Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2018 (2Q18) and Year-to-Date (HY18).
Reporting Date: July 26, 2018
Currency: Brazilian Reais (R$) unless otherwise noted.
Accounting Standard: International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric | 2Q18 (R$ Million) | 2Q17 (R$ Million) | Change (Organic) | HY18 (R$ Million) | HY17 (R$ Million) | Change (Organic) |
|---|---|---|---|---|---|---|
| Net Revenue | 11,509.5 | 10,268.0 | +11.4% | 23,149.8 | 21,509.8 | +8.5% |
| Volume ('000 hl) | 36,551.1 | 35,660.3 | +2.6% | 75,466.6 | 76,965.4 | -1.9% |
| Net Revenue/hl (R$) | 314.9 | 287.9 | +8.6% | 306.8 | 279.5 | +10.7% |
| Normalized EBITDA | 4,534.0 | 3,943.3 | +16.7% | 9,172.7 | 8,299.5 | +13.2% |
| Normalized EBITDA Margin | 39.4% | 38.4% | +180 bps | 39.6% | 38.6% | +160 bps |
| Normalized Profit | 2,348.5 | 2,141.5 | +9.7% | 4,959.4 | 4,457.5 | +11.3% |
| Normalized EPS (R$) | 0.14 | 0.13 | +11.0% | 0.30 | 0.27 | +12.3% |
| Cash from Operations | 3,518.7 | 2,417.1 | +45.6% | 6,061.6 | 5,526.1 | +9.7% |
| CAPEX | 805.1 | 751.0 | +7.2% | 1,277.8 | 1,310.5 | -2.5% |
| Net Cash Position | 5,774.4 | 7,811.6 (Dec 31, 2017) | - | - | - | - |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a mix of volume growth (+2.6%) and price/mix improvements (NR/hl +8.6%). Growth was broad-based across Brazil (+9.3%), Central America and the Caribbean (CAC +16.2%), and Latin America South (LAS +25.6%). Canada was the only region with a decline (-2.0%).
- Cost Pressures: Cost of Goods Sold (COGS) increased 6.7% (4.0% per hectoliter) due to inflation in Argentina and higher commodity prices, partially offset by favorable foreign exchange (FX) in LAS and Brazil.
- SG&A Expenses: Increased 9.6% (10.3% cash SG&A), exceeding weighted average inflation (~7.2%). This was primarily due to marketing expenses concentrated around the 2018 FIFA World Cup Russia.
- Profitability: Gross margin expanded 170 basis points to 61.9%, and EBITDA margin expanded 180 basis points to 39.4%.
- Regional Performance:
- Brazil: Volume resumed growth (+1.5%) despite a truck drivers' strike, aided by World Cup activations. Non-Alcoholic Beverages (NAB) saw EBITDA surge 44.2% due to lower sugar prices and favorable FX.
- CAC: Strong volume growth (+10.8%) driven by brand activations in the Dominican Republic and Panama.
- LAS: Significant revenue growth (+25.6%) driven by price increases (+19.5% NR/hl) and volume growth (+4.9%), particularly in Argentina.
- Canada: Revenue declined 2.0% due to a 2.7% volume drop in a soft industry. EBITDA fell 6.6% due to operational deleverage and higher cash COGS/hl.
Guidance, Outlook, and Risks
- Outlook: Management remains optimistic about the full year, expecting healthy top-line and EBITDA growth. Expectations for the year remain mostly unchanged despite a challenging and volatile environment in Brazil.
- Cost Guidance: Cash COGS/hl for NAB Brazil is expected to grow by mid-single digits for the full year 2018.
- Canada Strategy: Management is not satisfied with recent results but expects to cycle hard comparables starting in 3Q18 to resume growth.
- Risks & Contingencies:
- Macroeconomic Volatility: Specifically noted in Argentina and Brazil.
- Operational Disruptions: The truck drivers' strike in Brazil impacted operations, though management mitigated the impact.
- Financial Risks: Net finance results increased 50.1% to R$ 1,049.1 million, driven by losses on derivative instruments (equity swaps) and foreign exchange variations on intercompany loans.
- Unusual Items: Recorded an exceptional income of R$ 38.1 million in 2Q18, primarily from the disposal of Barbados Bottling Company (R$ 74.8 million gain) and a non-cash gain from an asset exchange with AB InBev in Argentina (R$ 50.8 million).
Investor Verification Checklist
- Dividend Payouts: Verify the impact of the R$ 2.5 billion dividend payment announced in May (payable July 30) on the net cash position reported as of June 30.
- FX Sensitivity: Assess the exposure to currency fluctuations, particularly given the significant impact of FX on COGS in LAS and Brazil, and the losses on derivative instruments.
- Canada Turnaround: Monitor the execution of cost management and volume recovery strategies in Canada, where margins contracted significantly.
- Argentina Inflation: Evaluate the sustainability of the high revenue growth in LAS given the inflationary pressures and macroeconomic instability in Argentina.
- World Cup Impact: Determine the extent to which Q2 results were boosted by one-time marketing spend and volume spikes related to the FIFA World Cup, and whether this is repeatable.