Ambev S.A. (NYSE:ABEV) Q1 2023 Earnings Call Transcript

Ambev S.A. (NYSE:ABEV) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good morning, good afternoon and thank you for waiting. We would like to welcome everyone to Ambev’s First Quarter 2023 Results Conference Call. Today with us we have Mr. Jean Jereissati, CEO for Ambev; and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website, ri.ambev.com.br, as well as through the webcast link of this call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company’s presentation. After Ambev’s remarks are completed, there will be a Q&A section, where we kindly ask that each participating analyst asks only one question. At that time, further instructions will be given.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1995. Forward-looking statements are based on the beliefs and assumptions of Ambev’s management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ambev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today’s call are both organic and normalized in nature, and unless otherwise stated, percentage changes refer to comparisons with first quarter 2022 results.

Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as a part of Ambev’s normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, operating profit and EBITDA on a fully reported basis in the earnings release. Now, I’ll turn the conference over to Mr. Jean Jereissati. Mr. Jereissati, you may begin your conference.

Jean Jereissati: Hello everyone. Thank you for joining our Q1 earnings call. During our last call, I had two key messages. First that I was starting 2023 more confident that I started 2022 because of our business momentum, because of overall costs and expenses inflation coming down and because of our financial strength. Second, that in 2023, the plan was and still is to maintain top-line momentum and accelerate EBITDA growth with Brazil leading the way and international operations bouncing back as we continue to improve profitability not only in terms of ROIC, but also gross and EBITDA margins. Well, I was happy to see that in this first quarter we delivered on both fronts. Top-line momentum persists growing above 26% ahead of costs and expenses.

EBITDA growth accelerated nearly 40% year-over-year, which by the way was ahead of last year’s growth with or without taking Argentina into account with Brazil continuing to perform well while international operations are recovering. And profitability improved with gross margin expanding 290 basis points and EBITDA margin expanding 310 bps. In other words, a good start to the year. Let’s see how we got there. In Brazil Beer, according to our estimates, industry grew mid single-digit in the quarter backed by Carnival celebrations returning to the streets despite the rainy weather. Such growth, however, was partially offset by tough comps as masks mandate was lifted in March last year. With that, our volumes grew around 1% with flat market share versus last year according to our estimates as our sellout volumes were higher than selling given a disciplined revenue management during the typically discounted carnival season.

Our premium and super premium brands such as Original, Spaten, Stella and Corona grew almost 35% and the core segment remained resilient. And thanks to consistent investments behind our brands and capabilities. The health of our super premium and premium focus portfolio continued to improve. We estimate our brands added over 700,000 fans versus last year and almost 4 million since 2019. Also relationship with our customers remain making progress with NPS reaching over 60 points. Net revenue per hectoliter increased above 13% versus last year and almost 3% sequentially following our revenue management strategy. And despite expected pressure on cash COGS per hectoliter EBITDA grew 24%, the highest increase since the first quarter of 2009 with margin expansion of 250 bps supported by a deceleration of distribution expenses growth as well as savings initiatives on administrative expenses.

In NAB, commercial momentum also continued. Volumes grew above 7%, thanks to a strong portfolio and a wider distribution boosted by BEES. Pepsi Black grew over 200% now representing 14% of Pepsi-Cola portfolio and Guaraná Antarctica grew almost 7% LED by Guaraná Zero . Net revenue per hectoliter increased almost 11% following a consistent revenue management strategy and a positive brand and pack mix. EBITDA grew 47% supported also by cash COGS per hectoliter growth deceleration leading to a 530 bps margin expansion. Regarding our tech platforms, our marketplace in Brazil continues to go in the right direction. GMV grew by 36% versus last year, and cash grows margin increased 790 bps. We have been working with our partners to expand the offering of their set of products as we still see room to improve SKUs per customer on top of continuing expanding the assortment of marketplace products.

After the FIFA World Cup and carnival activations, Zé Delivery’s awareness continued to grow sequentially and it is present in almost 450 cities in Brazil. As a result, Zé reached five million monthly active users and GMV grew 5% versus last year. Turning into our international operations, in LAS, macro environment remains a challenge, bringing volatility to our operations and inflationary pressure on disposable incomes. Volumes decreased almost 8%, driven mostly by Argentina and Chile. Revenue grew 66% driven by revenue management initiatives, especially in Argentina, which supported EBITDA margin expansions of 600 bps. In Argentina, despite industry decline in our market share going slightly down, premium brands gained weight in our portfolio.

Our plan to perform operational hedging continues evolving, and we are more agile in making decisions to protect our cash flow generation in dollars as macro conditions change. The decision to lower coverage of our financial hedge still stood this quarter and resulted in improvements in cash flow. The decision to lower coverage of our financial hedge still stood this quarter and resulted in improvements in cash flow. In Chile, volumes suffered mostly due to continued industry slowdown even with less volume, EBITDA improved supported by expanded local production capacity, reducing imports levels. Bolivia on the other hand, grew volumes as it continues on the recovery path After COVID-19 restrictions last year. In CAC sequential improvement continued this quarter, revenue is back to growth driven by net revenue per hectoliter and gross profit grew almost 9% after a year of decline.

EBITDA declined by 2% as we lap it over a low base in SG&A. The Dominican Republic continues ahead in terms of recovery. Volumes grew by low single digits led by Presidente brand family, which suffered from lack of bottles last year. In Canada, volume grew by 5%, driven by both industry lapping historically bad weather and COVID-19 restrictions in early 2022 and estimated market share gains in both beer and beyond beer, our premium brands led the pack growing above 10%. In terms of brand health, our above core brands are healthier with highlight to Corona the highest brand power in the country. Net revenue per hectoliter grew above 9% following revenue management strategy and favorable mix impacts, and EBITDA grew 3.5%. So the numbers for the quarter were good, but one thing that I would like to highlight today is that in order for Ambev to do well in a sustainable way, our ecosystem also has to do well.

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On the last call I mentioned why I believe that the company is more and more solid from a cultural, operational, and financial perspective. What I did not mention was that it’s not just about us, but it’s about the whole ecosystem. Our platform serves a purpose that goes beyond the company itself. For instance, as I mentioned before, it has been great to see number of fans of our brands growing and our NPS with customers continuously improving another information is that the NPS with our suppliers also reached the highest level of the past six years as we have been collaborating more. We are also proud to see that as a result of our partnerships and relationships with different stakeholders of our ecosystem, we obtained significant results in terms of reputation with Merco, the leading corporate reputation monitor in Latin America, ranking the company in the second place for the fifth consecutive year in Brazil, and in the first position for the sixth consecutive year in Bolivia.

In Argentina, we evolved from fifth to fourth place. And finally, in terms of value creation, the value that’s being created is also being shared with our ecosystem. To illustrate this point, I wanted to share some data from our value-added statement contained in our financials. In the first quarter, we generated roughly BRL30 billion in gross revenues, of which approximately BRL14 billion were pay to suppliers about BRL8 billion in taxes were collected. Remuneration of our people and third-party capital were about BRL1.8 billion each. In potential remuneration to shareholders correspond to about BRL3.8 billion. What this all means is that as Ambev grows, the ecosystem also benefits and for Ambev to grow sustainably, the ecosystem also needs to thrive.

And this is important to us as we think about creating a future with more cheers. Now looking ahead, we continue to expect 2023 to bring both challenges and opportunities, but I remain confident that we are on the right track and the team is committed to deliver once again. Short-term volatility and challenges vary market-by-market, but we believe that our long-term strategy is sound and we will continue to focus on the things we can control and on executing our plan to deliver our ambitions for the year, which is continuous and consistent growth with profitability. In terms of growth, we are talking about Brazil’s momentum and we are talking about international operations recovery leading to a consistent top and bottom line growth. And in terms of profitability, we are talking about not only improving ROIC once again, but also looking to improve growth in EBITDA margins as top-line momentum remains while costs and expenses headwinds continuous to ease.

So having said all that I would like to thank you all, and let me hand this over to Lucas. Thank you.

Lucas Lira: Thanks, Jean. Hello everyone. I would like to kick things off by putting our Q1 performance into perspective in terms of what we expected would be the same and what should change during this year as compared to 2022. Starting with what would be the same, first top-line growth remains a key priority with net revenue performance once again, driven more by net revenue per hectoliter than volumes. The result nearly 27% net revenue per hectoliter growth with consistent performance across our regions. Second, we expected a tougher Q1 given higher input cost pressures, but this time more from commodities than FX. The result cash COGS per hectoliter increased about 20% driven mainly by the timing of our barley and aluminum hedges.

And third, our focus on value creation drivers, such as return on invested capital, economic profit, and free cash flow generation all remain. The result, cash flow from operating activities declined almost BRL1 billion year-over-year, driven mostly by payables. Q1 payables are historically negative given the seasonality of our business, which has Q4 as our strongest quarter. Specifically with respect to Q1 2023, the decline is mainly a result of three things. Number one, lower non-income tax payables in Brazil given lower sales volumes versus March, 2022. Number two, lower volumes in CAC. And number three, a tough comp on non-income tax in Canada. As H1 2022 taxes were deferred to H2 given COVID in Canada. However, for the full year, we expect cash generation to improve.

Now, regarding what should change this year. First, we expected our cash COGS per hectoliter for Brazil Beer, excluding non-Ambev marketplace products to be significantly lower than the 16.6% growth in full year 2022. The result cash COGS per hectoliter rose about 15% and we expect this performance to improve materially during the remainder of the year as our aluminum hedges become a tailwind and the benefit from our FX hedges increase from Q2 onwards. Second, SG&A growth should improve given lower inflation overall as well as the implementation of internal restructurings designed to streamline and optimize our B2B, D2C and fintech technology big bets. The result cash SG&A grew 27% with administrative expenses growing 17% as we begin to capture projected savings, particularly in Brazil.

And third CAC in Canada to deliver organic EBITDA growth. The result CAC EBITDA was still about 2% below Q1 2022, but once again showed sequential improvements with the nearly flat EBITDA performance in the Dominican Republic, and Canada EBITDA was back to growth delivering 3.5% improvement year-over-year. Our EBITDA reached BRL6.4 billion in the quarter in our organic growth of almost 40% year-over-year, and which is 8% above our compiled consensus that we now disclose on our website. So we start the year definitely on track to deliver better organic EBITDA growth in 2023 than the 17% organic growth we delivered last year. Turning to our net income performance. Normalized profit totaled around BRL3.8 billion in Q1 in organic growth of about 8% year-over-year, and which is 22% above our compiled consensus.

This performance was driven mostly by the EBITDA growth we delivered, but also due to net finance results growing at a lower pace. Here although on the one hand, interest expenses increased mainly due to fair value adjustments of payables pursuant to IFRS 13 and losses on non-derivative instruments that were mainly a result of non-cash losses on intercompany balance sheet consolidation and third-party payables increased. On the other hand, losses on derivative instruments were actually lower than last year because of lower carry cost expenses in Brazil and Argentina. As you may recall, starting in Q3 2022, we have gradually reduced our financial hedging in Argentina and this decision led to a positive year-over-year impact this quarter. Before moving to Q&A, a quick update on tax litigation in Brazil.

Since our full year 2022 earnings call, there have been new developments in some of our relevant cases that are worth mentioning. Accordingly, the Brazilian Supreme Court and the administrative tax courts recently issued rulings in connection with certain of our tax positions involving approximately BRL9.5 billion that are classified as a possible but not probable chance of loss. And the good news is that the results were mostly favorable to the company, some of which we’ve already reclassified from possible to remote chance of loss. For further details, please refer to Items 26 and 28 in the notes to our financial statements. We expect the administrative and judicial courts to continue ruling on certain of our tax positions in the coming months, such as tax assessments received in connection with the deductibility of the IOC, the deductibility of goodwill amortization expense, and the Manaus free trade zone, as well as the case related to the ICMS substitute in the taxable basis of the PIS and the COFINS.

We will keep the market updated accordingly, and as we mentioned before, we believe in the merits of our legal position and that we will ultimately prevail. Finally, we will publish our 2022 ESG report on our website in the next few days. Stay tuned. That’s it for me. Let’s go to Q&A.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. First question comes with Lucas Ferreira – from Lucas Ferreira with JPMorgan. Please go ahead.

Lucas Ferreira: Hi, good morning everybody. I hope you’re hear me well. My question is regarding the – your outlook for volumes, in the beer volumes in Brazil. From listening to your comments and also looking at some industry data, apparently March was a fairly weak month, I don’t know if you know parts of Brazil. But just wondering if you have any views of why March was so weak and how if you see like already a rebound in volumes in April, eventually in May. And your overall expectations given the tough comps for second quarter and third quarter if you think these comps are really tougher than the first quarter, like you said, it’s tough. So, your outlook for volumes for the remainder of the year. Thank you very much.

Jean Jereissati: Okay. Thank you very much, Lucas. So I am – I mentioned in my call that we are – so we are 7% in this quarter above the 2019 levels. So this is an important number for us to keep follow because there were a lot of noise during the pandemic and back and forth, but this quarter we were 7%. Something happened on this quarter, so that our sellout volumes were ahead of our selling volumes. We kept our revenue management strategy discipline while we saw overall market competitors really intensifying promotional activities. So that was one of the reasons why we couldn’t put more products out in the trade. But overall market share with consumers with sellout volumes, they were okay, they were in line. When we think about the performance compared with last year in reality we did good in January, but – in February, but somehow it could be better in our view because of this promotional activity and our discipline on revenue management.

We knew that March and April would be tough comps because masks were lifted in the previous year. And they were good months when we think on a broader deseasonalized volume level of a given March and April in a historical level. So in terms of deseasonalized, it was okay. We are going to – have to wait a little bit more to understand how it’s going to go May and June to really give a proper more color on the year. But we are confident market share sequentially it is growing, it is going up. Our brands are strong. The minimal salary is coming. So somehow we believe that it will be a good year in terms of volumes.

Lucas Ferreira: Perfect. Thank you Jean.

Operator: Thank you. The next question comes with Camila Azevedo with UBS. Please go ahead.

Camila Azevedo: Hi, Jean and Lucas. Thank you for taking the questions. My question is about BEES. So could you give us more color on what drove the deceleration of coming from BEES? Thank you.

Jean Jereissati: Okay. So yes, so we – you are talking about, probably about the marketplace, right? We are in reality talking a little bit. This is responsible overall for 88% of our customers and 75% of our volumes are really covered by BEES. We are very proud that we reached 1.1 million customers accessing BEES and making their orders at some point in time. Customers are spending more than 20 minutes in the app per week. 95% of them are registered in our reward program. So the platform is – and our NPS went to above 60 on the first quarter. And all this is really related with BEES. Now talking about the marketplace, the GMV of non-Ambev products sold, we reached 400 million this year. It was 36% above last three years.

Looking at our portfolio, there is some seasonality, right, when we think sequentially when Q4 are compared with Q1. So we have a part of our portfolio that we are trying to learn about how they perform in terms of seasonality. So we have hard liquors, we have water, food. So there is a seasonality that we are learning, but compared with last – last year was 36% above. Now we have more than 366 – 630 SKUs. There is this opportunity to increase. And we are really working on getting deeper alliances on that. So we are learning with the GMVs and how each product performs month by month. But I would say that I’m happy. So if we – another thing is that the gross margin of the products that we have in – that we had in this quarter were much better than the gross profit that we had in last year.

Last year we were with a lot of commodities, now we have alliances and brands. So somehow I’m confident with the potential of the marketplace platform. It will sweat our assets, low investment with good returns and increasing margins and consistent growth.

Camila Azevedo: Thank you, very pleased.