Ambev S.A. Q4 FY2020 Earnings Call

Good morning and thank you for waiting. We would like to welcome everyone to Ambev's Fourth Quarter 2020 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 that this event is being recorded and all participants will be in a listen-only mode during the company’s presentation. 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 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 4Q 2019 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of the Ambev's normal activities. As normalized figures are non-GAAP measures, the company disclosed a consolidated profit, EPS, EBIT, and EBITDA on a fully reported basis in the earnings release. Now I'll turn the conference over to Mr. Jean Jereissati, CEO of Ambev's. Mr. Jereissati, you may begin your conference, please.

Good morning, good afternoon. Thank you very much for joining our call. 2020 was unforgettable in many ways. What a year! On one side, all the sadness, hardship, and challenges that COVID-19 brought. On the other, I praise the resilience of our team and respect their commitment to the profound transformation our company went through last year. Ambev made a positive impact in society. Ecosystem collaboration for a better world was the tone of 2020. We launched meaningful innovations, from Cusqueña in Bolivia to the most commented sparkling wine, LP QTP in Argentina. Our innovations grew our portfolio and expanded our reach in terms of new propositions to consumers. In Brazil, Brahma Duplo Malte was the star of our pipeline. Thanks to an innovative development process, singular, liquid, and a disruptive marketing launch, the Beats franchise revamp with GT and Zodiac also brought us a breath of fresh air with the new generation. Ambev's technology platforms were exponentially adopted during 2020. Digital businesses are here to stay and platforms like Ze Delivery and BEES, our super app, were in the right place at the right time. As for the fourth quarter, we built on the commercial momentum from Q3 to deliver a good finish to the year. More importantly, the success of our commercial strategy in the quarter positioned us well for 2021. And here's why. Beer volumes continued to recover and grew year-over-year in 7 out of our top 10 markets, led by our double-digit growth in Brazil, Chile, Guatemala, and Paraguay. It was also significant to see our beer volumes in the Dominican Republic recover strongly despite the COVID-related restrictions. We have been strengthening brand equity and power of our portfolio and gaining market share in most of our key markets. In Canada, our portfolio grew share once again. In Brazil, beer volumes grew almost 12% despite a still very volatile environment, the supply chain constraints that impacted us, our service level, the lower government stimulus, and our price increase rollout. On top of that, our global brands outperformed the total industry and had solid growth in brand equity and power. Bohemia and Brahma Duplo Malte finished the year as the top 2 leader brands in the underdeveloped core plus segment and still have plenty of room to grow. In the core segment, after years of volume decline, we stabilized our brand performance, thanks mainly to the expansion of the 300 ml returnable glass bottles in smaller retail locations and the takeaway strategy that we implemented. We strengthened our value portfolio with the launch of two more regional brands, Beer Hero in Poe and Esmera in Goiás. Finally, we delivered a strong net revenue per hectoliter, thanks to a successful implementation of our price strategy that was built around a more flexible approach, a positive mix driven mainly by innovation performance and revenue management initiatives, including a smarter occasion-based promotional activity that proved very efficient. We continue to transform our business to quickly respond to consumer and customer needs and solve their pain points. Today, I would like to share more details about the role technology is playing in this process and our DTC and B2B platforms are the best examples worth discussing. So, let's start talking about Ze Delivery in Brazil. Ze's value proposition is really simple: your favorite beverages at reasonable prices, cold in 35 minutes. This is simple, but very, very powerful. Ze is present in more than 200 cities in all 27 Brazilian states and in 2020, delivered 27 million orders, with the equivalent of one order per second only in Q4. It also delivered a rich assortment of products from over 40 partners and was rated the best delivery app on the App Store and Android. Its strong relationship with more than 2,000 retail partners, such as small and large supermarkets, smaller stores, and bars, is essential to ensure a high net promoter score, currently north of 80 for both consumers and customers. Ze's focus in 2020 was geographic expansion and improvement of the operational model. For 2021, it will focus on increasing penetration, retention, frequency, and assortment in order to continue the journey to fulfill its full potential, consumer by consumer, occasion by occasion. Now, let's talk about BEES, our super app, our B2B marketplace platform. BEES is designed to provide our customers more convenience in terms of 24/7 order taking and delivery tracking. It also serves as a marketplace that provides a broader assortment, additional logistics, and financial services. It aims to be the one-stop shop solution for retail, with a transformational opportunity for Ambev to develop a closer and more reliable relationship with our customers' ecosystem. It's about better quality of interaction. As we listen more and have more data to work with, we can ultimately offer a better service level to our partners. The platform was developed in the Dominican Republic, where 90% of our customers have already adopted it. There, our marketplace service already offers a broader assortment across 8 different categories, with 70 different SKUs that go beyond our beverage portfolio. Going into 2021, we expect another challenging year. COVID is still very real, and we will face larger cost pressures with cash COGS per hectoliter in Brazil expected to increase in the low 20s. That said, our commercial and top line momentum built last year is also real. In fact, our top line performance will be one of the most important things to watch as we work to partially offset the cost headwinds. The good news is that we are off to a good start with volumes growing above 10% in Brazil beer so far despite carnival cancellation. Also, pricing performance should benefit from the mix continuing to play in our favor, and a smarter promotional activity remaining in the full-year, taking into account the market environment. I have no doubt that we are starting this year much more prepared than we were in 2020. Our portfolio is in better shape, our brand power is healthy and growing, the innovation pipeline is strong, and our route to market has been transformed through all these digital platforms that scaled very fast. On top of that, cash generation continues to be strong, and we remain committed to invest ahead of the curve. That was pretty much it. Thank you very much for your time and attention. I will hand this over to Lucas.

Thanks, Jean, and hello, everyone. Let me start by talking about the tax credits in Brazil, given that they were so impactful in the quarter. We recognized BRL 4.3 billion in tax credits, of which BRL 2.5 billion were recorded in other operating income and BRL 1.7 billion were charged to our financial results. These credits result from a 2017 Brazilian Supreme Court decision on the merits that declared unconstitutional the inclusion of the ICMS state tax in the taxable basis of the PIS and the COFINS federal taxes. As further disclosed in our notes to the financial statements, with the support of counsel and external advisers, in December, we concluded the estimation with reasonable certainty of the amount to which we are entitled. Given the nature of the dispute, these tax credits are technically part of our normalized results from an accounting standpoint. However, due to the materiality of the amount, we decided it was appropriate to do two things: one, disregard these tax credits for purposes of calculating our organic performance and treat them as a scope change; and two, we updated our accounting policy to record all extemporaneous tax credits under other operating income instead of the P&L lines that were originally impacted in the past. If it weren't for the scope adjustments, our nominal normalized EBITDA for 2020 would have been nearly BRL 19.5 billion with an EBITDA margin of 33.4%, and normalized profit would have been approximately BRL 8.2 billion. There is still ongoing litigation in this matter, and we will keep the market updated as things progress. Any potential further tax credits will be recorded when the prospects of their recovery are practically certain from a legal perspective and the amounts to which we are entitled can be estimated with reasonable certainty. It is important to point out, however, that even if we disregard the impact of the tax credits, the financial performance in the quarter was actually good given the circumstances. We delivered a consolidated top line growth of 13.4%, with a healthy combination of 7.6% volume growth and 5.3% net revenue per hectoliter growth. Gross margin and EBITDA margin improved sequentially once again on a consolidated basis, and net-net, EBITDA declined only by a slight 0.1% year-over-year. This performance in the quarter allowed us to deliver a 4.7% top line organic growth for the year, while EBITDA declined organically 11.1% in 2020. In addition, full-year cash flow from operating activities actually grew 2.6%, and we managed to further strengthen our solid liquidity position, which proved critical in the very volatile operating environment of 2020, which we expect to continue into 2021. CapEx totaled BRL 4.7 billion for the year, and we returned BRL 7.7 billion to shareholders in the form of dividends and IOC. Switching gears to 2021, the challenge around improving our profitability remains front and center. Margins will once again be under pressure given significant FX and commodity headwind. For instance, our average hedge rate for the BRL versus the U.S. dollar for 2021 was BRL 5.29, which represented over a 30% increase year-over-year. The BRL showed high volatility in 2020 and was second only to the Argentinian peso in terms of depreciation relative to the U.S. dollar among major Latin American currencies. Although we expect to see a correction in the future, this is definitely the biggest hurdle we need to overcome this year. In addition, unlike the past, when we saw some negative correlation between commodity prices and the BRL devaluation against the U.S. dollar, commodity prices have actually trended against us, particularly barley and corn, not all of which we have the ability to hedge. As a result, we currently expect Brazil beer cash COGS per hectoliter to grow in the low 20s for the full-year. To tackle this challenge, we will basically have to get two things right: first, deliver a solid top line performance; and second, successfully implement several mapped blends and initiatives around productivity and maintain our financial discipline with respect to managing our costs and expenses. As I have mentioned in the past, there's not going to be an easy solution, and there's not going to be a silver bullet. It's difficult to predict exactly how much of the margin pressure we will be able to offset through these levers. But we remain fully committed to continuously and consistently improve our results during the course of the year without, however, losing sight of the longer term. As Jean mentioned, we are on a journey to transform the company, and we must do so while investing behind the long-term sustainability of our business. Speaking of sustainability, I also wanted to share some brief highlights on the progress we've been making on this front. In 2018, we announced our sustainability goals for 2025, which were broken down into five pillars: water, climate and energy, circular packaging, sustainable agriculture, and smart drinking. I am happy to report that in 2020, we made progress on all fronts even during these challenging times, and we remain on track to deliver our goals by 2025. For instance, in terms of clean energy, in Chile and Argentina, we are already operating with 100% renewable energy, and we expect to have more than 90% of our Brazilian breweries supplied with renewable energy by 2023. In addition, we are extending the supply of renewable energy to 100% of our distribution centers in Brazil, which will enable us to charge our delivery fleet comprised of at least 50% electric vehicles by 2023. As a final note, I wanted to share the news that Gilliam Acacia is succeeding CHA Oliver as our Head of Investor Relations. Yakka, as he is also known, joins us from Budweiser APAC where he spent the last seven years leading the FP&A agenda for the region. Levi, meanwhile, is taking over as Head of M&A for Ambev. I wanted to thank Levi for his work in IR over the last two years and wish both the best of luck and success going forward. With that, let's go to Q&A. Thank you.

Hi Jean, Hi Lucas, thank you for taking my question. The first one would be about the tax credits. If I understood correctly, there are more BRL 1.9 billion tax credits to collect over time, correct? So, do you have any visibility on timing for that? On top of that, will it be reasonable to expect a risk statement of Brazil beer sales of 2020? This is the first question. The second one, if I may. With the redesign in agreements between the Coke bottlers and Heineken announced yesterday, one of the main concerns of the market has been about competition identification, particularly in the premium segment. So, my question is what can we expect from Ambev as mitigating levers for, let's say, this potential higher competition? Thank you very much.

Thank you for the question, Marcelo. I will hand over the first one to Lucas and then I’ll take the second one.

Okay. Hi, Marcelo. Thank you for the question. With respect to the tax credit, Marcelo, there is no clear timing yet concerning the BRL 1.9 billion of potential tax credits that we disclosed in our footnotes to our financial statement. This really depends on the judicial system in Brazil. We still await the judicial decision that will give us reasonable certainty to be able to record and recognize these credits. It is really contingent upon the core of the judicial dispute regarding this amount.

And about the situation with Heineken and Coke, Brazil has always been a very competitive market. It's too early to predict how this situation will unfold. What I can say is that two years ago, we really started to transform our market approach significantly, and we believe that we are gaining a new edge. We have to remember that 30% of our volumes are distributed by 150 wholesalers that have been with us for over 20 years, and they are going through a business transformation as they adopt platforms like Zé Delivery. The remaining 70% is distributed by approximately 200 direct distribution centers. We are investing big time in technology and on the DTC and on the BEES platform, and we believe these will be our competitive edge. With this type of platform, we are seeing a transformation where sales representatives who previously had only brief interactions with customers can now spend much more time connecting and learning about marketing strategies. Our strategy is to continue investing in this digital transformation.

Okay. Thank you very much, Jean and Lucas.

Hello Jean and Lucas. Thank you for taking my question. I have basically two questions here. The first one is regarding the 10% volume increase you mentioned this year. Could you just provide us a bit more breakdown in terms of regions and mix and how that's been developing? We're curious, especially because of the end of the government aid program. So, especially in North and Northeast, we were wondering if you have been seeing, let's say, lower volume recoveries than in the other regions. The second question is relating to your digital initiatives. Could you guys comment a little bit on minor.com? It's been evolving quite well; I know it's been a big bet in terms of competing against cash and carry. So, what is the strategy on that front? And how do you see this developing going forward?

Okay. So, let me start with the volumes. We used to say that we lost close to 10 million hectoliters in Brazil beer from our peak volumes in 2014, and we have been working to get this 10 million back. In 2020 alone, we were able to recover 4.5 million hectoliters. That was possible because we created new occasions for in-home consumption. We have revolutionized the way we connect with our consumers. 2020 marked a moment where we can say that pretty much all the additional volumes sold in the industry were driven by Ambev through a holistic approach on portfolio technology, marketing, and RTM. These efforts are structural. We remain optimistic about the momentum we’ve seen in January and February of 2021. So that's it; we are investing in the things we can control, and we are excited about these new initiatives. The scenario is still fluid, and we are closely monitoring how it evolves. We see a lot of market share gains in the North and Northeast, especially with the expansion of our occasion-based strategies. Our emerging trends are witnessing substantial growth through both market share gains and new consumer occasions.

Just to supplement, specifically to your question around minor.com. This was an investment that we made a few years ago. We found a group of entrepreneurs that we were very impressed by and decided to partner together with them to develop a marketplace in the Brazilian market. 2020 was a significant year for them as they consistently managed to expand their presence in the market. The more we work with them, the more opportunities we see to leverage the scale and the infrastructure of Ambev. This is about creating a comprehensive ecosystem; it’s not just menu.com or BEES or Ze Delivery. We are also investing in Donus, which is our fintech start-up. We're really trying to create a menu of options to serve better on logistics, financial services, and product availability so that we can ultimately deliver tangible benefits.

Hello Jean, hello Lucas. Good afternoon, everybody. I have three questions, two focus on the digital initiatives and the last on the market. The first one, could you talk a little about BEES, particularly the BEES service and how that affects our commercial and go-to-market strategy? I get the benefits of scalability, use of Big Data, and how many services you can put together for customers. But I was wondering, in the past, the competitive advantage that Ambev had with the in-person presence in point-of-sale relative to competition. So, how can the digital platform enhance or cannibalize that direct route strategy? The second question is on Ze Delivery and the DTC initiatives. I know you're focused more on nominal dollar growth than margins, but you mentioned that one of the reasons for the increase in SG&A expenses in Brazil was expenses related to this DTC initiative. Can you talk a little about how this platform stacks up against your regular offline business in terms of gross margin and SG&A? Lastly, in your earnings report, you mentioned that in Brazil, the share of off-trade beer is back to pre-pandemic levels. Can you talk about how that normalization of sales channel reflected in your packaging and brand mix in the fourth quarter?

Okay. Many questions here, Duarte. So, BEES and menu.com are two strategies that we are really working together to execute our RTM revolution. We are thinking ten years ahead regarding RTM, aiming to evolve our approach. With that in mind, we don’t anticipate losing human contact with our customers. What we are focusing on now is to upgrade and transform the role of sales representatives from order-takers to business representatives who can assist our customers with category management, innovation, and technology adoption while still maintaining that human connection. BEES centralizes diverse services; it’s a 24-hour, seven-days-a-week platform that improves service levels and aids our customers in their digital transitions. We were initially concerned about how long it would take to drive adoption, and it exceeded our expectations. BEES is already behaving like a full business, achieving an annualized GMV of BRL 20 billion. Now concerning Ze, we know it's essential for the Brazilian community; it delivered significant value during the pandemic by addressing convenience issues. It has built a strong proposition, and its customer recurrence is noteworthy. The third point focuses on the off-trade channels, where the re-opening has been gradual. Some areas have reopened while others remain closed, which may create a fluctuating situation as restrictions vary at the municipality level. However, we are seeing overall trends returning—though consumption patterns will take longer to recover. We see many opportunities as we help bars and restaurants adjust to the market changes with our promotional strategies.

Just to supplement, in relation to BEES, it retains the human element by providing a support system for in-person sales representatives, utilizing technology to enhance their capabilities instead of replacing them. We are being careful about leveraging all channels available to us for expanding consumer access and enhancing our marketing strategies.

Great, thank you very much. A couple of things. One, I wonder if you can give us a little bit more detail on how your premium portfolio is evolving and the strategy there and your ability to maintain or gain share in premium. Then the second, you talked about how you're helping your customers digitally, but I'm also wondering—many bars and restaurants have been hurt badly because of COVID. Are there things that you've done in terms of perhaps temporarily loosening up terms, working capital assistance, or any other financial support to strengthen your relationships and create greater loyalty?

Thank you, Rob. Premium is a long-term strategy requiring patience to build brands, invest in brand equity, and we see that as an important revenue stream for the future. In 2020, our global brands continued their good momentum with double-digit growth. We are eager about the consistency of our portfolio strategy within premium brands and focus on growth across the board. In the case of restaurant clients, we’ve worked flexibly to support them during this challenging time. We collaborated with the National Bar Association and aided our customers by loosening payment terms, providing safety kits, and selecting a brand, Bohemia, to support as we reopened, allowing for better margins. We work with our clients to support their transformations, and our digital platforms are essential in assisting them in this process. The feedback has been positive; we have improved customer satisfaction compared to 2019.

And Rob, just to add that not only in Brazil but also in our other markets, our premium brands have been thriving, showing a positive trajectory across the board, reinforcing our commitment to this growth strategy.

Good morning, Jean, Lucas. Thanks for taking the questions. Two questions, please. After the strong volume score that you have in Brazil beer in H2 and the strong start indicated for Q1, could you please give us an update on your capacity utilization in Brazil?

Olivier, your line is open. You may continue.

Hi everybody. Can you hear me okay?

Yes.

Great. Just a very quick one on my side. Jean, Lucas, regarding the cash COGS per hectoliter guidance, the 20% to 23%, could you clarify how conservative that is in the sense that we should expect a mix shift back towards the RGDs? If I recall correctly, in the third quarter, you mentioned a significant impact from the mix shift. So, is there any upside for cash COGS, or could it be smaller depending on the way the mix shift behaves?

Yes, regarding transparency, we decided to provide guidance that everyone can incorporate into their models. This is the best figure we currently possess. We see a relationship with FX and commodity prices and how that can impact us, and the potential changes in recovery can certainly influence this. But we feel this is a well-reasoned forecast. We are working tremendously on maintaining our bar customers while supporting their transition to platforms that are more than just physical locations. We have big plans to introduce returnable bottles in the second half of the year for smaller retail outlets. We anticipate that we should continue gaining traction as the year unfolds.

Great. That’s great. Thanks, guys. Thank you.

The question-and-answer session is now finished. Now I'll turn the conference over to Mr. Jean Jereissati for final remarks. Please, sir.

Thank you very much for being with us today. To wrap up, I just want to say that I'm very confident about our future. I could mention three reasons. Though transformations take time and the environment remains challenging, our 2020 performance shows how responsive and agile we can be amidst change. Our portfolio is much better positioned now. We have momentum; the brand power of our portfolio is robust and growing. Innovation pipeline is strong, and our route to market has transformed through digitalization. This is a competitive advantage that we plan to extend as we continue scaling all these digital efforts. Our cash generation remains strong despite all the support we extended to customers during the pandemic. We are committed to pursuing our transformation responsibly while maintaining financial discipline, preparing Ambev for an even stronger future. Thank you very much, and have a good day.

Ambev's conference call is now finished. Thank you for your participation, and have a good day.