Business Context and Reporting Period
Company: AMBEV S.A.
Filing Type: Form 6-K (Interim Consolidated Financial Statements)
Reporting Period: Six months ended June 30, 2018
Currency: Brazilian Reais (R$) in thousands
Business Overview: Ambev produces and sells beer, soft drinks, and other non-alcoholic beverages across Latin America and Canada. The company is a subsidiary of Anheuser-Busch InBev N.V.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 |
Six Months Ended June 30, 2017 |
|---|---|---|
| Net Sales | R$ 23,149,764 | R$ 21,509,758 |
| Gross Profit | R$ 14,301,783 | R$ 12,938,428 |
| Income from Operations (EBIT) | R$ 7,411,400 | R$ 6,538,752 |
| Net Income | R$ 5,021,790 | R$ 4,414,664 |
| Net Income (Attributable to Ambev) | R$ 4,833,114 | R$ 4,212,283 |
| Normalized EBITDA | R$ 9,172,693 | R$ 8,299,496 |
| Cash Flow from Operating Activities | R$ 3,867,717 | R$ 4,409,130 |
| Cash and Cash Equivalents (End of Period) | R$ 10,619,955 | R$ 10,354,527 |
| Total Debt (Interest-bearing loans) | R$ 4,856,995 | R$ 2,553,050 |
| Total Assets | R$ 90,921,356 | R$ 86,851,989 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by approximately 7.6% year-over-year, driven by volume and price mix.
- Profitability: Net income rose by 13.7% to R$ 5.02 billion. Normalized EBITDA margin improved to 39.6% from 38.6% in the prior year.
- Debt Levels: Total interest-bearing loans and borrowings increased significantly from R$ 2.55 billion to R$ 4.86 billion, primarily due to the acquisition of new loans totaling approximately R$ 2.0 billion in January 2018.
- Operating Cash Flow: Cash generated from operations decreased by 12.3% to R$ 3.87 billion, largely due to a decrease in trade payables and an increase in inventories.
- Exceptional Items: The company recorded a net positive impact of R$ 29.7 million from exceptional items, compared to a negative R$ 60.8 million in the prior year. This includes a gain of R$ 75 million from the sale of a subsidiary (Barbados Bottling Company) and a gain of R$ 50 million from a perpetual licensing agreement with Quilmes.
Guidance, Outlook, Risks, and Unusual Items
- Argentina Inflation Risk: The Argentine peso underwent severe devaluation in May 2018, with accumulated inflation exceeding 100% over three years. Ambev has not yet applied inflation accounting (IAS 29) for the period ended June 30, 2018, but is assessing the requirements. Argentina operations accounted for 13.5% of consolidated revenues in 2017.
- Contingent Liabilities: Significant tax contingencies exist, particularly regarding goodwill amortization (estimated possible loss of R$ 9.1 billion) and disallowance of taxes paid abroad (estimated possible loss of R$ 7.3 billion). No provisions were made for these as the likelihood of loss is classified as "possible" rather than "probable."
- Dividends: The company distributed R$ 2.51 billion in dividends during the six-month period.
- Accounting Changes: The company adopted IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments) effective January 1, 2018. The adoption of IFRS 15 resulted in a decrease to retained earnings of R$ 355 million at the opening balance.
- Equity Swaps: The company maintains equity swap contracts to hedge share-based payment risks, with an exposure limit of up to R$ 1.8 billion approved in May 2018.
Investor Verification Checklist
- Argentina Exposure: Verify the timeline and methodology for applying IAS 29 (Hyperinflationary Economies) and the potential impact on future financial statements.
- Tax Contingencies: Review the status of major tax disputes, specifically the R$ 9.1 billion goodwill amortization case and the R$ 7.3 billion foreign tax disallowance case, to assess potential future cash outflows.
- Debt Structure: Analyze the terms of the R$ 2.0 billion in new loans acquired in January 2018 and their impact on future interest expenses and liquidity.
- Working Capital: Investigate the drivers behind the decrease in operating cash flow, specifically the increase in inventory levels and the reduction in trade payables.
- Exceptional Items: Confirm the sustainability of the R$ 125 million in gains from the sale of the Barbados subsidiary and the Quilmes licensing agreement.