Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2019
Business Overview: Ambev produces and sells beer, soft drinks, and non-alcoholic beverages primarily in Brazil, Central America, South America, and Canada. The company is a subsidiary of Anheuser-Busch InBev N.V.
Accounting Standards: Interim financial statements prepared in accordance with IAS 34 and Brazilian CPC 21. Comparative 2018 figures have been restated to reflect the full retrospective adoption of IFRS 16 (Leases) and the application of IAS 29 (Hyperinflationary Economies) for Argentinean subsidiaries.
Key Financial Metrics (Six Months Ended June 30, 2019)
| Metric | 2019 (R$ Thousands) | 2018 Restated (R$ Thousands) |
|---|---|---|
| Net Sales | 24,785,259 | 23,149,764 |
| Gross Profit | 14,716,257 | 14,311,524 |
| Income from Operations (EBIT) | 7,603,912 | 7,483,840 |
| Net Income | 5,364,969 | 4,998,633 |
| Net Income Attributable to Ambev | 5,182,583 | 4,809,957 |
| Normalized EBITDA | 9,811,890 | 9,460,615 |
| Cash Flow from Operating Activities | 5,194,219 | 4,155,637 |
| Cash and Cash Equivalents (End of Period) | 14,233,403 | 11,463,498 |
| Total Debt (Interest-bearing loans) | 4,898,313 | 4,103,663 |
Note: All figures expressed in thousands of Brazilian Reais (R$). 2018 figures are restated for IFRS 16 adoption.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by approximately 7.1% year-over-year, driven by volume and price mix, partially offset by foreign exchange impacts.
- Profitability: Net income attributable to Ambev shareholders rose by 7.8% to R$5.18 billion. Operating income increased by 1.6%.
- Cost Structure: Cost of sales increased by 13.9%, outpacing revenue growth, impacting gross margin slightly. However, sales and marketing expenses decreased by 6.6%.
- Financial Impact of IFRS 16: The adoption of IFRS 16 resulted in the recognition of right-of-use assets and lease liabilities, increasing total assets and liabilities compared to the prior year's originally submitted figures. This also shifted lease payments from operating cash flows to financing cash flows.
- Hyperinflation Accounting: Continued application of IAS 29 for Argentinean operations resulted in significant adjustments to non-monetary assets and equity, as well as finance income/expense recognition.
- Exceptional Items: The company recorded a net exceptional loss of R$52.3 million in the first half of 2019, compared to a gain of R$29.7 million in the same period of 2018.
Outlook, Risks, and Contingencies
- Guidance: The filing does not contain specific forward-looking financial guidance or earnings projections for the full year 2019.
- Financial Risks:
- Foreign Exchange: Significant exposure to currency fluctuations, particularly the Argentine Peso, Brazilian Real, and Canadian Dollar. The company utilizes derivatives to hedge operational and financial exposures.
- Commodity Prices: Exposure to aluminum, sugar, wheat, and corn prices, managed through fixed-price contracts and derivatives.
- Interest Rates: Dynamic hedging strategy employed to balance fixed and floating rate debt.
- Contingent Liabilities:
- Tax Disputes: Significant exposure to Brazilian federal tax assessments regarding profits earned abroad (approx. R$7.4 billion possible loss), disallowance of taxes paid abroad (approx. R$10.1 billion possible loss), and PIS/COFINS on bonus products (approx. R$2.3 billion possible loss).
- Legal: Ongoing civil and labor lawsuits, primarily involving former distributors and employee benefits.
- Equity Swaps: The Board approved new equity swap contracts in May 2019, potentially exposing up to 80 million shares (limit value R$1.5 billion) to hedge share-based payment costs.
Key Facts for Investor Verification
- Restated Comparables: Verify that all 2018 comparative figures used for analysis are the "restated" numbers reflecting IFRS 16 adoption, as originally submitted 2018 figures are not comparable.
- Argentina Exposure: Review the specific impact of IAS 29 hyperinflation accounting on the Argentinean segment's reported assets, liabilities, and finance income, as this significantly distorts standard year-over-year comparisons.
- Tax Contingencies: Assess the magnitude of the R$10+ billion in potential tax losses related to Brazilian federal assessments and the likelihood of realization based on ongoing litigation.
- Debt Composition: Analyze the increase in total interest-bearing loans (from R$4.1B to R$4.9B) and the impact of lease liabilities recognized under IFRS 16 on leverage ratios.
- Dividend Policy: Note that no dividends or interest on shareholders' equity were paid in the first six months of 2019, whereas R$2.5 billion was paid in the same period in 2018.