Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months and three months ended September 30, 2020
Currency: Brazilian Reais (R$) in thousands, unless otherwise stated
Auditor: PricewaterhouseCoopers (Review of interim financial statements)
Ambev S.A. is a Brazilian beverage company producing and selling beer, soft drinks, and non-alcoholic beverages. The company operates primarily in Brazil, Central America and the Caribbean (CAC), Latin America - South, and Canada. The financial statements were reviewed in accordance with ISRE 2410 and prepared under IAS 34.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30) | 2020 (R$ '000) | 2019 (R$ '000) |
|---|---|---|
| Net Sales | 39,822,425 | 36,742,911 |
| Gross Profit | 20,954,210 | 21,444,177 |
| Income from Operations (EBIT) | 8,539,367 | 10,744,375 |
| Net Income | 4,841,536 | 7,969,354 |
| Net Income Attributable to Ambev | 4,593,384 | 7,680,260 |
| Basic EPS (R$) | 0.2920 | 0.4884 |
| Cash Flow from Operating Activities | 10,462,224 | 8,746,406 |
| Cash and Cash Equivalents (Sep 30, 2020) | 21,660,450 | 11,900,666 (Dec 31, 2019) |
| Total Debt (Interest-bearing loans) | 6,855,007 | 3,062,804 (Dec 31, 2019) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 8.4% year-over-year (YoY) to R$39.8 billion, driven by volume recovery in Brazil and price increases, despite pandemic-related restrictions.
- Profitability Decline: Net income decreased by 39.2% YoY to R$4.8 billion. This was primarily due to significant exceptional items and increased finance costs.
- Exceptional Items: The company recorded R$311.8 million in exceptional expenses for the nine-month period, compared to R$66.9 million in 2019. Key drivers included:
- COVID-19 Impacts: R$183.1 million in expenses related to safety measures and community donations.
- Restructuring: R$93.7 million related to realignment of structures in Latin America and Brazil.
- Stella Recall: R$14.1 million.
- Finance Costs: Net finance costs surged to R$3.48 billion (from R$1.55 billion in 2019), largely due to losses on hedging instruments (equity swaps) and exchange rate variations.
- Liquidity: Cash and cash equivalents increased significantly to R$21.7 billion, up from R$11.9 billion at year-end 2019, supported by strong operating cash flow.
- Debt: Total interest-bearing loans increased to R$6.86 billion, reflecting new working capital financing approved in the second quarter.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Outlook: Management notes that while restrictions have eased in some regions (leading to volume increases in Q3), uncertainty remains regarding future government restrictions and economic effects. The company maintains that there is no substantial doubt about its ability to continue as a going concern.
- Segment Performance:
- Brazil: Remains the largest contributor to sales and EBIT, showing resilience with sales of R$20.1 billion.
- CAC & Latin America - South: Impacted by severe restrictions in countries like Bolivia and Panama, though showing signs of recovery in Q3.
- Financial Risks:
- Foreign Exchange: Significant exposure to currency fluctuations, partially hedged. The company recorded substantial losses on equity swaps related to share price variations.
- Commodity Prices: Hedging strategies are in place for aluminum, sugar, wheat, and corn.
- Contingent Liabilities: The company faces significant potential tax liabilities (classified as "possible" loss) totaling approximately R$73.9 billion, primarily related to Brazilian federal taxes (Income tax, ICMS, PIS/COFINS). No provisions have been recorded for these as the outcome is not probable.
- Unusual Items: The "Stella recall" cost of R$14.1 million and specific COVID-19 related expenses of R$183.1 million are non-recurring items impacting the bottom line.
Investor Verification Checklist
- Exceptional Item Sustainability: Verify the one-time nature of the R$183 million COVID-19 expenses and R$94 million restructuring costs to assess normalized earnings power.
- Finance Cost Volatility: Analyze the impact of equity swap losses (R$556 million in Q3) on future earnings, as these are tied to share price performance.
- Tax Contingencies: Review the status of the R$73.9 billion in "possible" tax losses, particularly the R$10.3 billion related to disallowance of taxes paid abroad and R$8.3 billion related to ICMS-ST.
- Debt Servicing: Confirm the company's ability to service the increased debt load (R$6.86 billion) given the current interest rate environment and exchange rate risks.
- Volume Recovery: Monitor sales volume trends in high-risk markets (Bolivia, Panama) to ensure the Q3 recovery trend continues as restrictions lift.