AmBev’s Upbeat Outlook

Earlier this month, Companhia de Bebidas das Americas (AmBev or ABV - Analyst Report) reported better-than-expected second quarter figures with excellent results in the key Brazilian market.

Top line grew 8.8% driven by volume growth and price increase across regions. Organic volume growth of 4.1% was a result of a 7% volume growth in Brazil, partly offset by a 3.5% volume decline in Southern Latin America. Canada and Hila-Ex volumes grew 2.3% and 1.1%, respectively, in the period.

EBITDA reached R$2,383.1 million, an organic growth of 13.8 % and margin expansion of 230 basis points to 44.6%. Operating cash flow generation was R$1,991.1 million in the quarter, an increase of 31.4% year over year. Net income was R$1,391.4 million, up 35.1% from the same period of 2008, while EPS grew 34.6% year over year.

Despite the continued efficiency improvements in the North American business, the market remains quite competitive. We remain quite concerned with the difficult economic environment and the recession in the U.S, which makes competition even fiercer. Presently, the company faces competition from Coca-Cola FEMSA S.A.B de CV (KOF - Snapshot Report) Fomento Económico Mexicano, S.A.B de C.V (FMX - Analyst Report) Embotelladora Andina S.A. (AKO.A - Analyst Report). Indeed, the outlook for the key U.S. market for 2009 is not encouraging, which is going to affect Canada and AmBev’s North American results in the short term.

We believe that the company is less exposed to the international economic crisis since it is a producer of low cost everyday products, focused on domestic markets. Indeed, we have an optimistic view on the medium to long-term demand for soft drinks in Latin America. In the short run, we believe Brazil will be less affected by the international credit crisis compared to more developed markets such as the U.S., Europe and Japan. Also, a more relaxed monetary policy in Brazil is very positive for the company.

AmBev’s strategy to focus on a few premium brands with the stress on higher quality and higher margins has already started delivering strong results and will continue to deliver robust revenues and earnings. This strategy has enabled the company to deliver strong organic growth, including higher revenues and margins and increase market share, which reached 68.3% in the second quarter from 67.5% in the year-ago period.

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