Ambev S.A. (NYSE:ABEV) Q1 2024 Earnings Call Transcript

And last but not least, I think the additional piece of information that I introduced in my prepared remarks was on the other financial expenses line we saw in Q1 and we should continue to see going forward. And this is not necessarily just a 2024 point, but it’s perhaps a longer term point to follow, is the expenses related to letters of credit that are necessary to the extent we decide to litigate in the judiciary, our tax litigation. So as you may recall of our tax litigation, roughly 70%, seven zero percent is still at the administrative level. And to the extent we don’t prevail on the administrative level, given that we believe in the merits of our case from a legal, technical perspective and looking into kind of case law in the judiciary, right, assuming we decide to litigate in the courts, which has been the case so far.

That entails, right, some degree of letters of credit. So as our administrative cases move to the judicial system, that’s going to require some greater degree of guarantees. And so it already impacted to some extent in Q1. So I just wanted to flag that for everybody’s reference. But again, this is over time, depending on the pace of decisions at the administrative level, which we obviously don’t control, but directionally, this is a line that may continue to impact negatively down the road. Hope this helps.

Operator: Next question from Felipe Ucros with Scotia.

Felipe Ucros: You’ve had a very good performance on the zero sugar products for quite a few quarters in NAB in Brazil. And 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, that has. Not sure how the cost of sugar relates to the sweeteners that you use. But for example, maybe less sugar per hectoliter may be good for margins in the long run as the 0 products continue to perform really well. Just wondering if you can comment on the effects that such high growth in the 0 products is having.

Jean Jereissati: So thank you very much for the question, Felipe. So yes, this is a big bet of ours. When you look at our business, our NAB business, we have something around 18% market share in the total business, but we have 30-plus in the no-sugar portfolio when we compare with other products that are no sugar. So this is a big trend that we are very well positioned to serve it more recently. So we stepped up the portfolio with Pepsi Black that is a success. And then last year, we renovated Guarana Zero. Both these products, they have a cash COGS, a VIC that is better when we compare with the sugared products, and they are doing very well. So we are very excited about the performance of more recently of Guarana Zero that we just started.

In reality, we were not able to supply all the demand that we have. So we are having some SKUs that we could meet demand with our production. Guarana Zero grew 60%. And overall, we really believe that this rate of growing nonsugar products at 20% for 9 quarters in a row is really something structural that is happening in the business in our company. And yes, it’s true it has a more — a better margin overall this product.

Lucas Lira: And also, Jean, just to complement. And with respect to the part of the portfolio, right, that contains sugar, I think one of the things that the team has been focused and successful over the last few years is to consistently lower the sugar content of those products. So there has been also kind of very good progress on that front as well. So no low sugar, health and wellness trend, innovation targeted there to really leverage that kind of tailwind, but also with respect to the remaining part of the portfolio, consistently lowering the sugar content there.

Jean Jereissati: Through technology being able really to make the most from each gram of sugar.

Operator: Next question from Rodrigo Alcantara with UBS.

Rodrigo Alcantara: I mean I guess this is not the first time we asked this question, right? I mean on capital allocation, right, I mean you certainly have fulfilled your — committed to cash flow generation, and we have seen that, right, you guys meeting your targets. But somehow, we see this mismatch with the share price in valuation. So I mean just curious here, I mean, if this situation persists, I mean, is this something that could lead us to maybe perhaps thinking on Ambev taking a different approach on buybacks or dividends? Is this — could this be a potential scenario [indiscernible] to assume in the investment case? That would be my question.

Lucas Lira: Rodrigo, thank you for the question. In short, Rodrigo, the mindset around capital allocation has not changed. So we continue to look towards reinvesting the cash flows that we’ve generated consistently. The resilient cash flows that our business has delivered over the last, right, several years, reinvest in the growth of the business, be it organically, be it non-organically, and over and above those opportunities that we look at, right, on an annual basis or even shorter. We were always looking to return excess cash to shareholders over time. And this will be, over time, a combination of IOC. There has been less deductibility since the beginning of the year, but there’s still some deductibility. So we will continue to look to maximize the IOC that’s still available.

So we will continue focusing on maximizing IOC deductibility, number one. And then the balance will be a combination of dividends and/or share buybacks from time to time as we discuss with the Ambev Board consistently, right? And so the Board always looks at capital allocation. So this is always a live discussion with the Board. Historically, our payout has been skewed towards December, given that our cash flow generation, our operational cash flow is very skewed towards Q4, particularly December. So that’s when we have the greatest visibility of the excess cash that’s available to be returned to shareholders, number one. Number two, that’s the moment in time when we’re looking at the budget for the next year, so we have a much better visibility on what we plan on reinvesting for growth in the year to come.

And so I think this is going to be more of an H2 conversation than where we are now. But this is always a topic that we look very closely at and are very kind of diligent behind.

Operator: Next question from Lucas Ferreira with JPMorgan.

Lucas Ferreira: My question is on Argentina. I know the situation remains hard to read. But in general terms, when you look at inflation coming down, we’ve been hearing from other companies that probably first quarter was the weakest point in terms of volumes. If you have the same perception that things could start improving on the margin from here? And then more maybe here to Lucas on how to think about margins from here because what we’re seeing is FX relatively stable, right, even the blue, so the official effects kind of narrowing the gap to the blue while inflation remains high. So I would imagine that you guys keep on pace on the top line front in terms of passing on prices to the market. But I would suppose that the impact on cost has been probably smaller than that one on the top line.

So my question is basically, if we could see an improvement in profitability in the country given that we’re seeing this — the changes in these effects and inflation kind of going to the right direction, put it this way?

Jean Jereissati: So let me start and then I hand this to Lucas — hand over to Lucas. Lucas, so yes, Argentina is going through a stabilization plan where we know that there is the need of an adjustment in the country, but we are seeing favorable evolution month after month on the macro numbers, on the fiscal surplus, on CPI decelerations on central bank reserves, as you mentioned, the gap between dollar [indiscernible] is coming down. I think it’s still early for us to access if we — if the volumes will begin to recover from Q1 on. I think it is still early because the country is really adjusting the inventory levels, the wholesaler inventories, the consumers. So it’s still — we are still with the high guard on that. As we have been mentioning before, what we are looking is that — so we want really to maintain the grip with our consumers and maintain our market share over there and really protecting the cash.

So these are the 2 main important KPIs for us and then go through this correction that Argentina is doing. The good part — so there is a possibility of Argentina really making it work for H2 and for 2025. So — but for now, I think this is the most we can say. I think it’s early to say that all the correction is done.

Lucas Lira: Hi, Lucas. Lucas here. Thank you for the question. Regarding margins for Argentina, a few comments. I think the tougher comp is going to be H2, particularly Q4, subject to everything that Jean mentioned, right? It’s a very volatile situation in the short term. But if the country continues to make progress, I think the bigger hurdle that we face on the margin side, I would say, is H2 and particularly Q4, number one. And number two, I think it’s important to call out that when we look at profitability, it’s important to kind of go beyond EBITDA. I mean, as a company, we don’t stop at EBITDA, right? We keep going and also spend a lot of focus and energy around free cash flow, but even more so in Argentina. But the reason I’m saying this is given our lack of hedging in Argentina, right, even though above EBITDA, our EBITDA margin, right, may be more impacted in H2 given that there is no hedging, no carry costs associated to that, if you look at kind of our margins from a net income standpoint, that could help, right?

This dynamic could help offset kind of the headwinds from a margin perspective, from an EBITDA margin perspective, okay? So keep that in mind.

Operator: Next question from Robert Ottenstein with Evercore ISI.

Robert Ottenstein: You mentioned that you had record brand health indicators for Corona, Brahma, Budweiser and Spaten. Could you just remind us what those indicators are? How meaningful that is? And how the overall trend on brand health is in aggregate because presumably not everything is going in the same direction?

Jean Jereissati: So thank you, Robert, for the question. So having a broader perspective, a more long-term one. So we always mentioned that as part of our strategy, the Pillar 1 of our strategy was really to have a portfolio with more people declaring that love one of our brands. So this is the KPI that we follow. So the declaration of consumers that mentioned that one of our brands is one brand that they love. And when we compare today to 2019’s, we had — we have something around 4 million people declaring that they adopt one of our brands as a loved one when — in this time horizon of 5 years. So it was something around 800,000 a year. The brands that really led this performance was — they were the mega brands. So Corona is doing very well.

Spaten is doing very well. Brahma is very solid. And Budweiser is more stable. But — so these are the brands that made this uplift. We still have some headwinds on the long tail. So we have many brands like Bohemia, like we have regional brands like Polar that they — when we adopt the long tail, we have not — we have been concentrating on the 4 brands, but the brands that we believe that are the brands of the future and the total add-up of lovers in our portfolio, both they are positive.

Robert Ottenstein: And what about Beck’s?

Jean Jereissati: So Beck’s, that’s a good question, Robert. Beck’s is, let me look at exactly the right number, is pretty much stable. And in the end, we mentioned in the Investor Day, and we’re going to show you again that Beck’s was really a bet on the super premium. And what happened from the investors – that Investors Day and today, it is that we unlocked a lot of capacity. We were constrained on Corona. We could not make this statement on Corona on that time. We unlocked capacity new Beck’s production. And then Corona is really leading our efforts on the super premium part of the segment, and Beck’s will continue there, but Corona is really, really leading the super premium as we’ve been able to produce more.

Operator: Next question from Ben Theurer with Barclays.

Ben Theurer: Just wanted to kind of get maybe a little more granularity as to just the general consumer trends in Brazil in particular and how you guys have been performing market share-wise in both beer and NAB. And what are the initiatives you’re taking to potentially gain further share, particularly in beer? And maybe my sense is needing to catch up a little bit on NAB. So whatever strategies you’re putting out as it relates to market share in Brazil?