Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2014
Reporting Date: May 7, 2014
Currency: Brazilian Reais (R$) unless otherwise noted
Accounting Standard: International Financial Reporting Standards (IFRS)
Ambev S.A. reported its first-quarter 2014 results, highlighting double-digit growth in net revenue and Normalized EBITDA. The company operates across Brazil, Latin America North (LAN), Latin America South (LAS), and Canada. The results reflect organic growth driven primarily by Brazil's beer division, offset by declines in Canada due to weather and industry conditions.
Key Financial Metrics
| Metric | 1Q 2014 (R$ million) | 1Q 2013 (R$ million) | Change (%) |
|---|---|---|---|
| Net Revenue | 9,045.1 | 7,832.0 | +16.9% |
| Normalized EBITDA | 4,051.0 | 3,624.1 | +14.8% |
| Normalized Profit (Ambev Holders) | 2,603.4 | 2,374.2 | +9.7% |
| Normalized EPS | R$ 0.16 | R$ 0.15 | +9.5% |
| Cash Generated from Operations | 2,620.0 | 1,760.4 | +48.8% |
| Capital Expenditures (CAPEX) | 875.8 | 544.4 | +60.9% |
| Net Cash Position | 4,951.5 | 8,921.0 (Dec 2013) | -44.5% |
| Consolidated Debt | 2,754.3 | 2,905.8 (Dec 2013) | -5.2% |
Margins: Gross margin expanded 140 basis points to 66.7%. Normalized EBITDA margin contracted 90 basis points to 44.8%, primarily due to a decrease in "Other operating income" compared to a one-time credit in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue grew 16.9% organically, driven by a 6.8% volume increase and a 9.4% increase in net revenue per hectoliter (NR/hl). Brazil Beer was the primary driver with 21.1% revenue growth.
- Cost Pressures: Cost of Goods Sold (COGS) increased 12.2% (5.0% per hectoliter), mainly due to higher currency hedging costs, partially offset by lower commodity hedges (aluminum, barley, corn, sugar).
- SG&A Expenses: Selling, General & Administrative expenses rose 17.2%, driven by increased sales and marketing investments for the 2014 FIFA World Cup in Brazil, higher distribution costs, and variable compensation accruals.
- Segment Performance:
- Brazil: Strong performance with 19.1% revenue growth and 15.1% EBITDA growth.
- LAS (Latin America South): EBITDA grew 23.1% to R$ 847.7 million, driven by industry expansion and margin improvements.
- HILA-Ex: EBITDA grew 12.1% to R$ 105.5 million, with margin expansion in the Dominican Republic.
- Canada: EBITDA declined 16.3% to R$ 210.7 million due to poor weather, the timing of Easter, and industry contraction.
- Other Operating Income: Declined 28.3% to R$ 238.3 million, largely because 1Q13 included a one-time R$ 120 million credit from government grants in Brazil.
Guidance, Outlook, and Risks
2014 Outlook:
- Revenue: Maintains guidance of high single to low double-digit net revenue growth for the full year.
- Brazil Beer: Expects industry volume growth to resume in 2014, though a recent federal tax increase (effective June) is expected to create headwinds for volumes.
- Costs: Expects COGS per hectoliter in Brazil to grow mid-single digits. SG&A expenses in Brazil are expected to grow high single to low double-digits due to World Cup marketing and distribution investments.
- CAPEX: Revised Brazil CAPEX guidance downwards to below the previous year's level of R$ 2.8 billion, citing the negative volume impact from the tax increase.
Risks and Contingencies:
- Taxation: Recent Brazilian government tax increases may impact consumer prices and industry volumes.
- Macroeconomics: Caution regarding the Argentinean macroeconomic environment in the LAS region.
- Seasonality/Weather: Canada results were negatively impacted by poor weather and calendar shifts (Easter).
- Special Items: Recorded R$ 6.6 million in restructuring costs in 1Q14.
Investor Verification Checklist
- Dividend Impact: Verify the impact of the R$ 2 billion dividend payment announced March 25, 2014, on the reported net cash position of R$ 4,951.5 million.
- Normalized vs. GAAP: Confirm the reconciliation between Normalized EBITDA/Profit and IFRS GAAP measures, noting the exclusion of special items and non-controlling interests.
- Brazil Tax Headwinds: Assess the potential volume impact of the June 2014 tax increase on the Brazil Beer segment, which drives the majority of revenue.
- Canada Turnaround: Monitor the integration of Grupo Modelo brands (started March 1, 2014) and its ability to offset industry contraction in Canada.
- World Cup Spend: Evaluate the ROI on increased SG&A spending related to the 2014 FIFA World Cup marketing initiatives.