United Breweries Limited (532478) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Breweries Limited Q3 FY '20 Earnings Conference call hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mehul Desai from IDFC securities. Thank you, and over to you, sir.

Thanks, Nirav. Good evening, everyone. On behalf of IDFC Securities, I would like to welcome the management of United Breweries as well as all the participants for the Q3 FY '20 earnings call. Today, we have with us Mr. Berend Odink, the CFO of United Breweries; and Mr. Poonacha, Investor Relations Head from United Breweries. I'll hand over the call to Mr. Berend for the opening remarks. Over to you, sir.

Thank you, Mehul, and good day, everybody. And thank you for joining the call today. I'll start with providing some context on the Q3 and year-to-date results following which we'll be happy to take your questions. So on the Q3 performance, the overall volumes in Q3 were somewhat subdued with volumes declining 7%. Excluding the impact of the state of Andhra Pradesh, the volumes would have been flat. As you might be aware, the government in Andhra has implemented a number of measures from October 1, including ownership of retail outlets moving into government hands, reducing the number of outlets by circa 20% as well as reduced opening hours and an increase in government duties, resulting in higher MRPs. As a result, the beer industry volume fell by around 50%. At the same time, we also observed in the market that most orders were given to previously smaller players in the state, instead of being awarded accordingly to prevailing market shares before October 1. As a result, UBL volume and resulting performance in Q3 was negatively impacted. To provide some context, Andhra Pradesh accounted for around 7% of our volume prior to October 1. Commenting on the regional volume performance. In North, UBL volumes were down 4%. Key state performance included Delhi, which posted flat volumes, and volume growth in U.P. and Punjab, and there was a negative growth in state of Rajasthan and Haryana. In South, UBL volumes were down 13%, largely due to performance in the state of AP, as explained earlier. Positive growth was posted in Tamil Nadu and Telangana, whilst Karnataka and Kerala declined mid-single digits. In East, UBL volumes were up 19%, with volumes in West Bengal and Orissa, both increased in double digits. In the West, UBL volumes declined 7%. Mumbai and Goa declined, while the rest of Maharashtra also saw negative growth, albeit to a lesser extent than Mumbai and Goa. Touching on the revenue and margins for Q3. Net sales were flat for the quarter. Gross margins declined by 60 basis points year-over-year, which is a lower reduction than the decline year-to-date, as we started to cycle the higher input costs for mainly barley and glass. Input cost increased largely during Q3 with the full impact of the higher costs seen in Q4. EBITDA for the quarter declined by 10%. Looking at the year-to-date performance, overall performance in terms of volume growth was positive 2%. And on the regional performance. North UBL volumes grew 1%. Volume growth again in Delhi, Punjab, Rajasthan and U.P, while volume declined year-to-date in Haryana. In South, UBL volumes grew 1% with growth in the states of Telangana, Tamil Nadu and Kerala, but the volume declined in Karnataka and Andhra Pradesh. In East, UBL volume grew 28% with volumes in West Bengal and Jharkhand up, while the Orissa was also up. In West, volumes declined 6%. Volume declined in Mumbai and Goa, and volume growth for the rest of Maharashtra. In terms of revenues and margins, year-to-date, net sales were up 5%. Gross margins declined by 290 basis points on the comparable period, given the higher input cost of barley and glass bottles. Overall results have been challenging. However, we remain very much committed to our strategy, which includes investing behind our brands, particularly the premium portfolio. Growth in premium remains very positive, despite a lower GDP growth environment overall. We recently launched Kingfisher Ultra Witbier, which started the wheat beer segment, and initial consumer response has been very positive. With that, I would like to conclude the opening remarks, and we'd like to take your questions.

[Operator Instructions] The first question is from the line of Krishnan Sambamoorthy from Motilal Oswal.

In your press release, you talked about a delay in payment from the Andhra government. Did this start in the third quarter? Or did this start in the fourth quarter?

So we have seen this in the current quarter, but also in the prior quarter already.

Okay. And you also mentioned that there is advanced duty that have been asked by several states. Now putting the delay in payment in Andhra as well as the advanced duty, how much -- can you just quantify in terms of number of days? How much has -- there has been an increase on a Y-o-Y basis, if you could do that?

Yes. Andhra Pradesh currently in days is around 150 days, collectibles. And the amount is in the region of INR 140 crores. And you want to know the quantum of...

Yes. How much was it earlier, right? How much was it -- it is currently 150 days, how much was it earlier?

No, no. Value-wise, it has come down, reason being our turnover also has come down in the quarter. So both the days has come down. There were times where the outstanding was even higher closer to INR 200 crores.

Okay. I'll put it the other way, right? You mentioned that the interest costs have increased because of higher receivables. Now at a net company level, how much of the receivable days has gone up approximately?

Receivable days has gone up by -- exactly, I'll tell you, that is 4 days, just let me confirm. Yes, it has gone up by 5 days.

5 days, okay. And the other -- just on your CapEx, given the relatively muted outlook, would you be deferring some of your CapEx? And if so, what is the CapEx number for '20 and '21?

So for next year, we've not yet published the outlook, but the total CapEx that we see for the current financial year has been brought down versus earlier budget. So what we mentioned in the press release is around INR 300 crores year-to-date. I think that would be the run rate for the full year as well.

So INR 400 crores plus for the full year?

Yes.

[Operator Instructions] Next question is from the line of Himanshu S from Dolat Capital.

Sir, our price mix has improved quite materially in this quarter, while the volumes were down 7%, the revenues were flat. So I'm assuming that the price mix was very positive. You have called out that you've taken price increase in 4 states. So was the price increase taken in Q3 itself or it was taken in earlier quarters?

The price increases have been taken in earlier quarters. But obviously, as we progress through the year, year-over-year impact becomes bigger.

Okay. So Q3 had a full benefit of the price increase that was taken in quarters prior to that. There was nothing that was taken in Q3, per se, from prices increase perspective, because, last quarter, our price mix was negative in Q2.

No. So in Q3, there has not been any significant price changes as such. But we have seen, of course, year-to-year impact coming through.

Okay. And sir, will there be any -- because the contribution of AP has also gone down, and I'm assuming AP might be a lower realization per case market, and that should have also lead to improvement in realization per case, optically?

Yes, absolutely. So AP is, in terms of price levels, below the average, given that the volume declines, purely from AP perspective, there is a positive state mix.

Yes. Okay. So if we -- like -- and how you have informed in volumes that without AP, the volumes would have been flat? What would have been the realization improvement ex of AP in Q3 on a Y-o-Y basis?

Well, we don't break that out separately. But as I commented earlier, the realization in AP is below the company average.

Fair enough, sir. Sir, second question is on other expense line item. First, just want to -- want a clarification. Is there any one-off write-backs or anything? One-off provision, write-backs either for receivables or any other line items in that, a significant number or anything? Because other expenses on a Y-o-Y basis has gone down very significantly. I mean in last trailing 5, 6 quarters, the other expenses were up by 15% to 20% on a Y-o-Y basis. And suddenly, that came off. So anything, if you can just provide color on that line item?

Yes. So in Q3, we have an income of around INR 15 crores from a reversal of service tax and GST on license fees. So that has been booked in the Q3 as a positive one-off. And you might recall, year-to-date, the first 6 months, there were a few things we called out last call in terms of one-off costs, so that the impact was the other way.

Okay, okay. And sir, any color you can provide on A&P spend on a Y-o-Y basis on absolute number, Q3 of last year to Q3 of this year?

In terms of marketing investments, we're slightly up year-over-year. So as I said in the opening comments, we continue to invest, particularly in the premium part of the portfolio. And in that, we take a very long-term consistent approach, I would say, to support the brand building.

Okay. So sir, then which has been the line item which has gone down? Means, if I see on a sequential basis also, we have never seen historically such sharp decline on a sequential basis. Also on a sequential basis, the cost is down almost by INR 80 crores. So if you can just provide some bridge or something?

Which cost you are talking about that has gone by INR 80 crores?

Other expenses. Last quarter, it was INR 507 crores and this quarter, it is INR 419 crores.

Last year, that's what I'm saying. If that reversal was not there, your INR 419 crores would have been INR 569 crores.

How much is the reversal, sorry, you say?

INR 15 crores?

1-5?

Yes, 1-5.

Okay. So sir, INR 419 crores would have been INR 434 crores or something you are saying?

Perfect, perfect.

Still it would have been lower on a Q-o-Q basis versus INR 507 crores of last quarter.

No, you can't compare the previous quarters because they are cyclic because you have rates and taxes also, which is variable to your volume turnover, which forms part of your other things. For example, bottling fees. Bottling fees is like a duty which you pay on your dispatches. So if your volume goes up, your bottling fees goes up. Your volume comes down, your bottling fees comes down. So there's variability of volume also. It's not other expenses per se. It's not that this is purely business benefits, it's also part of duties included there.

Next question is from the line of Harit Kapoor from Investec.

Just have a few questions. Firstly, if you could give a sense on your volumes have declined by 7%. In your estimate, what would have been the market decline?

So for the most recent quarter, we don't have the market shares as of yet. But for the 12 months ending September, we do believe we have expanded share to around 2%.

Okay, okay. So your absolute share would be in the range of about 54-odd?

Probably 53%, that kind of level.

Okay, okay. The second was on the material cost outlook. You've seen the kind of impact of glass as well as barley over the last few quarters. Is it your sense that now most of this is behind us in the base? Or do you see any kind of cost inflation issues going forward also? Hello? Hello?

Sir, the management line disconnected. Just a moment. [Technical Difficulty] Participants, please stay connected while we join the management back to the call. Participants, thank you for your patience. We have the management line back to the call. Sir, go ahead.

Harit?

Yes, yes. So this was regarding the material cost question, what's your outlook on that? Did you think the glass and barely costs are now behind you in terms of -- in the base?

Yes, absolutely. I think the last year Q4, we have seen the major pickup in barely and glass. I think for barley, we are -- have secured the whole position for the remainder of the year, so that we don't see any significant changes from where we are today. And in terms of glass, again, we will go back to normal kind of inflationary price changes. We have secured additional capacity in the market. And under our normal circumstances, we can source demand without any major price movements [indiscernible] 1 to 2 quarters at least.

Good to know. If you look at the issues in Andhra Pradesh that you faced in quarter 3. Would you say that as you've come into quarter 4, some of those issues are kind of dissolved or there has been a move to normalcy there? How would you kind of assess the situation in Andhra Pradesh going forward?

Now, obviously, we closely monitor the situation. It's a bit difficult to predict, but I don't see immediately in the next quarter a major improvement where we stand today. So we continue to make representations to the government. But there's not been a kind of a major improvement in the quarter so far.

Okay, okay. And from a rest-of-India perspective, markets in the North are down and the West is down. Apart from the East, the balance markets also have shown a bit of lower growth or, in fact, even declined. So how do you look at this? Do you see this as a slightly near-term or medium-term demand issue? Or how are you assessing this impact?

I think the dynamics are, of course, state-by-state. So Karnataka has seen some challenging environment in the last few months. I think it has to do with the overall slowdown in economics and consumer spending. So we have to see how long that takes to improve. Year-to-date, we obviously also pulled out some of the impacts in terms of capacity issues in Q1, impact of elections in Q1 and even in Q3 in Maharashtra with a number of dry days that took place. So without AP, I would say, we're cautiously optimistic. But obviously, yes, the consumer spending confidence is somewhat subdued versus prior years.

Okay, okay. On the premium side, what's the kind of growth that you've seen for the premium portfolio? And if you could just give a sense of which are the brands that are leading this?

So the whole premium portfolio is growing double digits. So that's continuing, I would say, quite strongly and right there where we have -- it's one of the cornerstones of our strategy. Again, it's brand-by-brand, state-by-state, dynamics are a little bit differently, but safe to say that the Amstel, Storm and also Ultra are doing quite well.

[Operator Instructions] Next question is from the line of Aditya Soman from Goldman Sachs.

Just one question from my end, actually. So next quarter, given that we've had elections in Maharashtra that are behind us and even with the Karnataka, there's government now in place and majority of the disruption because of the change in government or the vote -- confidence vote now that is done, should we expect volume growth in these 2 states? Also, we start hitting the weak pace for these states from 1Q next year. So a related question to that one, should we see volume in these 2 states? And would volume growth in these 2 states lead to an improvement in the mix?

The 2 states, you mean Maharashtra and Andhra?

Maharashtra and Karnataka.

Maharashtra and Karnataka. I think, for Maharashtra, the rest of Maharashtra, obviously, has been performing a little bit better than the Mumbai itself. So without the impact in lieu of state elections that we've seen in Q3, we're cautiously optimistic. Similar for Karnataka, I think Q1 has been positive in terms of industry growth, Q2 and Q3 was negative. So it's too early to tell what Q4 will look like. But I think if the overall economy and the optimism step-by-step comes back, again, we're cautiously optimistic. But in any case, we -- of course, we're ready on our end to supply any pickup in demand that we can see.

I understand. And just a follow-up on that. I mean if you see growth, hypothetically, let's say the growth improves in these 2 states or is at least in line with your company growth, would you see an improvement in the mix and the margins?

Yes. So both states, you called out are important states in our total business. So they would lead to a positive mix, absolutely.

Next question is from the line of Ashit Desai from Emkay Global.

This is Ashit. Sir, my question is on volumes again. Last quarter, you had mentioned that domestic volumes were up 6%, and sales growth was 3.5%. So there was a negative price mix of around 2.5%. This quarter, you have a positive price mix of 7% with 7% decline and flat volumes. And I think last year -- last quarter, you had also mentioned some one-offs relating to exports or something. So can you tell us what is the domestic volume growth for this quarter? And is -- are there any one-offs like last quarter in that?

No. So in terms of the impact of exports this quarter, there's nothing to call out. It has been trending, let's say, as usual. So there's no difference between domestic and total as such.

Okay. And last quarter, how much was the export impact?

Last quarter, I think there were around 2 percentage points difference in terms of total company growth due to exports.

Okay, okay. And secondly, Telangana has seen some change in the way they collect excise. Could you tell us what is the impact of that?

Working capital wise?

Telangana, there has been a...

Yes. Working capital, positive working capital improvement.

Yes. So what is the change and the benefit, if you could...

In capital wise, anywhere between INR 60 crores to INR 80 crores, working capital.

INR 16 crores to INR 18 crores or INR 60 crores to INR 80 crores?

Yes, INR 60 crores to INR 80 crores.

6-0 to 8-0.

Okay. That is the benefit that you all get?

Yes, yes.

Okay, okay. And just on volumes, again, I mean, the industry growth also seems to be -- seems to have declined. But overall, if you look at markets which have declined, can you share what has been the consumer price increase for beer in those markets? Is it due to a very steep price increases? Or it's just because of the economic slowdown? And if you could give some picture on that?

No. I mean, I wouldn't project the state specifically, but largely, what has happened in the business in this previous quarter and the year, but we just speaking on the year-to-date basis is, wherever there has been some correction -- for example, you see correction in West Bengal with respect to reduction in price, correction in Tamil Nadu with respect to route to market. So wherever there's been correction where, in the past, impediment to demand, those markets have grown. Wherever the markets where there were no impediments, the slowdown of the economy has pulled the volumes down. Am I clear?