AmBev Weathering Brazil’s First Beer Drop-Off in Decade

Brazilians are drinking less beer for the first time in a decade. Cia. de Bebidas das Americas, Latin America’s biggest brewer, says it can still boost profit.

AmBev, as the Anheuser-Busch InBev NV unit is known, is promoting higher-margin premium beers and repackaging cheaper offerings to make them more affordable after a surprise volume drop, Chief Executive Officer Joao Castro Neves said last week in a conference call. It’s also expanding in Brazil’s North and Northeast, where sales aren’t slowing as in other regions.

“Even though we’re expecting volumes to be down, that’s a volume number, not a profit number,” Lauren Torres, an HSBC Holdings Plc analyst, said by telephone from New York. “They could actually still grow their company, still generate cash and pay dividends.”

The Sao Paulo-based drinks maker is fine-tuning operations amid a projected 4 percent drop in beer sales this year, Chief Financial Officer Nelson Jamel said on a July 31 call with reporters. It would be the first annual decline since 2003, according to AmBev presentations to analysts and investors. While the Confederations Cup soccer tournament in June helped buoy sales temporarily, faster inflation and federal tax increases on soda and beer are damping consumption.

Shares Rally

Of 14 analysts covering AmBev, seven say buy, including Torres, who has an overweight rating. Seven recommend holding the stock. The maker of Skol and Brahma beer and bottler of PepsiCo soft drinks rose 0.5 percent through yesterday in 2013, while the benchmark Ibovespa index fell 20 percent. The shares slid 0.6 percent to 85.51 reais at 2:55 p.m. in Sao Paulo.

Alan Alanis, a JPMorgan Chase & Co. analyst, said executives are scaling back marketing and investments as they work to counter the drop in volumes and ensure financial targets are met. HSBC’s Torres said the aggressive cost-management style of billionaire Jorge Paulo Lemann, whose 3G Capital Inc. is the biggest shareholder in AmBev parent AB InBev, will help weather the decline.

“If they don’t deliver, they don’t get paid,” Alanis, who rates the stock buy, said in a telephone interview from New York. When executives last missed targets -- in 2003 and 2008 -- bonuses weren’t paid, he said. “It’s a culture that aligns the creation of shareholder value with management compensation better than any other company in the region.”

‘Downside Risk’

Cost cuts and new product strategies may not be enough if beer sales continue to fall sharply, Goldman Sachs Group Inc. analysts led by Luca Cipiccia said in a July 31 note. “Further deterioration in volumes dynamics in Brazil is the key downside risk,” said Cipiccia, who is neutral on the stock.

Brazil’s beer industry will “be either flat or show a single-digit decline for the year,” CEO Castro Neves said.

For Ambev, “guidance for the year remains,” he said, including high single-digit growth in net revenue per 100 liters of beer produced. Sales, salaries and operating costs will rise less than inflation, according to the company, which doesn’t release detailed earnings forecasts.

“We got tougher in Q2, which was great, but we definitely must remain during the second half of the year -- no question about it,” Castro Neves said on the conference call. A press agency for Ambev in Sao Paulo declined to comment further about the company.

Second-quarter net income fell 1.1 percent from a year earlier to 1.88 billion reais ($823 million), Ambev said last week. Revenue rose 10 percent to 7.5 billion reais.

Strategy Working

“It’s important to emphasize that revenue rose high single digits in the first half,” Will Landers, manager of the $4.7 billion BlackRock Latin America Fund, said in an e-mailed response to questions. “Their revenue management strategy worked during a period in which the economy was weak and consumer wallets were squeezed by inflation and credit.”

Lemann’s role in Ambev has been pivotal.

The investor and his partners combined a series of Latin American brewers into their 1989 purchase of Cia. Cervejaria Brahma, which became AmBev in 1999. In 2004, they engineered AmBev’s $11 billion merger with Belgium’s Interbrew SA. They followed that up in 2008 with the $52 billion union with Anheuser-Busch, which created the world’s largest brewer.

Warren Buffett’s Berkshire Hathaway Inc. teamed up with 3G Capital earlier this year to acquire HJ Heinz Co. in a $28.8 billion takeover that included debt financing. The ketchup maker said in June that 11 executives were leaving as 3G and Berkshire shake up management.

As the market leader, with 68 percent of beer sales, AmBev can pass on federal tax increases expected in October to consumers, JPMorgan’s Alanis said. Exports may also help raise profits as Brazil’s real weakens, he said.

“It’s a high-class company that knows how to manage through tough conditions,” HSBC’s Torres said. “It takes a while to convince people that things are going to swing in the right direction.”

Before it's here, it's on the Bloomberg Terminal.