Becle Sab De Cv Ord

Good morning and thank you for joining Beckley's fourth quarter and full year unaudited financial results call. During this call, you may hear certain forward-looking statements. These statements may relate to our future prospects, developments and business strategies and may be identified by our use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will, goals, target, strategy, and similar terms and phrases and may include references to assumptions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those in forward-looking statements. For all the foregoing reasons, you are cautioned against relying on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Before we begin, we would like to remind you that the figures discussed on this call were prepared in accordance with International Financial Reporting Standards, or IFRS, and published in the Mexican Stock Exchange. The information for the fourth quarter of 2023 is preliminary and is provided with the understanding that, once financial statements are available, Updated information will be shared in the appropriate electronic formats. At this time, we would like to remind participants that your lines will be in listen-only mode until the question and answer session. Now, I will pass the call on to Beckley's CEO, Mr. Juan Domingo Beckman.

Good morning, everyone, and thank you for joining us today as we discuss Beckley's fourth quarter and full year 2023 results. In the fourth quarter, we observed an improvement in volume trends across most regions. We had notably strong sequential performance in Mexico and the rest of the world. It's important to recall that in the U.S. and Canada region, the off-cycle price increase implemented on January 1st of 2023 resulted in distributors purchasing ahead of these changes, creating a challenging comparable for this quarter. Additionally, A runoff inventory sale from the Playa Mar brand in the fourth quarter of 2022 led to a decline in U.S. volumes during this quarter versus that period. Luis Felix will soon provide more detailed insights into the region's performance. From a brand perspective, we either gained or maintained market share in most of our key markets in 2023. We ended the year with historically high levels of market share in Mexico, both in terms of volume and value. Our commitment to staying close to our consumers and innovating accordingly continues to yield positive results. The past year has been marked by significant milestones in product innovation, including the launch of Reserva de la Familia Cristalino, an organic reposado, Creyente Cristalino Reposado, Maestro Dovel Atelier, and 1800 Guachimonton, among other notable additions to our portfolio. Looking into market dynamics, we recognized the ongoing challenges posed by macroeconomic and geopolitical conditions. We have observed a slowdown in consumer demand across several markets, indicating a return to historical trends. Nevertheless, demand for our brands remains strong and resilient, after two years of growth surpassing our long-term historical trends. Consumer demand for spirits is now normalizing from this elevated base. Regarding gross margins, we foresee a gradual improvement throughout 2024, driven by supply chain pressures, easing, and lower input costs. We remain confident that the collective strength of our brands and regions will continue to drive growth in 2024, even in the face of slower than anticipated industry growth, particularly in the United States and Mexico, due to recent changes in trends in the spirits category. I will now turn the call over to Luis Felix to discuss our U.S. and Canada results in further detail. Luis Felix.

Thank you, Juan. Good morning, everyone. I am pleased to share the results for the fourth quarter and the full year 2023 in the United States and Canada region. Please note that the following remarks are based on a constant currency base. In the fourth quarter, net sales value declined by 1.9%, primarily due to the steeper decline in shipments. However, on a full year basis, NSB increased by 2.7%, mainly driven by the ongoing strong performance of our super and ultra-premium tequila brands. This reflects the positive impact of our premiumization strategy and effective pricing initiatives that were implemented in early 2023. Shipments in the fourth quarter dropped by 6.7% compared to the previous year, mainly due to a significant decline in the RTD category. This decline was primarily influenced by a high comparison base resulting from a one-off sale of Plyamar. We discontinued this brand and sold off the remaining inventory in the fourth quarter of 2022, contributing to a 251,000 case headwind in the fourth quarter of 2023. Excluding the Plyamar effect, our shipments for the fourth quarter would have only declined by 1.2%. On an annual basis, shipments declined by 3.1% compared to the previous year. However, excluding the RTD category, shipments would have only declined by 1.1%. Depletions for the quarter increased by 1.6% year-over-year on the back of a 4.1% growth in the previous year. Yearly depletions decreased by 2.3% compared to the previous year, aligning to the previously mentioned 3.1% contraction in shipments, providing a resilient foundation as we step into 2024. Despite the overall market slowdown in some categories within the U.S., our portfolio maintained an advantage position relative to our peers. According to the 13-week Nielsen value indicators for the period ended in December 30th, The spirits industry grew by 1.6%, with tequila category increasing by 3.7%. Our tequila portfolio marginally trailed the category growth rate, growing by 2.9%. And our whiskey portfolio consolidated its strong position, increasing 1% per point, while the total whiskey category declined by 0.3%. Furthermore, Proximo's NAPCA numbers for the quarter indicates that the resilient performance of our portfolio, which was partially impacted by inflationary pressures on consumer spending, our NAPCA consumer value growth in the fourth quarter of 2023 was 2.7%, outperforming the industry average of 2.5%. Heading into 2024, we are confident that our pricing power, our ongoing tequila immunization strategy, and the portfolio mix will continue to deliver significant value. Now I will turn the call over to Olga Limon to discuss the Mexico and Latin America results.

Thank you, Luis, and good morning, everyone. Mexico faced a challenging year due to an ongoing spirits market contraction affecting most categories across the industry. Despite these difficulties, the region posted encouraging results for both the fourth quarter and full year of 2023. A notable highlight was the record high market share in terms of both volume and value in tequila and the improvement towards year end in boosts performance. Boost experience volume declines throughout the year, particularly in the third quarter due to necessary adjustments related to packaging regulation change. Encouragingly, by the end of the fourth quarter, Boost started showing positive trends as distribution channels for the brand began to normalize. While acknowledging a favorable comparison, we are optimistic about achieving positive volume growth for this brand this year. In the fourth quarter, volume in Mexico increased by 3.1 year-over-year, driven by a 7% increase in our tequila portfolio and the improvement of Boost volumes. This resulted in a 7.9% increase in the non-alcoholic category compared to the same period in 2022. On a full year basis, total volume declined by 4.2 compared to the previous year. However, our spirit volume increased by 2.8% compared to the previous year, driven by a 6.2% growth in tequilas. Despite the challenges faced in 2023 and limited brand growth across the industry, our portfolio has proven resilient, with five of the top ten fastest growing brands in the region belonging to Cuervo. Net sales for the quarter and full year rose by 10.2% and 8.1% respectively, with tequila leading the way, driven by our successful premiumization and effective pricing. Latin America, though representing a small part of our global portfolio, remains a significant challenge. Economic and political factors continue to pose a difficult environment, which is affecting the industry. Unfavorable macroeconomic conditions, inflationary pressures, and persistent political uncertainties prevail across most countries in the region, affecting performance and depletion. Heading into 2024, we recognize the challenges but remain confident in our strong brands and diversified portfolio to face the ongoing pressures arising from a slowdown in consumption. I will now turn the call to Gordon Drone, Managing Director of EMEA and APAC Region. Thank you.

Many thanks, Olga, and good afternoon from Europe. The impact of the economic slowdown within Europe continued to dampen consumer spending through the fourth quarter. Despite a robust first half of the year, we observed a significant fall-off in consumer spending from September onwards. Notably, inflation within the EU reduced to 2.9% by the year-end, yet consumer goods inflation remains persistently high at over 9%. Although some European markets saw a recovery in December, it fell short of retailers' expectations. This should not be a surprise as the real incomes have dropped by at least 2% year-on-year. The situation in Asia presents a different picture, with inflation remaining low across key markets, the highest being 5.5% in India. Australia's consumer price index has notably improved up to the end of November. Across the EMEA and APAC regions, Beclay's Q4 volumes show low single-digit growth, while the value growth is twice that of the volumes. On a full-year basis, the EMEA-APAC region achieved mid-double-digit growth in both volume and value. As we conclude the year, we acknowledge significant economic pressures, particularly in EMEA, arising from the tensions across the Middle East and the ongoing conflict in Ukraine. While we have not encountered any supply issues due to the Suez closure, we remain vigilant and believe we are well prepared to navigate the challenges of 2024. I will now hand over the call to Fernando Suarez to walk us through our financial results at the consolidated level.

Thank you and good morning, everyone. I will now walk you through the fourth quarter full year 2023 financial results. During the quarter, the company reported a 5% decrease in consolidated net sales to 13.2 billion pesos. On a constant currency pro forma basis, our top line increased by 4% during the quarter. For the full year, net sales decreased 3% to 44.3 billion pesos. On a pro forma constant currency basis, our top line increased 6%. This growth reflects the company's successful premiumization strategy, prioritizing a product mix skewed towards brands with higher revenues per case, in addition to year-over-year price increases. Gross profit decreased by 13% in the fourth quarter to 6.9 billion pesos, while gross margin decreased 490 basis points to 52.6%. For the full year 2023, gross margin was 50.7% compared to 54.9% in 2022. The decrease in gross margin in the quarter was primarily due to foreign currency effects caused by the appreciation of the Mexican peso against the U.S. dollar, which accounted for approximately half of the margin erosion. The margin was also affected by a lesser degree by higher non-agave input costs. This was partially offset by price increases across the regions and a favorable shift in the product mix. The anticipated benefits stemming from lower third-party agave prices have yet to be reflected in our P&L. This delay can be primarily attributed to the aging process of our products, which requires some time before they are ready for bottling. As we continue the gradual transition through our older inventory, produced with higher cost materials, there is an anticipated time lag in realizing cost reductions. Although we still have some high-cost inventory on hand, we expect to start reaping some of the benefits of lower agave costs throughout 2024, with this positive impact extending into future years. EMP expenses as a percentage of net sales decreased to 21.6% from 28.6% in the fourth quarter of 2022. On a four-year basis, 2023 AMP as a percentage of sales remained nearly flat compared to the previous year, rising by just 30 basis points to 22.5%. This was a result of our previously communicated slowdown in AMP investment during the fourth quarter, aligning with our four-year AMP guidance for 2023. Distribution expenses decreased by 20% to 524 million pesos compared to the fourth quarter of 2022. As a percentage of net sales, distribution expenses for this quarter decreased to 4.0% from 4.8% of sales during the fourth quarter of 2022, primarily driven by lower freight, warehousing, and logistics costs arising from reduced supply chain constraints. SG&A expenses increased by 7% in the fourth quarter, representing 9.3% of sales compared to 8.3% in the fourth quarter of 2022. On a four-year basis, SG&A expenses increased by 10%, accounting for 9.6% of net sales compared to 8.5% in 2022. This increase was mainly due to lower net sales value and prevailing inflationary pressures. Operating income decreased by 1% in the quarter, while the operating margin increased to 16.4% from 15.8%. For the full year, operating income decreased 30% to 6.2 billion pesos, while the operating margin decreased to 14.1% from 19.4% compared to the previous year. EBITDA for the fourth quarter decreased by 2% to 2.4 billion pesos, with an EBITDA margin of 18.5%. For the full year, the EBITDA margin was 16.5% compared to 21.5% margin in 2022. The net financial result in the fourth quarter of 2023 was positive 224 million pesos compared to negative 230 million pesos in the same period of 2022. This increase was mainly driven by a higher year-over-year non-cash foreign exchange gain, as our net cash exposure in U.S. dollars was positively impacted by the appreciation of the Mexican peso. In addition, the company recorded a higher interest income, primarily due to rises in interest rates. For the full year 2023, net financial results resulted in a loss of $7 million. Fourth quarter consolidated net income increased by 30% to $1.96 billion. Net margin was 14.9% compared to 10.1% in the fourth quarter of 2022. For the full year, net margin was 10.7%. Earnings per share were 55 peso cents for the quarter and 1.32 pesos for the full year. As of December 31st, 2023, cash and cash equivalents were 6.4 billion pesos and total debt at 23.9 billion pesos. We observed a significant positive swing in free cash flow generation from the company, mainly driven by lower agave costs and the reduction of inventories. On the working capital side, we observed a cash generation of 2.3 billion pesos in the fourth quarter attributed to our ongoing inventory optimization efforts, which is a reversal of previous cash consumption trends seen in the balance sheet. Moving forward, we expect to continue right-sizing inventories throughout 2024 alongside optimizing CapEx over the coming years. On the financing front, we recently refinanced our existing short-term debt. The company entered into a dual-trench loan facility agreement of up to $535 million, consisting of $385 million term loan and a $150 million revolving credit facility. Current spread is at SOFR plus 110 basis points, with a five-year tenor, payable in a single installment upon maturity. The proceeds from the facility were used to prepay short-term bank indebtedness of $500 million, with $35 million of capacity left undrawn under the revolving credit facility. This refinancing improves our liquidity position and debt maturity profile of the company, increasing the average maturity from 4.2 to 5.5 years. Over the past quarter, we've successfully reduced our least adjusted net debt ratio from 3.2 times to a more favorable 2.8 times. We strive to maintain a net leverage range between two and three times as this optimizes our capital structure, allowing us to strategically invest in growth opportunities while prudently managing our debt obligations. I will now turn to our 2024 outlook. In what has been a highly volatile and dynamic operating environment, we remain optimistic and are confident global trends are simply normalizing after two years of exceptionally strong growth. We expect to deliver full-year net sales value growth in the mid-single-digit range in 2024, assuming a 17.50 peso per dollar exchange rate. Additionally, we estimate our AMP spend to be in the range of 21% to 23% of net sales value, and our 2024 capex in the $160 million to $180 million range. I will now turn the call back to the operator for questions and answers session.

Thank you. We will now move to the question and answer section. If you would like to ask a question, please press star two on your phone and wait to be prompted. If you're dialed in by web, you can type your question in the box provided or request to ask a voice question. So our first question comes from Ulysses Sargote from JP Morgan. Your line is open, please go ahead.

Hey everyone, thanks so much for the question and for the space for questions and the call provided here. So just wanted to touch on a couple of points. I wanted to ask if you could maybe provide some details on the magnitude of the gross margin improvement that you expect kind of for the coming quarters. They're kind of favoring and levering on Fernando's comments there on maybe that's starting to gradually pass on to the P&L. And then the second, if you can comment maybe a bit on a per region basis on how the pricing dynamics look like for 24 and what are more or less your expectations on that front. Thank you.

Ulises, regarding your agave question, as you know, it is company policy not to discuss specifics of the agave market for competitive and market reasons, as we are the largest producer and purchaser. We can only say that in the recent agave cycle, it will result in lower input costs going forward. We are not in a position to specifically quantify by quarter or semester the potential gross margin upside, nor attribute a specific timetable to it. It is directionally good news for us and will result in long-term earnings growth. Thanks for your understanding. And as to the second question.

Yes, Ulises, you asked for pricing. In the case of the U.S., we just announced and we executed a price increase in the month of January in a high percentage of our SKUs. So we continue to increase prices as we have done in recent years.

As for my region, Mexico and Latam, we are monitoring price opportunities by brand but we haven't decided yet whether we will make a price increase.

And in ERA and APAC, we are taking price increases across the portfolio in selected markets.

All right, perfect. Thanks so much for that, and congrats on the sequentially better results, guys.

Okay, great. And our next question comes from Lucas Mussi from Morgan Stanley. Your line is open. Please go ahead.

Thanks, Tim, for taking my question. So I just wanted to understand a little bit more the drivers behind the sequential quarter-on-quarter improvement you guys had on gross margins. From what we understand, the geographical mix, it looked a little bit more unfavorable in terms of margins this quarter with a higher mix towards Mexico, while FX was not that much different from the last quarter. So our initial thought here was that perhaps you guys have used more internal agave in your cogs on the fourth quarter. So we just wanted to confirm this. Was that the case, or was that anything different in terms of component that would explain the better sequential gross margins compared to the third quarter? That's it. Thanks, guys.

We do not comment on specific agave usage quarter over quarter, so sorry we cannot elaborate on that. What we can say for the fourth quarter is, as stated in the scripted remarks, about half of the year-over-year margin erosion is clearly attributed to exchange rate. The other half has to do with higher input costs on a year-over-year basis. And we also have tailwind in terms of mix there. So that would be on a year-over-year basis. And on a sequential basis, overall, we're seeing slightly better input costs from third quarter to fourth quarter. And as mentioned earlier, We expect to see that going forward in 2024.

Thanks, guys.

Okay, thank you. Just a reminder, if you have a question, please press star 2 on your phone, or you can request to ask a question on the webcast. We'll just give it another minute or so just for some more questions to come in. Okay, I'm not seeing any more questions, so perhaps I can hand back to the Beckley team for closing remarks.

Tim, I believe there's a question from Felipe. Could we take that?

Yeah, of course. Just bear with me one moment.

Hi, Tim. Were you able to get Felipe's question?

Yes. Sorry about that. Just a few issues on my side. So we have a question from Felipe from Scotiabank. Please go ahead.

Great. Thank you, operator. And sorry about the technical difficulties there, guys. So hi, Juan Domingo Fernandez and team. Thanks for the space. My question, I have some questions about the sequential improvements, but I think those were already asked, so let me ask another one about U.S. tequila demand, and obviously taking into account your commentaries about demand normalizing, but the category continues to grow above other spirits in the U.S., and obviously it's become a very important player in on-premise. I think it's now second or third in on-premise, if I'm not mistaken, so Obviously, the growth has been great over the last decade. I'm wondering where you guys think the ceiling can be for tequila and beyond premise in the U.S.?

Well, yes, as you mentioned, the tequila category is growing above the rest of the categories except for prepared cocktails. But we see that there's still a big opportunity for tequila since the penetration still lower when you compare penetration compared to whiskey or vodka. So the comparison is there's like a 31% penetration in tequila while in whiskey and vodka it's more than 44% penetration. So we believe that from a consumer standpoint penetration should continue. And then in the on-premise You can see that now the back bars on premise are plenty of tequilas there. So we believe that that trend will continue, and that is also helping the category to continue growing above the other categories.

Great. That's very helpful. And just one other very quick follow-up on Boost. I think August's comments on what had happened with Boost were very clear, but I just wanted to – To follow up on this, obviously having old labeling and not being able to sell that product for a small period of time was a bit of a problem. So I understand you guys got the permission to sell the old labeling product. Just wondering if there's any of this old labeling product remaining in inventory or has it been completely cleared at this point? Thank you.

Yes. Well, the thing is we're getting back to a normalization from Boost, from the Boost brand. We did have challenges in terms of packaging regulations, which impacted the brand's performance in the third quarter, but these have now been resolved. So going forward, we expect to have a normalization of the brand's performance. I don't know if you have any other questions on this.

No, that was very clear. It sounds like the old product has been completely cleared off of inventory. So very clear. Thanks a lot for the call, guys.

Thanks.

Thank you. And apologies again for the technical difficulties. So I'm not seeing any more questions. So perhaps we can close. So I'll hand over to the Beckley team for closing remarks.

Thank you for the call and talk to you next quarter. Appreciate the time.

Thank you. That concludes the call for today. Thank you and have a nice weekend.