Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter (3Q) and Nine Months (9M) ended September 30, 2018.
Accounting Standards: International Financial Reporting Standards (IFRS).
Key Context: Starting in 3Q18, Ambev applied Hyperinflation Accounting (IAS 29) to its Argentinean subsidiaries due to Argentina's cumulative inflation exceeding 100% over three years. This resulted in significant restatements of revenue and EBITDA for the region.
Key Financial Metrics
| Metric (R$ million) | 3Q17 | 3Q18 Reported | 3Q18 Organic | 9M17 | 9M18 Reported | 9M18 Organic |
|---|---|---|---|---|---|---|
| Net Revenue | 11,362.3 | 11,063.7 | +5.8% | 32,872.1 | 34,213.5 | +7.6% |
| Volume ('000 hl) | 38,433.5 | 37,494.5 | -2.4% | 115,398.9 | 112,961.1 | -2.1% |
| Net Revenue/hl (R$) | 295.6 | 295.1 | +8.3% | 284.9 | 302.9 | +9.8% |
| Normalized EBITDA | 4,552.0 | 4,450.8 | +9.0% | 12,851.5 | 13,623.5 | +11.7% |
| EBITDA Margin | 40.1% | 40.2% | +120 bps | 39.1% | 39.8% | +150 bps |
| Normalized Profit | 3,236.6 | 2,907.4 | -10.2% | 7,694.1 | 7,866.8 | +2.2% |
| Normalized EPS (R$) | 0.20 | 0.18 | -8.2% | 0.47 | 0.49 | +3.7% |
| Cash Flow from Ops | 4,563.9 | 5,257.3 | +15.2% | 8,973.1 | 9,125.0 | +1.7% |
| CAPEX | 727.6 | 940.4 | +29.2% | 2,038.2 | 2,218.2 | +8.8% |
Liquidity and Debt: As of September 30, 2018, Ambev held a net cash position of R$ 7,234.3 million. Consolidated debt totaled R$ 4,980.8 million, while cash and cash equivalents less bank overdrafts were R$ 12,202.0 million.
Material Changes vs. Prior Period
- Revenue Mix: Consolidated net revenue grew 5.8% organically in 3Q18, driven by an 8.3% increase in Net Revenue per hectoliter (NR/hl) which offset a 2.4% volume decline. Revenue growth was observed across all regions: Brazil (+2.1%), Central America and Caribbean (CAC) (+16.5%), Latin America South (LAS) (+13.9%), and Canada (+0.4%).
- Cost Pressures: COGS per hectoliter increased 4.7% organically due to inflationary pressures in Argentina and higher commodity prices (notably aluminum), partially offset by favorable foreign exchange (FX) in LAS and Brazil.
- Argentina Hyperinflation Impact: The adoption of IAS 29 resulted in a negative impact of R$ 1,242.5 million on reported revenue and R$ 573.8 million on reported EBITDA for 3Q18. Without this accounting adjustment, 3Q18 EPS would have been R$ 0.20 (+0.6% vs prior year).
- Profitability: Normalized profit declined 10.2% in 3Q18 primarily due to the Argentina hyperinflation accounting impact. However, on a year-to-date basis, normalized profit increased 2.2%.
- Segment Performance:
- Brazil: Beer volume declined 3.1% due to price increases and a volatile consumer environment, though Non-Alcoholic Beverages (NAB) saw EBITDA surge 136.0% due to lower sugar prices and favorable FX.
- CAC: Strong volume growth (+10.3%) drove revenue up 16.5%, though EBITDA margin compressed 380bps due to temporary supply chain costs in Panama.
- LAS: Volume declined 5.0% (driven by Argentina consumption contraction), but NR/hl rose 19.4% to match inflation, resulting in 14.5% organic EBITDA growth.
- Canada: EBITDA declined 7.0% due to higher aluminum costs and marketing expense phasing, despite slight revenue growth.
Guidance, Outlook, and Risks
- Outlook: Management remains committed to accelerating full-year EBITDA growth versus 2017. They are positive about long-term perspectives in Brazil and CAC. For LAS, while cautious regarding Argentina in the short term, they maintain positive mid-to-long-term views.
- Cost Guidance: Management reiterated guidance that cash COGS per hectoliter for NAB Brazil is expected to grow by mid-single digits for the full year 2018.
- Strategic Initiatives: Continued focus on premiumization (e.g., Corona, Stella Artois, Budweiser) and innovation (e.g., Skol Hops, Nossa). Cervejaria Ambev received 63 medals at the World Beer Awards.
- Risks and Contingencies:
- Argentina: Ongoing macroeconomic volatility, currency devaluation, and high inflation continue to impact consumer confidence and volume.
- Commodity Prices: Exposure to aluminum and sugar prices affects COGS.
- FX Volatility: Depreciation of the Brazilian Real and Argentine Peso impacts financial results and intercompany loans.
Investor Verification Checklist
- Argentina Accounting Impact: Verify the specific line-item adjustments for Hyperinflation Accounting (IAS 29) in the consolidated income statement to understand the true operational performance vs. accounting restatements.
- Volume vs. Price Dynamics: Confirm the sustainability of the 8.3% NR/hl growth given the 2.4% volume decline, particularly in Brazil where consumer confidence is low.
- Commodity Exposure: Assess the sensitivity of future margins to aluminum prices, which significantly impacted Canada and Beer Brazil COGS.
- Cash Flow vs. Profit: Note the divergence where operating cash flow grew 15.2% while normalized profit declined 10.2% in 3Q18; verify working capital changes driving this.
- Dividend Payouts: Confirm the R$ 3.6 billion paid/announced in dividends year-to-date against the net cash position of R$ 7.2 billion to assess liquidity coverage.