United Breweries Limited (532478) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Breweries Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Jorn Kersten, CFO. Thank you, and over to you, sir.

Thank you. Thank you. Good afternoon, everyone, and thanks for joining us today. It's been a very interesting quarter. We'll take a bit of time to do an introduction. I'll make a few comments before I hand over to Vivek. And of course, afterwards, we'll very happily address all of your questions. But before we dive into the questions, I think this last quarter, we can characterize by 2 very different realities. On the one hand, the beer category continued to accelerate. So industry growth at approximately 13%, very positively supported by both premiumization as well as increasingly supportive regulatory development, which we see across several states, which Vivek will also comment a bit more on, which makes us believe that this is really the start of a new era for beer in India, where we think the reforms increasingly recognize beer as a differentiating category, which will create a more favorable environment for long-term growth. Now that's one side of the story. On the other hand, in the quarter, we operated through one of the most significant cost shocks that the industry has experienced over the past couple of years, referring, of course, to the Middle East conflict that created substantial pressure across the entire value chain on packaging materials, logistics, foreign exchange rates, our export business overall, on the overall supply chain. Despite the headwinds, we're very proud that we delivered solid growth, that we very intentionally improved cash generation and that we continue to strengthen the underlying business. And I'll talk a little bit more about that. But first, on the top line, as you would have seen, our sell-in volumes increased by around 9%, while our sellout volumes increased in line with the industry at 13%. The gap between the sell-in and the sellout is driven by a very deliberate choice to reduce our in-market inventory, which went down by approximately 20% versus the same period last year. This we did to strengthen our free operating cash flow, given the external headwinds, which also grew our working capital by 38% versus the same quarter last year. The combination of strong top line growth, while being able to really protect the margins, and I'll talk a bit more about this as well as deliver cash flow, gives us a lot of confidence that the fundamentals of the business continue to strengthen. Now stepping back a little bit from the quarter, we believe that the broader industry context is becoming increasingly attractive. If we look at Karnataka and the ABV-based tax reform, that represents an important milestone for the industry and for the beer category specifically, while we see also other states like Maharashtra, Jharkhand and Andhra continue to demonstrate strong category momentum as well. We think it's very important to mention that this is no longer a story of isolated growth pockets. It is something where we see sustained category expansion across regions and across segments. And UBL as a market leader, we remain very committed to playing our part as a category maker with strong brands, with innovations, but also through responsible advocacy as well as disciplined execution, a lot of which we have seen proof of during this quarter. I'll talk a little bit about margins as well. At the headline, we see that the gross margin 41% was down by approximately 155 basis points versus last year. EBITDA delivered 10.9%, while EBIT margin was 8%. Clearly, these are not the margins that fully reflect the underlying performance of the business because the Middle East conflict created an estimated impact on our GP margins of around 300 basis points during the quarter alone. And we, of course, spoke about this after the previous quarter as well as on a recovery program, which includes pricing actions, a lot of procurement activities as well as productivity measures and that helped us to recover approximately half of the impact that we've seen, mitigating the impact to roughly the 155 basis points that we see on the reported financials. During the quarter, we delivered over INR 50 crores through that recovery program, both on the top line with accelerated pricing across a large set of markets as well as revenue management initiatives, including trade spend optimization, again, some very deliberate choices, which Vivek will also elaborate on. And secondly, on the cost base through productivity, both in our variable and in our fixed, a cross-functional effort where procurement as well as supply chain drove many initiatives to deliver savings as well as quite a bit of cost avoidance. On the EBITDA margin, I'm happy that we improved materially versus the previous quarter from 6.5% to 10.9% in this quarter despite this external cost pressure. And while we expect that the inflationary pressure continues to be elevated, especially on the near-term, we remain extremely focused on the disciplined pricing, the cost management as well as productivity improvements to protect our profitability for the short-term as well as the long-term. One thing that I really want to highlight, which also plays into the margin story, is the continued evolution of the premium portfolio, one of the structural growth opportunities for us as well as for the category. And during quarter 1 of this fiscal year, we reached an important milestone, which we didn't want to leave unaddressed because we've spoken about this many times and following multiple years of localizing production, optimizing our network and improving the execution, we can now proudly mention that premium margins have become accretive for the first time in the past quarter. And we believe this is structural and the premium portfolio will continue their upward trajectory to become a meaningful contributor to profitability for UBL in the future. The premium volumes increased approximately 17% if we exclude the intentional interventions that we made in some markets where we reduced the investments to mitigate the pressure on cost and to also really protect profitability where premium is led by Kingfisher Ultra, which continues the strong momentum, but also very good to see Heineken Silver growing approximately 28% in the quarter and really driving the growth on the international premium segment. To conclude, we really believe that this quarter demonstrates the resilience of the category and specifically our business. Industry continues to grow double digits. We are very happy in how we're navigating external factors while we really improve and strengthen the underlying business. Premium margins, I can't stress enough, became accretive for the first time. We're very happy with the cash flow delivery, where we also think it's really strengthening the muscle of generating profitable growth. And while we do think that the near-term volatility will remain, the confidence in the long-term opportunity for beer in India has never been stronger than it is today. With that, I'll happily hand over to Vivek before we address your questions.

Thanks, Jorn. I think you have captured most of it. I would just say that as you started that this was a quarter with 2 key milestones and 2 key wins. I think first big milestone for us that we made structural improvements, the work we have been doing for the last couple of years to get premium business in structurally right shape. I think we achieved it. We actually achieved ahead of our glide path. And now we can say that our premium portfolio is accretive to the business and which gives us even more courage and conviction to drive the investment. The second big milestone is we talked about making structural improvement in business to our network design. We -- despite having very tough context on the war, as an organization, we stick to our long-term priorities and the structural intervention. In this quarter, we achieved a lot. We did our network optimization work in [indiscernible]. We closed our Punjab brewery, which was not an easy decision, but the right call from a business and profitability and long-term health of the business. And we transitioned to a partnership with ABB in Punjab. We had a choice to delay this transition because there are lots happening, but as an organization, we stick to the plan because it was important to take some short-term hit to get it right, and I'm proud that our transition is complete, and we are back on full course from this quarter. The second milestone related to network design is our can line in Telangana is commissioned. It is one of the report times in which UBL has commissioned a new can line facility, and I'm happy to report that last week, first can was consumed by the consumer from the line. And the third important part as part of the network milestone is that our other projects where we were doing localization of premium in some of the states, we were improving better production excellence-related features, we have also been completed. So on one side, good milestone. At the same time, I think it's a revolutionary movement for the category. I can actually say that I think the beer category after all the efforts of differentiating versus rest of the Alcobev is paying off. The Karnataka move is a revolutionary move. And we have been seeing that category is now growing higher of 30%, 35% in Karnataka and in some months, in recent months is actually up more than 50%. We saw the similar intervention in Maharashtra last year and category continues to grow upward of 20% in Maharashtra. We saw privatization of retail happen in Jharkhand, and we have seen the category size significantly increase. So it gives us a lot of confidence that it is not an isolated event. The more government are looking at beer as a separate go-to category, and this is going to be a revolution for us. But most important for us, during this turmoil phase where the costs have really gone up, I think we have delivered our plan. We had 3 priorities as a company. Number one, we wanted to make sure that we are increasing our brand power. So I'm happy to report that based on the recent data, for peak summer quarter of April, May, June, our brand power as a company has improved on brands like Kingfisher, it has improved; on Ultra, it has improved; Heineken has improved. So we have emerged stronger from the brand power. Second, we continue to drive focus on premiumization and sell-through. We -- our sell-through volumes increased 13%, and we took the right call to ensure that we reduce inventory so that we can offer fresh beer to consumers, especially getting into monsoons. This was a learning from last year. But also at the same time, we create working capital because cash is king in the scenario. And third area, which is extremely critical, we made choices and tough choices to get the structure right in the market. We reduced trade discount where it was needed. We made sure that we are not unnecessarily taking big losses to serve a market versus working a structural solution for the long-term health of the business. We improved productivity in the organization. We created a lot of cost initiatives. And despite having a 300 bps of impact on the -- behind the wall, I think the team was able to mitigate a large part of it. We actually -- the most important thing is we actually took pricing interventions in 22 states and that have been all implemented. So -- and when we take the pricing implementation, it takes time, it takes transition. But by end of this month, we are now live in 22 states with the pricing implementation, which again tells us that we were not chasing business at any cost, which is the right thing. And we are also able to create a large level of network with the stakeholders so that they can understand how the category is going through a bad phase and leveraging [indiscernible] and we were able to do a lot of things. The outlook for the category is looking positive. I expect we are hearing positive news coming out of some of the other states where they are looking at Karnataka model, where they're also discussing with us on what needs to be done. So let's hope -- nothing is firmed up, but we think this momentum can actually further build out. The other thing is a lot of people ask that this volume result is based on good summer. I think definitely based on good summer. But when we go deeper into it, there are big states where the category is still down despite having very good summer. And the states which are actually accelerating are having good summer, but mostly good strategic reforms, which are leading to the multiplication effect and some of those reforms hopefully will stay for the rest of the year and this category momentum should continue. So with this, I hand over back to you for any questions.

[Operator Instructions] The first question is from Ashutosh Jain from Barclays.

I have 2 questions. First would be, we have seen contract weighing on the price mix. So could you just highlight some more color like was the contract growing more than the 20% to 25% range, which was highlighted previously? And is there -- and also on the other side, do you also see any impact in Maharashtra from MML, that is Maharashtra-Made Liquor? Because I'm talking about more towards the mainstream portfolio. And do you -- and are you seeing any substitution from beer category into the lower-end spirits category? And my second question would be, could you just please remind us like what is your fiscal year '27 ambition? Is it still double-digit top line growth led by high single-digit volumes?

Yes. I think let me answer the Maharashtra and the other question. I think it's very difficult to see the data on how much is the MML impacting beer. Based on the recent data, we haven't seen much of the impact. But one thing we are definitely seeing in Maharashtra, there is strong growth happening at economy segment. So there is -- definitely affordability is becoming extremely critical for the consumers. And we continuously see at the economy end, there is significant growth happening in Maharashtra, which is more linked to affordability. Whether there is a direct impact of beer to MML, I think it's yet to be seen. On a '27 ambition, I think we absolutely believe that it is critical that the category continues to grow at high single digit, and our goal is to, of course, grow ahead of the category in the profitable balance manner. And we do expect -- our ambition is still to have double-digit revenue growth with the share growth and with strong momentum on premium, which we have done in the last 2 years. But at the same time, we are also ensuring that we continue to improve our brand power and strengthen the portfolio so that we can continue to build this strategy.

And on contracts -- sorry. Yes, to address the first question on contract brewers. So yes, the volume through our contract partnerships is growing ahead of the overall volume, which is in line with the plan because we also expanded our footprint with -- through our partnerships in locations where we saw growth. So I think also coming out of the summer, we were happy to be able to deliver those volumes for which these partnerships are contracted. On the accounting side, it has a dampening effect on the revenue growth because actually, we report this as one line in our accounting. So hence, also inflationary pressure there dampens the revenue growth. So that combination of those 2 factors is what you see in the reported revenue number versus last year. Underlying, we're very happy with the 9% volume and the approximate 4% price mix there.

The next question is from Harit Kapoor from Investec.

Just on -- follow-up on the earlier question. How much was the source mix for the quarter? Just wanted to understand how to look at this going forward? And secondly, given that these states are delivering exceptionally high growth where we are contracted, is there a plan to kind of look at own manufacturing in the states? Are those states conducive for that? That's my first question.

I think -- let me answer the second question. I think your first question was on the source mix again, right? Sorry, your voice was breaking. You were asking what is the source mix? Sorry, Harit, your voice was not clear in the first question.

Yes. Can you hear me now? Is it better?

Yes. Yes.

Yes.

Yes. My question was on how much was the source mix for the quarter so we can realize the real revenue -- get a sense of the real revenue growth? And the question was given that these states where we have contracted breweries, those states are showing very strong growth. Just wanted to get your sense of whether there is a thought process here of having own breweries, et cetera, in them as well.

Yes. I think let me answer the second question coming with the data on this one. I think -- look, I think what we are seeing is our own breweries are also getting full. Like, Karnataka is a good example where we have 2 breweries and Karnataka policy started happening only in the second half of the quarter. Maharashtra, we have our own breweries, but we already have a plan to have a greenfield in UP, where today we are in contract brewery. We also done the brownfield expansion with 2 can lines, one in Maharashtra, where some of that requirement was served through the contract breweries and also now in Telangana as well. So yes, we have been investing in our own breweries either in expansion. But I think the main thing is we look at the potential of a state, how much is the growth potential today, the stability of the policy, our portfolio gap and then we make the call. And we believe that it's a good mix of having our own breweries and contract breweries because it's a highly capital-intensive business. So we need to also make sure the return on capital invested is also into account. So it is going to be a good mix. We consistently invest in our breweries. The 2 can lines are in our own breweries. The greenfield is our own brewery. But at the same time, we also invest in the contract breweries wherever it is needed. So we consistently are looking at our network.

Yes. I think that like Vivek mentioned, the capital intensity also means that the CBUs give us flexibility. So if we see sustained growth of category across states, that for us triggers the thinking around where do we think is feasible. And that's what happened, for instance, in UP, we see that the opportunity is long term and will stay and then we'll move also to investments. And to your earlier question on the CBU, it's approximately a 4% impact in the quarter.

Got it. The second question was if you look at premium now, as you said, is accretive to the margin. Just wanted to understand that the earlier thought process was that you would require a higher share than it is currently to make that accretive. So is it that your accelerated localization efforts have driven a sooner-than-expected milestone here? And would premium be in the low double digits, or 11%, 12% type of your total mix right now? So that was my second question.

Yes. So I think there's 2 things. On the premium and being accretive, yes, you are absolutely right. It's about tipping the scale on the size of the business where the localization helps being closer to the market also helps the collection of bottles, which is the underlying factor, which really helps to drive the profitability. The other thing is what I think we did well and where we accelerate is the interventions that we did through the revenue margin team and really looking at great discounts also for the premium portfolio that has helped and has also accelerated a bit of delivery on margins where we structurally looked into the business and how can we optimize where we have been more deliberate in choices, and that helps to drive the profitability.

Fantastic. And third question was you mentioned about price increases. So what is the extent on a weighted average basis of these price increases that you would have got in these 22 states? Just wanted to understand how to model price increase component over this year.

I think it's always a very mixed bag and also looking at how do we serve the consumer best and how does it work across the value chain. We would say that it's between 2.5% and 3%, but accelerated through other initiatives around price laddering and great sense.

The next question is from Abneesh Roy from Nuvama.

My first question is on the trade spend. You said that wherever needed from the long-term health of the company, you have reduced the trade spend. And you also did mention that you don't want to do business at any cost. I wanted to understand there is an IPO for a large multinational company. And generally, the valuation is linked to the exit quarter sales, et cetera. So we are picking up that there is some level of increase in aggression by that player. So are you responding to that because it seems you are not responding? And is that impacting you in any way either in terms of share or in terms of, say, placement, et cetera?

I think the first -- thanks, Abneesh, for asking the question. I think one of the key focus area for us is to really build very strong brand power and pull for our brands. And as I said, in holistic package, which includes investment in sponsorship, trade spend, distribution, all of this put together, I think I'm very proud that we are able to grow brand power, which is consumer-centric data on this, and we continue to increase the brand power. We have seen the increased investment in the category, which on one side is good for the category because there's more interest in the category. But at the same time, I think it is extremely important that we do the business responsibly. And I think the state where we don't make enough money and pricing and margins are very thin, spending more money to push the product with the trade discount doesn't make sense. At the same time, we work with the retailers to create value creation initiatives. We are working with retailers to actually create initiatives which actually help them to create category. We have placed 50,000 coolers now. We did not put a break on our cooler program, which is also seen in the depreciation numbers because that is the right thing to do when the category is growing. In states like Karnataka, Maharashtra, we -- go-to-market execution where we are now able to hear the retailers' claims within 20 days, which used to take 6 months. We are using technology to better predict the out-of-stock and giving them the service. We have reduced 20% less inventory and bringing better ROI for the retailers. So we are actually moving our capability from being just push-driven to actually building category and building business for the retailers. So in most of the cases, we have got very strong conversations and very good alignment with the retailers. At the same time, we have been brutally honest and transparent the impact on the margins and the cost because of the war impact, and the data is absolutely clear that the states where UTPs are very low, we actually don't make money, and it's very difficult for us to invest the money in pushing the product. So it is always a balance. We are not playing in isolation. But having said that, we are making the choices. We are also challenging our own cost structure to really see that where we can actually reduce the inefficiencies so that we can invest behind customers, consumers and our products. So short answer is, yes, we have seen impact. For example, Haryana is one state where we saw a significant drop because we significantly reduced the trade spend, but it is also one state where the product is not sold on MRP. Consumers is actually paying much more than the product -- the beer should be. So I think there's no point in feeding those margins when it's not going to the consumer. So I think we have made those choices.

Understood. Second question is on the price hike and the cost inflation. So you had given out a very upfront that number of the cost inflation due to war. Now we have a bit more understanding of war, plus you have got now price hike in most of the states, which is also a reasonable price hike. Now how do you see Q2, Q3 impact of the war?

Yes. Look, I think no one has a good understanding of the war, and it will remain volatile. So we remain a bit cautious. That being said and also seeing that our recovery program really kicks in, we do revise our full year impact downward where we said INR 400 crores to INR 500 crores. We now think it's more on the lower side of that range between INR 350 crores, INR 400 crores impact. So in that sense, we're slightly more positive. Overall, we see the volatility is high, we think oil today and how it moves. So every day is a new dawn, but we keep being very vigilant on how we treat it from a recovery point of view.

Sir, last quick question on the demand side. So some of the large states are doing very well for you. So Maharashtra, 20% volume growth; Karnataka, 20% to 40% or maybe even higher. But what are the -- if you could discuss how is your performance in those laggard states versus competition? And what will be the outlook in such states now peak season is behind, but anyway, you will see the Y-o-Y numbers. If you could discuss the negatives pulling down the number?

See, we do have a -- we have a national business. Of course, there are states where we have made choices. I gave an example of Haryana where we had to reduce the trade discount because the business was not viable, and that had an impact on us. We also had an impact in states like West Bengal because we import -- used to import a lot of products from other states, and it did not make sense at an inflated cost to pay higher taxes and other things to do that. But we do have structural plan in the next few months where we will see more capacity in that state, which will mean that instead of relying on the short-term volumes, we will actually have volumes to serve the market when we do that. We're also working a very good plan in Haryana with the retailers to actually work a joint business plan to show them the value of what we can bring in the market. So it is state by state. As I said, we are seeing more positives where they are reform, but we also have state where we still are in negotiation with the government on pricing and the viability of the business. And it is difficult for us to invest more commercially till our margin structure, the business is sustainable. So I think it's a matter of doing the right thing for the business, but also the right thing for the category. But in a whole, as Jorn said, we feel the outlook is positive. We have got more positive response from the state governments and corporations that 22 states is a huge number when we are saying that we are implementing our revenue and pricing plan, which is now in market from this month, month of July. So we feel that we'll be able to grow shares in the coming quarters.

Sir, 22 states is a large number. One question on Haryana I had, and end there. If it is unviable for you in Haryana in the short term, will it also unviable for other players or this scenario can be a bit different?

I think everyone's scenario is very different because the portfolio is different, ability to have local manufacturing of different formats is very different. So I think it's all about making choices, right? And it's also about the network part of it.

The next question is from Latika Chopra from JPMorgan.

A couple of clarifications. The first one was on your differential in sell-in and sellout volume growth. Was this specific to the quarter? Or do you anticipate that the inventory rationalization piece is kind of behind us and both these growth rates will now be more aligned in the quarters ahead?

Yes. I think this was primarily for the quarter because usually, we build the stock and we say that when you come out of the season, you need to maintain a certain level of inventory. Based on our last 2 years learning and getting more smarter analytically, we were able to do more deliberate attempt to really do that. We still are working on stock norms in many of the depots, both for us as well as for the -- for our partners. So I would say that mostly you will see our sell-through and sell-in in line, but we will not hesitate to take correction because the fresher the beer, the better it is. So because many of the inventory points are actually government depots and we still are working with the new tool to really understand what is the right replenishment model, so we get the freshest beer and high rotation. And given that we are also focusing on premiumization and in many cases, economies that is a large number of SKUs are adding now. So we are working through it, but we expect this to be more in line. But as I mentioned to you, if we find opportunities, we will continue to correct it.