Ambev Earnings: Margins Continue To Recover, but Cyclical Weakness Looms

Our hopes that Ambev’s ABEV3 margins had bottomed out were given a boost by the company’s second-quarter performance. The key financial metrics that we watch closely were mixed, with volume declining 2% year over year—a touch below our expectations—but margins beginning to recover. We attribute the volume weakness to cyclical factors rather than any change in the long-term fundamentals of the business, and although we have slightly lowered our full-year earnings estimate, this has no impact on our BRL 18 fair value estimate or our wide moat rating. While the stock has rerated moderately during the last six months, we still think there is some upside from the market valuation as of early trading Aug. 3.

The volume contraction was not driven by any single region; it was more a case of an overall softening of the consumer environment and cycling a strong second quarter last year. Having said that, Brazil accounted for 70% of volume and 55% of revenue in the second quarter, meaning it is highly influential on Ambev’s performance. Although the Brazilian central bank raised its forecast for 2023 GDP growth in June, it still expects growth to slow this year over last, and Ambev’s management pointed to weakness in consumer demand. We retain our forecast that Ambev’s net revenue in Brazil will decline from the 9.7% achieved in the second quarter to mid-single-digit growth by the fourth quarter due to lower cost inflation pressure and weakening consumer demand.

The good news was the margin performance, with broad-based margin improvement across markets driving 230 basis points of expansion at the gross margin to 49.9% and 310 basis points at the EBITDA margin to 29.7%. Given the magnitude of price increases relative to last year, this is a solid performance and indicates that price elasticity remains somewhat robust and product mix is still positive.