AMBEV REPORTS 2012 FOURTH QUARTER AND FULL YEAR RESULTS UNDER IFRS

São Paulo, February 27, 2013 – Companhia de Bebidas das Américas – Ambev [BOVESPA: AMBV4, AMBV3; NYSE: ABV, ABVc] announces today its results for the fourth quarter and full year 2012 results. 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 financial information for the twelve-month period ended December 31, 2012 filed with the CVM and submitted to the SEC.

Operating and Financial Highlights

Top line performance: Net revenues were up 13.7% in the quarter, leading to 12.4% better top line results for FY 2012, which represents an improvement versus 2011, when top line grew 9.9%.  Likewise, total volumes were above last year’s performance (+2.0% for FY 2012, up from +0.8% in 2011) while also resuming growth in the short-term (+1.7% during Q4 2012) thanks primarily to a quick volume recovery in our Brazilian operations following our Q3 2012 price increases.  Net revenue per hectoliter (NR/Hl) ended the year up 11.5% as compared to Q4 2011 (+10.0% in FY 2012) given better pricing performance in Brazil, but also in LAS and Canada, helping offset low-single digit negative volumes in these two international operations.  Meanwhile, HILA-ex wrapped up its game-changing year with the acquisition of Cervecería Nacional Dominicana by also delivering 7.7% organic top line growth for the year.

Cost of Goods Sold (COGS): COGS increased 13.4% in Q4 2012 and 10.2% for the year, whereas on a per hectoliter basis, costs grew 11.1% and 7.9%, respectively.  In the fourth quarter we continued to suffer from greater barley, aluminum and sugar costs, as well as negative package mix, while currency hedges were less of a tailwind.  In addition, increased industrial depreciation resulting from capital expenditures in Brazil was once again a relevant factor.  Accordingly, COGS/Hl (excluding depreciation) rose by 9.8% in Q4 2012 and 7.1% in FY 2012, which was in line with the average inflation in the countries where we operate.

Selling, General & Administrative (SG&A) expenses: SG&A (excluding depreciation and amortization) growth decelerated as compared to the first three quarters of the year, and grew 7.7% in the quarter (+13.0% for the year).  Q4 2012 performance was positively impacted by lower administrative expenses (mainly bonus accruals due to a favorable comparison with Q4 2011) primarily in Brazil, combined with lower commercial spend in Canada versus prior quarters.  On the other hand, we continued to witness labor-related inflationary pressures on our distribution expenses in Argentina and Brazil, while we also decided to continue investing behind our brands to support our commercial initiatives during peak season in Brazil and LAS.

EBITDA, Gross margin and EBITDA margin: Normalized EBITDA grew 15.7% in the quarter, reaching R$ 5,511.6 million.  As a result, we delivered R$ 15,679.0 million of Normalized EBITDA in FY 2012, which represents a 13.6% improvement against FY 2011.  EBITDA performance in the quarter was mostly driven by Brazil and LAS’ double-digit, top line-led growth, though Canada managed to deliver positive EBITDA growth despite negative volumes, and HILA contributed with R$ 117.7 million of EBITDA (R$ 204.9 million for FY 2012 as compared to -R$ 24.5 million during 2011).  Moreover, our strong finish to the year allowed us to achieve expansion in both Gross and EBITDA margins for the quarter (+10 bps and +90 bps, respectively) and for the year (+60 bps and +50 bps, respectively). 

Operating Cash generation and Profit: Cash generated from our operations in Q4 2012 rose 27.8% versus the same period last year, totaling R$ 7,401.4 million (R$ 15,774.2 for the year, which was 14.4% higher than FY 2011).  In terms of profits, through the combination of the aforementioned EBITDA growth and a lower effective tax rate, our Normalized Profit in the quarter reached R$ 3,734.4 million and Normalized Earnings Per Share (EPS) were R$ 1.19.  For the full year, Normalized Profit totaled R$ 10,558.5 million and Normalized EPS were R$ 3.38.

 

 

 

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

 

CAPEX, Pay-out and Financial discipline: During the fourth quarter we invested a total of R$ 1,054.6 million in capital expenditures, giving us R$ 3,014.0 million for the year, of which R$ 2,141.0 million were invested in Brazil alone.  In October 2012 we paid approximately R$ 1.7 billion in dividends and IOC, and ended Q4 2012 with a net cash position of R$ 6,258.9 million.  Such position, however, does not account for the dividend and IOC payments of about R$ 3.0 billion (which took place as from January 21, 2013) plus an additional R$ 2.1 billion to be distributed as from March 28, 2013, as announced on February 26, 2013.    

Management Comments

Our fourth quarter results gave us the sort of ending for the year we expected and worked very hard to deliver: R$ 5,511.6 million of EBITDA (+15.7% versus the same period last year), with 13.7% top line growth sufficient to offset COGS pressure (+13.4%), helped by lower growth in SG&A expenses (+7.0%) as compared to earlier in the year.  EBITDA margin stood at 54.4%, an expansion of 90 bps.

How we delivered this performance is as important.  Accordingly,

·         Commercial strategy in Brazil continues to deliver.  Volumes in Brazil rebounded following the price increases of Q3 2012, with CSD&NANC volume growth (+5.1%) ahead of beer volume growth (+2.9%) thanks to steady market share gains on top of the record levels set in 2011 (+20 bps in the quarter, arriving at an average of 18.1%; +10 bps for FY 2012 also at 18.1%).  Our efforts behind innovation, regional expansion in the North and Northeast, premium products and returnable glass bottles have proven to be successful;

·         International operations with steady performance.  Top line performance in LAS and Canada was supported not only through pricing (LAS net revenue per hectoliter increased 24.5% while Canada was +1.7% higher than Q4 2011) but also healthy brand preference and encouraging market share performance of the Quilmes family and Stella Artois in Argentina, Bud Light and Michelob Ultra in Canada;

·         Integration of breakthrough acquisition in HILA-ex on track.  The integration of the newly-acquired business of Cervecería Nacional Dominicana (CND) continues making progress and was responsible for the bulk of HILA-ex’s R$ 117.7 million of EBITDA and 24.8% EBITDA margin during Q4 2012; and,

·         Great people, management capabilities.  Having a team that was committed as ever to the plans we had in place and showed the appropriate resolve in implementing them until the very end of the year.  Simply put, our People were decisive in delivering 13.6% EBITDA growth with improved profitability (+50 bps in EBITDA margin) in a year marked by federal excise taxes increase for a second straight year in Brazil, concerns surrounding consumption trends in Brazil and elsewhere, and tough macroeconomic environments in many countries where we operate, such as Argentina.  Nevertheless, volumes continued growing (+2.0% in FY 2012) and ahead of last year’s pace, with a price/mix balance that led to EBITDA performance fully in line with the average of the last three years.

 

 

Looking at our divisional performance:

·         Brazil.  EBITDA grew 15.8% in Q4 2012 to R$ 3,855.6 million, delivering an EBITDA margin expansion of 70 bps while gross margin remained flat.

o       Net revenue for the country grew 14.3% in Q4 2012, with volumes 3.5% ahead of Q4 2011 and net revenue per hectoliter +10.4%. 

§         We estimate that the beer industry grew 4.7% in the quarter (+3.2% for FY 2012) and the CSD industry was up 3.0% in Q4 2012 (+3.9% in the full year) due to favorable disposable income (i.e., minimum wage growth, low unemployment levels) and weather (i.e., generally warmer with less rainfall) offsetting higher pricing in the marketplace. 

§          As for our market share, we averaged 67.9% in beer for the quarter (-120 bps vs. 4Q 2011; 68.5% for the year, which represented a 50 bps loss YoY) while 18.1% in CSD (+20 bps compared to the prior year; 18.1% in FY 2012, up +10 bps).  With respect to beer in particular, though our performance against last year was impacted by the price increases, towards the end of the quarter market share began recovering on a sequential basis, ending the year at 68.2%. 

§         Pricing performance in the quarter benefited from the earlier pricing than the year before (as from Q3 2012), higher weight of direct distribution (~65% for beer and CSD&NANC combined) and accelerated growth of beer premium volumes (+21.4%).  For the year, net revenue per hl in Brazil grew 9.3%, as per our high-single digit guidance.

§         Our commercial strategies were instrumental volume drivers:

·         innovation was led by Antarctica Sub-Zero and the newly-launched 550 ml can for Skol and Brahma,

·         North and Northeast volumes continued to outgrow the rest of the country,

·         Premium volumes enjoyed growth across our top four brands Bohemia, Original, Budweiser and Stella Artois, and

·         The 300 ml returnable glass bottle for beer and 1 liter returnable glass bottle for Guaraná Antarctica roll-outs into new areas in the Southeast and Northeast were the top performers.

o       Brazil COGS/hl rose 10.4% in the fourth quarter, which translated into 6.6% growth for the full year, slightly ahead of inflation and higher than what we expected as a result of a higher than anticipated mix of more expensive one-way volumes.  In Q4 2012, our higher commodity hedges were once again partially offset by favorable currency hedges; and a higher industrial depreciation also explained the growth versus 2011 (COGS/Hl excluding depreciation actually grew 8.6% in Q4 2012; 4.4% for FY 2012). 

o       SG&A increased 6.8% in Q4 2012 (+13.7% in FY 2012).  The lower pace of SG&A growth in the quarter is mainly a product of higher sales and marketing expenses to support our commercial and brand strategy going into the summer season, greater distribution costs linked to higher direct distribution and labor inflation (though we continued to benefit from a more balanced supply chain footprint), but a relevant decline in administrative expenses (mainly bonus accruals) as compared to Q4 2011. 

·         HILA-ex.  EBITDA for the region was R$ 117.7 million in Q4 2012, while EBITDA margin jumped to 24.8%.  We completed the year by delivering a total of R$ 204.9 million of EBITDA, with an EBITDA margin of 15.3%, which was undoubtedly transformational for the division, but is still far from the type of long-term EBITDA contribution and profitability levels we believe we can achieve over time. 

o    Revenue and cost synergies stemming from our integration efforts in the Dominican Republic were the primary source of EBITDA growth in the quarter and the year.  Organically, HILA-ex net revenue grew 1.7% in the quarter, with volumes up 3.1% driven primarily by our operations in Guatemala, where we doubled our market share achieving close to 30% in Q4 2012.   

·          LAS.  We delivered EBITDA of R$1,084.8 million (+28.0%) in the fourth quarter, with gross margins expanding 280 bps and EBITDA margin expansion of 310 bps, leading to double-digit EBITDA growth (+21.6%) for the year, as anticipated.

 

o       Volume performance declined 3.2%, adversely impacted by industry decline in Argentina, while the top line grew by 20.6% driven by net revenue per hectoliter growth of 24.5%.  And in Argentina we remained active in the marketplace despite the tough macroeconomic environment: innovation volume performance with Quilmes 1890, Quilmes Night and the new 1 liter returnable glass bottle, and premium volumes led by Stella Artois stood out. 

·         Canada.  EBITDA grew 0.9% in the quarter, reaching R$ 453.5 million.  Gross margins contracted by 40 bps, but EBITDA margins expanded 50 bps to 44.0%.  In FY 2012, Labatt delivered 0.7% of EBITDA growth.

o      We experienced volume decline of 2.1% in the quarter (-0.5% for the year) given tough comparison with a favorable industry in Q4 2011 and the hockey lock-out.  Market share averaged 40.5% for the quarter (-10 bps versus Q4 2011; 40.6% for all of 2012, which is -20 bps against the previous year).  Our brand performance among light beers, with Bud Light growing market share, and through new product launches, namely Michelob Ultra earlier in the year, helped us retain our leading position in the Canadian market.  Moreover, our net revenue per hectoliter performance remained positive, growing 1.7% in the quarter and 2.0% for FY 2012.

 

2013 Outlook

 

In the last couple of years our ability to deliver solid top line and EBITDA growth amid a difficult to predict macroeconomic environment and higher taxes was put to the test, particularly in Brazil.  2013 presents a similar setting.

The Brazilian beer industry will have to cope with further federal excise tax increases expected for April and October.  On the other hand, real increases in minimum wage and fairly low unemployment levels should continue to positively impact disposable income, which, combined with the Federal Government’s continued efforts to stimulate the Brazilian economy, should be supportive.  As a result, we believe that given the current macroeconomic outlook, the beer industry should continue to grow around the same levels of 2012.  The first quarter should be challenging mainly due to an earlier Carnival and slightly poorer weather. 

We will once again pursue striking the appropriate balance between volume and price/mix to make the most of the opportunities we continue to see in the market.  Accordingly, our focus on growth through package, liquid and route-to-market innovation, driving premium volumes, further increasing availability of our full portfolio in the North and Northeast and our returnable glass bottles initiatives will all remain high on our agenda.  Therefore, the execution of our commercial platforms at the right mix will once again be of paramount importance in order to deliver volume growth, while we will also focus on building up our execution capabilities for the 2014 World Cup.    Meanwhile, net revenues per hl in Brazil should grow high-single digits for the year primarily driven by the carry over of our 2012 pricing, as well as continued benefits from higher weight of premium brands and direct distribution. 

On the costs side, we believe COGS per hectoliter in Brazil should grow high single-digit to low double-digit  for the year based on the current product mix given input cost pressures, such as the devaluation of the Brazilian Real during the course of 2012, and negative tax impacts in CSD&NANC.  The average implied foreign exchange hedge rate for 2013 was of 1.93 BRL/USD, which compares to the 1.66 BRL/USD of 2012.  As regards CSD&NANC, we expect to face higher cost pressure during the year as a result of the tax changes that took place in October 2012 that should lead to “high-teens” COGS per hectoliter growth. 

We believe Brazil continues to be a unique market where we have witnessed, and will continue to pursue, growth and profitability.  As such, we are prepared to invest around R$ 3.0 billion given the medium and long-term prospects for organic growth in Brazil, which represents a fourth year of record level capital expenditures, subject to the level of federal excise taxes, including:

·         The already announced greenfield breweries in the States of Minas Gerais and Paraná,

·         Further capacity to continue the accelerated roll-out of the beer 300 ml returnable glass bottle as well as the 1 liter returnable glass bottle for Guaraná Antarctica,

·         Add further capacity to brew Budweiser, and,

·         Ensuring our supply chain capabilities are ready for the 2014 World Cup and beyond.

On the corporate front, in early December we announced our intention to move towards a single-class of shares.  The proposed transaction should be submitted to minority shareholder approval during Q2 2013 once all regulatory approvals are obtained in Brazil and the U.S.  We believe the proposed stock swap merger should deliver value to all classes of shareholders through improved corporate governance and liquidity resulting from a single-class of shares, but also resulting from gains related to tax deductibility of goodwill amortization expenses, cost savings arising from the corporate restructuring of certain of our subsidiaries, and increased flexibility in managing our capital structure going forward. 

 

 

Ambev Consolidated Income Statement

 

 

 

 

Ambev Consolidated Results

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

 

 

 

Ambev Consolidated

The table below summarizes our fourth quarter consolidated results.  Normalized EBITDA totaled R$ 5,511.6 million, which was 15.7% higher than Q4 2011.  Our net revenue growth of 13.7% in the quarter led to gross margin expansion of 10 bps, and, along with SG&A growing at a slower pace than prior quarters (+7.0%), was an important driver behind our EBITDA margin expansion of 90 bps.  For the year, we delivered an EBITDA of R$ 15,679.0 million, up 13.6% when compared to FY 2011, and an EBITDA margin of 48.6%.

 

 

 

 

 

Latin America North (LAN)

Our LAN region included Beer Brazil, CSD & NANC Brazil and HILA-ex operations.  LAN delivered normalized EBITDA of R$ 3,973.3 million in Q4 2012 (+14.5% versus the same period last year), with an EBITDA margin of 56.2%.  EBITDA growth was primarily driven by our volume and net revenue per hectoliter performance in Brazil, though HILA-ex continued to deliver promising results thanks mainly to the CND integration.  For 2012, normalized EBITDA increased 13.8% and EBITDA margin expanded 50 bps.  

As from January 1, 2013 the results of our Peruvian and Ecuadorian operations will be reported as part of Latin America South.  To that effect, we have included as an annex to this press release restated figures for LAN and LAS, as if this change had been in place since January 1, 2012. 

 

 

 

 

 

Ambev Brazil

In Brazil normalized EBITDA reached R$ 3,855.6 million in the quarter, which corresponds to an improvement of +15.8% as compared to Q4 2011, and EBITDA margin expanded 70 bps to 58.4%. 

Volumes rebounded during the quarter and grew 2.9% in beer and 5.1% in CSD&NANC.  Meanwhile, net revenue per hectoliter continued strong and improved 10.4% in the country, benefitting from our earlier price increases, greater weight of premium brands and higher direct distribution.  COGS per hectoliter, however, grew 10.4% impacted primarily by higher raw materials and packaging costs, higher industrial depreciation and negative package mix in Beer Brazil.  SG&A (excluding depreciation and amortization) increased 6.8% thanks to lower distribution expenses growth and less administrative costs.

For the full year, volumes grew 3.1% (vs. growth of just 0.2% in FY 2011) and, as anticipated, we delivered high single digit net revenue per hectoliter growth of 9.3%, leading to 14.3% EBITDA growth.

 

 

 

Beer Brazil

The Brazilian beer industry grew +4.7% in the fourth quarter according to our estimates despite the price increase implemented as from Q3 2012.  Although our market share performance in Q4 2012 (67.9%; -120 bps) was impacted by our price increase, towards the end of the quarter market share began recovering on a sequential basis, ending the year at 68.2%.  Brazil Beer volumes grew 2.9%, with top brand performers being Antarctica and Budweiser, while the 300 ml returnable glass bottle and our different can sizes performed best on the packaging side. 

Our net revenue/hl increase of 10.9% is explained by our price increases, but also by higher direct distribution and greater weight of our premium brands within our portfolio, which continued to grow well ahead of our overall volumes.

COGS/hl posted a rise of 11.9%.  Hedging currency gains were insufficient to offset higher industrial asset depreciation, raw materials costs (mostly barley) and increased weight of cans in our mix.  SG&A (excl. depreciation and amortization) increased 7.0% due to higher commercial spend and distribution expenses, which grew less when compared to the first half of the year, partially offset by lower administrative expenses due to timing of variable compensation accruals.  General inflation and higher direct distribution were also a relevant factor. Normalized EBITDA totaled R$ 3,302.6 million (+16.6% versus the same period last year).

 

 

 

 

CSD & NANC Brazil

Our Brazil CSD & NANC volume grew +5.1%, driven by industry growth (+3.0%) and CSD market share gain (18.1%; +20 bps vs. Q4 2011).  Guaraná Antarctica remained on its growth path, while the 237 ml PET bottle and the 1L returnable glass bottle continued to deliver promising results.

Net revenue/hl grew 9.7% given price increases and higher direct distribution weight.

COGS/hl grew 5.5% because of higher raw material costs (mainly PET resin and sugar), partially offset by currency gains given execution of our hedging policy.  SG&A (excluding depreciation and amortization) reported an increase of 4.9%, with general inflation and higher distribution expenses being the main adverse impacts, partially offset by lower administrative expenses due to the timing of variable compensation accruals.

Normalized EBITDA reached R$ 553.0 million (+11.1% growth as compared to the same quarter last year), while EBITDA margin was 53.8% with -200 bps of contraction mainly driven by a tough comparison on other operating income due to one time gains in Q4 2011.

 

 

 

  

 

HILA-ex

Net revenues for HILA-ex increased 1.7% in the quarter thanks to 3.1% volume growth, which in turn was driven by strong volume in our beer business in the region (+24.1%) and consistent market share growth in countries such as Guatemala.      

In terms of costs and expenses, COGS/hl rose 23.0% in the quarter while SG&A (excluding depreciation and amortization) increased 30.6%, most of which coming from an increased level of market investments behind our brands.

Normalized EBITDA was R$ 117.7 million in the quarter (R$ 204.9 million for the year, which compares to a negative R$ 24.5 million in FY 2011), and EBITDA margin improved to 24.8% (15.3% for FY 2012).  Such considerable improvement in the contribution of HILA-ex to our EBITDA and profitability growth are mostly due to the consolidation of CND’s operational and financial results since May 2012 and the ongoing integration plan.

 

 

 

 

 

Latin America South (LAS)

Our LAS region includes the operations for Argentina, Bolivia, Paraguay, Uruguay and Chile.  LAS delivered in the fourth quarter R$ 1,084.8 million of normalized EBITDA, growing 28.0% against Q4 2011, with an EBITDA margin of 53.5% (+310 bps improvement). Market share growth in our main countries was not sufficient to offset the challenging industry environment. Top line performance remains solid despite a 3.2% decline in volumes (-0.8% for the full year), and was instrumental to deliver gross margin expansion of 280 bps with the help of somewhat contained COGS and SG&A growth. Q4 2012 EBITDA growth was key to deliver an EBITDA organic growth of 21.6% for the year, also increasing EBITDA margin by 60 bps.