Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter 2014 (Ended June 30, 2014)
Announcement Date: July 31, 2014
Context: Ambev reported results under IFRS in nominal Brazilian Reais (R$). The quarter was significantly influenced by the 2014 FIFA World Cup hosted in Brazil, driving volume growth but impacting margins through one-time packaging costs and increased marketing spend.
Key Financial Metrics
| Metric | 2Q14 Reported | 2Q13 Reference | Organic Growth |
|---|---|---|---|
| Net Revenue | R$ 8,177.4 million | R$ 7,570.2 million | +9.2% |
| Total Volumes | 39,310.6 thousand hl | 37,303.1 thousand hl | +4.9% |
| Normalized EBITDA | R$ 3,327.4 million | R$ 3,238.6 million | +5.4% |
| Normalized EBITDA Margin | 40.7% | 42.8% | -150 bps |
| Normalized Net Profit | R$ 2,222.7 million | R$ 1,916.6 million | +16.0% |
| Normalized EPS | R$ 0.14 | R$ 0.12 | +16.7% |
| Operating Cash Flow | R$ 2,982.6 million | R$ 2,577.2 million | +15.7% |
| Capital Expenditures (CAPEX) | R$ 1,120.6 million | R$ 756.6 million | N/A |
| Net Cash Position | R$ 3,748.8 million | R$ 8,921.0 million (Dec 2013) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Driven by double-digit growth in Brazil (11.3%) and Hila-Ex (19.2%). Brazil Beer revenue grew 11.2% and CSD 11.7%. Net revenue per hectoliter (NR/hl) grew 4.1% globally.
- Margin Compression: Normalized EBITDA margin contracted 150 basis points to 40.7%. Gross margin fell 210 basis points to 62.8%.
- Cost Drivers: Cost of Goods Sold (COGS) rose 15.5% (10.2% per hectoliter). This was primarily due to a one-time negative packaging mix related to the 2014 FIFA World Cup and higher currency hedges in Brazil, Latin America South (LAS), and Canada.
- SG&A Expenses: Increased 6.8% (excluding depreciation/amortization), driven by sales and marketing initiatives for the World Cup, higher distribution costs in Brazil, and inflation in Argentina.
- Regional Performance:
- Brazil: EBITDA up 7.2% to R$ 2,339.4 million. Market share increased 90bps sequentially.
- Hila-Ex: Strongest performer with EBITDA up 18.4% to R$ 141.1 million.
- Latin America South (LAS): EBITDA declined 0.6% to R$ 354.9 million due to challenging macroeconomic conditions in Argentina.
- Canada: EBITDA flat (-0.3%) at R$ 491.9 million, impacted by timing of price increases and commercial spend phasing.
Guidance, Outlook, and Risks
- 2014 Outlook: Management expects Brazil net revenue growth to be at the upper end of the high single to low double-digit guidance for the full year.
- Cost Guidance: Brazil COGS per hectoliter is expected to grow mid-single digits on a constant product mix basis. SG&A in Brazil is expected to grow high single to low double-digits.
- Capital Allocation: A dividend and interest on capital distribution totaling R$ 2.5 billion was announced, payable from August 28, 2014. Year-to-date payouts reached R$ 8.5 billion.
- Risks and Contingencies:
- Argentina: Continued caution regarding the macroeconomic environment in Argentina, which is causing industry volume contraction.
- One-Time Impacts: Management does not expect significant incremental mix effects in the second half of the year following the World Cup.
- Special Items: R$ 7.1 million in restructuring costs recorded in the quarter.
Investor Verification Checklist
- World Cup Impact: Verify the sustainability of the 1.4 million hectoliter volume benefit attributed to the World Cup and the extent of the one-time packaging cost impact on margins.
- Argentina Exposure: Assess the severity of the volume decline in LAS (down 4.4%) and the effectiveness of revenue management strategies in a high-inflation environment.
- Currency Hedging: Review the impact of currency hedges on COGS, which contributed to the 10.2% increase in costs per hectoliter.
- Cash Position: Note the significant reduction in net cash position from R$ 8.9 billion (Dec 2013) to R$ 3.7 billion (June 2014), largely due to the R$ 2.5 billion dividend announcement and operating cash usage.
- Normalized Metrics: Confirm the reconciliation between IFRS Profit and Normalized Profit/EBITDA, as the company relies heavily on these non-GAAP measures for performance assessment.