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 Third Quarter Earnings Conference Call.
Before we begin, I would like to remind you that 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, goal, 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 based 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 will pass the call on to Mr. Luis Carlos de Pablo, Becle's Corporate Finance Director.
[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 third quarter ended September 30, 2018.
I am Luis Carlos de Pablo, and I'm joined today by Juan Domingo Beckmann, Chief Executive Officer; Luis Felix, Managing Director of Mexico and LatAm; Stephen Shanley, Senior VP of Commercial Strategy for Proximo; Gordon Dron, Managing Director of EMEA and APAC; Fernanda Suarez Gerard, Chief Financial Officer; and Michael Cheek.
Before we begin, I would like to remind you that the figures discussed on 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 third 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.
[Operator Instructions]
Now I will pass the call to Mr. Juan Domingo Beckmann, CEO of Becle.
Good morning. Thank you for joining us today to discuss Becle's third quarter results. I will make some opening comments, and then I will ask Mr. Felix to review our Mexico and LatAm results. Steve Shanley will update you on the U.S. and Canada, and Gordon Dron will discuss our results on EMEA and APAC regions. Fernando Suarez, who joined Becle earlier this month as Chief Financial Officer, will then walk you through our financial results.
First, let me begin by welcoming our CFO, Fernando Suarez, to the company. Fernando brings a wealth of experience as a public company CFO along with strong financial background and cost discipline to Becle. And I am sure he will be a good communication channel with the investor and analyst community.
Secondly, I would like to provide a quick industry overview as it pertains to tequila category. For the past few years, we have experienced a successful development of the tequila category worldwide. Our speed went beyond our expectations. Specifically, the 100% agave tequila segment is growing rapidly and much faster than the traditional tequila segment. This is an industry-wide phenomenon. And now players are facing challenges in sourcing agave at the pace of demand. This unanticipated growth is generating some sourcing and cost pressures in our operations and in our competitors' operations. That will be discussed by Fernando and the team later.
Our integrated business model remains a key focus and we believe is a competitive advantage for Becle. However, our integration efforts have encountered challenges and delays, driven by the rapid industry-wide growth of 100% agave tequila, which requires roughly double the amount of agave sugars as regular tequila. As an industry, we have been forced to take extraordinary steps to meet demand for our products, and the price of agave has increased accordingly. The cost pressures are compressing margins on all industry players. To address the situation and further strengthen our position going forward, we have: one, executed medium-term third-party sourcing agreements at preestablished prices and continued to develop our distillery capabilities for the future.
In terms of our third tequila distillery project, although delayed for over a year for various reasons, we continue to advance with the business case and we have been negotiating terms and conditions, specifically regarding real estate. The third tequila distillery is key to our long-term growth prospects, and we will work diligently in assuring we get the right cost for it. We expect to give you a better picture very shortly.
Our long-term perspective on agave supply remains positive, and we are proactively working with the industrial and agricultural solutions to secure sufficient supply at reasonable cost. We continue planting our agave leaves for the medium and long term. Industry members with reliable access to agave at efficient prices will be the revision of a potential shakeout of the tequila business, and I am very confident that our company is well positioned to face these challenges.
Now let me turn to the third quarter results. We had a strong top line quarter, generating growth across each of our geographic regions and across our portfolio. We reported 11% net sales growth and 8% volume growth, with strong depletion trends across most of the regions. The premiumization trends that are favorably impacting our business mix and growth continues globally and across our portfolio. We also see healthy business signals with the patient strategy that's in our markets and remain well positioned in each of our categories.
I will now turn the call over to Mr. Felix to discuss our performance in Mexico.
Thank you, and good morning, everyone. We had another excellent quarter in Mexico with 24% net sales growth and 15% volume growth. Depletion trends remained strong as well. The strong growth in net sales value continues to reflect the premiumization trends we're seeing in the tequila category, and to a lesser extent, higher pricing.
During the third quarter, we announced an additional price increase of 3% to 4% that took effect in mid-September. The volume growth also reflects the stronger wholesaler shipments in August and September ahead of this price increase. Tequila was again a strong performer during the quarter, up approximately 18% in volume compared to a category growth of 2% in terms of Nielsen and ISCA. The growth was led by super-premium brands, further strengthening our premium tequila leadership.
I am pleased to announce the launch of Jose Cuervo Tradicional Cristalino. This new addition to the Cristalino category is very promising. Priced 15% to 20% below Maestro Dobel, we will be able to capture an incremental market opportunity, expanding the category and our market share. Tradicional Cristalino was introduced to the trade in September and began shipping in October.
We have now cycled the initial distribution of B:oost through Jumex last year, and we're seeing strong performance of the brand. B:oost generated 13% growth during the third quarter.
And turning briefly to Latin America, our third quarter volumes were down year-over-year. The decline was due to the timing of shipments to Brazil as well as inflation and political risk in that market. Approximately 1/3 of the shipments decline were due to timing, so we anticipate fourth quarter shipments will -- that will normalize.
In summary, we had a strong third quarter, and we entered the seasonally strong fourth quarter in a good position for continued growth. As planned during the third quarter, our AMP investment increased with hire ad spending to support our tequila brands ahead of the peak season.
Let me now turn the call over to Steve Shanley to discuss our U.S. and Canada business.
Thank you, Luis, and good morning, everyone.
We were pleased with our commercial trends in the U.S. and Canada during the third quarter. Consumer takeaway, as measured by Nielsen and NABCA data, grew during the quarter, and depletions were up 5%. Importantly, we have now experienced 2 consecutive quarters of 5% depletion growth in both our tequila category and our newly acquired Pendleton Whisky brand are driving a significant portion of the growth.
Additionally, Nielsen performance is outpacing the industry, driving market share gains for Proximo. Depletions in the U.S. and Canada were driven by double-digit growth in our premium offerings of 100% agave tequilas. Our most recent acquisition, Pendleton Whiskey, continues to drive our whiskey portfolio, which is up 10% year-to-date through September. Pendleton reported double-digit depletion growth during the third quarter as we continue to gain distribution nationally.
Our margarita ready-to-drink category continued to drive traction -- gaining traction and recorded 10% depletion growth during the quarter as we continue to see the success in some recent flavor innovation.
In vodka, our rosé-flavored vodkas under both the Three Olives and Hangar 1 brands performed well, helping to offset some of the SKU rationalization still taking place in the very competitive flavored vodka segment.
Consistent with a strong takeaway and the depletion growth, we recorded 5% growth in shipments for the quarter compared to the prior year. Net sales value per case grew within each category, reflecting the continued trends toward premiumization of our brand portfolio. However, positive trends in the overall net sales value per case were obscured by a strong summer performance in margarita ready-to-drink and Margarita Mix during the quarter. We continue to focus on net sales value growth per case with both improved brand mix and improved size mix within each of the brands.
In sum, we remain pleased with the trends in the U.S. and Canada and the consistent depletion growth we have experienced over the last 2 quarters.
I will now turn the call over to Gordon Dron, Managing Director of our EMEA and APAC regions.
Thank you, Steve, and good afternoon from Europe. The EMEA and APAC regions continued to perform well. Year-to-date, depletions were up in single-digit range with 8% growth during the third quarter. After a slower second quarter for shipments, third quarter shipments growth was positive compared to the prior year.
By region, depletions remained strong in APAC, driven by Korea, China and Japan. While in EMEA, they are running a little slower due to our tighter controls to eliminate churn shipments. We also continue to see growth among our premium portfolio, driving higher net sales value per case on a local currency basis.
Kraken remains the strongest performer during the third quarter, delivering strong double-digit growth across the region, as the Cuervo brand shipments are running slightly behind last year at the end of Q3. This is driven by our decision to limit shipments to markets where the goods were found to be moving externally as well as distribution challenges and some deliberate destocking in the Philippines. That said, we are confident in our ability to deliver our full year targets.
Turning to Bushmills. We continue to see positive trends with mid-single-digit growth in depletions. Despite lower volumes in Russia, our brand health remains strong across the markets. We are seeing excellent performance for the brand in Poland and Bulgaria where we've recently launched a new platform titled more low, more character, a different black. Black Bush depletion results are exceeding expectations year-on-year in what is a flat whiskey market.
Moving to APAC. Our business continues to experience rapid growth in South Korea. We're also seeing strong growth in China, partly due to our broader distribution from our distributor, but also increasing consumer takeaway.
In summary, we are confident with our outlook for the remainder of the year, and we are satisfied with our year-to-date performance.
I will now turn the call over to Fernando Suarez to review the financial results.
Thank you, and good morning, everyone.
Let me begin by saying that I am excited to be part of the Becle team and look forward to meeting and speaking with all of you in the near future as we build and open and clear communication channel with The Street based on transparency and fair disclosure.
Let me walk you through the third quarter financial results. During the third quarter, the company recorded an 11.1% net sales increase to MXN 6.4 billion. Growth was driven by a 23.7% net sales increase in Mexico and 8.9% net sales increase in the U.S. and Canada and 1.2% growth in the rest of the world. Net sales growth benefited from favorable sales mix across all regions, partially offset by unfavorable foreign currency effects.
Total shipment volume increased 8.1% during the third quarter, including 15% growth in Mexico, 4.6% growth in the U.S. and Canada and 6.3% growth in the rest of the world.
During the third quarter of 2018, gross profit was MXN 3.4 billion. As a percentage of net sales, the gross margin decreased 460 basis points to 52.5%. As mentioned earlier in the sector remarks, the industry has been growing 100% agave tequila segment well above expectations, driving challenges on sourcing and raw materials. The negative impact in gross margin was mainly derived from lower production efficiencies and increases in third-party supply costs. These effects were due to higher demand of 100% agave tequila along both in Mexico and worldwide, with the industry-wide sourcing of younger agave plants that are less efficient in terms of yields than mature plants, affecting our distilling efficiency.
As the company anticipated in our previous earnings call, we will continue to see this cost pressure at least for the next calendar year, but are proactively working on initiatives to mitigate this impact, as mentioned earlier by Juan Domingo.
AMP as a percentage of net sales was 23.5% during the third quarter compared to 22% in the third quarter of last year. This increase in AMP was due to the depletions acceleration in line with our full year plan.
SG&A increased 18.1% during the third quarter, representing 11% of net sales. This increase in SG&A is mainly explained by FX. Another important part of this impact was related to the new Signature division launched this year in the U.S.
Distribution expenses as a percentage of sales increased 160 basis points to 4.8%. This line was impacted by higher fuel expenses and increased route costs. Operating profit decreased to MXN 863 million or 13.5% of net sales. And EBITDA decreased to MXN 1 billion or 15.4% of net sales.
Net comprehensive financing results this quarter was unfavorable MXN 325 million, mainly reflecting the noncash impact of quarter-to-quarter Mexican peso exchange rate appreciation on cash on hand held in U.S. dollars.
Third quarter consolidated net income decreased to MXN 381 million or MXN 0.11 per share. The company's cash balance as of September 30 was MXN 12.1 billion. This compares to a total debt of MXN 9.5 billion, hence holding a negative net debt position or positive net cash. We have a strong financial position, fortress balance sheet approach, low leverage with significant financial flexibility to respond to market challenges and opportunities.
Looking into the fourth quarter, as we observe healthy category segments and volume trends, we are in a position to confirm guidance of mid-single-digit growth in terms of full year volume.
Now I would like to turn the call back over to Juan Domingo for his closing remarks before Q&A.
Thank you, Fernando and team. Before we open it up to Q&A, let me update you with a few key matters. As you can understand, we are not comfortable disclosing our level of agave integration for competitive reasons, as this can affect the price of agave. However, we can comment that we are proactively working on increasing such level of integration. That should help us to offset cost pressures and ultimately return to margin stabilization.
In the interim, we are working on securing all necessary additional supply. Furthermore, I would like to mention that our search of Proximo CEO is on schedule. I want to thank you for your interest in Becle, and I will now turn the call back over to the operator to begin the question-and-answer session.
[Operator Instructions] And your first question comes from the line of Andrea Teixeira of JPMorgan.
So I wanted to just follow up on depletions and understand a little bit about the dynamics in Mexico in particular, and then the other regions, understand the issues [ Technical Difficulty ] Sorry. I'm just going to repeat the question, because there was some technical issues. But in terms of like the depletions into the fourth quarter, I understand that there were some issues in -- some increased inventory levels probably in Mexico, and just to see if you are on track to the initial guidance of growing up volumes in the low single digits for the year, which is the global average.
Yes. In Mexico as of September, we have healthy inventories. In fact, we have 0.6 months of inventory in the modern trade, which is lower than what we had last year, which was 0.8. And we have 1.6 months of inventory in the wholesaler channel, which is just 0.2% more than what we had last year. So we're starting the peak season with healthy levels of inventory and with strong -- the last 2 months, we have encouraging depletions in both channels. So we are basically in line to -- we have all the orders in place for the peak season. So we don't expect to miss anything that we will be supplying in Mexico. So we're in good shape.
I'll address the U.S. and Canada. Yes, as I've said before, the true trend of the business is really measured by depletions, right? So -- which we've had 2 straight quarters of 5% growth. You combine with the Nielsen trends, which show us as one of the leading suppliers in the U.S., we don't expect any deviation from that trend in the fourth quarter.
Okay. So you think you're shipping through consumption now roughly?
Yes. As you can see, in the third quarter, our consumer takeaway, our depletions and our shipments pretty much lined up, and we expect that correlation to continue moving forward.
Okay. Yes -- no, just because there are some known track channels that we influence, but I appreciate the color. And if I can ask now in terms of, obviously, agave, which I understand it's an industry practice we've heard throughout that there has been younger agave plants being cut, and that's probably pushing because of the pricing situation. But as you're going through the balance of the quarter, are you tactically -- were you actually, percentage-wise taking more spot plants this quarter specifically? And as you're going to 90% integration, just if you can update investors on how you're tracking, [ Technical Difficulty ], that would be great.
Yes, Andrea, this is Fernando. We have taken spot prices, as you can tell from the results. But however, we continue with our path towards integration. It is somewhat delayed, but we are managing the situation and continue that drive. As you can understand, we're not at the 90% integration levels that were previously expected, but we are on track to mitigate such cost pressures and continue that drive. We're not in a position to -- as explained in the scripted remarks -- to disclose the specific integration level for competitive reasons, because we ourselves will be driving the price of agave affecting it. So that's all we can say at this stage.
I'm just confused, because -- so you're taking down the guidance of 90% integration. That's what you're basically saying?
That's correct, although we're not giving a specific timing on that integration target, as you can understand.
And are you at least backwards looking, how much was the average price of agave in this quarter relative to last year?
It's growing. Last quarter was like MXN 23.50, MXN 24. And now we are seeing people selling it even at MXN 25, MXN 25.50. So it hasn't stopped. And the problem also is that the agave is younger. So the industry is buying agave that is more or less 4.5 years, which gives you much less sugar. So it's like a double hit. You're getting hit with the amount of sugars plus the cost per kilo. So...
And on a year-over-year basis on the third quarter of last year, how much roughly was -- I'm assuming it's about 60% or 70% more expensive, right, per kilo?
Closer to 30%, 35%, Andrea.
Your next question comes from the line of Benjamin Theurer of Barclays.
So wanted to follow-up a little bit on the issues and the demand dynamics, especially around the 100% agave tequila versus the other tequilas. So the question really is -- I mean, this is a trend we've been seeing for a while now, and obviously, it kind of hits in a more severe way now that demand has been very strong in that category. And if we actually take a look at like volume by category you reported, Jose Cuervo was just about 1.7% up on a year-over-year basis. So could you share a little bit like how the 100% agave categories in the U.S. have been growing? And then I have a follow-up on that. That would be my first question.
Steve?
Yes. In the U.S. specifically, the 100% agave is rough about 14% for us, which is pretty consistent with the overall trend if you compare us within Nielsen. So the 14% is a quarter over last year's prior year third quarter, but it's consistent with what we've seen throughout the year. So compared to the overall, which if you look at Nielsen, the overall tequila category is up about 7% or 8%. And obviously, the non-100% agave tequila is growing at a much lower rate towards the low single digits.
Okay. Got you. And then a follow-up on that...
One comment there also for Mexico.
Mexico, the total industry growth is 0.8%. And what we're seeing in 100% agave, it's growing 4.7% -- 5.8% versus last year in volume, and it's growing 18% in value. So it's also growing more than double than the average growth of tequila in Mexico.
Basically, what's growing in Mexico is 100% agave.
Yes. Higher-end categories and so on. Now just following up and coming back, my second question was on the U.S. So you saw that increase in SG&A, which you said was mainly FX, but there was also that Signature division. Could you break down a little bit what's behind that and what you've been working on that? And what's the ultimate goal in terms of promoting the product in the U.S. and potentially still to grow your more premium products in the U.S.?
Can you repeat that question one more time as it relates to Signature?
Yes. Looks like the ultimate -- the strategy of the Signature division, how that is going to impact. And obviously, you've had an impact to cost as of now, but how much do you think it can drive sales, especially more on the premium categories in the U.S?
It's a good question. Number one, we're quite pleased with our Signature group, and we've already seen the results where we're able now to drive additional focus on really some about what I will call our high-potential smaller brands. Those type brands needed a great deal of what I'll call extra care in the early years of their development. So this division is still somewhat new, but we also -- we already see what I will call consistent improved results as a result of having this greater focus on these brands.
Okay. So basically, it's a cost as of now, but it didn't show too much of benefit yet. Is that correct and fair to assume?
No, we're seeing benefit. I mean, it's a cost, because you've got the cost for the organization. It makes up the Signature division. But we'll continue to see improving results as a result of that much tighter focus again on brands. It just needs an awful lot of extra attention in their earlier years of development.
[Operator Instructions] And your next question comes from the line of Luis Miranda of Santander.
I just want to follow up a little bit on the price of agave. And as Luis mentioned in Mexico, we have already seen additional price increases. Do you believe that there's room for additional price increases in the category in the U.S., given that this is an industry issue in terms of cost? And my second question is with regards to this issue with harvesting younger agave. You mentioned this is an industry -- I want to confirm that within your fields, you have also been forced to harvest younger plants than expected?
Regarding price, well, it's difficult to take price in general in the U.S., as you can see. When we took price with Cuervo Especial, we struggled for 1.5 years. But I believe that competitors that are priced below us, they must be having a lot of pressure regarding cost. I guess, that, that's going to start making them take price. We are always analyzing about how to increase price in our portfolio. We even increased price in Mexico in September, which wasn't planned. And so -- and we are also planning in Mexico another price increase early next year. So I believe that there are still opportunities, but we are analyzing. We're analyzing, because the U.S. market is difficult to take price. See, general in 1800 and Especial, we are already price leaders, so -- and they haven't followed us. So regarding agave, yes, we are -- the majority of agave that is being harvested, it's 4.5 years, which makes the sugar content very low. So that's making the whole output of tequila lower than expected per kilo. So -- and we expect that to continue for at least the next -- 2019.
Your next question comes from the line of Miguel Tortolero of GBM.
My question is how farther would you expect this younger agave harvesting to continue in the industry and how this and the delayed integration plans have changed your profitability expectations for the years to come? And also if you could comment a bit more on the market share dynamic you're seeing in the U.S.
Yes, regarding the harvesting of younger agave is that I've mentioned earlier, we expect that to continue at least for 2019. And regarding the duration, again, we are continuing with our inroads towards further integration. But at this stage, we're not comfortable in a position to disclose the levels or the specific milestones, given that we in turn could be driving the price of agave itself. Now regarding market share...
Steve, maybe you can address that one.
Yes, sure. Perhaps the most market share, not only in the last quarter, which is measured by Nielsen in 13 weeks, but in the last half, we've increased market share 1 of 5, if you look at the top 15 suppliers in the U.S., 1 of 5 that actually had positive growth, both during the quarter and over the past 6 months. And aside from Tito's, we're the supplier with the greatest growth. So over that period of time, obviously, we've taken market share with that type of growth. And we feel that, that will continue as we're in some of the best categories to be in. Both tequila and whiskey are growing very strongly, and we feel that our presence there will only grow in the future.
And then your final question will come from the line of Brett Cooper of Consumer Edge Research.
I just hope you can square something for me. This is a business that you're seeing gross margins degrade at 500 basis points. And I just want to understand your view or your perspective on the brand health of your brands, I guess, specifically in the U.S., because typically, when this happens, you'd expect to build up price. And clearly, you're talking about that being difficult. And then, I guess, my second question would be what capacity do you have or thoughts you have on bringing innovation that can help drive mix if pricing is so difficult to come by?
We are doing that. The brands that we are investing more are the super premium ones, which keeps boosting our margin, and those are the ones that are growing more percentage-wise in our portfolio in the U.S. and in Mexico. In Mexico, those brands are much bigger, so the impact is easier to see. In the U.S. they are still smaller, but they are growing double digits, which is helping us offset that cost increase. I don't know if you, Steve, would add something else.
Yes, I think as far as our ability to take price, we took price last year for about $1 on the shelf. We're now probably within $1 to $2 of a number of 100% agave tequilas within the U.S. And we feel that eventually, those tequilas will have to follow us with taking the price increase, creating a little bit more room for us to take Especial up. Obviously, we continue to look at the 100% agave and take price where we can on those premium offerings, but Especial, obviously, makes up a major portion of the total tequila portfolio within the U.S.
We 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.
And you may now disconnect at this time.