Ambev S.A. (NYSE:ABEV) Q4 2023 Earnings Call Transcript
Ambev S.A. (NYSE:ABEV) Q4 2023 Earnings Call Transcript February 29, 2024
Ambev S.A. beats earnings expectations. Reported EPS is $0.06, expectations were $0.05. Ambev S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, good afternoon and thank you for waiting. We would like to welcome everyone to Ambev's 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.
Jean Jereissati: 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. CAC recovered thanks to [DR] which even went beyond 2021 results. Preparedness in Argentina made the difference with more cash flowing dollars being generated and profitability came back in a big way with gross and EBITDA margin expansion pretty much across the board, while ROIC 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 430 basis points. Cash flow from operating activities grew 20%, reaching almost R$ 25 billion and free cash flow stepped the change to R$ 17.7 billion. Normalized profit reached over R$ 15 billion. However, it was flattish on the account of increased taxes, mostly due to higher effective tax rate and currency devaluation in Argentina. All this while challenged by tough industries in Canada and Argentina, a tough comp on tax credits in Brazil and a steep effect devaluation in Argentina. And this performance was driven by a consistent commercial execution throughout the year with focus on the consumer, with industry volumes growing in half of our top markets and seven out of such top 10 markets delivering a net revenue per hectoliter ex-marketplace performance above inflation, a continued development of our digital platforms, over 90% of our gross turnover in Brazil was transacted via BEES, supporting our NPS at all time high levels once again.
GMV of our third-party marketplace products growing over 44%, totaling R$ 3.3 billion. Ze Delivery in Brazil expanding coverage and awareness, reaching 5.7 million monthly active users and growing GMV by 8% and effective decisions around optimizing our business. As a result, cash COGS per hectoliter and cash SG&A grew below net revenue growth, supporting both gross and EBITDA margin expansions. This shows how sound our operations are and how well we manage to convert commercial momentum, such as in Brazil and CAC, 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 having gained 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 total volumes to decline 1.1% as we faced a tough comparable from FIFA World Cup last year. Net revenue per hectoliter performance continued with momentum in the quarter, while cash COGS and cash SG&A grew below net revenue, leading to 27% EBITDA growth coupled with gross and EBITDA margin expansions. In the year, we checked all the boxes. We grew almost 3 million hectoliters in premium volumes, coupled with brand health improvement, EBITDA margin expanded 500 basis points to 32% resulting in EBITDA of R$ 12.5 billion, the highest in our history. Let's go for 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 POC.
Our diet light zero portfolio grew over 22% with a highlight to the new Guarana zero and the continued success of Pepsi Black. The 0.5% decline in net revenue per hectoliter was explained mostly by increased VAT taxable base for carbonated soft drinks and some general mix, with the increasing of the third-party distribution in our mix. Cash COGS 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 ours and our partners brand, delivering an EBITDA of almost R$ 2 billion the highest since 2015. Let's talk about glass. In Argentina, volumes in the quarter declined, driven by an industry that was impacted by macroeconomic conditions.
However, a new financial and commercial playbook on how to operate in the Argentina environment allowed us to accelerate revenue management, while keeping market share stable, offsetting increased costs and expenses due to accelerate inflation. In the year, cash flow generation in dollars improved significantly, even taking into consideration the FX depreciation in 2023 and the gap between parallel and official rates. As we implemented this new playbook, so in 2024, we already started to repatriate this cash generated in 2023. As for the other operations in last full year EBITDA grew in the mid-teens with margin expansion, resulting in the highest nominal EBITDA in history. CAC volumes grew 7.7%, led by the continued recovery in the Dominican Republic this quarter.
A positive industry supported volume growth as 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, translating into gross and EBITDA margins above 40%. This was a year of turnaround in CAC. Volumes top and bottom line were back to growth with margin improvement. And as for Canada, volumes declined on the back of a continued tough industry performance in the quarter in a growing cash COGS per hectoliter affected by the lower volumes really impacted our EBITDA growth. In the year, EBITDA grew low single-digits, thanks to initiatives to curb 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 being the driving force behind our sustainable value creation path, being able 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 today, Brazil represents one of the largest beer per capita consumption in the world, we still see opportunities to grow such as in the north and northeast regions of the country. And as for premium beers, it is growing, but it is still under-indexed in terms of participation in both beer and alcohol spaces as well as in 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.
And in terms of costs, we expect to face less input cost pressure, given currency and commodities tailwinds, partially offset by mix and fair value adjustment of payables. Therefore, assuming current commodities and FX prices, we expect our cash COGS 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 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 and brought over 31 million people together during the period. Sales volumes during Carnival were great 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. So we delivered a strong brand execution for Brahma and the new Guarana Antarctica Zero and scaled up Beats Tropical as the innovation of the season, performing over 2x better than what Caipi Beats did last year. And third, 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 2022, mainly as a result of higher profits in Argentina, the Dominican Republic and Canada and less IOC tax deductibility. And in December, Congress in Brazil passed a legislation on deductability of IOC and state VAT government rents that should impact our effective tax rate going forward.
However, the precise impact is not yet entirely clear. Lucas will come with more information about this topic. So let's summarize our call. We are confident about accelerating volumes, especially in Brazil. We step changed the free cash flow generation and it will remain strong and solid in 2024, a year that will present its own set of challenges, just as every year since 2023. Nevertheless, my team has been managing to overcome them and deliver continuous and consistent improvement. Therefore, I would like to thank my team again for the great 2023 and I'm counting on them to deliver in 2024, the next step in our transformation journey by doing what we have been doing the best, acting as owners listening to consumers and clients working collaboratively with our ecosystem, having a disciplined execution in the short-term, while laying the groundwork for sustainable value creation in the long-term.
So thank you very much. Now let me hand this call over to Lucas.
Lucas Lira : 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 the 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 COGS and cash SG&A growing below inflation with or without considering Argentina.
We continue to invest for growth with sales and marketing totalling BRL 6.5 billion and CapEx totaling BRL 6 billion. Return on invested capital expanded over 330 basis points, thanks mostly to better no path margin but also better asset turnover, while gross margins and EBITDA margins also 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 ELJ BRL 1.7 billion in connection with the exercise of the Dominican Republic put option and still return BRL 11.5 billion to shareholders. And all this while dealing with looming headwinds in Brazilian taxes and Argentina. So let me tackle these two 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. Lots of work to do here to ensure we move towards a less complex system and that does not increase the total tax burden of the industry, which is already among the highest in the world. And in terms of income taxes, changes were made to the rules regarding the income tax deductibility of the IOC and of state VAT government grants. On IOC, adjustments were made to the legal parameters for purposes of calculation and deductibility of the IOC. Accordingly, pursuant to the terms of the new law, the main change to our IOC basis is that as of January 1, 2024, it will be adjusted downwards by the value that was recorded in the carrying value adjustments account in connection with the stock swap merger carried out in 2013 that allowed us to move 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. As a result, it's still premature to say whether or not there will ultimately be an impact on our results and if so, to which extent. We will do our best to offset these headwinds as much as possible be it the income statement impact, be it the cash flow generation impact 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. And finally, on the tax litigation front, we ended the year with BRL 95 billion in disputes with a possible, but not probable, chance of loss.
During the year, we had a BRL 17 billion positive impact in these disputes due to favorable decisions at administrative or judicial courts as well as certain legislative changes. And so far in 2024, there have already been an additional $4 billion of 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 continue to expect will be subject to decisions at the administrative level during the year. Now Argentina. Our results under IFRS were materially impacted from an accounting standpoint given the Argentinian peso devaluation in mid-December of 124%. Page 15 of our press release contains a detailed description of the different impacts.
However, we have been preparing for this for over a year, so we will continue to follow our game plan. And not all is bad news, though. 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, allowed us to end 2023 having generated more cash flow in USD than in 2022. Capital controls have also eased, which has allowed us to begin repatriating funds. We still have a long road ahead, but we know what needs to be done, and the team has demonstrated its ability to execute and deliver despite these extraordinary circumstances. And speaking of the future, I wanted to call out that as from January 1, 2024, our definition of organic revenue growth will be amended to cap the 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 CPGs. Turning to our financial priorities for 2024. It's all about consistency. We will continue to focus on liquidity, financial discipline, profitability, value creation and capital allocation. We have important headwinds indeed. However, since 2020, we've had to navigate a lot of uncertainty and volatility, but we found ways to overcome them to keep delivering growth, profitability, resilient cash flows all while building our path to sustainable long-term value creation. Finally, before moving to Q&A, I would just like to call out some of our highlights on the sustainability front.
Sustainability is about impact. And in 2023, we took concrete steps towards that end, particularly on the environmental front. Our 2025 environmental commitments are on track. We were the first company of 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% versus 2022 as well as with 15 carbon-neutral plants. More details to come in our sustainability report, which should come out in the coming months. Stay tuned. With that, let's go to Q&A.
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