May 4, 2017 / 11:30 AM / 3 months ago

UPDATE 3-Ambev sees cost pressure easing in weak Brazil market

3 Min Read

(Recasts to add cost guidance, share performance, comments; paragraphs 1-6)

By Guillermo Parra-Bernal and Paula Arend Laier

SAO PAULO, May 4 (Reuters) - Stable Latin American currencies and increased hedging against commodity price swings should help Ambev SA slow cost growth to single-digits by year-end, as the region's biggest beer maker wrestles with the lowest annual profit in four years.

Costs per hectoliter should expand significantly less this quarter than the first quarter's 23.1 percent increase, Chief Executive Officer Bernardo Paiva said on Thursday on a call to discuss quarterly results. Cost growth will decrease much more rapidly between July and December, he said.

Stubbornly high cost growth has hurt performance at Ambev's Beer Brazil division, a relevant market segment for parent company Anheuser Busch Inbev NV. The Brazilian real's 20 percent surge in the 12 months through March led Ambev to spend more protecting itself against sudden changes in aluminum, grains and sugar prices.

As a result, Ambev missed first-quarter profit estimates despite rising beer volumes in Brazil, Argentina and Central America. Adjusted earnings before interest, taxes, depreciation and amortization slumped 17.3 percent, with margins contracting nearly 10 percentage points on an annual basis for a third straight quarter.

"Last year was a very volatile one, but we expect that more stable currencies in the regions where we operate help us meet" cost growth guidance, Chief Financial Officer Ricardo Rittes said on a separate call.

The situation underscores the hurdles facing Paiva, who is also battling the impact of Brazil's harshest recession ever, mounting competition and consumer indifference. He sees 2017 as a transition year for Ambev in which it should intensify a focus on premium products and cost controls.

Paiva said he remains cautious about a slight recovery in consolidated volumes, which rose 3.4 percent last quarter.

Earlier in the day, AB Inbev said Ambev's costs in Brazil could grow by double-digits in percentage terms during the first half of the year, but decline pronouncedly between July and December. Half of Ambev's sales costs in Brazil are pegged to the U.S. dollar.

Its shares gained 2.5 percent in late trading, the most in almost two months, as several indicators pointed to a gradual recovery in margins and volumes.

Adjusted net income totaled 2.316 billion reais ($732.1 million), below a consensus estimate of 2.795 billion reais. Profit fell 20.1 percent between January and March from a year earlier, the steepest decline in three quarters.

The cost of goods sold climbed 26.4 percent on an annual basis. The high cost per hectoliter signaled Ambev failed again to fully pass along repressed cost inflation to consumers, especially in Brazil.

$1 = 3.1635 reais Editing by Jason Neely, Jeffrey Benkoe and Dan Grebler

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