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 fourth 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, targets, 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. Thank you. [Operator Instructions]
You may now begin your conference.
Good morning, everyone. I am Mariana Rojo, Corporate Treasurer and Investor Relations Officer. Thank you for joining us to discuss the unaudited financial results for the fourth quarter and fiscal year ended December 31, 2018, of Becle, commercially known as Jose Cuervo.
I am joined today by Mr. Juan Domingo Beckmann, Chief Executive Officer; Michael Keyes, President and CEO of Proximo Spirits; Steve Shanley, Senior VP of Commercial Strategy for Proximo Spirits; Luis Felix, Managing Director of Mexico and LATAM; Gordon Dron, Managing Director of EMEA and APAC regions; and Fernando Suárez, 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 and published in the Mexican Stock Exchange. The information for the fourth 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 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 fourth quarter results.
I will make some opening comments, and then I will ask Steve Shanley to update you on the U.S. and Canada business units. Luis Felix will review our Mexico and LATAM results, and Gordon Dron will discuss our results in the EMEA and APAC regions. Fernando Suárez will then walk you through our financial results.
First, let me begin by welcoming Michael Keyes, who joined the company as President and CEO of Proximo Spirits this month. Michael has over 3 decades of experience in the spirits industry, including senior management positions in sales, marketing and commercial leadership. We are very pleased that Mike has joined us to lead the continued growth of Proximo and be our partner as we further build our global spirits business.
During the fourth quarter, we generated 14% volume growth, and net sales increased 23%. We continued to see strong performance across our spirits portfolio; and continued double-digit growth of tequila, again led by our super premium tequilas. The global consumer demand for super premium tequila remained strong. While this growth continues to create pressure on the entire industry supply chain and has led to higher sourcing costs for agave, Becle is uniquely positioned as an industry leader with significant sourcing capabilities. I remain confident that we have the resources and expertise to manage these near-term cost challenges.
During 2018, we generated 4% volume growth, while net sales increased 8%, in line with our stated guidance. We successfully integrated our acquisition of Pendleton Whisky brands, which has delivered strong growth since the purchase.
As we entered 2019, we remained focused on building a leading global spirits business. We look forward to further growth and continue to have significant capital to execute our growth strategy.
It is now my pleasure to present Mike Keyes for a brief introduction.
Thank you, Juan, and good morning, everybody. It's my pleasure to be with you on this call today. As you know, I joined the company about a month ago. And I've been working closely with the management team to review our U.S. and Canada businesses to better understand and refine our plans for the future. Proximo is well positioned for growth with strong brands in the industry's most desirable and profitable distilled spirit market. In particular, Proximo is a market leader in the high-growth categories of tequila and Irish whiskey, and we're increasing our participation in the hot North American whiskey category. Over the coming months and years, we expect to drive significant growth by expanding our market share in both the United States and in Canada.
I am very excited and pleased about my new role, and I look forward to sharing our strategies and successes with you on future calls.
I'll now turn the call over to Steve Shanley to review Proximo's excellent fourth quarter performance in the United States and Canada.
Thank you, Mike, and good morning, everyone. We were pleased with our commercial performance in the U.S. and Canada during the fourth quarter. Consumer takeaway for our brands in the U.S. as measured by Nielsen and NABCA data grew during the quarter by 6% and 7%, respectively. Depletions were up 8%, driven by a double-digit growth in our offerings of premium tequilas. Our most recent acquisition Pendleton Whisky continues to drive our whiskey portfolio, which saw a depletion growth of 27% for the quarter and 18% for the year. Pendleton itself recorded double-digit depletion growth during both the fourth quarter and the full year as we continue to gain distribution nationally.
Our ready-to-drink margarita category continue to gain traction and once again recorded 10% quarterly depletion growth, finishing the year with depletions up 8%.
Strong consumer takeaway and depletion growth during the quarter reinforced the trends that we have seen since the second quarter of 2018. We recognized 22% growth in shipments for the quarter compared to the prior year, which resulted in 1.4% shipments growth for the full year. In order to optimize our use of agave, we reduced distributor inventory at year-end by roughly 325,000 cases or 10 days.
Net sales value in the U.S. and Canada was up 31% in the fourth quarter and 6% for the full year, driven by volume growth and improved mix of products and a continuation of our premiumization strategy. And key expense in the U.S., which we view as an investment in our brands, was up slightly in relation to depletions. Depletions for the quarter were up 8%, while depletions for the year were up 5%, all adjusted to remove the effects of the Pendleton acquisition.
In conclusion, we remain pleased with the trends in the U.S. and Canada business and the consistent depletion growth we have experienced since the second quarter of 2018.
I will now turn over the call to Luis Felix to discuss the Mexico and Latin America results.
Thank you, and good morning, everyone. During the fourth quarter, we generated 1.5% volume growth in Mexico, with depletions modestly higher than the prior year. While our net sales show an increase of 2.1% on a pro forma IFRS 15 basis, we continue to see strong performance of our super premium tequila during the quarter with a year-on-year growth of high double digits. We gave priority to supply of some of the most profitable tequilas as the quarter progressed, which impacted our completions in the low-price tequila segment that helped support our more premium mix and optimized our agave supply.
We had another good quarter with B:oost. Selling was in line with our expectations and grew in high single digit when compared to the fourth quarter of 2017.
I am very pleased with our performance in Mexico during 2018. For the year, we generated 6.1% volume growth, and net sales increased 12.6% on a pro forma IFRS 15 basis.
Cuervo continues to drive the growth and the premiumization of the tequila category in Mexico. While the tequila market grew 1.4% in volume and 14.6% in value, over the same period, Cuervo grew 8.7% in volume and 19.6% in value. As a result, we increased market share in both tequila and all spirits during the year.
We continue to look at pricing as a mechanism to partially offset rising agave cost.
In Latin America, we generated 22% year-over-year growth during the fourth quarter, benefiting from a low base in the prior year period. We continue to see good trends in Colombia and seeing some stability in Brazil.
Now I will turn the call over to Gordon Dron, Managing Director of our EMEA and APAC regions.
Thank you, Luis. Good afternoon from Europe. The EMEA and APAC region had a strong fourth quarter and a positive full year performance. Fourth quarter depletions registered positive single-digit growth versus the prior year, and on a full year basis, depletions increased in the high single digits.
Shipments for the full year pleasingly showed good growth on all core brands, ending the year with high single-digit growth versus last year. Full year value grew significantly ahead of volume, reinforcing our premiumization and pricing strategies as well as the benefits accrued from our direct businesses in the end market companies and in global travel retail. Pleasingly, this growth has spread across the whole portfolio, with the lowest-value growth brands being still in high single digits.
Looking at the regions. APAC delivered strong volume growth in Q4 driven by China, Korea as well as more steady growth in Japan. Our new Australian subsidiary has had an exceptional first full year of trading. Overall, EMEA delivered very strong value growth reflecting price improvement and premiumization. In summary, despite some challenges, particularly in the emerging markets, we delivered good growth and met our expectations for the full year.
I will now turn the call over to Fernando Suárez to review our financial results.
Thank you, and good morning, everyone. Let me walk you through the fourth quarter financial results.
During the fourth quarter, the company reported 23.1% net sales increase to MXN 10.3 billion. Growth was driven by a 30.6% net sales increase in the U.S. and Canada and 47.9% net sales growth in Rest of World, while net sales in Mexico increased 2.1% on a pro forma IFRS 15 basis. The net sales increase exceeded volume growth, reflecting continued favorable sales mix and the premiumization trends that we are seeing across the markets.
Total volume increased 13.8% during the fourth quarter, including 22% growth in the U.S. and Canada, 1.5% in Mexico and 22.4% in Rest of World.
During the fourth quarter, gross profits increased 18.9% to MXN 5.8 billion. Gross margin decreased 200 basis points to 56.4%, when compared to the prior year, while improving from 52.5% quarter-over-quarter. As we have discussed, the industry has been growing the super premium tequila category well above expectations, driving challenges on sourcing and raw materials. As a consequence of the shortage of agave, gross margin was impacted by both increases in third-party agave costs and its effects on production efficiencies. We expect these cost pressures to continue in the short term.
AMP expenses as a percentage of net sales were 24.6% during the fourth quarter compared to 21.9% in the fourth quarter of 2017. This increase reflects the planned timing of AMP spend relative to the prior year period and the accelerated volume growth achieved during the fourth quarter. SG&A expenses decreased 1.7% during the fourth quarter, representing 7.2% of net sales.
Operating profit increased 6.4% to MXN 2.1 billion, while operating margin was 20.1%, primarily reflecting higher third-party agave supply costs and increased AMP.
EBITDA increased 8.1% to MXN 2.2 billion or 21.7% of net sales.
Net financial results this quarter were favorable MXN 350 million, mainly reflecting the noncash impact of quarter-to-quarter Mexican peso exchange rate depreciation on cash on hand held in U.S. dollars.
Fourth quarter consolidated net income decreased MXN 1.9 billion -- decreased to MXN 1.9 billion or MXN 0.54 per share.
As of December 31, 2018, net cash was MXN 2.2 billion, resulting from cash and cash equivalents of MXN 12 billion and total debt of MXN 9.8 billion. We maintain a strong balance sheet with low leverage and good financial flexibility.
For the full year, the company's return on invested capital or ROIC was 14%, well above our cost of capital.
Looking into 2019 and guidance, we expect to achieve a volume year-on-year growth in the mid-single-digit order of magnitude.
Now operator, if we can open up for questions and answers.
[Operator Instructions] We have a question from the line of Antonio Hernández with Barclays.
I'm not getting a response, so we'll go to the next question. The next question comes from Miguel Tortolero with GBM.
[indiscernible]. So could you give a bit more color on this matter? And if we should expect a reversion going forward? And also, in the U.S., could you give a little bit more color on what the growth -- volume growth, would have been if we excluded the Pendleton acquisition?
Miguel, can you repeat the question, as got cut off in the first part of your question, please?
Yes. The first one is regarding working capital. The cash flow we saw during the quarter was explained by a negative change in working capital, so my question is, first, if you can elaborate a bit more on this increase in receivables? And if we should expect a reversion going forward?
Okay, I'll take the first question. Regarding working capital for the fourth quarter, it has primarily to do with the cyclicality of the business. As you saw, we had a very strong fourth quarter with strong shipments and volume. So it's primarily working capital cyclicality related. And now to your second question regarding -- can you repeat your second question?
Yes, the U.S. -- yes. Could you give a bit more color of what the volume growth in the U.S. would have been if we excluded the Pendleton acquisition?
Yes, sure, yes. The...
Maybe Steve can answer that.
Yes. Thank you, Juan. The volume growth from a shipment basis has have been relatively flat if we took out the Pendleton volume for 2018. But the depletion growth, as I said in the past, is really what we look at. And the depletion growth that was quoted, which was a 5% depletion growth for the year, would include Pendleton for the full year against the previous depletions for Pendleton. So the depletion growth includes Pendleton. The volume growth does not. And it would have been roughly flat, not 1.4%, if you took the Pendleton volume out.
Okay, perfect. Just a quick follow-up. Is it fair to assume that going forward we shouldn't expect any relevant impact in terms of volumes due to the mismatch between shipments and depletions?
I think we're through a majority of that. Obviously, in the U.S. the fourth quarter always will outpace depletions from a shipment standpoint. And then there will be some giveback in the first quarter, if you just look at the gross numbers. But from a percentage standpoint, we expect them to line up pretty well going forward.
Your next question comes from the line of Ben Theurer with Barclays.
Can you hear me?
Yes.
Okay, perfect. Technology, not the easiest part of this. So actually 2 questions. So question number one, clearly a very strong finish in the U.S. in terms of volume and so on, 12 million unit cases and still below the level of 2016. So my question would be, looking into 2019 and a little bit of -- if you could share your outlook where you see potential to further grow. Obviously, Pendleton should be an important one, but I guess that's also a question for Mike from a strategic point of view. What do you want to do different in 2019 in the U.S. business compared to what's been done in the past to actually get maybe volume growth more to, let's say, aligned with other regions in the mid-single digit instead of the low single digit? So that would be more like the strategic question in that. What are your planned initiative to get mid-single-digit volume growth in the U.S., Canada business? That will be my first question.
Yes. Thank you. I think the first impression I had coming to Proximo is the quality of the people that I've met and the quality of the brands that we represent. And I think, by focusing on our premium brands, premiumizing our portfolio with regard to our tequila portfolio, also our whiskey portfolio right now, there is a lot of opportunity. And I think just focus and just really looking at some of these high-growth areas that we are participating in.
Okay, perfect. And then my second question is, can you elaborate a little bit of the changes? And I guess it's more of a how you have to account for it, but the SG&A expense, obviously as a percentage of sales, came down significantly on a year-over-year basis. Is that more to do because some of the expenses have to be now basically all net off on revenues? Or what's behind that? Just to understand a little bit the dynamics here and also to know what we should consider going forward in terms of the -- like a normalized level on the SG&A side. And as well on the advertising side, what do you plan to invest in terms of advertising looking into 2019? Similar levels? Do you want to save a little bit? So what's the strategy on SG&A and advertising?
Yes, Ben. This is Fernando. On SG&A, no accounting changes. It's simply cost control in the fourth quarter with a very solid volume and sales growth. So as percentage-wise, SG&A also looks good, in addition to on an absolute basis. And regarding AMP expense, going forward, we should be something very similar to this year. You should expect no surprises there.
Your next question comes from the line of Luis Miranda with Santander.
I have a couple of questions with regards to the EBITDA margin. The first one is, Fernando, you mentioned the sequential recovery in margin. And I understand that part of that is driven by the mix in the fourth quarter and the seasonality. Is there a way to give some color of how much of the margin expansion is driven by the sales and mix toward Other Spirits? And the second question is regarding with the price of agave. You mentioned that the pressure will continue in the short term. However -- if you could give us some color about if you have seen stable prices on the spot market or you continue to see increased pressure in the upside? And if there has been any evolution that you could disclose regarding the initiatives to lock some long-term contracts.
Of course, Luis, to your first question on margins, what we have there is -- we saw relatively stable costs in terms of agave-related costs, not just agave per se, but also other supply chain costs. And that's what we observed in the fourth quarter on a quarter-to-quarter basis. And as to your second question on agave spot prices, we are really not in a position to give any forward-looking comment in that sense. We do not want to represent where agave prices are going. What we can tell you is that we're diligently working in our integration process and advancing in that sense. That's the comment that we will be in a position to give. We are being very careful on what we say regarding agave prices and our third-party agave purchases because, as you can understand, for competitive reasons, this is very sensible (sic) [ sensitive ] market information.
Yes, perfect. That's fair enough. And on -- just my follow-on question is with regard to prices. Are you seeing any room or opportunities to increase prices in tequila either in Mexico, I believe the U.S. might not be the case, but in Mexico?
This is Juan Domingo. Maybe, Luis Felix, you can explain, but yes, we increased prices this year -- 2018, and we are planning to increase prices 2019. We cannot tell you exactly the -- how much, but yes, in Mexico we do see an opportunity to increase price.
Yes. This is Luis Felix. And yes, and last year, in 2018, we took some -- 2 price increases, one in February, the other one in October. And we still see some room for some tequila brands that we can take another price increase in this year. So we are very active, and we see that, that will be an opportunity.
We have a question from Andrea Teixeira with JPMorgan.
So I wanted to -- first of all, congratulate on the new format to this call and the press release as well. And now on to the business, I have 2 questions. One is the level of the gross margin you saw in the fourth quarter, which is about 56%. So is that a good proxy you're looking forward? As Fernando was saying, obviously the pressures from agave will linger. And if you can add specifically on the integration and the sourcing as well as the transportation costs that you're seeing, probably more intense towards the back end of 2018. And on the second question, if I can just -- a clarification on the comment on a previous question about the shipments against depletions in the first quarter. So obviously it's natural that you're building to -- into the shipments for the fourth quarter, but do you expect lower shipments now in the first quarter from a seasonal perspective? Because I just want to layer the commentary about the wholesale inventories, that you said it was reduced, I believe, by 10 days. I just want to kind of circle back to those 2 comments and see how we should be thinking into the first quarter.
As to your first question, Andrea, on fourth quarter margins, yes, we did observe a quarter-over-quarter gross margin improvement of almost 400 basis points. Going forward, we are not giving any profit guidance, so we're not able to answer if the fourth quarter profitability is a good proxy going forward. So that's what we consider at this stage. And regarding the second question, maybe Steve, do you want to comment on shipments in the first quarter as it pertains to the U.S.?
Yes, sure. Andrea, I -- my comment was more about the gross number. So we would expect the percentage increase on the shipment number off of a lower base to actually be higher than our depletion percentage growth for the first quarter, so because of those cases that we took out of inventory.
Thank you. I will now turn the call over to Juan Domingo Beckmann, CEO, for closing remarks.
I would like to thank you again for your continued interest in Becle, Cuervo. We remain extremely confident in our family of brands and our prospects for the long-term growth. Have a great day.
Thank you for participating in today's conference call. You may now disconnect.