ABEV Ambev SA

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AMBEV REPORTS 2017 FIRST QUARTER RESULTS UNDER IFRS

São Paulo, May 4, 2017 – Ambev S.A. [BOVESPA: ABEV3; NYSE: ABEV] announces today its results for the 2017 first quarter (1Q17). The following operating and financial information, unless otherwise indicated, is presented in nominal Reais and prepared according to International Financial Reporting Standards (IFRS), and should be read together with our quarterly financial information for the three-month period ended March 31 ^st , 2017 filed with the CVM and submitted to the SEC.

Top line performance: Top line was up 8.0% in the quarter, driven by growth in all operations: Brazil (+0.6%), Latin America South (LAS) (+27.4%), Central America and the Caribbean (CAC) (+5.5%) and Canada (+2.3%). Consolidated volumes were up 2.4%, growing in most regions, and net revenue per hectoliter (NR/hl) increased by 5.3%. In Brazil, volumes grew by 2.6%, while NR/hl was down 1.9%. In CAC, while organic volumes were up 1.2% with a NR/hl growth of 3.4%, reported volumes increased by 27.3%, as a result of the swap of assets carried out with ABI and our operations in Panama. In LAS, volumes increased by 3.1% and NR/hl was up 23.3%, reflecting the high inflation in the region. In Canada, volumes were slightly down (-0.9%), with a solid 3 .3% NR/hl growth. 

Cost of Goods Sold (COGS): Our COGS increased by 26.4% in 1Q17 while, on a per hectoliter basis, it grew by 23.1%, mainly due to inflationary pressures and unfavorable currency in Brazil and LAS.

Selling, General & Administrative (SG&A) expenses: SG&A (excluding depreciation and amortization) in 1Q17 was up 6.4%, with efficiency gains in non working money and cost savings in working money.

EBITDA, Gross margin and EBITDA margin: Normalized EBITDA reached R$ 4,356 million (-7.6%) in 1Q17 with gross margin of 59.8% (-580bps) and EBITDA margin of 38.7% (-670bps).

Normalized Net Profit and EPS : Normalized Net Profit was R$ 2,316 million in 1Q17, 20.1% below 1Q16, driven mainly by a lower EBITDA and currency translation due to the appreciation of the Brazilian Real. Normalized EPS in the quarter was R$ 0.14.

Operating Cash Generation and CAPEX : Cash generated from operations in 1Q17 was R$ 3.1 billion versus R$ 2.3 billion in 1Q16 (+37.7%). In the quarter, CAPEX reached R$ 559 million, 20.9% lower than in 1Q16.

Other cash gains: We have recorded in our Equity a cash gain of R$ 159 million, related to the recovery of restricted funds, to be received in 36 installments as of January, 2017.

Pay-out and Financial discipline : In 1Q17, we returned approximately R$ 1.1 billion to equity holders in dividends. As of March 31 ^st , 2017, our net cash position was R$ 2,106 million.

Note: Earnings p er share calculation is based on outstanding shares (total existing shares excluding shares held in treasury).

We started the year with net revenue going up 8.0% and EBITDA down 7.6% , driven by solid results in CAC, LAS and Canada but negatively impacted by Brazil’s performance.

As anticipated, our EBITDA decline in Brazil is explained by temporary headwinds : (i) the increase of our COGS mainly driven by negative effect of the FX, and (ii) a tough comparable of NR/hl, due to state taxes increases imposed towards the end of February 2016.

On the other hand, whilst the consumer market in Brazil remains challenging, leading to the beer industry decline of low single digit, we have been able to revert the negative trend and grow our beer volumes by 3.4%.

Our beer volumes performance represents a good first step towards our objective of resuming top line and EBITDA growth and benefited from our strong execution through our five commercial platforms:

·           Elevate the Core

o     Skol and Antarctica boosted summer experiences and took a leading role during Carnival, sponsoring the street Carnival in more than 40 cities and engaging with more than 35 million people through a complete 360 activation.

o     We have just launched a new visual brand identity (VBI) for Brahma, our classic lager, to highlight the brand’s attributes of flavor and beer expertise. Its gold and red colors are still there, but in a totally new design inspired in its old VBIs, evoking its tradition.

·           Accelerate Premium

o     Our domestic and global portfolios of premium brands have delivered another quarter of solid performance, with volumes increasing double digits, led by Budweiser that grew more than 30% year over year.

o     Stella Artois launched a global campaign “Buy a Lady a Drink”, in partnership with the Water.org, to help raise awareness of the global water crisis, inviting its core targets consumers to leave a legacy.

·           Near Beer

o     Our strong activation during Carnival has been supported by Skol Beats, with its three variants, Senses, Spirits and Secret. 

o     Going forward, there is still a big opportunity for Near Beer, as we increase our portfolio and capture a bigger share of throat in non-traditional beer occasions.

·           In Home

o     We have been expanding our market programs designed to improve the assortment of product s and category space, enhancing shoppers experience in the off-trade channel.

o     The 300ml returnable glass bottles continue to be a big focus for 2017, driving affordability to consumers. This presentation grew double digits year over year.

·           Out of Home

o     The bar is an extension of the Brazilian’s living rooms. We have been improving execution and service level across the country and investing in trade programs to support the point s of sales in the challenging macro environment.

o     The 1 liter returnable glass bottles grew high single digit year over year, playing an important role in such environment.

In CSD & NANC Brazil, we continued to invest behind our brands and to strengthen our pack price strategy, delivering flattish volumes, while the industry came under significant pressure declining, as per our estimates, high single digit.

In our international operations, CAC delivered another quarter of organic volumes growth and solid revenue management strategy that, coupled with a solid cost discipline, led to an EBITDA increase and margin expansion. In LAS, the weakness in soft drink industry was more than offset by an strong beer volumes performance in all the countries we operate, leading to solid EBITDA growth. And in Canada, we continued to grow our top line and EBITDA driven by organic volume growth and strong revenue management strategy.

Still with respect to our international operations, it is important to highlight that our reported results include for the first time our operations in Panama and exclude our former operations in Colombia, Peru and Ecuador, which are treated as a scope in our CAC as LAS divisions, respectively.

Looking at our divisional performance highlights in more detail:

·           Brazil . NR in Brazil was up 0.6% in 1Q17 and EBITDA down 23.8% to R$ 2,455 million, with a margin of 39.0% (-1250bps).

o     In Beer Brazil, net revenue grew by 1.1% in 1Q17.

§    Total volumes increased by 3.4% in the quarter, despite the continued macroeconomic weakness. We estimate that beer industry volumes declined low single digit. Premium continued to grow, with volumes increasing double digits.

§    NR/hl was down 2.2%, due to a hard comparable in 1Q16, as the 2016 state taxes increases only became effective towards the end of February 2016. In addition, as part of our revenue management strategy, we continue d to use our full portfolio of packs and brands to drive affordability to consumers, including the 1 liter returnable glass bottles in the on-trade channel and the 300ml returnable glass bottles in the off-trade channel. Volumes of both packaging presentations grew double digits in the quarter.  

o     In CSD & NANC Brazil , top line was down 2.6% in the quarter. Volumes were slightly up (+0.1%), better than CSD industry that declined, as we estimate, high single digit, as consumers continue to be pressured by negative real disposable income growth. NR/hl in CSD & NANC was down 2.7%.

o     Brazil cash COGS was up 38.2%, while on a per hectoliter basis 34.8%, mainly due to (i) FX impacts, (ii) inflation, and (iii) a hard comparable in 1Q16, when our cash COGS/hl increased by 2.3%, despite of an inflation of around 10% and a FX impact of more than 20%.  

o     Brazil cash SG&A was up 1.5%, below inflation, due to (i) low single digit growth of distribution and administrative expenses, and (ii) a decline in sales and marketing expenses driven by efficiency gains in non working money .

·           Central America and the Caribbean (CAC) . In 1Q17, EBITDA in CAC reached R$ 377 million (+7.8%) driven by top line performance (+5.5%) and another quarter of EBITDA margin expansion (+80bps) to 35.6%. In US dollars, reported EBITDA grew close to 25%.

o     We continued to experience a good momentum of top line growth in the region. Organic volumes grew by 1.2% on a tough comparable, given the 10.4% volume growth in 1Q16, while on a reported basis, volumes increased by 27.3% benefitting from the recent swap of assets carried out with ABI and our operations in Panama. In Dominican Republic, we continued to connect with our consumers through relevant platforms, such as Carnival Presidente and The World Baseball Classic, supporting the equity of our brands, while, in Guatemala, we further improved our execution, with strong summer activation of Corona and Busch.

·           Latin America South (LAS) . In 1Q17, top line was up 27.4%, and EBITDA in the region reached R$ 1,203 million (+20.5%) with an EBITDA margin compression of 250bps to 43.5% .

o     Volumes were up 3.1%, as the softness of the CSD&NANC industry in the region was more than offset by a strong performance of beer in (i) Argentina, where volumes reverted the recent negative trend and increased by a high single digit, leaded by Brahma, Iguana and Corona; (ii) Bolivia, driven by Huari; (iii) Paraguay, with an outperformance of Brahma, Bud Light and Ouro Fino; (iv) Chile, with strong performance of our Global Brands; and (v) Uruguay, with a double digits volume growth. EBITDA margin in LAS compressed 250bps in the quarter mainly due to a 41.8% cash COGS increase (+35.0% on a hectoliter basis) impacted by FX in Argentina.

·           Canada . EBITDA for the country totaled R$ 321 million (+17.5%) driven by top line growth (+2.3%) and continued cost discipline to drive robust EBITDA margin expansion (+370bps) to 28.5%.

o     We delivered another quarter of solid top line performance in Canada, with NR/hl growing 3.3% mainly as a result of our revenue management strategy. Volumes were down 0.9% in 1Q17 , due to Easter hol i day phasing impact on the beer industry, partially offset by the continued growth of our Global Brands, led by Bud Light and Stella Artois, and strong performance from our craft and near beer portfolio, which are growing double digits.

We are confident that the initiatives taken under our commercial platforms have played an important role for the recovery of beer volumes in Brazil.

However, it is important to keep in mind that the macro environment remains very challenging, with an all-time high unemployment rate and depressed disposable income, what is leading to a continued decline of the beer industry.

In this context, we remain cautiously optimistic for the year and we will continue to leverage our commercial platforms.

We will also keep pursuing efficiency in our investments and, despite the short-term negative impact of our COGS, as part of our culture, we will push ourselves further to improve our cost performance and deliver superior results, as we remain excited with the opportunities we see going forward to resume top line and EBITDA growth.

We reiterate our guidance that we expect cash COGS/hl to grow double digits in the first half and to be flattish to low single digit up in the second half of 2017. Further, year over year, the increase of the cash COGS/hl in 2Q17 will be significantly lower than the year over year increase in 1Q17, being a bridge for second half of the year.

Finally, regarding our international operations, in CAC, we will keep pursuing top line growth and EBITDA margin expansion and we remain enthusiastic with the region. In LAS, we are excited with the positive volumes trend and top line growth opportunities, especially for beer, whilst still cautious with the macro environment in Argentina. In Canada, we continue to focus on balanced top line growth translating into the bottom line and remain optimistic that we have the right portfolio to deliver profitable growth.

The combination of Ambev’s operations in Latin America North (LAN), LAS and Canada’s business units, eliminating intercompany transactions, comprises our consolidated financial statements. The figures shown below are on an as-reported basis.

We delivered during the quarter R$ 11,241.8 million of Net Revenue (+8.0%) and R$ 4,356.2 million of Normalized EBITDA (-7.6%).

Our LAN region includes Beer Brazil, CSD & NANC Brazil and Central America and the Caribbean (CAC) operations. LAN EBITDA for the quarter totaled R$ 2,832.0 million (-20.5 %).

In 1Q17 we delivered R$ 2,455.1 million (-23.8%) of Normalized EBITDA in Brazil, with an EBITDA margin of 39.0% (-1250bps). Net revenue increased by 0.6% in the quarter, with volumes going up 2.6% and a NR/hl down 1.9%. Cash COGS and cash COGS/hl were up 38.2% and 34.8%, respectively. Cash SG&A grew 1.5%.

In 1Q17, EBITDA for Beer Brazil was R$ 2,214.9 million (-20.1%) with an EBITDA margin compression of 1100bps to 41.2%.

NR was up 1.1% in the quarter, as volumes growth of 3.4% was partially impacted by a negative NR/hl (-2.2%), driven by (i) a hard comparable in 1Q16, as the 2016 state taxes increase s only became effective towards the end of February 2016, and (ii) negative mix.

Cash COGS/hl increased by 34.3 %, driven by (i) FX impacts, (ii) inflation, and (iii) a hard comparable in 1Q16, when our cash COGS/hl increased by 2.9%, despite of an inflation of around 10% and a FX impact of more than 20% .

Cash SG&A was flattish due to (i) a below inflation growth of sales and marketing, driven by efficiency gains in our non working money, and (ii) a low single digit increase in distribution costs and a decline in administrative costs, as a result of the revision of our logistics and administrative cost allocation between Beer and CSD & NANC businesses.

In Brazil CSD & NANC, we delivered an EBITDA of R$ 240.2 million (-46.5%) in the 1Q17, with an EBITDA margin of 26.0% (-2130bps).

Net revenue was down (-2.6%), as a flattish volumes (+0.1%) were impacted by a NR/hl decline of 2.7%.

Cash COGS/hl increased by 35.8% driven by (i) negative FX impacts, (ii) inflation, and (iii) a hard comparable in 1Q16, when cash COGS/hl increased by 1.1%, despite of an inflation of around 10% and a FX impact of more than 20% .

Cash SG&A was up 12.6% driven by a double digits decline in sales and marketing impacted by higher  distribution and administrative expenses, due to the revision of our cost allocation between our businesses to better reflect the CSD & NANC operations.

Our operations in CAC delivered an EBITDA of R$ 376.9 million (+7.8%) in the quarter, with an EBITDA margin of 35.6% (+80 bps). In US dollars, reported EBITDA grew close to 25%.

Top line increased by 5.5% in 1Q17 driven by organic volume growth (+1.2%), despite a tough comparable in 1Q16, when volumes grew 10.4%, and by a NR/hl increase of 3.4%. Reported volumes increased by 27.3%, benefitting from the recent swap of assets carried out with ABI and our operations in Panama. In Dominican Republic, we continued to connect with our consumers through relevant platforms, such as Carnival Presidente and The World Baseball Classic, enhancing our brand’s equity, while, in Guatemala, we improved our execution, with a strong summer activation of Corona and Busch.

Cash COGS/hl grew in line with top line performance, while our cash SG&A declined 2.7%, driving another quarter of EBITDA margin expansion.

The scope change in CAC refers to the beginning of our operations in Panama as a result of the swap of assets carried out with ABI on December 31, 2016.

LAS EBITDA increased by 20.5% in 1Q17 to R$ 1,203.4 million, with an EBITDA margin of 43.5% (-250 bps).

Our volumes grew by 3.1% , as the softness of the CSD&NANC industry in the region was more than offset by a strong performance of beer in (i) Argentina, where volumes reverted the recent negative trend and increased by a high single digit, with great contribution from Brahma, Iguana and Corona; (ii) Bolivia, mainly driven by Huari; (iii) Paraguay, with an outperformance of Brahma, Bud Light and Ouro Fino; (iv) Chile, with strong performance of our Global Brands; and (v) Uruguay, with a double digits volume growth driven by both mainstream and premium portfolios. Top line was up 27.4% with a NR/hl increase of 23.3%.

Cash COGS grew 41.8% while, on a hectoliter basis, 35.0%, mainly driven by higher inflation and negative currency impact, as we are very systematic with our hedge policy. Cash SG&A increased by 27.7%, adversely impacted by inflationary pressures mainly in Argentina.

The scope change in LAS refers to the termination of our operations in Colombia, Peru and Ecuador as a result of the swap of assets carried out with ABI on December 31 ^st , 2016.

In Canada, we delivered R$ 320.8 million of EBITDA (+17.5%), while our EBITDA margin increased 370bps to 28.5%.

In the first quarter our volumes were down 0.9% mostly due to contraction of the Canadian beer industry, which was impacted by Easter holiday phasing, partially offset by performance ahead of trend of our lead brand Budweiser, double digits growth on Bud Light, and continued strong performance from the craft and near beer portfolio. Our net revenue per hectoliter increased by 3.3% mainly explained by our revenue management initiatives.

Cash COGS decreased by 8.4% while, on a per hectoliter basis, by 7.6%, primarily driven by cost absorption with increased production and cost efficiencies with our import portfolio from ABI, while Cash SG&A expenses increased by 2.5% .

Other operating income totaled R$ 290.8 million in 1Q17 (-25.9%), mainly driven by government grants related to State VAT long-term tax incentives that were down year over year due to (i) the expiration of VAT Government Grants Agreements in 4Q16, and (ii) revenue geographic mix.

During the first quarter we recorded an expense of R$ 28.7 million in exceptional items (as compared to R$ 6.2 million in 1Q16).

Net finance results declined 25.5% (a R$ 1,171.3 million expense in 1Q16 compared to a R$ 872.6 million expense in 1Q17), as a higher Interest Expense of R$ 402.2 million, due to interest expenses and the non cash expense related to the put option associated with our investment in the Dominican Republic (around R$ 140 million), was more than offset by lower losses on:

(i)             Derivative instruments, driven by the carry cost of our FX hedges, primarily linked to our COGS exposure in Brazil and Argentina, and non-cash gains or losses related to the mark to market of the hedges; and

(ii)            Non-derivative instruments, related to foreign exchange translation on intercompany payables and loans, as we benefited from the BRL appreciation.

As of March 31 ^st , 2017 we held a net cash position of R$ 2,106.1 million (down from R$ 2,763.3 million as of December 31 ^st , 2016). Consolidated debt corresponded to R$ 5,132.9 million whereas cash and cash equivalents less bank overdrafts totaled R$ 7,229.1 million, down from R$ 7,876.8 million as of December 31 ^st , 2016.

The weighted nominal tax rate for the quarter was 29.6%, compared to 30.9% of 1Q16, while the effective tax rate increased from 10.4% to 12.9%, mainly driven by lower benefits from interest on shareholders’ equity.

The table below shows the reconciliation for income tax and social contribution provision .

The table below summarizes Ambev S.A.’s shareholding structure as of March 31 ^st , 2017.