Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2016 (3Q16)
Context: Ambev reported results under IFRS in nominal Brazilian Reais (BRL). The quarter was characterized as the toughest of a challenging year, primarily due to severe macroeconomic volatility in Brazil and Argentina, which pressured beverage consumption and inflated costs via currency devaluation.
Key Financial Metrics
| Metric | 3Q16 (R$ Million) | 3Q15 (R$ Million) | Change (Reported) | Change (Organic) |
|---|---|---|---|---|
| Net Revenue | 10,482.8 | 10,745.1 | -2.4% | +2.3% |
| Total Volumes (000 hl) | 38,838.2 | 39,988.4 | -2.9% | -3.4% |
| Normalized EBITDA | 3,999.4 | 4,992.0 | -19.9% | -14.0% |
| Normalized EBITDA Margin | 38.2% | 46.5% | -830 bps | -740 bps |
| Normalized Net Profit | 3,198.3 | 3,086.6 | +3.6% | N/A |
| Normalized EPS | R$ 0.20 | R$ 0.19 | +3.7% | N/A |
| Operating Cash Flow (Quarter) | 5,051.3 | 6,167.3 | -18.1% | N/A |
| CAPEX (Quarter) | 902.0 | 1,284.7 | -29.8% | N/A |
| Net Cash Position (Sep 30, 2016) | 3,120.1 | 10,233.3 (Dec 2015) | N/A | N/A |
Note: Organic growth excludes currency translation and scope changes. Net Profit increased despite EBITDA decline due to favorable tax adjustments.
Material Changes vs. Prior Period
- Revenue Mix: Consolidated Net Revenue grew organically by 2.3%, driven by strong performance in Central America and the Caribbean (CAC, +12.1%) and Latin America South (LAS, +22.1%). This offset a significant decline in Brazil (-6.6%) and flat performance in Canada (+0.1%).
- Volume Decline: Total volumes fell 3.4% organically, primarily due to economic volatility in Brazil and Argentina reducing consumption.
- Cost Inflation: Cost of Goods Sold (COGS) increased 15.5% (19.5% per hectoliter). In Brazil, COGS/hl rose 27.6% due to the lagged impact of FX hedges reflecting the severe BRL devaluation in late 2015.
- EBITDA Compression: Normalized EBITDA fell 14.0% organically. Brazil EBITDA dropped 31.3% due to cash COGS inflation and top-line weakness. Conversely, LAS EBITDA grew 22.6% and CAC grew 9.0%.
- Profitability Surprise: Normalized Net Profit rose 3.6% to R$ 3,198.3 million. This was driven by a R$ 1.18 billion gain in "Other Tax Adjustments," including the reversal of withholding tax provisions in Argentina and recognition of deferred tax assets on international losses.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- Brazil Strategy: Management emphasized a long-term structural positioning over short-term fixes. They delayed price adjustments to Q4 2016 to maintain competitiveness. The company expects cash COGS in Brazil to grow mid-to-high single digits for the full year and cash SG&A to grow low single digits.
- Guidance Revision: Ambev no longer expects to achieve its goal of flat net revenue in Brazil for the full year due to soft industry volumes and a tough comparable base in Q4 2015.
- Regional Outlook:
- CAC: Significant top-line growth and margin expansion opportunities remain.
- LAS: Solid profitable growth expected despite short-term volatility in Argentina.
- Canada: Continued top-line momentum driven by global brands and recent craft/near-beer acquisitions.
Risks and Contingencies
- Currency Volatility: The Brazilian Real (BRL) devaluation in 2H2015 created a temporary cost inflation spike in 3Q16 via FX hedges. Management expects this to ease as the currency reverts to current levels (~3.20 BRL/USD).
- Macroeconomic Conditions: High unemployment and declining real disposable income in Brazil continue to pressure consumer spending.
- Argentina Reforms: Structural reforms in Argentina create short-term volatility, though new legislation revoked a withholding tax on dividend remittances, providing a tax benefit.
Investor Verification Checklist
- Tax Adjustments: Verify the sustainability of the R$ 1.18 billion tax benefit (Argentina withholding tax reversal and deferred tax asset recognition) which drove the increase in Net Profit despite falling EBITDA.
- Brazil FX Hedge Impact: Confirm the timeline for the reversal of the COGS inflation caused by 2015 FX hedges and the expected benefit in 4Q16 and 2017.
- Volume Trends: Monitor the trajectory of volume declines in Brazil and Argentina versus the growth in CAC and LAS to assess if the geographic mix shift is sufficient to offset core market weakness.
- Price Implementation: Track the execution of price adjustments in Brazil in Q4 2016 and their impact on volume retention.
- Dividend Payout: Note the announced dividend of R$ 0.16 per share (approx. R$ 2.5 billion) to be paid starting November 25, 2016, and its impact on the net cash position.