October 25, 2018 / 12:51 PM / 20 days ago

UPDATE 3-Brazil competition, Argentine inflation squeeze brewer Ambev

(Adds information from conference call)

By Gram Slattery

SAO PAULO, Oct 25 (Reuters) - Ambev SA, Latin America's largest brewer, on Thursday reported quarterly earnings that were hurt by inflation in Argentina and slipping share in key market Brazil, where rival Heineken NV is making serious inroads.

The company, the Latin American unit of Anheuser Busch Inbev NV, posted a 10 percent year-on-year drop in net profit to 2.89 billion reais ($774 million).

That sent Ambev shares down 6 percent in afternoon trade, after falling almost 8 percent at the opening bell.

Dutch brewer Heineken, which is betting big on the Brazilian beer market, is beginning to take a chunk out of its rival's business there, with volumes growing by double digits, according to analysts.

"Despite easy comps, Brazil beer volumes dropped 3.1 percent year-over-year, although Heineken volumes grew double-digit in Q3," analysts at UBS wrote in a note to clients, in which they reiterated their sell recommendation.

While net profit beat the Reuters average estimate of 2.68 billion reais, earnings before interest, taxes, depreciation, and amortization (EBITDA) fell short of estimates, coming in at 4.45 billion reais, well below a Reuters projection of 5.11 billion.

In Brazil, EBITDA ticked up a modest 0.3 percent. Beer volume, however, fell 3.1 percent, underperforming the market as a whole, which reported a 2.5 percent decrease in volume.

To maintain its dominant position in Brazil's beer market, Ambev said it was continuing to invest in its more upscale brands, such as Budweiser, Stella Artois, and Corona, as well as Skol Hops, a "core plus" brand it recently rolled out.

The company said those brands reported a solid quarter volume-wise, with sales of Corona surging 75 percent year-on-year and sales of Stella Artois jumping 55 percent. Its lower-end and mainstream beers accounted for the drop in overall volume.

In a call with analysts, Chief Executive Bernardo Paiva said he expected Corona sales to "continue to ramp up at a fast pace," while preliminary results from Skol Hops were "encouraging."

"Premiumization is a trend that can be expected to continue. We have a portfolio to compete in the segment," he said.

In the quarter, the company said EBITDA took a 574 million-real hit as it adopted hyperinflationary accounting methods in Argentina, in accordance with international standards.

Across the board, Ambev said, unit production costs climbed 4.7 percent on increased commodity costs as well as Argentine inflation.

The company posted EBITDA growth of 5.8 percent in the Caribbean and Central American region, partly due to branding initiatives. EBITDA in Canada fell about 7 percent on higher input costs, particularly aluminum.

($1 = 3.73 reais)

Reporting by Gram Slattery; Editing by Steve Orlofsky and Dan Grebler

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