Emperador Inc. (EMI) Earnings Call Transcript & Summary

Okay. I think we can start the analyst briefing already. So first of all, I'd like to welcome everyone this afternoon for Emperador Inc.'s results briefing for the full year of 2024. Thank you for spending your afternoon with us this Monday afternoon. Joining us also today as our panelists are Mr. Winston Co, President of Emperador Inc. We also have Mr. Glenn Manlapaz, CEO of Emperador International.

Good afternoon, everyone.

We also have Ms. Dina Inting, Chief Financial Officer of Alliance Global Group, Inc. and Emperador Inc. And we have Mr. Kenneth Nerecina, Emperador Inc.'s Investor Relations Officer and also our presenter for today's briefing.

Hello.

[Operator Instructions] So without further ado, I will now turn you over to Sir Kenneth for the presentation.

Again, good afternoon. Thank you for joining this call. It really is going to be a brief call. We'll just go through our numbers for 2024, and then we'll spend more time doing the Q&A. So in 2024, EMI consolidated revenues amounted to PHP 61.6 billion. That's down 6% year-on-year. The split more or less at 60-40, still in favor of brandy. So that's PHP 36.4 billion for brandy; and the balance, PHP 25.3 billion, that's for whiskey. So again, top line, it's down 6% for EMI as a whole. In absolute amount, that's PHP 61.6 billion. We continue to face challenges in 2024. So the decline, mostly it was due to the weakness in consumer demand. So the culprit really is inflation plus competition as well. And in terms of our gross profit, it was down 11%. But the overall GP margin is still above 30%, 30.9%. The decline can be attributed to the cost of raw materials, dry goods and product mix to a certain degree. EBITDA. EBITDA in absolute amount totaled PHP 11.4 billion. It was also a decline but mostly this was because of the continued investment in terms of A&P for both brandy and whiskey. There was also pressure in terms of interest expense. And ultimately, net-net, earnings overall went down to PHP 6.3 billion as a result of the aforementioned factors. Now essentially, as you all know, there's two segments, brandy and whiskey. And the first one, brandy. Between brandy and whiskey, brandy experienced more challenges in 2024. Revenues -- brandy revenues declined 9%. That's PHP 36.4 billion. And again, the decline was on account of weaker demand and also because of the preference for more affordable or cheaper brands, especially in the domestic space. In terms of gross profit, gross profit amounted to PHP 7.7 billion. Margin amounted or equaled 21.3%. So there was pressure on the branded GPM, again, owing to the cost of goods plus the weakness of the Philippine peso. EBITDA amounted to PHP 4.9 billion. Margin-wise, that's 13%. So it was down because of -- mostly because of, again, the investment in our products, in brandy branded products, investment in terms of A&P for the most part. Brandy earnings went down, again, because of the aforementioned factors or considerations. So earnings went down to PHP 1.8 billion in 2024. The silver lining, if you want to put it that way, for EMI, for now is whiskey. I think just to digress a bit, if you are familiar with EMI, brandy and whiskey segments, between brandy and whiskey, we all know that whiskey, that business, it's more diversified in terms of products. The whiskey segment is driven by 4 single malts, Dalmore, Jura, Tamnavulin and Fettercairn. And we also have some blended whiskeys. So in terms of product mix, evidently, it's more diversified compared to our brandy segment, which is, for the most part, driven by Emperador brand and Fundador brand. And in terms of geographical reach, whiskey Whyte & Mackay is obviously more global. Our products are available in at least 100 countries. And in terms of markets or regions, again, it's more spread out, there's Asia, there's Europe, Middle East, travel retail, et cetera. So whiskey revenues in 2024 was down only 1.6%. And again, in absolute amount that's PHP 25.3 billion roughly. In terms of gross profit, it's down -- more or less the decline is in line with the revenue decline. And the margin still very much strong at 43.5%. And again, if you've followed or if you've been following Emperador for a number of years, you know that this whiskey GP margin came from -- in fact, 10 years ago, it was less than 20%, maybe 18%, 19% GP margin. And under Emperador's tutelage, this GP margin has evolved to much higher levels. So that GP margin still robust at 43.5% because of the product mix and ultimately, it's because of the continued focus on branded business, which is driven by our single malts. In terms of EBITDA, EBITDA was flat year-on-year. In absolute amount, that's PHP 6.5 billion. EBITDA margin was 25.4%. And in terms of earnings, ultimately, earnings amounted to PHP 4.5 billion, down 9.6% because of interest rates -- or higher interest rates and taxes. So the top line for brandy and whiskey, the mix rather, as I mentioned earlier, it's more or less 60-40 in favor of brandy. But in terms of earnings, the mix is biased now more towards whiskey. So given that -- clearly, if you do the math, PHP 6.2 billion, PHP 6.3 billion EMI earnings, and then you've got PHP 1.8 billion for brandy and then PHP 4.5 billion for whiskey, that's almost like a 70-30 split in favor of whiskey. And again, this should be clear, this should be understandable, because of the higher margin profile of whiskey. This next slide just shows you the consistency of our dividend payouts. Even if EMI doesn't have like a stipulated dividend policy, Emperador has managed to pay out dividends consistently in the last 10 years or so. Now just a quick update. Most of you have probably read or seen the news not too long ago, I think just a month ago or less than 2 months ago. There was an acquisition that Emperador made through its Mexican subsidiary, Casa Pedro Domecq. So it acquired a majority stake in Los Danzantes, which is a Mezcal company. So Mezcal, people think it's tequila, but it's not. Mezcal is more premium, and it's considered craft spirit. And it's associated, for the most part, to Oaxaca in Mexico. So there are two key brands for this acquisition, Los Danzantes and Alipus. So these are well-known or renowned Mezcal brands in Mexico and internationally, and especially in -- also in North America. Both are featured in the 2023 Drinks International Magazine Top 10 best-selling and top trending Mezcal brands. So this recent acquisition is very much aligned with our premiumization strategy. And again, if you're familiar with our strategy, it remains intact. It's a CPI, right, contemporized, premiumized and internationalized. And P, which stands for premiumized, that is at the very essence of our strategy. And this fresh acquisition really is aligned with this premiumization strategy of EMI. For the outlook, 2025 outlook for brandy. We believe that 2025 will be better than 2024. We expect the margins to recover. And we're pivoting brandy business to target low-price segment. As you know, it's very competitive. Competition is something that we have to deal with. And we have this strategy, both tactical and strategic, to target the low-price segment. So again, as I mentioned earlier, it's all about premiumization. I think the long-term gain is really to focus on premiumization. And for brandy, in fact, in the Philippines, we all know it's a Category V, brandy, gin, rum. Brandy is the most aggressive in a way in terms of premiumizing the space or the category, especially since we have Fundador, which is the key catalyst for our premiumization strategy. Now for whiskey, the environment, the global environment, it's going to continue to be challenging, especially with all these new trade policies from the U.S. But again, whiskey seems to be more resilient, and it will continue to be resilient given the product mix, the wide array of single malts and blended scotch that Whyte & Mackay has. And the continued focus on branded business will keep the GP margin to -- it will keep it healthy, above 40%. So other considerations, we're keeping a close eye on developments on U.S. tariffs and its effect on global market dynamics now. So that's really it at this point in time, and we want to entertain questions as much as possible. So the floor is now open for Q&A. So management is here to answer your questions. Thank you.

Thank you, Sir Kenneth. We will now take some questions from the audience. We will start with those who would like to use the raise hand option. Ms. Karisa Magpayo, go ahead, please.

Just wanted to ask, on the domestic brandy volumes, how did they perform in the fourth quarter? And are you seeing any improvement in demand already this year?

The fourth quarter performance of brandy, while it remained quite challenging, competition is very tough and the preference really is for lower-priced brands. So it is what it is. The volume of our brandy, domestic, it did face some challenges. However, we're confident that we can recoup some of the losses given that we have a product that we're focusing on right now to recoup some of the losses that we incurred, not only in the fourth quarter, but overall in 2024.

Yes, if I may. Karisa, this is Winston. Let me add some color to that. You -- we have been pivoting our business since a year ago in our last presentation, is that although our premiumization strategy continues to be intact, we are pivoting our company to focus on the value end as well. Because we noticed that with all the global challenges and local economic situation, the bottom-shelf products will continue to enjoy robust sales because of the purchasing power of the people. But on the long term, if you look at 5, 6, 7 years from now, the economic dynamics will change, and we hope that people will have more disposable income and upgrade to more premium products. Having said that, last year, we launched the Fundador Super Special. This is at the premium end, but we make it accessible to the market at about PHP 300 per 1 liter bottle, okay? Because previously, a Fundador is priced at PHP 380, okay? But last year -- I'm sorry, more accurately, towards the end of 2023, that was in November of 2023, we launched a Fundador Super Special, which is priced at PHP 300 per bottle. And we are basically a year into that product introduction. And it has started to show significant sign of consumer acceptance. We have fully started distribution, the target penetration is all there, we have done a year of activation. And we are seeing some very positive signs as far as the Fundador Super Special is concerned, okay? So as far as our premiumization strategy, and having a low price at that premium end at PHP 300, I think we have a very good foothold into this market already. And we expect this product and the entire Fundador portfolio to grow significantly this year, okay? That is why we said that we expect the outlook for 2025 on the brandy, especially on Fundador, is very, very positive. However, on the other end, you'll ask how is the domestic product. The domestic product is -- since broadly, our Emperador is considered premium compared to our competitors, our product is basically $2, $3 a bottle. Our competitors basically $1, $1.20 for the small packet size. The pricing is still -- there's a gap in the pricing. So just this month, we have launched a Gen Z product. So this product that we have developed -- and it took us 18 months in the development from conception to launch. We launched this product last month. And during this period of 18 months, Karisa, we have focused on targeting the Gen Zs, okay? So we have launched this product particularly for the Gen Z., and we call this CLVB Emperador, right? And if you visit a 7-Eleven store, you visit [ All Save ] and some of the retailers, you'd be able to see this product as it come on shelf, okay? 7-Eleven is already listed as of last week. The rest of the major retailers, you'll find the product hopefully within this week or immediately after the Holy Week. So we just launched this product, I think -- within a month, this month of April. And it is also Gen Z priced. It's going to be very affordable. And we have done a lot of consumer testing, and the results are positive. And we have done initial activations, which we find very interesting. And this product is definitely, as I mentioned, targeted at the generation Z, Gen Z. And you'll ask how much is this product? If we want to compete in the value end as we pivot the company, okay, a little bit to focus on the value side of the business, which today, we are not, but we are pivoting it to compete at the value end, this product CLVB Empi will be retailed at PHP 130 only for a 750 ML bottle. So we hope that this twin strategy of Fundador at an affordable premium price, and the CLVB Empi, which is an Emperador designed for Gen Z priced at a Gen Z price of PHP 130, should propel the forward momentum for the brandy here in the Philippines.

Good luck with your initiatives. My second question will be on the input costs. Are you seeing anything in input cost in the quarter, in the third quarter?

Yes, a very good question also. This input cost is -- because a significant portion of our products are imported, the brandy is imported from Spain, our cups are imported, our labels are imported from China. So a lot of our components are imported. So if there is any, what do you call this, currency fluctuation, we are impacted as well, okay? So not only is it in the rising cost of branded distillate, because the buying price has been going up in the last couple of years, so that cost has been going up. At the same time, the exchange rate is high as well versus -- peso versus euro is at PHP 61 -- PHP 60, PHP 61 to EUR 1, I think, which is a historical high. Dollar was at PHP 58, PHP 59, which is also very high. And against the English pound is around PHP 74, which is also very high historically. This have an impact on our COGS, okay? However, if you take a look at our financials, especially on the brandy segment, the culprit there is basically the input cost coming from Spain. Not only are the branded distillates more expensive, but the exchange rate is also on the high side, okay? However, we have taken significant initiatives last year and this year to reduce the cost of the inputs coming into the Philippines. And we have done, I think, sufficient negotiations with all our suppliers, the purchase of our wine, the wine distillates. Because the wine, it depends on the harvest, whether it's a good harvest, a bad harvest, it affects the wine prices. So we are now not only relying on wines coming from Spain, but we are exploring wines across the region that we can and may distillate in our distilleries, okay? And we're also doing some efficiencies in our two distilleries in Spain, okay? So -- and we believe that we will be able to drive down the COGS of the inputs this year. I think we have enough -- we have done enough to lower the COGS -- for the cost of our inputs. So we are also projecting that our cost of sales would improve this year, 2025. And because of the improvement in the input costs and the improvement of revenues in terms of the new products that we're introducing, and that's why we, in our outlook, we believe that 2025 will be a better year for the brandy segment compared to last year.

Do we have any other questions from the audience? Anyone who would like to raise their hand? Karisa again.

Yes, I just wanted to ask on your thoughts on how much of Emperador sales come from the U.S.? And what are your plans to mitigate the risks arising from the new trade policies?

Yes. Thank you, Karisa, for that. The bulk of our business in the U.S. is basically whiskey, the single malts. Yes, we do have exports of brandy to the U.S. and North America, but it's very small. It's a small percentage compared to our whiskey business. I think North America comprises about 12% of our total branded whiskey business. Is that about, right? Kenneth, is my -- around low-teens, around 12%, is that it, to the U.S.?

That is correct.

So that's around 12%, okay? And the tariff is about 10%, right? The Trump tariff to U.K. is roughly around 10%. I don't know whether it's part of the moratorium that is -- that was announced. But if it was paid at 10%, we feel that 10% is somehow manageable. In fact, we have started our conversation with the importer and the distributor. And we have proposed to sort of keep the price and then we will just share the cost. So we asked our importers and our distributors to reduce their margin in the meantime so as not to take up the price, to reduce their margins, okay, a bit and we will also reduce a bit of our selling price to them. And hopefully, together with their cooperation, we can retain the price at the shelf in the U.S. And for the brandy, what we have talked to both our importer and our distributors, have agreed to cost share the tariff so that we will be able to keep our shelf prices. That will take it up. So that one we have done for brandy, and we are currently in the conversation with the whiskey importer and distributor. So yes, that's what it is. But I think we believe that it's a bit manageable because it is 10%. So I think it's a bit manageable unlike other countries that they have 30% tax -- tariff increase, yes.

Okay. Thank you for that. Do we have anyone else who would like to ask a question through the raise hand option? Okay. There is a question here in the Q&A box from [ Justin Brasilia ]. Any update on the public float issue? Justin, if you would like to maybe ask this question through the raise hand option and clarify what you want to be clarified specifically? Or Sir Kenneth, do you want to address the question?

Well, technically...

Maybe [ Clarissa ]. Is Clarissa here?

Clarissa?

By the way, just very quickly, I -- there really isn't any issue, actually, no. I mean the float is 20.1%. And EMI, our reports have shown that the public float, it's always been -- in the last couple of years, in recent years, that public float has been impacted. And it hasn't really changed. So it's 20.1% public float. Of course, admittedly, some people feel that it's low. But we're studying the possibility of improving or increasing the float. I'm not sure if AGI is in the call, if [ Carol ] wants to chime in. But we are -- yes, Carol, do you want to chime in?

Yes. Thank you. Thank you, Kenneth. Actually, in terms of the public float, you probably have seen the transactions we have done -- black sale we have done maybe over a month ago, and this has already been reported. That's with AGI selling a part of its stake in Emperador. And the intention is really to improve the public float of Emperador. So probably the intention is to more of these transactions moving forward, depending on where the price movement is, because that is -- because we really wanted to address the public float issue. To date, I guess if you look at the numbers in terms of the public float, I think it's now higher by 1 percentage point, so 21.1%. And that's on the back of the transaction. Would that suffice, Kenneth?

Yes, Carol, thanks very much. I hope, Justin, that answers your question.

Okay. Let's just maybe wait a few seconds to see if there are any more attendees who would like to ask a question. Okay. I think there are no more questions from the participants or the attendees. But in case you have any further questions after this call, please feel free to e-mail Sir Kenneth or myself, or the Investor Relations e-mail of Emperador, and we would gladly answer any questions you have then. Thank you for joining us in today's call. Good afternoon, everyone.

Thank you.