Ambev S.A. Q4 FY2023 Earnings Call

Good morning, good afternoon and thank you for waiting. We would like to welcome everyone to Ambev's 2023 Fourth Quarter and Full Year 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, when we kindly ask that each participating analyst asks only one question. 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 referred to comparisons with 2022 fourth quarter and full year 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 your conference.

Hello, everyone, and thank you for joining our Q4 and full year 2023 earnings call. Today, I will cover our last year performance and then shed some light on what to expect in 2024. Let's get started. 2023 in review, it was a noisy year with a lot of distractions. But commercial strategy in Brazil continued to work, led by our premium brands. Cash flow recovered thanks to strong performance which even went beyond 2021 results. Preparedness in Argentina made a difference with more cash flowing dollars being generated, and profitability came back in a big way with gross and EBITDA margin expansion across the board, while return on invested capital also improved. Translating this into numbers, EBITDA grew 43% organically and 7% in nominal terms, despite the impact of FX depreciation in Argentina. Gross margin expanded 240 basis points, and EBITDA margin expanded 430 basis points. Cash flow from operating activities grew 20%, reaching almost R$ 25 billion, and free cash flow stepped up to R$ 17.7 billion. Normalized profit reached over R$ 15 billion. However, it was slightly down due to increased taxes, mostly from a higher effective tax rate and currency devaluation in Argentina. All this was while being challenged by tough industries in Canada and Argentina, a tough comparable on tax credits in Brazil, and the steep currency devaluation in Argentina. This performance was driven by a consistent commercial execution throughout the year that focused on the consumer, with industry volumes growing in half of our top markets and seven out of our top 10 markets delivering a net revenue per hectoliter performance above inflation. The continued development of our digital platforms saw over 90% of our gross turnover in Brazil transacted via BEES, supporting our Net Promoter Score at all-time high levels once again. The gross merchandise volume of our third-party marketplace products grew over 44%, totaling R$ 3.3 billion. The Ze Delivery in Brazil expanded in coverage and awareness, reaching 5.7 million monthly active users and growing GMV by 8%. Our effective decisions around optimizing our business showed that cash costs per hectoliter and cash selling, general and administrative expenses grew below net revenue growth, supporting both gross and EBITDA margin expansions. This demonstrates how sound our operations are and how well we are able to convert commercial momentum, such as in Brazil and cash flow, into free cash flow or offset commercial headwinds to protect our financial performance, such as we did in Argentina and Canada. Now I would like to share some highlights by geography. Let's start with Brazil beer. In Q4, premium volumes grew in the mid-20s and we estimate gaining market share in the segment for the fourth consecutive quarter, with brand health indicators continuing to improve. Corona was the highlight, once again proving the effectiveness of our strategy. Other segments, however, led to total volumes declining by 1.1% as we faced a tough comparable from the FIFA World Cup last year. Net revenue per hectoliter performance continued with momentum in the quarter while cash costs and cash SG&A grew below net revenue, leading to 27% EBITDA growth coupled with gross and EBITDA margin expansions. For the full year, we checked all the boxes. We grew almost 3 million hectoliters in premium volumes, coupled with brand health improvement, EBITDA margin expanded by 500 basis points to 32%, resulting in EBITDA of R$ 12.5 billion, the highest in our history. Moving on to Brazil NAB. Volumes grew over 6% in the quarter, driven by the consistent implementation of our commercial strategy, increasing both the number of buyers and number of SKUs per point of consumption. Our diet, light, and zero portfolio grew over 22%, with a highlight on the new Guarana zero and the continued success of Pepsi Black. The 0.5% decline in net revenue per hectoliter was explained mostly by an increased VAT taxable base for carbonated soft drinks and some general mix, with the rise in third-party distribution in our mix. Cash costs per hectoliter and expenses, however, declined, supporting an EBITDA growth of 15% and EBITDA margin expansion. For the full year, we estimate our market share remained stable while we continue to grow in energy and health and wellness, both with our own and our partners' brands, delivering an EBITDA of almost R$ 2 billion, the highest since 2015. Let's talk about Argentina. In Argentina, volumes in the quarter declined, driven by an industry impacted by macroeconomic conditions. However, a new financial and commercial playbook on how to operate in Argentina allowed us to accelerate revenue management while keeping market share stable, offsetting increased costs and expenses due to accelerating inflation. In the year, cash flow generation in dollars improved significantly, even considering the FX depreciation in 2023 and the gap between parallel and official rates. As we implemented this new playbook, in 2024, we already started to repatriate cash generated in 2023. As for the other operations, last full year, EBITDA grew in the mid-teens with margin expansion, resulting in the highest nominal EBITDA in history. Cash flow grew 7.7%, led by continued recovery in the Dominican Republic this quarter. A positive industry supported volume growth as the Presidente brand family continued to recover, and premium brands grew ahead of total volumes. Net revenue per hectoliter was up 4.5%, while costs and expenses grew below net revenue, resulting in gross and EBITDA margins above 40%. This was a year of turnaround in CAC. Volumes on the top and bottom line were back to growth with margin improvement. Regarding Canada, volumes declined due to continued tough industry performance in the quarter, where growing cash costs per hectoliter impacted our EBITDA growth. EBITDA grew in low single digits for the year, thanks to initiatives aimed at curbing costs and expenses considering a sluggish top line. Now changing gears to 2024. First, let's talk about operations. This year, we want to deliver consistent results with operational performance as the driving force behind our sustainable value creation path. We aim to translate this commercial momentum into more free cash flow generation, and to illustrate why we are confident in our strategy, let me use Brazil as an example. Although Brazil represents one of the largest beer per capita consumption rates in the world, opportunities remain for growth, especially in the north and northeast regions of the country. As for premium beers, it is growing but still under-indexed in terms of participation in both the beer and alcohol markets, as well as the number of occasions it is consumed. Since 2019, our premium volumes grew about 8 million hectoliters while our total volumes grew over 11 million hectoliters, which is greater than the industry growth for the period. In terms of costs, we expect to face less input cost pressure, given currency and commodities tailwinds, partially offset by mix and fair value adjustments of payables. Therefore, assuming current commodities and FX prices, we expect our cash costs per hectoliter in Brazil beer, excluding non-Ambev marketplace products, to decrease between 0.5% and 3% in the year. Second, let me share a little bit about how we kicked off the year. Carnival in Brazil was great, and we are off to a good start today. Brahma, Guaranantaska, and Beats sponsored the three largest Carnival festivals in Brazil—Salvador, Rio De Janeiro, and Sao Paulo—bringing over 31 million people together during the period. Sales volumes during Carnival were strong, and brand connection will last for the rest of the year. Carnival is a huge moment for our brands to connect with our consumers and to present innovations. We delivered strong brand execution for Brahma and the new Guarana Antarctica Zero and scaled up Beats Tropical as the innovation of the season, performing over twice better than what Caipi Beats did last year. Finally, perhaps our main challenge relates to taxes in Brazil. In 2023, we paid approximately BRL 32 billion in taxes—nearly BRL 11 billion of federal taxes and almost BRL 22 billion in state and municipal taxes. Our effective tax rate was higher than in 2022, mainly due to higher profits in Argentina, the Dominican Republic, and Canada and less deductibility of ICMS tax credits. In December, Congress in Brazil passed legislation on ICMS and state VAT government incentives that should impact our effective tax rate moving forward. However, the precise impact is not yet entirely clear. Lucas will provide more information about this topic. In summary, we are confident about accelerating volumes, especially in Brazil. We have significantly changed our free cash flow generation, and it will remain strong and solid in 2024, a year that will present its own set of challenges, just like every year since 2023. Nevertheless, my team has been managing to overcome these challenges and deliver continuous and consistent improvement. Therefore, I would like to thank my team again for the great year of 2023, and I am counting on them to deliver in 2024—the next step in our transformation journey by doing what we've been doing best: acting as owners, listening to consumers and clients, working collaboratively with our ecosystem, and having disciplined execution in the short term while laying the groundwork for sustainable long-term value creation. Thank you very much. Now let me hand this call over to Lucas.

Thanks, Jean. Hello, everyone. We had four financial priorities for 2023. First, to improve financial discipline, focusing on liquidity as well as cost and expense management while reinvesting for growth; Second, to improve profitability by increasing our return on invested capital but also expanding margins; Third, to further our value creation agenda, grow economic profit as well as free cash flow; and Fourth, returning excess cash to shareholders over time. I'm happy to report that we progressed on all fronts. Liquidity remained solid throughout the year, which was valuable in a year where several other Brazilian companies faced numerous challenges stemming from the credit crunch in the country. Disciplined cost and expense management resulted in cash costs and cash SG&A growing below inflation, whether or not considering Argentina. We continued to invest for growth with sales and marketing totaling BRL 6.5 billion and CapEx totaling BRL 6 billion. Return on invested capital expanded over 330 basis points, thanks mostly to better net path margins but also better asset turnover, while both gross margins and EBITDA margins expanded as Jean already mentioned. Economic profit grew compared to last year, while we delivered record levels of cash flow generated from operating activities at nearly BRL 25 billion. And finally, we paid BRL 1.7 billion in connection with the exercise of the Dominican Republic put option and still returned BRL 11.5 billion to shareholders. All this was achieved while dealing with looming headwinds in Brazilian taxes and Argentina. Now let me tackle these two points because they are relevant going forward as well. The constitutional amendment required for the tax reform on consumption was finally approved by Congress in December, and we now move to the next phase in the process, which is to pass enabling legislation before the transition period begins in 2026. There's a lot of work to do to ensure we move towards a less complex system that does not increase the total tax burden of the industry, which is already among the highest in the world. Regarding income taxes, changes were made to the rules concerning the income tax deductibility of the Incentive for the Use of Local Origin and VAT tax grants. Adjustments were made to the legal parameters for the calculation and deductibility of the intrastate taxes. As a result of the new law, the main change to our basis for intrastate taxes is that as of January 1, 2024, it will be adjusted downward by the amount that was recorded in the carrying value adjustments account in connection with the stock swap merger carried out in 2013 which allowed us to transition to a one share, one vote system. As for the deductibility of state VAT tax incentives, the new laws are already being challenged by several parties on constitutional grounds. Therefore, it is still premature to predict whether or not there will ultimately be an impact on our results and, if so, to what extent. We will diligently work to offset these headwinds as much as possible, whether it be impact on the income statement or cash flow generation, where we see more opportunity given that we have other tax credits to be used over the next few years. This is important because it gives us time to reassess our capital structure in an orderly fashion, as well as look for other opportunities within Ambev's corporate structure. Finally, regarding tax litigation, we ended the year with BRL 95 billion in disputes with a possible, but not probable chance of loss. During the year, we experienced a BRL 17 billion positive impact in these disputes due to favorable decisions at administrative or judicial courts, as well as certain legislative changes. So far in 2024, there have already been an additional BRL 4 billion in favorable decisions, as disclosed in Note 32 to our financial statements. We will continue to keep the market updated as new developments arise in our main disputes, many of which we anticipate will be subject to decisions at the administrative level during the year. Now concerning Argentina, our results under IFRS were materially impacted from an accounting standpoint due to the Argentinian peso devaluation in mid-December of 124%. Page 15 of our press release contains a detailed description of the various impacts. However, we have been preparing for this for over a year, so we will continue to follow our game plan. Not all is bad news, however. Despite the accounting impact, the combination of operational performance, gradual reduction of our FX financial hedges, and structural reduction of our exposure in U.S. dollars enabled us to end 2023 having generated more cash flow in USD than in 2022. Capital controls have also eased, allowing us to begin repatriating funds. We still have a long road ahead, but we are aware of what needs to be done, and the team has demonstrated its ability to execute and deliver despite these extraordinary circumstances. Speaking of the future, I wanted to point out that starting January 1, 2024, our definition of organic revenue growth will be amended to cap price growth in Argentina to a maximum of 2% per month, and corresponding adjustments will be made to the organic growth calculation of the income statement in our press releases going forward. We believe that given the circumstances, this more closely represents the underlying performance of the business and is in line with practices adopted by other consumer packaged goods companies. Regarding our financial priorities for 2024, it is all about consistency. We will maintain a focus on liquidity, financial discipline, profitability, value creation, and capital allocation. We have significant headwinds ahead. However, since 2020, we have navigated a considerable amount of uncertainty and volatility. We have found ways to overcome these challenges and continue delivering growth, profitability, and resilient cash flows, all while building our path toward sustainable long-term value creation. Before moving to Q&A, I would like to highlight some accomplishments on the sustainability front. Sustainability is about impact. In 2023, we made significant strides toward that goal, particularly in environmental areas. Our 2025 environmental commitments are on track. We were the first company in the brewing sector in Latin America to receive final approval for our emission reduction target from the Science Based Targets initiative. We closed the year with an average of 2.37 liters of water used per liter of beverage produced—improving by more than 8% compared to 2022—along with 15 carbon-neutral plants. More details will be provided in our sustainability report, which will come out in the coming months. Stay tuned. With that, let's go to Q&A.

Good afternoon, everyone. I have a couple of questions. First of all, of course, on the cost side for Brazil Beer. I think it was a consensus view that costs could decline more than probably what you announced, given the movement we saw on commodities and the FX relief from the BRL. So I wonder if you could break that expectation down a little bit. You mentioned the average price, and also the mix. Could we split the key drivers of cost per hectoliter? I think that would be very helpful. The second thing is on SG&A. You have said you delivered a more efficient SG&A in 2023. So I wonder when we don't see much of a cost payoff in 2024 how SG&A plays out as a margin driver potentially for the year. Finally, my last question is on Argentina. I think, of course, there was a big headwind from FX. But on the other hand, margins were quite strong due to increased prices. How can we think about the top line margin equation for 2024 in this new environment?

Isabella, this is Lucas. Let me kick off with question number one, and then we'll address the other two regarding SG&A and the situation in Argentina. So regarding cash costs per hectoliter, a few points, Isabella. First, when we factor in only FX and commodities—where I'm referring to not only what we can financially hedge but also what we can physically hedge, combined with efficiencies—we expect to see, all else being equal, a mid-single-digit decline in cash costs per hectoliter. However, when we account for the higher premium mix, we observe significant commentary on how our premium volumes are growing well ahead of our overall brand volumes. It's crucial to remind everybody that there is a benefit when the mix shifts more towards premium because, while it impacts cash costs, it has a positive effect on net revenue per hectoliter and overall profitability. When we factor in fair value adjustments to payables—which, by the way, has virtually a neutral effect on net income as it impacts our financial results—and inflation, along with some changes in royalties owing to new legislation passed last year, that's how we arrive at the low single-digit guidance. So if we only consider the FX and commodities, we expect a mid-single-digit decline, but factoring in the premium mix and other aspects leads us to the low single-digit guidance we've provided. The two biggest contributors to this guidance are primarily the mix and the fair value adjustments, which correspond to more than 50% of the impact.

Isabella, Jean here. Moving into SG&A, I think it was a great year for SG&A in 2023. Cash SG&A declined by 2.3% year-over-year in Q4, due to a combination of effectively managing administrative expenses. We changed the way we operate, working more as a platform with fewer silos, allowing us to leverage our entire organization for all our business segments, including beer, non-alcoholic beverages, innovation, and technology. Additionally, a significant reshuffle internally contributed to a strong performance. We invested in tech that improved our distribution efficiency. The combination of commodity market conditions and enhanced efficiencies in our logistics helped deliver impressive results. Looking ahead, we expect to see some administrative costs rising again, as I referenced inflation. However, we are now in a position where we can put more focus on sales and marketing support for our product portfolio while maintaining a disciplined CapEx approach. This balance will ensure we continue to generate positive contributions to our SG&A. Regarding Argentina, yes, our operational approach has changed significantly, adapting a new commercial and financial playbook. We altered how we conducted business with suppliers, adjusted our pricing strategies, and shifted from financial hedging to operational hedging strategies. This transformation has proven effective, resulting in significant cash flow increases despite the ongoing challenges with translation impacts on the P&L. We’re also beginning to see cash return in 2024, building on the solid outcomes of our new operational strategy. We see an overall correction in the industry volumes in Argentina as prices align with inflation, and we remain vigilant to protect our margins while adjusting to consumer resilience in that market.

Additionally, to comment on the EBITDA situation in Argentina, we reduced our hedge position significantly. As we start the year without any financial hedge, we should not face carry costs during the year, which will also assist in achieving cash flow generation in U.S. dollars.

I have two questions, mostly focused on Brazil. You mentioned the decrease in volume for the fourth quarter, attributed to a hard comparison due to the World Cup in 2022. However, it was quite surprising to see a 7.2% increase in net revenue per unit despite lower volumes. I understand that much of this increase likely comes from growing premium volumes. Could you elaborate on this? Is there room for further volume increases, and are there any changing strategies for the short term? Additionally, what are your expectations for the first quarter, notably because of events like Carnival, which appears to be going well? Is there potential for volume improvement in the upcoming quarter? Secondly, concerning non-alcoholic beverages, while the third-party distribution certainly helped bolster volumes, it also negatively impacted prices. I'm seeking clarity on this relationship since we've observed strong performances from BEES assisting NAB in the past. Could you explain this dynamic?

Let me provide a broader overview of Brazil concerning your inquiries about Q4 and Q1. We are pleased with Brazil’s beer performance. Overall, 2023 proved solid, especially compared to figures from 2019 pre-pandemic. In 2023, the country’s beer industry grew by 11 million hectoliters, and we captured 100% of that growth. It's clear that our strategy prioritized top-line resilience, while also reigniting margins, resulting in a 500 basis point margin expansion throughout the year. Now, looking specifically at Q4, yes, we faced tough comps from the World Cup, but our performance landed closely aligned with expectations. Strength in volume performance was evident at year-end. Entering Q1, the industry remains strong, and we enter with significant momentum. Our market share position is positive, and we expect volume increases. When addressing pricing, we consider external consumer metrics. Prices will align with the consumer's economic context while factoring in regional brand perceptions and product mix. We aim to continue our strategic focus on premium brands, seeing considerable performance rebound; for instance, the new Guarana Antarctica zero-sugar product has driven strong consumer interest and expectations for Q1.

For now, I believe it's 100% clear. Just a quick follow-up on the market reactions to the lower volume in Brazil. It seems there are mixed expectations among investors, particularly regarding the volume declines. Could you provide insight into this?

I'm not entirely sure about the reactions to our Q4 results. However, I am optimistic about two KPIs for 2024. We are confident in our volume capabilities. We began the year positively, a point that hung in the balance at the start of 2023. Much of our confidence stems from solid industry trends and our favorable market share position for this year. I strongly believe this will lead to greater volume performance as well as cash generation, remaining robust heading into 2024.

I want to follow up on your expectations regarding volume growth across different segments. Could you elaborate on what will be different in your approach to drive volume upside commercially? How should we think about marketing expenses in 2024, and how do your digital platforms contribute to helping attain growth?

We've been diligently building a new brand portfolio, innovating in previously untapped markets, which has enhanced our overall brand performance. Consequently, consumer affinity for our brands has grown, with 4 million additional customers expressing love for our portfolio since 2019. We are well-positioned with our brands, and we intend to allocate more funds for marketing. This, along with our strategic partnerships at our digital platforms, will allow us to drive sales above inflation. We are now rationally positioned after substantial investments in CapEx, as we have the capacity for nationwide production of our key brands. We also observed strong industry dynamics entering the year, building momentum through Carnival, which sets us in a positive direction for 2024. Additionally, our innovations such as zero-sugar and low-carb beers demonstrate our response to changing market demands.

I want to go back to the discussion on Brazil beer volumes and performance. It seems that you expect a balanced top-line performance between revenue per hectoliter and volume. Could you elaborate on how you will protect core segments in 2024, especially in light of your statements about premium segments? Additionally, Lucas, regarding the impacts of IOC regulation changes, what adjustments can we anticipate in your capital structure moving forward, if any?

On volumes, I am quite confident. Satisfaction within our core brands is mirroring the overall market. Premium segments are driving significant growth, and we expect the core to align closely with industry performance. Core plus segments will rebound positively, especially with strong innovations like Budweiser and Brahma Duplo Malte gaining traction in 2024. It’s essential to note that we intentionally scaled back promotional activities in the value segment to establish better revenue positioning. Looking forward to 2024, we are optimistic about our core and core plus achieving positive results, with sustained performance from our premium segments.

Thiago, discussing IOC, we reaffirm our capacity to offset the impact. The primary strategy is to utilize our recorded tax credits within our asset base as a means to cushion the cash ramifications. We are currently reviewing our capital structure in light of the IOC changes. So any strategic moves regarding that remain part of ongoing discussions, with no immediate decisions needed. We aim to explore opportunities for tax credits proactively within our corporate structure, with continual evaluations and communications to stakeholders as developments arise.

Could you comment on feedback from the European spirits market, indicating trade-down behavior where consumers are leaning towards beer? Is it realistic to assume that beer is outperforming spirits in the current market dynamics?

In the long run, the beer category is healthy in Brazil, maintaining its cultural relevance among younger consumers. We are seeing growth both in social bonding occasions and in mixed social gatherings where high-end brands like Corona are gaining traction. The industry's ability to innovate with low-carb and zero beers has revived consumer interest, ultimately connecting with a similar consumer demographic that previously preferred spirits. We believe we are well-equipped to capitalize on these trends in the Brazilian market moving forward.

I’d like to explore international operations briefly, as they seemed to overshadow Brazil's strong results in 2023. Can you provide a recap, specifically regarding volume recovery expectations across Canada and Central America? What do you foresee in terms of margin recovery for these markets?

You're correct. Each of our international operations faced unique circumstances this past year. For Argentina, we've covered challenges today. However, Bolivia, Chile, and Paraguay delivered encouraging mid-teens EBITDA growth in Q4 2023. Cash flow performance in these markets supported overall corporate cash flow generation as a whole. In CAC, volumes recovered throughout 2023, especially in the Dominican Republic; we are optimistic as we capitalize on that momentum moving forward. Notably, Canada faced industry-wide challenges but maintained solid brand performance from Corona and Michelob Ultra. As we focus on premiumization strategies, we believe we can improve outcomes in Canada in 2024. Despite hurdles, cash flow showed improvement year-over-year in all regions, powered primarily by Brazil's strong cash generation.

Just briefly, last year you indicated that Brazil's EBITDA growth would lead to an overall positive average. Do you expect that trend to persist in 2024, or do you think international operations will likely outpace Brazil this year?

Considering Argentina’s caps on organic revenue growth, we can anticipate challenges. However, with improved performance in Canada and opportunity in CAC, we may see balanced overall performance. Let's see how our strategies align with performance expectations as the year progresses. There's still much work to be done, and the year is just beginning.

Thank you all for joining the call. To summarize, operational performance will drive our sustainable value creation in the years ahead. We have the momentum in Brazil and confidence in volume recovery; CAC is on track for steady growth as well. Argentina is evolving with our playbook, and Canada aims for stronger EBITDA performance. Thank you for your continued support. We'll see you in May. Have a great day.

Thank you all very much. This concludes today's conference. You may now turn off your phones. Thank you.