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Edited Transcript of Y92.SI earnings conference call or presentation 15-Feb-17 10:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Thai Beverage PCL Earnings Call

Bangkok Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Thai Beverage PCL earnings conference call or presentation Wednesday, February 15, 2017 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Namfon Aungsutornrungsi

Thai Beverage Public Company Limited - Head, IR

* Sithichai Chaikriangkrai

Thai Beverage Public Company Limited - CFO

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Conference Call Participants

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* Thitithep Nophaket

Merrill Lynch/Phatra Securities - Analyst

* Fransisca Widjaja

Macquarie - Analyst

* Divya Kothiyal

Morgan Stanley - Analyst

* Jonathan Seow

CIMB - Analyst

* Marianne Chin

Morgan Stanley - Analyst

* Nicholas Teh

Credit Suisse - Analyst

* Andy Sim

DBS Vickers - Analyst

* Ian McLeish

Bernstein - Analyst

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Presentation

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Operator [1]

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Good evening everyone and thank you for joining the Thai Beverage first-quarter 2017 results call. All participants have been placed in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

I will now hand over the call to the presenters Ms. Namfon Aungsutornrungsi, ThaiBev's Head of Investor Relations and the members of ThaiBev's senior management team. Thank you.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [2]

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Good evening, ladies and gentlemen. Welcome to Thai Beverage's first 2017 quarter ended December 31, 2016 financial results conference call.

I am Namfon Aungsutornrungsi, Head of Investor Relations. The format of the call today, we will start with a summary of the first quarter ended December 31, 2016 results, then we will open for the Q&A session with the management team.

Before we start a summary of financial results, I will like to remind you again that the Company has changed the fiscal year to begin on October 1 and end it on the September 30, of every year. The first new fiscal year started in 2016 was nine months' period from January 1, 2016 to September 30, 2016. The 2017 fiscal year will be 12 months from October 1, 2016 to the September 30, 2017.

Now we will start a summary of the first quarter ended December 31, 2016 financial results. The total sales revenue of the Company for the first quarter was THB46,829 million, a decrease of 8% year on year attributable to the decrease in sales revenue during the mourning period.

Net profit was THB7,743 million, or an increase of 29.1% when compared to last year. This was due to an increase in net profit of beer, F&N and FCL operating results and a decrease in net loss of non-alcoholic beverages business.

From October 1, 2016, onwards, the soda water business was transferred from non-alcoholic beverage business to the spirits business segment to conform the changes in the Company's management and reporting structure. The change reflects the fact that the majority of consumers use soda water as a mixture for spirits.

The spirits business launched growth margin soda water in September 2016 and it was well accepted by consumers. As a result, sales revenue -- sales volume of soda water increased by 24.2% in the first quarter ended December 31, 2016 when comparing to the corresponding period of last year.

However, the spirit segment saw sales volume drop due to the fact that festive and entertainment activities at the end of the year were postponed. The government urged for 30 days' suspension of all entertainment activities right after the first 30 days of the mourning period. The trade activities was not resumed due to a slowdown at on trade consumption at the restaurant and entertainment venues. This resulted in low alcohol consumption in the last quarter of the year which normally is the peak season.

The situation caused a decrease in spirits sales volume by 10.8%. Sales revenue also dropped to THB26,302 million and net profit declined by THB464 million.

For the beer business, in the first quarter, we observed sales revenue of THB15,038 million, a drop of 4.6% compared to the corresponding period of last year due to the mourning period in Thailand as well. However, a decrease in water, raw material cost as well as A&P led the beer business to maintain satisfactory performance.

The net profit of beer business was THB1,260 million or an increase of 159.8% compared to last year.

In August 2016, the agreement of OEM of sports drink has been expired. As a result, revenue for non-alcoholic beverage business in the first quarter marginally dropped by 1.3% to THB3,888 million. However, an increase in sales volume of our core products together with several packaging costs and a decrease in A&P resulted in an improvement of net loss by 51.4%.

In the first quarter 2017, sales revenues generated by the full business declined by 1% to THB1,636 million due to a decrease in sales volume at the restaurant from the mourning period. The net profit was THB5 million, mainly driven by an increase in rental expenses.

The sales revenue for the international business in the first quarter decreased by 17.5%. Beer sales revenue dropped mainly due to a slowdown in ASEAN sales despite positive growth in Singapore and Cambodia markets.

For the international spirits, also an important revenue decline as a result of [procreated steering foreign basis] policy. This caused a delay in buying scotch whiskey because the consumers want to offer for the situation.

Now we will open the call for any questions on our results. Operator, please help open the line for Q&A.

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Questions and Answers

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Operator [1]

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Thank you. We will begin the question-and-answer session. (Operator Instructions). Our first question, Thitithep from Phatra. Please go ahead.

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Thitithep Nophaket, Merrill Lynch/Phatra Securities - Analyst [2]

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Hi. Thank you for the call. I have quite a few questions. The first one, I noticed that the average price of both beer and spirits increased in this quarter. Can you explain why?

Second quarter, is that the sales of spirit and beer has declined year on year in the first quarter of 2017. Can you tell us whether the magnitude of decline is in line with the market or more or less than the market? In other words, are you losing or gaining market share in this quarter?

The third question is on the beer gross margin. It's quite strong in this quarter at 23% year on year. Should we assume that 23% -- is it sustainable going forward in to second and the third quarter.

And the last question is on the sales in the second quarter of this year or between January to March. Have you seen it recover at all from the last quarter?

Thank you. That's all the question I have.

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Unidentified Company Representative [3]

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Thitithep, this is [Choi], I will answer the first one. The price increase of both spirit and beer was resulted from, you remember when we have a tax increase, we always add up a bit on top of that. What I call round up, but when I round up, I round up quite a bit there.

On beer, it did also increase more than the tax both in bottles, small bottles and cans. Yes, we did that. So, that in short, we take the opportunity of tax increase, add up on top of that a bit.

And then the second question about market share of beer and spirit, I think on beer --

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Unidentified Company Representative [4]

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(Inaudible) here. For the market share, for beer itself in the last quarter December, actually we inched a bit. So although, the volume has dropped, market share has specially gone up slightly, so in that sense we are quite happy in our position.

You also asked about the gross margin of 23%. What's driving this is a couple of things. One is largely because of the price increase for the top line revenue is a higher. In terms of the cost of goods itself, the malt prices, we got better malt prices this time round and also high returnable rate of our bottle. And so, that is actually contributing to a very nice positive gross margin.

It is sustainable. I think as we continue, I think the malt prices, we have it locked in already. Returnable bottles, we'll continue to maintain that ratio.

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Unidentified Company Representative [5]

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Okay, on spirit, response about the market share, Nielsen still report the market share of the brown spirit we got, so we didn't lose any market share. I think the market consumption declined as much -- a bit more than that, more to the international spirit than domestic.

From January to March, I mean that's speculative. But anyway we hope to improve because actually after the 100 days of mourning, we had started to resume activities as well as spirit. So it is slowly getting better and we hope that doing some [grant] the consumption will come back to normal.

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Thitithep Nophaket, Merrill Lynch/Phatra Securities - Analyst [6]

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Right. Khun (inaudible) I have one follow-up question. Go back to the spirit price. I recall that the average bid price is high in the last, in the third quarter of 2016, mainly because of the destocking of the brown. Is that over? Do you think the inventory at the dealer has come back to normal? Is it going to interfere with the average price of spirits going forward?

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Unidentified Company Representative [7]

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Actually, the trade stock has come back to normal since January.

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Unidentified Participant [8]

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All right. Okay. Thank you Khun.

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Unidentified Company Representative [9]

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Thank you.

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Operator [10]

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Thank you. Our next question, Fransisca Widjaja from Macquarie. Please go ahead.

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Fransisca Widjaja, Macquarie - Analyst [11]

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Hi, everyone. And thank you for the call. I have three questions. Just on the non-alcohol segment, carbonated drinks displayed really good growth. Could you maybe share the market share for that?

And also, we saw a reduction in SG&A and there was quite good trend on the profitability. Is this mainly due to the reduction in A&P spending or otherwise which are the components?

And finally, I wanted to ask about the loss of the contract of the energy drink. Could you -- I am not sure which brand this is about and is the contract coming back in the future? Thank you.

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Unidentified Company Representative [12]

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I will respond for the non-al, because most of the non-al is now away on business trip. On the CSD, our volume growth is roughly at about 5% and the market share is maintained about 10%, okay.

And then in terms of expenses going down, partly because we have to postpone the activities, because the first 30 days of the mourning, the government asked us to cooperate not to have any activities at all. But for non-alcohol, we started to have activities right after the 30 days. But for alcohol we started having activities after 100 days. So, part of the A&P is refacing, but a lot of them are coming on the expense that we tried to save a lot and then we hope that to have the same kind of saving and improving the profitabilties. That's our target anyway for the next year -- late this year, next year.

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Fransisca Widjaja, Macquarie - Analyst [13]

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Right.

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Unidentified Company Representative [14]

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Well the contract is not energy drink. Actually, it's the Gatorade, the Gatorade, I don't know what you call it, isotonic. It belongs to Pepsi I think. That is very small volume. And then we are now developing our own product, our own brands to replace that.

Firstly, it doesn't affect much of the income. Second, we will not take back the contract or doing anything else for somebody else, so we will create our own brand and doing it.

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Fransisca Widjaja, Macquarie - Analyst [15]

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Right, right okay. So, for carbonated drinks, actually if I'm not mistaken, the volumes grew by 26% year on year, isn't it? So, that's actually much higher than the industry.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [16]

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You're talking about which one?

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Fransisca Widjaja, Macquarie - Analyst [17]

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The carbonated drinks segment.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [18]

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For the CSD we grow for the same --

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Fransisca Widjaja, Macquarie - Analyst [19]

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Yes.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [20]

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The number that is part of this number that you got.

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Fransisca Widjaja, Macquarie - Analyst [21]

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Okay. Maybe there has been some reclassification, because they were using the last quarter's numbers. Anyway, okay, so maybe there was some reclassification with the soda, water in the carbonated soft drink segment as well. Was there? I had 46 million liters as of fourth quarter, but maybe that was wrong.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [22]

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Because this quarter we moved to the non-alcohol. So Fransisca, are you okay with the number that you have?

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Fransisca Widjaja, Macquarie - Analyst [23]

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Yes, I am okay with it.

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Unidentified Company Representative [24]

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Okay. Thank you.

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Fransisca Widjaja, Macquarie - Analyst [25]

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Okay. Thank you.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [26]

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If you need further --. Okay.

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Operator [27]

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Thank you. Our next question, Divya Gangahar from Morgan Stanley. Please go ahead.

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Divya Kothiyal, Morgan Stanley - Analyst [28]

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Thank you very much. I had three questions. My first question is just Khun [OHI] on spirits. Khun, can you explain on the spirit margins the packaging costs are down about 20% year on year, but what we are seeing is molasses prices have been going up recently. So, could you explain what is the reason for packaging costs going down and going forward, is the higher molasses price is going to be an issue?

And also on the spirits ASP, can you just clarify whether that improvement in ASP in this quarter had anything to do with mix? So, if you can just explain what the brown spirits versus white spirits was for the first quarter.

The second question I had is for Khun [Edmund]. Just on new beer, I just wanted to understand how you are sensing the distribution and marketing ramp-up of this new product by the competitor and how do you think is the best way to respond to this new product. And given that you did gain some market share, do you think, what's been the driver of that improvement in market share in the first quarter.

And my last question is just an overall question. We've seen a host of management changes announced for the non-alcoholic beverage segment. Could you explain the rationale behind that and what Khun Vivek's role now is and how is this segment really organized. Thanks.

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Unidentified Company Representative [29]

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I think we'll start with the question number two first in terms of new beers. Basically, for new beers, we are very active in a social media theme targeting very much with the young adults, university students.

So, the initial launch in terms of distribution was actually quite limited largely in (inaudible) outlets. In terms of the open outlets where Chang is, is actually quite limited. So, in terms of trial, there was a bit of a trial and most of it actually came from (inaudible) drinkers themselves. So either they came from same drinkers or Leo. The switch from Chang to new beer is actually very minimum, if any. The response is actually pretty mixed because the liquid itself is actually very, very light and not very bitter. So, so far, the response has been a raving response from the consumers.

In terms of our market share, how do we maintain our market share? I think first of all how do we consider new beer. I think we are just very focused on what we are doing now, our current strategy because we have just recently launched some new stuff for Chang, in terms of the testing period, in terms of innovation, the test impact and that response from the consumer has been very positive.

They have also been very active in the social media scene. In fact, on the social media front, in terms of awareness and reach, we have surpassed both [Sing] and Leo. So, I think being focused on our strategy is what we intend to do and I think that has actually enhanced our current market position and slight growth. Okay.

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Divya Kothiyal, Morgan Stanley - Analyst [30]

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Yes, thanks.

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Unidentified Company Representative [31]

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Okay Divya, I will respond to question number three about the reorganizations. Vivek went back to Singapore to take the new positions of looking after new business, M&A and all the stuff. And the new guy who is coming has left also Singapore area, have a lot of experience on the front end like the sales, marketing. And that I think we all -- actually in terms of Vivek we already agreed about two years to go than it is the end of his term, so Lester is coming to work with us. So, to improve the operation even further, so that is the answer.

On the spirit Divya, I'm now not responsible for spirit but Khun [Ponta] will give you the response. Okay.

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Unidentified Company Representative [32]

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Okay, I think that in general, overall gross margins of the products in the first quarter, the margin is slightly up which slightly due to a few factors. One of them is the product mix change. When we sell the white spirit -- the packaging cost, for the white spirits are cheaper than the brown spirit. That is one of the reasons.

As for the molasses, I think overall, we use the average cost of the molasses that we have. Based on our data for the first quarter the average cost molasses to be used in production are not actually much higher than the same quarter last year.

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Divya Kothiyal, Morgan Stanley - Analyst [33]

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So just, Ponta Khun, in terms of the mix between brown spirits and white spirits, how has that trended in this quarter and have you seen any improvement in brown spirits?

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Unidentified Company Representative [34]

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I think the general trend and the mix -- the reason why the mix have changed to white spirit is because the percentage of the pie. When you look at the white spirits, the white spirit market movement means the level we sell decline the same as the market, the same as the brown spirit declined about the same rate for Hong Thong, which is the main brand. But the brand are closely related to the on premises trade which is a Blend 285 brand, which have the same much declining rate similar to the imported spirit.

What I am saying is that the Hong Thong and Ruang Khao, or the white spirit movement are quite similar. So with that component, with the component that is in chain, but the pie shrink because of the brown spirit international star which is Blend 285.

It's moving now much higher than Hong Thong. But the market share in Blend 285 itself, we don't lose market share. So what it meant is that the international grew spirits style -- international style spirit actually that market is shrinking at a much faster rate due to the occasions on premises. And it's more like a festive season that causes this volume to move down. I hope that explains.

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Divya Kothiyal, Morgan Stanley - Analyst [35]

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Great. And is there an expectation of this coming back? I mean is that more to do because it's consumed more on premise and this was the mourning period hence Blend 285 hasn't done as well, or do you think this is an ongoing trend which may last longer?

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Unidentified Company Representative [36]

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We have been monitoring Blend 285 market share and since in the past six months, it seems to have been maintained to this stage. The market share hasn't been lost. But when we lose market share, it's only lose to Hong Thong and SangSom. So, it traded between the three brands, among the three brands.

And so, the questions about whether it's going to be an ongoing trend, it's hard to say. I think we have seen the brown spirit, Blend 285 market share have been stabilized. And we are working on some premiumizations of packagings on the Blend 285 products that hopefully will then sustain the market share in the markets. We are quite happy with the level of market share that Blend 285 have as a total bounce rate market.

So, the answer is we don't think that it's going to go down further. We are working just to premiumize the product a bit so that it's still attractive to the consumer.

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Divya Kothiyal, Morgan Stanley - Analyst [37]

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Okay. Thank you very much.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [38]

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Thank you.

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Operator [39]

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Thank you. Our next question, Jonathan Seow from CIMB. Please go ahead.

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Jonathan Seow, CIMB - Analyst [40]

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Hi, thanks. Could I just clarify what your market share in the beer segment is? Will you be able to quantify this?

The second question is on the year-end bonus. I understand there is a bit of a timing difference. Will you be able to exclude the year-end bonus in the previous quarter and give us a sense of either what margins will be or what the year-on-year earnings growth will be. Thank you.

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Unidentified Company Representative [41]

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For the beer market share, like I have mentioned, we improved slightly because there was a bit of a difference for a short while, but now we are back to around 40%.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [42]

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So, Jonathan, you're talking about the assessment of the bonus, right, in the third quarter that's impacting the third quarter. In the third quarter, it will like --

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Unidentified Company Representative [43]

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Jonathan, what's exactly the question, so I can ask our CFO to respond? What's exactly the question.

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Jonathan Seow, CIMB - Analyst [44]

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So, in the previous quarters or 1Q 2016 which is given a change, 1Q 2016 there were bonuses paid out -- year-end bonuses paid out. If you exclude that, what would the earnings growth be this 1Q 2017.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [45]

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Hi, Jonathan. The difference that one is roughly THB100 million.

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Jonathan Seow, CIMB - Analyst [46]

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About THB100 million of bonuses, yes.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [47]

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The one adjustment, yes.

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Jonathan Seow, CIMB - Analyst [48]

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That's all for me. Thank you.

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Unidentified Company Representative [49]

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Thank you.

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Operator [50]

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Thank you. Our next question Marianne Chin from Morgan Stanley. Please go ahead.

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Marianne Chin, Morgan Stanley - Analyst [51]

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Hi. Thank you for the call. My first question is on the prices. My understanding is that you took a price hike in late May. Was there another price hike taken this quarter?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [52]

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So, your question is you understand that we increased the price in May 2016. Are there any new increase in October to December 2016, right?

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Marianne Chin, Morgan Stanley - Analyst [53]

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Yes, correct.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [54]

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There is no price increase for the last quarter.

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Marianne Chin, Morgan Stanley - Analyst [55]

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Okay, so the last price hike was in May.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [56]

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Yes.

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Marianne Chin, Morgan Stanley - Analyst [57]

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Okay. Then what actually happened, because in the previous quarter, in the third quarter we actually saw spirit realizations dip. And in this quarter, if brown spirits didn't come back, why did spirits realizations actually increase maybe quarter on quarter or was flattish year on year?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [58]

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Hi Marianne, since we do not increase the price in this quarter, it's mainly because of the product mix that makes the average price increase.

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Marianne Chin, Morgan Stanley - Analyst [59]

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Okay. Can I check on your raw material cost for beer? So, you mentioned that malt prices are lower now. You had your inventory and how many months of this lower malt prices do you have locked in?

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Unidentified Company Representative [60]

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We have locked in for the whole -- the next 12 months.

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Marianne Chin, Morgan Stanley - Analyst [61]

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Similar to last quarter's prices, right?

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Unidentified Company Representative [62]

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Yes.

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Marianne Chin, Morgan Stanley - Analyst [63]

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Okay. And what is the current return rate for your beer bottle?

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Unidentified Company Representative [64]

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I think it's around 60%.

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Marianne Chin, Morgan Stanley - Analyst [65]

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Okay. Is there a target rate you think you can achieve, or you see this continuing to go up?

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Unidentified Company Representative [66]

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So, I think we are comfortable with this and as the market moves along, so I think anything more is a bonus, but not less than 60%.

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Marianne Chin, Morgan Stanley - Analyst [67]

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Okay. Can I also check what's actually causing the delay in your F&N and FCL restructuring?

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Unidentified Company Representative [68]

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For our [tier 1] we are targeting this year, this is supportive of our financial advisor but it should be happen within this year, within this financial year.

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Marianne Chin, Morgan Stanley - Analyst [69]

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Okay. All right. That's all I have. Thank you so much.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [70]

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Thank you.

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Operator [71]

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Thank you. Our next question, Nicholas Teh from Credit Suisse. Please go ahead.

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Nicholas Teh, Credit Suisse - Analyst [72]

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Hi. Just a couple of questions from me. Firstly, I just wanted to ask, the previous couple of quarters you were mentioning that there was some down-trading in the spirits business from brown to white. I just wanted to get a gauge given that we've seen a recovery quarter on quarter in the ASPs. Would that kind of tell us that there is -- you wouldn't expect further down-trading and it's the end of that?

And the other question, I just want to get a bit more clarity on the non-alcohol reshuffling in terms of the management. Lester comes over just to replace Vivek on the Sermsuk side. Just on the Thai drink side, just wanted to check what the plans are there.

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Unidentified Company Representative [73]

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Okay, on the spirt side, the questions on down-trading, as we are now based on the market we see -- we don't expect any further change in proportions of whites and brown where you are talking about down-trading into the white. I think they are processed probably. Now I think the brown/white movement quite in line with the economy and consumer sentiment.

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Unidentified Company Representative [74]

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On Lester, he focused on Sermsuk and then he's helped a bit on the Thai drinks. That all. What I mean is he took over Vivek sort of the responsibilities because Vivek now moved to Singapore to F&N.

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Nicholas Teh, Credit Suisse - Analyst [75]

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Okay. I just wanted to also just ask if we could get your thoughts on Sabeco and how you see it? What generally your thoughts will be in terms of positioning Chang in Vietnam if just got the opportunity to get into that market through that venture.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [76]

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For the acquisition in terms of about Sabeco, we cannot say anything until we announce. If there is anything, we announce it on SGX first. We cannot comment on this.

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Nicholas Teh, Credit Suisse - Analyst [77]

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Okay. That's all for me. Thanks.

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Operator [78]

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Thank you. Our next follow-up question Thitithep from Phatra Securities. Please go ahead.

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Thitithep Nophaket, Merrill Lynch/Phatra Securities - Analyst [79]

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Hi, I have just one follow-up question. I observed that your new soda water Rock Mountain is quite well received by the market. Can you disclose the market share of the new product right now and maybe your target market share? Thank you.

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Unidentified Company Representative [80]

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(inaudible). The Rock Mountain soda water was introduced to the markets sometime in the September of 2016 and it was made available only in non-returnable format 325 ml. Originally, the plan was to have the market advertising and penetration during the festive season of last year. But due to unfortunate circumstances as we all knew the October, November coming into December wasn't such a great festive season for the year 2016. And therefore, we have moved our marketing spending on advertising on Rock Mountain soda water towards the later part of December and we're starting to do it more and more in January.

So, to answer back to the market share -- to answer to that, our market share based on Nielsen data in January is about 5%. That's the number that we have.

It's an early stage number because that's -- and then this number, the Nielsen number, is actually an off-premise, off trade, general trade number and solely available for the 325 ml only. The soda market itself is about 50% returnable, 50% non-returnable. So, I think this Nielsen is only the answer to the non-returnable part of the market.

Just to add to the soda water, starting in the middle -- January 16, we have made available soda water in non-returnable format. I'm sorry, returnable format which is 400 ml returnable format which is sale on crates and we have made that exclusively distributed by Sermsuk. So, it is another product that's being sold by Sermsuk directly to the store or sell it to our bar supply and the sub-agent supply at wholesaler.

So, those products have been made available now. So, that's also -- just to answer for Sermsuk because now Sermsuk would have three format of returnable glass which is soda water, cola and flavored drinks and also water that's made available.

In terms of market share, (inaudible) I think we have made an interview in a newspaper before back in November that the market share is about 20% to 30% in the soda water market would be an ideal market share price. That's we are still on target for that.

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Thitithep Nophaket, Merrill Lynch/Phatra Securities - Analyst [81]

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Okay. Thank you very much.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [82]

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Thank you.

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Operator [83]

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Thank you. Our next question, (inaudible). Please go ahead.

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Unidentified Participant [84]

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Hi. Thanks very much for the call and just a couple of questions from me. The first question is on the raw material cost again. The bottle prices we have seen coming down. Are you able to lock in these prices for the next 12 months as you have with your malt contracts?

And my second question is to try and understand, the impact of your reclassification of brining soda water business into the spirits business. I mean it's a very small part at the moment. But what kind of revenue or net profit expectation are you expecting for the year ahead because that will kind of allow us to compare apples-to-apples how spirits has really grown by the end of the year.

And my third question is on the balance sheet. The trade accounts payables have dropped much more than the sales drop. Are you getting higher buyer discounts by making payments earlier or was this due to a decrease in the spirits business which typically has better credit terms than the rest?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [85]

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Hi. To recap about the raw material for the beer, for the amount we lock in for the next 12 months, just to confirm that, yes with the current price. Yes, for other questions, we will come back to you soon.

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Unidentified Participant [86]

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All right, so on the packaging, are you able to enter forward contracts and lock that in for 12 months as well?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [87]

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For the packaging costs, for the bottle we also have a yearly contract so it is also locked in for the year. For accounts payable?

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Unidentified Company Representative [88]

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(inaudible). Account -- as at December, account payable down due to its come through the credit term, because on the September it's still on the credit term. We not pay. But on December you have the credit term, so we have to pay them, we pay them, so they are down. It's in the December festive season.

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Unidentified Participant [89]

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I am actually comparing December 2015 versus December 2016. I think the drop was around 14% whereas the sales drop overall was about 8%.

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Unidentified Company Representative [90]

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Yes. Because we pay them.

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Unidentified Participant [91]

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Okay. So, (multiple speakers).

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Unidentified Company Representative [92]

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In credit term, sometimes we mixed up, we mixed and they kind of increase. The numbers say an increase.

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Unidentified Participant [93]

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Okay. So, it's purely a timing issue and you are not paying earlier for that.

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Unidentified Company Representative [94]

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For September, we have to make stock in order for the part in the festive season. So September we have more stock with a higher account payable. On December, you pay the -- we make a stock with the coming down and so because of the coming season.

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Unidentified Participant [95]

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Understood. What I meant to ask was December 2015 versus December 2016, the trade accounts payables had dropped and I'm just wondering if that was to get better discounts or is that just a timing issue, not (multiple speakers).

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Unidentified Company Representative [96]

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Yes.

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Unidentified Participant [97]

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Okay. Understood.

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Operator [98]

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Thank you. Our next question, Fransisca Widjaja from Macquarie. Please go ahead.

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Fransisca Widjaja, Macquarie - Analyst [99]

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Hello. Just two follow-up questions from me again. So, on the price increases, you mentioned earlier due to the excise tax expectations. So given that we are expecting another excise tax hike this year, are we expecting to see prices increase another time also, or is this ahead of that?

And then the second question is when you mentioned that the proportion of white and brown didn't change, you've also mentioned that the packaging costs decreased because of the higher white spirit segmentation. So, I am a bit confused by that statement. That's it from me. Thank you.

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Unidentified Company Representative [100]

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On the brown spirits, I think the answer I was giving was we don't expect the trend of the trading down from brown spirit to white to continue. So, the ratio we've seen in the past, in the last quarter would have been the ratio we expecting in the future.

And so, then I was answering to say that during the past quarter, there was less sale of Blend 285 from the declines in Blend 285 because it's on premises. Those are a bit higher than our Hong Thong, which are our main brands. And now -- and then the white spirit which is Ruang Khao brand and Hong Thong brown spirit, the market softened. It's about the same. So, for that mix, there isn't any mix. But it changed, but the slight decline was a bit greater, so it created this product mix that showed where the packaging cost is lower. But what I'm saying is that in the future we don't expect that to continue.

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Fransisca Widjaja, Macquarie - Analyst [101]

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Understood. Understood. And could you disclose that mix please?

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Unidentified Company Representative [102]

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No. I mean normally we don't discuss about it, because there are many ways to look at what the mix of brown and white. There is a mix on price, a mix on volume and the number we look inside is the mix without excise tax, which there's a different mix we rather not discuss about.

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Fransisca Widjaja, Macquarie - Analyst [103]

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Okay.

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Unidentified Company Representative [104]

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Okay, let's discuss about the tax increase. We don't expect to have the next tax increase, excise tax increase, until July, August this year.

And then to your question whether we want to move up the prices depend, depend on the -- we also look at the opportunities, look at the competitors and everything so we cannot answer now. But as I said before, if we have an opportunity, then we move it up, but we have to also evaluate the situation carefully, not to lose volume or market share because of the price increase.

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Fransisca Widjaja, Macquarie - Analyst [105]

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Right. So, you earlier mentioned you are not expecting the next excise tax hike to be this year, is that right?

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Unidentified Company Representative [106]

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This year, but it will be in at least the third quarter of this year.

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Fransisca Widjaja, Macquarie - Analyst [107]

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Yes, okay. So, then what you are saying is that you will monitor and see again if you will actually increase based on competitors, landscape and etc.

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Unidentified Company Representative [108]

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Yes.

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Fransisca Widjaja, Macquarie - Analyst [109]

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Okay. Just the last question from me. Could you quantify the savings from the low A&P this quarter?

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Unidentified Company Representative [110]

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I think roughly between THB600 million to THB700 million all in beer and spirit mainly be spirit.

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Fransisca Widjaja, Macquarie - Analyst [111]

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Okay. Understand. Understood. Okay, thank you very much.

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Operator [112]

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Thank you. Our next question, Ian [McLeish] from Bernstein. Please go ahead.

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Ian McLeish, Bernstein - Analyst [113]

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Good evening everybody. And just a couple of questions. One that kind of follows on from the last point you made. So, with that THB600 million to THB700 million of savings that you got in Q1, do you expect to drop that to the bottom line or do you expect to reinvest that to kind of catch up and drive the top line?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [114]

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Can you repeat it again? Sorry.

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Ian McLeish, Bernstein - Analyst [115]

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Yes, just about the THB600 million to THB700 million of savings that you've made in A&P, do you expect to bank that as savings or do you expect to invest more heavily in order to grow going forward?

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Unidentified Company Representative [116]

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Just to answer that in general, that's not -- it's a saving as to it didn't happen and it will not happen because the consumption for the quarter was -- we went into the mourning period. So, there was no consumption. And the consumption wasn't delayed because it cancelled for the quarter. So that spending, we didn't spend, we're not going to spend.

Now, if you ask then what we doing now, we are doing -- what are we doing this quarter is to spend what we planned to spend originally, because there are actually two spending seasons -- December season, April season. So, this season is as usual. So, that's just to answer.

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Ian McLeish, Bernstein - Analyst [117]

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Great. Thanks. That's very helpful. And then second question was just about the non-alcoholic beverage cost of goods sold per liter. Could you really help me understand why the cost of good sold per liter for non-alcohol has gone down and that's the nature of that savings?

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Unidentified Company Representative [118]

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Mainly two reasons. One of them the product mix part of them are water now okay. And secondly on Oishi, the production utilization is quite high so the costs has come down on the PET, so that's two reasons.

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Ian McLeish, Bernstein - Analyst [119]

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Great. Thank you very much.

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Operator [120]

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Thank you. Our next question, Andy Sim from DBS Vickers. Please go ahead.

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Andy Sim, DBS Vickers - Analyst [121]

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Hi. Thanks for the call. Just a quick question for me. This quarter, or rather the soda has shift included in spirits. I presume soda has lower margins vis-a-vis spirits, so going forward, would we see that spirits margin will as a reported basis will come off because of soda margins?

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Unidentified Company Representative [122]

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Andy, the size of our spirits business, and when we report in revenue terms, is including excise tax. So that's the beginning why you see that. And then the soda water is such a very low values products, so even if we have 20%, 30% market share, you're not going to see much of the changes in our top line. So it's not going to be something you will see much impact in our product Group's P&L.

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Andy Sim, DBS Vickers - Analyst [123]

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Okay, sure. Thanks. Just wanted to make sure going forward if you see anything in margins, we won't be caught off guard because of soda. Okay. Thank you. Thanks for it.

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Operator [124]

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Thank you. Our next follow-up question, Lin (inaudible). Please go ahead.

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Unidentified Participant [125]

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I think it was one of my questions earlier on, but I didn't manage to listen to the answer. I was just wondering would you be able to disclose when you said that the Rocky Mountain soda water target market share was around 30%, what kind of revenues, or what kind of net profits will we be able to see from the product then? And is this a one year target, or would you say it's more a two three year and medium-term?

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Unidentified Company Representative [126]

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I think when we view soda, water its less inside the non-alcoholic beverage people don't ask of this question, so we just moved the reporting to put in spirit and then people started pay attention to this one product.

So, I think for us internally, it's one of the mix of products that we decided to move to the spirit side so that because it's a mix product rather than direct to consumer type of margin products.

So, to answer to it, the numbers are not that big and from the producer price, which means produce and sell into the wholesaler, the number for the whole market is only like THB7 million. So even if you have 20%, so that's THB1.4 billion, that's THB1.4 billion. Again, this is nothing compared to the revenue that we reported. So, even we get to that, the level is not going to be that big.

Now, in terms of our profit, this is a new product launch. So, I will say the new product launch generally would have the negative P&L from the beginning because due to marketing spend, and yearly for the next three year we will want to move it around the breakeven point from the product itself.

We wouldn't be able to quantify the -- I mean we would say that we would not disclose the quantum of this number yet as to what P&L of our soda because it's part of our spirit business. But we have pointed out in an earlier press interview that our margin spend for the product for the year is around THB250 million for the year.

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Unidentified Company Representative [127]

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Okay. I would like to add that actually, the immediate benefit will go to Sermsuk because we asked Sermsuk to distribute this returnable soda. Sermsuk doesn't have to invest anything. The only thing they get is the net-net distribution from the internal contract, net distribution income and that will help Sermsuk. We're talking about THB1.4 billion. That's let's say half that, THB700 million is quite sizable to Sermsuk in terms of the -- meet that actually the immediate benefit to the company, to Sermsuk company.

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Unidentified Participant [128]

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All right. Very well, understood. Thank you very much.

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Unidentified Company Representative [129]

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Thank you.

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Operator [130]

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Thank you. Our next question Nicholas Teh from Credit Suisse. Please go ahead.

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Nicholas Teh, Credit Suisse - Analyst [131]

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No, my question is already answered. Thanks.

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Operator [132]

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Thank you. Our next question Joshua from (inaudible). Please go ahead.

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Unidentified Company Representative [133]

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Hi. Good evening. Thanks for the call. Just have a question on spirits revenue. So, in Q3, you guys did quite proudly on the top line and last quarter we've seen the mourning period or the top line has fallen as well. So I think moving forward for next quarter, how should we think about the spirits revenue. Will there be still this decline, or will there will be growth coming? I'd just like some color on that.

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Unidentified Company Representative [134]

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Yes, so I think from -- now you asked forward looking as to what the outlook would look like. But I think let's stated the fact that the king passed away on October 13, and generally in the Thai culture, the mourning period for generally for anyone stands for about 100 days. So, that's 100 days was about January 28. So, since then the mood in the country is improving and therefore we expect the selling season which is in April, March and April season to return to its normal mode. So, I think that's as far as we want to say about our prospect of the alcoholic beverage sale.

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Operator [135]

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Thank you. Our next question, (inaudible) from BlackRock. Please go ahead.

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Unidentified Participant [136]

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Hi. Thank you for the opportunity. Could you talk about how much flexibility you have on your balance sheet to make large acquisitions? Thank you.

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Sithichai Chaikriangkrai, Thai Beverage Public Company Limited - CFO [137]

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Sithichair Chaikriangkrai, CFO. I have blessings with [movie and fish]. Normally they step up with (inaudible) on net debt, net in the list (inaudible) to EBITDA for beyond to 2.5 times. You can calculate what yourself to 2.5 times will be about 1.4 times only.

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Unidentified Participant [138]

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Was that 4.5?

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Unidentified Company Representative [139]

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2.5 times.

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Unidentified Participant [140]

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And it's only that metric that they look at, or they consider as important?

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Unidentified Company Representative [141]

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They take this 2.5 times, but you can go step beyond this one, about full year up to 4 times maximum and that will have a big impact within 2.5 times within two years.

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Unidentified Participant [142]

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So, 4.5 times and then within two years.

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Unidentified Company Representative [143]

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4 times. We can go make a spend up to net debt to EBITDA maximum 4 times and have to bring back down now to 2.5 times within two years.

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Unidentified Participant [144]

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I see. Thank you.

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Operator [145]

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Thank you. Our next question, [Shane] from UBS.

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Unidentified Participant [146]

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Hi. It's Shane from UBS. I was just wondering if you can give me a bigger picture outlook on your business revenue growth for this year, spirits, beer specifically, and also are you seeing marketing expenses to be more aggressive this year than last year?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [147]

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Hi Shane. For this we are not giving the guidance in terms of the forward looking for the growth. Sorry about that.

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Unidentified Participant [148]

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Okay. How about marketing expenses for the year?

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Unidentified Company Representative [149]

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I think for the marketing expenses, it will be as per normal. I mean according to the standard ratios, vis-a-vis your NSR. So there is nothing extravagant as per our plan. Thank you.

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Unidentified Participant [150]

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Okay. Thank you.

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Operator [151]

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Thank you. Our next question, Divya from Morgan Stanley. Please go ahead.

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Divya Kothiyal, Morgan Stanley - Analyst [152]

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Thanks. I just had a couple of follow-up questions. One was for the non-alcoholic beverage business. Can you just give us the updated market shares for Oishi, Est and bottled water. And also from a vision 20/20 perspective, what is the target for the management that when should this segment actually breakeven at the EBIT level?

And the second is, sorry, I am asking this again, but just on spirits realization, if I look at it on a sequential basis, it went up like 5%, 6%. And given that you did not really take any price hikes and white spirits still remained dominant in this segment, I'm just trying to get my head around why the realizations were better if there was in fact a plan to wait five, which is the higher value product was still languishing in this quarter. So, if you can help me understand that better, thanks.

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Unidentified Company Representative [153]

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Divya, okay, the market share for green tea -- Oishi green tea is now 47.4%. We are now the market leader by far and Est is maintained at 10.2%, as I mentioned earlier, it's about 10%. And then water, Crystal, we are now at about 18% and then we are rank number two. If we include Chang, it will 21%. Thank you.

Well I think Lester will come in and I think, I am sure that we also mentioned what he promised, or what he has sort of mentioned earlier and then as a management of Thai Bev, we wish it's going to be like that soon.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [154]

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Hi Divya, is it okay for your questions?

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Divya Kothiyal, Morgan Stanley - Analyst [155]

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No sorry, I did not quite get what you mentioned on the breakeven. Did you mention something on breakeven? I didn't quite hear it.

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Unidentified Company Representative [156]

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I will say it again Divya. Lester probably kept the same brief during transition period from Vivek.

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Divya Kothiyal, Morgan Stanley - Analyst [157]

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Okay.

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Unidentified Company Representative [158]

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Then we hope he will achieve what Vivek has promised the management.

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Divya Kothiyal, Morgan Stanley - Analyst [159]

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Okay. Understood. Understood. Just then my question on spirits, so this is clear.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [160]

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Sorry, can you repeat again?

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Divya Kothiyal, Morgan Stanley - Analyst [161]

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Just the question on spirit realizations in this quarter. I'm just trying to understand that on a sequential basis, like say September quarter to December quarter, the realizations for spirits went up by about 5% despite the fact that Blend 285 is still obviously seeing some decline. So, I'm just trying to understand why would the realizations quarter on quarter go up if there was no price hike taken and if the brown spirits were not really coming back?

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [162]

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Hello Divya, actually the portion of what you mentioned about the portion of the brown and the white is improved in the October to December 2016 from the previous quarter. That's why you see the improvement in terms of the average selling price.

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Divya Kothiyal, Morgan Stanley - Analyst [163]

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Okay. So, you are saying brown spirits actually did improve in terms of proportion compared to the previous quarter. So, that explains the realization.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [164]

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Yes, that's right. But as [Bhart] mentioned in terms of the proportion, now is proportion of white and brown now is stable going forward.

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Divya Kothiyal, Morgan Stanley - Analyst [165]

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Okay. All right. Thank you so much.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [166]

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Yes.

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Operator [167]

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Thank you. There are currently no questions. (Operator Instructions). As there are no further questions, I will now hand the session back to Ms. Namfon Aungsutornrungsi. Please go ahead.

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Namfon Aungsutornrungsi, Thai Beverage Public Company Limited - Head, IR [168]

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Thank you again to Thai Beverage conference call tonight. If you have more questions, please feel free to contact us at ir@thaibev.com. Thank you and have a good night.