Companhia de Bebidas das Americas Ambev ADR Earnings Call Nuggets: Price Per Hectoliter, Margin Pressure

On Monday, Companhia de Bebidas das Americas Ambev ADR (NYSE:ABV) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Price Per Hectoliter

Lore Serra – Morgan Stanley: Joao, there is a lot of things going on in price per hectoliter. I just wondered if you could help clarify a couple of things. One is that, typically we’ve seen your price per hectoliter in Brazil Beer go down sequentially in the second quarter, I guess if I look at it over the years, it’s usually been a couple of points, but last year it was more pronounced. So, as you get into the second quarter, should we think about not having an impact from state tax resets, i.e., a more label pricing sequentially?

Joao Mauricio Giffoni de Castro Neves – CEO: Yes, Lore I think this could be the best way to look into the pricing sequentially. Of course, when you look on a year-on-year there, think there was a lot of confusion. When you look on our year-on year-basis, the biggest impact is, of course, the IPI or the federal taxes, because it will (indiscernible). When you look on a sequential basis, that’s where (indiscernible) had an impact, and potentially you had earlier surveys and things like that. So, we continue to say that for the year we will be in line with inflation and all things being equal, we could have a better sequential basis going into Q2, then on the other years because of this anticipation for the first quarter.

Lore Serra – Morgan Stanley: On a mix basis, I know you don’t want too specifically, but should we see a headwind for mix as you put more efforts on the 1 litter and in the 33-milliliter?

Joao Mauricio Giffoni de Castro Neves – CEO: As we said, we’re not going to give a lot of news on this in detail, but I think we continue to be in a country when we talk about Brazil Beer, where we see all the different social classes, getting more income. Okay, so there is opportunity for us both in the premium and let say in the more affordable presentations. I think we’re in a unique position to take advantage of our operating portfolio now really being complete with Original, Bohemia and now Budweiser and Stella, but also being able to compete also in more affordable presentations with the world leader in the 300ml. So, in a way this really let us to be excited about really having a good portfolio liquid-wise, packaging-wise to take advantage of any opportunities that will arise. The consequence will be mixed when you look at an excess per hectoliter, but then you have, which one is growing faster, okay, and how the mix will play out in the different channels. So, that’s why it’s difficult really to model exactly how things will be, but when you look at net, net, just to finalize on the point we started, feel very comfortable with the net revenues per hectoliter, in line with inflation all things being equal and on a potential better sequential basis for Q2.

Lore Serra – Morgan Stanley: Very quickly on the distribution of expenses in Brazil, further ABI disclosure there, they are rising higher than volumes. Is that – I mean I know it’s both because of more volumes and some higher cost, but is it more related to the volume impact or cost of transport going up in a more important way?

Nelson Jose Jamel – CFO and IR Officer: It’s really a global – I mean we’re not explaining exactly which one. You have to remember, one of course, at the same that would benefit from a 14% minimal wage growth or 7.5% real, this also impact helpers and drivers in the transportation. Those are the one actually more impacted by minimal wage growth. So labor is definitely a point. Overall inflation, when you talk about fuel, it is important. Volume is important, but we cannot forget the mix innovation because as you are starting to have, let’s say, Budweiser in selected cities to all the country. As you have the 200 ml going to other places and we continue to expand innovation, remember that we took innovation from very little to very high digits in terms of our total volume. The footprint continues to adapt that as we continue to be successful in the innovation strategy, because we always start producing them in all occasion and then you replicate some other regions of the country. It takes some times as it delay till you take full advantage of the new footprint that is coming with the new investments that have taken place in the last 18 months.

Margin Pressure

Lauren Torres – HSBC: My question relates on the margin pressure we saw on the quarter. You were specific about where you are seeing that from whether it be in soft drinks from Brazil or beer in Latin America South. I was curious if some of these pressures, particularly in the first quarter were more than you were expecting and then just how should we think about the remainder of the year, return to better margins and some of these cost pressures getting little better as we trend through the year?

Joao Mauricio Giffoni de Castro Neves – CEO: I think as we both heard this morning, I think when you look at Brazil Beer in Particular we didn’t see so much of that pressure if you look at with the margin growing on a comparable basis, right. We have more of a hit on (indiscernible) announce on the overall, I would say that if we put together the guidance of net revenues per hectoliter be in line with inflation and cost of goods sold being below inflation, I think that combination on the gross margin is a positive one. So you would see if we are able to deliver that we are able to see gross margin expansion. And I think when you look in the lines between gross margin and EBITDA, many times there is a choice that you will be making. There is of course the overhang in distribution expenses but there is also the sales and marketing. We feel the pressure from sales and marketing in the first quarter. There is a component of fazing due to the strategy of taking full advantage of the carnival. You have to remember, how important is carnival to Brazil and how that really fits the northeast and west region is strategy. Some of our competitors have built their brand health in the past 10, 11 years around those and we have the opportunity to take one of the most important events in Brazil which is Salvador Carnival. We didn’t have a doubt for second that we want to have that back. Of course that has an impact in the short-term especially in the quarter. It will return in the long-term. We have already seen in the past two years very good momentum from brand health indicators, very good momentum from market share, very good momentum from per capital performance capita growth. So the main strategy, northeast-north strategy is actually contributing above the average in all of those three indicators that I just mentioned. In this quarter in specifically it hit – it paid it particularly. You think the carnival is strategy? So I would say that the combination of gross margin and then all those things that I mentioned in terms of SG&A, you can do the math and I think we can (indiscernible).

Nelson Jose Jamel – CFO and IR Officer: It’s Nelson, just to complement on what Joao just said I think on the SG&A side it’s crystal clear that the charge we took in terms of sales and marketing expand but on the gross margin impact in particular the COGS outlook reduced. As we said we remain very committed and possibly our guidance for full year COGS per hectoliter below inflation. I think what we saw in Q1 was in line with our expectation as part of the plan and at the same time we had a combination of declining COGS per hectoliter in beer Brazil and that was mainly because of the easy comps versus the imported cans we had last year during the first quarter and also that currency hedges while for soft drinks mainly because of sugar and PET, so commodity related we had a particularly tough quarter in Q1, but again that was part of the plan. So for the rest of the year with the predictability we had and the visibility we had also given our hedging strategy, we are comfortable that we should have an improvement in CSD year-over-year right going down to low single-digit growth instead of double digit like we had in the first quarter. While with beer it should not be negative like it was this year as it is going to have some less favourable if you will, aluminum, barley and FX had, so less than in Q1. This too favorable, lesser than in Q1, but before will have a total let’s say below inflation growth at the COGS per hectoliter level.

Lauren Torres – HSBC: That’s really helpful. If I can ask one other question. You talked about those balance volume and pricing growth this year, but we’re obviously hearing about the potential for further tax increase on beverages, so I assume if that happens, I don’t know if you’ve commented on that and if it does then that balance kind of goes away for this year, is that the case?

Nelson Jose Jamel – CFO and IR Officer: Well, the mix between volume and pricing is something that we want. We think it’s – we always strive to navigate in that manner. We were more skewed towards volume in 2009-2010, were more skewed towards price in 2011, we want to be somewhere between the two. You are right definitely, the size of the increase that it comes will have an impact on our decision. If it is something that we can continue to find for the – what we think is the right balance, and what we actually think is better for everyone, including the government when we look at the long term, great, because then we invest more. If it comes, then we will first, protect our profitability. I mean, we always said that we move price in line with the inflation. Plus, the tax pass through, and second, if that happens, there will probably be an impact on volumes, and if that is the case, given our (game plan) and the ability that we have to very quickly, define what’s the right footprint, given the new pricing strategy, we will revise our CapEx for the year.