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

 4/13/12  American Beverage Co Ambev        20-F       12/31/11    6:6.6M                                   MZ Technologies/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Form 20F 2011                                       HTML   3.63M 
 2: EX-8.1      Opinion re: Tax Matters -- exhibit81                HTML     10K 
 3: EX-12.1     Statement re: Computation of Ratios -- exhibit121   HTML     14K 
 4: EX-12.2     Statement re: Computation of Ratios -- exhibit122   HTML     15K 
 5: EX-13.1     Annual or Quarterly Report to Security Holders --   HTML     11K 
                          exhibit131                                             
 6: EX-13.2     Annual or Quarterly Report to Security Holders --   HTML     11K 
                          exhibit132                                             

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 December 31, 2011

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

OR

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

*              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
		Page
INTRODUCTION		ii
PRESENTATION OF FINANCIAL INFORMATION		ii
CURRENCY TRANSLATION		ii
TRADEMARKS		ii
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	21
ITEM 4A.	UNRESOLVED STAFF COMMENTS	43
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	44
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	67
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	80
ITEM 8.	FINANCIAL INFORMATION	89
ITEM 9.	THE OFFER AND LISTING	97
ITEM 10.	ADDITIONAL INFORMATION	103
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	125
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	131
ITEM 13.	DEFAULT, DIVIDENDS ARREARAGES AND DELINQUENCIES	133
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	134
ITEM 15.	CONTROLS AND PROCEDURES	135
ITEM 15T.	CONTROLS AND PROCEDURES	137
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	138
ITEM 16B.	CODE OF BUSINESS CONDUCT	139
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	140
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	142
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	143
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	147
ITEM 16G.	CORPORATE GOVERNANCE	148
ITEM 17.	FINANCIAL STATEMENTS	149
ITEM 18.	FINANCIAL STATEMENTS	251
ITEM 19	EXHIBITS	252

 

 

INTRODUCTION

This annual report on Form 20-F relates to the two classes of registered American Depositary Shares (“ADSs”) of Companhia de Bebidas das Américas - Ambev evidenced by American Depositary Receipts (“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.

PRESENTATION OF FINANCIAL INFORMATION

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).  The company first adopted IFRS for the annual consolidated financial statements for the year ended December 31, 2008.  Through to and including our financial statements for the year ended December 31, 2007, we prepared our consolidated financial statements in accordance with accounting practices adopted in Brazil (“Brazilian GAAP”).  The effects of the transition to IFRS (from financial statements prepared in accordance with Brazilian GAAP) on the Company’s financial statements for the year ended December 31, 2007, its results of operations and its cash flows for that year, are detailed in note 4 to our consolidated annual financial statements included in the Company’s 2008 annual report.  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 (“U.S. GAAP”).

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$” are to the legal currency of Brazil, references to “U.S. dollar” or “U.S.$” are to the legal currency of the United States and references to “Canadian dollar” or “C$” are to the legal currency of Canada.  We have translated some of the Brazilian currency amounts contained in this annual report into U.S. dollars.  We have also translated some amounts from U.S. dollars and Canadian dollars into Reais.  All financial information relating to us that is presented in U.S. dollars in this annual report has been translated from Reais  at the period-end exchange rate or average exchange rate prevailing during the period, as published by the Central Bank of Brazil (“Central Bank”), unless the context otherwise requires.  The exchange rate on December 31, 2011, was R$1.88 to U.S.$1.00, as published by the Central Bank.  The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of the readers of this annual report and should not be construed as implying that the Brazilian currency amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any rate.  See “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.

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

This annual report includes 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 Exchange Act, principally in Items 3 through 5 and Item 11 of this annual report.  We have based these forward-looking statements largely on our current expectations and projections about future events, industry and financial trends affecting our business.

 

This annual report includes such statements as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, “may” or similar expressions that are forward‑looking statements.  These statements are subject to certain risks and uncertainties.  Actual results may differ materially from those suggested by these statements due to, among others, the risks or uncertainties listed below.  See also “Item 3.  Key Information—D. Risk Factors” for further discussion of risks and uncertainties that could impact our business.

These forward‑looking statements are not guarantees of future performance.  Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside our control and are difficult to predict, that may cause actual results or developments to differ materially from any future results or developments expressed or implied by the forward‑looking statements.  Factors that could cause actual results to differ materially from those contemplated by the forward‑looking statements include, among others:

§         greater than expected costs (including taxes) and expenses;

§         the risk of unexpected consequences resulting from acquisitions;

§         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;

§         changes in pricing environments and volatility in commodity prices;

§         regional or general changes in asset valuations;

§         tax consequences of restructuring;

§         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; and

§         the utilization of Ambev’s subsidiaries’ income tax loss carry forwards.

Our statements regarding market risks, including interest rate risk, foreign exchange rate risk, commodity risk, asset price risk, equity market risk, inflation and deflation, are subject to uncertainty.  For example, certain market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations.  By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

We caution that the forward-looking statements in this Form 20‑F are further qualified by the risk factors disclosed in “Item 3.  Key Information—D. Risk Factors” that could cause actual results to differ materially from those in the forward-looking statements.  Subject to our obligations under Brazilian and U.S. law in relation to disclosure and ongoing information, we undertake no obligation to update publicly or revise any forward‑looking statements, whether as a result of new information, future events or otherwise.

PART I

ITEM 1.                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

ITEM 2.                OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

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, 2011, 2010, 2009, 2008 and 2007, that were prepared under IFRS.

Selected Income Statement Data

 

 

 

(*)           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 will continue 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 represented to conform retrospectively to the effect of this split.

 3

 

Table of Contents

Selected Consolidated Balance Sheet Data

 

 

Other Data

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.

(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 and equipment.

(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; CSD & NANC is the abbreviation for Carbonated Soft Drinks and Non-Alcoholic and Non-Carbonated Soft Drinks.

(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 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 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 “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 Corporate 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 “Additional Information—Memorandum and Articles of Association—Dividends and Reserves—Dividend Preference of Preferred Shares”.

For further information on Brazilian Corporate Law provisions 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 “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 2007 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 “Additional Information—Memorandum and Articles of Association—Dividends and Reserves—Interest Attributable to Shareholders’ Equity”.  See “Information on the Company—History and Development of the Company”.  Last dividends distributed related to the fiscal year of 2011 were paid on April 10, 2012.             

 

(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 date of payment.

Exchange Rate Information

Prior to March 4, 2005, there were two principal legal foreign exchange markets in Brazil: (i) the commercial rate exchange market, and (ii) the floating rate exchange market.

Most trade and financial foreign exchange transactions were carried out on the commercial rate exchange market.  These included the purchase or sale of shares or payment of dividends or interest with respect to shares.  Foreign currencies could only be purchased in the commercial exchange market through a Brazilian bank authorized to buy and sell currency in these markets.  In both markets, rates were freely negotiated.

Resolution No. 3,265 by the Conselho Monetário Nacional (National Monetary Council), or CMN, dated March 4, 2005, consolidated the foreign exchange markets into one single foreign exchange market, effective as of March 14, 2005.  All foreign exchange transactions are now 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 of Brazil (“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.

 

Source : Central Bank

(1)           Represents the daily average of the exchange rates during the relevant period.

 

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 Brazilian Stock Exchange (“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 of Brazil.

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.  Restrictions on the remittance of foreign capital abroad could hinder or prevent Banco Bradesco S.A. (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 (“Foreign Investment Regulations”), foreign investors registered with the CVM and acting through authorized custody 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 Resolution No. 2,689/00 of the National Monetary Council, as amended (“Law No. 4,131” and “Resolution No. 2,689”).

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.

In addition, an investor operating under the provisions of Resolution No. 2,689 must be registered with the Brazilian internal revenue service (Secretaria da Receita Federal), pursuant to its Regulatory Instruction No. 1,183 of August 19, 2011, as amended and Regulatory Instruction No. 1,054 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 Mellon (formerly The Bank of New York) with respect to the Ambev ADSs to be maintained by the custodian on behalf of The Bank of New York Mellon, the custodian and The Bank of New York Mellon will be able to convert dividends and other distributions with respect to the Ambev shares represented by Ambev ADSs into foreign currency and remit the proceeds outside of Brazil.  In the event that a holder of Ambev ADSs exchanges such ADSs for Ambev shares, such holder will be entitled to continue to rely on The Bank of New York Mellon’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 measured by the National Consumer Price Index (Índice Nacional de Preços ao Consumidor), reached a hyper-inflationary peak of 2,489.1% in 1993.  Brazilian inflation, as measured by the same index, was 5.2% in 2007, 6.5% in 2008, 4.1% in 2009, 6.5% in 2010 and 6.1% in 2011.  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$2.3204 per U.S.$1.00 at December 31, 2001 to R$3.5333 at December 31, 2002.  The exchange rate reached R$3.9552 per U.S.$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$2.3370 per U.S.$1.00 as of December 31, 2008.  In 2009, the Real  appreciated by 34.2%, resulting in an exchange rate of R$1.7412 per U.S.$1.00 as of December 31, 2009.  In 2010, the Real appreciated by 4.5% resulting in an exchange rate of R$1.6662 per U.S. $1.00 as of December 31, 2010.  In 2011, the Real depreciated by 12.5% resulting in an exchange rate of R$1.8758 per U.S. $1.00 as of December 31, 2011.

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 PET bottles, 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 2011.  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.

 

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 (the Brazilian federal excise tax (“IPI”)) 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 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 in all Brazilian beer and carbonated soft drinks (“CSD”) factories in order to assist governments fight tax evasion in the beverage industry.  We cannot assure you that these regulations will have the intended impact.

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.

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; 

§         Exchange control policies;

§         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.

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. (“QIB”), the net revenues from which in 2011 corresponded to 16.5% 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, Argentina has recently experienced political and economic instability.  Commercial and financial activities were virtually paralyzed in 2002, further aggravating the economic recession that precipitated the financial crisis.  A widespread recession followed in 2002, including a 10.9% decrease in real GDP, high unemployment and high inflation, which have led to a reduction of disposable income and of real wages and resulted in changes in consumer behavior across all class sectors of the Argentine population.  Argentina began to stabilize in 2003, and since 2004 generally has continued to show signs of stability.  The real GDP growth was 9.7% in 2010 and 6.6% in 2011 and the unemployment rate reached 7.3% in 2011, compared to 7.7% in 2010.

Notwithstanding the current continued stabilization, the Argentine economic and social situation has rapidly deteriorated in the past, and may quickly deteriorate in the future; we cannot assure you that the Argentine economy will continue its sustained growth.  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.

U.S. investors may not be able to effect service of process upon, or to enforce judgments against us

We are organized under the laws of the Federative Republic of Brazil.  Substantially all of our directors and executive officers and the experts named in this annual report are residents of countries other than the United States.  All or a substantial portion of the assets of such non-U.S. residents and of Ambev are located outside the United States.  Therefore, it may not be possible for investors to effect service of process within the United States upon such persons or Ambev, or to enforce against them judgments obtained in U.S. courts based upon civil liability provisions of the Federal securities laws of the United States or otherwise.

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 Brahma and Antarctica upon the creation of Ambev in 1999, we entered into a performance agreement with the Brazilian antitrust authorities, which requires us to comply with a number of restrictions.  We are also party to other antitrust legal proceedings.  For further information on this matter see “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 Quinsa.  Our operation in Argentina is subject to constant monitoring by Argentinean antitrust authorities.  For further information on this matter see “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 higienic 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, please refer to “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 Brazilian Reais.  In 2011, we derived approximately 31.4% of our net revenues from operating companies that have functional currencies that are not Brazilian 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 the Brazilian Reais  will affect our consolidated income statement and balance sheet.  Decreases in the value of our operating companies’ functional currencies against the Brazilian 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 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.

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, 31.4% (R$8,509.8 million) of our total net revenues of R$27,126.7 million in 2011 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.

We rely on the reputation of our brands

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 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 and obesity), 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.

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 contamination or 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.

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 “Financial Information—Consolidated Financial Statements and other Financial Information—Legal Proceedings” and note 30 to our audited consolidated financial statements as of December 31, 2011, and 2010 for a description of certain material contingencies of the Company.

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

Our operations are subject to 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 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 an 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

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 such investments are generally considered speculative in nature.

Brazilian investments, such as investments in our securities, are subject to economic and political risks, involving, among others:

·         Changes in the 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, more concentrated and more volatile than major U.S. and European securities markets, and are not as highly regulated or supervised as these markets.  The relatively small market capitalization and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the securities 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 securities

Economic and market conditions in other emerging market countries, especially those in Latin America, influence the market for securities issued by Brazilian companies and 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 Brazil and other emerging market countries’ securities markets.  In the recent past, Argentina, Venezuela, Uruguay and Paraguay experienced a significant economic downturn.  The market value of our securities may therefore be adversely affected by events occurring outside of Brazil, especially in other emerging market countries.

Our controlling shareholders are able to determine the outcome of many corporate actions without the approval of non-controlling shareholders

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. (“A-B InBev”) and Fundação Zerrenner (“Fundação Zerrenner”), together hold approximately 91.1% of Ambev’s common shares (excluding treasury shares) as of December 31, 2011.

A-B InBev 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 December 31, 2011.  A-B InBev thus has control over Ambev, even though (i) A-B InBev remains subject to the Ambev shareholders’ agreement with Fundação Zerrenner and (ii) A-B InBev is jointly controlled by Messrs. Lemann, Sicupira and Telles and Interbrew’s former controlling shareholders.  For further information on these matters see “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 Corporate 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 for individual financial statements differ from IFRS).  The main sources for these dividends are cash flows from Ambev’s operations and dividends from Ambev’s operating subsidiaries.  The adjusted income may be capitalized, used to absorb losses or otherwise appropriated as allowed under Brazilian GAAP and Brazilian Corporate Law; therefore, adjusted income may not be available to be paid as dividends in a certain year.  Ambev might not pay dividends to its shareholders in any particular fiscal year, upon the determination of the Board of Directors that such distributions 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.

Controls and restrictions on foreign currency remittances could harm the ability of Ambev to transfer dividend payments abroad

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 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 companies such as Ambev from paying amounts denominated in foreign currencies or require that any such payments be made in Brazilian Reais.  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, Brazil’s policy toward the International Monetary Fund and other factors.  We cannot assure you that the Central Bank will not modify its policies or that the Brazilian government will not institute restrictions or delays on payments by Brazilian issuers in respect of securities issued in the international capital markets to date.  For further information on this matter see “—Exchange Controls”.

If you exchange the Ambev ADSs for Ambev shares, you risk losing some foreign currency remittance and Brazilian tax advantages

The Ambev ADSs benefit from the foreign capital registration that The Bank of New York Mellon (as depositary) has in Brazil, which permits The Bank of New York Mellon 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 Bank of New York Mellon’s foreign capital registration for only five business days from the date of 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.  For a more complete description of Brazilian restrictions on foreign investments and the foreign investment regulations, see “Additional Information—Memorandum and Articles of Association—Restrictions on Foreign Investment” and “Key Information—Exchange Rate Information—Exchange Controls”.  For a more complete description of Brazilian tax regulations, see “Additional Information—Taxation—Brazilian Tax Considerations”.

Ambev ADSs have fewer and less well-defined shareholders’ rights as compared to shareholders’ rights of similar U.S. companies

Ambev’s corporate affairs are governed by Ambev’s bylaws and Brazilian Corporate Law, which may differ from the legal principles that would apply to Ambev if the company was incorporated in a jurisdiction in the United States, such as Delaware or New York, or in other jurisdictions outside of Brazil.  In addition, your rights or the rights of holders of the Ambev shares and ADSs under Brazilian Corporate Law to protect your interests relative to actions taken by Ambev’s Board of Directors or controlling shareholders may be fewer and less well-defined than under the laws of those other jurisdictions outside of Brazil.

Although Brazilian law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets may not be as highly regulated and supervised as the U.S. securities markets or markets in other jurisdictions.  In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well-defined and enforced in Brazil than in the United States, potentially causing disadvantages to holders of the Ambev shares and ADSs.  Corporate disclosures may be less complete or informative than what may be expected of a U.S. public company.

Some entitlements are not available to U.S. holders of Ambev shares and ADSs

Due to various Brazilian and United States laws and regulations, United States holders of Ambev shares or ADSs may not be entitled to all of the rights possessed by Brazilian holders of Ambev shares.  For instance, U.S. holders of Ambev shares may not be able to exercise any preemptive or preferential rights relating to their shares unless a registration statement under the Securities Act is effective with respect to such 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 “Additional information—Voting Rights”.

Holders of ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary

Under Brazilian law, only shareholders registered as such in our corporate books may attend shareholders’ meetings.  All shares underlying the ADSs are registered in the name of the depositary.  A holder of ADSs is entitled to instruct the depositary as to how to vote the common shares represented by ADSs, in accordance with procedures provided for in the deposit agreement, but a holder of ADSs will not be able to vote the underlying common shares directly at a shareholders’ meeting or to appoint a proxy to do so.

Future equity issuances may dilute the holdings of current shareholders or ADS holders and could materially affect the market price of our shares or ADSs

We may in the future decide to offer additional equity to raise capital or for other purposes.  Any such additional 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 asset value per share or ADS, and any offerings by us or our main shareholders could have an adverse effect on the market price of our shares and ADSs.

As a “foreign private issuer” in the United States, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC

As a “foreign private issuer”, we are exempt from certain rules under the Exchange Act, that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act.  In addition, 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.

ITEM 4.                INFORMATION ON THE COMPANY

Ambev’s principal executive offices are located at Rua Dr. Renato Paes de Barros, 1017, 4^th floor, CEP 04530-001, São Paulo, SP, Brazil, tel.: (5511) 2122-1414, e-mail: 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 (“Brahma”) and Companhia Antarctica Paulista Indústria Brasileira de Bebidas e Conexos (“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. (“Aditus”) on September 14, 1998.  Ambev is a publicly held corporation incorporated under the laws of the Federative Republic 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. (“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 the north of 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 August 2004, Ambev and Interbrew (as it was then denominated), a Belgian brewer, completed a business combination that involved the merger of an indirect holding company of 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 in exchange for newly issued shares of Interbrew.  After this transaction, Interbrew changed its company name to InBev (and, since 2008, to A-B InBev) and became the majority shareholder of Ambev through subsidiaries and holding companies.

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 (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 Fundação Zerrenner, 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 Fundação Zerrenner 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 – Creation of Ambev

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 (“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 Quilmes International (Bermuda) Ltd. (“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 (“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.

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 the North of 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 (“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, importation, 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 Perú, certain production and distribution assets from Embotelladora Rivera, including two CSDs 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 Perú 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. (“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 SA, 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.

The InBev-Ambev Transactions

The “InBev-Ambev transactions” consisted of two transactions negotiated simultaneously: (i) in the first transaction, the Braco Group exchanged its Ambev shares for shares in Interbrew S.A./N.V. (“Interbrew”); and (ii) in the second transaction, Ambev issued shares to Interbrew 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 an agreement (the “Contribution and Subscription Agreement”) with Interbrew 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, which represented 24.7% of Interbrew’s voting shares.

Upon closing of this transaction in August 2004, (i) the Braco Group received approximately 44% of the voting interest in the Stichting, which thereupon owned approximately 56% of Interbrew’s common shares, and (ii) Interbrew 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 was renamed InBev.

Acquisition of Labatt

Pursuant to the Incorporação  Agreement, Labatt Brewing Canada Holding Ltd. (“Mergeco”) was merged into Ambev by means of an incorporação  under Brazilian law.  Mergeco held 99.9% of the capital stock of Labatt Holding ApS (“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.

With the consummation of this transaction in August 2004, (i) Labatt became a wholly-owned subsidiary of Ambev, and (ii) Interbrew increased its stake in Ambev to approximately 68% of common shares and 34% of preferred shares.

Ownership structure of InBev and Ambev upon consummation of the InBev-Ambev transactions

InBev

Upon closing the InBev-Ambev transactions, 56% of InBev’s voting shares were owned by the Stichting, 1% was owned by 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 entities representing the interests of the Interbrew Founding Families entered into a shareholders’ agreement (the “InBev Shareholders’ Agreement”) providing for, among other things, joint and equal influence over the exercise of the Stichting voting rights in InBev.

Ambev

Upon closing the InBev-Ambev transactions, InBev became the owner of approximately 68% of Ambev’s voting shares, Fundação Zerrenner retained approximately 16% of such shares, and the remaining shares were held by the public.

Mandatory Tender Offer

Pursuant to Brazilian Corporate Law, the entity then denominated InBev was required to conduct, following the consummation of the InBev-Ambev transactions, a mandatory tender offer (the “MTO”) for all remaining outstanding common shares of Ambev.  The MTO was completed in March 2005, and InBev (as it was then denominated) increased its stake in Ambev to approximately an 81% voting interest and a 56% economic interest.  Fundação Zerrenner 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 (“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 Lda. (“Goldensand”), the controlling shareholder of Cervejarias Cintra Indústria e Comércio Ltda. (“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. (“Schincariol”) the Cintra brands and distribution assets.  Following the sale of the brands, the corporate name of Cintra was changed to Londrina Bebidas Ltda. (“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.

Acquisition of Bebidas y Aguas Gaseosas Occidente S.R.L.

In March 2009, the subsidiary Quilmes Industrial Société Anonyme (“Quinsa”) acquired from SAB Miller plc 100% of the share capital of Bebidas y Aguas Gaseosas Occidente S.R.L., the exclusive bottler of Pepsi in Bolivia.

Business combination with Cervecería Regional

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.

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 13 countries across the Americas.  We are one of the largest PepsiCo independent bottlers in the world.

We conduct our operations through three business units:

§         Latin America North, which includes (i) our operations in Brazil, where we operate two divisions: (i) beer sales (“Beer Brazil”) and (ii) carbonated soft drinks and non-alcoholic non-carbonated sales (“CSD & NANC Brazil”); and (ii) our Hispanic Latin America Operations, excluding Latin America South (“HILA-Ex”), which includes our operations in the Dominican Republic, Ecuador, 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 following map illustrates our principal operating units:

An analysis of our net revenues by business unit is presented in the table below:

 

Source : Ambev

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

 

(1)           Totals may not add due to rounding.

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 we have created through our compensation program, which is based on both variable pay and stock ownership, financial incentives for high performance and results.  See “Directors, Senior Management and Employees—Compensation—Stock Ownership Plan”, and “Directors, Senior Management and Employees—Compensation—Profit Sharing Plan”.

Another core element of our culture is our distinguished managerial capability, which is characterized by: (i) hardworking ethos; (ii) results-focused evaluations; (iii) the encouragement of our executives to act as owners, not only managers; (iv) leadership by personal example; and (v) appreciation of field experience.

Top Line Growth

We are constantly seeking sustainable growth of our net revenues, primarily through four different initiatives:

§         Portfolio management: we constantly pursue increased sales of premium, higher-priced and more profitable products in our sales mix;

§         Maximize share of consumer expenditure: we seek to maximize our share of the consumer’s expenditure in our products;

§         Leadership: we are committed to maintaining and strengthening our leading position in the markets where we operate, as well as to evaluating opportunities to establish a presence in new markets across the Americas where we currently do not operate; and

§         Increase per capita consumption: based on proprietary research focused on consumer behavior and occasions of consumption, we aim to increase per capita consumption in the markets where we operate.

Building Strong Brands

We believe that building strong brands that connect and create enduring bonds with our consumers is a guaranteed 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 bonds.  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, increasing direct distribution in major cities while still strengthening our third-party distribution system has been one of our focuses.  In Brazil, for instance, instead of operating three legacy, parallel, single-brand systems (dedicated each 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

Among our employees’ top priorities are cost controls.  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 which requires every manager to build an annual budget for his/ her respective department from scratch.

Financial Discipline

Our focus is not only on volumes and our operational 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 interest on shareholders’ equity and dividends payments, and at the same time keep our investment plans and hold an adequate liquidity level to accommodate the seasonality of our business given our negative working capital and to cope with the 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 unit:

 

Description of the Markets Where We Operate

Latin America North

Brazil

The Brazilian beer market

In 2011, Brazil was the world’s third largest beer market in terms of volume, reaching 123 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 2011, according to our estimates, we had a 68.7% 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 were: Cervejaria Petrópolis S.A. with a 10.7% market share; Grupo Schincariol with a 10.3% market share; and Heineken, with an 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 (i) our network of exclusive third-party distributors, involving around 174 operations, and (ii) our proprietary direct distribution system, involving more than 75 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”.

The Brazilian CSD & NANC markets

The CSD & NANC markets in Brazil are comprised of many different segments, including CSD, bottled water, isotonics, 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. 

The leading CSD flavors in Brazil are (i) cola (about 55% of the market), (ii) guaraná, (iii) orange, and (iv) 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 2011, according to our estimates, The Coca-Cola Company family of brands had a 60.3% market share in the Brazilian CSDs market, while we had a market share of 17.9%.  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 isotonics 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  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 El Salvador, the 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 Guatemala, the main packaging presentations are the returnable, 12 oz. and 1-liter glass bottles.  Our main competitor in Guatemala is Cerveceria Centro Americana, the market leader.  Cerveceria Centro Americana is a private company held by local investors.

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 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 3.1 million hectoliters in 2011.

The Dominican Republic

The Dominican Beer Market

According to our estimates, the annual sales volume of the Dominican beer market was 4.1 million hectoliters in 2011.  The main packaging presentation is the returnable, 650 milliliter and 1 liter glass bottle, which is predominantly sold in small retail stores.  Currently, the market leader is Cerveceria Nacional Dominicana, which is owned by local investors and competes with our Brahma, Brahma Light, Brahma Ice, Stella Artois and  Budweiser brands. 

We sell beer in the Dominican Republic through the same distribution system used in the CSD business.

According to our estimates, the annual sales volume of the Dominican CSD market was 3.8 million hectoliters in 2011.  The main packaging presentation is the returnable, half-liter bottle (glass/PET), which is predominantly sold in small retail stores.  We share the leadership with The Coca-Cola Company, represented by Bepensa, the third player is Ajegroup which adopts a low price strategy.

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 3.5 million hectoliters in 2011.  The main packaging presentation is the 600 milliliter returnable 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 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 13.1 million hectoliters in 2011.  The main packaging presentation is the 630 milliliter returnable 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 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.

The main brands that we sell in Peru are Pepsi-Cola, Seven UP, Concordia and Triple Kola, 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 337,000 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 17.8 million hectoliters in 2011.  With a population of approximately 40 million, Argentina is Latin America South’s largest and most important beer market.

Beer consumption in Argentina has grown in recent years reaching a per capita consumption of 43.9 liters in 2011, above to the 42.8 liters registered in 2010.  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 28.4% of our beer volumes is distributed directly by us and 71.6% is distributed through exclusive third-party distributors.  Our main package presentation in Argentina is the one liter returnable glass bottles, which accounts for approximately 92.3% of our sales.

According to our estimates, on-premise consumption represented approximately 11.1% of beer volumes in 2011, and supermarkets sales representing approximately 15.7% 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 Andes.  We are the leading beer producers in Argentina with approximately 76.9% market share, according to our estimates.  Our main competitor in Argentina is CCU which held an approximate 20.1% market share in 2011 according to our estimates.

The Argentine CSD market

According to our estimates, in 2011, annual sales volume of the Argentine CSD market was 45.0 million hectoliters.  Per capita consumption slightly increased from 110.7 in 2010 to 111.2 in 2011, while 2009 reflected a total consumption of 119.1 liters.  Approximately 42.9% of our CSD volume is distributed directly by us and 57.1% is distributed through exclusive third-party distributors.  Approximately 83.8% 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.

Bolivia

The Bolivian Beer market

According to our estimates, the annual sales volume of the Bolivian beer market was 3.6 million hectoliters in 2011.  The Bolivian market is strongly influenced by macroeconomic trends and governmental, regulatory and fiscal policies.

Approximately 1.2% of our beer volumes is directly distributed by us and 98.8% is distributed through exclusive third-party distributors.  Our main package presentation in Bolivia is the 620-milliliter returnable glass bottles, which accounts for approximately 81.2% of our sales.

Our most important brands in Bolivia are Paceña, Taquiña  and Huari.  We are the leading beer producer in Bolivia with approximately 97% 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 2011, the annual sales volume of the Bolivian CSD market was 4.8 million hectoliters.  Per capita consumption increased slightly from 46.2 liters in 2010 to 47.3 liters in 2011, while 2009 reflected a total of consumption of 45.1 liters per capita.  Approximately 58.3% of our CSD volume is directly distributed by us and 41.7% is distributed through exclusive third-party distributors 94.5% of our sales are through non-returnable bottles.

Chile

According to our estimates, the annual sales volume of the Chilean beer market was 6.8 million hectoliters in 2011.

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.  Since the Chilean brewer CCU entered the Argentine market, our presence in Chile has taken on a strategic significance, since we are both competing in each other’s principal market.

Our most important brands in Chile are Brahma, Becker  and Báltica, 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 2.5 million hectoliters in 2011.

The market for beer in Paraguay has traditionally distinguished itself from those in the southern cone countries in certain respects because (i) beer has not faced significant competition from wine as an alternative alcoholic beverage; (ii) 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 (iii) the seasonality of our products is lower due to warmer conditions throughout the year.

Approximately 50.4% of our beer volumes is directly distributed by us and 49.6% is distributed through exclusive third-party distributors.  Our main package presentation in Paraguay is the returnable glass bottles, which accounts for approximately 68.4% of our sales.

Our most important brands in Paraguay are Brahma  and Pilsen, with our market share being approximately 96.2% 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 1.0 million hectoliters in 2011.  Latin America South manages both beer and CSD businesses out of the facility in Uruguay.

Approximately 20% of our beer volumes is directly distributed by us and 80% is distributed through exclusive third-party distributors.  Our main package presentation in Uruguay is the returnable glass bottles, which accounts for approximately 93.7% of our sales.

Our most important brands in Uruguay are Pilsen  and Patricia, with our market share being approximately 96.8%.

The Uruguayan CSD market

According to our estimates, in 2011, the annual sales volume of the Uruguayan CSD market was 3.8 million hectoliters.  The market growth in 2011 was a result of a recovery in the economy and also of higher market investments coming from the A-brands.  Per capita consumption reached 117 liters in 2011 according to our estimates.

We serve more than 27,000 points of sale in all Uruguay, including 7,200 in Montevideo.  Approximately 38.2% of our CSD volume is directly distributed and 61.8% is distributed through exclusive third-party distributors.  78.2% of our sales are 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 unit is represented by the Labatt operations, which sells domestic and A-B InBev 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 2011, of which Labatt, the market leader, had a volume share of approximately 41%.  The main packaging presentation in the country is the 341 milliliter returnable 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. (“Sleeman”) and Moosehead Breweries Ltd.

Our main brands in Canada are Budweiser  and Bud Light (brewed and sold under license from A-B InBev’s subsidiary Anheuser-Busch, Inc.) (“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 (“TBS”).  TBS and the Liquor Control Board of Ontario, a chain of liquor stores owned by the government of the Province of Ontario (“LCBO”), 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.

TBS has been the primary distribution and sales channel for beer in Ontario for 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 (“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 (i) distribution and retail networks controlled by the government in the provinces of Nova Scotia, New Brunswick and Prince Edward Island; and (ii) private distributors in Newfoundland.

Exports to the United States

As a result of the U.S. antitrust review of the transaction involving InBev and Anheuser-Busch, in February 2009, InBev’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 (“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, KPS volumes have been 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, A-B InBev also agreed to indemnify Ambev in connection with certain events related to the perpetual license.  See “—Related Party Transactions—Ambev and A-B InBev—Indemnification Agreement”.

Beer and CSD Production Process

Beer production involves several raw material and production stages.  The main ingredient in beer is malt, which is produced by germinating and roasting barley in a process called “malting”.  Malt is mixed with water, hops and adjuncts (corn syrup, grits or rice, for instance) in the proportions necessary to obtain the desired taste.  The resulting mixture is called “wort”.  Wort is fermented with selected yeasts to produce beer, which is then filtered and packaged.  In addition to these inputs, delivery of the product to consumers requires packaging materials such as bottles, aluminum or steel cans, labels and crown caps.

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, grits, corn syrup, rice, 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 65% 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 Canada Malting, Soufflet, Agromalte and Avangard.  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 farmers resident in Brazil, Argentina and Uruguay.  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 “Quantitative and Qualitative Disclosures 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, Yakima Chief, Inc., Hopsteiner and HVG Hopfenverwertungsgenossenschaft.

Adjuncts

Corn syrup is purchased from corn producers and Cargill.  Corn is purchased to produce grits in-house in some plants and 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, 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 3% of our requirements, with the remainder purchased directly from independent farmers in the Amazon region as well as other guaraná available regions in Brasil.  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 70,000 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 “Quantitative and Qualitative Disclosures about Market Risk”.

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 information on this matter see “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 St. Gobain Emballage, Owens-Illinois Glass Containers and Companhia Industrial de Vidro, 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 Fundação Zerrenner and is operated by us pursuant to a lease agreement.  Plastic closures are principally purchased from Alcoa Alumínio and Crown-Cork.  PET pre-forms are principally purchased from Plastpak.  Crown caps are sourced locally by each of our operations.  In Brazil and some of our HILA-ex operations, a significant part of our crown caps requirements are met by our facility in the north of Brazil.

Regulation

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

Environmental laws in the countries where we operate are mostly related to (i) the conformity of our operating procedures with environmental standards regarding, among other issues, the emission of gas and liquid effluents and (ii) 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 (“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.

Many governments also impose restrictions on beer advertisement, which may affect, among other issues, (i) the media channels used, (ii) the contents of advertising campaigns, and (iii) 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 “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, including the north and the Lima regions.  Through our Latin America South operations, we are also PepsiCo’s bottler for Argentina, Uruguay and Bolivia.  In 2011, sales volumes of PepsiCo products represented 36% 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 2011, the Anheuser-Busch brands sold by Labatt represented 52% 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 licence 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 A-B InBev 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 A-B InBev 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 A-B InBev have an arrangement through which Labatt distributes certain A-B InBev beer brands in Canada, and the Latin America South zone and A-B InBev have an arrangement through which it distributes Stella Artois in Argentina.  In addition, under the Indemnification Agreement between Ambev and A-B InBev, dated November 13, 2008 – See “—Related Party Transactions—Ambev and A-B InBev—Indemnification Agreement” – A-B InBev agreed to transfer the distribution in the U.S. of the non-Labatt branded beer to the Anheuser-Busch distribution network.

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 2011, represented as a percentage of gross sales, was approximately: 29.8% in Brazil; 22.3% in Canada; 16.2% in Central America; 34.8% in Ecuador; 44.2% in Peru; 52.7% in the Dominican Republic; 25.9% in Argentina; 34.2% in Bolivia; 25.4% in Chile; 16.0% in Paraguay; and 25.1% 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 2011, represented as a percentage of gross sales, was approximately: 24.9% in Brazil; 13.2% in the Dominican Republic; 28.1% in Peru; between 23.7% and 26.2% in Argentina (the final % depends on the type and flavor of the beverage); 26.8% in Bolivia and 30.5% in Uruguay.

Brazilian Tax Changes

In November 2008, the Brazilian Congress approved certain changes (effective 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 provided that higher priced brands pay higher taxes per hectoliter than lower priced brands based on a reference price to consumer table.  In 2011, the Brazilian government, through a market survey of prices of beverage products in Brazil, updated the abovementioned reference price table, effective as of April 4, 2011.  As a result, the actual increase in Ambev’s federal excise tax and PIS/COFINS tax burden – which according to the new system, is dependent on Ambev’s packaging and brand mix – was approximately 13% for beer and non alcoholic beverages, on average.

C.            Organizational Structure

The controlling shareholders of Ambev, Interbrew International B.V. and AmBrew S.A., which are both subsidiaries of A-B InBev and Fundação Zerrenner, together hold approximately 91.1% of Ambev’s common shares, as of December 31, 2011.  A-B InBev indirectly holds shares of Ambev common stock that represent approximately 74.0% of the total voting power of Ambev’s capital stock.  A-B InBev thus has control over Ambev, even though (i) A-B InBev remains subject to the Ambev Shareholders’ Agreement with Fundação Zerrenner, and (ii) A-B InBev is jointly controlled by Messrs. Lemann, Sicupira and Telles and Interbrew’s former controlling shareholders.  For further information on these matters see “—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 December 31, 2011 for total share capital owned.

 

Organizational Structure

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 2011, our aggregate beer and CSD production capacity was 262.6 million hectoliters per year.  Our total annual beer production capacity was 176.5 million hectoliters.  Our total CSD production capacity was 86.2 million hectoliters.  In 2011, the production of these facilities totaled 119.5 million hectoliters for beer and 46.5 million hectoliters for CSD.

The following is a list of our principal production facilities as of March 31, 2012:

 

Brazil
Plant	Type of Plant
Agudos, São Paulo	Beer
Brasília, Federal District	Beer
Curitiba, Paraná	Beer

 

 

40