United Breweries Limited (532478) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to United Breweries Limited Q4 FY '23 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 from Investec Capital. Thank you, and over to you, Mr. Kapoor.

Yes. Thank you, [ Andrew. ] On behalf of Investec Capital Services, I would like to welcome all the participants to the call as well as would like to thank the United Breweries management for giving us this opportunity to host the Q4 FY '23 earnings call for United Breweries. From the management of United Breweries, we have Mr. Radovan Sikorsky, Director and CFO; as well as Mr. [ Robin Eckstein, ] who is part of the Business Control and Investor Relations. I'll now hand over the call to Radovan for his opening comments, post which we'll take Q&A. So over to you, Radovan.

Thanks. Thank you. Yes, good afternoon, everyone, on the call, and thank you for joining. So today, we will discuss quarter 4 and full year '23 results of UBL. And I'm here together with [ Robin ] and after the opening comments on our results, we are, of course, happy to take your questions. I will start with the highlights of Q4. Volume growth of around 3% in the quarter, driven by Telangana, West Bengal, Uttar Pradesh, Rajasthan. We faced some market -- route to market headwinds during quarter 4 as well and the volume growth, excluding some of that was around 17% for the quarter. The premium segment again, recorded growth ahead of the total portfolio, which is nice to see, growing around 19% in the quarter, driven by Heineken, Kingfisher Ultra and Ultra Max, which was all nice to see. Net sales were up in a region of 3.5% with healthy pricing around 5%, with some of the positive premiumization coming through in net sales as well. But quite a bit of [indiscernible] again by the negative state mix. Our price increases have been taken across multiple states, and we have a continued commitment in driving revenue management activities, and we're putting much more effort behind that, and we see some fruits coming out of that going forward as well. Gross margin under pressure, as I have said before, for quarter 4 that would come, and that's really coming through -- with the cost of sales of barley and the packaging material. The decline versus quarter 3, so we spoke that the pressure would continue and was slightly more but that was primarily also because of the state mix effect. So the state mix effect was slightly higher than we thought and therefore, a slight decline in the GP margin. On the EBIT margin, mainly driven by that gross margin and that was the key driver on that front. In terms of highlights for the full year, so a fantastic 31% growth. So again, showing that category really coming back and actually at 2023 March year-end were the highest volumes we have sold in terms of which you look back historically, which is great to see. The premium segment grew close to 60%, strong net sales growth as well, supported by the pricing but, of course, impacted by the negative state mix. And regarding the margin, declines for the full year. And again, I don't need to repeat the inflationary pressure. But we also, of course, got some fixed cost leverage in that, so that boosted -- that mitigated some of that negative impact. In terms of -- from the board meeting, the board proposed a dividend of INR 7.5 per share. And although you know that amount is slightly lower than last year. Also last year, we had quite high cash position but still it's quite a bit higher than in previous years. And that really shows our commitment to shareholders that we really believe in the long-term categories of this business and the resilience of our business going forward. So I think that is nice to see. In terms of the final, the outlook, nothing really changes from that perspective. We believe in further building category growth, driving premium to our portfolio, Heineken Silver, Kingfisher Ultra family who will continue on that journey. In terms of the inflationary pressure on our cost base, that will continue in the near term, like I've mentioned, but we see some light at the end of the tunnel as we get to the back end of the year as well. As you know, we will continue with our revenue management initiatives and, of course, have really a cost mindset in terms of managing our cost saves. So overall, we remain optimistic on the long-term growth potential of this industry, increasing disposable income, favorable demographics and premiumization. So with that, I will conclude. And I think, yes, we can move to Q&A.

[Operator Instructions] The first question comes from the line of Latika Chopra from JPMorgan.

My first question was on the demand front. As you exited the quarter, 70% volume growth at Tamil Nadu, I think growth rates are fairly healthy but as you exited the quarter, did you sense any adverse impact from unseasonal rainfall as a lot of other consumer companies are calling this out, and do you see that as a risk for the summer quarter, is it the current quarter?

So you're moving -- you're saying moving into quarter 1 of this year, yes?

Yes.

Yes, so the weather was -- has been having an impact particularly in the north, definitely. And we see that. So it's putting some pressure on what we're seeing in some of the volumes. That consensus is there for sure.

Sure. And the second part was, other than the weather impact and if you look in the other line consumer spending behavior fairly healthy in your view? And how has market share progressed for United Breweries, including or excluding the Tamil Nadu piece.

So in terms of consumer, I do not see any impact. Its really too soon to tell. We are still confident behind that. And we're seeing strong premiumization as well. So we're seeing the disposable incomes must be playing a role there as well. So at that moment, I feel -- that I don't see really any issue in that respect. And in terms of your question on market share, yes, we have come under a bit of pressure in our market share, excluding Tamil Nadu. So we have low single-digit share, but again, you probably know even better than me, how volatile these market shares can be across the different states, also depending on supply, from interstate supply et cetera. So I wouldn't put too much reading into that at this point. I think we needed to look at it from a more longer-term perspective.

Sure. And the last question I had was on raw materialization. You said this might remain a headwind in the near term. If I recollect correctly, last time you spoke about the high-cost barley inventory probably be getting exhausted by Q1 of FY '24, is that the same situation -- status quo right now? And we are increasingly finding that the fresh barley crop in India, the prices seem to be moderated, I guess you would be procuring the fresh barley. Any color on incremental input cost inflation, particularly for barley and for glass. So assuming the state mix remains constant as Q4, would it be right to say that Q4 was bottoming out of gross margin?

Yes. So in terms -- rightly said, I've mentioned that in the last call that quarter 1 is going to continue to be difficult for us like in terms of margins. Hopefully, the weather picks up a little bit, and I think there are some green shoots in that in terms of the volume side, but the margins -- pressure on margins in Q1 will continue, and we should start seeing some benefits flowing through in quarter 2 as we start incorporating the new barley crops into production. And the current status on the new -- on the barley in the market, it's a good crop, and quality is good. Some issues with moisture as it's been raining quite a bit, as you rightly said about the weather conditions. So it had been raining more in the northern parts in the Rajasthan area. So there is moisture in the barley but it seems to be that the crops are still good. And in terms of pricing, it's sort of more or less in line to what we thought that there is -- pricing is coming down versus what we had in the past, so that's good to see.

Next question comes from the line of Nillai Shah from Moon Capital. The line of Mr. Nillai has been disconnected. I'll come with another one that is Jay Doshi from Kotak.

My apologies I joined a bit late so if the question has been answered, I'll go back in the queue. Could you give some color on your market share trends in the past couple of quarters, have you managed to maintain market share? Or are you losing market share both in the premium segment as well as mainstream segment? That's my first question.

So like I said in the previous call, we had come under a bit of pressure in the market share in total, in a very low single digits. But again, like I mentioned to the previous question, I wouldn't read too much into it, like there is volatility in market share across states when we try and consolidate across the whole of India. So that's the way we look at it. In terms of premium market share, I believe we are broadly flat in terms of the growth. Maybe excluding route to market share, yes, it could be around -- yes, I would say, broadly flat. As you know, it's not that easy to gain the exact market share that's way we see. How we're growing in the market, I would say, we build the plan.

Understood. That's helpful. And if you have not already answered, could you give us some color on what's the impact of AP-Telangana loss of volumes on a Y-o-Y basis? And what's your strategy for those markets? If you answered that, I will look at the transcript later.

Yes, I've mentioned in the transcript, I've said that given some of the route to markets headwinds, we had a growth of around 17% in the quarter. So on Tamil Nadu, we're seeing some positives coming through for summer in terms of volumes as there is shortage of capacity as well. So we are cautious in terms of saying if that will continue, but it looks like for the next couple of months we see increased demand for volumes, which is nice to see. Whether that will be permanent, I cannot say at this time as we work through improving the situation there. We continue with the same route to market model that we said -- that the changes we made using our own sales force, and we stick to that. But there seems to be a bit of positiveness coming out now for the summer, and we will monitor that.

Next question comes from the line of Nillai Shah from Moon Capital.

My question is essentially on the market shares. You gave us color on that. But just thinking about one state on which we get data on a regular basis, Karnataka, which has generally been a state where you've been very strong in the past. There has been a significant market share loss out there. Can you give some update as to what really is happening in that particular state for you?

So in Karnataka, yes, we have lost some market share, to be honest. You know there what -- there has been some dynamics there in terms of the growth of what we would call the economy segments, particularly driven by [indiscernible] Now that is growing quite a lot in the markets. We have also introduced bullets in that sort of segments but we are careful of being -- driving that volume growth because we feel that, that is not good for the total category. So we have lost some share there. But we're going to work our way through that and see how it goes. In Karnataka as well, as you know, the elections are coming through, so there is quite a bit of volatility in the market of supply. So we've had some of the administrative issues around dispatching. So that has complicated things a bit. Next week, as you know, it's going to be a bit more difficult. So hopefully, as we get through that, we can get that contract again.

Okay. And then the second question essentially is on this part that we've been trying to focus on the premium segment, which obviously is good from a Heineken perspective and good for UBL from a long-term perspective. In the near term, how do you balance the volume growth versus what your aspirations are from a long-term perspective for the premium portfolio which is to say that when your sales force is going through to the outlets, how are they incentivized to drive volumes versus mix versus just overall growth for the business?

So I'm not going to go now into details of the sales incentive schemes. But of course, it's a combination of the 2, the pool from the consumer and the push that we give. We do incentivize sales to focus on premium as well. But importantly, not to take the eyes of Kingfisher, which is the bread and butter of our business still, right? So it's the right balancing act, I would say, right. We've been managing that by trying to build the brands through digital, through media, in the respecting regulatory environment, we build consumer pool. We get the traction, and we see nice traction coming through actually for the Heineken Silver brand. And that's how we do it. And it needs to be a game of patience, I think, that is key for us. It takes a long time to build the brand, if you look what Heineken has done in markets like Brazil, it's taken many years but we can see that at the end of the day, there's huge opportunity for us.

Got it. That's clear. Just one small bit on the input cost that you spoke about to the earlier question. Given that the volumes arguably are more than overview have envisaged as we went into the season period, and now we have certain issues with the weather conditions. So volumes for next quarter are also slightly uncertain at this point in time. Will it be then fair to say that the barley which you've procured will probably go through till the end of 2Q, given the lower-than-expected volumes that you have witnessed?

That's a good question. That's a good question. Of course, I'm also grappling with that. So I'm still confident that we will continue to have good volumes. But to your point of -- if we have muted volumes going into the next couple of quarters, which hopefully won't be the case, then that, that would be an impact, 100%, I cannot deny that would impact, yes.

Next question comes from the line of Krishnan Sambamoorthy from Nirmal Bang.

Yes. Radovan, when you mentioned that gross margin pressures are likely to persist in Q1, were you talking about both material cost pressures as well as state mix being unfavorable?

Yes. I mean the state mix, it's difficult sometimes to make the call because -- the state mix was a little bit stronger in quarter 4 than we expected, so it was slightly. And it could continue not to the same extent potentially but what we are doing, however, is ensuring [indiscernible] management activities to try and push more and more pricing also in those states that have an impact on state mix. So that is a key focus for us. So we are looking at other states where we could potentially take price as well and that will help us in that respect.

And how many months of barley did you have inventory, did you have at the end of March? And how much do you have currently? Will you be able to share that data, given that you'd be typically procured barley for the 7, 8 months of the year, during the season?

We had quantities higher than what we had in March 2022, right? And there was -- and the reason behind that was that we needed to be slightly more conservative as we move into 2022 on the back end because if you recall very well, the barley crop wasn't good in 2022. And at the same time, volumes were coming way above expectations. Like I said at the beginning of the call, if you look at the full year volumes, it was a record year for us, which is fantastic also for the category. And when we saw that coming through, as we were progressing through the year, we made the call that we need to procure more. At that stage, there was also the pressure around Ukraine and barley crops combinations to the volatility, and therefore, there was a more conservative outlook on that. So our crops are higher, how much more I cannot quote that really to you at this point. But yes, that's basically the background to them.

Okay. And have you been supplementing your inventory significantly over the last month or so?

Have we been sorry, what?

Increasing your barley inventory?

Well, now -- we now are working to get the new crop in. So we already started purchasing new crop, and we are in the markets, and we are outsourcing, so that's happening, yes. But of course, we don't have the old crop.

Okay. Just one more question on the other component of your raw materials. By Q1, the higher proportion of markets would still mean that any adverse effects of -- particularly from a sequential perspective your bottling costs can come down. Do you see bottling cost being high for a few months and therefore, a risk to your Q2 numbers and beyond as well? Or do you see some kind of reduction there?

Now the question on the bottling is still there in pricing. So we still see our Q1, the bottling prices will be an impact and even into Q2 on the bottle. It's more the barley that I see the sort of the improvement. But on the bottles, the pressure is still there because of the supply in the market. But I think we are working through that with our large suppliers. And I think, we are much more looking now into the medium to longer term that we are in much better position and control of our pricing.

Will you be in a position to guide?

And on top of that, I think, I mentioned it also in my previous call, there's a lot of focus on us on the returnability of the bottles to get returnability improvement. So that's what the team working on. It's not an easy process, right? Because it's a complex infrastructure of bottle collections through the different S1, S2, S3 sort of layers that we operate through. But I think there is more that can be done there. And that, of course, helps a lot, and it's also grateful sustainability. It's got a double impact for us. [ Several ] positive impact. But it's -- some of these things just take a little bit of time, it needs structure, it needs thinking through, but we see opportunities there as well.

Okay. And would you be able to -- would you be in a position to guide us on when do you expect bottling cost to come down in Q2, Q3, realistically?

It's a little bit difficult for me to say that now, in terms of bottle. I still see the pressure continuing around the bottle. So I think we're going to get more the benefit of the barley than the bottles at this point in time. On the bottles, I see it more as being much more effective in terms of bottle returns. That's what we need to also focus on.

Okay. Just a follow-up on that. Typically, if I'm correct, the market bottle proportion would be about 70% to 75%. From a 4- or 5-year perspective, what do you expect that number to be?

Yes, I'm not -- you know it's an estimate. I'm not going to go through those estimates. We want to improve on where we are, and how we came out of COVID. And there has been some improvements already, but I'm still not happy with it. I still want teams to work more on that, to focus on that. And for me, yes, it's all about profit as well in terms of efficiencies, but also the sustainability agenda for us.

Next question comes from the line of Ajay Thakur from Anand Rathi.

I just want to understand on the competitive intensity. Given the fact that many of the new players are kind of seeing increasing share or increasing revenue, which is much faster than our growth rate. Can we expect that in the medium term our market share could be at threat from the current levels?

Our market share will be, sorry?

Our market share would be under threat in the medium term from our current levels given the competitive intensity rising from the newer players?

No. I mean look, Kingfisher has a very strong brand presence in India. And I think our premiumization strategy is also going in the right direction. Competition is healthy in India, and as we've always say, there is a lot of opportunity for category growth. I mean we just need to focus on doing the right things, in opening up new locations for the brand Kingfisher and for our premium portfolio. And I think if we do the right things, we can keep our market share or grow our market share actually in certain states and really grow premiums because where we feel we are underindexed, so that would be nice to see, and that is a focus to bring up in premium market...

And second, I wanted to understand what would be the mix of bottles and barley for us in terms of the raw material cost? And if I were to look at in terms of the correction in the barley cost, will we get the benefit of the whole of the correction in the barley cost whenever we exhaust our current inventory?

Well, yes, we will get the full benefit when we exhaust the full inventory, that's definitely the case. And hopefully, we can exhaust it as quickly as possible to be honest, right? And that would be the best. In terms of the mix cost and then I've given quite a lot of information already on that from the previous question. So in terms of the bottle strategy and barley pricing, so maybe you could pick that up from the transcript as well but -- yes, just covered there.

Next question comes from the line of [ Chinmay Kandwe ] from Canara HSBC Life Insurance.

So just on the gross margin, so you mentioned that margin has been attributed to state mix especially the Q-on-Q decline, the sequential decline. So can you help us understand like which are these states which have now resulted into a negative impact with respect to the state mix?

You mean in quarter 4, yes?

From quarter 3 to quarter 4.

Yes. So we're getting really strong volume growth out of states like Telangana, and Rajasthan was also strong despite -- Yes. Well, not actually despite, actually, it was strong. I think going into the back end of March, some -- there was some weather impact already started. But yes, I think, those states in the north and Telangana has some impact on the segment. So the growth exceeded what we thought [ this year. ]

And you also mentioned that basically you are trying for price increases in these states which have impacted you negatively. So have you got any hikes in any of these states post -- I mean recently? And what kind of quantum hikes would we require earlier?

So we got some nice price increases in Rajasthan in March, and [ Robin ] I can't remember exact how much is the change to us. It was double-digit...

Yes.

Yes, it was double-digit price increase. So we had a nice price increase coming through there. We are looking at opportunities also in some of the other states, I mentioned, yes.

Yes. And you also mentioned for Telangana. So Telangana, we would have obviously filed for the price increase. So I mean, is there a set time line in which whether we will get a response either -- whether we get it or not get it, I mean, how is that?

I'm really sorry. I didn't understand the question, the last question.

In Telangana, we would have also filed for the price increases. So is there a set timeline that the state has put always say in 1 month, 2 months or in certain time period we will get a notification whether we get it or we don't get it?

Well, we are in the process of discussion from that one. So we are hopeful to get that price increase also in Telangana. I think our case is quite clear of why we want this price increases due to the strong inflationary pressure on our businesses. And the officials understand our views. We are open -- really open in these discussions. So hopefully, we can -- you can get it. They need to do their work to understand this, which is understandable. And we are really pushing for it, and that would be very much if we could get that soon.

Yes. And then lastly, my question is on Tamil Nadu. So -- because of the change in the route to market, we have lost our presence over there. So I mean do we have a target or a guidance or a path wherein we plan to, say, recover at least say, 50%, 60% of the market, which we lost, I mean can you help us on that?

Yes. Like I said in the previous calls, we changed the route to markets to the way we believe we wanted to try with our sales, et cetera, of course, and like I said at the beginning of the call, we see some positives coming through for -- into now -- going into the summer season of orders coming through for May and June. But I want to be cautious on that in terms of -- if it is for the longer term or not. But it's nice to see that that's happening. And we can see also some excitement at the brewery that this is happening. But I'm just cautious of -- this is the long term. So -- but like I said, we continue doing our efforts to try and get the volumes, but let's see.

But ambitiously, I mean, should we expect at least 50% kind of a recovery in that market in terms of the lost volumes, say, in a year's time or would that be too aggressive -- I mean can you just broadly help us on that?

Like I said to you, I'm cautious at the moment. We're doing what we can. There is some profits coming through for the next couple of months but I cannot really say at this time. We are working through our way through. And I don't know...

Next question comes from the line of [indiscernible]