Brazil: Ambev expects price hikes to hurt fourth-quarter numbers to some extent

Brazilian beverages firm Ambev SA expects some of the headwinds that hurt third-quarter results to carry into the fourth-quarter, as recent prices hikes in its home country keep a lid on beer volumes, a company executive was quoted as saying by Yahoo Finance on October 25.

The largest brewer in Latin American has played down hopes of boosting its operating profit this year in Brazil, its largest market, where tougher competition and a still sluggish economy put pressure on beer sales.

"It takes two to three months for the local market to adjust to price hikes, hence why we still see some headwinds carrying into the fourth-quarter," Chief Financial Officer Fernando Tennenbaum told Reuters in an interview.

He added that discounts by some competitors had also contributed to a 2.8% drop in beer volumes in the third-quarter, contributing to a reduction in Ambev's market share in Brazil. "This atypical pricing behavior from competitors is not sustainable and that is why we don't do the same", the CFO said, without citing names.

Analysts at Bank of America Merrill Lynch noted that Ambev started hiking its beer prices in July, while Heineken did not follow the move until September. "There were signs of increased promotions with the Heineken brand ... Despite the gap, Heineken remains a rational competitor," they wrote in a report.

According to Tennenbaum, Ambev's mainstream brands in Brazil, including Brahma, Skol and Antartica, were the most affected by the pricing dynamic in the third-quarter, but the company still managed to perform well with its premium brands.

Regarding costs of goods sold, the company expects a growth of around 15% per year due to volatility caused by currency effects and commodities prices.

Ambev' shares were down almost 7% down on October 25 at 17.89 reais, posting the worst performance in the Brazilian main stock index, after the company reported a 9.7% fall in its quarterly net profit.

The maker of Budweiser, Corona and Stella Artois reported net income of 2.604 billion reais ($644.51 million) versus the 2.537 billion reais expected by analysts, Refinitiv data showed.

Quarterly revenue rose 8.1% to 11.96 billion reais but volume growth edged up just 0.8% to 37.8 million hectoliters, the unit of Anheuser Busch InBev said.

"We continue to be skeptical about Ambev's capacity to resume price hikes without sacrificing volumes," BTG Pactual analysts wrote in a note to clients, adding a neutral recommendation on shares.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 4% to 4.41 billion reais in the third quarter to September 30 compared to a consensus estimate of 4.863 billion reais compiled by Refinitiv.

Ambev, in which AB InBev holds a 61.9% stake, operates in 16 countries in the Americas, including Argentina and Canada.

On October 23, rival brewer Heineken also reported a slight decline in beer sales in Brazil, where it became the second largest player in 2017 after buying the loss-making operations in the country of Japan's Kirin.

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