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American Beverage Co Ambev – ‘20-F’ for 12/31/12

On:  Tuesday, 4/30/13, at 6:32am ET   ·   For:  12/31/12   ·   Accession #:  1193125-13-184204   ·   File #:  1-15194

Previous ‘20-F’:  ‘20-F’ on 4/13/12 for 12/31/11   ·   Latest ‘20-F’:  This Filing

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/30/13  American Beverage Co Ambev        20-F       12/31/12    8:6.3M                                   RR Donnelley/FA

Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   3.93M 
 2: EX-8.1      Opinion re: Tax Matters                             HTML     11K 
 3: EX-11.1     Statement re: Computation of Earnings Per Share     HTML     65K 
 4: EX-11.2     Statement re: Computation of Earnings Per Share     HTML    114K 
 5: EX-12.1     Statement re: Computation of Ratios                 HTML     13K 
 6: EX-12.2     Statement re: Computation of Ratios                 HTML     13K 
 7: EX-13.1     Annual or Quarterly Report to Security Holders      HTML      9K 
 8: EX-13.2     Annual or Quarterly Report to Security Holders      HTML      9K 


20-F   —   Annual Report of a Foreign Private Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Introduction
"Presentation of Financial Information
"Currency Translation
"Trademarks
"Cautionary Statement Regarding Forward-Looking Information
"Part I
"Identity of Directors, Senior Management and Advisers
"Offer Statistics and Expected Timetable
"Key Information
"Information on the Company
"Unresolved Staff Comments
"Operating and Financial Review and Prospects
"Directors, Senior Management and Employees
"Major Shareholders and Related Party Transactions
"Financial Information
"The Offer and Listing
"Additional Information
"Quantitative and Qualitative Disclosures About Market Risk
"Description of Securities Other Than Equity Securities
"Default, Dividends Arrearages and Delinquencies
"Material Modifications to the Rights of Security Holders and Use of Proceeds
"Controls and Procedures
"Audit Committee Financial Expert
"Code of Business Conduct
"Principal Accountant Fees and Services
"Exemptions From the Listing Standards for Audit Committees
"Purchases of Equity Securities by the Issuer and Affiliated Purchasers
"Change in Registrant's Certifying Accountant
"Corporate Governance
"Mine Safety Disclosure
"Financial Statements
"Exhibits

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  Form 20-F  
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 31 December 2012

 OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-15194

COMPANHIA DE BEBIDAS DAS AMÉRICAS – AMBEV

 

(Exact name of Registrant as specified in its charter)

American Beverage Company – Ambev

 

(Translation of Registrant’s name into English)

Federative Republic of Brazil

 

(Jurisdiction of incorporation or organization)

Rua Dr. Renato Paes de Barros, 1017, 4th floor

04530-001 São Paulo, SP, Brazil

(Address of principal executive offices)

Nelson José Jamel, Chief Financial and Investor Relations Officer

Address: Rua Dr. Renato Paes de Barros, 1017, 4th floor, 04530-001, São Paulo, SP, Brazil

Telephone No.: +55 (11) 2122-1508

e-mail: nelson.jamel@ambev.com.br

 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares,

evidenced by American Depositary

Receipts, each representing

1 (one) Common Share

Common Shares, no par value*

  New York Stock Exchange

American Depositary Shares,

evidenced by American Depositary

Receipts, each representing

1 (one) Preferred Share

Preferred Shares, no par value*

  New York Stock Exchange

 

* Not for trading, but in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.


Table of Contents

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

 

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Title of each class

 

Name of each exchange on which registered

Guaranty of the R$300,000,000 9.500% Notes due 2017 of

Ambev International Fund Ltd. by Companhia de Bebidas das Américas – Ambev

  Not applicable

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

1,754,981,694 Common Shares

1,371,927,729 Preferred Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No   x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x

   Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. N/A

Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No   x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A

Yes  ¨    No   ¨


Table of Contents

TABLE OF CONTENTS

 

     Page

INTRODUCTION

    i   

PRESENTATION OF FINANCIAL INFORMATION

    i   

CURRENCY TRANSLATION

    i   

TRADEMARKS

    i   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

    ii   

PART I

    1   

ITEM 1.

     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS     1   

ITEM 2.

     OFFER STATISTICS AND EXPECTED TIMETABLE     2   

ITEM 3.

     KEY INFORMATION     3   

ITEM 4.

     INFORMATION ON THE COMPANY     24   

ITEM 4A.

     UNRESOLVED STAFF COMMENTS     48   

ITEM 5.

     OPERATING AND FINANCIAL REVIEW AND PROSPECTS     49   

ITEM 6.

     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     72   

ITEM 7.

     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     86   

ITEM 8.

     FINANCIAL INFORMATION     94   

ITEM 9.

     THE OFFER AND LISTING     102   

ITEM 10.

     ADDITIONAL INFORMATION     107   

ITEM 11.

     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     130   

ITEM 12.

     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     135   

ITEM 13.

     DEFAULT, DIVIDENDS ARREARAGES AND DELINQUENCIES     137   

ITEM 14.

     MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS     138   

ITEM 15.

     CONTROLS AND PROCEDURES     139   

ITEM 15T.

     CONTROLS AND PROCEDURES     141   

ITEM 16A.

     AUDIT COMMITTEE FINANCIAL EXPERT     142   

ITEM 16B.

     CODE OF BUSINESS CONDUCT     143   

ITEM 16C.

     PRINCIPAL ACCOUNTANT FEES AND SERVICES     144   

ITEM 16D.

     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES     145   

ITEM 16E.

     PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     146   

ITEM 16F.

     CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT     148   

ITEM 16G.

     CORPORATE GOVERNANCE     149   

ITEM 16H.

     MINE SAFETY DISCLOSURE     150   

ITEM 17.

     FINANCIAL STATEMENTS     151   

ITEM 18.

     FINANCIAL STATEMENTS     247   

ITEM 19

     EXHIBITS     248   


Table of Contents

INTRODUCTION

This annual report on Form 20-F relates to the two classes of registered American Depositary Shares, or ADSs, of Companhia de Bebidas das Américas - Ambev evidenced by American Depositary Receipts, or ADRs, representing one preferred share of Ambev and ADSs evidenced by ADRs representing one common share of Ambev.

In this annual report, except as otherwise indicated or as the context otherwise requires, the “Company”, “Ambev”, “we”, “us” and “our” refers to Companhia de Bebidas das Américas - Ambev and its subsidiaries. All references to CSD & NANC are to Carbonated Soft Drinks and Non-Alcoholic and Non-Carbonated Soft Drinks. All references to “Brazil” are to the Federative Republic of Brazil. All references to percent ownership interests in Ambev do not take into account treasury shares.

PRESENTATION OF FINANCIAL INFORMATION

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB. The Company first adopted IFRS for the annual consolidated financial statements for the year ended December 31, 2008. Following the Company’s adoption of IFRS, as issued by the IASB, the Company is no longer required to reconcile its financial statements prepared in accordance with IFRS to U.S. generally accepted accounting principles.

Percentages and some amounts in this annual report have been rounded for ease of presentation. Any discrepancies between totals and the sums of the amounts listed are due to rounding.

CURRENCY TRANSLATION

In this annual report, references to “real”, “reais” or “R$” are to the legal currency of Brazil, references to “U.S. dollar” or “US$” are to the official currency of the United States and references to “Canadian dollar” or “C$” are to the legal currency of Canada.

We maintain our books and records in reais. However, solely for the convenience of the reader, we have translated certain amounts included in this annual report from reais into U.S. dollars using the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank, as of December 31, 2012 of R$2.044 to US$1.00 or at an average exchange rate prevailing during a certain period, where indicated. We have also translated some amounts from U.S. dollars and Canadian dollars into reais. All such currency translations should not be considered representations that any such amounts represent, or could have been or could be converted into, U.S. or Canadian dollars or reais at that or at any other exchange rate. See “Item 3. Key Information—Exchange Rate Information—Exchange Controls” for more detailed information regarding the translation of reais into U.S. dollars.

TRADEMARKS

This annual report includes the names of our products which constitute trademarks or trade names which we own or which are owned by others and are licensed to us for our use. This annual report also contains other brand names, trade names, trademarks or service marks of other companies, and these brand names, trade names, trademarks or service marks are the property of those other companies.

 

i


Table of Contents

CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING INFORMATION

Some of the information contained in this annual report may constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events, industry and financial trends affecting our business.

Many of these forward-looking statements can be identified by the use of forward-looking words such as “anticipate,” “project,” “may,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate,” “potential,” among others. These statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are subject to certain risks and uncertainties that are outside our control and are difficult to predict. These risks and uncertainties could cause actual results to differ materially from those suggested by forward-looking statements. Factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, among others:

 

   

greater than expected costs (including taxes) and expenses;

 

   

the risk of unexpected consequences resulting from acquisitions, joint ventures, strategic alliances or divestiture plans, and our ability to successfully integrate the operations of businesses or other assets that we acquire;

 

   

the risk of unexpected consequences resulting from corporate restructurings, including the Stock Swap Merger (as defined under “Item 4. Stock Swap Merger with Newbev”), and our ability to successfully and cost-effectively implement them and capture their intended benefits;

 

   

our expectations with respect to expansion, projected asset divestitures, premium growth, accretion to reported earnings, working capital improvements and investment income or cash flow projections;

 

   

lower than expected revenue;

 

   

greater than expected customer losses and business disruptions;

 

   

limitations on our ability to contain costs and expenses;

 

   

local, regional, national and international economic conditions, including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that impact;

 

   

the monetary and interest rate policies of central banks;

 

   

continued availability of financing;

 

   

market risks, such as interest rate risk, foreign exchange rate risk, commodity risk, asset price risk, equity market risk, inflation or deflation;

 

   

our ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

 

   

the effects of competition and consolidation in the markets in which we operate, which may be influenced by regulation, deregulation or enforcement policies;

 

ii


Table of Contents
   

changes in pricing environments and volatility in commodity prices;

 

   

regional or general changes in asset valuations;

 

   

changes in consumer spending;

 

   

the outcome of pending and future litigation and governmental proceedings;

 

   

changes in government policies;

 

   

changes in applicable laws, regulations and taxes in jurisdictions in which we operate including the laws and regulations governing our operations, as well as actions or decisions of courts and regulators;

 

   

natural and other disasters;

 

   

any inability to economically hedge certain risks;

 

   

inadequate impairment provisions and loss reserves;

 

   

technological changes;

 

   

our success in managing the risks involved in the foregoing;

 

   

governmental intervention, resulting in changes to the economic, tax or regulatory environment in Brazil or other countries in which we operate;

 

   

the declaration or payment of dividends;

 

   

the utilization of Ambev’s subsidiaries’ income tax loss carry forwards; and

 

   

other factors or trends affecting our financial condition or results of operations, including those factors identified or discussed under “Item 3D. —Risk Factors.”

We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Forward-looking statements reflect only our current expectations and are based on our management’s beliefs and assumptions and on information currently available to our management. Actual results may differ materially from those in forward-looking statements as a result of various factors, including, without limitation, those identified under “Item 3D. —Risk Factors” in this annual report. As a result, investors are cautioned not to place undue reliance on forward-looking statements contained in this annual report when making an investment decision.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

Investors should consider these cautionary statements together with any written or oral forward-looking statements that we may issue in the future.

 

iii


Table of Contents

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

1


Table of Contents
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

2


Table of Contents
ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

The following financial information of Ambev is only a summary and should be read in conjunction with, and is qualified in its entirety by reference to, the audited annual consolidated financial statements of Ambev and the related notes which are included in this annual report.

The tables below represent the selected consolidated income statement and balance sheet data for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 that were prepared under IFRS.

Selected Income Statement Data

 

    Year Ended December 31,
          2012               2011               2010               2009               2008      
    (in R$ million)

Consolidated Income Statement

   

Net sales

      32,231.0             27,126.7             25,233.3             23,194.0             20,713.2      

Cost of sales

      (10,291.5)            (8,793.3)            (8,449.0)            (7,731.9)            (7,217.6)     

Gross profit

      21,939.5             18,333.4             16,784.3             15,462.1             13,495.5      

Sales and marketing expenses

      (7,346.6)            (6,251.0)            (6,038.5)            (5,542.0)            (4,956.3)     

Administrative expenses (1)

      (1,546.5)            (1,180.6)            (1,197.0)            (1,478.1)            (1,037.0)     

Other operating income/(expense)

      864.0             784.5             624.9             539.3             383.5      

Special items

      (50.4)            23.1             (150.8)            196.6             (59.2)     

Income from operations

      13,860.0             11,709.4             10,022.9             9,177.9             7,826.5      

Net finance expense

      (812.8)            (468.1)            (319.4)            (982.1)            (1,190.8)     

Income tax expense

      (2,405.1)            (2,522.0)            (2,084.5)            (2,208.1)            (1,447.2)     

Share of results of associates

      0.5             0.5             0.2             0.7             2.3      

Net Income

      10,642.6             8,719.8             7,619.2             5,988.4             5,190.9      

Attributable to:

                   

Equity holders of Ambev

      10,508.1             8,641.0             7,561.4             5,986.1             5,119.1      

Non-controlling shareholders

      134.5             78.8             57.8             2.3             71.8      
    Year Ended December 31,
          2012               2011               2010               2009(*)               2008(*)      
    (in R$, except number of shares)

Earnings per share and per ADS(3)

                   

- Basic

                   

Common shares

      3.22         2.66         2.34         1.86         1.60  

Preferred shares

      3.55         2.93         2.58         2.05         1.75  

- Diluted

                   

Common shares

      3.21         2.65         2.33         1.86         1.60  

Preferred shares

      3.53         2.91         2.57         2.05         1.76  

Dividends and interest on shareholders’ equity per share and per ADS (weighted average)(2)

                   

- Basic

                   

Common shares

      2.44         1.62         1.50         1.11         0.87  

Preferred shares

      2.69         1.79         1.65         1.22         0.96  

- Diluted

                   

Common shares

      2.44         1.62         1.50         1.11         0.87  

Preferred shares

      2.66         1.79         1.65         1.22         0.96  

Weighted average number of shares (thousand)

                   

- Basic

                   

Common shares

      1,753,191             1,747,588             1,737,238             1,730,780             1,724,230      

Preferred shares

      1,369,704             1,363,790             1,355,258             1,346,700             1,344,650      

- Diluted

                   

Common shares

      1,753,191             1,747,588             1,737,236             1,731,055             1,724,530      

Preferred shares

      1,384,158             1,376,380             1,365,231             1,351,005             1,346,870      

 

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(*) On December 17, 2010, the Extraordinary General Meeting approved a stock split pursuant to which each common and each preferred share issued by the Company was split into five common shares and five preferred shares, respectively, without any modification to the Company’s issued capital. Each ADR continued to be represented by one common or preferred share, as the case may be. For purposes of comparison, information relating to the number of shares and earnings per share for all periods presented has been adjusted to conform retrospectively to the effect of this split.

Selected Consolidated Balance Sheet Data

 

    As at December 31,
          2012               2011               2010               2009               2008      
    (in R$ million)

Consolidated Balance Sheet

                   

Cash and cash equivalents

      8,926.2         8,076.2         5,909.3         4,042.9         3,298.9  

Total current assets

      16,256.0         14,679.5         12,910.9         10,303.1         9,293.3  

Deferred tax assets

      1,418.5         1,447.1         2,021.6         2,651.2         1,817.8  

Property, plant and equipment

      11,412.3         9,265.2         7,032.3         6,595.1         7,304.6  

Intangible assets

      2,935.4         1,763.0         1,823.2         1,932.6         2,492.9  

Goodwill

      19,971.5         17,454.0         17,441.8         17,527.5         17,912.4  

Total non-current assets

      37,903.9         31,459.9         29,767.3         29,797.8         32,519.6  

Total assets

      54,159.9         46,139.4         42,678.2         40,101.0         41,813.0  

Shareholders’ equity

      28,863.7         25,611.3         24,361.9         22,017.4         20,787.5  

Non-controlling interests

      1,060.1         217.5         203.0         278.7         224.1  

Interest-bearing loans and borrowings

      2,306.0         1,890.2         4,164.2         6,460.2         7,069.6  

Employee benefits

      1,780.9         1,603.0         966.2         767.9         784.3  

Deferred tax liabilities

      1,048.3         734.5         548.7         502.2         821.2  

Provisions

      518.1         478.4         536.1         919.3         962.9  

Total non-current liabilities

      8,717.3         5,902.7         7,558.6         9,313.2         10,264.3  

Interest-bearing loans and borrowings

      837.8         2,212.1         2,606.2         801.1         3,588.2  

Provisions

      137.5         101.6         103.0         96.2         101.8  

Total current liabilities

      15,518.8         14,407.9         10,554.7         8,491.7         10,537.1  

Total equity and liabilities

      54,159.9         46,139.4         42,678.2         40,101.0         41,813.0  

Other Data

 

    As at and for the year Ended December 31,
          2012               2011               2010               2009               2008      
    (in R$ million, except for operating data)

Other Financial Information:

                   

Net working capital (4)

      737.2         271.6         2,356.2         1,811.4         (1,243.8 )

Cash dividends and interest on shareholders’ equity paid

      5,450.1         5,475.4         5,030.8         3,560.5         2,801.8  

Depreciation and amortization (5)

      1,768.6         1,454.7         1,567.2         1,376.5         1,290.7  

Capital expenditures (6)

      3,014.0         3,200.2         2,286.8         1,438.8         1,957.3  

Operating cash flows - generated (7)

      14,128.6         12,606.8         10,062.9         8,697.1         7,032.6  

Investing cash flows - used (7)

      (5,717.3 )       (2,203.4 )       (3,174.3 )       (1,551.8 )       (2,214.1 )

Financing cash flows - used (7)

      (7,652.3 )       (8,652.0 )       (4,861.6 )       (5,929.0 )       (4,005.7 )

Other Operating Data:

                   

Total production capacity - Beer - million hl (8)

      192.6         176.5         163.3         156.7         156.9  

Total production capacity - CSD & NANC - million hl (8)

      87.0         86.2         83.7         79.9         78.9  

Total beer volume sold - million hl (9)

      122.5         118.7         119.2         110.7         105.0  

Total CSD & NANC volume sold - million hl (9)

      47.4         46.3         46.0         44.0         41.9  

Number of employees (10)

      51,299            46,503            44,924            40,787            39,301     

 

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Footnotes to selected financial information:

 

(1) General and administrative expenses include director’s fees.

 

(2) The dividend and interest on shareholders’ equity per share was calculated based on the amount paid in the year and net of withholding tax.

 

(3) Earnings per share are calculated dividing the net income by the weighted average number of common and preferred shares outstanding during the periods. Ambev’s preferred shares are entitled to dividends 10% greater than the dividends paid to common shares. For purposes of comparison, information relating to the number of shares and earnings per share for all periods presented has been represented to conform retrospectively to the effect of the 2010 split. Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all potentially dilutive shares comprising the net income attributable to equity holders of Ambev and the weighted average number of shares outstanding during the year. Basic is the calculation of earnings per share before special items, which is based on the net income before special items, attributable to equity holders of Ambev.

 

(4) Represents total current assets less total current liabilities.

 

(5) Includes depreciation of property, plant and equipment, amortization of intangible assets and impairment losses related to these assets.

 

(6) Represents cash expenditures for property, plant, equipment and intangible assets.

 

(7) Operating, Investing and Financing cash flows data is derived from our Consolidated Cash Flow Statements.

 

(8) Represents available production capacity at year end of Ambev and its subsidiaries; capacity can vary from year to year depending on mix; hl is the abbreviation for hectoliters.

 

(9) Represents full-year volumes of Ambev and its subsidiaries.

 

(10) Includes all production and non-production-related employees of Ambev and its subsidiaries.

Dividends

Dividend Policy

The timing, frequency and amount of future dividend payments, if any, will depend upon various factors the Board of Directors of Ambev considers relevant, including the earnings and the financial condition of Ambev. Ambev’s bylaws provide for a minimum mandatory dividend of 35% of its adjusted annual net income, if any, as determined under Brazilian GAAP in the parent company financial statements. Brazilian companies are permitted to pay limited amounts of interest attributable to capital to shareholders, referred to as interest on shareholders’ equity, and treat such payments as an expense for Brazilian income and social contribution tax purposes. This notional interest distribution is treated for accounting purposes as a deduction from shareholders’ equity in a manner similar to a dividend. The benefit from the tax deductible interest on shareholders’ equity is recognized in income. The minimum mandatory dividend includes amounts paid as interest on shareholders’ equity. However, payment of such interest on shareholders’ equity is subject (including ADSs) to Brazilian withholding income tax, whereas no such payment is required in connection with dividends paid. For further information on this matter see “Item 10. Additional Information—Taxation—Brazilian Tax Considerations”.

Adjusted income not distributed as dividends or as interest on shareholders’ equity may be capitalized, used to absorb losses or otherwise appropriated as allowed under Brazilian Corporation Law or our bylaws; therefore, any adjusted income may no longer be available to be paid as dividends. Ambev may also not pay dividends to its shareholders in any particular fiscal year, upon the determination by the Board of Directors that such distribution would be inadvisable in view of Ambev’s financial condition. Any such dividends not distributed would be allocated to a special reserve account for future payment to shareholders, unless it is used to offset subsequent losses. For further information on this matter see “—Risk Factors—Risks Relating to our Securities—Ambev shareholders may not receive any dividends”. Any dividends or interest on shareholders’ equity payable on Ambev’s preferred shares must be 10% greater than those payable on Ambev’s common shares. See “Item 10. Additional Information—Memorandum and Articles of Association—Dividends and Reserves—Dividend Preference of Preferred Shares”.

 

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For further information on provisions of the Brazilian Corporation Law relating to required reserves and payment of dividends or interest on shareholders’ equity, as well as specific rules applicable to the payment of dividends by Ambev, see “Item 10. Additional Information—Memorandum and Articles of Association—Dividends and Reserves”.

Ambev - Dividends and Interest on Shareholders’ Equity

The following table shows the cash dividends paid by Ambev to its preferred and common shareholders since the first half of 2008 in reais and in U.S. dollars (translated from reais at the commercial exchange rate as of the date of payment). The amounts include interest on shareholders’ equity, net of withholding tax. See “Item 10. Additional Information—Memorandum and Articles of Association—Dividends and Reserves—Interest Attributable to Shareholders’ Equity”. See “Item 4. Information on the Company—History and Development of the Company. The last distribution of dividends approved, which relates to the fiscal year of 2012, were scheduled for first payment on March 28, 2013.

 

Earnings Generated

       First payment date            Reais per    
     shares (1)    
   U.S. dollar equivalent per
share at payment

        date(1)(2)        

First half 2008

   April 28, 2008    0.37    (preferred)           0.22    
      0.33    (common)           0.20    
   July 31, 2008    0.33    (preferred)           0.21    
      0.30    (common)           0.19    

Second half 2008

   October 13, 2008    0.28    (preferred)           0.13    
      0.25    (common)           0.12    

First half 2009

   January 30, 2009    0.07    (preferred)           0.03    
      0.07    (common)           0.03    
   May 29, 2009    0.08    (preferred)           0.04    
      0.07    (common)           0.04    
   July 31, 2009    0.24    (preferred)           0.13    
      0.22    (common)           0.12    

Second half 2009

   October 2, 2009    0.33    (preferred)           0.19    
      0.30    (common)           0.17    
   December 18, 2009    0.43    (preferred)           0.24    
      0.39    (common)           0.22    

First half 2010

   April 1, 2010    0.33    (preferred)           0.18    
      0.30    (common)           0.17    

Second half 2010

   October 14, 2010    0.65    (preferred)           0.39    
      0.59    (common)           0.36    
   December 15, 2010    0.67    (preferred)           0.39    
      0.61    (common)           0.36    

First half 2011

   March 22, 2011    0.62    (preferred)           0.37    
      0.56    (common)           0.34    

Second half 2011

   August 5, 2011    0.39    (preferred)           0.24    
      0.35    (common)           0.22    
   November 18, 2011    0.78    (preferred)           0.44    
      0.71    (common)           0.40    

First half 2012

   April 10, 2012    0.83    (preferred)           0.45    
      0.75    (common)           0.41    

Second half 2012...

   July 27, 2012    0.40    (preferred)           0.20    
      0.37    (common)           0.18    
   October 15, 2012    0.56    (preferred)           0.28    
      0.51    (common)           0.25    

First half 2013

   January 21, 2013    0.99    (preferred)           0.49    
      0.90    (common)           0.44    
   March 28, 2013    0.70    (preferred)           0.35    
      0.64    (common)           0.32    

 

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(1) The amounts set forth above are amounts actually received by shareholders, which are net of withholding tax. The financial statements present the amounts actually disbursed, including the withholding tax on interest on shareholders’ equity, which was paid by Ambev on behalf of shareholders. The dividends set forth above are calculated based on the number of outstanding shares at the date the distributions were declared. For purposes of comparison, information relating to the number of shares and earnings per share for all periods presented has been represented to conform retrospectively to the effect of the 2010 split. See “Item 7. Major Shareholders and related party transaction —A. Major Shareholders.”

 

(2) Translated to U.S. dollars at the exchange rate in effect at the first scheduled payment date.

Exchange Rate Information

Since March 2005, with the issuance of Resolution No. 3,265 by the Conselho Monetário Nacional (National Monetary Council), or the CMN, all foreign exchange transactions in Brazil are carried out through institutions authorized to operate in the consolidated market and are subject to registration with the electronic registration system of the Central Bank. Foreign exchange rates continue to be freely negotiated, but may be influenced by Central Bank intervention.

Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and during that period, the real/U.S. dollar exchange rate has fluctuated considerably. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian federal government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the future. See “Item 3D. —Risk Factors—Risks Relating to Brazil.”

The following table sets forth the selling exchange rate, expressed in reais per U.S. dollar, for the periods indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during the periods presented.

 

     Reais per U.S. Dollar
Year            High                    Low                    Average                Period End    

2008

       2.500          1.559          1.834          2.337  

2009

       2.422          1.702          1.994          1.741  

2010

       1.881          1.655          1.756          1.666  

2011

       1.902          1.535          1.677          1.876  

2012

       2.112          1.702          1.955          2.044  

 

Source: Central Bank.

 

             Reais per U.S.  Dollar        
Month                    High                                     Low                 

October 2012

       2.038          2.022  

November 2012

       2.107          2.031  

December 2012

       2.112          2.044  

January 2013

       2.047          1.988  

February 2013

       1.989          1.957  

March 2013

       2.019          1.953  

April 2013 (until April 19)

       2.024          1.974  

 

Source: Central Bank.

We pay cash dividends and make other cash distributions in reais. Accordingly, exchange rate fluctuations may affect the U.S. dollar amounts received by the holders of ADSs on conversion by the depositary of such distributions into U.S. dollars for payment to holders of ADSs. Fluctuations in the exchange rate between the real and the U.S. dollar may also affect the U.S. dollar equivalent of real price of our shares on the São Paulo

 

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Stock, Commodities and Futures Exchange (BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros), or the BM&FBOVESPA. For further information on this matter see “—Risk Factors—Risks Relating to Our Shares.”

Exchange Controls

There are no restrictions on ownership of the ADSs or the preferred shares or common shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments, interest on shareholders’ equity payments and proceeds from the sale of preferred shares or common shares into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation which generally requires, among other things, that relevant investments be registered with the Central Bank and the Comissão de Valores Mobiliários (Securities Commission), or the CVM.

Restrictions on the remittance of foreign capital abroad could hinder or prevent Banco Bradesco S.A., the custodian of Ambev ADS program, or the custodian, or holders who have exchanged Ambev’s ADSs for shares of Ambev, from converting dividend distributions, interest on shareholders’ equity or the proceeds from any sale of shares of Ambev into U.S. dollars and remitting such U.S. dollars abroad. Holders of Ambev ADSs could be adversely affected by delays in or refusal to grant any required governmental approval for conversions of real payments and remittances abroad.

Under Brazilian law relating to foreign investment in the Brazilian capital markets, or the Foreign Investment Regulations, foreign investors registered with CVM, and acting through authorized custodial accounts managed by local agents may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration for each transaction. Foreign investors may register their investment under Law No. 4,131/62 as amended, or Law No. 4,131, or Resolution No. 2,689/00 of the CMN as amended, or Resolution No. 2,689.

Law No. 4,131 is the main legislation concerning foreign capital and direct equity investments in Brazilian companies and it is applicable to any amount that enters the country in the form of foreign currency, goods and services. Except for registration of the capital inflow/outflow with the Central Bank, non-resident investors directly investing in equity of Brazilian companies do not need any specific authorization to make such investments.

Under Resolution No. 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of a foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.

In order to become a Resolution No. 2,689 investor, a foreign investor must:

 

   

Appoint at least one representative in Brazil, with powers to perform actions relating to its investment;

 

   

Appoint an authorized custodian in Brazil for its investments, which must be a financial institution or entity duly authorized by the Central Bank or CVM;

 

   

Complete the appropriate foreign investor registration form;

 

   

Register as a foreign investor with the CVM; and

 

   

Register its foreign investment with the Central Bank.

 

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In addition, an investor operating under the provisions of Resolution No. 2,689 must be registered with the Brazilian Internal Revenue Services (Secretaria da Receita Federal), pursuant to its Regulatory Instruction No. 1,183 of August 19, 2011, as amended and Regulatory Instruction No. 1,042 of June 10, 2010, as amended.

Pursuant to the registration obtained by Ambev with the Central Bank in the name of The Bank of New York, as depositary for the ADS programs of Ambev, or the Depositary, with respect to the ADSs to be maintained by the custodian on behalf of the Depositary, the custodian and the Depositary will be able to convert dividends and other distributions with respect to the Ambev shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for Ambev shares, such holder will be entitled to continue to rely on the Depositary’s registration for only five business days after such exchange. After that, such holder must seek to obtain its own registration pursuant to Law No. 4,131 or Resolution No. 2,689. Thereafter, unless any such holder has registered its investment with the Central Bank, such holder may not convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such Ambev shares.

Under current legislation, the Brazilian government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian government directives. We cannot assure you that the Brazilian government will not impose similar restrictions on foreign repatriations in the future. See “—Risk Factors—Risks Relating to Brazil and Other Countries in Which We Operate” and “Risk Factors—Risks Relating to Our Shares”.

 

B. Capitalization and Indebtedness

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

D. Risk Factors

Before making an investment decision, you should consider all of the information set forth in this annual report. In particular, you should consider the special features applicable to an investment in Brazil and applicable to an investment in Ambev, including those set forth below. In general, investing in the securities of issuers in emerging market countries, such as Brazil, involves a higher degree of risk than investing in the securities of issuers in the United States.

For purposes of this section, when we state that a risk, uncertainty or problem, may, could or would have an adverse effect on us we mean that the risk, uncertainty or problem may, could or would have an adverse effect on our business, financial condition, liquidity, results of our operations or prospects, except as otherwise indicated or as the context may otherwise require. You should view similar expressions in this section as having a similar meaning.

Risks Relating to Brazil and other Countries in Which We Operate

Economic uncertainty and volatility in Brazil may adversely affect our business.

Our most significant market is Brazil, which has periodically experienced extremely high rates of inflation. Inflation, along with governmental measures to fight inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. The annual rates of inflation, as

 

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measured by the Índice Nacional de Preços ao Consumidor (National Consumer Price Index), reached a hyper-inflationary peak of 2,489.1% in 1993. Brazilian inflation, as measured by the same index, was 6.5% in 2008, 4.1% in 2009, 6.5% in 2010, 6.1% in 2011 and 6.2% in 2012. Brazil may experience high levels of inflation in the future. There can be no assurance that recent lower levels of inflation will continue. Future governmental actions, including actions to adjust the value of the real, may trigger increases in inflation. We cannot assure you that inflation will not affect our business in the future. In addition, any Brazilian government’s actions to maintain economic stability, as well as public speculation about possible future actions, may contribute significantly to economic uncertainty in Brazil and may heighten volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers. It is also difficult to assess the impact that turmoil in the credit markets will have in the Brazilian economy, and as a result on our future operations and financial results.

The Brazilian currency has devalued frequently during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations and periodic mini-devaluations, during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. There have been significant fluctuations in the exchange rates between Brazilian currency and the U.S. dollar and other currencies. For example, the real/U.S. dollar exchange rate depreciated from R$2.320 per US$1.00 at December 31, 2001 to R$3.533 at December 31, 2002. The exchange rate reached R$3.955 per US$1.00 in October 2002. From 2002 through late 2008 the real appreciated against the U.S. dollar.

During 2008, as a result of financial market volatility, the real depreciated by 24.2%, resulting in an exchange rate of R$2.337 per US$1.00 as of December 31, 2008. In 2009, the real appreciated by 34.2%, resulting in an exchange rate of R$1.741 per US$1.00 as of December 31, 2009. In 2010, the real appreciated by 4.5% resulting in an exchange rate of R$1.666 per US$1.00 as of December 31, 2010. In 2011, the real depreciated by 12.5% resulting in an exchange rate of R$1.876 per U.S. $1.00 as of December 31, 2011. In 2012, the real depreciated by 8.9% resulting in an exchange rate of R$2.044 per U.S. $1.00 as of December 31, 2012.

Devaluation of the real relative to the U.S. dollar may create additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary governmental policies to curb aggregate demand. On the other hand, further appreciation of the real against the U.S. dollar may lead to a deterioration of the current account and the balance of payments, as well as dampen export-driven growth. The potential impact of the floating exchange rate and measures of the Brazilian government aimed at stabilizing the real is uncertain. In addition, a substantial increase in inflation may weaken investor confidence in Brazil, impacting our ability to finance our operations through the international capital markets.

Devaluation of the real relative to the U.S. dollar may adversely affect our financial performance.

Most of our sales are in reais; however, a significant portion of our debt is denominated in or indexed to U.S. dollars. In addition, a significant portion of our cost of sales, in particular those related to packaging such as cans and bottles made of polyethylene terephthalate, or PET, as well as sugar, hops and malt are also denominated in or linked to U.S. dollars. Therefore, any devaluation of the real may increase our financial expenses and operating costs and could affect our ability to meet our foreign currency obligations. Although our current policy is to hedge substantially all of our U.S. dollar-denominated debt and cost of sales against changes in foreign exchange rates, we cannot assure you that such hedging will be possible at all times in the future.

Volatility in commodities prices may adversely affect our financial performance.

A significant portion of our cost of sales is comprised of commodities such as aluminum, sugar, hops and barley, the prices of which fluctuated significantly in 2012. An increase in commodities prices directly affects our operating costs. Although our current policy is to mitigate our exposure risks to commodity prices whenever financial instruments are available, we cannot assure that such hedging will be possible at all times in the future.

 

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Set forth below is a table showing the volatility in prices of the commodities we purchase:

 

Commodity

          High Price                    Low Price                    Avg. 2012                    Fluctuation        

Aluminum (US$/Ton)

      2,353.00         1,836.00         2,052.09         28.16 %

Sugar (Cents/Pounds)

      26.50         18.54         21.57         42.93 %

Corn (R$/Bag)

      36.75         23.41         29.08         56.98 %

Wheat (Cents/Bushel)

      943.25         591.25         751.25         59.53 %

PET (US$/Ton)

      1,596.30         1,214.00         1,421.40         31.49 %

Increases in taxes levied on beverage products in Brazil and unfair competition arising from tax evasion may adversely affect our results and profitability.

Increases in Brazil’s already high levels of taxation could adversely affect our profitability. Increases in taxes on beverage products usually result in higher beverage prices for consumers. Higher beverage prices generally result in lower levels of consumption and, therefore, lower net sales. Lower net sales result in lower margins because some of our costs are fixed and thus do not vary significantly based on the level of production. We cannot assure you that the government will not increase current tax levels, at both state and/or federal levels, and that this will not impact our business. In November 2008, the Brazilian Congress approved certain changes (effective January 1, 2009) to the taxable basis and tax rates of the Imposto Sobre Produtos Industrializados, or IPI (the Brazilian federal excise tax) and the PIS/COFINS (Brazilian social contribution sales taxes). Under the previous system, these taxes were paid as a fixed R$/hectoliter rate by all taxpayers. The new system establishes that higher priced brands pay higher taxes per hectoliter than lower priced ones. The increase in Ambev’s IPI and PIS/COFINS tax burden is dependent on Ambev’s price, packaging and brand mix. No assurance can be given that the Brazilian government will not consider further tax increases in the future.

In 2012, taxes on the beverage industry were increased in federal and state levels. The federal taxes were increased in October 2012 based on price to consumer researches. Moreover, the following five Brazilian states increased their rates of the value added-tax on the distribution of goods and services, or the ICMS, for beer: Minas Gerais, Ceara, Amazonas, Mato Gross and Distrito Federal.

In addition, the Brazilian beverage industry experiences unfair competition arising from tax evasion, which is primarily due to the high level of taxes on beverage products in Brazil. An increase in taxes may lead to an increase in tax evasion, which could result in unfair pricing practices in the industry. The federal government issued regulations requiring the mandatory installation of production (volume) control systems, or the SICOBE, in all Brazilian beer and carbonated soft drinks, or CSD, factories in order to assist governments fight tax evasion in the beverage industry. The installation of this equipment in the production lines has been completed and it covers more than 98% of our total volume. The objective of reducing tax evasion is being achieved for federal taxes. The state governments have started using the data from SICOBE in order to identify potential state tax evasion; however this procedure is being still implemented by the states and no sanctions have been issued yet.

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy; Brazilian economic and political conditions have a direct impact on our business.

The Brazilian economy has been characterized by significant involvement on the part of the Brazilian government, which often changes monetary, credit and other policies to influence Brazil’s economy. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, the Central Bank’s base interest rates, as well as other measures, such as the freezing of bank accounts, which occurred in 1990.

 

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Actions taken by the Brazilian government concerning the economy may have important effects on Brazilian corporations and other entities, including Ambev, and on market conditions and prices of Brazilian securities. Our financial condition and results of operations may be adversely affected by the following factors and the Brazilian government’s response to the following factors:

 

   

Devaluations and other exchange rate movements;

 

   

Inflation;

 

   

Investments;

 

   

Exchange control policies;

 

   

Employment Levels;

 

   

Social instability;

 

   

Price instability;

 

   

Energy shortages;

 

   

Interest rates;

 

   

Liquidity of domestic capital and lending markets;

 

   

Tax policy; and

 

   

Other political, diplomatic, social and economic developments in or affecting Brazil.

Our Latin America South operations are subject to substantial risks relating to its business and operations in Argentina and other countries in which it operates.

We own 100% of the total share capital of Quilmes International (Bermuda) Ltd., or QIB, the net revenues from which in 2012 corresponded to 18.3% of Ambev’s consolidated results. QIB is a holding company with operating subsidiaries in Argentina and other South American countries. As a result, QIB’s financial condition and results of operations may be adversely affected by the political instability, fluctuations in the economy and governmental actions concerning the economy of Argentina and the other countries in which its subsidiaries operate and, consequently, affect our consolidated results.

For example, in the early 2000s, Argentina experienced political and economic instability. A widespread recession occurred in 2002, including a 10.9% decrease in real GDP, high unemployment and high inflation. In the past, the Argentine economic and social situation has rapidly deteriorated, and may quickly deteriorate in the future; we cannot assure you that the Argentine economy will not rapidly deteriorate as in the past.

The devaluation of the Argentine peso, inflation and deteriorating macroeconomic conditions in Argentina could have, and may continue to have, a material adverse effect on our Latin America South operations and their results and in our ability to transfer funds from and within Argentina. If the economic or political situation in Argentina deteriorates, or if additional foreign exchange restrictions are implemented in Argentina, our liquidity and operations, and our ability to access funds from Argentina could be adversely affected.

 

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Risks Relating to Ambev and its Subsidiaries

We are subject to Brazilian and other antitrust regulations.

We have a substantial share of the beer market in Brazil and thus we are subject to constant monitoring by Brazilian antitrust authorities. In addition, in connection with the combination of Companhia Cervejaria Brahma, or Brahma, and Companhia Antarctica Paulista Indústria Brasileira de Bebidas e Conexos, or Antarctica, upon the creation of Ambev in 1999, we entered into a performance agreement with the Brazilian antitrust authorities, which required us to comply with a number of restrictions. We are also party to a number of antitrust legal proceedings. For further information on this matter see “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings—Antitrust matters”. We cannot assure you that Brazilian antitrust regulation will not affect our business in the future.

Ambev’s participation in the Argentine beer market increased substantially following the acquisition of our interest in Quilmes Industrial Société Anonyme, or Quinsa. Our operation in Argentina is subject to constant monitoring by Argentinean antitrust authorities. For further information on this matter see “Item 4. Information on the Company—History and Development of the Company—Interest in Quinsa”. We cannot assure you that Argentinean antitrust regulation will not affect our business in Argentina in the future, and therefore, impact the benefits that Ambev anticipates will be generated from this investment.

We are subject to regulation on alcoholic and CSD beverages in the countries in which we operate.

Our business is regulated by federal, state, provincial and local laws and regulations regarding such matters as licensing requirements, marketing practices and related matters. We may be subject to claims that we have not complied with existing laws and regulations, which could result in fines and penalties. Recently, the federal government as well as certain Brazilian states and municipalities in which we operate have enacted legislation restricting the hours of operations of certain points of sale, prohibiting the sale of alcoholic beverages at highway points of sale and prohibiting the sale of CSDs in schools. In addition, the Brazilian Congress is evaluating proposed regulation imposing hygienic seals on beverage cans, as well as regulation on the consumption, sales and marketing of alcoholic beverages, including beer which, if enacted, may impose restrictions on the advertisement of alcoholic beverage products on television during specified times of the day and the hours of operation of certain points of sale, among other things. These restrictions may adversely impact our results of operations. For further information, see “Item 4. Information on the Company—Business Overview—Regulation”.

In addition, there is a global trend of increasing regulatory restrictions with respect to the sale of alcoholic and CSD beverages. Compliance with such regulatory restrictions can be costly and may affect earnings in the countries in which we operate.

Our results of operations are affected by fluctuations in exchange rates.

We have historically reported our consolidated results in reais. In 2012, we derived approximately 34.9% of our net revenues from operating companies that have functional currencies that are not reais (that is, in most cases, the local currency of the respective operating company). Consequently, any change in exchange rates between our operating companies’ functional currencies and reais will affect our consolidated income statement and balance sheet. Decreases in the value of our operating companies’ functional currencies against reais will tend to reduce those operating companies’ contributions in terms of our financial condition and results of operations.

In addition to currency translation risk, we incur currency transaction risks whenever one of our operating companies enters into transactions using currencies other than their respective functional currencies, including purchase or sale transactions and the issuance or incurrence of debt. Although we have hedge policies

 

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in place to manage commodity price and foreign currency risks to mitigate our exposure to currencies other than our operating companies’ functional currencies, there can be no assurance that such policies will be able to successfully hedge against the effects of such foreign exchange exposure, particularly over the long-term.

If we do not successfully comply with laws and regulations designed to combat governmental corruption in countries in which we sell our products, we could become subject to fines, penalties or other regulatory sanctions and our sales and profitability could suffer.

Although we are committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to our business, there is a risk that our employees or representatives may take actions that violate applicable laws and regulations that generally prohibit the making of improper payments to foreign government officials for the purpose of obtaining or keeping business, including laws relating to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions such as the U.S. Foreign Corrupt Practices Act.

Competition could lead to a reduction of our margins, increase costs and adversely affect our profitability.

Globally, brewers compete mainly on the basis of brand image, price, quality, distribution networks and customer service. Consolidation has significantly increased the capital base and geographic reach of our competitors in some of the markets in which we operate, and competition is expected to increase further as the trend towards consolidation among companies in the beer industry continues.

Competition may divert consumers and customers from our products. Competition in our various markets could cause us to reduce pricing, increase capital investment, increase marketing and other expenditures, prevent us from increasing prices to recover higher costs, and thereby cause us to reduce margins or lose market share. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. Innovation faces inherent risks, and the new products we introduce may not be successful.

Additionally, the unfair pricing practices in some markets and the lack of transparency, or even certain illicit practices, such as tax evasion and corruption, may skew the competitive environment, with material adverse effects on our profitability or ability to operate.

The ability of our subsidiaries to distribute cash upstream may be subject to various conditions and limitations.

Our foreign subsidiaries’ ability to distribute cash (to be used, among other things, to meet our financial obligations) through dividends, intercompany advances, management fees and other payments is, to a large extent, dependent on the availability of cash flows at the level of such domestic and foreign subsidiaries and may be restricted by applicable laws and accounting principles. In particular, 34.9% (R$11,253.2 million) of our total net revenues of R$32,231.0 million in 2012 came from our foreign subsidiaries. In addition to the above, some of our subsidiaries are subject to laws restricting their ability to pay dividends or the amount of dividends they may pay.

If we are not able to obtain sufficient cash flows from our foreign subsidiaries, this could negatively impact our business, results of operations and financial condition because insufficient cash at the Ambev holding company may constrain it from paying all of its obligations.

We rely on the reputation of our brands and damages to their reputation may have an adverse effect on us.

Our success depends on our ability to maintain and enhance the image and reputation of our existing products and to develop a favorable image and reputation for new products. The image and reputation of our products may be reduced in the future; concerns about product quality, even when unfounded, could tarnish the image and reputation of our products. An event, or series of events, that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that

 

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brand or business. Restoring the image and reputation of our products may be costly and may not be possible. Moreover, our marketing efforts are subject to restrictions on the permissible advertising style, media and messages used. In a number of countries, for example, television is a prohibited medium for advertising alcoholic products, and in other countries, television advertising, while permitted, is carefully regulated. Any additional restrictions in such countries, or the introduction of similar restrictions in other countries, may constrain our brand building potential and thus reduce the value of our brands and related revenues.

Negative publicity may harm our business.

Media coverage and publicity generally, can exert significant influence on consumer behavior and actions. If the social acceptability of beer or soft drinks were to decline significantly, sales of our products could materially decrease. In recent years, there has been increased public and political attention directed at the alcoholic beverage and soft drink industries. This attention is a result of public concern over alcohol-related problems, including drunk driving, underage drinking and health consequences resulting from the misuse of beer (for example, alcoholism), as well as soft-drink related problems, including health consequences resulting from the excessive consumption of soft drinks (for example, obesity). Negative publicity regarding alcohol or soft drink consumption, publication of studies that indicate a significant health risk from consumption of alcohol or soft drinks, or changes in consumer perceptions in relation to alcohol or soft drinks generally could adversely affect the sale and consumption of our products and could harm our business, results of operations, cash flows or financial condition as consumers and customers change their purchasing patterns.

Key brand names are used by us, our subsidiaries, associates and joint ventures, and licensed to third-party brewers. To the extent that we, one of our subsidiaries, associates, joint ventures or licensees are subject to negative publicity, and the negative publicity causes consumers and customers to change their purchasing patterns, it could have a material adverse effect on our business, results of operations, cash flows or financial condition. As we continue to expand our operations into emerging and growth markets, there is a greater risk that we may be subject to negative publicity, in particular in relation to labor rights and local work conditions. Negative publicity that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that brand or business, which could adversely impact our business, results of operations, cash flows and financial condition.

Demand for our products may be adversely affected by changes in consumer preferences and tastes.

We depend on our ability to satisfy consumer preferences and tastes. Consumer preferences and tastes can change in unpredictable ways due to a variety of factors, such as changes in demographics, consumer health concerns about obesity, product attributes and ingredients, changes in travel, vacation or leisure activity patterns, weather, negative publicity resulting from regulatory action or litigation against us or comparable companies or a downturn in economic conditions. Consumers also may begin to prefer the products of competitors or may generally reduce their demand for products in the category. Failure by us to anticipate or respond adequately to changes in consumer preferences and tastes could adversely impact our business, results of operations and financial condition.

Seasonal consumption cycles and adverse weather conditions may result in fluctuations in demand for our products.

Seasonal consumption cycles and adverse weather conditions in the markets in which we operate may have an impact on our operations. This is particularly true in the summer months, when unseasonably cool or wet weather can affect sales volumes.

 

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If any of our products is defective or found to contain contaminants, we may be subject to product recalls or other liabilities.

We take precautions to ensure that our beverage products are free from contaminants and that our packaging materials (such as bottles, crowns, cans and other containers) are free of defects. Such precautions include quality-control programs for primary materials, the production process and our final products. We have established procedures to correct problems detected.

In the event that contamination or a defect does occur in the future, it may lead to business interruptions, product recalls or liability, each of which could have an adverse effect on our business, reputation, prospects, financial condition and results of operations.

Although we maintain insurance policies against certain product liability (but not product recall) risks, we may not be able to enforce our rights in respect of these policies, and, in the event that a defect occurs, any amounts that we recover may not be sufficient to offset any damage we may suffer, which could adversely impact our business, results of operations and financial condition.

We may not be able to protect our intellectual property rights.

Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how. We have been granted numerous trademark registrations covering our brands and products and have filed, and expect to continue to file, trademark and patent applications seeking to protect newly developed brands and products. We cannot be sure that trademark and patent registrations will be issued with respect to any of our applications. There is also a risk that we could, by omission, fail to renew a trademark or patent on a timely basis or that our competitors will challenge, invalidate or circumvent any existing or future trademarks and patents issued to, or licensed by, us.

Although we have put in place appropriate actions to protect our portfolio of intellectual property rights (including trademark registration and domain names), we cannot be certain that the steps we have taken will be sufficient or that third parties will not infringe upon or misappropriate proprietary rights. If we are unable to protect our proprietary rights against infringement or misappropriation, it could have a material adverse effect on our business, results of operations, cash flows or financial condition, and in particular, on our ability to develop our business.

We rely on key third parties, including key suppliers, and the termination or modification of the arrangements with such third parties could negatively affect our business.

We rely on key third-party suppliers, including third-party suppliers for a range of raw materials for beer and soft drinks, and for packaging material, including aluminum cans, glass, kegs and PET bottles. We seek to limit our exposure to market fluctuations in these supplies by entering into medium- and long-term fixed-price arrangements. We have a limited number of suppliers of aluminum cans, glass and PET bottles. Consolidation of the aluminum can industry, glass and PET bottle industry in certain markets in which we operate has reduced local supply alternatives and increased the risk of disruption to aluminum can, glass and PET bottle supplies. Although we generally have other suppliers of raw materials and packaging materials, the termination of or material change to arrangements with certain key suppliers, disagreements with suppliers as to payment or other terms, or the failure of a key supplier to meet our contractual obligations or otherwise deliver materials consistent with current usage would or may require us to make purchases from alternative suppliers, in each case at potentially higher prices than those agreed with this supplier, and this could have a material impact on our production, distribution and sale of beer and have a material adverse effect on our business, results of operations, cash flows or financial condition.

 

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For certain packaging supplies, raw materials and commodities, we rely on a small number of important suppliers. If these suppliers became unable to continue to meet our requirements, and we are unable to develop alternative sources of supply, our operations and financial results could be adversely affected.

We are exposed to the risk of litigation.

We are now and may in the future be party to legal proceedings and claims (including labor, tax and alcohol-related claims) and significant damages may be asserted against us. See “Item 8. Financial Information—Consolidated Financial Statements and other Financial Information—Legal Proceedings” and note 30 to our audited consolidated financial statements as of December 31, 2012, and 2011 for a description of certain material contingencies of the Company. Given the inherent uncertainty of litigation, it is possible that we might incur liabilities as a consequence of the proceedings and claims brought against us, including those that are not currently believed by us to be reasonably possible.

We may not be able to recruit or retain key personnel.

In order to develop, support and market our products, we must hire and retain skilled employees with particular expertise. The implementation of our strategic business plans could be undermined by a failure to recruit or retain key personnel or the unexpected loss of senior employees, including in acquired companies. We face various challenges inherent in the management of a large number of employees over diverse geographical regions. Key employees may choose to leave their employment for a variety of reasons, including reasons beyond our control. The impact of the departure of key employees cannot be determined and may depend on, among other things, our ability to recruit other individuals of similar experience and skill. It is not certain that we will be able to attract or retain key employees and successfully manage them, which could disrupt our business and have an unfavorable material effect on our financial position, income from operations and competitive position.

Our operations are subject to safety and environmental regulations, which could expose us to significant compliance costs and litigation relating to environmental issues.

Our operations are subject to safety and environmental regulations by national, state and local agencies, including, in certain cases, regulations that impose liability without regard to fault. These regulations can result in liability which might adversely affect our operations. The environmental regulatory climate in the markets in which we operate is becoming stricter, with greater emphasis on enforcement.

While we have budgeted for future capital and operating expenditures to maintain compliance with environmental laws and regulations, there can be no assurance that we will not incur substantial environmental liability or that applicable environmental laws and regulations will not change or become more stringent in the future.

Information technology failures could disrupt our operations.

We increasingly rely on information technology systems to process, transmit, and store electronic information. A significant portion of the communication between our personnel, customers, and suppliers depends on information technology. As with all large systems, our information systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers or other security issues. These or other similar interruptions could disrupt our operations, cash flows or financial condition.

We depend on information technology to enable us to operate efficiently and interface with customers, as well as to maintain in-house management and control. The concentration of processes in shared services centers means that any disruption could impact a large portion of our business. If we do not allocate, and effectively manage, the resources necessary to build and sustain the proper technology infrastructure, we could

 

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be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. As with all information technology systems, our system could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. Such interruptions could disrupt our business and could have a material adverse effect on our business, results of operations, cash flows or financial condition.

Natural and other disasters could disrupt our operations.

Our business and operating results could be negatively impacted by social, technical or physical risks such as earthquakes, hurricanes, flooding, fire, power loss, loss of water supply, telecommunications and information technology system failures, political instability, military conflict and uncertainties arising from terrorist attacks, including a global economic slowdown, the economic consequences of any military action and associated political instability.

Our insurance coverage may not be sufficient.

The cost of some of our insurance policies could increase in the future. In addition, some types of losses, such as losses resulting from wars, acts of terrorism, or natural disasters, generally are not insured because they are either uninsurable or it is not economically practical to obtain insurance. Moreover, insurers recently have become more reluctant to insure against these types of events. Should a material uninsured loss or a loss in excess of insured limits occur, this could adversely impact our business, results of operations and financial condition.

Risks Relating to our Shares and ADSs

The relative volatility and illiquidity of securities of Brazilian companies may substantially limit your ability to sell our securities at the price and time you desire.

Investing in securities of companies in emerging markets, such as Brazil, involves greater risk than investing in securities of companies from more developed countries and those investments are generally considered speculative in nature. Brazilian investments, such as investments in our shares and ADSs, are subject to economic and political risks, involving, among other factors:

 

   

changes in the Brazilian regulatory, tax, economic and political environment that may affect the ability of investors to receive payment, in whole or in part, in respect of their investments; and

 

   

restrictions on foreign investment and on repatriation of capital invested.

The Brazilian securities markets are substantially smaller, less liquid and more concentrated and volatile than major U.S. and European securities markets. They are also not as highly regulated or supervised as those other markets. The relative illiquidity and smaller market capitalization of Brazilian securities markets may substantially limit your ability to sell the Ambev shares and ADSs at the price and time you desire.

Deterioration in economic and market conditions in other emerging market countries may adversely affect the market price of Ambev’s shares and ADSs.

Economic and market conditions in other emerging market countries, especially those in Latin America, influence the market for securities issued by Brazilian companies as well as investors’ perception of economic conditions in Brazil. Past economic crises in emerging markets, such as in Southeast Asia, Russia and Argentina, triggered securities market volatility in other emerging market countries, including Brazil. In addition, global financial crises originating in developed economies, including the subprime debt crisis and the bankruptcy of Lehman Brothers in the United States and the sovereign debt crisis in Europe, have had an impact on many

 

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economies and capital markets around the world, including Brazil, which may adversely affect investors’ interest in the securities of Brazilian issuers such as Ambev. Therefore, the market value of our shares and ADSs may be adversely affected by events occurring outside of Brazil.

Our current controlling shareholders will be able to determine the outcome of our most significant corporate actions.

The controlling shareholders of Ambev, Interbrew International B.V. and AmBrew S.A., which are both subsidiaries of Anheuser-Busch InBev N.V./S.A., or ABI, and Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficência, or FAHZ, together hold approximately 91.1% of Ambev’s common shares (excluding treasury shares) as of March 31, 2013.

ABI indirectly holds shares of Ambev common stock that represent approximately 74.0% of the total voting power of Ambev’s capital stock (excluding treasury shares) as of March 31, 2013. ABI thus has control over Ambev, even though (1) ABI remains subject to the Ambev shareholders’ agreement with FAHZ and (2) ABI is jointly controlled by Messrs. Lemann, Sicupira and Telles and the former controlling shareholders of Interbrew N.V./S.A. (as it was than denominated). For further information on these matters see “Item 4. Information on the Company—InBev-Ambev Transactions” and “Major Shareholders and Related Party Transactions—Major Shareholders—Ambev Shareholders’ Agreement”.

The controlling shareholders are able to elect the majority of the members of Ambev’s Board of Directors and Fiscal Council, and generally determine the outcome of other actions requiring the approval of Ambev’s shareholders. Under Brazilian Corporation Law, the protections afforded to non-controlling security holders and the fiduciary duties of directors may, in some respects, be less comprehensive than in the United States or other jurisdictions.

Ambev shareholders may not receive any dividends.

According to our bylaws, Ambev must generally pay its shareholders 35% of its annual adjusted net income as presented in the parent company (individual) financial statements prepared under Brazilian GAAP, which differs from net income as presented in the parent company (individual) or consolidated financial statements prepared under IFRS. The main sources for these dividends are cash flows from Ambev’s operations and dividends from Ambev’s operating subsidiaries. The net income may be capitalized, used to absorb losses or otherwise appropriated as allowed under Brazilian GAAP and Brazilian Corporation Law. Therefore, that net income may not be available to be paid out to the Company’s shareholders in a certain year. In addition, Ambev might not pay dividends to its shareholders in any particular fiscal year, upon the determination of the Board of Directors that any such distribution would be inadvisable in view of Ambev’s financial condition. While the law does not establish the circumstances rendering the payment of dividends inadvisable, it is generally agreed that a company need not pay dividends if such payment threatens the existence of the company as a going concern or harms its normal course of operations. Any dividends not distributed would be allocated to a special reserve account for future payment to shareholders, unless it is used to offset subsequent losses or as otherwise provided for in our bylaws. It is possible, therefore, that shareholders of Ambev will not receive dividends in any particular fiscal year.

Brazilian foreign exchange controls and regulations could restrict conversions and remittances abroad of the dividend payments and other shareholder distributions paid in Brazil in reais in respect of the Ambev shares (including shares underlying the Ambev ADSs).

Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reasons to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. For example, for approximately six months in 1989 and early 1990 the Brazilian government froze all dividend and capital repatriations that were

 

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owed to foreign equity investors and held by the Central Bank in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian government directives. Similar measures could be taken by the Brazilian government in the future.

As a result, the Brazilian government may in the future restrict the conversion, and remittance abroad to ADS holders or holders of Ambev’s shares residing outside Brazil, of dividend payments and other shareholder distributions paid in Brazil in reais in respect of the Ambev shares (including shares underlying the ADSs). The likelihood that the Brazilian government would impose such restrictions may be affected by the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole and other factors. We cannot assure you that the Central Bank of Brazil will not modify its policies or that the Brazilian government will not institute restrictions or delays on cross-border remittances in respect of securities issued in the international capital markets. For further information on this matter, see “—Exchange Rate Information—Exchange Controls.”

If you exchange your Ambev ADSs for the respective Ambev shares underlying those ADSs, you risk losing some Brazilian tax and foreign currency remittance advantages.

The Ambev ADSs benefit from the foreign capital registration that The Bank of New York Mellon, as depositary of the ADSs, or the Depositary, has in Brazil, which permits the Depositary to convert dividends and other distributions with respect to the Ambev shares into foreign currency and remit the proceeds abroad. If you exchange your Ambev ADSs for Ambev shares, you will be entitled to rely on the Depositary’s foreign capital registration for only five business days from the date of such exchange. After this five-day period, you will not be able to remit abroad non-Brazilian currency unless you obtain your own foreign capital registration. In addition, gains with respect to Ambev shares will be subject to less favorable tax treatment unless you obtain your own certificate of foreign capital registration or you obtain your own registration with the Central Bank pursuant to Resolution No. 2,689/00. For a more complete description of Brazilian restrictions on foreign investments and the foreign investment regulations, see “Item 10. Additional Information—Memorandum and Articles of Association—Restrictions on Foreign Investment” and “—Exchange Rate Information—Exchange Controls”. For a more complete description of Brazilian tax regulations, see “Item 10. Additional Information—Taxation—Brazilian Tax Considerations”.

As a Brazilian company, Ambev is subject to different corporate laws and regulations than those typically applicable to U.S. listed companies, which may result in Ambev’s shareholders having fewer or less well-defined shareholder rights than the shareholder rights of those companies.

Ambev’s corporate affairs are governed by Ambev’s bylaws and the Brazilian Corporation Law, which may differ from the legal principles that would apply to Ambev if the company were incorporated in a jurisdiction in the United States, such as Delaware or New York, or in other jurisdictions outside of Brazil. In addition, shareholder rights under the Brazilian Corporation Law to protect them from actions taken by the board of directors or controlling shareholders may be fewer and less well-defined than under the laws of jurisdictions outside of Brazil.

Although insider trading and price manipulation are restricted under applicable Brazilian capital markets regulations and treated as crimes under Brazilian law, the Brazilian securities markets may not be as highly regulated and supervised as the securities markets of the United States or other jurisdictions outside Brazil. In addition, rules and policies against self-dealing and for the preservation of shareholder interests may be less well-defined and enforced in Brazil than in the United States or other jurisdictions outside Brazil, potentially causing disadvantages to a holder of Ambev’s ADSs as compared to a holder of shares in a U.S. public company. Further, corporate disclosures may be less complete or informative than required of public companies in the United States or other jurisdictions outside Brazil.

 

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Certain shareholder entitlements may not be available to U.S. holders of Ambev shares and ADSs.

Due to certain United States laws and regulations, United States holders of Ambev ADSs may not be entitled to all of the rights possessed by holders of Ambev shares. For instance, U.S. holders of Ambev ADSs may not be able to exercise preemptive, subscription or other rights in respect of the Ambev shares underlying their Ambev ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements thereunder is available.

Holders of preferred shares have limited voting rights.

Of our two classes of shares outstanding, only our common shares have full voting rights. Our preferred shares will be entitled to unlimited voting rights only in certain limited circumstances, such as in the event that we fail to pay statutory dividends for a period of three consecutive years. As a result, holders of our preferred shares generally will not be able to influence any corporate decision requiring a shareholder vote, including the declaration of dividends. See “Item 10. Additional information—Voting Rights”.

Holders of Ambev ADSs may be unable to fully exercise voting rights with respect to the Ambev shares underlying their ADSs.

Under Brazilian law, only shareholders registered as such in the corporate books of Brazilian companies may attend shareholders’ meetings. All the Ambev shares underlying the Ambev ADSs are registered in the name of the Depositary. A holder of Ambev ADSs is entitled to instruct the Depositary as to how to vote the respective Ambev shares underlying their ADSs only pursuant to the procedures set forth in the deposit agreement for Ambev’s ADS program. Accordingly, holders of Ambev ADSs will not be allowed to vote the corresponding Ambev shares underlying their ADSs directly at a shareholders’ meeting of Ambev (or to appoint a proxy other than the Depositary to do so), unless they surrender their Ambev ADSs for cancellation in exchange for the respective Ambev shares underlying their ADSs. We cannot ensure that any such arrangements or the ADS cancellation and exchange process will be completed in time to allow Ambev ADS holders to attend a shareholders’ meeting of Ambev.

Further, the Depositary has no obligation to notify Ambev ADS holders of an upcoming vote or to distribute voting cards and related materials to those holders unless Ambev specifically instructs the Depositary to do so. If Ambev provides such instruction to the Depositary, it will then notify Ambev’s ADS holders of the upcoming vote and arrange for the delivery of voting cards to those holders. We cannot ensure that Ambev’s ADS holders will receive proxy cards in time to allow them to instruct the Depositary as to how to vote the Ambev shares underlying their Ambev ADSs. In addition, the Depositary and its agents are not responsible for a failure to carry out voting instructions or for an untimely solicitation of those instructions.

As a result, holders of Ambev ADSs may be unable to fully exercise their voting rights.

Future equity issuances may dilute the holdings of current shareholders or ADS holders and could materially affect the market price for those securities.

We may in the future decide to offer additional equity to raise capital or for other purposes. Any such future equity offering could reduce the proportionate ownership and voting interests of holders of our shares and ADSs, as well as our earnings per share or ADS and net equity value per share or ADS. Any offering of shares and ADSs by us or our main shareholders, or a perception that any such offering is imminent, could have an adverse effect on the market price of these securities.

 

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Our status as a foreign private issuer allows us to follow local corporate governance practices and exempts us from a number of rules under the U.S. securities laws and listing standards, which may limit the amount of public disclosures available to investors and the shareholder protections afforded to them.

We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, we are exempt from most of the corporate governance requirements of stock exchanges located in the United States, as well as from rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. For example, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions under Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Accordingly, there may be less publicly available information concerning us than there is for U.S. public companies.

In addition, for so long as we remain as a foreign private issuer, we will be exempt from most of the corporate governance requirements of stock exchanges located in the United States. Accordingly, you will not be provided with some of the benefits or have the same protections afforded to shareholders of U.S. public companies. The corporate governance standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. For example, although Rule 10A-3 under the Exchange Act generally requires that a company listed in the United States have an audit committee of its board of directors composed solely of independent directors, as a foreign private issuer we are relying on an exemption from this requirement under Rule 10A-3(c)(3) of the Sarbanes-Oxley Act of 2002 that is available to us as a result of features of the Brazilian Corporation Law applicable to our Fiscal Council. In addition, we are not required under the Brazilian Corporation Law to, among other things:

 

   

have a majority of our Board of Directors be independent;

 

   

have a compensation committee, a nominating committee, or corporate governance committee of its Board of Directors (though we currently have a non-permanent Operations, Finance and Compensation Committee that is responsible for evaluating our compensation policies applicable to management);

 

   

have regularly scheduled executive sessions with only non-management directors (though none of our current directors hold management positions); or

 

   

have at least one executive session of solely independent directors each year.

For further information on the main differences in corporate governance standards in the United States and Brazil, see “Item 6C. Directors, Senior Management and Employees-Board Practices-Differences Between the United States and Brazilian Corporate Governance Practices.”

Foreign holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

We are organized under the laws of Brazil and most of our directors and executive officers, as well as our independent registered public accounting firm, reside or are based in Brazil. In addition, substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for foreign holders of our ADSs to expediently effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to efficiently enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders of our ADSs may face greater difficulties in protecting their interests from actions promoted by

 

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Ambev, its directors and executive officers than would shareholders of a U.S. corporation. In addition, Brazil does not have a treaty with the United States to facilitate or expedite the enforcement in Brazil of decisions issued by a court in the United States.

Judgments of Brazilian courts with respect to our shares will be payable only in reais.

If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we will not be required to discharge any such obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank of Brazil, in effect on the date the judgment is obtained, and any such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under our shares.

 

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ITEM 4. INFORMATION ON THE COMPANY

Ambev’s principal executive offices are located at Rua Dr. Renato Paes de Barros, 1017, 4th floor, CEP 04530-001, São Paulo, SP, Brazil, and its telephone number and email are: (5511) 2122-1414 and ir@ambev.com.br.

 

A. History and Development of the Company

Overview

Companhia de Bebidas das Américas—Ambev is the successor of Companhia Cervejaria Brahma, or Brahma, and Companhia Antarctica Paulista Indústria Brasileira de Bebidas e Conexos, or Antarctica, two of the oldest brewers in Brazil. Antarctica was founded in 1885. Brahma was founded in 1888 as Villiger & Cia. The Brahma brand was registered on September 6, 1888, and in 1904 Villiger & Cia. changed its name to Companhia Cervejaria Brahma. Ambev, a Brazilian sociedade anônima, was incorporated as Aditus Participações S.A., or Aditus, on September 14, 1998. Ambev is a publicly held corporation incorporated under the laws of Brazil.

In 1994, Brahma started its international expansion into Latin America, starting beer operations in Argentina, Paraguay and Venezuela.

In 1997, Brahma acquired the exclusive rights to produce, sell and distribute Pepsi CSD products in northeastern Brazil and in 1999, obtained the exclusive rights to produce, sell and distribute Pepsi CSD products throughout Brazil. In October 2000, Ambev entered into a new franchise agreement with PepsiCo which terminated the Brahma franchise agreement and granted us exclusive bottler and distributor rights for Pepsi CSD products in Brazil. In January 2002, we expanded our partnership with PepsiCo to include the production, sale and distribution of Gatorade. Our PepsiCo franchise agreement for Brazil expires in 2017, and thereafter, will be automatically renewed for additional ten-year terms absent two years’ prior notice by either party of its intent not to renew the contract following the expiration of the initial or any subsequent term. In addition, certain of our subsidiaries have franchise agreements for Pepsi products in Argentina, Bolivia, Uruguay, Peru and the Dominican Republic.

In January 2003, Ambev completed a two-step business combination with Quinsa, through which Ambev acquired an initial 40.5% economic interest and joint control of Quinsa along with Beverages Associates (BAC) Corp., or BAC, the former controlling shareholder of Quinsa, establishing a leading presence in the beer markets of Argentina, Bolivia, Paraguay and Uruguay, while agreeing on the terms for Ambev to acquire full control of Quinsa from BAC in the future. In April 2006, Ambev acquired BAC’s shares in Quinsa, increasing its equity interest to approximately 91% of its total share capital and started to fully consolidate Quinsa upon the closing of the transaction in August 2006.

During 2003 and the first quarter of 2004, Ambev expanded its presence in Latin America through a series of acquisitions by which it established a foothold in several beverage markets, such as Central America, Peru, Ecuador and the Dominican Republic. In 2012, Ambev concluded a transaction to form a strategic alliance with E. León Jimenes S.A., which owned 83.5% of Cervecería Nacional Dominicana S.A., or CND, to create the leading beverage company in the Caribbean through the combination of their businesses in the region.

In August 2004, Ambev and a Belgian brewer called Interbrew S.A./N.V. (as ABI was then denominated) completed a business combination that involved the merger of an indirect holding company of Labatt Brewing Company Limited, or Labatt, one of the leading brewers in Canada, into Ambev. At the same time, controlling shareholders of Ambev completed the contribution of all shares of an indirect holding company which owned a controlling stake in Ambev to Interbrew S.A./N.V. in exchange for newly issued shares of Interbrew S.A./N.V. After this transaction, Interbrew S.A./N.V. changed its company name to InBev S.A./N.V. (and, since 2008, to Anheuser-Busch InBev N.V./S.A.) and became the majority shareholder of Ambev through subsidiaries and holding companies.

 

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The Brahma-Antarctica Combination—Creation of Ambev and Brazilian Antitrust Approval

Creation of Ambev

Brahma was a company controlled by Messrs. Jorge Paulo Lemann, Marcel Herrmann Telles and Carlos Alberto da Veiga Sicupira through certain holding companies, or the Braco Group, who collectively held a 55.1% voting stake in Brahma prior to the Brahma-Antarctica transaction. The remaining shares of Brahma were publicly held.

Antarctica was controlled by FAHZ, which held an 88.1% voting interest in Antarctica before the Brahma-Antarctica transaction took place. The remaining shares of Antarctica were publicly held.

The creation of Ambev consisted of the combination of Brahma and Antarctica and was carried out over the course of 1999 and 2000. The combination first resulted in Ambev becoming the owner of 55.1% of Brahma’s voting shares and 88.1% of Antarctica’s voting shares, while the Braco Group and FAHZ each owned, respectively, 76% and 24% of Ambev’s voting shares. Subsequently, both Antarctica’s (September 1999) and Brahma’s (September 2000) minority shareholders exchanged their shares in Antarctica and Brahma for Ambev shares, causing both companies to become wholly-owned subsidiaries of Ambev.

Brazilian Antitrust Approval

The transfer of control of Brahma and Antarctica to Ambev through the controlling shareholders’ contribution resulted in a market share for Ambev as of that date in excess of 70% of the Brazilian beer market and 20% of the Brazilian CSDs market. Brazilian antitrust authorities, therefore, reviewed the transaction to determine whether it would negatively impact competitive conditions in the relevant markets, or whether it would negatively affect consumers.

The Conselho Administrativo de Defesa Econômica, or CADE, an independent agency of the Brazilian Ministry of Justice, is the principal Brazilian antitrust authority. In April 2000, CADE approved the controlling shareholders’ contribution subject to certain restrictions set forth in a performance agreement that Ambev entered into with CADE. CADE imposed no restrictions in connection with CSDs or other beverages produced by Ambev.

On July 28, 2008, CADE decided that all obligations under the agreement had been considered fulfilled.

Acquisition of Quinsa and Argentinean Antitrust approval

In January 2003, Ambev consummated the acquisition of an interest in Quinsa, an indirect holding company of Cervecería y Maltería Quilmes S.A.I.C.A. y G., the largest Argentine brewer, and in QIB, Quinsa’s subsidiary which is the holding company for all Quinsa’s operating subsidiaries. Quinsa then owned an 85% interest in QIB. This transaction involved an initial acquisition of 37.5% of the total capital of Quinsa and 8.6% of the shares of QIB, resulting in a total ownership of 40.5% of Quinsa’s economic interest. During 2003, we acquired additional Quinsa Class B shares in the open market, increasing our total economic interest in Quinsa to 49.7% as of December 31, 2003. During 2004 and 2005, Quinsa conducted certain share repurchases pursuant to its share buyback program, increasing our total economic interest in Quinsa to approximately 59.2% as of December 31, 2005.

The acquisition of Ambev’s interest in Quinsa was approved with certain restrictions by the Comisión Nacional de Defensa de la Competencia, or the CNDC, the Argentine antitrust authority, related to the divestiture of certain brands and industrial assets. The sale of the brands and the plant was concluded in December 2006. Furthermore, in January 2007, the Llavallol malting plant was leased to Tai Pai Malting for a period of 10 years. The CNDC formally approved the fulfillment of the conditions set forth above in December 2006.

 

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In April 2006, Ambev agreed to acquire BAC’s remaining shares in Quinsa. Upon the closing of the transaction, which took place on August 8, 2006, Ambev’s equity interest in Quinsa increased to approximately 91% of its total share capital.

On December 28, 2007, Ambev launched a voluntary offer to purchase the outstanding shares that were not owned by Ambev or its subsidiaries and on February 12, 2008, when the voluntary offer to purchase expired, Ambev’s voting interest in Quinsa increased to 99.56% and its economic interest increased to 99.26%. During 2008, Ambev, through its subsidiary Dunvegan S.A., continued to purchase Class A and Class B shares from Quinsa’s minority shareholders, increasing its voting interest in Quinsa to approximately 99.83% and its economic interest to approximately 99.81%.

On October 20, 2011, Ambev, through its subsidiary Labatt Holding A/S, being the holder of more than 95% of the issued shares of QIB (post-liquidation of Quinsa, which occurred through an offshore restructuring in 2010), exercised its right under Bermuda law and acquired the totality of the shares held by the remaining minority shareholders of QIB whereby Ambev, as of October 20, 2011, increased its equity interest in QIB to 100% of issued shares.

Expansion into Latin America

Starting in late 2002, we extended our presence in Latin America through a series of transactions in the north of the region.

In October 2002, Ambev and The Central America Bottling Corporation, or CabCorp, PepsiCo’s anchor bottler in Central America, agreed to establish a 50/50 joint venture company – Ambev Centroamerica – to collaborate in, among other things, the production, import, distribution, marketing and sale of Ambev’s products, especially beer, in Guatemala and other Central American countries.

In October 2003, we agreed to purchase, through our Peruvian subsidiary, Ambev Peru, certain production and distribution assets from Embotelladora Rivera, including two CSD bottling plants. Among the assets acquired were the franchise for Pepsi products in Lima and northern Peru. In October 2009, the Company through its subsidiary Monthiers S.A., increased its equity in Ambev Peru from 85.62% to 100%.

In December 2003, we acquired an 80% interest in Cervecería Suramericana, and renamed it Compañía Cervecera Ambev Ecuador S.A., or Ambev Ecuador. In 2007 we acquired the remaining 20%.

In February 2004, Ambev acquired a 66% stake in Embotelladora Dominicana, C. por A. (currently Ambev Dominicana), the Pepsi bottler in the Dominican Republic. Ambev then started a beer business in 2005 after the construction of a brewery. In August 2009, the Company, through its subsidiary Monthiers S.A., increased its equity interest in Ambev Dominicana to 100%.

In March 2009, Quinsa acquired from SAB Miller plc, 100% of the share capital of Bebidas y Aguas Gaseosas Occidente S.R.L., becoming the exclusive bottler of Pepsi in Bolivia.

We operated in Venezuela until September 2010. In October 2010, we effected a business combination between Ambev and Cervecería Regional aimed at creating a stronger and more dynamic player in South America’s second largest beer market. Cervecería Regional’s controlling shareholders now own an 85% interest in the combined venture and Ambev owns the remaining 15%. As a result, we no longer consolidate our interest in the operational results of the Venezuelan investment. The combined venture is the second largest brewer in the Venezuelan market after Cervecería Polar.

On May 11, 2012, Ambev Brasil Bebidas S.A., or Ambev Brasil, a closely-held subsidiary of Ambev, concluded a transaction to form a strategic alliance with E. León Jimenes S.A., which owned 83.5% of CND, to create the leading beverage company in the Caribbean through the combination of their businesses in the region.

 

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Ambev’s initial indirect interest in CND was acquired through a cash payment and the contribution of Ambev Dominicana. Separately, Ambev Brasil acquired an additional 9.3% stake in CND from Heineken N.V., when Ambev became the owner of a total indirect interest of 51% in CND. In September and October 2012 as part of the same transaction, Ambev Brasil acquired additional interest in CND of approximately 0.88% and 0.11%, respectively, becoming the owner of a total indirect interest of approximately 51.9% in CND.

The InBev-Ambev Transactions

The “InBev-Ambev transactions” consisted of two transactions negotiated simultaneously: (1) in the first transaction, the Braco Group exchanged its Ambev shares for shares in Interbrew N.V./S.A. (as ABI was then denominated); and (2) in the second transaction, Ambev issued shares to Interbrew N.V./S.A. in exchange for Interbrew’s 100% stake in Labatt.

Exchange of Shares between Braco Group and Interbrew Founding Families

In March 2004, various entities controlled by the Braco Group entered into a contribution and subscription agreement with Interbrew N.V./S.A. (as ABI was then denominated) and various entities representing the interests of the Interbrew Founding Families to exchange their controlling interest in Ambev for newly issued voting shares of Interbrew N.V./S.A., which represented 24.7% of its voting shares.

Upon closing of this transaction in August 2004, (1) the Braco Group received approximately 44% of the voting interest in the Stichting Anheuser-Busch InBev (formerly Stichting InBev and Stichting Interbrew), or Stichting, which thereupon owned approximately 56% of Interbrew N.V./S.A.’s common shares, and (2) Interbrew N.V./S.A. received approximately a 53% voting interest and a 22% economic interest in Ambev. Such voting interest was subject to the pre-existing Ambev Shareholders’ Agreement, as amended in connection with the InBev-Ambev transactions. In addition, Interbrew N.V./S.A. changed its legal name to InBev N.V./S.A. (and, since 2008, to Anheuser Busch-InBev N.V./S.A.).

Acquisition of Labatt

Pursuant to the incorporação agreement dated March 3, 2004, Labatt Brewing Canada Holding Ltd., or the Mergeco, was merged into Ambev by means of an upstream merger (incorporação) under Brazilian law, or the Incorporação. Mergeco held 99.9% of the capital stock of Labatt Holding ApS, or Labatt ApS, a corporation organized under the laws of Denmark, and Labatt ApS owned all the capital stock of Labatt. Upon completion of the Incorporação, Ambev held 99.9% of the capital stock of Labatt ApS, and, indirectly, of Labatt. As consideration for the acquisition of Labatt, Ambev issued Ambev common and preferred shares to Interbrew N.V./S.A. (as ABI was then denominated).

With the consummation of this transaction in August 2004, (1) Labatt became a wholly-owned subsidiary of Ambev, and (2) Interbrew N.V./S.A. (as ABI was then denominated) increased its stake in Ambev to approximately 68% of common shares and 34% of preferred shares.

Ownership structure of InBev N.V./S.A. and Ambev upon consummation of the InBev-Ambev transactions

InBev N.V./S.A.

Upon closing the InBev-Ambev transactions, 56% of InBev N.V./S.A.’s voting shares were owned by the Stichting, 1% was jointly owned by Fonds Voorzitter Verhelst SPRL and Fonds InBev-Baillet Latour SPRL, or the InBev Foundations,17% were owned directly by entities and individuals associated with the Interbrew Founding Families and the remaining 26% constituted the public float.

The Braco Group became the holder of 44% of the Stichting’s voting interests, while the Interbrew Founding Families held the remaining 56% of the Stichting’s voting interests. In addition, the Braco Group and

 

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entities representing the interests of the Interbrew Founding Families entered into a shareholders’ agreement, the InBev N.V./S.A. shareholders’ agreement, providing for, among other things, joint and equal influence over the exercise of the Stichting voting rights in InBev N.V./S.A. (as ABI was then denominated).

Ambev

Upon closing the InBev-Ambev transactions, InBev N.V./S.A. (as ABI was then denominated) became the owner of approximately 68% of Ambev’s voting shares, FAHZ retained approximately 16% of such shares, and the remaining shares were held by the public.

Mandatory Tender Offer

Pursuant to Brazilian Corporation Law, InBev N.V./S.A. (as ABI was then denominated) was required to conduct, following the consummation of the InBev-Ambev transactions, a mandatory tender offer, or the MTO, for all remaining outstanding common shares of Ambev. The MTO was completed in March 2005, and InBev N.V./S.A. (as ABI was then denominated) increased its stake in Ambev to approximately an 81% voting interest and a 56% economic interest. FAHZ did not tender its Ambev shares in the MTO.

Lakeport Acquisition

On February 1, 2007, Ambev announced that its subsidiary Labatt entered into a support agreement with Lakeport Brewing Income Fund, or Lakeport. The transaction was concluded on March 29, 2007, when the holders of trust units tendered their units and all of the conditions of the offer were satisfied. Subsequent to the compulsory acquisition of the non-tendered units, Lakeport became wholly-owned by Labatt and has been fully integrated into Labatt’s business. The Competition Bureau concluded in January 2009 that there was insufficient evidence to establish that the transaction was likely to substantially lessen or prevent competition.

Cintra Acquisition

On April 17, 2007, Ambev closed the acquisition of 100% of Goldensand – Comércio e Serviços Ltda., or Goldensand, the controlling shareholder of Cervejarias Cintra Indústria e Comércio Ltda., or Cintra, a local brewer with presence in the Southeast of Brazil. We subsequently acquired 100% of the capital stock of Obrinvest—Obras e Investimentos S.A. which owned the Cintra brands. On May 21, 2008, Ambev sold to Schincariol Participações e Representações S.A., or Schincariol, the Cintra brands and distribution assets. Following the sale of the brands, the corporate name of Cintra was changed to Londrina Bebidas Ltda., or Londrina, on June 20, 2008. In July 2008, CADE issued its unrestricted approval of the Cintra acquisition and on April 28, 2009, in order to simplify Ambev’s corporate structure, our subsidiary Goldensand was merged into Ambev. There were no changes to Ambev’s capital stock.

Stock Swap Merger with Newbev

On December 7, 2012, the Company announced its intention to propose for deliberation by its shareholders, at an extraordinary general shareholders’ meeting to be held in the first half of 2013, or the EGM, a corporate restructuring to combine the Company’s current dual-class capital structure comprised of voting common shares and non-voting preferred shares into a new, single-class capital structure comprised exclusively of voting common shares. The purpose of the proposed restructuring is to simplify Ambev’s corporate structure and improve its corporate governance with a view to increasing liquidity to all shareholders, eliminating certain administrative, financial and other costs and providing more flexibility for management of the Company’s capital structure.

If approved, the proposed corporate restructuring will be implemented by means of a stock swap merger under Brazilian Corporation Law (incorporação de ações), or the Stock Swap Merger, of Ambev with Ambev S.A. (formerly InBev Participações Societárias S.A.), or Newbev, which currently is a non-reporting, privately

 

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held Brazilian corporation. Per the terms of the proposed Stock Swap Merger, all the issued and outstanding shares of Ambev (including in the form of ADRs) not held by Newbev shall be exchanged for newly issued common shares (some in the form of ADRs) of Newbev if the transaction is approved by the required shareholder vote. Upon consummation and as a result of the Stock Swap Merger, Ambev will become a wholly owned subsidiary of Newbev.

The exchange ratio for the Stock Swap Merger will be such that equal value shall be ascribed to each common and preferred share of Ambev, as a result of which the equity stake that each shareholder of Ambev will hold in Newbev after the Stock Swap Merger shall be the same as the equity stake that each such shareholder held in Ambev prior to the transaction.

Following the Stock Swap Merger and as a result thereof, all shareholders of Ambev will receive in exchange for their Ambev shares newly issued common shares of Newbev that will confer to their holders the same rights and privileges currently conferred by the common shares of Ambev, including full voting rights and the right to be included in a change of control tender offer under the Brazilian Corporation Law that ensures that holders of common stock are offered 80% of the price per share paid to a selling controlling shareholder in a change of control transaction.

In addition, Newbev’s bylaws will be substantially identical to Ambev’s current bylaws, except that:

 

   

Newbev’s minimum mandatory dividend shall be 40% of adjusted net income, as compared to 35% for Ambev; and

 

   

Newbev’s board of directors shall at all times include two independent members, as compared to no similar requirement for Ambev’s board of directors.

After the Stock Swap Merger, at which point Ambev will have become a wholly owned subsidiary of Newbev, Ambev and certain of its wholly owned subsidiaries shall be subject to an upstream merger with and into Newbev.

Special voting procedures for minority shareholder protection will be adopted for the Ambev EGM to ensure that the transaction be implemented only if both the minority holders of the Ambev common and preferred shares, as separate classes and without interference from our controlling shareholders, are each in favor of the transaction. To this end, the Stock Swap Merger will only be approved if a majority of the Ambev common shares present at the EGM and not held by our controlling shareholders or their affiliates vote in favor of the transaction, provided that it has not been rejected by a majority of the Ambev preferred shares present at the EGM and not held by our controlling shareholders or their affiliates.

The implementation of the Stock Swap Merger is subject to the approval of the Company’s EGM that will deliberate on the matter, the negotiation of a stock swap merger agreement under Brazilian Corporation Law (protocolo de incorporação) and obtaining the required registrations from the competent authorities.

 

B. Business Overview

Description of the Company

We are the largest brewer in Latin America in terms of sales volumes and one of the largest beer producers in the world, according to our estimates. We produce, distribute and sell beer, CSDs and other non-alcoholic and non-carbonated products in 16 countries across the Americas. We are one of the largest PepsiCo independent bottlers in the world.

 

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We conduct our operations through three business segments:

 

   

Latin America North, which includes our operations in Brazil, where we operate two divisions (the beer sales division and the CSD & NANC sales division), and our HILA-ex operations, which includes our operations in the Dominican Republic, Saint Vincent, Antigua, Dominica, Guatemala (which also serves El Salvador and Nicaragua) Peru and Ecuador (both of which became part of our Latin America South business segment starting in 2013);

 

   

Latin America South, or LAS, which includes our operations in Argentina, Bolivia, Paraguay, Uruguay, Chile and, starting in 2013, Peru and Ecuador; and

 

   

Canada, represented by Labatt’s operations, which includes domestic sales in Canada and some exports to the U.S. market.

The following map illustrates our three business segments as of December 31, 2012:

 

LOGO

 

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An analysis of our consolidated net sales by business segment is presented in the table below:

 

                                                                                                                 
     Net Sales (in R$ million)
Year Ended December 31,
 
                 2012                               2011                               2010               

Latin America North

     22,313.3           69.2%         19,132.4           70.5%         17,710.5           70.2%   

Brazil

     20,977.8           65.1%         18,616.9           68.6%         17,146.6           68.0%   

Beer Brazil

     17,598.2           54.6%         15,667.5           57.8%         14,279.3           56.6%   

CSD & NANC

     3,379.6           10.5%         2,949.4           10.9%         2,867.3           11.4%   

HILA-Ex

     1,335.5           4.1%         515.5           1.9%         563.9           2.2%   

Latin America South

     5,886.9           18.3%         4,488.9           16.5%         3,857.2           15.3%   

Canada

     4,030.8           12.5%         3,505.4           12.9%         3,665.6           14.5%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ambev Consolidated

         32,231.0               100.0%             27,126.7               100.0%             25,233.3               100.0%   

 

Source: Ambev.

An analysis of our sales volume by business segment is presented in the table below:

 

                                                                                                                             
     Sales Volumes (‘000 hl)
Year Ended December 31,
 
                 2012                               2011                               2010               

Latin America North

     126,186.8           74.3%         120,339.9           72.9%         120,056.6           72.7%   

Brazil

     117,486.6           69.2%         113,960.5           69.0%         113,725.6           68.9%   

Beer Brazil

     86,692.2           51.0%         84,597.8           51.3%         84,475.6           51.2%   

CSD & NANC

     30,794.4           18.1%         29,362.7           17.8%         29,250.0           17.7%   

HILA-Ex

     8,700.2           5.1%         6,379.4           3.9%         6,331.0           3.8%   

Latin America South

     34,291.8           20.2%         34,564.7           20.9%         33,854.3           20.5%   

Canada

     9,360.7           5.5%         10,139.3           6.1%         11,231.6           6.8%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ambev Consolidated

         169,839.4                   100.0%             165,043.9               100.0%             165,142.5               100.0%   

 

Source: Ambev.

Business Strategy

We aim to continuously create value for our stockholders. The main components of our strategy are:

 

   

our people and culture;

 

   

top line growth;

 

   

building strong brands;

 

   

excellence in route to market;

 

   

permanent cost efficiency; and

 

   

financial discipline.

Our People and Culture

We believe highly qualified, motivated and committed employees are critical to our long-term success. We carefully manage our hiring and training process with a view to recruiting and retaining outstanding professionals. In addition, we believe that through our compensation program, which is based both on variable pay and stock ownership, we have created financial incentives for high performance and results. Another core

 

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element of our culture is our distinguished managerial capability, which is characterized by (1) a hardworking ethos, (2) results-focused evaluations, (3) the encouragement of our executives to act as owners and not only as managers, (4) leadership by personal example, and (5) appreciation of field experience.

Top Line Growth

We are constantly seeking sustainable growth of our net revenues. For instance, in Brazil we have focused our efforts behind four main commercial strategies:

 

   

Innovation: we seek to expand the beer category and maintain a healthy pipeline of products through innovation in liquids, packaging and route to market to continue connecting with consumers in different consumption occasions;

 

   

Premium: we believe the weight of premium brands volume can grow in the Brazilian beer industry and we are working towards leading this growth through our portfolio of domestic and international premium brands;

 

   

Regional expansion: we have been investing to expand our presence in the North and Northeast regions of Brazil mainly due to the per capita consumption and market share growth opportunities. We focus on expanding our production capacity and executing our strong brands and route to market capabilities in those faster growing regions of Brazil; and

 

   

Returnable glass bottles: our commercial initiatives are focused on strengthening the on-premise channel (e.g., Nosso Bar franchise, micro events) and reintroducing returnable bottles into the off-premise channel (e.g., Pit Stop formats in supermarkets, 300 ml returnable glass bottle).

Building Strong Brands

We believe that building strong brands that connect and create enduring bonds with our consumers is a fundamental prerequisite to assure the sustainability of our business in the future. Our consumers are the reason for everything we do and we need to understand them, be close to them and connect them to our brands in order to build enduring ties with them. We bring together tradition and modernity in our product portfolio in a clear strategy to create value and insert our brands into the lives of our consumers.

Excellence in Route to Market

Delivering our brands to almost one million points of sale in Brazil is a very complex feature of our business. For several years, one of our main areas of focus has been to increase direct distribution in major cities while still strengthening our third-party distribution system. In Brazil, for instance, instead of operating three legacy, parallel, single-brand systems (each dedicated to one of our major brands: Skol, Brahma and Antarctica), we have been shifting towards a multi-brand network of distributors committed to handling all of our brands. In addition, we are constantly seeking to improve our point of sale execution through new and creative measures. One of our key marketing initiatives was the introduction into the Brazilian market of our custom-made beverage refrigerators designed and built to chill beer and soft drinks to the optimal temperature for on-premise consumption. These refrigerators also work as effective marketing tools, as they are decorated with images related to our core brands.

Permanent Cost Efficiency

Cost control is one of the top priorities of our employees. Each of our departments must comply with its respective annual budget for fixed and variable costs. As a means of avoiding unnecessary expenses, we have designed a management control system inspired on “zero-base budgeting” concepts that requires every manager to build from scratch an annual budget for his/her respective department.

 

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Financial Discipline

Our focus is not only on volumes and operating performance, but also on the disciplined management of our working capital and our cash flow generation. Our objective is to maximize the return to our shareholders through a combination of payments of dividends and interest on shareholders’ equity, while at the same time keeping our investment plans and holding an adequate level of liquidity to accommodate the seasonality of our business and cope with often volatile and uncertain financial market conditions.

Seasonality

Sales of beverages in our markets are seasonal. Generally, sales are stronger during the summer and major holidays. Therefore, in the Southern Hemisphere (Latin America North and Latin America South) volumes are usually stronger in the fourth calendar quarter due to early summer and year-end festivities. In Canada, volumes are stronger in the second and third calendar quarters due to the summer season. This is demonstrated by the table below, which shows our volumes by quarter and business segment:

 

     2012 Quarterly Volumes
(As a percentage of annual volumes)
 
       1st Quarter          2nd Quarter          3rd Quarter          4th Quarter          2012    

Latin America North

     24.2%           22.2%            24.2%           29.4%           100

Brazil

     24.6%           22.1%            23.9%           29.5%           100

Beer Brazil

     24.9%           21.9%            23.8%           29.4%           100

CSD & NANC

     23.6%           22.7%            24.1%           29.6%           100

HILA-Ex

     19.3%           24.3%            28.0%           28.5%           100

Latin America South

     28.7%           19.5%            21.4%           30.3%           100

Canada

     20.0%           28.1%            28.5%           23.4%           100

Ambev Consolidated

     24.9%           22.0%            23.9%           29.3%           100

Description of the Markets Where We Operate

Latin America North

Brazil

The Brazilian beer market

In 2012, Brazil was one of the world’s largest beer markets in terms of volume, reaching 127 million hectoliters, according to our estimates. Beer is predominantly sold in bars for on-premise consumption, in standardized, returnable 600-milliliter glass bottles. The second favored packaging presentation is the 350-milliliter one-way aluminum can, which is predominantly sold in supermarkets for off-premise consumption.

As of December 2012, according to our estimates, we had a 68.2% share of the Brazilian market share in terms of beer sales volumes, mainly through our three major brands, Skol, Brahma and Antarctica. Our closest competitors in Brazil are: Cervejaria Petrópolis with 11.2% market share; Brasil Kirin with 10.4% market share; and Heineken, with 8.7% market share, according to our estimates.

Distribution represents an important feature in this market, as the retail channel is fragmented into almost one million points of sale. Our distribution is structured under two separate branches, comprising (1) our network of exclusive third-party distributors, involving around 168 operations, and (2) our proprietary direct distribution system, involving more than 79 distribution centers spanned over most Brazilian regions. We have been focusing on direct distribution in large urban regions, while strengthening our third-party distribution system. See “—Business Overview—Business Strategy”.

 

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The Brazilian CSD & NANC markets

The CSD & NANC markets in Brazil are comprised of many different segments, including CSD, bottled water, isotonic beverages, energy drinks and ready-to-drink teas. The CSD segment is the most significant to our business representing more than 90% of the profits of our CSD & NANC unit.

According to our estimates, the leading CSD flavors in Brazil are (1) cola (about 53.5% of the market), (2) guaraná, (3) orange, and (4) lime. Most CSDs in Brazil are sold in supermarkets in 2-liter non-returnable PET bottles, for in-home consumption. The 350-milliliter one-way aluminum can is also an important packaging format for our business and is mainly sold in supermarkets and restaurants.

Our main competitor in this market is The Coca-Cola Company, which operates in Brazil through approximately 16 bottlers. As of December 2012, according to our estimates, The Coca-Cola Company family of brands had a 60.2% market share in the Brazilian CSDs market, while we had a market share of 18.1%. In addition to The Coca-Cola Company, we face competition from small regional bottlers that produce what are usually referred to as “B Brands”. The B Brands compete mainly on price, usually being sold at a significantly lower price than our products.

Our main CSD brands are Guaraná Antarctica, the leader in the “non-cola” flavor segment, and Pepsi Cola, which is sold under the exclusive production and bottling agreements with PepsiCo. Our CSD portfolio also includes such brands as Gatorade in the isotonic market, H2OH! in the flavored water market, and Lipton Iced Tea in the ready-to-drink tea market, which are also sold under license from PepsiCo, and Fusion and Monster, under license from Monster Energy Company, in the energy drinks market.

Our CSD & NANC products are sold through the same distribution system used for beer.

Hila-Ex

Central America (including Guatemala, El Salvador and Nicaragua)

The Central American Beer Market

In Guatemala, our most important operation in Central America, the main packaging presentations are the returnable, 12 oz. and 1-liter glass bottles, and the 12 oz. can. Our main competitor in Guatemala is Cerveceria Centro Americana, the market leader. Cerveceria Centro Americana is a private company held by local investors.

In El Salvador, our main packaging presentation is the returnable 1-liter glass bottle. Our main competitor in El Salvador is Industrias La Constancia, a local subsidiary of SAB Miller, which is the market leader.

In Nicaragua, the main packaging presentation is the returnable, 1-liter glass bottle. Our main competitor in Nicaragua is the market leader, which is a joint venture between Guatemala’s Cerveceria Centro Americana and Florida Ice & Farm Co, an investor group from Costa Rica.

In all three of these markets, beer is predominantly sold in returnable bottles through small retailers. We sell our Brahva, Brahva Beats, Brahva Light, Extra, Budweiser, Becks & Stella Artois brands, which are distributed through CabCorp’s distribution system, jointly with CabCorp’s CSDs portfolio. According to our estimates, the total annual sales volume of these beer markets was 3.5 million hectoliters in 2012.

 

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The Dominican Republic

The Dominican Beer Market

According to our estimates, the annual sales volume of the Dominican beer market was 3.9 million hectoliters in 2012. The main packaging presentation is the returnable, 650-milliliter and 1 liter glass bottles, which is predominantly sold in small retail stores. Today we lead the beer market in the Dominican Republic, after the acquisition of Cerveceria Nacional Dominicana, with portfolio leading brands such as Presidente, Brahma Light, President Light, Bohemia, The One, Corona, Stella Artois and Budweiser.

Our distribution system in the Dominican Republic is comprised of direct distribution operations.

The Dominican CSD Market

According to our estimates, the annual sales volume of the Dominican CSD market was 3.8 million hectoliters in 2012. The main packaging presentation is the returnable, half-liter bottle (glass/PET), which is predominantly sold in small retail stores. The Coca-Cola Company, represented by Bepensa, has the leadership of the Dominican CSD Market, followed by Ajegroup (which adopts a low price strategy). Ambev is currently the third player.

Our main brands are Red Rock, Pepsi-Cola and Seven UP (all of which are marketed under an exclusive bottling agreement with PepsiCo). Our distribution system in the Dominican Republic is comprised of direct distribution operations and third-party distributors.

Ecuador

The Ecuadorian Beer Market

According to our estimates, the annual sales volume of the Ecuadorian beer market was 3.8 million hectoliters in 2012. The main packaging presentation is the returnable, 600-milliliter glass bottle, predominantly sold in small retail stores. The market leader is SABMiller.

Our main brands in Ecuador are Brahma and Budweiser, and our distribution system in Ecuador is comprised of direct distribution operations in Guayaquil and Quito, and third-party distributors around the country.

Peru

The Peruvian Beer Market

According to our estimates, the annual sales volume of the Peruvian beer market was 12.6 million hectoliters in 2012. The main packaging presentation is the returnable, 630-milliliter glass bottle, which is predominantly sold in small retail stores. The market leader is SABMiller.

The main brands that we sell in Peru are Brahma, Corona, Stella Artois and Zenda and the distribution system used for our beer business is also used for our CSD sales, and is comprised of direct distribution operations and third-party distributors.

The Peruvian CSD Market

The main packaging presentation is the 3-liter one-way PET bottle and 0.5-liter one-way PET bottle, which are predominantly sold in small retail stores. The market leader is The Coca-Cola Company, represented by its local network of bottlers. We also face competition from Ajegroup and other regional brands, which compete mainly on price, usually being sold significantly below than the market average.

 

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The main brands that we sell in Peru are Pepsi-Cola, Seven UP, Concordia, Evervess, Triple Kola and Gatorade, all sold under an exclusive bottling agreement with PepsiCo.

The distribution system in Peru is comprised of direct distribution operations and third-party distributors.

Latin America South

Argentina

Argentina is one of our most important regions, second only to Brazil in terms of volume.

We serve more than 335,000 points of sale throughout Argentina both directly and through our exclusive third party distributors.

The Argentine beer market

According to our estimates, the annual sales volume of the Argentine beer market was 17.5 million hectoliters in 2012. With a population of approximately 42 million, Argentina is Latin America South’s largest and most important beer market.

Beer consumption in Argentina has grown in recent years, but experienced a slight decrease in 2012, reaching a per capita consumption of 42.9 liters in 2012, below the 43.9 liters registered in 2011. In recent years, beer has gained share versus wine and became the number one alcoholic beverage in Argentina from 2000, according to our estimates.

Approximately 28.7% of our beer volumes is distributed directly by us and 71.3% is distributed through exclusive third-party distributors. Our main package presentation in Argentina is the one liter returnable glass bottles, which accounts for approximately 94.3% of our sales.

According to our estimates, on-premise consumption represented approximately 15.6% of beer volumes in 2012, and supermarkets sales representing approximately 10.6% of beer volumes. The main channels of volume consumption in Argentina are through kiosks and small grocery stores.

Our most important brands in Argentina are Quilmes Cristal, Brahma and Stella Artois. We are the leading beer producers in Argentina with approximately 77.7% market share, according to our estimates. Our main competitor in Argentina is CCU which held an approximate 19.2% market share in 2012 according to our estimates.

The Argentine CSD market

According to our estimates, in 2012, annual sales volume of the Argentine CSD market was 42.3 million hectoliters. Per capita consumption decreased from 111.2 liters in 2011 to 103.6 liters in 2012, while 2010 reflected a total consumption of 110.7 liters. Approximately 45.9% of our CSD volume is distributed directly by us and 54.1% is distributed through exclusive third-party distributors. Approximately 85% of our sales are through non-returnable bottles.

We are the exclusive Pepsi bottlers in Argentina and our most important brand is Pepsi. We are second to The Coca Cola Company with around 22% market share, according to our estimates.

 

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Bolivia

The Bolivian Beer market

According to our estimates, the annual sales volume of the Bolivian beer market was 3.5 million hectoliters in 2012. The Bolivian market is strongly influenced by macroeconomic trends and governmental, regulatory and fiscal policies.

Approximately 1.3% of our beer volume is directly distributed by us and 98.7% is distributed through exclusive third-party distributors. Our main package presentation in Bolivia is the 620-milliliter returnable glass bottles, which accounts for approximately 82.4% of our sales.

Our most important brands in Bolivia are Paceña, Taquiña and Huari. We are the leading beer producer in Bolivia with approximately 96.7% market share.

The Bolivian CSD market

In March 2009, Latin America South, through Quinsa, acquired from SAB Miller plc, 100% of Bebidas y Aguas Gaseosas Occidente S.R.L., becoming the exclusive bottler of Pepsi in Bolivia.

According to our estimates, in 2012, the annual sales volume of the Bolivian CSD market was 5.8 million hectoliters. Per capita consumption decreased slightly from 57.3 liters in 2011 to 55.9 liters in 2012. Approximately 42.3% of our CSD volume is directly distributed by us and 57.7% is distributed through exclusive third-party distributors 95.4% of our sales are through non-returnable bottles.

Chile

According to our estimates, the annual sales volume of the Chilean beer market was 7.1 million hectoliters in 2012.

Quinsa originally entered the Chilean market with the expectation that it would be participating in a growing market but this growth did not occur as expected, and from 1998 until 2002, consumption decreased on a per capita basis. However, consumption has increased every year since 2002.

Our most important brands in Chile are Becker, Báltica and Stella Artois, where our market share has been growing in the last years.

Paraguay

According to our estimates, the annual sales volume of the Paraguayan beer market was 2.4 million hectoliters in 2012.

The market for beer in Paraguay has traditionally distinguished itself from those in the southern cone countries in certain respects because (1) beer has not faced significant competition from wine as an alternative alcoholic beverage; (2) the domestic beer market has faced significant competition from imported beer, which accounted for a far higher market share in Paraguay than in neighboring countries; and (3) the seasonality of our products is lower due to warmer conditions throughout the year.

Approximately 55.4% of our beer volumes is directly distributed by us and 44.6% is distributed through exclusive third-party distributors. Our main package presentation in Paraguay is the returnable glass bottles, which accounts for approximately 65.8% of our sales.

 

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Our most important brands in Paraguay are Brahma and Pilsen, with our market share being approximately 89.8% according to our estimates. In March 2009, we also became the exclusive distributors of the Budweiser brand in Paraguay.

Uruguay

The Uruguayan beer market

According to our estimates, the annual sales volume of the Uruguayan beer market was 1.1 million hectoliters in 2012. Latin America South manages both beer and CSD businesses out of the facility in Uruguay.

Approximately 24.2% of our beer volumes is directly distributed by us and 75.8% is distributed through exclusive third-party distributors. Our main package presentation in Uruguay is the 960 milliliters returnable glass bottle, which accounts for approximately 89.8% of our sales.

Our most important brands in Uruguay are Pilsen and Patricia, with our market share being approximately 97.1%.

The Uruguayan CSD market

According to our estimates, in 2012, the annual sales volume of the Uruguayan CSD market was 3.6 million hectoliters. The market growth in 2012 was a result of a recovery in the economy and also of higher market investments coming from the A-brands. Per capita consumption reached 110 liters in 2012 according to our estimates.

Approximately 43.1% of our CSD volume is directly distributed and 56.9% is distributed through exclusive third-party distributors. 78.4% of our sales is through non-returnable bottles. Our most important brand in Uruguay is Pepsi, with The Coca-Cola Company being our main competitor.

Canada - Labatt

Our Canada business segment is represented by the Labatt operations, which sells domestic and ABI beer brands, and exports Kokanee to the United States.

According to our estimates, the annual sales volume in the beer market in Canada was 22.4 million hectoliters in 2012, of which Labatt, the market leader, had a volume share of approximately 40.6%. The main packaging presentation in the country is the returnable, 341-milliliter glass bottle, which is predominantly sold in privately owned and government owned retail stores. Our main competitor in Canada is Molson Coors, we also compete with smaller brewers, such as Sleeman Breweries Ltd., or Sleeman, and Moosehead Breweries Ltd.

Our main brands in Canada are Budweiser and Bud Light (brewed and sold under license from ABI’s subsidiary Anheuser-Busch, Inc., or Anheuser-Busch), Labatt Blue, Alexander Keith’s and Kokanee. Our distribution system is structured in different ways across the country:

Distribution in Ontario

In Ontario, the province with the largest beer consumption in Canada, we own together with Molson and Sleeman a distribution and retail company named Brewers Retail Inc., a company incorporated in 1927, the retail component of which carries out business as The Beer Store, or TBS. TBS and the Liquor Control Board of Ontario, or LCBO, a chain of liquor stores owned by the government of the Province of Ontario, own the exclusive rights to sell beer for off-premise consumption in Ontario. TBS also has the exclusive rights to supply domestic-produced beer to the LCBO.

 

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TBS has been the primary distribution and sales channel for beer in Ontario for more than 80 years. TBS operates on a cost recovery model under which it charges volume-based fees for services it provides to the brewers. The nature of TBS’s business requires compliance with laws and regulations and oversight by the Province of Ontario. The Liquor Control Act and the Liquor License Act are administered by the Minister of Consumer and Business Services, which maintains control of the beverage alcohol sectors through the Liquor Control Board of Ontario and the Alcohol and Gaming Commission of Ontario.

Distribution in Quebec

Quebec is the province in Canada with the second largest beer consumption. In this province there are no exclusive rights for the sales of beer, and both the on-premise and off-premise sales channels are mostly comprised of privately owned stores. The SAQ, a government-operated liquor store, sells a select few beer brands that are not available in the private retail system.

We (as well as our competitors) sell our products in Quebec through a direct sales and distribution system.

Distribution in the Western Provinces

Molson and Labatt are each a shareholder in Brewers Distributors Limited, or BDL, which operates a distribution network for beer in the four western provinces of British Columbia, Alberta, Manitoba and Saskatchewan, The Yukon and the Northwest Territories. In Alberta, some volume is also sold through a third-party wholesaler. In these Western Provincial markets there are both private (Alberta, British Columbia) and government-controlled retail stores (British Columbia, Manitoba, Saskatchewan).

Distribution in the Atlantic Provinces

We distribute and sell our products in the Atlantic Provinces (including New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island) through (1) distribution and retail networks controlled by the government in the provinces of Nova Scotia, New Brunswick and Prince Edward Island; and (2) private distributors in Newfoundland.

Exports to the United States

As a result of the U.S. antitrust review of the transaction involving InBev N.V./S.A. (as ABI was then denominated) and Anheuser-Busch, in February 2009, InBev N.V./S.A.’s subsidiary InBev USA, LLC ceased to act as the exclusive importer of Labatt branded beer in the U.S. for Labatt. At that time, KPS Capital Partners, LP, or KPS received from Labatt the perpetual license to brew Labatt branded beer in the United States or Canada solely for sale for consumption in the United States and to use the relevant trademarks and intellectual property to do so. Further, Labatt agreed to continue to brew and supply the Labatt branded beer for KPS on a provisional basis until March 2012. During 2011 and the first quarter of 2012, KPS volumes were phased out to Molson Coors Canada as part of the production agreement signed in August 2010. Separately, in order to ensure that Ambev is adequately compensated, ABI also agreed to indemnify Ambev in connection with certain events related to the perpetual license. See “Item 7. Major Shareholders—B. Related Party Transactions—Ambev and ABI—Indemnification Agreement”.

Beer and CSD Production Process

The basic brewing process for most beers is straightforward, but significant know-how is involved in quality and cost control. The most important stages are brewing and fermentation, followed by maturation, filtering and packaging. Although malted barley (malt) is the primary ingredient, other grains such as unmalted barley, corn, rice or wheat are sometimes added to produce different beer flavors. The proportion and choice of other raw materials varies according to regional taste preferences and the type of beer.

 

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The first step in the brewing process is making wort by mixing malt with warm water and then gradually heating it to around 75°C in large mash tuns to dissolve the starch and transform it into a mixture, called “mash,” of maltose and other sugars. The spent grains are filtered out and the liquid, now called “wort,” is boiled. Hops are added at this point to give a special bitter taste and aroma to the beer, and help preserve it. The wort is boiled for one to two hours to sterilize and concentrate it, and extract the flavor from the hops. Cooling follows, using a heat exchanger. The hopped wort is saturated with air or oxygen, essential for the growth of the yeast in the next stage.

Yeast is a micro-organism that turns the sugar in the wort into alcohol and carbon dioxide. This process of fermentation takes five to eleven days, after which the wort finally becomes beer. Different types of beer are made using different strains of yeast and wort compositions. In some yeast varieties, the cells rise to the top at the end of fermentation. Ales and wheat beers are brewed in this way. Pilsen beers are made using yeast cells that settle to the bottom.

During the maturation process the liquid clarifies as yeast and other particles settle. Further filtering gives the beer more clarity. Maturation varies by type of beer and can take as long as three weeks. Then the beer is ready for packaging in kegs, cans or bottles.

CSDs are produced by mixing water, flavored concentrate and sugar or sweetener. Water is processed to eliminate mineral salts and filtered to eliminate impurities. Purified water is combined with processed sugar or, in the case of diet CSDs, with artificial sweeteners and concentrate. Carbon dioxide gas is injected into the mixture to produce carbonation. Immediately following carbonation, the mixture is packaged. In addition to these inputs, delivery of the product to consumers requires packaging materials such as PET bottles, aluminum or steel cans, labels and plastic closures.

For information on our production facilities, see “— Property, Plant and Equipment”.

Sources and Availability of Raw Materials

Beer

The main raw materials used in our production are malting barley, malt, non-malted cereals, hops and water.

Barley and malt

Malt is widely available and our requirements are met by domestic and international suppliers as well as our own malting facilities. In the case of our beer operations in Brazil, around 70% of our malt needs are supplied by our own malting facilities located in the south of Brazil, Argentina and Uruguay.

For the rest of our needs, our most significant malt suppliers are Soufflet, Agromalte and Cargill Malt. Market prices for malt are volatile, and depend on the quality and the level of production of the barley crop across the world, as well as on the intensity of demand.

We purchase barley for our malting facilities directly from South America farmers. Barley prices depend on the quality of the barley crop and on the prices for wheat on the main boards of trade across the world. We enter into future contracts or financials instruments to avoid the impact of short-term volatility in barley and malt prices on our production costs. See “Item 11. Quantitative and Qualitative Disclosure about Market Risk”.

Hops

There are two types of hops used in our beer production: hops used to give beer its distinctive bitter flavor, which we generally import from the United States, and hops used to give beer its distinctive aroma, which we generally import from Europe. The supply of hops is concentrated into a few international companies, namely the Barth-Haas Group, Hopsteiner, Kalsec and HVG.

 

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Non-malted cereals

Corn syrup is purchased from Ingredion and Cargill. Corn is purchased to produce grits in-house in some plants and corn grits and rice are purchased in other plants from local suppliers and are generally widely available.

Water

Water represents a small portion of our raw material costs. We obtain our water requirements from several sources, such as: lakes and reservoirs, deep wells located near our breweries, rivers adjoining our plants and public utility companies. We monitor the quality, taste and composition of the water we use, and treat it to remove impurities and to comply with our high quality standards and applicable regulations. As a result of advances in technology, we have continuously reduced our water consumption per-hectoliter produced. We do not foresee any shortage in our current water supply.

CSDs

The main raw materials used in our production are: concentrate (including guaraná extract), sugar, sweetener, juices, water and carbon dioxide gas. Most of these materials are obtained from local suppliers.

Guaraná fruit

We have a 1,070 hectare farm that provides us with 4 tons of guaraná seeds (berries) per year, or about 2% of our requirements, with the remainder purchased directly from independent farmers in the Amazon region as well as other guaraná available regions in Brazil. The focus of our own farm is to provide Guaraná seedlings for local producers and promote the sustainable cultivation of Guaraná in the Amazon Region. Approximately 50,000 seedlings are donated per year.

Concentrates

We have a concentrate facility in the north of Brazil which produces the concentrates to meet our requirements for the production of our proprietary brand Guaraná Antarctica among others. The concentrate for Pepsi CSD products is purchased from PepsiCo.

Sugar

Sugar is widely available and is purchased locally by each of our operations. We enter into derivative instruments to avoid the impact of short-term volatility in sugar prices on our production costs. See “Item 11. Quantitative and Qualitative Disclosure about Market Risk”.

Juices

Orange, lemon and grape are purchased locally from Louis Dreyfus Commodities and Dohler.

Other

We buy all of the fruit juice, pulp and concentrate that we use in the manufacture of our fruit-flavored CSDs.

Packaging

Packaging costs are comprised of the cost of glass and PET bottles, aluminum and steel cans, plastic film (shrink and stretch), paper labels, plastic closures, metal crowns and paperboard. We enter into derivative instruments to mitigate the risks of short-term volatility in aluminum prices on our production costs; for further

 

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information on this matter see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. For other materials, we usually set a fixed price for the period in accordance with the prevailing macroeconomic conditions.

In April 2008 we started operating a glass bottle producing facility in Rio de Janeiro. The new unit has a yearly production capacity of 120 thousand tons of glass, or approximately 600 million bottles.

Our main aluminum can suppliers are Rexam, Latapack Ball, Metallic and Crown-Cork. Our main glass bottles suppliers are Verallia (part of St. Gobain group), Owens-Illinois Glass Containers, Companhia Industrial de Vidro (part of Owens-Illinois group) and Vidroporto, and part of our glass bottles needs are being produced internally at our Rio de Janeiro glass bottle facility. We obtain the labels for our beer and CSD primarily from local suppliers; in Brazil, the majority of our requirements are met by a printing house that belongs to FAHZ and is operated by us pursuant to a lease agreement. Plastic closures are principally purchased from America Tampas (former Crown-Cork), Ravi and Berry plastics. PET pre-forms are principally purchased from Plastipak, Lorenpet group (CPR, Centralpet, LEB and Lorenpet), Logoplaste, Amcor and Cristalpet. Crown caps in Brazil are mainly sourced from our vertical operation in Manaus (Arosuco), but part of the volume used is produced by Mecesa, Aro and Tapon Corona (Mexico). These producers also supply some of our HILA-Ex operations as well as Allucaps Mexico, Pelliconi USA, Tapas Antillanas Dom. Rep and Fadesa Ecuador.

Regulation

All our operations are subject to local governmental regulation and supervision, including (1) labor laws; (2) social security laws; (3) public health, consumer protection and environmental laws; (4) securities laws; and (5) antitrust laws. In addition, regulations exist to (1) ensure healthy and safe conditions in facilities for the production, bottling, and distribution of beverages and (2) place restrictions on beer consumption.

Environmental laws in the countries where we operate are mostly related to (1) the conformity of our operating procedures with environmental standards regarding, among other issues, the emission of gas and liquid effluents and (2) the disposal of one-way packaging.

Governmental restrictions on beer consumption in the markets where we operate vary from one country to another, and in some instances, from one local region to another. The most relevant restrictions are:

 

   

Each country has a minimum legal drinking age that is established by the government; the beer legal drinking age varies from 18 to 21 years;

 

   

Some local and federal governments require that retail stores own special licenses for the sale of alcohol; this is the case in some regions of Argentina and Canada;

 

   

Some local governments in Canada establish a minimum price for beer sales, which is named Social Reference Price, or SRP. There is a specific SRP for each different packaging presentation. The SRP may vary from one province to another;

 

   

Beer sales in the off-premise channel in the Canadian provinces of New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island and Saskatchewan are restricted to specific government-owned stores; and

 

   

Beer sales in the off-premise channel in Canada in the Province of Ontario are restricted to two chains of retail stores. One of them is the LCBO, which is government owned, and the other is TBS, jointly owned by Labatt, Molson and Sleeman. The Alcohol and Gaming Commission of Ontario regulates the alcohol industry.

 

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Many governments also impose restrictions on beer advertisement, which may affect, among other issues, (1) the media channels used, (2) the contents of advertising campaigns, and (3) the time and places where beer can be advertised.

Marketing

Ambev’s marketing initiatives are concentrated in off-trade and on-trade initiatives. Off-trade initiatives comprise mass media vehicles, such as television, radio, magazines and internet websites. On-trade initiatives include banners, and all types of enhancements to the point of sale, such as branded coolers and decorated furniture.

Licenses

Ambev has long-term agreements with PepsiCo whereby Ambev has been granted the exclusive right to bottle, sell and distribute certain brands of PepsiCo’s portfolio of CSDs in Brazil, including Pepsi-Cola, Seven Up and Gatorade. The agreements will expire on December 31, 2017, and, thereafter, will be automatically renewed for additional ten-year terms absent written notice by either party of its intent not to renew the contract at least two years prior to the expiration of their term, or on account of other events, such as a change of control or insolvency of, or failure to comply with material terms or meet material commitments by Ambev. See “Item 10. Additional Information—Material Contracts. Ambev also has agreements with PepsiCo to manufacture, package, sell, distribute and market some of its brands in the Dominican Republic and in some regions of Peru. Through our Latin America South operations, we are also PepsiCo’s bottler for Argentina, Uruguay and Bolivia. In 2012, sales volumes of PepsiCo products represented 35% of our total CSD & NANC sales volumes in Brazil, nearly 90% of our total CSD & NANC sales volumes in the Dominican Republic, all of our CSD & NANC sales volumes in Argentina, Peru, Bolivia and Uruguay.

Effective January 1998, Labatt entered into long-term licensing agreements with Anheuser-Busch whereby Labatt was granted the exclusive right and license to manufacture, package, sell, distribute and market some of Anheuser-Busch’s brands, including the Budweiser and Bud Light brands, in Canada, including the right to use Anheuser-Busch’s trademarks for those purposes. The agreements expire in January 2098 and are renewable by either party for a second term of 100 years. In 2012, the Anheuser-Busch brands sold by Labatt represented approximately 60% of Labatt’s total sales volumes. According to Ambev’s estimates, the Budweiser brand is currently the largest selling brand in terms of volume in Canada.

Ambev also has a license agreement with Anheuser-Busch which allows us to exclusively produce, distribute and market Budweiser in Brazil. The Company also has certain arrangements to sell and distribute Budweiser products in Ecuador, Paraguay, Guatemala, El Salvador and Nicarágua.

Ambev and ABI are also parties to a 10-year cross-licensing agreement which began in 2005, through which Ambev is allowed to produce, package, market and distribute beer under the brands Stella Artois and Beck’s in Latin America (except Argentina and Cuba) on an exclusive basis, and ABI is allowed to produce, package, market and distribute beer under the brand Brahma in Europe, Asia, Africa, Cuba and the United States on an exclusive basis. Labatt and ABI have an arrangement through which Labatt distributes certain ABI beer brands in Canada, and the Latin America South zone and ABI have an arrangement through which it distributes Stella Artois in Argentina. In addition, under the Indemnification Agreement between Ambev and ABI, dated November 13, 2008 (see “Item 7. Major Shareholders—B. Related Party Transactions—Ambev and ABI—Indemnification Agreement”) ABI agreed to transfer the distribution in the U.S. of the non-Labatt branded beer to the Anheuser-Busch distribution network.

 

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Taxation

Beer

Taxation on beer in the countries where we operate is comprised of different taxes specific to each jurisdiction, such as an excise tax and a value-added tax. The amount of sales tax charged on our beer products in 2012, represented as a percentage of gross sales, was approximately: 30.3% in Brazil; 21.8% in Canada; 16.2% in Central America; 34.8% in Ecuador; 44.2% in Peru; 44.7% in the Dominican Republic; 20.6% in Argentina; 26.7% in Bolivia; 21.2% in Chile; 13.9% in Paraguay; and 18.7% in Uruguay.

CSD & NANC

Taxation on CSD & NANC in the countries where we operate is comprised of taxes specific to each jurisdiction, such as an excise tax and a value-added tax. The amount of taxes charged on our CSD & NANC products in 2012, represented as a percentage of gross sales, was approximately: 23.6% in Brazil; 10.8% in the Dominican Republic; 28.1% in Peru; between 18.5% and 20.7% in Argentina (the final % depends on the type and flavor of the beverage); 19.8% in Bolivia and 24.6% in Uruguay.

Brazilian Tax Changes

In November 2008, the Brazilian Congress approved changes (effective as of January 1, 2009) to the taxable basis and tax rates of the IPI and the PIS/COFINS. Under the previous system, these taxes were paid as a fixed rate per hectoliter by all taxpayers. The new system provides that higher priced brands pay higher taxes per hectoliter than lower priced brands based on a consumer price reference table. The tax base is calculated through the application of a percentage (“multiplier”) to the consumer price established in such reference table, which result is the retailer price. In 2012, the Brazilian government announced further increases in the federal excise tax burden for the next six years not only by updating the reference table, but also by increasing the multiplier for certain packages.

 

C. Organizational Structure

The controlling shareholders of Ambev, Interbrew International B.V. and AmBrew S.A., which are both subsidiaries of ABI and FAHZ, together hold approximately 91.1% of Ambev’s common shares, as of March 31, 2013. ABI indirectly holds shares of Ambev common stock that represent approximately 74.0% of the total voting power of Ambev’s capital stock as of that date. ABI thus has control over Ambev, even though (1) ABI remains subject to the Ambev Shareholders’ Agreement with FAHZ, and (2) ABI is jointly controlled by Messrs. Lemann, Sicupira and Telles and Interbrew’s former controlling shareholders. For further information on these matters see “Item 10. Ambev Shareholders’ Agreement” and “—Information on the Company—InBev-Ambev Transactions”.

Ambev conducts the bulk of its operations in Brazil directly. It also indirectly controls Labatt, the operations of HILA-Ex and Latin America South. The following chart illustrates the ownership structure of Ambev’s principal subsidiaries as of March 31, 2013 for total share capital owned.

 

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Organizational Structure

 

LOGO

 

D. Property, Plant and Equipment

Our properties consist primarily of brewing, soft drink production, malting, bottling, distribution and office facilities in the countries we operate.

In 2012, our aggregate beer and CSD production capacity was 279.6 million hectoliters per year. Our total annual beer production capacity was 192.6 million hectoliters. Our total CSD production capacity was 87.0 million hectoliters. In 2012, the production of these facilities totaled 123.4 million hectoliters for beer and 46.4 million hectoliters for CSD.

 

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The following is a list of our principal production facilities as of March 31, 2013:

Latin America North

 

Plant   Type of Plant

Agudos, São Paulo

  Beer

Brasília, Federal District

  Beer

Curitiba, Paraná

  Beer

Equatorial, Maranhao

  Beer

Goiânia, Goiás

  Beer

Jacarei, São Paulo

  Beer

Lages, Santa Catarina

  Beer

Natal, Rio Grande do Norte

  Beer

Guarulhos, São Paulo

  Beer

Sete Lagoas, Minas Gerais

  Beer

Petrópolis, Rio de Janeiro

  Beer

Águas Claras, Sergipe

  Mixed

Aquiraz, Ceará

  Mixed

Camaçari, Bahia

  Mixed

Cebrasa, Goiás

  Mixed

Cuiabá, Mato Grosso

  Mixed

Jaguariúna, São Paulo

  Mixed

João Pessoa, Paraiba

  Mixed

Itapissuma, Pernambuco

  Mixed

Nova Rio, Rio de Janeiro

  Mixed

Manaus, Amazonas

  Mixed

Minas, Minas Gerais

  Mixed

Teresina, Piauí

  Mixed

Águas Claras do Sul, Rio Grande do Sul

  Mixed

Piraí, Rio de Janeiro

  Mixed

Curitibana, Paraná

  Soft drinks

Contagem, Minas Gerais

  Soft drinks

Jundiaí, São Paulo

  Soft drinks

Sapucaia, Rio Grande do Sul

  Soft drinks

São Paulo, São Paulo

  Labels

Manaus, Amazonas

  Crown Cap

Campo Grande, Rio de Janeiro

  Glass Bottle

Manaus, Amazonas

  Concentrate

Maltaria Navegantes, Rio Grande do Sul

  Malt

Maltaria Passo Fundo, Rio Grande do Sul

  Malt

AmbevCentroamerica, Guatemala

  Beer

AmbevEcuador, Ecuador

  Beer

Santo Domingo, Dominican Repulic

  Beer

Saint Vincent

  Mixed

Hato Nuevo, Dominican Republic

  Mixed

Huachipa, Peru

  Mixed

Sullana, Peru

  Soft Drinks

Cympay, Uruguay

  Malt

MUSA, Uruguay

  Malt

Malteria Pampa, Argentina

  Malt

 

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Latin America South

 

Plant   Type of Plant

Quilmes, Argentina

  Beer

Corrientes, Argentina

  Mixed

La Paz, Bolivia

  Beer

Santa Cruz, Bolivia

  Beer

Taquiña, Bolivia

  Beer

Huari, Bolivia

  Beer

Tarija, Bolivia

  Beer

Santiago, Chile

  Beer

Minas, Uruguay

  Beer

Ypane, Paraguay

  Beer

Zarate, Argentina

  Beer

Mendoza, Argentina

  Mixed

Montevideo, Uruguay

  Mixed

Cordoba, Argentina

  Soft Drinks

Trelew, Argentina

  Soft Drinks

Buenos Aires South, Argentina

  Soft Drinks and Juices

Tucuman, Argentina

  Soft Drinks

Tres Arroyos, Argentina

  Malt

Llavallol, Argentina (1)

  Malt

Acheral, Argentina

  Beer

Coroplas, Argentina

  Crown Cap

FPV, Paraguay

  Bottles

Sacaba, Bolivia

  Soft Drinks

El Alto, Bolivia

  Soft Drinks

Enalbo, Bolivia

  Cans

 

(1)

This malting facility has been leased to third parties for 10 years as from 2007.

Canada

 

Plant   Type of Plant

St. John’s

  Beer

Halifax

  Beer

Montreal

  Beer

London

  Beer

Edmonton

  Beer

Creston

  Beer

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

Introduction

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited financial statements included in this annual report. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors including, without limitation, those set forth in “Cautionary Statement Regarding Forward-Looking Information” and the matters set forth in this annual report generally.

We have prepared our audited consolidated financial statements as of December 31, 2012, 2011 and 2010 and for the years then ended in reais in accordance with IFRS as promulgated by the IASB.

The financial information and related discussion and analysis contained in this item are in accordance with IFRS as issued by the IASB. The amounts are in million reais, unless otherwise stated.

Critical Accounting Policies

The SEC has defined a critical accounting policy as a policy for which there is a choice among alternatives available, and for which choosing a legitimate alternative would yield materially different results. We believe that the following are our critical accounting policies. We consider an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant or complex judgments and estimates on the part of our management.

The preparation of financial statements in conformity with IFRS requires us to use estimates and adopt assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and accounting disclosures. Actual results may differ from those estimated under different variables, assumptions or conditions. note 3 to our audited consolidated financial statements includes a summary of the significant accounting policies applied in the preparation of these financial statements. In order to provide an understanding about how management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included below a brief discussion of our more significant accounting policies.

Accounting for Business Combinations and Impairment of Goodwill and Intangible Assets

We have made acquisitions that generated a significant amount of goodwill and other intangible assets, including from the acquisition of Labatt, Quinsa and Cerveceria Nacional Dominicana, or CND.

Under IFRS, goodwill is calculated as the difference between the transferred consideration and the fair value of the net assets acquired. IFRS 3 “Business Combinations” does not permit that goodwill and intangible assets with indefinite useful lives be amortized but they should be tested annually for impairment. Our intangible assets with definite useful lives are amortized over the estimated useful lives of these assets.

We exercise significant judgment in the process of identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and in determining their remaining useful lives. We generally engage third-party valuation firms to assist in valuing the acquired assets and liabilities. The valuation of these assets and liabilities is based on the assumptions and criteria which include in some cases estimates of future cash flows discounted at the appropriate rates. The use of different assumptions used for valuation purposes including estimates of future cash flows or discount rates may result in different estimates of value of assets acquired and liabilities assumed.

 

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We test our goodwill and other long-lived assets for impairment annually and whenever events and circumstances indicate that the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. Our estimates of fair values used to determine the resulting impairment loss, if any, represent our best estimate based on forecasted cash flows, industry trends and reference to market rates and transactions. Impairments can also occur when we decide to dispose of assets.

Pension and other Post-Retirement Benefits

Post-employment benefits include pension benefits, dental and health care. The Company manages defined benefit and defined contribution plans for employees of its companies located in Brazil, the Dominican Republic, Argentina, Bolivia and Canada. Usually, pension plans are funded by payments made both by the Company and its employees, taking into account the recommendations of independent actuaries. Ambev maintains funded and unfunded plans.

Defined Contribution Plans

A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity. The group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

Contributions to these plans are recognized as expenses in the period in which they are incurred.

Defined Benefit Plans

Defined benefit plans typically define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

For defined benefit plans, expenses are assessed separately for each plan using the projected unit credit method. The projected unit credit method takes into account each period of service as giving rise to an additional unit of benefit to measure each unit separately. Under this method, the cost of providing pensions is charged to the income statement during the period of service of the employee. The amounts charged to the income statement consist of current service cost, interest cost, the expected return of any plan assets, past service costs and the effect of any settlements and curtailments. The obligations of the plan recognized in the balance sheet are measured at the current value of the estimated future cash outflows using a discount rate equivalent to the bond rates with maturity terms similar to those of the obligation, less any past service cost not yet recognized and the fair value of any plan assets. Past service costs result from the introduction of a new plan or changes to an existing plan. These are recognized in the income statement over the period the benefit vests. Actuarial gains and losses consist of the effects of differences between the previous actuarial assumptions compared to the actual results and the effects of changes in actuarial assumptions. Actuarial gains and losses are fully recognized in other comprehensive income.

Past-service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.

For defined contribution plans, the group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

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Where the calculated amount of a defined benefit plan liability is negative (an asset), Ambev recognizes such pension asset to the extent of any unrecognized past service costs plus any economic benefits available to Ambev either from refunds or reductions in future contributions.

Other Post-Employment Obligations

The Company and its subsidiaries provide health care benefits, reimbursement of expenses with certain medications and other benefits to certain retirees who retired in the past. These benefits are not granted to new retirees. The expected costs of these benefits are recognized over the period of employment, using an accounting methodology similar to that for defined benefit plans.

Contingencies

The preparation of our financial statements requires our management to make estimates and assumptions regarding contingencies which affect the valuation of assets and liabilities at the date of the financial statements and the revenues and expenses during the reported period.

We disclose material contingent liabilities unless the possibility of any loss arising is considered remote, and material contingent assets where the inflow of economic benefits is probable. We discuss our material contingencies in note 30 to our financial statements.

Under IFRS, we record a provision for a loss contingency when it is probable that a future event will confirm that a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated. In particular, given the uncertain nature of Brazilian tax legislation, the assessment of potential tax liabilities requires significant management judgment. By their nature contingencies will only be resolved when one or more future events occur or fail to occur – and typically those events may occur a number of years in the future.

Total provisions including contingencies, restructuring and other provisions related to such matters, recorded on our balance sheet as of December 31, 2012, 2011 and 2010 totaled R$655.6 million, R$580.1 million and R$639.1 million, respectively. For further details, see note 26 of our consolidated financial statements.

Deferred and Current Income Taxes

We recognize deferred tax effects of tax loss carry forwards and temporary differences between the financial statement carrying amounts and the tax basis of our assets and liabilities. We estimate our income taxes based on regulations in the various jurisdictions where we conduct business. This requires us to estimate our actual current tax exposure and to assess temporary differences that result from different treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we record on our balance sheet. We regularly review the deferred tax assets for recoverability and will only recognize these if we believe that it is probable that there will be sufficient taxable profit against any temporary differences that can be utilized, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date. We reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Accounting for Derivatives

Ambev uses derivative financial instruments in order to mitigate against risks related to foreign currency, interest rates and commodity prices. Ambev’s financial risk management policy forbids the use of

 

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derivative financial instruments for speculative purposes. Derivative instruments that, although contracted for hedging purposes, do not meet all hedge accounting criteria defined in the International Accounting Standard 39 Financial Instruments: Recognition and Measurement, or the IAS 39, are recognized at fair value in the income statement.

Derivative financial instruments are recognized initially at fair value. Fair value is the amount for which the asset could be realized and the liability settled, between knowledgeable parties, in an arm’s length transaction. The fair value of derivative financial instruments may be obtained from quoted market prices or from pricing models that take into account current market rates.

Subsequent to initial recognition, derivative financial instruments are remeasured taking into account their fair value on the financial statements date. Depending on the type of instrument, whether cash flow hedging or fair value hedging, the changes in their fair value are recognized in the income statement or in equity.

The concepts of cash flow, net investment hedge accounting and fair value hedge are applied to all instruments that meet the hedge accounting requirements defined in IAS 39, e.g., the maintenance of the documentation required and the effectiveness of the hedge.

Cash Flow Hedge Accounting

When a derivative financial instrument hedges the exposure in cash flows of a recognized asset or liability, the foreign currency risk of a firm commitment or a highly probable forecasted transaction, the effective part of any resulting gain or loss on the derivative financial instrument is recognized directly in equity (hedging reserves). When the firm commitment in foreign currency or the forecasted transaction results in the recognition of a non-financial asset or a non-financial liability, the cumulative gain or loss is removed from equity and included in the initial measurement of the asset or liability. When the hedge relates to financial assets or liabilities, the cumulative gain or loss on the hedging instrument is reclassified from equity into the income statement in the same period during which the hedged risk affects the income statement (e.g., when the variable interest expense is recognized). The ineffective part of any gain or loss is recognized immediately in the income statement. When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss (at that point) remains in equity and is reclassified in accordance with the above policy when the hedged transaction occurs. If the hedged transaction is no longer probable, the cumulative gain or loss recognized in equity is recognized into the income statement immediately.

Net Investment Hedge Accounting

When a foreign currency liability hedges a net investment in a foreign operation, exchange differences arising on the translation of the liability to the functional currency are recognized directly in other comprehensive income (translation reserves).

When a derivative financial instrument hedges a net investment in a foreign operation, the portion of the gain or the loss on the hedging instrument that is determined to be an effective hedge is recognized directly in other comprehensive income (translation reserves), while the ineffective portion is reported in the income statement.

Investments in equity instruments or derivatives linked to and to be settled by delivery of an equity instrument are stated at cost when such equity instrument does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are clearly inappropriate or unworkable.

Fair Value Hedge Accounting

When a derivative financial instrument hedges the variability in fair value of a recognized asset or liability, any resulting gain or loss on the hedging instrument is recognized in the income statement. The hedged

 

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item is also stated at fair value in respect of the risk being hedged, with any gain or loss being recognized in the income statement. The Company will discontinue fair value hedge accounting when the object of coverage expires, is sold, terminated or exercised.

Should these instruments be settled only on their respective maturity dates, any effect between the market value and estimated yield curve of the instruments would be totally eliminated. Had we adopted the same criterion to recognize our financial liabilities at market value, we would have recorded an additional loss, before income taxes, of R$(28.6) million on December 31, 2012 (as compared to a loss of R$(55.6) million on December 31, 2011, and R$(266.5) million on December 31, 2010), as follows:

 

Financial Liabilities

       Book Value              Market Value              Difference    
     (in R$ million)

International financing (other currencies)

     531.1         531.1       -

BNDES/FINEP/EGF 

     2,109.8         2,109.8       -

Bond 2017

     314.0         342.6       (28.6)

Debentures

        -       -

Tax incentives

     168.7         168.7       -

Financial Leasing

     20.1         20.1       -
  

 

 

    

 

 

    

 

Total

     3,143.8         3,172.3       (28.6)

Special Items

Special items are those that in management’s judgment need to be disclosed by virtue of their size or incidence. In deciding whether an event or transaction is special, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence, and the potential for variation of impact on profit or loss. These items are disclosed on the face of the consolidated income statement or separately disclosed in the notes to the financial statements. Transactions which may give rise to special items are principally restructuring activities, impairments, and gains or losses on disposal of assets and investments.

Taxes

Income taxes

Income taxes in Brazil are comprised of federal income tax and social contribution (which is an additional federal income tax). Ambev’s aggregated weighted nominal tax rate applicable for the years ended on December 31, 2012, 2011 and 2010 was 32.13%, 32.58% and 32.81% respectively. For the years of 2012, 2011 and 2010, our IFRS effective tax rate was 18.43% in 2012, 22.37% in 2011 and 21.48% in 2010.

The major reasons for the differences between the effective tax rates and the nominal statutory rates have been: (1) benefits arising from tax-deductible payments of interest on shareholder’s equity without an interest charge in pre-tax income and (2) non-taxable benefits arising from state value-added incentive programs.

Tax Losses Available for Offset

Part of the tax benefit corresponding to the tax losses carry forward of some subsidiaries located abroad was not recorded as an asset, as management cannot determine whether realization is probable. The tax loss carry forward related to these unrecognized deferred tax assets were equivalent to R$1.08 billion on December 31, 2012, with an average expiration period of five years.

Tax losses and negative bases of social contribution, in Brazil, have no expiry date; however, the annual offset is limited to 30% of pre-tax income.

 

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Year Ended December 31, 2012, Compared to Year Ended December 31, 2011

In the periods discussed below, we conducted our operations through three business segments as follows:

 

   

Latin America North, which includes our operations in Brazil, where we operate two divisions (the beer sales division and the CSD & NANC sales division), and our HILA-Ex operations, which includes our operations in the Dominican Republic, Ecuador, Saint Vincent, Antigua, Dominica, Guatemala (which also serves El Salvador and Nicaragua) and Peru.

 

   

Latin America South, which includes our operations in Argentina, Bolivia, Paraguay, Uruguay and Chile.

 

   

Canada, represented by Labatt’s operations, which includes domestic sales in Canada and some exports to the U.S. market.

The table below sets forth certain operating highlights of Ambev for the years presented.

 

         Consolidated Financial Highlights      
             2012                     2011                     % Change          
     (in R$ million, except volume amounts,
percentages and per share amounts)
 

Sales volume—‘000 hectoliters

     169,839.4        165,043.9        2.9

Net sales

     32,231.0        27,126.7        18.8

Net revenue per hectoliter—R$/hl

     189.8        164.4        15.5

Cost of sales

     (10,291.5     (8,793.3     17.0

Gross profit

     21,939.5        18,333.4        19.7

Gross margin (%)

     68.1     67.6     -     

Sales and marketing expenses

     (7,346.6     (6,251.0     17.5

Administrative expenses

     (1,546.5     (1,180.6     31.0

Other operating income/(expenses)

     864.0        784.5        10.1

Special items

     (50.4     23.1        (318.2 )% 

Income from operations

     13,860.0        11,709.4        18.4

Operating margin (%)

     43.0     43.2     -     

Profit

     10,642.6        8,719.8        22.1

Net margin

     33.0     32.1     -     

Margin Analysis

The following table sets forth certain line items in our income statement expressed as percentages of net sales for the years ended December 31, 2012 and 2011:

 

         Year Ended December 31,    
             2012                   2011        
     (%)   (%)

Net sales

       100.0         100.0  

Cost of sales

       (31.9 )       (32.4 )

Gross profit

       68.1         67.6  

Sales and marketing expenses

       (22.8 )       (23.0 )

Administrative expenses

       (4.8 )       (4.4 )

Other operating income/(expenses)

       2.7         2.9  

Special items

       (0.2 )       0.1  

Income from operations

       43.0         43.2  

 

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Selected Financial Data by Business Segment

The following table sets forth selected financial data by business segment, and business operations of Latin America North, for the years ended December 31, 2012 and 2011:

 

    Year Ended December 31,  
    2012     2011  
    Brazil (1)     Hila-Ex (1)     LAS     Canada     Total     Brazil (1)     Hila-Ex (1)     LAS     Canada     Total  
    (in R$ million)  

Net sales

    20,977.8        1,335.5        5,886.9        4,030.8        32,231.0        18,616.9        515.5        4,488.9        3,505.4        27,126.7   

Cost of sales

    (6,239.7     (710.8     (2,196.0     (1,145.0     (10,291.5     (5,680.1     (326.0     (1,740.8     (1,046.4     (8,793.3

Gross profit

    14,738.1        624.7        3,690.8        2,885.8        21,939.5        12,936.8        189.5        2,748.1        2,459.0        18,333.4   

Sales and marketing and administrative expenses

    (5,689.4     (570.0     (1,277.2     (1,356.5     (8,893.1     (5,006.1     (270.7     (978.3     (1,176.5     (7,431.6

Other operating income/ (expenses)

    836.9        3.8        7.3        16.0        864.0        776.3        (3.2     2.1        9.3        784.5   

Special items

    (19.1     (31.3     -        -        (50.4     35.6        -        (9.2     (3.3     23.1   

Income from operations

    9,866.5        27.2        2,421.0        1,545.3        13,860.0        8,742.6        (84.4     1,762.7        1,288.5        11,709.4   

 

(1) The business segment Latin America North is comprised of Brazil and Hila-Ex.

Net Sales

Net sales increased by 18.8% for the year ended December 31, 2012 to R$32,231.0 million from R$27,126.7 million in the same period of 2011, as shown in the tables set forth below.

 

     Net Sales
Year Ended December 31,
 
                 2012                               2011                       % Change      
     (in R$ million, except percentages)  

Latin America North

     22,313.3             69.2%             19,132.4             70.5%             16.6%       

Brazil

     20,977.8             65.1%             18,616.9             68.6%             12.7%       

Beer Brazil

     17,598.2             54.6%             15,667.5             57.8%             12.3%       

CSD & NANC

     3,379.6             10.5%             2,949.4             10.9%             14.6%       

HILA-Ex

     1,335.5             4.1%             515.5             1.9%             159.1%       

Latin America South

     5,886.9             18.3%             4,488.9             16.5%             31.1%       

Canada

     4,030.8             12.5%             3,505.4             12.9%             15.0%       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ambev Consolidated

         32,231.0                 100.0%                 27,126.7                     100.0%                 18.8%       

 

     Sales Volumes
Year Ended December 31,
 
                 2012                               2011                       % Change      
     (in thousand of hectoliters, except percentages)  

Latin America North

     126,186.8             74.3%             120,339.9             72.9%             4.9%       

Brazil

     117,486.6             69.2%             113,960.5             69.0%             3.1%       

Beer Brazil

     86,692.2             51.0%             84,597.8             51.3%             2.5%       

CSD & NANC

     30,794.4             18.1%             29,362.7             17.8%             4.9%       

HILA-Ex

     8,700.2             5.1%             6,379.4             3.9%             36.4%       

Latin America South

     34,291.8             20.2%             34,564.7             20.9%             (0.8)%       

Canada

     9,360.7             5.5%             10,139.3             6.1%             (7.7)%       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ambev Consolidated

         169,839.4                 100.0%                 165,043.9                     100.0%                 2.9%       

 

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     Net Revenues per Hectoliter
Year Ended December 31,
     2012    2011    % Change
     (in R$ million except percentages)

Latin America North

   176.8    159.0    11.2%

Brazil

   178.6    163.4    9.3%

Beer Brazil

   203.0    185.2    9.6%

CSD & NANC

   109.7    100.4    9.3%

HILA-Ex

   153.5    80.8    90.0%

Latin America South

   171.7    129.9    32.2%

Canada

   430.6    345.7    24.6%
  

 

  

 

  

 

Ambev Consolidated

   189.8    164.4    15.5%

Latin America North Operations

Brazilian Operations

Net sales from our Brazilian operations increased by 12.7% for the year ended December 31, 2012, to R$20,977.8 million from R$18,616.9 million in the same period in 2011.

Net sales of beer in Brazil increased by 12.3% for the year ended December 31, 2012, to R$17,598.2 million from R$15,667.5 million in the same period in 2011. The main drivers that contributed to this growth were: (1) beer sales volume growth of 2.5%, driven by industry expansion and partially offset by market share loss, and (2) growth of 9.6% in revenue per hectoliter, which reached R$203.0 per hectoliter. This growth in revenue per hectoliter was mainly a result of price increases, higher direct distribution weight and higher premium brands mix, partially offset by higher taxes.

Net sales of CSD & NANC in Brazil increased by 14.6% for the year ended December 31, 2012, to R$3,379.6 million from R$2,949.4 million in the same period in 2011. The main drivers that contributed to this growth were (1) sales volume growth of 4.9%, mainly driven by market share gains; (2) market expansion; and (3) an increase in revenues per hectoliter of 9.3% reaching R$109.7 per hectoliter. This increase in revenue per hectoliter was mainly a reflection of price increases, partially offset by higher taxes.

HILA-Ex Operations

Ambev’s operations in HILA-Ex increased net sales by 159.1% in 2012 to R$1,335.5 million. The main reason for the increase was our strategic alliance with CND, in the Caribbean, pursuant to which we started consolidating CND’s results in May 2012. Revenues grew organically by 7.7% (without the impact of CND consolidation) due to our price increases in the region.

Latin America South Operations

Latin America South’s net sales were R$5,886.9 in 2012, compared to R$4,488.9 million in 2011, yielding a growth of 31.1% in the period. The main reason for this growth was a 32.2% growth in revenue per hectoliter due to our price increases in the region, also helped by a strong performance of our premium brands and by the appreciation of the Argentine Peso compared against the real (based on the annual average rate).

Canada Operations

Labatt’s operations in Canada contributed R$4,030.8 million to Ambev’s consolidated revenues in 2012, an increase of 15.0% compared to 2011. This result was mainly driven by the appreciation of the Canadian Dollar compared against the real and by our price increases, partially offset by the phasing out of contracted volume supplied to NAB (North American Brewers) in connection with the grant of the perpetual license for Labatt branded beer for sale exclusively in the U.S.

 

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Cost of Sales

Total cost of sales increased by 17.0% for the year ended December 31, 2012, to R$10,291.5 from R$8,793.3 million in the same period in 2011. As a percentage of our net sales, total cost of sales decreased to 31.9% in 2012 from 32.4% in 2011.

 

     Cost of Sales per Hectoliter
Year Ended December 31,
 
     2012      2011          % Change      
     (in R$ million, except percentages)  

Latin America North

     55.1         49.9         10.4

Brazil

     53.1         49.8         6.6

Beer Brazil

     55.7         52.0         7.1

CSD & NANC

     45.9         43.7         5.1

HILA-Ex

     81.7         51.1         59.9

Latin America South

     64.0         50.4         27.2

Canada

     122.3         103.2         18.5
  

 

 

    

 

 

    

 

 

 

Ambev Consolidated

     60.6         53.3         13.7

Latin America North Operations

Brazilian Operations

Total cost of sales for our Brazilian operations increased by 9.9% for the year ended December 31, 2012, to 6,239.7 million from R$5,680.1 million in the same period in 2011. On a per-hectoliter basis, our Brazilian operations’ cost of sales increased by 6.6% for the year ended December 31, 2012, to R$53.1 from R$49.8 in the same period in 2011.

Cost of sales for our Brazilian beer operations increased by 9.8% for the year ended December 31, 2012, to R$4,825.7 million. On a per hectoliter basis, cost of sales for our Brazilian beer operations increased by 7.1%. The main factors that led to this increase were (1) increased barley prices, (2) greater industrial depreciation and (3) higher packaging costs (mainly due to higher weight of cans in the volume mix), partially offset by (4) currency hedges.

Cost of sales for the CSD & Nanc segment in Brazil increased 10.2%, reaching R$1,414.0. The cost of sales per hectoliter increased 5.1%, totaling R$45.9, impacted by (1) higher packaging costs, (2) greater industrial depreciation and (3) higher sugar prices, partially offset by (4) currency hedges.

HILA-Ex Operations

The cost of sales in HILA-Ex operations increased 118.0%, reaching R$710.8 million in 2012. The main reason for this increase was our strategic alliance with CND in the Caribbean, pursuant to which we started consolidating CND’s results in May 2012. Cost of sales per hectoliter increase by 59.9% in reported terms, but grew 12.5% organically (without the impact of CND consolidation).

Latin America South Operations

Latin America South’s cost of sales were R$2,196.0 million in 2012, a 26.2% increase from 2011. On a per hectoliter basis, cost of sales increased by 27.2% in the year. The increase in cost of sales was due to (1) higher commodities prices (mainly barley), (2) general inflation and higher labor costs, mainly in Argentina, and (3) an appreciation of the Argentine Peso compared against the real (based on the annual average rate).

 

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Canada Operations

Cost of sales for Labatt increased by 9.4% for the year ended December 31, 2012, to R$1,145.0 from R$1,046.4 million in the same period in 2011. This increase was mainly due to the appreciation of the Canadian Dollar compared against the real, partially offset by the phasing out of contracted volume supplied to NAB (North American Brewers) in connection with the grant of the perpetual license for Labatt branded beer for sale exclusively in the U.S.

Gross Profit

Gross profit increased by 19.7% for the year ended December 31, 2012, to R$21,939.5 million from R$18,333.4 million in the same period in 2011. The table below sets forth the contribution of each business segment to Ambev’s consolidated gross profit.

 

                                                                                                                             
     Gross Profit  
     2012      2011  
     Amount      % of Total      Margin      Amount      % of Total      Margin  
     (in R$ million, except percentages)  

Latin America North

     15,362.8         70.0%         68.9%         13,126.3         71.6%         68.6%   

Brazil

     14,738.1         67.2%         70.3%         12,936.8         70.6%         69.5%   

Beer Brazil

     12,772.5         58.2%         72.6%         11,270.6         61.5%         71.9%   

CSD & NANC

     1,965.6         9.0%         58.2%         1,666.2         9.1%         56.5%   

HILA-Ex

     624.7         2.8%         46.8%         189.5         1.0%         36.8%   

Latin America South

     3,690.9         16.8%         62.7%         2,748.1         15.0%         61.2%   

Canada

     2,885.8         13.2%         71.6%         2,459.0         13.4%         70.2%   

Ambev Consolidated

     21,939.5         100.0%         68.1%         18,333.4         100.0%         67.6%   

Sales and Marketing and Administrative Expenses

Ambev’s sales and marketing and administrative expenses amounted to R$8,893.1 million for the year ended December 31, 2012, a 19.7% increase over the same period in 2011. An analysis of sales and marketing and administrative expenses for each business segment is set forth below.

Latin America North Operations

Brazilian Operations

Sales and marketing and administrative expenses in Brazil amounted to R$5,689.4 million for the year ended December 31, 2012, an increase of 13.7% over the same period in 2011.

Sales and marketing and administrative expenses for our Brazilian beer operations reached R$4,979.1 million for the year ended December 31, 2012, increasing 13.3% over the same period in 2011. The main drivers for the higher operating expenses were: (1) higher distribution costs (although at a lower rate during the second half of the year because of our investments in production and distribution capacity) and (2) higher bonus accruals.

Sales and marketing and administrative expenses for the CSD & NANC segment in Brazil were R$710.3 million for the year ended December 31, 2012, an increase of 16.0% over the same period in 2011 due to (1) higher distribution costs and (2) higher bonus accrual.

HILA-Ex

Sales and marketing and administrative expenses for Ambev’s operations in HILA-Ex amounted to R$570.0 million for the year ended December 31, 2012, increasing 110.5% compared to the same period in 2011

 

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as a result of our strategic alliance with CND in the Caribbean, pursuant to which we started consolidating CND’s results in May 2012. Organically, sales and marketing and administrative expenses grew 13.4% (without the impact of CND consolidation).

Latin America South Operations

Sales and marketing and administrative expenses totaled R$1,277.2 million for the year ended December 31, 2012, increasing 30.6% over the same period in 2011. This increase was due to (1) higher transportation and labor costs, caused mainly by high inflation in Argentina, (2) additional commercial expenses to support our brands and (3) the appreciation of the Argentine peso compared against the real (based on the annual average rate).

Canada Operations

Labatt’s sales and marketing and administrative expenses was R$1,356.5 million for the year ended December 31, 2012, an increase of 15.3% as compared to 2011 principally because the appreciation of the Canadian Dollar.

Other Operating Income (Expense)

Other operating income in 2012 represented a net gain of R$864.0 million compared to R$784.5 million in 2011. The increase in 2012 was mainly due to higher government grants, and the net present value adjustment of greater long term fiscal incentives.

Special items

Special items were losses of R$50.4 million in 2012 explained mainly by restructuring costs of R$31.3 million and expenses with acquisition of subsidiaries in the amount of R$15.8 million.

Income from operations

Income from operations increased by 18.4 % for the year ended December 31, 2012, to R$13,860.0 million from R$11,709.4 million in the same period in 2011, primarily as a result of our higher gross profit.

Net Finance Cost

Our financial result was an expense of R$812.8 million, compared to an expense of R$468.1 million in 2011. This result is mainly explained by a non-cash accretion expense in connection with the put option associated with our investment in CND, a lower interest income due to the lower interest rate compared to the previous year and higher expenses related to derivative instruments. This result was also impacted by foreign exchange translation losses on intercompany loans as a consequence of the real depreciation. Given the nature of these transactions (intercompany loans), the non-cash currency translation impact is reported in our income statement. However, such impact is economically offset by the foreign exchange translation gains that are registered in equity on the consolidation of offshore companies with functional currency different than reais.

Ambev’s total year end indebtedness decreased by R$958.5 million compared to 2011, while its cash and cash equivalents and current investment securities, net of bank overdrafts, increased R$1,145.3 million, reflecting the Company’s strong cash generation in 2012. As a result Ambev’s net cash position increased by R$2,103.9 million.

 

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Income Tax Expense

Our consolidated income tax and social contribution for the year ended December 31, 2012, totaled R$2,405.1 million, a decrease of 4.6% in relation to the R$2,522.0 million in 2011. The effective rate was 18.4%, compared to 22.4% in the previous year. Such decrease in our effective rate during the year was primarily due to higher deductible interest on shareholders’ equity, higher goodwill amortization and other income tax benefits.

Net Income Attributable to Shareholders

Profit increased by 21.6% for the year ended December 31, 2012, to R$10,508.1 million from R$8,641.0 million in the same period in 2011 due to a higher EBITDA and a lower effective tax rate.

Net Income Attributable to Non-Controlling Interest

Non-controlling interest totaled R$134.5 million compared to R$78.8 million in 2011, mostly due to our strategic alliance with CND in the Caribbean, pursuant to which we started consolidating CND’s results in May 2012.

Year Ended December 31, 2011, Compared to Year Ended December 31, 2010

In the periods discussed below, we conducted our operations through three business segments as follows:

 

   

Latin America North, which includes our operations in Brazil, where we operate two divisions (the beer sales division and the CSD & NANC sales division), and our HILA-ex operations, which includes our operations in the Dominican Republic, Guatemala (which also serves El Salvador and Nicaragua) Peru and Ecuador .

 

   

Latin America South, which includes our operations in Argentina, Bolivia, Paraguay, Uruguay and Chile.

 

   

Canada, represented by Labatt’s operations, which includes domestic sales in Canada and some exports to the U.S. market.

The table below sets forth certain operating highlights of Ambev for the years presented.

 

     Consolidated Financial Highlights  
     2011      2010      % Change  
    

(in R$ million, except volume amounts,

percentages and per share amounts)

 

Sales volume—‘000 hectoliters

     165,043.9              165,142.5              (0.1 %) 

Net sales

     27,126.7              25,233.3              7.5

Net revenue per hectoliter—R$/hl

     164.4              152.8              7.6

Cost of sales

     (8,793.3)             (8,449.0)             4.1

Gross profit

     18,333.4              16,784.3              9.2

Gross margin (%)

     67.6%          66.5%          -   

Sales and marketing expenses

     (6,251.0)             (6,038.5)             3.5

Administrative expenses

     (1,180.6)             (1,197.0)             (1.4 %) 

Other operating income/(expenses)

     784.5              624.9              25.5

Special items

     23.1              (150.8)             nm   

Income from operations

     11,709.4              10,022.9              16.8

Operating margin (%)

     43.2%          39.7%          -   

Profit

     8,719.8              7,619.2              14.4

Net margin

     32.1%          30.2%          -   

 

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Margin Analysis

The following table sets forth certain items in our income statement expressed as percentages of net sales for the years ended December 31, 2011 and 2010:

 

                                                             
     Year Ended December 31,  
     2011     2010  
     (%)     (%)  

Net sales

     100.0        100.0   

Cost of sales

     (32.4     (33.5

Gross profit

     67.6        66.5   

Sales and marketing expenses

     (23.0     (23.9

Administrative expenses

     (4.4     (4.7

Other operating income/(expenses)

     2.9        2.5   

Special items

     0.1        (0.6

Income from operations

     43.2        39.7   

Selected Financial Data by Business Segment

The following table sets forth selected financial data by business segment, and business operations of Latin America North for the years ended December 31, 2011 and 2010:

 

    Year Ended December 31,  
    2011     2010  
    Brazil(1)     Hila-Ex(1)     LAS     Canada     Total     Brazil(1)     Hila-Ex(1)     LAS     Canada     Total  
    (in R$ million)  

Net sales

    18,616.9        515.5        4,488.9        3,505.4        27,126.7        17,146.6        563.9        3,857.2        3,665.6        25,233.3   

Cost of sales

    (5,680.1     (326.0     (1,740.8     (1,046.4     (8,793.3     (5,421.0     (372.9     (1,500.2     (1,154.9     (8,449.0

Gross profit

    12,936.8        189.5        2,748.1        2,459.0        18,333.4        11,725.6        191.0        2,357.0        2,510.7        16,784.3   

Sales and marketing and administrative expenses

    (5,006.1     (270.7     (978.3     (1,176.5     (7,431.6     (4,865.9     (317.3     (861.4     (1,190.9     (7,235.5

Other operating income/ (expenses)

    776.3        (3.2     2.1        9.3        784.5        634.2        3.1        (13.9     1.5        624.9   

Special items

    35.6        -        (9.2     (3.3     23.1        (59.3     -        (14.1     (77.4     (150.8

Income from operations

    8,742.6        (84.4     1,762.7        1,288.5        11,709.4        7,434.6        (123.2     1,467.6        1,243.9        10,022.9   

 

(1) The business segment Latin America North is comprised of Brazil and Hila-Ex.

Net Sales

Net sales increased by 7.5% for the year ended December 31, 2011, to R$27,126.7 million from R$25,233.3 million in the same period in 2010.

 

                                                                                                                  
     Net Sales
Year Ended December 31,
 
     2011     2010     % Change  
     (in R$ million, except percentages)  

Latin America North

     19,132.4         70.5     17,710.5         70.2     8.0

Brazil

     18,616.9         68.6     17,146.6         68.0     8.6

Beer Brazil

     15,667.5         57.8     14,279.3         56.6     9.7

CSD & NANC

     2,949.4         10.9     2,867.3         11.4     2.9

HILA-Ex

     515.5         1.9     563.9         2.2     (8.6 %) 

Latin America South

     4,488.9         16.5     3,857.2         15.3     16.4

Canada

     3,505.4         12.9     3,665.6         14.5     (4.4 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ambev Consolidated

     27,126.7         100.0     25,233.3         100.0     7.5

 

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     Sales Volumes
Year Ended December 31,
 
     2011     2010     % Change  
     (in thousands of Hectoliters, except percentages)  

Latin America North

     120,339.9         72.9     120,056.6         72.7     0.2

Brazil

     113,960.5         69.0     113,725.6         68.9     0.2

Beer Brazil

     84,597.8         51.3     84,475.6         51.2     0.1

CSD & NANC

     29,362.7         17.8     29,250.0         17.7     0.4

HILA-Ex

     6,379.4         3.9     6,331.0         3.8     0.8

Latin America South

     34,564.7         20.9     33,854.3         20.5     2.1

Canada

     10,139.3         6.1     11,231.6         6.8     (9.7 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ambev Consolidated

     165,043.9         100.0     165,142.5         100.0     (0.1 %) 

 

                                                        
     Net Revenues per Hectoliter
Year Ended December 31,
 
     2011      2010      % Change  
     (in R$, except percentages)  

Latin America North

     159.0         147.5         7.8

Brazil

     163.4         150.8         8.4

Beer Brazil

     185.2         169.0         9.6

CSD & NANC

     100.4         98.0         2.5

HILA-Ex

     80.8         89.1         (9.3 %) 

Latin America South

     129.9         113.9         14.0

Canada

     345.7         326.4         5.9
  

 

 

    

 

 

    

 

 

 

Ambev Consolidated

     164.4         152.8         7.6

Latin America North Operations

Brazilian Operations

Net sales from our Brazilian operations increased by 8.6% for the year ended December 31, 2011, to R$18,616.9 million from R$17,146.6 million in the same period in 2010.

Net sales of beer in Brazil increased by 9.7% for the year ended December 31, 2011, to R$15,667.5 million from R$14,279.3 million in the same period in 2010. The main drivers that contributed to this growth were: (1) beer sales volume growth of 0.1%, reflecting a deceleration in industry growth in 2011 compared to previous years plus the impact of volume market share losses and (2) growth of 9.6% in revenue per hectoliter, which reached R$185.2 per hectoliter. This growth in revenue per hectoliter was mainly a result of price increases and higher direct distribution weight, partially offset by higher taxes.

Net sales of CSD & NANC in Brazil increased by 2.9% for the year ended December 31, 2011, to R$2,949.4 million from R$2,867.3 million in the same period in 2010. The main drivers that contributed to this growth were (1) sales volume growth of 0.4%, mainly driven by market share gains offsetting industry contraction in 2011 and (2) an increase in revenues per hectoliter of 2.5% reaching R$100.4 per hectoliter. This increase in revenue per hectoliter was mainly a reflection of price increases, partially offset by higher taxes.

HILA-Ex Operations

Ambev’s operations in HILA-Ex experienced a decrease in net sales of 8.6% in 2011, to R$515.5 million. The main reason for the decrease was our business combination in Venezuela in October 20, 2010, when we stopped consolidating the results of this subsidiary. Revenues grew organically by 17.8% due to organic volume growth of 9.7% and price increases in the region.

 

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Latin America South Operations

Latin America South’s net sales were R$4,488.9 million in 2011, compared to R$3,857.2 million in 2010, yielding a growth of 16.4% in the period. The main reason for this growth was a 2.1% sales volume growth combined with price increases in the region, also helped by a strong performance of our premium brands, partially offset by the devaluation of the Argentine Peso compared against the real.

Canada Operations

Labatt’s operations in Canada contributed R$3,505.4 million to Ambev’s consolidated revenues in 2011, a decrease of 4.4% compared to 2010. This result is principally explained by a sales volume decrease of 9.7%, resulting from industry contraction and from the phasing out of contracted volume supplied to NAB (North American Brewers) in connection with the grant of the perpetual license for Labatt branded beer for sale exclusively in the U.S.

Cost of Sales

Total cost of sales increased by 4.1% for the year ended December 31, 2011, to R$8,793.3 million from R$8,449.0 million in the same period in 2010. As a percentage of our net sales, total cost of sales decreased to 32.4% in 2011 from 33.5% in 2010.

 

                                                  
     Cost of Sales per Hectoliter
Year Ended December 31,
 
     2011      2010          % Change      
     (in R$, except percentages)  

Latin America North

     49.9         48.3         3.4

Brazil

     49.8         47.7         4.6

Beer Brazil

     52.0         49.3         5.4

CSD & NANC

     43.7         42.9         2.0

HILA-Ex

     51.1         58.9         (13.2 %) 

Latin America South

     50.4         44.3         13.6

Canada

     103.2         102.8         0.4

Ambev Consolidated

     53.3         51.2         4.1

Latin America North Operations

Brazilian Operations

Total cost of sales for our Brazilian operations increased by 4.8% for the year ended December 31, 2011, to R$5,680.1 million from R$5,421.0 million in the same period in 2010. On a per-hectoliter basis, our Brazilian operations’ cost of sales increased by 4.6% for the year ended December 31, 2011, to R$49.8 from R$47.7 in the same period in 2010.

Cost of sales for our Brazilian beer operations increased by 5.5% for the year ended December 31, 2011, to R$4,396.9 million. On a per hectoliter basis, cost of sales for our Brazilian beer operations increased by 5.4%. The main factors that led to this increase were (1) increased commodities prices and (2) higher packaging costs, partially offset by (3) currency hedges and (4) easier comparison with the previous year that was impacted by imported cans at a higher price, an effect that was not relevant in 2011.

Cost of sales for the CSD & Nanc segment in Brazil increased 2.4%, reaching R$1,283.2 million. The cost of sales per hectoliter increased 2.0%, totaling R$43.7, impacted by (1) higher packaging costs and (2) higher sugar prices, partially offset by currency hedges.

 

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HILA-Ex Operations

The cost of sales in HILA-Ex operations decreased 12.6%, reaching R$326.0 million in 2011. The main reason for this decrease was our business combination in Venezuela after which we stopped consolidating the results of the subsidiary. Cost of sales per hectoliter decreased by 13.2% in reported terms, but grew 3.2% organically reflecting (1) higher volumes and (2) general inflation in the region, partially offset by (3) lower packaging costs.

Latin America South Operations

Latin America South’s cost of sales were R$1,740.8 million in 2011, a 16.0% increase from 2010. On a per hectoliter basis, cost of sales increased by 13.6% in the year. The increase in cost of sales was due to (1) higher commodities prices, (2) general inflation and higher labor costs, mainly in Argentina, partially offset by (3) a devaluation of the Argentine Peso.

Canada Operations

Cost of sales for Labatt decreased by 9.4% for the year ended December 31, 2011, to R$1,046.4 million from R$1,154.9 million in the same period in 2010. This decrease was mainly due to (1) the phasing out of contracted volume supplied to NAB (North American Brewers), (2) lower costs on hedged commodities and (3) benefits from closing our Hamilton brewery.

Gross Profit

Gross profit increased by 9.2% for the year ended December 31, 2011, to R$18,333.4 million from R$16,784.3 million in the same period in 2010. The table below sets forth the contribution of each business segment to Ambev’s consolidated gross profit.

 

                                                                                                     
    Gross Profit  
    Year Ended December 31,  
    2011     2010  
      Amount       %     Margin     Amount     %     Margin  
    (in R$ million, except percentages)  

Latin America North

    13,126.3        71.6%        68.6%        11,916.6        71.0%        67.3%   

Brazil

    12,936.8        70.6%        69.5%        11,725.6        69.9%        68.4%   

Beer Brazil

    11,270.6        61.5%        71.9%        10,112.0        60.2%        70.8%   

CSD & NANC

    1,666.2        9.1%        56.5%        1,613.6        9.6%        56.3%   

HILA-Ex

    189.5        1.0%        36.8%        191.0        1.1%        33.9%   

Latin America South

    2,748.1        15.0%        61.2%        2,357.0        14.0%        61.1%   

Canada

    2,459.0        13.4%        70.2%        2,510.7        15.0%        68.5%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ambev Consolidated

    18,333.4        100.0%        67.6%        16,784.3        100.0%        66.5%   

Sales and Marketing and Administrative Expenses

Ambev’s sales and marketing and administrative expenses amounted to R$7,431.6 million for the year ended December 31, 2011, a 2.7% increase over the same period in 2010. An analysis of sales and marketing and administrative expenses for each business segment is set forth below.

Latin America North Operations

Brazilian Operations

Sales and marketing and administrative expenses in Brazil amounted to R$5,006.1 million for the year ended December 31, 2011, an increase of 2.9% over the same period in 2010.

 

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Sales and marketing and administrative expenses for our Brazilian beer operations reached R$4,394.0 million for the year ended December 31, 2011, increasing 3.2% over the same period in 2010. The main drivers for the higher operating expenses were: (1) general inflation and (2) higher distribution costs (although at a lower rate because of the capacity investments in the North and Northeast of the country), partially offset by (2) cost saving initiatives.

Sales and marketing and administrative expenses for the CSD & NANC segment in Brazil were R$612.1 million for the year ended December 31, 2011, an increase of 0.7% over the same period in 2010 due to (1) higher distribution costs and (2) general inflation, partially offset by (3) cost saving initiatives.

HILA-Ex

Sales and marketing and administrative expenses for Ambev’s operations in HILA-Ex amounted to R$270.7 million for the year ended December 31, 2011, decreasing 14.7% compared to the same period in 2010 as a result of our business combination in Venezuela whereby we stopped consolidating the results of the subsidiary. Organically, sales and marketing and administrative expenses grew 17.8% as a result of higher volumes and general inflation in the region.

Latin America South Operations

Sales and marketing and administrative expenses totaled R$978.3 million for the year ended December 31, 2011, increasing 13.6% over the same period in 2010. This increase was due to (1) higher transportation and labor costs, caused mainly by high inflation in Argentina, and (2) additional marketing expenses to support our brands, which were partially offset by (3) the devaluation of the Argentine Peso.

Canada Operations

Labatt’s sales and marketing and administrative expenses was R$1,176.5 million for the year ended December 31, 2011, a decrease of 1.2% as compared to 2010 principally because of the devaluation of the Canadian Dollar.

Other Operating Income (Expense)

Other operating income in 2011 represented a net gain of R$784.5 million compared to R$624.9 million in 2010. The increase in 2011 was mainly due to (1) government grants, (2) the reversal of provisions, and (3) the net present value adjustment of greater long term fiscal incentives.

Special items

Special items were gains of R$23.1 million in 2011 explained by proceeds from the sale of property of R$35.6 million partially offset by restructuring costs of R$12.5 million.

Income from operations

Income from operations increased by 16.8% for the year ended December 31, 2011, to R$11,709.4 million from R$10,022.9 million in the same period in 2010, primarily as a result of our higher gross profit and other operating income.

Net Finance Cost

Our financial result was an expense of R$468.1 million, compared to an expense in 2010 of R$319.4 million. This result is explained primarily by: (1) expenses related to the prepayment of the 2013 Bond and (2) unrealized foreign exchange translation losses, partially offset by (3) higher interest income due to higher average cash and cash equivalents and current investment securities compared to 2010.

 

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Ambev’s total year end indebtedness decreased by R$2,668.1 million compared to 2010, while its cash and cash equivalents and current investment securities, net of bank overdrafts, increased R$1,279.7 million, reflecting the Company’s strong cash generation in 2011. As a result, Ambev’s net debt decreased by R$3,947.9 million.

Income Tax Expense

Our consolidated income tax and social contribution for the year ended December 31, 2011, totaled R$2,522.0 million, an increase of 21.0% in relation to R$2,084.5 million in 2010. The effective rate was 22.4%, compared to 21.5% in the previous year. Such increase in our effective rate during the year was primarily due to a higher profit before tax taxable at a rate of 32.6%, which was partially offset by higher deductible interest on shareholders’ equity and income tax benefits.

Net Income Attributable to Shareholders

Profit increased by 14.3% for the year ended December 31, 2011, to R$8,641.0 million from R$7,561.4 million in the same period in 2010.

Net Income Attributable to Non-Controlling Interest

Non-controlling interest totaled R$78.8 million compared to R$57.8 million in 2010, mostly due to our business combination in Venezuela in October 20, 2010, whereby we stopped consolidating the results of the local subsidiary.

 

B. Liquidity and Capital Resources

Liquidity and Capital Resources

The information in this section refers to the years 2012 and 2011. Our primary sources of liquidity have historically been cash flows from operating activities and borrowings. Our material cash requirements have included the following:

 

   

Debt service;

 

   

Capital expenditures;

 

   

Share buyback program;

 

   

Payments of dividends and interest on shareholders’ equity;

 

   

Increases in ownership of our consolidated subsidiaries or companies in which we have equity investments; and

 

   

Investments in companies participating in the brewing, CSD and malting industries.

Our cash and cash equivalents and current investment securities net of bank overdrafts at December 31, 2012 and 2011 were R$9,402.7 million and R$8,257.3 million, respectively.

We believe that cash flows from operating activities, available cash and cash equivalents and current investment securities, along with our derivative instruments and our access to borrowing facilities, will be sufficient to fund our capital expenditures, debt service and dividend payments going forward.

 

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Cash Flows

Operating Activities

Our cash flows from operating activities increased 12.1 % to R$14,128.6 for the year ended December 31, 2012 compared to R$12,606.8 million for the same period in 2011. This increase was due primarily to an increase of R$1,988.4 in cash generated from operations.

Investing Activities

Cash flows used in our investing activities for the year ended December 31, 2012, totaled R$5,717.3 million, compared to R$2,203.4 million for the same period in 2011. The increase of cash used in investing activity was due primarily to the R$2,537.0 million spent in acquisition of subsidiaries in connection with our strategic alliance in the Caribbean with CND.

Financing Activities

Cash flows used in financing activities for the year ended December 31, 2012, amounted to R$7,652.3 million compared to R$8,652.0 million for the same period in 2011. This decrease was principally due to lower debt repayments in 2012 compared to 2011.

The table below shows the profile of our debt instruments.

 

    Maturity Schedule of Debt Portfolio as of December 31, 2012
Debt Instrument       2013           2014           2015           2016           2017         Thereafter     Total
    (in R$ million, except percentages)

BNDES Currency Basket Debt Floating Rate:

                           

Currency Basket Debt Floating Rate

      (126.7)         (107.4)         (85.3)         (51.3)         (8.2)         -         (378.9)  

UMBNDES + Average Pay Rate

      1.76 %       1.76 %       1.76 %       1.76 %       1.76 %       -         1.76 %

International Debt:

                           

Other Latin America Currency Fixed Rate

      (5.7)         (19.3)         (54.0)         -         -         -         (79.0)  

Average Pay Rate

      6.79 %       6.81 %       6.81 %       -         -         -         6.81 %

Other Latin America Currency Floating Rate

      (147.5)         (86.4)         (84.7)         (58.7)         (1.7)         (39.1)         (418.1)  

Average Pay Rate

      6.14 %       6.14 %       6.14 %       6.14 %       6.14 %       6.14 %       6.14 %

Reais Denominated Debt Floating Rate – TJLP:

                           

Notional Amount

      (473.8)         (469.4)         (356.0)         (224.9)         (27.4)         -         (1,551.5)  

TJLP + Average Pay Rate

      6.79 %       6.79 %       6.79 %       6.79 %       6.79 %       -         6.79 %

Reais Debt - ICMS Fixed Rate:

                           

Notional Amount

      (17.2)         (23.4)         (23.8)         (10.9)         (8.2)         (85.2)         (168.7)  

Average Pay Rate

      3.38 %       3.38 %       3.38 %       3.38 %       3.38 %       3.38 %       3.38 %

Reais Debt - Debentures Floating Rate – CDI:

                           

Notional Amount

      -         -         -         -         -         -         -  

Average Pay Rate % CDI

      -         -         -         -         -         -         -  

Reais Debt - Fixed Rate:

                           

Notional Amount

      (66.9)         (34.4)         (26.3)         (16.2)         (381.9)         (21.7)         (547.5)  

Average Pay Rate

      4.21 %       4.94 %       4.94 %       4.94 %       9.31 %       4.94 %       7.90 %
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Debt

      (837.8)         (740.3)         (630.1)         (362.0)         (427.4)         (146.0)         (3,143.7)  

 

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Borrowings

Most of our borrowings are for general use, based upon strategic capital structure considerations. Although seasonal factors affect the business, they have little effect on our borrowing requirements. We accrue interest based on different interest rates, the most significant of which are: (1) fixed, for the 2017 bond; and (2) Currency Basket, or the UMBNDES, and Taxa de Juros de Longo Prazo, or the TJLP, for loans of the Brazilian Economic and Social Development Bank (Banco Nacional de Desenvolvimento Economico e Social), or the BNDES. For further information, see note 14 of our Consolidated Financial Statements.

The following table sets forth our net debt consolidated position as of December 31, 2012 and 2011:

 

     Net Debt Consolidated Position  
     Year Ended December 31,  
     2012     2011  
         LC (1)              FC (2)              Total             LC (1)              FC (2)              Total      
     (in R$ million)  

Short Term Debt

     667.4         170.4         837.8        2,089.2         122.9         2,212.1   

Long Term Debt

     1,756.4         549.6         2,306.0        1,632.4         257.8         1,890.2   

Total

     2,423.8         720.0         3,143.7        3,721.6         380.7         4,102.3   

Cash and Cash Equivalents

           8,926.2              8,076.2   

Investment Securities

           476.6              193.4   

Bank overdrafts

           (0.1           (12.3
        

 

 

         

 

 

 

Net Debt

           (6,259.0           (4,155.0

 

(1) LC = Local Currency.
(2) FC = Foreign Currency.

Short-term Debt

As of December 31, 2012, our short-term debt totaled R$837.8 million, 20.34% of which was denominated in foreign currencies. As of December 31, 2011, our short-term debt totaled R$2,212.1 million, 6% of which was denominated in foreign currencies.

Long-term Debt

As of December 31, 2012, our long-term debt, excluding the current portion of long-term debt, totaled R$2,306.0 million, of which R$1,756.4 million was denominated in local currency. As of December 31, 2011, our long-term debt, excluding the current portion of long-term debt, totaled R$1,890.2 million, of which 86% was denominated in reais.

The table below shows a breakdown of our long term debt by year.

 

       As of December 31, 2012  

 Long-Term Debt Maturity in:

   (in R$ million)

 2014

                       (740.3)                    

 2015

                       (630.2)                    

 2016 and Later

                       (935.4)                    
    

 

 

 

 Total

                       (2,306.0)                    

In accordance with our foreign currency risk management policy, we have entered into forward and cross-currency interest rate swap contracts in order to mitigate currency and interest rate risks. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for our policy with respect to mitigating foreign currency and interest rate risks through the use of financial instruments and derivatives.

 

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On July 24, 2007, Ambev International issued R$300 million in bonds with a fixed interest of 9.500% per annum and a maturity date of July 24, 2017, or the 2017 bonds, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and outside the United States to non-U.S. persons in reliance on Regulation S, fully guaranteed by Ambev. The bonds are unsecured and unsubordinated obligations of Ambev International and are fully and unconditionally guaranteed by Ambev. The guarantee ranks equally in right of payment with all of Ambev’s other unsecured and unsubordinated debt obligations (except for statutorily preferred credits set forth in Brazilian bankruptcy laws). The bonds are denominated in reais, but both principal and interest are paid in U.S. dollars at the prevailing exchange rate at the applicable payment date. Interest is paid semiannually in arrears, starting January 24, 2008. The net proceeds of the offering were used for the repayment of short-term debt and for general corporate purposes by Ambev and its subsidiaries. In February 2009, we completed a SEC-registered exchange offer for these notes.

As of December 31, 2012, our local currency long-term debt borrowings consisted primarily of the BNDES debts. Long-term local currency also includes long-term plant expansion and other loans from governmental agencies including BNDES, and BNDES programs, including the Fund for Financing the Acquisition of Industrial Machinery and Equipment, or FINAME, and the Financing and Endeavors, or FINEM.

Secured Debt

Certain loans, provided by BNDES, are secured by some of our facilities and some of our equipment (mainly coolers).

Sales Tax Deferrals and Other Tax Credits

Many States in Brazil offer tax benefits programs to attract investments to their regions. We participate in ICMS value-added tax credit programs offered by various Brazilian States which provide (1) tax credits to offset ICMS value-added tax payable and (2) ICMS value-added tax deferrals. In return, we are required to meet certain operational requirements including, depending on the State, production volume and employment targets, among others. All of these conditions are included in specific agreements between Ambev and the State governments. In the event that we do not meet the program’s targets, future benefits may be withdrawn. The total amount deferred (financing) as of December 31, 2012, was R$168.7 million with a current portion of R$17.2 million, and R$151.5 million as non-current. Percentages deferred typically range from 50% to 90% over the life of the program. Balances deferred generally accrue interest and are partially inflation indexed, with adjustments generally set at 60% to 80% of a general price index. The grants (tax waivers) are received over the lives of the respective programs. In the years ended December 31, 2012 and 2011, we recorded R$531.7 million and R$444.5 million, respectively, of tax credits as gains on tax incentive programs.

However, there is a controversy regarding whether these benefits are constitutional when granted without the approval of every state of the country. Some states and Public Prosecutors have filed Direct Actions of Unconstitutionality (ADIs) in the Brazilian Supreme Court to challenge the constitutionality of certain State laws granting tax incentive programs unilaterally, without the prior approval of CONFAZ (the Council formed by all the 27 States Treasury Secretaries).

Since 2007, we have received tax assessments from the States of São Paulo, Rio de Janeiro and Minas Gerais, in the aggregate amount of approximately R$440 million (updated as of December 31, 2012), challenging the legality of tax credits arising from existing tax incentives received by the Company in other States. We have treated this proceeding as a possible (but not probable) loss. Such estimate is based on reasonable assumptions and management assessments, but should we lose such proceedings the expected net impact on our income statement would be an expense for this amount. Moreover, we cannot rule out the possibility of other Brazilian States issuing similar tax assessments related to the Company’s tax incentives. In 2011 the Brazilian Supreme Court declared 14 State laws granting tax incentives without the prior approval of CONFAZ unconstitutional, including one granting incentives to Ambev in the Federal District, which we have ceased to benefit from since such decision. In a meeting held on September 30, 2011 CONFAZ issued a resolution suspending the right of the

 

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States to claim the return of the tax incentives incurred by the beneficiaries of the state laws declared unconstitutional. There are a number of other actions (ADIs) before the Supreme Court challenging the constitutionality of benefit laws offered by some States, which may impact our tax benefits.

In 2012 the Brazilian Supreme Court issued a binding precedent proposal (Proposta de Súmula Vinculante No. 69/2012), which would automatically declare as unconstitutional all tax incentives granted without prior unanimous approval of CONFAZ. In order to become effective, such proposal must be approved by 2/3 of the members of the Supreme Court. We do not expect that the Supreme Court will vote on this matter before Congress votes a bill of law (there are currently different proposals before Congress) aimed at regulating this issue. The proposals before Congress generally provide for (1) existing tax incentives to be grandfathered for a number of years; (2) new tax incentives to be approved by a majority of the States (rather than unanimously); and (3) a reduction on interstate ICMS in order to decrease the relevance of tax benefits on interstate transactions. However, no assurance can be given that the Supreme Court will not vote on the binding precedent proposal before the matter is regulated by Congress.

Capital Investment Program

In 2011, consolidated capital expenditures on property, plant and equipment and intangible assets totaled R$3,200.2 million consisting of R$2,667.4 million in Latin America North, R$393.1 million related to investments in the Latin America South’s operations and R$139.7 million related to investments in Canada. These expenditures primarily included investments in capacity expansion, quality controls, automation, modernization and replacement of packaging lines, innovations, warehousing for direct distribution, coolers, expenditures for the replacement of bottles and crates, market assets from former dealers, and continued investments in information technology.

In 2012, consolidated capital expenditures on property, plant and equipment and intangible assets totaled R$3,014.0 million consisting of R$2,304.4 million in Latin America North, R$555.3 million related to investments in the Latin America South’s operations and R$154.3 million related to investments in Canada. These expenditures primarily included investments in capacity expansion, quality controls, automation, modernization and replacement of packaging lines, innovations, warehousing for direct distribution, coolers, expenditures for the replacement of bottles and crates, market assets from former dealers, and continued investments in information technology.

 

C. Research and Development

We maintain a research and development center in the city of Guarulhos, State of São Paulo, in order to assure continuous product innovation and yearly increases in efficiency.

 

D. Trend Information

For detailed information regarding the latest trends in our business, see “—Year Ended December 31, 2012, Compared to Year Ended December 31, 2011.”

 

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E. Off-balance Sheet Arrangements

We have a number of off-balance sheet items which have been disclosed elsewhere in this annual report, under Item 4.B - “Sources and Availability of Raw Materials”, under Item 4.B “Packaging” and under Item 17, note 29, “Collateral and contractual commitments with suppliers, advances from customers and other”. Off-balance sheet items include future commitments with suppliers of R$15,269 million as of December 31, 2012, as set forth in the table below:

 

Contractual Obligation

   As of December 31, 2012
     (in R$ million)

 Purchase commitments with respect to property, plant and equipment

       249.5  

 Purchase commitments with respect to raw materials

       851.9  

 Purchase commitments with respect to packaging materials

       13,449.5  

 Other purchase commitments

       717.8  

 

F. Commitments and contingencies (tabular disclosure of contractual obligations)

The following table and discussion provide additional disclosure regarding our material contractual obligations and commercial commitments as of December 31, 2012:

 

    Payments due by period

 Contractual Obligations

  Total       Less Than    
1 year
      1-3 years           3-5 years       More than
5 years
    (in R$ million)

 Short-term and long-term debt*

      (3,577.3 )       (1,095.6 )       (1,613.0 )       (798.8 )       (69.9 )

 Trade and other payables

      (6,878.7 )       (6,723.9 )       (154.7 )       -             -      

 Sales tax deferrals

      (753.1 )       (72.0 )       (155.5 )       (119.5 )       (416.1 )

 Total contractual cash commitments

      (11,209.1 )       (7,891.5 )       (1,923.2 )       (908.4 )       (486.0 )

 

* The long-term debt amounts presented above differ from the amounts presented in the financial statements in that they include the Company’s best estimates on future interest payable (not yet accrued) in order to better reflect the Company’s future cash flow position. Long-term debt amounts presented above also include other unsecured debts.

The above table does not reflect contractual commitments discussed in “Off-Balance Sheet Arrangements”.

We are subject to numerous commitments and contingencies with respect to tax, labor, distributors and other claims. To the extent that we believe it is probable that these contingencies will be realized, they have been recorded in the balance sheet. We have estimated the total exposures of possible (but not probable) losses, which are not recorded as liabilities, to be R$11,912.7 million as of December 31, 2012. These are not considered commitments. Our estimates are based on reasonable assumptions and management assessments, but should the worst case scenario develop, subjecting us to losses in all cases, our expected net impact on the income statement would be an expense for this amount.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

The Board of Directors oversees Ambev’s executive officers. The Board of Directors is currently comprised of ten members, and provides the overall strategic direction of Ambev. Directors are elected at general shareholders’ meetings for a three-year term, re-election being permitted. Day-to-day management is delegated to the executive officers of Ambev, of which there are currently eleven. The Board of Directors appoints executive officers for a three-year term, re-election being permitted. The Ambev Shareholders’ Agreement regulates the election of directors of Ambev by the controlling shareholders. See “Item 7. Major Shareholders and Related Party Transactions—Ambev Shareholders’ Agreement—Management of Ambev.”

Directors

The following table sets forth information with respect to the directors of Ambev, as of April 29, 2013:

Board of Directors (1)

 

Name

      Age      

Position

  Director of
  Ambev Since  
  Term
 Expires (2) 

Victorio Carlos De Marchi

  74         Co-Chairman and Director         1999   2013

Carlos Alves de Brito

  52   Co-Chairman and Director   2006   2013

Marcel Herrmann Telles

  63   Director   1999   2013

Roberto Moses Thompson Motta

  55   Director   2008   2013

José Heitor Attilio Gracioso

  81   Director   1999   2013

Vicente Falconi Campos

  72   Director   1999   2013

Luis Felipe Pedreira Dutra Leite

  47   Director   2005   2013

Luiz Fernando Ziegler de Saint Edmond

  47   Director   2008   2013

Paulo Alberto Lemann

  45   Director   2011   2013

Álvaro Antonio Cardoso de Souza

  64   Director   2012   2013

 

(1) Victorio Carlos De Marchi, Co-Chairman of the Board of Directors of Ambev, was appointed by FAHZ, the former controlling shareholder of Antarctica, while Carlos Alves de Brito was appointed by ABI and is also a Chief Executive Officer of ABI. ABI appointed six additional directors—Marcel Herrmann Telles, Roberto Moses Thompson Motta, Luis Felipe Pedreira Dutra Leite, Luiz Fernando Ziegler de Saint Edmond, Vicente Falconi Campos and Paulo Alberto Lemann. FAHZ appointed one additional director — José Heitor Attílio Gracioso.

 

(2) Annual General Meeting to be held in 2014.

The following are brief biographies of each of Ambev’s directors:

Victorio Carlos De Marchi. Mr. De Marchi is Co-Chairman of the Board of Directors of Ambev. Mr. De Marchi joined Antarctica in 1961 and held various positions during his tenure, including Chief Executive Officer from 1998 to April 2000. Mr. De Marchi was also president of the Brewing Industry National Association (Sindicerv) until February 2002 and is a member of the Orientation Committee of FAHZ. Mr. De Marchi has a degree in economics from Faculdade de Economia, Finanças e Administracão de São Paulo and a law degree from Faculdade de Direito de São Bernardo do Campo. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Carlos Alves de Brito. Mr. Brito is Co-Chairman of the Board of Directors of Ambev. He has also served, since December 2005, as Chief Executive Officer of ABI. He joined Brahma in 1989 and has held various management positions during his tenure. He served as Chief Operating Officer of Ambev from 1999 to 2003, as Chief Executive Officer for Latin America in 2004 and as Chief Executive Officer for North America in 2005. Mr. Brito holds a degree in mechanical engineering from the Universidade Federal do Rio de Janeiro and an MBA from Stanford University. His principal business address is Brouwerijplein 1, 3000, Leuven, Belgium.

 

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Marcel Herrmann Telles. Mr. Telles is a member of the Board of Directors of Ambev. He served as Chief Executive Officer of Brahma from 1989 to 1999. Currently, he is also a member of the Board of Directors of ABI. Mr. Telles has a degree in economics from Universidade Federal do Rio de Janeiro and attended the Owners/Presidents Management Program at Harvard Business School. His principal business address is Redingstrasse 4, 4th floor, CH-9000, St. Gallen, Switzerland.

Roberto Moses Thompson Motta. Mr. Thompson is a member of the Board of Directors of Ambev. He is also a board member of ABI and Lojas Americanas S.A. He holds a degree in engineering from Pontifícia Universidade Católica do Rio de Janeiro, and an MBA from the Wharton School of the University of Pennsylvania. His principal business address is 600, Third Avenue, 37th floor, New York, NY, USA.

José Heitor Attílio Gracioso. Mr. Gracioso is a member of the Board of Directors of Ambev. Mr. Gracioso joined Antarctica in 1946 and held various positions during his tenure. In 1994, Mr. Gracioso was elected to Antarctica’s Board of Directors and, in 1999, he was elected Chairman of the Board of Directors, a position held until April 2000. He holds a degree in marketing from Escola Superior de Propaganda de São Paulo, a degree in business administration from Fundação Getulio Vargas and a degree in law from Faculdade de Direito de São Bernardo do Campo. His principal business address is Av. Brig. Faria Lima, 3900, 11th floor, São Paulo, SP, Brazil.

Vicente Falconi Campos. Mr. Campos is a member of the Board of Directors of Ambev. He is also a member of the Institutional Council of Instituto de Desenvolvimento Gerencial - INDG. Mr. Campos is also a consultant for the Brazilian government and Brazilian and multinational companies such as Grupo Gerdau, Grupo Votorantim and Mercedes-Benz. He holds a degree in Mining and Metal Engineering from Universidade Federal de Minas Gerais, and M.Sc. and Ph.D. degrees from the Colorado School of Mines. His principal business address is Av. do Contorno, 7962, 10th floor, Belo Horizonte, MG, Brazil.

Luis Felipe Pedreira Dutra Leite. Mr. Dutra is a member of the Board of Directors of Ambev. He has also served, since January 2005, as Chief Financial Officer of ABI. He joined Brahma in 1990 and has held numerous positions during his tenure, including that of Chief Financial Officer and Investor Relations Officer of Ambev. Mr. Dutra holds a degree in economics from Universidade Cândido Mendes and an MBA in financial management from Universidade de São Paulo. His principal business address is Brouwerijplein 1, 3000, Leuven, Belgium.

Luiz Fernando Ziegler de Saint Edmond. Mr. Edmond is a member of the Board of Directors of Ambev. He has also served, since January 2009, as Zone President for ABI’s operations in North America. He joined the Company in 1990 in the first group of trainees of Brahma and held various positions in the Distribution, Commercial and Direct Distribution Departments. He was Sales Officer from 2002 to 2004 and Chief Executive Officer for Latin America from 2005 to 2008. Mr. Edmond has an engineering degree from Universidade Federal do Rio de Janeiro. His principal business address is One Busch Place, St. Louis, MO, USA.

Paulo Alberto Lemann. Mr. Lemann is a member of the Board of Directors of Ambev. He is also the co-founder of Pollux Capital, an asset management firm. Mr. Lemann has been managing hedge funds since 1997. Previously, he was co-founder of Synergy Fund, a fund of funds headquartered in New York. He was also an analyst at Dynamo Administração de Recursos, an asset management firm. Currently, he is a member of the Board of Directors of Lojas Americanas S.A., a retail company, a member of the International Board of Lone Capital Pine LLC, an asset management firm and the Fundação Lemann, which main purpose is to improve public education in Brazil. His principal business address is Rua Visconde de Pirajá, 250, 7th floor, Ipanema, Rio de Janeiro, RJ, Brazil.

Álvaro Antonio Cardoso de Souza. Mr. Souza is a member of Ambev’s Board of Directors. He served as a member of Ambev’s Fiscal Council from 2005 to March 2012, and since then has been a member of the Board of Directors of this Company. His principal business address is Avenida Juscelino Kubitschek, 1726, Cj. 71, São Paulo, SP, Brazil.

 

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Executive Officers

The following table sets forth information with respect to the executive officers of Ambev, as of April 29, 2013:

 

Name

      Age       Position    Election 
Date
  Term
 Expires(1) 

João Mauricio Giffoni de Castro Neves

  46   Chief Executive Officer   2009   2013

Nelson José Jamel

  41       Chief Financial Officer and Investor    

Relations Officer

  2009   2013

Alexandre Médicis da Silveira

  36   Sales Executive Officer   2012   2013

Márcio Fróes Torres

  44   Industrial Executive Officer   2007   2013

Milton Seligman

  61   Corporate Affairs Executive Officer   2005   2013

Pedro de Abreu Mariani

  46   General Counsel   2005   2013

Marcel Martins Régis

  39   Soft Drinks Executive Officer   2012   2013

Vinícius Guimarães Barbosa

  44   Supply Executive Officer   2011   2013

Sandro de Oliveira Bassili

  43   People and Management Executive

Officer

  2011   2013

Jorge Pedro Victor Mastroizzi

  43   Marketing Executive Officer   2011   2013

Ricardo Rittes de Oliveira Silva

  38   Shared Services and Information

Technology Executive Officer

  2012   2013

 

(1) December 31, 2013.

The following are brief biographies of each of Ambev’s executive officers:

João Mauricio Giffoni de Castro Neves.  Mr. Castro Neves is Ambev’s Chief Executive Officer. He began working for Brahma in 1996, where he served in various departments, such as Mergers and Acquisitions, Treasury, Investor Relations, Business Development, Technology and Shared Services, and Carbonated Soft Drinks and Non-Alcoholic Non-Carbonated Beverages. He has also held the position of Chief Financial Officer and Investor Relations Officer, and was Quinsa’s Chief Executive Officer from 2007 to 2008. He has a degree in engineering from Pontifícia Universidade Católica do Rio de Janeiro, and holds an MBA from the University of Illinois. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Nelson José Jamel.  Mr. Jamel is Ambev’s Chief Financial Officer and Investor Relations Officer. He joined the Company in 1997 and has held several positions in the finance area throughout his career, including head of Budgeting and Business Performance for both Ambev and ABI, Finance Director for Ambev Dominicana, and, from 2007 to 2008, Vice-President Finance for Western Europe of ABI. He has a degree in production engineering from Universidade Federal do Rio de Janeiro and holds a Master’s Degree in production engineering from COPPE/UFRJ. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Alexandre Médicis da Silveira.  Mr. Médicis is Ambev’s Sales Executive Officer. He started working for Ambev in 2005 as the head of the Mergers and Acquisitions department. In 2007, he was appointed Regional Sales Officer for the North and Northeast regions of Brazil, having held the position for two years. In 2009, he took over the Trade Marketing area, being responsible for our Trade, Innovation and Events programs until the end of 2010. Subsequently, served as an Officer at HILA-Ex until the end of 2012. Mr. Médicis holds a bachelor’s degree in business administration from the Fundação Getúlio Vargas and a Corporate MBA from Ambev. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Márcio Fróes Torres.  Mr. Fróes has been Ambev’s Industrial Executive Officer since August 19, 2010. Until the end of 2009, Mr. Fróes was responsible for our Canadian Operations and as from January 1, 2010, he also acted as Ambev’s People and Management Executive Officer. He joined Brahma as a trainee in 1991 and has subsequently served in several roles, including plant manager of six different breweries and

 

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Director of People Sales for Ambev’s Latin America North Zone. Mr. Fróes moved to Labatt’s headquarters in Toronto in 2006 as Vice President, People Matters. In 2007, he was promoted to Vice President, Integrated Supply Chain and in 2008 assumed the role of Vice President, Sales for Canada. He has a degree in chemical engineering from Universidade Federal do Rio de Janeiro and also holds a Master’s Degree in Brewing from the University of Madrid. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Milton Seligman.  Mr. Seligman is Ambev’s Corporate Affairs Executive Officer. He joined the Company in 2001 and has held the positions of Governmental Relations Officer and Communication Officer. Mr. Seligman served, among others, as Chairman and member of the BNDES, as well as Minister of Development, Industry and Foreign Trade (Interim Substitute Minister) from 1999 to 2000. He has a degree in electrical engineering from Universidade Federal de Santa Maria. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Pedro de Abreu Mariani.  Mr. Mariani is the General Counsel of Ambev. He joined the Company in 2004. He holds a law degree from Pontifícia Universidade Católica do Rio de Janeiro and an LL.M. from the London School of Economics and Political Science. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Marcel Martins Régis.  Mr. Regis is Ambev’s Soft Drinks Executive Officer. He joined Ambev in 1997 and has held several positions in the sales and trade marketing areas. Between 2008 and 2010, he was Supermarkets Officer in Brazil until he became Regional Sales Officer in Rio de Janeiro, a position he held until December 2012. Mr. Régis holds a bachelor’s degree in marketing and advertising from Universidade Católica do Salvador, an MBA from Fundação Getulio Vargas and an MBA from Business School São Paulo. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Vinícius Guimarães Barbosa.  Mr. Barbosa is Ambev’s Supply Executive Officer. During the last five years he has held various positions in the Company as well as ABI, such as Regional Director in Brazil (States of Rio de Janeiro and Minas Gerais), Logistics Executive Officer for Canada and Global Operations and Logistics Vice President. He has a degree in engineering from Universidade Federal do Rio de Janeiro and holds an MBA from IBMEC. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Sandro de Oliveira Bassili.  Mr. Bassili is Ambev’s People and Management Executive Officer. He has worked during 17 years in Ambev’s Sales Department, assuming the positions of Director of the Off Trade Channel and Director of Trade Marketing in Brazil. He has also worked as Corporative Social Responsibility Manager. He has a degree in economics from Universidade Estadual do Rio de Janeiro. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Jorge Pedro Victor Mastroizzi.  Mr. Mastroizzi is Ambev’s Marketing Executive Officer. He has worked in various positions in the Company, including Exports and Marketing Manager for LAS and, in 2008, International Officer for LAS. He has a degree in business administration from Universidad de Buenos Aires and a specialization from the Wharton School of the University of Pennsylvania. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

Ricardo Rittes de Oliveira Silva.  Mr. Rittes is the Shared Services and Information Technology Executive Officer. He joined the Company in 2005 and has held the positions of Treasury Manager for Ambev and ABI. Mr. Rittes holds a degree in production engineering from Politécnica de São Paulo, in addition to an MBA from the University of Chicago. His principal business address is Rua Dr. Renato Paes de Barros, 1017, 4th floor, São Paulo, SP, Brazil.

 

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B. Compensation

The aggregate remuneration of all members of the Board of Directors and Executive Officers of Ambev in 2012 for services in all capacities amounted to R$64.0 million (fixed and variable remuneration and share-based payment), as presented below.

 

    Management’s Remuneration
Year Ended December 31, 2012
    (in R$ thousand)
        Fixed Remuneration   Variable Remuneration                
    No.
Members
  Fees   Direct
and
Indirect
Benefits
  Remunera-
tion for
sitting on
Committees
  Others   Bonus   Profit
Sharing
  Remunera-
tion for
attending
meetings
  Commissions   Others   Post-
Employ-
ment
Benefit
  Termin-
ation
Benefits
  Share-
based
Pay-
ment
  Total

Board of

Directors

  10   3,524   -   -   1,700   -   1,730   -   -   -   -   1,799   4,548   13,301

Executive Board

  10   7,080   989   -   1,824   -   7,839   -   -   -   -   -   32,984   50,716

Total

  20   10,604   989   -   3,524   -   9,569   -   -   -   -   1,799   37,532   64,017

In addition, members of the Board of Directors and Executive Officers received some additional benefits provided to all Ambev employees and their beneficiaries and covered dependents, such as health and dental care. Such benefits were provided through FAHZ. The Board of Directors and Executive Officers also received benefits pursuant to Ambev’s pension and stock ownership plan. For a description of these plans see note 24 of our consolidated financial statements.

On various dates in 2012, pursuant to the terms and conditions of the existing stock ownership plan, we acquired from the Directors and Executive Officers a total of 214,499 preferred shares (R$17.2 million). Such amounts were calculated and paid taking into consideration the closing market price on the day of the transaction.

Stock Ownership Plan

Under the Company Stock Option Plan, or the Plan, senior employees and management of either the Company or its direct or indirect subsidiaries, or the Beneficiaries, are eligible to receive stock options for shares issued by the Company. They may also be offered ADRs. As of December 2012, the Plan, combined with the previous stock ownership plan of the Company, had outstanding rights to acquire 28,783 million shares of Ambev, and included approximately 610 people (including managers and employees).

The Plan was initially adopted in 1990 by the Companhia Cervejaria Brahma, and was then approved by the Company at a General Meeting held on September 14, 2000, subsequently altered at the Extraordinary General Meetings held on April 20, 2006April 27, 2007 and April 28, 2010. This establishes the general conditions for granting options, the criteria for defining the acquisition price, the terms and conditions of these options. Restrictions apply to the divestment of the shares acquired through the Plan, which also defines the various duties and responsibilities of the Board of Directors as the Plan Administrator.

Pursuant to the Plan, the Board of Directors, as the Plan’s Administrator, is endowed with ample powers for the organization thereof, in compliance with the general conditions of the Plan. The Board of Directors grants the options, establishing the terms and conditions applicable to each grant through Stock Option Programs, or the Programs, which may define the beneficiaries, the number and type of Company shares covered by the grant, the exercise price, the exercise periods and the deadline for exercising the options, together with rules regarding option transfers and possible constraints on the shares acquired, in addition to penalties. Additionally, targets may be set for the Company performance, with the Board of Directors also being empowered to define specific rules for Company employees transferred to other countries, including to the controlling shareholder or subsidiaries controlled by the Company.

 

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The Beneficiaries granted these Options must sign Stock Option Agreements, or the Agreements, with the Company, through which the Beneficiaries have the option to purchase lots of shares issued by the Company in compliance with the terms and conditions of the Plan and the corresponding Program.

From 2003 onwards, due to the 2002 adoption of the Sarbanes-Oxley Act in the USA, the Company ceased to allow the possibility of acquiring Company shares over time under this Plan. However, the conditions granted until then under the aegis of the Plan remained in effect in compliance with the conditions thereof. Prior to the alterations to the Plan in 2006, the Company had approved 13 programs. Under these programs, the Beneficiaries must exercise their options on signature of the respective contract, and may pay the exercise price within four years, open to extension for a further three years, with an initial payment of at least 10% with annual interest falling due on the outstanding balance at 8% in addition to restatement by the General Market Price Inflation Index (Indíce Geral de Preços ao Mercado), or the IGP-M index, published by Fundação Getulio Vargas.

After the alterations to the Plan in 2006, the Company began to work with a new stock options model. Under this model, six programs were approved respectively at Board of Directors Meetings held on April 25, 2006, or the 2006 Program, May 8, 2007, or the 2007 Program, February 27, 2008, or the 2008 Program, February 26, 2009, or the 2009 Program, July 30, 2009, or the 2009.2 Program and March 1, 2010, or the 2010 Program.

In compliance with the conditions for the 2006, 2007, 2008, 2009, 2009.2 and 2010 Programs, the Beneficiaries may decide to allocate 50%, 75% or 100% of the amounts received as profit sharing during the year, to the immediate exercise of options, thus acquiring the corresponding preferred shares issued by the Company. Should the beneficiary decide to allocate its remuneration regarding profits sharing for the acquisition of stocks through this program, the first lot must necessarily be exercised at 50%, corresponding to Lot A of the options. In terms of the remaining 50% of the profit sharing, the beneficiary may decide between exercising Lot B1 (equivalent to the remaining 50% of the share in the profits) or Lot B2 (equivalent to 25% of the share in the profits). The beneficiary may also decide not to exercise any Lot B. In addition, Participants under the Plan who used 50% of their bonus to acquire the Lot A Shares and use 25% or 50% of their remaining net bonus in the purchase of our preferred shares or ADSs, or the Lot B shares, are entitled to a number of options, or the Options, calculated by dividing the amount invested in the Lot B shares (before tax) by the exercise price of the Lot A shares, and then multiplying the product of such division by 2.3 (in the case that the participant invests 25%) or 4.6 (in the case that the participant invests 50%). The exercise price of the Lot B shares corresponds to the price of Lot A shares with a ten percent discount. The exercise price of the Options corresponds to the price of Lot A shares, being deducted the value of the dividends and interest on shareholders’ equity effectively paid out by the Company on the corresponding shares during the period between granting the options and the corresponding exercise thereof. Lot B shares are subject to a five-year lock-up. The vesting of the Options is subject to the following conditions being met:

 

   

The Participant shall hold the Lot A shares for at least three years and Lot B shares for at least five years; and

 

   

The Company shall meet certain performance measures. The right to exercise the Options is forfeited in certain circumstances, such as resignation or dismissal prior to the vesting of the Options. The Options expire if not exercised within five years from vesting (i.e., ten years from the date the Lot B shares are acquired).

In 2010, the Plan was amended and the Company began to work with a new stock options model, which is comprised of two grants: (1) under the first type, the beneficiary may decide to allocate 30%, 40%, 60%, 70% or 100% of the amounts received as profit sharing during the year, to the immediate exercise of options, thus acquiring the corresponding preferred shares issued by the Company, whereas a substantial part of the shares acquired will be delivered in five years, as from the corresponding grant date, during which the beneficiary must remain working for the Company or any other company within its group; (2) under the second type, the

 

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beneficiary may exercise the options granted only after a period of 5 years as from the corresponding grant date. Further, the vesting of such options are not subject to performance measures, however, the right to exercise such options may be forfeited in certain circumstances, such as resignation or dismissal prior to the vesting of the options. Under this model, four programs were approved respectively at Board of Directors Meetings held on August 19, 2010, or the 2010.2 Program – contemplating both grants –, November 30, 2010, or the 2010.3 Program – contemplating the second type of grant –, February 28, 2011, or the 2011 Program, – contemplating the first type of grant – and November 25, 2011, or the 2011.2 Program, – contemplating the second type of grant.

On December 22, 2010, the Board of Directors also approved the grant of additional stock options for employees retreating to the U.S. who waive, in relation to their existing stock options under the programs created by the Company since 2005, to the right to deduct, from the exercise price, the dividends paid by the Company between the grant date and the exercise date.

Additionally, on August 26, 2011, the Board of Directors, seeking to create a long term incentive (wealth incentive) for certain senior employees and management considered as having high potential, approved the grant of Share Appreciation Rights (phantom stocks) to certain employees, pursuant to which the beneficiary shall receive two separate lots of phantom stocks – Lot A and B – subject, respectively, to lock-up periods of five and ten years. On the 5 or 10-year anniversary of the granting of such lots, as case may be, the beneficiary that remained working for the Company or any other company within its group shall receive, in cash, the amount corresponding to the closing price of preferred shares or ADRs issued by the Company at the BM&FBovespa or NYSE, in the trading session of the day immediately preceding such anniversary, whereas each phantom stock shall correspond to one preferred share or ADR, as case may be. Such Share Appreciation Rights shall not give the beneficiary the right to receive any shares or ADRs issued by the Company, which shall only serve as basis for the calculation of the cash incentive to be received by such beneficiary, nor shall it be subject to any exercise by the beneficiary. Although not subject to performance measures, the right to receive the cash incentive deriving from the phantom stocks may be forfeited in certain circumstances, such as resignation or dismissal prior to each anniversary.

ABI Exceptional Stock Option Grants

On November 25, 2008, ABI’s board of directors approved a grant of 28 million stock options to several executives, including approximately 7 million options granted to Ambev executives. Each option gives the grantee the right to purchase one existing common share of ABI at an exercise price of EUR 10.32, which corresponded to the fair value of ABI share at the time of granting of the options. Half of the options has a term of 10 years as from granting and will become exercisable on January 1, 2014. The other half has a term of 15 years as from granting and will become exercisable on January 1, 2019. The exercise of the options is subject, among other things, to the condition that a performance test will be met by ABI, namely that ABI’s net debt/EBITDA ratio falls below 2.5 before December 31, 2013. Specific forfeiture rules apply in case of employment terminations. Such grant was confirmed on April 28, 2009, by ABI’s annual general shareholders’ meeting.

On April 30, 2009, ABI granted approximately 4.9 million stock options to approximately 50 executives of the ABI Group, including approximately 1.8 million options granted to Ambev executives. Each option gives the grantee the right to purchase one existing common share of ABI at an exercise price of EUR 21.94, which corresponded to the fair value of ABI shares at the time of granting. The options have a term of 10 years as from granting and will become exercisable on January 1, 2014. The exercise of the options is subject, among other things, to the condition that a performance test will be met by ABI. This performance test will be met if ABI’s net debt/EBITDA ratio falls below 2.5 before December 31, 2013. Specific forfeiture rules apply in the case of employment termination. Such grant was authorized by ABI’s 2009 annual general shareholders’ meeting.

On December 18, 2009, ABI granted approximately 1,582,592 options to executives of ABI, including 97,711 options granted to Ambev executives. Each option gives the grantee the right to purchase one existing common share of ABI at an exercise price of EUR 35.90 and become exercisable after five years, on 18 December 2014.

 

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Ambev Pension Plan

Ambev’s pension plans for employees in Brazil are administered by the IAPP. IAPP operates both a defined benefit pension plan (closed to new participants since May 1998) and a defined contribution plan, which supplements benefits that the Brazilian government social security system provides to our employees. IAPP was established solely for the benefit of our employees and its assets are held independently. IAPP is managed by the IAPP Council Board (Conselho Deliberativo), which has three members, two of which are appointed by Ambev, and one member represents the employees and retired employees. The IAPP Executive Board (Diretoria Executiva) has three members, all of which are appointed by the IAPP Council Board. IAPP also has a Fiscal Council with three members, two of which are appointed by Ambev and one member represents the employees and retired employees.

Any employee after being hired may opt to join the defined contribution plan. When pension plans members leave Ambev, before retirement, but having contributed at least three years to the IAPP plan, they have some options such as: (a) have their contributions refunded, (b) transfer their contributions to a bank or insurance company, (c) keep their investment in IAPP to be paid in installments, and (d) keep contributing to IAPP for future retirement under the existing terms. In the event the employee leaves the Company prior to completing three years as a participant, such employee will only be entitled to refund his/her contributions to the plan.

Prior to May 1998, when the defined contribution plan was launched, there was only a defined benefit plan. At the time of adoption of the defined contribution plan, active participants were given the option either to remain in the defined benefit plan, or transfer their accumulated benefits to the defined contribution plan. The defined contribution plan covers substantially all new employees.

As of March 31, 2013, we had 6,074 participants in our pension plans, including 724 participants in the defined benefit plan, 3,945 participants in the defined contribution plan, and 1,405 retired or assisted participants.

The Plan assets are comprised mainly of equity securities, government and corporate bonds and properties. All benefits are calculated and paid in inflation-indexed reais.

Labatt provides pension plan benefits in the defined contribution model and in the defined benefit model to its employees, as well as certain post-retirement benefits.

As at December 31, 2012, the Company recorded liabilities for pension plan benefits, as described in note 23 to our financial statements.

Profit-Sharing Plan

Employees’ performance-based variable bonuses are determined on an annual basis taking into account the achievement of corporate, department or business-unit and individual goals, established by the Board of Directors.

The distribution of these bonuses is subject to a three-tier system in which Ambev must first achieve performance targets approved by the Board of Directors. Following that, each department or business segment must achieve its targets.

For employees involved in operations, we have a collective award for production sites and distribution centers with outstanding performances. The bonus award at the distribution centers and production sites is based on a ranking between the different distribution centers and production sites (as the case may be), which based on their relative ranking may or may not receive the bonus.

We provisioned R$288.0 million under these programs for the year ended December 31, 2012, R$162.5 million for the year ended December 31, 2011, R$229.0 million for the year ended December 31, 2010, R$20.1 million for the quarter ended March 31, 2013 and R$23.2 for the quarter ended March 31, 2012.

 

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C. Board Practices

During 2012 management held individual and group meetings with shareholders, investors and analysts to talk about the performance of our business and our opportunities for growth both in the short-term as well as in the future. We also participated in conferences and road shows in Brazil, the United States, Mexico and Europe. We hosted quarterly conference calls, transmitted simultaneously on the Internet, to clarify financial and operating results as well as answered questions from the investment community.

Fiscal Council (Conselho Fiscal)

At Ambev’s general and extraordinary shareholders’ meeting held in April 2005, we approved an amendment to our bylaws to make the Fiscal Council (Conselho Fiscal) a permanent body. The following members were appointed to the Fiscal Council at Ambev’s annual general meeting held on April 29, 2013, for a term expiring upon the general shareholders’ meeting of 2014: Celso Clemente Giacometti, James Terence Coulter Wright and Mário Fernando Engelke, and, as alternates, Ary Waddington, Emanuel Sotelino Schifferle and Eurípedes de Freitas. All of them are “independent” members as per Rule 10I(c)(v) of the Sarbanes-Oxley Act of 2002.

The responsibilities of the Fiscal Council include supervision of management, performing analyses and rendering opinions regarding Ambev’s financial statements and performing other duties in accordance with Brazilian Corporation Law and its charter. None of the members of the Fiscal Council is also a member of the Board of Directors or of any Committee thereof.

In addition, we have relied on the exemption provided for under Rule 10A-3(c)(3) of the Sarbanes-Oxley Act of 2002, which enables us to have the Fiscal Council perform the duties of an audit committee for the purposes of such Act, to the extent permitted by Brazilian law. We do not believe that reliance on this exemption would materially adversely affect the ability of our Fiscal Council to act independently and to satisfy the other requirements of such Act.

The Board of Directors

Most of the Board members have been in office for several years, having been re-elected for a new 3-year term at the annual general shareholders’ meeting held on April 29, 2011. These Board members use their extensive knowledge of the business to help ensure that Ambev reaches its long-term goals, while maintaining its short-term competitiveness. Moreover, another objective of the Board of Directors is to encourage Ambev to pursue its short-term business goals without compromising its long-term sustainable growth, while at the same time trying to make sure that Ambev’s corporate values are observed.

The Company’s Co-Chairmen of the Board of Directors and the Chief Executive Officer are separate positions held by different people. The Board of Directors is supported in its decision-making by the following committees:

Operations, Finance and Compensation Committee

The Operations, Finance and Compensation Committee is the main link between the policies and decisions made by the Board of Directors and Ambev’s management team. The Operations, Finance and Compensation Committee’s responsibilities are to:

 

   

Present medium and long-term planning proposals to the Board of Directors;

 

   

Analyze and issue an opinion on the decisions of the Board of Directors regarding the compensation policies for the Board of Directors and Executive Management, including their individual

 

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compensation packages, in order to assure that the members of the Board and Executive Management are being adequately motivated to reach an outstanding performance in consideration for proper compensation;

 

   

Monitor the Investors Relations strategies and the performance of the Company’s rating, as issued by the official rating agencies;

 

   

Monitor the evaluation of the Executive Officers, high management and their respective succession plans;

 

   

Analyze, monitor and propose to the Board of Directors suggestions regarding legal, tax and relevant regulatory matters;

 

   

Analyze and monitor the Company’s annual investment plan;

 

   

Analyze and monitor growth opportunities;

 

   

Analyze and monitor the Company’s capital structure and cash flow; and

 

   

Analyze and monitor the management of the Company’s financial risk, as well as budgetary and treasury policy.

Current members of the Committee are Messrs. Victorio Carlos De Marchi (Chairman), Luis Felipe Pedreira Dutra Leite, Marcel Herrmann Telles, Roberto Moses Thompson Motta and Carlos Alves de Brito. Throughout the year, the Operations and Finance Committee holds at least four meetings. The members of the Committee are elected by the Board of Directors.

Compliance Committee

The Compliance Committee’s responsibilities are to assist the Board of Directors in the following matters:

 

   

Related party transactions;

 

   

Any general conflict of interest situations;

 

   

Compliance, by the Company, with legal, regulatory and statutory provisions concerning related party transactions;

 

   

Compliance, by the Company, with legal, regulatory and statutory provisions concerning antitrust matters; and

 

   

Other matters the Board of Directors may consider relevant and in the interest of the Company.

Current members of the Compliance Committee are Messrs. Victorio Carlos De Marchi (Chairman), José Heitor Attilio Gracioso, Álvaro Antônio Cardoso de Souza and Bolívar Moura Rocha. The president of the Fiscal Council also attends the Compliance Committee meetings, however does not take part in the Committee’s decision-making process.

 

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Differences Between the United States and the Brazilian Corporate Governance Practices

The SEC approved in November 2003 the new corporate governance rules established by the NYSE. According to these rules, foreign private issuers that are listed on the NYSE must disclose the significant differences between their corporate governance practices and those required by the NYSE’s regulations for U.S. companies.

In Brazil, the CVM has provided guidance to the market with a set of recommendations on differentiated corporate governance practices which are not required but recommended. Additionally, the BM&FBOVESPA and the IBGC-Brazilian Institute of Corporate Governance have developed guidelines for corporate governance best practices.

The principal differences between the NYSE corporate governance standards and our corporate governance practices are as follows:

Independence of Directors and Independence Tests

NYSE corporate governance standards require listed companies to have a majority of independent directors and set forth the principles by which a listed company can determine whether a director is independent. “Controlled companies” such as Ambev need not to comply with this requirement.

The Brazilian Corporation Law requires that our directors be elected by our shareholders at a general shareholders’ meeting, cumulative voting being applicable if requested by 5% of the common shareholders. Moreover, provided certain statutory thresholds are met, the Brazilian Corporation Law grants common shareholders and/or preferred shareholders the right to elect a director if they so require in the general shareholders’ meeting called for the election of the Board of Directors. Currently, all of our directors are appointed by our controlling shareholders; minority shareholders are represented through one seat in our Fiscal Council.

The Brazilian Corporation Law and the CVM establish rules in relation to certain qualification requirements and restrictions, compensation, duties and responsibilities of a company’s executives and directors.

Executive Sessions

NYSE corporate governance standards require non-management directors of a listed company to meet at regularly scheduled executive sessions without management.

According to the Brazilian Corporation Law, up to one-third of the members of the Board of Directors can also hold management positions. However, none of our directors holds a management position at this time and, accordingly, we believe we would be in compliance with this NYSE corporate governance standard.

Nominating/Corporate Governance and Compensation Committees

NYSE corporate governance standards require that a listed company have a nominating/corporate governance committee and a compensation committee each composed entirely of independent directors with a written charter that addresses certain duties. “Controlled companies” such as Ambev need not comply with this requirement.

In addition, we are not required under the Brazilian Corporation Law to have, and accordingly we do not have, a nominating committee or corporate governance committee. According to the Brazilian Corporation Law, Board committees may not have any specific authority or mandate since the role of the full Board of Directors may not be delegated. The role of the corporate governance committee is generally performed by either our Board of Directors or our executive officers.

 

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Audit Committee and Audit Committee Additional Requirements

NYSE corporate governance standards require that a listed company have an audit committee composed of a minimum of three independent members that satisfy the independence requirements of Rule 10A-3 under the Exchange Act, with a written charter that addresses certain duties.

We maintain a permanent Fiscal Council, which is a body contemplated by the Brazilian Corporation Law that operates independently from our management and from our registered independent public accounting firm. Its principal function is to examine the annual and quarterly financial statements and provide a formal report to our shareholders. We are relying on the exemption provided by Rule 10A-3(c)(3) and believe that our reliance on this exemption will not materially affect the ability of the Fiscal Council to act independently and to satisfy the other requirements of Rule 10A-3.

Shareholder Approval of Equity Compensation Plans

NYSE corporate governance standards require that shareholders of a listed company must be given the opportunity to vote on all equity compensation plans and material revisions thereto, subject to certain exceptions.

Our existing stock ownership plan was amended and restated by the general shareholders’ meeting held on April 28, 2010.

Corporate Governance Guidelines

NYSE corporate governance standards require that a listed company must adopt and disclose corporate governance guidelines that address certain minimum specified standards, which include, director qualification standards, director responsibilities, director access to management and independent advisors, director compensation, director orientation and continuing education, management succession and annual performance evaluation of the Board.

We believe the corporate governance guidelines applicable to us under the Brazilian Corporation Law are consistent with the guidelines established by the NYSE. We have adopted and observe our Manual on Disclosure and Use of Information and Policies for Trading with Securities issued by Ambev which deals with the public disclosure of all relevant information as per CVM’s guidelines, as well as with rules relating to transactions involving the dealing by our management and controlling shareholders in our securities.

Code of Business Conduct

NYSE corporate governance standards require that a listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or officers.

We have adopted a Code of Business Conduct that applies to all directors, officers and employees. There are no waivers to our Code of Business Conduct.

Certification Requirements

NYSE corporate governance standards require that each listed company’s chief executive officer certify to the NYSE each year that he or she is not aware of any violation by the company of the NYSE corporate governance standards.

As required by Section 303A.12(b) of the NYSE corporate governance standards, our Chief Executive Officer will promptly notify the NYSE in writing after our executive officer becomes aware of any material non-compliance with any applicable provisions of the NYSE corporate governance standards.

 

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D. Employees

As of March 31, 2013, Ambev and its subsidiaries had 51,217 employees, approximately 54% of whom were engaged in production, 43% of whom were engaged in sales and distribution and 3% of whom were engaged in administration.

The following table sets forth the number of Ambev and its subsidiaries’ employees of as of the end of the periods indicated:

 

As of March 31,

  

As of December 31,

2013

  

2012

  

2011

51,217

   51,299    46,503

The following table shows the geographical distribution of Ambev’s employees as of March 31, 2013:

 

Geographical Distribution of Ambev Employees as of March 31, 2013

 
Location    Number of Employees  

Latin America North

       36,056             

Brazil

       31,754             

Dominican Republic

       4,013             

Peru

       1,793             

Ecuador

       276             

Guatemala

       289             

Latin America South

       10,621             

Argentina

       5,352             

Paraguay

       659             

Bolivia

       1,500             

Uruguay

       673             

Chile

       368             

Canada

       4,540             

Total

       51,217             

Industrial Relations

All of Ambev’s employees in Brazil are represented by labor unions, but only less than 5% of its employees in Brazil are actually members of labor unions. The number of administrative and distribution employees who are members of labor unions is not significant. Salary negotiations are conducted annually between the workers’ unions and Ambev. Collective bargaining agreements are negotiated separately for each facility or distribution center. Ambev’s collective bargaining agreements have a term of one year, and Ambev usually enters into new collective bargaining agreements on or prior to the expiration of the existing agreements. We conduct salary negotiations with labor unions in accordance with local law for our employees located in our HILA-Ex, Latin America South and Canadian operations.

Health and Severance Benefits

In addition to wages, Ambev’s employees receive additional benefits. Some of these benefits are mandatory under Brazilian law, some are provided for in collective bargaining agreements, and others are voluntarily granted. The benefits packages of Ambev’s employees in Brazil consist of benefits provided both by Ambev directly and through FAHZ, which provides medical, dental, educational and social assistance to current and retired employees of Ambev and their beneficiaries and covered dependents, either for free or at a reduced cost. Ambev may voluntarily contribute up to 10% of its consolidated net income, as determined in accordance with Brazilian Corporation Law and Ambev’s bylaws, to support FAHZ in this regard.

 

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Ambev is required to contribute 8% of each Brazilian employee’s gross pay to an account maintained in the employee’s name in the Government Severance Indemnity Fund, or the FGTS. Under Brazilian law, Ambev is also required to pay termination benefits to Brazilian employees dismissed without cause, equal to 40% (plus 10% to the Brazilian Government) of the accumulated contributions made by Ambev to the FGTS during the employee’s period of service.

We provide health and benefits in accordance with local law for our employees located in our HILA-Ex, Latin America South and Canadian operations.

 

E. Share Ownership

The following table shows the amount, type and percentage of class of our equity securities held by members of our Board of Directors and by executive officers as of March 31, 2013:

 

Name

   Amount and Percentage
of Common Shares
   Amount and Percentage
of Preferred Shares

Victorio Carlos De Marchi (1)

   *    *

Carlos Alves de Brito (2)

   *    *

Marcel Herrmann Telles (3)

   *    *

Roberto Moses Thompson Motta

   *    *

José Heitor Attílio Gracioso (4)

   *    *

Vicente Falconi Campos

   *    *

Luis Felipe Pedreira Dutra Leite

   *    *

Luiz Fernando Ziegler de Saint Edmond

   *    *

Paulo Alberto Lemann

   *    *

Álvaro Antonio Cardoso de Souza

   *    *

João Mauricio Giffoni de Castro Neves

   *    *

Nelson José Jamel

   *    *

Alexandre Médicis da Silveira

   *    *

Milton Seligman

   *    *

Pedro de Abreu Mariani

   *    *

Marcel Martins Régis

   *    *

Vinícius Guimarães Barbosa

   *    *

Márcio Fróes Torres

   *    *

Sandro de Oliveira Bassili

   *    *

Jorge Pedro Victor Mastroizzi

   *    *

Ricardo Rittes de Oliveira Silva

   *    *

 

* Indicates that the individual holds less than 1% of the class of securities.

 

(1) Mr. De Marchi is a trustee of FAHZ. For information regarding the shareholding of FAHZ, see “Item 7. Major Shareholders and Related Party Transactions—Ambev’s Major Shareholders”.

 

(2) Mr. Brito is a trustee of FAHZ. For information regarding the shareholding of FAHZ, see “Item 7. Major Shareholders and Related Party Transactions—Ambev’s Major Shareholders”.

 

(3) Does not include shares owned through interest in ABI. Mr. Telles is part of the controlling group of ABI, and is also an intervening party to the Ambev Shareholders’ Agreement. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Ambev Shareholders’ Agreement”. Mr. Telles is also a trustee of FAHZ. For information regarding the shareholdings of FAHZ, see “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Ambev’s Major Shareholders”.

 

(4) Mr. Gracioso is a trustee of FAHZ. For information regarding the shareholding of FAHZ, see “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Ambev’s Major Shareholders”.

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

Introduction

On June 29, 2007, at an Extraordinary Shareholders Meeting, shareholders approved a reverse stock split of our common and preferred shares at a ratio of 1/100. As a result, each ADS represents one common or preferred share, as the case may be.

On December 17, 2010, at an Extraordinary General Meeting, shareholders approved a stock split, pursuant to which each common and each preferred share issued by the Company was split into five common shares and five preferred shares, respectively, without any modification to the amount of the Company’s capital stock. Each ADR continued to be represented by one common or preferred share, as the case may be.

As of March 31, 2013, Ambev had 1,757,503,251 common voting shares and 1,374,373,304 preferred shares outstanding (excluding treasury shares). Ambev has registered two classes of ADSs pursuant to the Securities Act: ADSs evidenced by ADRs representing one preferred share, and ADSs evidenced by ADRs representing one common share. As of March 31, 2013, there were 287,055,370 preferred ADSs outstanding (representing 287,055,370 preferred shares which corresponds to 20.88% of the total preferred shares of the Company) and 3,503,749 common ADSs outstanding (representing 3,503,749 common shares which corresponds to 0.20% of the total common shares of the Company). Ambev ADRs are issuable by The Bank of New York Mellon pursuant to deposit agreements for our common and preferred shares. In addition, as of March 31, 2013, there were 61 registered holders of our common ADSs and 49 registered holders of our preferred ADSs.

Control

The controlling shareholders of Ambev, Interbrew International B.V. and AmBrew S.A., which are both subsidiaries of ABI and FAHZ, together hold approximately 91.1% of Ambev’s common shares (excluding treasury shares), as of March 31, 2013.

ABI indirectly holds shares of Ambev common stock that represent approximately 74.0% (as of March 31, 2013) of the total voting power of Ambev’s capital stock (excluding treasury shares). Thus, ABI has control over Ambev, even though (1) ABI’s control over Ambev remains subject to the Ambev Shareholders’ Agreement with FAHZ and (2) ABI is jointly controlled by (a) Messrs. Jorge Paulo Lemann, Marcel Herrmann Telles and Carlos Alberto da Veiga Sicupira, the former controlling shareholders of Companhia Cervejaria Brahma and (b) the former controlling shareholders of the Belgian brewer, Interbrew N.V./S.A. (as ABI was once named). For further information on these matters see “—Ambev Shareholders’ Agreement” and “Information on the Company—InBev-Ambev Transactions”.

Share Buyback

In 2012, we acquired 895,581 preferred and 3,059 common shares in connection with preemptive rights related to stock ownership plans, at a total cost of R$69.0 million.

In 2011, we acquired 1,253,294 preferred and 109,190 common shares in connection with preemptive rights related to stock ownership plans, at a total cost of R$63.3 million.

In accordance with CVM rules, share buyback programs may be conducted through the issuance of put and call options (provided that the volume of such options issued multiplied by their respective strike prices does not exceed the limit established for the plan), and the amount of shares to be kept in treasury may not exceed the equivalent to 10% of the free float of each class of shares. For a further description of our share buyback programs, see “—Purchases of Equity Securities by the Issuer and Affiliated Purchasers”.

 

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Ambev’s Major Shareholders

The following table sets forth information as of March 31, 2013, with respect to any person known to Ambev to be the beneficial owner of 5% or more of Ambev’s outstanding shares:

 

    Amount and Percentage
of  Common Shares
    Amount and Percentage
of  Preferred Shares
 

The Bank of New York Mellon – ADR Department (1)

    3,503,749        0.20%            287,055,370        20.88%       

Interbrew International B.V.

            1,148,159,628        65.31%                    521,033,836        37.91%       

AmBrew S.A.

    153,376,503        8.72%            100,924,824        7.34%       

FAHZ (2)

    300,286,481        17.08%            -        -       

Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI

    16,325,665        0.93%            74,125,085        5.39%       

 

(1) Represents the number of shares held in the form of ADSs. The Bank of New York Mellon is the depositary of Ambev shares in accordance with the deposit agreement entered into with Ambev and the owners of Ambev ADSs.

 

(2) Messrs. Marcel Herrman Telles, Carlos Alves Brito, Luis Felipe Pedreira Dutra Leite, Victorio Carlos De Marchi and José Heitor Attílio Gracioso, all of whom are directors of Ambev, are also trustees of FAHZ.

For a description of our major shareholders’ voting rights, see “—Ambev Shareholders’ Agreement”.

Ambev Shareholders’ Agreement

ABI (through AmBrew S.A. and InterBrew International B.V.), FAHZ, as well as Ambev and Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira, the latter four as intervening parties, are part of a shareholders’ agreement, or the Ambev Shareholders’ Agreement, with respect to the voting of the shares of Ambev and the voting by Ambev of the shares of its subsidiaries, among other matters.

The Ambev Shareholders’ Agreement was originally signed in July 1999 and amended in March 2004.

The following discussion relates to the Ambev Shareholders’ Agreement, as modified by the amendment.

Management of Ambev

Although each common share of Ambev entitles shareholders to one vote in connection with the election of Ambev’s Board of Directors, Ambev’s controlling shareholders, FAHZ, AmBrew S.A. and Interbrew International B.V., have the ability to elect the majority of Ambev’s directors. Because the election of any director by minority (non-controlling) shareholders would require, under Law 6,404/76, at the time of execution of the Ambev Shareholders’ Agreement, the adoption of a cumulative vote procedure, the provisions of the Ambev Shareholders’ Agreement on the management of Ambev were based on the assumption that no directors will be elected by minority shareholders of Ambev.

Due to the changes introduced by Law No. 10,303/01, the majority of common shareholders holding at least 15% of voting capital and the majority of preferred shareholders holding at least 10% of Ambev’s total capital (in both cases excluding shares held by controlling shareholders) may separately elect one member of the Board of Directors and its alternate member. Additionally, if neither the common shareholders nor the preferred shareholders achieve such quorum as mentioned above, they can jointly appoint one member and his alternate to the Board of Directors, provided those shareholders together represent a quorum of at least 10% of Ambev’s total capital. In order to exercise these rights, any of these shareholders must prove that he or she has uninterruptedly held the corresponding shares for at least three months prior to the shareholders’ meeting, where the election of the Board of Directors shall take place.

 

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If such prerogative is exercised collectively with the adoption of a cumulative voting procedure, and as a result the number of directors so elected is equal or greater than the directors elected by the controlling shareholders, the controlling shareholders are entitled to elect the same number of members plus one, regardless of the number of directors provided for in the bylaws.

Presently, under the Ambev Shareholders’ Agreement, as amended, each of FAHZ, AmBrew S.A. and Interbrew International B.V. will have representation on the Board of Directors of Ambev and its subsidiaries and, in addition to the members and respective alternates they are entitled to appoint, each of FAHZ, on the one hand, and AmBrew S.A. and Interbrew International B.V., on the other, may appoint up to two observers without voting rights to attend Ambev’s board meetings. The boards of directors of Ambev and its subsidiaries will each be comprised of at least three and no more than 15 regular members and the same number of alternates, with a term of office of three years with reelection being permitted.

FAHZ will have the right to appoint four directors and their respective alternates to the boards of directors of Ambev and its subsidiaries, so long as it maintains ownership of common shares that FAHZ held as of July 1, 1999, when the Ambev Shareholders’ Agreement was entered into (adjusted for share dividends, splits and reverse stock splits). At that time, FAHZ held 459,521,728 common shares, which has since been adjusted for the five-for-one stock split that took effect in October 2000, the share dividend that took effect in May 2005, the reverse stock split of June 2007 as well as the stock split approved on December, 2010. FAHZ appointed two of the members of our current Board of Directors. FAHZ is not allowed under the Ambev Shareholders’ Agreement to appoint more than four directors in the event that its holding of Ambev common shares increases. FAHZ will always be entitled to appoint at least one director as long as it holds a minimum of 10% of Ambev’s voting shares. AmBrew S.A. and Interbrew International B.V. have the right to appoint members and its alternates to the boards of directors of Ambev and its subsidiaries in a number proportionate to the number of members appointed by FAHZ. Such proportion is based on the ratio between FAHZ’s holding and the joint holding of AmBrew S.A. and Interbrew International B.V. in the voting capital of Ambev.

The Ambev Shareholders’ Agreement provides that Ambev will have two Co-Chairmen with identical rights and duties with one appointed by FAHZ and the other jointly by AmBrew S.A. and Interbrew International B.V. In the event of a deadlock, neither of the Co-Chairmen has a deciding vote on matters submitted to the Board of Directors of Ambev.

Each of FAHZ, AmBrew S.A. and Interbrew International B.V. may remove a director that it has appointed to the Board of Directors of Ambev or its subsidiaries, and each also has the right to appoint the respective replacement or a new alternate, if the originally appointed alternate is confirmed for the vacant position.

The Ambev Shareholders’ Agreement establishes that the shareholders may, by consensus, establish committees within Ambev’s Board of Directors, with the purpose of looking into specific matters, the analyses of which require that their members have specific technical knowledge. The Operations, Finance and Compensation Committee and the Compliance Committee are currently active. See “Item 6. Directors, Senior Management and Employees—Board Practices”.

Preliminary Meetings and Exercise of Voting Right

On matters submitted to a vote of the shareholders or their representatives in the Board of Directors of Ambev or its subsidiaries, FAHZ, AmBrew S.A. and Interbrew International B.V. have agreed to endeavor to first reach a consensus with respect to voting their common shares of each of Ambev and its subsidiaries, and have agreed on the manner to direct their representatives to vote on the matter being submitted. The Ambev Shareholders’ Agreement provides that the parties shall hold a preliminary meeting in advance of all meetings of shareholders or boards of directors of Ambev or of its subsidiaries, with the purpose of discussing and determining a consensus position to be taken by the parties in such meetings.

 

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If the parties fail to reach a consensus with respect to a particular matter, the position to be adopted by all parties to the agreement will be determined by the group holding the greatest number of Ambev voting common shares, which currently is constituted of AmBrew S.A. and Interbrew International B.V. However, this rule does not apply in connection with the election of members of Board of Directors, as described above under “—Management of Ambev”, and with respect to matters which require unanimous approval by FAHZ, AmBrew S.A. and Interbrew International B.V., as follows:

 

   

Any amendment to the bylaws of Ambev and/or any of its subsidiaries with the purpose of amending: (1) the corporate purposes, (2) the term of duration, and/or (3) the composition, powers and duties of management bodies;

 

   

Approval of the annual investment budget of Ambev and/or any of its subsidiaries when the amount of the investments exceed 8.7% of net sales of Ambev foreseen for the same fiscal year;

 

   

Designation, dismissal and substitution of the Chief Executive Officer of Ambev;

 

   

Approval of, or amendment to, the compensation policy for the Board of Directors and of the executive officers of Ambev, as well as of its subsidiaries;

 

   

Approval of stock ownership plans for the directors, executive officers and key employees of Ambev and/or its subsidiaries;

 

   

Change in the dividend policy of Ambev and/or any of its subsidiaries;

 

   

Increases in the capital of Ambev and/or any of its subsidiaries, with or without preemptive rights, through subscription, creation of a new class of shares, or changes in the characteristics of the existing shares, as well as decreases of capital, issuances of debentures (whether or not convertible into shares), warrants, and the creation of founders’ shares by Ambev and/or any of its subsidiaries except when such legal businesses are carried out between Ambev and its subsidiaries or between the subsidiaries;

 

   

Amalgamations, spin-offs, transformations, mergers, acquisitions, and divestments involving Ambev and/or any of its subsidiaries, in the latter case (1) when such operation involves a company that is not a subsidiary, directly or indirectly, of Ambev and (2) provided that the transaction in question results in the reduction in the average dividend paid by Ambev in the past five years, adjusted by the IGP-M index;

 

   

The creation, acquisition, assignment, transfer, establishment of an encumbrance on and/or disposal of shares, quotas and/or any securities issued by any of Ambev’s subsidiaries, under any title or form, except in the benefit of Ambev and/or another subsidiary;

 

   

The incurrence by Ambev and/or any of its subsidiaries of a debt transaction that results in a net debt/equity ratio greater than 1.5:1;

 

   

The execution, amendment, termination, renewal or cancellation of any contracts, agreements or the like involving the registered or deposited trademarks of Ambev or its subsidiaries;

 

   

The extension of loans or the offer of guarantees of any kind by Ambev and/or any of its subsidiaries to any third parties in an amount greater than 1% of Ambev’s shareholders’ equity as set forth in the last audited balance sheet prepared in accordance with Brazilian GAAP, except in favor of employees of Ambev and its subsidiaries, or in favor of the subsidiaries themselves;

 

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The election of members of committees of Ambev’s Board of Directors;

 

   

The cancellation of the registration of Ambev and/or any of its subsidiaries as publicly traded companies;

 

   

The execution of a petition for an arrangement with creditors (recuperação judicial) or acknowledgment of bankruptcy by Ambev and/or any of its subsidiaries;

 

   

Liquidation or dissolution of Ambev and/or any of its subsidiaries; and

 

   

Appointment of the external auditors of Ambev and/or any of its subsidiaries.

The Ambev Shareholders’ Agreement provides that whenever the parties fail to reach a consensus in a preliminary meeting as to any matter listed above, they will exercise their voting rights so as not to approve such matter. The Ambev Shareholders’ Agreement provides that any votes cast by FAHZ, AmBrew S.A. and Interbrew International B.V., or by any of the directors appointed by each of them, in violation of the provisions of the agreement will be deemed null, void and ineffective.

Transfer of Shares

The Ambev Shareholders’ Agreement contains the following provisions concerning the transfer of the shares subject to the Agreement (common shares):

 

   

FAHZ, AmBrew S.A. and Interbrew International B.V. have agreed (1) not to dispose of their shares, directly or indirectly, during the term of the agreement, whether through private trades, on the stock market or on the over-the-counter market, including by way of tender offers, either voluntary or mandatory, except as provided for in Section VI of the Ambev Shareholders’ Agreement, and (2) not to create any type of encumbrance on their shares, without the prior written consent of FAHZ, in the case of AmBrew S.A. and Interbrew International B.V., and without the prior written consent of AmBrew S.A. and Interbrew International B.V., in the case of FAHZ;

 

   

In the event that the shares of Ambev owned by FAHZ, on the one hand, and by AmBrew S.A. and Interbrew International B.V., on the other hand, become subject to seizure, attachment, judicial surety or any other restrictive measure, and such restriction is not lifted or waived within 30 days after its imposition, the shares subject to the restriction shall be automatically deemed offered for sale to the other party. This offer will remain open for 30 days, and the price for the Ambev shares will be the lesser of either (1) the book value of the Ambev shares, as per the latest audited balance sheet of Ambev, prepared in accordance with Brazilian GAAP, and adjusted by the IGP-M index or (2) the average quoted market price of the Ambev shares on stock exchanges in the 20-day period prior to the petition for lifting or waiving the restriction. If the obligations in respect of such restriction exceed the above price, the party whose shares have been subject to the restriction will be liable for the difference that the other party may be required to deposit in order to acquire the relevant shares. If the obligations in respect of such restriction were lower than the price for the Ambev shares as described above, then the party whose shares have been subject to the restriction will be entitled to receive the difference between the price for the Ambev shares and the obligations in respect of such restriction; and

 

   

If any of FAHZ, on the one hand, and AmBrew S.A. and Interbrew International B.V., on the other, intends to dispose of subscription rights relating to Ambev shares that it holds, it must first offer such rights to the other party, who will then be required to exercise its right of first refusal to subscribe the new shares to be issued, within 10 days.

 

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The Shareholders’ Agreement provides that any transfer of shares or subscription rights or creation of encumbrances in which the aforementioned provisions on rights of first refusal are not observed will be deemed null, void and ineffective. Ambev’s management is also prohibited from reflecting any such events in its corporate books, as permitted by the Brazilian Corporation Law.

Specific Performance

The obligations of the parties under the Ambev Shareholders’ Agreement will be subject not only to specific performance but will also bind third parties to the terms of the agreement, in effect declaring null and void any action taken in breach to it so long as rights and obligations of third parties stem from the agreement.

 

B. Related Party Transactions

Material Related Party Transactions

Ambev and Affiliated Entities

We engage in (1) the purchase and sale of raw material with affiliated entities and (2) intercompany loans and guarantees, which effects are eliminated in our consolidated financial statements, with the exception of entities under common control (which are consolidated), as described in note 31 to our financial statements. Pursuant to the legal, regulatory and statutory provisions concerning related party transactions, the transactions described below were carried out on an arm’s length basis.

Ambev and FAHZ

Medical, Dental and Social Assistance

One of the activities of FAHZ, as described in its bylaws, is to provide medical and dental assistance to employees and executive officers (including dependents) of Ambev and its subsidiaries.

Label Production

Ambev has entered into a lease agreement with FAHZ, pursuant to which Ambev leased and is operating FAHZ’s assets used to produce our labels. We began operating such assets in June 2008.

Leasing

FAHZ leases to Ambev two commercial properties, with a total payment of R$15.3. These agreements are being renewed.

Ambev and Employees

Before January 1, 2003, Ambev had deferred payment stock option plans. See “Item 6. Directors, Senior Management and Employees—Employees—Stock Ownership Plan”. Such option was removed from the stock ownership plans subsequent to the enactment of the Sarbanes-Oxley Act. Nevertheless, deferred payment for the stock ownership plans granted prior to 2003 were grandfathered and may be requested. The current Stock Ownership Plan is the result of a revised text approved in Ambev’s Extraordinary General Meeting of April 28, 2010.

 

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ABI and Labatt

In August 2004, in connection with the consummation of the merger of an indirect holding company of Labatt into Ambev, Labatt and InBev N.V./S.A. (as ABI was then denominated) entered into a cross-services agreement with a view to:

 

   

terminating the then-existing services agreement among those entities before the Incorporação;

 

   

Labatt providing to InBev N.V./S.A., on an hourly basis, certain administrative services such as tax support services, internal audit services and legal services; and

 

   

InBev N.V./S.A. providing to Labatt, on an hourly basis, administrative services such as internal audit services, legal advice and IT support.

Transfer Pricing

In August 2004, InBev N.V./S.A. (as ABI was then denominated), Ambev and Labatt entered into agreements relating to the transfer prices and policy for all beer product transfers between ABI and the Labatt companies. The companies confirmed that the Interbrew Transfer Pricing Policy will continue to be the transfer pricing policy in effect between the ABI companies and the Labatt companies for beer product transfers between and among them, except as provided for in the agreement.

Ambev and ABI

Licensing Agreements

In March 2005, Ambev and InBev N.V./S.A. (as ABI was then denominated) entered into a cross-license agreement through which Ambev is allowed to produce, package, market and distribute beer under the brands Stella Artois and Beck’s in Latin America (except Argentina and Cuba), on an exclusive basis, and ABI is allowed to produce, package, market and distribute beer under the brand Brahma in Europe, Asia, Africa, Cuba and the United States on an exclusive basis. Ambev has agreed not to directly or indirectly produce, package, market, distribute, sell or resell (or have an interest in any of these), any other European premium branded beer in Latin America, and ABI has agreed to be bound by the same restrictions relating to any other Latin American premium branded beer in Europe, Asia, Africa, Cuba and the United States. Since March 2005, ABI has been distributing Brahma beer in the United States and several countries such as the United Kingdom, Spain, Sweeden, Finland and Greece. We announced the launch of Stella Artois in Brazil in June 2005. Labatt and ABI have an arrangement through which Labatt distributes certain ABI beer brands in Canada, and Latin America South and ABI have an arrangement through which it distributes Stella Artois in Argentina.

The Company has a licensing agreement with Anheuser-Busch, Inc., to produce, bottle, sell and distribute Budweiser products in Brazil, Canada and, further, certain arrangements to sell and distribute Budweiser products in Ecuador, Paraguay, Guatemala, El Salvador and Nicarágua. Ambev also has ABI’s subsidiary Metal Container Corp. as one of its can suppliers.

Special Goodwill Reserve

As a result of the merger of InBev Holding Brasil S.A., or InBev Brasil, into Ambev in July 2005, Ambev acquired tax benefits resulting from the partial amortization of the special premium reserve pursuant to article 7 of CVM’s Normative Ruling No. 319/99. Such amortization will be carried out within the next ten years following the merger. As permitted by Normative Ruling No. 319/99, the Protocol and Justification of the Merger, entered into between Ambev, InBev Brasil and InBev N.V./S.A. (as ABI was then denominated) on July 7, 2005, established that 70% of the goodwill premium, which corresponded to the tax benefit resulting from the amortization of the tax goodwill derived from the merger, would be capitalized in Ambev to the benefit of its

 

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controlling shareholder, with the remaining 30% being capitalized in Ambev without the issuance of new shares to the benefit of all shareholders. Since 2005, pursuant to the Protocol and Justification of the Merger, Ambev has carried out, with shareholders’ approval, capital increases through the partial capitalization of the goodwill premium reserve. Accordingly, Interbrew International B.V. and AmBrew S.A., which are subsidiaries of ABI, have subscribed shares corresponding to 70% of the goodwill premium reserve (and Ambev minority shareholders subscribed shares pursuant to preferred subscription right under Brazilian law) and the remaining 30% of the tax benefit was capitalized without issuance of new shares to the benefit of all shareholders. The Protocol and Justification of the Merger also provides, among other matters, that ABI shall indemnify Ambev for any undisclosed liabilities of InBev Brasil.

In December 2011, Ambev received a tax assessment related to the goodwill amortization resulting from Inbev Brasil’s merger referred to above. See “Item 8. Financial Information – Consolidated Financial Statements and Other Financial Information – Tax Matters – Special Goodwill Reserve”.

ABI and Intra-group Companies

In January 2005, InBev N.V./S.A. (as ABI was then denominated) and certain intra-group companies executed an International Intra-Group Data Protection Agreement pursuant to which they agreed to provide adequate safeguards with respect to the protection of privacy and fundamental rights and freedoms of individuals in the transfer of personal information.

 

C. Interests of Experts and Counsel

Not applicable.

 

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ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Financial Statements and Other Financial Information

Consolidated Financial Statements

See “Item 17. Financial Statements”.

Legal Proceedings

We are subject to numerous claims with respect to tax, labor, distributors and other matters. To the extent that we believe these contingencies will probably be realized, they have been recorded in the balance sheet. We have estimated the total exposures of possible (but not probable) losses, which are not recorded as liabilities, to be R$12.8 billion as of March 31, 2013 (R$11.9 billion as of December 31, 2012). Our estimates are based on reasonable assumptions and management assessments, but should the worst case scenario develop, subjecting us to losses in all cases classified as possible (but not probable), our net impact on our results of operations would be an expense for this amount. Except as set forth herein, there are no legal proceedings to which we are a party, or to which any of our properties are subject which, either individually or in the aggregate, may have a material adverse effect on our results of operations, liquidity or financial condition. For more information, see notes 26 and 30 of our consolidated financial statements.

Tax Matters

As of March 31, 2013, the Company and its subsidiaries had several tax claims pending, including judicial and administrative proceedings. Most of these claims relate to ICMS value-added tax, IPI excise tax, and income tax and social contributions. As at March 31, 2013, we have made provisions of R$314.3 million (R$312.5 million as of December 31, 2012) in connection with those tax proceedings for which we believe there is a probable chance of loss.

Among the pending tax claims, there are claims filed by Ambev against Brazilian tax authorities alleging that certain taxes are unconstitutional. Such tax proceedings include claims for income taxes, ICMS, IPI and revenue taxes. As these claims are contingent on obtaining favorable judicial decisions, the corresponding assets which might arise in the future are only recorded once it becomes certain that we will receive the amounts previously paid or deposited.

As of March 31, 2013, there were also tax proceedings with a total estimated possible risk of loss of R$11.3 billion (R$10.9 billion as of December 31, 2012).

ICMS Value Added Tax, IPI Excise Tax and Taxes on Net Sales

During 1999, legislation came into effect requiring Brazilian companies to pay PIS and COFINS not only on sales and services net sales, but also on financial income. We have not been paying PIS and COFINS as required by such law, as we have obtained injunctions permitting the non-payment of these additional taxes on the basis that such legislation is unconstitutional. In November 2005, a leading case unrelated to Ambev was adjudicated by the Brazilian Supreme Court in favor of taxpayers. As of March 31, 2013, we had provisions in connection with cases still pending in the amount of R$49.0 million (R$50.0 million as of December 31, 2012).

We are currently parties to legal proceedings with the State of Rio de Janeiro where we are challenging such State’s attempt to assess ICMS with respect to irrevocable discounts granted by the Company in January 1996 and February 1998. These proceedings are currently before the Superior Court of Justice and the Brazilian Supreme Court, and involve the amount of R$358.0 million as of March 31, 2012 (R$356.0 million as of December 31, 2012), which we have treated as a possible loss. Such estimate is based on reasonable assumptions and assessments of management, but should our position not prevail the expected net impact on our income statement would be an expense for this amount.

 

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Between 2000 and 2004, certain third-party distributors of Londrina Bebidas Ltda. (Cintra, as it was then denominated) obtained preliminary injunctions permitting the non-payment of IPI. These preliminary injunctions were revoked between 2002 and 2005, and as a result, tax authorities assessed Cintra for the payment of IPI during the period in which IPI was not collected by the third-party distributors. As of March 31, 2013, Londrina Bebidas Ltda. had a provision of R$20.0 million (R$18.0 million as of December 31, 2012) with respect to such claims. We believe R$158.0 million is considered as a possible loss in connection with this litigation.

Goods manufactured within the Manaus Free Trade Zone – ZFM intended for consumption elsewhere in Brazil are exempt from the IPI. Our subsidiaries have been registering IPI presumed credits upon the acquisition of exempted inputs manufactured therein. Since 2009 we have been receiving a number of tax assessments from the Brazilian Federal Tax Authorities relating to the disallowance of such presumed credits, which decision from the Upper House of the Administrative Court is still pending. Management estimates possible losses in relation to these assessments to be R$669.1 million as of March 31, 2013 (R$410.0 million as of December 31, 2012). See “Item 5. Operating and Financial Review And Prospects — Liquidity and Capital Resources — Sales Tax Deferrals and Other Tax Credits.”

Income Tax and Social Contribution

Beginning in 1997, an amendment to the tax laws confirmed the deductibility of interest on shareholders’ equity for social contribution and income tax purposes. Brahma, which has since been succeeded in a series of corporate restructuring transactions by Ambev, filed a lawsuit with the Federal Courts of the State of Rio de Janeiro requesting the recovery of social contribution taxes previously paid in 1996. The Federal Court granted Brahma an injunction recognizing the deductibility of payment of interest on shareholders’ equity and, as a result, allowed Brahma to suspend the payment of social contribution in 1999 up to the amount not deducted in 1996 (approximately R$77 million as of December 31, 2011). Notwithstanding the aforesaid suspension of social contribution’s payment, the tax authority filed an administrative proceeding against Brahma claiming the payment of such amount and Brahma presented its defense. Meanwhile, in April 2001, the Federal Appellate Court reversed the Federal Court’s injunction. Though we appealed to the Brazilian Supreme Court in April 2002, our appeal was denied. The provision made in connection with this case was reversed in 2009 as management assessment established that even if Ambev loses the administrative proceeding, the tax authority would not be entitled to collect the respective amounts, due to the fact that the tax authority has indirectly consented, in a different proceeding, to the deductibility of payment of interest on shareholders’ equity made by Ambev in 1996. The case was closed in April 2012.

Profits Generated Abroad

During the first quarter 2005, certain of our subsidiaries received a number of assessments from Brazilian Federal Tax Authorities relating to profits obtained by subsidiaries domiciled abroad. In December 2008, the Administrative Court handed down a decision on one of the tax assessments relating to earnings of our foreign subsidiaries. This decision was partially favorable to Ambev, and in connection with the remaining part, the Company filed an appeal to the Upper House of the Administrative Court and is awaiting its decision. With respect to another of the tax assessments relating to foreign profits, the Administrative Court rendered a decision favorable to Ambev in September 2011. After this decision, we estimate the total exposures of possible losses in relation to these assessments to be R$2.7 billion at March 31, 2013 (R$2.6 billion as of December 31, 2012). Management has not recorded any provision in connection therewith.

Income Tax - Tax Loss Offset

The Company and certain of its subsidiaries received a number of assessments from Brazilian federal tax authorities relating to the use of income tax losses in company mergers. We have not recorded any provision in connection therewith.

 

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We estimated the total exposures of possible losses in relation to these assessments to be approximately of R$527.3 million as of March 31, 2013 (R$521.8 million at December 31, 2012).

Labatt Tax Matters

Labatt was assessed by the Canada Revenue Agency, or the CRA, for the interest rate used in certain related-party debts and related-party transactions, and other transactions existing prior to the merger of Labatt into Ambev. These issues have been settled in April 2010 with CRA at C$123 million of the estimated exposure of C$218 million at December 31, 2009. Part of the amount settled, corresponding to transactions made before to the merger of Labatt into Ambev, was reimbursed by ABI.

Labatt received another tax assessment on its valuations of certain intercompany transactions amounting to C$158.0 million. The company appealed this tax assessment. In the event Labatt would be required to pay these amounts, the totality would have been reimbursed by ABI. The appeal was allowed in April 2012 by the Canada Revenue Agency with no cost to Labatt.

Tax Amnesty and Refinancing Program

We enrolled in the Tax Amnesty and Refinancing Program, introduced by Federal Law 11,941/09, for some of its current tax lawsuits. Under this program, we agreed to pay R$374.8 million in 180 monthly installments, as from June 2011. As of April 24, 2013, the total amount due relating to such Program is of R$263.6 million (R$271.9 million as of December 31, 2012), registered under the “Other taxes, charges and contributions” line item of our income statement.

Special Goodwill Reserve

In December 2011, Ambev received a tax assessment from the Brazilian Federal Tax Authorities (Secretaria da Receita Federal do Brasil) related to the goodwill amortization resulting from Inbev Brasil’s merger referred to on “Item 7.B – Related Party Transactions – Special Goodwill Reserve”. In June 2012 the Company filed an appeal against the unfavorable first level administrative decision and awaits the decision of the Administrative Court. We believe that the goodwill amortization and respective deduction for tax purposes were in compliance with the provisions set forth by CVM Instruction No. 319/1999 and that Ambev’s use of this goodwill was lawful. In accordance with the advice of our external legal counsel, we believe that the Brazilian Federal Tax Authorities’ position is incorrect, the grounds to contest the tax assessment are well founded, and the risk of loss is possible (but not probable). Accordingly, we have not recorded any provisions for this matter and estimate possible losses in relation to this assessment to be approximately R$3.8 billion as of March 31, 2012 (R$3.7 billion as of December 31, 2012). In the event Ambev would be required to pay these amounts, ABI will reimburse the amount proportional to the benefit received by ABI pursuant to the merger protocol, as well as the related costs.

Labor Matters

The Company is involved in a total of 19,782 labor claims. In Brazil, it is not unusual for a company to be a defendant in such a large number of claims. As of March 31, 2013, we have made provisions totaling R$166.9 million (R$180.1 million as of December 31, 2012) in connection with slightly over a fifth of the above labor claims of the Company and its subsidiaries involving former and current employees and relating mainly to overtime, dismissals, severance, health and safety premiums, supplementary retirement benefits and other matters, all of which are awaiting judicial resolution and have probable chance of loss.

As of March 31, 2013, we had approximately 10 claims made by the Brazilian National Institute for Social Security with an aggregate exposure of R$7.5 million (R$7.5 million as of December 31, 2012). These claims are classified as having a possible chance of loss and allege, among other things, that the Company should have paid social security contributions in relation to bonus payments and payments to third-party service providers.

 

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Civil Claims

As of March 31, 2013, we had 4,640 civil claims pending in Brazil, including third party distributors and product-related claims. We are plaintiffs in 1,267 and defendants in 3,271 of these claims. We have established provisions totaling R$33.1 million for the Company and its subsidiaries as of March 31, 2013 (R$30.4 as of December 31, 2012), in connection with civil claims.

We are a party to a tortious interference claim brought by our competitor Schincariol whereby Schincariol seeks damages in the range of R$100 million from Ambev, claiming that Ambev signed up the entertainer Zeca Pagodinho while he was still contractually bound with Schincariol. On July 20, 2007, the lower courts of the State of São Paulo denied Schincariol’s claim, and Schincariol filed an appeal on August 24, 2007. Based on management assessments, we have not recorded a provision in connection with such proceeding. Schincariol’s appeal is waiting to be decided before the Appellate Court.

Subscription Warrants

In 2002, Ambev decided to request a ruling from the CVM in connection with a dispute between Ambev and some of its warrant holders regarding the criteria used in the calculation of the strike price of certain Ambev warrants. In March and April 2003, the CVM ruled that the criteria used by Ambev to calculate the strike price were correct. In response to the CVM’s final decision and seeking to reverse it, some of the warrant holders filed separate lawsuits before the courts of São Paulo and Rio de Janeiro.

Although the warrants expired without being exercised, the warrant holders claim that the strike price should be reduced to take into account the strike price of certain stock options granted by Ambev under its Stock Ownership Program, as well as for the strike price of other warrants issued in 1993 by Brahma.

We have been notified of seven claims from 12 holders arguing that they would be entitled to those rights. Two of them were ruled favorably to Ambev by the appellate court of the State of São Paulo. A third one was settled. Of the four other claims, Ambev recently received a favorable ruling in one claim by a court of first instance in Rio de Janeiro and the appellate court of the State of Rio de Janeiro ruled against Ambev in the other three claims. We have appealed to the Superior Court of Justice with respect to the final decisions issued by the appellate court of the state of Rio de Janeiro.

The warrant holders of one of the claims denied by the appellate court of the State of São Paulo have also appealed to the Superior Court of Justice. In September 2012, the Superior Court of Justice decided in favor of Ambev and the possibilities of a reversal decision are remote.

In the event the plaintiffs prevail in the above six pending proceedings, we believe that the corresponding economic dilution for the existing shareholders would be the difference between the market value of the shares at the time they are issued and the value ultimately established in liquidation proceedings as being the subscription price pursuant to the exercise of the warrants. We believe the warrants object of those six proceedings represented, on March 31, 2013, 27,684,596 preferred and 6,881,719 common shares that would be issued at a value substantially below fair market value, should claimants ultimately prevail. The plaintiffs also claim they should receive past dividends related to these shares in the amount of R$391.0 million.

Based on management assessments, our chances of receiving unfavorable final decisions are possible and therefore we have not established a provision in our financial statements. As these disputes are based on whether we should receive as a subscription price a lower price than the price that we consider correct, a provision of amounts with respect to these proceedings would only be applicable with respect to legal fees and past dividends.

 

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Third Party Distributors Claims

Numerous claims have been filed in Brazil against us by former distributors whose contracts were terminated. Most claims are still under review by first instance and state Appellate Courts, and a few are currently being reviewed by the Superior Court of Justice.

Ambev has established provisions in the amount of approximately R$8.3 million in connection with these claims as of March 31, 2013 (R$8.3 million as of December 31, 2012), based on management assessments.

Antitrust Matters

Investigations

We currently have a number of antitrust investigations pending against us before Brazilian antitrust authorities.

Tô Contigo

On July 22, 2009, CADE issued its ruling in connection with a proceeding initiated in 2004 as a result of a complaint filed by Schincariol which had, as its main purpose, the investigation of Ambev’s conduct in the market, in particular Ambev’s customer loyalty program known as “Tô Contigo” and which is similar to airline frequent flyer and other mileage programs.

During its investigation, the SDE concluded that the program should be considered anticompetitive unless certain adjustments were made. These adjustments were substantially incorporated into the version of the program at that time, and the program no longer exists. The SDE opinion did not threaten any fines and recommended that the other accusations be dismissed. After the SDE opinion, the proceeding was sent to CADE, which issued a ruling that, among other things, imposed a fine in the amount of R$352.7 million (R$486.0 million as of December 31, 2012 and R$492.8 million as of March 31, 2013, reflecting accrued interests).

Ambev has challenged CADE’s decision before the federal courts, which have ordered the suspension of the fine and other parts of the decision upon our posting of a guarantee. Ambev has already rendered a court bond (carta de fiança) for this purpose and the decision was partially suspended.

On March 29, 2011, and following a determination included in the abovementioned CADE decision, the SDE initiated investigations to determine whether individuals should also be held responsible for the Tô Contigo practices, including Bernardo Pinto Paiva currently Chief Sales Officer of ABI and Ricardo Tadeu Almeida Cabral de Soares, currently working for ABI and former Sales Executive Officer of Ambev.

Kaiser

On April 2, 2007, Cervejaria Kaiser, which is currently the fourth largest beer producer in Brazil and a part of the Heineken Group, filed a complaint with Brazilian antitrust authorities alleging that Ambev’s cooler programs and exclusivity agreements constituted anti-competitive practices, and also that Ambev launched two counter brands (Puerto del Sol and Puerto del Mar) in connection with the entry of Kaiser’s product Sol Pilsen in 2006. On December 9, 2008, the SDE registered two administrative proceedings to investigate the alleged practices. Our preliminary responses were filed before SDE on February 18, 2009, and on January 16, 2012.

630ml Bottle

On April 3, 2008, the Brazilian Association of Carbonated Soft Drinks Manufacturers, the Brazilian Association of Beverages, which is composed of Schincariol and Petrópolis –two large competitors in Brazil, and Cervejaria Imperial (a small Brazilian beverage company), filed complaints with Brazilian antitrust authorities

 

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challenging our 630ml returnable bottle launched under the Skol brand in the State of Rio de Janeiro and under the Bohemia brand in the State of Rio Grande do Sul. On April 17, 2008, Cervejarias Kaiser also filed a complaint with the Brazilian antitrust authorities challenging the Skol bottle. These competitors claim that we should be prevented from launching the new exclusive 630ml bottle and should be compelled to continue to use the standard 600ml returnable bottle used by all other producers. On May 27, 2