Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2017 (2Q17)
Reporting Date: July 27, 2017
Accounting Standard: International Financial Reporting Standards (IFRS)
Currency: Brazilian Reais (R$)
Ambev S.A. reported its 2Q17 results, describing the quarter as a "bridge quarter" where Brazil operations faced expected headwinds in Cost of Goods Sold (COGS) due to inflation and currency impacts, while international operations (Latin America South, Central America & Caribbean, and Canada) delivered strong growth.
Key Financial Metrics
| Metric (R$ Million) | 2Q17 Reported | 2Q16 Reported | Change (Reported) | Change (Organic) |
|---|---|---|---|---|
| Net Sales | 10,268.0 | 10,377.2 | -1.1% | +4.8% |
| Gross Profit | 6,219.8 | 6,482.6 | -4.1% | +1.4% |
| Gross Margin | 60.6% | 62.5% | -190 bps | -200 bps |
| Normalized EBITDA | 3,943.3 | 4,204.6 | -6.2% | -0.7% |
| Normalized EBITDA Margin | 38.4% | 40.5% | -210 bps | -210 bps |
| Normalized Net Profit | 2,141.5 | 2,194.7 | -2.4% | N/A |
| Normalized EPS (R$) | 0.13 | 0.13 | -1.7% | N/A |
| Cash Flow from Operations | 2,424.6 | 2,081.9 | +16.5% | N/A |
| CAPEX | 751.0 | 1,151.3 | -34.8% | N/A |
Liquidity and Debt: As of June 30, 2017, Ambev held a net cash position of R$ 3,821.4 million. Consolidated debt totaled R$ 4,917.6 million, while cash and cash equivalents less bank overdrafts were R$ 8,730.3 million.
Material Changes vs. Prior Period
- Revenue Mix: Organic revenue grew 4.8% driven by international markets: Latin America South (LAS) +36.2%, Central America & Caribbean (CAC) +6.9%, and Canada +1.4%. This was partially offset by a 4.1% decline in Brazil.
- Cost Pressures: COGS increased 10.6% (11.6% per hectoliter) primarily due to inflationary pressures and unfavorable foreign exchange (FX) impacts in Brazil and LAS. Cash COGS per hectoliter in Brazil rose 9.8% in the quarter.
- Profitability: Normalized EBITDA declined 0.7% organically. Gross margin compressed by 200 basis points to 60.6% due to cost inflation outpacing price increases in key markets.
- Volume Trends: Total volumes were flat (-1.1% organic). Brazil volumes declined 4.7%, while LAS volumes grew 12.2% and CAC organic volumes grew 1.6%.
- Segment Performance:
- Brazil: EBITDA down 15.7% to R$ 2,087.2 million; margin compressed 540 bps to 39.2%.
- CAC: EBITDA up 29.7% to R$ 431.9 million; margin expanded 770 bps to 38.3%.
- LAS: EBITDA up 33.9% to R$ 806.7 million; margin compressed 60 bps to 38.7% due to FX in Argentina.
- Canada: EBITDA up 3.9% to R$ 617.6 million; margin expanded 90 bps to 35.7%.
Guidance, Outlook, and Risks
Management Commentary: Management views 2Q17 as a bridge quarter with Brazil results affected by temporary COGS headwinds expected to dissipate in the second half of 2017. They remain "cautiously optimistic" for the second half, anticipating a resumption of EBITDA growth as they cycle more favorable net revenue per hectoliter comparisons and cash COGS per hectoliter growth moderates to flattish or low single digits.
Outlook by Region:
- Brazil: Focus on commercial platforms and cost savings to improve profitability despite a slow economic recovery.
- International: Significant top line and EBITDA margin expansion potential in CAC. Confidence in LAS despite macro challenges. Continued sustainable growth expected in Canada.
Risks and Contingencies:
- Macroeconomic Environment: Adverse and volatile political and economic conditions in Brazil and Argentina impacting consumer disposable income and costs.
- Currency Fluctuations: Significant impact on reported results and COGS due to the appreciation of the Brazilian Real and devaluation in Argentina.
- Commodity Prices: Inflationary pressures on raw materials.
Investor Verification Checklist
- COGS Trajectory: Verify if the projected moderation in cash COGS per hectoliter (flattish to low single-digit growth) materializes in 3Q17 as management forecasts.
- Brazil Volume Recovery: Monitor if Brazil volumes stabilize or grow given the challenging macroeconomic environment and the 4.7% decline in 2Q17.
- FX Sensitivity: Assess the impact of continued currency volatility in Argentina (LAS) and Brazil on consolidated margins and reported earnings.
- Dividend Payouts: Confirm the sustainability of the R$ 3.6 billion in dividends paid/announced year-to-date against cash flow generation.
- International Growth: Validate the sustainability of the high growth rates in LAS (+36.2% revenue) and CAC (+6.9% revenue) amidst local inflation and competitive pressures.