Earnings Transcript for BCCLF - Q4 Fiscal Year 2021

Operator: Good morning, ladies and gentlemen 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 the 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 the current expectations and assumptions regarding our business, the economy and the 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 disclose or revise any forward-looking statements, whether as a result of new information, future events or otherwise. So without ado, I'd like to pass the line to Mr. Fernando Suárez, Chief Financial Officer. Mr. Fernando, the floor is yours. Please go ahead.

Fernando Suárez: Good morning, everyone and thank you for joining us to discuss the unaudited financial results for the fourth quarter ended December 31, 2021 of Becle, commercially known as Jose Cuervo. We're joined today by Juan Domingo Beckmann, Chief Executive Officer and the rest of the senior management team. Before we begin, we would like to remind you that these figures discussed on this call were prepared in accordance with International Financial Reporting Standards or IFRS and published in the Mexican stock exchange. The information in the fourth quarter of 2021 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in the appropriate electronic formats. At this time, we would like to remind participants that your lines will in listen-only mode until the question-and-answer session. Now, we'll pass on the call to Becle's CEO, Mr. Juan Domingo Beckmann.

Juan Domingo Beckmann: Good morning. Thank you for joining us today to discuss Becle's fourth quarter and full year 2021 results. I'll make some opening comments and then I'll ask Luis Félix to discuss the performance of our US and Canada business, Olga Limon will be your Mexico and LATAM results and Gordon Dron will discuss our results in the EMEA and APAC results. Fernando Suárez will then walk you through our financial results. We're very pleased with overall results for the fourth quarter and full year 2021 despite of the recent COVID resurface with the Omicron variant affecting the global recovery. For the quarter, Becle delivered a very solid 5.5 year-on-year growth in volume, a 22.4% increase in net sales value, mainly driven by strong performance of premium brands throughout the regions led by our tequila portfolio. 2021 was a challenging year in many ways, given supply chain constraints, lockdowns affecting on premise sales and a top 2020 comparison base for off premise. Despite that for the full year 2021 Becle delivered a very solid 8.8% volume growth and 12% increase in net sales value and gross profit and operating income growth was 16.6% and 3.3% respectively. We're very pleased with this performance despite the challenges. In the US and Canada region, volume was of 10.5% versus the fourth quarter of 2020. The product mix favored premium tequila brands and compared to the fourth quarter of 2020, net sales value of the tequila portfolio was up 39.5%. We faced important supply chain issues in the region where our team did a great job limiting its effects on catching up with production by year end, We remain confident about underlying demand as depletions are holding up versus the strong 2020 numbers. EMEA and APAC solid results this quarter were driven by good on trade sales and tequila performance. Quarterly volume was soft in both regions by 29% and 53.7% respectively. EMEA and APAC had high depletions and despite the APAC region still being under heavy lockdowns, it still posted impressive numbers, even when comparing versus 2019 base. In Mexico, despite volume being down by 10% by prioritizing premium brand sales and increasing pricing the last quarter, net sales value grew by 7.5%. Even though LATAM still faced COVID 19 restrictions and supply constraints, volume and net sales value increased double digits in the quarter and in the full year. Our performance continues to outpace the broader spirits industry, reflecting our attractive portfolio of brands and favorable positioning in key growth categories. We're confident we can continue to deliver premiumization within our portfolio. Looking into 2022, we will be seeking to mitigate the cost pressures for the global supply chain situation by way of increasing price across our markets and our portfolio. I will now turn the call over to Luis Félix to discuss our US and Canada results.

Luis Félix: Thank you Juan Domingo. Good morning, everyone. We are very pleased with our commercial performance in the United States and Canada for the fourth quarter and the full year of 2021. For the 13 weeks ending December 4, 2021 consumer takeaway in the off premise for our brands in the US as measured by Nielsen Data grew over the three month period by 0.3% marginally outpacing the industry which grew 0.2%. This compares to a strong growth during the same period of last year of 21% versus the industry growing at 12%. Given the significant impact of COVID 19 in our 2020 results, we have been looking at our business results versus both prior year and versus a two year stack. Our consumer takeaway for the same period over the two year stack grew 32% outpacing the total distil spirits industry, which grew 21% over the same period. Proximo's wholesaler depletions were up 6% for the quarter lapping the fourth quarter of 2020, where depletions were up 10% when compared to the fourth quarter of 2019 depletions were up 17%. For the full year period, depletions were up 1% versus 2020. Our drop in '20 -- our growth in 2021 lapsed our previous year depletion growth rate of an unprecedented 23% demonstrating the continuous strength of our portfolio and the presence in key categories. Our tequila portfolio was up 13% for the quarter and completed 2021 up 4%, driven by continuous trend of our super premium tequilas, which grew over 19% in the quarter and ended the full year up 19% as well. Our 4% growth in tequila during 2021 was impacted by supply chain constraints for key brands, which had limited class availability for much of the second and third quarter. Our supply chain team's proactive actions dimprove availability in the four quarter and managed to the production gap by year end. These efforts help mitigate potential out of stocks across wholesalers and benefited markets like Canada, which gained market share as a result of effective inventory planning. Our ready to drink margarita category down 1% for the quarter, but ended the year flat versus prior year, lapping an unprecedented growth in 2020, where depletions were up 38% in the fourth quarter and up 48% for the year. Our whiskey portfolio was up 2% during the quarter and up 7% for the full year, also lapping the strong 2020 where depletions were up 19% for the quarter and 18% for 2020. Shipments for the quarter grew 10.5% of the previous year and ended the full year up 3.7%. Net sales value was up 25.8% versus the fourth quarter of 2020 and ended the full year up 4.6% noting that the full year rate reflects headwinds from exchange freight impact of roughly 6.5%. Our food NSP [ph] growth reflects the effects of 2021 price increase across our tequila portfolio and improved performance of our premium tequila bread. The quarter also benefited from improved availability of our brands versus the supply chain constraints that we saw during the second and third quarter. And these allow for a recovery of wholesaler inventories from reduced levels in previous months during the October to December timeframe. We increased AMP span during the fourth quarter, reflecting the higher media and sponsorship spend in our strategic initiatives, including super and ultra-premium tequila brands, as well as our whiskey portfolio. Going forward, we are confident we will be able to execute price action across our portfolio in the US in order to partially offset the inflationary pressures that we are experiencing in our cost structure and margins. I will now turn over the call to Al Galman to discuss the Mexico and Latin America resorts.

Olga Limon: Thank you, Luis and good morning, everyone. I'm happy to be here with you all for my first conference call as a Managing Director of Mexico and LATAM to discuss the results from our region. Although overall volume decreased in Mexico mainly due to industry wide supply chain constraints, net sales value grew 7.5% for the first quarter and 24.4% for 2021. Price increases coupled with a better mix help to achieve these very positive results. Tequila and whiskey performed very well growing net sales value of 16.2% and 38.5% respectively for the quarter led by our premium brands. We continue to generate higher market share in both the tequila category and the spirits industry as a whole on a quarterly and yearly basis as measured by Nielsen and [indiscernible]. This shows our brands are well positioned and well regarded in the market. Depletion levels have also improved. Full year depletions grew double digits across the business with tequila, whiskey and mescal being the fastest growing categories. Moving on to LATAM, we saw a significant increase of 32.5% in volume quarter over quarter and 87.4% year-over-year. This growth was mainly driven by markets such as Columbia, Peru and Chile. COVID 19 restrictions are still in place in some countries such as Brazil and supply chains, constraints continue to affect our industry in the re agent. However, we believe our response was effective in softening the impact, especially the decision to prioritize glass supply for our higher margin brands. Looking forward to the beginning of 2022, we are encouraged by the demand we are seeing for the products that we are focused on, such as tequila and mescal. We will continue making decisions to ensure our brands are readily available for customers across the region and we'll also be taking price actions across our portfolio. I will now turn the call to over Gordon Dron, Managing Director of EMEA and APAC region. Thank you Gordon,

Gordon Dron: Many thanks, Olga and good afternoon still in Europe. EMEA and APAC region reported a very strong fourth quarter with a record performance for the region over the course of 2021. The robust results were delivered across EMEA and Australia in particular as our tequila business performed exceptionally well as a result of the entree resurgence, driven by pipeline refill and the strong consumer demands alongside the continued outstanding retail sales. Europe, which became impacted both in the latter part of Q4 proved to be resilient and in previous quarters due to strong vaccination programs and many governments being more reluctant to close their expenses, as countries adapted to live with COVID. This has all helped to deliver a strong double digit growth in tequila performance both in Q4 and over 2021. This further benefited from our wish rum portfolios performing, delivering high double digit volume and even higher industry growth for the year. EMEA and APAC volume value growth versus 2020 has been driven by dynamic tequila performance while also including RTD development, premiumization and price increases. Looking at EMEA specifically, our depletions had stripped our shipments. Part of this was due to supply data constraints and some due to exceptionally strong November, December depletions. All these factors have resulted in a very strong Q4 fourth quarter performance in EMEA with depletions up 41% versus last year and 20% over 2019. The fourth quarter performance is similar for both volume and value growth, versus both these years. 2021 with slightly less stock [ph] therefore with a positive momentum entering into 2022. Asia Pacific, Australia and China has continued to be [indiscernible] in many markets with whole in the inventory channel with making up such a lasting portion about third party market business in the region being impacted by these restrictions. Despite that backdrop volume and net sales have grown in the high double digits versus '20, indicating that even with such challenges, we continue to focus on value creation and where appropriate have not shy away from participation. Across the EMEA and APAC region, we enter 2022 in a healthy position, a more stable COVID environment and a stronger supply chain to satisfy demand should enable us to continue growing going forward. This will also help us to take pricing actions in our markets and across our portfolio. I'll now hand over the call to Fernando Suárez to take you through our financial results at a consolidated level.

Fernando Suárez: Thank you and good morning, everyone. Let me walk you through the fourth quarter financial results. During the quarter, the company reported a 22.4% increase in consolidated net sales to MXN13.1 billion. This increase reflects the double digit growth in our siqueira [ph] and other tequila categories. For the full year, net sales increased 12.5% to MXN39.4 billion. During the fourth quarter gross profit increased 45% to MXN7.3 billion, while the gross margin increased to 55.5% from 48.3% in the fourth quarter of 2020. For the 2021 full year period, gross margin was 54.0% compared to 52.1% for 2020. The quarterly and full year gross margin increases reflect the stable agave pricing environment, favorable regional mix towards US and Canada and improvement in sales of higher margin premium brands. AMP expenses, as a percentage of net sales increased to 26% from 23.6% in the fourth core of 2020, as a result of our previously communicated catch up of AMP investment opportunities, primarily in the US. On a full year basis AMP was 22% of net sales versus 19.1% in 2020. This reflects resumption with 2020 offering, fewer investment opportunities due to the COVID 19 pandemic. Distribution expenses increased 27% to MXN650 millions when compared to the fourth quarter of 2020, mainly driven by an acceleration in sales and increased freight warehousing and logistic costs arising from the supply chain constraints and challenges. As a percentage of net sales, distribution increased to 5.1% from 4.9% in the fourth quarter of 2020. From a full year perspective, distribution expenses as a percentage of net sales increased to 5.1% from 3.9% in 2020. SG&A expenses increased 11.2% during the fourth quarter, representing 8.5% of net sales compared to 9.4% in the fourth quarter of 2020. This was mainly driven by an increase in sales. On a full year basis, SG&A as a percentage of sales represented 8.9% compared to 9.6% during 2020. Operating income increased 83.9% while the operating margin increased to 16% from 10.6% in the fourth quarter of 2020. For the full year, operating profit increased 3.3% to MXN7.1 billion compared to the prior year. The operating margin decreased to 18.1% from 19.7% in 2024. Fourth quarter EBITDA increased 76.1% year-over-year to MXN2.3 billion with a 17.6% margin. For the full year, EBITDA margin was 20.1% versus 21.7% margin of 2020. Net financial results for the quarter resulted in a gain of MXN138 million, primarily driven by an extraordinary benefit of MXN192 million from debt modification under IFRS9, as a result of our liability management exercise and refinancing during the fourth quarter of last year. For the full year 2021, net financial results were a loss of MXN214 million. Fourth quarter consolidated net income increased 71.5% to MXN1.6 billion and the net margin was 12% compared to 8.6% in the fourth quarter of 2020. For the full year, net margin was 12.8%. Earnings per share were MXN0.44 per share for the quarter and MXN1.40 per share for the full year. As of December 31, 2021, cash and cash equivalence were MXN12.8 billion and total debt was MXN18.5 billion. We maintain a strong balance sheet, extended debt maturity schedule with access to competitive long term financing, conservative financial leverage and ample liquidity to execute our long term growth strategy. Regarding growth guidance for the year, we expect to deliver full year mid single digit underlying volume growth. Regarding our CapEx program, we are continuing with our strategic expansion projects, the most significant of which are our 1800 distillery in tequila [ph] and our aging and warehousing facilities. Our 2022 CapEx guidance is in the MXN250 million. Now I will turn the call back to the operator for questions and answers.

Operator: [Operator instructions] Our first question comes from Mr. Ben Toro [ph] from Barclays. Please go ahead, sir. Your line is open.

Unidentified Analyst: Thank you very much and good morning. Congress on the results. Two questions, question number one. Just wanted to understand a little more, what you've been doing on the pricing side in Mexico and what the implications maybe during the quarter were on volume, because if we look at volume, it was obviously was 10% below last year's level, but actually 12% below 2019 levels. And it's like the only region where volumes were actually down versus 2000. So I wanted to understand more, is that around the elasticity because of the pricing increase or what's been driving that relatively weak volume, but still, pricing, pricing was very good. That would be the first question. A - Olga Limon Okay. I will answer that. Mainly the fall was because of industry supply chain constraints and they still pose a challenge to us. We took price early in the quarter in order to update shortages of raw material but depletions were okay. It's not a depletion problem. We had double digit depletion. So we're okay.

Unidentified Analyst: Okay. Got you. And then my second question, we've talked about this in the past about some of the it just said supply chain, so raw materials, glass and so on and having had an impact, is that a situation that has normalized or is it still somewhat challenged, but you're seeing a light at the end of the tunnel. Where do we stand on some of those packaging materials?

Juan Domingo Beckmann: This is Juan Domingo. No, it hasn't normalized. We believe it's a little better, but so far I hope by the end of the year, this normalizes, but so far it's still a challenge.

Unidentified Analyst: Yeah. At least, well, that's a challenge, but at least agave [ph] stable. Well with that, I'll leave it here and congrats again on the results.

Operator: Thank you very much. Our next question comes from Andrea Tahera [ph] from JPMorgan. Please go ahead. Your line is over.

Unidentified Analyst: Thank you. Good morning and congrats on your results. I just want to go to the margin point this marks an impressive recovery after many, many years of pressure from agave. So I was just hoping to see if this is the inflection and you expect to go from here as we think about your algorithm for 2022 like it seen the worsen and we are going to start to see that improvement or other inflation or other parts of any obviously you mentioned the distribution inflation and all of those which are separate, but I'm thinking more labor, all of those taking together with your pricing. You expect margin to go in the right direction now, in other words up year over year given your efforts to integrate agave and obviously stabilization of the SWAT prices. And then I want to just make sure and please comment on that on the margin and then on the mid-single digital volume guide I appreciate that visibility, but if we think about Latin America, it seems as if Latin America has a recovery, in front of this situation of supply chain. So should we be thinking Latin America outperforming that mid-single digit in the US potentially being below that or the US is still running that mid-single digit on top of the growth that you had over the past two years. Thank you so much.

Fernando Suárez: Andrea, let me just start with a first question regarding margins, although we do not give margin guidance, we're only giving volume guidance for the year. As we said in our scripted comments and disclosure, we see the benefit from stable agave pricing. But the margin expansion has also to do with an improved mix as well as more premiumized portfolio sales. As you well point out, distribution has been a cost headwind for us and just in general inflationary pressures across the cost structure, we are trying to offset that with price increases across the regions. One more point regarding AMP, you will an uptick in AMP for the quarter and for the year on a year on year basis. We printed 22% AMP as a percentage of net sales in 2021. We do expect to go north of that about a point or so in the 23% area as we see more opportunities to deploy AMP going forward across different regions. Regarding your second question on Latin America's growth potential, I'll ask Olga to comment qualitatively on Latin America in general

Olga Limon: And then if you can go back, sorry to the US as well and obviously I want to hear from Olga and congrats Olga from your position.

Olga Limon: Hi as you know, LATAM had a very strong performances this quarter and on a yearly basis. So what we expect from LATAM is to normalize because we have a very high volume base there and we still have a lot of uncertainty in terms of supply chain constraints and as well as other market competitors conditions. So I would say that, thank you.

Luis Félix: And, this is Luis, for the US, we're also striving to get single digit -- middle single digits growth in volume. We believe that as the category, the tequila category it's the fastest growing spirit category in the US. We believe that this year, we still had some problems in terms of supplying the amount of product that we were to sell. So we believe that is feasible that we continue to grow and that's what we're heading in in this year.

Unidentified Analyst: I appreciate the comments. Thank you the three of you.

Operator: Thank you very much. Our next question comes from Mr. Ricardo Alves from Morgan Stanley. Your line is open. Please go ahead, sir.

Ricardo Alves: Hi everyone. Thanks for the call. Impressive numbers. First question on pricing in the US specifically your average unit revenues continued to surprise to the outside very strong again. So just wanted to get some more caller on that particularly on the mix evolution from what you saw in the fourth quarter versus what we had in the third quarter would appreciate if you saw any major improvement on a sequential basis. And also given how strong demand is, can you comment on any prospects for price increase in 2022, maybe early in 2022? That's my first question. The second question, the speed of your vertical integration, pretty evident looking at your biological assets evolution in the short term throughout the second half of last year, the big improvement that you had, but at the same time, we saw from the second to the third, and then through the third to the fourth quarter, a deceleration, which would imply, I believe that you're using more of your own agave. So just wanted to check that with you. If you think that, you are speeding up your vertical integration as we speak, I know you cannot give guidance on that, but qualitively call would be appreciated. Thank you so much.

Mike Keyes: Luis you want to comment on the first question? And I can take the second question from Morgan Stanley.

Luis Félix: Yes. Thank you, Ricardo. In terms of pricing in the US, we took a price increase in 2021, and we see no impact in our premium products. We just announced a new price increase. So we believe that the whole industry is looking into pricing and we believe that we will be this announcement that we just made, it will be implemented in the middle of the year. So we believe that we will be in a good position to deliver the volume guidance that we are seeing right now.

Luis Félix: And as to your second question, regarding the changes in biological assets in our balance sheet again, we do not like discuss agave integration for competitive reasons, and we would just caution you not to utilize quarter over quarter movements in the biological asset as a proxy for integration. In that sense, what we can only say regarding biological asset is that we continue to step up our plantation efforts. Again, this year will be another year of double digit increase in plantation in our drive to control our own agave. That that would be the answer, Ricardo.

Ricardo Alves: I appreciate that. I appreciate that, Fernando, thank you. On the first question, just to clarify you did not see major improvement on the mix of products from the third to the fourth quarter, right?

Luis Félix: We saw some major, we saw improvement in the -- after we took the price increase, we saw some deceleration in some of the brands and our mix was -- we have a significant improvement in the fourth quarter, but that was more related to availability of product. So as soon as we got -- as soon as we got the product we were able to sell, and I will probably ask Victor if he can comment on this question as well.

Victor Chavez: Hi, Ricardo. So on the quarter from the third to the fourth quarter, we didn't see an impact specifically on price increases in the results. You will see that year over year because we took our price increases are in 2021. And hence, that's why you don't see it. The impact that you see from the third to the fourth quarter is mainly on the back of supply chain availability improvements and a better mix of product mix that's being reflected in the portfolio.

Ricardo Alves: Understood. Very clear. Appreciate the color. Thanks everyone.

Operator: Thank you very much. Our next question comes from Mr. Fernando Olvera from Bank of America. Please go ahead. Your line is open.

Fernando Olvera: Hi. Thanks. Good morning, everyone. Most of my questions were answered, but I think I don't know if you can comment about your product innovation projects for the years. That would be the first question. And my second question would be related to dividends. How are you thinking about them this year, given the Annual Shareholders Meeting in around the corner? Thank you,

Luis Félix: Fernando, let me start with your second question dividends and we'll let the team answer the product innovation afterwards. Regarding dividend, we will be proposing dividend payment not until the April General Shareholders Assembly. So we don't have that number for you ready yet, but we will communicate it in due course. Just as a way of reminder our dividend payout ratio last year was 30% of consolidated net income. And regarding the first question on product innovation,

Victor Chavez: Product innovation, we are -- the US doing quite well with 1800 crystal [ph], which are relatively new brands. And we're coming with a couple of new brands this year, which we cannot comment until they're launch and in Mexico, also in mescal [ph], we are coming with some innovation.

Operator: [Operator instructions] Thank you very much. Our next question comes from Marcella Recchia from Credit Suisse. Please go ahead. Ma'am your line is open.

Marcella Recchia: Hi everyone. Thank you for taking my question and congrats on results. I have two questions, first could you comment how your tequila portfolio today in US compares to that of pre pandemic in terms of segment share? And my second question is following the reopening in US have you seen any signs of acceleration in the off-prem or any kind of shift in terms of mix? Thank you,

Mike Keyes: Luis?

Luis Félix: Well, in the case of the segment share, what we're seeing is there is a significant trend of communication in the tequila category and in the spirits category. And that premiumization is continued to gain market share even and the total industry is gaining share versus wine and beer, but the premiumization is continuing and it's not slowing down. So what we're doing is we're investing heavily in our super premium and ultra-premium brands. We gain a little market share in those segments and as a total tequila, we are losing a little bit of market share in the US because of the high growth in the ultra and super premium segments of the category. It's growing in value, it's growing of course, much more than the premium segments where we have a very strong position. And in terms of the changes in the off and on premise, we haven't seen a big swing of on and off premise. So we continue to see a very strong demand from the on-premise account, from the off-premise accounts and that the on-premise has been open and closed and it's not totally open. So we will probably start seeing that in this year, but as far as the closing of the year we saw a very strong off premises, too.

Marcella Recchia: Perfect. Thank you very much.

Operator: Thank you very much. This is all we have time for the questions today. I'll now be passing the line back to Juan Domingo for concluding remarks

Juan Domingo Beckmann: 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.

Operator: Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Have a great day and a great weekend. Bye, bye.