increase in Beer, which is even higher than the average for the year-to-date for the nine months of the year. So, in the balance of the year, the third quarter was even better than the previous quarters.
And compared to a lower inflation for... compared to other years in the past or the previous years, inflation is going down.
The average in beer in Brazil was to grow net revenues in line with inflation plus another 120 basis points coming from direct distribution premium in revenue management. So, the results I see today, they are even better than previous quarters and previous years.
And these results come exactly in line with what we did in the past. I mean we continue to expand our distribution.
We continue to explain it for you in our portfolio. And that's why we are increasing 118 basis points more than inflation.
I see the results in line or even better than in the past.
Andrea Teixeira - JP Morgan
Luiz, definitely, that's why I'm asking. Definitely it was a very good...
without… given that all the reasons why you explain. And that's why it bodes into my question.
Should we see because of this tough comparison, and here as you go for next year, you're now going to see probably cost inflation as your costs are also going to go with inflation, you're probably not going to see that improvement anymore right? Is that a fair assumption or you still feel there is more to extract from this?
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
Honestly, I would like to emphasize what we have been doing for a long time and you follow us for a long time. We continue to see going forward expense of direct distribution.
We continue to see Brazil as a great opportunity to expand premium beers. And we will remain committed as we have always, disciplined to past inflation to prices.
So, I don't see why that will change. While I think when Graham mentioned that cost in line [ph] lowered inflation for next year, of course Brazil will benefit by that currency.
So, I see that the competitive environmental for next year wouldn't be significantly different from this year. Therefore, I believe you should expect similar results.
I don't see why results will be different than the ones we are delivering in the next many, many quarters.
Andrea Teixeira - JP Morgan
Okay. Perfect.
Thank you very much Luiz. And best of luck Miguel.
Thank you very much for all your contributions on that. Best of luck.
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
Thank you Andrea.
Operator
Thank you. Our next question comes from [inaudible] of Morgan Stanley.
Please go ahead.
Unidentified Analyst
Yes, Good morning, I guess good afternoon. I wonder if you could talk a little bit more about the soft drink business.
As you mentioned in the opening comments, the numbers look strong in terms of growth year-on-year, but I guess it was interesting to see the deceleration in volume growth. And you mention that your market share was stable, which isn't the conclusion I would have guessed seeing some of the publicly traded Coke bottlers.
We also saw your pricing slip a bit sequentially. So, can you just give us an update on the conditions in the soft drink market as you see them?
Thank you.
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
I think [inaudible] results this quarter. But let me try to separate things and to explain the new market trend.
But first volumes were lower... volume growth was low compared to the previous quarters and is basically a consequence of very poor July sales.
We try to understand that as much as we can, getting all the numbers we have internally compared to the recent [ph] numbers. And I think we increased share during the quarter according to recent numbers.
But very poor performance in July basically offset the good performance we had in August and September. So, that's a one-month situation that we had problems in explaining why that happened, but the good news is August, September and October, we improved the performance in the three last months, we are more in line with the rest of the year than specifically July was.
So, I think volume was not good for the quarter, but unfortunately it is difficult for us to explain exactly why when we compare with the main competitor here. They did very well, but we do not lose share.
We even gained shared during this period. So, we expect that we can continue to have good performance for the rest of the year.
In terms of SG&A, we... it's again something different than we did in previous years trying to have a better organized calendar between beer and soft drinks.
So, we've anticipated some of the investments we usually make at the end of the year into the third quarter. So, we'll be in better strength to compete in the summer seasons in both beer and soft drinks.
So, last year we had spoonful of these investments and to be in line with our strategy, in terms of competitors launching new beer, new brands and be more aggressive in the last quarter. So, we organized the calendar to be together in beer and soft drinks in the market.
The problems this year are exactly the opposite. I mean we anticipate investments that we usually do in the last quarter.
So we have that double counting effect in the third quarter. So, for the total of the year, we see that SG&A for soft drinks it should be in line with what we did in the first half of the year.
So, the total of the year the figures should be more similar to the ones we've got in the first half.
Unidentified Analyst
Okay. And then just...
and that's very helpful. Thanks very much.
And just a couple of just quick follow-ups on the cost in beer. We've seen the cost in beer on a COGS basis go up a little bit more during 2007 than we have seen in the case of the soft drink business where we've seen a tighter.
So, should we just assume that if the raw material pressure that's causing the COGS to increase because your hedge gain as you reported them should be helping you. I would have suspected a bit more that what we see in this quarter.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
If you want a comment on Q3, Luiz or should I take that. Yes, Q3 was a little more challenging on the cost.
We did get the benefits of the currency in the commodity gain as we've previously anticipated. But our packaging mix was adverse.
There was a little more can mix in there, which was helping us to recover the share, but obviously was driving up our cost of sales without giving us a better results, better margin. We're seeing in late a cost inflation, and we have still got price increases on some raw materials, particularly corn where we don't necessarily have hedgable contracts.
So, if you recall we'll still have the benefits coming from currency and hedging in the fourth quarter. And so we're expecting slightly better results in that fourth quarter.
Unidentified Analyst
Great.
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
On beer, that's all on beer.
Unidentified Analyst
Thank you.
Operator
Thank you. Our next question comes from [inaudible] of UBS.
Please go ahead.
Unidentified Analyst
Good morning everyone. I guess just to stay on the same general subject.
Can you comment at all what's your understanding, you don't want to talk about your hedges, your dollar hedges, but what's your outlook for the dollar price of barley for next year against this year. And especially if you can talk about aluminum as well, what's been going on and what do you expect to happen there?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
I mean, we've been watching barley prices and wheat prices very closely the last few weeks, it has really been up and down. And obviously we… as we state in many cases, we take out the hedge transactions against that product.
So, it's very difficult to know what is happening. The crop has been very poor world wide as you know.
There are signs in South America that crops will be less disappointing and so that should be good for suppliers as we move into the harvest season. And then certainly Northern hemisphere, not the same positive situation.
In terms of currency, clearly there is a significant movement in currency. A year ago we were communicating as I said earlier [inaudible] 2007 of R$2.3 to the dollar.
And now we are talking at the spot rate of R$1.75. So, in terms of the financial models, we can clearly expect that we here in Brazil are locked into some thing in between those two numbers.
I think that is far as I am prepared to go on this call. Hope that covers most of your question?
Unidentified Analyst
Can you comment on aluminum?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Aluminum still increasing. Again, there is evidence that demand is outstripping supply as we look at the markets around the world.
China is putting a lot of pressure on demand, but at the same time we're getting more supply coming on. As demand increases, obviously businesses open new starting plants, which should help to level it out.
Unidentified Analyst
And just to clarify on your earlier comment on Barley, you're hedging the dollar pricing of Barley as well?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Yes, we hedge here in Brazil in particular, where we have the contracts that allow that. We always hedge our currency exposure.
And we are obviously looking at the hedge position directly on barley as well as a commodity.
Unidentified Analyst
Okay. Thanks a lot.
Operator
Thank you. Our next question comes from Alexander Robarts of Santander.
Please go ahead.
Alexander Robarts - Santander Investment
Hi everybody. I guess I would like to continue on this barley theme as well.
I wanted to get a better understanding and I appreciate you can’t comment necessary on ’08. But as we look into the fourth quarter, you have talked about just...
if we could start in Brazil this year having about R$100 million in raw material savings from the hedging? And is it...
if I am reading the press release and understand your comments now, is it fair to assume that perhaps the physical prices of the commodities have gone up a lot in the second half and you might not get that R$100 million? And I guess secondly, where is your physical barley price today versus a year ago?
And I guess the third part of this goes to Canada if... understanding that you're doing less hedging there and if you think about your prices for Barley in Canada, can we assume that actually they are having more pressure relatively speaking on your cost structure?
And if we kind of think about '08… I know the only guidance you've given us this time in line with the inflation, perhaps could we assume next year in Canada in '08 that in fact Canada will be kind of higher barley prices '08 versus '07? Sorry, a lot of Canada-related question, but it really is kind of I think an important issue in the industry.
Wanted to get a kind of understanding there.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
We spend a lot of time talking about that. We would like to reiterate to everyone’s benefits, the press release we are not talking about cost of sales and that being in line with inflation.
We are talking about them being below inflation. We still feel we have...
yes we have pressures on commodity prices. Commodity pressures are going to be there for some considerable time.
Currencies are moving all over the place. It's very difficult to predict what's going to happen there.
So, that's a fact of life, we have to live with that. But also I'd like to say we have a big organization when it comes to production and supply organizations, you get every opportunity there.
So, there are still more efficiencies that we can drill out for the business. That's why we feel we are in a positive position about the cost of sales overall for next year, and why we feel we will be below the level of inflation taking the company as a whole.
You had specific comment and questions regarding Brazil. We are still delivering the anticipated hedge gains on sugar, aluminum and currency.
Those are still embedded into our forward thinking and or forward focus. It is just within Brazil that Luiz alluded to.
In the beer side, we have a different packaging mix, which obviously is offsetting some of those gains. And on the soft drinks side, we had a movement more towards H2OH!, which is obviously impacting cost of sale as well as the higher cost product to produce.
Physical barley prices today versus a year ago, all I know is they are a lot higher. I can't give you the precise number, but it's a lot higher.
[inaudible] in barley or should I say wheat which is the benchmark have been moving tremendously in the last month, very difficult to pin it down, and in some... on some occasions, very difficult to identify what's driving the movement.
But that is where a solid risk management strategy comes into play. In Canada, we have just different hedging opportunities.
I'm not going to get into the regional differences. I just want to reemphasize that AmBev overall is working as a coordinated business and we will deliver cost of sales increases below the level of inflation.
Alexander Robarts - Santander Investment
Can we assume that we have perhaps been into '08… more relative pressure from the malt, the barley in Canada versus Brazil?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Yes. Obviously, you know we have verticalized operations in South America.
We don't have those operations in North America. So, there obviously is more exposure.
Alexander Robarts - Santander Investment
Okay, sorry. And just a final thing in Argentina, if I may, excuse me.
And it is perhaps more of a clarification. If I'm reading the press release correctly, the reported revenue per hectoliter in Quinsa Beer down to 96.
I guess about 10% down year-on-year. And I guess in my numbers also about 11% down versus the second quarter.
Am I reading this right and why have we had on Quinsa beers price per hectoliter, this drop versus 2Q?
Joao Castro Neves – Chief Executive Officer, Quinsa
Hi, Alex this is Joao. I think the nice thing about the new format that we are releasing.
When you look at the column as reported, to your right you see 9.6 and when you look at the organic column, you see for the quarter a 1% up. But as we read down the explanation, we are seeing that beer net revenues grew organically from 9.1%, okay.
So, most of the effect there is on the asset [ph] is two fold. One is the currency and that's why we...
I mean that is one of the advantages of having this format. So, the reorganic growth on let’s say if you want local currency of all the five countries together, the 9.1% and there was also adjustments in the way malt business was filtered, the condition of local currency and the adjustments in the malt business.
Sugar is 1% but the correct figure organically in local currency is 9.1%.
Alexander Robarts - Santander Investment
Okay, thank you.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
If I could Alex, I'll just come back on one point there. Many of you heard me talk before about the team policy we have regarding this management on commodities and currency.
This is a classic example where our team policy comes into play. When there are these sort of shocks in the marketplace around something like barley and the price of malt, then the team policy the way we hedge the contracts allows us to buy time.
So, we engineer our business, rethink our strategies or whatever as required in order to deal with those shocks, which means therefore we can take out any significant impact on our base business over the longer period of time. That's a good example… I mean that's why we feel comfortable talking about cost of sales next year being lower than the level of inflation.
Alexander Robarts - Santander Investment
Thank you.
Operator
Thank you. Our next question comes from Lauren Torres of HSBC.
Please go ahead.
Lauren Torres - HSBC
Hi. I was hoping you could talk a little bit more about the competitive environment in Canada.
I guess obviously more specifically about the pricing environment and maybe talk about building brand equity and now looking at Lakeport and Labatt and your trends going forward. I was just hoping you could talk a little bit more about what your plans are… to withhold or build your brand equity in light of what is going on today in the pricing environment, and if you are going to kind of keep going this over the near-term the way to achieve that goals in that market?
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
Sure, definitely. I mean the pricing environment in Canada changed dramatically versus previous year, because till last year pricing activities were basically concentrated in Ontario and mainly because of the discount segment that was growing a lot and among the brands in the discount segment, Lakeport was the brand that was really growing.
While Lakeport continues growing, it is in our hands. But the pricing environment is not healthy and is not now concentrated in Ontario any more.
And then there is a lot of discount activity happening, especially in Quebec, because Quebec is a region where Labatt had mostly together had about 35% share. So, we should have been able to have a more discipline on price, but that definitely is not happening.
There are a lot of discounts going on, lot of activity on pricing, and in the Atlantic, which is the smaller region but in the Atlantic as well. In terms of brand health, we sort of plan for the future of Lakeport, our idea is to continue supporting the brand.
The brand is.. in Ontario , the discount segment represents more than 40% of the total volume.
And then we cannot ignore it and it continues growing. And among all the brands, Lakeport is the brand that grows more.
And then also with brand equities. So the brand health of the brand is pretty strong among brand in this segment.
I believe that there is room for more growth support in the upcoming years and we all continue supporting the brand Lakeport. I mean that's a specific segment that has been such a big problem for us… had been till last year.
Of course the expectations for next year, especially with the pressure on the cost of raw materials, accessories that we have to be more disciplined on pricing among competitors and ourselves. And that we can have a healthier environment in terms of pricing, so we can have better margins next year.
Does it answer your question?
Lauren Torres - HSBC
It does. But just over the last couple of last months, I could ask with respect to the pricing environment.
Has it gotten tougher, or it's basically been the same throughout the year?
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
I think it has been since April, it's the beginning of the summer season, has been pretty tough. And with productivity not in all segments of the market, imports… lot of import on discount from competitors.
We [inaudible] on import. But a lot of this come from import, especially on import, but also on core premium brand.
I don't see any reduction in terms of pricing activity at the moment. I am cheering for pricing reduction.
Again this last quarter, what was different from the last... the previous quarters was the industry.
And unfortunately the industry was very bad. It's not good versus last year.
I think that was basically the big difference, everything else in terms of pricing activities, I don't see a slowdown at the moment.
Lauren Torres - HSBC
Okay. That's it, thank you.
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
Thank you.
Operator
Our next question comes from Celso Sanchez of Citi. Please go ahead.
Celso Sanchez - Citigroup
Hi, good afternoon. Can you give us a little bit more color on the packaging mix shift in Brazil that you are talking about?
You mentioned can, but I wonder... as I understand, although I didn’t see this myself until a few weeks ago the idea of multipack, offering a bulk discount on can might have started to be part of the commercialization strategy.
So can you confirm, first of all if that's true and if it is true, can you help us understand a little bit of the thinking behind it. What do you think the bigger picture impact might be on the industry of getting people accustomed to what the rest of us are thinking in other markets, discount for multiple can pack?
That is my first question.
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
Yes. First the packaging mix shift towards cans has [inaudible].
We had a lot of share in cans. This is a segment where our share is more volatile when we increase prices.
We have suffered a lot, especially because we have gone above the one [inaudible] and after the price increases, we cannot do that, and of course maintain the profitability level. So, we lost some share in can.
We reacted, not only implemented but [inaudible]. There is more to come in that direction.
But then we can play better with the price points that we can have. We continue to improve in the returnable, but in can we cover more than returnable in the short-term.
That means it is not necessary the channel mix is changing or the rate of the cans in the market are increasing significantly. But it means more that we are recovering share in cans.
We are... to be honest it is where we have the lowest share compared to the other segments and the other presentations.
We believe... going forward to play against these pricing strategies that most of the small competitors put a lot of pressure in the supermarkets and in can.
This more complex portfolio that we are offering will allow us to play better with the consumer request in terms of prices and volumes. Always trying to leverage volume per case or volume per ticket, but also trying to have a better… a better profitability or better price in average.
Though… I don't see as a trend today is a negative trend, though even if it was the case, today the margins we deliver in cans supermarkets, in average they are not as high as returnable, but they are much more similar than the ones we used to have in the past. Profitability-wise it is not a concern, but as far as in terms of guarantees that our distribution system continues to make a lot of difference in a very fragmented market.
We are watching the moves very, very closely and of course trying to influence that trend if they come up. You should take the last five years, the channel and the package mix is pretty much stable.
It looks like more as a short-term result than a consumer shift towards a more modern trend than the traditional one. Even more because the inflation is going down in Brazil, and of course the big supermarket has big stores, and consumers are looking more for convenience today.
[inaudible] they're shopping.
Celso Sanchez - Citigroup
Okay. Then just to make sure I am very clear the notion of multipack discount.
One bunch of packet size, 18 pack, 12 pack or whatever else is coming down the pipe. But the idea of getting 18 for the price of maybe 16 or 17 or whatever it is rather than 18 times the individual can.
That is something to me at least, it is relatively newer and your perception is that is not something longer-term, but you think undermines the commercial relation strategy not just for yourself but for the industry?
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
To be honest, what we are doing or what we pretend to do is to have different presentations, but not take more and pay less. If you take 14 cans for the price of 12, that's not what we are doing in Brazil.
The 12 pack has a price, the 18 pack has a different price. If you buy the units, there will be a different price.
But of course not all presentations will be present all the time. So, we are playing with the kind of a...
you could read that as promotions, but in average if you look at the prices, they are in line with our [inaudible]. So that's bringing us more flexibility to play with discounts at certain moments.
At weekends, at holidays, at special days that we don't have to discount 100% of the volume, but only those volumes that will be relevant for consumers where the consumers that are looking for great quantities for competitive price in a more restricted price.
Celso Sanchez - Citigroup
Thank you very much.
Operator
Thank you. Our final question comes from [inaudible] of Morgan Stanley.
Please go ahead.
Unidentified Analyst
Yes. Thank you.
Just a couple of quick follow-ups in Canada. The strength of the Canadian dollar versus the US dollar will help you in terms of managing the cost outlook for 2008, that's correct, right?
Unidentified Company Representative
Graham, do you want to answer this question?
Graham David Staley - Chief Financial Officer and Investor Relations Officer
I can take that. I think the situation is a little bit more complicated in North America, because we do have exports to the US as well.
So, we have... we obviously have some natural hedges in place as well.
So, there is... it will help a little bit, but the impact is not that substantial.
Unidentified Analyst
Okay. And then just second question I guess… just… it is a bit repetitive of what was asked earlier, but you know I think it was mentioned on the investor conference call that you weren't as aggressive about reacting to competitive promotions in the market in the third quarter you might have been.
So, if you fast forward going into the fourth quarter, have you played out that sort of market behavior, and is the industry moving to less promotions or the market still must take a sort of heightened promotional activities?
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
Well, I wouldn't... I cannot comment on that, because I cannot tell my competitors how the fourth quarter is going to be.
I apologize about that.
Unidentified Analyst
Okay. Can you just comment on October?
How is the pricing dynamics in the market nationwide in October compared to what we saw in the third quarter, maybe that is something you could comment on?
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
I don't think we can. [inaudible] but I don't see any reasons to believe that it can.
Unidentified Analyst
Okay Thanks.
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
What can change in the fourth quarter is the industry, but I don't see reason to believe that the price is going to change.
Unidentified Analyst
Okay. Thanks, Miguel.
Miguel Nuno da Mata Patricio - Chief Executive Officer, North America
Thank you.
Luiz Fernando Ziegler de Saint Edmond - Chief Executive Officer, Latin America
Thank you.
Operator
I will now like to turn the floor back to Mr. Staley for any closing remarks.
Graham David Staley - Chief Financial Officer and Investor Relations Officer
Thank you very much Ray. And thanks everyone for joining the call this morning and my colleagues for the way they handled the conference this morning.
So look forward to meeting you all again in March, when we talk about the full-year 2007 results. Take care and goodbye.
Operator
Thank you. This concludes today's AmBev third quarter '07 earnings conference call.
You may now disconnect and have a great day.