Ambev S.A. Q1 FY2024 Earnings Call

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. 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.

Hello everyone. Thank you for joining our Q1 earnings call. Today, before jumping into our first quarter results, I would like to share some thoughts about the situation in 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 assisting 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 four hospitals in the capital of the state, totaling 375,000 liters. Additionally, 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. Lastly, our main challenge in the year is taxes in Brazil. 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 volumes grew. In LAS, Canada, volumes declined mainly due to the industry. Cash flow from operating activities and free cash flow grew almost BRL 1.3 billion each versus last year. Net income was slightly negative, thanks to currency devaluation in Argentina and 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 three 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, the 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, which grew over 70%, along with Spaten and Original. For the fifth consecutive quarter, we estimate to have gained market share within premium brands. In the core plus, the Budweiser family grew 55%, reaching 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, while 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, which grew 0.9% versus last year. Let me break it down into the main components of growth. Prices 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 mix impacts. Additionally, when we look at consumer 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 rates apply 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 an 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 the total Pepsi-Cola family. And Guarana Zero confirmed its momentum with a 61% growth. The number of buyers grew versus last year in all categories, supported by beer, with a highlight to Guarana Antarctica Zero, which 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 due to mixed sugar and overall inflation, EBITDA grew almost 18%, reaching an EBITDA margin of 28.6%. Finally, Argentina's volumes contracted almost 20% this quarter as the macro environment continues to be challenging. In nominal terms, EBITDA reduced significantly due to the currency devaluation that took place in December 2023. Lastly, despite the industry performance, cash generation excluding cash upstreams was above last year's 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 tough industry again. However, we were able to offset top-line performance, delivering a slight negative EBITDA performance with resilient cash generation. When we take a long-term perspective, we see that we have 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. We will add Corona Cero to the portfolio as the official sponsor of the Summer Olympic Games in Paris. These innovations continue to expand and add new third-party products in the marketplace, resulting in a wider assortment of products and a better experience for our customers. Delivery reached over 65% of the population coverage in Brazil with a presence in more than 700 cities. 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 remain confident in volumes. Tax will continue to be a headwind, impacting both the top line and net income. We will work to deliver consistent and sustainable results, expanding margins and improving cash flow. Thank you very much. Now let me hand over to Lucas.

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 in delivering growth, profitability, and resilient cash flows, despite the Brazil tax and Argentina headwinds. To do that, our focus will remain on financial discipline, value creation, and capital allocation. Q1 figures show that we are off to a good start. EBITDA grew about 12%, 15% excluding Argentina. Gross margins expanded 100 basis points organically, 150 basis points excluding Argentina. EBITDA margin expanded 240 basis points organically, 290 basis points excluding Argentina. Normalized profit declined slightly by 0.6%, and cash flow from operating activities totaled BRL 718 million. 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 three 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 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. We also had lower losses on non-derivative instruments, thanks to less third-party and intercompany payable exposures. Lower carry costs in Brazil and lower fair value adjustments of payables should continue to help our net finance results year-over-year 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%. Four 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 be, and how the transition period will be structured to ensure that there is no increase in the total tax burden of the industry, which is already among the highest in the world. 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, resulting in no cash outflow. 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 due to the Dominican Republic put option. We began 2024 with better cash flow performance than we did in 2023, which is great, but we still have work to do during the remainder of the year. Finally, regarding sustainability, we will publish our annual sustainability report on our website in the coming weeks. So stay tuned. With that, now let me hand it back to the operator for Q&A.

You received an injunction for March that eliminates the need to pay fiscal charges on top of the state-level subvention. I'm curious if this has affected your revenue per hectoliter. Additionally, historically, the industry and the company have typically passed on increased taxes to prices, but that doesn't appear to be the case now. From Jean's earlier comments, it seems this trend will continue. Could you provide more details on this matter? I'm trying to get a complete understanding of the taxation on sales.

Let me give you some information on that. Yes, you know that the VAT in Brazil is structured such that I am responsible for the whole VAT of my customers. This is a significant line for us. What happened? If you look 10 years back to our performance in net revenue per hectoliter in Brazil Beer, it's common for some reduction on net revenue per hectoliter Q1 versus Q4. This was more frequent before the pandemic and discussions surrounding the tax reform. However, it is important when the year turns for the states to get their tables updated, which typically impacts the net revenue per hectoliter. We historically had this change in NAB business during Q3 and Q4. Our numbers show that we experienced some impact from these VAT changes in NABs in Q3 and Q4, but we managed to pass it through with revenue management initiatives. What I mentioned in my initial remarks is that these elements, long-term, are interconnected. The recent update of VAT taxable bases during Q4 and the beginning of Q1 affected 18 states. We protected the carnival with all these changes happening in March while we began to pass it through to our customers and consumers. Long-term, we anticipate this will balance out. Let me now turn it over to Lucas for an update on the theme of PIS/COFINS.

Regarding PIS/COFINS, you're correct. Note 17 of our quarterly financials discloses the injunction that we obtained in connection with the PIS/COFINS. However, that injunction was granted towards the end of March, so it didn’t impact Q1. The impact will be seen going forward. It's more of a forward-looking impact rather than having any substantial effect on Q1.

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

I will answer the first question, and then Lucas can respond to the second. Yes, our cash COGS in Q1 for Brazil Beer ex marketplace declined 3.5%. As you mentioned, this Q1 was an easier comparison, but we have worked hard to reduce cash COGS. The primary factors were FX and commodities tailwinds, partially offset by the premium mix, suppliers' NPV, and overall inflation. Despite this, we expect that cash COGS will converge during the year within the guidance range provided in the previous quarter, which was between minus 0.5 to minus 3%. So there is not much news here. The plan is proceeding as we outlined, and we will maintain that guidance.

Let me break down financial results by the main lines just to explain some additional context on the quarter's performance. The first significant impact we saw in Q1 was related to losses on derivative instruments, which were much lower than last year. Two main effects here: lower carry costs in Brazil, and lower U.S. dollar exposure in Brazil. That represented a substantial gain compared to last year. In addition, we began the year with no financial hedges this year, resulting in no carry costs in Q1 2024, while we were still winding down in Q1 2023. Thus, the gains should continue throughout the year, assuming carry costs remain stable. The second impact is related to NPV payables, which were lower this year, and should continue to be positive. Finally, in Argentina, while the cash flow upstreaming is gradually reducing, it is crucial how we manage these balances as we aim to keep that benefit overall in the future.

You've had a very good performance on the zero-sugar products for quite a few quarters in NAB in Brazil. I imagine that's changing a little bit your mix in the NABs. So I'm just wondering if you can comment on any effects that it has. Not sure how the cost of sugar relates to the sweeteners that you use, but for example, perhaps less sugar per hectoliter may be good for margins in the long run as the zero products continue to perform well. Just wondering if you can comment on the effects that such high growth in the zero products is having.

Thank you very much for the question, Felipe. Yes, this is a significant area for us. In our NAB business, we have approximately 18% market share, but we have over 30% in the no-sugar portfolio compared to other no-sugar products. This trend is one that we are well positioned to leverage. Recently, we stepped up our portfolio with Pepsi Black and also renovated Guarana Zero last year. Both of these products have a cash COGS that is better compared to sugary products, and they are performing excellently. We are very excited about the recent performance of Guarana Zero, which has seen a 60% growth. Overall, we believe that the ongoing growth of non-sugar products, which has been around 20% for nine consecutive quarters, is a structural shift happening within our company. Moreover, these products yield better margins.

To complement what Jean said, regarding the part of the portfolio that contains sugar, the team has consistently focused on lowering the sugar content of those products. Thus, we have made significant progress in that area as well. So we are focusing on the no-sugar, health, and wellness trend while also innovating to leverage that tailwind regarding our remaining portfolio by consistently lowering sugar content.

I guess this isn't the first time we've asked this question regarding capital allocation. You've certainly fulfilled your commitments to cash flow generation, and we're seeing that reflect in your targets. But there seems to be a mismatch with the share price and valuation. If this situation persists, could we see Ambev take a different approach on buybacks or dividends? Could this be a potential scenario to consider in the investment case?

Rodrigo, thank you for the question. In short, our mindset surrounding capital allocation hasn't changed. We continue to look at reinvesting the cash flows consistently generated by our business, whether it's organic investments, inorganic opportunities, or any avenues available for returning excess cash to shareholders over time. The strategy is to maximize IOC deductibility, and the balance will remain a combination of dividends and/or share buybacks. The Board continually assesses these considerations so this remains a live discussion. Historically, payouts have skewed towards December given our operational cash flow, particularly in that month. At that point, we also have greater visibility of excess cash available to return to shareholders, while we're also budgeting for the next year, allowing better visibility for reinvestment plans.

My question is on Argentina. I know the situation remains hard to read. But generally, when you look at inflation coming down, we've been hearing from other companies that the first quarter was probably the weakest point in terms of volumes. Do you share the same perception that things could start improving on the margin from here? Additionally, how should we think about margins going forward? FX is relatively stable while inflation remains high. I would imagine you all maintain pricing on the top line, but costs may be smaller than the impact there.

Let me start and then I'll hand it to Lucas. Argentina is currently undergoing a stabilization plan, which entails necessary adjustments. However, we see favorable month-on-month developments in macro indicators—fiscal surplus, CPI deceleration, and improved central bank reserves. The narrowing gap between the official dollar and black-market rates is contributing as well. That said, it's still early to determine if volumes will recover beyond Q1. The focus remains on maintaining connection with our consumers and preserving our market share while managing cash effectively. These are the two key metrics for us during this adjustment process. There is optimism about Argentina making progress in H2 or 2025, but I believe it’s premature to claim complete stabilization.

Hi, Lucas here. Thank you for the question. Regarding margins in Argentina, the tougher comps will likely come in H2, particularly Q4, given the volatile circumstances Jean described. Margin improvements, considering we don’t stop at EBITDA, are also influenced by net income considerations. Our lack of hedging in Argentina may impact EBITDA margins in H2, but net income margins could benefit as we have been unhedged overall, unlike last year.

You mentioned that you had record brand health indicators for Corona, Brahma, Budweiser, and Spaten. Could you remind us what those indicators are? How meaningful are they? Additionally, how is the overall brand health trend across your portfolio? Presumably, not everything is trending positively.

Thank you, Robert, for the question. We maintain a long-term view of our brand strategy, focusing on the declaration of consumers who love at least one of our brands—a key performance indicator we track. Comparing today to 2019, we have approximately 4 million more people declaring a love for one of our brands, equating to around 800,000 new 'lovers' each year. Our leading brands have performed well: Corona and Spaten are excelling, Brahma remains solid, and Budweiser has stabilized. Still, we face some challenges with long-tail brands like Bohemia and regional brands like Polar. We're concentrating efforts on these major brands as we believe they are foundational for future growth amid a growing overall portfolio.

I wanted to gain a little more granularity regarding consumer trends in Brazil, specifically how you have been performing in terms of market share in both beer and NAB. What initiatives are you undertaking to gain further share, especially in beer, while need to catch up a little in NAB?

That’s a great question, Ben. To start with, the Brazilian industry remains resilient overall, and we’ve experienced recovery, with our volumes reaching record levels in Q1. This demonstrates market share gains. The industry remains structurally stronger, without signs of a trade down but rather benefiting from a premiumization trend. Our core segment is performing well, growing more robustly than the industry average. We have made significant investments in our mega brands while still focusing on our core brands. We are encouraged by our five consecutive quarters of market share gains in the premium/super premium segment. Our efforts in the core—particularly with Budweiser, Brahma, and our 300ml returnable bottles—are strong initiatives that have positioned us positively to capture market share in the future. In NAB, we are well-aligned with trends of low/no sugar consumption, fortifying our market share in that segment.

As a follow-up regarding volumes specifically in the core portfolio, we observed growth above the industry. It seems the third player is also seeking volume growth, indicating future promotional environments in this segment. How are you perceiving pricing pressures and growth continuation for the core portfolio?

Thank you for the question, Renata. The industry is indeed on a positive trajectory and shows overall rational behavior. There are market dynamics at play with the top three players endeavoring to position their brands effectively. The industry appears more rational now. Regarding the core, there remains substantial opportunity for growth. There is a considerable gap between C class consumption relative to the middle-income population's, where we are identifying prospects to broaden per capita consumption. We have strategic initiatives—like our RGB 300 ml option—aimed at making our brands affordable for a wider consumer base, and this strategy is yielding great results.

I wanted to follow up on the last two inquiries regarding Brazil Beer. Jean, you mentioned rationality in Brazil Beer. Observing your revenues per hectoliter seems to indicate solid pricing, particularly on an ex-ICMS basis. However, your volumes of 3%, 4% make it seem like Heineken is reporting higher single-digit volumes, which poses questions regarding Petropolis's performance. What insights can you share about the competitive landscape, especially concerning Antarctica and Brahma given their importance to your portfolio? Additionally, I'm curious if there were impacts on the channel mix that influenced revenue per hectoliter.

Thanks for the question, Ricardo. We have a robust intelligence system that reconciles Nielsen data with our performance and delivery information to evaluate our competition. We are aware some competitors have been selling ahead of sellout, influencing our positioning. Collectively our assessments indicate a positive industry, but still within a context of varying competitor performance. Petropolis, our third player, is attempting to regain its footing and is performing more favorably relative to last year. We noticed upticks in inventory levels as we adjusted pricing during the VAT changes. Within our numbers, we felt that inventories in the market may have been lower on average, as we strategically prepared for those downstream pricing updates. Overall, we maintain confidence in our portfolio and believe we are on track with market share gains. Regarding impacts on net revenue per hectoliter, direct sales via dedicated wholesaler strategies may impact revenue, as those distribution costs vary based on sales channels. So thank you, everybody, who joined the call for your time and attention. We kicked off the year with a solid operational performance. We remain confident in volumes, particularly with Brazil's commercial momentum. Taxes present challenges, but the long-term outlook remains favorable, and we'll focus on delivering consistent and sustainable results. We're prioritizing margins, volumes, and cash flow generation. Thank you very much. See you in August and have a great day.

This concludes today's presentation. Thank you, and have a nice day.