Becle SAB de CV
BMV:CUERVO
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Good day, everyone, and welcome to the Jose Cuervo First Quarter 2018 Earnings Results Conference Call. Just a reminder, today's conference is being recorded.
During this call, you may hear certain forward-looking statements. These statements may relate to our future prospects, developments and business strategies and may be identified by our use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will, goals, target, strategy, and similar terms and phrases and may include references to assumptions.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those in the forward-looking statements. And for all the foregoing reasons, you are cautioned against relying on such forward-looking statements.
At this time, I'd like to now turn the conference over to Mr. Luis Carlos de Pablo. Please go ahead, sir.
[Foreign Language], and good morning, everyone. Thank you for joining us to discuss the results of Becle, S.A.B. de C.V., commercially known as Jose Cuervo, for the first quarter ended March 31, 2018. I am Luis Carlos de Pablo, and I'm joined today by Juan Domingo Beckmann, our Chief Executive Officer; Daniel Elguea, our Chief Financial Officer; Mark Teasdale, Chief Executive Officer of Proximo Spirits; Steve Shanley, VP of Commercial Strategy for Proximo Spirits; and Luis Felix, Managing Director of Mexico.
Before we begin, I would like to remind you that the figures discussed in this call were prepared in accordance with International Financial Reporting Standards, or IFRS, and published in the Bolsa Mexicana de Valores. The information for the first quarter of 2018 is preliminary and is provided with the understanding that, once financial statements are available, updated information will be shared in the appropriate electronic formats.
I would now like to turn the call over to Juan Domingo Beckmann, CEO of Jose Cuervo.
Good morning. Thank you for joining us today to discuss Jose Cuervo's first quarter results. I will make some brief comments, and then I will ask Luis Felix to review our Mexico and Latin America results with you. Next, Mark Teasdale will update you on our U.S. and Rest of the World performance. Daniel Elguea will then walk you through our financial results.
We had a challenging first quarter with a 4% volume decline and foreign currency pressure that led to a 30% net sales decline. The results were driven by short-term declines in the U.S., partially offset by strong growth in Mexico and the Rest of World region. The decline in the U.S. reflected the final effects of last year's price increase, which led to high comparisons [indiscernible] purchasing in January and February of 2017, ahead of the resulting wholesaler price increases. Mark will provide additional detail on the first quarter shipments and depletions. However, we saw significant improvement in depletions in March and expect a strong performance in the second quarter and for the rest of the year.
Our excellent momentum in Mexico continued during the first quarter, and we are proud of our continued market leadership. Whilst short-term challenges in the U.S. impacted the first quarter, our strong performance across our other global markets, along with our exposure to multiple spirits categories, helped to partially offset the impact. The benefits of our efforts to build a global spirits company mitigated a challenging couple of months in the U.S., which, as I mentioned, do not lead us to revise our expectations for full year 2018.
I will now turn the call over to Luis Felix to discuss Mexico.
Thank you, and good morning, everyone. We had another good quarter in Mexico. And for the first time ever, we exceeded 1 million cases during a first quarter period. We reported 17% growth -- volume growth and 2.2% net sales growth, driven by strong, solid, double-digit increases in depletions in both the on-premise and the off-premise channels, and we ended the quarter with inventories below last-year level. Volume growth was strong across all categories and led by 20% growth in tequila. Vodka was up 24.7%, and rum and whiskey were up 3.4% and 8.4%, respectively. Boost also contributed with a 21% growth.
Our sales growth continued to drive market share gains in both tequila and across our combined spirits portfolio. Across all categories, we increased our leading volume share to 19.9% over the trailing 12 months, up from 18.3%. In the tequila category, we expanded our volume market share to 38.4% from 35.3%.
[Technical Difficulty]
Ladies and gentlemen, one moment while we reconnect our speaker.
[Technical Difficulty]
And ladies and gentlemen, you are live with your audience once more.
Thank you. This is Luis Carlos de Pablo. We're sorry for the technical difficulties. Luis Felix will repeat his message to you.
Okay, good morning, everyone. So starting again, the Mexico performance.
We had another good quarter in Mexico. And for the first time ever, we exceeded 1 million cases during the first quarter period. We reported 17% volume growth and 2.2 net sales growth, driven by strong double-digit increase in depletions in both the on-premise and the off-premise channels. And we ended the quarter with inventories below last-year level. Volume growth was strong across categories, led by 20% growth of tequila. Vodka was up 24.7%, and rum and whiskey were up 3.2% -- 3.4% and 8.4%, respectively. Boost also contributed with 21% growth.
Our sales growth continued to drive market share gains in both tequila and across our combined spirits portfolio. Across all categories, we increased our leading volume share to 19.9% over the trailing 12 months, up from 18.3%. In the tequila category, we expanded our volume market share to 38.4% from 35.3%.
During the first quarter, we benefited from good promotional activity across channels, including promotions for the first time ever in National Tequila Day in Mexico, which was celebrated on March 17. We focused our promotional activities in this first-ever national holiday, and we were very pleased with the results. Additionally, we benefited from the timing of the Holy Week, which appeared in March this year compared to April last year.
As we mentioned on our last call, we announced a portfolio-wide price increase during February, which took effect in March. The pricing has been activated in almost every channel and was taken across all our spirit categories.
In summary, we are very pleased with our start of 2018 in Mexico and remain optimistic about the full year. And let me now turn the call over to Mark Teasdale to discuss our U.S., Canada, EMEA and APAC businesses.
Thanks, Luis. Good morning, everybody.
As Juan Domingo mentioned, we had a challenging first quarter in the U.S. with volume and net sales down from the prior year plus a foreign currency translation impact. Let me walk you through the business development, which we believe are isolated to the first quarter and are already showing signs of correction.
January and February depletions slowed more than expected compared to last year, which reduced shipments to replenish stock. Jose Cuervo brand tequila, ready-to-drink cocktails and Margarita mix contributed to all the depletions decline. On these products in January and February, depletions faced unusually high comparison as a result of the timing of the price increase from wholesalers to retailers in February and March of 2017. March depletions improved markedly with tequila up 14% by volume and all 5 Tequila brands growing. Overall depletions grew 4% during March after being down 12% through February, recovering to an overall first quarter decline of 5%.
Strong growth in premium brands for the quarter served as a mitigating factor against the overall volume decline. The value generated by this quarter's depletion was only 1% lower than the value of the depletions for the first quarter of 2017. Depletion volume for the quarter was up 30% -- 31% for Gran Centenario, 16% for Maestro Dobel and 13% for TINCUP with even stronger performance in the month of March for these premium brands.
Shipments followed depletion with all these declines attributable to the Jose Cuervo brand products impacted by the 2017 retailer buy-in as wholesalers reacted to the lower depletion trends. Total shipments, excluding Tequila and related categories, were actually up for the full quarter.
Underlying data, including Nielsen -- key Nielsen consumer-level trends remained positive. With vastly improved depletion trends in March and the strengthening consumer data, we expect improved results in the upcoming quarters and remain confident in our full 2018 year outlook.
In EMEA, we saw Tequila depletions increase by 7%, driven by Jose Cuervo Especial, while Bushmills' depletion grew 14% and Kraken was actually up 43%. APAC also showed strong performance as well. They're driven by the benefits of our own route-to-market in Australia as Tequila depletions grew by 7%, Bushmills by 58% and Kraken by 30%.
I'll now turn the call over to Daniel, who'll discuss the financial results.
Thank you, Mark. Good morning, everyone. Let me walk you through the fourth quarter financial results.
During the first quarter, the company reported a 12.7% net sales decline to MXN 4.3 billion, driven by a 3.9% consolidated volume decline to 3.4 million 9-liter cases. The declines, as mentioned earlier, were driven by volume and net sales strength (sic) [ net sales weakness ] in the U.S., partially offset by growth in Mexico and the Rest of the World region. Net sales in the U.S. and Canada decreased 22.7% on 16.9% lower volume and the negative impact of the currency given the strength of the peso relative to the U.S. dollar. Net sales in Mexico increased 2.2% on 17.1% volume growth, and net sales in the Rest of the World region increased 18.2% on 14.2% volume growth.
In 2018, due to the implementation of IFRS 15, certain promotional costs are now netted from the gross sales in order to reach net sales in Mexico. Therefore, net sales in Mexico grew at a considerably lower rate than volume. Having said that, there's no resulting impact on earnings as this represents merely a reclassification of expenses.
Looking at category, net sales and volume performances. Net sales of Jose Cuervo decreased 21.2%, driven by a 9.7% volume decline, both related to the short-term impact in the U.S., including the impact of currency on net sales. Other Tequilas reported a 9.5% net sales decline on a 5.7% volume decline. Net sales of Other Spirits increased 17.4% on 13.6% volume growth. Ready-to-drink net sales decreased 24.8% on an 18.3% volume decline. And Non-alcoholic and Other net sales declined 26.4% on 1% volume growth. In total, the impact of the strong peso negatively impacted reported net sales by MXN 293 million.
During the first quarter of 2018, gross profit was MXN 2.6 billion. As a percentage of net sales, the gross margin decreased 380 basis points to 61.4% compared to the first quarter of 2017 but improved by 300 basis points compared to the fourth quarter of 2017. The decrease in gross profit versus the last year first quarter was primarily driven by the already mentioned volume shortfalls, a lower percentage of internally sourced agave in comparison to Q1 2017 and the impact of certain sales and promotions expenses in Mexico now being netted against rather than in an AMP spending. We continue to progress with our vertical integration strategy behind agave.
AMP in percentage of net sales was 19.3% during the first quarter, 50 basis points higher than the first quarter of 2017. AMP spending was lower in the prior year due to planned timing and investment.
Operating profit decreased to MXN 1 billion or 22.2% of net sales. EBITDA decreased 33.2% or to MXN 1.1 billion or 24.9% of net sales. Importantly, EBITDA margin closed at 24.9%. Net comprehensive financing results this quarter was negative MXN 779 million, mainly reflecting the noncash of quarter-to-quarter Mexican peso exchange rate appreciation on cash on hand held in the U.S. -- in U.S. dollars.
First quarter consolidated net income decreased to MXN 142 million or MXN 0.04 per share, driven by lower net sales and by noncash net comprehensive financing results. During the quarter, we repurchased 10 million shares since inception of our MXN 3.3 billion stock repurchase program. We have acquired 73.2 shares (sic) [ 73.2 million shares ], representing 69.2% of the total repurchase authorization. We remain opportunistic with respect to stock repurchases, balancing support for the stock price while maintaining a healthy free float.
The company's cash balance as of March 31, 2018, was MXN 14.7 billion. This compares to total debt of MXN 9.1 billion. During the first quarter, we utilized cash of MXN 5.6 billion mainly to support the acquisition of the Pendleton Whiskey brand. We ended the first quarter in a very strong financial position with significant surplus cash and the capacity to add additional debt leverage in acquisition opportunities if they are to materialize.
I want to thank you for your interest in Jose Cuervo, and I will now turn the call back over to the operator to begin the Q&A session.
[Operator Instructions] And we'll go first to Benjamin Theurer with Barclays.
Actually, could -- just a follow-up question and then to -- in order to understand better the implications from the U.S. I mean, clearly, we're seeing a lot of margin contraction. But listening to the call or going through the press release, we're seeing that the results in Mexico as well as in the European market actually were barely unaffected by the issues that were specific to the U.S. So my question is, could you share the level of gross profit or operating profit, how that behaved on a year-over-year basis, just the U.S.? What was just the U.S. first quarter '18 versus first quarter '17? And how was the other parts of the portfolio in terms of profitability performing just to understand a little bit the magnitude of the impact from the U.S. decline in depletion on the consolidated results? That would be great if you have some sort of an indication here.
Can you pick that question for us, please?
I think he's asking on the overall. But from the standpoint of gross profit, how it fits within the context of the whole business.
No, basically, how was gross profit or operating profit, whatever you can potentially share, how did that perform in the U.S. first quarter '18 versus first quarter '17? And then how did that perform in Mexico, for example? Just to understand the magnitude of the implications on the consolidated results from the declines in depletion in the U.S.
Okay, yes. I mean, just to talk about the -- okay, you have it, Daniel...
I'll pick that one up, Mark. From a gross margin standpoint, cost of goods sold closed pretty much in line to our expectations and in line with the overall strategy that we have for the year. We managed to, despite the peso appreciation, with efficiencies on operations, to sustain our operating costs and our cost of goods sold pretty much in line. So in the case of the gross margin for the U.S. or from a COGS as percentage of net sales value, there's no variance. So the impact is mainly behind the volume drop that we had year-on-year and on the absolute. But from a margin standpoint, it's not significant. We did have some volume mix impact, but it's pick the lesser.
Yes, I guess I expressed myself not properly. The question is, how was the margin in the U.S. on a year-over-year basis? Because we're seeing on an operating side about an 800 basis point margin contraction, consolidated. So how much of that was because of the U.S. business? And how much was because of the other businesses?
So with -- was the -- let me rephrase that part. When you compare year-on-year, last year cost of goods sold was lower than this year. And you recall that when we closed last year Q1, we informed you that we had used more internal agave than we regularly used. This was -- so the mix of own agave in Q1 2017 was higher, and this obviously impacts all of our geographies on the Tequila category. And this was done because we were seeing an important spike on speculation behind third-party agave. So this year, we're using the mix of internal agave and external agave much more in line with our original strategy, and that's why you're seeing a drop -- that's the main driver of a drop on gross margin profitability year-on-year. It's the usage of internal agave. That's across the board in all geographies, and it pertains to a base adjustment on a higher usage of own agave during Q1 2017.
Daniel, just to add to that, from a commercial standpoint, the net sales value per case based in U.S. dollars actually increased over the period from 2017. So net sales value grew as a function of more premium brands at a higher rate of growth within the portfolio.
Yes. As we mentioned before, even though the -- if you look at the value of the depletion from the standpoint even though the volume was off 5%, the value was actually only off 1% or almost flat, and your apples-to-apples on Especial/Boost price increase. So that's really about portfolio mix, more of the 100% agave product, more Dobel, more Centenario. Tradicional was up, I think, 14% for the quarter. So there is a premiumization effect, including the whiskeys as well, that's helping drive the higher net sales value for the U.S. business.
Adding to that, you have the exchange rate impact on foreign currency in pesos. We have lower pesos from the income lines. And from the cost of goods sold, we have a spike on the peso-denominated costs. So the peso revaluation also faced against us in this period.
We'll take our next question from Luis Miranda with Santander.
A couple of questions. The first, in the U.S. and Mexico. In the U.S., Mark, I don't know if you -- with what you have seen in March, and I understand in April you have very few days of [ measure ], but when could we start to see the level of depletions as of -- reflect normalized shipments for you and -- so we could have a slightly higher vision or visibility on the performance of volume? And if you can remind us what your objective in terms of volume for the U.S. this year. And I will go for Mexico later.
Okay. I mean, I think with -- the positive news, as I mentioned before, is that we're already seeing the positive trend. So that's what gives me the confidence for the 2018 outlook for the year from the standpoint of I look at it as an isolated issue on this retailer comp that we're having on the retailer buy-ins from a year ago. As I mentioned to you -- by the way, you understand the 3-tier system. So we took our price increase January 1, 2017. Some of the wholesalers lagged to even February and March 1. That created difficult comps. So the -- for those first 2 months for that Jose Cuervo franchise, depletions were actually off about 12%. We actually finished the quarter actually only off 5% because March was up 14%. March was disproportionately higher than the underlying consumer value, but the early signs that we're seeing in April seems that they are continuing on -- not as that aggressive a trend but very positive. So that's what gives us the overall positive outlook, that combined with the, as I mentioned previously, this value creation. The first quarter is less than 19% Tequila business. So that's given us even more optimism going forward. As far as the full year number, I defer that to Daniel on how we would respond to that.
Can you, Luis, tell me what side of the...
No, so the question was just look -- we talk about the [indiscernible] could you remind us how could we beat the range of volume that we could be expecting in the U.S. or overall for the company just as a reminder, please.
So the range of volume? I'm not understanding your question.
Yes, that we expect. What kind of volume growth do you expect for 2018? Sorry.
So we're -- Luis, we're not providing specific guidance. What we're saying is that if -- our growth on volume, we're expecting it to be pretty much in line to the IPO guidance that we gave. It will be in the mid-single digits, maybe slightly higher to the mid-single digits. And we do see and we do foresee our NSV growing at a little bit of a higher pace behind our premiumization and our pricing activity overall. But I may be -- I hope this is helpful for you. And what we're seeing is we will be -- we continue to feel comfortable with that guidance, which was the one that we gave initially.
No, that's perfect. And that's what I meant, and that's very clear.
Okay.
And the second question is with regards to Mexico. I just want to understand, Luis, if you can -- what was the average price increase you implemented in Mexico? And if there was inventory build-up from the retailers -- it is -- was a normalized inventory build-up. And how -- if it should translate into sequential weakness in Mexico.
Okay. The average -- the weighted price increase that we took, it was a 3.2 price increase. That was actually the weighted average increase. Of course, we took some more increase in some brands depending on the price position against competition, but the average was 3.2. We announced the price increase in February, and we had -- the only channel that normally takes a little bit more inventory is the wholesaler channel. Right now, we have 2.3 months of -- 2.5 months of inventory in that channel, so it's normal. It's basically just 0.2 above last year, so we don't see any discomfort on the level of inventory that we have. And we have 1.3 months of inventory in the modern trade in the self-service channel, so I think we're okay with that.
We'll go next to Andrea Teixeira with JPMorgan.
So I would like to take the benefit of having Juan Domingo on this call and just following up with Luis' questions just now and ask you for now the mid-single-digit outlook for volumes and faster-than-the -- [ faster ] revenues, so I'm assuming high single digit that Daniel just reminded us is the ideal. If that is still -- obviously, you just reiterated that. So I was hoping if you can kind of give us comfort in terms of the gross margin given the weak start of the year. I understand all the bulk tequila commentary, but how you see -- I know also the integration is going to come into 2019, but if you can remind us how the puts and takes of the pricing, of the spot prices of tequila -- of agave, sorry, and then how you're seeing the outlook. And then on Mark's comments, which I appreciate is kind of like the sequential improvement in shipments, right, in March against depletions. So I wanted to go back to this comment and ask if there is anything you're seeing in terms of disruptions at the wholesale standpoint because what we saw in IRI and [ NADCA ] has been a pretty supportive growth in tequila. So we're wondering if there is anything that led to some -- in this change in wholesalers last year that they may have built inventory as they switched and then perhaps we're still eating up that inventory. But if you feel very comfortable about the inventory levels that you see at the wholesale and how you see that going forward. So that has to do also with the outlook of mid-single digits, which is -- which probably is implying that you're going to grow at the same pace in the U.S. So I just want to go back to those points.
Yes, I -- fair enough. I'll go first, Andrea, and thank you for the question. From the wholesaler change that we made back in April/May, we feel that's been fully absorbed through the last year. So that's less of a worry. As far as the syndicated data that you referenced, I think we're in pretty good shape. As far as trends and effects that are happening in the wholesale network, I think you'll see continued consolidation as the one big deal that's been out there. Well, probably, it's lagging a little bit than it was originally going to go through in the RNDC break-through thing. But overall, there's more stability and more contraction happening within the wholesaler network. As far as other factors in tequila when you mentioned the Nielsen or [ NADCA ] data, we'll be watching closely to see if any of our competitors follow from a pricing standpoint. We've seen a couple of signs in a few markets that a couple of them are. The key competitor or what is perceived to be the key competitor, Sauza, is still $5, and we've been dipping it down to $6 below. So we still have the strength of the price increase that we took last year that's holding that value proposition going forward. So we're not responding to that. We're keeping our spending and our brand equity intact to continue to take the brand equity road and not compete down that price game. So overall, I think just to kind of recap your question, I think the underlier syndicated data is positive for us. Approximal -- as a company, it continues to grow share, both 13- and 26-week. We see -- from the tequila landscape standpoint, I think you're going to start seeing some pricing from the competitors with the exception of the lower-priced Sauza. And I think it's Daniel or Juan on the other part of the question.
Yes. Well, I feel very comfortable to reach the numbers that we presented for the IPO. So I don't know if that kind of answers the -- what you were asking.
Yes -- no, I guess, it would give comfort, Juan Domingo, if we could kind of get from you -- obviously, sitting on the board and having a good -- a great bird's-eye view on the company, if you feel this was a hiccup quarter, that if you're confident that what Mark just described in terms of the prices range that you had in U.S. And if you feel not only on the top line, which I believe is still not a -- is still possible that you're going to reach that mid-single-digit guidance, but if you can give us comfort on the gross margin perspective that you're going to be able to continue, as we tend the mix, to continue your agave management in terms of inventories to reach that objective and be able to grow EBITDA by that double-digit metric that you guys promised on the IPO.
Yes, we're comfortable in the top line and bottom line. We feel this was just -- this was a hiccup like you described.
We'll go next to Antonio Gonzalez with Credit Suisse.
Sorry to come back to the U.S. But just to clarify, I wanted to add a couple of follow-up questions to the debate. First, Mark, when you see -- obviously, when you see the month-to-month volatility, I guess it's safe to assume that, obviously, that's not the best way you would like to see the business, and everyone would rather see a smoother progression of volumes. So in terms of learnings of the -- for the future, if you will, how does this episode change the way you track end demand? I mean, in terms of having more people at the point of sale, tracking closer dialogue, I guess, with the retailers, perhaps tracking a different database from the syndicated data that you mentioned before, is there anything that you feel -- I know that the wholesalers might or might not be able to give a detailed view on the level of inventory that is building up at the retail channel, but I just wanted to ask how does this change the way you track end demand and inventory across the value chain so as to manage this in a smoother way going forward. So that's number one. And number two, I wanted to ask if this problem -- was there any region or was there a number of states where the problem was concentrated? Or was this -- or perhaps with a number of specific wholesaler network? Or was this pretty much across the board?
No problem, Antonio. It's a great question. And from the standpoint of learning from this experience and what could we do differently or how we can monitor more closely, we've obviously -- over the -- it's going to be 11 years approximately that we've had. We've taken price increases on many brands and then on some brands on an annual basis. So there's a certain predictability within the business. The challenge that we have with Jose Cuervo Especial is that the previous importer actually hadn't taken a price increase quantifiably for over 10 years. There wasn't kind of a track record and regular predictability from the standpoint of if you take a price increase, this is going to be the impact. So the learning was much more dramatic than we expected because we will be taking price increases going forward. We will have more effective senses to understand. Clearly, we understood our inventory. We understood the distributor inventory, the retailer buy-in. And by the way, as the retailer network continues to consolidate as well, more of these stores or these chains are moving to their own warehouses. So we will never have true visibility from the standpoint of their warehousing on Especial, but we'll have a better predictability on what the sell-through will be. So I understand the question; I understand the concern about the choppiness of it, the magnitude of the brand as being so important to the company and particularly in the U.S. market, it needs more scrutiny to understand when the impact happens because we will be taking price increases going forward. Our brand equity continues to improve. That's the other big difference that gave us the confidence to take that price increase. So I think the learnings are there. The measurements are there. We have a better channel management from the standpoint of seeing what the impact was, and we'll have a better handle on it going forward. On your second question, was it regionality with a particular distributor? It was about 40% of the business. It was not across the board. Some markets like Texas and Georgia delayed it till March. So that has an impact. But it was more spotty. So it wasn't quite the umbrella approach that we had to kind of monitor and step back from. It kind of drifted in a few places. And the scale of that changed based on whether it was in what we would call an independent market or a chain-dominated market. So you could see a lot of influence on how much they took in versus how much they were actually selling through. But again, I want to reemphasize that the trend coming out of that February depletion gap from the standpoint of that retailer volume, we really do see that's the last little bitter pill of the price increase. So we're positive going forward. And as I mentioned previously, again, that many years without a price increase, you get learning quick. And the first quarter is relatively small as a proportion of our overall business at about 19%, which gives us the confidence coming out of that and going forward. Does that address it, Antonio?
This is very helpful.
[Operator Instructions] We'll go next to Jorge Huerta with Grupo Bursátil Mexicano.
Mine is regarding Mexico. Volumes in Mexico had a solid increase. However, revenues in the region only grew 2.2%. I know that there is [indiscernible] affecting sales due to the change in accounting methodology but was Mexico also impacted by a mix effect?
We -- there was a -- last year in the first quarter, we have a very -- not good month -- not good quarter for Boost. So this -- yes, this quarter, we were up 21%. So there's a kind of effect on net sales value by the good performance in Boost because of last year. But the main reason is the accounting effect. So that's basically the effect. But that -- on a PLE basis, that effect is netted because there's less AMP, which was reclassificated (sic) [ reclassified ] to a net sales value.
We'll go next to Mohammed Ahmad with FGP.
Maybe we'll quickly polish off 2 parts which were already asked, but I just want to confirm I understood it correctly. So 400 basis points gross margin compression was largely due to agave internal use change, proportion change, and partially due to the operating leverage from volume decline in U.S. Could you give us a split of what of the 400 basis points was the 2 effects, like how much was one versus the other? And then just a question on SG&A. It had a significant year-over-year ramp, which also hit your margins by another 400 basis points. Can you just give us a little color on that?
The vast majority of the impact is the comparison year-on-year on the agave mix that we used from own to third-party agave. And the change, I want to emphasize this for all the attendants (sic) [ attendees ]. The change is on the base year, on 2017. The abnormal usage of internal agave is on 2017, not on 2018. We are performing perfectly in line to our agave strategy. And the fact that we did that in Q1 2017 was merely to send a message and tamper and trying to slow down or stop the speculation we were seeing in third-party agave prices. And to do that, what we did is we used our buffers, which -- our strategy on integration holds buffers, and so we used our buffer to precisely do that during Q1 2017.
Just on the SG&A, the fast ramp in SG&A cost Q-over-Q -- oh, sorry, year-over-year?
Yes, SG&A, we are doing some on investments on SG&A in the U.S., where we are setting up our groups to be more focused on the signature on the offerings -- the [ offering. ] So we've done some adjustments on SG&A, some investments in people to have more focus on the market. That's one. Then second, recall that we've acquired Pendleton. And also, recall that we've acquired [ Island to Island ]. When you compare quarter-to-quarter, [ Island to Island ] was not reflected in our numbers last year. It is now. And the Pendleton numbers were not reflected last year. It is now.
Okay. Just final question on sort of basically average net revenue per unit of volume in Mexico down 13%. Now you did say there was accounting change. Can you -- and then part of it was the mix impact. Can you just give us again a sense of scale of the 13%, how much was accounting versus the mix impact?
Well, we -- 90%, 80% is the accounting change. That's a $3.2 million...
Oh, sorry...
Yes.
Actual number was there. That's great.
There you go. Sure.
[Operator Instructions] We'll go next to Felipe Ucros with Scotiabank.
Thanks for the space for questions. I have a few, so I'll start with this one. Given, obviously, that there was quite a bit of abnormality in the quarter, I was thinking last night on how to adjust this. And I was -- I came up with trying to compare this on a 6-month-to-6-month basis that kind of includes the announcement of a price increase, the prestocking and then the later drop in volumes in the first quarter of last year. And then this year, it kind of also normalized the issues that we're seeing in this quarter. I wanted to ask you first of all if you think that maybe looking at numbers on a 6-month-to-6-month basis is a good way to normalize the effect.
It is a proper way to normalize the effects of both the price increase whilst -- or changing the fiscal years as well, which occurred. So when you normalize depletions, it shows a much smoother trend when you look at 6-month comparison through the years. So from a commercial standpoint, we try to look at [indiscernible] in just first quarters. Six months kind of cleans up both the price increase plus the change in fiscal year ends, which obviously impact the quarterly risk more than it will in 6 months.
Okay, that's clear. And if I can do a couple follow-ups. The first one is on Sauza and the dynamic that you had mentioned where your price increase was, after many years, not increasing prices. It was coincidental with Sauza dropping their prices. And obviously, they're somewhat of a direct competitor in that category. So I wanted to ask you if you're seeing any trends in market shares that we should be concerned about. And then the next one...
So the -- sorry.
Sure, go ahead. Then I'll ask my next question, please.
No, not -- it's actually very good [indiscernible]. I'll see if I can wrap them together.
Sure. And then the next one was on the message sent to the third-party agave producers. It seems like you used your buffers to kind of show them that you have your own agave and they can -- and the speculation has to stop. And I was thinking strategically whether that makes...
[Audio Gap]
to basically correct the entire market. I mean, to a certain degree, are you doing a favor to the rest of the tequila producers in the region? That was my question.
Well, I'll take the Sauza bit. The thing to watch out for, for us from the standpoint of the Sauza pricing is you have to think about -- you don't have think of it. But if you think about the Jose Cuervo Especial brand, it has 2 parts, Silver and Gold. They're very different profiles. They're both very similar products from the standpoint of pricing, their parity pricing, and it's basically just a difference in color and makeup of the product to make the gold variant. But the consumer franchise is much younger on the silver and older on the gold. So our driving motivation to build the Especial franchise is primarily through silver. When we took over Jose Cuervo Silver from the previous importer, it was about 300,000 cases. Now it's about 1.1 million. And despite all the different machinations of the first quarter, it's still growing at 14%, the Cuervo Silver. Where we're under more duress and the number that we watch closer is at Jose Cuervo Gold, which has an older consumer franchise that buys the larger size, the larger format, the 1 7 5 or handle as they call it. That consumer is more price sensitive to the lower-price Sauza gold buyer. Our silver franchise, where we would continue to build brand equity in and advertise above the lines with silver franchise almost exclusively is the one that's really the engine that's going to drive it. So the metric that we watch very closely is how much of the overall franchise is Silver, what's the MAT on it -- and plus 14 is pretty healthy -- and can we hold on to as much of the gold franchise as possible because that's the one where you have more price elasticity versus the competitor that we mentioned earlier. So the one that I watch is the gold and the larger-format sizes. And overall, just to improve our overall profit mix, we're trying to reduce our dependence on that large size in general. We've had a lot of success over the last 12 months promoting smaller sizes, 100 to 200 mls, which are very enriching from a price/mix basis. I'll now throw -- I'll throw it to Daniel on the agave bit.
Listen, this is an internal decision done and looking for the interest of the company and its stockholders. We had concerns of seeing an uncontrolled, increasing spiral on speculation behind the price early last year. We took the decision of doing what we did. We have the ability and the capacity. We're of the few that have the ability and capacity to do that, and it was in our own interest to make sure that, that spiral, at least [ gate or flood ], which we managed to do. But this was in no means thinking or doing any favors to anybody out there. This was an internal strategy of the company.
And I guess, maybe I didn't explain myself well. But obviously, when you stop the speculators, this benefits everyone who's purchasing third-party agave. And the way I understand, you guys have the highest level of vertical integration of agave. So if you stop the speculation, doesn't that -- on a relative basis, doesn't that -- isn't that great for your competitors since you guys have less third-party agave than everyone else?
They -- I mean, they do right away, but it is in our interest as well to stop it. And we still have an amount that impacts our cost of goods sold; and when we are fully integrated, then it will be a different story. But for now, it was still a good idea for us to do that, and we have the tools to do that.
[Operator Instructions] And with no further questions in queue, I'd like to turn the call back over to Mr. Juan Domingo for any additional or closing remarks.
We would like to thank you again for your continued interest in Jose Cuervo. We remain extremely confident in our family of brands and our prospects for long-term growth. Thank you very much. Have a good -- have a great day.
And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.