Ambev S.A. Q1 FY2021 Earnings Call

Good morning, and thank you for waiting. I would like to welcome everyone to Ambev's First Quarter 2021 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. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of 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 first quarter 2021 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, EBIT and EBITDA on a fully reported basis in the earnings release. Now I'll turn the conference over to Mr. Jean Jereissati, CEO for Ambev. Mr. Jereissati, you may begin your conference.

Thank you very much for joining our call. In February, I mentioned that 2021 would be a challenging year and the COVID-19 pandemic was still very real. After that, we saw a steep deterioration of the sanitary conditions in Brazil, coupled with increased mobility restrictions, which impacted our people, customers, suppliers, and consumers. At the same time, we were better prepared this time around. As a result, we delivered a great start to the year. We grew EBITDA by 23.8%, driven by double-digit volume and double-digit net revenue per hectoliter growth in Brazil, CAC, and LAS. Consolidated volumes were 5.4% above Q1 '19, and we were able to get back to flattish EBITDA versus Q1 2019. This was another quarter we saw clear signs that our commercial strategy is working, and that momentum continues. I was very happy to see the strong performance of our international operations, and Brazil continues to show that we are on the right path. We delivered volume growth in 8 of our 10 markets and market share gains in 7 of these markets. We saw solid net revenue per hectoliter growth in the quarter, driven by more flexible and efficient revenue management initiatives, including occasion-based promotional activities. We continued to strengthen our portfolio as we launched innovations across our markets. To name a few, Golden Extra in Panama, Bud Light Seltzer in Canada, and Michelob Ultra in the premium segment in Brazil. LAS delivered strong volume growth in the Core Plus and Premium segments with a great performance of Corona. In Argentina, we had an outstanding volume performance and improved net revenue per hectoliter, delivering top line growth of 67%. CAC restrictions were partially lifted during the quarter that, combined with the good performance of our above core portfolio and effective revenue management initiatives, delivered a top line growth of 28%, led by the Dominican Republic and Guatemala. Canada gained market share and grew volumes despite a tough comp in Q1 2020. Growth was led by hard seltzers and the above core beer portfolio with Michelob Ultra and Corona. Brazil Beer volumes grew 16% despite carnival cancellation in February and tougher mobility restrictions imposed in March. According to our estimates, we gained market share while growing volumes in all segments, with special highlight to our global brands that had solid high-teens growth and Brahma Duplo Malte that continued its growth momentum. Green health of the portfolio improved once again in all segments this quarter, and our digital initiatives continued to expand. Ze delivery fulfilled 14 million orders in this quarter, reaching an all-time high in March. Net revenue per hectoliter growth was strong again, mainly driven by effective revenue management initiatives that also had a positive impact, helping to standardize and increase efficiency across our portfolio. Today, I would like to further focus on BEES, our super app for our customers. We believe that BEES has been important to deliver a strong commercial performance as it digitizes our route to market, enables our customers to place an order in 3 clicks at any time of the day and offers assortment selections to POCs using algorithms. On top of that, BEES offers other services, such as financial services, scheduled delivery, rewards programs, and other products via marketplace, providing a full e-commerce experience to our customers. Since our decision last year to launch BEES in Brazil, we managed to roll it out to all our DDCs and wholesalers. As a result, we now reach more than 65% of our active customers in Brazil via BEES, accounting for over BRL 6.5 billion in GMV. Given these promising early results and to further boost the platform, in March, we announced that menu.com, a start-up marketplace for bars and restaurants that had been accelerated by Z-Tech for the past 2 years, will be integrated into BEES ecosystem. Today in Brazil, we offer more than 100 SKUs from approximately 31 partners in 380 cities already, reaching more than 5% of our net revenue in some of these locations. Our platform's scale will open many new opportunities for us to grow together with our customers and our partners. Our platform's scale will open many new opportunities for us to grow together with our customers and our partners. Our digital platforms will be fully connected throughout our operation, integrating with and leveraging our existing supply chain, logistics, and sales capabilities. As our digital transformation evolves, we will enhance each step in our supply chain and become more flexible, efficient, and integrated with our partners, customers, and consumers, improving our NPS throughout the ecosystem. As for the rest of 2021, our outlook remains unchanged, and we continue to expect a challenging year. COVID-19 is real and around us. Cost pressures will continue mainly in Brazil, not only thanks to FX but also to commodities prices. With that said, I remain very confident in our people, our capabilities, and plans for 2021. Overall volumes at Ambev continued its performance in April, and net revenue per hectoliter performance will remain a focus, especially in Brazil, given the inflationary scenario we are living. We expect our top line performance should continue to drive our recovery, growing ahead of bottom line as we work to get back in the full year to the normalized consolidated EBITDA of pre-pandemic levels. Thank you very much for your time and attention. And I will hand this over to Lucas.

Thank you, Jean. Hello, everyone. This time last year, our financial performance was marked by declining net revenue, declining EBITDA, declining normalized profit, and declining operational cash flow generation. What's worse, we were still in the early days of the COVID-19 pandemic. What a difference a year makes. In Q1 2021, net revenue grew nearly 28%. EBITDA grew almost 24%, normalized profit grew close to 125%, and operational cash flow grew close to 84%. Brazil Beer performance was strong, and the growth of our international operations was even stronger. Just to put things into perspective, all these indicators are either at or above 2019 levels in nominal terms. In terms of outlook, even though COVID-19 is still around, I believe it's fair to say that things are not as gloomy as before, quite the contrary, we expect recovery to continue as vaccinations pick up. So I'm proud to see that not only have we navigated the crisis well so far but more importantly, that the commercial momentum we started to build in Q3 2020 has continued to translate into consistent improvement in our financial results quarter after quarter. We have 2 big priorities on the finance side: number one, continue to protect liquidity given the still volatile environment; and number two, improve our return on invested capital. The team has done a great job since last year in terms of protecting our liquidity position, which remains solid in each of our markets, while still investing about BRL 1.3 billion in CapEx in the quarter. Most of this investment was directed towards increasing our brewing and packaging capacity, particularly in Brazil, to support our innovation pipeline. The second biggest bucket of investment was in technology, such as our ERP integration designed to, among other things, support our B2B and B2C platforms. In terms of ROIC, there's a lot of work going into improving resource allocation as well as improvements in working capital, but there is no doubt that one of our biggest challenges remains the recovery of our profitability. FX headwinds will remain as our biggest hurdle throughout the year, particularly in Q2, whereas one-way package mix and commodity pressures should also be a factor. In addition, cash SG&A was higher in Q1, mainly due to provisions for variable compensation given the stronger-than-expected start to the year. Since 2020 was a 0 bonus year, should our performance remain on track, provisions for variable compensation should continue to impact our year-over-year SG&A performance going forward. On the other hand, the stronger-than-expected top line performance should help offset higher SG&A for the remainder of the year. We will keep focusing on our productivity initiatives and typical financial discipline regarding costs and expenses management. Yes, we will continue to work hard on improving our profitability, but we will not lose sight of the long term. The sense of urgency is there, but we have to be disciplined and stick to our commercial plan, which, after all, has been working. For us, the name of the game still is continuous and consistent improvement of our results. We have been on this improvement journey since the second half of 2020, and Q1 was another important step. So there's definitely more to come. Finally, a quick word on ESG. In June, we plan to host a webinar to focus specifically on how we have been working to embed ESG into our company model. I hope to see you all there. Thank you. And now let's move to Q&A.

Now we will begin the Q&A session. Our first question comes from Marcel Moraes with Santander.

Congrats on the impressive results for the first quarter. My question relates to market share trends per segment. So you mentioned you gained share, especially in Brazil, where you gained share in all segments. Can you give us a little bit of color on the super premium and the premium plus core value segments? What's going on over there?

Okay. Thank you for the question. So yes, we feel that our portfolio is much more prepared. We went through a big renovation, launching new brands, resource allocation, betting on brands that really could drive the future. Our performance of global brands, specifically, they were quite strong, close to double digits, and this is what we believe is above the performance of the premium segment, overall performance. So that's why we mentioned that. We have been investing for a while in Budweiser and Stella Artois. More and more, we are seeing Beck's with a very strong performance, and we are seeing Corona doing very well too and Colorado. So these are our top 5 brands that we are investing in for the future, and they are really doing well. Specifically, Beck's is showing triple-digit growth. Corona is in the 50s, with Colorado doing very well on the in-home occasion too, still struggling a little bit in bars but performing well from the off-street. On top of that, we are not only looking at market share, but something that we are focusing on now is really equity of our brands, which we need to push ahead of market share to build brand equity. The brand equity of premium brands is moving much faster than market share, and that is an important KPI for us.

Jean, what about the core segment? Any color on that?

Yes. The core segment since the beginning of the pandemic has proven to be very resilient. We have really reorganized our portfolio, creating the Core Plus segment, launching pack innovations, and different packs for the core segment. After years of volume decline, our core segment was characterized by resilience with Brahma, Skol, and Antarctica growing by high single digits. This is due to the RGB 300 mL bottles that we are really focusing on during the pandemic as the pack that moms and pops and bars can use for delivery and takeaway. So core brands have bounced back, and on top of that, the Core Plus segment, with Brahma Duplo Malte and Bohemian, are really on fire.

The next question comes from Carlos Laboy with HSBC.

Congratulations on really strong results. I'm wondering, what have you learned about Brahma Duplo Malte through this period? And how do you drive that brand going forward? What consumer insights have you gleaned as you sit back and reflect on everything you've learned here for what's next?

Okay. So thank you for the question, Laboy. Brahma Duplo Malte is a product that took us 1 year to develop. It was really tested with all consumer insights. We had that mindset to achieve superiority through all the analysis we conducted comparing with the core and drew inspiration from other categories like whiskey that has the double malt, single malt, and everything. It was amazing how the Brazilian consumer connected with the concept of Duplo Malte or 2 malts combined. We were able to develop a product that draws attention for both its appearance and taste because it is creamy and has fantastic flavor. This whole process took 1 year to perfect. We decided to bet on the flagship brand, which is Brahma family – Brahma, Chopp Brahma, and Brahma Duplo Malte. So we are all in with that.

The next question comes from Rob Ottenstein with Evercore.

Congratulations on a great start to the year. A couple of follow-up housekeeping items. Number one, it looks to us, Lucas, that you didn't reiterate the guidance on the COGS being up 20%, is that correct? Or am I missing something? Two, just a follow-up on the Brahma Duplo Malte, and that is I believe that got launched last year, the biggest innovation you've had. Where are the comps toughest for you on that launch? So just kind of 2 housekeeping items there. And then the bigger picture question, how do you see the Beyond Beer market and business developing for you? It was a big theme for Brito on the ABI call today. Obviously, a lot of interesting stuff going on in that side in Brazil. Love to get a little bit more detail on your thoughts on that.

Okay. So thank you for the question, Robert. Yes, regarding cash costs, our guidance was in low 20s for Brazil Beer, for the full year. In this quarter, we had higher than the full year, but it was already expected given the curve of the hedges that we have in Brazil. For Q2, we will continue to see cash COGS above the full year guidance for the same reason, but we are not making any changes to this guidance, okay? Regarding Brahma Duplo Malte, our aim is to innovate and transform our portfolio for the future and it is already shaping the company. One KPI I focus on is the percentage of our net revenue coming from products that didn’t exist 3 years ago. This number was 5% in 2018, 10% in 2019, and we reached 20% in 2021. We want to maintain this trajectory with a robust view about where to innovate. It’s not just about any type of innovation. We have a framework with 5 avenues that we want to explore and maintain this momentum of 20% of our net revenue coming from products that didn’t exist 3 years ago. The toughest comparisons for Brahma Duplo Malte were really seen in Q3 when we were ramping up operations. However, we will not change our goal or pipeline; there's definitely more to come there. On the Beyond Beer side, we are excited about our Beats brand in partnership with Fundita. We just launched Beats Zodiac and there are several pilots happening for us to learn and decide where to launch next.

And then just to add something here on our international operations, Robert. Beyond Beer is already a reality in Canada, for instance, and the quarter showed very good results yet again from our Beyond Beer portfolio, not only thanks to Nutrl, right, which we partnered with last year and showed consistent growth throughout last year. But in the quarter, we launched Bud Light Seltzer in Canada. Early days, but off to a very good start as well. I think that's one additional benefit that we have to be able to learn from the Canadian operations and roll out these learnings to other Ambev markets.

To give a little bit more information, Robert. So you know that we acquired a winery in Argentina last year to build and enhance our capabilities in wine production. This business in Argentina is now growing at 16%, compared to what we bought, and we are building the capability to package and sell wines in cans, testing this across South America.

The next question comes from Thiago Duarte with BTG Pactual.

I have 2 questions on the revenue per hectoliter in Beer Brazil and then a third question on the brand portfolio. The first question is, can you talk a little bit more about how you manage the decision on the discounts in the Brazilian beer division? Since the third quarter last year, we've seen discounts coming down considerably. It's certainly been an important push to revenue per hectoliter growth. So I'm just wondering what conditions allow you to more aggressively cut back those discounts during the pandemic when it comes to channel, package, and the competition changes that the pandemic brought to the business? I think it would be interesting to hear. The second question is if we look into the revenue per hectoliter growth in Brazil Beer, 12.6% year-over-year. Can you help us break it down in terms of some impacts that you had on a year-over-year basis? Specifically, I'm looking to hear about the impact of the Carnival or lack of Carnival this year and the digital initiatives such as Ze Delivery and BEES. And the third question, Jean, you mentioned in your opening remarks that the brand health of the portfolio has improved across the whole portfolio. If you can elaborate a little bit more on what sort of metrics you're looking at when you make that statement and how your brand preferences stack up against market share in each segment, that would be interesting too.

Okay. Give me one minute to collect my thoughts. Yes – So for a while, I've been mentioning previous quarters that overall prices should grow in line with inflation. Here we mean shelf prices. Plus or minus, you have efficiencies on discounts, brand and channel mix, and the impact of our portfolio strategy, mainly through innovation. We have been much more flexible and agile in terms of revenue management to react to market conditions. We are still in the middle of a pandemic, and channels are really changing. We went deep on revenue management. Regarding discounts, first of all, BEES is helping us big time because it provides a granular view of our volumes. We have a substantial amount of our volumes already through BEES. We have better algorithms and better price trees because everything is digitized and centralized which facilitates understanding listings and discounts. We are also able to implement a more linear approach, offering discounts spread across the board rather than being concentrated. Our promotions now correlate with sales occasions rather than just blanket discounts. This strategy is helping us be much more effective. So these three aspects have driven improvements in our discount management efficiencies. Moving onto your second question, looking at net revenue per hectoliter growth: we have been working hard on price adjustments and managing our discount strategies. The absence of Carnival did have an impact, especially in terms of packaging mix, so I don’t see a pricing impact there. If Carnival had taken place, I would have had a different combination of sales that might have affected overall performance. And regarding brand health, the metric mainly revolves around brand power, which serves as a proxy for future market share. We have strategically focused on the brands we believe will lead in the future. Our core brands are stabilizing and moving ahead with very positive trends.

And Thiago, this improvement in brand building takes time, right, requires consistency. We're seeing this gradual improvement in brand power across segments for the portfolio ever since last year.

Perfect. That's very helpful. And Jean, just one part of one of my questions. Is it fair to say that Carnival should have had an impact in terms of how you translate revenue per hectoliter on a year-over-year basis?

So if I had Carnival, I would have had a net revenue that would have been smaller than what I have today? So that's the question?

Yes.

Let me think. I think if I had Carnival, the mix of packaging would have been less favorable than what I have today because it’s more concentrated on weekends. So I don’t foresee a pricing impact from this.

The next question comes from Marcella Recchia with Credit Suisse.

I have two questions. First, it's regarding pricing. I heard Brito mention during the ABI conference call about price increases for beer in Brazil in June. Could you provide more details on the pricing pressures and the extent of these changes over the next few quarters, considering recent commodity cost pressures and the anticipated cost outlook for next year? That will be my first question before I proceed to the second one.

Brito mentioned that, Marcella, and as we have been mentioned in previous quarters, overall prices should grow over the long run in line with inflation, which covers shelf prices. On top of that, you have discounts and brand/channel impacts, but that’s the long-term reference. It’s challenging for us to comment on specific future pricing moves due to fluid market conditions, but we are currently operating in a much more inflationary scenario now than before. My focus is really on consumer’s basket and inflation considerations rather than just on our costs.

Got it. My second question is about SG&A. You mentioned in the outlook for this year, as well as on the call, that you expect higher SG&A due to the bonus provision. Can you provide some comments on the outlook for this increase in this area this year? What can we expect regarding that?

Yes, Marcella, this is Lucas. Thanks for the question. For SG&A, in Q1, the most significant impact was indeed the provision for bonuses, based on our stronger-than-expected performance to start the year. Should we remain on track or ahead of our budget expectations, we will continue to accumulate bonus provisions throughout the remainder of the year, leading to a reasonable expectation for higher SG&A. The second biggest impact in this year's SG&A is about distribution expenses, mostly due to volume growth. As our volumes grow, our variable logistics cost tends to rise alongside. Fortunately, there’s a positive impact on top-line revenues. Lastly, marketing spend in Q1 was lower versus last year but was mainly due to phasing. Going forward, as cities reopen, we will adjust our marketing spend accordingly.

The next question comes from Lucas Ferreira with JPMorgan.

Congrats on the strong results. I have two questions. Sorry if they are kind of too technical around your forward-looking statements. The first one, you guys mentioned that you already kind of envisioned turning to the pre-pandemic EBITDA, right? So assuming the 2019 number, for instance, I assume your profitability will still be back up. My question is, is there anything structural that you see in the industry in the recession, the cost structure of the industry that would impair you to come back to the pre-pandemic profitability. So in 2019 guidance, EBITDA margin was roughly 42%. So is there anything that you guys think would impair your return to this level? And if for some reason, considering the pricing power, considering the reopen you’re seeing right now, you kind of already envisioned that this could be occurring at some point in the foreseeable future. So that’s my first question. The second question is around the same topic. Looking at the second half of the year, are you reiterating the guidance for the cost per hectoliter? I would assume that your COGS curve is more skewed to the first half of the year, considering you COGS per hectoliter is up at 25% this quarter. So in terms of margin comparisons, are you seeing an easier second half than the first half?

Yes. Let me address this. We’re still in a pandemic, and while we are on this journey, we are aiming to recover top line revenue and volumes to levels we had back in 2014. We lost about 10 million hectoliters from that point onward. Since then we have been consistent in our strategy to regain that volume. So if we make the right moves, we see our bottom line growth converge with our top line growth without structural issues limiting our return to pre-pandemic performance. This journey will take time, but I'm confident that we can recover profitability levels from before the pandemic. About FX and commodities, we anticipate these will continue to create pressure, particularly as we are hedged for 50% of costs related to dollars. My COGS guidance is low 20s, so we’re managing this risk carefully. With the recent commodity price pressures, we’re assessing how costs will evolve in the future. But I truly believe that our solid cash generation is something structurally strong at Ambev, and we are prepared for that.

As I mentioned in my opening remarks, regarding cash COGS per hectoliter for Brazil beer, we anticipate that the pressure will be greater in Q2, followed by less pressure in the second half of the year. If you take a step back and look at our performance during 2020, you can see that the recovery driven by top line was very strong in the second half of 2020, leading to tough comparisons in the second half of this year. And as I also mentioned, we do expect higher SG&A primarily due to the increased provision for variable compensation.

The next question comes from Isabella Simonato with Bank of America.

Can you elaborate on the soft drink outlook in Brazil? And also how do you expect cost pressure to affect that line of business this year? If you could give us a little bit more color about the quarters as you gave for beer, that would be very helpful. And regarding the international performance, the top line has also been quite strong, but measures regarding restrictions etc. have been more volatile, right? How are you seeing the beginning of Q2 and the evolution throughout the year?

Thank you for the question. Our soft drink performance improved with recent net volume growth of 0.8%. We are still facing many mobility restrictions that impact on-the-go sales, which are significant for our NAB industry. Despite this, we've managed to achieve slightly positive volumes. The brand Antarctica is performing better than before, and our energy drinks portfolio is doing well too, although we still face challenges on certain occasions. We expect performance to continue to improve as vaccinations proceed and restrictions are lifted. Regarding LAS, there was strong performance from Argentina, Chile, and Paraguay, primarily driven by corporates and premium segments. We’ve seen gains in market share in these countries. However, we are still feeling restrictions in some areas, but overall performance remains encouraging.

The next question comes from João Soares with Citibank.

I have two quick questions. The first one, you had a very interesting discussion on the discount strategy, but it's interesting to see that you're using your online channels to enhance your intelligence, right? I imagine that especially through the DTC you've been gaining a lot of insights on consumer behavior. So if there's anything, Jean, that you could share regarding trends in consumer behavior, especially their ability to absorb further price increases and how it connects to the recent trends you’ve seen, like the recovery of brands that suffered in the past stabilizing. Anything connecting consumer behavior trends would be very interesting. The second point, regarding commodity cost pressure, we’ve seen aluminum prices go up. If you can talk about any initiatives ongoing to possibly mitigate this cost pressure going into next year would be interesting as well.

Okay. Let’s start with consumer behavior. We are witnessing a significant shift towards in-home consumption. The pandemic has transformed how people relax and consume products, allowing us to observe greater frequency in these behaviors as people now prefer relaxing at home versus going out. Today’s consumers prioritize convenience, which we are addressing by placing more emphasis on takeaway options and designing our products around this demand. We are leveraging packs like RGB 300 mL bottles, which are ideal for takeaway. We are working hard to implement a pricing strategy and product offerings that cater to these changing consumer habits effectively. As for initiatives against cost pressure, we are prepared on the cost side and continuously monitor the environment. The learning and adaptation phase of the pandemic has positioned us favorably for our future. We see the importance of enhancing operational efficiencies and adapting to these changes through strategic planning.

The conference call has now concluded. You may disconnect your lines. Thank you, everyone, and have a nice day.