Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2018
Currency: Brazilian Reais (R$) in thousands
Business Overview: Ambev produces and sells beer, soft drinks, and other non-alcoholic beverages across Latin America and Canada. The company is a subsidiary of Anheuser-Busch InBev N.V.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2017 |
|---|---|---|
| Net Sales | R$ 34,213,507 | R$ 32,872,061 |
| Gross Profit | R$ 20,994,813 | R$ 19,818,609 |
| Income from Operations (EBIT) | R$ 10,780,153 | R$ 10,152,522 |
| Net Income | R$ 7,913,896 | R$ 4,551,154 |
| Net Income Attributable to Ambev | R$ 7,664,273 | R$ 4,212,506 |
| Basic EPS (R$) | 0.49 | 0.27 |
| Cash Flow from Operating Activities | R$ 9,125,034 | R$ 8,973,078 |
| Total Assets | R$ 95,691,043 | R$ 86,851,989 |
| Total Liabilities | R$ 35,668,688 | R$ 38,869,134 |
| Interest-Bearing Loans (Total) | R$ 4,980,771 | R$ 2,553,050 |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased by 73.8% year-over-year, driven primarily by a significant reduction in income tax expense (from R$ 3.36 billion expense in 2017 to R$ 0.66 billion expense in 2018) and improved operating margins.
- Revenue Growth: Net sales grew 4.1% to R$ 34.2 billion, with Latin America - North (Brazil and CAC) contributing the majority of sales.
- Debt Expansion: Total interest-bearing loans and borrowings nearly doubled from R$ 2.55 billion to R$ 4.98 billion, reflecting the acquisition of new loans totaling approximately R$ 2.0 billion in January 2018.
- Hyperinflation Accounting: The company applied IAS 29 (Hyperinflationary Economies) to its Argentinean subsidiaries starting January 1, 2018, due to Argentina's cumulative inflation exceeding 100%. This resulted in a negative impact on profit of R$ 273.4 million but a positive adjustment of R$ 115.4 million in finance results.
- Exceptional Items: The company recorded a net gain of R$ 16.9 million in exceptional items, compared to a loss of R$ 81.3 million in the prior year. This includes a R$ 77 million gain from the sale of the Barbados Bottling Co. Limited subsidiary and a R$ 50 million gain from a perpetual licensing agreement with Quilmes.
Outlook, Risks, and Contingencies
- Tax Contingencies: Significant contingent liabilities exist regarding Brazilian federal taxes. Management estimates a possible loss of approximately R$ 9.2 billion related to goodwill amortization assessments and R$ 9.4 billion regarding the disallowance of taxes paid abroad. No provisions were made for these as the likelihood of loss is classified as "possible."
- Legal Proceedings: The company faces ongoing litigation regarding ICMS (state VAT) and IPI (excise tax) assessments, with estimated possible losses totaling R$ 7.2 billion and R$ 3.7 billion respectively.
- Financial Risk Management: Ambev utilizes extensive derivative instruments to hedge foreign currency, interest rate, and commodity price risks. As of September 30, 2018, the company held derivative assets of R$ 1.28 billion and liabilities of R$ 0.62 billion.
- Capital Management: The company continues to optimize its capital structure to maximize shareholder value while maintaining financial flexibility. Dividends and interest on shareholders' equity paid during the period totaled R$ 3.68 billion.
Investor Verification Checklist
- Tax Rate Volatility: Verify the sustainability of the effective tax rate (7.72% in 2018 vs. 42.45% in 2017), which was heavily influenced by government subsidies and deductible interest on shareholders' equity.
- Argentina Exposure: Assess the ongoing impact of hyperinflation accounting (IAS 29) on the financial statements of Argentinean subsidiaries and the stability of the local currency.
- Debt Servicing: Review the implications of the near-doubling of interest-bearing debt on future cash flows and interest coverage ratios.
- Contingent Liabilities: Monitor the status of major tax disputes (Goodwill, Foreign Profits, ICMS) which represent potential liabilities exceeding R$ 20 billion in aggregate.
- Exceptional Gains: Confirm the non-recurring nature of the R$ 127 million in gains from the sale of the Barbados subsidiary and the Quilmes licensing agreement.