Brazil: AmBev reports Q1 2005 financial results: Brazil beer sales increased by 12.9%

Companhia de Bebidas das Américas (AmBev), the leading brewer in Latin America, announced on May 4 its results for the first quarter 2005 (1Q05). AmBev, owned by Belgian brewer InBev, recorded net income of R$144.2 million for 1Q05, representing a decrease of 52.7%. Earnings per share were R$2.65, down 67.4%. This decrease is mainly explained by the goodwill amortization of Labatt’s transaction, in addition to non-operating expenses related to the closure of Labatt’s brewery in Toronto. AmBev’s operating income, however, presented a strong increase, reflected in the 11.9% increase of EBITDA per share, which reached R$26.64.

Net revenues for the Beer Brazil operation reached R$1,915.4 million in 1Q05 (+24.9%). This increase was a consequence of both stronger sales volumes and higher revenues per hl. Beer sales volumes, as previously disclosed by the Company, increased by 12.9%. This result reflects the Brazilian market’s expansion (of 7.3%, according to ACNielsen) and AmBev’s higher market share (Mar/05: 67.6%; Mar/04: 65.0%).

Revenues per hectolitre in beer were R$128.5, 10.6% and 4.6% higher than 1Q04 and 4Q04, respectively. The main factors explaining the increase were the several price repositioning initiatives carried out throughout 2004, as well as a more generalized readjustment (of 5% on average) implemented last December.

It is important to point out that other revenue management levers also contributed to the average revenue growth in the quarter. As the Company fulfilled in 4Q04 its commitment of recover the 67% to 70% market share range, it was possible to once again focus on important profitability levers in 1Q05. The renewed focus on AmBev’s traditional revenue management activities enabled the evolution of direct distribution channel proportion in the sales mix (1Q05: 44.8%; 1Q04: 37.9%; 4Q04: 44.3%) and the resumption of the premium segment growth – we emphasize the higher volumes of Bohemia (+23.1%) and Original (+28.4%) brands.

Cost of Goods Sold (COGS) for the Beer Brazil operation totaled R$601.0 million in 1Q05, 6.5% higher than last year. The compound effect of (i) stronger sales volumes; (ii) higher efficiency reached in the production lines; (iii) a product mix with larger participation of returnable bottles; and (iv) carry over of the hedge transactions performed for acquisition of raw-material during 4Q04 caused a drop of 5.6% in COGS per hectoliter (1Q05: R$40.3; 1Q04: R$42.7).

Gross profit for Beer Brazil increased by 35.6% to R$1,314.3 million. Gross margin was 68.6%, an increase of 540 basis points. Beer Brazil’s EBIT increased by 58.0%, totaling R$805.6 million. EBIT margin increased by 880 basis points, reaching 42.1%. EBITDA for Beer Brazil amounted to R$929.1 million (+44.7%), and EBITDA margin stood at 48.5% (+660 basis points).

EBITDA generated by malt and by-product sales to third parties increased by 20.9% in 1Q05. Despite a drop in sales of 37.3%, a margin increase of more than 34 percentage points allowed for growth in results. The absolute amount of the malt and by-product sales EBITDA was R$14.8 million.

AmBev’s 54.8% stake in Quinsa generated EBITDA of R$171.0 million for the Company in 1Q05 (+27.5%). These results were achieved mainly due to the growth in Beer operations in Argentina and AmBev’s larger stake in Quinsa.

Quinsa Beer operations recorded EBITDA of R$156.2 million for 1Q05, a 27.7% increase in relation to the same period in prior year. In addition to AmBev’s larger stake in Quinsa’s capital, some operating factors contributed for the better performance in 2005, of which we highlight (i) the sales volumes growth, mainly in Argentina (+5.7%) and Paraguay (+10.7%); and (ii) the price adjustment in local currency in a number of operations, which helped offset the appreciation of the Brazilian real against the currencies of the countries where Quinsa operates.

Labatt, AmBev’s operation in North America, delivered solid performance in 1Q05, reaching R$207.1 million EBITDA. The Company’s good performance is reflected in a stable market share in the competitive domestic Canadian market, of around 42% (Mar/05: 41.7%), as well as the Labatt team strong commitment in pursuing the cost reduction and growth rates targets, as implied by Labatt’s valuation report.

Labatt’s net revenue reached CAD$381.7 million, a 0.5% decrease compared to 1Q04. This reduction is explained by an 8.0% volume decrease, the consequence of (i) discontinuing a co-packing agreement with an American brewery; and (ii) a 23.2% decrease in exports of Labatt brands to InBev USA. Domestic sales volumes remained stable, with a slightly stronger performance than overall market, which Labatt estimates at a 1.5% decrease (measured as shipment volumes). The decrease in sales volumes was mostly compensated by an 8.2% growth in revenue per hectoliter (1Q05: CAD$187.0; 1Q04: CAD$172.8), achieved through a 3.5% increase in net revenue per hectoliter in domestic sales (1Q05: CAD$209.3; 1Q04: CAD$202.2) and the greater share of this segment in Labatt’s sales mix (1Q05:84.8%; 1Q04: CAD$78.0%).

AmBev stocks closed 1.7 percent higher in Sao Paulo and 3.2 percent higher in New York before the results were announced.

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