Becle SAB de CV
BMV:CUERVO
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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 maybe 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 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.
Before we begin, we would like to remind you that the figures discussed on this call were prepared in accordance with the International Financial Reporting Standards, or IFRS, and published in the Mexican Stock Exchange. The information for the first quarter of 2023 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in the appropriate electronic formats. [Operator Instructions].
Now I will pass the call to Becle's CEO, Mr. Juan Domingo Beckmann.
Good morning, everyone, and thank you for joining us today as we discuss Becle's first quarter 2023 results. Looking at overall results for the quarter, we saw total volume growth by 3.9% and net sales by 5.7% on the back of our premiumization strategy. In the U.S. and Canada, volume and net sales were down 5.4% and 5.9%, respectively, versus the first quarter of 2022, primarily due to the decrease in our ready-to-drink category and an increased competition. However, our premium tequila segment remained strong, outpacing overall tequila growth in the region, as per recent Nielsen reading.
On the other hand, Mexico and Lat Am experienced a noteworthy year-over-year increase in overall volume and net sales during the quarter due to our well-executed premiumization strategy and price increases in the region. Tequila sales reported a substantial year-over-year surge, underlying strong demand for our key brands and a robust core business performance. Despite ongoing challenges with lead times and availability in some Lat Am countries, both Mexico and Lat Am regions demonstrated impressive strength overall.
The EMEA region posted a 19.8% year-over-year increase in volume despite consumers' resulting -- despite consumers' concerns resulting from inflationary pressures, while APAC was up an impressive 91%, mainly attributed to post-COVID openings. These results were largely driven by tequila's continued growing demand, which experienced a 35.6% year-over-year increase in the EMEA region and nearly triple its value in the APAC region as compared to the previous year. Despite the challenging macroeconomic environment, our key brands continue to perform well, driven by strong demand for our premium products.
We remain confident in the enduring value of our brands and our ability to deliver sustainable growth for shareholders. I am also proud to announce the opening of our state-of-the-art Causeway Distillery located -- adjacent to our old Bushmills Distillery. This investment more than doubles our production capacity of Irish malts and reflects our commitment to premiumize the category even further.
I will now turn the call to Felix to discuss our U.S. and Canada results in further detail.
Thank you, Juan, and good morning, everyone. I am pleased to report the United States and Canada regions' commercial performance of the first quarter of 2023. Kindly note that the results in the following remarks were prepared on a constant currency basis.
Net sales value was up 3.4% compared to the first quarter of 2022. This was mainly driven by our premiumization strategy and a 9.8% increase in tequila sales, which benefited from the price increases in the second quarter of 2022 and the first quarter of 2023. Additionally, we observed a 9.4% quarter-over-quarter improvement in net sales per case for our entire portfolio.
Shipments for the first quarter were down 5.4% compared to the previous year due to challenges faced by the RTD category. However, this decline was partially offset by the recovery of the nonalcoholic beverages.
Depletions for the quarter fell by 5.7%, largely caused by a timing difference between the price increase at the start of the quarter lapping an increase from the second quarter of last year. This increase affected all categories, with tequilas and whiskeys experiencing a 2% decline and RTD declining by 11%. We expect depletion rates to normalize after distributors and retailers have fully implemented and absorbed the first quarter price increases.
During the quarter, we made significant investment in our brands through an effective AMP activities. This increase reflected our commitment to early year investment in our whiskey and tequila portfolios, aimed at maximizing the AMP's positive effect and driving consumer awareness and engagement.
Based on the 13-week Nielsen value indicators, our tequila portfolio grew by 11%, outpacing the category's 6% growth rate. Furthermore, our whiskeys grew 3% despite the categories declining by 2%. This highlights the off-premise performance of our Proximo's U.S.-spirits only business, which continues to post strong momentum, growing at 8.8% compared to an industry decline of 1.7%. Even when considering our full portfolio, including RTDs, growth remained strong at 4.9%, while the industry's total growth was only 1%. We remain confident that our tequila-based premiumization strategy will continue to deliver substantial value, supported by the outstanding performance of the tequila category overall as well as our consistent AMP investment and implementation of effective in-market execution program.
I will now turn the call over to Olga Limon to discuss the Mexico and Latin America results.
Thank you, Luis, and good morning, everyone. Mexico had a successful quarter on the back of sustained growth of our tequila portfolio and improving glass availability in the face of industry shortages. This led to volume increasing 9.1% year-over-year and net sales increasing a very strong 25.9% for the same period. We implemented a March price increase in Mexico. However, it is currently too early to assess its impact on the market demand for our products. We need to exercise caution and carefully monitor our brand decision. Our tequila strategy contributed significantly to profitability as most of our brands continued to experience growth in our first quarter.
The Lat Am region faced political and economic volatility, along with supply chain that impacted performance. Additionally, most of our countries in the region are facing tough macroeconomic conditions, and some of our markets are experiencing a downward trend in brand decisions. Despite these obstacles, our volume for the quarter showed a year-over-year increase of 6.4%, while net sales were nearly flat with a growth of 0.7% for the same period.
Overall, Mexico and Lat Am reported a positive first quarter with underlying positive demand for our key brands. In particular, our core tequila business demonstrated resilience and growth. We remain optimistic due to the recent continued demand for our strong portfolio and our ability to mitigate challenges in the region.
I will now turn the call over to Gordon Dron, Managing Director of our EMEA and APAC region. Thank you.
Many thanks, Olga, and good afternoon from Europe. EMEA and APAC economic outlooks are diverging. EMEA faced challenges from high overall inflation and soaring food costs in many European markets, while APAC is experiencing a post-COVID boost.
In EMEA, the effects of the energy price inflation from the Russia-Ukraine conflict persists. However, consumer inflation is expected to decline moving forward. This economic backdrop has given rise to consumer apprehension. Some evidence of modest down trading, extensive promotional activity and heavy trade resistance making it difficult to offset increasing costs in some European markets.
Despite the challenges in EMEA, business in both regions are continuing to grow. In the first quarter, sales volume in both EMEA and APAC were significantly above the same period last year, with net sales also increasing. EMEA witnessed a 19.8% increase in sales volume and an 11.9% growth in value despite the challenging retail and consumer landscape in key markets. The growth in value is being suppressed by product mix.
In Europe, our owned and controlled businesses are performing strongly, favoring from growth in our line extensions and premium tequila distribution even in the face of intensified on-trade competition.
In the APAC region, key markets are performing well, driven by tequila and our premium whiskey portfolio. The overall APAC business has experienced substantial growth in both volume and value compared to the first quarter of last year, reflecting its continued robust rebound from the COVID-related lockdowns in 2022. Tequila sales have been particularly strong with volume and value nearly tripling versus the same quarter of last year, reflecting premium mix in key markets. Looking forward, the economic outlook in EMEA remains uncertain, while APAC is expected to maintain its growth trajectory and further strengthen its position.
I will now pass you over to Fernando Suárez who will take you through the financial results.
Thank you, and good morning, everyone. I will walk you through the financial results for the first quarter of 2023. The company reported a 5.7% year-over-year increase in consolidated net sales to MXN 9.6 billion. Pro forma for a constant currency basis, our top line increased 12.8% during the quarter. This increase reflects a product mix skewed towards brands with higher sales per case and year-on-year price increases.
Gross profit decreased by 2% in the first quarter to MXN 4.9 billion, while gross margin decreased from 54.9% in the first quarter to 50.7% in the first quarter of this year. The decrease in gross margin was primarily due to foreign currency effects from the appreciation of the Mexican peso against the U.S. dollar and an adverse regional mix. This was partially offset by price increases across the regions and improved product mix and steady agave market price. The FX impact alone represents 2% of the gross margin decrease.
AMP expenses as a percentage of net sales increased to 20.6% from 18.6% in the first quarter of 2022 as we continue to invest in strategic opportunities.
Distribution expenses decreased by 5% to MXN 458 million compared to the first quarter of 2022, mainly driven by lower logistics and carrier costs. As a percentage of net sales, distribution decreased to 4.8% from 5.3% in the first quarter of 2022.
SG&A expenses increased 6% in the first quarter. As a percentage of sales, SG&A remained flat at 9.7% when compared to the same period of 2022, primarily driven by effective cost control management.
Operating income decreased 22% for the quarter, and the operating margin decreased to 16.1% from 21.9%. EBITDA for the first quarter was down by 18% quarter-over-quarter to MXN 1.8 billion, with EBITDA margin contracting to 18.8%.
Net financing results for the quarter was a gain of MXN 170 million, which was mainly due to higher interest expense and by the Mexican peso appreciation versus the U.S. dollar compared to the first quarter of 2022.
First quarter consolidated net income decreased 9% to MXN 1.2 billion. The net margin was 12.8% compared to 14.9% in the first quarter of 2022. Earnings per share were MXN 0.34 for the quarter compared to MXN 0.38 for the first quarter of 2022. As of March 31, cash and cash equivalents were MXN 4.5 billion, and total debt was MXN 19.3 billion.
During the quarter, we incurred in a $150 million short-term loan for planned working capital and CapEx expenditures. Accordingly, our net debt-to-EBITDA ratio of 1.3x as of December 31, 2022, increased to 1.6x as of March 31 of this year. This capital structure brings us closer to spirit industry peers' benchmarks and lowers our weighted average cost of capital.
Regarding capital allocation, we will be proposing a cash dividend payment and share repurchase program extension at our General Shareholders' Meeting, which will be held later today. The proposed cash dividend is MXN 0.49128 per share, which corresponds to 30% of the 2022 fiscal year's consolidated net income. The proposed share repurchase program amount is up to MXN 2 billion.
Looking to our ratings. On March 17, Fitch ratings affirmed Becle's investment grade long-term foreign and local currency ratings of BBB+ with a stable outlook.
Finally, we would like to update the 2023 guidance to high single-digit consolidated net sales value growth and specify that this is on a constant currency basis.
I will now turn the call back over to the operator for a question-and-answer session.
[Operator Instructions]. Our first question comes from Andrea Teixeira of JPMorgan.
So I wanted to just ask, Fernando, you mentioned at the end of your prepared remarks the high single digits organic for this year. That was like the range was between high single and low teens. I think it's obviously, we're seeing what has happened with inventories. So number one, can you help us with -- it seems that you -- and Luis, you mentioned for the U.S., inventory levels have been normalized. So how should we be thinking from a volume standpoint that breakdown? And I know you don't like to give that, but I think it's important given what's happening to your stock and what's happening to that to think about what is the FX impact on your top line to clarify that this is a FX-neutral component. And if that's the case, what is -- what do you expect to do in terms of like pricing as we go forward? And how much pricing would be the component?
And if I may, I'm sorry to ask two questions, but on the margin side, you mentioned 200 basis points impact of FX. As we lap, we continue -- we will continue to have that. But you also have the geo mix effect that is negative. As we go into having the U.S. shipments more normalized, should we expect that negative mix effect to normalize as we go through the quarters?
Yes, Andrea, let me take the first part of the first question, and then the second question after I turn it over to Luis. Regarding high single-digit net sales value growth for the full year on a consolidated basis, yes, you are right, it is on an FX-neutral basis or constant currency basis. So we would like to reconfirm that. And with regards to distributor U.S. inventory levels, I'll hand it over to Luis to comment.
Yes, we -- thank you, Andrea. In the U.S., what we're seeing with distributors' inventories are normal. We ended the year with 60 days inventories, and we are remaining at that same level. So we're confident that we're maintaining good numbers in terms of inventory levels at the trade.
And just to clarify, a point of clarification, the low double digits -- low teens before was also FX-neutral. So you removed the top of the range, and why was that? What led you to be below plan? Or what has -- what was the change that maybe reduced guide at the high end?
Yes, Andrea, we want to go with high single digit based on first quarter performance. And we just want to be cautious on the performance for the rest of the year. We think we can deliver high single digit on an FX-neutral basis,, knowing what we already know about the first quarter. So that's the guidance going forward.
And we need to answer your margin question.
Yes, please.
Yes. Regarding margins, yes, you're right. We attribute 2% of the gross margin decrease to FX impact. And yes, to the degree that we see a pickup in the U.S. activity, the U.S. performance, we would expect to have a geographical mix benefit in the gross margins.
Our next question comes from Fernando Olvera of Bank of America.
My first question is related to distribution expenses. I mean can you elaborate more on the decline on these expenses? And how should we think about this line in coming quarters?
And my second question is about the increase of interest gain. Also if you can give us more color about that, would be very helpful.
Sure, Fernando. Regarding distribution expenses, after many quarters of cost pressure because of the logistics pressure as part of the pandemic, we finally have seen more distribution costs in line or under control. They do vary quarter by quarter based on the different volume that we have. But we have seen, as commented in the scripted remarks, lower freight and logistics costs in the year-to-date. That's on distribution expense. In -- with regards to interest gains, do you actually mean the change in interest expense instead of the gain?
Yes, interest income that, I mean, in previous quarter, it was around MXN 40 million that you've taken. Now it's about around MXN 120 million...
Yes, what we have there is you have financing results netted out, which are comprised of 3 elements, as you all know: interest income, interest expense and FX gain or loss. We do have more interest expense because we -- remember that we are carrying more financial debt versus a year or 2 years ago. And in terms of FX gain, we actually booked this quarter an FX gain, because remember that we have a net U.S. dollar passive position. So when the Mexican peso appreciates, we book again. So you see the net result in the release, but that's -- the 3 effects that are going on there. It's primarily affect or benefited from an FX gain from the appreciation of the Mexican peso year-on-year in the first quarter. I hope that helps.
My question was more related to the interest income that, I mean, in previous quarters, it was very low. Right now, this quarter jumped to MXN 113 million.
Yes. That phenomenon is just a reflection of higher rates. Remember that for a long time, we had near 0 rates on excess cash, and now we're seeing somewhat of a yield pickup. So that's just the interest gain on excess cash that the company has on the balance sheet, reflecting increased rates overall.
Our next question comes from Antonio Hernández from Barclays.
My question is regarding the Jose Cuervo brand. How much of that price/mix contribution from this brand in the first quarter impacted by higher selling in Mexico because of the glass supply catch-up? How much of this impacted lower price/mix reported in the first quarter, and whether this should normalize going forward?
Thank you, Antonio. In the case of not only Cuervo, but there a significant difference because we took a price increase in the U.S. in January. And remember, last year, the price increase was executed in May. Normally, when you take a price increase, there like 2 months before where you have some excess orders coming from distributors. So those orders came last year in March and April. And when you compare that to this year's March, the significant difference is there. So it's not a problem on depletions. If you see the numbers in Nielsen, we're gaining share. So it's more a reflection of the timing of the off-cycle price increase that we just took in January of this year.
And just...
For Mexico, did you ask a question about the supply chain, right, for Mexico?
Yes, how much of this normalization of glass supply chain should impact price mix going forward in Mexico?
Well, right now, our supplying issues have been normalizing. We are still not out of the woods yet, but we don't think there should be a very big impact on our portfolio performance due to supply chain this year because of this normalizing we're talking about. But we still need to have more certainty. And so we're not out of the woods yet. But I would say that right now, our performance has not been really impacted by supply as of the first quarter. Thank you.
Our next question comes from Lucas Mussi of Morgan Stanley.
So my first question is regarding the gross margin. I just wanted to know how many of those 2 percentage points was related to translation-only effects? And how much or if there was any related to a result or cash flow basis due to FX transactions? And how much -- did it also -- that also translate directly to the EBIT margin? Or was it somewhat different because of SG&A differences?
And my second question is related to the U.S. I just wanted to explore a little bit more recent trends. I get the comment that on March, the base of comparison was tougher because of the different timing regarding price increases. But I just wanted to know what are you guys seeing in April in terms of both depletions and distributors' feedback, anything related to the brand overall equity that you guys are seeing on the margin.
Yes, let me take the first one. All right, so regarding gross margin, the 2% that we see the erosion that we attribute to FX, that is all basically FX translation. It's not a cash effect. Any cash effect would be reflected below EBITDA. So it's all translation effect. And as to the second question, Luis is going to comment.
Yes, as we mentioned before, the price increase, there's a significant difference on the way we took price increases this year compared to last year. And what we have heard from our distributors, the numbers that we are seeing in April, it's still a comparison. It's -- remember what happened in last year, we took a price increase in March. So we still have some orders that came in April of last year. But we believe that after May, we're going to be normalizing in terms of depletions and shipments because the effect of the price increase in May, we believe, that throughout the remaining 9 months of the year, we will be normalized. And I'll pass this to , our VP of Commercial Strategy, to see if he has some additional comments from our distributor network.
No. No. Thank you, Luis. I think you articulated it very well. We're experiencing normal market behavior when we offer price structures. So as we get into May and June, as you stated, we'll see the normalization in the business. Our distributor network is very confident, and we speak to them on a regular basis. This normalization, we'll start to see right away, and that Q2 business is projected to be in a very good place as we end the quarter.
This was our final question for today. Thank you everyone that has joined and asked questions. That concludes the call. Thank you, and have a nice day.
Thank you.