Ambev S.A. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the filing does not provide a clear standalone Q4 income statement. Financial statements are prepared under IFRS in Brazilian reais (R$).
Business context
Ambev produces, distributes and sells beer and non-alcoholic beverages across 18 countries in the Americas. Its reportable segments are Latin America North (Brazil and Central America and the Caribbean), Latin America South, and Canada. Brazil contributed 53.4% of 2018 net sales. ABI indirectly controlled 61.9% of the company’s voting and total capital at year-end.
Key financial and operating metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | R$50.23bn | R$47.90bn | +4.9% |
| Sales volume | 158.7m hl | 162.8m hl | -2.5% |
| Gross profit / margin | R$30.96bn / 61.6% | R$29.86bn / 62.3% | Profit +3.7%; margin -0.7 percentage points |
| Operating income / margin | R$16.99bn / 33.8% | R$16.43bn / 34.3% | Income +3.4%; margin -0.5 percentage points |
| Net income | R$11.38bn | R$7.85bn | +44.9% |
| Net income attributable to Ambev shareholders | R$11.02bn | R$7.33bn | +50.4% |
| Basic EPS | R$0.701 | R$0.467 | Higher |
| Operating cash flow | R$17.91bn | R$17.87bn | +0.2% |
| Capital expenditures | R$3.57bn | R$3.20bn | Higher |
| Cash dividends and interest on equity paid | R$8.81bn | R$8.82bn | Approximately flat |
At December 31, 2018, cash and cash equivalents were R$11.46bn, total interest-bearing debt was approximately R$2.42bn, and the reported net cash position was R$9.05bn. Current assets were R$25.33bn versus current liabilities of R$24.83bn, leaving net working capital of R$501m. Total equity was R$57.55bn. The company reported total liabilities of R$36.58bn.
The effective tax rate fell to 13.6% from 39.3% in 2017. Management attributed much of the year-over-year net income increase to the absence of the 2017 PERT tax regularization expense, alongside interest-on-equity deductions, tax incentives and other tax effects. Net finance cost increased 9.4% to R$3.82bn, primarily due to derivative and foreign-exchange losses.
Material changes versus FY2017
- Net sales grew despite lower total volume, mainly reflecting higher revenue per hectoliter, pricing and mix. Revenue per hectoliter rose 7.6% to R$316.5.
- Brazil beer volume declined 3.1%; Brazilian non-alcoholic beverage volume fell 8.7%. Brazil sales increased 1.8%, supported by higher revenue per hectoliter.
- CAC sales increased 22.8%, with volume up 7.2%. Canada sales rose 13.3%, substantially supported by currency translation and higher revenue per hectoliter, while volume declined 1.9%. Latin America South sales were approximately flat.
- Cost of sales rose 6.8%, faster than revenue, and gross margin narrowed. Management cited higher hedged input costs, particularly aluminum, and currency translation effects.
- Operating cash flow was nearly unchanged. Investing cash outflow rose to R$3.68bn, while financing cash outflow was R$13.22bn, including R$3.06bn to acquire non-controlling interests following the Tenedora put-option exercise.
- Ambev acquired an additional interest in Tenedora, bringing its ownership to approximately 85%, and sold its Barbados soft-drink subsidiary, recording a gain. The Quilmes/ABI brewery and brand transaction closed in May 2018.
Outlook, commentary and risks
- Outlook: The filing gives no specific numerical earnings or revenue guidance. Management stated it believed operating cash flows, available cash and investments, derivatives and borrowing access would be sufficient to fund capital spending, debt service and dividends.
- Operating conditions: Management cited adverse Brazilian summer weather, high unemployment, slow disposable-income growth, weak consumer confidence and the May–June 2018 truckers’ strike as factors weighing on Brazilian demand. The strike disrupted supply chains and caused food and fuel shortages.
- Argentina: The peso lost 51% of its value against the real in 2018, and Argentina was treated as hyperinflationary under IAS 29. The accounting transition affected reported asset values, equity, revenue translation and financial results; Ambev reported a positive R$182.5m IAS 29 adjustment in finance income and a negative R$292.4m impact on profit.
- Contingencies: Recorded provisions for legal contingencies were R$599.2m. Possible, not probable, losses not recorded as liabilities were estimated at R$72.1bn, including R$67.3bn of tax matters. These are management estimates of possible exposure, not stated expected cash losses. Major cases include goodwill amortization, foreign subsidiary income, Manaus Free Trade Zone IPI credits and ICMS disputes.
- Other risks: Key exposures include Brazilian and regional economic and political volatility, currency devaluation, commodity-price swings, beverage taxes and regulation, competition, supplier concentration, litigation, water scarcity, climate impacts and restrictions on cash upstreaming from foreign subsidiaries. The company also disclosed a Canadian research partnership on non-alcoholic cannabis beverages and related evolving legal and reputational risks.
- Accounting and audit: IFRS 15 adoption reduced opening retained earnings by R$355.4m due to customer rebates. For 2019, management estimated IFRS 16 would add R$1.55bn of right-of-use assets and R$1.67bn of lease liabilities. Deloitte issued unqualified opinions on the financial statements and internal controls; PwC was appointed auditor beginning in 2019.
Most important facts for investors to verify
- Reconcile the reported 44.9% net income increase with the lower 2018 effective tax rate and the one-off PERT-related comparison in 2017.
- Assess whether pricing and revenue-per-hectoliter growth can offset continued volume pressure, especially in Brazil, without further margin erosion.
- Review the R$72.1bn possible-loss estimate, the underlying tax cases and potential changes in probability, provision requirements or cash guarantees.
- Track Argentine inflation, exchange rates and IAS 29 effects, and distinguish underlying local performance from translation and accounting impacts.
- Confirm the cash, debt and liquidity figures against the audited statements; assess cash availability across subsidiaries, dividend needs and the Tenedora-related put-option liability.
- Monitor commodity and currency hedge costs, the 2019 Brazilian IPI changes affecting Manaus Free Trade Zone credits, and implementation effects from IFRS 16.