Becle SAB de CV
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Becle SAB de CV
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Good morning, and thank you for joining Becle's first quarter unaudited financial results call.
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 may -- they are subject to inherent uncertainties, risks and changes and circumstances that are difficult to predict. Our actual results may differ materially from those in forward-looking statements. For all the foregoing reasons, you are cautioned against relying on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Now I would like to turn the call over to Mariana Rojo Granados, Treasurer and Investor Relations. Please go ahead.
Good morning, everyone. I'm Mariana Rojo, Corporate Treasurer and Investor Relations Officer. Thank you for joining us to discuss the unaudited financial results for the first quarter ended March 31, 2019, of Becle, commercially known as Jose Cuervo.
I am joined today by Juan Domingo Beckmann, Chief Executive Officer; Michael Keyes, President and CEO of Proximo Spirits; Steve Shanley, Senior VP of Commercial Strategy for Proximo; [ Manuel Colon ], Marketing Director of Mexico; Gordon Dron, Managing Director of EMEA and APAC regions; and Fernando Suárez Gerard, Chief Financial Officer.
Before we begin, I would like to remind you that the figures discussed on this call were prepared in accordance with IFRS including IFRS 16 adoption effective January 2019 and published in the Mexican Stock Exchange. The information for the first quarter of 2019 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in the appropriate electronic format.
[Operator Instructions] Now I will pass the call on to Mr. Juan Domingo Beckmann, CEO of Becle.
Good morning. Thank you for joining us today to discuss Becle's first quarter results. I will make some opening comments, and then I will ask Mike Keyes to discuss performance of our U.S. and Canada business unit. [ Manuel Colon ] sitting in for Fernando -- for Luis Felix, will review our Mexico and LATAM results; and Gordon Dron will discuss our results in EMEA and APAC. Fernando Suárez will then walk you through our financial results.
We are pleased to report continued strength across our spirits portfolio and categories during the first quarter and now are on track to deliver our targets for 2019. Volume and net sales increased 13% and 23%, respectively. Each of our categories realized double-digit net sales growth, once again driven by our premium spirits offerings across our geographical regions. Our results were met by another strong performance in the U.S. and Canada where depletion trends further accelerated during the quarter contributing to double-digit volume and net sales gains. We remain well positioned with a leading portfolio of spirits brands and significant financial resources to execute our global growth strategy.
We are taking necessary measures to deal with the industry-wide sourcing agave situation notwithstanding actions taken will take time to yield tangible results and cost pressures are expected to continue in the short term. We have been more active in structured agave third-party purchases and focusing on price and sugar content. We have also been stepping up in our plantation efforts. While this may take time to see the results, it is still a bit too early to tell if we have seen the top of the agave cycle.
Now let me turn the call over to Mike Keyes to discuss our U.S. and Canada results.
Thank you, and good morning, everybody. We were pleased with our commercial performance in the U.S. and Canada during the first quarter. Consumer takeaway for our brands in the U.S. as measured by Nielsen and NABCA data grew over the past 3 months by 10% and 13%, respectively. Depletions were up 9% driven by double-digit growth in our offerings of premium tequila. Depletions of our whiskey portfolio organically grew by 14% in the first quarter. Our ready-to-drink category continued an increasing trend of plus-9% for the depletions growth. This strong consumer takeaway and depletions growth during the quarter continued to reinforce the positive trend we've seen over the last 4 quarters. We achieved 21% growth in shipments in the quarter compared to the prior year. Our fourth quarter 2018 plan to optimize inventories with all channels reduced distributor inventory at year-end and led to a closer correlation of first quarter depletion and shipments than in recent years.
Net sales value in the United States and Canada was up 31% during the quarter driven by volume growth, an improved mix of products and continuation of a premiumization strategy. In conclusion, we remain pleased with the trends in the United States and Canada and with the consistent depletion growth that we have experienced over the last 4 quarters.
I will now turn the call over to [ Manuel Colon ] to discuss our Mexico and Latin America results.
Thank you, and good morning, everyone. During the first quarter, we generated 12% volume growth in Mexico with depletion consistent with the prior year. While our net sales increased by 20%. Volume growth this quarter was led by a double-digit performance of our nonalcoholic category, while the strong increase in net sales was driven by continued mix towards premium tequila and the effect of accumulated price increases over the last 12 months.
We continue to outperform industry category during the first quarter. Inventory sales were up modestly, that remains 10 days up to February where we generate higher share in both volume and sales value. The spirit industry in Mexico is showing a low single-digit performance year-on-year. Nonetheless, the company continued to grow market share in both the tequila category and the spirit industry as a whole during the quarter.
In February, we implemented an additional price increase. Some competitors are also taking price increases. In Latin America, we experienced a decline in volume year-over-year during the first quarter, in part, reflecting lower shipments in Brazil given the political and economic environment along with reduced promotion and product support. In total, while volumes were impacted in the quarter -- in this quarter, depletions increased 5% in Latin America.
I will now turn the call over to Gordon Dron.
Thank you very much, and good afternoon from Europe. The EMEA and APAC region had a demanding first quarter due to route-to-market challenges in Russia, Ukraine and South Africa along with the rephasing in the APAC region. Tequila depletions were consistent in Q1 versus last year, but the shipments in the quarter were lower, reflecting heavy buy-in in EMEA in Q1 2018.
Other spirits brands, however, generated strong volume growth with our rums offering continuing their double-digit performance on shipments and depletions. Irish whiskey sales show high single-digit increase supported by new launches and double-digit depletion growth year-to-date in all of our key European markets. In APAC, we generated double-digit depletion growth, notably our owned distribution business in Australia, a strong recovery in the Philippines as well as high single-digit increase in Japan, Korea and China. Overall, we remain confident about the outlook for the rest of 2019.
And I will now turn the call over to Fernando Suárez to review the financial results.
Thank you, and good morning, everyone. Let me walk you through the first quarter financial results.
During the first quarter, the company reported a 22.5% net sales increase to MXN 5.3 billion. Growth was driven by a 30.7% net sales rise in the U.S. and Canada and a 19.8% increase in Mexico. While net sales in the Rest of World were 2.4% lower than the prior year. The net sales increase exceeded volume growth reflecting continued favorable sales mix and the premiumization trends we are seeing across our markets. Total volume increased to 13.1% during the first quarter including 20.5% growth in the U.S. and Canada and 11.9% rise in Mexico partially offset by a 9.8% decline in the Rest of World region.
During the first quarter, gross profit increased 5.3% to MXN 2.8 billion. Gross margin decreased to 52.8% from 61.4% in the prior year, reflecting the ongoing impact of increases in third-party agave costs and effects on production efficiencies. As we have discussed, the industry has been growing the super premium tequila category well above expectations driving challenges on sourcing and raw materials, and we expect these cost pressures to continue for at least the rest of the year.
AMP expenses as a percentage of net sales were 20.2% during the first quarter compared to 19.3% in the first quarter of 2018. This increase reflects the planned timing of AMP spend relative to the prior year period and the accelerated volume growth achieved during the first quarter.
SG&A expenses increased 1.4% during the first quarter representing 13.1% of net sales, down from 15.8% in the first quarter of 2018. Operating profit increased 3.1% to MXN 1 billion, while the operating margin was 18.7% primarily reflecting higher third-party agave supply costs, increased AMP and partially offset by nonrecurring items and other efficiencies in SG&A.
EBITDA increased 6.8% to MXN 1.1 billion translating into a 21.7% EBITDA margin. Net financial results this quarter were MXN 37 million mainly driven by net interest expense. First quarter net income increased fourfold to MXN 703 million when compared to the first quarter of 2018. Net margin was 13.3% compared to 3.3% during the same period of the prior year translating into a MXN 0.20 earnings per share.
As of March 31, 2019, net cash was MXN 3.1 billion resulting from cash and cash equivalents of MXN 12.8 billion and a total financial debt of MXN 9.7 billion. We maintain a strong balance sheet with conservative financial leverage and ample liquidity.
On the rating agency front, earlier this month, 1 of the 2 credit rating agencies covering Becle's fixed income security confirmed our rating of BBB+ reflecting our solid financial position.
Regarding capital allocation. The company will be proposing the following actions in today's general shareholders' meeting: first, a MXN 2 billion dividend corresponding to 50% of 2018 net income. This represents a 1.8% dividend yield. Second, the extension of a share repurchase program for MXN 3.3 billion; and third, MXN 34.4 million of treasury stock representing approximately 1% of shares outstanding will be proposed to be canceled.
Regarding IFRS 16 leases accounting requirements, the company adopted such bulletin effective first quarter of 2019 utilizing the modified retrospective approach. The cumulative effect of adopting this standard was recognized as an increase in assets and liabilities. The difference between these accounts have been recognized as an adjustment in retained earnings as of January 1, 2019, and there was no restatement for comparative information. As a result of this adoption, the company booked MXN 1.9 billion in balance sheet during this quarter. Lastly, we would like to reiterate our 2019 volume guidance for the year and the growth in the mid-single digits.
Operator, we can now proceed to Q&A.
[Operator Instructions] The first question will come from Benjamin Theurer with Barclays.
So first of all, congratulations on the results. I have one question, and that is actually related to a commentary you made on the last quarter's conference call and how the implications were during the quarter. So you mentioned you had a couple of cases that weren't sold in the fourth quarter and you've expected them to be sold in the first quarter. And obviously, we saw the very strong volume in the U.S., up over 20% on a year-over-year basis. Could you remind me quickly on the quantity? I think it was something like 300,000 cases, but I wasn't sufficely sure, so just to understand what was driven by that, call it, intra-quarter shift from 4Q '18 into 1Q '19 and if there's something similar we should expect looking into 2Q or is this something opposite on that side. That would be like a first question just to understand, and then I have one follow-up.
Yes, this is Steve Shanley. The 325,000 was the number that we quoted last quarter. It was 250,000 cases of Especial and the rest RTD. And those cases did put us in a better position through the first quarter this year. If you compare quarters last year, we had slightly less of a drawdown this year as distributors didn't have those excess cases of inventory. So we ended the quarter at a pretty good inventory position, roughly [ 50 days ] and we would expect that to continue going into the remaining quarters, at least through the third quarter. There's a natural build in the fourth quarter that will occur again, but through the second and third, we would expect that depletions and shipments will line up pretty closely.
Okay. Perfect. And then just one follow-up, and I guess that's more for Fernando. If there's some way of giving a little more of a detail of that other income, that roughly MXN 180 million that you've reported, because that usually has been more like a number not so relevant, and I mean, obviously, this time MXN 180 million in other income is a significant number. So if you could give a little bit of a breakdown where it came from to understand the nature of what's behind and how onetime that is or maybe not.
Yes, Benjamin. Primarily a benefit from tax balances and applying Mexican inflation to that, which is -- that's why we're referring it to as onetime or nonrecurring. So it's primarily a fiscal.
Okay. So it's definitely something onetime and we should assume this goes back to whatever, MXN 10 million, MXN 20 million, up and down maybe on a quarter, but nothing really material, correct?
That's correct. It's a nonrecurring.
The next question will come from Miguel Tortolero with GBM.
The first one is regarding profitability. Could you give sensibility of the impact of IFRS implementation on this quarter that you made? Just to understand EBITDA margin for the quarter because despite the year-over-year margin improvements, when you look at the gross margin, it was actually close to 3Q of last year results when you had an EBITDA margin of 50% to 63%. So I'd like to get a little more color on that.
And also related to the first question that was made, could you share what the volume growth would have been in the U.S. if we excluded, one, the effect of the distribution -- distributor's inventory reduction in 4Q that you had in 1Q and also, secondly, the inorganic contribution of Pendleton to this quarter's results.
Yes. Again, as to your first question, the adoption of IFRS 16, so you will see on the balance sheet, on the asset side, a right-of-use asset line item of MXN 1.9 billion and then you'll see the corresponding short-term and long-term liability with that. As it pertains to the net income, the effect there is basically the different rents will now be flowing through a combination of interest expense below the line and depreciation, given that we now have, on balance sheet, this effect. So in general, it's very limited effect. It's MXN 1.9 billion out of MXN 68 billion asset size. So that's with respect to IFRS 16. Now, your second?
Just as a follow-up, I understand this side on the balance sheet, so I just would like to have more color on that, on the SG&A reduction that you have this quarter due to the leases that now are classified as assets and liability.
We don't break down that specific amount, Miguel, but let us see if we can provide a better disclosure on that, but at this stage, we're not breaking that down. And as to your second question on volume?
Yes. This is Mike Keyes. I think shipments will rise and fall based on situations. I think the proper way for you to look at the data, [ it doesn't mean ] that they should be on a depletion basis as we were up about 90% in the U.S. on a depletion basis. As we've said, the next few quarters will be -- depletions and shipments will near -- and that is the answer, that as we sell in the fourth quarter the distributors will make sure they have enough inventory and we'll see a little bit of a increase.
The next question will come from Luis Miranda with Santander.
The first one is regarding advertising, marketing and promotion. I don't know if you could give us some color. You mentioned -- Juan Domingo mentioned in the remarks the AMP. But does this sense that it might be running exactly ahead of schedule although you are investing a little bit more on promotions? Could you give us some additional color on that?
And the second one is regarding Mexico. And especially when we hear about the mix and the sales growth, what was the range of the prices that you implemented in February? And how much is in mix?
Luis, on AMP, you'll see that we're pretty much in line with last year, maybe a bit off. And it primarily has to do with AMP reflecting the depletions figures for the year. So we may have a carryover effect between first quarter and second quarter, but it's mainly linked to how depletions are playing out. Overall, in the year, you should expect to see a figure of AMP in or around that neighborhood, maybe marginally up because we continue to invest in the brands. That's what we can say on AMP.
With regard to price and mix in Mexico?
Yes. In that respect, that will come in the weighted, we increased 6%. With tequila business, it was increased by high single digit. That was on February effectively.
And just a follow-up, with regards to the recurring volume growth and depletions in the U.S., Michael, you mentioned 9% was -- did I hear right?
Yes.
The next question will come from Andrea Teixeira with JPMorgan.
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Hello? Hello? You are somewhat -- she's cut, something happen or...
The next question is from Felipe Ucros with Scotiabank.
First, I wanted to go back to the IFRS 16 issue. I understand that you guys didn't open up at the SG&A line. I was wondering if you guys had an estimate of how much it increased EBITDA. It seems it's in the, throughout most of the companies that have reported, has been an increase of a few basis points -- getting close to 100 basis points on EBITDA for most producers. I want to ask you about that.
And then on the agave situation, I know you're no longer giving a qualitative information about the third party agave market, but I was hoping you could give us some qualitative details about the situation. Obviously, the gross margin took a step back from the fourth quarter's improvement and like another person asking in the call, it was closer to the third quarter situation. So I was wondering if this was driven by agave prices or maybe you are seeing pressures from other costs? Or maybe the fourth quarter is just -- it showed some seasonality with better margins due to more premium products. So I just wanted to see why -- basically why the gross margin spiked in 4Q and came back down in 1Q, and looking for some color on the agave situation.
Felipe, regarding the impact of IFRS 16 adoption on SG&A, it's not really material there. As you see, overall, the impact is MXN 1.9 billion out of the MXN 69 billion asset base. So it's not really material what would be coming out from SG&A.
And with respect to your second question on agave third-party contracts, what we have been doing and what we've been disclosing here today basically is that we have been entering into more structured agave purchases with trusted key third-party suppliers in which we are focusing on obtaining price discounts and focusing on the sugar yields, making sure that we get the appropriate sugar yields from such purchases. They're not the majority of third-party contracts, but we have been securing certain sources.
Regarding agave pricing in general, quarter-over-quarter, from the fourth quarter to the first quarter, we'd seen just a marginal increase on agave prices. That's what we have been observing. And we've been very cautious and very selective on how we go about our third-party agave purchases. That's what we can say at this stage.
And any changes on the general yields that you're seeing? Or is that stable?
Stable. No major variations there. Again, third-party purchases, we're focusing on getting the right sugar yields. We're being very demanding on that.
Okay. Understood. And going back to IFRS 16, I understand the balance sheet movement and I understand you couldn't break it up by SG&A, but the question was on EBITDA, if you had an idea of how much the impact was on EBITDA. I have the idea that a decent percentage of the land that you use for owned agave production was leased. So I kind of was thinking that it would be maybe a little mature along the EBITDA side.
Well, it's a 3 effect there. Yes, one is the leased land, the operating leases that we have on the agave, but also it is a portion of facilities rentals of both industrial and offices. So it's roughly 1/3, 1/3, 1/3 of that, but again, it's not substantially material on EBITDA. We can try to follow-up on more disclosure on what we are doing, the breakdown of that, but at this stage, this is the effect that we're willing to share.
The next question will be from Andrea Teixeira with JPMorgan.
So I hope you can hear me now. Sorry for what happened before. And I was hoping if you can discuss the trends for volumes going forward. I understand from your comment before. Obviously, you had guided us in the quarter prior that you had the inventory buildup as well as obviously tough comps in the U.S. I was hoping just to get your depletions going out or going forward. I understand your guidance, but also for the rest of the world to explain a little bit what happened there, if there is any update you can give us on Bushmills and a lot of the distributors that you took over from a bunch of countries.
And also, second question on hedging. I understand that you're trying to work on a long-term contract. And if you can kind of update us on that process and how much have you been able to achieve. And adding sort of a guidance, I understand also that you don't want to give guidance at this point, but should we look at the most recent quarter as a parameter? Obviously, it had a big hit in this quarter and specifically on gross margin, so if you can kind of give us a little bit of an outlook for that as well.
This is Mike Keyes. With regard to the U.S., the last 4 quarters are -- had been very, very good to us. It's been in the 5% to 6% range. We had a very good start this year and we anticipate the guidance really hitting 6% or 7% for the U.S.
And if you want me to talk about rest of the world phasing -- this is Gordon Dron. It is purely, as I said in the commentary, that it's truly a rephasing in shipments. Depletions are very strong and indeed positive in all key markets versus last year. So we just see it as a timing issue.
For Mexico, I will comment that we are seeing strong depletions in the wholesaler side while we are working harder on the self-service side. So overall, it's flattish than we have been [ this year ].
And Andrea, as to your second question on third party purchases, again, they are not the majority of the third party purchases. They have been building up, but they are still a minority of the volume. And that's what we can say at this stage. We're focusing a lot on getting aggressive pricing and getting good pricing for the company and focusing on sugar yields.
With respect to first quarter profitability or margins being a proxy going forward, again, we're not in a position to give guidance at this stage. We would not like to represent if first quarter margin is a proxy for profitability going forward. We're not there to make such representation.
Yes. If I can squeeze one question because I understand there's this new brand Proper No. Twelve, which is an Irish whiskey, that I don't think your third party is doing that. I think it's like -- it was initially done by one of the Bushmills' prior executives. Is that -- or are you having any part of that investment as well?
Let me just do a quick follow-up on your previous question on profitability. Also, bear in mind Andrea that as was asked earlier in the call, we do have certain onetime or nonrecurring effect in the cost line items in the first Q. Now, as to your ...
Those are negative, right? I'm sorry. Then those are negative?
Right. Those are onetime benefits.
Okay. Now, I will follow up with you later. And then on the Proper No. Twelve?
What -- could you repeat the question on Proper No. Twelve?
Yes. I was -- I understand it's made by an ex-Bushmills executive. If that is correct or that is something that you are still part of?
We have distributors of that brand, but we don't own the brand itself. We cannot really talk that much about that brand. There's something more I'd say...
Tangible.
Tangible.
Okay. So at this point, you can just confirm that you manufacture the brand, but you can't confirm if you're going to have a stake on the brand. Is that what should I...
Yes, that's correct.
The next question will come from Antonio Gonzalez with Credit Suisse.
I just have a very quick follow-up on the previous question that my colleague, Felipe Ucros, did. This is perhaps for Fernando. Fernando, when I look at the, again, quarter-on-quarter gross margin, I understand that you guys are not making forward-looking comments, but just to understand the sequential decline from 4Q to 1Q in gross margin, you mentioned that the price -- the spot price of agave moved but only marginally, right? And I think -- please correct me if I'm wrong, but I think that the contribution from Other Tequilas as a percentage of the total volume contribution actually declined marginally from 17% to 14% of total volumes from 4Q to 1Q. And so I -- apologies if I missed it, but how come then we are seeing such a significant decline in gross margin quarter-on-quarter? Is there any accounting issue that you are recognizing the agave earlier or later in the year? Or any other explanation, again, in light of not a very meaningful quarter-on-quarter move in the cost of agave? Is there something else that we're missing explaining the sequential decline? Sorry if I missed this on your earlier explanation.
Antonio, as you well point out, we have a substantial drag in gross profit on a year-on-year basis, although it's less pronounced on a quarter-over-quarter basis. The impact is primarily coming in from agave. And on a quarter-over-quarter basis, yes, we've seen a marginal increase in the price of third-party agave. And is that linked to the tequila category or 100% agave tequila category quarter-over-quarter or year-on-year? Basically, on a year-on-year basis, both categories are growing 8.5%, so that's relatively stable. We would sum it up that the core of the cost pressure is called agave, that's the reality, that's the focus. Even on a year-on-year basis or on a quarter-over-quarter basis, the core cost pressure is specifically agave price.
The next question will come from Rafael Shin with Morgan Stanley.
Also, a very quick follow-up on Antonio's and Felipe's question. Can you talk a little bit about like how -- what's the percentage of your own agave usage, I guess, and how that has evolved over the last couple of quarters? I mean, I guess another way of asking this, when I look at the 1Q versus 4Q, are you using less of your own agave? That's the first question.
And the second thing is, I mean, just looking at the Nielsen data, it seems that you had a very strong January and February and then you saw a little bit of a slowdown in March. So I was wondering if you can comment a little bit on like the monthly trends you've seen, especially in the last -- this last month of April.
Rafael, as to your first question, percentage of owned agave, as you might recall, we discontinued disclosure on such percentages. So I'm sorry, but for competitive reasons, we cannot disclose also our percentage.
Or maybe directionally, like how is that moving maybe?
I'm sorry. No. I'm sorry. For competitive reasons, we can't state that. And as to your second question on January and February...
That's a U.S. question, right?
Yes.
Yes. Looking at a 4-week period is very difficult within Nielsen. Yes, we had a very strong quarter, 10% growth within -- if you add up all of our brands over the quarter. It is true that March was a little bit light if you look at it from a percentage standpoint, but truly, we see the continuation of these trends in through April and the second quarter and -- January and February are probably our 2 widest months of the year, so the expansion of those percentages could be expected.
At this time, there are no further questions. I would like to turn the conference back over to Juan Domingo, CEO, for any closing comments.
I would like to thank you again for your continued interest in Becle. We remain extremely confident in our family of brands and our prospects for long-term growth. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.