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, 2017 (1Q17)
Announcement Date: May 4, 2017
Context: Ambev reported results under IFRS in nominal Brazilian Reais (R$). The quarter included scope changes: inclusion of Panama operations and exclusion of former operations in Colombia, Peru, and Ecuador following an asset swap with Anheuser-Busch InBev (ABI).
Key Financial Metrics
| Metric (R$ Million) | 1Q17 | 1Q16 | Change |
|---|---|---|---|
| Net Revenue | 11,241.8 | 11,565.1 | -2.8% (Reported) / +8.0% (Organic) |
| Normalized EBITDA | 4,356.2 | 5,264.3 | -17.3% (Reported) / -7.6% (Organic) |
| Normalized Net Profit | 2,316.0 | 2,900.2 | -20.1% |
| Normalized EPS | R$ 0.14 | R$ 0.18 | -19.7% |
| Operating Cash Flow | 3,109.0 | 2,258.2 | +37.7% |
| CAPEX | 559.5 | 707.3 | -20.9% |
| Net Cash Position | 2,106.1 | 2,763.3 (Dec 2016) | Decrease |
| Consolidated Debt | 5,132.9 | 5,396.3 (Dec 2016) | Decrease |
Margins: Gross margin declined to 59.8% (-580 bps organic). Normalized EBITDA margin declined to 38.7% (-670 bps organic).
Material Changes vs. Prior Period
- Revenue Growth: Organic revenue grew 8.0% driven by Latin America South (LAS) (+27.4%), Central America and Caribbean (CAC) (+5.5%), and Canada (+2.3%). Brazil revenue was flat (+0.6% organic).
- Volume Performance: Consolidated volumes grew 2.4% organically. Brazil beer volumes grew 3.4% despite a declining industry. CAC reported volumes surged 27.3% due to the Panama asset swap.
- Cost Pressures: Cost of Goods Sold (COGS) increased 26.4% reported (23.1% per hectoliter) due to inflation and unfavorable currency impacts in Brazil and LAS. Brazil cash COGS/hl rose 34.8%.
- Profitability Decline: Normalized EBITDA fell 7.6% organically. Brazil EBITDA dropped 23.8% due to FX impacts and a difficult comparable period regarding state taxes. Conversely, LAS EBITDA grew 20.5% and Canada EBITDA grew 17.5%.
- Cash Flow: Cash generated from operations improved significantly (+37.7%) despite lower profits, aided by working capital management.
Guidance, Outlook, and Risks
- Outlook: Management remains "cautiously optimistic" for 2017. They expect to resume top-line and EBITDA growth as commercial initiatives take hold.
- Cost Guidance: Cash COGS per hectoliter is expected to grow double digits in the first half of 2017, flattening to low single digits in the second half. The year-over-year increase in Q2 is expected to be significantly lower than Q1.
- Regional Strategy:
- Brazil: Focus on affordability via returnable glass bottles and premium brand growth (Budweiser, Stella Artois) to offset macroeconomic weakness and high unemployment.
- International: Continued top-line growth and margin expansion targeted in CAC and Canada. LAS remains positive on volume trends but cautious regarding Argentina's macro environment.
- Risks: High unemployment and depressed disposable income in Brazil; inflationary pressures and currency volatility in LAS (specifically Argentina); and challenging comparables due to prior year tax changes.
- Unusual Items: Recorded R$ 28.7 million in exceptional items (primarily restructuring). Recorded a R$ 159 million cash gain in equity related to the recovery of restricted funds.
Investor Verification Checklist
- Brazil FX Impact: Verify the specific magnitude of the Brazilian Real appreciation impact on reported vs. organic results and future hedging strategies.
- COGS Trajectory: Monitor Q2 results to confirm the management guidance that COGS/hl growth will decelerate significantly compared to Q1.
- Scope Changes: Ensure future comparisons account for the inclusion of Panama and exclusion of Colombia, Peru, and Ecuador operations.
- Dividend Payout: Confirm the sustainability of the R$ 1.1 billion dividend return given the decline in normalized net profit.
- Argentina Exposure: Assess the specific exposure to inflation and currency devaluation in Argentina within the LAS segment.