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, 2016
Reporting Date: May 4, 2016
Accounting Standard: International Financial Reporting Standards (IFRS)
Currency: Brazilian Reais (R$)
Ambev reported a soft start to 2016, characterized by solid growth in Central America and the Caribbean (CAC), Latin America South (LAS), and Canada, which was offset by a decline in Brazil due to a challenging macroeconomic environment, a tough comparable base from an early Carnival, and price increases to mitigate taxes.
Key Financial Metrics
| Metric (R$ Million) | 1Q 2016 | 1Q 2015 | Change (Reported) | Change (Organic) |
|---|---|---|---|---|
| Net Revenue | 11,565.1 | 10,768.8 | +7.4% | +2.6% |
| Normalized EBITDA | 5,264.3 | 5,072.9 | +3.8% | +1.1% |
| Normalized Net Profit | 2,900.2 | 2,970.6 | -2.4% | -2.4% |
| Normalized EPS | R$ 0.18 | R$ 0.18 | -1.8% | -1.8% |
| Operating Cash Flow | 2,258.2 | 3,819.1 | -40.9% | N/A |
| CAPEX | 707.3 | 719.5 | -1.7% | N/A |
| Net Cash Position | 2,256.5 | 10,233.3 (Dec 2015) | Significant Decline | N/A |
Margins: Gross margin compressed by 60 basis points (bps) to 65.8%. Normalized EBITDA margin compressed by 160 bps to 45.5%.
Volumes: Consolidated volumes declined 7.7% organically to 39.96 million hectoliters.
Material Changes vs. Prior Period
- Brazil Performance: Net revenue declined 4.0% and EBITDA fell 5.5% to R$ 3,221 million. Beer volumes dropped 10.0% due to macroeconomic headwinds and a difficult prior-year comparison. However, Net Revenue per hectoliter (NR/hl) increased 4.9%.
- International Growth:
- CAC: Revenue up 19.4% and EBITDA up 28.1% driven by double-digit volume growth (+10.4%) and margin expansion.
- LAS: Revenue up 15.1% and EBITDA up 15.4% despite a 10.4% volume decline (impacted by Peru CSD exit and Argentina weakness). High inflation drove a 28.6% increase in NR/hl.
- Canada: Revenue up 2.3% organically with volume growth of 0.9% (5.8% reported including acquisitions). EBITDA grew 5.7% in local currency.
- Cost Structure: COGS increased 2.9% (11.5% per hectoliter) due to inflation in LAS/Brazil and unfavorable currency movements, partially offset by procurement savings and FX hedges. SG&A (excl. D&A) rose 3.9%.
- Financial Results: Net finance results worsened significantly to an expense of R$ 1,171.3 million (vs. R$ 481.7 million in 1Q15), driven by higher interest expenses, non-cash accretion on the Dominican Republic investment, and FX translation losses.
Guidance, Outlook, and Risks
Management Outlook: Management anticipates top line and EBITDA performance to improve in subsequent quarters, particularly in Brazil, as the company laps the difficult first-quarter comparable base. April volumes were reported to be trending significantly better.
2016 Brazil Guidance:
- Top line growth: Mid to high single digit.
- Cash COGS growth: Low to mid teens.
- Cash SG&A growth: Low single digit.
- Capex: Decline year over year.
Strategic Initiatives:
- Returnable Glass Bottles (RGB): A top priority to drive affordability and lower cash COGS/hl, with mix increasing materially.
- Premiumization: Continued focus on premium brands (e.g., Budweiser, Corona) and near-beer segments.
- Cost Management: Ongoing procurement savings and efficiency gains in non-working money.
Risks and Contingencies:
- Macroeconomic Volatility: Adverse conditions in Brazil and Argentina continue to impact volumes and costs.
- Currency Fluctuations: Significant impact on COGS and financial results due to FX exposure and translation losses.
- Market Share Dynamics: Temporary market share loss in Brazil due to price increases and inflation.
Investor Verification Checklist
- Brazil Volume Recovery: Verify if volume trends in Brazil improve in Q2 and Q3 as management anticipates, given the 10% decline in Q1.
- FX Hedge Effectiveness: Assess the impact of currency fluctuations on future COGS and net finance results, given the R$ 417 million loss on derivatives in Q1.
- RGB Mix Impact: Monitor the trade-off between lower NR/hl and lower cash COGS/hl as the company accelerates the Returnable Glass Bottle strategy.
- Liquidity Position: Review the significant drawdown in net cash position (from R$ 10.2B in Dec 2015 to R$ 2.3B in Mar 2016) and its implications for future capital allocation and debt servicing.
- Argentina Inflation: Evaluate the sustainability of revenue growth in LAS driven by high inflation versus real volume performance.