United Breweries Limited (532478) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Breweries Limited Q1 FY '22 Earnings Conference Call hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harit Kapoor. Thank you, and over to you, sir.

Yes. Thank you, Rio. On behalf of Investec Capital Services, we'd like to welcome you all this evening to the Q1 FY '22 conference call for United Breweries Limited. From the senior management at United Breweries, we have with us Mr. Berend Odink, CFO; and Mr. P. A. Poonacha, Finance and Investor Relations. At the outset, we'd like to thank the senior management for giving Investec Capital Services the opportunity to host this call. I'll now hand over the call to Berend for his opening remarks, post which we can open the floor for Q&A. Over to you, Berend.

Thank you, Harit, and thank you for hosting us. Good evening, everybody, on the call. Thank you for joining today. I hope everybody is safe and healthy after what has been a very challenging quarter, given the situation in the country. Today, we'll discuss the quarter 1 results. And after some brief opening comments, Poonacha and I will be happy to take any questions that there might be. Turning first to the results highlights. Q1 was again heavily impacted by the second wave of COVID-19. We continue to focus on safety while ensuring an agile approach on costs and investments considering the dynamic environment. Our volumes more than doubled versus prior year Q1, reflecting the different nature of the second wave-related trade restrictions and healthy underlying company performance. Restrictions in the quarter were less stringent when compared to the similar period of the prior year, with almost all the markets partially functional in some form. However, our June 2021 volumes were at about half that of our volumes in June 2019. We realized a positive sales and price mix for the quarter. Combined with continued cost management and adaptation to new ways of working, the bottom line results turned positive with an EBITDA of INR 102 crores and a 9.1% EBITDA margin. Slide 5 shows the volume performance by region. In general, the growth figures differ by region and by state due to different impact and timing of the second COVID-19 wave and differences in markets opening up both this year and last year. North saw good trading, particularly in Rajasthan and Delhi. In west, we saw broad recovery in all the markets. East posted the highest growth, that's mainly due to a low base last year due to late opening of markets at that time. In south, we saw broad recovery, some markets opened relatively later or were fully closed such as Kerala in the month of May. In summary, all major markets were partially closed during the first quarter and into July. Limitations in opening hours and for example, weekend lockdowns continue in most of the markets. If we look at the net sales buildup, it was driven by 115% volume growth and 6% price/mix. The next slide shows the EBITDA breakdown. Gross profit improvement were driven by better volume performance. Employee expenses lower by 1% despite the higher volumes. Other expenses have increased by 51% due to learnings from prior year which led to better management of COVID-related disruptions and associated costs, continued cost savings and partially offset by higher commercial investments. Finally, turning to the slide on outlook and summary. We have observed progressive recovery of underlying consumer demand post the first COVID-19 wave. I see no reason why there should not be any structural changes post the second phase. Health and safety of our employees and stakeholders remains paramount, while operations are fully in compliance with regulations as they are introduced from time to time. We are monitoring the changing environment on a continuous basis and will take appropriate actions for steering the business profitably by dynamically managing all elements of costs and investments. While the industry outlook continues to be volatile, given the uncertain trajectory of the pandemic, the company continues to be optimistic about the long-term growth drivers of the industry and is committed to strengthen its market position. That concludes the opening comments and let us move to the Q&A. Please go ahead.

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

So 2 questions from my end. So firstly, can you give us a sense of how the reopen is progressing by region? I mean you've given a sense of the performance, say, up to June in your slide. But can you give us what's happening in July by region? And secondly, in terms of where you see July end up compared with July '19? Any sort of commentary on that will also be extremely useful.

Thank you, Aditya. The situation of restrictions and lifting off lockdowns is, of course, very state specific, sometimes even district specific. But I think the broad thing we have seen in June, the restrictions started being lifted and subsequent steps in July, we have seen in most of the states. So of course, some states went to full lockdown, some states went to partial opening, some states were less impacted at all. So that has been definitely differentiated and very different from prior year Q1. But I think the picture is today that we have seen, of course, retail, first of all, mostly come back and retail -- sorry, on-trade on the second phase with still limited opening hours and limited seating capacity in most of the states. That's the picture, broadly state by state. And towards July trading, we don't put out the figures, but definitely the picture is one that where we have seen last year, recovery of the markets month-by-month, quarter-by-quarter. Again, this trend is very strongly visible today. At the same time, we all read the news, the trajectory of the pandemic is very difficult to make any estimates about. But at least where we are today, we do see recovery and that's been manifesting itself in July.

No, I understand. That's clear. And in terms of sequential gross margins, we see a compression there. Now is this a function of sort of higher input costs? Or was this just largely state mix and lower utilization [ mix ]?

Yes. If you compare to last year Q1, we, of course, made an improvement. If you compare it sequentially to Q4, we are a bit lower on gross margin. This has to do partly also with state mix that we see, for example, a few states, for example, with cans been -- having a larger share in the total company results. So we expect that to normalize as the state mix and the recovery continues in the months to come.

Also, some costs with respect to the failure of the reverse logistics on used bottles, because when we ended last financial year, our used bottle returns had come back to almost normal. But this quarter, again, with the pandemic hitting, the infusion of new bottles has gone up because of the used bottles return system having failed.

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

My first question is, from your presentation, you have said June sales were half of June 2019, 2 years back. So I wanted to understand this number. So would you be a bit disappointed given pent-up demand would have been there and in-home consumption has also taken some shift in favor of from pubs and bars. Pubs and bars will be 25% of the sales. But why should the sales be half of June 2019. Because in most other sectors in consumption, we have seen pent-up demand of the loss here of May coming out in May -- in June. So that is not visible in your case.

I think one has to recognize that even in June, there were a lot of restrictions. So most of the opening of the trade, for example, the on-trade that in certain states continued to be closed for the full month, other states had on-trade opening towards maybe the 21st of June, so only a small part of the month. But even in retail, we saw restrictions on opening hours. So for example, if the opening hours are only from 9 to 3 or 9 to 1, given that beer is, of course, a product that needs to be chilled and that you consume towards the end of the day, I mean that's not supporting immediate good recovery. But having that, as we have seen in July, further opening of trade and the restrictions continue to be lifted. Yes, we're hopeful that recovery will continue on a good pace.

Sure. My second question is in some of the states like Bengal and Rajasthan, there has been favorable regulatory action for beer industry versus the spirit. So if you could elaborate on those 2 states? And any other states, you can get this benefit? Why should it be restricted to only 2 states?

Yes. In those 2 states, we have seen indeed, as we discussed on earlier calls, favorable regulatory changes. With that, we have also seen very good trading. I would say in the case of Rajasthan, it's probably a little bit early to really conclude as we need a couple of months, I would say, to really get a picture, which is not impacted by restrictions on opening hours to get the full visibility. But at the same time, to the second part of your question, the states, each of them make their own decision as to what the policies are going forward. So it's good to know that a couple of these policies are moving in the right direction, but this discussion will remain very much state-by-state discussion and policy. But definitely, we are using those examples with other states as to what future policy could look like and what could be the -- that we think are the win-wins for the industry participants. But it's too early to comment on other states' moves and by when, et cetera. That's not in our hands.

Just to add, even Uttar Pradesh, there was a duty reduction effective April 1. You've not taken a note of that. So in addition to West Bengal and Rajasthan, in UP also, there was a duty reduction and subsequent drop in MRP, which is leading to a buoyant market in UP also.

Okay. But do you see any risk that these 3 markets could reverse because we know how state governments operate. So when they see good volumes coming back, they become quite greedy to increase the taxes again. So is there some risk, or do you see this financial year that risk is low, based on your understanding? We can't predict how state governments operate.

Yes. I think what I can see is the states made a conscious call to move in this direction. Of course, you never can rule out some of this might be changed in due course. But I would also refer to last year when we had many states introducing kind of COVID tax or COVID-type taxation, which was quite large in a number of the states. I think all of those examples showed that those kind of big duty increases did not really work and were rolled back fully or sometimes partially in subsequent months. So I think this has also shown many of the states that, yes, you have to be with a long-term approach with careful rationale in terms of your excise policies. So I think all those learnings hopefully will bear fruit in the years to come.

Sure. And one last one, so on Delhi liquor policy, any comments? What will be the changes? What will be the benefit?

Yes. I think in general, it's going to be good for consumers in the sense that increased opening hours, reduction of the legal drinking age, moving much more of the trade, in fact all of it to private hands. So I think that's a move towards consumer choice, and that's something we certainly support. Yes. So we're hopeful that it's brings new growth introduced to the Delhi market. And that, yes, we fully support it.

In addition to that, in Delhi, the rule also says that the manufacturer of beer can no longer have their depot in Delhi because there's no manufacturing facility in Delhi. So as such, today, the manufacturer needs to have their depot. So going forward, those depots will have to go. So the smaller players in the immediate will be in some sort of a pain. So the major players tend to gain with this new Delhi policy.

And your depot will be where? In the UP? How do you...

In Delhi. In Delhi. I mean all manufacturers cannot have manufacturing facilities in the vicinity of Delhi, that's the outside Delhi. So the rule now says that you have to have manufacturer owning a depot location inside Delhi. So your production facility bills the depot from which you sell to Delhi market. So going forward, the manufacturer cannot have this depot facility. So it has to be a large distributor who has previous financial strength and track record. So in the immediate future, the large players will tend to gain because the smaller players will not be able to identify a strong party to do their distribution.

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

Just 2 questions. We've seen a lot of cost savings from you over the last 2 quarters. So when we look at the overhead cost line item, could you help us understand how much of these are structural in nature? And if you could split that into the major costs where you've seen a lot of savings? That will be helpful.

Yes. In the -- you're right, we have been running, let's say, comprehensive cost savings program since the start of pandemic. This is actually continuing. All of those savings are of a structural nature. But at the same time, we've always said, we don't put out one figure what is moving to the bottom line as we always have to also take into account other types of inflation that come from time to time in the different cost items. Secondly, we also decided to reinvest part of that into commercial activities, whether it's in the top line or in the A&P spend. So those elements will be there from time to time. But definitely, the cost savings that we have done are of structural nature, and we continue that program to reach further efficiency. And as we said, we dynamically look at cost in the sense that yes, we have seen, of course, a very volatile top line. And with that, we aim to manage also the cost elements in that space.

Okay. And is there a target which you will work on internally to save costs every year, like some other companies do?

Yes, we have a program where we have a rolling forecast of what are the -- all the initiatives, what is the pipeline, what is the realization. And of course, we identify those initiatives, we have in mind the certain absolute figure which can also be fully moved to the bottom line, let's say, depending on where other costs move, what is the competitiveness in the market. But that's how we operate. But again, we don't put one figure out there because I think that might be partially misleading it, if we decide to reinvest some of that in -- behind brands or behind innovation, then yes, it might give the wrong signal, I think, if we talk about those numbers. But rest assured that all the main cost items, we have those programs running, and we will continue to identify new initiatives and move those along going forward as well.

Got it. Got it. And lastly, with Heineken increasing stake and you becoming a subsidiary of Heineken, do we see any changes in operations or more collaboration or some synergies, cost efficiencies due to that?

Yes. I think we will, of course, explore in the coming months as to where we will closely further seek cooperation with Heineken. I don't expect huge changes in how we operate or what we do. But of course, Heineken has been a long-term shareholder in the business, has been longtime represented on the Board. Of course, we have the brand's full cooperation. But yes, of course, we can always take next steps and further levels of cooperation, so that's something we'll definitely explore. But if you ask me if there immediately is going to be a huge change, I don't think so. But again, we're happy with that kind of confidence Heineken has in the business, sees in the beer markets, the potential for India. And yes, we will work together to unlock that further growth potential.

The next question is from the line of Alok Shah from AMBIT Capital. There seems to be no response from the line of Mr. Alok Shah. The next question is from the line of Arnab Mitra from Credit Suisse.

My first question was on input costs. So if you can give us some sense of the outlook on barley prices that you see for this year? And also, do you anticipate increases in glass prices given the inflation that we have seen in crude oil and gas prices? So some outlook on both these commodities if you can share with us?

Yes. The -- on barley, the picture is still similar as we have been discussing in the last call. So barley prices have moved up by around 15% this crop versus last year crop. Both the quantity and the quality this year around is a little below normal than what we would see in prior years. On glass, we see more or less stable input prices there, much, of course, will depend on the collections that we get back out of the markets. But all in all, I think for input costs, the picture is similar as we said in last call, that we look at kind of mid-single digits in terms of -- on a per case basis the input cost inflation.

And in terms of possibly mitigating the cost pressure, is there some pricing you have from some of the states that you've got versus last year? And also, if you look at it versus FY '20, which was actually a relatively tough year for input costs also, are -- is the margin scenario tougher than what it was pre pandemic?

So on the pricing, we have taken some price increases in some of the states, smaller increases in Maharashtra and Karnataka, a few of the other states. But I would say probably this year is more about volume recovery versus straight-out pricing. I think that's a bit different maybe than traditional years. I think really the emphasis is on moving the volumes back to pre-COVID levels versus straight out price increases. And on the margin side, yes, of course, we have mitigating cost measures in place. So we look at increasing the recollection. If we look at the type of bottles we use. We look at consumer value engineering approaches on some of the input materials and we're confident that that will, in part, mitigate some of these cost increases.

Sure. And one last question from me. Any CapEx plans now for the next 1 or 2 years, given that volumes have now come down, but if you anticipate a recovery, are you going to restart your CapEx this year? Or could you give it a bit of a pause to see how the volumes come back?

Yes, it will be more the latter. It's a bit of a pause. So we have completed a couple of programs that were initiated pre-COVID period. Those are finalized, those have been completed. So we will do the normal kind of statutory safety compliance-related replacement type of CapEx programs. So the guidance we put out last time was around INR 250 crores for this year, but that includes not really any expansion because we have ample capacity at the moment. At the same time, there will be some lead time, of course, when things pick up and we would look at volume growth from pre-COVID levels. But yes, that's not yet on the table today.

The next question is from the line of Jaykumar Doshi from Kotak. We seemed to have lost the line from Mr. Doshi. We move to the next question. The next question is from Vishal Punmiya from Nirmal Bang Institutional Equities.

So I have 3 questions. Firstly, on the realization as well as the price/mix during the quarter. So if I see the volume growth and then, obviously, minus it from the beer sales growth, the realization/mix growth is actually negative. What has led to that negative growth which has been positive over the last many quarters? Second question is on the premium brands. If you can update in terms of how the overall performance versus the overall portfolio of the premium brands during the quarter? And any update on the Witbier scale up as well as performance during the quarter? And lastly, also, if you can give some highlight on the advertisement spend during the quarter? There was a [ sporting ] event during the quarter. So how did that pan out on a Y-o-Y basis? And how do we see this spend on a full year basis?

Yes. Coming to your mix, I think this unusual quarter and unusual year has seen the high realization markets having more restrictions than the others. So that has resulted in an unfavorable mix. And with things normalizing, the sales mix should go positive and the more profitable markets, which were subdued now, should bounce back and you should see a favorable sales mix. And your second question was on super premium brands. Yes, there was a pressure in the quarter because even now the complete opening up of the places of consumption has not been complete. I mean there have been a lot of -- so as such, super premium brands are consumed in these locations where, currently, we are finding these restrictions not fully gone. And coming to your last, [ A&P ], yes, there were subsequent spends on the IPL, which was -- which has been shelved now because the event has been shifted to April. So wherever the buzz for the brand is needed, we are ensuring that that has been taken care of. We are using digital media and other methods to reach out to the consumer. So the buzz needed for the brand is in place. So we should find positive results in the coming quarters.

Just a couple of doubts. Firstly, in terms of price increase, what would be the weighted average price increase that will flow through in the next quarter? And also an update on the Witbier scale-up and performance?

Yes, yes. Witbier scale-up will be done as and when things normalize. We had started some scaling of Witbier but then with the pandemic, we had to pull back. It will be done [Audio Gap] when the mix normalizes, you will see improvement.

[Audio Gap] increase for the company?

I can't quantify that. If you start multiplying each [Audio Gap] SKU with [Audio Gap] projection, it is difficult to achieve.

[Operator Instructions] The next question is from the line of Alok Shah.

Sir, while you partially elaborated that [Audio Gap] on the CapEx. But just wanted to understand better what would be a typical cost for a greenfield brewery that you setup? And that should typically include premium plus your [Audio Gap]. So what is that ballpark number?

The brewery including land might be really depending on the location, [Audio Gap]. But we talk about numbers like [Audio Gap].

Okay. And just to confirm, you are saying that the earliest that you will possibly look at this is some time around FY '23 and not before that, right?

No, we've not spoken about greenfield. We're talking about new investment. I mean greenfield is setting up a new brewery. I mean we have breweries across almost all states where we need to have them. So as such, there's no tearing hurry to open up a greenfield. When CFO said that there will be new investments after 2023, it's new investments in expanding capacity because the current investment is for replacement and upgradation only considering that we have sufficient capacity to meet the current demand in '23. That's what he meant. He didn't mean that new investment means a new greenfield.

Got it. Got it. Okay. And Poonacha, I just wanted to clarify on the depot thing that you said. So basically, you are saying that now you do not require a depot, but all the beer companies will have to rely on a large distributor in order to penetrate well in the new retail landscape in Delhi. Is that understanding correct?

Your understanding is correct. And most large players have depots which are currently being managed by these large distributors. So as such, they have an ongoing relationship. So what would happen is the large players would ensure that this billing happens to this current distributor who's managing the depot and the business will run seamlessly. But the smaller players who have their own depots now, which they are managing themselves, they will be left in the lurch because it will be a difficult time for them to find a distributor in a hurry.

Got it. Got it. And very quickly, if I can just squeeze in one more. I just wanted your quick remarks on the related party transactions, of course, it's a small amount, but things like technical service payer or royalty payer. So if you can share the rates for the same? Or how does the transaction work?

Yes. The Heineken brand, we are paying 7% royalty. And for the Amstel brand, we're paying 5% royalty. These are as per income tax transfer pricing rules, and it is perfectly in sync with what is done across the world.

And the related party?

Yes?

No, I'm saying, the purchase and sale transactions within the related party would essentially pertain to what?

We're not talking royalty, we're talking about purchase and sales.

Yes. No. So first was on the technical service and the royalty, and the second part was on the purchase and sales that we see in the related party. If you can just explain on that.

Yes. I mean if we are purchasing something from Heineken, Heineken has a rack rate, which is as per international transfer pricing rules. And it is no different whether it is sold to UBL in India or to any other their opcos across the globe. So that way, we are completely compliant with related party transactions in all statutes.

So some components will be related to brands owned by Heineken where we pay a royalty. Some components is where we import brands, for example, finished product goods like Heineken 0.0, so that we buy and import. And another component can be technical assistance or know-how fees, which are also quite [ difficult ].

Okay. Got it. Then because [Audio Gap]

Sorry, I didn't get your last question.

No, no. So I was saying because the absolute amounts were going up year after year, so I thought I'll just clarify on the transaction [ fee ]. That's it from my side.

Yes because the transactions -- the number of transactions are going up. So royalty is going up. The volume is going up...

[Operator Instructions] The next question is from Jaykumar Doshi from Kotak.

Part of my question was already answered earlier. Just a quick one follow-up. So you mentioned about roughly mid-single digit increase in input costs based on where barley prices are current as of now, and you don't see any material inflation in glass prices. My question is, has this inflation already reflected in the 1Q FY '22 results? Or will we see incremental input cost pressure over the next 1 or 2 quarters?

No, no, this guidance is for the full year including Q1. I think behind your question is, of course, barley that will take a bit more time to flow through the full P&L. On the other hand, we also see a couple of other commodities where we saw earlier inflation, for example, on carton or secondary packaging that will flow -- that's already more built into the current pricing. So in that sense, the guidance is composite of all those input cost materials.

Understood. And second is around the price increases that in a few states, including Karnataka, Maharashtra, Rajasthan, Punjab, Kerala, has this reflected in the current quarter? Or will we see a full benefit of those price increases as over the next 1 or 2 quarters as state mix and product mix normalizes?

Yes. I mean partially, they have been because some have come in April, some have come in May, some have come in June. But all these states have had some effect in the first quarter already. We'll see the complete effect in the second quarter onwards.

Understood. So as you sort of move towards normalized environment and state mix, reasonable to expect that gross margins should go back to 51%, 52% levels from the current quarter's 48%?

If the mix remains as it was as of March, achieving March quarter's margin percentage with these price increases should be achievable.

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

Just a couple from my end [Audio Gap] in the balance sheet from net cash to net debt, this is largely led by higher working capital towards the end of the year or a little bit of CapEx that you spoke about, which has been done in the first quarter. Obviously, you had lower cash flow from operations this time. So I just wanted to get your sense on what [indiscernible]?

It should be -- we should be comfortable. I mean -- because I mean if you see the start of the quarter, we started with huge opening cash balance, and we also had a high working capital blockage considering the March quarter had a 9% volume growth. So you had a high level of debtors. So all that will be liquidated as we go on and go into the off-season. So cash flow-wise, we should be comfortable as we speak. And as the CFO already mentioned, we will be cautious with respect to our CapEx, considering that the CapEx is limited to replacement and not for expanding the capacity considering we have capacity for current volume levels. So we should be comfortable as we speak.

Got it. Got it. The other question was regarding new product innovation. I mean you had the [indiscernible] Witbier, I think this is initial phases of launch...

Your voice is very feeble. Harit, you are very feeble. I mean we have to -- at least I have to strain my ear to hear you.

Sir, can you hear me now? Is it better?

That's better. That's better.

Yes. So my question was really regarding the innovation pipeline. So once things do see a little bit of normalcy, do you expect a higher rate of new product launches, given the market was just not conducive to roll out Witbier or any other new agendas that you were planning for the last 15, 16 months. So is that a better way to look at it, that we could see more new things from United Breweries stable once you see signs of normalcy kind of setting in?

Yes, you're right that, of course, with the current trading environment, we're not really conducive to launch brand or expand them. We do have plans that we had to suspend given the second wave, so on Witbier and some of the other brands, we still have more states and more expansion to go. So that's something that definitely will pick up. And certainly, as we always said, I mean, the development of the beer market in India is, I think, still early days. So much more will happen particularly on the premium end and that's what we're, of course, gearing up for. And if anything, the number of innovations and launches will increase with that development. So I think that's very positive that the market continues to evolve, consumers continue to experiment and look for varieties. So that's all making the beer market more excited and particularly on the value and the premium end, so that's positive.

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

Yes. Just 2 follow-ups. In Delhi, you talked about the changes in policy. If you could give us a sense how large is this market? And also how -- what is the share of smaller players in this? So if you remove the top 3 players, what's the share that the small players enjoy over there?

Smaller players is around 15%. And Delhi salience for the country is approximately 3.5%, 4%.

Okay. And lastly, last year, you all had some provisions after the lockdowns due to the lockdown. Are there any provisions in this quarter?

No, the provisions are on a very low level. So there's nothing in terms of one-offs that's really impacting the profit and loss this quarter.

And looking at the inventory at depots and your plants, is it fair to assume that there will not be much provisions going ahead also?

No, the expectation is that, I would say, the worst is behind us in terms of markets being under lockdown. Of course, with the experience from last year, the different nature of the lockdown and the weeks leading up to the lockdown, then yes, we were able to anticipate a couple of these dynamics. So where we stand today, we do not see any particular risk on stocks, whether it's in the market, breweries, et cetera.

[Operator Instructions] And as there are no further questions, I'd like to hand the conference back to Mr. Harit Kapoor for closing comments.

Yes, thanks, Rio. Once again, on behalf of Investec Capital, we would like to thank all the participants who joined on this call as well as we would like to thank the management team at United Breweries. I would also now like to hand over to Berend for any closing comments. Berend, over to you.

Yes. Thank you, everybody, for your interest today, and thank you, Harit, for hosting the call. And I think we can conclude and look forward to being in touch with everybody in the next few months or otherwise in the next quarter call.

Thank you very much. On behalf of Investec Capital Services, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.