United Breweries Limited (532478) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Breweries Q2 FY '21 Earnings Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Mehul Desai from DAM Capital Advisors. Thank you, and over to you, sir.

Thanks, Lisa. Good afternoon, everyone. On behalf of DAM Capital and United Breweries, I welcome you all for our Q2 FY '21 earnings call of United Breweries. From the management side, we have Mr. Berend Odink, CFO of the company; and Mr. Poonacha from the Investor Relations team. I'll hand over the call to Mr. Berend for his opening remarks, and then we can open the call for Q&A session. Over to you, sir.

Thank you, Mehul. Good evening, everybody, on the call. Thank you for joining. So today, we discussed quarter 2 and half year results of United Breweries. And as said earlier, I'll start with some opening comments accompanied with slides that were distributed. And after the slides and the comments, I will open it up for questions as usual. So on the key results highlight for Q2. Q2 saw sequential improvement from Q1 volume decline of 77% to Q2 volume decline of 48%. Q2 continue to be impacted by COVID-related restrictions but month-by-month improvements were noticed. For example, September volume [indiscernible] versus September of the prior year. If we look at some of the original challenges that saw improvement, that is the on-trade further opening up with on-trade, as I said, resuming for the first time in the number of states in September. Original excise duty increases were reduced in Orissa and Andhra. In West Bengal, we introduced a new excise policy on beer that results in lower consumer prices. With revenue and cost action, the company is at a positive bottom line and a gross margin of 16 basis points in the second quarter. Cash flows for the first half were strong INR 95 crore free operating cash flow against the negative INR 245 crore in Q2 last year. Net debt, INR 27 crores and interest costs were down by 20%.

Sorry to interrupt Mr. Berend, your voice is breaking up.

Can you hear now?

Yes, sir. This is a little better for but your voice is breaking up initially. So if you could repeat from the last minute.

Sure. Let me go back a little bit to the results. So I said with revenue and cost action, the company delivered positive bottom line and gross margin up 16 basis points in the second quarter. Cash flows for the first half were strong with results free operating cash flow of INR 95 crore against the negative INR 245 crores same period last year. Net debt reduced by INR 27 crores and interest costs were down 20% for the first half. On the next slide, we show the EBITDA result of quarter 2 at INR 73 crores and 8.1% margin. Sequential growth versus Q1 was strong with EBITDA improving by INR 167 crore versus the Q1 loss of INR 194 crores, and all cost lines show decreases. Year-to-date, the impact of Q1 is obviously still having a key impact. EBITDA year-to-date is at minus INR 21 crore. If you move to the volume performance per region for quarter 2 and year-to-date, That is shown on Slide 6. We see North volumes in quarter 2, down by 32%, with recovery driven by Delhi, Rajasthan, UP and Haryana. In West, the volume decline is 37% due to gradual opening of markets with Maharashtra on-trade opening for early October. In East at minus 59%. You see that recovery in Orissa and West Bengal is relatively slow related to trade restrictions and taxation. In South at minus 55%, Karnataka and Tamil Nadu performing relatively better, and Karnataka was one of the first as to open on-trade in September. In Telangana, we saw recovery relatively slow with permit rooms remaining close as of now. Kerala shows steady improvement. The net sales breakdown is on Slide 7. With besides a negative volume impact, the company realized a positive price/mix impact due to positive state mix, price increases and brand mix. The EBITDA breakdown shows the main impact being volume-related, which was to a significant extent, offset by higher gross margin, reductions in employee cost of 11% and other expenses of 37%. To point out that as other income is somewhat higher than usually by almost INR 30 crore. That includes income from a reversal of prior year doubtful debt provision. But this income was more than offset in the quarter by one-offs, related to amongst dollars provisions for stock positions and liquidation schemes for product that was at risk of expiry. Q2 is therefore not impacted by positive one-offs net-net. Slide 9 shows the free operating cash flow results, which was a robust INR 95 crore for the first half. The decline in operating cash flow was more than offset by improvements in working capital. And further, the capital investments were down as well as income tax. The resulting free operating cash flow in the first half was, as a result, INR 340 crores higher than the same period last year. Turning to the last slide on outlook and summary. The company continues to put health and safety of all staff and stakeholders first. Today, all breweries and functions are operating and fully compliant to COVID-19 protocols. The volatile trajectory of the pandemic results in considerable uncertainty on consumer demand. The company continues to dynamically manage cost and funding, balanced with appropriate brand investments to support our long-term market position while also actively engaging consumers. UBL is well positioned to navigate current circumstances with a leading market position, strong brand portfolio and robust balance sheet. The company continues to be optimistic about long-term growth drivers of the industry and is committed to strengthen its market position and driving profitable market penetration. With that, we were happy to take your questions. So operator, please go ahead.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Congrats, sir, on sequential improvement and opening up of the bar. My first question is on gross margins. So you have seen spirits companies see severe gross margin pressure both in Q1 and Q2. In your case, you have seen gross margin expansion. So if you could elaborate the key raw materials, how it has been in Q2 and versus Y-o-Y? And how do you see the outlook in both the key raw materials?

Sure. Thank you for the question. The outlook on key raw materials. One is what we said earlier, this season around is trading a bit better in terms of pricing softening up by around 10% versus prior year. So this is by now slowly finding its way in our cost of goods sold. On bottles, we see low inflationary pressure on new bottles. And for both barley and bottles, I would see a kind of similar outlook for the remainder of the year as they are the key input costs. And I think you have to read that combined with the positive state mix and positive pricing actions that the company took year-to-date in the first half and as a totality gross margin, but therefore upside.

So could you elaborate on last bit, which you mentioned, how much has been the price hikes and mix change. Any numbers you can put there?

Yes. In the slide, we break it down. So if you compare Q2 to prior year on the prior year's are combined. It's also positive brand mix, but 2 main elements contributing to that. It's the state mix and the pricing increases.

Right. My second question is you've given beautifully the region-wise comparison. Now Eastern region has been the slowest you have pointed that out. And in Q1 also, it was worse in Q2 also, it is worth. So what is the reason for that? Is it because these are anyway the poorer regions of the country, so that has been the reason here? Post the cut, how much is the consumer prices lower versus the earlier time?

Yes. So I think we have to break down that question a little bit state-by-state because prices and dynamics differ. Maybe to start with West Bengal, I think they have seen quite a number of restrictions from COVID recently. Now for early October, the new excess policy will be -- has been implemented. Pricing, therefore, consumer prices has come down considerably. So for example, Kingfisher Strong 650 is now sold at INR 130, which was INR 125 before COVID. So recently closed in terms of consumer prices pre and post COVID. So, therefore, I think going forward, help to see West Bengal improve their volume growth trajection. In Orissan there was a long time trade restrictions. It was also the COVID sets, which was rolled back in early July. But in totality, the market has been somewhat slower to take off compared to other markets which is also quite high products in stock that need to be sold out first. But yes, as we start those stocks on industry, also step-by-step we would expect recovery.

And 1 follow-up here, sir. Bengal rationalization, are you expecting any more state in the near term, such a similar step? And what led to this is, was it proactive on your part on the industry part or it was just that they have been a bit more considerate given the very weak volume?

Yes. On the first part of your question, we don't at this point in time, foresee other states, making policy changes, but obviously, that is only the line of sight we have as of now. On West Bengal, we speak to all excise departments on a quite regular basis. So this is something we have been put forward our thoughts. But in the end, it's also the state that obviously decides the right moment and the right way in their minds to change the policy. there is a differentiation in excise. So yes, I think that's a positive step but will not overnight change the whole dynamics. But I think it's a good direction the state is moving to.

And sir, last quick question. So Bihar, the elections results will come out soon. And supposing it's an assumption I'm putting, I'm not asking for your view on which party will win. I'm just saying if the new government new party comes and supposing the prohibition goes away. My simple question is if the provision goes away, how quickly you can respond to the new things in terms of supply? That is the only question I have.

Yes, we have a brewery in Bihar, as you might know so. So, yes, as soon as the indications that prohibition might be lifted will be working with the excise department to resume supply, but that could be, yes, a matter of 2 or 3 months, 4 months, difficult to say, depending also, of course, on how the excise department it's always organized in terms of trade outlets being organized, policies being available, et cetera. But obviously, it's something we closely monitor.

We'll move on to the next question that is from the line of Vishal Biraia from Aviva.

Would you have lost market share in this quarter?

Our market share, we don't have full line of sight yet for the quarter. But if we look at the corporations, the published market data. We see a few states where we're in the plus, so Karnataka, Kerala. We also see a few states, Telangana, West Bengal, where we saw more discounted pressure in the market. So in that sense, I would say it's a bit of a mixed picture. But for their states where we thought that some of the more underlying dynamics we need to act upon that obviously we have done so going forward, where required we have put in place mitigating actions at the end of the quarter.

Okay. On the growth that we saw in Karnataka, Goa, Tamil Nadu, or would this be for the industry as a whole? And what was this because on-trade open up earlier compared to other states? Or Could you elaborate a bit more on this one?

Yes. It's definitely, for example, in Karnataka, was the state, I think one of the first out of the blocks to open on-trade by the early days of September. So there is a good momentum in the state. Tamil Nadu, we still see some closure of permit rooms there. So it's not fully to, let's say, trade restrictions only. So I would say there are mixed contributors on a state-by-state but the overall pictures that we see those trade restrictions being lifted step by step, and it's obviously a bit positive that first, you need outlets to open up, and it will take a bit of time before consumers resume the visits, get the confidence back increases in numbers over time. So it's a gradual recovery from that perspective. But yes, directionally in a good way.

We'll move to the next question. That is from the line of Aditya Soman from Goldman Sachs.

Firstly, in terms of some of the new products that you launched last year here, in New Kingfisher Ultra, the wheat beer and the light. Have you launched them further in new states? I think it was last launched in Karnataka and Goa, so any further launch? And any sort of indications of when you would look to launch it further, given that markets are now opening up?

Yes. So on the wheat beer, indeed, the initial launches took place in Karnataka and Goa. We've seen very good consumer traction. In fact, it's been leading the segment for the last 2 quarters, we believe. So that's positive. We're now introducing it in Delhi. Obviously, that kind of launch scale has been impacted by COVID as we first needed business to normalize before we went to further new launches. But that is definitely now a next step, we're taking it to Delhi and then, subsequently, further states where we think the potential is there we'll follow.

So would it be fair to say that you would launch it in at least 3 or 4 states by the end of the year? Or you wait and watch depending on how they reopen?

No, I think we'll progressively add more states, and that is, I think, can be kind of month by month, further states will be added. So that's, I think, a valid expectation.

Fair enough. And lastly, in terms of online sales, any update on the trajectory, so have any of the states -- have any further states allowed online are states scaling that back? And what would be the contributions from that?

Yes. I think it's still a little bit similar state as we discussed in Q1 calls. So a number of states, it's a bit more advanced, a couple of states in the Northeast. So there you can find some volume online could be anywhere between 5% to 10%. Other states due to trade opening up, I think the interest has been a bit more limited in the sense that there was not a big push to start that online. So yes, I think a couple of states seem to continue. Other states, not yet further progression because I think the on-trade opening up has given the opportunities for consumers there.

And just 1 last one. In terms of the off-trade sales, any indication of how many stores have shut down or what proportion of stores are open at this point compared with, let's say, last year?

Yes, probably, you would say that at least 95% of off-trade is open. It could, of course, be -- but that can happen any year that some houses have closed and new ones opened up. But I don't think you can conclude that there's a significant drop in the number of off-trade outlets operating in the country. So there might always be a couple of pluses and minuses, but we don't see big drops where we are today.

We move on to the next question. That is from the line of Jatin Chawla from First Voyager.

First question is...

Sorry to interrupt Mr. Chawla. Sir, your audio is not clear. Sir, can you use the handset?

Is this better?

Yes, much better.

Yes. So first question is, I couldn't hear you clearly in your opening remarks. Did you give a number for the volume decline in September?

Yes, we did. So for September, our volume decline was 33%.

Okay. And this has continued to improve in this quarter as well in terms of October and the early start that you see in November?

Yes. So as we indicated in the communication, we see quite good sequential growth month-on-month improvement due to some of the restrictions being lifted, et cetera. So also in October, we saw further recovery. But of course, that is the line of sight kind of what we have today, what will happen subsequently, yes, will depend again a lot on any restrictions, any trajectory of COVID itself. But yes, so far, it's [ recurring ] trend.

And when compared with 1Q, I see that the gap between beer and spirits has widened further. One would have assumed that with the gradual opening up, that gap would kind of start narrowing down So what do you think are the key reasons for the same? And when do you see this kind of bridging? Or do you think there will be some longer-term implications of this [ anyway ]?

Yes. I don't see structural changes or reasons why there should be a different growth paths let's say, longer term, obviously, coming out of lockdown and a lot of trade restrictions, we already guided that there is a differential being, for example, of course, the move to cold beer which is not the case for spirits, plus the fact that, by nature, beer is a bit more bulkier products than spirits. So longer term, I don't see reasons why things should be structurally different. I think in Q2, there were still quite some impacts of COVID and trade restrictions. But again, by where we are now in early October, yes, I think the situation is looking better also on-trade opening up progressively is a plus. So we'll have to see how it goes going forward.

And in terms of your off-trade channel, your off-trade channel now kind of back to pre-COVID levels or that is also still down?

Yes, we don't split out those I would say that it's getting pretty close to pre-COVID. So from a distribution and availability point of view, yes, that we certainly now cycled. So that is behind us from that part.

And 1 last question from my side. When I look at Carlsberg's September quarter numbers, for the quarter, they had a 30% decline. And in September, they spoke about an 18% decline. So it seems they are doing far better. So is there a significant loss of market share or are there any other reasons kind of the difference in performance between the 2 companies?

Yes, I don't want to comment on what others have put out or what are the backgrounds. I mean, there will always be differences in footprint and relative position in states. I think it's fair to say that trajectory state-by-state has been very different with off-trade, on-trade, stock positions in the market all playing its role. I think, if I look at our brand portfolio, I have no concerns or no areas of weakness where we think need to take protection at this point in time. So yes, in that sense, we focus on the recovery for our total portfolio and yes, we'll be supporting that going forward.

Sorry, 1 more. In terms of premium versus the mass beer or light versus strong beer, any kind of differential trends? What trends are you seeing in the market?

Poonacha, you want to comment on that one?

Yes. Premium has recovered as the on-premise has opened up. So as Berend was mentioning that the on-premise opened up only towards the latter part of August and there was only 1 month of September, which had the complete on-trade operating across the country. So there, the super premium segment has fairly recovered. But however, for the entire quarter, it is as bad as the main segment.

[Operator Instructions] The next question is from the line of Harit Kapoor from Investec.

So my question was on the product mix. So you mentioned in your release that product mix has been positive. But I just wanted to get a better sense. You also mentioned that strong has done better than mild. Also the off-trade was -- the on-trade was open for only a month. So I mean, I could just not reconcile the 2, that product mix has been positive but these 2 factors have still played out. So if you could just help me understand that?

Yes. I mean when say product, we say SKU. SKU means a state mix also would work there. And here, states with higher margins and higher LFR have done better than the other sales. Thereby, we're having average revenues higher when compared to last year, along with the couple effect of price increases that we have taken almost across 7, 8 major markets.

So, Poonacha, just to follow-up on that is, what would be the price increase component within this 5% price mix that you're seeing?

Yes. It will be largely mix because the Southern states and more profitable states have recovered faster than the other states. SO majority is state mix. And also, we have price mix. We have taken price increases in Karnataka, we've taken price increases in Delhi, we have taken price increases in Kerala, Tamil Nadu, Maharashtra. So in all major markets, we have taken marginal price increases. So this is a double effect.

Got it. Got it. And the -- just this 1 question was on the overhead side. So this year has made you guys probably look at all lines of the P&L even sharper to see where you can kind of extract the savings. I just want to understand whether you see some of these savings in the P&L on the overhead cost line a little more permanent as compared to earlier. So what I'm trying to ask is, once the business comes back to normal, do we see some of these savings will sustain going forward?

Yes. Definitely, there are, of course, many changes in the market and with consumers due to COVID, so how we react and how we are organized to respond to that. So there are short-term impacts from COVID, but definitely also we look in the future as to how we competitively organized and what is appropriate cost level against that. So that's -- in that mix, we'll manage the company going forward to make sure whatever learnings and new opportunities from COVID are reflected in our cost base and our key processes. And at the same time, as the market continues to open up. we'll also progressively support that with trade programs and activations. So obviously, that will also impact the cost base as well.

Berend, what I was trying to understand is that if you -- going into next year, once your revenues are kind of back, I know you will have to support it with trade programs, et cetera. But ex this trade promos, et cetera, is there a say cost saving that you can see. So for example, some of the costs that you've cut to kind of generate these kind of numbers, would some of them sustain going into next year? What I'm trying to understand is ex trade promos, is there a permanent cost-saving benefit that you have seen partly in the overheads as well?

Yes. So I think we would expect to come out this crisis also, from that perspective, so much stronger. So some costs will not come back. But obviously, we carefully monitor what happens in the market from quarter-to-quarter, how much we want to support trade program, distribution, et cetera. So there is always the balance equation, so I cannot kind of put the guidance out there as to what will happen exactly on the cost and margin side. But to your question, yes, we do see opportunities to continue some of these savings going forward.

And yes, sorry. And the last question was on the stock position side. So this 43-odd percent revenue decline, does it adequately reflect the secondary decline as well? Or did we have lower primary sales compared to secondary or higher primary sales to secondary?

No, I think there's not a huge impact from stock positions going up or going down. So market by market, hopefully, it might be sometimes a plus or minus. But I would think this is a fair reflection of secondary sales as well.

The next question is from the line of Jaykumar Doshi from Kotak Institutional Equities.

So my first question is on if you could quantify the quantum of price increases that you've taken and you mentioned about across 7 to 8 states, how does it sort of translate into at the portfolio level? Second is just curious to understand the timing of price increase given that volumes are fairly yet to recover. And have you seen the competition also take similar price increase? So that's probably the first question. I have 1 more, but I'll come back.

Sure. So the -- yes, we don't split out the pricing impact per state and per brands, but as a kind of guideline, you've seen hopefully the slide where we talk about 5% for the quarter, including state mix. And Poonacha mentioned the number of the states, which includes our larger states where we have taken price on a kind of year-to-date. And the timing is always, yes, subject to local circumstances, but they've been fully implemented by now. So we can see that benefit continue. For example, in Karnataka, we speak about INR 5 to INR 10 per bottle, same in Maharashtra. So, definitely, that kind of level, I think, is indicative for what we've done. And so what have competition done it rather refraining from commenting on that. But yes, we all know that the beer market is relatively competitive. So there the pricing element is quite key.

Understood. Second question is, you did mention about reduction in tax rate in West Bengal new beer policy. I didn't hear the exact number. So did I hear it correctly that INR 170 SKU -- 50 ml SKU is now at INR 130. And prior to COVID it was at INR 125. Did I hear that correctly?

Yes, that's correct.

Correct. So it's almost close to pre-COVID level. Now have they also reduced the taxation on spirits to a similar extent? Or It's just -- this concession is for beer. And is this a temporary thing and they will sort of again increase it once demand or volumes come back? Or you think this will stay?

I would expect the latter, I mean, it would be not very normal to do it as a very short-term measure. So of course, we have seen a lot of disruptions quite quickly after markets opened from lockdown. But I think all that dust have settled. And as far as I can see in West Bengal there is a new policy going forward. So I would expect that, that supports the volume for the total industry. As to exact increases on spirits, I don't really have that data. I think they implemented that policy a little bit later. So I need to come back to you on that.

And on similar lines, can you guide us on AP and Orissa, what are the benefit, if possible to quantify Orissa perhaps not that relevant or significant. in terms of scale, but AP? And do you see any recovery in volume given that distribution is undergoing a change. So with [ RPM ] change, do you think this tax reduction will...

Yes. So in Orissa, the pre-COVID MLPs for our main SKU was INR 120, then due to kind of COVID says it went up to INR 170 1-7-0. And that has been partly rolled back. So now that pricing is around INR 140. For AP, I think it's early days, we've seen no certification from the excise coming out, citing a couple of negative impacts from the recent measures. So that will back at least for the beer, the excise by some INR 30 per bottle. So that's an encouraging sign. So let's see where the market is heading there.

The next question is from the line of Ashit Anil Desai from Emkay Global.

Just 1 more question on Andhra Pradesh. Have we resumed supplies over there? And if you can quantify the impact that is there in this quarter? And when we expect either the impact to anniversarize or applies to resume in AP, what's the situation over there?