Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter 2018 (Ended March 31, 2018)
Announcement Date: May 9, 2018
Currency: Brazilian Reais (R$) unless otherwise noted.
Accounting Standard: International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric | 1Q18 (R$ Million) | 1Q17 (R$ Million) | Change (Organic) |
|---|---|---|---|
| Net Revenue | 11,640.2 | 11,241.8 | +5.9% |
| Normalized EBITDA | 4,638.7 | 4,356.2 | +10.1% |
| Normalized Net Profit | 2,610.9 | 2,316.0 | +12.7% |
| Normalized EPS | R$ 0.16 | R$ 0.14 | +13.6% |
| Gross Margin | 61.7% | 59.8% | +210 bps |
| EBITDA Margin | 39.9% | 38.7% | +160 bps |
| Cash Flow from Ops (Pre-WC) | 4,651.7 | 4,578.6 | +1.6% |
| CAPEX | 472.7 | 559.5 | -15.5% |
| Net Cash Position | 3,497.9 | 7,811.6 (Dec 2017) | Down R$ 4.3B QoQ |
Material Changes vs. Prior Period
- Revenue Growth: Driven by strong performance in Latin America South (LAS, +24.6%) and Central America/Caribbean (CAC, +8.7%). Brazil revenue declined -1.8% due to an 11.0% volume drop, though this was offset by a 10.3% increase in Net Revenue per hectoliter (NR/hl).
- Volume Trends: Consolidated volume declined 5.8% organically. Brazil Beer volume fell 8.1% and Non-Alcoholic Beverages (NAB) volume fell 19.4% due to soft industry conditions and tough comparables. Conversely, LAS volume grew 5.7% and CAC grew 4.3%.
- Cost Dynamics: Consolidated COGS was flat (+0.2%), but COGS per hectoliter rose 6.3% due to inflation in Argentina and higher commodity prices. Canada experienced a significant 26.0% increase in cash COGS/hl due to a hard comparable in 1Q17.
- Profitability: Normalized EBITDA grew 10.1% despite volume headwinds in Brazil, supported by margin expansion and revenue management initiatives. Effective tax rate increased from 12.9% to 19.3% due to FX variations on intercompany transactions.
- Canada Performance: EBITDA declined 20.4% to R$ 275.0 million, primarily driven by the aforementioned COGS increase and excise tax hikes.
Guidance, Outlook, and Risks
- Outlook: Management maintains a positive view for the balance of 2018. They expect beer volume in Brazil to resume growth in 2Q18, supported by the 2018 FIFA World Cup. International operations in LAS and CAC remain on a positive trajectory.
- Strategic Initiatives: Focus on "Elevate the Core" (Antarctica brand identity), "Accelerate Premium" (Budweiser, Stella Artois, Corona), and "Drive Smart Affordability" (packaging initiatives) to foster consumption.
- Risks & Contingencies:
- FX Volatility: Depreciation of the Brazilian Real impacted the effective tax rate and translation of foreign results.
- Commodity Prices: Inflationary pressures, particularly sugar prices (up >30% YoY), impacted NAB Brazil costs.
- Regulatory: Excise tax increases in Canada negatively impacted NR/hl.
- Subsequent Event: On May 2, 2018, Ambev closed a transaction with AB InBev regarding the Budweiser license in Argentina, estimated to have a positive impact of R$ 57 million on profit and loss.
Investor Verification Checklist
- Brazil Volume Recovery: Verify if the anticipated volume growth in 2Q18 materializes following the soft 1Q18 performance.
- Margin Sustainability: Monitor if gross margin expansion can be sustained amidst rising commodity costs (sugar) and inflation in Argentina.
- Canada Turnaround: Assess whether Canada's EBITDA margin stabilizes as the hard 1Q17 comparable cycles out.
- Cash Position: Review the significant quarter-over-quarter reduction in net cash (from R$ 7.8B to R$ 3.5B) and its impact on liquidity and dividend capacity.
- Tax Rate Volatility: Track the effective tax rate, which is sensitive to FX fluctuations on intercompany transactions.