Ambev S.A. (NYSE:ABEV) Q1 2024 Earnings Call Transcript

Ambev S.A. (NYSE:ABEV) Q1 2024 Earnings Call Transcript May 9, 2024

Ambev S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, good afternoon, and thank you for waiting. We would like to welcome everyone to Ambev’s 2024 First quarter Results Conference Call. Today, with us we have Mr. Jean Jereissati, Ambev’s CEO; and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a slide presentation is available for downloading on our website ir.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. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. 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 2023 first quarter results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as 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.

Jean Jereissati: So, hello everyone. Thank you for joining our Q1 earnings call. Today, before jumping into our first quarter results, I would like to say some words about the situation in the Rio Grande do Sul. Since last week, we have been working with all our energies to help our team and the population affected by the floods in the state. As a Brazilian company, we will always be at the side of Brazilians in all situations. So in addition to protecting and helping our colleagues, we have already donated more than 185,000 liters of water to 11 affected municipalities. We have also been taking water directly from our brewery in the Greater Porto Alegre to supply 4 hospitals in the capital of the state, totalizing 375,000 liters.

In addition, we have stopped our production in Porto Alegre to start producing water to distribute to the local population. And we won’t stop. We will continue our efforts to find other solutions to help our ecosystem. Now, talking about the first quarter, in our last call, I left you with three main messages regarding 2024. First, that we were and still are confident about volume growth, especially in Brazil. Second, we are working to deliver solid free cash flow generation. And lastly, our main challenge in the year is taxes in Brazil. And this quarter was a good example of this. Brazil had its best volume performance for a Q1 in history in both Beer and NABs. CAC grew volumes. In LAS, in Canada, volumes decline were mainly driven by industry.

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Q&A Session

Cash flow from operating activities and free cash flow grew almost BRL 1.3 billion each versus last year. And net income was slightly negative, thanks to currency devaluation in Argentina into a higher effective tax rate due to lower deductibility from IOC and VAT government grants in Brazil. All in all, a good start to the year. Going into more details on this quarter’s performance, I would like to focus on 3 topics. First, the Brazil Beer top line, then Brazil NABs and Argentina. So let’s get started. Brazil Beer volumes grew 3.6% in the quarter. According to our estimates, industry was slightly positive this quarter and we estimate to have gained market share. Premium and super premium brands grew in the low-teens led by Corona that grew over 70%, Spaten and Original.

And for the fifth consecutive quarter, we estimate to have gained market share within premium brands. In core plus, Budweiser family grew 55%, reaching the all-time high volumes in any given quarter. Our core brands remained healthy, growing slightly above the industry. Growth this quarter was led by Antarctica and Brahma. And our value brands declined double-digits. I’m very satisfied with this shape of volume growth led by premium and core plus with a resilient core, while trade inventory levels remained stable. Now onto net revenue per hectoliter that grew 0.9% versus last year. Let me break it down into the main components of growth. Price to retailers grew above CPI at about 5%. This is well aligned with our strategy of keeping prices in line with inflation plus and minus the mix impacts.

In addition, when we look at [indiscernible] data, beer consumer inflation reached 4.2% in the quarter. Such data, coupled with a growing industry, showed how structurally healthier our industry is. However state VAT grew ahead of our pricing. This growth is mainly explained by the different schedule that states updated their consumer price reference tables on which VAT rate applies compared to our price calendar of the year. Although we might continue to see such an impact for the next quarters, that is not a structural headwind. With that, net revenue grew 4.5% in the quarter ahead of COGS delivering a 200 basis points gross margin expansion and a EBITDA margin of 33.6%, 260 basis points ahead of last year. In Brazil NAB, volume grew 6.5% versus last year.

Growth was led by health and wellness brands. Pepsi Black grew 33% and now represents 25% of total Pepsi-Cola family. And Guarana Zero confirmed its momentum with a 61% growth. Number of buyers grew versus last year in all categories supported by beer with a highlight to Guarana Antarctica Zero that more than doubled the number of buyers. Net revenue per hectoliter grew 7% as revenue management initiatives coupled with a positive brand and single serve mix more than offset increased VAT taxable basis. Even though COGS per hectoliter grew in line with net revenue per hectoliter on the account of mixed sugar and overall inflation, EBITDA grew almost 18% reaching an EBITDA margin of 28.6%. And finally, Argentina. Volumes contracted almost 20% this quarter as macro environment continues to be challenging.

In nominal terms, EBITDA reduced significantly given currency devaluation that took place in December 2023. Lastly, despite the industry performance, cash generation excluding cash [upstreams] was above last year performance. Regarding CAC in Canada, the Dominican Republic led CAC to another great quarter with volume increase, double-digit EBITDA growth and gross and EBITDA margins expansion. Canada saw a a tough industry again. However, we were able to offset top line performance, delivering a slight negative EBITDA performance with a resilient cash generation. And when we put things in a long-term perspective, we see that we made huge progress since 2019. Brazil Beer is a good example of how our commercial momentum continues. We have been making great progress in brand health.

Together, our focus brands Corona, Spaten, Brahma and Budweiser reached an all-time high brand health indicator. Innovation continues to work with Stella Pure Gold and Budweiser Zero combined, growing over 40% versus last quarter. And we will add Corona Cero to the portfolio as the official sponsor of the Summer Olympic Games of Paris. These continued to expand and add new third-party products in the marketplace, resulting in a wider assortment of products and a better experience to our customers. And the delivery reached over 65% of the population coverage in Brazil with presence in more than 700 cities. And to close, no different than other years, this year presents challenges and opportunities along the way. Short-term uncertainties are part of operating in Latin America and that’s why we focus on what we can control and on our long term strategy.

For the year, we continue confident in volumes. Tax will continue to be a headwind, impacting both the top line and the net income. And we will work to deliver consistent and sustainable results, expanding margins and improving cash flow. So thank you very much. Now let me hand over to Lucas.

Lucas Lira: Thank you, Jean. Good morning and good afternoon everyone. I closed our February call by saying that in terms of our financial performance, the name of the game in 2024 would be consistency and delivering growth, profitability and resilient cash flows, despite the Brazil tax and Argentina headwinds. To do that, our focus would remain on financial discipline, value creation and capital allocation. And Q1 figures shows that we are off to a good start. EBITDA grew about 12%, 15% ex Argentina. Gross margins expanded 100 basis points organically, 150 basis points ex Argentina. EBITDA margin expanded 240 basis points organically, 290 basis points ex Argentina. Normalized profit declined slightly by 0.6% and cash flow from operating activities totaled BRL 718 million.

Now, today I want to spend a bit more time on our net finance results, income tax and cash flow given the materiality of the impacts from Brazil taxes in Argentina. Starting with net finance results, which improved nearly BRL 600 million compared to last year. There were 3 main drivers of such improvement. First, lower losses on derivative instruments given lower carry costs to implement our hedging strategy for FX in Brazil and for commodities. Second, lower fair value adjustments of payables pursuant to IFRS 13 and CPC 46. Third, the impact of our financial performance decisions in Argentina, where higher cash flow generation during 2023 led to higher interest income. We had lower losses on derivative instruments given our change in hedging strategy and U.S. exposure.

And we also had lower losses on non-derivative instruments, thanks to less third-party and intercompany payables exposures. Lower carry costs in Brazil and lower fair value adjustments of payables should continue to help our net finance results year-over-year performance going forward. However, the year-over-year gains related to Argentina will be significantly reduced as we lowered our hedging and U.S. exposure throughout last year. Also, we should continue to see higher costs associated with judicial bonds and judicial guarantee expenses. Now let’s move to income taxes. Our income tax expense totaled almost BRL 700 million in the quarter, which was equivalent to an effective tax rate of 15%. 4 main drivers here. First, higher EBT, which grew from roughly BRL 3.9 billion to nearly BRL 4.5 billion.

Second, the final approval during the quarter of our 2023 request to renew the income tax incentive for Arosuco, our subsidiary in the state of Amazonas, which is a one-off. Third, following the December 2023 change in legislation, there were no deductions related to state VAT government grants. Although the new law is already being challenged, we are not yet technically in a position to continue accruing such deductibility. Should the situation change on the litigation front, we will then accrue the corresponding benefit retroactively. And fourth, following the December 2023 change in legislation, there was less IOC deductibility given lower IOC basis for the 2024 fiscal year. We continue to work towards offsetting this as much as possible.

In other words, though net income was pretty much flat in the first quarter, these headwinds remain for the time being and should impact our performance during the rest of the year. Since I’m on the topic of taxes, let me provide a quick update on tax litigation and the tax reform on consumption in Brazil. In terms of litigation, there were no material administrative or judicial rulings during the quarter, but we continue to expect decisions at the administrative level in the coming quarters. As for the tax reform on consumption, on April 24, the federal government formally submitted to Congress the draft enabling legislation, which may be voted in the House of Representatives by mid year. Although the transition period will only begin in 2026 and the parameters for the excise tax are somewhat clearer, there are still some important topics to be addressed, such as what the federal and state VAT rates will actually be, what the excise tax rates for beer and sugary drinks will actually be, and finally, how the transition period will be structured so as to ensure that there is no increase in the total tax burden of the industry, which was already among the highest in the world.

Okay, let’s quickly go over cash flow now. Cash flow from operating activities was positive, thanks to a combination of EBITDA growth, lower net finance expenses and better working capital performance, where higher inventories driven by a faster inventory buildup versus last year were more than offset by better payables, which benefited not only from a lower crop in Argentina that had adversely affected Q1 2023 but also from short-term raw material market dynamics in Argentina, which should revert going forward. Cash flow used in investing activities totaled approximately negative BRL 1.8 billion, and year-over-year performance was mainly impacted by CapEx investments, which were 12% lower than last year, and roughly BRL 800 million of investments in Brazilian treasury bonds, so there was ultimately no cash outflow.

And cash flow from financing activities was about negative BRL 2.3 billion, with year-over-year performance pretty much entirely driven by the BRL 1.7 billion disbursement in January given the Dominican Republic put option. So we began 2024 better cash flow-wise than we did in 2023, which is great, but we still have work to do during the remainder of the year. And finally, regarding sustainability, we will publish our annual sustainability report on our website in the coming weeks. So stay tuned. And with that, now let me hand it back to the operator for Q&A.

Q – Unidentified Analyst: [Technical Difficulty] that you got an injunction for March so that you no longer have to pay fiscal things on top of the state-level subvention. So just wondering, number one, whether this had an impact as well in terms of your revenue per hectoliter. And finally, and also in a related question, historically, we would see the industry and the company passing on higher taxes into prices. It doesn’t seem to be the case here. In my understanding from Jean’s remarks in the beginning, it continues not to be the case going forward. So if you could elaborate on that. I’m trying to get the full picture on the taxation on sales.

Jean Jereissati: So let me give you some information on that. So, yes, you know that the VAT in Brazil is, we have this methodology that is a substitute, right? I’m responsible for the whole VAT of my customers. So it’s a big chunk of an important line for us. What happened? If you look 10 years back to our performance in net revenue per hectoliter in Brazil Beer, some reduction on net revenue per hectoliter Q1 versus Q4 happens more frequently than not. So, if you look 10 years back, this would happen more frequently that what happened in this previous 2 or 3 years, that things changed a little bit because of the pandemic and because of the discussions on the tax reform. But it’s important date when turned the year that the states decide to get their tables actualized right, and usually these impact on the net revenue per hectoliter.

So this happens more frequently than not. It was different 2 or 3 years ago than the historical. We suffered, for example, this in the NAB business during Q3 and Q4. If you look at my numbers, we suffered a little bit on this VAT changes in NABs in Q3 and Q4. And now we are okay, as we pass it through and find revenue management initiatives. And what I mentioned in my initial remarks, and I’m not sure if you got it right, is that these things, long-term wise, they connect. So what’s happening is more of a mismatch that in the long-term these things should grow together. So, we had 18 states that updated their VAT taxable bases during Q4 and the beginning of Q1. We protected the carnival with all these changes happens in March. We already started to passing it through to our customers and to consumers.

And long term wise, this thing should be imbalanced. Okay. So let me get to Lucas for Lucas to update you on the theme of PIS/COFINS.

Lucas Lira: Regarding PIS/COFINS, you’re right, Note 17, right to our quarterly financials discloses the injunction that we obtained already in connection with the PIS/COFINS. However, that injunction was granted towards the end of March. So it didn’t really impact Q1. The impact will be seen going forward. Okay. So it’s more of a prospective impact than having any material impact on Q1.

Operator: Next question from Isabella Simonato with Bank of America.

Isabella Simonato: I have just two quick topics. First of all, I wanted to explore a little bit more the cost performance of Beer Brazil, because I understand that this was maybe the quarter, right, when we look for the 4 quarters of 2024 with the easiest comp in terms of cost, right? So thinking about the guidance, right, that you guys provided in Q4, how should we think about this cost deceleration going forward? And if you can elaborate on what drove the minus 3.5% this quarter, I think will be helpful. And the second thing, Lucas, thanks for detailing the financial results performance. But if you could just recap a little bit, you mentioned about some of the effects that might be reversed right, in the next couple of quarters, if I understood correctly, the cash level that you run in Argentina and consequently, the financial revenues associated to that and other deposits and so on.

So, if you could just reconcile to us what’s the trend of these main lines, I think it would be helpful for us to understand the sustainability of this. That’s it.

Jean Jereissati: I will get the first one and then Lucas get the second one. Yes, so our cash COGS in Q1 Brazil Beer ex marketplace declined 3.5%. As you mentioned, you were right, this Q1 was easy comp, but we have been working very hard to get this cash COGS down. So what happened? It was really FX and commodities tailwinds partially being offset by the premium mix and suppliers NPV and inflation overall. But even though the Q1, it’s outside of the full-year guidance that we made that it was cash COGS will be in between minus 0.5 to minus 3, we should converge during the year inside this range that we mentioned in the previous quarter. So there is not that much news on here. The plan is going as we did and the guidance we maintained.

Lucas Lira: Let me break down financial results by the main lines just to try and give some additional color on the quarter performance and what shouldn’t change or what should change going forward, if that helps. So the first big impact that we saw in Q1 was related to losses on derivative instruments, which were significantly lower, the losses of last year. 2 main effects here, carry costs in Brazil and lower U.S. dollar exposure in Brazil. So that was big impact. #1, there was marginally some lower exposure to the U.S. dollar on our cost base in Brazil, BRL 1.8 billion versus BRL 2 billion last year. In addition to that, the carry cost declined from roughly 7.5% to 3.9%. So, that’s kind of the biggest chunk of gain year-over-year.

And the second is really related to hedging in Argentina. As we disclosed in December, we started the year with no financial hedges. So we carried no carry cost in the quarter whatsoever, whereas in Q1 of 2023, we were still ramping down gradually our hedging. So there was some carry cost embedded into the performance for this line in Q1 of last year. Okay. So that was benefit #1. What this means going forward is with respect to the Brazil hedging strategy, we should continue to see kind of benefits throughout the year, right, assuming carry cost stays where they are today. So the Brazil portion of this gain, right, should continue to be a reality. And for Argentina, we continue to see some benefit going forward, but to a lesser extent, because as 2023 progressed, we reduced our hedging.

So the carry cost was gradually lowering as well. So when we lap that, even though we remain unhedged, and as we continue to remain unhedged in Argentina, the year-over-year benefit is lower because we were already gradually reducing our hedging in Argentina. Okay. So that was the big effect, #1. The second one relates to NPV payables. So that was a lower expense in 2024 in Q1. That should continue to be positive throughout the year, right. Jean mentioned that in our cash COGS per hectoliter performance, there’s a negative impact coming from this. But on the flip side, there’s a positive impact in our net finance results pursuant to kind of IFRS 13 and CPC 46. So with the lower interest rates, this line should continue to be positive throughout the year, #1.

And also, another important interest expense that’s coming down year-over-year is the CND put option that it was already exercised. So the tail that’s left is still going to impact, but to a much lesser extent. So interest expense should also flow through positively for the remainder of the year. And then I think the third big bucket relates more to Argentina. Argentina, I already talked about derivative instruments, but there are 2 other elements that are relevant. #1, interest income. Since we generated in 2023 more cash flows than we generated before, we started the year with a higher cash balance. And so that translated into more interest income on the cash balances that was deposited in Argentina year-over-year. So that was positive impact #1.

And on the losses on derivative, non-derivative instruments line, even though there was an impact of the funds that we took out of Argentina through the blue chip swap, this was more than offset by lower balances that we had in Argentina with respect to third-party suppliers, with respect to intercompany payments. And so the lower cash balance more than offset the impact that we had as we took money out in the beginning of the year. Okay. Going forward, this line is really going to depend on what we do in terms of cash upstreaming in Argentina. Let’s see how the year progresses and also how these cash balances behave. We’ve been reducing them consistently since 2023. So if we continue to do a good job, this should continue to be a benefit going forward.